UNITED STATES
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, 1997
[ ] 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: 802-257-7151
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value per share
(Title of Class)
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or any amendment to
the Form 10-K. [X] As of February 28, 1998, 13,279,750 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 $364,363,140.
DOCUMENTS INCORPORATED BY REFERENCE:
None
- The index for exhibits is on Page __.
CAUTIONARY STATEMENT FOR PURPOSES OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company desires to take advantage of the "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 $2,097 million at December 31, 1997. VFSC owns 100 percent
of the stock of Vermont National Bank (VNB) and United Bank (UB). On June 27,
1997 VFSC acquired Eastern Bancorp., Inc. (Eastern) and its subsidiary Vermont
Federal Bank (VFB) based in Burlington, Vermont. VFB was merged into VNB on
September 22, 1997. VFSC also owns Vermont Service Corporation (VSC) , a real
estate development company which it acquired from Eastern. VSC and its
subsidiary company, Vermont East Coast Company (VECC), are join venture partners
in the ownership of development rights in a mobile home association known as
"Williston Woods". VFSC has no other active subsidiaries and engages in no
activities other than holding the stock of VNB and UB (the Banks) and VSC.
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 largest bank in the
State of Vermont with total deposits of $1,457 million, total loans of $1,109
million and total assets of $1,825 million at December 31, 1997. VNB conducts
business through 42 offices located in nine of Vermont's 14 counties, including
the cities of Brattleboro, Burlington, Rutland and Montpelier and 16 offices
located in four of New Hampshires 10 counties situated in the southeastern part
of the state. 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
or southeastern New Hampshire. 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, 1996, 1 federally chartered savings and loan, 1 federally
chartered savings bank, 4 state-chartered savings banks, 13 state-chartered
commercial banks and 2 national banks are located and do business in the State
of Vermont, the area in which VFSC conducts most of its business. As of such
date, VNB had 12.2%, 12.0% and 12.5% of the total assets, loans and deposits,
respectively, of these 31 banking institutions and VFB had 10.2%, 8.4% and 9.2%,
respectively.
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, 1997
UB had total assets of $258 million, total loans of $205 million and total
deposits of $230 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.
VFSC owns and operates 60 automated teller machines (ATMs) at its branch
locations and 19 ATMs in other locations.
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, 1997, employed approximately
1,040 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 of the
Currency (the "OCC"). UB, a Massachusetts-chartered 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 subsidiaries, 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
subsidiaries, 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 deposits 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 operating 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 interstate branches. 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, 1997 the Banks had available approximately $4.2 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, 1997, an aggregate of $1.56 per share of dividends
were declared. Diluted earnings per share for the same period was $4.88.
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 prohibitions. 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 subsidiary of VFSC
or related to FDIC assistance provided to such subsidiary in danger of default-
other banking subsidiaries 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 subsidiary banks are subordinate in right of payment to
depositors and certain other indebtedness of such subsidiary banks. In the
event of 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 activities,
including mergers and acquisitions and branch openings and closings, require
the approval of the Banks' respective regulators. 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.
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, 1997 of $13.1 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's 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 account 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
undercapitalized" if it has a total risk-based capital ratio that is less than
6%, a Tier 1 risk-based capital ratio that is less than 3% or a Tier 1 leverage
capital ratio that is less than 3%, and (v) "critically undercapitalized" if
it has a ratio of tangible equity to total assets that is equal to or less
than 2%.
At December 31, 1996, VFSC's consolidated Total and Tier 1 risk-based
capital ratios and Tier 1 Leverage ratios were 13.29%, 12.03% and 7.30%,
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 41 other branch locations throughout
Vermont in the Counties of Addison, Chittenden, Washington, Rutland, Bennington,
Franklin, Windsor, Orange and Windham. VNB also operates 16 branch locations
in southeastern New Hampshire in the counties of Rockingham, Strafford,
Merrimack and Hillsborough. Of these offices, 29 are owned by VNB, 21 are
leased directly from independent parties as lessors, and 7 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, 1997. Each office listed is equipped with an ATM facility, all of
which are owned by UB.
Main Office Route 116, Parsons Road Owned
Conway, MA 01341
Administrative headquarters 45 Federal Street Owned
office, Operations Center Greenfield, MA 01301
Branch Office
Branch Office 90 Bridge Street Owned
Shelburne Falls, MA 01370
Branch Office 22 West Street Leased
Hatfield, MA 01038
Branch Office Route 9 Owned
Haydenville, MA 01039
Branch Office 280 Mohawk Trail Leased
Greenfield, MA 01301
Branch Office 134 Elm Street Owned
South Deerfield, MA 01373
Except as noted in "Item 1 - Business, United Bank", the Company and Banks
do not own any other real estate, except real estate that may be held
temporarily following a foreclosure in connection with loan business. See Notes
6 and 11 to the Consolidated Financial Statements for information as to amounts
at which bank premises are carried, and as to commitments for lease obligations.
Item 3 - Legal Proceedings
VFSC is a party to litigation arising in the ordinary course of its
business.
Management, after reviewing these claims with legal counsel, is of the
opinion that these matters, when resolved, will not have a material effect on
VFSC's consolidated financial condition or results of 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 Stockholde
Matters
As of February 28, 1998, VFSC Common Stock consisted of 20,000,000
authorized shares, $1.00 par value per share, of which 13,279,750 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 1997 and 1996.
Dividends
Year Quarte High Low Declared
1997 4th $29 $22-7/8 $.15
3rd 27-3/16 22-7/16 .15
2nd 23-9/16 19-11/16 .15
1st 22-1/2 17-5/8 .15
1996 4th 18-1/4 17-1/8 .13
3rd 17-9/16 15-5/8 .13
2nd 17 15-1/2 .13
1st 17-1/2 15-3/4 .12
Per the Company's stockholder reports, the approximate number of stockholders
as of February 28, 1998 was 2,850.
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, 1997 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,
1997 1996 1995 1994 1993
(Dollars in thousands, except per share data)
Results of Operations:
Interest income $ 127,878 $ 98,105 $ 96,457 $ 84,391 $ 82,142
Interest expense 55,962 41,351 41,969 33,293 31,361
Net interest income 71,916 56,754 54,488 51,098 50,781
Provision for loan
losses 3,250 3,350 3,900 4,000 5,053
Net interest income
after provision for
loan losses 68,666 53,404 50,588 47,098 45,728
Other operating income 28,522 19,161 17,549 16,692 17,348
Other operating expense 70,049 47,411 45,999 46,763 52,459
Income before
income taxes 27,139 25,154 22,138 17,027 10,617
Applicable income
tax expense 10,013 8,539 7,241 5,159 3,386
Net income $ 17,126 $ 16,615 $ 14,897 $ 11,868 $ 7,231
Balance Sheet Data
At Year End:
Total assets $2,097,452 $1,312,981 $1,246,669 $1,205,421 $1,158,101
Loans, net of
unearned income 1,314,501 910,436 893,470 911,503 872,441
Securities available
for sale 527,649 291,120 249,682 173,865 184,400
Total deposits 1,686,172 1,083,258 1,033,957 1,012,869 967,582
Stockholders' equity 213,596 119,717 111,833 90,457 91,027
Per Share Data:
Basic earnings $1.52 $1.79 $1.60 $1.30 $1.06
Diluted earnings 1.51 1.77 1.59 1.29 1.05
Total cash dividends
declared 0.60 0.53 0.43 0.27 0.12
Tangible book value
at period end,
diluted (1) 11.48 11.87 11.24 9.18 9.31
Average basic shares
outstanding 11,257,292 9,284,890 9,295,341 9,142,060 6,822,423
Average diluted shares
outstanding 11,364,920 9,364,601 9,354,772 9,232,973 6,923,911
Selected Financial Ratios:
Return on average
total assets (2) 1.00% 1.31% 1.23% 1.00% 0.64%
Return on average
stockholders' equity(3) 10.22 14.51 14.69 13.23 8.36
Net interest margin (4) 4.70 4.93 4.92 4.74 4.97
Cash dividends per share
as a percentage of basic
earnings per share 38 29 28 21 16
Average stockholders'
equity to average assets 9.80 9.19 8.69 7.97 7.67
Core (leverage) capital
ratio at period end (5) 7.46 8.68 8.77 7.26 7.59
Total risk-based capital
ratio at period end (6) 13.24 15.09 14.67 13.03 12.06
Allowance for loan losses
to period end loans,
net of unearned income 1.44 1.50 1.65 1.78 2.04
Nonperforming assets to
period end loans plus
other real estate
owned (7) 1.50 1.01 1.67 2.32 3.64
Net charge-offs to average
loans, net of
unearned income 0.49 0.50 0.59 0.62 0.95
(1) Equal to stockholders' equity less intangibles divided by diluted end of
period shares outstanding.
(2) Based on average total assets after adjustment for unrealized gain (loss)
on securities available for sale.
(3) Based on average total equity after adjustment for unrealized gain (loss)
on 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.
(8) 1997 data is reflective of the acquisition of Eastern Bancorp.
(See footnote 2 to the financial statements.)
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operation
For the years ended December 31, 1997, 1996 and 1995.
Overview
Net income for 1997 was $17.1 million, up from the $16.6 million and $14.9
million earned in 1996 and 1995, respectively.
Return on average assets was 1.00% in 1997, 1.31% in 1996 and 1.23% in
1995. Return on average stockholders' equity was 10.22% in 1997, 14.51% in
1996 and 14.69% in 1995.
Basic earnings per share was $1.52, $1.79 and $1.60 in 1997, 1996 and
1995, respectively. Diluted earnings per share was $1.51, $1.77 and $1.59 for
the same periods.
On June 26, 1997 the Company acquired Eastern Bancorp, Inc. ("Eastern")
and its subsidiary Vermont Federal Bank, FSB ("VFB"), based in Burlington,
Vermont. Many of the fluctuations noted in this discussion were significantly
impacted by this transaction ("merger"). See note 2 to the Consolidated
Financial Statements for details.
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. Foot notes (1) through (5) following
1997, 1996, 1995 schedules.
1997
Interest Rate
Average Income/ Earned/
Balance Expense(1) Paid (1)
(Dollars in thousands)
ASSETS
Earning assets:
Loans, net of unearned
income (2) $1,117,325 $100,722 9.01%
Taxable securities (3) 409,817 26,649 6.50
Tax exempt securities (3) 10,371 789 7.61
Federal funds sold and
securities purchased
under agreement to resell 13,140 723 5.50
Interest-bearing bank
deposits 1,260 48 3.81
Total earning assets 1,551,913 128,931 8.31%
Noninterest-earning
assets:
Cash and due from banks 61,335
Premises and equipment,net 35,850
Other assets 90,372
Allowance for loan losses (17,469)
Total assets 1,722,001
LIABILITIES AND STOCKHOLDER' EQUITY
Interest-bearing Liabilities:
Savings and transactional
deposits $ 770,556 25,097 3.26%
Certificates of deposit:
$100,000 or more 54,587 2,830 5.18
Under $100,000 392,474 21,157 5.39
Federal funds purchased
and securities sold under
agreement to repurchase 76,135 3,639 4.78
Other borrowed funds 57,974 3,239 5.59
Total interest-bearing
liabilities 1,351,726 55,962 4.14
Noninterest-bearling
liabilities:
Demand deposits 185,174
Other liabilities 16,338
Total liabilities 1,553,238
Stockholders' equity 168,763
Total liabilities and
stockholders' equity $1,722,001
Net interest income
(fully taxable equivalent) 72,969
Less fully taxable equivalent
adjustments (1,053)
Net interest income $71,916
Net interest spread (4) 4.17%
Net interest margin (5) 4.70%
1996
Interest Rate
Average Income/ Earned/
Balance Expense (1) Paid (1)
(Dollars in thousands)
ASSETS
Earning assets:
Loans, net of unearned
income (2) $ 896,417 $82,113 9.16%
Taxable securities (3) 250,590 15,449 6.17
Tax exempt securities (3) 11,099 809 7.29
Federal funds sold and
securities purchased
under agreements to
resell 14,869 842 5.66
Interest-bearing bank
deposits 34 2 5.88
Total earning assets 1,173,009 99,215 8.46
Noninterest-earning
assets:
Cash and due from banks 46,165
Premises and equipment,net 24,146
Other assets 33,683
Allowance for loan losses (14,461)
Total assets 1,262,542
LIABILITIES AND STOCKHOLDERS' EQUITY
Interst-bearing liabilities:
Savings and transactional
deposits $ 612,780 20,353 3.32
Certificates of deposit
$100,000 or more 38,343 2,025 5.28
Under $100,000 264,043 14,679 5.56
Federal funds purchased and
securities sold under
agreements to repurchase 68,446 3,181 4.65
Other borrowed funds 18,678 1,113 5.96
Total interest-bearing
liabilities: 1,002,290 41,351 4.13
Noninterest-bearing liabilities:
Demand deposits 135,158
Other liabilities 9,077
Total liabilities 1,146,525
Stockholders' equity 116,017
Total liabilities and
stockholders' equity $1,262,542
Net interest income
(fully taxable equivalent) 57,864
Less fully taxable equivalent
adjustments (1,110)
Net interest income $56,754
Net interest spread (4) 4.33%
Net interest margin (5) 4.93%
1995
Interest Rate
Average Income/ Earned/
Balance Expense (1) Paid (1)
(Dollars in thousands)
ASSETS
EArning assets:
Loans, net of unearned
income (2) $ 910,799 $84,431 9.27%
Taxable securities (3) 190,764 11,441 6.00
Tax exempt securities (3) 10,289 752 7.31
Federal funds sold and
securities purchased
under agreement to resell 16,684 1,029 6.17
Interest-bearing bank
deposits 61 3 4.92
Total earning assets 1,128,597 97,656 8.65
Noninterest-earning
assets:
Cash and due from banks 43,707
Premises and equipment,net 23,517
Other assets 32,359
Allowance for loan losses (14,834)
Total assets 1,212,346
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings and transactional
deposits $ 607,202 21,497 3.54
Certificates of deposit
$100,000 or more 33,538 1,766 5.27
Under $100,000 252,920 13,682 5.41
Federal funds purchased
and securities sold under
agreements to repurchase 67,896 3,317 4.88
Other borrowed funds 27,138 1,707 6.33
Total interest-bearing
liabilities 988,694 41,969 4.24
Noninterest-bearing
liabilities:
Demand deposits 109,631
Other liabilities 8,605
Total liabilities 1,106,930
Stockholders' equity 105,416
Total liabilities and
stockholders' equity $1,212,346
Net interest income
(fully taxable equivalent) 55,687
Less fully taxable equivalent
adjustments (1,199)
Net interest income $54,488
Net interest spread (4) 4.41%
Net interest margin (5) 4.92%
(1) Includes a fully taxable equivalent adjustment based on a 35% federal
income tax rate.
