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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required) For the Fiscal Year Ended December 31, 2000
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) for the transition period from to
Commission File Number 0-7974
CHITTENDEN CORPORATION
(Exact name of Registrant as specified in its charter)
Vermont 03-0228404
(State of Incorporation) (IRS Employer Identification No.)
Two Burlington Square
Burlington, Vermont 05401
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number: 802-658-4000
Securities registered pursuant to Section 12(b) of the Act:
$1.00 Par Value Common Stock
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant: (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's common stock held by
non-affiliates of the Registrant, computed by reference to the last reported
sale price on the NYSE on February 28, 2001 was $810,675,312.
At February 28, 2001 there were 25,941,610 shares of the Registrant's common
stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, in whole or in part, are specifically incorporated
by reference in the indicated Part of this Annual Report on Form 10-K:
1. Notice of 2001 Annual Meeting and Proxy Statement: Part III, Items 10,
11, 12, 13.
This Form 10-K contains certain statements that may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. The Company's actual results could differ materially from
those projected in the forward-looking statements as a result of, among other
factors, changes in general, national or regional economic conditions, changes
in loan default and charge-off rates, reductions in deposit levels
necessitating increased borrowing to fund loans and investments, changes in
interest rates, changes in levels of income and expense in noninterest income
and expense related activities, and changes in the assumptions used in making
such forward-looking statements.
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PART I
ITEM 1 BUSINESS
Chittenden Corporation (the "Company" or "CC"), a Vermont corporation
organized in 1971, is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended. At December 31, 2000, the Company had total
consolidated assets of approximately $3.8 billion. The Company is the holding
company parent and owns 100% of the outstanding common stock of Chittenden
Trust Company ("CTC"), Flagship Bank and Trust Company ("FBT"), The Bank of
Western Massachusetts ("BWM") (collectively "The Banks") and Chittenden
Connecticut Corporation ("CCC"), a non-bank mortgage company.
On May 28, 1999, Chittenden Corporation completed its acquisition of Vermont
Financial Services Corp. ("VFSC") in a stock-for-stock merger. The acquisition
has been accounted for as a pooling of interests and accordingly, all financial
data has been restated to reflect the combined financial condition and results
of operations as if the acquisition had been in effect for all periods
presented. Acquired in the VFSC acquisition were its subsidiary banks: Vermont
National Bank (VNB) and United Bank. United Bank merged into The Bank of
Western Massachusetts in the third quarter of 1999. Vermont National Bank
merged into Chittenden Trust Company in the first quarter of 2000. Under the
agreement, VFSC shareholders received 1.07 shares of Chittenden Corporation
common stock for each share of VFSC stock. Total shares outstanding of
Chittenden Corporation common stock increased by approximately 14 million
shares as a result of the acquisition. Based on the closing price of Chittenden
stock as of May 28, 1999, the market value of the shares exchanged totaled
$387.2 million. Eastern Bancorp was acquired by VFSC on June 26, 1997 in a
transaction accounted for as a purchase.
The Company engages in one line of business, that of providing financial
services through its banking subsidiaries. Through its subsidiaries, the
Company offers a variety of lending services, with loans and leases totaling
approximately $2.8 billion at December 31, 2000. The largest loan categories
are commercial loans and residential real estate loans. Commercial loans
include those secured by commercial real estate, and others made to a variety
of businesses, including retail concerns, small manufacturing businesses,
larger corporations, other commercial banks, and to political subdivisions in
the U.S. Commercial loans amounted to 48% of the total loans outstanding at
December 31, 2000.
Loans secured by residential properties, including closed-ended home equity
loans comprised 36% of total loans outstanding at December 31, 2000. The
Company underwrites substantially all of its residential mortgages based upon
secondary market standards and sells substantially all of its fixed-rate
residential mortgage loans on a servicing-retained basis. Variable or
adjustable rate mortgage loans are typically held in portfolio. Revolving home
equity loans as a separate group amounted to 5% of loans at December 31, 2000.
These loans are generally underwritten based upon the same standards as first
mortgages. The remaining real estate loans, which are 2% of total loans
outstanding at December 31, 2000, are construction loans secured by residential
and commercial land under development. Consumer loans outstanding at December
31, 2000 were 11% of total loans. Indirect installment loans and auto leases
comprise 14%, while the remaining loans consist of direct installment and
revolving credit.
The Company's lending activities are conducted primarily in Vermont,
Massachusetts and New Hampshire, with additional activity related to nearby
market areas in Quebec, New York, Maine and Connecticut. In addition to the
portfolio diversification described above, the loans are diversified by
borrowers and industry groups. In making commercial loans, the Banks
occasionally solicit the participation of other banks and financial investors.
The Company, through its subsidiaries, also occasionally participates in loans
originated by other banks. Certain of the Company's commercial loans are made
under programs administered by the Vermont Industrial Development Authority,
the U.S. Small Business Administration, the U.S. Farmers Home Administration or
other local government agencies within the Company's market. Loan terms include
repayment guarantees by the agency involved in varying amounts up to 90% of the
original loan.
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The Banks offer a wide range of banking services, including the acceptance
of demand, savings, and time deposits. As of December 31, 2000, total
interest-bearing deposits and noninterest-bearing demand deposits amounted to
approximately $2.8 billion and $531 million, respectively. The Banks also
provide personal trust services, including services as executor, trustee,
administrator, custodian and guardian. Corporate trust services are also
provided, including services as trustee for pension and profit sharing plans.
Asset management services are provided for both personal and corporate trust
clients. Trust assets under administration totaled $5.2 billion at December 31,
2000, which included $1.6 million under full discretionary management.
The Company offers data processing services consisting primarily of payroll
and automated clearing house for several outside clients. Financial and
investment counseling is provided to municipalities and school districts within
the Company's service area, as well as central depository, lending, payroll,
and other banking services. The Banks offer a variety of other services
including safe deposit facilities, MasterCard business credit card services,
credit card processing, certain non-deposit investment products through the
brokerage services of Chittenden Securities, Inc., and various insurance
related products through The Pomerleau Agency. Chittenden Securities and The
Pomerleau Agency are subsidiaries of Chittenden Bank.
The Company's principal executive offices are located at Two Burlington
Square, Burlington, Vermont 05401; telephone number: 802-658-4000.
Chittenden Trust Company
CTC was chartered by the Vermont Legislature as a commercial bank in 1904.
It is the largest bank in Vermont, based on total assets of approximately $2.9
billion and total deposits of approximately $2.5 billion, at December 31, 2000.
CTC's principal offices are in Burlington, Vermont and it has fifty-two
additional locations in Vermont, along with twelve offices located in New
Hampshire. There are thirteen free standing automated teller machines ("ATM's")
at other locations. (See Item 2, "Properties"). The trade name "Chittenden
Bank" is used at all locations within Vermont and at two locations in New
Hampshire. The remaining ten locations in New Hampshire use the trade name
"First Savings of New Hampshire."
On May 31, 1997, CTC acquired The Pomerleau Agency, which offers various
insurance related products including: personal, commercial and life/health
policies, as well as specialized coverages and a consulting and risk management
service.
In October 1998, CTC established a registered broker/dealer, Chittenden
Securities, Inc., as a subsidiary. Chittenden Securities, Inc., is a full
service broker-dealer registered with the Securities and Exchange Commission
(SEC) and is a member of both the National Association of Securities Dealers,
Inc. (NASD) and the Securities Investor Protection Corporation (SIPC).
The Bank of Western Massachusetts
BWM was chartered by the Commonwealth of Massachusetts as a commercial bank
in 1986. At December 31, 2000, BWM had total assets of $469 million and total
deposits of $417 million. BWM's principal offices are in Springfield,
Massachusetts and it has eleven additional locations in the western
Massachusetts area.
Flagship Bank and Trust Company
FBT was chartered by the Commonwealth of Massachusetts as a commercial bank
in 1986. At December 31, 2000, FBT had total assets of $426 million and total
deposits of $391 million. FBT's principal offices are in Worcester,
Massachusetts and it has six additional locations in the greater Worcester,
Massachusetts area.
Chittenden Connecticut Corporation
CCC was chartered by the State of Vermont as a mortgage company in 1996 and
its principal offices are in Burlington, Vermont. CCC has additional offices in
Brattleboro, Vermont and Lexington, Massachusetts (See Item 2, "Properties").
CCC's primary business is the origination of conforming residential real estate
mortgage loans for resale to the secondary market. CCC originates these loans
for resale through correspondent relationships with credit unions and through
other mortgage brokers in the state of Connecticut who receive loan
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applications. These applications are underwritten by CTC in Vermont based upon
secondary market standards and then sold. In addition, CCC uses brokers that
are directly employed by and working through various financial institutions in
Connecticut.
Economy
The New England economy continued to expand in 2000, although at a much
slower pace than in the past several years. Retail sales continued to grow, but
at a slower rate than the previous year. The residential real estate market
slowed reflecting the usual seasonal patterns and changing economic conditions.
New England unemployment levels have remained at steady lows. The ability and
willingness of the Company's borrowers to honor their repayment commitments are
impacted by many factors, including the prevailing market interest rates and
the level of overall economic activity within the borrowers' geographic area.
Competition
There is vigorous competition in the Company's marketplace for all aspects
of banking and related financial service activities presently engaged in by the
Company and its subsidiaries. In the retail financial services market,
competitors also include other banks, credit unions, finance companies, thrift
institutions and, increasingly, brokerage firms, insurance companies, and
mortgage loan companies. Money market deposit accounts and short-term
flexible-maturity certificates of deposit offered by the Banks compete with
investment account offerings of brokerage firms and with new products offered
by insurance companies. The Company also competes for personal and commercial
trust business with investment advisory firms, mutual funds, and insurance
companies.
Moreover, under the Gramm-Leach-Bliley Act of 1999 (the "Gramm-Leach-Bliley
Act"), effective March 11, 2000, securities firms, insurance companies and
other financial services providers that elect to become financial holding
companies may acquire banks and other financial institutions. The
Gramm-Leach-Bliley Act may significantly change the competitive environment in
which the Company and its subsidiaries conduct business. See "The Financial
Services Modernization Legislation" below. The financial services industry is
also likely to become more competitive as further technological advances enable
more companies to provide financial services. These technological advances may
diminish the importance of depository institutions and other financial
intermediaries in the transfer of funds between parties.
CTC competes with Vermont and New Hampshire banks and metropolitan banks
based in southern New England and New York to provide commercial banking
services to businesses. Many of these out-of-state banks have greater financial
resources than CTC and are actively seeking financial relationships with
promising local enterprises. BWM and FBT compete with other similar financial
institutions in the western Massachusetts and Worcester, Massachusetts markets.
Supervision and Regulation
The Company and its banking subsidiaries ("The Banks") are subject to
extensive regulation under federal and state banking laws and regulations. The
following discussion of certain of the material elements of the regulatory
framework applicable to banks and bank holding companies is not intended to be
complete and is qualified in its entirety by the text of the relevant state and
federal statutes and regulations. A change in the applicable laws or
regulations may have a material effect on the business of the Company and/or
The Banks.
Regulation of the Company
General. As a corporation incorporated under Vermont law, the Company is
subject to regulation by the Vermont Secretary of State and the rights of its
stockholders are governed by Vermont corporate law. As a bank holding company,
the Company is subject to supervision and regulation by the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board") under the Bank
Holding Company Act of 1956, as amended (the "BHC Act"). Under the BHC Act,
bank holding companies generally may not acquire ownership or control of
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more than 5% of any class of voting shares or substantially all of the assets
of any company, including a bank, without the prior approval of the Federal
Reserve Board. In addition, bank holding companies that are not also financial
holding companies are generally prohibited under the BHC Act from engaging in
non-banking activities, subject to certain exceptions. As a bank holding
company that has not elected to become a financial holding company, the
Company's activities are limited generally to the business of banking and
activities determined by the Federal Reserve Board to be so closely related to
banking as to be a proper incident thereto. The Federal Reserve Board has
authority to issue cease and desist orders to terminate or prevent unsafe or
unsound banking practices or violations of laws or regulations and to assess
civil money penalties against bank holding companies and their non-bank
subsidiaries, officers, directors and other institution-affiliated parties, and
to remove officers, directors and other institution-affiliated parties.
Riegel-Neal Interstate Banking and Branching Efficiency Act of 1994
(Interstate Act). The Interstate Act permits adequately capitalized bank
holding companies to acquire banks in any state subject to certain
concentration limits and other conditions. The Interstate Act also authorizes
the interstate merger of banks. In addition, among other things, the Interstate
Act permits banks to establish new branches on an interstate basis provided
that such action is specifically authorized by the law of the host state.
Financial Services Modernization Legislation. On November 12, 1999,
President Clinton signed into law the Gramm-Leach-Bliley Act. The
Gramm-Leach-Bliley Act repeals provisions of the Glass-Steagall Act: Section
20, which restricted the affiliation of Federal Reserve member banks with firms
"engaged principally" in specified securities activities; and Section 32, which
restricts officer, director, or employee interlocks between a member bank and
any company or person "primarily engaged" in specified securities activities.
In addition, the Gramm-Leach-Bliley Act also contains provisions that expressly
preempt any state law restricting the establishment of financial affiliations,
primarily related to insurance. The general effect of the law is to establish a
comprehensive framework to permit affiliations among commercial banks,
insurance companies, securities firms, and other financial service providers by
revising and expanding the Bank Holding Company Act framework to permit a
holding company system, such as the Company, to engage in a full range of
financial activities through a new entity known as a "Financial Holding
Company." "Financial activities" is broadly defined to include not only
banking, insurance, and securities activities, but also merchant banking and
additional activities that the Federal Reserve Board, in consultation with the
Secretary of the Treasury, determines to be financial in nature, incidental to
such financial activities, or complementary activities that do not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally.
Generally, the Gramm-Leach-Bliley Act:
. repeals historical restrictions on, and eliminates many federal and
state law barriers to, affiliations among banks, securities firms,
insurance companies, and other financial service providers;
. provides a uniform framework for the functional regulation of the
activities of banks, savings institutions, and their holding companies;
. broadens the activities that may be conducted by national banks (and
derivatively state banks), banking subsidiaries of bank holding
companies, and their financial subsidiaries;
. provides an enhanced framework for protecting the privacy of consumer
information;
. adopts a number of provisions related to the capitalization, membership,
corporate governance, and other measures designed to modernize the
Federal Home Loan Bank system;
. modifies the laws governing the implementation of the Community
Reinvestment Act of 1977 (See "Supervision and Regulation, --Regulation
of the Banks, --CRA Regulations"); and
. addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial
institutions.
In order to become a financial holding company and engage in the new
activities, a bank holding company, such as the Company, must meet certain
tests. Specifically, all of a bank holding company's banks must be
well-capitalized and well-managed, as measured by regulatory guidelines, and
all of the bank holding company's
4
banks must have been rated "satisfactory" or better in the most recent
Community Reinvestment Act evaluation of each bank. See "Supervision and
Regulation,--Regulation of the Banks,--CRA Regulations." A bank holding company
that elects to be treated as a financial holding company may face significant
consequences if its banks fail to maintain the required capital and management
ratings, including entering into an agreement with the Federal Reserve Board
which imposes limitations on its operations and may even require divestitures.
Such possible ramifications may limit the ability of a bank subsidiary to
significantly expand or acquire less than well-capitalized and well-managed
institutions. At this time, the Company has not elected to become a financial
holding company.
Dividends. The Federal Reserve Board has authority to prohibit bank holding
companies from paying dividends if such payment is deemed to be an unsafe or
unsound practice. The Federal Reserve Board has indicated generally that it may
be an unsafe and an unsound practice for bank holding companies to pay
dividends unless the bank holding company's net income over the preceding year
is sufficient to fund the dividends and the expected rate of earnings retention
is consistent with the organization's capital needs, asset quality, and overall
financial condition. The Company's ability to pay dividends is dependent upon
the flow of dividend income to it from The Banks, which may be affected or
limited by regulatory restrictions imposed by federal or state bank regulatory
agencies. See "--Regulation of The Banks--Dividends."
Certain Transactions by Bank Holding Companies with their Affiliates. There
are various legal restrictions on the extent to which bank holding companies
and their non-bank subsidiaries may borrow, obtain credit from or otherwise
engage in "covered transactions" with their insured depository institution
subsidiaries. Such borrowings and other covered transactions by an insured
depository institution subsidiary (and its subsidiaries) with its
non-depository institution affiliates are limited to the following amounts: (a)
in the case of any one such affiliate, the aggregate amount of covered
transactions of the insured depository institution and its subsidiaries cannot
exceed 10% of the capital stock and surplus of the insured depository
institution; and (b) in the case of all affiliates, the aggregate amount of
covered transactions of the insured depository institution and its subsidiaries
cannot exceed 20% of the capital stock and surplus of the insured depository
institution. "Covered transactions" are defined by statute for these purposes
to include a loan or extension of credit to an affiliate, a purchase of or
investment in securities issued by an affiliate, a purchase of assets from an
affiliate unless exempted by the Federal Reserve Board, the acceptance of
securities issued by an affiliate as collateral for a loan or extension of
credit to any person or company, or the issuance of a guarantee, acceptance or
letter of credit on behalf of an affiliate. Covered transactions are also
subject to certain collateral security requirements. Other types of
transactions between a bank and a bank holding company must be on market terms
and not otherwise unduly favorable to the holding company or an affiliate
thereof. Further, a bank holding company and its subsidiaries are prohibited
from engaging in certain tying arrangements in connection with any extension of
credit, lease or sale of property of any kind, or furnishing of any service.
Holding Company Support of Subsidiary Banks. Under Federal Reserve Board
policy, the Company is expected to act as a source of financial strength to its
subsidiary banks and to commit resources to support such subsidiaries. This
support of its subsidiary banks may be required at times when, absent such
Federal Reserve Board policy, the Company might not otherwise be inclined to
provide it. In addition, any capital loans by a bank holding company to any of
its subsidiary banks are subordinate in right of payment to deposits and
certain other indebtedness of such subsidiary banks. In the event of a bank
holding company's bankruptcy, any commitment by the bank holding company to a
federal bank regulatory agency to maintain capital of a subsidiary bank will be
assumed by the bankruptcy trustee and entitled to a priority of payment.
Liability of Commonly Controlled Depository Institutions. Under the Federal
Deposit Insurance Act, as amended ("FDI Act"), an FDIC-insured depository
institution, such as CTC, BWM or FBT, can be held liable for any loss incurred
by, or reasonably expected to be incurred by, the FDIC after August 9, 1989 in
connection with (i) the "default" of a commonly controlled FDIC-insured
depository institution, or (ii) any assistance provided by the FDIC to any
commonly controlled depository institution in "danger of default." For these
purposes, the term "default" is defined generally as the appointment of a
conservator or receiver and "in danger of default" is defined generally as the
existence of certain conditions indicating that a default is likely to occur
without Federal regulatory assistance.
5
Regulation of The Banks
General. As FDIC-insured state-chartered banks, The Banks are subject to
supervision of and regulation by the Commissioner of Banking, Insurance,
Securities and Health Care Administration of the State of Vermont, in the case
of CTC, and to the extent CTC operates as First Savings of New Hampshire, the
Vermont Commissioner and the Commissioner of Banking of the State of New
Hampshire and the Commissioner of Banks of the Commonwealth of Massachusetts in
the case of BWM and FBT (individually, a Commissioner and collectively, the
"Commissioners") and, for all The Banks, by the FDIC. This supervision and
regulation is for the protection of depositors, the BIF (as hereinafter
defined), and consumers, and is not for the protection of the Company's
stockholders. The prior approval of the FDIC and the relevant Commissioner is
required for The Banks to establish or relocate an additional branch office,
assume deposits, or engage in any merger, consolidation or purchase or sale of
all or substantially all of the assets of any bank or savings association.
Examinations and Supervision. The FDIC and the Commissioners regularly
examine the condition and the operations of the banks, including (but not
limited to) their capital adequacy, reserves, loans, investments, earnings,
liquidity, compliance with laws and regulations, record of performance under
the Community Reinvestment Act of 1997 and management practices. In addition,
the banks are required to furnish quarterly and annual reports of income and
condition to the FDIC and periodic reports to the Commissioners. The
enforcement authority of the FDIC includes the power to impose civil money
penalties, terminate insurance coverage, remove officers and directors and
issue cease-and-desist orders to prevent unsafe or unsound practices or
violations of laws or regulations. In addition, under recent federal banking
legislation, the FDIC has authority to impose additional restrictions and
requirements with respect to banks that do not satisfy applicable regulatory
capital requirements. See "--Capital Requirements and FDICIA--Prompt Corrective
Action" below.
Dividends. The principal source of the Company's revenue is dividends from
the Banks. Payments of dividends by the Banks are subject to certain Vermont
and Massachusetts banking law restrictions. Payment of dividends by CTC is
subject to Vermont banking law restrictions which require that, CTC may not,
without the Commissioner's approval, authorize dividends that reduce capital
below certain standards established by the Commissioner. Payment of dividends
by BWM and FBT is subject to Massachusetts banking law restrictions which
require that each bank's capital not be impaired. Massachusetts banking laws
require each of BWM and FBT to maintain a capital structure with a surplus
account amounting to at least 50% of its capital stock and to transfer to its
surplus account each year from net profits one-quarter of one percent of its
deposit liabilities.
The FDIC has authority to prevent the banks from paying dividends if such
payment would constitute an unsafe or unsound banking practice or reduce the
respective bank's capital below safe and sound levels. In addition, federal
legislation prohibits FDIC-insured depository institutions from paying
dividends or making capital distributions that would cause the institution to
fail to meet minimum capital requirements. See "Capital Requirements and
FDICIA--Prompt Corrective Action" below.
Affiliate Transactions. As noted above, banks are subject to restrictions
imposed by federal law on extensions of credit to, purchases of assets from,
and certain other transactions with, affiliates, and on investments in stock or
other securities issued by affiliates. Such restrictions prevent the banks from
making loans to affiliates unless the loans are secured by collateral in
specified amounts and have terms at least as favorable to the bank as the terms
of comparable transactions between the bank and non-affiliates. Further,
federal and applicable state laws significantly restrict extensions of credit
by the banks to directors, executive officers and principal stockholders and
related interests of such persons.
Deposit Insurance. The Bank's deposits are insured by the Bank Insurance
Fund ("BIF") of the FDIC to the legal maximum of $100,000 for each insured
depositor. The FDI Act provides that the FDIC shall set deposit insurance
assessment rates on a semi-annual basis at a level sufficient to increase the
ratio of BIF reserves to BIF-insured deposits to at least 1.25% over a 15-year
period commencing in 1991, and to maintain that ratio. Although the established
framework of risk-based insurance assessments accomplished this increase in May
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1995, and the FDIC has made a substantial reduction in the assessment rate
schedule, the BIF insurance assessments may be increased in the future if
necessary to maintain BIF reserves at the required level. In addition,
legislation enacted in 1996 to recapitalize the Savings Association Insurance
Fund ("SAIF"), which insures the deposits of savings associations and certain
savings banks, resulted in increased BIF assessments. See "Capital Requirements
and FDICIA--Risk-Based Deposit Insurance and FICO Assessments" below.
Federal Reserve Board Policies. The monetary policies and regulations of the
Federal Reserve Board have had a significant effect on the operating results of
banks in the past and are expected to continue to do so in the future. Federal
Reserve Board Policies affect the levels of bank earnings on loans and
investments and the levels of interest paid on bank deposits through the
Federal Reserve System's open-market operations in United States government
securities, regulation of the discount rate on bank borrowings from Federal
Reserve Banks and regulation of non-earning reserve requirements applicable to
bank deposit account balances.
