SECCURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1994
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 preceding 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
September 30, 1994
MERCHANTS BANCSHARES, INC.
INDEX TO FORM 10-Q
PART 1 PAGE
ITEM 1 FINANCIAL STATEMENTS 1
Consolidated Balance Sheets
September 30, 1994 and 1993 and December 31, 1993
Consolidated Statements of Income 2
for the three months ended September 30, 1994 and 1993
and the nine months ended September 30, 1994 and 1993
Consolidated Statement of Stockholders' Equity 3
for the nine months ended September 30, 1994 and 1993
and the year ended December 31, 1993
Consolidated Statements of Cash Flows for the 4
nine months ended September 30, 1994 and 1993
ITEM 2 Management's Discussion and Analysis of Financial 5-14
Condition and Results of Operations
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 15
ITEM 2 Changes in Securities None
ITEM 3 Defaults upon Senior Securities None
ITEM 4 Submission of Matters to a Vote of Security Holders None
ITEM 5 Other Information None
ITEM 6 Exhibits and Reports on Form 8-K None
MERCHANTS BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET
UNAUDITED
(Dollar Amounts in Thousands)
September 30 September 30 December 31
1994 1993 1993
ASSETS --------- --------- ---------
Cash and Due From Banks $ 32,461 $ 36,766 $ 30,588
Debt Securities Available for Sale 91,936 92,044 85,506
Debt Securities Held for Investment 10,014 0 0
Marketable Equity Securities 1,153 6,516 1,452
---------- ---------- ----------
Total Investments 103,103 98,560 86,958
Loans 414,463 445,796 440,592
Segregated Assets 104,582 148,605 132,879
Less: Reserve for Possible Loan Losses (19,299) (14,684) (20,060)
---------- ---------- ----------
Net Loans 499,746 579,717 553,411
FHLB Stock 6,856 4,728 5,574
Bank Premises and Equipment 16,440 16,010 16,148
Investment in Real Estate Ltd Partnerships 4,240 4,976 4,610
OREO and Insubstance Foreclosure 15,583 12,753 13,674
Other Assets 24,428 18,209 24,085
---------- ---------- ----------
Total Assets $ 702,857 $ 771,719 $ 735,048
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 90,743 $ 89,640 $ 96,413
Savings, NOW and Money Market Accounts 302,412 331,592 321,821
Time Certificates of Deposit $100,000 and Over 24,983 24,711 21,215
Other Time 177,989 190,251 179,860
---------- ---------- ----------
Total Deposits 596,127 636,194 619,309
Federal Funds Purchased 0 15,700 7,500
Securities Sold U/A to Repurchase 0 10,343 1,681
Demand Note Due US Treasury 4,205 5,164 5,743
Other Liabilities 9,806 9,631 8,462
---------- ---------- ----------
Total Liabilities 610,138 677,032 642,695
Long-Term Debt 44,230 46,634 46,633
Stockholders' Equity
Common Stock, $.01 Par Value 42 42 42
Shares Authorized 4,700,000
Outstanding, All Periods 4,242,927
Treasury Stock (at Cost) (178) (178) (179)
Surplus 30,647 30,647 30,647
Undivided Profits 18,576 17,542 15,354
Valuation Allowance- Investments (Net of Taxes) (598) (144)
---------- ---------- ----------
Total Stockholders' Equity 48,489 48,053 45,720
--------- --------- ---------
Total Liabilities and Shareholders' Equity $ 702,857 $ 771,719 $ 735,048
========== ========== ==========
Book Value per Share $11.46 $11.36 $10.74
MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
UNAUDITED
(Dollar Amounts in Thousands, Except for Per Share Data)
Quarter Ended Nine Months Ended
September 30 September 30,
1994 1993 1994 1993
Interest Income:
Interest on Loans $ 11,482 $ 12,170 $ 33,960 $ 30,795
Investment Income:
Obligations of U.S. Government 761 859 2,334 2,844
Other 143 116 416 299
Federal Funds Sold 129 56 304 96
---------- ---------- ---------- ----------
$ 12,515 $ 13,201 $ 37,014 $ 34,034
---------- ---------- ---------- ----------
Interest Expense:
Interest on Deposits $ 4,589 $ 5,012 $ 13,234 $ 12,420
Interest on Capital Notes
and Other Borrowings 996 1,349 3,378 3,749