(2) Average balances include nonaccrual loans but do not include deferred
loan fees.
(3) Taxable and tax-exempt securities are recorded at amortized cost.
(4) The difference between the average rate earned on total earning assets
and the average rate paid on total interest-bearing liabilities.
(5) Represents net interest income divided by average earning assets.
Net interest income increased $15.2 million or 26.7% to $71.9 million in
1997 from $56.8 million in 1996. This compared to a $2.3 million or 4.2%
increase in 1996 from 1995. On a fully taxable equivalent basis, net interest
income increased $15.1 million, or 26.1%, from 1996 to 1997 and $2.2 million,
or 3.9%, from 1995 to 1996. The growth in 1997 was primarily due to a $378.9
million increase in average earning assets. The fluctuations in the yields on
securities, the net interest spread and net interest margin in 1997 were
primarily influenced by the earning assets and the interest-bearing liabilities
purchased from Eastern. The increase in 1996 was also mostly due to a $44.4
million increase in average earning assets. Management anticipates that the
Company's net interest margin in 1998 will continue to decline and that net
interest income will increase due to higher levels of average earning assets
offset somewhat by the decrease in margin. Nearly all the growth in the
Company's earning assets and financial resources came as a result of the merger
with Eastern. Comparing combined balances at December 31, 1997 with December
31, 1996, earnings assets decreased $158.4 million, or 7.9%. Most of the
decrease came from a $92.8 million decrease in the loan portfolio which was
the result of the sale of approximately $60 million in mobile home loans which
were sold as a result of credit quality concerns and the sale of $30 million
in portfolio mortgages. In addition, the securities portfolio decreased $59.7
million, or 10.2%, and short-term investments decreased $6.6 million, or 99.3%,
in an effort to reduce the short-term borrowings acquired in the Eastern merger.
During the same period, financial resources decreased $119.4 million, or 6.0%.
Most of this decrease came from a $95.1 million, or 35.3%, decrease in fed funds
purchased and other short-term borrowings. Management decided that in order to
achieve a more balanced GAP position and a better mix of assets and liabilities
it would be prudent to reduce the long-term securities acquired from Eastern
that were funded by short-term liabilities. As a result $95.3 million of
securities were sold in 1997, approximately the decrease in federal funds
purchased and other short-term borrowings.
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.
1997 vs 1996 1996 vs 1995
Net Net
Increase Due to Changes in Increase Due to Changes in
(Decrease) Rate (1) Volume (Decrease) Rate (1) Volume
(in thousands)
INTEREST INCOME:
Loans(2) $18,609 $19,971 $(1,362) $(2,318) $(1,323) $ (995)
Taxable securities 11,200 10,330 870 4,008 3,676 332
Tax exempt securities (20) (20) 0 57 59 (2)
Federal funds sold
and securities
purchased under
agreements to resell (119) (96) (23) (187) (106) (81)
Interest-bearing bank
deposits 46 47 (1) (1) (2) 1
Total interest
income 29,716 30,232 (516) 1,559 2,304 (745)
INTEREST EXPENSE:
Savings and
transactional
deposits 4,744 5,120 (376) (1,144) 197 (1,341)
Certificates of deposit:
--$100,000 or more 805 844 (39) 259 256 3
--Under $100,000 6,478 6,940 (462) 997 611 386
Federal funds purchased
and securities sold
under agreements to
repurchase 458 367 91 (136) 26 (162)
Other borrowed funds 2,126 2,199 (73) (594) (500) (94)
Total interest
expense 14,611 15,470 (859) (618) 590 (1,208)
Change in net
interest income $15,105 $14,762 343 $2,177 $1,714 $ 463
(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 probable 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 1997 was $3.3 million compared to $3.4
million in 1996 and $3.9 million in 1995. Net loans charged off were $5.4
million, $4.5 million and $5.4 million for the respective years. The provision
was reduced $0.1 million in 1997 and $0.5 million in 1996. Nonperforming asset
levels and the Company's local economy continued to improve offsetting the need
for a larger provision normally associated with a growing loan portfolio. Net
charged-off loans exceeded the provision in 1997 due to the charge-off of one
loan for approximately $2.0 million.
Other Operating Income And Other Operating Expense
In 1997, other operating income (net of securities gains) increased $8.7
million, or 45%, from 1996. Increases of $1.7 million in trust department
income and $4.1 million in service charges on deposit accounts comprised 65%
of this increase. Management anticipates that the Company will continue to
achieve increases in other operating income in 1998 as a result of the
increase in customers and business from the Eastern acquisition.
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.
Total other operating expense increased $22.6 million, or 48%, in 1997
after increasing $1.4 million, or 3%, in 1996. The increase in 1997 was
primarily a result of the merger. Expenses in the second half of 1997 versus
the last six months of 1996 were up $19.6 million. Approximately $4.6 million
of the increase in other operating expenses was due to expenses incurred as
a result of unanticipated operational and back office problems associated with
the integration of VFB into VNB. Operating expenses for 1997 were also
impacted by approximately $.4 million in connection with a shareholder appraisal
case. The merger with a Company approximately two thirds the former size of
VFSC largely accounted for the remainder of the increase. Amortization of the
goodwill acquired in the merger which is being amortized over a fifteen year
period results in expense of approximately $1 million per quarter. Based on
the current business plan, and without any unforeseen changes to such plan,
management anticipates that other operating expense will be running at a rate
of approximately $20 million per quarter by the end of 1998, below the $24.8
million level of the fourth quarter of 1997. The increase in other operating
expense for 1996 over 1995 was primarily due to inflation and the purchase of
the Green Mountain Bank Trust Department.
Applicable Income Taxes
During 1997, 1996 and 1995 the Company recorded income tax expense of $10.0
million, $8.5 million and $7.2 million, respectively. The changes were almost
entirely due to the level of pre-tax earnings and the increase in goodwill
amortization in 1997 which is a nondeductible expense for tax purposes. See
also footnote 12 to the financial statements.
Financial Condition
Loans
The loan portfolio increased $404 million, or 44%, in 1997 following a
$17.0 million, or 2%, increase in 1996. 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 from 42% of the loan portfolio to 33%, primarily as a result of the
mix of loans acquired from Eastern. It is management's intention to focus
on increasing the commercial lending sector of the loan portfolio.
Through its subsidiary Banks the Company makes commercial business loans
to small and medium sized businesses in Vermont, Massachusetts and New
Hampshire. 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,
Massachusetts, New Hampshire and adjacent communities in neighboring states.
Approximately 53% of the commercial real estate portfolio represents loans on
owner occupied properties. Management's goal is to keep the construction loan
portion of the loan portfolio below 5% of total loans. As of December 31, 1997
this sector represented 3% of the portfolio.
In 1997, the Company originated $135.2 million of residential mortgage
loans and sold $117.7 million of loans in the secondary market, compared to
$119.2 million originated and $56.0 million sold in 1996 and $111.4 million
originated and $33.1 million sold in 1995. The 15% increase in originations
in 1997 was primarily due to the merger and the additional opportunities it
afforded the Company. The 7% increase in mortgage loan originations in 1996
was primarily due to slightly lower interest rates.
At year end 1997, the mortgage portfolio serviced for others totaled
$1,056.6 million compared to $412.2 million at year end 1996 and $420.6
million at year end 1995 and currently generates income of approximately $2.1
million per year. The increase in 1997 was almost entirely due to the merger.
The $8.3 million, or 2% reduction in 1996 was due to net amortization of
existing balances. Of the residential real estate portfolio, 61% were
adjustable rate loans and 39% were fixed rate loans at December 31, 1997.
Residential real estate loans represented 58%, 47% and 47% of gross loans at
year end 1997, 1996 and 1995, respectively.
Consumer loans represented 8% of gross loans at December 31, 1997 and 11%
at December 31, 1996 and 1995.
The following table summarizes the composition of the Company's loan
portfolio at the dates indicated.
December 31,
1997 1996 1995 1994 1993
(in thousands)
Commercial(1) $166,418 $181,372 $170,162 $207,299 $203,300
Real Estate:
Residential 765,634 429,657 415,468 389,033 372,570
Commercial 234,394 177,339 182,233 186,185 174,881
Construction 38,695 25,205 24,816 25,033 25,762
Total real estate 1,038,723 632,201 622,517 600,251 573,213
Consumer 109,360 96,863 100,791 103,953 95,928
Total loans, net
of unearned income $1,314,501 $910,436 $893,470 $911,503 $872,441
(1) Includes loans to Massachusetts and Vermont municipalities and industrial
revenue bonds of $20,730, $46,038, $24,874, $44,669 and $30,339 for years 1997
through 1993, respectively.
The following table details the loan maturity and interest rate sensitivity
of commercial, commercial real estate and construction loans, at December 31,
1997.
After One After
Within But Within Five
One Year Five Years Years Total
(Dollars in thousands)
Loans:
With fixed interest rates $ 40,190 $49,140 $49,708 $139,038
With variable interest rates 288,798 4,286 7,385 300,469
Total $328,988 $53,426 $57,093 $439,507
Nonperforming Assets And Risk Elements
Nonperforming assets are assets on which income recognition in the form
of principal and/or interest has either ceased or is limited. 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.
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,
1997 1996 1995 1994 1993
(Dollars in thousands)
Loans 90 days or more
past due and still
accruing interest $ 6,055 $ 1,933 $ 2,008 $ 1,448 $ 1,503
Nonperforming assets:
Nonaccrual loans $17,006 $7,812 $11,695 $16,491 $25,746
Other real estate owned 2,794 697 2,977 4,487 4,678
Restructured loans
- accruing 0 661 316 294 1,532
Total nonperforming
assets $19,800 $9,170 $14,988 $21,272 $31,956
Nonperforming assets
to period end loans,
net of unearned income,
plus other real estate owned 1.50% 1.01% 1.67% 2.32% 3.64%
Loans 90 days or more past due and still accruing interest include loans
that are adequately collateralized and are in the process of collection and
loans which have exceeded their contractual maturity and are in the process of
being renewed. At December 31, 1997, there were three loans, totaling $2.2
million, which were in the process of renewal. The remainder of the $4,122,000
increase in loans 90 days or more past due and still accruing interest in 1997
was due to loans acquired from Eastern.
Additional interest income of $1,342,000, $739,000 and $1,084,000 would
have been recorded in 1997, 1996 and 1995, respectively, if nonaccrual and
restructured loans had been on a current basis in accordance with their original
terms. Payments, totaling $1,117,000, $1,850,000 and $1,052,000 respectively,
were received on nonaccrual loans during 1997, 1996 and 1995. All payments,
were applied as principal reductions with the exception of $18,000 recorded as
interest income in 1997. 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, 1997, 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, 1997, 3% of the total
nonaccrual loans are current as to contractual terms. Loans to three commercial
borrowers, totaling $4.1 million represented 24% of nonaccrual loans.
Management expects to see moderate improvement in 1998 over the 1997 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 probable losses
which are inherent 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 $18.9 million, or 1.44% of the total loan
portfolio at December 31, 1997, compared with 1.50% at year end 1996 and 1.65%
at year end 1995. On December 31, 1997 the allowance for loan losses
represented 96% of total nonperforming assets and 111% of nonperforming loans
(which include nonaccrual and restructured loans), compared to 149% and 161%,
respectively, at year end 1996. The primary cause of the fluctuations noted
above was the nonperforming assets and allowance acquired in the merger. On
June 26, 1997 the Company acquired nonperforming assets of $13.0 million,
nonperforming loans of $9.0 million and an allowance for loan losses of $7.5
million from Eastern.
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,
1997 1996 1995 1994 1993
(Dollars in thousands)
Allowance for loan
losses at beginning of year $13,647 $14,761 $16,236 $17,815 $21,047
Allowance acquired from Eastern 7,488 0 0 0 0
Loans charged off:
Commercial, commercial
real estate and construction (3,637) (3,416) (4,533) (4,895) (7,361)
Real estate-residential (890) (1,047) (596) (650) (807)
Consumer (2,178) (1,570) (1,484) (1,240) (1,427)
Total loans charged off (6,705) (6,033) (6,613) (6,785) (9,595)
Recoveries of loans
previously charged off:
Commercial, commercial
real estate and construction 743 1,115 772 783 884
Real estate-residential 57 36 40 0 96
Consumer 463 418 426 423 330
Total Recoveries 1,263 1,569 1,238 1,206 1,310
Net loans charged off (5,442) (4,464) (5,375) (5,579) (8,285)
Additions to allowance
charged to earnings 3,250 3,350 3,900 4,000 5,053
Allowance for loan losses
at year end $18,943 $13,647 $14,761 $16,236 $17,815
Ratio of net charge-offs
to average loans, net of
unearned income 0.49% 0.50% 0.59% 0.62% 0.95%
Allowance for loan losses
to period end loans, net of
unearned income 1.44% 1.50% 1.65% 1.78% 2.04%
Net loans charged off in 1997 totaled $5,442,000 or 0.49% of average loans.
This compares with $4,464,000 or 0.50% in 1996 and $5,375,000 or 0.59% in 1995.
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
factors and assumptions, management is of the opinion that an allocation of
the reserve is not necessarily indicative of the specific amount of future
charge-offs or the specific loan categories in which these charge-offs may
ultimately occur.
