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, 1995
[ ] 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 March 1, 1996, 4,789,770 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 $155,667,525.
DOCUMENTS INCORPORATED BY REFERENCE:
None
- The index for exhibits is on Page 65.
CAUTIONARY STATEMENT FOR PURPOSES OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company desires to take advantage of the new "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995.
This Report contains certain "forward-looking statements" including
statements concerning plans, objectives, future events or performance
and assumptions and other statements which are other than statements of
historical fact. The Company wishes to caution readers that the
following important factors, among others, may have affected and could
in the future affect the Company's actual results and could cause the
Company's actual results for subsequent periods to differ materially
from those expressed in any forward-looking statement made by or on be-
half of the Company herein: (i) the effect of changes in laws and
regulations, including federal and state banking laws and regulations,
with which the Company and its banking subsidiaries must comply, the
cost of such compliance and the potentially material adverse effects if
the Company or any of its banking subsidiaries were not in substantial
compliance either currently or in the future as applicable; (ii) the
effect of changes in accounting policies and practices, as may be adopt-
ed by the regulatory agencies as well as by the Financial Accounting
Standards Board, or of changes in the Company's organization, compen-
sation and benefit plans; (iii) the effect on the Company's competitive
position within its market area of increasing consolidation within the
banking industry and increasing competition from larger "super regional"
and other out-of-state banking organizations as well as nonbank pro-
viders of various financial services; (iv) the effect of unforeseen
changes in interest rates; and (v) the effect of changes in the bus-
iness cycle and downturns in the local, regional or national economies.
<PAGE>
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 $1,247 million at December
31, 1995. 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
$822 million and total assets of $1,002 million at December 31, 1995.
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 ser-
vices, 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, agri-
cultural 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 7 ATMs in other locations.
In addition, VNB is a member of the Plus, NYCE, and VISA networks and
has access to the Honor, Cirrus, Discover, American Express and
Master Card networks.
According to the State Department of Banking, Insurance and
Securities, as of December 31, 1994, 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 13.0%, 12.9% and 13.1% 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, Hatfield, 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, 1995 UB had total assets of $241 million,
total loans of $209 million and total deposits of $212 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 collater-
alized. 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. In addition, UB offers a wide range of trust and trust
related services, including services as executor, trustee, admini-
strator, custodian and guardian. 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 NYCE network with
members throughout New England.
UB has a wholly-owned subsidiary, Hayburne, Inc., which is in-
corporated 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, 1995, employed approxi-
mately 593 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 super-
vision 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, direc-
tors 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, 1995 the Banks had available approximately $30.5 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 pro-
spective earnings are analyzed to determine compliance with this policy.
Dividend payout rates for any one year may vary from this long term pay-
out policy based on these analyses and projections of future earnings
and future capital needs. For the three-year period ended December 31,
1995, an aggregate of $1.65 per share of dividends were declared.
Earnings per share for the same period were $7.15.
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 sub-
sidiary (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 covered
transactions of the insured depository institutions and its subsidiaries
cannot exceed 20% of the 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 controlled FDIC-insured depository institution, or (ii)
any assistance provided by the FDIC to any commonly controlled deposit-
ory 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 exist-
ence 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 exam-
ination, regulation and supervision by both the FDIC and the Massachu-
setts 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 in
accordance 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 substan-
tially 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 prohibited to state banks under the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
unless certain "grandfather" provisions of the statute are satisfied or
the FDIC otherwise permits such investments (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 FDICIA and the Federal and Massachu-
setts bank holding company statutes.
Subject to applicable regulations and required approvals, Mass-
achusetts 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 or to otherwise make investments
prohibited under FDICIA. 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 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,
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 exten-
sions 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, the BIF reserve
reached its 1.25% goal in 1995 at which time BIF assessments were
decreased. The Banks' assessment rates were reduced to $2,000 per
year effective January 1, 1996.
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, regula-
tion 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, 1995 of $7.5 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 organiza-
tion'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 and that are not experiencing or
anticipating significant growth will be permitted to maintain a leverage
capital ratio of only 3.0%. All other banks are required to maintain an
additional margin of capital, equal to at least 1% to 2% of total assets,
above the minimum ratio. 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 excludes all tangible assets. 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 convert-
ible securities, and certain forms of subordinated debt and inter-
mediate-term preferred stock.
The risk-based capital rules of the FDIC and the Federal Reserve
Board assign a bank's balance sheet assets and the credit equivalent
amounts of the bank's off-balance sheet obligations to one of four risk
categories, weighted at 0%, 20%, 50% or 100%, respectively. Applying
these risk-weights to each category of the bank's balance sheet assets
and to the credit equivalent amounts of the bank's off-balance sheet
obligations and summing the totals results in the amount of the bank's
total Risk-Adjusted Assets for purposes of the risk-based capital
requirements. Risk-Adjusted Assets can either exceed or be less than
reported balance sheet assets, depending on the risk profile of the
banking organization. Risk-Adjusted Assets for institutions such as VNB
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 regula-
tions 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 require-
ment 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 regula-
tions 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 undercapital-
ized" 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, 1995, VFSC's consolidated Total and Tier 1 risk-
based capital ratios were 14.70% and 13.44%, respectively. These ratios
exceeded applicable regulatory requirements. VFSC, VNB and UB are all
considered "well capitalized" by their respective regulators.
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 affil-
iated depository institution) overlap. States may, by statute, regula-
tion 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, South Burlington, Essex Junction, Williston and 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 Shop-
ping 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, eighteen are owned
by VNB, ten 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, 1995.
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 22 West Street Leased
Hatfield, MA 01038
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 11 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 opera-
tions, 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 March 1, 1996, VFSC Common Stock consisted of 20,000,000
authorized shares, $1.00 par value per share, of which 4,789,770 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 1995 and 1994.
<TABLE>
<CAPTION><C> <C> <C> <C> <C>
Year Quarter High Low Declared
1995 4th $35 $29-1/2 $.25
3rd 30-7/8 26 .22
2nd 27-1/4 21-3/4 .20
1st 23-1/2 20-3/4 .20
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
</TABLE>
Per the Bank's stockholder reports, the approximate number of
stockholders as of January 29, 1996 was 2,500.
Item 6 - Selected Consolidated Financial Data
The following table sets forth selected data regarding the
Company's operating results and financial position. This data should be
read in conjunction with Management's Discussion and Analysis and the
Consolidated Financial Statements and Notes thereto. The results of
operations, per share data and the total cash dividends, allowance for
loan losses and nonperforming assets ratios as of and for the five years
ended December 31, 1995 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 its two Bank subsidiaries
Vermont National Bank of Brattleboro, Vermont and United Bank of
Greenfield, Massachusetts.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993 1992 1991
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Results of Operations:
Interest income $96,457 $84,391 $82,142 $88,265 $102,012
Interest expense 41,969 33,293 31,361 41,164 57,869
Net interest income 54,488 51,098 50,781 47,101 44,143
Provision for loan losses 3,900 4,000 5,053 9,430 15,748
Net interest income after
provision for loan losses 50,588 47,098 45,728 37,671 28,395
Other operating income 17,549 16,692 17,348 15,223 14,365
Other operating expense 45,999 46,763 52,459 45,384 41,331
Income before income taxes
and accounting change 22,138 17,027 10,617 7,510 1,429
Applicable income tax expense 7,241 5,159 3,386 2,436 539
Net income $14,897 $11,868 $7,231 $5,074 $890
====== ====== ====== ====== ==== Balance Sheet Data At Year End:
Total assets $1,246,669 $1,205,421 $1,158,101 $1,124,578 $1,102,034
Loans, net of unearned income 893,470 911,503 872,441 856,768 815,690
Securities available for sale 249,682 173,865 184,400 149,487 179,121
Total deposits 1,033,957 1,012,869 967,582 941,882 1,005,338
Stockholders' equity 111,833 90,457 91,027 83,484 78,770
Per Share Data:
Net income, primary
and fully diluted $3.10 $2.51 $1.54 $1.08 $0.19
Total cash dividends declared 0.87 0.54 0.24 0.13 0.19
Tangible book value at period end,
Fully diluted (1) 22.47 18.36 18.61 17.00 16.05
Average primary
shares outstanding 4,807,553 4,735,480 4,710,228 4,686,116 4,626,064
Selected Financial Ratios:
Return on average
total assets (2) 1.23% 1.00% 0.64% 0.46% 0.08%
Return on average
stockholders' equity(3) 14.69% 13.23% 8.36% 6.31% 1.16%
Net interest margin (4) 4.92% 4.74% 4.97% 4.72% 4.54%
Cash dividends per share as a
percentage of earnings per share 28 22 16 12 100
Average stockholders' equity to
average assets 8.69 7.97 7.67 7.32 7.11
Core (leverage) capital ratio at period
end (5) 8.77 7.26 7.59 7.11 6.79
Total risk-based capital ratio at
period end (6) 14.67 13.03 12.06 11.11 10.80
Allowance for loan losses to period
end loans, net of unearned income 1.65 1.78 2.04 2.46 2.34
Nonperforming assets to period end
loans plus other real
estate owned (7) 1.67 2.32 3.64 5.71 5.97
Net charge-offs to
average net loans 0.59 0.62 0.95 0.90 1.30
</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, 1995, 1994 and 1993.
Overview
Net income for 1995 was $14.9 million, up from the $11.9 million
and $7.2 million earned in 1994 and 1993, respectively. Return on
average assets was 1.23% in 1995, 1.00% in 1994 and 0.64% in 1993.
Return on average stockholders' equity was 14.69% in 1995, 13.23% in 1994
and 8.36% in 1993.
On a primary and fully diluted per share basis, net income was
$3.10, $2.51, and $1.54 in 1995, 1994 and 1993, 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>
1995 1994 1993
Interest Rate Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance Expense(1) Paid(1) Balance Expense(1) Paid(1) Balance Expense(1) Paid(1)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans, net of unearned
income (2) $ 910,799 $84,431 9.27% $ 894,001 $73,929 8.27% $ 869,563 $72,356 8.32%
Taxable
securities (3) 190,764 11,441 6.00 191,425 10,479 5.47 154,238 9,738 6.31
Tax exempt
securities (3) 10,289 752 7.31 9,796 798 8.15 7,603 632 8.31
Federal funds sold and
securities purchased
under agreements to
resell 16,684 1,029 6.17 5,332 270 5.06 4,838 146 3.02
Interest-bearing bank
deposits 61 3 4.92 106 4 3.77 203 9 4.43
Total earning assets 1,128,597 97,656 8.65 1,100,660 85,480 7.77 1,036,445 82,881 8.00
Noninterest-earning assets:
Cash and due from banks 43,707 44,590 43,225
Premises and equipment,
net 23,517 23,084 22,481
Other assets (3) 32,359 35,761 44,371
Allowance for loan
losses (15,834) (16,574) (18,483)
Total assets (3) $1,212,346 $1,187,521 $1,128,039
========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
1995 1994 1993
Interest Rate Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance Expense(1) Paid(1) Balance Expense(1) Paid(1) Balance Expense(1) Paid(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings and transactional
deposits $ 607,202 21,497 3.54 $ 589,244 17,183 2.92 $ 537,204 14,656 2.73
Certificates of deposit:
--$100,000 or more 33,538 1,766 5.27 29,339 1,123 3.83 38,051 1,669 4.39
--Under $100,000 252,920 13,682 5.41 255,661 10,731 4.20 269,198 11,916 4.43
Federal funds purchased
and securities sold
under agreements to
repurchase 67,896 3,317 4.88 77,606 2,924 3.77 66,800 2,335 3.50
Other borrowed funds 27,138 1,707 6.33 26,605 1,332 5.01 21,486 785 3.65
Total interest-bearing
liabilities 988,694 41,969 4.24 978,455 33,293 3.40 932,739 31,361 3.36
Noninterest-bearing
liabilities:
Demand deposits 109,631 107,301 100,903
Other liabilities 8,605 7,139 7,897
Total liabilities 1,106,930 1,092,895 1,041,539
Stockholders' equity(3) 105,416 94,626 86,500
Total liabilities
and stockholders
equity (3) $1,212,346 $1,187,521 $1,128,039
========= ========= ==========
Net interest income $55,687 $52,187 $51,520
====== ====== ======
Net interest spread(4) 4.41% 4.37% 4.64%
==== ==== ====
Net Interest margin 4.92% 4.74% 4.97%
==== ==== ====
</TABLE>
(1) Includes a fully taxable equivalent adjustment based on a 35% federal
income tax rate in 1995, 34% for 1994 and 1993.
