<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, 2000
or
__ Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ____________to____________
Commission File Number 0-7974
CHITTENDEN CORPORATION
(Exact Name of Registrant as Specified in its Charter)
VERMONT 03-0228404
(State of Incorporation) (IRS Employer Identification No.)
TWO BURLINGTON SQUARE
BURLINGTON, VERMONT 05401
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (802) 658-4000
NOT APPLICABLE
Former Name, Former Address and Formal Fiscal Year
If Changed Since Last Report
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
-
At November 6, 2000, there were 26,336,638 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
<PAGE>
C h i t t e n d e n C o r p o r a t i o n
C o n s o l i d a t e d B a l a n c e S h e e t s
( U n a u d i t e d )
<TABLE>
<CAPTION>
September 30, December 31,
<S> <C> <C>
2000 1999
------------------------------
(in thousands)
Assets
Cash and cash equivalents $ 135,361 $ 150,415
Securities available for sale 575,376 649,471
FHLB and FRB stock 12,311 16,879
Mortgage loans held for sale 6,893 2,926
Loans:
Commercial 486,490 445,426
Municipal 94,670 90,148
Real Estate:
Residential 1,047,749 1,067,463
Commercial 722,601 689,254
Construction 53,742 57,429
------------------------------
Total Real Estate 1,824,092 1,814,146
Consumer 515,013 546,010
------------------------------
Total Loans 2,920,265 2,895,730
Less: Allowance for loan losses (39,945) (41,079)
------------------------------
Net loans 2,880,320 2,854,651
Accrued interest receivable 25,074 25,399
Other real estate owned 430 416
Other assets 51,578 67,499
Premises and equipment, net 46,455 41,052
Intangible assets 16,307 18,589
------------------------------
Total assets $3,750,105 $3,827,297
==============================
Liabilities:
Deposits:
Demand $ 511,599 $ 532,120
Savings 1,881,873 1,807,843
Certificates of deposit less than $100,000 and other time deposits 612,300 649,051
Certificates of deposit $100,000 and over 208,803 215,084
------------------------------
Total deposits 3,214,575 3,204,098
Short-term borrowings 162,386 197,072
Accrued expenses and other liabilities 36,262 63,667
------------------------------
Total liabilities 3,413,223 3,464,837
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; 28,540 28,380
issued - 28,540,208 in 2000 and 28,380,040 in 1999
Surplus 152,346 149,828
Retained earnings 213,677 189,018
Treasury stock, at cost - 2,163,217 shares in 2000 and 1,808 shares in 1999 (56,927) (24)
Accumulated other comprehensive income (3,922) (7,018)
Directors deferred compensation to be settled in stock 3,284 2,449
Unearned portion of employee restricted stock (116) (173)
------------------------------
Total stockholders' equity 336,882 362,460
------------------------------
Total liabilities and stockholders' equity $3,750,105 $3,827,297
==============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
C h i t t e n d e n C o r p o r a t i o n
C o n s o l i d a t e d S t a t e m e n t s o f O p e r a t i o n s
( U n a u d i t e d )
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
--------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $62,738 $59,773 $183,672 $173,721
Investment securities:
Taxable 9,823 12,108 30,689 39,870
Tax-favored 85 389 260 1,643
Short-term investments 331 840 493 1,735
--------------------------------------------------------
Total interest income 72,977 73,110 215,114 216,969
--------------------------------------------------------
Interest expense:
Deposits:
Savings 16,564 14,499 46,057 42,823
Time 11,228 12,273 32,390 38,192
--------------------------------------------------------
Total interest on deposits 27,792 26,772 78,447 81,015
Short-term borrowings 3,797 1,585 11,553 4,799
--------------------------------------------------------
Total interest expense 31,589 28,357 90,000 85,814
--------------------------------------------------------
Net interest income 41,388 44,753 125,114 131,155
Provision for loan losses 2,175 2,175 6,525 6,525
--------------------------------------------------------
Net interest income after provision for loan losses 39,213 42,578 118,589 124,630
--------------------------------------------------------
Noninterest income:
Investment management and trust income 3,482 3,606 10,350 10,805
Service charges on deposit accounts 3,335 4,722 10,390 14,130
