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, 1997, 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, 1997 6,560,320
Item 1. FINANCIAL INFORMATION
VERMONT FINANCIAL SERVICES CORP.
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996
($ in thousands, except per share data)
(unaudited)
June 30, December 31,
ASSETS 1997 1996
Cash and Due from Banks $ 95,895 $ 61,962
Interest Bearing Balances with Banks 5,868 60
Securities Available for Sale:
U.S. Treasury and U.S. Government Agencies 249,592 194,727
Mortgage Backed Securities 282,260 67,055
State and Municipal 10,976 10,558
Other 22,993 18,780
Total Securities Available for Sale 565,821 291,120
Federal Funds Sold 2,975 1,775
Loans:
Commercial 181,550 181,372
Commercial Real Estate 277,069 199,640
Residential Real Estate 750,025 432,561
Consumer 136,141 96,863
Total Loans 1,344,785 910,436
Less: Allowance for Loan Losses 21,408 13,647
Net Loans 1,323,377 896,789
Premises and Equipment 43,480 23,618
Real Estate Held for Investment 1,728 1,360
Other Real Estate Owned (OREO) - net of
reserve of $1,590 in 1997 and $87 in 1996 4,404 697
Goodwill & Other Intangibles 60,786 6,327
Other Assets 49,526 29,273
Total Assets $2,153,860 $1,312,981
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand 216,098 162,887
Savings, NOW & Money Market Accounts 872,193 620,111
Other Time: Under $100,000 555,729 261,427
Over $100,000 66,156 38,833
Total Deposits 1,710,176 1,083,258
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 60,565 77,672
Liabilities for Borrowed Money 131,563 23,169
Other Liabilities 51,595 9,165
Total Liabilities 1,953,899 1,193,264
Stockholders' Equity
Common Stock - $1 Par Value
Authorized 20,000,000 shares
Issued : 1997 - 6,651,613
1996 - 4,892,442 6,652 4,892
Preferred Stock - $1 Par Value
Authorized 5,000,000 shares
Capital Surplus 120,826 49,590
Undivided Profits 77,290 71,151
Security Valuation Allowance (737) (1,029)
Treasury Stock,at cost - 1997 - 149,656
1996 - 180,021 (4,070) (4,887)
Total Stockholders' Equity 199,961 119,717
Total Liabilities and Stockholders' Equity $2,153,860 $1,312,981
Fully Diluted Tangible Book Value
per Share of Common Stock $21.08 $23.73
Vermont Financial Services Corp.
Consolidated Statements of Income
(in thousands)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Interest Income:
Interest and Fees on Loans $20,345 $20,386 $40,072 $40,777
Interest on Securities
Available for Sale:
Taxable Interest Income 4,808 3,729 9,240 7,267
Tax Exempt Income 28 118 179 238
Interest on Fed Funds Sold 158 243 224 499
Total Interest Income 25,339 24,476 49,715 48,781
Interest Expense:
Interst on Deposits 9,350 9,087 18,318 18,456
Interest on Fed Funds Purchased,
Borrowed Money and Securities
Sold under Agreements to Repurchase 1,337 1,073 2,460 2,134
Total Interest Expense 10,687 10,160 20,778 20,590
Net Interest Income 14,652 14,316 28,937 28,191
Less: Provision for Loan Losses 700 900 1,450 1,800
Net Interest Income After
Provision for Loan Losses 13,952 13,416 27,487 26,391
Other Operating Income
Securities Gains 0 0 6 8
Trust Department Income 1,381 871 2,771 1,747
Service Charges on Deposit Accounts 1,623 1,515 3,131 3,106
Serviced Mortgage Fees 304 280 570 583
Credit Card Merchant Income 822 656 1,672 1,308
Other Noninterest Income 1,394 1,110 2,779 2,197
Total Other Operating Income 5,524 4,432 10,929 8,949
Other Operating Expense
Salaries and Wages 5,081 4,595 9,963 9,050
Pension and Other Employee Benefits 1,402 1,325 2,911 2,699
Occupancy of Bank Premises, net 914 852 1,906 1,744
Furniture and Equipment 1,165 993 2,274 2,007
FDIC Assessment 35 1 67 3
Credit Card Merchant Expense 549 450 1,106 996
OREO & Collection Expense/Losses, net 244 417 534 818
Other Noninterest Expense 3,383 3,082 6,502 5,832
Total Other Operating Expense 12,773 11,715 25,263 23,149
Net Overhead (7,249) (7,283) (14,334) (14,200)
Income Before Income Taxes 6,703 6,133 13,153 12,191
Applicable Income Tax Expense 2,193 2,124 4,243 4,241
Net Income $ 4,510 $ 4,009 $ 8,910 $ 7,950
Average Fully Diluted
Shares Outstanding 4,896,659 4,848,938 4,855,963 4,849,386
Earnings Per Common Share (Based on
Average Number of Common Shares
Outstanding for the Respective Period)
Net Income --
Primary and Fully Diluted $ 0.92 $ 0.83 $ 1.84 $ 1.64
VERMONT FINANCIAL SERVICES CORP.
