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 Six Months Ended June 30, 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 03-028404
(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 August 8, 2001, there were 25,685,031 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)
June 30, December 31,
2001 2000
---------------------------
(in thousands)
Assets
Cash and cash equivalents $ 228,073 $ 178,621
Securities available for sale 571,025 585,281
FHLB stock 13,613 12,311
Loans held for sale 34,327 44,950
Loans:
Commercial 632,768 515,926
Municipal 62,535 83,566
Real Estate:
Residential 997,019 1,024,174
Commercial 785,223 723,339
Construction 52,772 57,701
---------------------------
Total Real Estate 1,835,014 1,805,214
Consumer 405,185 451,392
---------------------------
Total Loans 2,935,502 2,856,098
Less: Allowance for loan losses (44,541) (40,255)
---------------------------
Net loans 2,890,961 2,815,843
Accrued interest receivable 24,836 25,642
Other real estate owned 625 513
Other assets 44,239 39,020
Premises and equipment, net 55,272 51,959
Intangible assets 35,058 15,721
---------------------------
Total assets $ 3,898,029 $ 3,769,861
===========================
Liabilities:
Deposits:
Demand $ 567,788 $ 530,975
Savings 2,044,384 1,934,227
Certificates of deposit less than $100,000 and other time deposits 644,701 615,336
Certificates of deposit $100,000 and over 195,832 211,869
---------------------------
Total deposits 3,452,705 3,292,407
Short-term borrowings 45,422 93,757
Accrued expenses and other liabilities 50,969 41,631
---------------------------
Total liabilities 3,549,096 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; 28,594 28,589
issued - 28,593,708 in 2001 and 28,589,428 in 2000
Surplus 153,399 153,474
Retained earnings 238,557 222,140
Treasury stock, at cost - 2,944,180 shares in 2001 and 2,492,344 shares in 2000 (79,588) (65,637)
Accumulated other comprehensive income 4,549 164
Directors deferred compensation to be settled in stock 3,514 3,414
Unearned portion of employee restricted stock (92) (78)
---------------------------
Total stockholders' equity 348,933 342,066
---------------------------
Total liabilities and stockholders' equity $ 3,898,029 $ 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 For the Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
-------------------------------------------------
(in thousands) (in thousands)
Interest income:
Interest on loans $ 57,955 $ 61,555 $ 116,062 $ 121,384
Investment securities:
Taxable 9,580 10,104 19,238 20,819
Tax-favored 248 120 387 222
Short-term investments 103 142 337 161
------------------------------------------------
Total interest income 67,886 71,921 136,024 142,586
------------------------------------------------
Interest expense:
Deposits:
Savings 13,479 15,400 29,297 29,493
Time 10,951 10,776 22,103 21,162
------------------------------------------------
Total interest on deposits 24,430 26,176 51,400 50,655
Short-term borrowings 772 4,307 1,765 7,757
------------------------------------------------
Total interest expense 25,202 30,483 53,165 58,412
------------------------------------------------
Net interest income 42,684 41,438 82,859 84,174
Provision for loan losses 2,041 2,175 3,991 4,350
------------------------------------------------
Net interest income after provision for loan losses 40,643 39,263 78,868 79,824
------------------------------------------------
Noninterest income:
Investment management income 3,849 3,124 7,225 6,617
Service charges on deposit accounts 3,705 3,393 7,053 7,055
Mortgage servicing income 944 1,121 1,922 2,058
Gains on sales of loans, net 1,945 547 6,884 1,120
Credit card income, net 1,114 1,428 2,114 2,545
Insurance commissions, net 834 688 1,728 1,469
Other 3,052 3,256 5,716 6,226
------------------------------------------------
Total noninterest income 15,443 13,557 32,642 27,090
------------------------------------------------
Noninterest expense:
Salaries 15,350 13,124 29,367 27,911
Employee benefits 3,102 2,800 6,869 4,342
Net occupancy expense 4,260 3,668 8,995 8,502
Amortization of intangibles 741 520 1,253 1,060
Other real estate owned, income and expense, net 8 (23) 47 (67)
Special charges - - - 833
Other 10,364 10,640 20,242 20,935
------------------------------------------------
Total noninterest expense 33,825 30,729 66,773 63,516
------------------------------------------------
Income before income tax expense 22,261 22,091 44,737 43,398
Income tax expense 7,935 7,620 15,900 14,336
------------------------------------------------
Net income $ 14,326 $ 14,471 $ 28,837 $ 29,062
================================================
Basic earnings per share $ 0.56 $ 0.53 $ 1.12 $ 1.05
Diluted earnings per share 0.55 0.53 1.10 1.04
Dividends per share 0.24 0.24 0.48 0.46
The accompanying notes are an integral part of these consolidated financial
statements.