Mortgage servicing income 1,029 736 3,087 2,476
Gains on sales of mortgage loans, net 952 956 2,134 4,246
Credit card income, net 1,440 1,606 3,984 4,141
Insurance commissions, net 774 593 2,243 1,794
Other 3,251 3,802 10,247 10,930
--------------------------------------------------------
Total noninterest income 14,263 16,021 42,435 48,522
Noninterest expense:
Salaries 13,328 14,669 40,633 45,072
Employee benefits 2,931 3,744 7,879 12,194
Net occupancy expense 3,862 5,041 12,364 16,865
Amortization of intangibles 520 547 1,581 3,475
Other real estate owned, income and expense, net 54 (76) (20) 71
Special charges - (1,739) 833 69,256
Other 10,241 11,650 31,817 34,235
--------------------------------------------------------
Total noninterest expense 30,936 33,836 95,087 181,168
--------------------------------------------------------
Income (loss) before income tax expense 22,540 24,763 65,937 (8,016)
Income tax expense 7,792 8,834 22,128 8,540
--------------------------------------------------------
Net income (loss) $14,748 $15,929 $ 43,809 $(16,556)
========================================================
Basic earnings (loss) per share $ 0.56 $ 0.56 $ 1.61 $ (0.59)
Diluted earnings (loss) per share 0.55 0.56 1.59 (0.59)
Dividends per share 0.24 0.22 0.70 0.62
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
C h i t t e n d e n C o r p o r a t i o n
C o n s o l i d a t e d S t a t e m e n t s o f C a s h F l o w s
( U n a u d i t e d )
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
2000 1999
--------------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 43,809 $ (16,556)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Provision for loan losses 6,525 6,525
Depreciation and amortization 3,986 7,087
Amortization of intangible assets 1,581 3,475
Amortization of premiums, fees, and discounts, net 8,586 3,256
Merger related expenses - 49,866
Write-off of impaired intangible assets - 21,129
Gain on branch sales (812) (2,042)
Investment securities (gains) losses 689 287
Deferred income taxes 11,838 (37,921)
Loans originated for sale (132,416) (392,241)
Proceeds from sales of loans 130,583 434,965
Gains on sales of loans (2,134) (4,246)
Changes in assets and liabilities:
Accrued interest receivable 324 1,206
Other assets 4,603 (6,898)
Accrued expenses and other liabilities (26,256) 20,896
---------------------
Net cash provided by operating activities 50,906 88,788
---------------------
Cash flows from investing activities:
Net cash used in branch divestitures (22,195) (22,299)
Proceeds from maturing securities and principal payments
on securities available for sale 333,526 598,464
Purchases of securities available for sale (251,135) (366,396)
Loans originated, net of principal repayments (45,347) (224,156)
Purchases of premises and equipment (9,889) (11,081)
---------------------
Net cash provided by (used in) investing activities 4,960 (25,468)
---------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 37,543 (68,060)
Net increase (decrease) in short-term borrowings (34,685) 6,798
Cash paid for fractional shares - (37)
Proceeds from issuance of treasury and common stock 2,505 7,805
Dividends on common stock (19,166) (16,538)
Repurchase of common stock (57,117) -
---------------------
Net cash used in financing activities (70,920) (70,032)
---------------------
Net increase (decrease) in cash and cash equivalents (15,054) (6,712)
Cash and cash equivalents at beginning of period 150,415 267,999
---------------------
Cash and cash equivalents at end of period $ 135,361 $ 261,287
=====================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 89,279 $ 85,536
Income taxes 24,586 16,846
Non-cash investing and financing activities:
Loans transferred to other real estate owned 1,606 1,028
Issuance of treasury and restricted stock 70 75
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
Chittenden Corporation
Notes to Consolidted Financial Statements
NOTE 1 - ACCOUNTING POLICIES
The Company's significant accounting policies are described in Note 1 of the
Notes to Consolidated Financial Statements included in its 1999 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 1999 have been reclassified to conform to 2000 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 included 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.
