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, 1994
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
$29,021,285 as computed using the average bid and asked prices of stock, as of
February 15, 1995.
The number of shares outstanding for each of the registrant's classes of
common stock, as of February 15, 1995 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,
1994 are incorporated herein by reference to Part II.
Portions of the Proxy Statement to Shareholders for the year ended December 31,
1994 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 10
Vote of Security Holders
Part II
Item 5 - Market for Registrant's Common 11
Equity and Related Stockholder
Matters
Item 6 - Selected Financial Data 11
Item 7 - Management's Discussion and Analysis 24
of Financial Condition and Results of
Operations
Item 8 - Financial Statements and Supplementary 24
Data
Item 9 - Changes in and Disagreements with Accountants 24
on Accounting and Financial Disclosures
Part III
Item 10 - Directors and Executive Officers of the 25
Registrant
Item 11 - Executive Compensation 25
Item 12 - Security Ownership of Certain Beneficial 25
Owners and Management
Item 13 - Certain Relationships and Related Party 25
Transactions
Part IV
Item 14 - Exhibits, Financial Statement 25
Schedules, and Reports on Form 8-K
Indemnification Undertaking by Registrant 27
Signatures 28
PART I
ITEM 1 - BUSINESS
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 as 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,
1994 the Bank was the third largest commercial banking operation in Vermont,
with deposits totalling $582.2 million, net loans of $490.6 million, and total
assets of $694.8 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, 1994 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. This housing development is fully occupied at this time. Total assets
of this corporation at December 31, 1994 were $1,309,983.
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,
1994, the Merchants Trust Company had fiduciary responsibilities for assets
valued at market in excess of $365.5 million. Total revenue for 1994 was
$1,809,991, total expense was $4,415,949, (including an extraordinary item
totalling $3,246,100 as described in Part I, Item 4, page 9) resulting in a
pre-tax net loss for the year of $2,605,958. This loss 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, 1994, the corporation had assets of $1,720,961,
liabilities of $109,034 due to the parent company for accrued management fees,
and equity capital of $1,611,928.
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 ($23,269) in 1994. This fee is eliminated in the financial
statement consolidation of the parent company.
Queneska'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 of 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
The Merchants Bank offers a wide range of deposit and investment products
including business checking accounts; Free 60 accounts; NOW checking accounts;
NOW 50 accounts; regular checking and Super NOW accounts. In July 1994, the
Bank offered a new type of personal account entitled "bottom line checking".
This account features a flat monthly fee of $3.00 for twenty checks per
statement period with no monthly minimum balance required. A charge of $.50
per check is assessed for more than twenty checks per month. The account can
also be used for all electronic transactions including ATM transactions.
The Bank also offers Certificates of Deposit, Money Market accounts, savings
accounts, individual retirement accounts and Christmas Club accounts, all at
competitive rates and terms. ATF (automatic transfer of funds) provides
overdraft protection benefits for personal checking accounts through electronic
funds transfer. In addition, the bank offers cash management services for
commercial account depositors who may have idle overnight or longer term
balances to invest.
The bank provides strong customer support with thirty Automated Teller machines
statewide, including one drive-up ATM; and 106 on-line electronic teller
stations. The bank's expanded personal computer networks now connect each
banking office to the mainframe AS/400 computer with CRT capability, as well
as, electronic mail and other PC software applications.
Additional 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
Types of Credit Offerings:
Consumer Loans:
Financing is provided for new or used automobiles; boats; airplanes;
recreational vehicles; new mobile homes; collateral loans, secured by savings
accounts, listed equities or life insurance; personal loans. Home improvement
and home equity lines of credit, as well as Master and Visa credit cards.
Real Estate Loans:
Financing is available for one-to-four family residential mortgages; multi-
family mortgages; residential construction; mortgages for seasonal dwellings;
commercial real estate mortgages. Mortgages for residential properties are
offered on a long-term fixed-rate basis; alternatively, adjustable-rate
mortgages are offered. Bi-weekly 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, providing 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.
