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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER 0-11595
MERCHANTS BANCSHARES, INC.
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(Exact name of registrant as specified in its charter)
Incorporated in the State of Delaware Employer Identification No. 03-0287342
164 College St., Burlington, Vermont 05401
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(Address of principal executive office) (Zip Code)
Registrants telephone number: (802) 658-3400
Securities registered pursuant to Section 12(b) of the Act:
(Not Applicable)
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: Common Stock (Par Value $.01 a share)
Name of Exchange on which listed: NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[X] Contained herein [ ] Not contained herein
The aggregate market value of the voting stock held by non-affiliates is
$60,692,385 as computed using the average bid and asked prices of stock, as of
February 21, 1997.
The number of shares outstanding for each of the registrant's classes of
common stock, as of February 21, 1997 is:
Class: Common stock, par value $.01 per share
Outstanding: 4,427,873 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December
31, 1996 are incorporated herein by reference to Parts I and II.
Portions of the Proxy Statement to Shareholders for the year ended
December 31, 1996 are incorporated herein by reference to Part III.
TABLE OF CONTENTS Page
Independent Auditors' Report 2
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Summary of Unaudited Quarterly Financial Information 26
Five Year Selected Financial Data 30
Management's Discussion and Analysis of Financial Condition and
Results of Operations 31
Form 10-K 37
Signatures 62
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF
MERCHANTS BANCSHARES, INC.
We have audited the accompanying consolidated balance sheets of Merchants
Bancshares, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Merchants
Bancshares, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 16, 1997
Merchants Bancshares, Inc.
Consolidated Balance Sheets
At December 31, 1996 1995
- ----------------------------------------------------------------------------------------------
ASSETS:
Cash and Due from Banks (Note 1) $ 29,726,308 $ 38,366,772
Trading Securities (at market value) (Notes 1 and 2) 500,000 500,000
Securities Available for Sale (Notes 1 and 2):
Debt Securities 57,655,914 97,943,234
Marketable Equity Securities 230,017 309,508
Debt Securities Held to Maturity 86,903,743 0
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Total Investment Securities 144,789,674 98,252,742
- ----------------------------------------------------------------------------------------------
Loans (Notes 1 and 3) 387,232,761 379,930,413
Segregated Assets (Note 3) 0 69,793,604
Reserve for Possible Loan Losses (15,699,791) (16,234,481)
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Net Loans 371,532,970 433,489,536
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Federal Home Loan Bank Stock 2,840,500 3,174,400
Premises and Equipment, Net (Notes 1 and 4) 13,791,388 12,454,708
Investments in Real Estate Limited Partnerships (Note 1) 2,499,095 3,141,245
Other Real Estate Owned, Net (Note 1) 1,924,530 7,772,067
Other Assets (Notes 5 and 6) 14,031,569 17,896,993
- ----------------------------------------------------------------------------------------------
Total Assets $ 581,636,034 $ 615,048,463
==============================================================================================
LIABILITIES:
Deposits:
Demand $ 80,576,424 $ 85,417,465
Savings, NOW and Money Market Accounts 263,881,654 278,241,601
Time Deposits Over $100,000 20,369,480 20,473,321
Other Time 143,451,954 160,381,588
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Total Deposits 508,279,512 544,513,975
Other Borrowed Funds (Note 7) 9,598,712 5,335,422
Other Liabilities (Note 5) 11,088,092 9,525,446
Debt (Note 8) 6,419,950 15,424,757
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Total Liabilities $ 535,386,266 $ 574,799,600
- ----------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 11)
STOCKHOLDERS' EQUITY (Note 9):
Preferred Stock
Class A:
$.01 par value, non-voting Shares Authorized: 200,000
Shares Outstanding: None $ 0 $ 0
Class B:
$.01 par value, voting Shares Authorized: 1,500,000
Shares Outstanding: None 0 0
Common Stock, $.01 par value Shares Authorized: 4,700,000
in 1996 and 1995 Shares Issued: 4,434,620 in 1996 and 1995 44,346 44,346
Capital in Excess of Par Value 33,154,407 33,154,407
Retained Earnings 14,844,614 8,620,881
Treasury Stock (at Cost) 144,278 Shares in 1996 and 1995 (2,037,927) (2,037,927)
Net Unrealized Appreciation of Investment Securities
Available for Sale, Net of Taxes 244,328 467,156
- ----------------------------------------------------------------------------------------------
Total Stockholders' Equity 46,249,768 40,248,863
- ----------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 581,636,034 $ 615,048,463
==============================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
Merchants Bancshares, Inc.
Consolidated Statements of Operations
For the years ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME:
Interest and Fees on Loans $ 39,953,105 $ 46,067,109 $ 48,938,668
Interest and Dividends on Investments:
U.S. Treasury and Agency Obligations 7,587,824 4,525,095 3,508,523
Other 463,061 722,539 872,267
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Total Interest and Dividend Income 48,003,990 51,314,743 53,319,458
- --------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Savings, NOW and Money Market Accounts 8,216,152 9,077,337 8,419,716
Time Deposits Over $100,000 1,396,197 1,432,520 1,335,775
Other Time 8,112,475 8,981,211 8,095,686
Other Borrowed Funds 344,702 256,439 495,997
Debt 602,477 3,254,128 4,029,479
- --------------------------------------------------------------------------------------------------------------
Total Interest Expense 18,672,003 23,001,635 22,376,653
- --------------------------------------------------------------------------------------------------------------
Net Interest Income 29,331,987 28,313,108 30,942,805
Provision for Possible Loan Losses (Note 3) 3,150,000 12,100,000 10,000,000
- --------------------------------------------------------------------------------------------------------------
Net Interest Income after Provision for Possible Loan Losses 26,181,987 16,213,108 20,942,805
- --------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Trust Department Income 1,493,275 1,796,138 1,729,376
Service Charges on Deposits 3,347,128 3,183,525 3,451,507
Merchant Discount Fees 1,696,387 1,861,313 2,123,526
Gains on Sale of Investment Securities, Net (Note 2) 33,483 351,771 72,884
Gain on Curtailment of Pension Plan (Note 5) 0 1,562,670 0
FDIC Assistance Received-Loss Sharing (Note 3) 406,595 2,950,840 6,248,802
Other 2,385,439 1,059,660 1,411,587
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Total Non-Interest Income 9,362,307 12,765,917 15,037,682
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NON-INTEREST EXPENSES:
Salaries and Wages 8,222,050 10,728,741 10,664,411
Employee Benefits (Note 5) 1,790,795 2,705,164 2,531,980
Occupancy Expense 2,054,256 2,177,612 2,324,171
Equipment Expense 2,024,248 2,068,991 2,004,352
Losses on and Write-downs of Other Real Estate Owned 3,400,214 2,986,555 3,791,819
Equity in Losses of Real Estate Limited Partnerships 845,644 645,600 1,588,914
Trust Customers' Reimbursement, Net (Note 11) 0 0 3,246,100
Losses and Write-downs of Segregated Assets (Note 3) 406,595 2,950,840 6,248,802
Reengineering Expenses and Related Consultants' Fees (Note 10) 0 4,055,510 0
Other 8,745,228 8,286,836 9,312,413
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Total Non-Interest Expenses 27,489,030 36,605,849 41,712,962
- --------------------------------------------------------------------------------------------------------------
Income (Loss) Before Provision (Benefit) for Income Taxes 8,055,264 (7,626,824) (5,732,475)
Provision (Benefit) for Income Taxes (Notes 1 and 6) 1,831,531 (3,784,885) (2,842,451)
- --------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 6,223,733 $ (3,841,939) $ (2,890,024)
==============================================================================================================
INCOME (LOSS) PER SHARE, based upon weighted average common
shares outstanding of 4,290,342 in 1996, 4,269,231 in 1995,
and 4,230,194 in 1994 (Note 9): $ 1.45 $ (0.90) $ (0.68)
==============================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
Merchants Bancshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
For Each of the Three Years in the Period Ended December 31, 1996
Net Unrealized
Appreciation
(Depreciation)
Common Capital in of Investment
Stock Excess of Retained Securities Treasury
(Note 9) Par Value Earnings (Note 2) Stock Total
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 $ 42,429 $ 30,647,120 $ 15,352,844 $ (143,657) $ (178,730) $ 45,720,006
Net Loss -- -- (2,890,024) -- -- (2,890,024)
Change in Net Unrealized Depreciation
of Securities Available for Sale, Net
of Tax -- -- -- (530,012) -- (530,012)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $ 42,429 $ 30,647,120 $ 12,462,820 $ (673,669) $ (178,730) $ 42,299,970
Net Loss -- -- (3,841,939) -- -- (3,841,939)
Sale of Treasury Stock -- (44,598) -- -- 178,730 134,132
Purchase of Treasury Stock -- -- -- -- (2,037,927) (2,037,927)
Issuance of Common Stock 1,917 2,551,885 -- -- -- 2,553,802
Change in Net Unrealized Appreciation
(Depreciation) of Securities
Available for Sale, Net of Tax -- -- -- 1,140,825 -- 1,140,825
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ 44,346 $ 33,154,407 $ 8,620,881 $ 467,156 $ (2,037,927) $ 40,248,863
Net Income -- -- 6,223,733 -- -- 6,223,733
Change in Net Unrealized Appreciation
(Depreciation) of Securities
Available for Sale, Net of Tax -- -- -- (359,309) -- (359,309)
Change in Net Unrealized Appreciation
of Securities Transferred to the Held
to Maturity Portfolio, Net of Tax -- -- -- 136,481 -- 136,481
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 44,346 $ 33,154,407 $ 14,844,614 $ 244,328 $ (2,037,927) $ 46,249,768
============================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
Merchants Bancshares, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996 1995 1994
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 6,223,733 $ (3,841,939) $ (2,890,024)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided
by Operating Activities:
Provision for Possible Loan Losses 3,150,000 12,100,000 10,000,000
Provision for Possible Losses on Other Real Estate Owned 2,494,758 1,365,011 2,388,469
Provision for Depreciation and Amortization 2,667,329 4,357,768 6,685,094
Prepaid Income Taxes (1,474,913) (692,726) (1,890,304)
Net Gains on Sales of Investment Securities (33,483) (351,771) (72,884)
Net Gains on Sales of Loans and Leases (505,422) (463,919) (218,510)
Net Gains on Sales of Premises and Equipment (565,350) (222,895) 0
Net Gains on Sales of Other Real Estate Owned (327,647) 0 0
Equity in Losses of Real Estate Limited Partnerships 845,644 645,600 1,588,916
Changes in Assets and Liabilities:
Decrease in Interest Receivable 935,703 1,099,212 40,651
Increase (Decrease) in Interest Payable (313,478) 170,331 347,000
(Increase) Decrease in Other Assets 7,004,634 8,810,236 (3,336,601)
Increase (Decrease) in Other Liabilities (723,876) 1,567,069 (1,418,975)
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Net Cash Provided by Operating Activities 19,377,632 24,541,977 11,222,832
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Investment Securities Available for
Sale 42,521,602 50,377,072 682,030
Proceeds from Maturities of Investment Securities Available
for Sale 16,000,000 59,000,000 0
Proceeds from Sales of Loans and Leases 19,575,786 35,573,702 48,911,562
Proceeds from Sales of FHLB Stock 333,900 3,681,800 0
Proceeds from Sales of Premises and Equipment 1,817,818 327,500 39,631
Proceeds from Sales of Other Real Estate Owned 6,143,639 8,377,527 5,684,332
Purchases of FHLB Stock 0 0 (1,282,500)
Purchases of Available for Sale Investment Securities (105,928,484) (102,822,744) (10,014,063)
Purchases of Held to Maturity Investment Securities 0 0 (10,098,437)
Principal Repayments in Excess of (Less Than) Loans Originated 37,291,808 4,075,622 (2,272,774)
Investments in Real Estate Limited Partnerships (110,727) 0 (273,742)
Purchases of Premises and Equipment (4,687,458) (792,762) (2,258,284)
Decrease in Net Investment in Leveraged Leases 0 0 41,731
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Investing Activities 12,957,884 57,797,717 29,159,486
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Decrease in Deposits (36,234,463) (37,710,409) (37,085,500)
Net Increase (Decrease) in Other Borrowed Funds 4,263,290 (12,959,312) 3,370,653
Principal Payments on Debt (9,004,807) (28,804,609) (2,404,056)
Acquisition of Treasury Stock 0 (2,082,525) 0
Issuance of Common Stock 0 2,553,802 0
Sale of Treasury Stock 0 178,730 0
- --------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (40,975,980) (78,824,323) (36,118,903)
- --------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (8,640,464) 3,515,371 4,263,415
Cash and Cash Equivalents at Beginning of Year 38,366,772 34,851,401 30,587,986
- --------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 29,726,308 $ 38,366,772 $ 34,851,401
====================================================================================================================
Total Interest Payments $ 18,985,481 $ 22,831,304 $ 22,029,653
Total Income Tax Payments $ 0 $ 0 $ 50,000
Transfer of loans to Other Real Estate Owned $ 2,814,578 $ 2,777,117 $ 7,899,401
Transfer of securities Available for Sale to Held to Maturity
Portfolio $ 87,508,657 $ 0 $ 0
The accompanying notes are an integral part of these consolidated financial
statements.
Merchants Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Merchants Bancshares, Inc. (the "Company") and its wholly owned subsidiaries,
Merchants Bank (the "Bank") (including its wholly owned subsidiaries Merchants
Trust Company, Queneska Capital Corp. and certain trusts) and Merchants
Properties, Inc., after elimination of all material intercompany accounts and
transactions. The Bank and the Merchants Trust Company offer a full range of
deposit, loan, cash management and trust services to meet the financial needs of
individual consumers, businesses and municipalities at 33 full-service banking
locations throughout the State of Vermont.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting periods.
Operating results in the future could vary from the amounts derived from
management's estimates and assumptions.
Investment Securities
The Company classifies certain of its investments in debt securities as
held-to-maturity and measures the value of such investments at amortized cost if
the Company has the positive intent and ability to hold such securities to
maturity. Investments in debt securities that are not classified as
held-to-maturity and equity securities that have readily determinable fair
values are classified as trading securities or available-for-sale securities.
Trading securities are investments purchased and held principally for the
purpose of selling in the near term; available-for-sale securities are
investments not classified as trading or held-to-maturity.
Transfers from securities available for sale to securities held to maturity are
recorded at the securities' fair values on the date of the transfer. Any net
unrealized gains or losses continue to be reported as a separate component of
stockholders' equity, on a net of tax basis as long as the securities are
carried in the held to maturity portfolio, and are amortized over the estimated
remaining life of the transferred securities as an adjustment to yield in a
manner consistent with the amortization of premiums and discounts.
Dividend and interest income, including amortization of premiums and discounts,
is recorded in earnings for all categories of investment securities. Discounts
and premiums related to debt securities are amortized using a method which
approximates the level-yield method. The gain or loss recognized on the sale of
an investment security is based upon the adjusted cost of the specific security.
Management reviews all reductions in fair value below book value to determine
whether the impairment is other than temporary. If the impairment is determined
to be other than temporary in nature, the carrying value of the security is
written down to the appropriate level by a charge to earnings.
Loan Origination and Commitment Fees
Loan origination and commitment fees and certain direct loan origination costs
are deferred and amortized over the lives of the related loans. Net deferred
origination fees were $946,723 and $956,333 at December 31, 1996 and 1995,
respectively.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using straight-line and accelerated methods at rates
that depreciate the original cost of the premises and equipment over their
estimated useful lives. Expenditures for maintenance, repairs and renewals of
minor items are generally charged to expense as incurred.
Gains and Losses on Sales of Loans
Gains and losses on sales of loans are recognized based upon the difference
between the selling price and the carrying amount of loans sold. Gains and
losses are adjusted for excess servicing rights resulting from the sale of
certain loans with servicing rights retained. Excess servicing rights are
recorded at the net present value of estimated future servicing revenue when
they are greater than normal servicing fees. Deferred excess servicing is
amortized over the period of estimated net servicing income. Origination fees
collected, net of commitment fees paid in connection with the sales of loans and
net of the direct cost of loan originations, are recognized at the time such
loans are sold.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. Low income housing tax credits are recognized in the
year in which they are earned.
Investments in Real Estate Limited Partnerships
The Bank has investments in various real estate limited partnerships that
acquire, develop, own and operate low and moderate income housing. The Bank's
ownership interest in these limited partnerships varies from 35% to 100% as of
December 31, 1996. The Bank consolidates the financial statements of the limited
partnership in which the Company is the general partner and is actively involved
in management and has a controlling interest. The Bank accounts for its
investments in limited partnerships where the Bank does not actively participate
and have a controlling interest under the equity method of accounting.
Management periodically reviews the results of operations of the various real
estate limited partnerships to determine if the partnerships generate sufficient
operating cash flow to fund their current obligations. In addition, management
reviews the current value of the underlying property compared to the outstanding
debt obligations. If it is determined that the investment suffers from a
permanent impairment, the carrying value is written down to the estimated
realizable value. The Bank recognized losses of $97,000 and $546,000 due to the
impairment of an investment in a real estate limited partnership in 1996 and
1994, respectively.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, amounts due from banks and
federal funds sold in the accompanying consolidated statements of cash flows. At
December 31, 1996 and 1995, cash and cash equivalents included $4,704,000 and
$5,187,000, respectively, held to satisfy the reserve requirements of the
Federal Reserve Bank.
Other Real Estate Owned
Collateral acquired through foreclosure is recorded at the lower of cost or fair
value, less estimated costs to sell, at the time of acquisition. A valuation
allowance is established for the estimated costs to sell and is charged to
expense. Subsequent changes in the fair value of other real estate owned are
reflected in the valuation allowance and charged or credited to expense. Net
operating income or expense related to foreclosed property is included in
non-interest expense in the accompanying consolidated statements of operations.
There are inherent uncertainties in the assumptions with respect to the
estimated fair value of other real estate owned. Because of these inherent
uncertainties, the amount ultimately realized on real estate owned may differ
from the amounts reflected in the consolidated financial statements. The Bank
recognized losses due to additions to the valuation allowance of $2,441,547,
$1,361,000 and $2,392,000 during 1996, 1995 and 1994, respectively.
Mortgage Servicing Rights
In May 1995, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights", as amended by SFAS No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS No. 122"). This
statement requires a banking enterprise that sells or securitizes loans and
retains the mortgage servicing rights, to allocate the total cost of the loans
to the mortgage servicing rights and the loans based on their relative fair
value if it is practicable to estimate those fair values beginning on January 1,
1996. Mortgage servicing rights are recognized as a separate asset and amortized
in proportion to, and over the period of, estimated net servicing income. In
addition, these servicing rights are evaluated by management for impairment
based on their fair value. The adoption of this standard by the Bank on January
1, 1996 did not have a significant effect on the consolidated results of
operations for 1996.
Stock-based Compensation Plans
The Company applies Accounting Principles Bulletin (APB) No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock-based compensation plans. Accordingly, no accounting recognition is given
to stock options granted at fair market value until they are exercised. Upon
exercise, net proceeds, including tax benefits realized, are credited to equity.
Earnings Per Share
Earnings per share have been computed based on the weighted average number of
shares outstanding during the period. Because the effect of common stock
equivalents would be immaterial, they have been excluded from the calculation of
weighted average shares.
Intangible Assets
Premiums paid for the purchase of core deposits are recorded as other assets and
amortized on a straight-line method over the estimated period of time over which
value is realized. Management reviews the value of the intangible asset by
comparing purchased deposit levels to the current level of acquired deposits in
the branches purchased. If any significant deposit runoff has occurred and is
determined to be permanent in nature, the asset is written down accordingly.
Accounting for Impairment of Long-Lived Assets
In March 1995 the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of." This statement
requires a review for impairment of long-lived assets and certain identifiable
intangibles to be held and used by an entity when events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. The Bank adopted the statement, which did not have a significant
effect on earnings, on January 1, 1996. If the sum of the undiscounted future
cash flows expected to result from the use and eventual disposition of the asset
is less than the carrying amount of the asset, an impairment loss is recognized.
Measurement of the impairment loss is determined by comparing the carrying
amount of the asset to its fair value. For certain long-lived assets to be
disposed of, the cost to sell the asset is deducted from the asset's fair value
in determining the impairment loss, if any. This statement does not apply to
financial instruments, core deposit intangibles, mortgage and other servicing
rights, or deferred tax assets.
