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, 1998
[ ] 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 January 31, 1999, 12,858,155 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
$385.7 million.
DOCUMENTS INCORPORATED BY REFERENCE:
None
- The index for exhibits is on Page 60.
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; (v) the effect of changes in the business cycle
and downturns in the local, regional or national economies; and (vi) the
effect of the "Year 2000" issue (i.e., that many current computer programs
use only two digits to identify a year in the date field and cannot reflect a
change in the century) on the Company's business and operations.
VERMONT FINANCIAL SERVICES CORP.
BRATTLEBORO, VERMONT
PART I
Item 1 - Business
Vermont Financial Services Corp. ("VFSC", or the "Company"), 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 $2,142 million at
December 31, 1998. VFSC owns 100 percent of the stock of Vermont National
Bank (VNB) and United Bank (UB). On June 26, 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 joint 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. On December
16, 1998, VFSC, Chittenden Corporation (NYSE: "CHZ"), and a wholly owned
subsidiary of Chittenden Corporation, entered into an Agreement and Plan of
Merger (the Merger Agreement), pursuant to which VFSC will be merged with
and into Chittenden Corporation (the Merger). The Merger is structured to
qualify as a pooling of interests for accounting purposes and as a tax-free
exchange of 1.07 shares of Chittenden Corporation common stock for each share
of VFSC common stock and is expected to close in the second quarter of 1999.
The completion of the Merger is subject to certain customary conditions,
including without limitation the approval of the stockholders of each of VFSC
and Chittenden Corporation and certain regulatory approvals.
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 $1,546 million, total loans of
$1,182 million and total assets of $1,857 million at December 31, 1998.
VNB conducts business through 41 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.
VNB offers a wide range of personal and commercial banking services, including
accepting 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, MasterCard 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 of ATMs and has access to the Honor, Cirrus,
Discover, American Express and Master Card networks.
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 USB
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, 1998 UB
had total assets of $276 million, total loans of $187 million and total
deposits of $244 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.
VFSC owns and operates 60 automated teller machines (ATMs) at its branch
locations and 19 ATMs in other locations.
The Banks compete on local and 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, 1998, employed approximately
1,030 persons.
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.
Allowance for Loan Losses. The Company evaluates the adequacy of the
allowance for loan losses based upon historical experience, industry
statistics and economic conditions. The evaluation is a result of the
Company's loan rating process which assesses individual loans in the
commercial, commercial real estate and construction categories as either -
unrated, uncriticized, otherwise and especially mentioned, substandard,
doubtful or loss. Loans in other portfolios are not individually assessed
but may be assigned to one of the aforementioned categories when information
is known to management which indicates such action is warranted.
Management applies the allowance percentages it considers appropriate to the
balances in each rating category within each loan portfolio. These
percentages are based on the Company's historical loss experience, industry
trends and the actual or anticipated impact of economic conditions on the
borrowers. In accordance with its regulatory requirements, the Company
performs a detailed migration analysis on a quarterly basis to determine its
historical loss experience. As a result of the Company's ongoing review,
the percentage allocations are periodically adjusted as necessary when
changes in the above-mentioned factors warrant. In addition, specific
allowances for all loans considered impaired are determined in accordance
with Statement of Financial Accounting Standards No. 114 "Allowance for
Loan Losses" below.
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 States 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, 1998 the Banks had available approximately $3.5 million for payment of
dividends to VFSC under regulatory guidelines. VFSC has a policy to pay
out over time 35%-40% 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, 1998, an aggregate of $1.77 per
share of dividends were declared. Diluted earnings per share for the
same period was $4.73.
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 a bank holding
company's bankruptcy, any commitment by the bank holding company to a federal
bank regulatory agency to maintain the capital of a subsidiary bank will be
assumed by the bankruptcy trustee and entitled to priority of payment.
Regulation of VNB and UB
General. As a national bank, VNB is subject to supervision of and regulation
by the Office of the Comptroller of the Currency (the "OCC"). UB is a
stock-owned Massachusetts-chartered savings bank whose deposits are insured
by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal
limits and the Depository Insurance Fund (DIF) of Massachusetts, a private
industry-sponsored insurer of excess deposits. Accordingly, UB is subject to
examination, regulation and supervision by both the FDIC and the
Massachusetts Commissioner of Banks. The Banks are also members of the
Federal Home Loan Bank of Boston. Deposits at VNB are also insured by the
FDIC and VNB is subject to examination, regulation and supervision by the
FDIC.
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 Banks' 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. In addition, as a result of the merger of VFB into VNB,
certain deposit obligations of VNB are insured by the Savings Association
Insurance Fund ("SAIF") of the FDIC. The FDIA provides that the FDIC
shall set deposit insurance assessment rates on a semi-annual basis to
ensure adequate BIF and SAIF reserves to cover BIF-insured and SAIF-insured
deposits. BIF-insured and SAIF-insured deposits may be assessed at
different rates. Also UB is required to be a member of the Massachusetts
Deposit Insurance Fund ("DIF") as a state-chartered savings bank. Such
membership provides deposit-insurance for all deposits in excess of those
amounts covered by the FDIC.
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, 1998 of $13.2 million. The maximum amount which the FHLB of
Boston will advance for purposes other than meeting withdrawals fluctuates
from time to time in accordance with changes in policies of the 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 OCC and 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.
Under 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 are assigned 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, 1998, VFSC's consolidated Total and Tier 1 risk-based capital
ratios and Tier 1 Leverage ratios were 13.03%, 11.78% and 7.51%,
respectively. These ratios exceeded applicable regulatory requirements.
VNB and UB are considered "well capitalized" by their respective primary
federal banking regulators and VFSC is considered "well capitalized"
under applicable Federal Reserve Board regulations.
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. UB operates 7 branch offices throughout Franklin
County, Massachusetts. Of these 7 offices, 5 are owned by UB and 2 are
leased from independent lessors. Each offices is equipped with an ATM
facility, all of which are owned by UB.
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 Stockholder
Matters
As of January 31, 1999, VFSC Common Stock consisted of 20,000,000 authorized
shares, $1.00 par value per share, of which 12,858,155 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 1998 and 1997.
Dividends
Year Quarter High Low Declared
1998 4th $33-3/4 $19-5/8 $.17
3rd 27-7/8 18-7/8 .17
2nd 30-5/8 26-1/4 .15
1st 29 25-1/8 .15
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
Per the Company's stockholder reports, the approximate number of
stockholders of record as of January 31, 1999 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, 1998 are derived from the financial statements of the Company.
<TABLE>
Year Ended December 31,
1998 1997 (*) 1996 1995 1994
(Dollars in thousands, except per share data)
Results of Operations:
<C> <C> <C> <C> <C>
Interest income $148,170 $126,294 $96,606 $96,457 $84,391
Interest expense 65,724 55,962 41,351 41,969 33,293
Net interest income 82,446 70,332 55,255 54,488 51,098
Provision for loan
losses 3,135 3,250 3,350 3,900 4,000
Net interest income
after provision for
loan losses 79,311 67,082 51,905 50,588 47,098
Other operating income 37,857 29,059 19,947 17,549 16,692
Other operating expense 85,714 69,002 46,698 45,999 46,763
Income before income
taxes 31,454 27,139 25,154 22,138 17,027
Applicable income tax
expense 12,341 10,013 8,539 7,241 5,159
Net income $19,113 $17,126 $16,615 $14,897 $11,868
Balance Sheet Data At
Year End:
Total assets $2,142,424 $2,097,452 $1,312,981$1,246,669$1,205,421
Loans, net of unearned
income 1,369,505 1,314,501 910,436 893,470 911,503
Securities available
for sale 517,936 527,649 291,120 249,682 173,865
Total deposits 1,789,017 1,686,172 1,083,258 1,033,957 1,012,869
Stockholders' equity 214,313 213,596 119,717 111,833 90,457
Per Share Data:
Basic earnings $1.46 $1.52 $1.79 $1.60 $1.30
Diluted earnings 1.45 1.51 1.77 1.59 1.29
Total cash dividends
declared 0.64 0.60 0.53 0.43 0.27
Tangible book value at
period end, diluted (1) 12.25 11.48 11.87 11.24 9.18
Average basic shares
outstanding 13,102,672 11,257,292 9,284,890 9,295,341 9,142,060
Average diluted shares
outstanding 13,222,300 11,364,920 9,364,601 9,354,772 9,232,973
Selected Financial
Ratios:
Return on average
total assets (2) 0.92% 1.00% 1.31% 1.23% 1.00%
Return on average
stockholders' equity(3) 8.90 10.22 14.51 14.69 13.23
Net interest margin (4) 4.48 4.60 4.81 4.92 4.74
Cash dividends per share
as a percentage of
basic earnings per share 44 38 29 28 21
Average stockholders'
equity to average assets 10.18 9.80 9.19 8.69 7.97
Core (leverage) capital
ratio at period end (5) 7.54 7.46 8.68 8.77 7.26
Total risk-based capital
ratio at period end (6) 13.03 13.24 15.09 14.67 13.03
Allowance for loan losses
to period end loans,
net of unearned income 1.22 1.44 1.50 1.65 1.78
Nonperforming assets to
period end loans plus
other real estate
owned (7) 0.66 1.50 1.01 1.67 2.32
Net charge-offs to
average loans, net of
unearned income 0.41 0.49 0.50 0.59 0.62
</TABLE>
(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.
(*) 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, 1998, 1997 and 1996.
Overview
Net income for 1998 was $19.1 million, up from the $17.1 million and $16.6
million earned in 1997 and 1996, respectively. Return on average assets
was 0.92% in 1998, 1.00% in 1997 and 1.31% in 1996. Return on average
stockholders' equity was 8.90% in 1998, 10.22% in 1997 and 14.51% in 1996.
Basic earnings per share was $ 1.46, $1.52 and $1.79 in 1998, 1997 and 1996,
respectively. Diluted earnings per share was $1.45, $1.51 and $1.77 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 Williston,
Vermont. VFB was merged into VNB on September 22, 1997. 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.
On December 16, 1998, VFSC, Chittenden Corporation (NYSE: "CHZ"), and a
wholly owned subsidiary of Chittenden Corporation, entered into an
Agreement and Plan of Merger (the Merger Agreement), pursuant to which VFSC
will be merged with and into Chittenden Corporation (the Merger). The
Merger is structured to qualify as a pooling of interests for accounting
purposes and as a tax-free exchange of 1.07 shares of Chittenden Corporation
common stock for each share of VFSC common stock and is expected to close
in the second quarter of 1999. The completion of the Merger is subject to
certain customary conditions, including without limitation the approval of
the stockholders of each of VFSC and Chittenden Corporation and
certain regulatory approvals.
Results Of Operations
Net Interest Income
The following table presents the major categories of earning assets and
interest-bearing liabilities with their corresponding average balances,
related interest income or expense and resulting yields and rates on a fully
taxable equivalent basis for the years indicated.
<TABLE>
<CAPTION>
1998 1997 1996
Interest Rate Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance Expense(1) Paid(1) Balance Expense(1) Paid(1) Balance Expense(1) Paid(1)
(Dollars in thousands)
<C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans, net of
unearned income (2)$1,320,087 $114,873 8.70% $1,117,325 $99,138 8.87% $896,417 $80,614 8.99%
Taxable
securities (3) 449,380 31,663 6.34 409,817 26,649 6.50 250,590 15,449 6.17
Tax exempt
securities (3) 9,863 743 7.53 10,371 789 7.61 11,099 809 7.29
Federal funds sold
and securities
purchased under
agreements to resell 27,536 1,520 5.52 13,140 723 5.50 14,869 842 5.66
Interest-bearing bank
deposits 4,338 277 6.39 1,260 48 3.81 34 2 5.88
Total earning assets 1,861,204 149,076 8.01 1,551,913 127,347 8.21 1,173,009 97,716 8.33
Noninterest-earning
assets:
Cash and due from
banks 74,822 61,335 46,165
Premises and equipment,
net 44,412 35,850 24,146
Other assets 120,501 90,372 33,683
Allowance for loan
losses (18,108) (17,469) (14,461)
Total assets $2,082,831 $1,722,001 $1,262,542
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings and
transactional
deposits $951,608 31,708 3.33 $770,556 25,097 3.26 $612,780 20,353 3.32
Certificates of
deposit:
--$100,000 or more 81,346 4,038 4.96 54,587 2,830 5.18 38,343 2,025 5.28
--Under $100,000 431,839 23,478 5.44 392,474 21,157 5.39 264,043 14,679 5.56
Federal funds
purchased and
securities sold under
agreements to
repurchase 75,925 3,635 4.79 76,135 3,639 4.78 68,446 3,181 4.65
Other borrowed funds 48,988 2,865 5.85 57,974 3,239 5.59 18,678 1,113 5.96
Total interest-bearing
liabilities 1,589,706 65,724 4.13 1,351,726 55,962 4.14 1,002,290 41,351 4.13
Noninterest-bearing
liabilities:
Demand deposits 254,908 185,174 135,158
Other liabilities 26,221 16,338 9,077
Total liabilities 1,553,238 1,146,525
Stockholders' equity 211,996 168,763 116,017
Total liabilities
and stockholders
equity $2,082,831 $1,722,001 $1,262,542
Net interest income
(fully taxable
equivalent) 83,352 71,385 56,365
Less fully taxable
equivalent adjustments (906) (1,053) (1,110)
Net interest income $82,446 $70,332 $55,255
Net interest spread (4) 3.88% 4.07% 4.20%
Net interest margin (5) 4.48% 4.60% 4.81%
</TABLE>
(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 (fully taxable equivalent) divided by
average earning assets.
Net interest income increased $12.1 million or 17.2% to $82.4 million in
1998 from $70.3 million in 1997. This compared to a $15.1 million or
27.3% increase in 1997 from 1996. On a fully taxable equivalent basis, net
interest income increased $12.0 million, or 16.8%, from 1997 to 1998 and
$15.0 million, or 26.7%, from 1996 to 1997. The growth in 1998 and 1997
was primarily due to increases in average earning assets of $309.3 million
and $378.9 million. During 1998, net interest margin and net interest
spread decreased 12 and 19 basis points, respectively to 4.48% and 3.88%.
This decline was largely due to a 17 basis point decline in the yield on
loans and 16 basis point decline in the yield on taxable securities as a
result of a significant decline in market interest rates. 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. Management anticipates that
the Company's net interest margin in 1999 will continue to decline and that
net interest income will remain stable due to higher levels of average
earning assets offset 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. Assuming the merger with Eastern had occurred
January 1, 1997, average earning assets decreased $53.1 million from 1996
to 1997. Most of the pro-forma decrease is a result of a decrease in
investment securities of $47.2 million as a result of management selling
$95.3 in long-term securities acquired from Eastern that were funded by
short-term borrowings. During the same period, financial resources
decreased $54.7 million, or 2.9%. This was largely due to a $59.7 million,
or 32.3%, 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 subsequent
to the merger in 1997, approximately the decrease in average 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.
<TABLE>
<CAPTION>
1998 vs. 1997 1997 vs. 1996
Net Net
Increase Due to Changes in Increase Due to Changes in
(Decrease) Volume(1) Rate(1)(Decrease) Volume(1) Rate(1)
(in thousands)
<C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans(2) $15,735 $17,668 $(1,933) $18,524 $21,022 $(2,498)
Taxable securities 5,014 5,685 (671) 11,200 10,330 870
Tax exempt securities (46) (38) (8) (20) (20) 0
Federal funds sold
and securities
purchased under
agreements to resell 797 794 3 (119) (96) (23)
Interest-bearing bank
deposits 229 179 50 46 47 (1)
Total interest income $21,729 24,289 (2,560) 29,631 31,283 (1,652)
INTEREST EXPENSE:
Savings and
transactional
deposits 6,611 6,057 554 4,744 5,120 (376)
Certificates of
deposit:
--$100,000 or more 1,208 1,333 (125) 805 844 (39)
--Under $100,000 2,321 2,125 196 6,478 6,940 (462)
Federal funds
purchased and securities
sold under agreements
to repurchase (4) (11) 7 458 367 91
Other borrowed funds (374) (520) 146 2,126 2,199 (73)
Total interest
expense 9,762 8,984 778 14,611 15,470 (859)
Change in net interest
income $11,967 15,305 $(3,338) $15,020 $15,813 (793)
</TABLE>
(1) The effect of changes due to both volume and rate have been allocated
to the change in volume and change in rate categories in proportion to the
relationship of the absolute dollar amounts of the change in each category.
(2) Includes nonaccrual loans.
