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 September 30, 1995, 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 October 31, 1995 4,781,932
Part I. FINANCIAL INFORMATION
VERMONT FINANCIAL SERVICES CORP.
Condensed Statement of Condition
September 30, 1995 and December 31, 1994
(in thousands,except per share data)
(unaudited)
September 30, December 31,
ASSETS 1995 1994
<TABLE>
<CAPTION> <C> <C> <C> <C>
Cash and Due from Banks $ 49,532 $ 57,002
Interest Bearing Balances with Banks 39 105
Securities Available for Sale:
U.S. Treasury and U.S. Government Agencies 132,499 99,815
Mortgage Backed Securities 56,891 50,668
State and Municipal 10,309 8,238
Other 15,384 15,144
--------- --------
Total Securities Available for Sale 215,083 173,865
Federal Funds Sold 12,000 16,000
Loans:
Commercial 195,704 207,299
Commercial Real Estate 203,689 211,218
Residential Real Estate 412,203 389,033
Consumer 100,958 103,953
--------- --------
Total Loans 912,554 911,503
Less: Allowance for Loan Losses 15,861 16,236
--------- --------
Net Loans 896,693 895,267
Premises and Equipment 20,659 21,298
Real Estate Held for Investment 1,311 1,272
Other Real Estate Owned (OREO) - net of
reserve of $230 in 1995 and $710 in 1994 3,435 4,487
Goodwill and Other Intangibles 2,848 3,136
Other Assets 28,023 32,989
--------- ---------
Total Assets $1,229,623 $1,205,421
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 117,065 $ 117,411
Savings, NOW & Money Market Accounts 605,262 624,038
Other Time: Under $100,000 261,123 243,488
Over $100,000 36,302 27,932
--------- ---------
Total Deposits 1,019,752 1,012,869
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 62,016 71,163
Liabilities for Borrowed Money 31,916 22,725
Other Liabilities 8,884 8,207
--------- ---------
Total Liabilities 1,122,568 1,114,964
Stockholders' Equity
Common Stock - $1 Par Value
Authorized 20,000,000 shares
Issued : 1995--4,877,917 shares
1994--4,790,479 shares 4,878 4,790
Preferred Stock - $1 Par Value
Authorized 5,000,000 shares
Capital Surplus 49,361 48,715
Undivided Profits 56,631 48,615
Security Valuation Allowance (1,845) (9,604)
Treasury Stock 1995--100,743 shares
1994--105,260 shares (1,970) (2,059)
--------- ---------
Total Stockholders' Equity 107,055 90,457
Total Liabilities and Stockholders' Equity $1,229,623 $ 1,205,421
========= =========
Fully Diluted Tangible Book Value
per Share of Common Stock $21.54 $18.36
</TABLE>
Vermont Financial Services Corp.
Condensed Statement of Income
(in thousands,except per share data)
(unaudited)
Three Months Ended Nine months Ended
September 30, September 30,
1995 1994 1995 1994
<TABLE>
<CAPTION> <C> <C><C> <C> <C> <C><C> <C>
Interest Income
Interest and Fees on Loans $21,169 $18,813 $62,502 $53,367
Interest on Securities Available for Sale:
Taxable Interest Income 2,902 2,747 8,203 7,776
Tax Exempt Interest Income 112 106 323 323
Interest on Short Term Investments 357 86 587 156
Total Interest Income 24,540 21,752 71,615 61,622
Interest Expense
Interest on Deposits 9,468 7,282 27,113 20,939
Interest on Federal Funds Purchased,
Borrowed Money and Securities Sold
under Agreements to Repurchase 1,364 1,407 3,720 3,062
Total Interest Expense 10,832 8,689 30,833 24,001
Net Interest Income 13,708 13,063 40,782 37,621
Less: Provision for Loan Losses 1,000 1,000 3,000 3,000
Interest Income After Provison
for Loan Losses 12,708 12,063 37,782 34,621
Other Operating Income:
Securities Gains 3 3 79 56
Trust Department Income 811 721 2,353 2,166
Service Charges on Deposit Accounts 1,432 1,348 4,222 4,075
Serviced Mortgage Fees 449 381 1,463 1,231
Credit Card Merchant Income 820 830 2,001 1,882