Reclassification
Certain amounts in 1994 and 1995 consolidated financial statements have been
reclassified to be consistent with the 1996 presentation.
(2) INVESTMENT SECURITIES
Investments in debt securities are classified as trading, available for sale or
held to maturity as of December 31, 1996 and 1995. The amortized cost and fair
values of the debt securities classified as available for sale and held to
maturity as of December 31, 1996 and 1995 are as follows:
SECURITIES AVAILABLE FOR SALE:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------
1996
U.S. Treasury Obligations $18,146,244 $ 13,607 $ 35,993 $18,123,858
U.S. Agency Obligations 23,098,045 177,893 0 23,275,938
Mortgage-backed Securities 16,218,220 97,434 59,536 16,256,118
--------------------------------------------------------
$57,462,509 $288,934 $ 95,529 $57,655,914
========================================================
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------------------
1995
U.S. Treasury Obligations $49,644,093 $219,355 $ 11,835 $49,851,613
Mortgage-backed Securities 47,561,580 592,975 62,934 48,091,621
--------------------------------------------------------
$97,205,673 $812,330 $ 74,769 $97,943,234
========================================================
SECURITIES HELD TO MATURITY:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------------------
1996
U.S. Agency Securities $ 2,502,922 $ 0 $ 51,360 $ 2,451,562
Mortgage-backed Securities 84,400,821 22,852 870,928 83,552,745
--------------------------------------------------------
$86,903,743 $ 22,852 $922,288 $86,004,307
========================================================
There were no securities classified as held to maturity as of December 31, 1995.
Marketable equity securities are classified as available for sale at December
31, 1996 and 1995 and are stated at their fair value of $230,017 and $309,508,
respectively. Gross unrealized losses on equity securities were $30,000 at
December 31, 1996 and 1995.
The fair value of securities held for trading was $500,000 at December 31, 1996
and 1995. There were no unrealized gains or losses related to securities held
for trading at December 31, 1996 or 1995.
The contractual maturities of all debt securities held at December 31, 1996
(except for mortgage-backed securities which are presented based on estimated
duration) are as follows:
Amortized Fair
Cost Value
------------------------------------------------------------------------
U.S. Treasuries and Agencies:
Due in one year or less $ 9,246,769 $ 9,236,826
Due after one year through five years 34,500,442 34,614,532
Mortgage-backed securities:
Due within five years 40,878,015 40,752,944
Due after five years through ten years 28,395,010 28,099,961
Due after ten years 31,346,011 30,955,958
-----------------------------
$144,366,247 $143,660,221
=============================
Proceeds from sales of available for sale debt securities, including principal
repayments on mortgage-backed securities, were $42,521,602 and $50,377,072
during 1996 and 1995, respectively. Gross gains of $119,486, $659,994 and
$91,780 and gross losses of $86,003, $308,223 and $18,896, were realized from
sales of debt and equity securities in 1996, 1995 and 1994, respectively.
On November 29, 1996, $87,508,657 of securities available for sale were
transferred to the held to maturity portfolio. Net unrealized gains of $202,462
associated with these securities are being amortized over the remaining lives of
the individual securities.
At December 31, 1996, securities with a face value of $20,819,868 were pledged
to secure federal funds lines, public deposits, securities sold under agreements
to repurchase and for other purposes required by law.
(3) LOANS
The composition of the loan portfolio at December 31, 1996 and 1995 (including
Segregated Assets in 1995) is as follows:
1996 1995
- --------------------------------------------------------------------------------------
Commercial, Financial and Agricultural $ 61,091,132 $ 76,925,602
Real Estate - Commercial 182,199,150 207,235,189
Real Estate - Residential 128,576,970 148,611,053
Installment Loans to Individuals 14,831,421 16,559,626
All Other Loans (including overdrafts) 534,088 392,547
- --------------------------------------------------------------------------------------
$387,232,761 $449,724,017
======================================================================================
In connection with an acquisition, the Bank received financial assistance (loss
sharing) with respect to certain acquired loans charged off by the Bank during
the three-year period ended June 30, 1996. The FDIC reimbursed the Bank, on a
quarterly basis, 80% of net charge-offs and certain expenses related to loans
subject to loss sharing aggregating $41.1 million. Charge-offs, net of
recoveries, and eligible expenses on Segregated Assets aggregated $2,210,845 and
$3,688,550 for 1996 and 1995. The Bank received $406,595, $2,950,840 and
$6,248,802 from the FDIC for eligible charge-offs, net of recoveries and
eligible expenses, related to 1996, 1995 and 1994, respectively, in accordance
with the loss sharing arrangement. Prior to June 30, 1996, acquired loans
subject to loss sharing were classified as Segregated Assets in the accompanying
consolidated balance sheet. After June 30, 1996, acquired loans are no longer
subject to loss sharing and are no longer classified as Segregated Assets. The
composition of the Segregated Assets portfolio at December 31, 1995 is as
follows:
---------------------------------------------------------------
Commercial, Financial and Agricultural $11,793,297
Real Estate - Commercial 28,625,693
Real Estate - Residential 29,352,150
Installment Loans to Individuals 22,464
---------------------------------------------------------------
$69,793,604
===============================================================
There has been an insignificant effect on the Bank's noninterest expenses for
1996, 1995 and 1994 as a result of expenses and charge-offs relating to the
Segregated Assets. The Bank's share of the charge-offs was charged to the
allowance for losses on the Segregated Assets (such allowance being a component
of the Bank's overall allowance for loan losses), which was established in
conjunction with the acquisition. Any future losses on these loans will be
charged to the Bank's allowance for loan losses. The Bank continues to be
obligated to compensate the FDIC for a portion of recoveries received through
June, 1998 on loans previously charged off and on which the Bank received
reimbursement from the FDIC.
The Company originates primarily residential and commercial real estate loans
and a lesser amount of commercial and installment loans to customers throughout
the state of Vermont. In order to minimize its interest rate and credit risk,
the Company sells certain residential loans to the secondary market and to
financial investors such as insurance companies and pension funds located in
other states. There were no loans held for sale at December 31, 1996; loans held
for sale at December 31, 1995 aggregated $7,985,000. Substantially all of the
Company's loan portfolio is based in the state of Vermont. There are no known
significant industry concentrations in the loan portfolio. Loans serviced for
others at December 31, 1996 and 1995 amounted to $313,063,620 and $322,292,294,
respectively.
The reserve for possible loan losses is based on management's estimate of the
amount required to reflect the risks in the loan portfolio, based on
circumstances and conditions known or anticipated at each reporting date. There
are inherent uncertainties with respect to the final outcome of certain of the
Bank's loans and nonperforming assets. Because of these inherent uncertainties,
actual losses may differ from the amounts reflected in these consolidated
financial statements. Factors considered in evaluating the adequacy of the
reserve include previous loss experience, current economic conditions and their
effect on the borrowers, the performance of individual loans in relation to
contract terms and estimated fair values of properties to be foreclosed. Losses
are charged against the reserve for loan losses when management believes that
the collectibility of principal is doubtful.
Key elements of the above estimates, including those used in independent
appraisals, are dependent upon the economic conditions prevailing at the time of
the estimates. Accordingly, uncertainty exists as to the final outcome of
certain of the valuation judgments as a result of the difficult and
unpredictable conditions in the region. The inherent uncertainties in the
assumptions relative to the projected sales prices or rental rates may result in
the ultimate realization of amounts on certain loans that are different from the
amounts reflected in these consolidated financial statements.
An analysis of the reserve for possible loan losses for the years ended December
31, 1996 and 1995 is as follows:
1996 1995
- -------------------------------------------------------------------------
Balance, Beginning of Year $16,234,481 $19,928,817
Provision for Possible Loan Losses 3,150,000 12,100,000
Loans Charged Off (5,135,150) (18,360,790)
Recoveries 1,450,460 2,566,454
- -------------------------------------------------------------------------
Balance, End of Year $15,699,791 $16,234,481
=========================================================================
Loans charged off include $157,620 and $749,103 and recoveries include $247,472
and $145,380 related to the Bank's portion of charge-offs and recoveries on
Segregated Assets for 1996 and 1995, respectively.
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended. Under the standard, the
allowance for possible loan losses related to loans that are identified as
impaired is based on discounted cash flows using the loan's effective interest
rate or the fair value of the collateral for certain collateral dependent loans.
The Company has determined that commercial and commercial real estate loans
recognized by the Company as nonaccrual, loans past due over 90 days and still
accruing, restructured troubled debt and certain internally classified loans are
generally equivalent to "impaired loans."
Total impaired loans at December 31, 1996 and 1995 with a related allowance were
$8,442,892 and $29,629,572, respectively, and the specific allowance associated
with such loans was $875,000 and $2,724,371, respectively. Interest payments on
impaired loans are generally recorded as principal reductions if the remaining
loan balance is not expected to be paid in full. If full collection of the
remaining loan balance is expected, payments are recognized as interest income
on a cash basis. During 1996 and 1995 the Company recorded interest income on
impaired loans of approximately $505,000 and $949,000, respectively. The average
balance of impaired loans was $16,439,760 in 1996 and $35,280,318 in 1995.
Nonperforming assets at December 31, 1996 and 1995 were as follows:
1996 1995
---------- --------------------------------------
Segregated
Total Loans Assets Total
- -------------------------------------------------------------------------------------------------------------
Nonaccrual loans $4,091,058 $19,580,747 $6,035,520 $25,616,267
Restructured Loans 2,403,344 1,364,018 65,756 1,429,774
Loans Past Due 90 Days or More and Still Accruing 216,537 236,817 0 236,817
- -------------------------------------------------------------------------------------------------------------
Total Nonperforming Loans $6,710,939 $21,181,582 $6,101,276 $27,282,858
Other Real Estate Owned, Net 1,924,530 7,224,395 547,672 7,772,067
- -------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets $8,635,469 $28,405,977 $6,648,948 $35,054,925
=============================================================================================================
Included in nonaccrual loans are $14,520 and $8,362,454 of loans whose terms
have been substantially modified in troubled restructurings at December 31, 1996
and 1995, respectively. Additionally, the Bank had $2,403,344 and $1,429,774 of
restructured loans that were performing in accordance with the modified
agreement at December 31, 1996 and 1995, respectively. Other Real Estate Owned
is shown net of valuation reserves of $2,716,789 and $2,430,301 at December 31,
1996 and 1995.
The Bank's policy is to discontinue the accrual of interest and reverse
uncollected interest receivable on loans when scheduled payments become
contractually past due in excess of 90 days or, in the judgment of management,
the ultimate collectibility of principal or interest becomes doubtful.
The amount of interest which was not earned but which would have been earned had
the nonaccrual and restructured loans performed in accordance with their
original terms and conditions was approximately $1,493,000, $3,466,000 and
$1,859,000 in 1996, 1995 and 1994, respectively.
During 1996, the Bank consummated three transactions involving sales of loans,
including certain loans classified as impaired. The aggregate net book value of
loans sold was approximately $13,224,000, resulting in a total loss on sales of
$556,000, which was charged against the allowance for possible loan losses.
These loans were sold without recourse.
An analysis of loans in excess of $60,000 to directors and executive officers
for the year ended December 31, 1996 is as follows:
Balance, December 31, 1995 $12,574,659
Additions 273,791
Repayments (1,007,507)
-----------
Balance, December 31, 1996 $11,840,943
===========
It is the policy of the Bank to grant such loans on substantially the same
terms, including interest rates and collateral, as those prevailing for
comparable lending transactions with other persons.
(4) PREMISES AND EQUIPMENT
The components of premises and equipment included in the accompanying
consolidated balance sheets are as follows:
1996 1995
- ----------------------------------------------------------------------------------
Land and Buildings $12,139,121 $14,461,616
Leasehold Improvements 962,493 867,775
Furniture and Equipment 13,860,467 11,373,256
- ----------------------------------------------------------------------------------
26,962,081 26,702,647
Less: Accumulated Depreciation and Amortization 13,237,283 14,247,939
- ----------------------------------------------------------------------------------
$13,724,798 $12,454,708
==================================================================================
Depreciation and amortization expense amounted to $1,679,057, $1,932,074 and
$1,786,213 in 1996, 1995 and 1994, respectively.
The Bank leases certain properties for branch purposes. Rent expense on these
properties totaled $240,075, $213,096 and $214,891 for the years ended December
31, 1996, 1995 and 1994, respectively. Minimum lease payments for these
properties subsequent to December 31, 1996 are as follows: 1997 - $235,667; 1998
- - $217,663; 1999 - $220,176; 2000 - $222,764; 2001 - $225,430 and $156,079
thereafter.
During 1996, the Bank began a capital improvement project to upgrade its branch
facilities and to make further investments in technology. At December 31, 1996,
approximately $4,100,000 has been capitalized and will be depreciated over the
estimated useful lives of the individual improvements once they are placed in
service. Additionally, the Bank retired assets with a total net book value of
$601,582 in conjunction with these projects, which amount was charged against
current earnings.
(5) EMPLOYEE BENEFIT PLANS
Pension Plan
Prior to January 1995, the Company maintained a noncontributory defined benefit
plan covering all eligible employees. The plan was a final average pay plan with
benefits based on the average salary rates over the five consecutive plan years
out of the last ten consecutive plan years that produce the highest average. It
was the Company's policy to fund the cost of benefits expected to accrue during
the year plus amortization of any unfunded accrued liability that had
accumulated prior to the valuation date based on IRS regulations for funding.
During 1994, the Company made the decision to freeze the plan beginning on
January 1, 1995. During 1995, the plan was curtailed. Accordingly, all accrued
benefits were fully vested and no additional years of service or age will be
accrued. As a result of the curtailment, the Bank recognized a gain in the
amount of $1.56 million in 1995.
The plan's funded status and amounts recognized in the accompanying consolidated
balance sheets and statements of operations as of December 31, 1996 and 1995 are
as follows:
1996 1995
- ---------------------------------------------------------------------------------------
Actuarial Present Value of Benefit Obligation:
Vested Benefit Obligation $5,180,459 $5,771,869
- ---------------------------------------------------------------------------------------
Accumulated Benefit Obligation 5,180,459 5,771,869
- ---------------------------------------------------------------------------------------
Projected Benefit Obligation For Service Rendered
Through December 31, 1994 5,180,459 5,771,869
Plan Assets 6,778,159 6,835,057
- ---------------------------------------------------------------------------------------
Excess of Plan Assets Over Projected Benefit Obligation 1,597,700 1,063,188
Unrecognized Net Asset at January 1, 1987 Being Amortized
over 13.4 Years (98,424) (132,513)
Unrecognized Net Loss (Gain) (368,941) 34,114
- ---------------------------------------------------------------------------------------
Prepaid Pension Costs Included In Other Assets $1,130,335 $ 964,789
=======================================================================================
- ---------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------
Net Pension Expense (Income) Included the Following
Components:
Service Cost - Earned During the Year $ 0 $ 0 $316,681
Interest Cost on Projected Benefit Obligation 402,161 393,901 486,993
Actual Return on Plan Assets (691,781) (815,566) 100,004
Net Amortization and Deferral 119,074 172,099 (660,098)
- ----------------------------------------------------------------------------------------------
Total $(170,546) $(249,566) $243,580
==============================================================================================
The actuarial present value of the projected benefit obligation was determined
using a weighted average discount rate of 7.6%, 7.5% and 8.5% as of December 31,
1996, 1995 and 1994, respectively. For 1996 and 1995 there was no assumed rate
of increase in future compensation due to the freeze on plan benefits. The rate
of increase of future compensation levels for 1994 (prior to the curtailment of
the plan) was 4% for the period 1994-1995, 4.5% for the period 1996-1997 and 5%
thereafter. The expected long-term rate of return on assets used was 9% in 1996
and 8% in 1995 and 1994.
Employee Stock Ownership Plan/ 401(k) Plan
Under the terms of the Company's Employee Stock Ownership Plan (ESOP), eligible
employees are entitled to contribute up to 15% of their compensation to the
ESOP, and the Company contributes a percentage of the amounts contributed by the
employees, as authorized by the Company's Board of Directors. The Company
contributed approximately 120% and 127%, respectively, of the amounts
contributed by the employees (200% of up to 4.5% of individual employee
compensation in 1995) in 1996 and 1995 and approximately 75% of the amounts
contributed by employees (82% of up to 4.5% of individual employee compensation)
in 1994. Substantially all contributions to the ESOP are funded with cash and
are used to purchase the Company's common stock.
Deferred Compensation Plans
Through December 1995, the Bank maintained an Executive Salary Continuation Plan
and a Deferred Compensation Plan for Directors. In December 1995, the Bank and
participants in its Executive Salary Continuation Plan and in the Fixed Growth
Program of its Deferred Compensation Plan for Directors agreed to amend or
terminate the existing plans. In satisfaction of all liabilities under those
plans, the Bank agreed to make payments to, or credits for, the participants.
Pursuant to these agreements, the Bank established several new plans (the New
Plans), to which it made lump sum payments. The New Plans used those payments,
in part, to purchase newly issued common stock of the Company at its market
price. The purchases have been accounted for as treasury stock transactions in
the Company's consolidated financial statements. The portions of the payments
made to the New Plans that were not invested in the common stock of the Company
are included as investments in the consolidated financial statements and are
classified as trading. In conjunction with the amendment and termination of the
existing plans, the Bank either sold or surrendered certain life insurance
policies and used the proceeds as a partial source to fund the lump sum payments
made to the New Plans. As a result of these transactions, the Bank recognized
increased earnings of $673,000 in 1995. To the extent the obligations of the
Company under the New Plans are based on investments by the New Plans in other
than shares of the Company, the investments will be revalued at each reporting
date with a corresponding adjustment to compensation expense. In addition, the
obligation related to certain treasury shares, originally purchased for
$200,000, will be revalued at each reporting date, with a corresponding
adjustment to compensation expense.
The Company continues to maintain the floating growth (savings) program of the
deferred compensation plan for Directors. Benefits accrue based on the
Directors' fees deferred and a monthly allowance for interest at a rate that is
fixed from time to time at the discretion of the Board of Directors. The
benefits under the Savings Program of the Deferred Compensation Plan for
Directors and the New Plans are generally payable starting on the January 2
following a participant's 65th birthday or earlier death, and will be
distributed to the participant (or upon the participant's death, to the
participant's designated beneficiary) in accordance with the Plan.
Phantom Stock Plan
The Company maintained a Phantom Stock Plan, wherein certain key officers of the
Bank were entitled to receive an annual award of phantom shares of stock for up
to five consecutive years. All such awards were granted by June 30, 1993. In
December 1995, the Bank entered into agreements with certain participants in the
Bank's Phantom Stock Plan (the Plan). The Bank agreed to pay, and those
participants agreed to accept, lump sum amounts in full satisfaction of the
Bank's obligations under the Plan.
A summary of expenses relating to the Company's various employee benefit plans
for each of the three years in the period ended December 31, 1996 is as follows:
1996 1995 1994
- -----------------------------------------------------------------------------------
Pension Plan $(144,000) $(249,566) $243,580
Employee Stock Ownership Plan/401(k) Plan 653,017 807,605 348,468
Deferred Compensation Plans 26,629 25,185 303,939
Phantom Stock Plan (15,542) 67,677 (179,227)
- -----------------------------------------------------------------------------------
Total $520,104 $650,901 $716,760
===================================================================================
Stock-Based Compensation Plan
In October, 1995 the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation" which establishes a fair value based method of recognizing
stock-based compensation expense. As permitted by SFAS No. 123, the Company has
elected to continue to apply APB No. 25 to account for its stock-based
compensation plans. Had compensation cost for awards under the Company's
stock-based compensation plans been determined consistent with the method set
forth under SFAS No. 123, the effect on the Company's net income and earnings
per share would have been as follows:
1996 1995
----------------------- ---------------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ------------
Net Income (Loss): $6,223,733 $6,062,733 $(3,841,939) $(3,911,032)
Earnings (Loss) per share: $1.45 $1.41 $(0.90) $(0.92)
Because the method prescribed by SFAS No. 123 has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation expense
may not be representative of the amount to be expected in future years. Pro
forma compensation expense for options granted is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted. Compensation expense for options granted is
reflected over the vesting period; therefore, future compensation expense may be
greater as additional options are granted.
The Company has granted stock options to certain key employees. The options
granted vest after two years and are immediately exercisable upon vesting.
Nonqualified stock options may be granted at any price determined by the
Compensation Committee of the Board of Directors. All stock options have been
granted at fair market value at the date of grant.
