SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
____________________
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
___________________
For the Quarterly Period Ended June 30, 1994, Commission Files
Number 0-11012
VERMONT FINANCIAL SERVICES CORP.
A DELAWARE CORPORATION IRS EMPLOYER IDENTIFICATION NO. 03-0284445
100 Main Street, Brattleboro, Vermont 05301
Telephone: (802) 257-7151
___________________
Indicate by check mark 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 requirement for the past 90
days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of July 31, 1994 - 4,670,223
Part I. FINANCIAL INFORMATION
VERMONT FINANCIAL SERVICES CORP.
Consolidated Statements of Condition
June 30, 1994 and December 31, 1993
(in thousands)
(unaudited)
<TABLE>
<CAPTION> <C> <C>
June 30 December 31
1994 1993
ASSETS -------- ---------
Cash and Due from Banks $ 59,164 $ 53,345
Interest Bearing Balances with Banks 50 235
Securities Available for Sale:
U.S. Treasury and U.S. Government Agencies 101,090 70,776
Mortgage Backed Securities 57,865 75,720
State and Municipal 12,414 15,808
Other 21,775 22,096
--------- ---------
Total Securities Available for Sale 193,144 184,400
Federal Funds Sold 2,500 8,298
Loans:
Commercial 205,238 203,300
Commercial Real Estate 200,866 200,643
Residential Real Estate 372,108 372,570
Consumer 97,404 95,928
--------- ---------
Total Loans 875,616 872,441
Less: Allowance for Loan Losses 16,052 17,815
--------- ---------
Net Loans 859,564 854,626
Premises and Equipment 21,848 21,989
Real Estate Held for Investment 1,274 1,277
Other Real Estate Owned (OREO) (net of
reserve $601 in 1994 and $490 in 1993) 4,177 4,678
Goodwill and Other Intangibles 3,228 3,407
Other Assets 30,634 25,846
--------- ---------
Total Assets $1,175,583 $1,158,101
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand $ 107,732 $ 110,243
Savings, NOW & Money Market Accounts 574,335 560,570
Other Time: Under $100,000 257,090 262,134
Over $100,000 30,697 34,635
--------- ---------
Total Deposits 969,854 967,582
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 102,339 86,262
Liabilities for Borrowed Money 7,563 5,791
Other Liabilities 7,373 7,439
--------- ---------
Total Liabilities 1,087,129 1,067,074
Stockholders' Equity
Common Stock - $1 Par Value
Authorized 20,000,000 shares
Issued and Outstanding: 1994-4,764,814 shares
1993-4,749,519 shares 4,765 4,749
Preferred Stock - $l Par Value
Authorized 5,000,000 shares
Capital Surplus 48,465 48,301
Undivided Profits 43,251 39,171
Security Valuation Allowance (5,968) 865
Treasury Stock 1994-105,261 shares
1993-105,255 shares (2,059) (2,059)
--------- ---------
Total Shareholders; Equity 88,454 91,027
Total Liabilities & Stockholders' Equity $1,175,583 $1,158,101
========= =========
Fully Diluted Tangible Book Value
per Share of Common Stock $17.99 $18.61
</TABLE>
Vermont Financial Services Corp.
