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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (Fee
Required) For the Fiscal Year Ended December
31, 1997
or
[ ] Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
(No Fee Required) for the transition period
from to
COMMISSION FILE NUMBER 0-7974
CHITTENDEN CORPORATION
(Exact name of Registrant as specified in its charter)
VERMONT 03-0228404
(State of Incorporation) (IRS Employer Identification No.)
TWO BURLINGTON SQUARE
BURLINGTON, VERMONT 05401
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER: 802-658-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
$1.00 Par Value Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this Form 10-K [ ].
The aggregate market value of the Registrant's common stock held by non-
affiliates of the Registrant, on February 27, 1998 as reported on NYSE, was
$472,346,917.
At February 27, 1998, there were 14,405,671 shares of the Registrant's
common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, in whole or in part, are specifically incorporated
by reference in the indicated Part of this Annual Report on Form 10-K:
1. Proxy Statement for 1998 Annual Meeting of Registrant's Stockholders: Part
III, Items 10, 11, 12, 13.
This Form 10-K contains certain statements that may be considered forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The Company's actual results could differ materially from those
projected in the forward-looking statements as a result, among other factors,
of changes in general, national or regional economic conditions, changes in
loan default and charge-off rates, reductions in deposit levels necessitating
increased borrowing to fund loans and investments, changes in interest rates,
and changes in the assumptions used in making such forward-looking statements.
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PART I
ITEM 1 BUSINESS
Chittenden Corporation (the "Company" or "CC"), a Vermont corporation
organized in 1971, is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended. At December 31, 1997, the Company had total
consolidated assets of $1,977,150,000. The Company is the holding company
parent and owns 100% of the outstanding common stock of Chittenden Trust
Company ("CTC"), Flagship Bank and Trust Company ("FBT"), The Bank of Western
Massachusetts ("BWM") (collectively "The Banks") and Chittenden Connecticut
Corporation ("CCC"), a non-bank mortgage company.
Through its subsidiaries, the Company offers a variety of lending services,
with loans and leases totaling $1,399,138,000 at December 31, 1997. The
largest loan category is commercial loans, including those secured by
commercial real estate, and others made to a variety of businesses, including
retail concerns, small manufacturing businesses, larger corporations, other
commercial banks, and to political subdivisions in the U.S. Commercial loans
amounted to 49% of the total loans outstanding at December 31, 1997. Loans
secured by residential properties, including closed-ended home equity loans
comprised 27% of total loans outstanding at December 31, 1997. The Company
underwrites substantially all of its residential mortgages based upon
secondary market standards and sells substantially all of its fixed-rate
residential mortgage loans on a servicing-retained basis. Variable or
adjustable rate mortgage loans are typically held in portfolio. The remaining
real estate loans, which are 1% of total loans outstanding at December 31,
1997, are construction loans secured by residential and commercial land under
development.
Consumer loans outstanding at December 31, 1997 were 17% of total loans.
These include direct and indirect installment loans, auto leases, and
revolving credit which accounted for 3%, 7%, 2% and 5% of total loans
respectively. Revolving home equity loans as a separate group amounted to 6%
of loans at December 31, 1997. These loans are generally underwritten based
upon the same standards as first mortgages.
The Company's lending activities are conducted primarily in Vermont and
Massachusetts, with additional activity related to nearby market areas in
Quebec, New York, New Hampshire, Maine and Connecticut. In addition to the
portfolio diversification described above, the loans are diversified by
borrowers and industry groups. In making commercial loans, the Banks
occasionally solicit the participation of other banks and other financial
investors. The Company, through its subsidiaries, also occasionally
participates in loans originated by other banks. Certain of the Company's
commercial loans are made under programs administered by the Vermont
Industrial Development Authority, the U.S. Small Business Administration, the
U.S. Farmers Home Administration or other local government agencies within the
Company's market. Loan terms include repayment guarantees by the agency
involved in varying amounts up to 90% of the original loan.
The Banks offer a wide range of banking services, including the acceptance
of demand, savings, and time deposits. As of December 31, 1997, total
interest-bearing deposits and noninterest-bearing demand deposits amounted to
$1,454,990,000 and $302,555,000 respectively. The Banks also provide personal
trust services, including services as executor, trustee, administrator,
custodian and guardian. Corporate trust services are also provided, including
services as trustee for pension and profit sharing plans. Asset management
services are provided with both personal and corporate trust services. Trust
administered assets totaled $2.8 billion at December 31, 1997.
The Company offers data processing services consisting primarily of payroll
and automated clearing house for several outside clients. Financial and
investment counseling is provided to municipalities and school districts
within the Company's service area, as well as central depository, lending,
payroll, and other banking services for such customers. The Banks offer a
variety of other services including safe deposit facilities, MasterCard and
VISA credit card services, credit card processing, and certain non-deposit,
investment products through a dual-employee contractual relationship with
Fiserv Investor Services, Inc.
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The Company's principal executive offices are located at Two Burlington
Square, Burlington, Vermont 05401; telephone number: 802-658-4000.
CHITTENDEN TRUST COMPANY
CTC was chartered by the Vermont Legislature as a commercial bank in 1904.
It is the second largest bank in Vermont, based on total assets of
$1,384,526,000 and total deposits of $1,227,624,000 at December 31, 1997.
CTC's principal offices are in Burlington, Vermont and it has 35 additional
locations in Vermont, of which three are free standing automated teller
machines ("ATM's"). (See Item 2, "Properties"). All of these offices use the
trade name "Chittenden Bank".
On May 31, 1997, Chittenden Bank acquired certain assets and assumed certain
liabilities of The Pomerleau Agency. The Pomerleau Agency offers various
insurance related products including: personal, commercial and life/health
policies, as well as specialized coverages and a consulting and risk
management service.
THE BANK OF WESTERN MASSACHUSETTS
BWM was chartered by the Commonwealth of Massachusetts as a commercial bank
in 1986. At December 31, 1997, BWM had total assets of $270,484,000 and total
deposits of $235,533,000. BWM's principal offices are in Springfield,
Massachusetts and it has four additional locations in the greater Springfield,
Massachusetts area.
FLAGSHIP BANK AND TRUST COMPANY
FBT was chartered by the Commonwealth of Massachusetts as a commercial bank
in 1986. At December 31, 1997, FBT had total assets of $327,483,000 and total
deposits of $301,921,000. FBT's principal offices are in Worcester,
Massachusetts and it has five additional locations in the greater Worcester,
Massachusetts area.
CHITTENDEN CONNECTICUT CORPORATION
CCC was chartered by the State of Vermont as a mortgage company in 1996 and
its principal offices are in Burlington, Vermont. CCC has additional offices
in Brattleboro, Vermont and Southbury, Connecticut (See Item 2, "Properties").
CCC's primary business is the origination of conforming residential real
estate mortgage loans for resale to the secondary market. CCC originates these
loans for resale through correspondent relationships with credit unions and
through other mortgage brokers in the state of Connecticut who receive loan
applications. These applications are underwritten by CTC in Vermont based upon
secondary market standards and then sold. In addition, CCC uses brokers that
are directly employed by and working through various financial institutions in
Connecticut.
ECONOMY
The New England economy showed signs of continued improvement in 1997.
Retail sales improved along with increases in both housing permits and new
construction contracts. New England unemployment levels also continued to
decrease. The ability and willingness of the Company's borrowers to honor
their repayment commitments are impacted by many factors, including prevailing
market interest rates and the level of overall economic activity within the
borrowers' geographic area.
COMPETITION
There is vigorous competition in the Company's marketplace for all aspects
of banking and related financial service activities presently engaged in by
the Company and its subsidiaries.
In the retail financial services market, competitors include other banks,
credit unions, finance companies, thrift institutions and, increasingly,
brokerage firms, insurance companies, and mortgage loan companies. Money
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market deposit accounts and short-term flexible-maturity certificates of
deposit offered by the Banks compete with investment account offerings of
brokerage firms and with new products offered by insurance companies. The
Company also competes for personal and commercial trust business with
investment advisory firms, mutual funds, and insurance companies.
CTC competes with Vermont banks and metropolitan banks based in southern New
England and New York City to provide commercial banking services to
businesses. Many of these out-of-state banks have greater financial resources
than those of Vermont banks and are actively seeking financial relationships
with promising Vermont enterprises. BWM and FBT compete with other financial
institutions in their respective franchises of Springfield and Worcester
Massachusetts.
BWM and FBT also operate in areas in which competition among financial
institutions is continuously increasing. BWM has focused on meeting the needs
of the smaller and medium-sized businesses and professionals in its market
area, while FBT has taken a balanced approach in serving the needs of both
smaller and medium-sized businesses, as well as retail consumers in its
market.
SUPERVISION AND REGULATION
The Company and its banking subsidiaries (CTC, BWM and FBT) are subject to
extensive regulation under federal and state banking laws and regulations. The
following discussion of certain of the material elements of the regulatory
framework applicable to banks and bank holding companies is not intended to be
complete and is qualified in its entirety by the text of the relevant state
and federal statutes and regulations. A change in the applicable laws or
regulations may have a material effect on the business of the Company and/or
its banking subsidiaries.
Regulation of the Company
General. As a corporation incorporated under Vermont law, the Company is
subject to regulation by the Secretary of the State of Vermont and the rights
of its stockholders are governed by Vermont corporate law. As a bank holding
company, the Company is subject to supervision and regulation by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") under
the Bank Holding Company Act of 1956, as amended (the "BHC Act"). Under the
BHC Act, bank holding companies generally may not acquire ownership or control
of more than 5% of any class of voting shares or substantially all of the
assets of any company, including a bank, without the prior approval of the
Federal Reserve Board. In addition, bank holding companies are generally
prohibited under the BHC Act from engaging in non-banking activities, subject
to certain exceptions. As a bank holding company, the Company's activities are
limited generally to the business of banking and activities determined by the
Federal Reserve Board to be so closely related to banking as to be a proper
incident thereto. The Federal Reserve Board has authority to issue cease and
desist orders to terminate or prevent unsafe or unsound banking practices or
violations of laws or regulations and to assess civil money penalties against
bank holding companies and their non-bank subsidiaries, officers, directors
and other institution-affiliated parties, and to remove officers, directors
and other institution-affiliated parties.
Interstate Acquisitions. Prior to September 29, 1995, under the BHC Act a
bank holding company was permitted to acquire a bank in another state only if
the law of the state in which the bank to be acquired was located specifically
authorized such acquisition of an in-state bank by an out-of-state bank
holding company. As described below under "Capital Requirements and FDICIA--
Interstate Banking and Branching", the BHC Act was amended, effective
September 29, 1995, to remove this prohibition. Even prior to this amendment
to the BHC Act, previously enacted state legislation substantially lessened
prior legislative restrictions on geographic expansion by bank holding
companies from and into Massachusetts and Vermont. For example, under
nationwide reciprocal interstate banking legislation adopted by both states
which became effective in 1990, bank holding companies whose subsidiaries'
banking operations were principally conducted in any state outside
Massachusetts or Vermont were authorized to acquire Massachusetts or Vermont
banking organizations, provided that such
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companies' home states afforded Massachusetts or Vermont banking organizations
reciprocal rights to acquire banks in such states.
