-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CGPEJlhcuq/aAbtx7uqcLgZH36+MPeUceTzHQb7IvrwMHxDZAI/hhi+RtTdBGnf7 aZdiOhI/fJhVTGBSWGINlg== 0000910647-97-000078.txt : 19970326 0000910647-97-000078.hdr.sgml : 19970326 ACCESSION NUMBER: 0000910647-97-000078 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970325 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCHANTS BANCSHARES INC CENTRAL INDEX KEY: 0000726517 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 030287342 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-11595 FILM NUMBER: 97562480 BUSINESS ADDRESS: STREET 1: 123 CHURCH ST CITY: BURLINGTON STATE: VT ZIP: 05401 BUSINESS PHONE: 8026583400 MAIL ADDRESS: STREET 1: PO BOX 1009 CITY: BURLINGTON STATE: VT ZIP: 05401 10-K 1 BODY OF 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 0-11595 MERCHANTS BANCSHARES, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Incorporated in the State of Delaware Employer Identification No. 03-0287342 164 College St., Burlington, Vermont 05401 - --------------------------------------------------- ---------------------- (Address of principal executive office) (Zip Code) Registrants telephone number: (802) 658-3400 Securities registered pursuant to Section 12(b) of the Act: (Not Applicable) Securities registered pursuant to Section 12(g) of the Act: Title of Class: Common Stock (Par Value $.01 a share) Name of Exchange on which listed: NASDAQ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Contained herein [ ] Not contained herein The aggregate market value of the voting stock held by non-affiliates is $60,692,385 as computed using the average bid and asked prices of stock, as of February 21, 1997. The number of shares outstanding for each of the registrant's classes of common stock, as of February 21, 1997 is: Class: Common stock, par value $.01 per share Outstanding: 4,427,873 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended December 31, 1996 are incorporated herein by reference to Parts I and II. Portions of the Proxy Statement to Shareholders for the year ended December 31, 1996 are incorporated herein by reference to Part III. TABLE OF CONTENTS Page Independent Auditors' Report 2 Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statements of Changes in Stockholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 Summary of Unaudited Quarterly Financial Information 26 Five Year Selected Financial Data 30 Management's Discussion and Analysis of Financial Condition and Results of Operations 31 Form 10-K 37 Signatures 62 TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF MERCHANTS BANCSHARES, INC. We have audited the accompanying consolidated balance sheets of Merchants Bancshares, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Merchants Bancshares, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Boston, Massachusetts January 16, 1997 Merchants Bancshares, Inc. Consolidated Balance Sheets
At December 31, 1996 1995 - ---------------------------------------------------------------------------------------------- ASSETS: Cash and Due from Banks (Note 1) $ 29,726,308 $ 38,366,772 Trading Securities (at market value) (Notes 1 and 2) 500,000 500,000 Securities Available for Sale (Notes 1 and 2): Debt Securities 57,655,914 97,943,234 Marketable Equity Securities 230,017 309,508 Debt Securities Held to Maturity 86,903,743 0 - ---------------------------------------------------------------------------------------------- Total Investment Securities 144,789,674 98,252,742 - ---------------------------------------------------------------------------------------------- Loans (Notes 1 and 3) 387,232,761 379,930,413 Segregated Assets (Note 3) 0 69,793,604 Reserve for Possible Loan Losses (15,699,791) (16,234,481) - ---------------------------------------------------------------------------------------------- Net Loans 371,532,970 433,489,536 - ---------------------------------------------------------------------------------------------- Federal Home Loan Bank Stock 2,840,500 3,174,400 Premises and Equipment, Net (Notes 1 and 4) 13,791,388 12,454,708 Investments in Real Estate Limited Partnerships (Note 1) 2,499,095 3,141,245 Other Real Estate Owned, Net (Note 1) 1,924,530 7,772,067 Other Assets (Notes 5 and 6) 14,031,569 17,896,993 - ---------------------------------------------------------------------------------------------- Total Assets $ 581,636,034 $ 615,048,463 ============================================================================================== LIABILITIES: Deposits: Demand $ 80,576,424 $ 85,417,465 Savings, NOW and Money Market Accounts 263,881,654 278,241,601 Time Deposits Over $100,000 20,369,480 20,473,321 Other Time 143,451,954 160,381,588 - ---------------------------------------------------------------------------------------------- Total Deposits 508,279,512 544,513,975 Other Borrowed Funds (Note 7) 9,598,712 5,335,422 Other Liabilities (Note 5) 11,088,092 9,525,446 Debt (Note 8) 6,419,950 15,424,757 - ---------------------------------------------------------------------------------------------- Total Liabilities $ 535,386,266 $ 574,799,600 - ---------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 11) STOCKHOLDERS' EQUITY (Note 9): Preferred Stock Class A: $.01 par value, non-voting Shares Authorized: 200,000 Shares Outstanding: None $ 0 $ 0 Class B: $.01 par value, voting Shares Authorized: 1,500,000 Shares Outstanding: None 0 0 Common Stock, $.01 par value Shares Authorized: 4,700,000 in 1996 and 1995 Shares Issued: 4,434,620 in 1996 and 1995 44,346 44,346 Capital in Excess of Par Value 33,154,407 33,154,407 Retained Earnings 14,844,614 8,620,881 Treasury Stock (at Cost) 144,278 Shares in 1996 and 1995 (2,037,927) (2,037,927) Net Unrealized Appreciation of Investment Securities Available for Sale, Net of Taxes 244,328 467,156 - ---------------------------------------------------------------------------------------------- Total Stockholders' Equity 46,249,768 40,248,863 - ---------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 581,636,034 $ 615,048,463 ==============================================================================================
The accompanying notes are an integral part of these consolidated financial statements. Merchants Bancshares, Inc. Consolidated Statements of Operations
For the years ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------- INTEREST AND DIVIDEND INCOME: Interest and Fees on Loans $ 39,953,105 $ 46,067,109 $ 48,938,668 Interest and Dividends on Investments: U.S. Treasury and Agency Obligations 7,587,824 4,525,095 3,508,523 Other 463,061 722,539 872,267 - -------------------------------------------------------------------------------------------------------------- Total Interest and Dividend Income 48,003,990 51,314,743 53,319,458 - -------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Savings, NOW and Money Market Accounts 8,216,152 9,077,337 8,419,716 Time Deposits Over $100,000 1,396,197 1,432,520 1,335,775 Other Time 8,112,475 8,981,211 8,095,686 Other Borrowed Funds 344,702 256,439 495,997 Debt 602,477 3,254,128 4,029,479 - -------------------------------------------------------------------------------------------------------------- Total Interest Expense 18,672,003 23,001,635 22,376,653 - -------------------------------------------------------------------------------------------------------------- Net Interest Income 29,331,987 28,313,108 30,942,805 Provision for Possible Loan Losses (Note 3) 3,150,000 12,100,000 10,000,000 - -------------------------------------------------------------------------------------------------------------- Net Interest Income after Provision for Possible Loan Losses 26,181,987 16,213,108 20,942,805 - -------------------------------------------------------------------------------------------------------------- NON-INTEREST INCOME: Trust Department Income 1,493,275 1,796,138 1,729,376 Service Charges on Deposits 3,347,128 3,183,525 3,451,507 Merchant Discount Fees 1,696,387 1,861,313 2,123,526 Gains on Sale of Investment Securities, Net (Note 2) 33,483 351,771 72,884 Gain on Curtailment of Pension Plan (Note 5) 0 1,562,670 0 FDIC Assistance Received-Loss Sharing (Note 3) 406,595 2,950,840 6,248,802 Other 2,385,439 1,059,660 1,411,587 - -------------------------------------------------------------------------------------------------------------- Total Non-Interest Income 9,362,307 12,765,917 15,037,682 - -------------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSES: Salaries and Wages 8,222,050 10,728,741 10,664,411 Employee Benefits (Note 5) 1,790,795 2,705,164 2,531,980 Occupancy Expense 2,054,256 2,177,612 2,324,171 Equipment Expense 2,024,248 2,068,991 2,004,352 Losses on and Write-downs of Other Real Estate Owned 3,400,214 2,986,555 3,791,819 Equity in Losses of Real Estate Limited Partnerships 845,644 645,600 1,588,914 Trust Customers' Reimbursement, Net (Note 11) 0 0 3,246,100 Losses and Write-downs of Segregated Assets (Note 3) 406,595 2,950,840 6,248,802 Reengineering Expenses and Related Consultants' Fees (Note 10) 0 4,055,510 0 Other 8,745,228 8,286,836 9,312,413 - -------------------------------------------------------------------------------------------------------------- Total Non-Interest Expenses 27,489,030 36,605,849 41,712,962 - -------------------------------------------------------------------------------------------------------------- Income (Loss) Before Provision (Benefit) for Income Taxes 8,055,264 (7,626,824) (5,732,475) Provision (Benefit) for Income Taxes (Notes 1 and 6) 1,831,531 (3,784,885) (2,842,451) - -------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 6,223,733 $ (3,841,939) $ (2,890,024) ============================================================================================================== INCOME (LOSS) PER SHARE, based upon weighted average common shares outstanding of 4,290,342 in 1996, 4,269,231 in 1995, and 4,230,194 in 1994 (Note 9): $ 1.45 $ (0.90) $ (0.68) ==============================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. Merchants Bancshares, Inc. Consolidated Statements of Changes in Stockholders' Equity For Each of the Three Years in the Period Ended December 31, 1996
Net Unrealized Appreciation (Depreciation) Common Capital in of Investment Stock Excess of Retained Securities Treasury (Note 9) Par Value Earnings (Note 2) Stock Total - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1993 $ 42,429 $ 30,647,120 $ 15,352,844 $ (143,657) $ (178,730) $ 45,720,006 Net Loss -- -- (2,890,024) -- -- (2,890,024) Change in Net Unrealized Depreciation of Securities Available for Sale, Net of Tax -- -- -- (530,012) -- (530,012) - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 $ 42,429 $ 30,647,120 $ 12,462,820 $ (673,669) $ (178,730) $ 42,299,970 Net Loss -- -- (3,841,939) -- -- (3,841,939) Sale of Treasury Stock -- (44,598) -- -- 178,730 134,132 Purchase of Treasury Stock -- -- -- -- (2,037,927) (2,037,927) Issuance of Common Stock 1,917 2,551,885 -- -- -- 2,553,802 Change in Net Unrealized Appreciation (Depreciation) of Securities Available for Sale, Net of Tax -- -- -- 1,140,825 -- 1,140,825 - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 $ 44,346 $ 33,154,407 $ 8,620,881 $ 467,156 $ (2,037,927) $ 40,248,863 Net Income -- -- 6,223,733 -- -- 6,223,733 Change in Net Unrealized Appreciation (Depreciation) of Securities Available for Sale, Net of Tax -- -- -- (359,309) -- (359,309) Change in Net Unrealized Appreciation of Securities Transferred to the Held to Maturity Portfolio, Net of Tax -- -- -- 136,481 -- 136,481 - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 $ 44,346 $ 33,154,407 $ 14,844,614 $ 244,328 $ (2,037,927) $ 46,249,768 ============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. Merchants Bancshares, Inc. Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $ 6,223,733 $ (3,841,939) $ (2,890,024) Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities: Provision for Possible Loan Losses 3,150,000 12,100,000 10,000,000 Provision for Possible Losses on Other Real Estate Owned 2,494,758 1,365,011 2,388,469 Provision for Depreciation and Amortization 2,667,329 4,357,768 6,685,094 Prepaid Income Taxes (1,474,913) (692,726) (1,890,304) Net Gains on Sales of Investment Securities (33,483) (351,771) (72,884) Net Gains on Sales of Loans and Leases (505,422) (463,919) (218,510) Net Gains on Sales of Premises and Equipment (565,350) (222,895) 0 Net Gains on Sales of Other Real Estate Owned (327,647) 0 0 Equity in Losses of Real Estate Limited Partnerships 845,644 645,600 1,588,916 Changes in Assets and Liabilities: Decrease in Interest Receivable 935,703 1,099,212 40,651 Increase (Decrease) in Interest Payable (313,478) 170,331 347,000 (Increase) Decrease in Other Assets 7,004,634 8,810,236 (3,336,601) Increase (Decrease) in Other Liabilities (723,876) 1,567,069 (1,418,975) - -------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 19,377,632 24,541,977 11,222,832 - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from Sales of Investment Securities Available for Sale 42,521,602 50,377,072 682,030 Proceeds from Maturities of Investment Securities Available for Sale 16,000,000 59,000,000 0 Proceeds from Sales of Loans and Leases 19,575,786 35,573,702 48,911,562 Proceeds from Sales of FHLB Stock 333,900 3,681,800 0 Proceeds from Sales of Premises and Equipment 1,817,818 327,500 39,631 Proceeds from Sales of Other Real Estate Owned 6,143,639 8,377,527 5,684,332 Purchases of FHLB Stock 0 0 (1,282,500) Purchases of Available for Sale Investment Securities (105,928,484) (102,822,744) (10,014,063) Purchases of Held to Maturity Investment Securities 0 0 (10,098,437) Principal Repayments in Excess of (Less Than) Loans Originated 37,291,808 4,075,622 (2,272,774) Investments in Real Estate Limited Partnerships (110,727) 0 (273,742) Purchases of Premises and Equipment (4,687,458) (792,762) (2,258,284) Decrease in Net Investment in Leveraged Leases 0 0 41,731 - -------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Investing Activities 12,957,884 57,797,717 29,159,486 - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net Decrease in Deposits (36,234,463) (37,710,409) (37,085,500) Net Increase (Decrease) in Other Borrowed Funds 4,263,290 (12,959,312) 3,370,653 Principal Payments on Debt (9,004,807) (28,804,609) (2,404,056) Acquisition of Treasury Stock 0 (2,082,525) 0 Issuance of Common Stock 0 2,553,802 0 Sale of Treasury Stock 0 178,730 0 - -------------------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (40,975,980) (78,824,323) (36,118,903) - -------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents (8,640,464) 3,515,371 4,263,415 Cash and Cash Equivalents at Beginning of Year 38,366,772 34,851,401 30,587,986 - -------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 29,726,308 $ 38,366,772 $ 34,851,401 ==================================================================================================================== Total Interest Payments $ 18,985,481 $ 22,831,304 $ 22,029,653 Total Income Tax Payments $ 0 $ 0 $ 50,000 Transfer of loans to Other Real Estate Owned $ 2,814,578 $ 2,777,117 $ 7,899,401 Transfer of securities Available for Sale to Held to Maturity Portfolio $ 87,508,657 $ 0 $ 0
The accompanying notes are an integral part of these consolidated financial statements. Merchants Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of Merchants Bancshares, Inc. (the "Company") and its wholly owned subsidiaries, Merchants Bank (the "Bank") (including its wholly owned subsidiaries Merchants Trust Company, Queneska Capital Corp. and certain trusts) and Merchants Properties, Inc., after elimination of all material intercompany accounts and transactions. The Bank and the Merchants Trust Company offer a full range of deposit, loan, cash management and trust services to meet the financial needs of individual consumers, businesses and municipalities at 33 full-service banking locations throughout the State of Vermont. Use of Estimates in Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting periods. Operating results in the future could vary from the amounts derived from management's estimates and assumptions. Investment Securities The Company classifies certain of its investments in debt securities as held-to-maturity and measures the value of such investments at amortized cost if the Company has the positive intent and ability to hold such securities to maturity. Investments in debt securities that are not classified as held-to-maturity and equity securities that have readily determinable fair values are classified as trading securities or available-for-sale securities. Trading securities are investments purchased and held principally for the purpose of selling in the near term; available-for-sale securities are investments not classified as trading or held-to-maturity. Transfers from securities available for sale to securities held to maturity are recorded at the securities' fair values on the date of the transfer. Any net unrealized gains or losses continue to be reported as a separate component of stockholders' equity, on a net of tax basis as long as the securities are carried in the held to maturity portfolio, and are amortized over the estimated remaining life of the transferred securities as an adjustment to yield in a manner consistent with the amortization of premiums and discounts. Dividend and interest income, including amortization of premiums and discounts, is recorded in earnings for all categories of investment securities. Discounts and premiums related to debt securities are amortized using a method which approximates the level-yield method. The gain or loss recognized on the sale of an investment security is based upon the adjusted cost of the specific security. Management reviews all reductions in fair value below book value to determine whether the impairment is other than temporary. If the impairment is determined to be other than temporary in nature, the carrying value of the security is written down to the appropriate level by a charge to earnings. Loan Origination and Commitment Fees Loan origination and commitment fees and certain direct loan origination costs are deferred and amortized over the lives of the related loans. Net deferred origination fees were $946,723 and $956,333 at December 31, 1996 and 1995, respectively. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is provided using straight-line and accelerated methods at rates that depreciate the original cost of the premises and equipment over their estimated useful lives. Expenditures for maintenance, repairs and renewals of minor items are generally charged to expense as incurred. Gains and Losses on Sales of Loans Gains and losses on sales of loans are recognized based upon the difference between the selling price and the carrying amount of loans sold. Gains and losses are adjusted for excess servicing rights resulting from the sale of certain loans with servicing rights retained. Excess servicing rights are recorded at the net present value of estimated future servicing revenue when they are greater than normal servicing fees. Deferred excess servicing is amortized over the period of estimated net servicing income. Origination fees collected, net of commitment fees paid in connection with the sales of loans and net of the direct cost of loan originations, are recognized at the time such loans are sold. Income Taxes Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Low income housing tax credits are recognized in the year in which they are earned. Investments in Real Estate Limited Partnerships The Bank has investments in various real estate limited partnerships that acquire, develop, own and operate low and moderate income housing. The Bank's ownership interest in these limited partnerships varies from 35% to 100% as of December 31, 1996. The Bank consolidates the financial statements of the limited partnership in which the Company is the general partner and is actively involved in management and has a controlling interest. The Bank accounts for its investments in limited partnerships where the Bank does not actively participate and have a controlling interest under the equity method of accounting. Management periodically reviews the results of operations of the various real estate limited partnerships to determine if the partnerships generate sufficient operating cash flow to fund their current obligations. In addition, management reviews the current value of the underlying property compared to the outstanding debt obligations. If it is determined that the investment suffers from a permanent impairment, the carrying value is written down to the estimated realizable value. The Bank recognized losses of $97,000 and $546,000 due to the impairment of an investment in a real estate limited partnership in 1996 and 1994, respectively. Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand, amounts due from banks and federal funds sold in the accompanying consolidated statements of cash flows. At December 31, 1996 and 1995, cash and cash equivalents included $4,704,000 and $5,187,000, respectively, held to satisfy the reserve requirements of the Federal Reserve Bank. Other Real Estate Owned Collateral acquired through foreclosure is recorded at the lower of cost or fair value, less estimated costs to sell, at the time of acquisition. A valuation allowance is established for the estimated costs to sell and is charged to expense. Subsequent changes in the fair value of other real estate owned are reflected in the valuation allowance and charged or credited to expense. Net operating income or expense related to foreclosed property is included in non-interest expense in the accompanying consolidated statements of operations. There are inherent uncertainties in the assumptions with respect to the estimated fair value of other real estate owned. Because of these inherent uncertainties, the amount ultimately realized on real estate owned may differ from the amounts reflected in the consolidated financial statements. The Bank recognized losses due to additions to the valuation allowance of $2,441,547, $1,361,000 and $2,392,000 during 1996, 1995 and 1994, respectively. Mortgage Servicing Rights In May 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights", as amended by SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 122"). This statement requires a banking enterprise that sells or securitizes loans and retains the mortgage servicing rights, to allocate the total cost of the loans to the mortgage servicing rights and the loans based on their relative fair value if it is practicable to estimate those fair values beginning on January 1, 1996. Mortgage servicing rights are recognized as a separate asset and amortized in proportion to, and over the period of, estimated net servicing income. In addition, these servicing rights are evaluated by management for impairment based on their fair value. The adoption of this standard by the Bank on January 1, 1996 did not have a significant effect on the consolidated results of operations for 1996. Stock-based Compensation Plans The Company applies Accounting Principles Bulletin (APB) No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock-based compensation plans. Accordingly, no accounting recognition is given to stock options granted at fair market value until they are exercised. Upon exercise, net proceeds, including tax benefits realized, are credited to equity. Earnings Per Share Earnings per share have been computed based on the weighted average number of shares outstanding during the period. Because the effect of common stock equivalents would be immaterial, they have been excluded from the calculation of weighted average shares. Intangible Assets Premiums paid for the purchase of core deposits are recorded as other assets and amortized on a straight-line method over the estimated period of time over which value is realized. Management reviews the value of the intangible asset by comparing purchased deposit levels to the current level of acquired deposits in the branches purchased. If any significant deposit runoff has occurred and is determined to be permanent in nature, the asset is written down accordingly. Accounting for Impairment of Long-Lived Assets In March 1995 the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of." This statement requires a review for impairment of long-lived assets and certain identifiable intangibles to be held and used by an entity when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Bank adopted the statement, which did not have a significant effect on earnings, on January 1, 1996. If the sum of the undiscounted future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of the impairment loss is determined by comparing the carrying amount of the asset to its fair value. For certain long-lived assets to be disposed of, the cost to sell the asset is deducted from the asset's fair value in determining the impairment loss, if any. This statement does not apply to financial instruments, core deposit intangibles, mortgage and other servicing rights, or deferred tax assets. Reclassification Certain amounts in 1994 and 1995 consolidated financial statements have been reclassified to be consistent with the 1996 presentation. (2) INVESTMENT SECURITIES Investments in debt securities are classified as trading, available for sale or held to maturity as of December 31, 1996 and 1995. The amortized cost and fair values of the debt securities classified as available for sale and held to maturity as of December 31, 1996 and 1995 are as follows: SECURITIES AVAILABLE FOR SALE:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value - ------------------------------------------------------------------------------------------ 1996 U.S. Treasury Obligations $18,146,244 $ 13,607 $ 35,993 $18,123,858 U.S. Agency Obligations 23,098,045 177,893 0 23,275,938 Mortgage-backed Securities 16,218,220 97,434 59,536 16,256,118 -------------------------------------------------------- $57,462,509 $288,934 $ 95,529 $57,655,914 ======================================================== Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------------------------------------------------------------------------------- 1995 U.S. Treasury Obligations $49,644,093 $219,355 $ 11,835 $49,851,613 Mortgage-backed Securities 47,561,580 592,975 62,934 48,091,621 -------------------------------------------------------- $97,205,673 $812,330 $ 74,769 $97,943,234 ========================================================
SECURITIES HELD TO MATURITY:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------------------------------------------------------------------------------- 1996 U.S. Agency Securities $ 2,502,922 $ 0 $ 51,360 $ 2,451,562 Mortgage-backed Securities 84,400,821 22,852 870,928 83,552,745 -------------------------------------------------------- $86,903,743 $ 22,852 $922,288 $86,004,307 ========================================================
There were no securities classified as held to maturity as of December 31, 1995. Marketable equity securities are classified as available for sale at December 31, 1996 and 1995 and are stated at their fair value of $230,017 and $309,508, respectively. Gross unrealized losses on equity securities were $30,000 at December 31, 1996 and 1995. The fair value of securities held for trading was $500,000 at December 31, 1996 and 1995. There were no unrealized gains or losses related to securities held for trading at December 31, 1996 or 1995. The contractual maturities of all debt securities held at December 31, 1996 (except for mortgage-backed securities which are presented based on estimated duration) are as follows:
Amortized Fair Cost Value ------------------------------------------------------------------------ U.S. Treasuries and Agencies: Due in one year or less $ 9,246,769 $ 9,236,826 Due after one year through five years 34,500,442 34,614,532 Mortgage-backed securities: Due within five years 40,878,015 40,752,944 Due after five years through ten years 28,395,010 28,099,961 Due after ten years 31,346,011 30,955,958 ----------------------------- $144,366,247 $143,660,221 =============================
Proceeds from sales of available for sale debt securities, including principal repayments on mortgage-backed securities, were $42,521,602 and $50,377,072 during 1996 and 1995, respectively. Gross gains of $119,486, $659,994 and $91,780 and gross losses of $86,003, $308,223 and $18,896, were realized from sales of debt and equity securities in 1996, 1995 and 1994, respectively. On November 29, 1996, $87,508,657 of securities available for sale were transferred to the held to maturity portfolio. Net unrealized gains of $202,462 associated with these securities are being amortized over the remaining lives of the individual securities. At December 31, 1996, securities with a face value of $20,819,868 were pledged to secure federal funds lines, public deposits, securities sold under agreements to repurchase and for other purposes required by law. (3) LOANS The composition of the loan portfolio at December 31, 1996 and 1995 (including Segregated Assets in 1995) is as follows:
1996 1995 - -------------------------------------------------------------------------------------- Commercial, Financial and Agricultural $ 61,091,132 $ 76,925,602 Real Estate - Commercial 182,199,150 207,235,189 Real Estate - Residential 128,576,970 148,611,053 Installment Loans to Individuals 14,831,421 16,559,626 All Other Loans (including overdrafts) 534,088 392,547 - -------------------------------------------------------------------------------------- $387,232,761 $449,724,017 ======================================================================================
In connection with an acquisition, the Bank received financial assistance (loss sharing) with respect to certain acquired loans charged off by the Bank during the three-year period ended June 30, 1996. The FDIC reimbursed the Bank, on a quarterly basis, 80% of net charge-offs and certain expenses related to loans subject to loss sharing aggregating $41.1 million. Charge-offs, net of recoveries, and eligible expenses on Segregated Assets aggregated $2,210,845 and $3,688,550 for 1996 and 1995. The Bank received $406,595, $2,950,840 and $6,248,802 from the FDIC for eligible charge-offs, net of recoveries and eligible expenses, related to 1996, 1995 and 1994, respectively, in accordance with the loss sharing arrangement. Prior to June 30, 1996, acquired loans subject to loss sharing were classified as Segregated Assets in the accompanying consolidated balance sheet. After June 30, 1996, acquired loans are no longer subject to loss sharing and are no longer classified as Segregated Assets. The composition of the Segregated Assets portfolio at December 31, 1995 is as follows: --------------------------------------------------------------- Commercial, Financial and Agricultural $11,793,297 Real Estate - Commercial 28,625,693 Real Estate - Residential 29,352,150 Installment Loans to Individuals 22,464 --------------------------------------------------------------- $69,793,604 ===============================================================
There has been an insignificant effect on the Bank's noninterest expenses for 1996, 1995 and 1994 as a result of expenses and charge-offs relating to the Segregated Assets. The Bank's share of the charge-offs was charged to the allowance for losses on the Segregated Assets (such allowance being a component of the Bank's overall allowance for loan losses), which was established in conjunction with the acquisition. Any future losses on these loans will be charged to the Bank's allowance for loan losses. The Bank continues to be obligated to compensate the FDIC for a portion of recoveries received through June, 1998 on loans previously charged off and on which the Bank received reimbursement from the FDIC. The Company originates primarily residential and commercial real estate loans and a lesser amount of commercial and installment loans to customers throughout the state of Vermont. In order to minimize its interest rate and credit risk, the Company sells certain residential loans to the secondary market and to financial investors such as insurance companies and pension funds located in other states. There were no loans held for sale at December 31, 1996; loans held for sale at December 31, 1995 aggregated $7,985,000. Substantially all of the Company's loan portfolio is based in the state of Vermont. There are no known significant industry concentrations in the loan portfolio. Loans serviced for others at December 31, 1996 and 1995 amounted to $313,063,620 and $322,292,294, respectively. The reserve for possible loan losses is based on management's estimate of the amount required to reflect the risks in the loan portfolio, based on circumstances and conditions known or anticipated at each reporting date. There are inherent uncertainties with respect to the final outcome of certain of the Bank's loans and nonperforming assets. Because of these inherent uncertainties, actual losses may differ from the amounts reflected in these consolidated financial statements. Factors considered in evaluating the adequacy of the reserve include previous loss experience, current economic conditions and their effect on the borrowers, the performance of individual loans in relation to contract terms and estimated fair values of properties to be foreclosed. Losses are charged against the reserve for loan losses when management believes that the collectibility of principal is doubtful. Key elements of the above estimates, including those used in independent appraisals, are dependent upon the economic conditions prevailing at the time of the estimates. Accordingly, uncertainty exists as to the final outcome of certain of the valuation judgments as a result of the difficult and unpredictable conditions in the region. The inherent uncertainties in the assumptions relative to the projected sales prices or rental rates may result in the ultimate realization of amounts on certain loans that are different from the amounts reflected in these consolidated financial statements. An analysis of the reserve for possible loan losses for the years ended December 31, 1996 and 1995 is as follows:
1996 1995 - ------------------------------------------------------------------------- Balance, Beginning of Year $16,234,481 $19,928,817 Provision for Possible Loan Losses 3,150,000 12,100,000 Loans Charged Off (5,135,150) (18,360,790) Recoveries 1,450,460 2,566,454 - ------------------------------------------------------------------------- Balance, End of Year $15,699,791 $16,234,481 =========================================================================
Loans charged off include $157,620 and $749,103 and recoveries include $247,472 and $145,380 related to the Bank's portion of charge-offs and recoveries on Segregated Assets for 1996 and 1995, respectively. Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended. Under the standard, the allowance for possible loan losses related to loans that are identified as impaired is based on discounted cash flows using the loan's effective interest rate or the fair value of the collateral for certain collateral dependent loans. The Company has determined that commercial and commercial real estate loans recognized by the Company as nonaccrual, loans past due over 90 days and still accruing, restructured troubled debt and certain internally classified loans are generally equivalent to "impaired loans." Total impaired loans at December 31, 1996 and 1995 with a related allowance were $8,442,892 and $29,629,572, respectively, and the specific allowance associated with such loans was $875,000 and $2,724,371, respectively. Interest payments on impaired loans are generally recorded as principal reductions if the remaining loan balance is not expected to be paid in full. If full collection of the remaining loan balance is expected, payments are recognized as interest income on a cash basis. During 1996 and 1995 the Company recorded interest income on impaired loans of approximately $505,000 and $949,000, respectively. The average balance of impaired loans was $16,439,760 in 1996 and $35,280,318 in 1995. Nonperforming assets at December 31, 1996 and 1995 were as follows:
1996 1995 ---------- -------------------------------------- Segregated Total Loans Assets Total - ------------------------------------------------------------------------------------------------------------- Nonaccrual loans $4,091,058 $19,580,747 $6,035,520 $25,616,267 Restructured Loans 2,403,344 1,364,018 65,756 1,429,774 Loans Past Due 90 Days or More and Still Accruing 216,537 236,817 0 236,817 - ------------------------------------------------------------------------------------------------------------- Total Nonperforming Loans $6,710,939 $21,181,582 $6,101,276 $27,282,858 Other Real Estate Owned, Net 1,924,530 7,224,395 547,672 7,772,067 - ------------------------------------------------------------------------------------------------------------- Total Nonperforming Assets $8,635,469 $28,405,977 $6,648,948 $35,054,925 =============================================================================================================
Included in nonaccrual loans are $14,520 and $8,362,454 of loans whose terms have been substantially modified in troubled restructurings at December 31, 1996 and 1995, respectively. Additionally, the Bank had $2,403,344 and $1,429,774 of restructured loans that were performing in accordance with the modified agreement at December 31, 1996 and 1995, respectively. Other Real Estate Owned is shown net of valuation reserves of $2,716,789 and $2,430,301 at December 31, 1996 and 1995. The Bank's policy is to discontinue the accrual of interest and reverse uncollected interest receivable on loans when scheduled payments become contractually past due in excess of 90 days or, in the judgment of management, the ultimate collectibility of principal or interest becomes doubtful. The amount of interest which was not earned but which would have been earned had the nonaccrual and restructured loans performed in accordance with their original terms and conditions was approximately $1,493,000, $3,466,000 and $1,859,000 in 1996, 1995 and 1994, respectively. During 1996, the Bank consummated three transactions involving sales of loans, including certain loans classified as impaired. The aggregate net book value of loans sold was approximately $13,224,000, resulting in a total loss on sales of $556,000, which was charged against the allowance for possible loan losses. These loans were sold without recourse. An analysis of loans in excess of $60,000 to directors and executive officers for the year ended December 31, 1996 is as follows: Balance, December 31, 1995 $12,574,659 Additions 273,791 Repayments (1,007,507) ----------- Balance, December 31, 1996 $11,840,943 ===========
It is the policy of the Bank to grant such loans on substantially the same terms, including interest rates and collateral, as those prevailing for comparable lending transactions with other persons. (4) PREMISES AND EQUIPMENT The components of premises and equipment included in the accompanying consolidated balance sheets are as follows:
1996 1995 - ---------------------------------------------------------------------------------- Land and Buildings $12,139,121 $14,461,616 Leasehold Improvements 962,493 867,775 Furniture and Equipment 13,860,467 11,373,256 - ---------------------------------------------------------------------------------- 26,962,081 26,702,647 Less: Accumulated Depreciation and Amortization 13,237,283 14,247,939 - ---------------------------------------------------------------------------------- $13,724,798 $12,454,708 ==================================================================================
Depreciation and amortization expense amounted to $1,679,057, $1,932,074 and $1,786,213 in 1996, 1995 and 1994, respectively. The Bank leases certain properties for branch purposes. Rent expense on these properties totaled $240,075, $213,096 and $214,891 for the years ended December 31, 1996, 1995 and 1994, respectively. Minimum lease payments for these properties subsequent to December 31, 1996 are as follows: 1997 - $235,667; 1998 - - $217,663; 1999 - $220,176; 2000 - $222,764; 2001 - $225,430 and $156,079 thereafter. During 1996, the Bank began a capital improvement project to upgrade its branch facilities and to make further investments in technology. At December 31, 1996, approximately $4,100,000 has been capitalized and will be depreciated over the estimated useful lives of the individual improvements once they are placed in service. Additionally, the Bank retired assets with a total net book value of $601,582 in conjunction with these projects, which amount was charged against current earnings. (5) EMPLOYEE BENEFIT PLANS Pension Plan Prior to January 1995, the Company maintained a noncontributory defined benefit plan covering all eligible employees. The plan was a final average pay plan with benefits based on the average salary rates over the five consecutive plan years out of the last ten consecutive plan years that produce the highest average. It was the Company's policy to fund the cost of benefits expected to accrue during the year plus amortization of any unfunded accrued liability that had accumulated prior to the valuation date based on IRS regulations for funding. During 1994, the Company made the decision to freeze the plan beginning on January 1, 1995. During 1995, the plan was curtailed. Accordingly, all accrued benefits were fully vested and no additional years of service or age will be accrued. As a result of the curtailment, the Bank recognized a gain in the amount of $1.56 million in 1995. The plan's funded status and amounts recognized in the accompanying consolidated balance sheets and statements of operations as of December 31, 1996 and 1995 are as follows:
1996 1995 - --------------------------------------------------------------------------------------- Actuarial Present Value of Benefit Obligation: Vested Benefit Obligation $5,180,459 $5,771,869 - --------------------------------------------------------------------------------------- Accumulated Benefit Obligation 5,180,459 5,771,869 - --------------------------------------------------------------------------------------- Projected Benefit Obligation For Service Rendered Through December 31, 1994 5,180,459 5,771,869 Plan Assets 6,778,159 6,835,057 - --------------------------------------------------------------------------------------- Excess of Plan Assets Over Projected Benefit Obligation 1,597,700 1,063,188 Unrecognized Net Asset at January 1, 1987 Being Amortized over 13.4 Years (98,424) (132,513) Unrecognized Net Loss (Gain) (368,941) 34,114 - --------------------------------------------------------------------------------------- Prepaid Pension Costs Included In Other Assets $1,130,335 $ 964,789 =======================================================================================
- --------------------------------------------------------------------------------------------- 1996 1995 1994 - ---------------------------------------------------------------------------------------------- Net Pension Expense (Income) Included the Following Components: Service Cost - Earned During the Year $ 0 $ 0 $316,681 Interest Cost on Projected Benefit Obligation 402,161 393,901 486,993 Actual Return on Plan Assets (691,781) (815,566) 100,004 Net Amortization and Deferral 119,074 172,099 (660,098) - ---------------------------------------------------------------------------------------------- Total $(170,546) $(249,566) $243,580 ==============================================================================================
The actuarial present value of the projected benefit obligation was determined using a weighted average discount rate of 7.6%, 7.5% and 8.5% as of December 31, 1996, 1995 and 1994, respectively. For 1996 and 1995 there was no assumed rate of increase in future compensation due to the freeze on plan benefits. The rate of increase of future compensation levels for 1994 (prior to the curtailment of the plan) was 4% for the period 1994-1995, 4.5% for the period 1996-1997 and 5% thereafter. The expected long-term rate of return on assets used was 9% in 1996 and 8% in 1995 and 1994. Employee Stock Ownership Plan/ 401(k) Plan Under the terms of the Company's Employee Stock Ownership Plan (ESOP), eligible employees are entitled to contribute up to 15% of their compensation to the ESOP, and the Company contributes a percentage of the amounts contributed by the employees, as authorized by the Company's Board of Directors. The Company contributed approximately 120% and 127%, respectively, of the amounts contributed by the employees (200% of up to 4.5% of individual employee compensation in 1995) in 1996 and 1995 and approximately 75% of the amounts contributed by employees (82% of up to 4.5% of individual employee compensation) in 1994. Substantially all contributions to the ESOP are funded with cash and are used to purchase the Company's common stock. Deferred Compensation Plans Through December 1995, the Bank maintained an Executive Salary Continuation Plan and a Deferred Compensation Plan for Directors. In December 1995, the Bank and participants in its Executive Salary Continuation Plan and in the Fixed Growth Program of its Deferred Compensation Plan for Directors agreed to amend or terminate the existing plans. In satisfaction of all liabilities under those plans, the Bank agreed to make payments to, or credits for, the participants. Pursuant to these agreements, the Bank established several new plans (the New Plans), to which it made lump sum payments. The New Plans used those payments, in part, to purchase newly issued common stock of the Company at its market price. The purchases have been accounted for as treasury stock transactions in the Company's consolidated financial statements. The portions of the payments made to the New Plans that were not invested in the common stock of the Company are included as investments in the consolidated financial statements and are classified as trading. In conjunction with the amendment and termination of the existing plans, the Bank either sold or surrendered certain life insurance policies and used the proceeds as a partial source to fund the lump sum payments made to the New Plans. As a result of these transactions, the Bank recognized increased earnings of $673,000 in 1995. To the extent the obligations of the Company under the New Plans are based on investments by the New Plans in other than shares of the Company, the investments will be revalued at each reporting date with a corresponding adjustment to compensation expense. In addition, the obligation related to certain treasury shares, originally purchased for $200,000, will be revalued at each reporting date, with a corresponding adjustment to compensation expense. The Company continues to maintain the floating growth (savings) program of the deferred compensation plan for Directors. Benefits accrue based on the Directors' fees deferred and a monthly allowance for interest at a rate that is fixed from time to time at the discretion of the Board of Directors. The benefits under the Savings Program of the Deferred Compensation Plan for Directors and the New Plans are generally payable starting on the January 2 following a participant's 65th birthday or earlier death, and will be distributed to the participant (or upon the participant's death, to the participant's designated beneficiary) in accordance with the Plan. Phantom Stock Plan The Company maintained a Phantom Stock Plan, wherein certain key officers of the Bank were entitled to receive an annual award of phantom shares of stock for up to five consecutive years. All such awards were granted by June 30, 1993. In December 1995, the Bank entered into agreements with certain participants in the Bank's Phantom Stock Plan (the Plan). The Bank agreed to pay, and those participants agreed to accept, lump sum amounts in full satisfaction of the Bank's obligations under the Plan. A summary of expenses relating to the Company's various employee benefit plans for each of the three years in the period ended December 31, 1996 is as follows:
1996 1995 1994 - ----------------------------------------------------------------------------------- Pension Plan $(144,000) $(249,566) $243,580 Employee Stock Ownership Plan/401(k) Plan 653,017 807,605 348,468 Deferred Compensation Plans 26,629 25,185 303,939 Phantom Stock Plan (15,542) 67,677 (179,227) - ----------------------------------------------------------------------------------- Total $520,104 $650,901 $716,760 ===================================================================================
Stock-Based Compensation Plan In October, 1995 the FASB issued SFAS No. 123, "Accounting for Stock Based Compensation" which establishes a fair value based method of recognizing stock-based compensation expense. As permitted by SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account for its stock-based compensation plans. Had compensation cost for awards under the Company's stock-based compensation plans been determined consistent with the method set forth under SFAS No. 123, the effect on the Company's net income and earnings per share would have been as follows:
1996 1995 ----------------------- --------------------------- As Reported Pro Forma As Reported Pro Forma ----------- --------- ----------- ------------ Net Income (Loss): $6,223,733 $6,062,733 $(3,841,939) $(3,911,032) Earnings (Loss) per share: $1.45 $1.41 $(0.90) $(0.92)
Because the method prescribed by SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation expense may not be representative of the amount to be expected in future years. Pro forma compensation expense for options granted is reflected over the vesting period; therefore, future pro forma compensation expense may be greater as additional options are granted. Compensation expense for options granted is reflected over the vesting period; therefore, future compensation expense may be greater as additional options are granted. The Company has granted stock options to certain key employees. The options granted vest after two years and are immediately exercisable upon vesting. Nonqualified stock options may be granted at any price determined by the Compensation Committee of the Board of Directors. All stock options have been granted at fair market value at the date of grant. The fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions: Risk-free interest rate: 6.00% Expected life of options: 4 Years Expected volatility of stock: 31.4% The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Stock Option Plan Activity A summary of the Company's stock option activity is as follows:
1996 1995 1994 - ------------------------------------------------------------------------------------------------------- Weighted Weighted Option Number Average Number Average Number Price Of Exercise of Exercise of per Shares Price Shares Price Shares Share ----------------------------------------------------------- (In thousands, except per share amounts) Options outstanding, beginning Of year 40 $11.72 20 $11.00 -- Granted 10 $15.38 20 $12.44 20 $11.00 Exercised -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------- Options outstanding, end of year 50 $12.45 40 $11.72 20 $11.00 Options exercisable 20 $11.00 -- -- Weighted average fair value per option of options granted during year $ 6.83 $ 6.72
As of December 31, 1996, the exercisable options outstanding were exercisable at a price of $11.00 and had a weighted-average remaining contractual life of 4.8 years. (6) INCOME TAXES The provision (benefit) for income taxes for each of the three years in the period ended December 31, 1996 consists of the following:
1996 1995 1994 - ----------------------------------------------------------------------- Current $3,306,444 $(3,092,159) $ (952,147) Prepaid (1,474,913) (692,726) (1,890,304) - ----------------------------------------------------------------------- $1,831,531 $(3,784,885) $(2,842,451) - -----------------------------------------------------------------------
Prepaid and deferred income taxes result from differences between the income (loss) for financial reporting and tax reporting relating primarily to the provision for possible loan losses. The net deferred tax asset amounted to approximately $5,390,000 and $3,793,000 at December 31, 1996 and 1995, respectively. This tax asset is included in other assets in the accompanying consolidated balance sheets. The components of the net deferred tax asset as of December 31, 1996 and 1995 are as follows:
1996 1995 - ----------------------------------------------------------------- Reserve for Possible Loan Losses $6,261,000 $6,780,000 Deferred Compensation 1,278,000 1,428,000 Unrealized Securities Gains (129,000) (251,000) Loan Fees 191,000 193,000 Depreciation (481,000) (393,000) Accrued Liabilities 291,000 524,000 Capital Loss Carryforwards 937,000 431,000 Investments in Limited Partnerships (668,000) (542,000) Excess Servicing Right (43,000) (8,000) Loan Market Adjustment (3,368,000) (8,630,000) Other (1,526,000) (706,000) Tax Credit Carryforward 3,150,000 3,276,000 NOL Carryforward 0 1,752,000 Core Deposit Intangible 434,000 370,000 - ----------------------------------------------------------------- 6,327,000 4,224,000 Valuation Allowance (937,000) (431,000) - ----------------------------------------------------------------- $5,390,000 $3,793,000 =================================================================
