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 March 31, 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 April 30, 1997 4,631,679
ITEM 1. FINANCIAL INFORMATION
VERMONT FINANCIAL SERVICES CORP.
Condensed Balance Sheets
March 31, 1997 and December 31, 1996
($ in thousands,except per share data)
(unaudited)
March 31, December 31,
ASSETS 1997 1996
Cash and Due from Banks $ 56,996 $ 61,962
Interest Bearing Balances with Banks 42 60
Securities Available for Sale
U.S. Treasury and U.S. Government Agencies 197,586 194,727
Mortgage Backed Securities 63,704 67,055
State and Municipal 10,497 10,558
Other 12,278 18,780
Total Securities Available for Sale 284,065 291,120
Federal Funds Sold 2,996 1,775
Loans:
Commercial 176,672 181,372
Commercial Real Estate 198,675 199,640
Residential Real Estate 421,202 432,561
Consumer 92,925 96,863
Total Loans 889,474 910,436
Less: Allowance for Loan Losses 13,759 13,647
Net Loans 875,715 896,789
Premises and Equipment 23,017 23,618
Real Estate Held for Investment 1,348 1,360
Other Real Estate Owned (OREO) - net of
reserve of $12 in 1997 and $87 in 1996 628 697
Goodwill & Other Intangibles 6,560 6,327
Other Assets 30,869 29,273
Total Assets $ 1,282,236 $ 1,312,981
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 145,647 $ 162,887
Savings, NOW & Money Market Accounts 621,141 620,111
Other Time: Under $100,000 260,511 261,427
Over $100,000 38,191 38,833
Total Deposits 1,065,490 1,083,258
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 73,757 77,672
Liabilities for Borrowed Money 12,773 23,169
Other Liabilities 9,011 9,165
Total Liabilities 1,161,031 1,193,264
Stockholders' Equity
Common Stock - $1 Par Value
Authorized 20,000,000 shares
Issued : 1997 - 4,897,399
1996 - 4,892,442 4,897 4,892
Preferred Stock - $1 Par Value
Authorized 5,000,000 shares
Capital Surplus 49,677 49,590
Undivided Profits 74,169 71,151
Security Valuation Allowance (3,248) (1,029)
Treasury Stock,at cost - 1997 - 158,049
1996 - 180,021 (4,290) (4,887)
Total Stockholders' Equity 121,205 119,717
Total Liabilities and
Stockholders' Equity $ 1,282,236 $ 1,312,981
Fully Diluted Tangible Book Value
per Share of Common Stock $23.80 $23.73
Vermont Financial Services Corp.
Consolidated Statements of Income
(in thousands)
(unaudited)
Three Months Ended
March 31,
1997 1996
Interest Income
Interest and Fees on Loans $19,727 $20,391
Interest on Securities Available for Sale:
Taxable Interest Income 4,433 3,538
Tax Exempt Interest Income 151 120
Interest on Federal Funds Sold 66 256
Total Interest Income 24,377 24,305
Interest Expense
Interest on Deposits 8,968 9,369
Interest on Federal Funds Purchased,
Borrowed Money and Securities Sold
under Agreements to Repurchase 1,124 1,061
Total Interest Expense 10,092 10,430
Net Interest Income 14,285 13,875
Less: Provision for Loan Losses 750 900
Net Interest Income After Provison
for Loan Losses 13,535 12,975
Other Operating Income
Securities Gains (Losses) 6 8
Trust Department Income 1,390 876
Service Charges on Deposit Accounts 1,508 1,591
Serviced Mortgage Fees 266 411
Credit Card Merchant Income 850 652
Other Noninterest Income 1,385 979
Total Other Operating Income 5,405 4,517
Other Operating Expense
Salaries and Wages 4,882 4,455
Pension and Other Employee Benefits 1,509 1,374
Occupancy of Bank Premises, net 992 892
Furniture and Equipment 1,109 1,014
FDIC Assessment 32 2
Credit Card Merchant Expense 557 401
OREO & Collection Expense/Losses, net 290 546
Other Noninterest Expense 3,119 2,750
Total Other Operating Expense 12,490 11,434
Net Overhead (7,085) (6,917)
Income Before Income Taxes 6,450 6,058
Applicable Income Taxes 2,050 2,117
Net Income $ 4,400 $ 3,941
Average Fully Diluted Shares Outstanding 4,801,943 4,849,832
Earnings Per Common Share (Based on
Average Number of Common Shares
Outstanding for the Respective Period)
Net Income -- Primary and Fully Diluted $0.92 $0.81
VERMONT FINANCIAL SERVICES CORP.
