<PAGE>
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, 1998
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 September 30, 1998, there were 15,929,661 shares of the Corporation's $1.00
par value common stock issued, with 14,199,375 shares outstanding.
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
2
<PAGE>
CHITTENDEN CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------------------------
(in thousands)
<S> <C> <C>
Assets
Cash and cash equivalents $ 150,685 $ 143,394
Securities available for sale 396,456 363,279
Federal Home Loan Bank stock 5,591 5,591
Mortgage loans held for sale 30,056 16,433
Loans:
Commercial 405,732 365,042
Real Estate:
Residential 393,012 456,396
Commercial 322,519 314,477
Construction 19,483 21,900
------------------------------
Total Real Estate 735,014 792,773
Consumer 277,074 241,323
------------------------------
Total Loans 1,417,820 1,399,138
Less: Allowance for possible loan losses (24,576) (26,721)
------------------------------
Net loans 1,393,244 1,372,417
Accrued interest receivable 13,681 14,431
Other real estate owned 762 747
Other assets 15,936 19,593
Premises and equipment, net 29,541 27,412
Intangible assets 12,829 13,853
------------------------------
Total assets $2,048,781 $1,977,150
==============================
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Demand $ 309,061 $ 302,555
Savings 970,033 924,846
Time deposits less than $100,000 399,210 409,055
Time deposits $100,000 and over 124,704 121,089
------------------------------
Total deposits 1,803,008 1,757,545
Short-term borrowings 40,111 23,250
Accrued expenses and other liabilities 31,671 31,843
Long-term debt 986 2,239
------------------------------
Total liabilities 1,875,776 1,814,877
Commitments and contingencies
Stockholders' Equity:
Preferred stock - $100 par value - -
authorized - 200,000 shares; issued and outstanding - none
Common stock - $1 par value authorized - 30,000,000 shares; 15,930 15,930
issued 15,929,661 in 1998 and 1997
Surplus 72,345 72,611
Retained earnings 117,094 102,553
Treasury stock, at cost 1,730,286 shares in 1998 and 1,508,076 shares in 1997 (38,302) (30,084)
Accumulated other comprehensive income 6,228 1,675
Unearned portion of employee restricted stock (290) (412)
------------------------------
Total stockholders' equity 173,005 162,273
------------------------------
Total liabilities and stockholders' equity $2,048,781 $1,977,150
==============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
CHITTENDEN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------- --------------- --------------- ----------------
1998 1997 1998 1997
----------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $31,261 $31,860 $ 92,669 $ 92,551
Investment securities:
Mortgage-backed securities 1,275 1,935 4,170 5,859
Taxable 4,726 3,669 14,071 11,311
Tax-favored debt 2 5 11 19
Tax-favored equity 247 286 1,119 760
Short-term investments 698 402 1,630 1,293
----------------- --------------- --------------- ----------------
Total interest income 38,209 38,157 113,670 111,793
----------------- --------------- --------------- ----------------
Interest expense:
Deposits:
Savings 7,867 7,611 23,317 21,852
Time 6,691 7,032 20,345 20,352
----------------- --------------- --------------- ----------------
Total interest on deposits 14,558 14,643 43,662 42,204
Short-term borrowings 511 589 1,672 1,854
Long-term debt 39 63 135 163
----------------- --------------- --------------- ----------------
Total interest expense 15,108 15,295 45,469 44,221
----------------- --------------- --------------- ----------------
Net interest income 23,101 22,862 68,201 67,572
Provision for possible loan losses 1,275 1,013 3,825 3,038
----------------- --------------- --------------- ----------------
Net interest income after provision for
possible loan losses 21,826 21,849 64,376 64,534
----------------- --------------- --------------- ----------------
Noninterest income:
Investment management and trust income 1,723 1,400 4,826 4,124
Service charges on deposit accounts 1,740 1,781 5,264 5,170
Mortgage servicing income 460 561 1,435 1,703
Gains on sales of mortgage loans, net 1,137 611 3,656 1,672
Credit card income, net 826 982 2,766 3,763
Insurance commissions, net 819 592 2,362 829
Other 1,536 1,142 4,181 3,523
