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.
<TABLE>
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.
<CAPTION>
(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: -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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.
</TABLE>
<TABLE>
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.
<CAPTION>
1993 vs 1992 1992 vs 1991
------------------------------------------- -------------------------------------------
Increase --Due to (a)-- Increase --Due to (a)--
1993 1992 (Decrease) Volume Rate 1992 1991 (Decrease) Volume Rate
------- ------- -------- ------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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.
</TABLE>
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
----------
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
Report of Independent Public Accountants
To the Stockholders and Board of Directors of Merchants
Bancshares, Inc.:
We have audited the accompanying consolidated balance sheets of
Merchants Bancshares, Inc. (a Delaware corporation) and
subsidiaries as of December 31, 1993 and 1992, and the related
consolidated statements of operations, changes in
stockholders'equity and cash flows for the years ended December
31, 1993, 1992 and 1991. These consolidated financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Merchants Bancshares, Inc. and subsidiaries
as of December 31, 1993 and 1992, and the consolidated results of
their operations and their cash flows for the years ended
December 31, 1993, 1992 and 1991, in conformity with generally
accepted accounting principles.
As explained in Note 3 to the consolidated financial statements,
the Company adopted prospectively, effective December 31, 1993,
Statement of Financial Accounting Standards No. 115 "Accounting
for Certain Investments in Debt and Equity Securities".
ARTHUR ANDERSEN & CO.
Boston, Massachusetts
March 31, 1994
<TABLE>
Merchants Bancshares, Inc.
Consolidated Balance Sheets
<CAPTION>
At December 31, 1993 1992
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and Due from Banks (Note 3) $ 30,587,986 $ 36,744,477
Federal Funds Sold 0 10,500,000
Investment Securities Available for Sale: (Notes 3 and 4)
Debt Securities 85,505,677 103,197,500
Marketable Equity Securities (Market Value
$1,612,726 in 1992) 1,451,793 1,411,393
- ------------------------------------------------------------------------------------------------
Total Investment Securities 86,957,470 104,608,893
- ------------------------------------------------------------------------------------------------
Loans (Notes 3 and 5) 440,827,786 429,535,257
Segregated Assets (Notes 2 and 5) 132,643,814 0
Reserve for Possible Loan Losses (20,060,059) (7,411,635)
- ------------------------------------------------------------------------------------------------
Net Loans 553,411,541 422,123,622
- ------------------------------------------------------------------------------------------------
Federal Home Loan Bank Stock 5,573,700 2,921,300
Premises and Equipment, net (Notes 3 and 6) 16,148,102 14,635,796
Investments in Real Estate Limited Partnerships 4,609,901 5,695,218
Other Real Estate Owned 13,674,259 12,661,294
Other Assets (Note 8) 24,084,495 12,949,176
- ------------------------------------------------------------------------------------------------
Total Assets $ 735,047,454 $ 622,839,776
- ---------------------------------------------------------------------============---============
LIABILITIES:
Deposits:
Demand $ 96,413,399 $ 82,271,624
Savings, NOW and Money Market Accounts 321,821,034 289,670,209
Time Deposits Over $100,000 21,214,667 6,646,857
Other Time 179,860,784 125,464,160
- ------------------------------------------------------------------------------------------------
Total Deposits 619,309,884 504,052,850
Other Borrowed Funds (Note 9) 14,924,081 8,464,812
Other Liabilities (Notes 7 and 8) 8,460,061 9,082,066
Debt (Note 10) 46,633,422 49,037,135
- ------------------------------------------------------------------------------------------------
Total Liabilities $ 689,327,448 570,636,863
- ------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 13)
STOCKHOLDERS' EQUITY (Notes 11 and 12):
Preferred Stock
Class A:
$.01 par value, non-voting
Shares Authorized: 200,000
Shares Outstanding: None 0 0
Class B:
$.01 par value, voting
Shares Authorized: 1,500,000
Shares Outstanding: None 0 0
Common Stock, $.01 par value
Shares Authorized: 4,700,000
Shares Issued: 4,242,927 42,429 42,429
Capital in Excess of Par Value 30,647,120 30,635,559
Retained Earnings 15,352,844 21,949,050
Treasury Stock (at Cost) 12,733 Shares at December 31, 1993
and 28,611 Shares at December 31, 1992 (178,730) (424,125)
Net Unrealized Depreciation of Investment Securities Available
for Sale, Net of Applicable Income Taxes of $74,005 (143,657) 0
- ------------------------------------------------------------------------------------------------
Total Stockholders' Equity 45,720,006 52,202,913
- ------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 735,047,454 $ 622,839,776
- ---------------------------------------------------------------------============---============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
Merchants Bancshares, Inc.
Consolidated Statements of Operations
<CAPTION>
For the years ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Interest and Fees on Loans $ 47,268,729 $ 44,521,757 $ 52,931,821
Interest and Dividends on Investments:
U.S. Treasury and Agency Obligations 3,655,198 4,305,553 3,881,480
Obligations of State and Political Subdivisions 12,839 700 700
Other 537,054 410,565 435,167
- -------------------------------------------------------------------------------------------------------------
Total Interest and Dividend Income 51,473,820 49,238,575 57,249,168
- -------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Savings, NOW and Money Market Accounts 8,476,489 11,014,319 12,987,269
Time Deposits Over $100,000 151,735 56,485 582,522
Other Time 8,351,062 8,619,026 14,222,708
Other Borrowed Funds 733,817 663,434 938,903
Debt 4,242,423 3,697,715 3,372,608
- -------------------------------------------------------------------------------------------------------------
Total Interest Expense 21,955,526 24,050,979 32,104,010
- -------------------------------------------------------------------------------------------------------------
Net Interest Income 29,518,294 25,187,596 25,145,158
Provision for Possible Loan Losses (Note 5) 23,822,000 8,050,000 7,243,443
- -------------------------------------------------------------------------------------------------------------
Net Interest Income after Provision for Possible Loan Losses 5,696,294 17,137,596 17,901,715
- -------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Trust Department Income 1,686,561 1,399,451 1,282,511
Service Charges on Deposits 3,571,376 2,536,267 2,421,389
Other 3,296,930 2,810,840 2,899,405
Gains on Investment Securities, net (Note 4) 1,898,945 3,448,531 2,773,627
FDIC Assistance Received-Loss Sharing (Note 2) 1,674,615 0 0
- -------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 12,128,427 10,195,089 9,376,932
- -------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES:
Salaries and Wages 9,590,775 7,827,449 8,201,044
Employee Benefits (Note 7) 2,713,988 2,367,865 2,478,971
Occupancy Expense 1,949,256 1,489,827 1,465,409
Equipment Expense 1,879,764 1,783,293 2,044,949
Losses on and Writedowns of Other Real Estate Owned 1,970,428 833,329 282,366
Equity in Losses of Real Estate Limited Partnerships 967,138 1,059,973 974,279
Other 7,270,812 5,718,930 5,791,253
Losses and Write-downs of Segregated Assets (Note 2) 1,674,615 0 0
- -------------------------------------------------------------------------------------------------------------
Total Non-Interest Expenses 28,016,776 21,080,666 21,238,271
- -------------------------------------------------------------------------------------------------------------
Income (Loss) Before Provision (Benefit) for Income Taxes (10,192,055) 6,252,019 6,040,376
Provision (Benefit) for Income Taxes (Notes 3 and 8) (4,410,486) 575,508 909,029
- -------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (5,781,569) $ 5,676,511 $ 5,131,347
- ----------------------------------------------------------------============-----============----============
EARNINGS (LOSS) PER SHARE, based upon weighted average common
shares outstanding of 4,216,355 in 1993, 4,213,941 in 1992 and
4,223,726 in 1991 (Note 12): $ (1.37) $ 1.39 $ 1.21
- -------------------------------------------------------------- ============-----============----============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
Merchants Bancshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
For Each of the Three Years in the Period Ended December 31, 1993
<CAPTION>
Net Unrealized
Depreciation
Common Capital in of Investment
Stock Excess of Retained Securities Treasury
(Note 10) Par Value Earnings (Note 3) Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1990 (Restated)(Note 17)$ 40,386 $ 27,414,998 $ 20,783,372 $ (317,268) $ (282,012) $ 47,639,476
Net Income --- --- 5,131,347 --- --- 5,131,347
Treasury Stock Transactions --- 64,434 18,163 --- (348,857) (266,260)
Cash Dividends ($.76 per share) --- --- (3,230,861) --- --- (3,230,861)
Stock Dividends (80,771 shares issued)
(Note 12) 807 1,170,373 (1,171,180) --- --- 0
Decrease in Net Unrealized Depreciation
of Investment Securities (Note 4) --- --- 317,268 --- 317,268
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1991 $ 41,193 $ 28,649,805 $ 21,530,841 $ 0 $ (630,869) $ 49,590,970
Net Income --- --- 5,676,511 --- --- 5,676,511
Treasury Stock Transactions --- 22,061 26,821 --- 206,744 255,626
Cash Dividends ($.78 per share) --- --- (3,320,194) --- --- (3,320,194)
Stock Dividends (80,771 shares issued)
(Note 12) 1,236 1,963,693 (1,964,929) --- --- 0
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 $ 42,429 $ 30,635,559 $ 21,949,050 $ 0 $ (424,125) $ 52,202,913
Net Loss --- --- (5,781,569) --- --- (5,781,569)
Treasury Stock Transactions --- 11,561 33,948 --- 245,395 290,904
Cash Dividends ($.20 per share) --- --- (848,585) --- --- (848,585)
Effect of a change in accounting
principle (Note 3) --- --- (143,657) --- (143,657)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 $ 42,429 $ 30,647,120 $ 15,352,844 $ (143,657) $ (178,730) $ 45,720,006
- ----------------------------------------------=====================================================================================
<FN>
Per share amounts have been restated to reflect all stock dividends.
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
Merchants Bancshares, Inc.
Consolidated Statements of Cash Flows
<CAPTION>
For the Years Ended December 31, 1993 1992 1991
CASH FLOWS FROM OPERATING ACTIVITIES: ----------- ----------- -----------
<S> <C> <C> <C>
Net Income (Loss) $ (5,781,569) $ 5,676,511 $ 5,131,347
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by Operating Activities:
Provision for Possible Loan Losses 23,822,000 8,050,000 7,243,443
Provision for Depreciation and Amortization 4,762,037 1,646,560 1,890,153
Prepaid Income Taxes (25,360) (2,133,353) (1,994,973)
Net Gains on Sales of Investment Securities (1,898,945) (3,448,531) (2,773,627)
Net Gains on Sales of Loans and Leases (818,376) (584,669) (123,390)
Net (Gains) Losses on Sales of Premises and Equipment 0 52,607 (83,884)
Equity in Losses of Real Estate Limited Partnerships 967,138 1,059,973 974,279
Changes in Assets and Liabilities net of Effects From
Acquisition of NFNBV (Note 2):
(Increase) Decrease in Interest Receivable (28,313) 1,333,450 (680,471)
Increase (Decrease) in Interest Payable 587,598 (803,013) (1,082,389)
(Increase) Decrease in Other Assets (5,032,001) (5,429,789) 2,055,272
Increase (Decrease) in Other Liabilities (272,603) 2,939,600 (1,818,875)
----------- ----------- -----------
Net Cash Provided by Operating Activities 16,281,606 8,359,347 8,736,885
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Investment Securities 403,140,859 386,442,780 296,003,262
Proceeds from Maturities of Investment Securities 1,000,000 0 0
Proceeds from Sales of Loans and Leases 98,332,905 118,395,253 56,467,359
Proceeds from Sales of Premises and Equipment 0 16,839 514,684
Purchases of Investment Securities (385,195,506) (422,915,625) (303,227,623)
Cash and Cash Equivalents Received - Acquisition (Note 2) 17,102,000 0 0
Loans Originated, net of Principal Repayments (82,277,333) (90,067,635) (35,949,381)
Investments in Real Estate Limited Partnerships 281,821 (73,939) (2,043,922)
Purchases of Premises and Equipment (1,599,220) (424,952) (4,145,305)
Decrease in Net Investment in Leveraged Leases 587,438 1,116,644 68,623
----------- ----------- -----------
Net Cash Provided by (Used in) Investing Activities 51,372,964 (7,510,635) 7,687,697
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase (Decrease) in Deposits (87,773,966) 13,436,584 (8,082,913)
Net Increase (Decrease) in Other Borrowed Funds 6,459,269 (6,891,487) (8,523,289)
Proceeds from Debt 12,000,000 13,000,000 5,030,000
Principal Payments on Debt (14,403,713) (2,644,110) (3,109)
Acquisition of Treasury Stock (132,058) (964,717) (1,133,584)
Cash Dividends Paid (838,050) (3,293,450) (3,212,698)
Sale of Treasury Stock 377,457 1,193,522 867,325
----------- ----------- -----------
Net Cash Provided by (Used in) Financing Activities (84,311,061) 13,836,342 (15,058,268)
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents (16,656,491) 14,685,054 1,366,314
Cash and Cash Equivalents at Beginning of Year 47,244,477 32,559,423 31,193,109
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $ 30,587,986 $ 47,244,477 $ 32,559,423
=========== =========== ===========
Total Interest Payments $ 21,367,928 $ 24,853,992 $ 33,186,399
Total Income Tax Payments $ 1,190,000 $ 2,860,000 $ 3,415,000
Transfer of loans to Other Real Estate Owned $ 5,151,867 $ 13,856,598 $ 5,783,298
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
Merchants Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 1993
(1) CURRENT OPERATING ENVIRONMENT AND REGULATORY MATTERS
Merchants Bancshares, Inc. (the Company), and its wholly owned
subsidiaries, including the Merchants Bank and subsidiaries (the
Bank), operate primarily in Vermont. Beginning in the late
1980's, this region was severely affected by a deterioration in
the real estate market and an economic recession. As a result,
the Company has experienced increased levels of nonperforming
assets and loan charge-offs, increased the provision for possible
loan losses and incurred high costs associated with troubled
assets and foregone income on nonaccrual loans. Although these
adverse trends appear to be abating, prospects as to the extent
and timing of future improvement in the economy remain uncertain.
