FINANCIAL HIGHLIGHTS
1994 1993
-----------------------
(dollars in thousands,
except per share amounts)
For the Year
Net interest income $53,905 $50,229
Provision for possible loan losses 4,300 6,600
Noninterest income 23,525 24,308
Noninterest expense 49,867 51,097
Net income 15,537 11,022
Cash dividends declared 2,838 1,243
------------------------
At Year End
Investment securities $206,698 $152,993
Net loans 853,861 831,579
Deposits 1,070,198 1,034,764
Stockholders' equity 98,310 97,711
Total assets 1,213,908 1,231,003
Number of stockholders 2,995 3,087
Number of employees 707 744
-----------------------
Per Share of Common Stock
Net income $2.46 $1.78
Cash dividends declared 0.46 0.20
Book value at end of year 16.63 15.73
Weighted average shares outstanding
during year 6,303,223 6,206,848
------------------------
CHITTENDEN CORPORATION
Consolidated Balance Sheets
December 31,
------------------------
1994 1993
(in thousands)
Cash and cash equivalents $100,973 $195,163
Securities available for sale (Note 3) 196,829 -
Securities held for sale (Market value
$152,205,000) (Note 3) - 150,743
Securities held for investment
(Market value $9,280,000 in 1994 and
$2,250,000 in 1993) (Note 3) 9,869 2,250
Loans 872,960 850,496
Allowance for possible loan losses (19,099) (18,917)
----------------------
Net loans 853,861 831,579
----------------------
Mortgage loans held for sale 2,870 11,646
Premises and equipment 17,864 16,333
Accrued interest receivable 9,906 6,341
Other real estate owned 1,288 2,619
Net deferred tax asset 11,969 9,179
Other assets 8,479 5,150
-----------------------
Total assets $1,213,908 $1,231,003
=======================
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Demand $ 180,481 $ 159,323
Certificates of deposit $100,000 and over 69,885 62,640
Savings and other time 819,832 812,801
-----------------------
Total deposits 1,070,198 1,034,764
Short-term borrowings (Note 3) 22,650 79,078
Accrued expenses and other liabilities 22,750 19,450
-----------------------
Total liabilities 1,115,598 1,133,292
-----------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $100 par value authorized
- 200,000 shares issued and outstanding-none - -
Common stock - $1 par value authorized
- 30,000,000 shares issued
- 6,479,896 in 1994 and 6,460,584 in 1993 6,480 6,461
Surplus 51,483 51,228
Retained earnings 55,755 43,056
Treasury stock, at cost - 568,277 shares
in 1994 and 248,129 shares in 1993 (9,586) (2,982)
Valuation allowance for net unrealized loss
on marketable equity securities - (21)
Net unrealized loss on securities available
for sale, net of taxes of $3,077,000
(Notes 1 and 3) (5,718) -
Unearned portion of employee restricted stock (104) (31)
-----------------------
Total stockholders' equity 98,310 97,711
-----------------------
Total liabilities and
stockholders' equity $1,213,908 $1,231,003
=========================
The accompanying notes are an integral part of these consolidated financial
statements.
CHITTENDEN CORPORATION
Consolidated Statements of Income
Years Ended December 31,
---------------------------------------
1994 1993 1992
---------------------------------------
(in thousands, except per share amounts)
Interest income:
Interest on loans $71,055 $69,979 $75,086
Investment securities:
Mortgage-backed securities 2,379 2,101 3,956
Taxable 8,517 5,919 4,755
Tax-favored debt 1,568 1,313 1,419
Tax-favored equity 529 224 1,231
Short-term investments 882 267 537
-------------------------------------
Total interest income 84,930 79,803 86,984
-------------------------------------
Interest expense:
Deposits:
Savings 14,727 12,207 16,209
Time 14,498 15,663 22,702
-------------------------------------
Total interest on deposits 29,225 27,870 38,911
Short-term borrowings 1,800 1,704 2,167
Long-term debt - - 222
-------------------------------------
Total interest expense 31,025 29,574 41,300
-------------------------------------
Net interest income 53,905 50,229 45,684
Provision for possible loan losses 4,300 6,600 7,513
-------------------------------------
Net interest income after provision
for possible loan losses 49,605 43,629 38,171
-------------------------------------
Noninterest income:
Trust department income 4,038 4,007 4,067
Service charges on deposit accounts 4,622 4,484 4,129
Gains (losses) on sales of
securities, net (Note 3) (523) 130 (235)
Mortgage servicing income 2,052 997 486
Gains on sales of mortgage loans 1,086 5,760 4,812
Credit card income 8,238 5,654 4,372
Other 4,012 3,276 3,442
------------------------------------
Total noninterest income 23,525 24,308 21,073
------------------------------------
Noninterest expense
Salaries 17,180 17,049 16,729
Employee benefits 6,344 5,485 4,763
Net occupancy expense 5,635 5,932 5,823
FDIC deposit insurance 2,325 2,574 2,276
(Gains) losses on and write-downs
of other real estate owned (67) 1,542 2,736
Credit card expense 5,466 3,783 3,003
Other 12,984 14,732 14,252
---------------------------------
Total noninterest expense 49,867 51,097 49,582
---------------------------------
Income before income taxes and
cumulative effect of change in
accounting principle 23,263 16,840 9,662
Provision for income taxes 7,726 5,243 2,444
---------------------------------
Income before cumulative effect
of change in accounting principle 15,537 11,597 7,218
Cumulative effect of change in
accounting principle - (575) -
---------------------------------
Net income $15,537 $ 11,022 $ 7,218
=================================
Earnings per share:
Income before cumulative effect of
change in accounting principle $2.46 $1.87 $1.17
Cumulative effect of change in
accounting principle - (0.09) -
--------------------------------
Primary $2.46 $1.78 $1.17
================================
Fully diluted $2.46 $1.78 $1.17
Dividends declared per share $0.46 $0.20 $0.13
Weighted average shares
outstanding 6,303,223 6,206,848 6,193,944
The accompanying notes are an integral part of these consolidated financial
statements.
Years Ended December 31,
----------------------------
1994 1993 1992
----------------------------
(in thousands)
Cash flows from operating activities:
Net income $ 15,537 $ 11,022 $ 7,218
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for possible loan losses 4,300 6,600 7,513
Depreciation and amortization 2,061 2,071 1,838
Amortization of excess of cost over
fair value of net assets acquired - 636 502
Amortization of premiums, fees, and
discounts, net 1,375 1,035 3,219
Investment securities (gains)losses 523 (130) 235
Deferred (prepaid) income taxes 160 (1,573) (1,953)
Changes in:
Mortgage loans held for sale 8,776 (3,675) 2,996
Accrued interest receivable (3,565) 963 236
Other assets (182) 11,156 8,581
Accrued expenses and other
liabilities 3,300 (4,389) 8,850
------------------------------
Net cash provided by operating
activities 32,285 23,716 39,235
-----------------------------
Cash flows from investing activities:
Proceeds from sales of securities
available for sale 32,818 - -
Proceeds from maturing securities
and principal payments on securities
available for sale 151,537 - -
Purchases of securities available
for sale (249,707) - -
Proceeds from principal payments on
securities held for investment 1,476 - -
Purchases of securities held for
investment (104) - -
Proceeds from sales of securities - 20,308 56,939
Proceeds from maturing securities and
principal payments on securities - 239,910 243,392
Purchases of securities - (265,532) (309,952)
Loans originated, net of principal
repayments (28,625) 18,337 (56,983)
Purchases of premises and equipment (3,592) (2,470) (2,207)
-----------------------------
Net cash provided by (used in)
investing activities (96,197) 10,553 (68,811)
-----------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 35,434 (9,175) 22,630
Net increase (decrease) in short-term
borrowings (56,428) 41,866 (49,807)
Principal repayments of long-term debt - (59) (2,414)
Proceeds from issuance of treasury and
common stock 239 172 103
Dividends on common stock (2,838) (1,243) (826)
Repurchase of common stock (6,685) - -
-----------------------------
Net cash provided by (used in)
financing activities (30,278) 31,561 (30,314)
----------------------------
Net increase (decrease) in cash and cash
equivalents (94,190) 65,830 (59,890)
Cash and cash equivalents at beginning
of year 195,163 129,333 189,223
----------------------------
Cash and cash equivalents at end of year $100,973 $195,163 $129,333
=============================
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest $ 30,881 $ 29,854 $ 42,374
Income taxes 6,650 6,838 5,390
Noncash investing and financing
activities:
Loans transferred to other real
estate owned 1,688 3,916 2,955
Mortgage loans securitized 9,228 - -
The accompanying notes are an integral part of these consolidated financial
statements.
CHITTENDEN CORPORATION
Notes to Consolidated Financial Statements
Note I
Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Chittenden Corporation (the OCompanyO) and its subsidiary, Chittenden Trust
Company (the OBankO). All material intercompany accounts and transactions
have been eliminated in consolidation. Certain amounts for 1993 and 1992
have been reclassified to conform with 1994 classifications.
Investments
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments
in Debt and Equity Securities (SFAS 115). Under this statement,
investments in debt securities may be classified as held for investment and
measured at amortized cost only if the Company has the positive intent and
ability to hold such securities to maturity. Investments in debt
securities that are not classified as held for investment and equity
securities that have readily determinable fair values are classified as
either trading securities or securities available for sale. Trading
securities are investments purchased and held principally for the purpose
of selling in the near term; securities available for sale are investments
not classified as trading or held for investment. Unrealized holding gains
and losses on trading securities are included in earnings; unrealized
holding gains and losses on securities available for sale are reported as a
separate component of stockholders' equity, net of applicable income taxes.
The Company adopted SFAS 115 on January 1, 1994. The majority of the
Bank's investment portfolio was classified as securities available for sale
and the cumulative net unrealized holding gain of $986,000, net of
applicable taxes, was recorded in stockholders' equity. All other debt
securities held are classified as held for investment as the Company has
the positive intent and ability to hold such securities to maturity.
Dividend and interest income, including amortization of premiums and
discounts, is included in earnings for all categories of investment
securities. Discounts and premiums related to debt securities are
amortized using a method which approximates the level-yield method,
adjusted for estimated prepayments in the case of mortgage-backed
securities.
Prior to January 1, 1994, debt securities were designated at the time
purchased as either held for sale or held for investment, based on
management's intentions in light of investment policy, liquidity needs, and
economic factors. Debt securities held for sale were stated at the lower
of amortized cost or market value with any unrealized loss included in
earnings. Debt securities held for investment, where management had the
intention and ability to hold such securities until maturity, were stated
at amortized cost. The gain or loss recognized on the sale of a debt
security was based on the amortized cost of the specific security.
Marketable equity securities were stated at the lower of aggregate cost or
market value. Net unrealized losses considered temporary in nature were
shown as a reduction of stockholders' equity.
Unrealized losses which are considered other than temporary in nature are
recognized in earnings.
Allowance for Possible Loan Losses
The allowance for possible loan losses is based on managementOs 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.
There are inherent uncertainties with respect to the final outcome of the
Bank's loans. Because of these inherent uncertainties, actual losses may
differ from the amounts reflected in these consolidated financial
statements. The inherent uncertainties in the assumptions relative to
projected sales prices or rental rates may result in the ultimate
realization of amounts on certain loans that are significantly different
from the amounts reflected in these consolidated financial statements.
Factors considered in evaluating the adequacy of the allowance for possible
loan losses include previous loss experience, current economic conditions
and their effect on borrowers, the performance of individual loans in
relation to contract terms, and estimated fair values of underlying
collateral. Losses are charged against the allowance for possible loan
losses when management believes that the collectability of principal is
doubtful.
Key elements of the above estimates, including assumptions used in
developing independent appraisals, are dependent on the economic conditions
prevailing at the time such estimates are made. Accordingly, uncertainty
exists as to the final outcome of certain valuation judgments as a result
of changes in economic conditions in the Bank's lending areas.
Loan Origination and Commitment Fees
Loan origination and commitment fees, and certain loan origination costs,
are deferred and amortized over the contractual terms of the related loans
as yield adjustments using primarily the level-yield method. When loans
are sold or paid off, the unamortized net fees and costs are recognized in
income. Net deferred loan fees amounted to $2,516,000 and $2,161,000 at
December 31, 1994 and 1993, respectively.
Purchased Mortgage Servicing Rights
Other assets include $628,000 of Purchased Mortgage Servicing Rights
(PMSRs). PMSRs are initially recorded at the lower of cost or the present
value of the estimated future net servicing income. Such amounts are
amortized in proportion to and over the period of the estimated net
servicing income. The Company regularly evaluates the carrying value of
PMSRs for individual servicing acquisitions, based on the present value of
estimated future net servicing income. Amortization is adjusted to reflect
changes in prepayment experience.
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of aggregate cost or
market value. Gains and losses on sales of mortgage loans are recognized at
the time of the sale and are adjusted when the interest rate charged to the
borrower and the interest rate paid to the purchaser, after considering a
normal servicing fee, (and, in the case of mortgage-backed securities, a
guarantee fee) differ.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight line method over the estimated
useful lives of the premises and equipment. Leasehold improvements are
amortized over the shorter of the terms of the respective leases or the
estimated useful lives of the improvements. Expenditures for maintenance,
repairs, and renewals of minor items are charged to expense as incurred.
