Back to GetFilings.com



 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
x Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 
For Six Months Ended June 30, 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 August 9, 2002, there were 32,250,282 shares of the Corporation’s $1.00 par value common stock issued and outstanding.
 

 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 

2

Chittenden Corporation
Consolidated Balance Sheets
(Unaudited)
 
    
June 30,
2002
     
December 31, 2001
  
    
(in thousands)
  
Assets
                  
Cash and cash equivalents
   
$
195,884
 
   
$
308,023
 
Securities available for sale
   
 
1,232,549
 
   
 
826,495
 
FHLB stock
   
 
14,967
 
   
 
13,613
 
Loans held for sale
   
 
27,556
 
   
 
50,208
 
Loans:
                  
Commercial
   
 
583,557
 
   
 
559,752
 
Municipal
   
 
44,107
 
   
 
85,479
 
Real Estate:
                  
Residential
   
 
914,141
 
   
 
855,561
 
Commercial
   
 
1,043,889
 
   
 
903,819
 
Construction
   
 
78,995
 
   
 
79,801
 
    
  
Total Real Estate
   
 
2,037,025
 
   
 
1,839,181
 
Consumer
   
 
301,634
 
   
 
353,765
 
    
  
Total Loans
   
 
2,966,323
 
   
 
2,838,177
 
Less: Allowance for loan losses
   
 
(48,994
)
   
 
(45,268
)
    
  
Net loans
   
 
2,917,329
 
   
 
2,792,909
 
Accrued interest receivable
   
 
28,051
 
   
 
23,357
 
Other real estate owned
   
 
230
 
   
 
703
 
Other assets
   
 
36,284
 
   
 
33,934
 
Premises and equipment, net
   
 
57,381
 
   
 
55,104
 
Mortgage servicing rights
   
 
16,917
 
   
 
16,020
 
Identified intangibles
   
 
10,175
 
   
 
4,007
 
Goodwill
   
 
58,249
 
   
 
29,341
 
    
  
Total assets
   
$
4,595,572
 
   
$
4,153,714
 
    
  
                   
                   
Liabilities:
                  
Deposits:
                  
Demand deposits
   
$
627,498
 
   
$
620,828
 
Savings deposits
   
 
393,025
 
   
 
346,974
 
NOW and money market deposits
   
 
1,922,452
 
   
 
1,870,835
 
Certificates of deposit less than $100,000
   
 
682,636
 
   
 
634,992
 
Certificates of deposit $100,000 and over
   
 
198,607
 
   
 
196,217
 
    
  
Total deposits
   
 
3,824,218
 
   
 
3,669,846
 
Borrowings
   
 
177,729
 
   
 
44,409
 
Company obligated, mandatorily redeemable securities of subsidiary trust
   
 
125,000
 
   
 
—  
 
Accrued expenses and other liabilities
   
 
69,298
 
   
 
68,805
 
    
  
Total liabilities
   
 
4,196,245
 
   
 
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
   
 
145,201
 
   
 
145,687
 
Retained earnings
   
 
274,266
 
   
 
256,677
 
Treasury stock, at cost – 3,513,595 shares in 2002 and 3,673,027 shares in 2001
   
 
(76,272
)
   
 
(79,733
)
Accumulated other comprehensive income
   
 
16,604
 
   
 
8,621
 
Directors deferred compensation to be settled in stock
   
 
3,839
 
   
 
3,746
 
Unearned portion of employee restricted stock
   
 
(60
)
   
 
(87
)
    
  
Total stockholders’ equity
   
 
399,327
 
   
 
370,654
 
    
  
Total liabilities and stockholders’ equity
   
$
4,595,572
 
   
$
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 June 30,
   
For the Six Months
Ended June 30,
    
2002
   
2001
   
2002
     
2001
    
(in thousands, except per
share amounts)
Interest income:
                              
Interest on loans
   
$
49,656
   
$
57,955
   
$
97,983
 
   
$
116,063
Investment securities:
                              
Taxable
   
 
15,328
   
 
9,580
   
 
28,110
 
   
 
19,238
Tax-favored
   
 
114
   
 
248
   
 
209
 
   
 
387
Short-term investments
   
 
6
   
 
103
   
 
42
 
   
 
337
    
  
  
  
Total interest income
   
 
65,104
   
 
67,886
   
 
126,344
 
   
 
136,025
    
  
  
  
Interest expense:
                              
Deposits
   
 
15,283
   
 
24,430
   
 
31,346
 
   
 
51,400
Borrowings
   
 
1,484
   
 
772
   
 
2,147
 
   
 
1,765
    
  
  
  
Total interest expense
   
 
16,767
   
 
25,202
   
 
33,493
 
   
 
53,165
    
  
  
  
Net interest income
   
 
48,337
   
 
42,684
   
 
92,851
 
   
 
82,860
Provision for loan losses
   
 
1,691
   
 
2,041
   
 
3,766
 
   
 
3,991
    
  
  
  
Net interest income after provision for loan losses
   
 
46,646
   
 
40,643
   
 
89,085
 
   
 
78,869
    
  
  
  
Noninterest income:
                              
Investment management income
   
 
3,913
   
 
3,849
   
 
7,885
 
   
 
7,225
Service charges on deposit accounts
   
 
4,098
   
 
3,705
   
 
7,852
 
   
 
7,054
Mortgage servicing income
   
 
625
   
 
944
   
 
1,315
 
   
 