4
Chittenden Corporation
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months
Ended June 30,
2001 2000
-----------------------
(in thousands)
Cash flows from operating activities:
Net income $ 28,837 $ 29,062
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 3,991 4,350
Depreciation and amortization 2,943 2,596
Amortization of intangible assets 1,253 1,060
Amortization of premiums, fees, and discounts, net 944 253
Recovery of goodwill related to sale of branch - 702
Investment securities (gains) losses 407 688
Deferred income taxes (1,544) 10,417
Loans originated for sale (167,272) (82,858)
Proceeds from sales of loans 184,779 78,056
Gains on sales of loans (6,884) (1,120)
Changes in assets and liabilities, net of effect from purchase of acquired
companies:
Accrued interest receivable 1,674 (718)
Other assets (1,956) 3,177
Accrued expenses and other liabilities 8,817 (32,253)
-----------------------
Net cash provided by operating activities 55,989 13,412
-----------------------
Cash flows from investing activities:
Cash acquired, net of cash paid in acquisition of Maine Bank & Trust 8,001 -
Purchases of Federal Home Loan Bank stock (616) (1,494)
Proceeds from sales of securities available for sale 189,159 186,464
Proceeds from maturing securities and principal payments
on securities available for sale 191,994 51,203
Purchases of securities available for sale (355,614) (196,998)
Loans originated, net of principal repayments 88,052 (31,758)
Purchases of premises and equipment (458) (7,883)
-----------------------
Net cash provided by (used in) investing activities 120,518 (466)
-----------------------
Cash flows from financing activities:
Net increase (decrease) in deposits (52,127) (39,193)
Net increase (decrease) in short-term borrowings (48,335) 88,942
Tax benefit of stock plans - 856
Proceeds from issuance of treasury and common stock 823 1,707
Dividends on common stock (12,421) (12,807)
Repurchase of common stock (14,995) (47,081)
-----------------------
Net cash provided by (used in) financing activities (127,055) (7,576)
-----------------------
Net increase (decrease) in cash and cash equivalents 49,452 5,370
Cash and cash equivalents at beginning of period 178,621 150,415
-----------------------
Cash and cash equivalents at end of period $ 228,073 $ 155,785
=======================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 26,047 $ 59,886
Income taxes 19,978 6,875
Non-cash investing and financing activities:
Loans transferred to other real estate owned 821 1,480
Issuance of treasury and restricted stock 143 70
Assets acquired and liabilities assumed through acquisitions:
Fair value of assets acquired $ 239 $ -
Liabilities assumed 212 -
Cash paid 47 -
-----------------------
Goodwill $ 20 $ -
=======================
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 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.
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.
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 portion of a
derivative's change in fair value is to be immediately recognized in earnings.
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's adoption of SFAS 133 did not have a material impact on
its financial position or results of operations.
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This
Statement replaces SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, and rescinds FASB Statement
No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125. SFAS No. 140 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities. This
Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
This Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001 and is effective
for recognition and reclassification of collateral and for disclosures relating
to securitization transactions and collateral for fiscal years ending after
December 15, 2000. The Company has quantified the impact of provisions
effective for 2000 and 2001 and the adoption did not have a material impact on
its financial position or results of operations.