Other miscellaneous commercial banking services include night depository, coin
and currency handling and employee benefits management and related 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 assumption of deposits of the 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 and 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. During the
fall of 1994, The Merchants Bank began restoration of the Old South Hero Inn on
the corner of US Route 2 and South St., So. Hero, Vt. The Merchants Bank
relocated its South Hero office to this historic site on January 17, 1995.
COMPETITION
Competition for financial services remains very strong in Vermont. As of
December 31, 1994, there were eleven 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, loan, and other ancillary financial activities.
At year-end 1994 The Merchants Bank was the third largest bank in Vermont,
enjoying a strong competitive franchise within the state, with thirty-nine
banking offices as identified in Item 2 (A). During January 1995 the Bank of
Vermont, a subsidiary of Bank of Boston, was acquired by KeyCorp, a large
regional bank holding company headquartered in Cleveland, Ohio. Competition
from this large regional institution is expected to be very aggressive.
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, 1994, Merchants Bancshares, Inc. had five officers: Dudley
H. Davis, Chairman of the Board; Joseph L. Boutin, President and Chief
Executive Officer; Susan D. Struble, Secretary; Edward W. Haase, Treasurer; and
Susan M. Verro, Assistant Secretary. No officer of the Company is on a salary
basis.
As of December 31, 1994, The Merchants Bank employed 399 full-time and 81 part-
time employees, representing a full-time equivalent complement of 439
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 and a pension plan, a
401(k) Employee Stock Ownership Plan and a Performance Progress Sharing
Plan. Employee benefits offered by the Bank are very competitive with
comparable plans provided by other Vermont banks.
REGIONAL ECONOMY
Regional economists are hopeful that the economy will begin to
moderate as the result of seven Federal Reserve interest rate hikes
over the past thirteen months, and that there will be a "soft
landing" as opposed to a much less attractive "boom-bust" scenario.
While growth in 1994 exceeded earlier forecasts, the slower
predicted 1995 national economic expansion is expected to produce
only moderate economic gains in New England. Job growth in New
Hampshire, Massachusetts, Rhode Island, Connecticut and Vermont is
expected to be in the 1 1/2 - 2% range. However, for the region to
grow jobs at this predicted level there are several prerequisites.
Namely, (i) U.S. real GDP Growth cannot fall much below 2 1/2%,
because historically the New England states have been among the
most sensitive to changes in national economic activity, (ii)
growth must continue to be strong for exports and capital spending
because both are important to New England (iii) and finally,
defense cutbacks cannot be too severe. If several New England
military bases are eventually closed as recommended by the Base
Closing Commission, this could have a dramatic adverse economic
impact on the region.
VERMONT ECONOMY
The most recent Vermont economic report published by the New
England Economic Project (NEEP) dated October 1994 forecasts the
following outlook for the period 1994-1995.
- The Vermont economy should continue to improve if the
Federal Reserve Bank can engineer a "soft landing" in
1995, whereby interest rates will not be raised by an
excessive amount.
- Vermont's seasonally adjusted year-end 1994 unemployment
rate was 4.3% compared to the U.S. rate at 5.6%.
However, the current rate of unemployment has begun to
increase due to: a) rising interest rates; b) a slowdown
in Canadian tourism activity; and c) industrial "mix"
factors involving corporate "right sizing", budgetary
constraints and related corporate actions.
- Vermont exporters, specialty manufacturers, and sectors
of the VT economy benefiting from the strong national
expansion are expected to experience the strongest
employment growth rates during the period 1995-1996.
- The majority of new jobs that will be added in the
Vermont economy through 1995 will be found in non-
manufacturing job categories, - mostly trade and
services. Service sector employment currently accounts
for nearly 3 out of every 10 jobs in the state.
- With the national economic recovery moving into its'
third year, and based upon historical post-war business
cycle data, the possibility of a recession during the
next three year period is a possibility that should not
be ignored.
Over the past three years, 1991 - 1994, employment levels
within Vermont's five industrial sectors have changed according to
the following levels of job creation:
Manufacturing 44,200 to 43,700 (1.1%)
Construction 11,900 to 11,800 (.8%)
Trade 57,400 to 60,800 5.9%
Services 67,900 to 77,300 13.8%
Government 43,800 to 44,800 2.3%
The November 1994 Vermont Economic Newsletter published by
Northern Economic Consulting, Inc. reported that actual job growth
accelerated in 1994, and that all sectors of the economy posted job
gains, with the service sector leading the way.
