<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, 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 August 4, 2000, there were 26,541,732 shares of the Corporation's $1.00 par
value common stock issued and outstanding.
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
2
<PAGE>
Chittenden Corporation
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------------------------
(in thousands)
Assets
<S> <C> <C>
Cash and cash equivalents $ 155,785 $ 150,415
Securities available for sale 613,104 649,471
FHLB and FRB stock 12,311 16,879
Mortgage loans held for sale 8,848 2,926
Loans:
Commercial 483,134 445,426
Municipal 67,942 90,148
Real Estate:
Residential 1,065,837 1,067,463
Commercial 720,532 689,254
Construction 70,684 57,429
---------------------------
Total Real Estate 1,857,053 1,814,146
Consumer 512,265 546,010
---------------------------
Total Loans 2,920,394 2,895,730
Less: Allowance for loan losses (39,643) (41,079)
---------------------------
Net loans 2,880,751 2,854,651
Accrued interest receivable 26,117 25,399
Other real estate owned 579 416
Other assets 55,430 67,499
Premises and equipment, net 46,339 41,052
Intangible assets 16,827 18,589
---------------------------
Total assets $3,816,091 $3,827,297
===========================
Liabilities:
Deposits:
Demand $ 496,762 $ 532,120
Savings 1,828,440 1,807,843
Certificates of deposit less than $100,000 and other time deposits 617,941 649,051
Certificates of deposit $100,000 and over 221,762 215,084
---------------------------
Total deposits 3,164,905 3,204,098
Short-term borrowings 286,013 197,072
Accrued expenses and other liabilities 31,429 63,667
---------------------------
Total liabilities 3,482,347 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; 28,512 28,380
issued - 28,512,358 in 2000 and 28,380,040 in 1999
Surplus 151,922 149,828
Retained earnings 205,289 189,018
Treasury stock, at cost - 1,757,390 shares in 2000 and 1,808 shares in 1999 (46,891) (24)
Accumulated other comprehensive income (7,578) (7,018)
Directors deferred compensation to be settled in stock 2,625 2,449
Unearned portion of employee restricted stock (135) (173)
---------------------------
Total stockholders' equity 333,744 362,460
---------------------------
Total liabilities and stockholders' equity $3,816,091 $3,827,297
===========================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
<PAGE>
Chittenden Corporation
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
---------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $61,319 $ 57,442 $120,935 $113,949
Investment securities:
Taxable 10,136 13,418 20,865 27,955
Tax-favored 88 533 176 1,059
Short-term investments 142 423 161 894
---------------------------------------------------------------------
Total interest income 71,685 71,816 142,137 143,857
---------------------------------------------------------------------
Interest expense:
Deposits:
Savings 15,400 13,459 29,493 28,269
Time 10,776 13,414 21,162 25,974
---------------------------------------------------------------------
Total interest on deposits 26,176 26,873 50,655 54,243
Short-term borrowings 4,307 1,567 7,757 3,210
---------------------------------------------------------------------
Total interest expense 30,483 28,440 58,412 57,453
---------------------------------------------------------------------
Net interest income 41,202 43,376 83,725 86,404
Provision for loan losses 2,175 2,175 4,350 4,350
---------------------------------------------------------------------
Net interest income after provision for loan losses 39,027 41,201 79,375 82,054
---------------------------------------------------------------------
Noninterest income:
Investment management and trust income 3,375 3,657 6,868 7,199
Service charges on deposit accounts 3,421 4,884 7,108 9,450
Mortgage servicing income 1,121 807 2,058 1,739
Gains on sales of mortgage loans, net 570 1,459 1,181 3,290
Credit card income, net 1,473 1,350 2,626 2,593
