Annual Report (Form 10-K), fiscal year 1994

Item 1 - Business
Vermont Financial Services Corp. (VFSC), a Delaware corporation organized in 1990, is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and its main office is located in Brattleboro, Vermont. Assets of VFSC were $1,205 million at December 31, 1994. VFSC owns 100 percent of the stock of Vermont National Bank (VNB) and United Bank (UB). VFSC has no other active subsidiaries and engages in no activities other than holding the stock of VNB and UB (the Banks).
Vermont National Bank VNB, a national banking association, is the successor to the original Bank of Brattleborough, which was chartered in 1821. VNB is the second largest bank in the State of Vermont with total deposits of $814 million and total assets of $977 million at December 31, 1994. VNB conducts business through 31 offices located in seven of Vermont's 14 counties, including the cities of Brattleboro, Burlington, Rutland and Montpelier. The offices of VNB are in good physical condition with modern equipment and facilities adequate to meeting the banking needs of customers in the communities served.
VNB offers a wide range of personal and commercial banking services, including the acceptance of demand, savings, and time deposits; making and servicing secured and unsecured loans; issuing letters of credit; and offering fee based services. In addition, VNB offers a wide range of trust and trust related services, including services as executor, trustee, administrator, custodian and guardian. VNB lending services include making real estate, commercial, industrial, agricultural and consumer loans. VNB also offers data processing services consisting primarily of payroll and automated clearing house for several outside clients. VNB provides financial and investment counseling to municipalities and school districts within its service area and also provides central depository, lending payroll and other banking services for such customers. VNB also provides safe deposit facilities, Master Card and Visa credit card services. Over ninety percent of VNB's loans are made to individuals and business which are located in or have properties in Vermont. VNB owns and operates 28 automated teller machines (ATMs) at its branch locations and 6 ATMs in other locations. In addition, VNB is a member of the Plus, Yankee 24, NYSE, and VISA networks and has access to the Honor, Cirrus, Discover, American Express and Master Card networks.
According to the State Department of Banking, Insurance and Securities, as of December 31, 1993, 5 state-chartered savings banks, 12 state-chartered commercial banks and 9 national banks are located and do business in the State of Vermont, the area in which VNB conducts its business. As of such date, VNB had 12.4%, 12.6% and 12.5% of the total assets, loans and deposits, respectively, of these 26 banking institutions.
United Bank UB is a Massachusetts chartered stock savings bank originally incorporated in 1855 as the Shelburne Falls Five Cent Savings Bank, which subsequently changed its name to the Shelburne Falls Savings Bank. In 1975, the Shelburne Falls Savings Bank merged with the Conway Savings Bank under the name of United Savings Bank (USB). In 1978, USB merged with the Haydenville Savings Bank. USB centralized its operations in Greenfield in 1981. In April, 1988, USB purchased the deposits, real estate, furniture and equipment of four (4) branch offices of First National Bank of Boston located in Shelburne Falls, Greenfield (2) and South Deerfield, all in Franklin County, Massachusetts. The deposits of these four offices totalled $40.4 million. In 1995 United Savings Bank changed its name to United Bank. UB maintains full service banking offices in Greenfield (2), Conway, 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, 1994 UB had total assets of $226 million, total loans of $199 million and total deposits of $200 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. UB has installed a proprietary system of "Money Mover24" ATMs in all its branch offices; the ATMs are part of the Cirrus system, which operates nationally, and the Yankee 24 network with members throughout New England in over 2,000 locations.
UB has a wholly-owned subsidiary, Hayburne, Inc., which is incorporated in the Commonwealth of Massachusetts. Hayburne, Inc., owns the "Hayburne Building", a 26,000 square foot office building located at 55 Federal Street, Greenfield, Massachusetts, in which office space is leased to various tenants.
The Banks compete on the local and the regional levels with other commercial banks and financial institutions for all types of deposits, loans and trust accounts. Competitors include metropolitan banks and financial institutions based in southern New England and New York City, many of which have greater financial resources.
In the retail market for financial services, competitors include other banks, credit unions, finance companies, thrift institutions and, increasingly, brokerage firms, insurance companies, and mortgage loan companies.
In the personal and commercial trust business, competitors include mutual funds, insurance companies and investment advisory firms.
VFSC and its subsidiaries, on December 31, 1994, employed approximately 622 persons. They enjoy good relations with their employees. A variety of employee benefits are available to officers and employees, including health, group life and disability income replacement insurance, a funded, non-contributory pension plan and an incentive savings and profit sharing plan.
Impact of Inflation. The Consolidated Financial Statements and related consolidated financial data presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on the operation of the Company is reflected in increased operating costs. Unlike industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates generally move in the same direction and with the same magnitude as the expected rate of inflation. Management believes that continuation of its efforts to manage the rates, liquidity and interest sensitivity of the Company's assets and liabilities is necessary to generate an acceptable return.
Supervision and Regulation. VFSC and the Banks are subject to extensive regulation under federal and state banking laws and regulations. The following discussion of certain of the material elements of the regulatory framework applicable to banks and bank holding companies is not intended to be complete and is qualified in its entirety by the text of the relevant state and federal statutes and regulations. A change in the applicable laws or regulations may have a material effect on the business of VFSC and/or the Banks.
Regulation of VFSC
General. As a bank holding company, VFSC is subject to 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 (the "BHC Act"). Under the BHC Act, bank holding companies generally may not acquire ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the Federal Reserve Board. In addition, bank holding companies are generally prohibited under the BHC Act from engaging in non-banking activities, subject to certain exceptions. VFSC's activities are limited generally to the business of banking and activities determined by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto. The Federal Reserve Board has authority to issue cease and desist orders and assess civil money penalties against bank holding companies and their non-bank subsidiaries, officers, directors and other institution-affiliated parties and to remove officers, directors and other institution-affiliated parties to terminate or prevent unsafe or unsound banking practices or violations of laws or regulations.
Dividends. The Federal Reserve Board has authority to prohibit bank holding companies from paying dividends if such payment would be an unsafe or unsound practice. The Federal Reserve Board has indicated generally that it may be an unsound practice for bank holding companies to pay dividends unless the bank holding company's net income over the preceding year is sufficient to fund the dividends and the expected rate of earnings retention is consistent with the organization's capital needs, asset quality, and overall financial condition. VFSC's ability to pay dividends is dependent upon the flow of dividend income to it from VNB and UB, which may be affected or limited by regulatory restrictions imposed by federal or state bank regulatory agencies. At December 31, 1994 the Banks had available approximately $24.8 million for payment of dividends to VFSC under regulatory guidelines. VFSC has a policy to pay out over time 30% - 35% of net income to shareholders in the form of cash dividends. Earnings for prior years as well as prospective earnings are analyzed to determine compliance with this policy. Dividend payout rates for any one year may vary from this long term payout policy based on these analyses and projections of future earnings and future capital needs. For the three-year period ended December 31, 1994, an aggregate of $0.91 per share of dividends were declared. Earnings per share for the same period were $5.13.
Certain Transactions by Bank Holding Companies with Their Affiliates. There are various legal restrictions on the extent to which bank holding companies and their non-bank subsidiaries can borrow, obtain credit from or otherwise engage in "covered transactions" with their insured depository institution subsidiaries. Such borrowings and other covered transactions by an insured depository institution subsidiary (and its subsidiaries) with its non-depository institution affiliates are limited to the following amounts: (a) in the case of any one such affiliate, the aggregate amount of covered transactions of the insured depository institutions and its subsidiaries cannot exceed 10% of the capital stock and surplus of the insured depository institution; (b) in the case of all affiliates, the aggregate amount of stock and surplus of the insured depository institution. "Covered transactions" are defined by statute for these purposes to include a loan or extension of credit to an affiliate, a purchase of or investment in securities issued by an affiliate, a purchase of assets from an affiliate unless exempted by the Federal Reserve Board, the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any person or company, or the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. Covered transactions are also subject to certain collateral security requirements. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property of any kind, or furnishing of any service.
Holding Company Support of Subsidiary Banks. Under Federal Reserve Board policy, VFSC is expected to act as a source of financial strength to the Banks and to commit resources to support them. This support of the Banks may be required at times when, absent such Federal Reserve Board policy, VFSC might not otherwise be inclined to provide it. In addition, any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and certain other indebtedness of such subsidiary banks. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Under the Federal Deposit Insurance Act, as amended ("FDI ACT"), an FDIC-insured depository institution, such as VNB or UB can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989 in connection with (i) the "default" of a commonly controlledFDIC-insured depository institution, or (ii) any assistance provided by the FDIC to any commonly controlled depository institution in "danger of default". For these purposes, the term "default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a default is likely to occur without Federal regulatory assistance.
Regulation of VNB and UB
General. As a national bank, VNB is subject to supervision of and regulation by the Office of the Comptroller of the Currency (the "OCC"). UB is a stock-owned Massachusetts-chartered savings bank whose deposits are insured by the Federal Deposit Insurance Corporation (FDIC) and the Depositors Insurance Fund (DIF). Accordingly, UB is subject to 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.
Examinations and Supervision. As a Massachusetts-chartered savings bank UB is regulated and supervised by the Massachusetts Commissioner of Banks. The Commissioner is required to examine each state-chartered bank at least once every two years. The Commissioner's approval is required for establishing or closing branches, for merging with other banks and other activities.
Any Massachusetts-chartered savings bank that does not operate inaccordance with the Commissioner's regulations, policies and directives may be subject to sanctions for non-compliance. The Commissioner may, under certain circumstances, suspend or remove directors or officers who have violated the law, conducted the Bank's business in a manner which is unsafe, unsound or contrary to the depositor's interests, or have been negligent in the performance of their duties.
Massachusetts-chartered savings banks can exercise powers substantially equivalent to those of state-chartered commercial banks. A wide variety of mortgage loans, including fixed and variable-rate, renegotiable-rate and graduated payment loans, and construction, condominium and cooperative loans, may be made on the security of real estate located in Massachusetts, or another New England state or New York if the Bank has an office in such state or under certain other circumstances. Certain mortgage loans may be made on the security of improved or unimproved real estate located throughout the United States.
Commercial and consumer loans may be made, with or without security, without geographic limitation. No percentage of assets limitation exists with respect to the aggregate amount of commercial loans that a Massachusetts savings bank may have outstanding; however, as a stock-owned savings bank, loans to one borrower generally will be limited to 20% of the Bank's stockholders' equity.
Investments in debt securities may be made without geographic limitation, subject to the limitations on loans to one borrower. Investments in equity securities are not prohibited to state banks under the Federal Deposit Insurance Corporation Improvement Act of 1991 unless the FDIC deems otherwise (see Recent Federal Banking Legislation). In addition, Massachusetts-chartered savings banks may invest in the capital stock of other banks and bank holding companies, subject to the limitations of the Federal and Massachusetts bank holding company statutes.
Subject to applicable regulations and required approvals, Massachusetts savings banks may also engage in leasing activities, act as trustee or custodian for tax-qualified retirement plans, establish a trust department, and establish mortgage banking companies and discount brokerage operations. Subject to certain limits, a Massachusetts chartered savings bank may also invest an amount up to 5% of its deposits in investments not otherwise legally permitted a savings bank, and up to 2% in any one such investment, provided that amounts in excess of 3% of deposits must be invested in companies organized for the purpose of acquiring, constructing, rehabilitating, leasing, financing and disposing of housing. This "leeway" authority cannot be used to alter statutory limits on the aggregate amounts that can be invested in any specific class of investment. See "Recent Banking Legislation".
The OCC regularly examines the operations of VNB, including but not limited to its capital adequacy, reserves, loans, investments, earnings,liquidity, compliance with laws and regulations, record of performance under the Community Reinvestment Act and management practices. In addition, VNB is required to furnish quarterly and annual reports of income and condition to the FDIC and periodic reports to the OCC.
