SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1993. COMMISSION FILE NUMBER 0-11595
MERCHANTS BANCSHARES, INC.
(A DELAWARE CORPORATION)
EMPLOYER IDENTIFICATION NO. 03-0287342
123 Church Street, Burlington, VT 05401
Telephone: (802) 658-3400
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(D) of the Securities Exchange
Act of 1934 during the preceeding 12 months (or for such shorter period
that the registrant was required to file such reports), and has been
subject to such filing requirement for the past 90 days.
YES X NO
--- ---
4,242,927 Shares Common Stock, $.01 Par Outstanding June 30, 1993.
MERCHANTS BANCSHARES, INC. FORM 10-Q
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 15, 1993
IS HEREBY RESTATED AS FOLLOWS:
PART 1
ITEM 1 FINANCIAL STATEMENTS
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
MERCHANTS BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET
UNAUDITED
(Dollar Amounts in Thousan
June 30 June 30 December 31
1993 1992 1992
ASSETS --------- --------- ---------
Cash and Due From Banks $35,492 $30,434 $36,744
Federal Funds Sold 1,600 0 10,500
Investments-Debt Securities held for Sale 96,690 30,460 103,197
-Debt Securities held for Investment 0 63,393 0
-Marketable Equity Securities 8,452 3,455 4,333
------------------------------
Total Investments 105,142 97,308 107,530
Loans 595,658 434,531 429,535
Less: Reserve for Possible Loan Losses (13,275) (6,604) (7,412)
-------------------------------
Net Loans 582,383 427,927 422,123
Bank Premises and Equipment 14,068 15,250 14,636
OREO and Insubstance Foreclosure 14,575 6,182 12,661
Other Assets 26,779 16,222 18,646
-------------------------------
Total Assets 780,039 593,323 622,840
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand 83,337 64,737 82,272
Savings, NOW and Money Market Accounts 342,965 276,622 289,670
Time CDs $100,000 and Over 712 1,472 6,647
Other Time 225,330 146,079 125,464
------------------------------
Total Deposits 652,344 488,910 504,053
Federal Funds Purchased 0 1,600 0
Securities Sold U/A to Repurchase 8,739 3,912 3,595
Demand Note Due U/S Treasury 4,752 4,638 4,870
Other Liabilities 8,392 6,747 9,082
-------------------------------
Total Liabilities 674,227 505,807 521,600
Long-Term Debt 58,635 36,344 49,037
Stockholders' Equity
Common Stock, $.01 Par Value 42 41 42
Shares Authorized 4,700,000
Outstanding, Current Year 4,242,927
Previous Year 4,119,347
December 31, 1991 4,242,927
Treasury Stock (at Cost) (179) (392) (424)
Surplus 30,647 28,603 30,636
Undivided Profits 16,667 22,920 21,949
Valuation Reserve - Marketable Equity Securitie 0 0 0
-------------------------------
Total Stockholders' Equity 47,177 51,172 52,203
--------- --------- ----------
Total Liabilities and Shareholder Equity 780,039 593,323 622,840
===============================
Book Value per Share (Note 1) $11.15 $12.16 $12.39
Note 1: Book Values per share have been adjusted to reflect the 3% stock
dividend issued December 1992.
