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, 1996
[ ] 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 identification No.)
incorporation or organization)
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 January 29, 1997, 4,606,728 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 $181,965,756.
DOCUMENTS INCORPORATED BY REFERENCE:
None
- - The index for exhibits is on Page 53.
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 behalf 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 adopted by the regulatory agencies as well as by the
Financial Accounting Standards Board, or of changes in the Company's
organization, compensation 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 providers of
various financial services; (iv) the effect of unforeseen changes in interest
rates; and (v) the effect of changes in the business cycle and downturns in
the local, regional or national economies.
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 $1,313 million at December 31, 1996. 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 $873 million, total loans
of $709 million and total assets of $1,041 million at December 31, 1996. VNB
conducts business through 33 offices located in seven of Vermont's 14 counties,
including the cities of Brattleboro, Burlington, Rutland and Montpelier. The
offices of VNB are in good physical condition with modern equipment and
facilities adequate to meeting the banking needs of customers in the communities
served.
VNB offers a wide range of personal and commercial banking services,
including the acceptance of demand, savings, and time deposits; making and
servicing secured and unsecured loans; issuing letters of credit; and
offering fee based services. In addition, VNB offers a wide range of trust
and trust related services, including services as executor, trustee,
administrator, custodian and guardian. VNB lending services include making
real estate, commercial, industrial, agricultural and consumer loans. VNB
also offers data processing services consisting primarily of payroll and
automated clearing house for several outside clients. VNB provides financial
and investment counseling to municipalities and school districts within its
service area and also provides central depository, lending payroll and other
banking services for such customers. VNB also provides safe deposit facilities,
Master Card and Visa credit card services. Over ninety percent of VNB's loans
are made to individuals and businesses which are located in or have properties
in Vermont. VNB owns and operates 30 automated teller machines (ATMs) at its
branch locations and 12 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, 1995, 5 state-chartered savings banks, 12 state-chartered
commercial banks and 10 national banks are located and do business in the
State of Vermont, the area in which VNB conducts its business. As of such date,
VNB had 12.9%, 12.2% and 12.6% of the total assets, loans and deposits,
respectively, of these 27 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 totaled $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, 1996 UB had total assets of $240 million, total loans of $202
million and total deposits of $215 million.
UB is primarily engaged in the business of attracting deposits from
the general public and originating loans secured by first liens on residential
real estate. UB also makes mortgage loans on commercial real estate and
originates consumer loans, most of which are collateralized. UB maintains a
portion of its assets in federal government and agency obligations, various
types of corporate securities and other authorized investments. UB provides
traditional deposit services as well as money market deposit instruments,
demand deposits and NOW accounts. In addition, UB offers a wide range of
trust and trust related services, including services as executor, trustee,
administrator, 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 incorporated
in the Commonwealth of Massachusetts. Hayburne, Inc., owns the "Hayburne
Building", a 26,000 square foot office building located at 55 Federal Street,
Greenfield, Massachusetts, in which office
space is leased to various tenants.
The Banks compete on the local and the regional levels with other
commercial banks and financial institutions for all types of deposits,
loans and trust accounts. Current principal competitors include metropolitan
banks and financial institutions based in southern New England and New York
City, many of which have greater financial resources. The continuing
consolidation of the banking industry, together with changes in interstate
banking and branching laws, increases the likelihood that the Banks will face
increasing competition from national as well as regional competitors.
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, 1996, employed approximately
620 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 law. VFSC is a bank holding company
subject to supervision and regulation by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") under the Bank Holding Company Act
of 1956, as amended. VNB, a national banking association under the National
Bank Act, is subject to regulation, supervision and examination by the
Comptroller fo the Currency (the "OCC"). UB, a Massachusetts-chartgered
savings bank, is subject to examination, regulation and supervision by the
Massachusetts Commissioner of Banks. In addition, deposits at both VNB and UB
are insured by the Federal Deposit Insurance Corporation (the "FDIC") to the
extent permitted by law, and both Banks are accordingly subject to supervision
and regulation by the FDIC. Both Banks are also members of the Federal Home
Loan Bank of Boston.
Proposals to change the laws and regulations governing the banking
industry are frequently introduced in Congress and state legislatures and
before bank regulatory agencies. In addition, VFSC and the Banks are subject
to other laws and regulations and to supervision and examination by other
regulatory agencies, all of which directly or indirectly affect VFSC's
operations, management and ability to make distributions.
Regulation of VFSC
General. VFSC is a bank holding company subject to supervision and
regulation by the Federal Reserve Board. The Federal Reserve Board has
authority to issue cease and desist orders and to assess civil money penalties
against bank holding companies and their nonbank subsididaries, officers,
directors and other affiliated parties and to remove officers, directors and
other affiliated parties in order to terminate or prevent unsafe or unsound
banking practices or violations of laws or regulations.
The activities of VFSC and the companies that it controls or in which
it holds more than 5% of the voting stock are limited to banking
or managing or controlling banks or furnishing services to or performing
services for its subsididaries, or any other activity that the Federal
Reserve Board determines to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In making any such
determination, the Federal Reserve Board is required to consider whether the
performance of such activities by a bank holding company or its subsidiaries
can reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition or gains in efficiency, that outweigh
possible adverse effects such as undue concentration of resources, decreased
or unfair competition, conflicts of interest or unsound banking practices.
Generally, bank holding companies such as VFSC are required to obtain prior
approval of the Federal Reserve Board to engage in any new activity not
previously approved by the Federal Reserve Board or to acquire more than 5%
of any class of voting stock of any company, including any bank that is not
already majority-owned by the bank holding company.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Interstate Banking and Branching Act") permits a bank holding
company to acquire banks in states other than its home state notwithstanding
contrary provisions of state law, subject to the requirement that the bank
holding company, before and after the proposed acquisition, control no more
than 10% of the total amount of deposits of insured depository institutions
in the United State and no more than 30% of such depsoits in that state (or
such lesser or greater amount set by state law) and to any state requirement
that the bank have been organized and oeprating for a minimum period of time,
not to exceed five years.
The Interstate Banking and Branching Act also authorizes banks to merge
across state lines, thereby creating insterstate branches, beginning June 1,
1997. In addition, a bank may now open new branches in a state in which it
does not already have banking operations, if the laws of the state permit
such de novo branching. Although the effect of such changes cannot be
predicted precisely, they are likely to make it easier for out-of-state banks
to compete in the states where VFSC and the Banks operate.
Dividends and Distributions. VFSC's ability to pay dividends depends
upon the dividend income it receives from the Banks, which may be affected or
limited by regulatory restrictions. The Federal Reserve Board generally
prohibits a bank holding company from declaring or paying a cash dividend that
would impose undue pressure on the capital of subsidiary banks or that would
be funded only through borrowing or other arrangements that might adversely
affect a bank holding company's financial position. The Federal Reserve
Board has determined that it may be an unsound practice for a bank holding
company to pay dividends unless its net income over the preceding year is
sufficient to fund fully each dividend and its prospective rate of earnings
retention appears consistent with its capital needs, asset quality and
overall financial condition. At December 31, 1996 the Banks had available
approximately $1.3 million for payment of dividends to VFSC under regulatory
guidelines. VFSC has a policy to pay out over time 30%-35% of net income to
shareholders in the form of cash dividends. Earnings for prior years as well
as prospective earnings are analyzed to determine compliance with this policy.
Dividend payout rates for any one year may vary from this long term payout
policy based on these analyses and projections of future earnings and future
capital needs. For the three-year period ended December 31, 1996, an
aggregate of $2.47 per share of dividends were declared. Earnings per share
for the same period were $9.06.
Transactions with Affiliates. Various legal restrictions limit the
extent to which bank holding companies and their nonbank subsidiaries may
borrow, obtain credit from or otherwise engage in "covered transactions" with
their insured depository institution subsidiaries. "Covered transactions" are
defined by statute to include loans or extensions of credit to and from
affiliates, purchases of or investments in securities issued by affiliates,
purchases of assets from affiliates unless exempted by the Federal Reserve
Board, acceptance of securities issued by affiliates as collateral for a loan
or extension of credit to any person or company, and the issuance of
guaranties, acceptances or letters of credit on behalf of affiliates. The
aggregate amount of such covered transactions between an insured depository
institution (and its subsidiaries) and its nondepository affiliates is limited
to not more than 10% (in the case of any single affiliate) and not more than
20% (in the case of all affiliates) of the capital stock and surplus of the
insured depository institution. Covered transactions are also subject to
certain collateral security requirements.
In addition, a bank holding company and its subsidiaries are generally
prohibited from engaging in certain tie-in arrangements in connection with
extensions of credit, leases or sales of property or furnishing of services
unless the Federal Reserve Board, pursuant to authority available under
applicable law, permits an exception to the tying prohibitioins. A Federal
Reserve Board rule, effective September 2, 1994, amended the antitying
provisions to permit a bank or bank holding company to offer a lower price on
a loan, deposit or trust service (a "traditional bank product") or on securities
brokerage services, on the condition that the customer obtain a traditional
bank product from an affiliate. In addition, effective January 23, 1995, a
bank holding company or a nonbank subsidiary may offer lower prices on any of
its products or services on the condition that the customer obtain another
product or service from such company or any of its nonbank affiliates,
provided that all products offered in the package arrangement are separately
available for purchase.
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 VFSC may not be able to provide it. If the FDIC suffers or
anticipates a loss-either as a result of default by a banking or thrift
subsididary of VFSC or related to FDIC assistance provided to such subsididary
in danger of default-other banking subsididaries of VFSC may be assessed for
the FDIC's loss, subject to certain exceptions. Applicable law defines
"default" generally as the appointment of a conservator or receiver, and "in
danger of default" as the existence of certain conditions indicating that,
absent federal regulatory assistance, a default is likely to occur. In
addition, capital loans by a bank holding company to its subsididary banks
are subordinate in right of payment to depositors 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 the capital of a subsidiary bank will be
assumed by the bankruptcy trustee and entitled to priority of payment.
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)up to applicable
legal limits and the Depository Insurance Fund (DIF) of Massachusetts, a
private industry-sponsored insurer of excess deposits. Accordingly, UB is
subject to examination, regulation and supervision by both the FDIC and the
Massachusetts Commissioner of Banks. The Banks are also members of the Federal
Home Loan Bank of Boston.
The operations of the Banks, including but not limited to their capital
adequacy, reserves, loans, investments, earnings, liquidity, compliance with
laws and regulations, record of performance under the Community Reinvestment
Act and management practices are subject to regular examination by, in the
case of VNB, the OCC, and, in the case of UB, the FDIC and the Massachusetts
Commissioner of Banks. In addition, the Banks' various corporate activites,
including mergers and acquisitions and branch openings and closings, require
the approval of the Banks' respective reguators. The Banks are also required
to furnish quarterly and annual reports of income and condition to
the FDIC and VNB files periodic reports with the OCC.
The enforcement authorities of the Bank's primary federal banking
regulators include the power to impose civil money penalties, remove officers
and directors and issue cease-and-desist orders to prevent unsafe or unsound
practices or violations of laws or regulations governing their business
activities. In addition, the FDIC has authority to terminate federal deposit
insurance coverage with respect to banks that do not satisfy applicable
regulatory capital requirements.
The Banks' authority to pay dividends is subject to both specific
statutory limitations and general safety and soundness regulatory constraints.
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 extensions of credit by the Banks to their directors,
executive officers and principal stockholders and related interests of such
persons.
Deposit Insurance. The Banks' deposits are insured by the Bank Insurance
Fund ("BIF") of the FDIC to the legal maximum of $100,000 for each insured
depositor. The FDIA provides that the FDIC shall set deposit insurance
assessment rates on a semi-annual basis to ensure adequate BIF reserves to
cover BIF-insured deposits. The Banks' current assessment rates are $.01296
per $100 of deposits per year effective January 1, 1997.
Federal Reserve Board Policies. The monetary policies and regulations of
the Federal Reserve Board have had a significant effect on the operating results
of banks in the past and are expected to continue to do so in the future.
Federal Reserve Board policies affect the levels of bank earnings on loans and
investments and the levels of interest paid on bank deposits through the
Federal Reserve System's open-market operations in United States government
securities, regulation of the discount rate on bank borrowings from Federal
Reserve Banks and regulation of non-earning reserve requirements applicable
to bank deposit account balances.
Consumer Protection Regulation; Bank Secrecy Act. Other aspects of the
lending and deposit business of the Banks that are subject to regulation by
the OCC in the case of VNB and the FDIC and the Massachusetts Commissioner of
Banks, in the case of UB, 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 members of the FHLB of Boston, the Banks are required to own
shares of capital stock in the FHLB of Boston in an 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, 1996 of $7.6 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 FHFB
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 OCC and the FDIC have established requirements with
respect to the maintenance of appropriate levels of capital by national banks
and state chartered banks that are not members of the Federal Reserve System
("state nonmember banks"), respectively. The Federal Reserve Board has
established substantially identical guidelines with respect to the maintenance
of appropriate levels of capital, on a consolidated basis, by bank holding
companies. If a banking organization's capital levels fall below the minimum
requirements established by its primary federal banking regulator, a bank or
bank holding company will be expected to develop and implement a plan acceptable
to such regulator 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 law also 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 national and
state nonmember banks, such as VNB and UB, to maintain a minimum "Leverage
Capital Ratio" or "Tier 1 Capital" (as defined in the Risk-Based Capital
Requirements discussed in the following paragraphs) to total assets of 3.0%.
The regulations of the OCC and the FDIC further provide, however, 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 capital
adequacy guidelines impose substantially similar leverage capital requirements
on bank holding companies on a consolidated basis.
Risk-Based Capital Requirements. The regulations of the OCC and the FDIC
also require national and state nonmember 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, and certain non-cumulative perpetual preferred
stock and excludes all intangible 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 convertible securities, and certain forms
of subordinated debt and intermediate-term preferred stock.
The risk-based capital rules of the OCC and the FDIC 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
regulations limit the portion of the allowance for loan losses eligible for
inclusion in Total Capital to 1.25% of Risk-Adjusted Assets.
The Federal Reserve Board has established substantially identical risk-
based capital requirements to be applied to bank holding companies on a
consolidated basis.
Consequences of Failing to Meet Capital Requirements. A number of
sanctions may be imposed on banking organizations that are not in compliance
with the capital regulations, including, among other things, issuance of a
cease and desist order and/or imposition of a capital directive. Under such
circumstances, the organization's primary federal banking regulator may require,
among other things, an increase in regulatory capital, restrictions on asset
growth, 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 organization'
primary federal banking regulator may deem necessary or appropriate. In
addition, any banking organization that is not meeting its capital requirements
must provide its primary federal banking regulator with prior notice before
the addition of any new director or senior officer.
Any insured depository institution that fails to meet any of its minimum
capital requirements must, within 45 days of the date as of which it fails to
comply with such requirements, submit to its primary federal banking regulator
for review and approval a reasonable plan describing the means and timing by
which such insured depository institution shall achieve its minimum capital
requirements. Any such capital plan must include a limited guaranty of the
parent holding company, if any, of the insured depository institution. 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
acount of its capital ratios if it has entered into and is in compliance with
a written agreement with its primary federal banking regulator to increase its
Tier 1 leverage capital ratio to such level as such regulator deems appropriate
and to take such other action as may be necessary for the institution to be
operated in a safe and sound manner.