The enforcement authority of the FDIC includes the power to impose civil money penalties, terminate insurance coverage, remove officers and directors and issue cease-and-desist orders to prevent unsafe or unsound practices or violations of laws or regulations governing its business. In addition, under recent federal banking legislation, the FDIC has authority to impose additional restrictions and requirements with respect to banks that do not satisfy applicable regulatory capital requirements.
The FDIC has authority to prevent VNB or UB from paying dividends if such payment would constitute an unsafe or unsound banking practice or reduce their capital below safe and sound levels. In addition, recently enacted federal legislation prohibits FDIC-insured depository institutions from paying dividends or making capital distributions that would cause the institution to fail to meet minimum capital requirements.
Affiliate Transactions. The Banks are subject to restrictions imposed by federal law on extensions of credit to, purchases from, and certain other transactions with, affiliates, and on investments in stock or other securities issued by affiliates. Such restrictions prevent the Banks from making loans to affiliates unless the loans are secured by collateral in specified amounts and have terms at least as favorable to the Banks as the terms of comparable transactions between the Banks and non-affiliates. Further, federal laws significantly restrict extensions of credit by the Banks to their directors, executive officers and principal stockholders and related interests of such persons.
Deposit Insurance. The Banks' deposits are insured by the Bank Insurance Fund ("BIF") of the FDIC to the legal maximum of $100,000 for each insured depositor. The Federal Deposit Insurance Act provides that the FDIC shall set deposit insurance assessment rates on a semi-annual basis at a level sufficient to increase the ratio of BIF reserves to BIF-insured deposits to at least 1.25% over a 15-year period commencing in 1991. The FDIC established a framework of risk-based insurance assessments to accomplish this increase. See "Recent Banking Legislation-Risk-Based Deposit Insurance Assessments" below. The BIF insurance assessments may be increased further in the future if necessary to restore and maintain BIF reserves. However, it is anticipated that the BIF reserve will reach its 1.25% goal some time in 1995 at which time BIF assessments will be decreased.
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 FDIC, the Commissioner and the OCC include disclosure requirements with respect to interest, payment and other terms of consumer and residential mortgage loans and disclosure of interest and fees and other terms of and the availability of funds for withdrawal from consumer deposit accounts. In addition, the Banks are subject to federal and state laws and regulations prohibiting certain forms of discrimination in credit transactions, and imposing certain record keeping, reporting and disclosure requirements with respect to residential mortgage loan applications. In addition, the Banks are subject to federal laws establishing certain record keeping, customer identification, and reporting requirements with respect to certain large cash transactions, sales of travelers checks or other monetary instruments and the international transportation of cash or monetary instruments.
Federal Home Loan Bank System. The Banks are members of the Federal Home Loan Bank of Boston, one of 12 regional Federal Home Loan Banks ("FHL Banks"), each subject to Federal Housing Finance Board ("FHFB") supervision and regulation. The FHL Banks provide a central credit facility for member-insured institutions. As a member of the FHLB of Boston, the Banks are required to own shares of capital stock in the bank in a amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts, and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHL Bank, whichever is greater. The Banks are in compliance with this requirement with an investment in FHLB stock at December 31, 1994 of $7.2 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 FHLB and the FHLB of Boston, and the maximum amount is reduced by borrowings from any other source except debentures with more than one year to maturity and/or debentures covered by a sinking fund.
Capital Requirements
General. The FDIC has established guidelines with respect to the maintenance of appropriate levels of capital by FDIC-insured banks. The Federal Reserve Board has established substantially identical guidelines with respect to the maintenance of appropriate levels of capital, on a consolidated basis, by bank holding companies. If a banking organization's capital levels fall below the minimum requirements established by such guidelines, a bank or bank holding company will be expected to develop and implement a plan acceptable to the FDIC or the Federal Reserve Board, respectively, to achieve adequate levels of capital within a reasonable period, and may be denied approval to acquire or establish additional banks or non-bank businesses, merge with other institutions or open branch facilities until such capital levels are achieved. Federal legislation requires federal bank regulators to take "prompt corrective action" with respect to insured depository institutions that fail to satisfy minimum capital requirements and imposes significant restrictions on such institutions.
Leverage Capital Ratio. The regulations of the FDIC require FDIC-insured banks to maintain a minimum "Leverage Capital Ratio" or "Tier 1 Capital" (as defined in the Risk-Based Capital Guidelines discussed in the following paragraphs) to total assets of 3.0%. The regulations of the FDIC state that only banks with the highest federal bank regulatory examination rating will be permitted to maintain an additional margin of capital, equal to at least 1% to 2% of total assets, above the minimum ratio. Any bank experiencing or anticipating significant growth is expected to maintain capital well above the minimum levels. The Federal Reserve Board's guidelines impose substantially similar leverage capital requirements on bank holding companies on a consolidated basis.
Risk-Based Capital Requirements. The regulations of the FDIC also require FDIC-insured banks to maintain minimum capital levels measured as a percentage of such banks' risk-adjusted assets. A bank's capital for this purpose may include two components - "Core" (Tier 1) Capital and "Supplementary" (Tier 2) Capital. Core Capital consists primarily of common stockholders' equity, which generally includes common stock, related surplus and retained earnings, certain non-cumulative perpetual preferred stock and primarily goodwill. Supplementary Capital elements include, subject to certain limitations, a portion of the allowance for losses on loans and leases, perpetual preferred stock that does not qualify for inclusion in Tier 1 capital, long-term preferred stock with an original maturity of at least 20 years for issuance and related surplus, certain forms of perpetual debt and mandatory convertible securities, and certain forms of subordinated debt and intermediate-term preferred stock.
The risk-based capital rules of the FDIC and the Federal Reserve Board assign a bank's balance sheet assets and the credit equivalent amounts of the bank's off-balance sheet obligations to one of four risk categories, weighted at 0%, 20%, 50% or 100%, respectively. Applying these risk-weights to eachcategory 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 FDIC-insured banks that are not in compliance with the capital regulations, including, among other things, restrictions on asset growth and imposition of a capital directive that may require, among other things, an increase in regulatory capital, reduction of rates paid on savings accounts, cessation of or limitations on deposit-taking, lending, purchasing loans, making specified investments, or issuing new accounts, limits on operational expenditures, an increase in liquidity and such other restrictions or corrective actions as the FDIC may deem necessary or appropriate. In addition, any FDIC-insured bank that is not meeting its capital requirements must provide the FDIC with prior notice before the addition of any new director or senior officer.
A bank having less than the minimum Tier 1 leverage capital ratio must, within 60 days of the date as of which it fails to comply with such requirements, submit to its FDIC regional director for review and approval a reasonable plan describing the means and timing by which the bank shall achieve its minimum leverage capital requirement. A bank that fails to file such plan with the FDIC is deemed to be operating in an unsafe and unsound manner, which could subject the bank to a cease-and-desist order from the FDIC. The capital regulations also provide that any insured depository institution with a Tier 1 leverage capital ratio that is less than 2% is deemed to be operating in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA and is subject to potential termination of deposit insurance. Such an institution, however, will not be subject to an enforcement proceeding thereunder solely on account of its capital ratios if it has entered into and is in compliance with a written agreement with the FDIC to increase its Tier 1 leverage capital ratio to such level as the FDIC deems appropriate and to take such other action as may be necessary for the institution to be operated in a safe and sound manner. The capital regulations also provide, among other things, for the issuance by the FDIC or its designee(s) of a capital directive, which is a final order issued to a bank to restore its capital to the minimum leverage capital requirement within a specified time period. Such a directive is enforceable in the same manner as a final cease-and-desist order.
Any material failure to comply with the provisions of any capital plan or a capital-related regulation, written agreement, order or directive will be treated by the FDIC as an unsafe and unsound practice. Any plan or agreement between the FDIC and a bank is enforceable by cease-and-desist orders and by civil penalties for violations of regulatory orders or agreements. Unsafe and unsound practices and violations of regulatory orders or agreements also constitute grounds for termination of deposit insurance.
Each federal banking agency is also required to implement a system of prompt corrective action for institutions which it regulates. The federal banking agencies have promulgated substantially similar 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, 1994, VFSC's consolidated Total and Tier 1 risk-based capital ratios were 13.03% and 11.77%, respectively. These ratios exceeded applicable regulatory requirements. VFSC, VNB and UB are all considered "well capitalized" by their respective regulators. In 1993 UB entered into a memorandum of understanding with the FDIC and the Massachusetts Commissioner of Banks requiring UB, among other things, to maintain a certain minimum Tier 1 Leverage Capital Ratio. UB complied with the memorandum from its inception, and it was rescinded by the regulators on March 29, 1994.
Recent Banking Legislation
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 became effective at the end of 1994. Under the new law, different types of interstate transactions and activities will be permitted, each with different effective dates. Interstate transactions and activities provided for under the new law include: (i) bank holding company acquisitions of separately held banks in a state other than a bank holding company's home state; (ii) mergers between insured banks with different home states, including consolidations of affiliated insured banks; (iii) establishment of interstate branches either de novo or by branch acquisition; and (iv) affiliated banks acting as agents for one another for certain banking functions without being considered a "branch". In general, nationwide interstate banking will be permissible on June 1, 1997, unless a state passes legislation either to prevent or to permit the earlier occurrence of interstate mergers. States may at any time enact legislation permitting interstate de novo branching. Affiliated banks may act as agents for one another beginning one year after enactment. Each of the transactions and activities must be approved by the appropriate federal bank regulator, with separate and specific criteria established for each category.
Once the applicable effective date has occurred (and, the case of interstate mergers and de novo branching, subject to applicable state law "opt-out" or "opt-in" provisions), the appropriate federal bank regulator may approve the respective interstate transactions only if certain criteria are met. First, in order for a banking institution (a bank or bank holding company) to receive approval for an interstate transaction, it must be "adequately capitalized" and "adequately managed". The term "adequately capitalized" is generally defined as meeting or exceeding all applicable federal regulatory capital standards; the phrase "adequately managed" was left undefined. Second, the appropriate federal bank regulator must consider the applicant's and its affiliated institutions' records under the CRA as well as the applicant's record under applicable state community reinvestment laws.
The new law applies deposit "concentration limits" to interstate acquisition and merger transactions. Specifically, a banking institution may not receive federal approval for interstate expansion if it and its affiliates would control (i) more than 10% of the deposits held by all insured depository institutions in the United States, or (ii) 30% or more of the deposits of all insured depository institutions in any state in which the banks or branches involved in the transactions (or any affiliated depository institution) overlap. States may, by statute, regulation or order, raise or lower the 30% limit. In addition, the new law preempts certain existing state law restrictions on interstate banking (such as regional compacts and reciprocity requirements), effective one year after enactment. However, in order to receive federal approval for an interstate merger or de novo branching transaction, an applicant still also must comply with any non-discriminatory host state filing and other requirements.
The reaction, if any, of the Vermont, Massachusetts or other state legislatures to the interstate banking legislation is uncertain at this time. However, regardless of the reaction of state legislatures, the new interstate banking law is likely to make it easier for out-of-state institutions to attempt to purchase or otherwise acquire VFSC, VNB, UB or their competitors in Vermont and western Massachusetts.
Item 2



Item 2 - Properties
The principal offices of the Company and VNB are located at 100 Main Street in Brattleboro, Vermont. VNB operates 30 other locations throughout Vermont in the Counties of Chittenden, Washington, Rutland, Bennington, Franklin, Windsor, Orange and Windham. Eight offices are located in Windham County - The Main Office and two branches in Brattleboro, and offices in Bellows Falls, Jamaica, Newfane, West Dover and Wilmington. An office is operated in Bennington County in the Town of Bennington, and five offices operate in Chittenden County in the City of Burlington, two in South Burlington, Essex Junction Winooski. VNB has six offices in Windsor County in the Towns of Chester, Ludlow, Springfield, White River Junction, Windsor and Woodstock. Four facilities are located in Rutland County, three in Rutland and one in Fair Haven. Five offices are located in Washington County, one each located on State Street and Main Street in Montpelier, the Berlin Shopping Mall, Northfield and Barre. One office is operated in Franklin County in the town of St. Albans and one office is located in Orange County in the town of Williamstown. Of these offices, seventeen are owned by VNB, eleven are leased directly from independent parties as lessors, and two buildings are owned by VNB, but are situated on leased land. VNB also owns and occupies a building in Brattleboro which it uses for its operational functions. The following table sets forth the location of UB's offices and other related information as of December 31, 1994. Each office listed is equipped with an ATM facility, all of which are owned by UB.