Other Real Estate Owned
Collateral acquired through foreclosure ("Other Real Estate Owned" or
"OREO") is recorded at the lower of the carrying amount of the loan or the
fair value of the property, less estimated costs to sell, at the time of
acquisition. A valuation allowance for the estimated costs to sell is
charged to expense. Subsequent changes in the fair value of OREO are
reflected in the valuation allowance and charged or credited to expense.
Such amounts and net operating income or expense related to OREO are
included in noninterest expense in the accompanying consolidated statements
of income.
Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109), which
recognizes income taxes under the asset and liability method. Under this
method, deferred tax assets and liabilities are established for the
temporary differences between the accounting basis and the tax basis of the
CompanyOs assets and liabilities at enacted tax rates expected to be in
effect when the amounts related to such temporary differences are realized
or settled. The cumulative effect of this change in accounting principle as
of January 1, 1993 was a charge of $575,000. This charge has been recorded
as a cumulative effect of change in accounting principle in the
accompanying 1993 consolidated statement of income.
Prior to January 1, 1993, the Company recognized income taxes under the
deferred method. Under this method, annual income tax expense was matched
with pretax accounting income by providing deferred taxes at current tax
rates for timing differences between income reported for accounting
purposes and income reported for tax purposes.
Earnings Per Share
The calculation of earnings per share is based on the weighted average
number of shares of common stock outstanding, adjusted for the incremental
shares attributed to outstanding common stock equivalents, using the
treasury stock method. Common stock equivalents include options granted
under the Company's stock plan and shares to be issued under the Company's
Directors' Deferred Compensation Plan. (See notes 9 and 10.)
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, amounts due from banks,
interest-bearing deposits, certain money market mutual fund investments,
and investments with original maturities of less than three months.
Trust Department
Trust department assets of approximately $1.8 billion, $1.8 billion, and
$1.5 billion at December 31, 1994, 1993, and 1992, respectively, held by
the Bank in a fiduciary or agency capacity for its customers are not
included in the accompanying consolidated balance sheets as they are not
assets of the Bank. Trust department income is recorded on the cash basis
in accordance with customary bank practices. The amounts recognized under
this method are not significantly different from amounts that would be
recognized in accordance with generally accepted accounting principles.
Credit Card Income and Credit Card Expense
Credit card income includes annual fees and interchange income from credit
cards issued by the Company, and merchant discount income. Merchant
discount income consists of the fees charged on credit card receipts
submitted by the Company's business customers. Credit card expense
includes fees paid by the Company to credit card issuers and third-party
processors. Such amounts are recognized on the accrual basis.
Note 2
Acquisitions
On August 17, 1994, the Company and The Bank of Western Massachusetts
signed a definitive agreement whereby the Company would acquire The Bank of
Western Massachusetts, with assets of approximately $222 million at
December 31, 1994, for approximately $25.5 million in stock and cash. The
ultimate purchase price is dependent on the fair value of the 627,525
shares of the Company's stock at the date such shares are issued in
connection with this transaction. Consummation of the transaction is
subject to appropriate regulatory and stockholder approvals and is expected
to occur in the first quarter of 1995.
On April 27, 1993, the Company issued 460,845 shares of its common stock
for all the outstanding common stock of VerBanc Financial Corp. (VerBanc),
a holding company for Bellows Falls Trust Company. The acquisition was
accounted for as a pooling-of-interests and, accordingly, the CompanyOs
consolidated financial statements and per share data have been restated for
all periods prior to the acquisition to include the results of operations,
financial position, and cash flows of VerBanc. Costs related to the merger
of $961,000 were charged to expenses during 1993.
Note 3
Investment Securities
Investment securities at December 31, 1994 and 1993 are as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------
1994 (in thousands)
Securities available for sale:
US Treasury securities $ 61,076 $ 7 $(4,095) $ 56,988
US government agency obligations 33,138 - (889) 32,249
Obligations of states and political subdivisions 40,341 - - 40,341
Mortgage-backed securities 23,823 10 (1,182) 22,651
Corporate bonds and notes 36,397 2 (1,947) 34,452
Government bond mutual funds 10,605 - (818) 9,787
Marketable equity securities 244 123 (6) 361
------------------------------------------------------
Total securities available for sale $205,624 $142 $(8,937) $196,829
======================================================
Securities held for investment:
Obligations of states and political subdivisions $1,651 $ - $ - $1,651
Mortgage-backed securities 8,218 - (589) 7,629
------------------------------------------------------
Total securities held for investment $9,869 $ - $(589) $9,280
======================================================
Book Unrealized Unrealized Market
Value Gains Losses Value
------------------------------------------------------
1993 (in thousands)
US Treasury securities $ 54,310 $ 880 $(183) $ 55,007
US government agency obligations 20,211 280 - 20,491
Obligations of states and political subdivisions 25,368 - - 25,368
Mortgage-backed securities 23,996 468 (35) 24,429
Corporate bonds and notes 28,885 198 (146) 28,937
Marketable equity securities 244 - (21) 223
------------------------------------------------------
153,014 $1,826 $(385) $154,455
==================================
Valuation allowance on marketable equity
securities (21)
-------------
$152,993
=============
Investment securities at December 31, 1993 are classified in the
accompanying balance sheet as held for sale, except for certain investments
totaling $2,250,000 which are classified as held for investment.
Proceeds from sales of debt securities amounted to $32,818,000,
$12,913,000, and $47,245,000 in 1994, 1993, and 1992, respectively.
Realized gains on sales of debt securities were $21,000, $84,000, and
$471,000 in 1994, 1993, and 1992, respectively. Realized losses on sales
of debt securities were $78,000, $71,000, and $49,000 in 1994, 1993, and
1992, respectively. In 1994, the Company sold government bond mutual funds
at a loss of $466,000. The Company sold marketable equity securities at a
gain of $117,000 in 1993, and at a loss of $557,000 in 1992. In addition,
the Company reduced the carrying value of marketable equity securities by
$100,000 in 1992 to recognize losses considered to be other than temporary
in nature.
Securities pledged to secure U.S. Treasury borrowings, public deposits,
securities sold under agreements to repurchase, and for other purposes
required by law, amounted to $30,483,000 and $95,140,000 at December 31,
1994 and 1993, respectively.
The following table shows the maturity distribution of the amortized cost of the
Company's investment securities at December 31, 1994, with a comparative total
for 1993:
After After
One But Five But
Within Within Within After
One Five Ten Ten No Fixed
Year Years Years Years Maturity Total
--------------------------------------------------------------------------
(in thousands)
Securities available for sale:
US Treasury securities $ 3,027 $ 52,992 $5,057 $ -$ - $ 61,076
US government agency obligations 14,631 18,507 - - - 33,138
Obligations of states and political
subdivisions 39,687 543 111 - - 40,341
Mortgage-backed securities (1) 4,166 12,924 4,191 2,542 - 23,823
Corporate bonds and notes 8,776 27,621 - - - 36,397
Government bond mutual funds - - - - 10,605 10,605
Marketable equity securities - - - - 244 244
--------------------------------------------------------------------------
Total securities available for sale 70,287 112,587 9,359 2,542 10,849 205,624
--------------------------------------------------------------------------
Securities held for investment:
Obligations of states and political
subdivisions 111 484 439 617 - 1,651
Mortgage-backed securities (1) 567 1,965 1,900 3,786 - 8,218
--------------------------------------------------------------------------
Total securities held for investment 678 2,449 2,339 4,403 - 9,869
--------------------------------------------------------------------------
Total securities $70,965 $115,036 $11,698 $6,945 $10,849 $215,493
=========================================================================
Comparative amounts at December 31, 1993 $43,072 $92,440 $15,765 $1,493 $223 $152,993
(1) Maturities of mortgage-backed securities are based on mortgage loan
prepayment assumptions.
The following table shows the maturity distribution of the fair value of the
Company's investment securities at December 31, 1994, with a comparative total
for 1993:
After After
One But Five But
Within Within Within After
One Five Ten Ten No Fixed
Year Years Years Years Maturity Total
-----------------------------------------------------------------
(in thousands)
Securities available for sale:
US Treasury securities $ 3,029 $ 49,614 $4,345 $ - $ - $ 56,988
US government agency obligations 14,345 17,904 - - - 32,249
Obligations of states and political
subdivisions 39,687 543 111 - - 40,341
Mortgage-backed securities (1) 3,949 12,413 3,842 2,447 - 22,651
Corporate bonds and notes 8,696 25,756 - - - 34,452
Government bond mutual funds - - - - 9,787 9,787
Marketable equity securities - - - - 361 361
-------------------------------------------------------------------
Total securities available for sale 69,706 106,230 8,298 2,447 10,148 196,829
-------------------------------------------------------------------
Securities held for investment:
Obligations of states and political
subdivisions 111 484 439 617 - 1,651
Mortgage-backed securities (1) 520 1,803 1,749 3,557 - 7,629
-------------------------------------------------------------------
Total securities held for investment 631 2,287 2,188 4,174 - 9,280
-------------------------------------------------------------------
Total securities $70,337 $108,517 $10,486 $6,621 $10,148 $206,109
===================================================================
Comparative amounts at December 31, 1993 $43,266 $93,562 $15,895 $1,509 $223 $154,455
(1) Maturities of mortgage-backed securities are based on mortgage loan
prepayment assumptions. The discount for fair value is applied to the maturity
distribution proportionately.
Expected maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Note 4
Loans
Major classifications of loans, based on F.D.I.C. collateral definitions,
at December 31, 1994 and 1993 are as follows:
1994 1993
-------------------------
(in thousands)
Commercial $105,281 $107,722
Real estate:
Residential 334,841 328,165
Commercial 214,103 206,601
Construction 7,281 13,747
-------------------------
Total real estate: 556,225 548,513
Home equity 70,777 69,849
Consumer 140,677 124,412
------------------------
Total gross loans 872,960 850,496
Allowance for possible loan losses (19,099) (18,917)
------------------------
Net loans $853,861 $831,579
========================
Mortgage loans held for sale $ 2,870 $ 11,646
========================
The Bank's lending activities are conducted primarily in Vermont and
surrounding counties in adjoining states. The Bank makes single family and
multi-family residential loans, commercial real estate loans, commercial
loans, and a variety of consumer loans. In addition, the Bank makes loans
for the construction of residential homes, multi-family and commercial
properties, and for land development. The ability and willingness of the
Bank's borrowers to honor their repayment commitments are impacted by many
factors, including the level of overall economic activity within the
borrowers' geographic areas.
Changes in the allowance for possible loan losses are summarized as
follows:
1994 1993 1992
--------------------------
(in thousands)
Balance at beginning of year $18,917 $16,372 $14,373
Provision for possible loan losses 4,300 6,600 7,513
Loan recoveries 1,111 1,117 737
Loans charged off (5,229) (5,172) (6,251)
------------------------------
Balance at end of year $19,099 $18,917 $16,372
==============================
The Bank's policy is to discontinue the accrual of interest on loans when
scheduled payments become past due in excess of 90 days, and when, in the
judgment of management, the ultimate collectability of principal or
interest becomes doubtful. When a loan is placed on nonaccrual status, all
interest previously accrued but not collected is reversed against interest
income in the current period. The principal amount of loans in nonaccrual
status was $7,934,000 and $12,756,000 at December 31, 1994 and 1993,
respectively. Loans whose terms have been substantially modified in
troubled debt restructurings amounted to $185,000 and $367,000 at December
31, 1994 and 1993, respectively. There were no outstanding commitments to
lend to customers with existing loans whose terms have been substantially
modified.
The amount of interest which was not earned but which would have been
earned had the nonaccrual and restructured loans performed in accordance
with their original terms and conditions was as follows:
1994 1993 1992
----------------------------
(in thousands)
Interest income in accordance
with original loan terms $1,269 $1,418 $1,554
Interest income recognized 506 507 528
---------------------------
Reduction in interest income $763 $911 $1,026
===========================
Directors and executive officers of the Company and their associates are
credit customers of the Company in the normal course of business. All loans
and commitments included in such transactions are made on substantially the
same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons, and do not involve
more than normal risk of collectability or present other unfavorable
features.
An analysis of loans to directors and executive officers of the Company and
their associates, for 1994, is as follows:
Balance at Balance at
December 31, 1993 Additions Reductions December 31, 1994
- ------------------------------------------------------------------
(in thousands)
$14,710 $7,781 $14,560 $7,931
- ------------------------------------------------------------------
The Company's portfolio of residential mortgage loans serviced for others,
which is not reflected in the consolidated balance sheets, totaled
approximately $709,873,000 and $634,689,000 at December 31, 1994 and 1993,
respectively. No formal recourse provisions exist in connection with such
servicing.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 114, Accounting by Creditors for Impairment of a
Loan, as amended by SFAS No. 118 (hereafter collectively referred to as
SFAS 114). SFAS 114 requires that impaired loans, as defined, be measured
based on the present value of the expected future cash flows discounted at
the loan's effective interest rate, or the fair value of the collateral if
the loan is collateral dependent. This statement is effective for fiscal
years beginning after December 15, 1994. Management believes that adoption
of this statement will not have a material effect on the financial
condition or results of operations of the Company.