The fair value of each option grant is estimated on the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
Risk-free interest rate: 6.00%
Expected life of options: 4 Years
Expected volatility of stock: 31.4%
The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
Stock Option Plan Activity
A summary of the Company's stock option activity is as follows:
1996 1995 1994
- -------------------------------------------------------------------------------------------------------
Weighted Weighted Option
Number Average Number Average Number Price
Of Exercise of Exercise of per
Shares Price Shares Price Shares Share
-----------------------------------------------------------
(In thousands, except per share amounts)
Options outstanding, beginning Of year 40 $11.72 20 $11.00 --
Granted 10 $15.38 20 $12.44 20 $11.00
Exercised -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------
Options outstanding, end of year 50 $12.45 40 $11.72 20 $11.00
Options exercisable 20 $11.00 -- --
Weighted average fair value per option
of options granted during year $ 6.83 $ 6.72
As of December 31, 1996, the exercisable options outstanding were exercisable at
a price of $11.00 and had a weighted-average remaining contractual life of 4.8
years.
(6) INCOME TAXES
The provision (benefit) for income taxes for each of the three years in the
period ended December 31, 1996 consists of the following:
1996 1995 1994
- -----------------------------------------------------------------------
Current $3,306,444 $(3,092,159) $ (952,147)
Prepaid (1,474,913) (692,726) (1,890,304)
- -----------------------------------------------------------------------
$1,831,531 $(3,784,885) $(2,842,451)
- -----------------------------------------------------------------------
Prepaid and deferred income taxes result from differences between the income
(loss) for financial reporting and tax reporting relating primarily to the
provision for possible loan losses. The net deferred tax asset amounted to
approximately $5,390,000 and $3,793,000 at December 31, 1996 and 1995,
respectively. This tax asset is included in other assets in the accompanying
consolidated balance sheets.
The components of the net deferred tax asset as of December 31, 1996 and 1995
are as follows:
1996 1995
- -----------------------------------------------------------------
Reserve for Possible Loan Losses $6,261,000 $6,780,000
Deferred Compensation 1,278,000 1,428,000
Unrealized Securities Gains (129,000) (251,000)
Loan Fees 191,000 193,000
Depreciation (481,000) (393,000)
Accrued Liabilities 291,000 524,000
Capital Loss Carryforwards 937,000 431,000
Investments in Limited Partnerships (668,000) (542,000)
Excess Servicing Right (43,000) (8,000)
Loan Market Adjustment (3,368,000) (8,630,000)
Other (1,526,000) (706,000)
Tax Credit Carryforward 3,150,000 3,276,000
NOL Carryforward 0 1,752,000
Core Deposit Intangible 434,000 370,000
- -----------------------------------------------------------------
6,327,000 4,224,000
Valuation Allowance (937,000) (431,000)
- -----------------------------------------------------------------
$5,390,000 $3,793,000
=================================================================
A valuation allowance is provided when it is more likely than not that some
portion of the net prepaid tax asset will not be realized. The Bank has
established a valuation allowance for capital loss carryforwards since such
losses may only be utilized against future capital gains.
The following is a reconciliation of the federal income tax provision (benefit),
calculated at the statutory rate, to the recorded provision (benefit) for income
taxes:
1996 1995 1994
- --------------------------------------------------------------------------------------------------
Applicable Statutory Federal Income Tax (Benefit) $2,738,790 $(2,593,120) $(1,949,042)
(Reduction) Increase in Taxes Resulting From:
Loss on Investment Securities 27,200 (114,226) (24,780)
Tax-exempt Income (73,953) (86,879) (187,301)
Tax Credits (980,487) (851,250) (707,750)
Other, Net 119,981 (139,410) 26,422
- -------------------------------------------------------------------------------------------------
$1,831,531 $(3,784,885) $(2,842,451)
=================================================================================================
The state of Vermont assesses a franchise tax for banks in lieu of income tax.
The franchise tax is assessed based on deposits and amounted to approximately
$255,000, $277,000, and $290,000 in 1996, 1995, and 1994, respectively. These
amounts are included in other expenses in the accompanying consolidated
statements of operations. The Company received refunds of its 1995, 1994, and
1993 Vermont Franchise Taxes of $271,643, $284,738, and $240,332, respectively,
during 1996.
(7) OTHER BORROWED FUNDS
Other borrowed funds consist of the following at December 31, 1996 and 1995:
1996 1995
------------------------------------------------------
Treasury Tax and Loan Notes $3,598,712 $2,085,422
Federal Funds Purchased 0 3,250,000
Short Term Borrowing 6,000,000 0
------------------------------------------------------
$9,598,712 $5,335,422
======================================================
As of December 31, 1996, the Bank may borrow up to $18,000,000 in federal funds
on an unsecured basis. The following table provides certain information
regarding other borrowed funds for the two years ended December 31, 1996 and
1995:
Weighted
Maximum Average Weighted
Month-End Average Annual Average Rate
Amount Amount Interest on Amounts
1996 Outstanding Outstanding Rate Outstanding
- -----------------------------------------------------------------------------------------
Treasury Tax and Loan Notes $ 4,571,734 $2,134,406 5.06% 5.37%
Federal Funds Purchased 11,500,000 703,419 4.59% --
Short Term Borrowing 11,500,000 773,770 5.46% 5.90%
Repurchase Agreements 7,660,000 2,365,722 5.79% --
1995
- -----------------------------------------------------------------------------------------
Treasury Tax and Loan Notes $ 4,957,123 $3,083,449 5.61% 5.16%
Federal Funds Purchased 9,500,000 975,555 5.96% 5.38%
(8) DEBT
Debt consists of the following at December 31, 1996 and 1995:
1996 1995
- ------------------------------------------------------------------------------------
9% Mortgage Note, Payable in Monthly Installments of
$1,736 (Principal and Interest) Through 2020 $ 202,991 $ 205,441
1% Mortgage Note, payable in Monthly Installments of
$2,542 (Principal and Interest) Through 2039 1,186,959 1,189,316
Federal Home Loan Bank Notes Payable, Interest Rates
from 4.83% to 8.66% Due 1996 through 2001 5,030,000 14,030,000
- ------------------------------------------------------------------------------------
$6,419,950 $15,424,757
- ------------------------------------------------------------------------------------
Maturities of debt subsequent to December 31, 1996 are as follows: 1997 -
$5,288; 1998 - $5,771; 1999 - $6,293; 2000 - $6,896; 2001 - $7,533 and
$6,388,169 thereafter.
As of December 31, 1996, the Company is in compliance with all of the covenants
of the Federal Home Loan Bank agreements.
On June 30, 1995, in accordance with a specific plan authorized by the Federal
Reserve, the Bank prepaid the outstanding $18 million of Capital Notes, which
carried an interest rate of 9.81%, using funds from operations. The Bank was
released from any further obligations under the Capital Notes Agreement. A
prepayment premium of $701,400 was paid to the noteholders. The prepayment
premium is reflected in interest expense in the accompanying consolidated
statement of operations.
On December 20, 1995, in accordance with a specific plan authorized by the
Federal Reserve, the Company prepaid $2,400,000 in obligations under the Senior
Subordinated Debt Agreement which carried an interest rate of 10%, using funds
provided by the issuance of common stock in conjunction with the settlement of
the deferred compensation plans (see Note 6). The Company was released from any
further obligations under the Senior Debt Agreement. No prepayment premium was
required.
(9) STOCKHOLDERS' EQUITY
Vermont state law requires the Bank to appropriate a minimum of 10% of net
income to surplus until such time as appropriated amounts equal 10% of deposits
and other liabilities. The Company's stockholders' equity includes $7,189,562 as
of December 31, 1996 and $6,561,600 as of December 31, 1995 of such
appropriations. Vermont state law also restricts the payment of dividends under
certain circumstances.
(10) REENGINEERING
The Company began a reengineering project during 1995 to reduce ongoing
operating costs and increase noninterest income. As a result, the Bank
implemented a plan to reduce its workforce by approximately 250 employees. All
employees were offered the opportunity to voluntarily terminate their
employment, which would entitle them to a severance package equal to one week's
pay for each year of service plus four additional weeks. Employees whose age
plus years of service with the Company equalled at least 60 were offered an
early retirement option whereby, in lieu of the plan described above, five years
would be added to both their years of service and their age for purposes of
determining vested benefits through the pension plan. The total severance
charges realized by the Company as a result of the reengineering project were
approximately $1.3 million. The incremental cost of the enhanced early
retirement benefit realized during 1995 was approximately $728,000.
In conjunction with the reengineering project, the Company engaged a consulting
firm to assist in the identification of possible workforce reductions and the
implementation of the reengineering plan. The fee earned by these consultants
is, in part, contingent upon actual future operating cost reductions and the
increase in noninterest income, and the Company recognized all expenses
associated with fees to these consultants of approximately $2 million in 1995.
Pursuant to an agreement with these consultants, the Company will make the final
payment to the consultants in 1997, which has been fully accrued as of December
31, 1996.
(11) COMMITMENTS AND CONTINGENCIES
During the fall of 1994, lawsuits were brought against the Company, the Bank,
the Trust Company (collectively referred to as "the Companies") and certain
directors of the Companies. These lawsuits related to certain investments
managed for Trust Company clients and placed in the Piper Jaffray Institutional
Government Income Portfolio. Separately, and before the suits were filed, the
Companies had initiated a review of those investments. As a result of the
review, the Trust Company paid to the affected Trust Company clients a total of
approximately $9.2 million in December 1994. The payments do not constitute a
legal settlement of any claims in the lawsuits. However, based on consultation
with legal counsel, management believes that further liability, if any, of the
Companies on account of matters complained of in the lawsuits will not have a
material adverse effect on the consolidated financial position and results of
operations of the Company. In December 1994, the Trust Company received a
payment of $6,000,000 from its insurance carriers in connection with these
matters, which was treated as a reduction in amounts reimbursed to Trust Company
customers in the accompanying consolidated statement of operations. The
Companies are separately pursuing claims against Piper Jaffray Companies, Inc.
and others on account of the losses that gave rise to the $9.2 million payment
by the Companies. The claims of the Trust Company, as trustee, against Piper
Jaffray Companies were joined with claims of other investors in the Piper Fund
in a class action in the United States District Court for the District of
Minnesota. The class action was settled by the parties, and on December 14,
1995, the settlement was approved by the Court. By order dated January 11, 1996,
the Court ordered the share of the settlement proceeds attributable to Trust
Company investments not be paid pending further order. On February 18, 1997, the
District Court entered an Order for Final Judgment. That Order provides, among
other matters, that except to the extent (if at all) any other court with
jurisdiction has given leave for some or all of the proceeds to be deposited
with the court pursuant to Vermont Rule of Civil Procedure 67, Federal Rule of
Civil Procedure 67, or such other rule as may apply, and absent an appeal, the
entire net settlement proceeds attributable to the Trust Company investments are
to be paid to the Trust Company starting approximately sixty-one days after the
date of the Order. Any recovery of settlement proceeds is subject to the terms
of an agreement between the Companies and their insurance carriers. The
attorneys representing the plaintiffs in one of the lawsuits discussed above
have taken the position that amounts recovered by the Companies on these claims
should be paid to the affected Trust Company clients (net of legal fees to those
attorneys), in addition to the $9.2 million already paid.
The attorneys representing the plaintiffs in one of the lawsuits discussed above
requested an award of attorneys' fees for allegedly causing the Companies to
make the $9.2 million payment and asked the District Court to order the Trust
Company to withhold payment of $500,000. The Trust Company resisted claims for
payment of such fees and, as a result, has been directed to place the sum of
$500,000 into escrow pending a ruling by the Court. On appeal by the Companies,
the United States Court of Appeals affirmed in part, vacated in part, and
reversed for further proceedings the lower court's judgment. The attorneys
representing the plaintiffs in that lawsuit have indicated that they intend to
seek damages as well as attorneys' fees. There is the possibility that the
Companies will be required to remit all or part of the escrowed funds, or to pay
damages. However, based upon consultation with legal counsel, management
believes that on the facts of this case there is no substantial authority for an
award of such fees or damages in those proceedings.
The Bank is also involved in various legal proceedings arising in the normal
course of business. Based upon consultation with legal counsel, management
believes that the resolution of these matters will not have a material effect on
the consolidated financial position and results of operations of the Company.
(12) PARENT COMPANY
The Parent Company's investments in its subsidiaries are recorded using the
equity method of accounting. Summarized financial information relative to the
Parent Company only balance sheets at December 31, 1996 and 1995 and statements
of operations and cash flows for each of the three years in the period ended
December 31, 1996 is as follows:
Balance Sheets - December 31, 1996 1995
- -----------------------------------------------------------------------------------
Assets:
Investment in and Advances to Subsidiaries * $ 47,999,312 $ 41,843,980
Other Assets 860,191 972,452
- -----------------------------------------------------------------------------------
Total Assets $ 48,859,503 $ 42,816,432
===================================================================================
Liabilities and Equity Capital:
Other Liabilities 2,609,735 2,567,569
Equity Capital 46,249,768 40,248,863
- -----------------------------------------------------------------------------------
Total Liabilities and Equity Capital $ 48,859,503 $ 42,816,432
===================================================================================
Statements of Operations for the Year Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
Equity in Undistributed Earnings (Loss) of Subsidiaries* $ 6,306,352 $ (4,021,297) $ (2,679,429)
Other Income (Expense), Net (125,180) 72,360 (374,142)
Benefit from Income Taxes 42,561 106,998 163,547
- -------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 6,223,733 $ (3,841,939) $ (2,890,024)
=============================================================================================================
Statements of Cash Flows for the Year Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Loss $ 6,223,733 $ (3,841,939) $ (2,890,024)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by (Used in) Operating Activities:
Amortization $ 0 $ 0 $ 6,360
Gains on Investment Securities 0 (309,020) (91,780)
(Increase) Decrease in Miscellaneous Receivables 98,754 (612,543) (11,425)
Increase (Decrease) in Miscellaneous Payables 0 2,527,569 .(20,000)
Equity in Undistributed (Income) Losses of Subsidiaries (6,306,352) 4,021,297 2,679,429
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities $ 16,135 $ 1,785,364 $ (327,440)
- -------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Repayment of Advances from Subsidiaries $ 0 $ 1,035,460 $ 2,263,399
Proceeds from Sales of Investment Securities 0 643,931 682,030
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided by Investing Activities $ 0 $ 1,679,391 $ 2,945,429
- -------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Sale of Treasury Stock $ 0 $ 178,730 $ 0
Acquisition of Treasury Stock 0 (2,082,525) 0
Issuance of Common Stock 0 2,553,802 0
Principal Payments on Debt 0 (4,800,000) (2,400,000)
- -------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities $ 0 $ (4,149,993) $ (2,400,000)
- -------------------------------------------------------------------------------------------------------------
Increase (decrease) in Cash and Cash Equivalents 16,135 (685,238) 217,989
Cash and Cash Equivalents at Beginning of Year 301,495 986,733 768,744
- -------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 317,630 $ 301,495 $ 986,733
=============================================================================================================
Total Interest Paid $ 0 $ 333,333 $ 580,000
Taxes Paid $ 0 $ 0 $ 50,000
* Account balances are partially or fully eliminated in consolidation.
(13) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Commitments and Off-Balance Sheet Risk
The Bank is a 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 primarily include commitments to extend credit and
financial guarantees. Such instruments involve, to varying degrees, elements of
credit and interest rate risk that are not recognized in the accompanying
consolidated balance sheets.
Exposure to credit loss in the event of nonperformance by the other party to the
financial instruments for commitments to extend credit and financial guarantees
written is represented by the contractual amount of those instruments. The Bank
uses the same credit policies in making commitments as it does for on-balance
sheet instruments. The contractual amounts of these financial instruments at
December 31, 1996 and 1995 are as follows:
1996 Contractual Amount
---------------------------------------------------------------------
Financial Instruments Whose Contract Amounts
Represent Credit Risk:
Commitments to Extend Credit $80,756,000
Standby Letters of Credit 6,104,000
Loans Sold with Recourse 1,219,000
1995 Contractual Amount
---------------------------------------------------------------------
Financial Instruments Whose Contract Amounts
Represent Credit Risk:
Commitments to Extend Credit $92,596,000
Standby Letters of Credit 6,550,000
Loans Sold with Recourse 1,832,000
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 a portion of the commitments are expected to
expire without being drawn upon, the total commitment amount does not
necessarily represent a future cash requirement. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained by the Bank upon extension of credit is based on management's credit
evaluation of the counterparty, and an appropriate amount of real and/or
personal property is obtained as collateral.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee performance of a customer to a third
party. Those guarantees are primarily issued to support public and private
borrowing arrangements. Most guarantees extend for less than two years, and 75%
are for less than $100,000. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. The Bank obtains real and/or personal property as collateral for
those commitments for which collateral is deemed to be necessary.
The Bank may enter into commitments to sell loans which involve market and
interest rate risk. There were no such commitments at December 31, 1996. At
December 31, 1995, the remaining commitments to deliver loans pursuant to master
commitments with secondary market investors amounted to approximately
$8,947,000.
Interest Rate Floor Contracts
Interest rate floor transactions generally involve the exchange of fixed and
floating rate interest payments without the exchange of the underlying principal
amounts. The Company has used a floor contract to mitigate the effects on net
interest income in the event interest rates on floating rate loans decline. The
Company is exposed to risk should the counterparty default in its responsibility
to pay interest under the terms of the floor agreement, but minimizes this risk
by performing normal credit reviews on the counterparties, by limiting its
exposure to any one counterparty, and by utilizing well known national
investment firms as counterparties. Notional principal amounts are a measure of
the volume of agreements transacted, but the level of credit risk is
significantly less. At December 31, 1996, the notional principal amount of
contracts outstanding was $20,000,000 and the amortized cost of such contracts
was $73,900. There were no outstanding interest rate floor agreements at
December 31, 1995.
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
Investments
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents and stock in the Federal Home Loan Bank of Boston (FHLB)
approximate fair values. Fair value for investment securities is determined from
quoted market prices, when available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable instruments.
An analysis of the estimated fair value of the investment securities as of
December 31, 1996 and 1995 is as follows:
1996 1995
- ------------------------------------------------------------------------------------
Carrying Calculated Carrying Calculated
Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------------
(In Thousands)
Securites Available for Sale $ 57,656 $ 57,656 $97,943 $97,943
Securities Held to Maturity 86,904 86,004 -- --
Marketable Equity Securities 230 230 310 310
- ----------------------------------------------------------------------------------
$144,790 $143,890 $98,253 $98,253
==================================================================================
Loans
The fair value of variable rate loans that reprice frequently and have no
significant credit risk is based on carrying values. The fair value of fixed
rate (one-to-four family residential) mortgage loans, and other consumer loans,
is based on quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan characteristics.
The fair value for other loans is estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality.
An analysis of the estimated fair value of the loan portfolio (including
Segregated Assets as of December 31, 1995) as of December 31, 1996 and 1995 is
as follows:
1996 1995
---------------------------------------------------------------
Carrying Calculated Carrying Calculated
Amount Fair Value Amount Fair Value
---------------------------------------------------------------
(In Thousands)
Net Loans $371,533 $371,187 $433,490 $435,291
===============================================================
Deposits
The fair value of demand deposits approximates the amount reported in the
consolidated balance sheets. The fair value of variable rate, fixed term
certificates of deposit also approximate the carrying amount reported in the
consolidated balance sheets. The fair value of fixed rate and fixed term
certificates of deposit is estimated using a discounted cash flow which applies
interest rates currently being offered for deposits of similar remaining
maturities.
An analysis of the estimated fair value of deposits as of December 31, 1996 and
1995 is as follows:
1996 1995
- ------------------------------------------------------------------------------------
Carrying Calculated Carrying Calculated
Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------------
(In Thousands)
Demand Deposits $ 80,576 $ 80,576 $ 85,417 $ 85,804
Savings, NOW and Money Market 263,882 263,967 278,242 278,242
Time Deposits Over $100,000 20,369 20,522 20,473 20,792
Other Time 143,452 144,516 160,382 162,881
- -----------------------------------------------------------------------------------
$508,279 $509,581 $544,514 $547,719
===================================================================================
Debt
The fair value of debt is estimated using current market rates for borrowings of
similar remaining maturity.