Provision For Loan Losses
The provision for loan losses charged to operating expense is based upon
management's judgment of the amount necessary to maintain the allowance for
loan losses at a level adequate to absorb probable and incurred 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 1998
was $3.1 million compared to $3.3 million in 1997 and $3.4 million in 1996.
Net loans charged off were $5.4 million, $5.4 million and $4.5 million for
the respective years. 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 1998 as the Company's non-performing assets
declined to $9,079 from $19,800, a 54% decrease. 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 1998, other operating income (net of securities gains) increased $8.6
million, or 30%, from 1997. Increases of $0.5 million in trust department
income, $3.7 million in service charges on deposit accounts and a $4.5 million
increase in other service charge income accounted for nearly all of the
increase. $2.2 million of the increase in other service charges was due
to mortgage related fee income as a result of a substantial increase in
refinancings during 1998. The remainder of the increase in other service
charges and the increase in deposit service charges was almost entirely due
to the merger with Eastern. In 1997, other operating income (net of
securities gains) increased $8.4 million, or 45%, from the $19.9 million
earned in 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. The 66% increase in deposit service charges for 1997 was largely
due to the Eastern merger. The 41% improvement in trust department income
was largely due to the purchase of the Green Mountain Bank Trust
Department on August 31, 1996.
Total other operating expense increased $16.7 million, or 24%, in 1998 after
increasing $22.3 million, or 48%, in 1997. Increases in salaries and
benefits of $7.1 million and furniture and equipment costs of $4.2 million
accounted for 68% of the increase in 1998 noninterest expense. These
increases were primarily due to expenses for a full year on the operations
acquired from Eastern in June of 1997. Other noninterest expense increased
$2.5 million, or 14%, as a result of $1.3 million in consulting fees aimed
at improving organizational efficiency and $1.0 million in external costs
associated with the Year 2000 effort. 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 $19.8 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 $0.4 million in connection with a shareholder
appraisal case related to an earlier acquisition. The merger with Eastern,
which was approximately two-thirds the former size of VFSC, largely
accounted for the remainder of the increase. Amortization of the goodwill
arising out of the merger which is being amortized over a fifteen year
period results in expense of approximately $1 million per quarter.
Applicable Income Taxes
During 1998, 1997 and 1996 the Company recorded income tax expense of $12.3
million, $10.0 million and $8.5 million, respectively. The changes were
almost entirely due to the level of pre-tax earnings and the increase in
goodwill amortization in 1998 and 1997 which is a nondeductible expense for
tax purposes. See also footnote 12 to the financial statements.
Financial Condition
Loans
The loan portfolio increased $55 million, or 4%, in 1998 following a $404
million, or 44%, increase in 1997. The 1997 increase was primarily due to
the merger. 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. During 1997 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. In 1998, it increased to 36% of the loan
portfolio. It is management's intention to continue its focus on
increasing the commercial lending sector of the loan portfolio.
Through the Banks, the Company makes commercial business loans to small and
medium sized businesses in Vermont, Massachusetts and New Hampshire.
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 54% 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, 1998 this sector represented 3% of the
portfolio.
In 1998, the Company originated $244.4 million of residential mortgage loans
for sale and sold $229.7 million of these loans in the secondary market,
compared to $135.2 million originated and $117.7 million sold in 1997 and
$119.2 million originated and $56.0 million sold in 1996. The 80% increase
in mortgage loan originations in 1998 was primarily due to lower interest
rates which resulted in a strong market for real estate sales and
refinancings. The 15% increase in originations in 1997 was primarily due
to the merger and the additional opportunities it afforded the Company.
At year end 1998, the mortgage portfolio serviced for others totaled
$1,008.4 million compared to $1,056.6 million at year end 1997 and
$412.2 million at year end 1996 and currently generates income of
approximately $1.4 million per year. The $48.2 million, or 4.6%, reduction
in 1998 was due to net amortization of existing balances. The increase in
1997 was almost entirely due to the merger. Of the residential real
estate portfolio, 58% were adjustable rate loans and 42% were fixed rate
loans at December 31, 1998. Residential real estate loans represented 55%,
58% and 47% of gross loans at year end 1998, 1997 and 1996, respectively.
Consumer loans represented 9% of gross loans at December 31, 1998, 8%
at December 31, 1997 and 11% at December 31, 1996.
The following table summarizes the composition of the Company's loan
portfolio at the dates indicated.
<TABLE>
December 31,
1998 1997 1996 1995 1994
(in thousands)
<C> <C> <C> <C> <C>
Commercial(1) $203,851 $166,418 $181,372 $170,162 $207,299
Real Estate:
Residential 758,888 765,634 429,657 415,468 389,033
Commercial 241,235 234,394 177,339 182,233 186,185
Construction 45,350 38,695 25,205 24,816 25,033
Total real estate 1,045,473 1,038,723 632,201 622,517 600,251
Consumer 120,181 109,360 96,863 100,791 103,953
Total loans, net
of unearned
income $1,369,505 $1,314,501 $910,436 $893,470 $911,503
</TABLE>
(1) Includes loans to Massachusetts and Vermont municipalities and
industrial revenue bonds of $27,752, $20,730, $46,038, $24,874 and $44,669
for years 1998 through 1994, respectively.
The following table details the loan maturity and interest rate sensitivity
of commercial, commercial real estate and construction loans, at December
31, 1998.
<TABLE>
After One After
Within But Within Five
One Year Five Years Years Total
(Dollars in thousands)
<C> <C> <C> <C>
Loans:
With fixed interest
rates $46,696 $50,447 $143,725 $240,868
With variable interest
rates 240,118 2,999 6,451 249,568
Total $286,814 $53,446 $150,176 $490,436
</TABLE>
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.
<TABLE>
December 31,
1998 1997 1996 1995 1994
(Dollars in thousands)
<C> <C> <C> <C> <C>
Loans 90 days or more past
due and still accruing
interest $2,069 $6,055 $1,933 $2,008 $1,448
Nonperforming assets:
Nonaccrual loans $7,904 $17,006 $7,812 $11,695 $16,491
Other real estate owned 1,175 2,794 697 2,977 4,487
Restructured loans -
accruing 0 0 661 316 294
Total nonperforming assets $9,079 $19,800 $9,170 $14,988 $21,272
Nonperforming assets to
period end loans, net of
unearned income, plus
other real estate owned 0.66% 1.50% 1.01% 1.67% 2.32%
</TABLE>
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. During
1998, the aforementioned three loans totaling $2.2 million, renewed. The
remainder of the $4.0 million decline in loans 90 days past due was
addressed in accordance with the Company's nonaccrual and loan charge-off
policies. Additional interest income of $991,000, $1,342,000 and $739,000
would have been recorded in 1998, 1997 and 1996, respectively, if
nonaccrual and restructured loans had been on a current basis in accordance
with their original terms. Payments, totaling $645,000, $1,117,000 and
$1,850,000 respectively, were received on nonaccrual loans during 1998,
1997 and 1996. All payments, were applied as principal reductions with the
exception of $12,000 recorded as interest income in 1998 and $18,000 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, 1998, 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,
1998, none of the total nonaccrual loans are current as to contractual
terms. Loans to three commercial borrowers, totaling $3.2 million
represented 41% of nonaccrual loans. Management expects to see improvement
in 1999 over the 1998 charged-off loan total with no significant 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. Also, management is not aware of any potential problem
loans other than those balances reported above and those described in
footnote 10 to the financial statements as being impaired.
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 $16.7 million, or
1.22% of the total loan portfolio at December 31, 1998, compared with 1.44%
at year end 1997 and 1.50% at year end 1996. On December 31, 1998 the
allowance for loan losses represented 184% of total nonperforming assets
and 211% of nonperforming loans (which include nonaccrual and restructured
loans), compared to 96% and 111%, respectively, at year end 1997. 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.
<TABLE>
Year Ended December 31,
1998 1997 1996 1995 1994
(Dollars in thousands)
<C> <C> <C> <C> <C>
Allowance for loan losses
at beginning of year $18,943 $13,647 $14,761 $16,236 $17,815
Allowance acquired
from Eastern 0 7,488 0 0 0
Loans charged off:
Commercial, commercial
real estate and
construction (2,024) (3,637) (3,416) (4,533) (4,895)
Real estate-residential (2,518) (890) (1,047) (596) (650)
Consumer (3,690) (2,178) (1,570) (1,484) (1,240)
Total loans charged off (8,232) (6,705) (6,033) (6,613) (6,785)
Recoveries of loans
previously charged off:
Commercial, commercial
real estate and
construction 1,052 743 1,115 772 783
Real estate-residential 386 57 36 40 0
Consumer 1,415 463 418 426 423
Total Recoveries 2,853 1,263 1,569 1,238 1,206
Net loans charged off (5,379) (5,442) (4,464) (5,375) (5,579)
Additions to allowance
charged to earnings 3,135 3,250 3,350 3,900 4,000
Allowance for loan losses
at year end $16,699 $18,943 $13,647 $14,761 $16,236
Ratio of net charge-offs
to average loans, net of
unearned income 0.41% 0.49% 0.50% 0.59% 0.62%
Allowance for loan losses
to period end loans, net
of unearned income 1.22% 1.44% 1.50% 1.65% 1.78%
</TABLE>
Net loans charged off in 1998 totaled $5,379,000 or 0.41% of average loans.
This compares with $5,442,000 or 0.49% in 1997 and $4,464,000 or 0.50% in
1996. Net charge-offs on commercial, commercial real estate and construction
loans declined 66% while net charge-offs on residential real estate and
consumer loans, increased 156% and 33%, respectively. These fluctuations
are reflective of the mix of loans acquired with the Eastern merger. In 1998
charged off loans associated with one lending relationship totaling $781,000
represented 15% of the net charge-offs for the year. No other charge-off
exceeded 10% of the year's net loans charged off.
Over the last five years, the portion of the allowance for loan losses
allocated to commercial and commercial real estate loans has decreased from
23% and 20%, respectively, to 15% and 18%, respectively. Over the same
period the portion allocated to the residential real estate portfolio
increased from 43% to 55%. These fluctuctions reflect the changing mix
of the Company's loan portfolio, largely affected by the Eastern merger,
and the inherent risks in these loan categories. The remaining category of
the allowance for loan losses management feels is necessary based on its
assessment of historical loss experience, industry trends and the impact
of loan and regional economies on the Company's borrowers that may not
have been captured in the previously mentioned risk classifications.
Over this five year period, the company's allowance for loan losses
as a percentage of nonperforming assets has risen from 76% at December 31,
1994 to 184% at December 31, 1998, a level much more consistent with the
Company's peers and industry trends.
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, 1998, 1997, 1996, 1995 and 1994. Notwithstanding
these allocations, the entire allowance for loan losses is available to
absorb charge-offs in any category of loans. Also during the last five
years, management provided an unallocated allowance for expected
charge-offs not specifically identified in the loan portfolio.
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
Loan Type Loan Type Loan Type Loan Type Loan Type
Amount to Total Amount to Total Amount to Total Amount to Total Amount to Total
Allocated Loans Allocated Loans Allocated Loans Allocated Loans Allocated Loans
(Dollars in thousands)
<C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $1,894 15% $2,178 13% $2,637 20% $2,726 19% $4,226 23%
Real Estate-
Commercial 385 18 3,998 18 2,161 19 1,010 20 4,597 20
Construction 1,942 3 121 3 407 3 2,033 3 488 3
Real Estate-
Residential 3,243 55 4,440 58 1,651 47 1,398 47 1,061 43
Consumer 2,792 9 2,103 8 1,704 11 1,399 11 1,644 11
Unallocated 6,443 - 6,103 - 5,087 - 6,195 - 4,220 -
$16,699 100% $18,943 100% $13,647 100% $14,761 100% $16,236 100%
</TABLE>
Investment Portfolio
The investment portfolio is utilized primarily for liquidity and
secondarily for investment income. As a result, the portfolio is primarily
comprised of short-term U. S. Treasury instruments and high grade municipal
obligations, mortgage-backed securities and corporate bonds with short
maturities.
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 market values.
<TABLE>
December 31,
1998 1997 1996
(in thousands)
<C> <C> <C>
U.S. Treasury and other U.S.
Government agencies $167,785 $295,775 $194,727
State and political
subdivisions 10,318 9,987 10,558
Mortgage-backed
securities 223,910 199,121 67,055
Other securities (1) 115,923 22,766 18,780
Total $517,936 $527,649 $291,120
</TABLE>
(1) Includes money market overnight investments of $11,877, $7,348 and
$9,343 at year end 1998, 1997 and 1996, respectively.
During 1998 the investment portfolio decreased 2%, to $517.9 million at year
end. During 1997 the portfolio increased 81%, to $527.6 million at year
end. The total portfolio as a percent of total assets was 24% at year end
1998 compared to 25% and 22% at year end 1997.
Securities are carried at fair market value in the above tables. During
1998, investment in Treasury and Agency Securities decreased $128 million,
or 43%. Nearly offsetting this decrease was a 12.4% or $24.8 million increase
in mortgage backed securities and 409.2% or $93.2 million increase in other
securities in an effort to obtain higher yields. The significant change in
the portfolio in 1997 was almost entirely due to the acquisition of the
security portfolio of Eastern. The average maturity of the investment
portfolio is approximately 2.4 years. The Company invests a portion of its
capital in marketable equity securities which comprised 3.3%, 2.9% and
3.1% of total investments at December 31, 1998, 1997 and 1996,
respectively. At December 31, 1998, $16.4 million of the $16.8 million
marketable equity security portfolio were investments in the Federal
Reserve Bank and Federal Home Loan Bank. Investments in these
institutions are carried at par, which equals market. The following table
sets forth the maturities of the Company's investment securities at
December 31, 1998 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, 1998.
<TABLE>
<CAPTION>
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)
<C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies $39,608 5.36% $106,859 5.51% $21,318 7.01% $0 0.00%
State and political
subdivisions 2,173 6.56 7,088 6.51 1,057 5.91 0 0.00
Mortgage-backed securities 4,512 6.49 218,533 6.28 865 6.49 0 0.00
Other fixed income securities 97,913 5.89 0 0.00 1,174 6.00 0 0.00
Total $144,206 $332,480 $24,414 $0 0.00
Tax equivalent adjustment
for calculation of yield $50 $161 $21 $0
Does not include equity securities of $16,836 at December 31, 1998.
</TABLE>
Deposits
Average total deposits for 1998 of $1,719.7 million represented a $316.9
million, or 23%, increase from 1997's average, which had increased $352.5
million, or 34%, from 1996's average balances. Almost all of the average
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.
From December 31, 1997 to December 31, 1998 total deposits grew $107.3
million, or 6%. Large CDs represented 5% of average total deposits in
1998 and 4% in 1997 and 1996. The majority of these deposits was obtained
from local Vermont, Massachusetts and New Hampshire customers.
Management expects to continue to fund future asset growth primarily
with core deposits as opposed to the more volatile large CDs and other
borrowed funds.
The following table summarizes the daily average amount of deposits for
the years indicated, and rates paid on such deposits on the last day of
the respective year.
<TABLE>
December 31,
1998 1997 1996
Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
<C> <C> <C> <C> <C> <C>
Demand deposits $254,908 -% $185,174 -% $135,158 -%
Interest-bearing
transactional deposits 181,140 1.20 193,714 2.62 123,417 2.46
Savings deposits 770,468 3.40 576,842 3.42 489,363 3.49
Certificates of deposit:
-$100,000 or more 81,346 4.62 54,587 5.22 38,343 5.00
-Under $100,000 431,839 4.48 392,474 5.11 264,043 4.86
Total $1,719,701 $1,402,791 $1,050,324
</TABLE>
The following table shows the maturity schedule of certificates of
deposit of $100,000 or more at December 31, 1998.
Certificates
of Deposit
(in thousands)
3 months or less $22,187
Over 3 through 6 months 26,432
Over 6 through 12 months 26,864
Over 12 months 13,979
Total $89,462
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 10.00%, 10.18% and 9.12% as of December 31, 1998, 1997 and
1996, 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 10.18%, in 1998, 9.80% in 1997 and 9.19% in 1996.
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, 1998 and 1997 place them in the
"well capitalized" category at each respective date. Management's goal
is to remain "well capitalized". See Note 14 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 of VFB into VNB, the Company
acquired $625 million of SAIF-insured deposits which were assessed at
a rate of 6.1 cents per $100 of deposits for 1998. The remaining deposits
of both Banks are BIF-insured and were assessed at a rate of 1.2 cents
per $100 of deposits for 1998. This compares with rates of 6.3 cents and
1.3 cents per $100 of deposits in 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. No assessment rate changes are anticipated for 1999.
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 $622 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, 1998.