Consumer Protection Regulation; Bank Secrecy Act. Other aspects of the
lending and deposit businesses of the banks that are subject to regulation by
the FDIC and the Commissioners include disclosure requirements with respect to
interest, payment and other terms of consumer and residential mortgage loans
and disclosure of interest and fees and other terms of, and the availability
of, funds for withdrawal from consumer deposit accounts. In addition, the banks
are subject to federal and state laws and regulations prohibiting certain forms
of discrimination in credit transactions, and imposing certain record keeping,
reporting and disclosure requirements with respect to residential mortgage loan
applications. The banks are also subject to federal laws establishing certain
record keeping, customer identification, and reporting requirements with
respect to certain large cash transactions, sales of travelers checks or other
monetary instruments and the international transportation of cash or monetary
instruments.
CRA Regulations. The Community Reinvestment Act of 1997 ("CRA") requires
lenders to identify the communities served by the institution's offices and to
identify the types of credit the institution is prepared to extend within such
communities. The FDIC conducts examinations of insured institutions' CRA
compliance and rates such institutions as "Outstanding", "Satisfactory", "Needs
to Improve" and "Substantial Noncompliance". As of their last CRA examinations,
CTC, BWM and FBT all received a rating of "Outstanding". Failure of an
institution to receive at least a "Satisfactory" rating could inhibit such
institution or its holding company from undertaking certain activities,
including engaging in activities newly permitted as a financial holding company
under the Gramm-Leach-Bliley Act and acquisitions of other financial
institutions, which require regulatory approval based, in part, on CRA
compliance considerations. The Federal Reserve Board must take into account the
record of performance of banks in meeting the credit needs of the entire
community served, including low and moderate income neighborhoods.
As a result of certain amendments in 1996, current CRA regulations rely more
than the former CRA regulations upon objective criteria of the performance of
institutions under three key assessment tests: a lending test, a service test
and an investment test. The Banks are committed to meeting the existing or
anticipated credit needs of their entire communities, including low and
moderate-income neighborhoods, consistent with safe and sound operations.
Capital Requirements and FDICIA
General. The FDIC has established guidelines with respect to the maintenance
of appropriate levels of capital by FDIC-insured banks. The Federal Reserve
Board has established substantially identical guidelines with respect to the
maintenance of appropriate levels of capital, on a consolidated basis, by bank
holding companies. If a banking organization's capital levels fall below the
minimum requirements established by such guidelines, a bank or bank holding
company will be expected to develop and implement a plan acceptable to the FDIC
or the Federal Reserve Board, respectively, to achieve adequate levels of
capital within a reasonable period, and may be denied approval to acquire or
establish additional banks or non-bank businesses, merge with other
institutions or open branch facilities until such capital levels are achieved.
Federal legislation requires federal bank regulators to take "prompt corrective
action" with respect to insured depository institutions that fail to satisfy
minimum capital requirements and imposes significant restrictions on such
institutions. See "Prompt Corrective Action" below.
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Leverage Capital Ratio. The regulations of the FDIC require FDIC-insured
banks to maintain a minimum "Leverage Capital Ratio" or "Tier 1 Capital" (as
defined in the Risk-Based Capital Guidelines discussed in the following
paragraphs) to Total Assets of 3.0%. The regulations of the FDIC state that
only banks with the highest federal bank regulatory examination rating will be
permitted to operate at or near such minimum level of capital. All other banks
are expected to maintain an additional margin of capital, equal to at least 1%
to 2% of Total Assets, above the minimum ratio. Any bank experiencing or
anticipating significant growth is expected to maintain capital well above the
minimum levels. The Federal Reserve Board's guidelines impose substantially
similar leverage capital requirements on bank holding companies on a
consolidated basis.
Risk-Based Capital Requirements. The regulations of the FDIC also require
FDIC-insured banks to maintain minimum capital levels measured as a percentage
of such banks' risk-adjusted assets. A bank's qualifying total capital ("Total
Capital") for this purpose may include two components--"Core" (Tier 1) Capital
and "Supplementary" (Tier 2) Capital. Core Capital consists primarily of common
stockholders' equity, which generally includes common stock, related surplus
and retained earnings, certain non-cumulative perpetual preferred stock and
related surplus, and minority interests in the equity accounts of consolidated
subsidiaries, and (subject to certain limitations) mortgage servicing rights
and purchased credit card relationships, less all other intangible assets
(primarily goodwill). Supplementary Capital elements include, subject to
certain limitations, a portion of the allowance for losses on loans and leases,
perpetual preferred stock that does not qualify for inclusion in Tier 1
capital, long-term preferred stock with an original maturity of at least 20
years and related surplus, certain forms of perpetual debt and mandatory
convertible securities, and certain forms of subordinated debt and
intermediate-term preferred stock.
The risk-based capital rules of the FDIC and the Federal Reserve Board
assign a bank's balance sheet assets and the credit equivalent amounts of the
bank's off-balance sheet obligations to one of four risk categories, weighted
at 0%, 20%, 50% or 100%, respectively. Applying these risk-weights to each
category of the bank's balance sheet assets and to the credit equivalent
amounts of the bank's off-balance sheet obligations and summing the totals
results in the amount of the bank's total Risk-Adjusted Assets for purposes of
the risk-based capital requirements. Risk-Adjusted Assets can either exceed or
be less than reported balance sheet assets, depending on the risk profile of
the banking organization. Risk-Adjusted Assets for institutions such as The
Banks will generally be less than reported balance sheet assets because its
retail banking activities include proportionally more residential mortgage
loans and certain investment securities with a lower risk weighting and
relatively smaller off-balance sheet obligations.
The risk-based capital regulations require all banks to maintain a minimum
ratio of Total Capital to Risk-Adjusted Assets of 8.0%, of which at least
one-half (4.0%) must be Core (Tier 1) Capital. For the purpose of calculating
these ratios: (i) a banking organization's Supplementary Capital eligible for
inclusion in Total Capital is limited to no more than 100% of Core Capital; and
(ii) the aggregate amount of certain types of Supplementary Capital eligible
for inclusion in Total Capital is further limited. For example, the regulations
limit the portion of the allowance for loan losses eligible for inclusion in
Total Capital to 1.25% of Risk-Adjusted Assets. The Federal Reserve Board has
established substantially identical risk-based capital requirements, which are
applied to bank holding companies on a consolidated basis. The risk-based
capital regulations provide explicitly for consideration of interest rate risk
in the FDIC's overall evaluation of a bank's capital adequacy to ensure that
banks effectively measure and monitor their interest rate risk, and that they
maintain capital adequate for that risk. A bank deemed by the FDIC to have
excessive interest rate risk exposure may be required by the FDIC to maintain
additional capital (that is, capital in excess of the minimum ratios discussed
above). The Banks believe that this provision will not have a material adverse
effect on them.
At December 31, 2000, the Company's consolidated Total and Tier 1 Risk-Based
Capital Ratios were 12.08% and 10.82%, respectively, and its Leverage Capital
Ratio was 8.65%. Based on the above figures and accompanying discussion, CC
exceeds all regulatory capital requirements and is considered well capitalized.
Prompt Corrective Action. Among other things, the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") requires the federal banking
regulators to take "prompt corrective action" with respect
8
to, and imposes significant restrictions on, any bank that fails to satisfy its
applicable minimum capital requirements. FDICIA establishes five capital
categories consisting of "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." Under applicable regulations, a bank that has a Total
Risk-Based Capital Ratio of 10.0% or greater, a Tier 1 Risk-Based Capital Ratio
of 6.0% or greater and a Leverage Capital Ratio of 5.0% or greater, and is not
subject to any written agreement, order, capital directive or prompt corrective
action directive to meet and maintain a specific capital level for any capital
measure is deemed to be "well capitalized." A bank that has a Total Risk-Based
Capital Ratio of 8.0% or greater, a Tier 1 Risk-Based Capital Ratio of 4.0% or
greater and a Leverage Capital Ratio of 4.0% (or 3% for banks with the highest
regulatory examination rating that are not experiencing or anticipating
significant growth or expansion) or greater and does not meet the definition of
a well capitalized bank is considered to be "adequately capitalized." A bank
that has a Total Risk-Based Capital Ratio of less than 8.0% or has a Tier 1
Risk-Based Capital Ratio that is less than 4.0%, except as noted above, a
Leverage Capital Ratio of less than 4.0% is considered "undercapitalized." A
bank that has a Total Risk-Based Capital Ratio of less than 6.0%, or a Tier 1
Risk-Based Capital Ratio that is less than 3.0% or a Leverage Capital Ratio
that is less than 3.0% is considered to be "significantly undercapitalized,"
and a bank that has a ratio of tangible equity to total assets equal to or less
than 2% is deemed to be "critically undercapitalized." A bank may be deemed to
be in a capital category lower than is indicated by its actual capital position
if it is determined to be in an unsafe or unsound condition or receives an
unsatisfactory examination rating. FDICIA generally prohibits a bank from
making capital distributions (including payment of dividends) or paying
management fees to controlling stockholders or their affiliates if, after such
payment, the bank would be undercapitalized.
Under FDICIA and the applicable implementing regulations, an
undercapitalized bank will be (i) subject to increased monitoring by the FDIC;
(ii) required to submit to the FDIC an acceptable capital restoration plan
(guaranteed, subject to certain limits, by the bank's holding company) within
45 days of being classified as undercapitalized; (iii) subject to strict asset
growth limitations; and (iv) required to obtain prior regulatory approval for
certain acquisitions, transactions not in the ordinary course of business, and
entry into new lines of business. In addition to the foregoing, the FDIC may
issue a "prompt corrective action directive" to any undercapitalized
institution. Such a directive may require sale or re-capitalization of the
bank, impose additional restrictions on transactions between the bank and its
affiliates, limit interest rates paid by the bank on deposits, limit asset
growth and other activities, require divestiture of subsidiaries, require
replacement of directors and officers, and restrict capital distributions by
the bank's parent holding company.
In addition to the foregoing, a significantly undercapitalized institution
may not award bonuses or increases in compensation to its senior executive
officers until it has submitted an acceptable capital restoration plan and
received approval from the FDIC.
Not later than 90 days after an institution becomes critically
undercapitalized, the appropriate federal banking agency for the institution
must appoint a receiver or, with the concurrence of the FDIC, a conservator,
unless the agency, with the concurrence of the FDIC, determines that the
purposes of the prompt corrective action provisions would be better served by
another course of action. FDICIA requires that any alternative determination be
"documented" and reassessed on a periodic basis. Notwithstanding the foregoing,
a receiver must be appointed after 270 days unless the appropriate federal
banking agency and the FDIC certify that the institution is viable and not
expected to fail.
Risk-Based Deposit Insurance and FICO Assessments. The FDIC has adopted a
rule establishing a risk-based system which assigns an institution to one of
three capital categories consisting of (1) well capitalized, (2) adequately
capitalized, or (3) undercapitalized, and one of three supervisory categories.
An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under this rule there are nine
assessment risk classifications (i.e. combinations of capital categories and
supervisory subgroups within each capital group). An institution's deposit
insurance assessment rate is determined by assigning the institution to a
capital category and a supervisory subgroup to determine which one of the nine
risk classification categories is applicable. The FDIC is authorized to raise
the assessment rates in certain circumstances. If the
9
FDIC determines to increase the assessment rates for all institutions,
institutions in all risk categories could be affected. The FDIC has exercised
this authority several times in the past and may raise BIF insurance premiums
again in the future. If such action is taken by the FDIC, it could have an
adverse effect on the earnings of The Banks, the extent of which is not
currently quantifiable. The risk classification to which an institution is
assigned by the FDIC is confidential and may not be disclosed.
The Deposit Insurance Funds Act of 1996 authorizes the Financing Corporation
(FICO) to levy assessments on BIF-assessable deposits and stipulates that the
rate must equal one-fifth the FICO assessment rate that is applied to deposits
assessable by the SAIF. The actual assessment rates for FICO were determined by
deposit data from the September 30, 2000, Call Reports. Based on the 1996 Act,
the Banks paid assessments totaling $700,000 or 2.1 cents per $100 of deposits
in 2000.
Brokered Deposits and Pass-Through Deposit Insurance Limitations. Under
FDICIA, a bank cannot accept brokered deposits unless it either (i) is "Well
Capitalized" or (ii) is "Adequately Capitalized" and has received a written
waiver from the FDIC. For this purpose, "Well Capitalized" and "Adequately
Capitalized" have the same definitions as in the Prompt Corrective Action
regulations. See "--Prompt Corrective Action" above. Banks that are not in the
"Well Capitalized" category are subject to certain limits on the rates of
interest they may offer on any deposits (whether or not obtained through a
third-party deposit broker). Pass-through insurance coverage is not available
for deposits of certain employee benefit plans in banks that do not satisfy the
requirements for acceptance of brokered deposits, except that pass-through
insurance coverage will be provided for employee benefit plan deposits in
institutions which at the time of acceptance of the deposit meet all applicable
regulatory capital requirements and send written notice to their depositors
that their funds are eligible for pass-through deposit insurance. Although
eligible to do so, the Banks have not accepted brokered deposits.
Conservatorship and Receivership Amendments. FDICIA authorizes the FDIC to
appoint itself conservator or receiver for a state-chartered bank under certain
circumstances and expands the grounds for appointment of a conservator or
receiver for an insured depository institution to include (i) consent to such
action by the board of directors of the institution; (ii) cessation of the
institution's status as an insured depository institution; (iii) the
institution is undercapitalized and has no reasonable prospect of becoming
adequately capitalized, or fails to become adequately capitalized when required
to do so, or fails to timely submit an acceptable capital plan, or materially
fails to implement an acceptable capital plan; and (iv) the institution is
critically undercapitalized or otherwise has substantially insufficient
capital. FDICIA provides that an institution's directors shall not be liable to
its stockholders or creditors for acquiescing in or consenting to the
appointment of the FDIC as receiver or conservator for, or as a supervisor in
the acquisition of, the institution.
Real Estate Lending Standards. FDICIA requires the federal bank regulatory
agencies to adopt uniform real estate lending standards. The FDIC has adopted
implementing regulations, which establish supervisory limitations on
Loan-to-Value ("LTV") ratios in real estate loans by FDIC-insured banks. The
regulations require FDIC-insured banks to establish LTV ratio limitations
within or below the prescribed uniform range of supervisory limits.
Standards for Safety and Soundness. FDICIA requires the federal bank
regulatory agencies to prescribe, by regulation, standards for all insured
depository institutions and depository institution holding companies relating
to: (i) internal controls, information systems and internal audit systems; (ii)
loan documentation; (iii) credit underwriting; (iv) interest rate risk
exposure; (v) asset growth; and (vi) compensation, fees and benefits. The
compensation standards would prohibit employment contracts, compensation or
benefit arrangements, stock option plans, fee arrangements or other
compensatory arrangements that would provide "excessive" compensation, fees or
benefits, or that could lead to material financial loss. In addition, the
federal bank regulatory agencies are required by FDICIA to prescribe standards
specifying; (i) maximum classified assets to capital ratios; (ii) minimum
earnings sufficient to absorb losses without impairing capital; and (iii) to
the extent feasible, a minimum ratio of market value to book value for
publicly-traded shares of depository institutions and depository institution
holding companies. The FDIC has issued regulations implementing certain of
these provisions.
10
Activities and Investments of Insured State Banks. FDICIA provides that
FDIC-insured state banks such as CTC, BWM and FBT may not engage as a
principal, directly or through a subsidiary, in any activity that is not
permissible for a national bank unless the FDIC determines that the activity
does not pose a significant risk to the BIF, and the bank is in compliance with
its applicable capital standards. In addition, an insured state bank may not
acquire or retain, directly or through a subsidiary, any equity investment of a
type, or in an amount, that is not permissible for a national bank, unless such
investments meet certain grandfather requirements.
The Gramm-Leach-Bliley Act includes a new section of the FDI Act governing
subsidiaries of state banks that engage in "activities as principal that would
only be permissible" for a national bank to conduct in a financial subsidiary.
This provision will permit state banks, to the extent permitted under state
law, to engage in certain new activities which are permissible for subsidiaries
of a financial holding company. See "Supervision and Regulation, Regulation of
the Company." Further, it expressly preserves the ability of a state bank to
retain all existing subsidiaries. Because Vermont does not explicitly permit
banks chartered by the state to engage in all activities permissible for
national banks, CTC will be permitted to form subsidiaries to engage in the
activities authorized by the Gramm-Leach-Bliley Act, only to the extent
permitted by Vermont Law. Massachusetts permits banks chartered by that state
to engage in activities which are permissible for a national bank and that are
approved by the Massachusetts Commissioner of Banks. Thus, BWM and FBT would
only be permitted to engage in the activities authorized by the
Gramm-Leach-Bliley Act that are also approved by the Massachusetts Commissioner
of Banks or otherwise authorized by Massachusetts law. In order to form a
financial subsidiary, a state bank must be well-capitalized, and the state bank
would be subject to certain capital deduction, risk management and affiliate
transaction rules which are applicable to national banks.
Consumer Protection Provisions. FDICIA also includes provisions requiring
advance notice to regulators and customers for any proposed branch closing and
authorizing (subject to future appropriation of the necessary funds) reduced
insurance assessments for institutions offering "lifeline" banking accounts or
engaged in lending in distressed communities. FDICIA also includes provisions
requiring depository institutions to make additional and uniform disclosures to
depositors with respect to the rates of interest, fees and other terms
applicable to consumer deposit accounts.
Depositor Priority Statute. The FDI Act provides that, in the liquidation or
other resolution by any receiver of a bank insured by the FDIC, the claims of
depositors have priority over the general claims of other creditors. Hence, in
the event of the liquidation or other resolution of a banking subsidiary of the
Company, the general claims of the Company as creditor of such banking
subsidiary would be subordinate to the claims of the depositors of such banking
subsidiary, even if the claims of CC were not by their terms so subordinated.
In addition, this statute may, in certain circumstances, increase the costs to
banks of obtaining funds through non-deposit liabilities.
Employees
At December 31, 2000, the Company and its subsidiaries employed 1,672
persons, with a full-time equivalency of 1,551 employees. The Company enjoys
good relations with its employees. A variety of employee benefits, including
health, group life and disability income replacement insurance, a funded,
non-contributory pension plan, and an incentive savings and profit sharing
plan, are available to qualifying officers and employees.
ITEM 2 PROPERTIES
The Company's principal banking subsidiary, CTC, operates banking facilities
in fifty-three locations in Vermont, along with twelve locations in New
Hampshire. The offices of the Company are located in an owned facility at Two
Burlington Square in Burlington, Vermont. BWM's principal offices are in
Springfield, Massachusetts and it has eleven additional locations in the
western Massachusetts area. FBT's principal offices are in Worcester,
Massachusetts and it has six additional locations in the greater Worcester,
Massachusetts area. CCC operates two mortgage company facilities in Vermont and
Massachusetts. Except for the CTC property, all
11
of the properties mentioned above are leased. The offices of CTC, BWM, FBT and
CCC are in good physical condition with modern equipment and facilities
considered adequate to meet the banking needs of customers in the communities
served.
ITEM 3 LEGAL PROCEEDINGS
A number of legal claims against the Company arising in the normal course of
business were outstanding at December 31, 2000. Management, after reviewing
these claims with legal counsel, is of the opinion that these matters, when
resolved, will not have a material effect on the consolidated financial
statements.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None
12
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The $1 par value common stock of Chittenden Corporation has been publicly
traded since November 14, 1974. As of January 31, 2001, there were 5,011
holders of record of the Company's common stock.
As of February 18, 1998, the Company's stock initiated trading on the NYSE
under the symbol "CHZ". Prior to that date, the Company's stock traded on the
NASDAQ, under the symbol "CNDN". The following table sets forth the range of
the high and low sales prices for the Company's common stock, and the dividends
declared, for each quarterly period within the past two years:
Dividends
Quarter ended High Low Paid
- ------------- ------ ------ ---------
2000
March 31..... $30.94 $24.75 $0.22
June 30...... 30.50 22.56 0.24
September 30. 27.38 23.75 0.24
December 31.. 31.56 22.75 0.24
1999
March 31..... $33.63 $26.00 $0.20
June 30...... 31.75 26.44 0.22
September 30. 31.50 26.31 0.22
December 31.. 33.25 27.75 0.22
For a discussion of dividend restrictions on the Company's common stock, see
"Dividends" under the caption Regulation on page 6 of this report.
13
ITEM 6 SELECTED FINANCIAL DATA
Years Ended December 31,
----------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(In thousands, except share and per share amounts)
Statements of income:
Interest income..................................... $ 288,102 $ 288,737 $ 299,476 $ 276,021 $ 238,887
Interest expense.................................... 121,030 113,252 126,199 115,462 99,950
----------- ----------- ----------- ----------- -----------
Net interest income................................. 167,072 175,485 173,277 160,559 138,937
Provision for possible loan losses.................. 8,700 8,700 8,235 7,300 7,533
Net interest income after provision for possible
loan losses........................................ 158,372 166,785 165,042 153,259 131,404
Noninterest income.................................. 54,810 63,403 66,780 55,577 42,698
Noninterest expense................................. 125,629 145,137 152,204 136,199 108,775
Special charges..................................... 833 58,472 -- -- --
----------- ----------- ----------- ----------- -----------
Income before income taxes.......................... 86,720 26,579 79,618 72,637 65,327
Income tax expense.................................. 28,033 29,075 29,840 26,105 21,991
----------- ----------- ----------- ----------- -----------
Net income (loss)................................... $ 58,687 $ (2,496) $ 49,778 $ 46,532 $ 43,336
=========== =========== =========== =========== ===========
Total assets at year-end............................... $ 3,769,861 $ 3,828,296 $ 4,256,052 $ 4,074,602 $ 3,301,727
Common shares outstanding at year-end.................. 26,097,084 28,378,232 27,937,070 28,591,977 25,429,846
Balance sheets--average daily balances:
Total assets........................................ $ 3,813,366 $ 4,104,497 $ 4,090,244 $ 3,656,334 $ 3,104,486
Loans, net of allowance............................. 2,902,303 2,834,961 2,694,097 2,463,250 2,189,681
Investment securities and interest-bearing cash
equivalents........................................ 643,838 931,076 1,009,881 852,355 661,703
Deposits............................................ 3,207,857 3,528,426 3,494,945 3,098,744 2,678,158
Stockholders' equity................................ 341,081 373,742 379,615 337,871 280,075
Per common share:
Basic earnings (loss)............................... $ 2.17 $ (0.09) $ 1.76 $ 1.73 $ 1.72
Diluted earnings (loss)............................. 2.15 (0.09) 1.73 1.70 1.70
Operating basic earnings (4)........................ 2.20 1.95 1.76 1.73 1.72
Operating diluted earnings (4)...................... 2.18 1.92 1.73 1.70 1.70
Cash dividends declared............................. 0.94 0.81 0.69 0.95 0.54
Book value.......................................... 13.11 12.77 14.02 13.21 11.62
Weighted average common shares outstanding............. 27,008,425 28,172,425 28,322,911 26,857,510 25,163,652
Weighted average common and common equivalent shares
outstanding........................................... 27,280,090 28,635,839 28,830,483 27,327,021 25,563,864
Selected financial percentages:
Return on average stockholders' equity (1)(4)....... 17.44% 14.69% 13.05% 13.77% 15.47%
Return on average total assets (1)(4)............... 1.56 1.34 1.22 1.27 1.40
Net yield on earning assets......................... 4.73 4.67 4.71 4.88 4.88
Interest rate spread................................ 3.95 3.98 4.01 4.20 4.21
Net charge-offs as a percent of average loans....... 0.32 0.31 0.46 0.43 0.37
Nonperforming assets ratio (2)...................... 0.42 0.33 0.72 1.02 1.00
Allowance for possible loan losses as a percent of
year-end loans..................................... 1.41 1.42 1.51 1.69 1.85
Year-end leverage capital ratio..................... 8.65 8.17 7.58 7.35 8.68
Risk-based capital ratios:
Tier 1........................................... 10.82 11.96 10.76 10.82 12.53
Total............................................ 12.08 13.23 12.02 12.14 13.85
Average stockholders' equity to average assets...... 8.94 9.11 9.28 9.24 9.02
Common stock dividend payout ratio (1)(3)(4)........ 42.85 41.55 39.30 55.03 31.56
- --------
(1) Ratios calculated based on operating net income for the year.
