ITEM 1 - BUSINESS
Merchants Bancshares, Inc. (the "Company") is a bank holding company originally organized under Vermont law in 1983 for the purposes of owning all of the outstanding capital stock of Merchants Bank (the "Bank") and providing greater flexibility in helping the Bank achieve its business objectives. Merchants Bank, which is the Company's primary subsidiary, is a Vermont commercial bank with 33 full-service offices.
Merchants 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 Vermont state commercial bank charter, adopting its current name, Merchants Bank. Since 1971, the Bank has acquired by merger seven Vermont banking institutions, and acquired the deposits of two other Vermont banks. As of December 31, 1998 the Bank operated one of the largest commercial banking operations in Vermont, with deposits totaling $550 million, loans of $405 million, and total assets of $635 million, on a consolidated basis.
The Bank designs its products to provide customers a clear alternative to the local, regional and national financial service providers. The Bank's simplified LYNX product line was developed using the image of the lynx feline to connote speed and agility. Lynx also implies that a customer's accounts can be linked together to provide a comprehensive approach to their financial needs. The Bank's products have all been designed to be easy for the customer to understand and for the Bank's staff to deliver.
Merchants Trust Company (the "Trust Company"), a wholly owned subsidiary of the Bank, is a Vermont corporation chartered in 1870 for the purpose of offering fiduciary services including estate settlement, testamentary trust, guardianship, agency, intervivos trust and employee benefit plan services. The 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, 1998, the Trust Company had fiduciary responsibilities for assets having a market value in excess of $334 million, of which more than $207 million constituted managed assets. Total revenue of the Trust Company for 1998 was $1,910 thousand; total expenses were $1,118 thousand resulting in pretax net income of $877 thousand for the year. This net income is included in the consolidated tax return of its parent company, the Merchants Bank.
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, 1998, Merchants Properties, Inc. owned one development located in Enosburg, Vermont, consisting of a 24-unit low-income family rental housing project. Total assets of this Merchants Properties, Inc. at December 31, 1998 were $1.2 million.
RETAIL SERVICES
The Bank offers a variety of consumer financial products and services designed to satisfy the deposit and loan needs of its retail customers. The Bank's retail products include interest-bearing and noninterest-bearing checking accounts, money market accounts, club accounts, and short-term and long-term certificates of deposit. The Bank also offers customary check collection services, wire transfers, safe deposit box rentals, and automated teller machine (ATM) cards and services.
In 1997, the Bank extended its commitment to automation by introducing a debit card and by expanding its automated overdraft protection. Using the BankLYNX[SM] Check Card, in addition to standard ATM transactions, customers can pay for purchases at locations that accept VISA and can also use the card for standard ATM transactions. With expanded automated overdraft protection, customers can use a savings account and/or a home equity line of credit as overdraft protection for a checking account. The customer may choose either or both accounts to cover overdrafts.
During 1998 the Bank converted all of its passbook savings account to statement savings accounts and introduced its MoneyLYNX[TM] Money Market Account as its primary savings vehicle. MoneyLYNX[TM] pays interest at tiered levels beginning with the first dollar in the account, and charges fees only under limited circumstances. Passbook savings accounts and statement savings accounts are no longer offered as new accounts.
FreedomLYNX[R] checking is available with no service charges to customers who have, at least monthly, an automatic deposit to the account or an automatic debit from the account to pay a Merchants Bank loan and to customers who qualify for a BankLYNX[SM] Check Card or who use PhoneLYNX[SM] or PCLYNX[R] Bill Payment Services. The account pays interest on higher balances with a tiered rate structure. No minimum balance is required. During 1999, to celebrate its 150th anniversary, the Bank will drop all electronic qualifications for the FreedomLYNX[R] account and offer the account free for life. This offer will begin on February 15 and ends on May 28. All existing FreedomLYNX[R] accounts will be converted to Free for Life on February 15. The Bank continues to offer Bottom Line Checking, an account that provides for a flat service charge up to a maximum number of checks.
