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, 1994
[ ] 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, 1995, 4,729,106 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 $109,951,714.
DOCUMENTS INCORPORATED BY REFERENCE:
None
- The index for exhibits is on Page 63.
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
$1,205 million at December 31, 1994. VFSC owns 100 percent of the
stock of Vermont National Bank (VNB) and United Bank (UB). VFSC has
no other active subsidiaries and engages in no activities other than
holding the stock of VNB and UB (the Banks).
Vermont National Bank
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 $814 million and total assets of $977 million at
December 31, 1994. VNB conducts business through 31 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 and servicing 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 28 automated teller
machines (ATMs) at its branch locations and 6 ATMs in other
locations. In addition, VNB is a member of the Plus, Yankee 24,
NYSE, 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 December 31, 1993, 5 state-chartered savings
banks, 12 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 12.4%, 12.6%
and 12.5% of the total assets, loans and deposits, respectively, of
these 26 banking institutions.
United Bank
UB is a Massachusetts chartered stock savings bank originally
incorporated in 1855 as the Shelburne Falls Five Cent Savings Bank,
which subsequently changed its name to the Shelburne Falls Savings
Bank. In 1975, the Shelburne Falls Savings Bank merged with the
Conway Savings Bank under the name of United Savings Bank (USB). In
1978, USB merged with the Haydenville Savings Bank. USB centralized
its operations in Greenfield in 1981. In April, 1988, USB purchased
the deposits, real estate, furniture and equipment of four (4)
branch offices of First National Bank of Boston located in Shelburne
Falls, Greenfield (2) and South Deerfield, all in Franklin County,
Massachusetts. The deposits of these four offices totalled $40.4
million. In 1995 United Savings Bank changed its name to United Bank.
UB maintains full service banking offices in Greenfield (2), Conway,
Haydenville, Shelburne Falls and South Deerfield. UB's market area
is centered in Franklin County which abuts the southern borders of
both Vermont and New Hampshire. At December 31, 1994 UB had total
assets of $226 million, total loans of $199 million and total deposits
of $200 million.
UB is primarily engaged in the business of attracting deposits
from the general public and originating loans secured by first liens
on residential real estate. UB also makes mortgage loans on
commercial real estate and originates consumer loans, most of which
are collateralized. UB maintains a portion of its assets in federal
government and agency obligations, various types of corporate
securities and other authorized investments. UB provides traditional
deposit services as well as money market deposit instruments, demand
deposits and NOW accounts. UB has installed a proprietary system of
"Money Mover24" ATMs in all its branch offices; the ATMs are part of
the Cirrus system, which operates nationally, and the Yankee 24
network with members throughout New England in over 2,000 locations.
UB has a wholly-owned subsidiary, Hayburne, Inc., which is
incorporated in the Commonwealth of Massachusetts. Hayburne, Inc.,
owns the "Hayburne Building", a 26,000 square foot office building
located at 55 Federal Street, Greenfield, Massachusetts, in which
office space is leased to various tenants.
The Banks compete 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 subsidiaries, on December 31, 1994, employed
approximately 622 persons. They enjoy good relations with their
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 the Banks 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 the Banks.
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.
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. VFSC's ability to pay dividends is dependent upon the flow
of dividend income to it from VNB and UB, which may be affected or
limited by regulatory restrictions imposed by federal or state bank
regulatory agencies. At December 31, 1994 the Banks had available
approximately $24.8 million for payment of dividends to VFSC under
regulatory guidelines. 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, 1994, an
aggregate of $0.91 per share of dividends were declared. Earnings per
share for the same period were $5.13.
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 the Banks and to commit resources to support them. This
support of the Banks 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 or UB 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 controlledFDIC-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 and UB
General. As a national bank, VNB is subject to supervision of
and regulation by the Office of the Comptroller of the Currency (the
"OCC"). UB is a stock-owned Massachusetts-chartered savings bank
whose deposits are insured by the Federal Deposit Insurance
Corporation (FDIC) and the Depositors Insurance Fund (DIF).
Accordingly, UB is subject to examination, regulation and supervision
by both the FDIC and the Massachusetts Commissioner of Banks. The
Banks are also members of the Federal Home Loan Bank of Boston.
Examinations and Supervision. As a Massachusetts-chartered
savings bank UB is regulated and supervised by the Massachusetts
Commissioner of Banks. The Commissioner is required to examine each
state-chartered bank at least once every two years. The
Commissioner's approval is required for establishing or closing
branches, for merging with other banks and other activities.
Any Massachusetts-chartered savings bank that does not operate
inaccordance with the Commissioner's regulations, policies and
directives may be subject to sanctions for non-compliance. The
Commissioner may, under certain circumstances, suspend or remove
directors or officers who have violated the law, conducted the Bank's
business in a manner which is unsafe, unsound or contrary to the
depositor's interests, or have been negligent in the performance of
their duties.
Massachusetts-chartered savings banks can exercise powers
substantially equivalent to those of state-chartered commercial banks.
A wide variety of mortgage loans, including fixed and variable-rate,
renegotiable-rate and graduated payment loans, and construction,
condominium and cooperative loans, may be made on the security of real
estate located in Massachusetts, or another New England state or New
York if the Bank has an office in such state or under certain other
circumstances. Certain mortgage loans may be made on the security of
improved or unimproved real estate located throughout the United
States.
Commercial and consumer loans may be made, with or without
security, without geographic limitation. No percentage of assets
limitation exists with respect to the aggregate amount of commercial
loans that a Massachusetts savings bank may have outstanding; however,
as a stock-owned savings bank, loans to one borrower generally will be
limited to 20% of the Bank's stockholders' equity.
Investments in debt securities may be made without geographic
limitation, subject to the limitations on loans to one borrower.
Investments in equity securities are not prohibited to state banks
under the Federal Deposit Insurance Corporation Improvement Act of
1991 unless the FDIC deems otherwise (see Recent Federal Banking
Legislation). In addition, Massachusetts-chartered savings banks may
invest in the capital stock of other banks and bank holding companies,
subject to the limitations of the Federal and Massachusetts bank
holding company statutes.
Subject to applicable regulations and required approvals,
Massachusetts savings banks may also engage in leasing activities, act
as trustee or custodian for tax-qualified retirement plans, establish
a trust department, and establish mortgage banking companies and
discount brokerage operations. Subject to certain limits, a
Massachusetts chartered savings bank may also invest an amount up to
5% of its deposits in investments not otherwise legally permitted a
savings bank, and up to 2% in any one such investment, provided that
amounts in excess of 3% of deposits must be invested in companies
organized for the purpose of acquiring, constructing, rehabilitating,
leasing, financing and disposing of housing. This "leeway" authority
cannot be used to alter statutory limits on the aggregate amounts that
can be invested in any specific class of investment. See "Recent
Banking Legislation".
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.
The FDIC has authority to prevent VNB or UB from paying
dividends if such payment would constitute an unsafe or unsound
banking practice or reduce their 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.
Affiliate Transactions. The Banks are 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 the Banks from making loans to affiliates unless the loans
are secured by collateral in specified amounts and have terms at
least as favorable to the Banks as the terms of comparable
transactions between the Banks and non-affiliates. Further, federal
laws significantly restrict extensions of credit by the Banks to their
directors, executive officers and principal stockholders and related
interests of such persons.
Deposit Insurance. The Banks' 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 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. However, it is anticipated that the BIF reserve will
reach its 1.25% goal some time in 1995 at which time BIF assessments
will be decreased.
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 the Banks 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, the Banks
are 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, the
Banks are 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.
Federal Home Loan Bank System. The Banks are members of the
Federal Home Loan Bank of Boston, one of 12 regional Federal Home Loan
Banks ("FHL Banks"), each subject to Federal Housing Finance Board
("FHFB") supervision and regulation. The FHL Banks provide a central
credit facility for member-insured institutions. As a member of the
FHLB of Boston, the Banks are required to own shares of capital stock
in the bank in a amount at least equal to 1% of the aggregate
principal amount of its unpaid residential mortgage loans, home
purchase contracts, and similar obligations at the beginning of each
year, or 1/20 of its advances (borrowings) from the FHL Bank,
whichever is greater. The Banks are in compliance with this
requirement with an investment in FHLB stock at December 31, 1994 of
$7.2 million. The maximum amount which the FHLB of Boston will
advance for purposes other than meeting withdrawals fluctuates from
time to time in accordance with changes in policies of the FHLB and
the FHLB of Boston, and the maximum amount is reduced by borrowings
from any other source except debentures with more than one year to
maturity and/or debentures covered by a sinking fund.
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. 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.
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 eachcategory 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 and UB will
generally be less than reported balance sheet assets because their
retail banking activities include proportionally more residential
mortgage loans with a lower risk weighting and relatively smaller
off-balance sheet obligations.
Current 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.
Consequences of Failing to Meet Capital Requirements. A
number of sanctions may be imposed on FDIC-insured banks that are not
in compliance with the capital regulations, including, among other
things, restrictions on asset growth and imposition of a capital
directive that may require, among other things, an increase in
regulatory capital, reduction of rates paid on savings accounts,
cessation of or limitations on deposit-taking, lending, purchasing
loans, making specified investments, or issuing new accounts, limits
on operational expenditures, an increase in liquidity and such other
restrictions or corrective actions as the FDIC may deem necessary or
appropriate. In addition, any FDIC-insured bank that is not
meeting its capital requirements must provide the FDIC with prior
notice before the addition of any new director or senior officer.
A bank having less than the minimum Tier 1 leverage capital
ratio must, within 60 days of the date as of which it fails to comply
with such requirements, submit to its FDIC regional director for
review and approval a reasonable plan describing the means and timing
by which the bank shall achieve its minimum leverage capital
requirement. A bank that fails to file such plan with the FDIC is
deemed to be operating in an unsafe and unsound manner, which could
subject the bank to a cease-and-desist order from the FDIC. The
capital regulations also provide that any insured depository
institution with a Tier 1 leverage capital ratio that is less
than 2% is deemed to be operating in an unsafe or unsound condition
pursuant to Section 8(a) of the FDIA and is subject to potential
termination of deposit insurance. Such an institution, however, will
not be subject to an enforcement proceeding thereunder solely on
account of its capital ratios if it has entered into and is in
compliance with a written agreement with the FDIC to increase its Tier
1 leverage capital ratio to such level as the FDIC deems appropriate
and to take such other action as may be necessary for the institution
to be operated in a safe and sound manner. The capital regulations
also provide, among other things, for the issuance by the FDIC or its
designee(s) of a capital directive, which is a final order issued to a
bank to restore its capital to the minimum leverage capital
requirement within a specified time period. Such a directive is
enforceable in the same manner as a final cease-and-desist order.
Any material failure to comply with the provisions of any
capital plan or a capital-related regulation, written agreement, order
or directive will be treated by the FDIC as an unsafe and unsound
practice. Any plan or agreement between the FDIC and a bank is
enforceable by cease-and-desist orders and by civil penalties for
violations of regulatory orders or agreements. Unsafe and unsound
practices and violations of regulatory orders or agreements also
constitute grounds for termination of deposit insurance.
Each federal banking agency is also required to implement a
system of prompt corrective action for institutions which it
regulates. The federal banking agencies have promulgated
substantially similar regulations to implement the system of prompt
corrective action. Under the regulations, a bank is deemed to be (i)
"well capitalized" if it has total risk-based capital of 10% or more,
a Tier 1 risk-based capital ratio of 6% or more, a Tier 1 leverage
capital ratio of 5% or more and is not subject to any written
agreement, order, capital directive, or corrective action
directive, (ii) "adequately capitalized" if it has a total risk-based
capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 4%
or more and Tier 1 leverage capital ratio of 4% or more (3% under
certain circumstances) and does not meet the definition of "well
capitalized", (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8%, a Tier 1 risk-based
capital ratio that is less than 4% or a Tier 1 leverage capital ratio
that is less than 4% (3% under certain circumstances), (iv)
"significantly undercapitalized" if it has a total risk-based
capital ratio that is less than 6%, a Tier 1 risk-based capital
ratio that is less than 3% or a Tier 1 leverage capital ratio that is
less than 3%, and (v) "critically undercapitalized" if it has a ratio
of tangible equity to total assets that is equal to or less than 2%.
At December 31, 1994, VFSC's consolidated Total and Tier 1
risk-based capital ratios were 13.03% and 11.77%, respectively.
These ratios exceeded applicable regulatory requirements. VFSC, VNB
and UB are all considered "well capitalized" by their respective
regulators. In 1993 UB entered into a memorandum of understanding
with the FDIC and the Massachusetts Commissioner of Banks requiring
UB, among other things, to maintain a certain minimum Tier 1 Leverage
Capital Ratio. UB complied with the memorandum from its inception,
and it was rescinded by the regulators on March 29, 1994.
Recent Banking Legislation
The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 became effective at the end of 1994. Under the new law,
different types of interstate transactions and activities will be
permitted, each with different effective dates. Interstate
transactions and activities provided for under the new law include:
(i) bank holding company acquisitions of separately held banks in a
state other than a bank holding company's home state; (ii) mergers
between insured banks with different home states, including
consolidations of affiliated insured banks; (iii) establishment of
interstate branches either de novo or by branch acquisition; and
(iv) affiliated banks acting as agents for one another for certain
banking functions without being considered a "branch". In general,
nationwide interstate banking will be permissible on June 1, 1997,
unless a state passes legislation either to prevent or to permit the
earlier occurrence of interstate mergers. States may at any time
enact legislation permitting interstate de novo branching.
Affiliated banks may act as agents for one another beginning one year
after enactment. Each of the transactions and activities must be
approved by the appropriate federal bank regulator, with separate and
specific criteria established for each category.
Once the applicable effective date has occurred (and, the case
of interstate mergers and de novo branching, subject to applicable
state law "opt-out" or "opt-in" provisions), the appropriate federal
bank regulator may approve the respective interstate transactions
only if certain criteria are met. First, in order for a banking
institution (a bank or bank holding company) to receive approval for
an interstate transaction, it must be "adequately capitalized" and
"adequately managed". The term "adequately capitalized" is generally
defined as meeting or exceeding all applicable federal regulatory
capital standards; the phrase "adequately managed" was left
undefined. Second, the appropriate federal bank regulator must
consider the applicant's and its affiliated institutions' records
under the CRA as well as the applicant's record under applicable
state community reinvestment laws.
The new law applies deposit "concentration limits" to
interstate acquisition and merger transactions. Specifically, a
banking institution may not receive federal approval for interstate
expansion if it and its affiliates would control (i) more than 10% of
the deposits held by all insured depository institutions in the
United States, or (ii) 30% or more of the deposits of all insured
depository institutions in any state in which the banks or branches
involved in the transactions (or any affiliated depository
institution) overlap. States may, by statute, regulation or order,
raise or lower the 30% limit. In addition, the new law preempts
certain existing state law restrictions on interstate banking (such
as regional compacts and reciprocity requirements), effective one year
after enactment. However, in order to receive federal approval for an
interstate merger or de novo branching transaction, an applicant
still also must comply with any non-discriminatory host state filing
and other requirements.