(2) 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.
(3) Common stock cash dividends declared divided by operating net income;
dividends declared during 1997 included a special cash dividend of $0.60
per share.
(4) Operating earnings per share are computed by adding back the impact of
one-time special charges (net of the effect of income taxes) to net income
(loss).
(5) All information for the years 1996-1998 has been restated to include VFSC,
which was acquired May 28, 1999, in a transaction accounted for as a
pooling of interests.
14
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For the Years Ended December 31, 2000, 1999, and 1998
Overview
The following discussion and analysis of financial condition and results of
operations of the Company and its subsidiaries should be read in conjunction
with reference to the consolidated financial statements and notes thereto and
selected statistical information appearing elsewhere in this report.
On May 28, 1999, the Company completed the acquisition of Vermont Financial
Services Corp. in a stock-for-stock transaction accounted for as a pooling of
interests. Accordingly, the consolidated financial statements of the Company
have been restated to reflect the acquisition as of the beginning of the
earliest period presented. The Company recognized $57.4 million of after-tax
special charges in 1999 (and an additional $792,000 in 2000) and the results
excluding these special charges are referred to in the following discussion as
operating.
A reconciliation of the Company's net income (loss) to its operating net
income for the years ended December 31, 2000, 1999, and 1998 is presented
below:
2000 1999 1998
------- -------- -------
Net income (loss), as reported............... $58,687 $ (2,496) $49,778
Less:
Gain (loss) on branch sales............... (833) 12,524 --
Impaired goodwill written off upon merger. -- (21,129) --
Merger costs.............................. -- (49,866) --
Tax effect of gain (loss) on branch sales. 41 (13,399) --
Tax effect of merger costs................ -- 14,465 --
------- -------- -------
Operating Net Income......................... $59,479 $ 54,909 $49,778
======= ======== =======
Diluted Operating EPS........................ $ 2.18 $ 1.92 $ 1.73
During the first quarter of 2000, special charges of $833,000 (pre-tax) were
recorded which included the loss on branch fixed assets and recovery of
goodwill (net of deposit premiums) of $145,000 and losses of $688,000 on
securities sold to fund the final branch divestiture.
Chittenden recorded operating earnings of $59.5 million or basic operating
earnings per share of $2.20 and diluted operating earnings per share of $2.18
for the year ended December 31, 2000. This compares to operating net income of
$54.9 million and basic earnings per share of $1.95 and diluted earnings per
share of $1.92 for 1999 and operating net income of $49.8 million, basic
earnings per share of $1.76 and diluted earnings per share of $1.73 in 1998.
For 2000, operating return on average equity was 17.44% and the operating
return on average assets was 1.56%. These compare to returns on average equity
of 14.69% and 13.05% and returns on average assets of 1.34% and 1.22% for 1999
and 1998, respectively. The increases in operating return on equity from 1999
to 2000 were attributable to higher levels of operating net income, as well as
lower levels of average stockholders' equity, which resulted from the share
repurchase plan commenced in 2000. The increases in operating return on equity
between 1998 and 1999 were attributable to higher levels of operating net
income and lower levels of average stockholders' equity in the third and fourth
quarters of 1999, which resulted from the special charges taken in 1999.
Total assets decreased from $3.828 billion in 1999 to $3.770 billion in
2000. Divested in the final branch sale, in the first quarter of 2000, was $3.9
million in loans, $27.1 million in deposits, and $755,000 in fixed assets.
Total assets decreased from $4.256 billion in 1998 to $3.828 billion in 1999,
as a result of the sale of seventeen VNB branches, which was required as a
condition of regulatory approval of the VFSC acquisition. Divested in the 1999
branch sales were $127.6 million in loans, $442.2 million in deposits and $8.3
million of fixed assets. Total cash transferred to the buyers was $265.1
million. To fund the cash transferred securities available for sale were sold
at a loss of $1.2 million. The loss on sale of securities is netted against the
overall
15
gain on sale of branches of $12.5 million. The divestiture of these branches
did not have a material impact on operating income in 1999 or 2000.
The $4.6 million increase in operating net income from 1999 to 2000 was
primarily attributable to reductions in noninterest expenses, which net of
special charges, totaled $125.6 million for 2000, down from $145.1 million for
1999. The reduction in noninterest expenses was due to lower levels of
amortization of intangibles resulting from the writedown of goodwill related to
the merger, reduced compensation expense caused by lower staffing levels, and
reduced depreciation expense related to duplicative fixed assets written off as
a result of the merger. These reduced expenses outpaced declines in net
interest income and noninterest income which were primarily attributable to the
sale of eighteen branches in late 1999 and early 2000.
The $5.1 million increase in operating earnings from 1998 to 1999 was
primarily attributable to reductions in noninterest expenses, which net of
special charges, totaled $145.1 million for 1999, down from $152.5 million for
1998. The reduction in noninterest expenses was due to lower levels of
amortization of intangibles resulting from the writedown of goodwill related to
the merger, reduced compensation expense caused by lower staffing levels, and
reduced depreciation expense related to duplicative fixed assets written off as
a result of the merger.
Financial Condition
Loans
Chittenden's gross loan portfolio at December 31, 2000 totaled $2.856
billion compared to $2.905 billion in 1999. As noted above, $3.9 million in
loans were divested in branch sales in 2000. Excluding the divested loans,
overall loans declined $45 million or 1.5% from 1999. The classification of the
Company's loan portfolio is based on underlying collateral. The overall
proportions of commercial-related loans continued to increase in 2000. At
December 31, 2000, commercial loans secured by non-real estate business assets
totaled $599.5 million or 21% of total loans, up from the $591.9 million posted
at year-end 1999. Commercial real estate loans, representing 25% of the
portfolio, increased $81.8 million or 12.8% to $723.3 million at year-end 2000,
compared to $641.5 million at December 31, 1999. Consumer loans, including
automobile leasing, declined $97.7 million or 17.8% from year-end 1999. The
decline reflects the movement of $39.0 million in personal credit card loans to
loans held for sale in accordance with the Company's announcement that it had
signed an agreement to sell all such balances in a transaction which closed in
the first quarter of 2001. Construction loans amounted to $57.7 million at
December 31, 2000, up from $55.4 million the year before. Residential real
estate loans decreased $33.5 million to $884.0 million in 2000. The reduction
in the balances of residential real estate were caused by relatively normal
payment activity, including some prepayments on adjustable rate loans, although
at much lower levels than in 1999. The overall proportion of the loan portfolio
comprised of residential real estate loans is declining because new loans are
being added to the portfolio at a slower rate than the existing portfolio is
paying down. Over time, this will increase the percentage of the portfolio
comprised of higher yielding commercial loans. The total real estate portfolio,
including home equity credit lines, increased $42.5 million or 2.41% from
year-end 1999, after adjusting for the effect of divested real estate loans.
This increase was caused by increases in the commercial real estate portfolio,
consistent with the Company's ongoing focus on commercial lending.
Residential mortgages originated during 2000 totaled $259.4 million,
compared to $501.7 million during 1999, due to reduced volumes of fixed rate
residential loans caused by increasing market rates throughout 2000. The
Company underwrites substantially all of its residential mortgages to secondary
market standards. The Company continued to follow its policy of selling
substantially all of its fixed-rate residential mortgage production on a
servicing-retained non-recourse basis. Secondary market sales of mortgage loans
totaled $179.6 million in 2000, compared to $381.6 million in 1999.
Included in the real estate portfolio are home equity credit lines, which
totaled $140.2 million at December 31, 2000 compared to $149.3 million the
previous year. The unused portion of these lines totaled $147.4 million at
December 31, 2000 compared to $206.1 million at year-end 1999.
The portfolio of residential mortgages serviced for investors totaled $1.991
billion at December 31, 2000, compared to $2.079 billion at year-end 1999.
These assets are owned by investors other than Chittenden and
16
therefore are not included in the consolidated balance sheets of the Company.
Of the loans serviced, the Company originated $1.585 billion and the balance
consisted of loans whose mortgage-servicing rights were purchased by the
Company in prior years.
Consumer loans decreased in 2000, ending the year at $451.4 million,
compared with $549.1 million at year-end 1999. This decrease reflects the
pending sale of the Company's retail credit card portfolio, totaling $39.0
million at December 31, 2000. Accordingly, the credit card portfolio is
included in loans held for sale as of December 31, 2000 on the accompanying
balance sheets. The Company underwrites all of its indirect automotive loans,
maintaining substantially the same credit standards as for car loans originated
in its branch offices. Indirect installment lending through auto dealers was
down $60.3 million from year-end 1999 to $277.1 million at the end of 2000. The
decline was due to regular payments and payoffs exceeding new production
because of increases in the Company's pricing structure designed to increase
the overall yield on these loans. The Company also offers auto leases through
its dealer base. This product is underwritten and priced similarly to indirect
installment auto loans. Lease financing receivables outstanding at December 31,
2000 were $136.5 million, up from $135.0 million a year earlier, of which $86.8
million and $84.7 million represented the residual value of these leases. The
Company has insurance through outside insurance companies which substantially
eliminates the risk associated with the residual values of its leased vehicle
portfolio. Direct installment and credit card balances at December 31, 2000
stood at $31.5 million and $6.3 million, respectively, compared with $25.2
million and $51.6 million at the end of 1999. Unused portions of credit card
lines totaled $137.5 million at the end of 2000, down from $169.1 million one
year earlier.
The Company's lending activities are conducted in market areas focused in
Vermont, western and central Massachusetts, and southern New Hampshire, with
additional activity related to nearby trading areas in Quebec, New York, Maine,
and Connecticut. In addition to the geographic 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, 2000:
December 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ------------- ---------- ----------
(in thousands)
Commercial........................ $ 599,492 $ 591,875 $ 581,132 $ 529,261 $ 502,295
Real estate:
Residential.................... 884,024 917,505 927,454 1,042,530 819,030
Commercial..................... 723,339 641,494 573,756 548,970 481,869
Construction................... 57,701 55,448 68,744 60,965 50,439
Home equity....................... 140,150 149,347 159,641 178,236 121,883
Consumer.......................... 314,914 414,173 309,055 276,235 239,087
Lease financing................... 136,478 134,967 107,058 72,562 41,117
---------- ---------- ------------- ---------- ----------
Total gross loans................. 2,856,098 2,904,809 2,726,840 2,708,759 2,255,720
Allowance for possible loan losses (40,255) (41,079) (41,209) (45,664) (41,743)
---------- ---------- ------------- ---------- ----------
Net loans......................... $2,815,843 $2,863,730 $2,685,631 $2,663,095 $2,213,977
========== ========== ============= ========== ==========
Loans held for sale............... $ 44,950 $ 2,926 $ 53,684 $ 49,651 $ 18,438
Nonperforming Assets
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. Management classifies loans, except consumer and
residential loans, as nonaccrual loans when they become 90 days past due as to
principal or interest, unless they are adequately secured and are in the
process of collection. In addition, loans that have not met this delinquency
test may be placed on nonaccrual at management's discretion. Consumer and
residential loans are included when management considers it to be appropriate,
based upon evidence of collectibility, the value of any underlying collateral,
and other general criteria. Nonaccrual loans with a related guarantee by a
governmental agency are reflected net of those guarantees in nonperforming
statistics. Generally, a loan remains on nonaccrual status until the factors
which
17
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.
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, 2000:
December 31,
--------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(in thousands)
Loans on nonaccrual........................................ $11,376 $ 9,172 $17,865 $23,487 $18,413
Troubled debt restructurings............................... -- -- -- 767 638
Other real estate owned.................................... 513 416 1,870 3,541 2,948
Restructured loans accruing................................ -- -- -- -- 661
------- ------- ------- ------- -------
Total nonperforming assets................................. $11,889 $ 9,588 $19,735 $27,795 $22,660
======= ======= ======= ======= =======
Loans past due 90 days or more and still accruing.......... $ 4,595 $ 5,016 $ 4,184 $ 8,893 $ 2,899
Percentage of nonperforming assets to total loans and other
real estate owned........................................ 0.42% 0.33% 0.72% 1.02% 1.00%
Nonperforming assets to total assets....................... 0.32 0.25 0.46 0.68 0.69
Allowance for possible loan losses to nonperforming loans,
excluding OREO........................................... 353.86 447.87 230.66 188.27 211.76
Nonaccrual loans, at December 31, 2000, consisted of approximately 168
loans, which were diversified across a range of industries, sectors, and
geography.
Allowance for possible loan losses
Credit quality of the commercial loan and lease portfolios is quantified by
a corporate credit rating system designed to parallel regulatory criteria and
categories of loan risk. Individual lenders monitor their loans to ensure
appropriate rating assignments are made on a timely basis. Risk ratings and
quality of both commercial and consumer credit portfolios are also assessed on
a regular basis by an independent Loan Review Department, which reports to the
Executive Vice President in charge of Asset Quality. Loan Review personnel
conduct ongoing portfolio trend analyses and individual credit reviews to
evaluate loan risk and compliance with corporate lending policies. Results and
recommendations from this process provide senior management and the Board of
Directors with independent information on loan portfolio condition. The Board
of Directors monitors asset quality throughout the year. Consumer loan quality
is evaluated on the basis of delinquency data and other credit data available
due to the large number of such loans and the relatively small size of
individual credits. Historical trend analyses are reviewed on a monthly basis
by senior management and the Company's Board of Directors.
The allowance for possible loan losses is based on management's estimate of
the amount required to reflect the potential inherent losses in the loan
portfolio, based on circumstances and conditions known at each reporting date
in accordance with GAAP. Adequacy of the allowance is determined using a
consistent, systematic methodology which analyzes the size and risk of the loan
portfolio. In addition to evaluating the collectibility of specific loans when
determining the adequacy of the allowance for possible loan losses, management
also takes into consideration other factors such as changes in the mix and
volume of the loan portfolio, historic loss experience, the amount of
delinquencies and loans adversely classified, and economic trends. The adequacy
of the allowance for possible loan losses is assessed by an allocation process
whereby specific loss allocations are made against certain adversely classified
loans, and general loss allocations are made against segments of the loan
portfolio which have similar attributes. The Company's historical loss
experience, industry trends, and the
18
impact of the local and regional economy on the Company's borrowers, were
considered by management in determining the adequacy of the allowance for
possible loan losses.
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.
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 following table summarizes the activity in the Company's allowance for
possible loan losses for the five years ended December 31, 2000:
December 31,
-----------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(in thousands)
Balance of allowance for possible loan
losses at beginning of year.............. $ 41,079 $ 41,209 $ 45,664 $ 41,743 $ 42,579
Eastern Bancorp allowance acquired......... -- -- -- 7,488 --
Provision charged to expense............... 8,700 8,700 8,235 7,300 7,533
---------- ---------- ---------- ---------- ----------
Balance of allowance for possible loan
losses after provision................... 49,779 49,909 53,899 56,531 50,112
---------- ---------- ---------- ---------- ----------
Loans charged off:
Commercial.............................. 4,335 4,747 6,941 6,127 4,769
Real estate:
Residential......................... 454 600 2,647 1,593 1,876
Commercial.......................... 332 248 399 2,088 1,208
Construction........................ -- -- 101 204 185
Home equity............................. 120 124 502 235 304
Consumer................................ 8,198 7,697 7,101 4,695 3,800
---------- ---------- ---------- ---------- ----------
Total loans charged off.......... 13,439 13,416 17,691 14,942 12,142
---------- ---------- ---------- ---------- ----------
Recoveries of loans previously charged off:
Commercial.............................. 720 1,661 1,779 1,380 1,873
Real estate:
Residential......................... 164 116 329 165 219
Commercial.......................... 230 272 320 1,390 597
Construction........................ 112 64 5 12 104
Home equity............................. 51 67 110 59 13
Consumer................................ 2,638 2,406 2,458 1,069 967
---------- ---------- ---------- ---------- ----------
Total recoveries................. 3,915 4,586 5,001 4,075 3,773
---------- ---------- ---------- ---------- ----------
Net loans charged off...................... 9,524 8,830 12,690 10,867 8,369
---------- ---------- ---------- ---------- ----------
Balance of allowance for possible loan
losses at year end....................... $ 40,255 $ 41,079 $ 41,209 $ 45,664 $ 41,743
========== ========== ========== ========== ==========
Amount of loans outstanding at end of year. $2,856,098 $2,904,809 $2,739,289 $2,713,639 $2,255,103
Average amount of loans outstanding during
the year................................. 2,943,018 2,877,218 2,739,617 2,508,559 $2,232,602
Ratio of net charge-offs during year to
average loans outstanding................ 0.32% 0.31% 0.46% 0.43% 0.37%
Allowance as a percent of loans outstanding
at end of year........................... 1.41 1.42 1.51 1.69 1.85
19
The following table summarizes the allocation of the allowance for possible
loan losses for the five years ended December 31, 2000:
December 31,
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997
---------------------- ---------------------- ---------------------- ---------------------- ---------
Amount Loan Amount Loan Amount Loan Amount Loan Amount
Allocated Distribution Allocated Distribution Allocated Distribution Allocated Distribution Allocated
--------- ----------- --------- ----------- --------- ----------- --------- ----------- ---------
(in thousands)
Commercial.......... $ 7,861 21% $ 8,207 20% $ 6,885 21% $ 7,253 20% $ 7,131
Real estate:
Residential...... 2,276 31 2,985 32 3,818 34 4,942 38 2,764
Commercial....... 13,510 25 11,333 22 5,919 21 10,141 20 8,121
Construction..... 865 2 882 2 2,276 3 576 2 907
Home equity......... 566 5 616 5 928 6 1,091 7 599
Consumer and leasing 7,290 16 7,912 19 7,488 15 6,196 13 4,853
Other............... 7,887 -- 9,144 -- 13,895 -- 15,465 -- 17,368
--------- ----------- --------- ----------- --------- ----------- --------- ----------- ---------
$40,255 100% $41,079 100% $41,209 100% $45,664 100% $41,743
========= =========== ========= =========== ========= =========== ========= =========== =========
Loan
Distribution
- -----------
22%
36
21
2
6
13
--
- -----------
100%
===========
Over the last five years, the percentage of the allowance for loan losses
allocated to consumer (including leasing) loans and commercial real estate
loans has increased from 12% and 19%, respectively, to 18% and 35%,
respectively. The shifts in these allocations reflect the trends in the overall
mix of the Company's portfolio (described above in "Overview" and "Loans"). As
noted in the Nonperforming Assets table, the overall level of the allowance for
loan losses at December 31, 2000, when viewed as a percentage of nonperforming
loans, excluding OREO, decreased to 353.86% from 447.87% in 1999. This decrease
is primarily due to increases in the balance of loans on nonaccrual status. The
other category is the allowance considered necessary by management based on its
assessment of historical loss experience, industry trends, and the impact of
the local and regional economy on the Company's borrowers that may not have
been captured in the specific risk classifications.
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, invest excess liquidity, and generate interest
income. At December 31, 2000, the Company held investments available for sale
totaling $585.3 million. This compares with investments of $649.5 million
available for sale at December 31, 1999. The decline from 1999 to 2000 is
primarily attributable to repayments of short-term borrowings utilized to fund
branch divestitures in late 1999. At December 31, 2000, unrealized gains (net
of taxes) of $164,000 resulted from marking the available for sale portfolio to
market value. This compares with unrealized losses (net of taxes) of $7,018,000
at December 31, 1999. These amounts are reflected as an increase and a
decrease, respectively, in stockholders' equity as the change in accumulated
other comprehensive income.
20
The following tables show the composition of the Company's investment
portfolio, at:
December 31,
--------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands)
Securities available for sale (at market value)
U.S. Treasury securities.......................... $ 4,724 $ 18,942 $ 53,519 $ 57,713 $139,796
U.S. government agency obligations................ 251,826 230,479 388,434 399,599 241,109
Obligations of states and political subdivisions.. 6,142 8,297 8,123 10,301 10,558
Mortgage-backed securities........................ 152,902 197,596 289,086 290,559 118,659
Corporate bonds and notes......................... 163,606 193,208 216,570 90,812 65,690
Government bond mutual funds...................... -- -- 9,000 9,050 10,103
Marketable equity securities...................... 5,248 307 25,941 25,425 25,075
Other debt securities............................. 833 642 142 121 --
-------- -------- -------- -------- --------
Total Securities available for sale............ 585,281 649,471 990,815 883,580 610,990
-------- -------- -------- -------- --------
Securities held for investment (at amortized cost)
U.S. government agency obligation................. -- -- -- -- $ 198
Obligations of states and political subdivisions.. -- -- -- -- 490
Mortgage-backed securities........................ -- -- -- -- 34,761
Corporate bonds and notes......................... -- -- -- -- 25
Other debt securities............................. -- -- -- -- 106
-------- -------- -------- -------- --------
Total Securities held for investment........... -- -- -- -- 35,580
-------- -------- -------- -------- --------
Total Investment Securities................. $585,281 $649,471 $990,815 $883,580 $646,570
======== ======== ======== ======== ========
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, 2000, with
comparative totals for 1999. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations:
After One After Five
Within But Within But Within After No Fixed
One Year Five Years Ten Years Ten Years Maturity
----------------- ----------------- ---------------- --------------- ---------------
Amount Yield(2) Amount Yield(2) Amount Yield(2) Amount Yield(2) Amount Yield(2)
-------- ------- -------- ------- ------- ------- ------ ------- ------ -------
Securities Available for Sale
US Treasury securities............. $ 2,700 6.15% $ 1,996 6.12% $ -- -- % $ -- -- % $ -- -- %
US government agency
obligations....................... 49,470 6.48 169,430 6.18 32,878 7.24 -- -- -- --
Obligations of states and political
subdivisions...................... 1,482 6.52 4,524 6.42 60 8.99 67 8.99 --
Mortgage-backed securities (1)..... 61,465 6.05 77,040 6.51 11,319 6.46 2,553 5.58 -- --
Corporate bonds and notes.......... 25,330 6.10 137,583 6.63 30 7.00 1,005 6.18 -- --
Marketable equity securities....... 5,000 7.18 -- -- -- -- -- -- 250 --
Other debt securities.............. 10 5.00 795 6.74 28 9.02 -- -- -- --
-------- ------- -------- ------- ------- ------- ------ ------- ------ -------
Total available for sale........... $145,457 6.25% 391,368 6.41% $44,315 7.05% $3,625 5.81% $250 -- %
======== ======= ======== ======= ======= ======= ====== ======= ====== =======
Comparative totals for 1999........ $ 90,665 6.14% 535,219 6.17% $31,760 7.01% $2,431 6.97% $274 -- %
Total
-----------------
Amount Yield(2)
-------- -------
Securities Available for Sale
US Treasury securities............. $ 4,696 6.14%
US government agency
obligations....................... 251,778 6.38
Obligations of states and political
subdivisions...................... 6,133 6.47
Mortgage-backed securities (1)..... 152,377 6.31
Corporate bonds and notes.......... 163,948 6.55
Marketable equity securities....... 5,250 7.18
Other debt securities.............. 833 6.79
-------- -------
Total available for sale........... $585,015 6.41%
======== =======
Comparative totals for 1999........ $660,349 6.21%
- --------
(1) Maturities of mortgage-backed securities are based on contractual payments
and estimated mortgage loan prepayments.
(2) Tax-equivalent yield computed using historical cost balances and does not
give effect to changes in fair value.
