-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E1rGC1NwEXy5QkTGdZnjlWJ/L+UU5uKfCZlqQKL+tcoUlJoHwzzW5Fu4MBJxQ8Kf tPyKonSSmUxJsMzHqBAEUw== 0000950130-02-003198.txt : 20020501 0000950130-02-003198.hdr.sgml : 20020501 ACCESSION NUMBER: 0000950130-02-003198 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020501 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHITTENDEN CORP /VT/ CENTRAL INDEX KEY: 0000200138 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 030228404 STATE OF INCORPORATION: VT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13769 FILM NUMBER: 02630275 BUSINESS ADDRESS: STREET 1: TWO BURLINGTON SQ P O BOX 820 STREET 2: C/O STOCKHOLDER RELATIONS CITY: BURLINGTON STATE: VT ZIP: 05401 BUSINESS PHONE: 8026584000 MAIL ADDRESS: STREET 1: 2 BURLINGTON SQUARE CITY: BURLINGTON STATE: VT ZIP: 05401 10-Q 1 d10q.txt FORM 10-Q 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 Three Months Ended March 31, 2002 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 April 26, 2002, there were 32,198,750 shares of the Corporation's $1.00 par value common stock issued and outstanding. 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements 2 Chittenden Corporation Consolidated Balance Sheets (Unaudited)
March 31, December 31, 2002 2001 ------------------------------- (in thousands) Assets Cash and cash equivalents $ 222,372 $ 308,023 Securities available for sale 922,414 826,495 FHLB stock 14,967 13,613 Loans held for sale 38,432 50,208 Loans: Commercial 566,746 559,752 Municipal 88,134 85,479 Real Estate: Residential 926,463 855,561 Commercial 1,022,858 903,819 Construction 91,325 79,801 ------------------------------- Total Real Estate 2,040,646 1,839,181 Consumer 324,292 353,765 ------------------------------- Total Loans 3,019,818 2,838,177 Less: Allowance for loan losses (49,384) (45,268) ------------------------------- Net loans 2,970,434 2,792,909 Accrued interest receivable 24,096 23,357 Other real estate owned 351 703 Other assets 56,581 53,961 Premises and equipment, net 57,913 55,104 Goodwill 58,249 29,341 ------------------------------- Total assets $4,365,809 $4,153,714 =============================== Liabilities: Deposits: Demand deposits $597,680 $620,828 Savings deposits 389,504 346,974 NOW and money market deposits 1,993,050 1,870,835 Certificates of deposit less than $100,000 674,653 634,992 Certificates of deposit $100,000 and over 229,536 196,217 ------------------------------- Total deposits 3,884,423 3,669,846 Borrowings 45,182 44,409 Accrued expenses and other liabilities 61,832 68,805 ------------------------------- Total liabilities 3,991,437 3,783,060 Stockholders' Equity: Preferred stock - $100 par value authorized - 200,000 shares; issued and outstanding - none Common stock - $1 par value; authorized - 60,000,000 shares; issued - 35,748,653 in 2002 and 35,743,473 in 2001 35,749 35,743 Surplus 144,820 145,687 Retained earnings 265,457 256,677 Treasury stock, at cost - 3,568,165 shares in 2002 and 3,673,027 shares in 2001 (77,456) (79,733) Accumulated other comprehensive income 2,151 8,621 Directors deferred compensation to be settled in stock 3,723 3,746 Unearned portion of employee restricted stock (72) (87) ------------------------------- Total stockholders' equity 374,372 370,654 ------------------------------- Total liabilities and stockholders' equity $4,365,809 $4,153,714 ===============================
The accompanying notes are an integral part of these consolidated financial statements. 3 Chittenden Corporation Consolidated Statements of Income (Unaudited)
For the Three Months Ended March 31, 2002 2001 ------------------------------- (in thousands, except per share amounts) Interest income: Interest on loans $48,327 $58,108 Investment securities: Taxable 12,783 9,658 Tax-favored 94 139 Short-term investments 36 234 ------------------------------- Total interest income 61,240 68,139 ------------------------------- Interest expense: Deposits 16,063 26,970 Borrowings 663 993 ------------------------------- Total interest expense 16,726 27,963 ------------------------------- Net interest income 44,514 40,176 Provision for loan losses 2,075 1,950 ------------------------------- Net interest income after provision for loan losses 42,439 38,226 ------------------------------- Noninterest income: Investment management income 3,972 3,376 Service charges on deposit accounts 3,754 3,349 Mortgage servicing income 690 978 Gains on sales of loans, net 2,755 4,940 Credit card income, net 792 1,000 Insurance commissions, net 937 894 Other 3,260 2,429 ------------------------------- Total noninterest income 16,160 16,966 ------------------------------- Noninterest expense: Salaries 17,151 14,018 Employee benefits 3,681 3,767 Net occupancy expense 4,921 4,735 Amortization of intangibles 235 512 Other real estate owned, income and expense, net (168) 39 Other 10,226 9,644 ------------------------------- Total noninterest expense 36,046 32,715 ------------------------------- Income before income taxes 22,553 22,477 Income tax expense 7,730 7,965 ------------------------------- Net income $14,823 $14,512 =============================== Basic earnings per share $ 0.46 $ 0.45 Diluted earnings per share 0.46 0.44 Dividends per share 0.19 0.19