Insurance commissions, net 688 560 1,469 1,201
Other 3,590 3,781 6,879 7,185
---------------------------------------------------------------------
Total noninterest income 14,238 16,498 28,189 32,657
Noninterest expense:
Salaries 13,221 15,108 27,022 30,041
Employee benefits 2,724 4,299 5,252 8,804
Net occupancy expense 3,664 6,353 8,492 12,868
Other real estate owned, income and expense, net (17) 262 (67) 292
Special charges - 70,995 833 70,995
Other 11,583 12,259 22,635 24,490
---------------------------------------------------------------------
Total noninterest expense 31,175 109,276 64,167 147,490
---------------------------------------------------------------------
Income (loss) before income tax expense (benefit) 22,090 (51,577) 43,397 (32,779)
Income tax expense (benefit) 7,620 (7,174) 14,336 (294)
---------------------------------------------------------------------
Net income (loss) $14,470 $(44,403) $ 29,061 $(32,485)
=====================================================================
Basic earnings (loss) per share $0.53 $(1.58) $1.05 $(1.16)
Diluted earnings (loss) per share 0.53 (1.58) 1.04 (1.16)
Dividends per share $0.24 $0.22 0.46 0.42
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
4
<PAGE>
Chittenden Corporation
Consolidated Statements of CashFlows
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
2000 1999
-----------------------
(in thousands)
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 29,061 $ (32,485)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Provision for loan losses 4,350 4,350
Depreciation and amortization 2,596 5,304
Amortization of intangible assets 1,060 2,930
Amortization of premiums, fees, and discounts, net 253 2,150
Merger related expenses - 49,866
Write-off of goodwill related to sale of branch 702 21,129
Investment securities (gains) losses 688 -
Deferred income taxes 10,417 (47,809)
Loans originated for sale (82,858) (234,701)
Proceeds from sales of loans 78,117 273,371
Gains on sales of loans (1,181) (3,290)
Changes in assets and liabilities:
Accrued interest receivable (718) 6,348
Other assets 3,178 1,094
Accrued expenses and other liabilities (32,253) 22,885
-----------------------
Net cash provided by operating activities 13,412 71,142
-----------------------
Cash flows from investing activities:
Proceeds from maturing securities and principal payments 236,173 451,692
on securities available for sale
Purchases of securities available for sale (196,998) (317,660)
Loans originated, net of principal repayments (31,758) (146,448)
Purchases of premises and equipment (7,883) (9,467)
-----------------------
Net cash used in investing activities (466) (21,883)
-----------------------
Cash flows from financing activities:
Net increase (decrease) in deposits (39,193) (124,886)
Net increase (decrease) in short-term borrowings 88,942 (1,636)
Cash paid for fractional shares - (37)
Tax benefit of stock plans 856 -
Proceeds from issuance of treasury and common stock 1,707 7,348
Dividends on common stock (12,807) (10,355)
Repurchase of common stock (47,081) -
-----------------------
Net cash used in financing activities (7,576) (129,566)
-----------------------
Net increase (decrease) in cash and cash equivalents 5,370 (80,307)
Cash and cash equivalents at beginning of period 150,415 267,748
-----------------------
Cash and cash equivalents at end of period $ 155,785 $ 187,441
=======================
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 59,886 $ 57,953
Income taxes 6,875 14,017
Non-cash investing and financing activities:
Loans transferred to other real estate owned 1,480 752
Issuance of treasury and restricted stock 70 75
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
<PAGE>
Chittenden Corporation
Notes to Consolidated 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. 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, 2000, are merger related expenses totaling $3.2 million
which will be paid in future periods.