1,922
Gains on sales of loans, net
   
 
1,860
   
 
1,945
   
 
4,615
 
   
 
6,885
Credit card income, net
   
 
897
   
 
1,114
   
 
1,689
 
   
 
2,114
Insurance commissions, net
   
 
882
   
 
834
   
 
1,819
 
   
 
1,728
Other
   
 
3,288
   
 
2,799
   
 
6,548
 
   
 
5,228
    
  
  
  
Total noninterest income
   
 
15,563
   
 
15,190
   
 
31,723
 
   
 
32,156
    
  
  
  
Noninterest expense:
                              
Salaries
   
 
18,491
   
 
15,275
   
 
35,642
 
   
 
29,277
Employee benefits
   
 
3,959
   
 
3,177
   
 
7,640
 
   
 
6,960
Net occupancy expense
   
 
4,859
   
 
4,260
   
 
9,780
 
   
 
8,995
Other real estate owned, income and expense, net
   
 
7
   
 
8
   
 
(161
)
   
 
47
Amortization of intangibles
   
 
348
   
 
741
   
 
583
 
   
 
1,253
Other
   
 
10,933
   
 
10,111
   
 
21,159
 
   
 
19,755
    
  
  
  
Total noninterest expense
   
 
38,597
   
 
33,572
   
 
74,643
 
   
 
66,287
    
  
  
  
Income before income taxes
   
 
23,612
   
 
22,261
   
 
46,165
 
   
 
44,738
Income tax expense
   
 
8,297
   
 
7,935
   
 
16,027
 
   
 
15,900
    
  
  
  
Net income
   
$
15,315
   
$
14,326
   
$
30,138
 
   
$
28,838
    
  
  
  
Basic earnings per share
   
$
0.48
   
$
0.45
   
$
0.94
 
   
$
0.89
Diluted earnings per share
   
 
0.47
   
 
0.44
   
 
0.92
 
   
 
0.88
Dividends per share
   
 
0.20
   
 
0.19
   
 
0.39
 
   
 
0.38
 
The accompanying notes are an integral part of these consolidated financial statements.

4

Chittenden Corporation
Consolidated Statements of CashFlows
(Unaudited)
 
    
For the Six Months
Ended June 30,
  
    
2002
     
2001
  
    
(in thousands)
  
Cash flows from operating activities:
                  
Net income
   
$
30,138
 
   
$
28,838
 
Adjustments to reconcile net income to net cash provided by operating activities:
                  
Provision for loan losses
   
 
3,766
 
   
 
3,991
 
Depreciation
   
 
3,709
 
   
 
2,943
 
Amortization of intangible assets
   
 
583
 
   
 
1,253
 
Amortization of premiums, fees, and discounts, net
   
 
1,597
 
   
 
944
 
Investment securities (gains) losses
   
 
(323
)
   
 
407
 
Deferred income taxes
   
 
(3,430
)
   
 
(1,544
)
Loans originated for sale
   
 
(275,652
)
   
 
(167,272
)
Proceeds from sales of loans
   
 
302,919
 
   
 
184,779
 
Gains on sales of loans, net
   
 
(4,615
)
   
 
(6,885
)
Changes in assets and liabilities, net of effect from purchase of acquired companies:
                  
Accrued interest receivable
   
 
(3,232
)
   
 
1,674
 
Other assets
   
 
(4,131
)
   
 
(1,956
)
Accrued expenses and other liabilities
   
 
(332
)
   
 
8,817
 
    
  
Net cash provided by operating activities
   
 
50,997
 
   
 
55,989
 
    
  
Cash flows from investing activities:
                  
Cash paid, net of cash received in acquisitions
   
 
(41,481
)
   
 
8,001
 
Proceeds from sales (purchases) of Federal Home Loan Bank stock
   
 
(148
)
   
 
(616
)
Proceeds from sales of securities available for sale
   
 
424,035
 
   
 
189,159
 
Proceeds from maturing securities and principal payments on securities available for sale
   
 
162,147
 
   
 
191,994
 
Purchases of securities available for sale
   
 
(938,616
)
   
 
(355,614
)
Loans originated, net of principal repayments
   
 
77,103
 
   
 
88,052
 
Purchases of premises and equipment
   
 
(2,053
)
   
 
(458
)
    
  
Net cash provided by (used in) investing activities
   
 
(319,013
)
   
 
120,518
 
    
  
Cash flows from financing activities:
                  
Net (decrease) in deposits
   
 
(81,479
)
   
 
(52,127
)
Net increase (decrease) in borrowings
   
 
126,645
 
   
 
(48,335
)
Issuance of trust preferred securities
   
 
120,558
 
   
 
—  
 
Proceeds from issuance of treasury and common stock
   
 
2,701
 
   
 
823
 
Dividends on common stock
   
 
(12,548
)
   
 
(12,421
)
Repurchase of common stock
   
 
—  
 
   
 
(14,995
)
    
  
Net cash provided by (used in) financing activities
   
 
155,877
 
   
 
(127,055
)
    
  
Net increase (decrease) in cash and cash equivalents
   
 
(112,139
)
   
 
49,452
 
Cash and cash equivalents at beginning of period
   
 
308,023
 
   
 
178,621
 
    
  
Cash and cash equivalents at end of period
   
$
195,884
 
   
$
228,073
 
    
  