The reserve for possible loan losses as of December 31, 1993 is
deemed adequate based on management's estimate of the amount
required to absorb future losses in the loan portfolio based on
known current circumstances and real estate market conditions.
However, given the uncertainty that exists as to future trends in
the regional real estate market, which, if there is further
deterioration, could result in the Company experiencing increases
in nonperforming assets and resultant operating losses
attributable to a need for further significant provisions for
loan losses and increased foregone interest income on nonaccrual
loans.
As of March 31, 1993, the Federal Deposit Insurance Corporation
(the FDIC) and the State of Vermont Department of Banking,
Insurance and Securities (the Commissioner) conducted a joint
field examination of the Bank. As a result of this examination,
the Bank entered into a Memorandum of Understanding (MOU) with
the FDIC and the Commissioner on October 29, 1993. Under the
terms of the MOU, the Bank is required to, among other things,
maintain a leverage capital ratio of at least 5.5%, revise
certain operating policies, enhance certain loan review
procedures, refrain from declaring dividends and correct certain
technical exceptions and violations of applicable regulations.
The dividend limitation includes dividends paid by the Bank
to the Company. The Company services senior subordinated debt
(see Note 10) which requires semi-annual interest payments and
an annual principal payment of $2.4 million through 1996. The MOU
permits the repayment of certain advances totaling approximately
$3.3 million which were outstanding at December 31, 1993. The
repayment of such advances, together with the Company's cash on
hand at December 31, 1993 is sufficient to service the senior
subordinated debt until May, 1995. Management believes the Bank
is in substantial compliance with the provisions of the MOU as of
December 31, 1993. The Bank was also directed by the FDIC to increase
the reserve for possible loan losses by approximately $12 million
and to charge- off loans totaling approximately $8 million at the
conclusion of the examination in June 1993. The Bank recorded this
increase in the reserve for possible loan losses and charged off
the loans in 1993.
As of February 18, 1994 the Company and the Federal Reserve Bank
of Boston (the Federal Reserve) entered into an agreement
requiring the Company to submit to the Federal Reserve, among
other things, a capital plan, a dividend policy, a debt service
plan and a management assessment. In addition, the Company may
not declare or pay a dividend or incur any debt without the
approval of the Federal Reserve.
On March 31, 1994, the FDIC and the Commissioner completed the
field work related to their most recent examination of the Bank
as of December 31, 1993. Although the FDIC and Commissioner have
not yet issued the formal examination report, management believes
that the results of the examination will not have a significant
impact on the Company's financial statements.
Failure to maintain the minimum leverage capital ratio of 5.5%
(see Note 11) included in the MOU, or compliance with other
provisions of the MOU, or the agreement with the Federal Reserve,
could subject the Bank or the Company to additional actions by
the regulatory authorities.
Merchants Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 1993
(2) ACQUISITION
On June 4, 1993, the Bank purchased certain assets and assumed
the deposits and certain other liabilities of the New First
National Bank of Vermont (NFNBV) from the FDIC. NFNBV was a
three bank holding company conducting banking activities
primarily in central and northern Vermont. NFNBV had been taken
over by the FDIC in January 1993. The acquisition involved an
assumption of net deposits and liabilities which resulted in the
Bank receiving a cash payment from the FDIC of approximately $5.7
million. The Bank subsequently acquired certain NFNBV property
and equipment from the FDIC for approximately $1.5 million which
is payable to the FDIC on June 3, 1994. The acquisition was
accounted for using the purchase method of accounting and
accordingly, the acquired assets and liabilities have been
recorded at their estimated fair market values at the date of
acquisition. The operating results related to NFNBV are included
in the Company's statement of operations since the date of the
acquisition.
In accordance with the purchase method of accounting, the
purchase price has been allocated to the assets acquired and
liabilities assumed based on their fair market value at the date
of acquisition. Included in the purchase price allocation is the
establishment of an allowance for possible loan losses of $2
million and a core deposit intangible of approximately $4.5
million, which is being amortized over 15 years using the
straight line method. The fair market value of the assets
acquired and liabilities assumed is summarized as follows (in
thousands):
Cash $ 5,290
Federal Funds Sold 6,075
Investment Securities 4,118
Loans 23,909
Segregated Assets 154,537
Allowance for Possible Loan Losses (2,000)
Premises and Equipment 1,509
Other Assets 1,523
Intangible Asset - Core Deposit Intangible 4,478
Deposits (203,031)
Other Liabilities (537)
Cash Payment From the FDIC, Net of ----------
Settlement Amount Payable for
Premises and Equipment $ 4,129
=========
Summarized below are the results of operations on an unaudited
pro forma basis, of the acquired NFNBV business as if NFNBV had
been acquired on January 1, 1992. The pro forma information is
based on the Company's audited historical results of operations
for 1992 and NFNBV's unaudited historical results of operations
for the period October 1, 1991 to September 30, 1992, giving
effect to certain pro forma adjustments. The pro forma financial
information does not purport to be indicative of the results of
operations that would have occurred had the purchase been made on
January 1, 1992 or of future results of operations of the
combined companies. No pro forma information is presented for
the period January 1, 1993 to the date of the acquisition because
no accurate financial information is available relative to
NFNBV's operations from the FDIC.
Pro Forma 1992
(in thousands except per share data)
Net Interest Income $ 36,185
Net Income 7,463
Earnings Per Share 1.83
In computing the pro forma net income, adjustments were
recognized to give effect to a reduced provision for possible
loan losses and other real estate owned (OREO) expenses,
resulting from loss sharing and the transfer of problem loans and
OREO to the FDIC Division of Liquidation prior to acquisition;
amortization of the core deposit intangible; and reduced
operating expenses relating to regulatory actions.
Under the terms of the acquisition, the Company will receive
financial assistance (loss sharing) with respect to certain
acquired loans charged-off by the Company during the three years
subsequent to the acquisition. The FDIC will reimburse the
Company, on a quarterly basis, 80% of net charge-offs and certain
expenses related to loans subject to loss sharing up to
cumulative losses aggregating $41.1 million, after which the
reimbursement rate will be 95% of net charge-offs on the loans.
The Bank received $1,674,615 in reimbursement from the FDIC for
the year ended December 31, 1993. Acquired loans subject to loss
sharing are classified as Segregated Assets in the accompanying
consolidated balance sheets.
In addition, under the terms of the acquisition approval received
from the State of Vermont Department of Banking, Insurance and
Securities, the Bank is required to, among other things, maintain
Tier 1 leverage capital at the higher of 5.5% or the minimum
regulatory leverage capital required by the FDIC, and to refrain
from paying dividends from the Bank to the Company if the Bank's
capital is below the minimum capital requirement. The Bank and
the Company were in compliance with all the terms of the
acquisition approval agreement with the State of Vermont during
1993.
Merchants Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 1993
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, the
Bank and Merchants Properties, Inc, after elimination of all
material intercompany accounts and transactions.
Investment Securities
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (SFAS No.
115). Under the new statement, investments in debt securities
may be classified as held-to-maturity and measured at amortized
cost only if the Company has the positive intent and ability to
hold such securities to maturity. Investments in debt securities
that are not classified as held-to-maturity and equity securities
that have readily determinable fair values are classified as
trading securities or available-for-sale securities. Trading
securities are investments purchased and held principally for the
purpose of selling in the near term; available-for-sale
securities are investments not classified as trading or held-to-
maturity. Unrealized holding gains and losses for trading
securities are included in earnings; unrealized holding gains and
losses for available-for-sale securities are reported in a
separate component of stockholders' equity, net of applicable
income taxes. Dividend and interest income, including
amortization of premiums and discounts, is recorded in earnings
for all categories of investment securities. Discounts and
premiums related to debt securities are amortized using a method
which approximates the level-yield method. As permitted by SFAS
No. 115, the Company elected to apply the accounting principle to
investment securities held as of December 31, 1993. All
investment securities were classified as available-for-sale at
December 31, 1993 and the resulting adjustment was included in
the accompanying consolidated statement of changes in
stockholders' equity as the effect of a change in accounting
principle.
Prior to December 31, 1993, debt securities were designated at
the time they were purchased as either held for sale or held for
investment, based on management's intentions in light of
investment policy, asset/liability management policy, liquidity
needs and economic factors. Debt securities held for sale were
stated at the lower of amortized cost or market value while debt
securities held for investment, where management had the
intention and ability to hold such securities until maturity,
were stated at amortized cost. Unrealized losses on debt
securities held for sale were recorded as a valuation allowance
against the related securities. The provision for the valuation
allowance was recorded in the accompanying consolidated
statements of operations.
Marketable equity securities were stated at the lower of
aggregate cost or market value. Net unrealized losses, considered
temporary in nature, were shown as a reduction of stockholders'
equity. Unrealized losses, considered other than temporary in
nature, were recognized in the accompanying consolidated
statements of operations. The gain or loss recognized on the
sale of an investment security was based upon the adjusted cost
of the specific security.
Loan Origination and Commitment Fees
Loan origination and commitment fees and certain direct loan
origination costs are deferred and amortized over the lives of
the related loans. Net deferred origination fees were $1,310,416
and $1,183,360 at December 31, 1993 and 1992, respectively.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation. Depreciation is provided using straight-line and
accelerated methods at rates that amortize the original cost of
the premises and equipment over estimated useful lives.
Expenditures for maintenance, repairs and renewals of minor items
are generally charged to expense as incurred.
Gains and Losses on Sales of Loans
Gains and losses on sales of loans are recognized based upon the
difference between the selling price and the carrying amount of
loans sold. Gains and losses are adjusted for excess servicing
rights resulting from the sale of loans with servicing rights
retained. Excess servicing rights are recorded at the net
present value of estimated future servicing revenue less expected
normal servicing costs. Deferred excess servicing is amortized
over the period of estimated net servicing income. Origination
fees collected, net of commitment fees paid in connection with
the sales of loans and net of the direct cost of loan
originations, are recognized at the time such loans are sold.
The net gain on sales of loans is included in interest and fees
on loans and amounted to $818,375, $584,669 and $268,082 in 1993,
1992 and 1991, respectively.