<TABLE>
<CAPTION>
Repricing Date
0-30 Days 31-90 Days 91-180 Days 181-365 Days 1-5 Years Over 5 Years
(in thousands)
<C> <C> <C> <C> <C> <C>
Earning assets:
Loans (1) $316,294 $63,823 $112,111 $171,057 $356,905 $341,411
Investment
securities (2) (3) 25,949 21,878 35,232 58,825 333,809 25,407
Other earning assets 57,847 0 0 0 0 0
Total 400,090 85,701 147,343 229,882 690,714 366,818
Interest-bearing
liabilities:
MMDA's (4) 193,862 8,786 13,179 58,459 169,728 0
NOW's and Super
NOW's (4) 3,207 6,412 9,618 50,558 115,423 0
Savings and
Clubs (4) 23,246 50,022 72,367 79,161 148,451 0
Certificates of
Deposit 39,320 74,039 113,066 131,997 127,860 7,790
Borrowed Funds 82,312 6,209 244 13 16,925 6,204
Total 341,947 145,468 208,474 320,188 578,387 13,994
Net Interest
Sensitivity Gap $58,143 $(59,767) $(61,131) $90,306 $112,327 $352,824
Cumulative Interest
Sensitivity Gap $58,143 $(1,624) $(62,755) $(153,061) $(40,734) $312,090
</TABLE>
(1) Does not include non-accrual loans of $7,904 at December 31, 1998.
(2) Does not include equity securities of $16,836 at December 31, 1998.
(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, 1998.
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, 1998 (1)
There- Total Fair
1999 2000 2001 2002 2003 after Balance Value
(Dollars in thousands)
<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 $367,775 $49,576 $42,152 $10,493 $6,071 $266,576 $742,643 $753,732
Average interest rate 7.61% 7.65% 7.36% 6.97% 7.55% 7.75% 7.74%
Multi-family and
nonresidential 165,741 16,942 11,940 14,396 15,918 75,221 300,158 307,616
Average interest rate 8.31% 7.79% 7.77% 7.81% 7.62% 7.96% 8.12%
Consumer and
commercial 177,463 24,528 8,784 23,137 13,524 79,270 326,706 335,651
Average interest rate 8.72% 10.62% 10.16% 9.97% 9.74% 9.94% 6.93%
Mortgage-backed securities 56,818 42,138 49,014 34,238 18,972 20,620 221,800 223,910
Average interest rate 6.37% 6.36% 6.36% 6.36% 6.35% 6.36% 6.36%
Investment securities(2)(3) 91,074 57,477 68,408 37,164 20,091 17,804 292,018 294,026
Average interest rate 5.89% 5.57% 5.84% 5.70% 5.90% 6.15% 5.81%
Other earning assets 57,847 - - - - - 57,847 57,847
Average interest rate 4.60% - - - - - 4.60%
Total interest-sensitive
assets $916,718 $190,661 $180,298 $119,428 $74,576 $459,491 $1,941,172 $1,972,762
Interest-sensitive liabilities:
Deposits:
Checking $132,812 $75,726 $75,726 $75,727 $29,422 $88,268 $477,681 $477,681
Average interest rate 0.35% 0.62% 0.62% 0.62% 0.00% 0.00% 0.39%
Savings 232,646 46,903 46,851 46,849 - - 373,249 373,249
Average interest rate 4.17% 2.21% 2.21% 2.21% - - 3.43%
Money-market 250,209 60,735 60,735 60,734 11,601 - 444,014 444,014
Average interest rate 3.65% 3.70% 3.76% 3.70% 3.90% - 3.80%
Certificates 381,511 62,011 16,201 10,423 15,419 8,508 494,073 497,467
Average interest rate 5.10% 5.67% 5.28% 5.43% 5.37% 6.03% 5.21%
Borrowings:
FHLB 5,066 70 5,074 81 12,011 5,222 27,524 27,524
Average interest rate 5.52% 6.70% 5.69% 6.71% 5.76% 5.51% 5.66%
Other 83,778 605 - - - - 84,383 84,444
Average interest rate 4.05% 4.71% - - - - 4.05%
Total interest-sensitive
liabilities $1,086,022 $246,050 $204,587 $193,814 $68,453 $101,998 $1,900,924 $1,904,379
</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 $11,877.
(3) Includes equity securities at amortized cost and fair values of
$16,744 and $16,836, respectively.
The following variances in interest sensitive assets and liabilities occurred
from December 31, 1997 to December 31, 1998:
Interest sensitive assets maturing within 1 year declined $41.3 million.
This was primarily due to a $3.9 million reduction in investment securities
maturing within one year net of a $55.3 million increase in other short term
earning assets- largely overnight sales of federal funds. Interest
sensitive liabilities maturing within 1 year increased $35.3 million
largely due to a $99.5 million increase in the Company's "No Penalty CD"
product which must be classified as a savings account. Offsetting this
increase was a $64.9 million decline in short term FHLB borrowings inherited
from Eastern. During this same period, interest sensitive assets maturing
within 1-2 years declined $45.6 million due to nearly equal reductions in
single family 1-4 unit loans and consumer and industrial loans. Interest
sensitive liabilities maturing within this same period declined $17.7
million primarily due to a $14.0 million decline in certificates of deposit.
Interest sensitive assets maturing within 2-3 years increased $38.5 million
primarily due to a $45.2 million increase in investment securities with
this range of maturties. Interest sensitive liabilities maturing within
2-3 years declined $18.4 million, largely as a result of a $23.0 million
reduction in certificates of deposit maturing in this time frame. Interest
sensitve assets maturing within 4-5 years increased as a result of a $11.2
million increase in commercial and consumer loans while interest
sensitive liabilities increased $23.9 million due to a $12.0 million
increase in borrowings from the FHLB and nearly equal increases in
checking accounts and certificates of deposits. Interest sensitive
maturing within 3-4 years increased $28.3 million largely as a result of
an increase in investment securities with this range of maturities.
Interest sensitive liabilities expected to mature within 3-4 years declined
$3.1 million primarily due to a decline in FHLB borrowings maturing in
this time frame.
Interest sensitive assets maturing beyond 5 years increased $99.8 million
due to a $150.4 million increase in loans with this range of maturities as
a result of decline in long term interest rates throughout the year. This
increase was somewhat offset by decrease in mortgage-backed securities and
investment securities of $12.9 million and $29.5 million, respectively.
Interest sensitive liabilities maturing beyond 5 years increased $20.1
million primarily due to an increase in checking accounts of $22.0 million.
Overall, the Company's interest sensitive assets increased $99.8 million
or 5.4% while the fair value of these assets increased $106.8 million or
5.7%. The Company's interest sensitive liabilities increased $40.0 million
or 2.2% while their fair value increased $45.1 million or 2.4%.
Year 2000
The Project
Many of the world's computer systems (including those in non-information
technology equipment and systems) currently record years in a two-digit
format. If not addressed, such computer systems will be unable to properly
interpret dates beyond the year 1999, which could lead to business
disruptions (the "Year 2000" issue). The potential costs and uncertainties
associated with the Year 2000 issue will depend on a number of factors,
including software, hardware and the nature of the industry in which a
company operates. Additionally, companies must coordinate with other
entities with which they electronically interact. VFSC, like most
financial service providers, is dependent on computer-generated information
and processing and thus may be significantly affected by the Year 2000
issue. The Company began its Year 2000 remediation project in late 1996.
The Year 2000 project has been structured following the guidance set forth
in several statements that have been issued by the Federal Financial
Institutions Examination Counsel ("FFIEC"). VFSC and the Banks are
monitored in their Year 2000 efforts by various regulators, including the
Federal Reserve Board, the Office of the Comptroller of the Currency, the
FDIC and the Massachusetts Commissioner of Banks.
The overall project has five phases: awareness, assessment, renovation,
validation and implementation. In the awareness phase, the Company defined
the Year 2000 issue, communicated the Year 2000 issue to all employees and
obtained executive level support and funding. In the assessment phase, the
Company created a comprehensive Year 2000 plan which includes conducting
an inventory of all systems which may be affected by the Year 2000 issue
including facilities and related non-information technology systems
(embedded systems), such as vaults, alarms, elevators, telephone and electric
power, computer systems, hardware, and services and products provided by
third parties, and assessing the risk of non-compliance for each identified
system. In the renovation phase, the Company renovates or fixes certain
systems, while others are replaced or retired. In the validation phase, the
Company conducts testing to ensure all systems, including renovated systems,
are Year 2000 compliant for present and future dates. Finally, in the
implementation phase, the Company places compliant systems in production.
The Company's banking subsidiaries, VNB and UB, maintain separate computer
systems. Both VNB and UB have completed the awareness and assessment
phases. VNB has substantially completed the renovation and validation
phases for all their mission critical systems. UB is currently underway
with the validation phase of the project and is also substantially complete
with the renovation portion of the project. VNB and UB purchase the
software for their mission critical systems from nationally recognized
vendors, and although they services these applications, they do very
little custom coding for those systems. The Company considers its mission
critical systems to be software used to maintain its general ledger, loan,
deposit, item processing and ATM/EFT (Electronic Funds Transfer)
applications. In order to perform the assessment of its systems, both VNB
and UB have initiated communications with the appropriate vendors as to the
Year 2000 readiness of their product(s) and continue to monitor vendor
status. VNB and UB have initiated communications with their suppliers,
data exchange partners and large customers to determine the status of their
Year 2000 efforts.
The renovation phase principally consists of the installation of the vendor
identified Year 2000 compliant versions of the relevant systems and the
validation of the functionality of the systems as well as forward date (dates
in the next century) verification. As of December 31, 1998, Management
estimates that 83% of the renovation phase at VNB was completed. Forward
date testing of VNB's systems was substantially complete at that date,
with the remainder of forward date testing and the validation of all
internal and external data exchange interfaces to be completed by March 31,
1999. Validation of VNB's non-mission-critical systems will continue
during 1999. Validation of UB's non-mission critical systems will
likewise continue during 1999. As of December 31, 1998, management
estimates that the renovation phase of the project at UB was 85%
complete. In addition, UB is currently underway with the validation
phase (including forward date testing) as is expected to complete this
phase of the project by March 31, 1999. VNB's schedule to date in
addressing the Year 2000 issue, meets the applicable regulatory
guidelines. UB has been notified by the FDIC that it is behind the
timetable prescribed by them for certain requirements of the FFIEC. As
a result, on February 19, 1999 UB entered into an agreement with the
FDIC which specified certain Year 2000 compliance steps that must be
completed in the near term. The Company has allocated additional
resources to UB's Y2K project and expects that UB's schedule for Year
2000 compliance will be within this agreement and FDIC parameters by
March 31, 1990.
Costs
Management estimates the costs of its Year 2000 project to be $4.4 million.
As of December 31, 1998, $2.3 million has been expended. The estimated
expenditure for 1999 is $1.9 million and for 2000, $0.2 million. The $2.3
million already incurred includes $1.7 in operating expense(s) and $0.6
million in capital expenditures. The $4.4 million estimated total cost of
the project includes $0.8 million for capital expenditures, including
upgrades of hardware and software for ATM machines and software for the
Retail Delivery System (teller/platform automation) which were incurred
primarily in 1998 and will be depreciated over three to five years
depending on useful life. The Company is relying primarily on internal
staff resources to complete the project. The costs of the project will be
obtained from normal operating budgets and are not expected to have a
material effect on the Company.
Risks
There are many risks associated with the Year 2000 issue, including the
possibility of a failure of the Company's computer and non-information
technology systems. Such failures could have a material adverse effect on
the Company and may cause systems malfunctions, incorrect or incomplete
transaction processing resulting in failed trade settlements, the
inability to reconcile accounting books and records and disruptions of
funding requirements. While the Company is attempting to mitigate
the risks for systems under its control, the Company obtains most of
the hardware and software from external vendors. In addition, even if
the Company successfully remediates its Year 2000 issues, it can be
materially and adversely affected by failures of third parties to
remediate their own Year 2000 issues. The failure of third parties with
which the Company has financial or operational relationships such as
clearing organizations, regulatory agencies, other banks, borrowers,
counterparties, vendors and utilities, to remediate their computer and
non-information technology systems issues in a timely manner could result
in a material financial risk to the Company.
The Company has undertaken to communicate communications with its
commercial loan customers to assess their Year 2000 readiness. As of
December 31, 1998 the Company had completed its assessment of 100% of the
target portfolio, which includes all commercial loans in excess of $250,000.
If the above mentioned risks are not remedied, the Company may experience
business interruption or shutdown, financial loss, regulatory actions,
damage to the Company's franchise and legal liability.
Contingency Plan
The Company has initiated contingency planning for its mission critical
systems and processes, including a business impact analysis and risk
assessment of these processes. A draft contingency plan (the "Plan")
was completed by December 31, 1998. This will be reviewed and enhanced
by senior management and will be completed by June 30, 1999. The Plan
will be monitored quarterly for the remainder of 1999 for any changes or
additional contingencies that may be required.
Recent Developments
Merger with Chittenden Corporation
On December 16, 1998, Chittenden Corporation ("Chittenden"), Chittenden
Acquisition Subsidiary, Inc., a wholly owned subsidiary of Chittenden, and
the Company entered into an Agreement and Plan of Merger (the "Merger
Agreement"). The Merger Agreement provides for a series of related
transactions pursuant to which the Company will be merged with and into
Chittenden (the "Merger"), with Chittenden being the surviving corporation.
Under the terms of the Merger Agreement, at the Effective Time (as such
term is defined in the Merger Agreement), each outstanding share of common
stock, par value $1.00 per share, of the Company will be converted into
the right to receive 1.07 shares of Chittenden common stock, par value
$1.00 per share (subject to adjustment under certain circumstances).
Each holder of shares of the Company's common stock who would otherwise be
entitled to receive a fractional share of Chittenden common stock will
receive cash in lieu thereof. The Merger is intended to constitute a
reorganization under Section 368(a) of the Internal Revenue Code of 1986,
as amended, and to be accounted for as a pooling of interests. The
consummation of the Merger is subject to certain customary conditions,
including without limitation the approval of the stockholders of each of
the Company and Chittenden and certain regulatory approvals. In connection
with the parties' execution of the Merger Agreement, the Company and
Chittenden also entered into a Stock Option Agreement, dated December 16,
1998, pursuant to which the Company granted Chittenden an option to
purchase, subject to certain terms and conditions contained therein, up
to an aggregate of 19.9% of the outstanding shares of the Company's common
stock. The option was granted as an inducement to Chittenden's willingness
to enter into the Merger Agreement.
Other
January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (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. January 1, 1998, the Company adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, in
its December 31, 1998 financial statements. SFAS No. 131 has established
revised standards relating to the reporting of financial and descriptive
information about the operating segments of an enterprise in its financial
statements. Operating segments are those components of an enterprise that
are evaluated regularly by the chief operating decision maker with regard
to the allocation of resources and assessing performance. VFSC's chief
operating decision maker is its' President and Chief Executive Officer.
In addition, the Company has identified its operating segments as its
two banking subsidiaries, VNB and UB. See Note 16 to the financial
statements for further discussion. During 1999, the Company plans a
major renovation to its branch operations in Chittenden County, Vermont
at a total cost of $2 to $3 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.
The Company will be required to adopt SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", in its 1999 financial
statements. SFAS No. 133 requires all derivatives to be recorded on the
balance sheet as either assets or liabilities and must be carried at
their fair value. In addition, VFSC will be required to adopt SFAS No.
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans held for Sale by a Mortgage Banking
Enterprise". This statement requires that after an enterprise securitizes
a mortgage loan held for sale, it must then classify the resulting
mortgage-backed security as a trading security. These statements are not
anticipated to have a material impact on the financial statements of the
Company.