The reaction, if any, of the Vermont, Massachusetts or other
state legislatures to the interstate banking legislation is uncertain
at this time. However, regardless of the reaction of state
legislatures, the new interstate banking law is likely to make it
easier for out-of-state institutions to attempt to purchase or
otherwise acquire VFSC, VNB, UB or their competitors in Vermont and
western Massachusetts.
Item 2 - Properties
The principal offices of the Company and VNB are located at
100 Main Street in Brattleboro, Vermont. VNB operates 30 other
locations throughout Vermont 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. VNB 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. Five offices
are located in Washington County, one each located on State Street
and Main Street in Montpelier, the Berlin Shopping Mall, 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 VNB, eleven
are leased directly from independent parties as lessors, and two
buildings are owned by VNB, but are situated on leased land. VNB
also owns and occupies a building in Brattleboro which it uses for
its operational functions. The following table sets forth the
location of UB's offices and other related information as of
December 31, 1994. Each office listed is equipped with an ATM
facility, all of which are owned by UB.
Main Office Route 116, Parsons Road Owned
Conway, MA 01341
Administrative headquarters 45 Federal Street Owned
office, Operations Center Greenfield, MA 01301
Branch Office
Branch Office 90 Bridge Street Owned
Shelburne Falls, MA 01370
Branch Office Route 9 Owned
Haydenville, MA 01039
Branch Office 280 Mohawk Trail Leased
Greenfield, MA 01301
Branch Office 134 Elm Street Owned
South Deerfield, MA 01373
Except as noted in "Item 1 - Business, United Bank", the
Company and Banks 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 6 and 10 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, 1995, VFSC Common Stock consisted of
20,000,000 authorized shares, $1.00 par value per share, of which
4,729,106 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
1994 and 1993.
<TABLE>
<CAPTION> <C> <C> <C> <C> <C>
Year Quarter High Low Declared
1994 4th $22-1/4 $19-3/4 .17
3rd 24-1/4 19 .15
2nd 20 16-1/2 .12
1st 19-1/4 16-1/4 .10
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 -
</TABLE>
Per the Bank's stockholder reports, the approximate number
of stockholders as of January 24, 1995 was 2,610.
Item 6 - Selected Financial Data
The following table sets forth selected consolidated 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, 1994 are
derived from the financial statements of the Company. The financial
condition and operations of the Company in all material respects
reflect the operations of VNB and UB.
<TABLE>
Year Ended December 31,
1994 1993 1992 1991 1990
(Dollars in thousands, except per share data)
<CAPTION> <C> <C> <C> <C> <C>
Results of Operations:
Interest income $84,391 $82,142 $88,265 $102,012 $106,699
Interest expense 33,293 31,361 41,164 57,869 65,332
Net interest income 51,098 50,781 47,101 44,143 41,367
Provision for loan losses 4,000 5,053 9,430 15,748 14,020
Net interest income after
provision for loan losses 47,098 45,728 37,671 28,395 27,347
Other operating income 16,692 17,348 15,223 14,365 10,734
Other operating expense 46,763 52,459 45,384 41,331 37,182
Income before income taxes
and accounting change 17,027 10,617 7,510 1,429 899
Applicable income tax expense (benefit) 5,159 3,386 2,436 539 (268)
Net income $11,868 $7,231 $5,074 $890 $1,167
====== ===== ===== ====
</TABLE>
<TABLE>
<CAPTION> <C> <C> <C> <C>
Balance Sheet Data At Year End:
Total assets $1,205,421 $1,158,101 $1,124,578 $1,102,034 $1,090,039
Loans, net of unearned income 911,503 872,441 856,768 815,690 845,355
Securities available for sale 173,865 184,400 149,487 179,121 130,077
Total deposits 1,012,869 967,582 941,882 1,005,338 960,712
Stockholders' equity 90,457 91,027 83,484 78,770 77,387
Per Share Data:
Net income, primary and fully diluted $2.51 $1.54 $1.08 $0.19 $0.25
Total cash dividends declared 0.54 0.24 0.13 0.19 0.74
Tangible book value at period end,
fully diluted (1) 18.36 18.61 17.00 16.05 15.90
Average primary shares outstanding 4,735,480 4,710,228 4,686,116 4,626,064 4,633,895
Selected Financial Ratios:
Return on average total assets (2) 1.00% 0.64% 0.46% 0.08% 0.11%
Return on average stockholders' equity(3) 13.23 8.36 6.31 1.16 1.45
Net interest margin (4) 4.74 4.97 4.72 4.54 4.32
Cash dividends per share as a
percentage of earnings per share 22 16 12 100 296
Average stockholders' equity to
average assets 7.97 7.67 7.32 7.11 7.64
Core (leverage) capital ratio at period
end (5) 7.26 7.59 7.11 6.79 6.73
Total risk-based capital ratio at
period end (6) 13.03 12.06 11.11 10.80 9.89
Allowance for loan losses to period
end loans, net of unearned income 1.78 2.04 2.46 2.34 1.63
Nonperforming assets to period end
loans plus other real estate owned (7) 2.32 3.64 5.71 5.97 3.08
Net charge-offs to average net loans 0.62 0.95 0.90 1.30 0.84
</TABLE>
(1) Equal to stockholders' equity less intangibles divided by
fully diluted end of period shares outstanding.
(2)Based on average total assets after adjustment for securities
available for sale.
(3)Based on average total equity after adjustment for securities
available for sale.
(4)Net interest income stated on a fully taxable equivalent basis
divided by average earning assets.
(5)Equal to stockholders' equity less intangibles divided by total
assets less intangibles.
(6)Equal to stockholders' equity less intangibles plus the allowable
portion of the allowance for loan losses divided by total risk
weighted assets.
(7)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, 1994, 1993 and 1992.
Overview
Net income for 1994 was $11.9 million, up from the $7.2
million and $5.1 million earned in 1993 and 1992, respectively.
Return on average assets was 1.00% in 1994, 0.64% in 1993 and 0.46%
in 1992. Return on average stockholders' equity was 13.23% in 1994,
8.36% in 1993 and 6.31% in 1992.
On a primary and fully diluted per share basis, net income was
$2.51, $1.54 and $1.08 in 1994, 1993 and 1992, 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>
1994 1993
Interest Rate Interest
Average Income/ Earned/ Average Income/
Balance Expense(1) Paid(1) Balance Expense(1)
ASSETS
Earning assets:
Loans, net of unearned
income (2) $894,001 $73,929 8.27% $869,563 $72,356
Taxablesecurities (3) 191,425 10,479 5.47 154,238 9,738
Tax exempt
securities (3) 9,796 798 8.15 7,603 632
Federal funds sold and
securities purchased
under agreements to
resell 5,332 270 5.06 4,838 146
Interest-bearing bank
deposits 106 4 3.77 203 9
Total earning assets 1,100,660 85,480 7.77 1,036,445 82,881
Noninterest-earning assets:
Cash and due from banks 44,590 43,225
Premises and equipment,
net 23,084 22,481
Other assets (3) 35,761 44,371
Allowance for Loan
Losses (16,574) (18,483)
Total assets (3) $1,187,521 $1,128,039
========= ==========
</TABLE>
<TABLE>
<CAPTION> <C> <C> <C> <C>
1993 1992
Rate Interest Rate
Earned/ Averange Income/ Earned/
Paid(1) Balance Expense(1) Paid(1)
ASSETS
Earning assets:
Loans, net of unearned
income (2) 8.32% $830,055 $75,631 9.11%
Taxable
securities (3) 6.31 165,455 12,331 7.45
Tax exempt
securities (3) 8.31 7,484 615 8.22
federal funds sold and
securities purchased
under agreements to
resell 3.02 5,570 198 3.55
interest-bearing bank
deposits 4.43 250 9 3.60
Total earning assets 8.00 1,008,814 88,784 8.80
Noninterest-earning assets:
Cash and due from banks 39,238
Premises and equipment,
net 22,136
Other assets (3) 48,966
Allowance for Loan
Losses (21,439)
Total assets (3) $1,097,715
==========
</TABLE>
<TABLE>
<CAPTION> <C> <C> <C> <C>
1994 1993
Interest Rate
Average Income/ Earned/ Average
Balance Expense(1) Paid(1) Balance
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings and transactional
deposits $589,244 17,183 2.92% $537,204
Certificates of deposit:
--$100,000 or more 29,339 1,123 3.83 38,051
--Under $100,000 255,661 10,731 4.20 269,198
Federal funds purchased
and securities sold
under agreements to
repurchase 77,606 2,924 3.77 66,800
Other borrowed funds 26,605 1,332 5.01 21,486
Total interest-bearing
liabilities 978,455 33,293 3.40 932,739
Noninterest-bearing
Liabilities:
Demand deposits 107,301 100,903
Other liabilities 7,139 7,897
Total liabilities 1,092,895 1,041,539
Stockholders' equity(3) 94,626 86,500
Total liabilities
and stockholders
equity (3) $1,187,521 $1,128,039
========= ==========
Net interest income $52,187
======
Net interest spread(4) 4.37%
====
Net Interest margin 4.74%
====
</TABLE>
<TABLE>
1993 1992
Interest Rate Interest Rate
Income/ Earned/ Average Income/ Earned/
Expense(1) Paid(1) Balance Expense(1) Paid(1)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION> <C> <C> <C> <C> <C>
Interest-bearing liabilities:
Savings and transactional
deposits 14,656 2.73 $480,140 17,474 3.64
Certificates of deposit:
--$100,000 or more 1,669 4.39 80,125 4,408 5.50
--Under $100,000 11,916 4.43 301,650 16,954 5.62
Federal funds purchased
and securities sold
under agreements to
repurchase 2,335 3.50 41,194 1,630 3.96
Other borrowed funds 785 3.65 17,456 698 4.00
Total interest-bearing
liabilities 31,361 3.36 920,565 41,164 4.47
Noninterest-bearing
Liabilities:
Demand deposits 88,933
Other liabilities 7,820
Total liabilities 1,017,318
Stockholders' equity(3) 80,397
Total liabilities
and stockholders
equity (3) $1,097,715
=========
Net interest income $47,620
====== ======
Net interest spread(4) 4.33%
====
Net Interest margin 4.72%
====
</TABLE>
(1) Includes a fully taxable equivalent adjustment based on a 34%
federal income tax rate.
(2) Nonaccrual loans are included in average balances.
(3) Taxable and tax-exempt securities are reflected at amortized
cost.
(4) The difference between the rate earned on total earning assets and
the rate paid on total interest-bearing liabilities.
Net interest income increased $0.3 million or 0.6% to $51.1
million in 1994 from $50.8 million in 1993. This compared to a $3.7
million or 7.8% increase in 1993 from 1992. On a fully taxable
equivalent basis, net interest income increased $0.7 million or 1.3%
from 1993 to 1994 and $3.9 million or 8.2% from 1992 to 1993. The
smaller increase in 1994 was primarily due to rising interest rates
and the resulting 48% decrease in mortgage loan originations. This
caused a $2.6 million reduction in related fees and nearly offset the
income effects of a $64.2 million increase in average earning assets.
During 1993 the Company significantly reduced its level of
nonperforming assets (See "Nonperforming Assets and Risk Elements"
section following) which improved the net interest spread by 0.31%.
The 0.27% reduction in the spread in 1994 was caused by the lower loan
fees noted above.
Average earning assets increased slowly over the last two
years with 6.2% and 2.7% growth rates in 1994 and 1993,
respectively. The 1994 growth came from a $24.4 million or 2.8%
increase in loans and a $37.2 million or 24.1% increase in taxable
securities. The growth in loans was primarily in the municipal area,
while the growth in the investment portfolio was primarily in U.S.
Government Agency Securities.
Average interest-bearing liabilities increased $45.7 million,
or 4.9% in 1994 following a $12.2 million, or 1.3% growth in 1993.
Over the two-year period, average core interest-bearing deposits
(savings and transactional deposits and certificates of deposit under
$100,000 increased by $63.1 million. Non-core interest-bearing
liabilities were reduced by $5.2 million over the same period.
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>
1992 VS 1993
Net
Increase Due to Changes in
(Decrease) Volume(1) Rate(1)
(In thousands)
<CAPTION> <C> <C> <C>
INTEREST INCOME:
Loans(2) $1,573 $2,012 $ (439)
Taxable securities 741 2,147 (1,406)
Tax exempt securities 166 178 (12)
Federal funds sold and securities
purchased under agreements to resell 124 16 108
Interest-bearing bank
deposits (5) (4) (1)
Total interest income 2,599 4,349 (1,750)
INTEREST EXPENSE:
Savings and transactional deposits 2,527 1,470 1,057
Certificates of deposit:
--$100,000 or more (546) (351) (195)
--Under $100,000 (1,185) (583) (602)
Federal funds purchased and securities
sold under agreements to repurchase 589 399 190
Other borrowed funds 547 214 333
Total interest expense 1,932 1,149 783
Change in net interest income $ 667 $3,200 $(2,533)
======= ======= =======
</TABLE>
<TABLE>
1993 VS 1992
Net
Increase Due to Changes in
(Decrease) Volume(1) Rate(1)
(In thousands)
<CAPTION> <C> <C> <C>
INTEREST INCOME:
Loans(2) $ (3,275) $3,488 $(6,763)
Taxable securities (2,593) (796) (1,797)
Tax exempt securities 17 7 10
Federal funds sold and securities
purchased under agreements to resell (52) (24) (28)
Interest-bearing bank
deposits - (2) 2
Total interest income (5,903) 2,673 (8,576)
INTEREST EXPENSE:
Savings and transactional deposits (2,819) 1,907 (4,726)
Certificates of deposit:
--$100,000 or more (2,739) (1,979) (760)
--Under $100,000 (5,038) (1,697) (3,341)
Federal funds purchased and securities
sold under agreements to repurchase 705 913 (208)
Other borrowed funds 87 152 (65)
Total interest expense (9,804) (704) (9,100)
Change in net interest income $3,901 $3,377 $524
====== ====== ======
</TABLE>
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 1994 was $4.0 million
compared to $5.1 million in 1993 and $9.4 million in 1992. Net loans
charged off were $5.6 million, $8.3 million and $7.5 million for the
respective years. The $4.4 million reduction in the provision for
1993 was principally due to a reduction in the level of nonperforming
assets (See "Nonperforming Assets and Risk Elements" section
following) and management's view that the Vermont economy began a
slow recovery near the end of 1992. The provision was reduced an
additional $1.1 million in 1994 as nonperforming asset levels and the
Company's local economy continued to improve.
Other Operating Income and Other Operating Expense
In 1994, other operating income decreased $0.7 million, or
3.8%, from the $17.3 million earned in 1993. Net of the $2.0
million decrease in securities gains, other operating income was up
$1.4 million, or 9.1%, compared to 1993. An increase of $0.9 million
in service charges on deposit accounts comprised 63% of this
increase.
In 1993, other operating income, net of securities gains,
increased $1.2 million, or 8.6% over 1992. The two major items
representing the increase were service charges on deposit accounts
and mortgage servicing income. Respectively, they contributed $470,000
and $341,000 to the increase. Noninterest income is expected to
continue to grow at a similar pace in 1995.