Deposits
During 2000, total deposits averaged $3.208 billion, down from $3.528
billion in 1999. Noninterest-bearing demand deposits averaged $506 million,
down from $580 million in 1999. Average savings deposits decreased $121.5
million, to
21
$1.854 billion for 2000. This category includes non-contractual interest
bearing deposit products, such as savings, money market, and N.O.W. accounts.
During 2000, time accounts (retirement and certificates of deposit) averaged
$848 million, compared to $974 million in 1999. All of the declines in average
balances were attributable to the sale of the eighteen branches, in which
$469.3 million in total deposits were sold. The Company has a number of
institutional customers within its franchise whose investment needs are
frequently met by purchasing certificates of deposit over $100,000. Depositors
in this category tend to seek bids regularly, and the Company raises or lowers
the interest rates it offers depending on its liquidity needs and investment
opportunities.
The following table shows average balances of the Company's deposits for the
periods indicated:
Years Ended December 31,
------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(in thousands)
Demand deposits........................... $ 506,192 $ 579,631 $ 555,635 $ 464,208 $ 386,434
Savings deposits.......................... 1,853,576 1,975,125 1,903,265 1,657,072 1,445,457
Certificates of deposit less than $100,000
and other time deposits................. 621,826 795,361 856,290 805,510 694,544
Certificates of deposit $100,000 and over. 226,263 178,309 179,755 171,954 151,723
---------- ---------- ---------- ---------- ----------
Total.................................. $3,207,857 $3,528,426 $3,494,945 $3,098,744 $2,678,158
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
The Company's ending balances of outstanding certificates of deposit and
other time deposits in denominations of $100,000 and over had maturities as
follows:
Years Ended December 31,
-----------------------------------
2000 1999 1998 1997
-------- -------- -------- --------
(in thousands)
Three months or less............ $135,263 $135,371 $108,597 $101,967
Over three months to six months. 35,065 39,647 48,471 36,637
Over six months to twelve months 42,433 45,439 45,978 40,260
Over twelve months.............. 28,100 15,252 23,311 29,475
-------- -------- -------- --------
$240,861 $235,709 $226,357 $208,339
-------- -------- -------- --------
-------- -------- -------- --------
Borrowings
During 2000, short-term borrowings averaged $214.8 million, up from the
$139.3 million posted in 1999. This funding consists of treasury, tax and loan
deposits, securities sold under agreements to repurchase, Federal Home Loan
Bank (FHLB) borrowings, and federal funds purchased. FHLB borrowings averaged
$146.8 million for 2000, up from $29.7 million in 1999. This increase is
primarily attributable to amounts borrowed to fund the branch divestitures
which occurred late in 1999. These borrowings were gradually repaid in 2000.
FHLB borrowings at December 31, 2000 were $65.1 compared with $70.1 at December
31, 1999. Treasury borrowings averaged $17.4 million for 2000 compared with
$13.1 million during 1999. 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 $45.5 million for 2000,
down from $89.6 million in 1999.
Capital Resources
The Company's capital forms the foundation for maintaining investor
confidence as well as for developing programs for growth and new activities.
Total capital decreased from $377.6 million at December 31, 1997 to $342.1
million at December 31, 2000. During 1997, the Company adopted measures to
maintain a capital level
22
consistent with the needs for its activities. A special dividend of $0.60 per
share was declared in October 1997 to maintain capital at a level consistent
with the Company's requirements at that time. Additionally, a share repurchase
plan was implemented, in which up to 1,250,000 shares could be repurchased
during 1997 and 1998. During 1998, the repurchase plan was expanded to allow an
additional 500,000 shares to be repurchased during 1998 and 1999. However, the
repurchase plan was rescinded prior to the announcement of the agreement to
merge with VFSC.
On January 19, 2000, the Board of Directors authorized the repurchase of up
to 2,000,000 shares of the Corporation's common stock in negotiated
transactions or open market purchases. Chittenden, depending on market
conditions, may repurchase its Common Stock without further Board authorization
for two years. On July 19, 2000, the Board authorized the repurchase of an
additional 2,000,000 shares, bringing the total authorization to 4,000,000
shares. During 2000, 2.5 million shares were repurchased under the plan at a
total cost of $66.5 million.
At December 31, 2000, capital stood at $342.1 million, a decrease of $20.4
million from $362.5 million at December 31, 1999. Net income of $58.7 million
increased the capital position in 2000, while dividend payments of $25.5
million and the share repurchases of $66.5 million reduced it. The reduction in
capital was partially offset by increases in the net unrealized gain on
securities available for sale of $7.2 million.
Cash dividend payments totaling $22.8 million reduced the capital position
during 1999, as did the net loss of $2.5 million, and a decrease in the net
unrealized gain on securities available for sale of $13.5 million.
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, 2000, the Company's leverage capital
ratio (which is calculated pursuant to the FRB's regulations) was 8.65%, CTC's,
BWM's, and FBT's leverage capital ratios (which are calculated pursuant to the
FDIC's regulations) were 8.44%, 7.50%, and 6.61% respectively. The ratios in
1999 were 8.17% for the Company, 8.02% for CTC, 6.77% for BWM, and 6.72% for
FBT.
Additionally, the FRB and the FDIC have a risk-based capital standard. Under
this measure of capital, banks are required to hold more capital against
certain assets perceived as higher risk, such as commercial loans, than against
other assets perceived as lower risk, 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, 2000, the Company's risk-based
capital ratio was 12.08% and its Tier 1 capital, consisting entirely of common
stock, was 10.82% of risk-weighted assets. This compares with year-end 1999
ratios of 13.23% and 11.96%, respectively.
FDIC regulations pertaining to capital adequacy, which apply to the Banks,
require a minimum 3% leverage capital ratio for those institutions with the
most favorable composite regulatory examination rating. In addition, a 4% Tier
1 risk-based capital ratio, and an 8% total risk-based capital ratio are
required for a bank to be considered adequately capitalized. Leverage, Tier 1
risk-based, and total risk-based capital ratios exceeding 5%, 6%, and 10%,
respectively, qualify a bank for the "well-capitalized" designation. At
December 31, 2000, CTC's leverage capital ratio was 8.44%, its Tier 1
risk-based capital ratio was 10.52%, and its total risk-based capital ratio was
11.77%; BWM's ratios were 7.50%, 9.65%, and 10.92%, respectively; and FBT's
ratios were 6.61%, 9.69%, and 10.98%, respectively. These ratios placed the
Banks in the FDIC's highest capital category of "well capitalized". Capital
ratios in excess of minimum requirements indicate capacity to take advantage of
profitable and credit-worthy opportunities as well as the potential to respond
to unforeseen adverse conditions.
23
The following table presents capital components and ratios of the Company
at:
December 31,
-----------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(in thousands)
Leverage
Stockholders' equity........ $ 322,929 $ 350,715 $ 313,273 $ 295,717 $ 278,108
Total average assets (1).... 3,735,584 4,294,030 4,135,637 4,022,061 3,202,866
8.65% 8.17% 7.58% 7.35% 8.68%
Risk-based
Capital components:
Tier 1................... $ 322,929 $ 350,715 $ 313,273 $ 295,717 $ 278,108
Tier 2................... 37,301 36,647 36,394 34,186 27,784
---------- ---------- ---------- ---------- ----------
Total................ $ 360,230 $ 387,362 $ 349,667 $ 329,903 $ 305,892
========== ========== ========== ========== ==========
Risk-weighted assets:
On-balance sheet......... $2,787,046 $2,824,133 $3,628,633 $3,461,939 $2,137,870
Off-balance sheet........ 212,812 126,100 118,628 128,885 101,581
---------- ---------- ---------- ---------- ----------
$2,999,858 $2,950,233 $3,747,261 $3,590,824 $2,239,451
========== ========== ========== ========== ==========
Ratios:
Tier 1................... 10.82% 11.96% 10.76% 10.82% 12.53%
Total (including Tier 2). 12.08 13.23 12.02 12.14 13.85
- --------
(1) Total average assets for the most recent quarter.
Liquidity and Rate Sensitivity
The Company's liquidity and rate sensitivity are monitored by the asset and
liability committee, based upon policies approved by the Board of Directors.
Strategies are implemented by the Banks' asset and liability committee. This
committee meets periodically to review and direct the Banks' lending and
deposit-gathering functions. Investment and borrowing activities are managed by
the Company's Treasury function.
The measure of an institution's liquidity is its ability to meet its cash
commitments at all times with available cash or by conversion of other assets
to cash at a reasonable price. At December 31, 2000, the Company maintained
cash balances and short-term investments of approximately $178.6 million,
compared with $151.8 million at December 31, 1999. During 2000, the Company
reduced borrowings by $103.1 million. Borrowings at December 31, 2000 were
$93.8 million compared to $196.9 million on December 31, 1999. The decline was
attributable to reduced balances in securities available for sale of $64.2
million and loans of $48.7 million. The borrowings were used to fund cash
payments to acquiring institutions in exchange for liabilities assumed net of
assets acquired, totaling $287.3 million ($22.2 million in 2000 and $265.1
million in 1999) for required branch divestitures.
To measure the sensitivity of its income to changes in interest rates, the
Company uses a variety of methods, including simulation, valuation techniques
and gap analyses. Interest rate risk is the sensitivity of income to variations
in interest rates over both short-term and long-term horizons. The primary goal
of interest-rate management is to control this risk within limits approved by
the Board of Directors. These limits and guidelines reflect the Company's
tolerance for interest-rate risk. The Company attempts to control interest-rate
risk by identifying exposures, quantifying them and taking appropriate actions.
The Company uses simulation analyses to measure the exposure of net interest
income to changes in interest rates over a relatively short (i.e., within one
year) time horizon. Simulation analysis incorporates what management believes
to be the most appropriate assumptions about customer and competitor behavior
in the
24
specified interest rate scenario. These assumptions are the basis for
projecting future interest income and expense from the Company's assets and
liabilities under various scenarios. Simulation analysis may have certain
limitations caused by market conditions varying from those assumed in a model.
Actual results can often differ due to the effects of prepayments and
refinancings of loans and investments, as well as deposits ability to reprice
or runoff, which may be different from that which has been assumed.
The Company's limits on interest-rate risk specify that if interest rates
were to shift immediately, (shocked) up or down 200 basis points, estimated net
interest income for the next 12 months should neither improve or be impacted by
greater than 10%. The results of the simulations over the next 12 months based
on an increase in interest rates of 200 basis points will result in an increase
of .08% in net interest income and a decline of 200 basis points will result in
a decrease of .47% in net interest income. An additional analysis is performed
to review results if interest rates were to shift quarterly, (ramped) up or
down 100 and 200 basis points over a twelve month period. The results of the
simulations over the next 12 months based on a gradual increase in interest
rates of 100 and 200 basis points will result in a decrease of .15% and .28%
respectively, in net interest income and a decline of 100 and 200 basis points
will result in an increase of .05% and .09% respectively, in net interest
income.
As noted above, one of the tools used to measure rate sensitivity is the
funds gap. The funds gap is defined as the amount by which a bank's rate
sensitive assets exceed its rate sensitive liabilities. A positive gap exists
when rate sensitive assets exceed rate sensitive liabilities. This indicates
that a greater volume of assets than liabilities will reprice during a given
period. This mismatch will improve earnings in a rising rate environment and
inhibit earnings when rates decline. Conversely, when rate sensitive
liabilities exceed rate sensitive assets, the gap is referred to as negative
and indicates that a greater volume of liabilities than assets will reprice
during the period. In this case, a rising rate environment will inhibit
earnings and declining rates will improve earnings. Notwithstanding this
general description of the effect on income of the gap position, it may not be
an accurate predictor of changes in net interest income. The Company's limits
on interest-rate risk specify that the cumulative one-year gap should be less
than 15% of total assets. As of December 31, 2000, the estimated exposure was
0.06% and the Company was liability-sensitive.
The following table shows the amounts of interest-earning assets and
interest-bearing liabilities at December 31, 2000 that reprice during the
periods indicated:
Repricing Date
-------------------------------------------------------
Over
Over Six One Year
One Day To Months To To Five Over
Six Months One Year Years Five Years Total
---------- --------- ---------- --------- ----------
(in thousands)
Interest-earning assets:
Loans................................. $1,320,986 $ 380,511 $1,024,797 $ 177,097 $2,903,391
Investment securities (1)............. 176,936 71,044 327,283 18,904 594,167
Interest-bearing cash equivalents..... 37,990 135 770 53 38,948
---------- --------- ---------- --------- ----------
Total interest-earning assets...... 1,535,912 451,690 1,352,850 196,054 3,536,506
---------- --------- ---------- --------- ----------
Interest-bearing liabilities:
Deposits.............................. 1,723,932 217,268 307,101 513,130 2,761,431
Borrowings............................ 48,707 24 22,120 22,908 93,759
---------- --------- ---------- --------- ----------
Total interest-bearing liabilities. 1,772,639 217,292 329,221 536,038 2,855,190
---------- --------- ---------- --------- ----------
Net interest rate sensitivity gap..... $ (236,727) $ 234,398 $1,023,629 $(339,984) $ 681,316
========== ========= ========== ========= ==========
Cumulative gap at December 31, 2000... $ (236,727) $ (2,329) $1,021,300 $ 681,316
Cumulative gap at December 31, 1999... $ (373,632) $(135,211) $1,028,163 $ 697,699
- --------
(1) Amounts are based on amortized cost balances.
25
The following table shows scheduled maturities of selected loans at December
31, 2000:
One Year
Less Than To Five Over Five
One Year Years Years Total
--------- -------- --------- --------
(in thousands)
Predetermined rates:
Commercial.............................. $ 39,079 $ 96,133 $ 55,509 $190,721
Commercial real estate and construction. 44,205 214,821 176,834 435,860
--------- -------- --------- --------
83,284 310,954 232,343 626,581
========= ======== ========= ========
Floating or adjustable rates:
Commercial.............................. 147,803 99,941 77,462 325,206
Commercial real estate and construction. 72,974 164,877 107,329 345,180
--------- -------- --------- --------
$220,777 $264,818 $184,791 $670,386
========= ======== ========= ========
Results of Operations
Comparison of Years Ended December 31, 2000 and 1999
Net Interest Income
The primary source of recurring income for the Company is the net interest
income of the Banks, which is the difference between interest income on loans
and investments, and interest paid on deposits and borrowings. Net interest
income is affected by changes in interest rates and the volumes of interest
earning assets and interest bearing liabilities.
For 2000, net interest income was $167.1 million, down $8.4 million from the
1999 level. On a fully taxable equivalent basis, net interest income decreased
$8.5 million from 1999, to $169.5 million in 2000. These decreases resulted
from lower levels of interest earning assets, which were down $221.4 million
from 1999, to $3.587 billion for 2000. The decreased level of earning assets
offset an increase in the net yield on earning assets from 4.67% in 1999 to
4.73% in 2000. The increase in the net yield on earning assets was due to
higher yields in both the loan and investment portfolios.
26
The following table presents an analysis of average rates and yields on a
fully taxable equivalent basis for the years indicated:
2000 1999 1998
------------------------------- ------------------------------- -----------------------
Interest Average Interest Average Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/
Balance Expense (1) Rate(1) Balance Expense(1) Rate (1) Balance Expense (1)
---------- ----------- ------ ---------- ---------- ------- ---------- -----------
(in thousands)
Assets
Interest-earning assets:
Loans............................ $2,943,018 $248,946 8.46% $2,877,218 $235,393 8.18% $2,739,617 238,785
Investments:
Taxable......................... 619,485 39,991 6.46 847,076 51,408 6.07 893,649 57,117
Tax-favored equity
securities..................... 8,379 519 6.19 41,108 2,319 5.64 49,978 3,233
Interest-bearing deposits in
banks.......................... 241 10 4.03 1,423 71 4.99 3,356 200
Federal funds sold............... 15,732 1,062 6.75 41,469 2,032 4.90 62,898 3,458
---------- ----------- ---------- ---------- ---------- -----------
Total interest-earning assets... 3,586,855 290,528 8.10 3,808,294 291,223 7.65 3,749,498 302,793
----------- ---------- -----------
Noninterest-earning assets......... 267,226 338,460 386,266
Allowance for possible loan
losses............................ (40,715) (42,257) (45,520)
---------- ---------- ----------
Total assets................... $3,813,366 $4,104,497 $4,090,244
========== ========== ==========
Interest-bearing liabilities:
Savings and interest-bearing
transactional accounts.......... $1,853,576 $ 63,304 3.42% $1,975,125 $ 57,875 2.93 $1,903,265 $ 61,969
Certificates of deposit under
$100,000 and other time
deposits........................ 621,826 31,383 5.05 795,361 40,018 5.03 856,290 45,638
Certificates of deposit $100,000
and over........................ 226,263 12,699 5.61 178,309 8,471 4.75 179,755 9,861
---------- ----------- ---------- ---------- ---------- -----------
Total interest-bearing
deposits....................... 2,701,665 107,386 3.97 2,948,795 106,364 3.61 2,939,310 117,648
Short-term borrowings............ 214,777 13,644 6.35 139,340 6,871 4.93 158,931 8,691
---------- ----------- ---------- ---------- ---------- -----------
Total interest-bearing
liabilities.................... 2,916,442 121,030 4.15 3,088,135 113,235 3.67 3,098,241 126,159
----------- ---------- -----------
Noninterest-bearing liabilities:
Demand deposits.................... 506,192 579,631 555,635
Other liabilities.................. 49,651 62,989 56,753
---------- ---------- ----------
Total liabilities............... 3,472,285 3,730,755 3,710,629
Stockholders' equity............... 341,081 373,742 379,615
---------- ---------- ----------
Total liabilities and
stockholders' equity........ $3,813,366 $4,104,497 $4,090,244
========== ========== ==========
Net interest income................ $169,498 $177,988 $176,634
=========== ========== ===========
Interest rate spread (2)........... 3.95% 3.98%
Net yield on earning assets (3).... 4.73% 4.67%
Average
Yield/
Rate (1)
-------
Assets
Interest-earning assets:
Loans............................ 8.72%
Investments:
Taxable......................... 6.39
Tax-favored equity
securities..................... 6.47
Interest-bearing deposits in
banks.......................... 5.96
Federal funds sold............... 5.50
Total interest-earning assets... 8.08
Noninterest-earning assets.........
Allowance for possible loan
losses............................
Total assets...................
Interest-bearing liabilities:
Savings and interest-bearing
transactional accounts.......... 3.26
Certificates of deposit under
$100,000 and other time
deposits........................ 5.33
Certificates of deposit $100,000
and over........................ 5.49
Total interest-bearing
deposits....................... 4.00
Short-term borrowings............ 5.47
Total interest-bearing
liabilities.................... 4.07
Noninterest-bearing liabilities:
Demand deposits....................
Other liabilities..................
Total liabilities...............
Stockholders' equity...............
Total liabilities and
stockholders' equity........
Net interest income................
Interest rate spread (2)........... 4.01%
Net yield on earning assets (3).... 4.71%
- --------
(1) On a fully taxable equivalent basis. Calculated using a Federal income tax
rate of 35%. Loan income includes fees.
(2) Interest rate spread is the average rate earned on total interest-earning
assets less the average rate paid on interest-bearing liabilities.
(3) Net yield on earning assets is net interest income divided by total
interest-earning assets.
27
The following table attributes changes in the Company's net interest income
(on a fully taxable equivalent basis) to changes in either average balances or
average rates. Changes due to both interest rate and volume have been allocated
to change due to balance and change due to rate in proportion to the
relationship of the absolute dollar amounts of the change in each.
2000 Compared With 1999 1999 Compared With 1998
------------------------------ ------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in: Due to Change in:
------------------- Total ------------------- Total
Average Average Increase Average Average Increase
Rate Balance (Decrease) Rate Balance (Decrease)
-------- -------- --------- -------- ------- ---------
(in thousands)
Interest income:
Loans...................................... $ 7,987 $ 5,566 $ 13,553 $(14,731) $11,339 $ (3,392)
Investments:
Taxable.................................. 3,275 (14,692) (11,417) (2,883) (2,826) (5,709)
Tax-favored debt securities.............. 227 (2,027) (1,800) (414) (500) (914)
Interest-bearing deposits in banks......... (12) (49) (61) (33) (96) (129)
Federal funds sold......................... 767 (1,737) (970) (376) (1,050) (1,426)
-------- -------- --------- -------- ------- ---------
Total interest income................. 12,244 (12,939) (695) (18,437) 6,867 (11,570)
-------- -------- --------- -------- ------- ---------
Interest expense:
Savings and interest-bearing transactional
accounts.................................. (9,580) 4,151 (5,429) 6,200 (2,106) 4,094
Certificates of deposit under $100,000 and
other time deposits....................... (123) 8,758 8,635 2,554 3,066 5,620
Certificates of deposit $100,000 and over.. (1,537) (2,691) (4,228) 1,321 69 1,390
-------- -------- --------- -------- ------- ---------
Total deposits........................... (11,240) 10,218 (1,022) 10,075 1,029 11,104
Short-term borrowings...................... (1,982) (4,791) (6,773) 854 966 1,820
-------- -------- --------- -------- ------- ---------
Total interest expense................ (13,222) 5,427 (7,795) 10,929 1,995 12,924
-------- -------- --------- -------- ------- ---------
Change in net interest income................ (978) (7,512) (8,490) $ (7,508) $ 8,862 $ 1,354
======== ======== ========= ======== ======= =========
Noninterest Income and Noninterest Expense
Noninterest income was $54.8 million in 2000, down $8.6 million from the
$63.4 million reported in 1999. The decline was primarily attributable to lower
service charges on deposit accounts, which declined $4.5 million from the $18.3
million reported in 1999. The decline in noninterest income is also
attributable to lower gains on sales of mortgage loans, which decreased $2.4
million to $3.0 million, compared to gains of $5.4 million in 1999. This was a
result of the decrease in the volume of loans sold from $386.1 million in 1999
to $179.6 million in 2000.
Noninterest expense, including special charges of $833,000, totaled $126.5
million in 2000, compared to $203.6 million in 1999. Excluding special charges,
noninterest expenses were $19.5 million lower in 2000 than in 1999. Salaries
decreased $6.3 million from $61.7 million in 1999. This was primarily
attributable to lower staffing levels after the merger with VFSC and to the
divestiture of seventeen VNB branches between September and November 1999.
Employee benefits were down $4.0 million from 1999, partially as a result of
the staff reductions, as well as to a $1.3 million gain recognized in pension
expense upon the merger of the CTC and VNB pension plans in 2000. In addition,
pension expense for 2000 was a credit of $614,000. Occupancy expenses decreased
$5.2 million from 1999 due to lower levels of depreciation expense resulting
from the write-off of duplicative fixed assets and the elimination of occupancy
expenses relating to the divested branches. Finally, amortization of intangible
assets was $1.9 million lower than in 1999 due to the write off of goodwill
recorded by VFSC relative to the Eastern acquisition. Upon the effective date
of the Chittenden-VFSC merger, impaired goodwill totaling $21.1 million related
to former Eastern locations in markets already occupied by Chittenden was
written off. In addition, $25.7 million of goodwill allocated to the branches
sold was recovered. The Company also charged $1 million to other noninterest
expense in 2000 for additional reserves of the residual
28
value on auto leases. The Company carries insurance which covers any shortfall
between the projected residual value of the vehicle and the published wholesale
value of the vehicle at lease end. The Company's reserves cover any shortfall
between the published wholesale value and the actual sale price, if lower, at
lease end.