---------- ---------- ---------- ----------
$ 5,585 $ 6,361 $ 16,612 $ 16,169
---------- ---------- ---------- ----------
Net Interest Income $ 6,930 $ 6,840 $ 20,402 $ 17,865
Provision for Possible Loan Losses 1,750 2,750 4,250 17,072
---------- ---------- ---------- ----------
Net Interest Income after
Provision for Possible Loan Losses $ 5,180 $ 4,090 $ 16,152 $ 793
Other Income: ---------- ---------- ---------- ----------
Fees on Loans $ 789 $ 1,156 $ 2,657 $ 3,128
Service Charges on Deposits 846 961 2,653 2,545
Other 1,292 1,233 3,843 3,668
Gains on Sales of Investments 81 423 62 1,751
---------- ---------- ---------- ----------
$ 3,008 $ 3,773 $ 9,215 $ 11,092
Other Expenses: ---------- ---------- ---------- ----------
Salaries and Wages $ 2,790 $ 2,587 $ 8,023 $ 6,766
Employee Benefits 769 708 2,093 1,998
Occupancy Expense, Net 535 504 1,781 1,384
Equipment Expense 549 493 1,459 1,308
Low Income Housing Losses 238 239 715 709
Other Real Estate Owned Expenses (Net) 392 581 1,195 1,435
Other 2,149 1,936 6,554 5,088
---------- ---------- ---------- ----------
$ 7,422 $ 7,048 $ 21,820 $ 18,688
---------- ---------- ---------- ----------
Income (Loss) Before Income Taxes $ 766 $ 815 $ 3,547 $ (6,803)
Provision (Benefit) for Income Taxes (13) (26) 324 (3,234)
---------- ---------- ---------- ----------
Net Income (Loss) $ 779 $ 841 $ 3,223 $ (3,569)
========== ========== ========== ==========
Per Common Share Net Income (Loss) $ 0.18 $ 0.20 $ 0.76 $ (0.85)
========== ========== ========== ==========
Dividends Paid Per Share $ 0.00 $ 0.00 $ 0.00 $ 0.20
========== ========== ========== ==========
Weighted Average Common Shares Outstanding 4,230,192 4,230,192 4,230,192 4,211,709
MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1993 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
UNAUDITED
(Thousands of Dollars)
Valuation Total
Common Undivided Treasury Allowance Equity
Stock Surplus Profits Stock Investments Capital
------ -------- -------- ------- --------- --------
Balance - December 31, 1992 $ 42 $ 30,636 $ 21,949 $ (424) $ $ 52,203
Net Income (Loss) (3,569) (3,569)
Treasury Stock Transactions 11 11 246 268
Cash Dividends ($.20 per share) (849) (849)
----- ------ ------ ------- --------- -------
Balance - September 30, 1993 $ 42 $ 30,647 $ 17,542 $ (178) $ 0 $ 48,053
Net Income (Loss) (2,213) (2,213)
Treasury Stock Transactions 25 0 25
Change in Valuation
Allowance - Investments (144) (144)
----- ------ ------- ------- --------- -------
Balance - December 31, 1993 $ 42 $ 30,647 $ 15,354 $ (178) $ (144) $ 45,721
Net Income 3,222 3,222
Change in Valuation
Allowance - Investments (454) (454)
----- ------- ------- ------- --------- -------
Balance - September 30, 1994 $ 42 $ 30,647 $ 18,576 $ (178) $ (598) $ 48,489
===== ======= ======= ======= ========= =======
MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(Dollar Amounts in Thousands)
For the Nine Months Ended September 30, 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES: ------- -------
Net Income (Loss) $ 3,223 $ (3,569)
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by Operating Activities:
Provision for Possible Loan Losses 4,250 17,072
Provision for Depreciation and Amortization 1,572 1,347
Prepaid income taxes (427) (4,612)
Imputed Gain on Sale of Loans (172) (415)
Net Gains on Sales of Investment Securities (62) (1,827)
Net Gains on Sales of Loans and Leases 176 (288)
Equity in Losses Real Estate Ltd Partnerships 715 709
(Increase) Decrease in Interest Receivable (249) (425)
Increase in Interest Payable 1,195 776
(Increase) in Other Assets (1,113) (4,206)
Increase in Other Liabilities 149 1,965
Decrease in Net Investment - Leases 48 452
------- -------
Net Cash Provided by Operating Activities $ 9,305 $ 6,979
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Investment Securities $ 651 $ 362,819
Proceeds from Sales of Loans and Leases 36,434 67,067