The following table summarizes the allocation of the allowance for loan
losses at December 31, 1997, 1996, 1995, 1994 and 1993. 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,
1997 1996 1995 1994 1993
Loan Loan Loan Loan Loan
Type Type Type Type Type
to to to to to
Allo- Total Allo- Total Allo- Total Allo- Total Allo- Total
cated Loans cated Loans cated Loans cated Loans cated Loans
(Dollars in thousands)
Commercial $2,178 13% $ 2,637 20% $2,726 19% $4,226 23% $5,027 23%
Real Estate-
Commercial 3,998 18 2,161 19 1,010 20 4,597 20 4,324 20
Construction 121 3 407 3 2,033 3 488 3 519 3
Real Estate-
Residential 4,440 58 1,651 47 1,398 47 1,061 43 1,116 43
Consumer 2,103 8 1,704 11 1,399 11 1,644 11 1,712 11
Unallo-
cated 6,103 - 5,087 - 6,195 - 4,220 - 5,117 -
$18,943 100% $13,647 100% $14,761 100% $16,236 100% $17,815 100%
Investment Portfolio
The investment portfolio is utilized primarily for liquidity and
secondarily for investment income. As a result, the portfolio is primarily
comprised of short-term U. S. Treasury instruments and high grade municipal
obligations, mortgage-backed securities and corporate bonds with short
maturities.
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,
1997 1996 1995
(in thousands)
U.S. Treasury and other
U.S. Government agencies $295,775 $194,727 $145,873
State and political
subdivisions 9,987 10,558 10,343
Mortgage-backed securities 199,121 67,055 75,752
Other securities (1) 22,766 18,780 17,714
Total $527,649 $291,120 $249,682
(1) Includes money market overnight investments of $15,417, $9,343 and $4,895
at year end 1997, 1996 and 1995, respectively.
The investment portfolio increased 81%, to $527.6 million, at year end.
During 1996 the portfolio increased 17%, to $291.1 million at year end. The
total portfolio as a percent of total assets was 25% at year end 1997 compared
to 22% and 20% at year end 1996 and 1995, respectively.
Securities are carried at fair market value in the above tables. The
significant change in the portfolio in 1997 was almost entirely due to the
acquisition of the security portfolio of Eastern. During 1996 excess liquidity,
as a result of sluggish loan demand, was primarily invested in U.S. Treasury
and U.S. Government Agency securities, and mortgage backed securities. The
average maturity of the investment portfolio is approximately 2-1/4 years.
The Company invests a portion of its capital in marketable equity
securities which comprised 2.9%, 3.1% and 4.7% of total investments at December
31, 1997, 1996 and 1995, respectively. At December 31, 1997, $8.1 million of
the $15.4 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, 1997 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 amortized cost of the securities
at December 31, 1997.
Maturing (at Market Value)
After One But After Five But
Within Within Five Within Ten After
One Year Years Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in thousands)
U.S. Treasury
and other U.S.
Government agencies $10,086 6.22% $155,240 6.32% $130,449 6.98% $0 0.00%
State and political
subdivisions 1,381 6.18 8,606 6.48 0 0.00 0 0.00
Mortgage-backed
securities 13,309 6.10 155,751 6.87 30,062 7.19 0 0.00
Other fixed
income securities 7,348 5.52 0 0.00 0 0.00 0 0.00
Total $32,124 6.01 $319,597 6.59 $160,511 7.02 $0 0.00
Tax equivalent adjustment
for calculation of yield $28 $175 $56 $0
Does not include equity securities of $15,417 at December 31, 1997.
Deposits
Average total deposits for 1997 of $1,402.8 million represented a $352.5
million, or 34%, increase from 1996's average, which had increased $47.0
million, or 5%, from 1995's average balances. Almost all of the deposit growth
was due to the merger. Deposits actually decreased $24.3 million, or 1.4%,
from December 31, 1996 to December 31, 1997 comparing actual 1997 deposit
balances with combined Eastern/VFSC balances for 1996. Large CDs represented
4% of average total deposits in 1997 and 1996, and 3% in 1995. The majority
of these deposits was obtained from local Vermont, Massachusetts and New
Hampshire 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,
1997 1996 1995
Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
Demand deposits $ 185,174 - % $ 135,158 -% $ 109,631 -%
Interest-bearing
transactional
deposits 576,842 3.42 489,363 3.49 472,753 3.70
Savings deposits 193,714 2.62 123,417 2.46 134,449 2.67
Certificates of
deposit:
-$100,000 or more 54,587 5.22 38,343 5.00 33,538 5.19
-Under $100,000 392,474 5.11 264,043 4.86 252,920 5.03
Total $1,402,791 $1,050,324 $1,003,291
The following table shows the maturity schedule of certificates of deposit
of $100,000 or more at December 31, 1997.
Certificates
of Deposit
(in thousands)
3 months or less $19,081
Over 3 through 6 months 15,702
Over 6 through 12 months 15,303
Over 12 months 18,777
Total $68,863
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 10.18%, 9.12% and 8.97% as
of December 31, 1997, 1996 and 1995, 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 9.80%, in 1997, 9.19% in 1996 and 8.69%
in 1995.
As a result of the Federal Deposit Insurance Corporation (FDIC) Improvement
Act of 1991 (FDICIA), bank regulators have established uniform capitalization
standards. The ratios for the Company and its two subsidiary banks as of
December 31, 1997 and 1996 place them in the "well capitalized" category at
each respective date. Management's goal is to remain "well capitalized".
See Note 13 to the Consolidated Financial Statements.
FDIC insurance rates vary depending on a bank's capital ratio and
regulatory rating. Well-capitalized institutions will be assessed less than
those that are adequately capitalized, which in turn lower than the other
categories. Both banks are currently assessed at the lowest available FDIC
rate. With the merger, the Company acquired $625 million of Oaker deposits
which were assessed at a rate of 6.3 cents per $100 of deposits for 1997.
The remaining deposits of both Banks were assessed at a rate of 1.3 cents per
$100 of deposits for 1997, The assessment rate for both Banks 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. No assessment rate changes are anticipated for 1998.
Liquidity And Interest Rate Sensitivity
Liquidity is the ability of the Company to meet each maturing obligation
or customer demand for funds. VFSC's main source of liquidity is dividend's
from its bank subsidiaries. As a result, the liquidity of the Company is
largely dependent upon the liquidity and profitability of the Company's bank
subsidiaries and their ability to pay dividends under applicable laws and
regulations.
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while adjusting the asset/liability structure to
obtain the maximum yield-cost spread on that structure. The Company relies on
its asset/liability structure to control interest rate risk. However, a sudden
and substantial change in interest rates may adversely impact the Company's
earnings to the extent that the interest rates borne by assets and liabilities
do not change at the same speed, to the same extent, or on the same basis.
A method used by asset liability management to measure the interest rate
risk exposure of the Company is the interest rate sensitivity "GAP" , which is
the difference between assets and liabilities subject to rate change over
specific time periods. There are limitations to GAP analysis, however, as
rates on different assets and liabilities may not move to the same extent in
any given time period. Competition may affect the ability of the Company to
change rates on a particular deposit or loan product.
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 capacity of $725 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 displays the estimated distribution of the principal
amounts of the Company's interest-earning assets and interest-bearing
liabilities maturing or repricing over various time periods. The amounts of
assets and liabilities reported in each time period were determined by the
contractual terms of the asset or liability adjusted for projected repayments
and prepayments of principal, where applicable. The prepayments are estimated
based on the Company's experience. The actual maturity or repricing could
differ substantially from those estimates if future prepayments differ from
the Company's historical experience.
The following table summarizes the Company's interest rate sensitivity
over various periods at December 31, 1997.
Repricing Date
0-30 31-90 91-180 181-356 1-5 Over 5
Days Days Days Days Years Years
(in thousands)
Earning assets:
Loans (1) $368,108 $89,430 $110,771 $189,371 $386,655 $153,160
Investment
securities (2) (3) 22,064 45,591 63,262 114,221 200,564 66,530
Other earning assets 2,514 0 0 0 0 0
Total 392,686 135,021 174,033 305,592 587,219 219,690
Interest-bearing
liabilities:
MMDA's (4) 188,989 8,562 12,843 59,714 165,463 0
NOW's and
Super NOW's (4) 3,387 6,774 10,161 52,675 121,928 0
Savings and
Clubs (4) 14,650 36,469 49,289 24,900 160,133 0
Certificates
of Deposit 46,561 86,968 127,793 135,819 137,441 6,718
Borrowed Funds 129,371 4,668 225 23,666 10,000 6,787
Total 382,958 143,441 200,311 296,774 594,965 13,505
Net Interest
Sensitivity Gap $9,728 $(8,420) $(26,278) $8,818 $(7,746) $206,185
Cumulative Interest
Sensitivity Gap $9,728 $1,308 $(24,970) $(16,152) $(23,898) $182,287
(1) Does not include non-accrual loans of $17,006 at December 31, 1997.
(2) Does not include equity securities of $15,417 at December 31, 1997.
(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.
Market Risk
The Company is subject to market risk from derivative and other financial
instruments. Other than the market risk associated with fluctuations in
interest rates, market risk is immaterial. Management attempts to imitate the
interest rate risk inherent in its balance sheet by purchasing, originating or
selling interest-sensitive assets or liabilities to minimize the impact of
changes in interest rates. In order to accomplish this, management attempts
to maintain a ratio of interest-sensitive assets to interest-sensitive
liabilities near 1:1 at each maturity period .
The following table shows the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturities or
next repricing date, in the case of variable rate instruments, and the
instruments' fair values at December 31, 1997. Market risk sensitive
instruments are generally defined as on and off balance sheet derivatives and
other financial instruments.
<TABLE>
<CAPTION>
Expected Maturity Date at December 31, 1997 (1)
There- Total Fair
1998 1999 2000 2001 2002 after Balance Value
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive
assets:
Loans receivable (net
of unearned discount,
gross of allowance:
Single-family
1-4 units $ 380,767 $ 71,938 $ 45,330 $ 16,488 $16,440 $214,616 $ 745,579 $ 754,894
Average int rate 8.62% 7.25% 7.91% 7.87% 7.50% 8.28% 8.31%
Multi-family and
nonresidential 170,677 35,602 28,625 12,603 14,153 31,989 293,649 294,651
Average int rate 8.96% 8.04% 8.08% 8.06% 7.91% 8.06% 8.58%
Consumer and
commercial 159,355 47,617 14,857 27,131 2,243 24,070 275,273 286,212
Average int rate 9.78% 11.10% 11.23% 11.82% 9.76% 6.91% 9.96%
Mortgage-backed
securities 69,791 32,335 29,742 19,550 11,625 33,539 196,582 199,121
Average int rate 6.74% 6.74% 6.74% 6.74% 6.74% 6.71% 6.74%
Investment
securities (2) (3) 174,932 48,726 23,254 15,398 18,106 47,322 327,738 328,528
Average int rate 6.68% 6.31% 6.40% 6.13% 6.44% 6.50% 6.54%
Other earning assets 2,514 - - - - - 2,514 2,514
Average int rate 5.50% - - - - - 5.50%
Total interest-
sensitive assets $ 958,036 $236,218 $141,808 $ 91,170 $62,567 $351,536 $1,841,335 $1,865,920
Interest-
sensitive
liabilities:
Deposits:
Checking $ 117,967 $ 72,092 $ 72,092 $ 72,091 $23,360 $ 66,259 $ 423,861 $ 423,861
Average int rate 0.48% 0.77% 0.77% 0.77% 0.05% 0.05% 0.54%
Savings 133,117 50,779 50,779 50,763 - - 285,438 285,438
Average int rate 4.11% 2.98% 2.98% 2.98% - - 3.51%
Money-market 244,596 59,890 59,890 59,890 11,307 - 435,573 435,573
Average int rate 4.40% 4.18% 4.18% 4.18% 4.47% - 4.32%
Certificates 397,141 76,035 39,172 9,161 9,873 9,918 541,300 539,628
Average int rate 5.10% 5.86% 6.04% 5.43% 5.50% 6.21% 5.31%
Borrowings:
FHLB 70,008 5,000 - 5,000 - 5,572 85,580 85,652
Average int rate 6.03% 5.00% - 5.88% - 5.61% 5.93%
Other 87,922 - 1,068 - - 147 89,137 89,148
Average int rate 5.17% - 6.96% - - 11.05% 5.20%
Total interest
-sensitive
liabilities $1,050,751 $263,796 $223,001 $196,905 $44,540 $81,896 $1,860,889 $1,859,300
</TABLE>
(1) For assets and liabilities expected maturities are contractual maturities
adjusted for projected repayments and prepayments of principal or next
contractual repricing opportunity in the case of variable rate instruments.
The Bank uses certain assumptions to estimate fair values and expected
maturities. The prepayment experience reflected herein is based on the Bank's
historical experience. The actual maturities of these instruments could vary
substantially if future prepayments differ from the Bank's historical
experience.
(2) Includes money market overnight investments at amortized cost and fair value
of $7,348.
(3) Includes equity securities at amortized cost and fair values of $15,325 and
$15,417, respectively.
Recent Developments
Merger with Eastern Bancorp, Inc.
See Note 2 to the Consolidated Financial Statements for details.
Other
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128, Earnings per Share, on December 31, 1997. SFAS No. 128 supersedes APB
Opinion No. 15, Earnings per Share, and replaces primary earnings per share
(EPS) and fully diluted EPS with basic EPS and diluted EPS, respectively, and
required the Company to make a dual presentation of basic EPS and diluted EPS
on the face of the income statement. Basic EPS, unlike primary EPS, excludes
all dilution while diluted EPS, like fully diluted EPS, reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or results in the issuance of
common stock that then shares in the earnings of the Company. The Company has
restated EPS for all prior periods presented to comply with the provisions of
SFAS No. 128.
The Company adopted 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". The effect of these statements did not
have a material impact on the financial statements of the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and displaying
comprehensive income, which is defined as all changes to equity except
investments by and distributions to shareholders. Net income is a component
of comprehensive income, with all other components referred to in the
aggregate as other comprehensive income. This statement is effective for 1998
financial statements.
The Company will be required to adopt SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, in its December 31, 1998
financial statements. SFAS No. 131 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
information about operating segments in interim financial reports issued to
shareholders. The Company anticipates providing segment information for its
Trust Department and United Bank.
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches. The
"year 2000" issue is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize
date sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause
systems to fail. The Company is utilizing both internal and external resources
to identify, correct or reprogram, and test the systems for the year 2000
compliance. It is anticipated that all reprogramming efforts will be complete
by December 31, 1998, allowing adequate time for testing. To date,
confirmations have been received from the Company's primary processing vendors
that they have developed systems that address processing transaction in the year
2000. Testing and conversion of systems applications is expected to cost
between $1.5 million and $2.5 million over the next two years. The Company
expects its year 2000 date conversion project to be completed on a timely basis.