Any material failure by a banking organization to comply with the
provisions of any capital plan, regulation, written agreement, order
or directive may subject the organization to additional enforcement actions,
including the imposition of civil money penalties and, in the case
of an insured depository institution, termination of deposit insurance.
Each of the Banks is also subject to the prompt corrective action framework
established by the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). The federal banking agencies have promulgated substantially similar
regulations to implement the system of prompt corrective action. Under the
regulations, a bank is deemed to be (i) "well capitalized" if it has total risk-
based capital of 10% or more, a Tier 1 risk-based capital ratio of 6% or more,
a Tier 1 leverage capital ratio of 5% or more and is not subject to any written
agreement, order, capital directive, or corrective action directive, (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8% or
more, a Tier 1 risk-based capital ratio of 4% or more and Tier 1 leverage
capital ratio of 4% or more (3% under certain circumstances) and does not
meet the definition of "well capitalized", (iii) "undercapitalized" if it has
a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based
capital ratio that is less than 4% or a Tier 1 leverage capital ratio that is
less than 4% (3% under certain circumstances), (iv) "significantly
undercapitalzed" 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, 1996, VFSC's consolidated Total and Tier 1 risk-based
capital ratios and Tier 1 Leverage ratios were 15.17%, 13.92% and 8.84%,
respectively. These ratios exceeded applicable regulatory requirements. VNB
and UB are considered "well capitalized" by their respective primary federal
banking regulators.
Item 2 - Properties
The principal offices of the Company and VNB are located at 100 Main Street
in Brattleboro, Vermont. VNB operates 32 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 six offices operate in
Chittenden County in the City of Burlington, South Burlington, Essex Junction,
Williston (2 offices) and Winooski. VNB has seven offices in Windsor
County in the Towns of Chester, Ludlow, Norwich, 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 Montpelier,
the Berlin Shopping Mall, Northfield and Barre. One office is operated in
Franklin County in the town of St. Albans and one office is located in Orange
County in the town of Williamstown. Of these offices, eighteen are owned by
VNB, twelve 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, 1996. 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
5 and 10 to the Consolidated Financial Statements for information as to amounts
at which bank premises are carried, and as to commitments for lease obligations.
Item 3 - Legal Proceedings
VFSC is a party to litigation arising in the ordinary course of its
business.
Management, after reviewing these claims with legal counsel, is of the
opinion that these matters, when resolved, will not have a material effect on
VFSC's consolidated financial condition or results of operations, 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 January 29, 1997, VFSC Common Stock consisted of 20,000,000
authorized shares, $1.00 par value per share, of which 4,606,728 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 1996 and 1995.
Dividends
Year Quarter High Low Declared
1996 4th $36-1/2 $34-1/4 $.27
3rd 35-1/8 31-1/4 .27
2nd 34 31 .27
1st 35 31-1/2 .25
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
Per the Company's stockholder reports, the approximate number of stockholders
as of January 29, 1997 was 2,450.
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, 1996 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.
Year Ended December 31,
1996 1995 1994 1993 1992
(Dollars in thousands, except per sare data)
Results of Operations:
Interest income $98,105 $96,457 $84,391 $82,142 $88,265
Interest expense 41,351 41,969 33,293 31,361 41,164
Net interest income 56,754 54,488 51,098 50,781 47,101
Provision for loan losses 3,350 3,900 4,000 5,053 9,430
Net interest income after
provision for loan losses 53,404 50,588 47,098 45,728 37,671
Other operating income 19,161 17,549 16,692 17,348 15,223
Other operating expense 47,411 45,999 46,763 52,459 45,384
Income before income taxes 25,154 22,138 17,027 10,617 7,510
Applicable income tax expense 8,539 7,241 5,159 3,386 2,436
Net income $16,615 $14,897 $11,868 $ 7,231 $ 5,074
1996 1995 1994 1993 1992
Balance Sheet Data At Year End:
Total assets $1,312,981 $1,246,669 $1,205,421 $1,158,101 $1,124,578
Loans, net of
unearned income 910,436 893,470 911,503 872,441 856,768
Securities available
for sale 291,120 249,682 173,865 184,400 149,487
Total deposits 1,083,258 1,033,957 1,012,869 967,582 941,882
Stockholders' equity 119,717 111,833 90,457 91,027 83,484
Per Share Data:
Net income, primary
and fully diluted $3.45 $3.10 $2.51 $1.54 $1.08
Total cash dividends
declared 1.06 0.87 0.54 0.24 0.13
Tangible book value at
period end, fully
diluted (1) 23.73 22.47 18.36 18.61 17.00
Average primary
shares outstanding 4,817,324 4,807,553 4,735,480 4,710,228 4,686,116
Selected Financial Ratios:
Return on average
total assets(2) 1.31% 1.23% 1.00% 0.64% 0.46%
Return on average
stockholders' equity(3) 14.51 14.69 13.23 8.36 6.31
Net interest margin (4) 4.93 4.92 4.74 4.97 4.72
Cash dividends per share
as a percentage of
earnings per share .31 .28 .22 .16 .12
Average stockholders'
equity to average assets 9.19 8.69 7.97 7.67 7.32
Core (leverage) capital
ratio at period end (5) 8.49 8.77 7.26 7.59 7.11
Total risk-based capital
ratio at period end (6) 15.09 14.67 13.03 12.06 11.11
Allowance for loan losses
to period end loans,
net of unearned income 1.50 1.65 1.78 2.04 2.46
Nonperforming assets to
period end loans plus other
real estate owned (7) 1.01 1.67 2.32 3.64 5.71
Net charge-offs to average
net loans 0.49 0.59 0.62 0.95 0.90
(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 Operation
For the years ended December 31, 1996, 1995 and 1994.
Overview
Net income for 1996 was $16.6 million, up from the $14.9 million and
$11.9 million earned in 1995 and 1994, respectively. Return on average
assets was 1.31% in 1996, 1.23% in 1995 and 1.00% in 1994. Return on average
stockholders' equity was 14.51% in 1996, 14.69% in 1995 and 13.23% in 1994.
On a primary and fully diluted per share basis, net income was $3.45,
$3.10, and $2.51 in 1996, 1995 and 1994, 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>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994
Interest Rate Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid Balance Expense Paid
(1) (1) (1) (1) (1) (1)
(Dollars in thousands)
ASSETS
Earning assets:
Loans, net of unearned
income (2) $ 896,417 $82,113 9.16% $ 910,799 $84,431 9.27% $ 894,001 $73,929 8.27%
Taxable securities (3) 250,590 15,449 6.17 190,764 11,441 6.00 191,425 10,479 5.47
Tax exempt securities (3) 11,099 809 7.29 10,289 752 7.31 9,796 798 8.15
Federal funds sold and
securities purchased
under agreements to
resell 14,869 842 5.66 16,684 1,029 6.17 5,332 270 5.06
Interest-bearing
bank deposits 34 2 5.88 61 3 4.92 106 4 3.70
Total earning assets 1,173,009 99,215 8.46 1,128,597 97,656 8.65 1,100,660 85,480 7.77
Noninterest-earning assets:
Cash and due from banks 46,165 43,707 44,590
Premises and equipment,
net 24,146 23,517 23,084
Other assets (3) 33,683 32,359 35,761
Allowance for loan losses (14,461) (15,834) (16,574)
Total assets (3) $1,262,542 $1,212,346 $1,187,521
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings and transactional
deposits $ 612,780 20,353 3.32 $ 607,202 21,497 3.54 $ 589,244 17,183 2.92
Certificates of deposit:
--$100,000 or more 38,343 2,025 5.28 33,538 81,766 5.27 29,339 1,123 3.83
--Under $100,000 264,043 14,679 5.56 252,920 13,682 5.41 255,661 10,731 4.20
Federal funds purchased
and securities sold under
agreements to repurchase 68,446 3,181 4.65 67,896 3,317 4.88 77,606 2,924 3.77
Other borrowed funds 18,678 1,113 5.96 27,138 1,707 6.33 26,605 1,332 5.01
Total interest-bearing
liabilities 1,002,290 41,351 4.13 988,694 41,969 4.24 978,455 33,293 3.40
Noninterest-bearing liabilities:
Demand deposits 135,158 109,631 107,301
Other liabilities 9,077 8,605 7,139
Total liabilities 1,146,525 1,106,930 1,092,895
Stockholders' equity(3) 116,017 105,416 94,626
Total liabilities
and stockholders
equity (3) $1,262,542 $1,212,346 $1,187,521
Net interest income $57,864 $55,687 $52,187
Net interest spread(4) 4.33% 4.41% 4.37%
Net Interest margin 4.93% 4.92% 4.74%
</TABLE>
(1) Includes a fully taxable equivalent adjustment based on a 35% federal
income tax rate in 1996 and 1995 and 34% for 1994.
(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 $2.3 million or 4.2% to $56.8 million in 1996
from $54.5 million in 1995. This compared to a $3.4 million or 6.6% increase
in 1995 from 1994. On a fully taxable equivalent basis, net interest income
increased $2.2 million, or 3.9%, from 1995 to 1996 and $3.5 million, or 6.7%,
from 1994 to 1995. The growth in 1996 was primarily due to a $44.4 million
increase in average earning assets. The increase in 1995 was almost equally
attributable to favorable changes in levels of earning assets and interest rates
Management anticipates that the Company's net interest margin in 1997 will be
approximately the same as in 1996 and that net interest income will increase at
approximately the same pace as in 1996.
Average earning assets increased slowly over the last two years with 3.9%
and 2.5% growth rates in 1996 and 1995, respectively. The 1996 growth came
from a $60.6 million, or 30.2%, increase in securities available for sale and
a $14.4 million, or 1.6%, decrease in loans. The growth in securities was
primarily in the U.S. Government Agency portfolio.
Average interest-bearing liabilities increased $13.6 million, or 1.4%, in
1996 following a $10.2 million, or 1.0%, growth in 1995. Over the two-year
period, average core interest-bearing deposits (savings and transactional
deposits and certificates of deposit under $100,000) increased by $31.9 million.
Non-core interest-bearing liabilities decreased by $8.1 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.
1996 vs. 1995 1995 vs. 1994
Net Net
Increase Due to Changes Increase Due to Changes
in in
(Decrease) Volume Rate (Decrease) Volume Rate
(1) (1) (1) (1)
(in thousands)
INTEREST INCOME:
Loans(2) $(2,318) $(1,323) $(995) $10,502 $1,412 $9,090
Taxable securities 4,008 3,676 332 962 (37) 999
Tax exempt securities 57 59 (2) (46) 39 (85)
Federal funds sold and
securities purchased
under agreements to resell (187) (106) (81) 759 688 71
Interest-bearing bank
deposits (1) (2) 1 (1) (2) 1
Total interest income 1,559 2,304 (745) 12,176 2,100 10,076
INTEREST EXPENSE:
Savings and transactional
deposits (1,144) 197 (1,341) 4,315 542 3,773
Certificates of deposit:
--$100,000 or more 259 256 3 643 177 466
--Under $100,000 997 611 386 2,951 (116) 3,067
Federal funds purchased and
securities sold under
agreements to repurchase (136) 26 (162) 392 (397) 789
Other borrowed funds (594) (500) (94) 375 26 349
Total interest expense (618) 590 (1,208) 8,676 232 8,444
Change in net interest
income $ 2,177 $1,714 $ 463 $3,500 $1,868 $1,632
(1) The effect of changes due to both volume and rate have been allocated to
the change in volume and change in rate categories in proportion to the
relationship of the absolute dollar amounts of the change in each category.
(2) Includes nonaccrual loans.
Provision for Loan Losses
The provision for loan losses charged to operating expense is based upon
management's judgment of the amount necessary to maintain the allowance for
loan losses at a level adequate to absorb possible losses. The factors
evaluated include, but are not limited to: the size, composition, growth and
quality of the loan portfolio, specific and potential problem loans, current
economic conditions and their effect on a borrower's performance in relation
to contract terms, historical loss experience by loan type and loan
collectibility. The provision for loan losses in 1996 was $3.4 million
compared to $3.9 million in 1995 and $4.0 million in 1994. Net loans charged
off were $4.5 million, $5.4 million and $5.6 million for the respective years.
The provision was reduced $0.5 million in 1996 and $0.1 million in 1995 as
nonperforming asset levels and the Company's local economy continued to improve.
Other Operating Income and Other Operating Expense
In 1996, other operating income (net of securities gains) increased $1.7
million, or 9%, from the $17.5 million earned in 1995. Increases of $0.9
million in trust department income and $0.4 million in service charges on
deposit accounts comprised 76.5% of this increase. The 28% improvement in
trust department income was largely due to the purchase of the Green Mountain
Bank Trust Department on August 31, 1996, which accounted for $0.6 million of
this increase.
In 1995, other operating income increased $0.9 million, or 5%, from 1994.
Increases of $0.3 million in trust department income and $0.3 million in
service charges on deposit accounts comprised 63% of this increase.
Total other operating expense increased $1.4 million, or 3%, in 1996 after
decreasing $0.8 million, or 2%, in 1995. Staff expense increased $2.0 million,
or 9% in 1996. FDIC insurance expense decreased $1.2 million in 1995 and 1996.
Salary expense was $18.7 million in 1996, $17.5 million in 1995 and $17.8
million in 1994. These represent an increase of 7% and a decrease of 2%,
respectively. The increase in 1996 was largely a result of the purchase of the
Green Mountain Bank Trust Department. The decrease in 1995 continued to
reflect a reduction of approximately 13% of the Company's average number of
employees during 1995 and 1994. Pension and employee benefits increased $0.8
million, or 17%, during 1996 after decreasing $0.4 million, or 8%, in 1995.
Other noninterest expense increased $0.6 million, or 6%, in 1996 after
increasing $1.1 million, or 13%, in 1995. Nearly half of the 1995 increase
was due to the receipt of $0.6 million in life insurance proceeds in 1994's
second quarter.
Over the last three 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 $30.1 million in 1994 to
$28.5 million in 1995 and $28.3 million in 1996.
Applicable Income Taxes
During 1996, 1995 and 1994 the Company recorded income tax expense of $8.5
million, $7.2 million and $5.2 million, respectively. The changes were almost
entirely due to the level of pre-tax earnings. See also footnote 11 to the
financial statements.
Financial Condition
Loans
The loan portfolio increased $17.0 million, or 2%, in 1996 following a
$18.0 million, or 2%, decrease in 1995. In structuring the composition of its
loan portfolio, the Company considers the following factors: profitability,
liquidity, risk, rate sensitivity and service in its market area. It tries
to maintain a balance between commercial lending (commercial, commercial real
estate and construction loans) and consumer lending (residential real estate
and consumer loans) with each representing between 40% and 60% of the total
loan portfolio. Over the last two years the commercial lending sector decreased
$34.6 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 collateralized by real estate include
loans collateralized 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
collateralizing these loans to its primary market areas in Vermont and
Massachusetts, and adjacent communities in neighboring states. Approximately
58% of the commercial real estate portfolio represents loans on owner occupied
properties. Real estate values in Vermont were depressed as a result of the
recent recession in New England and the Nation, but have experienced some
recent improvement over the last two years. Management's goal is to keep the
construction loan portion of the loan portfolio below 5% of total loans. As
of December 31, 1996 this sector represented 3% of the portfolio.