However, it is noteworthy that job gains have not been
accompanied by significant wage gains. Overall, incomes are
probably rising at or just above the level of inflation, with
median family income changing little in recent years.
The Vermont economy has now come through two very long and
abnormal periods; the boom of 1983 to 1988, followed by the bust of
recovery of 1989 to 1994. There are many divergent opinions
concerning the forecast for Vermont's economic outlook over the
next three years; however, a fair consensus remains that Vermont
should continue to maintain a stable, reasonably healthy economy
over the next several years.
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
12 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 Square Branch office
2 Main St. Drive-up Facility
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
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
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 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, 1994 a mortgage with an unpaid
principal balance of $207,860 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 117 Church St. Future Expansion
Burlington, VT
Land 1977 30 Main Street Future Expansion
Burlington, VT
Land 1977 45 College St. 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 55 College Street Future Expansion
Burlington, VT
Land & Building 1990 60 Main Street Future Expansion
Burlington, VT
Land & Building 1993 Bradford Operations Future Expansion
Building
1 Main St.
Bradford, VT
Note:
*1: Buildings identified in Schedule B are all rented or
leased to tenants. Leases are generally for short-term
or medium term periods and are at varying rental amounts
depending upon the location and the amount of space
leased.
ITEM 3 - 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 relate 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. Outside
consultants were retained to assist in this review. 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 affect 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. Any recovery
obtained as a result of such efforts is subject to the terms of an
agreement between the Companies and the insurance carriers.
The attorneys representing the plaintiffs in one of the
lawsuits discussed above have asked the Court to order the Trust
Company's clients to pay fees to those attorneys in an amount of up
to $500,000. The Trust Company has resisted the claims for payment
of such fees by its clients, and as a result, the Trust Company has
been directed to place the sum of $500,000 into escrow pending a
ruling by the Court. Based upon consultation with legal counsel,
management believes there is no substantial basis for any liability
on the part of the Companies for payment of legal fees to those
attorneys and, although there is the possibility that the Companies
may be required to remit all or part of these funds, such an
outcome is not considered likely.
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 1994 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, 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 *
March 31, 1994 14.75 9.00 *
June 30, 1994 13.50 9.00 *
September 30, 1994 17.00 11.25 *
December 31, 1994 14.00 8.50 *
*Cash dividends were suspended for the second, third and
fourth quarters of 1993, and for all four quarters of 1994.
As of December 31, 1994 Merchants Bancshares, Inc. had 1,512
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 1994 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 23 through 30 in the 1994 Annual Report to
Shareholders are herein incorporated by reference.
Tables included on the following pages 12 through 16 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.
1994 1993 1992
Demand Deposits $ 91,853 $ 81,761 $ 68,494
Savings, Money Market and
NOW Accounts 310,613 315,254 272,729
Time Deposits Over $100,000 18,135 17,752 18,170
Other Time Deposits 177,198 155,227 132,971
-------- -------- --------
Total Average Deposits $597,799 $569,994 $492,364
======== ======== ========
Time Deposits over $100,000 at December 31, 1994 had the
following schedule of maturities (In Thousands):
Three Months or Less $ 1,865
Over Three to Six Months 7,904
Over Six to Twelve Months 3,895
Over Twelve Months 2,943
Over Five Years 6,674
-------
Total $23,281
=======
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, 1994 were as follows:
1994 1993 1992
Return on Average Total Assets -0.41% -0.82% 0.94%
Return on Average Stockholders' Equity -6.24% -11.92% 11.01%
Dividend Payout Ratio N/A N/A 58.48%
Average Stockholders' Equity to
Average Total Assets 6.53% 6.88% 8.56%
SHORT-TERM BORROWINGS
For this information refer to notes 8 and 9 to the financial
statements of the Company, as contained in the Annual Report to
Shareholders, which is herein incorporated by reference.
