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, 1993
COMMISSION FILE NUMBER 0-11595
MERCHANTS BANCSHARES, INC.
-----------------------------------
(Exact name of registrant as specified in its charter)
Incorporated in the State of Delaware Employer Identification No. 03-0287342
123 Church St, Burlington, Vermont 05401
(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.
Contained herein X Not contained herein
The aggregate market value of the voting stock held by non-affiliates
is $32,146,829 as computed using the average bid and asked prices of stock,
as of March 8, 1994.
The number of shares outstanding for each of the registrant's classes
of common stock, as of March 31, 1994 is:
Class: Common stock, par value $.01 per share
Outstanding: 4,242,927 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended
December 31, 1993 are incorporated herein by reference to Part II.
Portions of the Proxy Statement to Shareholders for the year ended
December 31, 1993 are incorporated herein by reference to Part III.
FORM 10-K
TABLE OF CONTENTS
Part I Page Reference
Item 1 - Business 1
Item 2 - Properties 6
Item 3 - Legal Proceedings 9
Item 4 - Submission of Matters to a 9
Vote of Security Holders
Part II
Item 5 - Market for Registrant's Common 10
Equity and Related Stockholder
Matters
Item 6 - Selected Financial Data 10
Item 7 - Management's Discussion and Analysis 26
of Financial Condition and Results of
Operations
Item 8 - Financial Statements and Supplementary 26
Data
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 26
Part III
Item 10 - Directors and Executive Officers of the
Registrant 27
Item 11 - Executive Compensation 27
Item 12 - Security Ownership of Certain Beneficial
Owners and Management 27
Item 13 - Certain Relationships and Related Party
Transactions 27
Part IV
Item 14 - Exhibits, Financial Statement 27
Schedules, and Reports on Form 8-K
Indemnification Undertaking by Registrant 29
Signatures 30
PART I
ITEM 1 - BUSINESS
MERCHANTS BANCSHARES, INC., (the Company) was organized on July 1,
1983 as a Vermont corporation, for the purpose of acquiring, investing in
or holding stock in any subsidiary enterprise permitted under the Bank
Holding Company Act of 1956. On January 24, 1984 the Company acquired The
Merchants Bank; and on October 4, 1988 the Company organized Merchants
Properties, Inc. On June 2, 1987 shareholders approved a resolution to
change the state of incorporation of the Company from Vermont to Delaware.
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. As
of December 31, 1993 the Bank was the third largest commercial banking
operation in Vermont, with deposits totalling $619.3 million, net loans of
$553.4 million, and total assets of $735.4 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 695 units of residential housing, 446 (64%) of which qualify as
"affordable housing units for eligible low income owners or renters", and
249 (36%) of which are "market rate units". These partnerships have
invested in 14 affordable and elderly housing projects within 11 Vermont
communities: St. Albans, Middlebury, Williston, Winooski, Brattleboro,
Montpelier, Burlington, Springfield, St. Johnsbury, Colchester and Swanton.
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, 1993 the
corporation 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. Total assets of this corporation at December 31,
1993 were $1,328,295.
The Bank owns controlling interest in MERCHANTS TRUST COMPANY, a
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, 1993, the Merchants Trust Company had fiduciary
responsibilities for assets valued at market in excess of $311 million.
Total income for 1993 was $1,756,523, total expense was $1,016,153
resulting in net profit for the year of $740,370. This 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, 1993, the corporation had assets
of $1,536,668, a liability of $5,524 due to the parent company for accrued
management fees, and equity capital of $1,531,144.
QUENESKA Capital Corporation has no employees, relying on the
personnel resources of its parent company to operate. As compensation for
its services QUENESKA pays the Bank a management fee in the amount of 1.5%
on annual average assets ($21,673) in 1993. This fee is eliminated in the
financial statement consolidation of the parent company.
The corporation's taxable income or loss is included in the
consolidated tax return of its parent company, The Merchants Bank.
QUENESKA computes its income tax provision or benefit on an individual
basis and reimburses, or is reimbursed, by the parent company an amount
equal to the annual provision or benefit.
RETAIL SERVICES
A variety of deposit, credit and other miscellaneous financial
services are offered by the Bank, encompassing the following:
Checking accounts are offered in the form of regular, N.O.W.,
Super N.O.W. and senior citizen accounts. The Bank also offers a
basic account called the Thrift account.
Statement savings accounts are offered with a related account
feature to a number of personal checking account products which
may satisfy the checking account minimum balance requirements.
ATF (automatic transfer of funds) provides overdraft protection
benefits for personal checking accounts through electronic funds
transfer.
Certificates of deposit provide investment opportunities with
varying maturities and yields.
Money Market and Preferred Investment accounts offer competitive
annual percentage yields and the ability to engage in third party
transactions.
A flexible I.R.A. program offers several deposit options for
retirement investment using both fixed and adjustable rate
offerings with varying maturities.
A Christmas Club account is also available for the accumulation
of savings with an annual disbursement.
The Consumer Credit program consists of installment loans, Mastercard,
University of Vermont Affinity Mastercard, VISA, a home equity line of
credit, and fixed and adjustable rate residential real estate mortgages.
Four unique mortgage programs are: an accelerated amortization mortgage
which allows mortgagors to make biweekly payments resulting in interest
savings and an earlier payoff compared to monthly payment mortgages; a Two
Step program with an affordable low fixed rate for the first five or seven
years which then adjusts once based upon a specific index; a loan under the
Farmers' Home Administration Rural Guaranteed Housing Program which
provides for up to 100% financing, flexible qualifying ratios, and a
government guarantee for loans on properties in the rural portions of the
state; and a "jumbo" loan program providing salable loans for customers
with requirements for larger mortgage balances. The Bank also participates
in the state's housing finance agency program which assists the low to
moderate income home buyer.
The Bank provides strong customer support with thirty Automated
Teller machines statewide and including one drive-up machine and 106 on-
line electronic teller stations. The bank's expanded personal computer
networks now connect each of our thirty nine banking offices to the main
frame computer with CRT capability as well as with electronic mail and
other PC software. Miscellaneous retail services include safe deposit
boxes, travelers and gift checks, bank drafts, personal money orders, and
several methods of automated money transfer, including Federal Reserve wire
services.