However, there can be no assurance that the systems of other companies on which
the Company's systems rely or that systems of the Company's borrowing customers
will be timely converted or that any such failure to convert by another company
would not have an adverse effect on the Company's systems or results of
operations.
During 1998, the Company plans a major renovation to its branch operations
in Chittenden County, Vermont at a total cost of $2 to $3 million. In addition,
the Company plans to purchase a new remittance processing system, upgrade VNB's
credit card software and purchase a new system for originating mortgage loans,
each costing approximately $0.5 million. No other additions to plant and
equipment are expected to exceed $0.5 million. All additions will be funded
through the operations of the Company.
Item 8 - Financial Statements and Supplementary Data
Consolidated Balance Sheets
December 31,
1997 1996
(Dollars in thousands, except share amounts)
Assets
Cash and due from banks $ 95,495 $ 61,962
Interest-bearing deposits with other banks 44 60
Federal funds sold and securities purchased under
agreements to resell 2,470 1,775
Total cash and cash equivalents 98,009 63,797
Securities available for sale
Mortgage-backed securities 199,121 67,055
Other securities 328,528 224,065
Total securities available for sale 527,649 291,120
Loans 1,314,501 910,436
Less: allowance for loan losses (18,943) (13,647)
Net loans 1,295,558 896,789
Premises and equipment, net 46,620 23,618
Real estate held for investment 1,298 1,360
Other real estate owned (OREO)
(Net of valuation reserve of $0 at
December 31, 1997 and $87 at
December 31, 1996) 2,794 697
Goodwill and other intangibles 61,729 6,327
Other assets 63,795 29,273
Total assets $2,097,452 $1,312,981
Liabilities and Stockholders' Equity
Deposits:
Demand $ 228,935 $ 162,887
Savings, NOW and money market accounts 915,937 620,111
Time deposits 541,300 300,260
Total deposits 1,686,172 1,083,258
Federal funds purchased and securities sold
under agreements to repurchase 87,818 77,672
Liabilities for borrowed money 86,899 23,169
Other liabilities 22,967 9,165
Total liabilities 1,883,856 1,193,264
Commitments and contingencies
Stockholders' Equity:
Preferred stock - $1 par value;
Authorized 5,000,000 shares - -
Common stock - $1 par value;
Authorized 20,000,000 shares
Issued: 1997 - 13,243,357
1996 - 9,784,884 13,243 9,785
Capital surplus 116,640 44,697
Undivided profits 81,562 71,151
Unrealized holding gains (losses), net 2,152 (1,029)
Treasury stock, at cost - 1997 - 52 shares
1996 - 360,042 shares (1) (4,887)
Total stockholders' equity 213,596 119,717
Total liabilities and stockholders' equity $2,097,452 $1,312,981
See accompanying notes to consolidated financial statements.
Consolidated Statements of Income
For the years ended December 31,
1997 1996 1995
(Dollars in thousands,
except per share amounts)
Interest Income
Interest and fees on loans $100,013 $81,281 $83,506
Interest on securities available for sale:
Taxable interest income 26,638 15,504 11,480
Tax exempt interest income 456 478 443
Fed Funds sold and securities purchased
under resale agreements 771 842 1,028
Total interest income 127,878 98,105 96,457
Interest Expense
Interest on deposits:
Certificates of deposit over $100,000 2,830 2,025 1,766
Other deposits 46,254 35,032 35,179
Interest on federal funds purchased,
borrowed money and securities
sold under agreements to repurchase 6,878 4,294 5,024
Total interest expense 55,962 41,351 41,969
Net interest income 71,916 56,754 54,488
Provision for loan losses 3,250 3,350 3,900
Net interest income after
provision for loan losses 68,666 53,404 50,588
Other Operating Income
Securities gains, net 688 11 79
Trust Department income 5,761 4,109 3,218
Service charges on deposit accounts 10,220 6,165 5,746
Credit card fees 3,801 3,219 2,794
Mortgage servicing income 1,800 1,698 1,910
Other service charges, commissions and fees 6,252 3,959 3,802
Total other operating income 28,522 19,161 17,549
Net interest and other operating income 97,188 72,565 68,137
Other Operating Expense
Salaries and wages 25,603 18,677 17,503
Pension and other employee benefits 6,302 5,288 4,509
Occupancy of bank premises, net 5,346 3,447 3,337
Furniture and equipment 6,285 3,980 4,155
Goodwill and other intangible amortization 2,601 440 389
Net OREO and collection expenses and losses 1,155 1,780 2,244
Printing and supplies 2,044 1,157 1,143
FDIC insurance 331 4 1,163
Credit card merchant expense 2,506 2,093 1,715
Other 17,876 10,545 9,841
Total other operating expense 70,049 47,411 45,999
Income before income taxes 27,139 25,154 22,138
Applicable income tax expense 10,013 8,539 7,241
Net Income $17,126 $16,615 $14,897
Earnings Per Common Share:
Basic $1.52 $1.79 $1.60
Diluted $1.51 $1.77 $1.59
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 1997, 1996 and 1995
Unrealized
Common Capital Undivided Holding Treasury
Stock Surplus Profits (Losses) Stock Total
(Dollars in thousands, except per share amounts)
Balance, December 31, 1994 $ 9,581 $ 43,924 $48,615 $(9,604) $(2,059) $ 90,457
Net income - - 14,897 - - 14,897
Issuance of 10,890 shares
of common stock under
employee stock purchase plan 11 131 - - - 142
Exercise of options 174 489 - - 109 772
Change in unrealized gain/loss
on securities available for
sale portfolio, net of tax - - - 9,613 - 9,613
Cash dividends
declared ($0.43) - - (4,048) - - (4,048)
Balance, December 31, 1995 9,766 44,544 59,464 9 (1,950) 111,833
Net income - - 16,615 - - 16,615
Issuance of 8,702 shares
of common stock under
employee stock purchase
plan 9 135 - - - 144
Exercise of options - (144) - - 618 474
Purchase of 198,000 shares
under 1996 stock
repurchase plan - - - - (3,555) (3,555)
Issuance of 9,774 shares
of common stock under
dividend reinvestment plan 10 162 - - - 172
Change in unrealized
gain/loss on securities
available for sale
portfolio, net of tax - - - (1,038) - (1,038)
Cash dividends
declared ($.53) - - (4,928) - - (4,928)
Balance,
December 31, 1996 9,785 44,697 71,151 (1,029) (4,887) 119,717
Net income - - 17,126 - - 17,126
Issuance of 6,230 shares
of common stock under
employee stock
purchase plan 6 138 - - - 144
Exercise of options 147 4,929 - - 4,886 9,962
Issuance of 35,629 shares
of common stock under
dividend reinvestment
plan 36 808 - - - 844
Issuance of 3,497,443
shares in merger
transaction (Note 2) 3,497 68,866 - - - 72,363
Retirement of 228,378
shares related to
dissenting WMBS
shareholder suit (228) (2,798) - - - (3,026)
Change in unrealized
gain/loss on securities
available for sale
portfolio, net of tax - - - 3,181 - 3,181
Cash dividends declared
($0.60) - - (6,715) - - (6,715)
Balance,
December 31, 1997 $13,243 $116,640 $81,562 $2,152 $(1) $213,596
See accompanying notes to consolidated financial statements.
Consolidated Statements Of Cash Flows
For the years ended December 31,
1997 1996 1995
(Dollars in thousands)
OPERATING ACTIVITIES
Net Income $17,126 $16,615 $14,897
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 3,250 3,350 3,900
Provision for depreciation 4,878 3,007 3,233
Net amortization on investment securities 543 682 670
Deferred income taxes (2,192) (56) 307
Net gain on sale of loans (1,114) (1,008) (637)
Security gains, net (688) (11) (79)
Proceeds from sales of loans 135,815 57,098 36,910
Loans originated for sale (122,010) (58,860) (37,192)
Net loss on sale of OREO 240 578 798
Changes in assets and liabilities,
net of effect from the purchase
of Eastern (Increase) decrease
in other assets (14,024) (4,236) 24
(Decrease) increase in other liabilities (1,070) (49) 1,007
NET CASH PROVIDED BY OPERATING ACTIVITIES 20,754 18,118 24,475
INVESTING ACTIVITIES
Proceeds from sales of securities 95,397 19,488 18,598
Proceeds from maturities of securities 111,782 62,726 21,694
Purchase of securities (164,600)(125,915) (102,135)
Proceeds from sale of OREO 5,942 4,672 4,469
Purchase of mortgage loans - (2,555) -
Net cash or cash equivalents from Eastern Bancorp. 13,819 - -
Net decrease (increase) in loans 30,390 (20,083) 9,183
Purchase of premises and equipment (10,939) (6,259) (2,301)
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 81,791 (67,926) (50,492)
FINANCING ACTIVITIES
Net (decrease) increase in deposits (39,619) 49,301 21,088
Net (decrease) increase in other borrowings (29,923) 9,176 (2,223)
Issuance of common stock 10,950 790 914
Purchase of treasury stock and retirement
of shares (3,026) (3,555) -
Cash dividends (6,715) (4,928) (4,048)
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (68,333) 50,784 15,731
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 34,212 976 (10,286)
Cash and Cash equivalents at beginning of year 63,797 62,821 73,107
CASH AND CASH EQUIVALENTS AT END OF YEAR $98,009 $63,797 $62,821
Non-monetary Transactions:
Transfer of loans to OREO for the years ended December 31, 1997, 1996 and
1995 totaled $2,903, $2,970 and $3,757, respectively.
On June 27, 1997, the Company purchased all of the stock of Eastern
Bancorp., Inc. for approximately $99.5 million. Cash of $26,913 was paid and
3,497,443 shares of common stock with a value of $72,363 were issued in
conjunction with the merger.
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting 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"). On June
27, 1997, the Company acquired Eastern Bancorp, Inc. (Eastern) and its
subsidiary Vermont Federal Bank, FSB (VFB). This acquisition was accounted
for under the purchase method of accounting. On September 22,1997 VFB was
merged into VNB. All intercompany transactions have been eliminated in the
consolidated financial statements.
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.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the balance sheet and revenues and expenses
for the period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to change in the near term are the
determination of the allowance for loan losses, the valuation of other real
estate owned and the valuation of loans held for sale.
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. The
Company is required to comply with various laws and regulations of the FRB
which require that the Company maintain certain amounts of cash on deposit and
is restricted from investing those amounts.
Securities are classified in one of three categories, held to maturity,
trading or available for sale. Debt securities for which the Company has the
ability and intent to hold to maturity are classified as held to maturity and
are stated at amortized cost. Securities bought in anticipation of short-term
market movements, if any, are classified as trading securities and are carried
at market value with unrealized gains or losses reflected in the statement of
income. 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 are carried at market value with unrealized
gains or losses reported as a separate component of stockholders' equity, net
of income taxes.
Premiums and discounts on debt securities are amortized into interest
income over the term of the securities in a manner that approximates the
interest method. Realized gains and losses on sales of securities are computed
using the specific identification method. Any security with a decline in market
value which is considered other than temporary is written down to its market
value through a charge to income.
Loans are carried at the principal amounts outstanding reduced by charge-
offs and net deferred loan fees. Loan origination and commitment fees, net of
direct loan originations costs, are amortized as an adjustment of the related
loan's yield over the contractual life of the related loans by the level yield
method.
When loans are moved to nonaccrual status, previously accrued interest is
reversed by charging interest income of the current period. Payments received
on nonaccrual loans are generally applied to reduce principal. Nonaccrual loans
are not generally returned to accrual status until all principal and interest
payments are current and the customer had demonstrated the ability to keep the
loan current.
A loan is considered impaired 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. Impaired loans have been defined as all nonaccrual loans and commercial
classified assets in excess of $250,000.
Impaired loans are valued based on the fair value of the related collateral
in the case of a collateral-dependent loan and, for all other impaired loans,
based on the present value of expected future cash flows, using the interest
rate in effect at the time the loan became impaired. Impairment exists when
the recorded investment in a loan exceeds the value of the loan measured using
the above-mentioned techniques. Such impairment is recognized as a valuation
reserve, which is included as a part of the Company's overall allowance for
loan 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.
For all commercial loans and residential mortgage loans, the accrual of
interest is discontinued once loans become 90 days delinquent or earlier if
management determines that the collection of principal may be in doubt. Loans
may be left in accrual status if they are adequately collateralized or are
expected to result in collection within the next 60 days. Commercial loans 180
days or more past due must be recommended for charge-off unless management
determines the collateral is sufficient. For consumer loans no specific period
of delinquency triggers nonaccrual status. 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. Credit card loans are generally
charged off after 180 days without payment.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb probable 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. The allowance is increased by provisions charged to operating
expense and by recoveries on loans previously charged off, and reduced by
charge-offs on loans. Arriving at an appropriate level of allowance for loan
losses necessarily involves a high degree of judgment. Primary considerations
in this evaluation are prior loan loss experience, the character and size of
the loan portfolio, business and economic conditions and management's estimation
of future potential losses. Although management uses available information to
establish the appropriate level of the allowance for loan losses, future
additions to the allowance may be necessary based on estimates that are
susceptible to change as a result of changes in economic conditions and other
factors. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize adjustments to the
allowance based on their judgments about information available to them at the
time of their examination.
Loans held for sale in the secondary market are carried at the lower of
aggregate cost or market value. Management estimates the market value of the
held for sale portfolio based on outstanding investor commitments or market
indices for comparable loans. Net unrealized losses, if any, are recognized
in the statement of income with a corresponding increase to a valuation
allowance.
OREO and foreclosed assets are carried at the lower of cost or fair value
less the estimated cost to sell the property. Fair value is determined using
appraisals, selling prices for similar assets and discounted cash flows using
rates commensurate with the risk involved. Costs of holding OREO and foreclosed
assets, net of rental income, are charged to income in the period incurred.
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.
Long-lived assets, including long-lived assets to be disposed of, are
reviewed for impairment whenever events or changes in circumstances indicate
the carrying amount of an asset may not be recoverable. An impairment loss is
charged to income in the period in which the asset is deemed to be impaired.
Gains and losses on sales of loans are recognized at the time of the sale.