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential
The following table presents the condensed annual average balance sheets for 1994, 1993 and 1992. 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) 1994 1993 1992
---------------------------- ----------------------------- ---------------------------
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 $89,183 $3,508 3.93% $98,971 $3,655 3.69% $92,184 $4,306 4.67%
States & Political Subdivisions 0 0 0.00% 143 12 8.39% 10 1 10.00%
Other, Including FHLB Stock 8,178 535 6.54% 8,900 667 7.49% 3,733 242 6.48%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Investment Securities $97,361 $4,043 4.15% $108,014 $4,334 4.01% $95,927 $4,549 4.74%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Loans, Including Fees on Loans:
Commercial (a) (b) 117,948 10,128 8.59% 111,353 9,236 8.29% 105,489 10,174 9.64%
Real Estate 396,176 36,959 9.33% 380,810 35,639 9.36% 317,865 32,685 10.28%
Consumer 19,710 2,167 10.99% 23,642 2,728 11.54% 18,692 2,239 11.98%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Loans $533,834 $49,254 9.23% $515,805 $47,603 9.23% $442,046 $45,098 10.20%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Federal Funds Sold $7,865 $315 4.01% $3,230 $97 3.00% $4,939 $168 3.40%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Earning Assets $639,060 $53,612 8.39% $627,049 $52,034 8.30% $542,912 $49,815 9.18%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Reserve for Possible Loan Losses (18,991) (11,488) (7,480)
Cash and Due From Banks 31,910 29,177 27,312
Premises and Equipment 16,349 15,166 15,279
Other Assets 40,749 45,611 24,293
-------- -------- --------
Total Assets $709,077 $705,515 $602,317
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Time Deposits:
Savings, Money Market &
NOW Accounts $309,490 $8,420 2.72% $315,254 $8,546 2.71% $277,330 $11,011 3.97%
Certificates of Deposit
over $100,000 22,248 1,336 6.01% 25,578 1,394 5.45% 22,173 765 3.45%
Other Time 177,250 8,096 4.57% 148,364 7,109 4.79% 123,081 7,913 6.43%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Time Deposits $508,988 $17,852 3.51% $489,196 $17,049 3.49% $422,584 $19,689 4.66%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Federal Funds Purchased 1,167 57 4.88% 2,197 88 4.01% 1,791 94 5.25%
Securities Sold Under Agreement
to Repurchase 19 1 5.26% 7,688 229 2.98% 5,117 187 3.65%
Demand Notes Due U.S. Treas 3,130 120 3.83% 3,540 97 2.74% 3,498 119 3.40%
Other Interest Bearing Liabilities 4,555 303 6.65% 5,471 290 5.30% 3,672 264 7.19%
Debt 50,575 4,044 8.00% 58,337 4,272 7.32% 42,171 3,698 8.77%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Interest Bearing
Liabilities $568,434 $22,377 3.94% $566,429 $22,025 3.89% $478,833 $24,051 5.02%
-------- ------- -------- -------- -------- -------- -------- -------- --------
Demand Deposits 89,318 81,761 68,324
Other Liabilities 4,994 8,814 3,612
Stockholders' Equity 46,331 48,511 51,548
-------- -------- --------
Total Liabilities &
Stockholders' Equity $709,077 $705,515 $602,317
======== ======== ========
Net Interest Income (a) $31,235 $30,009 $25,764
======== ======== ========
Yield Spread 4.45% 4.41% 4.15%
===== ===== =====
NET INTEREST INCOME TO EARNING ASSETS 4.89% 4.79% 4.75%
===== ===== =====
(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.
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 change therein for 1994 as compared with 1993 and 1993 as compared with 1992.