The accompanying notes are an integral part of these consolidated financial statements. 4 Chittenden Corporation Consolidated Statements of CashFlows (Unaudited)
For the Three Months Ended March 31, 2002 2001 ---------------------------- (in thousands) Cash flows from operating activities: Net income $ 14,823 $ 14,512 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 2,075 1,950 Depreciation 1,901 1,406 Amortization of intangible assets 235 512 Amortization of premiums, fees, and discounts, net 938 801 Investment securities (gains) losses (227) 428 Deferred income taxes (4,020) (578) Loans originated for sale (152,481) (34,141) Proceeds from sales of loans 167,012 58,609 Gains on sales of loans, net (2,755) (4,940) Changes in assets and liabilities, net of effect from purchase of acquired companies: Accrued interest receivable 723 2,044 Other assets (2,022) (2,526) Accrued expenses and other liabilities 499 14,511 --------------------------- Net cash provided by operating activities 26,701 52,588 --------------------------- Cash flows from investing activities: Cash paid, net of cash acquired in acquisitions (41,481) - Proceeds from sales (purchases) of Federal Home Loan Bank stock (148) (616) Proceeds from sales of securities available for sale 352,142 153,356 Proceeds from maturing securities and principal payments on securities available for sale 97,082 125,372 Purchases of securities available for sale (513,567) (231,881) Loans originated, net of principal repayments 26,410 50,355 Purchases of premises and equipment (776) (1,116) --------------------------- Net cash provided by (used in) investing activities (80,338) 95,470 --------------------------- Cash flows from financing activities: Net (decrease) in deposits (21,274) (69,152) Net (decrease) in borrowings (5,902) (48,332) Proceeds from issuance of treasury and common stock 1,264 41 Dividends on common stock (6,102) (6,252) Repurchase of common stock - (10,937) --------------------------- Net cash provided by (used in) financing activities (32,014) (134,632) --------------------------- Net increase (decrease) in cash and cash equivalents (85,651) 13,426 Cash and cash equivalents at beginning of period 308,023 178,621 --------------------------- Cash and cash equivalents at end of period $ 222,372 $ 192,047 =========================== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 17,014 $ 28,277 Income taxes 260 3,353 Non-cash investing and financing activities: Loans transferred to other real estate owned 483 142 Issuance of treasury and restricted stock 139 76 Assets acquired and liabilities assumed through acquisitions: Fair value of assets acquired $ 255,541 $ - Liabilities assumed 242,968 - Cash paid 41,481 - --------------------------- Goodwill $ 28,908 $ - ===========================
The accompanying notes are an integral part of these consolidated financial statements. 5 Chittenden Corporation Notes to Consolidated Financial Statements NOTE 1 - ACCOUNTING POLICIES 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. The Company's significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in its 2001 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 reclassifications have been made to prior year balances to conform to the current year presentation. NOTE 2 - RECENTLY ADOPTED ACCOUNTING POLICIES In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations ("SFAS 141"), and No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). Statement No. 141 requires that the purchase accounting method be used for all business combinations initiated after June 30, 2001. The Company adopted SFAS 142 as of January 1, 2002. SFAS 142 addresses the method of identifying and measuring goodwill and other intangible assets acquired in a business combination, eliminates further amortization of goodwill, and requires periodic impairment evaluations of goodwill. As a result of adopting SFAS 142, the Company eliminated goodwill amortization of $676,000 in the first quarter of 2002. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), which supersedes SFAS No. 121 and portions of APB Opinion No. 30. This statement addresses the recognition of an impairment loss for long-lived assets to be held and used, or disposed of by sale or otherwise. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The adoption of SFAS 144 did not have a significant impact on the financial position or results of operations of the Company. NOTE 3 - ACQUISITIONS AND SALES On February 28, 2002, Chittenden acquired Ocean National Corporation, headquartered in Kennebunk, Maine and its subsidiary Ocean National Bank for $53.25 million in cash. The transaction has been accounted for as a purchase and, accordingly, the operations of Ocean National Bank (ONB) are included in Chittenden's consolidated financial statements from the date of acquisition. The purchase price has been allocated to assets acquired and liabilities assumed based on estimates of fair value at the date of acquisition. The excess of purchase price over the fair value of net tangible and intangible assets acquired has been recorded as goodwill. The fair value of these assets and liabilities is summarized as follows (in thousands): Cash and cash equivalents ............................. $ 11,769 FHLB Stock ............................................ 1,256 Securities available for sale ......................... 41,498 Net loans ............................................. 207,443 Prepaid expenses and other assets ..................... (5,341) Premises and equipment ................................ 3,934 Core Deposit Intangibles .............................. 6,751 Goodwill .............................................. 28,908 Deposits .............................................. (235,851) Accrued expenses and other liabilities ................ (7,117) --------- Total acquisition cost ................................ $ 53,250 ========= 6 In addition to the purchase price of $53.25 million was approximately $4.5 million of capitalized costs incurred in connection with the acquisition. Approximately $3.9 million of these capitalized costs were associated with the conversion of Ocean's systems to the Chittenden platform. On April 30, 2001, the Company acquired Maine Bank Corp., headquartered in Portland, Maine and its subsidiary, Maine Bank & Trust for $49.25 million in cash. The acquisition has been accounted for as a purchase and, accordingly, the operations of Maine Bank & Trust (MBT) are included in these financial statements from the date of acquisition. The purchase price has been allocated to assets acquired and liabilities assumed based on estimates of fair value at the date of acquisition. The excess of purchase price over the fair value of assets acquired has been recorded as goodwill. The fair value of these assets and liabilities is summarized as follows (in thousands): Cash and cash equivalents ............................... $ 55,453 FHLB Stock .............................................. 686 Securities available for sale ........................... 5,034 Net loans ............................................... 168,860 Prepaid expenses and other assets ....................... 3,422 Premises and equipment .................................. 5,798 Goodwill ................................................ 20,590 Deposits ................................................ (212,425) Accrued expenses and other liabilities .................. 34 ------------ Total acquisition cost .................................. $ 47,452 ============ Included in the total acquisition cost is approximately $636,000 of capitalized costs incurred in connection with the acquisition. Following is supplemental information reflecting selected pro forma results as if these acquisitions had been consummated as of January 1, 2001 (in thousands, except EPS): For the three months ended March 31, 2002 2001 ---------------------------- Total revenue $63,313 $64,681 Income before income taxes 23,591 24,269 Net income 15,504 15,558 Diluted earnings per share (EPS) 0.48 0.47 Total revenue includes net interest income and noninterest income. 7 During the first quarter of 2001, the Company sold its retail credit card portfolio, totaling approximately $39 million, at a gain of $4.3 million. An additional gain of $330,000 was recognized in the second quarter of 2001 after the expiration of certain contingent obligations accrued in the first quarter. NOTE 4 - COMPREHENSIVE INCOME The Company's comprehensive income for the three-months ended March 31, 2002 and 2001 is presented below (amounts in thousands):