In connection with the sale of loans, the Company recognizes as a separate
asset the value of the right to service mortgage loans which have been sold
with servicing retained. The total cost of the loans sold is allocated to the
mortgage servicing rights and the loans based on their relative fair values.
Mortgage servicing rights are recorded for both purchased mortgage servicing
rights (PMSRs) and for originated mortgage servicing rights (OMSRs) for loans
originated after December 31, 1995. These mortgage servicing rights are
amortized over the period of estimated net servicing income and are evaluated
for impairment based on their fair values. Amortization is recorded as a
charge against mortgage servicing fee income. The Company's assumptions with
respect to prepayments, which affect the estimated average life of the loan
are adjusted periodically to reflect current circumstances.
Goodwill and other intangibles are amortized over their estimated lives
by the straight-line method. As part of its ongoing review, management
evaluates the Company's intangible assets, assesses whether events and changes
in circumstances have occurred that may indicate the carrying value is not
recoverable.
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 effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
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.
On October 14, 1997 the Company paid a two-for-one stock split which was
effected as a stock dividend. All per share amounts have been retroactively
restated for the effects of this stock split including cash dividends.
Dollars in the following footnotes are in thousands except for per share
amounts.
Note 2. Acquisitions
On June 27, 1997, the Company acquired Eastern Bancorp, Inc. (Eastern)
and its subsidiary Vermont Federal Bank, FSB (VFB), based in Burlington,
Vermont which had approximately $800 million of assets. VFB operated 15
branches in Vermont and 10 branches in New Hampshire through First Savings of
New Hampshire, an operating division of VFB. The acquisition was accounted
for as a purchase and accordingly, the results of Eastern from June 27, 1997
are included in the consolidated financial statements of the Company. VFB was
merged into VNB on September 22, 1997.
In connection with the merger with Eastern, the Company issued 3,497,443
shares of its common stock and paid $26.9 million in cash for all of the
outstanding shares of Eastern's common stock. Under the terms of the merger
agreement, each outstanding share of Eastern's common stock was converted
into .6455 shares of VFSC common stock. The excess of the purchase price over
the fair value of the net identifiable assets acquired of approximately $58.1
million has been recorded as goodwill and is being amortized on a straight-line
basis over 15 years.
Presented below is certain proforma information as if Eastern had been
acquired on January 1, 1996. These results combine the historical results of
Eastern into the Company's consolidated statements of income, and while
adjustments were made for the estimated impact of purchase accounting
adjustments and other acquisition-related activity, they are not necessarily
indicative of what would have occurred had the acquisition taken place at
that time.
Pro forma
Years Ended December 31,
(Unaudited)
1997 1996
Interest income $158,310 $159,783
Net interest income 86,913 86,513
Net income 14,432 19,853
Diluted earnings per share $1.27 $1.54
In September 1996, the Company acquired the trust department of Green
Mountain Bank for $4.5 million in cash. Goodwill of $4.0 million was recorded
in connection with this transaction and is being amortized over 15 years on a
straight-line basis.
Note 3. Securities
The amortized cost, estimated market value and contractual maturity of
securities available for sale are shown in the following tables. Actual
maturities will differ from contractual maturities because borrowers have the
right to call or prepay obligations with or without call or prepayment
penalties.
December 31,
1997 1996
Fair Amortized Fair Amortized
Value Cost Value Cost
Classification and Maturity:
U. S. Treasury Securities:
Within 1 year $ 6,595 $ 6,556 $ 5,023 $ 5,008
1-5 years 27,784 27,629 25,302 25,304
Total 34,379 34,185 30,325 30,312
Obligations of Other
U. S. Government Agencies:
Within 1 year 3,491 3,500 - -
1-5 years 127,453 127,272 104,540 104,979
5-10 years 130,452 130,213 59,862 60,919
Total 261,396 260,985 164,402 165,898
Obligations of States and
Political Subdivisions:
Within 1 year 1,381 1,377 1,005 997
1-5 years 8,606 8,518 7,128 7,103
5-10 years - - 2,425 2,452
Total 9,987 9,895 10,558 10,552
Corporate Securities:
Within 1 year - - 500 500
Mortgage-backed Securities with current
estimated average life:
Within 1 year 13,309 13,344 2,594 2,588
1-5 years 155,751 153,787 59,689 59,782
5-10 years 30,062 29,451 3,402 3,437
Over 10 years - - 1,370 1,403
Total 199,122 196,582 67,055 67,210
Marketable Equity Securities 15,417 15,325 8,937 8,883
Money Market Overnight Investments:
Within 1 year 7,348 7,348 9,343 9,343
Total Securities $527,649 $524,320 $291,120 $292,698
Mortgage-backed securities are shown at their estimated final maturity
but are expected to have shorter average lives due to principal prepayments.
The expected maturities will differ from contractual maturities because
borrowers have the ability to call or prepay obligations with or without call
or prepayment penalties.
December 31,
1997 1996
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
Classification:
U.S. Treasury Securities $ 269 $ 75 $194 $ 181
Obligations of Other U.S.
Government Agencies 1,113 702 277 1,773
Obligations of States
and Political Subdivisions 95 3 61 55
Corporate Securities - - - -
Mortgage-backed Securities 2,672 132 260 415
Marketable Equity Securities 92 - 61 7
Total $4,241 $912 $853 $2,431
Proceeds from sales of securities available for sale during 1997, 1996
and 1995 were $95,397, $19,488 and $18,598, respectively.
Gross gains of $2,203, $11 and $124 were realized on those sales in 1997,
1996 and 1995, respectively. Gross losses of $1,515, $0 and $45 were realized
in the respective periods.
Securities with a book value of $259,931 as of December 31, 1997 and
$98,172 as of December 31, 1996 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.
Securities that are callable or have callable features had fair values
of $257,603 and $160,673 at December 31, 1997 and December 31, 1996,
respectively.
Note 4. Loans
Loans classified by type are summarized as follows:
December 31,
1997 1996
Commercial $ 166,418 $181,372
Real Estate:
Residential 765,634 429,657
Commercial 234,394 177,339
Construction 38,695 25,205
Total Real Estate 1,038,723 632,201
Consumer 109,360 96,863
Total loans, net of unearned income $1,314,501 $910,436
The Company grants loans to customers primarily in northern New England.
Although the Company has a diversified portfolio, the ability of the Company's
debtors to honor their contracts is substantially impacted by the general
economic conditions of the region.
At December 31, 1997 the amount of loans outstanding to directors,
executive officers, principal holders of equity securities or to any of their
associates totaled $6,362. The following table summarizes the related party
loan activity:
1997 1996
Balance at beginning of year $6,683 $7,447
Additions 3,290 1,409
Repayments (3,611) (2,173)
Balance at end of year $6,362 $6,683
Mortgage Banking Activities - During 1997 the Company originated $135,186
of mortgage loans for sale in the secondary market and sold $117,733. As of
December 31, 1997, $33,218 of mortgage loans were held for sale, included in
other assets, and were carried at the aggregate of the lesser of the loan
balance or market value. All loans are sold without recourse, except or
certain technical underwriting exceptions and $1,527 in loans sold by UB to
the Federal Home Loan Mortgage Corporation under a recourse agreement. None
have been presented for recourse. At December 31, 1997 and 1996 the Company's
serviced mortgage portfolio for others totaled $1,056,555 and $412,259,
respectively. Loan servicing income was $1,800, $1,698 and $1,910 for 1997,
1996 and 1995, respectively. The Company acquired $4,229 in purchased mortgage
servicing rights (PMSRs) with the acquisition of Eastern. The table below
summarizes mortgage servicing right activity for the last two years:
1997 1996
Balance at beginning of year $2,734 $2,713
Additions 5,259 495
Amortization (891) (474)
Balance at end of year $7,102 $2,734
The MSRs were carried at the lower of their cost or fair values. The
fair value of MSRs is measured by discounting the net cash flows of future
mortgage servicing. The associated cash flows were discounted using current
rates for similar investments and expected prepayment speeds are considered
based on current market data. The Company stratifies MSRs according to type
of product, rate and date sold. Impairment of MSRs of $47 and $11 was recorded
in 1997 and 1996, respectively.
The following table represents activity in the valuation allowance during
the respective years:
1997 1996
Balance at beginning of year $ 11 $ -
Additions 47 11
Repayments - -
Balance at end of year $58 $11
Note 5. Allowance for Loan and OREO Losses
Transactions in the allowance
for loan losses are summarized as follows: 1997 1996 1995
Balance, January 1 $13,647 $14,761 $16,236
Provision for Loan Losses 3,250 3,350 3,900
Loans Charged Off (6,705) (6,033) (6,613)
Recoveries of Loans Previously Charged Off 1,263 1,569 1,238
Addition of Eastern's Allowance 7,488 - -
Balance, December 31 $18,943 $13,647 $14,761
Transactions in the OREO valuation
reserve are summarized as follows: 1997 1996 1995
Balance, January 1 $ 87 $ 47 $ 710
Provisions for OREO losses 23 249 503
OREO Charged Off (110) (209) (1,166)
Balance, December 31, $ - $ 87 $ 47
Proceeds from sales of OREO were $5,942 in 1997, $4,672 in 1996 and
$4,469 in 1995. Loans granted in connection with these sales were $354, $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.
Note 6. Premises and Equipment
Premises and equipment, stated at cost,
consist of the following: December 31,
1997 1996
Land $ 4,206 $ 2,504
Premises 33,959 22,222
Equipment 43,386 18,188
Leasehold Improvements 5,338 1,833
Total 86,889 44,747
Accumulated Depreciation
and Amortization (40,269)(21,129)
Premises and Equipment,
Net $46,620 $23,618
Note 7. Deposits
Time certificates of deposit outstanding in denominations of $100 or more
aggregated to $68,863 and $38,833 at December 31, 1997 and 1996, respectively.
Total interest on these deposits amounted to $2,830, $2,025 and $1,766 for the
years ended December 31, 1997, 1996 and 1995, respectively.
The Company paid $48,642, $37,083 and $36,934 in interest on deposits
during 1997, 1996 and 1995, respectively.
Note 8. Other Borrowings
The following table shows the distribution of the Company's borrowings
and the weighted average interest rate thereon at the end of each of the last
three years. The table also shows the maximum amount of borrowings and the
average amount of borrowings as well as weighted average interest rates for
the last three years. Federal funds purchased and securities and loans
sold under agreements to repurchase generally mature within 30 days from the
transaction date.
At December 31, 1997 the Company owned $13,137 of stock in the Federal
Home Loan Bank ("FHLB") which provided borrowing capacity up to $725 million
from the FHLB at maturities, rates and terms determined by the FHLB.
December 31,
1997 1996 1995
Federal funds purchased $ 16,000 $ 0 $ 450
Securities and loans sold under
agreements to repurchase 71,818 77,672 79,323
FHLB and other borrowings 86,899 23,169 11,892
Total $174,717 $100,841 $ 91,665
Average amount outstanding
during the year $134,109 $ 88,133 $ 95,034
Maximum amount outstanding
at any month end $198,959 $106,793 $112,370
Weighted average interest
rate at year end 5.38% 4.81% 4.85%
Weighted average interest
rate during the year 5.12% 4.86% 5.21%
Long-term borrowings from
the FHLB (included in the above): December 31,
1997 1996 1995
Maturing March 2, 1998 5.57% $ 4,000 $ _ $ -
Maturing July 15, 1998 @ 6.03% 10,000 10,000 10,000
Maturing October 27, 1998 @ 4.99% 4,500 - -
Maturing December 10, 1998 @ 5.64% 5,000 - -
Maturing December 11, 1998 @ 5.77% 1,000 - -
Maturing December 14, 1998 @ 5.79% 3,000 - -
Maturing February 2, 1999 @ 5.50% 5,000 - -
Maturing February 2, 2001 @ 5.88% 5,000 - -
Maturing August 6, 2007 @ 6.42% 393 - -
Maturing September 21, 2007 @ 6.53% 35 - -
Maturing April 19, 2011 @ 3.50% 1,745 - -
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 1, 2014 @ 6.29% 206 - -
Maturing May 6, 2014 @ 7.61% 523 539 553
Maturing October 20, 2014 @ 8.24% 593 - _
Maturing August 19, 2016 @ 5.50% 288 296 -
Maturing January 30, 2017 @ 7.27% 608 - -
Total $43,069 $12,013 $11,731
The repurchase agreements represent amounts due to customers in connection
with overnight sweep accounts. They represent a purchase, by customers, of a
fractional portion of the Bank's interest in certain purchased securities and
are an obligation of the Bank to repurchase that portion of the securities based
on terms in a Master Purchase Agreement between the bank and the customer.
U.S. Treasury and agency securities pledged to secure repurchase agreements
totaled $71,818 at December 31, 1997. The securities are under the Bank's
control.
Note 9. Fair Market Value of Financial Instruments
Cash and Cash Equivalents - Cash and cash equivalents had a carrying value
of $98,009 and $63,797 at December 31, 1997 and 1996, respectively. Due to
their short term and very liquid nature the carrying value is considered to
also represent the fair market value of those 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 $527,649 and
$291,120 at December 31, 1997 and 1996, respectively.
Loans - At December 31, 1997 and 1996 total loans, net of allowance for
loan losses, had a carrying value of $1,295,558 and $896,789, respectively.
The fair value of these loans were $1,316,814 and $908,688, 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, 1997 and 1996 total deposits had carrying values
of $1,686,172 and $1,083,258 and fair values of $1,684,500 and $1,084,304,
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 $174,717
and $100,841 at December 31, 1997 and 1996, respectively. The fair value of
these borrowings were $174,800 and $100,828, respectively.
Off-Balance Sheet Financial Instruments - The Company's off-balance sheet
exposure is primarily in the form of commitments to extend credit and standby
letters of credit. The carrying amount of these arrangements represents
accruals or deferred income (fees) arising from those unrecognized financial
instruments. Such amounts are minimal and approximate fair value.