Purchases of Investment Securities (20,201) (367,006)
Loans Originated, Net of Principal Repayments 12,478 (59,759)
Net Cash Rec'd - New First Nat'l Bank Acquisition 0 5,737
Purchases of Premises and Equipment (1,834) (2,685)
------- -------
Net Cash Provided by Investing Activities $ 27,528 $ 6,173
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase (Decrease) in Deposits $ (23,182) $ (32,871)
Net Increase (Decrease) in Short-term Borrowing (9,375) 22,742
Principal (Payments) Borrowings on Long-Term Debt (2,403) (2,403)
Acquisition of Treasury Stock 0 (132)
Cash Dividends Paid 0 (843)
Sale of Treasury Stock 0 377
------- -------
Net Cash Used in Financing Activities $ (34,960) $ (13,130)
------- -------
Increase in Cash and Cash Equivalents 1,873 22
Cash and Cash Equivalents at January 1 30,588 36,744
------- -------
Cash and Cash Equivalents at Period End $ 32,461 $ 36,766
======= =======
Total Interest Payments $ 15,417 $ 15,393
Total Income Tax Payments $ 50 $ 1,190
MERCHANTS BANCSHARES, INC
SEPTEMBER 30, 1994
NOTES TO FINANCIAL STATEMENTS:
See the Form 10-K filed as of December 31, 1993 for
additional information.
NOTE 1: CURRENT OPERATING ENVIRONMENT AND REGULATORY MATTERS
As a result of a joint field examination of the Bank by the
Federal Deposit Insurance Corporation (the FDIC) and the State of
Vermont Department of Banking, Insurance and Securities (the
Commissioner) as of March 31, 1993, the Bank entered into a
Memorandum of Understanding (MOU) with the FDIC and the
Commissioner on October 29, 1993. Under the terms of the MOU,
the Bank is required to, among other things, maintain a leverage
capital ratio of at least 5.5%, revise certain operating
policies, enhance certain loan review procedures, refrain from
declaring dividends and correct certain technical exceptions and
violations of applicable regulations. The dividend limitation
includes dividends paid by the Bank to the Company. The Company
services senior subordinated debt, which totalled $4.8 million at
September 30, 1994, and which requires semiannual interest
payments and an annual principal payment of $2.4 million through
1996. The MOU permits the repayment of certain advances totaling
approximately $940,000 which were outstanding at September 30,
1994. The repayment of such advances, together with the
Company's cash on hand at September 30, 1994 is sufficient to
service the senior debt until May, 1996. The Bank was also
directed by the FDIC to increase the reserve for possible loan
losses by approximately $12 million and to charge off loans
totaling approximately $8 million at the conclusion of the
examination in June, 1993.
As of February 18, 1994, the Company and the Federal Reserve
Bank of Boston (the Federal Reserve) entered into an agreement
requiring the Company to submit to the Federal Reserve, among
other things, a capital plan, a dividend policy, a debt service
plan and a management assessment. As of September 30, 1994, the
Company has submitted drafts of the requested plans and is
working with the Federal Reserve to develop acceptable plans by
October 25, 1995. In addition, the Company may not declare or pay
a dividend without the approval of the Federal Reserve.
OnMarch 31, 1994, the FDIC and the Commissioner completed the
field work related to their most recent examination of the bank
as of December 31, 1993. The examination report, received in
early July, requires management to correct certain administrative
and legal violations and enhance certain operating policies.
Management believes that it is in substantial compliance with
the MOU and the Written Agreement as of September 30, 1994.
Failure to maintain theminimum leverage capital ratio of5.5%
included in the MOU or compliance with other provisions of the
MOU, or the agreement with the Federal Reserve, could subject the
Bank or the Company to additional actions by the regulatory
authorities.
