SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
________________________
Form 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
________________________
For the Quarterly Period Ended September, 1998, Commission Files
Number 0-11012
VERMONT FINANCIAL SERVICES CORP.
A DELAWARE CORPORATION
IRS EMPLOYER IDENTIFICATION NO. 03-0284445
100 Main Street, Brattleboro, Vermont 05301
Telephone: (802) 257-7151
__________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days.
Yes X No___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of October 31, 1998 12,847,914
VEREMONT FINANCIAL SERVICES CORP. AND SUBSIDIARIES
INDEX
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures about
About Market Risk 9
Part II Other Information 10
Signatures 11
VERMONT FINANCIAL SERVICES CORP.
<TABLE>
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
($ in thousands,except per share data)
(unaudited)
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September 30, December 31,
ASSETS 1998 1997
Cash and Due from Banks $ 70,837 $ 95,495
Interest Bearing Balances with Banks 4,486 44
Federal Funds Sold 35,532 2,470
Total Cash and Cash Equivalents 110,855 98,009
Securities Available
U.S. Treasury and U.S. Government
Agencies 179,812 295,775
Mortgage Backed Securities 211,697 199,121
State and Municipal 9,618 9,987
Other 116,086 22,766
Total Securities Available for Sale 517,213 527,649
Loans:
Commercial 202,467 166,418
Commercial Real Estate 270,394 234,394
Residential Real Estate 753,979 804,329
Consumer 116,632 109,360
Total Loans 1,343,472 1,314,501
Less: Allowance for Loan Losses 16,916 18,943
Net Loans 1,326,556 1,295,558
Premises and Equipment 41,691 46,620
Real Estate Held for Investment 1,269 1,298
Other Real Estate Owned (OREO) - net of
reserve of $0 in 1998 and $0 in 1997 2,276 2,794
Goodwill & Other Intangibles 58,269 61,729
Other Assets 52,171 63,795
Total Assets $2,110,300 $2,097,452
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 263,591 $ 228,935
Savings, NOW & Money Market
Accounts 981,777 915,937
Other Time: Under $100,000 422,722 467,939
Over $100,000 86,055 68,863
Total Deposits 1,754,145 1,681,674
Federal Funds Purchased and
Securities Sold
Under Agreements to Repurchase 74,231 87,818
Liabilities for Borrowed Money 41,779 86,899
Other Liabilities 25,628 27,465
Total Liabilities 1,895,783 1,883,856
Stockholders' Equity
Common Stock - $1 Par Value
Authorized 20,000,000 shares
Issued : 1998 - 13,292,559
1997 - 13,243,357 13,293 13,243
Preferred Stock - $1 Par Value
Authorized 5,000,000 shares
Capital Surplus 117,077 116,640
Undivided Profits 89,248 81,562
Other Comprehensive Income
(see accompanying notes) 5,093 2,152
Treasury Stock, at cost -
1998 - 398,611
1997 - 52 (10,194) (1)
Total Stockholders' Equity 214,517 213,596
Total Liabilities and
Stockholders' Equity $2,110,300 $2,097,452
Fully Diluted Tangible Book Value
per Share of Common Stock $12.12 $11.48
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VERMONT FINANCIAL SERVICES CORP. AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
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Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Interest Income:
Interest and Fees on Loans $ 28,771 $ 29,766 $ 85,435 $ 69,316
Interest on Securities Available
for Sale:
Taxable Interest Income 7,893 8,614 24,009 17,854
Tax Exempt Income 27 282 325 461
Interest on Fed Funds Sold and
Other Short Term Investments 559 387 1,305 611
Total Interest Income 37,250 39,049 111,074 88,242
Interest Expense:
Interst on Deposits 14,915 15,350 44,480 33,668
Interest on Fed Funds Purchased,
Borrowed Money
and Securities Sold under Agreements
to Repurchase 1,486 2,397 5,120 4,857
