Chittenden Reports Earnings; Announces Quarterly Dividend

Chittenden Corporation (NYSE: CHZ) Chairman, President and Chief Executive Officer, Paul A. Perrault,
announced third quarter 2003 net income of $0.54 per diluted share,
compared to the $0.48 per diluted share earned in the third quarter of 2002.
For the first nine months of 2003, earnings were $1.54 per diluted share,
compared to $1.41 a year ago. Chittenden also announced its quarterly dividend
of $0.20 per share. The dividend will be paid on November 14, 2003, to
shareholders of record on October 31, 2003.
In making the announcement, Perrault said, "I am extremely pleased with
our progress in organizing ourselves to be most responsive to our customers,
shareholders, and employees, and with the financial results that we have
achieved at the same time. With our early-summer decision to migrate to a new
information technology platform, work has begun in earnest to convert all of
our banks by the second quarter of next year. I am pleased to report that we
are on schedule to meet that objective. The end result will be greater
effectiveness in serving our customers, enhanced efficiencies in our processes
and lower costs associated with providing that service."
On February 28, 2003, Chittenden completed its acquisition of Granite
Bank, a $1.1 billion commercial bank headquartered in Keene, NH for $123
million in cash and approximately 4.4 million shares of Chittenden stock
valued at $116 million. This transaction was accounted for as a purchase and,
accordingly, Granite Bank's operations are reflected in Chittenden's
consolidated financial statements from the date of acquisition.
Total loans increased $85 million from June 30, 2003, due to increases in
municipal, commercial real estate and construction loans. The increase in
municipal loans reflects a seasonal trend, as the second quarter is
historically the low point for municipal borrowings, coinciding with the
borrowers' fiscal year-ends. Commercial real estate loans increased $50
million from June 30th with growth throughout Chittenden's markets. The
Company's residential real estate portfolio declined $43 million due to
continued heavy prepayments emanating from the decline in long term interest
rates which hit their recent lows in the second quarter of 2003. This decline
was substantially offset by growth in construction loans due to the financing
of several projects within Chittenden's commercial customer base, continuing a
trend that has been seen for the last several quarters.
Total deposits increased $151 million from June 30th to $5.0 billion at
September 30, 2003. The increase was driven primarily by higher activity in
demand, savings and money market/cash management accounts associated with
municipal and commercial customers. The Company's deposit base primarily
consists of demand, savings and NOW accounts, which comprise 46% of total
deposits and have an average weighted cost of 0.20%, and money market/cash
management accounts which comprise 32% of total deposits and have an average
weighted cost of 0.73%. Borrowings declined $159 million to $240 million at
September 30, 2003, primarily as a result of the early redemption of FHLB
borrowings and customer repurchase agreements.
The operating net interest margin for the third quarter of 2003 was 4.11%
compared to 4.14% for the second quarter of 2003. In addition to scheduled
amortization of Granite's purchase accounting adjustments to loans, deposits,
and borrowings which reduced net interest income by $900,000, the Company
recognized accelerated amortization of $1.7 million in the third quarter
primarily due to heavy prepayments on Granite's residential mortgages. The
net interest margin for the third quarter, including the accelerated purchase
accounting amortization, was 3.98%. Net interest income was $54.7 million for
the third quarter of 2003 and $49.7 million for the same period a year ago.
The increase was driven by a larger balance sheet, as average-earning assets
increased $1.1 billion to $5.5 billion in 2003 due primarily to the Granite
acquisition.
Net charge-offs as a percentage of average loans were 1 basis point in the
third quarter and 8 basis points in the first nine months of 2003 compared to
10 basis points and 20 basis points for the respective periods in 2002. Net
charge-off activity on a year-to-date basis totaled $3.1 million compared with
$6.1 million in 2002. Nonperforming assets were $18.0 million at September
30, 2003 unchanged from June 30, 2003 and as a percentage of total loans
decreased to 48 basis points compared to 49 basis points a quarter ago and 54
basis points for the third quarter of 2002. As a percentage of loans, the
allowance for loan losses was 1.57%, which was consistent with the last
several quarters.
Noninterest income was $25.0 million for the third quarter of 2003 down
from $29.8 million for the second quarter and up from $13.8 million for the
same period a year ago. The change from the second quarter was primarily due
to fluctuations in securities gains, impairments on mortgage servicing rights,
and losses on prepayments of borrowings. Excluding these items, noninterest
income grew approximately $1.6 million on a linked-quarter basis. Gains on
sales of loans increased $860,000 from the second quarter of 2003 due to a
slightly higher margin on mortgage loans sold and insurance commissions were
up $610,000 primarily due to higher levels of performance based commissions.
Compared with the third quarter of a year ago, increases were also seen in
service charges on deposit accounts due to the Granite Bank acquisition, as
well as investment management income, and retail investment services. The
Company realized $3.3 million of gains on sales of securities compared to $9.7
million during the second quarter of 2003 and $6 thousand in the comparable
quarter of 2002. Partially offsetting the securities gains recognized in the
current quarter were losses of $2.1 million associated with the prepayment of
borrowings. In addition, mortgage servicing income was $2.1 million higher on
a linked-quarter basis and $2.2 million higher from the same quarter of 2002
due to recoveries recognized in the current quarter associated with the fair
value of the Company's serviced loan portfolio, net of continued heavy
amortization of those assets. During the third quarter the Company recognized
approximately $3.3 million in impairment recoveries versus $3.5 million in
amortization expense on its mortgage servicing rights.
Noninterest expenses decreased $7.4 million from the second quarter of
2003 and increased $9.9 million from the third quarter of 2002. The increase
in noninterest expenses from the same period a year ago were primarily a
result of the Granite Bank acquisition which contributed approximately $4.0
million in salary and benefits expenses, $1.2 million of net occupancy expense
and $1.5 million of other noninterest expenses. The decrease from the second
quarter of 2003 was largely due to $6.8 million in non-recurring charges
accrued in the second quarter related to the Company's decision to convert its
core data processing system and lower compensation expense due to reductions
in staffing.
Effective income tax rates for 2003 were 35.4% for the third quarter and
36.2% year to date compared to 34.7% for both respective periods in 2002. The
higher effective rates in 2003 are due primarily to a larger proportion of the
Company's taxable income being generated in New Hampshire. The lower
effective tax rate in the third quarter of 2003 versus year-to-date was due to
the recognition of the settlement of tax assessments by the Massachusetts
Department of Revenue relating to the taxation of Real Estate Investment
Trusts. This settlement benefited the current quarter's provision by
approximately $250,000.
The return on average equity was 14.19% for the third quarter of 2003,
compared with 13.34% for the second quarter and 15.36% in the same quarter of
2002. This decline from a year ago is primarily due to the issuance of
additional equity in the Granite acquisition. The return on average assets
for the third quarter of 2003 was 1.32%, flat with the third quarter of 2002
and up from 1.26% for the second quarter of 2003.