NOTE 2: ACQUISITION
On June 4, 1993, the Bank purchased certain assets and assumed
the deposits and certain other liabilities of the New First
National Bank of Vermont (NFNBV) from the FDIC. NFNBV had been
taken over by the FDIC in January 1993. The acquisition involved
an assumption of net deposits and liabilities which resulted in
the Bank receiving a cash payment from the FDIC of approximately
$5.7 million. The Bank subsequently acquired certain NFNBV
property and equipment from the FDIC for approximately $1.5
million which was paid to the FDIC in April, 1994. The
acquisition was accounted for using the purchase method of
accounting and accordingly, the acquired assets and liabilities
were recorded at their estimated fair market values at the date
of acquisition. The operating results related to NFNBV are
included in the Company's statement of operations since the date
of the acquisition.
Included in the purchase price allocation is the establishment
of an allowance for possible loan losses of $2 million and a core
deposit intangible of approximately $4.5 million, being amortized
over 15 years using the straight line method.
No pro forma informationis presented for the periodJanuary 1,
1993 to the date of the acquisition because no accurate financial
information is available relative to NFNBV's operations from the
FDIC.
Under the terms of the acquisition, the Company will receive
financial assistance (loss sharing) with respect to certain
acquired loans charged-off by the Company during the three years
subsequent to the acquisition. The FDIC will reimburse the
Company, on a quarterly basis, 80% of net charge-offs and certain
expenses related to loans subject to loss sharing up to
cumulative losses aggregating $41.1 million, after which the
reimbursement rate will be 95% of net charge-offs on the loans.
Acquired loans subject to loss sharing are classified as
Segregated Assets in the accompanying consolidated balance
sheets.
In addition, under the terms of the acquisition approval
received from the State of Vermont Department of Banking,
Insurance and Securities, the Bank is required to, among other
things, maintain Tier 1 leverage capital at the higher of 5.5% or
the minimum regulatory leverage capital required by the FDIC, and
to refrain from paying dividends from the Bank to the Company if
the Bank's capital is below the minimum capital requirement. The
Bank and the Company were in compliance with all the terms of the
acquisition approval agreement with the State of Vermont during
1993 and through September 30, 1994.
NOTE 3: SUBSEQUENT EVENT
See Part II (Other Information), Item 1 (Legal Proceedings) for
a description of a legal action brought against the Company and
its subsidiaries after the close of the quarter.
MERCHANTS BANCSHARES, INC
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
All adjustments necessary for a fair statement of the nine
months ended September 30, 1994 and 1993 have been included in
the financial statements. The information was prepared from the
books of Merchants Bancshares, Inc. and its subsidiaries, the
Merchants Bank and Merchants Properties, Inc., without audit.
In the ordinary course of business, the Merchants Bank makes
commitments for possible future extensions of credit. On
September 30, 1994, the Bank was obligated for $10,207,725 of
standby letters of credit. No losses are anticipated in
connection with these commitments.
RESULTS OF OPERATIONS
1. ANALYSIS OF QUARTERLY STATEMENTS OF OPERATIONS
Netincome for the third quarter of 1994 was $779,000 compared
to net income for the same period a year earlier of $841,000. On
a per share basis, the net income represented $.18 per share
compared to $.20 for 1993. Third quarter net interest income
before the provision for possible loan losses was $6.9 million in
1994 compared to $6.8 million a year earlier even though average
earning assets were $66 million less than for the quarter a year
earlier and interest bearing liabilities were $34 million less
for the quarter.
The provision for possible loan losses totalled $1.75 million
for the third quarter of 1994 compared to $2.75 million for the
third quarter of 1993. The decrease in provisioning is due to a
slowly improving portfolio of nonperforming assets and a slowly
improving economic environment during 1994.
During the quarter ended September 30, 1994, the Company
recognized $81,000 in gains on the sale of investments, as
compared to $423,000 for the same quarter a year earlier.
Total non-interest expenses are up approximately 5.3%from
the same quarter a year ago due to higher employee expenses and
the costs of maintaining compliance with the MOU and the Written
Agreement. Net expenses of other real estate owned are down
32.5% from the previous year.
