<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, 1999
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, 1999, there were 28,193,504 shares of the Corporation's $1.00 par
value common stock issued and 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,
1999 1998
(Restated)
-----------------------------
(in thousands)
<S> <C> <C>
Assets
Cash and cash equivalents $ 203,349 $ 267,748
Securities available for sale 844,678 993,370
FHLB and FRB stock 21,979 21,979
Mortgage loans held for sale 17,831 53,684
Loans:
Commercial 527,250 480,801
Municipal 83,975 97,189
Real Estate:
Residential 1,105,387 1,106,135
Commercial 631,478 573,253
Construction 65,508 69,690
-----------------------------
Total Real Estate 1,802,373 1,749,078
Consumer 477,983 414,830
-----------------------------
Total Loans 2,891,581 2,741,898
Less: Allowance for loan losses (42,431) (41,209)
-----------------------------
Net loans 2,849,150 2,700,689
Accrued interest receivable 31,767 32,523
Other real estate owned 615 1,870
Other assets 69,098 52,108
Premises and equipment, net 47,437 71,012
Intangible assets 45,401 69,460
-----------------------------
Total assets $ 4,131,305 $ 4,264,443
=============================
Liabilities:
Deposits:
Demand $ 615,292 $ 613,645
Savings 1,982,213 2,059,028
Certificates of deposit less than $100,000 and other time deposits 781,758 798,921
Certificates of deposit $100,000 and over 188,029 208,177
-----------------------------
Total deposits 3,567,292 3,679,771
Short-term borrowings 138,966 135,276
Accrued expenses and other liabilities 82,386 59,936
-----------------------------
Total liabilities 3,788,644 3,874,983
Commitments and contingencies
Stockholders' Equity:
Preferred stock - $100 par value
authorized - 1,000,000 shares; issued and outstanding - none
Common stock - $1 par value authorized - 60,000,000 shares; 28,193 30,154
issued -28,193,504 in 1999 and 30,153,669 in 1998
Surplus 145,994 188,431
Retained earnings 171,489 214,329
Treasury stock, at cost - 2,216,599 shares in 1998 - (49,650)
Accumulated other comprehensive income (2,788) 6,462
Unearned portion of employee restricted stock (227) (266)
-----------------------------
Total stockholders' equity 342,661 389,460
-----------------------------
Total liabilities and stockholders' equity $ 4,131,305 $ 4,264,443
=============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
Chittenden Corporation
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months Ended
Ended June 30, June 30,
1999 1998 1999 1998
(Restated) (Restated)
---------------------------------------------------------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $ 57,338 $58,876 $113,910 $117,946
Investment securities:
Taxable 13,507 14,326 28,007 28,413
Tax-favored 419 649 1,060 1,179
Short-term investments 413 781 895 1,678
---------------------------------------------------------
Total interest income 71,677 74,632 143,872 149,216
---------------------------------------------------------
Interest expense:
Deposits:
Savings 14,033 15,537 29,192 30,712
Time 12,803 13,801 25,058 27,858
---------------------------------------------------------
Total interest on deposits 26,836 29,338 54,250 58,570
Short-term borrowings 1,599 2,459 3,211 4,992
---------------------------------------------------------
Total interest expense 28,435 31,797 57,461 63,562
---------------------------------------------------------
Net interest income 43,242 42,835 86,411 85,654
Provision for loan losses 2,175 2,310 4,350 4,710
---------------------------------------------------------
Net interest income after provision for loan losses 41,067 40,525 82,061 80,944
---------------------------------------------------------
Noninterest income:
Investment management and trust income 3,657 3,164 7,199 6,255
Service charges on deposit accounts 4,687 5,240 9,102 10,186
Mortgage servicing income 808 848 1,738 1,591
Gains on sales of mortgage loans, net 1,395 2,127 3,199 4,087
Credit card income, net 1,510 1,824 2,850 3,124
Insurance commissions, net 560 577 1,201 1,543
Securities gains - 111 - 261
Other 3,984 3,325 7,470 6,125
---------------------------------------------------------
Total noninterest income 16,601 17,216 32,759 33,172
---------------------------------------------------------
Noninterest expense:
Salaries 14,964 14,464 29,880 29,174
Employee benefits 4,421 4,141 8,949 8,526
Net occupancy expense 6,396 6,417 13,036 12,842
Other real estate owned, income and expense, net 110 314 256 575
Amortization of intangibles 1,465 1,465 2,928 2,949
Special charges 70,995 - 70,995 -
Other 10,890 10,693 21,554 21,067
---------------------------------------------------------
Total noninterest expense 109,241 37,494 147,598 75,133
---------------------------------------------------------
Income (Loss) before income taxes (51,573) 20,247 (32,778) 38,983
Income tax expense (benefit) (7,169) 7,607 (294) 14,728
---------------------------------------------------------
Net income (Loss) $(44,404) $12,640 $(32,484) $ 24,255
