THE ONCE-GLOOMY picture at Vermont Financial Services Corp. has brightened enough that John D. Hashagen Jr. can chuckle about his early days as president and chief executive.
"The month after I took over as CEO of the holding company is when our nonperformers started to go up. They went up for a year and a half. There's a lesson in there somewhere about career timing," he said.
The Brattleboro-based banking company, like others in New England, was hit hard by the recession and collapse of the real estate market in the early 1990s. In 1990 and 1991, the bank barely broke even.
But Vermont Financial has been recovering in the last two years, clearing up its nonperforming assets, and has again been posting profits.
Now, Mr. Hashagen has his sights set on reengineering the $1.2 billion-asset company, absorbing the recent acquisition of a Massachusetts thrift, and increasing revenues.
It's a familiar story in the banking industry - but with a few twists. Vermont Financial is taking on the reengineering with a streak of Yankee independence: unlike most others institutions, it is forgoing help from outside consultants. And unlike most banks that take on acquisitions, it has no broad plans to consolidate back-office data processing.
But like many banks, it is turning to technology to help make itself more efficient - and competitive.
Mr. Hashagen, 52, joined Vermont National Bank in 1967 as a credit manager. He rose through the commercial lending side of the business and was named Vermont National's president in 1987. Three years later, he took the reins of the holding company.
"Up here in Vermont the spaghetti really hit the fan in 1990," he said. "It's been quite a swing for us from the heady days of the 1980s to the crunch. We never would expect real estate values to go down as they did and affect our portfolio like they did."
But down they went. By 1991, Vermont Financial's ratio of nonperforming assets had jumped to 3.20%. A year later the figure ballooned to 6.08%. Return on average assets plummeted from 1.09% in 1989 to 0.02% in 1991.
"In 1992 we came back and earned $3.5 million," said Mr. Hashagen. "Last year we earned close to $5 million."
Return on assets rose to 0.54% last year and reached 0.91% in the first half of 1994. For the year, Mr. Hashagen said, the ROA will be in the 0.85% range.
While Vermont Financial is back in the black, Mr. Hashagen conceded that a lot of work remains to be done.
"The key things for this year is to complete the Massachusetts acquisition, maximize that potential, finish the job on nonperforming assets, and get our expenses down," he said.
Toward that end, the bank has begun what it calls its Profit Improvement Plan.
"It's not in the same category or same scope as Fleet Focus," Mr. Hashagen said, referring to Fleet Financial Group's top-to-bottom reengineering effort. "But the objective is the same: to get down our efficiency ratio," said Mr. Hashagen.
The efficiency ratio, or non-interest expense per dollar of revenue, hovered around 70% for several years. For the first six months this year, it stood at 67%.
The goal is to get that figure down to 65% by the fourth quarter of 1995.
At a time when other banks are pushing for efficiency numbers in 50s, that goal may not sound terribly ambitious. But analysts note there are two factors working against a bank like Vermont Financial. It operates as a community bank - an inherently expensive strategy. Most of its 38 branches are in small towns and small cities where there is only one banking office.
And Thomas F. Theurkauf Jr., an analyst with Keefe, Bruyette & Woods in New York, noted that despite the modest economic recovery in Vermont, there will be few opportunities to boost revenue from loans in such a sparsely populated state.
"I don't see any of the banks being bombarded with loan requests," he said.
Still, Mr. Theurkauf said, the community bank approach embraced by Vermont Financial does have advantages: "I think one would argue that you have a greater revenue opportunity" by being closer to the market and offering better customer service than large out-of-state banks.
"We can't be a true low-cost producer with the community type of bank we are trying to run," said Mr. Hashagen. "But we have to be close to the large banks' costs and, hopefully, balance that out with higher service."
But unlike many other banks planning to shed overhead and restructure, Vermont Financial plans to go it alone. "Sheshunoff [Alex Sheshunoff Management Services] came in and looked at us in December of last year and said, 'You know, you folks can substantially reduce your operating overhead,'" Mr. Hashagen said.
But rather than enlisting the consulting firm or other hired guns to assist in the restructuring, Mr. Hashagen said, "We decided to keep control of the process ourselves."
Two task forces were set up, to examine each area of the bank's business. "Through the May figures, we've identified revenue opportunities and cost savings of about $2 million," he said, adding that they haven't set a specific dollar goal in reducing overhead.
Among the larger steps being taken is the centralization of consumer loan collections, a function previously performed in two departments in Brattleboro and one in Burlington. Mr. Hashagen said the bank is also automating chargeoff recoveries, for savings of up to $300,000.
Vermont Financial will also handle commercial loan approvals from five regional branch "hubs."
