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, 1996,
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, 1996 4,702,686
Part I. FINANCIAL INFORMATION
VERMONT FINANCIAL SERVICES CORP.
Condensed Statements of Condition
September 30, 1996 and December 31, 1995
($ in thousands,except per share data)
(unaudited)
September 30, December 31,
ASSETS 1996 1995
Cash and Due from Banks $ 58,178 $ 53,834
Interest Bearing Balances with Banks 66 62
Securities Available
U.S. Treasury and U.S. Government Agencies 173,508 145,872
Mortgage Backed Securities 67,785 75,753
State and Municipal 10,734 10,342
Other 11,228 17,715
--------- --------
Total Securities Available for Sale 263,255 249,682
Federal Funds Sold 400 8,925
Loans:
Commercial 182,484 170,162
Commercial Real Estate 199,621 207,049
Residential Real Estate 429,798 415,468
Consumer 95,326 100,791
--------- --------
Total Loans 907,229 893,470
Less: Allowance for Loan Losses 14,193 14,761
--------- ---------
Net Loans 893,036 878,709
Premises and Equipment 21,782 20,366
Real Estate Held for Investment 1,373 1,309
Other Real Estate Owned (OREO) - net of
reserve of $58 in 1996 and $517 in 1995 1,867 2,977
Goodwill and Other Intangibles 6,141 2,747
Other Assets 30,547 28,058
--------- --------
Total Assets $ 1,276,645 $ 1,246,669
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 145,709 $ 137,504
Savings, NOW & Money Market Accounts 624,002 594,580
Other Time: Under $100,000 266,130 263,915
Over $100,000 38,473 37,958
--------- ---------
Total Deposits 1,074,314 1,033,957
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 65,562 79,773
Liabilities for Borrowed Money 12,175 11,892
Other Liabilities 9,140 9,214
--------- --------
Total Liabilities 1,161,191 1,134,836
Stockholders' Equity
Common Stock - $1 Par Value
Authorized 20,000,000 shares
Issued : 1996--4,885,773 shares
1995--4,878,954 shares 4,887 4,883
Preferred Stock - $1 Par Value
Authorized 5,000,000 shares
Capital Surplus 49,526 49,427
Undivided Profits 67,893 59,464
Security Valuation Allowance (2,230) 9
Treasury Stock 1996-- 110,552 shares
1995-- 103,238 shares (4,622) (1,950)
--------- ---------
Total Stockholders' Equity 115,454 111,833
Total Liabilities and Stockholders' $ 1,276,645 $ 1,246,669
Equity ========= =========
Fully Diluted Tangible Book Value
per Share of Common Stock $22.87 $22.47
Vermont Financial Services Corp.
Condensed Statements of Income
(in thousands,except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Interest Income
Interest and Fees on Loans $ 20,250 $ 21,169 $ 61,027 $ 62,502
Interest on Securities
Available for Sale:
Taxable Interest Income 3,853 2,902 11,120 8,203
Tax Exempt Interest Income 124 112 362 323
Interest on Short Term Investments 193 357 692 587
Total Interest Income 24,420 24,540 73,201 71,615
Interest Expense
Interest on Deposits 9,231 9,468 27,687 27,113
Interest on Federal Funds Purchased,
Borrowed Money and Securities under
Agreement to Repurchase 1,156 1,364 3,290 3,720
Total Interest Expense 10,387 10,832 30,977 30,833
Net Interest Income 14,033 13,708 42,224 40,782
Less: Provision for Loan Losses 800 1,000 2,600 3,000
Net Interest Income After
Provision for Loan Losses 13,233 12,708 39,624 37,782
Other Operating Income
Securities Gains 3 3 11 79
Trust Department Income 1,000 811 2,747 2,353
Service Charges on Deposit Accounts 1,477 1,432 4,583 4,222
Serviced Mortgage Fees 429 449 1,262 1,463
Credit Card Merchant Income 933 820 2,241 2,001
Other Noninterest Income 993 896 2,940 2,846
Total Other Operating Income 4,835 4,411 13,784 12,964
Other Operating Expense
Salaries and Wages 4,747 4,444 13,797 13,063
Pension and Other Employee Benefits 1,334 1,167 4,033 3,437
Occupancy of Bank Premises, net 828 829 2,572 2,515
Furniture and Equipment 986 1,035 2,993 3,148
FDIC Assessment 1 (69) 4 1,065
Credit Card Merchant Expense 635 512 1,453 1,235
OREO & Collection Expense/Losses, net 235 414 1,231 1,716
Other Noninterest Expense 3,039 2,712 8,871 8,368
Total Other Operating Expense 11,805 11,044 34,954 34,547
Net Overhead (6,970) (6,633) (21,170) (21,583)
Income Before Income Taxes 6,263 6,075 18,454 16,199
Applicable Income Tax Expense 2,096 2,049 6,337 5,302
Net Income $ 4,167 $ 4,026 $ 12,117 $ 10,897
======== ======== ======== ========
Average Fully Diluted Shares
Outstanding 4,806,362 4,835,501 4,835,044 4,799,898
Earnings Per Common Share (Based on
Average Number of Common Shares
Outstanding for the Respective Period)
Net Income - Primary
and Fully Diluted $ 0.87 $ 0.83 $ 2.51 $ 2.27
VERMONT FINANCIAL SERVICES CORP.