COMMERCIAL SERVICES
The Bank provides commercial banking services to individuals,
partnerships and corporations, as well as to public and governmental
organizations. Corporate Cash Management services provide several vehicles
for managing and investing idle funds on a daily and weekly basis.
Business Credit Card services offer full participation in Mastercard and
VISA programs and feature various types of electronic deposit options.
Regular and Small Business checking accounts address the need for essential
deposit and disbursement services for commercial customers. Commercial
loans are offered for a wide range of private and public funding needs.
Included in this area is the Bank's Small Business Preferred Lender
Program. Also offered are commercial real estate loans, lines of credit,
business credit cards, and irrevocable letters of credit.
Other miscellaneous commercial banking services include night
depository, coin and currency handling, and employee benefits management
and fiduciary services available through the Merchants Trust Company.
EXPANSION EFFORTS
The Merchants Bank operates thirty-eight full-service banking
facilities within Vermont; 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. The
Merchants Bank's most recent acquisition occurred in June of 1993 with the
acquisition of the assets and deposits of New First National Bank of
Vermont from the FDIC. Through this acquisition the Merchants Bank
extended its presence on the east side of the State gaining offices in
Springfield, Windsor, E. Thetford, Fairlee, Bradford, Newbury and Groton
and on the west side of the State an office in Fair Haven. This
acquisition also resulted in The Merchants Bank increasing market share in
Hardwick, St. Johnsbury and Northfield.
Each decision to expand the branch network has been based upon
strategic planning and analysis indicating that the new or acquired
facility would provide enhanced banking resources within the community,
insure the competitive viability of the Bank through potential growth of
deposits and lending activities.
On March 14, 1994 The Merchants Bank opened a limited service office
on the Wake Robin Retirement Community Campus in Shelburne, Vermont.
COMPETITION
Competition for financial services remains very strong in Vermont. As
of December 31, 1993, there were twelve state chartered commercial banks,
nine national banks, five savings banks and three savings and loan
associations operating in Vermont. In addition, other financial
intermediaries such as brokerage firms, credit unions, and out-of-state
banks also compete for deposit and loan activities.
At year-end 1993 The Merchants Bank was the third largest bank in
Vermont, enjoying a strong competitive franchise within the state, with
thirty-nine banking offices. Whereas Vermont does have a nationwide
interstate banking law there was no merger or acquisition activity during
1993.
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, 1993 Merchants Bancshares, Inc. had four officers:
Dudley H. Davis, President and Chief Executive Officer; Susan D. Struble,
Secretary; Edward W. Haase, Treasurer; and Susan M. Verro, Assistant
Secretary. No officers of the Company are on a salary basis.
As of December 31, 1993, The Merchants Bank employed 388 full-time and
80 regular part-time employees, representing a full-time equivalent
complement of 432 employees. The Bank maintains a comprehensive employee
benefits program which provides major medical insurance, hospitalization,
dental insurance, long-term and short-term disability insurance, life
insurance, a pension plan and a 401(k) Employee Stock Ownership Plan. In
addition, the Bank offers a Performance Progress Sharing Plan, which is
available to all eligible employees. Employee benefits offered by the Bank
are very competitive with comparable plans provided by other Vermont banks.
REGIONAL ECONOMY
In New England the long and deep recession which eliminated about one
out of every nine jobs, appears to be abating. The year-end 1993 forecast
from the New England Economic Project (NEEP) predicts that payroll surveyed
jobs will be growing in 1994 in all six New England states. However, by
gradual economic improvement within the region, business activity and labor
markets have not yet returned to "normal". It may take another decade for
this region to regain the jobs lost since the recession which started in
1989.
Some segments of the economy are recovering better than others. For
example, 1993 building permits for new home construction had risen more
that 25% above their 1991 lows. By the end of 1997, NEEP predicts that
permits will be up an additional 15%. Even so, the level of home building
activity will still be less than half what it was in 1986, when New
Englanders took out 112,000 permits at the peak of the speculative housing
period.
The economy of the New England states is expected to underperform the
national economy, with the economy of the southern three N.E. states
expected to be weaker than the three northern states. Connecticut has been
especially hard hit by defense restructuring and by restructuring in the
insurance industry. Continued tough economic times for the region's
richest state is not favorable news for New England.
New Hampshire is currently the bright spot in New England, because of
its position as the low cost producer in the region. Non farm employment
is forecast to add 9,000 jobs in 1994 (up 1.9%) and an additional 15,000
jobs in 1995 (up 2.9%).
Overall, however, it appears unlikely that any significant economic
expansion is on the horizon for the New England region. Growth will need
to come from the expansion of existing businesses operating within the
region, and from the region's natural environmental appeal for tourism.
VERMONT ECONOMY
A conclusion of the Vermont Business Roundtable is that "not since the
Great Depression has there been a period of such extended and steep decline
in employment in Vermont". Many of the reasons for this decline are
attributable to regional and national factors; specifically the following:
The end of the national defense build-up. The direct and
indirect economic impact of defense spending in Vermont could
account for as much as 10 percent of the state's total annual
economic activity.
Maturation of high-technology and computer industries. There has
been a decline in the high-tech, computer business in Vermont as
foreign competition has been intense, and changes within the
computer industry have hurt job growth since its mid-1980's
employment peak.
Problems in agriculture. The dramatic decline in milk prices
over the past two years has placed many Vermont dairy farmers at
considerable financial risk. Over the past ten years the number
of dairy farms has declined 31 percent, from 3,170 in 1984 to
2,187 this year.
Loss of Vermont's and New England's cost competitiveness to
domestic competition. Vermont's businesses find themselves
facing increasingly sharp cost competition from national and
foreign concerns. This loss of competitiveness has resulted in
numerous work-force reductions and cost-cutting initiatives among
key employers across the state.
Restructuring in financial services. Ongoing employment
restructuring in the banking and financial services sector in
Vermont has had a negative impact on the economy as firms seek to
reduce payroll and overhead costs in order to restore
profitability.