In 1996, the Company originated $119.2 million of residential mortgage
loans and sold $56.0 million of loans in the secondary market, compared to
$111.4 million originated and $33.1 million sold in 1995 and $140.5 million
originated and $86.9 million sold in 1994. The 7% increase in mortgage loan
originations was primarily due to slightly lower interest rates. This compares
to a 21% decrease in mortgage originations in 1995 due to higher interest
rates.
At year end 1996, the mortgage servicing portfolio totaled $412.3 million
compared to $420.6 million at year end 1995 and $459.2 million at year end 1994
and currently generates income of approximately $1.7 million per year. The
$8.3 million, or 2% reduction in 1996 is due to net amortization of existing
balances. 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 for 1995. Of the residential
real estate portfolio, 59% were adjustable rate loans and 41% were fixed rate
loans at December 31, 1996. Residential real estate loans represented 47%,
47% and 43% of gross loans at year end 1996, 1995 and 1994, respectively.
Consumer loans represented 11% of gross loans the last three year ends.
Credit card loans and related plans were $35.9 million and $37.7 million of
total consumer loans at December 31, 1996 and 1995, respectively.
The following table summarizes the composition of the Company's loan
portfolio at the dates indicated.
December 31,
1996 1995 1994 1993 1992
(in thousands)
Commercial(1) $181,372 $170,162 $207,299 $203,300 $199,128
Real Estate:
Residential 429,657 415,468 389,033 372,570 355,144
Commercial 177,339 182,233 186,185 174,881 181,041
Construction 25,205 24,816 25,033 25,762 31,180
Total real estate 632,201 622,517 600,251 573,213 567,365
Consumer 96,863 100,791 103,953 95,928 90,275
Total loans, net of
unearned income $910,436 $893,470 $911,503 $872,441 $856,768
(1) Includes loans to Massachusetts and Vermont municipalities and industrial
revenue bonds of $46,038, $24,874, $44,669, $30,339 and $13,680 for years
1996 through 1992, respectively.
The following table details the loan maturity and interest rate
sensitivity of loans, exclusive of loans secured by 1-4 family residential
property and consumer loans, at December 31, 1996.
After One After
Within But Within Five
One Year Five Years Years Total
(Dollars in thousands)
Loans:
With fixed interest rates $ 57,577 $ 25,633 $ 35,804 $119,014
With variable interest
rates 258,824 4,621 1,457 264,902
Total $316,401 $30,254 $37,261 $383,916
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 they 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 reductions. While no specific period of delinquency
triggers nonaccrual status for consumer loans, unsecured installment loans 90
days or more past due and collateralized installment loans 180 days or more
past due are generally recommended for charge-off.
A loan remains in nonaccrual status until the factors which indicate
doubtful collectibility no longer exist and six consecutive months of
contractual payments are received or until the loan is determined to be
uncollectible and is charged off against the allowance for loan losses.
Credit card loans are required to be charged off after 180 days without a
payment. Commercial loans 180 days or more past due must be recommended for
charge-off unless management determines the collateral is sufficient. When a
mortgage loan in default is transferred to OREO, its carrying value is the
lesser of the loan amount or the fair value of the property collateralizing the
loan, less the estimated cost to sell the property. A loan is classified as a
restructured loan when the interest rate is materially reduced or when the
term is extended beyond the original maturity date because of the inability
of the borrower to service the interest payments at the contractual rate. All
of the $0.7 million of accruing restructured loans as of December 31, 1996 were
in full compliance with restructured terms and conditions. The average
yield on these loans is 6.19%.
The following table provides information with respect to the Company's past
due loans and the components of nonperforming assets at the dates indicated.
December 31,
1996 1995 1994 1993 1992
(Dollars in thousands)
Loans 90 days or more
past due and still
accruing interest $1,933 $2,008 $1,448 $1,503 $6,569
Nonperforming assets:
Nonaccrual loans $7,812 $11,695 $16,491 $25,746 $39,150
Other real estate owned 697 2,977 4,487 4,678 10,332
Restructured loans -
accruing 661 316 294 1,532 0
Total nonperforming
assets $9,170 $14,988 $21,272 $31,956 $49,482
Nonperforming assets to
period end loans, net of
unearned income, plus
other real estate owned 1.01% 1.67% 2.32% 3.64% 5.71%
Additional interest income of $739,000 and $1,084,000 would have been
recorded in 1996 and 1995, respectively, if nonaccrual and restructured loans
had been on a current basis in accordance with their original terms. Payments,
totaling $1,850,000 and $1,052,000 respectively, were received on nonaccrual
loans during 1996 and 1995. During 1996, $1,850,000 was applied as principal
reductions and $0 was recognized as interest income, while in 1995 $1,052,000
was applied as a principal reduction and $0 was recognized as interest income.
Interest income is recognized solely on nonaccrual loans which are subsequently
determined to have no doubt as to the ultimate collectibility of principal.
At December 31, 1996, all nonaccrual loans were collateralized. In
addition, it is the Company's policy to obtain personal guarantees of the
borrowers whenever it is possible. As of December 31, 1996, 4% of the total
nonaccrual loans are current as to contractual terms. Loans to one borrower,
totaling $0.6 million represented 7% of nonaccrual loans. Management expects
to see moderate improvement in 1997 over the 1996 charged-off loan total with
a further decrease in the level of nonperforming assets. Management is not
aware of any current recommendations by regulatory authorities or suggestions
with respect to loans classified as loss, doubtful, substandard or special
mention which, if they were implemented, would have a material effect on the
Company.
Allowance for Loan Losses
The allowance for loan losses is available to absorb future losses which
are anticipated in the current loan portfolio. The adequacy of the allowance
for loan losses, which is formally reviewed on a monthly basis by management,
is evaluated according to the factors outlined in "Provision for Loan Losses".
To maintain the allowance at an adequate level, current earnings are charged
with an amount necessary to restore the allowance to the desired level. A loan
loss is charged against the allowance when management believes the
collectibility of principal and interest with respect to such loan is unlikely.
The allowance for loan losses equaled $13.6 million, or 1.50% of the total loan
portfolio at December 31, 1996, compared with 1.65% at year end 1995 and 1.78%
at year end 1994. On December 31, 1996 the allowance for loan losses
represented 149% of total nonperforming assets and 161% of nonperforming loans,
compared to 98% and 123%, respectively, at year end 1995.
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.
Year Ended December 31,
1996 1995 1994 1993 1992
(Dollars in thousands)
Allowance for loan losses at
beginning of year $14,761 $16,236 $17,815 $21,047 $19,116
Loans charged off:
Commercial, commercial
real estate and construction (3,416) (4,533) (4,895) (7,361) (5,828)
Real estate-residential (1,047) (596) (650) (807) (721)
Consumer (1,570) (1,484) (1,240) (1,427) (2,002)
Total loans charged off (6,033) (6,613) (6,785) (9,595) (8,551)
Recoveries of loans
previously charged off:
Commercial, commercial
real estate and construction 1,115 772 783 884 550
Real estate-residential 36 40 0 96 84
Consumer 418 426 423 330 418
Total Recoveries 1,569 1,238 1,206 1,310 1,052
Net loans charged off (4,464) (5,375) (5,579) (8,285) (7,499)
Additions to allowance charged
to earnings 3,350 3,900 4,000 5,053 9,430
Allowance for loan losses
at year end $13,647 $14,761 $16,236 $17,815 $21,047
Ratio of net charge-offs to
average loans 0.50% 0.59% 0.62% 0.95% 0.90%
Allowance for loan losses to
period end loans, net of
unearned income 1.50% 1.65% 1.78% 2.04% 2.46%
Net loans charged off in 1996 totaled $4,464,000 or 0.50% of average
loans. This compares with $5,375,000 or 0.59% in 1995 and $5,579,000 or 0.62%
in 1994. In 1996 charged off loans associated with one lending relationship
totaling $937,000 represented 21% of the net charge-offs for the year. No
other charge-offs exceeded 10% of the 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 consideration of various factor
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, 1996, 1995, 1994, 1993 and 1992. Notwithstanding these
allocations, the entire allowance for loan losses is available to absorb
charge-offs in any category of loans. Also during the last five years,
management provided an unallocated allowance for expected charge-offs not
specifically identified in the loan portfolio.
December 31,
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
Loan Type Loan Type Loan Type Loan Type Loan Type
Amount to Total Amount to Total Amount to Total Amount to Total Amount to Total
Allocated Loans Allocated Loans Allocated Loans Allocated Loans Allocated Loans
(Dollars in thousands)
Commercial $ 2,637 20% $2,726 19% $4,226 23% $5,027 23% $6,823 23%
Real Estate-Commercial 2,161 19 1,010 20 4,597 20 4,324 20 5,364 21
Construction 407 3 2,033 3 488 3 519 3 1,827 4
Real Estate-Residential 1,651 47 1,398 47 1,061 43 1,116 43 1,222 41
Consumer 1,704 11 1,399 11 1,644 11 1,712 11 1,845 11
Unallocated 5,087 - 6,195 - 4,220 - 5,117 - 3,966 -
$13,647 100% $14,761 100% $16,236 100% $17,815 100% $21,047 100%
</TABLE>
Investment Portfolio
The investment portfolio is utilized primarily for liquidity and
secondarily for investment income. As a result, the portfolio primarily
consists of short-term U. S. Treasury instruments and high grade municipal
obligations, mortgage-backed securities and corporate bonds with short
maturities.
The following table summarizes the composition of the Company's
investment portfolio at the dates indicated. The portfolio is
classified as available for sale and the values noted are therefore both
book and market values.
December 31,
1996 1995 1994
(in thousands)
U.S. Treasury and other
U.S. Government agencies $194,727 $145,873 $99,815
State and political subdivisions 10,558 10,343 8,238
Mortgage-backed securities 67,055 75,752 50,668
Other securities (1) 18,780 17,714 15,144
Total $291,120 $249,682 $173,865
(1) Includes money market overnight investments of $9,343, $4,895 and $1,635
at year end 1996, 1995 and 1994, respectively.
The investment portfolio increased 17%, to $291.1 million, at year end.
During 1995 the portfolio increased 44%, to $249.7 million at year end. The
total portfolio as a percent of total assets was 22% at year end 1996 compared
to 20% and 14% at year end 1995 and 1994, respectively.
Securities are carried at fair market value in the above tables. 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. During 1996, this trend in liquidity continued and U.S.
Treasury and Government Agency securities increased $48.9 million, or 33%.
Partially offsetting this increase was an $8.7 million, or 11%, decrease in
mortgage-backed securities. The average maturity of the investment portfolio
is approximately 3.1 years.
The Company invests a portion of its capital in marketable equity
securities which comprised 3.1%, 4.7% and 6.9% of total investments at December
31, 1996, 1995 and 1994, respectively. At December 31, 1996, $8.1 million of
the $8.9 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, 1996 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, 1996.
Maturing (at Market Value)
(Dollars in thousands)
After One But
Amount Yield Amount Yield
U.S. Treasury and other U.S.
Government agencies $ 5,023 6.24% $129,842 6.28%
State and political
subdivisions 1,005 8.26 6,566 6.61
Mortgage-backed securities 3,964 6.35 59,689 6.70
Other fixed income securities 9,843 5.44 0 0.00
Total $19,835 5.97 $196,097 6.42
Tax equivalent adjustment
for calculation of yield $31 $157
Maturing (at Market Value)
(Dollars in thousands)
After Five But
Within Ten After
Years Ten Years
Amount Yield Amount Yield
U. S. Treasury and other U.S.
Government Agencies $59,862 6.50% $0 0.00%
State and political subdivisions 2,987 6.27 0 0.00
Mortgage-backed securities 3,402 7.00 0 0.00
Other fixed income securities 0 0.00 0 0.00
Total $66,251 6.52 $0 0.00%
Tax equivalent adjustment for
calculation of yield $70 $0
Does not include equity securities of $8,937 at December 31, 1996.
Deposits
Average total deposits for 1996 of $1,050.3 million represented a $47.0
million, or 5%, increase from 1995's average, which had increased $21.7
million, or 2%, from 1994's average balances. The average balance of large
CDs was $38.3 million in 1996, $33.5 million in 1995 and $29.3 million in 1994.
In 1996 the $11.1 million increase in CDs under $100,000 was complemented by a
$25.5 million increase in demand deposits and a $5.6 million total increase in
the average balance of all other core deposit categories. Large CDs represented
4% of average total deposits in 1996, and 3% in 1995 and 1994. 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.
December 31,
1996 1995 1994
Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
Demand deposits $ 135,158 -% $ 109,631 -% $107,301 -%
Interest-bearing
transactional deposits 489,363 3.49 472,753 3.70 427,862 3.69
Savings deposits 123,417 2.46 134,449 2.67 161,382 2.67
Certificates of deposit:
-$100,000 or more 38,343 5.00 33,538 5.19 29,339 4.41
-Under $100,000 264,043 4.86 252,920 5.03 255,661 4.46
Total $1,050,324 $1,003,291 $981,545
The following table shows the maturity schedule of certificates of deposit
of $100,000 or more at December 31, 1996.
Certificates
of Deposit
(in thousands)
3 months or less $11,011
Over 3 through 6 months 9,472
Over 6 through 12 months 10,183
Over 12 months 8,167
Total $38,833
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 9.12%, 8.97% and 7.50%
as of December 31, 1996, 1995 and 1994, 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 equaled 9.19%, in 1996, 8.69% in 1995 and 7.97%
in 1994.
In accordance with FDICIA, the federal bank regulators have established
uniform capitalization standards for insured depository institutions as per
the following table. The ratios for the Company and its two subsidiary banks
as of December 31, 1996 and 1995 are shown for comparative purposes, placing
the banks 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, 1996 13.65% 12.40% 7.48%
December 31, 1995 15.59% 14.34% 9.19%
Vermont National Bank
December 31, 1996 10.46% 9.20% 5.83%
December 31, 1995 13.87% 12.61% 8.29%
Vermont Financial Services Corp.
December 31, 1996 15.17% 13.92% 8.84%
December 31, 1995 14.70% 13.44% 8.82%
FDIC insurance rates vary depending on a bank's capital ratio and
regulatory rating. Well-capitalized institutions are assessed less than
those that are adequately capitalized, which are in turn assessed less than
those that are in the other lower categories. Both Banks are currently assessed
at the lowest available FDIC rate, which was $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 through December 1995.
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 $322.0 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 sensitivity
over various periods at December 31, 1996.
Repricing Date
0-30 31-90 91-180 181-365 1-5 Over 5
Days Days Days Days Years Years
(in thousands)
Earning assets:
Loans (1) $254,094 $47,046 $ 89,202 $119,391 $291,875 $101,016
Investment securities
(2) (3) 20,837 39,253 32,653 31,444 126,633 31,363
Other earning assets 1,835 - - - - -
Total 276,766 86,299 121,855 150,835 418,508 132,379
Interest-bearing liabilities:
MMDA's (4) 163,772 7,592 11,388 61,994 146,444 -
NOW's and Super NOW's (4) 1,681 3,362 5,043 40,596 60,527 -
Savings and Clubs (4) 1,801 3,602 5,403 10,808 96,098 -
Certificates of Deposit 26,014 55,048 63,176 69,433 80,692 5,897
Borrowed Funds 86,089 785 1,707 115 10,113 2,032
Total 279,357 70,389 86,717 182,946 393,874 7,929
Net Interest
Sensitivity Gap $ (2,591) $15,910 $35,138 $(32,111) $24,634 $124,450
Cumulative Interest
Sensitivity Gap $ (2,591) $13,319 $48,457 $ 16,346 $40,980 $165,430
(1) Does not include non-accrual loans of $7,812 at December 31, 1996.