1
MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
UNAUDITED
(Dollar Amounts in Thousands, Except for Per Share Data)
RESTATED
Quarter Ended Six Months Ended
June 30 June 30
1993 1992 1993 1992
Interest Income:
Interest on Loans $9,623 $10,133 $18,624 $20,798
Investment Income:
Obligations of U.S. Government 980 1,278 1,985 2,166
Obligations of States and
Political Subdivisions 9 0 9 0
Other 66 70 174 123
Federal Funds Sold 28 6 41 59
-------------------- --------------------
$10,706 $11,487 $20,833 $23,146
-------------------- --------------------
Interest Expense:
Interest on Deposits $3,817 $5,257 $7,408 $10,714
Interest on Capital Notes
and Other Borrowings 1,212 1,116 2,400 2,190
-------------------- --------------------
$5,029 $6,373 $9,808 $12,904
-------------------- --------------------
Net Interest Income $5,677 $5,114 $11,025 $10,242
Provision for Possible Loan Losses 9,314 1,400 14,322 2,800
-------------------- --------------------
Net Interest Income after
Provision for Possible Loan Losses ($3,637) $3,714 ($3,297) $7,442
Other Income: -------------------- --------------------
Fees on Loans $1,039 $1,063 $1,972 $2,018
Service Charges on Deposits 837 606 1,584 1,200
Other 1,288 1,583 3,763 3,602
-------------------- --------------------
$3,164 $3,252 $7,319 $6,820
Other Expenses: -------------------- --------------------
Salaries and Wages $2,232 $1,955 $4,178 $3,920
Employee Benefits 671 580 1,290 1,178
Occupancy Expense, Net 432 375 880 798
Equipment Expense 411 456 815 916
Low Income Housing Losses 237 292 470 535
Other 1,901 1,491 4,008 3,053
-------------------- --------------------
$5,884 $5,149 $11,641 $10,400
-------------------- --------------------
Income (Loss) Before Income Taxes ($6,357) $1,817 ($7,619) $3,862
Provision (Benefit) for Income Taxes (2,416) 366 (3,209) 644
-------------------- --------------------
Net Income (Loss) ($3,941) $1,451 ($4,410) $3,218
==================== ====================
Per Common Share Net Income (Loss) ($1) $0 ($1) $1
==================== ====================
Dividends Paid Per Share $0 $0 $0 $0
==================== ====================
Weighted Average Common Shares
Outstanding Adjusted for All Stock
Dividends Paid 4,229,818 4,218,223 4,202,366 4,213,758
2
MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1992 AND
THE SIX MONTHS ENDED JUNE 30, 1993 AND 1992
UNAUDITED
(Thousands of Dollars)
Total
Common Undivided Treasury Equity
Stock Surplus Profits Stock Capital
------ -------- -------- ------- --------
Balance - December 31, 1991 $ 41 $ 28,650 $ 21,531 $ (631) $ 49,591
Net Income 3,218 3,218
Treasury Stock Transactions (47) (181) 239 11
Cash Dividends ($.39 per share)* (1,648) (1,648)
----- ------ ------ ------- -------
Balance - June 30, 1992 $ 41 $ 28,603 $ 22,920 $ (392) $ 51,172
Net Income 2,459 2,459
Treasury Stock Transactions 69 207 (32) 244
Cash Dividends ($.39 per share)* (1,672) (1,672)
Stock Dividends (123,580
shares declared) 1 1,964 (1,965) 0
----- ------ ------- ------ -------
Balance - December 31, 1992 $ 42 $ 30,636 $ 21,949 $ (424) $ 52,203
Net Loss (4,410) (4,410)
Treasury Stock Transactions 11 (23) 245 233
Cash Dividends ($.20 per share) (849) (849)
----- ------- ------- ------ -------
Balance - June 30, 1993 $ 42 $ 30,647 $ 16,667 $ (179) $ 47,177
===== ======= ======= ====== =======
*Per share amounts have been adjusted to reflect all stock dividends.
3
MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(Dollar Amounts in Thousands)
For the Six Months Ended June 30, 1993 1992
CASH FLOWS FROM OPERATING ACTIVITIES: ------- -------
Net Income (Loss) $ (4,410) $ 3,218
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Possible Loan Losses 14,322 2,800
Provision for Depreciation and Amortization 816 899
Prepaid income taxes (2,011) (951)
Imputed Gain on Sale of Loans (265) (247)
Net Gains on Sales of Investment Securities (1,405) (1,651)
Net Gains on Sales of Loans and Leases (94) (89)
Equity in Losses Real Estate Ltd Partnerships 470 535
Decrease in Interest Receivable 88 614
Increase (Decrease) in Interest Payable (235) 46
(Increase) in Other Assets (8,976) (1,376)
(Decrease) in Other Liabilities (137) (151)
Decrease in Net Investment - Leases 338 493
------- -------
Net Cash Provided by Operating Activities $ (1,499) $ 4,140
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Investment Securities $ 336,501 $ 98,023
Proceeds from Sales of Loans and Leases 41,850 51,159
Purchases of Investment Securities (334,113) (106,198)
Loans Originated, Net of Principal Repayments 2,314 (40,770)
Loans Purchased - New First National Bank of Vt (178,446) 0
Other Assets (net) Purchased - New First Nat'l (25,122) 0
Purchases of Premises and Equipment (182) (220)
------- -------
Net Cash Provided by Investing Activities $ (157,198) $ 1,994
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Decrease in Deposits $ (54,742) $ (1,706)
Deposits Assumed - New First Nat'l Bank of Vt 203,033 0
Net (Increase) Decrease in Short-term Borrowing 4,339 (5,206)
Principal (Payments) Borrowings on Long-Term Debt 9,598 62
Acquisition of Treasury Stock (132) (351)
Cash Dividends Paid (843) (1,648)
Sale of Treasury Stock 377 590
------- -------
Net Cash Used in Financing Activities $ 161,630 $ (8,259)
------- -------
Decrease in Cash and Cash Equivalents 2,933 (2,125)
Cash and Cash Equivalents at January 1 32,559 32,559
------- -------
Cash and Cash Equivalents at June 30 $ 35,492 $ 30,434
======= =======
Total Interest Payments $ 10,790 $ 12,949
Total Income Tax Payments $ 1,190 $ 1,595
4
Merchants Bancshares, Inc.