Item 8 - Financial Statements and Supplementary Data
<TABLE>
Consolidated Balance Sheets
December 31,
1998 1997
(Dollars in thousands, except share amounts)
<C> <C>
Assets
Cash and due from banks $63,346 $95,495
Interest-bearing deposits with other banks 1,661 44
Federal funds sold and securities purchased under
agreements to resell 56,186 2,470
Total cash and cash equivalents 121,193 98,009
Securities available for sale
U.S. Treasury and U.S. Government Agencies 167,785 295,775
Mortgage-backed securities 223,910 199,121
State and Municipal 10,318 9,987
Other securities 115,923 22,766
Total securities available for sale 517,936 527,649
Loans 1,369,505 1,314,501
Less: allowance for loan losses (16,699) (18,943)
Net loans 1,352,806 1,295,558
Premises and equipment, net 41,571 43,761
Real estate held for investment 1,251 1,298
Other real estate owned (OREO)
(Net of valuation reserve of $28 at
December 31, 1998 and $0 at
December 31, 1997) 1,175 2,794
Goodwill and other intangibles 56,966 61,729
Other assets 49,526 66,654
Total assets $2,142,424 $2,097,452
Liabilities and Stockholders' Equity
Deposits:
Demand $292,466 $228,935
Savings, NOW and money market accounts 1,002,478 915,937
Time deposits 494,073 536,802
Total deposits 1,789,017 1,681,674
Federal funds purchased and securities sold
under agreements to repurchase 83,778 87,818
Liabilities for borrowed money 28,129 86,899
Other liabilities 27,187 27,465
Total liabilities 1,928,111 1,883,856
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: 1998 - 13,293,465
1997 - 13,243,357 13,293 13,243
Capital surplus 116,894 116,640
Undivided profits 92,273 81,562
Other Comprehensive Income 2,651 2,152
Treasury stock, at cost - 1998 - 438,547 shares
1997 - 52 shares (10,798) (1)
Total stockholders' equity 214,313 213,596
Total liabilities and stockholders' equity $2,142,424 $2,097,452
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
Consolidated Statements of Income
For the years ended December 31
1998 1997 1996
(Dollars in thousands,
except per share amounts)
<C> <C> <C>
Interest Income
Interest and fees on loans $114,282 $98,429 $79,782
Interest on securities available for sale:
Taxable interest income 31,663 26,638 15,504
Tax exempt interest income 428 456 478
Fed Funds sold and securities purchased
under resale agreements 1,797 771 842
Total interest income 148,170 126,294 96,606
Interest Expense
Interest on deposits:
Certificates of deposit over $100,000 4,038 2,830 2,025
Other deposits 55,186 46,254 35,032
Interest on federal funds purchased,
borrowed money and securities
sold under agreements to repurchase 6,500 6,878 4,294
Total interest expense 65,724 55,962 41,351
Net interest income 82,446 70,332 55,255
Provision for loan losses 3,135 3,250 3,350
Net interest income after provision
for loan losses 79,311 67,082 51,905
Other Operating Income
Securities gains, net 866 688 11
Trust Department income 6,245 5,761 4,109
Service charges on deposit accounts 13,926 10,220 6,165
Credit card fees 4,188 3,801 3,219
Mortgage servicing income 1,364 1,800 1,698
Other service charges, commissions and fees 11,268 6,789 4,745
Total other operating income 37,857 29,059 19,947
Net interest and other operating income 117,168 96,141 71,852
Other Operating Expense
Salaries and wages 31,156 25,012 18,275
Pension and other employee benefits 7,096 6,114 5,160
Occupancy of bank premises, net 7,125 5,346 3,447
Furniture and equipment 8,686 6,285 3,980
Goodwill and other intangible amortization 4,516 2,601 440
Net OREO and collection expenses and losses 1,438 1,155 1,780
Printing and supplies 2,191 2,044 1,157
FDIC insurance 508 331 4
Credit card merchant expense 2,852 2,506 2,093
Other 20,146 17,608 10,362
Total other operating expense 85,714 69,002 46,698
Income before income taxes 31,454 27,139 25,154
Applicable income tax expense 12,341 10,013 8,539
Net Income $19,113 $17,126 $16,615
Earnings Per Common Share:
Basic $1.46 $1.52 $1.79
Diluted $1.45 $1.51 $1.77
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
Consolidated Statements of Changes in Stockholders' Equity
<CAPTION>
For the years ended December 31, 1998, 1997 and 1996 (*)
Other
Common Capital Undivided Comp Treasury
Stock Surplus Profits Income Stock Total
(Dollars in thousands, except per share amounts)
<C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 9,766 44,544 59,464 9 (1,950) 111,833
Net income - - 16,615 - - 16,615
Issuance of 8,702 shares of
common stock under
employee stock purchase
plan 9 135 - - - 144
Exercise of options - (144) - - 618 474
Purchase of 198,000 shares
under 1996 stock
repurchase plan - - - - (3,555) (3,555)
Issuance of 9,774 shares of
common stock under dividend
reinvestment plan 10 162 - - - 172
Other comprehensive income - - - (1,038) - (1,038)
Cash dividends declared ($.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)
Other comprehensive income - - - 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
Net income - - 19,113 - - 19,113
Issuance of 7,002 shares of
common stock under employee
stock purchase plan 7 199 - - - 206
Exercise of options 43 55 - - 881 979
Purchase of 474,529 shares under
1998 stock repurchase program
net of 34,784 shares reissued
for option e xercises and 1,300
shares reissued under employee
stock purchase plan - - - - (11,678) (11,678)
Other comprehensive income - - - 499 - 499
Cash dividends declared ($0.64) - - (8,402) - - (8,402)
Balance, December 31, 1998 $13,293 $116,894 $92,273 $2,651 $(10,798) $214,313
</TABLE>
(*) 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.
<TABLE>
Statement of Comprehensive Income
1998 1997 1996
<C> <C> <C>
Net Income $19,113 $17,126 $16,615
Other comprehensive income, net of tax:
Unrealized gains (losses) on investments
Unrealized holding gain (loss) arising
during the year net of income tax
expense (benefit) of $1,769, $1,418
and $(555) for 1998, 1997, and 1996,
respectively 3,214 2,599 (1,022)
Less reclassification adjustment for
gains included in net income net of
income tax expense of $(303), $(241)
and $(4) for 1998, 1997 and 1996,
respectively (563) (447) (7)
Other comprehensive income 2,651 2,152 (1,029)
Comprehensive income $21,764 $19,728 $15,588
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
Consolidated Statements Of Cash Flows
<CAPTION>
For the years ended December 31,
1998 1997 1996
(Dollars in thousands)
<C> <C> <C>
OPERATING ACTIVITIES
Net Income $19,113 $17,126 $16,615
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 3,135 3,250 3,350
Provision for depreciation 7,124 4,878 3,007
Net amortization on investment securities 503 543 682
Deferred income taxes 785 (2,192) (56)
Net gain on sale of loans (3,220) (1,114) (1,008)
Security gains, net (866) (688) (11)
Proceeds from sales of loans 232,124 135,815 57,098
Loans originated for sale (250,282) (122,010) (58,860)
Net loss on sale of OREO 54 240 578
Changes in assets and liabilities, net of
effect from the purchase of Eastern
Decrease (increase) in other assets 20,861 (14,024) (4,236)
(Decrease) in other liabilities (278) (1,070) (49)
NET CASH PROVIDED BY OPERATING ACTIVITIES 35,493 20,754 18,118
INVESTING ACTIVITIES
Proceeds from sales of securities 34,257 95,397 19,488
Proceeds from maturities of securities 291,396 111,782 62,726
Purchase of securities (314,787) (164,600) (125,915)
Proceeds from sale of OREO 3,999 5,942 4,672
Purchase of mortgage loans - - (2,555)
Net cash or cash equivalents from
Eastern Bancorp. - 13,819 -
Net (increase) decrease in loans (47,878) 30,390 (20,083)
Purchase of premises and equipment (4,934) (10,939) (6,259)
NET CASH (USED) PROVIDED BY INVESTING
ACTIVITIES (37,947) 81,791 (67,926)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 107,343 (39,619) 49,301
Net (decrease) increase in other borrowings (62,810) (29,923) 9,176
Issuance of common stock 1,185 10,950 790
Purchase of treasury stock and retirement
of shares (11,678) (3,026) (3,555)
Cash dividends (8,402) (6,715) (4,928)
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 25,638 (68,333) 50,784
INCREASE IN CASH AND CASH
EQUIVALENTS 23,184 34,212 976
Cash and Cash equivalents at beginning of year 98,009 63,797 62,821
CASH AND CASH EQUIVALENTS AT
END OF YEAR $121,193 $98,009 $63,797
</TABLE>
Non-monetary Transactions:
Transfer of loans to OREO for the years ended December 31, 1998, 1997
and 1996 totaled $2,433, $2,903 and $2,970, 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
Vermont Financial Services Corp. and its subsidiaries ("VFSC" or the
"Company"), organized in April 1982, became a registered bank holding
company and 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 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 current period interest income. 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
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.
Commerical loans must be charged off when the borrower is no longer
operating in a manner that can reasonably repay the loan principal,
or when the Company's collateral protection has been substantially or
permanently impairied. 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.
Certain costs associated with the obtaining of development of computer
software for internal use are capitalized and are amortized on a
straight-line basis over the useful life of the software. The costs include
the direct costs of materials and services consumed, interest costs
incurred and payroll and payroll-related costs for employees who devote
time to the internal-use computer software project.
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.
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") NO. 132, Employers' Disclosures about Pension and
Other Postretirement Benefits. SFAS No. 132 revises employers' disclosures
about pension and other postretirement benefit plans. SFAS No. 132 does
not change the method of accounting for such plans. The Company has
two defined benefit pension plans covering substantially all of its
employees. The benefits are based on years of service and the
employee's compensation during the five years before retirement. The
cost of this program is being funded currently. The Company also sponsors
a defined benefit health care plan for substantially all retirees and
employees. The Company measures the costs of its obligation based on its
best estimate. The net periodic costs are recognized as employees
render the services necessary to earn the postretirement benefits.
January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (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. January 1, 1998, the Company adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, in
its December 31, 1998 financial statements. SFAS No. 131 has established
revised standards relating to the reporting of financial and descriptive
information about the operating segments of an enterprise in its financial
statements. Operating segments are those components of an enterprise that
are evaluated regularly by the chief operating decision maker with regard
to the allocation of resources and assessing performance. VFSC's chief
operating decision maker is its' President and Chief Executive Officer.
In addition, the Company has identified its operating segments as its two
banking subsidiaries, VNB and UB. See Note 16 to the financial statements
for further discussion.
The accompanying consolidated balance sheets contain reclassification to
achieve consistency in their presentation.
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 Williston,
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.
<TABLE>
Pro forma
Years Ended December 31,
(Unaudited)
1997 1996
<C> <C>
Interest income $156,726 $158,284
Net interest income 85,329 85,014
Net income 14,432 19,853
Diluted earnings per share $1.27 $1.54
</TABLE>
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.
On December 16, 1998, VFSC, Chittenden Corporation (NYSE: "CHZ"), and a
wholly owned subsidiary of Chittenden Corporation, entered into an
Agreement and Plan of Merger (the Merger Agreement), pursuant to which
VFSC will be merged with and into Chittenden Corporation (the Merger).
The Merger is structured to qualify as a pooling of interests for
accounting purposes and as a tax-free exchange of 1.07 shares of
Chittenden Corporation common stock for each share of VFSC common stock
and is expected to close in the second quarter of 1999. The completion of
the Merger is subject to certain customary conditions, including without
limitation the approval of the stockholders of each of VFSC and
Chittenden Corporation and certain regulatory approvals.
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.
<TABLE>
December 31,
1998 1997
Fair Amortized Fair Amortized
Value Cost Value Cost
<C> <C> <C> <C>
Classification and Maturity:
U. S. Treasury Securities:
Within 1 year $13,578 $13,509 $6,595 $6,556
1-5 years 27,111 26,643 27,784 27,629
Total 40,689 40,152 34,379 34,185
Obligations of Other U. S.
Government Agencies:
Within 1 year 26,030 26,032 3,491 3,500
1-5 years 79,748 79,586 127,453 127,272
5-10 years 21,318 21,001 130,452 130,213
Total 127,096 126,219 261,396 260,985
Obligations of States and
Political Subdivisions:
Within 1 year 2,173 2,158 1,381 1,377
1-5 years 7,088 6,947 8,606 8,518
5-10 years 1,057 1,060 - -
Total 10,318 10,165 9,987 9,895
Corporate Securities:
Within 1 year 86,036 85,337 - -
5-10 years 1,174 1,125 - -
Total 87,210 86,462 - -
Mortgage-backed Securities
with current estimated
average life:
Within 1 year 4,512 4,487 13,309 13,344
1-5 years 218,533 216,415 155,751 153,787
5-10 years 865 896 30,062 29,451
Total 223,910 221,798 199,122 196,582
Marketable Equity Securities 16,836 16,744 15,417 15,325
Money Market Overnight Investments:
Within 1 year 11,877 11,877 7,348 7,348
Total Securities $517,936 $513,817 $527,649 $524,320
</TABLE>
Mortgage-backed securities are shown at their estimated average life.
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.
<TABLE>
December 31,
1998 1997
Gross Gross Gross Gross
UnrealizedUnrealized UnrealizedUnrealized
Gains Losses Gains Losses
<C> <C> <C> <C>
Classification:
U.S. Treasury Securities $537 $- $269 $75
Obligations of Other U.S. Government
Agencies 775 298 1,113 702
Obligations of States and Political
Subdivisions 164 11 95 3
Corporate Securities 838 90 - -
Mortgage-backed Securities 2,518 406 2,672 132
Marketable Equity Securities 93 1 92 -
Total $4,925 $806 $4,241 $912
</TABLE>
Proceeds from sales of securities available for sale during 1998, 1997 and
1996 were $34,257, $95,397 and $19,488, respectively.
Gross gains of $866, $2,203 and $11 were realized on those sales in
1998, 1997 and 1996, respectively. Gross losses of $0, $1,515 and $0 were
realized in the respective periods.
Securities with a book value of $136,175 as of December 31, 1998 and
$259,931 as of December 31, 1997 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
$46,063 and $257,603 at December 31, 1998 and December 31, 1997, respectively.
Note 4. Loans
Loans classified by type are summarized as follows:
<TABLE>
December 31,
1998 1997
<C> <C>
Commercial $203,851 $166,418
Real Estate:
Residential 758,888 765,634
Commercial 241,235 234,394
Construction 45,350 38,695
Total Real Estate 1,045,473 1,038,723
Consumer 120,181 109,360
Total loans, net of
unearned income $1,369,505 $1,314,501
</TABLE>
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 impacted by the general
economic conditions of the region.
At December 31, 1998 the amount of loans outstanding to directors,
executive officers, principal holders of equity securities or to any of
their associates totaled $5,058.
The following table summarizes the related party loan activity:
<TABLE>
1998 1997
<C> <C>
Balance at beginning of year $6,362 $6,683
Additions 4,255 3,290
Repayments (5,559) (3,611)
Balance at end of year $5,058 $6,362
</TABLE>
Mortgage Banking Activities - During 1998 the Company originated $244,385
of mortgage loans for sale in the secondary market and sold $229,665. As
of December 31, 1998, $27,752 of mortgage loans were held for sale,
included in residential real estate loans, and were carried at the
aggregate of the lesser of the loan balance or market value. All loans
are sold without recourse, except for certain technical underwriting
exceptions and $1,243 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, 1998 and 1997 the Company's serviced
mortgage portfolio for others totaled $1,008,449 and $1,056,555,
respectively. Loan servicing income was $1,364, $1,800 and $1,698 for
1998, 1997 and 1996, 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:
<TABLE>
1998 1997
<C> <C>
Balance at beginning of year $7,102 $2,734
Additions 2,584 5,259
Amortization (1,597) (891)
Balance at end of year $8,089 $7,102
</TABLE>
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. The fair value of the
Company's MSRs was $10,028 and $9,755 at December 31, 1998 and 1997,
respectively. Impairment of MSRs of $219 and $47 was recorded in 1998
and 1997, respectively.
The following table represents activity in the valuation allowance
during the respective years:
<TABLE>
1998 1997
<C> <C>
Balance at beginning of year $58 $11
Additions 219 47
Balance at end of year $277 $58
</TABLE>
Note 5. Allowance for Loan and OREO Losses
<TABLE>
Transactions in the allowance for loan losses are summarized as follows:
1998 1997 1996
<C> <C> <C>
Balance, January 1 $18,943 $13,647 $14,761
Provision for Loan Losses 3,135 3,250 3,350
Loans Charged Off (8,232) (6,705) (6,033)
Recoveries of Loans Previously
Charged Off 2,853 1,263 1,569
Addition of Eastern's Allowance - 7,488 -
Balance, December 31 $16,699 $18,943 $13,647
</TABLE>
Transactions in the OREO valuation reserve are summarized as follows:
<TABLE>
1998 1997 1996
<C> <C> <C>
Balance, January 1 $- $87 $47
Provisions for OREO losses 88 23 249
OREO Charged Off (60) (110) (209)
Balance, December 31, $28 $- $87
</TABLE>
Proceeds from sales of OREO were $3,999 in 1998, $5,942 in 1997 and $4,672
in 1996. Loans granted in connection with these sales were $103, $354 and
$873, 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:
<TABLE>
December 31,
1998 1997
<C> <C>
Land $4,505 $4,206
Premises 33,410 33,959
Equipment 40,923 40,527
Leasehold Improvements 5,682 5,338
Total 84,520 84,030
Accumulated Depreciation and
Amortization (42,940) (40,269)
Premises and Equipment, Net $41,571 $43,761
</TABLE>
Note 7. Deposits
Time certificates of deposit outstanding in denominations of $100 or more
aggregated to $89,462 and $68,863 at December 31, 1998 and 1997,
respectively. Total interest on these deposits amounted to $4,038, $2,830
and $2,025 for the years ended December 31, 1998, 1997 and 1996,
respectively.