Supplemental disclosure of cash flow information:
                  
Cash paid during the period for:
                  
Interest
   
$
32,560
 
   
$
26,047
 
Income taxes
   
 
14,387
 
   
 
19,978
 
Non-cash investing and financing activities:
                  
Loans transferred to other real estate owned
   
 
952
 
   
 
821
 
Issuance of treasury and restricted stock
   
 
138
 
   
 
143
 
Assets acquired and liabilities assumed through acquisitions:
                  
Fair value of assets acquired
   
$
267,310
 
   
$
239,253
 
Fair value of liabilities assumed
   
 
242,968
 
   
 
212,391
 
Cash paid
   
 
53,250
 
   
 
47,452
 
    
  
Goodwill
   
$
28,908
 
   
$
20,590
 
    
  
 
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 $1,352,000 in the first six months 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. In addition to the purchase price the company incurred approximately $4.5 million of capitalized costs incurred in connection with the acquisition. 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

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. Included in the total acquisition cost is approximately $636,000 of capitalized costs incurred in connection with the acquisition. 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
 
    
 
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 June 30,
   
For the Six Months
Ended June 30,
    
2002
   
2001
   
2002
   
2001
Total revenue
   
$
63,900
   
$
62,832
   
$
127,213
   
$
127,513
Income before income taxes
   
 
23,612
   
 
23,765
   
 
47,090
   
 
47,865
Net income
   
 
15,315
   
 
15,212
   
 
30,706
   
 
30,601
Diluted earnings per share (EPS)
   
 
0.47
   
 
0.47
   
 
0.94
   
 
0.94
 
Total revenue includes net interest income and non-interest income.
 
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 – CAPITAL TRUST SECURITIES
 
On May 21, 2002, a wholly-owned subsidiary of Chittenden, Chittenden Capital Trust I, issued $125 million of 8% trust preferred securities (“Securities”) to the public and invested the proceeds from this offering in an equivalent amount of junior subordinated debentures issued by Chittenden. These debentures are the sole asset of the trust subsidiary. The proceeds from the offering, which was net of $4.4 million of issuance costs, will be used for general corporate purposes. The Securities pay interest quarterly, are mandatorily redeemable on July 1, 2032 and may be redeemed by the Trust at par any time on or after July 1, 2007. Chittenden has fully and unconditionally guaranteed the Securities issued by Chittenden Capital Trust I.
 
Concurrent with the issuance of these securities, Chittenden entered into interest rate swap agreements with two counterparties, in which Chittenden will receive 8% fixed on the notional amount of $125 million, while paying the counterparties a variable rate based on the three month LIBOR (London Interbank Offered Rate), plus approximately 122 basis points.

7

NOTE 5 – COMPREHENSIVE INCOME
 
The Company’s comprehensive income for the periods ended June 30, 2002 and 2001 is presented below (amounts in thousands):
 
    
For the Three Months
Ended June 30,
     
For the Six Months
Ended June 30,
    
2002
     
2001
     
2002
     
2001
Net Income
   
$
15,315
 
   
$
14,326
 
   
$
30,138
 
   
$
28,838
Unrealized gains/losses on investment securities:
                                  
Unrealized holding gains (losses) on securities available for sale, net of tax
   
 
14,515
 
   
 
(1,453
)
   
 
8,193
 
   
 
4,120
Reclassification adjustments for (gains) losses arising during period, net of tax
   
 
(62
)
   
 
(13
)
   
 
(210
)
   
 
265
    
  
  
  
Total Comprehensive income
   
$
29,768
 
   
$
12,860
 
   
$
38,121
 
   
$
33,223
    
  
  
  
 
NOTE 6 – EARNINGS PER SHARE
 
The following table summarizes the calculation of basic and diluted earnings per share:
 
    
Three Months Ended
June 30,
     
Six Months Ended
June 30,
  
    
2002
     
2001
     
2002
     
2001
  
    
(in thousands except per share information)
  
Net income (loss)
   
$
15,315
 
   
$
14,326
 
   
$
30,138
 
   
$
28,838
 
    
  
  
  
Weighted average common shares outstanding
   
 
32,219
 
   
 
32,123
 
   
 
32,177
 
   
 
32,286
 
Dilutive effect of common stock equivalents
   
 
466
 
   
 
367
 
   
 
434
 
   
 
359
 
    
  
  
  
Weighted average common and common equivalent shares outstanding
   
 
32,684
 
   
 
32,490
 
   
 
32,611
 
   
 
35,644
 
    
  
  
  
Basic earnings per share
   
$
0.48
 
   
$
0.45
 
   
$
0.94
 
   
$
0.89
 
Dilutive effect of common stock equivalents
   
 
(0.01
)
   
 
(0.01
)
   
 
(0.02
)
   
 
(0.01
)
    
  
  
  
Diluted earnings per share
   
$
0.47
 
   
$
0.44
 
   
$
0.92
 
   
$
0.88
 
    
  
  
  
 
NOTE 7 – 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 June 30, 2002
(in thousands)
   
Commercial Banking
   
Other (2)
     
Consolidation
Adjustments
     
Consolidated
Net interest income (1)
   
$
48,698
   
$
(361
)
   
 
—  
 
   
$
48,337
Noninterest income
   
 
14,683
   
 
880
 
   
 
—  
 
   
 
15,563
Provision for loan losses
   
 
1,691
   
 
—  
 
   
 