NOTE 2 - ACQUISITIONS AND SALES
On April 30, 2001, the Company acquired Maine Bank Corp., headquartered in
Portland, Maine and its subsidiary, Maine Bank & Trust for $49.25 million in
cash. The acquisition has been accounted for as a purchase and, accordingly,
the operations of Maine Bank & Trust (MBT) are included in these financial
statements from the date of acquisition.
6
The purchase price has been allocated to assets acquired and liabilities
assumed based on estimates of fair value at the date of acquisition. The excess
of purchase price over the fair value of assets acquired has been recorded as
goodwill. The fair value of these assets and liabilities is summarized as
follows (in thousands):
Cash and cash equivalents ...................................................... $ 54,519
FHLB Stock ..................................................................... 686
Securities available for sale .................................................. 5,968
Net loans ...................................................................... 168,860
Premises and equipment ......................................................... 5,798
Goodwill ....................................................................... 20,590
Prepaid expenses and other assets .............................................. 3,422
Deposits ....................................................................... (212,425)
Accrued expenses and other liabilities ......................................... 34
------------------
Total acquisition cost ......................................................... $ 47,452
==================
Included in the total acquisition cost is approximately $636,000 of
capitalized cost incurred in connection with the acquisition. Following is
supplemental information reflecting selected pro forma results as if this
acquisition had been consummated as of January 1, 2000 (in thousands, except
EPS):
For the three months For the six months
ended June 30, ended June 30,
2001 2000 2001 2000
--------------------------------------------------------------
Total revenue $59,657 $59,731 $121,568 $119,400
Income before income taxes 22,534 23,174 45,708 45,312
Net income 14,463 15,048 29,303 30,055
Earnings per share (EPS) 0.56 0.55 1.12 1.07
Total revenue includes net interest income and noninterest income.
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. An
additional gain of $330,000 was recognized in the second quarter of 2001 after
the expiration of certain contingent obligations accrued in the first quarter.
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 $3.6 million and $27.0 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 June 30, 2001, are merger-related expenses totaling $627,000,
which will be paid in future periods.
The change in accrued merger related expenses at June 30, 2001 is summarized
below (amounts in thousands):
Accrual Balance as Less: Accrual Balance as
of December 31, 2000 Cash Transactions of June 30, 2001
=================================================================================
Compensation and Benefits $1,218 $591 $627
---------------------------------------------------------------------------------
Total $1,218 $591 $627
=================================================================================
7
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("SFAS 141"), and
No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). Statement No. 141
requires that the purchase accounting method be used for all business
combinations initiated after June 30, 2001.
SFAS 142 addresses the method of identifying and measuring goodwill and other
intangible assets acquired in a business combination, eliminates further
amortization of goodwill, and requires periodic evaluations of impairment of
goodwill balances. SFAS 142 is effective for fiscal years beginning after
December 15, 2001. The Company is currently assessing the impact of adopting
SFAS 141 and SFAS 142. In relation to SFAS 142, the Company expects that its
annualized goodwill amortization of $2.6 million will be eliminated beginning in
2002.
NOTE 5 - COMPREHENSIVE INCOME
The Company's comprehensive income for the three-month and six-month periods
ended June 30, 2001 and 2000 is presented below (amounts in thousands):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
--------------------------------------------
Net Income $14,326 $14,471 $28,837 $29,062
Unrealized gains/losses on investment securities:
Unrealized holding gains (losses) on securities available for sale, net of tax (1,452) (216) 4,120 (1,035)
Reclassification adjustments for (gains) losses arising during period, net of tax (14) 475 265 475
--------------------------------------------
Total Comprehensive income $12,860 $14,730 $33,222 $28,502
============================================
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, Maine Bank & Trust, and Chittenden Connecticut
Corporation, which provide similar products and services, have similar
distribution methods, types of customers and regulatory responsibilities. The
Commercial Banking segment 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 adjustments reflect certain eliminations of inter-segment revenue,
cash and parent company investments in subsidiaries.