=========================================================
Basic earnings per share $ (1.58) $ 0.44 $ (1.16) $ 0.85
Diluted earnings per share (1.58) 0.44 (1.16) 0.83
Dividends per share 0.19 0.17 0.37 0.33
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
4
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Chittenden Corporation
Consolidated Statements of CashFlows
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1999 1998
(Restated)
--------------------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (32,484) $ 24,255
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses 4,350 4,710
Depreciation and amortization 5,304 5,430
Amortization of intangible assets 2,928 2,948
Amortization of premiums, fees, and discounts, net 2,150 2,455
Investment securities (gains) - (261)
Merger related expenses 49,866 -
Write-off of impaired goodwill 21,129 -
Deferred income taxes (21,477) 2,342
Loans originated and purchased for sale (234,228) (341,016)
Proceeds from sales of loans 273,280 335,654
Gains on sales of loans (3,199) (4,087)
Changes in assets and liabilities:
Accrued interest receivable 756 2,315
Other assets (21,680) 14,916
Accrued expenses and other liabilities 29,762 1,927
--------------------------
Net cash provided by operating activities 76,457 51,588
--------------------------
Cash flows from investing activities:
Proceeds from sales of securities available for sale - 23,525
Proceeds from maturing securities and principal payments
on securities available for sale 452,169 290,747
Purchases of securities available for sale (317,660) (327,148)
Loans originated, net of principal repayments (155,725) 13,960
Purchases of premises and equipment (5,591) (5,942)
--------------------------
Net cash used in investing activities (26,807) (4,858)
--------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits (112,479) 23,488
Net increase (decreases) in short-term borrowings 3,690 (42,756)
Cash paid for fractional shares (37) -
Proceeds from issuance of treasury and common stock 5,133 757
Dividends on common stock (10,356) (9,452)
Cash paid to list on New York Stock Exchange, net of taxes - (93)
Repurchase of common stock - (7,490)
--------------------------
Net cash used in financing activities (114,049) (35,546)
--------------------------
Net increase (decrease) in cash and cash equivalents (64,399) 11,184
Cash and cash equivalents at beginning of period 267,748 241,403
--------------------------
Cash and cash equivalents at end of period $ 203,349 $ 252,587
==========================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 57,691 $ 63,924
Income taxes 14,017 2,850
Non-cash investing and financing activities:
Loans transferred to other real estate owned 752 1,929
Issuance of treasury and restricted stock 75 77
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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Chittenden Corporation
Notes to Consolidated Financial Statements
NOTE 1 - ACCOUNTING POLICIES
The Company's significant accounting policies, other than those described in
Note 4 below, are described in Note 1 of the Notes to Consolidated Financial
Statements included in its 1998 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 1998 have been
reclassified to conform to 1999 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 - ACQUISITIONS
On May 28, 1999, the Company acquired Vermont Financial Services Corp. (VFSC)
of Brattleboro, Vermont for stock. VFSC's subsidiary banks include Vermont
National Bank, headquartered in Brattleboro, Vermont and United Bank,
headquartered in Greenfield, Massachusetts. Under the agreement, VFSC
shareholders received 1.07 shares of Chittenden Corporation common stock for
each share of VFSC stock. Total shares outstanding of Chittenden Corporation
stock increased by approximately 14 million shares as a result of the
acquisition. Based on the closing price of Chittenden stock as of May 28, 1999,
the market value of the shares exchanged totaled $387.2 million. The
acquisition was accounted for as a pooling of interests. Accordingly, the
consolidated financial statements for the periods presented have been restated
to include VFSC.
Total revenue, income before taxes, net income, and earnings per share data
of the separate companies for the periods preceding the acquisition were:
<TABLE>
<CAPTION>
For the Three Months For the Six Months For the Three Months
Ended June 30, 1998 Ended June 30, 1998 Ended March 31, 1999
Chittenden Chittenden Chittenden
Corporation VFSC Combined Corporation VFSC Combined Corporation VFSC Combined
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Revenue $30,872 $29,179 $60,051 $61,152 $57,674 $118,826 $30,673 $28,654 $59,327
Income before Income Taxes 11,715 8,532 20,247 22,971 16,012 38,983 11,072 7,337 18,409
Net Income 7,830 4,810 12,640 15,166 9,089 24,255 7,495 4,424 11,919
Diluted Earnings Per Share 0.53 0.36 0.44 1.03 0.68 0.83 0.52 0.34 0.42
</TABLE>
Total revenue includes net interest income and noninterest income.
