SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d)
--- of the Securities Exchange Act of 1934
For Three Months Ended March 31, 2001
or
___ Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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
NOT APPLICABLE
Former Name, Former Address and Formal Fiscal Year
If Changed Since Last Report
Indicate by checkmark whether the Registrant (1) has filed all reports required
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
-
At May 4, 2000, there were 25,697,410 shares of the Corporation's $1.00 par
value common stock issued and outstanding.
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
2
Chittenden Corporation
Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
2001 2000
----------------------------------
(in thousands)
Assets
Cash and cash equivalents $192,047 $178,621
Securities available for sale 546,991 585,281
FHLB and FRB stock 12,927 12,311
Mortgage loans held for sale 25,422 44,950
Loans:
Commercial 535,518 515,926
Municipal 93,848 83,566
Real Estate:
Residential 987,142 1,024,174
Commercial 703,336 723,339
Construction 52,814 57,701
----------------------------------
Total Real Estate 1,743,292 1,805,214
Consumer 429,588 451,392
----------------------------------
Total Loans 2,802,246 2,856,098
Less: Allowance for loan losses (39,546) (40,255)
----------------------------------
Net loans 2,762,700 2,815,843
Accrued interest receivable 23,598 25,642
Other real estate owned 328 513
Other assets 41,805 39,020
Premises and equipment, net 51,669 51,959
Intangible assets 15,210 15,721
----------------------------------
Total assets $3,672,697 $3,769,861
==================================
Liabilities:
Deposits:
Demand $481,119 $530,975
Savings 1,902,051 1,934,227
Certificates of deposit less than $100,000 and other time deposits 617,988 615,336
Certificates of deposit $100,000 and over 222,097 211,869
----------------------------------
Total deposits 3,223,255 3,292,407
Short-term borrowings 45,425 93,757
Accrued expenses and other liabilities 58,641 41,631
----------------------------------
Total liabilities 3,327,321 3,427,795
Stockholders' Equity:
Preferred stock - $100 par value
authorized - 1,000,000 shares; issued and outstanding - none
Common stock - $1 par value; authorized - 60,000,000 shares;
issued - 28,589,428 in 2001 and 2000 28,589 28,589
Surplus 153,364 153,474
Retained earnings 230,400 222,140
Treasury stock, at cost - 2,847,018 shares in 2001 and 2,492,344 shares in 2000 (76,405) (65,637)
Accumulated other comprehensive income 6,015 164
Directors deferred compensation to be settled in stock 3,456 3,414
Unearned portion of employee restricted stock (43) (78)
----------------------------------
Total stockholders' equity 345,376 342,066
----------------------------------
Total liabilities and stockholders' equity $3,672,697 $3,769,861
==================================
The accompanying notes are an integral part of these consolidated financial
statements.
3
Chittenden Corporation
Consolidated Statements of Income
(Unaudited)
For the Three Months
Ended March 31,
2001 2000
----------------------------------
(in thousands)
Interest income:
Interest on loans $58,108 $59,829
Investment securities:
Taxable 9,658 10,729
Tax-favored 139 88
Short-term investments 234 19
----------------------------------
Total interest income 68,139 70,665
----------------------------------
Interest expense:
Deposits:
Savings 15,818 14,094
Time 11,152 10,385
----------------------------------
Total interest on deposits 26,970 24,479
Short-term borrowings 993 3,450
----------------------------------
Total interest expense 27,963 27,929
----------------------------------
Net interest income 40,176 42,736
Provision for loan losses 1,950 2,175
----------------------------------
Net interest income after provision for loan losses 38,226 40,561
----------------------------------
Noninterest income:
Investment management income 3,376 3,494
Service charges on deposit accounts 3,349 3,662
Mortgage servicing income 978 936
Gains on sales of loans, net 4,940 573
Credit card income, net 1,000 1,117
Insurance commissions, net 894 781
Other 2,663 2,970
----------------------------------
Total noninterest income 17,200 13,533
----------------------------------
Noninterest expense:
Salaries 14,018 14,788
Employee benefits 3,767 1,541
Net occupancy expense 4,735 4,834
Amortization of intangibles 512 540
Other real estate owned, income and expense, net 39 (50)
Special charges - 833
Other 9,878 10,301
----------------------------------
Total noninterest expense 32,949 32,787
----------------------------------
Income before income tax expense 22,477 21,307
Income tax expense 7,965 6,716
----------------------------------
Net income $14,512 $14,591
==================================
Basic earnings per share $0.56 $0.52
Diluted earnings per share 0.55 0.51
Dividends per share 0.24 0.22
The accompanying notes are an integral part of these consolidated financial
statements.
