SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1993
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 0-11012
Vermont Financial Services Corp.
(Exact name of registrant as specified in its charter)
DELAWARE 03-0284445
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
100 MAIN STREET, BRATTLEBORO, VT 05301
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (802)257-7151
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value per share
(Title of Class)
Indicate by checkmark 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 requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or any amendment to the
Form 10-K. [X]
As of February 28, 1994, 3,417,829 shares of Registrant's Common Stock
were outstanding, and the aggregate market value of the shares of such Common
Stock held by non-affiliates (based upon the closing sale price on the NASDAQ
National Market System over-the-counter market) was approximately $58,530,355.
DOCUMENTS INCORPORATED BY REFERENCE:
None
- The index for exhibits is on Page 59.
VERMONT FINANCIAL SERVICES CORP.
BRATTLEBORO, VERMONT
PART I
Item 1 - Business
Vermont Financial Services Corp. (VFSC), a Delaware corporation organized
in 1990, is a registered bank holding company under the Bank Holding Company
Act of 1956, as amended, and its main office is located in Brattleboro,
Vermont. Assets of VFSC were $934 million at December 31, 1993. VFSC owns 100
percent of the stock of Vermont National Bank (VNB). VFSC has no other active
subsidiaries and engages in no activities other than holding the stock of VNB.
VNB, a national banking association, is the successor to the original Bank
of Brattleborough, which was chartered in 1821. VNB is the second largest bank
in the State of Vermont with total deposits of $773 million and total assets of
$931 million at December 31, 1993. VNB conducts business through 32 offices
located in seven of Vermont's 14 counties, including the cities of Brattleboro,
Burlington, Rutland and Montpelier. The offices of VNB are in good physical
condition with modern equipment and facilities adequate to meeting the banking
needs of customers in the communities served.
VNB offers a wide range of personal and commercial banking services,
including the acceptance of demand, savings, and time deposits; making secured
and unsecured loans; issuing letters of credit; and offering fee based
services. In addition, VNB offers a wide range of trust and trust related
services, including services as executor, trustee, administrator, custodian and
guardian. VNB lending services include making real estate, commercial,
industrial, agricultural and consumer loans. VNB also offers data processing
services consisting primarily of payroll and automated clearing house for
several outside clients. VNB provides financial and investment counseling to
municipalities and school districts within its service area and also provides
central depository, lending payroll and other banking services for such
customers. VNB also provides safe deposit facilities, Master Card and Visa
credit card services. Over ninety percent of VNB's loans are made to
individuals and business which are located in or have properties in Vermont.
VNB owns and operates 27 automated teller machines (ATMs) at its branch
locations and 4 ATMs in other locations. In addition, VNB is a member of the
Plus, Yankee 24, NYCE, and VISA networks and has access to the Honor, Cirrus,
Discover, American Express and Master Card networks.
According to the State Department of Banking, Insurance and Securities, as
of September 30, 1993, 5 state-chartered savings banks, 11 state-chartered
commercial banks and 9 national banks are located and do business in the State
of Vermont, the area in which VNB conducts its business. As of such date, VNB
had 12.3%, 12.7% and 12.5% of the total assets, loans and deposits,
respectively, of these 25 banking institutions.
VNB competes on the local and the regional levels with other commercial
banks and financial institutions for all types of deposits, loans and trust
accounts. Competitors include metropolitan banks and financial institutions
based in southern New England and New York City, many of which have greater
financial resources.
In the retail market for financial services, competitors include other
banks, credit unions, finance companies, thrift institutions and, increasingly,
brokerage firms, insurance companies, and mortgage loan companies.
In the personal and commercial trust business, competitors include mutual
funds, insurance companies and investment advisory firms.
VFSC and its subsidiary, on December 31, 1993, employed approximately 600
persons. VFSC enjoys good relations with its employees. A variety of employee
benefits are available to officers and employees, including health, group life
and disability income replacement insurance, a funded, non-contributory pension
plan and an incentive savings and profit sharing plan.
Impact of Inflation. The Consolidated Financial Statements and related
consolidated financial data presented herein have been prepared in accordance
with generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. The primary impact of inflation on the operation of the Company is
reflected in increased operating costs. Unlike industrial companies, virtually
all of the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates have a more significant impact on a
financial institution's performance than the effects of general levels of
inflation. Interest rates generally move in the same direction and with the
same magnitude as the expected rate of inflation. Management believes that
continuation of its efforts to manage the rates, liquidity and interest
sensitivity of the Company's assets and liabilities is necessary to generate an
acceptable return.
Supervision and Regulation. VFSC and VNB are subject to extensive
regulation under federal and state banking laws and regulations. The following
discussion of certain of the material elements of the regulatory framework
applicable to banks and bank holding companies is not intended to be complete
and is qualified in its entirety by the text of the relevant state and federal
statutes and regulations. A change in the applicable laws or regulations may
have a material effect on the business of VFSC and/or VNB.
Regulation of VFSC
General. As a bank holding company, VFSC is subject to supervision and
regulation by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") under the Bank Holding Company Act of 1956, as amended
(the "BHC Act"). Under the BHC Act, bank holding companies generally may not
acquire ownership or control of more than 5% of any class of voting shares or
substantially all of the assets of any company, including a bank, without the
prior approval of the Federal Reserve Board. In addition, bank holding
companies are generally prohibited under the BHC Act from engaging in
non-banking activities, subject to certain exceptions. VFSC's activities are
limited generally to the business of banking and activities determined by the
Federal Reserve Board to be so closely related to banking as to be a proper
incident thereto. The Federal Reserve Board has authority to issue cease and
desist orders and assess civil money penalties against bank holding companies
and their non-bank subsidiaries, officers, directors and other
institution-affiliated parties and to remove officers, directors and other
institution-affiliated parties to terminate or prevent unsafe or unsound
banking practices or violations of laws or regulations.
Interstate Acquisitions. Under the BHC Act, a bank holding may acquire a
bank in another state only if the law of the state in which the bank to be
acquired is located specifically authorizes such acquisition of an in-state
bank by an out-of-state bank holding company. State legislation enacted in
recent years has substantially lessened prior legislative restrictions on
geographic expansion by bank holding companies from and into Vermont. For
example, under nationwide interstate banking legislation which became effective
in 1990, bank holding companies whose subsidiaries' banking operations are
principally conducted in any state outside Vermont are now authorized to
acquire Vermont banking organizations, provided that such companies' home
states afford Vermont banking organizations reciprocal rights to acquire banks
in such states.
Dividends. The Federal Reserve Board has authority to prohibit bank
holding companies from paying dividends if such payment would be an unsafe or
unsound practice. The Federal Reserve Board has indicated generally that it
may be an unsound practice for bank holding companies to pay dividends unless
the bank holding company's net income over the preceding year is sufficient to
fund the dividends and the expected rate of earnings retention is consistent
with the organization's capital needs, asset quality, and overall financial
condition. The payment of dividends by VFSC is also subject to the requirement
that VFSC provide notification to the Federal Reserve Board at least 15 days
prior to any proposed dividend action. This 15-day prior notice requirement
imposed by the Federal Reserve Bank will continue until rescinded by the
Federal Reserve Bank. VFSC's ability to pay dividends is dependent upon the
flow of dividend income to it from VNB , which may be affected or limited by
regulatory restrictions imposed by federal or state bank regulatory agencies.
See "-Regulation of VNB-Dividends." VFSC has a policy to pay out over time 30%
- - - 35% of net income to shareholders in the form of cash dividends. Earnings
for prior years as well as prospective earnings are analyzed to determine
compliance with this policy. Dividend payout rates for any one year may vary
from this long term payout policy based on these analyses and projections of
future earnings and future capital needs. For the three-year period ended
December 31, 1993, an aggregate of $0.47 per share of dividends were declared.
Earnings per share for the same period were $2.55.
Certain Transactions by Bank Holding Companies with Their Affiliates.
There are various legal restrictions on the extent to which bank holding
companies and their non-bank subsidiaries can borrow, obtain credit from or
otherwise engage in "covered transactions" with their insured depository
institution subsidiaries. Such borrowings and other covered transactions by an
insured depository institution subsidiary (and its subsidiaries) with its
non-depository institution affiliates are limited to the following amounts:
(a) in the case of any one such affiliate, the aggregate amount of covered
transactions of the insured depository institutions and its subsidiaries cannot
exceed 10% of the capital stock and surplus of the insured depository
institution; (b) in the case of all affiliates, the aggregate amount of stock
and surplus of the insured depository institution. "Covered transactions" are
defined by statute for these purposes to include a loan or extension of credit
to an affiliate, a purchase of or investment in securities issued by an
affiliate, a purchase of assets from an affiliate unless exempted by the
Federal Reserve Board, the acceptance of securities issued by an affiliate as
collateral for a loan or extension of credit to any person or company, or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate. Covered transactions are also subject to certain collateral
security requirements. Further, a bank holding company and its subsidiaries
are prohibited from engaging in certain tying arrangements in connection with
any extension of credit, lease or sale of property of any kind, or furnishing
of any service.
Holding Company Support of Subsidiary Banks. Under Federal Reserve Board
policy, VFSC is expected to act as a source of financial strength to VNB and to
commit resources to support VNB. This support of VNB may be required at times
when, absent such Federal Reserve Board policy, VFSC might not otherwise be
inclined to provide it. In addition, any capital loans by a bank holding
company to any of its subsidiary banks are subordinate in right of payment to
deposits and certain other indebtedness of such subsidiary banks. In the event
of a bank holding company's bankruptcy, any commitment by the bank holding
company to a federal bank regulatory agency to maintain capital of a subsidiary
bank will be assumed by the bankruptcy trustee and entitled to a priority of
payment.
Under the Federal Deposit Insurance Act, as amended ("FDI ACT"), an
FDIC-insured depository institution, such as VNB can be held liable for any
loss incurred by, or reasonably expected to be incurred by, the FDIC after
August 9, 1989 in connection with (i) the "default" of a commonly controlled
FDIC-insured depository institution, or (ii) any assistance provided by the
FDIC to any commonly controlled depository institution in "danger of default".
For these purposes, the term "default" is defined generally as the appointment
of a conservator or receiver and "in danger of default" is defined generally as
the existence of certain conditions indicating that a default is likely to
occur without Federal regulatory assistance.
Regulation of VNB
General. As a national bank, VNB is subject to supervision of and
regulation by the Office of the Comptroller of the Currency (the "OCC").
Examinations and Supervision. The OCC regularly examines the operations
of VNB, including but not limited to its capital adequacy, reserves, loans,
investments, earnings, liquidity, compliance with laws and regulations, record
of performance under the Community Reinvestment Act and management practices.
In addition, VNB is required to furnish quarterly and annual reports of income
and condition to the FDIC and periodic reports to the OCC. The enforcement
authority of the FDIC includes the power to impose civil money penalties,
terminate insurance coverage, remove officers and directors and issue
cease-and-desist orders to prevent unsafe or unsound practices or violations of
laws or regulations governing its business. In addition, under recent federal
banking legislation, the FDIC has authority to impose additional restrictions
and requirements with respect to banks that do not satisfy applicable
regulatory capital requirements. See "Recent Banking Legislation-Prompt
Corrective Action" below.
Dividends. The principal source of VFSC's revenue is dividends from VNB.
At December 31, 1993, VNB had available approximately $8.8 million for payment
of dividends to VFSC under regulatory guidelines.
The FDIC has authority to prevent VNB from paying dividends if such
payment would constitute an unsafe or unsound banking practice or reduce its
capital below safe and sound levels. In addition, recently enacted federal
legislation prohibits FDIC-insured depository institutions from paying
dividends or making capital distributions that would cause the institution to
fail to meet minimum capital requirements. See "Recent Banking
Legislation-Prompt Corrective Action" below.
Affiliate Transactions. VNB is subject to restrictions imposed by federal
law on extensions of credit to, purchases from, and certain other transactions
with, affiliates, and on investments in stock or other securities issued by
affiliates. Such restrictions prevent VNB from making loans to affiliates
unless the loans are secured by collateral in specified amounts and have terms
at least as favorable to the bank as the terms of comparable transactions
between the bank and non-affiliates. Further, federal laws significantly
restrict extensions of credit by VNB to its directors, executive officers and
principal stockholders and related interests of such persons.
Deposit Insurance. VNB's deposits are insured by the Bank Insurance Fund
("BIF") of the FDIC to the legal maximum of $100,000 for each insured
depositor. The Federal Deposit Insurance Act provides that the FDIC shall set
deposit insurance assessment rates on a semi-annual basis at a level sufficient
to increase the ratio of BIF reserves to BIF-insured deposits to at least 1.25%
over a 15-year period commencing in 1991. The FDIC has recently established a
framework of risk-based insurance assessments to accomplish this increase. See
"Recent Banking Legislation-Risk-Based Deposit Insurance Assessments" below.
The BIF insurance assessments may be increased further in the future if
necessary to restore and maintain BIF reserves.
Federal Reserve Board Policies. The monetary policies and regulations of
the Federal Reserve Board have had a significant effect on the operating
results of banks in the past and are expected to continue to do so in the
future. Federal Reserve Board Policies affect the levels of bank earnings on
loans and investments and the levels of interest paid on bank deposits through
the Federal Reserve System's open-market operations in United States government
securities, regulation of the discount rate on bank borrowings from Federal
Reserve Banks and regulation of non-earning reserve requirements applicable to
bank deposit account balances.
Consumer Protection Regulation; Bank Secrecy Act. Other aspects of the
lending and deposit business of VNB that are subject to regulation by the FDIC,
the Commissioner and the OCC include disclosure requirements with respect to
interest, payment and other terms of consumer and residential mortgage loans
and disclosure of interest and fees and other terms of and the availability of
funds for withdrawal from consumer deposit accounts. In addition, VNB is
subject to federal and state laws and regulations prohibiting certain forms of
discrimination in credit transactions, and imposing certain record keeping,
reporting and disclosure requirements with respect to residential mortgage loan
applications. In addition, VNB is subject to federal laws establishing certain
record keeping, customer identification, and reporting requirements with
respect to certain large cash transactions, sales of travelers checks or other
monetary instruments and the international transportation of cash or monetary
instruments.
Capital Requirements
General. The FDIC has established guidelines with respect to the
maintenance of appropriate levels of capital by FDIC-insured banks. The
Federal Reserve Board has established substantially identical guidelines with
respect to the maintenance of appropriate levels of capital, on a consolidated
basis, by bank holding companies. If a banking organization's capital levels
fall below the minimum requirements established by such guidelines, a bank or
bank holding company will be expected to develop and implement a plan
acceptable to the FDIC or the Federal Reserve Board, respectively, to achieve
adequate levels of capital within a reasonable period, and may be denied
approval to acquire or establish additional banks or non-bank businesses, merge
with other institutions or open branch facilities until such capital levels are
achieved. Recently enacted Federal legislation requires federal bank
regulators to take "prompt corrective action" with respect to insured
depository institutions that fail to satisfy minimum capital requirements and
imposes significant restrictions on such institutions. See "Recent Banking
Legislation-Prompt Corrective Action" below.
Leverage Capital Ratio. The regulations of the FDIC require FDIC-insured
banks to maintain a minimum "leverage Capital Ratio" or "Tier 1 Capital" (as
defined in the Risk-Based Capital Guidelines discussed in the following
paragraphs) to Total Assets of 3.0%. The regulations of the FDIC state that
only banks with the highest federal bank regulatory examination rating will be
permitted to maintain an additional margin of capital, equal to at least 1% to
2% of Total Assets, above the minimum ratio. Any bank experiencing or
anticipating significant growth is expected to maintain capital well above the
minimum levels. The Federal Reserve Board's guidelines impose substantially
similar leverage capital requirements on bank holding companies on a
consolidated basis.
Risk-Based Capital Requirements. The regulations of the FDIC also require
FDIC-insured banks to maintain minimum capital levels measured as a percentage
of such banks' risk-adjusted assets. A bank's capital for this purpose may
include two components - "Core" (Tier 1) Capital and "Supplementary" (Tier 2)
Capital. Core Capital consists primarily of common stockholders' equity, which
generally includes common stock, related surplus and retained earnings, certain
non-cumulative perpetual preferred stock and primarily goodwill. Supplementary
Capital elements include, subject to certain limitations, a portion of the
allowance for losses on loans and leases, perpetual preferred stock that does
not qualify for inclusion in Tier 1 capital, long-term preferred stock with an
original maturity of at least 20 years for issuance and related surplus,
certain forms of perpetual debt and mandatory convertible securities, and
certain forms of subordinated debt and intermediate-term preferred stock.
The risk-based capital rules of the FDIC and the Federal Reserve Board
assign a bank's balance sheet assets and the credit equivalent amounts of the
bank's off-balance sheet obligations to one of four risk categories, weighted
at 0%, 20%, 50% or 100%, respectively. Applying these risk-weights to each
category of the bank's balance sheet assets and to the credit equivalent
amounts of the bank's off-balance sheet obligations and summing the totals
results in the amount of the bank's total Risk-Adjusted Assets for purposes of
the risk-based capital requirements. Risk-Adjusted Assets can either exceed or
be less than reported balance sheet assets, depending on the risk profile of
the banking organization. Risk-Adjusted Assets for institutions such as VNB
will generally be less than reported balance sheet assets because its retail
banking activities include proportionally more residential mortgage loans with
a lower risk weighting and relatively smaller off-balance sheet obligations.
Effective as of December 31, 1992, the risk-based capital regulations
require all banks to maintain a minimum ratio of Total Capital to Risk-Adjusted
Assets of 8.0%, of which at least one-half (4.0%) must be Core (Tier 1)
Capital. For the purpose of calculating these ratios: (i) a banking
organization's Supplementary Capital eligible for inclusion in Total Capital is
limited to no more than 100% of Core Capital; and (ii) the aggregate amount of
certain types of Supplementary Capital eligible for inclusion in Total Capital
is further limited. The regulations limit the portion of the allowance for
loan losses eligible for inclusion in Total Capital to 1.25% of Risk-Adjusted
Assets. The Federal Reserve Board has established substantially identical
risk-based capital requirements to be applied to bank holding companies on a
consolidated basis.
At December 31, 1993, VFSC's consolidated Total and Tier 1 Risk-Based
Capital Ratios were 11.40% and 10.14%, respectively. These ratios exceeded
applicable regulatory requirements.
Recent Banking Legislation
General. On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted. The FDICIA extensively revised
the regulatory and funding provision of the FDI Act and made revisions to
several federal banking statutes. Certain of these changes are summarized
below.
Prompt Corrective Action. Among other things, FDICIA requires the federal
banking regulators to take "prompt corrective action" with respect to, and
imposes significant restrictions on, any bank that fails to satisfy its
applicable minimum capital requirements. FDICIA establishes five capital
categories consisting of "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." Under applicable regulations, a bank that has a Total
Risk-Based Capital Ratio of 10.0% or greater, a Tier Risk-Based Capital Ratio
of 6.0% or greater and a leverage Capital Ratio of 5.0% or greater, and is not
subject to any written agreement, order, capital directive or prompt corrective
action directive to meet and maintain a specific capital level for any capital
measure is deemed to be "well capitalized." A bank that has a Total Risk-Based
Capital Ratio of 8.0% or greater, a Tier 1 Risk-Based Capital Ratio of 4.0% or
greater and a Leverage Capital Ratio of 4.0% or greater and does not meet the
definition of a well capitalized bank is considered to be "adequately
capitalized." A bank that has a Total Risk-Based Capital Ratio of less than
8.0% or has a Tier 1 Risk-Based Capital Ratio that is less than 4.0% (or a
Leverage Capital Ratio of less than 4.0%) is considered "undercapitalized." A
bank that has a Total Risk-Based Capital Ratio of less than 6.0%, or a Tier 1
Risk-Based Capital Ratio that is less than 3.0% or a Leverage Capital Ratio
that is less than 3.0% is considered to be "significantly undercapitalized",
and a bank that has a ratio of tangible equity to total assets equal to or less
than 2% is deemed to be "critically undercapitalized." A bank may be deemed to
be in a capital category lower than is indicated by its actual capital position
if it is determined to be in an unsafe or unsound condition or receives an
unsatisfactory examination rating. At December 31, 1993, VNB's ratio of
tangible equity to assets as calculated under the prompt correction action rule
was 6.88%. FDICIA generally prohibits a bank from making capital distributions
(including payment of dividends) or paying management fees to controlling
stockholders or their affiliates, if, after such payment, the bank would be
undercapitalized.
Under FDICIA and the applicable implementing regulations, an
undercapitalized bank will be (i) subject to increased monitoring by the FDIC;
(ii) required to submit to the FDIC an acceptable capital restoration plan
within 45 days, (iii) subject to strict asset growth limitations; and (iv)
required to obtain prior regulatory approval for certain acquisitions,
transactions not in the ordinary course of business, and entry into new lines
of business. In addition to the foregoing, the FDIC may issue a "prompt
corrective action directive" to any undercapitalized institution. Such a
directive may require sale or recapitalization of the bank, impose additional
restrictions on transactions between the bank and its affiliates, limit
interest rates paid by the bank on deposits, limit asset growth and other
activities, require divestiture of the subsidiaries, require replacement of
directors and officers, and restrict capital distributions by the bank's parent
holding company.
In addition to the foregoing, a significantly undercapitalized institution
may not award bonuses or increases in compensation to its senior executive
officers until it has submitted an acceptable capital restoration plan and
received approval from the FDIC.
Not later than 90 days after an institution becomes critically
undercapitalized, the appropriate federal banking agency for the institution
must appoint a receiver or, with the concurrence of the FDIC, a conservator,
unless the agency, with the concurrence of the FDIC, determines that the
purposes of the prompt corrective action provisions would be better served by
another course of action. FDICIA requires that any alternative determination
be "documented" and reassessed on a periodic basis. Notwithstanding the
foregoing, a receiver must be appointed after 270 days unless the appropriate
federal banking agency and the FDIC certify that the institution is viable and
not expected to fail.
Risk-Based Deposit Insurance Assessments. Effective January 1, 1993, a
transitional risk-based structure was implemented by the FDIC pursuant to the
FDICIA and the average assessment rate paid by Savings Association Insurance
Fund-insured and BIF-insured institutions was increased. Under the rule
implementing the transitional system, the FDIC assigns an institution to one of
three capital categories consisting of (1) well capitalized, (2) adequately
capitalized, or (3) undercapitalized, and one of three supervisory categories.