—  
 
   
 
1,691
Noninterest expense
   
 
37,660
   
 
937
 
   
 
—  
 
   
 
38,597
    
  
  
  
Net income (loss) before income tax
   
 
24,030
   
 
(418
)
   
 
—  
 
   
 
23,612
Income tax expense/(benefit)
   
 
8,403
   
 
(106
)
   
 
—  
 
   
 
8,297
    
  
  
  
Net income (loss)
   
$
15,627
   
$
(312
)
   
 
—  
 
   
$
15,315
    
  
  
  
End of Period Assets
   
$
4,579,552
   
$
520,178
 
   
$
(504,158
)
   
$
4,595,572
                                 
                                 
For the Three Months Ended June 30, 2001
(in thousands)
   
Commercial Banking
   
Other (2)
     
Consolidation
Adjustments
     
Consolidated
Net interest income (1)
   
$
42,618
   
$
66
 
   
 
—  
 
   
$
42,684
Noninterest income
   
 
14,354
   
 
836
 
   
 
—  
 
   
 
15,190
Provision for loan losses
   
 
2,041
   
 
—  
 
   
 
—  
 
   
 
2,041
Noninterest expense
   
 
32,573
   
 
999
 
   
 
—  
 
   
 
33,572
    
  
  
  
Net income (loss) before income tax
   
 
22,358
   
 
(97
)
   
 
—  
 
   
 
22,261
Income tax expense/(benefit)
   
 
7,948
   
 
(13
)
   
 
—  
 
   
 
7,935
    
  
  
  
Net income (loss)
   
$
14,410
   
$
(84
)
   
 
—  
 
   
$
14,326
    
  
  
  
End of Period Assets
   
$
3,896,909
   
$
355,355
 
   
$
(354,235
)
   
$
3,898,029
                                 
                                 
For the Six Months EndedJune 30, 2002
(in thousands)
   
Commercial Banking
   
Other (2)
     
Consolidation
Adjustments
     
Consolidated
Net interest income (1)
   
$
93,170
   
$
(319
)
   
 
—  
 
   
$
92,851
Noninterest income
   
 
29,903
   
 
1,831
 
   
 
(11
)
   
 
31,723
Provision for loan losses
   
 
3,766
   
 
—  
 
   
 
—  
 
   
 
3,766
Noninterest expense
   
 
72,769
   
 
1,885
 
   
 
(11
)
   
 
74,643
    
  
  
  
Net income (loss) before income tax
   
 
46,538
   
 
(373
)
   
 
—  
 
   
 
46,165
Income tax expense/(benefit)
   
 
16,087
   
 
(60
)
   
 
—  
 
   
 
16,027
    
  
  
  
Net income (loss)
   
$
30,451
   
$
(313
)
   
 
—  
 
   
$
30,138
    
  
  
  
End of Period Assets
   
$
4,579,552
   
$
520,178
 
   
$
(504,158
)
   
$
4,595,572
                                 
                                 
For the Six Months EndedJune 30, 2001
(in thousands)
   
Commercial Banking
   
Other (2)
     
Consolidation
Adjustments
     
Consolidated
Net interest income (1)
   
$
82,691
   
$
169
 
   
 
—  
 
   
$
82,860
Noninterest income
   
 
30,419
   
 
1,758
 
   
 
(21
)
   
 
32,156
Provision for loan losses
   
 
3,991
   
 
—  
 
   
 
—  
 
   
 
3,991
Noninterest expense
   
 
64,310
   
 
1,998
 
   
 
(21
)
   
 
66,287
    
  
  
  
Net income (loss) before income tax
   
 
44,809
   
 
(71
)
   
 
—  
 
   
 
44,738
Income tax expense/(benefit)
   
 
15,883
   
 
17
 
   
 
—  
 
   
 
15,900
    
  
  
  
Net income (loss)
   
$
28,926
   
$
(88
)
   
 
—  
 
   
$
28,838
    
  
  
  
End of Period Assets
   
$
3,896,909
   
$
355,355
 
   
$
(354,235
)
   
$
3,898,029
 
(1)
 
The Commerical 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.

9

NOTE 8 – 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 June 30, 2002 and December 31, 2001; all share and per share amounts presented herein have been restated to reflect the split. On July 17, 2002, the Company declared dividends of $0.20 per share or approximately $6.4 million, to be paid on August 16, 2002 to shareholders of record on August 2, 2002.

10

 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Results of Operations
 
Chittenden Corporation posted second quarter 2002 net income of $0.47 per diluted share, compared to the net income of $0.44 per diluted share posted in the second quarter of last year. Net income for the second quarter of 2002 was $15.3 million, compared to net income of $14.3 million recorded in the same quarter a year ago. For the first six months of 2002, diluted earnings per share were $0.92, compared to the $0.88 diluted earnings per share recorded for the same time period in 2001. Year to date net income for 2002 was $30.1 million, compared to net income of $28.8 million for the same period a year ago.
 
Return on average equity was 15.95% for the quarter ended June 30, 2002 compared with return on average equity of 16.63% for the same period in 2001. Return on average equity for the first six months of 2002 was 16.01%, down from return on average equity of 16.89% a year ago. The decline in return on average equity for the quarter and year ended June 30, 2002 was a result of higher levels of average stockholders’ equity.
 