4
Chittenden Corporation
Consolidated Statements of CashFlows
(Unaudited)
For the Three Months
Ended March 31,
2001 2000
--------------------------------
(in thousands)
Cash flows from operating activities:
Net income $14,512 $14,591
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 1,950 2,175
Depreciation and amortization 1,406 1,676
Amortization of intangible assets 512 540
Amortization of premiums, fees, and discounts, net 801 (126)
Loss on sale of branch - (792)
Recovery of goodwill related to sale of branch - 701
Investment securities (gains) losses 428 688
Deferred income taxes (578) 7,356
Loans originated for sale (34,141) (31,962)
Proceeds from sales of loans 58,609 33,838
Gains on sales of loans (4,940) (573)
Changes in assets and liabilities:
Accrued interest receivable 2,044 (400)
Other assets (2,526) 200
Accrued expenses and other liabilities 14,511 (21,243)
--------------------------------
Net cash provided by operating activities 52,588 6,669
--------------------------------
Cash flows from investing activities:
Net cash used in branch divestitures - (21,823)
Proceeds from redemption of Federal Home Loan Bank stock - 2,836
Purchases of Federal Home Loan Bank stock (616) -
Proceeds from sales of securities available for sale 153,356 176,164
Proceeds from maturing securities and principal payments
on securities available for sale 125,372 25,112
Purchases of securities available for sale (231,881) (188,641)
Loans originated, net of principal repayments 50,355 (60,728)
Purchases of premises and equipment (1,116) (4,298)
--------------------------------
Net cash provided by (used in) investing activities 95,470 (71,378)
--------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits (69,152) 10,017
Net increase (decrease) in short-term borrowings (48,332) 57,251
Proceeds from issuance of treasury and common stock 41 1,866
Dividends on common stock (6,252) (6,247)
Repurchase of common stock (10,937) (20,351)
--------------------------------
Net cash provided by (used in) financing activities (134,632) 42,536
--------------------------------
Net increase (decrease) in cash and cash equivalents 13,426 (22,173)
Cash and cash equivalents at beginning of period 178,621 150,415
--------------------------------
Cash and cash equivalents at end of period $192,047 $128,242
================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $28,277 $29,029
Income taxes 3,353 17,685
Non-cash investing and financing activities:
Loans transferred to other real estate owned 142 431
Issuance of treasury and restricted stock 76 70
The accompanying notes are an integral part of these consolidated financial
statements.
5
Chittenden Corporation
Notes to Consolidated Financial Statements
NOTE 1 - ACCOUNTING POLICIES
The Company's significant accounting policies are described in Note 1 of
the Notes to Consolidated Financial Statements included in its 2000 Annual
Report on Form 10-K filed with the Securities and Exchange Commission. For
interim reporting purposes, the Company follows the same basic accounting
policies and considers each interim period as an integral part of an annual
period. Certain amounts for 2000 have been reclassified to conform to 2001
classifications.
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods. Results for interim periods are
not necessarily indicative of the results of operations for the full year or any
other interim period.
