Chittenden Reports Earnings; Increases Quarterly Dividend

Chittenden Corporation
(NYSE: CHZ) Chairman, President and Chief Executive Officer, Paul A. Perrault,
announced earnings for the quarter ended March 31, 2004 of $17.5 million
or $0.47 per diluted share, compared to $16.6 million or $0.49 a year ago.
Chittenden also announced a 10% increase in its quarterly dividend to $0.22
per share. The dividend will be paid on May 14, 2004, to shareholders of
record on April 30, 2004.
In making the announcement, Perrault said, "By and large, most core
businesses are doing well. However, the volatility of market interest rates
and the timing of their movements during the quarter adversely impacted the
mortgage banking business. On the whole, we consider the quarter's results a
little disappointing, though there is cause for optimism. Commercial loan
growth was particularly good during the quarter and accelerated in the month
of March. In mortgage banking, the interest rate dip in March led to
significant mortgage application activity late in the quarter, which should
bode well for better mortgage gains as we move forward into the coming
months."
Total loans increased $55.5 million from December 31, 2003 and $151.6
million from March 31, 2003. The Company's banks continued their strong growth
in commercial lending by increasing their commercial and commercial real
estate portfolios at an annualized rate of 16% on a linked-quarter basis.
Partially offsetting the growth in commercial loans was the continued decline
in the residential real estate loan portfolio, which experienced faster than
expected prepayments. The increase in the loan portfolio from March 31, 2003
was entirely attributable to double-digit growth in the Company's commercial
and commercial real estate loan portfolios.
Total deposits increased $20.3 million from March 31, 2003 and decreased
$135.5 million from the prior year-end. The decline from December 31, 2003 is
primarily attributable to normal seasonal trends relating to the Company's
municipal, commercial, and captive insurance customers. Borrowings at March
31, 2004 were $312.5 million, a decrease of $241.1 million from the same
period a year ago. The decline was due to maturities and the early redemption
of $214 million of FHLB borrowings assumed in the Granite acquisition.
The Company's net interest margin for the first quarter of 2004 was 4.17%,
an increase from the fourth quarter of last year and a decrease from the first
quarter of 2003. On a linked quarter basis, the increase in the net interest
margin was due to a better asset mix with a higher proportion of loans in
average earning assets, and a lower cost of funds driven primarily by reduced
costs of borrowings. The decline in net interest margin from the first quarter
of 2003 was primarily attributable to lower earning asset yields and the
inclusion of Granite for the full quarter of 2004 as compared to just one
month in 2003.
Net charge-offs as a percentage of average loans were 1 basis point for
the first quarter of 2004, compared to 8 basis points for the fourth quarter
of last year and 4 basis points for the first quarter in 2003. Net charge-offs
in 2004 totaled $391,000, compared with $2.7 million in the fourth quarter of
2003 and $1.5 million for the first quarter of 2003. Nonperforming assets
increased $6.3 million from December 31, 2003 to $20.7 million at March 31,
2004 and as a percentage of total loans increased to 55 basis points compared
to 39 basis points in the fourth quarter of 2003. The increase in
nonperforming assets primarily resulted from two commercial relationships and
the Company believes that the loans are well secured. The level of
nonperforming assets in 2004 is consistent with the Company's historical
experience which has averaged approximately 50 basis points over the last six
years.
The provision for loan losses was $427,000 for the first quarter of 2004
compared to $1.0 million for the fourth quarter of last year, and $2.1 million
in the first quarter of 2003. The provision for the first quarter of 2004 was
driven by significantly lower net charge-offs, continued strong asset quality,
and minimal growth in the total loan portfolio. As a percentage of total
loans, the allowance for loan losses was 1.52%, down slightly from 1.54% at
December 31, 2003.
Noninterest income declined $5.0 million from the prior quarter and $1.2
million from the same period a year ago. The decline from the fourth quarter
of 2003 was attributable to reduced gains on sales of mortgages, lower
mortgage servicing income, and a decline in gains on sales of securities.
Gains on sales of mortgage loans decreased $2.4 million from the fourth
quarter of 2003 due to lower volumes of loan sales caused by higher mortgage
interest rates. Mortgage servicing income declined $1.4 million in the first
quarter of 2004 due to higher forward-looking prepayment speeds which were
driven by the dip in interest rates in early March, continued heavy paydowns
on adjustable rate mortgages, and the decision by one of the Company's credit
union customers to service its portfolio in house. Gains on sales of
securities, net of losses on prepayments of borrowings, were $608,000 in the
first quarter of 2004, compared to $2.1 million in the fourth quarter of last
year and $1.4 million in the first quarter of 2003. Partially offsetting
these declines, on a linked quarter and year-over-year basis, were
significantly higher insurance commissions and increased investment management
income. Insurance commissions increased $1.1 million from the prior quarter
primarily due to the timing of policy renewals and increased performance-based
income. The increase from the same quarter a year ago was due to the inclusion
of Granite's insurance operations for the full quarter in 2004 versus only one
month in 2003. In addition, on a year-over-year basis, the Company
experienced higher investment management income, which was attributable to
stronger equity markets and better penetration in the non-Vermont banks.
Noninterest expenses were $44.6 million for the quarter ending March 31,
2004, a decrease of $3.5 million from the prior quarter and an increase of
$2.4 million from a year ago. The decline from the fourth quarter of 2003 is
primarily attributable to lower conversion and restructuring expenses,
decreased incentives and commissions costs, and lower levels of other expense.
The higher conversion and restructuring expenses in the fourth quarter of 2003
were due to the accrual of certain costs in relation to the Company's plan to
consolidate branches, close offsite ATMs and to recognize severance for
related staff reductions. The increase from a year ago is attributable to the
acquisition of Granite Bank, which in 2004 contributed three months of
expenses compared to one month in 2003.
The effective income tax rate for first quarter 2004 was 36.9%, compared
with 36.1% for the comparable quarter in 2003. The higher effective income tax
rate was primarily attributable to increased taxable income in New Hampshire,
which has a higher statutory tax rate than other states in which the Company
has operations.
The return on average tangible equity was 20.38% in the first quarter of
2004, compared to 23.63% in the prior quarter and 19.95% in the same quarter a
year ago. The return on average equity was 11.97% for the first quarter of
2004, compared with 13.66% for the fourth quarter of 2003 and 14.53% for the
first quarter a year ago. The decrease in ROE from the first quarter of 2003
is primarily due to the issuance of additional equity of $116 million in the
Granite acquisition, which was included for only one month in the 2003
calculation. The return on average assets for the quarter ended March 31, 2004
was 1.21%, down from 1.31% for the quarter ended December 31, 2003 and 1.29%
for the first quarter of last year. The decline from a year ago was due to
higher levels of average assets caused by the acquisition of Granite Bank and
the reduction from the fourth quarter of 2004 was due to lower net income.
Chittenden is a bank holding company headquartered in Burlington, Vermont.
Through its subsidiary banks(1), the Company offers a broad range of financial
products and services to customers throughout Northern New England and
Massachusetts, including deposit accounts and services; commercial and
consumer loans; insurance; and investment and trust services to individuals,
businesses, and the public sector. Chittenden Corporation's news releases,
including earnings announcements, are available on the Company's website.