----------------- --------------- --------------- ----------------
Total noninterest income 8,241 7,069 24,490 20,784
----------------- --------------- --------------- ----------------
Noninterest expense:
Salaries 7,928 7,088 22,722 20,864
Employee benefits 2,476 2,142 7,511 6,942
Net occupancy expense 2,337 2,450 7,073 7,094
FDIC deposit insurance 56 54 174 171
Other real estate owned, income and expense, net (10) (63) 59 9
Other 5,475 5,733 16,551 16,942
----------------- --------------- --------------- ----------------
Total noninterest expense 18,262 17,404 54,090 52,022
----------------- --------------- ---------------- ---------------
Income before income taxes 11,805 11,514 34,776 33,296
Provision for income taxes 4,101 3,978 11,906 11,359
----------------- --------------- --------------- ----------------
Net income $ 7,704 $ 7,536 $ 22,870 $ 21,937
================= =============== =============== ================
Basic earnings per share $0.54 $0.52 $1.59 $1.47
Diluted earnings per share 0.53 0.50 1.55 1.44
Dividends per share $0.20 $0.18 $0.58 $0.51
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
4
<PAGE>
CHITTENDEN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1998 1997
------------ ----------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 22,870 $ 21,937
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for possible loan losses 3,825 3,038
Depreciation and amortization 2,731 2,574
Amortization of intangible assets 1,024 955
Amortization of premiums, fees, and discounts, net 1,850 (669)
Investment securities losses (gains) 81 (5)
Deferred income taxes 2,517 (760)
Loans originated and purchased for sale (327,101) (120,314)
Proceeds from sales of loans 317,134 120,238
Gains on sales of loans (3,656) (1,672)
Changes in assets and liabilities:
Accrued interest receivable 750 1,111
Other assets 2,761 (4,166)
Accrued expenses and other liabilities (3,062) 7,216
----------- ----------
Net cash provided by operating activities 21,724 29,483
----------- ----------
Cash flows from investing activities:
Acquisition of The Pomerleau Agency, Inc., net of cash paid - 721
Proceeds from sales of securities available for sale 18,724 66,699
Proceeds from maturing securities and principal payments
on securities available for sale 193,038 126,333
Purchases of securities available for sale (237,806) (204,804)
Proceeds from sales of securities held for investment - 6,843
Proceeds from principal payments on securities held for investment - 5,688
Purchases of securities held for investment - (199)
Loans originated, net of principal repayments (27,285) (71,580)
Purchases of premises and equipment (4,859) (3,950)
----------- ----------
Net cash used in investing activities (58,188) (74,249)
------------ ----------
Cash flows from financing activities:
Net increase (decrease) in deposits 45,463 (25,264)
Net increase in short-term borrowings 16,861 46,158
Net increase (decrease) in long term borrowings (1,253) 685
Cash paid to list on New York Stock Exchange, net of taxes (93) -
Proceeds from issuance of treasury and common stock 209 156
Dividends on common stock (8,329) (7,673)
Repurchase of common stock (9,103) (22,011)
----------- ----------
Net cash provided by (used in) financing activities 43,755 (7,949)
------------ ----------
Net increase (decrease) in cash and cash equivalents 7,291 (52,715)
Cash and cash equivalents at beginning of period 143,394 214,459
----------- ----------
Cash and cash equivalents at end of period $ 150,685 $ 161,744
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 45,415 $ 44,032
Income taxes 6,484 8,244
Non-cash investing and financing activities:
Loans transferred to other real estate owned 976 1,477
Issuance of treasury and restricted stock 119 501
Acquisition of The Pomerleau Agency, Inc.:
Fair value of assets acquired - $ 7,937
Liabilities assumed - 3,182
Debt issued - 3,700
----------- ----------
Cash paid - $ 1,055
============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS/
MANAGEMENT'S DISCUSSION AND ANALYSIS
NOTE 1 - ACCOUNTING POLICIES
The Company's significant accounting policies, other than those described in
Note 2 below, are described in Note 1 of the Notes to Consolidated Financial
Statements included in its 1997 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 1997 have been
reclassified to conform to 1998 classifications.