A valuation allowance is provided when it is more likely than not that some portion of the net prepaid tax asset will not be realized. The Bank has established a valuation allowance for capital loss carryforwards since such losses may only be utilized against future capital gains. The following is a reconciliation of the federal income tax provision (benefit), calculated at the statutory rate, to the recorded provision (benefit) for income taxes:
1996 1995 1994 - -------------------------------------------------------------------------------------------------- Applicable Statutory Federal Income Tax (Benefit) $2,738,790 $(2,593,120) $(1,949,042) (Reduction) Increase in Taxes Resulting From: Loss on Investment Securities 27,200 (114,226) (24,780) Tax-exempt Income (73,953) (86,879) (187,301) Tax Credits (980,487) (851,250) (707,750) Other, Net 119,981 (139,410) 26,422 - ------------------------------------------------------------------------------------------------- $1,831,531 $(3,784,885) $(2,842,451) =================================================================================================
The state of Vermont assesses a franchise tax for banks in lieu of income tax. The franchise tax is assessed based on deposits and amounted to approximately $255,000, $277,000, and $290,000 in 1996, 1995, and 1994, respectively. These amounts are included in other expenses in the accompanying consolidated statements of operations. The Company received refunds of its 1995, 1994, and 1993 Vermont Franchise Taxes of $271,643, $284,738, and $240,332, respectively, during 1996. (7) OTHER BORROWED FUNDS Other borrowed funds consist of the following at December 31, 1996 and 1995:
1996 1995 ------------------------------------------------------ Treasury Tax and Loan Notes $3,598,712 $2,085,422 Federal Funds Purchased 0 3,250,000 Short Term Borrowing 6,000,000 0 ------------------------------------------------------ $9,598,712 $5,335,422 ======================================================
As of December 31, 1996, the Bank may borrow up to $18,000,000 in federal funds on an unsecured basis. The following table provides certain information regarding other borrowed funds for the two years ended December 31, 1996 and 1995:
Weighted Maximum Average Weighted Month-End Average Annual Average Rate Amount Amount Interest on Amounts 1996 Outstanding Outstanding Rate Outstanding - ----------------------------------------------------------------------------------------- Treasury Tax and Loan Notes $ 4,571,734 $2,134,406 5.06% 5.37% Federal Funds Purchased 11,500,000 703,419 4.59% -- Short Term Borrowing 11,500,000 773,770 5.46% 5.90% Repurchase Agreements 7,660,000 2,365,722 5.79% -- 1995 - ----------------------------------------------------------------------------------------- Treasury Tax and Loan Notes $ 4,957,123 $3,083,449 5.61% 5.16% Federal Funds Purchased 9,500,000 975,555 5.96% 5.38%
(8) DEBT Debt consists of the following at December 31, 1996 and 1995:
1996 1995 - ------------------------------------------------------------------------------------ 9% Mortgage Note, Payable in Monthly Installments of $1,736 (Principal and Interest) Through 2020 $ 202,991 $ 205,441 1% Mortgage Note, payable in Monthly Installments of $2,542 (Principal and Interest) Through 2039 1,186,959 1,189,316 Federal Home Loan Bank Notes Payable, Interest Rates from 4.83% to 8.66% Due 1996 through 2001 5,030,000 14,030,000 - ------------------------------------------------------------------------------------ $6,419,950 $15,424,757 - ------------------------------------------------------------------------------------
Maturities of debt subsequent to December 31, 1996 are as follows: 1997 - $5,288; 1998 - $5,771; 1999 - $6,293; 2000 - $6,896; 2001 - $7,533 and $6,388,169 thereafter. As of December 31, 1996, the Company is in compliance with all of the covenants of the Federal Home Loan Bank agreements. On June 30, 1995, in accordance with a specific plan authorized by the Federal Reserve, the Bank prepaid the outstanding $18 million of Capital Notes, which carried an interest rate of 9.81%, using funds from operations. The Bank was released from any further obligations under the Capital Notes Agreement. A prepayment premium of $701,400 was paid to the noteholders. The prepayment premium is reflected in interest expense in the accompanying consolidated statement of operations. On December 20, 1995, in accordance with a specific plan authorized by the Federal Reserve, the Company prepaid $2,400,000 in obligations under the Senior Subordinated Debt Agreement which carried an interest rate of 10%, using funds provided by the issuance of common stock in conjunction with the settlement of the deferred compensation plans (see Note 6). The Company was released from any further obligations under the Senior Debt Agreement. No prepayment premium was required. (9) STOCKHOLDERS' EQUITY Vermont state law requires the Bank to appropriate a minimum of 10% of net income to surplus until such time as appropriated amounts equal 10% of deposits and other liabilities. The Company's stockholders' equity includes $7,189,562 as of December 31, 1996 and $6,561,600 as of December 31, 1995 of such appropriations. Vermont state law also restricts the payment of dividends under certain circumstances. (10) REENGINEERING The Company began a reengineering project during 1995 to reduce ongoing operating costs and increase noninterest income. As a result, the Bank implemented a plan to reduce its workforce by approximately 250 employees. All employees were offered the opportunity to voluntarily terminate their employment, which would entitle them to a severance package equal to one week's pay for each year of service plus four additional weeks. Employees whose age plus years of service with the Company equalled at least 60 were offered an early retirement option whereby, in lieu of the plan described above, five years would be added to both their years of service and their age for purposes of determining vested benefits through the pension plan. The total severance charges realized by the Company as a result of the reengineering project were approximately $1.3 million. The incremental cost of the enhanced early retirement benefit realized during 1995 was approximately $728,000. In conjunction with the reengineering project, the Company engaged a consulting firm to assist in the identification of possible workforce reductions and the implementation of the reengineering plan. The fee earned by these consultants is, in part, contingent upon actual future operating cost reductions and the increase in noninterest income, and the Company recognized all expenses associated with fees to these consultants of approximately $2 million in 1995. Pursuant to an agreement with these consultants, the Company will make the final payment to the consultants in 1997, which has been fully accrued as of December 31, 1996. (11) COMMITMENTS AND CONTINGENCIES During the fall of 1994, lawsuits were brought against the Company, the Bank, the Trust Company (collectively referred to as "the Companies") and certain directors of the Companies. These lawsuits related to certain investments managed for Trust Company clients and placed in the Piper Jaffray Institutional Government Income Portfolio. Separately, and before the suits were filed, the Companies had initiated a review of those investments. As a result of the review, the Trust Company paid to the affected Trust Company clients a total of approximately $9.2 million in December 1994. The payments do not constitute a legal settlement of any claims in the lawsuits. However, based on consultation with legal counsel, management believes that further liability, if any, of the Companies on account of matters complained of in the lawsuits will not have a material adverse effect on the consolidated financial position and results of operations of the Company. In December 1994, the Trust Company received a payment of $6,000,000 from its insurance carriers in connection with these matters, which was treated as a reduction in amounts reimbursed to Trust Company customers in the accompanying consolidated statement of operations. The Companies are separately pursuing claims against Piper Jaffray Companies, Inc. and others on account of the losses that gave rise to the $9.2 million payment by the Companies. The claims of the Trust Company, as trustee, against Piper Jaffray Companies were joined with claims of other investors in the Piper Fund in a class action in the United States District Court for the District of Minnesota. The class action was settled by the parties, and on December 14, 1995, the settlement was approved by the Court. By order dated January 11, 1996, the Court ordered the share of the settlement proceeds attributable to Trust Company investments not be paid pending further order. On February 18, 1997, the District Court entered an Order for Final Judgment. That Order provides, among other matters, that except to the extent (if at all) any other court with jurisdiction has given leave for some or all of the proceeds to be deposited with the court pursuant to Vermont Rule of Civil Procedure 67, Federal Rule of Civil Procedure 67, or such other rule as may apply, and absent an appeal, the entire net settlement proceeds attributable to the Trust Company investments are to be paid to the Trust Company starting approximately sixty-one days after the date of the Order. Any recovery of settlement proceeds is subject to the terms of an agreement between the Companies and their insurance carriers. The attorneys representing the plaintiffs in one of the lawsuits discussed above have taken the position that amounts recovered by the Companies on these claims should be paid to the affected Trust Company clients (net of legal fees to those attorneys), in addition to the $9.2 million already paid. The attorneys representing the plaintiffs in one of the lawsuits discussed above requested an award of attorneys' fees for allegedly causing the Companies to make the $9.2 million payment and asked the District Court to order the Trust Company to withhold payment of $500,000. The Trust Company resisted claims for payment of such fees and, as a result, has been directed to place the sum of $500,000 into escrow pending a ruling by the Court. On appeal by the Companies, the United States Court of Appeals affirmed in part, vacated in part, and reversed for further proceedings the lower court's judgment. The attorneys representing the plaintiffs in that lawsuit have indicated that they intend to seek damages as well as attorneys' fees. There is the possibility that the Companies will be required to remit all or part of the escrowed funds, or to pay damages. However, based upon consultation with legal counsel, management believes that on the facts of this case there is no substantial authority for an award of such fees or damages in those proceedings. The Bank is also involved in various legal proceedings arising in the normal course of business. Based upon consultation with legal counsel, management believes that the resolution of these matters will not have a material effect on the consolidated financial position and results of operations of the Company. (12) PARENT COMPANY The Parent Company's investments in its subsidiaries are recorded using the equity method of accounting. Summarized financial information relative to the Parent Company only balance sheets at December 31, 1996 and 1995 and statements of operations and cash flows for each of the three years in the period ended December 31, 1996 is as follows:
Balance Sheets - December 31, 1996 1995 - ----------------------------------------------------------------------------------- Assets: Investment in and Advances to Subsidiaries * $ 47,999,312 $ 41,843,980 Other Assets 860,191 972,452 - ----------------------------------------------------------------------------------- Total Assets $ 48,859,503 $ 42,816,432 =================================================================================== Liabilities and Equity Capital: Other Liabilities 2,609,735 2,567,569 Equity Capital 46,249,768 40,248,863 - ----------------------------------------------------------------------------------- Total Liabilities and Equity Capital $ 48,859,503 $ 42,816,432 ===================================================================================
Statements of Operations for the Year Ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------- Equity in Undistributed Earnings (Loss) of Subsidiaries* $ 6,306,352 $ (4,021,297) $ (2,679,429) Other Income (Expense), Net (125,180) 72,360 (374,142) Benefit from Income Taxes 42,561 106,998 163,547 - ------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ 6,223,733 $ (3,841,939) $ (2,890,024) ============================================================================================================= Statements of Cash Flows for the Year Ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Loss $ 6,223,733 $ (3,841,939) $ (2,890,024) Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities: Amortization $ 0 $ 0 $ 6,360 Gains on Investment Securities 0 (309,020) (91,780) (Increase) Decrease in Miscellaneous Receivables 98,754 (612,543) (11,425) Increase (Decrease) in Miscellaneous Payables 0 2,527,569 .(20,000) Equity in Undistributed (Income) Losses of Subsidiaries (6,306,352) 4,021,297 2,679,429 - ------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Operating Activities $ 16,135 $ 1,785,364 $ (327,440) - ------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Repayment of Advances from Subsidiaries $ 0 $ 1,035,460 $ 2,263,399 Proceeds from Sales of Investment Securities 0 643,931 682,030 - ------------------------------------------------------------------------------------------------------------- Net Cash Provided by Investing Activities $ 0 $ 1,679,391 $ 2,945,429 - ------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Sale of Treasury Stock $ 0 $ 178,730 $ 0 Acquisition of Treasury Stock 0 (2,082,525) 0 Issuance of Common Stock 0 2,553,802 0 Principal Payments on Debt 0 (4,800,000) (2,400,000) - ------------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities $ 0 $ (4,149,993) $ (2,400,000) - ------------------------------------------------------------------------------------------------------------- Increase (decrease) in Cash and Cash Equivalents 16,135 (685,238) 217,989 Cash and Cash Equivalents at Beginning of Year 301,495 986,733 768,744 - ------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 317,630 $ 301,495 $ 986,733 ============================================================================================================= Total Interest Paid $ 0 $ 333,333 $ 580,000 Taxes Paid $ 0 $ 0 $ 50,000 * Account balances are partially or fully eliminated in consolidation.
(13) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK Commitments and Off-Balance Sheet Risk The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to extend credit and financial guarantees. Such instruments involve, to varying degrees, elements of credit and interest rate risk that are not recognized in the accompanying consolidated balance sheets. Exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and financial guarantees written is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments as it does for on-balance sheet instruments. The contractual amounts of these financial instruments at December 31, 1996 and 1995 are as follows:
1996 Contractual Amount --------------------------------------------------------------------- Financial Instruments Whose Contract Amounts Represent Credit Risk: Commitments to Extend Credit $80,756,000 Standby Letters of Credit 6,104,000 Loans Sold with Recourse 1,219,000 1995 Contractual Amount --------------------------------------------------------------------- Financial Instruments Whose Contract Amounts Represent Credit Risk: Commitments to Extend Credit $92,596,000 Standby Letters of Credit 6,550,000 Loans Sold with Recourse 1,832,000
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent a future cash requirement. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained by the Bank upon extension of credit is based on management's credit evaluation of the counterparty, and an appropriate amount of real and/or personal property is obtained as collateral. Standby letters of credit and financial guarantees written are conditional commitments issued by the Bank to guarantee performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. Most guarantees extend for less than two years, and 75% are for less than $100,000. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank obtains real and/or personal property as collateral for those commitments for which collateral is deemed to be necessary. The Bank may enter into commitments to sell loans which involve market and interest rate risk. There were no such commitments at December 31, 1996. At December 31, 1995, the remaining commitments to deliver loans pursuant to master commitments with secondary market investors amounted to approximately $8,947,000. Interest Rate Floor Contracts Interest rate floor transactions generally involve the exchange of fixed and floating rate interest payments without the exchange of the underlying principal amounts. The Company has used a floor contract to mitigate the effects on net interest income in the event interest rates on floating rate loans decline. The Company is exposed to risk should the counterparty default in its responsibility to pay interest under the terms of the floor agreement, but minimizes this risk by performing normal credit reviews on the counterparties, by limiting its exposure to any one counterparty, and by utilizing well known national investment firms as counterparties. Notional principal amounts are a measure of the volume of agreements transacted, but the level of credit risk is significantly less. At December 31, 1996, the notional principal amount of contracts outstanding was $20,000,000 and the amortized cost of such contracts was $73,900. There were no outstanding interest rate floor agreements at December 31, 1995. (14) FAIR VALUE OF FINANCIAL INSTRUMENTS Investments The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents and stock in the Federal Home Loan Bank of Boston (FHLB) approximate fair values. Fair value for investment securities is determined from quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. An analysis of the estimated fair value of the investment securities as of December 31, 1996 and 1995 is as follows:
1996 1995 - ------------------------------------------------------------------------------------ Carrying Calculated Carrying Calculated Amount Fair Value Amount Fair Value - ------------------------------------------------------------------------------------ (In Thousands) Securites Available for Sale $ 57,656 $ 57,656 $97,943 $97,943 Securities Held to Maturity 86,904 86,004 -- -- Marketable Equity Securities 230 230 310 310 - ---------------------------------------------------------------------------------- $144,790 $143,890 $98,253 $98,253 ==================================================================================
Loans The fair value of variable rate loans that reprice frequently and have no significant credit risk is based on carrying values. The fair value of fixed rate (one-to-four family residential) mortgage loans, and other consumer loans, is based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair value for other loans is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. An analysis of the estimated fair value of the loan portfolio (including Segregated Assets as of December 31, 1995) as of December 31, 1996 and 1995 is as follows:
1996 1995 --------------------------------------------------------------- Carrying Calculated Carrying Calculated Amount Fair Value Amount Fair Value --------------------------------------------------------------- (In Thousands) Net Loans $371,533 $371,187 $433,490 $435,291 ===============================================================
Deposits The fair value of demand deposits approximates the amount reported in the consolidated balance sheets. The fair value of variable rate, fixed term certificates of deposit also approximate the carrying amount reported in the consolidated balance sheets. The fair value of fixed rate and fixed term certificates of deposit is estimated using a discounted cash flow which applies interest rates currently being offered for deposits of similar remaining maturities. An analysis of the estimated fair value of deposits as of December 31, 1996 and 1995 is as follows:
1996 1995 - ------------------------------------------------------------------------------------ Carrying Calculated Carrying Calculated Amount Fair Value Amount Fair Value - ------------------------------------------------------------------------------------ (In Thousands) Demand Deposits $ 80,576 $ 80,576 $ 85,417 $ 85,804 Savings, NOW and Money Market 263,882 263,967 278,242 278,242 Time Deposits Over $100,000 20,369 20,522 20,473 20,792 Other Time 143,452 144,516 160,382 162,881 - ----------------------------------------------------------------------------------- $508,279 $509,581 $544,514 $547,719 ===================================================================================
Debt The fair value of debt is estimated using current market rates for borrowings of similar remaining maturity. An analysis of the estimated fair value of the debt of the Company as of December 31, 1996 and 1995 is as follows:
1996 1995 ------------------------------------------------------ Carrying Calculated Carrying Calculated Amount Fair Value Amount Fair Value ------------------------------------------------------ Debt $6,420 $6,732 $15,425 $15,990 ------------------------------------------------------
Commitments to Extend Credit And Standby Letters Of Credit The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of financial standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. The fair value of commitments to extend credit and standby letters of credit is $88,000 and $101,000 as of December 31, 1996 and 1995, respectively. (15) SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION (in thousands): Merchants Bancshares, Inc. Notes to Consolidated Financial Statements December 31, 1996
1996 1995 ------------------------------------- ------------------------------------- Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 - --------------------------------------------------------------------------------------------------------------------- Interest and Fee Income $12,204 $11,990 $11,901 $11,909 $13,053 $13,362 $12,460 $12,440 Interest Expense 4,858 4,642 4,573 4,599 5,872 6,647 5,407 5,076 - --------------------------------------------------------------------------------------------------------------------- Net Interest Income $ 7,346 $ 7,348 $ 7,328 $ 7,310 $ 7,181 $ 6,715 $ 7,053 $ 7,364 Provision for Possible Loan Losses (A) 900 900 900 450 2,700 7,600 900 900 Non-Interest Income (B) 2,913 2,174 1,897 1,972 2,210 2,094 3,524 1,987 Non-Interest Expense (C) 7,646 6,639 6,215 6,582 7,180 7,992 11,116 7,367 Income (Loss) Before Provision (Benefit) for Income Taxes $ 1,713 $ 1,983 $ 2,110 $ 2,250 $ (489) $(6,783) $(1,439) $ 1,084 Provision (Benefit) For Income Taxes 344 439 501 548 (528) (2,732) (717) 192 - --------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ 1,369 $ 1,544 $ 1,609 $ 1,702 $ 39 $(4,051) $ (722) $ 892 ===================================================================================================================== Earnings (Loss) Per Share $ 0.32 $ 0.36 $ 0.37 $ 0.40 $ 0.01 $ (0.95) $ (0.17) $ 0.21 ===================================================================================================================== Dividends Per Share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 ===================================================================================================================== (A) During the second quarter of 1995, the Bank provided reserves for possible loan losses of $5 million in addition to planned provisions of $1.75 million to cover exposure identified during loan renewals and restructures. (B) The Bank recognized a gain of $1.6 million in conjunction with the curtailment of its pension plan during the third quarter of 1995. (C) During the third quarter of 1995 the Bank began a reengineering project. The Bank recognized total severance charges of $1.5 million and total fees to consultants of $2.2 million in conjunction with the reengineering.
(16) REGULATORY ENVIRONMENT The Bank and the Company are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possible additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Bank's and the Company's financial statements. Under capital adequacy guidelines, the Bank and the Company must meet specific capital guidelines that involve quantitative measures of the Bank's and the Company's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank is also subject to the regulatory framework for prompt corrective action that requires the Bank to meet specific capital guidelines to be considered well capitalized. The Bank's and the Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Company to maintain minimum ratios (set forth in the table below) of total and Tier-1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier-1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1996, that the Bank and the Company meet all capital adequacy requirements to which it is subject. As of December 31, 1996, the most recent notification from the FDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category. To be considered well capitalized under the regulatory framework for prompt corrective action, the Bank must maintain minimum Tier-1 Leverage, Tier-1 Risk-Based, and Total Risk-Based Capital ratios as set forth in the table below.
To Be Well- Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions - ----------------------------------------------------------------------------------------------------- Amount Percent Amount Percent Amount Percent - ----------------------------------------------------------------------------------------------------- As of December 31, 1996: Merchants Bancshares, Inc.: Tier 1 Risk-Based Capital $43,814 11.08% $15,811 4.00% N/A Total Risk-Based Capital $48,888 12.37% $31,623 8.00% N/A Tier 1 Leverage Capital $43,814 7.50% $23,381 4.00% N/A Merchants Bank: Tier 1 Risk-Based Capital $45,517 11.56% $15,757 4.00% $23,635 6.00% Total Risk-Based Capital $50,574 12.84% $31,513 8.00% $39,392 10.00% Tier 1 Leverage Capital $45,517 7.80% $23,330 4.00% $29,163 5.00% As of December 31, 1995 (Unaudited) Merchants Bancshares, Inc.: Tier 1 Risk-Based Capital $36,023 7.81% $18,450 4.00% N/A Total Risk-Based Capital $41,777 9.06% $36,900 8.00% N/A Tier 1 Leverage Capital $36,023 5.87% $24,548 4.00% N/A Merchants Bank: Tier 1 Risk-Based Capital $37,627 8.19% $18,386 4.00% $27,579 6.00% Total Risk-Based Capital $43,420 9.45% $36,772 8.00% $45,965 10.00% Tier 1 Leverage Capital $37,627 6.15% $24,486 4.00% $30,608 5.00%
Discussion of Prior Regulatory Actions In March 1993, the FDIC and the State of Vermont Department of Banking, Insurance and Securities (the Commissioner) conducted a joint field examination of the Bank. As a result of this examination, the Bank entered into a Memorandum of Understanding ("MOU") with the FDIC and the Commissioner. Under the terms of the MOU, the Bank was required to, among other things, maintain a leverage capital ratio of at least 5.5% and refrain from declaring dividends. The Bank operated under the terms of the MOU until its removal on October 15, 1996. In February 1994, the Company and the Federal Reserve entered into an agreement. Under this agreement, among other things, the Company was not permitted to declare or pay a dividend or incur any debt without the approval of the Federal Reserve. The Company operated under the terms of the agreement until its removal on June 3, 1996. In February 1995, the Trust Company entered into an MOU with the FDIC and the Commissioner to put into effect corrective actions relating to certain operating, technical and regulatory issues. The Trust Company operated under the terms of the MOU until its removal on August 8, 1996. Merchants Bancshares, Inc. and Subsidiaries Interest Management Analysis
(Taxable Equivalent, in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ Total Average Assets $580,860 $642,487 $709,077 - ------------------------------------------------------------------------------------------------------------------------------
% of % of % of Average Average Average NET INTEREST INCOME: 1996 Assets 1995 Assets 1994 Assets Interest and Dividend Income $ 45,807 7.89% $ 48,988 7.62% $ 50,041 7.06% Fees on Loans 2,333 0.40% 2,492 0.39% 3,571 0.50% - ----------------------------------------------------------------------------------------------------------------------------- Total $ 48,140 8.29% $ 51,480 8.01% $ 53,612 7.56% Interest Expense 18,672 3.21% 23,002 3.58% 22,377 3.16% Net Interest Income Before Provision for Possible Loan Losses $ 29,468 5.07% $ 28,478 4.40% $ 31,235 4.40% Provision for Possible Loan Losses 3,150 0.54% 12,100 1.88% 10,000 1.41% - ----------------------------------------------------------------------------------------------------------------------------- Net Interest Income $ 26,318 4.53% $ 16,378 2.55% $ 21,235 2.99% OPERATING EXPENSE ANALYSIS: Non-Interest Expense Personnel $ 10,013 1.72% $ 13,434 2.09% $ 13,196 1.86% Occupancy Expense 2,054 0.35% 2,178 0.34% 2,324 0.33% Equipment Expense 2,024 0.35% 2,069 0.32% 2,004 0.28% Other 12,991 2.24% 15,974 2.49% 17,939 2.53% - ----------------------------------------------------------------------------------------------------------------------------- Total Non-Interest Expense $ 27,082 4.66% $ 33,655 5.24% $ 35,463 5.00% Less Non-Interest Income Service Charges on Deposits $ 3,347 0.58% $ 3,184 0.50% $ 3,452 0.49% Other, Including Securities Gains (Losses) 5,580 0.96% 6,632 1.03% 5,337 0.75% - ----------------------------------------------------------------------------------------------------------------------------- Total Non-Interest Income $ 8,927 1.54% $ 9,816 1.53% $ 8,789 1.24% - ----------------------------------------------------------------------------------------------------------------------------- Net Operating Expense $ 18,155 3.13% $ 23,839 3.71% $ 26,674 3.76% ============================================================================================================================= SUMMARY: Net Interest Income $ 26,318 4.53% $ 16,378 2.55% $ 21,235 2.99% Less: Net Overhead 18,155 3.13% 23,839 3.71% 26,674 3.76% - ----------------------------------------------------------------------------------------------------------------------------- Profit Before Taxes - Taxable Equivalent Basis $ 8,163 1.41% $ (7,461) -1.16% $ (5,439) -0.77% Net Profit (Loss) After Taxes $ 6,224 1.07% $ (3,842) -0.60% $ (2,890) -0.41% =============================================================================================================================
Merchants Bancshares, Inc. Five Year Summary of Operations (Not Covered by Report of Independent Public Accountants) (In Thousands)
For the years ended 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------- Interest and Investment Income $ 48,004 $ 51,315 $ 53,319 $ 51,474 $ 49,239 Interest Expense 18,672 23,002 22,377 21,956 24,051 - ----------------------------------------------------------------------------------------------------------------- Net Interest Income $ 29,332 $ 28,313 $ 30,942 $ 29,518 $ 25,188 Provision for Possible Loan Losses 3,150 12,100 10,000 23,822 8,050 - ----------------------------------------------------------------------------------------------------------------- Net Interest Income after Provision for Loan Losses 26,182 16,213 20,942 5,696 17,138 - ----------------------------------------------------------------------------------------------------------------- Other Income $ 9,362 $ 12,766 $ 15,038 $ 12,128 $ 10,195 Other Expense 27,489 36,606 41,712 28,016 21,081 - ----------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES $ 8,055 $ (7,627) $ (5,732) $ (10,192) $ 6,252 Provision (benefit) for Income Taxes (Notes 2 and 4) 1,831 (3,785) (2,842) (4,410) 575 - ----------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 6,224 $ (3,842) $ (2,890) $ (5,782) $ 5,677 - ----------------------------------------------------------------------------------------------------------------- SELECTED AVERAGE BALANCES (IN THOUSANDS) Total Assets $ 580,860 $ 642,487 $ 709,077 $ 705,516 $ 602,317 Average Earning Assets 533,192 575,551 620,070 627,049 542,157 Loans 406,514 481,047 514,843 515,805 441,291 Total Deposits 513,923 556,242 598,305 570,957 490,908 Long-Term Debt 8,925 28,707 45,433 47,835 42,171 Shareholders' Equity 43,111 40,848 46,331 48,511 51,548 Shareholders' Equity plus Loan Loss Reserve 59,094 58,794 65,322 59,999 59,028 SELECTED RATIOS Net Income (Loss) to: Average Stockholders' Equity 14.44% -9.41% -6.24% -11.92% 11.01% Average Assets 1.07% -0.60% -0.41% -0.82% 0.94% Average Stockholders' Equity to Average Total Assets 7.42% 6.36% 6.53% 6.88% 8.56% Common Dividend Payout Ratio 0.00% 0.00% 0.00% 0.00% 58.48% Loan Loss Reserve to Total Loans at Year End 4.05% 3.61% 3.90% 3.50% 1.73% Net Charge-Offs to Average Loans 1.26% 3.28% 1.97% 1.95% 1.65% PER SHARE (Note 1) Net Income (Loss) $ 1.45 $ (0.90) $ (0.68) $ (1.37) $ 1.39 Cash Dividends 0.00 0.00 0.00 0.20 0.80 Year End Book Value 10.78 9.38 10.00 10.74 12.39 OTHER Cash Dividends Paid (In Thousands) $ 0 $ 0 $ 0 $ 848 $ 3,320 Stock Dividends Issued 0.0% 0.0% 0.0% 0.0% 3.0%
(Note 1): All stock dividends and splits are reflected retroactively. See Note 9 of Notes to Consolidated Financial Statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for the historical information contained herein, this Annual Report on Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Investors are cautioned that forward-looking statements are inherently uncertain. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to certain risks and uncertainties, including, without limitation, (i) the fact that the Company's success is dependent to a significant extent upon general economic conditions in Vermont and Vermont's ability to attract new business, (ii) the fact that the Company's earnings depend to a great extent upon the level of net interest income (the difference between interest income earned on loans and investments and the interest expense paid on deposits and other borrowings) generated by the Bank, and the level of net interest income and thus the Bank's results of operations may be adversely affected by increases or decreases in interest rates, and (iii) the fact that the banking business is highly competitive and the profitability of the Company depends upon the Bank's ability to attract loans and deposits in Vermont, where the Bank competes with a variety of traditional banking and nontraditional institutions such as credit unions and finance companies. These factors, as well as general economic and market conditions, may materially and adversely affect the market price of the Company's common shares. Because of these and other factors, past financial performance should not be considered an indicator of future performance. The forward-looking statements contained herein represent the Company's judgment as of the date of this Form 10-K, and the Company cautions readers not to place undue reliance on such statements. The following discussion and analysis of financial condition and results of operations of the Company and its subsidiaries for the three years ended December 31, 1996 should be read in conjunction with the consolidated financial statements and notes thereto and selected statistical information appearing elsewhere in this annual report. The information is discussed on a fully taxable equivalent basis. Particular attention should be given to the INTEREST MANAGEMENT ANALYSIS and OPERATING EXPENSE ANALYSIS TABLES immediately preceding this discussion upon which this discussion is primarily based. The financial condition and operating results of the Company essentially reflect the operations of its principal subsidiary, the Merchants Bank. RESULTS OF OPERATIONS: OVERVIEW The Company recognized net income of $6.2 million for the year ended December 31, 1996. Core earnings (pretax earnings, excluding the provision for loan losses and reengineering expenses) increased from approximately $8.5 million in 1995 to $11.2 million in 1996. This increase is attributable to several factors. The Company's portfolio of nonperforming loans decreased by $20.6 million from $27.3 million at year-end 1995 to $6.7 at year-end 1996. Additionally, the Company's OREO portfolio decreased by $5.9 million from $7.8 million at year-end 1995 to $1.9 million at year-end 1996. These reductions in nonperforming asset levels have allowed the Company to redeploy funds into earning assets and reduce administrative efforts associated with a nonperforming asset portfolio. Also, the Company began a reengineering project during 1995 to reduce ongoing operating costs through a reduction in workforce and improved operating efficiencies, and to increase noninterest income. The Company estimates that the changes made as a result of the reengineering have reduced noninterest expenses by approximately $4.6 million, and have had a marginal effect on noninterest income. The Company recognized a net loss of $3.8 million for the year ended December 31, 1995, due primarily to the substantial provision for possible loan losses of $12.1 million (refer to the discussion under "Provision for Possible Loan Losses" that follows), and $4 million in reengineering charges and related consultants fees. Substantially all costs incurred and actions associated with the reengineering project occurred during 1995. Core earnings (pretax earnings excluding the provision for loan losses and reengineering expenses) showed slight improvement from 1994 to 1995 due primarily to reductions in nonperforming assets. The Company recognized a net loss of $2.9 million for the year ended December 31, 1994, due primarily to the following three items: provisions for possible loan losses of $10 million (refer to the discussion under "Provision for Possible Loan Losses" that follows), an increase in the provision for write-downs of other real estate owned of $2.4 million, and the net expenses related to the reimbursement of Trust Company clients for losses related to investments managed by the Trust Company and placed in the Piper Jaffray Institutional Government Income Portfolio. The net Trust Company expenses totaled approximately $3.2 million after an insurance reimbursement of $6 million. Net income (loss) on a per share basis was $1.45, $(0.90) and $(0.68) for the years ended December 31, 1996, 1995 and 1994, respectively. No dividends were paid in 1996, 1995 or 1994. The Company declared a dividend, its first since April of 1993, of $0.10 per share on January 21, 1997, payable on February 14, 1997 to shareholders of record as of February 4, 1997. The net income (loss) as a percentage of average equity capital was 14.44%, (9.41%) and (6.24%) for 1996, 1995 and 1994, respectively. The ten-year average return on equity is 8.70% at December 31, 1996. The net income (loss) as a percentage of average assets was 1.07%, (.60%) and (.41%) in 1996, 1995 and 1994, respectively. The ten-year average return on assets is .62% at December 31, 1996. NET INTEREST INCOME Net interest income before the provision for possible loan losses is the difference between total interest, loan fees and investment income, and total interest expense. Net interest income before the provision for possible loan losses is a key indicator of a bank's performance in managing its assets and liabilities. Maximization and stability of net interest income is a primary objective of the Bank. From 1995 to 1996, total interest income decreased $3.3 million (6.45%), and total interest expense decreased $4.3 million (18.8%). This resulted in an increase to net interest income before the provision for possible loan losses on a fully taxable equivalent basis of $1 million (4.2%) from $28.5 million in 1995 to $29.5 million in 1996. There are a number of factors contributing to this change. First, the Bank's overall loan portfolio decreased by $62 million (13.8%), while the Bank's investment portfolio increased by $46 million (47%) (see "Balance Sheet Analysis" for a more comprehensive discussion of changes in the balance sheet). This shift of funds from the loan portfolio to the lower yielding investment portfolio decreased the Bank's overall net interest income. However, the impact of the shift from the loan portfolio to the investment portfolio was mitigated by three major factors. First, the Bank decreased its nonperforming loan portfolio by $20.6 million (75%), which created earning assets and increased the yield on the overall loan portfolio from 9.61% to 9.86%. Second, during 1995, the Company paid off $20.4 million in long term debt accruing at an average interest rate of 9.81%, resulting in a reduction in the Company's cost of funds from 4.51% in 1995 to 4.14% in 1996. Finally, the Bank made a strategic decision to lower the rates paid on certain interest-bearing checking and money market accounts, which reduced its cost of deposits from 4.16% in 1995 to 4.07% in 1996. These factors combined to increase the Company's net interest margin from 4.95% in 1995 to 5.53% in 1996. Net interest income before the provision for possible loans losses on a fully taxable equivalent basis decreased 8.5% from $31.2 million in 1994 to $28.5 million in 1995. The primary cause for this net decline was a decrease in average assets of $66.6 million (9.39%) from 1994 to 1995. Continued decreases in the level of nonperforming assets increased net interest margin to 4.95% in 1995 from 4.89% in 1994 and the average yield on earning assets to 8.94% in 1995 from 8.39% in 1994. Total interest income decreased 8.4% in 1995 from 1994. The decrease in net interest income is primarily due to a decrease in fees on loans discussed above. Total interest expense increased 2.79% from 1994 to 1995 due to a higher overall interest rate environment, which created a higher cost of funds in 1995 as compared to 1994. Total fees on loans changed by an immaterial amount from 1995 to 1996 and had a minimal effect on the change in net interest income. Fees on loans decreased $1.1 million (30.2%) from 1994 to 1995 as a result of a less favorable interest rate environment during 1995 for refinancing of home mortgages. Additionally, over the last two years, the Bank has shifted its strategic focus, deemphasizing the commercial and home mortgage portfolio, as it more actively pursues the small business and commercial portfolio. NONINTEREST INCOME AND EXPENSES Net operating expense (net overhead) is total noninterest expense reduced by noninterest income. Operating expense includes all costs associated with staff, occupancy, equipment, supplies and all other noninterest expenses. Noninterest income consists primarily of fee income on deposit accounts, trust services, credit card, corporate and data processing services and gains or losses on investment securities. Excluding the FDIC assistance received pursuant to the loss sharing agreement (see "FDIC Assisted Acquisition"), the gain on the curtailment of the pension plan recognized in 1995, and net gains on investment securities, noninterest income increased $1 million (13.35%) from 1995 to 1996. There were two nonrecurring items comprising the majority of the net increase: a net gain on the sale of a branch of $300,000 and refunds of Vermont Franchise Taxes paid in prior years of $800,000. Noninterest expenses decreased $6.6 million (19.5%) in 1996 from 1995, excluding losses and write-downs on Segregated Assets reimbursed by the FDIC. Contributing significantly to this reduction were an absence of reengineering expenses in 1996 compared to $4 million in reengineering and related costs recognized in 1995 (see Note 10 and discussion following). Additionally, salaries and benefits decreased by $3.4 million (25.5%) in 1996 from 1995 as a result of the reengineering project begun in 1995. Excluding the FDIC assistance received from loss-sharing, the gain on the curtailment of the pension plan and net gains on investment securities, noninterest income earned in 1995 decreased $815,000 (9.35%) from 1994. This decrease is due primarily to a $262,000 decrease in merchant discount fees and a $268,000 decrease in service charge revenue. The Bank's deposit base decreased by $37 million (6.3%) during 1995, contributing to these decreases. Noninterest expenses decreased $1.8 million (5.1%), not including the amount of losses and write-downs on Segregated Assets, which were reimbursed by the FDIC, in 1995 as compared to 1994. There are several large transactions that occurred during 1994 and 1995 which, on a combined basis, contributed to this decrease. During 1995, the Bank began a reengineering project to reduce ongoing operating costs and increase noninterest income. As a result, the Bank implemented a plan to reduce its workforce by approximately 250 employees. All employees were offered the opportunity to voluntarily terminate their employment, which would entitle them to a severance package equal to one week's pay for each year of service plus four additional weeks. Employees whose age plus years of service with the Company equalled at least 60 were offered an early retirement option whereby, in lieu of the plan described above, five years would be added to both their years of service and their age for purposes of determining vested benefits through the pension plan. The total charge for severance realized by the Bank was $1.3 million. The incremental cost of the enhanced early retirement benefit realized during 1995 was approximately $728,000. In conjunction with the reengineering changes, the Bank engaged a consulting firm to assist in the identification of areas where the Bank could reduce expenses or enhance revenue. The Bank recognized expenses associated with fees to these consultants of approximately $2 million in 1995. Pursuant to an agreement with these consultants, the Company will make the final payment to the consultants in 1997, which has been fully accrued as of December 31, 1996. During 1994, the Company recognized a net charge related to the Trust Company's reimbursement to its clients due to investments in the Piper Jaffray Institutional Government Income Portfolio totaling $3.2 million after the recognition of a $6 million reimbursement from insurance carriers. Losses and Write-downs of Other Real Estate Owned (OREO) increased $413,000 from 1995 to 1996. This increase is due primarily to the Bank's aggressive marketing of its OREO portfolio and necessary adjustments to bring the value of the remaining properties in line with the market. Losses and Write-downs of OREO decreased $805,000 from 1994 to 1995, due primarily to a decrease in the amount provided for the reserve on the portfolio from $2.3 million in 1994 to $1.4 million in 1995. The change in noninterest expense from 1994 to 1995 was also affected by the write-down of the core deposit intangible related to the acquisition of the NFNBV in the amount of $458,000 and $686,000 in 1995 and 1994, respectively. Additionally, during 1994, the Bank wrote off the carrying value of one of its investments in real estate limited partnerships totaling $546,000 due to significant cash flow deficiencies experienced by the partnership, which caused the Bank to question the value of its investment. The Company recognized $851,000 in low-income housing tax credits as a reduction in the provision for income taxes during 1996, $851,000 during 1995 and $708,000 during 1994. As a consequence of the operating losses incurred during 1995 and 1994, the Company recognized tax benefits of $3.8 million and $2.8 million, including $851,000 and $708,000 in low-income housing tax credits, respectively. Additionally, as of December 31, 1996, the Company has a cumulative deferred prepaid tax asset of approximately $5.3 million arising from timing differences between the Company's book and tax reporting. The prepaid tax asset is included in other assets. CREDIT QUALITY AND RESERVE FOR POSSIBLE LOAN LOSSES Improving credit quality has been a major strategic focus of the Bank since 1994. The success of this program is evidenced by the Bank's aggressive reduction in the level of problem assets over the last two years. Nonperforming assets (loans past due 90 days or more and still accruing, nonaccruing loans, restructured loans and other real estate owned) decreased 75% to $8,635,000 at December 31, 1996 from $35,055,000 at December 31, 1995. The 1995 figures represent a decrease of 31% from $51,182,000 at year-end 1994. Of the 1995 amount, $6,649,000 represents Segregated Assets covered by the Loss Sharing Agreement with the FDIC, which expired June 4, 1996. Excluding the FDIC's 80% exposure on the Segregated Assets ($5,319,000), adjusted nonperforming assets totaled $29,736,000 at December 31, 1995, a decrease of 31% over the adjusted 1994 level. The reserve for possible loan losses (RPLL) was $15,699,791 at December 31, 1996, $16,234,000 at December 31, 1995 and $19,929,000 at December 31, 1994. As a percentage of loans outstanding, the reserve for possible loan losses was 4.05%, 3.61% and 3.90% at year-end 1996, 1995 and 1994, respectively. The provision for possible loan losses charged to operations was $3,150,000 in 1996, $12,100,000 in 1995 and $10,000,000 in 1994. Net charge-offs were $3,685,000 in 1996, $15,794,000 in 1995 and $10,131,000 in 1994. The continued high level of the reserve for possible loan losses reflects management's current strategies and efforts to maintain the reserve at a level adequate to provide for loan losses based on an evaluation of known and inherent risks in the loan portfolio. Among the factors that management considers in establishing the level of the reserve are overall findings from an analysis of individual loans, the overall risk characteristics and size of the loan portfolio, past credit loss history, management's assessment of current economic and real estate market conditions and estimates of the current value of the underlying collateral. The Company takes all appropriate measures to restore nonperforming assets to performing status or otherwise liquidate these assets in an orderly fashion so as to maximize their value to the Company. There can be no assurances that the Company will be able to complete the disposition of nonperforming assets without incurring further losses. RISK MANAGEMENT Interest Rate Risk Interest rate risk is the exposure to a movement in interest rates which could effect the Company's net interest income. It is the responsibility of the Company's Asset and Liability Management Committee (ALCO) to manage interest rate risk, which arises naturally from imbalances in repricing, maturity and/or cash flow characteristics of the Company's assets and liabilities. The Committee is responsible for developing asset/liability management strategies and tactics, and for ensuring that the Board of Directors receives timely, accurate information regarding the Bank's interest rate risk position at least quarterly. Techniques used by the Committee take into consideration the cash flow and repricing attributes of balance sheet and off-balance sheet items and their relation to possible changes in interest rates. Through the use of computerized modeling systems, and with the assistance of outside consultants, the effect on the Company's net interest income of a possible 200 basis point change in interest rates, in rising and declining scenarios, is determined and evaluated by management. The Bank has established a target range for the change in net interest income, given a 200 basis point change in interest rates, of zero to 5%. As of December 31, 1996, through the use of such computer models, management has determined that the change in net interest income for the 12 months ending December 31, 1997 from the Company's expected or "most likely" forecast under any of the interest rate scenarios used in the analysis is less than 2%. The Company's interest rate sensitivity gap ("gap") is pictured below. Gap is defined as the difference between assets and liabilities repricing or maturing within specified periods. An asset-sensitive position (positive gap) indicates that there are more rate-sensitive assets than rate-sensitive liabilities repricing or maturing within a specified time period, which would imply a favorable impact on net interest income during periods of rising interest rates. Conversely, a liability-sensitive position (negative gap) generally implies a favorable impact on net interest income during periods of falling interest rates. The Company's balance sheet is very closely matched on the one year horizon, as shown below.