Return on average assets was 1.38% for the second quarter of 2002, compared with the return on average assets of 1.51% for the second quarter of last year. Return on average assets for the first six months of 2002 was 1.41%, down from 1.56% a year ago. The decline in return on average assets for the quarter and the year ended June 30, 2002 was primarily due to higher levels of average assets caused by the acquisition of ONB and MBT.
 
Net interest income on a tax equivalent basis for the three months ended June 30, 2002 was $48.7 million, up from $43.3 million for the same period a year ago. The yield on earning assets was 4.69% in the second quarter of 2002, compared with 4.87% in the same period of 2001 and 4.61% for the first quarter of 2002. The increase in the net interest income from the second quarter of 2001 was attributed primarily to higher levels of average earning assets and deposits that resulted from the acquisition of ONB and MBT, growth of the affiliate banks, and the trust preferred securities issuance. Approximately half of the decline in the yield on earning assets from the second quarter of 2001 was a result of a narrower margin on the investment of the proceeds from the trust preferred securities issuance and additional borrowings from the FHLB.

11

The following table presents an analysis of average rates and yields on a fully taxable equivalent basis for the three months and six months ended June 30, 2002 and 2001:
 
For the Three Months
Ended June 30, 2002
     
For the Three Months
Ended June 30, 2001
          
For the Six Months
Ended June 30, 2002
     
For the Six Months
Ended June 30, 2001
  
Average Balance
   
Interest Income/ Expense(1)
   
Average Yield/ Rate(1)
     
Average Balance
     
Interest Income/ Expense(1)
   
Average Yield/ Rate(1)
     
Description
   
Average Balance
     
Interest Income/ Expense(1)
   
Average Yield/ Rate(1)
     
Average Balance
     
Interest Income/ Expense(1)
   
Average Yield/ Rate(1)
  
                                         
ASSETS
                                              
                                         
Interest-Earning Assets:
                                              
                                         
Loans:
                                              
$577,932
   
$
8,782
   
6.10
%
   
$
457,981
 
   
$
9,369
   
8.21
%
   
Commercial
   
$
566,206
 
   
$
17,233
   
6.14
%
   
$
424,410
 
   
$
18,088
   
8.59
%
84,786
   
 
935
   
4.41
%
   
 
89,136
 
   
 
1,316
   
5.92
%
   
Municipal
   
 
85,109
 
   
 
1,948
   
4.58
%
   
 
88,004
 
   
 
2,598
   
5.95
%
                                         
Real Estate:
                                              
950,808
   
 
16,090
   
6.78
%
   
 
1,130,754
 
   
 
21,308
   
7.56
%
   
Residential
   
 
933,142
 
   
 
31,757
   
6.83
%
   
 
1,124,519
 
   
 
42,710
   
7.66
%
1,037,386
   
 
16,489
   
6.38
%
   
 
796,391
 
   
 
16,570
   
8.35
%
   
Commercial
   
 
994,083
 
   
 
31,919
   
6.48
%
   
 
774,571
 
   
 
32,744
   
8.52
%
84,710
   
 
1,734
   
8.21
%
   
 
91,507
 
   
 
1,928
   
8.45
%
   
Construction
   
 
86,344
 
   
 
3,424
   
8.00
%
   
 
93,589
 
   
 
3,930
   
8.47
%
  
         
  
              
  
         
  
      
2,072,904
   
 
34,313
   
6.63
%
   
 
2,018,652
 
   
 
39,806
   
7.96
%
   
Total Real Estate
   
 
2,013,569
 
   
 
67,100
   
6.70
%
   
 
1,992,679
 
   
 
79,384
   
8.03
%
311,521
   
 
5,962
   
7.68
%
   
 
368,860
 
   
 
7,968
   
8.66
%
   
Consumer
   
 
323,950
 
   
 
12,394
   
7.72
%
   
 
378,193
 
   
 
17,003
   
9.07
%
  
         
  
              
  
         
  
      
3,047,143
   
 
49,992
   
6.58
%
   
 
2,934,629
 
   
 
58,459
   
7.99
%
   
Total loans
   
 
2,988,834
 
   
 
98,675
   
6.65
%
   
 
2,883,286
 
   
 
117,073
   
8.19
%
                                         
Investments:
                                              
1,095,216
   
 
15,328
   
5.60
%
   
 
600,233
 
   
 
9,580
   
6.40
%
   
Taxable
   
 
1,032,851
 
   
 
28,111
   
5.45
%
   
 
596,509
 
   
 
19,238
   
6.50
%
19,697
   
 
162
   
3.31
%
   
 
24,680
 
   
 
347
   
5.64
%
   
Tax-Favored Securities
   
 
17,382
 
   
 
298
   
3.46
%
   
 
18,644
 
   
 
544
   
5.88
%
225
   
 
2
   
3.40
%
   
 
225
 
   
 
2
   
3.55
%
   
Interest-Bearing Deposits
   
 
225
 
   
 
4
   
3.39
%
   
 
225
 
   
 
4
   
3.80
%
827
   
 
4
   
1.96
%
   
 
7,663
 
   
 
101
   
5.29
%
   
Federal Funds Sold
   
 
4,765
 
   
 
38
   
1.63
%
   
 
12,179
 
   
 
333
   
5.51
%
  
         
  
              
  
         
  
      
4,163,108
   
 
65,488
   
6.30
%
   
 
3,567,430
 
   
 