(2) Nonaccrual loans are included in average balances.
(3) Taxable and tax-exempt securities are recorded 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 $3.4 million or 6.6% to $54.5 million
in 1995 from $51.1 million in 1994. This compared to a $0.3 million or
0.6% increase in 1994 from 1993. On a fully taxable equivalent basis,
net interest income increased $3.5 million, or 6.7%, from 1994 to 1995
and $0.7 million, or 1.3%, from 1993 to 1994. The increase in 1995 was
almost equally attributable to favorable changes in levels of earning
assets and interest rates. In 1994, changes in interest rates reduced
net interest income by $2.5 million. This was more than offset by the
impact of a $64 million increase in earning assets. Management anti-
cipates that the Company's net interest margin will shrink somewhat in
1996, but that net interest income will still increase, although at a
slower pace than in 1995.
Average earning assets increased slowly over the last two years
with 2.5% and 6.2% growth rates in 1995 and 1994, respectively. The 1995
growth came from a $16.8 million, or 1.9%, increase in loans and an $11.4
million, or 213%, increase in federal funds sold and securities purchased
under agreements to resell. The growth in loans was primarily in the
residential real estate area.
Average interest-bearing liabilities increased $10.2 million, or
1.0%, in 1995 following a $45.7 million, or 4.9%, growth in 1994. Over
the two-year period, average core interest-bearing deposits (savings and
transactional deposits and certificates of deposit under $100,000)
increased by $53.7 million. Non-core interest-bearing liabilities were
increased by $2.2 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>
<CAPTION>
1995 vs. 1994 1994 vs. 1993
Net Net
Increase Due to Changes in Increase Due to Changes in
(Decrease) Volume(1) Rate(1) (Decrease) Volume(1) Rate(1)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans(2) $10,502 $1,412 $9,090 $1,573 $2,012 $ (439)
Taxable securities 962 (37) 999 741 2,147 (1,406)
Tax exempt securities (46) 39 (85) 166 178 (12)
Federal funds sold and securities
purchased under agreements to resell 759 688 71 124 16 108
Interest-bearing bank
deposits (1) (2) 1 (5) (4) (1)
Total interest income 12,176 2,100 10,076 2,599 4,349 (1,750)
INTEREST EXPENSE:
Savings and transactional deposits 4,315 542 3,773 2,527 1,470 1,057
Certificates of deposit:
--$100,000 or more 643 177 466 (546) (351) (195)
--Under $100,000 2,951 (116) 3,067 (1,185) (583) (602)
Federal funds purchased and securities
sold under agreements to repurchase 392 (397) 789 589 399 190
Other borrowed funds 375 26 349 547 214 333
Total interest expense 8,676 232 8,444 1,932 1,149 783
Change in net interest income $3,500 $1,868 $1,632 $ 667 $3,200 $(2,533)
===== ===== ===== ===== ===== =======
</TABLE>
(1) The effect of changes due to both volume and rate have been allocated
to the change in volume and change in rate categories in proportion
to the relationship of the absolute dollar amounts of the change in
each category.
(2) Includes nonaccrual loans.
Provision for Loan Losses
The provision for loan losses charged to operating expense is based
upon management's judgment of the amount necessary to maintain the allow-
ance 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 1995 was $3.9 million compared to
$4.0 million in 1994 and $5.1 million in 1993. Net loans charged off
were $5.4 million, $5.6 million and $8.3 million for the respective
years. The provision was reduced $0.1 million in 1995 and $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 1995, other operating income increased $0.9 million, or 5%, from
the $16.7 million earned in 1994. Increases of $0.3 million in trust
department income and $0.3 million is service charges on deposit accounts
comprised 69.4% of this increase.
In 1994, other operating income, decreased $0.7 million, or 4%,
from 1993. Net of the $2.0 million decrease in securities gains, other
income was up $1.4 million, or 9%, compared to 1993. An increase of $0.9
million in service charges on deposit accounts comprised 63% of this
increase.
Total other operating expense decreased $0.8 million, or 2%, in
1995 after decreasing $5.7 million, or 11%, in 1994. FDIC insurance
expense decreased $1.2 million in 1995. Net OREO and collection expenses
represented $5.1 million, or 89%, of the decrease in 1994 . Salary
expense was $17.5 million in 1995, $17.8 million in 1994 and $18.4
million in 1993. These represent decreases of 2% and 3%, respectively,
reflecting a reduction of approximately 13% in the Company's average
number of employees over the last two years. Pension and employee
benefits decreased $0.4 million, or 8%, in 1995 after decreasing $0.3
million, or 6%, in 1994. Also contributing to the expense improvements
in 1995 was a decrease of $0.6 million in merger related expenses. (See
note 2. to the consolidated financial statements.) Partially offsetting
the expense improvements in 1995 was a $1.3 million increase in other
noninterest expense. Nearly half of this increase was due to the receipt
of $0.6 million in life insurance proceeds in 1994's second quarter.
Over the last two years management has coordinated a profit
improvement plan which has focused on delivering high quality customer
service more efficiently and at a reduced cost. During that period net
noninterest expense (net of securities transactions) has decreased from
$37.2 million in 1993 to $30.1 million in 1994 and $28.5 million in 1995.
Management anticipates that net noninterest expense will be reduced
further in 1996.
Applicable Income Taxes
During 1995, 1994 and 1993 the Company recorded income tax expense
of $7.2 million, $5.2 million and $3.4 million, respectively. The
changes were almost entirely due to the level of pre-tax earnings. See
also footnote 12 to the financial statements.
Financial Condition
Loans
The loan portfolio decreased $18.0 million, or 2%, in 1995 follow-
ing a $39.1 million, or 4%, increase in 1994. 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 42% and 58% of the total loan portfolio. Over the
last two years the commercial lending sector decreased $26.7 million and
decreased from 46% to 42% 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.
Vermont National Bank 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 63% 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, 1995 this sector
represented 3% of the portfolio.
In 1995, the Company originated $111.4 million of residential
mortgage loans and sold $33.1 million of loans in the secondary market,
compared to $140.5 million originated and $86.9 million sold in 1994 and
$267.2 million originated and $189.7 million sold in 1993. The 21%
decrease in mortgage loan originations was primarily due to higher
interest rates. The high levels of 1993 were in part due to lower
interest rates which led to a significant number of mortgage
refinancings.
At year end 1995, the mortgage servicing portfolio totaled $420.6
million compared to $459.2 million at year end 1994 and $458.7 million at
year end 1993 and currently generates income of approximately $1.8
million per year. The $38.6 million, or 8%, decrease in 1995 was
principally due to the sale of the right to service $29.0 million of
mortgage loans on second home properties during the second quarter of
1995. A resulting gain of $0.2 million is included in other operating
income. Of the residential real estate portfolio, 54% were adjustable
rate loans and 46% were fixed rate loans at December 31, 1995.
Residential real estate loans represented 47%, 43% and 43% of gross loans
at year end 1995, 1994 and 1993, respectively.
Consumer loans represented 11% of gross loans the last three year
ends. Credit card loans and related plans were $37.7 million and $37.3
million of total consumer loans at December 31, 1995 and 1994, respect-
ively.
The following table summarizes the composition of the Company's loan
portfolio at the dates indicated.
<TABLE>
<CAPTION>
December 31,
1995 1994 1993 1992 1991
(in thousands)
<S> <C> <C> <C> <C> <C>
Commercial(1) $170,162 $207,299 $203,300 $199,128 $181,755
Real Estate:
Residential 415,468 389,033 372,570 355,144 326,534
Commercial 182,233 186,185 174,881 181,041 174,465
Construction 24,816 25,033 25,762 31,180 44,033
Total real estate 622,517 600,251 573,213 567,365 545,032
Consumer 100,791 103,953 95,928 90,275 88,903
Total loans, net of unearned income $893,470 $911,503 $872,441 $856,768 $815,690
======= ======= ======= ======= =======
</TABLE>
(1) Includes loans to Massachusetts and Vermont municipalities and
industrial revenue bonds of $24,874, $44,669, $30,339, $13,680 and
$8,857 for years 1995 through 1991, respectively.
The following table details the loan maturity and interest rate sensi-
tivity of loans, exclusive of loans secured by 1-4 family residential
property and consumer loans, at December 31, 1995.
<TABLE>
<CAPTION>
Repricing
After One After
Within But Within Five
One Year Five Years Years Total
(in thousands)
<S> <C> <C> <C> <C>
Loans:
With fixed interest rates $ 36,577 $25,520 $24,527 $ 86,624
With variable interest rates 284,814 2,742 3,031 290,587
Total $321,391 $28,262 $27,558 $377,211
======= ====== ====== =======
</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
when the become 90 days past due or when foreclosure action is started,
whichever is sooner. Commercial loans are placed on nonaccrual status
when they become 90 days past due as to principal or interest. Loans may
be left in accrual status if they are adequately collateralized or are
expected to result in collection within the next 60 days. Cash payments
received on loans in nonaccrual status are applied as principal re-
ductions. While no specific period of delinquency triggers nonaccrual
status for consumer loans, unsecured installment loans 90 days or more
past due and secured installment loans 180 days or more past due are
generally recommended for charge-off.
A loan remains in nonaccrual status until the factors which
indicate doubtful collectibility no longer exist and six consecutive
months of contractual payments are received or until the loan is
determined to be uncollectible and is charged off against the allowance
for loan losses. Credit card loans are required to be charged off after
180 days without a payment. Commercial loans 180 days or more past due
must be recommended for charge-off unless management determines the
collateral is sufficient. When a mortgage loan in default is trans-
ferred 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 re-
structured loan when the interest rate is materially reduced or when the
term is extended beyond the original maturity date because of the in-
ability of the borrower to service the interest payments at the con-
tractual rate. All of the $0.3 million of accruing restructured loans as
of December 31, 1995 were in full compliance with restructured terms and
conditions. The average yield on these loans is 8.55%.
The following table provides information with respect to the
Company's past due loans and the components of nonperforming assets at
the dates indicated.