Repricing Date - --------------------------------------------------------------------------------------------------- One Day Over Six One Year To Six Months to to Five Over Five Months One Year Years Years Total - --------------------------------------------------------------------------------------------------- Interest-Earning Assets: Loans $192,136 $38,616 $ 83,561 $ 57,220 $371,533 U.S. Treasury & Agency Securities 13,000 16,617 57,588 57,355 144,560 Other Securities 3,341 0 0 230 3,571 Other Assets 0 0 0 59,372 59,372 - --------------------------------------------------------------------------------------------------- Total Assets $208,477 $55,233 $141,149 $174,177 $579,036 =================================================================================================== Liabilities and Stockholders' Equity: Noninterest-bearing Deposits 0 0 0 $ 80,576 $ 80,576 Interest-bearing Deposits $200,170 $45,439 $175,412 6,683 427,704 Borrowed Funds 9,598 0 0 6,420 16,018 Other Liabilities 0 0 0 8,488 8,488 Stockholders' Equity 0 0 0 46,250 46,250 - --------------------------------------------------------------------------------------------------- Total Liabilities And Stockholders' Equity $209,768 $45,439 $175,412 $148,417 $579,036 =================================================================================================== Cumulative Gap (1,291) 8,503 (25,760) Gap as a % of Earning Assets (.22%) 1.59% (4.83%)
Based on historical experience, and the Bank's internal repricing policies, it is the Bank's practice to present repricing of statement savings, savings deposits and NOW account balances divided into two repricing categories: 8% of such deposits are repriced in the "six months to one year" category, and the balance is repriced in the "one to five year" category. The Bank's experience has shown that the rates on these deposits tend to be less rate-sensitive than other types of deposits. Credit Risk Credit risk is managed by a network of loan officers, with review by the Bank's Credit Department and oversight by the Board of Directors. The Board of Directors grants each loan officer the authority to originate loans on behalf of the Bank and establishes policies regarding loan portfolio diversification and loan officer lending limits. The Bank's loan portfolio is continuously monitored, through the use of a variety of management reports and with the assistance of an external loan review firm, for performance, creditworthiness and strength of documentation. Credit ratings are assigned to commercial loans and are routinely reviewed. When necessary, loan officers or the loan workout function take remedial actions to assure full and timely payment of loan balances. The Bank's policy is to discontinue the accrual of interest on loans when scheduled payments become contractually past due in excess of 90 days and the ultimate collectibility of principal or interest becomes doubtful. Credit card balances 90 days past due are charged off and consumer installment loans are charged off when they reach 120 days past due. Liquidity and Capital Resource Management Liquidity, as it pertains to banking, can be defined as the ability to generate cash in the most economical way to satisfy loan and deposit withdrawal demand, and to meet other business opportunities that require cash. Sources of liquidity for banks include short-term liquid assets, cash generated from loan repayments and amortization, borrowing, deposit generation and earnings. The Merchants Bank has a number of sources of liquid funds, including $18,000,000 in available Federal Funds lines of credit at year-end 1996; an overnight line of credit with the Federal Home Loan Bank (FHLB) of $15 million; an estimated additional borrowing capacity with FHLB of $38 million; and the ability to borrow $60 million through the use of repurchase agreements, collateralized by the Bank's investments, with certain approved counterparties. Additionally, the Bank's investment portfolio is actively managed by the ALCO Committee and is a strong source of cash flow for the Bank. The portfolio is liquid, with an average duration of 3.2 years, and is available to be used as a source of funds, if needed. BALANCE SHEET ANALYSIS Total assets at December 31, 1996 decreased $33 million (5.43%) from the previous year-end. The net decrease is attributable to two major factors. The first factor is a decrease in the Bank's loan portfolio by $62.5 million over the course of 1996. Of this amount, $6.5 million resulted from the sale of the Bank's branch located in Danville, VT in January of 1996. Additionally, loans totaling $5.1 million were charged off, and the Bank sold loans totaling $13.2 million in bulk loan sales. The remainder of the decrease ($37.7 million) was the result of payouts of nonperforming obligations and scheduled amortization greater than the level of new loan originations as the Bank moved through the last phases of its reengineering project. Over the past two years, we have focused our efforts on training and developing the commercial lending skills of our loan officers. These efforts, coupled with a performance-based compensation program, will help to generate new high quality loan relationships. Balances of earning loans have stabilized in the fourth quarter of 1996. The second factor contributing to the net change in total assets is the increase in the Bank's investment portfolio. As dollars previously employed in the loan portfolio became available, the Bank redeployed these assets into its investment portfolio, resulting in a $46.5 million increase in the investment portfolio over the course of 1996. The Bank continued to take aggressive steps to address its portfolio of nonperforming assets during 1996, the nonperforming loan portfolio decreased by $20.6 million (75%) and the Bank's OREO portfolio decreased by $5.8 million (75%). It is important to note that the Bank's year-end earning assets (net of nonperforming loans) increased by $4 million during 1996. Total deposit balances declined during 1996 by $36.2 million (6.65%). This decrease in total assets is attributable to several factors. In conjunction with the sale of the Bank's branch in Danville, VT, $8.8 million in deposits was assumed by the buyer. Additionally, the combination of the announced reengineering project and the existing regulatory agreements, from which the Bank was removed in October, 1996, also contributed to the total deposit balance decline. Almost all (82%) of the decrease in deposit balances occurred in the first quarter of this year; the Bank's deposit balances have remained steady through the last two quarters of 1996. Finally, although difficult to quantify, we are continuing to see the movement of savings balances to nonbank competitors as interest rates remain low and the stock market remains strong. The Bank began a capital improvement project to upgrade its branch facilities and to make further investments in technology during 1996. Approximately $4.1 million was capitalized and will be depreciated over the estimated useful lives of the individual improvements. Additionally, the Bank retired assets with a net book value of approximately $600,000 in connection with the project; this amount was charged to expense during 1996. The Bank plans to spend $3 million on the branch upgrade project and $2.2 million for technology upgrades during 1997. Total assets at December 31, 1995 decreased $79.8 million (11.4%) from the previous year-end. Much of this shrinkage is attributable to steps taken by the Bank to address its portfolio of troubled assets, as well as a low volume of new loan originations due to the continued sluggish economy. Of the $61 million decrease in loans and Segregated Assets, $18 million was due to charge offs, and $6.3 million was due to the sale of nonperforming loans. The remainder of the decrease ($36.7 million) was the result of payouts of nonperforming obligations and scheduled amortization greater than the level of new loan originations. Additionally, during 1995, the Bank's OREO portfolio decreased by $5.5 million (41%) due to aggressive steps taken by the Bank to liquidate these assets. Total deposit balances decreased during 1995 by $38 million, as customers' continued to move savings balances to other bank and nonbank competitors, partly as a result of the continued low interest rate environment. CAPITAL RESOURCES Capital growth is essential to support deposit and asset growth and to ensure strength and safety of the Company. Net income increased, and net losses reduced, the Company's capital by $6,224,000 in 1996, ($3,842,000) in 1995, and ($2,890,000) in 1994. The Bank and the Company are subject to various regulatory capital requirements administered by banking regulatory agencies. To be considered adequately capitalized under the regulatory framework for prompt corrective action, the Bank and the Company must maintain minimum Tier-1 Leverage, Tier-1 Risk-Based and Total Risk-Based Capital. The Bank and the Company were above all regulatory minimums and considered well-capitalized by the regulators at December 31, 1996. The ratios for the Company are set forth below:
Amount Percentage ------------------------- Tier-1 Risk-Based Capital $43,814 11.08% Total Risk-Based Capital $48,888 12.37% Tier-1 Leverage Capital $43,814 7.50%
The Company declared a dividend, its first since April 1993, of $0.10 per share on January 21, 1997, payable on February 14, 1997 to shareholders of record as of February 4, 1997. REGULATORY MATTERS The Bank, Trust Company and Holding Company were released from all regulatory agreements during 1996. Following is a discussion of the provisions and terms of the various agreements. In 1993, the Bank entered into a Memorandum of Understanding (MOU) with the FDIC and the Commissioner. Under the terms of the MOU, the Bank was required, among other things, to maintain a leverage capital ratio of at least 5.5% and refrain from declaring dividends. The Bank operated under the MOU from October, 1993 until its removal on October 15, 1996. In February 1994, the Company and the Federal Reserve entered into an agreement. Under this agreement, among other things, the Company could not declare or pay a dividend or incur any debt without the approval of the Federal Reserve. The Company operated under the agreement beginning in February 1994 until the removal of the agreement on June 3, 1996. In 1995, the Trust Company entered into an MOU with the FDIC and the Commissioner to correct certain operating, technical and regulatory issues. The Trust Company operated under the MOU from February 1995 until its removal on August 8, 1996. EFFECTS OF INFLATION The financial nature of the Company's balance sheet and statement of operations is more clearly affected by changes in interest rates than by inflation, but inflation does affect the Company because as prices increase the money supply tends to increase, the size of loans requested tends to increase, total bank assets increase, and interest rates are affected by inflationary expectations. In addition, operating expenses tend to increase without a corresponding increase in productivity. There is no precise method, however, to measure the effects of inflation on the Company's financial statements. Accordingly, any examination or analysis of the financial statements should take into consideration the possible effects of inflation. FORM 10-K The following is a copy, except for the exhibits, of the Annual Report of Merchants Bancshares, Inc. (the "Company") on Form 10-K for the year ended December 31, 1996, filed with the Securities and Exchange Commission (the "Commission"). Certain information included herein is incorporated by reference from the Company's 1996 Annual Report to Shareholders ("Annual Report") as indicated below. Except for those portions of the Annual Report which are expressly incorporated herein by reference, the Annual Report is not to be deemed filed with the Commission. The Annual Report and Form 10-K have not been approved or disapproved by the Commission, nor has the Commission passed upon the accuracy or adequacy of the same. TABLE OF CONTENTS Part I Page Reference - ---------------------------------------------------------------------------- Item 1 - Business 38 Item 2 - Properties 45 Item 3 - Legal Proceedings 47 Item 4 - Submission of Matters to a Vote of Security Holders 47 Part II - ------- Item 5 - Market for Registrant's Common Equity and 48 Related Stockholder Matters Item 6 - Selected Financial Data 48-51 Item 7 - Management's Discussion and Analysis of 31-37 Financial Condition and Results of Operations Item 8 - Financial Statements and Supplementary Data 3-30 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 58 Part III * - ---------- Item 10 - Directors and Executive Officers of the Registrant Item 11 - Executive Compensation Item 12 - Security Ownership of Certain Beneficial Owners and Management Item 13 - Certain Relationships and Related Party Transactions Part IV ** Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K * The information required by Part III is incorporated herein by reference from the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 29, 1997. ** A list of exhibits in the Form 10-K is set forth on the Exhibit Index included in the Form 10-K filed with the Commission and incorporated herein by reference. Copies of any exhibit to the Form 10-K may be obtained from the Company by contacting Shareholder Communications, Merchants Bancshares, Inc., P.O. Box 1009, Burlington, VT 05401. All financial statement schedules are omitted since the required information is included in the consolidated financial statements of the Company and notes thereto in the Annual Report. Signatures 62 PART I ITEM 1 - BUSINESS Merchants Bancshares, Inc. is a one-bank holding company originally organized under Vermont law in 1983 for the purposes of owning all of the outstanding capital stock of the Merchants Bank (the "Bank") and providing greater flexibility in helping the Bank achieve its business objectives. Its primary subsidiary is Merchants Bank (the "Bank"), a Vermont Bank with 33 full-service offices. The last two years have been a period of great change for Merchants Bank. We have undergone a reengineering project that reduced our workforce by approximately 50%. At the same time, we have decreased our nonperforming asset portfolio to its lowest level in 7 years. We have also redefined the way we do business and created a new image for our institution. We have closed corporate headquarters and deployed resources to our branch system. We have brought technological innovations to our internal operations and to our customers. These changes have allowed us to meet our goals for 1996 and have set the stage for future earnings growth. A chronology of events, including acquisitions, relating to MERCHANTS BANCSHARES, INC., (the Company) is as follows: July 1, 1983: Merchants Bancshares, Inc. was organized as a Vermont corporation, for the purpose of acquiring, investing in or holding stock in any subsidiary enterprise under the Bank Holding Company Act of 1956. January 24, 1984: Company acquired The Merchants Bank, a Vermont chartered commercial bank. June 2, 1987: Company shareholders approved a resolution to change the state of incorporation of the Company from Vermont to Delaware. October 4, 1988: Company organized Merchants Properties, Inc., whose mission is described below. THE MERCHANTS BANK, (the Bank) was organized in 1849, and assumed a national bank charter in 1865, becoming The Merchants National Bank of Burlington, Vermont. On September 6, 1974 the Bank converted its national charter to a state-bank charter, becoming known as The Merchants Bank. Since 1971 the Bank has acquired by merger seven Vermont banking institutions, and has acquired the deposits of an eighth bank located in St. Johnsbury, Vt. The last such acquisition occurred on June 4, 1993 at which time the Bank acquired the New First National Bank of Vermont, with thirteen banking offices, from the Federal Deposit Insurance Corporation Division of Liquidation. As of December 31, 1996 the Bank was the fifth largest commercial banking operation in Vermont, with deposits totaling $508.3 million, net loans of $371.5 million, and total assets of $579.0 million, on a consolidated basis. Since September 30, 1988, the Merchants Bank has participated as an equity partner in the development of several AFFORDABLE HOUSING PARTNERSHIPS which were formed to provide residential housing units within the State of Vermont. During the past four years these partnerships have developed 727 units of residential housing, 470 (65%) of which qualify as "affordable housing units for eligible low-income owners or renters", and 257 (35%) of which are "market rate units." These partnerships have invested in 16 affordable and elderly housing projects within 13 Vermont communities: St. Albans, Middlebury, Williston, Winooski, Brattleboro, Montpelier, Burlington, Springfield, St. Johnsbury, Colchester, Swanton, Bradford and Hardwick. MERCHANTS PROPERTIES, INC., a wholly owned subsidiary of the Company, was organized for the purpose of developing and owning affordable rental housing units throughout the state of Vermont. As of December 31, 1996 Merchants Properties, Inc. owned one development located in Enosburg, Vermont, consisting of a 24-unit low-income family rental housing project, which was completed and rented during 1989. This housing development is fully occupied at this time. Total assets of this corporation at December 31, 1996 were $1,276,665. The Merchants Bank owns controlling interest in the MERCHANTS TRUST COMPANY, a Vermont corporation chartered in 1870 for the purpose of offering fiduciary services such as estate settlement, testamentary trusts, guardianships, agencies, intervivos trusts, employee benefit plans and corporate trust services. The Merchants Trust Company also operates a discount brokerage office through Olde Discount Corporation, enabling investors to purchase or sell stocks and bonds on a discounted commission schedule. As of December 31, 1996, the Merchants Trust Company had fiduciary responsibilities for assets valued at market in excess of $256 million, of which more than $174 million were managed assets. Total revenue for 1996 was $1,517,838; total expense was $1,297,445, resulting in pretax net income of $220,393 for the year. This net income is included in the consolidated tax return of its parent company, the Merchants Bank. QUENESKA CAPITAL CORPORATION, a wholly owned subsidiary of the Merchants Bank was established on April 4, 1988 as a Federal licensee under the Small Business Act of 1958 to provide small business enterprises with loans and/or capital. As of December 31, 1996, the corporation had assets of $1,673,001, liabilities of $4,173 due to the parent company for accrued management fees, and equity capital of $1,668,828. Queneska Capital Corporation has no employees, relying on the personnel resources of its parent company to operate. As compensation for the Bank's services, Queneska pays the Bank a management fee ($25,361 in 1996) in the amount of 1.5% on annual average assets. This fee is eliminated in the financial statement consolidation of the parent company. RETAIL SERVICES The Bank offers a variety of consumer financial products and services designed to satisfy the deposit and loan needs of its retail customers. The Bank's retail products include interest-bearing and noninterest-bearing checking accounts, money market accounts, passbook and statement savings, club accounts, and short-term and long-term certificates of deposit. The Bank also offers customary check collection services, wire transfers, safe deposit box rentals, and automated teller machine (ATM) cards and services. Merchants Bank introduced a new checking account in May of 1996. FreedomLynx checking is available with no service charges to customers who have, at least monthly, an automatic deposit to the account or an automatic debit from the account to pay a Merchants Bank loan. The account pays interest on higher balances with a tiered rate structure. Interest accrues on any day that the balance falls within one of the tiers. No minimum balance is required. During 1996, the Bank worked to revise and simplify its retail deposit and investment products. Beginning on January 1, 1997 the Bank will offer two basic checking accounts - FreedomLynx Checking and Bottom Line Checking, an account that provides for a flat service charge up to a maximum number of checks. Other retail checking accounts will continue to be maintained but will no longer be available as new accounts. In 1996, the Bank introduced electronic bill payment by telephone or by personal computer. With these services, customers can pay any type of bill electronically from their own PC or from a telephone at any time that fits their schedule. The Bank is committed to automation, offering ATM cards, ATF (automatic transfer of funds) to cover overdrafts, EFT (electronic funds transfer) to automate transfers between accounts, PCLynx bill payment services and the PCLynx telephone banking system. In 1997, the Bank plans to expand its automated services by introducing a debit card and a retail home banking system. The Bank continues to provide strong customer support with 34 ATMs and 34 on-line banking offices throughout the state of Vermont. The Bank offers all of its retail services and products at its 33 full-service banking offices. COMMERCIAL SERVICES The 1995-1996 restructuring of the Sales organization has been completed. Each branch office is led by a branch president or manager who has consumer lending authority for the full range of retail credit services. Branch presidents additionally are being given small business lending authority up to a prescribed limit. There are 23 branch presidents and 9 managing customer representatives. The ten corporate banking officers and five corporate banking administrators provide commercial credit services throughout the state of Vermont to customers requiring business credit above the prescribed authorities of the branch presidents. Merchants Bank offers a variety of commercial checking accounts. Commercial Checking uses an earnings credit rate to help offset service charges. Small Business Checking is designed for the smaller business carrying lower balances and reduced account activity. Investment opportunities are available to businesses in the form of savings accounts and money market accounts. The Bank's cash management services provide additional investment opportunities through the Cash Sweep Program. Other cash management services include funds concentration. The Bank offers on-line banking services through PCLynx Corporate and PCLynx Small Business. These products allow businesses to view their account histories, order stop payments, transfer between accounts, transmit ACH batches and order both domestic and foreign wire transfers. Other miscellaneous commercial banking services include night depository, coin and currency handling, lockbox and balance reporting services. Employee benefits management and related fiduciary services are available through the Merchants Trust Company. Types of Credit Offerings: Consumer Loans: - --------------- Financing is provided for new or used automobiles, boats, airplanes, recreational vehicles and new mobile homes. Home improvement and home equity lines of credit, Master Card credit cards and various collateral loans and personal loans are also available. Real Estate Loans: - ------------------ Financing is available for one-to-four-family residential mortgages; multifamily mortgages; residential construction; mortgages for seasonal dwellings; and commercial real estate mortgages. Mortgages for residential properties are offered on a long-term, fixed-rate basis; alternatively, adjustable-rate mortgages are offered. Biweekly payment mortgages and graduated (two-step) payment mortgages are offered. Loans under the Farmers Home Administration Rural Guaranteed Housing Program provide up to 100% financing. The Bank also participates with the Vermont Housing Finance Agency (VHFA) in providing mortgage financing for low- to moderate-income Vermonters. Most mortgage loan products are offered with as little as a 5% down payment to assist borrowers who qualify, provided that the mortgagor(s) acquires private mortgage insurance. Commercial Loans: - ----------------- Financing for business inventory, accounts receivable, fixed assets, lines of credit for working capital, community development, irrevocable letters of credit, business credit cards and U.S. Small Business Administration loans are available. EXPANSION EFFORTS Merchants Bank operates thirty-three full-service banking facilities within Vermont, one limited service facility, and a remote ATM unit located at the Burlington International Airport. Since 1963, the Bank has established eleven de novo offices, and since 1969 has acquired seven Vermont banks by merger. Merchants Bank's most recent acquisition occurred in June of 1993 with the acquisition of the assets and assumption of deposits of the New First National Bank of Vermont from the FDIC. Each decision to expand the branch network has been based on strategic planning and analysis indicating that the new or acquired facility would provide enhanced banking resources within the community and insure the competitive viability of the Bank through potential growth of deposits and lending activities. On January 12, 1996, the Passumpsic Savings Bank purchased certain assets and assumed certain liabilities of the Bank's branch located in Danville, VT. Merchants Bank received an 8% deposit premium on deposits sold in accordance with the purchase and assumption agreement. In the first quarter of 1996, the Colchester Avenue branch in Burlington was closed, with customer accounts consolidated to the College Street and White Street offices. COMPETITION Competition for financial services remains very strong in Vermont. As of December 31, 1996, there were more than 30 state and national banking institutions operating in Vermont. In addition, other financial services providers such as brokerage firms, credit unions, and out-of-state banks also compete for deposit, loan and ancillary services customers. Due to national institutions' use of aggressive direct mail marketing and the opening of more satellite offices in Vermont, Merchants Bank can expect the competitive environment of financial services to become even more aggressive. At year-end 1996, Merchants Bank was the fifth largest state chartered bank in Vermont, enjoying a strong competitive franchise within the state, with 35 banking offices as identified in Item 2 (A). Consolidation within the overall banking industry continues to change the competitive environment in which we operate. Competition from nationwide banks, as well as local institutions, is expected to be aggressive. However, there may be opportunities for business development by the Bank in shared market communities as a result of the continued consolidation in the banking industry. No material part of the Bank's business is dependent upon one, or a few, customers, or upon a particular market segment, the loss of which would have a materially adverse impact on the operations of the Bank. NUMBER OF EMPLOYEES As of December 31, 1996, Merchants Bancshares, Inc. had five officers: Joseph L. Boutin, President and Chief Executive Officer; Jennifer L. Varin, Secretary; Janet P. Spitler, Treasurer; and Susan M. Verro and Janet L. Lussier, Assistant Secretaries. No officer of the Company is on a salary basis. As of December 31, 1996, Merchants Bank employed 211 full-time and 49 part-time employees, representing a full-time equivalent complement of 237 employees; the Merchants Trust Company employed 13 full-time and 1 part-time employees, representing a full-time equivalent complement of 13.5 employees. The Bank and the Trust Company maintain comprehensive employee benefits programs which provide major medical insurance, hospitalization, dental insurance, long-term and short-term disability insurance, life insurance and a 401(k) Employee Stock Ownership Plan. Employee benefits offered by the Bank and the Trust Company are very competitive with comparable plans provided by similar Vermont institutions. REGULATION AND SUPERVISION General As a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"), the Company is subject to substantial regulation and supervision by the Federal Reserve Board. As a state-chartered bank, the Bank is subject to substantial regulation and supervision by the Federal Deposit Insurance Corporation (the "FDIC") and by applicable state regulatory agencies. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to those particular statutory provisions. Any change in applicable law or regulation may have a material effect on the business and prospects of the Company and the Bank. The Company is required by the BHCA to file with the Federal Reserve Board an annual report and such additional reports as the Federal Reserve Board may require. The Federal Reserve Board also makes periodic inspections of the Company and its subsidiaries. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire substantially all of the assets of any bank, or ownership or control of any voting shares of an bank, if, after such acquisition, it would own or control, directly or indirectly, more than 5 percent of the voting shares of such bank. Additionally, as a bank holding company, the Company is prohibited from acquiring ownership or control of 5% or more of any company not a bank or from engaging in activities other than banking or controlling banks except where the Federal Reserve Board has determined that such activities are so closely related to banking as to be a "proper incident thereto." Dividends General. The Company is a legal entity separate and distinct from the Bank and its other nonbank subsidiaries. The revenue of the Company (on a parent company only basis) is derived primarily from interest and dividends paid to the corporation by its subsidiaries. The right of the Company, and consequently the right of stockholders of the Company, to participate in any distribution of the assets or earnings of any subsidiary through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the subsidiary (including depositors, in the case of banking subsidiaries), except to the extent that certain claims of the Company in a creditor capacity may be recognized. The payment of dividends by the Company is determined by its board of directors based on the Company's liquidity, asset quality profile, capital adequacy, and recent earnings history, as well as economic conditions and other factors, including applicable government regulations and policies and the amount of dividends payable to the Company by its subsidiaries. It is the policy of the Federal Reserve Board that banks and bank holding companies, respectively, should pay dividends only out of current earnings and only if after paying such dividends the bank or bank holding company would remain adequately capitalized. Federal banking regulators also have authority to prohibit banks and bank holding companies from paying dividends if they deem such payment to be unsafe or unsound practice. In addition, it is the position of the Federal Reserve Board that a bank holding company is expected to act as a source of financial strength to its subsidiary banks. State law requires the approval of state bank regulatory authorities if the dividends declared by state banks exceed prescribed limits. The payment of any dividends by the Company's subsidiaries will be determined based on a number of factors, including the subsidiary's liquidity, asset quality profile, capital adequacy and recent earnings history. Legislation and Related Matters General. In addition to extensive existing government regulation, federal and state statutes and regulations are subject to changes that may have significant impact on the way in which banks may conduct business. The likelihood and potential effects of any such changes cannot be predicted. Legislation enacted in recent years has substantially increased the level of competition among commercial banks, thrift institutions and non-banking institutions, including insurance companies, brokerage firms, mutual funds, investment banks, finance companies and major retailers. In addition, the existence of banking legislation such as the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") have affected the banking industry by, among other things, broadening the regulatory powers of the federal banking agencies in a number of areas. The following summary is qualified in its entirety by the text of the relevant statutes and regulations. FIRREA. As a result of the enactment of FIRREA on August 9, 1989, the Bank can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989, in connection with (a) the default of the Bank or (b) any assistance provided by the FDIC to the Bank in danger of default. "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur without regulatory assistance. FDICIA. The FDICIA, which was enacted on December 19, 1991, provides for, among other things, increased funding for the Bank Insurance Fund ("BIF") of the FDIC and expanded regulation of depository institutions and their affiliates, including parent holding companies. A summary of certain material provisions of FDICIA and its regulations is provided below. Prompt Corrective Action. The FDICIA provides the federal banking agencies with broad powers to take prompt corrective action to resolve problems of insured depository institutions, depending upon a particular institution's level of capital. The FDICIA establishes five tiers of capital measurement for regulatory purposes ranging from "well-capitalized" to "critically undercapitalized." A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position under certain circumstances. As of December 31, 1996, the Bank was classified as "well-capitalized" under the applicable prompt corrective action regulations. Brokered Deposits. Under the FDICIA, a depository institution that is well-capitalized may accept brokered deposits. A depository institution that is adequately capitalized may accept brokered deposits only if it obtains a waiver from the FDIC, and may not offer interest rates on deposits "significantly higher" than the prevailing rate in its market. An undercapitalized depository institution may not accept brokered deposits. Safety and Soundness Standards. The FDICIA, as amended, directs each federal banking agency to prescribe safety and soundness standards for depository institutions relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, asset-quality, earnings and stock valuation. The Community Development and Regulatory Improvement Act of 1994 amended FDICIA by allowing federal banking activities to publish guidelines rather than regulations concerning safety and soundness. The Federal Reserve Board has finalized these safety and soundness guidelines. These guidelines relate to the management policies of financial institutions and are designed, in large part, to implement the safety and soundness criteria outlined in FDICIA. These guidelines will be published after the other federal bank regulatory agencies have developed their guidelines. At this time, it is not known what effect the applicable guidelines will have on the current practices of the Company or the Bank. FDICIA also contains a variety of other provisions that may affect the Company's and the Bank's operations, including reporting requirements, regulatory guidelines for real estate lending, "truth in savings" provisions, and the requirement that a depository institution give 90 days' prior notice to customers and regulatory authorities before closing any branch. Certain of the provisions in FDICIA have recently been or will be implemented through the adoption of regulations by the various federal banking agencies and, therefore, their precise impact cannot be assessed at this time. Capital Guidelines. Under the uniform capital guidelines adopted by the federal banking agencies, a well-capitalized institution must have a minimum ratio of total capital to risk-adjusted assets (including certain off-balance sheet items, such as standby letters of credit) of 10%, a minimum Tier 1 (comprised of common equity, retained earnings, minority interests in the equity accounts of consolidated subsidiaries and a limited amount of noncumulative perpetual preferred stock, less deductible intangibles) capital-to-total risk based assets of 6% and a minimum leverage ratio (Tier 1 capital to average quarterly assets, net of goodwill), of 5%. As of December 31, 1996, the Bank was classified as "well-capitalized." Neither the Company nor the Bank is subject to, or party to, any order or agreement with any federal banking agency with respect to the capital maintenance. The federal banking agencies continue to indicate their desire to raise capital requirements applicable to banking organizations, and recently proposed amendments to their risk-based capital regulations to provide for the consideration of interest rate risk in determination of a bank's minimum capital requirements. The proposed amendments are intended to require that banks effectively measure and monitor their interest rate risk and that they maintain capital adequate for that risk. Under the proposed amendments, banks with interest rate risk in excess of a defined supervisory threshold would be required to maintain additional capital beyond that generally required. In addition, effective January 17,1995, the federal banking agencies adopted amendments to their risk-based capital standards to provide for the concentration of credit risk and certain risks arising from nontraditional activities, as well as a bank's ability to manage these risks, as important factors in assessing a bank's overall capital adequacy. Under federal banking laws, failure to meet the minimum regulatory capital requirements could subject a banking institution to a variety of enforcement remedies available to federal regulatory authorities, including the termination of deposit insurance by the FDIC and seizure of the institution. Community Investment Act. Pursuant to the Community Reinvestment Act ("CRA") and similar provisions of Vermont law, regulatory authorities review the performance of the Company and the Bank in meeting the credit needs of the communities served by the Bank. The applicable regulatory authorities consider compliance with this law in connection with the applications for, among other things, approval of branches, branch relocations and acquisitions of banks and bank holding companies. The Bank received a "satisfactory" rating at its most recent CRA examination. Interstate Banking Legislation. The Interstate Banking and Branching Efficiency Act of 1994 facilitates the interstate expansion and consolidation of banking organizations by permitting (i) beginning one year after enactment of the legislation, bank holding companies that are adequately capitalized and managed to acquire banks located in states outside their home states regardless of whether such acquisitions are authorized under the law of the host state, (ii) the interstate merger of banks after June 1, 1997, subject to the right of individual states to "opt in" or "opt out" of this authority prior to such date, (iii) banks to establish new branches on an interstate basis provided that such action is specifically authorized by the law of the host state, (iv) foreign banks to establish, with approval of the appropriate regulators in the United States, branches outside their home states to the same extent that national or state banks located in such state would be authorized to do so and (v) banks to receive deposits, renew time deposits, close loans, service loans and receive payment on loans and other obligations as agent for any bank or thrift affiliate, whether the affiliate is located in the same or different state. Other Proposals Other legislative and regulatory proposals regarding changes in banking, and the regulation of banks and other financial institutions, are regularly considered by the executive branch of the federal government, Congress and various state governments, including Vermont, and state and federal regulatory authorities. It cannot be predicted what additional legislative and/or regulatory proposals, if any, will be considered in the future, whether any such proposals will be adopted or, if adopted, how any such proposals would affect the Company or the Bank. ITEM 2 - PROPERTIES A. SCHEDULE OF BANKING OFFICES BY LOCATION Merchants Bank operates thirty-five banking facilities as indicated in Schedule A below. Corporate administrative offices and the operations data processing center are located at 275 Kennedy Drive, South Burlington, Vermont. Burlington 164 College Street Merchants Trust Co. 172 College Street Branch office 1014 North Avenue Branch office Essex Junction 54 Pearl Street Branch office South Burlington 50 White Street Branch office 929 Shelburne Road *1 Branch office 275 Kennedy Drive Operations Center Corporate Offices Branch office Burlington Airport *1 ATM Bristol 15 West Street Branch office Barre 105 North Main Street Branch office Northfield 47 Depot Square Branch office South Hero South St. & Route 2 Branch office Hardwick Wolcott Street Branch office Hinesburg Route 116/Shelburne Falls Rd Branch office Vergennes Monkton Road Branch office Winooski 364 Main Street Branch office Shelburne Wake Robin Branch office Johnson Main Street, Route 15 Branch office Colchester 8 Porters Point Road *2 Branch office Jericho Route 15 Branch office Enosburg Falls 155 Main Street Branch office No. Bennington Bank Street Branch office Manchester Ctr. 515 Main Street Branch office Brattleboro 205 Main Street *3 Branch office Wilmington West Main Street Branch office Bennington Putnam Square *2 Branch office Wallingford Route 7 *2 Branch office St. Johnsbury 90 Portland Street Branch office Bradford 1 Main Street & Branch office Operations Building Fairlee U.S. Route #5 Branch office Groton 258 Scott Highway Branch office East Thetford U.S. Route #5 & VT 113 Branch office Newbury U.S. Route #5 Branch office Fair Haven 97 Main Street Branch office Washington Street Grand Union *1 ATM Springfield Springfield Shopping Plaza Branch office Windsor 160 Main Street Branch office Notes: *1: Facilities owned by the Bank are located on leased land. *2: Facilities located on leased land with improvements also leased. *3: As of December 31, 1996, a mortgage with an unpaid principal balance of $202,991 is outstanding on the Brattleboro office. This mortgage is being amortized at $1,736 per month, at a rate of 9% through the year 2020. ITEM 3 - LEGAL PROCEEDINGS LEGAL PROCEEDINGS During the fall of 1994, lawsuits were brought against the Company, the Bank, the Trust Company (collectively referred to as "the Companies") and certain directors of the Companies. These lawsuits related to certain investments managed for Trust Company clients and placed in the Piper Jaffray Institutional Government Income Portfolio. Separately, and before the suits were filed, the Companies had initiated a review of those investments. As a result of the review, the Trust Company paid to the affected Trust Company clients a total of approximately $9.2 million in December 1994. The payments do not constitute a legal settlement of any claims in the lawsuits. However, based on consultation with legal counsel, management believes that further liability, if any, of the Companies on account of matters complained of in the lawsuits will not have a material adverse effect on the consolidated financial position and results of operations of the Company. In December 1994, the Trust Company received a payment of $6,000,000 from its insurance carriers in connection with these matters. The Companies also intend to pursue all available claims against Piper Jaffray Companies, Inc. and others on account of the losses that gave rise to the $9.2 million payment by the Companies. The claims of the Trust Company, as trustee, against Piper Jaffray Companies were joined with claims of other investors in the Piper Fund in a class action in the United States District Court for the District of Minnesota. The class action was settled by the parties, and on December 14, 1995, the settlement was approved by the Court. By order dated January 11, 1996, the Court ordered the share of the settlement proceeds attributable to Merchants Trust Company investments not be paid pending further order. On February 18, 1997, the District Court entered an Order for Final Judgment. That Order provides, among other matters, that except to the extent (if at all) any other court with jurisdiction has given leave for some or all of the proceeds to be deposited with that court pursuant to Vermont Rule of Civil Procedure 67, Federal Rule of Civil Procedure 67, or such other rule as may apply, and absent an appeal, the entire net settlement proceeds attributable to the Trust Company investments are to be paid to the Trust Company starting approximately sixty-one days after the date of the Order. Any recovery of settlement proceeds is subject to the terms of an agreement between the Companies and their insurance carriers. The attorneys representing the plaintiffs in one of the lawsuits discussed above have taken the position that amounts recovered by the Companies on these claims should be paid to the affected Trust Company clients (net of legal fees paid to attorneys), in addition to the $9.2 million already paid. The attorneys representing the plaintiffs in one of the lawsuits discussed above requested an award of attorneys' fees for allegedly causing the Companies to make the $9.2 million payment and asked the Court to order the Trust Company to withhold payment of $500,000. The Trust Company has resisted the claims for payment of such fees by its clients, and, as a result, the Trust Company was directed to place the sum of $500,000 into escrow pending a ruling by the Court. On appeal by the Companies, the United States Court of Appeals affirmed in part, vacated in part, and reversed for further proceedings the lower court's judgment. The attorneys representing the plaintiffs in that lawsuit have indicated that they intend to seek damages as well as attorneys' fees. There is the possibility that the Companies may be required to remit all or part of the escrowed funds, or to pay damages. However, based upon consultation with legal counsel, management believes that on the facts of this case there is no substantial authority for an award of such fees or damages in those proceedings. The Bank is also involved in various legal proceedings arising in the normal course of business. Based upon consultation with legal counsel, management believes that the resolution of these matters will not have a material effect on the consolidated financial position and results of operations of the Company. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of calendar year 1996 no matters were submitted to a vote of security holders through a solicitation of proxies or otherwise. PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of the Company is traded on the over-the-counter market and the price is quoted on the NASDAQ National Market Stock Exchange under the trading symbol MBVT. Quarterly stock prices during the last eight quarters are as indicated below based upon quotations as provided by the National Association of Securities Dealers, Inc. Prices of transactions between private parties may vary from the ranges quoted below.