Dividends. The Federal Reserve Board has authority to prohibit bank holding
companies from paying dividends if such payment is deemed to be an unsafe or
unsound practice. The Federal Reserve Board has indicated generally that it
may be an unsafe and an unsound practice for bank holding companies to pay
dividends unless the bank holding company's net income over the preceding year
is sufficient to fund the dividends and the expected rate of earnings
retention is consistent with the organization's capital needs, asset quality,
and overall financial condition. The Company's ability to pay dividends is
dependent upon the flow of dividend income to it from its banking
subsidiaries, which may be affected or limited by regulatory restrictions
imposed by federal or state bank regulatory agencies. See "Regulation of CTC,
BWM and FBT--Dividends."
Certain Transactions by Bank Holding Companies with their Affiliates. There
are various legal restrictions on the extent to which bank holding companies
and their non-bank subsidiaries may borrow, obtain credit from or otherwise
engage in "covered transactions" with their insured depository institution
subsidiaries. Such borrowings and other covered transactions by an insured
depository institution subsidiary (and its subsidiaries) with its non-
depository institution affiliates are limited to the following amounts: (a) in
the case of any one such affiliate, the aggregate amount of covered
transactions of the insured depository institution and its subsidiaries cannot
exceed 10% of the capital stock and surplus of the insured depository
institution; and (b) in the case of all affiliates, the aggregate amount of
covered transactions of the insured depository institution and its
subsidiaries cannot exceed 20% of the capital stock and surplus of the insured
depository institution. "Covered transactions" are defined by statute for
these purposes to include a loan or extension of credit to an affiliate, a
purchase of or investment in securities issued by an affiliate, a purchase of
assets from an affiliate unless exempted by the Federal Reserve Board, the
acceptance of securities issued by an affiliate as collateral for a loan or
extension of credit to any person or company, or the issuance of a guarantee,
acceptance or letter of credit on behalf of an affiliate. Covered transactions
are also subject to certain collateral security requirements. Other types of
transactions between a bank and a bank holding company must be on market terms
and not otherwise unduly favorable to the holding company or an affiliate
thereof. Further, a bank holding company and its subsidiaries are prohibited
from engaging in certain tying arrangements in connection with any extension
of credit, lease or sale of property of any kind, or furnishing of any
service.
Holding Company Support of Subsidiary Banks. Under Federal Reserve Board
policy, the Company is expected to act as a source of financial strength to
its subsidiary banks and to commit resources to support such subsidiaries.
This support of its subsidiary banks may be required at times when, absent
such Federal Reserve Board policy, the Company might not otherwise be inclined
to provide it. In addition, any capital loans by a bank holding company to any
of its subsidiary banks are subordinate in right of payment to deposits and
certain other indebtedness of such subsidiary banks. In the event of a bank
holding company's bankruptcy, any commitment by the bank holding company to a
federal bank regulatory agency to maintain capital of a subsidiary bank will
be assumed by the bankruptcy trustee and entitled to a priority of payment.
Liability of Commonly Controlled Depository Institutions. Under the Federal
Deposit Insurance Act, as amended ("FDI Act"), an FDIC-insured depository
institution, such as CTC, BWM or FBT, can be held liable for any loss incurred
by, or reasonably expected to be incurred by, the FDIC after August 9, 1989 in
connection with (i) the "default" of a commonly controlled FDIC-insured
depository institution, or (ii) any assistance provided by the FDIC to any
commonly controlled depository institution in "danger of default." For these
purposes, the term "default" is defined generally as the appointment of a
conservator or receiver and "in danger of default" is defined generally as the
existence of certain conditions indicating that a default is likely to occur
without Federal regulatory assistance.
Regulation of CTC, BWM and FBT
General. As FDIC-insured state-chartered banks, CTC, BWM and FBT are subject
to supervision of and regulation by the Commissioner of Banking, Insurance,
Securities and Heath Care Administration of the State of
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Vermont, in the case of CTC, and the Commissioner of Banks of the Commonwealth
of Massachusetts in the case of BWM and FBT (individually, a Commissioner and
collectively, the "Commissioners") and, for all three banks, by the FDIC. This
supervision and regulation is for the protection of depositors, the BIF (as
hereinafter defined), and consumers, and is not for the protection of the
Company's stockholders. The prior approval of the FDIC and the relevant
Commissioner is required for CTC, BWM or FBT to establish or relocate an
additional branch office, assume deposits, or engage in any merger,
consolidation or purchase or sale of all or substantially all of the assets of
any bank or savings association.
Examinations and Supervision. The FDIC and the Commissioners regularly
examine the condition and the operations of CTC, BWM and FBT, including (but
not limited to) their capital adequacy, reserves, loans, investments,
earnings, liquidity, compliance with laws and regulations, record of
performance under the Community Reinvestment Act and management practices. In
addition, CTC, BWM and FBT are required to furnish quarterly and annual
reports of income and condition to the FDIC and periodic reports to the
Commissioners. The enforcement authority of the FDIC includes the power to
impose civil money penalties, terminate insurance coverage, remove officers
and directors and issue cease-and-desist orders to prevent unsafe or unsound
practices or violations of laws or regulations. In addition, under recent
federal banking legislation, the FDIC has authority to impose additional
restrictions and requirements with respect to banks that do not satisfy
applicable regulatory capital requirements. See "Capital Requirements and
FDICIA--Prompt Corrective Action" below.
Dividends. The principal source of the Company's revenue is dividends from
the Banks. Payments of dividends by the Banks are subject to certain Vermont
and Massachusetts banking law restrictions. Payment of dividends by CTC is
subject to Vermont banking law restrictions which require that, except when
surplus and paid-in capital together amount to 10% or more of deposits and
other liabilities (not including surplus, paid-in capital, capital notes and
debentures, and funds held in a fiduciary capacity), at least one-tenth of its
net profits must be set aside annually and added to surplus. Payment of
dividends by BWM and FBT is subject to Massachusetts banking law restrictions
which require that the capital stock and surplus account of the bank must
amount, in the aggregate to at least 10% of the bank's deposit liability or
there shall be transferred from net profits to the surplus account (1) the
amount required to increase the surplus account so that it, together with the
capital stock, will amount to at least 10% of deposit liability or (2) the
amount required to increase the surplus account so that it shall amount to 50%
of the common stock, and thereafter, the amount , not exceeding 50% of net
profits, required to increase the surplus account so that it shall amount to
100% of capital stock.
The FDIC has authority to prevent CTC, BWM and FBT from paying dividends if
such payment would constitute an unsafe or unsound banking practice or reduce
the respective bank's capital below safe and sound levels. In addition,
federal legislation prohibits FDIC-insured depository institutions from paying
dividends or making capital distributions that would cause the institution to
fail to meet minimum capital requirements. See "Capital Requirements and
FDICIA--Prompt Corrective Action" below.
Affiliate Transactions. As noted above, banks are subject to restrictions
imposed by federal law on extensions of credit to, purchases of assets from,
and certain other transactions with, affiliates, and on investments in stock
or other securities issued by affiliates. Such restrictions prevent CTC, BWM
and FBT from making loans to affiliates unless the loans are secured by
collateral in specified amounts and have terms at least as favorable to the
bank as the terms of comparable transactions between the bank and non-
affiliates. Further, federal and applicable state laws significantly restrict
extensions of credit by CTC, BWM and FBT to directors, executive officers and
principal stockholders and related interests of such persons.
Deposit Insurance. CTC's, BWM's and FBT's deposits are insured by the Bank
Insurance Fund ("BIF") of the FDIC to the legal maximum of $100,000 for each
insured depositor. The FDI Act provides that the FDIC shall set deposit
insurance assessment rates on a semi-annual basis at a level sufficient to
increase the ratio of BIF reserves to BIF-insured deposits to at least 1.25%
over a 15-year period commencing in 1991, and to maintain that ratio. Although
the established framework of risk-based insurance assessments accomplished
this increase in May 1995, and the FDIC has made a substantial reduction in
the assessment rate schedule, the BIF
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insurance assessments may be increased in the future if necessary to maintain
BIF reserves at the required level. In addition, legislation enacted in 1996
to recapitalize the Savings Association Insurance Fund ("SAIF"), which insures
the deposits of savings associations and certain savings banks, resulted in
increased BIF assessments. See "Capital Requirements and FDICIA--Risk-Based
Deposit Insurance and FICO Assessments" below.
Federal Reserve Board Policies. The monetary policies and regulations of the
Federal Reserve Board have had a significant effect on the operating results
of banks in the past and are expected to continue to do so in the future.
Federal Reserve Board Policies affect the levels of bank earnings on loans and
investments and the levels of interest paid on bank deposits through the
Federal Reserve System's open-market operations in United States government
securities, regulation of the discount rate on bank borrowings from Federal
Reserve Banks and regulation of non-earning reserve requirements applicable to
bank deposit account balances.
Consumer Protection Regulation; Bank Secrecy Act. Other aspects of the
lending and deposit business of CTC, BWM and FBT that are subject to
regulation by the FDIC and the Commissioners include disclosure requirements
with respect to interest, payment and other terms of consumer and residential
mortgage loans and disclosure of interest and fees and other terms of, and the
availability of, funds for withdrawal from consumer deposit accounts. In
addition, CTC, BWM and FBT are subject to federal and state laws and
regulations prohibiting certain forms of discrimination in credit
transactions, and imposing certain record keeping, reporting and disclosure
requirements with respect to residential mortgage loan applications. In
addition, CTC, BWM and FBT are subject to federal laws establishing certain
record keeping, customer identification, and reporting requirements with
respect to certain large cash transactions, sales of travelers checks or other
monetary instruments and the international transportation of cash or monetary
instruments.
CRA Regulations. The Community Reinvestment Act ("CRA") requires lenders to
identify the communities served by the institution's offices and to identify
the types of credit the institution is prepared to extend within such
communities. The FDIC conducts examinations of insured institutions' CRA
compliance and rates such institutions as "Outstanding", "Satisfactory",
"Needs to Improve" and "Substantial Noncompliance". As of their last CRA
examinations, CTC, BWM and FBT received a rating of "Outstanding". Failure of
an institution to receive at least a "Satisfactory" rating could inhibit such
institution's undertaking certain activities, including acquisitions of other
financial institutions, which require regulatory approval based, in part, on
CRA compliance considerations. The Federal Reserve Board must take into
account the record of performance of banks in meeting the credit needs of the
entire community served, including low and moderate income neighborhoods.
As a result of certain amendments in 1996, current CRA regulations rely more
than the former CRA regulations upon objective criteria of the performance of
institutions under three key assessment tests: a lending test, a service test
and an investment test. CTC, BWM and FBT are committed to meeting the existing
or anticipated credit needs of their entire communities, including low and
moderate-income neighborhoods, consistent with safe and sound operations.