Problems associated with the national recession and subsequent
weak recovery. Vermont is not immune to the inevitable ups and
downs associated with the national business cycle. The
manufacturing sector has been negatively impacted by the slow
recovery in markets for durable goods products.
In spite of the problems discussed above, Vermont's labor market has
recently expanded. The Vermont unemployment rate was 4.5% in November
1993, versus 6.4% nationally. Jobs within the service sector have
increased 3% over the past year, and now account for approximately 29% of
all jobs in Vermont. The total state labor force expanded by 2,300 jobs
between December 31, 1992 and November 30, 1993.
Many have recommended that it's time to take inventory of Vermont's
advantages and disadvantages and to capitalize on the state's many
attributes, while at the same time assessing and finding reasonable
solutions to the problems facing Vermont's current economy.
ITEM 2 - PROPERTIES
The Merchants Bank operates thirty-nine banking facilities as
indicated in Schedule A below. Corporate administrative offices are
located at 123 Church Street, Burlington, Vermont, and the operations data
processing center is located at 275 Kennedy Drive, South Burlington,
Vermont.
Schedule B (below) indicates properties owned by the Bank as possible
future expansion sites.
A. SCHEDULE OF BANKING OFFICES BY LOCATION
Burlington 123 Church Street Corporate offices
164 College Street Merchants Trust Co.
172 College Street Branch office
1014 North Avenue Branch office
112 Colchester Avenue *2 Branch office
Essex Junction 54 Pearl Street Branch office
South Burlington 50 White Street Branch office
947 Shelburne Road *1 Branch office
275 Kennedy Drive Operations Center
Branch office
Burlington Airport *1 ATM
Bristol 15 West Street Branch office
Barre 105 North Main Street Branch office
Northfield Depot Street Branch office
South Hero 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
Johnson Main Street 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 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
Danville Main Street Branch office
Fairlee U.S. Route #5 Branch office
Groton U.S. Route #302 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
Springfield 56 Main Street Branch office
Springfield Plaza 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, 1993 a mortgage with an unpaid principal
balance of $209,909 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.
B. SCHEDULE OF PROPERTIES OWNED FOR FUTURE EXPANSION *1
Year
Description Acquired Location Purpose
Land & Building 1973 Corner of Church Future Expansion
& College Sts.
Burlington, VT
Land 1977 30 Main Street Future Expansion
Burlington, VT
Land & Building 1979 Plainfield, VT Future Expansion
Land & Building 1981 8 White Street Future Expansion
So. Burlington, VT
Land & Building 1985 U.S. Route 7 Future Expansion
Shelburne, VT
Land & Building 1986 Pearl Street Future Expansion
Essex Jct., VT
Land & Building 1986 So. Summit St. Future Expansion
Essex Jct., VT
Land 1990 45 College Street Future Expansion
Burlington, VT
Land & Building 1990 60 Main Street Future Expansion
Burlington, VT
Note:
*1: Buildings identified in Schedule B are all rented or leased to
tenants. Leases are generally for short-term periods and are at
varying rental amounts depending upon the location and the amount
of space leased.
ITEM 3 - LEGAL PROCEEDINGS
The Company is involved in various legal proceedings arising in the
normal course of business. Based on consultation with legal counsel,
management believes that the resolution of these matters will not have a
material effect on the consolidated financial statements of the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of calendar year 1993 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
NASDAQ 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.
CASH DIVIDEND
QUARTER ENDING HIGH LOW PAID PER SHARE
March 31, 1992 $14.75 $11.50 .20
June 30, 1992 15.50 11.75 .20
September 30, 1992 16.50 14.00 .20
December 31, 1992 17.00 14.50 .20
March 31, 1993 17.00 14.75 .20
June 30, 1993 16.50 10.25 *
September 30, 1993 16.00 11.25 *
December 31, 1993 15.00 11.00 *
On December 11, 1992 a three percent stock dividend was issued to
shareholders of record on November 30, 1992.
*Cash dividends were suspended for the second, third and fourth
quarters of 1993.
As of December 31, 1993 Merchants Bancshares, Inc. had 1,630
shareholders.
ITEM 6 - SELECTED FINANCIAL DATA
The supplementary financial data presented in the following tables and
narrative contains 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 1993
Annual Report to Shareholders, a copy of which is attached as an addendum
to this Form 10K.
The five-year summary of operations, interest management analysis, and
management's discussion and analysis, all as contained on pages 27 through
33 in the 1993 Annual Report to Shareholders are herein incorporated by
reference.
Tables included on the following pages concern the following:
Deposits; return on equity and assets; distribution of assets,
liabilities, and stockholders' equity; analysis of changes in net interest
income; investment securities and U.S. Treasury and Agency obligations;
and the estimated maturity / repricing structure of the Company's interest
earning assets and interest bearing liabilities.
DEPOSITS
The following schedule shows the average balances of
various classifications of deposits. Dollar amounts are expressed in
thousands.
1993 1992 1991
Demand Deposits $ 81,761 $ 68,494 $ 63,986
Savings, Money Market
and NOW Accounts 315,254 272,729 233,873
Time Deposits Over $100,000 17,752 18,170 9,534
Other Time Deposits 155,227 132,971 183,331
-------- -------- --------
Total Average Deposits $569,994 $492,364 $490,724
======== ======== ========
Time Deposits over $100,000 at December 31, 1993 had the following
schedule of maturities (In Thousands):
Three Months or Less $ 6,725
Three to Six Months 1,717
Six to Twelve Months 6,517
Over Twelve Months 6,255
--------
Total $ 21,214
========
RETURN ON EQUITY AND ASSETS
The return on averageassets, return on average equity,dividend payout
ratio and average equity to average assets ratio for the three years ended
December 31, 1993 were as follows:
1993 1992 1991
Return on Average Total Assets -0.82% 0.94% 0.86%
Return on Average Stockholders' Equity -11.92% 11.01% 10.53%
Dividend Payout Ratio N/A 58.48% 62.69%
Average Stockholders' Equity to
Average Total Assets 6.88% 8.56% 8.22%
SHORT-TERM BORROWINGS
Refer to Notes 9 and 10 to the consolidated 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 1993, 1992 and 1991. 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.