For the Three Months Ended March 31, 2002 2001 ------------------------ Net Income $14,823 $ 14,512 Unrealized gains/losses on investment securities: Unrealized holding gains (losses) on securities available for sale, net of tax (6,322) 5,573 Reclassification adjustments for (gains) losses arising during period, net of tax (148) 278 ------------------------ Total Comprehensive income $ 8,353 $ 20,363 ========================
NOTE 5 - BUSINESS SEGMENTS The Company has identified Commercial Banking as its reportable operating business segment based on the fact that the results of operations are viewed as a single strategic unit by the chief operating decision-maker. The Commercial Banking segment is comprised of the five Commercial Banking subsidiaries 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, 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. Revenue derived from these segments includes insurance commissions from insurance related products and services, as well as other operations associated with the parent holding company. 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 2001 Annual Report on Form 10-K. The consolidation adjustments reflect certain eliminations of inter-segment revenue, cash and parent company investments in subsidiaries. 8
For the Three Months Ended March 31, 2002 Commercial Consolidation (in thousands) Banking Other (2) Adjustments Consolidated -------------------------------------------------------------- Net interest income (1) $ 44,514 $ 42 $ (42) $ 44,514 Noninterest income 15,220 951 (11) 16,160 Provision for loan losses 2,075 - - 2,075 Noninterest expense 35,109 948 (11) 36,046 -------------------------------------------------------------- Net income (loss) before income tax 22,550 45 (42) 22,553 Income tax expense/(benefit) 7,684 46 - 7,730 -------------------------------------------------------------- Net income (loss) $ 14,866 $ (1) $ (42) $ 14,823 ============================================================== End of Period Assets $4,346,044 $ 389,086 $ (369,321) $ 4,365,809 For the Three Months Ended March 31, 2001 Commercial Consolidation (in thousands) Banking Other (2) Adjustments Consolidated -------------------------------------------------------------- Net interest income (1) $ 40,169 $ 103 $ (96) $ 40,176 Noninterest income 16,066 921 (21) 16,966 Provision for loan losses 1,950 - - 1,950 Noninterest expense 31,737 999 (21) 32,715 -------------------------------------------------------------- Net income (loss) before income tax 22,548 25 (96) 22,477 Income tax expense/(benefit) 7,936 29 - 7,965 -------------------------------------------------------------- Net income (loss) $ 14,612 $ (4) $ (96) 14,512 ============================================================== End of Period Assets $3,668,010 $ 354,817 $ (350,130) $ 3,672,697
(1) The Commercial Banking segment derives a majority of its revenue from interest. In addition, management primarily relies on net interest income, 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, as well as other operations associated with the parent holding company. NOTE 6 - STOCKHOLDERS' EQUITY On July 18, 2001, the Company declared a five-for-four stock split which was distributed on September 14, 2001 to stockholders of record August 31, 2001. This stock split has been reflected in the accompanying balance sheets as of March 31, 2002 and December 31, 2001; all share and per share amounts presented herein have been restated to reflect the split. On April 17, 2002, the Company declared dividends of $0.20 per share or approximately $6.4 million, to be paid on May 17, 2002 to shareholders of record on May 3, 2002. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Chittenden Corporation posted first quarter 2002 net income of $0.46 per diluted share, compared to the net income of $0.44 per diluted share posted in the first quarter of last year. Net income for the first quarter of 2002 was $14.8 million, compared to net income of $14.5 million recorded in the same quarter a year ago. Return on average equity was 16.07% for the quarter ended March 31, 2002 compared with return on average equity of 17.15% for the same period in 2001. Return on average assets was 1.44% for the first quarter of 2002, compared with the return on average assets of 1.61% for the first quarter of last year. The decline in return on average equity for the quarter ended March 31, 2002 was a result of higher levels of average stockholders' equity, while the decline in return on average assets for the quarter ended March 31, 2002 was primarily due to higher levels of average assets caused by the acquisitions of MBT and ONB. Net interest income on a tax equivalent basis for the three months ended March 31, 2002 was $44.9 million, up from $40.7 million for the same period a year ago. The yield on earning assets was 4.61% in the first quarter