Capital Requirements and FDICIA
General. The FDIC has established guidelines with respect to the maintenance
of appropriate levels of capital by FDIC-insured banks. The Federal Reserve
Board has established substantially identical guidelines with respect to the
maintenance of appropriate levels of capital, on a consolidated basis, by bank
holding companies. If a banking organization's capital levels fall below the
minimum requirements established by such guidelines, a bank or bank holding
company will be expected to develop and implement a plan acceptable to the
FDIC or the Federal Reserve Board, respectively, to achieve adequate levels of
capital within a reasonable period, and may be denied approval to acquire or
establish additional banks or non-bank businesses, merge with other
institutions or open branch facilities until such capital levels are achieved.
Federal legislation requires federal bank regulators to take "prompt
corrective action" with respect to insured depository institutions that fail
to satisfy minimum capital requirements and imposes significant restrictions
on such institutions. See "Prompt Corrective Action" below.
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Leverage Capital Ratio. The regulations of the FDIC require FDIC-insured
banks to maintain a minimum "Leverage Capital Ratio" or "Tier 1 Capital" (as
defined in the Risk-Based Capital Guidelines discussed in the following
paragraphs) to Total Assets of 3.0%. The regulations of the FDIC state that
only banks with the highest federal bank regulatory examination rating will be
permitted to operate at or near such minimum level of capital. All other banks
are expected to maintain an additional margin of capital, equal to at least 1%
to 2% of Total Assets, above the minimum ratio. Any bank experiencing or
anticipating significant growth is expected to maintain capital well above the
minimum levels. The Federal Reserve Board's guidelines impose substantially
similar leverage capital requirements on bank holding companies on a
consolidated basis.
Risk-Based Capital Requirements. The regulations of the FDIC also require
FDIC-insured banks to maintain minimum capital levels measured as a percentage
of such banks' risk-adjusted assets. A bank's qualifying total capital ("Total
Capital") for this purpose may include two components--"Core" (Tier 1) Capital
and "Supplementary" (Tier 2) Capital. Core Capital consists primarily of
common stockholders' equity, which generally includes common stock, related
surplus and retained earnings, certain non-cumulative perpetual preferred
stock and related surplus, and minority interests in the equity accounts of
consolidated subsidiaries, and (subject to certain limitations) mortgage
servicing rights and purchased credit card relationships, less all other
intangible assets (primarily goodwill). Supplementary Capital elements
include, subject to certain limitations, a portion of the allowance for losses
on loans and leases, perpetual preferred stock that does not qualify for
inclusion in Tier 1 capital, long-term preferred stock with an original
maturity of at least 20 years and related surplus, certain forms of perpetual
debt and mandatory convertible securities, and certain forms of subordinated
debt and intermediate-term preferred stock.
The risk-based capital rules of the FDIC and the Federal Reserve Board
assign a bank's balance sheet assets and the credit equivalent amounts of the
bank's off-balance sheet obligations to one of four risk categories, weighted
at 0%, 20%, 50% or 100%, respectively. Applying these risk-weights to each
category of the bank's balance sheet assets and to credit the equivalent
amounts of the bank's off-balance sheet obligations and summing the totals
results in the amount of the bank's total Risk-Adjusted Assets for purposes of
the risk-based capital requirements. Risk-Adjusted Assets can either exceed or
be less than reported balance sheet assets, depending on the risk profile of
the banking organization. Risk-Adjusted Assets for institutions such as CTC,
BWM and FBT will generally be less than reported balance sheet assets because
its retail banking activities include proportionally more residential mortgage
loans with a lower risk weighing and relatively smaller off-balance sheet
obligations.
The risk-based capital regulations require all banks to maintain a minimum
ratio of Total Capital to Risk-Adjusted Assets of 8.0%, of which at least one-
half (4.0%) must be Core (Tier 1) Capital. For the purpose of calculating
these ratios: (i) a banking organization's Supplementary Capital eligible for
inclusion in Total Capital is limited to no more than 100% of Core Capital;
and (ii) the aggregate amount of certain types of Supplementary Capital
eligible for inclusion in Total Capital is further limited. For example, the
regulations limit the portion of the allowance for loan losses eligible for
inclusion in Total Capital to 1.25% of Risk-Adjusted Assets. The Federal
Reserve Board has established substantially identical risk-based capital
requirements, which are applied to bank holding companies on a consolidated
basis. The risk-based capital regulations provide explicitly for consideration
of interest rate risk in the FDIC's overall evaluation of a bank's capital
adequacy to ensure that banks effectively measure and monitor their interest
rate risk, and that they maintain capital adequate for that risk. A bank
deemed by the FDIC to have excessive interest rate risk exposure may be
required by the FDIC to maintain additional capital (that is, capital in
excess of the minimum ratios discussed above). CTC, BWM and FBT believe that
this provision will not have a material adverse effect on them.
At December 31, 1997, the Company's consolidated Total and Tier 1 Risk-Based
Capital Ratios were 11.17% and 9.86%, respectively, and its Leverage Capital
Ratio was 7.43%. Based on the above figures and accompanying discussion, CC
exceeds all regulatory capital requirements and is considered well
capitalized.
Prompt Corrective Action. Among other things, the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA") requires the federal banking regulators
to take "prompt corrective action" with respect to, and
7
imposes significant restrictions on, any bank that fails to satisfy its
applicable minimum capital requirements. FDICIA establishes five capital
categories consisting of "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." Under applicable regulations, a bank that has a Total Risk-
Based Capital Ratio of 10.0% or greater, a Tier 1 Risk-Based Capital Ratio of
6.0% or greater and a Leverage Capital Ratio of 5.0% or greater, and is not
subject to any written agreement, order, capital directive or prompt
corrective action directive to meet and maintain a specific capital level for
any capital measure is deemed to be "well capitalized." A bank that has a
Total Risk-Based Capital Ratio of 8.0% or greater, a Tier 1 Risk-Based Capital
Ratio of 4.0% or greater and a Leverage Capital Ratio of 4.0% or greater and
does not meet the definition of a well capitalized bank is considered to be
"adequately capitalized." A bank that has a Total Risk-Based Capital Ratio of
less than 8.0% or has a Tier 1 Risk-Based Capital Ratio that is less than 4.0%
or generally a Leverage Capital Ratio of less than 4.0% is considered
"undercapitalized." A bank that has a Total Risk-Based Capital Ratio of less
than 6.0%, or a Tier 1 Risk-Based Capital Ratio that is less than 3.0% or a
Leverage Capital Ratio that is less than 3.0% is considered to be
"significantly undercapitalized," and a bank that has a ratio of tangible
equity to total assets equal to or less than 2% is deemed to be "critically
undercapitalized." A bank may be deemed to be in a capital category lower than
is indicated by its actual capital position if it is determined to be in an
unsafe or unsound condition or receives an unsatisfactory examination rating.
FDICIA generally prohibits a bank from making capital distributions (including
payment of dividends) or paying management fees to controlling stockholders or
their affiliates if, after such payment, the bank would be undercapitalized.
Under FDICIA and the applicable implementing regulations, an
undercapitalized bank will be (i) subject to increased monitoring by the FDIC;
(ii) required to submit to the FDIC an acceptable capital restoration plan
(guaranteed, subject to certain limits, by the bank's holding company) within
45 days; (iii) subject to strict asset growth limitations; and (iv) required
to obtain prior regulatory approval for certain acquisitions, transactions not
in the ordinary course of business, and entry into new lines of business. In
addition to the foregoing, the FDIC may issue a "prompt corrective action
directive" to any undercapitalized institution. Such a directive may require
sale or re-capitalization of the bank, impose additional restrictions on
transactions between the bank and its affiliates, limit interest rates paid by
the bank on deposits, limit asset growth and other activities, require
divestiture of subsidiaries, require replacement of directors and officers,
and restrict capital distributions by the bank's parent holding company.
In addition to the foregoing, a significantly undercapitalized institution
may not award bonuses or increases in compensation to its senior executive
officers until it has submitted an acceptable capital restoration plan and
received approval from the FDIC.
Not later than 90 days after an institution becomes critically
undercapitalized, the appropriate federal banking agency for the institution
must appoint a receiver or, with the concurrence of the FDIC, a conservator,
unless the agency, with the concurrence of the FDIC, determines that the
purposes of the prompt corrective action provisions would be better served by
another course of action. FDICIA requires that any alternative determination
be "documented" and reassessed on a periodic basis. Notwithstanding the
foregoing, a receiver must be appointed after 270 days unless the appropriate
federal banking agency and the FDIC certify that the institution is viable and
not expected to fail.
Risk-Based Deposit Insurance and FICO Assessments. The FDIC has adopted a
rule establishing a risk-based system which assigns an institution to one of
three capital categories consisting of (1) well capitalized, (2) adequately
capitalized, or (3) undercapitalized, and one of three supervisory categories.
An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under this rule there are nine
assessment risk classifications (i.e. combinations of capital categories and
supervisory subgroups within each capital group). An institution's deposit
insurance assessment rate is determined by assigning the institution to a
capital category and a supervisory subgroup to determine which one of the nine
risk classification categories is applicable. The FDIC is authorized to raise
the assessment rates in certain circumstances. If the FDIC determines to
increase the assessment rates for all institutions, institutions in all risk
categories could be affected. The FDIC has exercised this authority several
times in the past and may raise BIF insurance premiums
8
again in the future. If such action is taken by the FDIC, it could have an
adverse effect on the earnings of CTC, BWM and FBT, the extent of which is not
currently quantifiable. The risk classification to which an institution is
assigned by the FDIC is confidential and may not be disclosed.
Assessment rates in 1996 ranged from 0% of domestic deposits for an
institution in the lowest risk category (i.e., well-capitalized and healthy
from a supervisory standpoint) to 0.27% of domestic deposits for institutions
in the highest risk category (i.e., undercapitalized and unhealthy from a
supervisory standpoint), for the first semiannual period of 1997. During 1996,
assessment rates also included a minimum annual assessment of $2,000 per
institution. CTC, BWM and FBT qualified for, and paid in 1996, the minimum
annual assessment under this rate schedule.
The Deposit Insurance Funds Act of 1996 eliminates the minimum assessment
and authorizes the Financing Corporation (FICO) to levy assessments on BIF-
assessable deposits and stipulates that the rate must equal one-fifth the FICO
assessment rate that is applied to deposits assessable by the SAIF. The actual
assessment rates for FICO were determined by deposit data from the September
30, 1996, Call Reports. Based on the 1996 Act, the Banks paid assessments
totaling $231,000 or 1.3 cents per $100 of deposits in 1997.