Other Noninterest Income 896 1,027 2,846 2,749
Total Other Operating Income 4,411 4,310 12,964 12,159
Other Operating Expense:
Salaries and Wages 4,444 4,427 13,063 13,332
Pension and Other Employee Benefits 1,167 937 3,437 3,443
Occupancy of Bank Premises, net 829 822 2,515 2,492
Furniture and Equipment 1,035 897 3,148 2,835
Organizational Expenses 20 51 20 551
FDIC Assessment (69) 602 1,065 1,830
OREO & Collection Expense/ Losses, net 414 447 1,716 1,845
Other Noninterest Expense 3,204 3,422 9,583 8,485
Total Other Operating Expense 11,044 11,605 34,547 34,813
Net Overhead (6,633) (7,295) (21,583) (22,654)
Income Before Income Taxes 6,075 4,768 16,199 11,967
Applicable Income Tax Expense 2,049 1,492 5,302 3,646
Net Income $ 4,026 $ 3,276 $ 10,897 $ 8,321
======== ======== ======== ========
Earnings Per Common Share (Based on
Average Number of Common Shares
Outstanding for the Respective Period)
Net Income- Primary and Fully Diluted $ 0.83 $ 0.69 $ 2.27 $ 1.76
</TABLE>
VERMONT FINANCIAL SERVICES CORP.
STATEMENTS OF CASH FLOW
(unaudited)
9 months ended September 30,
1995 1994
------ ------
OPERATING ACTIVITIES (in thousands)
<TABLE>
<CAPTION> <C> <C> <C> <C>
Net Income $ 10,897 $ 8,321
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for Loan Losses 3,000 3,000
Provision for depreciation 2,393 2,034
Amortization and accretion on securities 455 769
Deferred income taxes 768 629
Security (gains) (76) (56)
Proceeds from sale of loans 25,410 75,106
Loans originated for sale (23,967) (66,496)
Losses on OREO 565 583
Decrease (increase) in interest receivable
and other assets 512 (1,274)
(Increase) decrease in real estate held
for investment (39) 9
Increase (decrease) in interest payable
and other liabilities 677 (525)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 20,595 22,100
INVESTING ACTIVITIES
Proceeds from sales of securities 16,549 27,127
Proceeds from maturities of securities 5,371 37,575
Purchases of securities (51,784) (77,641)
Proceeds from sales of OREO 3,192 5,243
Purchases of loans (1,441) 0
Net (increase) in loans (7,133) (65,376)
Purchase of premises and equipment (1,754) (1,544)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (37,000) (74,616)
FINANCING ACTIVITIES
Net increase in deposits 6,883 46,300
Net increase in short-term borrowings 44 12,692
Issuance of common stock 822 401
Cash dividends (2,880) (1,648)
--------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 4,869 57,745
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (11,536) 5,229
Cash and cash equivalents at beginning
of period 73,107 61,878
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 61,571 $ 67,107
========== ==========
Non-monetary Transactions:
Transfer of Loans to OREO for the periods ended September 30, 1995
and 1994 totaled $2,705 and $5,612, respectively.
</TABLE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
For the Nine-Month Periods Ended September 30, 1995 and 1994
Overview
The first nine months of 1995 resulted in net income of $10,897,000 or $2.27
per share, versus $8,321,000, or $1.76 per share in the same period of 1994.
Income before taxes improved by $4,232,000 from 1994's first nine months,
primarily due to a $3,943,000 increase in net revenue, a combination of net
interest income plus other operating income, net of securities gains.
The annualized return on average total assets was 1.22% versus 0.94%
and the annualized return on average stockholders' equity was 14.76% versus
12.42% for the nine months of 1995 and 1994, 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 reflect-
ed and all such adjustments are of a normal recurring nature.