Consolidated Statements of Income
(in thousands)
(unaudited)
<TABLE>
<CAPTION> <C> <C> <C> <C>
3 Months Ended 6 Months Ended
June 30, June 30,
1994 1993 1994 1993
Interest Income
Interest and Fees on Loans $17,537 $17,734 $34,473 $35,751
Interest on Securities Available
for Sale:
Taxable Interest Income 2,623 2,461 5,029 5,042
Tax Exempt Interest Income 148 104 298 215
Interest on Federal Funds Sold 32 36 69 119
Interest on Time Deposits 0 0 1 1
------ ------ ------ ------
Total Interest Income 20,340 20,335 39,870 41,128
Interest Expense
Interest on Deposits 6,967 6,945 13,657 14,285
Interest on Federal Funds Purchased
and Borrowed Money and Securities
Sold Under Agreements to Repurchase 965 901 1,655 1,695
------ ------ ------ ------
Total Interest Expense 7,932 7,846 15,312 15,980
------ ------ ------ ------
Net Interest Income 12,408 12,489 24,558 25,148
Less: Provision for Loan Losses 1,000 1,475 2,000 3,053
------ ------ ------ ------
Net Interest Income After
Provision for Loan Losses 11,408 11,014 22,558 22,095
Other Operating Income
Securities Gains 33 286 53 649
Trust Department Income 686 680 1,445 1,283
Service Charges on Deposit Accounts 1,512 1,151 2,727 2,248
Serviced Mortgage Fees 339 511 850 997
Merchants Discount 504 446 1,052 898
Other Noninterest Income 739 968 1,722 1,866
------ ------ ------ ------
Total Other Operating Income 3,813 4,042 7,849 7,941
Other Operating Expense
Salaries and Wages 4,421 4,604 8,905 9,008
Pension and Other Employee Benefits 1,289 1,442 2,506 2,645
Occupancy of Bank Premises, net 764 821 1,670 1,753
Furniture and Equipment 935 899 1,938 1,819
Organizational Expenses 426 0 500 0
FDIC Assessment 614 539 1,228 1,187
OREO & Collection Expense/Losses, net 690 1,174 1,398 2,699
Other Noninterest Expense 2,152 2,952 5,063 5,632
------ ------ ------ ------
Total Other Operating Expense 11,291 12,431 23,208 24,743
------ ------ ------ ------
Net Overhead (7,478) (8,389)(15,359)(16,802)
------ ------ ------ ------
Income Before Income Taxes 3,930 2,625 7,199 5,293
Applicable Income Tax Expense 1,059 866 2,154 1,811
------ ------ ------ ------
Income Before Cum. Effect of Acctg. Change 2,871 1,759 5,045 3,482
Cum. Effect of Change in Acctg.
for Income Taxes 0 0 0 100
------ ------ ------ ------
Net Income $ 2,871 $ 1,759 $ 5,045 $ 3,582
====== ====== ====== ======
Earnings Per Common Share (Based on
Average Number of Common Shares
Outstanding for the Respective Period)
Net Income --
Primary and Fully Diluted $ 0.61 $ 0.38 $ 1.07 $ 0.76
</TABLE>
VERMONT FINANCIAL SERVICES CORP.
STATEMENTS OF CASH FLOW
(unaudited)
<TABLE>
<CAPTION> <C> <C>
6 Months Ended June 30,
1994 1993
-------- --------
(in thousands)
OPERATING ACTIVITIES
Net Income
Adjustments to reconcile net income to net $ 5,045 $ 3,582
cash provided by operating activities:
Provision for Loan Losses 2,000 3,053
Provision for depreciation 1,329 1,362
Amortization and accretion on securities 596 367
Deferred income taxes 204 (62)
Security (gains) (53) (649)
Proceeds from sale of loans 56,037 85,791
Loans originated for sale (45,923) (85,633)
Losses on OREO 454 1,188
(Increase) in interest receivable
& other assets (1,293) (245)
Decrease (increase) in real estate held
for investment 3 (28)
(Decrease) increase in interest payable and
other liabilities (66) 1,162
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 18,333 9,888
INVESTING ACTIVITIES
Proceeds from sales of securities 22,924 19,545
Proceeds from maturities of securities 27,198 35,815
Purchases of securities (69,762) (52,366)
Proceeds from sales of OREO 3,795 5,857
Net (increase) in loans (20,800) (19,974)
Purchase of premises and equipment (1,188) (1,540)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (37,833) (12,663)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 2,272 (26,126)
Net increase in short-term borrowings 17,849 9,864
Issuance of common stock 180 124
Cash dividends (965) (444)
------- --------
NET CASH PROVIDED BY (USED BY) FINANCING ACTIVITIES 19,336 (16,582)
(DECREASE) IN CASH AND CASH EQUIVALENTS (164) (19,357)
Cash and cash equivalents beginning of period 61,878 80,210
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 61,714 $ 60,853
======== ========
</TABLE>
Non-monetary Transactions:
Transfer of Loans to OREO for the periods ended June 30, 1994
and 1993 totaled $3,748 and $4,795, respectively.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For the Six-Month Periods Ended June 30, 1994 and 1993
Overview
The first half of 1994 resulted in net income of $5,045,000 or
$1.07 per share, versus $3,582,000, or $0.76 per share in the same
period of 1993. Income before taxes improved by $1,906,000 from the
first half of 1993, primarily due to $1.1 million decrease in the
provision for loan losses ($2 million and $3.1 million for the first
halves of 1994 and 1993, respectively), and a $1.3 million reduction
in net OREO and collection expense/losses.
