<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 SIX MONTHS ENDED JUNE 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 JUNE 30, 1998, THERE WERE 15,929,661 SHARES OF THE CORPORATION'S $1.00 PAR
VALUE COMMON STOCK ISSUED, WITH 14,324,535 SHARES OUTSTANDING.
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
2
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Chittenden Corporation
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------------------------
<S> <C> <C>
(in thousands)
Assets
Cash and cash equivalents $ 155,565 $ 143,394
Securities available for sale 389,857 363,279
Federal Home Loan Bank stock 5,591 5,591
Mortgage loans held for sale 19,683 16,433
Loans:
Commercial 363,929 365,042
Real Estate:
Residential 412,066 456,396
Commercial 314,740 314,477
Construction 21,966 21,900
----------------------------
Total Real Estate 748,772 792,773
Consumer 262,539 241,323
----------------------------
Total Loans 1,375,240 1,399,138
Less: Allowance for possible loan losses (27,118) (26,721)
----------------------------
Net loans 1,348,122 1,372,417
Accrued interest receivable 14,864 14,431
Other real estate owned 661 747
Other assets 16,015 19,593
Premises and equipment, net 28,520 27,412
Intangible assets 13,164 13,853
----------------------------
Total assets $1,992,042 $1,977,150
============================
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Demand $ 320,613 $ 302,555
Savings 925,954 924,846
Other time 404,916 409,055
Certificates of deposit $100,000 and over 91,105 121,089
----------------------------
Total deposits 1,742,588 1,757,545
Short-term borrowings 42,427 23,250
Accrued expenses and other liabilities 36,304 31,843
Long-term debt 2,333 2,239
----------------------------
Total liabilities 1,823,652 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;
issued 15,929,661 in 1998 and 1997 15,930 15,930
Surplus 72,398 72,611
Retained earnings 112,245 102,553
Treasury stock, at cost 1,605,126 shares in 1998 and 1,508,076 shares in 1997 (34,170) (30,084)
Accumulated other comprehensive income 2,392 1,675
Unearned portion of employee restricted stock (405) (412)
----------------------------
Total stockholders' equity 168,390 162,273
----------------------------
Total liabilities and stockholders' equity $1,992,042 $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 Six Months
Ended June 30, Ended June 30,
----------------- --------------- --------------- ---------------
1998 1997 1998 1997
----------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Interest on loans $30,745 $30,964 $61,412 $60,691
Investment securities:
Mortgage-backed securities 1,900 2,146 3,915 3,924
Taxable 4,443 3,722 8,420 7,642
Tax-favored debt 4 5 9 14
Tax-favored equity 449 184 872 474
Short-term investments 473 437 935 891
---------------- --------------- --------------- ---------------
Total interest income 38,014 37,458 75,563 73,636
---------------- --------------- --------------- ---------------
Interest expense:
Deposits:
Savings 7,771 7,189 15,410 14,241
Time 6,770 6,703 13,655 13,320
---------------- --------------- --------------- ---------------
Total interest on deposits 14,541 13,892 29,065 27,561
Short-term borrowings 786 748 1,263 1,265
Long-term debt 49 50 96 100
---------------- --------------- --------------- ---------------
Total interest expense 15,376 14,690 30,424 28,926
---------------- --------------- --------------- ---------------
Net interest income 22,638 22,768 45,139 44,710
Provision for possible loan losses 1,275 1,012 2,550 2,025
---------------- --------------- --------------- ---------------
Net interest income after provision
for possible loan losses 21,363 21,756 42,589 42,685
---------------- --------------- --------------- ---------------
Noninterest income:
Investment management and trust income 1,637 1,435 3,102 2,724
Service charges on deposit accounts 1,778 1,793 3,524 3,389
Mortgage servicing income 498 578 975 1,142
Gains on sales of mortgage loans, net 1,407 656 2,520 1,061
Credit card income, net 1,064 1,437 1,940 2,781
Insurance commissions, net 560 237 1,504 237
Other 1,414 1,168 2,645 2,381
---------------- --------------- --------------- ---------------
Total noninterest income 8,358 7,304 16,210 13,715
---------------- --------------- --------------- ---------------
Noninterest expense:
Salaries 7,478 7,169 14,793 13,776
Employee benefits 2,443 2,298 5,036 4,800
Net occupancy expense 2,317 2,322 4,736 4,644
FDIC deposit insurance 62 64 118 117
Other real estate owned, income and expense, net 30 16 70 72
Other 5,676 5,807 11,076 11,209
---------------- --------------- --------------- ---------------
Total noninterest expense 18,006 17,676 35,829 34,618
--------------- --------------- --------------- ---------------
Income before income taxes 11,715 11,384 22,970 21,782
Provision for income taxes 3,885 3,867 7,804 7,381
---------------- --------------- --------------- ---------------