Results of Operations
Net interest income of $40.8 million for the nine months ended September 30,
1995 represented a $3.2 million increase from the same period in 1994. The net
interest margin was 4.99% in 1995, up from 4.70% a year earlier. The increase
in net interest income was due to a 22 basis point increase in net interest
spread and a $25.3 million increase in average earning assets versus a smaller
$12.0 million increase in average financial resources.
At September 30, 1995, the mortgage servicing portfolio totaled $421.3
million compared to $459.2 million at year end. This portfolio generates
approximately $150,000 of servicing income on a monthly basis.
Net overhead for the first nine months of 1995 decreased $1.1 million or
4.7%, over the same 1994 period. This was due to a $0.8 million improvement
in other operating income, and a $0.3 million decrease in other operating
expense.
The majority of the increase in other operating income (net of securities
gains) was due to increases in Trust Department income, service charges on de-
posit accounts and serviced mortgage fees which were up $187,000, $147,000 and
$232,000, respectively
Other operating expenses decreased $266,000 during the period ended Septem-
ber 30, 1995 as compared to the same period in 1994. Decreases in merger rela-
ted expenses and FDIC insurance of $531,000 and $765,000, respectively, more
than offset $1,098,000 increase in other noninterest expense. The decrease in
FDIC insurance was due to a lowering of the insurance rate from 0.23% to 0.04%
in the third quarter of 1995 which was applied effective June 1, 1995. The in-
crease in other noninterest expense was primarily due to an unusual expense
credit of $584,000 received in the second quarter of 1994 related to the
receipt of life insurance proceeds.
Asset Quality
Nonperforming assets (nonaccrual loans, restructured loans and OREO) were
reduced from $21.3 million on December 31, 1994 to $16.5 million on Septem-
ber 30, 1995 due to nonaccrual loans and OREO decreasing $3.8 million, and
$1.1 million, respectively. As of September 30, 1995 nonperforming assets
equaled 1.8% of total loans plus OREO, down from 2.3% at year end 1994.
Loans 90 or more days past due and still accruing interest were $2.7 million
at September 30, 1995, up from $1.4 million at December 31, 1994.
The Allowance for Loan Losses was $15.9 million as of quarter end, equal
to 1.7% of loans outstanding, 121.6% of nonperforming (nonaccrual and rest
ructured) loans and 96.3% of total nonperforming assets. These compare to
the year end 1994 levels of 1.8%, 96.7% and 76.3%. respectively.
Effective January 1, 1995, the Company adopted, prospectively, Statement of
Financial Accounting Standards (SPAS) NO. 114, "Accounting by Creditors for
Impairment of a Loan" as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosure." These standards re-
quire that loans be classified and accounted for as impaired loans when it is
probably that the Company will be unable to collect all principal and interest
due on a loan in accordance with the loan's original contractual terms or will
collect them in a time frame which reduces the present value of the expected
cash flows from the repayment of the loan. For purposes of applying the stand-
ards, impaired loans have been defined as all nonaccrual loans and commercial
classified assets in excess of $250,000.
Impaired loans are valued based on the fair value of the related collateral in
the case of a collateral-dependent loan and, for all other impaired loans,
based on the present value of expected future cash flows, using the interest
rate in effect at the time the loan became impaired. Impairment exists when
the recorded investment in a loan exceeds the value of the loan measured using
the above-mentioned techniques. Such impairment is recognized as a valuation
reserve, which is included as a part of the Company's overall reserve for
credit losses. The Company recognizes interest income on impaired loans consis-
tent with its nonaccrual policy. When loans are placed on nonaccrual status,
the related interest receivable is reversed against current period interest
income. Interest payments received on nonaccrual status are applied as a re-
duction of the principal. For loans not in nonaccrual status, the Company rec-
ognizes principal and interest, in accordance with the original contractual
terms.