of 2002, compared with 4.78% in the same period of 2001 and 4.59% for the fourth quarter of 2001. The Company experienced unusually high inflows of deposits in the third and fourth quarters of 2001, caused by the slowing economy and the September 11th tragedies. The majority of these deposits remained with the Banks during the first quarter of 2002, leading to unusually high liquidity in the last six months. Excluding the impact of this additional liquidity, net interest margins would have been approximately 4.76% for the fourth quarter of 2001 and 4.75% for the first quarter of 2002. The increase in net interest income from the first quarter of 2001 was attributed primarily to the acquisitions of MBT and ONB. 10 The following table presents an analysis of average rates and yields on a fully taxable equivalent basis for the three months ended March 31, 2002 and 2001:
2002 2001 ------------------------------------------------------------------------ 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: Loans: Commercial $ 554,284 $ 8,495 6.22% $ 528,206 $11,755 9.03% Municipal 85,443 1,015 4.75% 86,862 1,302 6.00% Real estate: Residential 915,404 15,519 6.81% 1,021,120 18,155 7.13% Commercial 950,282 15,590 6.65% 703,493 16,193 9.34% Construction 87,978 1,629 7.51% 52,429 1,073 8.30% ------------------------- ------------------------ Total real estate 1,953,664 32,738 6.77% 1,777,042 35,421 8.04% Consumer 336,509 6,435 7.76% 434,907 10,136 9.34% ------------------------- ------------------------ Total loans 2,929,900 48,683 6.72% 2,832,017 58,614 8.39% Investments: Taxable 969,794 12,783 5.28% 592,799 9,658 6.61% Tax-favored securities 15,041 136 3.67% 12,542 197 6.36% Interest-bearing deposits in banks 225 2 3.38% 225 2 4.05% Federal funds sold 8,747 34 1.59% 16,268 232 5.78% ------------------------- ------------------------ Total interest-earning assets 3,923,707 61,638 6.34% 3,453,851 68,703 8.07% ----------- ----------- Goodwill 39,298 10,854 Noninterest-earning assets 256,643 233,879 Allowance for loan losses (46,828) (40,310) ------------- ------------ Total assets $4,172,820 $3,658,274 ============= ============ Liabilities and stockholders' equity Interest-bearing liabilities: Savings $ 372,270 $ 1,101 1.20% $ 365,530 $ 2,318 2.57% NOW and money market deposits 1,894,571 7,080 1.52% 1,519,824 13,500 3.60% Certificates of deposit under $100,000 647,896 6,307 3.95% 617,149 8,159 5.36% Certificates of deposit $100,000 and over 201,775 1,575 3.17% 210,003 2,993 5.78% ------------------------- ------------------------ Total interest-bearing deposits 3,116,512 16,063 2.09% 2,712,506 26,970 4.03% Borrowings 44,586 663 6.03% 66,612 993 6.05% ------------------------- ------------------------ Total interest-bearing liabilities 3,161,098 16,726 2.15% 2,779,118 27,963 4.08% ----------- ----------- Noninterest-bearing liabilities: Demand deposits 575,281 481,130 Other liabilities 62,293 54,949 ------------- ------------ Total liabilities 3,798,672 3,315,197 Stockholders' equity 374,148 343,077 ------------- ------------ Total liabilities and stockholders' equity $4,172,820 $3,658,274 ============= ============ Net interest income $44,912 $40,740 =========== =========== Interest rate spread (2) 4.19% 3.99% Net yield on earning assets (3) 4.61% 4.78%
(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 $16.2 million for the first quarter of 2002 down from $17.0 million last year. Gains on sales of loans were $2.8 million for the first quarter of 2002 compared with $4.9 million in the first quarter of 2001. The 2001 amount includes a $4.3 million gain on the sale of the Company's retail credit card portfolio. Gains on sales of residential mortgages increased from $640,000 in 2001 to $2.8 million in 2002 as a result of increased market activity. Investment management income increased $596,000 to $4.0 million for the first quarter of 2002 primarily due to the acquisition of MBT. Increases in insurance, service charges on 11 deposits, and other income were offset by declines in credit card (due to the sales of the retail credit card portfolio in 2001) and mortgage servicing income. Noninterest expenses were $36.0 million for the first quarter of 2002, up from the $32.7 million for the first quarter of 2001. Salaries increased $3.1 million from the first quarter of 2001. The inclusion of MBT and ONB in the 2002 numbers amounted to approximately $2.4 million of the variance in salaries. Amortization of intangibles decreased $277,000 from the first quarter 2001 to $235,000 due to the adoption of FAS 142, which eliminated the amortization of unidentified intangibles (goodwill). The amortization recognized in 2002 consists