NOTE 3 - SPECIAL CHARGES
Special charges of $71 million (pre-tax) were recorded during the second
quarter of 1999 which included merger related expenses of $49.9 million and
$21.1 million related to the write-off of impaired goodwill. The merger related
expenses included asset disposal write-downs, conversion, severance and
transaction costs, such as legal, advisory and accounting fees. The impaired
goodwill, which related to VFSC's purchase of Eastern Bancorp, was written-off
as a result of divestitures required by the U.S. Department of Justice and the
Federal Reserve. On an after-tax basis, special charges amounted to $56.5
million in the second quarter of 1999. Included in accrued expenses and other
liabilities at June 30, 1999, are merger related expenses totaling $43.2 million
which will be paid in future periods.
NOTE 4 - RECENTLY ADOPTED ACCOUNTING POLICIES
Effective January 1, 1999, the Company adopted Statement of Position (SOP)
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP 98-1 requires computer software costs associated with
internal-use software to be expensed as incurred until certain capitalization
criteria are met. The
6
<PAGE>
adoption of SOP 98-1 did not have a material effect on the Company's financial
position or its results of operations.
As of January 1, 1999, the Company adopted Statement of Position (SOP) 98-5,
Reporting on the Costs of Start-Up Activities. SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. The adoption of SOP 98-5 did not have a material impact on
the Company's financial position or results of operations.
Effective January 1, 1999, the Company adopted SFAS No. 134, Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise. This statement requires that
after the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities or
other retained interests based on its ability and intent to sell or hold those
investments. SFAS No. 134 did not have a material impact on the Company's
financial condition or results of operations.
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133 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 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, as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activiities - Deferral of the Effective Date of FASB Statement No. 133," is
effective for the Company's fiscal year beginning January 1, 2001. The Company
has the option to elect to early adopt the Statement at 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.
NOTE 6 - COMPREHENSIVE INCOME
The Company's comprehensive income for the three-month and six-month periods
ended June 30, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Net Income $(44,404) $12,640 $(32,484) $24,255
Unrealized gains on investment securities:
Unrealized holding gains (losses) on securities available for
sale, net of tax (5,821) 534 (9,250) 898
Reclassification adjustments for (gains) losses arising during
period, net of tax - (71) - (169)
------------------------------------------------
Total Comprehensive income $(50,225) $13,103 $(41,734) $24,984
================================================
</TABLE>
NOTE 7 - BUSINESS SEGMENTS
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and
Related Information, which establishes standards for reporting operating
segments of a business enterprise. Under SFAS 131, operating segments are
defined as components of an enterprise which are evaluated regularly by the
chief operating decision maker in deciding how to allocate
7
<PAGE>
resources and in assessing performance. The Company's chief operating decision-
maker is the Chairman, President and Chief Executive Officer of the Company. The
adoption of SFAS 131 did not have a material effect on the Company's primary
financial statements, but did result in the disclosure of segment information
contained herein.
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, Vermont National Bank, Bank of Western
Massachusetts, United Bank, Flagship Bank and Trust, and Chittenden Connecticut
Corporation, which provide similar products and services, have similar
distribution methods, types of customers and regulatory responsibilities.
Commercial Banking derives its revenue from a wide range of banking services,
including lending activities, acceptance of demand, savings and time deposits,
safe deposit facilities, merchant credit card services, trust and investment
management, data processing, brokerage services, mortgage banking, and loan
servicing for investor portfolios.
Immaterial operating segments of the Company's operations, which do not have
similar characteristics to the commercial banking operations and do not meet the
quantitative thresholds requiring disclosure, are included in the Other category
in the disclosure of business segments below.
The accounting policies used in the disclosure of business segments are the
same as those described in the summary of significant accounting policies
included in Note 1 of the Company's 1998 Annual Report on Form 10-K. The
consolidation adjustment reflects certain eliminations of inter-segment revenue,
cash and parent company investments in subsidiaries.