10. Impaired Loans
The following table details the Company's impaired loans as of the periods
indicated:
December 31,
1997 1996
Commercial (measured using discounted cash flows) $ 4,600 $20,900
Commercial (measured using collateral values) 900 300
Real Estate - Commercial (measured using discounted cash flows) 4,100 -
Real Estate - Commercial (measured using collateral values) 14,400 1,500
Real Estate - Residential (measured using collateral values) 7,200 5,600
Real Estate - Residential (measured using discounted cash flows) 1,700 -
Consumer (measured using collateral values) 400 -
Total impaired loans $33,300 $28,300
Impaired loans with a specific valuation reserve $6,600 1,600
Valuation reserve for impaired loans 2,400 300
Impaired loans without a specific valuation reserve 26,700 26,700
Average impaired loans 31,300 30,200
Income accrued on impaired loans 1,700 2,100
Note 11. Commitments and Contingencies and Financial Instruments with Off-
Balance Sheet Risk
Leases- The following is a schedule by years of future minimum rental
payments required under operating leases for premises and data processing
equipment that have initial or remaining noncancelable lease terms in excess
of one year as of December 31, 1997. Certain operating leases contain various
options to renew.
Year Ending December 31:
1998 $2,020
1999 1,892
2000 1,501
2001 874
2002 554
Later Years 2,973
Total Minimum Payments Required $9,814
Operating expenses include approximately $1,086, $872 and $943 in 1997,
1996 and 1995, 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 1997,
1996 and 1995 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 balance sheets.
The contract amounts of those instruments reflect the extent of involvement
the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the counterparty to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual amount of those
instruments. The Banks use the same credit policies in making commitments and
conditional obligations as they do for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Total commitments to extend
credit at December 31, 1997 and 1996 were as follows:
1997 1996
Home equity lines $145,126 $52,081
Credit card lines 98,629 92,336
Commercial real estate 16,760 16,270
Other unused commitments 135,457 112,106
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, 1997, the Company had outstanding commitments for the
following: financial standby letters of credit - $25,794, performance standby
letters of credit - $4,305 and commercial and similar letters of credit -
$8,896.
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, 1997 the Company's reserve
requirement of $27,077 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.
Note 12. Income Taxes
The provisions for income tax expense (benefit) included in the statements
of income are as follows:
Year Ended December 31,
1997 1996 1995
Currently Payable:
Federal $11,564 $7,439 $5,992
State 641 636 665
Deferred:
Federal (2,195) 421 569
State 3 43 15
Total $10,013 $8,539 $7,241
The Company made income tax payments of $7,965, $7,390 and $6,425 during 1997,
1996 and 1995, respectively.
The components of the net deferred tax asset as of December 31 are as follows:
1997 1996
Deferred tax assets:
Pension $1,070 $ 729
Deferred compensation and fees 2,292 1,853
Allowance for loan losses 6,906 4,649
Unrealized loss on securities, net - 549
Intangibles 560 -
Other 1,330 283
Total gross deferred tax assets 12,158 8,063
Deferred tax liabilities:
Accretion 127 94
Unearned income 323 419
Depreciation 1,793 1,216
Unrealized gain on securities, net 1,177 -
Intangibles - 413
Deferred loan fees 691 -
Total gross deferred tax liabilities 4,111 2,142
Deferred tax asset, net $8,047 $5,921
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:
1997 1996 1995
% of % of % of
Pre Tax Pre Tax Pre Tax
Amount Income Amount Income Amount Income
Federal Statutory Rate $ 9,499 35.0% $8,804 35.0% $7,748 35.0%
Decreases in Taxes Resulting From:
Tax exempt interest (709) (2.6) (786) (3.1) (841) (3.8)
State taxes, net of federal benefit 419 1.5 443 1.8 444 2.0
Goodwill 875 3.2 - - - -
Other, net (71) (0.2) 78 0.3 (110) (0.5)
Total $10,013 36.9% $8,539 34.0% $7,241 32.7%
Note 13. Employee Benefit Plans
The Company's two subsidiaries each have separate defined benefit pension
plans.
VNB has a trusteed non-contributory defined benefit pension plan covering
substantially all of its employees. The benefits are based on years of service
and the employee's final compensation. VNB'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 UB'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, 1997 and 1996:
Year Ended December 31,
1997 1996
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $14,664 and $12,174 for 1997 and
1996, respectively $(15,149) $(12,326)
Projected benefit obligation ("PBO") for
service rendered to date $(20,521) $(17,183)
Plan assets at fair value, comprised of
guaranteed insurance contacts, mutual,
real estate and money market funds
and listed stocks and bonds 20,616 17,665
PBO less than plan assets 95 482
Unrecognized net (gain) loss from past
experience different from that assumed and
effects of changes in assumptions (2,003) (1,485)
Unrecognized prior service cost 320 (48)
Unrecognized net asset at period end being
recognized over 18.64 years (782) (901)
Accrued pension cost $(2,370) $(1,952)
1997 1996 1995
Net pension cost included the following components:
Service cost - benefits earned during the period $ 894 $ 870 $ 652
Interest cost on PBO 1,348 1,270 1,141
Actual return on plan assets (3,301) (2,127) (2,974)
Amortization of net transition asset (119) (119) (119)
Net amortization and deferral of gains 1,824 802 1,864
Net pension cost $ 646 $ 696 $ 564
Significant assumptions used in actuarial computations were:
1997 1996
Discount rate 7.00% - 7.75% 7.50% - 7.75%
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 1997 and 1996 and $500 for 1995. The Plan included a
50% Company match of employee contributions to a 401k portion of the Plan
for 1997 and 1996 and a 25% match for 1995. This Plan feature was added in
1993 and the associated expense was $410 for 1997, $340 for 1996 and $140 for
1995.
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.
The following table sets forth the plan's accumulated postretirement
benefit obligation reconciled with the amount shown in the Company's financial
statements:
1997 1996
Accumulated postretirement benefit obligation:
Retired employees $ 310 $ 255
Active employees 304 168
Total $ 614 $ 423
Plan assets at fair value $ - $ -
1997 1996
Unfunded accumulated benefit obligation
in excess of plan assets $(614) $(423)
Unrecognized net loss 157 68
Unrecognized transition obligation 171 182
Accrued postretirement medical and life benefit cost $(286) $(173)
Net periodic postretirement benefit cost included
the following components:
Service cost - benefits attributed to service
during the period $ 14 $ 12
Interest cost 35 32
Recognition of transition obligation 11 11
Unrecognized loss 12 3
Net periodic postretirement cost $ 72 $ 58
For measurement purposes, 7.75% and 8.00% annual rates of increase in the
per capita net employer share of covered health care benefits were assumed for
1997 and 1996, respectively. 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,
1997, as well as the total of the service cost and interest cost components of
net periodic postretirement cost for 1997 by less than 2%. The weighted
average discount rate used in determining the accumulated postretirement
benefit obligation was 7.00% in 1997 and 7.75% in 1996. As the plan is
unfunded, no assumption was needed as to the long term rate of return on assets.
Note 14. Stockholders' Equity
The Company adopted SFAS No. 128 Earnings per Share, on December 31, 1997.
SFAS No. 128 supersedes APB Opinion No. 15, Earnings per Share, and replaces
primary earnings per share and fully diluted earnings per share with basic
earnings per share and diluted earnings per share, respectively. The Company
has restated earnings per share for all prior periods presented to comply with
the provisions of SFAS No. 128.
Following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share (EPS) computations for the years ended
December 31, 1997, 1996 and 1995:
Average Shares Per-Share
Income Outstanding Amount
(in thousands, except share and per share amounts)
1997
Basic EPS:
Income Available to common stockholders $17,126 11,257,292 $1.52
Effect of Dilutive Securities:
Stock options - 107,628 (0.01)
Diluted EPS:
Income available to common stockholders $17,126 11,364,920 $1.51
1996
Basic EPS:
Income Available to common stockholders $16,615 9,284,890 $1.79
Effect of Dilutive Securities:
Stock options - 79,711 (0.02)
Diluted EPS:
Income available to common stockholders $16,615 9,364,601 $1.77
1995
Basic EPS:
Income Available to common stockholders $14,897 9,295,341 $1.60
Effect of Dilutive Securities:
Stock options - 59,431 (0.01)
Diluted EPS:
Income available to common stockholders $14,897 9,354,772 $1.59
The per share amounts of cash dividends paid on an equivalent share basis
were $.60 for 1997, $0.53 for 1996 and $0.43 for 1995. At December 31, 1997,
the Banks had available $4,156 for payment of dividends to the Company, under
regulatory guidelines.
At December 31, 1997, there were 112,527 and 115,475 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 210,000 shares of the Company's common stock
and on April 17, 1990 stockholders approved a non-qualified stock option plan
for 160,000 shares of the Company's common stock. On October 13, 1993 options
to purchase 72,000 and 24,000 shares, respectively, were granted under these
plans at an exercise price of $9.50 per share and are exercisable for a five
year period; 76,000 have been exercised to date. On August 31, 1994
stockholders approved the Vermont Financial Services Corp. 1994 Stock Option
plan which reserves 450,000 common shares to be issued in the form of stock
options. To date 96,000 have been issued at an exercise price of $9.50 per
share, 13,000 have been issued at an exercise price of $10.12 per share, 119,600
have been issued at an exercise price of $11.25 per share and 148,000 have been
issued at an exercise price of $15.75 per share; 115,200 have been exercised
to date. All options are exercisable for a ten year period. On August 13, 1997
the Board of Directors approved, subject to approval by stockholders at the
next annual meeting of stockholders, an amendment and restatement of the 1994
plan which reserves an additional 660,000 common shares to be issued in the
form of stock options. To date, 144,000 have been issued at a price of $24.44
per share subject to approval of the plan as noted above and no shares have
been exercised. 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 276,000 common shares which
are exercisable for a ten year period. To date 253,920 have been issued at
an exercise price of $3.75 per share all of which have been exercised and
13,800 have been issued at an exercise price of $5.12 per share of which 11,150
have been exercised to date. In conjunction with the merger with Eastern
Bancorp, the Company acquired 451,772 options at an exercise price of $20.78
which had previously been granted to Eastern's employees and directors at lower
exercise price; 369,590 have been exercised to date. The following table
presents the activity in each of the Company's stock option plans:
Shares Shares Shares Shares Shares Shares
Under Under Under Under Under Under
Option Option Option Option Option Option
@ $3.75 - @ $9.50 -
$5.12 @ $9.50 @ $9.50 $15.75 @ $20.78 @ $24.44
Outstanding,
December 31, 1994 190,674 72,000 24,000 109,000 - -
Granted - - - 119,600 - -
Expired - - - - - -
Exercised 174,184 8,000 - 3,000 - -
Outstanding,
December 31, 1995 16,490 64,000 24,000 225,600 - -
Granted - - - 148,000 - -
Expired - - - 2,000 - -
Exercised 11,440 16,000 10,000 18,400 - -
Outstanding,
December 31, 1996 5,050 48,000 14,000 353,200 - -
Acquired - - - - 451,772 -
Granted - - - - - 144,000
Exercised 2,400 36,000 6,000 93,800 369,590 -
Outstanding,
December 31, 1997 2,650 12,000 8,000 259,400 82,182 144,000
Weighted average
remaining maturity
(years) 5.4 0.8 0.8 7.5 5.7 9.7
Weighted average
exercise price at
January 1, 1997 $5.12 $9.50 $9.50 $12.66 - -
Weighted average
exercise price at
December 31, 1997 $5.12 $9.50 $9.50 $12.65 $20.78 $24.44
Weighted average
exercise price of
options exercised
during 1997 $5.12 $9.50 $9.50 $12.69 $20.78 -
The Company accounts for stock options in accordance with the provisions
of APB Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly,
compensation expense is recognized only if the fair value of the underlying
stock at the grant date exceeds the exercise price of the option. Accordingly,
no compensation cost has been recognized for options issued under the plans
described above. 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 SFAS 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:
1997 1996 1995
Net income As reported $17,126 $16,615 $14,897
Pro forma $16,452 $16,213 $14,586
Basic earnings per share As reported $1.52 $1.79 $1.60
Pro forma $1.46 $1.75 $1.57
Diluted earnings per share As reported $1.51 $1.77 $1.59
Pro forma $1.45 $1.73 $1.55
Diluted tangible book value
per share As reported $11.48 $11.87 $11.24
Pro forma $11.43 $12.50 $11.90
Significant values and assumptions used in calculating the above proforma
amounts are as follows:
Options Options Options
Issued Issued Issued
8/27/97 3/13/96 5/10/95
Stock price at date of issuance $24.44 $15.75 $11.25
Exercise price $24.44 $15.75 $11.25
Anticipated remaining life (years) 7.50 7.50 7.50
Volatility 21.99% 23.18% 38.13%
Annual rate of quarterly dividends 2.45% 3.18% 3.56%
Risk free discount rate 6.36% 6.20% 6.54%
Grant date fair value of options $7.20 $8.35 $8.01
The Superior Court in Greenfield, Massachusetts has issued an order in a
shareholder appraisal case involving former stockholders of WMBS. As a result
of the court order, which remains appealable by either party, VFSC has accrued
approximately $3.7 million to these former stockholders of WMBS for the shares
of WMBS stock that they still hold. The WMBS stock involved in this case is the
equivalent of approximately 228,400 shares of VFSC common stock, so the
settlement is equal to $16.35 per VFSC share. There was approximately $420,000
of pretax expense and a charge to equity capital of approximately $3.3 million
for this settlement representing the retirement of these shares.
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt correction action,
the Company and its banking subsidiaries must meet specific capital guidelines
that involve quantitative measures of the assets, liabilities and certain off-
balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its banking subsidiaries to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier 1 Capital to risk-
weighted assets, and Tier 1 Capital to average assets. Management believes,
as of December 31, 1997, the Company and Banks meet all capital adequacy
requirements to which they are is subject.
As of December 31, 1997, the most recent notification from the OCC for VNB
and from the FDIC for UB categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Banks must maintain minimum total risk-based, Tier I risk-based,
Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institutions category.