Note 5
Premises and Equipment
Premises and equipment at December 31, 1994 and 1993 are summarized as
follows:
Estimated
Original
1994 1993 Useful Lives
-----------------------------------------
(in thousands)
Land $1,570 $ 1,626 --
Buildings and improvements 6,102 6,102 12 - 50 years
Leasehold improvements 11,918 11,567 1 - 33 years
Furniture and equipment 13,335 12,845 2 - 10 years
Construction in progress 2,869 264 --
-----------------------
35,794 32,404
Accumulated depreciation
and amortization (17,930) (16,071)
------------------------
$17,864 $16,333
========================
The Company is obligated under various noncancelable operating leases for
premises and equipment expiring in various years through the year 2008.
Total lease expense, less income from subleases, amounted to approximately
$601,000, $600,000, and $514,000 in 1994, 1993, and 1992, respectively.
Future minimum rental commitments for noncancelable operating leases for
premises and equipment with initial or remaining terms of one year or more
at December 31, 1994 are as follows:
Year Amount
- ---------------------------------
(in thousands)
1995 $ 619
1996 468
1997 422
1998 318
1999 263
Thereafter 806
-------
$2,896
=======
Note 6
Short-term Borrowings
Short-term borrowings at December 31, 1994 and 1993 consist of the
following:
1994 1993
-----------------------
(in thousands)
Securities sold under
agreements to repurchase:
Due through January 9, 1995,
weighted average rate of 9.20% $10,000 $ -
Due through January 10, 1994,
weighted average rate of 9.20% - 10,000
U.S. Treasury borrowings, 5.21%
in 1994 and 2.76% in 1993,
due on demand 12,650 69,078
------- -------
$22,650 $79,078
======= =======
Short-term borrowings are collateralized by U.S. Treasury and agency
securities, mortgage-backed securities, and residential mortgage loans.
These assets had a carrying value and a market value of $23,909,000 and
$22,336,000, respectively, at December 31, 1994, and $84,077,000 and
$85,554,000, respectively, at December 31, 1993.
The following information relates to securities sold under agreements to
repurchase:
1994 1993 1992
--------------------------------
(in thousands)
Average balance outstanding
during the year $11,806 $10,954 $25,240
Average rate during the year 8.46% 8.65% 5.18%
Maximum amount outstanding at any
month-end $20,237 $14,140 $43,974
The following information relates to U.S. Treasury borrowings:
1994 1993 1992
(in thousands)
Average balance outstanding
during the year $20,349 $25,758 $22,444
Average rate during the year 3.74% 2.82% 3.41%
Maximum amount outstanding at any
month-end $70,517 $72,325 $70,364
Note 7
Income Taxes
The provision for income taxes consists of the following:
1994 1993 1992
(in thousands)
Current $7,566 $6,816 $4,397
Deferred (prepaid) 160 (1,573) (1,953)
------------------------------------
Provision for income taxes $7,726 $5,243 $2,444
====================================
The following is a reconciliation of the provision for Federal income
taxes, calculated at the statutory rate, to the recorded provision for
income taxes:
1994 1993 1992
---------------------------
(in thousands)
Computed tax at statutory Federal rate $8,142 $5,894 $3,285
Increase (decrease) in taxes from:
Amortization of intangible assets - 255 98
Tax-exempt interest, net (645) (581) (628)
Dividend received deduction (134) (33) (81)
Capital loss (benefited through
carry forward) not available
for carryback - (35) (98)
Alternative minimum tax credit - - (290)
Other, net 363 (257) 158
--------------------------
Total $7,726 $5,243 $2,444
==========================
Effective income tax rate 33.21% 31.13% 25.30%
As discussed in Note 1, effective January 1, 1993, the Company adopted SFAS
109, Accounting for Income Taxes. Prior to adoption of SFAS 109, prepaid
and deferred income taxes arose due to timing differences in the
recognition of revenue and expense for tax and financial statement
purposes. For the year ended December 31, 1992, the sources of the
differences and the approximate tax effect of each is as follows:
1992
-------------
(in thousands)
Provision for possible loan losses $(413)
Other real estate owned (419)
Depreciation (160)
Deferred loan origination fees (233)
Amortization of excess servicing fees (396)
Pension and employee benefits (162)
Restructuring charges (357)
Allowance for uncollected interest 81
Other 106
-----------
$(1,953)
===========
The components of the net deferred tax asset at December 31, 1994 and 1993
are as follows:
1994 1993
-----------------------
(in thousands)
Allowance for possible loan losses $6,494 $6,356
Deferred compensation and pension 1,871 1,466
Other real estate owned writedowns 161 420
Deferred loan origination fees 113 735
Depreciation (798) (776)
Accrued liabilities 1,017 999
Unrealized loss on securities available for sale 3,077 -
Other 34 (21)
-----------------------
$11,969 $9,179
========================
Current income taxes payable, included in accrued expenses and other
liabilities, was $266,000 and $78,000 at December 31, 1994 and 1993,
respectively.
The State of Vermont assesses a franchise tax for banks in lieu of a bank
income tax. The franchise tax, assessed based on deposits, amounted to
approximately $493,000, $468,000, and $459,000 in 1994, 1993, and 1992,
respectively. These amounts are included in other noninterest expense in
the accompanying consolidated statements of income.
Note 8
Stockholders' Equity
Treasury Stock
On October 26 and November 7, 1994, the Company purchased 226,875 and
100,000 shares, respectively, of its common stock for a total cost of $6.7
million.
Dividends
Dividends paid by the Bank are the primary source of funds available to the
Company for payment of dividends to its stockholders and for other
corporate needs. Applicable Federal and state statutes, regulations, and
guidelines impose restrictions on the amount of dividends that may be
declared by the Bank.
During 1994, the Company declared dividends of $2,838,000 or $0.46 per
share. In 1993, the Company declared dividends of $1,243,000 or $0.20 per
share.
Surplus
The Bank is required by Vermont statute to transfer a minimum of 10% of net
income from retained earnings to surplus on an annual basis. No transfer
is required if net worth as a percent of deposits and other liabilities
exceeds 10%.
Stock Split
On September 24, 1993, the Company distributed a five-for-four stock split.
Accordingly, all historical share information presented in the consolidated
financial statements was restated in 1993 to reflect this event.
Capital Ratios
The Bank is subject to various regulatory capital requirements administered
by the Federal Deposit Insurance Corporation (the "FDIC"). To be considered
adequately capitalized under the regulatory framework for prompt corrective
action, the Bank must maintain minimum Tier I leverage, Tier 1 risk-based,
and total risk-based ratios of 4%, 4%, and 8%, respectively. At December
31, 1994 and 1993, the Bank exceeded all regulatory requirements to be
considered adequately capitalized.
Note 9
Stock Plans
The Company has four stock option plans: a 1980 employee stock purchase
plan, a 1985 restricted stock plan, a 1988 employee stock option plan, and
a 1993 Stock Incentive Plan. The employee stock purchase plan, the
restricted stock plan and the employee stock option plan expired between
October 1990 and February 1993, except as to options then outstanding. Of
the 281,219 options outstanding at December 31, 1994, 239,969 were
exercisable.
Under the Stock Incentive Plan, certain key employees and directors are
eligible to receive various types of stock incentives: options to purchase
a specified number of shares of stock at a specified price (including
incentive stock options and non-qualified stock options); restricted stock
which vests after a specified period of time; non-employee directorsO stock
options to purchase stock at pre-determined prices over a five-year period;
and performance shares which are incorporated into the Company's Executive
Management Incentive Compensation Plan and which represent a portion of
each bonus awarded pursuant to that plan. A total of 468,750 shares are
allocated to the Stock Incentive Plan. At December 31, 1994 there were
257,000 shares reserved under the plan.
Information regarding the Company's stock option plans is summarized as
follows:
Option Price
Per Share Options
------------------------
December 31, 1991 165,495
Granted $ 7.20 - 12.40 14,968
Exercised 6.20 - 10.97 (5,185)
Expired (24,265)
-------------------------
December 31, 1992 151,013
Granted $15.10 - 16.00 209,599
Exercised 6.20 - 17.10 (11,427)
Expired (26,875)
-------------------------
December 31, 1993 322,310
Granted $19.75 - 21.19 8,750
Exercised 6.20 18.49 (12,510)
Expired (37,331)
-------------------------
December 31, 1994 $ 5.00 - 21.19 281,219
=======
Note 10
Employee Benefits
Pension Plan
The Company has a noncontributory pension plan covering substantially all
of its employees. Benefits are based on years of service and the level of
compensation during the final years of employment. The funding policy of
the Company for the plan is to contribute annually the amount necessary to
meet the minimum funding standards established by the Employee Retirement
Income Security Act (ERISA). This contribution is based on an actuarial
method that recognizes estimated future salary levels and service.
The funded status of the plan is as follows at December 31, 1994 and 1993:
1994 1993
------------------------
(in thousands)
Vested benefits $10,222 $10,902
Nonvested benefits 1,069 1,111
------------------------
Accumulated benefit obligation 11,291 12,013
Additional benefits related
to future compensation levels 3,886 3,120
------------------------
Projected benefit obligation 15,177 15,133
Fair value of plan assets,
invested primarily in equity
securities and bonds 12,232 12,714
------------------------
Plan assets less than projected
benefit obligation $(2,945) $(2,419)
========================
Amounts resulting from changes in actuarial assumptions used to measure the
CompanyOs benefit obligations are not recognized as they occur, but are
amortized systematically over subsequent periods. Unrecognized amounts to
be amortized and the reconciliation of the plan assets less than the
projected benefit obligation to the amounts included in the consolidated
balance sheets at December 31, 1994 and 1993 are shown below:
1994 1993
------------------------
(in thousands)
Plan assets less than projected
benefit obligation $(2,945) $(2,419)
Unrecognized net transition asset being
amortized over participantsO
period of service (143) (172)
Prior service cost not yet recognized
in net periodic pension cost 414 445
Unrecognized net loss from past
experience different from that assumed 778 1,140
--------------------------
Accrued pension cost included in accrued
expenses and other liabilities $(1,896) $(1,006)
==========================
Net pension expense, included in employee benefits in the consolidated
statements of income, includes the following components:
1994 1993 1992
----------------------------
(in thousands)
Service cost - benefits attributable
to service during the period $868 $ 681 $666
Interest cost on projected benefit
obligation 1,136 1,043 898
Actual return on plan assets 72 (864) (598)
Net amortization and deferral (1,186) (338) (607)
-------------------------------
Net pension expense $890 $522 $359
===============================
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 8.0% in 1994, 7.0% in
1993, and 8.0% in 1992. Future compensation levels were estimated using
average salary increases of 6.0% for 1994, 5.0% for 1993, and 6.0% for
1992. The expected long-term rate of return on plan assets was 9.0% in
1994 and 1993, and 9.5% in 1992.
The Bank has supplemental pension arrangements with certain retired
employees. The liability, included in accrued expenses and other
liabilities, related to such arrangements was $995,000 and $925,000 at
December 31, 1994 and 1993, respectively.
Postretirement Benefits
In addition to providing pension benefits, the Company provides or will
provide certain postretirement health care benefits to current retirees and
to current employees who meet certain age and length of service criteria.
Prior to January 1, 1993, the cost of retiree health care benefits was
recognized as expense and funded as claims were paid. Such costs totaled
$114,000 in 1992.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, EmployersO Accounting for Postretirement
Benefits Other Than Pensions (SFAS 106). This accounting standard requires
that the expected cost of postretirement benefits be charged to expense
during the years that the employees render service. The Company has elected
to amortize the unfunded obligation that was measured as of January 1, 1993
over a period of 20 years.
The following table reconciles the planOs funded status to the accrued
postretirement health care liability as reflected in the balance sheets at
December 31, 1994 and 1993:
1994 1993
------------------
(in thousands)
Accumulated postretirement
benefit obligation:
Retirees $725 $1,092
Other fully eligible participants 113 114
Other active participants 454 522
-------------------
1,292 1,728
Unrecognized actuarial gain (loss) 259 (92)
Unrecognized transition obligation (1,446) (1,527)
-------------------
Accrued postretirement health care
liability $105 $109
===================
Net postretirement health care expense includes the following components:
Service cost - benefits attributed
to service during the period $20 $ 20
Interest cost on accumulated
postretirement benefit obligation 99 125
Net amortization and deferral 76 80
-------------------
Net postretirement health care expense $195 $225
===================
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation at December 31, 1994 and 1993 was 7.0%.
For measurement purposes, an 11.0% and 14.0% annual rate of increase in the
per capita cost of covered health care benefits was assumed for the
respective periods.
Other Benefit Plans
The Company has an incentive savings and profit sharing plan to provide
eligible employees with a means to save and invest a portion of their
earnings, supplemented by contributions from the Company. Investment in
the Company's common stock is one of four investment options available to
employees.
Eligible employees of the Company may contribute, by salary reductions, up
to 6% of their compensation as a basic employee contribution and may
contribute up to an additional 10% of their compensation as a supplemental
employee contribution. The Company makes an incentive savings contribution
in an amount equal to 35% of each employeeOs basic contribution. In 1994,
1993, and 1992, 14,589, 14,861, and 22,320 shares, respectively, of the
CompanyOs common stock were purchased through the incentive savings and
profit sharing plan; $214,000, $233,000, and $192,000, respectively, were
charged to expense for contributions and payments made or to be made under
the plan.
The Company may also make an additional matching contribution based on the
extent to which the annual corporate profitability goal established by the
Board of Directors is met. Expenses related to achievement of
profitability goals totaled $214,000, $225,000, and $151,000 in 1994, 1993,
and 1992, respectively.