<TABLE>
<CAPTION>
For the Three Months Ended Commercial Consolidation
Banking Other (2) Adjustments Consolidated
-----------------------------------------------------------
June 30, 1999
<S> <C> <C> <C> <C>
Net interest revenue (1) $ 43,172 $ 70 $ - $ 43,242
Noninterest income 15,994 612 (5) 16,601
Provision for Loan Losses 2,175 - - 2,175
Noninterest expense 95,965 13,276 - 109,241
---------------------------------------------------------
Net income before tax (38,974) (12,594) (5) (51,573)
Income tax expense/(benefit) (6,872) (297) - (7,169)
---------------------------------------------------------
Total Net Income $ (32,102) $(12,297) $ (5) $ (44,404)
=========================================================
End of Period Assets $4,121,769 $401,297 $(391,761) $4,131,305
For the Three Months Ended Commercial Consolidation
Banking Other (2) Adjustments Consolidated
---------------------------------------------------------
June 30, 1998
Net interest revenue (1) $ 42,711 $ 124 $ - $ 42,835
Noninterest income 16,671 545 - 17,216
Provision for Loan Losses 2,310 - - 2,310
Noninterest expense 36,047 1,447 - 37,494
---------------------------------------------------------
Net income before tax 21,025 (778) - 20,247
Income tax expense/(benefit) 8,000 (393) - 7,607
---------------------------------------------------------
Total Net Income $ 13,025 $ (385) $ - $ 12,640
=========================================================
End of Period Assets $4,049,476 $390,030 $(371,446) $4,068,060
For the Six Months Ended Commercial Consolidation
Banking Other (2) Adjustments Consolidated
---------------------------------------------------------
June 30, 1999
Net interest revenue (1) $ 86,248 $ 163 $ - $ 86,411
Noninterest income 31,510 1,254 (5) 32,759
Provision for Loan Losses 4,350 0 - 4,350
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Noninterest expense 133,198 14,400 - 147,598
---------------------------------------------------------
Net income before tax (19,790) (12,983) (5) (32,778)
Income tax expense/(benefit) 76 (370) - (294)
---------------------------------------------------------
Total Net Income $ (19,866) $(12,613) $ (5) $ (32,484)
=========================================================
End of Period Assets $4,121,769 $401,297 $(391,761) $4,131,305
For the Six Months Ended Commercial Consolidation
Banking Other (2) Adjustments Consolidated
---------------------------------------------------------
June 30, 1998
Net interest revenue (1) $ 85,441 $ 213 $ - $ 85,654
Noninterest income 31,659 1,519 (6) 33,172
Provision for Loan Losses 4,710 - - 4,710
Noninterest expense 72,516 2,617 - 75,133
---------------------------------------------------------
Net income before tax 39,874 (885) (6) 38,983
Income tax expense/(benefit) 15,082 (354) - 14,728
---------------------------------------------------------
Total Net Income 24,792 (531) (6) 24,255
=========================================================
End of Period Assets $4,049,476 $390,030 $(371,446) $4,068,060
</TABLE>
(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 that
segment. Therefore, only the net amount has been disclosed.
(2) Revenue derived from these non-reportable segments includes insurance
commissions from various insurance related products and services.
NOTE 8 - SUBSEQUENT EVENT
On July 21, 1999, the Company declared regular dividends of approximately
$6.2 million, or $0.22 per share, to be paid on August 20, 1999 to shareholders
of record on August 6, 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
On May 28, 1999, Chittenden Corporation ("Chittenden" or "the Company")
completed the acquisition of Vermont Financial Services Corp. (VFSC) in a stock-
for-stock transaction accounted for as a pooling of interests. Accordingly, the
consolidated financial statements of the Company have been restated to reflect
the acquisition as of the beginning of the earliest period presented. The
Company recognized $56.5 million of after-tax special charges in the second
quarter of 1999. Results excluding these special charges are referred to in the
following discussion as operating.
The Company has entered into contracts with three banking organizations to
sell eighteen branches under divestitures required by the U.S. Department of
Justice and the Federal Reserve as conditions of the approval of the merger
transaction with VFSC. Total loans and deposits to be transferred to the buyers
are approximately $180 million and $514 million, respectively. Sixteen of the
eighteen branch sales are expected to be completed in the fourth quarter of
1999, with the remaining two branch sales to be completed in the third quarter
of 1999 and the first quarter of 2000.
Chittenden Corporation posted second quarter 1999 operating net income of
$0.42 per diluted share, compared to the $0.44 per diluted share posted in the
second quarter of last year. Operating net income for the second quarter of
1999 was $12.1 million, compared to the $12.6 million recorded in the same
quarter a year ago. Operating return on average equity was 12.28% for the
quarter ended June 30, 1999 compared with 13.34% for the same period in 1998.
Operating return on average assets was 1.17% for the first quarter of 1999, down
from 1.25% for the second quarter of last year.
For the first six months of 1999, diluted operating earnings per share were
$0.84, an increase over the $0.83 per share for the same time period in 1998.
Year to date operating net income for 1999 was $24 million, which was consistent
with
9
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the same period for the prior year. Operating return on average equity and
operating return on average assets for the first six months of 1999 were 12.36%
and 1.16%, down from the 13.00% and 1.21% reported in 1998. The decline in
operating return on average equity was primarily attributed to increased levels
of average stockholders equity caused by the Company's rescission of its share
repurchase program prior to the announcement of the agreement to acquire VFSC.