Total other operating expense decreased $5.7 million, or 11%,
in 1994 after increasing $7.1 million, or 16%, in 1993. Net OREO
and collection expenses and losses represented $5.1 million, or 89%,
of the decrease in 1994, and $4.0 million, or 56%, of the increase in
1993. Salary expense was $17.8 million in 1994, $18.4 million
in 1993 and $17.8 million in 1992. These represent a decrease of 3%
and an increase of 3%, respectively, reflecting a reduction of
approximately 7% in the Company's average number of employees over
the last two years. Pension and employee benefits decreased $0.3
million, or 6%, in 1994 after increasing $1.1 million, or 28%, in
1993. The increase in 1993 was largely due to early retirement and
termination costs. Partially offsetting the expense improvements in
1994 was an increase of $0.4 million in expenses related to the
merger with West Mass Bankshares (See Note 2. to the consolidated
financial statements). See also "Recent Developments".
Applicable Income Taxes
During 1994, 1993 and 1992 the Company recorded income tax
expense of $5.2 million, $3.4 million and $2.4 million,
respectively. The changes were almost entirely due to the level of
pre-tax earnings. See also footnote 11 to the financial statements.
Financial Condition
Loans
The loan portfolio increased $39.1 million, or 4.5%, in 1994
following a $15.7 million, or 1.8%, increase in 1993. 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. It tries to maintain a balance
between commercial lending (commercial , commercial real estate and
construction loans) and consumer lending (residential real estate and
consumer loans) with each representing between 40% and 60% of the
total loan portfolio. Over the last two years the commercial lending
sector increased $7.2 million but decreased from 48% to 46% of the
total loan portfolio.
Through its subsidiary Banks the Company makes commercial
business loans to small and medium sized businesses in Vermont and
Massachusetts and is the leading commercial lender in the State of
Vermont.
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 areas in Vermont and Massachusetts, and adjacent
communities in neighboring states. Approximately 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, 1994 this sector represented 2.7% of
the portfolio.
In 1994, the Company originated $140.5 million of residential
mortgage loans and sold $86.9 million of loans in the secondary
market, compared to $267.2 million originated and $189.7 million sold
in 1993 and $291.3 million originated and $192.4 million sold in
1992. The 48% decrease in mortgage loan originations was primarily
due to rising interest rates. The high levels of 1993 and 1992 were
in part due to lower interest rates which led to a significant number
of mortgage refinancings.
At year end 1994, the mortgage servicing portfolio totaled
$459.2 million compared to $458.7 million at year end 1993 and $439.8
million at year end 1992 and currently generates income of
approximately $2.0 million per year. Of the residential real estate
portfolio, 68.7% were adjustable rate loans and 31.3% were fixed
rate loans at December 31, 1994. Residential real estate loans
represented 42.7%, 42.7% and 41.5% of gross loans at year end
1994, 1993 and 1992, respectively.
Consumer loans represented 11.4%, 11.0% and 10.5% of gross
loans at year end 1994, 1993 and 1992, respectively. Credit card
loans and related plans were $37.3 million and $37.5 million of
total consumer loans at December 31, 1994 and 1993, respectively.
The following table summarizes the compositions of the
Company's loan portfolio at the dates indicated.
<TABLE>
December 31,
1994 1993 1992
(in thousands)
<CAPTION> <C> <C> <C>
Commercial(1) $207,299 $203,300 $199,128
Real Estate:
Residential 389,033 372,570 355,144
Commercial 186,185 174,881 181,041
Construction 25,033 25,762 31,180
Total real estate 600,251 573,213 567,365
Consumer 103,953 95,928 90,275
Total loans, net of unearned income $911,503 $872,441 $856,768
======== ======== ========
</TABLE>
<TABLE>
December 31,
1991 1990
(in thousands)
<CAPTION> <C> <C>
Commercial(1) $181,755 $183,581
Real Estate:
Residential 326,534 328,902
Commercial 174,465 164,658
Construction 44,033 61,331
Total real estate 545,032 554,891
Consumer 88,903 106,883
Total loans, net of unearned income $815,690 $845,355
======== ========
</TABLE>
(1) Includes loans to Massachusetts and Vermont municipalities and
industrial revenue bonds of $44,669, $30,339, $13,680, $8,857 and
$11,767 for years 1994 through 1990, 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, 1994.
<TABLE>
Repricing
After One After
Within But Within Five
One Year Five Years Years Total
(in thousands)
<CAPTION> <C> <C> <C> <C>
Loans:
With fixed interest rates $ 57,711 $24,659 $37,556 $119,926
With variable interest rates 290,967 1,589 6,035 298,591
Total $348,678 $26,248 $43,591 $418,517
======= ====== ====== =======
</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 whichever is sooner. 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 at least 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 $0.3 million of accruing restructured loans as of December
31, 1994 were in full compliance with restructured terms and
conditions. An additional $0.6 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, 1994 in the table
below. The average yield on these loans is 7.2%.
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>
December 31,
1994 1993 1992
(Dollars in thousands)
<CAPTION> <C> <C> <C>
Loans 90 days or more past due
and still accruing interest $1,448 $1,503 $6,569
====== ====== ======
Nonperforming assets:
Nonaccrual loans $16,491 $25,746 $39,150
Other real estate owned 4,487 4,678 10,332
Restructured loans - accruing 294 1,532 0
Total nonperforming assets $21,272 $31,956 $49,482
======= ======= =======
Nonperforming assets to period end loans,
net of unearned income, plus other
real estate owned 2.32% 3.64% 5.71%
==== ==== ====
</TABLE>
<TABLE>
December 31,
1991 1990
(Dollars in thousands)
<CAPTION> <C> <C>
Loans 90 days or more past due
and still accruing interest $8,696 $4,599
====== =====
Nonperforming assets:
Nonaccrual loans $34,893 $23,432
Other real estate owned 8,797 2,475
Restructured loans - accruing 5,505 185
Total nonperforming assets $49,195 $26,092
======= =======
Nonperforming assets to period end loans,
net of unearned income, plus other
real estate owned 5.97% 3.08%
==== ====
</TABLE>
In December 1993, $5.9 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.
Additional interest income of $1,320,000 and $1,943,000 would
have been recorded in 1994 and 1993, respectively, if nonaccrual and
restructured loans had been on a current basis in accordance with
their original terms. Payments, totaling $936,000 and $1,562,000
respectively, were received on nonaccrual loans during 1994 and
1993. During 1994, $592,000 was applied as principal reductions and
$344,000 was recognized as interest income, while in 1993 $1,152,000
was applied as a principal reduction and $410,000 was recognized as
interest income. Interest income was recognized solely on nonaccrual
loans which were subsequently determined to have no doubt as to
the ultimate collectibility of principal.
At December 31, 1994, all nonaccrual loans were
collateralized. In addition, it is the Company's policy to
obtain personal guarantees of the borrower's whenever it is possible.
As of December 31, 1994, 6.5% of the total nonaccrual loans are
current as to contractual terms. Loans to five borrowers, totaling
$3.6 million represented 22.0% of nonaccrual loans. Management
expects to see moderate improvement in 1995 over the 1994 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 $16.2
million, or 1.78% of the total loan portfolio at December 31, 1994,
compared with 2.04% at year end 1993 and 2.46% at year end 1992. On
December 31, 1994 the allowance for loan losses represented 76% of
total nonperforming assets and 97% of nonperforming loans, compared to
56% and 65%, respectively, at year end 1993.
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>
Year Ended December 31,
1994 1993
(Dollars in thousands)
<CAPTION> <C> <C>
Allowance for loan losses at beginning of year $17,815 $21,047
Acquired allowance - -
Loans charged off:
Commercial, commercial real estate and construction (4,895) (7,361)
Real Estate-residential (650) (807)
Consumer (1,240) (1,427)
Total loans charged off (6,785) (9,595)
Recoveries of loans previously charged off:
Commercial, commercial real estate and construction 783 884
Real estate-residential 0 96
Consumer 423 330
Total Recoveries 1,206 1,310
Net loans charged off (5,579) (8,285)
Additions to allowance charged to earnings 4,000 5,053
Allowance for loan losses at year end $16,236 $17,815
======= =======
Ratio of net charge-offs to average loans 0.62% 0.95%
Allowance for loan losses to period end loans, net of ==== ====
unearned income 1.78% 2.04%
==== ====
</TABLE>
<TABLE>
Year Ended December 31,
1992 1991
(Dollars in thousands)
<CAPTION> <C> <C>
Allowance for loan losses at beginning of year $19,116 $13,776
Acquired allowance - 402
Loans charged off:
Commercial, commercial real estate and construction (5,828) (8,761)
Real Estate-residential (721) (490)
Consumer (2,002) (2,342)
Total loans charged off (8,551) (11,593)
Recoveries of loans previously charged off:
Commercial, commercial real estate and construction 550 553
Real estate-residential 84 20
Consumer 418 210
Total Recoveries 1,052 783
Net loans charged off (7,499) (10,810)
Additions to allowance charged to earnings 9,430 15,748
Allowance for loan losses at year end $21,047 $19,116
======= =======
Ratio of net charge-offs to average loans 0.90% 1.30%
Allowance for loan losses to period end loans, net of ==== ====
unearned income 2.46% 2.34%
==== =====
</TABLE>
Year Ended December 31,
1990
(Dollars in thousands)
Allowance for loan losses at beginning of year $6,777
Acquired allowance -
Loans charged off:
Commercial, commercial real estate and construction (5,698)
Real Estate-residential (224)
Consumer (1,623)
Total loans charged off (7,545)
Recoveries of loans previously charged off:
Commercial, commercial real estate and construction 326
Real estate-residential -
Consumer 198
Total Recoveries 524
Net loans charged off (7,021)
Additions to allowance charged to earnings 14,020
Allowance for loan losses at year end $13,776
======
Ratio of net charge-offs to average loans 0.84%
Allowance for loan losses to period end loans, net of ====
unearned income 1.63%
====
Net loans charged off in 1994 totaled $5,579,000 or 0.62% of
average loans. This compares with $8,285,000 or 0.95% in 1993 and
$7,499,000 or 0.90% in 1992. In 1994, 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.
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, 1994, 1993, 1992, 1991 and 1990.
Notwithstanding these allocations, the entire allowance for loan
losses is available to absorb charge-offs in any category of loans.
Also during the last five years, management provided an unallocated
allowance for expected charge-offs not specifically identified in the
loan portfolio.
<TABLE>
December 31,
1994 1993
Loan Type Loan Type
Amount to Total Amount to Total
Allocated Loans Allocated Loans
(Dollars in thousands)
<CAPTION> <C> <C> <C> <C>
Commercial $4,226 23% $5,027 23%
Real Estate-Commercial 4,597 20 4,324 20
Construction 488 3 519 3
Real Estate-Residential 1,061 43 1,116 43
Consumer 1,644 11 1,712 11
Unallocated 4,220 - 5,117 -
$16,236 100% $17,815 100%
======= === ======= ===
</TABLE>
<TABLE>
December 31,
1992 1991
(in thousands)
<CAPTION> <C> <C> <C> <C>
Commercial $6,823 23% $4,503 22%
Real Estate-Commercial 5,364 21 4,351 21
Construction 1,827 4 1,081 5
Real Estate-Residential 1,222 41 1,387 41
Consumer 1,845 11 1,850 11
Unallocated 3,966 - 5,944 -
$21,047 100% $19,116 100%
======= === ======= ===
</TABLE>
<TABLE>
December 31,
1990
Loan Type
Amount to Total
Allocated Loans
(Dollars in thousands)
<CAPTION> <C> <C> <C> <C> <C> <C>
Commercial $2,824 22%
Real Estate-Commercial 2,365 19
Construction 926 7
Real Estate-Residential 889 39
Consumer 1,399 13
Unallocated 5,373 -
$13,776 100%
====== ===
</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>
December 31,
1994 1993 1992
(Market (Market (Cost
Value) Value) Value)
(in thousands)
<CAPTION> <C> <C> <C>
U.S. Treasury and other U.S.,
Government agencies $99,815 $70,776 $49,193
State and political subdivisions 8,238 15,807 9,732
Mortgage-backed securities 50,668 75,721 70,805
Other securities (1) 15,144 22,096 19,757
Total $173,865 $184,400 $149,487
======== ======== ========
</TABLE>
(1) Includes money market overnight investments of $1,635, $9,182,
and $4,977 at year end 1994, 1993 and 1992, respectively.
The investment portfolio decreased 5.7%, to $173.9 million,
at year end. During 1993 the portfolio increased 23.4%, to $184.4
million at year end. The total portfolio as a percent of total
assets was 14.4% at year end 1994 compared to 15.9% and 13.3% at year
end 1993 and 1992, 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, 1994 and December 31, 1993 in the above
tables. The 1992 values reflect the amortized cost of the securities.
During 1993 the Company and national economy saw record low interest
rates and record high repayments in mortgage-backed securities.
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 into this portfolio. During 1994
prepayments were primarily invested in U. S. Treasury and other U.
S. government agency securities as management determined that the
relative values of these investments were superior to mortgage-backed
securities. The average maturity of the investment portfolio is
approximately 3.9 years.
The Company invests a portion of its capital in marketable
equity securities which comprised 6.9%, 5.5% and 7.3% of total
investments at December 31, 1994, 1993 and 1992, respectively. At
December 31, 1994, $7.7 million of the $12.0 million marketable equity
security portfolio were investments in the Federal Reserve Bank and
Federal Home Loan Bank. Investments in these institutions are carried
at par, which equals market.
The following table sets forth the maturities of the Company's
investment securities at December 31, 1994 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, 1994.
<TABLE>
Maturing (at Market Value)
After One But
Within Within Five
One Year Years
Amount Yield Amount Yield
(Dollars in thousands)
<CAPTION> <C> <C> <C> <C>
U.S. Treasury and other U.S. Government
agencies $ - -% $46,979 5.49%
State and political subdivisions 876 8.88 2,823 8.60
Mortgage-backed securities 1,526 8.33 40,579 6.03
Other fixed income securities 2,135 5.82 989 7.10
Total $4,537 7.26 $91,370 5.84
===== ======
Tax equivalent adjustment for calculation
of yield $26 $81
== ==
</TABLE>
<TABLE>
Maturing (at Market Value)
After Five But
Within Ten After
Years Ten Years
Amount Yield Amount Yield
(Dollars in thousands)
<CAPTION> <C> <C> <C> <C>
U.S. Treasury and other U.S. Government
agencies $52,836 5.94% $ - -%
State and political subdivisions 4,539 6.77 - -
Mortgage-backed securities 6,924 6.40 1,639 5.20
Other fixed income securities - - 60 9.18
Total $64,299 6.05 $1,699 5.34
====== =====
Tax equivalent adjustment for calculation
of yield $104 $0
=== =
</TABLE>
Does not include equity securities of $11,960 at December 31,
1994.
Deposits
Average total deposits for 1994 of $981.5 million represented
a $36.2 million, or 3.8%, increase from 1993's average, which had
decreased $5.5 million, or 0.6%, from 1992's average balances.