The Company also has an Executive Management Incentive Compensation Plan.
Executives performing at defined levels of responsibility are eligible to
participate in the plan. Incentive award payments are determined on the
basis of corporate profitability and individual performance, with incentive
awards ranging from zero to 60% of annual compensation. These awards are
paid over a four-year period, contingent upon meeting profitability goals
in subsequent years. Beginning with payouts made in 1993, based on 1992
performance, a portion of each award is paid in cash and a portion is paid
in the Company's common stock. Expenses for this plan totaled $529,000,
$407,000, and $256,000 in 1994, 1993, and 1992, respectively.
In 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 112, EmployersO Accounting for
Postemployment Benefits (SFAS 112). SFAS 112 covers all postemployment
benefits not already covered by two prior accounting pronouncements. The
Company adopted SFAS 112 on January 1, 1994. Adoption of SFAS 112 did not
have a material impact on the accompanying consolidated financial
statements.
The Company has a DirectorsO Deferred Compensation Plan. Under the plan,
Directors may defer fees and retainers that would otherwise be payable
currently. Deferrals may be made to an uninsured interest account or an
account recorded in equivalents of the Company's common stock. Expenses for
this plan totaled $202,000, $289,000, and $207,000 for 1994, 1993, and
1992, respectively. Shares which will be issued under the plan totaled
103,087 at December 31, 1994.
Note 11
Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates,
the Bank is a party to financial instruments with off-balance sheet risk,
held for purposes other than trading. The financial instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. The BankOs exposure
to credit loss in the event of nonperformance by the other party to the
financial instrument, for loan commitments and standby letters of credit,
is represented by the contractual amount of those instruments, assuming
that the amounts are fully advanced and that collateral or other security
is of no value. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The Bank evaluates each customerOs creditworthiness on a case-
by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on managementOs credit
evaluation of the borrower. Collateral held varies, but may include
accounts receivable, inventory, property, plant and equipment, and income-
producing commercial properties.
Commitments to originate loans, unused lines of credit, and unadvanced
portions of construction loans are agreements to lend to a customer
provided there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Many of the
commitments are expected to expire without being drawn upon. Therefore, the
amounts presented below do not necessarily represent future cash
requirements.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance by a customer to a third party. These guarantees
are issued primarily to support public and private borrowing arrangements,
bond financing, and similar transactions. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan commitments to customers.
Financial instruments whose contractual amounts represent off-balance sheet
risk at December 31, 1994 and 1993 are as follows:
1994 1993
--------------------------
(in thousands)
Commitments to originate loans $ 13,671 $22,012
Unused lines of credit 122,784 136,736
Standby letters of credit 16,005 10,753
Unadvanced portions of construction loans 7,065 6,803
Equity commitments
to limited partnerships 597 912
Note 12
Commitments and Contingencies
As a nonmember of the Federal Reserve System, the Company is required to
maintain certain reserve requirements of vault cash and/or deposits with
the Federal Reserve Bank of Boston. The amount of this reserve requirement,
included in cash and cash equivalents, was $20,409,000 and $19,466,000 at
December 31, 1994 and 1993, respectively.
The Bank has a contract for data processing services that extends to July
1998. Base fees required to be paid during the remaining term of the
contract are approximately $12,127,000. Total fees to be paid may be the
same as or exceed the base fees depending on additional services rendered
and consumer price index changes during the remaining term of the contract.
Various legal claims against the Company arising in the normal course of
business were outstanding at December 31, 1994. Management, after
reviewing these claims with legal counsel, is of the opinion that the
resolution of these claims will not have a material effect on the
consolidated financial statements.
One legal claim, Walsh vs. Chittenden Corp., et al, was a class action in
which the plaintiff represented himself and other persons who purchased
Chittenden common stock from March 29, 1989 through August 15, 1990. On
July 1, 1994, the Federal District Court of Vermont approved a settlement
agreement which provided, among other things, that a fund of $1.5 million
be established to resolve any claims of members of the class, including the
plaintiff's counsel fees. Taking into consideration certain payments
contributed by an insurance carrier, the Company's contribution to the
settlement fund had no material effect on the accompanying consolidated
financial statements.
Note 13
Other Noninterest Expense
The components of other noninterest expense for the years presented are as
follows:
1994 1993 1992
-----------------------------
(in thousands)
Data processing $3,275 $3,104 $2,846
Amortization of excess of cost over
fair value of net assets acquired - 636 502
Legal and professional 573 1,054 1,859
Other 9,136 9,938 9,045
-------------------------------
$12,984 $14,732 $14,252
===============================
Note 14
Quarterly Financial Data (Unaudited)
A summary of quarterly financial data for 1994 and 1993 is presented below:
1994 Three Months Ended
--------------------------------------------
March 31 June 30 Sept 30 Dec 31
--------------------------------------------
(in thousands, except per share amounts)
Total interest income $19,278 $20,672 $21,851 $23,129
Total interest expense 6,956 7,173 7,898 8,998
---------------------------------------------
Net interest income 12,322 13,499 13,953 14,131
Provision for possible loan losses 1,200 1,200 1,000 900
Noninterest income 5,620 5,775 5,640 6,490 (1)
Noninterest expense 11,690 12,314 12,539 13,324 (2)
---------------------------------------------
Income before income taxes 5,052 5,760 6,054 6,397
Provision for income taxes 1,667 1,917 2,031 2,111
----------------------------------------------
Net income $3,385 $3,843 $4,023 $4,286
==============================================
Earnings per share $0.53 $0.60 $0.63 $0.70
Dividends declared per share $0.10 $0.10 $0.13 $0.13
(1) Noninterest income for the fourth quarter of 1994 was $850,000 higher than
for the third quarter Increased credit card income, primarily from higher
merchant discount volumes, amounted to $363,000 A one-time gain of $444,000
resulted from the sale of branch real estate(2) Noninterest expense for the
fourth quarter of 1994 exceeded the third quarter level by $785,000 Employee
benefits expense was higher by $300,000, primarily due to accuals for
various performance-based incentive plans Credit card expense was up
$212,000 as higher volumes resulted in increased processing costs
1993 Three Months Ended
-------------------------------------------
March 31 June 30 Sept 30 Dec 31
-------------------------------------------
(in thousands, except per share amounts)
Total interest income $20,124 $19,789 $19,868 $20,022
Total interest expense 7,839 7,455 7,152 7,128
-------------------------------------------
Net interest income 12,285 12,334 12,716 12,894
Provision for possible loan losses 1,650 1,650 1,650 1,650
Noninterest income 5,571 6,143 6,519 6,075
Noninterest expense 12,181 13,209 13,252 12,455
-------------------------------------------
Income before income taxes
and cumulative effect of
change in accounting principle 4,025 3,618 4,333 4,864
Provision for income taxes 1,172 1,073 1,470 1,528
-------------------------------------------
Income before cumulative effect of
change in accounting principle 2,853 2,545 2,863 3,336
Cumulative effect of change
in accounting principle (575) - - -
-------------------------------------------
Net income $2,278 $2,545 $2,863 $3,336
===========================================
Earnings per share:
Income before cumulative
effect of change in
accounting principle $0.46 $0.41 $0.46 $0.54
Cumulative effect of change
in accounting principle (0.09) - - -
-------------------------------------------
Net income $0.37 $0.41 $0.46 $0.54
===========================================
Dividends declared per share $0.04 $0.05 $0.05 $0.06
Note 15
Fair Value of Financial Instruments
Cash and Cash Equivalents
The carrying amounts for cash and cash equivalents approximate fair value
because they mature in 90 days or less and do not present unanticipated
valuation risk.
Investments
The fair value of investment securities, other than obligations of states
and political subdivisions, is based on quoted market prices. The fair
value of obligations of states and political subdivisions is estimated to
be equal to amortized cost since most of these notes mature within six
months and there is no active market for these instruments.
Loans
Fair values are estimated for portfolios of loans with similar financial
and credit characteristics. The loan portfolio was evaluated in the
following segments: commercial, residential real estate, commercial real
estate, construction, home equity, and other consumer loans. Other consumer
loans include installment, credit card, and student loans. Each of these
consumer portfolios also was evaluated separately.
The fair value of performing commercial and real estate loans is estimated
by discounting cash flows through the estimated maturity using discount
rates that reflect the expected maturity and the credit and interest rate
risk inherent in such loans. The fair value of nonperforming commercial and
real estate loans is estimated using historical net charge-off experience
applied to the nonperforming balances. For performing residential mortgage
loans, fair value is estimated by discounting contractual cash flows
adjusted for prepayment estimates using discount rates based on secondary
market sources. The fair value of home equity, credit card, and other
consumer loans is estimated based on secondary market prices for asset-
backed securities with similar characteristics.
Deposits
The fair value of deposits with no stated maturity, such as noninterest-
bearing demand deposits, savings and N.O.W. accounts, and money market and
checking accounts, is equal to the amount payable on demand, that is, the
carrying amount. The fair value of certificates of deposit and retirement
accounts is based on the discounted value of contractual cash flows. The
discount rate used is based on the estimated rates currently offered for
deposits of similar remaining maturities.
Short-term Borrowings
The carrying amounts for short-term borrowings approximate fair value
because they mature or are callable in ten days or less and do not present
unanticipated valuation risk.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers
the difference between current levels of interest rates and the committed
rates. The fair value of financial standby letters of credit is based on
fees currently charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the counterparties.
Assumptions
Fair value estimates are made at a specific point in time, based on
relevant market information and information about specific financial
instruments. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the BankOs entire holdings
of a particular financial instrument. Because no active observable market
exists for a significant portion of the BankOs financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
The estimated fair values of the Bank's financial instruments are as follows:
December 31,
-----------------------------------------------------
1994 1993
-----------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-----------------------------------------------------
(in thousands)
Financial assets:
Cash and cash equivalents $ 100,973 $ 100,973 $ 195,163 $ 195,163
Securities available for sale 196,829 196,829 - -
Securities held for sale - - 150,743 152,205
Securities held for investment 9,869 9,280 2,250 2,250
Loans, net 853,861 870,111 831,579 858,469
Mortgage loans held for sale 2,870 2,870 11,646 11,646
Financial liabilities:
Deposits:
Demand 180,481 180,481 159,323 159,323
Savings 519,512 519,512 496,692 496,692
Time:
Certificates of deposit $100,000 and over 69,885 69,594 62,640 62,930
Other time deposits 300,320 298,329 316,109 318,217
Short-term borrowings 22,650 22,650 79,078 79,078
Commitments 160 160 105 105
Note 16
Parent Company Financial Statements
Chittenden Corporation (Parent Company Only)
Balance Sheets December 31,
--------------------
1994 1993
--------------------
(in thousands)
Assets
Cash and cash equivalents $5,011 $1,902
Investment securities 225 210
Investment in bank subsidiary at
equity in net assets 92,525 95,161
Other assets 749 593
--------------------
Total assets $98,510 $97,866
====================
Liabilities and stockholders' equity
Liabilities:
Accrued expenses and other liabilities $ 200 $ 155
--------------------
Total liabilities 200 155
--------------------
Stockholders' equity:
Preferred stock - -
Common stock 6,480 6,461
Surplus 51,483 51,228
Retained earnings 55,755 43,056
Treasury stock, at cost (9,586) (2,982)
Valuation allowance for net unrealized
loss on securities (5,718) (21)
Unearned portion of employee restricted stock (104) (31)
--------------------
Total stockholders' equity 98,310 97,711
--------------------
Total liabilities and stockholders' equity $98,510 $97,866
====================
Statements of Income Years Ended December 31,
------------------------------
1994 1993 1992
------------------------------
Operating income: (in thousands)
Dividends from bank subsidiary $13,275 $1,679 $2,049
Dividends from investment securities 19 - 40
Interest income 13 - 39
---------------------------------
Total operating income 13,307 1,679 2,128
---------------------------------
Operating expense:
Interest on borrowed funds - - 222
Losses on investment securities - 16 281
Other operating expense 1,268 769 759
---------------------------------
Total operating expense 1,268 785 1,262
---------------------------------
Income before income taxes and equity
in undistributed earnings of
subsidiaries 12,039 894 866
Income tax benefit 420 267 395
---------------------------------
Income before equity in undistributed
earnings of subsidiaries 12,459 1,161 1,261
Equity in undistributed earnings
(loss) of:
Bank subsidiary 3,078 9,861 5,958
Nonbank subsidiaries - - (1)
---------------------------------
Net income $15,537 $11,022 $7,218
=================================
Statements of Cash Flows Years Ended December 31,
---------------------------------
1994 1993 1992
---------------------------------
(in thousands)
Cash flows from operating activities:
Net income $15,537 $11,022 $7,218
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed earnings
of subsidiaries:
Bank subsidiary (3,078) (9,861) (5,958)
Nonbank subsidiaries - - 1
Amortization - 29 78
Investment securities losses - 16 281
(Increase) decrease in other assets (171) 361 (378)
Increase (decrease) in accrued
expenses and other liabilities 105 (36) 23
-------------------------------------
Net cash provided by
operating activities 12,393 1,531 1,265
-------------------------------------
Cash flows from investing activities:
Proceeds from sales of investment
securities - - 1,719
Proceeds from maturities of
investment securities - - 1,600
Purchase of investment securities - - (1,639)
-------------------------------------
Net cash provided by investing
activities - - 1,680
-------------------------------------
Cash flows from financing activities:
Principal repayments of long-term debt - (59) (2,414)
Proceeds from issuance of treasury
and common stock 239 172 103
Dividends on common stock (2,838) (1,243) (826)
Repurchase of common stock (6,685) - -
--------------------------------------
Net cash used in financing activities (9,284) (1,130) (3,137)
--------------------------------------
Net increase (decrease) in cash
and cash equivalents 3,109 401 (192)
Cash and cash equivalents at
beginning of year 1,902 1,501 1,693
--------------------------------------
Cash and cash equivalents at
end of year $5,011 $1,902 $1,501
======================================
Supplemental disclosure of
cash flow information:
Cash paid during the year
for interest $ - $ - $242
REPORT OF INDEPENDENT PUBLIC ACCOUNTANT
To the Board of Directors and Stockholders
Chittenden Corporation:
We have audited the accompanying consolidated balance sheets of Chittenden
Corporation and its subsidiary as of December 31, 1994 and 1993, and the
related consolidated statements of income, changes in stockholders' equity
and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Chittenden Corporation
and its subsidiary as of December 31, 1994 and 1993, and the results of
their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1994, the Company adopted Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities. As
discussed in Note 1, the Company adopted Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, as of January 1, 1993.