<TABLE>
<CAPTION>
December 31,
1995 1994 1993 1992 1991
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans 90 days or more past due
and still accruing interest $ 2,008 $ 1,448 $ 1,503 $ 6,569 $8,696
====== ====== ====== ====== =====
Nonperforming assets:
Nonaccrual loans $11,695 $16,491 $25,746 $39,150 $34,893
Other real estate owned 2,977 4,487 4,678 10,332 8,797
Restructured loans - accruing 316 294 1,532 0 5,505
Total nonperforming assets $14,988 $21,272 $31,956 $49,482 $49,195
======= ======= ======= ======= =======
Nonperforming assets to period
end loans net of unearned income,
plus other
real estate owned 1.67% 2.32% 3.64% 5.71% 5.97%
==== ==== ==== ==== ====
</TABLE>
Additional interest income of $1,084,000 and $1,320,000 would have
been recorded in 1995 and 1994, respectively, if nonaccrual and restruct-
ured loans had been on a current basis in accordance with their original
terms. Payments, totaling $1,052,000 and $936,000 respectively, were
received on nonaccrual loans during 1995 and 1994. During 1995,
$1,052,000 was applied as principal reductions and $0 was recognized as
interest income, while in 1994 $592,000 was applied as a principal
reduction and $344,000 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 prin-
cipal.
At December 31, 1995, 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, 1995, 16% of the
total nonaccrual loans are current as to contractual terms. Loans to
five borrowers, totaling $2.7 million represented 23% of nonaccrual
loans. Management expects to see significant improvement in 1996 over
the 1995 charged-off loan total with a further decrease in the level of
nonperforming assets. Management is not aware of any current recommen-
dations by regulatory authorities or suggestions with respect to loans
classified as loss, doubtful, substandard or special mention which, if
they were implemented, would have a material effect on the Company.
Allowance for Loan Losses
The allowance for loan losses is available to absorb future losses
which are anticipated in the current loan portfolio. The adequacy of the
allowance for loan losses, which is formally reviewed on a monthly basis
by management, is evaluated according to the factors outlined in
"Provision for Loan Losses". To maintain the allowance at an adequate
level, current earnings are charged with an amount necessary to restore
the allowance to the desired level. A loan loss is charged against the
allowance when management believes the collectibility of principal and
interest with respect to such loan is unlikely. The allowance for loan
losses equalled $14.8 million, or 1.65% of the total loan portfolio at
December 31, 1995, compared with 1.78% at year end 1994 and 2.04% at year
end 1993. On December 31, 1995 the allowance for loan losses represented
98% of total nonperforming assets and 123% of nonperforming loans,
compared to 76% and 97%, respectively, at year end 1994.
The following table provides an analysis of the allowance for loan
losses and an analysis of loans charged off and recoveries by type of
loan and for the years indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993 1992 1991
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning of year $16,236 $17,815 $21,047 $19,116 $13,776
Acquired allowance - - - - 402
Loans charged off:
Commercial, commercial real estate and construction (4,533) (4,895) (7,361) (5,828) (8,761)
Real Estate-residential (596) (650) (807) (721) (490)
Consumer (1,484) (1,240) (1,427) (2,002) (2,342)
Total loans charged off (6,613) (6,785) (9,595) (8,551) (11,593)
Recoveries of loans previously charged off:
Commercial, commercial real estate and construction 772 783 884 550 553
Real estate-residential 40 0 96 84 20
Consumer 426 423 330 418 210
Total Recoveries 1,238 1,206 1,310 1,052 783
Net loans charged off (5,375) (5,579) (8,285) (7,499) (10,810)
Additions to allowance charged to earnings 3,900 4,000 5,053 9,430 15,748
Allowance for loan losses at year end $14,761 $16,236 $17,815 $21,047 $19,116
====== ======= ======= ======= ======
Ratio of net charge-offs to average loans 0.59% 0.62% 0.95% 0.90% 1.30%
Allowance for loan losses to period end loans, net of ==== ==== ==== ==== ====
unearned income 1.65% 1.78% 2.04% 2.46% 2.34%
==== ==== ==== ==== ====
</TABLE>
Net loans charged off in 1995 totaled $5,375,000 or 0.59% of
average loans. This compares with $5,579,000 or 0.62% in 1994 and
$8,285,000 or 0.95% in 1993. In 1991 loans charged off for one customer
totaled $1,125,000. No other charge-offs exceeded 10% of the respective
year's net loans charged off.
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 con-
sideration 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, 1995, 1994, 1993, 1992 and 1991. Notwith-
standing 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>
<CAPTION>
December 31,
1995 1994 1993 1992 1991
Loan Type Loan Type Loan Type Loan Type Loan Type
Amount to Total Amount to Total Amount to Total Amount to Total Amount to Total
Allocated Loans Allocated Loans Allocated Loans Allocated Loans Allocated Loans
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 2,726 19% $ 4,226 23% $ 5,027 23% $ 6,823 23% $ 4,503 22%
Real Estate-Commercial 1,010 20 4,597 20 4,324 20 5,364 21 4,351 21
Construction 2,033 3 488 3 519 3 1,827 4 1,081 5
Real Estate-Residential 1,398 47 1,061 43 1,116 43 1,222 41 1,387 41
Consumer 1,399 11 1,644 11 1,712 11 1,845 11 1,850 11
Unallocated 6,195 - 4,220 - 5,117 - 3,966 - 5,944 -
$14,761 100% $16,236 100% $17,815 100% $21,047 100% $19,116 100%
====== === ====== === ====== === ====== === ======= ===
</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. The portfolio is class-
ified as available for sale and the values noted are therefore both book
and market values.
<TABLE>
<CAPTION>
December 31,
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies $145,873 $ 99,815 $ 70,776
State and political subdivisions 10,343 8,238 15,807
Mortgage-backed securities 75,752 50,668 75,721
Other securities (1) 17,714 15,144 22,096
Total $249,682 $173,865 $184,400
======== ======== ========
</TABLE>
(1) Includes money market overnight investments of $4,895, $1,635, and
$9,182 at year end 1995, 1994 and 1993, respectively.
The investment portfolio increased 44%, to $249.7 million, at year
end. During 1994 the portfolio decreased 6%, to $173.9 million at year
end. The total portfolio as a percent of total assets was 20% at year
end 1995 compared to 14% and 16% at year end 1994 and 1993, 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 in the above
tables. During 1994 prepayments and sales of mortgage backed securities
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. During 1995 excess liquidity, as a
result of sluggish loan demand, was primarily invested in U.S.
Treasury and U.S. Government agency securities and mortgage backed
securities. The average maturity of the investment portfolio is
approximately 2.8 years.
The Company invests a portion of its capital in marketable equity
securities which comprised 4.7%, 6.9% and 5.5% of total investments at
December 31, 1995, 1994 and 1993, respectively. At December 31, 1995,
$8.0 million of the $11.8 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, 1995 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 35%. 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, 1995.
<TABLE>
<CAPTION>
Maturing
After One But After Five But
Within Within Five Within Ten After
One Year Years Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S. Government
agencies $ 8,622 5.90% $ 89,480 5.76% $47,771 6.09% $0 0.00%
State and political subdivisions 1,316 8.69 5,427 6.97 3,600 6.11 0 0.00
Mortgage-backed securities 3,172 6.87 67,011 6.47 5,569 6.69 0 0.00
Other fixed income securities 1,279 6.53 508 7.32 15 9.18 0 0.00
Total $14,389 6.43 $162,426 6.10 56,955 6.15 $0 0.00
===== ====== ====== =
Tax equivalent adjustment for calculation
of yield $40 $132 $77 $0
== === === =
</TABLE>
Does not include equity securities of $11,787 at December 31, 1995.
Deposits
Average total deposits for 1995 of $1,003.3 million represented a
$21.7 million, or 2%, increase from 1994's average, which had increased
$36.2 million, or 4%, from 1993's average balances.
The average balance of large CDs was $33.5 million in 1995, $29.3
million in 1994 and $38.1 million in 1993. In 1995 the decrease in CDs
under $100,000 was offset by a $20.3 million total increase in the
average balance of all other core deposit categories (all deposits other
than large CD's). Large CDs represented 3% of average total deposits in
1995 and 1994 and 4% in 1993. The majority of these deposits was
obtained from local Vermont and Massachusetts customers. Management
expects to continue to limit future asset growth primarily to the
growth of core deposits as opposed to the more volatile large CDs and
other borrowed funds.
The following table summarizes the daily average amount of deposits
for the years indicated, and rates paid on such deposits on the last day
of the respective year.
<TABLE>
<CAPTION>
December 31,
1995 1994 1993
Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 109,631 -% $107,301 -% $100,903 -%
Interest-bearing transactional deposits 472,753 3.70 427,862 3.69 369,590 2.69
Savings deposits 134,449 2.67 161,382 2.67 167,614 2.50
Certificates of deposit:
-$100,000 or more 33,538 5.19 29,339 4.41 38,051 4.22
-Under $100,000 252,920 5.03 255,661 4.46 269,198 4.33
Total $1,003,291 $981,545 $945,356
========= ======= ========
</TABLE>
The following table shows the maturity schedule of certificates of deposit of
$100,000 or more at December 31, 1995.
<TABLE>
<CAPTION>
Certificates
of Deposit
(in thousands)
<S> <C>
3 months or less $ 9,532
Over 3 through 6 months 10,352
Over 6 through 12 months 9,095
Over 12 months 8,979
Total $37,958
======
</TABLE>
Capital Resources
The Company engages in an ongoing assessment of its capital needs
in order to maintain an adequate level of capital to support business
growth and ensure depositor protection. The Company's two sources of
capital are internally generated funds and the capital markets. Primary
reliance is on internally generated capital.
Stockholders' equity as a percent of assets was 8.97%, 7.50% and
7.86% as of December 31, 1995, 1994 and 1993, 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 8.69% in 1995, 7.97% in 1994 and 7.67% in 1993.
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, 1995 and
1994 are shown for comparative purposes placing them in the "well
capitalized" category at each respective date.
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, 1995 15.59% 14.34% 9.19%
December 31, 1994 14.60% 13.34% 8.73%
Vermont National Bank
December 31, 1995 13.87% 12.61% 8.29%
December 31, 1994 12.16% 10.90% 7.48%
Vermont Financial
Services Corp.
December 31, 1995 14.70% 13.44% 8.82%
December 31, 1994 13.03% 11.77% 8.01%
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 will be assessed at the
lowest available FDIC rate, $0.00 per $100 of deposits, subject to a
$2,000.00 per year minimum in 1996. They were assessed at a rate of
$0.23 per $100 of deposits from January, 1993 through May, 1995 at which
time the rate was lowered to $0.04 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
$226.0 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 sen-
sitivity over various periods at December 31, 1995.
<TABLE>
<CAPTION>
Repricing Date
0-30 Days 31-90 Days 91-180 Days 181-365 Days 1-5 Years Over 5 Years
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans (1) $ 263,379 $ 60,390 $98,511 $136,174 $210,491 $112,830
Investment securities (2) (3) 13,897 27,600 24,119 30,157 116,518 25,604
Other earning assets 8,987 - - - - -
Total 286,263 87,990 122,630 166,331 327,009 138,434
Interest-bearing liabilities:
MMDA's (4) 295,377 - - 66,536 - -
NOW's and Super NOW's (4) - - - 76,371 31,427 -
Savings and Clubs (4) - - - - 124,869 -
Certificates of Deposit 24,445 42,124 61,207 72,376 95,909 5,812
Borrowed Funds 74,433 1,508 3,739 107 10,068 1,810
Total 394,255 43,632 64,946 215,390 262,273 7,622
Net Interest Sensitivity Gap $(107,992) $ 44,358 $57,684 $(49,059) $64,736 $130,812
======== ====== ====== ======= ====== =======
Cumulative Interest Sensitivity Gap $(63,634) $(5,950) $(55,009) $9,727 $140,539
======= ======= ======== ===== =======
</TABLE>
(1) Does not include non-accrual loans of $11,695 at December 31, 1995.