(2) Does not include equity securities of $8,937 at December 31, 1996.
(3) Repricing dates for mortgage-backed securities are based upon estimated
actual principal prepayments obtained from third party sources. Amounts
differ from maturity distribution in Note 2 to the financial statements,
which reports the original average life date for mortgage-backed securities.
(4) Estimated based upon historical experience over the last five years.
Recent Developments
Merger with Eastern Bancorp, Inc. - The Company has signed a definitive
agreement to acquire Eastern Bancorp, Inc. (EBCP) in a tax-free merger
involving an exchange of stock and cash. EBCP is the holding company for
Vermont Federal Bank, FSB which operates 15 branches in Vermont and 10 branches
in southern New Hampshire through First Savings of New Hampshire, an operating
division of Vermont Federal Bank.
The acquisition will result in VFSC becoming a $2.2 billion asset bank
holding company. The acquisition will add an additional $640 million in retail
and commercial deposits to VFSC's existing franchise. Significantly, in Vermont
the transaction will give VFSC a 19% statewide deposit market share and a 17%
deposit market share in Chittenden County, the state's largest market. In
southern New Hampshire, the combined company will continue to do business as
First Savings of New Hampshire, providing VFSC with attractive new markets for
the full range of its commercial banking products and services. The acquisition
which is expected to close in the second quarter of 1997, will be accounted for
by the purchase method of accounting, and is expected to be accretive to VFSC's
earnings by 1997 calendar year end.
Under the terms of the definitive agreement, EBCP shareholders will
receive stock and/or cash equal to the sum of $7.25 plus the product of 0.49
times the average closing bid price of VFSC common stock for a twenty trading
day period ending shortly before the effective time of the merger. Prior to
closing each EBCP shareholder may elect to receive either stock or cash or a
combination of both in exchange for the EBCP shares. The acquisition price will
be identical without regard to whether a shareholder has elected to receive
stock or cash or a combination. Based on a closing bid price of VFSC common
stock at November 11, 1996 of $36.25, the transaction would be valued at
$97.7 million and EBCP shareholders would be entitled to receive stock and/or
cash equal to approximately $25.01 for each share of EBCP common stock. The
total amount of each to be paid and the number of shares to be issued by VFSC
in acquisition are fixed, subject to certain collar adjustments. Based upon
EBCP's audited September 30, 1996 financial statements and the transaction
value indicated above, the price payable to EBCP shareholders would represent
1.45 times book value and, excluding the one-time special statutory assessment
to be paid by EBCP to capitalize the Savings Association Insurance Fund, 16.1
times trailing twelve month earnings.
The definitive agreement has been unanimously approved by both the
boards of directors of VFSC and EBCP. The acquisition is now subject
to approval by the shareholders of both companies and regulatory authorities,
including the Federal Reserve Board, as well as usual and customary closing
conditions.
Other - During 1997, the Company plans to upgrade Vermont National Bank's
(VNB's) check processing equipment at a cost of $1.7 million, upgrade VNB's
mainframe computer to provide computer capacity for the merger with EBCP at
a cost of $1.2 million, upgrade VNB's signage at a cost of $1.0 million and
upgrade VNB's credit card software at a cost of $0.5 million. No other addition
to plant and equipment are expected to exceed $0.5 million. All additions will
be funded through operations of the Company.
The Company's financial statements for 1997 will be affected by rules
and regulations which have been announced but are not yet effective. The
Financial Accounting Standards Board (FASB) has issued Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities". This statement has been
amended with the issuance of SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of SFAS No. 125". These statements are not expected to
have a material impact on the financial statements of the Company.
Item 8 - Financial Statements and Supplementary Data
Consolidated Balance Sheets December 31,
1996 1995
(Dollars in thousands)
Assets
Cash and due from banks $ 61,962 $ 53,834
Interest-bearing deposits with other banks 60 62
Federal funds sold and securities purchased under
agreements to resell 1,775 8,925
Total cash and cash equivalents 63,797 62,821
Securities available for sale
Mortgage-backed securities 67,055 75,752
Other securities 224,065 173,930
Total securities available for sale 291,120 249,682
Loans 910,436 893,470
Less: allowance for loan losses (13,647) (14,761)
Net loans 896,789 878,709
Premises and equipment, net 23,618 20,366
Real estate held for investment 1,360 1,309
Other real estate owned (OREO)
(Net of valuation reserve of $87 at
December 31, 1996 and $47 at December 31, 1995) 697 2,977
Goodwill and other intangibles 6,327 2,747
Other assets 29,273 28,058
Total assets $1,312,981 $1,246,669
Liabilities and Stockholders' Equity
Deposits:
Demand $ 162,887 $ 137,504
Savings, NOW and money market accounts 620,111 594,580
Other time 300,260 301,873
Total deposits 1,083,258 1,033,957
Federal funds purchased and securities sold
under agreements to repurchase 77,672 79,773
Liabilities for borrowed money 23,169 11,892
Other liabilities 9,165 9,214
Total liabilities 1,193,264 1,134,836
Commitments and contingencies
Stockholders' Equity:
Common stock - $1 par value;
Authorized 20,000,000 shares
Issued: 1996 - 4,892,442
1995 - 4,883,017 4,892 4,883
Preferred stock - $1 par value;
Authorized 5,000,000 shares
Capital surplus 49,590 49,427
Undivided profits 71,151 59,464
Security valuation allowance (1,029) 9
Treasury stock, at cost - 1996 - 180,021 shares
1995 - 99,750 shares (4,887) (1,950)
Total stockholders' equity 119,717 111,833
Total liabilities and stockholders' equity $1,312,981 $1,246,669
See notes to consolidated financial statements
Consolidated Statements of Income
For the years ended December 31,
1996 1995 1994
(Dollars in thousands,
except per share amounts)
Interest Income
Interest and fees on loans $81,281 $83,506 $73,085
Interest on securities available for sale:
Taxable interest income 15,504 11,480 10,603
Tax exempt interest income 478 443 429
Income on federal funds sold and
securities purchased under agreements to resell 842 1,028 270
Interest on time deposits 0 0 4
Total interest income 98,105 96,457 84,391
Interest Expense
Interest on deposits:
Certificates of deposit over $100,000 2,025 1,766 1,123
Other deposits 35,032 35,179 27,914
Interest on federal funds purchased,
borrowed money and securities
sold under agreements to repurchase 4,294 5,024 4,256
Total interest expense 41,351 41,969 33,293
Net interest income 56,754 54,488 51,098
Provision for loan losses 3,350 3,900 4,000
Net interest income after
provision for loan losses 53,404 50,588 47,098
Other Operating Income
Securities gains, net 11 79 56
Trust Department income 4,109 3,218 2,965
Service charges on deposit accounts 6,165 5,746 5,420
Credit card fees 3,219 2,794 2,871
Mortgage servicing income 1,698 1,910 1,775
Other service charges, commissions and fees 3,959 3,802 3,605
Total other operating income 19,161 17,549 16,692
Net interest and other operating income 72,565 68,137 63,790
Other Operating Expense
Salaries and wages 18,677 17,503 17,786
Pension and other employee benefits 5,288 4,509 4,897
Occupancy of bank premises, net 3,447 3,337 3,221
Furniture and equipment 3,980 4,155 3,992
Organizational expenses 216 36 612
Net OREO and collection expenses and losses 1,780 2,244 2,182
Printing and supplies 1,157 1,143 1,147
FDIC insurance 4 1,163 2,319
Credit card merchant expense 2,093 1,715 1,561
Other operating expense 10,769 10,194 9,046
Total other operating expense 47,411 45,999 46,763
Income before income taxes 25,154 22,138 17,027
Applicable income tax expense 8,539 7,241 5,159
Net Income $16,615 $14,897 $11,868
Earnings Per Common Share:
Net income-primary and fully diluted $3.45 $3.10 $2.51
See notes to consolidated financial statements.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 1996, 1995 and 1994
Unrealized
Holding
Common Capital Undivided Gains Treausury
Stock Suprlus Profits (Losses) Stock Total
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 8 - - - 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
Net income - - 16,615 - - 16,615
Issuance of 4,351 shares of
common stock under employee
stock purchase plan 4 140 - - - 144
Exercise of options: 5,520
shares at $7.50; 200 shares
at $10.25; 18,700 shares at
$19.00; 1,500 shares at
$20.25 and 2,000 shares
at $22.50; 1,000 shares
at $31.50 - (144) - - 618 474
Purchase of 99,000 shares
under 1996 stock repurchase
plan - - - - (3,555) (3,555)
Issuance of 4,887 shares of
common stock under dividend
reinvestment plan 5 167 - - - 172
Change in unrealized gain/loss
on securities available for
sale portfolio, net of tax - - - (1,038) - (1,038)
Cash dividends declared
($1.06) - - (4,928) - - (4,928)
Balance, December 31, 1996 $4,892 $49,590 $71,151 $(1,029) $(4,887)$119,717
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
1996 1995 1994
(Dollars in thousands)
OPERATING ACTIVITIES
Net Income $16,615 $14,897 $11,868
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 3,350 3,900 4,000
Provision for depreciation 3,007 3,233 2,747
Net amortization on investment securities 682 670 885
Deferred income taxes (56) 307 239
Net gain on sale of loans (1,008) (637) (362)
Security gains, net (11) (79) (56)
Proceeds from sales of loans 58,106 37,547 90,097
Loans originated for sale (58,860) (37,192) (80,047)
Net loss on sale of OREO 578 798 526
(Increase) decrease in other assets (4,236) 24 (3,233)
(Decrease) increase in other liabilities (49) 1,007 768
NET CASH PROVIDED BY OPERATING ACTIVITIES 18,118 24,475 27,432
INVESTING ACTIVITIES
Proceeds from sales of securities 19,488 18,598 28,097
Proceeds from maturities of securities 62,726 21,694 43,933
Purchase of securities (125,915) (102,135) (82,703)
Proceeds from sale of OREO 4,672 4,469 7,000
Purchase of mortgage loans (2,555) - (9,963)
Net (increase) decrease in loans (20,083) 9,183 (45,664)
Purchase of premises and equipment (6,259) (2,301) (2,056)
NET CASH USED BY INVESTING ACTIVITIES (67,926) (50,492) (61,356)
FINANCING ACTIVITIES
Net increase in deposits 49,301 21,088 45,287
Net increase (decrease) in other borrowings 9,176 (2,223) 1,835
Issuance of common stock 790 914 456
Purchase of treasury stock (3,555) - -
Cash dividends (4,928) (4,048) (2,425)
NET CASH PROVIDED BY FINANCING ACTIVITIES 50,784 15,731 45,153
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 976 (10,286) 11,229
Cash and Cash equivalents at beginning of year 62,821 73,107 61,878
CASH AND CASH EQUIVALENTS AT
END OF YEAR $63,797 $62,821 $73,107
Non-monetary Transactions:
Transfer of loans to OREO for the years ended December 31, 1996,
1995 and 1994 totaled $2,970, $3,757 and $7,335, respectively.
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
The accounting and reporting policies of Vermont Financial Services Corp.
and its subsidiaries (the "Company" or "VFSC") are in conformity with generally
accepted accounting principles and general practices within the banking
industry. The following is a description of the more significant policies.
The Company, organized in April 1982, became a registered bank holding
company, acquired controlling interest in Vermont National Bank ("VNB") on
March 1, 1983, upon exchange of all of the outstanding shares of common stock
of VNB for shares of the Company. In 1990 the Company changed its state of
incorporation from Vermont to Delaware. On June 14, 1994, a merger with West
Mass Bankshares ("WMBS") was effected as a pooling of interest with WMBS' sole
banking subsidiary, United Savings Bank ("USB"), becoming wholly owned by VFSC.
Subsequent to the merger USB changed its name to United Bank ("UB"). All
intercompany transactions have been eliminated in the consolidated financial
statements.
Cash equivalents include amounts due from banks, interest bearing
deposits with other banks and federal funds sold and securities purchased under
agreements to resell with original maturities of three months or less.
Securities that may be sold as part of the Company's asset/liability
or liquidity management or in response to or in anticipation of changes in
interest rates and resulting prepayment risk, or for other similar factors, are
classified as available for sale and carried at fair market value which is based
on quoted market prices or dealer quotes. Unrealized holding gains and losses
on such securities are reported net of related taxes as a separate component of
shareholders' equity. Realized gains and losses on the sales of all securities
are reported in earnings and computed using the specific identification cost
basis.
The 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 Recognition and
Disclosure". In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheets and income and expense for
the periods. Actual results could differ from those estimates.
The reserve for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb future loan losses through
charges to operating expenses. Principal factors considered by management
include the historical loan loss experience, the value and adequacy of
collateral, the level of nonperforming (nonaccrual) loans, the growth and
composition of the loan portfolio and examination of individual loans by
senior management.
OREO is carried at the lower of cost or fair value less the estimated
cost to sell the property.
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed principally on the straight-line
method over the estimated useful life of the related assets. Leasehold
improvements are amortized over the lease periods or the useful life of the
improvement, whichever is shorter. When assets are sold or retired, the
related cost and accumulated depreciation and amortization are removed from the
respective accounts and any gain or loss is credited or charged to income.
The Company has adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and
accordingly, management revalues long-lived assets and identifiable intangibles
(see below) upon events or a change in circumstances that indicate the carrying
amount of an asset may not be recoverable.
The Company accounts for its mortgage banking activities in accordance
with SFAS No. 122, "Accounting for Mortgage Servicing Rights - an amendment of
FASB Statement No. 65". This statement requires a mortgage banking enterprise
to recognize as separate assets, rights to service mortgage loans for others,
however those servicing rights are acquired.
Goodwill and other intangibles are amortized over their estimated lives
by the straight-line method. As part of its ongoing review, management
estimates the value of the Company's intangible assets, taking into
consideration any events and circumstances which might have diminished such
value.
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation". This pronouncement requires a fair value based method of
accounting for the award of an employee stock option or similar equity
instrument. Within the guidelines of this statement, the Company has chosen
to present the proforma effects on earnings per share of any new options granted
These disclosures are presented in Footnote 13 - Stockholders' Equity.
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 Company. Trust Department income is recorded
on the cash basis which is not materially different from income that would be
reported on the accrual basis.
Loan origination and commitment fees and certain direct loan origination
costs are deferred and amortized as an adjustment of the related loan's yield
over the contractual life of the related loans by the level yield method.
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. Securities
Additional information with respect to the contractual maturities of
securities available for sale at December 31, 1996 and 1995 follows:
December 31,
1996 1995
Fair Amortized Fair Amortized
Value Cost Value Cost
Classification and Maturity:
U. S. Treasury Securities:
Within 1 year $ 5,023 $ 5,008 $ 6,064 $ 6,045
1-5 years 25,302 25,304 26,268 25,890
Total 30,325 30,312 32,332 31,935
Obligations of Other U. S.