Other noninterest expense for 2000 totaled $42.7 million, down from $44.9
million in 1999. The components of other noninterest expense for the years
presented are as follows:
2000 1999 1998 1997
------- ------- ------- -------
(in thousands)
Data processing................. $11,160 $10,618 $ 7,366 $ 7,671
Legal and professional.......... 1,522 2,216 4,234 2,562
Marketing....................... 2,749 3,143 3,608 3,249
Software and Supplies........... 4,722 4,755 4,641 4,320
Net OREO and collection expenses 47 (147) 472 1,019
Telephone....................... 3,118 3,979 4,133 3,103
Postage......................... 2,553 3,147 3,112 2,565
Other........................... 16,873 17,155 18,463 18,461
------- ------- ------- -------
$42,744 $44,866 $46,029 $42,950
------- -------- ------- -------
------- -------- ------- -------
Income Taxes
The Company and the Banks are taxed on income by the IRS at the Federal
level and by various states in which they do business. The majority of the
Company's income is generated in the State of Vermont, which levies franchise
taxes on banking institutions based upon average deposit levels in lieu of
taxing income. Franchise taxes are included in income tax expense in the
consolidated statements of operations.
For the years ended December 31, 2000 and 1999, Federal and state income tax
provisions amounted to $28.0 million and $29.1 million, respectively. The
provision for 2000 includes a $1.5 million tax benefit recorded in the fourth
quarter reflecting the reconciliation of the 1999 income tax provision to the
1999 tax returns filed in 2000. The provision for 1999 includes a $14.4 million
tax benefit associated with the tax-deductible portion of the merger related
one-time charge, and a $13.4 million provision related to the branch gains
recognized upon the sale of divested branches. Excluding the effect of the
special provision and benefit, the effective tax rates for the respective
periods were 34.2% and 35.4%. During both periods, the Company's statutory
Federal corporate tax rate was 35%. The Company's effective tax rates differed
from the statutory rates primarily because of non-tax-deductible amortization
of goodwill related to VFSC's acquisition of Eastern Bancorp. The higher
effective rate produced by these nondeductible expenses was reduced by 1) the
proportion of interest income from state and municipal securities and loans and
corporate dividend income, which are partially exempt from Federal taxation and
2) tax credits on investments in qualified low income housing projects. The
reduction in the Company's effective tax rate from 1999 to 2000 reflects lower
levels of non-tax deductible goodwill resulting from the impaired goodwill
written off in the second quarter of 1999 upon the consummation of the merger
of Chittenden and VFSC and to the goodwill recovered in relation to the branch
sales in the fourth quarter, as well as the $1.5 million tax benefit reflecting
the reconciliation of the 1999 income tax provision to the 1999 tax returns
filed in 2000.
As noted above, the Company recorded $58.5 million in special charges in
1999, which included $49.9 million of merger related expenses and $21.1 million
related to the write-off of impaired goodwill, offset by a $12.5 million gain
recorded on sales of branches. No tax benefit was recorded in relation to the
goodwill reductions since that expense is not tax deductible. Tax benefits were
recognized at the Company's marginal federal tax rate of 35% in relation to all
deductible merger related expenses including severance and related expenses,
conversion of systems, and dispositions of duplicative assets.
29
Results of Operations
Comparison of Years Ended December 31, 1999 and 1998
Net Interest Income
For 1999, net interest income was $175.5 million, compared with $173.2
million for 1998. On a fully taxable equivalent basis, net interest income
increased $1.4 million from 1998 to $178.0 million in 1999. Average
interest-earning assets totaled $3.808 billion for 1999, up $58.8 million from
the 1998 level. The taxable equivalent net yield on earning assets was 4.67% in
1999, a decrease of 4 basis points from 4.71% in 1998. The decrease in the net
yield on earning assets was due to lower yields in both the loan and investment
portfolios.
Noninterest Income and Noninterest Expense
Noninterest income was $63.4 million in 1999, down $3.4 million from the
$66.8 million reported in 1998. The decline was primarily attributable to lower
gains on sales of mortgage loans, which decreased $2.6 million to $5.4 million,
compared to gains of $8.0 million in 1998. Investment management income was up
$1.4 million from the 1998 level, to $14.3 million, due to the effects of an
increase in the number of investment management clients served and higher
levels of administered assets, which were enhanced by the impact of advances in
the stock market during the year. Service charges on deposit accounts declined
$2.3 million from the previous year to $18.3 million in 1999. This was caused
primarily by lower levels of overdraft charges related to the no fee checking
product acquired by VFSC in the Eastern acquisition.
Noninterest expense, including special charges of $58.5 million, totaled
$203.6 million in 1999, up $51.4 million from the 1998 level. Excluding special
charges, noninterest expenses were $7.1 million lower in 1999 than in 1998.
Salaries decreased $1.7 million to $61.7 million in 1999. Occupancy expenses
decreased $2.4 million from 1998 due to lower levels of depreciation expense
resulting from the write-off of duplicative fixed assets and the elimination of
occupancy expenses relating to the divested branches. Finally, amortization of
intangible assets was $1.9 million lower than in 1998 due to the write-off of
goodwill recorded by VFSC relative to the Eastern acquistion. Upon the
effective date of the Chittenden-VFSC merger, impaired goodwill totaling $21.1
million related to former Eastern locations in markets already occupied by
Chittenden was written off. In addition, $25.7 million of goodwill allocated to
the branches sold was recovered.
Income Taxes
For 1999, the Federal and state income tax provisions amounted to $29.1
million. This compares with an income tax provision of $29.8 million for 1998.
The effective tax rates for 1999 and 1998 were 35.4% and 37.5%, respectively.
During 1999 and 1998, the Company's statutory Federal corporate tax rate was
35%. The Company's effective tax rates differed from the statutory rates
primarily because of non tax-deductible amortization of goodwill related to
VFSC's acquisition of Eastern Bancorp. The higher effective rate produced by
these nondeductible expenses was partially reduced by 1) the proportion of
interest income from state and municipal securities and loans and corporate
dividend income, which are partially exempt from Federal taxation and 2) tax
credits on investments in qualified low income housing projects. The reduction
in the Company's effective tax rate from 1998 to 1999 reflects lower levels of
non-tax deductible goodwill resulting from the impaired goodwill written off in
the second quarter of 1999 upon the consummation of the merger of Chittenden
and VFSC and to the goodwill recovered in relation to the branch sales in the
fourth quarter.
30
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHITTENDEN CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------
2000 1999
---------- ----------
(in thousands)
Assets
Cash and cash equivalents................................................. $ 178,621 $ 151,764
Securities available for sale............................................. 585,281 649,471
FHLB and FRB stock........................................................ 12,311 16,879
Loans held for sale....................................................... 44,950 2,926
Loans..................................................................... 2,856,098 2,904,809
Less: Allowance for possible loan losses.................................. (40,255) (41,079)
---------- ----------
Net loans.............................................................. 2,815,843 2,863,730
Accrued interest receivable............................................... 25,642 25,226
Other real estate owned................................................... 513 416
Other assets.............................................................. 39,020 58,342
Premises and equipment, net............................................... 51,959 41,052
Intangible assets......................................................... 15,721 18,490
---------- ----------
Total assets........................................................... $3,769,861 $3,828,296
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Demand................................................................. $ 530,975 $ 533,607
Savings................................................................ 1,934,227 1,807,843
Certificates of deposit less than $100,000 and other time deposits..... 615,336 649,051
Certificates of deposit $100,000 and over.............................. 211,869 215,084
---------- ----------
Total deposits..................................................... 3,292,407 3,205,585
Short-term borrowings..................................................... 93,757 196,923
Accrued expenses and other liabilities.................................... 41,631 63,328
---------- ----------
Total liabilities.................................................. 3,427,795 3,465,836
Stockholders' Equity:
Preferred stock--$100 par value--authorized: 200,000 shares--issued and
outstanding: none....................................................... -- --
Common stock--$1 par value--authorized: 60,000,000 shares--issued and
outstanding: 28,589,428 in 2000 and 28,380,040 in 1999.................. 28,589 28,380
Surplus................................................................... 153,474 149,502
Retained earnings......................................................... 222,140 189,344
Treasury stock, at cost--2,492,344 shares in 2000 and 1,808 shares in 1999 (65,637) (24)
Accumulated other comprehensive income.................................... 164 (7,018)
Directors deferred compensation to be settled in stock.................... 3,414 2,449
Unearned portion of employee restricted stock............................. (78) (173)
---------- ----------
Total stockholders' equity......................................... 342,066 362,460
---------- ----------
Total liabilities and stockholders' equity......................... $3,769,861 $3,828,296
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
31
CHITTENDEN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
----------------------------------------
2000 1999 1998
-------- -------- --------
(in thousands, except per share amounts)
Interest Income:
Interest on loans............................................ $246,683 $233,580 $236,783
Interest on investment securities:...........................
Taxable.................................................. 39,991 51,158 57,167
Tax-favored.............................................. 356 1,896 1,868
Short-term investments....................................... 1,072 2,103 3,658
-------- -------- --------
Total interest income................................. 288,102 288,737 299,476
-------- -------- --------
Interest Expense:
Deposits:....................................................
Savings.................................................. 63,304 57,875 61,969
Time..................................................... 44,082 48,489 55,499
-------- -------- --------
Total interest on deposits............................ 107,386 106,364 117,468
Short-term borrowings........................................ 13,644 6,888 8,731
-------- -------- --------
Total interest expense................................ 121,030 113,252 126,199
-------- -------- --------
Net interest income............................................. 167,072 175,485 173,277
Provision for possible loan losses.............................. 8,700 8,700 8,235
-------- -------- --------
Net interest income after provision for possible loan losses.... 158,372 166,785 165,042
-------- -------- --------
Noninterest Income:
Investment management income................................. 13,817 14,290 12,913
Service charges on deposit accounts.......................... 13,875 18,330 20,556
Mortgage servicing income.................................... 4,079 3,589 3,274
Gains on sales of mortgage loans, net........................ 2,992 5,361 7,976
Credit card income, net...................................... 5,349 5,545 5,403
Insurance commissions, net................................... 2,894 2,538 2,878
Other........................................................ 11,804 13,750 13,780
-------- -------- --------
Total noninterest income.............................. 54,810 63,403 66,780
-------- -------- --------
Noninterest Expense:
Salaries..................................................... 55,447 61,732 63,387
Employee benefits............................................ 9,124 13,138 13,102
Net occupancy expense........................................ 16,213 21,379 23,791
Amortization of intangibles.................................. 2,101 4,022 5,895
Special charges.............................................. 833 58,472 --
Other........................................................ 42,744 44,866 46,029
-------- -------- --------
Total noninterest expense............................. 126,462 203,609 152,204
-------- -------- --------
Income before income taxes...................................... 86,720 26,579 79,618
Income tax expense.............................................. 28,033 29,075 29,840
-------- -------- --------
Net income (loss)............................................... $ 58,687 $ (2,496) $ 49,778
======== ======== ========
Basic earnings (loss) per share................................. $ 2.17 $ (0.09) $ 1.76
Diluted earnings (loss) per share............................... 2.15 (0.09) 1.73
Dividends per share............................................. 0.94 0.81 0.69
Weighted average common shares outstanding...................... 27,008 28,172 28,323
Weighted average common and common equivalent shares outstanding 27,280 28,636 28,830
The accompanying notes are an integral part of these consolidated financial
statements.
32
CHITTENDEN CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
Years Ended December 31, 2000, 1999, 1998
(In thousands)
Unearned
Accumulated Director's Portion of
Comp- Other Comp- Deferred Employee
rehensive Common Retained Treasury rehensive Comp. Restricted
Income Stock Surplus Earnings Stock Income Stock Stock
-------- ------- -------- -------- -------- ---------- ---------- ---------
Balance at December 31, 1997................ $30,100 $188,323 $184,115 $(30,084) $ 3,827 $1,777 $(412)
Comprehensive Income:
Net income (loss)........................... $ 49,778 -- -- 49,778 -- -- -- --
Total Other Comprehensive
Income (Note 8)......................... 2,635 -- -- -- -- 2,635 -- --
--------
Total Comprehensive Income............... $ 52,413
========
Cash dividends declared ($0.69 per share)... -- -- (19,564) -- -- -- --
Shares issued/forfeited under various stock
plans, net................................. 54 201 -- 2,993 -- -- 42
Amortization of deferred compensation for
restricted stock earned.................... -- -- -- -- -- -- 104
Directors deferred compensation............. -- -- -- -- -- 325 --
Purchase of treasury stock.................. -- -- -- (22,559) -- -- --
Cost associated with listing on NYSE,
net of tax................................. -- (93) -- -- -- -- --
------- -------- -------- -------- ---------- ---------- ---------
Balance at December 31, 1998................ 30,154 188,431 214,329 (49,650) 6,462 2,102 (266)
Comprehensive Income:
Net income (loss)........................... $ (2,496) -- -- (2,496) -- -- -- --
Total Other Comprehensive
Income (Note 8)......................... (13,480) -- -- -- -- (13,480) -- --
--------
Total Comprehensive Income............... $(15,976)
========
Cash dividends declared ($0.81 per share)... -- -- (22,815) -- -- -- --
Shares issued/forfeited under various stock
plans, net................................. 187 2,523 326 6,250 -- -- --
Amortization of deferred compensation for
restricted stock earned.................... -- -- -- -- -- -- 93
Directors deferred compensation............. -- -- -- -- -- 347 --
Cash paid for fractional shares............. -- (37) -- -- -- -- --
Treasury stock retired in connection
with acquisition of VFSC................... (1,961) (41,415) -- 43,376 -- -- --
------- -------- -------- -------- ---------- ---------- ---------
Balance at December 31, 1999................ 28,380 149,502 189,344 (24) (7,018) 2,449 (173)
Comprehensive Income:
Net income (loss)........................ $ 58,687 -- -- 58,687 -- -- -- --
Total Other Comprehensive
Income (Note 8)......................... 7,182 -- -- -- -- 7,182 -- --
--------
Total Comprehensive Income............... $ 65,869
========
Cash dividends declared ($0.94 per share)... -- -- (25,484) -- -- -- --
Shares issued /forfeited under various stock
plans, net................................. 209 3,972 (407) 865 -- -- --
Amortization of deferred compensation for
restricted stock earned.................... -- -- -- -- -- -- 95
Directors deferred compensation............. -- -- -- -- -- 965 --
Purchase of treasury stock.................. -- -- -- (66,478) -- -- --
------- -------- -------- -------- ---------- ---------- ---------
Balance at December 31, 2000................ $28,589 $153,474 $222,140 $(65,637) $ 164 $3,414 $ (78)
======= ======== ======== ======== ========== ========== =========
Total
Stock-
holders'
Equity
--------
Balance at December 31, 1997................ $377,646
Comprehensive Income:
Net income (loss)........................... 49,778
Total Other Comprehensive
Income (Note 8)......................... 2,635
Total Comprehensive Income...............
Cash dividends declared ($0.69 per share)... (19,564)
Shares issued/forfeited under various stock
plans, net................................. 3,290
Amortization of deferred compensation for
restricted stock earned.................... 104
Directors deferred compensation............. 325
Purchase of treasury stock.................. (22,559)
Cost associated with listing on NYSE,
net of tax................................. (93)
--------
Balance at December 31, 1998................ 391,562
Comprehensive Income:
Net income (loss)........................... (2,496)
Total Other Comprehensive
Income (Note 8)......................... (13,480)
Total Comprehensive Income...............
Cash dividends declared ($0.81 per share)... (22,815)
Shares issued/forfeited under various stock
plans, net................................. 9,286
Amortization of deferred compensation for
restricted stock earned.................... 93
Directors deferred compensation............. 347
Cash paid for fractional shares............. (37)
Treasury stock retired in connection
with acquisition of VFSC................... --
--------
Balance at December 31, 1999................ 362,460
Comprehensive Income:
Net income (loss)........................ 58,687
Total Other Comprehensive
Income (Note 8)......................... 7,182
Total Comprehensive Income...............
Cash dividends declared ($0.94 per share)... (25,484)
Shares issued /forfeited under various stock
plans, net................................. 4,639
Amortization of deferred compensation for
restricted stock earned.................... 95
Directors deferred compensation............. 965
Purchase of treasury stock.................. (66,478)
--------
Balance at December 31, 2000................ $342,066
========
The accompanying notes are an integral part of these consolidated financial
statements.
33
CHITTENDEN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------------
2000 1999 1998
--------- --------- ---------
(in thousands)
Cash Flows from Operating Activities:
Net income (loss).......................................................................... $ 58,687 $ (2,496) $ 49,778
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for possible loan losses...................................................... 8,700 8,700 8,235
Depreciation............................................................................ 5,296 8,780 10,797
Amortization of intangible assets....................................................... 2,101 4,022 5,895
Amortization (accretion) of premiums, fees, and discounts, net.......................... 1,461 (1,696) 3,473
Merger related expenses................................................................. -- 49,866 --
Write-off of impaired intangible assets................................................. -- 21,129 --
Loss (gain) on branch sales............................................................. 833 (12,524) --
Investment securities (gains) losses.................................................... 393 -- (785)
Deferred (prepaid) income taxes......................................................... 15,168 (8,895) (543)
Loans originated and purchased for sale................................................. (182,600) (330,832) (695,778)
Proceeds from sales of loans............................................................ 182,597 386,951 679,275
Gains on sales of loans................................................................. (2,992) (5,361) (7,976)
Changes in assets and liabilities:
Accrued interest receivable............................................................. (416) 2,011 1,964
Other assets............................................................................ 3,826 3,611 19,760
Accrued expenses and other liabilities.................................................. (22,346) (4,173) 490
--------- --------- ---------
Net cash provided by operating activities............................................ 70,708 119,093 74,585
--------- --------- ---------
Cash Flows from Investing Activities:
Net cash used in branch divestiture........................................................ (22,195) (265,142) --
Proceeds from sale of Federal Home Loan Bank stock......................................... 6,065 5,100 --
Proceeds from sales of securities available for sale....................................... 156,305 109,394 52,984
Proceeds from maturing securities and principal payments on securities available for sale.. 269,339 922,556 636,831
Purchases of securities available for sale................................................. (352,669) (711,153) (815,700)
Loans originated, net of principal repayments.............................................. (6,468) (301,512) (59,493)
Purchases of premises and equipment........................................................ (16,702) (9,715) (10,636)
--------- --------- ---------
Net cash provided by (used in) investing activities.................................. 33,675 (250,472) (196,014)
--------- --------- ---------
Cash Flows from Financing Activities:
Net increase (decrease) in deposits........................................................ 113,888 (32,493) 240,552
Net increase (decrease) in short-term borrowings........................................... (103,166) 61,010 (64,930)
Cash paid to list on New York Stock Exchange, net of taxes................................. -- -- (93)
Cash paid for fractional shares............................................................ -- (37) --
Proceeds from issuance of treasury and common stock........................................ 3,714 9,479 2,491
Dividends on common stock.................................................................. (25,484) (22,815) (19,564)
Repurchase of common stock................................................................. (66,478) -- (22,559)
--------- --------- ---------
Net cash provided by (used in) financing activities.................................. (77,526) 15,144 135,897
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.......................................... 26,857 (116,235) 14,468
Cash and cash equivalents at beginning of year................................................ 151,764 267,999 253,531
--------- --------- ---------
Cash and cash equivalents at end of year...................................................... $ 178,621 $ 151,764 $ 267,999
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest................................................................................ $ 120,267 $ 114,340 $ 120,174
Income taxes............................................................................ 24,816 18,160 18,197
Non-cash investing and financing activities:
Securities transferred from held for investment to available for sale................... -- -- 1,124
Portfolio loans transferred to loans held for sale...................................... 39,029 -- --
Loans transferred to other real estate owned............................................ 2,026 1,066 2,551
Issuance of treasury and restricted stock............................................... 70 52 --
The accompanying notes are an integral part of these consolidated financial
statements.
34
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary Of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Chittenden Corporation (the "Company") and its subsidiaries: Chittenden Trust
Company (CTC), and its subsidiaries The Pomerleau Agency (Pomerleau) and
Chittenden Securities, Inc. (CSI); The Bank of Western Massachusetts (BWM);
Flagship Bank & Trust Company (FBT); and Chittenden Connecticut Corporation
(CCC). (CTC, BWM, and FBT are collectively referred to as the "Banks.") All
material intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made to prior year balances
to conform with the current year presentation. All applicable prior-period
amounts included in these financial statements have been restated to reflect
the May 28, 1999 acquisition of Vermont Financial Services Corp. (VFSC) in a
transaction accounted for as a pooling of interests. Refer to Note 2 for a
further discussion of this acquisition.
Nature of Operations
CTC operates fifty-three branches throughout the state of Vermont, two
branches in New Hampshire and ten branches in New Hampshire under the trade
name "First Savings of New Hampshire"; BWM operates twelve branches in the
western Massachusetts area and FBT operates seven branches in the greater
Worcester, Massachusetts area. The Banks' primary business is providing loans,
deposits, and other banking services to commercial, individual, and public
sector customers. CCC is a mortgage banking operation with offices in
Brattleboro, Vermont, and Lexington, Massachusetts. The Pomerleau Agency is an
independent insurance agency with offices in Waterbury and Burlington, Vermont.
Chittenden Securities, Inc. is a registered broker/ dealer providing brokerage
services to its customers through existing branch locations located in Vermont,
Massachusetts, and New Hampshire.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant changes in the near
term relate to the determination of the allowance for loan losses, the
valuation of foreclosed real estate, and deferred tax assets.
Securities
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.
Securities transferred between categories are accounted for at market value.
Unrealized holding gains and losses on trading securities are included in
earnings; unrealized holding gains and losses on securities available for sale
or on securities transferred into the available for sale category from the held
for investment category are reported as a separate component of stockholders'
equity, net of applicable income taxes. Unrealized losses, which are considered
other than temporary in nature, are recognized in earnings.
35
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Loans
Loans are stated at the amount of unpaid principal, net of unearned
discounts, unearned net loan origination fees and net any government agency
guarantees. Such fees and discounts are accreted using methods that approximate
the effective-interest method.
Interest on loans is included in income as earned based upon interest rates
applied to unpaid principal. Interest is not accrued on loans 90 days or more
past due unless they are adequately secured and in the process of collection,
or on other loans when management believes collection is doubtful. All loans
considered impaired (except troubled debt restructurings), as defined below,
are nonaccruing. Interest on nonaccruing loans is recognized as payments are
received when the ultimate collectibility of interest is no longer considered
doubtful. When a loan is placed on nonaccrual status, all interest previously
accrued is reversed against current-period interest income.
Allowance for Possible Loan Losses
A loan is impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement. Impaired loans are measured based
on the present value of the expected future cash flows discounted at the loan's
effective interest rate. In the case of collateral dependent loans, impairment
may be measured based on the fair value of the collateral. When the measure of
the impaired loan is less than the recorded investment in the loan, the
impairment is recorded through a valuation allowance.
The allowance for possible loan losses is based on management's estimate of
the amount required to reflect the inherent losses in the loan portfolio, based
on circumstances and conditions known or anticipated at each reporting date.
There are inherent uncertainties with respect to the collectibility of the
Banks' loans. Because of these inherent uncertainties, it is reasonably
possible that actual losses experienced in the near term may differ 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 collectibility 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 Banks' lending areas.
Loan Origination and Commitment Fees
Loan origination and commitment fees, and certain loan origination costs,
are deferred and amortized over the contractual term 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 $6,096,000 and $4,889,000 at December 31, 2000
and 1999, respectively.
Mortgage Servicing Rights
Servicing assets are recognized as separate assets when rights are acquired
through purchase or through sale of financial assets. Capitalized servicing
rights are reported in other assets and are amortized into noninterest
36
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
income in proportion to, and over the period of, the estimated future net
servicing income of the underlying financial assets. Servicing assets are
evaluated for impairment based upon the fair value of the rights as compared to
amortized cost. Impairment is determined by stratifying rights by predominant
characteristics, such as interest rates and terms. Fair value is determined
using prices for similar assets with similar characteristics, when available,
or based upon discounted cash flows using market-based assumptions.
Impairment is recognized through a valuation allowance for an individual
stratum, to the extent that fair value is less than the capitalized amount for
the stratum.