Brokered Deposits and Pass-Through Deposit Insurance Limitations. Under
FDICIA, a bank cannot accept brokered deposits unless it either (i) is "Well
Capitalized" or (ii) is "Adequately Capitalized" and has received a written
waiver from the FDIC. For this purpose, "Well Capitalized" and "Adequately
Capitalized" have the same definitions as in the Prompt Corrective Action
regulations. See "--Prompt Corrective Action" above. Banks that are not in the
"Well Capitalized" category are subject to certain limits on the rates of
interest they may offer on any deposits (whether or not obtained through a
third-party deposit broker). Pass-through insurance coverage is not available
for deposits of certain employee benefit plans in banks that do not satisfy
the requirements for acceptance of brokered deposits, except that pass-through
insurance coverage will be provided for employee benefit plan deposits in
institutions which at the time of acceptance of the deposit meet all
applicable regulatory capital requirements and send written notice to their
depositors that their funds are eligible for pass-through deposit insurance.
Although eligible to do so, CTC, BWM and FBT have not accepted brokered
deposits.
Conservatorship and Receivership Amendments. FDICIA authorizes the FDIC to
appoint itself conservator or receiver for a state-chartered bank under
certain circumstances and expands the grounds for appointment of a conservator
or receiver for an insured depository institution to include (i) consent to
such action by the board of directors of the institution; (ii) cessation of
the institution's status as an insured depository institution; (iii) the
institution is undercapitalized and has no reasonable prospect of becoming
adequately capitalized, or fails to become adequately capitalized when
required to do so, or fails to timely submit an acceptable capital plan, or
materially fails to implement an acceptable capital plan; and (iv) the
institution is critically undercapitalized or otherwise has substantially
insufficient capital. FDICIA provides that an institution's directors shall
not be liable to its stockholders or creditors for acquiescing in or
consenting to the appointment of the FDIC as receiver or conservator for, or
as a supervisor in the acquisition of, the institution.
Real Estate Lending Standards. FDICIA requires the federal bank regulatory
agencies to adopt uniform real estate lending standards. The FDIC has adopted
implementing regulations, which establish supervisory limitations on Loan-to-
Value ("LTV") ratios in real estate loans by FDIC-insured banks. The
regulations require FDIC-insured banks to establish LTV ratio limitations
within or below the prescribed uniform range of supervisory limits.
Standards for Safety and Soundness. FDICIA requires the federal bank
regulatory agencies to prescribe, by regulation, standards for all insured
depository institutions and depository institution holding companies relating
to: (i) internal controls, information systems and internal audit systems;
(ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk
exposure; (v) asset growth; and (vi) compensation, fees and benefits. The
compensation standards would prohibit employment contracts, compensation or
benefit arrangements, stock option plans, fee arrangements or other
compensatory arrangements that would provide "excessive"
9
compensation, fees or benefits, or that could lead to material financial loss.
In addition, the federal bank regulatory agencies are required by FDICIA to
prescribe standards specifying; (i) maximum classified assets to capital
ratios; (ii) minimum earnings sufficient to absorb losses without impairing
capital; and (iii) to the extent feasible, a minimum ratio of market value to
book value for publicly-traded shares of depository institutions and
depository institution holding companies. The FDIC has issued regulations
implementing certain of these provisions.
Activities and Investments of Insured State Banks. FDICIA provides that
FDIC-insured state banks such as CTC, BWM and FBT may not engage as a
principal, directly or through a subsidiary, in any activity that is not
permissible for a national bank unless the FDIC determines that the activity
does not pose a significant risk to the BIF, and the bank is in compliance
with its applicable capital standards. In addition, an insured state bank may
not acquire or retain, directly or through a subsidiary, any equity investment
of a type, or in an amount, that is not permissible for a national bank.
Subject to certain limited exceptions, the foregoing provisions of FDICIA
prohibit insured state banks such as CTC, BWM and FBT or any subsidiary of
such insured state banks from retaining or acquiring equity investments.
However, under an exception in the statute, an insured state bank that (i) is
located in a state such as Vermont or Massachusetts which authorized, as of
September 30, 1991, state banks to invest in common or preferred stock listed
on a national securities exchange ("listed stock") or shares of an investment
company registered under the Investment Company Act of 1940 ("registered
shares") and (ii) during the period beginning September 30, 1990 and ending on
November 26, 1991 made or maintained investments in listed stocks and
registered shares, may retain whatever listed stock or registered shares it
lawfully acquired or held prior to December 19, 1991 and may continue to
acquire listed stock or registered shares which may not exceed, taken together
in the aggregate, 100% of the bank's Tier 1 Capital. In order to acquire or
retain any listed stock or registered shares under this exception, the bank
must file a one-time notice with the FDIC containing specified information,
and the FDIC must determine that acquiring or retaining the listed stock or
registered shares will not pose a significant risk to the BIF. Any such
approval may be subject to whatever conditions or restrictions the FDIC
determines to be necessary or appropriate and will terminate with respect to
further acquisitions of listed stock or registered shares if the bank or its
holding company experiences a change in control and in certain other
circumstances. CTC filed the one-time notice with the FDIC and the FDIC did
not object.
Consumer Protection Provisions. FDICIA also includes provisions requiring
advance notice to regulators and customers for any proposed branch closing and
authorizing (subject to future appropriation of the necessary funds) reduced
insurance assessments for institutions offering "lifeline" banking accounts or
engaged in lending in distressed communities. FDICIA also includes provisions
requiring depository institutions to make additional and uniform disclosures
to depositors with respect to the rates of interest, fees and other terms
applicable to consumer deposit accounts.
Depositor Priority Statute. The FDI Act provides that, in the liquidation or
other resolution by any receiver of a bank insured by the FDIC, the claims of
depositors have priority over the general claims of other creditors. Hence, in
the event of the liquidation or other resolution of a banking subsidiary of
the Company, the general claims of the Company as creditor of such banking
subsidiary would be subordinate to the claims of the depositors of such
banking subsidiary, even if the claims of CC were not by their terms so
subordinated. In addition, this statute may, in certain circumstances,
increase the costs to banks of obtaining funds through non-deposit
liabilities.
Interstate Banking and Branching. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Riegle-Neal Act") provides that an
adequately capitalized and managed bank holding company may (with Federal
Reserve Board approval) acquire control of banks outside its principal state
of operations, without regard to whether such acquisitions are permissible
under state law. States may, however, limit the eligibility of banks to be
acquired by an out-of-state bank holding company to banks in existence for a
minimum period of time (not in excess of five years). No bank holding company
may make an acquisition outside its principal state of operations which would
result in it controlling more than 10% of the total amount of deposits of all
insured
10
depository institutions in the United States, or 30% or more of the total
deposits of insured depository institutions in any state (unless such limit is
waived, or a more restrictive or permissible limit is established, by a
particular state). In addition, since June 1, 1997, banks may branch across
state lines either by merging with banks in other states or by establishing
new branches in other states. The date relating to interstate branching
through mergers may be accelerated by any state. The provision relating to
establishing new branches in another state requires a state's specific
approval. Effective in 1996, the Vermont and Massachusetts legislatures
adopted legislation to accelerate the effective date of interstate branching
through mergers (that is, to "opt-in early"). Since 1990, Massachusetts has
had nationwide reciprocal interstate banking legislation permitting out-of-
state banks to conduct banking operations in that state both by mergers and by
establishing new banks, subject to the reciprocity requirements that banks
from another state may acquire banks in Massachusetts only if Massachusetts
banks may conduct banking operations in that state. The Company is unable to
predict the ultimate impact of this interstate banking legislation on it or
its competitors.
The United States Congress has periodically considered and adopted
legislation which has resulted in and could result in further regulation or
deregulation of both banks and other financial institutions. Such legislation
could place the Company, CTC, BWM, FBT or CCC in more direct competition with
other financial institutions, including mutual funds, securities brokerage
firms and investment banking firms. No assurance can be given as to whether
any additional legislation will be enacted or as to the effect of such
legislation on the business of the Company or its subsidiaries.
EMPLOYEES
At December 31, 1997 the Company and its subsidiaries employed 986 persons,
with a full-time equivalency of 923 employees. The Company enjoys good
relations with its employees. A variety of employee benefits, including
health, group life and disability income replacement insurance, a funded, non-
contributory pension plan, and an incentive savings and profit sharing plan,
are available to qualifying officers and employees.
ITEM 2 PROPERTIES
The Company's principal banking subsidiary, CTC, operates banking facilities
in 36 locations in Vermont. The offices of the Company are located in an owned
facility at Two Burlington Square in Burlington, Vermont. BWM's principal
offices are in Springfield, Massachusetts and it has four additional locations
in the greater Springfield, Massachusetts. FBT's principal offices are in
Worcester, Massachusetts and it has five additional locations in the greater
Worcester, Massachusetts area. CCC operates two mortgage company facilities in
Connecticut. Except for the CTC property, all of the properties mentioned
above are leased. The offices of CTC, BWM, FBT and CCC are in good physical
condition with modern equipment and facilities considered adequate to meet the
banking needs of customers in the communities serviced.
ITEM 3 LEGAL PROCEEDINGS
A number of legal claims against the Company arising in the normal course of
business were outstanding at December 31, 1997. Management, after reviewing
these claims with legal counsel, is of the opinion that these matters, when
resolved, will not have a material effect on the consolidated financial
statements.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
11
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The $1 par value common stock of Chittenden Corporation has been publicly
traded since November 14, 1974. As of December 31, 1997, there were 3,085
holders of record of the Company's common stock.
As of February 18, 1998 the Corporation's stock initiated trading on the
NYSE under the symbol "CHZ". Prior to that date, the Corporation's stock
traded on the NASDAQ, under the symbol "CNDN". The following table sets forth
the range of the high and low sales prices for the Corporation's common stock,
and the dividends declared, for each quarterly period within the past two
years:
DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
------------- ------ ------ ---------
1997
March 31........................................ $24.00 $18.50 $0.160
June 30......................................... 27.60 21.50 0.176
September 30.................................... 31.70 25.60 0.176
December 31..................................... 36.00 30.40 0.776(1)
1996
March 31........................................ 20.48 15.36 0.088
June 30......................................... 18.20 16.48 0.160
September 30.................................... 20.60 16.60 0.160
December 31..................................... 21.00 19.10 0.160
- --------
(1) Dividends declared during the fourth quarter of 1997 included a special
cash dividend of $0.60 per share.
For a discussion of dividend restrictions on the Corporation's common stock,
see "Dividends" under the caption Regulation on page 6 of this report.