8
For the Three Months Ended June 30, 2001 Commercial Consolidation
(in thousands) Banking Other (2) Adjustments Consolidated
------------------------------------------------------------
Net interest revenue (1) $ 42,684 $ 66 $ (66) $ 42,684
Noninterest income 14,607 836 - 15,443
Provision for loan losses 2,041 - - 2,041
Noninterest expense 32,826 999 - 33,825
------------------------------------------------------------
Net income (loss) before income tax 22,424 (97) (66) 22,261
Income tax expense/(benefit) 7,948 (13) - 7,935
------------------------------------------------------------
Net income (loss) $ 14,476 $ (84) $ (66) $ 14,326
============================================================
End of Period Assets $3,896,909 $355,355 $(354,235) $3,898,029
For the Three Months Ended June 30, 2000 Commercial Consolidation
(in thousands) Banking Other (2) Adjustments Consolidated
------------------------------------------------------------
Net interest revenue (1) $ 41,430 $ 122 $ (114) $ 41,438
Noninterest income 12,864 681 12 13,557
Provision for loan losses 2,175 - - 2,175
Noninterest expense 29,960 757 12 30,729
------------------------------------------------------------
Net income (loss) before income tax 22,159 46 (114) 22,091
Income tax expense/(benefit) 7,599 21 - 7,620
------------------------------------------------------------
Net income (loss) $ 14,560 $ 25 $ (114) $ 14,471
============================================================
End of Period Assets $3,814,718 $342,606 $(341,233) $3,816,091
For the Six Months Ended June 30, 2001 Commercial Consolidation
(in thousands) Banking Other (2) Adjustments Consolidated
------------------------------------------------------------
Net interest revenue (1) $ 82,852 $ 169 $ (162) $ 82,859
Noninterest income 30,905 1,758 (21) 32,642
Provision for loan losses 3,991 - - 3,991
Noninterest expense 64,796 1,998 (21) 66,773
------------------------------------------------------------
Net income (loss) before income tax 44,970 (71) (162) 44,737
Income tax expense/(benefit) 15,883 17 - 15,900
------------------------------------------------------------
Net income (loss) $ 29,087 $ (88) $ (162) $ 28,837
============================================================
End of Period Assets $3,896,909 $355,355 $(354,235) $3,898,029
For the Six Months Ended June 30, 2000 Commercial Consolidation
(in thousands) Banking Other (2) Adjustments Consolidated
------------------------------------------------------------
Net interest revenue (1) $ 84,148 $ 198 $ (172) $ 84,174
Noninterest income 25,614 1,473 3 27,090
Provision for loan losses 4,350 - - 4,350
Noninterest expense 61,820 1,693 3 63,516
------------------------------------------------------------
Net income (loss) before income tax 43,592 (22) (172) 43,398
Income tax expense/(benefit) 14,324 12 - 14,336
------------------------------------------------------------
Net income (loss) $ 29,268 $ (34) $ (172) $ 29,062
============================================================
End of Period Assets $3,814,718 $342,606 $(341,233) $3,816,091
(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.
9
NOTE 7 - SUBSEQUENT EVENT
On July 18, 2001, the Company declared regular dividends of $0.24 per share
or approximately $6.2 million, to be paid on August 17, 2001 to shareholders of
record on August 3, 2001. In addition, Chittenden announced a five-for-four
stock split. The stock split will be distributed on September 14, 2001, to
shareholders of record on August 31, 2001. The accompanying consolidated
financial statements do not give effect to the stock split.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
On April 30, 2001, the Company acquired Maine Bank Corp., headquartered in
Portland, Maine and its subsidiary, Maine Bank & Trust for $49.25 million in
cash. The acquisition has been accounted for as a purchase and, accordingly,
the operations of Maine Bank & Trust (MBT) are included in these financial
statements from the date of acquisition.