Adoption of the standards did not have a material effect on the Company's fin-
ancial position or results of operations and did not result in any additional
provision for credit losses as of January 1, 1995. At September 30, 1995,
loans for which impairment has been recognized in accordance with SFAS No. 114
totaled $35.4 million, of which $33.8 million related to loans with no specific
valuation reserve and $1.6 million related to loans with a specific valuation
reserve of $1.4 million.
Financial Condition
Loans
Total loans at September 30, 1995 were $912.6 million, up $1.1 million from
the December 31, 1994 balance. Decreases in commercial, commercial real
estate and consumer loans of $11.6 million, $7.5 million and $3.0 million,
respectively, were more than offset by a $23.2 million increase in resident-
ial real estate loans.
Securities Available for Sale
The amortized cost of securities available for sale increased $29.4 million.
This increase is primarily due to a $8.9 million increase in U.S. Treasury
securities and a $15.9 million increase in U.S. Government Agency securities.
These increases were supplemented by increases in Mortgage Backed, State and
Municipal and Other securities of $2.8 million, $0.8 million, and $1.2 million,
respectively. Signs of a slowing economy and a resulting decrease in interest
rates caused a reduction in the unrealized loss of $14.6 million at year end
1994 to $2.8 million at September 30, 1995.
Deposits
At September 30, 1995, total deposits were $1,019.8, an increase of $6.9 mill-
ion, or 0.7% from the December 31, 1994 level. Demand deposits decreased $0.3
million during this period due while Savings, Now and Money Market Accounts
decreased $18.8 million. Other time deposits (CDs) increased by $26.0 million,
with a $8.4 million increase in CDs over $100,000 and a $17.6 million in-
crease in CD's under $100,000.
Capital Resources
Stockholder's Equity increased from $90.5 million at year end to $107.1 mill-
ion at September 30, 1995. Equity as a percent of total assets increased from
7.50% at year end 1994 to 8.71% at september 30, 1995. This increase was a
result of a $7.8 million reduction in the Security Valuation Allowance assoc-
iated with the securities available for sale portfolio and $8.0 million of
earnings retained by the Company. As current risk based capital regulations
exclude unrealized gains and losses from the defenition of Capital, Tier 1
and Total Risk Based Capital ratios increased to 13.03% and 14.29% from their
year end levels of 11.77% and 13.03%, respectively. The above ratios are in
excess of all regulatory limits and place the Company in the the "well capital-
ized" regulatory classification.
Recent Developments
During the third quarter of 1995, Philip Drumheller of Shelburne, Vermont, was
elected to the Board of Directors of Vermont Financial Services Corp. and
Vermont National Bank. Mr. Drumheller is President and Chief Executive Officer
of The Lane Press, Inc., a successful printing company in Vermont's Chittenden
County.
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 122, "Accounting for Mortgage Serv-
icing Rights", which amends FASB Statement No. 65, "Accounting for Certain
Mortgage Banking Activities" and applies to fiscal years beginning after
December 15, 1995. SFAS No. 122 requires a mortgage banking enterprise to
recognize as separate assets rights to service mortgage loans for others
however those rights are acquired, either by acquisition or origination. The
Company plans to adopt this statement effective January 1, 1996 with an esti-
mated positive income statement effect equal to 1.25% of total loans sold.
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 caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERMONT FINANCIAL SERVICES CORP.
/s/ John D. Hashagen, Jr.
Dated November 8, 1995 ________________________________________
John D. Hashagen, Jr.
/s/ Richard O. Madden
Dated November 8, 1995 ______________________________________
Richard O. Madden
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<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 49532
<INT-BEARING-DEPOSITS> 39
<FED-FUNDS-SOLD> 12000
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<DEPOSITS> 1019752
<SHORT-TERM> 29199
<LIABILITIES-OTHER> 8884
<LONG-TERM> 11700
<COMMON> 4878
0
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<INTEREST-EXPENSE> 30833
<INTEREST-INCOME-NET> 40782
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<INCOME-PRETAX> 16199
<INCOME-PRE-EXTRAORDINARY> 16199
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</TABLE>