Effective January 1, 2001, the Company adopted SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities ("SFAS 133"). This statement
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 income 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 income and requires that a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. If a derivative qualifies as a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative are either offset against the
change in the fair value of assets, liabilities, or firm commitments through
earnings or are recognized in other comprehensive income until the hedged item
is recognized in earnings. The ineffective portions of a derivative's change in
fair value is to be immediately recognized in earnings. The Company's
derivatives in sale and the related forward sale agreements with investors. The
Company's adoption of SFAS 133 did not have a material impact on its financial
position or results of operations.
NOTE 2 - ACQUISITIONS AND SALES
On January 26, 2001, the Company announced that it had signed a
definitive merger agreement with Maine Bank Corp., headquartered in Portland,
Maine whereby Chittenden would acquire Maine Bank Corp., and its subsidiary,
Maine Bank & Trust for $49.25 million in cash. The acquisition was completed on
April 30, 2001, after the receipt of the final regulatory approval.
On May 28, 1999, the Company acquired Vermont Financial Services Corp.
(VFSC) 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.
During the first quarter of 2001, the Company sold its retail credit card
portfolio, totaling approximately $39 million, at a gain of $4.3 million. The
Company will continue to service these accounts into the second quarter when
they are converted to the acquiring Company's systems. The recorded gain is net
of accrued expenses related to the conversion which will occur in the second
quarter of 2001.
NOTE 3 - SPECIAL CHARGES
Special charges of $833,000 (pre-tax) were recorded during the first
quarter of 2000 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 required as a condition of
regulatory approval of the VFSC merger. Total loans and deposits sold in the
final branch divestiture were $27.0 million and $3.6 million, respectively. Upon
consummation of the VFSC acquisition in the second quarter of 1999, the Company
recorded special charges, which included an accrual for merger related expenses
that would occur in future periods. Included in accrued expenses and other
liabilities at March 31, 2001, are merger-related expenses totaling $828,000,
which will be paid in future periods.
6
The change in accrued merger related expenses at March 31, 2001 is summarized
below (amounts in thousands):
Less:
Accrual Balance as Cash Accrual Balance as
of December 31, 2000 Transactions of March 31, 2001
============================================================
Compensation and Benefits $1,218 $390 $828
------------------------------------------------------------
Total $1,218 $390 $828
============================================================
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
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.
NOTE 5 - COMPREHENSIVE INCOME
The Company's comprehensive income for the three-month periods ended
March 31, 2001 and 2000 is presented below (amounts in thousands):
For the Three Months
Ended March 31,
2001 2000
----------------------------
Net Income $14,512 $14,591
Unrealized losses on investment securities:
Unrealized holding gains (losses) on securities available for sale, net of tax 5,573 (1,294)
Reclassification adjustments for (gains) losses arising during period, net of tax 278 475
----------------------------
Total Comprehensive income $20,363 $13,772
============================
NOTE 6 - BUSINESS SEGMENTS
The Company has identified Commercial Banking as its reportable operating
business segment based on the fact that the chief operating decision-maker views
the results of operations as a single strategic unit. The Commercial Banking
segment is comprised of Chittenden Bank, The Bank of Western Massachusetts,
Flagship Bank and Trust, and Chittenden Connecticut Corporation, 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.
The accounting policies used in the disclosure of business segments are
the same as those described in the summary of significant accounting policies
included in Note 1 of the Company's 2000 Annual Report on Form 10-K. The
consolidation adjustment reflects certain eliminations of inter-segment revenue,
cash and parent company investments in subsidiaries.