Main Office Route 116, Parsons Road Owned Conway, MA 01341
Administrative headquarters 45 Federal Street Owned office, Operations Center Greenfield, MA 01301 Branch Office
Branch Office 90 Bridge Street Owned Shelburne Falls, MA 01370
Branch Office Route 9 Owned Haydenville, MA 01039
Branch Office 280 Mohawk Trail Leased Greenfield, MA 01301
Branch Office 134 Elm Street Owned South Deerfield, MA 01373
Except as noted in "Item 1 - Business, United Bank", the Company and Banks do not own any other real estate, except real estate that may be held temporarily following a foreclosure in connection with loan business. See Notes 6 and 10 to the Consolidated Financial Statements for information as to amounts at which bank premises are carried, and as to commitments for lease obligations.
Item 3

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 operation, including quarterly earnings.
Item 4

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

Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters
As of February 28, 1995, VFSC Common Stock consisted of 20,000,000 authorized shares, $1.00 par value per share, of which 4,729,106 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 1994 and 1993.
Per the Bank's stockholder reports, the approximate number of stockholders as of January 24, 1995 was 2,610.
Item 6

Item 6 - Selected Financial Data
The following table sets forth selected consolidated 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, 1994 are derived from the financial statements of the Company. The financial condition and operations of the Company in all material respects reflect the operations of VNB and UB.
(1) Equal to stockholders' equity less intangibles divided by fully diluted end of period shares outstanding. (2)Based on average total assets after adjustment for securities available for sale. (3)Based on average total equity after adjustment for securities available for sale. (4)Net interest income stated on a fully taxable equivalent basis divided by average earning assets. (5)Equal to stockholders' equity less intangibles divided by total assets less intangibles. (6)Equal to stockholders' equity less intangibles plus the allowable portion of the allowance for loan losses divided by total risk weighted assets. (7)Nonperforming assets include nonaccrual loans, restructured loans and other real estate owned.
Item 7

Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
For the years ended December 31, 1994, 1993 and 1992.
Overview
Net income for 1994 was $11.9 million, up from the $7.2 million and $5.1 million earned in 1993 and 1992, respectively. Return on average assets was 1.00% in 1994, 0.64% in 1993 and 0.46% in 1992. Return on average stockholders' equity was 13.23% in 1994, 8.36% in 1993 and 6.31% in 1992.
On a primary and fully diluted per share basis, net income was $2.51, $1.54 and $1.08 in 1994, 1993 and 1992, respectively.
Results of Operations
Net Interest Income
The following table presents the major categories of earning assets and interest-bearing liabilities with their corresponding average balances, related interest income or expense and resulting yields and rates on a fully taxable equivalent basis for the years indicated.
(1) Includes a fully taxable equivalent adjustment based on a 34% federal income tax rate. (2) Nonaccrual loans are included in average balances. (3) Taxable and tax-exempt securities are reflected at amortized cost. (4) The difference between the rate earned on total earning assets and the rate paid on total interest-bearing liabilities.
Net interest income increased $0.3 million or 0.6% to $51.1 million in 1994 from $50.8 million in 1993. This compared to a $3.7 million or 7.8% increase in 1993 from 1992. On a fully taxable equivalent basis, net interest income increased $0.7 million or 1.3% from 1993 to 1994 and $3.9 million or 8.2% from 1992 to 1993. The smaller increase in 1994 was primarily due to rising interest rates and the resulting 48% decrease in mortgage loan originations. This caused a $2.6 million reduction in related fees and nearly offset the income effects of a $64.2 million increase in average earning assets.
During 1993 the Company significantly reduced its level of nonperforming assets (See "Nonperforming Assets and Risk Elements" section following) which improved the net interest spread by 0.31%. The 0.27% reduction in the spread in 1994 was caused by the lower loan fees noted above.
Average earning assets increased slowly over the last two years with 6.2% and 2.7% growth rates in 1994 and 1993, respectively. The 1994 growth came from a $24.4 million or 2.8% increase in loans and a $37.2 million or 24.1% increase in taxable securities. The growth in loans was primarily in the municipal area, while the growth in the investment portfolio was primarily in U.S. Government Agency Securities.
Average interest-bearing liabilities increased $45.7 million, or 4.9% in 1994 following a $12.2 million, or 1.3% growth in 1993. Over the two-year period, average core interest-bearing deposits (savings and transactional deposits and certificates of deposit under $100,000 increased by $63.1 million. Non-core interest-bearing liabilities were reduced by $5.2 million over the same period.
The following table provides an analysis of the variances in net interest income, on a fully taxable equivalent basis, attributable to changes in volume and rate. Volume variances are calculated by multiplying the preceding year's rate by the current year's change in the average balance. Rate variances are calculated by multiplying the current year's change in rate by the prior year's average balance.
allocated to the change in volume and change in rate categories in proportion to the relationship of the absolute dollar amounts of the change in each category. (2) Includes nonaccrual loans.
Provision for Loan Losses
The provision for loan losses charged to operating expense is based upon management's judgment of the amount necessary to maintain the allowance for loan losses at a level adequate to absorb possible losses. The factors evaluated include, but are not limited to: the size, composition, growth and quality of the loan portfolio, specific and potential problem loans, current economic conditions and their effect on a borrower's performance in relation to contract terms, historical loss experience by loan type and loan collectibility.
The provision for loan losses in 1994 was $4.0 million compared to $5.1 million in 1993 and $9.4 million in 1992. Net loans charged off were $5.6 million, $8.3 million and $7.5 million for the respective years. The $4.4 million reduction in the provision for 1993 was principally due to a reduction in the level of nonperforming assets (See "Nonperforming Assets and Risk Elements" section following) and management's view that the Vermont economy began a slow recovery near the end of 1992. The provision was reduced an additional $1.1 million in 1994 as nonperforming asset levels and the Company's local economy continued to improve.
Other Operating Income and Other Operating Expense
In 1994, other operating income decreased $0.7 million, or 3.8%, from the $17.3 million earned in 1993. Net of the $2.0 million decrease in securities gains, other operating income was up $1.4 million, or 9.1%, compared to 1993. An increase of $0.9 million in service charges on deposit accounts comprised 63% of this increase.
In 1993, other operating income, net of securities gains, increased $1.2 million, or 8.6% over 1992. The two major items representing the increase were service charges on deposit accounts and mortgage servicing income. Respectively, they contributed $470,000 and $341,000 to the increase. Noninterest income is expected to continue to grow at a similar pace in 1995.
Total other operating expense decreased $5.7 million, or 11%, in 1994 after increasing $7.1 million, or 16%, in 1993. Net OREO and collection expenses and losses represented $5.1 million, or 89%, of the decrease in 1994, and $4.0 million, or 56%, of the increase in 1993. Salary expense was $17.8 million in 1994, $18.4 million in 1993 and $17.8 million in 1992. These represent a decrease of 3% and an increase of 3%, respectively, reflecting a reduction of approximately 7% in the Company's average number of employees over the last two years. Pension and employee benefits decreased $0.3 million, or 6%, in 1994 after increasing $1.1 million, or 28%, in 1993. The increase in 1993 was largely due to early retirement and termination costs. Partially offsetting the expense improvements in 1994 was an increase of $0.4 million in expenses related to the merger with West Mass Bankshares (See Note 2. to the consolidated financial statements). See also "Recent Developments".
Applicable Income Taxes
During 1994, 1993 and 1992 the Company recorded income tax expense of $5.2 million, $3.4 million and $2.4 million, respectively. The changes were almost entirely due to the level of pre-tax earnings. See also footnote 11 to the financial statements.
Financial Condition
Loans The loan portfolio increased $39.1 million, or 4.5%, in 1994 following a $15.7 million, or 1.8%, increase in 1993. In structuring the composition of its loan portfolio, the Company considers the following factors: profitability, liquidity, risk, rate sensitivity and service in its market area. It tries to maintain a balance between commercial lending (commercial , commercial real estate and construction loans) and consumer lending (residential real estate and consumer loans) with each representing between 40% and 60% of the total loan portfolio. Over the last two years the commercial lending sector increased $7.2 million but decreased from 48% to 46% of the total loan portfolio.
Through its subsidiary Banks the Company makes commercial business loans to small and medium sized businesses in Vermont and Massachusetts and is the leading commercial lender in the State of Vermont.
Construction and commercial loans secured by real estate include loans secured by residential and commercial properties, office and industrial buildings, condominium development and land development properties. The Company limits both of these types of lending activities and the properties securing these loans to its primary market areas in Vermont and Massachusetts, and adjacent communities in neighboring states. Approximately 60% of the commercial real estate portfolio represents loans on owner occupied properties. Real estate values in Vermont have been depressed as a result of the recent recession in New England and the Nation, but have experienced some recent improvement. Management's goal is to keep the construction loan portion of the loan portfolio below 5% of total loans. As of December 31, 1994 this sector represented 2.7% of the portfolio.
In 1994, the Company originated $140.5 million of residential mortgage loans and sold $86.9 million of loans in the secondary market, compared to $267.2 million originated and $189.7 million sold in 1993 and $291.3 million originated and $192.4 million sold in 1992. The 48% decrease in mortgage loan originations was primarily due to rising interest rates. The high levels of 1993 and 1992 were in part due to lower interest rates which led to a significant number of mortgage refinancings.
At year end 1994, the mortgage servicing portfolio totaled $459.2 million compared to $458.7 million at year end 1993 and $439.8 million at year end 1992 and currently generates income of approximately $2.0 million per year. Of the residential real estate portfolio, 68.7% were adjustable rate loans and 31.3% were fixed rate loans at December 31, 1994. Residential real estate loans represented 42.7%, 42.7% and 41.5% of gross loans at year end 1994, 1993 and 1992, respectively.
Consumer loans represented 11.4%, 11.0% and 10.5% of gross loans at year end 1994, 1993 and 1992, respectively. Credit card loans and related plans were $37.3 million and $37.5 million of total consumer loans at December 31, 1994 and 1993, respectively.
The following table summarizes the compositions of the Company's loan portfolio at the dates indicated.
(1) Includes loans to Massachusetts and Vermont municipalities and industrial revenue bonds of $44,669, $30,339, $13,680, $8,857 and $11,767 for years 1994 through 1990, respectively.
The following table details the loan maturity and interest rate sensitivity of loans, exclusive of loans secured by 1-4 family residential property and consumer loans, at December 31, 1994.
Nonperforming Assets and Risk Elements
It is the Company's policy to manage the loan portfolio so as to recognize and respond to problem loans at an early stage and thereby minimize losses. All new loan originations, loan renewals, loans categorized as past due and classified loans are reviewed on a weekly basis by the administrative officers in charge of the commercial, mortgage and consumer loan portfolios. In turn, the status of these loans is reported in detail to senior management and the Loan Committee of the Board of Directors on a monthly basis. From these reviews, determinations are made on a case-by-case basis as to the collectibility of principal and interest.
Nonreceipt of contractually due principal or interest payments on loans 30 days after the due date results in their being reported as past due with increased monitoring and collecting efforts to restore such loans to current status. Mortgage loans are classified as nonaccrual and placed on a cash basis for purposes of income recognition when they become 180 days past due or when foreclosure action is started whichever is sooner. Commercial loans are placed on nonaccrual status and placed on a cash basis when they become 90 days past due as to principal or interest, unless they are adequately collateralized or are expected to result in collection within the next 60 days. While no specific period of delinquency triggers nonaccrual status for consumer loans, unsecured installment loans 90 days or more past due and secured installment loans 180 days or more past due are generally recommended for charge-off.