Consolidated Statement of Cash Flows
(unaudited)
6 months ended June 30,
1997 1996
OPERATING ACTIVITIES (in thousands)
Net Income $ 8,910 $ 7,950
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 1,450 1,800
Provision for depreciation 2,002 1,510
Amortization and accretion on securities 278 538
Deferred income taxes 1,160 698
Security (gains) (6) (8)
Proceeds from sale of loans 32,184 34,067
Loans originated for sale (31,727) (32,849)
Losses on OREO 44 249
(Increase) in interest receivable
and other assets (3,061) (1,622)
Decrease (Increase) in real estate
held for investment 25 (46)
Increase in interest payable and
other liabilities 253 143
NET CASH PROVIDED BY OPERATING ACTIVITIES
OPERATING ACTIVITIES 11,512 12,430
INVESTING ACTIVITIES
Proceeds from the sale of the securities 14,092 10,403
Proceeds from the maturity of the securities 34,564 31,592
Purchases of securities (49,127) (53,546)
Proceeds from sales of OREO 877 2,354
Purchases of loans - (1,060)
Net cash and cash equivalents from Eastern Bancorp. 41,054 -
Net decrease (increase) in loans 19,958 (4,759)
Purchase of premises and equipment (3,511) (1,964)
NET CASH PROVIDED BY (USED BY) INVESTING ACTIVITIES 57,907 (16,980)
FINANCING ACTIVITIES
Net (decrease) increase in deposits (15,615) 2,735
Net (decrease) increase in short-term borrowings (11,220) 7,743
Issuance of common stock 1,129 82
Purchase of treasury stock - (597)
Cash dividends (2,772) (2,435)
NET CASH PROVIDED BY FINANCING ACTIVITIES (28,478) 7,528
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 40,941 2,978
Cash and cash equivalents at beginning of period 63,797 62,821
CASH AND CASH EQUIVALENTS AT END OF PERIOD $104,738 $ 65,799
Non-monetary Transactions:
Transfer of loans to OREO for the periods ended June 30, 1997 and 1996
totaled $654 and $1,690, respectively. In addition, cash payments totaling
$26,913 were accrued (to be paid in July 1997) and 1,748,769 shares of
common stock were issued in association with the merger with Eastern Bancorp.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For the Six-Month Periods Ended June 30, 1997 and 1996
Overview
The first half of 1997 resulted in net income of $8,910,000, or $1.84 per
share, versus $7,950,000, or $1.64 per share, in the same period of 1996.
Income before taxes improved by $1.0 million from 1996's first six months.
The annualized return on average total assets was 1.37% versus 1.29% and
the annualized return on average stockholders' equity was 14.36% versus 14.18%
for the first half of 1997 and 1996, respectively.
On June 26, 1997 the Company acquired 100% of the common stock of Eastern
Bancorp, Inc., a thrift holding company with total assets of approximately $810
million, headquartered in Dover, NH. Cash totaling $26,913 and 1,748,769
shares of VFSC common stock were issued in association with this transaction.
This acquisition is being accounting for under the purchase method of accounting
and the results of operations for the period from June 27, 1997 through June 30,
1997 are included in the Company's net income for the second quarter.
The accompanying unaudited condensed consolidated financial statements
should be read with the audited financial statements and notes thereto included
in the Company's annual report on Form 10-K. 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.
Operating results for any interim period are not necessarily indicators
of results for any other interim period or the entire year.
Results of Operations
Net interest income of $28.9 million for the first half of 1997 represented
a $0.7 million increase from the same period in 1996. Net interest margin was
4.91% and net interest spread was 4.67% during the first six months of 1997,
compared to 4.99% and 4.69%, respectively, during the same period in 1996. A
61.7 million increase in average earning assets offset the impact of the
somewhat lower margin and spread.
Noninterest income increased $1,980,000 primarily due to a $1,024,000
increase in trust department income, a $364,000 increase in credit card merchant
income and a $240,000 gain on the sale of $10,000,000 in adjustable rate
residential mortgages. The increase in trust department income is largely
due to the purchase of the Green Mountain Bank Trust Department in the third
quarter of 1996.