Income Taxes
The Company provided for income taxes in accordance with the
comprehensive income tax allocation method under Statement of
Financial Accounting Standards No. 96 prior to 1992. Effective
January 1, 1992, the Company implemented Statement of Financial
Accounting Standards No. 109. There was no material effect from
this change on the accompanying consolidated financial
statements. This method recognizes the tax effects of all income
and expense transactions in each year's consolidated statement of
operations, regardless of the year in which the transactions are
reported for tax purposes. Investment tax credits related to the
Bank's leasing activities are deferred and amortized over the
life of the related leases. Low income housing tax credits are
recognized in the year in which they are earned.
Investments in Real Estate Limited Partnerships
The Bank has investments in various real estate limited
partnerships that acquire, develop, own and operate low and
moderate income housing. The Bank's ownership interest in these
limited partnerships varies from 35% to 100% as of December 31,
1993. The Bank consolidates the financial statements of the
limited partnership in which the Bank is actively involved in
management and has a controlling interest. The Bank generally
accounts for its investments in limited partnerships where the
Bank does not actively participate and have a controlling
interest under the equity method of accounting.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, amounts due
from banks and federal funds sold in the accompanying
consolidated statements of cash flows.
Other Real Estate Owned
Collateral acquired through foreclosure and loans accounted for
as in-substance foreclosures are recorded at the lower of cost or
fair value, less estimated costs to sell, at the time of
acquisition or designation as in-substance foreclosure. A
valuation allowance is established for the estimated costs to
sell and is charged to expense. Subsequent changes in the fair
value of other real estate owned are reflected in the valuation
allowance and charged or credited to expense. Net operating
income or expense related to foreclosed property is included in
non-interest expense in the accompanying statements of
operations. Because of the present adverse market conditions,
there are inherent uncertainties in the assumptions with respect
to the estimated fair value of other real estate owned. Because
of these inherent uncertainties, the amount ultimately realized
on real estate owned may differ from the amounts reflected in
the consolidated financial statements.
Reclassification
Certain amounts in the 1992 and 1991 consolidated financial
statements have been reclassified to be consistent with 1993
classifications.
Merchants Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 1993
(4) INVESTMENT SECURITIES
Investments in debt securities are classified as available for sale as of
December 31, 1993 and as held for sale as of December 31, 1992. The
amortized cost and estimated fair values are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
1993
U.S. Treasury and
Agency Obligations $ 85,713,865 0 $ 438,865 $ 85,275,000
Other Debt Securities 230,677 0 0 230,677
------------ --------- ---------- ------------
$ 85,944,542 $ 0 $ 438,865 $ 85,505,677
============ ========= ========== ============
1992
U.S. Treasury and
Agency Obligations $104,221,663 $ 0 $1,024,163 $103,197,500
============ ========= ========== ============
Marketable equity securities are classified as available for sale at
December 31, 1993 and are stated at their estimated fair value of
$1,451,793. Marketable equity securities were carried at the lower of cost
or market at December 31, 1992 and were stated at cost of $1,411,393. Gross
unrealized gains related to marketable equity securities were $414,328 and
$291,333; and gross unrealized losses were $193,125 and $90,000, at December
31, 1993 and 1992, respectively.
The contractual maturities of all debt securities held at December 31, 1993
are between one and five years.
Proceeds from sales of investment securities were $403,140,859 and
$386,442,780 during 1993 and 1992, respectively. Gross gains of $2,120,838,
$4,474,318 and $2,953,496 and gross losses of $221,893, $1,624 and $179,869
were realized on those sales in 1993, 1992 and 1991, respectively.
At December 31, 1993, securities carried at $7,300,000 were pledged to
secure public deposits, securities sold under agreements to repurchase, and
for other purposes required by law.
Merchants Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 1993
(5) LOANS
The composition of the loan portfolio at December 31, 1993 and 1992 is as
follows (including segregated assets - Note 2):
1993 1992
-----------------------------------------------------------------
Commercial, Financial and Agricultural $105,631,000 $ 84,862,000
Real Estate - Construction 30,526,000 18,776,000
Real Estate - Mortgage 413,112,000 305,513,000
Installment Loans to Individuals 22,836,000 18,332,000
Lease Financing 42,000 630,000
All Other Loans (including overdrafts) 1,324,000 1,422,000
_________________________________________________________________
$573,471,000 $429,535,000
=================================================================
As discussed in Note 2, segregated assets consist of loans subject to loss
sharing. Segregated assets, net of the allocated reserve for losses of
$2,360,232 totaled $130,518,976 at December 31, 1993, and consisted of
$28,428,878 of commercial loans, $58,856,952 of commercial mortgages,
$45,478,471 of residential real estate, $74,031 of consumer loans, and
$40,876 of OREO. There has been an insignificant effect on the Bank's non-
interest expenses for 1993 as a result of expenses and charge-offs relating
to the segregated assets. The Bank's share of the charge-offs was charged
to the allowance for losses on the segregated assets, which was established
in conjunction with the acquisition. Accordingly, there has been no impact
to the consolidated statement of operations for these charge-offs.
Management believes that the allowance for losses on the segregated assets
is adequate to cover possible losses inherent in the segregated assets.
Charge-offs, net of recoveries, and eligible expenses on segregated assets
aggregated $2,093,268 for 1993. The Bank received $1,384,156 from the FDIC
during 1993 and $290,459 during February 1994 for eligible charge-offs and
reimbursable expenses related to 1993 in accordance with the loss sharing
arrangement. The amount due from the FDIC in the amount of $290,459 as of
December 31, 1993 is included in other assets in the accompanying
consolidated balance sheets.
The Company originates primarily residential and commercial real estate
loans and a lesser amount of installment loans to customers throughout the
state of Vermont. In order to minimize its interest rate and credit risk,
the Company sells loans to the secondary market and to financial investors
such as insurance companies and pension funds located in other states.
Substantially all of the Company's loan portfolio is based in the state of
Vermont. There are no known significant industry concentrations in the
loan portfolio.
An analysis of loans in excess of $60,000 to directors and executive
officers for the year ended December 31, 1993 is as follows:
Balance, December 31, 1992 $15,997,467
Additions 3,088,505
Repayments (2,302,840)
------------
Balance, December 31, 1993 $16,783,132
============
It is the policy of the Bank to grant such loans on substantially the same
terms, including interest rates and collateral, as those prevailing for
comparable lending transactions with other persons.
The reserve for possible loan losses is based on management's estimate of
the amount required to reflect the risks in the loan portfolio, based on
circumstances and conditions known or anticipated at each reporting date.
There are inherent uncertainties with respect to the final outcome of
certain of the Bank's loans and non-performing assets. Because of these
inherent uncertainties, actual losses may differ from the amounts reflected
in these consolidated financial statements. Factors considered in
evaluating the adequacy of the reserve include previous loss experience,
current economic conditions and their effect on the borrowers, the per-
formance of individual loans in relation to contract terms and estimated
fair values of properties to be foreclosed. Losses are charged against
the reserve for loan losses when management believes that the
collectibility of principal is doubtful.
Key elements of the above estimates, including those used in independent
appraisals, are dependent upon the economic conditions prevailing at the
time of the estimates. Accordingly, uncertainty exists as to the final
outcome of certain of the valuation judgments as a result of the difficult
and unpredictable operating conditions in the region. The inherent
uncertainties in the assumptions relative to the projected sales prices or
rental rates may result in the ultimate realization of amounts on certain
loans which are different from the amounts reflected in these consolidated
financial statements.
An analysis of the reserve for possible loan losses for each of the three
years in the period ended December 31, 1993 is as follows:
1993 1992 1991
Balance, beginning of year $ 7,411,635 $6,650,217 $5,074,745
Provision for possible
loan losses 23,822,000 8,050,000 7,243,443
Reserve recorded in connection
with acquisition of NFNBV 2,000,000 -- --
Loans charged-off (13,952,000) (7,739,000) (6,504,000)
Recoveries 778,424 450,418 836,029
----------- ----------- -----------
Balance, end of year $20,060,059 $7,411,635 $6,650,217
=========== ========== ==========
Included in the 1993 provision for possible loan losses is $666,667
recorded as a provision for the Bank's potential share of losses on
segregated assets. Included in 1993 are charge-offs of $306,435 and
recoveries of $8,249 related to segregated assets.
In May, 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan". The new standard requires that impaired loans be
measured based on the present value of expected future cash flows
discounted at each loan's effective interest rate or, as a practical
expedient, the loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. The statement also
changes the accounting for in-substance foreclosures and troubled debt
restructurings. This statement is applied prospectively with any
adjustment reflected in the provision for possible loan losses.
The Company is required to adopt the new standard by January 1, 1995,
although early implementation is permitted. Because of the complexities of
the new standard and the changing composition of the impaired loan
portfolio, management has not yet determined the effect that this change in
accounting will have on the Company's consolidated financial statements.
Nonperforming assets at December 31, 1993 and 1992 were as follows:
1993
-----------------------------------
Segregated
Loans Assets Total 1992
----------- ----------- ----------- -----------
Nonaccrual Loans $29,712,089 $17,356,607 $47,068,696 $12,148,233
Restructured Loans 2,772,783 68,389 2,841,172 1,838,120
Loans Past Due
90 Days or More
and Still Accruing 712,391 2,978 715,369 7,251,028
Other Real Estate
Owned 13,633,383 40,876 13,674,259 12,661,294
----------- ----------- ----------- -----------
Total $46,830,646 $17,468,850 $64,299,496 $33,898,675
=========== =========== =========== ===========
Included in Nonaccrual Loans is $4,543,860 and $8,354,797 of loans whose
terms have been substantially modified in troubled restructurings at
December 31, 1993 and 1992, respectively. Other Real Estate Owned is shown
net of a valuation reserve of $598,675 at December 31, 1993.
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 collectibility of principal or
interest becomes doubtful.
The amount of interest which was not earned but which would have been
earned had the nonaccrual and restructured loans performed in accordance
with their original terms and conditions was approximately $2,688,000,
$1,268,000 and $1,283,000 in 1993, 1992 and 1991, respectively.
Merchants Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 1993
(6) PREMISES AND EQUIPMENT
The components of premises and equipment included in the
accompanying consolidated balance sheets are as follows:
1993 1992
---------------------------------------------------
Land and Buildings $17,835,574 $16,571,052
Leasehold Improvements 869,444 869,444
Furniture and Equipment 10,421,058 8,911,663
----------------------------------------------------
$29,126,076 $26,352,159
Less: Accumulated
Depreciation and
Amortization 12,977,974 11,716,363
----------------------------------------------------
$16,148,102 $14,635,796
====================================================
Depreciation and amortization expense amounted to $1,595,914,
$1,646,560, and $1,890,153 in 1993, 1992 and 1991, respectively.