CONDENSED STATEMENTS OF CASH FLOW
(unaudited)
9 Months Ended September 30,
1996 1995
------ ------
OPERATING ACTIVITIES (in thousands)
Net Income $12,117 $10,897
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for Loan Losses 2,600 3,000
Provision for depreciation 2,259 2,393
Amortization and accretion on securities 582 455
Deferred income taxes 484 768
Security (gains) (11) (76)
Proceeds from sale of loans 46,832 25,410
Loans originated for sale (47,071) (23,967)
Losses on OREO 312 565
(Increase) Decrease in interest receivable
and other assets (5,155) 512
(Increase) in real estate held
for investment (64) (39)
(Decrease) Increase in interest payable
and other liabilities (74) 677
------- -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 12,811 20,595
INVESTING ACTIVITIES
Proceeds from sales of securities 17,478 16,549
Proceeds from maturities of securities 40,211 5,371
Purchases of securities (75,283) (51,784)
Proceeds from sales of OREO 3,413 3,192
Purchases of loans (2,031) (1,441)
Net (Increase) in loans (17,272) (7,133)
Purchase of premises and equipment (3,675) (1,754)
-------- --------
NET CASH (USED BY) INVESTING
ACTIVITIES (37,159) (37,000)
FINANCING ACTIVITIES
Net Increase in deposits 40,357 6,883
Net (Decrease) Increase in
short-term borrowings (13,928) 44
Issuance of common stock 109 822
Purchase of Treasury Stock (2,678) 0
Cash dividends (3,689) (2,880)
-------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 20,171 4,869
(DECREASE) IN CASH AND CASH EQUIVALENTS (4,177) (11,536)
Cash and cash equivalents at beginning
of period 62,821 73,107
-------- --------
CASH AND CASH EQUIVALENTS
AT THE END OF PERIOD $58,644 $61,571
========= =========
Non-monetary Transactions:
Transfer of Loans to OREO for the periods ended September 30, 1996
and 1995 totaled $2,615 and $2,705, respectively.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the Nine-Month Periods Ended September 30, 1996 and 1995
Overview
The first nine months of 1996 resulted in net income of
$12,117,000 or $2.51 per share, versus $10,897,000, or $2.27 per share
in the same period of 1995. Income before taxes improved by $2,255,000
from 1995's first nine months, primarily due to a $2,330,000, or 4.3%
increase in net net revenue, a combination of net interest income plus
other operating income, net of securities gains.
The annualized return on average total assets was 1.29% versus
1.22% and the annualized return on average stockholders' equity was
14.18% versus 14.20% for the first nine months of 1996 and 1995,
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 $42.2 million for the nine months ended
September 30, 1996 represented a $1.4 million increase from the same
period in 1995. The net interest margin was 4.94% in 1996, down from
4.99% a year earlier. The increase in net interest income was due to
a $44.4 million increase in average earning assets and financial
resources and a $288,000 increase in charges and fees on loans as
mortgage loan originations increased $12.7 million or 16.3% over
the prior year.
At September 30, 1996, the mortgage servicing portfolio totaled
$433.3 million compared to $420.6 million at year end. This
portfolio generates approximately $143,000 of servicing income on a
monthly basis.
Net overhead for the first nine months of 1996 decreased
$481,000, or 2.2%, over the same 1995 period. This was due to a
$888,000 improvement in other operating income net of a $407,000
increase in other operating expense.
Other operating income (net of securities gains) increased
$888,000.
Trust department income, service charges on deposits and credit
card merchant income increased $394,000, $361,000 and $240,000,
respectively. Partially offsetting these improvements was a $201,000
decrease in serviced mortgage fees. This decrease was partially due to
the Company's sale of the right to service $29.0 million of mortgage
loans on second home properties during the second quarter of 1995 at a
gain of $170,000.
Other operating expenses increased $407,000, or 1.2%, from
$34,547,000 during the first nine months of 1995. Furniture and
equipment expenses decreased $98,000 and FDIC insurance expense
decreased $1,059,000. OREO and Collection Expense/Losses decreased
$485,000, or 28%, as nonperforming assets decreased 33% from their
balances at September 30, 1995. These improvements were more than
offset by a $1,330,000 increase in salaries and benefits, a $218,000
increase in credit card merchant expense and a $503,000 increase in
other non-interest expense.