A loan remains in nonaccrual status until the factors which indicate doubtful collectibility no longer exist and at least six consecutive months of contractual payments are received or until the loan is determined to be uncollectible and is charged off against the allowance for loan losses. Credit card loans are required to be charged off after 180 days without a payment. Commercial loans 180 days or more past due must be recommended for charge-off unless management determines the collateral is sufficient. When a mortgage loan in default is transferred to OREO, its carrying value is the lesser of the loan amount or the fair value of the property collateralizing the loan, less the estimated cost to sell the property. A loan is classified as a restructured loan when the interest rate is materially reduced or when the term is extended beyond the original maturity date because of the inability of the borrower to service the interest payments at the contractual rate. All of the $0.3 million of accruing restructured loans as of December 31, 1994 were in full compliance with restructured terms and conditions. An additional $0.6 million of loans have been restructured and are in full compliance with restructured terms and conditions. However, as there remains some doubt as to the ultimate collectibility of all principal and interest on these loans, they are classified as nonaccrual as of December 31, 1994 in the table below. The average yield on these loans is 7.2%.
The following table provides information with respect to the Company's past due loans and the components of nonperforming assets at the dates indicated.
In December 1993, $5.9 million of insubstance foreclosures (ISF) were transferred from OREO to loans and are included with nonaccrual loans in the above table. Prior years' ISF loans have been reclassified accordingly.
Additional interest income of $1,320,000 and $1,943,000 would have been recorded in 1994 and 1993, respectively, if nonaccrual and restructured loans had been on a current basis in accordance with their original terms. Payments, totaling $936,000 and $1,562,000 respectively, were received on nonaccrual loans during 1994 and 1993. During 1994, $592,000 was applied as principal reductions and $344,000 was recognized as interest income, while in 1993 $1,152,000 was applied as a principal reduction and $410,000 was recognized as interest income. Interest income was recognized solely on nonaccrual loans which were subsequently determined to have no doubt as to the ultimate collectibility of principal.
At December 31, 1994, all nonaccrual loans were collateralized. In addition, it is the Company's policy to obtain personal guarantees of the borrower's whenever it is possible. As of December 31, 1994, 6.5% of the total nonaccrual loans are current as to contractual terms. Loans to five borrowers, totaling $3.6 million represented 22.0% of nonaccrual loans. Management expects to see moderate improvement in 1995 over the 1994 charged-off loan total with a further decrease in the level of nonperforming assets. Management is not aware of any current recommendations by regulatory authorities or suggestions with respect to loans classified as loss, doubtful, substandard or special mention which, if they were implemented, would have a material effect on the Company.
Allowance for Loan Losses
The allowance for loan losses is available to absorb future losses which are anticipated in the current loan portfolio. The adequacy of the allowance for loan losses, which is formally reviewed on a monthly basis by management, is evaluated according to the factors outlined in "Provision for Loan Losses". To maintain the allowance at an adequate level, current earnings are charged with an amount necessary to restore the allowance to the desired level. A loan loss is charged against the allowance when management believes the collectibility of principal and interest with respect to such loan is unlikely. The allowance for loan losses equalled $16.2 million, or 1.78% of the total loan portfolio at December 31, 1994, compared with 2.04% at year end 1993 and 2.46% at year end 1992. On December 31, 1994 the allowance for loan losses represented 76% of total nonperforming assets and 97% of nonperforming loans, compared to 56% and 65%, respectively, at year end 1993.
The following table provides an analysis of the allowance for loan losses and an analysis of loans charged off and recoveries by type of loan and for the years indicated.
Year Ended December 31, (Dollars in thousands) Allowance for loan losses at beginning of year $6,777 Acquired allowance - Loans charged off: Commercial, commercial real estate and construction (5,698) Real Estate-residential (224) Consumer (1,623) Total loans charged off (7,545) Recoveries of loans previously charged off: Commercial, commercial real estate and construction 326 Real estate-residential - Consumer 198 Total Recoveries 524 Net loans charged off (7,021) Additions to allowance charged to earnings 14,020 Allowance for loan losses at year end $13,776 ====== Ratio of net charge-offs to average loans 0.84% Allowance for loan losses to period end loans, net of ==== unearned income 1.63% ====
Net loans charged off in 1994 totaled $5,579,000 or 0.62% of average loans. This compares with $8,285,000 or 0.95% in 1993 and $7,499,000 or 0.90% in 1992. In 1994, 1993 and 1992, no loan charged off exceeded 10% of the net loans charged off during the year. In 1991 loans charged off for one customer totaled $1,125,000. No other charge-offs exceeded 10% of the year's total.
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, 1994, 1993, 1992, 1991 and 1990. 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.
Investment Portfolio The investment portfolio is utilized primarily for liquidity and secondarily for investment income. As a result, the portfolio is primarily comprised of short-term U. S. Treasury instruments and high grade municipal obligations, mortgage-backed securities and corporate bonds with short maturities. These various segments of the investment portfolio and their related income are reported monthly to the Company's Board of Directors.
The following table summarizes the composition of the Company's investment portfolio at the dates indicated.
(1) Includes money market overnight investments of $1,635, $9,182, and $4,977 at year end 1994, 1993 and 1992, respectively.
The investment portfolio decreased 5.7%, to $173.9 million, at year end. During 1993 the portfolio increased 23.4%, to $184.4 million at year end. The total portfolio as a percent of total assets was 14.4% at year end 1994 compared to 15.9% and 13.3% at year end 1993 and 1992, respectively.
On December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115 (See Note 1 to the Consolidated Financial Statements). Securities are carried at fair market value at December 31, 1994 and December 31, 1993 in the above tables. The 1992 values reflect the amortized cost of the securities. During 1993 the Company and national economy saw record low interest rates and record high repayments in mortgage-backed securities. These mortgage-backed securities include newly issued and seasoned securities of government housing agencies and those portions of agency-backed collateralized mortgage obligations with relatively short and stable average lives. During 1993 management reinvested the proceeds of sales and prepayments into this portfolio. During 1994 prepayments were primarily invested in U. S. Treasury and other U. S. government agency securities as management determined that the relative values of these investments were superior to mortgage-backed securities. The average maturity of the investment portfolio is approximately 3.9 years.
The Company invests a portion of its capital in marketable equity securities which comprised 6.9%, 5.5% and 7.3% of total investments at December 31, 1994, 1993 and 1992, respectively. At December 31, 1994, $7.7 million of the $12.0 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, 1994 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 34%. The yields are calculated by dividing annual interest, net of amortization of premiums and accretion of discounts, by the book value of the securities at December 31, 1994.
Does not include equity securities of $11,960 at December 31, 1994.
Deposits Average total deposits for 1994 of $981.5 million represented a $36.2 million, or 3.8%, increase from 1993's average, which had decreased $5.5 million, or 0.6%, from 1992's average balances. The average balance of large CDs was $29.3 million in 1994, $38.1 million in 1993 and $80.1 million in 1992. In 1994 the decrease in large CDs was offset by a $44.9 million total increase in the average balance of all other deposit categories, considered core deposits by management. Large CDs represented 3.0% of average total deposits in 1994 versus 4.0% in 1993 and 8.4% in 1992. The majority of these deposits was obtained from local Vermont and Massachusetts customers. Management expects to limit future asset growth primarily to the growth of core deposits as opposed to the more volatile large CDs and other borrowed funds.
The following table summarizes the daily average amount of deposits for the years indicated, and rates paid on such deposits on the last day of the respective year.
The following table shows the maturity schedule of certificates of deposit of $100,000 or more at December 31, 1994.
Certificates of Deposit (in thousands) 3 months or less $7,650 Over 3 through 6 months 9,741 Over 6 through 12 months 7,493 Over 12 months 3,048 Total $27,932 ====== 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 7.50%, 7.86% and 7.42% as of December 31, 1994, 1993 and 1992, respectively. Management's goal is to maintain a 7% equity to asset ratio so that the Company has sufficient capital to take advantage of expansion or capital opportunities that might arise. Average equity to average assets equalled 7.97% in 1994, 7.67% in 1993 and 7.32% in 1992.
As a result of the Federal Deposit Insurance Corporation (FDIC) Improvement Act of 1991 (FDICIA), bank regulators have established uniform capitalization standards as per the following table. The ratios for the Company and its two subsidiary banks as of December 31, 1994 and 1993 are shown for comparative purposes placing them in the "well capitalized" category at each respective date.
FDIC insurance rates after 1992 vary depending on a bank's capital ratio and regulatory rating. Well-capitalized institutions will be assessed less than those that are adequately capitalized, which are in turn lower than the other categories. Both banks are currently assessed at the lowest available FDIC rate, $0.23 per $100 of deposits.
Liquidity and Interest Rate Sensitivity
Liquidity measures the ability of the Company to meet its maturing obligations and existing commitments, to withstand fluctuation in deposit levels, to fund its operations and to provide for customers' credit needs. Liquidity is monitored by the Company on an ongoing basis. Ready asset liquidity is provided by cash and due from banks, sales of excess funds, loan repayments and an investment portfolio with short maturities and ready marketability. In addition, the Company has a strong core deposit base which supports a significant portion of its earning assets. Secondary liquidity is provided by the potential sale of loans and other assets, large certificates of deposit, short or long-term debt borrowings, federal funds purchased, repurchase agreements and borrowing from the Federal Reserve Bank. Both subsidiary banks are also members of the Federal Home Loan Bank (FHLB) with combined borrowing capability of $170.3 million.
Effective asset/liability management includes maintaining adequate liquidity and minimizing the impact of future interest rate changes on net interest income. The Company attempts to manage its interest rate sensitivity position through the composition of its loan and investment portfolios and by adjusting the average maturity of and establishing rates on earning assets in line with its expectations for future interest rates. The Company endeavors to maintain a cumulative gap ratio in all periods under one year of approximately one to one.
The following table summarizes the Company's interest rate sensitivity over various periods at December 31, 1994.
(1) Does not include non-accrual loans of $16,491 at December 31, 1994. (2) Does not include equity securities of $11,960 at December 31, 1994. (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. Money-market deposit accounts with an interest rate tied to an external index are included in the 0-30 day category.
Recent Developments
During 1995, the Company plans to upgrade its mainframe computer's central processing unit at an anticipated total cost of $537,000. No other additions to premises or equipment are expected to exceed $500,000. All additions will be funded through the operations of the Company.
The Company's financial statements for 1995 will be affected by rules and regulations which have been announced but are not yet effective. The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan". This statement shall be effective for financial statements issued for fiscal years beginning after December 15, 1994. This statement is not expected to have a material impact on the financial statements of the Company.
A recent District of Columbia federal court of appeals ruling, Chemical Manufacturers Association vs. Environmental Protection Agency No. 92-1314, potentially increased banks' liabilities for hazardous waste cleanup costs. It is the Company's policy to require Phase I site assessments from a qualified engineering firm for all real estate loans in excess of $500,000 and any property of concern for loans below $500,000. Management is not aware of any hazardous waste actions against the Company or its borrowers.
Vermont Financial Services Corp.'s (VFSC) acquisition of West Mass Bankshares, Inc. (WMBS), of Greenfield, MA, was completed on June 14, 1994 and all information in the consolidated financial statements herein, reflect this transaction. WMBS' sole banking subsidiary, United Savings Bank, became a wholly owned subsidiary of VFSC. The acquisition was effected as a pooling of interests with an exchange of .9861 shares of VFSC stock for each share of WMBS stock. As of January 24, 1994, there were 115,800 dissenting WMBS shares. Although management does not know the final outcome of the disposition of the dissenting shareholders, the attached financial statements assume an exchange at .9861 per share for all shares.