12
ITEM 6 SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Statements of income:
Interest income........ $ 150,189 $ 142,592 $ 135,103 $ 101,383 $ 93,889
Interest expense....... 59,545 58,599 56,772 36,088 34,395
----------- ----------- ----------- ----------- -----------
Net interest income.... 90,644 83,993 78,331 65,295 59,494
Provision for possible
loan losses........... 4,050 4,183 5,000 5,500 8,135
Net interest income
after provision for
possible loan losses.. 86,594 79,810 73,331 59,795 51,359
Noninterest income..... 28,210 24,920 22,040 19,352 22,793
Noninterest expense.... 70,072 64,557 61,584 51,393 54,263
----------- ----------- ----------- ----------- -----------
Income before
provision for income
taxes................. 44,732 40,173 33,787 27,754 19,889
Provision for income
taxes................. 15,326 13,452 11,656 9,717 6,387
----------- ----------- ----------- ----------- -----------
Income before
cumulative effect of
change in accounting
principle............. 29,406 26,721 22,131 18,037 13,502
Cumulative effect of
change in accounting
principle............. -- -- -- -- (575)
----------- ----------- ----------- ----------- -----------
Net income............. $ 29,406 $ 26,721 $ 22,131 $ 18,037 $ 12,927
=========== =========== =========== =========== ===========
Total assets at year-
end.................... $ 1,977,150 $ 1,988,746 $ 1,794,704 $ 1,461,419 $ 1,466,292
Long-term debt at year-
end.................... 2,239 2,540 2,484 1,528 4,377
Common shares
outstanding at year-
end.................... 14,421,585 15,345,265 14,972,359 13,581,631 14,169,201
Balance sheets--average
daily balances:
Total assets........... $ 1,934,333 $ 1,841,944 $ 1,687,803 $ 1,436,462 $ 1,379,830
Loans, net of
allowance............. 1,363,394 1,307,725 1,202,591 1,001,356 987,477
Investment securities
and interest-bearing
cash equivalents...... 417,767 385,111 348,028 328,296 278,964
Total deposits......... 1,695,953 1,627,834 1,486,500 1,268,338 1,200,778
Long-term debt......... 4,210 2,514 1,662 1,406 1,360
Total stockholders'
equity................ 167,568 162,823 138,641 115,442 105,732
Per common share:
Basic Earnings......... $ 1.99 $ 1.75 $ 1.50 $ 1.28 $ 0.93
Diluted Earnings....... 1.94 1.72 1.47 1.26 0.91
Cash dividends
declared.............. 1.29 0.57 0.32 0.22 0.10
Book value............. 11.25 11.37 10.28 8.34 7.97
Weighted average common
shares outstanding..... 14,812,208 15,228,820 14,763,133 14,087,763 13,877,032
Weighted average common
and common equivalent
shares outstanding..... 15,166,557 15,543,741 15,105,914 14,341,166 14,143,183
Selected financial
percentages:
Return on average
total assets.......... 1.52% 1.45% 1.31% 1.25% 0.84%
Return on average
stockholders' equity.. 17.55 16.41 15.96 15.62 12.23
Interest rate spread... 4.31 4.23 4.34 4.37 4.22
Net yield on earning
assets................ 5.11 4.99 5.08 4.95 4.70
Net charge-offs as a
percent of average
loans................. 0.39 0.29 0.28 0.49 0.58
Nonperforming assets
ratio (1)............. 0.56 0.99 1.19 1.03 1.87
Allowance for possible
loan losses as a
percent of year-end
loans................. 1.89 2.07 2.20 2.09 2.14
Year-end leverage
capital ratio......... 7.43 8.58 8.05 8.10 7.94
Risk-based capital
ratios:
Tier 1............... 9.86 11.71 11.16 11.40 10.91
Total................ 11.17 13.06 12.53 12.76 12.25
Average stockholders'
equity to average
assets................ 8.66 8.84 8.21 8.03 7.66
Common stock dividend
payout ratio (2)...... 64.25 32.73 21.71 17.38 11.70
- --------
(1) The sum of nonperforming assets (nonaccrual loans, restructured loans, and
other real estate owned) divided by the sum of total loans and other real
estate owned
(2) Common stock cash dividends declared divided by net income; dividends
declared during 1997 include a special cash dividend of $0.60 per share.
13
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
Overview
The following discussion and analysis of financial condition and results of
operations of the Company and its subsidiaries should be read in conjunction
with reference to the consolidated financial statements and notes thereto and
selected statistical information appearing elsewhere in this report.
On March 17, 1995, the Company acquired all of the outstanding shares of BWM
for a combination of cash and common stock of the Company. The transaction has
been accounted for as a purchase and, accordingly, the consolidated statements
of income for 1997, 1996 and 1995 include BWM's results of operations for the
period from the acquisition date.
On February 29, 1996, the Company acquired all of the outstanding shares of
FBT in exchange for 2.0 million shares of Chittenden stock. The transaction
has been accounted for as a pooling of interests and, accordingly, all
historical financial information has been restated to reflect the acquired
bank.
On May 31, 1997, CTC acquired certain assets and assumed certain liabilities
of The Pomerleau Agency, Inc. This transaction has been accounted for as a
purchase and accordingly, all results of operations subsequent to the
transaction have been included in the consolidated statement of income.
Chittenden recorded net income of $29.4 million or basic earnings per share
of $1.99 and diluted earnings per share of $1.94 for the year ended December
31, 1997. This compares to net income of $26.7 million and basic earnings per
share of $1.75 and diluted earnings per share of $1.72 for 1996 and net income
of $22.1 million, basic earnings per share of $1.50 and diluted earnings per
share of $1.47 in 1995. For 1997, return on average equity was 17.55% and the
return on average assets was 1.52%. These compare to returns on average equity
of 16.41% and 15.96% and returns on average assets of 1.45% and 1.31% for 1966
and 1995, respectively.
Total assets decreased slightly from $1.989 billion in 1996 to $1.977
billion in 1997. Loans receivable increased by $54.5 million, largely due to
the continued emphasis on commercial and consumer lending. This increase was
partially offset by a $71.1 million decrease in cash and cash equivalents
which was attributable to higher than usual deposits left on hand by
governmental agencies at December 31, 1996. Total deposits were $1.758 billion
at December 31, 1997 compared with $1.762 billion at December 31, 1996.
The increase in earnings during 1997 compared to 1996 was primarily
attributable to a higher level of interest earning assets as well as an
increase in the net yield from 4.99% to 5.11%. These combined factors resulted
in an increase in net interest income of $6.7 million to $90.6 million for
1997.
Noninterest income totaled $28.2 million for 1997 up from $24.9 million for
1996. Commissions from insurance sales, which commenced with the May 1997
acquisition of the Pomerleau Agency, were $1.4 million in 1997. Credit card
and merchant servicing income increased $606,000 to $4.8 million in 1997.
Service charges on deposit accounts increased $692,000 to $7.0 million and
trust income increased $509,000 to $5.4 million in 1997. Mortgage servicing
income declined slightly in 1997 as a result of increased amortization expense
related to originated mortgage-servicing rights. Gains on sales of mortgages
decreased to $2.4 million in 1997, compared to $2.7 million in 1996 due to
decreased market activity.
Noninterest expense totaled $70.1 million in 1997, up 5.5 million from the
1996 level. Salaries increased $2.4 million from $25.8 million in 1996.
Employee benefits increased by $1.8 million to $9.4 million in 1997. The
increase in salaries and benefits during 1997 was primarily due to higher
staffing levels and related recruitment expenses. FDIC insurance premiums
totaled $231,000, up from $27,000 in 1996. Included in the
14
increases of the various noninterest expense categories (except FDIC Premium)
during 1997 were administrative expenses for the insurance agency acquired
during the second quarter of 1997, totaling $1.3 million.
The $4.6 million increase in earnings from 1995 to 1996 was due to several
factors. Net interest income increased $5.7 million to $84.0 million due to
the higher level of average earning assets, which offset a decrease in the net
yield from 5.08% to 4.99%. The provision for possible loan losses was $4.2
million, down $817,000 from the 1995 level reflecting continued strength in
asset quality. Revenues from noninterest sources were $24.9 million, up $2.9
million, led by higher gains on sales of mortgage loans and by higher net
credit card processing revenues. The increase in mortgage gains was
attributable to the adoption of SFAS No. 122, effective January 1, 1996, which
requires the capitalization of originated servicing rights related to loans
sold on a servicing retained basis. An additional $1.3 million in gains
representing the value of the mortgage servicing rights were recognized in
1996. Net credit card and merchant servicing income increased 16% to $4.2
million as a result of higher processing volumes in 1996 over 1995 levels.
Total noninterest expense increased $3.0 million to $64.6 million for 1996, of
which $1.6 million was due to the completion of the BWM acquisition late in
the first quarter of 1995. Considering the effect of including BWM for the
full year, noninterest expenses were up 2% for 1996 compared to the previous
year.
FINANCIAL CONDITION
Loans
Chittenden's gross loan portfolio increased by $54.5 million during 1997, to
end the year at $1.399 billion. The overall proportions of commercial-related
and consumer types of loans increased from the mix at the end of 1996. The
Company continues to pursue its strategy of gradually shifting its loan mix
through continued focus on commercial and non-real estate consumer lending
while at the same time selling on the secondary market substantially all of
its originated fixed-rate residential mortgage loans. Growth in non-
residential consumer loans, including automobile leases, was $38.5 million or
19.0% from the previous year, while non-real estate commercial loan growth was
$44.0 million or 13.7% from year-end 1996. The total real estate portfolio,
including home equity credit lines, decreased $28.0 million or 3.4% from year-
end 1996.
The classification of the Company's loan portfolio is based on underlying
collateral. At December 31, 1997, commercial loans secured by non-real estate
business assets totaled $365.0 million or 26.1% of total loans, up from the
$321.1 million posted at year-end 1996. Commercial real estate loans,
representing 22.5% of the portfolio, stood at $314.5 million at year-end 1997,
up slightly from $304.5 million at December 31, 1996. Construction loans
amounted to $21.9 million at December 31, 1997, down slightly from $25.1
million the year before.
Residential real estate loans stood at $456.4 million at year-end 1997, down
from $491.2 million at December 31, 1996. Reflecting the shift in the
Company's strategy, this category represented 32.6% of the portfolio at year-
end 1997, compared to 36.5% at year-end 1996. In total, $219.3 million in
residential mortgages were originated during 1997, compared to $264.2 million
during 1996. Secondary market sales of mortgage loans totaled $182.4 million
in 1997, compared to $201.4 million in 1996. The Company underwrites
substantially all of its residential mortgages to secondary market standards.
During 1997, the Company continued to follow its policy of selling
substantially all of its fixed-rate residential mortgage production on a
servicing-retained non-recourse basis.
Included in the real estate portfolio are home equity credit lines, which
totaled $80.4 million at December 31, 1997, compared to $84.3 million the
previous year. The unused portion of these lines totaled $79.8 million at
December 31, 1997, compared to $80.5 million at year-end 1996.
The portfolio of residential mortgages serviced for investors totaled
$1,024.4 million at December 31, 1997, compared to $1,006.9 million at year-
end 1996. These assets are owned by investors other than Chittenden and
therefore are not included in the consolidated balance sheets of the Company.
Of the loans serviced, the
15
Company originated $876.2 million and the balance consisted of purchased
mortgage-servicing rights acquired prior to 1996.