Net income $ 7,830 $ 7,517 $15,166 $14,401
================ =============== =============== ===============
Basic earnings per share $0.54 $0.50 $1.05 $0.95
Diluted earnings per share 0.53 0.49 1.03 0.93
Dividends per share $0.20 $0.18 $0.38 $0.34
</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 SIX MONTHS
ENDED JUNE 30,
1998 1997
-------------------------
<S> <C> <C>
(in thousands)
Cash flows from operating activities:
Net income $ 15,166 $ 14,401
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for possible loan losses 2,550 2,025
Depreciation and amortization 1,815 1,706
Amortization of intangible assets 689 602
Amortization of premiums, fees, and discounts, net 1,034 276
Investment securities losses 81 -
Deferred income taxes 2,225 (25)
Loans originated and purchased for sale (214,385) (66,703)
Proceeds from sales of loans 213,655 68,052
Gains on sales of loans (2,520) (1,061)
Changes in assets and liabilities:
Accrued interest receivable (433) 236
Other assets 2,405 (996)
Accrued expenses and other liabilities 3,944 4,790
-------------------------
Net cash provided by operating activities 26,226 23,303
-------------------------
Cash flows from investing activities:
Acquisition of The Pomerleau Agency, Inc., net of cash paid - 721
Proceeds from sales of securities available for sale 18,726 64,064
Proceeds from maturing securities and principal payments
on securities available for sale 151,725 83,803
Purchases of securities available for sale (195,923) (148,199)
Proceeds from principal payments on securities held for investment - 10,871
Purchases of securities held for investment - (199)
Loans originated, net of principal repayments 20,174 (20,889)
Purchases of premises and equipment (2,923) (2,498)
-------------------------
Net cash used in investing activities (8,221) (12,326)
-------------------------
Cash flows from financing activities:
Net decrease in deposits (14,957) (86,775)
Net increase in short-term borrowings 19,177 47,950
Net increase in long term borrowings 94 28
Cash paid to list on New York Stock Exchange, net of taxes (93) -
Proceeds from issuance of treasury and common stock 244 115
Dividends on common stock (5,473) (5,095)
Repurchase of common stock (4,826) (15,343)
-------------------------
Net cash used in financing activities (5,834) (59,120)
-------------------------
Net increase (decrease) in cash and cash equivalents 12,171 (48,143)
Cash and cash equivalents at beginning of year 143,394 214,459
-------------------------
Cash and cash equivalents at end of year $ 155,565 $ 166,316
=========================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 30,419 $ 28,851
Income taxes 640 6,866
Non-cash investing and financing activities:
Loans transferred to other real estate owned 598 1,297
Issuance of treasury and restricted stock 77 297
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 six-month periods ended June 30, 1998 and 1997 is presented
below:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997 1998 1997
-------------------------------------------
<S> <C> <C> <C> <C>
(in thousands)
NET INCOME $7,830 $ 7,517 $15,166 $14,401
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses) arising during period 681 3,323 1,058 (348)
Less: Reclassification adjustments for (gains) losses
included in net income 84 1 81 1
-------------------------------------------
Other comprehensive income, before tax 8,595 10,841 16,305 14,054
Income tax expense (benefit) related to:
Unrealized holding gains (losses) arising during period 268 1,206 394 (122)
Gains (losses) included in net income (29) - (28) -
-------------------------------------------
Total income tax expense (benefit) related to
items of comprehensive income 238 1,206 365 (122)
-------------------------------------------
Comprehensive income $8,357 $ 9,635 $15,940 $14,176
==================== ===================
</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.
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 as early
as its fiscal quarter beginning July 1, 1998. The statement
6
<PAGE>
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 July 15, 1998, the Company declared regular dividends of approximately
$2.9 million, or $0.20 per share, to be paid on August 14, 1998 to shareholders
of record on July 31, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Chittenden Corporation posted second quarter 1998 net income of $0.53 per
diluted share, an increase of 8% over the $0.49 per diluted share posted in the
second quarter of last year. Net income for the second quarter of 1998 was $7.8
million, an increase of 4% over the $7.5 million recorded in the same quarter a
year ago. Return on average equity was 18.95% for the quarter ended June 30,
1998 compared with 17.88% for the same period in 1997. Return on average assets
was 1.58% for both the second quarter of 1998 and the second quarter of last
year.