Merchants Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 1993
(7) EMPLOYEE BENEFIT PLANS
Pension Plan
The Company maintains a noncontributory defined benefit plan covering
all eligible employees. The plan is a final average pay plan with
benefits based on the average salary rates over the five consecutive
plan years out of the last ten consecutive plan years that produces
the highest average. It is the Company's policy to fund the cost of
benefits expected to accrue during the year plus amortization of any
unfunded accrued liability that has accumulated prior to the valuation
date based on IRS regulations for funding. The plan's funded status
and amounts recognized in the accompanying consolidated balance sheets
and statements of operations as of December 31, 1993 and 1992 are as
follows:
1993 1992
-----------------------------------------------------------------
Actuarial Present Value of
Benefit Obligation:
Vested Benefit Obligation $4,827,238 $4,067,456
Nonvested Benefits 155,662 129,696
-----------------------------------------------------------------
Accumulated Benefit Obligation $4,982,900 $4,197,152
Effects of Projected
Future Compensation Levels 1,661,854 1,211,997
-----------------------------------------------------------------
Projected Benefit Obligation for
Service Rendered to Date $6,644,754 $5,409,149
Plan Assets 6,544,833 6,004,578
-----------------------------------------------------------------
Excess (Deficiency) of Plan Assets Over
(Under) Projected Benefit Obligation $ ( 99,921) $ 595,429
Unrecognized Net Asset
at January 1, 1987 Being Amortized
over 13.4 Years (210,691) (249,780)
Unrecognized Net (Gain) Loss 260,749 (558,330)
-----------------------------------------------------------------
Accrued Pension Costs Included
in Other Liabilities ($ 49,893) ($212,681)
================================================================
1993 1992 1991
-----------------------------------------------------------------
Net Pension Expense Included
the Following Components:
Service Cost - Benefits Earned
During the Year $257,232 $221,688 $236,548
Interest Cost on Projected
Benefit Obligation 432,963 387,401 373,648
Actual Return on
Plan Assets (488,860) (518,990) (608,820)
Net Amortization and
Deferral (24,194) 21,042 186,440
-----------------------------------------------------------------
$177,141 $111,141 $187,816
=================================================================
The actuarial present value of the projected benefit obligation was
determined using a weighted average discount rate of 7.5%, 8% and
8.25% as of December 31, 1993, 1992, and 1991, respectively. The
assumed rate of increase of future compensation levels used for 1993
was 4% for the period 1993-1995, 4.5% for the period 1996-1997 and 5%
thereafter. The rate of increase in future compensation levels for
1992 was 4% and for 1991 was 5%. The expected long-term rate of
return on assets used was 8% in 1993 and 8.25% in 1992 and 1991.
Employee Stock Ownership Plan/ 401(K) Plan
Under the terms of the Company's Employee Stock Ownership Plan (ESOP),
eligible employees are entitled to contribute up to 10% of their
compensation to the ESOP, and the Company contributes a percentage of
the amounts contributed by the employees, as authorized by the
Company's Board of Directors. The Company contributed approximately
75% of the amounts contributed by the employees (up to 4.5% of
individual employee compensation) in 1993, 1992 and 1991.
Substantially all contributions to the ESOP are funded with cash and
are used to purchase the Company's common stock.
Merchants Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 1993
(7) EMPLOYEE BENEFIT PLANS (Continued)
Performance Progress Sharing Plan
The Company maintains a Performance Progress Sharing Plan. Substan-
tially all Company employees are eligible to participate in this plan,
and awards are based on performance of the Company measured against
goals established by the Board of Directors.
Deferred Compensation Plans
The Company maintains an Executive Salary Continuation Plan and a
Deferred Compensation Plan for Directors. The plans are designed to
supplement the retirement benefits available to certain key employees
and directors of the Company. The plans are part of the Company's
overall strategy for attracting and retaining high quality management.
Under the plans, each participant is entitled to receive monthly
benefits for 15 years in an amount specified in each participant's
contract. Benefits commence upon retirement and may be reduced in the
case of early retirement. If death occurs after retirement but before
all benefits have been paid, the balance of the payments will be made
to the participant's designated beneficiary. The Company has
purchased insurance policies on the lives of the participants to help
fund benefits payable under the plans.
Phantom Stock Plan
The Company maintains a Phantom Stock Plan, which expired in 1993,
wherein certain key officers of the Bank receive an annual award of
phantom shares of stock for up to five consecutive years. Each year,
the Board of Directors reviews the performance of the officers and may
make additional awards based upon such reviews. The value of the
phantom shares for each annual grant is vested over a one-year period
subject to certain early termination provisions. Benefits are payable
in 60 monthly installments subsequent to the payment commencement
date, as defined in the plan. The benefit level is based upon the
market value of the Company's stock at the determination date, as
defined in the plan.
A summary of expenses relating to the Company's various employee
benefit plans for each of the three years in the period ended December
31, 1993 is as follows:
1993 1992 1991
-----------------------------------------------------------------
Pension Plan $177,141 $ 111,141 $187,816
Employee Stock Ownership Plan/
401K Plan 285,199 267,636 246,651
Performance Progress Sharing Plan 264,000 360,641 162,791
Deferred Compensation Plans 272,946 233,222 202,026
Phantom Stock Plan 249,600 259,896 144,000
-----------------------------------------------------------------
$1,248,886 $1,232,536 $943,284
=================================================================
Merchants Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 1993
(8) INCOME TAXES
The provision (benefit) for income taxes for each of the three years
in the period ended December 31, 1993 consists of the following:
1993 1992 1991
-------------------------------------------------------------
Current $(4,385,126) $2,708,861 $2,904,002
Prepaid ( 25,360) (2,133,353) (1,994,973)
--------------------------------------------------------------
$(4,410,486) $ 575,508 $ 909,029
==============================================================
Prepaid and deferred income taxes result from differences between
financial reporting income and taxable income relating primarily to
the provision for possible loan losses, accelerated tax depreciation
and the difference between the book and tax treatments of equipment
leases. The net prepaid tax asset amounted to approximately
$3,422,000 and $3,316,000 at December 31, 1993 and 1992, respectively.
In addition, as of December 31, 1993, the Bank has filed for a refund
for overpayment of 1989 and 1990 taxes totalling $1,191,000. These
tax assets are included in other assets in the accompanying
consolidated balance sheets.
The following is a reconciliation of the federal income tax provision
(benefit), calculated at the statutory rate, to the recorded provision
(benefit) for income taxes:
1993 1992 1991
---------------------------------------------------------------------
Applicable Statutory Federal
Income Tax (benefit) $(3,465,299) $2,125,686 $2,016,866
(Reduction) Increase in
Taxes Resulting From:
Loss on Investment Securities 40,018 171,074 37,134
Tax-Exempt Income (213,631) (371,334) (525,000)
Tax Credits (960,750) (941,500) (626,000)
Other, Net 189,176 (66,270) 6,029
---------------------------------------------------------------------
$(4,410,486) $ 575,508 $ 909,029
=====================================================================
The components of the net prepaid tax asset as of December 31, 1993
and 1992 are as follows:
1993 1992
---------------------------------------------------------------------
Reserve for Possible Loan Losses $6,387,000 $2,645,000
Deferred Compensation 1,522,000 1,351,000
Unrealized Securities Losses 74,000 357,000
Loan Fees 446,000 402,000
Leveraged Leases (42,000) (547,000)
Depreciation (389,000) (375,000)
Accrued Liabilities 189,000 185,000
Capital Loss Carryforwards 576,000 544,000
Investments in Limited Partnerships (463,000) (375,000)
Excess Servicing on Sold Mortgages (60,000) (169,000)
Loan Market Adjustment (4,274,000) 0
Other 32,000 (158,000)
--------------------------------------------------------------------
$3,998,000 $3,860,000
Valuation Allowance (576,000) (544,000)
----------------------------------------------------------------------
$3,422,000 $3,316,000
======================================================================
A valuation allowance is provided when it is more likely than not that
some portion of the net prepaid tax asset will not be realized. The
Bank has established a valuation allowance for capital loss
carryforwards since such losses may only be utilized against future
capital gains.
The State of Vermont assesses a franchise tax for banks in lieu of
income tax. The franchise tax is assessed based on deposits and
amounted to approximately $247,000, $234,000 and $233,000 in 1993,
1992 and 1991, respectively. These amounts are included in other
expenses in the accompanying consolidated statements of operations.
Merchants Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 1993
(9) OTHER BORROWED FUNDS
Other borrowed funds consist of the following at December 31, 1993 and 1992:
1993 1992
--------------------------------------------------------
Treasury Tax and Loan Notes $5,742,607 $4,869,873
Securities Sold Under
Agreements to Repurchase 1,681,474 3,594,939
Federal Funds Purchased 7,500,000 0
--------------------------------------------------------
$14,924,081 $8,464,812
========================================================
The Bank may borrow up to $48,400,000 in federal funds on an unsecured basis.
The following table provides certain information regarding other borrowed
funds for each of the two years in the period ended December 31, 1993:
Weighted Weighted
Maximum Average Average
Month-end Average Annual Rate
Amount Amount Interest on Amounts
1993 Outstanding Outstanding Rate Outstanding
-----------------------------------------------------------------------------
Treasury Tax and
Loan Notes $5,742,607 $3,540,180 2.74% 3.11%
Securities Sold
Under Agreements
to Repurchase $12,051,559 $7,669,030 2.99% 2.65%
Federal Funds
Purchased $14,600,000 $2,636,629 3.34% 3.50%
1992
-----------------------------------------------------------------------------
Treasury Tax and
Loan Notes $5,379,420 $3,496,710 3.39% 3.20%
Securities Sold
Under Agreements
to Repurchase $6,080,811 $5,021,966 3.72% 3.25%
Federal Funds
Purchased $18,300,000 $2,148,709 4.39% ----
Merchants Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 1993
(10) DEBT
Debt outstanding consists of the following at December 31, 1993
and 1992:
1993 1992
---------------------------------------------------------------
10% Senior Subordinated Debt
Payable 1994 Through 1996 $7,200,000 $ 9,600,000
9% Mortgage Note, Payable
in Monthly Installments of
$1,736 (Principal and
Interest) Through 2020 209,909 211,782
1% Mortgage Note, Payable
in Monthly Installments of
$2,542 (Principal and
Interest) Through 2039 1,193,513 1,195,353
9.81% Capital Notes,
Interest Payable
Semiannually, Principal
Payable 1995 Through 2000 10,000,000 10,000,000
9.81% Capital Notes,
Interest Payable
Semiannually, Principal
Payable in 1997 10,000,000 10,000,000
Federal Home Loan Bank Notes
Payable, Interest Rates from
4.83% to 8.66% due 1995
through 2001 18,030,000 18,030,000
---------------------------------------------------------------
$46,633,422 $49,037,135
===============================================================
Maturities of debt subsequent to December 31, 1993 are: 1994 -
$2,404,056; 1995 -$8,404,431; 1996 - $4,404,841; 1997 -
$21,005,288; 1998 - $7,035,778; and $3,379,028 thereafter.
The capital and senior subordinated note agreements contain a
number of restrictive covenants including, among other things,
limitations on additional indebtedness, the payment of dividends
and certain other uses of cash. In addition, the agreements
contain restrictions, based upon defined formulas, with respect
to maintaining certain financial ratios and specified levels of
capital. Under the Federal Home Loan Bank agreement,the Bank
pledged as collateral mortgages on 1 to 4 family residences
totaling approximately $7,200,000. As of December 31, 1993, the
Company is in compliance with all of the covenants of the capital
notes, senior subordinated note and Federal Home Loan Bank
agreements.
Merchants Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 1993
(11) STOCKHOLDERS' EQUITY
As a state-chartered bank, the Bank's primary regulator is the FDIC.
The Bank is subject to regulatory capital regulations that provide for
two capital requirements: a leverage requirement and a risk-based
capital requirement. The leverage requirement provides for a minimum
"core" capital, consisting primarily of common stockholders' equity,
of 3.0% of total adjusted assets, for those institutions with the most
favorable composite regulatory examination rating. As discussed in
Note 1, the Bank is required to maintain a minimum leverage capital
ratio of 5.5% under the MOU. As of December 31, 1993 the Bank's
leverage capital was 5.94%. The minimum risk-based capital
requirement provides for minimum capital levels based on risk-weighted
assets of 8.0% at December 31, 1993. At December 31, 1993, the Bank
exceeded all capital requirements of the FDIC. Vermont state law
requires the Bank to appropriate a minimum of 10% of net income to
surplus until such time as appropriated amounts equal 10% of deposits
and other liabilities. The Bank's stockholders' equity includes
$6,561,600 as of December 31, 1993 and 1992, respectively, of such
appropriations. Debt covenants and Vermont state law restrict the
payment of dividends under certain circumstances. The most
restrictive of these limits dividend payments on a cumulative basis
since December 31, 1985 to cumulative net income for the same period
plus $2,000,000. In addition, as discussed in Note 1, the Company may
not declare or pay a dividend without the approval of the Federal
Reserve.
(12) STOCK DIVIDENDS
On December 6, 1991, the Company declared a 2% stock dividend, payable
on December 30, 1991, to shareholders of record on December 20, 1991.
On November 13, 1992, the Company declared a 3% stock dividend,
payable on December 11, 1992 to shareholders of record on November 30,
1992. All per share amounts were restated in prior years to reflect
this activity.