Government Agencies:
1-5 years 104,540 104,979 65,770 65,977
5-10 years 59,862 60,919 47,771 48,028
Total 164,402 165,898 113,541 114,005
Obligations of States and
Political Subdivisions:
Within 1 year 1,005 997 - -
1-5 years 7,128 7,103 1,316 1,302
5-10 years 2,425 2,452 5,427 5,372
Over 10 years - - 3,600 3,641
Total 10,558 10,552 10,343 10,315
Corporate Securities:
Within 1 year 500 500 509 503
1-5 years - - 508 500
Over 10 years - - 15 15
Total 500 500 1,032 1,018
Mortgage-backed Securities
with Original Average Life:
Within 1 year 2,594 2,588 1,602 1,591
1-5 years 59,689 59,782 67,011 67,010
5-10 years 3,402 3,437 5,569 5,561
Over 10 years 1,370 1,403 1,570 1,603
Total 67,055 67,210 75,752 75,765
Marketable Equity Securities 8,937 8,883 11,787 11,735
Money Market Overnight Investments:
Within 1 year 9,343 9,343 4,895 4,895
Total Securities $291,120 $292,698 $249,682 $249,668
December 31,
1996 1995
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
Classification:
U.S. Treasury Securities $194 $ 181 $ 458 $ 61
Obligations of Other U.S.
Government Agencies 277 1,773 480 944
Obligations of States and
Political Subdivisions 61 55 91 63
Corporate Securities - - 14 0
Mortgage-backed Securities 260 415 337 350
Marketable Equity Securities 61 7 54 2
Total $853 $2,431 $1,434 $1,420
Proceeds from sales of securities available for sale during 1996, 1995
and 1994 were $19,488, $18,598 and $28,097, respectively.
Gross gains of $11, $124 and $625 were realized on those sales in 1996,
1995 and 1994, respectively. Gross losses of $0, $45 and $569 were realized
in the respective periods.
Securities with a book value of $98,172 as of December 31, 1996 and
$90,723 as of December 31, 1995 were pledged to qualify for fiduciary powers,
to collateralize deposits of public bodies, for borrowed money and for other
purposes as required or permitted by law.
3. Loans
Loans classified by type are summarized as follows:
December 31,
1996 1995
Commercial $181,372 $170,162
Real Estate:
Residential 429,657 415,468
Commercial 177,339 182,233
Construction 25,205 24,816
Total Real Estate 632,201 622,517
Consumer 96,863 100,791
Total loans, net
of unearned income $910,436 $893,470
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, 1996 the amount of loans outstanding to directors,
executive officers, principal holders of equity securities or to any
of their associates totaled $6,683.
The following table summarizes the related party loan activity for 1996:
Balance at beginning of year $ 7,447
Additions 1,409
Repayments (2,173)
Balance at end of year $ 6,683
Mortgage Banking Activities - During 1996 the Company originated $55,969 of
mortgage loans for sale in the secondary market and sold $55,950. As of
December 31, 1996, $5,192 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 $1,859 in
loans sold by UB to the Federal Home Loan Mortgage Corporation under a recourse
agreement. 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 were $874 for 1996, $290 for 1995 and $187 for 1994. At December 31, 1996
and 1995 the Company's serviced mortgage portfolio totaled $412,259 and $420,573
respectively. Loan servicing income was $1,698, $1,910 and $1,775 for 1996,
1995 and 1994, respectively.
The following schedule represents excess servicing right activity for
the past two years:
1996 1995
Balance, January 1 $2,713 $3,279
Additions 57 11
Amortization (474) (359)
Sales 0 (218)
Balance, December 31 $2,296 $2,713
The Company capitalized $438 in originated mortgage servicing rights
(OMSRs) during 1996. The resulting revenue is recorded in mortgage servicing
income. The OMSRs were carried at their fair value of $427 as of December 31,
1996. The fair value of OMSRs is measured by discounting the expected net cash
flows of future mortgage servicing. The associated cash flows are discounted
using current rates for similar investments and expected prepayment spreads are
considered based on current market data. The Company stratifies OMSRs
according to type of product, rate and date sold. Impairment of OMSRs of $11
was recorded in 1996.
The following schedule presents activity in the valuation allowance
during the year:
1996
Balance at beginning of year $ 0
Additions 11
Repayments 0
Balance at end of year $11
4. Allowance for Loan and OREO Losses
Transactions in the allowance for
loan losses are summarized as follows: 1996 1995 1994
Balance, January 1 $14,761 $16,236 $17,815
Provision for Loan Losses 3,350 3,900 4,000
Loans Charged Off (6,033) (6,613) (6,785)
Recoveries of Loans Previously Charged Off 1,569 1,238 1,206
Balance, December 31 $13,647 $14,761 $16,236
Transactions in the OREO valuation
reserve are summarized as follows: 1996 1995 1994
Balance, January 1 $ 47 $ 710 $ 490
Provisions for OREO losses 249 503 571
OREO Charged Off (209) (1,166) (351)
Balance, December 31 $ 87 $ 47 $ 710
Proceeds from sales of OREO were $4,672 in 1996 and $4,469 in 1995. Loans
associated with these sales were $873 and $1,468, 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.
5. Premises and Equipment
Premises and equipment, stated at cost, consist of the following:
December 31,
1996 1995
Land $ 2,504 $ 2,504
Premises 22,222 20,841
Equipment 18,188 14,195
Leasehold Improvements 1,833 1,768
Total 44,747 39,308
Accumulated Depreciation and
Amortization (21,129) (18,942)
Premises and Equipment, Net $ 23,618 $ 20,366
6. Deposits
Time certificates of deposit outstanding in denominations of $100 or more
aggregated to $38,833 and $37,958 at December 31, 1996 and 1995, respectively.
Total interest on these deposits amounted to $2,025, $1,766 and $1,123 for the
years ended December 31, 1996, 1995 and 1994, respectively.
The Company paid $37,057, $36,945 and $29,042 in interest on deposits
during 1996, 1995 and 1994, respectively.
7. Other Borrowings
The following table shows the distribution of the Company's borrowings
and the weighted average interest rate thereon at the end of
each of the last three years. The table also shows the maximum amount of
borrowings and the average amount of borrowings as well as weighted average
interest rates for the last three years. Federal funds purchased and securities
and loans sold under agreements to repurchase generally mature within 30 days
from the transaction date.
At December 31, 1996 the Company owned $7,563 of stock in the Federal
Home Loan Bank ("FHLB") which provided borrowing capacity up to $322 million
from the FHLB at maturities, rates and terms determined by the FHLB.
December 31,
1996 1995 1994
Federal funds purchased $ 0 $ 450 $ 350
Securities and loans sold under
agreements to repurchase 77,672 79,323 70,813
FHLB and other borrowings 23,169 11,892 22,725
Total $100,841 $ 91,665 $93,888
Average amount outstanding
during the year $ 88,133 $ 95,034 $102,963
Maximum amount outstanding at
any month end $106,793 $112,370 $125,097
Weighted average interest rate
at year end 4.81% 4.85% 4.66%
Weighted average interest rate
during the year 4.86% 5.21% 4.03%
Long-term borrowings from the FHLB(included in the above):
December 31,
1996 1995 1994
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% 539 553 566
Maturing July 15, 1998 @ 6.03% 10,000 10,000 -
Maturing September 1, 2016 @ 5.50% 296 - -
8. Fair Market Value of Financial Instruments
Cash and Cash Equivalents - Cash and cash equivalents had a carrying
value of $63,797 and $62,821 at December 31, 1996 and 1995, respectively.
Due to their short term and very liquid nature the carrying value is considered
to also represent the fair market value of these balances.
Securities - Securities are classified as available for sale and are
carried at fair market value based on quoted market prices or dealer
quotes. Securities available for sale had a total fair market value of $291,120
and $249,682 at December 31, 1996 and 1995, respectively.
Loans - At December 31, 1996 and 1995 total loans, net of allowance for
loan losses, had a carrying value of $896,789 and $878,709, respectively.
The fair value of these loans was $908,688 and $900,652, respectively. For
certain homogeneous categories of loans, such as some residential mortgages,
credit card receivables and other consumer loans, fair value is estimated using
the quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value of other types of loans
is estimated by discounting the future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities.
Deposits - At December 31, 1996 and 1995 total deposits had carrying
values of $1,083,258 and $1,033,957 and fair values of $1,084,304 and $1,032,796
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 $100,841
and $91,665 at December 31, 1996 and 1995, respectively. These are also
reasonable estimates of fair market value.
Off-Balance Sheet Financial Instruments - The Company's off-balance sheet
exposure is primarily in the form of commitments to extend credit and standby
letters of credit. The carrying amount of these arrangements represents
accruals or deferred income (fees) arising from those unrecognized financial
instruments. Such amounts are minimal and approximate fair value.
9. Impaired Loans
Effective January 1, 1995, the Company adopted, prospectively, Statement 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 collect 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.
It is the Company's policy to manage the loan portfolio so as to recognize
and respond to problem loans at an early state 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 ocnsumer 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. Mortage loans are classified as nonaccrual 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 reductions. While no specfic period of delinquency
triggers nonaccrual status for consumer loans, unsecured installment loans 90
days or more past due and collateralized installment loans 180 days or more
past due are generally recommended for charge-off.
A loan remains in nonaccrual status until the factors which indicate
doubtful collectibility no longer exist and six consecutive months of
contractual payments are received or until the loan is determined to be
uncollectible and is charged off against the allowance for loan losses.
Credit card loans are required to be charged off after 180 days without a
payment. Commercial loans 180 days or more past due must be recommended for
charge-off unless management determines the collateral is sufficient. When a
mortgage loan in default is transferred to OREO, its carrying value is the
lesser of the loan amount or the fair value of the property collateralizing the
loan, less the estimated cost to sell the property. A loan is classified as
a restructured loan when the interest rate is materially reduced or when the
term is extended beyond the original maturity date because of the inability of
the borrower to service the interest payments at the contractual rate.
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 collectibility 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. Upon
returning to an accrual status, all foregone interest income is recovered into
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.
The following table details the Company's impaired loans as of the
periods indicated:
December 31,
1996 1995
Commercial (measured using discounted cash flows) $20.9 $24.6
Commercial (measured using collateral values) 0.3 0.5
Real Estate-Commercial (measured using collateral values) 1.5 5.0
Real Estate-Residential (measured using collateral values) 5.6 6.1
Consumer (measured using collateral values) - 0.1
Total impaired loans $28.3 $36.3
===== =====
Impaired loans with a specific valuation reserve 1.6 2.6
Valuation reserve for impaired loans 0.3 0.9
Impaired loans without a specific valuation reserve 26.7 33.7
Average impaired loans 30.2 35.5
Income accrued on impaired loans $ 2.1 $ 2.4
10. Commitments and Contingencies and Financial Instruments with Off-Balance
Sheet Risk Leases -
The following is a schedule by years of future minimum rental payments
required under operating leases for premises and data processing equipment that
have initial or remaining noncancelable lease terms in excess ofone year as of
December 31, 1996. Certain operating leases contain various options to renew.
Year Ending December 31:
1996 $ 463
1997 388
1998 334
1999 290
2000 196
Later Years 1,785
Total Minimum Payments Required $3,456
Operating expenses include approximately $872, $943 and $988 in 1996, 1995
and 1994, respectively, for rentals of premises and equipment used for banking
purposes.
Derivative Financial Instruments - Transactions involving derivative
financial instruments except those described below during the fiscal years 1996,
1995 and 1994 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 ofinvolvement 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, 1996 were as follows:
Home equity lines $ 52,081
Credit card lines 92,336
Commercial real estate 16,270
Other unused commitments 112,106
The Company evaluates each customer's credit-worthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary upon extension
of credit is based on management's credit evaluation of the counterparty.
Collateral held varies but may include certificates of deposit, accounts
receivable, inventory, property, plant and equipment, residential real estate
and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The collateral varies but may include certificates of deposit, accounts
receivable, inventory, property, plant and equipment and residential real
estate for those commitments for which collateral is deemed necessary.
As of December 31, 1996, the Company had outstanding commitments for the
following: financial standby letters of credit - $17,867, performance standby
letters of credit - $3,018 and commercial and similar letters of credit -
$6,179.
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, 1996 the Company's reserve
requirement of $16,420 was met with cash on hand and deposits at the Federal
Reserve Bank.
Other - The Company is also involved in litigation arising in the normal
course of business. The Company does not anticipate that any of these matters
will result in the payment by the Company of damages, that in the aggregate,
would be material in relation to the consolidated results of operations or
financial position of the Company.
11. Income Taxes
The provisions for income tax expense (benefit) included in the statements
ofincome are as follows:
Year Ended December 31,
1996 1995 1994
Currently Payable:
Federal $7,439 $5,992 $4,334
State 636 665 586
Deferred:
Federal 421 569 242
State 43 15 (3)
Total $8,539 $7,241 $5,159
The Company made income tax payments of $7,390, $6,425 and $4,623 during 1996,
1995 and 1994, respectively.
The components of the net deferred tax asset as of December 31 are as follows:
1996 1995
Deferred tax assets:
Pension $ 729 $ 661
Deferred compensation and fees 1,853 1,760
Provision for possible loan losses 4,649 5,016
Unrealized loss on securities 549 -
Other 283 361
Total gross deferred tax assets 8,063 7,798
Deferred tax liabilities:
Accretion 94 -
Unearned income 419 455
Depreciation 1,216 1,039
Unrealized gain on securities - 5
Intangibles 413 466
Total gross deferred tax liabilities 2,142 1,965
Deferred tax asset, net $5,921 $5,833
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:
1996 1995 1994
% of % of % of
Pre Tax Pre Tax Pre Tax
Amount Income Amount Income Amount Income
Federal Statutory Rate $8,804 35.0% $7,748 35.0% $5,959 35.0%
Decreases in Taxes Resulting From:
Tax exempt interest (786) (3.1) (841) (3.8) (782) (4.6)
State taxes, net of federal
benefit 443 1.8 444 2.0 378 2.2
Life insurance proceeds - - - - (238) (1.4)
Other, net 78 0.3 (110) (0.5) (158) (0.9)
Total $8,539 34.0% $7,241 32.7% $5,15 9 30.3%
On August 22, 1996 "The Small Business Job Protection Act" was signed into
law which repeals the tax bad debt method previously available to UB. For the
year ended December 31, 1996, the Bank was required to change to the method
prescribed under Internal Revenue Code Section 585. The change did not have
a material impact on the Bank's financial position or results of operations.
12. 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 highest paid
consecutive three years of employment during the last ten years of credited
service. It is the Company's policy to fund annually an amount equal to the
lesser of the actuarially determined normal cost or the amount allowed by the
Internal Revenue Code Section 412 Full Funding Limitations. All plan assets are
part of a single pooled fund made up of all participated SBERA members which are
managed by the SBERA Trustees.