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 June 30,
2001 and 2000 is presented below (amounts in thousands):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------------------
2001 2000 2001 2000
Net income, as reported $14,326 $14,471 $28,837 $29,062
Add:
Loss on branch sale - - - 833
Tax effect of adjustment for loss
on branch sale - - - (41)
------------------------------------------
Operating net income $14,326 $14,471 $28,837 $29,854
==========================================
Diluted Operating EPS $ 0.55 $ 0.53 $ 1.10 $ 1.07
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 second quarter 2001 net income of $0.55 per
diluted share, compared to the net income of $0.53 per diluted share posted in
the second quarter of last year. Net income for the second quarter of 2001 was
$14.3 million, compared to net income of $14.5 million recorded in the same
quarter a year ago. Return on average equity was 16.63% for the quarter ended
June 30, 2001 compared with operating return on average equity of 17.32% for the
same period in 2000. Return on average assets was 1.51% for the second quarter
of 2001, compared with the return on average assets of 1.52% for the second
quarter of last year.
For the first six months of 2001, diluted earnings per share were $1.10,
compare to the $1.07 diluted operating earnings per share recorded for the same
time period in 2000. Year to date net income for 2001 was $28.8 million,
compared to operating net income of $29.9 million for the same period a year
ago. Return on average equity for the first six months of 2001 was 16.89%, down
from operating return on average equity of 17.24% a year ago. Return on average
assets for the first six months of 2001 was 1.56%, flat to a year ago. The
decline in return on average equity for the quarter and the year to date in 2001
has been a result of higher levels of unrealized gains on the investment
portfolio. Unrealized gains (after tax) averaged approximately $5.4 million for
the second quarter and $4.2 million for the year to date of 2001 versus average
unrealized losses of approximately $7.5 million for the quarter and for the
first six months of 2000.
Net interest income on a tax equivalent basis for the three months ended June
30, 2001 was $43.3 million, up from $41.8 million for the same period a year
ago. The yield on earning assets was 4.87% in the second quarter of 2001,
compared with 4.66% in the same period of 2000 and 4.78% for the first quarter
of 2001. The increase in net interest
10
income from the second quarter of 2000 was attributed primarily to lower cost of
funds in 2001 due to a reduction in short-term borrowings, as well as the
acquisition of Maine Bank & Trust. Excluding the impact of MBT, the net yield on
earning assets in the second quarter of 2001 would have been 4.82%.
The following table presents an analysis of average rates and yields on a
fully taxable equivalent basis for the three months and six months ended June
30, 2001 and 2000:
For the Three Months For the Three Months
Ended June 30, Ended June 30,
2001 2000
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Description Balance Expense(1) Rate(1) Balance Expense(1) Rate(1)
- ----------------------------------------------------------------------------------------------------------
ASSETS
Interest-Earning Assets:
Loans $ 2,934,629 $58,459 7.99% $2,962,165 $61,872 8.40%
Investments:
Taxable 600,233 9,580 6.40% 624,917 10,136 6.52%
Tax-Favored Securities 24,680 347 5.64% 8,309 128 6.21%
Interest-Bearing Deposits 225 2 3.55% 239 2 3.86%
Federal Funds Sold 7,663 101 5.29% 8,891 140 6.33%
----------------------- --------------------
Total Interest-Earning Assets 3,567,430 68,489 7.70% 3,604,521 72,278 8.06%
--------- --------
Noninterest-Earning Assets 271,484 276,538
Allowance for Loan Losses (42,665) (40,906)
------------ -----------
Total Assets $ 3,796,249 $3,840,153
============ ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities:
Savings and Interest-Bearing
Transactional Accounts $ 1,967,315 $13,479 2.75% $1,848,359 $15,400 3.35%
Time Deposits * $100,000 214,184 2,723 5.10% 230,351 3,191 5.57%
Other Time Deposits 636,409 8,225 5.18% 620,161 7,585 4.92%