Loans Held for Sale
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. Net operating income or expense related to OREO is included in
noninterest expense in the accompanying consolidated statements of operations.
Intangible Assets
Intangible assets include the excess of the purchase price over the fair
value of net assets acquired (goodwill) in the acquisitions of Eastern Bancorp,
BWM and Pomerleau, as well as a core deposit intangible related to BWM and the
acquisition of certain trust business by VNB. Goodwill is being amortized on a
straight-line basis over 15 years. The core deposit intangible is being
amortized on an accelerated basis over 10 years. The Company periodically
evaluates intangible assets for impairment on the basis of whether these assets
are fully recoverable from projected, undiscounted net cash flows of the
related acquired entity.
Income Taxes
The Company accounts for income taxes in accordance with 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 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.
Earnings Per Share
The calculation of basic earnings per share is based on the weighted average
number of shares of common stock outstanding during the period. Diluted
earnings per share is based on the weighted average number of
37
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 plans and shares to be issued under the Company's Directors' Deferred
Compensation Plan.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, amounts due from banks,
interest-bearing deposits and certain money market fund investments. Cash
equivalents are accounted for at cost, which approximates fair value.
Trust
Trust administered assets of approximately $5.2 billion and $4.8 billion at
December 31, 2000 and 1999, respectively, held by the Banks in a fiduciary or
agency capacity for customers, are not included in the accompanying
consolidated balance sheets as they are not assets of the Company. Trust income
is recorded on the cash basis (which approximates the accrual basis) in
accordance with industry practice.
Credit Card Income
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 commercial customers. Credit card income is presented net of credit
card expense, which includes fees paid by the Company to credit card issuers
and third-party processors. Such amounts are recognized on the accrual basis,
and are presented in the noninterest income section of the statement of
operations.
On January 11, 2001, the Company entered into an agreement to sell its
retail credit card portfolio, which totaled $39.0 million at December 31, 2000.
Accordingly, the retail credit card portfolio is included in loans held for
sale as of December 31, 2000 on the accompanying balance sheets.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, encourages but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. Accordingly, compensation cost for stock options is measured
as the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock.
The Company has provided Pro Forma disclosures of net income and earnings per
share and other disclosures, as if the fair value based method had been
applied. The Pro Forma disclosures include effects of all awards granted on or
after January 1, 1995. (See Note 9)
Pensions
Effective January 1, 1998, The Company adopted SFAS No. 132, Employers
Disclosures about Pensions and Other Postretirement Benefits--an amendment to
FASB Statements No. 87, 88, and 106. This statement revises employer's
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans but standardizes the
disclosure requirements. The adoption of SFAS 132 did not have a material
effect on the Company's financial position or results of operations, but did
affect the disclosure of employee benefits expenses presented in Note 10.
38
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recently Adopted Accounting Policies
Effective January 1, 1999, the Company adopted SFAS No. 134, Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise. This statement requires that
after the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities
or other retained interests based on its ability and intent to sell or hold
those investments. SFAS No. 134 did not have a material impact on the Company's
financial position or results of operations.
Effective January 1, 1999, the Company adopted Statement of Position (SOP)
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP 98-1 requires computer software costs associated with
internal-use software to be expensed as incurred until certain capitalization
criteria are met. The adoption of SOP 98-1 did not have a material effect on
the Company's financial position or its results of operations.
Reclassifications
Certain amounts in the 2000 and 1999 financial statements have been
reclassified to be consistent with current year presentation.
Note 2 Acquisitions And Divestitures
Vermont Financial Services Corporation
On May 28, 1999, the Company acquired Vermont Financial Services Corp. of
Brattleboro, Vermont for stock. VFSC's subsidiary banks included Vermont
National Bank, headquartered in Brattleboro, Vermont and United Bank,
headquartered in Greenfield, Massachusetts. Under the agreement, VFSC
shareholders received 1.07 shares of Chittenden Corporation common stock for
each share of VFSC stock. Total shares outstanding of Chittenden Corporation
stock increased by approximately 14 million shares as a result of the
acquisition. Based on the closing price of Chittenden stock as of May 28, 1999,
the market value of the shares exchanged totaled $387.2 million. The
acquisition was accounted for as a pooling of interests. Accordingly, the
consolidated financial statements for the periods presented have been restated
to include VFSC.
Total revenue, income before taxes, net income, and earnings per share data
of the separate companies for the periods preceding the acquisition were:
For the Three Months For the Year
Ended March 31, 1999 Ended December 31, 1998
---------------------------- -----------------------------
Chittenden Chittenden
Corporation VFSC Combined Corporation VFSC Combined
----------- ------- -------- ----------- -------- --------
Total Revenue............. $30,673 $28,422 $59,095 $123,405 $116,652 $240,057
Income before Income taxes 11,072 7,722 18,794 46,538 33,080 79,618
Net Income................ 7,495 4,424 11,919 30,665 19,113 49,778
Diluted Earnings Per Share $ 0.52 $ 0.34 $ 0.42 $ 2.09 $ 1.45 $ 1.73
Special charges of $58.5 million (pre-tax) were recorded during 1999 related
to the VFSC transaction. These charges included merger related expenses of
$49.9 million, and $21.1 million related to the write-off of impaired goodwill,
less a net gain of $12.5 million from branch sales (see below). The merger
related expenses included asset disposal write-downs of $23.9 million, and
conversion, severance and transaction costs, such as legal, advisory and
accounting fees which totaled $26.0 million. The impaired goodwill, which
related to VFSC's purchase of Eastern Bancorp, was written-off as a result of
divestitures required by the U.S. Department of Justice and the Federal
Reserve. On an after-tax basis, special charges amounted to $57.4 million in
1999. Included in accrued expenses and other liabilities at December 31, 2000,
are merger related expenses totaling $1.2 million which will be paid in future
periods.
39
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The change in accrued merger related expenses at December 31, 2000 is
summarized below:
Accrual Balance Accrual Balance
as of Less: as of
December 31, 1999 Cash Transactions December 31, 2000
----------------- ----------------- -----------------
Compensation and Benefits $6,730 $5,512 $1,218
System Conversion........ 1,664 1,664 --
Other.................... 1,244 1,244 --
----------------- ----------------- -----------------
Total................. $9,638 $8,420 $1,218
================= ================= =================
As noted above, the Company recognized a net $12.5 million gain on branch
sales in 1999. One of the conditions of regulatory approval of the VFSC
transaction was the divestiture of eighteen VNB branches. Seventeen of the
required divestitures were completed in 1999. The final branch divestiture was
completed in the first quarter of 2000. Divested in the sale of the eighteen
branches were $131.5 million in loans, $469.2 million in deposits and $9.0
million in fixed assets. Total cash transferred to the buyers was $287.3
million. To fund the cash transferred, $92.1 million and $70.0 million in
securities available for sale were sold in 2000 and 1999, respectively, at a
losses of $688,000 and $1,148,000, which are netted in the $833,000 loss and
the $12.5 million gain on the branch sales in 2000 and 1999, respectively.
Note 3 Securities
Investment securities at December 31, 2000 and 1999 are as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- --------- --------
(in thousands)
2000
Securities Available for Sale:
U.S. Treasury securities......................... $ 4,696 $ 28 $ -- $ 4,724
U.S. government agency obligations............... 251,778 751 (703) 251,826
Obligations of states and political subdivisions. 6,133 19 (10) 6,142
Mortgage-backed securities....................... 152,377 1,048 (523) 152,902
Corporate bonds and notes........................ 163,948 627 (969) 163,606
Other debt securities............................ 833 -- -- 833
Marketable equity securities..................... 5,250 -- (2) 5,248
--------- ---------- --------- --------
Total securities available for sale................. $585,015 $2,473 ($ 2,207) $585,281
========= ========== ========= ========
1999
Securities Available for Sale:
U.S. Treasury securities......................... $ 18,946 $ 8 $ (12) $ 18,942
U.S. government agency obligations............... 235,326 70 (4,917) 230,479
Obligations of states and political subdivisions. 8,345 25 (73) 8,297
Mortgage-backed securities....................... 200,414 218 (3,036) 197,596
Corporate bonds and notes........................ 196,402 47 (3,241) 193,208
Other debt securities............................ 642 -- -- 642
Marketable equity securities..................... 274 40 (7) 307
--------- ---------- --------- --------
Total securities available for sale................. $660,349 $ 408 ($11,286) $649,471
========= ========== ========= ========
40
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Proceeds from sales of debt securities amounted to $156,305,000,
$109,394,000 and $52,984,000 in 2000, 1999, and 1998, respectively. Realized
losses on sales of debt securities were $469,000 and $96,000 in 2000 and 1998,
respectively. Realized losses in 2000 and 1999 of $688,000 and $1,148,000,
respectively, were netted against the gain on sale of branch divestitures,
since all sales were to fund cash transferred to the acquirers. Realized gains
on sales of debt securities were $76,000 and $881,000 in 2000 and 1998,
respectively.
The market value of 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 $258,539,000 and $316,303,000 at December
31, 2000 and 1999, respectively.
The following table shows the maturity distribution of the amortized cost of
the Company's investment securities at December 31, 2000, with comparative
totals for 1999. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations:
After One After Five
Within But Within But Within After No Fixed
One Year Five Years Ten Years Ten Years Maturity Total
-------- ---------- ---------- --------- -------- --------
(in thousands)
Investment Securities:
U.S. Treasury securities............ $ 2,700 $ 1,996 $ -- $ -- $ -- $ 4,696
U.S. government agency obligations.. 49,470 169,430 32,878 -- -- 251,778
Obligations of states and political
subdivisions...................... 1,482 4,524 60 67 -- 6,133
Mortgage-backed securities (1)...... 61,465 77,040 11,319 2,553 -- 152,377
Corporate bonds and notes........... 25,330 137,583 30 1,005 -- 163,948
Other debt securities............... 10 795 28 -- -- 833
Marketable equity securities........ 5,000 -- -- -- 250 5,250
-------- ---------- ---------- --------- -------- --------
Total investment securities............ $145,457 $391,368 $44,315 $3,625 $250 $585,015
======== ========== ========== ========= ======== ========
Comparative totals for 1999............ $ 90,665 $535,219 $31,760 $2,431 $274 $660,349
- --------
(1) Maturities of mortgage-backed securities are based on contractual payments
and estimated mortgage loan prepayments.
41
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table shows the maturity distribution of the fair value of the
Company's investment securities at December 31, 2000, with comparative totals
for 1999. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations:
After One After Five
Within But Within But Within After Ten No Fixed
One Year Five Years Ten Years Years Maturity Total
-------- ---------- ---------- --------- -------- --------
(in thousands)
Investment Securities:
U.S. Treasury securities............ $ 2,703 $ 2,021 $ -- $ -- $ -- $ 4,724
U.S. government agency obligations.. 49,500 169,262 33,064 -- -- 251,826
Obligations of states and political
subdivisions...................... 1,484 4,531 60 67 -- 6,142
Mortgage-backed securities (1)...... 61,676 77,306 11,358 2,562 -- 152,902
Corporate bonds and notes........... 25,265 137,316 30 995 -- 163,606
Other debt securities............... 10 795 28 -- -- 833
Marketable equity securities........ 5,000 -- -- -- 248 5,248
-------- ---------- ---------- --------- -------- --------
Total investment securities............ $145,638 $391,231 $44,540 $3,624 $248 $585,281
======== ========== ========== ========= ======== ========
Comparative totals for 1999............ $ 89,893 $525,753 $31,133 $2,385 $307 $649,471
- --------
(1) Maturities of mortgage-backed securities are based on contractual
repayments and estimated mortgage loan prepayments.
Note 4 Loans
Major classifications of loans at December 31, 2000 and 1999 are as follows:
2000 1999
---------- ----------
(in thousands)
Commercial........................ $ 599,492 $ 591,875
Real estate:
Residential.................... 884,024 917,505
Commercial..................... 723,339 641,494
Construction................... 57,701 55,448
----------- -----------
Total real estate.......... 1,665,064 1,614,447
Home equity....................... 140,150 149,347
Consumer.......................... 314,914 414,173
Lease financing................... 136,478 134,967
---------- ----------
Total gross loans.......... 2,856,098 2,904,809
Allowance for possible loan losses (40,255) (40,255)
Net loans......................... $2,815,843 $2,863,730
========== ==========
Loans held for sale............... $ 44,950 $ 2,926
========== ==========
Lease financing receivable includes the estimated residual value of leased
vehicles of approximately $86,771,000 and $84,745,000 at December 31, 2000 and
1999, respectively, and is net of unearned interest income of approximately
$21,643,000 and $21,826,000 at those dates.
42
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CTC's lending activities are conducted primarily in Vermont and New
Hampshire, with additional activity relating to nearby trading areas in Quebec,
New York, Maine, and Connecticut. BWM's lending activities are conducted
primarily in the western Massachusetts area while FBT's lending activities are
conducted primarily in the greater Worcester, Massachusetts area. The Banks
make single-family and multi-family residential loans, commercial real estate
loans, commercial loans, and a variety of consumer loans. In addition, the
Banks make loans for the construction of residential homes, multi-family and
commercial properties, and for land development. The ability and willingness of
the Banks' 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:
2000 1999 1998
-------- -------- --------
(in thousands)
Balance at beginning of year...... $ 41,079 $ 41,209 $ 45,664
Provision for possible loan losses 8,700 8,700 8,235
Loan recoveries................... 3,915 4,586 5,001
Loans charged off................. (13,439) (13,416) (17,692)
-------- -------- --------
Balance at end of year............ $ 40,255 $ 41,079 $ 41,209
======== ======== ========
The principal amount of loans on nonaccrual status was $11,376,000 and
$9,172,000 at December 31, 2000 and 1999, respectively. There were no loans
whose terms have been substantially modified in troubled debt restructurings
during 2000, 1999 and 1998. At December 31, 2000, the Banks were not committed
to lend any additional funds to borrowers with loans whose terms have been
restructured.
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:
2000 1999 1998
------ ------ ------
(in thousands)
Interest income in accordance with original loan terms $3,964 $1,365 $2,467
Interest income recognized............................ 3,090 454 1,226
------ ------ ------
Reduction in interest income.......................... $ 874 $ 911 $1,241
====== ====== ======
At December 31, 2000, the recorded investment in loans that are considered
to be impaired under SFAS 114 was $6,794,000 (all such loans were on a
nonaccrual basis). Included in this amount is $2,687,000 of impaired loans for
which the related allowance for possible loan losses is $1,440,000 and
$4,107,000 of impaired loans for which no specific allowance for possible loan
losses has been allocated. The average recorded investment in impaired loans
during the year ended December 31, 2000 was approximately $6,627,000. For the
year ended December 31, 2000, interest income on impaired loans totaled
$336,000 of which $183,000 was recognized on a cash basis and $153,000 on an
accrual basis.
Residential mortgage loans serviced for others, which are not reflected in
the consolidated balance sheets, totaled approximately $1.991 billion and
$2.079 billion at December 31, 2000 and 1999, respectively. No recourse
provisions exist in connection with such servicing.
43
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table is a summary of activity for mortgage servicing rights
purchased and originated for three years ended December 31, 2000:
Purchased Originated Total
-------- --------- -------
(in thousands)
Balance at December 31, 1997 $5,485 $ 5,184 $10,669
Additions................ -- 5,147 5,147
Amortization............. (696) (1,948) (2,644)
-------- --------- -------
Balance at December 31, 1998 4,789 8,383 13,172
Additions................ -- 3,259 3,259
Amortization............. (598) (1,590) (2,188)
-------- --------- -------
Balance at December 31, 1999 4,191 10,052 14,243
Additions................ -- 1,654 1,654
Amortization............. (565) (1,163) (1,728)
-------- --------- -------
Balance at December 31, 2000 $3,626 $10,543 $14,169
======== ========= =======
SFAS 125 requires enterprises to measure the impairment of servicing rights
based on the difference between the carrying amount of the servicing rights and
current fair value. At December 31, 2000 no allowance for impairment in the
Company's mortgage servicing rights was necessary. Impairment of mortgage
servicing rights of $219,000 was recorded in 1998.
Note 5 Premises and Equipment
Premises and equipment at December 31, 2000 and 1999 are summarized as
follows:
Estimated
Original
2000 1999 Useful Lives
-------- -------- ------------
(in thousands)
Land..................................... $ 6,766 $ 6,716 --
Buildings and improvements............... 25,773 32,837 25-50 years
Leasehold improvements................... 21,555 22,431 2-50 years
Furniture and equipment.................. 38,640 45,307 3-15 years
Construction in progress................. 1,372 4,681 --
-------- --------
Premises and equipment, gross............ 94,106 111,972
Accumulated depreciation and amortization (42,147) (70,920)
-------- --------
Premises and equipment, net.............. $ 51,959 $ 41,052
======== ========
The Company is obligated under various noncancelable operating leases for
premises and equipment expiring in various years through the year 2021. Total
lease expense, net of income from subleases, amounted to approximately
$4,211,000, $4,694,000 and $4,546,000 in 2000, 1999, and 1998, respectively.
Future minimum rental commitments for noncancelable operating leases on
premises and equipment with initial or remaining terms of one year or more at
December 31, 2000 are as follows:
Lease
Year Obligations
---- --------------
(in thousands)
2001........................ $ 3,391
2002........................ 2,881
2003........................ 2,508
2004........................ 2,202
2005........................ 1,992
Thereafter.................. 7,077
--------------
Total minimum lease payments $20,051
==============
44
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6 Borrowings
Borrowings at December 31, 2000 and 1999 consisted of the following:
2000 1999
------- --------
(in thousands)
Federal funds purchased, rate 6.50%, maturing January 2, 2001.................... $ 1,325 $ --
Federal funds purchased, rate 5.50%, maturing January 3, 2000.................... -- 1,000
Securities sold under agreements to repurchase:
Due through January 2, 2001, weighted average rate of 9.20%................... 10,000 --
Due through January 3, 2000, weighted average rate of 9.20%................... -- 10,000
Securities sold under agreements to repurchase................................ -- 80,115
U.S. Treasury borrowings, 5.75% in 2000 and 4.54% in 1999, due on demand......... 17,116 35,000
Note Payable, 8.03% in 2000 and 7.74% in 1999, due January 1, 2015............... 251 205
Note Payable, 5.75% in 1999, due on June 1, 2001................................. -- 381
Capital Lease Obligation......................................................... -- 111
FHLB Advances:
Affordable Housing Program, 5.17% in 2000 and 5.15% in 1999, due May 29, 2018. 330 337
Maturing January 3, 2000 @ 4.19%.............................................. -- 10,000
Maturing May 3, 2000 @ 5.82%.................................................. -- 40,000
Maturing January 31, 2001 @ 6.69%............................................. 25,000 --
Maturing February 2, 2001 @ 5.88%............................................. 5,000 5,000
Maturing February 27, 2003 @ 5.77%............................................ 11,925 11,925
Maturing December 27, 2010 @ 4.80%, callable.................................. 20,000 --
Maturing April 19, 2011 @ 3.50%............................................... 1,632 1,671
Maturing August 1, 2011 @ 5.00%............................................... 560 560
Maturing October 29, 2013 @ 5.50%............................................. 32 32
Maturing April 2, 2013 @ 5.50%................................................ 586 586
------- --------
Total Borrowings:................................................................ $93,757 $196,923
======= ========
Short-term borrowings, excluding repurchase agreements and FHLB, are
collateralized by U.S. Treasury and agency securities, mortgage-backed
securities and corporate notes. These assets had a carrying value and a market
value of $28,881,000 and $28,907,000 respectively, at December 31, 2000, and
$130,067,000 and $127,565,000, respectively, at December 31, 1999. The
borrowings from Federal Home Loan Bank of Boston are secured by mortgage loans
held in the company's loan portfolio.
The following information relates to securities sold under agreements to
repurchase:
2000 1999 1998
-------- ------- -------
(in thousands)
Average balance outstanding during the year $ 45,452 $89,583 $83,744
Average interest rate during the year...... 6.23% 4.85% 5.38%
Maximum amount outstanding at any month-end $136,699 $99,995 $95,278
The following information relates to U.S. Treasury borrowings:
2000 1999 1998
------- ------- -------
(in thousands)
Average balance outstanding during the year $17,426 $13,138 $20,753
Average interest rate during the year...... 5.98% 4.73% 5.19%
Maximum amount outstanding at any month-end $34,930 $37,369 $60,295
45
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following information relates to FHLB borrowings:
2000 1999 1998
-------- ------- -------
(in thousands)
Average balance outstanding during the year $146,818 $29,663 $47,663
Average interest rate during the year...... 6.39% 5.82% 5.81%
Maximum amount outstanding at any month-end $220,095 $96,865 $69,403
Note 7 Income Taxes
Income tax expense consists of the following:
2000 1999 1998
------- ------- -------
(in thousands)
Current payable
Federal........ $ 9,638 $33,786 $26,168
State.......... 3,227 4,184 4,215
------- ------- -------
12,865 37,970 30,383
Deferred (prepaid)
Federal........ 14,675 (8,548) (847)
State.......... 493 (347) 304
------- ------- -------
15,168 (8,895) (543)
------- ------- -------
Income tax expense $28,033 $29,075 $29,840
======= ======= =======
Current income taxes receivable, included in other assets, were $2,878,000
and $43,000, at December 31, 2000 and 1999, respectively. Current income taxes
payable, included in accrued expenses and other liabilities, was $17,502,000 at
December 31, 1999.
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 $2,749,000, $2,975,000, and $3,063,000 in 2000, 1999, and 1998,
respectively. These amounts are included in income tax expense in the
accompanying consolidated statements of operations. The Company is also taxed
on income in the other states in which it operates.
The following is a reconciliation of the provision for Federal income taxes,
calculated at the statutory rate, to the recorded income tax expense:
2000 1999 1998
------- ------- -------
(in thousands)
Computed tax at statutory Federal rate......................................... $30,348 $ 9,331 $27,297
Increase (The following is a reconciliation of the provision for Federal income
taxes, calculated at the statutory rate, to the recorded income tax
expensedecrease) in taxes from:
Amortization of intangible assets (1)....................................... 684 17,223 1,684
Tax-exempt interest, net.................................................... (1,421) (1,638) (1,411)
Dividends received deduction................................................ (35) (315) (354)
Merger expenses............................................................. -- 1,599 --
State taxes, net of Federal tax benefit..................................... 2,418 2,494 3,380
Tax credits................................................................. (2,118) (385) (643)
Other, net.................................................................. (1,843) 766 (113)
------- ------- -------
Total................................................................... $28,033 $29,075 $29,840
======= ======= =======
Effective income tax rate...................................................... 32.3% 109.7% 37.5%
Effective income tax rate excluding the effect of special provision and benefit 34.2% 35.4% 37.5%
- --------
(1) The goodwill arising from the acquisition of Eastern Bancorp was not tax
deductible and therefore appears as a non-deductible item.
46
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the net deferred tax asset (liability) at December 31,
2000 and 1999 are as follows:
2000 1999
-------- --------
(in thousands)
Allowance for possible loan losses..................... $ 15,180 $ 15,080
Deferred compensation and pension...................... 4,498 4,773
Other real estate owned writedowns..................... 298 164
Depreciation........................................... (188) 10,651
Accrued liabilities.................................... 890 1,118
Unrealized (gain) loss on securities available for sale (102) 3,860
Basis differences, purchase accounting................. 579 1,167
Core deposit intangible................................ (777) (959)
Lease financing........................................ (18,127) (12,644)
Mortgage servicing..................................... (4,420) (3,900)
Other.................................................. (275) (2,822)
-------- --------
$ (2,444) $ 16,488
======== ========
Note 8 Stockholders' Equity
Treasury Stock
On June 17, 1998, the Company's Board of Directors authorized an expansion
of the Company's common stock repurchase program by 500,000 shares to a total
of 1.75 million shares of the Company's common stock to be repurchased in
negotiated transactions or on the open market. In May 1998, VFSC's Board of
Directors authorized the repurchase of up to 500,000 of its shares (equivalent
to 535,000 shares of Chittenden stock). Both the Chittenden and VFSC plans were
rescinded prior to the announcement of the definitive agreement to acquire
VFSC. During 1998, the Company repurchased 805,446 shares of its common stock
at a total cost of $22.6 million. Prior to the May 28, 1999 acquisition of VFSC
by the Company, VFSC retired all of its common stock held in treasury (a total
of 330,000 equivalent Chittenden shares).