(2) Does not include equity securities of $11,787 at December 31, 1995.
(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 3 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.
Recent Developments
During 1996, the Company plans to replace Vermont National Bank's
(VNB's) online teller system at an estimated total cost of $2.9 million
and purchase its Williston Road office at an anticipated total cost of
$0.7 million. No other additions to premises or equipment are expected to
exceed $500,000. All additions will be funded through the operations of
the Company.
The Company's financial statements for 1996 will be affected by
rules and regulations which have been announced but are not yet
effective. The Financial Accounting Standards Board (FASB) has issued
Statements of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of". This statement shall be effective
for all fiscal years beginning after December 15, 1995. This statement
is not expected to have a material impact on the financial statements of
the Company. The FASB has also issued SFAS No. 122, "Accounting for
Mortgage Servicing Rights". This statement amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities", to require that a
mortgage banking enterprise recognize as separate assets rights to
service mortgage loans for others, however those servicing rights were
acquired. The statement requires upfront recognition of income from loan
origination based on the expected value of any related servicing. Prior
to 1996, income on serviced mortgages was recognized as payments were
received. Management expects that the estimated annual effect of this
statement is an increase to pre-tax income of approximately 1% of
mortgage loans sold. The FASB also issued SFAS No.123, " Accounting for
Stock-Based Compensation" which establishes financial accounting and re-
porting standards for stock-based employee compensation plans and is
effective for all fiscal years that begin after December 15,1995. The
standard requires a fair value based method of accounting for an employee
stock option or similar equity instrument. Companies are given the option
of recognizing this compensation expense in the income statement or by
proforma footnote disclosure. VFSC will adopt the latter method effective
January 1, 1996. The estimated impact for VFSC stock options issued in
1995 is a $0.13 and $0.14 reduction in annual primary and fully diluted
earnings per share, respectively.
Item 8 - Financial Statements and Supplementary Data
Vermont Financial Services Corp.
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Assets
Cash and Due from Banks $ 53,834 $ 57,002
Interest-bearing Deposits with other Banks 62 105
Federal Funds Sold and Securities Purchased Under
Agreements to Resell 8,925 16,000
Total Cash and Cash Equivalents 62,821 73,107
Securities Available for Sale
Mortgage-Backed Securities 75,752 50,668
Other Securities 173,930 123,197
Total Securities Available for Sale 249,682 173,865
Loans 893,470 911,503
Less: Allowance for Loan Losses (14,761) (16,236)
Net Loans 878,709 895,267
Premises and Equipment, Net 20,366 21,298
Real Estate Held for Investment 1,309 1,272
Other Real Estate Owned (OREO)
(Net of valuation reserve of $47 at
December 31, 1995 and $710 at
December 31, 1994) 2,977 4,487
Goodwill and Other Intangibles 2,747 3,136
Other Assets 28,058 32,989
Total Assets $1,246,669 $1,205,421
========== ==========
______________________________________________________________________________________________
Liabilities and Stockholders' Equity
Deposits:
Demand $ 137,504 $ 117,411
Savings, NOW and Money Market Accounts 594,580 624,038
Other Time 301,873 271,420
Total Deposits 1,033,957 1,012,869
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 79,773 71,163
Liabilities for Borrowed Money 11,892 22,725
Other Liabilities 9,214 8,207
Total Liabilities 1,134,836 1,114,964
Commitments and Contingencies
Stockholders' Equity:
Common Stock - $1 Par Value;
Authorized 20,000,000 Shares;
Issued and Outstanding: 1995 - 4,883,017
1994 - 4,790,479 4,883 4,790
Preferred Stock - $1 Par Value;
Authorized 5,000,000 Shares
Capital Surplus 49,427 48,715
Undivided Profits 59,464 48,615
Security Valuation Allowance 9 (9,604)
Treasury Stock, at cost - 1995 - 99,750 shares
1994 - 105,260 shares (1,950) (2,059)
Total Stockholders' Equity 111,833 90,457
Total Liabilities and Stockholders' Equity $1,246,669 $1,205,421
========== ==========
</TABLE>
See notes to consolidated financial statements.
Vermont Financial Services Corp.
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Interest Income
Interest and fees on loans $83,506 $73,085 $71,826
Interest on securities available
for sale:
Taxable interest income 11,480 10,603 9,738
Tax exempt interest income 443 429 423
Income on federal funds sold and
securities purchased under
agreements to resell 1,028 270 146
Interest on time deposits 0 4 9
Total interest income 96,457 84,391 82,142
Interest Expense
Interest on deposits:
Certificates of deposit
over $100,000 1,766 1,123 1,669
Other deposits 35,179 27,914 26,572
Interest on federal funds purchased,
borrowed money and securities
sold under agreements to repurchase 5,024 4,256 3,120
Total interest expense 41,969 33,293 31,361
Net interest income 54,488 51,098 50,781
Provision for loan losses 3,900 4,000 5,053
Net interest income after provision
for loan losses 50,588 47,098 45,728
Other Operating Income
Securities gains, net 79 56 2,100
Trust Department income 3,218 2,965 2,775
Service charges on deposit accounts 5,746 5,420 4,557
Credit card fees 2,794 2,871 2,641
Mortgage servicing income 1,910 1,775 2,013
Other service charges, commissions
and fees 3,802 3,605 3,262
Total other operating income 17,549 16,692 17,348
Net interest and other operating income 68,137 63,790 63,076
Other Operating Expense
Salaries and wages 17,503 17,786 18,427
Pension and other employee benefits 4,509 4,897 5,213
Occupancy of bank premises, net 3,337 3,221 3,197
Furniture and equipment 4,155 3,992 3,768
Organizational expenses 36 612 261
Net OREO and collection expenses
and losses 2,244 2,182 7,307
Printing and supplies 1,143 1,147 1,171
FDIC Insurance 1,163 2,319 2,354
Other operating expense 11,909 10,607 10,761
Total other operating expense 45,999 46,763 52,459
Income before income taxes 22,138 17,027 10,617
Applicable income tax expense 7,241 5,159 3,386
Net Income $14,897 $11,868 $7,231
====== ====== =====
Earnings Per Common Share:
Net Income-Primary and Fully Diluted $3.10 $2.51 $1.54
==== ==== ====
</TABLE>
See notes to consolidated financial statements.
Vermont Financial Services Corp.
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands, except per share amounts)
For the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Unrealize
d Employee
Common Capital Undivided Holding Treasury Stock Ownership
Stock Surplus Profits Gains(Losses) Stock Plan Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 $4,726 $48,008 $33,105 $(224) $(2,059) $(72) $ 83,484
Net Income - - 7,231 - - - 7,231
Issuance of 4,214 Shares
of Common Stock under
Employee Stock Purchase
Plan 4 71 - - - - 75
Issuance of 10,093 Shares
of Common Stock under
Dividend Reinvestment
Plan 10 163 - - - - 173
Employee Stock Ownership
Plan Debt Payment - - - - - 72 72
Adoption of SFAS No. 115
(net of income taxes of
$446) - - - 1,089 - - 1,089
Exercise of Options: 9,000
shares @ $7.50 per share 9 58 - - - - 67
Cash Dividends Declared
($0.24) - - (1,164) - - - (1,164)
Balance, December 31, 1993 4,749 48,300 39,172 865 (2,059) - 91,027
Net Income - - 11,868 - - - 11,868
Issuance of 4,678 Shares
of Common Stock under
Employee Stock Purchase
Plan 5 88 - - - - 93
Issuance of 7,126 Shares
of Common Stock under
Dividend Reinvestment
Plan 7 132 - - - - 139
Change in unrealized
gain/loss on securities
available for sale portfolio,
net of tax - - - (10,469) - - (10,469)
Exercise of Options: 28,473
shares at $7.50 per share
and 1,050 shares at $10.25
per share 29 195 - - - - 224
Cash Dividends Declared
($0.54) - - (2,425) - - - (2,425)
Balance, December 31, 1994 4,790 48,715 48,615 (9,604) (2,059) - 90,457
Net Income - - 14,897 - - - 14,897
Issuance of 5,445 Shares
of Common Stock under
Employee Stock Purchase
Plan 6 136 - - - - 142
Exercise of options: 83,967
shares at $7.50; 3,125 shares
at $10.25; 4,000 shares at
$19.00; 500 shares at $20.25
and 1,000 shares at $22.50 87 576 - - 109 - 772
Change in unrealized gain/
loss on securities
available for sale
portfolio, net of tax - - - 9,613 - - 9,613
Cash Dividends Declared
($0.87) - - (4,048) - - - (4,048)
Balance, December 31, 1995 $4,883 $49,427 $59,464 $9 $(1,950) - $111,833
===========================================================================================
</TABLE>
See notes to consolidated financial statements.
Vermont Financial Services Corp.
Consolidated Statements of Cash Flow
(Dollars in thousands)
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 14,897 $ 11,868 $ 7,231
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 3,900 4,000 5,053
Provision for depreciation 3,233 2,747 2,711
Net amortization on investment
securities 670 885 740
Deferred income taxes 307 239 342
Net gain on sale of loans (637) (362) (3,146)
Security gains, net (79) (56) (2,100)
Proceeds from sales of loans 37,547 90,097 190,104
Loans originated for sale (37,192) (80,047) (187,440)
Net loss on sale of OREO 798 526 3,966
Decrease (increase) in other assets 24 (3,233) 846
Increase in other liabilities 1,007 768 1,257
NET CASH PROVIDED BY OPERATING
ACTIVITIES 24,475 27,432 19,564
INVESTING ACTIVITIES
Proceeds from sales of securities 18,598 28,097 58,436
Proceeds from maturities of
securities 21,694 43,933 45,779
Purchase of securities (102,135) (82,703) (136,235)
Proceeds from sale of OREO 4,469 7,000 15,241
Purchase of mortgage loans - (9,963) -
Net decrease (increase) in loans 9,183 (45,664) (37,030)
Purchase of premises and
equipment (2,301) (2,056) (3,704)
NET CASH USED BY INVESTING
ACTIVITIES (50,492) (61,356) (57,513)
FINANCING ACTIVITIES
Net increase in deposits 21,088 45,287 25,701
Net (decrease) increase in
other borrowings (2,223) 1,835 (1,047)
Issuance of common stock 914 456 315
Cash dividends (4,048) (2,425) (1,164)
NET CASH PROVIDED BY FINANCING
ACTIVITIES 15,731 45,153 23,805
(DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (10,286) 11,229 (14,144)
Cash and Cash equivalents at
beginning of year 73,107 61,878 76,022
CASH AND CASH EQUIVALENTS AT
END OF YEAR $62,821 $73,107 $61,878
====== ====== ======
</TABLE>
Non-monetary Transactions:
Transfer of loans to OREO for the years ended December 31, 1995, 1994
and 1993 totaled $3,757, $7,335 and $4,586, 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 descriptionof
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 trans-
actions 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.