An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the transitional system,
there are nine assessment risk classifications (i.e., combinations of capital
categories and supervisory subgroups within each capital group) to which
differing assessment rates are applied. Assessment rates will range from 0.23%
of deposits for an institution in the highest category (i.e., well-capitalized
and healthy from a supervisory standpoint) to 0.31% of deposits for an
institution in the lowest category (i.e., undercapitalized and substantial
supervisory concern). The risk classification to which an institution is
assigned by the FDIC is confidential and may not be disclosed.
On June 17, 1993, the FDIC adopted a final rule establishing a new
risk-based system that will be implemented beginning with the semi-annual
assessment period commencing on January 1, 1994, as required under FDICIA.
Except for limited changes, the structure of the new risk-based system will be
substantially the same as the structure of the transitional system it will
replace. Under the FDIC rule implementing the new risk-based system, an
institution's deposit insurance assessment rate will be determined by assigning
the institution to a capital category and a supervisory subgroup to determine
which one of the nine risk classification categories is applicable, in
substantially the same manner as for the transitional system discussed above.
The FDIC is authorized to raise the assessment rates in certain circumstances.
If the FDIC determines to increase the assessment rates for all institutions,
institutions in all risk categories could be affected. The FDIC has exercised
this authority several times in the past and may raise BIF insurance premiums
again in the future. If such action is taken by the FDIC, it could have an
adverse effect on the earnings of VFSC, the extent of which is not currently
quantifiable.
Brokered Deposits and Pass-Through Deposit Insurance Limitations. Under
FDICIA, a bank cannot accept brokered deposits unless it either (i) is "Well
Capitalized" or (ii) is "Adequately Capitalized" and has received a written
waiver from the FDIC. For this purpose, "Well Capitalized" and "Adequately
Capitalized" are defined the same as under the Prompt Corrective Action
regulations. See "-Prompt Corrective Action" above. Banks that are not in the
"Well Capitalized" category are prohibited from offering rates of interest on
deposits that are more than 75 basis points above prevailing deposits.
Pass-through insurance coverage is not available for deposits of certain
employee benefits plans in banks that do not satisfy the requirements for
acceptance of brokered deposits, except that pass-through insurance coverage
will be provided for employee benefit plan deposits in institutions which at
the time of acceptance of the deposit meet all applicable regulatory
requirements and send written notice to their depositors that their funds are
eligible for pass-through deposit insurance.
Real Estate Lending Standards. FDICIA requires the federal bank
regulatory agencies to adopt uniform real estate lending standards. The FDIC
recently adopted implementing regulations which establish supervisory
limitations on Loan-to-Value ("LTV") ratios in real estate loans by
FDIC-insured banks. The regulations require FDIC-insured banks to establish
LTV ratio limitations within or below the prescribed uniform range of
supervisory limits.
Standards for Safety and Soundness. FDICIA requires the federal bank
regulatory agencies describe, by regulation, standards for all insured
depository institutions and depository institution holding companies relating
to: (i) internal controls, information systems and internal audit systems;
(ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk
exposure; (v) asset growth; and (vi) compensation, fees and benefits. The
compensation standards would prohibit employment contracts, compensation or
benefit arrangements, stock option plans, fee arrangements or other
compensatory arrangements that would provide "excessive" compensation, fees or
benefits, or that could lead to material financial loss. In addition, the
federal bank regulatory agencies are required by FDICIA to prescribe standards
specifying; (i) maximum classified assets to capital ratios; (ii) minimum
earnings sufficient to absorb losses without impairing capital; and (iii) to
the extent feasible, a minimum ratio of market value to book value for
publicly-traded shares of depository institutions and depository institution
holding companies.
Consumer Protection Provisions. FDICIA also includes provisions requiring
advance notice to regulators and customers for any proposed branch closing and
authorizing (subject to future appropriation of the necessary funds) reduced
insurance assessments for institutions offering "lifeline" banking accounts or
engaged in lending in distressed communities. FDICIA also includes provisions
requiring depository institutions to make additional and uniform disclosures to
depositors with respect to the rates of interest, fees and other terms
applicable to consumer deposit accounts.
The United States Congress has periodically considered and adopted
legislation which has resulted in and could result in further regulation or
deregulation of both banks and other financial institutions. Such legislation
could place VNB in more direct competition with other financial institutions,
including mutual funds, securities brokerage firms and investment banking
firms. No assurance can be given as to whether any additional legislation will
be enacted or as to the effect of such legislation on the business of VNB.
Item 2 - Properties
The principal offices of the Company and the Bank are located at 100 Main
Street in Brattleboro, Vermont. The Bank operates 31 other locations in the
Counties of Chittenden, Washington, Rutland, Bennington, Franklin, Windsor,
Orange and Windham. Eight offices are located in Windham County - The Main
Office and two branches in Brattleboro, and offices in Bellows Falls, Jamaica,
Newfane, West Dover and Wilmington. An office is operated in Bennington County
in the Town of Bennington, and five offices operate in Chittenden County in the
City of Burlington, two in South Burlington, Essex Junction Winooski. The Bank
has six offices in Windsor County in the Towns of Chester, Ludlow, Springfield,
White River Junction, Windsor and Woodstock. Four facilities are located in
Rutland County, three in Rutland and one in Fair Haven. Six offices are
located in Washington County, one each located on State Street and Main Street
in Montpelier, the Berlin Shopping Mall, the Vermont Shopping Center in Berlin,
Northfield and Barre. One office is operated in Franklin County in the town of
St. Albans and one office is located in Orange County in the town of
Williamstown. Of these offices, seventeen are owned by the Bank, twelve are
leased directly from independent parties as lessors, and two buildings are
owned by the Bank, but are situated on leased land. The Bank also owns and
occupies a building in Brattleboro which it uses for its operational functions.
The Company and Bank do not own any other real estate, except real estate that
may be held temporarily following a foreclosure in connection with loan
business. See Notes 5 and 8 to the Consolidated Financial Statements for
information as to amounts at which bank premises are carried, and as to
commitments for lease obligations.
Item 3 - Legal Proceedings
VFSC is a party to litigation arising in the ordinary course of its
business.
Management, after reviewing these claims with legal counsel, is of the
opinion that these matters, when resolved, will not have a material effect on
VFSC's consolidated financial condition or results of operation, including
quarterly earnings.
Item 4 - Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter to a vote of security
holders.
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters
As of February 28, 1994, VFSC Common Stock consisted of 20,000,000
authorized shares, $1.00 par value per share, of which 3,417,829 were issued
and outstanding (exclusive of treasury shares). VFSC Common Stock is traded on
NASDAQ-NMS. The transfer agent and registrar for VFSC Common Stock is VNB.
Presented below is the range of market prices paid on Common Stock of
Vermont Financial Services Corp. for each quarter in 1993 and 1992.
Dividends
Year Quarter High Low Declared
1993 4th $19-1/4 $16-3/4 $.08
3rd 19-1/2 17 .08
2nd 23 16-1/2 .08
1st 21 14-1/2 -
1992 4th $16-3/8 $13-1/2 .08
3rd 16-1/4 13 -
2nd 17-7/8 14-1/2 -
1st 19-1/2 9 -
Per the Bank's stockholder reports, the approximate number of
stockholders as of January 24, 1994 was 2,200.
Item 6 - Selected Financial Data
The following table sets forth selected data regarding the Company's
operating results and financial position. This data should be read in
conjunction with Management's Discussion and Analysis and the Consolidated
Financial Statements and Notes thereto. The results of operations, per share
data and the total cash dividends, allowance for loan losses and nonperforming
assets ratios as of and for the five years ended December 31, 1993 are derived
from the financial statements of the Company which have been audited by Coopers
& Lybrand, independent certified public accountants. The financial condition
and operations of the Company essentially reflect the operations of Vermont
National Bank.
<TABLE>
Year Ended December 31,
<CAPTION> <C> <C> <C> <C> <C>
1993 1992 1991 1990 1989
(Dollars in thousands, except per share data)
Results of Operations:
Interest income $66,729 $71,646 $82,867 $88,079 $86,657
Interest expense 25,075 33,116 46,558 53,292 50,749
Net interest income 41,654 38,530 36,309 34,787 35,908
Provision for loan losses 4,900 7,500 14,400 13,565 2,800
Net interest income after
provision for loan losses 36,754 31,030 21,909 21,222 33,108
Other operating income 16,393 13,912 13,317 10,105 8,301
Other operating expense 46,677 39,882 35,652 32,264 29,321
Income (loss) before income taxes 6,470 5,060 (426) (937) 12,088
Applicable income tax expense (benefit) 1,699 1,304 (610) (1,235) 3,395
Net income $4,771 $3,756 $184 $298 $8,693
====== ====== ==== ==== ======
Balance Sheet Data At Year End:
Total assets $934,485 $906,148 $893,658 $885,028 $852,575
Loans, net of unearned income 689,256 683,483 663,911 676,064 649,201
Securities available for sale 161,238 128,986 144,728 117,793 104,820
Total deposits 773,434 749,579 817,033 775,292 747,297
Stockholders' equity 68,208 63,084 59,415 59,174 61,656
Per Share Data:
Net income:
Primary $1.40 $1.10 $0.05 $0.09 $2.70
Fully diluted 1.40 1.10 0.05 0.09 2.60
Total cash dividends declared 0.24 0.08 0.15 0.90 1.00
Book value at period end:
Primary $19.96 $18.54 $17.50 $17.50 $18.33
Fully diluted $19.96 $18.54 $17.50 $17.50 $18.33
Average primary shares outstanding 3,411,211 3,399,343 3,388,072 3,372,413 3,215,657
Selected Financial Ratios:
Return on average total assets 0.52% 0.42% 0.02% 0.03% 1.09%
Return on average stockholders' equity 7.35 6.20 0.32 0.48 15.22
Net interest margin (1) 5.10 4.79 4.63 4.50 5.01
Cash dividends per share as a
percentage of earnings per share 17 7 300 1,000 38
Average stockholders' equity to
average assets 7.13 6.81 6.63 7.26 7.13
Core (leverage) capital ratio at period
end (2) 7.15 6.94 6.62 6.69 7.22
Total risk-based capital ratio at
period end (3) 11.40 10.77 10.37 9.72 N/A
Allowance for loan losses to period
end loans, net of unearned income 2.11 2.65 2.66 1.92 0.95
Nonperforming assets to period end
loans plus other real estate owned (4) 3.62 5.80 6.08 3.20 1.57
Net charge-offs to average net loans 1.20 1.05 1.55 1.02 0.25
</TABLE>
(1)Net interest income stated on a fully taxable equivalent basis divided by
average earning assets.
(2)Equal to stockholders' equity less intangilbes divided by total assets less
intangibles.
(3)Equal to stockholders' equity less intagnibles plus the allowable portion of
the allowance for loan losses divided by total risk weighted assets.
(4)Nonperforming assets include nonaccrual loans, restructured loans and other
real estate owned.
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
For the years ended December 31, 1993, 1992 and 1991.
Overview
Net income for 1993 was $4.8 million, up from the $3.8 million and
$184,000 earned in 1992 and 1991, respectively. Return on average assets was
0.52% in 1993, 0.42% in 1992 and 0.02% in 1991. Return on average
stockholders' equity was 7.35% in 1993, 6.20% in 1992 and 0.32% in 1991.
On a primary and fully diluted per share basis, net income was $1.40,
$1.10 and $0.05 in 1993, 1992 and 1991, respectively.
Results of Operations
Net Interest Income
The following table presents the major categories of earning assets and
interest-bearing liabilities with their corresponding average balances, related
interest income or expense and resulting yields and rates on a fully taxable
equivalent basis for the years indicated.
<TABLE>
<CAPTION> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993 1992 1991
Interest Rate Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance Expense(1) Paid(1) Balance Expense(1) Paid(1) Balance Expense(1) Paid(1)
ASSETS
Earning assets:
Loans, net of unearned
income (2) $688,976 $58,077 8.43% $668,197 $60,912 9.12% $667,677 $71,843 10.76%
Taxable
securities (at cost) 133,212 8,732 6.55 137,759 10,598 7.69 115,922 10,292 8.88
Tax exempt
securities (at cost) 7,603 632 8.31 7,484 615 8.22 9,333 908 9.73
Federal funds sold and
securities purchased
under agreements to
resell 799 25 3.13 1,018 38 3.73 8,342 489 5.86
Interest-bearing bank
deposits 49 2 4.08 50 2 4.00 2,169 147 6.78
Total earning assets 830,639 67,468 8.12 814,508 72,165 8.86 803,443 83,679 10.42
Noninterest-earning assets:
Cash and due from banks 38,155 34,551 32,434
Premises and equipment,
net 19,124 18,248 17,751
Other assets 37,634 40,956 33,630
Allowance for loan
losses (16,188) (18,445) (16,176)
Total assets $909,364 $889,818 $871,082
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings and transactional
deposits $439,176 12,333 2.81 $388,243 14,368 3.70 $337,161 18,165 5.39
Certificates of deposit
and other time deposits:
--$100,000 or more 29,264 1,214 4.15 71,263 3,870 5.43 118,716 8,714 7.34
--Under $100,000 195,846 8,642 4.41 225,668 12,631 5.60 241,030 17,583 7.29
Federal funds purchased
and securities sold
under agreements to
repurchase 66,800 2,335 3.50 41,194 1,630 3.96 25,620 1,590 6.21
Other borrowed funds 16,064 551 3.43 15,469 617 3.99 8,385 506 6.03
Total interest-bearing
liabilities 747,150 25,075 3.36 741,837 33,116 4.46 730,912 46,558 6.37
Noninterest-bearing
liabilities:
Demand deposits 90,934 80,254 73,485
Other liabilities 6,397 7,138 8,902
Total liabilities 844,481 829,229 813,299
Stockholders' equity 64,883 60,589 57,783
Total liabilities
and stockholders
equity $909,364 $889,818 $817,082
======= ======== ========
Net interest income $42,393 $39,049 $37,121
====== ====== ======
Net interest spread(3) 4.76% 4.40% 4.05%
==== ==== ====
Net Interest margin 5.10% 4.79% 4.63%
==== ==== ====
</TABLE>
(1) Includes a fully taxable equivalent adjustment based on a 34% federal
income tax rate.
(2) Nonaccrual loans are included in the average amounts outstanding.
(3) The difference between the rate earned on total earning assets and the rate
paid on total interest-bearing liabilities.
Net interest income increased $3.1 million or 8.1% to $41.6 million in
1993 from $38.5 million in 1992. This compared to a $2.2 million or 6.1%
increase in 1992 from 1991. On a fully taxable equivalent basis, net interest
income increased $3.3 million or 8.6% from 1992 to 1993 and $1.9 million or
5.2% from 1991 to 1992. The increase in 1993 was primarily caused by the
following: First, total earning assets increased $16.1 million while total
interest-bearing liabilities only rose $5.3 million as nonperforming asset
levels decreased. Second, the rate paid on interest-bearing liabilities
decreased 1.10% while the rate earned on earning assets only decreased 0.74%.
During 1990 and 1991 banks in New England generally paid premium rates for
deposits. These premiums narrowed in 1992 and 1993. In addition, the
Company's growth in savings and transactional deposits and the ability to
attract low cost securities sold under agreements to repurchase allowed it to
reduce its reliance on higher cost certificates of deposit and other time
deposits of $100,000 or more and under $100,000.
Average earning assets increased slowly over the last two years with 2.0%
and 1.4% growth rates in 1993 and 1992, respectively. The 1993 growth came
from loans, primarily in the municipal area.
Average interest-bearing liabilities increased $5.3 million, or 0.7% in
1993 following a $10.9 million, or 1.5% growth in 1992. Over the two-year
period, average core interest-bearing deposits (savings and transactional
deposits and certificates of deposit and other time deposits under $100,000)
increased by $56.8 million. Non-core interest-bearing liabilities were reduced
by $40.6 million over the same period.
In spite of rate fluctuations, the Company's net interest margin had been
between 5.01% and 5.09% from 1987 to 1989. Continued weakness in the New
England and Vermont economies in 1990 and 1991 resulted in higher levels of
nonaccrual loans and nonearning assets for 1990 and 1991. This resulted in a
loss of interest income and a reversal of previously accrued interest on loans
placed on nonaccrual status. This, combined with the premium rates paid for
deposits in New England in 1991 and 1990, resulted in net interest margins of
4.63% and 4.50% for 1991 and 1990, respectively. During 1992, the reduction of
the New England premium rates and higher loan fees in the mortgage area (see
discussion of mortgage activity following) led to an improved margin of 4.79%.
Continued strong loan fees, a reduction in the level of nonperforming assets
and an improved net interest spread as discussed above resulted in a margin of
5.10% in 1993. Management expects some deterioration in this rate in 1994 as
competition leads to a lower interest spread.
The following table provides an analysis of the variances in net
interest income, on a fully taxable equivalent basis, attributable to changes
in volume and rate. Volume variances are calculated by multiplying the
preceding year's rate by the current year's change in the average balance.
Rate variances are calculated by multiplying the current year's change in rate
by the prior year's average balance.
<TABLE>
<CAPTION> <C> <C> <C> <C> <C> <C>
1993 vs. 1992 1992 vs. 1991
Net Net
Increase Due to Changes in Increase Due to Changes in
(Decrease) Volume(1) Rate(1) (Decrease) Volume(1) Rate(1)
(In thousands)
INTEREST INCOME:
Loans(2) $(2,835) $1,860 $(4,695) $(10,931) $56 $(10,987)
Taxable securities (1,866) (340) (1,526) 306 1,791 (1,485)
Tax exempt securities 17 10 7 (293) (164) (129)
Federal funds sold and securities
purchased under agreements to resell (13) (7) (6) (451) (319) (132)
Interest-bearing bank
deposits - - - (145) (102) (43)
Total interest income (4,697) 1,523 (6,220) (11,514) 1,262 (12,776)
INTEREST EXPENSE:
Savings and transactional deposits (2,035) 1,721 (3,756) (3,797) 2,475 (6,272)
Certificates of deposit and other
time deposits:
--$100,000 or more (2,656) (1,897) (759) (4,844) (2,934) (1,910)
--Under $100,000 (3,989) (1,530) (2,459) (4,952) (1,067) (3,885)
Federal funds purchased and securities
sold under agreements to repurchase 705 913 (208) 40 747 (707)
Other borrowed funds (66) 23 (89) 111 323 (212)
Total interest expense (8,041) (770) (7,271) (13,442) (456) (12,986)
Change in net interest income $3,344 $2,293 $1,051 $1,928 $1,718 $210
====== ====== ====== ====== ====== ======
</TABLE>
(1) The effect of changes due to both volume and rate have been allocated to
the change in volume and change in rate categories in proportion to the
relationship of the absolute dollar amounts of the change in each category.
(2) Includes nonaccrual loans.
Provision for Loan Losses
The provision for loan losses charged to operating expense is based upon
management's judgment of the amount necessary to maintain the allowance for
loan losses at a level adequate to absorb possible losses. The factors
evaluated include, but are not limited to: the size, composition, growth and
quality of the loan portfolio, specific and potential problem loans, current
economic conditions and their effect on a borrower's performance in relation to
contract terms, historical loss experience by loan type and loan
collectibility.
The provision for loan losses in 1993 was $4.9 million compared to $7.5
million in 1992 and $14.4 million in 1991. Net loans charged off were $8.2
million, $7.0 million and $10.3 million for the respective years. The $6.9
million reduction in the provision for 1992 was principally due to 1) the lower
level of charge-offs (See "Allowance for Loan Losses" section following), 2) a
small reduction in the level of nonperforming assets (See "Nonperforming Assets
and Risk Elements" section following) and 3) management's view that the Vermont
economy began a slow recovery near the end of 1992. The provision was reduced
an additional $2.6 million in 1993 as nonperforming asset levels improved
significantly, and the Vermont economy continued to improve.
Other Operating Income and Other Operating Expense
In 1993, other operating income increased $2.5 million, or 18%, from the
$13.9 million earned in 1992. Net of the $1.1 million increase in securities
gains, other operating income was up $1.4 million, or 11%, compared to 1992.
In 1992, other operating income increased $595,000, or 4.5% over 1991.
The two major items representing the increase were service charges on deposit
accounts and securities gains. Respectively, they contributed $446,000 and
$374,000 to the increase. Noninterest income is expected to continue to grow
at a similar pace in 1994.
Total other operating expense increased $6.8 million, or 17%, in 1993 and
$4.2 million, or 12% in 1992. Net OREO and collection expenses and losses
represented $4.1 million, or 61%, and $1.6 million, or 38% of the increases in
1993 and 1992, respectively. As a result of the reduction of nonperforming
assets achieved in 1993, management expects a significant reduction of this
expense in 1994. Pension and other employee benefits increased $1.1 million in
1993 due to 1) a $497,000 increase in early retirement and termination costs,
2) a $114,000 profit sharing allocation as a result of the Company 25% match of
employees' contributions to the Company's 401k plan, 3) a $152,000 increase in
medical insurance payments, 4) a $146,000 increase in the cost of the Company's
supplemental executive officers' retirement plan due to decreasing the discount
rate used to calculate benefits from 9% to 7-1/2% and 5) a $98,000 increase in
pension expense. The discount rate that will be used to calculate pension and
other employee benefits for 1994 will be 7% versus 7-1/2% in 1993. Although a
decrease in the discount rate will increase the costs of the associated
benefits, management expects that it will not be significant. Salary expense
was $16.3 million in 1993, $15.8 million in 1992 and $14.6 million in 1991,
increases of 3% and 8%, respectively.
Applicable Income Taxes
During 1993 and 1992 the Company recorded income tax expense of $1.7
million and $1.3 million respectively, versus a benefit of $0.6 million in
1991. The change was almost entirely due to the level of pre-tax earnings.
See footnotes 1 and 9 to the financial statements.
Financial Condition
Loans
Over the past two years the loan portfolio has increased $25.3 million, or
3.8%. Of the $23.0 million increase in commercial loans over the two year
period, $21.5 million has resulted from a higher level of municipal loans.
Residential loans and consumer loans are up $14.2 million and $9.2 million,
respectively over the period while construction and commercial loans secured by
real estate are down $21.1 million. Loans, net of unearned income, totaled
$689.3 million at December 31, 1993 and represented 73.8% of total assets
compared to 75.4% and 74.3% in 1992 and 1991, respectively. In structuring the
composition of its loan portfolio, the Company considers the following factors:
profitability, liquidity, risk, rate sensitivity and service in its market
area.
The Bank makes commercial business loans to small and medium sized
companies in Vermont and is the leading commercial lender in the State.