(13) COMMITMENTS AND CONTINGENCIES
The Bank is 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.
Merchants Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 1993
<TABLE>
(14) PARENT COMPANY
The Company's investments in its subsidiaries are recorded using the equity method of
accounting. Summarized financial information relative to the Company's (parent company
only) balance sheets at December 31, 1993 and 1992 and statements of operations and cash
flows for each of the three years in the period ended December 31, 1993 is as follows:
<CAPTION>
Balance Sheets - December 31, 1993 1992
--------------------------
<S> <C> <C>
Assets:
Investment in and Advances
to Subsidiaries $51,006,872 $60,167,795
Other Investments 1,077,035 1,050,817
Other Assets 896,099 1,315,752
--------------------------
Total Assets $52,980,006 $62,534,364
==========================
Liabilities and Equity Capital:
Notes Payable $7,200,000 $9,600,000
Other Liabilities 60,000 731,451
Equity Capital 45,720,006 52,202,913
--------------------------
Total Liabilities and
Equity Capital $52,980,006 $62,534,364
==========================
<CAPTION>
Statements of Operations for the Year Ended December 31, 1993 1992 1991
------------------------------------
<S> <C> <C> <C>
Dividends from the Merchants Bank* $848,585 $3,320,194 $3,230,861
Equity in Undistributed Earnings (Loss) of Subsidiaries* (6,365,554) 2,161,917 2,300,879
Other Expense, Net (450,636) (2,734) (648,470)
Provision for Income Taxes 186,036 197,134 248,077
------------------------------------
Net Income (Loss) ($5,781,569) $5,676,511 $5,131,347
====================================
<CAPTION>
Statements of Cash Flows for the Year Ended December 31, 1993 1992 1991
------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss) ($5,781,569) $5,676,511 $5,131,347
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Amortization 15,265 18,260 21,255
Losses (Gains) on Investment Securities (76,316) (530,300) 53,754
(Increase) Decrease in Miscellaneous Receivables 998,729 (40,870) 0
Increase (Decrease) in Miscellaneous Payables (868,585) 396,997 (272,476)
Equity in Undistributed (Earnings)
Losses of Subsidiaries 6,365,554 (2,161,917) (2,300,879)
------------------------------------
Net Cash Provided by Operating Activities $653,078 $3,358,681 $2,633,001
------------------------------------
Cash Flows from Investing Activities:
Repayment of Advances to Subsidiaries 2,379,917 382,420 657,975
Additional Investment in Subsidiary 0 0 (66,000)
Proceeds from Sales of Investment Securities 271,316 2,142,410 170,272
------------------------------------
Net Cash Provided by Investing Activities $2,651,233 $2,524,830 $762,247
------------------------------------
Cash Flows From Financing Activities:
Sale of Treasury Stock 388,998 1,193,522 849,236
Purchase of Treasury Stock (132,058) (964,717) (1,133,584)
Cash Dividends Paid (838,050) (3,293,450) (3,212,698)
Principal Payments on Debt (2,400,000) (2,400,000) 0
------------------------------------
Net Cash Used in Financing Activities ($2,981,110)($5,464,644)($3,497,046)
------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 323,201 418,867 (101,798)
Cash and Cash Equivalents at Beginning of Year 445,543 26,676 128,474
------------------------------------
Cash and Cash Equivalents at End of Year $768,744 $445,543 $26,676
====================================
Total Interest Paid $820,000 $1,080,000 $1,200,000
Taxes Paid 1,190,000 2,860,000 3,415,000
<FN>
*Account balances are partially or fully eliminated in consolidation.
</TABLE>
Merchants Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 1993
(15) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments primarily
include commitments to extend credit and financial guarantees.
Such instruments involve, to varying degrees, elements of credit
and interest rate risk that are not recognized in the
accompanying consolidated balance sheets.
Exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to
extend credit and financial guarantees written is represented by
the contractual amount of those instruments. The Company
generally requires collateral to support such financial
instruments in excess of the contractual amount of those
instruments and, therefore, is in a fully secured position. The
Company uses the same credit policies in making commitments as it
does for on-balance sheet instruments. The contractual amounts
of these financial instruments at December 31, 1993 and 1992 were
as follows:
Contractual
Amount
-----------------------------------------------------------------
1993
Financial Instruments Whose Contract
Amounts Represent Credit Risk:
Commitments to Extend Credit $113,360,000
Standby Letters of Credit 11,721,000
Loans Sold with Recourse 2,527,000
-----------------------------------------------------------------
1992
Financial Instruments Whose Contract
Amounts Represent Credit Risk:
Commitments to Extend Credit $104,377,000
Standby Letters of Credit 14,346,000
Loans Sold with Recourse 2,458,000
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee.
Since a portion of the commitments are expected to expire without
being drawn upon, the total commitment amount does not
necessarily represent a future cash requirement. The Company
evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained by the Company upon
extension of credit is based on management's credit evaluation of
the counterparty, and an appropriate amount of real and/or
personal property is obtained as collateral.
Standby letters of credit and financial guarantees written are
conditional commitments issued by the Company to guarantee
performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing
arrangements. Most guarantees extend for less than two years and
75% are for less than $100,000. The credit risk involved in
issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Company
obtains real and/or personal property as collateral for those
commitments for which collateral is deemed to be necessary.
Merchants Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 1993
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
INVESTMENTS
The carrying amounts reported in the consolidated balance sheets
for cash and cash equivalents and stock in the Federal Home Loan
Bank of Boston (FHLB) approximate fair values. Fair value for
investment securities is determined from quoted market prices,
when available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable
instruments. Refer to Note 4 - Investment Securities.
LOANS
The fair value of variable rate loans that reprice frequently and
have no significant credit risk is based on carrying values. The
fair value of fixed rate (one-to-four family residential)
mortgage loans, and other consumer loans, is based on quoted
market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan
characteristics. The fair value for other loans is estimated
using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers
of similar credit quality.
An analysis of the estimated fair value of the loan portfolio
(including segregated assets) as of December 31, 1993 and 1992 is
as follows:
1993 1992
--------------------------------------------------
Carrying Calculated Carrying Calculated
Amount Fair Value Amount Fair Value
-----------------------------------------------------------------
(In Thousands)
Net Loans $553,412 $554,905 $422,124 $424,157
=================================================================
DEPOSITS
The fair value of demand deposits approximates the amount
reported in the consolidated balance sheets. The fair value of
variable rate, fixed term certificates of deposit also
approximate the carrying amount reported in the consolidated
balance sheets. The fair value of fixed rate and term
certificates of deposit is estimated using a discounted cash flow
which applies interest rates currently being offered for deposits
of similar remaining maturities.
An analysis of the estimated fair value of deposits as of
December 31, 1993 and 1992 is as follows:
1993 1992
--------------------------------------------------
Carrying Calculated Carrying Calculated
Amount Fair Value Amount Fair Value
-----------------------------------------------------------------
(In Thousands)
Demand Deposits $ 96,413 $ 96,414 $ 82,272 $ 82,272
Savings, NOW and
Money Markets 321,821 311,606 289,670 291,925
Time Deposits Over
$100,000 21,215 22,617 6,647 6,647
Other Time 179,861 191,747 125,464 125,464
-----------------------------------------------------------------
$619,310 $622,384 $504,053 $506,308
=================================================================
DEBT
The fair value of debt is estimated using current market rates
for borrowings of similar remaining maturity.
An analysis of the estimated fair value of the debt of the
Company as of December 31, 1993 and 1992 is as follows:
1993 1992
--------------------------------------------------
Carrying Calculated Carrying Calculated
Amount Fair Value Amount Fair Value
-----------------------------------------------------------------
(In Thousands)
Debt $46,633 $47,699 $49,037 $49,143
=================================================================
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments to extend credit is estimated using
the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. For fixed rate
loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates.
The fair value of financial standby letters of credit is based on
fees currently charged for similar agreements or on the estimated
cost to terminate them or otherwise settle the obligations with
the counterparties. The fair value of commitments to extend
credit and standby letters of credit is $165,468 and $183,583 as
of December 31, 1993 and 1992, respectively.
Merchants Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1993
(17) RESTATEMENT OF 1990 FINANCIAL STATEMENTS
During 1991, the staff of the Securities and Exchange Commission
(the Commission staff) performed a review of the Company's
financial statements in its Form 10-K for the year ended December
31, 1990. In communications with the Company regarding this
review, the Commission staff expressed certain views and provided
additional guidance to the Company regarding the accounting for
its marketable equity securities portfolio. The Commission
staff's additional guidance focused on the criteria for
determining when the unrealized depreciation of marketable equity
securities should be deemed to be other than temporary in nature
and, therefore, recognized as a loss in the consolidated
statements of operations. While management believes that it had
properly accounted for marketable equity securities as of
December 31, 1990 in accordance with generally accepted
accounting principles and guidance existing at that time,
management concluded, in light of the Commission staff's
additional guidance, that the unrealized depreciation of
marketable equity securities as of December 31, 1990
included amounts deemed to be other than temporary in nature.
The Company reflected this conclusion by retroactively
recognizing in the consolidated statement of operations
additional losses with respect to certain securities as of
December 31, 1990. This restatement had no effect on the total
stockholders' equity at December 31, 1990 as originally reported.
The consolidated statement of changes in stockholders' equity as
of December 31, 1990 was restated as follows:
Originally As
Reported Restated
----------------------------------------------------------------
Retained Earnings $23,366,472 $20,783,372
Valuation Allowance for Net
Unrealized Depreciation of
Investment Securities (2,900,368) (317,268)
Merchants Bancshares, Inc.
Notes to Consolidated Financial Statements
December 31, 1993
<TABLE>
(18) SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION (in thousands):
<CAPTION>
1993 1992
----------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Restated (A) Restated (A)
Q1 Q2 Q3 Q4 YEAR Q1 Q2 Q3 Q4 YEAR
- --------------------------------------------------------------------------- ---------------------------------------------
Interest and Fee Income $11,060 $11,745 $14,357 $14,312 $51,474 $12,613 $12,551 $12,147 $11,928 $49,239
Interest Expense 4,779 5,029 6,361 5,787 21,956 6,531 6,373 5,912 5,235 24,051
- --------------------------------------------------------------------------- ---------------------------------------------
Net Interest Income $6,281 $6,716 $7,996 $8,525 $29,518 $6,082 $6,178 $6,235 $6,693 $25,188
Provision for Possible
Loan Losses (B) 5,008 9,314 2,750 6,750 23,822 1,400 1,400 3,000 2,250 8,050
Non-Interest Income 3,221 2,126 2,617 2,490 10,454 2,613 2,189 4,491 902 10,195
Non-Interest Expense 5,756 5,885 7,048 7,653 26,342 5,250 5,150 5,447 5,234 21,081
- --------------------------------------------------------------------------- ---------------------------------------------
Income (Loss) Before Provision
(Benefit) for Income Taxes ($1,262) ($6,357) $815 ($3,388)($10,192) $2,045 $1,817 $2,279 $111 $6,252
Provision (Benefit)
For Income Taxes (792) (2,416) (26) (1,176) (4,410) 278 366 527 (595) 576
- --------------------------------------------------------------------------- ---------------------------------------------
Net Income (Loss) ($470) ($3,941) $841 ($2,212) ($5,782) $1,767 $1,451 $1,752 $706 $5,676
- ----------------------------=============================================== =============================================
Earnings (Loss) Per Share ($0.11) ($0.93) $0.20 ($0.53) ($1.37) $0.43 $0.35 $0.43 $0.18 $1.39
- ----------------------------=============================================== =============================================
Dividends Per Share $0.20 $0.00 $0.00 $0.00 $0.20 $0.20 $0.20 $0.20 $0.20 $0.80
=============================================== =============================================
<FN>
(A) Based on subsequent discussions with the FDIC and additional review of certain credit information in connection with
the 1993 regulatory examination discussed in Note 1, management decided to amend the Bank's call reports and Forms 10-Q
for the quarters ended March 31, 1993 and June 30, 1993 to allocate $3 million of the additional provision for possible
loan losses originally recorded in the quarter ended June 30, 1993 to the quarter ended March 31, 1993.