Notes to Financial Statements
(Unaudited)
NOTE 1: INVESTMENT PORTFOLIO
The investment portfolio is comprised of the following as of June 30:
-----1993------ -----1992------
Book Market Book Market
(In Thousands) Value Value Value Value
------- ------- ------- -------
U.S. Government 96,690 96,690 93,712 94,334
State & Political 1,184 1,184 10 10
Other 7,268 7,570 3,586 3,722
------- ------- ------- -------
105,142 105,444 97,308 98,066
======= ======= ======= =======
NOTE 2: ACQUISITION
On June 4, 1993, the Merchants Bank purchased certain assets and assumed
the deposits and certain other liabilities of the New First National Bank of
Vermont ("NFNBV") from the F.D.I.C., as follows:
Investments 4,118 Deposits 203,033
Loans 178,446 Other Liabilities 535
Equipment 28
Other Assets 12,890
-------- --------
Total Acquired 195,482 Total Assumed 203,568
======== ========
The purchase price for the assets acquired consisted of the assumption of
the liabilities plus a bid premium of $2.4 million and capitalizable
acquisition costs of $76,000. The F.D.I.C. made a cash payment of $5.6
million to the Bank as part of the settlement. The transaction was accounted
for using the purchase method of accounting. Accordingly, assets acquired
and liabilities assumed were recorded at the estimated fair market value,
and included a reserve for possible loan losses of $2 million, which
resulted in a core deposit intangible in the amount of $4.486 million.
Under the terms of the Purchase and Assumption Agreement, the Bank will
receive assistance with respect to certain acquired loans charged-off by the
Bank during the three years subsequent to the acquisition. The F.D.I.C.
will reimburse the Bank, on a quarterly basis, 80 percent of net charge-offs
on acquired loans other than consumer loans up to cumulative losses
aggregating $41.1 million, after which the reimbursement rate will be 95% of
net charge-offs on the loans.
Also under the terms of the Agreement, the Bank had the option to purchase
and assume the leases of bank premises owned and leased by NFNBV. This
option expired on July 19, 1993, when the Bank exercised the option to
purchase all but one branch building for approximately $1.4 million and
assume all the leases. The purchase price includes the equipment and
leasehold improvements of NFNBV.
5
MERCHANTS BANCSHARES, INC.