The average balance of large CDs was $29.3 million in 1994, $38.1
million in 1993 and $80.1 million in 1992. In 1994 the decrease in
large CDs was offset by a $44.9 million total increase in the
average balance of all other deposit categories, considered core
deposits by management. Large CDs represented 3.0% of average total
deposits in 1994 versus 4.0% in 1993 and 8.4% in 1992. The majority
of these deposits was obtained from local Vermont and Massachusetts
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>
December 31,
1994 1993
Amount Rate Amount Rate
(Dollars in thousands)
<CAPTION> <C> <C> <C> <C>
Demand deposits $107,301 -% $100,903 -%
Interest-bearing transactional deposits 427,862 3.69 369,590 2.69
Savings deposits 161,382 2.67 167,614 2.50
Certificates of deposit:
-$100,000 or more 29,339 4.41 38,051 4.22
-Under $100,000 255,661 4.46 269,198 4.33
Total $981,545 $945,356
======= ========
</TABLE>
<TABLE>
December 31,
1992
Amount Rate
(Dollars in thousands)
<CAPTION> <C> <C> <C> <C> <C> <C>
Demand deposits $88,933 - %
Interest-bearing transactional deposits 327,608 2.89
Savings deposits 152,532 3.06
Certificates of deposit:
-$100,000 or more 80,125 3.83
-Under $100,000 301,650 3.52
Total $950,848
========
</TABLE>
The following table shows the maturity schedule of
certificates of deposit of $100,000 or more at December 31, 1994.
Certificates
of Deposit
(in thousands)
3 months or less $7,650
Over 3 through 6 months 9,741
Over 6 through 12 months 7,493
Over 12 months 3,048
Total $27,932
======
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 7.50%, 7.86%
and 7.42% as of December 31, 1994, 1993 and 1992, 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 7.97% in 1994, 7.67% in 1993 and 7.32% in 1992.
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 its two subsidiary banks as of
December 31, 1994 and 1993 are shown for comparative purposes
placing them 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
United Bank
December 31, 1994 14.60% 13.34% 8.73%
December 31, 1993 13.48% 12.23% 7.46%
Vermont National Bank
December 31, 1994 12.16% 10.90% 7.48%
December 31, 1993 11.02% 9.76% 6.88%
Vermont Financial
Services Corp.
December 31, 1994 13.03% 11.77% 8.01%
December 31, 1993 12.06% 10.80% 7.46%
</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. Both banks are
currently assessed at the lowest available FDIC rate, $0.23 per
$100 of deposits.
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. Both subsidiary banks are also members of the Federal
Home Loan Bank (FHLB) with combined borrowing capability of $170.3
million.
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, 1994.
<TABLE>
0-30 31-90 91-180
DAYS DAYS DAYS
(In thousands)
<CAPTION> <C> <C> <C>
Earning assets:
Loans (1) $284,503 $ 72,170 $ 98,177
Investment securities (2) (3) 6,193 11,497 7,794
Other earning assets 16,065 0 40
Total 306,761 83,667 106,011
Interest-bearing liabilities:
MMDA's (4) 271,519 0 0
NOW's and Super NOW's (4) 0 0 0
Savings and Clubs (4) 0 0 0
Certificates of Deposit 31,288 42,787 51,418
Borrowed Funds 88,990 1,388 1,605
Total 391,797 44,175 53,023
Net Interest Sensitivity Gap $(85,036) $39,492 $52,988
======== ====== ======
Cumulative Interest Sensitivity Gap $(45,544) $7,444
======== =====
</TABLE>
<TABLE>
181-365 1-5 Over 5
DAYS YEARS YEARS
(In thousands)
<CAPTION> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans (1) $164,139 $162,632 $113,391
Investment securities (2) (3) 13,791 93,922 28,708
Other earning assets 0 0 0
Total 177,930 256,554 142,099
Interest-bearing liabilities:
MMDA's (4) 79,978 0 0
NOW's and Super NOW's (4) 90,898 36,323 0
Savings and Clubs (4) 0 145,320 0
Certificates of Deposit 70,102 72,244 3,581
Borrowed Funds 7 63 1,835
Total 240,985 253,950 5,416
Net Interest Sensitivity Gap $(63,055) $2,604 $136,683
======== ===== =======
Cumulative Interest Sensitivity Gap $(55,611) $(53,007) $83,676
======= ======== ======
</TABLE>
(1) Does not include non-accrual loans of $16,491 at December 31,
1994.
(2) Does not include equity securities of $11,960 at December 31,
1994.
(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 1995, the Company plans to upgrade its mainframe
computer's central processing unit at an anticipated total cost of
$537,000. 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 for 1995 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.
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 Company'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.
Vermont Financial Services Corp.'s (VFSC) acquisition of West
Mass Bankshares, Inc. (WMBS), of Greenfield, MA, was completed on
June 14, 1994 and all information in the consolidated financial
statements herein, reflect this transaction. WMBS' sole banking
subsidiary, United Savings Bank, became a wholly owned subsidiary of
VFSC. The acquisition was effected as a pooling of interests with an
exchange of .9861 shares of VFSC stock for each share of WMBS
stock. As of January 24, 1994, there were 115,800 dissenting WMBS
shares. Although management does not know the final outcome of the
disposition of the dissenting shareholders, the attached financial
statements assume an exchange at .9861 per share for all shares.
Item 8 - Financial Statements and Supplementary Data
<TABLE>
Consolidated Balance Sheets
(Dollars in thousands)
December 31, 1994 1993
<CAPTION> <C> <C>
Assets
Cash and Due from Banks $57,002 $53,345
Interest-bearing Deposits with other Banks 105 235
Federal Funds Sold and Securities Purchased Under
Agreements to Resell 16,000 8,298
Total Cash and Cash Equivalents 73,107 61,878
Securities Available for Sale
Mortgage-Backed Securities 50,668 75,720
Other Securities 123,197 108,680
Total Securities Available for Sale 173,865 184,400
Loans 911,503 872,441
Less: Allowance for Loan Losses (16,236) (17,815)
Net Loans 895,267 854,626
Premises and Equipment, Net 21,298 21,989
Real Estate Held for Investment 1,272 1,277
Other Real Estate Owned (OREO)
(Net of valuation reserve of $710 at
December 31, 1994 and $490 at December 31, 1993) 4,487 4,678
Goodwill and Other Intangibles 3,136 3,407
Other Assets 32,989 25,846
Total Assets $1,205,421 $1,158,101
========== =========
Liabilities and Stockholders' Equity
Deposits:
Demand $117,411 $110,243
Savings, NOW and Money Market Accounts 624,038 560,570
Other Time 271,420 296,769
Total Deposits 1,012,869 967,582
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 71,163 85,702
Liabilities for Borrowed Money 22,725 6,351
Other Liabilities 8,207 7,439
Total Liabilities 1,114,964 1,067,074
Commitments and Contingencies
Stockholders' Equity:
Common Stock - $1 Par Value;
Authorized 20,000,000 Shares;
Issued and Outstanding: 1994 - 4,790,479
1993 - 4,749,519 4,790 4,749
Preferred Stock - $1 Par Value;
Authorized 5,000,000 Shares
Capital Surplus 48,715 48,301
Undivided Profits 48,615 39,171
Security Valuation Allowance (9,604) 865
Treasury Stock, at cost - 1994 - 105,260 shares
1993 - 105,255 shares (2,059) (2,059)
Total Stockholders' Equity 90,457 91,027
Total Liabilities and Stockholders' Equity $1,205,421 $1,158,101
========== =========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
For the years ended December 31,
1994 1993 1992
<CAPTION> <C> <C> <C>
Interest Income
Interest and fees on loans $73,085 $71,826 $75,321
Interest on securities available
for sale:
Taxable interest income 10,603 9,738 12,331
Tax exempt interest income 429 423 406
Income on federal funds sold and
securities purchased under
agreements to resell 270 146 198
Interest on time deposits 4 9 9
Total interest income 84,391 82,142 88,265
Interest Expense
Interest on deposits:
Certificates of deposit
over $100,000 1,123 1,669 4,408
Other deposits 27,914 26,572 34,428
Interest on federal funds purchased,
borrowed money and securities
sold under agreements to repurchase 4,256 3,120 2,328
Total interest expense 33,293 31,361 41,164
Net interest income 51,098 50,781 47,101
Provision for loan losses 4,000 5,053 9,430
Net interest income after provision
for loan losses 47,098 45,728 37,671
Other Operating Income
Securities gains, net 56 2,100 1,182
Trust Department income 2,965 2,775 2,508
Service charges on deposit accounts 5,420 4,557 4,087
Credit card fees 2,871 2,641 2,612
Mortgage servicing income 1,775 2,013 1,672
Other service charges, commissions
and fees 3,605 3,262 3,162
Total other operating income 16,692 17,348 15,223
Net interest and other operating income 63,790 63,076 52,894
Other Operating Expense
Salaries and wages 17,786 18,427 17,848
Pension and other employee benefits 4,897 5,213 4,070
Occupancy of bank premises, net 3,221 3,197 3,053
Furniture and equipment 3,992 3,768 3,801
Organizational expenses 612 261 -
Net OREO and collection expenses
and losses 2,182 7,307 3,322
Printing and supplies 1,147 1,171 961
FDIC Insurance 2,319 2,354 2,188
Other operating expense 10,607 10,761 10,141
Total other operating expense 46,763 52,459 45,384
Income before income taxes 17,027 10,617 7,510
Applicable income tax expense 5,159 3,386 2,436
Net Income $11,868 $7,231 $5,074
====== ===== =====
Earnings Per Common Share:
Net Income-Primary and Fully Diluted $2.51 $1.54 $1.08
==== ==== ====
See notes to consolidated financial statements.
</TABLE>
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands, except per share amounts)
For the years ended December 31, 1994, 1993 and 1992
<TABLE>
Unrealized
Common Capital Undivided Holding
Stock Surplus Profits Gains(Losses)
<PTION> <C> <C> <C> <C>
Balance, January 1, 1992 $4,719 $47,913 $28,649 $(307)
Net Income - - 5,074 -
Issuance of 4,893 Shares
of Common Stock under
Employee Stock Purchase Plan 5 69 - -
Issuance of 1,707 Shares
of Common Stock under
Dividend Reinvestment
Plan 2 26 - -
Employee Stock Ownership
Plan Debt Payment - - - -
Change in Security Valuation
Allowance - - - 83
Cash Dividends Declared
($0.08) - - (618) -
Balance, December 31, 1992 4,726 48,008 33,105 (224)
Net Income - - 7,231 -
Issuance of 4,214 Shares of Common Stock under
Employee Stock Purchase
Plan 4 71 - -
Issuance of 10,093 Shares
of Common Stock under
Dividend Reinvestment
Plan 10 163 - -
Employee Stock Ownership
Plan Debt Payment - - - -
Adoption of SFAS No. 115
(net of income taxes of
$446) - - - 1,089
Exercise of Options: 9,000
shares @ $7.50 per share 9 58 - -
Cash Dividends Declared
($0.24) - - (1,164) -
Balance, December 31, 1993 4,749 48,300 39,172 865
Net Income - - 11,868 -
Issuance of 4,678 Shares
of Common Stock under
Employee Stock Purchase
Plan 5 88 - -
Issuance of 7,126 Shares
of Common Stock under
Dividend Reinvestment
Plan 7 132 - -
Change in unrealized
gain/loss on securities
available for sale portfolio,
net of tax - - - (10,469)
Exercise of Options: 28,473
shares at $7.50 per share
and 1,050 shares at $10.25
per share 29 195 - -
Cash Dividends Declared
($0.54) - - (2,425) -
Balance, December 31, 1994 $4,790 $48,715 $48,615 $(9,604)
================================================
</TABLE>
<TABLE>
Employee
Treasury Stock Ownership
Stock Plan Total
<CAPTION> <C> <C> <C>
Balance, January 1, 1992 $(2,059) $(145) $78,770
Net Income - - 5,074
Issuance of 4,893 Shares
of Common Stock under
Employee Stock Purchase Plan - - 74
Issuance of 1,707 Shares
of Common Stock under
Dividend Reinvestment
Plan - - 28
Employee Stock Ownership
Plan Debt Payment - 73 73
Change in Security Valuation
Allowance - - 83
Cash Dividends Declared
($0.08) - - (618)
Balance, December 31, 1992 (2,059) (72) 83,484
Net Income - - 7,231
Issuance of 4,214 Shares
of Common Stock under
Employee Stock Purchase
Plan - - 75
Issuance of 10,093 Shares
of Common Stock under
Dividend Reinvestment
Plan - - 173
Employee Stock Ownership
Plan Debt Payment - 72 72
Adoption of SFAS No. 115
(net of income taxes of
$446) - - 1,089
Exercise of Options: 9,000
shares @ $7.50 per share - - 67
Cash Dividends Declared
($0.24) - - (1,164)
Balance, December 31, 1993 (2,059) - 91,027
Net Income - - 11,868
Issuance of 4,678 Shares
of Common Stock under
Employee Stock Purchase
Plan - - 93
Issuance of 7,126 Shares
of Common Stock under
Dividend Reinvestment
Plan - - 139
Change in unrealized
gain/loss on securities
available for sale portfolio,
net of tax - - (10,469)
Exercise of Options: 28,473
shares at $7.50 per share
and 1,050 shares at $10.25
per share - - 224
Cash Dividends Declared
($0.54) - - (2,425)
Balance, December 31, 1994 $(2,059) $ - $90,457
====================================
</TABLE>
See notes to consolidated financial statements.
<TABLE>
Consolidated Statements of Cash Flow
(Dollars in thousands)
For the years ended December 31,
1994 1993 1992
<CAPTION> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $11,868 $7,231 $5,074
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 4,000 5,053 9,430
Provision for depreciation 2,747 2,711 2,733
Amortization and accretion on
investment securities 885 740 86
Deferred income taxes 239 342 (1,091)
Net gain on sale of loans (187) (2,704) (2,944)
Security gains, net (56) (2,100) (1,182)
Proceeds from sales of loans 89,922 189,662 192,373
Loans originated for sale (80,047) (187,440) (194,733)
Net loss on sale of OREO 526 3,966 1,366
(Increase) Decrease in other assets (3,233) 846 82
Increase (Decrease) in other
liabilities 768 1,257 (1,411)
NET CASH PROVIDED BY OPERATING
ACTIVITIES 27,432 19,564 9,783
INVESTING ACTIVITIES
Proceeds from sales of securities 28,097 58,436 59,121
Proceeds from maturities of
securities 43,933 45,779 49,888
Purchase of securities (82,703) (136,235) (89,030)
Proceeds from sale of OREO 7,000 15,241 10,316
Purchase of mortgage loans (9,963) - -
Net increase in loans (45,664) (37,030) (56,490)
Purchase of premises and
equipment (2,056) (3,704) (2,685)
NET CASH USED BY INVESTING
ACTIVITIES (61,356) (57,513) (28,880)
FINANCING ACTIVITIES
Net increase (decrease) in
deposits 45,287 25,701 (63,457)
Net increase (decrease) in
other borrowings 1,835 (1,047) 82,434
Issuance of common stock 456 315 102
Cash dividends (2,425) (1,164) (618)
NET CASH PROVIDED BY FINANCING
ACTIVITIES 45,153 23,805 18,461
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 11,229 (14,144) (636)
Cash and Cash equivalents at
beginning of year 61,878 76,022 76,658
CASH AND CASH EQUIVALENTS AT
END OF YEAR $73,107 $61,878 $76,022
====== ====== ======
</TABLE>
Non-monetary Transactions:
Transfer of loans to OREO for the years ended December 31,1994, 1993
and 1992 totaled $7,335, $4,586 and $14,286, 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. and its subsidiaries (the "Company" or "VFSC") 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 ("VNB") on March 1, 1983, upon exchange of all of the outstanding
shares of common stock of VNB for shares of the Company. In 1990 the
Company changed its State of incorporation from Vermont to Delaware.