Securities that may be sold as part of the Company's
asset/liability or liquidity management or in response to or in anti-
cipation 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 share-
holders' 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.
The Company values impaired loans and recognizes related income in
accordance with Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan" and as amended by SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recog-
nition and Disclosure".
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 deprec-
iation 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, manage-
ment estimates the value of the Company's intangible assets, taking into
consideration any events and circumstances which might have diminished
such value.
The Company has 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 lia-
bilities and assets are determined based on the difference between the fi-
nancial 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.
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 origi-
nation 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.
The Company has adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" which requires 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
shares. Although management does not know the final outcome of the dispo-
sition 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>
<CAPTION>
Five months ended May 31, 1994 VFSC WMBS Combined
(unaudited)
<S> <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
</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, 1995 and 1994 follows:
December 31,
1995 1994
Fair Amortized Fair Amortized
Value Cost Value Cost
<TABLE>
<CAPTION> <C> <C> <C> <C>
Classification and Maturity:
U. S. Treasury Securities:
Within 1 year $ 6,064 $ 6,045 $ - $ -
1-5 years 26,268 25,890 18,802 19,870
5-10 years - - 2,829 3,184
Total 32,332 31,935 21,631 23,054
Obligations of Other U. S.
Government Agencies:
Within 1 year - - - -
1-5 years 65,770 65,977 28,177 30,468
5-10 years 47,771 48,028 50,007 56,253
Total 113,541 114,005 78,184 86,721
Obligations of States and
Political Subdivisions:
Within 1 year - - 876 867
1-5 years 1,316 1,302 2,823 2,825
5-10 years 5,427 5,372 4,539 4,933
Over 10 years 3,600 3,641 - -
Total 10,343 10,315 8,238 8,625
Corporate Securities:
Within 1 year 509 503 500 500
1-5 years 508 500 989 1,008
Over 10 years 15 15 60 60
Total 1,032 1,018 1,549 1,568
Mortgage-backed Securities
with Original Average Life:
Within 1 year 1,602 1,591 1,526 1,530
1-5 years 67,011 67,010 40,579 43,863
5-10 years 5,569 5,561 6,924 7,677
Over 10 years 1,570 1,603 1,639 1,766
Total 75,752 75,765 50,668 54,836
Marketable Equity Securities 11,787 11,735 11,960 11,977
Money Market Overnight
Investments:
Within 1 year 4,895 4,895 1,635 1,635
Total Securities $249,682 $249,668 $173,865 $188,416
======= ======= ======= =======
</TABLE>
December 31,
1995 1994
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Classification Gains Losses Gains Losses
<TABLE>
<CAPTION> <C> <C> <C> <C>
U.S. Treasury Securities $ 458 $ 61 $ 1 $ 1,424
Obligations of Other U.S.
Government Agencies 480 944 0 8,537
Obligations of States and
Political Subdivisions 91 63 40 427
Corporate Securities 14 0 0 19
Mortgage-backed Securities 337 350 1 4,169
Marketable Equity Securities 54 2 158 175
Total $1,434 $1,420 $200 $14,751
===== ===== === ======
</TABLE>
Proceeds from sales of securities available for sale during 1995,
1994 and 1993 were $18,598, $28,097 and $58,436, respectively.
Gross gains of $124, $625 and $2,100 were realized on those sales in
1995, 1994 and 1993, respectively. Gross losses of $45, $569 and $0 were
realized in the respective periods.
Securities with a book value of $90,723 as of December 31, 1995 and
$80,713 as of December 31, 1994 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:
December 31,
1995 1994
Commercial $170,162 $207,299
Real Estate:
Residential 415,468 389,033
Commercial 182,233 186,185
Construction 24,816 25,033
Total Real Estate 622,517 600,251
Consumer 100,791 103,953
Total loans, net of
unearned income $893,470 $911,503
======= =======
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, 1995 the amount of loans outstanding to directors,
executive officers, principal holders of equity securities or to any of
their associates totaled $7,447.
The following table summarizes the related party loan activity for
1995:
Balance at beginning of year $7,639
Additions 486
Repayments (678)
-------
Balance at end of year $7,447
=====
Mortgage Banking Activities
During 1995 the Company originated $32,573 of mortgage loans for sale
in the secondary market and sold $35,784. As of December 31, 1995, $3,080
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 $2,590 and $780 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
$290 for 1995, $187 for 1994 and $2,704 for 1993. At December 31, 1995 and
1994 the Company's serviced mortgage portfolio totaled $420,573 and
$459,172, respectively. Loan servicing income was $1,910, $1,775 and $2,013
for 1995, 1994 and 1993, respectively. The following schedule represents
excess servicing right activity for the past two years:
1995 1994
Balance, January 1 $3,279 $3,799
Additions 11 202
Amortization (359) (722)
Sales (218) 0
------ ------
Balance, December 31 $2,713 $3,279
====== =====
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:
1995 1994 1993
Balance,
January 1 $16,236 $17,815 $21,047
Provision for
Loan Losses 3,900 4,000 5,053
Loans
Charged Off (6,613) (6,785) (9,595)
Recoveries of
Loans Previously
Charged Off 1,238 1,206 1,310
Balance, ------- ------- -------
December 31 $14,761 $16,236 $17,815
====== ====== ======
Transactions in the OREO valuation reserve are summarized as follows:
1995 1994
Balance, January 1 $ 710 $ 490
Provisions for OREO losses 503 571
OREO Charged Off (1,166) (351)
Balance, December 31 $ 47 $ 710
== ===
Proceeds from sales of OREO were $4,469 in 1995 and $7,000 in 1994.
Loans associated with these sales were $1,468 and $2,275, 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 1995 two loans totaling $106 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:
December 31,
1995 1994
Land $ 2,504 $ 2,394
Premises 20,841 20,240
Equipment 14,195 13,352
Leasehold Improvements 1,768 1,745
Total 39,308 37,731
Accumulated Depreciation and
Amortization (18,942) (16,433)
Premises and Equipment, Net $ 20,366 $ 21,298
====== ======
7. Deposits
Time certificates of deposit outstanding in denominations of $100 or
more aggregated to $37,958 and $27,932 at December 31, 1995 and 1994,
respectively. Total interest on these deposits amounted to $1,766, $1,123,
and $1,669 for the years ended December 31, 1995, 1994 and 1993,
respectively.
The Company paid $36,945, $29,042 and $28,363 in interest on deposits
during 1995, 1994 and 1993, 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, 1995 the Company owned $7,481 of stock in the Federal
Home Loan Bank ("FHLB") which provided borrowing capacity up to $226 mill-
ion from the FHLB at maturities, rates and terms determined by the FHLB.
December 31,
1995 1994 1993
Federal funds purchased $ 450 $ 350 $ 350
Securities and loans sold under
agreements to repurchase 79,323 70,813 85,352
FHLB and other borrowings 11,892 22,725 6,351
Total $ 91,665 $ 93,888 $ 92,053
====== ====== ======
Average amount outstanding
during the year $ 95,034 $102,963 $ 88,286
Maximum amount outstanding at
any month end $112,370 $125,097 $107,716
Weighted average interest rate
at year end 4.85% 4.66% 3.28%
Weighted average interest rate
during the year 5.21% 4.03% 3.53%
Long-term borrowings from the FHLB(included in the above):
December 31,
1995 1994 1993
Maturing August 19, 1994 @ 4.12% $ 0 $ 0 $5,000
Maturing August 1, 2011 @ 5.00% 560 560 560
Maturing April 2, 2013 @ 5.50% 586 586 586
Maturing October 29, 2013 @ 5.50% 32 32 32
Maturing May 6, 2014 @ 7.61% 553 566 0
Maturing July 15, 1998 @ 6.03% 10,000 0 0
9. Fair Market Value of Financial Instruments
Cash and Cash Equivalents
Cash and cash equivalents had a carrying value of $62,821 and
$73,107 at December 31, 1995 and 1994, respectively. Due to their short
term and very liquid nature the carrying value is considered to also rep-
resent 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. Secur-
ities available for sale had a total fair market value of $249,682 and
$173,865 at December 31, 1995 and 1994, respectively. This compares to
amortized cost values of $249,668 at December 31, 1995 and $188,416 at
December 31, 1994.
Loans
At December 31, 1995 and 1994 total loans, net of allowance for loan
losses, had a carrying value of $878,709 and $895,267, respectively. The
fair value of these loans was $900,652 and $901,372, respectively. For
certain homogeneous categories of loans, such as some residential mort-
gages, 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, 1995 and 1994 total deposits had carrying values of
$1,033,957 and $1,012,869 and fair values of $1,032,796 and $1,010,215,
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 $91,665 and $93,888 at
December 31, 1995 and 1994, respectively. These are also reasonable esti-
mates 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. Impaired Loans
Effective January 1, 1995, the Company adopted, prospectively, State-
ment of Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan" as amended by SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan-Income Recognition and Disclosure."
These standards require that loans be classified and accounted for as
impaired loans when it is probable that the Company will be unable to coll-
ect all principal and interest due on a loan in accordance with the loan's
original contractual terms or will collect them in a time frame which
reduces the present value of the expected cash flows from the repayment of
the loan. For purposes of applying the standards, impaired loans have been
defined as all nonaccrual loans and commercial classified assets in excess
of $250,000.
Impaired loans are valued based on the fair value of the related
collateral in the case of a collateral-dependent loan and, for all other
impaired loans, based on the present value of expected future cash flows,
using the interest rate in effect at the time the loan became impaired.
Impairment exists when the recorded investment in a loan exceeds the value
of the loan measured using the above-mentioned techniques. Such impairment
is recognized as a valuation reserve, which is included as a part of the
Company's overall reserve for credit losses.
Loan losses on impaired loans are charged against the allowance for
loan and lease losses when management determines the ultimate collect-
ibility of principal and interest has changed from doubtful to unlikely.
The Company recognizes interest income on impaired loans consistent
with its nonaccrual policy. When loans are placed on nonaccrual status,
the related interest receivable is reversed against current period interest
income. Interest payments received on nonaccrual loans are applied as a
reduction of the principal. For loans not in nonaccrual status, the
Company recognizes principal and interest, in accordance with the original
contractual terms.
Adoption of the standards did not have a material effect on the
Corporation's financial position or results of operations and did not
result in any additional provision for credit losses as of January 1,
1995. At December 31, 1995, loans for which impairment has been
recognized in accordance with SFAS No. 114 totaled $36.3 million, of
which $33.7 million related to loans with no specific valuation reserve
and $2.6 million related to loans with a specific valuation reserve of
$0.9 million.
11. 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, 1995. Certain operating
leases contain various options to renew.
Year Ending December 31:
1995 $ 513
1996 381
1997 303
1998 258
1999 218
Later Years 1,946
------
Total Minimum Payments Required $3,619
=====
Operating expenses include approximately $943, $988, and $1,228 in
1995, 1994 and 1993, respectively, for rentals of premises and equipment
used for banking purposes.
Derivative Financial Instruments
Transactions involving derivative financial instruments during the
fiscal years 1995, 1994 and 1993 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, 1995 were as follows:
Home equity lines $58,484
Credit card lines 83,355
Commercial real estate 18,385
Other unused commitments 88,816
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 certifi-
cates 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, 1995, the Company had outstanding commitments for
the following: financial standby letters of credit - $9,327, performance
standby letters of credit - $1,618 and commercial and similar letters of
credit - $6,308.