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods. Results for interim periods are
not necessarily indicative of the results of operations for the full year or any
other interim period.
NOTE 2 - ACCOUNTING POLICY CHANGES
ADOPTION OF SFAS 130
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components (revenues, expenses, gains, and losses) in a full set of general-
purpose financial statements. Comprehensive income is the total of net income
and all other nonowner changes in equity. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements in year end financial
statements. Interim period disclosure may be shown in the footnotes to the
consolidated financial statements. The Company's comprehensive income for the
three-month and nine-month periods ended September 30, 1998 and 1997 is
presented below:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Net Income $ 7,704 $ 7,536 $22,870 $21,937
Unrealized gains on investment securities:
Unrealized holding gains arising during period 6,014 2,519 7,072 2,171
Less: Reclassification adjustments for (gains) losses
included in net income - (6) 81 (5)
---------------------------------------------
Other comprehensive income, before income taxes 13,718 10,049 30,023 24,103
Income tax expense (benefit) related to:
Unrealized holding gains arising during period 2,178 905 2,572 783
Gains (losses) included in net income - 2 (29) 2
---------------------------------------------
Total income tax expense related to items of other comprehensive income 2,178 907 2,543 785
---------------------------------------------
Comprehensive income $ 11,540 $ 9,142 $27,480 $23,318
=============================================
</TABLE>
ISSUANCE OF SFAS 133
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or a liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting treatment.
6
<PAGE>
Statement 133 is effective for the Company's fiscal year beginning January 1,
2000. The Company has the option to elect to early adopt the Statement the
beginning of its next fiscal quarter. The statement cannot be applied
retroactively. Statement 133 must be applied to (a) derivative instruments and
(b) certain derivative instruments embedded in hybrid contracts that were
issued, acquired, or substantively modified after December 31, 1997 (and, at the
Company's election, before January 1, 1998).
The Company has not yet quantified the impact of adopting Statement 133 on
its consolidated financial statements and has not determined the timing of or
method of its adoption of the Statement. However, the Company does not expect
that the adoption will have a material impact on its financial position or
results of operation.
NOTE 3 - SUBSEQUENT EVENT
On October 21, 1998, the Company declared regular dividends of approximately
$2.9 million, or $0.20 per share, to be paid on November 13, 1998 to
shareholders of record on October 30, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Chittenden Corporation posted third quarter 1998 net income of $0.53 per
diluted share, an increase of 6% over the $0.50 per diluted share posted in the
third quarter of last year. Net income for the third quarter of 1998 was $7.7
million, an increase of 2% over the $7.5 million recorded in the same quarter a
year ago. Return on average equity was 18.21% for the quarter ended September
30, 1998 compared with 17.79% for the same period in 1997. Return on average
assets was 1.53% for both the third quarter of 1998 and the third quarter of
last year.
For the first nine months of 1998, diluted earnings per share were $1.55, an
increase of 8% over the $1.44 posted for the same period a year ago. Net income
for the year to date 1998 was $22.9 million, 4% higher than the $21.9 million
recorded for the first nine months of 1997. Return on average equity and return
on average assets were 18.42% and 1.54%, respectively, in the first three
quarters of 1998 compared with 17.19% and 1.53% for the same period of 1997.
The higher levels of return on equity for the quarter and year-to-date reflect
the impact of the share repurchase plan that was commenced in the first quarter
of 1997.