QUARTER ENDED HIGH LOW ---------------------------------------------------------- March 31, 1995 $11.750 $ 9.250 June 30, 1995 12.500 10.000 September 30, 1995 15.000 10.500 December 31, 1995 15.000 13.250 March 31, 1996 16.000 13.250 June 30, 1996 16.375 14.250 September 30, 1996 16.000 15.000 December 31, 1996 19.375 15.000
As of January 29, 1997 Merchants Bancshares, Inc. had 1,366 shareholders. The Company did not declare or pay a dividend from April 1993 until February 1997, when the Board of Directors declared a fourth quarter, 1996 dividend payable on February 14, 1997 to shareholders of record at February 4, 1997. Future dividends will depend upon the financial condition and earnings of the Company and its subsidiaries, their need for funds and other factors, including applicable government regulations. ITEM 6 - SELECTED FINANCIAL DATA The supplementary financial data presented in the following tables and narrative contain information highlighting certain significant trends in the Company's financial condition and results of operations over an extended period of time. The following information should be analyzed in conjunction with the year-end audited consolidated financial statements as contained in the 1996 Annual Report to Shareholders, a copy of which is attached as an addendum to this Form 10-K. The five-year summary of operations, interest management analysis and management's discussion and analysis, all as contained on pages 29 through 37 of the 1996 Annual Report to Shareholders, are herein incorporated by reference. Tables included on the following pages 49 through 52 concern the following: Deposits; return on equity and assets; short-term borrowings; distribution of assets, liabilities, and stockholders' equity; analysis of changes in net interest income; and the composition and maturity of the loan portfolio. DEPOSITS The following schedule shows the average balances of various classifications of deposits. Dollar amounts are expressed in thousands.
1996 1995 1994 ------------------------------- Demand Deposits $ 78,873 $ 87,434 $ 91,853 Savings, Money Market and NOW Accounts 264,611 279,906 310,613 Time Deposits Over $100,000 20,059 20,927 18,135 Other Time Deposits 150,380 167,975 177,198 ------------------------------- Total Average Deposits $513,923 $556,242 $597,799 ===============================
Time Deposits over $100,000 at December 31, 1996 had the following schedule of maturities (in thousands): Three Months or Less $ 3,137 Three to Six Months 4,098 Six to Twelve Months 3,673 Over Twelve Months 2,789 Over Five Years 6,672 ------- Total $20,369 ======= RETURN ON EQUITY AND ASSETS The return on average assets, return on average equity, dividend payout ratio and average equity to average assets ratio for the three years ended December 31, 1996 were as follows:
1996 1995 1994 -------------------------- Return on Average Total Assets 1.07% (0.60%) (0.41%) Return on Average Stockholders' Equity 14.44% (9.41%) (6.24%) Dividend Payout Ratio N/A N/A N/A Average Stockholders' Equity to Average Total Assets 7.42% 6.36% 6.53%
SHORT-TERM BORROWINGS Refer to Notes 7 and 8 to the Financial Statements for this information. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential. The following table presents the condensed annual average balance sheets for 1996, 1995 and 1994. The total dollar amount of interest income from assets and the subsequent yields calculated on a taxable equivalent basis as well as the interest paid on interest bearing liablilities, expressed in dollars and rates are also shown in the table. (Dollars are in Thousands)
1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- Interest Average Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ ASSETS: Balance Expense Rate Balance Expense Rate Balance Expense Rate - ---------------------------------------------------------------------------------------------------------------------------------- Investment Securities: U.S. Treasury and Agencies $ 117,908 $ 7,588 6.44% $ 83,749 $ 4,525 5.40% $ 89,183 $ 3,508 3.93% Other, Including FHLB Stock 2,865 148 5.17% 4,416 357 8.08% 8,178 535 6.54% - ---------------------------------------------------------------------------------------------------------------------------------- Total Investment Securities $ 120,773 $ 7,736 6.41% $ 88,165 $ 4,882 5.54% $ 97,361 $ 4,043 4.15% - ---------------------------------------------------------------------------------------------------------------------------------- Loans, Including Fees on Loans: Commercial (a) (b) 68,783 7,281 10.59% 87,009 9,236 10.61% 117,948 10,128 8.59% Real Estate 322,690 31,135 9.65% 378,433 35,094 9.27% 396,176 36,959 9.33% Consumer 15,041 1,673 11.12% 15,605 1,902 12.19% 19,710 2,167 10.99% - ---------------------------------------------------------------------------------------------------------------------------------- Total Loans $ 406,514 $ 40,089 9.86% $ 481,047 $ 46,232 9.61% $ 533,834 $ 49,254 9.23% Federal Funds Sold $ 5,905 $ 315 5.33% $ 6,339 $ 366 5.77% $ 7,865 $ 315 4.01% - ---------------------------------------------------------------------------------------------------------------------------------- Total Earning Assets $ 533,192 $ 48,140 9.03% $ 575,551 $ 51,480 8.94% $ 639,060 $ 53,612 8.39% - ---------------------------------------------------------------------------------------------------------------------------------- Reserve for Possible Loan Losses (15,984) (17,946) (18,991) Cash and Due From Banks 28,907 34,099 31,910 Premises and Equipment 13,298 15,365 16,349 Other Assets 21,447 35,418 40,749 - ---------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 580,860 $ 642,487 $ 709,077 ================================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY: Time Deposits: Savings, Money Market & NOW Accounts $ 264,611 $ 8,217 3.11% $ 279,906 $ 9,077 3.24% $ 309,490 $ 8,420 2.72% Certificates of Deposit over $100,000 20,059 1,396 6.96% 20,927 1,433 6.85% 22,248 1,336 6.01% Other Time 150,380 8,112 5.39% 167,975 8,981 5.35% 177,250 8,096 4.57% - ---------------------------------------------------------------------------------------------------------------------------------- Total Time Deposits $ 435,050 $ 17,725 4.07% $ 468,808 $ 19,491 4.16% $ 508,988 $ 17,852 3.51% Federal Funds Purchased 704 32 4.59% 975 58 5.95% 1,167 57 4.88% Securities Sold Under Agreement to Repurchase 3,139 160 5.09% 0 0 0.00% 19 1 5.26% Demand Notes Due U.S. Treasury 2,134 108 5.04% 3,229 173 5.36% 3,130 120 3.83% Other Interest Bearing Liabilities 1,067 45 4.25% 4,524 44 0.97% 4,555 303 6.65% Debt 8,925 602 6.75% 32,819 3,236 9.86% 50,575 4,044 8.00% - ---------------------------------------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities $ 451,019 $ 18,672 4.14% $ 510,355 $ 23,002 4.51% $ 568,434 $ 22,377 3.94% - ---------------------------------------------------------------------------------------------------------------------------------- Demand Deposits 78,873 87,434 89,318 Other Liabilities 7,857 3,850 4,994 Stockholders' Equity 43,111 40,848 46,331 - ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities & Stockholders' Equity $ 580,860 $ 642,487 $ 709,077 ================================================================================================================================== Net Interest Income (a) $ 29,468 $ 28,478 $ 31,235 ================================================================================================================================== Yield Spread 4.89% 4.44% 4.45% ================================================================================================================================== NET INTEREST INCOME TO EARNING ASSETS 5.53% 4.95% 4.89% ================================================================================================================================== (a) Tax exempt interest has been converted to a tax equivalent basis using Federal tax rate of 34%. (b) Includes non-accruing loans.
Merchants Bancshares, Inc Analysis of Changes in Net Interest Income The following table sets forth, for each major category of interest earning assets and interest bearing liabilities, the dollar amounts (in thousands) of interest income (calculated on a taxable equivalent basis) and interest expense and changes therein for 1996 as compared with 1995 and 1995 as compared with 1994.
1996 vs 1995 1995 vs 1994 ----------------------------------------------- --------------------------------------------- -Due to (a)- -Due to (a)- Increase ---------------- Increase ---------------- 1996 1995 (Decrease) Volume Rate 1995 1994 (Decrease) Volume Rate - ------------------------------------------------------------------------------------------------------------------------------- Interest Income: Loans $40,089 $46,232 $(6,143) $(7,371) $1,228 $46,232 $49,254 $(3,022) $(5,073) $2,051 Investment Income: Taxable 7,736 4,882 2,854 2,090 764 4,882 4,043 839 (597) 1,436 Non-Taxable 0 0 0 0 0 0 0 0 0 0 Federal Funds Sold 315 366 (51) (23) (28) 366 315 51 (88) 139 - ------------------------------------------------------------------------------------------------------------------------------- Total $48,140 $51,480 $(3,340) $(5,304) $1,964 $51,480 $53,612 $(2,132) $(5,758) $3,626 - ------------------------------------------------------------------------------------------------------------------------------- Less Intereat Expense: Savings, Money Market & Now Accounts $ 8,217 $ 9,077 $ (860) $ (474) $ (386) $ 9,077 $ 8,420 $ 657 $ (959) $1,616 Certificates of Deposit Over $100,000 1,396 1,433 (37) (60) 23 1,433 1,336 97 (90) 187 Other Time 8,112 8,981 (869) (948) 79 8,981 8,096 885 (496) 1,381 Federal Funds Purchased 32 58 (26) (12) (14) 58 57 1 (11) 12 Securities Sold Under Agreement to Repurchase 160 0 160 160 (0) 0 1 (1) (1) (0) Demand Note - U.S. Treasury 108 173 (65) (55) (10) 173 120 53 5 48 Debt and Other Borrowings 647 3,280 (2,633) (1,760) (873) 3,280 4,347 (1,067) (1,751) 684 - ------------------------------------------------------------------------------------------------------------------------------- Total $18,672 $23,002 $(4,330) $(3,149) $(1,181) $23,002 $22,377 $ 625 $(3,303) $3,928 - ------------------------------------------------------------------------------------------------------------------------------- Net Interest Income $29,468 $28,478 $ 990 $(2,155) $ 3,145 $28,478 $31,235 $(2,757) $(2,455) $ (302) =============================================================================================================================== (a) The dollar amount of changes in interest income and interest expense attributable to changes in rate and volume has been allocated between rate and volume based upon the changes in rates times the first year's volume and the changes in volume times the current year's rate. Note: Included in Interest Income are fees on loans totalling $2,333, $2,492 and $3,571 for the years ended December 31, 1996, 1995 and 1994, respectively.
LOAN PORTFOLIO The following tables display the composition of the Bank's loan portfolio for the consecutive five year period 1991 through 1995, along with a schedule profiling the loan maturity distribution over the next five years. COMPOSITION OF LOAN PORTFOLIO The table below presents the composition of the Bank's loan portfolio by type of loan as of December 31 for each of the past five years. All dollar amounts are expressed in thousands. Amounts are shown gross of net deferred loan fees of $946,723 in 1996, $956,333 in 1995, $1,132,494 in 1994, $1,310,416 in 1993 and $1,183,400 in 1992, which principally relate to real estate mortgages.
As of December 31, - ------------------------------------------------------------------------------------------------- Type of Loan 1996 1995 1994 1993 1992 ---------------------------------------------------- Commercial, Financial & Agricultural $ 59,124 $ 73,915 $ 88,201 $ 98,936 $ 76,141 Industrial Revenue Bonds 1,967 3,010 4,411 6,695 8,721 Real Estate--Construction 3,420 9,644 21,992 30,526 18,776 Real Estate--Mortgage 307,357 346,202 377,429 413,112 305,513 Installment 14,831 16,560 18,086 22,836 18,332 Lease Financing 0 0 0 42 630 All Other Loan 534 393 436 1,324 1,422 ---------------------------------------------------- Total Loans $387,233 $449,724 $510,555 $573,471 $429,535 ====================================================
PROFILE OF LOAN MATURITY DISTRIBUTION The table below presents the distribution of the varying maturities or repricing opportunities of the loan portfolio at December, 1996. All dollar amounts are expressed in thousands.
Over One One Year Through Over Five Or Less 5 Years Years Total - ------------------------------------------------------------------------------- Commercial Loans, Industrial Revenue Bonds, Lease Financing and All Other Loans $ 46,818 $ 7,158 $ 7,649 $ 61,625 Real Estate Loans 180,583 65,195 64,999 $310,777 Installment Loans 3,351 11,208 272 $ 14,831 - ------------------------------------------------------------------------------- $230,752 $83,561 $72,920 $387,233 ===========================================
Loans maturing or repricing after one year which have predetermined interest rates totaled $155,109. Loans maturing or repricing after one year which have floating or adjustable interest rates totaled $1,372. In 1996, a total of 425 one-to-four family residential mortgage loans were closed by the bank, totaling $33.4 million. Approximately 33% of these originations were sold on the secondary market and the remaining 67%, or $22.3 million were placed in the Bank's portfolio. The Bank currently services $322 million in residential mortgage loans, $250 million of which it services for other investors such as federal government agencies (FNMA and FHLMC) and for financial investors such as insurance companies and pension funds located outside Vermont. During 1996, the Bank remained an active participant in the U.S. Small Business Administration guaranteed loan program. Thirty-two new SBA loans totaling $4.7 million were originated during 1996 with SBA guarantees ranging from 70% to 85%. This volume of new lending activity represents a decrease of 52% from that experienced in 1995. Approximately 27% of all new SBA loans originated during 1996 were sold to secondary market investors located outside Vermont. This selling activity has the positive effect on Vermont of importing capital into the state from other parts of the country. SBA guarantees are advantageous to the Bank because they reduce risk in the Bank's loan portfolio and allow the Bank to increase its commercial loan base and market share with minimal impact on capital. During 1996, the Bank originated 546 commercial loans, totaling $65.9 million. This lending activity represented a decrease of approximately 15% of new loan volume from that experienced in 1995. Commercial loans were originated throughout Vermont. LOAN PORTFOLIO MONITORING The Bank's Board of Directors grants each loan officer the authority to originate loans on behalf of the Bank. The Board also establishes restrictions regarding the types of loans that may be granted and the distribution of loan types within the portfolio, and sets loan authority limits for each lender. These authorized lending limits are established at least annually and are based upon the lender's knowledge and experience. Loan requests that exceed a lender's authority are referred to the Credit Department. All extensions of credit of $2.5 million to any one borrower, or related party interest, are reviewed and approved by the Directors Loan Committee. By using a variety of management reports, the Bank's loan portfolio is continuously monitored by the Board of Directors and Credit Department. The loan portfolio as a whole, as well as individual loans, are reviewed for loan performance, creditworthiness, and strength of documentation. The Bank has hired an external loan review firm to assist in portfolio monitoring. Credit ratings are assigned to commercial loans and are routinely reviewed. All loan officers are required to service their own loan portfolios and account relationships. As necessary, loan officers or the loan workout function takes remedial actions to assure full and timely payment of loan balances. LOAN QUALITY AND RESERVES FOR POSSIBLE LOAN LOSSES (RPLL) Merchants Bancshares, Inc. reviews the adequacy of the RPLL at least quarterly. The method used in determining the amount of the RPLL is not based on maintaining a specific percentage of RPLL to total loans or total nonperforming assets, but rather a comprehensive analytical process of assessing the credit risk inherent in the loan portfolio. This assessment incorporates a broad range of factors which are indicative of both general and specific credit risk, as well as a consistent methodology for quantifying probable credit losses. As part of the Merchants Bancshares, Inc.'s analysis of specific credit risk, a detailed and extensive review is done on larger credits and problematic credits identified on the watched asset list, nonperforming asset listings and credit rating reports. The Financial Accounting Standards Board ("FASB") issued revised accounting guidance which affected the RPLL. Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," requires, among other things, that the creditors measure impaired loans at the present value of expected future cash flows, discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral-dependent. For purposes of this statement, a loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The FASB also issued SFAS No. 118, which amended SFAS No. 114, by allowing creditors to use their existing methods of recognizing interest income on impaired loans. Merchants Bancshares, Inc. adopted the methodology of SFAS No. 114, incorporating the amendments of SFAS No. 118, on January 1, 1995. The more significant factors considered in the evaluation of the adequacy of the RPLL based on the analysis of general and specific credit risk include the following: Status of impaired loans as defined under SFAS No. 114 * Status of nonperforming loans * Status of adversely classified credits * Historic charge-off experience by major loan category * Size and composition of the loan portfolio * Concentrations of credit risk o Renewals and extensions * Current local and general economic conditions and trends * Loan growth trends in the portfolio * Off-balance-sheet credit risk relative to commitments to lend In accordance with SFAS No. 114, management has defined an impaired loan as meeting any of the following criteria: * A loan that is 90 days past due and still accruing * A loan that has been placed in nonaccrual and is 45 days past due * A loan that is rated Substandard and is 45 days past due * A loan that is rated Doubtful or Loss * A loan that has been classified as a Troubled Debt Restructuring * A loan that has been assigned a specific allocation Loans deemed impaired totaled $8.4 million. Impaired loans have been allocated $875,000 of the RPLL. On June 4, 1993, the Bank acquired New First National Bank of Vermont (NFNBV). The terms of the Purchase and Assumption Agreement (the "Agreement") required the FDIC to reimburse the Bank 80% of the net charge-offs up to $41 million on any loans that qualify as loss-sharing loans, for a period of three years from the date of acquisition. Losses in excess of $41 million would be reimbursed at 95%. The Agreement expired effective June 30, 1996, with respect to the reimbursement of losses. The Bank is required to return to the FDIC 80% of any reimbursed losses recovered, during the two year period following the expiration date. As of June 30, 1996, the remaining balance of loss-sharing loans aggregated $48,176,000; included in that balance was $2,928,000 in nonperforming loans. Due to the expiration of the loss-sharing agreement, management adjusted the analysis of the RPLL to account for 100% of the loss exposure associated with loans that qualified as loss-sharing. The RPLL analysis prepared the quarter ended March 31, 1996 showed an increase in the reserve requirement of approximately $1.4 million, due to the expiration of the Agreement. Management maintained the RPLL at a level adequate to offset the required increase in the reserve requirement; therefore, no additional provision was necessary due to the expiration of the Agreement. Overall, management maintains the RPLL at a level deemed to be adequate, in light of historical, current and prospective factors, to reflect the level of risk in the loan portfolio. Loan loss experience and nonperforming asset data are presented and discussed in relation to their impact on the adequacy of the RPLL. The table below reflects the Bank's loan loss experience and activity in the RPLL for the past five years. ===============================================================================
LOAN LOSSES AND RPLL RECONCILIATION December 31, 1996 (000's omitted) - ---------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------- Average Loans Outstanding $406,530 $481,047 $514,843 $515,805 $441,291 - ---------------------------------------------------------------------------------------- RPLL Beginning of Year 16,234 19,929 20,060 7,412 6,650 - ---------------------------------------------------------------------------------------- Charge-Off : - ---------------------------------------------------------------------------------------- Commercial, Lease Financing and all Other Loans (907) (3,671) (3,356) (5,567) (2,938) - ---------------------------------------------------------------------------------------- Real Estate - Construction (602) (1,485) (1,159) (275) (253) - ---------------------------------------------------------------------------------------- Real Estate - Mortgage (3,206) (12,942) (7,673) (7,651) (4,096) - ---------------------------------------------------------------------------------------- Installment & Credit Cards (405) (263) (462) (459) (452) - ---------------------------------------------------------------------------------------- Total Loans Charged Off (5,120) (18,361) (12,650) (13,952) (7,739) - ---------------------------------------------------------------------------------------- Recoveries: - ---------------------------------------------------------------------------------------- Commercial, Lease Financing and all Other Loans 391 1,232 1,187 392 232 - ---------------------------------------------------------------------------------------- Real Estate - Construction 63 32 400 0 0 - ---------------------------------------------------------------------------------------- Real Estate - Mortgage 856 1,224 769 301 108 - ---------------------------------------------------------------------------------------- Installment & Credit Cards 125 78 163 85 111 - ---------------------------------------------------------------------------------------- Total Recoveries 1,435 2,566 2,519 778 451 - ---------------------------------------------------------------------------------------- Net Loan Losses ($3,685) ($15,795) ($10,131) ($13,174) ($7,288) - ---------------------------------------------------------------------------------------- Provision for Loan Losses: - ---------------------------------------------------------------------------------------- Charged to Operations (NOTE 1) 3,150 12,100 10,000 23,882 8,050 - ---------------------------------------------------------------------------------------- Loan Loss Reserve (NOTE 2) 2,000 - ---------------------------------------------------------------------------------------- RPLL End of Year $15,700 $16,234 $19,929 $20,060 $7,412 - ---------------------------------------------------------------------------------------- RPLL to Total Loans 4.05% 3.61% 3.90% 3.50% 1.73% - ---------------------------------------------------------------------------------------- Net Losses to Average Loans 0.91% 3.28% 1.97% 2.28% 1.63% ======================================================================================== NOTE 1: The loan loss provision is charged to operating expense. When actual losses differ from these estimates, and if adjustments are considered necessary, they are reported in operations in the periods in which they become known. NOTE 2: See Note 2 to the consolidated financial statements regarding the acquisition of New First National Bank of Vermont.
The reserve for possible loan losses decreased from $16,234,000 at December 31, 1995 to $15,700,000 at December 31, 1996. At the same time, the provision for loan losses decreased from $12,100,000 to $3,150,000. The reduction in provision and relative stable reserve balance is reflective of the improvement in asset quality. These improvements are further noted in the reduction of net loan losses and nonperforming assets, as noted in the following tables: NONPERFORMING ASSETS The following tables summarize the Bank's nonperforming assets (NPAs) as of December 31, 1992 through 1996 (in thousands):
=============================================================================== 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------- Nonaccrual Loans $4,091 $25,617 $32,200 $47,069 $12,148 - -------------------------------------------------------------------------------------- Loans Past Due 90 Days or More and Still Accruing 217 237 668 715 7,251 - -------------------------------------------------------------------------------------- Restructured Loans 2,403 1,430 5,083 2,841 1,838 - -------------------------------------------------------------------------------------- Total Nonperforming Loans: 6,711 27,284 37,951 50,625 21,237 - -------------------------------------------------------------------------------------- Other Real Estate Owned 1,925 7,772 13,231 13,674 12,662 - -------------------------------------------------------------------------------------- Total NonperformingAssets: $8,636 $35,056 $51,182 $64,299 $33,899 - -------------------------------------------------------------------------------------- NPL to Total Loans 1.70% 3.61% 3.90% 3.50% 1.73% - -------------------------------------------------------------------------------------- NPA to Total Loans plus OREO 2.20% 3.28% 1.97% 2.28% 1.63% ======================================================================================
Excluded from the 1996 balances above are approximately $11 million of internally classified loans. These loans have well-defined weaknesses which, if left unattended, could lead to collection problems. Management maintains an internal listing, which includes these loans, which is reviewed and updated monthly. The oversight process on these loans includes an active risk management approach. A management committee reviews the status of these loans each quarter and determines or confirms the appropriate risk rating and accrual status. The findings of this review process are instrumental in determining the adequacy of the loan loss reserve. DISCUSSION OF 1996 EVENTS AFFECTING NONPERFORMING ASSETS Historically, the Company has worked closely with borrowers and also pursued vigorous collection efforts. The Company continued its efforts to collect troubled assets during 1996. The Company's enhanced Credit Department and Loan Workout functions provided resources to address collection strategies for nonperforming assets.
============================================================================== 12-31-96 9-30-96 6-30-96 3-31-96 12-31-95 - ------------------------------------------------------------------------------ Nonaccrual Loans $4,091 $11,235 $13,335 $16,988 $25,617 - ------------------------------------------------------------------------------ Loans Past Due 90 days or more and still Accruing 217 3 1,159 192 237 - ------------------------------------------------------------------------------ Restructured Loans 2,403 2,475 2,604 2,642 1,430 - ------------------------------------------------------------------------------ Other Real Estate Owned 1,925 3,317 2,617 4,698 7,772 - ------------------------------------------------------------------------------ Total $8,636 $17,030 $19,715 $24,520 $35,056 ==============================================================================
The more significant events affecting NPAs are discussed below. NONACCRUAL LOANS: - ----------------- Nonaccrual loans declined from $25,617,000 at December 31, 1995 to $4,091,000 at December 31, 1996. Management continued its efforts to proactively identify and resolve loans which present significant risk of loss to the Bank. During 1996, management identified approximately $4.8 million in accounts which were transferred to nonaccrual status. These transfers were offset by continued resolution of nonaccrual accounts; approximately $8.0 million in loans were returned to accrual status; principal payments of approximately $4.2 million were collected; a nonperforming loan sale was completed during the fourth quarter reducing nonaccruing loans by approximately $5.7 million. In addition, charges of approximately $5.0 million further decreased the balance of nonaccruing loans. LOANS PAST DUE 90 DAYS OR MORE AND STILL ACCRUING: - -------------------------------------------------- The Bank generally places loans that become 90 or more days past due in nonaccrual status. If the ultimate collectibility of principal and interest is assured, loans may continue to accrue and be left in this category. Included in this category are loans which have reached maturity and have not been renewed on a timely basis, for reasons other than financial capacity to pay. During the second quarter three significant accounts met this definition; renewal was completed during the third quarter. RESTRUCTURED LOANS: - ------------------- Restructured loans (TDRs) increased during 1996 from $1,430,000 at December 31, 1995 to $2,403,000 at December 31, 1996. The increase was due to a reclassification of restructured, nonaccruing loans to accrual status. In addition, one large loan for approximately $1.0 million was removed from TDR status. OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURE: - ----------------------------------------------------- The Bank continued its success in 1996 in disposing of OREO and continues to aggressively market such properties. The balance of OREO decreased from $7.772 million at December 31, 1995 to $1.925 million at December 31, 1996. The decrease was due to a combination of sales of approximately $4.0 million and write-downs of approximately $2.3 million. POLICIES AND PROCEDURES RELATING TO THE ACCRUAL OF INTEREST INCOME The Bank normally recognizes income on earning assets on the accrual basis, which calls for the recognition of income as earned, as opposed to when it is collected. The Company's policy is to classify a loan more than 90 days past due with respect to principal or interest as a nonaccruing loan, unless the ultimate collectibility of principal and interest is assured. Income accruals are suspended on all nonaccruing loans, and all previously accrued and uncollected interest is typically charged against current income. A loan remains on nonaccruing status until the factors which suggest doubtful collectibility no longer exist, the loan is liquidated, or when the loan is determined to be uncollectible and is charged off against the reserve for possible loan losses. In those cases where a nonaccruing loan is secured by real estate, the Company can, and usually does, initiate foreclosure proceedings. The result of such action is to force repayment of the loan through the proceeds of a foreclosure sale or to allow the Company to take possession of the collateral in order to manage a future resale of the real estate. Foreclosed property is recorded at the lower of its cost or estimated fair value, less any estimated costs to sell. Any cost in excess of the estimated fair value on the transfer date is charged to the reserve for possible loan losses, while further declines in market values are recorded as an expense in other non-interest expense in the statement of operations. As of December 31, 1996 and 1995, the Company had valuation reserves against the other real estate owned portfolio carrying values of $2,717,000 and $2,430,000, respectively. SUBSEQUENT EVENT During January, 1997, OREO balances were reduced to approximately $1.0 million. As a result, nonperforming assets were reduced to $7.6 million or 2% of total loans, plus OREO. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Please refer to pages 31-37 for Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated balance sheets of Merchants Bancshares, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996, together with the related notes and the opinion of Arthur Andersen LLP, independent public accountants, all as contained on pages 2 through 30 of the Company's 1996 Annual Report to Shareholders, are incorporated herein by reference. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. Part III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11 - EXECUTIVE COMPENSATION ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS Reference is hereby made to pages 7 through 13 and page 17of the Company's Proxy Statement to Shareholders dated March 25, 1997, wherein pursuant to Regulation 14 A information concerning the above subjects (Items 10 through 13) is incorporated by reference. Pursuant to Rule 12b-23, definitive copies of the Proxy Statement will be filed within 120 days subsequent to the end of the Company's fiscal year covered by Form 10-K. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (1) The following consolidated financial statements, as included in the 1996 Annual Report to Shareholders, are incorporated herein by reference: Consolidated Balance Sheets, December 31, 1996 and December 31, 1995. Consolidated Statements of Operations for years ended December 31, 1996, 1995 and 1994. Consolidated Statements of Changes in Stockholders' Equity for years ended December 31, 1996, 1995 and 1994. Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994. Notes to Consolidated Financial Statements, December 31, 1996. (2) The following exhibits are either filed or attached as part of this report, or are incorporated herein by reference. Exhibit Description ------- ----------- 3.1 Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit B to Pre-Effective Amendment No. 1 to Company's Definitive Proxy Statement for the Annual Meeting of the Stockholders of the Company, filed on April 25, 1987) 3.2 Amended By-Laws of the Company (Incorporated by reference to Exhibit C to Company's Definitive Proxy Statement for the Annual Meeting of the Stockholders of the Company, filed on April 25, 1987). 4 Instruments defining the rights of security holders, including indentures: 4.1 Specimen of the Company's Common Stock Certificate (Incorporated by Reference to Exhibit 7 to the Company's Registration Statement on Form S-14 (Registration Number 2-86108) filed on August 22, 1983) 4.2 Description of the rights of holders of the Company's Common Stock (appearing on page 9 of the Company's Registration Statement on Form S-14 (Registration No. 2-86108) filed on August 22, 1983) 10.1 Merchants Bancshares, Inc. Dividend Reinvestment and Stock Purchase Plan (Incorporated by reference to Exhibit 4.1 to Company's Registration Statement on Form S-3 (Registration No. 333-20375) filed on January 22, 1997) 10.2 401(k) Employee Stock Ownership Plan of the Company, dated January 1, 1990, as amended (Incorporated by reference to Company's Registration Statement on Form S-8 (Registration Number 33-3274) filed on November 16, 1989) 10.3 Amended and Restated Merchants Bank Pension Plan dated as of January 1, 1994 (Incorporated by Reference to Exhibit 10.6 to Post-Effective Amendment Number 1 to Company's Registration Statement on Form S-8 (Registration Number 333-18845) filed on December 26, 1996) 10.4 Amended Employment Agreement, dated as of October 31, 1994 by and between the Company, Merchants Bank and Joseph L. Boutin (Incorporated by reference to Exhibit 10.1 to Post-Effective Amendment No.1 to Company's Registration Statement on Form S-8 (Registration No. 333-18845) filed on December 26, 1996 (Superseded by Exhibit 10.5) 10.5 Employment Agreement dated as of January 1, 1997, by and between the Company, Merchants Bank and Joseph L. Boutin. 10.6 Amended Employment Agreement, dated as of January 23, 1995, by and between Merchants Bank and Michael R. Tuttle (Incorporated by reference to Exhibit 10.2 to Post-Effective Amendment No. 1 to the Company's Registration Statement on Form S-8 (Registration No. 333-18845) filed on December 26,1996 (Superseded by Exhibit 10.7) 10.7 Employment Agreement dated as of January 1, 1997, by and between Merchants Bank and Michael R. Tuttle 10.8 Employment Agreement, dated as of December 29, 1995, by and between Merchants Bank and Thomas R. Havers (Incorporated by reference to Exhibit 10.3 to Post-Effective Amendment No. 1 to Company's Registration Statement on Form S-8 (Registration No. 333-18845) filed on December 26, 1996) (Superseded by Exhibit 10.9) 10.9 Employment Agreement dated as of January 1, 1997, by and between Merchants Bank and Thomas R. Havers. 10.10 Employment Agreement, dated as of February 1,1996, by and between Merchants Bank and Thomas S. Leavitt (Incorporated by reference to Exhibit 10.4 to Post-Effective Amendment No. 1 to Company's Registration Statement on Form S-8 (Registration No. 333-18845) filed on December 26, 1996) (Superseded by Exhibit 10.11) 10.11 Employment Agreement dated as of January 1, 1997, by and between Merchants Bank and Thomas S. Leavitt. 10.12 Employment Agreement, dated as of December 29, 1995, by and between Merchants Bank and Merchants Trust Company and William R. Heaslip (Incorporated by reference to Exhibit 10.5 to Post-Effective Amendment No. 1 to the Company's Registration Statement on Form S-8 (Registration No. 333-18845) filed on December 26, 1996)(Superseded by Exhibit 10.13) 10.13 Employment Agreement, dated as of January 1, 1997, by and between Merchants Bank and Merchants Trust Company and William R. Heaslip 10.14 The Merchants Bank Amended and Restated Deferred Compensation Plan for Directors 10.14.1 Trust Under the Merchants Bank Amended and Restated Deferred Compensation Plan for Directors 10.15 Agreement among the Merchants Bank and Kathryn T. Boardman, Thomas R. Havers and Susan D. Struble dated as of December 20, 1995 10.15.1 Trust Under the Agreement among the Merchants Bank and Kathryn T. Boardman, Thomas R. Havers and Susan D. Struble dated as of December 20, 1995 10.16 Agreement between the Merchants Bank and Dudley H. Davis dated December 20, 1995. 10.16.1 Fixed Trust under Agreement between the Merchants Bank and Dudley H. Davis dated December 20, 1995. 10.16.2 Variable Trust under Agreement between the Merchants Bank and Dudley H. Davis dated December 21, 1995. 11 Statement re: computation of per share earnings. 13 1996 Annual Report to Shareholders 21 Subsidiaries of the Company 23 Consent of Arthur Andersen LLP (3) Reports on Form 8-K: NONE SIGNATURES Pursuant to the requirement of Section 13 or 15 (d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on it's behalf by the undersigned, thereunto duly authorized. Merchants Bancshares, Inc. Date February 20, 1997 by /s/ Joseph L. Boutin --------------------------- --------------------------------- Joseph L. Boutin, President & CEO Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of MERCHANTS BANCSHARES, INC., and in the capacities and on the date as indicated. by /s/ Joseph L. Boutin by /s/ Raymond C. Pecor, Jr. --------------------------- --------------------------------- Joseph L. Boutin, Director, President Raymond C. Pecor, Jr. Director & CEO of the Company and the Bank Chairman of the Board of Directors by /s/ Peter A. Bouyea by --------------------------- --------------------------------- Peter A. Bouyea, Director Charles A. Davis, Director by by /s/ Jeffrey L. Davis --------------------------- --------------------------------- Dudley H. Davis, Director Jeffrey L. Davis, Director by /s/ Michael G. Furlong by --------------------------- --------------------------------- Michael G. Furlong, Director Thomas F. Murphy, Director by /s/ Janet P. Spitler by /s/ Leo O'Brien, Jr --------------------------- --------------------------------- Janet P. Spitler, Treasurer of the Leo O'Brien, Jr, Director Company, Vice President, Controller and Treasurer of the Bank by /s/ Patrick S. Robins by --------------------------- --------------------------------- Patrick S. Robins, Director Benjamin F. Schweyer, Director by /s/ Robert A. Skiff --------------------------- Robert A. Skiff, Director EX-10 2 EX-10.5 EMPLOYMENT AGREEMENT-J. BOUTIN EXHIBIT 10.5 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT is made effective as of the 1st day of January, 1997, by and between MERCHANTS BANK, a state chartered Bank, and MERCHANTS BANCSHARES, INC., a Delaware corporation, both with principal offices at 275 Kennedy Drive, South Burlington, Vermont, (hereinafter collectively referred to as "CORPORATIONS") and JOSEPH L. BOUTIN, residing at 63 Morrill Drive, Burlington, Vermont 05401 (hereinafter referred to as "EMPLOYEE"). WITNESSETH ---------- In consideration of the mutual covenants herein contained, the parties agree as follows: 1. Employment: The CORPORATIONS hereby employ the EMPLOYEE, and the EMPLOYEE hereby accepts employment. 2. Terms and Renewal: This Agreement shall be for a term beginning on January 1, 1997, and terminating on December 31, 1999. On December 31, 1998, the CORPORATIONS shall notify EMPLOYEE if CORPORATIONS do not intend to renew the Agreement for a one-year term following its original term. In the event that the CORPORATIONS do not notify EMPLOYEE, the Agreement shall renew for a one-year term following its original term. Similarly, on each anniversary date thereafter the CORPORATIONS shall notify EMPLOYEE if they do not intend to renew the Agreement, and upon a failure to do so the Agreement shall automatically renew for an additional one-year term following the then applicable term. 3. Termination: 3.1 Discharge: The CORPORATIONS have the right to discharge the EMPLOYEE at any time with or without just cause, as herein defined. If the EMPLOYEE is discharged without just cause, the CORPORATIONS agree to pay in one lump sum the EMPLOYEE's salary, plus pay or provide as or when due all other normal benefits and Accrued Incentive Payments as provided herein, for one year from the date of such discharge or the balance of the time remaining under the terms of Agreement, whichever is greater. "Accrued Incentive Payments" shall mean the payment of incentive amounts, the precondition of which has occurred or will occur at or upon the expiration of the relevant Fiscal Period to which such incentive may be applicable. The EMPLOYEE may elect to receive the payments over a five (5) year period, such payments to be in an amount equal to the net present value of the lump sum payment if paid immediately. "Just cause" shall mean (a) misconduct connected with EMPLOYEE's work, if and as defined in any written policy of the CORPORATIONS covering all of the CORPORATIONS' officers or directors which is now, or subsequently, in effect; or (b) the conviction of a felony which precludes EMPLOYEE from performing all or an essential part of his duties of employment, provided that, if such conviction is subsequently reversed, rescinded or expunged, it shall not constitute just cause for termination. 3.2 Disability: In cases of disability, either party may elect to terminate the employment, subject to the following conditions: (i) the EMPLOYEE shall receive the greater of: (a) the compensation and other normal benefits plus Accrued Incentive Payments which the EMPLOYEE would have received had he been terminated without just cause; or (b) the benefits payable to, and actually paid to, the EMPLOYEE arising out of any disability insurance policy covering the EMPLOYEE, and paid for by the CORPORATIONS. If said policy benefits are paid other than in a lump sum payment, the value of the benefits, for purposes of this Agreement, shall be calculated by using a present value of all payments to be made; and (ii) EMPLOYEE has suffered a disability as defined below. "Disability" shall mean mental or physical incapacity which shall continue for six (6) months or longer after exhaustion of all sick leave benefits, or a permanent mental or physical incapacity, either of which makes the performance of substantially all of the EMPLOYEE's duties impossible, as certified in writing by the EMPLOYEE's physician. The CORPORATIONS, in the event of disagreement, may seek the opinion of a qualified physician to determine if such disability exists; provided, however, that such physician is Board Certified in the area of specialty pertinent to the nature and extent of such disability. In the event of further disagreement, the two physicians shall choose a third physician, qualified as above, who shall make the determination, which shall be binding upon the parties. 4. Resignation by the EMPLOYEE: The EMPLOYEE shall have the option of terminating his employment with the CORPORATIONS provided he gives at least 60 days advance written notice to the CORPORATIONS. The EMPLOYEE shall not be deemed to have resigned and, instead, shall have been deemed discharged by the CORPORATIONS, without just cause, if the EMPLOYEE resigns as a result of: (i) immoral, unethical or illegal acts or omissions committed by, or which reasonably appear will be committed by, any director, officer, employee, agent, or independent contractors of the CORPORATIONS (and the CORPORATIONS' Boards of Directors shall not act, after his recommendation, to terminate the offending party(s) or to cease and desist such offending activity); (ii) acts or omissions of any director, officer, employee, agent, or independent contractors of the CORPORATIONS which could reasonably subject the EMPLOYEE to personal liability from any Federal, State or local government or agency, or any banking authority, including, but not limited to, the Federal Deposit Insurance Corporation, the Internal Revenue Service, or the Securities and Exchange Commission; (iii) fundamental disagreements over basic corporate philosophies and/or corporate business plans. 5. Offices and Duties: The EMPLOYEE shall be appointed and/or elected, and shall serve, as the President and Chief Executive Officer of the CORPORATIONS and as a Director of Merchants Bank for the term of his employment hereunder. The CORPORATIONS intend and shall use their best efforts to ensure EMPLOYEE's retention as a Director of Merchants Bancshares, Inc. at subsequent annual meetings of its shareholders. Should the CORPORATIONS decide to alter the titles and/or positions, they must provide the EMPLOYEE with an essentially equivalent or better position, with equivalent or better salary and benefits. The CORPORATIONS will also use their best efforts to secure the Agreement of as many shareholders, if such are required, as are necessary to authorize this Agreement and any contemporaneous agreements required to perform the same on the part of the CORPORATIONS and to elect the EMPLOYEE to the Board of Directors of each of the CORPORATIONS. 6. Efforts: The EMPLOYEE shall devote his full-time efforts and energies to the business and affairs of the CORPORATIONS and shall use his best efforts, skill and abilities to promote the CORPORATIONS' interests. 7. Evaluation: The EMPLOYEE shall be evaluated annually by the Boards of the CORPORATIONS and shall receive a written copy of said evaluation. Nothing herein shall allow the CORPORATIONS to reduce the salary, incentive payments and other benefits provided for herein; nor shall this provision be deemed to allow for the alteration of EMPLOYEE's duties and authority otherwise set forth in this Agreement; provided, however, that the performance of a condition within any regulatory order, memorandum of understanding or requirement shall not be affected by this provision. 8. Salary and Increases: The CORPORATIONS shall pay the EMPLOYEE for all services rendered an initial salary of $200,000.00 per annum, commencing January 1, 1997, and payable on a bi-weekly basis. The annual salary will be reviewed annually by the Board and may be increased but not decreased at the discretion of the Board. The CORPORATIONS may also grant the EMPLOYEE such other compensation, bonuses, benefits, etc., as they may deem proper from time to time. 9. Annual Bonus: An annual bonus will be paid to the EMPLOYEE provided the CORPORATIONS maintain a "CAMEL" rating of 2 or above, and the CORPORATIONS achieve a target ROE, set annually by the CORPORATIONS Boards of Directors' Compensation Committee, equal to or greater than the median ROE of a defined group of bank holding companies and banks ("PEER GROUP"). The PEER GROUP will be comprised bank holding companies and independent commercial banks located in the Northeast (New England, New York, Pennsylvania and New Jersey), which have assets equal to at least 50% but not more than 200% of the assets of Merchants Bancshares, Inc. If the targets are met, the EMPLOYEE will receive a minimum bonus equal to 35% of base salary for the performance year. The maximum bonus will not exceed 75% of base salary. For the first year of this Agreement the minimum bonus threshold shall be the 65th percentile of the PEER GROUP. The maximum bonus threshold will be the 90th percentile of the PEER GROUP. Bonus awards between 35% and 75% will be interpolated (using linear progression). 