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 Nine Months Ended September 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 03-0228404
(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 November 9, 2001, there were 32,036,906 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)
September 30, December 31,
2001 2000
---------------- -----------------
(in thousands)
Assets
Cash and cash equivalents $278,006 $178,621
Securities available for sale 647,490 585,281
FHLB stock 13,613 12,311
Loans held for sale 33,220 44,950
Loans:
Commercial 632,553 515,926
Municipal 108,491 83,566
Real Estate:
Residential 962,420 1,024,174
Commercial 799,999 723,339
Construction 66,053 57,701
---------------- -----------------
Total Real Estate 1,828,472 1,805,214
Consumer 384,865 451,392
---------------- -----------------
Total Loans 2,954,381 2,856,098
Less: Allowance for loan losses (45,261) (40,255)
---------------- -----------------
Net loans 2,909,120 2,815,843
Accrued interest receivable 22,574 25,642
Other real estate owned 298 513
Other assets 40,640 39,020
Premises and equipment, net 56,127 51,959
Intangible assets 34,203 15,721
---------------- -----------------
Total assets $4,035,291 $3,769,861
================ =================
Liabilities:
Deposits:
Demand $575,821 $530,975
Savings 2,144,599 1,934,227
Certificates of deposit less than $100,000 and other time deposits 634,815 615,336
Certificates of deposit $100,000 and over 206,401 211,869
---------------- -----------------
Total deposits 3,561,636 3,292,407
Short-term borrowings 45,415 93,757
Accrued expenses and other liabilities 62,792 41,631
---------------- -----------------
Total liabilities 3,669,843 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 - 35,742,135 in 2001 and 35,736,785 in 2000 35,742 35,737
Surplus 146,052 146,326
Retained earnings 247,397 222,140
Treasury stock, at cost - 3,716,915 shares in 2001 and 3,115,430 shares in 2000 (80,643) (65,637)
Accumulated other comprehensive income 13,349 164
Directors deferred compensation to be settled in stock 3,627 3,414
Unearned portion of employee restricted stock (76) (78)
---------------- -----------------
Total stockholders' equity 365,448 342,066
---------------- -----------------
Total liabilities and stockholders' equity $4,035,291 $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 Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
--------------- --------------- --------------- ------------
(in thousands, except per share amounts)
Interest income:
Interest on loans $56,507 $62,962 $172,570 $184,346
Investment securities:
Taxable 9,788 9,870 29,026 30,689
Tax-favored 282 39 669 260
Short-term investments 243 331 579 493
--------------- --------------- --------------- ------------
Total interest income 66,820 73,202 202,844 215,788
--------------- --------------- --------------- ------------
Interest expense:
Deposits:
Savings 12,268 16,564 41,565 46,056
Time 10,280 11,228 32,383 32,391
--------------- --------------- --------------- ------------
Total interest on deposits 22,548 27,792 73,948 78,447
Short-term borrowings 694 3,797 2,459 11,554
--------------- --------------- --------------- ------------
Total interest expense 23,242 31,589 76,407 90,001
--------------- --------------- --------------- ------------
Net interest income 43,578 41,613 126,437 125,787
Provision for loan losses 2,025 2,175 6,016 6,525
--------------- --------------- --------------- ------------
Net interest income after provision for loan losses 41,553 39,438 120,421 119,262
--------------- --------------- --------------- ------------
Noninterest income:
Investment management income 4,334 3,482 11,559 10,100
Service charges on deposit accounts 3,570 3,335 10,624 10,390
Mortgage servicing income 893 1,029 2,815 3,086
Gains on sales of loans, net 1,916 903 8,800 2,023
Credit card income, net 927 1,440 3,041 3,985
Insurance commissions, net 966 774 2,694 2,243
Other 3,328 2,617 8,558 8,363
--------------- --------------- --------------- ------------
Total noninterest income 15,934 13,580 48,091 40,190
--------------- --------------- --------------- ------------
Noninterest expense:
Salaries 16,132 13,636 45,500 41,547
Employee benefits 3,315 2,623 10,183 6,965
Net occupancy expense 4,308 3,862 13,303 12,364
Amortization of intangibles 855 521 2,108 1,581
Other real estate owned, income and expense, net 21 54 68 (19)
Special charges - - - 833
Other 10,115 9,782 29,872 30,243
--------------- --------------- --------------- ------------
Total noninterest expense 34,746 30,478 101,034 93,514
--------------- --------------- --------------- ------------
Income before income tax expense 22,741 22,540 67,478 65,938
Income tax expense 7,930 7,792 23,829 22,128
--------------- --------------- --------------- ------------
Net income $14,811 $14,748 $43,649 $43,810
=============== =============== =============== ============
Basic earnings per share $0.46 $0.44 $1.36 $1.29
Diluted earnings per share 0.46 0.44 1.34 1.27
Dividends per share 0.19 0.19 0.57 0.56
The accompanying notes are an integral part of these consolidated financial
statements.