Net interest income on a tax equivalent basis for the three months ended
September 30, 1998 was $23.7 million, up slightly from $23.5 million for the
same period a year ago. The increase was attributable to a higher level of
average interest-earning assets, which were up $45 million compared to the same
three-month period a year ago. The increased level of earning assets offset a
decline in the net yield on earning assets from 5.09% in the third quarter of
1997 to 5.00% in the third quarter of 1998. The decline in the net yield was
attributed to declining yields in the Company's loan portfolio due to the
reduction in market interest rates relating to the global economic slowdown.
Net interest income on a tax equivalent basis for the first nine months of
1998 was $69.8 million, up from $68.8 million for the same period of 1997. The
increase was also attributable to higher level of average interest-earning
assets, which were up $58 million compared to the same period a year ago. The
increased level of earning assets offset a decline in the net yield on earning
assets from 5.10% in the first three quarters of 1997 to 5.01% in the same
period of 1998. The decline in the net yield was primarily caused by decreased
yields on the company's loan portfolio, similar to the trend noted for the third
quarter.
7
<PAGE>
The following table presents an analysis of average rates and yields on a fully
taxable equivalent basis for the nine months ended September 30,
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense (1) Rate (1) Balance Expense (1) Rate (1)
------------------------------------------------------------------------
Assets (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $1,414,308 $ 93,848 8.87% $1,392,815 $ 93,620 8.99%
Investments:
Taxable 378,753 18,234 6.44 359,107 17,227 6.41
Tax-favored securities 31,457 1,557 6.62 21,536 915 5.68
Interest-bearing deposits in banks 100 2 3.25 100 2 3.21
Federal funds sold 39,135 1,627 5.56 31,766 1,291 5.43
----------------------- ----------------------
Total interest-earning assets 1,863,753 115,268 8.27 1,805,324 113,055 8.37
------------ ------------
Noninterest-earning assets 146,626 141,250
Allowance for possible loan losses (27,308) (28,239)
----------- ----------
Total assets $1,983,071 $1,918,335
=========== ==========
Liabilities and stockholders' equity
Interest-bearing liabilities:
Savings and interest-bearing
transactional accounts $ 931,722 $ 23,317 3.35 $ 876,352 $ 21,852 3.33
Time deposits $100,000 and over 115,693 4,570 5.28 113,504 4,534 5.34
Other time deposits 406,223 15,775 5.19 413,855 15,818 5.11
------------------------ -------------------------
Total interest-bearing
deposits 1,453,638 43,662 4.02 1,403,711 42,204 4.02
Short-term borrowings 34,300 1,672 6.52 38,411 1,854 6.45
Long-term debt 2,420 135 7.46 2,575 163 8.46
------------------------- -------------------------
Total interest-bearing
liabilities 1,490,358 45,469 4.08 1,444,697 44,221 4.09
--------- -----------
Noninterest-bearing liabilities:
Demand deposits 295,294 275,155
Other liabilities 31,446 27,832
------------ -------------
Total liabilities 1,817,098 1,747,684
Stockholders' equity 165,973 170,651
------------ -------------
Total liabilities and
stockholders' equity $ 1,983,071 $1,918,335
============ =============
Net interest income $ 69,799 $ 68,834
============ ============
Interest rate spread (2) 4.19% 4.28%
Net yield on earning assets (3) 5.01% 5.10%
</TABLE>
(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 $8.2 million for the third quarter of 1998, up
from $7.1 million for the third quarter of 1997. Commissions from insurance
sales were $819,000 in the third quarter of 1998, compared with $526,000 in the
third quarter of 1997. Gains on sales of mortgages increased $526,000 from the
third quarter of 1997 due to increased market activity. Significant increases
were also seen in investment management and trust income, up $323,000 or 23% due
to increased business in both personal and corporate trust. Mortgage servicing
income declined in 1998 as a result of increased amortization expense related to
originated mortgage servicing rights. Net credit card income declined $156,000
to $826,000. The majority of the decrease was attributable to lower volumes of
transactions processed, which resulted from the Company's continuing evaluation
of its credit card processing customer base. Other noninterest income for the
third quarter of 1998 of $1.5 million was $394,000 higher than the same quarter
a year ago. Included in the increase were $173,000 in higher fees from
automatic teller machine surcharges.