The change in accrued merger related expenses at June 30, 2000 is summarized
below (amounts in thousands):
<TABLE>
<CAPTION>
Accrual Balance as Less: Accrual Balance as
of December 31, 1999 Cash Transactions of June 30, 2000
=================================================================================
<S> <C> <C> <C>
Compensation and Benefits $6,730 $3,486 $3,244
System Conversion 1,664 1,664 -
Other 1,244 1,244 -
---------------------------------------------------------------------------------
Total $9,638 $6,394 $3,244
=================================================================================
</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 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
6
<PAGE>
"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 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 5 - COMPREHENSIVE INCOME
The Company's comprehensive income for the three-month and six-month periods
ended June 30, 2000 and 1999 is presented below (amounts in thousands):
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
----------------------------------------------
<S> <C> <C> <C> <C>
Net Income (loss) $14,470 $(44,403) $29,061 $(32,485)
Unrealized losses on investment securities:
Unrealized holding gains (losses) on securities available for
sale, net of tax 259 (5,821) (1,035) (9,250)
Reclassification adjustments for (gains) losses arising during
period, net of tax - - 475 -
----------------------------------------------
Total Comprehensive income (loss) $14,729 $(50,224) $28,501 $(41,735)
==============================================
</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 June 30, 2000 Commercial Consolidation
(In Thousands) Banking Other (2) Adjustments Consolidated
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest revenue (1) $ 41,194 $ 122 $ (114) $ 41,202
Noninterest income 13,545 681 12 14,238
Provision for loan losses 2,175 - - 2,175
Noninterest expense 30,406 757 12 31,175
--------------------------------------------------------------
Net income (loss) before income tax 22,158 46 (114) 22,090
Income tax expense/(benefit) 7,599 21 - 7,620
--------------------------------------------------------------
Net income (loss) $ 14,559 $ 25 $ (114) $ 14,470
==============================================================
End of Period Assets $3,814,718 $342,606 $(341,233) $3,816,091
For the Three Months Ended June 30, 1999 Commercial Consolidation
(In Thousands) Banking Other (2) Adjustments Consolidated
--------------------------------------------------------------
Net interest revenue (1) $ 43,360 $ 71 $ (55) $ 43,376
Noninterest income 15,892 611 (5) 16,498
Provision for loan losses 2,175 - - 2,175
Noninterest expense 96,091 13,190 (5) 109,276
---------------------------------------------------------------
Net income (loss) before income tax (39,014) (12,508) (55) (51,577)
Income tax expense/(benefit) (6,962) (212) - (7,174)
--------------------------------------------------------------
Net income (loss) $ (32,052) $(12,296) $ (55) $ (44,403)
===============================================================
End of Period Assets $4,148,901 $351,846 $(391,838) $4,108,909
For the Six Months Ended June 30, 2000 Commercial Consolidation
(In Thousands) Banking Other (2) Adjustments Consolidated
--------------------------------------------------------------
Net interest revenue (1) $ 83,699 $ 198 $ (172) $ 83,725
Noninterest income 26,713 1,473 3 28,189
Provision for loan losses 4,350 - - 4,350
Noninterest expense 62,471 1,693 3 64,167
--------------------------------------------------------------
Net income (loss) before income tax 43,591 (22) (172) 43,397
Income tax expense/(benefit) 14,324 12 - 14,336
--------------------------------------------------------------
Net income (loss) $ 29,267 $ (34) $ (172) $ 29,061
==============================================================
End of Period Assets $3,814,718 $342,606 $(341,233) $3,816,091
For the Six Months Ended June 30, 1999 Commercial Consolidation
(In Thousands) Banking Other (2) Adjustments Consolidated
--------------------------------------------------------------
Net interest revenue (1) $ 86,367 $ 163 $ (126) $ 86,404
Noninterest income 31,408 1,254 (5) 32,657
Provision for loan losses 4,350 - - 4,350
Noninterest expense 133,200 14,295 (5) 147,490
---------------------------------------------------------------
Net income (loss) before income tax (19,775) (12,878) (126) (32,779)
Income tax expense/(benefit) (30) (264) - (294)
--------------------------------------------------------------
Net income (loss) $ (19,745) $(12,614) $ (126) $ (32,485)
===============================================================
End of Period Assets $4,148,901 $351,846 $(391,838) $4,108,909
</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 July 20, 2000, the Company declared regular dividends of approximately
$6.6 million, or $0.24 per share, to be paid on August 18, 2000 to shareholders
of record on August 4, 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. The
Company recognized $792,000 of after-tax special charges in the first quarter of
2000 related to the final branch sale required as a condition of the regulatory
approval of the acquisition. After tax special charges taken in the first half
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 June 30, 2000 and 1999 is presented below (amounts in
thousands):
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
Net income (loss) $14,470 $(44,403) $29,061 $(32,485)
Add:
Loss on branch sale - - 833 -
Impaired goodwill written off upon merger - 21,129 - 21,129
Merger costs - 49,866 - 49,866
Tax effect of adjustment for loss on branch sale - - (41) -
Tax effect of merger costs - (14,465) - (14,465)
--------------------------------------------
Operating net income $14,470 $ 12,127 $29,853 $ 24,045
============================================
Diluted Operating EPS $ 0.53 $0.42 $ 1.07 $0.84
</TABLE>
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 second quarter 2000 net income of $0.53 per
diluted share, compared to the operating net income of $0.42 per diluted share
posted in the second quarter of last year. Net income for the second quarter of
2000 was $14.5 million, compared to operating net income $12.1 million recorded
in the same quarter a year ago. Operating return on average equity was 17.32%
for the quarter ended June 30, 2000 compared with 12.28% for the same period in
1999. Operating return on average assets was 1.52% for the second quarter of
2000, up from 1.17% for the second quarter of last year.