(B) 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.
</TABLE>
<TABLE>
Merchants Bancshares, Inc.
Interest Management Analysis
<CAPTION>
(Taxable Equivalent, in thousands) 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------
Total Average Assets $705,516 $602,317 $592,343
- -----------------------------------------------------------------------------------------------------------
1993 % of 1992 % of 1991 % of
NET INTEREST INCOME: Assets Assets Assets
<S> <C> <C> <C> <C> <C> <C>
Interest and Dividend Income $ 47,194 6.69% $ 45,528 7.56% $ 54,712 9.24%
Fees on Loans 4,598 0.65% 4,326 0.72% 3,397 0.57%
- -----------------------------------------------------------------------------------------------------------
Total $ 51,792 7.34% $ 49,854 8.28% $ 58,109 9.81%
Interest Expense 21,956 3.11% 24,051 3.99% 32,104 5.42%
- -----------------------------------------------------------------------------------------------------------
Net Interest Income Before Provision for
Possible Loan Losses $ 29,836 4.23% $ 25,803 4.28% $ 26,005 4.39%
Provision for Possible Loan Losses 23,822 3.38% 8,050 1.34% 7,243 1.22%
- -----------------------------------------------------------------------------------------------------------
Net Interest Income $ 6,014 0.85% $ 17,753 2.95% $ 18,762 3.17%
- ----------------------------------------------=============================================================
OPERATING EXPENSE ANALYSIS:
Non-Interest Expense
Personnel $ 12,305 1.74% $ 10,195 1.69% $ 10,680 1.80%
Occupancy Expense 1,949 0.28% 1,490 0.25% 1,465 0.25%
Equipment Expense 1,880 0.27% 1,783 0.30% 2,045 0.35%
Other 10,208 1.45% 7,612 1.26% 7,047 1.19%
- -----------------------------------------------------------------------------------------------------------
Total Non-Interest Expense $ 26,342 3.73% $ 21,080 3.50% $ 21,237 3.59%
- -----------------------------------------------------------------------------------------------------------
Less Non-Interest Income
Service Charges on Deposits $ 3,571 0.51% $ 2,536 0.42% $ 2,421 0.41%
Other, Including Securities Gains (Losses) 6,883 0.98% 7,659 1.27% 6,956 1.17%
- -----------------------------------------------------------------------------------------------------------
Total Non-Interest Income $ 10,454 1.48% $ 10,195 1.69% $ 9,377 1.58%
- -----------------------------------------------------------------------------------------------------------
Net Operating Expense $ 15,888 2.25% $ 10,885 1.81% $ 11,860 2.00%
- ----------------------------------------------=============================================================
SUMMARY:
Net Interest Income $ 6,014 0.85% $ 17,753 2.95% $ 18,762 3.17%
Less: Net Overhead 15,888 2.25% 10,885 1.81% 11,860 2.00%
- -----------------------------------------------------------------------------------------------------------
Profit Before Taxes -
Taxable Equivalent Basis $ (9,874) -1.40% $ 6,868 1.14% $ 6,902 1.17%
Net Profit (Loss) After Taxes $ (5,781) -0.82% $ 5,677 0.94% $ 5,131 0.87%
- ----------------------------------------------=============================================================
</TABLE>
<TABLE>
Merchants Bancshares, Inc.
Five Year Summary of Operations
(Not Covered by Report of Independent Public Accountants)
<CAPTION>
RESTATED
For the years ended 1993 1992 1991 1990 1989
- ------------------------------------------------------------- --------------------- --------- --------
<S> <C> <C> <C> <C> <C>
Interest and Investment Income $ 51,474 $ 49,239 $ 57,249 $ 62,797 $ 60,632
Interest Expense 21,956 24,051 32,104 34,792 $ 32,540
- ----------------------------------------------------------------------- --------------------- --------
Net Interest Income $ 29,518 $ 25,188 $ 25,145 $ 28,005 $ 28,092
Provision for Possible Loan Losses 23,822 8,050 7,243 4,492 2,480
- ------------------------------------------------------------- ------------------------------- --------
Net Interest Income after Provision for Loan Losses $ 5,696 $ 17,138 $ 17,902 $ 23,513 $ 25,612
- ------------------------------------------------------------- ------------------------------- --------
Non-interest Income $ 10,454 $ 10,195 $ 9,376 $ 4,301 $ 7,268
Non-interest Expense 26,342 21,081 21,238 21,351 $ 20,651
- ------------------------------------------------------------- ----------- --------- --------- --------
INCOME (LOSS) BEFORE INCOME TAXES $ (10,192)$ 6,252 $ 6,040 $ 6,463 $ 12,229
Provision (benefit) for Income Taxes (Notes 3 and 8) (4,410) 575 909 1,670 3,263
- ------------------------------------------------------------- ----------- --------- --------- --------
NET INCOME (LOSS) $ (5,782)$ 5,677 $ 5,131 $ 4,793 $ 8,966
- ------------------------------------------------------------- ------------------------------- --------
SELECTED AVERAGE BALANCES (IN THOUSANDS)
Total Assets $ 705,516 $ 602,317 $ 592,343 $ 597,385 $ 577,347
Average Earning Assets 627,049 542,157 537,806 537,787 521,784
Loans 515,805 441,291 471,141 488,792 482,582
Total Deposits 570,957 490,908 488,831 495,299 486,657
Debt 47,835 42,171 35,007 25,416 12,864
Stockholders' Equity 48,511 51,548 48,668 46,493 42,631
Stockholders' Equity plus Loan Loss Reserve 59,999 59,028 54,707 51,401 47,392
SELECTED RATIOS
Net Income (Loss) to:
Average Stockholders' Equity -11.92% 11.01% 10.53% 10.31% 21.03%
Average Assets -0.82% 0.94% 0.86% 0.80% 1.55%
Average Stockholders' Equity to Average Total Assets 6.88% 8.56% 8.22% 7.78% 7.38%
Average Primary Capital to Average Total Assets 8.50% 9.80% 9.24% 8.60% 8.21%
Common Dividend Payout Ratio N/C 58.48% 62.69% 64.99% 30.37%
Loan Loss Reserve to Total Loans at Year End 3.50% 1.73% 1.41% 1.03% 1.03%
Net Charge-Offs to Average Loans 1.95% 1.65% 1.20% 0.93% 0.35%
PER SHARE (Note 1)
Net Income (Loss) $ (1.37)$ 1.39 $ 1.21 $ 1.13 $ 2.12
Cash Dividends 0.20 0.80 0.78 0.74 0.63
Year End Book Value 10.74 12.39 11.82 11.30 10.59
Other
Cash Dividends Paid (In Thousands) $ 848 $ 3,320 $ 3,231 $ 3,115 $ 2,723
Stock Dividends Issued 0.0% 3.0% 2.0% 5.0% 5.0%
<FN>
(Note 1): All stock dividends and splits are reflected retroactively.
See Note 12 of Notes to Consolidated Financial Statements.
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial
condition and results of operations of the Company and its
subsidiaries for the three years ended December 31, 1993 should
be read in conjunction with the consolidated financial statements
and notes thereto and selected statistical information appearing
elsewhere in this annual report. The information is discussed on
a fully taxable equivalent basis. Particular attention should be
given to the INTEREST MANAGEMENT ANALYSIS and OPERATING EXPENSE
ANALYSIS TABLES immediately preceding this discussion upon which
this discussion is primarily based. The financial condition and
operating results of the Company essentially reflect the
operations of its principal subsidiary, The Merchants Bank.
REGULATORY MATTERS
During the second quarter of 1993, the FDIC and the
Commissioner of the Vermont Department of Banking, Insurance and
Securities performed a joint field examination of the Bank as of
March 31, 1993. Additionally during the quarter, the Federal
Reserve Bank of Boston performed a field examination of the
Company as of March 31, 1993. As a result of these examinations,
the Bank entered into a Memorandum of Understanding (MOU) with
the FDIC and the Commissioner on October 29, 1993. Under the
terms of the MOU, the Bank is required to, among other things,
maintain a leverage capital ratio of at least 5.5%, revise
certain operating policies, enhance certain loan review
procedures, refrain from declaring dividends and correct certain
technical exceptions and violations of applicable regulations.
Management believes the Bank is in substantial compliance with
all of the provisions of the MOU as of December 31, 1993. The
Bank was also directed by the FDIC to increase the reserve for
possible loan losses by approximately $12 million and charge off
loans totaling approximately $8 million at the conclusion of the
examination in June, 1993. The Bank recorded the increase in the
reserve for possible loan losses as directed by the FDIC as of
June 30, 1993. Based on subsequent discussions with the FDIC and
additional review of certain loans, management decided to amend
the Bank's call reports and Forms 10-Q for the quarters ended
March 31, 1993 and June 30, 1993 to allocate $3 million of the
additional provision for possible loan losses originally recorded
in the quarter ended June 30, 1993 to the quarter ended March 31,
1993.
Additionally, on February 18, 1994, the Company entered into
a Written Agreement with the Federal Reserve Bank of Boston which
precludes the Company from declaring or paying any dividends
without prior permission, directed the Company to submit a
capital plan to maintain an adequate capital position at the Bank
and at the Company, precludes any additional borrowings or
incurrance of debt without the Federal Reserve's permission, and
requires the Bank to review and assess the qualifications of
senior management and form a succession plan for senior
management, revise certain policies, and not enter into certain
transactions without prior Federal Reserve permission.
Management is actively responding to the agreements, and has
addressed substantially all of the issues in the MOU and is in
the process of addressing the issues in the Written Agreement.
The FDIC and the Commissioner conducted another joint field
examination of the Bank as of December 31, 1993 which was
completed on March 31, 1994. An exit conference with management
was held on March 31, 1994 and management believes that the Bank
is in substantial compliance with the terms of the MOU.
On March 31, 1994, the FDIC and the Commissioner completed
the field work related to their most recent examination of the Bank
as of December 31, 1993. Although the FDIC and Commissioner have
not yet issued the formal examination report, management believes
that the results of the examination will not have a significant
impact on the Company's financial statements.
FDIC ASSISTED ACQUISITION
The Company expanded its banking operations through an FDIC-
assisted acquisition of the New First National Bank of Vermont
(NFNBV), a three bank holding company conducting banking
activities primarily on the eastern side of Vermont. Formerly
known as Independent Bank Group and later as the First National
Bank of Vermont, it was taken over by the FDIC in January 1993 as
a result of inadequate capital and subsequently run by the FDIC
as a bridge bank until its sale on June 4, 1993. Prior to
submitting its bid to the FDIC to acquire NFNBV, the Company was
able to conduct a due diligence review of NFNBV's assets and
liabilities using internal and outside consultants which the
Company believes contributed importantly to its successful bid
and reduced its risks relating to the acquisition. The
acquisition enabled the Company to acquire greater earning assets
and achieve economies of scale by consolidating administration
and operations, standardizing policies and procedures, and
providing uniform products and services. Management believes
that the acquisition represented a very attractive opportunity to
expand the Company's operations into a contiguous market area.
The integration of operations was completed in October, 1993.
Under the terms of the Purchase and Assumption Agreement
between the Company and the FDIC, the Company purchased $178.4
million in performing loans, $154.5 million of which are covered
under a Loss Sharing Agreement and classified as "Segregated
Assets" in the consolidated financial statements. Additionally
purchased was $11.4 million in cash and cash equivalents, $4.1
million of investment securities, $1.5 million of buildings and
equipment and $1.5 million of other assets. A purchase
accounting adjustment was made to set up an allowance for
possible loan losses in the amount of $2 million, which
represents managements' estimate of general credit risks within
the acquired portfolio as adjusted under the provisions of the
loss sharing agreement with the FDIC. The purchase price
consisted of the assumption of all of the deposit liabilities
($203 million) and $537,000 in other liabilities. Additionally,
the Company received cash from the FDIC in the amount of $4.1
million. Accordingly, the Company recognized a core deposit
intangible in the amount of $4.5 million which is being amortized
over 15 years using the straight-line method.