4
Chittenden Corporation
Consolidated Statements of CashFlows
(Unaudited)
For the Nine Months
Ended September 30,
2001 2000
----------------- --------------
(in thousands)
Cash flows from operating activities:
Net income $43,649 $43,810
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 6,016 6,525
Depreciation and amortization 4,542 3,986
Amortization of intangible assets 2,108 1,581
Amortization of premiums, fees, and discounts, net 1,523 8,586
Gain on branch sales - (812)
Investment securities (gains) losses 150 688
Deferred income taxes (6,128) 11,838
Loans originated for sale (309,951) (132,416)
Proceeds from sales of loans 330,481 130,472
Gains on sales of loans (8,800) (2,023)
Changes in assets and liabilities, net of effect from purchase of
acquired companies:
Accrued interest receivable 3,936 324
Other assets 2,264 4,603
Accrued expenses and other liabilities 20,730 (26,256)
----------------- --------------
Net cash provided by operating activities 90,520 50,906
----------------- --------------
Cash flows from investing activities:
Cash acquired, net of cash paid in acquisition of Maine Bank & Trust 8,001 -
Net cash used in branch divestitures - (22,195)
Purchases of Federal Home Loan Bank stock (616) -
Proceeds from sales of securities available for sale 208,675 264,541
Proceeds from maturing securities and principal payments
on securities available for sale 259,201 68,985
Purchases of securities available for sale (505,262) (251,135)
Loans originated, net of principal repayments 67,088 (45,347)
Purchases of premises and equipment (2,912) (9,889)
----------------- --------------
Net cash provided by investing activities 34,175 4,960
----------------- --------------
Cash flows from financing activities:
Net increase in deposits 56,804 37,543
Net (decrease) in short-term borrowings (48,342) (34,685)
Proceeds from issuance of treasury and common stock 1,277 2,505
Dividends on common stock (18,576) (19,166)
Repurchase of common stock (16,473) (57,117)
----------------- --------------
Net cash provided by (used in) financing activities (25,310) (70,920)
----------------- --------------
Net increase (decrease) in cash and cash equivalents 99,385 (15,054)
Cash and cash equivalents at beginning of period 178,621 150,415
----------------- --------------
Cash and cash equivalents at end of period $278,006 $135,361
================= ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $77,546 $89,279
Income taxes 20,073 24,586
Non-cash investing and financing activities:
Loans transferred to other real estate owned 1,116 1,606
Issuance of treasury and restricted stock 612 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 costs 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 nine months
ended September 30, ended September 30,
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Total revenue $59,512 $58,866 $180,595 $176,374
Income before income taxes 22,741 23,674 68,449 68,986
Net income 14,811 15,361 44,115 45,417
Diluted earnings per share (EPS) 0.46 0.46 1.35 1.32
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.
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.
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, which would occur in future periods. Included in accrued
expenses and other liabilities at September 30, 2001, are merger-related
expenses totaling $469,000, which will be paid in future periods.