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. (Sold as a result of these divestitures were one branch in the
third quarter of 1999, sixteen branches in the fourth quarter of 1999, and one
branch in the first quarter of 2000. Total loans and deposits sold to the buyers
were approximately $131 million and $469 million, respectively.) On an after-tax
basis, special charges amounted to $56.5 million in the second quarter of 1999.
Also recorded as special charges were a $1.7 million gain on the sale of a
divested branch in the third quarter of 1999 and an $833,000 loss on the sale of
the last divested branch in the first quarter of 2000. Included in accrued
expenses and other liabilities at September 30, 2000, are merger-related
expenses totaling $2.7 million which will be paid in future periods.
The change in accrued merger related expenses at September 30, 2000 is
summarized below (amounts in thousands):
<TABLE>
<CAPTION>
Less:
Accrual Balance as Cash Accrual Balance as
of December 31, 1999 Transactions of September 30, 2000
=================================================================================
<S> <C> <C> <C>
Compensation and Benefits $6,730 $4,008 $2,722
System Conversion 1,664 1,664 -
Other 1,244 1,244 -
---------------------------------------------------------------------------------
Total $9,638 $6,916 $2,722
=================================================================================
</TABLE>
NOTE 4 - 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
6
<PAGE>
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 was amended by SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," which deferred the effective date of
SFAS No. 133, and by SFAS No. 138 "Accounting for Certain Derivative Instruments
and Certain Hedging Activities," which made certain technical revisions to the
original standard. SFAS No. 133, as amended, will be effective for the Company's
fiscal year beginning January 1, 2001. 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.
NOTE 5 - COMPREHENSIVE INCOME
The Company's comprehensive income for the three-month and nine-month
periods ended September 30, 2000 and 1999 is presented below (amounts in
thousands):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
--------------------------------------------
<S> <C> <C> <C> <C>
Net Income (loss) $14,748 $15,929 $43,809 $(16,556)
Unrealized losses on investment securities:
Unrealized holding gains (losses) on securities available for 3,656 (1,599) 2,621 (10,849)
sale, net of tax
Reclassification adjustments for (gains) losses arising during - 198 475 198
period, net of tax
--------------------------------------------
Total Comprehensive income (loss) $18,404 $14,528 $46,905 $(27,207)
============================================
</TABLE>
NOTE 6 - BUSINESS SEGMENTS
The Company has identified Commercial Banking as its reportable operating
business segment based on the fact that the chief operating decision-maker views
the results of operations as a single strategic unit. The Commercial Banking
segment is comprised of Chittenden Bank, The Bank of Western Massachusetts,
Flagship Bank and Trust, 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 1999 Annual Report on Form 10-K. The
consolidation adjustment reflects certain eliminations of inter-segment revenue,
cash and parent company investments in subsidiaries.
