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, 1998,
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, 1998 13,283,204
VEREMONT 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 Operations 7
Part II Other Information 8
Signatures 9
VERMONT FINANCIAL SERVICES CORP. AND SUBSIDIARIES
<TABLE>
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997
( in thousands,except per share data)
(unaudited)
<C> <C>
March 31, December 31,
ASSETS 1998 1997
Cash and Due from Banks $ 95,375 $ 95,495
Interest Bearing Balances with Banks 11,113 44
Federal Funds Sold and Securities Purchased
Under Agreements to Resell 37,999 2,470
Total Cash & Cash Equivalents 144,487 98,009
Securities Available for Sale
U.S. Treasury and U.S. Government Agencies 239,697 295,775
Mortgage Backed Securities 187,342 199,122
State and Municipal 9,999 9,987
Other 35,721 22,765
Total Securities Available for Sale 472,759 527,649
Loans:
Commercial 172,160 166,418
Commercial Real Estate 258,047 273,089
Residential Real Estate 752,208 765,634
Consumer 103,975 109,360
Total Loans 1,286,390 1,314,501
Less: Allowance for Loan Losses 18,482 18,943
Net Loans 1,267,908 1,295,558
Premises and Equipment 43,852 46,620
Real Estate Held for Investment 1,286 1,298
Other Real Estate Owned (OREO) - net of
reserve of $0 in 1998 and $12 in 1997 3,408 2,794
Goodwill & Other Intangibles 60,549 61,729
Other Assets 68,181 63,795
Total Assets $2,062,430 $2,097,452
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $247,103 $228,935
Savings, NOW & Money Market Accounts 913,874 915,937
Other Time: Under $100,000 461,384 472,437
Over $100,000 69,590 68,863
Total Deposits 1,691,951 1,686,172
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 76,627 87,818
Liabilities for Borrowed Money 52,137 86,899
Other Liabilities 25,265 22,967
Total Liabilities 1,845,980 1,883,856
Stockholders' Equity
Common Stock - $1 Par Value
Authorized 20,000,000 shares
Issued : 1998 - 13,276,025
1997 - 13,243,357 13,276 13,243
Preferred Stock - $1 Par Value
Authorized 5,000,000 shares
Capital Surplus 117,151 116,640
Undivided Profits 83,855 81,562
Security Valuation Allowance 2,169 2,152
Treasury Stock,at cost - 1998 - 55
1997 - 52 (1) (1)
Total Stockholders' Equity 216,450 213,596
Total Liabilities and Stockholders'
Equity $2,062,430 $2,097,452
Diluted Tangible Book Value
per Share of Common Stock $11.75 $11.48
</TABLE>
<TABLE>
Vermont Financial Services Corp.
Consolidated Statements of Income
(in thousands, except share data)
(unaudited)
<C> <C>
Three Months Ended
March 31, March 31,
1998 1997
Interest Income
Interest and Fees on Loans $28,197 $19,341
Interest on Securities Available for Sale:
Taxable Interest Income 8,056 4,433
Tax Exempt Interest Income 109 151
Interest on Federal Funds Sold 435 66
Total Interest Income 36,797 23,991
Interest Expense
Interest on Deposits 14,686 8,968
Interest on Federal Funds Purchased,
Borrowed Money and Securities Sold
under Agreements to Repurchase 2,009 1,124
Total Interest Expense 16,695 10,092
Net Interest Income 20,102 13,899
Less: Provision for Loan Losses 1,125 750
Net Interest Income After Provision for
Loan Losses 18,977 13,149
Other Operating Income
Securities Gains (Losses) 147 6
Trust Department Income 1,625 1,390
Service Charges on Deposit Accounts 3,400 1,508
Credit Card Merchant Income 878 850
Other Noninterest Income 3,072 1,926
Total Other Operating Income 9,122 5,680
Other Operating Expense
Salaries and Wages 7,482 4,824
Pension and Other Employee Benefits 1,793 1,495
Occupancy of Bank Premises, net 1,892 992
Furniture and Equipment 2,114 1,109
Goodwill Amortization 1,129 171
FDIC Assessment 132 32
Credit Card Merchant Expense 680 557
OREO & Collection Expense/Losses, net 430 290
Other Noninterest Expense 5,285 2,909
Total Other Operating Expense 20,937 12,379
Net Overhead (11,593) (6,612)
Income Before Income Taxes 7,162 6,450
Applicable Income Tax Expense 2,883 2,050
Net Income $4,279 $4,400
Average shares outstanding 13,258,670 9,449,858