The actual capital amounts and ratios as of December 31, 1997 and 1996
are presented in the table:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Action
Actual Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1997
Total Capital
(to Risk Weighted Assets):
VFSC $164,899 13.24% $99,673 8.00% $124,591 10.00%
VNB 130,980 12.05 86,959 8.00 108,699 10.00
UB 22,302 14.54 12,269 8.00 15,336 10.00
Tier I Capital
(to Risk Weighted Assets):
VFSC 149,283 11.98 49,837 4.00 74,755 6.00
VNB 117,357 10.80 43,480 4.00 65,219 6.00
UB 20,385 13.29 6,134 4.00 9,202 6.00
Tier I Capital
(to Average Assets):
VFSC 149,283 7.27 82,090 4.00 102,612 5.00
VNB 117,357 6.55 71,707 4.00 89,633 5.00
UB 20,385 8.77 10,166 4.00 12,708 5.00
As of December 31, 1996
Total Capital
(to Risk Weighted Assets):
VFSC $124,931 15.17% $65,883 8.00% $82,354 10.00
VNB 69,451 10.46 53,118 8.00 66,397 10.00
UB 19,965 13.65 11,705 8.00 14,631 10.00
Tier I Capital
(to Risk Weighted Assets):
VFSC 114,595 13.92 32,941 4.00 49,412 6.00
VNB 61,115 9.20 26,559 4.00 39,838 6.00
UB 18,136 12.40 5,853 4.00 8,779 6.00
Tier I Capital
(to Average Assets):
VFSC 114,595 8.84 51,853 4.00 64,816 5.00
VNB 61,115 5.83 41,931 4.00 52,414 5.00
UB 18,136 7.48 9,700 4.00 12,125 5.00
Note 15. Parent Company Financial Information
Condensed financial information for Vermont Financial Services Corp.
(parent company only) is as follows:
CONDENSED BALANCE SHEETS December 31,
1997 1996
ASSETS
Cash $ 9,717 $ 4,085
Investment Securities 4,916 31,565
Other Assets 9,010 739
Investment in Subsidiaries 196,090 84,318
Total Assets $219,733 $120,707
LIABILITIES AND STOCKHOLDERS' EQUITY
Other Liabilities $ 6,137 $ 990
Total Liabilities 6,137 990
Total Stockholders' Equity 213,596 119,717
Total Liabilities and
Stockholders' Equity $219,733 $120,707
CONDENSED STATEMENTS OF INCOME Year Ended December 31,
1997 1996 1995
INCOME
Income on Securities $ 1,006 $ 334 $ 316
Other Income 11,140 39,000 3,615
Total Income 12,146 39,334 3,931
EXPENSES
Total Operating Expenses 1,117 668 551
Income Before Tax Benefit and Equity
in Undistributed Income from Subsidiaries 11,029 38,666 3,380
Applicable Income Tax (Benefit) (40) (168) (195)
Income Before Equity in Undistributed
Income of Bank Subsidiaries 11,069 38,834 3,575
Equity in Undistributed Income
of Subsidiaries 6,057 (22,219) 11,322
Net Income $17,126 $16,615 $14,897
STATEMENTS OF CASH FLOWS Year Ended December 31,
1997 1996 1995
OPERATING ACTIVITIES
Net Income $17,126 $16,615 $14,897
Adjustments to reconcile income
to net cash provided by
operating activities:
Net amortization on investment securities 37 22 2
Investment security (gains), net (79) (8) (121)
(Increase) in other assets (8,271) (633) (28)
Increase (decrease) in other liabilities 5,147 (151) 866
Equity in undistributed net
income of bank subsidiaries (6,057) 22,219 (11,322)
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,903 38,064 4,294
INVESTING ACTIVITIES
Proceed from sales and
maturities of securities 50,494 9,973 1,539
Investments in subsidiaries (30,172) - -
Purchase of securities (23,802) (36,762) (2,321)
NET CASH (USED) BY INVESTING ACTIVITIES (3,480) (26,789) (782)
FINANCING ACTIVITIES
Issuance of common stock 10,950 790 914
Purchase of treasury stock
and retirement of shares (3,026) (3,555) -
Cash dividends (6,715) (4,928) (4,048)
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 1,209 (7,693) (3,134)
INCREASE IN CASH AND CASH EQUIVALENTS 5,632 3,582 378
Cash and cash equivalents at
beginning of year 4,085 503 125
CASH AND CASH EQUIVALENTS AT END OF YEAR $9,717 $4,085 $ 503
Note 16. Supplemental Financial Data
Selected Quarterly Data (unaudited)
The following is a summary of selected consolidated quarterly data of the
Company for the periods presented:
1997
Fourth Third Second First
Quarter (1) Quarter (1) Quarter (1) Quarter
Interest income $38,672 $39,491 $25,338 $24,377
Interest expense 17,436 17,748 10,687 10,092
Net interest income 21,236 21,743 14,651 14,285
Provision for possible loan losses 900 900 700 750
Other operating income 9,222 8,371 5,524 5,405
Other operating expense (2) 24,795 19,991 12,773 12,490
Income before income taxes 4,763 9,223 6,702 6,450
Applicable income taxes 2,250 3,519 2,193 2,050
Net income $ 2,513 $ 5,704 $ 4,509 $ 4,400
Per share data:
Basic earnings per share $0.19 $0.42 $0.46 $0.46
Diluted earnings per share $0.19 $0.42 $0.46 $0.46
(1) Includes the impact of the merger with Eastern Bancorp from June 27, 1997.
(2) Includes the effect of $3.8 million in merger related losses/expenses and
$0.4 million from a shareholder appraisal case.
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:
Basic earnings per share $0.49 $0.45 $0.43 $0.42
Diluted earnings per share $0.47 $0.45 $0.43 $0.42
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 internal controls which are 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 KPMG Peat Marwick LLP the Company's
independent auditors. KPMG Peat Marwick LLP 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.
Independent Auditors' Report
To the Stockholders and Board of Directors of Vermont Financial Services Corp.:
We have audited the accompanying consolidated balance sheet of Vermont
Financial Services Corp. and subsidiaries as of December 31, 1997, and the
related consolidated statements of income, changes in stockholders' equity,
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free on material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Vermont
Financial Services Corp. and subsidiaries as of December 31, 1997, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accounting principles.
Hartford, Connecticut
April 3, 1998
Item 9 - Changes in and disagreements with Accountants on Accounting and
Financial Disclosure
None
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. (56) 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 (49) 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 (44) 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 (52) Executive Vice President of the Company 1992
Executive Vice President of VNB 1988
Senior Vice President of VNB 1984
W. Bruce Fenn (56) Executive Vice President of the Company 1997
Executive Vice President of VNB 1988
Senior Vice President and Senior Loan 1987
Officer of VNB
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 (58)
Attorney, Partner, Abatiell, Wysolmerski & 1982
Valerio Law Offices, Rutland, VT
Zane V. Akins (57)
President, Akins & Associates, 1987
Brattleboro, VT
Charles A. Cairns (56)
President, Champlain Oil Co., Inc. and 1986
Coco Mart, Inc., South Burlington, VT
William P. Cody (44)
General Manager, Cody Chevrolet, Inc., 1996
Montpelier, VT
Allyn W. Coombs (64)
President and Treasurer of Allyn W. Coombs, 1994
Inc. (Real Estate Development & Management),
Amherst, MA
Philip M. Drumheller (44)
President, The Lane Press, Inc., Burlington, VT 1995
John K. Dwight (53)
President and CEO, Dwight Asset Management
Company, Burlington, VT 1989
James E. Griffin (70)
President, J. R. Resources, Inc. 1972
(Business Consultants), Rutland, VT
John D. Hashagen, Jr. (56)
President & Chief Executive Officer of 1987
Vermont Financial Services Corp., Brattleboro;
President & Chief Executive Officer,
Vermont National Bank, Brattleboro, VT
Francis L. Lemay (65)
Chairman, United Bank 1994
Stephan A. Morse (51)
President and CEO, The Windham Foundation, 1986
Inc., Grafton, VT
Roger M. Pike (57)
Consultant, Rutland, VT 1980
Ernest R. Pomerleau (50)
President, Pomerleau Real Estate,
Burlington, VT 1990
Mark W. Richards (52)
President, Richards, Gates, Hoffman 1988
& Clay (Insurance), Brattleboro, VT
James M. Sutton (56)
Chairman, American Bankshares, Inc.
Welch, West Virginia 1995
Item 11 - Executive Compensation
The following tables contain a three-year summary of the total compensation
paid to the Chief Executive Officer of the Company and the other four executive
officers.
I. SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restric- All
Annual ted LTIP Other
Compen- Stock Options/ Pay Compen-
Name and Salary Bonus sation Awards SARs outs sation
Principal Position Year $ $ $ $ $ $(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John D. Hashagen 1997 $260,000 $0 N/A N/A 28,000 sh N/A $12,756(2)
President and Chief 1996 234,000 93,600 N/A N/A 27,000 N/A 15,108(3)
Executive Officer 1995 220,000 66,000 N/A N/A 28,000 N/A 14,528(4)
Richard O. Madden 1997 $138,000 $0 N/A N/A 14,000 sh N/A $12,283
Executive Vice
President, 1996 120,000 48,000 N/A N/A 14,000 N/A 12,435
Treasurer, Secretary 1995 112,000 33,600 N/A N/A 14,200 N/A 6,720
Robert G. Soucy 1997 $147,000 $0 N/A N/A 14,000 sh N/A $12,467(2)
Executive Vice
President, 1996 128,000 51,200 N/A N/A 14,800 N/A 13,167(3)
VNB Senior
Operating Officer 1995 120,000 36,000 N/A N/A 15,200 N/A 7,306(4)
Louis J. Dunham 1997 $125,000 $0 N/A N/A 13,000 sh N/A $12,299
Executive Vice
President, 1996 115,000 46,000 N/A N/A 13,400 N/A 11,696
VNB Senior
Credit Officer 1995 98,000 29,400 N/A N/A 12,400 N/A 5,961
W. Bruce Fenn 1997 $130,000 $0 N/A N/A 13,000 sh N/A $12,404(2)
Executive Vice
President, 1996 120,000 48,000 N/A N/A 14,000 N/A 13,838(3)
VNB Senior
Banking Officer 1995 111,077 33,000 N/A N/A 13,800 N/A 7,878(4)
</TABLE>
(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 $541 for Mr. Hashagen, $89 for Mr. Fenn
and $165 for Mr. Soucy.
(3) 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.
(4) Includes discounts received on purchases of common stock under the Company's
Employee Stock Purchase Plan of $2,754 for Mr. Hashagen, $1,120 for Mr. Fenn
and $452 for Mr. Soucy.
II. OPTION/SAR GRANTS TABLE
Option/SAR Grants in Last Fiscal Year
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term (1)
(a) (b) (c) (d) (e) (f) (g)
% of Total
Options/SARs
# of Granted to Exercise
Securities Employees or base
Underlying in Fiscal Price Expiration
Name Options Granted Year ($/Sh) Date 5%($) 10%($)
John D. Hashagen, Jr. 28,000 24.1% $24.44 8/27/07 $430,365 $1,090,629
Richard O. Madden 14,000 12.1 24.44 8/27/07 215,183 545,315
Robert G. Soucy 14,000 12.1 24.44 8/27/07 215,183 545,315
Louis J. Dunham 13,000 11.2 24.44 8/27/07 199,812 506,364
W. Bruce Fenn 13,000 11.2 24.44 8/27/07 199,812 506,364
(1) The assumed growth rates in price in the Company's stock are not necessarily
indicative of actual performance that may be expected.
III. OPTION EXERCISES AND YEAR-END VALUE TABLE
Aggregated Option Exercises in Last Fiscal Year, and FY-End Option Value
(a) (b) (c) (d) (e)
Number of Securities Value of
Underlying Unexercised Unexercised
Options at FY-End (#) In-the-Money
Shares Acquired Value Exercisable/ Exercisable/ (2)
Name Exercise (#) Realized ($)(1) Unexercisable Unexercisable
John D. Hashagen, Jr. 2,000 $23,250 83,600/28,000 $1,318,400/$96,180
Richard O. Madden 13,200 $224,900 36,200/14,000 $552,825/$48,090
Robert G. Soucy 8,000 $72,493 44,200/14,000 $693,075/$48,090
Louis J. Dunham 6,000 $76,943 37,200/13,000 $578,100/$44,655
W. Bruce Fenn 48,800 $654,192 200/13,000 $3,675/$44,655
(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, 1997.
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. Dunham, 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.
Management Continuity Agreements
The Company and VNB have entered into agreements with the Company'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
$1,730,000. These severance payments are subject to up to a 50% reduction
if the officer works for or participates in the management, operation or
control of a commercial or savings bank, or bank holding company, which does
business in Vermont, unless such officer's activities are substantially
outside Vermont. Additionally, the officer will be entitled to continuation
of life, disability, accident and health insurance benefits and a cash
adjustment to compensate the executive for the market value of any stock
options under the Company's Officers' 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 other employees of VNB and the
Company which provide for severance payments ranging from 100% to 200% of
the employee's base salary upon termination after a change in control.
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 then outstanding securities; (ii) during any two-year period
those persons, who at the beginning of such period were members of the
Company'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 approve a merger or
consolidation of the Company 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.
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.
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 1997, the
Company made a contribution of approximately $1,000,000 to the Profit-Sharing
Plan.
Retirement Plan
The VNB Retirement Plan covers substantially all eligible employees of
VNB, including officers, and provides for payment of retirement benefits
generally based upon an employee's years of credited service with VNB 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 VNB. The amounts shown are after
deduction of estimates for Social Security reductions based on the Social
Security law as of January 1, 1998.
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 $ 1,486 $ 2,971 $ 4,457 $ 5,942 $ 7,428
40,000 3,380 6,761 10,141 13,522 16,902
60,000 5,622 11,244 16,866 22,488 28,110
80,000 7,990 15,979 23,969 31,958 39,948
100,000 10,390 20,779 31,169 41,558 51,948
120,000 12,790 25,579 38,369 51,158 63,948
140,000 15,190 30,379 45,569 60,758 75,948
160,000 17,590 35,179 52,769 70,358 87,948
180,000 * 19,990 39,979 59,969 79,958 99,948
200,000 * 22,390 44,779 67,169 89,558 111,948
220,000 * 24,790 49,579 74,369 99,158 123,948
240,000 * 27,190 54,379 81,569 108,758 135,948 *
260,000 * 29,590 59,179 88,769 118,358 147,948 *
* Under current regulations of the Internal Revenue Code, the maximum annual
benefit payable from a defined benefit plan during 1998 is $130,000 payable
as a life annuity for retirements at age 65. In addition, the maximum annual
compensation may not exceed $160,000. For those associates who are covered
under the Retirement Restoration Plan, amounts above these maximums will be
paid under the terms of the Retirement Restoration Plan, up to the amounts
shown in the table above.
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.