7
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended September 30, 2000 Commercial Consolidation
(In Thousands) Banking Other (2) Adjustments Consolidated
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest revenue (1) $ 41,382 $ 127 $ (121) $ 41,388
Noninterest income 13,466 877 (80) 14,263
Provision for loan losses 2,175 - - 2,175
Noninterest expense 30,044 972 (80) 30,936
------------------------------------------------------------
Net income (loss) before income tax 22,629 32 (121) 22,540
Income tax expense/(benefit) 7,764 28 - 7,792
------------------------------------------------------------
Net income (loss) $ 14,865 $ 4 $ (121) $ 14,748
============================================================
End of Period Assets $3,742,200 $344,196 $(336,291) $3,750,105
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended September 30, 1999 Commercial Consolidation
(In Thousands) Banking Other (2) Adjustments Consolidated
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest revenue (1) $ 44,738 $ 126 $ (111) $ 44,753
Noninterest income 15,374 699 (52) 16,021
Provision for loan losses 2,175 - - 2,175
Noninterest expense 32,967 921 (52) 33,836
---------------------------------------------------------
Net income (loss) before income tax 24,970 (96) (111) 24,763
Income tax expense/(benefit) 8,848 (14) - 8,834
---------------------------------------------------------
Net income (loss) $ 16,122 $ (82) $ (111) $ 15,929
=========================================================
End of Period Assets $4,154,785 $369,445 $(374,257) $4,149,973
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 2000 Commercial Consolidation
(In Thousands) Banking Other (2) Adjustments Consolidated
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest revenue (1) $ 125,082 $ 325 $ (293) $ 125,114
Noninterest income 40,163 2,349 (77) 42,435
Provision for loan losses 6,525 - - 6,525
Noninterest expense 92,500 2,664 (77) 95,087
-----------------------------------------------------------
Net income (loss) before income tax 66,220 10 (293) 65,937
Income tax expense/(benefit) 22,087 41 - 22,128
-----------------------------------------------------------
Net income (loss) $ 44,133 $ (31) $ (293) $ 43,809
===========================================================
End of Period Assets $3,742,200 $344,196 $(336,291) $3,750,105
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999 Commercial Consolidation
(In Thousands) Banking Other (2) Adjustments Consolidated
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest revenue (1) $ 131,107 $ 289 $ (241) $ 131,155
Noninterest income 46,625 1,953 (56) 48,522
Provision for loan losses 6,525 - - 6,525
Noninterest expense 166,008 15,216 (56) 181,168
-------------------------------------------------------------
Net income (loss) before income tax 5,199 (12,974) (241) (8,016)
Income tax expense/(benefit) 8,819 (279) - 8,540
-------------------------------------------------------------
Net income (loss) $ (3,620) $(12,695) $ (241) $ (16,556)
=============================================================
End of Period Assets $4,154,785 $369,445 $(374,257) $4,149,973
</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 the
segment. Therefore, only the net amount has been disclosed.
(2) Revenue derived from these non-reportable segments includes insurance
commissions from various insurance related products and services.
8
<PAGE>
NOTE 7 - SUBSEQUENT EVENT
On October 18, 2000, the Company declared regular dividends of
approximately $6.3 million, or $0.24 per share, to be paid on November 17, 2000
to shareholders of record on November 3, 2000.
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.
In the third quarter of 1999, the Company recognized a net after tax gain
of $1.1 million on the sale of the first of eighteen Vermont National branches.
The Company also recognized $792,000 of after-tax special charges in the first
quarter of 2000 related to the final branch sale required as a condition of the
regulatory approval of the acquisition. In addition, after tax special charges
taken in the second quarter of 1999 were $56.5 million. Results excluding these
special charges are referred to in the following discussion as operating. A
reconciliation of the Company's net income (loss) to its operating earnings for
the periods ended September 30, 2000 and 1999 is presented below (amounts in
thousands):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-----------------------------------------------------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net income (loss), as reported $14,748 $15,929 $43,809 $(16,556)
Add:
(Gain) loss on branch sale (1) - (1,739) 833 (1,739)
Impaired goodwill written off upon merger - - - 21,129
Merger costs - - - 49,866
Tax effect of adjustment for (gain) loss on branch sale - 608 (41) 608
Tax effect of merger costs - - - (14,465)
-----------------------------------------------------------------
Operating net income $14,748 $14,798 $44,601 $ 38,843
=================================================================
Diluted Operating EPS $ 0.55 $ 0.52 $ 1.62 $1.36
</TABLE>
(1) Net of losses on sale of investments sold to fund branch divestitures ($689
in 2000 and $287 in 1999), losses on sale of fixed assets related to the
branches ($255 in 2000 and $16 in 1999), and write-off of goodwill
associated with the branches ($701 in 2000).