The Bank continues to offer ATM cards, debit cards, ATF (automatic transfer of funds) to cover overdrafts, EFT (electronic funds transfer) to automate transfers between accounts, PCLYNX[R] bill payment services and the PhoneLYNX[SM] telephone banking system. In 1999, the Bank plans to expand its automated services by introducing a retail home banking system through the Internet.
The Bank continues to provide strong customer service. Each of the Bank's 33 full-service branch offices is led by a branch president or manager who has consumer lending authority for the full range of retail credit services. Additionally, the Bank has 35 ATM locations throughout Vermont, and maintains a customer call center with expanded hours of operation.
COMMERCIAL SERVICES
Branch presidents are being given small business lending authority up to a prescribed limit. The eleven corporate banking officers and eight corporate banking administrators provide commercial credit services throughout the state of Vermont to customers requiring business credit above the prescribed authorities of the branch presidents.
In late 1998 the Bank developed a revitalized approach to small business markets in the state of Vermont. The retail branch network services approximately 75% of the commercial customers of the Bank. The Bank's Corporate Sales staff services the balance, primarily larger enterprises. Small business customers are being introduced to the Bank's new CommerceLYNX[TM] program. CommerceLYNX[TM] is a package of business banking services, including low cost electronic checking, investment accounts, streamlined credit application, and small business "Health Check". The Bank's philosophy of simplifying product offerings and minimizing fees has been applied to this program. Branch presidents are trained to offer this service, leading with the introduction of small business financing options and the value of utilizing the efficient transaction accounts. CommerceLYNX[TM] will be tested in 1999 in 10 pilot markets throughout the state. A dedicated Sales Manager will advance the program for more pervasive introduction throughout the state in the year 2000.
The Bank offers a variety of commercial checking accounts. Commercial Checking uses an earnings credit rate to help offset service charges. Small Business Checking is designed for the smaller business carrying lower balances and reduced account activity. Investment opportunities are available to businesses in the form of savings accounts and money market accounts. The Bank's cash management services provide additional investment opportunities through the Cash Sweep Program. Other cash management services include funds concentration. The Bank offers on-line banking services through PCLYNX[R] Corporate and PCLYNX[R] Small Business. These products allow businesses to view their account histories, order stop payments, transfer between accounts, transmit ACH batches and order both domestic and foreign wire transfers.
Other miscellaneous commercial banking services include night depository, coin and currency handling, lockbox and balance reporting services. Employee benefits management and related fiduciary services are available through the Trust Company.
TYPES OF CREDIT OFFERINGS
Consumer Loans: - ---------------
Financing is provided for new or used automobiles, boats, airplanes, recreational vehicles and new mobile homes. Home improvement and home equity lines of credit, Master Card credit cards and various collateral loans and personal loans are also available.
Real Estate Loans: - ------------------
Financing is available for one-to-four-family residential mortgages; multifamily mortgages; residential construction; mortgages for seasonal dwellings; and commercial real estate mortgages. The Bank offers both fixed rate and adjustable rate mortgages for residential properties. The Bank closed over 750 mortgages in 1998 with an average loan of approximately $76 thousand and a term of approximately 15 years. The process and the product have been streamlined to make the product easier to use and simpler for our 33 branch presidents to deliver.
Commercial Loans: - -----------------
Financing for business inventory, accounts receivable, fixed assets, lines of credit for working capital, community development, irrevocable letters of credit, business credit cards and U.S. Small Business Administration loans are available.
COMPETITION
The Bank competes for deposit and loan business with numerous other commercial and savings banks, savings and loan associations, credit unions, and other non-bank financial providers. As of December 31, 1998, there were more than 25 state and national banking institutions operating in Vermont. In addition, the number of other non-bank financial service providers competing in Vermont has increased dramatically. As a bank holding company and state-chartered bank, respectively, the Company and the Bank are subject to extensive regulation and supervision, including, in many cases, regulation that limits the type and scope of their activities. These non- financial institutions which compete with the Company and the Bank are not subject to such extensive regulation and supervision. Competition from nationwide banks, as well as local institutions continues to be aggressive
At year-end 1998, the Bank was one of the largest state chartered banks in Vermont, enjoying a strong competitive franchise within the state, with 33 banking offices as identified in Item 2
ITEM 2 - PROPERTIES
A. SCHEDULE OF BANKING OFFICES BY LOCATION
Merchants Bank operates thirty-three banking facilities as indicated in Schedule A below. Administrative offices and the operations data processing center are located at 275 Kennedy Drive, South Burlington, Vermont.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
The Bank is a counterclaim defendant in a litigation entitled "Pasquale and Vatsala Vescio, Counterclaim Plaintiffs v. The Merchants Bank, Counterclaim Defendant", now pending in the United States Bankruptcy Court for the District of Vermont.