For the first six months of 2000, diluted operating earnings per share were
$1.07, an increase of 27% over the $0.84 per share for the same time period in
1999. Year to date operating net income for 2000 was $29.9 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 six months of 2000
were 17.24% and 1.56%, up from the 12.35% and 1.16% reported in 1999. The
increases in 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 from the
one-time merger related charges taken in the second quarter of 1999 and the
share repurchase program commenced in January of 2000.
9
<PAGE>
Net interest income on a tax equivalent basis for the three months ended June
30, 2000 was $41.8 million, down from $44.2 million for the same period a year
ago. The yield on earning assets increased from 4.61% in the second quarter of
1999 to 4.66% 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 six months ended June
30, 2000 was $84.9 million, down from the $87.9 million for the same period a
year ago. The yield on earning assets increased from 4.61% in the first half of
1999 to 4.74% 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 six months ended June 30,
<TABLE>
2000 1999
(Restated)
-----------------------------------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense (1) Rate (1) Balance Expense (1) Rate (1)
-----------------------------------------------------------------------
Assets (in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans $2,939,535 $122,076 8.35% $2,821,908 $114,882 8.21%
Investments:
Taxable 648,330 20,865 6.47% 928,577 27,984 6.08%
Tax-favored securities 8,327 258 6.24% 57,721 1,561 5.45%
Interest-bearing deposits in banks 257 5 4.01% 4,748 98 4.16%
Federal funds sold 5,076 156 6.18% 35,302 817 4.67%
------------------------- -------------------------
Total interest-earning assets 3,601,525 143,360 8.00% 3,848,256 145,342 7.62%
------------- -------------
Noninterest-earning assets 290,063 362,068
Allowance for loan losses (41,273) (42,408)
------------ ------------
Total assets $3,850,315 $4,167,916
============ ============
Liabilities and stockholders' equity
Interest-bearing liabilities:
Savings and interest-bearing transactional accounts $1,824,724 $ 29,493 3.25% $2,025,770 $ 29,192 2.91%
Certificates of deposit under $100,000 and other
time deposits 630,919 15,313 4.88% 774,307 20,083 5.23%
Certificates of deposit $100,000 and over 218,726 5,849 5.38% 203,544 4,976 4.93%
------------------------- -------------------------
Total interest-bearing deposits 2,674,369 50,655 3.81% 3,003,621 54,251 3.64%
Short-term borrowings 258,145 7,757 6.04% 126,927 3,212 5.10%
------------------------- -------------------------
Total interest-bearing liabilities 2,932,514 58,412 4.01% 3,130,548 57,463 3.70%
------------- -------------
Noninterest-bearing liabilities:
Demand deposits 504,040 588,722
Other liabilities 65,507 56,335
------------ ------------
Total liabilities 3,502,061 3,775,605
Stockholders' equity 348,254 392,311
------------ ------------
Total liabilities and stockholders' equity $3,850,315 $4,167,916
============ ============
Net interest income $ 84,948 $ 87,879
============= =============
Interest rate spread (2) 3.99% 3.92%
Net yield on earning assets (3) 4.74% 4.61%
</TABLE>
(1) On a fully taxable equivalent basis, calculated using a Federal income tax
rate of 35%. Loan income includes fees.
(2) Interest rate spread is the average rate earned on total interest-earning
assets less the average rate paid on interest-bearing liabilities.
(3) Net yield on earning assets is net interest income divided by total
interest-earning assets.
Noninterest income amounted to $14.2 million for the second quarter of 2000,
down from $16.5 million for the second quarter of 1999. The $2.3 million decline
in noninterest income for the second quarter of 2000 was primarily attributable
to a decrease in service charges on deposit accounts of $1.5 million caused by
the required branch divestitures. Also contributing were decreased gains on
sales of mortgage loans of $889,000 related to lower volumes due to higher
market interest rates.
10
<PAGE>
Noninterest income for the first half of 2000 was $28.2 million, which
decreased by 14% or $4.4 million from the $32.7 million recorded for the same
period last year. The primary contributors were service charges on deposit
accounts and gains on sales of mortgage loans for the reasons outlined above.