The Company recognized $240,000 in low income housing tax
credits during the quarters September 30, 1994 and 1993
representing the amount earned during the those quarters.
The schedules on the following pages analyze interest and
overhead management in relation to total average assets and the
yield analysis for the periods reported.
MERCHANTS BANCSHARES, INC.
INTEREST MANAGEMENT AND OPERATING EXPENSE ANALYSIS
(IN THOUSANDS - TAXABLE EQUIVALENT BASIS)
QUARTER ENDED QUARTER ENDED QUARTER ENDED
09/30/94 12/31/93 09/30/93
Total Average Assets $699,706 $755,667 $789,182
------------------------ --------------- ---------------- ----------------
AMOUNT % OF AMOUNT % OF AMOUNT % OF
ASSETS ASSETS ASSETS
INTEREST MANAGEMENT
Interest Income (T.E.) $12,571 7.19% $12,915 6.84% $13,276 6.73%
--------------------------- --------------- ---------------- ----------------
Interest Expense 5,585 3.19% 5,786 3.06% 6,361 3.22%
--------------------------- --------------- ---------------- ----------------
Net Int before Prov (T.E.) $6,986 3.99% $7,129 3.77% $6,915 3.50%
--------------------------- --------------- ---------------- ----------------
Prov for Loan Losses 1,750 1.00% 6,750 3.57% 2,750 1.39%
--------------------------- --------------- ---------------- ----------------
Net Int. Income (T.E.) $5,236 2.99% $379 0.20% $4,165 2.11%
--------------------------- --------------- ---------------- ----------------
NET OPERATING EXPENSE
Non-Interest Expense:
Personnel $3,559 2.03% $3,541 1.87% $3,295 1.67%
--------------------------- --------------- ---------------- ----------------
Occupancy 535 0.31% 565 0.30% 504 0.26%
--------------------------- --------------- ---------------- ----------------
Equipment 549 0.31% 571 0.30% 493 0.25%
--------------------------- --------------- ---------------- ----------------
Other 2,779 1.59% 2,976 1.58% 2,756 1.40%
--------------------------- --------------- ---------------- ----------------
Total $7,422 4.24% $7,653 4.05% $7,048 3.57%
--------------------------- --------------- ---------------- ----------------
Less Non-Interest Income:
Fees on Loans $789 0.45% $1,470 0.78% $1,156 0.59%
--------------------------- --------------- ---------------- ----------------
Service Charges on Dep 846 0.48% 1,026 0.54% 962 0.49%
--------------------------- --------------- ---------------- ----------------
Other 1,373 0.78% 1,463 0.77% 1,656 0.84%
--------------------------- --------------- ---------------- ----------------
Total $3,008 1.72% $3,959 2.10% $3,774 1.91%
--------------------------- --------------- ---------------- ----------------
Net Operating Expense $4,414 2.52% $3,694 1.96% $3,274 1.66%
--------------------------- --------------- ---------------- ----------------
SUMMARY
Net Interest Income $5,236 2.99% $379 0.20% $4,165 2.11%
--------------------------- --------------- ---------------- ----------------
Less Net Operating Exp. $4,414 2.52% $3,694 1.96% $3,274 1.66%
--------------------------- --------------- ---------------- ----------------
Profit Before Taxes $822 0.47% ($3,315) -1.75% $891 0.45%
--------------------------- --------------- ---------------- ----------------
NET PROFIT $779 0.45% ($2,212) -1.17% $841 0.43%
--------------------------- --------------- ---------------- ----------------
MERCHANTS BANCSHARES, INC
YIELD ANALYSIS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
Fully Taxable Equivalent AVERAGE AVERAGE AVERAGE AVERAGE
Includes Fees on Loans BALANCE RATE BALANCE RATE
----------- ------- ----------- -------
INTEREST EARNING ASSETS
Investments $ 93,100 3.95% $ 107,341 3.94%
Loans 531,818 9.24% 500,790 9.23%
Federal Funds Sold 10,218 3.97% 4,265 3.00%
-------- ------- -------- -------
Total Interest Earning Assets $ 635,136 8.38% $ 612,396 8.26%
======== ======= ======== =======
INTEREST BEARING LIABILITIES
Savings, NOW and Money Market Deposits $ 314,039 2.61% $ 296,121 2.76%
Time Deposits 200,306 4.66% 165,957 4.89%
-------- ------- -------- -------
Total Savings and Time Deposits 514,345 3.41% 462,078 3.52%
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase 722 3.29% 9,351 3.09%
Other Borrowed Funds 62,642 7.32% 72,340 6.89%
-------- ------- -------- -------
Total Interest Bearing Liabilities 577,709 3.83% 543,769 3.97%
Other Liabilities and Stockholders' Equity
(Net of Non-Interest Earning Assets) 57,427 68,627
-------- --------
Total Liabilities and Stockholders' Equity
(Net of Non-Interest Earning Assets) $ 635,136 $ 612,396
======== ========
Rate Spread 4.55% 4.29%
======= =======
Net Yield on Interest Earning Assets 4.90% 4.74%
======= =======
MERCHANTS BANCSHARES, INC.
