10-Q 1 0001.txt FOR PERIOD ENDING 09/30/2000 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 PART I. FINANCIAL INFORMATION Item 1. Financial Statements 2 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 )
September 30, December 31, 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 ==============================
The accompanying notes are an integral part of these consolidated financial statements. 3 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 )
For the Three Months For the Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 -------------------------------------------------------- (in thousands, except per share data) 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
The accompanying notes are an integral part of these consolidated financial statements. 4 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 )
For the Nine Months Ended September 30, 2000 1999 -------------------- (in thousands) 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
The accompanying notes are an integral part of these consolidated financial statements. 5 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):
Less: Accrual Balance as Cash Accrual Balance as of December 31, 1999 Transactions of September 30, 2000 ================================================================================= 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 =================================================================================
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 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):
For the Three Months For the Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 -------------------------------------------- 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) ============================================
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
For the Three Months Ended September 30, 2000 Commercial Consolidation (In Thousands) Banking Other (2) Adjustments Consolidated ------------------------------------------------------------ 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
For the Three Months Ended September 30, 1999 Commercial Consolidation (In Thousands) Banking Other (2) Adjustments Consolidated ----------------------------------------------------------- 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
For the Nine Months Ended September 30, 2000 Commercial Consolidation (In Thousands) Banking Other (2) Adjustments Consolidated ----------------------------------------------------------- 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
For the Nine Months Ended September 30, 1999 Commercial Consolidation (In Thousands) Banking Other (2) Adjustments Consolidated ------------------------------------------------------------- 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
(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 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):
For the Three Months For the Nine Months Ended September 30, Ended September 30, ----------------------------------------------------------------- 2000 1999 2000 1999 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
(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 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,
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) 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%
(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 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 A summary of credit quality follows:
9/30/00 6/30/00 12/31/99 9/30/99 -------------------------------------------------------------------------- (In thousands) 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%
Provisions for and activity in the allowance for loan losses are summarized as follows:
Three Months Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 ----------------------------------------------------------------- (In thousands) 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 =================================================================
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 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 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 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