An analysis of the estimated fair value of the debt of the Company as of
December 31, 1996 and 1995 is as follows:
1996 1995
------------------------------------------------------
Carrying Calculated Carrying Calculated
Amount Fair Value Amount Fair Value
------------------------------------------------------
Debt $6,420 $6,732 $15,425 $15,990
------------------------------------------------------
Commitments to Extend Credit And Standby Letters Of Credit
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of financial standby letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties. The fair value of
commitments to extend credit and standby letters of credit is $88,000 and
$101,000 as of December 31, 1996 and 1995, respectively.
(15) SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION (in thousands):
Merchants Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 1996
1996 1995
------------------------------------- -------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
- ---------------------------------------------------------------------------------------------------------------------
Interest and Fee Income $12,204 $11,990 $11,901 $11,909 $13,053 $13,362 $12,460 $12,440
Interest Expense 4,858 4,642 4,573 4,599 5,872 6,647 5,407 5,076
- ---------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 7,346 $ 7,348 $ 7,328 $ 7,310 $ 7,181 $ 6,715 $ 7,053 $ 7,364
Provision for Possible Loan Losses (A) 900 900 900 450 2,700 7,600 900 900
Non-Interest Income (B) 2,913 2,174 1,897 1,972 2,210 2,094 3,524 1,987
Non-Interest Expense (C) 7,646 6,639 6,215 6,582 7,180 7,992 11,116 7,367
Income (Loss) Before Provision
(Benefit) for Income Taxes $ 1,713 $ 1,983 $ 2,110 $ 2,250 $ (489) $(6,783) $(1,439) $ 1,084
Provision (Benefit) For Income Taxes 344 439 501 548 (528) (2,732) (717) 192
- ---------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 1,369 $ 1,544 $ 1,609 $ 1,702 $ 39 $(4,051) $ (722) $ 892
=====================================================================================================================
Earnings (Loss) Per Share $ 0.32 $ 0.36 $ 0.37 $ 0.40 $ 0.01 $ (0.95) $ (0.17) $ 0.21
=====================================================================================================================
Dividends Per Share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
=====================================================================================================================
(A) During the second quarter of 1995, the Bank provided reserves for possible
loan losses of $5 million in addition to planned provisions of $1.75
million to cover exposure identified during loan renewals and
restructures.
(B) The Bank recognized a gain of $1.6 million in conjunction with the
curtailment of its pension plan during the third quarter of 1995.
(C) During the third quarter of 1995 the Bank began a reengineering project.
The Bank recognized total severance charges of $1.5 million and total fees
to consultants of $2.2 million in conjunction with the reengineering.
(16) REGULATORY ENVIRONMENT
The Bank and the Company are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possible additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Bank's and the Company's financial statements. Under
capital adequacy guidelines, the Bank and the Company must meet specific capital
guidelines that involve quantitative measures of the Bank's and the Company's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank is also subject to the regulatory
framework for prompt corrective action that requires the Bank to meet specific
capital guidelines to be considered well capitalized. The Bank's and the
Company's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank and the Company to maintain minimum ratios (set forth in the
table below) of total and Tier-1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier-1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the Bank
and the Company meet all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the FDIC categorized
the Bank as well-capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification
that management believes have changed the institution's category. To be
considered well capitalized under the regulatory framework for prompt corrective
action, the Bank must maintain minimum Tier-1 Leverage, Tier-1 Risk-Based, and
Total Risk-Based Capital ratios as set forth in the table below.
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
- -----------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
- -----------------------------------------------------------------------------------------------------
As of December 31, 1996:
Merchants Bancshares, Inc.:
Tier 1 Risk-Based Capital $43,814 11.08% $15,811 4.00% N/A
Total Risk-Based Capital $48,888 12.37% $31,623 8.00% N/A
Tier 1 Leverage Capital $43,814 7.50% $23,381 4.00% N/A
Merchants Bank:
Tier 1 Risk-Based Capital $45,517 11.56% $15,757 4.00% $23,635 6.00%
Total Risk-Based Capital $50,574 12.84% $31,513 8.00% $39,392 10.00%
Tier 1 Leverage Capital $45,517 7.80% $23,330 4.00% $29,163 5.00%
As of December 31, 1995 (Unaudited)
Merchants Bancshares, Inc.:
Tier 1 Risk-Based Capital $36,023 7.81% $18,450 4.00% N/A
Total Risk-Based Capital $41,777 9.06% $36,900 8.00% N/A
Tier 1 Leverage Capital $36,023 5.87% $24,548 4.00% N/A
Merchants Bank:
Tier 1 Risk-Based Capital $37,627 8.19% $18,386 4.00% $27,579 6.00%
Total Risk-Based Capital $43,420 9.45% $36,772 8.00% $45,965 10.00%
Tier 1 Leverage Capital $37,627 6.15% $24,486 4.00% $30,608 5.00%
Discussion of Prior Regulatory Actions
In March 1993, the FDIC and the State of Vermont Department of Banking,
Insurance and Securities (the Commissioner) conducted a joint field examination
of the Bank. As a result of this examination, the Bank entered into a Memorandum
of Understanding ("MOU") with the FDIC and the Commissioner. Under the terms of
the MOU, the Bank was required to, among other things, maintain a leverage
capital ratio of at least 5.5% and refrain from declaring dividends. The Bank
operated under the terms of the MOU until its removal on October 15, 1996.
In February 1994, the Company and the Federal Reserve entered into an agreement.
Under this agreement, among other things, the Company was not permitted to
declare or pay a dividend or incur any debt without the approval of the Federal
Reserve. The Company operated under the terms of the agreement until its removal
on June 3, 1996.
In February 1995, the Trust Company entered into an MOU with the FDIC and the
Commissioner to put into effect corrective actions relating to certain
operating, technical and regulatory issues. The Trust Company operated under the
terms of the MOU until its removal on August 8, 1996.
Merchants Bancshares, Inc. and Subsidiaries
Interest Management Analysis
(Taxable Equivalent, in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
Total Average Assets $580,860 $642,487 $709,077
- ------------------------------------------------------------------------------------------------------------------------------
% of % of % of
Average Average Average
NET INTEREST INCOME: 1996 Assets 1995 Assets 1994 Assets
Interest and Dividend Income $ 45,807 7.89% $ 48,988 7.62% $ 50,041 7.06%
Fees on Loans 2,333 0.40% 2,492 0.39% 3,571 0.50%
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 48,140 8.29% $ 51,480 8.01% $ 53,612 7.56%
Interest Expense 18,672 3.21% 23,002 3.58% 22,377 3.16%
Net Interest Income Before Provision for Possible Loan Losses $ 29,468 5.07% $ 28,478 4.40% $ 31,235 4.40%
Provision for Possible Loan Losses 3,150 0.54% 12,100 1.88% 10,000 1.41%
- -----------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 26,318 4.53% $ 16,378 2.55% $ 21,235 2.99%
OPERATING EXPENSE ANALYSIS:
Non-Interest Expense
Personnel $ 10,013 1.72% $ 13,434 2.09% $ 13,196 1.86%
Occupancy Expense 2,054 0.35% 2,178 0.34% 2,324 0.33%
Equipment Expense 2,024 0.35% 2,069 0.32% 2,004 0.28%
Other 12,991 2.24% 15,974 2.49% 17,939 2.53%
- -----------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense $ 27,082 4.66% $ 33,655 5.24% $ 35,463 5.00%
Less Non-Interest Income Service Charges on Deposits $ 3,347 0.58% $ 3,184 0.50% $ 3,452 0.49%
Other, Including Securities Gains (Losses) 5,580 0.96% 6,632 1.03% 5,337 0.75%
- -----------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income $ 8,927 1.54% $ 9,816 1.53% $ 8,789 1.24%
- -----------------------------------------------------------------------------------------------------------------------------
Net Operating Expense $ 18,155 3.13% $ 23,839 3.71% $ 26,674 3.76%
=============================================================================================================================
SUMMARY:
Net Interest Income $ 26,318 4.53% $ 16,378 2.55% $ 21,235 2.99%
Less: Net Overhead 18,155 3.13% 23,839 3.71% 26,674 3.76%
- -----------------------------------------------------------------------------------------------------------------------------
Profit Before Taxes - Taxable Equivalent Basis $ 8,163 1.41% $ (7,461) -1.16% $ (5,439) -0.77%
Net Profit (Loss) After Taxes $ 6,224 1.07% $ (3,842) -0.60% $ (2,890) -0.41%
=============================================================================================================================
Merchants Bancshares, Inc.
Five Year Summary of Operations
(Not Covered by Report of Independent Public Accountants)
(In Thousands)
For the years ended 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
Interest and Investment Income $ 48,004 $ 51,315 $ 53,319 $ 51,474 $ 49,239
Interest Expense 18,672 23,002 22,377 21,956 24,051
- -----------------------------------------------------------------------------------------------------------------
Net Interest Income $ 29,332 $ 28,313 $ 30,942 $ 29,518 $ 25,188
Provision for Possible Loan Losses 3,150 12,100 10,000 23,822 8,050
- -----------------------------------------------------------------------------------------------------------------
Net Interest Income after Provision for Loan Losses 26,182 16,213 20,942 5,696 17,138
- -----------------------------------------------------------------------------------------------------------------
Other Income $ 9,362 $ 12,766 $ 15,038 $ 12,128 $ 10,195
Other Expense 27,489 36,606 41,712 28,016 21,081
- -----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES $ 8,055 $ (7,627) $ (5,732) $ (10,192) $ 6,252
Provision (benefit) for Income Taxes (Notes 2 and 4) 1,831 (3,785) (2,842) (4,410) 575
- -----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 6,224 $ (3,842) $ (2,890) $ (5,782) $ 5,677
- -----------------------------------------------------------------------------------------------------------------
SELECTED AVERAGE BALANCES (IN THOUSANDS)
Total Assets $ 580,860 $ 642,487 $ 709,077 $ 705,516 $ 602,317
Average Earning Assets 533,192 575,551 620,070 627,049 542,157
Loans 406,514 481,047 514,843 515,805 441,291
Total Deposits 513,923 556,242 598,305 570,957 490,908
Long-Term Debt 8,925 28,707 45,433 47,835 42,171
Shareholders' Equity 43,111 40,848 46,331 48,511 51,548
Shareholders' Equity plus Loan Loss Reserve 59,094 58,794 65,322 59,999 59,028
SELECTED RATIOS
Net Income (Loss) to:
Average Stockholders' Equity 14.44% -9.41% -6.24% -11.92% 11.01%
Average Assets 1.07% -0.60% -0.41% -0.82% 0.94%
Average Stockholders' Equity to Average Total Assets 7.42% 6.36% 6.53% 6.88% 8.56%
Common Dividend Payout Ratio 0.00% 0.00% 0.00% 0.00% 58.48%
Loan Loss Reserve to Total Loans at Year End 4.05% 3.61% 3.90% 3.50% 1.73%
Net Charge-Offs to Average Loans 1.26% 3.28% 1.97% 1.95% 1.65%
PER SHARE (Note 1)
Net Income (Loss) $ 1.45 $ (0.90) $ (0.68) $ (1.37) $ 1.39
Cash Dividends 0.00 0.00 0.00 0.20 0.80
Year End Book Value 10.78 9.38 10.00 10.74 12.39
OTHER
Cash Dividends Paid (In Thousands) $ 0 $ 0 $ 0 $ 848 $ 3,320
Stock Dividends Issued 0.0% 0.0% 0.0% 0.0% 3.0%
(Note 1): All stock dividends and splits are reflected retroactively.
See Note 9 of Notes to Consolidated Financial Statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, this Annual Report on
Form 10-K may contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Investors are cautioned that forward-looking statements are inherently
uncertain. Actual performance and results of operations may differ materially
from those projected or suggested in the forward-looking statements due to
certain risks and uncertainties, including, without limitation, (i) the fact
that the Company's success is dependent to a significant extent upon general
economic conditions in Vermont and Vermont's ability to attract new business,
(ii) the fact that the Company's earnings depend to a great extent upon the
level of net interest income (the difference between interest income earned on
loans and investments and the interest expense paid on deposits and other
borrowings) generated by the Bank, and the level of net interest income and thus
the Bank's results of operations may be adversely affected by increases or
decreases in interest rates, and (iii) the fact that the banking business is
highly competitive and the profitability of the Company depends upon the Bank's
ability to attract loans and deposits in Vermont, where the Bank competes with a
variety of traditional banking and nontraditional institutions such as credit
unions and finance companies. These factors, as well as general economic and
market conditions, may materially and adversely affect the market price of the
Company's common shares. Because of these and other factors, past financial
performance should not be considered an indicator of future performance. The
forward-looking statements contained herein represent the Company's judgment as
of the date of this Form 10-K, and the Company cautions readers not to place
undue reliance on such statements.
The following discussion and analysis of financial condition and results of
operations of the Company and its subsidiaries for the three years ended
December 31, 1996 should be read in conjunction with the consolidated financial
statements and notes thereto and selected statistical information appearing
elsewhere in this annual report. The information is discussed on a fully taxable
equivalent basis. Particular attention should be given to the INTEREST
MANAGEMENT ANALYSIS and OPERATING EXPENSE ANALYSIS TABLES immediately preceding
this discussion upon which this discussion is primarily based. The financial
condition and operating results of the Company essentially reflect the
operations of its principal subsidiary, the Merchants Bank.
RESULTS OF OPERATIONS: OVERVIEW
The Company recognized net income of $6.2 million for the year ended December
31, 1996. Core earnings (pretax earnings, excluding the provision for loan
losses and reengineering expenses) increased from approximately $8.5 million in
1995 to $11.2 million in 1996. This increase is attributable to several factors.
The Company's portfolio of nonperforming loans decreased by $20.6 million from
$27.3 million at year-end 1995 to $6.7 at year-end 1996. Additionally, the
Company's OREO portfolio decreased by $5.9 million from $7.8 million at year-end
1995 to $1.9 million at year-end 1996. These reductions in nonperforming asset
levels have allowed the Company to redeploy funds into earning assets and reduce
administrative efforts associated with a nonperforming asset portfolio. Also,
the Company began a reengineering project during 1995 to reduce ongoing
operating costs through a reduction in workforce and improved operating
efficiencies, and to increase noninterest income. The Company estimates that the
changes made as a result of the reengineering have reduced noninterest expenses
by approximately $4.6 million, and have had a marginal effect on noninterest
income.
The Company recognized a net loss of $3.8 million for the year ended December
31, 1995, due primarily to the substantial provision for possible loan losses of
$12.1 million (refer to the discussion under "Provision for Possible Loan
Losses" that follows), and $4 million in reengineering charges and related
consultants fees. Substantially all costs incurred and actions associated with
the reengineering project occurred during 1995. Core earnings (pretax earnings
excluding the provision for loan losses and reengineering expenses) showed
slight improvement from 1994 to 1995 due primarily to reductions in
nonperforming assets.
The Company recognized a net loss of $2.9 million for the year ended December
31, 1994, due primarily to the following three items: provisions for possible
loan losses of $10 million (refer to the discussion under "Provision for
Possible Loan Losses" that follows), an increase in the provision for
write-downs of other real estate owned of $2.4 million, and the net expenses
related to the reimbursement of Trust Company clients for losses related to
investments managed by the Trust Company and placed in the Piper Jaffray
Institutional Government Income Portfolio. The net Trust Company expenses
totaled approximately $3.2 million after an insurance reimbursement of $6
million.
Net income (loss) on a per share basis was $1.45, $(0.90) and $(0.68) for the
years ended December 31, 1996, 1995 and 1994, respectively. No dividends were
paid in 1996, 1995 or 1994. The Company declared a dividend, its first since
April of 1993, of $0.10 per share on January 21, 1997, payable on February 14,
1997 to shareholders of record as of February 4, 1997.
The net income (loss) as a percentage of average equity capital was 14.44%,
(9.41%) and (6.24%) for 1996, 1995 and 1994, respectively. The ten-year average
return on equity is 8.70% at December 31, 1996. The net income (loss) as a
percentage of average assets was 1.07%, (.60%) and (.41%) in 1996, 1995 and
1994, respectively. The ten-year average return on assets is .62% at December
31, 1996.
NET INTEREST INCOME
Net interest income before the provision for possible loan losses is the
difference between total interest, loan fees and investment income, and total
interest expense. Net interest income before the provision for possible loan
losses is a key indicator of a bank's performance in managing its assets and
liabilities. Maximization and stability of net interest income is a primary
objective of the Bank. From 1995 to 1996, total interest income decreased $3.3
million (6.45%), and total interest expense decreased $4.3 million (18.8%). This
resulted in an increase to net interest income before the provision for possible
loan losses on a fully taxable equivalent basis of $1 million (4.2%) from $28.5
million in 1995 to $29.5 million in 1996. There are a number of factors
contributing to this change. First, the Bank's overall loan portfolio decreased
by $62 million (13.8%), while the Bank's investment portfolio increased by $46
million (47%) (see "Balance Sheet Analysis" for a more comprehensive discussion
of changes in the balance sheet). This shift of funds from the loan portfolio to
the lower yielding investment portfolio decreased the Bank's overall net
interest income. However, the impact of the shift from the loan portfolio to the
investment portfolio was mitigated by three major factors. First, the Bank
decreased its nonperforming loan portfolio by $20.6 million (75%), which created
earning assets and increased the yield on the overall loan portfolio from 9.61%
to 9.86%. Second, during 1995, the Company paid off $20.4 million in long term
debt accruing at an average interest rate of 9.81%, resulting in a reduction in
the Company's cost of funds from 4.51% in 1995 to 4.14% in 1996. Finally, the
Bank made a strategic decision to lower the rates paid on certain
interest-bearing checking and money market accounts, which reduced its cost of
deposits from 4.16% in 1995 to 4.07% in 1996. These factors combined to increase
the Company's net interest margin from 4.95% in 1995 to 5.53% in 1996.
Net interest income before the provision for possible loans losses on a fully
taxable equivalent basis decreased 8.5% from $31.2 million in 1994 to $28.5
million in 1995. The primary cause for this net decline was a decrease in
average assets of $66.6 million (9.39%) from 1994 to 1995. Continued decreases
in the level of nonperforming assets increased net interest margin to 4.95% in
1995 from 4.89% in 1994 and the average yield on earning assets to 8.94% in 1995
from 8.39% in 1994. Total interest income decreased 8.4% in 1995 from 1994. The
decrease in net interest income is primarily due to a decrease in fees on loans
discussed above. Total interest expense increased 2.79% from 1994 to 1995 due to
a higher overall interest rate environment, which created a higher cost of funds
in 1995 as compared to 1994.
Total fees on loans changed by an immaterial amount from 1995 to 1996 and had a
minimal effect on the change in net interest income. Fees on loans decreased
$1.1 million (30.2%) from 1994 to 1995 as a result of a less favorable interest
rate environment during 1995 for refinancing of home mortgages. Additionally,
over the last two years, the Bank has shifted its strategic focus, deemphasizing
the commercial and home mortgage portfolio, as it more actively pursues the
small business and commercial portfolio.
NONINTEREST INCOME AND EXPENSES
Net operating expense (net overhead) is total noninterest expense reduced by
noninterest income. Operating expense includes all costs associated with staff,
occupancy, equipment, supplies and all other noninterest expenses. Noninterest
income consists primarily of fee income on deposit accounts, trust services,
credit card, corporate and data processing services and gains or losses on
investment securities.
Excluding the FDIC assistance received pursuant to the loss sharing agreement
(see "FDIC Assisted Acquisition"), the gain on the curtailment of the pension
plan recognized in 1995, and net gains on investment securities, noninterest
income increased $1 million (13.35%) from 1995 to 1996. There were two
nonrecurring items comprising the majority of the net increase: a net gain on
the sale of a branch of $300,000 and refunds of Vermont Franchise Taxes paid in
prior years of $800,000.
Noninterest expenses decreased $6.6 million (19.5%) in 1996 from 1995, excluding
losses and write-downs on Segregated Assets reimbursed by the FDIC. Contributing
significantly to this reduction were an absence of reengineering expenses in
1996 compared to $4 million in reengineering and related costs recognized in
1995 (see Note 10 and discussion following). Additionally, salaries and benefits
decreased by $3.4 million (25.5%) in 1996 from 1995 as a result of the
reengineering project begun in 1995.
Excluding the FDIC assistance received from loss-sharing, the gain on the
curtailment of the pension plan and net gains on investment securities,
noninterest income earned in 1995 decreased $815,000 (9.35%) from 1994. This
decrease is due primarily to a $262,000 decrease in merchant discount fees and a
$268,000 decrease in service charge revenue. The Bank's deposit base decreased
by $37 million (6.3%) during 1995, contributing to these decreases.