INTEREST MANAGEMENT AND OPERATING EXPENSE ANALYSIS
(IN THOUSANDS - TAXABLE EQUIVALENT BASIS)
QUARTER ENDED QUARTER ENDED QUARTER ENDED
06/30/93 12/31/92 06/30/92
Total Average Assets $656,835 $617,684 $592,970
- ------------------------ ----------------- ----------------- -----------------
AMOUNT % OF AMOUNT % OF AMOUNT % OF
ASSETS ASSETS ASSETS
INTEREST MANAGEMENT
Interest Income (T.E.) $10,891 6.63% $10,773 6.98% $11,646 7.86%
- ------------------------- ----------------- ----------------- -----------------
Interest Expense 5,029 3.06% 5,236 3.39% 6,373 4.30%
- ------------------------- ----------------- ----------------- -----------------
Net Int before Prov (T.E.) $5,862 3.57% $5,537 3.59% $5,273 3.56%
- ------------------------- ----------------- ----------------- -----------------
Prov for Loan Losses 9,314 5.67% 2,250 1.46% 1,400 0.94%
- ------------------------- ----------------- ----------------- -----------------
Net Int. Income (T.E.) ($3,452) -2.10% $3,287 2.13% $3,873 2.61%
- ------------------------- ----------------- ----------------- -----------------
NET OPERATING EXPENSE
Non-Interest Expense:
Personnel $2,903 1.77% $2,535 1.64% $2,536 1.71%
- ------------------------- ----------------- ----------------- -----------------
Occupancy 432 0.26% 335 0.22% 375 0.25%
- ------------------------- ----------------- ----------------- -----------------
Equipment 411 0.25% 434 0.28% 456 0.31%
- ------------------------- ----------------- ----------------- -----------------
Other 2,139 1.30% 1,930 1.25% 1,784 1.20%
- ------------------------- ----------------- ----------------- -----------------
Total $5,885 3.58% $5,234 3.39% $5,151 3.47%
- ------------------------- ----------------- ----------------- -----------------
Less Non-Interest Income:
Fees on Loans $1,039 0.63% $1,291 0.84% $1,063 0.72%
- ------------------------- ----------------- ----------------- -----------------
Service Charges on Dep 837 0.51% 711 0.46% 606 0.41%
- ------------------------- ----------------- ----------------- -----------------
Other 1,288 0.78% 191 0.12% 1,583 1.07%
- ------------------------- ----------------- ----------------- -----------------
Total $3,164 1.93% $2,193 1.42% $3,252 2.19%
- ------------------------- ----------------- ----------------- -----------------
Net Operating Expense $2,721 1.66% $3,041 1.97% $1,899 1.28%
- ------------------------- ----------------- ----------------- -----------------
SUMMARY
Net Interest Income ($3,452) -2.10% $3,287 2.13% $3,873 2.61%
- ------------------------- ----------------- ----------------- -----------------
Less Net Operating Exp. $2,721 1.66% $3,041 1.97% $1,899 1.28%
- ------------------------- ----------------- ----------------- -----------------
Profit (Loss) Before Taxes ($6,173) -3.76% $246 0.16% $1,974 1.33%
- ------------------------- ----------------- ----------------- -----------------
NET PROFIT (LOSS) ($3,941) -2.40% $1,322 0.86% $1,451 0.98%
- ------------------------- ----------------- ----------------- -----------------
8
MERCHANTS BANCSHARES, INC
YIELD ANALYSIS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30, 1993 JUNE 30, 1992
Fully Taxable Equivalent AVERAGE AVERAGE AVERAGE AVERAGE
Includes Fees on Loans BALANCE RATE BALANCE RATE
---------- ------ --------- -------
INTEREST EARNING ASSETS
Taxable Investments $108,071 4.02% $83,491 5.53%
Non-Taxable Investments 243 12.02% 10 10.54%
Loans 444,811 9.45% 437,236 10.65%
Federal Funds Sold 2,797 2.87% 2,954 3.99%
------- ------ -------- -------
Total Interest Earning Assets $555,922 8.36% $523,691 9.79%
======= ====== ======== =======
INTEREST BEARING LIABILITIES
Savings, NOW and Money Market Deposits $283,331 2.75% $262,824 4.40%
Time Deposits 137,394 4.90% 153,470 6.25%
------- ------ -------- -------
Total Savings and Time Deposits 420,725 3.45% 416,294 5.09%
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase 8,672 3.27% 7,977 4.27%
Other Borrowed Funds 72,083 6.69% 52,301 8.21%
-------- ------ -------- -------
Total Interest Bearing Liabilities 501,480 3.91% 476,572 5.42%
Other Liabilities and Stockholders' Equity
(Net of Non-Interest Earning Assets) 54,442 47,119
------- -------
Total Liabilities and Stockholders' Equity
(Net of Non-Interest Earning Assets) $555,922 $523,691
======== ========
Rate Spread 4.45% 4.37%
======= =======
Net Yield on Interest Earning Assets 4.83% 4.87%
======= =======
MERCHANTS BANCSHARES, INC.
---------------------------------
BALANCE SHEET:
Average assets increased $44 million during the quarter ended June 30,
1993 from the March 31, 1993 level and increased $64 million from the same
date a year earlier. Virtually all of this is due to the acquisition of
certain assets of the New First National Bank of Vermont on June 4, 1993.