Construction and commercial loans secured by real estate include loans
secured by residential and commercial properties, office and industrial
buildings, condominium development and land development properties. The
Company limits both of these types of lending activities and the properties
securing these loans to its primary market area in Vermont and adjacent
communities in neighboring states. Over 60% of the commercial real estate
portfolio represents loans on owner occupied properties. Real estate values in
Vermont have been depressed as a result of the recent recession in New England
and the Nation, but have experienced some recent improvement. Management's
goal is to keep the construction loan portion of the loan portfolio below 5% of
total loans. As of December 31, 1993 this sector represented 3.3% of the
portfolio.
Residential real estate loans increased 2.9% to $222.9 million in 1993 and
3.7% to $216.5 million in 1992. The lack of growth in this portfolio reflects
the Company's strategy to originate fixed-rate mortgage loans for sale in the
secondary market, while retaining servicing on such loans. Also included in
this category are home equity loans which totaled $37.1 million, $38.5 million
and $39.6 million on December 31, 1993, 1992 and 1991, respectively. In 1993,
the Bank originated $231.3 million of residential mortgage loans and sold
$189.7 million of loans in the secondary market, compared to $235.6 million
originated and $192.1 million sold in 1993 and $144.4 million originated and
$117.0 million sold in 1991. The high levels of the last two years in part
reflect lower interest rates which led to a significant number of mortgage
refinancings. This trend is expected to subside in 1994 due to anticipated
interest rate increases.
At year end 1993, the mortgage servicing portfolio totaled $438.9 million
compared to $416.9 million at year end 1992 and $369.1 million at year end 1991
and currently generates income of approximately $2.0 million per year. Of the
residential real estate portfolio, 72.8% were adjustable rate loans and 27.2%
were fixed rate loans. Residential real estate loans represented 32.3%, 32.1%
and 31.9% of gross loans at year end 1993, 1992 and 1991, respectively.
Consumer loans represented 13.4%, 12.7% and 12.7% of gross loans at year
end 1993, 1992 and 1991, respectively. It is the Company's strategy to
increase the size of the consumer portfolio at a faster rate than either the
commercial or real estate portfolios during 1994. Credit card loans and
related plans were $36.9 and $28.2 million of total consumer loans at December
31, 1993 and 1992, respectively.
The following table summarizes the compositions of the Company's loan portfolio
at the dates indicated.
<TABLE>
December 31,
<CAPTION> <C> <C> <C> <C> <C>
1993 1992 1991 1990 1989
(in thousands)
Commercial(1) $192,964 $188,433 $169,986 $171,214 $175,558
Real Estate:
Residential 222,852 216,503 208,666 196,381 201,475
Commercial 158,034 164,613 160,276 150,831 114,052
Construction 22,984 28,370 41,804 58,192 76,822
Total real estate 493,870 409,486 410,746 405,404 392,349
Consumer 92,422 85,564 83,178 99,446 81,294
Total loans, net of unearned income $689,256 $683,483 $663,910 $676,064 $649,201
======== ======== ======== ======== ========
</TABLE>
(1) Includes loans to Vermont municipalities and industrial revenue bonds of
$30,339, $13,680, $8,857, $11,767 and $14,517 for years 1993 through 1989,
respectively.
The following table details the loan maturity and interest rate sensitivity of
loans, exclusive of loans secured by 1-4 family residential property and
consumer loans, at December 31, 1993.
<TABLE>
<CAPTION> <C> <C> <C> <C>
Repricing
After One After
Within But Within Five
One Year Five Years Years Total
(in thousands)
Loans:
With fixed interest rates $41,099 $24,405 $34,176 $99,680
With variable interest rates 274,302 - - 274,302
Total $315,401 $24,405 $34,176 $373,982
======= ====== ====== =======
</TABLE>
Nonperforming Assets and Risk Elements
It is the Company's policy to manage the loan portfolio so as to recognize
and respond to problem loans at an early stage and thereby minimize losses.
All new loan originations, loan renewals, loans categorized as past due and
classified loans are reviewed on a weekly basis by the administrative officers
in charge of the commercial, mortgage and consumer loan portfolios. In turn,
the status of these loans is reported in detail to senior management and the
Loan Committee of the Board of Directors on a monthly basis. From these
reviews, determinations are made on a case-by-case basis as to the
collectibility of principal and interest.
Nonreceipt of contractually due principal or interest payments on loans 30
days after the due date results in their being reported as past due with
increased monitoring and collecting efforts to restore such loans to current
status. Mortgage loans are classified as nonaccrual and placed on a cash basis
for purposes of income recognition when they become 180 days past due or when
foreclosure action is started. Commercial loans are placed on nonaccrual
status and placed on a cash basis when they become 90 days past due as to
principal or interest, unless they are adequately collateralized or are
expected to result in collection within the next 60 days. While no specific
period of delinquency triggers nonaccrual status for consumer loans, unsecured
installment loans 90 days or more past due and secured installment loans 180
days or more past due are generally recommended for charge-off.
A loan remains in nonaccrual status until the factors which indicate
doubtful collectibility no longer exist and six consecutive months of
contractual payments are received or until the loan is determined to be
uncollectible and is charged off against the allowance for loan losses. Credit
card loans are required to be charged off after 180 days without a payment.
Commercial loans 180 days or more past due must be recommended for charge-off
unless management determines the collateral is sufficient. When a mortgage
loan in default is transferred to OREO, its carrying value is the lesser of the
loan amount or the fair value of the property collateralizing the loan, less
the estimated cost to sell the property. A loan is classified as a
restructured loan when the interest rate is materially reduced or when the term
is extended beyond the original maturity date because of the inability of the
borrower to service the interest payments at the contractual rate. All of the
$1.5 million of accruing restructured loans as of December 31, 1993 were in
full compliance with restructured terms and conditions. An additional $4.3
million of loans have been restructured and are in full compliance with
restructured terms and conditions. However, as there remains some doubt as to
the ultimate collectibility of all principal and interest on these loans, they
are classified as nonaccrual as of December 31, 1993 in the table below. The
average yield on these loans is 5.1% with $2.7 million of the balance at a rate
of interest below the current market.
The following table provides information with respect to the Company's
past due loans and the components of nonperforming assets at the dates
indicated.
<TABLE>
<CAPTION> <C> <C> <C> <C> <C>
December 31,
1993 1992 1991 1990 1989
(Dollars in thousands)
Loans 90 days or more past due
and still accruing interest $1,398 $5,765 $7,990 $3,274 $3,944
====== ====== ====== ====== =====
Nonperforming assets:
Nonaccrual loans $20,761 $31,646 $27,828 $19,727 $8,849
Other real estate owned 2,756 8,510 7,467 1,794 1,373
Restructured loans - accruing 1,532 - 5,505 185 -
Total nonperforming assets $25,049 $40,156 $40,800 $21,706 $10,222
======= ======= ======= ======= =======
Nonperforming assets to period end loans,
net of unearned income, plus other
real estate owned 3.62% 5.80% 6.08% 3.20% 1.57%
==== ==== ==== ==== ====
</TABLE>
In December 1993, $5.5 million of insubstance foreclosures (ISF) were
transferred from OREO to loans and are included with nonaccrual loans in the
above table. Prior years' ISF loans have been reclassified accordingly.
Interest income of $1,765,000 and $2,161,000 would have been recorded in
1993 and 1992, respectively, if nonaccrual and restructured loans had been on a
current basis in accordance with their original terms. No interest income was
recorded on nonaccrual loans during 1993 or 1992. All payments, totaling
$818,000 and $668,000, respectively were applied as principal reductions.
At December 31, 1993, all nonaccrual loans were collateralized. In
addition, it is the Company's policy to obtain personal guarantees of the
principals whenever it is possible. As of December 31, 1993, 36% of the total
nonaccrual loans are current as to contractual terms. Loans to three
borrowers, totaling $4.9 million represented 24% of nonaccrual loans.
Management expects to see improvement in 1994 over the 1993 charged-off loan
total with a further decrease in the level of nonperforming assets. Management
is not aware of any current recommendations by regulatory authorities or
suggestions with respect to loans classified as loss, doubtful, substandard or
special mention which, if they were implemented, would have a material effect
on the Company.
Allowance for Loan Losses
The allowance for loan losses is available to absorb future losses which
are anticipated in the current loan portfolio. The adequacy of the allowance
for loan losses, which is formally reviewed on a monthly basis by management,
is evaluated according to the factors outlined in "Provision for Loan Losses".
To maintain the allowance at an adequate level, current earnings are charged
with an amount necessary to restore the allowance to the desired level. A loan
loss is charged against the allowance when management believes the
collectibility of principal and interest with respect to such loan is unlikely.
The allowance for loan losses equalled $14.6 million, or 2.11% of the total
loan portfolio at December 31, 1993, compared with 2.65% at year end 1992 and
2.66% at year end 1991. On December 31, 1993 the allowance for loan losses
represented 58% of total nonperforming assets and 65% of nonperforming loans,
compared to 45% and 57%, respectively, at year end 1992.
The following table provides an analysis of the allowance for loan losses
and an analysis of loans charged off and recoveries by type of loan and for the
years indicated.
<TABLE>
<CAPTION> <C> <C> <C> <C> <C>
Year Ended December 31,
1993 1992 1991 1990 1989
(Dollars in thousands)
Allowance for loan losses at beginning of year $17,893 $17,410 $12,924 $6,177 $4,936
Acquired allowance (See Note 4 to Consolidated
Financial Statements) - - 402 - -
Loans charged off:
Commercial, commercial real estate and construction (7,318) (5,721) (8,631) (5,690) (1,340)
Real Estate-residential (708) (372) (241) (134) (6)
Consumer (1,408) (1,940) (2,207) (1,501) (892)
Total loans charged off (9,434) (8,033) (11,079) (7,325) (2,238)
Recoveries of loans previously charged off:
Commercial, commercial real estate and construction 828 550 553 326 473
Real estate-residential 52 83 20 - -
Consumer 320 383 190 181 206
Total Recoveries 1,200 1,016 763 507 679
Net loans charged off 8,234 7,017 10,316 6,818 1,559
Additions to allowance charged to earnings 4,900 7,500 14,400 13,565 2,800
Allowance for loan losses at year end $14,559 $17,893 $17,410 $12,924 $6,177
======= ======= ======= ======= ======
Ratio of net charge-offs to average loans 1.20% 1.05% 1.55% 1.02% 0.25%
Allowance for loan losses to period end loans, net of
unearned income 2.11% 2.65% 2.66% 1.92% 0.95%
</TABLE>
Net loans charged off in 1993 totaled $8,234,000 or 1.20% of average
loans. This compares with $7,017,000 or 1.05% in 1992 and $10,316,000 or 1.55%
in 1991. In 1993 and 1992, no loan charged off exceeded 10% of the net loans
charged off during the year. In 1991 loans charged off for one customer
totaled $1,125,000. No other charge-offs exceeded 10% of the year's total.
The increase in charge-offs for 1993 is consistent with the decrease in
nonperforming assets noted above. Management entered into certain stipulated
agreements and took deeds in lieu of foreclosure in order to speed up the
foreclosure process. While this strategy reduced the ultimate cost of these
problem assets, it did increase the charge-offs for 1993.
While all segments of the Company's loan portfolio are subject to
continuous quality evaluation, there is no precise method for predicting loan
losses. An evaluation of the collectibility of a loan requires the exercise of
management's judgment. Since the determination of the adequacy of the
allowance is necessarily judgmental and involves consideration of various
factors and assumptions, management is of the opinion that an allocation of the
reserve is not necessarily indicative of the specific amount of future
charge-offs or the specific loan categories in which these charge-offs may
ultimately occur.
The following table summarizes the allocation of the allowance for loan
losses at December 31, 1993, 1992, 1991, 1990 and 1989. Notwithstanding these
allocations, the entire allowance for loan losses is available to absorb
charge-offs in any category of loans. Also during the last four years,
management provided an unallocated allowance for expected charge-offs not
specifically identified in the loan portfolio.
<TABLE>
<CAPTION> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31,
1993 1992 1991 1990 1989
Loan Type Loan Type Loan Type Loan Type Loan Type
Amount to Total Amount to Total Amount to Total Amount to Total Amount to Total
Allocated Loans Allocated Loans Allocated Loans Allocated Loans Allocated Loans
(Dollars in thousands)
Commercial $4,841 28% $6,722 28% $4,397 26% $2,700 25% $2,300 27%
Real Estate-Commercial 3,976 23 4,563 23 3,921 23 2,330 22 1,494 17
Construction 519 3 1,827 4 1,081 6 918 9 1,006 12
Real Estate-Residential 722 32 709 32 1,326 32 557 29 170 31
Consumer 1,708 14 1,845 13 1,840 13 1,326 15 1,207 13
Unallocated 2,793 - 2,227 - 4,845 - 5,093 - - -
$14,559 100% $17,893 100% $17,410 100% $12,924 100% $6,177 100%
======= === ======= === ======= === ======= === ====== ===
</TABLE>
Investment Portfolio
The investment portfolio is utilized primarily for liquidity and
secondarily for investment income. As a result, the portfolio is primarily
comprised of short-term U. S. Treasury instruments and high grade municipal
obligations, mortgage-backed securities and corporate bonds with short
maturities. These various segments of the investment portfolio and their
related income are reported monthly to the Company's Board of Directors.
The following table summarizes the composition of the Company's investment
portfolio at the dates indicated.
<TABLE>
<CAPTION> <C> <C> <C>
December 31,
1993 1992 1991
(Market (Cost (Cost
Value) Value) Value)
(In thousands)
U.S. Treasury and other U.S..
Government agencies $68,170 $43,650 $49,962
State and political subdivisions 8,886 6,854 9,182
Mortgage-backed securities 70,391 70,805 75,034
Other securities 13,791 7,677 12,187
Total $161,238 $128,986 $146,365
======== ======== ========
</TABLE>
The investment portfolio increased 25.0% to $161.2 million at year end.
During 1992 the portfolio decreased 11.9% to $129.0 million at year end. The
total portfolio as a percent of total assets was 17.3% at year end 1993
compared to 14.2% and 16.4% at year end 1992 and 1991, respectively.
On December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115 (See Note 1 to the Consolidated Financial
Statements). Securities are carried at fair market value at December 31, 1993
in the above tables. The other two year's values reflect the amortized cost of
the securities at the respective dates. During 1993 the Company and national
economy saw record low interest rates and record high repayments in the
mortgage-backed securities portfolio. These mortgage-backed securities include
newly issued and seasoned securities of government housing agencies and those
portions of agency-backed collateralized mortgage obligations with relatively
short and stable average lives. During 1993 management reinvested the proceeds
of sales and prepayments in this portfolio. Additional funds were primarily
invested in U. S. Treasury and other U. S. government agency securities. The
average maturity of the investment portfolio remains at approximately 3-1/2
years.
The Company invests a portion of its capital in marketable equity
securities which comprised 3.0%, 3.7% and 3.0% of total investments at December
31, 1993, 1992 and 1991, respectively.
The following table sets forth the maturities of the Company's investment
securities at December 31, 1993 and the weighted average yields of such
securities. Weighted average yields on tax exempt obligations have been
computed on a fully taxable equivalent basis assuming a federal tax rate of
34%. The yields are calculated by dividing annual interest, net of
amortization of premiums and accretion of discounts, by the book value of the
securities at December 31, 1993.
<TABLE>
<CAPTION> <C> <C> <C> <C> <C> <C> <C> <C>
Maturing (at Market Value)
After One But After Five But
Within Within Five Within Ten After
One Year Years Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in thousands)
U.S. Treasury and other U.S. Government
agencies $ - -% $22,186 6.47% $45,984 5.88% $ - -%
State and political subdivisions 504 7.43 3,235 8.06 4,909 6.39 238 10.61
Mortgage-backed securities 13,028 7.42 52,219 6.18 5,144 6.53 - -
Other fixed income securities 8,297 3.39 645 5.52 - - - -
Total $21,829 5.89 $78,285 6.33 $56,037 5.98 $238 10.61
======= ======= ======= ====
Tax equivalent adjustment for calculation
of yield $13 $89 $107 $9
====== ====== ====== ===
</TABLE>
(1) Does not include equity securities of $4,849 at December 31, 1993.
Deposits
Average total deposits for 1993 of $755.2 million represented a $10.2
million, or 1.3%, decrease from 1992's average, which had decreased $5.0
million, or 0.6%, over 1991's average balances. The reduction for both years
was due to management's decision to replace high cost certificates of deposit
and other time deposits of $100,000 or more (large CDs) with less expensive
deposits, securities sold under agreements to repurchase and other borrowings.
The average balance of these large CDs was $29.3 million in 1993, $71.3 million
in 1992 and $118.7 million in 1991. In 1993 this reduction was offset by a
$31.8 million total increase in the average balance of all other deposit
categories, considered core deposits by management. Large CDs represented 3.9%
of average total deposits in 1993 versus 9.3% in 1992 and 15.4% in 1991. The
majority of these deposits were obtained from local Vermont customers.
Management expects to limit future asset growth primarily to the growth of core
deposits as opposed to the more volatile large CDs and other borrowed funds.
The following table summarizes the daily average amount of deposits for
the years indicated, and rates paid on such deposits on the last day of the
respective year.
<TABLE>
<CAPTION> <C> <C> <C> <C> <C> <C>
December 31,
1993 1992 1991
Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
Demand deposits $90,934 - % $80,254 - % $73,485 - %
Interest-bearing transactional deposits 303,360 2.77 266,701 2.80 262,553 4.05
Savings deposits 135,816 2.50 121,542 2.98 74,608 5.00
Certificates of deposit and other
time deposits:
-$100,000 or more 29,264 3.91 71,263 4.31 118,716 6.29
-Under $100,000 195,846 4.29 225,668 4.70 241,030 6.65
Total $755,220 $765,428 $770,392
======== ======== ========
</TABLE>
The following table shows the maturity schedule of certificates of deposit
and other time deposits of $100,000 or more at December 31, 1993.
<TABLE>
<CAPTION> <C> <C> <C>
Certificates Other Time
of Deposit Deposits Total
(in thousands)
3 months or less $7,746 $5,169 $12,915
Over 3 through 6 months 4,354 - 4,354
Over 6 through 12 months 5,989 - 5,989
Over 12 months 1,750 - 1,750
Total $19,839 $5,169 $25,008
======= ====== =======
</TABLE>
Capital Resources
The Company engages in an ongoing assessment of its capital needs in order
to maintain an adequate level of capital to support business growth and ensure
depositor protection. The Company's two sources of capital are internally
generated funds and the capital markets. Primary reliance is on internally
generated capital.
Stockholders' equity as a percent of assets was 7.30%, 6.96% and 6.65% as
of December 31, 1993, 1992 and 1991, respectively. Management's goal is to
maintain a 7% equity to asset ratio so that the Company has sufficient capital
to take advantage of expansion or capital opportunities that might arise.
Average equity to average assets equalled 7.13% in 1993, 6.81% in 1992 and
6.63% in 1991.
As a result of the Federal Deposit Insurance Corporation (FDIC)
Improvement Act of 1991 (FDICIA), bank regulators have established uniform
capitalization standards as per the following table. The ratios for the
Company and the Bank as of December 31, 1993 and 1992 are shown for comparative
purposes placing it in the "well capitalized" category at each respective date.
<TABLE>
<CAPTION> <C> <C> <C>
Total Risk Tier 1 Risk Leverage
Based Ratio Based Ratio Ratio
Well Capitalized 10% or above 6% or above 5% or above
Adequately
Capitalized 8% or above 4% or above 4% or above
Undercapitalized less than 8% less than 4% less than 4%
Significantly
Undercapitalized less than 6% less than 3% less than 3%
Critically
Undercapitalized - - 2% or less
Vermont National Bank
December 31, 1993 11.02% 9.76% 6.88%
December 31, 1992 10.32% 9.05% 6.61%
Vermont Financial
Services Corp.
December 31, 1993 11.40% 10.14% 7.15%
December 31, 1992 10.77% 9.51% 6.94%
</TABLE>
FDIC insurance rates after 1992 vary depending on a bank's capital ratio
and regulatory rating. Well-capitalized institutions will be assessed less
than those that are adequately capitalized, which are in turn lower than the
other categories.
Liquidity and Interest Rate Sensitivity
Liquidity measures the ability of the Company to meet its maturing
obligations and existing commitments, to withstand fluctuation in deposit
levels, to fund its operations and to provide for customers' credit needs.
Liquidity is monitored by the Company on an ongoing basis. Ready asset
liquidity is provided by cash and due from banks, sales of excess funds, loan
repayments and an investment portfolio with short maturities and ready
marketability. In addition, the Company has a strong core deposit base which
supports a significant portion of its earning assets. Secondary liquidity is
provided by the potential sale of loans and other assets, large certificates of
deposit, short or long-term debt borrowings, federal funds purchased,
repurchase agreements and borrowing from the Federal Reserve Bank. During
1990, the Bank became a member of the Federal Home Loan Bank (FHLB) and has a
borrowing capability of approximately $132 million with the FHLB.
During 1993, total loans and securities increased by $6 million and $32
million, respectively. These increases were primarily funded through a $44
million increase in core deposits (deposits other than certificates of deposit
and other time deposits of $100,000 or more.)
Effective asset/liability management includes maintaining adequate
liquidity and minimizing the impact of future interest rate changes on net
interest income. The Company attempts to manage its interest rate sensitivity
position through the composition of its loan and investment portfolios and by
adjusting the average maturity of and establishing rates on earning assets in
line with its expectations for future interest rates. The Company endeavors to
maintain a cumulative gap ratio in all periods under one year of approximately
one to one.
The following table summarizes the Company's interest rate sensitivity
over various periods at December 31, 1993.
<TABLE>
<CAPTION> <C> <C> <C> <C> <C> <C>
Repricing Date
0-30 Days 31-90 Days 91-180 Days 181-365 Days 1-5 Years Over 5 Years
(In thousands)
Earning assets:
Loans (1) $284,897 $60,121 $70,572 $101,710 $116,127 $35,068
Investment securities (2) (3) 11,004 4,600 5,512 22,077 87,636 25,560
Other earning assets 4,010 - 40 - - -
Total 299,911 64,721 76,124 123,787 203,763 60,628
Interest-bearing liabilities:
MMDA's (4) 184,175 5,126 7,689 15,381 15,381 -
NOW's and Super NOW's (4) 10,053 6,702 10,053 20,106 52,589 -
Savings and Clubs (4) 15,761 15,762 12,609 18,913 70,000 -
Certificates of Deposit 25,640 38,690 49,530 52,672 45,860 807
Borrowed Funds 82,815 1,878 609 400 - 733
Total 318,444 68,158 80,490 107,472 183,830 1,540
Net Interest Sensitivity Gap $(18,533) $(3,437) $(4,366) $16,315 $19,933 $59,088
======== ======= ====== ====== ======= =======
Cumulative Interest Sensitivity Gap $(21,970) $(26,336) $(10,021) $9,912 $69,000
======= ======= ======= ====== =======
</TABLE>
(1) Does not include non-accrual loans of $20,761 at December 31, 1993.