7
The change in accrued merger related expenses at September 30, 2001 is
summarized below (amounts in thousands):
Less: Accrual Balance as
Accrual Balance as Cash of September 30,
of December 31, 2000 Transactions 2001
===================== ================ =====================
Compensation and Benefits $1,218 $749 $469
--------------------- ---------------- ---------------------
Total $1,218 $749 $469
===================== ================ =====================
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 $2.7 million will be eliminated beginning in
2002.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"), which supersedes SFAS
No. 121 and portions of APB Opinion No. 30. This statement addresses the
recognition of an impairment loss for long-lived assets to be held and used, or
disposed of by sale or otherwise. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. Management does not expect the
adoption of SFAS No. 144 to have a significant impact on the financial position
or results of operations of the Company.
NOTE 5 - COMPREHENSIVE INCOME
The Company's comprehensive income for the three-month and nine-month
periods ended September 30, 2001 and 2000 is presented below (amounts in
thousands):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
------------ ---------- ------------ ----------
Net Income $14,811 $14,748 $43,649 $43,810
Unrealized gains/losses on investment securities:
Unrealized holding gains (losses) on securities available for sale, net
of tax 8,967 3,656 13,088 2,621
Reclassification adjustments for (gains) losses arising during period, net
of tax (167) - 97 475
------------ ---------- ------------ ----------
Total Comprehensive income $23,611 $18,404 $56,834 $46,906
============ ========== ============ ==========
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.
8
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.
9
For the Three Months Ended September 30, 2001 Commercial Consolidation Consolidated
(in thousands) Banking Other (2) Adjustments
------------- --------------- --------------- ----------------
Net interest revenue (1) $43,578 $61 $(61) $43,578
Noninterest income 14,961 1,011 (38) 15,934
Provision for loan losses 2,025 - - 2,025
Noninterest expense 33,741 1,043 (38) 34,746
------------- --------------- --------------- ----------------
Net income (loss) before income tax 22,773 29 (61) 22,741
Income tax expense/(benefit) 7,887 43 - 7,930
------------- --------------- --------------- ----------------
Net income (loss) $14,886 $(14) $(61) $14,811
============= =============== =============== ================
End of Period Assets $4,028,335 $371,419 $(364,463) $4,035,291
For the Three Months Ended September 30, 2000 Commercial Consolidation
(in thousands) Banking Other (2) Adjustments Consolidated
------------- --------------- --------------- ----------------
$41,606 $127 $(120) $41,613
Net interest revenue (1)
Noninterest income 12,704 864 12 13,580
Provision for loan losses 2,175 - - 2,175
Noninterest expense 29,652 814 12 30,478
------------- --------------- --------------- ----------------
Net income (loss) before income tax 22,483 177 (120) 22,540
Income tax expense/(benefit) 7,719 73 - 7,792
------------- --------------- --------------- ----------------
Net income (loss) $14,764 $104 $(120) $14,748
============= =============== =============== ================
End of Period Assets $3,742,197 $344,196 $(336,288) $3,750,105
For the Nine Months Ended September 30, 2001 Commercial Consolidation
(in thousands) Banking Other (2) Adjustments Consolidated
------------- --------------- --------------- ----------------
Net interest revenue (1) $126,430 $229 $(222) $126,437
Noninterest income 45,380 2,770 (59) 48,091
Provision for loan losses 6,016 - - 6,016
Noninterest expense 98,051 3,041 (59) 101,034
------------- --------------- --------------- ----------------
Net income (loss) before income tax 67,743 (42) (222) 67,478
Income tax expense/(benefit) 23,770 59 - 23,829
------------- --------------- --------------- ----------------
Net income (loss) $43,973 $(102) $(222) $43,649
============= =============== =============== ================
End of Period Assets $4,028,335 $371,419 $(364,463) $4,035,291
For the Nine Months Ended September 30, 2000 Commercial Consolidation
(in thousands) Banking Other (2) Adjustments Consolidated
------------- --------------- --------------- ----------------
$125,755 $325 $(293) $125,787
Net interest revenue (1)
Noninterest income 37,918 2,349 (77) 40,190
Provision for loan losses 6,525 - - 6,525
Noninterest expense 90,927 2,664 (77) 93,514
------------- --------------- --------------- ----------------
Net income (loss) before income tax 66,221 10 (293) 65,938
Income tax expense/(benefit) 22,087 41 - 22,128
------------- --------------- --------------- ----------------
Net income (loss) $44,134 $(31) $(293) $43,810
============= =============== =============== ================
End of Period Assets $3,742,197 $344,196 $(336,288) $3,750,105
(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.