---------------------- --------------------
Total Interest-Bearing Deposits 2,817,908 24,427 3.48% 2,698,871 26,176 3.90%
Short-Term Borrowings 53,972 773 5.74% 270,145 4,307 6.41%
---------------------- --------------------
Total Interest-Bearing
Liabilities 2,871,880 25,200 3.52% 2,969,016 30,483 4.13%
--------- --------
NonInterest-Bearing Liabilities:
Demand Deposits 523,392 494,008
Other Liabilities 55,411 41,036
----------- -----------
Total Liabilities 3,450,683 3,504,060
Stockholders' Equity 345,566 336,093
----------- -----------
Total Liabilities and
Stockholders' Equity $ 3,796,249 $3,840,153
=========== ===========
Net Interest Income $43,289 $41,795
========= ========
Interest Rate Spread (2) 4.18% 3.93%
Net Yield on Earning Assets (3) 4.87% 4.66%
For the Six Months For the Six Months
Ended June 30, Ended June 30,
2001 2000
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Description Balance Expense(1) Rate(1) Balance Expense(1) Rate(1)
- ----------------------------------------------------------------------------------------------------------
ASSETS
Interest-Earning Assets:
Loans $2,883,286 $117,073 8.19% $2,939,535 $122,075 8.35%
Investments:
Taxable 596,509 19,238 6.50% 648,330 20,865 6.47%
Tax-Favored Securities 18,644 544 5.88% 8,327 258 6.24%
Interest-Bearing Deposits 225 4 3.80% 257 5 4.01%
Federal Funds Sold 12,179 333 5.51% 5,076 156 6.18%
--------------------- --------------------
Total Interest-Earning Assets 3,510,843 137,192 7.88% 3,601,525 143,359 8.00%
-------- --------
Noninterest-Earning Assets 258,063 290,063
Allowance for Loan Losses (41,486) (41,273)
---------- ----------
Total Assets $3,727,420 $3,850,315
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities:
Savings and Interest-Bearing
Transactional Accounts $1,926,026 $ 29,297 3.07% $1,824,724 $ 29,493 3.25%
Time Deposits * $100,000 212,119 5,716 5.43% 218,726 5,849 5.38%
Other Time Deposits 626,900 16,386 5.27% 630,919 15,313 4.88%
--------------------- --------------------
Total Interest-Bearing Deposits 2,765,045 51,399 3.75% 2,674,369 50,655 3.81%
Short-Term Borrowings 60,535 1,766 5.88% 258,145 7,757 6.04%
--------------------- --------------------
Total Interest-Bearing
Liabilities 2,825,580 53,165 3.79% 2,932,514 58,412 4.01%
-------- --------
NonInterest-Bearing Liabilities:
Demand Deposits 502,891 504,040
Other Liabilities 54,726 65,507
---------- ----------
Total Liabilities 3,383,197 3,502,061
Stockholders' Equity 344,223 348,254
---------- ----------
Total Liabilities and
Stockholders' Equity $3,727,420 $3,850,315
========== ==========
Net Interest Income $ 84,027 $ 84,947
======== ========
Interest Rate Spread(2) 4.09% 3.99%
Net Yield on Earning Assets (3) 4.83% 4.74%
(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.
* Denotes greater than sign.
Noninterest income amounted to $15.4 million for the second quarter of
2001 and $32.6 million for the first half of 2001, up from $13.6 million and
$27.1 million for the respective periods last year. Gains on sales of loans
increased $1.4 million for the second quarter to $1.9 million. For the year,
gains on sales of loans consisted of $2.3 million from
11
mortgage banking activities and $4.6 million gain on the sale of the Company's
retail credit card portfolio. Increases in investment management, insurance, and
service charges on deposits income were offset by declines in credit card income
(due to the sale of the retail credit card portfolio) and other income.
Noninterest expenses increased to $33.8 million for the second quarter of 2001
from $30.7 million for same period last year. Salaries and employee benefits
increased $2.5 million from the second quarter of 2000. Approximately half of
this increase was attributable to the inclusion of Maine Bank & Trust in the
2001 amounts. In addition, accruals for incentive compensation were $1.3 million
higher in 2001 than in 2000. Net occupancy expenses for the second quarter of
2001 were $4.3 million compared with $3.7 million a year ago. The majority of
this increase was also due to the inclusion of MBT. Amortization of intangibles
also increased due to the MBT acquisition as a result of recording goodwill of
approximately $20.6 million in the transaction.