Arthur Andersen LLP
Boston, Massachusetts
January 17, 1995
FIVE YEAR CONSOLIDATED FINANCIAL SUMMARY
Years Ended December 31,
-------------------------------------------------------------------------------
1994 1993 1992 1991 1990
-------------------------------------------------------------------------------
(in thousands, except share amounts)
Statements of income:
Interest income $ 84,930 $79,803 $86,984 $100,061 $106,182
Interest expense 31,025 29,574 41,300 57,972 63,410
------------------------------------------------------------------------------
Net interest income 53,905 50,229 45,684 42,089 42,772
Provision for possible loan losses 4,300 6,600 7,513 8,843 12,189
Net interest income after provision
for possible loan losses 49,605 43,629 38,171 33,246 30,583
Noninterest income 23,525 24,308 21,073 18,442 16,529
Noninterest expense 49,867 51,097 49,582 45,847 50,378
-------------------------------------------------------------------------------
Income (loss) before provision (benefit)
for income taxes 23,263 16,840 9,662 5,841 (3,266)
Provision (benefit) for income taxes 7,726 5,243 2,444 1,234 (2,219)
-------------------------------------------------------------------------------
Income (loss) before cumulative effect
of change in accounting principle 15,537 11,597 7,218 4,607 (1,047)
Cumulative effect of change in
accounting principle - (575) - - -
--------------------------------------------------------------------------------
Net income (loss) $15,537 $11,022 $7,218 $4,607 $(1,047)
================================================================================
Total assets at year-end $1,213,908 $1,231,003 $1,192,068 $1,204,949 $1,136,988
Long-term debt at year-end - - 59 2,473 2,473
Balance sheets - average daily balances:
Total assets $1,200,785 $1,172,809 $1,171,060 $1,115,744 $1,094,984
Loans, net of allowance 833,205 852,958 844,126 828,433 847,440
Investment securities and interest-bearing
cash equivalents 269,050 220,927 222,428 191,244 147,353
Total deposits 1,055,604 1,030,839 1,021,827 992,017 959,297
Long-term debt - 7 2,034 2,473 6,368
Total stockholders' equity 100,635 92,813 83,520 74,476 74,338
Per common share:
Net income (loss) $2.46 $1.78 $1.17 $0.74 $(0.17)
Cash dividends declared 0.46 0.20 0.13 - 0.29
Book value 16.63 15.73 14.04 12.79 11.59
Weighted average shares outstanding 6,303,223 6,206,848 6,193,944 6,186,600 6,192,416
Selected financial percentages:
Return on average total assets 1.29% 0.94% 0.62% 0.41% (0.10)%
Return on average stockholders' equity 15.44 11.88 8.64 6.19 (1.41)
Interest rate spread 4.33 4.21 3.79 3.41 3.53
Net yield on earning assets 4.92 4.69 4.35 4.22 4.44
Net charge-offs as a percent of
average loans 0.48 0.47 0.64 0.89 1.44
Nonperforming assets ratio (1) 1.08 1.85 2.79 3.75 3.42
Allowance for possible loan losses as a
percent of year-end loans 2.19 2.22 1.87 1.73 1.56
Year-end leverage capital ratio 8.41 8.13 7.30 6.86 NA
Year-end primary capital ratio NA NA NA NA 7.36
Risk-based capital ratios:
Tier 1 11.46 11.05 9.64 8.53 7.88
Total 12.82 12.41 10.95 10.04 9.36
Average stockholders' equity to
average assets 8.38 7.91 7.13 6.68 6.79
Common stock dividend payout ratio (2) 18.27 11.28 11.44 - NM
(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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
For the Years Ended December 31, 1994, 1993, and 1992
Overview
The following discussion and analysis of financial condition and results of
operations of Chittenden Corporation ("Chittenden" or the "Company") and
its subsidiary, Chittenden Trust Company (the "Bank"), should be read in
conjunction with the consolidated financial statements and notes thereto
and selected statistical information appearing in this annual report.
Chittenden reported net income of $15.5 million for 1994, up $4.5 million
or 41% from $11.0 million in earnings for 1993. In 1992, the Company
posted net income of $7.2 million. Total assets at December 31, 1994 were
$1.2 billion, unchanged from the level at year-end 1993. The return on
average assets was 1.29% for 1994, up from 0.94% in 1993 and 0.62% in 1992.
The return on average stockholders' equity was 15.44% for 1994, compared
with 11.88% for 1993 and 8.64% for 1992.
Although for the second consecutive year there was little change in total
assets of the Company at year-end, earnings continued their upward trend in
1994 due to several factors. Net interest income increased $3.7 million as
interest earned on assets increased more rapidly than did interest paid on
deposits and other borrowings. The provision for possible loan losses was
$4.3 million, down $2.3 million from the 1993 level reflecting continued
improvement and strength in asset quality. Noninterest expense declined by
$1.2 million, owing primarily to elimination of the expense related to
managing and disposing of foreclosed properties and one-time expenses
related to the Company's merger with VerBanc. The remaining noninterest
expenses increased less than 1% over the 1993 level. Revenues from
noninterest sources declined by $783,000, or 3%, as a $4.7 million
reduction in gains on sales of mortgage loans was almost offset by
increases in revenues from several other sources. The 1994 income tax
provision of $7.7 million exceeded the 1993 provision by $2.5 million, as
both the effective tax rate and the level of pre-tax income increased.
The $3.8 million increase in net income from 1992 to 1993 resulted from
improvement in several elements of earnings: net interest income increased
$4.5 million as interest earned on assets declined less than interest paid
on deposits; the provision for possible loan losses was down $913,000 from
1992; and revenues from noninterest sources improved by $3.2 million, led
by a $1.3 million increase in revenue related to credit card activities.
Noninterest expense increased $1.5 million, to $51.1 million, in 1993,
largely due to one-time expenses related to the Company's merger with
VerBanc. The increase was mitigated by a reduction of $1.2 million in
other real estate owned expenses. The 1993 income tax provision exceeded
the 1992 provision by $2.8 million. The cumulative effect of a change in
accounting principle related to providing for income taxes and adopted
effective January 1, 1993 amounted to a $575,000 additional charge against
earnings not included in the tax provision discussed above.
Financial Condition
Loans
Chittenden's loan portfolio increased by 3% during 1994, to end the year at
$873.0 million. The overall proportions of commercial-related and consumer
loans changed little from the mix at the end of 1993. The Company
continues to pursue its strategy of gradually shifting the loan mix through
continued focus on commercial and non-residential consumer lending
simultaneous with secondary market sales of originated fixed-rate
residential mortgage loans.
The classification of the Company's loan portfolio is based on underlying
collateral. At December 31, 1994, commercial loans secured by non-real
estate business assets totaled $105.3 million, down $2.4 million from the
$107.7 million posted at year-end 1993. The decrease in this category
reflects payoffs by a few large borrowers due to very competitive pricing
offered by out-of-market competition, almost offset by strong growth in the
small business market. Further, the Company's strategic focus on the small
business market has resulted in a higher proportion of commercial loans
advanced for business purposes being secured by equity in real estate
collateral. These loans are classified on the consolidated financial
statements as residential or commercial real estate loans, depending on the
real estate collateral pledged. Commercial real estate loans stood at
$214.1 million at year-end 1994, up 4 % from December 1993. The increase in
this category reflects increased loan demand in the Company's marketplace
and the focus, noted previously on developing small business relationships.
Approximately $67.6 million of commercial real estate loans are for
investment properties.
Construction loans amounted to $7.3 million at December 31, 1994, down from
$13.7 million the year before. Financing for custom-built residential
construction accounts for 43% of this total; the remainder is for various
types of commercial construction.
Residential real estate loans stood at $334.8 million at year-end 1994, up
$6.7 million from December 31, 1993. During the first quarter of 1994, the
Company created marketable securities using $9.2 million of Chittenden
Affordable Real Estate mortgage loans. These securities remained in the
Company's investment portfolio at December 31, 1994. The amounts and types
of residential mortgage loan originations changed during the year driven
primarily by rising interest rates. Early in the year, volume began to
slow as refinancing activity tapered off. Demand continued to be primarily
for fixed-rate loans which the Company sells in the secondary market. As
rates rose, origination volume declined further and what volume there was
shifted toward variable-rate loans which the Company generally holds in
portfolio. In total, $159.4 million in mortgages were originated during
1994, down from $373.8 million during 1993. Secondary market sales
were$127.9 million in 1994 (including the securitization described above),
down from $339.0million in 1993. The Company underwrites substantially all
of its residential mortgages to secondary market standards. During 1994
and 1993, the Company continued to follow its policy of selling
substantially all of its fixed-rate residential mortgage production on a
servicing-retained basis. From time to time, the Company also sells its
qualifying variable-rate production on a servicing-retained basis.
The portfolio of residential mortgages serviced for investors continued to
grow, totaling $709.9 million at December 31, 1994, up 12 % from the $635.0
million at year-end 1993. 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, $652.8 million were
originated by the Company. During 1994, the Company purchased, for
$664,000, rights to service a portfolio of $59.0 million in residential
mortgages in the northern New England market area, of which $57.1 million
remained at the end of 1994.
The outstanding balances on home equity lines totaled $70.8 million at
December 31, 1994, up from $69.8 million the previous year. The unused
portion of these lines totaled $61.2 million at December 31, 1994, down
from $67.2 million at year-end 1993.
Consumer loans increased for the third consecutive year, reaching $140.7
million at year-end 1994, up from $124.4 million at December 31, 1993. The
increase reflects primarily higher levels of indirect installment lending
through auto dealers which was up 47.4% to $67.1 million of this portfolio.
The Company underwrites its indirect automobile loans, maintaining the same
credit standards as for car loans originated in its branch offices. Direct
installment and student loans of $45.7 million, and credit card balances of
$30.8 million, were down slightly from the end of 1993. Unused portions of
credit card lines totaled $61.6 million at the end of 1994, down $7.8
million from the end of 1993. Congressionally-mandated changes regarding
the government-guaranteed student loan program have resulted in the
Company's decision to discontinue its participation in this program.
Management expects the remaining student loans to be sold in the secondary
market by mid-1995.
The Company's lending activities are conducted in a market area focused in
Vermont with activity related to contiguous trading areas in Quebec, New
York, New Hampshire, and Massachusetts. 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, 1994:
December 31,
-----------------------------------------------------
1994 1993 1992 1991 1990
-----------------------------------------------------
(in thousands)
Commercial $105,281 $107,722 $118,532 $94,336 $99,021
Real estate:
Residential 334,841 328,165 347,264 340,069 333,213
Commercial 214,103 206,601 190,907 160,824 154,335
Construction 7,281 13,747 18,008 32,471 39,384
Home equity 70,777 69,849 76,934 81,891 78,675
Consumer 140,677 124,412 123,484 120,284 131,454
----------------------------------------------------
Total gross loans 872,960 850,496 875,129 829,875 836,082
Allowance for possible
loan losses (19,099) (18,917) (16,372) (14,373) (13,030)
----------------------------------------------------
Net loans $853,861 $831,579 $858,757 $815,502 $823,052
====================================================
Mortgage loans held
for sale $2,870 $11,646 $7,971 $10,967 $8,254
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 which 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. Generally, a loan remains on nonaccrual status until the
factors which indicated 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. Following clarification of regulatory
interpretation, the Company has classified in-substance foreclosures in
nonaccrual loans. Historical amounts have been restated to reflect the
1994 classifications.