Period-end investment balances decreased approximately $9 million (8%) from
March 31, 1993 and increased $8 million (8%) from June 30, 1992 as the Bank
invests money previously invested in the loan portfolio. This increase is
in U.S. Treasury securities and Federal Home Loan Bank stock. Gross loans
increased approximately $171 million (40%) during the quarter and $161
million (37%) over the year, again due to the acquisition.
Short-term borrowings grew from approximately $3.3 million to $13.5
million during the periods reported. Deposit accounts averages, which
traditionally decrease during the first two quarters of the calendar year
and increase during the last two quarters have declined approximately $16
million (3.5%) from March 31, 1993 and $36 million (8.1%) from the same
date a year ago, (after considering the $203 million in deposits assumed
from the NFNBV transaction) as customers lave the banking industry to find
higher returns.
Shareholders' equity decreased to 6.05% of total assets as of June 30,
1993, from 8.6% at June 30, 1992 and 8.4% at December 31, 1992. This is
due to the acquisition of additional assets, as well as the recognition of
an additional loan loss provisions in 1993.
DETERMINATION OF RESERVE FOR POSSIBLE LOAN LOSSES (RPLL)
The Company reviews the adequacy of the RPLL at least quarterly. The
method used is not based upon maintaining a specific percentage of RPLL to
total loans or total non-performing assets but rather a comprehensive
analytical process of assessing the credit risk inherent in the loan
portfolio. This assessment incorporates a broad range of factors which are
indicative of both general and specific credit risk, as well as, a
consistent methodology for quantifying probable credit losses. As part of
the Company's analysis of specific credit risk, a detailed review is done
on larger credits and problematic credits identified on the watched asset
list, non-performing asset listings, and credit rating reports.
The more significant factors considered in the evaluation of the
adequacy of the RPLL include:
-Status of non-performing loans
-Status of adversely-classified credits
-Historic charge-off experience by major loan category
-Size and composition of the loan portfolio
-Concentrations of credit risk
-Renewals and extensions
-Current local and general economic conditions and trends
-Loan growth trends in portfolio
-Off balance sheet credit risk relative to commitments to lend
The RPLL is comprised of both specific and general components. The
specific allocation portion of the RPLL is based on evaluations of larger
loans and an analysis of problematic, watched asset list loans and credit
rated loans. The general or non-specific allocation portion of the RPLL is
based upon the factors above. The inherent risks of specific loan
categories based upon current and projected economic conditions are used to
produce an appropriate non-specific allocation. 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.
As part of management's continuing analysis of the adequacy of the
RPLL, a quarterly comparison is prepared of various quantitative
measurements relative to five other major banks in Vermont. The focus of
this comparison is the level of loan loss reserves in relation to non-
performing assets in total, as well as, certain non-performing loans. This
qualitative comparison is evaluated in light of significant qualitative
differences among the peer banks, such as geographic lending
concentrations, loan portfolio composition, historical lending practices,
loan workout skills and other indicators of relative overall credit risk.
A summary of the key ratios management considers are summarized below. The
June 30, 1993 Peer Group Average data was not yet available, however, the
March 31, 1993 data is presented. Additionally, Merchants' consolidated
data for June 30, 1993 is displayed. The Merchants' percentages include
the effect of the acquisition on June 4, 1993 of the new First National
Bank of Vermont (NFNBV), an FDIC "bridge bank".
Peer Group
Merchants Average
March 31, 1993 June 30, 1993 March 31, 1993
Reserves/NPA 32.68% 25.98% 46.22%
Reserves/Non-
Accruing 172.61% 48.82% 99.27%
Reserves/90-Day
Overdue
& Non-Accruing 85.62% 37.13% 81.30%
Reserves/Troubled
Debt Restructuring,
Non-Accruing & 90-
Day Overdue 53.85% 36.35% 69.61%
The Company's ratios were affected by two significant events during
the Second Quarter. The Company's largest subsidiary, The Merchants Bank
(the Bank), was examined by the Federal Deposit Insurance Corporation
(FDIC) which resulted in an increase in the Bank's loan loss reserves.
Additionally, the Bank acquired NFNBV. The acquisition resulted in
increased assets, increased non-performing assets, and an increase in loan
loss reserves.