(2) Does not include equity securities of $4,849 at December 31, 1993.
(3) Repricing dates for mortgage-backed securities are based upon estimated
actual principal prepayments obtained from third party sources. Amounts
differ from maturity distribution in Note 2 to the financial statements,
which reports the original average life date for mortgage-backed
securities.
(4) Estimated based upon historical experience over the last five years.
Money-market deposit accounts with an interest rate tied to an external
index are included in the 0-30 day category.
Recent Developments
During 1994, the Company plans to open a new branch in Barre, Vermont and
convert its computer software. The cost of these capital expenditures will be
approximately $2 million. No other additions to premises or equipment are
expected to exceed $500,000. All additions will be funded through the
operations of the Company.
The Company's financial statements will be affected by rules and
regulations which have been announced but are not yet effective.
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan". This Statement shall be effective for financial
statements issued for fiscal years beginning after December 15, 1994. This
Statement is not expected to have a material impact on the financial statements
of the Company.
The FASB has also issued SFAS No. 112 "Employers' Accounting for
Postemployment Benefits", which is effective for the Company's 1994 financial
statements. This statement's impact on the Company is expected to be
immaterial.
A recent District of Columbia federal court of appeals ruling, Chemical
Manufacturers Association vs. Environmental Protection Agency No. 92-1314,
potentially increased banks' liabilities for hazardous waste cleanup costs. It
is the Bank's policy to require Phase I site assessments from a qualified
engineering firm for all real estate loans in excess of $500,000 and any
property of concern for loans below $500,000. Management is not aware of any
hazardous waste actions against the Company or its borrowers.
In the third quarter of 1993 the Company announced a definitive merger
agreement with West Mass Bankshares, Inc. ("West Mass") of Greenfield, Mass.
The Company has agreed to acquire West Mass in a stock-for-stock merger which
will result in West Mass' banking subsidiary, United Savings Bank, becoming a
wholly owned subsidiary of VFSC. West Mass has total assets of approximately
$220 million as of December 31, 1993 and operates 6 banking offices in or near
Greenfield, Mass. The Company anticipates closing the transaction in the
second quarter of 1994 subject to receiving shareholder and regulatory
approval. A special shareholders' meeting to consider the proposed merger has
been called for April 26, 1994.
<TABLE>
<CAPTION> <C> <C>
Item 8 - Financial Statements and Supplementary Data
Vermont Financial Services Corp.
Consolidated Balance Sheets
December 31,
1993 1992
Assets
Cash and Due from Banks $48,453,071 $49,569,717
Interest-bearing Deposits with other Banks 50,075 50,000
Federal Funds Sold and Securities Purchased Under
Agreements to Resell 4,000,000 10,000,000
Total Cash and Cash Equivalents 52,503,146 59,619,717
Securities Available for Sale
Mortgage Backed Securities 70,391,000 70,805,126
Other Securities 90,847,000 58,180,644
Total Securities Available for Sale 161,238,000 128,985,770
Loans 689,255,755 683,482,880
Less: Allowance for Loan Losses (14,559,054) (17,892,739)
Net Loans 674,696,701 665,590,141
Premises and Equipment, Net 19,960,559 18,513,741
Other Real Estate Owned (OREO)
(Net of valuation reserve of $489,620 at
December 31, 1993 and $910,606 at
December 31, 1992) 2,756,411 8,509,676
Other Assets 23,330,654 24,928,524
Total Assets $934,485,471 $906,147,569
============ ============
Liabilities and Stockholders' Equity
Deposits:
Demand $99,935,918 $91,906,436
Savings, NOW and Money Market Accounts 460,299,965 412,868,651
Other Time 213,198,289 244,803,559
Total Deposits 773,434,172 749,578,646
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 86,262,368 67,362,954
Liabilities for Borrowed Money 172,753 20,737,629
Other Liabilities 6,408,115 5,384,443
Total Liabilities 866,277,408 843,063,672
Commitments and Contingencies
Stockholders' Equity:
Common Stock - $1 Par Value;
Authorized 20,000,000 Shares;
Issued and Outstanding: 1993 - 3,522,268
1992 - 3,507,961 3,522,268 3,507,961
Preferred Stock - $1 Par Value;
Authorized 5,000,000 Shares
Capital Surplus 41,240,272 41,005,520
Undivided Profits 24,805,446 20,853,103
Security Valuation Allowance 698,652 (223,828)
Treasury Stock, at cost - 1993 - 105,255 shares
1992 - 105,271 shares (2,058,575) (2,058,859)
Total Stockholders' Equity 68,208,063 63,083,897
Total Liabilities and Stockholders' Equity $934,485,471 $906,147,569
============ ============
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION> <C> <C> <C>
Vermont Financial Services Corp.
Consolidated Statements of Income
For the years ended December 31,
1993 1992 1991
Interest Income
Interest and fees on loans $57,547,052 $60,601,703 $71,339,955
Interest on securities available
for sale:
Taxable interest income 8,795,022 10,598,186 10,291,876
Tax exempt interest income 359,943 406,023 599,185
Income on federal funds sold and
securities purchased under
agreements to resell 25,156 38,484 489,305
Interest on time deposits 1,727 1,715 146,710
Total interest income 66,728,900 71,646,111 82,867,031
Interest Expense
Interest on deposits:
Certificates of deposit
over $100,000 1,049,239 3,474,267 7,234,494
Other deposits 21,140,341 27,394,670 37,227,621
Interest on federal funds purchased,
borrowed money and securities
sold under agreements to repurchase 2,885,767 2,246,753 2,095,872
Total interest expense 25,075,347 33,115,690 46,557,987
Net interest income 41,653,553 38,530,421 36,309,044
Provision for loan losses 4,900,000 7,500,000 14,400,000
Net interest income after provision
for loan losses 36,753,553 31,030,421 21,909,044
Other Operating Income
Securities gains 1,998,462 869,720 495,830
Trust Department income 2,774,883 2,508,293 2,471,730
Service charges on deposit accounts 3,973,798 3,577,094 3,131,280
Credit card fees 2,622,791 2,601,047 2,663,485
Mortgage servicing income 1,986,295 1,654,537 1,325,726
Other service charges, commissions
and fees 3,037,122 2,701,430 3,228,560
Total other operating income 16,393,351 13,912,121 13,316,611
Net interest and other operating income 53,146,904 44,942,542 35,225,655
Other Operating Expense
Salaries and wages 16,262,087 15,838,902 14,629,753
Pension and other employee benefits 4,508,339 3,425,712 3,437,106
Occupancy of bank premises, net 2,829,904 2,716,049 2,506,329
Furniture and equipment 3,631,517 3,552,161 3,116,385
Net OREO and collection expenses
and losses 7,075,187 2,960,235 1,350,128
Printing and supplies 1,071,057 879,985 841,639
FDIC Insurance 1,872,675 1,765,636 1,567,525
Other operating expense 9,426,546 8,744,126 8,203,387
Total other operating expense 46,677,312 39,882,806 35,652,252
Income (loss) before income taxes 6,469,592 5,059,736 (426,597)
Applicable income tax expense (benefit) 1,698,865 1,303,659 (610,410)
Net Income $4,770,727 $3,756,077 $183,813
========= ========= =======
Earnings Per Common Share:
Net Income-Primary and Fully Diluted $1.40 $1.10 $0.05
==== ==== ====
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION> <C> <C> <C> <C> <C> <C>
Vermont Financial Services Corp.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 1993, 1992 and 1991
Unrealized
Common Capital Undivided Holding Treasury
Stock Surplus Profits Gains(Losses) Stock Total
Balance, January 1, 1991 $3,487,902 $40,831,098 $17,693,131 $(749,038) $(2,088,955) $59,174,138
Net Income - - 183,813 - - 183,813
Issuance of 9,822 Shares
of Common Stock under
Employee Stock Purchase
Plan 9,822 76,356 - - - 86,178
Issuance of 3,637 Shares
of Common Stock under
Dividend Reinvestment
Plan 3,637 24,759 - - - 28,396
Treasury Stock Sales - (21,036) - - 29,582 8,546
Change in Security Valuation
Allowance - - - 441,657 - 441,657
Cash Dividends Declared
($0.15) - - (507,703) - - (507,703)
Balance, December 31, 1991 3,501,361 40,911,177 17,369,241 (307,381) (2,059,373) 59,415,025
Net Income - - 3,756,077 - - 3,756,077
Issuance of 4,893 Shares
of Common Stock under
Employee Stock Purchase Plan 4,893 68,625 - - - 73,518
Issuance of 1,707 Shares
of Common Stock under
Dividend Reinvestment
Plan 1,707 25,718 - - - 27,425
Treasury Stock Sales - - - - 514 514
Change in Security Valuation
Allowance - - - 83,553 - 83,553
Cash Dividends Declared
($0.08) - - (272,215) - - (272,215)
Balance, December 31, 1992 3,507,961 41,005,520 20,853,103 (223,828) (2,058,859) 63,083,897
Net Income - - 4,770,727 - - 4,770,727
Issuance of 4,214 Shares
of Common Stock under
Employee Stock Purchase
Plan 4,214 71,404 - - - 75,618
Issuance of 10,093 Shares
of Common Stock under
Dividend Reinvestment
Plan 10,093 163,348 - - - 173,441
Treasury Stock Sales - - - - 284 284
Adoption of SFAS No. 115
(net of income taxes of
$360,060) - - - 922,480 - 922,480
Cash Dividends Declared
($0.24) - - (818,384) - - (818,384)
Balance, December 31, 1993 $3,522,268 $41,240,272 $24,805,446 $698,652 $(2,058,575) $68,208,063
========= ========== ========== ======= ========== ==========
</TABLE>
See notes to consolidated financial statements.
Vermont Financial Services Corp.
Consolidated Statements of Cash Flow
<TABLE>
<CAPTION> <C> <C> <C>
For the years ended December 31,
1993 1992 1991
OPERATING ACTIVITIES
Net Income $4,770,727 $3,756,077 $183,813
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 4,900,000 7,500,000 14,400,000
Provision for depreciation 2,102,661 1,983,735 1,834,704
Amortization and accretion on
investment securities 740,178 85,600 (104,940)
Deferred income taxes 487,275 (586,775) (1,028,659)
Security gains (1,998,462) (869,720) (495,830)
Proceeds from sales of loans 189,662,000 192,149,000 116,988,000
Loans originated for sale (187,440,000) (194,733,000)(109,954,000)
Losses on other real estate
owned (OREO) 4,174,692 1,496,454 88,000
Decrease (Increase) in interest
receivable and other assets 750,535 (385,125) 309,103
Increase (Decrease) in interest
payable and other liabilities 1,023,672 (1,159,313) (938,211)
NET CASH PROVIDED BY OPERATING
ACTIVITIES 19,173,278 9,236,933 21,281,980
INVESTING ACTIVITIES
Proceeds from sales of securities 50,542,376 48,651,562 21,554,047
Proceeds from maturities of
securities 31,937,725 32,123,975 25,000,000
Purchase of securities (112,191,507) (62,528,772) (73,666,131)
Proceeds from sale of OREO 13,641,428 8,524,485 2,365,000
Net increase in loans (28,291,415) (35,069,567) (12,920,370)
Purchase of premises and
equipment (3,549,479) (2,914,576) (1,457,190)
NET CASH USED BY INVESTING
ACTIVITIES (47,910,872) (11,212,893) (39,124,644)
FINANCING ACTIVITIES
Net increase (decrease) in
deposits 23,855,526 (67,454,351) 41,740,989
Net (decrease) increase in
other borrowings (1,665,462) 77,434,087 (32,413,256)
Issuance of common stock 249,059 100,943 114,574
Sale of treasury stock 284 514 8,546
Cash dividends (818,384) (272,215) (507,703)
NET CASH PROVIDED BY FINANCING
ACTIVITIES 21,621,023 9,808,978 8,943,150
(DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (7,116,571) 7,833,018 (8,899,514)
Cash and Cash equivalents at
beginning of year 59,619,717 51,786,699 60,686,213
CASH AND CASH EQUIVALENTS AT
END OF YEAR $52,503,146 $59,619,717 $51,786,699
========== ========== ==========
</TABLE>
Non-monetary Transactions:
Transfer of loans to OREO for the years ended December 31, 1993, 1992 and
1991 totaled $3,093,745, $11,063,725 and $8,126,000, respectively.
See notes to consolidated financial statements.
Notes To Consolidated Financial Statements
1. Basis of Financial Statements and Significant Accounting Policies
The accounting and reporting policies of Vermont Financial Services Corp.
(the "Company") and its subsidiary are in conformity with generally accepted
accounting principles and general practices within the banking industry. The
following is a description of the more significant policies.
The Company, organized in April 1982, became a registered bank holding
company, acquired controlling interest in Vermont National Bank (the "Bank") on
March 1, 1983, upon exchange of all of the outstanding shares of common stock
of the Bank for shares of the Company. All intercompany transactions have been
eliminated in the consolidated financial statements.
Cash equivalents include amounts due from banks, interest bearing deposits
with other banks and Federal Funds sold and securities purchased under
agreements to resell with original maturities of three months or less. For
these items the carrying amount approximates fair value.
Effective December 31, 1993 the Company adopted, on a prospective basis,
Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115") and revised its
securities accounting policy. Securities that may be sold as part of the
Company's asset/liability or liquidity management or in response to or in
anticipation of changes in interest rates and resulting prepayment risk, or for
other similar factors, are classified as available for sale and carried at fair
market value which is based on quoted market prices or dealer quotes.
Unrealized holding gains and losses on such securities are reported net of
related taxes as a separate component of shareholders' equity. Realized gains
and losses on the sales of all securities are reported in earnings and computed
using the specific identification cost basis. The adoption of SFAS 115 has not
been applied retroactively to prior years' financial statements.
Prior to December 31, 1993 all securities were classified as available for
sale and were carried at the lower of aggregate cost or market value.
Unrealized losses on marketable equity securities were reported as a separate
component of shareholders' equity unless the loss was deemed to be other than
temporary in which case a charge to earnings was made.
The reserve for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb future loan losses through charges
to operating expenses. Principal factors considered by management include the
historical loan loss experience, the value and adequacy of collateral, the
level of nonperforming (nonaccrual) loans, the growth and composition of the
loan portfolio and examination of individual loans by senior management.
OREO is carried at the lower of cost or fair value less the estimated cost
to sell the property.
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed principally on the straight-line
method over the estimated useful life of the related assets. Leasehold
improvements are amortized over the lease periods or the useful life of the
improvement, whichever is shorter. When assets are sold or retired, the
related cost and accumulated depreciation and amortization are removed from the
respective accounts and any gain or loss is credited or charged to income.
In the fourth quarter of 1992, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", which requires
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Prior years' financial
statements have not been restated to apply to the provisions of SFAS No. 109.
Prior to that time, the provision for income taxes was based on income and
expenses included in the accompanying consolidated statements of operations.
Differences between taxes so computed and taxes payable under applicable
statutes and regulations were classified as deferred taxes.
Securities and other property held by the Trust Department in a fiduciary
or agency capacity are not included in the accompanying balance sheet, since
such items are not assets of the Bank. Trust Department income is recorded on
the cash basis which is not materially different from income that would be
reported on the accrual basis.
Loan origination and commitment fees and certain direct loan origination
costs are deferred and amortized as an adjustment of the related loan's yield
over the contractual life of the related loans by the level yield method.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions". SFAS 106 changed the Company's policy of
accounting for postretirement benefits on a pay-as-you-go (cash) basis by
requiring accrual of the expected cost of providing these benefits.
Certain 1992 and 1991 amounts have been reclassified to conform with the
current year presentation.
Dollars in the following footnotes are in thousands except for per share
amounts.
2. Securities
Additional information with respect to the contractual maturities of
securities available for sale at December 31, 1993 and 1992 follows:
<TABLE>
<CAPTION> <C> <C> <C> <C>
December 31,
1993 1992
Book or
Fair Amortized Carrying Fair
Value Cost Value Value
Classification and Maturity:
U. S. Treasury Securities:
Within 1 year $ - $ - $967 $988
1-5 years 12,907 12,172 17,217 18,007
5-10 years 11,516 11,504 8,074 8,212
Total 24,423 23,676 26,258 27,207
Obligations of Other U. S.
Government Agencies:
Within 1 year - - 1,003 1,028
1-5 years 9,279 9,013 13,350 14,085
5-10 years 34,468 34,476 3,039 3,163
Total 43,747 43,489 17,392 18,276
Obligations of States and
Political Subdivisions:
Within 1 year 504 501 1,041 1,085
1-5 years 3,235 3,057 3,641 3,829
5-10 years 4,909 4,863 1,447 1,456
Over 10 years 238 225 725 735
Total 8,886 8,646 6,854 7,105
Corporate Securities:
Within 1 year 254 249 542 541
1-5 years 645 634 1,583 1,577
Total 899 883 2,125 2,118
Mortgage-Backed Securities
with Original Average Life:
Within 1 year 13,028 12,825 - -
1-5 years 52,219 52,559 61,319 62,275
5-10 years 5,144 5,128 9,486 9,489
Total 70,391 70,512 70,805 71,764
Marketable Equity Securities: 4,849 4,930 4,987 4,763
Valuation Allowance - - (224) -
Total 4,849 4,930 4,763 4,763
Money Market Overnight
Investments:
Within 1 year 8,043 8,043 789 789
Total Securities $161,238 $160,179 $128,986 $132,022
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION> <C> <C> <C> <C>
December 31,
1993 1992
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Classification Gains Losses Gains Losses
U.S. Treasury Securities $808 $61 $954 $5
Obligations of Other U.S.
Government Agencies 447 189 884 -
Obligations of States and
Political Subdivisions 276 35 251 -
Corporate Securities 16 - 28 35
Mortgage-backed Securities 584 705 1,668 709
Marketable Equity Securities 2 84 1 225
Total $2,133 $1,074 $3,786 $974
===== ===== ===== ===
</TABLE>
Proceeds from sales of securities available for sale during 1993, 1992 and
1991 were $50,542, $48,652 and $21,554, respectively.
Gross gains of $1,998, $871 and $642 were realized on those sales in 1993,
1992 and 1991, respectively. Gross losses of $0, $1 and $31 were realized in
the respective periods.
Securities with a book value of $97,012 as of December 31, 1993 and
$74,923 as of December 31, 1992 were pledged to qualify for fiduciary powers,
to collateralize deposits of public bodies, for borrowed money and for other
purposes as required or permitted by law.
3. Loans
Loans classified by type are summarized as follows:
<TABLE>
<CAPTION> <C> <C>
December 31,
1993 1992
Commercial $192,964 $188,433
Real Estate:
Residential 222,852 216,503
Commercial 158,034 164,613
Construction 22,984 28,370
Total Real Estate 403,870 409,486
Consumer 92,422 85,564
Total loans, net of
unearned income $689,256 $683,483
======= =======
</TABLE>
At December 31, 1993 the amount of loans outstanding to directors,
executive officers, principal holders of equity securities or to any of their
associates total $6,019.
The following table summarizes the related party loan activity for 1993:
Balance at beginning of year $2,087
Additions 5,724
Repayments (1,792)
Balance at end of year $6,019
=====
At December 31, 1993 and 1992 total loans, net of the allowance for loan
losses, had a carrying value of $674,697 and $665,590, respectively. The fair
value of these loans was $689,670 and $668,322, respectively. For certain
homogeneous categories of loans, such as some residential mortgages, credit
card receivables and other consumer loans, fair value is estimated using the
quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value of other types of loans is
estimated by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for
the same remaining maturities. At December 31, 1993 and 1992 the Company's
serviced mortgage portfolio totaled $438,911 and $416,885, respectively.
Excess service fees associated with this portfolio had carrying values of
$3,799 and $3,253, respectively, and fair values of $7,999 and $8,338,
respectively. Fair value was based on quoted market prices for similar
portfolios.
Mortgage Banking Activities
During 1993, the Bank originated $187,440 of mortgage loans for sale in
the secondary market and sold $189,662. As of December 31, 1993, $19,907 of
mortgage loans were held for sale and were carried at the lesser of the loan
balance or market value. All loans are sold without recourse, except for
certain technical underwriting exceptions, and none have been presented for
recourse. Loan servicing is retained by the Bank and excess servicing is
capitalized monthly and adjusted quarterly based on actual payments received on
the sold loans. Gains, net of losses, from sales of mortgage loans are
included in interest and fees on loans and was $2,738 for 1993, $2,945 for 1992
and $2,430 for 1991. Loan servicing income is included in other service
charges, commissions and fees and was $1,986, $1,655 and $1,326 for 1993, 1992
and 1991, respectively. The following schedule represents excess servicing
right activity for the past two years:
<TABLE>
<CAPTION> <C> <C>
1993 1992
Balance January 1 $3,353 $1,834
Additions 1,977 1,928
Amortizations (1,531) (409)
Balance, December 31 $3,799 $3,353
===== =====
</TABLE>
Amortization represents quarterly valuation adjustments which are based on pool
balances and prepayment assumptions on a pool by pool basis as reported by the
Bloomberg Financial Market System.
4. Allowance for Loan Losses
Transactions in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION> <C> <C> <C>
1993 1992 1991
Balance,
January 1 $17,893 $17,410 $12,924
Provision for
Loan Losses 4,900 7,500 14,400
Acquired Allowance - - 402
Loans
Charged Off (9,434) (8,033) (11,079)
Recoveries of
Loans Previously
Charged Off 1,200 1,016 763
Balance,
December 31 $14,559 $17,893 $17,410
====== ====== ======
</TABLE>
An allowance of $402 was acquired during 1991 as a result of the
assumption of certain loans from the FDIC as a result of their liquidation of
Valley Bank of White River Junction, Vermont.