Net interest income on a tax equivalent basis for the three months ended June
30, 1999 was $44.0 million, up slightly from $43.8 million for the same period a
year ago. The yield on earning assets declined from 4.74% in the second quarter
of 1998 to 4.61% for the same period in 1999. This decrease was attributable to
declining yields in the Company's loan portfolio reflecting reductions in market
interest rates, which resulted from three rate reductions by the Federal Reserve
occurring in the third and fourth quarters of 1998.
Net interest income on a tax equivalent basis for the six months ended June
30, 1999 was $87.9 million, up slightly from $87.1 million for the same period a
year ago. The yield on earning assets declined from 4.76% in the first half of
1998 to 4.61% for the same period in 1999. This decrease was attributable to
increased liquidity in the Company's mix of investments and loans, which was
caused by deposit growth outpacing loan growth. Also contributing to the decline
in the net interest margin were declining yields in the Company's loan portfolio
discussed above.
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>
1999 1998
-----------------------------------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense (1) Rate (1) Balance Expense (1) Rate (1)
-----------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans $2,821,908 $ 114,882 8.21% $2,701,986 $118,989 8.88%
Investments:
Taxable 928,577 28,007 6.08% 875,459 28,468 6.56%
Tax-favored securities 57,721 1,561 5.45% 48,763 1,671 6.91%
Interest-bearing deposits in banks 4,748 62 2.63% 4,438 86 3.89%
Federal funds sold 35,302 830 4.74% 55,811 1,596 5.77%
------------------------ ----------------------
Total interest-earning assets 3,848,256 145,342 7.62% 3,686,457 150,810 8.25%
----------- ---------
Noninterest-earning assets 362,068 398,669
Allowance for loan losses (42,408) (45,878)
----------- -----------
Total assets $4,167,916 $4,039,248
=========== ===========
Liabilities and stockholders' equity
Interest-bearing liabilities:
Savings and interest-bearing transactional accounts $2,025,770 $ 29,192 2.91% $1,819,456 $ 30,655 3.40%
Certificates of deposit under $100,000 and other 774,307 20,083 5.23% 872,896 22,510 5.20%
time deposits
Certificates of deposit $100,000 and over 203,544 4,976 4.93% 205,888 5,350 5.24%
------------------------ ----------------------
Total interest-bearing deposits 3,003,621 54,251 3.64% 2,898,240 58,515 4.07%
Short-term borrowings 126,927 3,212 5.10% 178,511 5,196 5.87%
------------------------ ----------------------
Total interest-bearing liabilities 3,130,548 57,463 3.70% 3,076,751 63,711 4.18%
----------- ---------
Noninterest-bearing liabilities:
Demand deposits 588,722 532,407
Other liabilities 56,335 52,089
------------ -----------
Total liabilities 3,775,605 3,661,247
Stockholders' equity 392,311 378,001
------------ -----------
Total liabilities and stockholders' equity $4,167,916 $4,039,248
============ ===========
Net interest income $ 87,879 $ 87,099
=========== =========
Interest rate spread (2) 3.92% 4.07%
Net yield on earning assets (3) 4.61% 4.76%
</TABLE>
(1) On a fully taxable equivalent basis, which is 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 $16.6 million for the second quarter of 1999,
down 4% from $17.2 million for the second quarter of 1998. Investment
management revenue of $3.7 million increased 16% compared to $3.2 million in
10
<PAGE>
the second quarter of 1998, due to increased assets under management. This
revenue increase was offset by decreases in service charges on deposits and
gains on sales of mortgages. Service charges on deposits of $4.7 million
decreased $553,000 from the $5.2 million reported for the second quarter of
1998, due to a decrease in overdraft related fee income. Gains on sales of
mortgage loans decreased $732,000 due to a decrease in loans sold to investors
as a result of the increase in market rates between the two comparable periods.
Noninterest income for the first half of 1999 was $32.8 million, which
decreased by 1% from the $33.2 million recorded for the same period last year.
An increase of 15% or $944,000 in investment management revenue substantially
offset decreases in service charges on deposits, gains on sales of mortgage
loans and insurance commissions. Service charges on deposits declined $1.1
million compared to the six months of 1998, due to a decrease in overdraft
related fee income. Gains on sales of mortgage loans decreased by $888,000 due
to a decline in the amount of loans sold to investors as a result of the rate
increases discussed above. Commissions from insurance sales declined $342,000
from the comparable period in 1998, to $1.2 million for the second quarter of
1999 due to lower levels of contingent commissions received from insurance
companies. The decline in contingent commissions, which are based on loss
experience associated with policies sold and the insurance agency's ability to
attain sales goals, was related to increased competition and a less favorable
loss experience on policies sold by the agency.