10
NOTE 7 - SUBSEQUENT EVENT
On October 5, 2001, the Company announced that it had signed a definitive
agreement with Ocean National Corporation, whereby Chittenden will acquire Ocean
National Corporation, and its subsidiary, Ocean National Bank for $53.25 million
in cash. Consummation of the agreement is subject to the approval of Ocean
National Corporation shareholders as well as various regulatory agencies. The
acquisition is expected to close in the first quarter of 2002 and will be
accounted for as a purchase.
NOTE 8 - STOCKHOLDERS' EQUITY
On July 18, 2001, the Company declared a five-for-four stock split which
was distributed on September 14, 2001 to stockholders of record August 31, 2001.
This stock split has been reflected in the accompanying balance sheets as of
September 30, 2001 and December 31, 2000; all share and per share amounts
presented herein have been restated to reflect the split. On October 17, 2001,
the Company declared regular dividends of $0.19 per share or approximately $6.1
million, to be paid on November 16, 2001 to shareholders of record on November
2, 2001.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Chittenden Corporation posted third quarter 2001 net income of $0.46 per
diluted share, compared to the net income of $0.44 per diluted share posted in
the third quarter of last year. Net income for the third quarter of 2001 was
$14.8 million, compared to net income of $14.7 million recorded in the same
quarter a year ago. Return on average equity was 16.52% for the quarter ended
September 30, 2001 compared with operating return on average equity of 17.64%
for the same period in 2000. Return on average assets was 1.49% for the third
quarter of 2001, compared with the return on average assets of 1.54% for the
third quarter of last year.
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 VFSC 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
nine months ended September 30, 2001 and 2000 is presented below (amounts in
thousands):
For the Nine Months
Ended September 30,
----------------------------------------
2001 2000
Net income, as reported $43,649 $43,810
Add:
Loss on branch sale - 833
Tax effect of adjustment for loss on branch sale - (41)
-------------------- -------------------
Operating net income $43,649 $44,602
==================== ===================
Diluted Operating EPS $1.34 $1.30
For the first nine months of 2001, diluted earnings per share were $1.34,
compare to the $1.30 diluted operating earnings per share recorded for the same
time period in 2000. Year to date net income for 2001 was $43.6 million,
compared to operating net income of $44.6 million for the same period a year
ago. Return on average equity for the first nine months of 2001 was 16.77%, down
from operating return on average equity of 17.38% a year ago. Return on average
assets for the first nine months of 2001 was 1.54%, relatively 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 $7.9
million for the third quarter and $5.4 million for the year to date of 2001
versus average unrealized losses of approximately $6.6 million for the quarter
and $8.1 million for the first nine months of 2000. Excluding the unrealized
gains (losses) on the investment portfolio; the return on average equity would
have been 16.89% for the third quarter
11
2001 compared with 17.30% for 2000. For the year to date, the average return
on equity would have been 17.03% for 2001 compared to 16.98% a year ago.
Net interest income on a tax equivalent basis for the three months ended
September 30, 2001 was $44.2 million, up from $42 million for the same period a
year ago. The yield on earning assets was 4.76% in the third quarter of 2001,
compared with 4.67% in the same period of 2000 and 4.87% for the second quarter
of 2001. The increase in net interest income from the third quarter of 2000 was
attributed primarily to the acquisition of Maine Bank & Trust. The decline from
the second quarter of 2001 to the third quarter of 2001 was due primarily to
higher levels of deposits and lower yields on short-term investments.