Total Interest Expense 16,401 17,747 49,600 38,525
Net Interest Income 20,849 21,302 61,474 49,717
Less: Provision for Loan Losses 975 900 3,135 2,350
Net Interest Income After Provision
for Loan Losses 19,874 20,402 58,339 47,367
Other Operating Income
Securities Gains 95 405 437 411
Trust Department Income 1,526 1,488 4,678 4,259
Service Charges on Deposit Accounts 3,386 3,224 10,475 6,355
Credit Card Merchant Income 1,209 1,094 3,011 2,766
Other Loan Related Fee Income 153 179 715 423
Other Noninterest Income 3,341 2,160 8,764 5,509
Total Other Operating Income 9,710 8,550 28,080 19,723
Other Operating Expense
Salaries and Wages 7,824 7,522 23,022 17,328
Pension and Other Employee Benefits 1,755 1,569 5,246 4,430
Occupancy of Bank Premises, net 1,705 1,729 5,427 3,635
Furniture and Equipment 2,037 1,883 6,421 4,157
Goodwill Amortization 1,129 1,104 3,388 1,445
FDIC Assessment 127 132 387 199
Credit Card Merchant Expense 831 700 1,995 1,806
OREO & Collection Expense/Losses, net 389 245 1,279 779
Other Noninterest Expense 5,818 4,845 16,150 10,935
Total Other Operating Expense 21,615 19,729 63,315 44,714
Net Overhead (11,905) (11,179) (35,235) (24,991)
Income Before Income Taxes 7,969 9,223 23,104 22,376
Applicable Income Tax Expense 3,154 3,519 9,200 7,762
Net Income $ 4,815 $ 5,704 $13,904 $14,614
Average Shares Outstanding
Basic 13,054,743 13,310,111 13,187,133 10,846,288
Diluted 13,157,846 13,429,078 13,289,381 10,950,940
Earnings Per Common Share
(Based on
Average Number of Common Shares
Outstanding for the Respective Period)
Net Income -- Basic $0.37 $0.42 $1.05 $1.35
Net Income - Diluted $0.37 $0.42 $1.05 $1.34
(see accompanying notes)
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VERMONT FINANCIAL SERVICES CORP. AND SUBSIDIARIES
Condensed Statements of Cash Flows
(unaudited)
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9 months ended September 30,
1998 1997
OPERATING ACTIVITIES
(in thousands)
Net Income $ 13,904 $ 14,614
Adjustments to reconcile net income
to net cash provided
by operating activities:
Provision for loan losses 3,135 2,350
Provision for depreciation 5,368 3,308
Amortization and accretion on securities 327 408
Deferred income taxes 709 (2,247)
Security (gains) (437) (411)
Proceeds from sale of loans 176,452 99,323
Loans originated for sale (184,045) (69,313)
Losses on OREO 95 119
Decrease (Increase) in interest
receivable and other assets 15,588 (8,333)
Decrease in real estate held for investment 29 422
(Decrease) in interest payable and other
liabilities (1,837) (6,587)
NET CASH PROVIDED BY OPERATING ACTIVITIES
OPERATING ACTIVITIES 29,288 33,653
INVESTING ACTIVITIES
Proceeds from the sale of the securities 12,842 91,924
Proceeds from the maturity of the securities 223,668 55,983
Purchases of securities (221,377) (109,151)
Proceeds from sales of OREO 2,256 2,038
Net cash and cash equivalents from
Eastern Bancorp. - 13,821
Net (increase) decrease in loans (28,373) 170
Purchase of premises and equipment (3,298) (6,390)
NET CASH (USED BY)PROVIDED BY INVESTING
ACTIVITIES (14,282) 48,395
FINANCING ACTIVITIES
Net increase in deposits 72,471 13,230
Net (decrease)in short-term borrowings (58,707) (25,518)
Issuance of common stock 982 9,869
Purchase of treasury stock (10,689) -
Cash dividends (6,217) (4,738)
NET CASH (USED BY) FINANCING ACTIVITIES (2,160) (7,157)
INCREASE IN CASH AND CASH EQUIVALENTS 12,846 74,891
Cash and cash equivalents at beginning of period 98,009 63,797
CASH AND CASH EQUIVALENTS AT END OF PERIOD $110,855 $138,688
(see accompanying notes)
Non-monetary Transactions:
Transfer of loans to OREO for the periods ended September 30, 1998
and 1997 totaled $1,833 and $2,078, respectively.