Operating noninterest expenses were $38.2 million for the second quarter, and
$76.6 million for the first half of 1999. These amounts were $752,000 and $1.5
million, or approximately 2% higher than the comparable periods in 1998. Special
charges of $71 million (pre-tax) were incurred during the second quarter of 1999
which included merger related expenses of $49.9 million and $21.1 million
related to the write-off of impaired goodwill. The merger related expenses
included asset disposal write-downs, conversion, severance and transaction
costs, such as legal, advisory and accounting fees. The impaired goodwill, which
related to VFSC's purchase of Eastern Bancorp, was written-off as a result of
divestitures required by the U.S. Department of Justice and the Federal Reserve.
On an after-tax basis, special charges amounted to $56.5 million in the second
quarter of 1999. Included in accrued expenses and other liabilities at June 30,
1999, are merger related expenses of $43.2 million which will be paid in future
periods.
Income Taxes
The Company and its subsidiaries are taxed on income by the IRS at the
Federal level and by various states in which they do business. The majority of
the Company's income is generated in the State of Vermont, which levies
franchise taxes on banks based upon average deposit levels in lieu of taxing
income. Franchise taxes are included in income tax expense in the consolidated
statements of income.
For the six months ended June 30, 1999 and 1998, Federal and state operating
income tax provisions amounted to $14.2 million and $14.7 million, respectively.
The effective tax rates for the respective periods were 37.1% and 37.7%. 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 non-tax-deductible amortization of goodwill related to VFSC's
acquisition of Eastern Bancorp. The higher effective rate produced by these
nondeductible expenses was partially reduced by 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.
As noted above, the Company recorded $71 million in special charges in the
second quarter of 1999, which included $49.9 million of merger related expenses
and $21.1 million related to the write-off of impaired goodwill. No tax benefit
was recorded in relation to the goodwill write-off since that expense is not tax
deductible. In addition, no tax benefit was recognized in relation to certain
non-deductible merger related expenses including investment advisory, legal and
accounting fees incurred as part of the transaction. Tax benefits were
recognized at the Company's marginal federal tax rate of 35% in relation to all
deductible merger related expenses including severance and related expenses,
conversion of systems, and dispositions of duplicative assets.
Financial Position
Total assets decreased from $4.264 billion at December 31, 1998 to $4.131
billion at June 30, 1999. The Company invests the majority of its assets in
loans and investments. Total loans increased $149.8 million, to $2.8 billion at
June
11
<PAGE>
30, 1999. This increase was primarily attributable to growth in the commercial
and consumer portfolios, which offset prepayments in the residential portfolios.
Consistent with the Company's past practice, all conforming fixed-rate loan
production is sold on the secondary market. Total deposits at June 30, 1999 were
$3.6 million, a $112 million decrease from December 31, 1998 due to a decline in
seasonally high deposit balances at year end 1998. However, total deposits
increased by $100 million from June 30, 1998 to June 30, 1999. Securities
available for sale decreased $149 million to $845 million at June 30, 1999. The
decline was primarily due to a decrease in short-term investments, which matured
during the first half of 1999 providing available funds to support the increase
in loans and decline in deposits at June 30, 1999.
Credit Quality
Nonperforming assets include nonaccrual loans and foreclosed real estate (Other
Real Estate Owned). As of June 30, 1999, nonperforming assets totaled $14.2
million, compared to $19.7 million and $27.0 million at December 31, 1998 and
June 30, 1998, respectively. The June 30, 1999 balance reflects two large
payoffs on nonperforming commercial loans, which occurred during the second
quarter, as well as continuing reductions in the levels of Other Real Estate
Owned. The allowance for loan losses was $42.4 million at June 30, 1999, up
slightly from the December 31, 1998 level of $41.2 million.