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, 1994:
December 31,
----------------------------------------------------
1994 1993 1992 1991 1990
----------------------------------------------------
(in thousands)
Loans on nonaccrual $7,934 $12,756 $17,541 $19,740 $22,504
Loans not included above
which are troubled
debt restructurings 185 367 53 353 29
Other real estate owned 1,288 2,619 7,044 11,447 6,338
----------------------------------------------------
Total nonperforming assets $9,407 $15,742 $24,638 $31,540 $28,871
=====================================================
Loans past due 90 days
or more and still accruing $1,132 $1,453 $2,340 $4,146 $4,222
Percentage of nonperforming
assets to total loans and
other real estate owned 1.08% 1.85% 2.79% 3.75% 3.42%
Nonperforming assets to
total assets 0.77 1.28 2.07 2.62 2.54
Allowance for possible loan
losses to nonperforming
loans 235.24 144.15 93.05 71.53 57.83
Total nonperforming assets stood at $9.4 million, or 0.77% of total assets,
at year-end 1994, down $6.3 million from $15.7 million, or 1.28% of total
assets at the previous year-end. Nonaccrual loans stood at $7.9 million at
December 31, 1994, down from $12.8 million the year before. These
reductions continue to reflect the strong trend of improving asset quality.
The nonaccrual loans consist of 164 loans, the largest of which amounted to
$1.3 million at year-end 1994. These loans were diversified across a range
of industries, sectors, and geography. At year-end 1994, 42% were current
as to principal and interest, compared with 48% at the previous year-end.
OREO totaled $1.3 million at year-end 1994, one-half the 1993 level.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 114, Accounting by Creditors for Impairment of a
Loan, as amended by SFAS No. 118 (hereafter collectively referred to as
SFAS 114). SFAS 114 requires that impaired loans, as defined, be measured
based on the present value of the expected future cash flows discounted at
the loan's effective interest rate, or the fair value of the collateral if
the loan is collateral dependent. This statement is effective for fiscal
years beginning after December 15, 1994. Management believes that adoption
of this statement will not have a material effect on the financial
condition or results of operations of the Company.
Allowance for Possible Loan Losses
The following table summarizes the activity in the Company's allowance for
possible loan losses for the five years ended December 31, 1994:
December 31,
-------------------------------------------------------------------------
1994 1993 1992 1991 1990
-------------------------------------------------------------------------
(in thousands)
Balance of allowance for possible
loan losses at beginning of year $18,917 $16,372 $14,373 $13,030 $13,201
Provision charged to expense 4,300 6,600 7,513 8,843 12,189
---------------------------------------------------------------------------
Balance of allowance for possible
loan losses after provision 23,217 22,972 21,886 21,873 25,390
---------------------------------------------------------------------------
Loans charged off:
Commercial 893 2,001 1,725 788 962
Real estate:
Residential 461 927 738 432 669
Commercial 2,779 759 1,968 2,338 1,438
Construction - - 87 2,848 8,034
Home equity 51 209 272 115 60
Consumer 1,045 1,276 1,461 1,963 2,020
---------------------------------------------------------------------------
Total loans charged off 5,229 5,172 6,251 8,484 13,183
---------------------------------------------------------------------------
Recoveries of loans previously
charged off:
Commercial 512 232 327 435 260
Real estate:
Residential 80 201 74 111 11
Commercial 133 216 11 4 46
Consumer 386 468 325 434 506
---------------------------------------------------------------------------
Total recoveries 1,111 1,117 737 984 823
---------------------------------------------------------------------------
Net loans charged off 4,118 4,055 5,514 7,500 12,360
---------------------------------------------------------------------------
Balance of allowance for possible
loan losses at end of year $19,099 $18,917 $16,372 $14,373 $13,030
===========================================================================
Amount of loans outstanding
at end of year $872,960 $850,496 $875,129 $829,875 $836,082
Average amount of loans outstanding 852,528 870,603 859,654 842,583 857,247
Ratio of net charge-offs during
year to average loans outstanding 0.48% 0.47% 0.64% 0.89% 1.44%
Allowance as a percent of loans
outstanding at end of year 2.19 2.22 1.87 1.73 1.56
At December 31, 1994, the allowance for possible loan losses was $19.1
million, or 2.19% of total loans. This is a slight change from the $18.9
million, or 2.22% of loans, posted one year ago. The coverage ratio, or
allowance for possible loan losses to nonperforming loans, has improved
from 144% at year-end 1993 to 235% at the end of 1994.
The provision for possible loan losses totaled $4.3 million in 1994, down
from $6.6 million in 1993, and $7.5 million in 1992. The provision was
reduced due to, among other things, the reduction in the level of losses
experienced in the loan portfolio and the decline in nonperforming loans.
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 collectability 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 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 changed little during 1994. This and
uncertainties concerning how the rapid rise in interest rates will affect
the local and regional economy were among the factors considered by
management in determining the adequacy of the allowance for possible loan
losses.
The following table summarizes the allocation of the allowance for possible
loan losses for the five years ended December 31, 1994:
December 31,
-----------------------------------------------------------------------
1994 1993 1992
-----------------------------------------------------------------------
Amount Loan Amount Loan Amount Loan
Allocated Distribution Allocated Distribution Allocated Distribution
-----------------------------------------------------------------------
(in thousands)
Commercial $2,001 12% $2,146 13% $2,588 13%
Real estate:
Residential 726 38 785 38 999 40
Commercial 5,143 25 5,681 24 5,053 22
Construction 626 1 419 2 620 2
Home equity 248 8 349 8 377 9
Consumer 1,865 16 2,126 15 1,886 14
Other 8,490 - 7,411 - 4,849 -
-----------------------------------------------------------------------
$19,099 100% $18,917 100% $16,372 100%
=======================================================================
December 31,
1991 1990
------------------------------------------------------------------------
Amount Loan Amount Loan
Allocated Distribution Allocated Distribution
-------------------------------------------------------------------------
Commercial $3,469 11% $2,431 12%
Real estate:
Residential 587 41 783 40
Commercial 4,035 19 3,224 18
Construction 3,007 4 4,529 5
Home equity 200 10 193 9
Consumer 1,928 15 1,764 16
Other 1,147 - 106 -
-------------------------------------------------------------------------
$14,373 100% $13,030 100%
==========================================================================
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.
The Company adopted Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities (SFAS
115), on January 1, 1994. At that time, substantially all of the
investment portfolio was classified as available for sale in recognition of
the possibility that accelerating loan growth could create liquidity
demands which could be met by the sale of investments. At December 31,
1994, the Company held investments totaling $196.8 million in the available
for sale category; $9.9 million was held for investment. This compares
with $150.7 million held for sale and $2.3 million held for investment at
December 31, 1993. Upon adoption of SFAS 115, the Company recorded a
cumulative net increase in stockholders' equity of $986,000 to reflect the
unrealized gain, net of estimated tax effect, in the portfolio of
securities classified as available for sale at the adoption date.
Subsequent changes in net unrealized gains and losses, net of estimated tax
effect, were applied to this valuation account. At December 31, 1994, net
unrealized losses of $5.7 million (net of taxes) resulted from marking to
fair value the available-for-sale portfolio. This amount is reflected as a
reduction of stockholders' equity. Prior to the adoption of SFAS 115, held-
for-sale investments were marked to the lower of cost or market value.
Since market values of the investment portfolio generally exceeded cost at
the end of 1993, unrealized losses reflected in the equity account amounted
to only $21,000.
The mix of securities held changed little during 1994, with continued
emphasis on U.S. Treasury securities. Obligations of U. S. government
agencies, municipalities, and corporations continued to represent
significant, balanced portions of the portfolio.
The following tables show the composition of the Company's investment
portfolio, at amortized cost, at December 31, 1994, 1993, and 1992:
December 31,
--------------------------------------
1994 1993 1992
---------------------------------------
Securities available for sale (in thousands)
US Treasury securities $61,076 $54,310 $-
US government agency obligations 33,138 20,211 -
Obligations of states and
political subdivisions 40,341 23,701 -
Mortgage-backed securities 23,823 23,636 -
Corporate bonds and notes 36,397 28,885 -
Government bond mutual funds 10,605 - -
Marketable equity securities 244 - -
--------------------------------------
$205,624 $150,743(1) $-
======================================
Securities held for investment
US Treasury securities $- $- $27,338
US government agency obligations - - 19,059
Obligations of states and
political subdivisions 1,651 1,667 23,691
Mortgage-backed securities 8,218 360 50,127
Corporate bonds and notes - - 24,109
Marketable equity securities - 244 4,581
Other securities - - 285
Valuation allowance on marketable
equity securities - (21) (733)
--------------------------------------
$9,869 $2,250 $148,457
======================================
(1)In 1993, these securities were classified as held for sale.
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, 1994, with
a comparative total for 1993:
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
-------------------------------------------------------------------------------------------------------
(in thousands)
Securities available for sale
US Treasury securities $3,027 6.35% $52,992 5.53% $5,057 5.58% $- -% $- -% $61,076 5.57%
US government agency
obligations 14,631 5.58 18,507 6.18 - - - - - - 33,138 5.92
Obligations of states
and political
subdivisions 39,687 5.13 543 6.21 111 6.50 - - - - 40,341 5.15
Mortgage-backed
securities (1) 4,166 7.05 12,924 7.51 4,191 6.66 2,542 6.51 - - 23,823 7.17
Corporate bonds and notes 8,776 5.55 27,621 5.25 - - - - - - 36,397 5.32
Government bond
mutual funds - - - - - - - - 10,605 7.10 10,605 7.10
Marketable equity
securities - - - - - - - - 244 3.87 244 3.87
------- ------- ------ ----- ------- -------
Total available for sale 70,287 5.44 112,587 5.80 9,359 6.07 2,542 6.51 10,849 7.03 205,624 5.76
------- ------- ------ ----- ------- -------
Securities held for investment
Obligations of states
and political
subdivisions 111 8.73 484 8.73 439 8.73 617 8.73 0 - 1,651 8.73
Mortgage-backed
securities (1) 567 8.11 1,965 8.12 1,900 8.12 3,786 8.12 0 - 8,218 8.12
Total held for investment 678 8.21 2,449 8.24 2,339 8.23 4,403 8.21 0 - 9,869 8.22
------- -------- ------- ------ ------- --------
Total securities $70,965 5.47% $115,036 5.85% $11,698 6.51% $6,945 7.58% $10,849 7.03% $215,493 5.88%
------- -------- ------- ------- ------- --------
======= ======== ======= ======= ======= ========
Comparative amounts
at December 31, 1993 $43,072 5.26% $ 92,440 5.69% $15,765 6.43% $1,493 8.51% $ 223 2.77% $152,993 5.67%
(1) Maturities of mortgage-backed securities are based on mortgage loan
prepayment assumptions.
Deposits
During 1994, total deposits averaged $1.1 billion, up from $1.0 billion in
1993. Noninterest-bearing demand deposits averaged $161.7 million, up
$20.0 million from $141.7 million in 1993. Reversing the trend from the
previous year, possibly due to the availability of higher-yielding insured
deposits and the adverse impact rising rates generally had on the valuation
of uninsured non-bank investments, savings and time deposits under $100,000
increased $9.8 million, to $831.7 million for 1994. Deposit products in
this group which saw growth were interest-bearing transaction accounts
(money market accounts and N.O.W. accounts), while regular savings accounts
and time accounts (retirement and certificates of deposit) declined. This
shift in product mix reflects customers' preference to hold investments
without specific maturities in a time of consistently rising interest
rates. The Company has a number of institutional customers whose
investment needs frequently are met by offering certificates of deposit
over $100,000. During 1994, the average balance in this category decreased
slightly to $62.2 million, from $67.2 million for 1993. 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.
The following table shows average daily balances of the Company's deposits
for the periods indicated:
Years Ended December 31,
------------------------------------
1994 1993 1992
------------------------------------
(in thousands)
Demand deposits $161,657 $141,740 $131,282
Savings and time deposits
under $100,000 831,698 821,852 834,431
Certificates of deposit $100,000
and over 62,249 67,247 56,114
--------------------------------------
$1,055,604 $1,030,839 $1,021,827
======================================
The Company's outstanding certificates of deposit and other time deposits
in denominations of $100,000 and over had maturities as follows:
December 31,
-------------------------------------
1994 1993
-------------------------------------
(in thousands)
Three months or less $64,922 $71,118
Over three months to six months 21,548 11,673
Over six months to twelve months 8,717 6,011
Over twelve months 3,279 5,117
------------------------------------
$98,466 $93,919
====================================
Short-Term Borrowings
During 1994, short-term borrowings averaged $32.8 million, down from the
$36.9 million posted in 1993. This funding consists of borrowings from the
U.S. Treasury, securities sold under agreements to repurchase, and Federal
funds purchased. Treasury borrowings averaged $20.3 million for 1994
compared with $25.8 million during 1993. 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 $11.8 million for 1994, up slightly from $11.0 million during
1993. These borrowings have neither reserve requirements nor FDIC
insurance costs. U.S. Treasury and agency securities, mortgage-backed
securities, and residential mortgage loans are pledged as collateral for
the Treasury borrowings and repurchase agreements. Federal funds purchased
averaged $644,000 for 1994 compared with $167,000 for 1993.
Capital Resources
The Company's capital forms the foundation for maintaining investor
confidence as well as for developing programs for growth and new
activities. The Company continued to maintain and build on its capital
position during 1994. At December 31, 1994, capital stood at $98.3
million, up $599,000 from $97.7 million at December 31, 1993. Earnings of
$15.5 million and $173,000 of common stock issued in connection with
benefit plans added to capital during the year. The purchase of 326,875
shares of the Company's common stock for $6.7 million during the fourth
quarter in two negotiated transactions, a $5.7 million increase in the
valuation allowance for unrealized losses on securities available for sale,
and dividend payments totaling $2.8 million combined to decrease the
capital position from the 1993 year-end level. The capital position had
increased during 1993 by $10.7 million due to earnings of $11.0 million, a
$712,000 improvement in the valuation allowance on marketable equity
securities, and $201,000 from stock issued. Dividends of $1.2 million were
paid during 1993.