primarily of the amortization of core deposit intangibles relating to ONB and the Bank of Western Massachusetts. Other expenses were up $582,000 primarily as a result of the acquisitions of MBT and ONB, which contributed $1.1 million. The inclusion of MBT and ONB was offset by a 5% overall decline in other expenses at the remaining affiliates. Income Taxes The IRS taxes the Company and its subsidiaries on income at the Federal level and by various states in which they do business. Approximately half 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 three months ended March 31, 2002 and 2001, Federal and state income tax provisions amounted to $7.7 million and $7.9 million, respectively. The effective income tax rates for the respective periods were 34.3% and 35.4%. The decrease from 2001 to 2002 is primarily attributable to lower provisions for state income taxes in Massachusetts, caused by the establishment, in the second half of 2001, of Real Estate Investment Trusts (REITs) in that state. REITs receive preferential tax treatment in the ownership of mortgage loans secured by real estate in Massachusetts. During all periods, the Company's statutory Federal corporate tax rate was 35%. Financial Position The Company invests the majority of its assets in loans and securities. Total assets increased from $4.2 billion at December 31, 2001 to $4.4 billion at March 31, 2002 and total loans increased $182 million from a quarter ago to $3.0 billion as of March 31, 2002. Ocean National Bank contributed total assets of approximately $302 million and total loans of approximately $211 million. Residential real estate loans declined $61 million from a year ago and increased $71 million from December 31, 2001. The decline from March 31, 2001 was primarily due to higher levels of prepayments caused by declining market interest rates in 2001, as well as to the securitization of $66 million in residential loans in the fourth quarter of last year. The securitized loans were retained in the Company's investment portfolio as mortgage-backed securities. The acquisition of ONB increased residential real estate loans by approximately $97 million from December 31, 2001, leading to the increase from that date. Consumer loans declined $29 million from December 31, 2001 due primarily to paydowns on the automotive finance portfolio, driven by lower market interest rates, which outpaced originations. Overall commercial balances increased approximately $126 million from a quarter ago primarily as a result of the purchase of ONB. Excluding the effect of MBT and ONB, the commercial portfolio at March 31, 2002 grew $127 million or approximately 10% higher than a year ago, with growth primarily in the commercial real estate category while commercial loans were relatively flat. Total deposits at March 31, 2002 were $3.8 billion, up $215 million from December 31, 2001 and up $661 million from March 31, 2001. The increase from December 31, 2001 was primarily due to the acquisition of ONB, which contributed $239 million in deposits. The increase from March 31, 2001 was due to the inclusion of ONB, as well as the inclusion of $219 million in deposits at March 31, 2002 from MBT. However, the existing franchise grew its deposits approximately 6% from the level a year ago. Much of this increase was due to unusually high inflows of deposits in the third and fourth quarters, caused by the slowing economy and the September 11/th/ tragedies. The majority of these deposits have remained with the Banks during the first quarter of 2002. 12 Credit Quality Nonperforming assets include nonaccrual loans and foreclosed real estate (Other Real Estate Owned). As of March 31, 2002, nonperforming assets plus loans 90 days past due and still accruing totaled $17.5 million, down slightly from a quarter ago and up $1.3 million from a year ago. Loans on nonaccrual status increased from $12.4 million at December 31, 2001 to $13.4 million at March 31, 2002 entirely due to the acquisition of Ocean National Bank. Net charge-off activity totaled $931,000 for the first quarter of 2002, compared to $2.7 million for the same period in 2001, or 0.03% and 0.09%, of average loans for the respective periods. The allowance for loan losses was $49.4 million at March 31, 2002, up from $39.5 million a year ago, and $45.3 million at December 31, 2001. The acquisition of MBT led to $4.4 million of the increase from the March 31, 2001 balance. ONB accounted for $3.0 million of the increase from both the prior respective periods. A summary of credit quality follows: 3/31/02 12/31/01 3/31/01 ---------------------------------- (in thousands) Loans on nonaccrual $13,447 $12,374 $11,560 Troubled