7
For the Three Months Ended March 31, 2001 Commercial Consolidation
(in thousands) Banking Other (2) Adjustments Consolidated
--------------------------------------------------------------
Net interest revenue (1) $40,169 $103 $(96) $40,176
Noninterest income 16,300 921 (21) 17,200
Provision for loan losses 1,950 - - 1,950
Noninterest expense 31,971 999 (21) 32,949
--------------------------------------------------------------
Net income (loss) before income tax 22,548 25 (96) 22,477
Income tax expense/(benefit) 7,936 29 - 7,965
--------------------------------------------------------------
Net income (loss) $14,612 $(4) $(96) $14,512
==============================================================
End of Period Assets $3,668,010 $334,533 $(329,846) $3,672,697
For the Three Months Ended March 31, 2000 Commercial Consolidation
(in thousands) Banking Other (2) Adjustments Consolidated
--------------------------------------------------------------
Net interest revenue (1) $42,718 $75 $(57) $42,736
Noninterest income 12,750 792 (9) 13,533
Provision for loan losses 2,175 - - 2,175
Noninterest expense 31,860 936 (9) 32,787
------------- --------------- --------------- ----------------
Net income (loss) before income tax 21,433 (69) (57) 21,307
Income tax expense/(benefit) 6,725 (9) - 6,716
------------- --------------- --------------- ----------------
Net income (loss) $14,708 $(60) $(57) $14,591
============= =============== =============== ================
End of Period Assets $3,834,260 $342,818 $(338,041) $3,839,037
(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 the
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.
NOTE 7 - SUBSEQUENT EVENT
On April 18, 2001, the Company declared regular dividends of approximately
$6.2 million, or $0.24 per share, to be paid on May 18, 2001 to shareholders of
record on May 4, 2001.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
On May 28, 1999, Chittenden Corporation ("Chittenden" or "the Company")
completed the acquisition of Vermont Financial Services Corp. (VFSC) in a
stock-for-stock transaction accounted for as a pooling of interests. The Company
recognized $792,000 of after-tax special charges in the first quarter of 2000
related to the final branch sale required as a condition of the regulatory
approval of the acquisition. Results excluding these special charges are
referred to in the following discussion as operating. A reconciliation of the
Company's net income to its operating earnings for the periods ended March 31,
2001 and 2000 is presented below (amounts in thousands):
For the Three Months
Ended March 31,
--------------------------
2001 2000
Net income (loss), as reported $14,512 $14,591
Add:
Loss on branch sale - 833
Tax effect of adjustment for loss on branch sale - (41)
--------------------------
Operating net income $14,512 $15,383
==========================
Diluted Operating EPS $0.55 $0.54
8
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 Corporation posted first quarter 2001 net income of $0.55 per
diluted share, compared to the operating net income of $0.54 per diluted share
posted in the first quarter of last year. Net income for the first quarter of
2001 was $14.5 million, compared to operating net income of $15.4 million
recorded in the same quarter a year ago. Return on average equity was 17.15% for
the quarter ended March 31, 2001 compared with operating return on average
equity of 17.35% for the same period in 2000. Return on average assets was 1.61%
for the first quarter of 2001, flat with the operating return on average assets
of 1.60% for the first quarter of last year.
Net interest income on a tax equivalent basis for the three months ended
March 31, 2001 was $40.7 million, down from $43.1 million for the same period a
year ago. The yield on earning assets was 4.78% in the first quarter of 2001,
compared with 4.81% in the same period of 2000 and 4.70% for the fourth quarter
of 2000. The decrease in net interest income from the first quarter of 2000 was
attributed primarily to lower levels of earning assets, of which approximately
$63.5 million related to the Company's repurchase of shares. Of the eight basis
point increase in the margin from the fourth quarter of 2000, approximately half
was attributed to the Company's asset/liability mix and to fewer days in the
first quarter than in the fourth quarter.