(All Dollars are in Thousands) 1993 1992 1991
----------------------------- ----------------------------- -----------------------------
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 $98,971 $3,655 3.69% $92,184 $4,306 4.67% $60,455 $3,881 6.42%
States & Political Subdivisions 143 12 8.39% 10 1 10.00% 10 1 10.60%
Other 8,900 667 7.49% 3,733 242 6.48% 4,897 357 7.29%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Investment Securities $108,014 $4,334 4.01% $95,927 $4,549 4.74% $65,362 $4,239 6.49%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Loans, Net of Unearned Discount:
Commercial (a) (b) 111,353 9,236 8.29% 105,489 10,174 9.64% 132,453 13,854 10.46%
Real Estate 380,810 35,639 9.36% 317,865 32,685 10.28% 316,253 37,003 11.70%
Consumer 23,642 2,728 11.54% 18,692 2,239 11.98% 22,435 2,944 13.12%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Loans $515,805 $47,603 9.23% $442,046 $45,098 10.20% $471,141 $53,802 11.42%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Federal Funds Sold $3,230 $97 3.00% $4,939 $168 3.40% $1,303 $68 5.22%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Earning Assets $627,049 $52,034 8.30% $542,912 $49,815 9.18% $537,806 $58,109 10.80%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Reserve for Possible Loan Losses (11,488) (7,480) (6,039)
Cash and Due From Banks 29,177 27,312 25,958
Premises and Equipment 15,166 15,279 15,952
Other Assets 45,611 24,293 18,665
-------- -------- --------
Total Assets $705,515 $602,317 $592,343
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Time Deposits:
Savings, Money Market & NOW Accounts $315,254 $8,546 2.71% $277,330 $11,011 3.97% $233,873 $12,987 5.55%
Certificates of Deposit over $100,000 963 32 3.32% 1,630 56 3.44% 9,534 583 6.11%
Other Time 172,979 8,471 4.90% 143,624 8,622 6.00% 183,331 14,223 7.76%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Time Deposits $489,196 $17,049 3.49% $422,584 $19,689 4.66% $426,738 $27,793 6.51%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Federal Funds Purchased 2,197 88 4.01% 1,791 94 5.25% 3,993 269 6.74%
Securities Sold Under Agreement
to Repurchase 7,688 229 2.98% 5,117 187 3.65% 4,112 223 5.41%
Demand Notes Due U.S. Treasury 3,540 97 2.74% 3,498 119 3.40% 3,729 192 5.15%
Other Interest Bearing Liabilities 5,471 290 5.30% 3,672 264 7.19% 2,967 254 8.56%
Debt 58,337 4,272 7.32% 42,171 3,698 8.77% 34,946 3,373 9.65%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Interest Bearing Liabilities $566,429 $22,025 3.89% $478,833 $24,051 5.02% $476,485 $32,104 6.74%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Demand Deposits 81,761 68,324 63,986
Other Liabilities 8,814 3,612 3,204
Stockholders' Equity 48,511 51,548 48,668
-------- -------- --------
Total Liabilities & Stockholders' Equity $705,515 $602,317 $592,343
======== ======== ========
Net Interest Income (a) $30,009 $25,764 $26,005
======== ======== ========
Yield Spread 4.41% 4.15% 4.07%
===== ===== =====
NET INTEREST INCOME TO EARNING ASSETS 4.79% 4.75% 4.84%
===== ===== =====
<FN>
(a) Tax exempt interest has been converted to a tax equivalent basis by tax effecting such interest at the Federal tax rate of 34%.
(b) Includes non-accruing loans.
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 change
therein for 1993 as compared with 1992 and 1992 as compared with 1991.
1993 vs 1992 1992 vs 1991
------------------------------------------- -------------------------------------------
Increase --Due to (a)-- Increase --Due to (a)--
1993 1992 (Decrease) Volume Rate 1992 1991 (Decrease) Volume Rate
------- ------- -------- ------- ------- ------- ------- -------- ------- -------
Interest Income:
Loans $47,603 $45,098 $2,505 $6,808 ($4,303) $45,098 $53,802 ($8,704) ($3,051) ($5,654)
Investment Income:
Taxable 4,322 4,548 (226) 637 (863) 4,548 4,238 310 1,407 (1,098)
Non-Taxable 12 1 11 11 (0) 1 1 (0) 0 0
Federal Funds Sold 97 168 (71) (51) (20) 168 68 100 124 (24)
------- ------- -------- ------- ------- ------- ------- -------- ------- -------
Total $52,034 $49,815 $2,219 $7,404 ($5,186) $49,815 $58,109 ($8,294) ($1,521) ($6,776)
------- ------- -------- ------- ------- ------- ------- -------- ------- -------
Less Interest Expense:
Savings, Money Market
& Now Accounts $8,546 $11,011 ($2,465) $1,028 ($3,493) $11,011 $12,987 ($1,976) $1,722 ($3,698)
Certificates of Deposit
Over $100,000 32 56 (24) (22) (2) 56 583 (527) (272) (255)
Other Time 8,471 8,622 (151) 1,438 (1,589) 8,622 14,223 (5,601) (2,378) (3,223)
Federal Funds Purchased 88 94 (6) 16 (22) 94 269 (175) (116) (59)
Securities Sold Under
Agreement to Repurchase 229 187 42 77 (35) 187 223 (36) 37 (72)
Demand Note - U.S. Treasury 97 119 (22) 1 (23) 119 192 (73) (8) (65)
Debt and Other Borrowings 4,562 3,962 600 1,282 (682) 3,962 3,627 335 683 (348)
------- ------- -------- ------- ------- ------- ------- -------- ------- -------
Total $22,025 $24,051 ($2,026) $3,820 ($5,847) $24,051 $32,104 ($8,053) ($332) ($7,721)
------- ------- -------- ------- ------- ------- ------- -------- ------- -------
Net Interest Income $30,009 $25,764 $4,245 $3,584 $660 $25,764 $26,005 ($241) ($1,190) $945
======= ======= ======== ======= ======= ======= ======= ======== ======= =======
<FN>
(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 totaling $4,598, $4,326 and $3,506 for the years ended December 31,
1993, 1992 and 1991, respectively.