"It's interesting as you do this. One decision sort of leads into another. And sometimes you find twice the savings you thought you were going to find," he said.
Mr. Hashagen concedes they may miss some cost cutting opportunities by going it alone. But, he adds, "I think that will be more than offset by the development of our management team and the staff doing this ourselves. And the results on morale and employee relations would be worth the shortfall."
Although staff levels in the last year have fallen 11% - from 641 to 571 - Mr. Hashagen said just six employees were terminated. The rest left for early retirement or other jobs, or through normal attrition.
He said that further staff cuts will need to be made, however.
Mr. Hashagen is also now working on absorbing the recent acquisition of West Mass Bankshares. The $220-million asset Greenfield, Mass., thrift has six branches. Mr. Hashagen sees an opportunity to boost revenues. "The opportunity down there is to bring into that thrift commercial lending, cash management, credit cards, trust business, and add to the revenues," he said.
While back-office functions for those new lines of business will be handled at Vermont Financial's operations center three miles from Brattleboro, transaction processing will be handled at the acquired institution's existing data center.
"If we brought that bank into our data center, we don't really have room to do all of that and leave us what we need for internal growth. That would force us to buy a system here. And what they have there is [very efficient]," Mr. Hashagen said.
Still, he said, the bank is using technology to gain efficiencies in other areas. "The biggest step we are taking now is on the loan systems," he said.
The bank is in the process of rolling out a loan document preparation system from CFI ProServices Inc., Portland, Ore., to cut down on paperwork.
The bank is also using credit-scoring software from Fair, Isaac & Co., San Rafael, Calif. "The concept is to get better loan decisions made. No. 2, you should be able to give customers faster service," he said. "And you save staff. You don't need people in every branch that can make a decision.
"We anticipate when this gets done - which should be by the end of this year - the savings will be at least $200,000."
Marilyn McQuaide, senior vice president of operations, said Vermont Financial's technology budget this year is about $1.7 million. That figure is unusually high, she said because it includes about $1 million for converting the bank's aging core accounting systems to new software supplied by Systematics Information Services Inc., Little Rock.
In a typical year, the technology budget is between $500,000 and $700,000, she said.
Ms. McQuaide also wants to set up what she calls universal workstations, in which PC-equipped employees throughout the bank would be linked in local area networks. That would give all employees access to electronic mail, which fewer than one-third now have.
It would also enable the bank to put an executive information system in place to allow top managers to track profitability.
Ms. McQuaide said the bank is moving slowly toward this goal, as it purchases new personal computers that can accommodate this software.
Mr. Theurkauf, the Keefe Bruyette analyst, said: "They have made some efforts in technology improvements and enhancements."
As Vermont Financial moves to improve efficiency, Mr. Hashagen sometimes worries about how far he can go. He said he does not think it is possible for a bank like his, for example, to achieve an efficiency ratio of 55%.
"I think the companies that have unusually low efficiency ratios do it with a combination of technology and having an unusual fee income source." He cited Fifth Third Bancorp, Cincinnati, which derives considerable fee income from its Midwest Payment Systems subsidiary.
But for now, he believes there is a good niche for community banks. "The risk is if these larger, sophisticated banks can get their costs substantially below where we can get them running 38 branches - and [also] start giving good customer service."
If both were to happen, he said, "Then probably we would have to sell out to somebody if we can't compete against them."
But he quickly added, "As we sit here today, I don't believe they can do both."
Still, the state of Vermont has been largely avoided by acquisition-hungry banks in New England such as Fleet Financial Group or Shawmut National Corp.
But Mr. Hashagen sees signs that that may change. "I think now that the Vermont economy has turned and the Vermont banks are improving their balance sheets, there is probably going to be some interest in coming into the state," he said.
Keycorp, the Cleveland-based superregional, is in the process of acquiring the Bank of Vermont from Bank of Boston Corp. And Fleet holds a small stake in Vermont Financial - as it does in two other New England banks.
Mr. Hashagen said he was unaware of Fleet's interest until it was reported in The Wall Street Journal earlier this year. (Since the position is under 5%, disclosure to regulators was not required.)
But, said Mr. Hashagen, "I'm not sure having 5% makes a lot of difference if they come knocking at the door."
And Vermont Financial itself may enter the acquisition arena again - but probably not before next year.
Mr. Hashagen said management is keeping a look out for community banks in Vermont and in adjacent states.
"Our strategy is to do them in modest-size bites," he said. "It's difficult for a community bank to go on an acquisition binge. It takes an awful lot of time and effort to do it right."
And getting it right is the bank's focus. "Our strategy is to be the best commercial bank in the state," he said. "I think that has real advantages."