Under the terms of the Loss Sharing Agreement, the FDIC will
reimburse the Company, on a quarterly basis, 80% of the net
charge-offs and certain expenses relating to Segregated Assets up
to cumulative losses aggregating $41.1 million, after which the
rate will be 95% of net charge-offs on the loans. The Loss
Sharing Agreement runs for three years, after which time the
Company will reimburse the FDIC 80% of all recoveries on the
charged-off loans for three years.
RESULTS OF OPERATIONS
The Company recognized a loss of $5,781,569 for the year
ended December 31, 1993, due primarily to a significant increase
in the provision for possible loan losses. (Refer to the
discussion under "Provision For Possible Loan Losses" which
follows). Core earnings, not including the provision for
possible loan losses, improved over 1992 due to a stable interest
rate environment which allowed the Bank to improve the interest
margin by reducing the average cost of funding. Net gains on
investment securities decreased to $1,898,945 from $3,448,500 in
1992.
Net income for 1992 increased 10.6% to $5,676,500 over 1991.
Core earnings remained down rather significantly, due in part to
lower interest rates, increased non-performing assets and the
related higher provision for loan losses. Net gains on
investment securities increased dramatically, however, to $3,448,500
from $ 2,774,000 in 1991.
The 1993 loss on a per share basis was $1.37. Earnings per
share adjusted for all stock dividends increased 14.9% to $1.39
in 1992 from $1.21 in 1991. The cash dividends paid per share
were $0.20, $0.80 and $0.78 respectively for years 1993, 1992 and
1991 after adjustments for all stock dividends.
The net loss as a percentage of average equity capital was
11.92% for 1993, while the net return on average equity capital
was 11.0% in 1992 and 10.5% in 1991. The ten-year average return
on equity is 15.32%. The net loss as a percentage of average
assets was .82% in 1993, while the net return on average assets
was .94% in 1992 and .86% in 1991. The ten-year average return
on assets is 1.02%.
NET INTEREST INCOME
Net interest income before the provision for possible loan
losses is the difference between total interest, loan fees, and
investment income and total interest expense. Net interest
income before the provision for possible loan losses is the key
indicator of bank performance in managing its assets and
liabilities. Maximization and stability of this margin is the
primary objective of the Company. Net interest income before the
provision for possible loan losses on a fully taxable equivalent
basis was $29.8 million in 1993, up 15.5% from $25.8 million the
previous year. This increase is primarily due to the larger asset
base resulting from the NFNBV transaction, which added
approximately $84 million in earning assets and $80 million in
deposit liabilities to the averages. Interest rates remained
level during 1993, however, an increased level of nonperforming
assets reduced the net interest income before the provision for
possible loan losses as a percentage of total average assets to
4.23% from 4.28% in 1992.
Net interest income before the provision for possible loan
losses was $25.8 million in 1992, down 0.7% from $26.0 million
the previous year. There are several causes for this net
decline: (1) a significantly lower cost of funding, which dropped
from an average of 6.7% on average interest bearing liabilities
in 1991 to 5.0% in 1992 and saved the Company nearly $8,000,000
in interest expense during the year; (2) while the average yield
on average interest earning assets was down 14.9%, from 10.8% in
1991 to 9.19% in 1992, average earning assets increased
$4,300,000 resulting in a net decrease in interest income of
$9,180,000; (3) average prime lending rates were 6.25% in 1992
as compared to 8.47% in 1991, a decrease of 26%; (4) fees on
loans increased significantly (27.3%) to $4.3 million in 1992 as
compared to $3.7 million in 1991. The net interest margin as a
percentage of total average assets was 4.28% in 1992 compared to
4.39% in 1991.
Total interest income increased 3.7% in 1993 from 1992,
while total interest expense decreased 8.7% as the Company
continued to decrease its costs of funding by lowering the
interest rates paid to borrowers. The decrease in total interest
expense is dramatic, when the assumption of additional deposits
from the NFNBV acquisition is taken into consideration. Total
interest income declined 16.6% in 1992 while total interest
expense declined 25.1% from 1991 totals. Included in fees on
loans and interest income are net gains on sales of loans of
$818,300, $404,000 and $268,000 in 1993, 1992 and 1991,
respectively. These net gains included the present value of the
difference between the weighted average interest rate on the sold
loans serviced by the Bank and the interest rate remitted to the
investor, adjusted for a normal servicing fee.
Net interest income after the provision for possible loan
losses was $11.7 million lower in 1993 than 1992, which was a
5.4% decrease ($1,009,000) lower than 1991. The net interest
margin after the provision was .85% of average assets compared to
2.95% in 1992.
NET OPERATING EXPENSE
Net operating expense (net overhead) is total non-interest
expense reduced by non-interest income. Operating expense
includes all staff, occupancy, equipment, supplies, and all other
non-interest expenses. Non-interest income consists primarily of
fee income on deposit accounts, trust services, credit card,
corporate and data processing services, and gains or losses on
investment securities.
Non-interest income increased marginally (2.5%) during 1993,
to $10.5 million from $10.2 million in 1992. Trust department
income increased $287,000 (20.5%), service charges increased
$1,035,000 (40.8%) due to increased charges and many more deposit
accounts due to the NFNBV acquisition, all other non-interest
income increased $486,000 (17.3%), while gains on the sales of
investment securities decreased $1,550,000 (44.9%). Included in
the 1993 investment gains is $1,024,000 recognized on the sale of
U.S. Treasury issues sold during the first quarter of 1993 which
had been written down as of December 31, 1992 as an unrealized
loss and recognized as a reduction of investment gains during
1992.
During 1992, non-interest income increased $818,000, 8.7%
higher than 1991. Service charges on deposit accounts increased
$115,000 (4.8%), due to higher prices and an increase in the
number of accounts subject to service charges. All other non-
interest revenue decreased $696,000 (10.0%). Included in non-
interest revenue is $3,449,000 of net securities gains in 1992
compared to $2,774,000 of net security gains in 1991, a
difference of $675,000. Interest rates continued to fall during
the first half of 1992, creating the need to realign the
Company's interest sensitive balance sheet, which was
accomplished by changing the maturities of the U.S. Treasury
portfolio, as well as placing emphasis on writing fixed rate
loans and variable rate deposit products. To reflect the change
in strategy management redesignated its U.S. Treasury security
portfolio as held for sale within the context of its
asset/liability management policies. As rates fell during the
year, the market value of the U.S. Treasury issues held for sale
increased and, through a series of sales and purchases of
different maturities, the Company realized gains on these
instruments of $3,942,000 in 1992 as compared to $2,714,000 in
1991. During the fourth quarter of 1992 a change in short term
interest rates caused the market value of the Company's U.S.
Treasury portfolio to decrease. As a result, an unrealized loss
of $1,024,000 was recognized in non-interest income.
The Company's operating expenses increased $5,261,000 or
25% over 1992, due to the costs of regulatory actions and the
acquisition of NFNBV. Total personnel costs increased $2.1
million (20.7%) as the Company took on the 129 employees of NFNBV
on a temporary or consulting basis while converting the new
branches into the computer and operating systems. By December
31, 1993, the Company had hired on a permanent basis 64 employees
and paid approximately $100,000 in separation and severance pay
to the employees not hired. Occupancy and equipment expenses
increased $556,000 in the aggregate, or 17%, again due to
additional branches acquired in the NFNBV acquisition. Losses on
and write-downs of other real estate owned increased to $1.97
million from $833,300 due to the deterioration in the real estate
market and the economic recession during the late 1980's and
early 1990's. All other non-interest expenses increased $1.5
million (27.1%) due to higher FDIC insurance premiums, legal and
professional fees and amortization of the core deposit intangible
arising from the NFNBV transaction and regulatory actions.
The Company's operating expenses for 1992 decreased
$157,000, .7% lower than 1991. 1992 total personnel costs
decreased $485,000 or 4.5% from 1991, reflecting a 5.1% decrease
in salaries and 4.4% decrease in benefit costs. In February
1991, the Bank downsized staff by 40 employees, mostly middle
managers, to reduce overhead in a difficult economic environment.
This action reduced annualized salaries expense by $920,000,
however, severance expenses recognized during 1991 totaled
$400,000. The Bank's share of health and life insurance expense
decreased $40,600 (6.5%) during 1992. Deferred compensation plan
costs increased $31,200, pension costs decreased $76,700 and
other benefit costs decreased $25,000 for a total benefit cost
decrease of $111,100. During 1992, the Company began a wellness
incentive plan which awards employees for consistent activities
which lead toward a more healthy existence. The Company paid
approximately $70,000 to employees under this plan in 1992.
Equipment costs decreased $261,600 (12.8%) from 1991 while net
occupancy costs increased slightly by $24,000 (1.7%).
All other expenses increased $565,000 (8.1%) in 1992
compared to 1991. Of this amount, $86,000 represents increased
losses in low income housing projects. Expenses relating to
foreclosed assets increased $551,000 (195.1%) during 1992
reflecting a continuing difficult economy.
When non-interest income is netted against non-interest
expense, net operating expense (net overhead) increased $5.0
million (46%) from the 1992 level. As a percent of average total
managed assets, net overhead increased to 2.25% in 1993 from
1.81% in 1992.
The Company provided for income taxes in accordance with the
comprehensive income tax allocation method under Statement of
Financial Accounting Standard (SFAS) No. 96 prior to 1992.
Effective January 1, 1992, the Company implemented SFAS No. 109.
There was no material effect from this change on the accompanying
consolidated financial statements. The Company recognized
$960,000 in low income housing tax credits as a reduction in the
provision for income taxes during 1993 and 1992. As a
consequence of the operating loss during 1993, the Company
recognized a tax benefit of $4.4 million including $961,000 in
low income housing tax credits. Additionally, the Company has a
cumulative prepaid tax asset of $3.4 million arising from timing
differences between the Company's book and tax reporting. The
prepaid tax asset is included in other assets.
PROVISION FOR POSSIBLE LOAN LOSSES
Beginning in the late 1980's, the New England region was
severely affected by a deterioration in the real estate market and
an economic recession. During this period, the Company increased the
provision for possible loan losses and incurred costs associated with
with troubled assets and lost income on nonaccrual loans. The
provision for possible loan losses charged to operations was
$23,822,000 in 1993, $8,050,000 in 1992, and $7,243,000 in 1991. Net
charge offs were $13,174,000 in 1993, $7,289,000 in 1992, and
$5,668,000 in 1991. In addition, a reserve for possible loan losses
$2 million was set up related to the loans acquired in connection with
the acquisition of NFNBV, to reflect the general credit risks within
the acquired portfolio, net of the effects of the loss sharing
agreement with the FDIC.
The reserve for possible loan losses (RPLL) was $20,060,000
at December 31, 1993, $7,412,000 at December 31, 1992, and
$6,650,000 at December 31, 1991. As a percent of loans
outstanding, the reserve for possible loan losses was 3.50%,
1.73%, and 1.41%, at year-end 1993, 1992, and 1991 respectively.
The increase in the reserve for possible loan losses reflects
management's efforts to maintain the reserve at a level adequate
to provide for loan losses based on an evaluation of
known and inherent risks in the loan portfolio. Given the
continuing increase in the Bank's nonperforming assets (discussed)
below) and continued weakness in the regional economy, together with
other relevant economic factors, management concluded that a sig-
nificant increase in the reserve for possible loan losses was
appropriate. Among the factors which management considers in
establishing the level of the reserve are an analysis of individual
loans, the overall risk characteristics and size of the loan portfolio
past credit loss history, the assessment of current economic and real
estate market conditions, estimates of the current value of the
underlying collateral and other relevant factors. Further, during
the fourth quarter of 1993, as a result of significant increases in
nonperforming assets and ongoing weakness in the regional economy the
Company provided incremental reserves for possible loan losses of
$5 million in addition to the planned provision of $1.75 million.