The Company paid $59,636, $48,642 and $37,083 in interest on deposits
during 1998, 1997 and 1996, 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, 1998 the Company owned $13,160 of stock in the Federal Home
Loan Bank ("FHLB") which provided borrowing capacity up to $622 million
from the FHLB at maturities, rates and terms determined by the FHLB.
<TABLE>
December 31,
1998 1997 1996
<C> <C> <C>
Federal funds purchased $0 $16,000 $0
Securities and loans sold under
agreements to repurchase 83,778 71,818 77,672
FHLB and other borrowings 28,129 86,899 23,169
Total $111,907 $174,717 $100,841
Average amount outstanding during
the year $124,913 $134,109 $88,133
Maximum amount outstanding at any
month end $161,997 $198,959 $106,793
Weighted average interest rate
at year end 4.90% 5.38% 4.81%
Weighted average interest rate
during the year 5.20% 5.12% 4.86%
</TABLE>
<TABLE>
Long-term borrowings from the FHLB (included in the above):
December 31,
1998 1997 1996
<C> <C> <C>
Maturing March 2, 1998 @ 5.57% $4,000
Maturing July 15, 1998 @6.03% 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 5,000 -
Maturing February 2, 2001 @ 5.88% 5,000 5,000 -
Maturing February 27, 2003 @ 5.77% 11,925 - -
Maturing August 6, 2007 @ 6.42% 363 393 -
Maturing September 21, 2007 @ 6.53% 35 35 -
Maturing April 19, 2011 @ 3.50% 1,709 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% 201 206 -
Maturing May 6, 2014 @ 7.61% 507 523 539
Maturing October 20, 2014 @ 8.24% 587 593 -
Maturing August 19, 2016 @ 5.50% 279 288 296
Maturing January 30, 2017 @ 7.27% 602 608 -
Total $27,386 $43,069 $12,013
</TABLE>
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 $136,157 at December 31, 1998. 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 $121,193 and $98,009 at December 31, 1998 and 1997, 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
$517,936 and $527,649 at December 31, 1998 and 1997, respectively.
Loans - At December 31, 1998 and 1997 total loans, net of allowance for
loan losses, had a carrying value of $1,352,806 and $1,295,558,
respectively. The fair value of these loans were $1,380,300 and $1,316,814
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, 1998 and 1997 total deposits had carrying values
of $1,789,017 and $1,681,674 and fair values of $1,792,411 and $1,680,002,
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 $111,907
and $174,717 at December 31, 1998 and 1997, respectively. The fair value
of these borrowings were $111,968 and $174,800, 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.
Note 10. Impaired Loans
The following table details the Company's impaired loans as of the periods
indicated:
<TABLE>
December 31,
1998 1997
<C> <C>
Commercial (measured using discounted cash flows) $3,172 $4,600
Commercial (measured using collateral values) 1,421 900
Real Estate - Commercial (measured using discounted
cash flows) 10,892 4,100
Real Estate - Commercial (measured using collateral
values) 30 14,400
Real Estate - Residential (measured using collateral
values) 3,416 7,200
Real Estate - Residential (measured using discounted
cash flows) 39 1,700
Consumer (measured using collateral values) 107 400
Total impaired loans $19,077 $33,300
</TABLE>
<TABLE>
1998 1997 1996
<C> <C> <C>
Impaired loans with a specific valuation
reserve $2,095 $6,600 $1,600
Valuation reserve for impaired loans 832 2,400 300
Impaired loans without a specific valuation
reserve 16,982 26,700 26,700
Average impaired loans 25,411 31,300 30,200
Income accrued on impaired loans 1,140 1,700 2,100
</TABLE>
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, 1998. Certain operating leases
contain various options to renew.
Year Ending December 31:
1999 $1,908
2000 1,546
2001 961
2002 617
2003 491
Later Years 2,353
Total Minimum Payments Required $7,876
Operating expenses include approximately $2,283, $1,086 and $872 in 1998,
1997 and 1996, 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
1998, 1997 and 1996 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, 1998 and 1997 were as follows:
1998 1997
Home equity lines $121,032 $145,126
Credit card lines 118,878 98,629
Commercial real estate 48,603 16,760
Other unused commitments 138,575 135,457
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, 1998, the Company had outstanding commitments for the
following: financial standby letters of credit - $26,803, performance
standby letters of credit - $3,081 and commercial and similar letters of
credit - $2,316.
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, 1998 the Company's
reserve requirement of $1,031 was met with cash on hand.
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:
<TABLE>
Year Ended December 31,
1998 1997 1996
<C> <C> <C>
Currently Payable:
Federal $7,992 $11,564 $7,439
State 429 641 636
Deferred:
Federal 3,811 (2,195) 421
State 109 3 43
Total $13,341 $10,013 $8,539
</TABLE>
The Company made income tax payments of $11,106, $7,965, and $7,390
during 1998, 1997 and 1996, respectively.
The components of the net deferred tax asset as of December 31 are as
follows:
<TABLE>
1998 1997
<C> <C>
Deferred tax assets:
Pension $1,352 $1,070
Deferred compensation and fees 2,623 2,292
Allowance for loan losses 5,928 6,906
Other - 2,165
Total gross deferred tax assets 9,903 12,433
Deferred tax liabilities:
Accretion 167 127
Unearned income 347 323
Depreciation 2,287 1,793
Unrealized gain on securities, net 1,466 1,177
Intangibles 233 275
Deferred loan fees 1,365 691
Other 200 -
Total gross deferred tax liabilities 6,065 4,386
Deferred tax asset, net $3,838 $8,047
</TABLE>
No valuation allowance is required as there is sufficient taxable income in
the carry back period and through future operating results to be able to
fully realize the deferred tax asset.
The provision for income taxes is less than the amount computed by applying
the applicable federal income tax rate to income before taxes. The reasons
therefore are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
% of % of % of
Pre Tax Pre Tax Pre Tax
Amount Income Amount Income Amount Income
<C> <C> <C> <C> <C> <C>
Federal Statutory Rate $11,009 35.0% $9,499 35.0% $8,804 35.0%
Decreases in Taxes Resulting
From:
Tax exempt interest (413) (1.3) (709) (2.6) (786) (3.1)
State taxes, net of federal
benefit 350 1.1 419 1.5 443 1.8
Goodwill 1,518 4.8 875 3.2 - -
Other, net (123) (0.4) (71) (0.2) 78 0.3
Total $12,341 39.2% $10,013 36.9% $8,539 34.0%
</TABLE>
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 compensation during the highest
paid consecutive five years of employment during the last ten years of
credited service. VNB's funding policy is to contribute annually an amount
that can be deducted for federal income tax purposes using 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 participating 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, 1998 and December 31, 1997. All amounts are in thousands.
<TABLE>
1998 1997
Weighted-Average Assumptions as of December 31:
<C> <C>
Discount rate 6.50%-6.75% 7.00%-7.25%
Expected return on plan assets 8.00%-8.50% 8.00%-8.50%
Rate of compensation increase 5.00%-6.00% 5.00%-6.00%
</TABLE>
<TABLE>
Components of Net Periodic Benefit Cost
<C> <C>
Service cost $1,064 $894
Interest cost 1,441 1,348
Expected return on plan assets (1,709) (1,468)
Amortization of transition obligation
(asset) (119) (119)
Amortization of prior service cost 23 23
Recognized actuarial (gain) (52) (32)
Net periodic benefit cost $ 648 $ 646
Change in Benefit Obligation
Benefit obligation at beginning of year $ 20,521 $ 17,183
Service cost 1,064 894
Interest cost 1,441 1,348
Amendments
Actuarial loss (including assumption
changes) 1,564 1,780
Benefits paid (589) (684)
Benefit obligation at end of year $24,001 $20,521
1998 1997
Change in Plan Assets
Fair value of assets at beginning of
year $20,616 $17,665
Actual return on plan assets 2,502 3,408
Employer contributions 56 227
Benefits paid (589) (684)
Fair value of assets at end of year $22,585 $20,616
Funded Status and Statement of
Financial Position
Fair value of assets at end of year $22,585 $20,616
Benefit obligation at end of year (24,001) (20,521)
Funded status $(1,416) $95
Unrecognized actuarial (gain) (1,180) (2,003)
Unrecognized transition (asset) (664) (783)
Unrecognized prior service cost 297 320
Net (accrued) benefit cost $(2,963) $(2,371)
</TABLE>
The Company also has a Profit-Sharing Plan covering substantially all
employees. A portion of the annual contribution by the Company is at the
discretion of the Board of Directors. The discretionary contribution was
approximately $500 for 1998, and $750 for 1997 and 1996. The Plan included
a 50% Company match of employee contributions to a 401(k) portion of the
Plan for 1998, 1997 and 1996. This Plan feature was added in 1993 and the
associated expense was $608 for 1998, $410 for 1997, and $340 for 1996.
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:
<TABLE>
1998 1997
Weighted Average Assumptions as of December 31
<C> <C>
Discount rate 6.50% 7.00%
Expected return on plan assets N/A N/A
Rate of compensation increase N/A N/A
Medical inflation 6.50% 7.00%
Components of Net Periodic Benefit Cost
Service cost $26 $14
Interest cost 43 35
Amortization of transition obligation/(asset) 11 11
Recognized net actuarial loss/(gain) 5 12
Net periodic benefit cost $85 $72
Change in Accumulated Postretirement
Benefit Obligation (APBO)
APBO at beginning of year $614 $449
Service cost 26 14
Interest cost 43 35
Actuarial loss/(gain) 31 67
Acquisition 0 101
Benefits paid (56) (52)
APBO at end of year $658 $614
Change in Plan Assets
Fair value at beginning of year $0 $0
Employer contributions 56 52
Benefits paid (56) (52)
Fair value at end of year $0 $0
Funded Status and Statement of
Financial Position
Funded status at end of year $(658) $(614)
Unrecognized transition obligation (asset) 160 171
Unrecognized prior service cost 0 0
Unrecognized net actuarial loss/(gain) 183 157
Prepaid (accrued) benefit cost $(315) $(286)
</TABLE>
Effect of a 1% Change in Medical Trend Rate
Decrease Trend 1% Increase Trend 1%
Change in APBO as of 12/31/98 (2%) 2%
Change in total of FY 1998
service cost plus interest cost (2%) 2%
For measurement purposes, a 7% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1998 expense, and a
6.5% rate for disclosure. 1997 expense was calculated using an assumed annual
rate of 7.75%. The rate was assumed to remain at that level thereafter;
however, the impact of medical inflation eventually diminishes because
of the $10,000 per capita lifetime limit on medical benefits and the
likelihood that most current retirees and all future retirees will reach
the cap. The medical rate assumption, therefore, merely affects the timing
of the distribution of the $10,000 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, 1998, as well as the total of the service cost
and interest cost components of net periodic postretirement cost for 1998,
by less than 2%. Similarly, decreasing the trend rate by one percentage
point for all future years would decrease the accumulated postretirement
benefit obligation at December 31, 1998, as well as the total of the
service cost and interest cost components of net periodic postretirement
cost for 1998, by less than 2%.
The weighted average discount rate used in measuring the plans was 7% for
expense and 6.5% for disclosure, 7.75% and 7% were assumed for 1997
expense and disclosure, respectively. 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
<TABLE>
December 31, 1998, 1997 and 1996:
Average Shares Per-Share
Income Outstanding Amount
(in thousands, except share and per share amounts)
<C> <C> <C>
1998
Basic EPS:
Income Available to common stockholders $19,113 13,102,672 $1.46
Effect of Dilutive Securities:
Stock options - 119,615 (0.01)
Diluted EPS:
Income available to common stockholders $19,113 13,222,287 $1.45
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
</TABLE>
The per share amounts of cash dividends paid on an equivalent share basis
were $.64 for 1998, $0.60 for 1997 and $0.53 for 1996. At December 31,
1998, the Banks had available $3,539 for payment of dividends to the
Company, under regulatory guidelines.
At December 31, 1998, there were 112,527 and 108,911 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; 174,700 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, which was substained by the
stockholders as 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 and 152,000 have been issued at $27.06 per share. 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 12,800 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; 386,330 have been exercised
to date. The following table presents the activity in each of the
Company's stock option plans:
<TABLE>
<CAPTION>
Shares Shares Shares Shares Shares Shares
Under Under Under Under Under
Under Option Option Option Option Option Option
@ $3.75 - $5.12 @ $9.50 @ $9.50 - $15.75 @ $20.78 @ $24.44 @ $27.06
<C> <C> <C> <C> <C> <C>
Outstanding,
December 31, 1995 16,490 88,000 225,600 - - -
Granted - - 148,000 - - -
Expired - - 2,000 - - -
Exercised 11,440 26,000 18,400 - - -
Outstanding,
December 31, 1996 5,050 62,000 353,200 - - -
Acquired - - - 451,772 - -
Granted - - - - 142,000 -
Exercised 2,400 42,000 93,800 369,590 - -
Outstanding,
December 31, 1997 2,650 20,000 259,400 82,182 142,000 -
Granted - - - - - 152,000
Expired - - 2,000 682 2,000 2,000
Exercised 1,650 20,000 39,500 16,740 - -
Outstanding,
December 31, 1998 1,000 - 217,900 64,760 140,000 150,000
Weighted average
remaining maturity
(years) 4.4 - 6.7 4.9 8.7 9.4
Weighted average
exercise price at
January 1, 1998 $5.12 $9.50 $12.65 $20.78 $24.44 -
Weighted average
exercise price at
December 31, 1997 $5.12 - $13.03 $20.78 $24.44 $27.06
Weighted average
exercise price of
options exercised during
1998 $5.12 $9.50 $10.38 $20.78 - -
</TABLE>
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:
<TABLE>
1998 1997 1996
<C> <C> <C>
Net income As reported $19,113 $17,126 $16,615
Pro forma $18,085 $16,452 $16,213
Basic earnings
per share As reported $1.46 $1.52 $1.79
Pro forma $1.38 $1.46 $1.75
Diluted earnings
per share As reported $1.45 $1.51 $1.77
Pro forma $1.37 $1.45 $1.73
Diluted tangible
book value
per share As reported $12.25 $11.48 $11.87
Pro forma $12.17 $11.43 $12.50
</TABLE>
Significant values and assumptions used in calculating the above proforma
amounts are as follows:
<TABLE>
Options Options Options
Issued Issued Issued
<C> <C> <C>
6/10/98 8/27/97 3/13/96
Stock price at date of issuance $27.06 $24.44 $15.75
Exercise price $27.06 $24.44 $15.75
Anticipated remaining life (years) 7.50 7.50 7.50
Volatility 34.93% 21.99% 23.18%
Annual rate of quarterly dividends 2.04% 2.45% 3.18%
Risk free discount rate 5.45% 6.36% 6.20%
Grant date fair value of options $5.25 $7.20 $8.35
</TABLE>
The Superior Court in Greenfield, Massachusetts has issued an order in a
shareholder appraisal case involving former stockholders of WMBS. VFSC
has appealed this settlement. However, as a result of the court order,
VFSC has accrued approximately $4.0 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 $17.51 per
VFSC share. There was approximately $298,000 and $420,000 of pretax
expense recorded during 1998 and 1997, respectively, and a charge to
equity capital of approximately $3.3 million during 1997 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, 1998, the Company and
Banks meet all capital adequacy requirements to which they are is subject.
As of December 31, 1998, 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, 1998 and 1997
are presented in the table:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1998
Total Capital
(to Risk Weighted Assets):
<C> <C> <C> <C> <C> <C>
VFSC $171,228 13.03% $105,150 8.00% $131,438 10.00%
VNB 145,206 12.75 91,100 8.00 113,875 10.00
UB 25,089 14.50 13,712 8.00 17,139 10.00
Tier I Capital
(to Risk Weighted Assets):
VFSC 154,795 11.78 52,575 4.00 78,863 6.00
VNB 130,965 11.50 45,550 4.00 68,325 6.00
UB 23,202 13.40 6,856 4.00 10,284 6.00
Tier I Capital
(to Average Assets):
VFSC 154,795 7.51 82,409 4.00 N/A N/A
VNB 130,965 7.36 71,211 4.00 89,013 5.00
UB 23,202 8.45 10,864 4.00 13,580 5.00
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 12.50 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 N/A N/A
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
</TABLE>
Note 15. Parent Company Financial Information
Condensed financial information for Vermont Financial Services Corp.