9
The following table presents an analysis of average rates and yields on a
fully taxable equivalent basis for the three months ended March 31,
2001 2000
-------------------------------------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense(1) Rate(1) Balance Expense(1) Rate(1)
-------------------------------------------------------------------------
Assets (in thousands)
Interest-earning assets:
Loans $2,832,017 $58,614 8.39% $2,920,499 $60,105 8.28%
Investments:
Taxable 592,799 9,658 6.61% 671,368 10,729 6.43%
Tax-favored securities 12,542 197 6.36% 8,345 130 6.26%
Interest-bearing deposits in banks 225 2 4.05% 275 3 4.14%
Federal funds sold 16,268 232 5.78% 1,205 17 5.67%
------------------------ ------------------------
Total interest-earning assets 3,453,851 68,703 8.07% 3,601,692 70,984 7.93%
------------ ------------
Noninterest-earning assets 244,733 295,614
Allowance for loan losses (40,310) (41,694)
------------ ------------
Total assets $3,658,274 $3,855,612
============ ============
Liabilities and stockholders' equity
Interest-bearing liabilities:
Savings $1,885,353 $15,818 3.40% $1,818,721 $14,094 3.12%
Certificates of deposit under $100,000
and other time deposits 617,149 8,159 5.36% 647,039 7,727 4.80%
Certificates of deposit $100,000 and over 210,003 2,993 5.78% 205,725 2,658 5.20%
------------------------ ------------------------
Total interest-bearing deposits 2,712,505 26,970 4.03% 2,671,485 24,479 3.69%
Short-term borrowings 66,612 993 6.05% 233,961 3,450 5.93%
------------------------ ------------------------
Total interest-bearing liabilities 2,779,117 27,963 4.08% 2,905,446 27,929 3.87%
------------ ------------
Noninterest-bearing liabilities:
Demand deposits 481,130 515,045
Other liabilities 54,950 78,482
------------ ------------
Total liabilities 3,315,197 3,498,973
Stockholders' equity 343,077 356,639
------------ ------------
Total liabilities and stockholders' equity $3,658,274 $3,855,612
============ ============
Net interest income $40,740 $43,055
============ ============
Interest rate spread (2) 3.99% 4.06%
Net yield on earning assets (3) 4.78% 4.81%
(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.
Noninterest income amounted to $17.2 million for the first quarter of
2001, up from $13.5 million for the first quarter of 2000. Gains on sale of
loans consisted of $641,000 from mortgage banking activities and a $4.3 million
gain on the sale of the Company's retail credit card portfolio. This sale does
not affect Chittenden's business credit card portfolio and Chittenden will
continue to offer ATM/Check cards with the VISA logo. Also affecting the net
increase was a decline in service charges on deposit accounts. This decline was
due to a decrease in overdraft fees collected, which was partially offset by an
increase in cash management fee income. Also included in other noninterest
income was $428,000 in losses incurred on the restructuring of the investment
portfolio early in the 2001 quarter.
Noninterest expenses increased to $33.0 million for the first quarter of
2001 from $32.8 million for same period last year. Salaries were $800,000 lower
in 2001 than in 2000 due to lower staffing levels. Employee benefits increased
$2.2 million over the first three months of 2000. This increase was attributable
to a $1.3 million pension curtailment gain taken in the first quarter of 2000
upon the merger of the Vermont National and Chittenden Bank pension plans and to
a $600,000 increase in the accrual for medical and dental claims incurred but
not yet reported (IBNR). Because the Company is self-insured for these claims,
it maintains an accrual for IBNR to reflect services already performed which
will be paid in future periods. The accrual was adjusted to reflect an increase
in the number of participants in the Company's plan resulting from the addition
of former Vermont National Bank employees, as well as employees of The Bank of
Western Massachusetts, Flagship Bank, and the Pomerleau Agency, which have
recently been added to the plan. Net occupancy expenses for the first quarter of
2001 were $4.7 million compared with $4.8 million a year ago and
10
$3.8 million for the fourth quarter of 2000. The increase over the consecutive
quarter was primarily due to a $700,000 accrual in relation to space vacated by
restructurings.
Income Taxes
The Company and its subsidiaries 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 banks based upon average deposit levels in lieu of taxing
income. Franchise taxes are included in income tax expense in the consolidated
statements of income.
For the three months ended March 31, 2001 and 2000, Federal and state
income tax provisions amounted to $7.9 million and $6.7 million, respectively.