For the first six months of 1998, diluted earnings per share were $1.03, an
increase of 11% over the $0.93 posted for the same period a year ago. Net
income for the year to date 1998 was $15.2 million, 5% higher than the $14.4
million recorded for the first six months of 1997. Return on average equity and
return on average assets were 18.55% and 1.55% in the first half of 1998,
respectively, compared with 16.88% 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 June
30, 1998 was $23.2 million, up slightly from $23.1 million for the same period a
year ago. The increase was attributable to a higher level of average interest-
earning assets, which were up $71 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 5.15% in the second quarter of 1997 to 4.98% in
the second quarter of 1998. The decline in the net yield was caused by a
combination of declining yields in the company's loan portfolio, leverage
resulting from increased activity in municipal deposit gathering, and a
reduction in net earning assets caused by the Company's capital management plan.
Net interest income on a tax equivalent basis for the first six months of
1998 was $46.2 million, up from $45.5 million for the same period of 1997. The
increase was also attributable to higher level of average interest-earning
assets, which were up $66 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 5.12% in the first six months of 1997 to 5.02% 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 second quarter.
7
<PAGE>
The following table presents an analysis of average rates and yields on a fully
taxable equivalent basis for the six months ended June 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 $1,404,243 $62,184 8.94% $1,371,201 $61,313 9.02%
Investments:
Taxable 380,097 12,335 6.54 370,069 11,740 6.40
Tax-favored debt securities 271 13 9.67 438 20 9.21
Tax-favored equity securities 38,556 1,201 6.28 14,665 414 5.69
Interest-bearing deposits in banks 100 2 3.25 100 2 3.23
Federal funds sold 33,757 934 5.58 34,148 891 5.26
------------------------- -----------------------
Total interest-earning assets 1,857,024 76,669 8.33 1,790,621 74,380 8.38
----------- -----------
Noninterest-earning assets 144,867 139,160
Allowance for possible loan losses (27,200) (28,194)
------------ -------------
Total assets $1,974,691 $1,901,587
============ =============
Liabilities and stockholders' equity
Interest-bearing liabilities:
Savings and interest-bearing transactional accounts $ 924,135 $15,410 3.36 $ 869,920 $14,241 3.30
Certificates of deposit $100,000 and over 118,294 3,110 5.30 108,529 2,854 5.30
Other time deposits 407,888 10,545 5.21 414,385 10,466 5.09
------------------------- --------------------------
Total interest-bearing deposits 1,450,317 29,065 4.04 1,392,834 27,561 3.99
Short-term borrowings 36,216 1,263 7.03 41,730 1,265 6.11
Long-term debt 2,472 96 7.83 2,952 100 6.83
------------ ------------ ------------- ------------
Total interest-bearing liabilities 1,489,005 30,424 4.12 1,437,516 28,926 4.06
----------- -----------
Noninterest-bearing liabilities:
Demand deposits 291,888 268,382
Other liabilities 28,922 23,696
------------ -------------
Total liabilities 1,809,815 1,729,594
Stockholders' equity 164,876 171,993
------------ -------------
Total liabilities and stockholders' equity $1,974,691 $1,901,587
============ =============
Net interest income $46,245 $45,454
============= =============
Interest rate spread (2) 4.21% 4.32 %
Net yield on earning assets (3) 5.02% 5.12%
</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 $8.4 million for the second quarter of 1998, up
from $7.3 million for the second quarter of 1997. Commissions from insurance
sales, which commenced in June of 1997 with the acquisition of the Pomerleau
Agency, were $560,000 in the second quarter of 1998, compared with $237,000 in
the second quarter of 1997. Gains on sales of mortgages increased $751,000 from
the second quarter of 1997 due to increased market activity. Significant
increases were also seen in investment management and trust income, up $202,000
or 14%. Mortgage servicing income declined slightly in 1998 as a result of
increased amortization expense related to originated mortgage servicing rights.
Net credit card income declined $373,000 to $1.1 million. 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.
For the first six months of 1998, noninterest income was $16.2 million, up
$2.5 million or 18% from the comparable 1997 level. Commissions from insurance
sales were $1.5 million for the first half of 1998, compared with $237,000 for
the first half of 1997. Gains on sales of mortgages increased $1.5 million from
the first two quarters of 1997 due to the increased market activity noted above.
Trends similar to those observed in the second quarter for investment management
and trust income, and mortgage servicing income, were also seen in the first
half of 1998. Net credit card income declined $841,000 to $1.9 million. For
the first half of the year, lower processing volumes accounted for approximately
$466,000 of the decline in credit card income, while lower margins on processed
volume and increased processing expenses accounted for approximately $236,000
and $199,000 of decreased income. The decreases in the
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<PAGE>
margin and volume reflect the Company's continuing evaluation of its credit card
processing base. The increase in processing expenses is related to an increase
in the use of third parties for the processing of certain charge-back
transactions.