For the first six months, total noninterest expenses were $66.8 million in
2001, compared with $63.5 million the year before. Salaries and employee
benefits increased $4.0 million from the 2000 level. Approximately $2.5 million
of the variance in salaries and benefits related to the second quarter (see
previous paragraph). In addition, 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 reduced expenses for the previous year. Net
occupancy and amortization expenses increased $493,000 and $193,000,
respectively, for the first six months primarily as a result of the inclusion of
MBT in the 2001 amounts.
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 six months ended June 30, 2001 and 2000, Federal and state income tax
provisions amounted to $15.9 million and $14.3 million, respectively. The
effective income tax rates for the respective periods were 35.5% and 32.5%,
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 34.2%. The increase from this amount to the 35.5% for the
second 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 were flat from a year ago, at $2.9 billion as of June 30, 2001. The June
30, 2001 balance included approximately $174 million in total loans at MBT.
Residential real estate loans declined $68.8 million 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. For the quarter, residential real estate loans were
up $10 million from March 31, 2001. This was due to the addition of
approximately $36 million of variable rate home equity loans in the MBT
portfolio.
Consumer loans declined $107 million from June 30, 2000. Of that amount,
approximately $39 million was due to the sale of the retail credit card
portfolio, which occurred in the first quarter of 2001. 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 two
quarters of 2001.
Overall commercial balances increased approximately $205 million from a year
ago. Approximately $126 million was attributed to the purchase of MBT. Excluding
the effect of MBT, the commercial portfolio at June 30, 2001 was $79 million
higher than a year ago, with growth primarily in the commercial category while
commercial real estate loans were flat.
Total deposits at June 30, 2001 were $3.5 billion, up $160.3 million from
December 31, 2000 and up $287.8 million from June 30, 2000. The increase was
primarily in demand and money market/savings accounts. Much of the increase
12
was due to the acquisition of MBT, which contributed $209 million in deposits at
June 30, 2001. However, the existing franchise also grew its deposits
approximately 2.5% from the level a year ago.
Credit Quality
Nonperforming assets include nonaccrual loans and foreclosed real estate
(Other Real Estate Owned). As of June 30, 2001, nonperforming assets plus loans
90 days past due and still accruing totaled $16.3 million, flat from a quarter
ago and a year ago. Net charge-off activity totaled $1.1 million for the second
quarter of 2001, compared to $3.8 million for the same period in 2000.
Approximately $2.0 million of the charge-offs in the second quarter of 2000
related to a single commercial relationship. The allowance for loan losses was
$44.5 million at June 30, 2001, up from $39.6 million a year ago, and $39.5
million at March 31, 2001. The acquisition of MBT accounted for $4.1 million of
the increase.
The provision for possible loan losses was approximately $4.0 million in 2001
as compared to $4.35 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.
A summary of credit quality follows:
6/30/01 3/31/01 12/31/00 6/30/00
----------------------------------------------------------------------------------
(in thousands)
Nonaccrual loans $ 12,689 $ 11,560 $ 11,376 $ 11,024
Other real estate owned (OREO) 625 328 513 579
----------------------------------------------------------------------------------
Total nonperforming assets (NPAs) $ 13,314 $ 11,888 $ 11,889 $ 11,603
==================================================================================
Loans past due 90 days or more
and still accruing interest $ 3,082 $ 4,318 $ 4,595 $ 4,751
NPAs plus loans past due 90 days or more
and still accruing interest 16,396 16,206 16,484 16,354
Allowance for loan losses 44,541 39,546 40,255 39,643
NPAs as % of loans plus OREO 0.45% 0.42% 0.42% 0.40%
Allowance as % of loans 1.52% 1.41% 1.41% 1.35%
Allowance as % of nonperforming loans 351.02% 342.09% 353.86% 359.61%
Allowance as % of NPAs 334.54% 332.65% 338.59% 341.66%
Provisions for and activity in the allowance for loan losses are summarized as
follows:
Three Months Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
--------------------------------------------------------------------------
(in thousands)
Beginning Balance $39,546 $41,228 $40,255 $41,079
Provision for Loan Losses 2,041 2,175 3,991 4,350
Acquisition of Maine Bank & Trust 4,083 - 4,083 -
Loans Charged Off (2,294) (4,816) (5,735) (7,649)
Loan Recoveries 1,165 1,056 1,947 1,863
--------------------------------------------------------------------------
Ending Balance $44,541 $39,643 $44,541 $39,643
==========================================================================
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
13
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 June 30, 2001, approximately 3.0 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 1.0 million
shares authorized.