(parent company only) is as follows:
<TABLE>
CONDENSED BALANCE SHEETS December 31,
1998 1997
<C> <C>
ASSETS
Cash
$1,750 $9,717
Investment Securities 1,707 4,916
Other Assets 11,223 10,868
Investment in Subsidiaries 206,020 194,232
Total Assets $220,700 219,733
LIABILITIES AND STOCKHOLDERS' EQUITY
Other Liabilities $6,387 6,137
Total Liabilities 6,387 6,137
Total Stockholders' Equity 214,313 213,596
Total Liabilities and
Stockholders' Equity $220,700 $219,733
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF INCOME Year Ended December 31,
1998 1997 1996
<C> <C> <C>
INCOME
Income on Securities $180 $1,006 $334
Dividends from Subsidiaries 8,370 11,055 38,980
Other Income 336 85 20
Total Income 8,886 12,146 39,334
EXPENSES
Total Operating Expenses 1,173 1,117 668
Income Before Tax Benefit and Equity
in Undistributed Income from
Subsidiaries 7,713 11,029 38,666
Applicable Income Tax (Benefit) (111) (40) (168)
Income Before Equity in Undistributed
Income of Bank Subsidiaries 7,824 11,069 38,834
Equity in Undistributed Income
of Subsidiaries 11,289 6,057 (22,219)
Net Income $19,113 $17,126 $16,615
</TABLE>
<TABLE>
STATEMENTS OF CASH FLOWS Year Ended December 31,
1998 1997 1996
<C> <C> <C>
OPERATING ACTIVITIES
Net Income $19,113 $17,126 $16,615
Adjustments to reconcile income
to net cash provided
by operating activities:
Net amortization on investment
securities 7 37 22
Investment security (gains), net (15) (79) (8)
(Increase) in other assets (355) (8,271) (633)
Increase (decrease) in other
liabilities 250 5,147 (151)
Equity in undistributed net income
of bank subsidiaries (11,289) (6,057) 22,219
NET CASH PROVIDED BY OPERATING
ACTIVITIES 7,711 7,903 38,064
INVESTING ACTIVITIES
Proceed from sales and maturities
of securities 3,217 50,494 9,973
Investments in and advances to
subsidiaries - (30,172) -
Purchase of securities - (23,802) (36,762)
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES 3,217 (3,480) (26,789)
FINANCING ACTIVITIES
Issuance of common stock 1,185 10,950 790
Purchase of treasury stock and
retirement of shares (11,678) (3,026) (3,555)
Cash dividends (8,402) (6,715) (4,928)
NET CASH (USED) PROVIDED BY FINANCING
ACTIVITIES (18,895) 1,209 (7,693)
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (7,967) 5,632 3,582
Cash and cash equivalents at
beginning of year 9,717 4,085 503
CASH AND CASH EQUIVALENTS AT
END OF YEAR $1,750 $9,717 $4,085
</TABLE>
Note 16. Business Segments
Description of reportable segments
VFSC has two reportable segments, its two banking subsidiaries, Vermont
National Bank (VNB) and United Bank (UB). Each bank provides a wide
range of loan, deposit and trust services to individuals, businesses,
institutions and government entities located primarily in their respective
market areas. VNB operates 41 branches in Vermont and 16 branches in
southern New Hampshire and is regulated by the OCC. UB operates 7 branches
in western Massachusetts and is regulated by the FDIC. Each bank has a
separate management team. Financial reports for each are reviewed monthly
by the Company's Chief Executive Officer and Board of Directors and are the
basis for evaluating performance and allocating resources.
Measurement of segment profit or loss and segment assets
The Company evaluates each bank's performance primarily based on growth of
loans, deposits, net revenue, net income, operating efficiency and return
on assets. The accounting policies of each bank are the same as those
described in Note 1. Significant Accounting Policies". Intersegment
transactions are not material and are recorded approximately at cost.
On an enterprise-wide basis, except for interest and fees on loans,
revenues derived from all significant products and services are disclosed
in the Consolidated Statements of Income. The following table summarizes
the interest and fees on loans earned over the last three years for each
major category of loans.
<TABLE>
Interest and fees on loans for
the years ended December 31,
1998 1997 1996
(in thousands)
<C> <C> <C>
Commercial loans $22,792 $21,913 $17,584
Residential real estate loans 59,615 46,635 35,002
Commercial real estate loans 17,046 15,283 16,436
Construction loans 1,666 1,106 1,385
Consumer loans 13,163 13,492 9,375
Total interest and fees on loans $114,282 $98,429 $79,782
</TABLE>
The following tables summarize the significant items used by management
to evaluate the performance of each segment over the last three years.
<TABLE>
Year Ended December 31, 1998
VNB UB All Other Total
<C> <C> <C> <C>
Interest income $128,223 $19,768 $179 $148,170
Interest expense 56,535 9,189 - 65,724
Net interest income 71,688 10,579 179 82,446
Noninterest income 35,515 1,373 103 36,991
Net revenue 107,203 11,952 282 119,437
Depreciation 6,769 355 - 7,124
Goodwill Amortization 3,793 348 375 4,516
Other Noninterest expense 67,571 5,681 822 74,074
Provision for loan losses 3,015 120 - 3,135
Securities gain (losses) 848 3 15 866
Income before income taxes 26,903 5,451 (900) 31,454
Applicable income tax expense 10,201 2,251 (111) 12,341
Net income $16,702 $3,200 $(789) $19,113
Loans $1,182,253 $187,252 $- $1,369,505
Deposits $1,546,330 $244,445 $(1,758)$1,789,017
Total assets $1,856,646 $276,211 $9,567$2,142,424
Return on assets 0.92% 1.21% N/A 0.92%
Efficiency Ratio 72.88% 53.41% N/A 71.77%
Year Ended December 31, 1997
Interest income $93,278 $18,708 $14,308 $126,294
Interest expense 40,900 8,252 6,810 55,962
Net interest income 52,378 10,456 7,498 70,332
Noninterest income 25,089 1,176 2,106 28,371
Net revenue 77,467 11,632 9,604 98,703
Depreciation 4,017 335 526 4,878
Goodwill Amortization 1,965 348 288 2,601
Other Noninterest expense 50,189 5,605 5,729 61,523
Provision for loan losses 2,710 240 300 3,250
Securities gain (losses) 280 3 405 688
Income before income taxes 18,866 5,107 3,166 27,139
Applicable income tax expense 6,623 2,152 1,238 10,013
Net income $12,243 $2,955 $1,928 $17,126
Loans $1,109,234 $205,267 $-$1,314,501
Deposits $1,457,357 $229,663 $(848)$1,686,172
Total assets $1,825,344 $258,342 $13,766 $2,097,452
Return on assets 0.97% 0.92% N/A 1.00%
Efficiency Ratio 72.51% 54.06% N/A 69.91%
Year Ended December 31, 1996
Interest income $77,305 $18,975 $326 $96,606
Interest expense 32,915 8,383 53 41,351
Net interest income 44,390 10,592 273 55,255
Noninterest income 18,909 1,039 (12) 19,936
Net revenue 63,299 11,631 261 75,191
Depreciation 2,699 308 - 3,007
Goodwill Amortization 92 348 - 440
Other Noninterest expense 37,138 5,530 636 43,251
Provision for loan losses 3,350 - - 3,350
Securities gain (losses) - 3 8 11
Income before income taxes 20,020 5,448 (314) 25,154
Applicable income tax expense 6,376 2,331 (168) 8,539
Net income $13,644 $3,117 $(146) $16,615
Loans $708,805 $201,631 $- $910,436
Deposits $872,511 $214,892 $(4,145)$1,083,258
Total assets $1,041,000 $239,737 $32,244 $1,312,981
Return on assets 1.34% 1.29% N/A 1.31%
Efficiency Ratio 63.08% 53.19% N/A 62.11%
</TABLE>
Overall performance of the Company is primarily affected by the
overall performance of its largest banking subsidiary, VNB. Nearly all
fluctuations during 1996, 1997 and 1998 are due to the acquisition of
Eastern Bancorp, Inc. on June 26, 1997 and the subsequent integration of
Eastern's primary subsidiary, VFB, into VNB on September 22, 1997.
Note 17. Supplemental Financial Data
Selected Quarterly Data (unaudited)
The following is a summary of selected consolidated quarterly data of
the Company for the periods presented:
<TABLE>
1998
Fourth Third Second First
Quarter Quarter Quarter Quarter
<C> <C> <C> <C>
Interest income $37,097 $37,250 $36,749 $37,075
Interest expense 16,125 16,401 16,506 16,695
Net interest income 20,972 20,849 20,243 20,380
Provision for possible loan
losses 0 975 1,035 1,125
Other operating income 9,777 9,710 9,478 8,893
Other operating expense 22,399 21,615 20,713 20,986
Income before income taxes 8,350 7,969 7,973 7,162
Applicable income taxes 3,141 3,154 3,163 2,883
Net income $5,209 $4,815 $4,810 $4,279
Per share data:
Basic earnings per share $0.41 0.37 0.36 0.32
Diluted earnings per share $0.40 0.37 0.36 0.32
</TABLE>
<TABLE>
1997
Fourth Third Second First
Quarter(1) Quarter(1) Quarter Quarter
<C> <C> <C> <C>
Interest income $38,052 $39,050 $25,123 $24,070
Interest expense 17,436 17,748 10,687 10,092
Net interest income 20,616 21,302 14,436 13,978
Provision for possible loan
losses 900 900 700 750
Other operating income 9,336 8,551 5,637 5,534
Other operating expense (2) 24,289 19,730 12,671 12,312
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
</TABLE>
(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.
Statement of Management Responsibility
The management of Vermont Financial Services Corp. and its subsidiaries is
responsible for the accuracy, content and fair presentation of the
financial statements and other financial information in this annual report.
The accompanying consolidated financial statements and related notes 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 LLP the Company's
independent auditors. KPMG 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 and its subsidiaries.
Independent Auditors' Report
To the Stockholders and Board of Directors of Vermont Financial Services
Corp.:
We have audited the accompanying consolidated balance sheets of Vermont
Financial Services Corp. and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
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, 1998
and 1997, and the results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles.
Report of Independent Accountants
To the Stockholders and Board of Directors of Vermont Financial Services
Corp.:
We have audited the accompanying Vermont Financial Services Corp. and
subsidiaries' consolidated statements of income, changes in stockholders'
equity and cash flows for the year ended December 31, 1996. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, Vermont Financial Services Corp.
and subsidiaries', results of operations and their cash flows for the
year ended December 31, 1996 in conformity with generally accepted
accounting principles.
The Company adopted Statement of Financial Accounting Standards No. 122
"Accounting for Mortgage Servicing Rights" and Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
in 1996.
PricewaterhouseCoopers L.L.P.
Springfield, Massachusetts
February 8, 1999
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. (57) 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 of VNB 1987
Richard O. Madden (50) 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 (45) 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 (53) Executive Vice President of
the Company 1992
Executive Vice President of VNB 1988
Senior Vice President of VNB 1984
W. Bruce Fenn (57) Executive Vice President of
the Company 1997
Executive Vice President of VNB 1988
Senior Vice President and Senior
Loan Officer of VNB 1987
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 (59)
Attorney, Partner, Abatiell, Wysolmerski & 1982
Valerio Law Offices, Rutland, VT
Zane V. Akins (58)
President, Akins & Associates, 1987
Brattleboro, VT
Charles A. Cairns (57)
President, Champlain Oil Co., Inc. and 1986
Coco Mart, Inc., South Burlington, VT
William P. Cody (45)
General Manager, Cody Chevrolet, Inc., 1996
Montpelier, VT
Allyn W. Coombs (65)
President and Treasurer of Allyn W. Coombs, 1994
Inc. (Real Estate Development & Management),
Amherst, MA
Philip M. Drumheller (45)
President, The Lane Press, Inc., Burlington, VT 1995
John K. Dwight (54)
President and CEO, Dwight Asset Management
Company, Burlington, VT 1989
James E. Griffin (71)
President, J. R. Resources, Inc. 1972
(Business Consultants), Rutland, VT
John D. Hashagen, Jr. (57)
President & Chief Executive Officer of 1987
Vermont Financial Services Corp., Brattleboro;
President & Chief Executive Officer,
Vermont National Bank, Brattleboro, VT
Francis L. Lemay (66)
Chairman, United Bank 1994
Stephan A. Morse (52)
President and CEO, The Windham Foundation, 1986
Inc., Grafton, VT
Roger M. Pike (58)
Consultant, Rutland, VT 1980
Ernest R. Pomerleau (51)
President, Pomerleau Real Estate,
Burlington, VT 1990
Mark W. Richards (53)
President, Richards, Gates, Hoffman 1988
& Clay (Insurance), Brattleboro, VT
James M. Sutton (57)
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.
<TABLE>
I. SUMMARY COMPENSATION 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-
Salary Bonus sationAwards SARs outs sation
Name and Principal
Position Year $ $ $ $ # $ $(1)
<C> <C> <C> <C> <C> <C> <C> <C>
John D. Hashagen 1998 290,000 130,000 N/A N/A 30,000 sh N/A 11,281(2)
President and Chief 1997 260,000 0 N/A N/A 28,000 N/A 12,756(3)
Executive Officer 1996 234,000 93,600 N/A N/A 27,000 N/A 15,108(4)
Richard O. Madden 1998 155,000 56,000 N/A N/A 16,000 sh N/A 11,738(2)
Executive Vice
President, 1997 138,000 0 N/A N/A 14,000 N/A 12,283
Treasurer, Secretary 1996 120,000 48,000 N/A N/A 14,000 N/A 12,435
Robert G. Soucy 1998 162,000 58,000 N/A N/A 16,000 sh N/A 10,703(2)
Executive Vice
President, 1997 147,000 0 N/A N/A 14,000 N/A 12,467(3)
VNB Senior Operating
Officer 1996 128,000 51,200 N/A N/A 14,800 N/A 13,167(4)
Louis J. Dunham 1998 133,000 46,000 N/A N/A 14,000 sh N/A 10,000
Executive Vice
President, 1997 125,000 0 N/A N/A 13,000 N/A 12,299
VNB Senior Credit
Officer 1996 115,000 46,000 N/A N/A 13,400 N/A 11,696
W. Bruce Fenn 1998 136,000 47,000 N/A N/A 14,000 sh N/A 10,091(2)
Executive Vice
President, 1997 130,000 0 N/A N/A 13,000 N/A 12,404(3)
VNB Senior Banking
Officer 1996 120,000 48,000 N/A N/A 14,000 N/A 13,838(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 purchases of common stock under the
Company's Employee Stock Purchase Plan of $1,281 for Mr. Hashagen,
$1,738 for Mr. Madden, $90 for Mr. Fenn and $703 for Mr. Soucy.
(3) 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.
(4) Includes discounts received on purchase of common stock under the
Company's Employee Stock Purchase Plan of $2,754 for Mr. Hashagen,
$1,352 for Mr. Fenn and $569 for Mr. Soucy.
II. OPTION/SAR GRANTS TABLE
<TABLE>
Option/SAR Grants in Last Fiscal Year
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term (1)
(a) (b) (c) (d) (e) (f) (g)
% of Total
Options/SARs
# of Granted to Exercise
Securities Employees or base
Underlying in Fiscal Price Expiration
Name Options Granted Year ($/Sh) Date 5%($) 10%($)
<C> <C> <C> <C> <C> <C>
John D. Hashagen, Jr. 30,000 23.8% $27.06 6/10/08 $510,584 $1,293,919
Richard O. Madden 16,000 12.7 27.06 6/10/08 272,311 690,090
Robert G. Soucy 16,000 12.7 27.06 6/10/08 272,311 690,090
Louis J. Dunham 14,000 11.1 27.06 6/10/08 238,272 603,829
W. Bruce Fenn 14,000 11.1 27.06 6/10/08 238,272 603,829
</TABLE>
(1) The assumed growth rates in price in the Company's stock are not
necessarily indicative of actual performance that may be expected.