10. Benefits: The CORPORATIONS shall provide the EMPLOYEE with all fringe benefits (including but not limited to health, life, disability, workers compensation insurance; vacation and sick pay; pension benefits) offered to other employees of the CORPORATIONS in subordinate positions, but shall provide EMPLOYEE with five (5) weeks per year of vacation. 11. Supplemental Pension: The EMPLOYEE will reach normal retirement under the current pension plan at age 65. However, despite actual years of service, assuming he is employed by the CORPORATIONS for the entire period, he will have accumulated 18 years of service at age 65. Notwithstanding the foregoing, the CORPORATIONS will calculate the EMPLOYEE's benefits as if he had accumulated twenty-five (25) years of service under the plan. If the EMPLOYEE is not employed by the CORPORATIONS until age 65, then for each year of service, the EMPLOYEE will be credited with 1.4 years of service for the purpose of calculating his retirement benefits. This provision shall be applicable only if and so long as the CORPORATIONS shall maintain a pension plan. If the CORPORATIONS shall elect to freeze or modify any existing pension plan and shall enhance or modify any contributory pension plan qualified under [SECTION]401(K) of the Internal Revenue Code, EMPLOYEE shall participate in such replacement or modified plan. 12. Long Term Incentive/Stock option Plan: Each year, the EMPLOYEE will receive stock options with a "value" equal to 50% of his salary. The stock value is determined by calculating the "Black-Scholes" value. The exercise price will be determined annually by the CORPORATIONS' Board of Directors' Compensation Committee. It is intended that the Committee will set the exercise price slightly above the then current market price for the stock of Merchants Bancshares, Inc. Options are exercisable at any time after two (2) years from their original issue date. The term of the options will expire on the earlier of (a) ten years from the issue date, while EMPLOYEE remains employed by the CORPORATIONS, or (b) if EMPLOYEE's employment is terminated, then twelve months after termination of employment. If the EMPLOYEE is terminated without just cause or due to his disability, or in the event that any transaction occurs which results in a change of control of either of the CORPORATIONS from that existing on the date of this Agreement, the EMPLOYEE may exercise these options immediately upon the occurrence of any such event or at any other time permitted in the preceding sub-paragraph. In the event that there is a split of the stock of Merchants Bancshares, Inc., EMPLOYEE's stock options and option price shall be adjusted accordingly, so as to leave EMPLOYEE in the same relative position as at the time of commencement of this Agreement with regard to the issued and outstanding shares of Merchants Bancshares, Inc., on the date such action is taken. In the event there is a public offering of the stock of Merchants Bancshares, Inc. other than pursuant to a stock option or an employee stock ownership plan, at any time before the options granted hereby have been fully exercised, then the number of shares subject to the options granted herein shall be increased so that the total number of shares purchased and purchasable under these options as increased will bear the same relationship to the fully-diluted capitalization of Merchants Bancshares, Inc. immediately after giving effect to completion of the public offering as the original number of shares purchasable under these option does to the fully-diluted capitalization of Merchants Bancshares, Inc. at the effective date hereof. The purchase price for additional shares covered by these options as provided in the preceding sentence shall be the greater of the purchase price provided for herein or the purchase price paid by third parties purchasing stock in the public offering. If the CORPORATIONS are unable to deliver the shares upon which the EMPLOYEE seeks to exercise his options, for any reason, then the CORPORATIONS shall pay to the EMPLOYEE, on the date of exercise, the difference between the exercise price and the trading price of Merchants Bancshares, Inc. shares on that day, as traded on the exchange on which said shares are listed. In the event that the EMPLOYEE shall become deceased during the period in which the EMPLOYEE may exercise his stock options, as provided above, then his Estate may exercise said options in the manner provided above; provided, however, that said options are exercised within six (6) months after EMPLOYEE'S demise. 13. Expenses: The EMPLOYEE shall be reimbursed for documented business expense incurred or paid by the EMPLOYEE in connection with the performance of his duties, in the manner currently required by corporate policy. 14. Indemnification: The CORPORATIONS agree that, within the limits set forth in the Vermont Business Corporations Law and Delaware General Corporation Law, as applicable, they shall hold the EMPLOYEE harmless for any actions taken by the EMPLOYEE in what he reasonably believes to be in the CORPORATIONS' interests or for his omission to so act or for his negligence in connection with such employment. This indemnity shall include the EMPLOYEE's reasonable attorneys' fees and costs incurred in defending any such demands, claims, or actions. The EMPLOYEE shall have the sole right to defend himself against any and all such demands, claims or actions, using counsel of his choosing. The indemnity herein provided shall also include, but in no way be limited to, claims of liability arising for or on account of those acts or omissions of others described in Section 4 of this Agreement. Notwithstanding the foregoing and except to the extent insurance provides such indemnity, the CORPORATIONS shall have no obligation to hold the EMPLOYEE harmless from (i) any liability he may have to any governmental entity with respect to personal taxes, interest or penalties, unless that liability resulted from a liability of the CORPORATIONS (i.e. corporate 941 taxes, interest and penalties, assessed against the EMPLOYEE through a 100% assessment by the IRS); (ii) any claims arising out of, based upon or attributable to the gaining in fact of any personal profit or advantage to which the EMPLOYEE is not legally entitled; or (iii) any claim arising out of, based upon or attributable to the committing of any criminal or deliberately fraudulent act. Prior to receiving any purported personal profit or advantage, EMPLOYEE is entitled to receive, at the CORPORATIONS' expense, an opinion of counsel that he is legally entitled to receive it. This Paragraph 14 shall not limit any immunity or indemnity provided EMPLOYEE by law or by the Articles of Association or Bylaws of the CORPORATIONS. 15. Binding Effect: This Agreement shall inure to the benefit of and be binding upon the EMPLOYEE, his legal representatives, heirs, and distributee(s), and upon the CORPORATIONS, their successors and assigns, and also any subsidiary or affiliated corporation. 16. No Waiver: The waiver of any term or condition of this Agreement shall not be deemed to constitute the waiver of any other term or condition. 17. Notices: All notices, elections hereunder and similar communication(s) shall be in writing and shall be sufficient if addressed to the EMPLOYEE at his address as shown above (or at any new address as he shall advise the CORPORATIONS of in writing) and mailed by certified return receipt with postage fully paid. All notices to the CORPORATIONS shall be given to the presiding officer of their Boards of Directors. 18. Controlling Law and Attorneys' Fees: Notwithstanding the actual place of execution, or the states of incorporation of the CORPORATIONS, this Agreement shall be governed by the laws of the State of Vermont and the parties hereto consent to the jurisdiction of the Courts of the State of Vermont. In the event of a breach of this Agreement, the non-breaching party shall be entitled to recover its costs and attorneys' fees from the breaching party. 19. Compliance with Law: Any and all provisions of this Agreement shall be consistent and comply with applicable laws or regulations enacted or promulgated both before and after the execution date of this Agreement, and to the extent that any provision is inconsistent or does not comply with applicable laws or regulations, that part which is inconsistent or does not comply shall be modified to comply with the applicable law or regulation. 20. Prior Agreement Superseded: This Employment Agreement replaces and supersedes an Amended Employment Agreement between the CORPORATIONS and the EMPLOYEE dated effective as of October 31, 1994, with the following exception: The EMPLOYEE shall maintain all rights to incentive payments under paragraph 9 of such Amended Employment Agreement through June 30, 1997. IN WITNESS WHEREOF, the CORPORATIONS have caused this Agreement to be executed by directors or officers thereunto duly authorized, and the EMPLOYEE has hereunto set his hand and seal, all as of the day and year first above written. IN PRESENCE OF: CORPORATIONS MERCHANTS BANK /s/ Stacey L. Russell BY: /s/ Michael G. Furlong - ------------------------------ ------------------------------- MERCHANTS BANCSHARES, INC. /s/ Stacey L. Russell BY: /s/ Michael G. Furlong - ------------------------------ ------------------------------- EMPLOYEE /s/ Stacy May Dimes /s/ Joseph L. Boutin - ------------------------------ ------------------------------- JOSEPH L. BOUTIN EX-10 3 EX-10.7 EMPLOYMENT AGREEMENT-M. TUTTLE EXHIBIT 10.7 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT is made effective as of the 1st day of January, 1997, by and between MERCHANTS BANK, a state chartered Bank with its principal office at 275 Kennedy Drive, South Burlington, Vermont, (hereinafter referred to as "CORPORATION") and MICHAEL R. TUTTLE, residing at 17 Wealthy Avenue, South Burlington, Vermont 05403 (hereinafter referred to as "EMPLOYEE"). WITNESSETH ---------- In consideration of the mutual covenants herein contained, the parties agree as follows: 1. Employment: The CORPORATION hereby employs the EMPLOYEE, and the EMPLOYEE hereby accepts employment. 2. Terms and Renewal: This Agreement shall be for an initial term beginning on January 1, 1997, and terminating on December 31, 1999 (the "Initial Term"). On December 31, 1998, the CORPORATION shall notify the EMPLOYEE in writing if the CORPORATION does not intend to renew the Agreement for a one- year term following the Initial Term. In the event that the CORPORATION does not so notify the EMPLOYEE, the Agreement shall renew for a one-year term following the Initial Term. Similarly, on each successive December 31 of a then applicable Term, the CORPORATION shall notify the EMPLOYEE in writing if the CORPORATION does not intend to renew the Agreement. In the event that the CORPORATION does not so notify the EMPLOYEE, the Agreement shall automatically renew for an additional one-year Term following the then applicable Term. 3. Termination: 3.1 Discharge: The CORPORATION has the right to discharge the EMPLOYEE at any time with or without just cause, as herein defined. If the EMPLOYEE is discharged without just cause, the CORPORATION agrees to pay in one lump sum upon discharge the EMPLOYEE's salary, and the CORPORATION agrees to pay or provide as or when due all other normal benefits and Accrued Incentive Payments, including the Accrued Incentive Payments provided for in Section 9 of this Agreement, for one year from the date of such discharge or for the balance of the time remaining under the Term of this Agreement, whichever is greater. "Accrued Incentive Payments" shall mean the payment of incentive amounts, the precondition of which has occurred or will occur at or upon the expiration of the relevant Fiscal Period to which such incentive may be applicable. The EMPLOYEE may elect to receive the payments over a five (5) year period, and if he does so, the net present value of such payments shall be equal to the lump sum payment if paid immediately. "Just cause" shall mean (a) misconduct connected with EMPLOYEE's work, if and as defined in any written policy of the CORPORATION covering all of the CORPORATION's officers which is now, or subsequently, in effect; or (b) the conviction of a felony which precludes EMPLOYEE from performing all or an essential part of his duties of employment, provided that, if such conviction is subsequently reversed, rescinded or expunged, EMPLOYEE's termination will be treated as if made without just cause. 3.2 Disability: In cases of disability, either party may elect to terminate the employment, subject to the following conditions: (i) the EMPLOYEE shall receive the greater of: (a) the salary and other normal benefits plus Accrued Incentive Payments which the EMPLOYEE would have received had he been terminated without just cause; or (b) the benefits payable to, and actually paid to, the EMPLOYEE arising out of any disability insurance policy covering the EMPLOYEE, and paid for by the CORPORATION. If said policy benefits are paid other than in a lump sum payment, the value of the benefits, for purposes of this Agreement, shall be calculated by using a present value of all payments to be made; and (ii) EMPLOYEE has suffered a disability as defined below. "Disability" shall mean mental or physical incapacity which shall continue for six (6) months or longer after exhaustion of all sick leave benefits, or a permanent mental or physical incapacity, either of which makes the performance of substantially all of the EMPLOYEE's duties impossible, as certified in writing by the EMPLOYEE's physician. The CORPORATION, in the event of disagreement, may seek the opinion of a qualified physician to determine if such disability exists; provided, however, that such physician is Board Certified in the area of specialty pertinent to the nature and extent of such disability. In the event of further disagreement, the two physicians shall choose a third physician, qualified as above, who shall make the determination, which shall be binding upon the parties. 4. Resignation by the EMPLOYEE: The EMPLOYEE shall have the option of terminating his employment with the CORPORATION provided he gives at least 60 days advance written notice to the CORPORATION. The EMPLOYEE shall not be deemed to have resigned and, instead, shall be deemed to have been discharged by the CORPORATION, without just cause, if the EMPLOYEE resigns as a result of: (i) immoral, unethical or illegal acts or omissions committed by, or which reasonably appear will be committed by, any director, officer, employee, agent, or independent contractors of the CORPORATION (and the CORPORATION's Board of Directors shall not act, after his recommendation, to terminate the offending party(s) or to cease and desist such offending activity); (ii) acts or omissions of any director, officer, employee, agent, or independent contractors of the CORPORATION which could reasonably subject the EMPLOYEE to personal liability from any Federal, State or local government or agency, or any banking authority, including, but not limited to, the Federal Deposit Insurance Corporation, the Internal Revenue Service, or the Securities and Exchange Commission; (iii) fundamental disagreements over basic corporate philosophies and/or corporate business plans; (iv) the CORPORATION having reduced the EMPLOYEE's salary, incentive payments or other benefits provided for herein or having reduced his title or position from those specified herein; or (v) Joseph L. Boutin having been discharged by the Corporation without just cause from his employment as President and Chief Executive Officer of the CORPORATION. 5. Offices and Duties: The EMPLOYEE shall be appointed, and shall serve, as the Executive Vice President of the CORPORATION. Should the CORPORATION decide to alter his title and/or position, it must provide the EMPLOYEE with an essentially equivalent or better position, with equivalent or better salary and benefits. 6. Efforts: The EMPLOYEE shall devote his full-time efforts and energies to the business and affairs of the CORPORATION and shall use his best efforts, skill and abilities to promote the CORPORATION's interests. 7. Evaluation: The EMPLOYEE shall be evaluated in writing annually by the President of the CORPORATION and shall receive a copy of said evaluation. Nothing herein shall allow the CORPORATION to reduce the salary, incentive payments and other benefits provided for herein; nor shall this provision be deemed to allow for the alteration of EMPLOYEE's duties and authority otherwise set forth in this Agreement; provided, however, that the performance of a condition within any regulatory order, memorandum of understanding or requirement shall not be affected by this provision. 8. Salary and Increases: The CORPORATION shall pay the EMPLOYEE for all services rendered to the CORPORATION an initial salary of $130,000.00 per annum, commencing January 1, 1997, and payable on a bi-weekly basis. The salary will be reviewed annually by the President and may be increased but not decreased at the discretion of the President. The CORPORATION may also grant the EMPLOYEE such other compensation, bonuses, benefits, etc., as it may deem proper from time to time. 9. Annual Bonus: An annual bonus will be paid to the EMPLOYEE provided the CORPORATION maintains a "CAMEL" rating of 2 or above, and Merchants Bancshares, Inc. achieves a target ROE, set annually by the CORPORATION's Board of Directors' Compensation Committee, equal to or greater than the median "ROE" of a defined group of bank holding companies and banks ("PEER GROUP"). The PEER GROUP will be comprised of bank holding companies and independent commercial banks located in the Northeast (New England, New York, Pennsylvania and New Jersey), which have assets at least 50% but not more than 200% of the assets of Merchants Bancshares, Inc. If the targets are met, the EMPLOYEE will receive a minimum bonus equal to 35% of base salary for the performance year. The maximum bonus will not exceed 75% of base salary. For the first year of this Agreement the minimum bonus threshold shall be set at the 65th percentile of the PEER GROUP. The maximum bonus threshold will be the 90th percentile of the PEER GROUP. Bonus awards between 35% and 75% will be interpolated (using linear progression). 10. Benefits: The CORPORATION shall provide the EMPLOYEE with all fringe benefits (including but not limited to health, life, disability, workers compensation insurance; vacation and sick pay; pension benefits) offered to other employees of the CORPORATION in subordinate positions, but shall provide EMPLOYEE with five (5) weeks per year of vacation. 11. Long Term Incentive/Stock option Plan: Each year, the EMPLOYEE will receive stock options with a "value" equal to 50% of his salary. The stock value is determined by calculating the "Black-Scholes" value. The exercise price will be determined annually by the CORPORATION's Board of Directors' Compensation Committee. It is intended that the Committee will set the exercise price slightly above the then current market price for the stock of Merchants Bancshares, Inc. Options are exercisable at any time after two (2) years from their original issue date. The term of the options will expire on the earlier of (a) ten years from the issue date while EMPLOYEE remains employed by the CORPORATION, or (b) if EMPLOYEE's employment is terminated, then twelve months after termination of employment. If the EMPLOYEE is terminated without just cause or due to his disability, or in the event that any transaction occurs which results in a change of control of either the CORPORATION or Merchants Bancshares, Inc. from that existing on the date of this Agreement, the EMPLOYEE may exercise this option immediately upon the occurrence of any such event or at any other time permitted in the preceding sub-paragraph. In the event that there is a split of Merchants Bancshares, Inc. stock, EMPLOYEE's stock options and option price shall be adjusted accordingly, so as to leave EMPLOYEE in the same relative position as at the time of commencement of this Agreement with regard to the issued and outstanding shares of Merchants Bancshares, Inc. on the date such action is taken. In the event there is a public offering of the stock of Merchants Bancshares, Inc. other than pursuant to a stock option or an employee stock ownership plan, at any time before the options granted hereby have been fully exercised, then the number of shares subject to the options granted herein shall be increased so that the total number of shares purchased and purchasable under these options as increased will bear the same relationship to the fully-diluted capitalization of the Corporation immediately after giving effect to completion of the public offering as the original number of shares purchasable under these options does to the fully-diluted capitalization of the Corporation at the effective date hereof. The purchase price for additional shares covered by these options as provided in the preceding sentence shall be the greater of the purchase price provided for herein or the purchase price paid by third parties purchasing stock in the public offering. If the CORPORATION is unable to cause to be delivered the shares upon which the EMPLOYEE seeks to exercise his options, for any reason, then the CORPORATION shall pay to the EMPLOYEE, on the date of exercise, the difference between the exercise price and the trading price of Merchants Bancshares, Inc. shares on that day, as traded on the exchange on which said shares are listed. In the event that the EMPLOYEE shall become deceased during the period in which the EMPLOYEE may exercise his stock options, as provided above, then his Estate may exercise said options in the manner provided above; provided, however, that said options are exercised within six (6) months after EMPLOYEE'S demise. 12. Expenses: The EMPLOYEE shall be reimbursed for documented business expense incurred or paid by the EMPLOYEE in connection with the performance of his duties, in the manner currently required by corporate policy. 13. Indemnification: The CORPORATION agrees that, within the limits set forth in the Vermont Business Corporations Law, it shall hold the EMPLOYEE harmless for any actions taken by the EMPLOYEE or omissions to act, which, in either case, he reasonably believes to be in the CORPORATION's interests, or for his negligence in connection with such employment. This indemnity shall include the EMPLOYEE's reasonable attorneys' fees and costs incurred in defending any such demands, claims, or actions. The EMPLOYEE shall have the sole right to defend himself against any and all such demands, claims or actions, using counsel of his choosing. The indemnity herein provided shall also include, but in no way be limited to, claims of liability arising for or on account of those acts or omissions of others described in Section 4 of this Agreement. Notwithstanding the foregoing and except to the extent insurance provides such indemnity, the CORPORATION shall have no obligation to hold the EMPLOYEE harmless from (i) any liability he may have to any governmental entity with respect to personal taxes, interest or penalties, unless that liability resulted from a liability of the CORPORATION (i.e. [SECTION] 941 Withholding taxes, interest and penalties, assessed against the EMPLOYEE through a 100% assessment by the IRS); (ii) any claims arising out of, based upon or attributable to the gaining in fact of any personal profit or advantage to which the EMPLOYEE is not legally entitled; or (iii) any claim arising out of, based upon or attributable to the committing of any criminal or deliberately fraudulent act. Prior to receiving any purported personal profit or advantage, EMPLOYEE is entitled to receive, at the CORPORATION's expense, an opinion of counsel that he is legally entitled to receive it. This Paragraph 13 shall not limit any immunity or indemnity provided EMPLOYEE by law or by the Articles of Association or Bylaws of the CORPORATION. 14. Binding Effect: This Agreement shall inure to the benefit of and be binding upon the EMPLOYEE, his legal representatives, heirs, and distributee(s), and upon the CORPORATION, its successors and assigns, and also any subsidiary or affiliate corporation. 15. No Waiver: The waiver of any term or condition of this Agreement shall not be deemed to constitute the waiver of any other term or condition. 16. Notices: All notices, elections hereunder and similar communication(s) shall be in writing and shall be sufficient if addressed to the EMPLOYEE at his address shown above (or at any new address of which he shall advise the CORPORATION in writing) and mailed by certified return receipt with postage fully paid. All notices to the CORPORATION shall be given to the presiding officer of the Board of Directors. 17. Controlling Law and Attorneys' Fees: Notwithstanding the actual place of execution, or the state of incorporation of the CORPORATION, this Agreement shall be governed by the laws of the State of Vermont and the parties hereto consent to the jurisdiction of the Courts of the State of Vermont. In the event of a breach of this Agreement, the non-breaching party shall be entitled to recover its costs and attorneys' fees from the breaching party. 18. Corporate Authority. The Board of Directors of the CORPORATION has authorized the President of the CORPORATION to negotiate and execute this Agreement on behalf of the CORPORATION, and upon request of the EMPLOYEE the CORPORATION shall furnish its certificate of the Resolution granting such authority. 19. Compliance with Law. Any and all provisions of this Agreement shall be consistent and comply with applicable laws or regulations enacted or promulgated both before and after the execution date of this Agreement, and to the extent that any provision is inconsistent or does not comply with applicable laws or regulations, that part which is inconsistent or does not comply shall be modified to comply with the applicable law or regulation. 20. Prior Agreement Superseded. This Employment Agreement replaces and supersedes an Amended Employment Agreement between the CORPORATION and the EMPLOYEE dated effective as of January 23, 1995, with the following exception: The EMPLOYEE shall maintain all rights to incentive payments under paragraph 9 of such Amended Employment Agreement through June 30, 1997. IN WITNESS WHEREOF, the CORPORATION has caused this Agreement to be executed by its officer thereunto duly authorized, and the EMPLOYEE has hereunto set his hand and seal, all as of the day and year first above written. IN PRESENCE OF: CORPORATION: MERCHANTS BANK /s/ BRIAN W. GORMAN BY: /s/ JOSEPH L. BOUTIN - ------------------------------ ------------------------------- EMPLOYEE: /s/ JENNIFER L. VARIN /s/ MICHAEL R. TUTTLE - ------------------------------ ------------------------------- MICHAEL R. TUTTLE EX-10 4 EX-10.9 EMPLOYMENT AGREEMENT-T. HAVERS EXHIBIT 10.9 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT is made effective as of the 1st day of January, 1997, by and between MERCHANTS BANK, a state chartered Bank with its principal office at 275 Kennedy Drive, South Burlington, Vermont, (hereinafter referred to as "CORPORATION") and THOMAS R. HAVERS, residing at 144 Laurel Hill Drive, South Burlington, Vermont 05403 (hereinafter referred to as "EMPLOYEE"). WITNESSETH ---------- In consideration of the mutual covenants herein contained, the parties agree as follows: 1. Employment: The CORPORATION hereby employs the EMPLOYEE, and the EMPLOYEE hereby accepts employment. 2. Terms and Renewal: This Agreement shall be for an initial term beginning on January 1, 1997, and terminating on December 31, 1999. On December 31, 1998, the CORPORATION shall notify the EMPLOYEE in writing if the CORPORATION does not intend to renew the Agreement for a one- year term following the Initial Term. In the event that the CORPORATION does not so notify the EMPLOYEE, the Agreement shall renew for a one-year term following the Initial Term. Similarly, on each successive December 31 of a then applicable Term, the CORPORATION shall notify the EMPLOYEE in writing if the CORPORATION does not intend to renew the Agreement. In the event that the CORPORATION does not so notify the EMPLOYEE, the Agreement shall automatically renew for an additional one-year Term following the then applicable Term. 3. Termination: 3.1 Discharge: The CORPORATION has the right to discharge the EMPLOYEE at any time with or without just cause, as herein defined. If the EMPLOYEE is discharged without just cause, the CORPORATION agrees to pay in one lump sum upon discharge the EMPLOYEE's salary for one year. "Just cause" shall mean (a) misconduct connected with EMPLOYEE's work, if and as defined in any written policy of the CORPORATION covering all of the CORPORATION's officers which is now, or subsequently, in effect; or (b) the conviction of a felony which precludes EMPLOYEE from performing all or an essential part of his duties of employment, provided that, if such conviction is subsequently reversed, rescinded or expunged, EMPLOYEE's termination will be treated as if made without just cause. 3.2 Disability: In cases of disability, either party may elect to terminate the employment, subject to the following conditions: (i) the EMPLOYEE shall receive the greater of: (a) the salary and other normal benefits plus Accrued Incentive Payments which the EMPLOYEE would have received had he been terminated without just cause; or (b) the benefits payable to, and actually paid to, the EMPLOYEE arising out of any disability insurance policy covering the EMPLOYEE, and paid for by the CORPORATION. If said policy benefits are paid other than in a lump sum payment, the value of the benefits, for purposes of this Agreement, shall be calculated by using a present value of all payments to be made; and (ii) EMPLOYEE has suffered a disability as defined below. "Disability" shall mean mental or physical incapacity which shall continue for six (6) months or longer after exhaustion of all sick leave benefits, or a permanent mental or physical incapacity, either of which makes the performance of substantially all of the EMPLOYEE's duties impossible, as certified in writing by the EMPLOYEE's physician. The CORPORATION, in the event of disagreement, may seek the opinion of a qualified physician to determine if such disability exists; provided, however, that such physician is Board Certified in the area of specialty pertinent to the nature and extent of such disability. In the event of further disagreement, the two physicians shall choose a third physician, qualified as above, who shall make the determination, which shall be binding upon the parties. 4. Resignation by the EMPLOYEE: The EMPLOYEE shall have the option of terminating his employment with the CORPORATION provided he gives at least 60 days advance written notice to the CORPORATION. The EMPLOYEE shall not be deemed to have resigned and, instead, shall be deemed to have been discharged by the CORPORATION, without just cause, if the EMPLOYEE resigns as a result of: (i) immoral, unethical or illegal acts or omissions committed by, or which reasonably appear will be committed by, any director, officer, employee, agent, or independent contractors of the CORPORATION (and the CORPORATION's Board of Directors shall not act, after his recommendation, to terminate the offending party(s) or to cease and desist such offending activity); (ii) acts or omissions of any director, officer, employee, agent, or independent contractors of the CORPORATION which could reasonably subject the EMPLOYEE to personal liability from any Federal, State or local government or agency, or any banking authority, including, but not limited to, the Federal Deposit Insurance Corporation, the Internal Revenue Service, or the Securities and Exchange Commission. 5. Offices and Duties: The EMPLOYEE shall be appointed, and shall serve, as the Senior Vice President of the CORPORATION. Should the CORPORATION decide to alter his title and/or position, it must provide the EMPLOYEE with an essentially equivalent or better position, with equivalent or better salary and benefits. 6. Efforts: The EMPLOYEE shall devote his full-time efforts and energies to the business and affairs of the CORPORATION and shall use his best efforts, skill and abilities to promote the CORPORATION's interests. 7. Evaluation: The EMPLOYEE shall be evaluated in writing annually by the President of the CORPORATION and shall receive a copy of said evaluation. Nothing herein shall allow the CORPORATION to reduce the salary, incentive payments and other benefits provided for herein; nor shall this provision be deemed to allow for the alteration of EMPLOYEE's duties and authority otherwise set forth in this Agreement; provided, however, that the performance of a condition within any regulatory order, memorandum of understanding or requirement shall not be affected by this provision. 8. Salary and Increases: The CORPORATION shall pay the EMPLOYEE for all services rendered to the CORPORATION an initial salary of $100,000.00 per annum, commencing January 1, 1997, and payable on a bi-weekly basis. The salary will be reviewed annually by the President and may be increased but not decreased at the discretion of the President. The CORPORATION may also grant the EMPLOYEE such other compensation, bonuses, benefits, etc., as it may deem proper from time to time. 9. Annual Bonus: An annual bonus will be paid to the EMPLOYEE provided the CORPORATION maintains a "CAMEL" rating of 2 or above, and Merchants Bancshares, Inc. achieves a target ROE, set annually by the CORPORATION's Board of Directors' Compensation Committee, equal to or greater than the median ROE of a defined group of bank holding companies and banks ("PEER GROUP"). The PEER GROUP will be comprised of bank holding companies and independent commercial banks located in the Northeast (New England, New York, Pennsylvania and New Jersey), which have assets at least 50% but not more than 200% of the assets of Merchants Bancshares, Inc. If the targets are met, the EMPLOYEE will receive a minimum bonus equal to 35% of base salary for the performance year. The maximum bonus will not exceed 75% of base salary. For the first year of this Agreement the minimum bonus threshold shall be set at the 65th percentile of the PEER GROUP. The maximum bonus threshold will be the 90th percentile of the PEER GROUP. Bonus awards between 35% and 75% will be interpolated (using linear progression). 10. Benefits: The CORPORATION shall provide the EMPLOYEE with all fringe benefits (including but not limited to health, life, disability, workers compensation insurance; vacation and sick pay; pension benefits) offered to other employees of the CORPORATION in subordinate positions. 11. Long Term Incentive/Stock option Plan: Each year, the EMPLOYEE will receive stock options with a "value" equal to 50% of his salary. The stock value is determined by calculating the "Black-Scholes" value. The exercise price will be determined annually by the CORPORATION's Board of Directors' Compensation Committee. It is intended that the Committee will set the exercise price slightly above the then current market price for the stock of Merchants Bancshares, Inc. Options are exercisable at any time after two (2) years from their original issue date. The term of the options will expire on the earlier of (a) ten years from the issue date while EMPLOYEE remains employed by the CORPORATION, or (b) if EMPLOYEE's employment is terminated, then twelve months after termination of employment. If the EMPLOYEE is terminated without just cause or due to his disability, or in the event that any transaction occurs which results in a change of control of either the CORPORATION or Merchants Bancshares, Inc. from that existing on the date of this Agreement, the EMPLOYEE may exercise this option immediately upon the occurrence of any such event or at any other time permitted in the preceding sub-paragraph. In the event that there is a split of Merchants Bancshares, Inc. stock, EMPLOYEE's stock options and option price shall be adjusted accordingly, so as to leave EMPLOYEE in the same relative position as at the time of commencement of this Agreement with regard to the issued and outstanding shares of Merchants Bancshares, Inc. on the date such action is taken. In the event there is a public offering of the stock of Merchants Bancshares, Inc. other than pursuant to a stock option or an employee stock ownership plan, at any time before the options granted hereby have been fully exercised, then the number of shares subject to the options granted herein shall be increased so that the total number of shares purchased and purchasable under these options as increased will bear the same relationship to the fully-diluted capitalization of the Corporation immediately after giving effect to completion of the public offering as the original number of shares purchasable under these options does to the fully-diluted capitalization of the Corporation at the effective date hereof. The purchase price for additional shares covered by these options as provided in the preceding sentence shall be the greater of the purchase price provided for herein or the purchase price paid by third parties purchasing stock in the public offering. If the CORPORATION is unable to cause to be delivered the shares upon which the EMPLOYEE seeks to exercise his options, for any reason, then the CORPORATION shall pay to the EMPLOYEE, on the date of exercise, the difference between the exercise price and the trading price of Merchants Bancshares, Inc. shares on that day, as traded on the exchange on which said shares are listed. In the event that the EMPLOYEE shall become deceased during the period in which the EMPLOYEE may exercise his stock options, as provided above, then his Estate may exercise said options in the manner provided above; provided, however, that said options are exercised within six (6) months after EMPLOYEE'S demise. 12. Expenses: The EMPLOYEE shall be reimbursed for documented business expense incurred or paid by the EMPLOYEE in connection with the performance of his duties, in the manner currently required by corporate policy. 13. Indemnification: The CORPORATION agrees that, within the limits set forth in the Vermont Business Corporations Law, it shall hold the EMPLOYEE harmless for any actions taken by the EMPLOYEE or omissions to act, which, in either case, he reasonably believes to be in the CORPORATION's interests, or for his negligence in connection with such employment. This indemnity shall include the EMPLOYEE's reasonable attorneys' fees and costs incurred in defending any such demands, claims, or actions. The EMPLOYEE shall have the sole right to defend himself against any and all such demands, claims or actions, using counsel of his choosing. The indemnity herein provided shall also include, but in no way be limited to, claims of liability arising for or on account of those acts or omissions of others described in Section 4 of this Agreement. Notwithstanding the foregoing and except to the extent insurance provides such indemnity, the CORPORATION shall have no obligation to hold the EMPLOYEE harmless from (i) any liability he may have to any governmental entity with respect to personal taxes, interest or penalties, unless that liability resulted from a liability of the CORPORATION (i.e. [SECTION] 941 Withholding taxes, interest and penalties, assessed against the EMPLOYEE through a 100% assessment by the IRS); (ii) any claims arising out of, based upon or attributable to the gaining in fact of any personal profit or advantage to which the EMPLOYEE is not legally entitled; or (iii) any claim arising out of, based upon or attributable to the committing of any criminal or deliberately fraudulent act. Prior to receiving any purported personal profit or advantage, EMPLOYEE is entitled to receive, at the CORPORATION's expense, an opinion of counsel that he is legally entitled to receive it. This Paragraph 13 shall not limit any immunity or indemnity provided EMPLOYEE by law or by the Articles of Association or Bylaws of the CORPORATION. 14. Binding Effect: This Agreement shall inure to the benefit of and be binding upon the EMPLOYEE, his legal representatives, heirs, and distributee(s), and upon the CORPORATION, its successors and assigns, and also any subsidiary or affiliate corporation. 15. No Waiver: The waiver of any term or condition of this Agreement shall not be deemed to constitute the waiver of any other term or condition. 16. Notices: All notices, elections hereunder and similar communication(s) shall be in writing and shall be sufficient if addressed to the EMPLOYEE at his address shown above (or at any new address of which he shall advise the CORPORATION in writing) and mailed by certified return receipt with postage fully paid. All notices to the CORPORATION shall be given to the presiding officer of the Board of Directors. 17. Controlling Law and Attorneys' Fees: Notwithstanding the actual place of execution, or the state of incorporation of the CORPORATION, this Agreement shall be governed by the laws of the State of Vermont and the parties hereto consent to the jurisdiction of the Courts of the State of Vermont. In the event of a breach of this Agreement, the non-breaching party shall be entitled to recover its costs and attorneys' fees from the breaching party. 18. Corporate Authority. The Board of Directors of the CORPORATION has authorized the President of the CORPORATION to negotiate and execute this Agreement on behalf of the CORPORATION, and upon request of the EMPLOYEE the CORPORATION shall furnish its certificate of the Resolution granting such authority. 19. Compliance with Law. Any and all provisions of this Agreement shall be consistent and comply with applicable laws or regulations enacted or promulgated both before and after the execution date of this Agreement, and to the extent that any provision is inconsistent or does not comply with applicable laws or regulations, that part which is inconsistent or does not comply shall be modified to comply with the applicable law or regulation. 20. Prior Agreement Superseded: This Employment Agreement replaces and supersedes an Employment Agreement between the CORPORATION and the EMPLOYEE dated effective as of December 29, 1995, with the following exception: The EMPLOYEE shall maintain all rights to incentive payments under paragraph 9 through June 30, 1997. IN WITNESS WHEREOF, the CORPORATION has caused this Agreement to be executed by its officer thereunto duly authorized, and the EMPLOYEE has hereunto set his hand and seal, all as of the day and year first above written. IN PRESENCE OF: CORPORATION: MERCHANTS BANK /s/ JANET P. SPITLER BY: /s/ JOSEPH L. BOUTIN - ------------------------------ ------------------------------- NAME: Joseph L. Boutin TITLE: President ______________________________ EMPLOYEE: /s/ CYNTHIA W. OLSON /s/ THOMAS R. HAVERS - ------------------------------ ------------------------------- THOMAS R. HAVERS /s/ DALE M. F. HANSON - ------------------------------ EX-10 5 EX-10.11 EMPLOYMENT AGREEMENT-T. LEAVITT EXHIBIT 10.11 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT is made effective as of the 1st day of January, 1997, by and between MERCHANTS BANK, a state chartered Bank with its principal office at 275 Kennedy Drive, South Burlington, Vermont, (hereinafter referred to as the "CORPORATION") and THOMAS S. LEAVITT, residing at 819 North Avenue, Burlington, Vermont 05401 (hereinafter referred to as "EMPLOYEE"). WITNESSETH ---------- In consideration of the mutual covenants herein contained, the parties agree as follows: 1. Employment: The CORPORATION hereby employs the EMPLOYEE, and the EMPLOYEE hereby accepts employment. 2. Terms and Renewal: This Agreement shall be for an initial term beginning on January 1, 1997, and terminating on December 31, 1999. On December 31, 1998, the CORPORATION shall notify the EMPLOYEE in writing if the CORPORATION does not intend to renew the Agreement for a one- year term following the Initial Term. In the event that the CORPORATION does not so notify the EMPLOYEE, the Agreement shall renew for a one-year term following the Initial Term. Similarly, on each successive December 31 of a then applicable Term, the CORPORATION shall notify the EMPLOYEE in writing if the CORPORATION does not intend to renew the Agreement. In the event that the CORPORATION does not so notify the EMPLOYEE, the Agreement shall automatically renew for an additional one-year Term following the then applicable Term. 3. Termination: 3.1 Discharge: The CORPORATION has the right to discharge the EMPLOYEE at any time with or without just cause, as herein defined. If the EMPLOYEE is discharged without just cause, the CORPORATION agrees to pay in one lump sum upon discharge the EMPLOYEE's salary for one year. "Just cause" shall mean (a) misconduct connected with EMPLOYEE's work, if and as defined in any written policy of the CORPORATION covering all of the CORPORATION's officers which is now, or subsequently, in effect; or (b) the conviction of a felony which precludes EMPLOYEE from performing all or an essential part of his duties of employment, provided that, if such conviction is subsequently reversed, rescinded or expunged, EMPLOYEE's termination will be treated as if made without just cause. 3.2 Disability: In cases of disability, either party may elect to terminate the employment, subject to the following conditions: (i) the EMPLOYEE shall receive the greater of: (a) the salary and other normal benefits plus Accrued Incentive Payments which the EMPLOYEE would have received had he been terminated without just cause; or (b) the benefits payable to, and actually paid to, the EMPLOYEE arising out of any disability insurance policy covering the EMPLOYEE, and paid for by the CORPORATION. If said policy benefits are paid other than in a lump sum payment, the value of the benefits, for purposes of this Agreement, shall be calculated by using a present value of all payments to be made; and (ii) EMPLOYEE has suffered a disability as defined below. "Disability" shall mean mental or physical incapacity which shall continue for six (6) months or longer after exhaustion of all sick leave benefits, or a permanent mental or physical incapacity, either of which makes the performance of substantially all of the EMPLOYEE's duties impossible, as certified in writing by the EMPLOYEE's physician. The CORPORATION, in the event of disagreement, may seek the opinion of a qualified physician to determine if such disability exists; provided, however, that such physician is Board Certified in the area of specialty pertinent to the nature and extent of such disability. In the event of further disagreement, the two physicians shall choose a third physician, qualified as above, who shall make the determination, which shall be binding upon the parties. 4. Resignation by the EMPLOYEE: The EMPLOYEE shall have the option of terminating his employment with the CORPORATION provided he gives at least 60 days advance written notice to the CORPORATION. The EMPLOYEE shall not be deemed to have resigned and, instead, shall be deemed to have been discharged by the CORPORATION, without just cause, if the EMPLOYEE resigns as a result of: (i) immoral, unethical or illegal acts or omissions committed by, or which reasonably appear will be committed by, any director, officer, employee, agent, or independent contractors of the CORPORATION (and the CORPORATION's Board of Directors shall not act, after his recommendation, to terminate the offending party(s) or to cease and desist such offending activity); (ii) acts or omissions of any director, officer, employee, agent, or independent contractors of the CORPORATION which could reasonably subject the EMPLOYEE to personal liability from any Federal, State or local government or agency, or any banking authority, including, but not limited to, the Federal Deposit Insurance Corporation, the Internal Revenue Service, or the Securities and Exchange Commission. 