Noninterest expenses decreased $1.8 million (5.1%), not including the amount of
losses and write-downs on Segregated Assets, which were reimbursed by the FDIC,
in 1995 as compared to 1994. There are several large transactions that occurred
during 1994 and 1995 which, on a combined basis, contributed to this decrease.
During 1995, the Bank began a reengineering project to reduce ongoing operating
costs and increase noninterest income. As a result, the Bank implemented a plan
to reduce its workforce by approximately 250 employees. All employees were
offered the opportunity to voluntarily terminate their employment, which would
entitle them to a severance package equal to one week's pay for each year of
service plus four additional weeks. Employees whose age plus years of service
with the Company equalled at least 60 were offered an early retirement option
whereby, in lieu of the plan described above, five years would be added to both
their years of service and their age for purposes of determining vested benefits
through the pension plan. The total charge for severance realized by the Bank
was $1.3 million. The incremental cost of the enhanced early retirement benefit
realized during 1995 was approximately $728,000. In conjunction with the
reengineering changes, the Bank engaged a consulting firm to assist in the
identification of areas where the Bank could reduce expenses or enhance revenue.
The Bank recognized expenses associated with fees to these consultants of
approximately $2 million in 1995. Pursuant to an agreement with these
consultants, the Company will make the final payment to the consultants in 1997,
which has been fully accrued as of December 31, 1996. During 1994, the Company
recognized a net charge related to the Trust Company's reimbursement to its
clients due to investments in the Piper Jaffray Institutional Government Income
Portfolio totaling $3.2 million after the recognition of a $6 million
reimbursement from insurance carriers.
Losses and Write-downs of Other Real Estate Owned (OREO) increased $413,000 from
1995 to 1996. This increase is due primarily to the Bank's aggressive marketing
of its OREO portfolio and necessary adjustments to bring the value of the
remaining properties in line with the market. Losses and Write-downs of OREO
decreased $805,000 from 1994 to 1995, due primarily to a decrease in the amount
provided for the reserve on the portfolio from $2.3 million in 1994 to $1.4
million in 1995. The change in noninterest expense from 1994 to 1995 was also
affected by the write-down of the core deposit intangible related to the
acquisition of the NFNBV in the amount of $458,000 and $686,000 in 1995 and
1994, respectively. Additionally, during 1994, the Bank wrote off the carrying
value of one of its investments in real estate limited partnerships totaling
$546,000 due to significant cash flow deficiencies experienced by the
partnership, which caused the Bank to question the value of its investment.
The Company recognized $851,000 in low-income housing tax credits as a reduction
in the provision for income taxes during 1996, $851,000 during 1995 and $708,000
during 1994. As a consequence of the operating losses incurred during 1995 and
1994, the Company recognized tax benefits of $3.8 million and $2.8 million,
including $851,000 and $708,000 in low-income housing tax credits, respectively.
Additionally, as of December 31, 1996, the Company has a cumulative deferred
prepaid tax asset of approximately $5.3 million arising from timing differences
between the Company's book and tax reporting. The prepaid tax asset is included
in other assets.
CREDIT QUALITY AND RESERVE FOR POSSIBLE LOAN LOSSES
Improving credit quality has been a major strategic focus of the Bank since
1994. The success of this program is evidenced by the Bank's aggressive
reduction in the level of problem assets over the last two years. Nonperforming
assets (loans past due 90 days or more and still accruing, nonaccruing loans,
restructured loans and other real estate owned) decreased 75% to $8,635,000 at
December 31, 1996 from $35,055,000 at December 31, 1995. The 1995 figures
represent a decrease of 31% from $51,182,000 at year-end 1994. Of the 1995
amount, $6,649,000 represents Segregated Assets covered by the Loss Sharing
Agreement with the FDIC, which expired June 4, 1996. Excluding the FDIC's 80%
exposure on the Segregated Assets ($5,319,000), adjusted nonperforming assets
totaled $29,736,000 at December 31, 1995, a decrease of 31% over the adjusted
1994 level.
The reserve for possible loan losses (RPLL) was $15,699,791 at December 31,
1996, $16,234,000 at December 31, 1995 and $19,929,000 at December 31, 1994. As
a percentage of loans outstanding, the reserve for possible loan losses was
4.05%, 3.61% and 3.90% at year-end 1996, 1995 and 1994, respectively. The
provision for possible loan losses charged to operations was $3,150,000 in 1996,
$12,100,000 in 1995 and $10,000,000 in 1994. Net charge-offs were $3,685,000 in
1996, $15,794,000 in 1995 and $10,131,000 in 1994. The continued high level of
the reserve for possible loan losses reflects management's current strategies
and efforts to maintain the reserve at a level adequate to provide for loan
losses based on an evaluation of known and inherent risks in the loan portfolio.
Among the factors that management considers in establishing the level of the
reserve are overall findings from an analysis of individual loans, the overall
risk characteristics and size of the loan portfolio, past credit loss history,
management's assessment of current economic and real estate market conditions
and estimates of the current value of the underlying collateral.
The Company takes all appropriate measures to restore nonperforming assets to
performing status or otherwise liquidate these assets in an orderly fashion so
as to maximize their value to the Company. There can be no assurances that the
Company will be able to complete the disposition of nonperforming assets without
incurring further losses.
RISK MANAGEMENT
Interest Rate Risk
Interest rate risk is the exposure to a movement in interest rates which could
effect the Company's net interest income. It is the responsibility of the
Company's Asset and Liability Management Committee (ALCO) to manage interest
rate risk, which arises naturally from imbalances in repricing, maturity and/or
cash flow characteristics of the Company's assets and liabilities. The Committee
is responsible for developing asset/liability management strategies and tactics,
and for ensuring that the Board of Directors receives timely, accurate
information regarding the Bank's interest rate risk position at least quarterly.
Techniques used by the Committee take into consideration the cash flow and
repricing attributes of balance sheet and off-balance sheet items and their
relation to possible changes in interest rates. Through the use of computerized
modeling systems, and with the assistance of outside consultants, the effect on
the Company's net interest income of a possible 200 basis point change in
interest rates, in rising and declining scenarios, is determined and evaluated
by management. The Bank has established a target range for the change in net
interest income, given a 200 basis point change in interest rates, of zero to
5%. As of December 31, 1996, through the use of such computer models, management
has determined that the change in net interest income for the 12 months ending
December 31, 1997 from the Company's expected or "most likely" forecast under
any of the interest rate scenarios used in the analysis is less than 2%.
The Company's interest rate sensitivity gap ("gap") is pictured below. Gap is
defined as the difference between assets and liabilities repricing or maturing
within specified periods. An asset-sensitive position (positive gap) indicates
that there are more rate-sensitive assets than rate-sensitive liabilities
repricing or maturing within a specified time period, which would imply a
favorable impact on net interest income during periods of rising interest rates.
Conversely, a liability-sensitive position (negative gap) generally implies a
favorable impact on net interest income during periods of falling interest
rates. The Company's balance sheet is very closely matched on the one year
horizon, as shown below.
Repricing Date
- ---------------------------------------------------------------------------------------------------
One Day Over Six One Year
To Six Months to to Five Over Five
Months One Year Years Years Total
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Interest-Earning Assets:
Loans $192,136 $38,616 $ 83,561 $ 57,220 $371,533
U.S. Treasury & Agency Securities 13,000 16,617 57,588 57,355 144,560
Other Securities 3,341 0 0 230 3,571
Other Assets 0 0 0 59,372 59,372
- ---------------------------------------------------------------------------------------------------
Total Assets $208,477 $55,233 $141,149 $174,177 $579,036
===================================================================================================
Liabilities and Stockholders' Equity:
Noninterest-bearing Deposits 0 0 0 $ 80,576 $ 80,576
Interest-bearing Deposits $200,170 $45,439 $175,412 6,683 427,704
Borrowed Funds 9,598 0 0 6,420 16,018
Other Liabilities 0 0 0 8,488 8,488
Stockholders' Equity 0 0 0 46,250 46,250
- ---------------------------------------------------------------------------------------------------
Total Liabilities And Stockholders'
Equity $209,768 $45,439 $175,412 $148,417 $579,036
===================================================================================================
Cumulative Gap (1,291) 8,503 (25,760)
Gap as a % of Earning Assets (.22%) 1.59% (4.83%)
Based on historical experience, and the Bank's internal repricing policies, it
is the Bank's practice to present repricing of statement savings, savings
deposits and NOW account balances divided into two repricing categories: 8% of
such deposits are repriced in the "six months to one year" category, and the
balance is repriced in the "one to five year" category. The Bank's experience
has shown that the rates on these deposits tend to be less rate-sensitive than
other types of deposits.
Credit Risk
Credit risk is managed by a network of loan officers, with review by the Bank's
Credit Department and oversight by the Board of Directors. The Board of
Directors grants each loan officer the authority to originate loans on behalf of
the Bank and establishes policies regarding loan portfolio diversification and
loan officer lending limits. The Bank's loan portfolio is continuously
monitored, through the use of a variety of management reports and with the
assistance of an external loan review firm, for performance, creditworthiness
and strength of documentation. Credit ratings are assigned to commercial loans
and are routinely reviewed. When necessary, loan officers or the loan workout
function take remedial actions to assure full and timely payment of loan
balances. The Bank's policy is to discontinue the accrual of interest on loans
when scheduled payments become contractually past due in excess of 90 days and
the ultimate collectibility of principal or interest becomes doubtful. Credit
card balances 90 days past due are charged off and consumer installment loans
are charged off when they reach 120 days past due.
Liquidity and Capital Resource Management
Liquidity, as it pertains to banking, can be defined as the ability to generate
cash in the most economical way to satisfy loan and deposit withdrawal demand,
and to meet other business opportunities that require cash. Sources of liquidity
for banks include short-term liquid assets, cash generated from loan repayments
and amortization, borrowing, deposit generation and earnings. The Merchants Bank
has a number of sources of liquid funds, including $18,000,000 in available
Federal Funds lines of credit at year-end 1996; an overnight line of credit with
the Federal Home Loan Bank (FHLB) of $15 million; an estimated additional
borrowing capacity with FHLB of $38 million; and the ability to borrow $60
million through the use of repurchase agreements, collateralized by the Bank's
investments, with certain approved counterparties. Additionally, the Bank's
investment portfolio is actively managed by the ALCO Committee and is a strong
source of cash flow for the Bank. The portfolio is liquid, with an average
duration of 3.2 years, and is available to be used as a source of funds, if
needed.
BALANCE SHEET ANALYSIS
Total assets at December 31, 1996 decreased $33 million (5.43%) from the
previous year-end. The net decrease is attributable to two major factors. The
first factor is a decrease in the Bank's loan portfolio by $62.5 million over
the course of 1996. Of this amount, $6.5 million resulted from the sale of the
Bank's branch located in Danville, VT in January of 1996. Additionally, loans
totaling $5.1 million were charged off, and the Bank sold loans totaling $13.2
million in bulk loan sales. The remainder of the decrease ($37.7 million) was
the result of payouts of nonperforming obligations and scheduled amortization
greater than the level of new loan originations as the Bank moved through the
last phases of its reengineering project. Over the past two years, we have
focused our efforts on training and developing the commercial lending skills of
our loan officers. These efforts, coupled with a performance-based compensation
program, will help to generate new high quality loan relationships. Balances of
earning loans have stabilized in the fourth quarter of 1996. The second factor
contributing to the net change in total assets is the increase in the Bank's
investment portfolio. As dollars previously employed in the loan portfolio
became available, the Bank redeployed these assets into its investment
portfolio, resulting in a $46.5 million increase in the investment portfolio
over the course of 1996. The Bank continued to take aggressive steps to address
its portfolio of nonperforming assets during 1996, the nonperforming loan
portfolio decreased by $20.6 million (75%) and the Bank's OREO portfolio
decreased by $5.8 million (75%). It is important to note that the Bank's
year-end earning assets (net of nonperforming loans) increased by $4 million
during 1996. Total deposit balances declined during 1996 by $36.2 million
(6.65%). This decrease in total assets is attributable to several factors. In
conjunction with the sale of the Bank's branch in Danville, VT, $8.8 million in
deposits was assumed by the buyer. Additionally, the combination of the
announced reengineering project and the existing regulatory agreements, from
which the Bank was removed in October, 1996, also contributed to the total
deposit balance decline. Almost all (82%) of the decrease in deposit balances
occurred in the first quarter of this year; the Bank's deposit balances have
remained steady through the last two quarters of 1996. Finally, although
difficult to quantify, we are continuing to see the movement of savings balances
to nonbank competitors as interest rates remain low and the stock market remains
strong.
The Bank began a capital improvement project to upgrade its branch facilities
and to make further investments in technology during 1996. Approximately $4.1
million was capitalized and will be depreciated over the estimated useful lives
of the individual improvements. Additionally, the Bank retired assets with a net
book value of approximately $600,000 in connection with the project; this amount
was charged to expense during 1996. The Bank plans to spend $3 million on the
branch upgrade project and $2.2 million for technology upgrades during 1997.
Total assets at December 31, 1995 decreased $79.8 million (11.4%) from the
previous year-end. Much of this shrinkage is attributable to steps taken by the
Bank to address its portfolio of troubled assets, as well as a low volume of new
loan originations due to the continued sluggish economy. Of the $61 million
decrease in loans and Segregated Assets, $18 million was due to charge offs, and
$6.3 million was due to the sale of nonperforming loans. The remainder of the
decrease ($36.7 million) was the result of payouts of nonperforming obligations
and scheduled amortization greater than the level of new loan originations.
Additionally, during 1995, the Bank's OREO portfolio decreased by $5.5 million
(41%) due to aggressive steps taken by the Bank to liquidate these assets. Total
deposit balances decreased during 1995 by $38 million, as customers' continued
to move savings balances to other bank and nonbank competitors, partly as a
result of the continued low interest rate environment.
CAPITAL RESOURCES
Capital growth is essential to support deposit and asset growth and to ensure
strength and safety of the Company. Net income increased, and net losses
reduced, the Company's capital by $6,224,000 in 1996, ($3,842,000) in 1995, and
($2,890,000) in 1994.
The Bank and the Company are subject to various regulatory capital requirements
administered by banking regulatory agencies. To be considered adequately
capitalized under the regulatory framework for prompt corrective action, the
Bank and the Company must maintain minimum Tier-1 Leverage, Tier-1 Risk-Based
and Total Risk-Based Capital. The Bank and the Company were above all regulatory
minimums and considered well-capitalized by the regulators at December 31, 1996.
The ratios for the Company are set forth below:
Amount Percentage
-------------------------
Tier-1 Risk-Based Capital $43,814 11.08%
Total Risk-Based Capital $48,888 12.37%
Tier-1 Leverage Capital $43,814 7.50%
The Company declared a dividend, its first since April 1993, of $0.10 per share
on January 21, 1997, payable on February 14, 1997 to shareholders of record as
of February 4, 1997.
REGULATORY MATTERS
The Bank, Trust Company and Holding Company were released from all regulatory
agreements during 1996. Following is a discussion of the provisions and terms of
the various agreements.
In 1993, the Bank entered into a Memorandum of Understanding (MOU) with the FDIC
and the Commissioner. Under the terms of the MOU, the Bank was required, among
other things, to maintain a leverage capital ratio of at least 5.5% and refrain
from declaring dividends. The Bank operated under the MOU from October, 1993
until its removal on October 15, 1996.
In February 1994, the Company and the Federal Reserve entered into an agreement.
Under this agreement, among other things, the Company could not declare or pay a
dividend or incur any debt without the approval of the Federal Reserve. The
Company operated under the agreement beginning in February 1994 until the
removal of the agreement on June 3, 1996.
In 1995, the Trust Company entered into an MOU with the FDIC and the
Commissioner to correct certain operating, technical and regulatory issues. The
Trust Company operated under the MOU from February 1995 until its removal on
August 8, 1996.
EFFECTS OF INFLATION
The financial nature of the Company's balance sheet and statement of operations
is more clearly affected by changes in interest rates than by inflation, but
inflation does affect the Company because as prices increase the money supply
tends to increase, the size of loans requested tends to increase, total bank
assets increase, and interest rates are affected by inflationary expectations.
In addition, operating expenses tend to increase without a corresponding
increase in productivity. There is no precise method, however, to measure the
effects of inflation on the Company's financial statements. Accordingly, any
examination or analysis of the financial statements should take into
consideration the possible effects of inflation.
FORM 10-K
The following is a copy, except for the exhibits, of the Annual Report of
Merchants Bancshares, Inc. (the "Company") on Form 10-K for the year ended
December 31, 1996, filed with the Securities and Exchange Commission (the
"Commission").
Certain information included herein is incorporated by reference from the
Company's 1996 Annual Report to Shareholders ("Annual Report") as indicated
below. Except for those portions of the Annual Report which are expressly
incorporated herein by reference, the Annual Report is not to be deemed filed
with the Commission. The Annual Report and Form 10-K have not been approved or
disapproved by the Commission, nor has the Commission passed upon the accuracy
or adequacy of the same.
TABLE OF CONTENTS
Part I Page Reference
- ----------------------------------------------------------------------------
Item 1 - Business 38
Item 2 - Properties 45
Item 3 - Legal Proceedings 47
Item 4 - Submission of Matters to a Vote of Security Holders 47
Part II
- -------
Item 5 - Market for Registrant's Common Equity and 48
Related Stockholder Matters
Item 6 - Selected Financial Data 48-51
Item 7 - Management's Discussion and Analysis of 31-37
Financial Condition and Results of Operations
Item 8 - Financial Statements and Supplementary Data 3-30
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 58
Part III *
- ----------
Item 10 - Directors and Executive Officers of the Registrant
Item 11 - Executive Compensation
Item 12 - Security Ownership of Certain Beneficial
Owners and Management
Item 13 - Certain Relationships and Related Party
Transactions
Part IV **
Item 14 - Exhibits, Financial Statement
Schedules, and Reports on Form 8-K
* The information required by Part III is incorporated herein by reference
from the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held on April 29, 1997.
** A list of exhibits in the Form 10-K is set forth on the Exhibit Index
included in the Form 10-K filed with the Commission and incorporated
herein by reference. Copies of any exhibit to the Form 10-K may be
obtained from the Company by contacting Shareholder Communications,
Merchants Bancshares, Inc., P.O. Box 1009, Burlington, VT 05401. All
financial statement schedules are omitted since the required information
is included in the consolidated financial statements of the Company and
notes thereto in the Annual Report.
Signatures 62
PART I
ITEM 1 - BUSINESS
Merchants Bancshares, Inc. is a one-bank holding company originally organized
under Vermont law in 1983 for the purposes of owning all of the outstanding
capital stock of the Merchants Bank (the "Bank") and providing greater
flexibility in helping the Bank achieve its business objectives. Its primary
subsidiary is Merchants Bank (the "Bank"), a Vermont Bank with 33 full-service
offices.
The last two years have been a period of great change for Merchants Bank. We
have undergone a reengineering project that reduced our workforce by
approximately 50%. At the same time, we have decreased our nonperforming asset
portfolio to its lowest level in 7 years. We have also redefined the way we do
business and created a new image for our institution. We have closed corporate
headquarters and deployed resources to our branch system. We have brought
technological innovations to our internal operations and to our customers. These
changes have allowed us to meet our goals for 1996 and have set the stage for
future earnings growth.
A chronology of events, including acquisitions, relating to MERCHANTS
BANCSHARES, INC., (the Company) is as follows:
July 1, 1983: Merchants Bancshares, Inc. was organized as a Vermont
corporation, for the purpose of acquiring, investing in or holding stock
in any subsidiary enterprise under the Bank Holding Company Act of 1956.
January 24, 1984: Company acquired The Merchants Bank, a Vermont chartered
commercial bank.
June 2, 1987: Company shareholders approved a resolution to change the
state of incorporation of the Company from Vermont to Delaware.
October 4, 1988: Company organized Merchants Properties, Inc., whose
mission is described below.
THE MERCHANTS BANK, (the Bank) was organized in 1849, and assumed a national
bank charter in 1865, becoming The Merchants National Bank of Burlington,
Vermont. On September 6, 1974 the Bank converted its national charter to a
state-bank charter, becoming known as The Merchants Bank. Since 1971 the Bank
has acquired by merger seven Vermont banking institutions, and has acquired the
deposits of an eighth bank located in St. Johnsbury, Vt. The last such
acquisition occurred on June 4, 1993 at which time the Bank acquired the New
First National Bank of Vermont, with thirteen banking offices, from the Federal
Deposit Insurance Corporation Division of Liquidation. As of December 31, 1996
the Bank was the fifth largest commercial banking operation in Vermont, with
deposits totaling $508.3 million, net loans of $371.5 million, and total assets
of $579.0 million, on a consolidated basis.