In this litigation, the Vescios have made a number of "lender liability" claims dealing with a commercial development known as Brattleboro West in Brattleboro, Vermont. The pending litigation arose out of a suit to foreclose on several real estate mortgages and personal property originally delivered to the Bank as collateral by the Vescios in connection with the financing of a supermarket in the Brattleboro West project and various other projects.
Among other things, the Vescios have alleged that the Bank or its representatives violated supposed oral promises in connection with the origination and funding of the financing, and have claimed that the Bank is liable to them for damages based on the Bank's supposed "control" of the project and its alleged breach of covenants of "good faith" which the plaintiffs believe are to be implied from the loan documents. In addition, the plaintiffs have contended that the Bank breached a duty of care they believe it owed to them, and have claimed that the Bank should not have exercised its contract rights when the loan went into default, but should have worked out the default in a way that was more favorable to the borrowers. Trial concluded in United States Bankruptcy Court in November 1998. Although it is not possible at this stage to predict the outcome of this litigation, the Bank believes that it has meritorious defenses to the plaintiffs' allegations. The Bank intends to vigorously defend itself against these claims.
The Company, the Bank, the Trust Company (the "Companies") and certain of their directors are defendants in a lawsuit filed in November of 1994 (the "Vermont Proceedings"). The Vermont Proceedings arose from certain investments managed for Trust company customers and placed in the Piper Jaffray Institutional Government Income Portfolio (the "Portfolio"). In December of 1994, the Companies made payments to the Trust Company customers in amounts that the Companies believed reimbursed those customers fully for Portfolio losses. The United States District Court for the District of Vermont has dismissed the Plaintiff's claims in the Vermont Proceedings with prejudice, as moot, and ordered payment of approximately $99,000 in attorney's fees. The Plaintiff and his attorneys appealed those District Court orders to the Second Circuit Court of Appeals, and the Companies appealed on certain limited issues. By Order dated January 28, 1999 the Second Circuit Court affirmed those District Court orders in all material respects and remanded the case to the District Court with instructions to clarify whether the dismissal of the claims as moot was to be with prejudice. Still pending before the Second Circuit is a separate appeal from the District Court's denial of Plaintiff's requests for sanctions and other relief based on asserted improprieties in the defense of the litigation. The Companies believe the Plaintiff's assertions in that regard are groundless and will continue to seek denial of Plaintiff's requests.
The Companies have separately pursued claims against others on account of the losses suffered as a result of the investments in the Portfolio. Claims against Piper Jaffray Companies, Inc. were joined with the claims of others in a class action in the United States District Court for the District of Minnesota (the "Minnesota Proceedings"). The Minnesota Proceedings were settled by the parties and in February of 1997 the District Court ordered the net share of the settlement proceeds attributable to the Trust Company's investments to be paid to the Trust Company, starting approximately 60 days after the Court's order becomes final, except to the extent, if at all, any other court with jurisdiction has sooner given leave for some or all of those payments to be deposited with such other court pursuant to applicable rules. The attorneys representing the Plaintiff in the Vermont Proceedings and also representing, in the Minnesota Proceedings, the beneficiaries of four other Trust Company accounts, appealed that order to the Eighth Circuit Court of Appeals. By Per Curiam decision filed July 25, 1998, the Eighth Circuit denied that appeal. The attorneys for the Plaintiffs have filed a petition for certiorari to the United States Supreme Court, which has not yet acted upon it. The same attorneys also have announced an intention to initiate separate proceedings to seek to intercept at least a portion of any payments coming from the Minnesota Proceedings, in order to seek to deprive the Companies of at least a portion of the reimbursement that otherwise could be available. Any recovery by the Companies from the Minnesota Proceedings is subject to the terms of an agreement between the Companies and their insurance carrier, which reimbursed the Companies, in part, for the December, 1994 payments.