debt restructuring 272 - - Other real estate owned (OREO) 351 703 328 ---------------------------------- Total nonperforming assets (NPAs) $14,070 $13,077 $11,888 ================================== Loans past due 90 days or more and still accruing interest $ 3,430 $ 4,583 $ 4,318 NPAs plus loans past due 90 days or more and still accruing interest 17,500 17,660 16,206 Allowance for loan losses 49,384 45,268 39,546 NPAs as % of loans plus OREO 0.46% 0.46% 0.42% Allowance as % of loans 1.61% 1.59% 1.41% Allowance as % of nonperforming loans 359.97% 365.83% 342.09% Allowance as % of NPAs 350.99% 346.17% 332.65% Provisions for and activity in the allowance for loan losses are summarized as follows: Three Months Ended March 31, 2002 2001 ----------------------- (in thousands) Beginning balance $ 45,268 $ 40,255 Provision for loan losses 2,075 1,950 Allowance acquired through acquisitions 2,972 - Loans charged off (1,886) (3,441) Loan recoveries 955 782 ----------------------- Ending balance $ 49,384 $ 39,546 ======================= The allowance for loan losses is based on management's estimate of the amount required to reflect the potential inherent losses in the loan portfolio, based on circumstances and conditions known or anticipated at each reporting date. There are inherent uncertainties with respect to the collectibility of the Banks' loans. Because of these inherent uncertainties, it is reasonably possible that actual losses experienced in the near term may differ from the amounts reflected in these consolidated financial statements. 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 13 the adequacy of the allowance for 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 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 loan losses. For a full discussion on the Company's allowance for loan loss policies see "Allowance for Loan Loss" in the Company's 2001 annual report on Form 10-K. Capital The Company periodically repurchases its own stock under a share repurchase program originally authorized by the Board of Directors on January 19, 2000. Subsequent authorizations have increased the number of shares authorized to be repurchased under the program to six million shares. As of March 31, 2002, the Company has repurchased 3.8 million shares at a total cost of $83 million since inception under this program. Based on the resolution passed by the Corporation's Board of Directors, the Company has until December 31, 2003 to purchase the remaining 2.2 million shares authorized. Stockholders' equity totaled $374.4 million at March 31, 2002, compared to $370.7 million at year-end 2001. The current level reflects net income of $14.8 million less dividends paid to shareholders totaling $6.1 million. Accumulated other comprehensive income decreased $6.5 million to $2.2 million at March 31, 2002 from $8.6 million at December 31, 2001. "Tier One" capital, consisting entirely of common equity, measured 9.15% of risk-weighted assets at March 31, 2002. Total capital, including the "Tier Two" allowance for loan losses, was 10.40% of risk-weighted assets. The leverage capital ratio was 7.28%. 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 March 31, 2002, the Company maintained cash balances and short-term investments of approximately $222.4 million, compared with $308.0 million at December 31, 2001. To measure the sensitivity of its income to changes in interest rates, the Company uses a variety of methods, including simulation, valuation techniques and gap analyses. 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. For a full discussion of interest-rate risk see "Liquidity and Rate Sensitivity" in the Company's 2001 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. 14 PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS None. (b) REPORTS ON FORM 8-K The Company's fourth quarter 2001 press release announcing earnings and quarterly dividends, as well as a copy of the quarterly comparative financial statements was filed on Form 8-K on January 18, 2002. The Company's press release announcing the completion of its acquisition of Ocean National Bank was filed on Form 8-K on February 28, 2002. The Company's power point presentation distributed at various analyst meetings as of March 6, 2002 was filed on Form 8-K on March 7, 2002. 15 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 May 1, 2002 /s/ PAUL A. PERRAULT - ----------- ------------------- Date Paul A. Perrault, Chairman, President and Chief Executive Officer May 1, 2002 /s/ KIRK W. WALTERS - ----------- ------------------ Date Kirk W. Walters Executive Vice President, Treasurer, and Chief Financial Officer 16 -----END PRIVACY-ENHANCED MESSAGE-----