INVESTMENT SECURITIES
The Company invests in securities with short maturities, consisting
primarily of U.S. government securities. The Company's investment portfolio
is used primarily to fund the seasonality of loan growth and deposit
run-off as well as for asset/liability management purposes.
The table below showsthe classification of the investmentportfolio by
type of investment security based on lower of cost or market value at
December 31, 1993, 1992, and 1991, respectively. In addition, the
subsequent table shows the maturity distribution and weighted average yield
of the investment portfolio by security type as of December 31, 1993. All
dollar amounts are expressed in thousands.
December 31,
1993 1992 1991
U.S. Treasury and Agency Obligations $85,945 $103,187 $ 63,262
Other Securities 1,451 4,333 4,371
------- -------- --------
Total Investment Securities $87,396 $107,530 $ 67,643
Net Unrealized Depreciation (439) 0 0
-------- -------- --------
Total $86,957 $107,530 $ 67,643
======= ======== ========
The following table shows the maturity distribution and the weighted
average yields of such investment portfolio and the securities as of
December 31, 1993:
Book Average
Value Yield
U.S. Treasury and Agency Obligations(thousands)
Due Within 1 Year $ 0 ---
Due After 1 but Within 5 Years 85,714 3.71%
Due After 5 but Within 10 Years 0 ---
Due After 10 Years 231 7.67%
------- -----
Total $85,945 3.72%
------- -----
Other Securities
Due Within 1 Year $ 0 ---
Due After 1 but Within 5 Years 0 ---
Due After 5 but Within 10 Years 0 ---
Due After 10 Years 0
Equity Securities* 1,451 3.64%
-------- ------
Total $ 1,451 3.64%
-------- ------
Total $ 87,396 3.71%
======== ======
Total Securities
Due Within 1 Year $ 0 ---
Due After 1 but Within 5 Years 85,714 3.71%
Due After 5 but Within 10 Years 0 ---
Due After 10 Years 231 7.67%
Equity Securities* 1,451 3.64%
------- ------
Total $87,396 3.71%
======= ======
* Yields are adjusted to fully taxable equivalent basis, assuming a 34%
Federal tax rate.
LOAN PORTFOLIO
The following tables display the composition of the Bank's loan portfolio
for the consecutive five year period 1989 through 1993, along with a
schedule profiling the loan maturity distribution over the next five years.
COMPOSITION OF LOAN PORTFOLIO
The table belowpresents the composition ofthe Bank's loan portfolioby
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 $1,310,416 in 1993, $1,183,400 in 1992, $1,098,100 in
1991, $955,000 in 1990 and $950,000 in 1989, which principally relate to
real estate mortgages.
As of December 31,
Type of Loan 1993 1992 1991 1990 1989
------------ -------- -------- -------- -------- --------
Commercial, Financial
& Agricultural $ 98,936 $ 76,141 $120,033 $129,830 $113,169
Industrial Revenue Bonds 6,695 8,721 11,968 16,296 19,741
Real Estate - Construction 30,526 18,776 16,392 23,763 69,282
Real Estate - Mortgage 413,112 305,513 294,769 288,845 262,723
Installment 22,836 18,332 20,930 25,070 29,124
Lease Financing 42 630 1,769 4,144 6,005
All Other Loans 1,324 1,422 4,287 7,452 2,071
-------- -------- -------- -------- --------
Total Loans $573,471 $429,535 $470,148 $495,400 $502,115
======== ======== ======== ======== ========
PROFILE OF LOAN MATURITY DISTRIBUTION
The table below presents the distribution of the varying contractual
maturities or repricing opportunities of the loan portfolio at December,
1993. 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 $ 95,694 $ 8,313 $ 3,136 $107,143
Real Estate Loans 398,319 26,971 18,130 $443,420
Installment Loans 15,007 7,869 32 $22,908
-------- -------- -------- --------
$509,020 $ 43,153 $ 21,298 $573,471
======== ======== ======== ========
Residential mortgage lending during 1993 was very active due to
prevailing low interest rates for various mortgage products. Approximately
75% of the Bank's 1993 mortgage activity was for refinancing of existing
debt. In 1993 a total of 1,098 one-to-four family residential mortgage
loans were closed by the bank totaling $103.2 million. Approximately 95%
of these originations were sold on the secondary market. The remaining 5%,
or $4.9 million was placed in the Bank's portfolio. The Bank currently
services $347.9 million in residential mortgage loans, $257.1 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. At the end of 1993, the Bank had 181
residential mortgage loans in various stages of processing. Approximately
68% of these loans were refinancings of existing debt.
During 1993 the Bank continued to be very active in the U.S. Small
Business Administration guaranteed loan program. Forty new loans totaling
$7.1 million were originated during 1993 with SBA guarantees ranging from
70% to 90%. This represents an approximate decrease of 13% in originations
over 1992. The reason for the decline in volume is believed to be the
sluggish Vermont economy.
In most instances the Bank sells the guaranteed portion of its SBA
guaranteed loans to secondary investors 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.
In June 1993, the Bank purchased certain assets of the New First
National Bank of Vermont (NFNBV) from the Federal Deposit Insurance
Corporation, Division of Liquidation. The bulk of the assets purchased
were loans. Therefore, the majority of the net increase in assets, by loan
category, occurred as a result of this acquisition.
The Bank booked approximately $107,000,000 in new commercial loan
business in 1993. This business was written primarily out of the Bank's
Western Division.
LOAN REVIEW
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 sets
limits for each lender. These authorized lending limits are established at
least annually and are based upon the lender's job assignment, training,
and experience. Loan requests that exceed a lender's authority are
referred to senior loan officers having higher lending authorities. All
extensions of credit of $2.5 million to any one borrower, or related party
interest, are reviewed and approved by the Bank's Board of Directors.