12
The following table presents an analysis of average rates and yields on a fully
taxable equivalent basis for the three months and nine months ended September
30, 2001 and 2000:
For the Three Months For the Three Months
Ended September 30, Ended September 30,
2001 2000
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense(1) Rate(1) Balance Expense(1)Rate(1) Description
- ----------------------------------------------------------------------------------
ASSETS
Interest-Earning
Assets:
$2,996,712 $57,010 7.56% $2,945,013 $63,316 8.55% Loans
Investments:
648,057 9,788 6.04% 605,161 9,824 6.46% Taxable
27,124 394 5.77% 8,072 123 6.09% Tax-Favored Securities
Interest-Bearing
225 2 3.50% 225 2 4.07% Deposits
27,995 241 3.41% 19,965 329 6.56% Federal Funds Sold
- ----------------------- ---------------------
Total Interest-Earning
3,700,113 67,435 7.25% 3,578,436 73,594 8.18% Assets
----------- ----------
Noninterest-Earning
282,563 266,561 Assets
Allowance for Loan
(44,994) (40,112) Losses
- ------------ -----------
$3,937,682 $3,804,885 Total Assets
============ ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities:
Savings and Interest-Bearing
$2,057,662 $12,268 2.37% $1,874,757 $16,564 3.51% Transactional Accounts
213,526 2,451 4.55% 225,084 3,314 5.86% Time Deposits >$100,000
635,374 7,829 4.89% 614,409 7,915 5.12% Other Time Deposits
- ----------------------- ---------------------
Total Interest-Bearing
2,906,562 22,548 3.08% 2,714,250 27,793 4.07% Deposits
45,530 694 6.05% 223,784 3,796 6.75% Short-Term Borrowings
- ----------------------- ---------------------
Total Interest-Bearing
2,952,092 23,242 3.12% 2,938,034 31,589 4.28% Liabilities
----------- ----------
NonInterest-Bearing
Liabilities:
575,560 498,516 Demand Deposits
54,266 35,734 Other Liabilities
- ------------ -----------
3,581,918 3,472,284 Total Liabilities
355,764 332,601 Stockholders' Equity
- ------------ -----------
Total Liabilities and
$3,937,682 $3,804,885 Stockholders' Equity
============ ===========
$44,193 $42,005 Net Interest Income
=========== ==========
4.13% 3.90% Interest Rate Spread (2)
4.76% 4.67% Net Yield on Earning Assets (3)
For the Nine Months For the Nine Months
Ended September 30, Ended September 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 $2,922,336 $174,085 7.96% $2,941,374 $185,361 8.42%
Investments:
Taxable 613,817 29,026 6.31% 633,835 30,689 6.47%
Tax-Favored Securities 21,502 938 5.83% 8,241 382 6.19%
Interest-Bearing
Deposits 225 6 3.70% 246 7 4.03%
Federal Funds Sold 17,272 574 4.44% 10,122 485 6.40%
---------------------- --------------------
Total Interest-Earning
Assets 3,575,152 204,629 7.65% 3,593,818 216,924 8.06%
----------- ----------
Noninterest-Earning
Assets 266,164 282,496
Allowance for Loan
Losses (42,658) (40,883)
----------- ----------
Total Assets $3,798,658 $3,835,431
=========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-Bearing
Liabilities: Savings
and Interest-Bearing
Transactional Accounts $1,962,319 $41,565 2.83% $1,836,307 $46,056 3.35%
Time Deposits >$100,000 213,180 8,167 5.12% 224,035 9,163 4.96%
Other Time Deposits 629,162 24,216 5.15% 625,376 23,228 5.46%
---------------------- --------------------
Total Interest-Bearing
Deposits 2,804,661 73,948 3.53% 2,685,718 78,447 3.90%
Short-Term Borrowings 55,295 2,459 5.95% 246,655 11,554 6.26%
---------------------- --------------------
Total Interest-Bearing
Liabilities 2,859,956 76,407 3.57% 2,932,373 90,001 4.10%
----------- ----------
NonInterest-Bearing
Liabilities:
Demand Deposits 535,254 504,421
Other Liabilities 55,434 55,894
----------- ----------
Total Liabilities 3,450,644 3,492,688
Stockholders' Equity 348,014 342,743
----------- ----------
Total Liabilities and
Stockholders' Equity $3,798,658 $3,835,431
=========== ==========
Net Interest Income $128,222 $126,923
=========== ==========
Interest Rate Spread (2) 4.08% 3.96%
Net Yield on Earning Assets (3) 4.79% 4.72%
(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 $15.9 million for the third quarter of 2001
and $48.1 million for the first nine months of 2001, up from $13.6 million and
$40.2 million for the respective periods last year. Gains on sales of loans
increased $1.0 million from a year ago to $1.9 million for the third quarter of
2001 due to higher volumes of fixed rate mortgages sold resulting from lower
market interest rates. Investment management and trust income increased $900,000
to $4.3 million for the third quarter of 2001, of which $750,000 was due to the
inclusion of MBT. Increases in insurance, service charges on deposits, and other
income were offset by declines in credit card and mortgage servicing income.
