Arrow Financial Corp. of New York is taking initial steps that observers say could lead to a winding down of its once-troubled operations in Vermont.

Glens Falls-based Arrow is selling eight branches and $95 million of deposits from its Vermont subsidiary, Green Mountain Bank, to $219 million- asset Mascoma Savings Bank, Lebanon, N.H.

That's more than half Green Mountain's 14-branch Vermont franchise and about 45% of its deposits in the state.

Simultaneously, Green Mountain president and chief executive J. Peter Yankowski will resign, effective June 30. He will also step down as a director of Arrow.

Mr. Yankowski, who was hired just over four years ago to lead the troubled Vermont subsidiary, said he is leaving because of the downsizing and because he has returned the bank to profitability.

First Albany Corp. bank analyst Don J. Kauth said he "wouldn't be surprised" if Arrow decided to sell the rest of the Vermont franchise.

"I don't think they're in any huge hurry to sell it, but if they got a good offer for it, I think they'd consider selling their remaining presence in Vermont," he said.

Arrow vice president Tim C. Badger declined to comment on the company's plans, but Mr. Yankowski said officials intend to "take care of the customers and run the bank as if we're going to be here forever."

Under the branch sale agreement, Mascoma will pay an 8% deposit premium, or about $7.6 million, for the branches.

The eight branches being sold are in eastern Vermont and are separated from the core of the franchise by the Green Mountain range, Mr. Badger explained. "There's quite a physical barrier between the two areas," he said.

Green Mountain will continue operating six branches in the Rutland market, with $130 million of assets.

The 14 Green Mountain branches, which were bought by $767 million-asset Arrow in 1990 through its merger with United Vermont Bancorp, have caused financial trouble ever since.

More than 76% of United Vermont's portfolio was in commercial loans, many of which soured when the New England real estate market went bust.

Arrow reported a 1991 loss of $33.4 million, which equaled about half the company's equity, according to a First Albany research report.

Since then, nonperforming assets at Arrow have been reduced to $6.9 million, or 0.90% of the total at March 31. About 77% of those bad assets are from Green Mountain, however.

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