The following table sets forth the plans' combined funded status and
amounts recognized in the Company's consolidated balance sheets as of
December 31, 1996 and 1995:
Year Ended December 31,
1996 1995
Actuarial present value of benefit obligations:
Accumulated benefit obligation,
including vested benefits of $12,174
and $12,171 for 1996 and 1995, respectively $12,326 $ 12,266
Projected benefit obligation ("PBO") for
service rendered to date $(17,183) $(16,846)
Plan assets at fair value, comprised of
guaranteed insurance contacts, mutual,
real estate and money market funds and
listed stocks and bonds 17,665 15,737
PBO less than (in excess of) plan assets 482 (1,109)
Unrecognized net (gain) loss from
past experience different from that assumed
and effects of changes in assumptions $(1,485) 479
Unrecognized prior service cost (48) (52)
Unrecognized net asset at period end
being recognized over 18.64 years (901) (1,020)
Accrued pension cost $(1,952) $(1,702)
1996 1995 1994
Net pension cost included the following components:
Service cost - benefits earned during the period $ 870 $ 652 $ 833
Interest cost on PBO 1,270 1,141 1,052
Actual return on plan assets (2,127) (2,974) (166)
Amortization of net transition asset (119) (119) (119)
Net amortization and deferral of losses 802 1,864 (874)
Net pension cost $ 696 $ 564 $ 726
Significant assumptions used in actuarial computations were:
1996 1995
Discount rate 7.50% - 7.75% 7.00% - 7.25%
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% 8.00% - 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 $ 750 for 1996, $500 for 1995 and $250 for 1994. The Plan
included a 50% Company match of employee contributions to a 401k portion of
the Plan for 1996 and a 25% match for 1995 and 1994. This Plan feature was
added in 1993 and the associated expense was $340 for 1996, $140 for 1995 and
$118 for 1994.
The Company also has an Employee Stock Purchase Plan covering substantially
all employees. The Plan allows the purchase of common stock at a ten percent
discount from the then current fair market value, without payment of any
brokerage commission or service charge.
The Company sponsors defined benefit postretirement medical and life
insurance plans that cover all of its full time employees and participating
retirees. Eligible employees who retire and who have attained age 65 with at
least 10 years of service may elect coverage. Spouses of eligible retirees are
required to contribute 100% of the cost of any medical coverage they elect.
A closed group of certain retirees and their spouses who elected to retire
under a special incentive program receive additional medical benefits. The
plans are not funded. Effective January 1, 1993 the Company adopted SFAS No. 106
"Employers' Accounting for Postretirement Benefits Other Than Pensions".
The following table sets forth the plan's funded status reconciled
with the amount shown in the Company's financial statements:
1996 1995
Accumulated postretirement benefit obligation:
Retired employees $255 $302
Active employees 168 161
Total $423 $463
Plan assets at fair value $ - $ -
Unfunded accumulated benefit obligation
in excess of plan assets $(423) $(463)
Unrecognized net (gain) 68 96
Unrecognized transition obligation 182 194
(Accrued) postretirement medical and
life benefit cost $(173) $(173)
Net periodic postretirement benefit cost
included the following components:
Service cost - benefits attributed to service
during the period $ 12 $ 9
Interest cost 32 34
Recognition of transition obligation 11 11
Unrecognized loss 3 -
Net periodic postretirement cost $ 58 $ 54
For measurement purposes, an 8% annual rate of increase in the per capita
net employer share of covered health care benefits was assumed for 1996. The
rate was assumed to remain at that level thereafter, but the impact of medical
inflation eventually diminishes because of the $10 per capita lifetime limit on
medical benefits and the likelihood that most current retirees and all future
retirees will reach that cap. The medical trend rate assumption, therefore,
merely affects the timing of the distribution of the $10 in benefits to each
participant, and so has a relatively small effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rate by one percentage
point for all future years would increase the accumulated postretirement benefit
obligation at December 31, 1996, as well as the total of the service cost and
interest cost components of net periodic postretirement cost for 1996 by less
than 2%. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7.75% in 1996 and 7.25% in
1995. As the plan is unfunded, no assumption was needed as to the long term
rate of return on assets.
13. Stockholders' Equity
The Company had certain common stock equivalents outstanding from 1994
through 1996. 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:
1996 1995 1994
Average primary shares outstanding 4,817,324 4,807,553 4,735,480
Average fully diluted shares outstanding 4,819,673 4,812,831 4,735,753
The per share amounts of cash dividends paid on an equivalent share basis
were $1.06 for 1996, $0.87 for 1995 and $0.54 for 1994. At December 31, 1996,
the Banks had available $1,266 for payment of dividends to the Company, under
regulatory guidelines.
At December 31, 1996, there were 69,220 and 74,443 shares of common
stock reserved for issuance pursuant to the Company's Dividend Reinvestment
and Stock Purchase Plan and pursuant to the Company's Employee Stock Purchase
Plan, respectively.
Option Agreements - On April 20, 1987, stockholders approved a non-
qualified stock option plan for 105,000 shares of the Company's common stock
and on April 17, 1990 stockholders approved a non-qualified stock option plan
for 80,000 shares of the Company's common stock. In October, 1993 the 65,100
and 40,000 options that were then outstanding expired unexercised for these
respective plans. On October 13, 1993 new options to purchase 36,000 and
12,000 shares, respectively, were granted under these plans at an exercise
price of $19.00 per share and are exercisable for a five year period; 17,000
have been exercised to date. On August 31, 1994 stockholders approved the
Vermont Financial Services Corp. 1994 Stock Option plan which reserves 225,000
common shares to be issued in the form of stock options. To date 48,000 have
been issued at an exercise price of $19.00 per share, 6,500 have been issued at
an exercise price of $20.25 per share, 59,800 have been issued at an exercise
price of $22.50 per share and 74,000 have been issued at an exercise price of
$31.50 per share; 11,700 have been exercised to date. All options are
exercisable for a ten year period. In addition, the Company 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 which are exercisable for a ten year period. To date
126,960 have been issued at an exercise price of $7.50 per share all of which
have been exercised and 6,900 have been issued at an exercise price of $10.25
per share of which 4,375 have been exercised to date.
The following table presents the activity in each of the Company's
stock option plans:
Shares Shares Shares Shares
Under Under Under Under
Option Option Option Option
@ $7.50 - @ $19.00 @ $19.00 @ $19.00 -
$10.25 $31.50
Outstanding, December 31, 1993 124,860 36,000 12,000 -
Granted - - - 54,500
Expired - - - -
Exercised 29,523 - - -
Outstanding, December 31, 1994 95,337 36,000 12,000 54,500
Granted - - - 59,800
Expired - - - -
Exercised 87,092 4,000 - 1,500
Outstanding, December 31, 1995 8,245 32,000 12,000 112,800
Granted - - - 74,000
Expired - - - 1,000
Exercised 5,720 8,000 5,000 9,200
Outstanding, December 31, 1996 2,525 24,000 7,000 176,600
Weighted average remaining
maturity (years) 6.4 1.8 1.8 8.5
Weighted average exercise price $10.25 $19.00 $19.00 $25.32
The Company follows Accounting Principles Board (APB) Opinion No. 25 and the
related Interpretations in accounting for those plans. Accordingly, no
compensation cost has been recognized for any options issued under these plans.
Had compensation cost for the VFSC's stock option plans been determined based
on the fair value at the grant date for awards under those plans consistent
with FASB Statement No. 123, the Company's net income, earnings per share and
book value per share would have been reduced to the following pro forma
amounts:
1996 1995
Net income As reported $16,615 $14,897
Pro forma $16,213 $14,586
Primary and fully diluted
earnings per share As reported $3.45 $3.10
Pro forma $3.36 $3.03
Fully diluted tangible
book value per share As reported $23.73 $22.47
Pro forma $23.64 $22.41
Significant values and
assumptions used in calculating the above proforma amounts are as follows:
Options Issued Options Issued
3/13/96 5/10/95
Stock price at date of issuance $31.50 $22.50
Exercise price $31.50 $22.50
Anticipated remaining life (years) 7.50 7.50
Volatility 23.18% 38.13%
Annual rate of quarterly dividends 3.18% 3.56%
Risk free discount rate 6.20% 6.54%
Grant date fair value of options $8.35 $8.01
14. 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,
1996 1995
ASSETS
Cash $ 4,085 $ 503
Securities 31,565 4,722
Other Assets 739 127
Investment in Bank Subsidiaries 84,318 107,622
Total Assets $120,707 $112,974
LIABILITIES AND STOCKHOLDERS' EQUITY
Other Liabilities $ 990 $ 1,141
Total Liabilities 990 1,141
Total Stockholders' Equity 119,717 111,833
Total Liabilities and Stockholders' Equity $120,707 $112,974
CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
1996 1995 1994
INCOME
Income on Securities $ 334 $ 316 $ 194
Other Income 39,000 3,615 275
Total Income 39,334 3,931 469
EXPENSES
Organizational Expenses 216 36 612
Other 452 515 283
Total Operating Expenses 668 551 895
Income (Loss) Before Tax Benefit
and Equity in Undistributed Income
from Bank Subsidiaries 38,666 3,380 (426)
Applicable Income Tax (Benefit) (168) (195) (131)
Income (Loss) Before Equity in Undistributed
Income of Bank Subsidiaries 38,834 3,575 (295)
Equity in Undistributed
Income of Bank Subsidiaries (22,219) 11,322 12,163
Net Income $16,615 $14,897 $11,868
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1996 1995 1994
OPERATING ACTIVITIES
Net Income $16,615 $14,897 $11,868
Adjustments to reconcile income
to net cash providedby operating
activities:
Amortization and accretion
on investment securities 22 2 5
Investment security (gains) losses (8) (121) 9
(Increase) in other assets (633) (28) (10)
(Decrease) increase in other liabilities (151) 866 34
Equity in undistributed net income
of bank subsidiaries 22,219 (11,322) (12,163)
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES 38,064 4,294 (257)
INVESTING ACTIVITIES
Proceed from sales of securities 9,716 1,039 3,183
Proceeds from maturities of securities 257 500 750
Purchase of securities (36,762) (2,321) (3,489)
NET CASH (USED) PROVIDED BY
INVESTING ACTIVITIES (26,789) (782) 444
FINANCING ACTIVITIES
Issuance of common stock 316 914 456
Purchase of treasury stock (3,555) - -
Sales of treasury stock 474 - -
Cash dividends (4,928) (4,048) (2,425)
NET CASH USED BY FINANCING ACTIVITIES (7,693) (3,134) (1,969)
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,582 378 (1,782)
Cash and cash equivalents
at beginning of year 503 125 1,907
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,085 $ 503 $ 125
15. Supplemental Financial Data
Selected Quarterly Data (unaudited)
The following is a summary of selected consolidated quarterly data of
the Company for the periods presented:
1996
Fourth Third Second First
Quarter Quarter Quarter Quarter
Interest income $24,904 $24,420 $24,476 $24,305
Interest expense 10,374 10,387 10,160 10,430
Net interest income 14,530 14,033 14,316 13,875
Provision for possible loan losses 750 800 900 900
Other operating income 5,377 4,835 4,432 4,517
Other operating expense 12,457 11,805 11,715 11,434
Income before income taxes 6,700 6,263 6,133 6,058
Applicable income taxes 2,202 2,096 2,124 2,117
Net income $ 4,498 $ 4,167 $ 4,009 $ 3,941
Per share data:
Primary and fully diluted
Net income $0.94 $0.87 $0.83 $0.81
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
16. Merger with Eastern Bancorp, Inc.
The Company has signed a definitive agreement to acquire Eastern
Bankcorp, Inc. (EBCP) in a tax-free ,merger involving an exchange of stock and
cash. EBCP is the holding company for Vermont Federal Bank, FSB which operates
15 branches in Vermont and 10 branches in southern New Hampshire through First
Savings of New Hampshire, an operating division of Vermont Federal Bank. The
acquisition will be accounted for by the purchase method of accounting and is
expected to be accretive to VFSC's earnings by 1997 calendar year end.
Under the terms of the definitive agreement, EBCP shareholders will
receive stock and/or cash equal to the sum of $7.25 plus the product of 0.49
times the average closing bid price of VFSC common stock for a twenty trading
day period ending shortly before the effective time of the merger. Prior to
closing each EBCP shareholder may elect to receive either stock or cash or a
combination of both in exchange for the EBCP shares. The acquisition price
will be identical without regard to whether a shareholder has elected to receive
stock or cash or a combination. Based on a twenty day average closing bid
price of VFSC common stock at November 11, 1996 of $36.25, the transaction
would be value at $97.7 million and EBCP shareholders would be entitled to
receive stock and/or cash equal to approximately $25.01 for each share of EBCP
common stock. The total amount of each to be paid and the number of shares to
be issued by VFSC in acquisition are fixed, subject to certain collar
adjustments noted below. Based upon EBCP's audited September 30, 1996 financial
statements and the transaction value indicated above, the price payable to EBCP
shareholders would represent 1.45 times book value and, excluding the one-
time special statutory assessment to be paid by EBCP to capitalize the Savings
Association Insurance Fund, 16.1 times trailing twelve month earnings.
The following table(s) set forth separate and proforma combined
statements of condition and results of operations for VFSC's fiscal years
ended December 31, 1996 and 1995, respectively.
VERMONT FINANCIAL SERVICES CORP. -EASTERN BANCORP.
Pro Forma Combined Condensed Statement of Condition
December 31, 1996
(Dollars in Thousands)
(unaudited)
VFSC Eastern Pro Forma Pro Forma
Historical Historical Adjustments VFSC
Assets
Cash and due from banks $ 61,962 $ 30,626 $(25,424) (D) $ 67,164
Interest bearing balances
with banks 60 60
Securities available for sale 291,120 9,997 301,117
Securities held to maturity 276,909 (4,281) (A) 272,628
FHLB stock 9,283 9,283
Federal funds sold 1,775 6,598 8,373
Loans 910,436 496,852 (5,625) (A) 1,401,663
Allowance for loan losses (13,647) (2,906) (16,553)
Net loans 896,789 493,946 (5,625) 1,385,110
Premises and equipment 23,618 17,185 (757) (A) 40,046
Real estate held for investment 1,360 261 1,621
Other real estate owned 697 4,951 5,648
Goodwill and other intangibles 6,327 6,512 45,150 (A)(E) 57,989
Other assets 29,273 9,750 3,372 (B) 42,395
Total assets $1,312,981 $866,018 $12,435 $2,191,434
Liabilities and stockholders' equity
Liabilities
Total deposits $1,083,258 $627,217 $(1,493)(A) $1,711,968
Federal funds purchased and
securities sold with
agreements to repurchase 77,672 77,672
Borrowed money 23,169 168,780 333 (A) 191,616
Other liabilities 9,165 5,243 (3,753)(C) 18,161
Total liabilities 1,193,264 801,240 (4,913) 1,999,417
Stockholders' equity:
Common stock 4,892 41 41 (E) 6,886
(1,994)(D)
Capital Surplus 49,590 36,543 (E) 36,543 (E) 119,896
(70,306)(D)
Undivided profits 71,151 31,043 31,043 (E) 71,151
Security valuation allowance (1,029) (2) (2)(E) (1,029)
Treasury stock, at cost (4,887) (2,847) (2,847)(E) (4,887)
Total stockholders' equity 119,717 64,778 (7,522) 192,017
Total liabilities and
stockholders' equity $1,312,981 $866,018 $(12,435) $2,191,434
VERMONT FINANCIAL SERVICES CORP. - EASTERN BANCORP.