The Company and certain of its subsidiaries have been named as defendants in various legal proceedings arising from their normal business activities. Although the amount of any ultimate liability with respect to such proceedings cannot be determined, in the opinion of management, based upon the opinion of counsel on the outcome of such proceedings, any such liability will not have a material effect on the consolidated financial position of the Company and its subsidiaries.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of calendar year 1998 no matters were submitted to a vote of security holders through a solicitation of proxies or otherwise.
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is traded on the over-the-counter market and the price is quoted on the NASDAQ National Market Stock Exchange under the trading symbol MBVT. Quarterly stock prices during the last eight quarters are as indicated below based upon quotations as provided by the National Association of Securities Dealers, Inc. Prices of transactions between private parties may vary from the ranges quoted below.
As of February 23, 1999 the Company had 1,260 registered shareholders. The Company declared and distributed dividends totaling $0.71 per share during 1998. In January 1999 the Company declared a dividend of $0.19 per share. Future dividends will depend upon the financial condition and earnings of the Company and its subsidiaries, their need for funds and other factors, including applicable government regulations.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
The supplementary financial data presented in the following table 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 Management's Discussion and Analysis of Financial Condition and Results of Operations and with the year-end audited consolidated financial statements as contained in the 1998 Annual Report to Shareholders, a copy of which is attached as an addendum to this Form 10-K.
Merchants Bancshares, Inc. Five Year Summary of Operations (Not Covered by Report of Independent Public Accountants)
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RE- SULTS OF OPERATIONS
Please refer to pages 33-49 for Management's Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated balance sheets of Merchants Bancshares, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998, together with the related notes and the opinion of Arthur Andersen LLP, independent public accountants, all as contained on pages 3 through 32 of the Company's 1998 Annual Report to Shareholders on Form 10-K, are incorporated herein by reference.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
Part III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Reference is hereby made to pages 3-5, pages 8-10, page 13 and page 15 of the Company's Proxy Statement to Shareholders dated March 18, 1999, wherein pursuant to Regulation 14 A information concerning the above subjects (Items 10 through 13) is incorporated by reference.
Pursuant to Rule 12b-23, definitive copies of the Proxy Statement will be filed within 120 days subsequent to the end of the Company's fiscal year covered by Form 10-K.
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(1) The following consolidated financial statements, as included in the 1998 Annual Report to Shareholders, are incorporated herein by reference:
Consolidated Balance Sheets, December 31, 1998 and December 31, 1997.
Consolidated Statements of Operations for years ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Changes in Stockholders' Equity for years ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements, December 31, 1998.
(2) The following exhibits are either filed or attached as part of this report, or are incorporated herein by reference.
Exhibit Description - -------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit B to Pre-Effective Amendment No. 1 to Company's Definitive Proxy Statement for the Annual Meeting of the Stockholders of the Company, filed on April 25, 1987)
3.2 Amended By-Laws of the Company (Incorporated by reference to Exhibit C to Company's Definitive Proxy Statement for the Annual Meeting of the Stockholders of the Company, filed on April 25, 1987).