Stockholders' equity totaled $348.9 million at June 30, 2001, compared to
$342.1 million at year-end 2000. The current level reflects net income of $28.8
million less dividends paid to shareholders totaling $12.4 million, and share
repurchases totaling $15.0 million. Accumulated other comprehensive income
increased $4.4 million to $4.5 million at June 30, 2001 from $164,000 at
December 31, 2000, as a result of declining market interest rates and a
corresponding increase in the unrealized gain on securities available for sale.
"Tier One" capital, consisting entirely of common equity, measured 9.88% of
risk-weighted assets at June 30, 2001. Total capital, including the "Tier Two"
allowance for loan losses, was 11.13% of risk-weighted assets. The leverage
capital ratio was 8.13%. These ratios placed Chittenden in the "well-
capitalized" category according to regulatory standards.
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 June 30, 2001, the Company maintained cash
balances and short-term investments of approximately $228.1 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.
Impact of Future Changes to Generally Accepted Accounting Principles
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("SFAS 141"), and
No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). Statement No. 141
requires that the purchase accounting method be used for all business
combinations initiated after June 30, 2001.
Statement No. 142 establishes new accounting and reporting standards for
goodwill and intangible assets. Under the new statement, goodwill is no longer
subject to amortization over its useful life. It will be subject to periodic (at
least annual) assessments for impairment by applying a fair-value-based test. In
the event that the recorded amount of goodwill exceeds its fair value, an
impairment loss would be recorded. The Company will adopt SFAS 142 effective
January 1, 2002. The Company anticipates that the elimination of goodwill
amortization in 2002 will increase net income by approximately $2.6 million, or
approximately 10 cents per share for the year.
14
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Annual Meeting, April 18, 2001
Proposal 1:
----------
Election of four directors, each to serve for a term of three years:
DIRECTOR FOR AUTHORITY WITHHELD
- ----------------------------------------------------------------------------------------------------
Frederic H. Bertrand 23,448,353 129,901
David M. Boardman 23,454,400 123,854
Pall D. Spera 23,455,143 123,111
Martel D. Wilson, Jr. 23,455,356 122,898
Election of two directors, each to serve for a term of one year:
John K. Dwight 23,456,668 121,586
Ernest A. Pomerleau 23,455,779 122,476
Proposal 2
----------
Ratification of the Amendment to the 1997 Restatement and Amendment of the
1993 Stock Incentive Plan :
For: 23,443,987
Against: 877,547
Abstain: 256,721
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
The Company's first quarter 2001 press release announcing earnings and
quarterly dividends was filed on Form 8-K on April 18, 2001.
The Company's quarterly financial statements were filed on Form 8-K on
April 18, 2001.
The Company's press release announcing the completion of the acquisition
of Maine Bank & Trust was filed on form 8-K on April 30, 2001.
The Company's press release announcing the appointment of Owen W. Wells
to the Board of Chittenden Corporation and Chittenden Bank was filed on
form 8-K on May 2, 2001.
15
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
August 13, 2001 /S/ PAUL A. PERRAULT
- --------------- -------------------
Date Paul A. Perrault,
Chairman, President and
Chief Executive Officer
August 13, 2001 /S/ KIRK W. WALTERS
- --------------- ------------------
Date Kirk W. Walters
Executive Vice President,
Treasurer, and Chief Financial Officer
16