III. OPTION EXERCISES AND YEAR-END VALUE TABLE
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year, and FY-End Option Value
(a) (b) (c) (d) (e)
Number of Securities Value of
Underlying Unexercised Unexercised Options at FY-End ($)
Shares Acquired Value Options at FY-End(#) In-the-Money
Name on Exercise(#) Realized($)(1)Exercisable Exercisable (2)
<C> <C> <C> <C>
John D. Hashagen, Jr. 8,000 $170,500 133,600 $2,010,125
Richard O. Madden 16,000 $246,838 50,200 $603,775
Robert G. Soucy 5,200 $100,113 69,000 $987,525
Louis J. Dunham 6,000 $99,000 58,200 $836,738
W. Bruce Fenn 0 $0 27,200 $205,938
</TABLE>
(1) Represents the difference between the aggregate exercise price and the
aggregate market value on the date of the exercise.
(2) Represents the difference between the aggregate exercise price and the
aggregate market value as of December 31, 1998.
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 $2,037,500. 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. 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 1998, the Company made a contribution
of $500,000 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, 1999.
Estimated Annual Benefits at Retirement
by Specified Remuneration and
Years of Service Classification
<TABLE>
Final Average Years of Service
Compensation 5 10 15 20 25
<C> <C> <C> <C> <C>
$20,000 $1,507 $3,014 $4,522 $6,029 $7,536
40,000 3,382 6,763 10,145 13,526 16,908
60,000 5,614 11,227 16,841 22,454 28,068
80,000 7,952 15,905 23,857 31,810 39,762
100,000 10,352 20,705 31,057 41,410 51,762
120,000 12,752 25,505 38,257 51,010 63,762
140,000 15,152 30,305 45,457 60,610 75,762
160,000 17,552 35,105 52,657 70,210 87,762
180,000 * 19,952 39,905 59,857 79,810 99,762
200,000 * 22,352 44,705 67,057 89,410 111,762
220,000 * 24,752 49,505 74,257 99,010 123,762
240,000 * 27,152 54,305 81,457 108,610 135,762*
260,000 * 29,552 59,105 88,657 118,210 147,762*
* Under current regulations of the Internal Revenue Code, the maximum
annual benefit payable from a qualified defined benefit plan during
1999 is $130,000, payable as a life annuity for retirements at age 65.
In addition, the maximum annual compensation under a qualified plan 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 renumneration.
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.
1994 Stock Option Plan
The Company has a stock option plan for key employees, officers and
directors of the Company or its subsidiaries which was approved by
stockholders at the 1994 Annual Meeting ("1994 Plan"). The 1994 Plan was
amended and restated and approved by stockholders at the 1998 Annual
Meeting. Under the 1994 Plan, officers and directors have been previously
granted options as follows: (i) to acquire an aggregate of 96,000 and
13,000 shares, respectively, of the Common Stock at prices of $9.50
and $10.125 per share, respectively; (ii) to acquire an aggregate of
107,600 and 12,000 shares, respectively, of the Common Stock at a price
of $11.25 per share; (iii) to acquire an aggregate of 120,000 and 28,000
shares, respectively, of the Common Stock at a price of $15.75; (iv) to
acquire an aggregate of 116,000 and 28,000 shares, respectively, of the
Common Stock at a price of $24.4375; and (v) to acquire an aggregate of
126,000 and 26,000 shares, respectively, of the Common Stock at a price
of $27.0625. The exercise price of all of these options was equal to
the fair market value of the Company's Common Stock on the date of grant.
All options are exercisable for a period of ten years from the date of
the grant.
Attendance of Directors
The Board of Directors met 18 times during calendar year 1998. During
1998, all of the directors of the Company attended at least 75% of the
aggregate of (1) the total number of meetings of the Board of Directors of
the Company, and (2) the total number of meetings held by all committees
and subcommittees of the Board of Directors of the Company on which he or
she served.
Certain Committees
The management of the Company is the responsibility of the Board of
Directors. In carrying out this responsibility, the Board is authorized
to establish certain committees with the duties described below.
The Board of Directors has an Executive Committee which has Board of
Director nominating and non-executive officer review responsibilities.
Directors serving on the Executive Committee during 1998 were Anthony F.
Abatiell, Charles A. Cairns, Philip M. Drumheller, John K. Dwight,
John D. Hashagen, Jr. (President & CEO), Stephan A. Morse, Roger M. Pike
and Ernest R. Pomerleau. The Committee met 5 times during 1998. The
Executive Committee determines personnel policies and has authority to
appoint officers and to fix their compensation until the next meeting of the
Board of Directors. The Committee also considers nominees for election to
the Board of Directors. Shareholders who wish to suggest qualified
candidates should write to the Secretary of the Company at 100 Main
Street, Brattleboro, Vermont 05301, stating in detail the
qualifications of such persons for consideration by the Committee,
together with all other information specified in the Company's By-Laws.
Nominations must be received by the Secretary not less than 60 days nor
more than 90 days prior to the meeting; but if less than 70 days'
notice or prior public disclosure of the date of the meeting is given or
made to stockholders, nominations must be received within 10 days of
the date the notice of the meeting was mailed or such public disclosure
was made, whichever occurs first.
The Company has an Audit Committee whose members are appointed annually
by the Board of Directors. During 1998, these Directors served on the
Audit Committee: Charles A. Cairns, Philip M. Drumheller, John K.
Dwight, Roger M. Pike and Ernest R. Pomerleau. The Audit Committee
appoints Independent Public Accountants and supervises the Audit,
Compliance and Loan Review functions of the Company.
Compensation of Directors
Each director who is not an officer of VFSC, VNB or UB receives an
annual retainer of $6,000 and, in addition, a $750 fee for each
regular monthly Board of Directors' meeting attended and a $500 fee for
each meeting of a committee of the Board he or she attends. In
addition, the Chairman of the Board receives an annual retainer of
$5,000, the chairpersons of the Executive Committee, Audit Committee
and Loan Committee receive an annual retainer of $1,000 and the
chairpersons of the Compensation Committee and the Trust Committee
receive an annual retainer of $500. During 1998 non-officer directors
each received options to purchase 2,000 shares of the Company's stock at
an exercise price of the then current market value of $27.06.
Compensation Committee Report
The Company's executive compensation program is administered
by the Compensation Committee of the Board of Directors (the Committee)
which in 1998 was composed of five independent non-employee directors:
Charles A. Cairns, (Chair), Anthony F. Abatiell, Philip M. Drumheller,
Roger M. Pike and Zane V. Akins.
The Committee is responsible for determining the compensation of the
executive officers of the Company, subject to review and approval by
the full Board of Directors. The executive officers of the Company
subject to Compensation Committee review are the five executive
officers of Vermont Financial Services Corp: John D. Hashagen, Jr.,
Louis J. Dunham, W. Bruce Fenn, Richard O. Madden and Robert G.
Soucy. These are the executives who perform executive level
policy-making functions for the Company and its subsidiary banks.
The Committee, with concurrence from the Company's Board of Directors,
has established the following principal objectives of the executive
compensation program:
* Attract and retain quality management
* Increase management's focus on maximizing current earnings
* Encourage management to develop long-term earnings growth plans
* Motivate management to take actions that will enhance long-term
stockholders' value
* Link executive compensation to the financial performance of the Company
and to the Company's stock value
The Committee has retained Watson Wyatt & Company of Wellesley,
Massachusetts to assist in the design and implementation of the
executive compensation program. Watson Wyatt & Company representatives
have attended Committee meetings, have consulted with the Committee by
telephone and have provided peer group information and written
recommendations for the various components of the executive compensation
program.
The Committee has designed the Company's executive compensation program
based on the principle that the total compensation of each executive
shall be comparable to that of similar executives of banking companies
in the Company's peer group of comparable sized commercial banking
institutions. The Committee has determined that total compensation for
the executive officers shall consist of three components: base salary,
annual incentive payment and stock options.
Base Salary. The Committee's practice is to target the base salaries of
the executive officers somewhat below the median base salary levels of
similar executives in its peer group. The Committee's objective in
this regard is to control the portion of executive compensation that
is fixed, so that a larger portion of compensation is on a variable,
or at risk, basis. Base salaries are reviewed annually and increases
may be granted by the Committee and the Board of Directors dependent on
individual performance, the Company's performance and peer group
salary levels.
The Committee recommended, and the Board of Directors approved, an
increase in Mr. Hashagen's base salary from $260,000 for 1997 to
$300,000 for 1998. Mr. Hashagen's 1998 base salary was set below the
peer group's 1998 median base salary of $325,000 in accordance with
the Committee's practice regarding base salary levels. The base
salaries of the other executive officers of the Company were established
in a similar manner.
Annual Incentive Payments. The 1998 Executive Management Annual
Incentive Plan provided for a targeted payout of 50% of base salary for
Mr. Hashagen and 40% for the other four executive officers if the Company
achieved targeted performance in five areas; profitability, growth,
efficiency, credit quality and marketing/customer service. The Plan
provided for lower and higher payouts, ranging from zero to twice the
targeted percentage, dependent on the Company's results. The Company's
1998 performance resulted in a calculated payout of 93% of target.
Actual incentives were limited by the definitive merger agreement with
Chittenden Corporation and were somewhat below the 93% threshold.
Stock Options. The Company's stockholders approved the Vermont Financial
Services Corp. 1994 Stock Option Plan at the Annual Meeting of
Stockholders in August, 1994 and an Amended and Restated 1994 Stock Option
Plan in June 1998. This Plan, as amended, provides for the granting of
stock options, not to exceed 1,110,000 shares of common stock in
aggregate, to key employees, officers and directors of the Company and its
subsidiaries at option prices no less than 100% of market value on the
day granted. During 1998, the Board of Directors, based on the Committee's
recommendations, granted non-qualified stock options for 152,000 shares.
Mr. Hashagen was granted options for 30,000 shares, other executive officers
and senior officers of the Company and/or its subsidiaries were granted
options on 96,000 shares in aggregate and 13 non-employee directors was
granted an option for 2,000 shares, or 26,000 shares in aggregate.
In August 1997, the Board of Directors adopted stock ownership guidelines
for the Company's executive management and for the Board of Directors.
This was done to further align executive and director interests with those
of the Company's stockholders. The guidelines call for the executive
officers to own Company stock equal to specified multiples of their base
salary. The multiple for Mr. Hashagen is 3.5 times base salary and is
2.5 times base salary for the other four executive officers. If an
executive officer has not attained this level of stock ownership within
five years, the executive may subsequently receive Company stock in
lieu of cash incentive payments at the Committee's discretion. The
guidelines for the Board of Directors call for each Director to own
Company stock equal to five times their average annual directors fees for
the last three years. The Directors also have five years to attain the
guideline target. Stock options are excluded from stock ownership
calculations under the guidelines.
In the Committee's opinion, the compensation for executive management
for 1998 was appropriate based on the Company's performance and was
adequate to retain and motivate the Company's executive management group.
Vermont Financial Services Corp. Compensation Committee
Charles A. Cairns, Chair
Anthony F. Abatiell
Philip M. Drumheller
Roger M. Pike
Zane V. Akins
Performance Graph
The following graph compares the cumulative total stockholder return
(return) of the stockholders of Vermont Financial Services Corp. (VFSC) to
the return of the NASDAQ Stock Market U. S. Index (NASDAQ), which is a
broad-based market index, and to the return of the NASDAQ Bank Stock
Index (NBS), a national peer group index.
Assumes $100 invested on December 31, 1993 in the common stock of VFSC,
NASDAQ and NBS
* Total return assumes reinvestment of dividends.
** Fiscal year ending December 31.
Table of Graph Points in Performance Graph
Investment Value at December 31,
1993 1994 1995 1996 1997 1998
VFSC $100.00 $123.59 $212.11 $224.83 $362.39 $443.29
NASDAQ 100.00 97.75 138.26 170.01 208.58 293.21
NBS 100.00 99.64 148.38 195.91 328.02 324.90
Item 12 - Security Ownership of Certain Beneficial Owners and Management
As of December 31, 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.
</TABLE>
<TABLE>
Amount of Form 13G
Beneficial Percent Filing Date
Name and Address Ownership of Class as of
<C> <C> <C>
John Hancock Advisers, Inc. 858,172 6.7% (1) 12/31/98
John Hancock Place, P.O. Box 111
Boston, MA 02117-0111
Franklin Mutual Advisers, Inc 1,194,400 9.3% (1) 12/31/98
51 John F. Kennedy Parkway
Short Hills, NJ 07078
</TABLE>
(1) Includes sole voting and sole dispositive power for entire beneficial
ownership shares.
(2) Includes shared voting power for 100,200 shares and shared dispositive
power for 168,800 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 December 31, 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.
<TABLE>
Amount and Percent
Nature of of VFSC
Beneficial Common
Name and Age (1) Ownership(2) Stock
<C> <C>
Anthony F. Abatiell (59) 127,748(3) 0.99%
Zane V. Akins (58) 7,860(4) 0.06%
Charles A. Cairns (57) 19,157(5) 0.15%
William P. Cody (45) 7,885(6) 0.06%
Allyn W. Coombs (64) 30,660(7) 0.24%
Philip M. Drumheller (45) 8,500(8) 0.07%
John K. Dwight (54) 26,058(9) 0.20%
Susan V. Duprey (44) 100 -%
John D. Hashagen, Jr. (57) 179,953(10) 1.40%
Francis L. Lemay (66) 212,968(11) 1.66%
Stephan A. Morse (52) 20,696(12) 0.18%
Roger M. Pike (58) 22,706(13) 0.18%
Ernest A. Pomerleau (51) 34,388(14) 0.27%
Mark W. Richards (53) 67,360(15) 0.52%
James M. Sutton (57) 384,802(16) 2.99%
Louis J. Dunham (44) 69,501(17) 0.54%
W. Bruce Fenn (57) 33,549(18) 0.26%
Richard O. Madden (50) 58,013(19) 0.45%
Robert G. Soucy (53) 90,387(20) 0.70%
</TABLE>
(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.
(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.
(4) Includes options to acquire 4,000 shares, exercisable within sixty (60)
days, pursuant to the Directors' Non-Qualified Stock Option Plans.
(5) Includes options to acquire 8,000 shares, exercisable within sixty (60)
days, pursuant to the Directors' Non-Qualified Stock Option Plans.
(6) Includes options to acquire 6,000 shares, exercisable within sixty (60)
days, pursuant to the Directors' Non-Qualified Stock Option Plans.
(7) Includes 22,660 shares held jointly with a family member in which Mr.
Coombs shares voting and investment powers. Also includes options to
acquire 8,000 shares, exercisable within sixty (60) days, pursuant to
the Directors' Non-Qualified Stock Option Plans.
(8) Includes 2,000 shares held by The Lane Press which Mr. Drumheller shares
voting and investment powers. Also includes option to acquire 6,000
shares, exercisable within sixty (60) days, pursuant to the Directors'
Non-Qualified Stock Option Plans.
(9) Includes options to acquire 14,648 shares, exercisable within sixty
(60) days, pursuant to the Directors' Non-Qualified Stock Option Plans.
(10) Includes 400 shares held in the name of Green Mountain Investment
Club in which Mr. Hashagen shares voting and investment powers and
21,893 shares held in the VNB Profit Sharing Plan, and options to
acquire 133,600 shares, exercisable within sixty (60) days, pursuant to
the Officers' Non-Qualified Stock Option Plans.
(11) 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 6,000 shares, exercisable
within sixty (60) days, pursuant to the Directors' Non-Qualified Stock
Option Plans.
(12) 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.
(13) Includes 777 shares held jointly with family members. Also
includes 2,236 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.
(14) Includes options to acquire 14,648 shares, exercisable within sixty
(60) days, pursuant to the Directors' Non-Qualified Stock Option Plans.
(15) Includes 58,862 shares held jointly with family members in which Mr.
Richards shares voting and investment powers. Also includes options to
acquire 8,000 shares, exercisable within sixty (60) days, pursuant
to the Directors' Non-Qualified Stock Option Plans.
(16) Includes options to acquire 10,776 shares, exercisable within sixty
(60) days, pursuant to the Directors' Non-Qualified Stock Option Plans.
(17) Includes 11,301 shares in the VNB Profit Sharing Plan. Also
includes options to acquire 58,200 shares exercisable within sixty (60)
days pursuant to the Officers' Non-Qualified Stock Option Plans.
(18) Includes 6,342 shares in the VNB Profit Sharing Plan and options
to acquire 27,200 shares, exercisable within sixty (60) days pursuant to
the Officers' Non-Qualified Stock Option Plans.
(19) Includes 700 shares held jointly with a family member in which Mr.
Madden shares voting and investment powers. Also includes 7,113 shares
held in the VNB Profit Sharing Plan and options to acquire 50,200
shares exercisable within sixty (60) days pursuant to the Officers'
Non-Qualified Stock Option Plans.
(20) Includes 10,918 shares in the VNB Profit Sharing Plan and options to
acquire 69,000 shares, exercisable within sixty (60) days pursuant to the
Officers' Non-Qualified Stock Option Plans.