13
Noninterest income was $48.1 million for the first nine months of 2001
compared to $40.2 million the year before. For the year, gains on sales of loans
consisted of $4.2 million from mortgage banking activities, an increase of $2.5
million over 2000, and a $4.6 million gain on the sale of the Company's retail
credit card portfolio recorded in the first quarter. Also affecting the increase
from 2000 was investment management and trust income, which increased $1.5
million, of which $1.2 million was due to the inclusion of MBT.
Noninterest expenses increased to $34.7 million for the third quarter of
2001 from $30.5 million for same period last year. Salaries and employee
benefits increased $3.2 million from the third 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 $456,000
higher in 2001 than in 2000. Net occupancy expenses for the third quarter of
2001 were $4.3 million compared with $3.9 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 $20.4 million in the transaction.
For the first nine months, total noninterest expenses were $101 million in
2001, compared with $93.5 million the year before. Salaries and employee
benefits increased $7.2 million from the 2000 level. The inclusion of MBT
amounted to $3.1 million of the increase. Also, incentive accruals for the year
were $1.9 million higher in 2001 than 2000. 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 $939,000 and
$527,000, respectively, for the first nine months primarily as a result of the
inclusion of MBT in the 2001 amounts.
Income Taxes
The IRS taxes the Company and its subsidiaries on income 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 nine months ended September 30, 2001 and 2000, Federal and state
income tax provisions amounted to $23.8 million and $22.1 million, respectively.
The effective income tax rates for the respective periods were 35.3% and 33.2%,
after adjusting for the tax effect of the branch sale. The increase from this
amount to the 35.3% for the third 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 September 30,
2001. The September 30, 2001 balance included approximately $175 million in
total loans at MBT. Residential real estate loans declined $85 million from a
year ago and $35 million from June 30, 2001 due to higher levels of prepayments
caused by declining market interest rates.
Consumer loans declined $130 million from September 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.
Overall commercial balances increased approximately $215 million from a year
ago. Approximately $126 million was attributed to the purchase of MBT.
Excluding the effect of MBT, the commercial portfolio at September 30, 2001 was
$89 million higher than a year ago, with growth primarily in the commercial
category while commercial real estate loans were relatively flat.
Total deposits at September 30, 2001 were $3.6 billion, up $269.2 million
from December 31, 2000 and up $347.1 million from September 30, 2000. The
increase was primarily in demand and money market/savings accounts. Also
affecting the increase was the inclusion of $216 million in deposits at
September 30, 2001 from MBT. However, the existing franchise grew its deposits
approximately 4% from the level a year ago.