The effective income tax rates for the respective periods were 35.44% and
30.52%, after adjusting for the tax effect of the branch sale. In addition, the
2000 provision was reduced by approximately $750,000 for the effect of the
exercise of non-qualified stock options. Excluding this amount, the 2000
effective tax rate would have been 33.91%. The increase from this amount to the
35.44% for the first quarter of 2001 is primarily attributable to increases in
taxable income at the Massachusetts banks, relative to the Vermont bank. During
all periods, the Company's statutory Federal corporate tax rate was 35%.
Financial Position
The Company invests the majority of its assets in loans and securities.
Total loans decreased $156.0 million from March 31, 2000 to $2.8 billion at
March 31, 2001. Residential real estate loans accounted for $80 million of the
decline due to higher levels of prepayments caused by declining market interest
rates. During the quarter, the Company originated primarily fixed rate
residential loans, which were sold on the secondary market rather than variable
rate residential real estate loans, which it keeps in portfolio.
Consumer loans declined $108 million from March 31, 2000. Of that amount,
approximately $39 million was due to the sale of the retail credit card
portfolio. In addition, paydowns on the automotive finance portfolio, driven by
lower market interest rates, outpaced originations. The Company's decision
effective January 1, 2001, to concentrate its lease origination efforts in
Vermont, while scaling back in Massachusetts, also affected automotive finance
originations in the first quarter of 2001.
Overall commercial balances remained flat from year-end, with commercial
real estate loans down $20 million while commercial loans increased by the same
amount. The decline in commercial real estate was also due to the declining rate
environment in which institutional lenders, such as insurance companies,
actively solicit the Company's customers with long term fixed rate financing.
The commercial portfolio at March 31, 2001 is $44 million higher than a year
ago, with growth in both the commercial real estate and commercial categories.
Total deposits at March 31, 2001 were $3.2 billion, down $69.2 million
from December 31, 2000 and up $36.6 million from March 31, 2000. The decline
from year-end was primarily related to demands and money market/savings
accounts. Much of this was due to lower municipal and commercial deposits
resulting from seasonal declines as well as lower levels of liquidity in these
sectors. The decrease in securities available for sale of $38.3 million from
December 31, 2000 to $546.9 million at March 31, 2001 is primarily attributable
to the use of proceeds from maturing securities to reduce short term borrowings,
which increased late in 1999 to replace funding from deposits sold in the branch
divestitures.
Credit Quality
Nonperforming assets include nonaccrual loans and foreclosed real estate
(Other Real Estate Owned). As of March 31, 2001, nonperforming assets totaled
$11.9 million, flat to December 31, 2000 and to the end of the first quarter of
2000. Net charge-off activity totaled $2.7 million for the first quarter of 2001
compared to $2.0 million for the same period in 2000. Included in net
charge-offs for the first quarter of 2001 was approximately $300,000 of retail
credit card charge-offs recognized before the sale of that portfolio. The
allowance for loan losses was $39.5 million at March 31, 2001, down from $41.2
million a year ago, and $40.3 million at December 31, 2000.
The provision for possible loan losses was approximately $2.0 million in
2001 as compared to $2.0 million in 2000. The lower provision in 2001 was due to
the sale of the retail credit card portfolio. Net retail credit card charge-offs
in 2000 were $1.3 million or approximately $325,000 per quarter.
11
A summary of credit quality follows:
3/31/01 12/31/00 3/31/00
-------------------------------------------------
(in thousands)
Nonaccrual loans $11,560 $11,376 $11,280
Other real estate owned (OREO) 328 513 690
-------------------------------------------------
Total nonperforming assets (NPA) $11,888 $11,889 $11,970
=================================================
Loans past due 90 days or more
and still accruing interest $4,318 $4,595 $6,594
Allowance for loan losses 39,546 40,255 41,228
NPA as % of loans plus OREO 0.42% 0.42% 0.41%
Allowance as % of loans 1.41% 1.41% 1.40%
Allowance as % of nonperforming loans 342.09% 353.86% 365.50%
Allowance as % of NPA 332.65% 338.59% 344.43%
Provisions for and activity in the allowance for loan losses are summarized as
follows:
Three Months
Ended March 31,
2001 2000
------------------------------------
(in thousands)
Beginning Balance $40,255 $41,079
Provision for Loan Losses 1,950 2,175
Loans Charged Off (3,441) (2,793)
Loan Recoveries 782 767
------------------------------------
Ending Balance $39,546 $41,228
====================================
The allowance for possible loan losses is based on management's estimate
of the amount required to reflect the risks in the loan portfolio, based on
circumstances and conditions known at each reporting date. 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 the 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 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.