Basic earnings per share $0.32 $0.46
Average diluted shares outstanding 13,360,320 9,603,886
Diluted Earnings per share $0.32 $0.46
</TABLE>
<TABLE>
VERMONT FINANCIAL SERVICES CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<C> <C>
3 months ended March 31,
1998 1997
OPERATING ACTIVITIES (in thousands)
Net Income $4,279 $4,400
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 1,125 750
Provision for depreciation 1,812 867
Amortization and accretion on securities 102 104
Deferred income taxes 161 354
Security (gains) (147) (6)
Proceeds from sale of loans 60,468 21,215
Loans originated for sale (62,461) (22,583)
Losses on OREO 15 18
(Increase) in interest receivable
and other assets (518) (972)
Decrease in real estate held for investment 12 12
Increase (Decrease) in interest payable
and other liabilities 2,298 (154)
NET CASH PROVIDED BY OPERATING ACTIVITIES
OPERATING ACTIVITIES 7,146 4,005
INVESTING ACTIVITIES
Proceeds from the sale of the
securities 1,730 14,092
Proceeds from the maturity of the
securities 71,973 9,920
Purchases of securities (18,741) (20,485)
Proceeds from sales of OREO 413 564
Net decrease in loans 27,476 21,179
Purchase of premises and equipment (1,903) (266)
NET CASH PROVIDED BY INVESTING
ACTIVITIES 80,948 25,004
FINANCING ACTIVITIES
Net increase (decrease) increase in
deposits 5,779 (17,768)
Net (decrease) in short-term borrowings (45,953) (14,311)
Issuance of common stock 545 689
Cash dividends (1,987) (1,382)
NET CASH (USED BY) FINANCING
ACTIVITIES (41,616) (32,772)
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 46,478 (3,763)
Cash and cash equivalents at beginning of
period 98,009 63,797
CASH AND CASH EQUIVALENTS AT END OF PERIOD $144,487 $60,034
Non-monetary Transactions:
Transfer of loans to OREO for the periods ended March 31, 1998
and 1997 totaled $1,042 and $513, respectively.
VERMONT FINANCIAL SERVICES CORP.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
should be read with the audited financial statements and notes thereto
included in the annual report on Form 10-K. In the opinion of Management,
all adjustments which are necessary for the fair presentation of the
statement of the consolidated financial position of Vermont Financial
Services Corp., ("VFSC" or 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.
2. New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Financial
Accounting Standard (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes standards for the
way public enterprises are to report information about operating segments
in annual financial statements and requires those enterprises to report
selected financial information about operating segments in its interim
financial reports issued to shareholders. 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 December 31, 1998 financial statements and is effective for
interim financial statements beginning in 1999. The company anticipates
providing segment information for its Trust Department and United Bank.
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
(1,784,774 shares at $41.5625 per share).
This acquisition was accounted for by the purchase method 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.
5. Comprehensive Income
The Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income" as of January 1, 1998. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components (such as
changes in unrealized investment gains and losses). Comprehensive income
includes net income and any changes in equity from non-owner sources that
bypass the income statement. The purpose of reporting comprehensive
income is to report a measure of all changes in equity of an enterprise
that result from recognized transactions and other economic events of the
period other than transactions with owners in their capacity as owners.
Application of SFAS No. 130 has not impacted the amounts previously
reported for net income or effected the comparability of previously issued
financial statements.