By using a variety of management reports (new loans, largest exposures,
delinquencies, watched assets), the Bank's loan portfolio is continuously
monitored by the Board of Directors, senior loan officers, and the loan
review department. The loan portfolio as a whole, as well as individual
loans, are reviewed for loan performance, credit worthiness, and strength
of documentation. Credit ratings are assigned to commercial loans and
routinely are reviewed.
All loan officers are required to service their own loan portfolios and
account relationships. As necessary, loan officers take 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 upon maintaining a specific percentage of RPLL to total loans or
total non-performing 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, non-performing asset listings, and
credit rating reports.
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:
Status of non-performing 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
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
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.
An analysis of the allocation of the RPLL follows. Both the specific
and general components of the RPLL are grouped by loan categories. The
allocation of the RPLL is based upon loan loss experience, loan portfolio
composition, and an assessment of possible loan losses in the categories
shown.
Allocation of the Reserve for Possible Loan Losses
December 31, 1993
(000's omitted)
Percent of
loans in
Balance at End of Period Percent each category
Applicable to: Amount Allocation to total
Loans
Domestic:
Commercial, Financial, and
Agricultural & IRB's $6,500 32% 19%
Real Estate - Construction 2,000 10% 5%
Real Estate - Mortgage 11,000 55% 72%
Installment Loans to 350 2% 4%
Individuals
Lease Financing 25
All Other Loans 185 1%
------- ---- ----
Total: $20,060 100% 100%
======= ==== ====
Key data that are used in the assessment of the loan portfolio and the
analysis of the adequacy of the RPLL are presented in the tables and
schedules that follow in this discussion. 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. All dollar amounts are expressed in
thousands.
LOAN LOSSES AND RPLL RECONCILIATION
Year Ended December 31,
1993 1992 1991 1990 1989
Average Loans Outstanding $578,187 $447,652 $471,141 $482,756 $482,582
Reserve for Possible Loan
Losses at Beginning of Year 7,412 6,650 5,075 5,151 4,358
Loans Charged Off (NOTE 1):
Commercial, Lease Financing
and all Other Loans (5,567) (2,938) (3,367) (2,318) (1,162)
Real Estate - Construction (275) (253) (1,802) 0 0
Real Estate - Mortgage (7,651) (4,096) (718) (2,236) (175)
Installment & Credit Cards (459) (452) (617) (575) (463)
--------- -------- -------- -------- --------
Total Loans Charged Off ($13,952) ($7,739) ($6,504) ($5,129) ($1,800)
Recoveries on Loans:
Commercial, Lease Financing
and all Other Loans 392 232 366 471 22
Real Estate - Construction 0 0 379 0 0
Real Estate - Mortgage 301 108 0 3 5
Installment & Credit Cards 85 111 91 87 86
-------- ------- ------- ------- -------
Total Recoveries on Loans $ 778 $ 451 $ 836 $ 561 $ 113
Net Loans Charged Off (13,174) (7,288) (5,668) (4,568) (1,687)
Provision for Loan Losses
Charged to Operations
(NOTE 2) 23,822 8,050 7,243 4,492 2,480
Loan Loss Reserve-Acquired
Loans (NOTE 3) 2,000 --- --- --- ---
-------- -------- -------- -------- --------
Reserve for Possible Loan
Losses at End of Year $20,060 $7,412 $6,650 $5,075 $5,151
======== ======== ======== ======== ========
Loan Loss Reserve to Total
Loans at Year End 3.50% 1.73% 1.41% 1.03% 1.03%
Ratio of Net Charge-Offs
During the Year to
Average Loans Outstanding
During the Year 2.28% 1.63% 1.20% 0.95% 0.35%
NOTE 1: Prior to 1991, loans secured by real estate were not broken out
between construction and permanent financing for purposes of loan
charge-off and recovery analysis.
NOTE 2: The loan loss provision is charged to operations. When actual
losses differ from these estimates, and if considered necessary, they
are reported in operations in the periods in which they become known.
NOTE 3: See Note 2 to the consolidated financial statements regarding the
acquisition of New First National Bank of Vermont.
The increase in the reserve for possible loan losses from $7,412,000
at December 31, 1992 to $20,060,000 at December 31, 1993, reflects
management's efforts to maintain the reserve at an appropriate level to
provide for potential loan losses based on an evaluation of known and
inherent risks in the loan portfolio. Given the continued slow pace in the
economy which affected many of the Company's borrowers in 1993, and the
increase in nonperforming assets, management determined that a significant
increase in the reserve was appropriate. The provision for possible loan
losses increased from $8,050,000 for 1992 to $23,822,000 in 1993.
NON-PERFORMING ASSETS
---------------------
The following tables summarize the Bank's non-performing assets. The
first table shows a breakout of nonperforming assets covered by a loss
sharing arrangement related to the acquisition of the NFNBV on June 4,
1993. The terms of the Purchase and Assumption Agreement related to the
purchase of NFNBV require that the FDIC pay the Bank 80% of net charge-offs
up to $41,100,000 on any loans that qualify as loss sharing loans for a
period of three years from the date of the acquisition. If net charge offs
on qualifying loss sharing loans exceed $41,100,000 during the three year
period, the FDIC is required to pay 95% of such qualifying charge offs.
This arrangement significantly reduces the exposure that the Bank faces on
Nonperforming assets (NPAs) that are covered by loss sharing. As of
December 31, 1993 NPAs covered by loss sharing totaled approximately
$17,469,000. The aggregate amount of loans covered by the loss sharing
arrangement at December 31, 1993 was $132,879,000.