Condensed Statement of Cash Flows
(unaudited)
3 months ended March 31,
1997 1996
OPERATING ACTIVITIES (in thousands)
Net Income $ 4,400 $ 3,941
Adjustments to reconcile
net income to net cash provided
by operating activities:
Provision for loan losses 750 900
Provision for depreciation 867 761
Amortization and accretion on securities 104 260
Deferred income taxes 354 1,463
Security (gains) (6) (8)
Proceeds from sale of loans 21,215 18,827
Loans originated for sale (22,583) (15,531)
Losses on OREO 18 116
(Increase) in interest receivable
and other assets (972) (112)
Decrease (Increase) in real estate
held for investment 12 (11)
(Decrease) in interest payable
and other liabilities (154) (85)
NET CASH PROVIDED BY OPERATING ACTIVITIES
OPERATING ACTIVITIES 4,005 10,521
INVESTING ACTIVITIES
Proceeds from the sale of the securities 14,092 5,702
Proceeds from the maturity of
the securities 9,920 22,850
Purchases of securities (20,485) (30,646)
Proceeds from sales of OREO 564 124
Purchases of loans - (306)
Net decrease in loans 21,179 6,952
Purchase of premises and equipment (266) (1,096)
NET CASH PROVIDED BY INVESTING ACTIVITIES 25,004 3,580
FINANCING ACTIVITIES
Net (decrease) increase in deposits (17,768) 4
Net (decrease) in short-term borrowings (14,311) (11,959)
Issuance of common stock 689 258
Cash dividends (1,382) (1,169)
NET CASH USED BY FINANCING ACTIVITIES (32,772) (12,866)
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (3,763) 1,235
Cash and cash equivalents at
beginning of period 63,797 62,821
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 60,034 $ 64,056
Non-monetary Transactions:
Transfer of loans to OREO for the periods ended March 31, 1997 and 1996
totaled $513 and $1,151, respectively.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the Three-Month Periods Ended March 31, 1997 and 1996
Overview
The first quarter of 1997 resulted in net income of $4,400,000 or $0.92
per share, versus $3,941,000, or $0.81 per share in the same period of 1996.
Income before taxes improved by $0.4 million from 1996's first quarter,
primarily due to a similar decrease in net overhead.
The annualized return on average total assets was 1.38% versus 1.28%
and the annualized return on average stockholders' equity was 14.97% versus
14.08% for the first quarter of 1997 and 1996, respectively.
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 $14.3 million for the first quarter of 1997
represented a $0.4 million increase from the same period in 1996. Net interest
margin was 4.96% and net interest spread was 4.67 % during the first quarter
of 1997, compared to 4.93% and 4.61%, respectively, during the same period
in 1996. Also contributing to the increase in net interest income was a $44.7
million increase in average earning assets.
At March 31, 1997, the mortgage servicing portfolio totaled $421.7
million compared to $419.3 million at year end. This portfolio generates
approximately $90,000 of servicing income on a monthly basis. Both loan
fee income and mortgage servicing income are affected by the level of new
loan originations. During the first quarter of 1997, mortgage loan orig-
inations were $15.7 million compared to $ 28.4 million during the same
period in 1996. This contributed to a 15% reduction in loan fees to
$485,000 and a $145,000, or 35%, decrease in loan servicing income.
Noninterest income increased $890,000 due to a $514,000 increase
in trust department income and a $406,000 increase in other non-
interest income. The increase in trust department income is primarily
the result of the purchase of the Green Mountain Bank Trust Department
in the third quarter of 1996 and the improvement in other noninterest
income was largely due to a $240,000 gain on the sale of $10,000,000
in adjustable rate residential mortgages.
Noninterest expense increased $1,056,000 due to a $562,000, 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
and normal salary adjustments for existing staff. Other noninterest expense
increased $369,000 due to several insignificant increases.