Transactions in the OREO valuation reserve are summarized as follows:
<TABLE>
<CAPTION> <C> <C>
1993 1992
Balance, January 1 $ 911 $ 0
Provisions for OREO losses 3,754 2,765
OREO Charged Off (4,175) (1,854)
Balance, December 31 $ 490 $ 911
===== =====
</TABLE>
Proceeds from sales of OREO were $13,641 in 1993 and $8,524 in 1992. Loans
associated with these sales were $3,585 and $2,806, respectively. No loan
exceeded 90% of the sale price and no unguaranteed commercial, commercial real
estate or condominium loan exceeded 80% of the sale price.
5. Premises and Equipment
Premises and equipment stated at cost, consist of the following:
<TABLE>
<CAPTION> <C> <C>
December 31,
1993 1992
Land $2,025 $2,012
Premises 17,304 16,153
Equipment 10,823 9,517
Leasehold Improvements 1,799 1,628
Total 31,951 29,310
Accumulated Depreciation and
Amortization (11,990) (10,796)
Premises and Equipment, Net $19,961 $18,514
====== ======
</TABLE>
6. Deposits
Time certificates of deposit outstanding in denominations of $100 or more
aggregated to $19,839 and $40,293 at December 31, 1993 and 1992, respectively.
Other time deposits outstanding in denominations of $100 or more aggregated to
$5,169 and $3,561 at December 31, 1993 and 1992, respectively. Total interest
on these deposits amounted to $1,214, $3,870 and $8,714 for the years ended 31,
1993, 1992 and 1991, respectively.
The Company paid $9,856, $16,501 and $26,297 in interest on certificates
of deposit and other time deposits during 1993, 1992 and 1991, respectively.
At December 31, 1993 and 1992 total deposits had a fair value of $775,472
and $752,343, respectively. The fair value of demand deposits, savings
accounts, and certain money market deposits is the amount payable on demand at
the reporting date. The fair value of fixed-maturity certificates of deposit
is estimated using the rates currently offered for deposits of similar
remaining maturities.
7. Other Borrowings
The following table shows the distribution of the Company's borrowings and
the weighted average interest rate thereon at the end of each of the last three
years. The table also shows the maximum amount of borrowings and the average
amount of borrowings as well as weighted average interest rates for the last
three years. Federal funds purchased and securities and loans sold under
agreements to repurchase generally mature within 1 to 30 days from the
transaction date.
At December 31, 1993 the Bank owned $3,138 of stock in the Federal Home
Loan Bank (FHLB) which provided borrowing capacity up to $131,860 from the FHLB
at maturities, rates and terms determined by the FHLB.
<TABLE>
<CAPTION> <C> <C> <C>
December 31,
1993 1992 1991
Federal funds purchased $ 350 $ 225 $ 875
Securities and loans sold under
agreements to repurchase 85,352 67,137 9,049
Federal Home Loan Bank and
other borrowings 560 20,738 742
Total $ 86,262 $88,100 $10,666
====== ====== ======
Average amount outstanding
during the year $ 82,864 $56,664 $34,005
Maximum amount outstanding at
any month end $102,025 $88,100 $73,741
Weighted average interest rate
at year end 3.22% 3.77% 4.62%
Weighted average interest rate
during the year 3.48% 3.97% 6.16%
</TABLE>
For all of the above borrowings, the carrying amount is a reasonable estimate
of fair value.
Included in the above tables is a long-term borrowing from the FHLB totaling
$560 which is at a rate of 5.00% and matures August 1, 2011.
8. Commitments and Contingencies
Leases -- The following is a schedule by years of future minimum rental
payments required under operating leases for premises and data processing
equipment that have initial or remaining noncancelable lease terms in excess of
one year as of December 31, 1993. Certain operating leases contain various
options to renew.
Year Ending December 31:
1994 $ 586
1995 376
1996 302
1997 286
1998 279
Later Years 2,375
Total Minimum Payments Required $ 4,204
=====
Operating expenses include approximately $1,144, $1,449, and $1,293 in
1993, 1992 and 1991, respectively, for rentals of premises and equipment used
for banking purposes.
Financial Instruments With Off-Balance Sheet Risk --
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the consolidated
statements of financial condition. The contract amounts of those instruments
reflect the extent of involvement The Bank has in particular classes of
financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
counterparty to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Total commitments to extend
credit at December 31, 1993 were as follows:
Home equity lines $42,961
Credit card lines 64,379
Commercial real estate 15,064
Other unused commitments 74,468
The Bank evaluates each customer's credit-worthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the Bank upon
extension of credit is based on management's credit evaluation of the
counterparty. Collateral held varies but may include certificates of deposit,
accounts receivable, inventory, property, plant and equipment, residential real
estate and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The collateral varies
but may include certificates of deposit, accounts receivable, inventory,
property, plant and equipment and residential real estate for those commitments
for which collateral is deemed necessary.
As of December 31, 1993, the Bank had outstanding commitments for the
following: financial standby letters of credit - $5,100, performance standby
letters of credit - $2,744 and commercial and similar letters of credit -
$6,649.
The carrying amount of those financial instruments noted above represents
accruals or deferred income (fees) arising from those unrecognized financial
instruments. Such amounts are minimal and approximate fair value. As of
December 31, 1993 the Company had entered into an interest rate floor
arrangement on a notional value of $10,000. This financial instrument had a
carrying value of $60 and a fair value of $272 as of December 31, 1993.
Non-Interest Bearing Deposits and Cash -- The Bank is required by the
Federal Reserve Bank to maintain a portion of deposits as a cash reserve. The
Bank must maintain cash balances on hand or at the Federal Reserve Bank equal
to its reserve requirement. At December 31, 1993 the Bank's reserve
requirement of $6,778 was met with cash on hand and deposits at the Federal
Reserve Bank.
Subsequent to December 31, 1993, the Company filed with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
relating to a proposed acquisition of West Mass Bankshares, Inc. The Company
anticipates closing the transaction near the beginning of the second quarter of
1994 subject to receiving shareholder and regulatory approval. For complete
details, see the registration statement.
The Bank is also involved in litigation arising in the normal course of
business. The Bank does not anticipate that any of these matters will result
in the payment by the Bank of damages, that in the aggregate, would be material
in relation to the consolidated results of operations or financial position of
the Bank.
9. Income Taxes
As discussed in Note 1, the Company adopted the provisions of SFAS No. 109
as of the fourth quarter of 1992. The change had no material effect on
reported net income for 1992 or for any of the first three quarters of 1992.
The provisions for income tax expense (benefit) included in the statements
of income are as follows:
<TABLE>
<CAPTION> <C> <C> <C>
Year Ended December 31,
1993 1992 1991
Currently Payable:
Federal $1,222 $1,930 $940
Deferred:
Federal 477 (626) (1,550)
$1,699 $1,304 $(610)
===== ===== ====
</TABLE>
The approximate tax effect of principal temporary differences giving rise
to deferred taxes are summarized as follows:
<TABLE>
<CAPTION> <C> <C> <C>
Year Ended December 31,
1993 1992 1991
Deferred compensation and fees
and fees $(177) $(125) $(105)
Provision for possible loan
losses 1,134 (164) (1,389)
Accretion on investments (263) 53 114
Depreciation (67) 8 9
Pension 34 (136) (107)
Other liabilities (116) (103) 11
Other (68) (159) (83)
Total deferred taxes $477 $(626) $(1,550)
==== ====== ========
</TABLE>
The Company made income tax payments of $975, $1,791 and $435 during 1993,
1992 and 1991, respectively.
The components of the net deferred tax asset as of December 31 are as
follows:
<TABLE>
<CAPTION> <C> <C>
1993 1992
Pension $337 $371
Deferred compensation and fees 1,558 1,381
Provision for possible loan losses 4,814 5,948
Depreciation (783) (850)
Unrealized gain on securities (360) -
Accretion on investments (39) (302)
Other (64) (95)
$5,463 $6,453
===== =====
</TABLE>
No valuation allowance is required as there is sufficient taxable income
in the carry back period and through future operating results to be able to
fully realize the deferred tax asset.
The provision for income taxes is less than the amount computed by
applying the applicable federal income tax rate to income before taxes. The
reasons therefore are as follows:
<TABLE>
<CAPTION> <C> <C> <C> <C> <C> <C>
1993 1992 1991
% of % of % of
Pre Tax Pre Tax Pre Tax
Amount Income Amount Income Amount Income
Federal Statutory Rate $2,200 34.0% $1,720 34.0% $(145) (34.0)%
Decreases in Taxes
Resulting From:
Tax Exempt Interest (468) (7.2) (356) (7.0) (530) (124.3)
Other - Net (33) (0.6) (60) 1.2 65 15.2
Total $1,699 26.2% $1,304 25.8% $(610) (143.1)%
=============================================
</TABLE>
10. Employee Benefit Plans
The Company has a trusteed non-contributory defined benefit pension plan
covering substantially all of its employees. The benefits are based on years
of service and the employee's final compensation. The Company's funding policy
is to contribute annually an amount that can be deducted for federal income tax
purposes using a different actuarial cost method and different assumptions from
those used for financial reporting. Pension expense for 1993, 1992 and 1991
was $497, $399 and $316, respectively.
The following table sets forth the plan's funded status and amounts
recognized in the Company's statements of financial position as of December 31,
1993 and 1992:
<TABLE>
<CAPTION> <C> <C>
Year Ended December 31,
1993 1992
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $7,779 and $6,812 for 1993 and
1992, respectively. $8,111 $7,182
====== ======
Projected benefit obligation (PBO) for service
rendered to date $(11,871) $(10,491)
Plan assets at fair value, comprised of guaranteed
insurance contracts, mutual, real estate and
money market funds and listed stocks and bonds 10,391 9,311
Funded status under PBO (1,480) (1,180)
Unrecognized net loss from past experience different
from that assumed and effects of changes in
assumptions 1,700 1,416
Unrecognized prior service cost 52 57
Unrecognized net asset at period end being
recognized over 18.64 years (1,265) (1,384)
Accrued pension cost $(993) $(1,091)
======= ========
</TABLE>
<TABLE>
<CAPTION> <C> <C> <C>
1993 1992 1991
Net pension cost included the
following components:
Service cost $ 602 $ 573 $ 511
Interest cost 813 744 676
Actual return on plan assets (833) ( 22) (1,401)
Amortization of net transition asset (119) (119) ( 119)
Net amortization and deferral 34 (777) 649
Net pension cost $ 497 $ 399 $ 316
==== ==== ======
</TABLE>
The weighted average discount rate which is the estimated rate as which
the obligation for pension benefits could effectively be settled and rate of
increase in salary levels were 7.5 and 5.5 percent, respectively. The expected
long-term rate of return on assets was 8.5 percent. The respective rates
expected to be used for 1994 are 7.0%, 5.0%, and 8.5%.
The Company also has a Profit-Sharing Plan covering substantially all
employees. A portion of the annual contribution by the Company is at the
discretion of the Board of Directors and none was made for 1993, 1992 and 1991.
The Plan also includes a 25% Company match of employee contributions to a 401k
portion of the Plan. This Plan feature was added in 1993 and the associated
expense for 1993 was $114.
The Company also has an Employee Stock Purchase Plan covering
substantially all employees. The Plan allows the purchase of Common Stock at a
ten percent discount from the then current fair market value, without payment
of any brokerage commission or service charge.
The Company sponsors unfunded defined benefit postretirement medical and
life insurance plans which cover all of its full time employees. All employees
who retire from the Company at age 65 or over with at least ten years of
service are eligible. Effective January 1, 1993, the Company adopted Statement
of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The accumulated postretirement
benefit obligation (APBO) at the date of adoption was $228 of which the Company
accrued $11. The remaining net unrecorded liability of $217 will be recognized
over 20 years.
During 1993, the Company recognized $44 of expense related to
postretirement benefits consisting of service cost, interest cost and
transition amortization of $16, $17, and $11, respectively. As of December 31,
1993, the APBO was $250 of which $81 relates to current retirees. The accrued
liability as of December 31, 1993 was $20. A discount rate of 7% and a
long-term medical inflation rate of 8% was used in calculating the APBO. A 1%
increase in the medical inflation rate assumption would increase the APBO and
expense provision by less than 2% as of December 31, 1993.
11. Stockholders' Equity
Since the Company had no common stock equivalents outstanding from 1991 to
1993, both primary and fully diluted earnings per share are based on the
average number of shares outstanding. The number of shares used in the
computation was 3,411,211, 3,399,343, and 3,388,072 for 1993, 1992 and 1991,
respectively.
The per share amounts of cash dividends paid on an equivalent share basis
were $0.24 for 1993, $0.08 for 1992 and $0.15 for 1991. At December 31, 1993
the Bank had available $8,775 for payment of dividends to the Company, under
regulatory guidelines. At December 31, 1993, there were 59,085 and 89,916
shares of Common Stock reserved for issuance pursuant to the Company's Dividend
Reinvestment and Stock Purchase Plan and pursuant to the Company's Employee
Stock Purchase Plan, respectively.
Options Agreements - On April 20, 1987, stockholders approved a
non-qualified stock option plan for 105,000 shares of the Company's common
stock and on April 17, 1990 stockholders approved a non-qualified stock option
plan for 80,000 shares of the Company's common stock. In October, 1993 the
65,100 and 40,000 options that were then outstanding expired unexercised for
these respective plans. On October 13, 1993 new options to purchase 36,000 and
12,000 shares, respectively, were granted under these plans at an option price
of $19.00 per share and are exercisable for a five year period. None have been
exercised to date.
12. Parent Company Financial Information
Condensed financial information for Vermont Financial Services Corp.
(parent company only) is as follows:
<TABLE>
VERMONT FINANCIAL SERVICES CORP.
CONDENSED BALANCE SHEETS
<CAPTION> <C> <C>
December 31,
1993 1992
ASSETS
Cash $119 $49
Securities 2,782 3,584
Other Assets 117 126
Investment in Bank Subsidiary 65,431 59,839
Total Assets $68,449 $63,598
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other Liabilities $241 $514
Total Liabilities 241 514
Total Stockholders' Equity 68,208 63,084
Total Liabilities and
Stockholders' Equity $68,449 $63,598
====== ======
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF INCOME
<CAPTION> <C> <C> <C>
Year Ended December 31,
1993 1992 1991
INCOME
Income on Securities $157 $248 $160
Total Income 157 248 160
EXPENSES
Other 360 182 299
Total Operating
Expenses 360 182 299
(Loss) Income Before Tax
Benefit and Equity in
Undistributed Income
from Bank Subsidiary (203) 66 (139)
Applicable Income Tax
(Benefit) (111) (27) (74)
(Loss) Income Before Equity
in Undistributed Income of
Bank Subsidiary (92) 93 (65)
Equity in Undistributed
Income of Bank
Subsidiary 4,863 3,663 249
Net Income $4,771 $3,756 $184
=============================
</TABLE>
<TABLE>
STATEMENTS OF CASH FLOW
Year Ended December 31,
<CAPTION> <C> <C> <C>
1993 1992 1991
OPERATING ACTIVITIES
Net Income $4,771 $3,756 $184
Adjustments to reconcile
income to net cash provided
by operating activities:
Amortization and accre-
tion on investment
securities 4 5 8
Investment security losses - - 115
Decrease (Increase) in
interest receivable and
other assets 9 (9) 77
(Decrease) Increase in
interest payable and
other liabilities (273) 266 (519)
Equity in undistributed
net income of Bank sub-
sidiary (4,863) (3,663) (249)
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES (352) 355 (384)
INVESTING ACTIVITIES
Investment in Bank
subsidiary - (1,500) -
Proceeds from sales of
securities 248 - -
Proceeds from maturities of
securities 744 1,315 3,844
Purchase of securities (2) (2) (3,150)
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 990 (187) 694
FINANCING ACTIVITIES
Issuance of common stock 249 101 115
Sale of treasury stock - 1 8
Cash dividends (818) (272) (508)
NET CASH USED BY FINANCING
ACTIVITIES (569) (170) (385)
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 70 (2) (75)
Cash and cash equivalents
at beginning of year 49 51 126
CASH AND CASH EQUIVALENTS
AT END OF YEAR $119 $49 $51
============================
</TABLE>
13. Supplemental Financial Data
Selected Quarterly Data (unaudited)
The following is a summary of selected consolidated quarterly data of the
Company for the periods presented:
<TABLE>
<CAPTION> <C> <C> <C> <C>
1993
Fourth Third Second First
Quarter Quarter Quarter Quarter
Interest income $16,313 $17,049 $16,432 $16,935
Interest expense 6,181 6,169 6,270 6,455
Net interest income 10,132 10,880 10,162 10,480
Provision for possible loan losses 1,000 1,000 1,400 1,500
Other operating income 4,385 4,619 3,807 3,582
Other operating expense 11,375 13,331 10,996 10,975
Income before income taxes 2,142 1,168 1,573 1,587
Applicable income taxes (543) (256) (434) (466)
Net income $1,599 $912 $1,139 $1,121
===== === ==== =====
Per share data:
Primary and fully diluted
Net income $0.47 $0.27 $0.33 $0.33
==== ==== ==== ====
</TABLE>
<TABLE>
1992
<CAPTION> <C> <C> <C> <C>
Fourth Third Second First
Quarter Quarter Quarter Quarter
Interest income $17,747 $17,854 $17,625 $18,420
Interest expense 7,186 7,872 8,661 9,397
Net interest income 10,561 9,982 8,964 9,023
Provision for possible loan losses 1,750 1,000 2,500 2,250
Other operating income 3,797 3,407 3,493 3,215
Other operating expense 10,668 10,251 9,302 9,661
Income before income taxes 1,940 2,138 655 327
Applicable income taxes (513) (602) (152) (37)
Net income $1,427 $1,536 $503 $290
===== ===== === ===
Per share data:
Primary and fully diluted
Net income $0.41 $0.46 $0.14 $0.09
==== ==== ==== ====
</TABLE>
Statement of Management Responsibility
The management of Vermont Financial Services Corp. is responsible for the
accuracy and content of the financial statements and other financial
information in this annual report. The financial statements have been prepared
in conformity with generally accepted accounting principals applied on a
consistent basis in all material respects, and data include amounts based upon
management's judgement where appropriate.
The accounting systems which record, summarize and report financial data
are supported by a system of internal controls which is augmented by written
policies, internal audits and staff training programs. The Audit Committee of
the Board of Directors, which is made up solely of outside directors who are
not employees of the Company, reviews the activities of the internal audit
function and meets regularly with representatives of Coopers & Lybrand, the
Company's independent auditors. Coopers & Lybrand has been appointed by the
Board of Directors to conduct an independent audit and to express an opinion as
to the fairness of the presentation of the consolidated financial statements of
Vermont Financial Services Corp.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Vermont Financial Services Corp.
We have audited the accompanying consolidated balance sheets of Vermont
Financial Services Corp. and subsidiary as of December 31, 1993 and 1992, and
the related consolidated statements of income, changes in stockholders' equity
and cash flow for each of the three years in the period ended December 31,
1993. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Vermont Financial Services Corp. and subsidiary as of December 31, 1993 and
1992, and the consolidated results of their operations and their cash flow for
each of the three years in the period ended December 31, 1993, in conformity
with generally accepted accounting principles.
As discussed in Notes 1, 2 and 10 to the consolidated financial statements, the
Company changed its method of accounting for certain investments in debt and
equity securities and accounting for postretirement benefits other than
pensions in 1993.
As discussed in Notes 1 and 9 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1992.
Springfield, Massachusetts COOPERS & LYBRAND
January 21, 1994
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10 - Directors and Executive Officers of Registrant
Executive Officers
The following table shows the name of each executive officer of the
Company, his age, the offices with the Company held by him, and the year he was
first elected to a comparable office with the Bank. There are no family
relationships among the executive officers.
<TABLE>
Year First
Elected to
<CAPTION> <C> <C>
Name and Age Office Office
John D. Hashagen, Jr. (52).....President and Chief Executive 1990
Officer of the Company
Executive Vice President of the Company 1989
Senior Vice President of the Company 1983
President and Chief Executive Officer 1987
of the Bank
Richard O. Madden (45).........Secretary of the Company 1993
Executive Vice President of the Company 1990
Treasurer of the Company 1986
Executive Vice President of the Bank 1988
Senior Vice President of the Bank 1987
Chief Financial Officer of the Bank 1986
Louis J. Dunham (40)...........Executive Vice President of the Bank 1994
Senior Credit Officer of the Bank 1991
Senior Vice President and Senior
Commercial Loan Officer of the Bank 1987
Robert G. Soucy (48)...........Executive Vice President of the Company 1992
Executive Vice President of the Bank 1988
Senior Vice President of the Bank 1984
W. Bruce Fenn (52).............Executive Vice President of the Bank 1988
Senior Vice President and Senior Loan 1987
Officer of the Bank
William H. George (49).........Executive Vice President of the Bank 1992
Senior Vice President of the Bank 1983
</TABLE>
Directors
The following table sets forth the name and address of each director of
the Company, his or her age and principal occupation and the year in which he
or she first became a Director of the Company or its predecessors. The
business address of each of the nominees is the Company's address except as
otherwise noted. No family relationship exists between any director.
Year First
Name, Age and Principal Became
Occupation or Employment (1) Director
Anthony F. Abatiell (54)................... 1982
Attorney, Partner, Abatiell & Wysolmerski
Law Offices, Rutland
Zane V. Akins (53).......................... 1987
President, Akins & Associates; President
& Director, Anitech International, Inc.,
Brattleboro (Business Consulting)
Charles A. Cairns (52)...................... 1986
President, Champlain Oil Co., Inc. and
Coco Mart, Inc., South Burlington
Robert C. Cody (69)......................... 1974
President, Cody Chevrolet, Inc. Chairman,
Cody Management Associates (Real Estate
Ownership and Management), Montpelier
Beverly G. Davidson (62).................... 1980
Secretary, Treasurer of RCAS, Inc.,
(Vermont State Fair); Treasurer, N.M.&B.
Ltd. (NutriSystem Weight Control), Rutland
James E. Griffin (66)....................... 1972
President, J.R. Resources, Inc. (Business
Consultants), Rutland
John D. Hashagen, Jr. (52).................. 1987
President and Chief Executive Officer of
Vermont Financial Services Corp., Brattleboro;
President & Chief Executive Officer, Vermont
National Bank, Brattleboro
Daniel C. Lyons (62)........................ 1974
Lyons Pontiac-Cadillac GMC Trucks; Toyota,
Inc., Berlin
Kimball E. Mann (59)........................ 1969
President, J.E. Mann, Inc. (Women's
Department Store), Brattleboro
Stephan A. Morse (47)....................... 1986
President and CEO, The Windham Foundation,
Inc., Grafton
Donald E. O'Brien (68)...................... 1978
Attorney, Burlington
Roger M. Pike (53).......................... 1980
Vice President, Kinney, Pike, Bell & Conner,
Inc. (Insurance), Rutland
Mark W. Richards (48)....................... 1988
President, Richards, Gates, Hoffman & Clay
(Insurance) Brattleboro
(1) During the past five years, the principal occupation and employment of
each director has been as set forth above, except as follows: John D.