Pro Forma Combined Condensed Statement of Income
For the twelve months ended December 31, 1996
(Dollars in thousands, except per share data)
(unaudited)
VFSC Eastern Pro Forma Pro Forma
Historical Historical Adjustments VFSC
Interest income
Interest on fees on loans $81,281 $42,173 $ (804)(G) $124,258
Interest on securities
available for sale 15,982 321 (428)(F) 16,731
Interest on securities held
to maturity 19,184 19,184
Other 842 842
Total interest income 98,105 61,678 (1,232) 161,015
Interest expense
Deposits 37,057 23,734 (299)(I) 60,492
Other 4,294 8,185 167 (K) 12,646
Total interest expense 41,351 31,919 (132) 73,138
Net interest income 56,754 29,759 (1,364) 87,877
Provision for loan losses 3,350 605 3,955
53,404 29,154 (1,364) 83,922
Other income 19,161 10,810 29,971
Other expenses 47,411 34,715 3,026 (H)(J) 85,152
Income before income taxes 25,154 5,249 1,662 28,741
Applicable income taxes 8,539 2,011 582 (L) 11,132
Net income $16,615 $3,238 $2,244 $17,609
Weighted average common
shares outstanding 4,819,673 1,994,484 6,814,157
Earnings per share $3.45 $0.85 $2.58
VERMONT FINANCIAL SERVICES CORP. - EASTERN BANCORP.
Pro Forma Combined Condensed Statement of Income
For the twelve months ended December 31, 1995
(Dollars in thousands, except per share data)
(unaudited)
VFSC Eastern Pro Forma Pro Forma
Historical Historical Adjustments VFSC
Interest income
Interest on fees on loans $83,506 $39,764 $ (804) (G) $ 124,074
Interest on securities
available for sale 11,923 552 (428) (F) 12,903
Interest on securities held
to maturity 20,936 20,936
Other 1,028 1,028
Total interest income 96,457 61,252 (1,232) 158,941
Interest expense
Deposits 36,945 23,109 (299) (I) 59,755
Other 5,024 10,369 167 (K) 15,560
Total interest expense 41,969 33,478 (132) 75,315
Net interest income 54,488 27,774 (1,364) 83,626
Provision for loan losses 3,900 1,997 5,897
50,588 25,777 (1,364) 77,729
Other income 17,549 10,830 28,379
Other expense 45,999 29,711 3,026 (H)(J) 78,736
Income before income taxes 22,138 6,896 1,662 27,372
Applicable income taxes 7,241 2,414 582 (L) 10,237
Net income $14,897 $4,482 $2,244 $17,135
Weighted average common
shares outstanding 4,812,831 1,994,484 6,802,037
Earnings per share $3.10 $1.19 $2.52
VERMONT FINANCIAL SERVICES CORP. - EASTERN BANCORP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL DATA
(Dollars in t(Dollars in thousands, except per share data)
Note (A)
Note (A) To adjust assets and liabilities to their estimated fair values:
Dr.(Cr.)
Investments $(4,281)
Loans (5,625)
Premises and equipment (757)
Deposits (1,493)
Mortgage servicing rights 2,188
FHLB advances 333
Note (B) To reflect tax effects of transaction:
Dr.(Cr.)
Tax effect of fair value adjustments $ 3,372
Note (C) To accrue estimated professional and other costs associated with
the merger of $3,753.
Note (D) To reflect issuance of stock and payment of cash to Eastern:
Dr.(Cr.)
Market value of 1,801,032 shares of VFSC Common Stock
(based on closing bid price per share of $36.25 for
VFSC Common Stock on November 11, 1996) $65,286
Cash to be paid 26,648
Consideration for Eastern stock option spread 5,790
$97,724
This assumes that all holders of Eastern stock options exercise
such options and an additional 193,452 shares of VFSC common stock
are issued.
Note (E) Goodwill is calculated as follows:
Dr.(Cr.)
Stockholders' equity of Eastern at December 31, 1996 $64,778
Increase (decrease) to Eastern's equity as a result
of estimated fair value adjustments:
Investments (4,281)
Loans (5,625)
Premises and equipment (757)
Deposits (1,493)
Mortgage servicing rights 2,188
FHLB advances 333
Tax effect of fair value adjustments 3,372
Unallocated purchase price (goodwill) 42,962
Total purchase price (including merger costs) $101,477
Note (F) To accrete fair value adjustment for investments (10 years).
Note (G) To accrete fair value adjustment for loans (7 years).
Note (H) To accrete fair value adjustment for premises and equipment
(5 years).
Note (I) To accrete fair value adjustment for deposits (5 years).
Note (J) To amortize intangibles:
Year Ended Year Ended
12/31/96 12/31/95
Mortgage servicing rights (7 years) $ 313 $ 313
Goodwill (15 years) 2,864 2,864
Total $3,177 $3,177
Note (K) To amortize fair value adjustment of FHLB advances (2 years).
Note (L) To record tax impact of accretion and amortization of fair value
adjustments.
Note (M) Pursuant to the Merger Agreement described elsewhere in this
document, VFSC will issue 1,801,032 shares of VFSC Common
stock in connection with the Merger, provided that the price of
VFSC Common Stock at the Effective Date, as defined in the
Merger Agreement, is greater than $26.06 per share (minimum price)
and less than $39.96 per share (maximum price). The following
table presents the pro forma effect on selected financial data
assuming these minimum and maximum per share prices. This table
assumes that all holders of Eastern stock options exercise such
options and an additional 193,452 shares of VFSC common stock
are issued. See "THE MERGER - Treatment of Eastern Stock Options."
In thousands, except per share data
Minimum Maximum
Purchase Price $77,404 $105,128
Goodwill 22,642 50,366
Net income:
Year ended December 31, 1995 18,490 16,641
Year ended December 31, 1996 18,964 17,115
Earnings per share:
Year ended December 31, 1995 2.72 2.45
Year ended December 31, 1996 2.78 2.51
The combined financial results presented above include adjustments made
to conform accounting policies of the two Companies. All adjustments are
reclassifications to conform financial statement presentation. These
reclassifications include EBCP transferring its investment portfolio from
"Held-to-Maturity" to "Available for Sale" at December 31, 1996. There were
no intercompany transactions between the two Companies during the periods
presented above.
Statement of Management Responsibility
The management of Vermont Financial Services Corp. is responsible for
the accuracy and content of the financial statements and other financial
information in this annual report. The financial statements have been prepared
in conformity with generally accepted accounting principals applied on a
consistent basis in all material respects, and data include amounts based upon
management's judgment 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 L.L.P. the Company
s independent auditors. Coopers & Lybrand L.L.P. has been appointed by the
Board of Directors to conduct an independent audit and to express an opinion
as to the fairness of the presentation of the consolidated financial statements
of Vermont Financial Services Corp.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Vermont Financial Services Corp.
We have audited the accompanying consolidated balance sheets of Vermont
Financial Services Corp. and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. 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 statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects the consolidated financial position of
Vermont financial Services Corp. and subsidiaries as of December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
As described in Notes 1 and 3 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 122, "Accounting
for Mortgage Servicing Rights" and Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" in 1996.
Springfield, Massachusetts
January 21, 1997
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 no family
relationships among the executive officers.
Year First
Elected to
Name and Age Office Office
John D. Hashagen, Jr. (55) 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 (48) 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 (43) Executive Vice President of the Company 1997
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 (51) Executive Vice President of the Company 1992
Executive Vice President of VNB 1988
Senior Vice President of VNB 1984
W. Bruce Fenn (55) Executive Vice President of the Company 1997
Executive Vice President of VNB 1988
Senior Vice President and Senior Loan 1987
Officer of VNB
Kenneth R. Cole (50) 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 of the directors.
Name, Age and Principal Year First
Occupation or Employment and Became
Offices held with the Company(1) Director
Anthony F. Abatiell (57)
Attorney, Partner, Abatiell, Wysolmerski & 1982
Valerio Law Offices, Rutland, VT
Zane V. Akins (56)
President, Akins & Associates, 1987
Brattleboro, VT
Charles A. Cairns (55)
President, Champlain Oil Co., Inc. and 1986
Coco Mart, Inc., South Burlington, VT
William P. Cody (43)
General Manager, Cody Chevrolet, Inc., 1996
Montpelier, VT
Allyn W. Coombs (62)
President and Treasurer of Allyn W. Coombs, 1994
Inc. (Real Estate Development & Management),
Amherst, MA
Beverly G. Davidson (65)
Secretary, Treasurer of RCAS, Inc., 1980
(Vermont State Fair), Rutland, VT
Philip M. Drumheller (43)
President, The Lane Press, Inc., Burlington, VT 1995
James E. Griffin (69)
President, J. R. Resources, Inc. 1972
(Business Consultants), Rutland, VT
John D. Hashagen, Jr. (55)
President & Chief Executive Officer of 1987
Vermont Financial Services Corp., Brattleboro;
President & Chief Executive Officer,
Vermont National Bank, Brattleboro, VT
Francis L. Lemay (64)
Chairman, United Bank 1994
Kimball E. Mann (62)
President, J.E. Mann, Inc. (Real Estate 1969
Management), Brattleboro, VT
Stephan A. Morse (50)
President and CEO, The Windham Foundation, 1986
Inc., Grafton, VT
Roger M. Pike (56)
Consultant, Rutland, VT 1980
Mark W. Richards (51)
President, Richards, Gates, Hoffman 1988
& Clay (Insurance), Brattleboro, VT
Item 11 - Executive Compensation
The following tables contain a three-year summary of the total compensation
paid to the CEO of the Company and the other five executive officers.
I. SUMMARY COMPENSATION TABLE
Annual Compensation
(a) (b) (c) (d) (e)
Other
Annual
Salary Bonus Compensation
Name and Principal Position Year $ $ $
John D. Hashagen 1996 $234,000 $93,600 N/A
President and Chief 1995 220,000 66,000 N/A
Executive Officer 1994 200,000 30,000 N/A
Kenneth R. Cole 1996 $110,000 $16,500 N/A
President and 1995 109,727 12,540 N/A
Chief Executive Officer 1994 88,009 11,000 N/A
Richard O. Madden 1996 $120,000 $48,000 N/A
Executive Vice President, 1995 112,000 33,600 N/A
Treasurer, Secretary 1994 108,000 16,200 N/A
Robert G. Soucy 1996 $128,000 $51,200 N/A
Executive Vice President, 1995 120,000 36,000 N/A
VNB Senior Operating Officer 1994 115,000 17,250 N/A
Louis J. Dunham 1996 $115,000 $46,000 N/A
Executive Vice President, 1995 98,000 29,400 N/A
VNB Senior Credit Officer 1994 94,000 14,100 N/A
W. Bruce Fenn 1996 $120,000 $48,000 N/A
Executive Vice President, 1995 111,077 33,000 N/A
VNB Senior Banking Officer 1994 108,000 16,200 N/A
Long Term Compensation
Awards Payouts
(f) (g) (h) (i)
Restric-
ed
Stock Options/ LTIP All Other
Awards SARs Payouts Compensations
Name and Principal Position Year $ # $ $(1)
John D. Hashagen 1996 N/A 13,500 sh N/A $22,949 (2)
President and Chief 1995 N/A 14,000 N/A 14,528 (3)
Executive Officer 1994 N/A 12,300 N/A 7,298 (4)
Kenneth R. Cole 1996 N/A 6,400 sh N/A 2,539
UB President and 1995 N/A N/A N/A 611
Chief Executive Officer 1994 N/A N/A N/A N/A
Richard O. Madden 1996 N/A 7,000 sh N/A 12,540
Executive Vice President, 1995 N/A 7,100 N/A 6,720
Treasurer, Secretary 1994 N/A 10,600 N/A 4,111
Robert G. Soucy 1996 N/A 7,400 sh N/A 13,708 (2)
Executive Vice President, 1995 N/A 7,600 N/A 7,306 (3)
VNB Senior Operating Officer 1994 N/A 7,100 N/A 3,620
Louis J. Dunham 1996 N/A 6,700 sh N/A 11,718
Executive Vice President, 1995 N/A 6,200 N/A 5,961
VNB Senior Credit Officer 1994 N/A 5,700 N/A 3,550
W. Bruce Fenn 1996 N/A 7,000 sh N/A 13,959 (2)
Executive Vice President, 1995 N/A 6,900 N/A 7,878 (3)
VNB Senior Banking Officer 1994 N/A 6,600 N/A 5,065
(1) Includes the 50% Company match of the respective employees' 401k
contribution and the employees' portion of the Company's contribution
to the Employees Profit Sharing Plan.
(2) Includes discounts received on purchase of common stock under the
Company's Employee Stock Purchase Plan of $2,597 for Mr. Hashagen,
$1,352 for Mr. Fenn and $569 for Mr. Soucy.
(3) 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.
(4) Includes $778 discount received on purchases of common stock under
the Company's Employee Stock Purchase Plan.
II. OPTION/SAR GRANTS TABLE
Option/SAR Grants in Last Fiscal Year
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term (1)
(a) (b) (c) (d) (e) (f) (g)
% of Total
Options/SARs
# of Granted to Exercise
Securities Employees or
Underlying Fiscal base
Options in Price Expiration
Name Granted Year ($/Sh) Date 5%($) 10%($)
John D. Hashagen 13,500 22.5% $31.50 3/13/06 $267,437 $677,739
Kenneth R. Cole 6,400 10.7 31.50 3/13/06 126,785 321,298
Richard O. Madden 7,000 11.7 31.50 3/13/06 138,671 351,420
Robert G. Soucy 7,400 12.3 31.50 3/13/06 146,595 371,501
Louis J. Dunham 6,700 11.2 31.50 3/13/06 132,728 336,359
W. Bruce Fenn 7,000 11.7 31.50 3/13//06 138,671 351,420
(1) The assumed growth rates in price in the Company's stock are not
necessarily indicative of actual performance that may be expected.
III. OPTION EXERCISES AND YEAR-END VALUE TABLE
Aggregated Option Exercises in Last Fiscal Year, and FY-End Option Value
(a) (b) (c) (d) (e)
Number of Securities
Underlying
Unexercised Value of
Options at Unexercised
FY-End (#) In-the Money
Shares Acquired Value Exercisable/ Expiration
Name on Exercise (#) Realized($) Unexercisable Date
John D. Hashagen 1,000 $16,875 42,800/0 $488,450/$0
Kenneth R. Cole N/A N/A 6,400/0 $ 25,600/$0
Richard O. Madden N/A N/A 24,700/0 $295,200/$0
Robert G. Soucy N/A N/A 26,100/0 $311,550/$0
Louis J. Dunham N/A N/A 21,600/0 $250,950/$0
W. Bruce Fenn N/A N/A 24,500/0 $292,600/$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, 1996.
Deferred Compensation Agreements
VNB has entered into Executive Deferred Compensation Agreements with
certain officers, including Mr. Hashagen and the other executive officers
in the group referred to in the above table. The agreements provide for
monthly payments for a ten-year period from retirement after age 60 but before
age 65, and for a fifteen-year period from retirement after age 65, subject to
certain conditions. The conditions include the requirements that the officer
refrain from competitive activities, be available for certain advisory and
consulting services subsequent to retirement and continue in the employment
of VNB until retirement. The agreements also provide for payments upon
disability prior to retirement and payments to beneficiaries of the officers
under certain circumstances. Mr. Hashagen's agreement provides for payments
in the amount of $1,944.44 per month, and the agreements of Messrs. Madden,
Soucy and Fenn provide for payments of $1,388.89 per month. Vermont National
Bank has purchased life insurance policies on the lives of these officers which
in effect, will provide the funds to make payments to reimburse VNB for
payments made under the agreements.