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, 1994, the Company's
leverage capital ratio (which is calculated pursuant to the FRB's
regulations) was 8.41%, and the Bank's leverage capital ratio (which is
calculated pursuant to the FDIC's regulations) was 8.01%. The ratios in
1993 were 8.13% and 7.95%, respectively.
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, 1994, the Company's risk-based capital ratio was 12.82% and
its Tier 1 capital, consisting entirely of common stock, was 11.46%. This
compares with year-end 1993 ratios of 12.41% and 11.05%, respectively.
FDIC regulations pertaining to capital adequacy, which apply to the Bank,
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, 1994, the Bank's leverage capital ratio was 8.01%, its Tier
1 risk-based capital ratio was 10.86%, and its total risk-based capital
ratio was 12.22%, placing the Bank in this highest capital category.
Capital ratios in excess of minimum requirements indicate capacity to take
advantage of profitable and credit-worthy opportunities as they occur in
the future.
The following table presents capital components and ratios of the Company:
December 31,
----------------------------------
1994 1993 1992
----------------------------------
(in thousands)
Leverage
Stockholders' equity $ 103,333 $ 97,711 $ 87,019
Total average assets (1) 1,228,105 1,202,575 1,192,092
Leverage capital ratio 8.41% 8.13% 7.30%
Risk-based
Capital components:
Tier 1 $103,333 $ 97,711 $ 87,019
Tier 2 11,273 11,049 11,277
----------------------------------------
Total $114,606 $108,760 $ 98,296
========================================
Risk-weighted assets:
On-balance sheet $840,484 $819,735 $844,179
Off-balance sheet 61,317 64,180 58,593
----------------------------------------
$901,801 $883,915 $902,772
========================================
Ratios:
Tier 1 11.46% 11.05% 9.64%
Total (including Tier 2) 12.82 12.41 10.95
_____________________
(1) Total average assets are for the most recent quarter.
Liquidity and Rate Sensitivity
The Company's liquidity and rate sensitivity are monitored by the Bank's
asset and liability committee. This committee meets weekly to review and
direct the Bank's lending and investment activities, as well as its deposit-
gathering functions.
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, 1994, the Company
maintained cash and cash equivalents of $101.0 million, compared with
$195.2 million at the end of 1993. During 1994, the Company continued to
be an average daily net seller of Federal funds.
Interest rate sensitivity is managed by the Bank's asset and liability
committee whose goals include achieving adequate and stable interest
income. 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.
During 1994, interest rates increased significantly; the prime rate
increased from 6.00% in January to 8.50% at year-end, and the 1-year
Treasury constant maturity increased by approximately 360 basis points.
Both are indices used by banks to price certain loan products. 49% of the
Company's 1994 average earning assets were either indexed to prime or to
the 1-year Treasury constant maturity. The Company's liabilities are not
specifically indexed, but either bear a rate of interest to maturity or are
repriced at the discretion of management, taking into account loan demand,
other investment opportunities, liquidity, competition and other
considerations. The result of this asset/liability make-up was that more
of the Company's earning assets repriced to higher interest rates during
1994 than did its interest-bearing liabilities.
The following table shows the amounts of interest-earning assets and
interest-bearing liabilities at December 31, 1994 which 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:
Commercial $77,622 $1,419 $15,139 $11,101 $105,281
Real estate:
Commercial and
construction 167,303 2,342 31,523 20,216 221,384
Residential 113,585 100,211 60,389 60,656 334,841
Home equity 70,777 - - - 70,777
Consumer 80,517 15,456 44,136 568 140,677
-----------------------------------------------
Total loans 509,804 119,428 151,187 92,541 872,960
Investment securities (1) 56,222 25,349 115,034 18,888 215,493
Interest-bearing cash
equivalents 40,300 - - - 40,300
-----------------------------------------------
Total interest-earning
assets 606,326 144,777 266,221 111,429 1,128,753
------------------------------------------------
Interest-bearing liabilities:
Certificates of deposit
$100,000 and over 57,889 8,717 3,279 - 69,885
Other time deposits (2) 384,878 96,730 64,550 500 546,658
Short-term borrowings 22,650 - - - 22,650
------------------------------------------------
Total interest-bearing
liabilities 465,417 105,447 67,829 500 639,193
------------------------------------------------
Net interest rate
sensitivity gap $140,909 $39,330 $198,392 $110,929 $489,560
=================================================
Cumulative gap at
December 31, 1994 $140,909 $180,239 $378,631 $489,560
Cumulative gap at
December 31, 1993 164,924 220,710 344,733 432,678
__________________
(1) Amounts are based on amortized cost balances.
(2) Regular savings deposits and N.O.W. accounts of $273.2 million at
December 31, 1994, and $294.1 million at December 31, 1993, are not
included because repricing of these liabilities is neither required nor
defined.
The following table shows scheduled maturites of selected loans at December
31, 1994:
Less One Year Over
Than One To Five Five
Year Years Years Total
---------------------------------------
(in thousands)
Predetermined rates:
Commercial $4,407 $15,233 $11,163 $30,803
Commercial real estate
and construction 7,938 31,724 20,348 60,010
--------------------------------------
$12,345 $46,957 $31,511 $90,813
======================================
Floating or adjustable rates:
Commercial $21,715 $31,605 $21,158 $74,478
Commercial real estate
and construction 41,501 72,761 47,112 161,374
--------------------------------------
$63,216 $104,366 $68,270 $235,852
======================================
Results of Operations
Net Interest Income
For 1994, net interest income was $53.9 million, up $3.7 million from 1993.
On a fully taxable equivalent basis, net interest income increased $3.9
million from 1993, to $55.2 million in 1994. These improvements resulted
from higher yields on loans and investments and higher levels of interest-
earning assets, which more than offset the impact of higher deposit and
borrowing rates. The level of interest-bearing liabilities was essentially
unchanged from the 1993 average, thus the $30.0 million increase in
interest-earning assets was funded almost entirely by noninterest-bearing
sources, helping to improve net interest income.
For 1993, net interest income was up $4.5 million from the 1992 level, to
$50.2 million. On a fully taxable equivalent basis, net interest income
increased $4.1 million from 1992 to 1993. These increases were caused by
lower deposit rates, lower levels of interest-bearing liabilities, and
higher levels of interest-earning assets, which more than offset lower
yields on loans and investments.
The taxable equivalent net yield on earning assets was 4.92% in 1994, up 23
basis points from 4.69% in 1993. The 16-basis point increase in the cost
of interest-bearing liabilities was more than offset by the 28-basis point
increase in the yield on earning assets and the effect of the higher
proportion of non-interest bearing liabilities. The taxable equivalent net
yield on earning assets for 1993 was 4.69%, up 34 basis points from 4.35%
for 1992. The decline of 120 basis points in the cost of interest-bearing
liabilities, mitigated by the compression caused by an increase in the
portions of funding provided by non-interest bearing sources, more than
offset the decline of 77 basis points in the yield on earning assets.
The following table presents an analysis of average rates and yields on a
fully taxable equivalent basis for the years indicated:
1994
-------------------------------------
Interest Average
Average Income/ Yield/
Balance Expense (1) Rate (1)
--------------------------------------
(in thousands)
Assets
Interest-earning assets:
Loans (2) $842,807 $70,416 8.35%
Industrial revenue bonds (3) 9,721 956 9.83
Investments (4):
Taxable 190,784 10,897 5.71
Tax-favored debt securities 41,494 2,301 5.55
Tax-favored equity securities 16,609 728 4.38
Interest-bearing deposits in banks 1,045 35 3.35
Federal funds sold 19,118 847 4.43
--------------------
Total interest-earning
assets 1,121,578 86,180 7.68
-------
Noninterest-earning assets 98,530
Allowance for possible loan losses (19,323)
-----------
Total assets $1,200,785
===========
Liabilities and stockholders' equity
Interest-bearing liabilities:
Savings and interest-bearing
transactional accounts $526,422 14,727 2.80
Certificates of deposit
$100,000 and over 62,249 2,502 4.02
Other time deposits 305,276 11,996 3.93
----------------------
Total interest-bearing
deposits 893,947 29,225 3.27
Short-term borrowings 32,799 1,800 5.49
Long-term debt - - -
----------------------
Total interest-bearing
liabilities 926,746 31,025 3.35
------
Noninterest-bearing liabilities:
Demand deposits 161,657
Other liabilities 11,747
------------
Total liabilities 1,100,150
------------
Stockholders' equity 100,635
------------
Total liabilities and
stockholders' equity $1,200,785
===========
Net interest income $55,155
========
Interest rate spread (5) 4.33%
Net yield on earning assets (6) 4.92
______________________
1993
---------------------------------------
Interest Average
Average Income/ Yield/
Balance Expense (1) Rate (1)
---------------------------------------
(in thousands)
Assets
Interest-earning assets:
Loans (2) $859,195 $69,310 8.07%
Industrial revenue bonds (3) 11,408 970 8.50
Investments (4):
Taxable 170,975 8,020 4.69
Tax-favored debt securities 35,872 1,927 5.37
Tax-favored equity securities 4,952 309 6.24
Interest-bearing deposits in banks 2,319 74 3.19
Federal funds sold 6,809 193 2.83
-----------------------
Total interest-earning
assets 1,091,530 80,803 7.40
--------
Noninterest-earning assets 98,924
Allowance for possible loan losses (17,645)
------------
Total assets $1,172,809
============
Liabilities and stockholders' equity
Interest-bearing liabilities:
Savings and interest-bearing
transactional accounts $495,595 12,207 2.46
Certificates of deposit
$100,000 and over 67,247 2,452 3.65
Other time deposits 326,257 13,211 4.05
--------------------
Total interest-bearing
deposits 889,099 27,870 3.13
Short-term borrowings 36,879 1,704 4.62
Long-term debt 7 - 8.00
--------------------
Total interest-bearing
liabilities 925,985 29,574 3.19
-------
Noninterest-bearing liabilities:
Demand deposits 141,740
Other liabilities 12,271
---------
Total liabilities 1,079,996
---------
Stockholders' equity 92,813
---------
Total liabilities and
stockholders' equity $1,172,809
==========
Net interest income $51,229
=======
Interest rate spread (5) 4.21%
Net yield on earning assets (6) 4.69
______________________
1992
--------------------------------------
Interest Average
Average Income/ Yield/
Balance Expense (1) Rate (1)
--------------------------------------
(in thousands)
Assets
Interest-earning assets:
Loans (2) $846,697 $74,261 8.77%
Industrial revenue bonds (3) 12,957 1,153 8.90
Investments (4):
Taxable 151,974 8,711 5.73
Tax-favored debt securities 28,195 2,064 7.32
Tax-favored equity securities 29,592 1,695 5.73
Interest-bearing deposits in banks 8,938 356 3.98
Federal funds sold 3,729 181 4.85
---------------------
Total interest-earning assets 1,082,082 88,421 8.17
-------
Noninterest-earning assets 104,506
Allowance for possible loan losses (15,528)
------------
Total assets $1,171,060
============
Liabilities and stockholders' equity
Interest-bearing liabilities:
Savings and interest-bearing
transactional accounts $464,900 16,209 3.49
Certificates of deposit
$100,000 and over 56,114 2,708 4.83
Other time deposits 369,531 19,994 5.41
--------------------
Total interest-bearing
deposits 890,545 38,911 4.37
Short-term borrowings 49,056 2,167 4.42
Long-term debt 2,034 222 10.91
--------------------
Total interest-bearing
liabilities 941,635 41,300 4.39
-------
Noninterest-bearing liabilities:
Demand deposits 131,282
Other liabilities 14,623
-----------
Total liabilities 1,087,540
-----------
Stockholders' equity 83,520
-----------
Total liabilities and
stockholders' equity $1,171,060
============
Net interest income $47,121
=======
Interest rate spread (5) 3.79%
Net yield on earning assets (6) 4.35
______________________
(1) On a fully taxable equivalent basis. Calculated using a Federal income
tax rate of 35%.
(2) Includes nonperforming loans
(3) Industrial revenue bonds are included in loans in the financial
statements.
(4) Average balances are based on historical amortized cost balances.
(5) Interest rate spread is the average rate earned on total interest-
earning assets less the average rate paid on interest-bearing liabilities.
(6) Net yield on earning assets is net interest income divided by total
interest-earning assets.
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 volume and change due to rate
in proportion to the relationship of the absolute dollar amounts of the
change in each.