Hashagen, Jr. previously served as Executive Vice President and Senior
Vice President of Vermont Financial Services Corp.; Zane W. Akins was
Chief Executive Officer, Holstein-Friesian Association of America;
Executive Vice President Holstein-Friesian Services, Inc. (Cattle
Registration) until December 31, 1990.
Item 11 - Executive Compensation
The following tables contain three-year summary of the total compensation
paid to the CEO and the other three executive offices whose salary and bonus
exceeded $100,000 during 1993.
I. SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION> <C> <C> <C> <C> <C> <C> <C> <C>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restric- All
Annual ted LTIP Other
Name and Compen- Stock Options/ Pay Compen-
Principal Salary Bonus sation Awards SARs outs sations
Position Year $ $ $(1) $ # $ $(2)
John D. Hashagen 1993 $184,000 $7,360 $25,785 N/A 5,000 shares N/A $2,249
President and 1992 184,000 N/A 4,685 N/A N/A N/A N/A
Chief Executive Off. 1991 184,000 N/A 4,602 N/A N/A N/A N/A
Richard O. Madden 1993 $ 99,209 $4,040 $12,760 N/A N/A N/A $1,488
Exec. Vice Pres., 1992 96,000 N/A 1,786 N/A N/A N/A N/A
Tres., Secretary 1991 96,000 N/A 1,634 N/A N/A N/A N/A
Robert G. Soucy 1993 $110,000 $4,400 $15,732 N/A 4,000 shares N/A $1,100
Exec. Vice Pres., 1992 105,671 N/A 2,339 N/A N/A N/A N/A
Senior Banking Exec. 1991 101,000 N/A 2,167 N/A N/A N/A N/A
W. Bruce Fenn 1993 $105,000 $2,100 $17,717 N/A 4,000 shares N/A $1,575
Exec. Vice Pres., 1992 105,000 N/A 3,347 N/A N/A N/A N/A
Regional Banking Exec.1991 105,000 N/A 3,119 N/A N/A N/A N/A
</TABLE>
(1) In December, 1993 the discount rate used to compute the liability under
the officers' deferred compensation plan (See "Deferred Compensation
Agreements" following) was reduced from 9% to 7-1/2%. The associated
expenses attributable to Messrs.. Hashagen, Madden, Soucy and Fenn due to
this change were $19,597, $10,799, $12,211 and $13,998, respectively.
(2) Represents the 25% Company match of the respective employees' 401k
contribution.
II. OPTION/SAR GRANTS TABLE
<TABLE>
Option/SAR Grants in Last Fiscal Year
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation
Individual Grants for Option Term
<CAPTION> <C> <C> <C> <C> <C> <C>
(a) (b) (c) (d) (e) (f) (g)
% of
Total
Options/
SARs
Options/ Granted to Exercise
SARs Employees or base Expira-
Granted in Fiscal Price tion
Name (#) Year ($/Sh) Date 5%($) 10%($)
John D.
Hashagen 5,000 13.9 $19.00 10/13/98 $26,247 $57,998
Richard O.
Madden 0 0 N/A N/A N/A N/A
Robert G.
Soucy 4,000 11.1 19.00 10/13/98 20,997 46,399
W. Bruce
Fenn 4,000 11.1 19.00 10/13/98 20,997 46,399
</TABLE>
III. OPTION EXERCISES AND YEAR-END VALUE TABLE
Aggregated Option Exercises in Last Fiscal Year, and FY-End Option Value
<TABLE>
<CAPTION> <C> <C> <C> <C>
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End ($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
John D.
Hashagen N/A N/A E 5,000 $0
Richard O.
Madden N/A N/A 0 $0
Robert G.
Soucy N/A N/A E 4,000 $0
W. Bruce
Fenn N/A N/A E 4,000 $0
</TABLE>
Deferred Compensation Agreements
The Bank has entered in Executive Deferred Compensation Agreement with
certain officers, including Mr. Hashagen and the other executive officers in
the group referred to in the above table. The agreements provide for monthly
payments for a ten-year period from retirement after age 60 but before age 65,
and for a fifteen-year period from retirement after age 65, subject to certain
conditions. The conditions include the requirements that the officer refrain
from competitive activities, be available for certain advisory and consulting
services subsequent to retirement and continue in the employment of the Bank
until retirement. The agreements also provide for payments upon disability
prior to retirement and payments to beneficiaries of the officers under certain
circumstances. Mr. Hashagen's agreement provides for payments in the amount
of $1,944.44 per month, and the agreements of the other three officers noted
above provide for payments of $1,388.89 per month. The bank has purchased life
insurance policies on the lives of these officers which, in effect, will
provide the funds to make payments to reimburse the Bank for payments made
under the agreements.
Management Continuity Agreements
The Company and the bank have entered into agreements with its six
executive officers, Messrs. Hashagen, Madden, Soucy, Fenn, Dunham and George
which provide for the payment of certain severance benefits if such officer's
employment with the Company or the Bank is terminated within thirty-six months
after a change of control of the company or the Bank. The agreements provide
for severance payments to Mr. Hashagen equal to 250% of his base salary upon
termination after a change of control and for payments to each of the other
executive officers equal to 200% of his base salary upon termination after a
change of control as defined in the agreements.
The management continuity agreements do not provide for severance benefits
in instances where termination is due to death, disability or retirement.
Further, no benefits are payable in instances of termination for cause, or
after a change of control if the officer voluntarily terminates his employment
with both the Company and the Bank, unless such termination is for a "good
reason" as defined in the agreements.
Severance benefits payable in the event of a qualifying termination after
a change of control are to be paid in equal consecutive biweekly installments.
If severance payments due in the event of termination after a change of control
were payable to each of the executive officers on the date of this filing, the
aggregate amount of such severance payments would be $1,540,000. These
severance payments are subject to up to a 50% reduction if the officer works
for or participates in the management, operation or control of a commercial or
savings bank, or bank holding company, which does business in Vermont, unless
such officer's activities are substantially outside Vermont. Additionally, the
officer will be entitled to continuation of life, disability, accident and
health insurance benefits and a cash adjustment to compensate the executive for
the market value of any stock options under the Company's Officers' or
Directors' Non-Qualified Stock Option Plans in excess of their exercise price.
The agreements contain each officer's undertaking to remain in the employ
of the Company and the Bank if a potential change of control occurs until the
earlier of six months, retirement (at normal age), disability or the occurrence
of a change of control.
Similar agreements have been executed by certain employees of the Bank and
the Company which provide for severance payments ranging from 100% to 150% of
the employee's base salary upon termination after a change in control.
Profit-Sharing Plan
Each employee, including executive officers, becomes eligible to
participate in the Bank's Profit-Sharing Plan on January 1 of the Plan year in
which he or she completes one full year of continuous service of 1,000 hours or
more. Upon completion of three years of continuous service, a participant
become 30% vested, increasing to 40% after four years, 60% after five years,
80% after six years, and fully vested after seven years. Vested participants
may elect to receive, in cash, up to 50% of their annual allocation of the
Bank's contribution to the Profit-Sharing Plan. Vested amounts not so received
in cash are distributed to participants upon their retirement or earlier
termination of employment. During 1993, the Bank did not make a contribution
to the Profit-Sharing Plan.
Retirement Plan
The Vermont National Bank Retirement Plan covers substantially all
eligible employees of the Bank, including officers, and provides for payment,of
retirement benefits generally based upon an employee's years of credited
service with the Bank and his or her salary level, reduced by a portion of the
Social Security benefits to which it is estimated the employee will be
entitled.
The following table represents estimated annual benefits upon retirement
at age 65 to employees at specified salary levels (based upon the average
annual rate of salary during the highest five years within the final ten years
of employment) at stated years of service with the Bank. The amounts show are
after deduction of estimates for Social Security reductions based on the Social
security law as of January 1, 1994.
<TABLE>
Estimated Annual Benefits at Retirement
by Specified Remuneration and
Years of Service Classification
<CAPTION> <C> <C> <C> <C> <C>
Final Average Years of Service
Compensation 5 10 15 20 25
$ 20,000 1,516 3,031 4,547 6,062 7,578
40,000 3,515 7,030 10,544 14,059 17,574
60,000 5,824 11,647 17,471 23,294 29,118
80,000 8,224 16,447 24,671 32,894 41,118
100,000 10,624 21,247 31,871 42,494 53,118
120,000 13,024 26,047 39,071 52,094 65,118
140,000 15,424 30,847 46,271 61,694 77,118
160,000 * 17,824 35,647 53,471 71,294 89,118
180,000 * 20,224 40,447 60,671 80,894 101,118
200,000 * 22,624 45,247 67,871 90,494 113,118
220,000 * 25,024 50,047 75,071 100,094 125,118 *
240,000 * 27,424 54,847 82,271 109,694 137,118 *
260,000 * 29,824 59,647 89,471 119,294 * 149,118 *
</TABLE>
* Under current regulations of the Internal Revenue Code, the maximum annual
benefit payable from a defined benefit plan during 1994 is $118,800
payable as a life annuity for retirements at age 65. In addition, the
maximum annual compensation may not exceed $150,000. The amounts shown
above in excess of $118,800 and those using compensation in excess of
$150,000 are show for exhibit purposes only.
The description of the Retirement Plan in this filing is intended solely
to provide shareholders of the Company with general information concerning the
plan as it relates to management remuneration. Under no circumstances should
the description be construed as indicative of the rights of any particular
employee, or as conferring any right upon any employee , which rights will in
all cases be determined by the appropriate legal documents governing the plan.
Compensation of Directors
Each director who is not an officer of the Company or the Bank receives an
annual retainer of $4,800 and, in addition, a $400 fee for each regular monthly
Board of Directors' meeting attended, and a $300 fee for each meeting of a
committee of the Board he or she attends.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of December 31, 1993 as to
persons who are beneficial owners of more than 5% of the outstanding shares of
VFSC Common Stock.
<TABLE>
<CAPTION> <C> <C>
Amount of
Beneficial Percent
Name and Address Ownership of Class
David L. Babson & Company, Inc. . . . . . 239,600(1) 7.01%
One Memorial Drive
Cambridge, MA 02142-1300
UBS Asset Management (New York) Inc. . . 267,300(2) 7.82%
1211 Avenue of the Americas
New York, NY 10036-8796
Vermont National Bank . . . . . . . . . . 274,002(3) 8.02%
Trust Department
100 Main Street
Brattleboro, VT 05301
</TABLE>
(1) Includes sole voting power for 216,200 shares, shared voting power for
23,400 shares and sole dispositive power for 239,600 shares.
(2) Includes sole voting power for 236,100 shares and sole dispositive power
for 267,300 shares.
(3) Includes sole voting power for 30,185 shares, shared voting power for
243,817 shares, sole dispositive power for 157,632 shares and shared
dispositive power for 116,370 shares.
The following table sets forth information as of February 28, 1994, with
respect to the shares of VFSC Common Stock beneficially owned by each director
of VFSC, by the chief executive officer of VFSC, and certain other executive
officers of VFSC, and by all directors and executive officers as a group.
<TABLE>
<CAPTION> <C> <C>
Amount and Percent
Nature of of VFSC
Beneficial Common
Name Ownership Stock
Anthony F. Abatiell. . . . . . . . . . . . 65,439(1) 1.91%
Zane V. Akins. . . . . . . . . . . . . . . 375(2) 0.01%
Charles A. Cairns. . . . . . . . . . . . . 3,821(3) 0.11%
Robert C. Cody . . . . . . . . . . . . . . 14,869(4) 0.44%
Beverly G. Davidson. . . . . . . . . . . . 2,365(5) 0.07%
James E. Griffin . . . . . . . . . . . . . 2,524(6) 0.07%
John D. Hashagen, Jr.. . . . . . . . . . . 10,912(7) 0.32%
Daniel C. Lyons. . . . . . . . . . . . . . 9,718(8) 0.28%
Kimball E. Mann. . . . . . . . . . . . . . 11,013(9) 0.32%
Stephan A. Morse . . . . . . . . . . . . . 4,648(10) 0.14%
Donald E. O'Brien. . . . . . . . . . . . . 4,488(11) 0.13%
Roger M. Pike. . . . . . . . . . . . . . . 6,616(12) 0.19%
Mark W. Richards . . . . . . . . . . . . . 24,142(13) 0.71%
W. Bruce Fenn. . . . . . . . . . . . . . . 6,209(14) 0.18%
Richard O. Madden. . . . . . . . . . . . . 2,106(15) 0.06%
Robert G. Soucy. . . . . . . . . . . . . . 9,488(16) 0.28%
Directors & Executive Officers as a Group(18) 186,887(17) 5.47%
</TABLE>
__________
(1) Includes 813 shares held jointly with a family member in which Mr.
Abatiell shares voting and investment power. Also includes 60,192 shares
held in a custodial capacity in VNB's trust department in which Mr.
Abatiell has sole voting and investment powers. Does not include options
to acquire 1,000 additional shares, exercisable within sixty (60) days,
pursuant to the Directors' Non-Qualified Stock Option Plan.
(2) Does not include options acquire 1,000 shares, exercisable within sixty
(60) days, pursuant to the Directors' Non-Qualified Stock Option Plan.
(3) Does not include options to acquire 1,000 shares, exercisable within sixty
(60) days, pursuant to the Directors' Non-Qualified Stock Option Plan.
(4) Includes 10,149 shares held jointly with a family member in which Mr. Cody
shares voting and investment powers. Does not include options to acquire
1,000 shares, exercisable within sixty (60) days, pursuant to the
Directors' Non-Qualified Stock Option Plan.
(5) Ms. Davidson shares voting and investment powers on 2,365 shares. Does
not include options to acquire 1,000 shares, exercisable within sixty (60)
days, pursuant to the Directors' Non-Qualified Stock Option Plan.
(6) Does not include options to acquire 1,000 shares, exercisable within sixty
(60) days, pursuant to the Directors' Non-Qualified Stock Option Plan.
(7) Includes 224 shares held by a family member in which Mr. Hashagen has no
voting or investment powers and as to which mr. Hashagen disclaims
beneficial ownership. Also includes 200 shares held in the name of Green
Mountain Investment Club in which Mr. Hashagen shares voting and
investment powers and 7,154 shares held in the VNB Profit Sharing Plan.
Does not include options to acquire 5,000 shares, exercisable within sixty
(60) days, pursuant to the Officers' Non-qualified Stock Option Plan.
(8) Includes 2,512 shares held jointly with a family member in which Mr. Lyons
shares voting and investment powers. Also includes 7,206 shares held by a
family member in which Mr. Lyons has no voting or investment powers and as
to which Mr. Lyons disclaims beneficial ownership. Does not include
options to acquire 1,000 shares, exercisable within sixty (60) days,
pursuant to the Directors' Non-Qualified Stock Option Plan.
(9) Includes 9,379 shares held jointly with a family member in which Mr. Mann
shares voting and investment powers. Also includes 814 shares held by a
family member in which Mr. Mann has no voting or investment powers and as
to which Mr. Mann disclaims beneficial ownership. Does not include
options to acquire 1,000 shares, exercisable within sixty (60) days,
pursuant to the Directors' Non-Qualified Stock Option Plan.
(10) Includes 2,507 shares held jointly with a family member. Also includes
505 shares held by a family member in which Mr. Morse has no voting or
investment powers and as to which mr. Morse disclaims beneficial
ownership. Does not include options to acquire 1,000 shares, exercisable
within sixty (60) days, pursuant to the Directors' Non-Qualified Stock
Option Plan.
(11) Does not include options to acquire 1,000 shares, exercisable within sixty
(60) days, pursuant to the Directors' Non-Qualified Stock Option Plan.
(12) Includes 777 shares held jointly with family members and 1,125 shares held
by Kinney, Pike, Bell & Conner, Inc. in which Mr. Pike shares voting and
investment powers also includes 997 shares held by a family member in
which mr. Pike has no voting power and as to which Mr. Pike disclaims
beneficial ownership. Does not include options to acquire 1,000 shares,
exercisable within sixty (60) days, pursuant to the Directors'
Non-Qualified Stock Option Plan.
(13) Includes 24,142 shares held jointly with family members in which mr.
Richards shares voting and investment powers. Does not include options to
acquire 1,000 shares, exercisable within sixty (60) days, pursuant to the
Directors' Non-Qualified Stock Option Plan.
(14) Includes 4,468 shares held in the VNB Profit Sharing Plan. Does not
include options to acquire 4,000 shares, exercisable within sixty (60)
days, pursuant to the Officers' Non-Qualified Stock Option Plan.
(15) Includes 2,097 shares held in the VNB Profit Sharing Plan.
(16) Includes 3,732 shares held in the VNB Profit Sharing Plan. Does not
include options to acquire 4,000 shares, exercisable within sixty (60)
days, pursuant to the Officers' Non-Qualified Stock Option Plan.
(17) Does not include options to acquire 48,000 shares, or 1.40% of the
outstanding shares, exercisable within sixty (60) days, pursuant to the
Directors' and Officers' Non-Qualified Stock Option Plans.
Item 13 - Certain Relationships and Related Transactions
Some directors and officers of the Bank and the Company and their
associates were customers of and had transactions with the Bank and the Company
in the ordinary course of business during 1993. Additional transactions may be
expected to take place in the ordinary course of business in the future. Some
of the Company's directors are directors, officers, trustees, or principal
security holders of corporations or other organizations which were customers of
or had transactions with the Bank in the ordinary course of business during
1993. All outstanding loans and commitments included in such transactions were
made in the ordinary course of business on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other person and did not involve more than the
normal risk of collectibility nor present other unfavorable features.
In addition to banking and financial transactions, the Bank and the
Company have had other transactions with, or used products or services of,
various organizations of which directors of the Company are directors or
officers. The amounts involved have in no case been material in relation to
the business of the Bank or the Company, and it is believed that they have not
been material in relation to the business of such other organizations or to the
individuals concerned. It is expected that the Bank and the Company will
continue to have similar transactions with, and use products or services or,
such organizations in the future.
Two directors of the Company are attorneys who have been retained in the
past to represent the Bank or the Company in appropriate circumstances. During
1993, no director was retained by the Bank as legal counsel.
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements and Exhibits
(1) The following financial statements (including report thereon and
notes thereto) are filed as part of this Report.
Report of Independent Certified Public
Accountants
Consolidated Balance Sheets - December 31,
1993 and 1992
Consolidated Statements of Income -
For the Years Ended December 31,
1993, 1992, and 1991
Consolidated Statements of Changes in
Stockholders' Equity - For the
Years Ended December 31, 1993,
1992, and 1991
Consolidated Statements of Cash Flow
- For the Years Ended December 31,
1993, 1992 and 1991
Notes to Consolidated Financial
Statements
(2) Schedules - None
(3) Exhibits:
3.1 Certificate of Incorporation of Registrant. Incorporated by
reference to Exhibit 3.1 to Registrant's Current Report on Form 8-K dated April
23, 1990.
3.2 By-Laws of Registrant. Incorporated by reference to Exhibit 3.2
to Registrant's Current Report on Form 8-K dated April 23, 1990.
10.1 Management continuity agreements dated February 9, 1990 between
the Registrant's predecessor and four executive officers:
(a) John D. Hashagen, Jr.
(b) Richard O. Madden
(c) W. Bruce Fenn
(d) Robert G. Soucy
Incorporated by reference to Exhibit 3.2 to Registrant's Form 10-K
for the fiscal year ended December 31, 1990.
Management continuity agreement with Louis J. Dunham dated
March 17, 1994.
Filed herewith.
Management continuity agreement with William G. George dated
January 11, 1994.
Filed herewith.
10.2 Agreement of Merger dated February 28, 1990 between the Company
and Vermont Financial Services Corp., a Delaware corporation. Incorporated by
reference to Exhibit A of Registrant's Proxy Statement for its 1990 Annual
Meeting of Shareholders, Exhibit 28 to Registrant's Form 10-K for the fiscal
year ended December 31, 1989.
22. Subsidiaries of Registrant. Filed herewith.
24. Consent of Coopers & Lybrand. Filed herewith.
(b) Reports on Form 8-K.
During the Registrant's fiscal quarter ended December 31, 1993, the
Registrant filed no Reports on Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 9, 1994 By /s/ John D. Hashagen, Jr.
John D. Hashagen, Jr., President
and Chief Executive Officer
By /s/ Richard O. Madden
Richard O. Madden, Executive Vice
President and Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION> <C> <C>
Name Title Date
/s/ John D. Hashagen, Jr.Director and President March 9, 1994
John D. Hashagen, Jr. (Principal Executive Officer)
/s/ Richard O. Madden Secretary & Treasurer March 9, 1994
Richard O. Madden (Principal Financial Officer)
/s/ Anthony F. Abatiell Director March 9, 1994
Anthony F. Abatiell
/s/ Zane Akins Director March 9, 1994
Zane Akins
/s/ Charles A. Cairns Director March 9, 1994
Charles A. Cairns
/s/ Robert C. Cody Director March 9, 1994
Robert C. Cody
/s/ Beverly G. Davidson Director March 9, 1994
Beverly G. Davidson
/s/ James E. Griffin Director March 9, 1994
James E. Griffin
/s/ Daniel C. Lyons Director March 9, 1994
Daniel C. Lyons
/s/ Kimball E. Mann Director March 9, 1994
Kimball E. Mann
/s/ Stephan A. Morse Director March 9, 1994
Stephan A. Morse
/s/ Donald E. O'Brien Director March 9, 1994
Donald E. O'Brien
/s/ Roger M. Pike Director March 9, 1994
Roger M. Pike
/s/ Mark W. Richards Director March 9, 1994
Mark W. Richards
</TABLE>
Index to Exhibits
Exhibit 10.1 Management Continuity Agreements
Exhibit 22 Subsidiaries of Registrant
Exhibit 24 Consent of Independent Certified Public Accountants
Exhibit 10.1
Vermont National Bank
100 Main Street
Brattleboro, Vermont 05301
January 11, 1994
Mr. William H. George
Nine Woodbine Road
Shelburne, Vermont 05482
Dear Mr. George:
Vermont National Bank (the "Bank") considers it essential to the best
interests of the Bank and its corporate parent, Vermont Financial Services
Corp. ("VFSC") and their stockholders to foster the continuous employment of
key management personnel. In this connection, the Boards of Directors of VFSC
and the Bank (the "Boards") recognize that, as is the case with many publicly
held businesses, the possibility of a change of control may exist and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the business and its stockholders.