For the first nine months of 1998, noninterest income was $24.5 million, up
$3.7 million or 18% from the comparable 1997 level. Commissions from insurance
sales, which commenced in June of 1997 with the acquisition of the Pomerleau
Agency were $2.4 million for the first three quarters of 1998, compared with
$829,000 for the same period of 1997. Gains on sales of mortgages increased
$2.0 million from the first nine months of 1997 due to the increased market
activity noted above. Trends similar to those observed in the third quarter for
investment management and trust income, and mortgage servicing income, were also
seen in the first nine months of 1998. Net credit card income declined $1.0
million to $2.8 million. For the first three quarters of the year, lower
processing
8
<PAGE>
volumes accounted for approximately $600,000 of the decline in credit card
income, while lower margins on processed volume accounted for approximately
$281,000 of decreased income. The decreases in the margin and volume reflect the
Company's continuing evaluation of its credit card processing base.
Noninterest expenses were $18.3 million for the third quarter, and $54.1
million for the first nine months, of 1998. These amounts were $858,000 and
$2.1 million higher than the comparable 1997 levels. Noninterest expenses
related to the Pomerleau Agency were $1.8 million for the first nine months of
1998, compared with $853,000 for the same period of 1997. Excluding the
expenses related to the insurance agency, total noninterest expenses were
approximately 2% higher in 1998 than in 1997.
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. On
August 1, 1997, the franchise tax rate increased from $.04 per $1,000 of
deposits to $.096. This increased franchise tax expense by approximately
$90,000 for the three months ended September 30, 1998 and by approximately
$535,000 for the nine months then ended. Franchise taxes are included in income
tax expense in the consolidated statements of income.
For the nine months ended September 30, 1998 and 1997, Federal and state
income tax provisions amounted to $11.9 million and $11.4 million, respectively.
The effective tax rates for the respective periods were 34.2% and 34.1%.
Federal and state income tax provisions amounted to $4.1 million and $4.0
million in the three-month periods ended September 30, 1998 and 1997. The
effective tax rates for the respective periods were 34.7% and 34.5%. During all
periods, the Company's statutory Federal corporate tax rate was 35%. The
Company's effective tax rates differed from the statutory rates primarily
because of 1) the proportion of interest income from state and municipal
securities and corporate dividend income which are partially exempt from Federal
taxation and 2) tax credits on investments in qualified low income housing
projects.
FINANCIAL POSITION
Total assets increased from $1.977 billion at December 31, 1997 to $2.049
billion at September 30, 1998. The Company invests the majority of its assets
in loans and investments. During the first nine months of 1998, total loans
increased $18.7 million, to $1.418 billion at September 30, 1998. This increase
was primarily attributable to growth in the commercial and consumer portfolios
which offset reduced balances in the residential portfolios caused by higher
prepayments on adjustable rate residential real estate loans, caused by the
reduction in market rates relating to the global economic slowdown. Consistent
with the Company's past practice, all conforming fixed-rate loan production is
sold on the secondary market. The proceeds from these sales have been
reinvested in various securities available for sale, which were up $33.2 million
at September 30, 1998 compared to December 31, 1997. Total deposits at
September 30, 1998 were $1.803 billion, $45.5 million higher than the December
31, 1997 level. The increase was primarily attributable to higher market shares
in money market accounts.