Noninterest expenses were $18.0 million for the second quarter, and $35.8
million for the first half, of 1998. These amounts were $330,000 and $1.2
million higher than the comparable 1997 levels. Noninterest expenses related to
the Pomerleau Agency were $623,000 for the second quarter and $1.2 million for
the first half of 1998, compared with $316,000 for the second quarter of 1997.
Excluding the expenses related to the insurance agency, total noninterest
expenses were approximately 1% 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 financial institutions 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 $222,000 for the three months ended June 30, 1998 and by
approximately $445,000 for the six months then ended. Franchise taxes are
included in income tax expense in the consolidated statements of income.
For the six months ended June 30, 1998 and 1997, Federal and state income tax
provisions amounted to $7.8 million and $7.4 million, respectively. The
effective tax rates for the respective periods were 34.0% and 33.9%. Federal
and state income tax provisions amounted to $3.9 million in both three month
periods ended June 30, 1998 and 1997. The effective tax rates for the
respective periods were 33.2% and 34.0%. 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 slightly from $1.977 billion at December 31, 1997 to
$1.992 billion at June 30, 1998. The Company invests the majority of its assets
in loans and investments. During the first six months of 1998, total loans
decreased $23.9 million, to $1.375 billion at June 30, 1998. This decrease was
primarily attributable to higher prepayments on adjustable rate residential real
estate loans, due to favorable interest rates. 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 $26.6 million at June 30, 1998
compared to December 31, 1997. Total deposits at June 30, 1998 were $1.743
billion, down $15.0 million or less than 1% from the December 31, 1997 level.
9
<PAGE>
CREDIT QUALITY
Nonperforming assets include nonaccrual loans, restructured debt, and
foreclosed real estate (Other Real Estate Owned). As of June 30, 1998,
nonperforming assets totaled $8.7 million, compared to $8.0 million and $9.8
million at December 31 and June 30, 1997, respectively. The allowance for loan
losses was $27.1 million at June 30, 1998, up slightly from the December 31,
1997 level of $26.7 million. The provision for possible loan losses that was
charged against earnings in the first six months of 1998 was $2.55 million
compared to $2.0 million a year ago.
A summary of credit quality follows:
<TABLE>
<S> <C> <C> <C> <C>
6/30/98 3/31/98 12/31/97 6/30/97
---------------------------------------------------------------------------
(In thousands)
Nonaccrual loans $ 8,007 $ 7,132 $ 6,481 $ 7,845
Restructured debt - 116 767 835
Other real estate owned (OREO) 661 850 747 1,141
---------------------------------------------------------------------------
Total nonperforming assets (NPA) $ 8,668 $ 8,098 $ 7,995 $ 9,821
===========================================================================
Loans past due 90 days or more and still accruing
interest $ 1,419 $ 2,026 $ 2,838 $ 1,531
Allowance for possible loan losses 27,118 26,725 26,721 28,167
NPA as % of loans plus OREO 0.62% 0.58% 0.56% 0.72%
Allowance as % of loans 1.94% 1.90% 1.89% 2.06%
Allowance as % of nonperforming loans 338.68% 368.72% 368.67% 324.50%
Allowance as % of NPA 312.85% 330.02% 334.22% 286.80%
</TABLE>
Provisions for and activity in the allowance for possible loan losses are
summarized as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(In thousands)
Beginning Balance $26,725 $28,200 $26,721 $28,096
Provision for Possible Loan Losses 1,275 1,012 2,550 2,025
Loans Charged Off (1,676) (1,663) (3,325) (3,022)
Loan Recoveries 794 618 1,172 1,068
---------------------------------------
Ending Balance $27,118 $28,167 $27,118 $28,167
=======================================
</TABLE>
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
Stockholders' equity totaled $168.4 million at June 30, 1998, compared to
$162.3 million at year-end 1997. The current level reflects year-to-date net
income of $15.2 million, which was partially offset by stock repurchases
totaling $4.8 million and dividends paid to shareholders of $5.5 million.
10
<PAGE>
"Tier One" capital, consisting entirely of common equity, measured 9.93% of
risk-weighted assets at June 30, 1998. Total capital, including the "Tier Two"
allowance for loan losses, was 11.24% of risk-weighted assets. The leverage
capital ratio was 7.48%. 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 June 30, 1998, the Company maintained cash
balances and short-term investments of approximately $155.6 million, compared
with $143.4 million at December 31, 1997. During the first six 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. The Company has completed an assessment of its mainframe systems
and has developed a specific workplan to address issues identified. The
Company's assessment of its personal computer-based systems has also been
completed. Required renovations to mission critical mainframe and PC-based
systems have commenced. Management expects these renovations to be
substantially complete by October 1, 1998.