The Boards have determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of members of
the management of the Bank, including yourself, to their assigned duties
without distraction in the face of potentially disturbing circumstances arising
from the possibility of a change of control, although no such change is now
contemplated.
In order to induce you to remain in the employ of the Bank and in
consideration of your agreement set forth in Subsection 2(ii) hereof, the Bank
agrees that you shall receive the severance benefits set forth in this letter
agreement (the "Agreement") in the event your employment is terminated
subsequent to a "change in control" (as defined in Section 2 hereof) under the
circumstances described below. When used herein, the term "Employer" shall
mean the Bank.
1. Term of Agreement. This Agreement shall commence on the date hereof
and shall continue in effect through January 31, 1997; provided, however, that
commencing on January 31, 1995 and each January 31 thereafter, the term of this
Agreement shall automatically be extended for one additional year unless, at
least two years and thirty (30) days prior to the then scheduled termination of
this Agreement, the Bank shall have given notice that it does not wish to
extend this Agreement; provided, further, if a change in control (as defined in
Subsection 2(i) hereof) shall have occurred during the original or extended
term of this Agreement, this Agreement shall continue in effect for a period of
thirty-six (36) months beyond the month in which such change in control
occurred.
2. Change in Control.
(1) No benefits shall be payable hereunder unless there shall have
been a change in control of either VFSC or the Bank, as set forth below. For
purposes of this Agreement, a "change in control" shall be deemed to have
occurred if:
(A) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act")),
other than the Bank holding securities in a fiduciary capacity or a
trustee or other fiduciary holding securities under an employee benefit
plan of the Bank, is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of
VFSC or the Bank representing 25% or more of the combined voting power of
the then outstanding securities of VFSC or the Bank, as the case may be;
or
(B) during any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board of either VFSC or the Bank
and any new director (other than a director designated by a person who has
entered into an agreement with VFSC or the Bank to effect a transaction
described in clause (A) or (C) of this Subsection) whose election by such
Board or nomination for election by the stockholders of VFSC or the Bank,
as the case may be, was approved by a vote of at least two-thirds (2/3) of
the directors then still in office who either were directors at the
beginning of such period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority of
such Board; or
(C) the stockholders of VFSC or the Bank approve a merger or
consolidation of VFSC or the Bank, as the case may be, with any other
corporation, other than a merger or consolidation which would result in
the voting securities of VFSC or the Bank, as the case may be, outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least 70% of the combined voting power of the voting securities
of the surviving entity outstanding immediately after such merger or
consolidation, or the stockholders of VFSC or the Bank, as the case may
be, approve an agreement for the sale or disposition of all or
substantially all the assets of VFSC or the Bank, as the case may be. The
merger of VFSC with another corporation effected for the purpose of
reincorporating in another jurisdiction shall not constitute a change of
control hereunder, neither shall the merger of VFSC with the Bank.
(ii) For purposes of this Agreement, a "potential change in control"
shall be deemed to have occurred if:
(A) VFSC or the Bank enters into an agreement, the consummation of
which would result in the occurrence of a change in control of VFSC or the
Bank;
(B) any person (including VFSC or the Bank) publicly announces an
intention to take or to consider taking actions which if consummated would
constitute a change in control of VFSC or the Bank;
(C) any person, other than the Bank holding securities in a
fiduciary capacity or a trustee or other fiduciary holding securities
under an employee benefit plan of VFSC or the Bank, who is or becomes the
beneficial owner, directly or indirectly, of securities of VFSC or the
Bank representing 5% or more of the combined voting power of the then
outstanding securities of VFSC or the Bank, as the case may be, increases
its beneficial ownership of such securities by 5% or more over the
percentage so owned by such person on the date hereof; or
(D) the Board of VFSC or the Bank adopts a resolution to the effect
that, for purposes of this Agreement, a potential change in control has
occurred.
You agree that, subject to the terms and conditions of this Agreement, in the
event of a potential change in control, you will remain in the employ of the
Employer until the earliest of (i) a date which is six (6) months from the
occurrence of such potential change in control, (ii) the termination by you of
your employment by reason of Disability or Retirement (at your normal
retirement age), as defined in Subsection 3(i), or (iii) the occurrence of a
change in control of VFSC or the Bank.
3. Termination Following Change in Control. If any of the events
described in Subsection 2(i) hereof constituting a change in control shall have
occurred, you shall be entitled to the benefits provided in Subsection 4(iii)
hereof upon the subsequent termination of your employment with the Bank during
the term of this Agreement unless such termination is (A) because of your
death, Disability or Retirement, (B) for Cause, or (C) by you other than for
Good Reason.
(i) Disability; Retirement. Your employment may be terminated for
"Disability" in accordance with the Employer's disability policy as in effect
from time to time; provided that no discharge for Disability shall occur unless
as a result of your incapacity due to physical or mental illness you shall have
been absent from the full-time performance of your duties with the Employer for
six (6) consecutive months, and within thirty (30) days after written notice of
termination is given you shall not have returned to the full-time performance
of your duties. Termination by the Employer or you of your employment based on
"Retirement" shall mean termination in accordance with the Employer's
retirement policy generally applicable to its salaried employees or in
accordance with any retirement arrangement established with your consent with
respect to you.
(ii) Cause. Termination by the Employer of your employment for
"Cause" shall mean termination upon
(A) the willful and continued failure by you to substantially
perform your duties with the Employer (other than (i) any such failure
resulting from your incapacity due to physical or mental illness, or (ii)
any such actual or anticipated failure after the issuance of a Notice of
Termination by you for Good Reason, as defined in Subsections 3(iv) and
3(iii), respectively) after (a) a written demand for substantial
performance is delivered to you by the Board of the Employer, which demand
specifically identified the manner in which the Board believes that you
have not substantially performed your duties, and (b) you have been
afforded a reasonable opportunity to dispute any assertions of
nonperformance, or
(B) the willful engaging by you in conduct which is demonstrably and
materially injurious to the Employer, monetarily or otherwise.
For purposes of this Subsection, no act, or failure to act, on your part shall
be deemed "willful" unless done, or omitted to be done, by you not in good
faith and without reasonable belief that your action or omission was in the
best interest of the Employer. Notwithstanding the foregoing, you shall not be
deemed to have been terminated for Cause unless and until there shall have been
delivered to you a copy of a resolution duly adopted by the affirmative vote of
not less than three-quarters (3/4) of the Board called and held for such
purpose (after reasonable notice to you and an opportunity for you, together
with your counsel, to be heard before such Board), finding that in the good
faith opinion of such Board you were guilty of conduct set forth above in
clauses (A) or (B) of the first sentence of this Subsection and specifying the
particulars thereof in detail.
(iii) Good Reason. After a change in control defined in
Subsection 2(i) hereof, you shall be entitled to the benefits provided in
Subsection 4(iii) hereof, if you terminate your employment with the Employer
for Good Reason. For purposes of this Agreement, "Good Reason" shall mean,
without your express written consent, the occurrence after a change in control
of VFSC or the Bank of any of the following circumstances unless, in the case
of paragraphs (A), (E), (F), (G) or (H), such circumstances are fully corrected
prior to the Date of Termination specified in the Notice of Termination, as
defined in Subsections 3(v) and 3(iv), respectively, given in respect thereof:
(A) the assignment to you of any duties inconsistent with your
status as a senior executive officer of the Employer or a substantial
adverse alteration in the nature or status of your responsibilities from
those in effect immediately prior to the change in control;
(B) a reduction in your annual base salary as in effect on the date
hereof or as the same may be increased from time to time, except for
across-the-board salary reductions similarly affecting all senior
executives of VFSC and the Bank and all senior executives of any person in
control of VFSC or the Bank;
(C) the Employer's requiring you to be based anywhere other than
VFSC's or the Bank's principal executive offices wherever located in
Vermont from time to time, except for (i) transfers in connection with a
demonstrable promotion and (ii) required travel substantially consistent
with your present business travel obligations or in connection with a
demonstrable promotion;
(D) the failure by the Employer without your consent to pay to you
any portion of your current compensation, except pursuant to an
across-the-board compensation deferral similarly affecting all senior
executives of VFSC and the Bank and all senior executives of any person in
control of VFSC or the Bank, or to pay to you any portion of an
installment of deferred compensation under any deferred compensation
program, within seven (7) days of the date such compensation is due;
(E) (i) the failure by the Employer to continue in effect any
compensation plan in which you participate immediately prior to the change
in control which is material to your total compensation, including but not
limited to VFSC's Officers Nonqualified Stock Option Plan, Employee Stock
Purchase Plan, Profit Sharing Plan and Retirement Plan, or any substitute
plans adopted prior to the change in control, unless an equitable
arrangement (embodied in an ongoing substitute or alternative plan or
plans) has been made with respect to such plans in connection with the he
change in control, or (ii) the failure by the Employer to continue your
participation therein (or in such substitute or alternative plan or plans)
on a basis not materially less favorable, both in terms of the amount of
benefits provided and the level of your participation relative to other
participants, as existed at the time of the change in control;
(F) the failure by the Employer to continue to provide you with
benefits substantially similar to those enjoyed by you under any pension,
life insurance, medical, health and accident, or disability plans in which
you were participating at the time of the change in control, the taking of
any action which would directly or indirectly materially reduce any of
such benefits or deprive you of any material fringe benefit enjoyed by you
at the time of the change in control, or the failure to provide you with
the number of paid vacation days to which you are entitled on the basis of
years of service in accordance with normal vacation policy in effect at
the time of the change in control;
(G) the failure of the Employer to obtain a satisfactory agreement
from any successor to assume and agree to perform this Agreement, as
contemplated in Section 5 hereof; or
(H) any purported termination of your employment which is not
effected pursuant to a Notice of Termination satisfying the requirements
of Subsection (iv) below (and, if applicable, the requirements of
Subsection (ii) above); for purposes of this Agreement, no such purported
termination shall be effective.
Your right to terminate your employment pursuant to this Subsection shall not
be affected by your incapacity due to physical or mental illness. Your
continued employment shall not constitute consent to, or a waiver of rights
with respect to, any circumstances constituting Good Reason hereunder.
(iv) Notice of Termination. Any purported termination of your
employment by the Employer or by you shall be communicated by written Notice of
Termination to the other parties hereto in accordance with Section 6 hereof.
For purposes of this Agreement, a "Notice of Termination" shall mean a notice
which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of your employment
under the provision so indicated.
(v) Date of Termination, Etc. "Date of Termination shall mean (A)
if your employment is terminated for Disability, thirty (30) days after Notice
of Termination is given (provided that you shall not have returned to the
full-time performance of your duties during such thirty (30 day period), and
(B) if your employment is terminated pursuant to Subsection (ii) or (iii) above
or for any other reason (other than Disability), the date specified in the
Notice of Termination (which, in the case of a termination pursuant to
Subsection (ii) above shall not be less than thirty (30) days, and in the case
of a termination pursuant to Subsection (iii) above shall not be less than
fifteen (15) nor more than sixty (60) days, respectively, from the date such
Notice of Termination is given); provided that if within fifteen (15) days
after any Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this proviso), the party receiving
such Notice of Termination notifies the other party that a dispute exists
concerning the termination, the Date of Termination shall be the date on which
the dispute is finally determined, either by mutual written agreement of the
parties, by a binding arbitration award, or by a final judgment, order or
decree of a court of competent jurisdiction (which is not appealable or with
respect to which the time for appeal therefrom has expired and no appeal has
been perfected); provided further that the Date of Termination shall be
extended by a notice of dispute only if such notice is given in good faith and
the party giving such notice pursues the resolution of such dispute with
reasonable diligence. In the event of the pendency of any such dispute, the
Employer will suspend your salary payments but will continue you as a
participant in all benefit and insurance plans in which you were participating
when the notice giving rise to the dispute was given, until the dispute is
finally resolved in accordance with this Subsection. Amounts paid under this
Subsection are in addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts due under this
Agreement.
4. Compensation Upon Termination or During Disability. Following a
change in control, as defined by Subsection 2(i), upon termination of your
employment or during a period of disability you shall be entitled to the
following benefits:
(i) During any period that you fail to perform your full-time duties
with the Employer as a result of incapacity due to physical or mental illness,
you shall continue to receive your base salary at the rate in effect at the
commencement of any such period, together with all compensation payable to you
under the Profit Sharing Plan or other similar plans in effect during such
period, until this Agreement is terminated pursuant to Section 3(i) hereof.
Thereafter, or in the event your employment shall be terminated by the Employer
or by you for Retirement, or by reason of your death, your benefits shall be
determined under the Employer's retirement, insurance and other compensation
programs.
(ii) If your employment shall be terminated by the Employer for Cause
or by you other than for Good Reason, Disability, Death or Retirement, the
Employer shall pay you your full base salary through the Date of Termination at
the rate in effect at the time Notice of Termination is given, plus all other
amounts to which you are entitled under any compensation plan at the time such
payments are due, and VFSC and the Bank shall have no further obligations to
you under this Agreement.
(iii) If your employment shall be terminated (a) by the Bank
other than for Cause, Retirement or Disability or (b) by you for Good Reason,
then you shall be entitled to the benefits provided below:
(A) The Employer shall pay you your full base salary (net of all
required withholdings, if any) through the Date of Termination at the rate
in effect at the time Notice of Termination is given, plus all other
amounts to which you are entitled under any compensation plan of the
Employer, at the time such payments are due, except as otherwise provided
below.
(B) In lieu of any further salary payments to you for periods
subsequent to the Date of Termination, the Employer shall pay you as
severance an aggregate amount equal to 200% of your annual base salary in
effect immediately prior to the occurrence of the circumstance giving rise
to the Notice of Termination given in respect thereof, such amount to be
paid out in equal, consecutive biweekly installments commencing two weeks
after the Date of Termination, except as provided in paragraph (F) below.
(C) In lieu of shares of common stock of VFSC ("VFSC Shares")
issuable upon exercise of outstanding options ("Options"), if any, granted
to you under VFSC's Officers Nonqualified Stock Option Plan (which Options
shall be cancelled upon the making of the payment referred to below), you
shall receive an amount in cash equal to the produce of (i) the excess of
the higher of the mean of the bid and the asked price of VFSC Shares as
reported on the National Association of Securities Dealers Automated
Quotation system ("NASDAQ") on or nearest the Date of Termination or the
highest per share price for VFSC Shares actually paid in connection with
any change in control, over the per share exercise price of each Option
held by you (whether or not then fully exercisable), times (ii) the number
of VFSC Shares covered by each such option.
(D) The payment provided for in paragraph (C) above shall be made
not later than the fifth day following the Date of Termination, provided,
however, that if the amounts of such payments cannot be finally determined
on or before such day, you shall be paid on such day an estimate, as
determined in good faith, of the minimum amount of such payments, the
remainder of such payments (together with interest at the rate provided in
Section 1274(b) (2) (B) of the Internal Revenue Code) as soon as the
amount thereof can be determined but in no event later than the thirtieth
day after the Date of Termination. In the event that the amount of the
estimated payments exceeds the amount subsequently determined to have been
due, such excess shall constitute a loan to you, payable on the fifth day
after demand (together with interest at the rate hereinabove provided).
(E) The Employer also shall pay to you 50% of all legal fees and
expenses incurred by you as a result of such termination (including all
such fees and expenses, if any, incurred in contesting or disputing any
such termination or in seeking to obtain or enforce any right or benefit
provided by this Agreement or in connection with any tax audit or
proceeding to the extent attributable to any payment or benefit provided
hereunder). Such payments shall be made at the later of the time
specified in paragraph (D) above, or within five (5) days after your
request for payment accompanied with such evidence of fees and expenses
incurred as the Employer reasonably may require.
(F) The severance payments provided for in paragraph (B) above shall
be reduced, as provided hereinbelow, in the event that, during the period
in which you otherwise would be entitled to receive installments of such
payments, you directly or indirectly serve as an officer, employee,
director, agent, partner or consultant of, or otherwise participate in the
management, operation or control of, any commercial or savings banking
institution, or any entity which controls any such institution, which does
business in the State of Vermont. The provisions of this paragraph (F)
shall not apply in any instance (i) in which the services or activities
performed by you which would otherwise result in a reduction of severance
benefits are performed substantially outside of the State of Vermont, or
(ii) in which your sole connection with such commercial or savings banking
institution, or entity which controls such institution, consists of your
ownership of less than five percent (5%) of the outstanding voting
securities thereof. If an event described in the first sentence of this
paragraph (F) occurs prior to your receipt of one-half of the severance
payments provided for in paragraph (B) above, such severance payments
shall cease upon the payment of one-half thereof. If such event occurs
after your receipt of one-half of such severance payments, you shall be
entitled to no further severance payments; provided, however, that there
shall be no reduction in severance benefits if within thirty (30) days of
your notification from the Employer that an event has occurred which would
result in a reduction of severance payments as hereinabove provided (or
the Employer's cessation of such payments without prior notification), you
either sever the relationship which gives rise to such reduction of
severance payments or demonstrate to the reasonable satisfaction of the
Board of the Employer that no reduction of severance payments is
warranted.
(G) The Employer also shall reimburse you for the reasonable fee of
a professional out-placement service selected by you within 90 days after
termination of your employment.
(iv) If your employment shall be terminated (A) by the Employer other
than for Cause, Retirement or Disability or (B) by you for Good Reason, then
the Employer shall arrange to provide you with life, disability, accident,
health and dental insurance benefits substantially similar to those which you
are receiving immediately prior to the Notice of Termination, such benefits to
continue for so long as you are entitled to receive severance payments pursuant
to Subsection 4(iii) (B) above; provided, however, that each such aforesaid
category of benefits shall cease to be provided by the Employer upon your
becoming eligible to receive benefits substantially similar to such category of
benefits from another employer.
(v) You shall not be required to mitigate the amount of any payment
provided for in this Section 4 by seeking other employment or otherwise, nor
shall the amount of any payment or benefit provided for in this Section 4 be
reduced by any compensation earned by you as the result of employment by
another Employer, by retirement benefits, by offset against any amount claimed
to be owed by you to VFSC or the Bank, or otherwise, except as specifically
provided in this Section 4.
(vi) In addition to all other amounts payable to you under this
Section 4, you shall be entitled to receive all benefits payable to you under
the Employer's Pension Plan, Profit Sharing Plan and any other plan or
agreement relating to retirement benefits.
5. Successors Binding Agreement.
(i) The Bank will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
its business and/or assets to assume expressly and agree to perform this
Agreement in the same manner and to the same extent as if no such succession
had taken place. Failure of the Bank to obtain such assumption and agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle you to compensation in the same amount and on the
same terms as you would be entitled to hereunder if you terminate your
employment for Good Reason following a change in control, except that for
purposes of implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the Date of Termination. As used in this
Agreement, "Bank" shall mean the Bank as hereinbefore defined and any successor
to the business and/or assets of the Bank as aforesaid which successor assumes
and agrees to perform this Agreement by operation of law, or otherwise.
(ii) This Agreement shall inure to the benefit of and be enforceable
by your personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If you should die
while any amount would still be payable to you hereunder if you had continued
to live, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to your devisee, legatee or other
designee or, if there is no such designee, to your estate.
6. Notice. For the purpose of this Agreement, notices and all other
communications provided for in the agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement, or to such
other address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon receipt.
7. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by you and such officer or officers as may be
specifically designated by the Boards. No waiver by a party hereto at any time
of any breach by the other party hereto of, or compliance with, any condition
or provision of this Agreement to be performed by another party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at
any prior or subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect of the subject matter hereof have
been made by any party which are not expressly set forth in this Agreement.
The validity, interpretation, construction and performance of this Agreement
shall be governed by the laws of the State of Vermont. All references to
sections of the Exchange Act or the Code shall be deemed also to refer to any
successor provisions to such sections. Any payments provided for hereunder
shall be paid net of any applicable withholding required under federal, state
or local law. The obligations of the Bank under Section 4 shall survive the
expiration of the term of this Agreement.
8. Validity. The invalidity or unenforceability or any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
9. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
10. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
the city or town of VFSC's principal place of business as hereinbelow provided.
If a dispute or controversy hereunder arises and, within thirty (30) days of
each party's written notice thereof, such dispute or controversy has not been
resolved by mutual accord, then such dispute or controversy shall be
conclusively determined by three arbitrators, one arbitrator being selected by
you, one arbitrator being selected by the Employer and the third being selected
by the two arbitrators so selected. In the event of their inability to agree
on the selection of a third arbitrator, the third arbitrator shall be
designated in accordance with the rules of the American Arbitrator Association
then in effect. In the event that within ten (10) business days after the
above-referenced 30-day period expires without resolution of any dispute or
controversy by mutual accord any party shall not have selected its arbitrator
and given written notice thereof to the other party, such arbitrator shall be
selected in accordance with the rules of the American Arbitration Association
as then in effect. All determinations made by the arbitrators selected
pursuant to the provision of this Section shall be by majority vote and shall
be final. Notice of any such determination shall be forthwith given to each
party. Upon the conclusion of the arbitration, the arbitrators shall allocate
the costs of arbitration as follows: the Employer shall pay all the fees and
expenses of such arbitration, except that you shall pay the portion of your
legal fees specified in Subsection 4(iii) (E) above and the fees and expenses
of the arbitrator selected by you. Judgment may be entered on the arbitrators'
award in any court having jurisdiction; provided, however, that you shall be
entitled to seek specific performance of your right to be paid until the Date
of Termination during the pendency of any dispute or controversy arising under
or in connection with this Agreement.
If this letter sets forth our agreement on the subject matter hereof,
kindly sign and return the enclosed copy of this letter which will then
constitute our agreement on this subject.
Vermont National Bank
100 Main Street
Brattleboro, Vermont 05301
March 17, 1994
Mr. Louis J. Dunham
RR 2, Box 469
Brattleboro, VT 05301
Dear Mr. Dunham:
Vermont National Bank (the "Bank") considers it essential to the best
interests of the Bank and its corporate parent, Vermont Financial Services
Corp. ("VFSC") and their stockholders to foster the continuous employment of
key management personnel. In this connection, the Boards of Directors of VFSC
and the Bank (the "Boards") recognize that, as is the case with many publicly
held businesses, the possibility of a change of control may exist and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the business and its stockholders.