Asset Quality
Nonperforming assets (nonaccrual loans, restructured loans and
OREO) were reduced from $15.0 million on December 31, 1995 to $11.0
million on September 30, 1996 due to nonaccrual loans and OREO
decreasing $2.8 million, and $1.1 million, respectively. As of
September 30, 1996 nonperforming assets equaled 1.2% of total loans
plus OREO, down from 1.7% at year end 1995. Loans 90 or more days past
due and still accruing interest were $1.7 million, down slightly from
$2.0 million at December 31, 1995.
The Allowance for Loan Losses was $14.2 million as of quarter
end, equal to 1.6% of loans outstanding, 155.8% of nonperforming
(nonaccrual and restructured) loans and 129.3% of total nonperforming
assets. These compare to the year end 1995 levels of 1.7%, 122.9% and
98.5%, respectively.
At September 30, 1996 loans for which impairment has been
recognized in accordance with SFAS NO. 114 totalled $29.6 million, of
which $28.3 million pertained to loans with no specific valuation
reserve and $1.3 million pertained to loans with a specific valuation
reserve of $0.5 million. For the nine months ended September 30,
1996 the average investment in impaired loans was $33.0 million.
Financial Condition
Loans
Total loans at September 30, 1996 were $907.2 million, up $13.8
million from the December 31, 1995 balance. Decreases in commercial
real estate and consumer loans of $7.4 million and $5.4 million,
respectively, were more than offset by a $12.3 million increase in
commercial loans and a $14.3 increase in residential real estate
loans.
Securities Available for Sale
The amortized cost of securities available for sale increased
$17.0 million. U.S Agency securities increased $30.0 million, U.S.
Treasuries and State and Municipal securities each increased $0.4
million. These increases were partially offset by decreases in
Mortgage Backed and other securities of $7.3 million and $6.5
million, respectively. A rise in interest rates caused a shift from
the unrealized gain of $.01 million at year end 1995 to a $3.44
million unrealized loss at September 30,1996.
Deposits
At September 30, 1996, total deposits were $1,074.3 million, an
increase of $40.4 million, or 3.9%, from the December 31, 1995 level.
Growth occurred in all deposit categories during the nine months as
follows:
Incr.(Decr)
(in millions)
------------
Demand $ 8.2
Savings, NOW & Money Market Accounts 29.5
Other Time: Under $100,000 2.2
Over $100,000 0.5
----------
Total $40.4
Compared to September 30, 1995 balances, assets, deposits and
equity increased 3.8%, 5.4% and 7.8% respectively. Loans decreased
0.6% or $5.3 million from September 30, 1995 to 1996. The growth in
deposits was primarily the result of a $28.6 million increase in
demand deposits and a $18.7 million increase in savings, NOW and money
market deposit account balances.
Capital Resources
Stockholders' equity increased from $111.8 million at year end to
$115.5 million at September 30, 1996. Equity as a percent of total
assets increased from 8.97% at year end 1995 to 9.04% at September 30,
1996. This increase was a result of $8.4 million in earnings that were
retained by the company net of a $2.2 million increase in the Security
Valuation Allowance associated with the securities available for sale
portfolio and a $2.7 million increase in treasury stock as the company
undertook its stock buyback program (see Recent Developments).
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 13.79% and 15.05% from their year
end levels of 13.44% and 14.70%, respectively. The above ratios are
in excess of all regulatory requirements and place the Company in the
"well capitalized" regulatory classification.
Recent Developments
The Company plans to replace Vermont National Bank's on-line
teller system during the fourth quarter of 1996 at an estimated total
cost of $2.9 million. No other additions to premises and equipment are
expected to exceed $500,000. All additions will be funded through
operation of the Company.
The company announced during the second quarter that its Board of
Directors approved the repurchase of up to 3%, or 140,000 shares of
its outstanding common stock. This is a continuation of the repurchase
program instituted in 1987 under which shares are repurchased to cover
unexercised options that are expected to be exercised. These shares
are held in treasury pending reissuance when options are exercised.
The repurchase program will be accomplished through a series of
transactions on the open market. As of September 30, 1996, 93,000
shares had been repurchased under this program.
The Company completed its purchase of the Green Mountain Bank
Trust Department from Arrow Financial Corporation as of August 31,
1996. This transaction is expected to increase annual trust revenues
to over $5 million and increase earnings per share by $0.03 per
quarter beginning with the fourth quarter of 1996.
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.
Dated November 4, 1996 /s/ John D. Hashagen, Jr.
________________________________
John D. Hashagen, Jr.
President and Chief Executive Officer
Dated November 4, 1996 /s/ Richard O. Madden
________________________________
Richard O. Madden
Executive Vice President, Treasurer
and Secretary
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