SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
____________________________
Form 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act
____________________________
For the Quarterly Period Ended September 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
month (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, 1997 13,421,971
VERMONT FINANCIAL SERVICES CORP AND SUBSIDIARIES
INDEX
Part I FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's discussion and Analysis of
Financial Condition and Results of Operation 8
Part II OTHER INFORMATION 12
SIGNATURES 12
VERMONT FINANCIAL SERVICES CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996
( in thousands,except per share data)
(unaudited)
September 30, December 31,
ASSETS 1997 1996
Cash and Due from Banks $ 124,518 $ 61,962
Interest Bearing Balances with Banks 1,795 60
Securities Available
U.S. Treasury and U.S. Government Agencies 293,603 194,727
Mortgage Backed Securities 208,673 67,055
State and Municipal 9,958 10,558
Other 18,914 18,780
Total Securities Available for Sale 531,148 291,120
Federal Funds Sold 12,375 1,775
Loans:
Commercial 169,630 181,372
Commercial Real Estate 264,078 199,640
Residential Real Estate 784,165 432,561
Consumer 114,048 96,863
Total Loans 1,331,921 910,436
Less: Allowance for Loan Losses 20,623 13,647
Net Loans 1,311,298 896,789
Premises and Equipment 43,641 23,618
Real Estate Held for Investment 1,331 1,360
Other Real Estate Owned (OREO) - net of
reserve of $1,893 in 1997 and $87 in 1996 5,994 697
Goodwill & Other Intangibles 61,634 6,327
Other Assets 55,360 29,273
Total Assets $ 2,149,094 $ 1,312,981
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 231,476 $ 162,887
Savings, NOW & Money Market Accounts 874,789 620,111
Other Time: Under $100,000 560,116 261,427
Over $100,000 72,640 38,833
Total Deposits 1,739,021 1,083,258
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 84,655 77,672
Liabilities for Borrowed Money 94,467 23,169
Other Liabilities 16,550 9,165
Total Liabilities 1,934,693 1,193,264
Stockholders' Equity
Common Stock - $1 Par Value
Authorized 20,000,000 shares
Issued : 1997 - 13,413,646
1996 - 9,784,884 13,414 9,785
Preferred Stock - $1 Par Value
Authorized 5,000,000 shares
Capital Surplus 118,416 44,697
Undivided Profits 81,027 71,151
Security Valuation Allowance 1,545 (1,029)
Treasury Stock,at cost - 1997 - 44
. 1996 - 360,042 (1) (4,887)
Total Stockholders' Equity 214,401 119,717
Total Liabilities and Stockholders' Equity $ 2,149,094 $ 1,312,981
Fully Diluted Tangible Book Value
per Share of Common Stock $11.28 $11.87
VERMONT FINANCIAL SERVICES CORP. AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except share data)
(unaudited)
Three Months Ended Nine Months Ended
09/30/1997 09/30/1997
1997 1996 1997 1996
Interest Income:
Interest and Fees on Loans $ 30,207 $ 20,250 $ 70,279 $ 61,027
Interest on Securities Available
for Sale:
Taxable Interest Income 8,614 3,853 17,854 11,120
Tax Exempt Income 282 124 461 362
Interest on Fed Funds Sold and
Other Short Term Investments 387 193 611 692
Total Interest Income 39,490 24,420 89,205 73,201
Interest Expense:
Interst on Deposits 15,350 9,231 33,668 27,687
Interest on Fed Funds Purchased,
Borrowed Money and Securities
Sold under Agreements to Repurchase 2,397 1,156 4,857 3,290
Total Interest Expense 17,747 10,387 38,525 30,977
Net Interest Income 21,743 14,033 50,680 42,224
Less: Provision for Loan Losses 900 800 2,350 2,600
Net Interest Income After
Provision for Loan Losses 20,843 13,233 48,330 39,624
Other Operating Income
Securities Gains 405 3 411 11
Trust Department Income 1,488 1,000 4,259 2,747
Service Charges on Deposit Accounts 3,224 1,477 6,355 4,583
Serviced Mortgage Fees 471 386 1,041 969
Credit Card Merchant Income 1,094 933 2,766 2,241
Other Noninterest Income 1,689 1,036 4,468 3,233
Total Other Operating Income 8,371 4,835 19,300 13,784
Other Operating Expense
Salaries and Wages 7,670 4,747 17,633 13,797
Pension and Other Employee Benefits 1,616 1,334 4,527 4,033
Occupancy of Bank Premises, net 1,729 828 3,635 2,572
Furniture and Equipment 1,883 986 4,157 2,993
Goodwill Amortization 1,104 102 1,445 262
FDIC Assessment 132 1 199 4
Credit Card Merchant Expense 700 635 1,806 1,453
OREO & Collection Expense/Losses, net 245 235 779 1,231
Other Noninterest Expense 4,912 2,937 11,073 8,609
Total Other Operating Expense 19,991 11,805 45,254 34,954
Net Overhead (11,620) (6,970) (25,954) (21,170)
Income Before Income Taxes 9,223 6,263 22,376 18,454
Applicable Income Tax Expense 3,519 2,096 7,762 6,337
Net Income $ 5,704 $ 4,167 $ 14,614 $ 12,117
Average Shares Outstanding