VERMONT FINANCIAL SERVICES CORP.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
should be read with the audited financial statements and notes thereto
included in the annual report on Form 10-K and Form 10-K/A. In the opinion
of Management, all adjustments which are necessary for the fair presentation
of the statement of the consolidated financial position of Vermont Financial
Services Corp., ("VFSC" or the "Company"), and the consolidated results of
the Company's operations and cash flow for the interim periods presented
herein are reflected and all such adjustments are of a normal recurring
nature. Certain items from interest income have been reclassified to
noninterest income and noninterest expense in accordance with Statement of
Financial Accounting Standards (SFAS) No. 91, "Accounting for Nonrefundable
Fees and Costs Associated With Originating or Acquiring Loans and Initial
Direct Cost of Leases". There is no impact on net income associated with
these reclassifications.
Operating results for any interim period are not necessarily indicators of
results for any other interim period or the entire year.
2. New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Financial
Accounting Standard (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes standards for the
way public enterprises are to report information about operating segments
in annual financial statements and requires those enterprises to report
selected financial information about operating segments in its interim
financial reports issued to shareholders. Under this statement, operating
segments are defined as components of a company for which separate financial
information is available and is used by management to allocate resources and
assess performance (management approach). This statement is effective for
the Company's December 31, 1998 financial statements and is effective for
interim financial statements beginning in 1999. The company anticipates
providing segment information for its Trust Department and United Bank.
The FASB has also issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which provides for matching the timing of gain or
loss recognition on the hedging instrument with the recognition of (a) the
changes in fair value of the hedged asset or liability that are attributable
to the hedged risk or (b) the earnings effect of the hedged forecasted
transaction. The standard is effective for fiscal quarters beginning after
June 15, 1999. The Company expects adoption of this standard to have an
immaterial impact on its financial statements.
3. Acquisition
On June 26, 1997, the Company acquired all of the outstanding common stock
of Eastern Bancorp, Inc. ("Eastern"), a thrift holding company with total
assets of approximately $800 million headquartered in Dover, NH, for
approximately $26.9 million in cash and $72.7 million in VFSC common stock
(1,784,774 shares at $41.5625 per share).
This acquisition was accounted for by the purchase method and, accordingly,
the results of operations of Eastern have been included in VFSC's
consolidated financial statements from June 27, 1997. The excess of the
purchase price over the fair value of the net identifiable assets acquired
of approximately $57 million has been recorded as goodwill and is being
amortized on a straight-line basis over 15 years.
Eastern's primary subsidiary, Vermont Federal Bank, was merged into VFSC's
primary subsidiary, Vermont National Bank, on September 22,1997.
4. Stock Split
On October 14, 1997 the Company paid a two-for-one stock split which was
effected as a stock dividend. All per share and outstanding share amounts
have been retroactively restated for the effects of this stock split.
5. Comprehensive Income
The Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income" as of January 1, 1998. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components (such as
changes in unrealized investment gains and losses). Comprehensive income
includes net income and any changes in equity from non-owner sources that
bypass the income statement. The purpose of reporting comprehensive income
is to report a measure of all changes in equity of an enterprise that result
from recognized transactions and other economic events of the period other
than transactions with owners in their capacity as owners. Application of
SFAS No. 130 has not impacted the amounts previously reported for net income
or effected the comparability of previously issued financial statements.