1994 vs 1993 1993 vs 1992
------------------------------------------- -------------------------------------------
Increase --Due to (a)-- Increase --Due to (a)--
1994 1993 (Decrease) Volume Rate 1993 1992 (Decrease) Volume Rate
------- ------- -------- ------- ------- ------- ------- -------- ------- -------
Interest Income:
Loans $49,254 $47,603 $1,651 $1,664 ($13) $47,603 $45,098 $2,505 $6,808 ($4,303)
Investment Income:
Taxable 4,043 4,322 (279) (432) 153 4,322 4,548 (226) 637 (863)
Non-Taxable 0 12 (12) (12) (0) 12 1 11 11 (0)
Federal Funds Sol 315 97 218 186 32 97 168 (71) (51) (20)
------- ------- -------- ------- ------- ------- ------- -------- ------- -------
Total $53,612 $52,034 $1,578 $1,406 $171 $52,034 $49,815 $2,219 $7,404 ($5,186)
------- ------- -------- ------- ------- ------- ------- -------- ------- -------
Less Interest Expense:
Savings, Money Market
& Now Accounts $8,420 $8,546 ($126) ($157) $31 $8,546 $11,011 ($2,465) $1,028 ($3,493)
Certificates of Deposit
Over $100,000 1,336 1,394 (58) (200) 142 1,394 765 629 186 443
Other Time 8,096 7,109 987 1,313 (326) 7,109 7,913 (804) 1,211 (2,015)
Federal Funds Purchased 57 88 (31) (50) 19 88 94 (6) 16 (22)
Securities Sold Under
Agreement to Repurchase 1 229 (228) (403) 175 229 187 42 77 (35)
Demand Note - U.S. Treasury 120 97 23 (16) 39 97 119 (22) 1 (23)
Debt and Other Borrowings 4,347 4,562 (215) (685) 470 4,562 3,962 600 1,282 (682)
------- ------- -------- ------- ------- ------- ------- -------- ------- -------
Total $22,377 $22,025 $352 ($198) $550 $22,025 $24,051 ($2,026) $3,800 ($5,827)
------- ------- -------- ------- ------- ------- ------- -------- ------- -------
Net Interest Income $31,235 $30,009 $1,226 $1,604 ($378) $30,009 $25,764 $4,245 $3,603 $640
======= ======= ======== ======= ======= ======= ======= ======== ======= =======
(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 $3,571, $4,598 and $4,326 for the years ended
December 31, 1994, 1993 and 1992, respectively.
LOAN PORTFOLIO
The following tables display the composition of the Bank's
loan portfolio for the consecutive five year period 1990 through
1994, 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 $1,132,494 in
1994, $1,310,416 in 1993, $1,183,400 in 1992, $1,098,100 in 1991
and $955,000 in 1990, which principally relate to real estate
mortgages.
----------------As of December 31,--------------
Type of Loan 1994 1993 1992 1991 1990
Commercial, Financial
& Agricultural $ 88,201 $ 98,936 $ 76,141 $120,033 $129,830
Industrial Revenue Bonds 4,411 6,695 8,721 11,968 16,296
Real Estate-Construction 21,992 30,526 18,776 16,392 23,763
Real Estate - Mortgage 377,429 413,112 305,513 294,769 288,845
Installment 18,086 22,836 18,332 20,930 25,070
Lease Financing 0 42 630 1,769 4,144
All Other Loans 436 1,324 1,422 4,287 7,452
-------- -------- -------- -------- --------
Total Loans $510,555 $573,471 $429,535 $470,148 $495,400
PROFILE OF LOAN MATURITY DISTRIBUTION
The table below presents the distribution of the varying
maturities or repricing opportunities of the loan portfolio at
December, 1994. 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 $ 59,012 $ 23,698 $10,338 $93,048
Real Estate Loans 237,270 96,197 65,954 399,421
Installment Loans 5,342 12,386 358 18,086
-------- -------- ------- --------
$301,624 $132,281 $76,650 $510,555
======== ======== ======= ========
Residential mortgage lending slowed during 1994 after two
years of very heavy refinancing volume. Approximately 63% of the
Bank's 1994 mortgage activity was for refinancing of existing debt.
In 1994, a total of 490 one-to-four family residential mortgage
loans were closed by the bank, totalling $44.8 million.
Approximately 93% of these originations were sold on the secondary
market and the remaining 7%, or $3.5 million were placed in the
bank's portfolio. The bank currently services $335 million in
residential mortgage loans, $259.3 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 1994, the bank had
130 residential mortgage loans in various stages of processing.
Approximately 40% of these loans were refinancings of existing
debt.