Primary 13,420,426 9,599,258 10,936,382 9,664,968
Fully Diluted 13,429,078 9,612,724 10,950,940 9,670,088
Earnings Per Common Share (Based on
Average Number of Common Shares
Outstanding for the Respective Period)
Net Income -- Primary and Fully Diluted $ 0.42 $ 0.43 $ 1.33 $ 1.25
VERMONT FINANCIAL SERVICES CORP. AND SUBSIDIARIES
Condensed Statements of Cash Flows
(unaudited)
9 months ended September 30,
1997 1996
OPERATING ACTIVITIES (in thousands)
Net Income $ 14,614 $ 12,117
Adjustments to reconcile
net income to net cash provided
by operating activities:
Provision for loan losses 2,350 2,600
Provision for depreciation 3,308 2,259
Amortization and accretion on securities 408 582
Deferred income taxes (2,247) 484
Security (gains) (411) (11)
Proceeds from sale of loans 99,323 46,832
Loans originated for sale (69,313) (47,071)
Losses on OREO 119 312
(Increase) in interest receivable
and other assets (8,333) (5,155)
Decrease (Increase) in real estate
held for investment 422 (64)
(Decrease) in interest payable
and other liabilities (6,587) (74)
NET CASH PROVIDED BY OPERATING ACTIVITIES
OPERATING ACTIVITIES 33,653 12,811
INVESTING ACTIVITIES
Proceeds from the sale of the securities 91,924 17,478
Proceeds from the maturity of the securities 55,983 40,211
Purchases of securities (109,151) (75,283)
Proceeds from sales of OREO 2,038 3,413
Purchases of loans - (2,031)
Net cash and cash equivalents
from Eastern Bancorp. 13,821 -
Net decrease (increase) in loans 170 (17,272)
Purchase of premises and equipment (6,390) (3,675)
NET CASH PROVIDED BY (USED BY) INVESTING
ACTIVITIES 48,395 (37,159)
FINANCING ACTIVITIES
Net (decrease) increase in deposits 13,230 40,357
Net (decrease) increase in short-term
borrowings (25,518) (13,928)
Issuance of common stock 9,869 109
Purchase of treasury stock - (2,678)
Cash dividends (4,738) (3,689)
NET CASH (USED BY) PROVIDED BY FINANCING
ACTIVITIES (7,157) 20,171
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 74,891 (4,177)
Cash and cash equivalents at beginning of period 63,797 62,821
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 138,688 $ 58,644
Non-monetary Transactions:
Transfer of loans to OREO for the periods ended September 30, 1997 and 1996
totaled $2,078 and $2,615, respectively. In addition, cash payments totalling
$26,913 was paid and 1,748,769 shares of common stock were issued in
association with the merger with Eastern Bancorp.
VERMONT FINANCIAL SERVICES CORP.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited consolidated financial statements should be
read with the audited financial statements and notes thereto included in
the Annual Report on Form 10-K of Vermont Financial Services Corp. and its
subsidiaries ("VFSC" or the "Company") as of and for the year ended
December 31, 1996. In the opinion of Management, all adjustments which are
necessary for a fair statement of the results of the Company's operations
and cash flows 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.
2. New Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," on January 1, 1997, with no impact on its
results of operations.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, Earnings Per Share. This statement provides new
accounting and reporting standards for earnings per share. It will replace
the currently used primary and fully diluted earnings per share with basic
and diluted earnings per share. Basic earnings per share excludes dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share represents the potential dilution that could occur if all
stock options and other stock-based awards, were exercised and converted into
common stock if their effect is dilutive. A reconciliation of the numerator
and denominator used in the basic earnings per share computation to the
diluted earnings per share computation's numerator and denominator is also
required. This statement is effective for the Company's December 31, 1997
financial statements, earlier implementation is not permitted, and requires
that prior period earnings per share be restated. Basic earnings per share
will be higher than the earnings per share presented in the accompanying
financial statements because basic earnings per share does not consider the
effects of any dilution. The Company does not believe that diluted earnings
per share will be materially different than fully diluted earnings per share
as presented in the accompanying financial statements.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This statement establishes standards for the reporting and
presentation of comprehensive income in a full set of financial statements.