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The following table summarizes comprehensive income for the nine months ended
September 30, 1998 and 1997:
<C> <C>
1998 1997
Net Income $13,904 $14,614
Other comprehensive income, net of tax:
Unrealized gains (losses) on investments
Unrealized holding gain (loss) arising during
the period net of income tax expense of $126
and $159 for 1998 and 1997, respectively. 3,204 2,841
Less reclassification adjustment for gains
included in net income net of income tax
expense of $(174) and $(144) for 1998 and
1997, respectively.
(263) (267)
Other comprehensive income 2,941 2,574
Comprehensive income $16,845 $17,188
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For the Three-Month Periods Ended September 30,1998 and 1997
Net income for the three months ended September 30, 1998 was $4.8 million,
a 16% decrease from the $5.7 million earned in the third quarter of 1997
and equal to $4.8 million earned in the second quarter of 1998. Diluted
earnings per share for the third quarter of 1998 were $0.37 compared to
$0.42 for the third quarter of 1997and $0.36 for the second quarter of 1998.
Net revenue for the third quarter of 1998 was $30.4 million up $0.9 million
from the $29.5 million for the second quarter and up $1.0 million from the
third quarter of 1997. Net interest income was $20.8 million for the third
quarter, a $0.5 million decrease from the third quarter of 1997. A $24.0
million decrease in average earning assets and a 12 basis point decrease in
net interest margin accounted for this reduction. Noninterest income was
$9.7 million for the third quarter of 1998, a $1.2 million increase over
the $8.5 million for the third quarter of 1997. Nearly all the increase
was due to mortgage loan related fee income.
Noninterest expense for the third quarter of 1998 increased $1.9 million
over the third quarter of 1997. This increase was primarily due to $0.8
million of expense related to two consultants and $0.6 million in "Year
2000" (see further discussion below) expenses.
For the Nine-Month Periods Ended September 30, 1998 and 1997
Overview
The nine months ended September 30, 1998 resulted in net income of
$13,904,000, or a 5% decrease from $14,614,000 in earnings for the same
period of 1997. Diluted earnings per share for the nine months ended
September 30, were $1.05 and $1.34 for the first nine months of 1998 and
1997, respectively. Diluted cash earnings per share (earnings before the
effects of the amortization of goodwill) were $1.31 and $1.47 for the nine
months ended September 30, 1998 and 1997, respectively. The reduction in
earnings per share reflects the additional shares issued in conjunction
with last year's acquisition of Eastern Bancorp, Inc. and $850,000 of
pre-tax expenses associated with the integration of Eastern's subsidiary,
Vermont Federal Bank(VFB), into Vermont Financial Services Corp.'s main
banking subsidiary, Vermont National Bank(VNB).
Except for historical information contained herein, the matters discussed
in this filing, may express "forward-looking" statements. Those
"forward-looking" statements may involve risk and uncertainties, including
statements concerning future events or performances and assumptions and
other statements that are other than statements of historical facts. The
Company wishes to caution readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made. Readers
are advised that various factors - including, but not limited to, changes
in laws, regulations or Generally Accepted Accounting Principles; the
Company's competitive position within the markets served or increasing
consolidation within the banking industry; certain customers and vendors of
critical systems or services failing to comply with Year 2000 programming
issues; unforeseen changes interest rates; any unforeseen downturns in the
local, regional or national economies - could cause the Company's actual
results or circumstances for future periods to differ materially from those
anticipated or projected. Vermont Financial Services Corp. does not
undertake, and specifically disclaims any obligation, to publicly release
the result of any revisions that may be made to any forward-looking
statements to reflect the occurrence of unanticipated events or circumstances
after the date of such statements.