9
<PAGE>
CREDIT QUALITY
Nonperforming assets include nonaccrual loans, restructured debt, and
foreclosed real estate (Other Real Estate Owned). As of September 30, 1998,
nonperforming assets totaled $11.6 million, compared to $8.0 million and $8.7
million at December 31 and September 30, 1997, respectively. The allowance for
loan losses was $24.6 million at September 30, 1998, down from the December 31,
1997 level of $26.7 million. The provision for possible loan losses that was
charged against earnings in the first nine months of 1998 was $3.8 million
compared to $3.0 million a year ago.
A summary of credit quality follows:
<TABLE>
<CAPTION>
9/30/98 6/30/98 12/31/97 9/30/97
---------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Nonaccrual loans $ 10,792 $ 8,007 $ 6,481 $ 7,342
Restructured debt 36 - 767 659
Other real estate owned (OREO) 761 661 747 685
---------------------------------------------------------------
Total nonperforming assets (NPA) $ 11,589 $ 8,668 $ 7,995 $ 8,686
===============================================================
Loans past due 90 days or more
and still accruing interest $ 1,314 $ 1,419 $ 2,838 $ 2,978
Allowance for possible loan losses 24,576 27,118 26,721 26,227
NPA as % of loans plus OREO 0.80% 0.62% 0.56% 0.61%
Allowance as % of loans 1.70% 1.94% 1.89% 1.84%
Allowance as % of nonperforming loans 226.99% 338.68% 368.67% 327.80%
Allowance as % of NPA 212.06% 312.85% 334.22% 301.95%
</TABLE>
Provisions for and activity in the allowance for possible loan losses are
summarized as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Beginning Balance $27,118 $28,167 $26,721 $28,096
Provision for Possible Loan Losses 1,275 1,013 3,825 3,038
Loans Charged Off (4,272) (3,365) (7,598) (6,387)
Loan Recoveries 455 412 1,628 1,480
-----------------------------------------------------
Ending Balance $24,576 $26,227 $24,576 $26,227
=====================================================
</TABLE>
Charge-offs for the three-month and nine-month periods ended September 30,
1998 include a $2.4 million charge-off which resulted from a fraud committed by
a commercial borrower against the Company. The provision for possible loan
losses represents the charge to expense that is required to fund the allowance
for possible loan losses. The level of the allowance for possible loan losses
is determined by management based upon known and anticipated circumstances and
conditions. An analysis of individual loans and the overall risk
characteristics and size of the different loan portfolios is conducted on an
ongoing basis. In addition, the Company considers industry trends, regional and
national economic conditions, past estimates of possible loan losses as compared
to actual losses, and historical loss patterns. Management assesses the
adequacy of the allowance for possible loan losses and reviews that assessment
quarterly with the Board of Directors.
CAPITAL
10
<PAGE>
Stockholders' equity totaled $173.0 million at September 30, 1998, compared to
$162.3 million at year-end 1997. The current level reflects year-to-date net
income of $22.9 million and an increase in accumulated other comprehensive
income of $4.5 million. The increase in other comprehensive income resulted
from increases in the unrealized gains on available for sale securities caused
by lower yields in the Treasury bond market. These lower yields resulted from
investors looking for safety from unsettled global financial markets and the
anticipation of the Federal Reserve easing monetary policy in order to minimize
a slowdown in the U.S. economy. These items were partially offset by stock
repurchases totaling $9.1 million and dividends paid to shareholders of $8.3
million.
"Tier One" capital, consisting entirely of common equity, measured 9.75% of
risk-weighted assets at September 30, 1998. Total capital, including the "Tier
Two" allowance for loan losses, was 11.04% of risk-weighted assets. The
leverage capital ratio was 7.53%. 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 asset and
liability committee, based upon policies approved by the Board of Directors.
Strategies are implemented by the Company's asset and liability committee. This
committee meets periodically to review and direct the Banks' lending and
deposit-gathering functions. Investment and borrowing activities are managed by
the Company's Treasury function.