The Company has completed the sale of all eighteen branches as required by
the U.S. Department of Justice and the Federal Reserve in the approval of the
merger transaction with VFSC. Total loans and deposits sold to the buyers were
approximately $131 million and $469 million, respectively.
Chittenden Corporation posted third quarter 2000 net income of $0.55 per
diluted share, compared to the operating net income of $0.52 per diluted share
posted in the third quarter of last year. Net income for the third quarter of
2000 was $14.7 million, compared to operating net income of $14.8 million
recorded in the same quarter a year ago. Operating return on average equity was
17.64% for the quarter ended September 30, 2000 compared with 16.90% for the
same period in 1999. Operating return on average assets was 1.54% for the third
quarter of 2000, up from 1.42% for the third quarter of last year.
For the first nine months of 2000, diluted operating earnings per share
were $1.62, an increase of 19% over the $1.36 per share for the same period in
1999. Year to date operating net income for 2000 was $44.6 million, an increase
of $5.8 million over the same period a year ago. Operating return on average
equity and operating return on average assets for the first nine months of 2000
were 17.38% and 1.55%, up from the 13.76% and 1.25% reported in 1999. The
increases in
9
<PAGE>
operating ROE and ROA were attributable to higher levels of operating net
income. Also contributing to the increase in operating ROE were lower levels of
average stockholders equity in 2000, which resulted primarily from the share
repurchase program commenced in January of 2000.
Net interest income on a tax equivalent basis for the three months ended
September 30, 2000 was $42.0 million, down from $45.5 million for the same
period a year ago. The yield on earning assets decreased from 4.73% in the third
quarter of 1999 to 4.67% for the same period in 2000. The decrease in net
interest income from the comparable three month period is attributable to lower
levels of average earning assets resulting from required branch divestitures
which occurred during the second half of 1999 and the first quarter of 2000.
Net interest income on a tax equivalent basis for the nine months ended
September 30, 2000 was $126.9 million, down from the $133.5 million for the same
period a year ago. The yield on earning assets increased from 4.65% for the
first nine months of 1999 to 4.72% for the same period in 2000. This increase
was attributable to increasing yields in the Company's loan and investment
portfolios, which outpaced increases in the Company's cost of funds.
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>
2000 1999
----------------------------------------------------------------------------
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 $2,941,374 $185,361 8.42% $2,848,692 $175,529 8.24%
Investments:
Taxable 633,835 30,689 6.47% 893,843 40,115 6.00%
Tax-favored securities 8,241 382 6.19% 47,800 1,967 5.50%
Interest-bearing deposits in banks 246 7 4.03% 3,856 79 2.75%
Federal funds sold 10,122 485 6.40% 44,088 1,656 5.02%
-------------------------- ----------------------
Total interest-earning assets 3,593,818 216,924 8.06% 3,838,279 219,346 7.64%
----------- ----------
Noninterest-earning assets 282,496 358,392
Allowance for loan losses (40,883) (42,513)
------------- -------------
Total assets $3,835,431 $4,154,158
============= =============
Liabilities and stockholders' equity
Interest-bearing liabilities:
Savings and interest-bearing transactional accounts $1,836,307 $ 46,057 3.35% $1,970,057 $ 42,823 2.91%
Certificates of deposit under $100,000 and other
time deposits 625,376 23,227 4.96% 829,502 31,495 5.08%
Certificates of deposit $100,000 and over 224,035 9,163 5.46% 196,608 6,697 4.55%
------------------------- ------------------------
Total interest-bearing deposits 2,685,718 78,447 3.90% 2,996,167 81,015 3.62%
Short-term borrowings 246,655 11,553 6.26% 130,885 4,799 4.90%
------------------------- ------------------------
Total interest-bearing liabilities 2,932,373 90,000 4.10% 3,127,052 85,814 3.67%
----------- ----------- ---------
Noninterest-bearing liabilities:
Demand deposits 504,421 595,262
Other liabilities 55,894 54,496
------------ -------------
Total liabilities 3,492,688 3,776,810
Stockholders' equity 342,743 377,348
------------ -------------
Total liabilities and stockholders' equity $3,835,431 $4,154,158
============ =============
Net interest income $126,924 $133,532
============ ===========
Interest rate spread (2) 3.96% 3.97%
Net yield on earning assets (3) 4.72% 4.65%
</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.