Item 8


Item 8 - Financial Statements and Supplementary Data
Consolidated Statements of Changes in Stockholders' Equity (Dollars in thousands, except per share amounts) For the years ended December 31, 1994, 1993 and 1992
See notes to consolidated financial statements.
Non-monetary Transactions: Transfer of loans to OREO for the years ended December 31,1994, 1993 and 1992 totaled $7,335, $4,586 and $14,286, respectively.
See notes to consolidated financial statements.
Notes To Consolidated Financial Statements
1. Basis of Financial Statements and Significant Accounting Policies
The accounting and reporting policies of Vermont Financial Services Corp. and its subsidiaries (the "Company" or "VFSC") are in conformity with generally accepted accounting principles and general practices within the banking industry. The following is a description of the more significant policies.
The Company, organized in April 1982, became a registered bank holding company, acquired controlling interest in Vermont National Bank ("VNB") on March 1, 1983, upon exchange of all of the outstanding shares of common stock of VNB for shares of the Company. In 1990 the Company changed its State of incorporation from Vermont to Delaware. On June 14, 1994, a merger with West Mass Bankshares ("WMBS") was effected as a pooling of interest with WMBS' sole banking subsidiary, United Savings Bank ("USB"), becoming wholly owned by VFSC. Subsequent to the merger USB changed its name to United Bank ("UB"). All intercompany transactions have been eliminated in the consolidated financial statements.
Cash equivalents include amounts due from banks, interest bearing deposits with other banks and federal funds sold and securities purchased under agreements to resell with original maturities of three months or less.
Effective December 31, 1993 the Company adopted, on a prospective basis, Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and revised its securities accounting policy. Securities that may be sold as part of the Company's asset/liability or liquidity management or in response to or in anticipation of changes in interest rates and resulting prepayment risk, or for other similar factors, are classified as available for sale and carried at fair market value which is based on quoted market prices or dealer quotes. Unrealized holding gains and losses on such securities are reported net of related taxes as a separate component of shareholders' equity. Realized gains and losses on the sales of all securities are reported in earnings and computed using the specific identification cost basis. The adoption of SFAS No. 115 was not applied retroactively to prior years' financial statements.
Prior to December 31, 1993 all securities were classified as available for sale and were carried at the lower of aggregate cost or market value. Unrealized losses on marketable equity securities were reported as a separate component of shareholders' equity unless the loss was deemed to be other than temporary in which case a charge to earnings was made.
The Financial Accounting Standards Board has issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", which requires that creditors value all impaired loans, as defined in the statement, based on the present value of expected cash flows discounted at the loan's effective interest rate, or as a practical expedient, at the market price of the loan or the fair value of the collateral securing the loan if the loan is collateral dependent. The standard is required for fiscal years beginning after December 15, 1994. The Company does not believe adoption of the standard will have a significant impact on its results of operations or financial position.
The reserve for loan losses is maintained at a level which, in management's judgment, is adequate to absorb future loan losses through charges to operating expenses. Principal factors considered by management include the historical loan loss experience, the value and adequacy of collateral, the level of nonperforming (nonaccrual) loans, the growth and composition of the loan portfolio and examination of individual loans by senior management.
OREO is carried at the lower of cost or fair value less the estimated cost to sell the property.
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed principally on the straight-line method over the estimated useful life of the related assets. Leasehold improvements are amortized over the lease periods or the useful life of the improvement, whichever is shorter. When assets are sold or retired, the related cost and accumulated depreciation and amortization are removed from the respective accounts and any gain or loss is credited or charged to income.
Goodwill and other intangibles are amortized over their estimated lives by the straight-line method. As part of its ongoing review, management estimates the value of the Company's intangible assets, taking into consideration any events and circumstances which might have diminished such value.
In the fourth quarter of 1992, the Company adopted SFAS No.109, "Accounting for Income Taxes", which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax 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.
Prior to that time, the provision for income taxes was based on income and expenses included in the accompanying consolidated statements of operations. Differences between taxes so computed and taxes payable under applicable statutes and regulations were classified as deferred taxes.
Securities and other property held by the Trust Department in a fiduciary or agency capacity are not included in the accompanying balance sheet, since such items are not assets of the Bank. Trust Department income is recorded on the cash basis which is not materially different from income that would be reported on the accrual basis.
Loan origination and commitment fees and certain direct loan origination costs are deferred and amortized as an adjustment of the related loan's yield over the contractual life of the related loans by the level yield method.
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". SFAS 106 changed the Company's policy of accounting for postretirement benefits on a pay-as-you-go (cash) basis by requiring accrual of the expected cost of providing these benefits.
Dollars in the following footnotes are in thousands except for per share amounts.
2. Merger with WestMass Bankshares, Inc.
On June 14, 1994, the shareholders of WMBS and VFSC consummated a merger which resulted in WMBS' sole subsidiary, USB, becoming a wholly owned subsidiary of VFSC. Under the terms of the merger, WMBS shareholders received .9861 shares of VFSC stock for each WMBS share. As a result, VFSC issued 1,122,696 shares of its common stock for all the outstanding shares of WMBS common stock, with the exception of 115,800 dissenting WMBS. Although management does not know the final outcome of the disposition of the dissenting shareholders, the per share data in the financial statements assume an exchange at .9861 per share for all shares.
The merger was effected as a pooling of interests and accordingly, VFSC's financial statements have been restated to include the results of WMBS for all periods presented.
Combined and separate results of VFSC and WMBS during the periods preceding the merger were as follows:
The combined financial results presented above include adjustments made to conform accounting policies of the two companies. None of the adjustments impacted previously reported net income. All adjustments are reclassifications to conform financial statement presentation. These reclassifications include USB transferring its investment portfolio from "Held-to-Maturity" to "Available for Sale" at December 31, 1993. There were no intercompany transactions between the two companies during the periods presented above.
In connection with the merger, the Company recorded expenses of $466 in 1994. These expenses represent printing, investment advisory, legal, audit and other professional service fees.
3. Securities
Additional information with respect to the contractual maturities of securities available for sale at December 31, 1994 and 1993 follows:
Proceeds from sales of securities available for sale during 1994, 1993 and 1992 were $28,097, $58,436 and $59,121, respectively.
Gross gains of $625, $2,100 and $1,183 were realized on those sales in 1994, 1993 and 1992, respectively. Gross losses of $569, $0 and $1 were realized in the respective periods.
Securities with a book value of $80,713 as of December 31, 1994 and $97,512 as of December 31, 1993 were pledged to qualify for fiduciary powers, to collateralize deposits of public bodies, for borrowed money and for other purposes as required or permitted by law.
4. Loans
Loans classified by type are summarized as follows:
The Company grants loans to customers primarily in New England. Although the Company has a diversified portfolio, its debtors' ability to honor their contracts is substantially dependent upon the general economic conditions of the region.
At December 31, 1994 the amount of loans outstanding to directors, executive officers, principal holders of equity securities or to any of their associates totaled $7,639.
The following table summarizes the related party loan activity for 1994:
Balance at beginning of year $6,150 Additions 3,206 Repayments (1,717) Balance at end of year $7,639 =====
Mortgage Banking Activities
During 1994 the Company originated $77,001 of mortgage loans for sale in the secondary market and sold $86,876. As of December 31, 1994, $4,232 of mortgage loans were held for sale and were carried at the lesser of the loan balance or market value. All loans are sold without recourse, except for certain technical underwriting exceptions and $2,999 and $1,059 in loans sold by UB to the Federal Home Loan Mortgage Corporation and South Boston Savings Bank, respectively, under recourse agreements. None have been presented for recourse. Loan servicing is retained by the Company and excess servicing is capitalized monthly and adjusted quarterly based on actual payments received on the sold loans. Gains, net of losses, from sales of mortgage loans are included in interest and fees on loans and was $187 for 1994, $2,740 for 1993 and $2,944 for 1992. At December 31, 1994 and 1993 the Company's serviced mortgage portfolio totaled $459,172 and $458,693, respectively. Loan servicing income was $1,775, $2,013 and $1,672 for 1994, 1993 and 1992, respectively. The following schedule represents excess servicing right activity for the past two years:
Amortization represents quarterly valuation adjustments which are based on pool balances and prepayment assumptions on a pool by pool basis as reported by the Bloomberg Financial Market System.
5. Allowance for Loan Losses
Transactions in the allowance for loan losses are summarized as follows:
Transactions in the OREO valuation reserve are summarized as follows:
Proceeds from sales of OREO were $7,000 in 1994 and $15,241 in 1993. Loans associated with these sales were $2,275 and $4,738, respectively. It is the Company's policy that no loan exceed 90% of the sale price and no unguaranteed commercial, commercial real estate or condominium loan exceed 80% of the sale price. During 1994 loans of $686 were granted at UB at percentages of sales price which exceeded the Company's policy. None of these loans exceed 95% of the OREO sales price.
6. Premises and Equipment
Premises and equipment, stated at cost, consist of the following:
7. Deposits
Time certificates of deposit outstanding in denominations of $100 or more aggregated to $27,932 and $34,635 at December 31, 1994 and 1993, respectively. Total interest on these deposits amounted to $1,123, $1,669, and $4,408 for the years ended December 31, 1994, 1993 and 1992, respectively.
The Company paid $29,042, $28,363 and $39,254 in interest on deposits during 1994, 1993 and 1992, respectively.
8. Other Borrowings
The following table shows the distribution of the Company's borrowings and the weighted average interest rate thereon at the end of each of the last three years. The table also shows the maximum amount of borrowings and the average amount of borrowings as well as weighted average interest rates for the last three years. Federal funds purchased and securities and loans sold under agreements to repurchase generally mature within 30 days from the transaction date.
At December 31, 1994 the Company owned $7,175 of stock in the Federal Home Loan Bank ("FHLB") which provided borrowing capacity up to $170,300 from the FHLB at maturities, rates and terms determined by the FHLB.
9. Fair Market Value of Financial Instruments
Cash and Cash Equivalents
Cash and cash equivalents had a carrying value of $73,107 and $61,878 at December 31, 1994 and 1993, respectively. Due to their short term and very liquid nature the carrying value is considered to also represent the fair market value of these balances.
Securities
Securities are classified as available for sale and are carried at fair market value based on quoted market prices or dealer quotes. Securities available for sale had a total fair market value of $173,865 and $184,400 at December 31, 1994 and 1993, respectively. This compares to amortized cost values of $188,416 at December 31, 1994 and $183,089 at December 31, 1993.
Loans
At December 31, 1994 and 1993 total loans, net of allowance for loan losses, had a carrying value of $895,267 and $854,626, respectively. The fair value of these loans was $901,372 and $871,533, 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, 1994 and 1993 total deposits had carrying values of $1,012,869 and $967,582 and fair values of $1,010,215 and $970,782, 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 $93,888 and $92,053 at December 31, 1994 and 1993, respectively. These are also reasonable estimates of fair market value.
Off-Balance Sheet Financial Instruments
The Company's off-balance sheet exposure is primarily in the form of commitments to extend credit and standby letters of credit. The carrying amount of these arrangements represents accruals or deferred income (fees) arising from those unrecognized financial instruments. Such amounts are minimal and approximate fair value.
10. Commitments and Contingencies and Financial Instruments with Off-Balance Sheet Risk
Leases -- The following is a schedule by years of future minimum rental payments required under operating leases for premises and data processing equipment that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1994. Certain operating leases contain various options to renew. Year Ending December 31: 1995 $ 589 1996 458 1997 345 1998 285 1999 245 Later Years 2,156 Total Minimum Payments Required $4,078 ===== Operating expenses include approximately $988, $1,228, and $1,481 in 1994, 1993 and 1992, respectively, for rentals of premises and equipment used for banking purposes.
Derivative Financial Instruments
Transactions involving derivative financial instruments during the fiscal years 1994, 1993 and 1992 were immaterial.