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, 1995 the
Company's reserve requirement of $14,850 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.
12. Income Taxes
The provisions for income tax expense (benefit) included in the
statements of income are as follows:
Year Ended December 31,
1995 1994 1993
Currently Payable:
Federal $5,992 $4,334 $2,491
State 665 586 553
Deferred:
Federal 569 242 352
State 15 (3) (10)
$7,241 $5,159 $3,386
===== ===== =====
The approximate tax effect of principal temporary differences giving
rise to deferred taxes are summarized as follows:
Year Ended December 31,
1995 1994 1993
Deferred compensation
and fees $ 40 $(242) $ (177)
Provision for possible loan
losses 612 356 1,269
Accretion on investments 14 31 (263)
Depreciation (22) 154 (88)
Pension (133) (105) (52)
Intangibles (43) (133) (50)
Other 116 178 (297)
Total deferred taxes $ 584 $ 239 $ 342
=== === ===
The Company made income tax payments of $6,425, $4,623 and $2,833
during 1995, 1994 and 1993, respectively.
The components of the net deferred tax asset as of December 31 are as
follows:
1995 1994
Deferred tax assets:
Pension $ 661 $ 528
Deferred compensation and fees 1,760 1,800
Provision for possible loan losses 5,016 5,628
Unrealized loss on securities - 4,947
Other 361 33
Total gross deferred tax assets 7,798 12,936
Deferred tax liabilities:
Unearned income 455 -
Depreciation 1,039 1,061
Unrealized gain on securities 5 -
Intangibles 466 509
Total gross deferred tax liabilities 1,965 1,570
----- ------
Deferred tax asset, net $5,833 $11,366
===== ======
No valuation allowance is required as there is sufficient taxable
income in the carry back period and through future operating results to
be able to fully realize the deferred tax asset.
The provision for income taxes is less than the amount computed by
applying the applicable federal income tax rate to income before taxes.
The reasons therefore are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
% of % of % of
Pre Tax Pre Tax Pre Tax
Amount Income Amount Income Amount Income
<S> <C> <C> <C> <C> <C> <C>
Federal Statutory Rate $7,748 35.0% $5,959 35.0% $3,610 34.0%
Decreases in Taxes
Resulting From:
Tax exempt interest (841) (3.8) (782) (4.6) (509) (4.8)
State taxes, net
of federal benefit 444 2.0 378 2.2 373 3.5
Life insurance proceeds - - (238) (1.4) - -
Other, net (110) (0.5) (158) (0.9) (88) (0.8)
----- ------ ------
Total $7,241 32.7% $5,159 30.3% $3,386 31.9%
==========================================
</TABLE>
13. Employee Benefit Plans
The Company's two subsidiaries each have separate defined benefit
pension plans.
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.
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 high-
est 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 plans' combined funded status and
amounts recognized in the Company's consolidated balance sheets as of
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $12,171 and $9,757 for 1995 and
1994, respectively. $ 12,266 $ 9,968
====== =====
Projected benefit obligation ("PBO") for service
rendered to date $(16,846) $(13,667)
Plan assets at fair value, comprised of guaranteed
insurance contracts, mutual, real estate and
money market funds and listed stocks and bonds 15,737 13,203
PBO in excess of plan assets (1,109) (464)
Unrecognized net loss from past experience different
from that assumed and effects of changes in
assumptions 479 293
Unrecognized prior service cost (52) (56)
Unrecognized net asset at period end being
recognized over 18.64 years (1,020) (1,137)
------ -----
Accrued pension cost $ (1,702) $ (1,364)
======= ======
1995 1994 1993
Net pension cost included the
following components:
Service cost - benefits earned $ 652 $ 833 $ 770
during the period
Interest cost on PBO 1,141 1,052 984
Actual return on plan assets (2,974) (166) (1,152)
Amortization of net transition asset (119) (119) (119)
Net amortization and deferral of losses 1,864 (874) 206
----- ----- -----
Net pension cost $ 564 $ 726 $ 689
=== === ===
</TABLE>
Significant assumptions used in actuarial computations were:
1995 1994
Discount rate 7.00% - 7.25% 7.00% - 8.00%
Rate of increase in compensation levels 5.00% - 6.00% 5.00% - 6.00%
Long-term rate of return on assets 8.00% - 8.50% 7.00% - 8.50%
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 was
approximately $500 for 1995, $250 for 1994, and $0 for 1993. 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 assoc-
iated expense was $140 for 1995, $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 partici-
pating 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 cover age 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:
1995 1994
Accumulated postretirement benefit obligation:
Retired employees $ 302 $ 230
Active employees 161 140
Total $ 463 $ 370
=== ===
Plan assets at fair value $- $-
=== ===
Unfunded accumulated benefit obligation in excess
of plan assets $(463) $(370)
Unrecognized net (gain) 96 (12)
Unrecognized transition obligation 194 205
(Accrued) postretirement medical and life
benefit cost $(173) $(177)
===== =====
Net periodic postretirement benefit cost included the following components:
1995 1994
Service cost - benefits attributed to service during
the period $ 9 $ 16
Interest cost 34 29
Recognition of transition obligation 11 12
Special termination benefits - 162
Net periodic postretirement cost $54 $219
== ===
For measurement purposes, an 8% annual rate of increase in the per
capita net employer share of covered health care benefits was assumed for
1995. 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, increas-
ing 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, 1995, as well as the total of the service cost
and interest cost components of net periodic postretirement cost for 1995
by less than 2%. The weighted average discount rate used in determining
the accumulated postretirement benefit obligation was 7.25% in 1995 and
8.5% in 1994. As the plan is unfunded, no assumption was needed as to
the long term rate of return on assets.
14. Stockholders' Equity
The Company had certain common stock equivalents outstanding from
1993 through 1995. 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:
1995 1994 1993
Average primary shares outstanding 4,807,553 4,735,480 4,710,228
Average fully diluted shares outstanding 4,812,831 4,735,753 4,711,072
The per share amounts of cash dividends paid on an equivalent share
basis were $0.87 for 1995, $0.54 for 1994 and $0.24 for 1993. At December
31, 1995, the Banks had available $30,537 for payment of dividends to the
Company, under regulatory guidelines.
At December 31, 1995, there were 24,566 and 79,793 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 Pur-
chase 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 unex-
ercised 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: 4,000 have been exercised to date. On August 31, 1994 stock-
holders 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, 6,500 have been issued at an exercise price of $20.25 per share
and 59,800 have been issued at an exercise price of $22.50 per share under
the 1994 plan and are exercisable for a ten year period; 1,500 have been
exercised to date.
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:
Shares Exercise Shares Exercise
under option price under option price
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 28,473 7.50 1,050 10.25
Outstanding December 31, 1994 89,487 7.50 5,850 10.25
Granted - - - -
Exercised 83,967 7.50 3,125 10.25
Outstanding December 31, 1995 5,520 $7.50 2,725 $10.25
====== ==== ===== =====
15. Parent Company Financial Information
Condensed financial information for Vermont Financial Services Corp.
(parent company only) is as follows:
VERMONT FINANCIAL SERVICES CORP.
CONDENSED BALANCE SHEETS
December 31,
1995 1994
ASSETS
Cash $503 $125
Securities 4,722 3,747
Other Assets 127 128
Investment in Bank Subsidiaries 107,622 86,732
Total Assets $112,974 $90,732
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other Liabilities $1,141 $275
Total Liabilities 1,141 275
Total Stockholders' Equity 111,833 90,457
Total Liabilities and
Stockholders' Equity $112,974 $90,732
======= ======
CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
1995 1994 1993
INCOME
Income on Securities $ 316 $ 194 $ 251
Other Income 3,615 275 347
Total Income 3,931 469 598
EXPENSES
Organizational Expenses 36 612 261
Other 515 283 262
Total Operating
Expenses 551 895 523
Income (Loss) Before Tax
Benefit and Equity in
Undistributed Income
from Bank Subsidiaries 3,380 (426) 75
Applicable Income Tax
(Benefit) (195) (131) (104)
Income (Loss) Before Equity
in Undistributed Income of
Bank Subsidiaries 3,575 (295) 179
Equity in Undistributed
Income of Bank
Subsidiaries 11,322 12,163 7,052
Net Income $14,897 $11,868 $7,231
====== ======= ======
STATEMENTS OF CASH FLOW
Year Ended December 31,
1995 1994 1993
OPERATING ACTIVITIES
Net Income $ 14,897 $ 11,868 $ 7,231
Adjustments to reconcile
income to net cash provided
by operating activities:
Amortization and accre-
tion on investment
securities 2 5 4
Investment security (gains)
losses (121) 9 -
(Increase) Decrease in
other assets (28) (10) 595
Increase (Decrease) in
other liabilities 866 34 (273)
Equity in undistributed
net income of bank sub-
sidiaries (11,322) (12,163) (7,052)
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 4,294 (257) 505
INVESTING ACTIVITIES
Investment in bank
subsidiaries - - (30)
Proceeds from sales of
securities 1,039 3,183 248
Proceeds from maturities of
securities 500 750 744
Purchase of securities (2,321) (3,489) (2)
NET CASH (USED) PROVIDED BY
INVESTING ACTIVITIES (782) 444 960
FINANCING ACTIVITIES
Issuance of common stock 914 456 315
Cash dividends (4,048) (2,425) (1,164)
NET CASH USED BY FINANCING
ACTIVITIES (3,134) (1,969) (849)
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 378 (1,782) 616
Cash and cash equivalents
at beginning of year 125 1,907 1,291
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 503 $ 125 $ 1,907
==============================
16. Supplemental Financial Data
Selected Quarterly Data (unaudited)
The following is a summary of selected consolidated quarterly data of the
Company for the periods presented:
1995
Fourth Third Second First
Quarter Quarter Quarter Quarter
Interest income $24,842 $24,540 $24,012 $23,063
Interest expense 11,136 10,832 10,373 9,628
Net interest income 13,706 13,708 13,639 13,435
Provision for possible loan losses 900 1,000 1,000 1,000
Other operating income 4,585 4,411 4,446 4,107
Other operating expense 11,452 11,044 11,659 11,844
Income before income taxes 5,939 6,075 5,426 4,698
Applicable income taxes 1,939 2,049 1,727 1,526
Net income $4,000 $4,026 $3,699 $3,172
===== ===== ===== =====
Per share data:
Primary and fully diluted
Net income $0.83 $0.83 $0.77 $0.67
==== ==== ==== ====
1994
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
==== ==== ==== ====
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 pre-
pared 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, 1995
and 1994, and the related consolidated statements of income, changes in
stockholders' equity and cash flow for the years 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 audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial state-
ments are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Vermont Financial Services Corp. and subsidiaries as of
December 31, 1995 and 1994, and the results of their operations and their
cash flow for the years 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 the year ended December 31, 1993, prior to their
restatement for the June 14, 1994 pooling of interests with West Mass Bank-
shares, Inc. The contribution of Vermont Financial Services Corp. and sub-
sidiary to total assets, net interest income and net income represented
approximately 81%, 82% and 74%, respectively for 1993, 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 state-
ments of income, changes in stockholders' equity and cash flow for the year
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 13 to the consolidated financial state-
ments, 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.