10
<PAGE>
Noninterest income amounted to $14.3 million for the third quarter of 2000,
down from $16.0 million for the third quarter of 1999. The $1.7 million decline
in noninterest income for the third quarter of 2000 was primarily attributable
to a decrease in service charges on deposit accounts of $1.4 million caused by
the required branch divestitures.
Noninterest income for the nine months ended September 30, 2000 was $42.4
million, which decreased by 13% or $6.1 million from the $48.5 million recorded
for the same period last year. The primary contributors were decreases in
service charges on deposit accounts of $3.7 million and gains on sales of
mortgage loans of $2.1 million.
Operating noninterest expenses declined 13% to $30.9 million for the third
quarter of 2000 from $35.6 million for same period last year. For the first nine
months of the year, operating noninterest expenses declined 16% to $94.3 million
from $111.9 million a year ago. The reduction in noninterest expenses was due to
reduced compensation expense caused by lower staffing levels, lower levels of
incentive compensation accruals and reduced depreciation expense related to
duplicative fixed assets written off as a result of the merger. Lower levels of
amortization of intangibles resulting from the reduction of goodwill related to
the divested branches also contributed to the decline in noninterest expense.
Pension expense, included in employee benefits, was also reduced by a $1.3
million curtailment gain recorded in the first quarter of 2000 which was
recognized upon the merger of the Vermont National Bank and Chittenden Bank
pension plans.
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 nine months ended September 30, 2000 and 1999, Federal and state
operating income tax provisions amounted to $22.2 million and $22.4 million,
respectively. The effective tax rates for the respective periods were 33.2% and
36.6%. During all periods, the Company's statutory Federal corporate tax rate
was 35%. The Company's 1999 effective tax rate differed from the statutory rate
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. The reduction in the
Company's effective tax rate from 1999 to 2000 reflects lower levels of non-tax
deductible goodwill resulting from the impaired goodwill written off in the
second quarter of 1999 upon the consummation of the merger of Chittenden and
VFSC, as well as recognition of the tax deductibility of certain transaction
related expenses previously treated as non-tax deductible for accrual purposes.
Financial Position
The Company invests the majority of its assets in loans and marketable
securities. Total loans increased $24.5 million from December 31, 1999 to $2.92
billion at September 30, 2000. Total deposits at September 30, 2000 were $3.2
billion, flat from December 31, 1999. After adjusting for deposits divested in
all branch sales, total deposits were $71.6 million higher at September 30, 2000
than at September 30, 1999. The decrease in securities available for sale of
$74.1 million from December 31, 1999 to $575.4 million at September 30, 2000 is
primarily attributable to the use of proceeds from maturing securities to reduce
short term borrowings, which increased late in 1999 to replace funding from
deposits sold in the branch divestitures.
Credit Quality
Nonperforming assets include nonaccrual loans and foreclosed real estate
(Other Real Estate Owned). As of September 30, 2000, nonperforming assets
totaled $10.2 million, up from $9.6 million at December 31, 1999 and down from
$12.1 million at the end of the third quarter of 1999. Net charge-off activity
totaled $1.9 million for the third quarter of 2000 compared to $3.8 million for
the same period in 1999. The allowance for loan losses was $39.9 million at
September 30, 2000, down from $40.8 million a year ago, and $41.1 million at
December 31, 1999.