A summary of credit quality follows:
<TABLE>
6/30/99 3/31/99 12/31/98 6/30/98
----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Nonaccrual loans $ 13,564 $ 16,144 $ 17,866 $ 23,500
Other real estate owned (OREO) 615 1,354 1,869 3,300
----------------------------------------------------------------------------------
Total nonperforming assets (NPA) $ 14,179 $ 17,498 $ 19,735 $ 26,800
==================================================================================
Loans past due 90 days or more $ 4,273 $ 5,161 $ 4,184 $ 6,608
and still accruing interest
Allowance for loan losses 42,431 42,262 41,209 45,727
NPA as % of loans plus OREO 0.49% 0.62% 0.71% 0.98%
Allowance as % of loans 1.46% 1.50% 1.47% 1.68%
Allowance as % of nonperforming loans 312.82% 261.78% 230.66% 194.58%
Allowance as % of NPA 299.25% 241.52% 208.81% 170.62%
</TABLE>
Provisions for and activity in the allowance for loan losses are summarized as
follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands)
Beginning Balance $42,262 $45,207 $41,209 $45,664
Provision for Loan Losses 2,175 2,310 4,350 4,710
Loans Charged Off (3,073) (3,275) (5,753) (7,055)
Loan Recoveries 1,067 1,485 2,625 2,408
-------------------------------------------------------------------------------
Ending Balance $42,431 $45,727 $42,431 $45,727
===============================================================================
</TABLE>
The provision for loan losses represents the charge to expense that is
required to fund the allowance for loan losses. The level of the allowance for
loan losses is based on management's estimate of the amount required to reflect
the risks in the loan portfolio, based upon known and anticipated circumstances
and conditions. 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
delinquencies and loans adversely classified, economic trends, and the impact of
the local and regional economy on the Company's borrowers. The adequacy of the
allowance for possible loan
12
<PAGE>
losses is assessed by an allocation process whereby specific loss allocations
are made against adversely classified loans, and general loss allocations are
made against segments of the loan portfolio which have similar attributes.
Management assesses the adequacy of the allowance for loan losses and reviews
that assessment quarterly with the Board of Directors.
Capital
Stockholders' equity totaled $342.7 million at June 30, 1999, compared to
$389.5 million at year-end 1998. The current level reflects the year-to-date net
loss of $32.4 million, dividends paid to shareholders totaling $10.4 million,
and a decrease in accumulated other comprehensive income of $9.3 million. The
decrease in other comprehensive income resulted from decreases in the unrealized
gains on available for sale securities caused by the continued increase in
yields in the Treasury bond market during the first half of 1999, which was
precipitated by the increase in the federal funds rate at the end of June 1999.
"Tier One" capital, consisting entirely of common equity, measured 9.87% of
risk-weighted assets at June 30, 1999. Total capital, including the "Tier Two"
allowance for loan losses, was 11.13% of risk-weighted assets. The leverage
capital ratio was 7.20%. 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, 1999, the Company maintained cash
balances and short-term investments of approximately $203.3 million, compared
with $267.7 million at December 31, 1998. During this six month period 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 1998 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,
renovation, testing, and implementation of the renovations to all mission-
critical mainframe systems are complete. 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.
13
<PAGE>
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 complete. Renovation,
testing, and implementation of all systems are also complete.
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 expect to be ready for the Year 2000 within
mandated timeframes. 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 also has completed evaluations of the Y2K readiness of its
significant customers. These customers responded to a questionnaire which asked
them detailed questions regarding their Year 2000 readiness, including:
. whether or not they had developed a comprehensive plan for Year 2000
compliance;
. whether or not a specific individual had been assigned responsibility for
managing Y2K compliance;
. whether or not senior management had reviewed and approved the plan;
. whether or not the customer had inventoried its hardware, software,
telecommunications, and facilities for Y2K compliance;
. whether or not the customer had budgeted sufficient resources to accomplish
its Y2K mission;
. whether or not the plan had been reviewed by outside auditors;
. the timing for the completion of testing of critical systems and the
preparation of contingency plans for those systems;
. whether or not the customers had discussed Y2K related issues with their
attorneys and insurers.
The responses were directed to the customer's primary customer service
contact, who reviewed their responses and then forwarded them to a specific
individual responsible for coordinating all responses and assessing their impact
on the Company. Responses were rated based on the progress of the customers
implementation status. Of the customers who were evaluated, 90% were rated as a
low risk based on implementation progress that is fully or nearly complete. None
of the responses indicated the existence of any Y2K related issues which might
have a material impact on the Company. Alternative assessments were performed on
a case-by-case basis for the two significant customers who did not respond to
the questionnaire. These assessments included any procedures considered
necessary to satisfy the Company that there are no Y2K related issues associated
with these two significant customers.
The monitoring of the Y2K readiness of these customers will continue until
after January 1, 2000 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 as well as maintenance and software
modification costs which 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
June 30, 1998 incurred
after June 30, 1999
------------------------------------------------------------------------
<S> <C> <C>
Software Modification $2,015,919 $ 781,334
Replacement of non-compliant software 450,805 760,382
Replacement of non-compliant hardware 238,643 605,857
------------------------------------------------------------------------
Total $2,705,367 $2,147,573
========================================================================
</TABLE>
Of the $2.1 million in estimated future costs of Y2K compliance, it is
expected that approximately 64% will consist of hardware and software purchases
that will have future utility and expanded functionality and therefore will be
capitalized and depreciated in accordance with the Company's existing accounting
policy. The above
14
<PAGE>
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. The Company has not deferred any
significant information technology (IT) projects that would have a material
adverse effect on its future operations if not performed in a timely manner.