Results of Operations
Net interest income of $61.5 million for the first nine months of 1998
represented a $11.8 million increase from the same period in 1997. The
increase was primarily a result of the acquisition of earning assets and
financial resources from Eastern Bancorp, Inc. Net interest margin was
4.49% and net interest spread was 4.42% during the first nine months
of 1998, compared to 4.76% and 4.54%, respectively, during the same
period in 1997. A $401.7 million increase in largely lower yielding
average earning assets caused the lower margin and spread.
Noninterest income, before securities gains, increased $8,331,000 primarily
due to a $4,120,000 increase in service charges on deposits, a $419,000
increase in trust department income, a $710,000 increase in ATM income
and a $1,556,000 increase in mortgage related fee income .
Noninterest expense increased $18,601,000 largely due to a $6,510,000,
or 30%, increase in salaries and benefits. This increase was due to
the additional staff associated with the purchase of Eastern and normal
salary adjustments for existing staff. Primarily attributable to the
Eastern merger were increases in occupancy/equipment expenses and goodwill
amortization of $4,056,000 and $1,943,000. Other noninterest expense
increased $5,215,000, or 48%, primarily due to the following:
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Expense Item Increase(000) Increase (%)
Marketing Expense $631 79%
Professional Services(*) 1,688 178
Printing & Supplies 426 33
Deposit Related Franchise Taxes(**) 655 124
Telephone Expense 565 45
Postage 573 53
----- -----
(total) $4,538 77%
(*) does not include increase related to integration of VFB into VNB
(**) reflects 100% increase in statutory rate effective August 1,1998
Asset Quality
Nonperforming assets totaled $13.8 million as of September 30, 1998, a
$12.0 million decrease from $25.8 million on September 30, 1997 and a
$6.0 million decrease from $19.8 million at December 31, 1997. As of
September 30, 1998 nonperforming assets were 0.65% of total assets,
down from 1.20% a year ago and 0.94% at December 31, 1997.
The allowance for loan losses was $16.9 million at September 30, 1998,
down from $20.6 million a year ago and $18.9 million at December 31,1997,
reflecting the lower levels of nonperforming assets. The allowance for
loan losses was 147% of nonperforming loans and 122% of nonperforming
assets as of September 30, 1998. During the third quarter the Company
sold $6.3 million of nonperforming assets at a $1.0 million discount, which
resulted in charge-offs on these loans totaling $1.0 million during the
third quarter. This sale reduced the level of nonperforming assets but was
also the major cause of the quarter's high level of net charge-offs at
$2.7 million. As a result of the reduced level of nonperforming assets the
Company was able to reduce the provision for loan losses by $60,000 for the
third quarter from the level of the two prior quarters.
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<CAPTION>
The following table provides information with respect to the Company's past
due loans, the Components of nonperforming assets and the allowance for
loan losses at the dates indicated:
<S> <C> <C>
September 30, 1998 December 31, 1997
Loans 90 days past due and still
accruing interest $3,541 $6,055
Nonperforming assets:
Nonaccrual loans $11,540 $17,006
Other real estate owned 2,277 2,794
Total nonperforming assets $13,817 $19,800
Nonperforming assets to period end
loans net of unearned income, plus
other real estate owned 1.03% 1.50%
Allowance for loan losses $16,916 $18,943
The following table details the Company's impaired loans as of September
30, 1998:
Total impaired loans $23,757
Impaired loans with a specific valuation reserve 2,441
Impaired loans without a specific valuation reserve 21,316
Valuation reserve for impaired loans 796
Average impaired loans $28,967
Financial Condition
Total assets of $2.1 billion, decreased $0.1 billion while total deposits
of $1.8 billion and total loans of $1.3 billion, remained essentially the
same as their September 30, 1997 balances. Compared to their yearend
balances, assets, loans and deposits largely remained unchanged. Increases
of $36.0 million in each of Commercial Loans and Commercial Real Estate
loans was mostly offset by a $51.0 million decrease in Residential Real Estate
Loans. These balances include the reclassification of approximately $60
million in loans from Commercial Loans to Commercial Real Estate Loans.