Financial Instruments With Off-Balance Sheet Risk
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Banks use the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Total commitments to extend credit at December 31, 1994 were as follows:
Home equity lines $52,877 Credit card lines 71,730 Commercial real estate 13,229 Other unused commitments 86,266
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, 1994, the Company had outstanding commitments for the following: financial standby letters of credit - $5,962, performance standby letters of credit - $4,215 and commercial and similar letters of credit - $6,481.
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, 1994 the Company's reserve requirement of $13,872 was met with cash on hand and deposits at the Federal Reserve Bank.
The Company is also involved in litigation arising in the normal course of business. The Company does not anticipate that any of these matters will result in the payment by the Company of damages, that in the aggregate, would be material in relation to the consolidated results of operations or financial position of the Company.
11. Income Taxes
As discussed in Note 1, the Company adopted the provisions of SFAS No. 109 as of the fourth quarter of 1992. The change had no material effect on reported net income for1992 or for any of the first three quarters of 1992.
The provisions for income tax expense (benefit) included in the statements of income are as follows:
The approximate tax effect of principal temporary differences giving rise to deferred taxes are summarized as follows:
The Company made income tax payments of $4,623, $2,833 and $3,051 during 1994, 1993 and 1992, respectively.
The components of the net deferred tax asset as of December 31 are as follows:
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:
12. Employee Benefit Plans
The Company's two subsidiaries each have separate defined benefit pension plans.
Vermont National Bank
VNB has a trusteed non-contributory defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employee's final compensation. The Company's funding policy is to contribute annually an amount that can be deducted for federal income tax purposes using a different actuarial cost method and different assumptions from those used for financial reporting.
The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheets as of December 31, 1994 and 1993:
Significant assumptions used in actuarial computations were:
VNB will use an 8.5% discount rate for 1995.
United Bank
UB has a non-contributory defined benefit plan providing pension benefits through membership in the Savings Banks Employees Retirement Association ("SBERA") covering substantially all of its employees meeting certain requirements as to age and length of service. The plan provides a monthly benefit upon retirement based on compensation during the highest paid consecutive three years of employment during the last ten years of credited service. It is the Company's policy to fund annually an amount equal to the lesser of the actuarially determined normal cost or the amount allowed by the Internal Revenue Code Section 412 Full Funding Limitations. All plan assets are part of a single pooled fund made up of all participated SBERA members which are managed by the SBERA Trustees.
The following table sets forth the pension plan's funded status and amounts recognized in the Company's consolidated balance sheets as of December 31, 1994 and 1993.
The components of pension expense were as follows:
Significant assumptions used in actuarial computations were:
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 for 1994 was approximately $250 and none was made for 1993 or 1992. The Plan also includes a 25% Company match of employee contributions to a 401k portion of the Plan. This Plan feature was added in 1993 and the associated expense was $118 for 1994 and $114 for 1993.
The Company also has an Employee Stock Purchase Plan covering substantially all employees. The Plan allows the purchase of common stock at a ten percent discount from the then current fair market value, without payment of any brokerage commission or service charge.
The Company sponsors defined benefit postretirement medical and life insurance plans that cover all of its full time employees and participating retirees. Eligible employees who retire and who have attained age 65 with at least 10 years of service may elect coverage. Spouses of eligible retirees are required to contribute 100% of the cost of any medical coverage they elect. A closed group of certain retirees and their spouses who elected to retire under a special incentive program receive additional medical benefits. The plans are not funded. Effective January 1, 1993 the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions".
The following table sets forth the plan's funded status reconciled with the amount shown in the Company's financial statements:
Net periodic postretirement benefit cost included the following components:
For measurement purposes, an 8% annual rate of increase in the per capita net employer share of covered health care benefits was assumed for 1994. The rate was assumed to remain at that level thereafter, but the impact of medical inflation eventually diminishes because of the $10 per capita lifetime limit on medical benefits and the likelihood that most current retirees and all future retirees will reach that cap. The medical trend rate assumption, therefore, merely affects the timing of the distribution of the $10 in benefits to each participant, and so has a relatively small effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rate by one percentage point for all future years would increase the accumulated postretirement benefit obligation at December 31, 1994, as well as the total of the service cost and interest cost components of net periodic postretirement cost for 1994 by less than 2%. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 8.5% in 1994 and 7.0% in 1993. As the plan is unfunded, no assumption was needed as to the long term rate of return on assets.
13. Stockholders' Equity
The Company had certain common stock equivalents outstanding from 1992 through 1994. As a result, earnings per share is based on the primary and fully diluted shares outstanding during the respective periods shown in the table below:
The per share amounts of cash dividends paid on an equivalent share basis were $0.54 for 1994, $0.24 for 1993 and $0.08 for 1992. At December 31, 1994, the Banks had available $23,795 for payment of dividends to the Company, under regulatory guidelines.
At December 31, 1994, there were 51,960 and 70,599 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.
Options Agreements - On April 20, 1987, stockholders approved a non-qualified stock option plan for 105,000 shares of the Company's common stock and on April 17, 1990 stockholders approved a non-qualified stock option plan for 80,000 shares of the Company's common stock. In October, 1993 the 65,100 and 40,000 options that were then outstanding expired unexercised for these respective plans. On October 13, 1993 new options to purchase 36,000 and 12,000 shares, respectively, were granted under these plans at an option price of $19.00 per share and are exercisable for a five year period. None have been exercised to date. On August 31, 1994 stockholders approved the Vermont Financial Services Corp. 1994 Stock Option Plan which reserves 225,000 common shares to be issued in the form of stock options. To date 48,000 have been issued at an exercise price of $19.00 per share and 6,500 have been issued at an exercise price of $20.25 per share. None have been exercised
The Company also continues to maintain a stock option plan originally approved November 6, 1986 by the Stockholders of West Mass Bankshares which authorizes the issuance of up to 138,000 common shares. To date 126,960 shares have been issued at an exercise price of $7.50 per share and 6,900 shares have been issued at an exercise price of $10.25 per share. The following table summarizes activity under this plan:
14. Parent Company Financial Information
Condensed financial information for Vermont Financial Services Corp. (parent company only) is as follows:
15. Supplemental Financial Data
Selected Quarterly Data (unaudited) The following is a summary of selected consolidated quarterly data of the Company for the periods presented:
Statement of Management Responsibility
The management of Vermont Financial Services Corp. is responsible for the accuracy and content of the financial statements and other financial information in this annual report. The financial statements have been prepared in conformity with generally accepted accounting principals applied on a consistent basis in all material respects, and data include amounts based upon management's judgement where appropriate.
The accounting systems which record, summarize and report financial data are supported by a system of internal controls which is augmented by written policies, internal audits and staff training programs. The Audit Committee of the Board of Directors, which is made up solely of outside directors who are not employees of the Company, reviews the activities of the internal audit function and meets regularly with representatives of Coopers & Lybrand, the Company's independent auditors. Coopers & Lybrand has been appointed by the Board of Directors to conduct an independent audit and to express an opinion as to the fairness of the presentation of the consolidated financial statements of Vermont Financial Services Corp.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Vermont Financial Services Corp.
We have audited the accompanying consolidated balance sheet of Vermont Financial Services Corp. and subsidiaries as of December 31, 1994, and the related consolidated statements of income, changes in stockholders' equity and cash flow for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our 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 provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vermont Financial Services Corp. and subsidiaries as of December 31, 1994, and the results of their operations and their cash flow for the year then ended, in conformity with generally accepted accounting principles.
We previously audited and reported on the consolidated balance sheet as of December 31, 1993 and the related consolidated statements of income, changes in stockholders' equity and cash flow of Vermont Financial Services Corp. and subsidiary for each of the two years in the period ended December 31, 1993, prior to their restatement for the June 14, 1994 pooling of interests with West Mass Bankshares, Inc. The contribution of Vermont Financial Services Corp. and subsidiary to total assets, net interest income and net income represented approximately 81%, 82% and 74%, respectively for 1993 and 81%, 82% and 66%, respectively for 1992, of the respective restated totals. Separate financial statements of West Mass Bankshares, Inc. were audited and reported on separately by other auditors. We also have applied procedures to the combination of the accompanying consolidated balance sheet as of December 31, 1993 and the related consolidated statements of income, changes in stockholders' equity and cash flow for each of the two years in the period ended December 31, 1993, after restatement for the June 14, 1994 pooling of interests; in our opinion, such consolidated statements have been properly combined on the basis described in Note 2 to the consolidated financial statements.
As described in Notes 1 and 12 to the consolidated financial statements, the Company changed its method of accounting for certain investments in debt and equity securities and accounting for postretirement benefits other than pensions in 1993.
As discussed in Notes 1 and 11 to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1992.
Springfield, Massachusetts COOPERS & LYBRAND L.L.P. January 20, 1995
Item 9

Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable. PART III
Item 10



Item 10 - Directors and Executive Officers of Registrant
Executive Officers
The following table shows the name of each executive officer of the Company, his age, the offices with the Company held by him, and the year he was first elected to a comparable office with the Banks. There are not family relationships among the executive officers.
Year First Elected to Name/Age/Office Office John D. Hashagen, Jr. (53) President and Chief Executive 1990 Officer of the Company Executive Vice President of the Company 1989 Senior Vice President of the Company 1983 President and Chief Executive Officer 1987 of VNB
Richard O. Madden (46) 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 (41) 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 (49) Executive Vice President of the Company 1992 Executive Vice President of VNB 1988 Senior Vice President of VNB 1984
W. Bruce Fenn (53) Executive Vice President of VNB 1988 Senior Vice President and Senior Loan 1987 Officer of VNB
William H. George (50) Executive Vice President of VNB 1992 Senior Vice President of VNB 1983
Kenneth R. Cole (48) President of UB 1995 Senior Vice President and Treasurer 1986 of UB
Directors
The following table sets forth the name and address of each director of the Company, his or her age and principal occupation and the year in which he or she first became a Director of the Company or its predecessors. The business address of each of the nominees is the Company's address except as otherwise noted. No family relationship exists between any director.
Year First Name, Age and Principal Became Occupation or Employment (1) Director
Anthony F. Abatiell (55)................... 1982 Attorney, Partner, Abatiell & Wysolmerski Law Offices, Rutland
Zane V. Akins (54).......................... 1987 President, Akins & Associates; President & Director, Anitech International, Inc., Brattleboro (Business Consulting)
Charles A. Cairns (53)...................... 1986 President, Champlain Oil Co., Inc. and Coco Mart, Inc., South Burlington
Robert C. Cody (70)......................... 1974 President, Cody Chevrolet, Inc. Chairman, Cody Management Associates (Real Estate Ownership and Management), Montpelier
Allyn W. Coombs (60)........................ 1994 President, Treasurer of RCAS, Inc., (Real Estate Development and Management), Amherst, MA
Beverly G. Davidson (63).................... 1980 Secretary, Treasurer of RCAS, Inc., (Vermont State Fair); Treasurer, N.M.&B. Ltd. (NutriSystem Weight Control), Rutland
James E. Griffin (67)....................... 1972 President, J.R. Resources, Inc. (Business Consultants), Rutland
John D. Hashagen, Jr. (53).................. 1987 President and Chief Executive Officer of Vermont Financial Services Corp., Brattleboro; President & Chief Executive Officer, Vermont National Bank, Brattleboro
Francis L. Lemay (62)....................... 1994 Chairman, United Savings Bank, Greenfield, MA
Daniel C. Lyons (63)........................ 1974 Lyons Pontiac-Cadillac GMC Trucks; Toyota, Inc., Berlin
Kimball E. Mann (60)........................ 1969 President, J.E. Mann, Inc. (Women's Department Store), Brattleboro
Stephan A. Morse (48)....................... 1986 President and CEO, The Windham Foundation, Inc., Grafton
Donald E. O'Brien (69)...................... 1978 Attorney, Burlington
Roger M. Pike (54).......................... 1980 Vice President, Kinney, Pike, Bell & Conner, Inc. (Insurance), Rutland
Mark W. Richards (49)....................... 1988 President, Richards, Gates, Hoffman & Clay (Insurance) Brattleboro
(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 and Chief Executive Officer and Chairman of West Mass until June 14, 1994 and was President and Chief Executive Officer of UB until December 31, 1994; Zane V. Akins was Chief Executive Officer, Holstein-Friesian Association of America; Executive Vice President, Holstein-Friesian Services, Inc., (Cattle Registration) until December 31, 1990; Richard O. Madden became Secretary of the Company on May 1, 1993; Robert G. Soucy became Executive Vice President of the Company in July, 1992.