Since September 30, 1988, the Merchants Bank has participated as an equity
partner in the development of several AFFORDABLE HOUSING PARTNERSHIPS which were
formed to provide residential housing units within the State of Vermont. During
the past four years these partnerships have developed 727 units of residential
housing, 470 (65%) of which qualify as "affordable housing units for eligible
low-income owners or renters", and 257 (35%) of which are "market rate units."
These partnerships have invested in 16 affordable and elderly housing projects
within 13 Vermont communities: St. Albans, Middlebury, Williston, Winooski,
Brattleboro, Montpelier, Burlington, Springfield, St. Johnsbury, Colchester,
Swanton, Bradford and Hardwick.
MERCHANTS PROPERTIES, INC., a wholly owned subsidiary of the Company, was
organized for the purpose of developing and owning affordable rental housing
units throughout the state of Vermont. As of December 31, 1996 Merchants
Properties, Inc. owned one development located in Enosburg, Vermont, consisting
of a 24-unit low-income family rental housing project, which was completed and
rented during 1989. This housing development is fully occupied at this time.
Total assets of this corporation at December 31, 1996 were $1,276,665.
The Merchants Bank owns controlling interest in the MERCHANTS TRUST COMPANY, a
Vermont corporation chartered in 1870 for the purpose of offering fiduciary
services such as estate settlement, testamentary trusts, guardianships,
agencies, intervivos trusts, employee benefit plans and corporate trust
services. The Merchants Trust Company also operates a discount brokerage office
through Olde Discount Corporation, enabling investors to purchase or sell stocks
and bonds on a discounted commission schedule. As of December 31, 1996, the
Merchants Trust Company had fiduciary responsibilities for assets valued at
market in excess of $256 million, of which more than $174 million were managed
assets. Total revenue for 1996 was $1,517,838; total expense was $1,297,445,
resulting in pretax net income of $220,393 for the year. This net income is
included in the consolidated tax return of its parent company, the Merchants
Bank.
QUENESKA CAPITAL CORPORATION, a wholly owned subsidiary of the Merchants Bank
was established on April 4, 1988 as a Federal licensee under the Small Business
Act of 1958 to provide small business enterprises with loans and/or capital. As
of December 31, 1996, the corporation had assets of $1,673,001, liabilities of
$4,173 due to the parent company for accrued management fees, and equity capital
of $1,668,828.
Queneska Capital Corporation has no employees, relying on the personnel
resources of its parent company to operate. As compensation for the Bank's
services, Queneska pays the Bank a management fee ($25,361 in 1996) in the
amount of 1.5% on annual average assets. This fee is eliminated in the financial
statement consolidation of the parent company.
RETAIL SERVICES
The Bank offers a variety of consumer financial products and services designed
to satisfy the deposit and loan needs of its retail customers. The Bank's retail
products include interest-bearing and noninterest-bearing checking accounts,
money market accounts, passbook and statement savings, club accounts, and
short-term and long-term certificates of deposit. The Bank also offers customary
check collection services, wire transfers, safe deposit box rentals, and
automated teller machine (ATM) cards and services.
Merchants Bank introduced a new checking account in May of 1996. FreedomLynx
checking is available with no service charges to customers who have, at least
monthly, an automatic deposit to the account or an automatic debit from the
account to pay a Merchants Bank loan. The account pays interest on higher
balances with a tiered rate structure. Interest accrues on any day that the
balance falls within one of the tiers. No minimum balance is required.
During 1996, the Bank worked to revise and simplify its retail deposit and
investment products. Beginning on January 1, 1997 the Bank will offer two basic
checking accounts - FreedomLynx Checking and Bottom Line Checking, an account
that provides for a flat service charge up to a maximum number of checks. Other
retail checking accounts will continue to be maintained but will no longer be
available as new accounts.
In 1996, the Bank introduced electronic bill payment by telephone or by personal
computer. With these services, customers can pay any type of bill electronically
from their own PC or from a telephone at any time that fits their schedule. The
Bank is committed to automation, offering ATM cards, ATF (automatic transfer of
funds) to cover overdrafts, EFT (electronic funds transfer) to automate
transfers between accounts, PCLynx bill payment services and the PCLynx
telephone banking system. In 1997, the Bank plans to expand its automated
services by introducing a debit card and a retail home banking system.
The Bank continues to provide strong customer support with 34 ATMs and 34
on-line banking offices throughout the state of Vermont. The Bank offers all of
its retail services and products at its 33 full-service banking offices.
COMMERCIAL SERVICES
The 1995-1996 restructuring of the Sales organization has been completed. Each
branch office is led by a branch president or manager who has consumer lending
authority for the full range of retail credit services. Branch presidents
additionally are being given small business lending authority up to a prescribed
limit. There are 23 branch presidents and 9 managing customer representatives.
The ten corporate banking officers and five corporate banking administrators
provide commercial credit services throughout the state of Vermont to customers
requiring business credit above the prescribed authorities of the branch
presidents.
Merchants Bank offers a variety of commercial checking accounts. Commercial
Checking uses an earnings credit rate to help offset service charges. Small
Business Checking is designed for the smaller business carrying lower balances
and reduced account activity.
Investment opportunities are available to businesses in the form of savings
accounts and money market accounts. The Bank's cash management services provide
additional investment opportunities through the Cash Sweep Program.
Other cash management services include funds concentration.
The Bank offers on-line banking services through PCLynx Corporate and PCLynx
Small Business. These products allow businesses to view their account histories,
order stop payments, transfer between accounts, transmit ACH batches and order
both domestic and foreign wire transfers.
Other miscellaneous commercial banking services include night depository, coin
and currency handling, lockbox and balance reporting services. Employee benefits
management and related fiduciary services are available through the Merchants
Trust Company.
Types of Credit Offerings:
Consumer Loans:
- ---------------
Financing is provided for new or used automobiles, boats, airplanes,
recreational vehicles and new mobile homes. Home improvement and home equity
lines of credit, Master Card credit cards and various collateral loans and
personal loans are also available.
Real Estate Loans:
- ------------------
Financing is available for one-to-four-family residential mortgages; multifamily
mortgages; residential construction; mortgages for seasonal dwellings; and
commercial real estate mortgages. Mortgages for residential properties are
offered on a long-term, fixed-rate basis; alternatively, adjustable-rate
mortgages are offered. Biweekly payment mortgages and graduated (two-step)
payment mortgages are offered. Loans under the Farmers Home Administration Rural
Guaranteed Housing Program provide up to 100% financing. The Bank also
participates with the Vermont Housing Finance Agency (VHFA) in providing
mortgage financing for low- to moderate-income Vermonters. Most mortgage loan
products are offered with as little as a 5% down payment to assist borrowers who
qualify, provided that the mortgagor(s) acquires private mortgage insurance.
Commercial Loans:
- -----------------
Financing for business inventory, accounts receivable, fixed assets, lines of
credit for working capital, community development, irrevocable letters of
credit, business credit cards and U.S. Small Business Administration loans are
available.
EXPANSION EFFORTS
Merchants Bank operates thirty-three full-service banking facilities within
Vermont, one limited service facility, and a remote ATM unit located at the
Burlington International Airport. Since 1963, the Bank has established eleven de
novo offices, and since 1969 has acquired seven Vermont banks by merger.
Merchants Bank's most recent acquisition occurred in June of 1993 with the
acquisition of the assets and assumption of deposits of the New First National
Bank of Vermont from the FDIC.
Each decision to expand the branch network has been based on strategic planning
and analysis indicating that the new or acquired facility would provide enhanced
banking resources within the community and insure the competitive viability of
the Bank through potential growth of deposits and lending activities.
On January 12, 1996, the Passumpsic Savings Bank purchased certain assets and
assumed certain liabilities of the Bank's branch located in Danville, VT.
Merchants Bank received an 8% deposit premium on deposits sold in accordance
with the purchase and assumption agreement. In the first quarter of 1996, the
Colchester Avenue branch in Burlington was closed, with customer accounts
consolidated to the College Street and White Street offices.
COMPETITION
Competition for financial services remains very strong in Vermont. As of
December 31, 1996, there were more than 30 state and national banking
institutions operating in Vermont. In addition, other financial services
providers such as brokerage firms, credit unions, and out-of-state banks also
compete for deposit, loan and ancillary services customers. Due to national
institutions' use of aggressive direct mail marketing and the opening of more
satellite offices in Vermont, Merchants Bank can expect the competitive
environment of financial services to become even more aggressive.
At year-end 1996, Merchants Bank was the fifth largest state chartered bank in
Vermont, enjoying a strong competitive franchise within the state, with 35
banking offices as identified in Item 2 (A).
Consolidation within the overall banking industry continues to change the
competitive environment in which we operate. Competition from nationwide banks,
as well as local institutions, is expected to be aggressive. However, there may
be opportunities for business development by the Bank in shared market
communities as a result of the continued consolidation in the banking industry.
No material part of the Bank's business is dependent upon one, or a few,
customers, or upon a particular market segment, the loss of which would have a
materially adverse impact on the operations of the Bank.
NUMBER OF EMPLOYEES
As of December 31, 1996, Merchants Bancshares, Inc. had five officers: Joseph L.
Boutin, President and Chief Executive Officer; Jennifer L. Varin, Secretary;
Janet P. Spitler, Treasurer; and Susan M. Verro and Janet L. Lussier, Assistant
Secretaries. No officer of the Company is on a salary basis.
As of December 31, 1996, Merchants Bank employed 211 full-time and 49 part-time
employees, representing a full-time equivalent complement of 237 employees; the
Merchants Trust Company employed 13 full-time and 1 part-time employees,
representing a full-time equivalent complement of 13.5 employees. The Bank and
the Trust Company maintain comprehensive employee benefits programs which
provide major medical insurance, hospitalization, dental insurance, long-term
and short-term disability insurance, life insurance and a 401(k) Employee Stock
Ownership Plan. Employee benefits offered by the Bank and the Trust Company are
very competitive with comparable plans provided by similar Vermont institutions.
REGULATION AND SUPERVISION
General
As a bank holding company registered under the Bank Holding Company Act of 1956,
as amended (the "BHCA"), the Company is subject to substantial regulation and
supervision by the Federal Reserve Board. As a state-chartered bank, the Bank is
subject to substantial regulation and supervision by the Federal Deposit
Insurance Corporation (the "FDIC") and by applicable state regulatory agencies.
To the extent that the following information describes statutory or regulatory
provisions, it is qualified in its entirety by reference to those particular
statutory provisions. Any change in applicable law or regulation may have a
material effect on the business and prospects of the Company and the Bank.
The Company is required by the BHCA to file with the Federal Reserve Board an
annual report and such additional reports as the Federal Reserve Board may
require. The Federal Reserve Board also makes periodic inspections of the
Company and its subsidiaries. The BHCA requires every bank holding company to
obtain the prior approval of the Federal Reserve Board before it may acquire
substantially all of the assets of any bank, or ownership or control of any
voting shares of an bank, if, after such acquisition, it would own or control,
directly or indirectly, more than 5 percent of the voting shares of such bank.
Additionally, as a bank holding company, the Company is prohibited from
acquiring ownership or control of 5% or more of any company not a bank or from
engaging in activities other than banking or controlling banks except where the
Federal Reserve Board has determined that such activities are so closely related
to banking as to be a "proper incident thereto."
Dividends
General. The Company is a legal entity separate and distinct from the Bank and
its other nonbank subsidiaries. The revenue of the Company (on a parent company
only basis) is derived primarily from interest and dividends paid to the
corporation by its subsidiaries. The right of the Company, and consequently the
right of stockholders of the Company, to participate in any distribution of the
assets or earnings of any subsidiary through the payment of such dividends or
otherwise is necessarily subject to the prior claims of creditors of the
subsidiary (including depositors, in the case of banking subsidiaries), except
to the extent that certain claims of the Company in a creditor capacity may be
recognized.
The payment of dividends by the Company is determined by its board of directors
based on the Company's liquidity, asset quality profile, capital adequacy, and
recent earnings history, as well as economic conditions and other factors,
including applicable government regulations and policies and the amount of
dividends payable to the Company by its subsidiaries.
It is the policy of the Federal Reserve Board that banks and bank holding
companies, respectively, should pay dividends only out of current earnings and
only if after paying such dividends the bank or bank holding company would
remain adequately capitalized. Federal banking regulators also have authority to
prohibit banks and bank holding companies from paying dividends if they deem
such payment to be unsafe or unsound practice. In addition, it is the position
of the Federal Reserve Board that a bank holding company is expected to act as a
source of financial strength to its subsidiary banks.
State law requires the approval of state bank regulatory authorities if the
dividends declared by state banks exceed prescribed limits. The payment of any
dividends by the Company's subsidiaries will be determined based on a number of
factors, including the subsidiary's liquidity, asset quality profile, capital
adequacy and recent earnings history.
Legislation and Related Matters
General. In addition to extensive existing government regulation, federal and
state statutes and regulations are subject to changes that may have significant
impact on the way in which banks may conduct business. The likelihood and
potential effects of any such changes cannot be predicted. Legislation enacted
in recent years has substantially increased the level of competition among
commercial banks, thrift institutions and non-banking institutions, including
insurance companies, brokerage firms, mutual funds, investment banks, finance
companies and major retailers. In addition, the existence of banking legislation
such as the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") have affected the banking industry by, among other things, broadening
the regulatory powers of the federal banking agencies in a number of areas. The
following summary is qualified in its entirety by the text of the relevant
statutes and regulations.
FIRREA. As a result of the enactment of FIRREA on August 9, 1989, the Bank 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 (a) the default of the
Bank or (b) any assistance provided by the FDIC to the Bank in danger of
default. "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
regulatory assistance.
FDICIA. The FDICIA, which was enacted on December 19, 1991, provides for, among
other things, increased funding for the Bank Insurance Fund ("BIF") of the FDIC
and expanded regulation of depository institutions and their affiliates,
including parent holding companies. A summary of certain material provisions of
FDICIA and its regulations is provided below.
Prompt Corrective Action. The FDICIA provides the federal banking agencies with
broad powers to take prompt corrective action to resolve problems of insured
depository institutions, depending upon a particular institution's level of
capital. The FDICIA establishes five tiers of capital measurement for regulatory
purposes ranging from "well-capitalized" to "critically undercapitalized." A
depository institution may be deemed to be in a capitalization category that is
lower than is indicated by its actual capital position under certain
circumstances. As of December 31, 1996, the Bank was classified as
"well-capitalized" under the applicable prompt corrective action regulations.
Brokered Deposits. Under the FDICIA, a depository institution that is
well-capitalized may accept brokered deposits. A depository institution that is
adequately capitalized may accept brokered deposits only if it obtains a waiver
from the FDIC, and may not offer interest rates on deposits "significantly
higher" than the prevailing rate in its market. An undercapitalized depository
institution may not accept brokered deposits.
Safety and Soundness Standards. The FDICIA, as amended, directs each federal
banking agency to prescribe safety and soundness standards for depository
institutions relating to internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, asset-quality, earnings and stock valuation. The Community
Development and Regulatory Improvement Act of 1994 amended FDICIA by allowing
federal banking activities to publish guidelines rather than regulations
concerning safety and soundness.
The Federal Reserve Board has finalized these safety and soundness guidelines.
These guidelines relate to the management policies of financial institutions and
are designed, in large part, to implement the safety and soundness criteria
outlined in FDICIA. These guidelines will be published after the other federal
bank regulatory agencies have developed their guidelines. At this time, it is
not known what effect the applicable guidelines will have on the current
practices of the Company or the Bank.
FDICIA also contains a variety of other provisions that may affect the Company's
and the Bank's operations, including reporting requirements, regulatory
guidelines for real estate lending, "truth in savings" provisions, and the
requirement that a depository institution give 90 days' prior notice to
customers and regulatory authorities before closing any branch. Certain of the
provisions in FDICIA have recently been or will be implemented through the
adoption of regulations by the various federal banking agencies and, therefore,
their precise impact cannot be assessed at this time.
Capital Guidelines. Under the uniform capital guidelines adopted by the federal
banking agencies, a well-capitalized institution must have a minimum ratio of
total capital to risk-adjusted assets (including certain off-balance sheet
items, such as standby letters of credit) of 10%, a minimum Tier 1 (comprised of
common equity, retained earnings, minority interests in the equity accounts of
consolidated subsidiaries and a limited amount of noncumulative perpetual
preferred stock, less deductible intangibles) capital-to-total risk based assets
of 6% and a minimum leverage ratio (Tier 1 capital to average quarterly assets,
net of goodwill), of 5%.
As of December 31, 1996, the Bank was classified as "well-capitalized." Neither
the Company nor the Bank is subject to, or party to, any order or agreement with
any federal banking agency with respect to the capital maintenance.
The federal banking agencies continue to indicate their desire to raise capital
requirements applicable to banking organizations, and recently proposed
amendments to their risk-based capital regulations to provide for the
consideration of interest rate risk in determination of a bank's minimum capital
requirements. The proposed amendments are intended to require that banks
effectively measure and monitor their interest rate risk and that they maintain
capital adequate for that risk. Under the proposed amendments, banks with
interest rate risk in excess of a defined supervisory threshold would be
required to maintain additional capital beyond that generally required. In
addition, effective January 17,1995, the federal banking agencies adopted
amendments to their risk-based capital standards to provide for the
concentration of credit risk and certain risks arising from nontraditional
activities, as well as a bank's ability to manage these risks, as important
factors in assessing a bank's overall capital adequacy.
Under federal banking laws, failure to meet the minimum regulatory capital
requirements could subject a banking institution to a variety of enforcement
remedies available to federal regulatory authorities, including the termination
of deposit insurance by the FDIC and seizure of the institution.
Community Investment Act. Pursuant to the Community Reinvestment Act ("CRA") and
similar provisions of Vermont law, regulatory authorities review the performance
of the Company and the Bank in meeting the credit needs of the communities
served by the Bank. The applicable regulatory authorities consider compliance
with this law in connection with the applications for, among other things,
approval of branches, branch relocations and acquisitions of banks and bank
holding companies. The Bank received a "satisfactory" rating at its most recent
CRA examination.
Interstate Banking Legislation. The Interstate Banking and Branching Efficiency
Act of 1994 facilitates the interstate expansion and consolidation of banking
organizations by permitting (i) beginning one year after enactment of the
legislation, bank holding companies that are adequately capitalized and managed
to acquire banks located in states outside their home states regardless of
whether such acquisitions are authorized under the law of the host state, (ii)
the interstate merger of banks after June 1, 1997, subject to the right of
individual states to "opt in" or "opt out" of this authority prior to such date,
(iii) banks to establish new branches on an interstate basis provided that such
action is specifically authorized by the law of the host state, (iv) foreign
banks to establish, with approval of the appropriate regulators in the United
States, branches outside their home states to the same extent that national or
state banks located in such state would be authorized to do so and (v) banks to
receive deposits, renew time deposits, close loans, service loans and receive
payment on loans and other obligations as agent for any bank or thrift
affiliate, whether the affiliate is located in the same or different state.
Other Proposals
Other legislative and regulatory proposals regarding changes in banking, and the
regulation of banks and other financial institutions, are regularly considered
by the executive branch of the federal government, Congress and various state
governments, including Vermont, and state and federal regulatory authorities. It
cannot be predicted what additional legislative and/or regulatory proposals, if
any, will be considered in the future, whether any such proposals will be
adopted or, if adopted, how any such proposals would affect the Company or the
Bank.
ITEM 2 - PROPERTIES
A. SCHEDULE OF BANKING OFFICES BY LOCATION
Merchants Bank operates thirty-five banking facilities as indicated in Schedule
A below. Corporate administrative offices and the operations data processing
center are located at 275 Kennedy Drive, South Burlington, Vermont.
Burlington 164 College Street Merchants Trust Co.