On June 14, 1994, a merger with West Mass Bankshares ("WMBS") was
effected as a pooling of interest with WMBS' sole banking subsidiary,
United Savings Bank ("USB"), becoming wholly owned by VFSC.
Subsequent to the merger USB changed its name to United Bank ("UB").
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.
Effective December 31, 1993 the Company adopted, on a
prospective basis, Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" 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 No. 115 was
not 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 Financial Accounting Standards Board has issued SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan", which
requires that creditors value all impaired loans, as defined in the
statement, based on the present value of expected cash flows
discounted at the loan's effective interest rate, or as a practical
expedient, at the market price of the loan or the fair value of the
collateral securing the loan if the loan is collateral dependent. The
standard is required for fiscal years beginning after December 15,
1994. The Company does not believe adoption of the standard will have
a significant impact on its results of operations or financial
position.
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.
Goodwill and other intangibles are amortized over their
estimated lives by the straight-line method. As part of its ongoing
review, management estimates the value of the Company's intangible
assets, taking into consideration any events and circumstances which
might have diminished such value.
In the fourth quarter of 1992, the Company adopted SFAS
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 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 SFAS 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.
Dollars in the following footnotes are in thousands
except for per share amounts.
2. Merger with WestMass Bankshares, Inc.
On June 14, 1994, the shareholders of WMBS and VFSC
consummated a merger which resulted in WMBS' sole subsidiary, USB,
becoming a wholly owned subsidiary of VFSC. Under the terms of the
merger, WMBS shareholders received .9861 shares of VFSC stock for
each WMBS share. As a result, VFSC issued 1,122,696 shares of its
common stock for all the outstanding shares of WMBS common stock,
with the exception of 115,800 dissenting WMBS. Although management
does not know the final outcome of the disposition of the dissenting
shareholders, the per share data in the financial statements assume an
exchange at .9861 per share for all shares.
The merger was effected as a pooling of interests and
accordingly, VFSC's financial statements have been restated to
include the results of WMBS for all periods presented.
Combined and separate results of VFSC and WMBS during the
periods preceding the merger were as follows:
<TABLE>
Five months ended May 31, 1994
(unaudited) VFSC WMBS Combined
<CAPTION> <C> <C> <C>
Net interest income $16,254 $3,929 $20,183
Net income $ 3,194 $ 953 $ 4,147
Fiscal year ended December 31, 1993
(unaudited)
Net interest income $41,654 $9,127 $50,781
Net income $ 4,771 $2,460 $ 7,231
Fiscal year ended December 31, 1992
(unaudited)
Net interest income $38,530 $8,571 $47,101
Net income $ 3,756 $1,318 $ 5,074
</TABLE>
The combined financial results presented above include
adjustments made to conform accounting policies of the two companies.
None of the adjustments impacted previously reported net income. All
adjustments are reclassifications to conform financial statement
presentation. These reclassifications include USB transferring
its investment portfolio from "Held-to-Maturity" to "Available for
Sale" at December 31, 1993. There were no intercompany transactions
between the two companies during the periods presented above.
In connection with the merger, the Company recorded
expenses of $466 in 1994. These expenses represent printing,
investment advisory, legal, audit and other professional service fees.
3. Securities
Additional information with respect to the contractual
maturities of securities available for sale at December 31, 1994 and
1993 follows:
<TABLE>
December 31,
1994 1993
Fair Amortized Fair Amortized
Value Cost Value Cost
<CAPTION> <C> <C> <C> <C>
Classification and Maturity:
U. S. Treasury Securities:
Within 1 year $ - $ - $ 1,014 $1,000
1-5 years 18,802 19,870 13,498 12,721
5-10 years 2,829 3,184 11,516 11,504
Total 21,631 23,054 26,028 25,225
Obligations of Other U. S.
Government Agencies:
Within 1 year - - - -
1-5 years 28,177 30,468 10,280 10,013
5-10 years 50,007 56,253 34,468 34,476
Total 78,184 86,721 44,748 44,489
Obligations of States and
Political Subdivisions:
Within 1 year 876 867 7,326 7,323
1-5 years 2,823 2,825 3,334 3,157
5-10 years 4,539 4,933 4,909 4,863
Over 10 years - - 238 225
Total 8,238 8,625 15,807 15,568
Corporate Securities:
Within 1 year 500 500 507 500
1-5 years 989 1,008 2,219 2,146
Over 10 years 60 60 - -
Total 1,549 1,568 2,726 2,646
Mortgage-backed Securities
with Original Average Life:
Within 1 year 1,526 1,530 13,028 12,825
1-5 years 40,579 43,863 55,627 55,999
5-10 years 6,924 7,677 5,144 5,128
Over 10 years 1,639 1,766 1,922 1,930
Total 50,668 54,836 75,721 75,882
Marketable Equity Securities 11,960 11,977 10,188 10,097
Money Market Overnight
Investments:
Within 1 year 1,635 1,635 9,182 9,182
Total Securities $173,865 $188,416 $184,400 $183,089
======= ======= ======= =======
</TABLE>
<TABLE>
December 31,
1994 1993
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Classification Gains Losses Gains Losses
<CAPTION> <C> <C> <C> <C>
U.S. Treasury Securities $ 1 $ 1,424 $864 $61
Obligations of Other U.S.
Government Agencies 0 8,537 448 189
Obligations of States and
Political Subdivisions 40 427 276 35
Corporate Securities 0 19 80 1
Mortgage-backed Securities 1 4,169 584 745
Marketable Equity Securities 158 175 174 84
Total $200 $14,751 $2,426 $1,115
=== ====== ===== =====
</TABLE>
Proceeds from sales of securities available for sale
during 1994, 1993 and 1992 were $28,097, $58,436 and $59,121,
respectively.
Gross gains of $625, $2,100 and $1,183 were realized on
those sales in 1994, 1993 and 1992, respectively. Gross losses of
$569, $0 and $1 were realized in the respective periods.
Securities with a book value of $80,713 as of December
31, 1994 and $97,512 as of December 31, 1993 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.
4. Loans
Loans classified by type are summarized as follows:
<TABLE>
<CAPTION> <C> <C>
December 31,
1994 1993
Commercial $207,299 $203,300
Real Estate:
Residential 389,033 372,570
Commercial 186,185 174,881
Construction 25,033 25,762
Total Real Estate 600,251 573,213
Consumer 103,953 95,928
Total loans, net of
unearned income $911,503 $872,441
======= =======
</TABLE>
The Company grants loans to customers primarily in New
England. Although the Company has a diversified portfolio, its
debtors' ability to honor their contracts is substantially dependent
upon the general economic conditions of the region.
At December 31, 1994 the amount of loans outstanding to
directors, executive officers, principal holders of equity securities
or to any of their associates totaled $7,639.
The following table summarizes the related party loan
activity for 1994:
Balance at beginning of year $6,150
Additions 3,206
Repayments (1,717)
Balance at end of year $7,639
=====
Mortgage Banking Activities
During 1994 the Company originated $77,001 of mortgage
loans for sale in the secondary market and sold $86,876. As of
December 31, 1994, $4,232 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 $2,999 and $1,059 in loans sold by UB to
the Federal Home Loan Mortgage Corporation and South Boston
Savings Bank, respectively, under recourse agreements. None have
been presented for recourse. Loan servicing is retained by the
Company 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 $187 for 1994, $2,740 for 1993 and
$2,944 for 1992. At December 31, 1994 and 1993 the Company's
serviced mortgage portfolio totaled $459,172 and $458,693,
respectively. Loan servicing income was $1,775, $2,013 and $1,672
for 1994, 1993 and 1992, respectively. The following schedule
represents excess servicing right activity for the past two years:
<TABLE>
<CAPTION> <C> <C>
1994 1993
Balance, January 1 $3,799 $3,353
Additions 202 1,977
Amortizations (722) (1,531)
Balance, December 31 $3,279 $3,799
===== =====
</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.
5. Allowance for Loan Losses
Transactions in the allowance for loan losses are
summarized as follows:
<TABLE>
<CAPTION> <C> <C> <C>
1994 1993 1992
Balance,
January 1 $17,815 $21,047 $19,116
Provision for Loan Losses 4,000 5,053 9,430
Loans
Charged Off (6,785) (9,595) (8,551)
Recoveries of
Loans Previously
Charged Off 1,206 1,310 1,052
Balance,
December 31 $16,236 $17,815 $21,047
====== ====== ======
</TABLE>
Transactions in the OREO valuation reserve are summarized
as follows:
<TABLE>
<CAPTION> <C> <C>
1994 1993
Balance, January 1 $ 490 $ 911
Provisions for OREO losses 571 3,854
OREO Charged Off (351) (4,275)
Balance, December 31 $ 710 $ 490
=== ===
</TABLE>
Proceeds from sales of OREO were $7,000 in 1994 and
$15,241 in 1993. Loans associated with these sales were $2,275
and $4,738, respectively. It is the Company's policy that no loan
exceed 90% of the sale price and no unguaranteed commercial,
commercial real estate or condominium loan exceed 80% of the sale
price. During 1994 loans of $686 were granted at UB at percentages of
sales price which exceeded the Company's policy. None of these loans
exceed 95% of the OREO sales price.
6. Premises and Equipment
Premises and equipment, stated at cost, consist of the
following:
<TABLE>
December 31,
<CAPTION> <C> <C>
1994 1993
Land $ 2,394 $2,172
Premises $20,240 19,428
Equipment 13,352 13,251
Leasehold Improvements 1,745 1,890
Total 37,731 36,741
Accumulated Depreciation and
Amortization (16,433) (14,752)
Premises and Equipment, Net $ 21,298 $21,989
====== ======
</TABLE>
7. Deposits
Time certificates of deposit outstanding in denominations
of $100 or more aggregated to $27,932 and $34,635 at December 31, 1994
and 1993, respectively. Total interest on these deposits amounted to
$1,123, $1,669, and $4,408 for the years ended December 31, 1994, 1993
and 1992, respectively.
The Company paid $29,042, $28,363 and $39,254 in interest
on deposits during 1994, 1993 and 1992, respectively.
8. 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 30 days from the transaction
date.
At December 31, 1994 the Company owned $7,175 of stock in
the Federal Home Loan Bank ("FHLB") which provided borrowing capacity
up to $170,300 from the FHLB at maturities, rates and terms determined
by the FHLB.
<TABLE>
December 31,
<CAPTION> <C> <C> <C>
1994 1993 1992
Federal funds purchased $ 350 $ 350 $ 225
Securities and loans sold under
agreements to repurchase 70,813 85,352 67,137
FHLB and other borrowings 22,725 6,351 25,738
Total $93,888 $92,053 $93,100
====== ====== ======
Average amount outstanding
during the year $102,963 $88,286 $58,650
Maximum amount outstanding at
any month end $125,097 $107,716 $93,245
Weighted average interest rate
at year end 4.66% 3.28% 3.79%
Weighted average interest rate
during the year 4.03% 3.53% 3.97%
</TABLE>
<TABLE>
Long-term borrowings from the FHLB(included in the above):
<CAPTION> <C> <C> <C>
1994 1993 1992
Maturing August 19, 1994 @ 4.12% $ 0 $5,000 $5,000
Maturing August 1, 2011 @ 5.00% 560 560 560
Maturing April 2, 2013 @ 5.50% 586 586 0
Maturing October 29, 2013 @ 5.50% 32 32 0
Maturing May 6, 2014 @ 7.61% 566 0 0
</TABLE>
9. Fair Market Value of Financial Instruments
Cash and Cash Equivalents
Cash and cash equivalents had a carrying value of
$73,107 and $61,878 at December 31, 1994 and 1993, respectively. Due
to their short term and very liquid nature the carrying value is
considered to also represent the fair market value of these balances.
Securities
Securities are classified as available for sale and are carried
at fair market value based on quoted market prices or dealer quotes.
Securities available for sale had a total fair market value of
$173,865 and $184,400 at December 31, 1994 and 1993, respectively.
This compares to amortized cost values of $188,416 at December 31,
1994 and $183,089 at December 31, 1993.
Loans
At December 31, 1994 and 1993 total loans, net of
allowance for loan losses, had a carrying value of $895,267 and
$854,626, respectively. The fair value of these loans was $901,372
and $871,533, 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.
Deposits
At December 31, 1994 and 1993 total deposits had
carrying values of $1,012,869 and $967,582 and fair values of
$1,010,215 and $970,782, 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 deposits is estimated using the rates
currently offered for deposits of similar remaining maturities.
Other Borrowings
Total other borrowings had carrying values of $93,888
and $92,053 at December 31, 1994 and 1993, respectively. These are
also reasonable estimates of fair market value.
Off-Balance Sheet Financial Instruments
The Company's off-balance sheet exposure is primarily
in the form of commitments to extend credit and standby letters of
credit. The carrying amount of these arrangements represents
accruals or deferred income (fees) arising from those unrecognized
financial instruments. Such amounts are minimal and approximate fair
value.
10. Commitments and Contingencies and Financial Instruments with
Off-Balance Sheet Risk
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,
1994. Certain operating leases contain various options to renew.
Year Ending December 31:
1995 $ 589
1996 458
1997 345
1998 285
1999 245
Later Years 2,156
Total Minimum Payments Required $4,078
=====
Operating expenses include approximately $988, $1,228,
and $1,481 in 1994, 1993 and 1992, respectively, for rentals of
premises and equipment used for banking purposes.
Derivative Financial Instruments
Transactions involving derivative financial instruments
during the fiscal years 1994, 1993 and 1992 were immaterial.
Financial Instruments With Off-Balance Sheet Risk
The Company is party to financial instruments with
off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. 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
Company has in particular classes of financial instruments.
The Company'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
Banks use the same credit policies in making commitments and
conditional obligations as they do 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, 1994 were as follows:
Home equity lines $52,877
Credit card lines 71,730
Commercial real estate 13,229
Other unused commitments 86,266
The Company evaluates each customer's credit-worthiness
on a case-by-case basis. The amount of collateral obtained if deemed
necessary 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 Company 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, 1994, the Company had outstanding
commitments for the following: financial standby letters of credit -
$5,962, performance standby letters of credit - $4,215 and commercial
and similar letters of credit - $6,481.
Non-Interest Bearing Deposits and Cash -- The Company is
required by the Federal Reserve Bank to maintain a portion of
deposits as a cash reserve. The Company must maintain cash balances
on hand or at the Federal Reserve Bank equal to its reserve
requirement. At December 31, 1994 the Company's reserve requirement
of $13,872 was met with cash on hand and deposits at the Federal
Reserve Bank.
The Company is also involved in litigation arising in the
normal course of business. The Company does not anticipate that any
of these matters will result in the payment by the Company of
damages, that in the aggregate, would be material in relation to the
consolidated results of operations or financial position of the
Company.