BALANCE SHEET
Average assets decreased $4 million during the quarter ended
September 30, 1994, down $55.9 million from the December 31, 1993
level and $89.5 million from the same date a year ago. Period
end investment balances increased approximately $20 million
during the quarter, and have increased $5 million since September
30, 1993. Gross loans, including segregated assets, are down
$10.4 million during the quarter, and have decreased $74 million
from the same date a year ago.
Shortterm borrowings decreased $26.8 million over the last
12 months, and are down $103,000 since June. Effective January 1,
1994, the Bank no longer issues overnight repurchase agreements
to its cash management customers, rather, this product is handled
by the trust company subsidiary on an off-balance sheet basis.
Deposits have increased $5.3 million during the quarter, and are
down $40 million from the same date a year ago.
Shareholders'equity increased $901,000 during the quarter,
due to net income earned plus an adjustment of $121,000 to adjust
the investment portfolio to the market value at September 30,
1994. Tier 1 leverage capital at the Company level was 6.33%,
5.70% and 5.65% at September 30, 1994, December 31, 1993 and
September 30, 1993, respectively.
LOAN QUALITY AND RESERVES FOR POSSIBLE LOAN LOSSES (RPLL)
Merchants Bancshares, Inc. reviews the adequacy of the RPLL
at least quarterly. The method used in determining the amount of
the RPLL is not based upon maintaining a specific percentage of
RPLL to total loans or total non-performing assets, but rather a
comprehensive analytical process of assessing the credit risk
inherent in the loan portfolio. This assessment incorporates a
broad range of factors which are indicative of both general and
specific credit risk, as well as a consistent methodology for
quantifying probable credit losses. As part of the Merchants
Bancshares, Inc.'s analysis of specific credit risk, a detailed
and extensive review is done on larger credits and problematic
credits identified on the watched asset list, non-performing
asset listings, and credit rating reports.
The more significant factors considered in the evaluation of
the adequacy of the RPLL based on the analysis of general and
specific credit risk include:
Status of non-performing loans
Status of adversely-classified credits
Historic charge-off experience by major loan category
Size and composition of the loan portfolio
Concentrations of credit risk
Renewals and extensions
Current local and general economic conditions and
trends
Loan growth trends in the portfolio
Off balance sheet credit risk relative to commitments
to lend
Overall, management maintains the RPLL at a level deemed to be
adequate, in light of historical, current and prospective
factors, to reflect the level of risk in the loan portfolio.
NON-PERFORMING ASSETS
The following tables summarize the Bank's non-performing
assets. The first table shows balances of nonperforming assets at
September 30, 1994 covered by a loss sharing arrangement related
to the acquisition of the NFNBV On June 4, 1993. The terms of
the Purchase and Assumption Agreement related to the purchase of
NFNBV require that the FDIC pay the Bank 80% of net charge-offs
up to $41,100,000 on any loans that qualify as loss sharing
loans for a period of three years from the date of the
acquisition. If net charge offs on qualifying loss sharing loans
exceed $41,100,000 during the three year period, the FDIC is
required to pay 95% of such qualifying charge offs. This
arrangement significantly reduces the exposure that the Bank
faces on NPAs that are covered by loss sharing. As of September
30, 1994 NPAs covered by loss sharing totaled $14,999,000. The
aggregate amount of loans covered by the loss sharing arrangement
at September 30, 1994 totalled $104,582,000.