Consumer loans increased significantly in 1997, ending the year at $241.3
million, compared with $202.8 at year-end 1996. This increase resulted from
the Company's continued development of the indirect auto lending and leasing
market, which reflects the Company's emphasis on responding to the marketplace
through dealer relationships within its existing deposit franchise area. The
Company underwrites all of its indirect automotive loans, maintaining
substantially the same credit standards as for car loans originated in its
branch offices. The Company does not originate any subprime loans. Indirect
installment lending through auto dealers was up $11.3 million from year-end
1996 to $106.0 million at the end of 1997. The Company also offers auto leases
through its dealer base. This product is underwritten and priced similarly to
indirect installment auto loans. Lease financing receivables outstanding at
December 31, 1997 were $72.6 million, up from $41.1 million a year earlier.
The Company has residual insurance through outside insurance companies which
substantially eliminates the risk associated with the residual values of its
leased vehicle portfolio. Contrary to these trends, direct installment and
credit card balances at December 31, 1997 stood at $40.4 million and $22.4
million, respectively, compared with $43.0 million and $24.0 million at the
end of 1996. By emphasizing the indirect and leasing programs as well as
limiting credit card lending to its existing retail and commercial base these
trends should continue. Unused portions of credit card lines totaled $58.0
million at the end of 1997, down from $72.5 million one year earlier.
The Company's lending activities are conducted in market areas focused in
Vermont and western and central Massachusetts, with additional activity
related to nearby trading areas in Quebec, New York, New Hampshire, Maine, and
Connecticut. In addition to the portfolio diversification described above, the
loans are widely diversified by borrowers and industry groups.
The following table shows the composition of the loan portfolio for the five
years ended December 31, 1997:
DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Commercial.............. $ 365,042 $ 321,068 $ 291,651 $ 188,568 $ 165,372
Real estate:
Residential........... 375,967 406,850 388,705 372,344 362,292
Commercial............ 314,477 304,530 305,941 258,023 252,824
Construction.......... 21,900 25,084 25,796 18,813 20,994
Home equity............. 80,429 84,319 78,600 76,457 75,759
Consumer................ 168,761 161,699 147,540 143,250 125,423
Lease financing......... 72,562 41,117 12,420 -- --
---------- ---------- ---------- ---------- ----------
Total gross loans....... 1,399,138 1,344,667 1,250,653 1,057,455 1,002,664
Allowance for possible
loan losses............ (26,721) (28,096) (27,818) (22,163) (21,672)
---------- ---------- ---------- ---------- ----------
Net loans............... $1,372,417 $1,316,571 $1,222,853 $1,035,292 $ 980,992
========== ========== ========== ========== ==========
Mortgage loans held for
sale................... $ 16,433 $ 9,870 $ 14,692 $ 2,870 $ 11,646
NONPERFORMING ASSETS
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. Management classifies loans, except consumer and
residential loans, as nonaccrual loans when they become 90 days past due as to
principal or interest, unless they are adequately secured and are in the
process of collection. In addition, loans that have not met this delinquency
test may be placed on nonaccrual at management's discretion. Consumer and
residential loans are included when management considers it to be appropriate.
Nonaccrual loans with a related guarantee by a governmental agency are
reflected net of those guarantees in nonperforming statistics. Generally, a
loan remains on nonaccrual status until the factors which indicated
16
doubtful collectibility no longer exist or the loan is determined to be
uncollectible and is charged off against the allowance for possible loan
losses.
A loan is classified as a restructured loan when the interest rate is
reduced and/or other terms are modified because of the inability of the
borrower to service debt at current market rates and terms. Other real estate
owned ("OREO") is real estate that has been formally acquired through
foreclosure.
The following table shows the composition of nonperforming assets and loans
past due 90 days or more and still accruing for the five years ended December
31, 1997:
DECEMBER 31,
------------------------------------------
1997 1996 1995 1994 1993
------ ------- ------- ------- -------
(IN THOUSANDS)
Loans on nonaccrual................ $6,481 $10,601 $ 9,939 $ 8,289 $13,992
Loans not included above which are
troubled debt restructurings...... 767 638 2,502 515 1,030
Other real estate owned............ 747 2,251 2,652 2,141 3,816
------ ------- ------- ------- -------
Total nonperforming assets......... $7,995 $13,490 $15,093 $10,945 $18,838
====== ======= ======= ======= =======
Loans past due 90 days or more and
still accruing.................... $2,838 $ 966 $ 1,054 $ 1,134 $ 1,576
Percentage of nonperforming assets
to total loans and other real
estate owned...................... 0.56% 0.99% 1.19% 1.03% 1.87%
Nonperforming assets to total
assets............................ 0.40 0.68 0.84 0.75 1.28
Allowance for possible loan losses
to nonperforming loans............ 368.67 249.99 223.59 251.74 144.27
Nonaccrual loans consisted of approximately 200 loans, the largest of which
amounted to $451,000 at year-end 1997 and were diversified across a range of
industries, sectors, and geography. OREO totaled $747,000 at year-end 1997,
compared with $2.3 million at the end of 1996.
Allowance for possible loan losses
The allowance for possible loan losses is based on management's estimate of
the amount required to reflect the risks in the loan portfolio, based on
circumstances and conditions known or anticipated at each reporting date. In
addition to evaluating the collectibility of specific loans when determining
the adequacy of the allowance for possible loan losses, management also takes
into consideration other factors such as changes in the mix and volume of the
loan portfolio, historic loss experience, the amount of delinquencies and
loans adversely classified, and economic trends. The adequacy of the allowance
for possible loan losses is assessed by an allocation process whereby specific
loss allocations are made against adversely classified loans, and general loss
allocations are made against segments of the loan portfolio which have similar
attributes. As previously mentioned, the mix of the Company's loan portfolio
has changed during the past three years. This, and uncertainties concerning
how changing interest rates and unclear, or contradictory economic indicators
will affect the local and regional economy also were considered by management
in determining the adequacy of the allowance for possible loan losses.
17
The following table summarizes the activity in the Company's allowance for
possible loan losses for the five years ended December 31, 1997:
DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Balance of allowance for
possible loan losses at
beginning of year...... $ 28,096 $ 27,818 $ 22,163 $ 21,672 $ 19,392
BWM allowance acquired.. -- -- 4,135 -- --
Provision charged to
expense................ 4,050 4,183 5,000 5,500 8,135
---------- ---------- ---------- ---------- ----------
Balance of allowance for
possible loan losses
after provision........ 32,146 32,001 31,298 27,172 27,527
---------- ---------- ---------- ---------- ----------
Loans charged off:
Commercial............ 3,903 1,770 1,353 1,085 2,606
Real estate:
Residential......... 780 966 1,525 878 1,220
Commercial.......... 675 791 1,596 3,160 1,639
Construction........ 204 185 -- 4 63
Home equity........... 158 167 108 51 227
Consumer.............. 2,517 2,230 1,900 1,061 1,292
---------- ---------- ---------- ---------- ----------
Total loans charged
off................ 8,237 6,109 6,482 6,239 7,047
---------- ---------- ---------- ---------- ----------
Recoveries of loans
previously charged off:
Commercial............ 859 822 1,161 555 241
Real estate:
Residential......... 118 188 57 99 201
Commercial.......... 1,168 546 1,130 158 227
Construction........ 12 91 -- -- --
Home equity........... 49 8 -- 29 51
Consumer.............. 606 549 654 389 472
---------- ---------- ---------- ---------- ----------
Total recoveries.... 2,812 2,204 3,002 1,230 1,192
---------- ---------- ---------- ---------- ----------
Net loans charged off... 5,425 3,905 3,480 5,009 5,855
---------- ---------- ---------- ---------- ----------
Balance of allowance for
possible loan losses at
year end............... $ 26,721 $ 28,096 $ 27,818 $ 22,163 $ 21,672
========== ========== ========== ========== ==========
Amount of loans
outstanding at end of
year................... $1,415,571 $1,354,537 $1,265,345 $1,060,325 $1,014,310
Average amount of loans
outstanding............ 1,391,234 1,336,185 1,228,948 1,023,399 1,008,010
Ratio of net charge-offs
during year to average
loans outstanding...... 0.39% 0.29% 0.28% 0.49% 0.58%
Allowance as a percent
of loans outstanding at
end of year............ 1.89 2.07 2.20 2.09 2.14
At December 31, 1997, the allowance for possible loan losses was $26.7
million, or 1.89% of total loans compared with $28.1 million, or 2.07% of
loans one year ago. The coverage ratio, or allowance for possible loan losses
to nonperforming loans, stood at 369% at year-end 1997, compared with 250% at
the end of 1996.
The provision for possible loan losses totaled $4.1 million in 1997,
compared to $4.2 million in 1996, and $5.0 million in 1995. The lower
provision during 1997 and 1996 was primarily attributable to the reduction in
the level of nonperforming assets and the strength of the ratios in connection
with the allowance for possible loan losses.
Commercial charge-offs for 1997 include a $1.9 million charge related to
CTC's commercial customer credit card processing business. The charge off
related to a future services company, which had contracted with,
18
and accepted deposits, from customers, prior to discontinuing operations. This
company was obligated to provide services to its customers upon the payment of
a second amount. At the time this company discontinued operations, CTC chose
to honor these obligations, leading to the charge-off of the resulting $1.9
million overdraft. The Company has assessed its merchant servicing customer
base and has evaluated the processing volumes related to similar future
services businesses. It has also taken steps to mitigate the risk of similar
charge-offs in the future.
The following table summarizes the allocation of the allowance for possible
loan losses for the five years ended December 31, 1997:
DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995 1994
---------------------- ---------------------- ---------------------- ----------------------
AMOUNT LOAN AMOUNT LOAN AMOUNT LOAN AMOUNT LOAN AMOUNT
ALLOCATED DISTRIBUTION ALLOCATED DISTRIBUTION ALLOCATED DISTRIBUTION ALLOCATED DISTRIBUTION ALLOCATED
--------- ------------ --------- ------------ --------- ------------ --------- ------------ ---------
(IN THOUSANDS)
Commercial....... $ 5,075 26% $ 4,494 24% $ 3,901 23% $ 2,417 18% $ 2,468
Real estate:
Residential..... 1,275 27 1,395 30 1,452 31 764 35 819
Commercial...... 6,143 23 5,960 23 6,024 25 5,692 24 6,259
Construction.... 455 1 500 2 439 2 770 2 510
Home equity...... 318 6 317 6 291 6 268 7 370
Consumer and
leasing......... 4,093 17 3,149 15 1,754 13 1,916 14 2,146
Other............ 9,362 -- 12,281 -- 13,957 -- 10,336 -- 9,100
------- --- ------- --- ------- --- ------- --- -------
$26,721 100% $28,096 100% $27,818 100% $22,163 100% $21,672
======= === ======= === ======= === ======= === =======
1993
------------
LOAN
DISTRIBUTION
------------
Commercial....... 16%
Real estate:
Residential..... 36
Commercial...... 25
Construction.... 2
Home equity...... 8
Consumer and
leasing......... 13
Other............ --
------------
100%
============
Notwithstanding the foregoing analytical allocations, the entire allowance
for possible loan losses is available to absorb charge-offs in any category of
loans. (See "Provision for Possible Loan Losses.")