1994 Compared with 1993
---------------------------------
Increase (Decrease)
Due to Change in Total
Average Average Increase
Rate Balance (Decrease)
------------------------------------
(in thousands)
Interest income:
Loans, including fees $1,132 $ (26) $1,106
Industrial revenue bonds 140 (154) (14)
Investments:
Taxable 1,878 999 2,877
Tax-favored debt securities 64 310 374
Tax-favored equity securities (116) 535 419
Interest-bearing deposits
in banks 4 (43) (39)
Federal funds sold 155 499 654
--------------------------------------
Total interest income 3,257 2,120 5,377
--------------------------------------
Interest expense:
Savings and interest-bearing
transactional accounts 1,728 792 2,520
Certificates of deposit $100,000
and over 240 (190) 50
Other time deposits (383) (832) (1,215)
-------------------------------------
Total deposits 1,585 (230) 1,355
Short-term borrowings 298 (202) 96
Long-term debt - - -
-------------------------------------
Total interest expense 1,883 (432) 1,451
-------------------------------------
Change in net interest income $1,374 $2,552 $3,926
=====================================
1993 Compared with 1992
--------------------------------------
Increase (Decrease)
Due to Change in Total
Average Average Increase
Rate Balance (Decrease)
---------------------------------------
(in thousands)
Interest income:
Loans, including fees $(6,033) $1,082 $(4,951)
Industrial revenue bonds (50) (133) (183)
Investments:
Taxable (1,699) 1,008 (691)
Tax-favored debt securities (623) 486 (137)
Tax-favored equity securities 139 (1,525) (1,386)
Interest-bearing deposits
in banks (60) (222) (282)
Federal funds sold (96) 108 12
------------------------------------
Total interest income (8,422) 804 (7,618)
------------------------------------
Interest expense:
Savings and interest-bearing
transactional accounts (5,015) 1,013 (4,002)
Certificates of deposit $100,000
and over (734) 478 (256)
Other time deposits (4,629) (2,154) (6,783)
-------------------------------------
Total deposits (10,378) (663) (11,041)
Short-term borrowings 96 (559) (463)
Long-term debt (111) (111) (222)
-------------------------------------
Total interest expense (10,393) (1,333) (11,726)
-------------------------------------
Change in net interest income $ 1,971 $2,137 $4,108
=====================================
Provision for Possible Loan Losses
The Company provides for possible loan losses using the allowance method.
The allowance for possible loan losses is increased by provisions charged
against current earnings. Loan losses are charged against the allowance
when management believes that the collectibility of the loan principal is
unlikely. Recoveries on loans previously charged off are credited to the
allowance.
The allowance is the amount management believes is necessary to absorb
possible loan losses based on evaluations of collectibility and prior loan
loss experience, changes in the nature and volume of the loan portfolio,
overall portfolio quality, specific problem loans, and current and
anticipated economic conditions that may affect the borrowers' ability to
pay.
Management believes that the allowance for possible loan losses is
adequate. While management uses available information to assess possible
losses on loans, future additions to the allowance may be necessary. In
addition, various regulatory agencies periodically review the Company's
allowance for possible loan losses as an integral part of their examination
process. Such agencies may require the Company to recognize additions to
the allowance based on judgements different from those of management.
The provision for possible loan losses totaled $4.3 million in 1994, $6.6
million in 1993, and $7.5 million in 1992. (See "Allowance for Possible
Loan Losses".)
Noninterest Income and Noninterest Expense
Noninterest income was $23.5 million in 1994, down $783,000 from the $24.3
million reported in 1993. Trust department income was unchanged from the
1993 level, at $4.0 million. Income from higher levels of administered
assets was offset by the impact of the declines in the bond market during
the year. Service charges on deposit accounts increased again in 1994,
rising 3% to $4.6 million, primarily due to higher levels of cash
management fees.
During 1994, a net loss of $523,000 was realized on the sale of $41.9
million of securities, compared with a net gain of $130,000 posted in 1993.
The Company provides mortgage banking services through two channels: a
traditional retail origination approach which operates through the branch
office network and the Company's mortgage originators; and a wholesale
origination function (part of the VerBanc acquisition) which originates
residential mortgage loans through correspondents, brokers and agents.
This multi-faceted approach allows the Company to enhance its penetration
of the overall residential market. Regardless of the origination method,
the Company sells substantially all of its fixed-rate production and may
sell qualifying variable-rate production. The Company has retained the
servicing on the mortgage loans it has sold.
Mortgage banking activity changed significantly during 1994, as rapidly
rising interest rates impacted the business. Mortgage servicing income
rose by over 100% for the second consecutive year, to $2.1 million. The
increase was due in part to the nonrecurrence of write-downs of excess
servicing assets totaling $1.0 million which had occurred in the previous
year when refinancing activity was strong. The decline in refinancing
activity and a narrowing of spreads on sold loans in 1994 resulted in a
sharp decline in gains on sales of mortgage loans. For 1994, gains totaled
$1.1 million, down $4.7 million from the 1993 level.
Income related to credit card activities includes fees related to the
issuance of credit cards and interchange revenue generated when credit card
transactions are processed through the Company's merchant customers. These
activities generated income of $8.2 million in 1994, up from $5.7 million
in the prior year. The additional emphasis placed on expanding this
activity and the general improvement in the economy and in consumer
confidence contributed in the revenue increase. The Company posted a total
of $4.0 million in other noninterest income, up $736,000 from the 1993
level. This category represents over thirty categories of fee income. The
increase includes a gain of $444,000 resulting from the sale of a branch
property, as well as increases in revenues from payroll services, ATM fees,
and foreign exchange transactions.
Noninterest income was $24.3 million in 1993, up from $21.1 million
reported for 1992. Trust department income, at $4.0 million, declined
slightly from the 1992 level. Trust was largely successful during 1993 in
rebuilding approximately 9% of its revenue base which had been diminished
due in large part to the successful disposition of a large bankruptcy trust
during 1992. Service charges on deposit accounts rose on a year to year
basis; in 1993, $4.5 million of income was recorded compared with $4.1
million in 1992. The improvement reflects higher levels of activity in
deposit accounts, a larger proportion of accounts for which fee-based
services were provided, and the effect of lower interest rates generating
lower levels of credit on deposit balances used to offset service charges.
The Company sold $20.3 million in securities during 1993, reporting a net
gain of $130,000. During 1992, a net loss of $235,000 was reported,
including a $100,000 reduction in the carrying value of certain marketable
equity securities.
The Company's mortgage banking activities continued to grow in 1993. Total
servicing revenue was $1.0 million in 1993, up 105% from the level posted
in 1992. These amounts are net of significant accelerated write-downs of
excess deferred servicing premiums amounting to $1.0 million in 1993 and
$1.1 million in 1992. At December 31, 1993, the entire amount of the
deferred excess servicing asset had been amortized as a result of an
accelerated level of prepayments. Market demand for mortgage financing due
to declining interest rates resulted in brisk origination and sales of
mortgage loans. Gains on sales of mortgage loans totaled $5.8 million, up
from $4.8 million in 1992.
Income related to credit card activities amounted to $5.7 million in 1993,
up from $4.4 million in 1992. Other noninterest income decreased $166,000,
to $3.3 million in 1993.
Noninterest expense totaled $49.9 million in 1994, down $1.2 million from
the 1993 level. Salaries increased less than 1% to $17.2 million as the
Company continued to reduce staff, primarily though attrition. Employee
benefits rose by $859,000 to $6.3 million in 1994. This category includes
accruals for performance-based incentive compensation amounting to $1.5
million, up from $1.1 million in 1993. In 1994, the Company implemented
Statement of Financial Accounting Standards No. 112, Employers' Accounting
for Postemployment Benefits. Adoption of SFAS 112 did not have a material
impact on the financial statement.
Occupancy expense declined $297,000, to $5.6 million in 1994, primarily due
to efficiencies resulting from the VerBanc acquisition and other actions
taken to improve the branch network.
FDIC insurance premiums totaled $2.3 million, down $249,000 from the 1993
level. A reduction in the insurance premium rate accounted for the
decline.
In 1994, expenses associated with OREO were slightly more than offset by
recoveries on OREO properties and resulted in a net gain of $67,000. OREO
expenses were $1.5 million in 1993.
Expenses, excluding salaries and benefits, occupancy, and overhead
allocations, directly related to the processing of credit card transactions
totaled $5.5 million in 1994, up from $3.8 million in the previous year.
This increase was related to the significantly higher volumes processed in
1994 as compared with 1993.
Total other noninterest expense for 1994 totaled $13.0 million, down $1.7
million from 1993. Absence of goodwill amortization in 1994, which was
$636,000 in 1993, and nonrecurrence of one-time costs associated with the
1993 acquisition of VerBanc, accounted for most of the improvement.
Noninterest expense for 1993 totaled $51.1 million, up 3% from the $49.6
million recorded in 1992. Salaries of $17.0 million were up $320,000, or
2%, from the $16.7 million reported in 1992. The increase of 15% in
employee benefits reflects primarily higher medical insurance expenses and
incentive compensation accruals related to performance.
In 1993 the Company adopted, prospectively, Statement of Financial
Accounting Standards No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions. This accounting standard requires that the
expected cost of postretirement benefits be charged to expense during the
years that the employees render services. The Company has elected to
amortize the unfunded benefit obligation of $1.7 million that was measured
at January 1, 1993 over a period of 20 years. The effect of this change
was to increase the expense related to postretirement benefits by
approximately $100,000 in 1993.
Occupancy expense increased less than 2%, to $5.9 million in 1993.
Increases in employee and occupancy expenses were mitigated by efficiencies
realized from the in-market acquisition of VerBanc.
FDIC insurance premiums increased $298,000 from the 1992 level to $2.6
million in 1993. This increase was due to higher deposit levels during the
year.
Expenses associated with OREO decreased substantially from 1992. During
1993, $1.5 million was recorded in this area, of which $1.3 million
represented provisions to the OREO reserve to reflect estimated declines in
the market values of properties held. In 1992, OREO expenses amounted to
$2.7 million.
Direct credit card processing expenses were $3.8 million in 1993, up from
$3.0 million in 1992. This increase was primarily volume related.
Total other noninterest expense of $14.7 million was $480,000 higher than
the 1992 level. This increase was more than accounted for by one-time
costs related to the acquisition of VerBanc.
Income Taxes
For 1994, the Federal income tax provision amounted to $7.7 million. This
compares with an income tax provision of $5.2 million for 1993 and $2.4
million for 1992. Effective January 1, 1993, the Company adopted Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes,
which recognizes income taxes under the asset and liability method. The
cumulative effect of adopting this change in accounting principle was a one-
time charge of $575,000 to 1993 earnings. Prior to 1993, the Company
recognized income taxes under the deferred method, whereby annual income
tax expense was matched with pretax accounting income by providing deferred
taxes at current rates for timing differences between income reported for
accounting purposes and income reported for tax purposes. Under the asset
and liability method, deferred tax assets and liabilities are established
for temporary differences between the accounting basis and the tax basis of
the Company's assets and liabilities at enacted tax rates expected to be in
effect when the amounts related to such temporary differences are realized
or settled. The Company's deferred tax asset is reviewed quarterly and
adjustments, based on management's judgments as to the realizability of
this asset, are recognized in the provision for income taxes.
The effective tax rates for 1994, 1993, and 1992 were 33.2%, 31.1%
(excluding the cumulative effect charge), and 25.3%, respectively. During
1994 and 1993, the Company's statutory Federal corporate tax rate was 35%.
During 1992, the statutory Federal tax rate was 34%. The Company's
effective tax rates differed from the statutory rates primarily because of
the proportion of interest income from state and municipal securities and
corporate dividend income which are wholly or partially exempt from Federal
taxation.
The following table sets forth the range of the high and low prices for the
Corporation's common stock for the last five years:
1994 1993 1992 1991 1990
Quarter High Low High Low High Low High Low High Low
First 19.25 17.50 16.80 11.80 12.00 6.60 7.60 3.20 10.00 7.80
Second 21.75 17.00 17.60 15.20 13.20 10.20 7.40 5.20 8.20 5.80
Third 22.00 20.00 18.25 15.20 12.80 10.60 10.80 5.80 7.20 3.60
Fourth 21.50 20.00 19.00 17.00 13.00 11.20 9.00 5.40 6.00 3.80
Stockholder Information
Form 10-K
A copy of the Chittenden Corporation's Annual Report for 1994 (on Form 10-
K), as filed with the Securities and Exchange Commission pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, will be
furnished free of charge to beneficial owners of the Corporation's stock
upon request.
Chittenden Corporation Stock
The $1 par value common stock of Chittenden Corporation has been publicly
traded on the over-the-counter market wince November 14, 1974. As of
December 31, 1994, there were 2,995 record holders of the Corporation's
common stock.
The Corporation's stock is listed on NASDAQ, with the symbol CNDN, is
included in additional over-the-counter securities lists, and is listed
daily in the major newspapers.
For stockholder services and information, contact:
Stockholder Relations
Chittenden Corporation
P.O. Box 820
Burlington, VT 05402-0820
(802) 660-1412
Chittenden Corporation is currently a one-bank holding company registered
as a Vermont corporation. By the end of the first quarter of 1995,
Chittenden Corporation expects to consummate an Agreement and Plan of
Reorganization by which The Bank of Western Massachusetts will becom a
wholly-owned subsidiary of Chittenden Corporation. Organized in 1971 and
activated in 1974, Chittenden Coropration is the parent company of
Chittenden Trust Company. Chittenden Bank is the trade name for Chittenden
Trust Company.
Annual Meeting
The Annual Meeting of the Stockholders of Chittenden Corporation will be
held on Wednesday, April 19, 1995 at 4:00 p.m. in Salon I of the Emerald
Ballroom in the Sheraton Burlington Hotel and Conference Center, located at
the intersection of Routes 2 (Williston Road) and I-89 in South Burlington.
To find out about the wide range of products offered by Chittenden Bank,
call our Customer Information Center at 1-800-545-2236.