Comprehensive income is defined as all changes in equity of an enterprise
that result from transactions and other economic events of the period other
than transactions with owners. This statement is effective for financial
statements for years beginning after December 15, 1997 and reclassification
of financial statements for earlier periods, provided for comparative
purposes, is required. This statement will not affect the Company's
financial position or results of operations as the statement only affects
the presentation of financial information. The Company is currently
evaluating the presentation alternatives permitted by the statement.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". This standard establishes
standards for the reporting of information relating to operating segments
in annual financial statements as well as disclosure of selected information
in interim financial reports. Under this statement, operating segments are
defined as components of a company for which separate financial information
is available and is used by management to allocate resources and assess
performance (management approach). This statement is effective for the
Company's financial statements for the year ending December 31, 1998 and is
effective for interim financial statements beginning in 1999.
3. Acquisition
On June 26, 1997, the Company acquired all of the outstanding common
stock of Eastern Bancorp, Inc. ("Eastern"), a thrift holding company with
total assets of approximately $800 million headquartered in Dover, NH, for
approximately $26.9 million in cash and $72.7 million in VFSC common stock
(1,748,774 shares at $41.5625 per share).
This acquisition is being accounted for by the purchase method of
accounting and, accordingly, the results of operations of Eastern have been
included in VFSC's consolidated financial statements from June 27, 1997.
The excess of the purchase price over the fair value of the net identifiable
assets acquired of approximately $57 million has been recorded as goodwill
and is being amortized on a straight-line basis over 15 years.
Eastern's primary subsidiary, Vermont Federal Bank, was merged into
VFSC's primary subsidiary, Vermont National Bank, on September 22, 1997.
4. Stock Split
On October 14, 1997 the Company paid a two-for-one stock split which was
effected as a stock dividend. All per share and outstanding share amounts
have been retroactively restated for the effects of this stock split.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For the Nine Month Periods Ended September 30, 1997 and 1996
Net income for the three months ended September 30, 1997 was $5.7 million,
a 37% increase from the $4.2 million earned in the third quarter of 1996.
Earnings per share for the third quarter of 1997 were $0.42, a 2% decrease
from the $0.43 earnings per share for the same period last year. The disparity
between the 37% increase in dollar net income and the 2% decrease in earnings
per share is a result of Vermont Financial Services Corp's acquisition of
Eastern Bancorp, Inc. on June 26, 1997. (See Note 3. Acquisition). The
acquisition was accounted for under the purchase method of accounting,
therefore, Vermont Financial Services Corp's results for the second quarter
included the effect of the acquisition from June 26, 1997 on. The third
quarter 1997 results include the acquisition's impact for a full quarter for
the first time.
As a result of the Eastern acquisition, average total assets for the third
quarter of 1997 were $2.1 billion, up from $1.3 billion for the same period a
year ago. This increase in the overall size of the Company generated the 37%
increase in dollar earnings. Average common shares outstanding increased from
9.6 million shares in the third quarter of 1996 to 13.4 million shares in this
year's third quarter primarily as a result of the additional shares issued
to pay for the acquisition. This caused the 2% reduction in earnings per share
as the dollar earnings were spread over 3.8 million additional shares. Goodwill
and other intangible assets increased by approximately $57 million as a result
of the acquisition. Amortization of the goodwill, which is not deductible for
tax purposes, was $1.1 million in the third quarter of 1997, $0.08 per share,
as compared with $102,000 in the third quarter of 1996. Adding goodwill back
to reported earnings would increase earnings per share to $0.50.
Net interest income, the major contributor to earnings, was $21.7 million
for the third quarter of 1997, an increase of 55% from $14.0 million for the
third quarter of 1996. Average earning assets increased 61%, largely due to
the acquisition, while net interest margin decreased from 4.84% for the third
quarter of 1996 to 4.57% for this last quarter. The decreased net interest
margin reflects the lower margins of Eastern's primarily thrift balance
sheet.
Total noninterest income, excluding securities transactions, increased
65% to $8.0 million for the third quarter of 1997 from $4.8 million a year ago.
Significant factors in this increase were additional fee income from the
Eastern acquisition and a $488,000 increase in trust department income due
primarily to the acquisition of the Green Mountain Bank trust department,
which was completed towards the end of the third quarter of 1996. There was
also a $405,000 securities gain, primarily on Eastern investment securities
sold to reduce borrowings that were assumed with the acquisition.
Total noninterest expense, was $20.0 million for the third quarter of
1997, a 69% increase from $11.8 million for last year's similar period. Most
of this increase in operating expense was a result of the acquisition. The
$20.0 million of operating expense for 1997's third quarter includes the $1.1
million amortization of goodwill discussed above plus approximately $700,000
of expenses related to the merger of Vermont Federal Bank into Vermont Financial
Services Corp's primary subsidiary bank, Vermont National Bank. The merger of
the two subsidiary banks was completed on September 22, 1997. On that date
nine banking offices in overlapping locations were closed plus a number of
other efficiency measures were taken to reduce expenses for the combined bank
going forward.