11. 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 for1992 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>
Year Ended December 31,
1994 1993 1992
<CAPTION> <C> <C> <C>
Currently Payable:
Federal $4,334 $2,491 $2,952
State 586 553 575
Deferred:
Federal 242 352 (976)
State (3) (10) (115)
$5,159 $3,386 $2,436
===== ===== =====
</TABLE>
The approximate tax effect of principal temporary
differences giving rise to deferred taxes are summarized as follows:
<TABLE>
Year Ended December 31,
<CAPTION> <C> <C> <C>
1994 1993 1992
Deferred compensation
and fees $(242) $(177) $ (30)
Provision for possible loan
losses 356 1,269 (666)
Accretion on investments 31 (263) 53
Depreciation 154 (88) (6)
Pension (105) (52) (100)
Intangibles (133) (50) (73)
Other 178 (297) (269)
Total deferred taxes $239 $342 $(1,091)
=== === =======
</TABLE>
The Company made income tax payments of $4,623, $2,833
and $3,051 during 1994, 1993 and 1992, respectively.
The components of the net deferred tax asset as of
December 31 are as follows:
<TABLE>
<CAPTION> <C> <C>
1994 1993
Deferred tax assets:
Pension $528 $423
Deferred compensation and fees 1,800 1,558
Provision for possible loan losses 5,628 5,984
Unrealized loss on securities 4,947 -
Other 33 242
Total gross deferred tax assets 12,936 8,207
Deferred tax liabilities:
Depreciation 1,061 907
Unrealized gain on securities - 446
Intangibles 509 642
Total gross deferred tax liabilities 1,570 1,995
Deferred tax asset, net $11,366 $6,212
====== =====
</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>
1994 1993 1992
% of %of % of
Pre Tax PreTax Pre Tax
Amount Income Amount Income Amount Income
<CAPTION> <C> <C> <C> <C> <C> <C>
Federal Statutory Rate $5,959 35.0% $3,610 34.0% $2,553 34.0%
Decreases in Taxes
Resulting From:
Tax exempt interest (782) (4.6) (509) (4.8) (405) (5.4)
State taxes, net
of federal benefit 378 2.2 373 3.5 294 3.9
Life insurance proceeds (238) (1.4)
Other, net (158) (0.9) (88) (0.8) (6) (0.1)
Total $5,159 30.3% $3,386 31.9% $2,436 32.4%
================================================
</TABLE>
12. Employee Benefit Plans
The Company's two subsidiaries each have separate defined
benefit pension plans.
Vermont National Bank
VNB 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.
The following table sets forth the plan's funded status
and amounts recognized in the Company's consolidated balance sheets as
of December 31, 1994 and 1993:
<TABLE>
Year Ended December 31,
<CAPTION> <C> <C>
1994 1993
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $7,701 and $7,779 for 1994 and
1993, respectively. $7,909 $8,111
===== ======
Projected benefit obligation ("PBO") for service
rendered to date $(10,750) $(11,871)
Plan assets at fair value, comprised of guaranteed
insurance contracts, mutual, real estate and
money market funds and listed stocks and bonds 10,529 10,391
PBO in excess of plan assets (221) (1,480)
Unrecognized net loss from past experience different
from that assumed and effects of changes in
assumptions 462 1,700
Unrecognized prior service cost (56) 52
Unrecognized net asset at period end being
recognized over 18.64 years (1,146) (1,265)
Accrued pension cost $(961) $(993)
===== =====
</TABLE>
<TABLE>
<CAPTION> <C> <C> <C>
1994 1993 1992
Net pension cost included the
following components:
Service cost - benefits earned
during the period $651 $ 602 $ 573
Interest cost on PBO 856 813 744
Actual return on plan assets (16) (833) (22)
Amortization of net transition asset (119) (119) (119)
Net amortization and deferral (844) 34 (777)
Net pension cost $528 $ 497 $399
=== === ===
</TABLE>
Significant assumptions used in actuarial computations
were:
<TABLE>
<CAPTION> <C> <C>
1994 1993
Discount rate 7.00% 7.50%
Rate of increase in compensation levels 5.00 5.50
Long-term rate of return on assets 8.50 8.50
</TABLE>
VNB will use an 8.5% discount rate for 1995.
United Bank
UB has a non-contributory defined benefit plan providing
pension benefits through membership in the Savings Banks Employees
Retirement Association ("SBERA") covering substantially all of its
employees meeting certain requirements as to age and length of
service. The plan provides a monthly benefit upon retirement based
on compensation during the highest paid consecutive three years of
employment during the last ten years of credited service. It is the
Company's policy to fund annually an amount equal to the lesser of
the actuarially determined normal cost or the amount allowed by the
Internal Revenue Code Section 412 Full Funding Limitations. All plan
assets are part of a single pooled fund made up of all participated
SBERA members which are managed by the SBERA Trustees.
The following table sets forth the pension plan's funded
status and amounts recognized in the Company's consolidated balance
sheets as of December 31, 1994 and 1993.
<TABLE>
<CAPTION> <C> <C>
1994 1993
Actuarial present value of benefit obligations:
Vested benefit obligation $2,056 $1,716
Nonvested benefit obligation 3 1
Accumulated benefit obligation $2,059 $1,717
================
Plan assets at fair value $2,674 $2,582
PBO for services rendered to date 2,917 2,805
PBO in excess of plan assets (243) (223)
Unrecognized net (gain) loss (169) 9
Unrecognized net obligation 9 10
Accrued pension cost $(403) $(204)
================
</TABLE>
The components of pension expense were as follows:
<TABLE>
<CAPTION> <C> <C> <C>
1994 1993 1992
Service cost - benefits earned during the period $182 $168 $167
Interest cost on PBO 196 171 154
Actual return on plan assets (150) (319) (158)
Net amortization and deferral of losses (30) 172 53
Net pension cost $198 $192 $216
==================
</TABLE>
Significant assumptions used in actuarial computations
were:
<TABLE>
<CAPTION> <C> <C>
1994 1993
Discount rate 8.00% 7.20%
Rate of increase in compensation levels 6.00 6.00
Long-term rate of return on assets 7.00 7.00
</TABLE>
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. The
discretionary contribution for 1994 was approximately $250 and none
was made for 1993 or 1992. 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 was $118
for 1994 and $114 for 1993.
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 defined benefit postretirement
medical and life insurance plans that cover all of its full time
employees and participating retirees. Eligible employees who retire
and who have attained age 65 with at least 10 years of service may
elect coverage. Spouses of eligible retirees are required to
contribute 100% of the cost of any medical coverage they elect. A
closed group of certain retirees and their spouses who elected to
retire under a special incentive program receive additional
medical benefits. The plans are not funded. Effective January 1,
1993 the Company adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions".
The following table sets forth the plan's funded status
reconciled with the amount shown in the Company's financial
statements:
<TABLE>
<CAPTION> <C> <C>
1994 1993
Accumulated postretirement benefit obligation:
Retired employees $230 $98
Active employees 140 130
Total $370 $228
=== ===
Plan assets at fair value $- $-
=== ===
Unfunded accumulated benefit obligation in excess
of plan assets $(370) $(228)
Unrecognized net (gain ) (12) (13)
Unrecognized transition obligation 205 217
(Accrued) postretirement medical and life
benefit cost $(177) $(24)
=== ===
</TABLE>
Net periodic postretirement benefit cost included the
following components:
<TABLE>
<CAPTION> <C> <C>
1994 1993
Service cost - benefits attributed to service during
the period $ 16 $ 16
Interest cost 29 17
Recognition of transition obligation 12 11
Special termination benefits 162 0
Net periodic postretirement cost $219 $ 44
==== ==
</TABLE>
For measurement purposes, an 8% annual rate of increase in
the per capita net employer share of covered health care benefits
was assumed for 1994. The rate was assumed to remain at that level
thereafter, but the impact of medical inflation eventually diminishes
because of the $10 per capita lifetime limit on medical benefits and
the likelihood that most current retirees and all future retirees
will reach that cap. The medical trend rate assumption, therefore,
merely affects the timing of the distribution of the $10 in benefits
to each participant, and so has a relatively small effect on the
amounts reported. To illustrate, increasing the assumed health care
cost trend rate by one percentage point for all future years would
increase the accumulated postretirement benefit obligation at
December 31, 1994, as well as the total of the service cost and
interest cost components of net periodic postretirement cost for 1994
by less than 2%. The weighted average discount rate used in
determining the accumulated postretirement benefit obligation was 8.5%
in 1994 and 7.0% in 1993. As the plan is unfunded, no assumption was
needed as to the long term rate of return on assets.
13. Stockholders' Equity
The Company had certain common stock equivalents
outstanding from 1992 through 1994. As a result, earnings per share
is based on the primary and fully diluted shares outstanding
during the respective periods shown in the table below:
<TABLE>
<CAPTION> <C> <C> <C>
1994 1993 1992
Average primary shares outstanding 4,735,480 4,710,228 4,686,116
Average fully diluted shares
outstanding 4,735,753 4,711,072 4,688,253
</TABLE>
The per share amounts of cash dividends paid on an
equivalent share basis were $0.54 for 1994, $0.24 for 1993 and
$0.08 for 1992. At December 31, 1994, the Banks had available
$23,795 for payment of dividends to the Company, under regulatory
guidelines.
At December 31, 1994, there were 51,960 and 70,599 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. On August 31, 1994
stockholders approved the Vermont Financial Services Corp. 1994 Stock
Option Plan which reserves 225,000 common shares to be issued in
the form of stock options. To date 48,000 have been issued at an
exercise price of $19.00 per share and 6,500 have been issued at an
exercise price of $20.25 per share. None have been exercised
The Company also continues to maintain a stock option
plan originally approved November 6, 1986 by the Stockholders of West
Mass Bankshares which authorizes the issuance of up to 138,000 common
shares. To date 126,960 shares have been issued at an exercise price
of $7.50 per share and 6,900 shares have been issued at an exercise
price of $10.25 per share. The following table summarizes activity
under this plan:
<TABLE>
<CAPTION> <C> <C> <C> <C>
Shares Shares
under Exercise under Exercise
option price option price
Outstanding December 31, 1991 126,960 $7.50 6,900 $10.25
Granted - - - -
Exercised - - - -
Outstanding December 31, 1992 126,960 7.50 6,900 10.25
Granted - - - -
Exercised 9,000 7.50 - -
Outstanding December 31, 1993 117,960 $7.50 6,900 $10.25
Granted - - - -
Exercised 2 8,473 $7.50 1,050 $10.25
Outstanding December 31, 1994 89,487 $7.50 5,850 $10.25
====== ==== ===== =====
</TABLE>
14. 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
December 31,
<CAPTION> <C> <C>
1994 1993
ASSETS
Cash $125 $284
Federal Funds Sold 0 1,623
Cash and Cash Equivalents 125 1,907
Securities 3,747 4,198
Other Assets 128 52
Investment in Bank Subsidiaries 86,732 85,111
Total Assets $90,732 $91,268
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other Liabilities $275 $241
Total Liabilities 275 241
Total Stockholders' Equity 90,457 91,027
Total Liabilities and
Stockholders' Equity $90,732 $91,268
====== ======
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
<CAPTION> <C> <C> <C>
1994 1993 1992
INCOME
Income on Securities $194 $251 $349
Other Income 275 347 378
Total Income 469 598 727
EXPENSES
Organizational Expenses 612 261 -
Other 283 262 229
Total Operating
Expenses 895 523 229
(Loss) Income Before Tax
Benefit and Equity in
Undistributed Income
from Bank Subsidiaries (426) 75 498
Applicable Income Tax
(Benefit) (131) (104) 4
(Loss) Income Before Equity
in Undistributed Income of
Bank Subsidiaries (295) 179 494
Equity in Undistributed
Income of Bank
Subsidiaries 12,163 7,052 4,580
Net Income $11,868 $7,231 $5,074
==================================
</TABLE>
<TABLE>
STATEMENTS OF CASH FLOW
Year Ended December 31,
<CAPTION> <C> <C> <C>
1994 1993 1992
OPERATING ACTIVITIES
Net Income $11,868 $7,231 $5,074
Adjustments to reconcile
income to net cash provided
by operating activities:
Amortization and accre-
tion on investment
securities 5 4 5
Investment security losses 9 - -
(Increase) Decrease in
other assets (10) 595 174
Increase (Decrease) in
other liabilities 34 (273) 266
Equity in undistributed
net income of bank sub-
sidiaries (12,163) (7,052) (4,580)
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES (257) 505 939
INVESTING ACTIVITIES
Investment in bank
subsidiaries - (30) (1,777)
Proceeds from sales of
securities 3,183 248 -
Proceeds from maturities of
securities 750 744 1,315
Purchase of securities (3,489) (2) (616)
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 444 960 (1,078)
FINANCING ACTIVITIES
Issuance of common stock 456 315 101
Sale of treasury stock - - 1
Cash dividends (2,425) (1,164) (618)
NET CASH USED BY FINANCING
ACTIVITIES (1,969) (849) (516)
(DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (1,782) 616 (655)
Cash and cash equivalents
at beginning of year 1,907 1,291 1,946
CASH AND CASH EQUIVALENTS
AT END OF YEAR $125 $1,907 $1,291
================================
</TABLE>
15. 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>
1994
<CAPTION> <C> <C> <C> <C>
Fourth Third Second First
Quarter Quarter Quarter Quarter
Interest income $22,769 $21,752 $20,340 $19,530
Interest expense 9,292 8,689 7,932 7,380
Net interest income 13,477 13,063 12,408 12,150
Provision for possible loan losses 1,000 1,000 1,000 1,000
Other operating income 4,533 4,310 3,813 4,036
Other operating expense 11,950 11,605 11,291 11,917
Income before income taxes 5,060 4,768 3,930 3,269
Applicable income taxes 1,513 1,492 1,059 1,095
Net income $3,547 $3,276 $2,871 $2,174
========================================
Per share data:
Primary and fully diluted
Net income $0.75 $0.69 $0.61 $0.46
==== ==== ==== ====
</TABLE>
<TABLE>
1993
<CAPTION> <C> <C> <C> <C>
Fourth Third Second First
Quarter Quarter Quarter Quarter
Interest income $20,167 $20,847 $20,335 $20,793
Interest expense 7,710 7,671 7,846 8,134
Net interest income 12,457 13,176 12,489 12,659
Provision for possible loan losses 1,000 1,000 1,475 1,578
Other operating income 4,648 4,759 4,042 3,899
Other operating expense 13,004 14,712 12,431 12,312
Income before income taxes 3,101 2,223 2,625 2,668
Applicable income taxes 936 739 866 845
Net income $2,165 $1,484 $1,759 $1,823
===== ===== ===== =====
Per share data:
Primary and fully diluted
Net income $0.46 $0.32 $0.37 $0.39
==== ==== ==== ====
</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
sheet of Vermont Financial Services Corp. and subsidiaries as of
December 31, 1994, and the related consolidated statements of income,
changes in stockholders' equity and cash flow for the year then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides 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 subsidiaries as of December 31, 1994, and the results of their
operations and their cash flow for the year then ended, in conformity
with generally accepted accounting principles.