14
Credit Quality
Nonperforming assets include nonaccrual loans and foreclosed real estate
(Other Real Estate Owned). As of September 30, 2001, nonperforming assets plus
loans 90 days past due and still accruing totaled $18.4 million, up $2.0 million
from a quarter ago and up $4.0 million from a year ago. The increase from the
June 30, 2001 amount was attributed to two commercial lending relationships in
Massachusetts. Net charge-off activity totaled $1.3 million for the third
quarter of 2001, compared to $1.9 million for the same period in 2000, or 0.04%
and 0.06%, of average loans for the respective periods. Year-to-date 2001 net
charge-off activity totaled $5.1 million or 0.17% of average loans, compared
with $7.7 million or 0.26% of average loans for 2000. The allowance for loan
losses was $45.3 million at September 30, 2001, up from $39.9 million a year
ago, and $44.5 million at June 30, 2001. The acquisition of MBT accounted for
$4.3 million of the increase from the third quarter of 2000.
The provision for possible loan losses was approximately $6 million in 2001
as compared to $6.5 million in 2000. For the quarter, the provision was $2.0
million in 2001 compared to $2.2 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:
9/30/01 6/30/01 12/31/00 9/30/00
---------------- --------------- ---------------- ----------------
(in thousands)
Nonaccrual loans $14,660 $12,689 $11,376 $9,782
Other real estate owned (OREO) 298 625 513 430
---------------- --------------- ---------------- ----------------
Total nonperforming assets (NPAs) $14,958 $13,314 $11,889 $10,212
================ =============== ================ ================
Loans past due 90 days or more
and still accruing interest $3,400 $3,082 $4,595 $4,133
NPAs plus loans past due 90 days or
more and still accruing interest 18,358 16,396 16,484 14,345
Allowance for loan losses 45,261 44,541 40,255 39,945
NPAs as % of loans plus OREO 0.50% 0.45% 0.42% 0.35%
Allowance as % of loans 1.53% 1.52% 1.41% 1.36%
Allowance as % of nonperforming loans 308.74% 351.02% 353.86% 408.35%
Allowance as % of NPAs 302.59% 334.54% 338.59% 391.16%
Provisions for and activity in the allowance for loan losses are summarized as
follows:
Three Months Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
------------------- ---------------- ------------- ---------------
(in thousands)
Beginning Balance $44,541 $39,643 $40,255 $41,079
Provision for Loan Losses 2,025 2,175 6,016 6,525
Acquisition of Maine Bank & Trust - - 4,083 -
Loans Charged Off (2,014) (2,855) (7,750) (10,504)
Loan Recoveries 709 982 2,657 2,845
------------------- ---------------- ------------- ---------------
Ending Balance $45,261 $39,945 $45,261 $39,945
=================== ================ ============= ===============
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
15
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
The Company periodically repurchases its own stock under a share repurchase
program originally authorized by the Board of Directors on January 19, 2000. On
October 17, 2001, the Board announced the expansion of the share repurchase
program to six million shares. As of September 30, 2001, approximately 3.8
million shares had been repurchased. Based on the resolution passed by the
Corporation's Board of Directors, the Company has until December 31, 2003 to
purchase the remaining 2.2 million shares authorized.
Stockholders' equity totaled $365.4 million at September 30, 2001, compared
to $342.1 million at year-end 2000. The current level reflects net income of
$43.6 million less dividends paid to shareholders totaling $18.6 million, and
share repurchases totaling $16.5 million. Accumulated other comprehensive income
increased $13.2 million to $13.3 million at September 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 9.94% of
risk-weighted assets at September 30, 2001. Total capital, including the "Tier
Two" allowance for loan losses, was 11.19% of risk-weighted assets. The leverage
capital ratio was 8.05%. 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 September 30, 2001, the Company maintained cash
balances and short-term investments of approximately $278 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 $2.7 million or
approximately 8 cents per share for the year.
16
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 second quarter 2001 press release announcing
earnings, quarterly dividends, and a stock split was filed on
Form 8-K on July 19, 2001.
The Company's quarterly financial statements were filed on Form
8-K on July 19, 2001.
17
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
November 13, 2001 /S/ PAUL A. PERRAULT
- ----------------- ---------------------------------------
Date Paul A. Perrault,
Chairman, President and
Chief Executive Officer
November 13, 2001 /S/ KIRK W. WALTERS
- ----------------- --------------------------------------
Date Kirk W. Walters
Executive Vice President,
Treasurer, and Chief Financial Officer
18