Asset Quality
Nonperforming assets (nonaccrual loans, restructured loans and OREO)
were reduced from $9.2 million on December 31, 1996 to $8.5 million on
March 31, 1997. Nonaccrual and restructured loans decreased $0.6 million,
to $7.9 million. OREO decreased from year end by $0.1 million, to $0.6
million. As of March 31, 1997 nonperforming assets equaled 0.66% of
total assets, slightly down from the 0.70% level at year end 1996. Loans 90
or more days past due and still accruing interest were $2.4 million, up
from $1.9 million at December 31, 1996.
The Allowance for Loan Losses was $13.8 million as of quarter end, equal
to 1.5% of loans outstanding, 175.9% of nonperforming (nonaccrual and
restructured) loans and 162.8% of total nonperforming assets. These compare
to the year end 1996 levels of 1.5%, 161.1% and 148.8%, respectively.
The following table details the Company's impaired loans as of
March 31,1997:
(in millions)
Total impaired loans ............................................... $28.8
Impaired loans with a specific valuation reserve.......................2.7
Valuation reserve for impaired loans...................................0.4
Impaired loans without a specific valuation reserve...................26.1
Average impaired loans................................................28.5
Financial Condition
Loans
Total loans at March 31, 1997 were $889.5 million, down $21.0 million
from the December 31, 1996 balance. Decreases in residential real estate,
commercial and consumer loans of $11.4 million, $4.7 million and $3.9
million respectively accounted for nearly all of this change. $10.0 million of
the decrease in residential real estate loans was the loan sale mentioned above.
Securities Available for Sale
The fair value of securities available for sale decreased $7.1
million. Decreases in mortgage backed securities and other securities
of $3.4 million and $6.5 million, respectively, were partially offset by
a $2.9 million increase in U.S Treasury and Agency securities.
Deposits
At March 31, 1997, total deposits were $1,065.9 million, a $17.8
million, or 1.6%, decrease from the December 31, 1996 level. Nearly all
of this change was a result of $17.2 million decrease in demand deposits
due to the normal runoff of year end balances.
Compared to March 31, 1996 balances, assets, deposits and equity
increased 3.8%, 3.0% and 3.2%, respectively. The $31.5 million
growth in deposits was the result of a $19.1 million increase in Demand
Deposits and a $19.3 million increase in Savings, NOW and Money Market
Accounts. Offsetting these increases somewhat was a $6.9 million decrease
in Other Time Deposits. Total loans increased 1.0%, or$9.0 million, from
March 31, 1996 to 1997. Commercial loans increased $7.5 million and
Residential Real Estate Loans increased $5.0 million. Partially offsetting these
increases was a $2.1 million decrease in Consumer Loans. The additional
liquidity that resulted from the slight increase in the loan portfolio and
larger increase in deposits was primarily invested in the Securities Available
for Sale portfolio which increased $35.3 million from March 31, 1996.
Capital Resources
Stockholders' equity increased from $119.7 million at year end to $121.2
million at March 31, 1997. Equity as a percent of total assets increased
from 9.12% at year end 1996 to 9.45% at March 31, 1997. This increase was
primarily the result of $3.0 million of earnings retained by the Company,
net of a $2.2 million increase in the Security Valuation Allowance
associated with the Security 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 14.64% and 15.90% 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
The Company previously announced the pending merger with Eastern
Bancorp, Inc. in its form 10-K for the period ended December 31,1996.
The acquisition is subject to the approval by the shareholders of both
companies. Special meetings will be held May 30, 1997 for this purpose.
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 mainframe computer to provide capacity for the merger at a cost
of $1.3 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.
On January1, 1997, theCompany adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" which was amended
by SFAS No. 127, Deferral of the Effective Date of Certain Provisions of
SFAS No. 125". The adption of SFAS No. 125 did not have a material
impact on the Company's financial condition or results of operations.
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 Statndards 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
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
NONE
VERMONT FINANCIAL SERVICES CORP.
Dated May 12, 1997 /s/ John D. Hashagen, Jr.
President & CEO
Dated May 12, 1997 /s/ Richard O. Madden
Executive Vice President
Secretary and Treasurer
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