Operating noninterest expenses declined 19% to $31.2 million for the second
quarter from $38.3 million for same period last year. For the first half of the
year, operating noninterest expenses declined 17% to $63.3 million from $76.5
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 six months ended June 30, 2000 and 1999, Federal and state operating
income tax provisions amounted to $14.4 million and $14.2 million, respectively.
The effective tax rates for the respective periods were 32.5% and 37.1%. 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 $24.6 million from December 31, 1999 to $2.93
billion at June 30, 2000. Total deposits at June 30, 2000 were $3.2 billion,
flat from March 31, 2000. After adjusting for deposits divested in all branch
sales, total deposits were $79.0 million higher at June 30, 2000 than at June
30, 1999. The decrease in securities available for sale of $36.4 million from
December 31, 1999 to $613.1 million at June 30, 2000 is primarily attributable
to the sale of securities to fund the final branch divestiture.
Credit Quality
Nonperforming assets include nonaccrual loans and foreclosed real estate (Other
Real Estate Owned). As of June 30, 2000, nonperforming assets totaled $12.4
million, up from $9.6 million at December 31, 1999 and down from $14.2 million
at the end of the second quarter of 1999. The increase from December 31, 1999
was due to higher levels of nonperforming commercial loans driven by one
customer relationship. Net charge-off activity totaled $3.8 million for the
second quarter of 2000 compared to $2.0 million for the same period in 1999. The
allowance for loan losses was $39.6 million at June 30, 2000, down from $42.4
million a year ago, and $41.1 million at December 31, 1999.
11
<PAGE>
A summary of credit quality follows:
<TABLE>
<S> <C> <C> <C> <C>
6/30/00 3/31/00 12/31/99 6/30/99
----------------------------------------------------------------------------------
(In thousands)
Nonaccrual loans $ 11,024 $ 11,280 $ 9,172 $ 13,564
Other real estate owned (OREO) 579 690 416 615
----------------------------------------------------------------------------------
Total nonperforming assets (NPA) $ 11,603 $ 11,970 $ 9,588 $ 14,179
==================================================================================
Loans past due 90 days or more $ 4,751 $ 6,594 $ 5,016 $ 4,273
and still accruing interest
Allowance for loan losses 39,643 41,228 41,079 42,431
NPA as % of loans plus OREO 0.40% 0.41% 0.33% 0.49%
Allowance as % of loans 1.35% 1.40% 1.42% 1.46%
Allowance as % of nonperforming loans 359.61% 365.50% 447.87% 312.82%
Allowance as % of NPA 341.66% 344.43% 428.44% 299.25%
</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,
2000 1999 2000 1999
---------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Beginning Balance $41,228 $42,263 $41,079 $41,209
Provision for Loan Losses 2,175 2,175 4,350 4,350
Loans Charged Off (4,816) (3,073) (7,649) (5,753)
Loan Recoveries 1,056 1,066 1,863 2,625
---------------------------------------------------------------------------------
Ending Balance $39,643 $42,431 $39,643 $42,431
=================================================================================
</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 $333.7 million at June 30, 2000, compared to
$362.5 million at year-end 1999. The current level reflects net income of $29.1
million less dividends paid to shareholders totaling $12.8 million, and share
repurchases totaling $47.1 million. Through the second quarter of 2000,
approximately 1.75 million shares have been repurchased. "Tier One" capital,
consisting entirely of common equity, measured 10.71% of risk-weighted assets at
June 30, 2000. Total capital, including the "Tier Two" allowance for loan
losses, was 11.97% of risk-weighted assets. The leverage capital ratio was
8.27%. 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 June 30, 2000, the Company maintained cash
balances and short-term investments of approximately $155.8 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
None.
14
<PAGE>
CHITTENDEN CORPORATION
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHITTENDEN CORPORATION
Registrant
August 11, 2000 S/ PAUL A. PERRAULT
--------------- -------------------
Date Paul A. Perrault,
Chairman, President and
Chief Executive Officer
August 11, 2000 S/ KIRK W. WALTERS
--------------- ------------------
Date Kirk W. Walters
Executive Vice President,
Treasurer, and Chief Financial Officer
15