</TABLE>
<TABLE>
The following table summarizes comprehensive income for the three months
ended March 31, 1998 and 1997:
<C> <C>
1998 1997
Net Income $4,279 $4,400
Other comprehensive income, net of tax:
Unrealized gains (losses) on investments
Unrealized holding gain (loss) arising
during the period net of income tax
expense (benefit) of $61 and $(1,207)
for 1998 and 1997, respectively. 113 (2,215)
Less reclassification adjustment for
gains included in net income net of
income tax expense of $(51) and $(2)
for 1998 and 1997, respectively. (96) (4)
Other comprehensive income 17 (2,219)
Comprehensive income $4,296 $2,181
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
For the Three-Month Periods Ended March 31, 1998 and 1997
Overview
The first quarter of 1998 resulted in net income of $4.3 million, or $0.32
per share, versus $4.5 million , or $0.46 per share, in the same period of
1997. The first quarter financial results were negatively impacted by
approximately $0.9 million of pre-tax expenses associated with last year's
acquisition of Eastern Bancorp, Inc. and with the integration of its
subsidiary, Vermont Federal Bank (VFB), into Vermont Financial Services
Corp's main banking subsidiary, Vermont National Bank (VNB).
The annualized return on average total assets was 0.84% versus 1.38% and the
annualized return on average stockholders' equity was 8.10% versus 14.97%
for the first quarter of 1998 and 1997, respectively.
Results of Operations
Net interest income of $20.1 million for the first three months of 1998
represented a $6.2 million increase from the same period in 1997. This was
entirely due to the earning assets and financial resources acquired from
Eastern Bancorp, Inc. (Eastern). Net interest margin was 4.51% and net
interest spread was 4.52% during the first quarter of 1998, compared to
4.83% and 4.67%, respectively, during the same period in 1997. The lower
margin and spread are also reflective of the mix of average earning assets
and interest-bearing liabilities purchased from Eastern.
Noninterest income, net of securities gains, increased $3.3 million primarily
due to a $1.9 million increase in deposit service charges, a $ 0.2 million
increase in trust department income and a $1.1 million increase in other
noninterest income. The increase in other noninterest income is largely
due to a $0.4 million increase in gains on sold mortgages and a $0.3
million increase in ATM related fee income. The increase in deposit service
charges and ATM fees is the result of activity associated with the former
VFB customers.
Noninterest expense increased $8.6 million in the first quarter of 1998
compared to the same period in 1997. This fluctuation is due to increases in
staff expenses, occupancy and equipment expense, goodwill amortization and
other noninterest expense of $3.0 million, $1.9 million, $1.1 million and
$2.4 million, respectively. The increased expenses were caused by the
addition of the former VFB operations into VNB. Included throughout these
increases are $0.9 million in integration related expenses associated with
the merger with Eastern. These expenses were additional compensation costs
and outside services incurred to resolve operational and back office problems
associated with the integration of VFB into VNB. Merger related expenses
from the integration of Eastern are not expected to be a significant
factor in future qaurters.
Asset Quality
Nonperforming assets totaled $19.6 million as of March 31, 1998, an increase
from $8.5 million on March 31, 1997 and a decrease of $0.2 million from
December 31,1997. The acquisition of Eastern Bancorp added $13.0 million
of nonperforming assets to this total. As of March 31, 1998 nonperforming
assets were 0.95% of total assets, up from 0.66% a year ago and 0.94% at
year end.
The allowance for loan losses was $18.5 million at March 31, 1998, up from
$8.5 million a year ago, reflecting the effect of the acquisition, and down
from $18.9 million at December 31, 1997. The allowance for loan losses was
114% of nonperforming loans and 94% of nonperforming assets as of March
31, 1998, as compared with 176% and 163%, respectively, at March 31, 1997
and 111% and 65%, respectively, at year end.