Item 11

Item 11 - Executive Compensation
The following tables contain a three-year summary of the total compensation paid to the CEO of the Company and the other four most highly paid executive officers.
I. SUMMARY COMPENSATION TABLE
(1) In December, 1993 the discount rate used to compute the liability under the officers' deferred compensation plan (See "Deferred Compensation Agreements" following) was reduced from 9% to 7-1/2%. The associated expenses attributable to Messrs.. Hashagen, Madden, Soucy and Fenn due to this change were $19,597, $10,799, $12,211 and $13,998, respectively for 1993.
(2) Represents the 25% Company match of the respective employees' 401k contribution and the employees portion of the Company's contribution to the Employees Profit Share Plan. No Profit Sharing Plan contribution was made in 1993 or 1992.
(3) Represents the market value as of December 31 of each year of the shares allocated to the officers account under the UB ESOP plan for the respective year. (4) Includes $778 discount received on purchases of common stock under the Company's Employee Stock Purchase Plan.
II. OPTION/SAR GRANTS 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
Aggregated Option Exercises in Last Fiscal Year, and FY-End Option Value
(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, 1994.
Deferred Compensation Agreements
VNB has entered into Executive Deferred Compensation Agreements with certain officers, including Mr. Hashagen and the other executive officers in the group referred to in the above table. The agreements provide for monthly payments for a ten-year period from retirement after age 60 but before age 65, and for a fifteen-year period from retirement after age 65, subject to certain conditions. The conditions include the requirements that the officer refrain from competitive activities, be available for certain advisory and consulting services subsequent to retirement and continue in the employment of VNB until retirement. The agreements also provide for payments upon disability prior to retirement and payments to beneficiaries of the officers under certain circumstances. Mr. Hashagen's agreement provides for payments in the amount of $1,944.44 per month, and the agreements of Messrs. Madden, Soucy and Fenn provide for payments of $1,388.89 per month. Vermont National Bank has purchased life insurance policies on the lives of these officers which, in effect, will provide the funds to make payments to reimburse VNB for payments made under the agreements.
Mr. Lemay is covered under a Supplemental Executive Retirement Plan (SERP) which is designed to augment his retirement benefit from UB's pension plan and his social security benefit so that his aggregate annual retirement benefit will approximate 70% of his highest 3-year average salary prior to retirement. Under the terms of his SERP, it is anticipated that Mr. Lemay will receive an annual supplemental retirement benefit of $64,378 at age 65. UB has purchased a split-dollar life insurance policy which will provide a benefit this Mr. Lemay.
Management Continuity Agreements
The Company and VNB have entered into agreements with VNB's six executive officers, Messrs. Hashagen, Madden, Soucy, Fenn, Dunham and George which provide for the payment of certain severance benefits if such officer's employment with the Company or VNB is terminated within thirty-six months after a change of control of the Company or VNB. The agreements provide for severance payments to Mr. Hashagen equal to 250% of his base salary upon termination after a change of control and for payments to each of the other executive officers equal to 200% of his base salary upon termination after a change of control as defined in the agreements.
The management continuity agreements do not provide for severance benefits in instances where termination is due to death, disability or retirement. Further, no benefits are payable in instances of termination for cause, or after a change of control if the officer voluntarily terminates his employment with both the Company and VNB, unless such termination is for a "good reason" as defined in the agreements.
Severance benefits payable in the event of a qualifying termination after a change of control are to be paid in equal consecutive biweekly installments. If severance payments due in the event of termination after a change of control were payable to each of the executive officers on the date of this filing, the aggregate amount of such severance payments would be $1,626,000. These severance payments are subject to up to a 50% reduction if the officer works for or participates in the management, operation or control of a commercial or savings bank, or bank holding company, which does business in Vermont, unless such officer's activities are substantially outside Vermont. Additionally, the officer will be entitled to continuation of life, disability, accident and health insurance benefits and a cash adjustment to compensate the executive for the market value of any stock options under the Company's Officers' or Directors' Non-Qualified Stock Option Plans in excess of their exercise price.
The agreements contain each officer's undertaking to remain in the employ of the Company and VNB if a potential change of control occurs until the earlier of six months, retirement (at normal age), disability or the occurrence of a change of control.
Similar agreements have been executed by certain employees of VNB and the Company which provide for severance payments ranging from 100% to 150% of the employee's base salary upon termination after a change in control.
The Company and UB have entered into agreements with UB's five executive officers, Messrs. Lemay, Cole, Neill, Phillips and Noska. It was agreed that Mr. Lemay would be President and Chief Executive Officer of UB until December 31, 1994. Thereafter, the Company has agreed that Mr. Lemay would continue as Chairman and a Director of UB until December 31, 1997. Mr. Lemay's contract also provides that he will serve as a consultant to the Company from December 31, 1994 through December 31, 1997. Mr. Lemay's compensation for consulting services after December 31, 1994 is to be $25,000 per year. Mr. Lemay is also on the Company's Board of Directors. Currently, each director of the Company who is not an officer of the Company or a subsidiary receives an annual retainer of $4,800 and, in addition, a $400 fee for each regular monthly Board meeting attended as well as a $300 fee for each meeting of a committee of the Board attended. Mr. Lemay did not receive any such director's fees while serving as an operating officer of UB.
Additionally, the Company and UB entered into agreements to employ the following UB officers: Kenneth R. Cole as Senior Vice President & Treasurer of UB; James Neill as Senior Vice President of UB; and Robert W. Phillips and Matthew W. Noska as Vice Presidents of UB. Under these agreements, Mr. Cole was to receive a base salary of $82,500, Mr. Neill a base salary of $76,300, Mr. Phillips a base salary of $59,700 and Mr. Noska a base salary of $52,000, all subject to annual increases. Each agreement is to expire May, 1997, except that Mr. Noska's agreement is to expire May, 1995. On January 1, 1995, Mr. Cole became President and Chief Executive Officer of UB at an annual salary of $110,000.
In addition to and as part of the foregoing agreements, Messrs. Cole, Neill, Phillips and Noska have entered management continuity agreements which are similar in form to agreements currently in force between the Company and VNB and their senior officers. Each agreement's term ends on January 31, 1995 and is automatically renewable thereafter unless the Company and UB elect not to renew it. Under the management continuity agreements, the above officers would be entitled to the following severance payments if terminated under certain circumstances after a change of control of the Company or UB: Messrs. Cole, Phillips and Neill - 200% of base salary at the time of termination; Mr. Noska - 100% of base salary at the time of termination.
The management continuity agreements define a "change of control" as (i) the acquisition by a person or group of 25% of the combined voting power of the Company's or UB's then outstanding securities; (ii) during any two-year period those persons, who at the beginning of such period were members of the Company's or UB's Board of Directors and any new director whose election was approved by at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination was previously so approved, cease to constitute a majority of such board; or (iii) the stockholders of the Company or UB approve a merger or consolidation of the Company or UB which would result in such stockholders holding less than 70% of the combined voting power of the surviving entity immediately thereafter, or if such stockholders approve the sale of all or substantially all of the assets of the Company or UB.
The management continuity agreements do not provide for severance benefits in instances where termination is due to death, disability or retirement. Further, no benefits are payable in instances of termination for cause, defined as (i) the willful and continued failure of the officer to perform his duties and (ii) willful conduct materially injurious to the Company or UB.
Profit-Sharing Plan
Each employee of VNB and UB, including executive officers, becomes eligible to participate in the Company's Profit-Sharing Plan on January 1 of the Plan year in which he or she completes one full year of continuous service of 1,000 hours or more. Upon completion of three years of continuous service, a participant becomes 30% vested, increasing to 40% after four years, 60% after five years, 80% after six years, and fully vested after seven years. Vested participants may elect to receive, in cash, up to 50% of their annual allocation of the Company's contribution to the Profit-Sharing Plan. Vested amounts not so received in cash are distributed to participants upon their retirement or earlier upon termination of employment. During 1994, the Company made a contribution of approximately $250,000 to the Profit-Sharing Plan.
Retirement Plan
The VNB Retirement Plan covers substantially all eligible employees of the Bank, including officers, and provides for payment of retirement benefits generally based upon an employee's years of credited service with the Bank and his or her salary level, reduced by a portion of the Social Security benefits to which it is estimated the employee will be entitled.
The following table represents estimated annual benefits upon retirement at age 65 to employees at specified salary levels (based upon the average annual rate of salary during the highest five years within the final ten years of employment) at stated years of service with the Bank. The amounts shown are after deduction of estimates for Social Security reductions based on the Social Security law as of January 1, 1995.
* Under current regulations of the Internal Revenue Code, the maximum annual benefit payable from a defined benefit plan during 1995 is $120,000 payable as a life annuity for retirements at age 65. In addition, the maximum annual compensation may not exceed $150,000. The amounts shown above in excess of $120,000 and those using compensation in excess of $150,000 are shown for exhibit purposes only.
The description of the Retirement Plan in this Proxy Statement is intended solely to provide stockholders of the Company with general information concerning the Plan as it relates to management remuneration. Under no circumstances should the description be construed as indicative of the rights of any particular employee, or as conferring any right upon any employee, which rights will in all cases be determined by the appropriate legal documents governing the Plan.
UB provides a retirement plan for all eligible employees through the Savings Bank Employees Retirement Association ("SBERA"), an unincorporated association of savings banks operating within Massachusetts and other organizations providing services to or for savings banks SBERA's sole purpose is to enable the participating employers to provide pensions and other benefits for their employees.
Each UB employee age 21 or older who has completed at least 1,000 hours of service in the last 12 month period beginning with such employee's date of employment becomes a participant of the retirement plan. All participants are fully vested when they have been credited with three (3) years of service or at age 62 if earlier.
The retirement plan is a qualified defined benefit plan which does not require an employee to make any contributions to become a participant and earn benefits under the Plan. The benefits provide for a pension equal to 1.25% of Average Compensation (the average of the three highest consecutive years of Compensation) for each year of service up to 25 years, plus .6% of compensation above the Covered Compensation (defined below) for each year of service up to 25 years. For example, under the above benefit formula, a Participant attaining age 65 in 1995 with 25 years of service, will be entitled to a benefit equal to 31.25% (1.25% x 25 years) of Average Compensation plus 15% (.6% x 25 years) of the difference (if any) between the participant's Average Compensation and the Covered Compensation for a participant turning age 65 in 1994 which is $24,312. Covered Compensation is the average of the 35 years of Social Security taxable wages up to and including the year in which a Participant reaches Social Security retirement age. Normal retirement age under the plan is 65; a reduced early retirement benefit is payable from age 50 to 65 under certain conditions. On December 31, 1994, the latest date for which retirement plan information is available, the present value of accumulated benefits was fully funded by the market value of plan assets. The Bank made no contribution to the Pension Plan during 1994:
The following table illustrates annual pension benefits for retirement at age 65 under the most advantageous plan provisions available for various levels of compensation and years of service. The figures in this table are based upon the assumption that the plan continues in its present form and certain other assumptions regarding compensation trends and social security.
* Federal law does not permit defined benefit pension plans to recognize compensation in excess of $150,000 for plan years beginning in 1994 (11/01/94 for SBERA).
As of December 31, 1994 Messrs. Lemay, Cole, and Neill had 39, 9 and 11 years of credited service, respectively.
Compensation of Directors
Each director who is not an officer of VFSC, VNB, or UB receives an annual retainer of $4,800 and, in addition, a $400 fee for each regular monthly Board of Directors' meeting attended, and a $300 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 $4,000 and each committee chairperson receives an annual retainer of $500.