Noninterest expense increased $2,114,000 largely due to a $1,125,000, or
10%, increase in salaries and benefits. This increase was due to the additional
staff associated with the purchase of the Green Mountain Bank Trust Department,
expenses related to the Eastern merger, and normal salary adjustments for
existing staff. Other noninterest expense increased $989,000, or 8.7%.
Asset Quality
Nonperforming assets totaled $21.6 million as of June 30, 1997, an
increase from $11.8 million on June 30, 1996. The acquisition of Eastern
Bancorp added $13.0 million of nonperforming assets to this total. Excluding
the effect of the acquisition, Vermont Financial Services Corp.'s nonperforming
assets would have been $8.6 million, a 27% decrease from the $11.8 million of
nonperforming assets a year earlier. As of June 30, 1997 nonperforming assets
were 1.00% of total assets, up from 0.94% a year ago, reflecting the higher
level of nonperforming assets at Eastern Bancorp.
The allowance for loan losses was $21.4 million at June 30, 1997, up from
$14.5 million a year ago, reflecting the effect of the acquisition. The
allowance for loan losses was 124% of nonperforming loans and 99% of
nonperforming assets as of June 30, 1997.
The following table details the Company's impaired loans as of June 30, 1997:
Total impaired loans $31.0
Impaired loans with a specific valuation reserve 4.7
Valuation reserve for impaired loans 1.6
Impaired loans without a specific valuation reserve 26.3
Average impaired loans 29.9
Financial Condition
The June 30, 1997 balance sheet, including the effects of the Eastern
Bancorp acquisition, shows total assets of $2.2 billion, total deposits of
$1.7 billion and total loans of $1.3 billion. The Eastern Bancorp acquisition
added approximately $810 million to assets, $644 million to deposits and $459
million to loans. Exclusive of the acquisition, Vermont Financial Services
Corp.'s assets grew 6.8%, deposits increased 2.8% and loans decreased 0.9%
between June 30, 1996 and June 30, 1997. As of June 30, 1997 goodwill had
increased to approximately $60.8 million as a result of the Eastern Bancorp
acquisition. The amortization of this goodwill will create an after tax
non-cash charge to net income of approximately $1 million per quarter for the
next 15 years.
Capital Resources
Stockholders' equity increased from $119.7 million at year end to $200.0
million at June 30, 1997. Equity as a percent of total assets increased from
9.12% at year end 1996 to 9.28% at June 30, 1997. This increase was primarily
the result of the earnings retained by the Company and the capital issued as
a result of the Eastern merger. Also, due to the Eastern merger, the Tier I
and Total Risk Based Capital ratios decreased to 10.98% and 12.23% from their
year end levels of 13.92% and 15.17%, respectively. The above ratios are in
excess of all regulatory requirements and place the Company in the
"well capitalized" regulatory classification.
Recent Developments
During 1997 the Company plans to upgrade Vermont National Bank's (VNB's)
check processing equipment at a cost of $1.7 million, upgrade VNB's signage at
a cost of $1.0 million and upgrade VNB's credit card software at a cost of $0.5
million. No further additions to premises and equipment are expected to exceed
$0.5 million. All additions will be funded through the operation of the
Company.
The Company's financial statements for 1997 will be affected by rules and
regulations which have been announced but are not yet effective. The Financial
Accounting Standards Board (FASB) has announced the following Financial
Accounting Standards (SFAS) that are effective for financial statements for
periods ending after December 15, 1997:
Standard Title
SFAS 128 "Earnings Per Share"
SFAS 129 "Disclosure of Information about Capital Structure"
Management expects the financial statement effect(s) of the above
standards to be insignificant.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On May 30, 1997 the Company held a special meeting of stockholders for
the purpose of voting on a proposal to approved and adopt the merger with
Eastern Bancorp, Inc. Of the 4,625,160 shares outstanding and entitled to vote
at the meeting 3,410,580 or 74% were represented at the meeting. 3,388,950
shares voted for, 4,208 share voted against and 17,422 shares abstained from
voting for this proposal.
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
During the second quarter of 1997 the Company filed a Form 8-K dated
April 23, 1997 reporting a change in the Company's Certifying Accountants
from Coopers & Lybrand L.L.P. to KPMG Peat Marwick LLP.
VERMONT FINANCIAL SERVICES CORP.
Dated August 12, 1997 /s/_____________________________
John D. Hashagen, Jr.
Dated August 12, 1997 /s _____________________________
Richard O. Madden
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