Loss Sharing
Loans Assets Total
----------- ----------- -----------
Nonaccrual loans $29,712,089 $17,356,607 $47,068,696
Restructured loans 2,772,783 68,389 2,841,172
Loans Past due 90 days
or more and still accruing 712,391 2,978 715,369
Other Real Estate Owned 13,633,383 40,876 13,674,259
----------- ----------- -----------
Total $46,830,646 $17,468,850 $64,299,496
=========== =========== ===========
The second table shows nonperforming assets as of year end 1989 through
1993 (in thousands):
1993 1992 1991 1990 1989
------- ------- ------- ------- -------
Nonaccrual Loans $47,069 $12,148 $ 8,333 $ 2,914 $ 2,893
Loans Past Due 90 Days or
More and Still Accruing 715 7,251 8,613 5,908 5,964
Renegotiated Loans 2,841 1,838 5,679 0 0
------- ------- ------- ------ ------
Total Non-Performing Loans $50,625 $21,237 $22,625 $ 8,822 $8,857
Other Real Estate Owned 13,674 12,661 6,110 4,652 318
------- ------- ------- ------ ------
Total Non-Performing Assets $64,299 $33,898 $28,735 $13,474 $9,175
======= ======= ======= ====== ======
Percentage of Non-Performing
Assets to Total Loans plus
Other Real Estate Owned 8.83% 4.94% 4.81% 1.78% 1.76%
Percentage of Non-Performing
Loans to Total Loans 10.95% 7.67% 6.03% 2.70% 1.83%
======= ======= ====== ====== ======
The nonperforming assets table above shows an increasing trend in
nonperforming assets in general. Historically, the Company has worked
closely with borrowers and also pursued vigorous collection efforts. As
the local recession continued and property values declined further, the
Company redoubled its efforts to collect troubled assets. Policies and
procedures related to collection of nonaccruing assets in particular were
examined. Additionally, the Company enhanced its Loan Review and Loan
Workout functions to provide additional resources to address nonperforming
assets. Based partly on the continued increases in nonperforming assets in
1993, management significantly increased provisions for possible loan
losses during 1993, resulting in a reserve level of $20,060,000 at year end
1993. During the fourth quarter of 1993, as a result of significant
increases in nonperforming assets and continuing weakness in the regional
economy, the Company provided reserves for possible loan losses of $5
million in addition to the planned provision of $1.75 million for the
quarter.
Based upon the result of the Company's assessment of the factors
affecting the RPLL, as noted in this discussion, management determined
that the balance of the RPLL at December 31, 1993, is adequate.
DISCUSSION OF 1993 EVENTS AFFECTING THE RESERVE FOR POSSIBLE LOAN LOSSES
(RPLL)
Non-performing assets at year end 1993 increased from $33,899,000 at
December 31, 1992 to $64,299,000 at December 31, 1993. $19,637,000 of
the increase was the direct result of the acquisition of NFNBV. As
discussed, $17,469,000 of the NPAs at December 31, 1993 are covered under
a loss sharing arrangement with the FDIC and represent significantly
reduced credit exposure to the Bank. The individual categories of NPA's
are shown below:
12-31-93 9-30-93 6-30-93 3-31-93 12-31-92
-------- ------- ------- ------- --------
Non-Accrual Loans $47,069 $34,280 $27,190 $6,719 $12,148
Loans Past Due 90 days 715 3,144 8,566 6,827 7,251
or more and Still
Accruing
Restructured Loans 2,841 3,106 763 7,992 1,838
Other Real Estate Owned 6,235 6,249 3,712 5,245 3,874
Insubstance Foreclosure 7,439 8,125 10,863 8,705 8,787
------- ------- ------- ------- -------
Total: $64,299 $54,904 $51,094 $35,488 $33,898
======= ======= ======= ======= =======
All categories of NPAs had significant changes during 1993. The events
affecting each category of NPAs are discussed below:
NON-ACCRUAL LOANS:
------------------
The migration of loans 90 days or more overdue and still accruing,
and the acquisition of NFNBV principally accounted for the increase in
nonaccrual loans of $34,921,000 from December 31, 1992 to December 31,
1993. $19,525,000 is directly attributable to the acquisition of NFNBV.
Of the $19,525,000 amount $17,357,000 is covered by the loss sharing
arrangement with the FDIC. The remainder of the increase results from the
migration of loans 90 days or more overdue.
LOANS PAST DUE 90 DAYS OR MORE AND STILL ACCRUING:
--------------------------------------------------
The net decline in this category of $6,536,000 results primarily from
the migration of these loans to non-accruing.
Loans Past Due 90 Days or More and Still Accruing were briefly inflated
during the quarter ended June 30, 1993. This resulted from a provision in
the Purchase and Assumption Agreement with the FDIC that allowed the Bank
to accrue 90 days of additional interest from the June 4, 1993 acquisition
date. The accrued interest associated with these loans was covered by the
loss sharing arrangement previously described.
RESTRUCTURED LOANS:
-------------------
The significant events affecting this category include the migration
to Other Real Estate Owned (OREO) of a commercial office and retail
shopping center for $2,000,000 and a commercial office building for
$640,000. One loan of $955,000 was paid off. Significant charge downs in
two loans were taken in the amounts of $990,000 and $798,000. The
remaining balance of these two loans are included in the nonaccruing TDR
amount previously mentioned.
OTHER REAL ESTATE OWNED AND INSUBSTANCE FORECLOSURE:
----------------------------------------------------
The increase in OREO resulted primarily from three properties being
acquired - a retail shopping and commercial office space center for
$2,000,000, a residential building development for $560,000, and a
commercial office building for $640,000. The Bank had notable success in
the first half of 1993 in disposing of OREO and continues to aggressively
market such properties.
OREO includes specific assets to which legal title has been taken as the
result of transactions related to real estate loans.
The criteria for designation of loans as in-substance foreclosure are
that the debtor has little or no equity in the collateral, proceeds for
repayment of the loan will come only from the operation or sale of the
collateral, and the debtor has formally or effectively abandoned control of
the assets or is not expected to rebuild equity in the collateral. The
collateral underlying these loans is recorded at the lower of cost or
market value less estimated selling costs.