We previously audited and reported on the consolidated
balance sheet as of December 31, 1993 and the related consolidated
statements of income, changes in stockholders' equity and cash flow of
Vermont Financial Services Corp. and subsidiary for each of the two
years in the period ended December 31, 1993, prior to their
restatement for the June 14, 1994 pooling of interests with West
Mass Bankshares, Inc. The contribution of Vermont Financial Services
Corp. and subsidiary to total assets, net interest income and net
income represented approximately 81%, 82% and 74%, respectively for
1993 and 81%, 82% and 66%, respectively for 1992, of the respective
restated totals. Separate financial statements of West Mass
Bankshares, Inc. were audited and reported on separately by other
auditors. We also have applied procedures to the combination of the
accompanying consolidated balance sheet as of December 31, 1993 and
the related consolidated statements of income, changes in
stockholders' equity and cash flow for each of the two years in
the period ended December 31, 1993, after restatement for the June
14, 1994 pooling of interests; in our opinion, such consolidated
statements have been properly combined on the basis described in Note
2 to the consolidated financial statements.
As described in Notes 1 and 12 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 11 to the consolidated
financial statements, the Company changed its method of accounting for
income taxes in 1992.
Springfield, Massachusetts COOPERS & LYBRAND L.L.P.
January 20, 1995
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
Banks. There are not family relationships among the executive
officers.
Year First
Elected to
Name/Age/Office Office
John D. Hashagen, Jr. (53)
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 VNB
Richard O. Madden (46)
Secretary of the Company 1993
Executive Vice President of the Company 1990
Treasurer of the Company 1986
Executive Vice President of VNB 1988
Senior Vice President of VNB 1987
Chief Financial Officer of VNB 1986
Louis J. Dunham (41)
Executive Vice President of VNB 1994
Senior Credit Officer of VNB 1991
Senior Vice President and Senior
Commercial Loan Officer of VNB 1987
Robert G. Soucy (49)
Executive Vice President of the Company 1992
Executive Vice President of VNB 1988
Senior Vice President of VNB 1984
W. Bruce Fenn (53)
Executive Vice President of VNB 1988
Senior Vice President and Senior Loan 1987
Officer of VNB
William H. George (50)
Executive Vice President of VNB 1992
Senior Vice President of VNB 1983
Kenneth R. Cole (48)
President of UB 1995
Senior Vice President and Treasurer 1986
of UB
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 (55)................... 1982
Attorney, Partner, Abatiell & Wysolmerski
Law Offices, Rutland
Zane V. Akins (54).......................... 1987
President, Akins & Associates; President
& Director, Anitech International, Inc.,
Brattleboro (Business Consulting)
Charles A. Cairns (53)...................... 1986
President, Champlain Oil Co., Inc. and
Coco Mart, Inc., South Burlington
Robert C. Cody (70)......................... 1974
President, Cody Chevrolet, Inc. Chairman,
Cody Management Associates (Real Estate
Ownership and Management), Montpelier
Allyn W. Coombs (60)........................ 1994
President, Treasurer of RCAS, Inc.,
(Real Estate Development and Management),
Amherst, MA
Beverly G. Davidson (63).................... 1980
Secretary, Treasurer of RCAS, Inc.,
(Vermont State Fair); Treasurer, N.M.&B.
Ltd. (NutriSystem Weight Control), Rutland
James E. Griffin (67)....................... 1972
President, J.R. Resources, Inc. (Business
Consultants), Rutland
John D. Hashagen, Jr. (53).................. 1987
President and Chief Executive Officer of
Vermont Financial Services Corp., Brattleboro;
President & Chief Executive Officer, Vermont
National Bank, Brattleboro
Francis L. Lemay (62)....................... 1994
Chairman, United Savings Bank, Greenfield, MA
Daniel C. Lyons (63)........................ 1974
Lyons Pontiac-Cadillac GMC Trucks; Toyota,
Inc., Berlin
Kimball E. Mann (60)........................ 1969
President, J.E. Mann, Inc. (Women's
Department Store), Brattleboro
Stephan A. Morse (48)....................... 1986
President and CEO, The Windham Foundation,
Inc., Grafton
Donald E. O'Brien (69)...................... 1978
Attorney, Burlington
Roger M. Pike (54).......................... 1980
Vice President, Kinney, Pike, Bell & Conner,
Inc. (Insurance), Rutland
Mark W. Richards (49)....................... 1988
President, Richards, Gates, Hoffman & Clay
(Insurance) Brattleboro
(1) During the past five years, the principal occupation
and employment of each director and executive officer has been as set
forth above, except as follows: Francis L. Lemay was President and
Chief Executive Officer and Chairman of West Mass until June 14, 1994
and was President and Chief Executive Officer of UB until December
31, 1994; Zane V. Akins was Chief Executive Officer, Holstein-Friesian
Association of America; Executive Vice President, Holstein-Friesian
Services, Inc., (Cattle Registration) until December 31, 1990;
Richard O. Madden became Secretary of the Company on May 1, 1993;
Robert G. Soucy became Executive Vice President of the Company in
July, 1992.
Item 11 - Executive Compensation
The following tables contain a three-year summary of the
total compensation paid to the CEO of the Company and the other four
most highly paid executive officers.
I. SUMMARY COMPENSATION TABLE
<TABLE>
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) $ # $ $
<CAPTION> <C> <C> <C> <C> <C> <C> <C> <C>
John D. Hashagen 1994 $200,000 $30,000 N/A N/A 12,300 sh N/A $7,298(2)(4)
President and 1993 184,000 7,360 $25,785 N/A 5,000 N/A 2,249(2)
Chief Executive Off. 1992 184,000 N/A 4,685 N/A N/A N/A N/A
Francis L. Lemay 1994 $213,692 $26,700 $7,630 N/A N/A N/A N/A
Chairman, UB Pres. 1993 195,338 33,500 6,834 N/A N/A N/A $20,675(3)
& Chief Executive 1992 183,531 N/A 6,175 N/A N/A N/A 9,325(3)
Officer
Richard O. Madden 1994 $108,000 $16,200 N/A N/A 10,600 sh N/A $4,111(2)
Exec. Vice Pres., 1993 99,209 4,040 $12,760 N/A N/A N/A 1,488(2)
Tres., Secretary 1992 96,000 N/A 1,786 N/A N/A N/A N/A
Robert G. Soucy 1994 $115,000 $17,250 N/A N/A 7,100 sh N/A $3,620(2)
Exec. Vice Pres., 1993 110,000 4,400 $15,732 N/A 4,000 N/A 1,100(2)
VNB Senior Banking 1992 105,671 N/A 2,339 N/A N/A N/A N/A
Executive
W. Bruce Fenn 1994 $108,000 $16,200 N/A N/A 6,600 sh N/A $4,065(2)
VNB Exec. Vice Pres.,1993 105,000 2,100 $17,717 N/A 4,000 N/A 1,575(2)
and Regional Banking 1992 105,000 N/A 3,347 N/A N/A N/A N/A
Executive
</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 for 1993.
(2) Represents the 25% Company match of the respective
employees' 401k contribution and the employees portion of the
Company's contribution to the Employees Profit Share Plan. No Profit
Sharing Plan contribution was made in 1993 or 1992.
(3) Represents the market value as of December 31 of each
year of the shares allocated to the officers account under the UB ESOP
plan for the respective year.
(4) Includes $778 discount received on purchases of
common stock under the Company's Employee Stock Purchase Plan.
II. OPTION/SAR GRANTS TABLE
<TABLE>
Option/SAR Grants in Last Fiscal Year
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation
Individual Grants for Option Term (1)
(a) (b) (c) (d) (e) (f) (g)
% of
Total
Options/
SARs
# of Granted to Exercise
Securities Employees or base Expira-
Underlying in Fiscal Price tion
Name Options Granted Year ($/Sh) Date 5%($) 10%($)
<CAPTION> <C> <C> <C> <C> <C> <C>
John D.
Hashagen 12,300 25.6% $19.00 7/13/04 $146,973 $372,458
Francis L.
Lemay 0 0 N/A N/A N/A N/A
Richard O.
Madden 10,600 22.1 19.00 7/13/04 126,659 $320,980
Robert G.
Soucy 7,100 14.8 19.00 7/13/04 84,838 214,996
W. Bruce
Fenn 6,600 13.8 19.00 7/13/04 78,863 199,855
</TABLE>
(1) The assumed growth rates in price in the Company's
stock are not necessarily indicative of actual performance that may be
expected.
III. OPTION EXERCISES AND YEAR-END VALUE TABLE
Aggregated Option Exercises in Last Fiscal Year, and
FY-End Option Value
<TABLE>
(a) (b) (c) (d) (e)
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options at
Options at FY-End ($)
FY-End (#)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable(2)
<CAPTION> <C> <C> <C> <C>
John D. Hashagen N/A N/A 17,300/0 $30,275/$0
Francis L. Lemay 24,333 $286,203(1) 35,667/0 $472,588/$0
Richard O. Madden N/A N/A 10,600/0 $18,550/$0
Robert G. Soucy N/A N/A 11,100/0 $19,425/$0
W. Bruce Fenn N/A N/A 10,600/0 $18,550/$0
</TABLE>
(1) Represents the difference between the aggregate
exercise price and the aggregate market value on the date of the
exercise.
(2) Represents the difference between the aggregate
exercise price and the aggregate market value as of December 31,
1994.
Deferred Compensation Agreements
VNB has entered into Executive Deferred Compensation
Agreements 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 VNB 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 Messrs. Madden,
Soucy and Fenn provide for payments of $1,388.89 per month. Vermont
National Bank has purchased life insurance policies on the lives of
these officers which, in effect, will provide the funds to make
payments to reimburse VNB for payments made under the agreements.
Mr. Lemay is covered under a Supplemental Executive
Retirement Plan (SERP) which is designed to augment his retirement
benefit from UB's pension plan and his social security benefit so
that his aggregate annual retirement benefit will approximate 70% of
his highest 3-year average salary prior to retirement. Under the
terms of his SERP, it is anticipated that Mr. Lemay will
receive an annual supplemental retirement benefit of $64,378 at
age 65. UB has purchased a split-dollar life insurance policy
which will provide a benefit this Mr. Lemay.
Management Continuity Agreements
The Company and VNB have entered into agreements with
VNB's 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 VNB is terminated within thirty-six months after a
change of control of the Company or VNB. 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 VNB, 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 $1,626,000.
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 VNB 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 VNB 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.
The Company and UB have entered into agreements
with UB's five executive officers, Messrs. Lemay, Cole, Neill,
Phillips and Noska. It was agreed that Mr. Lemay would be President
and Chief Executive Officer of UB until December 31, 1994. Thereafter,
the Company has agreed that Mr. Lemay would continue as Chairman and a
Director of UB until December 31, 1997. Mr. Lemay's contract also
provides that he will serve as a consultant to the Company from
December 31, 1994 through December 31, 1997. Mr. Lemay's compensation
for consulting services after December 31, 1994 is to be $25,000 per
year. Mr. Lemay is also on the Company's Board of Directors.
Currently, each director of the Company who is not an officer of
the Company or a subsidiary receives an annual retainer of $4,800 and,
in addition, a $400 fee for each regular monthly Board meeting
attended as well as a $300 fee for each meeting of a committee of the
Board attended. Mr. Lemay did not receive any such director's
fees while serving as an operating officer of UB.
Additionally, the Company and UB entered into
agreements to employ the following UB officers: Kenneth R. Cole as
Senior Vice President & Treasurer of UB; James Neill as Senior Vice
President of UB; and Robert W. Phillips and Matthew W. Noska as Vice
Presidents of UB. Under these agreements, Mr. Cole was to receive a
base salary of $82,500, Mr. Neill a base salary of $76,300, Mr.
Phillips a base salary of $59,700 and Mr. Noska a base salary of
$52,000, all subject to annual increases. Each agreement is to
expire May, 1997, except that Mr. Noska's agreement is to expire May,
1995. On January 1, 1995, Mr. Cole became President and Chief
Executive Officer of UB at an annual salary of $110,000.
In addition to and as part of the foregoing
agreements, Messrs. Cole, Neill, Phillips and Noska have entered
management continuity agreements which are similar in form to
agreements currently in force between the Company and VNB and
their senior officers. Each agreement's term ends on January
31, 1995 and is automatically renewable thereafter unless the
Company and UB elect not to renew it. Under the management continuity
agreements, the above officers would be entitled to the following
severance payments if terminated under certain circumstances after a
change of control of the Company or UB: Messrs. Cole, Phillips
and Neill - 200% of base salary at the time of termination; Mr. Noska
- 100% of base salary at the time of termination.
The management continuity agreements define a "change
of control" as (i) the acquisition by a person or group of 25% of
the combined voting power of the Company's or UB's then outstanding
securities; (ii) during any two-year period those persons, who at the
beginning of such period were members of the Company's or UB's Board
of Directors and any new director whose election was approved by at
least two-thirds of the directors then still in office who either
were directors at the beginning of such period or whose election or
nomination was previously so approved, cease to constitute a
majority of such board; or (iii) the stockholders of the Company
or UB approve a merger or consolidation of the Company or UB
which would result in such stockholders holding less than 70% of
the combined voting power of the surviving entity immediately
thereafter, or if such stockholders approve the sale of all or
substantially all of the assets of the Company or UB.
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, defined as (i) the willful and
continued failure of the officer to perform his duties and (ii)
willful conduct materially injurious to the Company or UB.
Profit-Sharing Plan
Each employee of VNB and UB, including executive
officers, becomes eligible to participate in the Company'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 becomes 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 Company's contribution
to the Profit-Sharing Plan. Vested amounts not so received in
cash are distributed to participants upon their retirement or earlier
upon termination of employment. During 1994, the Company made a
contribution of approximately $250,000 to the Profit-Sharing Plan.
Retirement Plan
The VNB 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 shown are
after deduction of estimates for Social Security reductions based
on the Social Security law as of January 1, 1995.
<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 1,481 2,962 4,442 5,923 7,404
40,000 3,464 6,929 10,393 13,858 17,322
60,000 5,761 11,522 17,284 23,045 28,806
80,000 8,161 16,322 24,484 32,645 40,806
100,000 10,561 21,122 31,684 42,245 52,806
120,000 12,961 25,922 38,884 51,845 64,806
140,000 15,361 30,722 46,084 61,445 76,806
160,000 * 17,761 35,522 53,284 71,045 88,806
180,000 * 20,161 40,322 60,484 80,645 100,806
200,000 * 22,561 45,122 67,684 90,245 112,806
220,000 * 24,961 49,922 74,884 99,845 124,806*
240,000 * 27,361 54,722 82,084 109,445 136,806*
260,000 * 29,761 59,522 89,284 119,045 148,806*
</TABLE>
* Under current regulations of the Internal Revenue
Code, the maximum annual benefit payable from a defined benefit
plan during 1995 is $120,000 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 $120,000 and those using compensation in excess of $150,000
are shown for exhibit purposes only.
The description of the Retirement Plan in this
Proxy Statement is intended solely to provide stockholders 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.
UB provides a retirement plan for all eligible
employees through the Savings Bank Employees Retirement Association
("SBERA"), an unincorporated association of savings banks
operating within Massachusetts and other organizations providing
services to or for savings banks SBERA's sole purpose is to enable
the participating employers to provide pensions and other benefits
for their employees.