Capital
On January 19, 2000, the Board of Directors authorized the repurchase of
up to two million shares of the Corporation's common stock in negotiated
transactions or open market purchases. On July 19, 2000, the Board authorized
the repurchase of an additional two million shares, bringing the total
authorization to four million shares. As of March 31, 2001, approximately 2.9
million shares had been repurchased. Based on the resolution passed by the
Corporation's Board of Directors, the Company has until July 2002 to purchase
the remaining 1.1 million shares authorized.
Stockholders' equity totaled $345.4 million at March 31, 2001, compared to
$342.1 million at year-end 2000. The current level reflects net income of $14.5
million less dividends paid to shareholders totaling $6.3 million, and share
repurchases totaling $10.9 million. Accumulated other comprehensive income
increased $5.8 million to $6.0 million at March 31, 2001 from $164,000 at
December 31, 2000. "Tier One" capital, consisting entirely of common equity,
measured 11.12% of risk-weighted assets at March 31, 2001. Total capital,
including the "Tier Two" allowance for loan losses, was 12.38% of risk-weighted
assets. The leverage capital ratio was 8.97%. These ratios placed Chittenden in
the "well-capitalized" category according to regulatory standards.
12
Liquidity
The Company's liquidity and rate sensitivity are monitored by the
executive management committee, based upon policies approved by the Board of
Directors. Strategies are implemented by the Company's executive management
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 March 31, 2001, the Company maintained cash
balances and short-term investments of approximately $192.0 million, compared
with $178.6 million at December 31, 2000.
Interest-rate risk is the sensitivity of income to variations in interest
rates over both short-term and long-term horizons. The primary goal of
interest-rate management is to control this risk within limits approved by the
Board of Directors. These limits and guidelines reflect the Company's tolerance
for interest-rate risk. The Company attempts to control interest-rate risk by
identifying exposures, quantifying them and taking appropriate actions. The
Company quantifies its interest-rate risk exposure using sophisticated
simulation and valuation models, as well as simpler gap analyses. For a full
discussion of interest-rate risk see "Liquidity and Rate Sensitivity" in the
Company's 2000 annual report on Form 10-K. There has not been a material change
in the Company's interest-rate exposure or its anticipated market risk during
the current period.
13
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
The Company's fourth quarter 2000 press release announcing earnings
and quarterly dividends was filed on Form 8-K on January 22, 2001.
The Company's quarterly financial statements were filed on Form 8-K
on January 29, 2001.
The Company's press release announcing the appointment of James C.
Garvey as Flagship Bank and Trust Company's new President and Chief
Executive Officer succeeding the late Michael J. Toomey was filed on
Form 8-K on February 2, 2001.
The Company's press release announcing the definitive agreement
whereby Chittenden will acquire Maine Bank Corp., and its subsidiary
Maine Bank & Trust was filed on Form 8-K on February 2, 2001.
CHITTENDEN CORPORATION
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHITTENDEN CORPORATION
Registrant
May 14, 2001 /s/ PAUL A. PERRAULT
- ------------ --------------------
Date Paul A. Perrault,
Chairman, President and
Chief Executive Officer
May 14, 2001 /s/ KIRK W. WALTERS
- ------------ -------------------
Date Kirk W. Walters
Executive Vice President,
Treasurer, and Chief Financial Officer