The annualized return on the average total assets was 0.87%
versus 0.65% and the annualized return on average stockholders' equity
was 11.37% versus 8.52% for the first halves of 1994 and 1993,
respectively.
In the opinion of Management, all adjustments which are necessary
to the fair statement of the consolidated financial position of
Vermont Financial Services Corp. (the Company) and the consolidated
results of the Company's operations and cash flow for the interim
periods presented herein are reflected and all such adjustments are of
a normal recurring nature.
Results of Operations
Net interest income of $24.6 million for the first half of 1994
represented a $0.6 million decrease from the same period in 1993. Net
interest margin at 4.67%, represented a 0.33% decrease from the same
six month period in 1993. Nearly all of these decreases were due to a
reduction in charges and fees on loans which, at $2.3 million,
represented a $1.4 million decrease from the same period in 1993.
Mortgage loan related fees accounted for $1.2 million of this decrease
as rising interest rates caused a $40.0 million, or 39% reduction in
mortgage loan originations. Also contributing to this decrease was a
0.21% decrease in the spread between the rate earned on earning assets
and the rate paid on interest-bearing liabilities compared to the
prior year. Part of these decreases was offset by the earnings
associated with a $71.0 million increase in average earning assets for
the first six months of 1994 as compared to the same period in 1993.
Other operating income (net of security gains) for the six month
periods increased $504,000 due to an increase in service charges on
deposits of $479,000. Serviced mortgage fees decreased $147,000
during the first half of 1994 as compared to the first six months of
1993 due to a one time adjustment of $239,000. At June 30, 1994, the
serviced mortgage portfolio totalled $466.8 million and generates
approximately $170,000 of servicing income on a monthly basis.
Other operating expenses decreased $1.5 million or 6.1%, during
the first six months of 1994 as compared to the same 1993 period.
Salaries and benefits were $103,000 lower, net OREO and collection
expense/losses decreased $1.3 million, and other non interest expense
decreased $569,000 from the first half of 1993. These represented
relative decreases of 1%, 48%, and 10% respectively. The reduction in
net OREO and collection expenses was due to a substantial reduction in
nonperforming assets in part as a result of an auction of other real
estate held during the third quarter of 1993. This decrease is net of
a $364,000 loss resulting from Vermont National Bank's (VNB's)
participation in a second auction of OREO property held in June, 1994.
At this auction, VNB sold 15 properties with a book value of $702,000.
Partially offsetting these reductions was $0.5 million in costs
associated with the merger with West Mass Bankshares, which were
expensed as incurred. See also, "Recent Developments."
In the form 10-Q for the first quarter of 1994 management
reported that the FDIC insurance rate for VNB would drop to $0.23 per
$100 of deposits in the third quarter of 1994. Despite a favorable
supervisory CAMEL rating and the fact that VNB was well capitalized,
the FDIC maintained a $0.26 insurance rate for VNB for the remainder
of 1994. The rate is currently under appeal by the Bank.