Item 12

Item 12 - Security Ownership of Certain Beneficial Owners and Management
As of February 28, 1995 the following beneficial owners were known to control five percent or more of the outstanding shares of Common Stock, $1 par value, of the Company. The information below was taken from form Schedule 13Gs filed as of December 31, 1994 with the Securities and Exchange Commission.
(1) Includes sole voting power for 17,608 shares, shared voting power for 225,376 shares, sole dispositive power for 139,907 shares and shared dispositive power for 103,077 shares.
(2) Includes sole voting power for 158,600 shares, shared voting power for 93,000 shares and sole dispositive power for 251,600 shares.
The following table sets forth the name and address of each director, nominee for director or executive officer of the Company, his or her age and principal occupation, all positions or offices held by such individual within the Company, the year in which he or she first became a director of the Company or its predecessors, the number of whole shares of Common Stock of the Company beneficially owned by each at the close of business on February 28, 1995, 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.
(1) Includes 813 shares held jointly with a family member in which Mr. Abatiell shares voting and investment power. Also includes 54,012 shares held in a custodial capacity in VNB's trust department in which Mr. Abatiell has sole voting and investment powers. Does not include options to acquire 1,500 additional shares, exercisable within sixty (60) days, pursuant to the Directors' Non-Qualified Stock Option Plans.
(2) Does not include options to acquire 1,500 shares, exercisable within sixty (60) days, pursuant to the Directors' Non-Qualified Stock Option Plans.
(3) Does not include options to acquire 1,500 shares, exercisable within sixty (60) days, pursuant to the Directors' Non-Qualified Stock Option Plans.
(4) Includes 10,372 shares held jointly with a family member in which Mr. Cody shares voting and investment powers. Does not include options to acquire 1,500 shares, exercisable within sixty (60) days, pursuant to the Directors'Non-Qualified Stock Option Plans.
(5) Includes 8,070 shares held jointly with a family member in which Mr. Coombs shares voting and investment powers. Does not include options to acquire 500 shares, exercisable within sixty (60) days, pursuant to the Directors' Non-Qualified Stock Option Plans.
(6) Ms. Davidson shares voting and investment powers on 2,417 shares. Does not include options to acquire 1,500 shares, exercisable within sixty (60) days, pursuant to the Directors' Non-Qualified Stock Option Plans.
(7) Does not include options to acquire 1,500 shares, exercisable within sixty (60) days, pursuant to the Directors' Non-Qualified Stock Option Plans.
(8) Includes 224 shares held by a family member in which Mr. Hashagen has no voting or investment powers and as to which Mr. Hashagen disclaims beneficial ownership. Also includes 200 shares held in the name of Green Mountain Investment Club in which Mr. Hashagen shares voting and investment powers and 8,577 shares held in the VNB Profit Sharing Plan. Does not include options to acquire 12,300 shares, exercisable within sixty (60) days, pursuant to the Officers' Non-Qualified Stock Option Plans.
(9) Includes 73,164 shares held jointly with family members in which Mr. Lemay shares voting and investment powers. Does not include options to acquire 35,667 shares, exercisable within sixty (60) days, pursuant to the Inventive Stock Option Plan granted by West Mass (See "Option Exercisesand Year-end Value Table" following).
(10) Includes 2,512 shares held jointly with a family member in which Mr. Lyons shares voting and investment powers. Also includes 7,200 shares held by a family member in which Mr. Lyons has no voting or investment powers and in which Mr. Lyons disclaims beneficial ownership. Does not include options to acquire 1,500 shares, exercisable within sixty (60) days, pursuant to the Directors' Non-Qualified Stock Option Plans.
(11) Includes 9,379 shares held jointly with a family member in which Mr. Mann shares voting and investment powers. Also includes 814 shares held by a family member in which Mr. Mann has no voting or investment powers and as to which Mr. Mann disclaims beneficial ownership. Does not include options to acquire 1,500 shares, exercisable within sixty (60) days, pursuant to the Directors' Non-Qualified Stock Option Plans.
(12) Includes 2,507 shares held jointly with a family member. Also includes 505 shares held by a family member in which Mr. Morse has no voting or investment powers and as to which Mr. Morse disclaims beneficial ownership. Does not include options to acquire 1,500 shares, exercisable within sixty (60) days, pursuant to the Directors' Non-Qualified Stock Option Plans.
(13) Does not include options to acquire 1,500 shares, exercisable within sixty (60) days, pursuant to the Directors' Non-Qualified Stock Option Plans.
(14) Includes 777 shares held jointly with family members and 1,157 shares held by Kinney, Pike, Bell & Conner, Inc. in which Mr. Pike shares voting and investment powers. Also includes 997 shares held by a family member in which Mr. Pike has no voting power and as to which Mr. Pike disclaims beneficial ownership. Does not include options to acquire 1,500 shares, exercisable within sixty (60) days, pursuant to the Directors' Non-Qualified Stock Option Plans.
(15) Includes 24,829 shares held jointly with family members in which Mr. Richards shares voting and investment powers. Does not include options to acquire 1,500 shares, exercisable within sixty (60) days, pursuant to the Directors'Non-Qualified Stock Option Plans.
(16) Includes 14,095 shares held jointly with family members in which Mr. Cole shares voting and investment powers. Also includes 3,841 shares in UB's Employee Stock Ownership Plan.
(17) Includes 2,808 shares in the VNB Profit Sharing Plan. Does not include options to acquire 8,700 shares exercisable within sixty (60) days pursuant to the Officers' Non-Qualified Stock Option Plans.
(18) Includes 97 shares in which Mr. Fenn has no voting or investment powers. Also includes 2,153 shares held jointly with a family member in which Mr. Fenn shares voting and investment powers, and 5,800 shares in the VNB Profit Sharing Plan. Does not include options to acquire 10,600 shares, exercisable within sixty (60) days pursuant to the Officers' Non-Qualified Stock Option Plans.
(19) Includes 2,016 shares held jointly with family members in which Mr. George shares voting and investment powers. Also includes 3,809 shares in the VNB Profit Sharing Plan. Does not include options to acquire 9,700 shares, exercisable within sixty (60) days pursuant to the Officers Non-Qualified Stock Option Plans.
(20) Includes 27 shares held jointly with a family member in which Mr. Madden shares voting and investment powers. Also includes 2,158 shares held in the VNB Profit Sharing Plan. Does not include options to acquire 10,600 shares exercisable within sixty (60) days pursuant to the Officers' Non-Qualified Stock Option Plans.
(21) Includes 346 shares held by a family member in which Mr. Soucy has no voting or investment powers. Also includes 3,841 shares in the VNB Profit Sharing Plan. Does not include options to acquire 11,100 shares, exercisable within sixty (60) days pursuant to the Officers' Non-Qualified Stock Option Plans.
On February 28, 1995, the directors and officers of the Company as a group (21) had beneficial ownership of 286,776 shares of Company Common Stock, amounting to 6.06% of the outstanding shares. This does not include options to acquire 122,167 shares, or 2.58% of the outstanding shares, exercisable within sixty (60) days, pursuant to the Directors' and Officers' Non-Qualified Stock Options Plans.
Item 13

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 1994. 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 1994. 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.
Two directors of the Company are attorneys who have been retained in the past to represent VNB or the Company in appropriate circumstances. During 1994, no director was retained by the Banks or Company as legal counsel.
PART IV
Item 14

Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements and Exhibits
(1) The following financial statements (including report thereon and notes thereto) are filed as part of this Report.
Report of Independent Certified Public Accountants
Consolidated Balance Sheets - December 31, 1994 and 1993
Consolidated Statements of Income - For the Years Ended December 31, 1994, 1993, and 1992
Consolidated Statements of Changes in Stockholders' Equity - For the Years Ended December 31, 1994, 1993, and 1992
Consolidated Statements of Cash Flow - For the Years Ended December 31, 1994, 1993 and 1992
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 agreements dated March 17, 1994 with Louis J. Dunham and January 11, 1994 with William G. George are incorporated by reference to Exhibit 10.1 to Registrant's Form 10-K for the fiscal year-ended December 31, 1993.
Employment agreement dated October 19, 1993 by and among United Savings Bank, Registrant and Kenneth R. Cole. Filed as Exhibit 10.8 to the Company's Registration Statement on Form S-4. Registration #33-72554.
10.2 Agreement of Merger dated February 28, 1990 between the Company and Vermont Financial Services Corp., a Delaware corporation. Incorporated by reference to Exhibit A of Registrant's Proxy Statement for its 1990 Annual Meeting of Shareholders, Exhibit 28 to Registrant's Form 10-K for the fiscal year ended December 31, 1989.
22. Subsidiaries of Registrant. Filed herewith.
24. Consent of Coopers & Lybrand. Filed herewith.
(b) Reports on Form 8-K.
During the Registrant's fiscal quarter ended December 31, 1993, the Registrant filed no Reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VERMONT FINANCIAL SERVICES CORP.
Date: March 8, 1995 By /s/ John D. Hashagen, Jr. John D. Hashagen, Jr., President and Chief Executive Officer
By /s/ Richard O. Madden Richard O. Madden, Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
Name Title Date
/s/ John D. Hashagen, Jr.Director and President March 8, 1995 John D. Hashagen, Jr. (Principal Executive Officer)
/s/ Richard O. Madden Secretary & Treasurer March 8, 1995 Richard O. Madden (Principal Financial Officer)
/s/ Anthony F. Abatiell Director March 8, 1995 Anthony F. Abatiell
Zane Akins Director
/s/ Charles A. Cairns Director March 8, 1995 Charles A. Cairns
/s/ Robert C. Cody Director March 8, 1995 Robert C. Cody
/s/ Allyn W. Coombs Director March 8, 1995 Allyn W. Coombs
/s/ Beverly G. Davidson Director March 8, 1995 Beverly G. Davidson
/s/ James E. Griffin Director March 8, 1995 James E. Griffin
/s/ Francis L. Lemay Director March 8, 1995 Francis L. Lemay
/s/ Daniel C. Lyons Director March 8, 1995 Daniel C. Lyons
/s/ Kimball E. Mann Director March 8, 1995 Kimball E. Mann
/s/ Stephan A. Morse Director March 8, 1995 Stephan A. Morse
Donald E. O'Brien Director
/s/ Roger M. Pike Director March 8,1995 Roger M. Pike
/s/ Mark W. Richards Director March 8,1995 Mark W. Richards
Index to Exhibits
Exhibit 22 Subsidiaries of Registrant
Exhibit 24 Consent of Independent Certified Public Accountants
Exhibit 22
Exhibit 22
Subsidiaries of Registrant:
1. Vermont National Bank, a national banking association, with a principal place of business at 100 Main Street, Brattleboro, VT 05301.
2. United Bank, a Massachusetts state-chartered savings bank, with a principal place of business at 45 Federal Street, Greenfield, MA 01301
3. Vermont Financial Services Corp., a Delaware corporation, with a principal place of business at 100 Main Street, Brattleboro, VT 05301 (incorporated in 1990).
Exhibit 24
Exhibit 24
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of Vermont Financial Services Corp. on Form S-8 (File No. 2-83361) and Form S-3 (File No. 2-80833) of our report, which includes explanatory paragraphs regarding (i) our responsibility related to the Company's consolidated balance sheet as of December 31, 1993 and the related consolidated statements of income, changes in stockholders' equity and cash flow for each of the two years in the period ended December 31, 1993; (ii) the Company's change in its method of accounting for certain investments in debt and equity securities and accounting for postretirement benefits other than pensions in 1993; and (iii) the Company's change in its method of accounting for income taxes in 1992, dated January 20, 1995, on our audit of the consolidated financial statements of Vermont Financial Services Corp. and subsidiaries as of December 31, 1994 and for the year then ended, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Springfield, Massachusetts March 17, 1995