Nonperforming assets (loans past due 90 days or more and
still accruing, non-accruing loans, restructured loans and other
real estate owned) increased 89.7% to $64,299,000 at December 31,
1993 from $33,899,000 at year-end 1992. Of the 1993 amount,
$17,469,000 represents segregated assets covered by the FDIC
loss sharing agreement. Excluding the FDIC's 80% exposure on the
segregated assets ($13,975,000), adjusted nonperforming assets
totaled $50,324,000, an increase of 48% over the 1992 level. At
December 31, 1991, non-performing assets were $28,735,000. The
Company's policy is to classify a loan more than 90 days past due
with respect to principal or interest as a nonaccruing loan,
unless the underlying collateral is deemed collectible as to both
principal and interest and is in the process of collection.
Income accruals are suspended on all nonaccruing loans, and all
previously accrued and uncollected interest is reversed against
current income. A loan remains on nonaccruing status until the
factors which suggest doubtful collectibility no longer exist, or
the loan is liquidated, or when the loan is determined to be
uncollectible and is charged off against the reserve for possible
loan losses. In those cases where a nonaccruing loan is secured
by real estate, the Company can, and usually does, initiate
foreclosure proceedings. The result of such action is to force
repayment of the loan through the proceeds of a foreclosure sale
or to allow the Company to take possession of the collateral in
order to manage a future resale of the real estate. Foreclosed
property is recorded at the lower of its cost or estimated fair
value, less any estimated costs to sell. Any cost in excess of
the estimated fair value on the transfer date is charged to the
reserve for possible loan losses, while further declines in
market values are recorded as an expense in other non-interest
expense in the statement of operations.
The continuing effect of the downturn in the regional
economy was the
primary reason for the increase in nonperforming assets during
1993 and 1992. In response, the Company continued to enhance its
loan review and loan workout functions to provide additional resources
to address nonperforming assets and maximize collections and
recoveries. Historically, the Company worked closely with
borrowers and pursued vigorous collection efforts. As the
recession continued and property values declined further, policies
and procedures related to the collection of troubled assets
were evaluated, especially with respect to the accrual of interest on
delinquent loans. During 1993, non-accruing loans and loans past
due 90 days or more and still accruing increased $28.4 million due to
the acquisition of NFNBV and an overall incrase in nonperforming
assets. $19.6 million of this increase is due to the acquisition
of NFNBV of whcih $17.4 million is covered by the loss sharing agree-
ment. Restructured loans were $2,841,000 at December 31, 1993 as
compared to $1,838,000 at December 31, 1992. Other real estate
owned and in-substance foreclosures grew by $1,012,000 to $13,674,000
during 1993 from $12,661,000 a year earlier.
During 1992, the most significant change in nonperforming
assets occurred in the other real estate owned/in-substance
foreclosure category which grew to $12,661,000 from $6,110,000
the year earlier. Restructured loans within the nonperforming
category totaled $1,838,000 and $5,679,000 at December 31, 1992
and 1991, respectively. Prior to 1991, the Company's management
avoided loan restructuring and focused efforts on
collecting loans according to existing terms. However, during
1991 and 1992 some otherwise high quality loan relationships
experienced decreasing cash flows. In such circumstances,
management utilized restructuring to where long term
cash flow prospects appeared good, the borrower's business
abilities had been historically demonstrated through successful
operations and sound collateral values existed.
At December 31, 1992, nonaccruing loans were 45.8% higher
than the previous year-end balance of $8,333,000. Loans 90 days
past due and still accruing decreased to $7,251,000 at December
31, 1992, from $8,613,000 at the end of 1991.
The Company takes all appropriate measures to restore non-
performing assets to performing status or otherwise liquidate these
assets in an orderly fashion so as to maximize their value to the
Company. There can be no assurances that the Company will be able
to complete the disposition of nonperforming assets without incurring
further losses.
BALANCE SHEET ANALYSIS
Total year-end assets increased $112.6 million (18.1%) over
year-end 1992 due almost entirely to the NFNBV acquisition.
Total assets acquired in the transaction approximated $197
million, however, due to the efforts expended in converting the
systems and operations of the new branches, as well as dealing
with the ongoing effects of regulatory actions, fewer loans were
originated (other than residential mortgage loans, which were
subsequently sold on the secondary market) by the Company in 1993
in comparison to 1992. During 1993, approximately $97.5 million
of loans originated were sold to secondary market investors. As
a result, the portfolio reduced in size due to scheduled
amortization and charge-offs. Total year-end deposit balances
grew by $115.3 (22.9%), however, deposits totaling $203 million
were purchased in the NFNBV transaction. This shrinkage was due,
in part to normal runoff after an acquisition and also due to
aggressive marketing by existing banks in the NFNBV marketplace
following the acquisition.
The investment portfolio decreased by $17.7 million as of
December 31, 1993, and the cash assets including federal funds sold
decreased by $16.7 million as the Company replaced the funding
sources lost through the shrinkage in deposits during the year.
Non-deposit liabilities grew by $3.8 million (5.8%) over the year.
Total year-end 1992 assets increased 3.6%, or $21.6 million
over year-end 1991. Net of the year-end transactions noted
below, loans decreased $35.4 million. In addition, during 1992
approximately $118 million of loans originated were sold to
secondary market investors. The investment portfolio increased
$39.9 million over year-end 1991 while cash assets including
Federal Funds Sold were $14.7 million higher. Deposits, net of
the year-end transaction, increased $19.5 million (4.1%), non-
deposit liabilities increased $5.6 million (9.2%) and equity
capital increased $2.61 million or 5.3% over the previous year-
end. A series of year-end transactions increased year-end 1992,
and 1991 assets, loans, and deposits by approximately $5.3
million and $11.3 million, respectively. (The transaction total
at December 31, 1993 was only $2.9 million). These transactions
arise through an agreement with a customer of the Bank to provide
year-end bridge loans relative to certain leveraged leasing
transactions of the customer. The customer, a lessor, has an
annual note payment due December 31, and an annual rent
receivable January 2, for an equal amount. The transaction
bridges the gap between the loan payment and the rental income
receipt. Annually, since 1986, loans are originated on the last
business day of the calendar year and the proceeds are invested
in 0% certificates of deposit until the first business day of the
next calendar year, at which time the certificate of deposit
proceeds are used to pay off the loans. The funds never leave
the control of the Bank, and the Bank collects fee income on the
loans as well as a market rate of interest. Excluding these
transactions, growth (reduction) of these categories were as
follows:
1992 1991
Assets $27.6 million 9.5% ($5.6) million (.9%)
Loans ($35.4)million (7.7%) ($17.4) million (3.7%)
Deposits $19.5 million 4.1% ($1.2) million (.2%)
For the year ended December 31, 1993, the Company adopted
Statement of Financial Accounting Standards No. 115 (FASB 115),
entitled "Accounting for Certain Debt and Equity Securities." FASB 115
establishes standards of financial accounting and reporting for
investments in equity securities that have readily determinable fair
values and all investments in debt securities. The effects of
implementing FASB 115 was that certain investment securities were
designated as available-for-sale and adjustments related to unrealized
gains and losses with respect thereto (net of taxes) were made to
stockholders' equity.
LIQUIDITY
Liquidity, as it pertains to banking, can be defined as the
ability to generate cash in the most economical way to satisfy loan
demand, deposit withdrawal demand, and to meet other business
opportunities which require cash. Sources of liquidity for banks
include short term liquid assets, cash generated from loan repayments
and amortization, borrowing, deposit generation, and earnings.
The Merchants Bank has historically maintained a high percentage
of its total resources in loans. Accordingly, the Bank relies on
careful management of its ability to borrow money and generate deposits
for liquidity. At year-end 1993, the Bank had available $40,900,000 in
unused Federal Funds lines of credit. Only 2.9% of total resources
were funded by large certificates of deposit at December 31, 1993 and
1.1% at December 31, 1992.
EFFECTS OF INFLATION
The financial nature of the Company's Balance Sheet and Statement
of Operations is more clearly affected by changes in interest rates
than by inflation, but inflation does affect the Company because as
prices increase the money supply tends to increase, the size of loans
requested tends to increase, total bank assets increase, and interest
rates are affected by inflationary expectations. In addition,
operating expenses tend to increase without a corresponding increase in
productivity. There is no precise method, however, to measure the
effects of inflation on the Company's financial statements.
Accordingly, any examination or analysis of the financial statements
should take into consideration the possible effects of inflation.
ACCOUNTING PRONOUNCEMENTS
In May, 1993 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 114, Accounting by
Creditors for Impairment of a Loan. The Company is required to adopt
the new standard by January 1, 1995, although early adoption is
permitted. Due to the complexities of the new standard and the
changing nature of the impaired loan portfolio, management has not yet
determined the effect that this change in accounting will have when
adopted on the Company's consolidated financial statements.
CAPITAL RESOURCES
Capital growth is essential to support deposit and asset growth
and to ensure strength and safety of the Company. The operating loss
together with dividends paid reduced the Company's capital position by
$6.6 million in 1993. Operating income of $2,612,000 and $1,900,000
(after payment of cash dividends) added to equity capital in 1992
and 1991. Dividend Reinvestment (DRP) and Employee Stock Ownership Plan
(ESOP) requirements were satisfied by open market purchases of stock
during 1993, 1992 and 1991. No new equity capital was generated from
the sale of common stock to DRP and ESOP participants during 1993, 1992
or 1991 although this could be an important source of capital if
management felt additional capital was necessary. Over the three year
period, the equity capital of the Company has decreased $1,919,000
or 4.1%.
As a state chartered bank, the Bank's primary regulator is the
Federal Deposit Insurance Corporation (FDIC). Accordingly, the Bank is
affected by the Financial Institutions Reform, Recovery and Enforcement
Act of 1989 (FIRREA) which was enacted in August 1989 and the Federal
Deposit Insurance Corporation Improvement Act (FDICIA) enacted in
December 1992. The Bank is subject to regulatory capital regulations
which provide for two capital requirements - a leverage requirement and
a risk-based capital requirement. The leverage requirement provides for
a minimum "core" capital consisting primarily of common stockholders'
equity of 3% of total adjusted assets for those institutions with the
most favorable composite regulatory rating. Under the terms
of the MOU, the Bank is required to maintain a leverage capital
ratio of at least 5.5% and refrain from declaring dividends without the
prior approval of the FDIC. The Company is also required to refrain
from declaring dividends without the Federal Reserve's prior
permission. The risk-based capital requirement of FIRREA provides for
minimum capital levels based on the risk weighted assets of the Bank.
The guidelines require banks to meet a minimum Tier 1 risk-based
capital ratio of 4.0% and a total risk-based capital ratio of 8.0% as
of December 31, 1993.
The Bank's leverage capital ratio is 5.94% at December 31, 1993.
As of December 31, 1993, the Bank's risk-based Tier 1 capital ratio is
7.63% and the total risk-based ratio is 11.02%. As of December
31, 1993 all the Bank's capital measurements exceeded regulatory
minimums.
At the present time, Merchants Bancshares, Inc. has the following
sources of equity capital available as approved by stockholders and
regulatory authority:
A. Common Stock ($0.01 par value)
Shares Authorized: 4,700,000
Shares Issued and Outstanding at
December 31, 1993: 4,242,927
(Includes stock dividend
issued December 11, 1992)
B. Preferred Stock, Class A
Non-voting ($0.01 par value)
Shares Authorized: 200,000
Shares Outstanding: -0-
C. Preferred Stock, Class B
Voting ($0.01 par value)
Shares Authorized: 1,500,000
Shares Outstanding: -0-
The Preferred Stock was authorized by shareholders at the Annual
Meeting held on May 15, 1984. While the Company has no present
intention to issue any Preferred Stock, the Board of Directors of the
Company may do so in the future for any lawful purpose. The two
preferred issues afford the ability to offer a broader range of
securities and thus increase the ability to structure capital
transactions on terms and conditions beneficial to the Company.
In May, 1986 the Company issued privately $12 million of its 10%
Senior Notes due in 1996 to institutional investors. The proceeds of
this note issue are in use for general corporate purposes. The current
balance outstanding of this issue is $7.4 million.
In April, 1990, the Bank issued privately $20 million in 9.81%
capital notes to institutional investors. These proceeds increased the
regulatory capital of the Company and are in use for general corporate
purposes.