(in thousands) Regular Loss Sharing
Assets Assets Total
Nonaccrual Loans $15,065 $13,320 $28,385
Restructured Loans 4,947 67 5,014
Loans Past Due 90
days or more and
still accruing 106 0 106
Other Real Estate
Owned 13,971 1,612 15,583
------- ------- -------
Total $34,089 $14,999 $49,088
======= ======= =======
The second table shows nonperforming assets as of June 30, 1994
and September, 1994 (in thousands):
06/30/94 09/30/94
-------- --------
Nonaccrual Loans $39,166 $28,385
Loans Past due 90 Days or
More and still Accruing 558 106
Restructured Loans 2,892 5,014
------- -------
Total Nonperforming loans $42,616 $33,505
Other Real Estate Owned 15,954 15,583
------- -------
Total Nonperforming Assets $58,570 $49,088
======= =======
06/30/94 09/30/94
Percentage of Non-Performing -------- --------
Loans to Total Loans 8.04% 6.44%
Percentage of Non-Performing
Assets to Total Loans plus
Other Real Estate Owned 10.72% 9.18%
Percentage of RPLL to Total
Loans 3.45% 3.72%
Percentage of RPLL to NPL 42.98% 57.60%
Percentage of RPLL to NPA 31.27% 39.32%
Nonperforming Loans (NPL) declined by $9,111,000 from June
30, 1994 to September 30, 1994. Non-performing Assets (NPA)
declined by $9,482,000 during the same period. Gross charge offs
of $1,174,000 were responsible for part of the decline in NPLs.
$1,065,000 in performing loan balances were returned to accrual
status. Payoffs accounted for the remainder of the decrease in
NPAs and NPLs. The RPLL increased by $984,000 from June 30, 1994
to September 30, 1994 as the result of the provision for loan
losses.
As previously mentioned, the loss sharing arrangement reduces
the exposure the Company faces on NPLs. Adjusting the NPL total
for the 80% FDIC coverage on qualifying loss sharing loans
results in significantly larger RPLL to NPL ratios. The loss
sharing, adjusted ratios of RPLL to NPLs at June 30, 1994 and
September 30, 1994 were 57% and 85% respectively. This level of
coverage is considered adequate based upon management's
evaluation of known and inherent risks in the portfolio.
Approximately 85% of the NPLs are secured by real estate which
significantly reduces the Company's exposure to loss. Based upon
the combination of loss sharing coverage of some of the NPLs, the
secured nature of a significant portion of the NPLs,
stabilization of the local real estate market, and management's
assessment of the current and prospective leve of risk in the
loan portfolio, the balance in the RPLL is considered adequate at
September 30, 1994.
DISCUSSION OF EVENTS AFFECTING NPAs:
Significant events affecting the categories of NPAs are
discussed below:
Nonaccrual Loans:
Nonaccrual loans declined $10,781,000 during the third quarter
of 1994 due partially to the reclassification of a borrowing
relationship for $3,397,000 as troubled debt restructured (TDR).
Performing loans totalling $1,065,000 were returned to accrual
status. Payoffs accounted for the most significant part of the
decline.
Restructured Loans:
Restructured Loans increased from $2,892,000 at June 30, 1994
to $5,014,000 at September 30, 1994. This resulted primarily
from the reclassification of the $3,397,000 relationship
mentioned in the Nonaccrual section above. One loan for
$1,323,000 which had performed at market rates and terms for
fourteen (14) months was returned to performing status.
Other Real Estate Owned and Insubstance Foreclosure:
The decrease in OREO and ISF of $368,000 from June 30, 1994 to
September 30, 1994 resulted from various activity.
Additions in OREO included land parcels for $429,000 and
additional amounts for various residential properties.
Reductions resulting from sales included three separate
commercial properties for $1,219,000.
OREO includes specific assets to which legal title has been
taken as the result of transactions related to real estate loans.