</TABLE>
<TABLE>
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:
<C> <C>
March 31, December 31,
1998 1997
Loans 90 days past due and still
accruing interest $3,460 $6,055
Nonperforming assets:
Nonaccrual loans $16,206 $17,006
Other real estate owned 3,408 2,794
Total nonperforming assets $19,614 $19,800
Nonperforming assets to period end
loans net of unearned income, plus
other real estate owned 1.52% 1.50%
Allowance for loan losses $18,482 $18,943
The following table details the Company's impaired loans
as of March 31, 1998:
Total impaired loans $31,322
Impaired loans with a specific valuation reserve 5,803
Valuation reserve for impaired loans 2,352
Impaired loans without a specific valuation reserve 25,519
Average impaired loans 32,311
Financial Condition
The March 31, 1998 consolidated balance sheet shows total assets of $2.1
billion, total deposits of $1.7 billion and total loans of $1.3 billion.
The Eastern Bancorp acquisition accounted for an approximate $810 million
addition to assets, $644 million addition to deposits and $459 million
addition to loans. Exclusive of the acquisition, Vermont Financial Services
Corp.'s assets and deposits remained unchanged, while loans decreased 0.1%
between March 31, 1997 and March 31, 1998. As of March 31, 1998, goodwill
had increased to approximately $60.5 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.
Compared to balances at December 31, 1997, assets decreased $35.1 million (2%),
loans decreased $28.1 million (3%), while deposits increased $9.7 million
(1%). During the same period, securities available for sale decreased
$54.9 million, which enabled a $46.0 million reduction in borrowings.
While refinances of residential mortgages and loan portfolio sales have
reduced the loan portfolio, recently the Company has been successful in
acquiring new commercial loan customers, especially in the New Hampshire
market. The growth in deposits is believed to indicate success in the
Company's marketing strategy for deposit growth.
Capital Resources
Stockholders' equity increased from $213.6 million at year end to $216.5
million at March 31, 1998. Tangible equity as a percent of total assets
increased from 7.46% at year end 1997 to 7.79% at March 31, 1998. This
increase was a result of the earnings retained by the Company. Tier I and
Total Risk Based Capital ratios increased to 12.74% and 14.00% from their
year end levels of 11.98% and 13.24%, respectively. The above ratios are in
excess of all regulatory requirements and place the Company in the "well
capitalized" regulatory classification.
Recent Developments
During 1998 the Company plans a major renovation to its branch operations
in Chittenden County, Vermont at a total cost of $2-3 million. In addition,
the Company plans to purchase new remittance processing equipment, upgrade
VNB's credit card software and purchase a new system for originating
mortgage loans, each costing approximately $0.5 million. All additions
will be funded through the operating activities 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
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
NONE
VERMONT FINANCIAL SERVICES CORP.
Dated May 11, 1998 /s/__________________________________
John D. Hashagen, Jr.
Dated May 11, 1998 /s/__________________________________
Richard O. Madden
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 95,375
<INT-BEARING-DEPOSITS> 11,113
<FED-FUNDS-SOLD> 37,999
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 472,759
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,286,390
<ALLOWANCE> 18,482
<TOTAL-ASSETS> 2,062,430
<DEPOSITS> 1,691,951
<SHORT-TERM> 28,500
<LIABILITIES-OTHER> 25,265
<LONG-TERM> 23,637
0
0
<COMMON> 13,276
<OTHER-SE> 203,174
<TOTAL-LIABILITIES-AND-EQUITY> 2,062,430
<INTEREST-LOAN> 28,097
<INTEREST-INVEST> 8,165
<INTEREST-OTHER> 435
<INTEREST-TOTAL> 36,797
<INTEREST-DEPOSIT> 14,686
<INTEREST-EXPENSE> 2,009
<INTEREST-INCOME-NET> 20,102
<LOAN-LOSSES> 1,125
<SECURITIES-GAINS> 147
<EXPENSE-OTHER> 20,937
<INCOME-PRETAX> 7,162
<INCOME-PRE-EXTRAORDINARY> 4,279
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,279
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
<YIELD-ACTUAL> 4.51
<LOANS-NON> 19,614
<LOANS-PAST> 3,460
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 18,943
<CHARGE-OFFS> 2,130
<RECOVERIES> 544
<ALLOWANCE-CLOSE> 18,482
<ALLOWANCE-DOMESTIC> 18,482
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