Springfield, Massachusetts COOPERS & LYBRAND
January 18, 1996
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 and Age Office Office
John D. Hashagen, Jr. (54)...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 (47)....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 (42)......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 (50)......Executive Vice President of the Company 1992
Executive Vice President of VNB 1988
Senior Vice President of VNB 1984
W. Bruce Fenn (54)........Executive Vice President of VNB 1988
Senior Vice President and Senior Loan 1987
Officer of VNB
Kenneth R. Cole (49)......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 directors is the
Company's address except as otherwise noted. No family relationship
exists between any director.
Name, Age and Principal Year First
Occupation or Employment and Became
Offices held with the Company(1) Director
Anthony F. Abatiell (56) . . . . . . . . . .
Attorney, Partner, Abatiell, Wysolmerski & 1982
Valerio Law Offices, Rutland, VT
Zane V. Akins (55) . . . . . . . . . . . . .
President, Akins & Associates, 1987
Brattleboro, VT
Charles A. Cairns (54) . . . . . . . . . . .
President, Champlain Oil Co., Inc. and 1986
Coco Mart, Inc., South Burlington, VT
William P. Cody (42) . . . . . . . . . . . .
General Manager, Cody Chevrolet, Inc., 1996
Montpelier, VT
Allyn W. Coombs (61) . . . . . . . . . . . .
President and Treasurer of Allyn W. Coombs, 1994
Inc. (Real Estate Development & Management),
Amherst, MA
Beverly G. Davidson (64) . . . . . . . . . .
Secretary, Treasurer of RCAS, Inc., 1980
(Vermont State Fair), Rutland, VT
Philip M. Drumheller (42) . . . . . . . . .
President, The Lane Press, Inc., Burlington, 1995
VT
James E. Griffin (68) . . . . . . . . . . .
President, J. R. Resources, Inc. 1972
(Business Consultants), Rutland, VT
John D. Hashagen, Jr. (54) . . . . . . . . .
President & Chief Executive Officer of 1987
Vermont Financial Services Corp.,
Brattleboro; President & Chief Executive
Officer, Vermont National Bank,
Brattleboro, VT
Francis L. Lemay (63) . . . . . . . . . . .
Chairman, United Savings Bank, Greenfield, MA 1994
Kimball E. Mann (61) . . . . . . . . . . . .
President, J. E. Mann, Inc., (Women's 1969
Department Store), Brattleboro, VT
Stephan A. Morse (49). . . . . . . . . . . .
President and CEO, The Windham Foundation, 1986
Inc., Grafton, VT
Donald E. O'Brien (70) . . . . . . . . . . .
Attorney, Burlington, VT 1978
Roger M. Pike (55) . . . . . . . . . . . . .
Vice President, Kinney, Pike, Bell & 1980
Conner, Inc. (Insurance), Rutland, VT
Mark W. Richards (50) . . . . . . . . . . .
President, Richards, Gates, Hoffman 1988
& Clay (Insurance), Brattleboro, VT
Item 11 - Executive Compensation
The following tables contain a three-year summary of the total comp-
ensation paid to the CEO of the Company and the other five executive
officers.
I. SUMMARY COMPENSATION 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) $ # $ $
John D. Hashagen 1995 $220,000 $66,000 N/A N/A 14,000 sh N/A $14,528(2)(5)
President and 1994 200,000 30,000 N/A N/A 12,300 N/A 7,298(2)(4)
Chief Executive 1993 184,000 7,360 $25,785 N/A 5,000 N/A 2,249(2)
Officer
Kenneth R. Cole 1995 $109,727 $12,540 N/A N/A N/A N/A $611(2)
UB President and 1994 88,009 11,000 N/A N/A N/A N/A N/A
Chief Exec. Off. 1993 80,538 20,000 N/A N/A N/A N/A $ 3,763(3)
Richard O. Madden1995 $112,000 $33,600 N/A N/A 7,100 sh N/A $ 6,720(2)
Exec. Vice Pres.,1994 108,000 16,200 N/A N/A 10,600 N/A 4,111(2)
Treas., Secretary1993 99,209 4,040 12,760 N/A N/A N/A 1,488(2)
Robert G. Soucy 1995 $120,000 $36,000 N/A N/A 7,600 sh N/A $ 7,306(2)(5)
Exec. Vice Pres. 1994 115,000 17,250 N/A N/A 7,100 N/A $ 3,620(2)
VNB Senior 1993 110,000 4,400 15,732 N/A 4,000 N/A 1,100(2)
Operating Officer
Louis J. Dunham 1995 $98,000 $29,400 N/A N/A 6,200 sh N/A $5,961(2)
VNB Exec. V.P. 1994 94,000 14,100 N/A N/A 5,700 N/A 3,550(2)
and Senior Cr. 1993 85,000 1,700 5,568 N/A 3,000 N/A 638(2)
Officer
W. Bruce Fenn 1995 $111,077 $33,000 N/A N/A 6,900 sh N/A $ 7,878(2)(5)
VNB Exec. V.P. 1994 108,000 16,200 N/A N/A 6,600 N/A 4,065(2)
and Sr. Banking 1993 105,000 2,100 17,717 N/A 4,000 N/A 1,575(2)
Officer
(1) In December, 1993 the discount rate used to compute the liability
under the officers' deferred compensation plan (See "Deferred Comp-
ensation Agreements" following) was reduced from 9% to 7-1/2%. The
associated expenses attributable to Messrs.. Hashagen, Madden,
Soucy, Dunham and Fenn due to this change were $19,597, $10,799,
$12,211, $5,568 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 Sharing Plan. No Profit Sharing Plan cont-
ribution was made in 1993.
(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.
(5) Includes discounts received on purchase of common stock under the
Company's Employee Stock Purchase Plan of $2,754 for Mr. Hashagen,
$1,120 for Mr. Fenn and $452 for Mr. Soucy.
II. OPTION/SAR GRANTS TABLE
Option/SAR Grants in Last Fiscal Year
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation
Individual Grants for Option Term (1)
(a) (b) (c) (d) (e) (f) (g)
% of
Total
Options/
SARs
# of Granted to Exercise
Securities Employees or base Expira-
Underlying in Fiscal Price tion
Name Options Granted Year ($/Sh) Date 5%($) 10%($)
John D.
Hashagen 14,000 26.5% $22.50 5/10/05 $198,102 $502,029
Kenneth R.
Cole 0 0 N/A N/A N/A N/A
Richard O.
Madden 7,100 13.4 22.50 5/10/05 100,466 $254,600
Robert G.
Soucy 7,600 14.4 22.50 5/10/05 107,541 272,530
Louis J.
Dunham 6,200 11.7 22.50 5/10/05 87,731 222,327
W. Bruce
Fenn 6,900 13.1 22.50 5/10/05 97,636 247,429
(1) The assumed growth rates in price in the Company's stock are not
necessarily indicative of actual performance that may be expected.
III. OPTION EXERCISES AND YEAR-END VALUE TABLE
Aggregated Option Exercises in Last Fiscal Year, and FY-End Option Value
(a) (b) (c) (d) (e)
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options at
Options at FY-End ($)
FY-End (#)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable(2)
John D.
Hashagen N/A N/A 31,300/0 $438,106/$0
Kenneth R.
Cole 13,800 $191,475(1) 0/0 $0/$0
Richard O.
Madden N/A N/A 17,700/0 $250,606/$0
Robert G.
Soucy N/A N/A 18,700/0 $264,419/$0
Louis P.
Dunham N/A N/A 14,900/0 $210,181/$0
W. Bruce
Fenn N/A N/A 17,500/0 $248,194/$0
(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, 1995.
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 circum-
stances. 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. Cole 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 anti-
cipated that Mr. Cole will receive an annual supplemental retirement
benefit of $46,239 at age 65. UB has purchased a split-dollar life
insurance policy which will provide this benefit to Mr. Cole.
Management Continuity Agreements
The Company and VNB have entered into agreements with VNB's five
executive officers, Messrs. Hashagen, Madden, Soucy, Fenn and Dunham
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 achange of control if the officer voluntarily term-
inates his employment with both the Company and VNB, unless such term-
ination 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 pay-
ments would be $1,430,000. These severance payments are subject to up to
a 50% reduction if the officer works for or participates in the manage-
ment, 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 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 as Vice President of UB. Under these agreements, Mr. Cole
was to receive a base salary of $82,500, Mr. Neill a base salary of
$76,300 and Mr. Phillips a base salary of $59,700, all subject to
annual increases. Each agreement is to expire May, 1997. 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 ended on January 31, 1995 and was renewed. These agreements are
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 severance payments of 200% of base salary at the
time of termination if terminated under certain circumstances after a
change of control of the Company or UB.
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 begin-
ning 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 substant-
ially 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 con-
tinuous 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 term-
ination of employment. During 1995, the Company made a contribution of
approximately $500,000 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,
1996.
Estimated Annual Benefits at Retirement
by Specified Remuneration and
Years of Service Classification
Final Average Years of Service
Compensation 5 10 15 20 25
$ 20,000 $ 1,480 $ 2,959 $ 4,439 $ 5,918 $ 7,398
40,000 3,430 6,859 10,289 13,718 17,148
60,000 5,702 11,405 17,107 22,810 28,512
80,000 8,102 16,205 24,307 32,410 40,512
100,000 10,502 21,005 31,507 42,010 52,512
120,000 12,902 25,805 38,707 51,610 64,512
140,000 15,302 30,605 45,907 61,210 76,512
160,000 * 17,702 35,405 53,107 70,810 88,512
180,000 * 20,102 40,205 60,307 80,410 100,512
200,000 * 22,502 45,005 67,507 90,010 112,512
220,000 * 24,902 49,805 74,707 99,610 124,512 *
240,000 * 27,302 54,605 81,907 109,210 136,512 *
260,000 * 29,702 59,405 89,107 118,810 148,512 *
* Under current regulations of the Internal Revenue Code, the
maximum annual benefit payable from a defined benefit plan during 1996 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 appro-
priate legal documents governing the Plan.
UB provides a retirement plan for all eligible employees through
the Savings Bank Employees Retirement Association ("SBERA"), an unin-
corporated 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.
The following table illustrates annual pension benefits for retire-
ment 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.
Annual Pension Benefit Based on Years of Service and age 65 Retirement
Average Compensation 10 years 15 years 20 years 25 years
$ 20,000 $ 2,500 $ 3,750 $ 5,000 $ 6,250
40,000 5,845 8,767 11,690 14,612
60,000 9,545 14,317 19,090 23,882
80,000 13,245 19,867 26,490 33,112
100,000 16,945 25,417 33,890 42,362
120,000 20,645 30,967 41,290 51,612
140,000 24,345 36,517 48,690 60,862
* 150,000 26,105 39,292 52,390 65,487
* Federal law does not permit defined benefit pension plans to
recognize compensation in excess of $150,000 for plan years be-
ginning in 1994 (11/01/94 for SBERA).
As of December 31, 1995 Messrs. Cole and Neill had 10 and 12 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 $5,000 and, in addition, a $500 fee for each
regular monthly Board of Directors' meeting attended, a $400 fee for the
first meeting of a committee of the Board he or she attends on any
particular day and a $300 fee for each subsequent meeting of a committee
of the Board he or she attends on any such day. In addition, the
Chairman of the Board receives an annual retainer of $5,000 and each
committee chairperson receives an annual retainer of $500.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
As of March 1, 1996 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, 1995 with the Securities and
Exchange Commission.