Funds allocated for remediation of Year 2000 issues have not been appropriated
from the Company's ongoing IT budget.
Based upon the Company's progress in its Y2K readiness process, management
considers its most reasonably likely worst case Year 2000 scenario to be that
network related external communications channels become disrupted. In the event
that this were to happen, external business facilities will use emergency
wireless communication for verbal direction and refer to their existing
individual contingency plans to conduct business through off-line operation
and/or manual processing.
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. As part of the
replacement, all mainframe-based systems will be re-validated on the new
compiler.
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 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.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) Meeting Date
May 19, 1999
(b) Election of Directors
Paul J. Carrara 3 Year Term
Sally W. Crawford 3 Year Term
Philip A. Kolvoord 3 Year Term
James C. Pizzagalli 3 Year Term
(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>
Paul J. Carrara 11,835,091 62,304
Sally W. Crawford 11,831,491 65,904
Philip A. Kolwoord 11,831,471 65,923
James C. Pizzagalli 11,838,230 59,164
</TABLE>
15
s
<PAGE>
2. Proposal to vote upon the Agreement and Plan of Merger, dated as of
December 16, 1998, by and among Chittenden, Chittenden Acquisition
Subsidiary, Inc., a Delaware corporation and wholly-owned
subsidiary of Chittenden, and Vermont Financial Services Corp., a
Delaware corporation, and the issuance of 1.07 shares of Chittenden
common stock in exchange for each share of Vermont Financial common
stock, and all of the matters and transactions contemplated by the
merger, including the amendment and restatement of Chittenden's
charter.
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
9,183,693 129,241 26,796 2,557,664
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(d) EXHIBITS
Exhibit 27 Financial Data Schedule
(e) REPORTS ON FORM 8-K
A report was filed by the Company on Form 8-K on May 5, 1999 in
connection with the announcement that Charter One Financial, Inc's principal
subsidiary, Charter One Bank, F.S.B. had signed a definitive agreement with
Chittenden Corporation to purchase 14 Vermont National Bank offices along with
approximately $400 million in deposits and $120 million in commercial loans.
A report was file by the Company on Form 8-K on June 11, 1999 in
connection with the May 28, 1999 completion of the acquisition of Vermont
Financial Services Corp. by Chittenden Corporation, a Vermont corporation.
16
<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, 1999 /s/ PAUL A. PERRAULT
- --------------- --------------------
Date Paul A. Perrault,
Chairman, President and
Chief Executive Officer
August 13, 1999 /s/ KIRK W. WALTERS
- --------------- -------------------
Date Kirk W. Walters
Executive Vice President,
Treasurer, and Chief Financial Officer
17
<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, 1999
- --------------- ___________________________
Date Paul A. Perrault,
Chairman, President
and Chief Executive Officer
August 13, 1999
- --------------- ____________________________
Date Kirk W. Walters
Executive Vice President,
Treasurer, and Chief Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q
6/30/1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 160,658
<INT-BEARING-DEPOSITS> 4,438
<FED-FUNDS-SOLD> 38,252
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 844,678
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 2,891,581
<ALLOWANCE> 42,431
<TOTAL-ASSETS> 4,131,305
<DEPOSITS> 3,567,292
<SHORT-TERM> 138,966
<LIABILITIES-OTHER> 82,386
<LONG-TERM> 0
0
0
<COMMON> 28,193
<OTHER-SE> 314,468
<TOTAL-LIABILITIES-AND-EQUITY> 4,131,305
<INTEREST-LOAN> 113,910
<INTEREST-INVEST> 29,962
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 143,872
<INTEREST-DEPOSIT> 54,250
<INTEREST-EXPENSE> 57,461
<INTEREST-INCOME-NET> 86,411
<LOAN-LOSSES> 4,350
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 147,598
<INCOME-PRETAX> (32,778)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,484)
<EPS-BASIC> (1.16)
<EPS-DILUTED> (1.16)
<YIELD-ACTUAL> 4.53
<LOANS-NON> 14,179
<LOANS-PAST> 4,273
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 42,262
<CHARGE-OFFS> 3,073
<RECOVERIES> 1,067
<ALLOWANCE-CLOSE> 2,175
<ALLOWANCE-DOMESTIC> 42,431
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