The total amount of Other Real Estate Owned and In-Substance Foreclosure
at December 31 in each of the last five years is as follows:
1993 1992 1991 1990 1989
------ ------ ------ ------ ------
Other Real Estate Owned $6,235 $3,874 $2,650 $1,968 $318
In-Substance $7,439 $8,787 $3,460 $2,684
------- ------- ------ ------ ------
Total: $13,674 $12,661 $6,110 $4,652 $318
======= ======= ====== ====== ======
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 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, in the judgement of management, the ultimate collectability of
principal or interest becomes doubtful. The amount of interest which was
not earned but which would have been earned had the nonaccrual and re-
structured loans performed in accordance with their original terms and
conditions was approximately $2,688,000 and $1,268,000 in 1993 and 1992,
respectively.
In addition to the above policy, interest previously accrued is reversed
if management deems the past due conditions to be an indication of
uncollectability. Also, loans may be placed on a nonaccrual basis at any
time prior to the period specified above if management deems such action to
be appropriate.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of the Financial Condition and
Results of Operations as contained on pages 25 through 29 of the Company's
1993 Annual Report to Shareholders is incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated balance sheets of Merchants Bancshares, Inc. of
December 31, 1993 and 1992, and the related consolidated statements of
income, changes in stockholders' equity and cash flows, for each of the
three years in the period ended December 31, 1993 together with the related
notes and the opinion of Arthur Andersen & Co., independent public
accountants, all as contained on pages 7 through 24 of the Company's 1993
Annual Report to Shareholders are incorporated herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Part III
--------
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and ten percent shareholders to
file initial reports of ownership and reports of changes of ownership of
the Company's common stock with the Securities and Exchange Commission.
Based upon a review of these filings, there were no late filings of SEC
Form 4's during 1993.
ITEM 11 - EXECUTIVE COMPENSATION
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is hereby made to pages 3 through 13 of the Company's Proxy
Statement to Shareholders dated April 21, 1994, wherein pursuant to
Regulation 14 A information concerning the above subjects (Items 10 through
13) is incorporated by reference.
Pursuant to Rule 12 b-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
1993 Annual Report to Shareholders, are incorporated herein by
reference:
Consolidated Balance Sheets, December 31, 1993 and December 31, 1992.
Consolidated Statements of Income for years ended December 31, 1993,
1992, 1991.
Consolidated Statements of Changes in Stockholder's Equity for years
ended December 31, 1993, 1992, 1991.
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1992, 1991.
Notes to Consolidated Financial Statements, December 31, 1993.
(2) The following exhibits are either filed or attached as part of this
report, or are incorporated herein by reference.
Exhibit Description
(3a) Restated Certificate of Incorporation of the Company, filed on
April 25, 1987 as Exhibit B to the Proxy Statement filed as part
of the pre-effective amendment No. 1 to the Company's
Registration Statement on Form S-14 (Registration No. 2-86103) is
incorporated herein by reference.
(3b) Amended By-Laws of the Company, filed on April 25, 1987 as
Exhibit C to the Company's Proxy Statement is incorporated herein
by reference.
(4) Investments, defining the rights of security holders including
indentures; incorporated by reference from the Registrant's Form
S-14 Registration Statement (Registration No. 2-86103), as filed
on September 14, 1983.
(10) Material Contracts: The following are major contracts preceded
by applicable number to Registrant's Form S-14 (Registration No.
2-86103) and are incorporated herein by reference.
15 (10a) Service Agreement as amended between First Data Resources,
Inc., and Registrant dated June 1993 (effective through May 1998)
for Mastercard Services.
17 (10c) 401(k) Employee Stock Ownership Plan of Registrant, dated
January 1, 1990, for the employees of the Bank.
19 (10d) Merchants Bank Pension Plan, as amended and restated on
January 1, 1989, for employees of the Bank.
20 (10e) Agreement between Specialty Underwriters, Inc., and
Registrant dated January 12, 1993 for equipment maintenance
services.
(11) Statement re: computation of per share earnings.
(13) 1993 Annual Report to Shareholders is furnished for the
information of the Commission only and is not to be deemed filed
as part of this report, except as expressly provided herein.
(23) The Registrant's Proxy Statement to Shareholders for the calendar
year ended December 31, 1993 will be filed within 120 days after
the end of the Company's fiscal year.
Other schedules are omitted because of the absence of conditions
under which they are required, or because the required information
is provided in the financial statements or notes thereto.
(23a) Reports on Form 8-K
The Company filed a Form 8-K with the Securities and Exchange
Commission on June 4, 1993.
This report detailed the terms and conditions of a Purchase and
Assumption Agreement among the Federal Deposit Insurance
Corporation, Receiver of the New First National Bank of Vermont,
National Association, the Federal Deposit Insurance Corporation and
The Merchants Bank, dated June 4, 1993.
INDEMNIFICATION UNDERTAKING BY REGISTRANT
In connection with Registrant's Form S-8 Registration Statement under
the Securities Act of 1933 with respect to the Registrant's 401(k) Employee
Stock Ownership Plan, the Registrant hereby undertakes as follows, which
undertaking shall be incorporated by reference into such Registration
Statement on Form S-8:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel, the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
SIGNATURES
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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 March 25, 1994 By s/Dudley H. Davis
--------------------------------
Dudley H. Davis, 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 by s/ Dudley H. Davis
----------------------------- ------------------------------------
Charles A. Davis, Director Dudley H. Davis, Director, President
& CEO of the Company and the Bank
by s/ Jeffrey L. Davis by s/ Jack DuBrul II
----------------------------- ------------------------------------
Jeffrey L. Davis, Director Jack DuBrul, II, Director
by s/ Michael G. Furlong by
----------------------------- ------------------------------------
Michael G. Furlong, Director Thomas F. Murphy, Director
by s/ Edward W. Haase by s/ Leo O'Brien, Jr.
----------------------------- -----------------------------------
Edward W. Haase, Treasurer of the Leo O'Brien, Jr, Director
Company and the Bank, Senior Vice
President and Controller of the Bank
by by
----------------------------- -----------------------------------
Raymond C. Pecor, Jr., Director Patrick S. Robins, Director
by by s/ Robert A. Skiff
----------------------------- -----------------------------------
Benjamin F. Schweyer, Director Robert A. Skiff, Director
by s/ Susan D. Struble
-----------------------------
Susan D. Struble, Director