The Company has been notified by IBM that after December 31, 1999, it will no
longer support the compiler that the Company currently employs to convert source
programming code to machine language. Management has chosen to replace this
compiler and expects to complete this replacement by the end of the third
quarter of 1999. The compiler will not have any impact on the Company's Year
2000 readiness other than that the renovated systems will be running on a
compiler supported by IBM through and beyond the Year 2000.
Validation and testing of the renovations has begun and is expected to
continue through the end of 1999. Additionally, a program has been developed
and implemented in which the Company has contacted its major vendors and
critical customers to determine their progress in complying with the Year 2000
problem. The Company believes it will be able to modify or replace its affected
systems in time to minimize any detrimental effects on operations. The Company
has prepared an estimate of the costs to be incurred relative to the Year 2000
problem and has determined that the costs specifically identifiable to the Year
2000 issue are not expected to have a material impact on the Company's results
of operations or financial position in any future period.
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
11
<PAGE>
differ materially from those expressed in such forward-looking statements. An
additional risk is the Corporation's ability to timely and efficiently address
the Year 2000 problem.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Meeting Date
April 15, 1998
(b) Election of Directors and Continuing Directors
Frederic H. Bertrand 3 Year Term
David M. Boardman 3 Year Term
Pall D. Spera 3 Year Term
Martel D. Wilson, Jr. 3 Year Term
Paul J. Carrara Continuing
Richard D. Driscoll Continuing
Lyn Hutton Continuing
James C. Pizzagalli Continuing
Philip A. Kolvoord Continuing
Paul A. Perrault Continuing
(c) Voting Matters
1. The election of Directors as provided by the By-Laws.
<TABLE>
<CAPTION>
Total Vote Total Vote Withheld
For Each Director From Each Director
-------------------------- ----------------------
<S> <C> <C>
Frederic H. Bertrand 12,262,507 36,329
David M. Boardman 12,258,529 40,307
Pall D. Spera 12,262,660 36,176
Martel D. Wilson, Jr. 12,261,317 37,519
</TABLE>
<TABLE>
<CAPTION>
2. Ratification of the 1998 Directors' Omnibus Long-Term Incentive Plan.
For Against Abstain
- ----------------------------------- ------------------ ------------------
<S> <C> <C>
11,516,893 607,791 174,152
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
April 29,1998 Paul A. Perrault elected Chairman of the Board of Directors
June 19, 1998 Expansion of Common Stock Repurchase Program
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
August 13, 1998 S/PAUL A. PERRAULT
- --------------- -------------------------------------
Date Paul A. Perrault,
Chairman, President
and Chief Executive Officer
August 13, 1998 S/KIRK W. WALTERS
- --------------- -------------------------------------
Date Kirk W. Walters
Executive Vice President,
Treasurer, and Chief Financial Officer
14
<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
August 13, 1998
- --------------- _______________________
Date Paul A. Perrault,
Chairman, President
and Chief Executive Officer
August 13, 1998
- --------------- ______________________
Date Kirk W. Walters
Executive Vice President,
Treasurer, and Chief Financial Officer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 109,364
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 46,101
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 389,857
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,375,240
<ALLOWANCE> (27,118)
<TOTAL-ASSETS> 1,992,042
<DEPOSITS> 1,742,588
<SHORT-TERM> 42,427
<LIABILITIES-OTHER> 36,304
<LONG-TERM> 2,333
0
0
<COMMON> 15,930
<OTHER-SE> 152,460
<TOTAL-LIABILITIES-AND-EQUITY> 1,992,042
<INTEREST-LOAN> 61,412
<INTEREST-INVEST> 13,216
<INTEREST-OTHER> 935
<INTEREST-TOTAL> 75,563
<INTEREST-DEPOSIT> 29,065
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<INTEREST-INCOME-NET> 45,139
<LOAN-LOSSES> 2,550
<SECURITIES-GAINS> (81)
<EXPENSE-OTHER> 35,829
<INCOME-PRETAX> 22,970
<INCOME-PRE-EXTRAORDINARY> 22,970
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,166
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.03
<YIELD-ACTUAL> 4.90
<LOANS-NON> 8,007
<LOANS-PAST> 1,419
<LOANS-TROUBLED> 0
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</TABLE>