The measure of an institution's liquidity is its ability to meet its cash
commitments at all times with available cash or by conversion of other assets to
cash at a reasonable price. At September 30, 1998, the Company maintained cash
balances and short-term investments of approximately $150.7 million, compared
with $143.4 million at December 31, 1997. During the first nine months of 1998,
the Company continued to be an average daily net seller of Federal Funds.
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 1997 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.
YEAR 2000
The Year 2000 problem, which is common to most corporations, concerns the
inability of information systems, primarily computer software programs, to
properly recognize and process date sensitive information as the year 2000
approaches. In April 1997, the Company formed a task force to manage the
completion of the five phases of the Year 2000 (Y2K) readiness process which had
informally started in November 1996. These phases include awareness of the Y2K
problem; the assessment of its impact on the Company; the subsequent renovation
of affected systems; the validation of designed Y2K renovations; and the
implementation of the validated renovations.
The Company's information systems include larger programs that run on
mainframe systems and smaller programs that reside on individual or networked
personal computers. The vast majority of the systems considered by the Company
to be mission-critical (vital to the successful continuance of the Company's
core business activities) are mainframe-based systems. The assessment of all
mission-critical mainframe systems has been completed. In addition, the
renovation, testing, and implementation of the renovations to all but one
mission-critical mainframe system are also complete. All that remains for these
systems is final validation testing, which has commenced and is expected to be
completed by December 31, 1998. The Company's trust accounting system has been
represented by the vendor to be Y2K compliant but management has chosen to
replace that system rather than renovate it. The conversion from the
11
<PAGE>
current system to the new system is expected to be completed by April 30, 1999.
The Company has developed an internal reporting system to track its deadlines
relating to the renovation, testing, and implementation of Y2K related tasks to
ensure that they are completed on schedule.
The personal computer (PC) based systems considered to be mission-critical by
management are smaller in scope than the mainframe-based systems. The Company's
assessment of its mission-critical PC-based systems is approximately 90%
complete. Renovations, testing, and implementation for PC-based systems are
beginning for those systems for which assessment has been completed. Factors in
the progress made on the renovation, testing, and implementation of the PC-based
systems include the conversion of one of the affiliate bank's systems to those
of the lead bank, installations of hardware and software unrelated to Y2K, and
limited human resources. Renovation, testing, and implementation of mission-
critical PC-based systems is expected to be substantially completed by December
31, 1998.
The Company's Y2K readiness is also affected by the readiness of its vendors.
The Company's most significant vendors are those that provide the mainframe
software that the Company uses to process its mission-critical systems. The
Company has two major vendors that provide the majority of the mainframe based
computer programs used in mission-critical systems. The Company has confirmed
with each of these vendors that they should be ready for the Year 2000 within
mandated timeframes. The vendor who will provide the new trust accounting
system has also confirmed that it is Y2K compliant. The Company has also
contacted the remainder of its vendors to determine their compliance and has
developed a tracking mechanism that will provide immediate notification if a
vendor does not meet a promised deadline.
The Company has also performed an evaluation of the Y2K readiness of its
significant customers. The results of this evaluation have been considered when
evaluating internal loan risk ratings, which are used in the overall evaluation
of the adequacy of the allowance for possible loan losses. The monitoring of
the Y2K readiness of these customers will continue until after the millenium
change and could result in future increased credit risk to the Company in the
event that these customers do not successfully remediate any Y2K issues that
they might have.
The Company expects that it will incur costs to replace existing hardware and
software which will be capitalized and depreciated in accordance with the
Company's existing accounting policy while maintenance and software modification
costs will be expensed as incurred. The Company's current estimate of the total
costs expected to be incurred, and those already incurred, relative to Y2K
follows:
<TABLE>
<CAPTION>
Costs incurred through Costs expected to be incurred
9/30/98 after 9/30/98
-------------------------------------------------------
<S> <C> <C>
Software Modification $ 10,000 $ 300,000
Replacement of non-compliant software - 600,000
Replacement of non-compliant hardware - 700,000
-------------------------------------------------------
Total $ 10,000 $1,600,000
=======================================================
</TABLE>
Of the $1.6 million estimated future costs of Y2K compliance, it is expected
that approximately 80% will consist of hardware and software purchases that will
be capitalized and depreciated in accordance with the Company's existing
accounting policy. The above costs do not include salaries and benefits of
Company personnel or allocated costs of the Company's two major mainframe
contracts as these costs would have been incurred regardless of the Y2K problem.