68,489
   
7.70
%
   
Total Interest-Earning Assets
   
 
4,044,057
 
   
 
127,126
   
6.32
%
   
 
3,510,843
 
   
 
137,192
   
7.88
%
    
                  
                       
                  
      
322,685
                 
 
271,484
 
                 
Noninterest-Earning Assets
   
 
316,639
 
                 
 
258,063
 
              
(49,530)
                 
 
(42,665
)
                 
Allowance for Loan Losses
   
 
(48,186
)
                 
 
(41,486
)
              
                
                     
                
             
$4,436,263
                 
$
3,796,249
 
                 
Total Assets
   
$
4,312,510
 
                 
$
3,727,420
 
              
                
                     
                
             
                                         
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                              
                                         
Interest-Bearing Liabilities:
                                              
$390,679
   
 
1,130
   
1.16
%
   
$
378,033
 
   
 
2,163
   
2.30
%
   
Savings
   
$
376,798
 
   
 
2,231
   
1.19
%
   
$
371,027
 
   
 
4,481
   
2.44
%
1,949,626
   
 
6,812
   
1.40
%
   
 
1,589,282
 
   
 
11,316
   
2.86
%
   
NOW and money market accounts
   
 
1,921,719
 
   
 
13,881
   
1.46
%
   
 
1,554,999
 
   
 
24,816
   
3.22
%
676,065
   
 
5,758
   
3.42
%
   
 
636,409
 
   
 
8,228
   
5.18
%
   
Certificates of deposit under $100,000
   
 
662,057
 
   
 
12,065
   
3.67
%
   
 
626,900
 
   
 
16,387
   
5.27
%
229,598
   
 
1,583
   
2.77
%
   
 
214,184
 
   
 
2,723
   
5.10
%
   
Certificates of deposit $100,000and over
   
 
216,294
 
   
 
3,169
   
2.95
%
   
 
212,119
 
   
 
5,716
   
5.43
%
3,245,968
   
 
15,283
   
1.89
%
   
 
2,817,908
 
   
 
24,430
   
3.48
%
   
Total Interest-Bearing Deposits
   
 
3,176,868
 
   
 
31,346
   
1.99
%
   
 
2,765,045
 
   
 
51,400
   
3.75
%
135,697
   
 
1,484
   
4.39
%
   
 
53,972
 
   
 
772
   
5.74
%
   
Borrowings
   
 
90,394
 
   
 
2,147
   
4.79
%
   
 
60,535
 
   
 
1,765
   
5.88
%
  
         
  
              
  
         
  
      
3,381,665
   
 
16,767
   
1.99
%
   
 
2,871,880
 
   
 
25,202
   
3.52
%
   
Total Interest-Bearing Liabilities
   
 
3,267,262
 
   
 
33,493
   
2.07
%
   
 
2,825,580
 
   
 
53,165
   
3.79
%
    
                  
                       
                  
      
                                         
NonInterest-Bearing Liabilities:
                                              
605,606
                 
 
523,392
 
                 
Demand Deposits
   
 
603,376
 
                 
 
502,891
 
              
63,953
                 
 
55,411
 
                 
Other Liabilities
   
 
62,248
 
                 
 
54,726
 
              
                
                     
                
             
4,051,224
                 
 
3,450,683
 
                 
Total Liabilities
   
 
3,932,886
 
                 
 
3,383,197
 
              
385,039
                 
 
345,566
 
                 
Stockholders’ Equity
   
 
379,624
 
                 
 
344,223
 
              
                
                     
                
             
$4,436,263
                 
$
3,796,249
 
                 
Total Liabilities and Stockholders’ Equity
   
$
4,312,510
 
                 
$
3,727,420
 
              
                
                     
                
             
    
$
48,721
                                 
Net Interest Income
            
$
93,633
                   
$
84,027
       
    
                  
                       
                  
      
           
4.31
%
                   
4.18
%
   
Interest Rate Spread (2)
                   
4.25
%
                   
4.09
%
           
4.69
%
                   
4.87
%
   
Net Yield on Earning Assets (3)
                   
4.65
%
                   
4.83
%
 
(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.

12

Noninterest income amounted to $15.6 million for the second quarter of 2002 up from $15.2 for the second quarter of last year. Increases in service charges on deposits as a result of the ONB & MBT acquisitions, and other income were offset by declines in credit card income (due to the sale of the retail credit card portfolio in 2001) and mortgage servicing income, which resulted from higher amortization of originated mortgage servicing rights. The increase in other income was driven mainly by increased investment services business and by increases in general banking services, the latter due to the acquisition of ONB & MBT.
 
For the first six months of 2002, noninterest income was $31.7 million, down from $32.2 million a year ago. Gains on sales of loans were $4.6 million for the first half of 2002 compared with $6.9 million last year. Included in gains on sales of loans for 2001 was a $4.6 million gain on the sale of the Company’s retail credit card portfolio. Gains on the sales of mortgage loans increased from $2.3 million in 2001 to $4.6 million in 2002 due to increased mortgage market activity. Sales volume of mortgage loans increased $120.4 million from $177.9 million in 2001 to $298.3 million in 2002. Investment management income increased $660,000 to $7.9 million for the first six months of 2002 primarily due to the acquisition of MBT. Service charges on deposit accounts increased $798,000 due to the acquisition of MBT and ONB. Other noninterest income amounted to $6.5 million and $5.2 million for the six months ended June 30, 2002 and 2001 respectively. The gains and losses on sales of investment securities accounted for approximately half of the variance in total other noninterest income, since $407,000 in losses were realized on sales in 2001 while sales in 2002 generated $323,000 in gains. The remainder of the increase in noninterest income year over year was driven primarily by additional revenues in the business services units, particularly investment services, and payroll processing.
 