11
<PAGE>
A summary of credit quality follows:
<TABLE>
<CAPTION>
9/30/00 6/30/00 12/31/99 9/30/99
--------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Nonaccrual loans $ 9,782 $ 11,024 $ 9,172 $ 11,397
Other real estate owned (OREO) 430 579 416 695
--------------------------------------------------------------------------
Total nonperforming assets (NPA) $ 10,212 $ 11,603 $ 9,588 $ 12,092
==========================================================================
Loans past due 90 days or more
and still accruing interest $ 4,133 $ 4,751 $ 5,016 $ 5,881
Allowance for loan losses 39,945 39,643 41,079 40,844
NPA as % of loans plus OREO 0.35% 0.40% 0.33% 0.41%
Allowance as % of loans 1.37% 1.35% 1.42% 1.38%
Allowance as % of nonperforming loans 408.35% 359.61% 447.87% 358.38%
Allowance as % of NPA 391.16% 341.66% 428.44% 337.78%
</TABLE>
Provisions for and activity in the allowance for loan losses are summarized as
follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
-----------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Beginning Balance $39,643 $42,431 $ 41,079 $ 41,209
Provision for Loan Losses 2,175 2,175 6,525 6,525
Loans Charged Off (2,855) (4,485) (10,504) (10,239)
Loan Recoveries 982 723 2,845 3,349
-----------------------------------------------------------------
Ending Balance $39,945 $40,844 $ 39,945 $ 40,844
=================================================================
</TABLE>
The allowance for possible loan losses is based on management's estimate of
the amount required to reflect the risks in the loan portfolio, based on
circumstances and conditions known at each reporting date. Adequacy of the
allowance is determined using a consistent, systematic methodology which
analyzes the size and risk of the loan portfolio. In addition to evaluating the
collectibility of specific loans when determining the adequacy of the allowance
for possible loan losses, management also takes into consideration other factors
such as changes in the mix and volume of the loan portfolio, historic loss
experience, the amount of the delinquencies and loans adversely classified, and
economic trends. The adequacy of the allowance for possible loan losses is
assessed by an allocation process whereby specific loss allocations are made
against certain adversely classified loans, and general loss allocations are
made against segments of the loan portfolio which have similar attributes. The
Company's historical loss experience, industry trends, and the impact of the
local and regional economy on the Company's borrowers, were considered by
management in determining the adequacy of the allowance for possible loan
losses.
Capital
On January 19, 2000, the Board of Directors authorized the repurchase of up
to 2,000,000 shares of the Corporation's common stock in negotiated transactions
or open market purchases. Chittenden, depending on market conditions, may
repurchase its Common Stock without further Board authorization for two years.
On July 19, 2000, the Board authorized the repurchase of an additional 2,000,000
shares, bringing the total authorization to 4,000,000 shares.
Stockholders' equity totaled $336.9 million at September 30, 2000, compared
to $362.5 million at year-end 1999. The current level reflects net income of
$43.8 million less dividends paid to shareholders totaling $19.2 million, and
share repurchases totaling $57.1 million. Through the third quarter of 2000,
approximately 2.2 million shares have been repurchased. "Tier One" capital,
consisting entirely of common equity, measured 10.83% of risk-weighted assets at
September 30, 2000. Total capital, including the "Tier Two" allowance for loan
losses, was 12.09% of risk-weighted assets. The leverage capital ratio was
8.18%. These ratios placed Chittenden in the "well-capitalized" category
according to regulatory standards.
12
<PAGE>
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, 2000, the Company maintained cash
balances and short-term investments of approximately $135.4 million, compared
with $150.4 million at December 31, 1999.
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 1999 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.
13
<PAGE>
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
The Company's second quarter press release announcing the
authorization to repurchase an additional 2,000,000 shares of its
common stock (bringing the total amount authorized to 4,000,000
shares) was filed on Form 8-K on July 27, 2000.
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
November 13, 2000 S/ PAUL A. PERRAULT
----------------- -------------------
Date Paul A. Perrault,
Chairman, President and
Chief Executive Officer
November 13, 2000 S/ KIRK W. WALTERS
----------------- ------------------
Date Kirk W. Walters
Executive Vice President,
Treasurer, and Chief Financial
Officer
15