Retirement Restoration Plan
The Vermont Financial Services Corp. Retirement Restoration Plan was
approved by the Board of Directors in November 1996. It provides supplemental
retirement for employees whose benefits under the VNB Retirement Plan are
subject to limitations set forth in Sections 491(a)(17) and 415 of the Internal
Revenue Code. The Plan provides the participating employees with supplemental
benefits equal to the retirement benefit that the participating employee's
benefit under the VNB Retirement Plan is reduced by the limitations of Sections
401(a)(17) and 415 of the Internal Revenue Code.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
As of April 13, 1998 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 with the Securities and Exchange Commission.
Amount of Form 13G
Beneficial Percent Filing Date
Name and Address Ownership of Class as of
John Hancock Advisers, Inc. 928,172 7.0% (1) 12/31/97
John Hancock Place, P.O. Box 111
Boston, MA 02117-0111
Wellington Management Company, LLP 745,792 5.6% (2) 12/31/97
75 State Street
Boston, MA 02109
(1) Includes sole voting and sole dispositive power for 928,172 shares.
(2) Includes shared voting power for 451,988 shares and shared dispositive
power for 745,792 shares.
The following table sets forth the name and address of each director,
nominee for director and 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 April 13, 1998,
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
Name and Age (1) Ownership(2) Stock
Anthony F. Abatiell (58) 125,748 (3) 0.95%
Zane V. Akins (57) 5,843 (4) 0.04%
Charles A. Cairns (56) 16,948 (5) 0.13%
William P. Cody (44) 5,885 (6) 0.04%
Allyn W. Coombs (63) 28,740 (7) 0.22%
Philip M. Drumheller (44) 6,500 (8) 0.05%
John K. Dwight (53) 24,058 (9) 0.18%
James E. Griffin (70) 14,050 (10) 0.11%
John D. Hashagen, Jr. (56) 150,502 (11) 1.13%
Francis L. Lemay (65) 211,266 (12) 1.59%
Stephan A. Morse (51) 20,696 (13) 0.16%
Roger M. Pike (57) 20,588 (14) 0.16%
Ernest A. Pomerleau (50) 21,428 (15) 0.16%
Mark W. Richards (52) 64,017 (16) 0.48%
James M. Sutton (56) 448,674 (17) 3.38%
Louis J. Dunham (43) 54,777 (18) 0.41%
W. Bruce Fenn (56) 26,530 (19) 0.20%
Richard O. Madden (49) 24,396 (20) 0.18%
Robert G. Soucy (52) 78,282 (21) 0.59%
(1) During the past five years, the principal occupation and employment of
each director and executive officer has been as set forth above, except
as follows: Francis L. Lemay was President & Chief Executive Officer and
Chairman of West Mass Bankshares, Inc. until June 14, 1994 and was
President and Chief Executive Officer of UB until December 31, 1994;
Richard O. Madden became Secretary of the Company on May 1, 1993.
(2) Beneficial ownership means sole voting and investment powers, unless
otherwise noted.
(3) Mr. Abatiell's shares are held in a custodial capacity in VNB's trust
department in which Mr. Abatiell has sole voting and investment powers.
Includes options to acquire 8,000 additional shares, exercisable within
sixty (60) days, pursuant to the Directors' Non-Qualified Stock Option
Plans, of which 2,000 shares are subject to the approval of the Amended
and Restated 1994 Stock Option Plan (see Proposal 2.).
(4) Includes options to acquire 2,000 shares, exercisable within sixty (60)
days, pursuant to the Directors' Non-Qualified Stock Option Plans, which
are subject to the approval of the Amended and Restated 1994 Stock Option
Plan (see Proposal 2).
(5) Includes options to acquire 8,000 shares, exercisable within sixty (60)
days, pursuant to the Directors' Non-Qualified Stock Option Plans, 2,000
of which are subject to the approval of the Amended and Restated 1994
Stock Option Plan (see Proposal 2).
(6) Includes options to acquire 4,000 shares, exercisable within sixty (60)
days, pursuant to the Directors' Non-Qualified Stock Option Plans, 2,000
of which are subject to the approval of the Amended and Restated 1994
Stock Option Plan (see Proposal 2).
(7) Includes 22,740 shares held jointly with a family member in which
Mr.Coombs shares voting and investment powers. Also includes options to
acquire 6,000 shares, exercisable within sixty (60) days, pursuant to
the Directors' Non-Qualified Stock Option Plans, 2,000 of which are subject
to the approval of the Amended and Restated 1994 Stock Option Plan
(see Proposal 2).
(8) Includes 2,000 shares held by The Lane Press which Mr. Drumheller shares
voting and investment powers. Also includes option to acquire 4,000 shares,
exercisable within sixty (60) days, pursuant to the Directors' Non-Qualified
Stock Option Plans, 2,000 of which are subject to the approval of the
Amended and Restated 1994 Stock Option Plan (see Proposal 2).
(9) Includes options to acquire 12,648 shares, exercisable within sixty (60)
days, pursuant to the Directors' Non-Qualified Stock Option Plans, 2000 of
which are subject to the approval of the Amended and Restated 1994 Stock
Option Plan (see Proposal 2).
(10) Includes options to acquire 8,000 shares, exercisable within sixty (60)
days, pursuant to the Directors' Non-Qualified Stock Option Plans, 2000
of which are subject to the approval of the Amended and Restated 1994
Stock Option Plan (see Proposal 2).
(11) Includes 400 shares held in the name of Green Mountain Investment Club
in which Mr. Hashagen shares voting and investment powers and 20,896
shares held in the VNB Profit Sharing Plan, and options to acquire
111,600 shares, exercisable within sixty (60) days, pursuant to the
Officers' Non-Qualified Stock Option Plans, 28,000 of which are subject
to the approval of the Amended and Restated 1994 Stock Option Plan
(see Proposal 2).
(12) Includes 57,683 shares held in a trust in which Mr. Lemay has sole voting
and investment powers. Also includes 60,000 shares held by a family
member in a trust in which Mr. Lemay has no voting or investment powers.
Also includes options to acquire 4,000 shares, exercisable within sixty
(60) days, pursuant to the Directors' Non-Qualified Stock Option Plans,
2,000 of which are subject to the approval of the Amended and Restated
1994 Stock Option Plan (see Proposal 2).
(13) Includes 1,010 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 6,000 shares, exercisable within
sixty (60) days, pursuant to the Directors' Non-Qualified Stock Option
Plans, 2,000 of which are subject to the approval of the Amended and
Restated 1994 Stock Option Plan (see Proposal 2).
(14) Includes 777 shares held jointly with family members. Also includes
2,211 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 8,000 shares, exercisable within sixty (60) days,
pursuant to the Directors' Non-Qualified Stock Option Plans, 2,000 of
which are subject to the approval of the Amended and Restated 1994 Stock
Option Plan (see Proposal 2).
(15) Includes options to acquire 12,648 shares, exercisable within sixty (60)
days, pursuant to the Directors' Non-Qualified Stock Option Plans, 2,000
of which are subject to the approval of the Amended and Restated 1994 Stock
Option Plan (see Proposal 2).
(16) Includes 58,017 shares held jointly with family members in which
Mr. Richards shares voting and investment powers. Also includes options
to acquire 6,000 shares, exercisable within sixty (60) days, pursuant
to the Directors' Non-Qualified Stock Option Plans, 2,000 of which are
subject to the approval of the Amended and Restated 1994 Stock Option Plan
(see Proposal 2).
(17) Includes options to acquire 12,648 shares, exercisable within sixty (60)
days, pursuant to the Directors' Non-Qualified Stock Option Plans, 2,000
of which are subject to the approval of the Amended and Restated 1994
Stock Option Plan (see Proposal 2).
(18) Includes 10,577 shares in the VNB Profit Sharing Plan. Also includes
options to acquire 44,200 shares exercisable within sixty (60) days
pursuant to the Officers' Non-Qualified Stock Option Plans, 13,000 of
which are subject to the approval of the Amended and Restated 1994 Stock
Option Plan (see Proposal 2).
(19) Includes 13,331 shares in the VNB Profit Sharing Plan and options to
acquire 13,200 shares, exercisable within sixty (60) days pursuant to the
Officers' Non-Qualified Stock Option Plans, 13,000 shares of which are
subject to the approval of the Amended and Restated 1994 Stock Option
Plan (see Proposal 2).
(20) Includes 59 shares held jointly with a family member in which
Mr. Madden shares voting and investment powers. Also includes 6,137 shares
held in the VNB Profit Sharing Plan and options to acquire 18,200 shares
exercisable within sixty (60) days pursuant to the Officers' Non-Qualified
Stock Option Plans, 14,000 shares of which are subject to the approval
of the Amended and Restated 1994 Stock Option Plan (see Proposal 2).
(21) Includes 9,849 shares in the VNB Profit Sharing Plan and options to
acquire 58,200 shares, exercisable within sixty (60) days pursuant to the
Officers' Non-Qualified Stock Option Plans, 14,000 shares of which are
subject to the approval of the Amended and Restated 1994 Stock Option
Plan (see Proposal 2).
On April 13, 1998, the directors and officers of the Company as a group
(19) had beneficial ownership of 1,348,927 shares of Company Common Stock,
amounting to 10.16% of the outstanding shares. This includes options to
acquire 347,344 shares, or 2.61% of the outstanding shares, exercisable within
sixty (60) days, pursuant to the Directors' and Officers' Non-Qualified Stock
Options Plans, 110,000 shares of which are subject to the approval of the
Amended and Restated 1994 Stock Option Plan (see Proposal 2.)
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 1997. 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 1997. 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, 1997 and 1996
Consolidated Statements of Income - For the Years Ended December 31, 1997,
1996, and 1995
Consolidated Statements of Changes in Stockholders' Equity - For the Years
Ended December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flow - For the Years Ended December 31, 1997,
1996 and 1995
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.
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 KPMG Peat Marwick LLP. Filed herewith.
(b) Reports on Form 8-K.
During the Registrant's fiscal quarter ended December 31, 1997, 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: By /s/________________________________
John D. Hashagen, Jr., President
and Chief Executive Officer
By /s/________________________________
Richard O. Madden, Executive Vice
President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
Name Title Date
/s/________________________ Director and President April 8, 1998
John D. Hashagen, Jr. (Principal Executive Officer)
/s/________________________ Secretary & Treasurer April 8, 1998
Richard O. Madden (Principal Financial Officer)
/s/________________________ Director April 8, 1998
Anthony F. Abatiell
/s/________________________ Director April 8, 1998
Zane V. Akins
/s/________________________ Director April 8, 1998
Charles A. Cairns
/s/________________________ Director April 8, 1998
William P. Cody
/s/________________________ Director April 8, 1998
Allyn W. Coombs
/s/________________________ Director April 8, 1998
Philip M. Drumheller
/s/________________________ Director April 8, 1998
John K. Dwight
/s/________________________ Director April 8, 1998
James E. Griffin
/s/________________________ Director April 8, 1998
Francis L. Lemay
/s/________________________ Director April 8, 1998
Stephan A. Morse
/s/________________________ Director April 8, 1998
Roger M. Pike
/s/________________________ Director April 8, 1998
Ernest A. Pomerleau
/s/________________________ Director April 8, 1998
Mark W. Richards
/s/________________________ Director April 8, 1998
James M. Sutton
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 AUDITORS
The Board of Directors
Vermont Financial Services Corp.
We consent to incorporation by reference in the registration statements
(No. 2-80833 and No. 2-83361) on Form S-3 and S-8 of Vermont Financial Services
Corp. and subsidiaries of our report dated April 3, 1998, relating to the
consolidated balance sheet of Vermont Financial Services Corp. and subsidiaries
as of December 31, 1997, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for the year then ended, which
report appears in the December 31, 1997, annual report of Form 10-K of Vermont
Financial Services Corp.
Hartford, Connecticut
April 14, 1998
KPMG Peat Marwick LLP
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
VERMONT FINANCIAL SERVICES CORP.
Proxy Solicited on Behalf of Board of Directors
The undersigned hereby appoints John D. Hashagen, Jr., Anthony F. Abatiell
and Richard O. Madden, and each of them, attorneys and proxies with full power
of substitution in each, to vote all of the stock of Vermont Financial Services
Corp. (the "Company") which the undersigned is/are entitled to vote at the
Annual Meeting of Stockholders of the Company to be held at The Quality Inn
and Suites, Brattleboro, VT, on June 11, 1998 at 10:00 a.m. and at any and all
adjournments thereof. All powers may be exercised by a majority of said
proxyholders or substitutes voting or acting, or if only one votes and acts,
by that one. Receipt of the Company's Proxy Statement dated April 20, 1998
(the "Proxy Statement") is acknowledged. If not revoked, this Proxy shall be
voted, unless authority specifically to the contrary is provided, as specified
below, and as to any other business which may legally come before the meeting,
in accordance with the recommendation of the Board of Directors. IF NO
SPECIFICATION IS MADE, SUCH SHARES WILL BE VOTED "FOR" ITEMS #1 AND #2.
1. Proposal to elect Class II Directors
___ FOR ALL NOMINEES BELOW ___ WITHHOLD AUTHORITY TO VOTE FOR ALL NOMINEES
BELOW
TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
STRIKE A LINE THROUGH HIS NAME ON THE LIST BELOW.
Nominees:
Allyn W. Coombs, Philip M. Drumheller, John K. Dwight, Stephan A. Morse
2. To ratify and approve the Vermont Financial Services Corp. 1994 Amended and
Restated Stock Option Plan.
___ FOR ___ AGAINST ___ ABSTAIN
3. To act on whatever other business may properly be brought before the Meeting
or any adjournment thereof.
(over)
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
A VOTE "FOR" ITEM #1 AND #2 ON THE REVERSE.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS AND MAY BE REVOKED PRIOR TO ITS EXERCISE.
Date:_____________
Signature(s)
________________________
________________________
________________________
Please sign here exactly as name(s) appear (s) on
the left. When signing as attorney, executor,
administrator, trustee, guardian, or in any other
fiduciary capacity, give full title. If more
than one person acts as trustee, all should sign
ALL JOINT OWNERS MUST SIGN.
___ I/We plan to attend the Annual Meeting: ___ Number
PLEASE MARK (ON REVERSE SIDE), SIGN AND DATE, AND MAIL IN THE ENCLOSED POSTAGE
PAID
ENVELOPE
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