On December 31, 1998, the directors and officers of the Company as a
group (19) had beneficial ownership of 1,401,793 shares of Company Common
Stock, amounting to 10.92% of the outstanding shares. This includes
options to acquire 446,272 shares, or 3.49% of the outstanding shares,
exercisable within sixty (60) days, pursuant to the Directors' and
Officers' Non-Qualified Stock Options Plans.
Item 13 - Certain Relationships and Related Transactions
Some directors and officers of VNB, UB and the Company and their
associates were customers of and had transactions with the Banks and the
Company in the ordinary course of business during 1998. 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 1998. 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.
Independent Auditors' Report
Report of Independent Certified Public Accountants
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Income - For the Years Ended December 31,
1998, 1997, and 1996
Consolidated Statements of Changes in Stockholders' Equity - For the Years
Ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flow - For the Years Ended December 31,
1998, 1997 and 1996
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 Vermont 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.
10.3 Amendments to Management Continuity Agreements, each dated as of
December 11, 1998, by and between VFSC and/or VNB and each of Messrs.
Hashagen, Madden, Fenn, Soucy and Dunham.
22. Subsidiaries of Registrant. Filed herewith.
23. Consent of Independent Certified Public Accountants. Filed herewith.
(b) Reports on Form 8-K.
The Company filed a current report on Form 8-K/A dated January 6, 1999
reporting under Item 5 thereof that the Company had entered into an
Agreement and Plan of Merger dated as of December 16, 1998, pursuant
to which the Company will merge with and into Chittenden Corporation.
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 March 22, 1999
John D. Hashagen, Jr. (Principal Executive Officer)
/s/________________________ Secretary & Treasurer March 22, 1999
Richard O. Madden (Principal Financial Officer)
/s/________________________ Director March 22, 1999
Anthony F. Abatiell
/s/________________________ Director March 22, 1999
Zane V. Akins
___________________________ Director March 22, 1999
Charles A. Cairns
/s/________________________ Director March 22, 1999
William P. Cody
/s/________________________ Director March 22, 1999
Allyn W. Coombs
/s/________________________ Director March 22, 1999
Philip M. Drumheller
/s/________________________ Director March 22, 1999
Susan V. Duprey
/s/________________________ Director March 22, 1999
John K. Dwight
/s/________________________ Director March 22, 1999
Francis L. Lemay
/s/________________________ Director March 22, 1999
Stephan A. Morse
/s/________________________ Director March 22, 1999
Roger M. Pike
/s/________________________ Director March 22, 1999
Ernest A. Pomerleau
/s/________________________ Director March 22, 1999
Mark W. Richards
___________________________ Director March 22, 1999
James M. Sutton
Index to Exhibits
Exhibit 10.3 Amendments to Management Continuity Agreements each dated as
of December 11, 1998, by and between VFSC and/or VNB and each of Messrs,
Hashagen, Madden, Fenn, Soucy and Dunham
Exhibit 22 Subsidiaries of Registrant
Exhibit 23 Consent of Independent Certified Public Accountants
Exhibit 10.
Exhibit 10.3
Vermont Financial Services Corp. Vermont National Bank
100 Main Street 100 Main Street
Brattleboro, Vermont 05301 Brattleboro, VT 05301
December 11, 1998
Mr. John D. Hashagen, Jr.
c/o Vermont National Bank
100 Main Street
Brattleboro, VT 05301
Dear Mr. Hashagen:
Reference is made to that certain letter agreement, dated February 9, 1990
(the "Original Agreement"), among Vermont Financial Services Corp. (the
"Company"), Vermont National Bank (the "Bank") and John D. Hashagen, Jr.
concerning certain severance arrangements in the event of a "change of
control" (as defined therein) of the Bank. The purpose of this letter
is to set forth the understanding of the parties hereto with respect to
certain amendments to the Original Agreement contained herein.
In consideration of the premises contained herein and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree
as follows:
1. Paragraphs 4(iii)(C) and 4(iii)(D) of the Original Agreement are
hereby deleted in their entirety.
2. The Original Agreement as amended hereby is ratified and confirmed in
all respects and shall continue in full force and effect. Except as
expressly set forth herein, nothing contained herein shall be construed
to modify, amend or otherwise alter any of the terms or provisions of
the Original Agreement, and the terms of the Original Agreement,
except as expressly modified hereby, shall apply to this letter agreement.
3. This letter agreement may be executed in one or more counterparts,
and by the different parties hereto in separate counterparts, each of
which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.
4. This letter agreement shall be binding upon and inure to the benefit
of the parties hereto, and their respective representatives, successors
and assigns.
If this letter agreement sets forth our agreement on the subject matter
hereof, kindly sign and return the enclosed copy of this letter which
will then constitute, together with the Original Agreement, our agreement
on this subject matter.
Sincerely,
VERMONT FINANCIAL SERVICES CORP.
By: /s/ Richard O. Madden
Name: Richard O. Madden
Title: Executive Vice President
VERMONT NATIONAL BANK
By: /s/ Richard O. Madden
Name: Richard O. Madden
Title: Executive Vice President
Agreed to this 16th day
of December 1998
/s/ John D. Hashagen, Jr.
John D. Hashagen, Jr.
Vermont Financial Services Corp. Vermont National Bank
100 Main Street 100 Main Street
Brattleboro, Vermont 05301 Brattleboro, VT 05301
December 11, 1998
Mr. Richard O. Madden
c/o Vermont National Bank
100 Main Street
Brattleboro, VT 05301
Dear Mr. Madden:
Reference is made to that certain letter agreement, dated February 9,
1990 (the "Original Agreement"), among Vermont Financial Services Corp.
(the "Company"), Vermont National Bank (the "Bank") and Richard O.
Madden concerning certain severance arrangements in the event of a
"change of control" (as defined therein) of the Bank. The purpose of
this letter is to set forth the understanding of the parties hereto with
respect to certain amendments to the Original Agreement contained herein.
In consideration of the premises contained herein and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree
as follows:
1. Paragraphs 4(iii)(C) and 4(iii)(D) of the Original Agreement are
hereby deleted in their entirety.
2. The Original Agreement as amended hereby is ratified and confirmed
in all respects and shall continue in full force and effect. Except as
expressly set forth herein, nothing contained herein shall be construed
to modify, amend or otherwise alter any of the terms or provisions of
the Original Agreement, and the terms of the Original Agreement, except
as expressly modified hereby, shall apply to this letter agreement.
3. This letter agreement may be executed in one or more counterparts,
and by the different parties hereto in separate counterparts, each of
which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.
4. This letter agreement shall be binding upon and inure to the benefit
of the parties hereto, and their respective representatives, successors
and assigns.
If this letter agreement sets forth our agreement on the subject matter
hereof, kindly sign and return the enclosed copy of this letter which
will then constitute, together with the Original Agreement, our agreement
on this subject matter.
Sincerely,
VERMONT FINANCIAL SERVICES CORP.
By: /s/ John D. Hashagen, Jr.
Name: John D. Hashagen, Jr.
Title: President
VERMONT NATIONAL BANK
By: /s/ John D. Hashagen, Jr.
Name: John D. Hashagen, Jr.
Agreed to this 16th day
of December 1998
/s/ Richard O. Madden
Richard O. Madden
Vermont Financial Services Corp. Vermont National Bank
100 Main Street 100 Main Street
Brattleboro, Vermont 05301 Brattleboro, VT 05301
December 11, 1998
Mr. W. Bruce Fenn
c/o Vermont National Bank
100 Main Street
Brattleboro, VT 05301
Dear Mr. Fenn:
Reference is made to that certain letter agreement, dated February 9,
1990 (the "Original Agreement"), among Vermont Financial Services Corp.
(the "Company"), Vermont National Bank (the "Bank") and W. Bruce Fenn
concerning certain severance arrangements in the event of a "change of
control" (as defined therein) of the Bank. The purpose of this letter
is to set forth the understanding of the parties hereto with respect
to certain amendments to the Original Agreement contained herein.
In consideration of the premises contained herein and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree
as follows:
1. Paragraphs 4(iii)(C) and 4(iii)(D) of the Original Agreement are
hereby deleted in their entirety.
2. The Original Agreement as amended hereby is ratified and confirmed
in all respects and shall continue in full force and effect. Except as
expressly set forth herein, nothing contained herein shall be construed to
modify, amend or otherwise alter any of the terms or provisions of the
Original Agreement, and the terms of the Original Agreement, except
as expressly modified hereby, shall apply to this letter agreement.
3. This letter agreement may be executed in one or more counterparts,
and by the different parties hereto in separate counterparts, each of
which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.
4. This letter agreement shall be binding upon and inure to the benefit
of the parties hereto, and their respective representatives, successors
and assigns.
If this letter agreement sets forth our agreement on the subject matter
hereof, kindly sign and return the enclosed copy of this letter which
will then constitute, together with the Original Agreement, our agreement
on this subject matter.
Sincerely,
VERMONT FINANCIAL SERVICES CORP.
By: /s/ John D. Hashagen, Jr.
Name: John D. Hashagen, Jr.
Title: President
VERMONT NATIONAL BANK
By: /s/ John D. Hashagen, Jr.
Name: John D. Hashagen, Jr.
Agreed to this 16th day
of December 1998
/s/ W. Bruce Fenn
W. Bruce Fenn
Vermont Financial Services Corp. Vermont National Bank
100 Main Street 100 Main Street
Brattleboro, Vermont 05301 Brattleboro, VT 05301
December 11, 1998
Mr. Robert G. Soucy
c/o Vermont National Bank
100 Main Street
Brattleboro, VT 05301
Dear Mr. Soucy:
Reference is made to that certain letter agreement, dated February 9,
1990 (the "Original Agreement"), among Vermont Financial Services Corp.
(the "Company"), Vermont National Bank (the "Bank") and Robert G. Soucy
concerning certain severance arrangements in the event of a "change of
control" (as defined therein) of the Bank. The purpose of this
letter is to set forth the understanding of the parties hereto with
respect to certain amendments to the Original Agreement contained herein.
In consideration of the premises contained herein and for other good and
valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound,
agree as follows:
1. Paragraphs 4(iii)(C) and 4(iii)(D) of the Original Agreement are
hereby deleted in their entirety.
2. The Original Agreement as amended hereby is ratified and confirmed in
all respects and shall continue in full force and effect. Except as
expressly set forth herein, nothing contained herein shall be construed to
modify, amend or otherwise alter any of the terms or provisions of the
Original Agreement, and the terms of the Original Agreement, except
as expressly modified hereby, shall apply to this letter agreement.
3. This letter agreement may be executed in one or more counterparts,
and by the different parties hereto in separate counterparts, each of
which when executed shall be deemed to be an original but all of
which taken together shall constitute one and the same agreement.
4. This letter agreement shall be binding upon and inure to the benefit
of the parties hereto, and their respective representatives, successors
and assigns.
If this letter agreement sets forth our agreement on the subject matter
hereof, kindly sign and return the enclosed copy of this letter which
will then constitute, together with the Original Agreement, our agreement
on this subject matter.
Sincerely,
VERMONT FINANCIAL SERVICES CORP.
By: /s/ John D. Hashagen, Jr.
Name: John D. Hashagen, Jr.
Title: President
VERMONT NATIONAL BANK
By: /s/ John D. Hashagen, Jr.
Name: John D. Hashagen, Jr.
Agreed to this 16th day
of December 1998
/s/ Robert G. Soucy
Robert G. Soucy
Vermont National Bank
100 Main Street
Brattleboro, Vermont 05301
December 11, 1998
Mr. Louis J. Dunham
c/o Vermont National Bank
100 Main Street
Brattleboro, VT 05301
Dear Mr. Dunham:
Reference is made to that certain letter agreement, dated March 17,
1994 (the "Original Agreement"), among, Vermont National Bank (the
"Bank") and Louis J. Dunham concerning certain severance arrangements in
the event of a "change of control" (as defined therein) of the Bank.
The purpose of this letter is to set forth the understanding of the
parties hereto with respect to certain amendments to the Original
Agreement contained herein.
In consideration of the premises contained herein and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound,
agree as follows:
1. Paragraphs 4(iii)(C) and 4(iii)(D) of the Original Agreement are
hereby deleted in their entirety.
2. The Original Agreement as amended hereby is ratified and confirmed in
all respects and shall continue in full force and effect. Except as
expressly set forth herein, nothing contained herein shall be construed
to modify, amend or otherwise alter any of the terms or provisions of
the Original Agreement, and the terms of the Original Agreement,
except as expressly modified hereby, shall apply to this letter agreement.
3. This letter agreement may be executed in one or more counterparts, and
by the different parties hereto in separate counterparts, each of which
when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
4. This letter agreement shall be binding upon and inure to the benefit
of the parties hereto, and their respective representatives, successors
and assigns.
If this letter agreement sets forth our agreement on the subject matter
hereof, kindly sign and return the enclosed copy of this letter which
will then constitute, together with the Original Agreement, our agreement
on this subject matter.
Sincerely,
VERMONT NATIONAL BANK
By:/s/ John D. Hashagen, Jr.
Name: John D. Hashagen, Jr.
Title: President
Agreed to this 15th day
of December 1998
/s/ Louis J. Dunham
Louis J. Dunham
Exhibit 22
Exhibit 22
Subsidiaries of Registrant:
1. Vermont National Bank, a national banking association, with a principal
place of business at 100 Main Street, Brattleboro, VT 05301.
2. United Bank, a Massachusetts state-chartered savings bank, with a
principal place of business at 45 Federal Street, Greenfield, MA 01301
3. Vermont Service Corporation, a real estate development company.
Exhibit 23
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
23.1 Consent of KPMG LLP
We consent to incorporation by reference in the registration statements
(No. 33-58259 and No. 333-56745) on Form S-3 and S-8 of Vermont Financial
Services Corp. and subsidiaries of our report dated January 22, 1999,
relating to the consolidated balance sheet of Vermont Financial Services
Corp. and subsidiaries as of December 31, 1998 and 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, 1998, annual report on Form 10-K of Vermont Financial
Services Corp.
KPMG LLP
Hartford, Connecticut
April 14, 1998
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
23.2 Consent of PricewaterhouseCoopers LLP
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
audit of the consolidated financial statements as of December 31, 1996,
and for year then ended, which report is included in this Annual Report on
Form 10-K.
PricewaterhouseCoopers LLP
Springfield, Massachusetts
March 17, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<CASH> 63346 95495 61962
<INT-BEARING-DEPOSITS> 1661 44 60
<FED-FUNDS-SOLD> 56186 2470 1775
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 517936 527649 291120
<INVESTMENTS-CARRYING> 0 0 0
<INVESTMENTS-MARKET> 0 0 0
<LOANS> 1369505 1314501 910436
<ALLOWANCE> 16699 18943 13647
<TOTAL-ASSETS> 2142424 2097452 1312981
<DEPOSITS> 1789017 1686172 1083258
<SHORT-TERM> 89521 131648 88828
<LIABILITIES-OTHER> 27187 22967 9165
<LONG-TERM> 22386 43069 12013
0 0 0
0 0 0
<COMMON> 13293 13243 9785
<OTHER-SE> 201020 200353 109932
<TOTAL-LIABILITIES-AND-EQUITY> 2142424 2097452 1312981
<INTEREST-LOAN> 114282 100013 81281
<INTEREST-INVEST> 32091 27094 15982
<INTEREST-OTHER> 1797 771 842
<INTEREST-TOTAL> 148170 127878 98105
<INTEREST-DEPOSIT> 59224 49084 37057
<INTEREST-EXPENSE> 65724 55962 41351
<INTEREST-INCOME-NET> 82446 71916 56754
<LOAN-LOSSES> 3135 3250 3350
<SECURITIES-GAINS> 866 688 11
<EXPENSE-OTHER> 85714 70049 47411
<INCOME-PRETAX> 31454 27139 25154
<INCOME-PRE-EXTRAORDINARY> 31454 27139 25154
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 19113 17126 16615
<EPS-PRIMARY> 1.46 1.52 1.79
<EPS-DILUTED> 1.45 1.51 1.77
<YIELD-ACTUAL> 4.48 4.70 4.93
<LOANS-NON> 7904 17006 7812
<LOANS-PAST> 2069 6055 1933
<LOANS-TROUBLED> 0 0 661
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 18943 13647 14761
<CHARGE-OFFS> 8232 6705 6033
<RECOVERIES> 2853 1263 4464
<ALLOWANCE-CLOSE> 16699 18943 13647
<ALLOWANCE-DOMESTIC> 16699 18943 13647
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 6443 6103 5087
</TABLE>