4 Instruments defining the rights of security holders, including indentures:
4.1 Specimen of the Company's Common Stock Certificate (Incorporated by Reference to Exhibit 7 to the Company's Registration Statement on Form S-14 (Registration Number 2- 86108) filed on August 22, 1983)
4.2 Description of the rights of holders of the Company's Common Stock (appearing on page 9 of the Company's Registration Statement on Form S-14 (Registration No. 2-86108) filed on August 22, 1983)
10.1 Merchants Bancshares, Inc. Dividend Reinvestment and Stock Purchase Plan (Incorporated by reference to Exhibit 4.1 to Company's Registration Statement on Form S-3 (Registration No. 333-20375) filed on January 22, 1997)
10.2 401(k) Employee Stock Ownership Plan of the Company, dated January 1, 1990, as amended (Incorporated by reference to Company's Registration Statement on Form S-8 (Registration Number 33-3274) filed on November 16, 1989)
10.3 Amended and Restated Merchants Bank Pension Plan dated as of January 1, 1994 (Incorporated by Reference to Exhibit 10.6 to Post-Effective Amendment Number 1 to Company's Registration Statement on Form S-8 (Registration Number 333-18845) filed on December 26, 1996)
10.5 Employment Agreement dated as of January 1, 1997, by and between the Company, Merchants Bank and Joseph L. Boutin (Incorporated by reference to the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 1996)
10.7 Employment Agreement dated as of January 1, 1997, by and between Merchants Bank and Michael R. Tuttle (Incorporated by reference to the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 1996)
10.9 Employment Agreement dated as of January 1, 1997, by and between Merchants Bank and Thomas R. Havers (Incorporated by reference to the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 1996)
10.11 Employment Agreement dated as of January 1, 1997, by and between Merchants Bank and Thomas S. Leavitt (Incorporated by reference to the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 1996)
10.12 Employment Agreement, dated as of January 1, 1998 by and between Merchants Bank and Janet P. Spitler (Incorporated by reference to the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 1997)
10.13 Employment Agreement, dated as of January 1, 1997, by and between Merchants Bank and Merchants Trust Company and William R. Heaslip (Incorporated by reference to the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 1996).
10.14 The Merchants Bank Amended and Restated Deferred Compensation Plan for Directors (Incorporated by reference to the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 1997)
10.14.1 Trust Under the Merchants Bank Amended and Restated Deferred Compensation Plan for Directors (Incorporated by reference to the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 1997)
10.15 Agreement among the Merchants Bank and Kathryn T. Boardman, Thomas R. Havers and Susan D. Struble dated as of December 20, 1995 (Incorporated by reference to the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 1996).
10.15.1 Trust Under the Agreement among the Merchants Bank and Kathryn T. Boardman, Thomas R. Havers and Susan D. Struble dated as of December 20, 1995 (Incorporated by reference to the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 1996).
10.16 Agreement between the Merchants Bank and Dudley H. Davis dated December 20, 1995 (Incorporated by reference to the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 1996).
10.16.1 Fixed Trust under Agreement between the Merchants Bank and Dudley H. Davis dated December 20, 1995 (Incorporated by reference to the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 1996).
10.16.2 Variable Trust under Agreement between the Merchants Bank and Dudley H. Davis dated December 21, 1995 (Incorporated by reference to the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 1996).
11 Statement re: computation of per share earnings. See 1998 Annual Report to Shareholders Note 11.
13 1998 Annual Report to Shareholders
21 Subsidiaries of the Company
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
(3) Reports on Form 8-K: NONE
SIGNATURES
Pursuant to the requirement of Section 13 or 15 (d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on it's behalf by the undersigned, thereunto duly authorized.
Merchants Bancshares, Inc.
Date February 18, 1999 By /s/ Joseph L. Boutin ------------------------- --------------------------------- Joseph L. Boutin, President & CEO
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of MERCHANTS BANCSHARES, INC., and in the capacities and on the date as indicated.
By /s/ Joseph L. Boutin By /s/ Raymond C. Pecor, Jr. ----------------------- --------------------------------- Joseph L. Boutin, Director, Raymond C. Pecor, Jr. Director President & CEO of the Company Chairman of the Board of and the Bank Directors
By /s/ Peter A. Bouyea By /s/ Charles A. Davis ----------------------- --------------------------------- Peter A. Bouyea, Director Charles A. Davis, Director
By /s/ Robert A. Skiff By /s/ Jeffrey L. Davis ----------------------- --------------------------------- Robert A. Skiff, Director Jeffrey L. Davis, Director
By /s/ Michael G. Furlong By ----------------------- --------------------------------- Michael G. Furlong, Director Benjamin F. Schweyer, Director
By /s/ Janet P. Spitler By /s/ Leo O'Brien, Jr. ----------------------- --------------------------------- Janet P. Spitler, Treasurer Leo O'Brien, Jr., Director of the Company, Vice President, Controller, and Treasurer of the Bank
By /s/ Patrick S. Robins ----------------------- Patrick S. Robins, Director