On January 19, 2000, the Company's Board of Directors authorized the
repurchase of up to 2,000,000 shares of the Corporation's common stock
(approximately 7% of the Company's outstanding Common Stock) in negotiated
transactions or open market purchases. Chittenden, depending on market
conditions, may repurchase its Common Stock without further Board authorization
for two years. During 2000, the Company repurchased 2.5 million shares of its
common stock at a total cost of $66.5 million.
On July 19, 2000, the Company's Board of Directors authorized the repurchase
of an additional 2,000,000 shares, bringing the total authorization to
4,000,000 shares.
Dividends
Dividends paid by the Banks 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
Banks.
The Company paid dividends of $25,484,000, $22,815,000, and $19,564,000
during 2000, 1999, and 1998, respectively. These amounts represented $0.94,
$0.81, and $0.69 per share.
Surplus
The payments of dividends by BWM and FBT are subject to Massachusetts
banking law restrictions which require that the capital stock and surplus
account of the bank must amount, in the aggregate, to at least 10% of
47
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the bank's deposit liability or there shall be transferred from net profits to
the surplus account: (1) the amount required to increase the surplus account so
that it, together with the capital stock, will amount to at least 10% of
deposit liability or; (2) the amount required to increase the surplus account
so that it shall amount to 50% of the common stock, and thereafter, the amount,
not exceeding 50% of net profits, required to increase the surplus account so
that it shall amount to 100% of capital stock. Because one or both of these
tests were met at the individual banks, no transfers were made during the year.
Earnings Per Share
The following table summarizes the calculation of basic and diluted earnings
per share:
2000 1999 1998
------- ------- -------
(in thousands except per share
information)
Net income (loss)................................................... $58,687 $(2,496) $49,778
------- ------- -------
Weighted average common shares outstanding.......................... 27,008 28,172 28,323
Dilutive effect of common stock equivalents......................... 272 464 507
------- ------- -------
Weighted average common and common equivalent shares outstanding. 27,280 28,636 28,830
======= ======= =======
Basic earnings per share............................................ $ 2.17 $ (0.09) $ 1.76
Dilutive effect of common stock equivalents......................... (0.02) -- (0.03)
------- ------- -------
Diluted earnings per share.......................................... $ 2.15 $ (0.09) $ 1.73
======= ======= =======
The following table summarizes options that could potentially dilute
earnings per share in the future which were not included in the computation of
the common stock equivalents because to do so would have been antidilutive:
2000 1999 1998
------- --------- -------
Anti-dilutive options.......... 484,250 1,097,098 122,250
Weighted average exercise price $35.18 $23.71 $35.78
Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130
established standards for the reporting and display of comprehensive income and
its components (revenues, expenses, gains, and losses) in a full set of general
purpose financial statements. Comprehensive income is the total of net income
and all other non-owner changes in equity. The statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements in the year
end financial statements. The statement does not require a specific format for
that financial statement. The Company has chosen to display comprehensive
income in the Consolidated Statements of Changes in Stockholders' Equity.
The following table summarizes reclassification detail for other
comprehensive income for the years:
2000 1999 1998
------ -------- ------
(in thousands)
Unrealized holding gains (losses) on available for sale for period, net of tax.. $6,479 $(14,254) $2,698
Reclassification adjustment for (gains) losses arising during period, net of tax 703 774 (63)
------ -------- ------
Total Other Comprehensive Income................................................ $7,182 $(13,480) $2,635
====== ======== ======
48
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9 Stock Plans
The Company has three stock option plans: a 1988 Employee Stock Option plan,
a 1993 Stock Incentive Plan, and a 1998 Directors' Omnibus Long-term Incentive
Plan. The Company accounts for these plans in accordance with APB Opinion No.
25, under which no compensation cost for stock options has been recognized,
since all options qualify for fixed plan accounting and all options are granted
at fair market value, or higher in the case of stepped options.
Under the plans, certain key employees and directors are eligible to receive
various types of stock incentives, including 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; and non-employee directors' stock options to purchase
stock at predetermined fixed prices over a five-year period. At December 31,
2000 and 1999, there were a total of 1,640,528 shares available to be issued
under the plans. Of these shares, 1,306,387 and 1,211,150 shares were issued at
December 31, 2000 and 1999, respectively.
During 1998, 1,000 shares of restricted stock were granted, with a weighted
average grant-date fair value of $38.25 per share. There were no similar grants
of restricted stock issued in 1999 or 2000.
The following tables summarize information regarding the Company's stock
option plans:
Weighted Average
Price Per Share Options
---------------- ---------
December 31, 1997 $14.73 1,069,183
Granted....... 32.07 430,890
Exercised..... 9.42 (135,786)
Expired....... 32.10 (17,149)
---------------- ---------
December 31, 1998 20.59 1,347,138
Granted....... 36.84 135,000
Exercised..... 17.19 (378,082)
Expired....... 28.80 (6,958)
---------------- ---------
December 31, 1999 23.71 1,097,098
Granted....... 30.87 111,000
Exercised..... 15.89 (244,893)
Expired....... 30.93 (15,763)
---------------- ---------
December 31, 2000 $26.45 947,442
================ =========
Options Outstanding and Exercisable
December 31, Options Outstanding Options Exercisable
2000 ------------------------------------------- --------------------------
Weighted Average Weighted Weighted
Range of Options Remaining Average Options Average
Exercise Prices: Outstanding Contractual Life Exercise Price Outstanding Exercise Price
- ---------------- ----------- ---------------- -------------- ----------- --------------
$3.17-$17.80 257,464 3.13 $12.87 257,464 $12.87
$18.80-$29.09 308,228 5.66 24.94 308,228 24.94
$31.91-$56.28 381,750 8.35 36.82 329,500 34.74
----------- ---------------- -------------- ----------- --------------
$3.17-$56.28 947,442 6.06 $26.45 895,192 $25.08
=========== ================ ============== =========== ==============
49
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
If compensation cost for these plans had been determined in accordance with
SFAS 123, the Company's net income (loss) and earnings (loss) per share would
have been reduced to the following pro forma amounts:
2000 1999 1998
------- ------- -------
(in thousands, except per share data)
Net Income (Loss):
As Reported............ $58,687 $(2,496) $49,778
Pro Forma.............. 57,893 (4,427) 47,091
Earnings (Loss) Per Share:
Basic:
As Reported............ $ 2.17 $ (0.09) $ 1.76
Pro Forma.............. 2.14 (0.16) 1.66
Diluted:
As Reported............ $ 2.15 $ (0.09) $ 1.73
Pro Forma.............. 2.12 (0.16) 1.63
The SFAS 123 method of accounting has not been applied to options granted
prior to January 1, 1995; the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2000, 1999 and 1998:
2000 1999 1998
---- ---- ----
Expected life (years) 7.80 7.60 7.03
Interest rate........ 6.11% 6.40% 5.06%
Volatility........... 29.7 29.6 32.4
Dividend yield....... 3.28% 2.72% 2.23%
Using these assumptions, the weighted average fair value of options granted
was $8.52, $9.59 and $7.80 in 2000, 1999 and 1998, respectively.
Note 10 Employee Benefits
Pension Plan
CTC 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. CTC's funding policy 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). Additional
contributions may be made at the election of the Company. This contribution is
based on an actuarial method that recognizes estimated future salary levels and
service.
The changes in the benefit obligation for the years ended December 31, 2000
and 1999 are as follows:
2000 1999
------- -------
(in thousands)
Projected benefit obligation at beginning of year $37,743 $43,666
Service cost.................................. 1,575 2,438
Interest cost................................. 2,786 3,014
Plan amendments............................... -- (4,873)
Actuarial loss................................ (2,277) (4,234)
Disbursements................................. (2,687) (2,268)
Settlements or curtailments................... (300) --
------- -------
Projected benefit obligation at end of year...... $36,840 $37,743
======= =======
50
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The changes in the plan assets for the years ended December 31, 2000 and
1999 are as follows:
2000 1999
-------- --------
(in thousands)
Fair value of assets at beginning of year............................................. $45,808 $44,491
Actual return on plan assets....................................................... 6,028 1,785
Company contributions.............................................................. -- 1,800
Disbursements...................................................................... (2,687) (2,268)
-------- --------
Fair value of assets at end of year................................................... $49,149 $45,808
======== ========
2000 1999
-------- --------
(in thousands)
Funded status......................................................................... $12,309 $8,066
Prior service cost not yet recognized in net periodic pension cost.................... (4,764) (6,408)
Unrecognized net transition asset being amortized over participants' period of service (497) (626)
Unrecognized net (gain) loss from past experience different from that assumed......... (8,441) (4,339)
-------- --------
Accrued pension cost included in accrued expenses and other liabilities............... ($1,393) ($3,307)
======== ========
2000 1999
-------- --------
Weighted-average assumptions as of December 31, 2000 and 1999:
Discount rate......................................................................... 7.75% 7.50%
Expected return on plan assets........................................................ 9.00% 9.00%
Rate of compensation increase......................................................... 5.00% 5.00%
Net pension expense components included in employee benefits in the
consolidated statements of operations are as follows:
December 31,
------------------------
2000 1999 1998
------- ------ ------
(in thousands)
Service cost.................. $1,575 $2,438 $1,756
Interest cost................. 2,786 3,013 2,695
Expected return on plan assets (4,065) (3,706) (3,297)
------- ------ ------
Net amortization:
Prior service cost......... (644) (260) (260)
Net actuarial loss/(gain).. (137) (53) (53)
Transition amount.......... (129) (131) (131)
------- ------ ------
Total amortization............ (910) (444) (444)
Curtailment................... (1,300) -- --
------- ------ ------
Net pension expense........... ($1,914) $1,301 $710
======= ====== ======
Amounts resulting from changes in actuarial assumptions used to measure the
Bank's benefit obligations are not recognized as they occur, but are amortized
systematically over subsequent periods.
CTC has supplemental pension arrangements with certain retired employees.
The liability, included in accrued expenses and other liabilities, related to
such arrangements was $1,754,000 and $1,691,000 at December 31, 2000 and 1999,
respectively.
51
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has established a supplemental executive retirement plan (SERP)
for members of the executive management group. This plan is intended to cover
only those benefits excluded from coverage under the Bank's qualified defined
benefit pension plan as a result of IRS regulations. The design elements of
this SERP mirror those of the Bank's qualified plan. In addition to the SERP,
the Company has a separate arrangement with its Chief Executive Officer under
which contributions are accrued based upon the Company's Return on Equity
(ROE). An ROE of 10% is the minimum threshold at which any contribution will be
made. Benefits are payable upon attaining the age of 55, except in the event of
death or disability. The liability related to the SERPs, included in accrued
expenses and other liabilities, was $2,097,000 and $1,469,000 at December 31,
2000 and 1999 respectively.
Other Benefit Plans
CTC and its affiliates (the Banks) have 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 Banks.
Investment in the Company's common stock is one of nine investment options
available to employees.
Eligible employees of the corporation 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 corporation makes an incentive savings contribution
in an amount equal to 35% of each employee's basic contribution. In 2000, 1999,
and 1998, 75,875, 66,253, and 39,981 shares, respectively, of the Company's
common stock were purchased through the incentive savings and profit sharing
plan; $1,006,000, $1,347,000, and $1,234,000, respectively, were charged to
expense for contributions and payments made or to be made under the plan. In
1997, the Company established a supplemental executive savings plan. This plan
is intended to cover only those benefits excluded from coverage under the
Bank's qualified defined benefit pension plan as a result of IRS regulations.
Under this plan, participants agree to elect a reduction in their earnings and
the Company credits their retirement account in the amount of the reduction.
This contribution, when combined with the regular pre-tax contributions, shall
not exceed 16% of the individual's earnings. Expenses related to this plan were
$32,721 and $22,789 in 2000 and 1999, respectively, and are included in the
contribution expenses above.
CTC and its affiliates may also make an additional matching contribution
based on the extent to which the annual corporate profitability goals
established by the Board of Directors are met. Expenses related to achievement
of profitability goals totaled $420,000, $480,000, and $1,110,000, in 2000,
1999, and 1998, respectively.
CTC also has an Executive Management Incentive Compensation Plan. Executives
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 100% of
annual compensation. Expenses for this plan totaled $108,000, $671,000 and
$938,000 in 2000, 1999, and 1998, respectively.
The Company has a Directors' 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 $868,000, $876,000, and $1,155,000 for 2000, 1999, and 1998,
respectively. Directors are required to defer 50% of their compensation (and
may defer as much as 100%) in the Company's common stock. Based on these
elections, shares which will be issued under the plan totaled 254,252 at
December 31, 2000.
Note 11 Financial Instruments With Off-Balance Sheet Risk
In the normal course of business, to meet the financing needs of their
customers and to reduce their own exposure to fluctuations in interest rates,
the Banks are parties to financial instruments with off-balance sheet
52
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Banks' 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 Banks
use the same credit policies in making commitments and conditional obligations
as they do for on-balance sheet instruments. The Banks evaluate each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Banks upon extension of credit, is based on
management's 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 Banks 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, 2000 and 1999 are as follows:
2000 1999
-------- --------
(in thousands)
Commitments to originate loans............ $ 66,211 $ 64,541
Unused lines of credit.................... 306,376 323,957
Standby letters of credit................. 67,061 54,564
Unadvanced portions of construction loans. 60,605 74,301
Equity commitments to limited partnerships 3,465 3,084
Note 12 Commitments and Contingencies
As nonmembers of the Federal Reserve System, the Banks are 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 $5,270,000 and $12,349,000 at
December 31, 2000 and 1999, respectively.
CTC and FBT have contracts for data processing services that extend to June
2005 and April 2002, respectively. Base fees to be paid during the remaining
term of the contracts are approximately $37,366,000. 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.
The Company has entered into severance agreements with the Chief Executive
Officer and several members of senior management. These agreements are
triggered by a change of control under certain circumstances. Payments are
equal to 2.99 times annual salary for the Chief Executive Officer and from 1 to
2 times annual salary for the individual participating members of senior
management.
Various legal claims against the Company arising in the normal course of
business were outstanding at December 31, 2000. Management, after reviewing
these claims with legal counsel, is of the opinion that the
53
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
resolution of these claims will not have a material effect on the financial
condition or results of operations of the Company.
Note 13 Other Noninterest Expense
The components of other noninterest expense for the years presented are as
follows:
2000 1999 1998
------- ------- -------
(in thousands)
Data processing................. $11,160 $10,618 $ 7,366
Legal and professional.......... 1,522 2,216 4,234
Marketing....................... 2,749 3,143 3,608
Software and supplies........... 4,722 4,755 4,641
Net OREO and collection expenses 47 (147) 472
Telephone....................... 3,118 3,979 4,133
Postage......................... 2,553 3,147 3,112
Other........................... 16,873 17,155 18,463
------- ------- -------
$42,744 $44,866 $46,029
======= ======= =======
Note 14 Related Party Transactions
Directors and executive officers of the Banks and their associates are
credit customers of the Banks 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 unaffiliated persons, and do not involve more
than normal risk of collectibility or present other unfavorable features.
An analysis of loans to directors and executive officers of the Banks and
their associates, for 2000, is as follows (in thousands):
Balance at Balance at
December 31, 1999 Additions Reductions December 31, 2000
- ----------------- --------- ---------- -----------------
$25,773 10,163 5,287 30,649
======= ====== ===== ======
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.
Securities
The fair value of investment securities, other than obligations of states,
political subdivisions, and Federal Home Loan Bank (FHLB) and Federal Reserve
Bank (FRB) stock, is based on quoted market prices. The fair value of
obligations of states and political subdivisions is estimated to be equal to
amortized cost. The carrying value of FHLB and FRB stock represents its
redemption value.
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, lease financing and other consumer loans.
54
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 municipal loans is estimated to be equal to amortized cost
since most of these loans mature within six months. The fair value of home
equity, lease financing and other consumer loans is estimated based on
secondary market prices for asset-backed securities with similar
characteristics.
Mortgage Servicing Rights
The fair value is estimated by discounting the future cash flows through the
estimated maturity of the underlying mortgage loans.
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.
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. Long-term debt has an estimated fair value equal
to its carrying amount.
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 Banks' entire holdings of a particular
financial instrument. Because no active observable market exists for a
significant portion of the Banks' 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.
55
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The estimated fair values of the Company's financial instruments are as
follows:
December 31,
-------------------------------------------
2000 1999
--------------------- ---------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
(in thousands)
Financial assets:
Cash and cash equivalents.......................... $ 178,621 $ 178,621 $ 151,764 $ 151,764
Securities available for sale...................... 585,281 585,281 649,471 649,471
FHLB and FRB Stock................................. 12,311 12,311 16,879 16,879
Loans, net......................................... 2,815,843 2,828,184 2,863,730 2,878,101
Loans held for sale................................ 44,950 48,853 2,926 2,926
Mortgage servicing rights.......................... 14,169 17,332 14,283 20,170
Financial liabilities:
Deposits:
Demand......................................... 530,975 530,975 533,607 533,607
Savings........................................ 1,934,227 1,934,227 1,807,843 1,807,843
Certificates of deposit less than $100,000
and other time deposits...................... 615,336 617,504 649,051 649,566
Certificates of deposit $100,000 and over...... 211,869 212,308 215,084 214,678
Short-term borrowings.............................. 93,757 91,901 196,923 195,844
Commitments........................................ 616 616 268 268
Note 16 Parent Company Financial Statements
Chittenden Corporation (Parent Company Only)
Balance Sheets
December 31,
-----------------
2000 1999
-------- --------
(in thousands)
Assets
Cash and cash equivalents............................. $ 11,018 $ 9,749
Investment in subsidiaries at equity in net assets.... 324,408 335,291
Investment securities................................. 248 753
Other assets.......................................... 9,446 18,234
-------- --------
Total assets................................... $345,120 $364,027
======== ========
Liabilities and stockholders' equity
Liabilities:
Accrued expenses and other liabilities............. 3,054 1,567
-------- --------
Total liabilities.............................. 3,054 1,567
-------- --------
Total stockholders' equity............................ 342,066 362,460
-------- --------
Total liabilities and stockholders' equity..... $345,120 $364,027
======== ========
56
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Statements of Operations
Years Ended December 31,
-----------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
Operating income:
Dividends from bank subsidiaries............................... $ 78,500 $ 32,033 $ 31,967
Interest income................................................ 250 356 109
Gain on sale of securities..................................... 13 -- 15
Other operating income......................................... 39 186 501
-------- -------- --------
Total operating income..................................... 78,802 32,575 32,592
-------- -------- --------
Operating expense................................................. 1,006 1,211 2,267
Special charges................................................... -- 12,173 --
-------- -------- --------
Total expense.............................................. 1,006 13,384 2,267
-------- -------- --------
Income before income taxes and equity in undistributed earnings of
subsidiaries.................................................... 77,796 19,191 30,325
Income tax benefit................................................ 221 1,052 420
-------- -------- --------
Income before equity in undistributed earnings of subsidiaries.... 78,017 20,243 30,745
Equity in undistributed earnings of subsidiaries.................. (19,330) (22,739) 19,033
-------- -------- --------
Net income (loss)................................................. $ 58,687 $ (2,496) $ 49,778
======== ======== ========
Statements of Cash Flows
Years Ended December 31,
-----------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
Cash flows from operating activities:
Net income (loss).............................................. $ 58,687 $ (2,496) $ 49,778
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Equity in undistributed earnings of bank subsidiaries.......... 19,330 22,739 (19,033)
Gain on sale of securities..................................... (13) -- (15)
(Increase) decrease in other assets............................ 11,585 (3,479) (699)
Increase (decrease) in accrued expenses and other liabilities.. 597 (5,249) 826
-------- -------- --------
Net cash provided by operating activities.................. 90,186 11,515 30,857
-------- -------- --------
Cash flows from investing activities:
Investments in and advanced to subsidiaries.................... -- -- (48)
Proceeds from the sale of securities........................... 295 -- 3,217
-------- -------- --------
Net cash provided by investing activities.................. 295 -- 3,169
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of treasury and common stock............ 2,750 9,484 1,608
Dividends paid on common stock................................. (25,484) (22,815) (19,564)
Repurchase of common stock..................................... (66,478) -- (21,678)
Cash paid to list on New York Stock Exchange, net of taxes..... -- -- (93)
Cash paid for fractional shares................................ -- (37) --
-------- -------- --------
Net cash used in financing activities...................... (89,212) (13,368) (39,727)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........... 1,269 (1,853) (5,701)
Cash and cash equivalents at beginning of year................. 9,749 11,602 17,303
-------- -------- --------
Cash and cash equivalents at end of year....................... $ 11,018 $ 9,749 $ 11,602
======== ======== ========
57
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 17 Regulatory Matters
The Company and the Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Banks must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. Each entity's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum amounts and ratios (set
forth in the tables below) of total and Tier I capital (as defined in the
regulation) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined). Management believes, as of December 31, 2000, that
the Company and the Banks meet all capital adequacy requirements.
As of December 31, 2000, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Company and the Banks as "well
capitalized" under the regulatory framework for prompt corrective action. To be
categorized as adequately or well capitalized, the Company and the Banks must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the tables below. There are no conditions or events
since that notification that management believes have changed the institutions'
categories.
The Company's and the Banks' actual capital amounts (dollars in thousands)
and ratios are presented in the following tables:
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions:
--------------- -------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ---- -------- -----
As of December 31, 2000
Total Capital (to Risk Weighted Assets):
Consolidated.......................... $360,230 12.08% $238,495 8.00% N/A N/A
Chittenden Trust Company.............. 273,278 11.77 185,684 8.00 $232,105 10.00%
Bank of Western Massachusetts......... 41,966 10.92 30,748 8.00 38,435 10.00
Flagship Bank & Trust................. 31,226 10.98 22,760 8.00 28,451 10.00
Tier 1 Capital (to Risk Weighted Assets):
Consolidated.......................... 322,929 10.82 119,365 4.00 N /A N /A
Chittenden Trust Company.............. 244,250 10.52 92,888 4.00 139,332 6.00
Bank of Western Massachusetts......... 37,153 9.65 15,404 4.00 23,106 6.00
Flagship Bank & Trust................. 27,658 9.69 11,418 4.00 17,127 6.00
Tier 1 Capital (to Average Assets):
Consolidated.......................... 322,929 8.65 149,423 4.00 N /A N /A
Chittenden Trust Company.............. 244,250 8.44 115,760 4.00 144,700 5.00
Bank of Western Massachusetts......... 37,153 7.50 19,821 4.00 24,777 5.00
Flagship Bank & Trust................. 27,658 6.61 16,738 4.00 20,923 5.00
58
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions:
--------------- -------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ---- -------- -----
As of December 31, 1999:
Total Capital (to Risk Weighted Assets):
Consolidated.......................... $387,362 13.23% $234,184 8.00% N /A N /A
Chittenden Trust Company.............. 293,244 12.65 185,404 8.00 $231,755 10.00%
Bank of Western Massachusetts......... 43,841 11.12 31,541 8.00 39,426 10.00
Flagship Bank & Trust................. 26,695 10.52 20,304 8.00 25,380 10.00
Tier 1 Capital (to Risk Weighted Assets):
Consolidated.......................... 350,715 11.96 117,269 4.00 N /A N /A
Chittenden Trust Company.............. 264,435 11.41 92,728 4.00 139,092 6.00
Bank of Western Massachusetts......... 38,871 9.78 15,904 4.00 23,856 6.00
Flagship Bank & Trust................. 23,521 9.26 10,157 4.00 15,236 6.00
Tier 1 Capital (to Average Assets):
Consolidated.......................... 350,715 8.17 171,761 4.00 N /A N /A
Chittenden Trust Company.............. 264,435 8.02 131,918 4.00 164,898 5.00
Bank of Western Massachusetts......... 38,871 6.77 22,985 4.00 28,731 5.00
Flagship Bank & Trust................. 23,521 6.72 14,001 4.00 17,501 5.00
Note 18 Business Segments
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and
Related Information, which establishes standards for reporting operating
segments of a business enterprise. SFAS No. 131 has established revised
standards for public companies relating to the reporting of financial and
descriptive information about their operating segments in financial statements.