Mr. 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 anticipated that Mr. Cole will receive an
annual supplemental retirement benefit of $43,362 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 a change of control if the officer voluntarily terminates
his employment with both the Company and VNB, unless such termination is for
a "good reason" as defined in the agreements.
Severance benefits payable in the event of a qualifying termination
after a change of control are to be paid in equal consecutive biweekly
installments. If severance payments due in the event of termination after a
change of control were payable to each of the executive officers on the date
of this filing, the aggregate amount of such severance payments would be $1,730,
00. These severance payments are subject to up to a 50% reduction if the
officer works for or participates in the management, operation or control of
a commercial or savings bank, or bank holding company, which does business
in Vermont, unless such officer's activities are substantially outside Vermont.
Additionally, the officer will be entitled to continuation of life, disability,
accident and health insurance benefits and a cash adjustment to compensate the
executive for the market value of any stock options under the Company's
Officer' 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 an agreement to employ Mr. Cole,
President and Chief Executive Officer of UB, at an annual salary of $125,000.
In addition to and as part of the foregoing agreement, Mr. Cole has
entered into a management continuity agreement which is similar in form to
agreements currently in force between the Company and VNB and their senior
officers. This agreement is automatically renewable annually unless the
Company and UB elect not to renew it. Under the management continuity
agreement, Mr. Cole 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 beginning of such period or
whose election or nomination was previously so approved, cease to constitute
a majority of such board; or (iii) the stockholders of the Company or UB
approve a merger or consolidation of the Company or UB which would result in
such stockholders holding less than 70% of the combined voting power of the
surviving entity immediately thereafter, or if such stockholders approve the
sale of all or substantially all of the assets of the Company or UB.
The management continuity agreements do not provide for severance
benefits in instances where termination is due to death, disability or
retirement. Further, no benefits are payable in instances of termination for
cause, defined as (i) the willful and continued failure of the officer to
perform his duties and (ii) willful conduct materially injurious to the Company
or UB.
Profit-Sharing Plan
Each employee of VNB and UB, including executive officers, becomes
eligible to participate in the Company's Profit-Sharing Plan on January 1 of
the Plan year in which he or she completes one full year of continuous service
of 1,000 hours or more. Upon completion of three years of continuous service,
a participant becomes 30% vested, increasing to 40% after four years, 60% after
five years, 80% after six years, and fully vested after seven years. Vested
participants may elect to receive, in cash, up to 50% of their annual
allocation of the Company's contribution to the Profit-Sharing Plan. Vested\
amounts not so received in cash are distributed to participants upon their
retirement or earlier upon termination of employment. During 1996, the
Company made a contribution of approximately $750,000 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, 1997.
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 $1,458 $ 2,916 $ 4,374 $ 5,832 $ 7,290
40,000 3,368 6,737 10,105 13,474 16,842
60,000 5,609 11,218 16,826 22,435 28,044
80,000 8,009 16,018 24,026 32,035 40,044
100,000 10,409 20,818 31,226 41,635 52,044
120,000 12,809 25,618 38,426 51,235 64,044
140,000 15,209 30,418 45,626 60,835 76,044
160,000 17,609 35,218 52,826 70,435 88,044
180,000 * 20,009 40,018 60,026 80,035 100,044
200,000 * 22,409 44,818 67,226 89,635 112,044
220,000 * 24,809 49,618 74,426 99,235 124,044
240,000 * 27,209 54,418 81,626 108,835 136,044 *
260,000 * 29,609 59,218 88,826 118,435 148,044 *
* Under current regulations of the Internal Revenue Code, the maximum annual
benefit payable from a defined benefit plan during 1997 is $125,000 payable
as a life annuity for retirements at age 65. In addition, the maximum
annual compensation may not exceed $160,000. The amounts shown above in
excess of $125,000 and those using compensation in excess of $160,000 are
shown for exhibit purposes only.
The description of the Retirement Plan in this Proxy Statement is intended
solely to provide stockholders of the Company with general information
concerning the Plan as it relates to management remuneration. Under no
circumstances should the description be construed as indicative of the rights
of any particular employee, or as conferring any right upon any employee,
which rights will in all cases be determined by the appropriate legal documents
governing the Plan.
UB provides a retirement plan for all eligible employees through the
Savings Bank Employees Retirement Association ("SBERA"), an unincorporated
association of savings banks operating within Massachusetts and other
organizations providing services to or for savings banks. SBERA's sole
purpose is to enable the participating employers to provide pensions and other
benefits for their employees.
Each UB employee age 21 or older who has completed at least 1,000 hours
of service in the last 12 month period beginning with such employee's date of
employment becomes a participant of the retirement plan. All participants
are fully vested when they have been credited with three (3) years of service
or at age 62 if earlier.
The retirement plan is a qualified defined benefit plan which does not
require an employee to make any contributions to become a participant and
earn benefits under the Plan. The benefits provide for a pension equal to
1.25% of Average Compensation (the average of the three highest consecutive
years of Compensation) for each year of service up to 25 years, plus .6%
of compensation above the Covered Compensation (defined below) for each year
of service up to 25 years. For example, under the above benefit formula,
a Participant attaining age 65 in 1996 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 1996. 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
retirement at age 65 under the most advantageous plan provisions available for
various levels of compensation and years of service. The figures in this
table are based upon the assumption that the plan continues in its
present form and certain other assumptions regarding compensation trends and
social security.
Annual Pension Benefit Based on Years of Service and age 65 Retirement
Average 25 years
Compensation 10 years 15 years 20 years and after
$ 20,000 $ 2,500 $ 3,750 $ 5,000 $ 6,250
40,000 5,745 8,618 11,491 14,364
60,000 9,445 14,168 18,891 23,614
80,000 13,145 19,718 26,291 32,864
100,000 16,845 25,268 33,691 42,114
120,000 20,545 30,818 41,091 51,364
140,000 24,245 36,368 48,491 60,614
150,000 * 26,095 39,143 52,191 65,239
* Federal law does not permit defined benefit pension plans to recognize
compensation in excess of $150,000 for plan years beginning in 1994
(11/01/94 for SBERA).
As of December 31, 1996 Mr. Cole had 11 years of credited service.
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 $600 fee for each regular monthly Board
of Directors' meeting attended and a $400 fee for each meeting of a committee
of the Board he or she attends. In addition, the Chairman of the Board
receives an annual retainer of $5,000 and each committee chairperson receives
an annual retainer of $500. Non-officer directors each received options to
purchase 1,000 shares of the Company's stock during 1996 at an exercise price
of the then current market value of $31.50.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
As of December 31, 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, 1996 with the Securities and Exchange Commission.
Amount of
Beneficial Percent
Name and Address Ownership of Class
Vermont National Bank 306,681 6.7% (1)
Trust Department
100 Main Street
Brattleboro, VT 05301
David L. Babson & Company, Inc 250,100 5.4% (2)
One Memorial Drive
Cambridge, MA 02142-1300
John Hancock Advisers, Inc. 400,950 8.7% (3)
John Hancock Place, P.O. Box 111
Boston, MA 02117
(1) Includes sole voting power for 65,050 shares, shared voting power for
241,631 shares, sole dispositive power for 203,916 shares and
shared dispositive power for 102,765 shares.
(2) Includes sole voting power for 179,300 shares, shared voting power for
70,800 shares and sole dispositive power for 250,100 shares.
(3) Includes sole voting and sole dispositive power for 400,950 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
December 3, 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 (57) 61,169(1) 1.33%
Zane V. Akins (56) 2,409(2) 0.05%
Charles A. Cairns (55) 7,290(3) 0.16%
William P. Cody (43) 1,347(4) 0.03%
Allyn W. Coombs (62) 13,370(5) 0.29%
Beverly G. Davidson (65) 4,960(6) 0.11%
Philip M. Drumheller (43) 1,250(7) 0.03%
James E. Griffin (69) 5,748(8) 0.12%
John D. Hashagen, Jr. (55) 60,948(9) 1.32%
Francis L. Lemay (64) 104,987(10) 2.28%
Kimball E. Mann (62) 14,013(11) 0.30%
Stephan A. Morse (50) 8,348(12) 0.18%
Roger M. Pike (56) 8,820(13) 0.19%
Mark W. Richards (51) 29,972(14) 0.65%
Kenneth R. Cole (50) 24,816(15) 0.54%
Louis J. Dunham (42) 26,614(16) 0.58%
W. Bruce Fenn (55) 33,779(17) 0.73%
Richard O. Madden (48) 27,567(18) 0.60%
Robert G. Soucy (51) 36,034(19) 0.78%
(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 3,000 additional shares, exercisable
within sixty (60) days, pursuant to the Directors' Non-Qualified Stock
Option Plans.
(2) Includes options to acquire 1,000 shares, exercisable within sixty (60)
days, pursuant to the Directors' Non-Qualified Stock Option Plans.
(3) Includes options to acquire 3,000 shares, exercisable within sixty (60)
days, pursuant to the Directors' Non-Qualified Stock Option Plans.
(4) Includes options to acquire 1,000 shares, exercisable within sixty (60)
days, pursuant to the Directors' Non-Qualified Stock Option Plans.
(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 2,000 shares, exercisable within sixty (60) days, pursuant
to the Directors' Non-Qualified Stock Option Plans.
(6) Ms. Davidson shares voting and investment powers on 1,960 shares.
Includes options to acquire 3,000 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 250 shares.
Also includes options to acquire 1,000 shares, exercisable within
sixty (60) days, pursuant to the Directors' Non-Qualified Stock Option
Plans.
(8) Includes options to acquire 3,000 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 10,203 shares held in the VNB Profit Sharing Plan,
and options to acquire 42,800 shares, exercisable 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 investment powers.
Also includes options to acquire 1,500 shares, exercisable within sixty
(60) days, pursuant to the Directors' Non-Qualified Stock Option Plans.
(11) Includes 9,379 shares held jointly with a family member in which
Mr. Mann shares voting and investment powers. Also includes 814
shares held by a family member in which Mr. Mann has no voting or
investment powers and as to which Mr. Mann disclaims beneficial
ownership and also includes options to acquire 3,000 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 3,000 shares,
exercisable within sixty (60) days, pursuant to the Directors'
Non-Qualified Stock Option Plans.
(13) Includes 777 shares held jointly with family members. Also includes
1,075 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 3,000 shares, exercisable within
sixty (60) days, pursuant to the Directors' Non-Qualified Stock Option
Plans.
(14) Includes 27,972 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.
(15) Includes 14,135 shares held jointly with family members in which Mr. Cole
shares voting and investment powers. Also includes 4,281 shares in VNB's
Profit Sharing Plan and includes options to acquire 6,400 shares
exercisable within sixty (60) days pursuant to the Officers' Non-Qualified
Stock Option Plans.
(16) Includes 5,014 shares in the VNB Profit Sharing Plan. Also includes
options to acquire 21,600 shares exercisable within sixty (60) days
pursuant to the Officers' Non-Qualified Stock Option Plans.
(17) Includes 104 shares in which Mr. Fenn has no voting or investment
powers. Also includes 2,650 shares held jointly with a family member
in which Mr. Fenn shares voting and investment powers, 6,525 shares in
the VNB Profit Sharing Plan and options to acquire 24,500 shares,
exercisable within sixty (60) days pursuant to the Officers' Non-Qualified
Stock Option Plans.
(18) Includes 28 shares held jointly with a family member in which Mr. Madden
shares voting and investment powers. Also includes 2,839 shares held
in the VNB Profit Sharing Plan and options to acquire 24,700 shares
exercisable within sixty (60) days pursuant to the Officers' Non-Qualified
Stock Option Plans.
(19) Includes 346 shares held by a family member in which Mr. Soucy has no
voting or investment powers. Also includes 4,650 shares in the VNB
Profit Sharing Plan and options to acquire 26,100 shares, exercisable
within sixty (60) days pursuant to the Officers' Non-Qualified
Stock Option Plans.
On December 31, 1996, the directors and officers of the Company as a
group (19) had beneficial ownership of 473,441 shares of Company Common Stock,
amounting to 10.30% of the outstanding shares. This includes options to
acquire 175,600 shares, or 3.82% 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 1996. 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
1996. All outstanding loans and commitments included in such transactions were
made in the ordinary course of business on substantially the same terms,
including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons and did not involve more than
the normal risk of collectibility nor present other unfavorable features.
In addition to banking and financial transactions, the Banks and the
Company have had other transactions with, or used products or services
of, various organizations of which directors of the Company are directors or
officers. The amounts involved have in no case been material in relation to
the business of the Banks or the Company, and it is believed that they have
not been material in relation to the business of such other organizations or
to the individuals concerned. It is expected that the Banks and the Company
will continue to have similar transactions with, and use products or services
of, such organizations in the future.
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, 1996 and 1995
Consolidated Statements of Income - For the Years Ended December 31, 1996,
1995, and 1994
Consolidated Statements of Changes in Stockholders' Equity - For the Years
Ended December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flow - For the Years Ended December 31, 1996,
1995 and 1994
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 L.L.P.. Filed herewith.
(b) Reports on Form 8-K.
During the Registrant's fiscal quarter ended December 31, 1996, the
Registrant filed one Report on Form 8-K. Under Item 5. of that Report
the Registrant disclosed that on November 13, 1996, Vermont Financial Services
Corp. ("VFSC") entered into an Agreement and Plan of Reorganization by and
among VFSC, Eastern Bancorp, Inc., a Delaware corporation, and Vermont Federal
Bank, FSB, a federally chartered stock savings bank and wholly owned subsidiary
of Eastern. Pursuant to the Merger Agreement, Eastern will merge with and into
VFSC, and Vermont Federal will become a wholly owned subsidiary of VFSC.
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 12, 1997 By John D. Hashagen, Jr.
John D. Hashagen, Jr., President
and Chief Executive Officer
By Richard O. Madden
Richard O. Madden, Executive Vice
President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and
on the dates indicated.
Name Title Date
/S/ Director and President March 12, 1997
John D. Hashagen, Jr. (Principal Executive Officer)
/S/ Secretary & Treasurer March 12, 1997
Richard O. Madden (Principal Financial Officer)
/S/ Director March 12, 1997
Anthony F. Abatiell
/S/ Director March 12, 1997
Zane V. Akins
/S/ Director March 12, 1997
Charles A. Cairns
/S/ Director March 12, 1997
William P. Cody
/S/ Director March 12, 1997
Allyn W. Coombs
/S/ Director March 12, 1997
Beverly G. Davidson
/S/ Director March 12, 1997
Philip M. Drumheller
/S/ Director March 12, 1997
James E. Griffin
/S/ Director March 12, 1997
Francis L. Lemay
/S/ Director March 12, 1997
Kimball E. Mann
/S/ Director March 12, 1997
Stephan A. Morse
/S/ Director March 12, 1997
Roger M. Pike
/S/ Director March 12, 1997
Mark W. Richards
Index to Exhibits
Exhibit 22 Subsidiaries of Registrant
Exhibit 23 Consent of Independent Certified Public Accountants
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 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of Vermont Financial Services Corp. on Form S-8 (File No. 2-83361)
and Form S-3 (File No. 2-80833) of our report, dated January 21, 1997, on our
audits of the consolidated financial statements as of December 31, 1996 and
1995, and for each of the three years ended December 31, 1996.
COOPERS & LYBRAND L.L.P.
Springfield, Massachusetts
March 12, 1997
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