The Boards have determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of members of
the management of the Bank, including yourself, to their assigned duties
without distraction in the face of potentially disturbing circumstances arising
from the possibility of a change of control, although no such change is now
contemplated.
In order to induce you to remain in the employ of the Bank and in
consideration of your agreement set forth in Subsection 2(ii) hereof, the Bank
agrees that you shall receive the severance benefits set forth in this letter
agreement (the "Agreement") in the event your employment is terminated
subsequent to a "change in control" (as defined in Section 2 hereof) under the
circumstances described below. When used herein, the term "Employer" shall
mean the Bank.
1. Term of Agreement. This Agreement shall commence on the date hereof
and shall continue in effect through January 31, 1997; provided, however, that
commencing on January 31, 1995 and each January 31 thereafter, the term of this
Agreement shall automatically be extended for one additional year unless, at
least two years and thirty (30) days prior to the then scheduled termination of
this Agreement, the Bank shall have given notice that it does not wish to
extend this Agreement; provided, further, if a change in control (as defined in
Subsection 2(i) hereof) shall have occurred during the original or extended
term of this Agreement, this Agreement shall continue in effect for a period of
thirty-six (36) months beyond the month in which such change in control
occurred.
2. Change in Control.
(1) No benefits shall be payable hereunder unless there shall have
been a change in control of either VFSC or the Bank, as set forth below. For
purposes of this Agreement, a "change in control" shall be deemed to have
occurred if:
(A) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act")),
other than the Bank holding securities in a fiduciary capacity or a
trustee or other fiduciary holding securities under an employee benefit
plan of the Bank, is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of
VFSC or the Bank representing 25% or more of the combined voting power of
the then outstanding securities of VFSC or the Bank, as the case may be;
or
(B) during any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board of either VFSC or the Bank
and any new director (other than a director designated by a person who has
entered into an agreement with VFSC or the Bank to effect a transaction
described in clause (A) or (C) of this Subsection) whose election by such
Board or nomination for election by the stockholders of VFSC or the Bank,
as the case may be, was approved by a vote of at least two-thirds (2/3) of
the directors then still in office who either were directors at the
beginning of such period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority of
such Board; or
(C) the stockholders of VFSC or the Bank approve a merger or
consolidation of VFSC or the Bank, as the case may be, with any other
corporation, other than a merger or consolidation which would result in
the voting securities of VFSC or the Bank, as the case may be, outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least 70% of the combined voting power of the voting securities
of the surviving entity outstanding immediately after such merger or
consolidation, or the stockholders of VFSC or the Bank, as the case may
be, approve an agreement for the sale or disposition of all or
substantially all the assets of VFSC or the Bank, as the case may be. The
merger of VFSC with another corporation effected for the purpose of
reincorporating in another jurisdiction shall not constitute a change of
control hereunder, neither shall the merger of VFSC with the Bank.
(ii) For purposes of this Agreement, a "potential change in control"
shall be deemed to have occurred if:
(A) VFSC or the Bank enters into an agreement, the consummation of
which would result in the occurrence of a change in control of VFSC or the
Bank;
(B) any person (including VFSC or the Bank) publicly announces an
intention to take or to consider taking actions which if consummated would
constitute a change in control of VFSC or the Bank;
(C) any person, other than the Bank holding securities in a
fiduciary capacity or a trustee or other fiduciary holding securities
under an employee benefit plan of VFSC or the Bank, who is or becomes the
beneficial owner, directly or indirectly, of securities of VFSC or the
Bank representing 5% or more of the combined voting power of the then
outstanding securities of VFSC or the Bank, as the case may be, increases
its beneficial ownership of such securities by 5% or more over the
percentage so owned by such person on the date hereof; or
(D) the Board of VFSC or the Bank adopts a resolution to the effect
that, for purposes of this Agreement, a potential change in control has
occurred.
You agree that, subject to the terms and conditions of this Agreement, in the
event of a potential change in control, you will remain in the employ of the
Employer until the earliest of (i) a date which is six (6) months from the
occurrence of such potential change in control, (ii) the termination by you of
your employment by reason of Disability or Retirement (at your normal
retirement age), as defined in Subsection 3(i), or (iii) the occurrence of a
change in control of VFSC or the Bank.
3. Termination Following Change in Control. If any of the events
described in Subsection 2(i) hereof constituting a change in control shall have
occurred, you shall be entitled to the benefits provided in Subsection 4(iii)
hereof upon the subsequent termination of your employment with the Bank during
the term of this Agreement unless such termination is (A) because of your
death, Disability or Retirement, (B) for Cause, or (C) by you other than for
Good Reason.
(i) Disability; Retirement. Your employment may be terminated for
"Disability" in accordance with the Employer's disability policy as in effect
from time to time; provided that no discharge for Disability shall occur unless
as a result of your incapacity due to physical or mental illness you shall have
been absent from the full-time performance of your duties with the Employer for
six (6) consecutive months, and within thirty (30) days after written notice of
termination is given you shall not have returned to the full-time performance
of your duties. Termination by the Employer or you of your employment based on
"Retirement" shall mean termination in accordance with the Employer's
retirement policy generally applicable to its salaried employees or in
accordance with any retirement arrangement established with your consent with
respect to you.
(ii) Cause. Termination by the Employer of your employment for
"Cause" shall mean termination upon
(A) the willful and continued failure by you to substantially
perform your duties with the Employer (other than (i) any such failure
resulting from your incapacity due to physical or mental illness, or (ii)
any such actual or anticipated failure after the issuance of a Notice of
Termination by you for Good Reason, as defined in Subsections 3(iv) and
3(iii), respectively) after (a) a written demand for substantial
performance is delivered to you by the Board of the Employer, which demand
specifically identified the manner in which the Board believes that you
have not substantially performed your duties, and (b) you have been
afforded a reasonable opportunity to dispute any assertions of
nonperformance, or
(B) the willful engaging by you in conduct which is demonstrably and
materially injurious to the Employer, monetarily or otherwise.
For purposes of this Subsection, no act, or failure to act, on your part shall
be deemed "willful" unless done, or omitted to be done, by you not in good
faith and without reasonable belief that your action or omission was in the
best interest of the Employer. Notwithstanding the foregoing, you shall not be
deemed to have been terminated for Cause unless and until there shall have been
delivered to you a copy of a resolution duly adopted by the affirmative vote of
not less than three-quarters (3/4) of the Board called and held for such
purpose (after reasonable notice to you and an opportunity for you, together
with your counsel, to be heard before such Board), finding that in the good
faith opinion of such Board you were guilty of conduct set forth above in
clauses (A) or (B) of the first sentence of this Subsection and specifying the
particulars thereof in detail.
(iii) Good Reason. After a change in control defined in
Subsection 2(i) hereof, you shall be entitled to the benefits provided in
Subsection 4(iii) hereof, if you terminate your employment with the Employer
for Good Reason. For purposes of this Agreement, "Good Reason" shall mean,
without your express written consent, the occurrence after a change in control
of VFSC or the Bank of any of the following circumstances unless, in the case
of paragraphs (A), (E), (F), (G) or (H), such circumstances are fully corrected
prior to the Date of Termination specified in the Notice of Termination, as
defined in Subsections 3(v) and 3(iv), respectively, given in respect thereof:
(A) the assignment to you of any duties inconsistent with your
status as a senior executive officer of the Employer or a substantial
adverse alteration in the nature or status of your responsibilities from
those in effect immediately prior to the change in control;
(B) a reduction in your annual base salary as in effect on the date
hereof or as the same may be increased from time to time, except for
across-the-board salary reductions similarly affecting all senior
executives of VFSC and the Bank and all senior executives of any person in
control of VFSC or the Bank;
(C) the Employer's requiring you to be based anywhere other than
VFSC's or the Bank's principal executive offices wherever located in
Vermont from time to time, except for (i) transfers in connection with a
demonstrable promotion and (ii) required travel substantially consistent
with your present business travel obligations or in connection with a
demonstrable promotion;
(D) the failure by the Employer without your consent to pay to you
any portion of your current compensation, except pursuant to an
across-the-board compensation deferral similarly affecting all senior
executives of VFSC and the Bank and all senior executives of any person in
control of VFSC or the Bank, or to pay to you any portion of an
installment of deferred compensation under any deferred compensation
program, within seven (7) days of the date such compensation is due;
(E) (i) the failure by the Employer to continue in effect any
compensation plan in which you participate immediately prior to the change
in control which is material to your total compensation, including but not
limited to VFSC's Officers Nonqualified Stock Option Plan, Employee Stock
Purchase Plan, Profit Sharing Plan and Retirement Plan, or any substitute
plans adopted prior to the change in control, unless an equitable
arrangement (embodied in an ongoing substitute or alternative plan or
plans) has been made with respect to such plans in connection with the he
change in control, or (ii) the failure by the Employer to continue your
participation therein (or in such substitute or alternative plan or plans)
on a basis not materially less favorable, both in terms of the amount of
benefits provided and the level of your participation relative to other
participants, as existed at the time of the change in control;
(F) the failure by the Employer to continue to provide you with
benefits substantially similar to those enjoyed by you under any pension,
life insurance, medical, health and accident, or disability plans in which
you were participating at the time of the change in control, the taking of
any action which would directly or indirectly materially reduce any of
such benefits or deprive you of any material fringe benefit enjoyed by you
at the time of the change in control, or the failure to provide you with
the number of paid vacation days to which you are entitled on the basis of
years of service in accordance with normal vacation policy in effect at
the time of the change in control;
(G) the failure of the Employer to obtain a satisfactory agreement
from any successor to assume and agree to perform this Agreement, as
contemplated in Section 5 hereof; or
(H) any purported termination of your employment which is not
effected pursuant to a Notice of Termination satisfying the requirements
of Subsection (iv) below (and, if applicable, the requirements of
Subsection (ii) above); for purposes of this Agreement, no such purported
termination shall be effective.
Your right to terminate your employment pursuant to this Subsection shall not
be affected by your incapacity due to physical or mental illness. Your
continued employment shall not constitute consent to, or a waiver of rights
with respect to, any circumstances constituting Good Reason hereunder.
(iv) Notice of Termination. Any purported termination of your
employment by the Employer or by you shall be communicated by written Notice of
Termination to the other parties hereto in accordance with Section 6 hereof.
For purposes of this Agreement, a "Notice of Termination" shall mean a notice
which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of your employment
under the provision so indicated.
(v) Date of Termination, Etc. "Date of Termination shall mean (A)
if your employment is terminated for Disability, thirty (30) days after Notice
of Termination is given (provided that you shall not have returned to the
full-time performance of your duties during such thirty (30 day period), and
(B) if your employment is terminated pursuant to Subsection (ii) or (iii) above
or for any other reason (other than Disability), the date specified in the
Notice of Termination (which, in the case of a termination pursuant to
Subsection (ii) above shall not be less than thirty (30) days, and in the case
of a termination pursuant to Subsection (iii) above shall not be less than
fifteen (15) nor more than sixty (60) days, respectively, from the date such
Notice of Termination is given); provided that if within fifteen (15) days
after any Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this proviso), the party receiving
such Notice of Termination notifies the other party that a dispute exists
concerning the termination, the Date of Termination shall be the date on which
the dispute is finally determined, either by mutual written agreement of the
parties, by a binding arbitration award, or by a final judgment, order or
decree of a court of competent jurisdiction (which is not appealable or with
respect to which the time for appeal therefrom has expired and no appeal has
been perfected); provided further that the Date of Termination shall be
extended by a notice of dispute only if such notice is given in good faith and
the party giving such notice pursues the resolution of such dispute with
reasonable diligence. In the event of the pendency of any such dispute, the
Employer will suspend your salary payments but will continue you as a
participant in all benefit and insurance plans in which you were participating
when the notice giving rise to the dispute was given, until the dispute is
finally resolved in accordance with this Subsection. Amounts paid under this
Subsection are in addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts due under this
Agreement.
4. Compensation Upon Termination or During Disability. Following a
change in control, as defined by Subsection 2(i), upon termination of your
employment or during a period of disability you shall be entitled to the
following benefits:
(i) During any period that you fail to perform your full-time duties
with the Employer as a result of incapacity due to physical or mental illness,
you shall continue to receive your base salary at the rate in effect at the
commencement of any such period, together with all compensation payable to you
under the Profit Sharing Plan or other similar plans in effect during such
period, until this Agreement is terminated pursuant to Section 3(i) hereof.
Thereafter, or in the event your employment shall be terminated by the Employer
or by you for Retirement, or by reason of your death, your benefits shall be
determined under the Employer's retirement, insurance and other compensation
programs.
(ii) If your employment shall be terminated by the Employer for Cause
or by you other than for Good Reason, Disability, Death or Retirement, the
Employer shall pay you your full base salary through the Date of Termination at
the rate in effect at the time Notice of Termination is given, plus all other
amounts to which you are entitled under any compensation plan at the time such
payments are due, and VFSC and the Bank shall have no further obligations to
you under this Agreement.
(iii) If your employment shall be terminated (a) by the Bank
other than for Cause, Retirement or Disability or (b) by you for Good Reason,
then you shall be entitled to the benefits provided below:
(A) The Employer shall pay you your full base salary (net of all
required withholdings, if any) through the Date of Termination at the rate
in effect at the time Notice of Termination is given, plus all other
amounts to which you are entitled under any compensation plan of the
Employer, at the time such payments are due, except as otherwise provided
below.
(B) In lieu of any further salary payments to you for periods
subsequent to the Date of Termination, the Employer shall pay you as
severance an aggregate amount equal to 200% of your annual base salary in
effect immediately prior to the occurrence of the circumstance giving rise
to the Notice of Termination given in respect thereof, such amount to be
paid out in equal, consecutive biweekly installments commencing two weeks
after the Date of Termination, except as provided in paragraph (F) below.
(C) In lieu of shares of common stock of VFSC ("VFSC Shares")
issuable upon exercise of outstanding options ("Options"), if any, granted
to you under VFSC's Officers Nonqualified Stock Option Plan (which Options
shall be cancelled upon the making of the payment referred to below), you
shall receive an amount in cash equal to the produce of (i) the excess of
the higher of the mean of the bid and the asked price of VFSC Shares as
reported on the National Association of Securities Dealers Automated
Quotation system ("NASDAQ") on or nearest the Date of Termination or the
highest per share price for VFSC Shares actually paid in connection with
any change in control, over the per share exercise price of each Option
held by you (whether or not then fully exercisable), times (ii) the number
of VFSC Shares covered by each such option.
(D) The payment provided for in paragraph (C) above shall be made
not later than the fifth day following the Date of Termination, provided,
however, that if the amounts of such payments cannot be finally determined
on or before such day, you shall be paid on such day an estimate, as
determined in good faith, of the minimum amount of such payments, the
remainder of such payments (together with interest at the rate provided in
Section 1274(b) (2) (B) of the Internal Revenue Code) as soon as the
amount thereof can be determined but in no event later than the thirtieth
day after the Date of Termination. In the event that the amount of the
estimated payments exceeds the amount subsequently determined to have been
due, such excess shall constitute a loan to you, payable on the fifth day
after demand (together with interest at the rate hereinabove provided).
(E) The Employer also shall pay to you 50% of all legal fees and
expenses incurred by you as a result of such termination (including all
such fees and expenses, if any, incurred in contesting or disputing any
such termination or in seeking to obtain or enforce any right or benefit
provided by this Agreement or in connection with any tax audit or
proceeding to the extent attributable to any payment or benefit provided
hereunder). Such payments shall be made at the later of the time
specified in paragraph (D) above, or within five (5) days after your
request for payment accompanied with such evidence of fees and expenses
incurred as the Employer reasonably may require.
(F) The severance payments provided for in paragraph (B) above shall
be reduced, as provided hereinbelow, in the event that, during the period
in which you otherwise would be entitled to receive installments of such
payments, you directly or indirectly serve as an officer, employee,
director, agent, partner or consultant of, or otherwise participate in the
management, operation or control of, any commercial or savings banking
institution, or any entity which controls any such institution, which does
business in the State of Vermont. The provisions of this paragraph (F)
shall not apply in any instance (i) in which the services or activities
performed by you which would otherwise result in a reduction of severance
benefits are performed substantially outside of the State of Vermont, or
(ii) in which your sole connection with such commercial or savings banking
institution, or entity which controls such institution, consists of your
ownership of less than five percent (5%) of the outstanding voting
securities thereof. If an event described in the first sentence of this
paragraph (F) occurs prior to your receipt of one-half of the severance
payments provided for in paragraph (B) above, such severance payments
shall cease upon the payment of one-half thereof. If such event occurs
after your receipt of one-half of such severance payments, you shall be
entitled to no further severance payments; provided, however, that there
shall be no reduction in severance benefits if within thirty (30) days of
your notification from the Employer that an event has occurred which would
result in a reduction of severance payments as hereinabove provided (or
the Employer's cessation of such payments without prior notification), you
either sever the relationship which gives rise to such reduction of
severance payments or demonstrate to the reasonable satisfaction of the
Board of the Employer that no reduction of severance payments is
warranted.
(G) The Employer also shall reimburse you for the reasonable fee of
a professional out-placement service selected by you within 90 days after
termination of your employment.
(iv) If your employment shall be terminated (A) by the Employer other
than for Cause, Retirement or Disability or (B) by you for Good Reason, then
the Employer shall arrange to provide you with life, disability, accident,
health and dental insurance benefits substantially similar to those which you
are receiving immediately prior to the Notice of Termination, such benefits to
continue for so long as you are entitled to receive severance payments pursuant
to Subsection 4(iii) (B) above; provided, however, that each such aforesaid
category of benefits shall cease to be provided by the Employer upon your
becoming eligible to receive benefits substantially similar to such category of
benefits from another employer.
(v) You shall not be required to mitigate the amount of any payment
provided for in this Section 4 by seeking other employment or otherwise, nor
shall the amount of any payment or benefit provided for in this Section 4 be
reduced by any compensation earned by you as the result of employment by
another Employer, by retirement benefits, by offset against any amount claimed
to be owed by you to VFSC or the Bank, or otherwise, except as specifically
provided in this Section 4.
(vi) In addition to all other amounts payable to you under this
Section 4, you shall be entitled to receive all benefits payable to you under
the Employer's Pension Plan, Profit Sharing Plan and any other plan or
agreement relating to retirement benefits.
5. Successors Binding Agreement.
(i) The Bank will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
its business and/or assets to assume expressly and agree to perform this
Agreement in the same manner and to the same extent as if no such succession
had taken place. Failure of the Bank to obtain such assumption and agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle you to compensation in the same amount and on the
same terms as you would be entitled to hereunder if you terminate your
employment for Good Reason following a change in control, except that for
purposes of implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the Date of Termination. As used in this
Agreement, "Bank" shall mean the Bank as hereinbefore defined and any successor
to the business and/or assets of the Bank as aforesaid which successor assumes
and agrees to perform this Agreement by operation of law, or otherwise.
(ii) This Agreement shall inure to the benefit of and be enforceable
by your personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If you should die
while any amount would still be payable to you hereunder if you had continued
to live, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to your devisee, legatee or other
designee or, if there is no such designee, to your estate.
6. Notice. For the purpose of this Agreement, notices and all other
communications provided for in the agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement, or to such
other address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon receipt.
7. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by you and such officer or officers as may be
specifically designated by the Boards. No waiver by a party hereto at any time
of any breach by the other party hereto of, or compliance with, any condition
or provision of this Agreement to be performed by another party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at
any prior or subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect of the subject matter hereof have
been made by any party which are not expressly set forth in this Agreement.
The validity, interpretation, construction and performance of this Agreement
shall be governed by the laws of the State of Vermont. All references to
sections of the Exchange Act or the Code shall be deemed also to refer to any
successor provisions to such sections. Any payments provided for hereunder
shall be paid net of any applicable withholding required under federal, state
or local law. The obligations of the Bank under Section 4 shall survive the
expiration of the term of this Agreement.
8. Validity. The invalidity or unenforceability or any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
9. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
10. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
the city or town of VFSC's principal place of business as hereinbelow provided.
If a dispute or controversy hereunder arises and, within thirty (30) days of
each party's written notice thereof, such dispute or controversy has not been
resolved by mutual accord, then such dispute or controversy shall be
conclusively determined by three arbitrators, one arbitrator being selected by
you, one arbitrator being selected by the Employer and the third being selected
by the two arbitrators so selected. In the event of their inability to agree
on the selection of a third arbitrator, the third arbitrator shall be
designated in accordance with the rules of the American Arbitrator Association
then in effect. In the event that within ten (10) business days after the
above-referenced 30-day period expires without resolution of any dispute or
controversy by mutual accord any party shall not have selected its arbitrator
and given written notice thereof to the other party, such arbitrator shall be
selected in accordance with the rules of the American Arbitration Association
as then in effect. All determinations made by the arbitrators selected
pursuant to the provision of this Section shall be by majority vote and shall
be final. Notice of any such determination shall be forthwith given to each
party. Upon the conclusion of the arbitration, the arbitrators shall allocate
the costs of arbitration as follows: the Employer shall pay all the fees and
expenses of such arbitration, except that you shall pay the portion of your
legal fees specified in Subsection 4(iii) (E) above and the fees and expenses
of the arbitrator selected by you. Judgment may be entered on the arbitrators'
award in any court having jurisdiction; provided, however, that you shall be
entitled to seek specific performance of your right to be paid until the Date
of Termination during the pendency of any dispute or controversy arising under
or in connection with this Agreement.
If this letter sets forth our agreement on the subject matter hereof,
kindly sign and return the enclosed copy of this letter which will then
constitute our agreement on this subject.
Exhibit 22
Subsidiaries of Registrant:
1. Vermont National Bank, a national banking association, with a principal
place of business at 100 Main Street, Brattleboro, VT 05301.
2. Vermont Financial Services Corp., a Delaware corporation, with a principal
place of business at 100 Main Street, Brattleboro, VT 05301 (incorporated
in 1990).
Exhibit 24
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of Vermont Financial Services Corp. on Form S-8 (File No. 2-83361),
Form S-3 (File No. 2-80833) and Form S-4 (File No. 33-72554) of our report
dated January 21, 1994 on our audit of the consolidated financial statements of
Vermont Financial Services Corp. and subsidiary as of December 31, 1993 and
1992 and for each of the three years in the period ended December 31, 1993,
which report is included in this Annual Report on From 10-K.
COOPERS & LYBRAND
Springfield, Massachusetts
March 28, 1994