5. Offices and Duties: The EMPLOYEE shall be appointed, and shall serve, as the Senior Vice President and Director of Sales (Vermont) of MERCHANTS BANK. Should the CORPORATION decide to alter his title and/or position, it must provide the EMPLOYEE with an essentially equivalent or better position, with equivalent or better salary and benefits. 6. Efforts: The EMPLOYEE shall devote his full-time efforts and energies to the business and affairs of the CORPORATION and shall use his best efforts, skill and abilities to promote the CORPORATION's interests. 7. Evaluation: The EMPLOYEE shall be evaluated in writing annually by the President of the CORPORATION and shall receive a copy of said evaluation. Nothing herein shall allow the CORPORATION to reduce the salary, incentive payments and other benefits provided for herein; nor shall this provision be deemed to allow for the alteration of EMPLOYEE's duties and authority otherwise set forth in this Agreement; provided, however, that the performance of a condition within any regulatory order, memorandum of understanding or requirement shall not be affected by this provision. 8. Salary and Increases: The CORPORATION shall pay the EMPLOYEE for all services rendered to the CORPORATION an initial salary of $100,000.00 per annum, commencing January 1, 1997, and payable on a bi-weekly basis. The salary will be reviewed annually by the President and may be increased but not decreased at the discretion of the President. The CORPORATION may also grant the EMPLOYEE such other compensation, bonuses, benefits, etc., as it may deem proper from time to time. 9. Incentive Payments: Incentive payments based on the growth in the Bank's total loan and deposit portfolios will be paid to the EMPLOYEE on a quarterly basis. The 1997 payments will be calculated using, as the BASE, the averages for the fourth quarter of 1996. For each dollar of growth in average deposits and loans the EMPLOYEE will earn .0009 cents. The amount of the payout will be determined by subtracting the BASE for each category (gross loans and deposits) from the average for each of the four quarters for the same category. This number is then multiplied by .0009 and then divided by 4 to arrive at the quarterly payment for each category. Example (for illustration purposes only): -1996 Fourth Quarter Average Deposits $515MM -1996 Fourth Quarter Average Loans 390MM -1997 First Quarter Average Deposits 525MM -1997 First Quarter Average Loans 395MM Loan growth is $5MM (395-390=5) multiplied by .0009 equals $4,500 divided by 4 equals $1,125.00. Deposit growth is $10MM (525-515=10) multiplied by .0009 equals $9,000 divided by 4 equals $2,250.00. The EMPLOYEE would receive $3,375.00 in incentive compensation for the first quarter. This would be repeated for all quarters in 1997. The President of the CORPORATION or his designee will determine the incentive model to be used in each of the subsequent years of this Agreement. The spirit of this Paragraph is to encourage the EMPLOYEE to continue to develop the sales culture by placing emphasis on the growth of deposits and loans. 10. Benefits: The CORPORATION shall provide the EMPLOYEE with all fringe benefits (including but not limited to health, life, disability, workers compensation insurance; vacation and sick pay; pension benefits) offered to other employees of the CORPORATION in subordinate positions. 11. Long Term Incentive/Stock option Plan: Each year, the EMPLOYEE will receive stock options with a "value" equal to 50% of his salary. The stock value is determined by calculating the "Black-Scholes" value. The exercise price will be determined annually by the CORPORATION'S Board of Director's Compensation Committee. It is intended that the Committee will set the exercise price slightly above the then current market price for the stock of Merchants Bancshares, Inc. Options are exercisable at any time after two (2) years from their original issue date. The term of the options will expire on the earlier of (a) 10 years from the issue date while EMPLOYEE remained employed by the CORPORATION, or (b) if EMPLOYEE's employment is terminated, then twelve months after termination of employment. If the EMPLOYEE is terminated without just cause or due to his disability, or in the event that any transaction occurs which results in a change of control of either the CORPORATION or Merchants Bancshares, Inc. from that existing on the date of this Agreement, the EMPLOYEE may exercise this option immediately upon the occurrence of any such event or at any other time permitted in the preceding sub-paragraph. In the event that there is a split of Merchants Bancshares, Inc. stock, EMPLOYEE's stock options and option price shall be adjusted accordingly, so as to leave EMPLOYEE in the same relative position as at the time of commencement of this Agreement with regard to the issued and outstanding shares of Merchants Bancshares, Inc. on the date such action is taken. In the event there is a public offering of the stock of Merchants Bancshares, Inc. other than pursuant to a stock option or an employee stock ownership plan, at any time before the options granted hereby have been fully exercised, then the number of shares subject to the options granted herein shall be increased so that the total number of shares purchased and purchasable under these options as increased will bear the same relationship to the fully-diluted capitalization of the Corporation immediately after giving effect to completion of the public offering as the original number of shares purchasable under these options does to the fully-diluted capitalization of the Corporation at the effective date hereof. The purchase price for additional shares covered by these options as provided in the preceding sentence shall be the greater of the purchase price provided for herein or the purchase price paid by third parties purchasing stock in the public offering. If the CORPORATION is unable to cause to be delivered the shares upon which the EMPLOYEE seeks to exercise his options, for any reason, then the CORPORATION shall pay to the EMPLOYEE, on the date of exercise, the difference between the exercised price and the trading price of Merchants Bancshares, Inc. shares on that day, as traded on the exchange on which said shares are listed. In the event that the EMPLOYEE shall become deceased during the period in which the EMPLOYEE may exercise his stock options, as provided above, then his Estate may exercise said options in the manner provided above; provided, however, that said options are exercised within six (6) months after EMPLOYEE'S demise. 12. Expenses: The EMPLOYEE shall be reimbursed for documented business expense incurred or paid by the EMPLOYEE in connection with the performance of his duties, in the manner currently required by corporate policy. 13. Indemnification: The CORPORATION agrees that, within the limits set forth in the Vermont Business Corporations Law, it shall hold the EMPLOYEE harmless for any actions taken by the EMPLOYEE or omissions to act, which, in either case, he reasonably believes to be in the CORPORATION's interests, or for his negligence in connection with such employment. This indemnity shall include the EMPLOYEE's reasonable attorneys' fees and costs incurred in defending any such demands, claims, or actions. The EMPLOYEE shall have the sole right to defend himself against any and all such demands, claims or actions, using counsel of his choosing. The indemnity herein provided shall also include, but in no way be limited to, claims of liability arising for or on account of those acts or omissions of others described in Section 4 of this Agreement. Notwithstanding the foregoing and except to the extent insurance provides such indemnity, the CORPORATION shall have no obligation to hold the EMPLOYEE harmless from (i) any liability he may have to any governmental entity with respect to personal taxes, interest or penalties, unless that liability resulted from a liability of the CORPORATION (i.e. [SECTION] 941 Withholding taxes, interest and penalties, assessed against the EMPLOYEE through a 100% assessment by the IRS); (ii) any claims arising out of, based upon or attributable to the gaining in fact of any personal profit or advantage to which the EMPLOYEE is not legally entitled; or (iii) any claim arising out of, based upon or attributable to the committing of any criminal or deliberately fraudulent act. Prior to receiving any purported personal profit or advantage, EMPLOYEE is entitled to receive, at the CORPORATION's expense, an opinion of counsel that he is legally entitled to receive it. This Paragraph 13 shall not limit any immunity or indemnity provided EMPLOYEE by law or by the Articles of Association or Bylaws of the CORPORATION. 14. Binding Effect: This Agreement shall inure to the benefit of and be binding upon the EMPLOYEE, his legal representatives, heirs, and distributee(s), and upon the CORPORATION, its successors and assigns, and also any subsidiary or affiliate corporation. 15. No Waiver: The waiver of any term or condition of this Agreement shall not be deemed to constitute the waiver of any other term or condition. 16. Notices: All notices, elections hereunder and similar communication(s) shall be in writing and shall be sufficient if addressed to the EMPLOYEE at his address shown above (or at any new address of which he shall advise the CORPORATION in writing) and mailed by certified return receipt with postage fully paid. All notices to the CORPORATION shall be given to the presiding officer of the Board of Directors. 17. Controlling Law and Attorneys' Fees: Notwithstanding the actual place of execution, or the state of incorporation of the CORPORATION, this Agreement shall be governed by the laws of the State of Vermont and the parties hereto consent to the jurisdiction of the Courts of the State of Vermont. In the event of a breach of this Agreement, the non-breaching party shall be entitled to recover its costs and attorneys' fees from the breaching party. 18. Corporate Authority. The Board of Directors of the CORPORATION has authorized the President of the CORPORATION to negotiate and execute this Agreement on behalf of the CORPORATION, and upon request of the EMPLOYEE the CORPORATION shall furnish its certificate of the Resolution granting such authority. 19. Compliance with Law. Any and all provisions of this Agreement shall be consistent and comply with applicable laws or regulations enacted or promulgated both before and after the execution date of this Agreement, and to the extent that any provision is inconsistent or does not comply with applicable laws or regulations, that part which is inconsistent or does not comply shall be modified to comply with the applicable law or regulation. 20. Prior Agreement Superseded: This Employment Agreement replaces and supersedes an Employment Agreement between the CORPORATION and the EMPLOYEE dated effective as of February 1, 1995, with the following exception: The EMPLOYEE shall maintain all rights to incentive payments under Paragraph 9 of such Employment Agreement through January 30, 1997. IN WITNESS WHEREOF, the CORPORATION has caused this Agreement to be executed by its officer thereunto duly authorized, and the EMPLOYEE has hereunto set his hand and seal, all as of the day and year first above written. IN PRESENCE OF: CORPORATION: MERCHANTS BANK /s/ JENNIFER L. VARIN BY: /s/ JOSEPH L. BOUTIN - ------------------------------ ------------------------------- NAME: Joseph L. Boutin TITLE: President ______________________________ EMPLOYEE: /s/ JENNIFER L. VARIN /s/ THOMAS S. LEAVITT - ------------------------------ ------------------------------- THOMAS S. LEAVITT - ------------------------------ EX-10 6 EX-10.13 EMPLOYMENT AGREEMENT-W. HEASLIP EXHIBIT 10.13 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT is made effective as of the 1st day of January, 1997, by and among MERCHANTS BANK, a state chartered Bank with its principal office at 275 Kennedy Drive, South Burlington, Vermont, MERCHANTS TRUST COMPANY, a corporation organized and existing under the laws of the State of Vermont with its principal office at 164 College Street (hereinafter collectively referred to as "CORPORATION"), and WILLIAM R. HEASLIP, residing at 80 Dunder Road, Burlington, Vermont 05401 (hereinafter referred to as "EMPLOYEE"). WITNESSETH ---------- In consideration of the mutual covenants herein contained, the parties agree as follows: 1. Employment: The CORPORATION hereby employs the EMPLOYEE, and the EMPLOYEE hereby accepts employment. 2. Terms and Renewal: This Agreement shall be for an initial term beginning on January 1, 1997 and terminating on December 31, 1999. On December 31, 1998, the CORPORATION shall notify the EMPLOYEE in writing if the CORPORATION does not intend to renew the Agreement for a one- year term following the Initial Term. In the event that the CORPORATION does not so notify the EMPLOYEE, the Agreement shall renew for a one-year term following the Initial Term. Similarly, on each successive December 31 of a then applicable Term, the CORPORATION shall notify the EMPLOYEE in writing if the CORPORATION does not intend to renew the Agreement. In the event that the CORPORATION does not so notify the EMPLOYEE, the Agreement shall automatically renew for an additional one-year Term following the then applicable Term. 3. Termination: 3.1 Discharge: The CORPORATION has the right to discharge the EMPLOYEE at any time with or without just cause, as herein defined. If the EMPLOYEE is discharged without just cause, the CORPORATION agrees to pay in one lump sum upon discharge the EMPLOYEE's salary for one year. "Just cause" shall mean (a) misconduct connected with EMPLOYEE's work, if and as defined in any written policy of the CORPORATION covering all of the CORPORATION's officers which is now, or subsequently, in effect; or (b) the conviction of a felony which precludes EMPLOYEE from performing all or an essential part of his duties of employment, provided that, if such conviction is subsequently reversed, rescinded or expunged, EMPLOYEE's termination will be treated as if made without just cause. 3.2 Disability: In cases of disability, either party may elect to terminate the employment, subject to the following conditions: (i) the EMPLOYEE shall receive the greater of: (a) the salary and other normal benefits plus Accrued Incentive Payments which the EMPLOYEE would have received had he been terminated without just cause; or (b) the benefits payable to, and actually paid to, the EMPLOYEE arising out of any disability insurance policy covering the EMPLOYEE, and paid for by the CORPORATION. If said policy benefits are paid other than in a lump sum payment, the value of the benefits, for purposes of this Agreement, shall be calculated by using a present value of all payments to be made; and (ii) EMPLOYEE has suffered a disability as defined below. "Disability" shall mean mental or physical incapacity which shall continue for six (6) months or longer after exhaustion of all sick leave benefits, or a permanent mental or physical incapacity, either of which makes the performance of substantially all of the EMPLOYEE's duties impossible, as certified in writing by the EMPLOYEE's physician. The CORPORATION, in the event of disagreement, may seek the opinion of a qualified physician to determine if such disability exists; provided, however, that such physician is Board Certified in the area of specialty pertinent to the nature and extent of such disability. In the event of further disagreement, the two physicians shall choose a third physician, qualified as above, who shall make the determination, which shall be binding upon the parties. 4. Resignation by the EMPLOYEE: The EMPLOYEE shall have the option of terminating his employment with the CORPORATION provided he gives at least 60 days advance written notice to the CORPORATION. The EMPLOYEE shall not be deemed to have resigned and, instead, shall be deemed to have been discharged by the CORPORATION, without just cause, if the EMPLOYEE resigns as a result of: (i) immoral, unethical or illegal acts or omissions committed by, or which reasonably appear will be committed by, any director, officer, employee, agent, or independent contractors of the CORPORATION (and the CORPORATION's Board of Directors shall not act, after his recommendation, to terminate the offending party(s) or to cease and desist such offending activity); (ii) acts or omissions of any director, officer, employee, agent, or independent contractors of the CORPORATION which could reasonably subject the EMPLOYEE to personal liability from any Federal, State or local government or agency, or any banking authority, including, but not limited to, the Federal Deposit Insurance Corporation, the Internal Revenue Service, or the Securities and Exchange Commission. 5. Offices and Duties: The EMPLOYEE shall be appointed, and shall serve, as the President and Chief Executive Officer of THE MERCHANTS TRUST COMPANY. Should the CORPORATION decide to alter his title and/or position, it must provide the EMPLOYEE with an essentially equivalent or better position, with equivalent or better salary and benefits. 6. Efforts: The EMPLOYEE shall devote his full-time efforts and energies to the business and affairs of the CORPORATION and shall use his best efforts, skill and abilities to promote the CORPORATION's interests. 7. Evaluation: The EMPLOYEE shall be evaluated in writing annually by the President of the CORPORATION and shall receive a copy of said evaluation. Nothing herein shall allow the CORPORATION to reduce the salary, incentive payments and other benefits provided for herein; nor shall this provision be deemed to allow for the alteration of EMPLOYEE's duties and authority otherwise set forth in this Agreement; provided, however, that the performance of a condition within any regulatory order, memorandum of understanding or requirement shall not be affected by this provision. 8. Salary and Increases: The CORPORATION shall pay the EMPLOYEE for all services rendered to the CORPORATION an initial salary of $95,000.00 per annum, commencing January 1, 1997 and payable on a bi-weekly basis. The salary will be reviewed annually by the President and CEO of the Bank and may be increased but not decreased at the discretion of the President and CEO of the Bank. The CORPORATION may also grant the EMPLOYEE such other compensation, bonuses, benefits, etc., as it may deem proper from time to time. 9. Annual Bonus: An annual bonus will be paid to the EMPLOYEE provided: (a) Merchants Trust Company maintains a regulatory rating, for the first year of this Agreement, of 3 or above, and for subsequent years of this Agreement, of 2 or above; and (b) EMPLOYEE achieves certain objectives. The amount of the bonus and the objectives will be determined by the President and CEO of The Merchants Bank and communicated to the EMPLOYEE prior to the end of each year. For the first year of this Agreement the annual bonus will be 10% of the amount by which Merchants Trust Company's net profit after tax, adjusted to exclude (a) legal and professional expenses and (b) income related to the Piper Jaffray matter, exceeds $175,000, with a maximum payout of $25,000. 10. Benefits: The CORPORATION shall provide the EMPLOYEE with all fringe benefits (including but not limited to health, life, disability, workers compensation insurance; vacation and sick pay; pension benefits) offered to other employees of the CORPORATION in subordinate positions. 11. Long Term Incentive/Stock Option Plan: Each year, the EMPLOYEE will receive stock options with a "value" equal to 50% of his salary. The stock value is determined by calculating the "Black-Scholes" value. The exercise price will be determined annually by the CORPORATION's Board of Director's Compensation Committee. It is intended that the Committee will set the exercise price slightly above the fair market value. Options are exercisable at any time after two (2) years from their original issue date. The term of the options will expire on the earlier of (a) ten years from the issue date while EMPLOYEE remains employed by the CORPORATION, or (b) if EMPLOYEE's employment is terminated, then twelve months after termination of employment. If the EMPLOYEE is terminated without just cause or due to his disability, or in the event that any transaction occurs which results in a change of control of either the CORPORATION or Merchants Bancshares, Inc. from that existing on the date of this Agreement, the EMPLOYEE may exercise this option immediately upon the occurrence of any such event or at any other time permitted in the preceding sub-paragraph. In the event that there is a split of Merchants Bancshares, Inc. stock, EMPLOYEE's stock options and option price shall be adjusted accordingly, so as to leave EMPLOYEE in the same relative position as at the time of commencement of this Agreement with regard to the issued and outstanding shares of Merchants Bancshares, Inc. on the date such action is taken. In the event there is a public offering of the stock of Merchants Bancshares, Inc. other than pursuant to a stock option or an employee stock ownership plan, at any time before the options granted hereby have been fully exercised, then the number of shares subject to the options granted herein shall be increased so that the total number of shares purchased and purchasable under these options as increased will bear the same relationship to the fully-diluted capitalization of the Corporation immediately after giving effect to completion of the public offering as the original number of shares purchasable under these options does to the fully-diluted capitalization of the Corporation at the effective date hereof. The purchase price for additional shares covered by these options as provided in the preceding sentence shall be the greater of the purchase price provided for herein or the purchase price paid by third parties purchasing stock in the public offering. If the CORPORATION is unable to cause to be delivered the shares upon which the EMPLOYEE seeks to exercise his options, for any reason, then the CORPORATION shall pay to the EMPLOYEE, on the date of exercise, the difference between the exercise price and the trading price of Merchants Bancshares, Inc.'s shares on that day, as traded on the exchange on which said shares are listed. In the event that the EMPLOYEE shall become deceased during the period in which the EMPLOYEE may exercise his stock options, as provided above, then his Estate may exercise said options in the manner provided above; provided, however, that said options are exercised within six (6) months after EMPLOYEE'S demise. 12. Expenses: The EMPLOYEE shall be reimbursed for documented business expense incurred or paid by the EMPLOYEE in connection with the performance of his duties, in the manner currently required by corporate policy. 13. Indemnification: The CORPORATION agrees that, within the limits set forth in the Vermont Business Corporations Law, it shall hold the EMPLOYEE harmless for any actions taken by the EMPLOYEE or omissions to act, which, in either case, he reasonably believes to be in the CORPORATION's interests, or for his negligence in connection with such employment. This indemnity shall include the EMPLOYEE's reasonable attorneys' fees and costs incurred in defending any such demands, claims, or actions. The EMPLOYEE shall have the sole right to defend himself against any and all such demands, claims or actions, using counsel of his choosing. The indemnity herein provided shall also include, but in no way be limited to, claims of liability arising for or on account of those acts or omissions of others described in Section 4 of this Agreement. Notwithstanding the foregoing and except to the extent insurance provides such indemnity, the CORPORATION shall have no obligation to hold the EMPLOYEE harmless from (i) any liability he may have to any governmental entity with respect to personal taxes, interest or penalties, unless that liability resulted from a liability of the CORPORATION (i.e. [SECTION] 941 Withholding taxes, interest and penalties, assessed against the EMPLOYEE through a 100% assessment by the IRS); (ii) any claims arising out of, based upon or attributable to the gaining in fact of any personal profit or advantage to which the EMPLOYEE is not legally entitled; or (iii) any claim arising out of, based upon or attributable to the committing of any criminal or deliberately fraudulent act. Prior to receiving any purported personal profit or advantage, EMPLOYEE is entitled to receive, at the CORPORATION's expense, an opinion of counsel that he is legally entitled to receive it. This Paragraph 13 shall not limit any immunity or indemnity provided EMPLOYEE by law or by the Articles of Association or Bylaws of the CORPORATION. 14. Binding Effect: This Agreement shall inure to the benefit of and be binding upon the EMPLOYEE, his legal representatives, heirs, and distributee(s), and upon the CORPORATION, its successors and assigns, and also any subsidiary or affiliate corporation. 15. No Waiver: The waiver of any term or condition of this Agreement shall not be deemed to constitute the waiver of any other term or condition. 16. Notices: All notices, elections hereunder and similar communication(s) shall be in writing and shall be sufficient if addressed to the EMPLOYEE at his address shown above (or at any new address of which he shall advise the CORPORATION in writing) and mailed by certified return receipt with postage fully paid. All notices to the CORPORATION shall be given to the presiding officer of the Board of Directors. 17. Controlling Law and Attorneys' Fees: Notwithstanding the actual place of execution, or the state of incorporation of the CORPORATION, this Agreement shall be governed by the laws of the State of Vermont and the parties hereto consent to the jurisdiction of the Courts of the State of Vermont. In the event of a breach of this Agreement, the non-breaching party shall be entitled to recover its costs and attorneys' fees from the breaching party. 18. Corporate Authority. The Board of Directors of the CORPORATION has authorized the President of the CORPORATION to negotiate and execute this Agreement on behalf of the CORPORATION, and upon request of the EMPLOYEE the CORPORATION shall furnish its certificate of the Resolution granting such authority. 19. Compliance with Law. Any and all provisions of this Agreement shall be consistent and comply with applicable laws or regulations enacted or promulgated both before and after the execution date of this Agreement, and to the extent that any provision is inconsistent or does not comply with applicable laws or regulations, that part which is inconsistent or does not comply shall be modified to comply with the applicable law or regulation. 20. Prior Agreement Superseded: This Employment Agreement replaces and supersedes an Employment Agreement between the CORPORATION and the EMPLOYEE dated effective as of December 29, 1995, with the following exception: The EMPLOYEE shall maintain all rights to incentive payments under paragraph 9 of such Employment Agreement through June 30, 1997. IN WITNESS WHEREOF, the CORPORATION has caused this Agreement to be executed by its officer thereunto duly authorized, and the EMPLOYEE has hereunto set his hand and seal, all as of the day and year first above written. IN PRESENCE OF: CORPORATION: MERCHANTS BANK /s/ JANET P. SPITLER BY: /s/ JOSEPH L. BOUTIN - ------------------------------ ------------------------------- NAME: Joseph L. Boutin TITLE: President - ------------------------------ MERCHANTS TRUST COMPANY /s/ JANET P. SPITLER BY: /s/ JOSEPH L. BOUTIN - ------------------------------ ------------------------------- NAME: Joseph L. Boutin TITLE: Chairman EMPLOYEE: /s/ JANET P. SPITLER /s/ WILLIAM R. HEASLIP - ------------------------------ ------------------------------- WILLIAM R. HEASLIP - ------------------------------ EX-10 7 EX-10.14 MERCHANTS COMP. PLAN FOR DIRECTORS EXHIBIT 10.14 THE MERCHANTS BANK AMENDED AND RESTATED DEFERRED COMPENSATION PLAN FOR DIRECTORS THE MERCHANTS BANK, a Vermont banking corporation with a principal place of business in Burlington, Vermont (the "Bank"), does hereby amend the Deferred Compensation Plan (the "Plan") heretofore adopted by the Bank and as set forth in the standard contract executed by the Bank and various directors of the Bank since the time of adoption. Section 1. Purpose. The purpose of this Plan is to provide a foundation for continued growth of the Bank by strengthening its capacity to attract and retain outstanding directors in continued service. Section 2. Participants. All Directors of the Bank are eligible to participate in the Plan ("Participants"). No officers who are not already Participants will be allowed to take part in this Plan. Section 3. Participant's Election. (a) For the purpose of this Plan, "compensation" shall mean all fees, salary or other compensation paid by the Bank to said Participant as a director or officer of the Bank (including any amount of such fees which a Participant elects to defer under this Plan, but not including amounts paid as expense reimbursement). (b) For the year 1986, a Participant, by filing a written election with the Bank on or before January 31, 1986 may elect not to receive a part or all of the compensation that would have otherwise been paid during the remainder of the year. (c) For the year 1987, and each year thereafter, a Participant, by filing a written election with the Bank on or before December 31 of the preceding year, may elect not to receive a part or all of the compensation that would have otherwise been paid during such year. (d) Individuals who first become eligible to participate in this Plan after January 1 during any year, by filing a written election with the Bank before becoming eligible to participate, may elect not to receive a part or all of the compensation that would have otherwise been paid during the remainder of such year. (e) An election shall not be effective unless the Participant also specifies the manner in which the account will be distributed (see Section 5) and whether the Growth Program shall be fixed or floating (see Section 4). The Fixed Growth Percentage shall only be available in amounts and at times and rates in the sole discretion of the Bank. (f) Any election to defer compensation under this Section shall be irrevocable for that year or the remainder of that year (or longer in the case of Fixed Growth Program) and may not be cancelled by the Participant for any reason except that if the Board of Directors of the Bank or any committee appointed by it (the "Board") amends the Plan pursuant to Section 11, the Participant may elect, prior to the effective date of such amendment, to discontinue contributions for the remainder of the year (or other election period) commencing with the effective date of such amendment. (g) Any election to defer compensation under this Section will not reduce benefits payable under any other benefit plan the Bank may provide for its directors. Such benefits will be calculated as if the election had not been made. Section 4. Deferral Account. (a) The Bank shall establish one or more bookkeeping accounts (a "Deferral Account") for each Participant to record the amounts deferred according to the provisions of Section 3. The Bank shall credit to each Participant's Deferral Account the compensation deferred by the Participant in accordance with this Plan. Such credits shall be made at the times that payment to the Participant of current compensation would have been made if the deferral had not been elected hereunder. (b) If the Participant shall elect a Floating Growth Program (as hereinafter defined), the Bank shall also credit to such Participant's Deferral Account on the last day of each month an amount equal to a percentage (hereinafter referred to as the "Growth Percentage") of the balance recorded in such account as of the fifteenth day of said month. The Growth Percentage will be fixed from time to time in the discretion of the Board. The amount determined by applying the Growth Percentage will be added to the balance in the Deferral Account. The Board shall have the right to establish or change the method of computing Growth Percentages in its sole discretion. (c) If the Participant shall elect a Fixed Growth Program, such as may, from time to time, be offered by the Bank, the Participant shall so signify on his Deferred Compensation Election Form and, subject to the provisions of the remainder of this subsection (c), Growth Percentages will be credited to such Participant's account in accordance with the terms and schedule as shown on the Deferred Compensation Election Form executed by the Participant and as may, from time to time, be amended; provided, however, that: (i) From and after December 31, 1994, no further deferrals may be made to the Fixed Growth Program. (ii) The amount that otherwise would be credited to a Participant's Fixed Growth Account to the effective date of this Amended and Restated Deferred Compensation Plan for Directors, whether on account of deferrals, on account of Fixed Growth Percentage credits, or otherwise, shall be replaced and supplanted by the credit to such Participant's Fixed Growth Account in the amount set opposite such Participant's name on the attached Schedule 4(c). (iii) On the effective date of this Amended and Restated Plan, in lieu of any amounts that the Bank otherwise would be obligated to pay to any Plan Participant from and after the Effective Date on account of the Fixed Growth Program, the Bank shall be obligated to distribute to each Participant, at the times and as provided in this Amended and Restated Plan: (i) that number of shares of Merchants Bancshares, Inc. set forth on Schedule 4(c) opposite such Participant's name; plus (ii) all dividends, distributions or other consideration paid on, on account of, or in exchange for such shares prior to their distribution as herein provided; plus (iii) the amount, if any, set opposite the Participant's name under the Column labeled "1/2/96 Payment" on that schedule. Notwithstanding the provisions of the immediately-preceding sentence: (y) in the event of a merger, consolidation or reorganization of Merchants Bancshares, Inc., the Bank shall be obligated to distribute, in lieu of the shares of Merchants Bancshares, Inc. referred to above, such shares or other property as shall have been exchanged for said Merchants Bancshares, Inc. stock, or into which said Merchants Bancshares, Inc. shares shall have been converted pursuant to such merger, consolidation or reorganization; and (z) in the event of a Change of Control (as defined below), the Bank shall have the option, to be exercised (if at all) not earlier than sixty days prior to such Change of Control nor later than sixty days thereafter, and to be effective not earlier than the time when such Change of Control occurs nor later than one hundred eighty days thereafter, to provide that in lieu of any obligation thereafter to distribute shares of Merchants Bancshares, Inc., the Bank thereafter shall be required to pay or distribute to each Fixed Growth Plan Participant, in cash or in securities, a variable amount that equals the value from time to time of the balance posted to the bookkeeping account maintained for such Participant in the Trust referred to in Section 6, below; provided, however, that to the extent the balance posted to the credit of such Participant in the Trust has been reduced as a result of any withdrawals from the Trust for any purpose other than a payment to or for the benefit of the Participant or the Participant's designated beneficiary (see Section 7, below), the amount to be paid or distributed to such Participant shall be adjusted to take into account both such withdrawal(s) and the earnings (or losses) that would have been credited to the Participant's account under the Trust if such withdrawal(s) had not occurred. A "Change of Control" shall occur upon the earliest of the following: (A) any "person," as such term is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934 (a "Person"), becomes a "beneficial owner," as such term is used in Rule 13D-3 promulgated under such Act (an "Owner") of twenty-five percent (25%) or more of the Voting Stock, as defined below, of Merchants Bancshares, Inc.; or (B) the majority of the Board of Merchants Bancshares, Inc. consists of individuals other than the Incumbent Directors; (C) Merchants Bancshares, Inc., or the Bank, adopts any plan of liquidation providing for the distribution of all or substantially all of its assets; (D) all or substantially all of the business of Merchants Bancshares, Inc. is disposed of pursuant to a merger, consolidation, or other transaction in which Merchants Bancshares, Inc. is not the surviving corporation or is substantially or completely liquidated (unless the shareholders of Merchants Bancshares, Inc. immediately prior to such merger, consolidation, or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the Voting Stock of Merchants Bancshares, Inc., all of the Voting Stock, or correlative ownership interests, of the entity or entities, if any, that succeed to the business of Merchants Bancshares, Inc.); or (E) Merchants Bancshares, Inc. combines with another company and is the surviving corporation but, immediately after the combination, the shareholders of Merchants Bancshares, Inc. immediately prior to the combination (other than shareholders who, immediately prior to the combination, were "affiliates" of such other company, as such term is defined in the rules of the Securities and Exchange Commission) do not beneficially own, directly or indirectly, fifty percent (50%) or more of the Voting Stock of the combined company; or (F) Merchants Bancshares, Inc. transfers to any Person or Persons not controlled by Merchants Bancshares, Inc.: (1) fifty percent (50%) of the Voting Stock of the Bank; or (2) forty percent (40%) or more of the assets of the Bank. Notwithstanding the occurrence of any of the events described in clauses (A), (D) or (E), above, no "Change of Control" shall be deemed to have occurred if: (1) immediately following such event, members of the Board or employees of Merchants Bancshares, Inc. and its subsidiaries who file or are required to file (or immediately prior to such event, filed or were required to file) reports under Section 16(a) of the 1934 Act) are beneficial owners, directly or indirectly, of twenty-five percent (25%) or more of the Voting Stock of Merchants Bancshares, Inc. or its successor, as the case may be; or (2) such Change of Control event occurs as a result of a proposal initiated by the Board of Merchants Bancshares, Inc. (and not as a result of prior actions taken by the Person or Persons effecting the Change of Control), and if at the time of making the proposal, the Board of Directors notifies the Fixed Growth Plan Participants that any such Change of Control event resulting from the proposal shall not constitute a Change of Control. For this purpose, a Change of Control event shall be considered to result from a proposal if the event occurs because of the acquisition of stock or assets of Merchants Bancshares, Inc., directly or indirectly, by Persons, or a group of some of whose members are Persons, identified in the written notice described above. "Incumbent Director(s)" shall mean the members of the Board of Merchants Bancshares, Inc. on the date of this Amended Plan, provided that any person becoming a director subsequent to the date of this Amended Plan whose election or nomination for election was approved by two-thirds (but in no event less than two) of the directors who at the time of such election or nomination comprise the Incumbent Directors shall be considered to be an Incumbent Director. "Voting Stock" of any corporation shall mean the capital stock of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect directors of such corporation. Section 5. Distribution of Deferral Account. (a) Commencing on January 2 of the year following the Participant's attaining the age of sixty-five (65) or the Participant's earlier death ("Termination Date"), the Bank shall commence distribution and/or payment of the Merchants Bancshares, Inc. shares and/or other amounts which the Bank is obligated to distribute and/or pay pursuant to Section 4 of this Amended and Restated Plan, in accordance with the provisions of the Participant's Deferred Compensation Election Form and this Plan. (b) Notwithstanding the provisions of Section 5(a), above, to the extent, if at all, that the Bank is provided with evidence reasonably satisfactory to it that all or part of the shares or other amounts to be distributed to the Participant or the Participant's beneficiary are includible in the Participant's or such beneficiary's taxable estate for estate tax purposes, and increase the estate taxes otherwise payable by such estate, the Bank shall promptly distribute or pay to the person(s) or entity(ies) entitled thereto, the entire remaining amounts payable by the Bank under this Plan to such person(s) or entity(ies). (c) Notwithstanding the provisions of Section 5(a), above, a Participant may request, and the Bank may approve, a distribution due to hardship by submitting a written request to the Board accompanied by evidence to demonstrate that the circumstances being experienced qualify as a hardship. If a hardship is found by the Bank, the distribution shall be limited to an amount sufficient to meet the emergency. (d) For purposes of Section 5(c), "hardship" means a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The circumstances that will constitute a hardship will depend on the facts of each case. However, in no event shall payment be made if such purported hardship is or may be relieved: (i) through reimbursement or compensation by insurance or otherwise; (ii) by liquidation of the Participant's assets, to the extent that such liquidation would not itself cause severe financial hardship; or (iii) by the Participant's ceasing deferrals under the Plan. In no case shall the need to send a Participant's child to college or the desire to purchase a home be considered a hardship. (e) Prior to the year in which payments are to commence under Section 5(a) a Participant may request in writing to defer commencement of the such payments for any amount of time up to three years from the first January 2 following the Termination Date. (f) During the period of time that payments are being made to a Participant who has elected a Floating Growth Program, the Growth Percentage shall be applied to the unpaid balance of the Floating Growth Deferral Account in the manner prescribed herein, and the resulting growth amount shall be paid to the Participant upon the due date of the next regular distribution payment. Participants who elect a Fixed Growth Program will be paid in accordance with the provisions of the Deferred Compensation Election Form and Section 4 hereof. Section 6. Nature of Accounts. (a) With respect to the Fixed Growth Program, the Bank shall establish and maintain, from and after the Effective Date, a Trust Under The Merchants Bank Amended and Restated Deferred Compensation Plan For Directors in substantially the form attached hereto as Exhibit "A" (the "Trust"). (b) Except as provided in the Trust: all amounts credited to Deferral Accounts shall remain the sole property of the Bank and shall be usable by it as a part of its general funds for any legal purpose whatever; the Deferral Accounts shall exist only for the purpose of facilitating the computation of benefits hereunder; nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall create or be construed to create a trust or escrow of any kind, or a fiduciary relationship between the Bank and the Participant, the designated beneficiary or any other person; and to the extent that any person acquires a right to receive payments from the Bank under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Bank. (c) It is the intention of all parties that this Plan be unfunded for purposes of the Internal Revenue Code of 1986, as amended, and Title I of the Employee Retirement Income Security Act of 1974, as amended. Section 7. Beneficiary Designation. A Participant may designate a beneficiary to receive, in the event of Participant's death, all amounts which are then and thereafter payable under the Plan. Beneficiaries shall receive such amounts in accordance with the Participant's specifications (see Section 5) and the provisions of this Plan. Such designation and any subsequent changes thereto shall be made in writing and filed with the Treasurer. In the event of the Participant's death prior to receipt of the total Deferral Account and without so designating a beneficiary, the balance of said Deferral Account shall be paid to Participant's spouse, if then living, otherwise to Participant's estate in accordance with the election made pursuant to Section 5. Section 8. Nontransferability. No right to payment or distribution under this Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber or charge the same shall be void. No right to payment or distribution shall, in any manner, be liable for or subject to the debts, contracts, liabilities or torts of the person entitled thereto. If, at the time when payments or distributions are to be made hereunder, the Participant or the beneficiary is indebted to the Bank, then any payments or distributions remaining to be made hereunder may, at the discretion of the Bank, be reduced by the amount of such indebtedness. An election by the Bank not to reduce such payments or distributions shall not constitute a waiver of its claim for such indebtedness. Section 9. Plan Interpretation. The Board shall have full power and authority to interpret, construe and administer this Plan, and the Board's interpretations and construction thereof, and actions thereunder, including any valuation of the Deferral Account, or the amount or recipient of the payment to be made therefrom, shall be binding and conclusive on all persons for all purposes. No member of the Board shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of this Plan unless attributable to that member's own willful misconduct or lack of good faith. Section 10. Successors and Assigns. This Plan shall be binding upon and inure to the benefit of the Bank, its successors and assigns, and the Participant and the Participant's heirs, executors, administrators and legal representatives. Section 11. Amendment and Termination. The Bank may, in its sole discretion, at any time, amend or terminate this Plan with respect to any future period, provided, however, that (except as specifically provided in subsection 4(c), above) no such amendment or termination shall reduce the distributions and/or payments which the Bank is obligated to make as of the effective date of the amendment or termination nor reduce the amount of any deferral account existing as of such effective date. Notice of any such amendment or termination shall be given to the Participants sixty days before the effective date(s) thereof. Notwithstanding anything to the contrary elsewhere in this Plan or in the Trust, the Bank shall have the right to order the immediate distribution to all Fixed Growth Participants of the full number of shares of Merchants Bancshares, Inc. stock and/or other amounts which the Bank is then obligated to distribute or pay hereunder in full and final settlement and satisfaction of all such Participants' rights to any payment under this Plan with respect to or on account of any Fixed Growth deferral, if the Bank determines in good faith that financial market, regulatory, legislative, income tax, or other objective conditions would make failure to do so materially adverse to the Bank's interests. Section 12. Governing Law. This Plan shall be governed by and construed in accordance with the laws of the State of Vermont, without giving effect to such jurisdiction's principles of conflict of laws. IN WITNESS WHEREOF, the Bank has caused this Amended Plan to be executed by its duly authorized officer as of the 20th day of December, 1995. IN PRESENCE OF: THE MERCHANTS BANK /s/ Jennifer L. Varin By: /s/ Joseph L. Boutin - ------------------------------ ------------------------------- Secretary Its President and Chief Executive Officer EX-10 8 EX-10.14.1 TRUST UNDER MERCH. COMP. PLAN FOR DIR. EXHIBIT 10.14.1 TRUST UNDER THE MERCHANTS BANK AMENDED AND RESTATED DEFERRED COMPENSATION PLAN FOR DIRECTORS This Trust Agreement is made this 20th day of December, 1995, by and between THE MERCHANTS BANK (the "Company") and THE MERCHANTS TRUST COMPANY (the "Trustee"). Background ---------- 1. The Company has adopted the nonqualified deferred compensation Plan known as The Merchants Bank Amended and Restated Deferred Compensation Plan for Directors (the "Plan"). 