Loan Quality
Nonperforming assets (nonaccrual loans, restructured loans and
OREO) were reduced from $32.0 million at December 31, 1993 to $24.7
million on June 30, 1994 due to nonaccrual and restructured loans
decreasing $6.7 million to $20.6 million. OREO decreased from year
end by $0.6 million to $4.1 million. As of June 30, 1994,
nonperforming assets equalled 2.8% of total loans plus OREO, down from
3.6% at year end 1993. Loans 90 or more days past due and still
accruing interest were $1.8 million at June 30, 1994. This represents
$0.3 million increase over the year end level of $1.5 million.
The allowance for loan losses was $16.1 million at June 30, 1994,
equal to 1.8% of total loans outstanding, 78.2% of nonperforming
(nonaccrual and restructured) loans and 65.2% of nonperforming assets.
These compare to year end levels of 2.2%, 65.3%, and 55.7%
respectively.
Financial Condition
Loans
Total loans at June 30, 1994 were $875.6 million, up $3.2 million
from the December 31, 1993 balance. Commercial loans increased $1.9
million and real estate loans decreased $0.2 million while consumer
loans increased $1.5 million.
Securities Available for Sale
Securities available for sale increased $8.7 million from the
year end level of $184.4 million. U.S. Treasury securities and
Mortgage Backed securities decreased $2.7 million and $17.9 million
respectively while investments in U.S. Government Agency securities
increased $33.0 million. Rising interest rates caused a shift from an
unrealized gain of $1.3 million in the investment portfolio at year
end 1993, to an unrealized loss of $9.0 million at June 30, 1994.
This partially offset the increase in the investment portfolio.
Deposits
At June 30, 1994, total deposits were $969.9 million, an increase
of $2.3 million, or 0.2% from the December 31, 1993 level. Demand
deposits decreased $2.5 million during this period. Savings, Now, and
Money Market Accounts increased $13.8 million during the six months.
Other time deposits (CDs) decreased by $9.0 million, with a $3.9
million decrease in CDs over $100,000 and a $5.1 million decrease in
CDs under $100,000.
Compared to June 30, 1993 balances, assets, equity, loans and
deposits increased 5.70%, 1.8%, 3.3%, and 5.9% respectively. Nearly
all of the deposit growth was due to a $56.9 million increase in
Savings, Now, and Money Market balances.
Capital Resources
Stockholders' equity decreased from $91.0 million at year end to
$88.5 million at June 30, 1994. Equity as a percent of total assets
decreased from 7.90% at year end 1993 to 7.52% at June 30, 1994. This
decrease was a result of the $6.8 million charge, net of tax, to the
security valuation allowance due to the decline in market value of the
securities available for sale portfolio. As the current risk based
Capital regulations exclude unrealized gains and losses from the
definition of capital, Tier I and Total Risk Based Capital ratios
increased to 11.2% and 12.5% from their year end levels of 10.8% and
12.1%, respectively. The above ratios are in excess of all regulatory
requirements and place the Company in the "well capitalized"
regulatory classification.
Recent Developments
Vermont Financial Services Corp.'s (VFSC) acquisition of West
Mass Bankshares, Inc. (WMBS) was completed on June 14, 1994 and all
information reflected in the consolidated financial statements herein,
reflect this transaction. The acquisition was effected as a pooling
of interests with an exchange of .9861 shares of VFSC stock for each
share of WMBS stock. As of July 20, 1994, there were 115,800
dissenting WMBS shares. Although management does not know the final
outcome, the attached financial statements assume an exchange at .9861
per share for all shares.
No additions to premises and equipment are expected to exceed
$500,000. All additions will be funded through the operations of the
Company.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
NONE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly cased this report to be signed on its behalf
by the undersigned thereunto duly authorized.
VERMONT FINANCIAL SERVICES CORP.
Dated August 8, 1994
/s________________________________
John D. Hashagen, Jr.
Dated August 8, 1994
/s________________________________
Richard O. Madden