Noninterest expenses were $38.6 million for the second quarter of 2002, up from the $33.6 million for the second quarter of 2001. Salaries and employee benefits increased $4.0 million from the second quarter of 2001. The inclusion of ONB in 2002 and an additional month of MBT in the second quarter of 2002 (the MBT acquisition was closed as of April 30, 2001) amounted to approximately $2.2 million of the variance in salaries and benefits. In addition, incentive compensation increased $751,000 and employee benefits increased $514,000 from the same period a year ago, driven primarily by pension and medical insurance costs. Amortization of intangibles decreased $393,000 from the second quarter 2001 to $348,000 due to the adoption of FAS 142, which eliminated the amortization of unidentified intangibles (goodwill). The amortization recognized in 2002 relates primarily to of the amortization of core deposit intangibles resulting from the ONB and Bank of Western Massachusetts acquisitions. Other expenses were up $822,000 as a result of the acquisition of ONB and MBT.
 
For the first six months, total noninterest expenses were $74.6 million in 2002, compared with $66.3 million the year before. Salaries and employee benefits increased $7.0 million from the 2001 level. Approximately $5.3 million of the variance in salaries and employee benefits was due to the acquisition of ONB and MBT. The adoption of FAS 142 decreased amortization of intangibles $895,000 and the amortization of core deposit intangibles increased $225,000 with the acquisition of ONB. Increases in occupancy and other noninterest expense were primarily attributable to the acquisitions of ONB and MBT.
 
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. 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 six months ended June 30, 2002 and 2001, Federal and state income tax provisions amounted to $16.0 million and $15.9 million, respectively. The effective income tax rates for the respective periods were 34.7% and 35.5%. 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

13

 
The Company invests the majority of its assets in loans and securities. Total assets increased from $4.2 billion at December 31, 2001 to $4.6 billion at June 30, 2002. Ocean National Bank contributed total assets of approximately $300 million and total loans of approximately $207 million. Residential real estate loans declined $83 million from a year ago and increased $59 million from December 31, 2001. The acquisition of ONB increased residential real estate loans by approximately $97 million from December 31, 2001, leading to the increase from that date. The decline from June 30, 2001 was primarily due to higher levels of prepayments caused by steadily declining market interest rates in the last year, 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 available-for-sale investment portfolio as mortgage-backed securities.
 
Consumer loans declined $52 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 $210 million from a year ago primarily as a result of the purchase of ONB. Excluding the effect of ONB, the commercial portfolio at June 30, 2002 grew $111 million or approximately 6.8% from a year ago, with growth primarily in the commercial real estate category while commercial C & I loans were relatively flat.
 
Total deposits at June 30, 2002 were $3.8 billion, up $154 million from December 31, 2001 and up $372 million from June 30, 2001. The increase from December 31, 2001 and June 30, 2001 was primarily due to the acquisition of ONB, which contributed $236 million in deposits, and to stronger than normal deposit flows in the last six months of 2001 as investors moved investments out of the stock market and into cash. The seasonality of the Company’s deposits, particularly in the government-banking sector, has historically caused the low point of deposit levels during a typical year to be at the end of the second quarter.
 
Credit Quality
 
Nonperforming assets include nonaccrual loans and foreclosed real estate (Other Real Estate Owned). As of June 30, 2002, nonperforming assets plus loans 90 days past due and still accruing totaled $13.3 million, down $4.2 million from a quarter ago and down $3.0 million from a year ago. Loans on nonaccrual status decreased from $12.4 million at December 31, 2001 to $10.4 million at June 30, 2002. Net charge-off activity totaled $2.1 million for the second quarter of 2002, compared to $1.1 million for the same period in 2001, or 0.07% and 0.04%, of average loans for the respective periods. Net charge off activity totaled $3.0 million for the six months ended June 30, 2002 and $3.8 million for the same period in 2001 or 0.10% and 0.13% of average loans for the respective periods. The allowance for loan losses was $49.0 million at June 30, 2002, up from $44.5 million a year ago, and $45.3 million at December 31, 2001. The acquisition of ONB accounted for $3.0 million of the increase from both of the prior respective periods.
 
A summary of credit quality follows:
 
    
6/30/02
     
3/31/02
     
12/31/01
     
6/30/01
  
    
(in thousands)
  
Nonaccrual Loans
   
$
10,407
 
   
$
13,447
 
   
$
12,374
 
   
$
12,689
 
Troubled debt restructuring
   
 
235
 
   
 
272
 
   
 
—  
 
   
 
—  
 
Other real estate owned (OREO)
   
 
230
 
   
 
351
 
   
 
703
 
   
 
625
 
    
  
  
  
Total nonperforming assets (NPAs)
   
$
10,872
 
   
$
14,070
 
   
$
13,077
 
   
$
13,314
 
    
  
  
  
Loans past due 90 days or more
and still accruing interest
   
$
2,477
 
   
$
3,430
 
   
$
4,583
 
   
$
3,082
 
NPAs plus loans past due 90 days or
more and still accruing interest
   
 
13,349
 
   
 