As of September 30, 1998 goodwill had decreased to approximately $58.3
million from $60.8 million at June 30, 1997 and $61.7 million at December
31, 1997 as a result of finalization of the purchase accounting adjustments
associated with the Eastern merger and normal amortization of approximately
$1.1 million per quarter.
Capital Resources
Stockholders' equity increased from $213.6 million at year end to $214.5
million at September 30, 1998. Equity as a percent of total assets decreased
from 10.17% at year end 1997 to 10.16% at September 30, 1998. This decrease
was primarily the result of the earnings retained by the Company net of $10.7
million in stock repurchases under the 1998 stock repurchase plan described
below. Also, Tier I and Total Risk Based Capital ratios decreased slightly to
11.89% and 13.14% from their year end levels of 11.98% and 13.24%,
respectively. The above ratios are in excess of all regulatory
requirements and place the Company in the "well capitalized" regulatory
classification.
Year 2000
The Project
Many of the world's computer systems (including those in non-information
technology equipment and systems) currently record years in a two-digit
format. If not addressed, such computer systems will be unable to properly
interpret dates beyond the year 1999, which could lead to business
disruptions (the "Year 2000" issue). The potential costs and uncertainties
associated with the Year 2000 issue will depend on a number of factors,
including software, hardware and the nature of the industry in which a
company operates. Additionally, companies must coordinate with other entities
with which they electronically interact. VFSC, like most financial service
providers, is dependent on computer-generated information and processing and
thus may be significantly affected by the Year 2000 issue. The Company began
its Year 2000 Project in late 1996. The Year 2000 project has been
structured following the guidance set forth in several statements that have
been issued by the Federal Financial Institutions Examination Counsel
("FFIEC"). VFSC is monitored in its Year 2000 efforts by various
regulators, including the Federal Reserve Board and the Office of the
Comptroller of the Currency.
The overall project has five phases: awareness, assessment, renovation,
validation and implementation. In the awareness phase, the Company defined
the Year 2000 issue, communicated the Year 2000 issue to all employees and
obtained executive level support and funding. In the assessment phase, the
Company created a comprehensive Year 2000 plan which includes conducting
an inventory of all systems which may be affected by the Year 2000 issue
including facilities and related non-information technology systems
(embedded systems), such as vaults, alarms, elevators, telephone and
electric power, computer systems, hardware, and services and products
provided by third parties, and assessing the risk of non-compliance for
each identified system. In the renovation phase, the Company renovates or
fixes certain systems, while others are replaced or retired. In the
validation phase, the Company conducts testing to ensure all systems,
including renovated systems, are Year 2000 complaint for present and future
dates. Finally, in the implementation phase, the Company places complaint
systems in production. The Company has completed the awareness and
assessment phases and is in the renovation and validation phases for all of
its mission critical systems.
The Company purchases the software for its mission critical systems from
nationally recognized vendors, and although it services these applications
it does very little custom coding for those systems. In order to perform
the assessment of its systems, the Company initiated communications with
each vendor as to the Year 2000 readiness of their product(s) and
continues to monitor vendor status. The Company has also initiated
communications with its suppliers, data exchange partners and large
customers to determine the status of their Year 2000 efforts.
Thus the renovation phase principally consists of the installation of the
vendor identified Year 2000 compliant versions of the system and the
validation of the functionality of the system as well as forward date
(dates in the next century) verification. As of September 30, 1998,
Management estimates that 42% of the renovation has been completed.
The Company presently plans to have 75% of the renovation complete by
December 31, 1998. Forward date testing is expected to be
substantially complete, by that date, with the remainder of forward date
testing and the validation of all internal and external data exchange
interfaces to be completed by March 31, 1999. Validation of
non-mission-critical systems will continue during 1999. The company's
schedule meets the required regulatory deadlines.
Costs
Management estimates the costs of its Year 2000 project to be $4.0 million.