During 1994, the Bank remained an active participant in the
U.S. Small Business Administration guaranteed loan program. Sixty-
six new SBA loans totalling $8.22 million were originated during
1994 with SBA guarantees ranging from 70% to 90%. This volume of
new lending activity represents an increase of 15% over
originations during 1993.
Approximately 79% of all new SBA loans originated during 1994
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
it's commercial loan base and market share with minimal impact on
capital.
During 1994, the Bank originated 746 commercial loans
totalling $134.6 million. This lending activity represented an
increase of approximately 26% of new loan volume over that
experienced in 1993. Commercial loans were originated throughout
Vermont.
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 loan authority 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, 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
reviewed.
All loan officers are required to service their own loan
portfolios and account relationships. As necessary, loan officers
or the loan workout function 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 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 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 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
- 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 future loan losses in the categories shown.
Allocation of the Reserve for Possible Loan Losses
December 31, 1994
(000's omitted)
Percent of
loans in each
Balance at End of Period Percent category to
Applicable to: Amount Allocation total Loans
----------------------------------------------------------------------
Domestic:
Commercial, Financial, and
Agricultural & IRB's $5,000 25% 18%
Real Estate - Construction 1,500 8% 4%
Real Estate - Mortgage 13,000 65% 74%
Installment Loans to Individuals 350 2% 4%
All Other Loans 79 0% 0%
----------------------------------------------------------------------
Total: $19,929 100% 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,
1994 1993 1992 1991 1990
--------- --------- --------- --------- --------
Average Loans $514,843 $515,805 $441,291 $471,141 $488,792
======== ======== ======== ======== ========
Reserve for Possible Loan Losses
at Beginning of Year 20,060 7,412 6,650 5,075 5,151
Loans Charged Off (NOTE 1): -------- -------- -------- -------- -----
Commercial, Lease Financing
and all Other Loans (3,356) (5,567) (2,938) (3,367) (2,318)
Real Estate - Construction (1,159) (275) (253) (1,802) 0
Real Estate - Mortgage (7,673) (7,651) (4,096) (718) (2,236)
Installment & Credit Cards (462) (459) (452) (617) (575)
--------- --------- --------- -------- -------
Total Loans Charged Of (12,650) (13,952) (7,739) (6,504) (5,129)
--------- --------- -------- -------- -------
Recoveries on Loans:
Commercial, Lease Financing
and all Other Loans 1,187 392 232 366 471
Real Estate - Construction 400 0 0 379 0
Real Estate - Mortgage 769 301 108 0 3
Installment & Credit Cards 163 85 111 91 87
--------- --------- --------- -------- --------
Total Recoveries on Loans $2,519 $778 $451 $836 $561
--------- --------- --------- -------- --------
Net Loans Charged Off ($10,131) ($13,174) ($7,288) ($5,668) ($4,568)
--------- --------- -------- -------- --------
Provision for Loan Losses:
Charged to Operations (NOTE 2) 10,000 23,822 8,050 7,243 4,492
Loan Loss Reserve (Note 3) 2,000
------- ------- ------ ------ ------
Reserve for Possible Loan Losses
at End of Year $19,929 $20,060 $7,412 $6,650 $5,075
======= ======= ====== ====== ======
Loan Loss Reserve to Total Loans
at Year End 3.90% 3.50% 1.73% 1.41% 1.03%
Ratio of Net Charge Offs During
the Year to Average Loans
Outstanding During the Year 1.97% 2.28% 1.63% 1.20% 0.95%
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 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 3: See Note 10 to the consolidated financial statements regarding the
acquisition of New First National Bank of Vermont.
The slight decrease in the reserve for possible loan losses from $20,060,000
at December 31, 1993 to $19,929,000 at December 31, 1994, reflects
management's in-depth analysis of the RPLL and efforts to maintain the
reserve at an appropriate level to provide for potential loan losses based on
the evaluation of known and inherent risks in the loan portfolio. The
provision for loan losses decreased from $23,822,000 in 1993 to $10,000,000
in 1994. This was partly driven by net loans charged off by the Company in
1993 of $13,174,000.