Investment Securities
The investment portfolio is used to meet liquidity demands, mitigate
interest rate sensitivity, and generate interest income. At December 31, 1997,
the Company held investments available for sale totaling $363.3 million. This
compares with investments of $329.2 million available for sale and $35.6
million held for investment at December 31, 1996. During 1997, in order to
improve the liquidity of the investment portfolio, investments previously
classified as held to maturity with an amortized cost and market value of $6.8
million were sold. In addition, the remaining held for investment portfolio
with an amortized cost of $21.9 million and unrealized loss of $385,000 was
transferred to available for sale in accordance with Statement of Financial
Accounting Standards No. 115. At December 31, 1997, unrealized gains (net of
taxes) of $1,675,000 resulted from marking the available for sale portfolio to
market value. This compares with unrealized losses (net of taxes) of $208,000
at December 31, 1996. These amounts are reflected as an increase and as a
reduction, respectively, in stockholders' equity.
19
The following tables show the composition of the Company's investment
portfolio, at December 31, 1997 and 1996:
1997 1996
-------- --------
Securities available for sale (at market value) (IN THOUSANDS)
U.S. Treasury securities................................... $ 23,334 $109,471
U.S. government agency obligations......................... 138,203 76,707
Obligations of states and political subdivisions........... 314 --
Mortgage-backed securities................................. 91,438 51,604
Corporate bonds and notes.................................. 90,812 65,190
Government bond mutual funds............................... 9,050 10,103
Marketable equity securities............................... 10,007 16,138
Other debt securities...................................... 121 --
-------- --------
Total Securities available for sale...................... 363,279 329,213
-------- --------
Securities held for investment (at amortized cost)
U.S. government agency obligation.......................... -- $ 198
Obligations of states and political subdivisions........... -- 490
Mortgage-backed securities................................. -- 34,761
Corporate bonds and notes.................................. -- 25
Other debt securities...................................... -- 106
-------- --------
Total Securities held for investment..................... -- 35,580
-------- --------
Total Investment Securities............................ $363,279 $364,793
======== ========
The following table shows the maturity distribution of the amortized cost of
the Company's investment securities and weighted average yields of such
securities on a fully taxable equivalent basis, at December 31, 1997, with
comparative totals for 1996. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations:
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER NO FIXED
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS MATURITY TOTAL
------------- -------------- ------------- ------------ ------------- --------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- -------- ----- ------- ----- ------ ----- ------- ----- -------- -----
Securities available for
sale (IN THOUSANDS)
US Treasury securities. $10,574 6.74% $ 12,513 6.53% $ -- --% $ -- --% $ -- --% $ 23,087 6.63%
US government agency
obligations........... 9,963 5.60 122,109 6.43 3,000 7.82 1,800 7.25 -- -- 136,872 6.40
Obligations of states
and political
subdivisions.......... 16 9.96 17 9.96 170 9.61 111 9.14 -- -- 314 9.67
Mortgage-backed
securities (1)........ 17,571 6.87 46,716 6.79 26,339 6.94 247 6.45 -- -- 90,873 6.84
Corporate bonds and
notes................. 5,991 5.74 83,861 6.61 25 7.00 -- -- -- -- 89,877 6.55
Government bond mutual
funds................. -- -- -- -- -- -- -- -- 9,526 6.91 9,526 6.91
Marketable equity
securities............ 10,000 6.14 -- -- -- -- -- -- -- -- 10,000 6.41
Other debt securities.. -- -- 89 6.25 32 10.36 -- -- -- -- 121 7.34
------- ---- -------- ---- ------- ----- ------ ---- ------- ---- -------- ----
Total available for
sale................... 54,115 6.35 265,305 6.55 29,566 7.05 2,158 7.26 9,526 6.91 360,670 6.57
------- ---- -------- ---- ------- ----- ------ ---- ------- ---- -------- ----
Comparative totals for
1996................... $85,640 6.08% $239,349 6.27% $22,350 6.98% $6,924 7.26% $10,840 5.44% $365,103 6.26%
- --------
(1) Maturities of mortgage-backed securities are based on contractual payments
and estimated mortgage loan prepayments.
Deposits
During 1997, total deposits averaged $1,696.0 million, up from $1,627.8
million in 1996. Noninterest-bearing demand deposits averaged $279.0 million,
up from $251.3 million in 1996. Average savings deposits increased $53.8
million, to $886.5 million for 1997. This category includes non-contractual
interest bearing deposit products, such as savings, money market, and N.O.W.
accounts. During 1997, time accounts (retirement and certificates of deposit)
totaling $530.4 million decreased 2% compared to $543.9 million in 1996. The
Company has a number of institutional customers whose investment needs are
frequently met by purchasing certificates of deposit over $100,000. Depositors
in this category tend to seek bids regularly, and the Company raises or lowers
the interest rates it offers depending on its liquidity needs and on its
investment opportunities.
20
The following table shows average daily balances of the Company's deposits
for the periods indicated:
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
Demand deposits................................ $ 279,034 $ 251,276 $ 223,800
Savings deposits............................... 886,516 832,677 760,029
Other time..................................... 413,036 430,501 388,276
Certificates of deposit $100,000 and over...... 117,367 113,380 114,395
---------- ---------- ----------
Total deposits............................... $1,695,953 $1,627,834 $1,486,500
========== ========== ==========
The Company's outstanding certificates of deposit and other time deposits in
denominations of $100,000 and over had maturities as follows:
DECEMBER 31,
--------------
1997
--------------
(IN THOUSANDS)
Three months or less....................................... $ 82,886
Over three months to six months............................ 20,935
Over six months to twelve months........................... 24,957
Over twelve months......................................... 10,698
--------
$139,476
========
BORROWINGS
During 1997, short-term borrowings averaged $33.9 million, up from the $28.2
million posted in 1996. This funding consists of: Treasury, tax and loan
deposits; securities sold under agreements to repurchase and Federal funds
purchased. Treasury borrowings averaged $22.4 million for 1997 compared with
$15.3 million during 1996. Treasury funding is attractive to the Company
because the rate of interest paid on borrowings floats at 25 basis points
below the Federal funds rate, there are no reserve requirements, and there are
no FDIC insurance costs. Repurchase agreements averaged $10.6 million for
1997, compared to $10.1 million posted during 1996. These borrowings have
neither reserve requirements nor FDIC insurance costs. Short-term FHLB
Borrowings averaged $194,000 for 1997 compared with $2.3 million for 1996.
U.S. Treasury and agency securities, mortgage-backed securities and corporate
notes are pledged as collateral for the Treasury borrowings and repurchase
agreements. Federal funds purchased averaged $698,000 for 1997 compared with
$382,000 for 1996. Long-term borrowings averaged $4.2 million in 1997 compared
to $2.5 million in 1996.
CAPITAL RESOURCES
The Company's capital forms the foundation for maintaining investor
confidence as well as for developing programs for growth and new activities.
Because of the Company's profitability over the past several years, total
capital increased from $111.7 million at December 31, 1993 to $174.4 million
at December 31, 1996. During 1997, the Company adopted measures to maintain a
capital level consistent with the needs for its activities. The quarterly
dividend rate was increased from $0.16 to $0.18 per share in the second
quarter and an additional special $0.60 per share dividend was paid in the
fourth quarter of 1997. Additionally, a share repurchase plan was implemented,
in which up to 1,250,000 shares could be repurchased during 1997 and 1998. At
December 31, 1997, capital stood at $162.3 million, a reduction of $12.1
million from $174.4 million at December 31, 1996. Repurchases of 1,043,000
shares of the Company's stock totaling $26.0 million and dividend payments
totaling $18.9 million reduced the capital position during 1997. These
reductions were partially offset by earnings of $29.4 million, $1.4 million of
common stock issued in connection with benefit plans and a change in the net
unrealized gain on securities available for sale of $1.9 million.
The capital position increased during 1996 by $20.5 million. Earnings of
$26.7 million and $3.5 million of common stock issued in connection with
benefit plans added to capital during the year. Dividend payments totaling
$8.7 million reduced the capital position, as did a change in the net
unrealized gain on securities available for sale of $976,000.
21
Both the Board of Governors of the Federal Reserve System (the "FRB") and
the Federal Deposit Insurance Corporation (the "FDIC") have defined leverage
capital requirements. At December 31, 1997, the Company's leverage capital
ratio (which is calculated pursuant to the FRB's regulations) was 7.43%,
CTC's, BWM's, and FBT's leverage capital ratios (which are calculated pursuant
to the FDIC's regulations) were 7.05%, 7.31% and 6.65%, respectively. The
ratios in 1996 were 8.58% for the Company, 8.42% for CTC, 7.85% for BWM, and
6.85% for FBT.
Additionally, the FRB and the FDIC have a risk-based capital standard. Under
this measure of capital, banks are required to hold more capital against
certain assets perceived as more-risky, such as commercial loans, than against
other assets perceived as less-risky, such as residential mortgage loans and
U.S. Treasury securities. Further, off-balance sheet items such as unfunded
loan commitments and standby letters of credit, are included for the purposes
of determining risk-weighted assets. Commercial banking organizations are
required to have total capital equal to 8% of risk-weighted assets, and Tier 1
capital--consisting of common stock and certain types of preferred stock--
equal to at least 4% of risk-weighted assets. Tier 2 capital, included in
total capital, includes the allowance for possible loan losses up to a maximum
of 1.25% of risk-weighted assets. At December 31, 1997, the Company's risk-
based capital ratio was 11.17% and its Tier 1 capital, consisting entirely of
common stock, was 9.86% of risk-weighted assets. This compares with year-end
1996 ratios of 13.06% and 11.71%, respectively.
FDIC regulations pertaining to capital adequacy, which apply to the Banks,
require a minimum 3% leverage capital ratio for those institutions with the
most favorable composite regulatory examination rating. In addition, a 4% Tier
1 risk-based capital ratio, and an 8% total risk-based capital ratio are
required for a bank to be considered adequately capitalized. Leverage, Tier 1
risk-based, and total risk-based capital ratios exceeding 5%, 6%, and 10%,
respectively, qualify a bank for the "well-capitalized" designation. At
December 31, 1997, CTC's leverage capital ratio was 7.05%, its Tier 1 risk-
based capital ratio was 9.30%, and its total risk-based capital ratio was
10.60%; BWM's ratios were 7.31 %, 8.79%, and 10.14%, respectively, while FBT's
ratios were 6.65%, 9.70%, and 10.98%, respectively. These ratios placed the
Banks in the FDIC's highest capital category of well capitalized. Capital
ratios in excess of minimum requirements indicate capacity to take advantage
of profitable and credit-worthy opportunities as well as the potential to
respond to unforeseen adverse conditions.