The Merchants Bank's asset quality ratios as of June 30, 1993 would
have been as follows when excluding the effects of the acquisition:
Reserves/NPA 33.30%
Reserves/Non-Accruing 62.60%
Reserves/90-Day Overdue & Non-Accruing 60.41%
Reserves/Troubled Debt Restructurings,
Non-Accruing & 90-Days Overdue 58.46%
The Company's ratios, when adjusted for the effects of the NFNBV
acquisition, compare more favorably with the Peer Group Averages. In
addition, the ratios must be considered in light of the loss sharing
arrangement with the FDIC.
The terms of the Purchase and Assumption Agreement covering the
acquisition of NFNBV result in the $17,233,000 in NPAs being protected by a
loss sharing arrangement with the FDIC. This loss
sharing agreement provides that the FDIC will pay the Bank 80% of net
charge-offs up to $41,100,000 on any loss sharing loans for three years
from the date of acquisition of NFNBV. This significantly reduces the
exposure that the Bank faces on the NPAs at NFNBV.
The favorable change in the Company's ratios as of June 30, 1993 when
compared to March 31, 1993 and the lower exposure on NPAs at NFNBV provide
additional support to the conclusion that the Company's loan loss reserves
are adequate. This conclusion is further supported by several qualitative
factors. The Merchants has a more diversified loan portfolio than many of
its Vermont competitors. In addition, the Company's primary trade area is
located in Chittenden County in Vermont. This area of Vermont has weathered
the recent recession better than other sections of the State. The area's
primary employer, IBM, remains relatively strong. The unemployment rate
for the Fourth Quarter of 1992 was significantly lower for Chittenden
County at 4.3% than the State of Vermont as a whole at 5.9%
The Company's Commercial and Real Estate portfolios primarily consist
of traditional, non-speculative businesses and properties. While the
Company does lend significantly to commercial real estate enterprises, our
borrowers in this area are well-known, local businessman of substance.
Also, our commercial real estate projects are usually pre-leased by high
quality tenants.
Non-performing assets during the Second Quarter of 1993 increased to
$51,798,000 from $35,488,000 on March 31, 1993. This increase results
primarily from the Bank's acquisition of NFNBV on June 4, 1993. As noted
above, the $17,233,000 in non-performing assets at NFNBV are covered by a
loss sharing arrangement with the FDIC. To provide for appropriate
comparisons of the Company's non-performing trends as of June 30, 1993, the
non-performing assets detail, shown below, presents separate figures for
The Merchants Bank (TMB) and the acquired NFNBV.
TMB NFNBV
3/31/93 6/30/93 6/30/93
Non-Accrual Loans 6,719 18,011 9,179
Restructured Loans 7,992 622 141
Other Real Estate Owned 5,245 3,712 0
In-Substance Foreclosure 8,705 10,863 0
Loans Past Due 90 Days or more
and Still Accruing 6,827 653 7,913
Total 35,488 33,861 17,233
Significant changes in TMB's individual components of non-performing
assets occurred in all categories. Non-Accrual loans increased primarily
as a result of reclassifying Restructured Loans whose interest rates were
at zero percent on March 31, 1993.
Restructured loans declined due to the migration noted above an some
charge downs.
Other Real Estate Owned (OREO) declined as the result of sales.
In-substance Foreclosure increased as the result of the addition of
ten properties to the category. The largest addition was $2,000,000 for a
retail shopping center and office complex.
The NFNBV amount in Loan Past Due and Still Accruing results from a
provision in the Purchase and Assumption Agreement with the FDIC that
allows the Bank to accrue 90 days of additional interest from the June 4,
1993 acquisition date. This accrued interest is covered by the loss
sharing arrangement previously described.
The increase in the reserve for possible loan losses from $11,598,000
at March 31, 1993, to $13,275,000 at June 30, 1993 reflects the previously
discussed recommendations by the FDIC, and the establishing of a $2,000,000
reserve at NFNBV. The reserve balance reflects management's efforts to
maintain the reserve at a level adequate to provide for potential loan
losses based on an evaluation of known and inherent risks in the loan
portfolio. Based upon the result of the Company's assessment of the
factors affecting the RPLL management believes that the balance of the RPLL
at June 30, 1993, is adequate.
OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURE
Other Real Estate Owned (OREO) includes specific assets to which legal
title has been taken as the result of transactions related to real estate
loans. The criteria for designation of loans as in-substance foreclosure
are that the debtor has little or no equity in the collateral, proceeds for
repayment of the loan will come only from the operation or sale of the
collateral, and the debtor has formally or effectively abandoned control of
the asset or is not expected to rebuild equity in collateral. The
collateral underlying these loans is recorded at the lower of cost or
market value less selling costs.
The total amount of Other Real Estate Owned and In-Substance
Foreclosure at June 30, 1993 and March 31, 1993, follows:
(Dollar Amount in Thousands)
June 30, 1993 March 31, 1993
Other Real Estate Owned 3,712 5,245
In-Substance Foreclosure 10,863 8.705
Total 14,575 13,950
RESULTS OF OPERATIONS:
Net interest income on taxable equivalent basis before the provision
for loan losses remained level at about 3.57% of total average assets for
the second quarter of 1993, the quarter ended December 31, 1992 and June
30, 1992, signifying a stable interest rate environment.
Total non-interest expenses increased to 3.58% of average total assets
from 3.39% in the December quarter and 3.47% a year ago. Much of this
increase is due to higher costs in the Bank's Other Real Estate Owned
portfolio as well as expenses related to reducing staff in the acquired
locations.
Total non-interest income was slightly less than the same period a
year ago and significantly higher than the quarter ended December 31, 1992,
due in part to a $1 million write-down to market on US Securities held for
sale in December. Additionally, gains on the sale of US Treasury and
equity securities held for sale are included in other non-interest income
in the amounts of $206,000 and $603,000 during the quarters ended June 30,
1993 and 1992, respectively.
The annualized return (loss) on average assets was (2.40%), .97% and
.46% while the annualized return (loss) on average stockholders' equity was
(32.1%), 11.49% and 5.4% for the quarters ended June 30, 1993, 1992 and
December 31, 1992, respectively.
CAPITAL RESOURCES:
As a state chartered bank, the Bank's primary regulator is the Federal
Deposit Insurance Corporation. Accordingly, the Bank is subject to
regulatory capital regulations which provide for two capital requirements -
a leverage requirement and a risk-based capital requirement. The leverage
requirement provides for a minimum "core" capital consisting primarily of
common stockholders' equity of 3% of total adjusted assets for those
institutions with the most favorable composite regulatory rating, with an
additional 1 percent to 2 percent of assets added to the requirement for
other institutions. The risk-based capital requirement provides for
minimum capital levels based on the risk weighted assets of the Bank. The
guidelines require banks to meet a minimum Tier 1 risk-based capital ratio
of 4.0% and a Total risk-based capital ratio of 8.0% as of December 31,
1992.
As of June 30, 1993, the Corporation's Tier 1 leverage ratio was 5.5%,
the Tier 1 risk-based ratio was 6.15% and the total (Tier 2) risk-based
ratio was 9.1%. At the subsidiary bank level, these ratios were 5.7%,
6.35% and 9.3%, all exceeding regulatory minimums.
The Board of Directors has determined not to declare any dividends on
shares of the Company's common stock until further notice. Any future
dividend declared by the Board of Directors would be subject to regulatory
review.
MERCHANTS BANCSHARES, INC.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Merchants Bank, a wholly-owned subsidiary, is involved in
various legal proceedings arising in the normal course of business.
Management believes that the resolution of these matters will not have
a materially adverse effect on the consolidated financial statements.
Item 2 - Changes in Securities - NONE
Item 3 - Defaults upon Senior Securities - NONE
Item 4 - Submission of Matters to a Vote of Security Holders
The annual meeting of Merchants Bancshares, Inc. was held April 27,
1993 and the following resolutions were approved by the shareholders:
(1) The election of five individuals to the Board of Directors of the
Company as Class II and III directors serving three year terms.
(2) To ratify the selection of Arthur Andersen & Co. as independent
auditors of the Company for 1993.
Item 5 - Other Issues - NONE
Item 6 - Exhibits and Reports on Form 8-K -
The Corporation filed a Form 8-K dated June 4, 1993 announcing the
purchase of certain assets and the assumption of certain liabilities
of the New First National Bank of Vermont.
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Merchants Bancshares, Inc.
By: /s/ Dudley H. Davis
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Dudley H. Davis, President
By: /s/ Edward W. Haase
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Edward W. Haase, Treasurer
17