NONPERFORMING ASSETS
The following tables summarize the Bank's nonperforming 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 NPAs
that are covered by loss sharing. Nonperforming assets (NPAs) covered by
loss sharing totaled $10,455,000 and $17,469,000 at December 31, 1994 and
1993, respectively. The aggregate amount of loans covered by the loss
sharing arrangement at December 31, 1994 was $95,802,000 and $132,879,208 at
December 31, 1993.
Nonperforming assets as of December 31, 1994 were:
Segregated
Loans Loans Total
-----------------------------------------------------------------------
Nonaccrual Loans $24,251,987 $7,948,632 $32,200,619
Restructured Loans 5,016,123 66,731 5,082,854
Loans Past Due 90 Days or
More and Still Accruing 668,007 0 668,007
Other Real Estate Owned, Net 10,791,262 2,439,545 13,230,807
----------- ----------- -----------
Total: $40,727,379 $10,454,908 $51,182,287
=========== =========== ===========
The following table shows nonperforming assets as of year end 1990 through
1994 (in thousands):
1994 1993 1992 1991 1990
---------------------------------------------------------------------------
Nonaccrual Loans $32,200 $47,069 $12,148 $8,333 $2,914
Loans Past Due 90 Days or
More and Still Accruing 668 715 7,251 8,613 5,908
Restructured Loans 5,083 2,841 1,838 5,679 0
------ ------ ------ ------ ------
Total Nonperforming Loans: 37,951 50,625 21,237 22,625 8,822
------ ------ ------ ------ ------
Other Real Estate Owned 13,231 13,674 12,662 6,110 4,652
------ ------- ------- ------- -------
Total Nonperforming Assets: $51,182 $64,299 $33,899 $28,735 $13,474
======= ======= ======= ======= =======
Percentage of Nonperforming
Loans to Total Loans 7.43% 8.83% 4.94% 4.81% 1.78%
Percentage of Nonperforming
Assets to Total Loans plus Other
Real Estate Owned 9.77% 10.95% 7.67% 6.03% 2.70%
======= ======= ======== ======= =======
The nonperforming assets table above showed an increasing trend in
nonperforming assets until December 31, 1993. Historically, the Company has
worked closely with borrowers and also pursued vigorous collection efforts.
The Company continued its efforts to collect on troubled assets during 1994.
The Company's enhanced Loan Review and Loan Workout functions provided
resources to address collection strategies for nonperforming assets.
Based upon the result of the Company's assessment of the factors
affecting the RPLL, as noted in this discussion, management believes that
the balance of the RPLL at December 31, 1994, is adequate.
DISCUSSION OF 1994 EVENTS AFFECTING THE RESERVE FOR POSSIBLE LOAN LOSSES
(RPLL)
Nonperforming assets declined from $64,299,000 at December 31, 1993 to
$51,182,000 at December 31, 1994. Net charge offs during 1994 were
$10,131,000 which accounted for part of the reduction. Paydowns, payoffs,
return to performing status, and OREO sales resulted in a further decrease in
NPAs.
12-31-94 9-30-94 6-30-94 3-31-94 12-31-93
-------- -------- -------- -------- --------
Nonaccrual Loans $32,200 $28,385 $39,166 $43,091 $47,069
Loans Past Due 90 days
or more and still Accruing 668 106 558 109 715
Restructured Loans 5,083 5,014 2,892 1,915 2,841
Other Real Estate Owned, Net 7,389 10,898 10,759 9,784 6,235
In-substance Foreclosure, Net 5,842 4,685 5,195 5,430 7,439
------- ------- ------- ------- -------
Total: $51,182 $49,088 $58,570 $60,329 $64,299
======= ======= ======= ======= =======
The more significant events affecting NPAs are discussed below:
NONACCRUAL LOANS:
Nonaccrual loans declined from $47,069,000 at December 31, 1993 to
$32,200,000 at December 31, 1994. The decline resulted from charge offs,
payments, and return to accruing status. The increase in nonaccrual loans
from September 30, 1994 to December 31, 1994 is due primarily to one
borrowing relationship. This $5.8 million relationship was re-analyzed in
the fourth quarter as the result of a softening in the market.