The criteria for designation of loans as in-substance
foreclosure are that the debtor has little or no equity in the
collateral, proceeds for repayment of the loan will come only
from the operation or sale of the collateral, and the debtor has
formally or effectively abandoned control of the assets or is not
expected to rebuild equity in the collateral. The collateral
underlying these loans is recorded at the lower of cost or market
value less estimated selling costs.
The total amount of Other Real Estate Owned and In-Substance
Foreclosure at June 30, 1994 and September 30, 1994 was as
follows:
June 30, 1994 September 30, 1994
Other Real Estate Owned $10,759 $10,898
In-Substance Foreclosure 5,195 4,685
------- -------
Total: $15,954 $15,583
======= =======
CAPITAL RESOURCES
As a state chartered bank, the Bank's primary regulator is
the FDIC. Accordingly, the Bank is affected by the Financial
Institutions Reform, Recovery and Enforcement act of 1989
(FIRREA) which was enacted in August 1989 and the Federal Deposit
Insurance Corporation Improvement Act (FDICIA) enacted in
December 1992.
The Bank is subject to regulatory capital regulations which
provide for two capital requirements - a leverage requirement and
a risk-based capital requirement. The leverage requirement
provides for a minimum "core" capital consisting primarily of
common stockholders' equity of 3% of total adjusted assets for
those institutions with the most favorable composite regulatory
rating. Under the terms of the MOU, the Bank is required to
maintain a leverage capital ratio of at least 5.5% and refrain
from declaring dividends without the prior approval of the FDIC.
The Company is also required to refrain from declaring dividends
without the Federal Reserve's prior permission. The risk-based
capital requirement of FIRREA provides for minimum capital levels
based on the risk weighted assets of the Bank. The guidelines
require banks to meet a minimum Tier 1 risk-based capital ratio
of 4.0% and a total risk based capital ratio of 8.0% as of March
31, 1994. As of September 30, 1994, all the Bank's capital
measurements exceeded regulatory minimums.
MERCHANTS BANCSHARES, INC.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On October 25, 1994, a lawsuit was filed in U.S. District
Court against the Company, the Bank, the Bank's wholly owned
subsidiary, the Merchants Trust Company (MTC) and the trustees of
MTC alleging violations of Sections 10(b) and 20 of the Exchange
Act, 15 U.S.C. SS 78j(b), 78t and Securities and Exchange
Commission, Rule 10b-5 promulgated thereunder, 15 U.S.C. SS
240.10b-5(1)-(3); Sections 12(2) and 15 of the Securities Act, 15
U.S.C. SS 771(2); RICO, 18 U.S.C. SS 1964; the common laws of
negligent misrepresentation and breach of fiduciary duties; and
for breach of contract by a customer of MTC purporting to
represent a class of customers of MTC relating to certain
investments made in funds managed by Piper Jaffrey. The action
seeks compensatory and/or treble damages plus interest and legal
costs in an amount to be proven at trial. The Company and
counsel intend to vigorously defend the action. The proceedings
are at an early stage and we are not presently able to quantify
the likelihood that the Company will prevail, the likely
magnitude of a damage award in the event it should not prevail
nor whether any such award would have a materially adverse effect
on the Company's financial position or results of operations.
A lawsuit was filed in Vermont Superior Court on September
22, 1994 arising from the same investment based on common law
theories. Management believes that the resolution of this matter
will not have a materially adverse effect on the consolidated
financial position or results of operations.
In addition, the Bank is involved in various legal
proceedings arising in the normal course of business. Management
believes that the resolution of such proceedings will not have a
materially adverse effect on the consolidated financial position
or results of operations.
Item 2 - Changes in Securities - NONE
Item 3 - Defaults upon Senior Securities - NONE
Item 4 - Submission of Matters to a Vote of Security Holders
- NONE
Item 5 - Other Issues - NONE
Item 6 - Exhibits and Reports on Form 8-K - NONE
MERCHANTS BANCSHARES, INC.
FORM 10-Q
SEPTEMBER 30, 1994
SIGNATURES
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.
\S\ Joseph L. Boutin
-------------------------
Joseph L Boutin, President
\S\ Edward W. Haase
--------------------------
Edward W Haase, Treasurer
November 11, 1994
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Date