2. The Company has incurred or expects to incur liability under the terms of such Plan with respect to the individuals participating in such Plan and entitled to benefits under the Fixed Growth Program thereunder. 3. The Company wishes to establish a trust (hereinafter called "Trust") and to contribute to the Trust assets that shall be held therein, subject to the claims of Company's creditors in the event of the Company's Insolvency, as herein defined, until paid to Fixed Growth Program Plan participants and their beneficiaries in such manner and at such times as is specified and provided for in the Plan. 4. It is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plan as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974. 5. It is the intention of the Company to make contributions to the Trust to provide itself with a source of funds and resources to assist it in the meeting of its liabilities under the Fixed Growth Program of the Plan. N O W , T H E R E F O R E , The parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: Section 1. Establishment Of Trust. (a) The Company hereby deposits with the Trustee in trust $1,506,707, which shall become the principal of the Trust to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. (b) The Trust hereby established shall be irrevocable. (c) The Trust is intended to be a grantor trust, of which the Company is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (d) The principal of the Trust, and any earnings thereon shall be held separate and apart from other funds of the Company and shall be used exclusively for the uses and purposes of the Fixed Growth Program Plan participants and general creditors, as herein set forth. Fixed Growth Program Plan participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Fixed Growth Program of the Plan and this Trust Agreement shall be mere unsecured contractual rights of Fixed Growth Program Plan participants and their beneficiaries against the Company. Any assets held by the Trust will be subject to the claims of Company's general creditors under federal and state law in the event of Insolvency, as defined in Section 3(a) herein. (e) The Company, in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property in trust with the Trustee to augment the principal to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. Neither the Trustee nor any Plan participant or beneficiary shall have any right to compel such additional deposits. Section 2. Payments to Plan Participants and Their Beneficiaries. (a) The Company shall deliver to the Trustee a schedule (the "Payment Schedule") that indicates the amounts payable in respect of each Fixed Growth Program Plan participant (and his or her beneficiaries), that provides a formula or other instructions acceptable to the Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Fixed Growth Program of the Plan), and the time of commencement for payment of such amounts. Except as otherwise provided herein, the Trustee shall make payments to the Fixed Growth Program Plan participants and their beneficiaries in accordance with such Payment Schedule. The Trustee shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Plan and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by the Company. (b) The entitlement of a Fixed Growth Program Plan participant or his or her beneficiaries to benefits under the Plan shall be determined by the Company or such party as it shall designate under the Plan, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Plan. (c) The Company may make payment of benefits directly to Fixed Growth Program Plan participants or their beneficiaries as they become due under the terms of the Plan. The Company shall notify the Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to participants or their beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Plan, the Company shall make the balance of each such payment as it falls due. The Trustee shall notify the Company where principal and earnings are not sufficient. Section 3. Trustee Responsibility Regarding Payments to Trust Beneficiary When The Company Is Insolvent. (a) The Trustee shall cease payment of benefits to Plan participants and their beneficiaries if the Company is Insolvent. The Company shall be considered "Insolvent" for purposes of this Trust Agreement if: (i) the Company is unable to pay its debts as they become due; (ii) the Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code; or (iii) the Company is determined to be insolvent by the federal and/or state regulatory agencies having authority over the Company and its operations. (b) At all times during the continuance of this Trust, as provided in Section 1(d) hereof, the principal and income of the Trust shall be subject to claims of general creditors of the Company under federal and state law as set forth below. (i) The Board of Directors and the Chief Executive Officer of the Company shall have the duty to inform the Trustee in writing of the Company's Insolvency. If a person claiming to be a creditor of the Company alleges in writing to the Trustee that the Company has become Insolvent, the Trustee shall determine whether the Company is Insolvent and, pending such determination, the Trustee shall discontinue payment of benefits to Fixed Growth Program Plan participants or their beneficiaries. (ii) Unless the Trustee has actual knowledge of Company's Insolvency, or has received notice from the Company or a person claiming to be a creditor alleging that the Company is Insolvent, the Trustee shall have no duty to inquire whether the Company is Insolvent. The Trustee may in all events rely on such evidence concerning the Company's solvency as may be furnished to the Trustee and that provides the Trustee with a reasonable basis for making a determination concerning the Company's solvency. (iii) If at any time the Trustee has determined that the Company is Insolvent, the Trustee shall discontinue payments to Plan participants or their beneficiaries and shall hold the assets of the Trust for the benefit of the Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Plan participants or their beneficiaries to pursue their rights as general creditors of the Company with respect to benefits due under the Plan or otherwise. (iv) The Trustee shall resume the payment of benefits to Plan participants or their beneficiaries in accordance with Section 2 of this Trust Agreement only after the Trustee has determined that the Company is not Insolvent (or is no longer Insolvent). (c) Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Fixed Growth Program Plan participants or their beneficiaries under the terms of the Fixed Growth Program Plan for the period of such discontinuance, less the aggregate amount of any payments made to Plan participants or their beneficiaries by the Company in lieu of the payments provided for hereunder during any such period of discontinuance. Section 4. Payments to the Company. Except as provided in Section 3 hereof or on account of the Company's direct payments pursuant to Section 2(c), the Company shall have no right or power to direct the Trustee to return to the Company or to divert to others any of the Trust assets before all payment of benefits have been made to Fixed Growth Program Plan participants and their beneficiaries pursuant to the terms of the Plan. Section 5. Investment Authority. The Trustee shall invest $1,460,402 of the amount deposited with it pursuant to Section 1(a) initially in shares of Merchants Bancshares, Inc. stock except to the extent otherwise instructed by the Company. Following such initial investment, the Trustee may invest in securities (including stock or rights to acquire stock) or obligations issued by the Company or its affiliates and may dispose of the amount of the initial investment in Merchants Bancshares, Inc. stock and take such other actions with respect to the Trust assets as directed by the Company, or, in the absence of such direction, as the Trustee, in its sole discretion, determines to be appropriate. All rights associated with assets of the Trust shall be exercised by the Trustee or the person designated by the Trustee, and shall in no event be exercisable by, or rest with, Plan participants, except that voting rights with respect to Trust assets will be exercised by the Company. The Company shall have the right at any time, and from time to time in its sole discretion, to substitute assets of equal fair market value for any asset held by the Trust. This right is exercisable by the Company in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity. Section 6. Disposition of Income. During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested. Section 7. Accounting by the Trustee. The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between the Company and the Trustee. Within sixty (60) days following the close of each calendar year and within sixty (60) days after the removal or resignation of the Trustee, the Trustee shall deliver to the Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. Section 8. Responsibility of the Trustee. (a) The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that the Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by the Company which is contemplated by, and in conformity with, the terms of the Plan or this Trust and is given in writing by the Company. In the event of a dispute between the Company and a party, the Trustee may apply to a court of competent jurisdiction to resolve the dispute. (b) If the Trustee undertakes or defends any litigation arising in connection with this Trust, the Company agrees to indemnify the Trustee against Trustee's costs, expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. If the Company does not pay such costs, expenses and liabilities in a reasonably timely manner, the Trustee may obtain payment from the Trust. (c) The Trustee may consult with legal counsel (who may also be counsel for the Company generally) with respect to any of its duties or obligations hereunder. (d) The Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder. (e) The Trustee shall have, without exclusion, all powers conferred on Trustees by applicable law, unless expressly provided otherwise herein, provided, however, that if an insurance policy is held as an asset of the Trust, the Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy. (f) However, notwithstanding the provisions of Section 8(e) above, the Trustee may loan to the Company the proceeds of any borrowing against an insurance policy held as an asset of the Trust. (g) Notwithstanding any powers granted to the Trustee pursuant to this Trust Agreement or to applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. Section 9. Compensation and Expenses of the Trustee. The Company shall pay all administrative and Trustee's fees and expenses. If not so paid, the fees and expenses shall be paid from the Trust. Section 10. Resignation and Removal of the Trustee. (a) The Trustee may resign at any time by written notice to the Company, which shall be effective thirty (30) days after receipt of such notice unless the Company and the Trustee agree otherwise. (b) The Trustee may be removed by the Company on thirty (30) days' notice or upon shorter notice accepted by the Trustee. (c) If the Trustee resigns or is removed within five (5) years of a Change of Control, as defined in Section 13(d), the Trustee shall select a successor trustee in accordance with the provisions of Section 11(b) hereof prior to the effective date of Trustee's resignation or removal. (d) Upon resignation or removal of the Trustee and appointment of a successor trustee, all assets shall subsequently be transferred to the successor trustee. The transfer shall be completed within thirty (30) days after receipt of notice of resignation, removal or transfer, unless the Company extends the time limit. (e) If the Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 11 hereof, by the effective date of resignation or removal under Section 10(a) or 10(b). If no such appointment has been made, the Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of the Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. Section 11. Appointment of Successor. (a) Except as provided in Section 11(b), if the Trustee resigns or is removed in accordance with Section 10(a) or 10(b) hereof, the Company may appoint any third party, such as a bank trust department or other party that may be granted corporate trustee powers under state law, as a successor to replace the Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the new trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the Company or the successor trustee to evidence the transfer. (b) If the Trustee resigns or is removed pursuant to the provisions of Section 10(c) hereof and is to select a successor trustee, the Trustee may appoint any third party such as a bank trust department or other party that may be granted corporate trustee powers under state law. The appointment of a successor trustee shall be effective when accepted in writing by the new trustee. The new trustee shall have all the rights and powers of the former Trustee, including ownership rights in Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the successor trustee to evidence the transfer. (c) The successor trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Sections 7 and 8 hereof. The successor trustee shall not be responsible for and the Company shall indemnify and defend the successor trustee from any claim or liability resulting from any action or inaction of any prior trustee or from any other past event, or any condition existing at the time it becomes successor trustee. Section 12. Amendment or Termination. (a) Notwithstanding Section 1(b) hereof, the Trustee and the Company, acting jointly or solely, shall have the power to amend the Trust in any manner required for the sole purpose of insuring that the Trust qualifies and continues to qualify as a "rabbi trust" for purposes of Revenue Procedure 92-64, any successor provisions thereto or any other similar or successor provisions of the Internal Revenue Code of 1986, as amended. (b) The Trust shall not terminate until the date on which Fixed Growth Program Plan participants and their beneficiaries are no longer entitled to benefits pursuant to the terms of the Plan. Upon termination of the Trust any assets remaining in the Trust shall be returned to the Company. Section 13. Miscellaneous. (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) Benefits payable to Plan participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. (c) This Trust Agreement shall be governed by and construed in accordance with the laws of Vermont. (d) For purposes of this Trust, "Change of Control" shall mean the purchase or other acquisition by any person, entity or group of persons, within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934 ("Act"), or any comparable successor provisions, of beneficial ownership (within the meaning of Rule l3d-3 promulgated under the Act) of 30 percent or more of either the outstanding shares of common stock or the combined voting power of Company's then outstanding voting securities entitled to vote generally, or the approval by the stockholders of the Company of a reorganization, merger, or consolidation, in each case, with respect to which persons who were stockholders of the Company immediately prior to such reorganization-merger or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated Company's then outstanding securities, or a liquidation or dissolution of the Company or of the sale of all or substantially all of Company's assets. Section 14. Effective Date. The effective date of this Trust Agreement shall be December 20, 1995. THE MERCHANTS BANK THE MERCHANTS TRUST COMPANY By: /s/ Joseph L. Boutin By: /s/ Rebecca P. Arnold - ------------------------------ ------------------------------- Duly Authorized Duly Authorized EX-10 9 EX-10.15 AGREEMENT-K.BOARDMAN, T.HAVERS, S.STRUBLE EXHIBIT 10.15 AGREEMENT This Agreement is among THE MERCHANTS BANK, a Vermont banking corporation with a principal place of business in Burlington, Vermont (the "Bank") and KATHRYN T. BOARDMAN, THOMAS R. HAVERS and SUSAN D. STRUBLE (individually, a "Participant" and collectively, the "Participants") and is effective as of the date specified on the execution page of this Agreement (the "Effective Date"). Background ---------- 1. The Bank and the Participants are parties to Salary Continuation Agreements dated June 1, 1989 (the "Salary Continuation Agreements"). 2. The Bank desires to amend the Salary Continuation Agreements and the benefits payable thereunder, and the Participants are willing to agree to such amendments. N O W , T H E R E F O R E , In consideration of the premises and the mutual covenants and agreements herein set forth, the parties hereby agree as follows: Section 1. Bank to Establish Trust. The Bank shall establish, on the Effective Date, and thereafter shall maintain in accordance with this Agreement, a so-called rabbi trust in the form attached hereto as Exhibit "A" (the "Trust"). The Bank shall contribute to the Trust, on the Effective Date, the sum of $160,863. Section 2. Deferral Account. (a) The Bank shall establish a bookkeeping account (a "Deferral Account") for each Participant to record the amounts due under this Agreement. (b) On the effective date of this Agreement, in lieu of any amounts that the Bank otherwise would be obligated to pay to any Participant under or on account of the Salary Continuation Agreements, the Bank shall be and become obligated to distribute to each Participant, at the times and as provided in this Agreement: (i) that number of shares of Merchants Bancshares, Inc. set forth on Schedule 2(b) opposite such Participant's name; plus (ii) all dividends, distributions or other consideration paid on, on account of, or in exchange for such shares prior to their distribution as herein provided. Notwithstanding the provisions of the immediately-preceding sentence: (y) in the event of a merger, consolidation or reorganization of Merchants Bancshares, Inc., the Bank shall be obligated to distribute, in lieu of the shares of Merchants Bancshares, Inc. referred to above, such shares or other property as shall have been exchanged for said Merchants Bancshares, Inc. stock, or into which said Merchants Bancshares, Inc. shares shall have been converted pursuant to such merger, consolidation or reorganization; and (z) in the event of a Change of Control (as defined below), the Bank shall have the option, to be exercised (if at all) not earlier than sixty days prior to such Change of Control nor later than sixty days thereafter, and to be effective not earlier than the time when such Change of Control occurs nor later than one hundred eighty days thereafter, to provide that in lieu of any obligation thereafter to distribute shares of Merchants Bancshares, Inc., the Bank thereafter shall be required to pay or distribute to each Participant, in cash or in securities, a variable amount that equals the value from time to time of the balance posted to the bookkeeping account maintained for such Participant in the Trust, provided, however, that to the extent the balance posted to the credit of such Participant in the Trust has been reduced as a result of any withdrawals from the Trust for any purpose other than a payment to or for the benefit of the Participant or the Participant's designated beneficiary (see Section 6, below), the amount to be paid or distributed to such Participant shall be adjusted to take into account both such withdrawal(s) and the earnings (or losses) that would have been credited to the Participant's account under the Trust if such withdrawal(s) had not occurred. A "Change of Control" shall occur upon the earliest of the following: (A) any "person," as such term is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934 (a "Person"), becomes a "beneficial owner," as such term is used in Rule 13D-3 promulgated under such Act (an "Owner") of twenty-five percent (25%) or more of the Voting Stock, as defined below, of Merchants Bancshares, Inc.; or (B) the majority of the Board of Merchants Bancshares, Inc. consists of individuals other than the Incumbent Directors; (C) Merchants Bancshares, Inc., or the Bank, adopts any plan of liquidation providing for the distribution of all or substantially all of its assets; (D) all or substantially all of the business of Merchants Bancshares, Inc. is disposed of pursuant to a merger, consolidation, or other transaction in which Merchants Bancshares, Inc. is not the surviving corporation or is substantially or completely liquidated (unless the shareholders of Merchants Bancshares, Inc. immediately prior to such merger, consolidation, or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the Voting Stock of Merchants Bancshares, Inc., all of the Voting Stock, or correlative ownership interests, of the entity or entities, if any, that succeed to the business of Merchants Bancshares, Inc.); or (E) Merchants Bancshares, Inc. combines with another company and is the surviving corporation but, immediately after the combination, the shareholders of Merchants Bancshares, Inc. immediately prior to the combination (other than shareholders who, immediately prior to the combination, were "affiliates" of such other company, as such term is defined in the rules of the Securities and Exchange Commission) do not beneficially own, directly or indirectly, fifty percent (50%) or more of the Voting Stock of the combined company; or (F) Merchants Bancshares, Inc. transfers to any Person or Persons not controlled by Merchants Bancshares, Inc.: (1) fifty percent (50%) of the Voting Stock of the Bank; or (2) forty percent (40%) or more of the assets of the Bank. Notwithstanding the occurrence of any of the events described in clauses (A), (D) or (E), above, no "Change of Control" shall be deemed to have occurred if: (1) immediately following such event, members of the Board or employees of Merchants Bancshares, Inc. and its subsidiaries who file or are required to file (or immediately prior to such event, filed or were required to file) reports under Section 16(a) of the 1934 Act) are beneficial owners, directly or indirectly, of twenty-five percent (25%) or more of the Voting Stock of Merchants Bancshares, Inc. or its successor, as the case may be; or (2) such Change of Control event occurs as a result of a proposal initiated by the Board of Merchants Bancshares, Inc. (and not as a result of prior actions taken by the Person or Persons effecting the Change of Control), and if at the time of making the proposal, the Board of Directors notifies the Fixed Growth Plan Participants that any such Change of Control event resulting from the proposal shall not constitute a Change of Control. For this purpose, a Change of Control event shall be considered to result from a proposal if the event occurs because of the acquisition of stock or assets of Merchants Bancshares, Inc., directly or indirectly, by Persons, or a group of some of whose members are Persons, identified in the written notice described above. "Incumbent Director(s)" shall mean the members of the Board of Merchants Bancshares, Inc. on the date of this Amended Plan, provided that any person becoming a director subsequent to the date of this Amended Plan whose election or nomination for election was approved by two-thirds (but in no event less than two) of the directors who at the time of such election or nomination comprise the Incumbent Directors shall be considered to be an Incumbent Director. "Voting Stock" of any corporation shall mean the capital stock of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect directors of such corporation. Section 3. Distribution of Deferral Account. (a) Commencing on January 2 of the year following the Participant's attaining the age of sixty-five (65) or the Participant's earlier death ("Termination Date"), the Bank shall commence distribution and/or payment of the Merchants Bancshares, Inc. shares and/or other amounts which the Bank is obligated to distribute and/or pay pursuant to this Agreement. On or promptly following such January 2, and on or promptly following each subsequent January 2, the Bank shall distribute or cause to be distributed to the Participant: (i) a portion of the total number of shares of Merchants Bancshares, Inc. specified on Schedule 2(b) and required then, if at all, to be distributed to the Participant under this Agreement, minus the number of such shares previously so distributed; and (ii) a portion of the balance of the value of the Participant's Deferral Account valued as of the last business day of the immediately-preceding calendar year (excluding from such valuation, however, any shares of Merchants Bancshares, Inc.). The fractional share to be distributed shall have: (a) a numerator of 1; and (b) a denominator equal to (i) 15 minus (ii) the aggregate number of previous annual distributions made to the Participant pursuant to this Section 3. All such valuations in each case shall include all adjustments required to be made pursuant to this Agreement. With respect to distributions other than those required to satisfy the Bank's obligations to distribute shares of Merchants Bancshares, Inc., distributions may be made in cash or in the form of negotiable securities held under the Trust Under The Merchants Bank Amended and Restated Deferred Compensation Plan for Directors (the "Trust") (such securities shall be valued at their fair market value as of the date of distribution as reasonably determined by the Bank or its designee). (b) Notwithstanding the provisions of Section 3(a), above, to the extent, if at all, that the Bank is provided with evidence reasonably satisfactory to it that all or part of the shares or other amounts to be distributed to the Participant or the Participant's beneficiary are includible in the Participant's or such beneficiary's taxable estate for estate tax purposes, and increase the estate taxes otherwise payable by such estate, the Bank shall promptly distribute or pay to the person(s) or entity(ies) entitled thereto, the entire remaining amounts payable by the Bank under this Agreement to such person(s) or entity(ies). (c) Notwithstanding the provisions of Section 3(a), above, a Participant may request, and the Bank may approve, a distribution due to hardship by submitting a written request to the Bank's Board of Directors accompanied by evidence to demonstrate that the circumstances being experienced qualify as a hardship. If a hardship is found by the Bank, the distribution shall be limited to an amount sufficient to meet the emergency. (d) For purposes of Section 3(c), "hardship" means a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The circumstances that will constitute a hardship will depend on the facts of each case. However, in no event shall payment be made if such purported hardship is or may be relieved: (i) through reimbursement or compensation by insurance or otherwise; (ii) by liquidation of the Participant's assets, to the extent that such liquidation would not itself cause severe financial hardship; or (iii) by the Participant's ceasing deferrals under the Plan. In no case shall the need to send a Participant's child to college or the desire to purchase a home be considered a hardship. Section 4. Nature of Accounts. (a) Except as provided in the Trust: all amounts credited to or held in the Trust shall remain the sole property of the Bank and shall be usable by it as a part of its general funds for any legal purpose whatever; the bookkeeping account referred to herein shall exist only for the purpose of facilitating the computation of payments hereunder; nothing contained in this Agreement and no action taken pursuant to the provisions of this Agreement shall create or be construed to create a trust or escrow of any kind, or a fiduciary relationship between the Bank and the Participants or any Participant's designated beneficiary or any other person; and to the extent that any person acquires a right to receive payments from the Bank under this Agreement, such right shall be no greater than the right of any unsecured general creditor of the Bank. (b) It is the intention of all parties that the Participants' rights under this Agreement be unfunded for purposes of the Internal Revenue Code of 1986, as amended, and Title I of the Employee Retirement Income Security Act of 1974, as amended. Section 5. No Reductions. The amounts to be paid to the Participants hereunder, and the dates on which such payments shall be due, shall under no circumstances and in no event be subject to reduction, curtailment or deferral. Section 6. Beneficiary Designation. Each Participant may designate one or more beneficiaries to receive, in the event of his or her death, all amounts which are then and thereafter payable under this Agreement. Such designation and any subsequent changes thereto shall be made in writing and filed with the Treasurer of the Bank. In the event of a Participant's death prior to receipt of the total amount due to him or her hereunder and without a then-effective beneficiary designation, the balance shall be paid to the Participant's spouse, if then living, and otherwise to his or her estate. Section 7. Nontransferability. No right to payment under this Agreement shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber or charge the same shall be void. No right to payment shall, in any manner, be liable for or subject to the debts, contracts, liabilities or torts of the person entitled thereto. If, at the time when payments are to be made hereunder, a Participant or any beneficiary is indebted to the Bank, then any payments remaining to be made hereunder may, at the discretion of the Bank, be reduced by the amount of such indebtedness. An election by the Bank not to reduce such payments shall not constitute a waiver of its claim for such indebtedness. Section 8. Full Release. The provisions of this Agreement are in full and final satisfaction of any and all claims which the Participants have or may have against the Bank under or on account of the Salary Continuation Agreement. Section 9. Successors and Assigns. This Plan shall be binding upon and inure to the benefit of the Bank, its successors and assigns, and the Participants and their respective heirs, executors, administrators and legal representatives. Section 10. Governing Law. This Plan shall be governed by and construed in accordance with the laws of the State of Vermont, without giving effect to such jurisdiction's principles of conflict of laws. IN WITNESS WHEREOF, the Bank and the Participants have executed this Agreement as of the 20th day of December, 1995. THE MERCHANTS BANK /s/ Kathryn T. Boardman By: /s/ Joseph L. Boutin - ------------------------------ ------------------------------- Kathryn T. Boardman Its President and Chief Executive Officer /s/ Thomas R. Havers - ------------------------------ Thomas R. Havers /s/ Susan D. Struble - ------------------------------ Susan D. Struble EX-10 10 EX-10.15.1 TRUST UND. AGREE-BOARDMAN-HAVERS-STRUBL EXHIBIT 10.15.1 TRUST UNDER AGREEMENT WITH KATHRYN T. BOARDMAN, THOMAS R. HAVERS AND SUSAN D. STRUBLE This Trust Agreement is made this 20th day of December, 1995, by and between THE MERCHANTS BANK (the "Company") and THE MERCHANTS TRUST COMPANY (the "Trustee"). Background ---------- 1. The Company has entered into a nonqualified deferred compensation Plan with Kathryn T. Boardman, Thomas R. Havers and Susan D. Struble (the "Agreement; capitalized terms used in this Trust Agreement that are not otherwise defined herein have the meanings and definitions set forth in the Agreement). 2. The Company has incurred liability under the terms of such Agreement with respect to the Participants. 3. The Company wishes to establish a trust (hereinafter called "Trust") and to contribute to the Trust assets that shall be held therein, subject to the claims of Company's creditors in the event of the Company's Insolvency, as herein defined, until paid to the Participants and their beneficiaries in such manner and at such times as is specified and provided for in the Agreement. 4. It is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Agreement as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974. 5. It is the intention of the Company to make contributions to the Trust to provide itself with a source of funds and resources to assist it in the meeting of its liabilities under the Agreement. N O W , T H E R E F O R E , The parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: Section 1. Establishment Of Trust. (a) The Company hereby deposits with the Trustee in trust $160,862, which shall become the principal of the Trust to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. (b) The Trust hereby established shall be irrevocable. (c) The Trust is intended to be a grantor trust, of which the Company is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (d) The principal of the Trust, and any earnings thereon shall be held separate and apart from other funds of the Company and shall be used exclusively for the uses and purposes of the Participants and general creditors, as herein set forth. The Participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Agreement and this Trust Agreement shall be mere unsecured contractual rights of the Participants and their beneficiaries against the Company. Any assets held by the Trust will be subject to the claims of Company's general creditors under federal and state law in the event of Insolvency, as defined in Section 3(a) herein. (e) The Company, in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property in trust with the Trustee to augment the principal to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. Neither the Trustee nor any Participant or beneficiary shall have any right to compel such additional deposits. Section 2. Payments to Participants and Their Beneficiaries. (a) The Company shall deliver to the Trustee a schedule (the "Payment Schedule") that indicates the amounts payable in respect of each Participant (and his or her beneficiaries), that provides a formula or other instructions acceptable to the Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Agreement), and the time of commencement for payment of such amounts. Except as otherwise provided herein, the Trustee shall make payments to the Participants and their beneficiaries in accordance with such Payment Schedule. The Trustee shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Plan and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by the Company. (b) The entitlement of a Participant or his or her beneficiaries to benefits under the Agreement shall be determined by the Company or such party as it shall designate under the Agreement, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Agreement. (c) The Company may make payment of benefits directly to Participants or their beneficiaries as they become due under the terms of the Agreement. The Company shall notify the Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to participants or their beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Agreement, the Company shall make the balance of each such payment as it falls due. The Trustee shall notify the Company where principal and earnings are not sufficient. Section 3. Trustee Responsibility Regarding Payments to Trust Beneficiary When The Company Is Insolvent. (a) The Trustee shall cease payment of benefits to the Participants and their beneficiaries if the Company is Insolvent. The Company shall be considered "Insolvent" for purposes of this Trust Agreement if: (i) the Company is unable to pay its debts as they become due; (ii) the Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code; or (iii) the Company is determined to be insolvent by the federal and/or state regulatory agencies having authority over the Company and its operations. (b) At all times during the continuance of this Trust, as provided in Section 1(d) hereof, the principal and income of the Trust shall be subject to claims of general creditors of the Company under federal and state law as set forth below. (i) The Board of Directors and the Chief Executive Officer of the Company shall have the duty to inform the Trustee in writing of the Company's Insolvency. If a person claiming to be a creditor of the Company alleges in writing to the Trustee that the Company has become Insolvent, the Trustee shall determine whether the Company is Insolvent and, pending such determination, the Trustee shall discontinue payment of benefits to the Participants or their beneficiaries. (ii) Unless the Trustee has actual knowledge of Company's Insolvency, or has received notice from the Company or a person claiming to be a creditor alleging that the Company is Insolvent, the Trustee shall have no duty to inquire whether the Company is Insolvent. The Trustee may in all events rely on such evidence concerning the Company's solvency as may be furnished to the Trustee and that provides the Trustee with a reasonable basis for making a determination concerning the Company's solvency. (iii) If at any time the Trustee has determined that the Company is Insolvent, the Trustee shall discontinue payments to the Participants or their beneficiaries and shall hold the assets of the Trust for the benefit of the Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Participants or their beneficiaries to pursue their rights as general creditors of the Company with respect to benefits due under the Agreement or otherwise. (iv) The Trustee shall resume the payment of benefits to the Participants or their beneficiaries in accordance with Section 2 of this Trust Agreement only after the Trustee has determined that the Company is not Insolvent (or is no longer Insolvent). (c) Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to the Participants or their beneficiaries under the terms of the Agreement for the period of such discontinuance, less the aggregate amount of any payments made to Participants or their beneficiaries by the Company in lieu of the payments provided for hereunder during any such period of discontinuance. Section 4. Payments to the Company. Except as provided in Section 3 hereof, or on account of the Company's direct payments pursuant to Section 2(c), the Company shall have no right or power to direct the Trustee to return to the Company or to divert to others any of the Trust assets before all payment of benefits have been made to the Participants and their beneficiaries pursuant to the terms of the Agreement. Section 5. Investment Authority. The Trustee shall invest the amount deposited with it pursuant to Section 1(a) initially in shares of Merchants Bancshares, Inc. stock except to the extent otherwise instructed by the Company. Following such initial investment, the Trustee may invest in securities (including stock or rights to acquire stock) or obligations issued by the Company or its affiliates and may dispose of the amount of the initial investment in Merchants Bancshares, Inc. stock and take such other actions with respect to the Trust assets as directed by the Company, or, in the absence of such direction, as the Trustee, in its sole discretion, determines to be appropriate. All rights associated with assets of the Trust shall be exercised by the Trustee or the person designated by the Trustee, and shall in no event be exercisable by, or rest with, the Participants, except that voting rights with respect to Trust assets will be exercised by the Company. The Company shall have the right at any time, and from time to time in its sole discretion, to substitute assets of equal fair market value for any asset held by the Trust. This right is exercisable by the Company in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity. Section 6. Disposition of Income. During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested. Section 7. Accounting by the Trustee. The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between the Company and the Trustee. Within sixty (60) days following the close of each calendar year and within sixty (60) days after the removal or resignation of the Trustee, the Trustee shall deliver to the Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. Section 8. Responsibility of the Trustee. (a) The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that the Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by the Company which is contemplated by, and in conformity with, the terms of the Agreement or this Trust and is given in writing by the Company. In the event of a dispute between the Company and a party, the Trustee may apply to a court of competent jurisdiction to resolve the dispute. (b) If the Trustee undertakes or defends any litigation arising in connection with this Trust, the Company agrees to indemnify the Trustee against Trustee's costs, expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. If the Company does not pay such costs, expenses and liabilities in a reasonably timely manner, the Trustee may obtain payment from the Trust. (c) The Trustee may consult with legal counsel (who may also be counsel for the Company generally) with respect to any of its duties or obligations hereunder. (d) The Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder. (e) The Trustee shall have, without exclusion, all powers conferred on Trustees by applicable law, unless expressly provided otherwise herein, provided, however, that if an insurance policy is held as an asset of the Trust, the Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy. (f) However, notwithstanding the provisions of Section 8(e) above, the Trustee may loan to the Company the proceeds of any borrowing against an insurance policy held as an asset of the Trust. (g) Notwithstanding any powers granted to the Trustee pursuant to this Trust Agreement or to applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. Section 9. Compensation and Expenses of the Trustee. The Company shall pay all administrative and Trustee's fees and expenses. If not so paid, the fees and expenses shall be paid from the Trust. Section 10. Resignation and Removal of the Trustee. (a) The Trustee may resign at any time by written notice to the Company, which shall be effective thirty (30) days after receipt of such notice unless the Company and the Trustee agree otherwise. (b) The Trustee may be removed by the Company on thirty (30) days' notice or upon shorter notice accepted by the Trustee. (c) If the Trustee resigns or is removed within five (5) years of a Change of Control, as defined in Section 13(d), the Trustee shall select a successor trustee in accordance with the provisions of Section 11(b) hereof prior to the effective date of Trustee's resignation or removal. (d) Upon resignation or removal of the Trustee and appointment of a successor trustee, all assets shall subsequently be transferred to the successor trustee. The transfer shall be completed within thirty (30) days after receipt of notice of resignation, removal or transfer, unless the Company extends the time limit. (e) If the Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 11 hereof, by the effective date of resignation or removal under Section 10(a) or 10(b). If no such appointment has been made, the Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of the Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. Section 11. Appointment of Successor. (a) Except as provided in Section 11(b), if the Trustee resigns or is removed in accordance with Section 10(a) or 10(b) hereof, the Company may appoint any third party, such as a bank trust department or other party that may be granted corporate trustee powers under state law, as a successor to replace the Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the new trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the Company or the successor trustee to evidence the transfer. (b) If the Trustee resigns or is removed pursuant to the provisions of Section 10(c) hereof and is to select a successor trustee, the Trustee may appoint any third party such as a bank trust department or other party that may be granted corporate trustee powers under state law. The appointment of a successor trustee shall be effective when accepted in writing by the new trustee. The new trustee shall have all the rights and powers of the former Trustee, including ownership rights in Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the successor trustee to evidence the transfer. (c) The successor trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Sections 7 and 8 hereof. The successor trustee shall not be responsible for and the Company shall indemnify and defend the successor trustee from any claim or liability resulting from any action or inaction of any prior trustee or from any other past event, or any condition existing at the time it becomes successor trustee. Section 12. Amendment or Termination. (a) Notwithstanding Section 1(b) hereof, the Trustee and the Company, acting jointly or solely, shall have the power to amend the Trust in any manner required for the sole purpose of insuring that the Trust qualifies and continues to qualify as a "rabbi trust" for purposes of Revenue Procedure 92-64, any successor provisions thereto or any other similar or successor provisions of the Internal Revenue Code of 1986, as amended. (b) The Trust shall not terminate until the date on which the Participants and their beneficiaries are no longer entitled to benefits pursuant to the terms of the Agreement. Upon termination of the Trust any assets remaining in the Trust shall be returned to the Company. Section 13. Miscellaneous. (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) Benefits payable to the Participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. (c) This Trust Agreement shall be governed by and construed in accordance with the laws of Vermont. (d) For purposes of this Trust, "Change of Control" shall mean the purchase or other acquisition by any person, entity or group of persons, within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934 ("Act"), or any comparable successor provisions, of beneficial ownership (within the meaning of Rule l3d-3 promulgated under the Act) of 30 percent or more of either the outstanding shares of common stock or the combined voting power of Company's then outstanding voting securities entitled to vote generally, or the approval by the stockholders of the Company of a reorganization, merger, or consolidation, in each case, with respect to which persons who were stockholders of the Company immediately prior to such reorganization-merger or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated Company's then outstanding securities, or a liquidation or dissolution of the Company or of the sale of all or substantially all of Company's assets. Section 14. Effective Date. The effective date of this Trust Agreement shall be December 20, 1995. THE MERCHANTS BANK THE MERCHANTS TRUST COMPANY By: /s/ Joseph L. Boutin By: /s/ Rebecca P. Arnold - ------------------------------ ------------------------------- Duly Authorized Duly Authorized EX-10 11 EX-10.16 AGREEMENT-MERCHANTS & D. DAVIS-12/20/95 EXHIBIT 10.16 AGREEMENT This Agreement is between THE MERCHANTS BANK, a Vermont banking corporation with a principal place of business in Burlington, Vermont (the "Bank") and DUDLEY H. DAVIS, of Burlington, Vermont ("Davis") and is effective as of the date specified on the execution page of this Agreement (the "Effective Date"). Background ---------- 1. The Bank and Davis are parties to a Salary Continuation Agreement dated June 1, 1989 (the "Salary Continuation Agreement"). 2. The Bank desires to amend the Salary Continuation Agreement and the benefits payable thereunder, and Davis is willing to agree to such amendments. 