To date, $1.0 million has been expended with a total expenditure for
1998 estimated to be $2.2 million and for 1999, $1.8 million. The
$1.0 million already incurred includes $0.9 in operating expense(s) and
$0.1 million in capital expenditures. The $4.0 million estimated
total cost of the project includes $1.0 million for capital expenditures,
including upgrades of hardware and software for ATM machines and software
for the Retail Delivery System (teller/platform automation) which will be
incurred primarily in 1998 and depreciated over three to five years
depending on useful life.
The Company is relying primarily on internal staff resources to complete
the project. The costs of the project will be obtained from normal
operating budgets and are not expected to have a material effect on the
Company.
Risks
There are many risks associated with the Year 2000 issue, including the
possibility of a failure of the Company's computer and non-information
technology systems. Such failures could have a material adverse effect on
the Company and may cause systems malfunctions, incorrect or incomplete
transaction processing resulting in failed trade settlements, the
inability to reconcile accounting books and records and disruptions of
funding requirements. While the Company is attempting to mitigate the
risks for systems under its control, the company obtains most of the
hardware and software from external vendors. In addition, even if the
Company successfully remediates its Year 2000 issues, it can be
materially and adversely affected by failures of third parties to
remediate their own Year 2000 issues. The failure of third parties with
which the Company has financial or operational relationships such as clearing
organizations, regulatory agencies, other banks, borrowers, counterparties,
vendors and utilities, to remediate their computer and non-information
technology systems issues in a timely manner could result in a material
financial risk to the Company.
The Company has initiated communications with its commercial loan customers
to assess their Year 2000 readiness. As of September 30, 1998 the Company
had completed the assessment on approximately 75% of the dollar obligations
represented by such customers. The Company continues to monitor these
customers.
If the above mentioned risks are not remedied, the Company may experience
business interruption or shutdown, financial loss, regulatory actions,
damage to the Company's franchise and legal liability.
Contingency Plan
The Company has initiated contingency planning for its mission critical
systems and processes, including a business impact analysis and risk
assessment of these processes. The contingency plan will be completed by
12/31/98 and will be monitored quarterly during 1999 for any changes or
additional contingencies that may be required.
Recent Developments
The Company has retained the services of a national consulting firm to review
each business line and support area within its organization, including the
mortgage banking, consumer lending, commercial loan, trust and the operations
and technology area. Costs totaling $0.7 million were expensed in the third
quarter. The Company expects that immediately realizable profit
opportunities will offset most of the third quarter expense, but expects the
most significant revenue enhancements and cost savings will not be seen
until 1999.
The Company also plans a major renovation to its branch operations in
Chittenden County, Vermont at a total cost of approximately $2-3 million.
In addition, the company plans to purchase new remittance processing
equipment, upgrade VNB's credit card software and purchase a new system
for originating mortgage loans, each costing approximately $0.5 million.
All additions will be funded through operations of the Company. On May 21,
1998, the Company announced that its Board of Directors has authorized the
repurchase of up to 500,000 shares of it's outstanding common stock,
approximately 3.8% of the 13,275,970 shares outstanding as of March 31,
1998. Shares purchased under this program will be held in treasury stock
to cover unexercised stock options that are expected to be exercised in
the future. The repurchase program will be accomplished through transactions
on the open market. Through September 30, 1998. 425,886 shares had been
repurchased at an average price of $24.95.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity and Liquidity
See discussion and analysis of interest rate sensitivity and liquidity
provided in the Company's Annual Report filed on Form 10-K and Form
10-K/A for the year ended December 31, 1997. There have been no material
changes in reported market risks faced by the Company since the filing of
the Company's Annual Report Form 10-K and Form 10-K/A.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
NONE
VERMONT FINANCIAL SERVICES CORP.
Dated November 12, 1998 _____________________________________
John D. Hashagen, Jr.
Dated November 12, 1998 _____________________________________
Richard O. Madden
Page 11 of 11
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