LOANS PAST DUE 90 DAYS OR MORE AND STILL ACCRUING:
The Bank generally places loans that become 90 or more days past due on
nonaccrual status. If the ultimate collectability of principal and interest
is assured, loans may continue to accrue and be left in this category. The
loan amount shown in this category was evaluated and full collection of
principal and interest is probable.
RESTRUCTURED LOANS:
Restructured loans (TDRs) increased during 1994 from $2,841,000 at
December 31, 1993 to $5,083,000 at December 31, 1994. Two relationships for
$1,325,000 and $3,397,000, respectively, previously shown as nonaccruing were
returned to accrual status. These two relationships migrated to the TDR
category from non-accrual since performance after restructuring had not
spanned a year end accounting period. One relationship for $1,323,000 which
had performed at market rates and terms for fourteen (14) months was returned
to performing status. Payoffs accounted for approximately $1 million in
reduction in TDRs during 1994.
OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURE:
The Bank had notable success in 1994 in disposing of OREO and continues
to aggressively market such properties. However, OREO increased from
$6,235,000 at December 31, 1993 to $7,389,000 at December 31, 1994.
Larger balance additions to OREO were:
- an apartment complex for $1.5 million
- a commercial building lot for $800,000
- a residential development for $2 million
Larger balance reductions were:
- a commercial office building for $637,000
- Five separate commercial buildings for $1,770,000
- A multi-function commercial building for $750,000
The fourth quarter reduction in OREO results from sales and from a $2.1
million provision to valuation reserves allocated against specific OREO
properties.
OREO includes specific assets to which legal title has been taken as the
result of transactions related to real estate loans.
In-substance Foreclosures (ISF) decreased from $7,439,000 at December 31,
1993 to $5,842,000 at December 31, 1994. Payments or payoffs of
approximately $1.2 million were received and one ISF was transferred to OREO
for $2 million. Six loans were reclassified as ISF totalling approximately
$1.4 million.
The criteria for designation of loans as in-substance foreclosures 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 Foreclosures
at December 31 in each of the last five years is as follows:
1994 1993 1992 1991 1990
----------------------------------------------
Other Real Estate Owned 7,389 6,235 3,874 2,650 1,968
In-Substance Foreclosure 5,842 7,439 8,787 3,460 2,684
------- ------- ------- ------ ------
Total: $13,231 $13,674 $12,661 $6,110 $4,652
======= ======= ======= ====== ======
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 the
ultimate collectability of principal or interest becomes doubtful. 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 30 of the Company's
1994 Annual Report to Shareholders is incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated balance sheets of Merchants Bancshares, Inc. as of
December 31, 1994 and 1993, 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, 1994 together with the related
notes and the opinion of Arthur Andersen LLP, independent public accountants,
all as contained on pages 5 through 33 of the Company's 1994 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 1994.
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 March 24, 1995, 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 1994
Annual Report to Shareholders, are incorporated herein by reference:
Consolidated Balance Sheets, December 31, 1994 and December 31, 1993.
Consolidated Statements of Operations for years ended December 31, 1994,
1993, 1992.
Consolidated Statements of Changes in Stockholder's Equity for years
ended December 31, 1994, 1993, 1992.
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1993, 1992.
Notes to Consolidated Financial Statements, December 31, 1994.
(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) 1994 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, 1994 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
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 24, 1995 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/ Peter A. Bouyea
------------------------------- ------------------------------
Joseph L. Boutin, Director, President Peter A. Bouyea, Director
& CEO of the Company and the Bank
by by S/Dudley H. Davis
------------------------------- ------------------------------
Charles A. Davis, Director Dudley H. Davis, Director
Chairman of the Board of Directors
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
------------------------------- -----------------------------
Edward W. Haase, Treasurer and Leo O'Brien, Jr, Director
Chief Financial Officer of the Company
Senior Vice President and Treasurer of
the Bank
by by S/Patrick S. Robins
------------------------------- ------------------------------
Raymond C. Pecor, Jr., Director Patrick S. Robins, Director
by by S/Robert A. Skiff
------------------------------- ------------------------------
Benjamin F. Schweyer, Director Robert A. Skiff, Director
by
-------------------------------
Susan D. Struble, Director