3. Davis has or may have claims on account of the Bank's administration of its so-called 401(k) Plan, particularly with respect to the timing of distributions made by the Bank to Davis thereunder, and the Bank and Davis desire forever to resolve and settle any such claims. N O W , T H E R E F O R E , In consideration of the premises and the mutual covenants and agreements herein set forth, the parties hereby agree as follows: Section 1. Bank to Establish Trust. The Bank shall establish, on the Effective Date, and thereafter shall maintain in accordance with this Agreement: (a) a so-called rabbi trust in the form attached hereto as Exhibit "A" (the "Variable Trust"); and (b) a second so-called rabbi trust in the form attached hereto as Exhibit "B" (the "Fixed Trust"); the Variable Trust and the Fixed Trust are collectively sometimes referred to in this Agreement as the "Trusts". The Bank shall contribute to the Variable Trust, on the Effective Date, the sum of $700,000, and shall contribute to the Fixed Trust, on the Effective Date, the sum of $200,000. Section 2. Bookkeeping Account. The Bank shall establish and maintain a bookkeeping account (the "Variable Account"), and not less frequently than the end of each calendar year shall credit (or debit) to such Variable Account, that amount which causes the balance in such Variable Account to equal precisely the balance in the Variable Trust established and maintained under and pursuant to this Agreement and referred to in Section 1, above; provided, however, that to the extent the balance in the Variable Trust has been reduced as a result of any withdrawals from the Variable Trust for any purpose other than a payment to or for the benefit of Davis or his designated beneficiary, the amount credited to such Variable Account shall be adjusted to take into account both such withdrawal(s) and the earnings (or losses) that would have been credited to such bookkeeping account if such withdrawal(s) had not occurred; and provided, further, that to the extent the Bank makes payments of amounts due under this Agreement directly to Davis or his beneficiary, or causes them to be made, from sources other than the Variable Trust, corresponding adjustments also shall be made to the Variable Account. Section 3. Nature of Accounts. (a) Except as provided in the Trusts: all amounts credited to or held in the Trusts shall remain the sole property of the Bank and shall be usable by it as a part of its general funds for any legal purpose whatever; the bookkeeping account referred to herein shall exist only for the purpose of facilitating the computation of payments hereunder; nothing contained in this Agreement and no action taken pursuant to the provisions of this Agreement shall create or be construed to create a trust or escrow of any kind, or a fiduciary relationship between the Bank and Davis or his designated beneficiary or any other person; and to the extent that any person acquires a right to receive payments from the Bank under this Agreement, such right shall be no greater than the right of any unsecured general creditor of the Bank. (b) It is the intention of all parties that Davis' rights under this Agreement be unfunded for purposes of the Internal Revenue Code of 1986, as amended, and Title I of the Employee Retirement Income Security Act of 1974, as amended. Section 4. Variable Trust Investments. The Bank has provided to Davis a copy of a letter of instructions of even date that the Bank has given to the Trustee under the Variable Trust. Pursuant to its sole authority to direct the manner in which the Variable Trust assets will be invested, the Bank has instructed that the assets be invested as provided in that letter. The Bank agrees that it will not change the investment instructions without Davis' prior written approval, which Davis agrees not to unreasonably withhold. Section 5. Distribution of Shares of Merchants Bancshares, Inc. On January 2, 1997 and on January 2, 1998, the Bank shall distribute or cause to be distributed to Davis: (i) 7,079.5 shares of Merchants Bancshares, Inc. (an aggregate of 14,159 shares); plus (ii) all dividends, distributions or other consideration paid on, on account of, or in exchange for such shares prior to their distribution as herein provided, however, if Davis dies before he has received all of such payments and distributions, the Bank shall pay and distribute to Davis' designated beneficiary, not later than 90 days after the date of his death, the entire amount remaining for payment and distribution pursuant to the foregoing subsections (i) and (ii). Notwithstanding the provisions of the immediately-preceding sentence: (y) in the event of a merger, consolidation or reorganization of Merchants Bancshares, Inc., the Bank shall be obligated to distribute, in lieu of the shares of Merchants Bancshares, Inc. referred to above, such shares or other property as shall have been exchanged for said Merchants Bancshares, Inc. stock, or into which said Merchants Bancshares, Inc. shares shall have been converted pursuant to such merger, consolidation or reorganization; and (z) in the event of a Change of Control (as defined below), the Bank shall have the option, to be exercised (if at all) not earlier than sixty days prior to such Change of Control nor later than sixty days thereafter, and to be effective not earlier than the time when such Change of Control occurs nor later than one hundred eighty days thereafter, to provide that in lieu of any obligation thereafter to distribute shares of Merchants Bancshares, Inc., the Bank thereafter shall be required to pay or distribute to Davis, in cash or in securities, a variable amount that equals the value from time to time of the balance posted to the bookkeeping account maintained for Davis in the Fixed Trust referred to in Section 3, above, provided, however, that to the extent the balance posted to the credit of Davis in the Fixed Trust has been reduced as a result of any withdrawals from the Fixed Trust for any purpose other than a payment to or for the benefit of Davis or Davis' designated beneficiary (see Section 8, below), the amount to be paid or distributed to Davis shall be adjusted to take into account both such withdrawal(s) and the earnings (or losses) that would have been credited to Davis' account under the Fixed Trust if such withdrawal(s) had not occurred. A "Change of Control" shall occur upon the earliest of the following: (A) any "person," as such term is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934 (a "Person"), becomes a "beneficial owner," as such term is used in Rule 13D-3 promulgated under such Act (an "Owner") of twenty-five percent (25%) or more of the Voting Stock, as defined below, of Merchants Bancshares, Inc.; or (B) the majority of the Board of Merchants Bancshares, Inc. consists of individuals other than the Incumbent Directors; (C) Merchants Bancshares, Inc., or the Bank, adopts any plan of liquidation providing for the distribution of all or substantially all of its assets; (D) all or substantially all of the business of Merchants Bancshares, Inc. is disposed of pursuant to a merger, consolidation, or other transaction in which Merchants Bancshares, Inc. is not the surviving corporation or is substantially or completely liquidated (unless the shareholders of Merchants Bancshares, Inc. immediately prior to such merger, consolidation, or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the Voting Stock of Merchants Bancshares, Inc., all of the Voting Stock, or correlative ownership interests, of the entity or entities, if any, that succeed to the business of Merchants Bancshares, Inc.); or (E) Merchants Bancshares, Inc. combines with another company and is the surviving corporation but, immediately after the combination, the shareholders of Merchants Bancshares, Inc. immediately prior to the combination (other than shareholders who, immediately prior to the combination, were "affiliates" of such other company, as such term is defined in the rules of the Securities and Exchange Commission) do not beneficially own, directly or indirectly, fifty percent (50%) or more of the Voting Stock of the combined company; or (F) Merchants Bancshares, Inc. transfers to any Person or Persons not controlled by Merchants Bancshares, Inc.: (1) fifty percent (50%) of the Voting Stock of the Bank; or (2) forty percent (40%) or more of the assets of the Bank. Notwithstanding the occurrence of any of the events described in clauses (A), (D) or (E), above, no "Change of Control" shall be deemed to have occurred if: (1) immediately following such event, members of the Board or employees of Merchants Bancshares, Inc. and its subsidiaries who file or are required to file (or immediately prior to such event, filed or were required to file) reports under Section 16(a) of the 1934 Act) are beneficial owners, directly or indirectly, of twenty-five percent (25%) or more of the Voting Stock of Merchants Bancshares, Inc. or its successor, as the case may be; or (2) such Change of Control event occurs as a result of a proposal initiated by the Board of Merchants Bancshares, Inc. (and not as a result of prior actions taken by the Person or Persons effecting the Change of Control), and if at the time of making the proposal, the Board of Directors notifies the Fixed Growth Plan Participants that any such Change of Control event resulting from the proposal shall not constitute a Change of Control. For this purpose, a Change of Control event shall be considered to result from a proposal if the event occurs because of the acquisition of stock or assets of Merchants Bancshares, Inc., directly or indirectly, by Persons, or a group of some of whose members are Persons, identified in the written notice described above. "Incumbent Director(s)" shall mean the members of the Board of Merchants Bancshares, Inc. on the date of this Amended Plan, provided that any person becoming a director subsequent to the date of this Amended Plan whose election or nomination for election was approved by two-thirds (but in no event less than two) of the directors who at the time of such election or nomination comprise the Incumbent Directors shall be considered to be an Incumbent Director. "Voting Stock" of any corporation shall mean the capital stock of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect directors of such corporation. Section 6. Distributions Relating to Variable Account. (a) On or promptly following January 2, 1999 and each January 2 thereafter through and including January 2, 2008, the Bank shall distribute or cause to be distributed to Davis or his designated beneficiary a fraction of the value of the Variable Account as of the last business day of the immediately-preceding calendar year, as such value is determined in good faith by the Bank, where the fraction has (a) a numerator of 1; and (b) a denominator equal to ten (10) minus the aggregate number of distributions previously made to Davis or his designated beneficiary pursuant to this subsection 6(a). All such valuations in each case shall include all credits (or debits) required to be made pursuant to Section 2 of this Agreement. Distributions may be made in cash or in the form of securities held by the Trust (distributed securities shall be valued at their fair market value as of the date of distribution as reasonably determined by the Bank). (b) Notwithstanding the provisions of subsection 6(a), above, if Davis dies before he has received all of the payments referred to above, the Bank shall pay to Davis' designated beneficiary, not later than ninety (90) days after the date of his death, a lump sum in an amount equal to the value of the Account as of the date of his death. (c) Notwithstanding the provisions of subsection 6(a) and 6(b), above, Davis may request, and the Bank may approve, a distribution due to hardship by submitting a written request to the Board of Directors of the Bank, accompanied by evidence to demonstrate that the circumstances being experienced qualify as a hardship. If a hardship is found by the Bank, the distribution shall be limited to an amount sufficient to meet the hardship. (d) For purposes of subsection 6(c), "hardship" means a severe financial hardship to Davis resulting from a sudden and unexpected illness or accident of Davis or a dependent of Davis, loss of Davis' property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of Davis. The circumstances that will constitute a hardship will depend on the facts of each case. However, in no event shall payment be made if such purported hardship is or may be relieved: (i) through reimbursement or compensation by insurance or otherwise; or (ii) by liquidation of Davis' assets, to the extent that such liquidation would not itself cause severe financial hardship. In no case shall the need to send a child to college or the desire to purchase a home be considered a hardship. Section 7. No Reductions. The amounts to be paid to Davis hereunder, and the dates on which such payments shall be due, shall under no circumstances and in no event be subject to reduction, curtailment or deferral. Section 8. Beneficiary Designation. Davis may designate one or more beneficiaries to receive, in the event of his death, all amounts which are then and thereafter payable under this Agreement. Such designation and any subsequent changes thereto shall be made in writing and filed with the Treasurer of the Bank. In the event of Davis' death prior to receipt of the total amount due to him hereunder and without a then-effective beneficiary designation, the balance shall be paid to Davis' spouse, if then living, and otherwise to his estate. Section 9. Nontransferability. No right to payment under this Agreement shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber or charge the same shall be void. No right to payment shall, in any manner, be liable for or subject to the debts, contracts, liabilities or torts of the person entitled thereto. If, at the time when payments are to be made hereunder, Davis or any beneficiary is indebted to the Bank, then any payments remaining to be made hereunder may, at the discretion of the Bank, be reduced by the amount of such indebtedness. An election by the Bank not to reduce such payments shall not constitute a waiver of its claim for such indebtedness. Section 10. Full Release. The provisions of this Agreement are in full and final satisfaction of any and all claims which Davis has or may have against the Bank under or on account of the Salary Continuation Agreement and/or under on account of any act or omission of the Bank or any of its affiliates or their respective officers, directors or employees to the date of this Agreement with respect to its so-called 401(k) Plan and the untimely payment of amounts due to Davis thereunder. Section 11. Successors and Assigns. This Plan shall be binding upon and inure to the benefit of the Bank, its successors and assigns, and Davis and his heirs, executors, administrators and legal representatives. Section 12. Governing Law. This Plan shall be governed by and construed in accordance with the laws of the State of Vermont, without giving effect to such jurisdiction's principles of conflict of laws. IN WITNESS WHEREOF, the Bank and Davis have executed this Agreement as of the 20th day of December, 1995. THE MERCHANTS BANK /s/ Dudley H. Davis By: /s/ Joseph L. Boutin - ------------------------------ ------------------------------- Dudley H. Davis Its President and Chief Executive Officer EX-10 12 EX-10.16.1 FIXED TRUST UNDER AGREE-D. DAVIS EXHIBIT 10.16.1 FIXED TRUST UNDER AGREEMENT WITH DUDLEY H. DAVIS This Trust Agreement is made this 20th day of December, 1995, by and between THE MERCHANTS BANK (the "Bank") and THE MERCHANTS TRUST COMPANY (the "Trustee"). Background ---------- 1. The Bank has entered into an Agreement with Dudley H. Davis ("Davis") of even date herewith (the "Agreement") pursuant to which, among other matters, the Bank and Davis have agreed that the Bank will pay to Davis, in lieu of amounts otherwise due to Davis under a so-called Officers' Salary Continuation Plan, the amounts specified and provided for in the Agreement. 2. The Bank wishes to establish a trust (hereinafter called "Fixed Trust") and to contribute to the Fixed Trust assets that shall be held therein, subject to the claims of Bank's creditors in the event of the Bank's Insolvency, as herein defined, until paid to Davis and his beneficiaries in such manner and at such times as are specified and provided for in the Agreement. 3. It is the intention of the parties that this trust shall constitute an unfunded arrangement and shall not affect the status of the Agreement as an unfunded plan maintained for the purpose of providing deferred compensation for Davis for purposes of Title I of the Employee Retirement Income Security Act of 1974. 4. It is the intention of the Bank to make contributions to the Fixed Trust to provide itself with a source of funds and resources to assist it in the meeting of its liabilities under the Agreement. N O W , T H E R E F O R E , The parties do hereby establish the Fixed Trust and agree that the Fixed Trust shall be comprised, held and disposed of as follows: Section 1. Establishment Of Fixed Trust. (a) The Bank hereby deposits with the Trustee, in trust, $200,000, which shall become the principal of the Fixed Trust to be held, administered and disposed of by the Trustee as provided in this Fixed Trust Agreement. (b) The Fixed Trust hereby established shall be irrevocable. (c) The Fixed Trust is intended to be a grantor trust, of which the Bank is the grantor, within the meaning of subpart E, part 1, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (d) The principal of the Fixed Trust, and any earnings thereon shall be held separate and apart from other funds of the Bank and shall be used exclusively for the uses and purposes of the Agreement and general creditors, as herein set forth. Davis and his beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Fixed Trust. Any rights created under the Agreement and this Fixed Trust Agreement shall be mere unsecured contractual rights of Davis and his beneficiaries against the Bank. Any assets held by the Fixed Trust will be subject to the claims of Bank's general creditors under federal and state law in the event of Insolvency, as defined in Section 3(a) herein. (e) The Bank, in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property in trust with the Trustee to augment the principal to be held, administered and disposed of by the Trustee as provided in this Fixed Trust Agreement. Neither the Trustee nor Davis nor any Davis beneficiary shall have any right to compel such additional deposits. Section 2. Payments to Davis and His Beneficiaries. (a) The Bank shall deliver to the Trustee instructions (the "Payment Instructions") that indicate the amounts payable to Davis and his beneficiaries under and in respect of the Agreement, or that provide a formula or other instructions acceptable to the Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Agreement), and the time of commencement for payment of such amounts. Except as otherwise provided herein, the Trustee shall make payments to Davis and his beneficiaries in accordance with such Payment Instructions. The Trustee shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Agreement and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by the Bank. (b) The entitlement of Davis or his beneficiaries to benefits under the Agreement shall be determined by the Bank or such party as it shall designate under the Agreement, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Agreement. (c) The Bank may make payment of benefits directly to Davis and his beneficiaries as they become due under the terms of the Agreement. The Bank shall notify the Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to Davis or such beneficiaries. In addition, if the principal of the Fixed Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Agreement, the Bank shall make the balance of each such payment as it falls due. The Trustee shall notify the Bank where principal and earnings are not sufficient. Section 3. Trustee Responsibility Regarding Payments When The Bank Is Insolvent. (a) The Trustee shall cease payment of benefits to Davis and his beneficiaries if the Bank is Insolvent. The Bank shall be considered "Insolvent" for purposes of this Fixed Trust Agreement if: (i) the Bank is unable to pay its debts as they become due; (ii) the Bank is subject to a pending proceeding as a debtor under the United States Bankruptcy Code; or (iii) the Bank is determined to be insolvent by the federal and/or state regulatory agencies having authority over the Bank and its operations. (b) At all times during the continuance of this Fixed Trust, as provided in Section 1(d) hereof, the principal and income of the Fixed Trust shall be subject to claims of general creditors of the Bank under federal and state law as set forth below. (i) The Board of Directors and the Chief Executive Officer of the Bank shall have the duty to inform the Trustee in writing of Bank's Insolvency. If a person claiming to be a creditor of the Bank alleges in writing to the Trustee that the Bank has become Insolvent, the Trustee shall determine whether the Bank is Insolvent and, pending such determination, the Trustee shall discontinue payment of benefits to Davis or his beneficiaries. (ii) Unless the Trustee has actual knowledge of Bank's Insolvency, or has received notice from the Bank or a person claiming to be a creditor alleging that the Bank is Insolvent, the Trustee shall have no duty to inquire whether the Bank is Insolvent. The Trustee may in all events rely on such evidence concerning Bank's solvency as may be furnished to the Trustee and that provides the Trustee with a reasonable basis for making a determination concerning Bank's solvency. (iii) If at any time the Trustee has determined that the Bank is Insolvent, the Trustee shall discontinue payments to Davis or his beneficiaries and shall hold the assets of the Fixed Trust for the benefit of Bank's general creditors. Nothing in this Fixed Trust Agreement shall in any way diminish any rights of Davis or his beneficiaries to pursue their rights as general creditors of the Bank with respect to benefits due under the Agreement or otherwise. (iv) The Trustee shall resume the payment of benefits to Davis or his beneficiaries in accordance with Section 2 of this Fixed Trust Agreement only after the Trustee has determined that the Bank is not Insolvent (or is no longer Insolvent). (c) Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Fixed Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Davis and his beneficiaries under the terms of the Agreement for the period of such discontinuance, less the aggregate amount of any payments made to Davis or his beneficiaries by the Bank in lieu of the payments provided for hereunder during any such period of discontinuance. Section 4. Payments to the Bank. Except as provided in Section 3 hereof or on account of the Bank's direct payments pursuant to Section 2(c), the Bank shall have no right or power to direct the Trustee to return to the Bank or to divert to others any of the Fixed Trust assets before all payment of benefits have been made to Davis and his beneficiaries pursuant to the terms of the Agreement. Section 5. Investment Authority. The Trustee shall invest the entire amount deposited with it pursuant to Section 1(a) initially in shares of Merchants Bancshares, Inc. stock. Following such initial investment, the Trustee may invest in securities (including stock or rights to acquire stock) or obligations issued by the Bank or its affiliates and may dispose of the amount of the initial investment in Merchants Bancshares, Inc. stock and take such other actions with respect to the Fixed Trust assets as directed by the Bank, or, in the absence of such direction, as the Trustee, in its sole discretion, determines to be appropriate. All rights associated with assets of the Fixed Trust shall be exercised by the Trustee or the person designated by the Trustee, and shall in no event be exercisable by, or rest with, Davis, except that voting rights with respect to Fixed Trust assets will be exercised by the Bank. The Bank shall have the right at any time, and from time to time in its sole discretion, to substitute assets of equal fair market value for any asset held by the Fixed Trust. This right is exercisable by the Bank in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity. Section 6. Disposition of Income. During the term of this Fixed Trust, all income received by the Fixed Trust, net of expenses and taxes, shall be accumulated and reinvested. Section 7. Accounting by the Trustee. The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between the Bank and the Trustee. Within sixty (60) days following the close of each calendar year and within sixty (60) days after the removal or resignation of the Trustee, the Trustee shall deliver to the Bank a written account of its administration of the Fixed Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Fixed Trust at the end of such year or as of the date of such removal or resignation, as the case may be. Section 8. Responsibility of the Trustee. (a) The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that the Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by the Bank which is contemplated by, and in conformity with, the terms of the Plan or this Fixed Trust and is given in writing by the Bank. In the event of a dispute between the Bank and a party, the Trustee may apply to a court of competent jurisdiction to resolve the dispute. (b) If the Trustee undertakes or defends any litigation arising in connection with this Fixed Trust, the Bank agrees to indemnify the Trustee against Trustee's costs, expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. If the Bank does not pay such costs, expenses and liabilities in a reasonably timely manner, the Trustee may obtain payment from the Fixed Trust. (c) The Trustee may consult with legal counsel (who may also be counsel for the Bank generally) with respect to any of its duties or obligations hereunder. (d) The Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder. (e) The Trustee shall have, without exclusion, all powers conferred on Trustees by applicable law, unless expressly provided otherwise herein, provided, however, that if an insurance policy is held as an asset of the Fixed Trust, the Trustee shall have no power to name a beneficiary of the policy other than the Fixed Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy. (f) However, notwithstanding the provisions of Section 8(e) above, the Trustee may loan to the Bank the proceeds of any borrowing against an insurance policy held as an asset of the Fixed Trust. (g) Notwithstanding any powers granted to the Trustee pursuant to this Fixed Trust Agreement or to applicable law, the Trustee shall not have any power that could give this Fixed Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. Section 9. Compensation and Expenses of the Trustee. The Bank shall pay all administrative and Trustee's fees and expenses. If not so paid, the fees and expenses shall be paid from the Fixed Trust. Section 10. Resignation and Removal of the Trustee. (a) The Trustee may resign at any time by written notice to the Bank, which shall be effective thirty (30) days after receipt of such notice unless the Bank and the Trustee agree otherwise. (b) The Trustee may be removed by the Bank on thirty (30) days' notice or upon shorter notice accepted by the Trustee. (c) If the Trustee resigns or is removed within five (5) years of a Change of Control, as defined in Section 13(d), the Trustee shall select a successor trustee in accordance with the provisions of Section 11(b) hereof prior to the effective date of Trustee's resignation or removal. (d) Upon resignation or removal of the Trustee and appointment of a successor trustee, all assets shall subsequently be transferred to the successor trustee. The transfer shall be completed within thirty (30) days after receipt of notice of resignation, removal or transfer, unless the Bank extends the time limit. (e) If the Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 11 hereof, by the effective date of resignation or removal under Section 10(a) or 10(b). If no such appointment has been made, the Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of the Trustee in connection with the proceeding shall be allowed as administrative expenses of the Fixed Trust. Section 11. Appointment of Successor. (a) Except as provided in Section 11(b), if the Trustee resigns or is removed in accordance with Section 10(a) or 10(b) hereof, the Bank may appoint any third party, such as a bank trust department or other party that may be granted corporate trustee powers under state law, as a successor to replace the Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the new trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Fixed Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the Bank or the successor trustee to evidence the transfer. (b) If the Trustee resigns or is removed pursuant to the provisions of Section 10(c) hereof and is to select a successor trustee, the Trustee may appoint any third party such as a bank trust department or other party that may be granted corporate trustee powers under state law. The appointment of a successor trustee shall be effective when accepted in writing by the new trustee. The new trustee shall have all the rights and powers of the former Trustee, including ownership rights in Fixed Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the successor trustee to evidence the transfer. (c) The successor trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Fixed Trust assets, subject to Sections 7 and 8 hereof. The successor trustee shall not be responsible for and the Bank shall indemnify and defend the successor trustee from any claim or liability resulting from any action or inaction of any prior trustee or from any other past event, or any condition existing at the time it becomes successor trustee. Section 12. Amendment or Termination. (a) Notwithstanding Section 1(b) hereof, the Trustee and the Bank, acting jointly or solely, shall have the power to amend the Fixed Trust in any manner required for the sole purpose of insuring that the Fixed Trust qualifies and continues to qualify as a "rabbi trust" for purposes of Revenue Procedure 92-64, any successor provisions thereto or any other similar or successor provisions of the Internal Revenue Code of 1986, as amended. (b) The Fixed Trust shall not terminate until the date on which Davis and his beneficiaries are no longer entitled to payments pursuant to the terms of the Agreement. Upon termination of the Fixed Trust any assets remaining in the Fixed Trust shall be returned to the Bank. Section 13. Miscellaneous. (a) Any provision of this Fixed Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) Benefits payable to Davis and his beneficiaries under this Fixed Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. (c) This Fixed Trust Agreement shall be governed by and construed in accordance with the laws of Vermont. (d) For purposes of this Fixed Trust, Change of Control shall have the meaning specified in the Agreement. Section 14. Effective Date. The effective date of this Fixed Trust Agreement shall be December 20, 1995. THE MERCHANTS BANK THE MERCHANTS TRUST COMPANY By: /s/ Joseph L. Boutin By: /s/ Rebecca P. Arnold - ------------------------------ ------------------------------- Duly Authorized Duly Authorized EX-10 13 EX-10.16.2 VARIABLE TRUST UNDER AGREE-D. DAVIS EXHIBIT 10.16.2 VARIABLE TRUST UNDER AGREEMENT WITH DUDLEY H. DAVIS This Trust Agreement is made this 20th day of December, 1995, by and between THE MERCHANTS BANK (the "Bank") and THE MERCHANTS TRUST COMPANY (the "Trustee"). Background ---------- 1. The Bank has entered into an Agreement with Dudley H. Davis ("Davis") of even date herewith (the "Agreement") pursuant to which, among other matters, the Bank and Davis have agreed that the Bank will pay to Davis, in lieu of amounts otherwise due to Davis under a so-called Officers' Salary Continuation Plan, the amounts specified and provided for in the Agreement. 2. The Bank wishes to establish a trust (hereinafter called "Variable Trust") and to contribute to the Variable Trust assets that shall be held therein, subject to the claims of Bank's creditors in the event of the Bank's Insolvency, as herein defined, until paid to Davis and his beneficiaries in such manner and at such times as are specified and provided for in the Agreement. 3. It is the intention of the parties that this trust shall constitute an unfunded arrangement and shall not affect the status of the Agreement as an unfunded plan maintained for the purpose of providing deferred compensation for Davis for purposes of Title I of the Employee Retirement Income Security Act of 1974. 4. It is the intention of the Bank to make contributions to the Variable Trust to provide itself with a source of funds and resources to assist it in the meeting of its liabilities under the Agreement. N O W , T H E R E F O R E , The parties do hereby establish the Variable Trust and agree that the Variable Trust shall be comprised, held and disposed of as follows: Section 1. Establishment Of Variable Trust. (a) The Bank hereby deposits with the Trustee, in trust, $700,000, which shall become the principal of the Variable Trust to be held, administered and disposed of by the Trustee as provided in this Variable Trust Agreement. (b) The Variable Trust hereby established shall be irrevocable. (c) The Variable Trust is intended to be a grantor trust, of which the Bank is the grantor, within the meaning of subpart E, part 1, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (d) The principal of the Variable Trust, and any earnings thereon shall be held separate and apart from other funds of the Bank and shall be used exclusively for the uses and purposes of the Agreement and general creditors, as herein set forth. Davis and his beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Variable Trust. Any rights created under the Agreement and this Variable Trust Agreement shall be mere unsecured contractual rights of Davis and his beneficiaries against the Bank. Any assets held by the Variable Trust will be subject to the claims of Bank's general creditors under federal and state law in the event of Insolvency, as defined in Section 3(a) herein. (e) The Bank, in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property in trust with the Trustee to augment the principal to be held, administered and disposed of by the Trustee as provided in this Variable Trust Agreement. Neither the Trustee nor Davis nor any Davis beneficiary shall have any right to compel such additional deposits. Section 2. Payments to Davis and His Beneficiaries. (a) The Bank shall deliver to the Trustee instructions (the "Payment Instructions") that indicate the amounts payable to Davis and his beneficiaries under and in respect of the Agreement, or that provide a formula or other instructions acceptable to the Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Agreement), and the time of commencement for payment of such amounts. Except as otherwise provided herein, the Trustee shall make payments to Davis and his beneficiaries in accordance with such Payment Instructions. The Trustee shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Agreement and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by the Bank. (b) The entitlement of Davis or his beneficiaries to benefits under the Agreement shall be determined by the Bank or such party as it shall designate under the Agreement, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Agreement. (c) The Bank may make payment of benefits directly to Davis and his beneficiaries as they become due under the terms of the Agreement. The Bank shall notify the Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to Davis or such beneficiaries. In addition, if the principal of the Variable Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Agreement, the Bank shall make the balance of each such payment as it falls due. The Trustee shall notify the Bank where principal and earnings are not sufficient. Section 3. Trustee Responsibility Regarding Payments When The Bank Is Insolvent. (a) The Trustee shall cease payment of benefits to Davis and his beneficiaries if the Bank is Insolvent. The Bank shall be considered "Insolvent" for purposes of this Variable Trust Agreement if: (i) the Bank is unable to pay its debts as they become due; (ii) the Bank is subject to a pending proceeding as a debtor under the United States Bankruptcy Code; or (iii) the Bank is determined to be insolvent by the federal and/or state regulatory agencies having authority over the Bank and its operations. (b) At all times during the continuance of this Variable Trust, as provided in Section 1(d) hereof, the principal and income of the Variable Trust shall be subject to claims of general creditors of the Bank under federal and state law as set forth below. (i) The Board of Directors and the Chief Executive Officer of the Bank shall have the duty to inform the Trustee in writing of Bank's Insolvency. If a person claiming to be a creditor of the Bank alleges in writing to the Trustee that the Bank has become Insolvent, the Trustee shall determine whether the Bank is Insolvent and, pending such determination, the Trustee shall discontinue payment of benefits to Davis or his beneficiaries. (ii) Unless the Trustee has actual knowledge of Bank's Insolvency, or has received notice from the Bank or a person claiming to be a creditor alleging that the Bank is Insolvent, the Trustee shall have no duty to inquire whether the Bank is Insolvent. The Trustee may in all events rely on such evidence concerning Bank's solvency as may be furnished to the Trustee and that provides the Trustee with a reasonable basis for making a determination concerning Bank's solvency. (iii) If at any time the Trustee has determined that the Bank is Insolvent, the Trustee shall discontinue payments to Davis or his beneficiaries and shall hold the assets of the Variable Trust for the benefit of Bank's general creditors. Nothing in this Variable Trust Agreement shall in any way diminish any rights of Davis or his beneficiaries to pursue their rights as general creditors of the Bank with respect to benefits due under the Agreement or otherwise. (iv) The Trustee shall resume the payment of benefits to Davis or his beneficiaries in accordance with Section 2 of this Variable Trust Agreement only after the Trustee has determined that the Bank is not Insolvent (or is no longer Insolvent). (c) Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Variable Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Davis and his beneficiaries under the terms of the Agreement for the period of such discontinuance, less the aggregate amount of any payments made to Davis or his beneficiaries by the Bank in lieu of the payments provided for hereunder during any such period of discontinuance. Section 4. Payments to the Bank. Except as provided in Section 3 hereof or on account of the Bank's direct payments pursuant to Section 2(c), the Bank shall have no right or power to direct the Trustee to return to the Bank or to divert to others any of the Variable Trust assets before all payment of benefits have been made to Davis and his beneficiaries pursuant to the terms of the Agreement. Section 5. Investment Authority. The Trustee shall invest $200,000 of the amount deposited with it pursuant to Section 1(a) initially in shares of Merchants Bancshares, Inc. stock. Except to the extent otherwise instructed by the Bank, following such initial investment, the Trustee may invest in securities (including stock or rights to acquire stock) or obligations issued by the Bank or its affiliates and may dispose of the amount of the initial investment in Merchants Bancshares, Inc. stock and take such other actions with respect to the Variable Trust assets as directed by the Bank, or, in the absence of such direction, as the Trustee, in its sole discretion, determines to be appropriate. All rights associated with assets of the Variable Trust shall be exercised by the Trustee or the person designated by the Trustee, and shall in no event be exercisable by, or rest with, Davis, except that voting rights with respect to Variable Trust assets will be exercised by the Bank. The Bank shall have the right at any time, and from time to time in its sole discretion, to substitute assets of equal fair market value for any asset held by the Variable Trust. This right is exercisable by the Bank in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity. Section 6. Disposition of Income. During the term of this Variable Trust, all income received by the Variable Trust, net of expenses and taxes, shall be accumulated and reinvested. Section 7. Accounting by the Trustee. The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between the Bank and the Trustee. Within sixty (60) days following the close of each calendar year and within sixty (60) days after the removal or resignation of the Trustee, the Trustee shall deliver to the Bank a written account of its administration of the Variable Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Variable Trust at the end of such year or as of the date of such removal or resignation, as the case may be. Section 8. Responsibility of the Trustee. (a) The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that the Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by the Bank which is contemplated by, and in conformity with, the terms of the Plan or this Variable Trust and is given in writing by the Bank. In the event of a dispute between the Bank and a party, the Trustee may apply to a court of competent jurisdiction to resolve the dispute. (b) If the Trustee undertakes or defends any litigation arising in connection with this Variable Trust, the Bank agrees to indemnify the Trustee against Trustee's costs, expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. If the Bank does not pay such costs, expenses and liabilities in a reasonably timely manner, the Trustee may obtain payment from the Variable Trust. (c) The Trustee may consult with legal counsel (who may also be counsel for the Bank generally) with respect to any of its duties or obligations hereunder. (d) The Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder. (e) The Trustee shall have, without exclusion, all powers conferred on Trustees by applicable law, unless expressly provided otherwise herein, provided, however, that if an insurance policy is held as an asset of the Variable Trust, the Trustee shall have no power to name a beneficiary of the policy other than the Variable Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy. (f) However, notwithstanding the provisions of Section 8(e) above, the Trustee may loan to the Bank the proceeds of any borrowing against an insurance policy held as an asset of the Variable Trust. (g) Notwithstanding any powers granted to the Trustee pursuant to this Variable Trust Agreement or to applicable law, the Trustee shall not have any power that could give this Variable Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. Section 9. Compensation and Expenses of the Trustee. The Bank shall pay all administrative and Trustee's fees and expenses. If not so paid, the fees and expenses shall be paid from the Variable Trust. Section 10. Resignation and Removal of the Trustee. (a) The Trustee may resign at any time by written notice to the Bank, which shall be effective thirty (30) days after receipt of such notice unless the Bank and the Trustee agree otherwise. (b) The Trustee may be removed by the Bank on thirty (30) days' notice or upon shorter notice accepted by the Trustee. (c) If the Trustee resigns or is removed within five (5) years of a Change of Control, as defined in Section 13(d), the Trustee shall select a successor trustee in accordance with the provisions of Section 11(b) hereof prior to the effective date of Trustee's resignation or removal. (d) Upon resignation or removal of the Trustee and appointment of a successor trustee, all assets shall subsequently be transferred to the successor trustee. The transfer shall be completed within thirty (30) days after receipt of notice of resignation, removal or transfer, unless the Bank extends the time limit. (e) If the Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 11 hereof, by the effective date of resignation or removal under Section 10(a) or 10(b). If no such appointment has been made, the Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of the Trustee in connection with the proceeding shall be allowed as administrative expenses of the Variable Trust. Section 11. Appointment of Successor. (a) Except as provided in Section 11(b), if the Trustee resigns or is removed in accordance with Section 10(a) or 10(b) hereof, the Bank may appoint any third party, such as a bank trust department or other party that may be granted corporate trustee powers under state law, as a successor to replace the Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the new trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Variable Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the Bank or the successor trustee to evidence the transfer. (b) If the Trustee resigns or is removed pursuant to the provisions of Section 10(c) hereof and is to select a successor trustee, the Trustee may appoint any third party such as a bank trust department or other party that may be granted corporate trustee powers under state law. The appointment of a successor trustee shall be effective when accepted in writing by the new trustee. The new trustee shall have all the rights and powers of the former Trustee, including ownership rights in Variable Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the successor trustee to evidence the transfer. (c) The successor trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Variable Trust assets, subject to Sections 7 and 8 hereof. The successor trustee shall not be responsible for and the Bank shall indemnify and defend the successor trustee from any claim or liability resulting from any action or inaction of any prior trustee or from any other past event, or any condition existing at the time it becomes successor trustee. Section 12. Amendment or Termination. (a) Notwithstanding Section 1(b) hereof, the Trustee and the Bank, acting jointly or solely, shall have the power to amend the Variable Trust in any manner required for the sole purpose of insuring that the Variable Trust qualifies and continues to qualify as a "rabbi trust" for purposes of Revenue Procedure 92- 64, any successor provisions thereto or any other similar or successor provisions of the Internal Revenue Code of 1986, as amended. (b) The Variable Trust shall not terminate until the date on which Davis and his beneficiaries are no longer entitled to payments pursuant to the terms of the Agreement. Upon termination of the Variable Trust any assets remaining in the Variable Trust shall be returned to the Bank. Section 13. Miscellaneous. (a) Any provision of this Variable Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) Benefits payable to Davis and his beneficiaries under this Variable Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. (c) This Variable Trust Agreement shall be governed by and construed in accordance with the laws of Vermont. (d) For purposes of this Variable Trust, Change of Control shall have the meaning specified in the Agreement. Section 14. Effective Date. The effective date of this Variable Trust Agreement shall be December 20, 1995. THE MERCHANTS BANK THE MERCHANTS TRUST COMPANY By: /s/ Joseph L. Boutin By: /s/ Rebecca P. Arnold - ------------------------------ ------------------------------- Duly Authorized Duly Authorized EX-11 14 EX-11 STATEMENT RE: COMPUTATION OF PER SHARE EARN. EXHIBIT 11 11. Statement re: Computation of Per Share Earnings Earnings per share computations are based on the weighted average number of shares outstanding after giving retroactive effect to stock dividends. Because the effect of common stock equivalents would be immaterial, they have been excluded from the calculation of weighted average shares. Weighted average numbers of shares outstanding for each year in the period 1992 to 1996 are as follows: 1996 4,290,342 1995 4,269,231 1994 4,230,194 1993 4,216,355 1992 4,213,941 EX-21 15 EX-21 SUBSIDIARIES OF THE COMPANY EXHIBIT 21 21. Subsidiaries of Merchants Bancshares, Inc. Merchants Bank Merchants Properties, Inc. Merchants Trust Company (a subsidiary of Merchants Bank) Queneska Capital Corporation (a subsidiary of Merchants Bank) EX-23 16 EX-23 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated January 16, 1997 included in Merchants Bancshares, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, into Merchants Bancshares, Inc.'s previously filed Registration Statement No. 333-18845 on Form S-8, as amended by Post Effective Amendment No. 1 on Form S-8/A. ARTHUR ANDERSEN LLP Boston, MA March 21, 1997 EX-27 17 EX-27 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1996 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-K. 1,000 YEAR DEC-31-1996 DEC-31-1996 29,726 54 0 500 57,886 86,904 0 387,233 (15,700) 581,636 508,280 9,599 11,088 6,420 0 0 44 46,205 581,636 39,953 7,588 463 48,004 17,724 18,672 29,332 3,150 33 27,489 8,055 8,055 0 0 6,224 1.45 1.45 5.53 4,091 217 2,403 10,767 16,234 (5,135) 1,451 15,700 15,700 0 3,251
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