172 College Street Branch office
1014 North Avenue Branch office
Essex Junction 54 Pearl Street Branch office
South Burlington 50 White Street Branch office
929 Shelburne Road *1 Branch office
275 Kennedy Drive Operations Center
Corporate Offices
Branch office
Burlington Airport *1 ATM
Bristol 15 West Street Branch office
Barre 105 North Main Street Branch office
Northfield 47 Depot Square Branch office
South Hero South St. & Route 2 Branch office
Hardwick Wolcott Street Branch office
Hinesburg Route 116/Shelburne Falls Rd Branch office
Vergennes Monkton Road Branch office
Winooski 364 Main Street Branch office
Shelburne Wake Robin Branch office
Johnson Main Street, Route 15 Branch office
Colchester 8 Porters Point Road *2 Branch office
Jericho Route 15 Branch office
Enosburg Falls 155 Main Street Branch office
No. Bennington Bank Street Branch office
Manchester Ctr. 515 Main Street Branch office
Brattleboro 205 Main Street *3 Branch office
Wilmington West Main Street Branch office
Bennington Putnam Square *2 Branch office
Wallingford Route 7 *2 Branch office
St. Johnsbury 90 Portland Street Branch office
Bradford 1 Main Street & Branch office
Operations Building
Fairlee U.S. Route #5 Branch office
Groton 258 Scott Highway Branch office
East Thetford U.S. Route #5 & VT 113 Branch office
Newbury U.S. Route #5 Branch office
Fair Haven 97 Main Street Branch office
Washington Street Grand Union *1 ATM
Springfield Springfield Shopping Plaza Branch office
Windsor 160 Main Street Branch office
Notes:
*1: Facilities owned by the Bank are located on leased land.
*2: Facilities located on leased land with improvements also
leased.
*3: As of December 31, 1996, a mortgage with an unpaid principal
balance of $202,991 is outstanding on the Brattleboro office.
This mortgage is being amortized at $1,736 per month, at a
rate of 9% through the year 2020.
ITEM 3 - LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
During the fall of 1994, lawsuits were brought against the Company, the Bank,
the Trust Company (collectively referred to as "the Companies") and certain
directors of the Companies. These lawsuits related to certain investments
managed for Trust Company clients and placed in the Piper Jaffray Institutional
Government Income Portfolio. Separately, and before the suits were filed, the
Companies had initiated a review of those investments. As a result of the
review, the Trust Company paid to the affected Trust Company clients a total of
approximately $9.2 million in December 1994. The payments do not constitute a
legal settlement of any claims in the lawsuits. However, based on consultation
with legal counsel, management believes that further liability, if any, of the
Companies on account of matters complained of in the lawsuits will not have a
material adverse effect on the consolidated financial position and results of
operations of the Company. In December 1994, the Trust Company received a
payment of $6,000,000 from its insurance carriers in connection with these
matters. The Companies also intend to pursue all available claims against Piper
Jaffray Companies, Inc. and others on account of the losses that gave rise to
the $9.2 million payment by the Companies. The claims of the Trust Company, as
trustee, against Piper Jaffray Companies were joined with claims of other
investors in the Piper Fund in a class action in the United States District
Court for the District of Minnesota. The class action was settled by the
parties, and on December 14, 1995, the settlement was approved by the Court. By
order dated January 11, 1996, the Court ordered the share of the settlement
proceeds attributable to Merchants Trust Company investments not be paid pending
further order. On February 18, 1997, the District Court entered an Order for
Final Judgment. That Order provides, among other matters, that except to the
extent (if at all) any other court with jurisdiction has given leave for some or
all of the proceeds to be deposited with that court pursuant to Vermont Rule of
Civil Procedure 67, Federal Rule of Civil Procedure 67, or such other rule as
may apply, and absent an appeal, the entire net settlement proceeds attributable
to the Trust Company investments are to be paid to the Trust Company starting
approximately sixty-one days after the date of the Order. Any recovery of
settlement proceeds is subject to the terms of an agreement between the
Companies and their insurance carriers. The attorneys representing the
plaintiffs in one of the lawsuits discussed above have taken the position that
amounts recovered by the Companies on these claims should be paid to the
affected Trust Company clients (net of legal fees paid to attorneys), in
addition to the $9.2 million already paid.
The attorneys representing the plaintiffs in one of the lawsuits discussed above
requested an award of attorneys' fees for allegedly causing the Companies to
make the $9.2 million payment and asked the Court to order the Trust Company to
withhold payment of $500,000. The Trust Company has resisted the claims for
payment of such fees by its clients, and, as a result, the Trust Company was
directed to place the sum of $500,000 into escrow pending a ruling by the Court.
On appeal by the Companies, the United States Court of Appeals affirmed in part,
vacated in part, and reversed for further proceedings the lower court's
judgment. The attorneys representing the plaintiffs in that lawsuit have
indicated that they intend to seek damages as well as attorneys' fees. There is
the possibility that the Companies may be required to remit all or part of the
escrowed funds, or to pay damages. However, based upon consultation with legal
counsel, management believes that on the facts of this case there is no
substantial authority for an award of such fees or damages in those proceedings.
The Bank is also involved in various legal proceedings arising in the normal
course of business. Based upon consultation with legal counsel, management
believes that the resolution of these matters will not have a material effect on
the consolidated financial position and results of operations of the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of calendar year 1996 no matters were submitted to a
vote of security holders through a solicitation of proxies or otherwise.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is traded on the over-the-counter market and the
price is quoted on the NASDAQ National Market Stock Exchange under the trading
symbol MBVT. Quarterly stock prices during the last eight quarters are as
indicated below based upon quotations as provided by the National Association of
Securities Dealers, Inc. Prices of transactions between private parties may vary
from the ranges quoted below.
QUARTER ENDED HIGH LOW
----------------------------------------------------------
March 31, 1995 $11.750 $ 9.250
June 30, 1995 12.500 10.000
September 30, 1995 15.000 10.500
December 31, 1995 15.000 13.250
March 31, 1996 16.000 13.250
June 30, 1996 16.375 14.250
September 30, 1996 16.000 15.000
December 31, 1996 19.375 15.000
As of January 29, 1997 Merchants Bancshares, Inc. had 1,366 shareholders. The
Company did not declare or pay a dividend from April 1993 until February 1997,
when the Board of Directors declared a fourth quarter, 1996 dividend payable on
February 14, 1997 to shareholders of record at February 4, 1997. Future
dividends will depend upon the financial condition and earnings of the Company
and its subsidiaries, their need for funds and other factors, including
applicable government regulations.
ITEM 6 - SELECTED FINANCIAL DATA
The supplementary financial data presented in the following tables and narrative
contain information highlighting certain significant trends in the Company's
financial condition and results of operations over an extended period of time.
The following information should be analyzed in conjunction with the year-end
audited consolidated financial statements as contained in the 1996 Annual Report
to Shareholders, a copy of which is attached as an addendum to this Form 10-K.
The five-year summary of operations, interest management analysis and
management's discussion and analysis, all as contained on pages 29 through 37 of
the 1996 Annual Report to Shareholders, are herein incorporated by reference.
Tables included on the following pages 49 through 52 concern the following:
Deposits; return on equity and assets; short-term borrowings; distribution of
assets, liabilities, and stockholders' equity; analysis of changes in net
interest income; and the composition and maturity of the loan portfolio.
DEPOSITS
The following schedule shows the average balances of various classifications of
deposits. Dollar amounts are expressed in thousands.
1996 1995 1994
-------------------------------
Demand Deposits $ 78,873 $ 87,434 $ 91,853
Savings, Money Market and NOW Accounts 264,611 279,906 310,613
Time Deposits Over $100,000 20,059 20,927 18,135
Other Time Deposits 150,380 167,975 177,198
-------------------------------
Total Average Deposits $513,923 $556,242 $597,799
===============================
Time Deposits over $100,000 at December 31, 1996 had the following schedule
of maturities (in thousands):
Three Months or Less $ 3,137
Three to Six Months 4,098
Six to Twelve Months 3,673
Over Twelve Months 2,789
Over Five Years 6,672
-------
Total $20,369
=======
RETURN ON EQUITY AND ASSETS
The return on average assets, return on average equity, dividend payout ratio
and average equity to average assets ratio for the three years ended December
31, 1996 were as follows:
1996 1995 1994
--------------------------
Return on Average Total Assets 1.07% (0.60%) (0.41%)
Return on Average Stockholders' Equity 14.44% (9.41%) (6.24%)
Dividend Payout Ratio N/A N/A N/A
Average Stockholders' Equity to
Average Total Assets 7.42% 6.36% 6.53%
SHORT-TERM BORROWINGS
Refer to Notes 7 and 8 to the Financial Statements for this information.
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and
Interest Differential.
The following table presents the condensed annual average balance sheets for
1996, 1995 and 1994. The total dollar amount of interest income from assets and
the subsequent yields calculated on a taxable equivalent basis as well as the
interest paid on interest bearing liablilities, expressed in dollars and rates
are also shown in the table.
(Dollars are in Thousands)
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
ASSETS: Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------------------------------
Investment Securities:
U.S. Treasury and Agencies $ 117,908 $ 7,588 6.44% $ 83,749 $ 4,525 5.40% $ 89,183 $ 3,508 3.93%
Other, Including FHLB Stock 2,865 148 5.17% 4,416 357 8.08% 8,178 535 6.54%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities $ 120,773 $ 7,736 6.41% $ 88,165 $ 4,882 5.54% $ 97,361 $ 4,043 4.15%
- ----------------------------------------------------------------------------------------------------------------------------------
Loans, Including Fees on Loans:
Commercial (a) (b) 68,783 7,281 10.59% 87,009 9,236 10.61% 117,948 10,128 8.59%
Real Estate 322,690 31,135 9.65% 378,433 35,094 9.27% 396,176 36,959 9.33%
Consumer 15,041 1,673 11.12% 15,605 1,902 12.19% 19,710 2,167 10.99%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Loans $ 406,514 $ 40,089 9.86% $ 481,047 $ 46,232 9.61% $ 533,834 $ 49,254 9.23%
Federal Funds Sold $ 5,905 $ 315 5.33% $ 6,339 $ 366 5.77% $ 7,865 $ 315 4.01%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets $ 533,192 $ 48,140 9.03% $ 575,551 $ 51,480 8.94% $ 639,060 $ 53,612 8.39%
- ----------------------------------------------------------------------------------------------------------------------------------
Reserve for Possible Loan Losses (15,984) (17,946) (18,991)
Cash and Due From Banks 28,907 34,099 31,910
Premises and Equipment 13,298 15,365 16,349
Other Assets 21,447 35,418 40,749
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 580,860 $ 642,487 $ 709,077
==================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Time Deposits:
Savings, Money Market & NOW
Accounts $ 264,611 $ 8,217 3.11% $ 279,906 $ 9,077 3.24% $ 309,490 $ 8,420 2.72%
Certificates of Deposit over
$100,000 20,059 1,396 6.96% 20,927 1,433 6.85% 22,248 1,336 6.01%
Other Time 150,380 8,112 5.39% 167,975 8,981 5.35% 177,250 8,096 4.57%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Time Deposits $ 435,050 $ 17,725 4.07% $ 468,808 $ 19,491 4.16% $ 508,988 $ 17,852 3.51%
Federal Funds Purchased 704 32 4.59% 975 58 5.95% 1,167 57 4.88%
Securities Sold Under Agreement to
Repurchase 3,139 160 5.09% 0 0 0.00% 19 1 5.26%
Demand Notes Due U.S. Treasury 2,134 108 5.04% 3,229 173 5.36% 3,130 120 3.83%
Other Interest Bearing Liabilities 1,067 45 4.25% 4,524 44 0.97% 4,555 303 6.65%
Debt 8,925 602 6.75% 32,819 3,236 9.86% 50,575 4,044 8.00%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities $ 451,019 $ 18,672 4.14% $ 510,355 $ 23,002 4.51% $ 568,434 $ 22,377 3.94%
- ----------------------------------------------------------------------------------------------------------------------------------
Demand Deposits 78,873 87,434 89,318
Other Liabilities 7,857 3,850 4,994
Stockholders' Equity 43,111 40,848 46,331
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities & Stockholders'
Equity $ 580,860 $ 642,487 $ 709,077
==================================================================================================================================
Net Interest Income (a) $ 29,468 $ 28,478 $ 31,235
==================================================================================================================================
Yield Spread 4.89% 4.44% 4.45%
==================================================================================================================================
NET INTEREST INCOME TO EARNING ASSETS 5.53% 4.95% 4.89%
==================================================================================================================================
(a) Tax exempt interest has been converted to a tax equivalent basis using
Federal tax rate of 34%.
(b) Includes non-accruing loans.
Merchants Bancshares, Inc
Analysis of Changes in Net Interest Income
The following table sets forth, for each major category of interest earning
assets and interest bearing liabilities, the dollar amounts (in thousands) of
interest income (calculated on a taxable equivalent basis) and interest expense
and changes therein for 1996 as compared with 1995 and 1995 as compared with
1994.
1996 vs 1995 1995 vs 1994
----------------------------------------------- ---------------------------------------------
-Due to (a)- -Due to (a)-
Increase ---------------- Increase ----------------
1996 1995 (Decrease) Volume Rate 1995 1994 (Decrease) Volume Rate
- -------------------------------------------------------------------------------------------------------------------------------
Interest Income:
Loans $40,089 $46,232 $(6,143) $(7,371) $1,228 $46,232 $49,254 $(3,022) $(5,073) $2,051
Investment Income:
Taxable 7,736 4,882 2,854 2,090 764 4,882 4,043 839 (597) 1,436
Non-Taxable 0 0 0 0 0 0 0 0 0 0
Federal Funds Sold 315 366 (51) (23) (28) 366 315 51 (88) 139
- -------------------------------------------------------------------------------------------------------------------------------
Total $48,140 $51,480 $(3,340) $(5,304) $1,964 $51,480 $53,612 $(2,132) $(5,758) $3,626
- -------------------------------------------------------------------------------------------------------------------------------
Less Intereat Expense:
Savings, Money Market &
Now Accounts $ 8,217 $ 9,077 $ (860) $ (474) $ (386) $ 9,077 $ 8,420 $ 657 $ (959) $1,616
Certificates of Deposit
Over $100,000 1,396 1,433 (37) (60) 23 1,433 1,336 97 (90) 187
Other Time 8,112 8,981 (869) (948) 79 8,981 8,096 885 (496) 1,381
Federal Funds Purchased 32 58 (26) (12) (14) 58 57 1 (11) 12
Securities Sold Under
Agreement to Repurchase 160 0 160 160 (0) 0 1 (1) (1) (0)
Demand Note - U.S. Treasury 108 173 (65) (55) (10) 173 120 53 5 48
Debt and Other Borrowings 647 3,280 (2,633) (1,760) (873) 3,280 4,347 (1,067) (1,751) 684
- -------------------------------------------------------------------------------------------------------------------------------
Total $18,672 $23,002 $(4,330) $(3,149) $(1,181) $23,002 $22,377 $ 625 $(3,303) $3,928
- -------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $29,468 $28,478 $ 990 $(2,155) $ 3,145 $28,478 $31,235 $(2,757) $(2,455) $ (302)
===============================================================================================================================
(a) The dollar amount of changes in interest income and interest expense
attributable to changes in rate and volume has been allocated between rate
and volume based upon the changes in rates times the first year's volume
and the changes in volume times the current year's rate.
Note: Included in Interest Income are fees on loans totalling $2,333, $2,492 and
$3,571 for the years ended December 31, 1996, 1995 and 1994, respectively.
LOAN PORTFOLIO
The following tables display the composition of the Bank's loan portfolio for
the consecutive five year period 1991 through 1995, along with a schedule
profiling the loan maturity distribution over the next five years.
COMPOSITION OF LOAN PORTFOLIO
The table below presents the composition of the Bank's loan portfolio by type of
loan as of December 31 for each of the past five years. All dollar amounts are
expressed in thousands. Amounts are shown gross of net deferred loan fees of
$946,723 in 1996, $956,333 in 1995, $1,132,494 in 1994, $1,310,416 in 1993 and
$1,183,400 in 1992, which principally relate to real estate mortgages.
As of December 31,
- -------------------------------------------------------------------------------------------------
Type of Loan 1996 1995 1994 1993 1992
----------------------------------------------------
Commercial, Financial & Agricultural $ 59,124 $ 73,915 $ 88,201 $ 98,936 $ 76,141
Industrial Revenue Bonds 1,967 3,010 4,411 6,695 8,721
Real Estate--Construction 3,420 9,644 21,992 30,526 18,776
Real Estate--Mortgage 307,357 346,202 377,429 413,112 305,513
Installment 14,831 16,560 18,086 22,836 18,332
Lease Financing 0 0 0 42 630
All Other Loan 534 393 436 1,324 1,422
----------------------------------------------------
Total Loans $387,233 $449,724 $510,555 $573,471 $429,535
====================================================
PROFILE OF LOAN MATURITY DISTRIBUTION
The table below presents the distribution of the varying maturities or repricing
opportunities of the loan portfolio at December, 1996. All dollar amounts are
expressed in thousands.
Over One
One Year Through Over Five
Or Less 5 Years Years Total
- -------------------------------------------------------------------------------
Commercial Loans, Industrial
Revenue Bonds, Lease Financing
and All Other Loans $ 46,818 $ 7,158 $ 7,649 $ 61,625
Real Estate Loans 180,583 65,195 64,999 $310,777
Installment Loans 3,351 11,208 272 $ 14,831
- -------------------------------------------------------------------------------
$230,752 $83,561 $72,920 $387,233
===========================================
Loans maturing or repricing after one year which have predetermined interest
rates totaled $155,109. Loans maturing or repricing after one year which have
floating or adjustable interest rates totaled $1,372.
In 1996, a total of 425 one-to-four family residential mortgage loans were
closed by the bank, totaling $33.4 million. Approximately 33% of these
originations were sold on the secondary market and the remaining 67%, or $22.3
million were placed in the Bank's portfolio. The Bank currently services $322
million in residential mortgage loans, $250 million of which it services for
other investors such as federal government agencies (FNMA and FHLMC) and for
financial investors such as insurance companies and pension funds located
outside Vermont.
During 1996, the Bank remained an active participant in the U.S. Small Business
Administration guaranteed loan program. Thirty-two new SBA loans totaling $4.7
million were originated during 1996 with SBA guarantees ranging from 70% to 85%.
This volume of new lending activity represents a decrease of 52% from that
experienced in 1995.
Approximately 27% of all new SBA loans originated during 1996 were sold to
secondary market investors located outside Vermont. This selling activity has
the positive effect on Vermont of importing capital into the state from other
parts of the country. SBA guarantees are advantageous to the Bank because they
reduce risk in the Bank's loan portfolio and allow the Bank to increase its
commercial loan base and market share with minimal impact on capital.
During 1996, the Bank originated 546 commercial loans, totaling $65.9 million.
This lending activity represented a decrease of approximately 15% of new loan
volume from that experienced in 1995. Commercial loans were originated
throughout Vermont.
LOAN PORTFOLIO MONITORING
The Bank's Board of Directors grants each loan officer the authority to
originate loans on behalf of the Bank. The Board also establishes restrictions
regarding the types of loans that may be granted and the distribution of loan
types within the portfolio, and sets loan authority limits for each lender.
These authorized lending limits are established at least annually and are based
upon the lender's knowledge and experience. Loan requests that exceed a lender's
authority are referred to the Credit Department. All extensions of credit of
$2.5 million to any one borrower, or related party interest, are reviewed and
approved by the Directors Loan Committee.
By using a variety of management reports, the Bank's loan portfolio is
continuously monitored by the Board of Directors and Credit Department. The loan
portfolio as a whole, as well as individual loans, are reviewed for loan
performance, creditworthiness, and strength of documentation. The Bank has hired
an external loan review firm to assist in portfolio monitoring. Credit ratings
are assigned to commercial loans and are routinely reviewed.
All loan officers are required to service their own loan portfolios and account
relationships. As necessary, loan officers or the loan workout function takes
remedial actions to assure full and timely payment of loan balances.
LOAN QUALITY AND RESERVES FOR
POSSIBLE LOAN LOSSES (RPLL)
Merchants Bancshares, Inc. reviews the adequacy of the RPLL at least quarterly.
The method used in determining the amount of the RPLL is not based on
maintaining a specific percentage of RPLL to total loans or total nonperforming
assets, but rather a comprehensive analytical process of assessing the credit
risk inherent in the loan portfolio. This assessment incorporates a broad range
of factors which are indicative of both general and specific credit risk, as
well as a consistent methodology for quantifying probable credit losses. As part
of the Merchants Bancshares, Inc.'s analysis of specific credit risk, a detailed
and extensive review is done on larger credits and problematic credits
identified on the watched asset list, nonperforming asset listings and credit
rating reports.