17,500
 
   
 
17,660
 
   
 
16,396
 
Allowance for loan losses
   
 
48,994
 
   
 
49,384
 
   
 
45,268
 
   
 
44,541
 
NPAs as % of loans plus OREO
   
 
0.36
%
   
 
0.46
%
   
 
0.46
%
   
 
0.45
%
Allowance as % of loans
   
 
1.64
%
   
 
1.61
%
   
 
1.59
%
   
 
1.52
%
Allowance as % of nonperforming loans
   
 
460.38
%
   
 
359.97
%
   
 
365.83
%
   
 
351.02
%
Allowance as % of NPAs
   
 
450.64
%
   
 
350.99
%
   
 
346.17
%
   
 
334.54
%

14

 
Provisions for and activity in the allowance for loan losses are summarized as follows:
 
    
Three Months Ended June 30,
     
Six Months Ended June 30,
  
    
2002
     
2001
     
2002
     
2001
  
    
(in thousands)
  
Beginning balance
   
$
49,384
 
   
$
39,546
 
   
$
45,268
 
   
$
40,255
 
Provision for loan losses
   
 
1,691
 
   
 
2,041
 
   
 
3,766
 
   
 
3,991
 
Allowance acquired through acquisitions
   
 
—  
 
   
 
4,083
 
   
 
2,972
 
   
 
4,083
 
Loans charged off
   
 
(2,839
)
   
 
(2,294
)
   
 
(4,725
)
   
 
(5,736
)
Loan recoveries
   
 
758
 
   
 
1,165
 
   
 
1,713
 
   
 
1,947
 
    
  
  
  
Ending balance
   
$
48,994
 
   
$
44,541
 
   
$
48,994
 
   
$
44,541
 
    
  
  
  
 
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, 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 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 delinquencies and loans adversely classified, and economic trends. An allocation process whereby specific loss allocations are made against certain adversely classified loans assesses the adequacy of the allowance for loan losses, 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 economies 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 Losses” 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 June 30, 2002, the Company has repurchased 3.8 million shares at a total cost of $83 million since the inception of the 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 $399.3 million at June 30, 2002, compared to $370.7 million at year-end 2001. The current level reflects net income of $30.1 million less dividends paid to shareholders totaling $12.5 million. Accumulated other comprehensive income increased $8.0 million to $16.6 million at June 30, 2002 from $8.6 million at December 31, 2001 due to higher unrealized gains on the available for sale securities portfolio. “Tier One” capital, consisting of common equity and the allowable portion of the trust preferred securities (approximately $98.9 million), measured 11.84% of risk-weighted assets at June 30, 2002. Total capital, including the “Tier Two” allowance for loan losses and the remaining $26.1 million of the trust preferred securities, was 13.85% of risk-weighted assets. The leverage capital ratio was 9.35%. These ratios placed Chittenden in the “well-capitalized” category according to regulatory standards.
 
Liquidity

15

 
The Company’s liquidity and rate sensitivity are managed by the asset and liability committee, based upon policies approved by the Board of Directors. This committee meets periodically to review and direct the Banks’ lending, investment, deposit-gathering, and borrowing activities.
 
The measure of an institution’s liquidity is its ability to meet its cash commitments at all times with available cash or by conversion of other assets to cash at a reasonable price. At June 30, 2002, the Company maintained cash balances and short-term investments of approximately $196 million, compared with $228 million at June 30, 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.

16

 
PART II—OTHER INFORMATION
 
Item 4. Submission of Matters to a Vote of Security Holders
 
Annual Meeting, April 17, 2002
 
Proposal 1:
Election of five directors, each to serve for a term of three years.
 
    DIRECTOR
  
FOR
   
AUTHORITY WITHHELD
Paul J. Carrara
  
27,956,336
   
181,256
Sally W. Crawford
  
27,954,802
   
182,790
Phillip M. Drumheller
  
27,920,436
   
217,156
James C. Pizzagalli
  
27,956,336
   
181,256
Ernest A. Pomerleau
  
27,956,336
   
181,256
 
Election of three directors, each to serve for a term of one year:
 
John K. Dwight
  
27,955,284
  
182,308
Philip A. Kolvoord
  
27,933,089
  
204,503
Mark W. Richards
  
27,934,039
  
203,553
 
Proposal 2
Amendment and Restatement of the 1998 Directors’ Omnibus Long-Term Incentive Plan.
 
For:
   
24,658,243
     
Against:
   
2,906,631
     
Abstain:
   
577,765
     
No Vote:
   
5,048
     
 
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
 
(a)    EXHIBITS
 
None.
 
(b)    REPORTS ON FORM 8-K
 
The Company’s first quarter 2002 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 April 19, 2002.
 
The Company’s investor presentation distributed to various analyst meetings as of May 15, 2002 was filed on Form 8-K on May 16, 2002.

17

 
CHITTENDEN CORPORATION
SIGNATURES
 
Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
   
CHITTENDEN CORPORATION
   
Registrant
     
     
     
August 13, 2002
  
S/ PAUL A. PERRAULT
Date
  
Paul A. Perrault,
   
Chairman, President and
Chief Executive Officer
     
     
     
August 13, 2002
  
S/ KIRK W. WALTERS
Date
  
Kirk W. Walters
   
Executive Vice President,
Treasurer, and Chief Financial Officer

18