Each UB employee age 21 or older who has completed
at least 1,000 hours of service in the last 12 month period
beginning with such employee's date of employment becomes a
participant of the retirement plan. All participants are fully
vested when they have been credited with three (3) years of
service or at age 62 if earlier.
The retirement plan is a qualified defined benefit
plan which does not require an employee to make any contributions to
become a participant and earn benefits under the Plan. The
benefits provide for a pension equal to 1.25% of Average
Compensation (the average of the three highest consecutive years of
Compensation) for each year of service up to 25 years, plus .6% of
compensation above the Covered Compensation (defined below) for each
year of service up to 25 years. For example, under the above
benefit formula, a Participant attaining age 65 in 1995 with 25
years of service, will be entitled to a benefit equal to 31.25%
(1.25% x 25 years) of Average Compensation plus 15% (.6% x 25 years)
of the difference (if any) between the participant's Average
Compensation and the Covered Compensation for a participant
turning age 65 in 1994 which is $24,312. Covered Compensation is the
average of the 35 years of Social Security taxable wages up to and
including the year in which a Participant reaches Social Security
retirement age. Normal retirement age under the plan is 65; a
reduced early retirement benefit is payable from age 50 to 65 under
certain conditions. On December 31, 1994, the latest date
for which retirement plan information is available, the present
value of accumulated benefits was fully funded by the market value
of plan assets. The Bank made no contribution to the Pension Plan
during 1994:
The following table illustrates annual pension
benefits for retirement at age 65 under the most advantageous plan
provisions available for various levels of compensation and years
of service. The figures in this table are based upon the assumption
that the plan continues in its present form and certain other
assumptions regarding compensation trends and social security.
<TABLE>
Annual Pension Benefit Based on Years of Service
<CAPTION> <C> <C> <C> <C>
Average Compensation 10 years 15 years 20 years 25 years
$ 20,000 $ 2,500 $ 3,750 $ 5,000 $ 6,250
40,000 5,941 8,912 11,883 14,853
60,000 9,641 14,462 19,283 24,103
80,000 13,341 20,012 26,683 33,353
100,000 17,041 25,562 34,083 42,603
120,000 20,741 31,112 41,483 51,853
140,000 24,441 36,662 48,883 61,103
* 150,000 26,291 39,437 52,583 65,728
</TABLE>
* Federal law does not permit defined benefit
pension plans to recognize compensation in excess of $150,000 for plan
years beginning in 1994 (11/01/94 for SBERA).
As of December 31, 1994 Messrs. Lemay, Cole, and
Neill had 39, 9 and 11 years of credited service, respectively.
Compensation of Directors
Each director who is not an officer of VFSC, VNB, or UB
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.
In addition, the Chairman of the Board receives an annual retainer of
$4,000 and each committee chairperson receives an annual retainer of
$500.
Item 12 - Security Ownership of Certain Beneficial Owners and
Management
As of February 28, 1995 the following beneficial owners
were known to control five percent or more of the outstanding shares
of Common Stock, $1 par value, of the Company. The information
below was taken from form Schedule 13Gs filed as of December 31,
1994 with the Securities and Exchange Commission.
<TABLE>
<CAPTION> <C> <C>
Amount of
Beneficial Percent
Name and Address Ownership of Class
Vermont National Bank . . . . . . . . . . . 242,984 5.14% (1)
Trust Department
100 Main Street
Brattleboro, VT 05301
David L. Babson & Company, Inc. . . . . . . 251,600 5.32% (2)
One Memorial Drive
Cambridge, MA 02142-1300
</TABLE>
(1) Includes sole voting power for 17,608 shares, shared
voting power for 225,376 shares, sole dispositive power for 139,907
shares and shared dispositive power for 103,077 shares.
(2) Includes sole voting power for 158,600 shares, shared
voting power for 93,000 shares and sole dispositive power for 251,600
shares.
The following table sets forth the name and address
of each director, nominee for director or executive officer of the
Company, his or her age and principal occupation, all positions or
offices held by such individual within the Company, the year in which
he or she first became a director of the Company or its predecessors,
the number of whole shares of Common Stock of the Company beneficially
owned by each at the close of business on February 28, 1995, and the
percent of class so owned. The business address of each of the
directors, nominees and executive officers is the Company's address
except as otherwise noted. It is anticipated that each of the
nominees will continue to act as Directors of VNB and/or UB. No
family relationship exists between any director or persons nominated
by the Company to become directors.
<TABLE>
<CAPTION> <C> <C>
Amount and Percent
Nature of of VFSC
Beneficial Common
Name Ownership Stock
Anthony F. Abatiell....................... 59,169(1) 1.25%
Zane V. Akins............................. 1,383(2) 0.03%
Charles A. Cairns......................... 4,027(3) 0.09%
Robert C. Cody............................ 15,196(4) 0.32%
Allyn W. Coombs........................... 8,070(5) 0.17%
Beverly G. Davidson....................... 2,417(6) 0.05%
James E. Griffin.......................... 2,579(7) 0.05%
John D. Hashagen, Jr...................... 13,349(8) 0.28%
Francis L. Lemay.......................... 73,164(9) 1.55%
Daniel C. Lyons........................... 9,712(10) 0.21%
Kimball E. Mann........................... 11,013(11) 0.23%
Stephan A. Morse.......................... 4,948(12) 0.10%
Donald E. O'Brien......................... 4,586(13) 0.10%
Roger M. Pike............................. 6,735(14) 0.14%
Mark W. Richards.......................... 24,829(15) 0.53%
Kenneth R. Cole........................... 17,936(16) 0.38%
Louis J. Dunham........................... 2,808(17) 0.06%
W. Bruce Fenn............................. 8,050(18) 0.17%
William H. George......................... 5,825(19) 0.12%
Richard O. Madden......................... 2,185(20) 0.05%
Robert G. Soucy........................... 8,795(21) 0.19%
</TABLE>
(1) Includes 813 shares held jointly with a family
member in which Mr. Abatiell shares voting and investment power.
Also includes 54,012 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 1,500
additional shares, exercisable within sixty (60) days,
pursuant to the Directors' Non-Qualified Stock Option Plans.
(2) Does not include options to acquire 1,500 shares,
exercisable within sixty (60) days, pursuant to the Directors'
Non-Qualified Stock Option Plans.
(3) Does not include options to acquire 1,500 shares,
exercisable within sixty (60) days, pursuant to the Directors'
Non-Qualified Stock Option Plans.
(4) Includes 10,372 shares held jointly with a family
member in which Mr. Cody shares voting and investment powers.
Does not include options to acquire 1,500 shares, exercisable
within sixty (60) days, pursuant to the Directors'Non-Qualified Stock
Option Plans.
(5) Includes 8,070 shares held jointly with a family
member in which Mr. Coombs shares voting and investment powers. Does
not include options to acquire 500 shares, exercisable within
sixty (60) days, pursuant to the Directors' Non-Qualified Stock
Option Plans.
(6) Ms. Davidson shares voting and investment powers on
2,417 shares. Does not include options to acquire 1,500 shares,
exercisable within sixty (60) days, pursuant to the Directors'
Non-Qualified Stock Option Plans.
(7) Does not include options to acquire 1,500 shares,
exercisable within sixty (60) days, pursuant to the Directors'
Non-Qualified Stock Option Plans.
(8) 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
8,577 shares held in the VNB Profit Sharing Plan. Does not
include options to acquire 12,300 shares, exercisable within sixty
(60) days, pursuant to the Officers' Non-Qualified Stock Option
Plans.
(9) Includes 73,164 shares held jointly with family
members in which Mr. Lemay shares voting and investment powers.
Does not include options to acquire 35,667 shares, exercisable
within sixty (60) days, pursuant to the Inventive Stock Option Plan
granted by West Mass (See "Option Exercisesand Year-end
Value Table" following).
(10) Includes 2,512 shares held jointly with a family
member in which Mr. Lyons shares voting and investment powers.
Also includes 7,200 shares held by a family member in which Mr.
Lyons has no voting or investment powers and in which Mr. Lyons
disclaims beneficial ownership. Does not include options to
acquire 1,500 shares, exercisable within sixty (60) days,
pursuant to the Directors' Non-Qualified Stock Option Plans.
(11) 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 1,500 shares, exercisable within sixty (60) days,
pursuant to the Directors' Non-Qualified Stock Option Plans.
(12) 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 1,500 shares, exercisable within sixty (60) days,
pursuant to the Directors' Non-Qualified Stock Option Plans.
(13) Does not include options to acquire 1,500 shares,
exercisable within sixty (60) days, pursuant to the Directors'
Non-Qualified Stock Option Plans.
(14) Includes 777 shares held jointly with family members
and 1,157 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 1,500 shares, exercisable
within sixty (60) days, pursuant to the Directors' Non-Qualified
Stock Option Plans.
(15) Includes 24,829 shares held jointly with family
members in which Mr. Richards shares voting and investment powers.
Does not include options to acquire 1,500 shares, exercisable
within sixty (60) days, pursuant to the Directors'Non-Qualified Stock
Option Plans.
(16) Includes 14,095 shares held jointly with family
members in which Mr. Cole shares voting and investment powers.
Also includes 3,841 shares in UB's Employee Stock Ownership Plan.
(17) Includes 2,808 shares in the VNB Profit Sharing
Plan. Does not include options to acquire 8,700 shares exercisable
within sixty (60) days pursuant to the Officers' Non-Qualified Stock
Option Plans.
(18) Includes 97 shares in which Mr. Fenn has no voting or
investment powers. Also includes 2,153 shares held jointly with a
family member in which Mr. Fenn shares voting and investment
powers, and 5,800 shares in the VNB Profit Sharing Plan. Does not
include options to acquire 10,600 shares, exercisable within sixty
(60) days pursuant to the Officers' Non-Qualified Stock Option Plans.
(19) Includes 2,016 shares held jointly with family
members in which Mr. George shares voting and investment powers.
Also includes 3,809 shares in the VNB Profit Sharing Plan. Does
not include options to acquire 9,700 shares, exercisable within
sixty (60) days pursuant to the Officers Non-Qualified Stock Option
Plans.
(20) Includes 27 shares held jointly with a family
member in which Mr. Madden shares voting and investment powers.
Also includes 2,158 shares held in the VNB Profit Sharing Plan.
Does not include options to acquire 10,600 shares exercisable within
sixty (60) days pursuant to the Officers' Non-Qualified Stock Option
Plans.
(21) Includes 346 shares held by a family member in which
Mr. Soucy has no voting or investment powers. Also includes 3,841
shares in the VNB Profit Sharing Plan. Does not include options
to acquire 11,100 shares, exercisable within sixty (60) days pursuant
to the Officers' Non-Qualified Stock Option Plans.
On February 28, 1995, the directors and officers of the
Company as a group (21) had beneficial ownership of 286,776 shares of
Company Common Stock, amounting to 6.06% of the outstanding shares.
This does not include options to acquire 122,167 shares, or 2.58% of
the outstanding shares, exercisable within sixty (60) days, pursuant
to the Directors' and Officers' Non-Qualified Stock Options Plans.
Item 13 - Certain Relationships and Related Transactions
Some directors and officers of VNB, UB and the
Company and their associates were customers of and had transactions
with the Banks and the Company in the ordinary course of business
during 1994. 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 Banks in the ordinary
course of business during 1994. 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 persons and did not
involve more than the normal risk of collectibility nor
present other unfavorable features.
In addition to banking and financial transactions,
the Banks 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 Banks 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 Banks and the Company will continue to have similar transactions
with, and use products or services of, such organizations in
the future.
Two directors of the Company are attorneys who have
been retained in the past to represent VNB or the Company in
appropriate circumstances. During 1994, no director was retained
by the Banks or Company 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,
1994 and 1993
Consolidated Statements of Income -
For the Years Ended December 31,
1994, 1993, and 1992
Consolidated Statements of Changes in
Stockholders' Equity - For the
Years Ended December 31, 1994,
1993, and 1992
Consolidated Statements of Cash Flow
- For the Years Ended December 31,
1994, 1993 and 1992
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 with the following four executive officers:
(a) John D. Hashagen, Jr.
(b) Richard O. Madden
(c) W. Bruce Fenn
(d) Robert G. Soucy
are incorporated by reference to Exhibit 3.2 to
Registrant's Form 10-K for the fiscal year ended December 31, 1990.
Management continuity agreements dated March 17, 1994
with Louis J. Dunham and January 11, 1994 with William G. George
are incorporated by reference to Exhibit 10.1 to Registrant's Form
10-K for the fiscal year-ended December 31, 1993.
Employment agreement dated October 19, 1993 by and
among United Savings Bank, Registrant and Kenneth R. Cole. Filed as
Exhibit 10.8 to the Company's Registration Statement on Form S-4.
Registration #33-72554.
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.
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 8, 1995 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.
Name Title Date
/s/ John D. Hashagen, Jr.Director and President March 8, 1995
John D. Hashagen, Jr. (Principal Executive Officer)
/s/ Richard O. Madden Secretary & Treasurer March 8, 1995
Richard O. Madden (Principal Financial Officer)
/s/ Anthony F. Abatiell Director March 8, 1995
Anthony F. Abatiell
Zane Akins Director
/s/ Charles A. Cairns Director March 8, 1995
Charles A. Cairns
/s/ Robert C. Cody Director March 8, 1995
Robert C. Cody
/s/ Allyn W. Coombs Director March 8, 1995
Allyn W. Coombs
/s/ Beverly G. Davidson Director March 8, 1995
Beverly G. Davidson
/s/ James E. Griffin Director March 8, 1995
James E. Griffin
/s/ Francis L. Lemay Director March 8, 1995
Francis L. Lemay
/s/ Daniel C. Lyons Director March 8, 1995
Daniel C. Lyons
/s/ Kimball E. Mann Director March 8, 1995
Kimball E. Mann
/s/ Stephan A. Morse Director March 8, 1995
Stephan A. Morse
Donald E. O'Brien Director
/s/ Roger M. Pike Director March 8,1995
Roger M. Pike
/s/ Mark W. Richards Director March 8,1995
Mark W. Richards
Index to Exhibits
Exhibit 22 Subsidiaries of Registrant
Exhibit 24 Consent of Independent Certified Public
Accountants
Exhibit 22
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. United Bank, a Massachusetts state-chartered savings
bank, with a principal place of business at 45 Federal Street,
Greenfield, MA 01301
3. 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
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) and Form S-3 (File No. 2-80833) of our report,
which includes explanatory paragraphs regarding (i) our responsibility
related to the Company's consolidated balance sheet as of December
31, 1993 and the related consolidated statements of income, changes
in stockholders' equity and cash flow for each of the two years in the
period ended December 31, 1993; (ii) the Company's change in its
method of accounting for certain investments in debt and equity
securities and accounting for postretirement benefits other than
pensions in 1993; and (iii) the Company's change in its method of
accounting for income taxes in 1992, dated January 20, 1995, on our
audit of the consolidated financial statements of Vermont Financial
Services Corp. and subsidiaries as of December 31, 1994 and for the
year then ended, which report is included in this Annual Report on
Form 10-K.
COOPERS & LYBRAND L.L.P.
Springfield, Massachusetts
March 17, 1995
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