Based upon the Company's progress in its Y2K readiness process, management
considers its most reasonably likely worst case Year 2000 mainframe-based
scenario to be that its final validation testing does not pass and that time
will need to be spent in 1999 to correct any resultant problems. Management
considers its most reasonably likely worst case PC-based scenario to be that
certain vendors will not provide software renovations or upgrades on a timely
basis and that the Company will need to convert to other software providers or
to temporarily adopt manual procedures to replace these systems. The Company
has identified those instances in which alternate software providers are
available, as well as those for which the only alternative is manual processing.
The agencies that regulate the Company (the Federal Reserve Board) and its
subsidiary banks (the Federal Deposit Insurance Corporation, the State of
Vermont and the Commonwealth of Massachusetts) have issued guidance as to
12
<PAGE>
the standards they will use in assessing Year 2000 readiness. If, in the
judgment of these regulatory agencies, a regulated institution, such as the
Company and its subsidiaries, fails to take appropriate action to address its
Y2K issues, the regulatory agencies could impose enforcement actions which could
have a material adverse impact on such an institution, including the imposition
of civil money penalties, or the delay of applications seeking to complete
acquisitions.
Except for historical information contained herein, the foregoing statements
are forward-looking statements, the accuracy of which is subject to a number of
risks and assumptions. The Corporation's Form 10-K for the fiscal year ended
December 31, 1997 discusses such risks and assumptions and other key factors
that could cause actual results to differ materially from those expressed in
such forward-looking statements.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
September 17,1998 Sally W. Crawford elected to Board of Directors of
Chittenden Trust Company
13
<PAGE>
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, 1998 S/PAUL A. PERRAULT
- ----------------- -------------------------------------
Date Paul A. Perrault,
Chairman, President and
Chief Executive Officer
November 13, 1998 S/KIRK W. WALTERS
- ----------------- -------------------------------------
Date Kirk W. Walters
Executive Vice President,
Treasurer, and Chief Financial Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 75,985
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 74,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 396,456
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,417,820
<ALLOWANCE> (24,576)
<TOTAL-ASSETS> 2,048,781
<DEPOSITS> 1,803,008
<SHORT-TERM> 40,111
<LIABILITIES-OTHER> 31,671
<LONG-TERM> 986
0
0
<COMMON> 15,930
<OTHER-SE> 157,075
<TOTAL-LIABILITIES-AND-EQUITY> 2,048,781
<INTEREST-LOAN> 92,669
<INTEREST-INVEST> 19,371
<INTEREST-OTHER> 1,630
<INTEREST-TOTAL> 113,670
<INTEREST-DEPOSIT> 43,662
<INTEREST-EXPENSE> 45,469
<INTEREST-INCOME-NET> 68,201
<LOAN-LOSSES> 3,825
<SECURITIES-GAINS> (81)
<EXPENSE-OTHER> 54,090
<INCOME-PRETAX> 34,776
<INCOME-PRE-EXTRAORDINARY> 34,776
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,870
<EPS-PRIMARY> 1.59
<EPS-DILUTED> 1.55
<YIELD-ACTUAL> 4.89
<LOANS-NON> 10,792
<LOANS-PAST> 1,314
<LOANS-TROUBLED> 36
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 26,721
<CHARGE-OFFS> 7,598
<RECOVERIES> 1,628
<ALLOWANCE-CLOSE> 24,576
<ALLOWANCE-DOMESTIC> 24,576
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,588
</TABLE>