The Financial Accounting Standards Board ("FASB") issued revised accounting
guidance which affected the RPLL. Statement of Financial Accounting Standards
(SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," requires,
among other things, that the creditors measure impaired loans at the present
value of expected future cash flows, discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral-dependent. For purposes
of this statement, a loan is considered impaired when it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. The FASB also issued SFAS No. 118, which amended
SFAS No. 114, by allowing creditors to use their existing methods of recognizing
interest income on impaired loans. Merchants Bancshares, Inc. adopted the
methodology of SFAS No. 114, incorporating the amendments of SFAS No. 118, on
January 1, 1995.
The more significant factors considered in the evaluation of the adequacy of the
RPLL based on the analysis of general and specific credit risk include the
following:
Status of impaired loans as defined under SFAS No. 114
* Status of nonperforming loans
* Status of adversely classified credits
* Historic charge-off experience by major loan category
* Size and composition of the loan portfolio
* Concentrations of credit risk o Renewals and extensions
* Current local and general economic conditions and trends
* Loan growth trends in the portfolio
* Off-balance-sheet credit risk relative to commitments to lend
In accordance with SFAS No. 114, management has defined an impaired loan as
meeting any of the following criteria:
* A loan that is 90 days past due and still accruing
* A loan that has been placed in nonaccrual and is 45 days past due
* A loan that is rated Substandard and is 45 days past due
* A loan that is rated Doubtful or Loss
* A loan that has been classified as a Troubled Debt Restructuring
* A loan that has been assigned a specific allocation
Loans deemed impaired totaled $8.4 million. Impaired loans have been allocated
$875,000 of the RPLL. On June 4, 1993, the Bank acquired New First National Bank
of Vermont (NFNBV). The terms of the Purchase and Assumption Agreement (the
"Agreement") required the FDIC to reimburse the Bank 80% of the net charge-offs
up to $41 million on any loans that qualify as loss-sharing loans, for a period
of three years from the date of acquisition. Losses in excess of $41 million
would be reimbursed at 95%. The Agreement expired effective June 30, 1996, with
respect to the reimbursement of losses. The Bank is required to return to the
FDIC 80% of any reimbursed losses recovered, during the two year period
following the expiration date. As of June 30, 1996, the remaining balance of
loss-sharing loans aggregated $48,176,000; included in that balance was
$2,928,000 in nonperforming loans.
Due to the expiration of the loss-sharing agreement, management adjusted the
analysis of the RPLL to account for 100% of the loss exposure associated with
loans that qualified as loss-sharing. The RPLL analysis prepared the quarter
ended March 31, 1996 showed an increase in the reserve requirement of
approximately $1.4 million, due to the expiration of the Agreement. Management
maintained the RPLL at a level adequate to offset the required increase in the
reserve requirement; therefore, no additional provision was necessary due to the
expiration of the Agreement.
Overall, management maintains the RPLL at a level deemed to be adequate, in
light of historical, current and prospective factors, to reflect the level of
risk in the loan portfolio. Loan loss experience and nonperforming asset data
are presented and discussed in relation to their impact on the adequacy of the
RPLL.
The table below reflects the Bank's loan loss experience and activity in the
RPLL for the past five years.
===============================================================================
LOAN LOSSES AND RPLL RECONCILIATION
December 31, 1996
(000's omitted)
- ----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------
Average Loans Outstanding $406,530 $481,047 $514,843 $515,805 $441,291
- ----------------------------------------------------------------------------------------
RPLL Beginning of Year 16,234 19,929 20,060 7,412 6,650
- ----------------------------------------------------------------------------------------
Charge-Off :
- ----------------------------------------------------------------------------------------
Commercial, Lease Financing
and all Other Loans (907) (3,671) (3,356) (5,567) (2,938)
- ----------------------------------------------------------------------------------------
Real Estate - Construction (602) (1,485) (1,159) (275) (253)
- ----------------------------------------------------------------------------------------
Real Estate - Mortgage (3,206) (12,942) (7,673) (7,651) (4,096)
- ----------------------------------------------------------------------------------------
Installment & Credit Cards (405) (263) (462) (459) (452)
- ----------------------------------------------------------------------------------------
Total Loans Charged Off (5,120) (18,361) (12,650) (13,952) (7,739)
- ----------------------------------------------------------------------------------------
Recoveries:
- ----------------------------------------------------------------------------------------
Commercial, Lease Financing
and all Other Loans 391 1,232 1,187 392 232
- ----------------------------------------------------------------------------------------
Real Estate - Construction 63 32 400 0 0
- ----------------------------------------------------------------------------------------
Real Estate - Mortgage 856 1,224 769 301 108
- ----------------------------------------------------------------------------------------
Installment & Credit Cards 125 78 163 85 111
- ----------------------------------------------------------------------------------------
Total Recoveries 1,435 2,566 2,519 778 451
- ----------------------------------------------------------------------------------------
Net Loan Losses ($3,685) ($15,795) ($10,131) ($13,174) ($7,288)
- ----------------------------------------------------------------------------------------
Provision for Loan Losses:
- ----------------------------------------------------------------------------------------
Charged to Operations (NOTE 1) 3,150 12,100 10,000 23,882 8,050
- ----------------------------------------------------------------------------------------
Loan Loss Reserve (NOTE 2) 2,000
- ----------------------------------------------------------------------------------------
RPLL End of Year $15,700 $16,234 $19,929 $20,060 $7,412
- ----------------------------------------------------------------------------------------
RPLL to Total Loans 4.05% 3.61% 3.90% 3.50% 1.73%
- ----------------------------------------------------------------------------------------
Net Losses to Average Loans 0.91% 3.28% 1.97% 2.28% 1.63%
========================================================================================
NOTE 1: The loan loss provision is charged to operating expense. When actual
losses differ from these estimates, and if adjustments are considered
necessary, they are reported in operations in the periods in which
they become known.
NOTE 2: See Note 2 to the consolidated financial statements regarding the
acquisition of New First National Bank of Vermont.
The reserve for possible loan losses decreased from $16,234,000 at December 31,
1995 to $15,700,000 at December 31, 1996. At the same time, the provision for
loan losses decreased from $12,100,000 to $3,150,000. The reduction in provision
and relative stable reserve balance is reflective of the improvement in asset
quality. These improvements are further noted in the reduction of net loan
losses and nonperforming assets, as noted in the following tables:
NONPERFORMING ASSETS
The following tables summarize the Bank's nonperforming assets (NPAs) as of
December 31, 1992 through 1996 (in thousands):
===============================================================================
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------
Nonaccrual Loans $4,091 $25,617 $32,200 $47,069 $12,148
- --------------------------------------------------------------------------------------
Loans Past Due 90 Days or
More and Still Accruing 217 237 668 715 7,251
- --------------------------------------------------------------------------------------
Restructured Loans 2,403 1,430 5,083 2,841 1,838
- --------------------------------------------------------------------------------------
Total Nonperforming Loans: 6,711 27,284 37,951 50,625 21,237
- --------------------------------------------------------------------------------------
Other Real Estate Owned 1,925 7,772 13,231 13,674 12,662
- --------------------------------------------------------------------------------------
Total NonperformingAssets: $8,636 $35,056 $51,182 $64,299 $33,899
- --------------------------------------------------------------------------------------
NPL to Total Loans 1.70% 3.61% 3.90% 3.50% 1.73%
- --------------------------------------------------------------------------------------
NPA to Total Loans plus OREO 2.20% 3.28% 1.97% 2.28% 1.63%
======================================================================================
Excluded from the 1996 balances above are approximately $11 million of
internally classified loans. These loans have well-defined weaknesses which, if
left unattended, could lead to collection problems. Management maintains an
internal listing, which includes these loans, which is reviewed and updated
monthly. The oversight process on these loans includes an active risk management
approach. A management committee reviews the status of these loans each quarter
and determines or confirms the appropriate risk rating and accrual status. The
findings of this review process are instrumental in determining the adequacy of
the loan loss reserve.
DISCUSSION OF 1996 EVENTS AFFECTING NONPERFORMING ASSETS
Historically, the Company has worked closely with borrowers and also pursued
vigorous collection efforts. The Company continued its efforts to collect
troubled assets during 1996. The Company's enhanced Credit Department and Loan
Workout functions provided resources to address collection strategies for
nonperforming assets.
==============================================================================
12-31-96 9-30-96 6-30-96 3-31-96 12-31-95
- ------------------------------------------------------------------------------
Nonaccrual Loans $4,091 $11,235 $13,335 $16,988 $25,617
- ------------------------------------------------------------------------------
Loans Past Due 90 days or
more and still Accruing 217 3 1,159 192 237
- ------------------------------------------------------------------------------
Restructured Loans 2,403 2,475 2,604 2,642 1,430
- ------------------------------------------------------------------------------
Other Real Estate Owned 1,925 3,317 2,617 4,698 7,772
- ------------------------------------------------------------------------------
Total $8,636 $17,030 $19,715 $24,520 $35,056
==============================================================================
The more significant events affecting NPAs are discussed below.
NONACCRUAL LOANS:
- -----------------
Nonaccrual loans declined from $25,617,000 at December 31, 1995 to $4,091,000 at
December 31, 1996. Management continued its efforts to proactively identify and
resolve loans which present significant risk of loss to the Bank. During 1996,
management identified approximately $4.8 million in accounts which were
transferred to nonaccrual status. These transfers were offset by continued
resolution of nonaccrual accounts; approximately $8.0 million in loans were
returned to accrual status; principal payments of approximately $4.2 million
were collected; a nonperforming loan sale was completed during the fourth
quarter reducing nonaccruing loans by approximately $5.7 million. In addition,
charges of approximately $5.0 million further decreased the balance of
nonaccruing loans.
LOANS PAST DUE 90 DAYS OR MORE AND STILL ACCRUING:
- --------------------------------------------------
The Bank generally places loans that become 90 or more days past due in
nonaccrual status. If the ultimate collectibility of principal and interest is
assured, loans may continue to accrue and be left in this category. Included in
this category are loans which have reached maturity and have not been renewed on
a timely basis, for reasons other than financial capacity to pay. During the
second quarter three significant accounts met this definition; renewal was
completed during the third quarter.
RESTRUCTURED LOANS:
- -------------------
Restructured loans (TDRs) increased during 1996 from $1,430,000 at December 31,
1995 to $2,403,000 at December 31, 1996. The increase was due to a
reclassification of restructured, nonaccruing loans to accrual status. In
addition, one large loan for approximately $1.0 million was removed from TDR
status.
OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURE:
- -----------------------------------------------------
The Bank continued its success in 1996 in disposing of OREO and continues to
aggressively market such properties. The balance of OREO decreased from $7.772
million at December 31, 1995 to $1.925 million at December 31, 1996. The
decrease was due to a combination of sales of approximately $4.0 million and
write-downs of approximately $2.3 million.
POLICIES AND PROCEDURES RELATING TO THE ACCRUAL OF INTEREST INCOME
The Bank normally recognizes income on earning assets on the accrual basis,
which calls for the recognition of income as earned, as opposed to when it is
collected. The Company's policy is to classify a loan more than 90 days past due
with respect to principal or interest as a nonaccruing loan, unless the ultimate
collectibility of principal and interest is assured. Income accruals are
suspended on all nonaccruing loans, and all previously accrued and uncollected
interest is typically charged against current income. A loan remains on
nonaccruing status until the factors which suggest doubtful collectibility no
longer exist, the loan is liquidated, or when the loan is determined to be
uncollectible and is charged off against the reserve for possible loan losses.
In those cases where a nonaccruing loan is secured by real estate, the Company
can, and usually does, initiate foreclosure proceedings. The result of such
action is to force repayment of the loan through the proceeds of a foreclosure
sale or to allow the Company to take possession of the collateral in order to
manage a future resale of the real estate. Foreclosed property is recorded at
the lower of its cost or estimated fair value, less any estimated costs to sell.
Any cost in excess of the estimated fair value on the transfer date is charged
to the reserve for possible loan losses, while further declines in market values
are recorded as an expense in other non-interest expense in the statement of
operations. As of December 31, 1996 and 1995, the Company had valuation reserves
against the other real estate owned portfolio carrying values of $2,717,000 and
$2,430,000, respectively.
SUBSEQUENT EVENT
During January, 1997, OREO balances were reduced to approximately $1.0 million.
As a result, nonperforming assets were reduced to $7.6 million or 2% of total
loans, plus OREO.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Please refer to pages 31-37 for Management's Discussion and Analysis of
Financial Condition and Results of Operations.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated balance sheets of Merchants Bancshares, Inc. as of December 31,
1996 and 1995, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996, together with the related notes and the opinion of
Arthur Andersen LLP, independent public accountants, all as contained on pages 2
through 30 of the Company's 1996 Annual Report to Shareholders, are incorporated
herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
Part III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11 - EXECUTIVE COMPENSATION
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Reference is hereby made to pages 7 through 13 and page 17of the Company's Proxy
Statement to Shareholders dated March 25, 1997, wherein pursuant to Regulation
14 A information concerning the above subjects (Items 10 through 13) is
incorporated by reference.
Pursuant to Rule 12b-23, definitive copies of the Proxy Statement will be filed
within 120 days subsequent to the end of the Company's fiscal year covered by
Form 10-K.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(1) The following consolidated financial statements, as included in the 1996
Annual Report to Shareholders, are incorporated herein by reference:
Consolidated Balance Sheets, December 31, 1996 and December 31, 1995.
Consolidated Statements of Operations for years ended December 31, 1996,
1995 and 1994.
Consolidated Statements of Changes in Stockholders' Equity for years ended
December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994.
Notes to Consolidated Financial Statements, December 31, 1996.
(2) The following exhibits are either filed or attached as part of this
report, or are incorporated herein by reference.
Exhibit Description
------- -----------
3.1 Restated Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit B to Pre-Effective
Amendment No. 1 to Company's Definitive Proxy Statement for
the Annual Meeting of the Stockholders of the Company, filed
on April 25, 1987)
3.2 Amended By-Laws of the Company (Incorporated by reference to
Exhibit C to Company's Definitive Proxy Statement for the
Annual Meeting of the Stockholders of the Company, filed on
April 25, 1987).
4 Instruments defining the rights of security holders, including
indentures:
4.1 Specimen of the Company's Common Stock Certificate
(Incorporated by Reference to Exhibit 7 to the Company's
Registration Statement on Form S-14 (Registration Number
2-86108) filed on August 22, 1983)
4.2 Description of the rights of holders of the Company's Common
Stock (appearing on page 9 of the Company's Registration
Statement on Form S-14 (Registration No. 2-86108) filed on
August 22, 1983)
10.1 Merchants Bancshares, Inc. Dividend Reinvestment and Stock
Purchase Plan (Incorporated by reference to Exhibit 4.1 to
Company's Registration Statement on Form S-3 (Registration No.
333-20375) filed on January 22, 1997)
10.2 401(k) Employee Stock Ownership Plan of the Company, dated
January 1, 1990, as amended (Incorporated by reference to
Company's Registration Statement on Form S-8 (Registration
Number 33-3274) filed on November 16, 1989)
10.3 Amended and Restated Merchants Bank Pension Plan dated as of
January 1, 1994 (Incorporated by Reference to Exhibit 10.6 to
Post-Effective Amendment Number 1 to Company's Registration
Statement on Form S-8 (Registration Number 333-18845) filed on
December 26, 1996)
10.4 Amended Employment Agreement, dated as of October 31, 1994 by
and between the Company, Merchants Bank and Joseph L. Boutin
(Incorporated by reference to Exhibit 10.1 to Post-Effective
Amendment No.1 to Company's Registration Statement on Form S-8
(Registration No. 333-18845) filed on December 26, 1996
(Superseded by Exhibit 10.5)
10.5 Employment Agreement dated as of January 1, 1997, by and
between the Company, Merchants Bank and Joseph L. Boutin.
10.6 Amended Employment Agreement, dated as of January 23, 1995, by
and between Merchants Bank and Michael R. Tuttle (Incorporated
by reference to Exhibit 10.2 to Post-Effective Amendment No. 1
to the Company's Registration Statement on Form S-8
(Registration No. 333-18845) filed on December 26,1996
(Superseded by Exhibit 10.7)
10.7 Employment Agreement dated as of January 1, 1997, by and
between Merchants Bank and Michael R. Tuttle
10.8 Employment Agreement, dated as of December 29, 1995, by and
between Merchants Bank and Thomas R. Havers (Incorporated by
reference to Exhibit 10.3 to Post-Effective Amendment No. 1 to
Company's Registration Statement on Form S-8 (Registration No.
333-18845) filed on December 26, 1996) (Superseded by Exhibit
10.9)
10.9 Employment Agreement dated as of January 1, 1997, by and
between Merchants Bank and Thomas R. Havers.
10.10 Employment Agreement, dated as of February 1,1996, by and
between Merchants Bank and Thomas S. Leavitt (Incorporated by
reference to Exhibit 10.4 to Post-Effective Amendment No. 1 to
Company's Registration Statement on Form S-8 (Registration No.
333-18845) filed on December 26, 1996) (Superseded by Exhibit
10.11)
10.11 Employment Agreement dated as of January 1, 1997, by and
between Merchants Bank and Thomas S. Leavitt.
10.12 Employment Agreement, dated as of December 29, 1995, by and
between Merchants Bank and Merchants Trust Company and William
R. Heaslip (Incorporated by reference to Exhibit 10.5 to
Post-Effective Amendment No. 1 to the Company's Registration
Statement on Form S-8 (Registration No. 333-18845) filed on
December 26, 1996)(Superseded by Exhibit 10.13)
10.13 Employment Agreement, dated as of January 1, 1997, by and
between Merchants Bank and Merchants Trust Company and William
R. Heaslip
10.14 The Merchants Bank Amended and Restated Deferred Compensation
Plan for Directors
10.14.1 Trust Under the Merchants Bank Amended and Restated Deferred
Compensation Plan for Directors
10.15 Agreement among the Merchants Bank and Kathryn T. Boardman,
Thomas R. Havers and Susan D. Struble dated as of December 20,
1995
10.15.1 Trust Under the Agreement among the Merchants Bank and
Kathryn T. Boardman, Thomas R. Havers and Susan D. Struble
dated as of December 20, 1995
10.16 Agreement between the Merchants Bank and Dudley H. Davis dated
December 20, 1995.
10.16.1 Fixed Trust under Agreement between the Merchants Bank and
Dudley H. Davis dated December 20, 1995.
10.16.2 Variable Trust under Agreement between the Merchants Bank
and Dudley H. Davis dated December 21, 1995.
11 Statement re: computation of per share earnings.
13 1996 Annual Report to Shareholders
21 Subsidiaries of the Company
23 Consent of Arthur Andersen LLP
(3) Reports on Form 8-K: NONE
SIGNATURES
Pursuant to the requirement of Section 13 or 15 (d) of the Securities Exchange
Act of 1934 the registrant has duly caused this report to be signed on it's
behalf by the undersigned, thereunto duly authorized.
Merchants Bancshares, Inc.
Date February 20, 1997 by /s/ Joseph L. Boutin
--------------------------- ---------------------------------
Joseph L. Boutin, President & CEO
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of MERCHANTS
BANCSHARES, INC., and in the capacities and on the date as indicated.
by /s/ Joseph L. Boutin by /s/ Raymond C. Pecor, Jr.
--------------------------- ---------------------------------
Joseph L. Boutin, Director, President Raymond C. Pecor, Jr. Director
& CEO of the Company and the Bank Chairman of the Board of Directors
by /s/ Peter A. Bouyea by
--------------------------- ---------------------------------
Peter A. Bouyea, Director Charles A. Davis, Director
by by /s/ Jeffrey L. Davis
--------------------------- ---------------------------------
Dudley H. Davis, Director Jeffrey L. Davis, Director
by /s/ Michael G. Furlong by
--------------------------- ---------------------------------
Michael G. Furlong, Director Thomas F. Murphy, Director
by /s/ Janet P. Spitler by /s/ Leo O'Brien, Jr
--------------------------- ---------------------------------
Janet P. Spitler, Treasurer of the Leo O'Brien, Jr, Director
Company, Vice President, Controller
and Treasurer of the Bank
by /s/ Patrick S. Robins by
--------------------------- ---------------------------------
Patrick S. Robins, Director Benjamin F. Schweyer, Director
by /s/ Robert A. Skiff
---------------------------
Robert A. Skiff, Director