Amount of
Beneficial Percent
Name and Address Ownership of Class
Vermont National Bank . . . . . . . . . . . 297,201 6.2% (1)
Trust Department
100 Main Street
Brattleboro, VT 05301
David L. Babson & Company, Inc. . . . . . . 248,200 5.2% (2)
One Memorial Drive
Cambridge, MA 02142-1300
(1) Includes sole voting power for 16,026 shares, shared voting power
for 281,175 shares, sole dispositive power for 206,011 shares and
shared dispositive power for 91,190 shares.
(2) Includes sole voting power for 155,600 shares, shared voting power
for 92,600 shares and sole dispositive power for 248,200 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 March 1, 1996, 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.
Amount and Percent
Nature of of VFSC
Beneficial Common
Ownership Stock
Anthony F. Abatiell (56) . . . . . . . . . . 60,169(1) 1.26%
Zane V. Akins (55) . . . . . . . . . . . . . 3,399(2) 0.07%
Charles A. Cairns (54) . . . . . . . . . . . 6,189(3) 0.13%
William P. Cody (42) . . . . . . . . . . . . 100(4) 0.00%
Allyn W. Coombs (61) . . . . . . . . . . . . 12,370(5) 0.26%
Beverly G. Davidson (64) . . . . . . . . . . 4,214(6) 0.09%
Philip M. Drumheller (42) . . . . . . . . . 150(7) 0.00%
James E. Griffin (68) . . . . . . . . . . . 4,683(8) 0.10%
John D. Hashagen, Jr. (54) . . . . . . . . . 46,529(9) 0.97%
Francis L. Lemay (63) . . . . . . . . . . . 106,487(10) 2.22%
Kimball E. Mann (61) . . . . . . . . . . . . 13,013(11) 0.27%
Stephan A. Morse (49). . . . . . . . . . . . 7,248(12) 0.15%
Donald E. O'Brien (70) . . . . . . . . . . . 6,771(13) 0.14%
Roger M. Pike (55) . . . . . . . . . . . . . 8,924(14) 0.19%
Mark W. Richards (50) . . . . . . . . . . . 28,206(15) 0.59%
Kenneth R. Cole (49) . . . . . . . . . . . . 18,204(16) 0.38%
Louis J. Dunham (41) . . . . . . . . . . . . 19,416(17) 0.41%
W. Bruce Fenn (54) . . . . . . . . . . . . . 26,132(18) 0.55%
Richard O. Madden (47) . . . . . . . . . . . 20,113(19) 0.42%
Robert G. Soucy (50) . . . . . . . . . . . . 27,951(20) 0.58%
(1) Includes 58,169 shares held in a custodial capacity in VNB's trust
department in which Mr. Abatiell has sole voting and investment
powers. Also includes options to acquire 2,000 additional shares,
exercisable within sixty (60) days, pursuant to the Directors'
Non-Qualified Stock Option Plans.
(2) Includes options to acquire 2,000 shares, exercisable within sixty
(60) days, pursuant to the Directors' Non-Qualified Stock Option
Plans.
(3) Includes options to acquire 2,000 shares, exercisable within sixty
(60) days, pursuant to the Directors' Non-Qualified Stock Option
Plans.
(4) Mr. Cody has sole voting and investment powers on 100 shares.
(5) Includes 8,370 shares held jointly with a family member in which
Mr. Coombs shares voting and investment powers. Also includes
options to acquire 1,000 shares, exercisable within sixty (60) days,
pursuant to the Directors' Non-Qualified Stock Option Plans.
(6) Ms. Davidson shares voting and investment powers on 2,214 shares.
Includes options to acquire 2,000 shares, exercisable within sixty
(60) days, pursuant to the Directors' Non-Qualified Stock Option
Plans.
(7) Mr. Drumheller has sole voting and investment powers on 150 shares.
(8) Includes options to acquire 2,000 shares, exercisable within sixty
(60) days, pursuant to the Directors' Non-Qualified Stock Option
Plans.
(9) 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 9,494 shares held in the VNB
Profit Sharing Plan, and options to acquire 31,300 shares, exercis-
able within sixty (60) days, pursuant to the Officers' Non-Qualified
Stock Option Plans.
(10) Includes 29,100 shares held in a trust in which Mr. Lemay has sole
voting and investment powers. Also includes 30,000 shares held by a
family member in a trust in which Mr. Lemay has no voting or invest-
ment powers. Also includes options to acquire 500 shares, exercis-
able 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 and also includes options to acquire 2,000 shares,
exercisable within sixty (60) days, pursuant to the Directors'
Non-Qualified Stock Option Plans.
(12) 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 and includes options to acquire 2,000 shares,
exercisable within sixty (60) days, pursuant to the Directors'
Non-Qualified Stock Option Plans.
(13) Includes options to acquire 2,000 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 1,203
shares held by Kinney, Pike, Bell & Conner, Inc. in which Mr. Pike
shares voting and investment powers. Also includes 1,052 shares
held by a family member in which Mr. Pike has no voting power and as
to which Mr. Pike disclaims beneficial ownership and includes
options to acquire 2,000 shares, exercisable within sixty (60) days,
pursuant to the Directors' Non-Qualified Stock Option Plans.
(15) Includes 26,206 shares held jointly with family members in which Mr.
Richards shares voting and investment powers. Also includes options
to acquire 2,000 shares, exercisable within sixty (60) days,
pursuant to the Directors' Non-Qualified Stock Option Plans.
(16) Includes 14,226 shares held jointly with family members in which
Mr. Cole shares voting and investment powers. Also includes 4,070
shares in VNB's Profit Sharing Plan.
(17) Includes 4,516 shares in the VNB Profit Sharing Plan. Also
includes options to acquire 14,900 shares exercisable within sixty
(60) days pursuant to the Officers' Non-Qualified Stock Option
Plans.
(18) Includes 101 shares in which Mr. Fenn has no voting or investment
powers. Also includes 2,228 shares held jointly with a family
member in which Mr. Fenn shares voting and investment powers, 6,303
shares in the VNB Profit Sharing Plan and options to acquire 17,500
shares, exercisable within sixty (60) days pursuant to the Officers'
Non-Qualified Stock Option Plans.
(19) Includes 28 shares held jointly with a family member in which
Mr. Madden shares voting and investment powers. Also includes 2,386
shares held in the VNB Profit Sharing Plan and options to acquire
17,700 shares exercisable within sixty (60) days pursuant to the
Officers' Non-Qualified Stock Option Plans.
(20) Includes 346 shares held by a family member in which Mr. Soucy has
no voting or investment powers. Also includes 4,138 shares in the
VNB Profit Sharing Plan and options to acquire 18,700 shares,
exercisable within sixty (60) days pursuant to the Officers'
Non-Qualified Stock Option Plans.
On March 1, 1996, the directors and officers of the Company as a
group (20) had beneficial ownership of 420,268 shares of Company Common
Stock, amounting to 8.78% of the outstanding shares. This includes
options to acquire 121,600 shares, or 2.54% 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 1995. 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 1995. All out-
standing 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 1995, 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,
1995 and 1994
Consolidated Statements of Income -
For the Years Ended December 31,
1995, 1994, and 1993
Consolidated Statements of Changes in
Stockholders' Equity - For the
Years Ended December 31, 1995,
1994, and 1993
Consolidated Statements of Cash Flow
- For the Years Ended December 31,
1995, 1994 and 1993
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 agreement dated March 17, 1994 with Louis J.
Dunham is 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, 1995, 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 13, 1996 By
/s/ John D. Hashagen, Jr., President
and Chief Executive Officer
By
/s/ 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/ Director and President March 13, 1996
John D. Hashagen, Jr. (Principal Executive Officer)
/s/ Secretary & Treasurer March 13, 1996
Richard O. Madden (Principal Financial Officer)
/s/ Director March 13, 1996
Anthony F. Abatiell
/s/ Director March 13, 1996
Zane V. Akins
/s/ Director March 13, 1996
Charles A. Cairns
/s/ Director March 13, 1996
William P. Cody
/s/ Director March 13, 1996
Allyn W. Coombs
/s/ Director March 13, 1996
Beverly G. Davidson
/s/ Director March 13, 1996
Philip M. Drumheller
/s/ Director March 13, 1996
James E. Griffin
/s/ Director March 13, 1996
Francis L. Lemay
/s/ Director March 13, 1996
Kimball E. Mann
/s/ Director March 13, 1996
Stephan A. Morse
/s/ Director March 13, 1996
Donald E. O'Brien
/s/ Director March 13, 1996
Roger M. Pike
/s/ Director March 13, 1996
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
Exhibit 24
Exhibit 24
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration state-
ments 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 responsibiltiy 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 the year ended December 31, 1993 and (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, dated January 18, 1996, on our audit of the con-
solidated financial statements of Vermont Financial Services Corp. and
subsidiaries as of December 31, 1995 and 1994 and for each of the two
years in the period ended December 31, 1995, which report is included in
this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Springfield, Massachusetts
March 18, 1996
VERMONT FINANCIAL SERVICES CORP.
Proxy Solicited on Behalf of Board of Directors
The undersigned hereby appoints John D. Hashagen, Jr., Anthony F.
Abatiell and Richard O. Madden, and each of them, attorneys and proxies
with full power of substitution in each, to vote all of the stock of
Vermont Financial Services Corp. (the "Company") which the undersigned
is/are entitled to vote at the Annual Meeting of Stockholders of the
Company to be held at The Woodstock Inn, Woodstock, VT, on April 30, 1996
at 10:00 a.m. and at any and all adjournments thereof. All powers
may be exercised by a majority of said proxyholders or substitutes voting
or acting, or if only one votes and acts, by that one. Receipt of the
Company's Proxy Statement dated March 15, 1996 (the "Proxy Statement") is
acknowledged. If not revoked, this Proxy shall be voted, unless
authority specifically to the contrary is provided, as specified below,
and as to any other business which may legally come before the meeting,
in accordance with the recommendation of the Board of Directors.
IF NO SPECIFICATION IS MADE, SUCH SHARES WILL BE VOTED "FOR" ITEM #1.
1. Proposal to elect Class III Directors
___ FOR ALL NOMINEES BELOW
___ WITHHOLD AUTHORITY TO VOTE FOR ALL NOMINEES BELOW
TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A
LINE THROUGH HIS NAME ON THE LIST BELOW.
Nominees:
Anthony F. Abatiell, Francis L. Lemay, Roger M. Pike, and Mark W.
Richards
2. To act on whatever business may properly be brought before the
Meeting or any adjournment thereof.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" ITEM #1 ON THE
REVERSE.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND MAY BE
REVOKED PRIOR TO ITS EXERCISE.
Date: ______________________
Signature(s) ______________________
______________________
______________________
Please sign here exactly as name(s)
appear(s) on the left. When signing
as attorney, executor, administrator,
trustee, guardian, or in any other
fiduciary capacity, give full title.
If more than one person acts as
trustee, all should sign. ALL JOINT
OWNERS MUST SIGN.
___ I/We plan to attend the Annual Meeting: ___ Number
PLEASE MARK (ON REVERSE SIDE), SIGN AND DATE, AND MAIL IN THE
ENCLOSED POSTAGE PAID ENVELOPE
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0
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