Operating segments are components of an enterprise, which are evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. The Company's chief operating decision
maker is the President and Chief Executive Officer of the Company. The adoption
of SFAS 131 did not have a material effect on the Company's primary financial
statements, but did result in the disclosure of segment information contained
herein.
The Company has identified Commercial Banking as its reportable operating
business segment based on the fact that the results of operations are viewed as
a single strategic unit by the chief operating decision maker. The Commercial
Banking segment is comprised of the four Commercial Banking subsidiaries and
CCC, which provide similar products and services, have similar distribution
methods, types of customers and regulatory responsibilities. Commercial Banking
derives its revenue from a wide range of banking services, including lending
activities, acceptance of demand, savings and time deposits, safe deposit
facilities, merchant credit card services, trust and investment management,
data processing, brokerage services, mortgage banking, and loan servicing for
investor portfolios.
Immaterial operating segments of the Company's operations, which do not have
similar characteristics to the commercial banking operations and do not meet
the quantitative thresholds requiring disclosure, are included in the Other
category in the disclosure of business segments below.
59
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The accounting policies used in the disclosure of business segments are the
same as those described in the summary of significant accounting policies. The
consolidation adjustment reflects certain eliminations of inter-segment
revenue, cash and Parent Company investments in subsidiaries.
The following tables present the results of the Company's reportable
operating business segment results as of December 31, 2000, 1999 and 1998:
Commercial Other Consolidation
Banking (2) Adjustments Consolidated
---------- -------- ------------ ------------
Year Ended December 31, 2000
Net interest revenue (1).................. $ 167,072 $ 410 $ (410) $ 167,072
Non interest income:
Investment management income........... 13,817 -- -- 13,817
Service charges on deposits............ 13,875 -- -- 13,875
Mortgage servicing income.............. 4,079 -- -- 4,079
Gains on sales of mortgage loans, net.. 2,992 -- -- 2,992
Credit card income, net................ 5,349 -- -- 5,349
Insurance commissions, net............. -- 2,968 (74) 2,894
Other non-interest income.............. 11,773 31 -- 11,804
---------- -------- ------------ ------------
Total non-interest income................. 51,885 2,999 (74) 54,810
---------- -------- ------------ ------------
Total income.............................. 218,957 3,409 (484) 221,882
Provision for possible loan losses........ 8,700 -- -- 8,700
Depreciation and amortization expense..... 7,017 380 -- 7,397
Salaries and employee benefits............ 62,904 1,667 -- 64,571
Special charges........................... 833 -- -- 833
Other non-interest expense................ 52,095 1,566 -- 53,661
---------- -------- ------------ ------------
Total non-interest expense................ 122,849 3,613 -- 126,462
---------- -------- ------------ ------------
Income (loss) before income taxes......... 87,408 (204) (484) 86,720
Income tax expense (benefit).............. 28,055 (22) -- 28,033
---------- -------- ------------ ------------
Net income (loss)......................... $ 59,353 $ (182) $ (484) $ 58,687
========== ======== ============ ============
End of period assets...................... 3,766,152 346,833 (343,124) 3,769,861
End of period loans, net.................. 2,815,843 -- -- 2,815,843
End of period deposits.................... 3,303,506 -- (11,099) 3,292,407
Expenditures for long-lived assets........ 16,604 98 -- 16,702
60
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Commercial Consolidation
Banking Other (2) Adjustments Consolidated
---------- -------- ------------ -----------
Year Ended December 31, 1999
Net interest revenue (1).................. $ 175,455 $ 404 $ (374) $ 175,485
Non interest income:
Investment management income........... 14,290 -- -- 14,290
Service charges on deposits............ 18,330 -- -- 18,330
Mortgage servicing income.............. 3,589 -- -- 3,589
Gains on sales of mortgage loans, net.. 5,361 -- -- 5,361
Credit card income, net................ 5,545 -- -- 5,545
Insurance commissions, net............. -- 2,603 (65) 2,538
Other non-interest income.............. 13,570 180 -- 13,750
---------- -------- ------------ -----------
Total non-interest income................. 60,685 2,783 (65) 63,403
---------- -------- ------------ -----------
Total income.............................. 236,140 3,187 (439) 238,888
Provision for possible loan losses........ 8,700 -- -- 8,700
Depreciation and amortization expense..... 12,269 533 -- 12,802
Salaries and employee benefits............ 73,460 1,410 -- 74,870
Special charges........................... 46,299 12,173 -- 58,472
Other non-interest expense................ 55,785 1,680 -- 57,465
---------- -------- ------------ -----------
Total non-interest expense................ 187,813 15,796 -- 203,609
---------- -------- ------------ -----------
Income (loss) before income taxes......... 39,627 (12,609) (439) 26,579
Income tax expense (benefit).............. 29,973 (898) -- 29,075
---------- -------- ------------ -----------
Net income (loss)......................... $ 9,654 $(11,711) $ (439) $ (2,496)
========== ======== ============ ===========
End of period assets...................... 3,827,278 368,819 (367,801) 3,828,296
End of period loans, net.................. 2,863,730 -- -- 2,863,730
End of period deposits.................... 3,222,473 -- (16,888) 3,205,585
Expenditures for long-lived assets........ 9,631 84 -- 9,715
Commercial Consolidation
Banking Other (2) Adjustments Consolidated
---------- -------- ------------ ------------
Year Ended December 31, 1998
Net interest revenue (1).................. $ 173,097 $ 391 $ (211) $ 173,277
Non interest income:
Investment management income........... 12,913 -- -- 12,913
Service charges on deposits............ 20,556 -- -- 20,556
Mortgage servicing income.............. 3,274 -- -- 3,274
Gains on sales of mortgage loans, net.. 7,976 -- -- 7,976
Credit card income, net................ 5,403 -- -- 5,403
Insurance commissions, net............. -- 2,917 (39) 2,878
Other non-interest income.............. 13,417 363 -- 13,780
---------- -------- ------------ ------------
Total non-interest income................. 63,539 3,280 (39) 66,780
---------- -------- ------------ ------------
Total income.............................. 236,636 3,671 (250) 240,057
Provision for possible loan losses........ 8,235 -- -- 8,235
Depreciation and amortization expense..... 15,971 721 -- 16,692
Salaries and employee benefits............ 75,093 1,396 -- 76,489
Other non-interest expense................ 56,534 2,509 -- 59,023
---------- -------- ------------ ------------
Total non-interest expense................ 147,578 4,626 -- 152,204
Income (loss) before income taxes......... 80,823 (955) (250) 79,618
Income tax expense (benefit).............. 29,985 (145) -- 29,840
---------- -------- ------------ ------------
Net income (loss)......................... $ 50,838 $ (810) $ (250) $ 49,778
========== ======== ============ ============
End of period assets...................... 4,238,790 404,621 (387,359) 4,256,052
End of period loans, net.................. 2,698,080 -- -- 2,698,080
End of period deposits.................... 3,691,182 -- (10,937) 3,680,245
Expenditures for long-lived assets........ 10,434 202 -- 10,636
- --------
(1) The Commercial Banking segment derives a majority of its revenue from
interest. In addition, management primarily relies on net interest revenue,
not the gross revenue and expense amounts, in managing that segment.
Therefore, only the net amount has been disclosed.
(2) Revenue derived from these non-reportable segments includes insurance
commissions from various insurance related products and services, which
began during 1997.
61
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 19 Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133 establishes the accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or a liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the statement of operations,
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting treatment.
Statement 133, as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," is effective for the Company's fiscal year beginning
January 1, 2001. Statement 133 must be applied to (a) derivative instruments
and (b) certain derivative instruments embedded in hybrid contracts that were
issued, acquired, or substantively modified after December 31, 1997 (and, at
the Company's election, before January 1, 1998). The Company's derivatives
include certain commitments to fund mortgage loans which are intended for sale
and the related forward sale agreements with investors. The Company adopted
this statement on January 1, 2001; adoption did not have a material impact on
its financial position or results of operation.
In September 2000, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS 140").
SFAS 140 replaces FASB Statement No. 125 and revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of
Statement 125's provisions without reconsideration. SFAS 140 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. The Company does not expect that the adoption
of Statement 140 will have a material impact on its financial position or
results of operation.
62
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 20 Quarterly Financial Data (Unaudited)
A summary of quarterly financial data for 2000 and 1999 is presented below:
Three Months Ended
----------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(in thousands, except per share amounts)
2000
Total interest income............... $70,666 $71,921 $73,202 $72,313
Total interest expense.............. 27,929 30,483 31,589 31,029
------- ------- ------- -------
Net interest income................. 42,737 41,438 41,613 41,284
Provision for possible loan losses 2,175 2,175 2,175 2,175
Noninterest income.................. 13,652 13,929 13,947 13,282
Special charges..................... 833 -- -- --
Noninterest expense................. 32,074 31,101 30,845 31,609
------- ------- ------- -------
Income before income taxes.......... 21,307 22,091 22,540 20,782
Income tax expense.................. 6,716 7,620 7,792 5,905
------- ------- ------- -------
Net income.......................... $14,591 $14,471 $14,748 $14,877
======= ======= ======= =======
Basic earnings per share............ $ 0.52 $ 0.53 $ 0.56 $ 0.57
Diluted earnings per share.......... 0.51 0.53 0.55 0.56
Dividends paid per share............ 0.22 0.24 0.24 0.24
Three Months Ended
----------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- -------- ------- --------
(in thousands, except per share amounts)
1999
Total interest income............. $72,125 $ 71,936 $73,280 $ 71,396
Total interest expense............ 29,020 28,445 28,366 27,421
------- -------- ------- --------
Net interest income............... 43,105 43,491 44,914 43,975
Provision for possible loan losses 2,175 2,175 2,175 2,175
Noninterest income................ 15,990 16,150 15,782 15,481
Special charges................... -- 70,995 (1,739) (10,784)
Noninterest expense............... 38,126 38,049 35,508 33,454
------- -------- ------- --------
Income (loss) before income taxes. 18,794 (51,578) 24,752 34,611
Income tax expense (benefit)...... 6,875 (7,174) 8,840 20,534
------- -------- ------- --------
Net income (loss)................. $11,919 $(44,404) $15,912 $ 14,077
======= ======== ======= ========
Basic earnings (loss) per share... $ 0.43 $ (1.58) $ 0.56 $ 0.50
Diluted earnings (loss) per share. 0.42 (1.58) 0.56 0.49
Dividends paid per share.......... 0.20 0.22 0.22 0.22
Amounts for total interest income, net interest income, noninterest income
and noninterest expense vary from amounts shown on previously filed Forms 10-Q
due to immaterial reclassification adjustments made between categories in the
fourth quarter of 2000.
63
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 21 Subsequent Event
On January 26, 2001, the Company announced the signing of a definitive
agreement whereby Chittenden will acquire Maine Bank Corp., and its subsidiary,
Maine Bank & Trust (MB&T) for $49.25 million in cash. Consummation of the
agreement is subject to regulatory approvals. The acquisition has received the
approval of the shareholders of Maine Bank Corp. and is expected to close in
the second quarter of 2001. Maine Bank Corp. had total assets of $236 million,
deposits of $205 million, and $28 million of stockholders' equity at December
31, 2000. The Company had $172 million in loans, of which $123 million were
commercial loans. In addition, MB&T has approximately $766 million in assets
under administration, of which $565 million is under full discretionary
management. It presently operates fifteen banking offices in southern Maine.
64
To the Board of Directors and Stockholders of
Chittenden Corporation:
We have audited the accompanying consolidated balance sheets of Chittenden
Corporation and its subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, changes in stockholders' equity
and comprehensive income, and cash flows for each of the three years in the
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of Vermont Financial Services Corp. (a bank
holding company acquired during 1999 in a transaction accounted for as a
pooling of interests, as discussed in Note 2) for the year ended December 31,
1998. Such statements are included in the consolidated financial statements of
Chittenden Corporation and subsidiaries and reflect net interest income of 47.5
percent in 1998 of the related consolidated totals. These statements were
audited by other auditors whose report has been furnished to us and our opinion
on the consolidated financial statements of Chittenden Corporation and
subsidiaries for the year ending December 31, 1998, insofar as it relates to
amounts included for Vermont Financial Services Corp., is based solely upon the
report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 and the report of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Chittenden Corporation and its
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
January 12, 2001 (except with respect to the matter
discussed in Note 21, as to which the date is
January 26, 2001)
65
To the Stockholders and Board of Directors of
Vermont Financial Services Corporation:
We have audited the consolidated statements of income, changes in
stockholders' equity, and cash flows of Vermont Financial Services Corp. and
subsidiaries for the year ended December 31, 1998. These consolidated financial
statements (not presented separately herein) are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Vermont Financial Services Corp. for the year ended December 31, 1998
in conformity with accounting principles generally accepted in the United
States of America.
/s/ KPMG LLP
Hartford, Connecticut
January 22, 1999
66
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
The consolidated financial statements contained in this annual report on
Form 10-K have been prepared in accordance with generally accepted accounting
principles and, where appropriate, include amounts based upon management's best
estimates and judgements. Management is responsible for the integrity and the
fair presentation of the consolidated financial statements and related
information.
Management maintains an extensive system of internal controls to provide
reasonable assurance that the Company's assets are safeguarded against loss and
that financial information is reliable. These internal controls include the
establishment and communication of policies and procedures, the selection and
training of qualified personnel and an internal auditing program that evaluates
the adequacy and effectiveness of such internal controls, policies and
procedures.
The Audit Committee, which is comprised entirely of non-employee directors,
is responsible for ensuring that management, internal auditors, and the
independent public accountants fulfill their respective responsibilities with
regard to the consolidated financial statements. The Audit Committee meets
periodically with management, internal auditors and the independent public
accountants to assure that each is carrying out its responsibilities. The
internal auditors and the independent public accountants have full and free
access to the Audit Committee and meet with it, with and without management
being present, to discuss the scope and results of their audits and any
recommendations regarding the system of internal controls.
The responsibility of the Company's independent public accountants, Arthur
Andersen LLP, is limited to an expression of their opinion as to the fairness
of the consolidated financial statements presented. Their opinion is based on
an audit conducted in accordance with generally accepted auditing standards as
described in the second paragraph of their report.
/s/ Paul A. Perrault /s/ Kirk Walters
Paul A. Perrault Kirk W. Walters
President, Chief Executive Officer and Executive Vice President and
Chair of Board of Directors Chief Financial Officer
67
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Registrant is included in the
Company's Definitive Proxy Statement/Prospectus for the 2001 Annual Meeting of
Stockholders of Chittenden Corporation at pages 7-10, and is specifically
incorporated herein by reference.
At December 31, 2000, the principal officers of the Company and its
principal subsidiary, CTC, with their ages, positions, and years of
appointment, were as follows:
Year
Name Age Appointed Positions
- ---- --- --------- ---------
Paul A. Perrault... 49 1990 President, Chief Executive Officer of the Company and
CTC
John P. Barnes..... 45 1990 Executive Vice President of the Company and CTC
Lawrence W. DeShaw. 55 1990 Executive Vice President of the Company and CTC
John W. Kelly...... 51 1990 Executive Vice President of the Company and CTC
Danny H. O'Brien... 51 1990 Executive Vice President of the Company and CTC
Kirk W. Walters.... 45 1996 Executive Vice President, Chief Financial Officer, and
Treasurer of the Company and CTC
F. Sheldon Prentice 49 1985 Senior Vice President, General Counsel, and Secretary of
the Company and CTC
Howard L. Atkinson. 56 1996 Chief Auditor of the Company and CTC
All of the current officers, except Mr. Walters and Mr. Atkinson, have been
principally employed in executive positions with CTC for more than seven years.
In accordance with the provisions of the Company's By-laws, the officers,
with the exception of the Secretary, hold office at the pleasure of the Board
of Directors. The Secretary is elected annually by the Board of Directors.
ITEM 11 EXECUTIVE COMPENSATION
Information regarding remuneration of the directors and officers of the
Company is included in the Company's Definitive Proxy Statement for the 2001
Annual Meeting of Stockholders of Chittenden Corporation at pages 11-19 and is
specifically incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the security ownership of directors and
director-nominees of the Company, all directors and officers of the Company as
a group, and certain beneficial owners of the Company's common stock, as of
January 31, 2001, is included in the Company's Definitive Proxy Statement for
its 2001 Annual Meeting of Stockholders of Chittenden Corporation at pages 4-5,
and is specifically incorporated herein by reference.
There are no arrangements known to the registrant that may, at a subsequent
date, result in a change of control of the registrant.
68
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and transactions between the
Company and its Directors, Director-Nominees, Executive Officers, and family
members of these individuals, is included in the Company's Definitive Proxy
Statement for its 2001 Annual Meeting of Stockholders of Chittenden Corporation
at page 21, and is specifically incorporated herein by reference.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
(1) Financial Statements
The financial statements of the Company and its subsidiaries are included in
Part II, Item 8 hereof and are incorporated herein by reference.
(2) Financial Statement Schedules
There are no financial statement schedules required to be included in this
report.
(3) Exhibits
(a) The following are included as exhibits to this report:
2.1 Agreement and Plan of Merger, dated as of December 16, 1998, between the Company, Chittenden
Acquisition Subsidiary, Inc. and Vermont Financial Services Corp., incorporated by reference to the
Company's Form 8-K/A filed with the SEC on January 6, 1999.
3(i).1 Amended and restated Articles of Incorporation of the Company, incorporated herein by reference to
the Proxy Statement for the 1994 Annual Meeting of Stockholders.
3(ii).1 By-laws of the Company, as amended and restated as of October 18, 1997, incorporated herein by
reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
4. Statement of the Company regarding its Dividend Reinvestment Plan is incorporated herein by
reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993.
10.1 Directors' Deferred Compensation Plan, dated April 1972, as amended May 20, 1992, incorporated
herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31,
1992.
10.2 Amended and Restated Pension Plan, incorporated herein by reference to the Company's Annual
Report on Form 10-Q for the period ended September 30, 1996.
10.3 Incentive Savings and Profit Sharing Plan, attached to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994, as amended for the year ended December 31, 1995.
10.4 Letter from the Company to Paul A. Perrault, dated July 26, 1990, regarding terms of employment,
incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1990.
10.5 The Company's 1988 Stock Option Plan, incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1987.
10.6 The Company's Restricted Stock Plan, incorporated herein by reference to the Company's Proxy
Statement in connection with the 1986 Annual Meeting of Stockholders.
10.8 Executive Management Incentive Compensation Plan ("EMICP"), incorporated herein by reference to
the Company's Annual Report on Form 10-K for the year ended December 31, 1994.
69
10.9 Amendment to EMICP to increase cap on awards from 60% to 100% of base salary, incorporated herein
by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996.
10.10 The Company's Stock Incentive Plan, amended and restated February 21, 2001, incorporated herein by
reference to the Company's Proxy Statement for the 2001 Annual Meeting of Stockholders.
10.11 Compensation plan of Paul A. Perrault, incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
10.12 Supplemental Executive Retirement Plan of Paul A. Perrault, incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
10.13 Supplemental Executive Cash Balance Restoration Plan incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
10.14 Supplemental Executive Savings Plan, incorporated herein by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
10.15 The 1998 Directors' Omnibus Long-Term Incentive Plan, incorporated herein by reference to the
Company's Proxy Statement for the 1998 Annual Meeting of Stockholders.
10.16 Stock Option Agreement, dated as of December 16, 1998, between the Company and Vermont Financial
Services Corp., incorporated by reference to the Company's Form 8-K/A filed with the SEC on
January 6, 1999.
21. List of subsidiaries of the Registrant.
23. Consent of Arthur Andersen LLP
24. Consent of KPMG LLP
(b) Reports on Form 8-K
None.
(c) Exhibits
EXHIBIT 21 LIST OF SUBSIDIARIES OF CHITTENDEN CORPORATION
Chittenden Trust Company, Vermont, d/b/a Chittenden Bank, Mortgage Service
Center, CUMEX Mortgage Service Center, and First Savings of New Hampshire and
Chittenden Trust Company's subsidiaries Chittenden Securities, Inc. and
Chittenden Insurance Products and Services, Inc, d/b/a The Pomerleau Agency
The Bank of Western Massachusetts, Massachusetts
Flagship Bank and Trust Company, Massachusetts
Chittenden Connecticut Corporation, Vermont, d/b/a Mortgage Service Center and
CUMEX Mortgage Service Center
EXHIBIT 23 CONSENT OF ARTHUR ANDERSEN LLP HAS BEEN FILED AS AN EXHIBIT
EXHIBIT 24 CONSENT OF KPMG LLP HAS BEEN FILED AS AN EXHIBIT
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereto duly authorized.
Date: February 21, 2001 CHITTENDEN CORPORATION
By: /S/ PAUL A. PERRAULT
-----------------------------------------
Paul A. Perrault
President, Chief Executive Officer
and Chairman of the Board of Directors
71
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/S/ PAUL A. PERRAULT President, Chief Executive February 21, 2001
------------------------ Officer and Chairman of the
Paul A. Perrault Board of Directors
/S/ KIRK W. WALTERS Executive Vice President, February 21, 2001
------------------------ Chief Financial Officer
Kirk W. Walters and Treasurer (principal
accounting officer)
FREDERIC H. BERTRAND Director February 21, 2001
------------------------
Frederic H. Bertrand
/S/ DAVID M. BOARDMAN Director February 21, 2001
------------------------
David M. Boardman
/S/ PAUL J. CARRARA Director February 21, 2001
------------------------
Paul J. Carrara
/S/ WILLIAM P. CODY Director February 21, 2001
------------------------
William P. Cody
/S/ SALLY W. CRAWFORD Director February 21, 2001
------------------------
Sally W. Crawford
/S/ RICHARD D. DRISCOLL Director February 21, 2001
------------------------
Richard D. Driscoll
/S/ PHILIP M. DRUMHELLER Director February 21, 2001
------------------------
Philip M. Drumheller
/S/ JOHN K. DWIGHT Director February 21, 2001
------------------------
John K. Dwight
/S/ LYN HUTTON Director February 21, 2001
------------------------
Lyn Hutton
PHILIP A. KOLVOORD Director February 21, 2001
------------------------
Philip A. Kolvoord
/S/ STEPHAN A. MORSE Director February 21, 2001
------------------------
Stephan A. Morse
/S/ JAMES C. PIZZAGALLI Director February 21, 2001
------------------------
James C. Pizzagalli
72
Name Title Date
---- ----- ----
/S/ ERNEST A. POMERLEAU Director February 21, 2001
-------------------------
Ernest A. Pomerleau
/S/ MARK W. RICHARDS Director February 21, 2001
-------------------------
Mark W. Richards
/S/ PALL D. SPERA Director February 21, 2001
-------------------------
Pall D. Spera
/S/ MARTEL D. WILSON, JR. Director February 21, 2001
-------------------------
Martel D. Wilson, Jr.
73
CHITTENDEN CORPORATION
SKU #0667-10K-01