The State of Vermont increased the franchise tax rate it charges banks
based on their Vermont deposits by 140% effective August 1, 1997. This reduced
pre-tax earnings by approximately $145,000 for the third quarter and will
reduce earnings per share by $0.01 per quarter going forward.
Net income for the nine months ended September 30, 1997 was $14.6 million,
a 21% increase from $12.1 million earned in the same period in 1996. Earnings
per share for the first three quarters of 1997 were $1.33, a 6% increase from
the $1.25 earnings per share for the same period last year. These results
include the effect of the Eastern acquisition for the entire third quarter
plus four days in the second quarter.
Asset Quality
Nonperforming assets, which includes nonaccrual loans, restructured loans
plus other real estate owned, totaled $25.8 million as of September 30, 1997,
1.20% of total assets. This was a $4.2 million increase from June 30, 1997,
$3.3 million of which was due to one commercial borrower's loans going to a
nonperforming basis. Nonperforming assets increased $14.9 million from
September 30, 1996, approximately $13 million of which was nonperforming assets
from the Eastern acquisition. Of the $6.0 million of other real estate
owned as of September 30, 1997, $1.0 million was not foreclosed property but
was closed branch office real estate that is now for sale.
The allowance for loan losses was $20.6 million as of September 30, 1997.
This was down moderately from $21.4 million as of June 30, 1997 primarily due
to a $1.1 million loan charge-off from the same commercial borrower referred
to above. Total loans charged off in the current quarter were $1.7 million.
The allowance was up from $14.2 million a year earlier, reflecting the addition
of the Eastern allowance for loan losses of $7.5 million at the acquisition
date. The allowance as of September 30, 1997 covered 104% of nonperforming
loans and 80% of nonperforming assets.
The following table provides information with respect to the Company's
past due loans, the components of nonperforming assets and the allowance for
loan losses at the dates indicated
Sept. 30, Dec. 31,
1997 1996
Loans 90 days or more past due and
still accruing interest........................ $ 3,002 $ 1,933
======== ========
Nonperforming assets:
Nonaccrual loans................................$ 19,835 $ 7,812
Other real estate owned......................... 5,994 697
Restructured loans - accruing................ - 661
Total nonperforming assets..................... $ 25,829 $ 9,170
======== ========
Nonperforming assets to period end loans
net of unearned income, plus other
real estate owned 1.93% 1.01%
======== ========
Allowance for loan losses........................$ 20,623 $ 13,647
======== ========
The following table details the Company's impaired loans as of September
30, 1997 (in millions)
Total impaired loans $ 35.1
Impaired loans with a specific valuation reserve $ 8.9
Valuation reserve for impaired loans $ 3.0
Impaired loans without a specific valuation reserve $ 26.2
Average impaired loans $ 31.6
Financial Condition
The September 30, 1997 balance sheet, including the effects of the Easter
Bancorp acquisition, shows total assets of $2,149 million, total deposits of
$1,739 million and total loans of $1,332 million. 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 4.9%, deposits increased 2.0% and loans decreased
3.7% between September 30, 1996 and September 30, 1997. The loan decrease
was largely due to the sale of approximately $50 million of portfolio loans
included in the balance as of September 30, 1996. Approximately $35 million
of the $63 million increase in cash and due from banks was due to a temporary
increase in cash items as a result of delays in processing cash letters to
correspondent banks and the Federal Reserve Bank due to the merger of Vermont
National Bank and Vermont Federal Bank.
Capital Resources
Stockholders' equity increased from $119.7 million at year end to $214.4
million at September 30, 1997. Equity as a percent of total assets increased
from 9.12% at year end 1996 to 9.98% at September 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 1 and Total Risk Based Capital ratios decreased to 11.88% and 13.14% 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.
Capital Expenditures
All of the major expenditures for premises and equipment noted in prior
reports have been completed with the exception of the credit card software
upgrade which is anticipated to cost approximately $0.5 million and is expected
to be completed in the fourth quarter of 1998. There are no plans for further
additions to premises and equipment that are expected to exceed $0.5 million.
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 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
One August 5, 1997 the Company held its annual meeting of stockholders.
The only item of business was the election of five directors, Zane V. Akins,
Charles A. Cairns, William P. Cody, John D. Hashagen, Jr. and Ernest A.
Pomerleau. Each director was elected with over 99% of the votes cast in favor.
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
NONE
VERMONT FINANCIAL SERVICES CORP.
Dated November 12, 1997 /s/____________________________
John D. Hashagen, Jr.
Dated November 12, 1997 /s/____________________________
Richard O. Madden
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