The following table presents capital components and ratios of the Company at
December 31, 1997, 1996, and 1995:
DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
LEVERAGE
Stockholders' equity........................ $ 146,434 $ 163,513 $ 141,453
Total average assets (1).................... 1,969,822 1,906,114 1,757,002
Leverage capital ratio...................... 7.43% 8.58% 8.05%
RISK-BASED
Capital components:
Tier 1..................................... $ 146,434 $ 163,513 $ 141,453
Tier 2..................................... 18,570 17,449 15,873
---------- ---------- ----------
Total..................................... $ 165,004 $ 180,962 $ 157,326
========== ========== ==========
Risk-weighted assets:
On-balance sheet........................... $1,407,074 $1,331,203 $1,216,807
Off-balance sheet.......................... 92,441 75,308 62,347
---------- ---------- ----------
$1,499,515 $1,406,511 $1,279,154
========== ========== ==========
Ratios:
Tier 1..................................... 9.86% 11.71% 11.16%
Total (including Tier 2)................... 11.17 13.06 12.53
- --------
(1) Total average assets for the most recent quarter.
22
LIQUIDITY AND RATE SENSITIVITY
The Company's liquidity and rate sensitivity are monitored by the asset and
liability committee, based upon policies approved by the Board of Directors.
Strategies are implemented by the Banks' asset and liability committee. This
committee meets periodically to review and direct the Banks' lending and
deposit-gathering functions. Investment and borrowing activities are managed
by the Company's Treasury function.
The measure of an institution's liquidity is its ability to meet its cash
commitments at all times with available cash or by conversion of other assets
to cash at a reasonable price. At December 31, 1997, the Company maintained
cash balances and short-term investments of approximately $143.4 million,
compared with $214.5 million at December 31, 1996. Cash on hand at December
31, 1996 was higher than usual due to a change in the timing of certain
payments to municipalities by the State of Vermont. In addition, repurchases
of the Company's stock totaling $26.0 million and dividend payments totaling
$18.9 million reduced the Company's cash position during the year. During
1997, the Company continued to be an average daily net seller of Federal
Funds.
Interest-rate risk is the sensitivity of income to variations in interest
rates over both short-term and long-term horizons. The primary goal of
interest-rate management is to control this risk within limits approved by the
Board of Directors. These limits and guidelines reflect the Company's
tolerance for interest-rate risk. The Company attempts to control interest-
rate risk by identifying exposures, quantifying them and taking appropriate
actions. The Company quantifies its interest-rate risk exposure using
sophisticated simulation and valuation models, as well as simpler gap
analyses.
The Company uses simulation analyses to measure the exposure of net interest
income to changes in interest rates over a relatively short (i.e., within one
year) time horizon. Simulation analysis involves projecting future interest
income and expense from the Company's assets and liabilities under various
scenarios.
The Company's limits on interest-rate risk specify that if interest rates
were to shift immediately up or down 200 basis points, estimated net interest
income for the next 12 months should decline by less than 10%. The following
table reflects the Company's estimated exposure, as a percentage of estimated
net interest income for the next 12 months, assuming an immediate shift in
interest rates:
RATE CHANGE ESTIMATED EXPOSURE AS A
(BASIS POINTS) % OF NET INTEREST INCOME
-------------- ------------------------
+200 4.33%
-200 (4.77)
As noted above, one of the tools used to measure rate sensitivity is the
funds gap. The funds gap is defined as the amount by which a bank's rate
sensitive assets exceed its rate sensitive liabilities. A positive gap exists
when rate sensitive assets exceed rate sensitive liabilities. This indicates
that a greater volume of assets than liabilities will reprice during a given
period. This mismatch will improve earnings in a rising rate environment and
inhibit earnings when rates decline. Conversely, when rate sensitive
liabilities exceed rate sensitive assets, the gap is referred to as negative
and indicates that a greater volume of liabilities than assets will reprice
during the period. In this case, a rising rate environment will inhibit
earnings and declining rates will improve earnings. Notwithstanding this
general description of the effect on income of the gap position, it may not be
an accurate predictor of changes in net income. The Company's limits on
interest-rate risk specify that the cumulative one-year gap should be less
than 15% of total assets. As of December 31, 1997, the estimated exposure was
2.7% asset-sensitive.
23
The following table shows the amounts of interest-earning assets and
interest-bearing liabilities at December 31, 1997 that reprice during the
periods indicated:
REPRICING DATE
--------------------------------------------------
OVER
ONE DAY OVER SIX ONE YEAR OVER
TO SIX MONTHS TO TO FIVE FIVE
MONTHS ONE YEAR YEARS YEARS TOTAL
-------- --------- -------- --------- ----------
(IN THOUSANDS)
Interest-earning assets:
Loans....................... $823,893 $178,474 $352,743 $ 60,461 $1,415,571
Investment securities (1)... 35,772 27,775 273,661 31,662 368,870
Interest-bearing cash
equivalents................ 60,801 -- -- -- 60,801
-------- -------- -------- --------- ----------
Total interest-earning
assets.................... 920,466 206,249 626,404 92,123 1,845,242
-------- -------- -------- --------- ----------
Interest-bearing
liabilities:
Deposits.................... 897,557 152,939 141,300 263,194 1,454,990
Borrowings.................. 22,250 1,000 2,239 -- 25,489
-------- -------- -------- --------- ----------
Total interest-bearing
liabilities............... 919,807 153,939 143,539 263,194 1,480,479
-------- -------- -------- --------- ----------
Net interest rate
sensitivity gap............ $ 659 $ 52,310 $482,865 $(171,071) $ 364,763
======== ======== ======== ========= ==========
Cumulative gap at December
31, 1997................... $ 659 $ 52,969 $535,834 $ 364,763
Cumulative gap at December
31, 1996................... $(12,922) $ 31,228 $382,924 $ 321,201
- --------
(1) Amounts are based on amortized cost balances.
The following table shows scheduled maturities of selected loans at December
31, 1997:
LESS THAN ONE YEAR TO OVER FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
--------- ----------- --------- --------
(IN THOUSANDS)
Predetermined rates:
Commercial........................... $ 13,751 $ 69,827 $ 26,570 $110,148
Commercial real estate and
construction........................ 7,351 67,605 40,969 115,925
-------- -------- -------- --------
21,102 137,432 67,539 226,073
======== ======== ======== ========
Floating or adjustable rates:
Commercial........................... 95,286 98,835 60,773 254,894
Commercial real estate and
construction........................ 24,281 99,856 96,315 220,452
-------- -------- -------- --------
119,567 198,691 157,088 475,346
======== ======== ======== ========
RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 1997 and 1996
NET INTEREST INCOME
The primary source of recurring income for the Company is the net interest
income of the Banks, which is the difference between interest income on loans
and investments and interest paid on deposits and borrowings. Net interest
income is affected by the change in interest rates and the volumes of interest
earning assets and interest bearing liabilities.
For 1997, net interest income was $90.6 million, up $6.7 million from the
1996 level. On a fully taxable equivalent basis, net interest income increased
$6.6 million from 1996, to $92.4 million in 1997. These improvements resulted
from higher levels of interest earning assets and an increase in the net yield
on interest bearing liabilities. Average interest-earning assets totaled
$1,809.0 million for 1997, up $87.7 million from the 1996 level. The taxable
equivalent net yield on earning assets was 5.11% in 1997, an increase of 12
basis points from 4.99% in 1996.
24
The following table presents an analysis of average rates and yields on a
fully taxable equivalent basis for the years indicated:
1997 1996 1995
--------------------------------- -------------------------------- --------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE (1) RATE (1) BALANCE EXPENSE (1) RATE (1) BALANCE EXPENSE (1) RATE (1)
---------- ------------ -------- ---------- ----------- -------- ---------- ----------- --------
(IN THOUSANDS)
ASSETS
Interest-earning
assets:
Loans................. $1,386,772 $125,076 9.02% $1,331,199 $120,362 9.04% $1,222,790 $114,358 9.35%
Industrial revenue
bonds (2)............ 4,462 522 11.70 4,986 571 11.45 6,158 718 11.66
Investments:
Taxable............... 360,284 22,992 6.38 327,099 20,232 6.19 292,495 18,313 6.26
Tax-favored debt
securities........... 379 39 10.29 1,112 111 9.98 1,596 157 9.84
Tax-favored equity
securities........... 21,475 1,417 6.60 28,488 1,684 5.91 19,927 1,289 6.47
Interest-bearing
deposits in banks.... 100 3 3.25 100 3 3.00 100 3 3.00
Federal funds sold.... 35,529 1,936 5.45 28,312 1,524 5.38 33,910 1,988 5.86
---------- -------- ---------- -------- ---------- --------
Total interest-earning
assets............... 1,809,001 151,985 8.40 1,721,296 144,487 8.39 1,576,976 136,826 8.68
-------- -------- --------
Noninterest-earning
assets............... 153,172 149,108 137,184
Allowance for possible
loan losses.......... (27,840) (28,460) (26,357)
---------- ---------- ----------
Total assets.......... $1,934,333 $1,841,944 $1,687,803
========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Savings and interest-
bearing transactional
accounts............. $ 886,516 $ 29,637 3.34 $ 832,677 $ 27,268 3.27 $ 760,029 $ 26,211 3.45
Certificates of
deposit $100,000 and
over................. 117,367 6,267 5.34 113,380 6,259 5.52 114,395 7,144 6.25
Other time deposits... 413,036 21,193 5.13 430,501 22,988 5.34 388,276 20,416 5.26
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
deposits............. 1,416,919 57,097 4.03 1,376,558 56,515 4.11 1,262,700 53,771 4.26
Short-term borrowings. 33,930 2,225 6.56 28,165 1,887 6.70 42,628 2,858 6.70
Long-term debt........ 4,210 223 5.30 2,514 197 7.84 1,662 143 8.60
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
liabilities.......... 1,455,059 59,545 4.09 1,407,237 58,599 4.16 1,306,990 56,772 4.34
-------- -------- --------
Noninterest-bearing
liabilities:
Demand deposits....... 279,034 251,276 223,800
Other liabilities..... 32,672 20,608 18,372
---------- ---------- ----------
Total liabilities..... 1,766,765 1,679,121 1,549,162
Stockholders' equity.. 167,568 162,823 138,641
---------- ---------- ----------
Total liabilities and
stockholders' equity. $1,934,333 $1,841,944 $1,687,803
========== ========== ==========
Net interest income... $ 92,440 85,888 $ 80,054
======== ======== ========
Interest rate spread 4.31% 4.23% 4.34%
(3)..................
Net yield on earning
assets (4)........... 5.11 4.99 5.08
- --------
(1) On a fully taxable equivalent basis. Calculated using a Federal income tax
rate of 35%. Loan income includes fees.
(2) Industrial revenue bonds are included in loans in the financial statements.
(3) Interest rate spread is the average rate earned on total interest-earning
assets less the average rate paid on interest-bearing liabilities.
(4) Net yield on earning assets is net interest income divided by total
interest-earning assets.
25
The following table attributes changes in the Company's net interest income
(on a fully taxable equivalent basis) to changes in either average daily
balances or average rates. Changes due to both interest rate and volume have
been allocated to change due to balance and change due to rate in proportion