SECURITIES 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 MARCH 31, 1995
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 March 31, 1995
MERCHANTS BANCSHARES, INC.
INDEX TO FORM 10-Q
PART I
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets
March 31, 1995 and December 31, 1994 1
Consolidated Statements of Operations
For the three months ended March 31, 1995 and 1994 2
Consolidated Statement of Stockholders' Equity
For the three months ended March 31, 1995 and 1994
and the year ended December 31, 1994 3
Consolidated Statements of Cash Flows for the
three months ended March 31, 1995 and 1994 4
Footnotes to Financial Statements as of
March 31, 1995 5-6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-14
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
SIGNATURES 16
MERCHANTS BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET
UNAUDITED
MARCH 31, DECEMBER 31
ASSETS 1995 1994
Cash and Due from Banks $ 31,673,749 $ 34,851,401
Federal Funds Sold 2,425,000 0
Investments:
Debt Securities Available for Sale 73,561,649 90,470,922
Debt Securities Held to Maturity 10,073,258 10,084,646
Marketable Equity Securities Available for Sale 754,690 1,195,897
------------ ------------
Total Investments $ 84,389,596 $ 101,751,465
Loans: 505,484,652 516,397,052
Reserve for possible loan losses 20,102,568 19,928,817
------------ ------------
Net Loans $ 485,382,084 $ 496,468,235
FHLB Stock 6,856,200 6,856,200
Bank Premises and Equipment 16,276,227 16,620,173
Investment in Housing Partnerships 3,400,428 3,593,818
Other Real Estate Owned, Net 6,158,915 7,388,807
Other Assets 20,774,367 27,306,440
------------ ------------
Total Assets $ 657,336,567 $ 694,836,539
LIABILITIES ============ ============
Deposits:
Demand $ 81,083,507 $ 94,467,122
Savings, NOW and Money Market Accounts 280,634,004 293,655,696
Time Certificates of Deposit $100,000 and Over 19,563,265 23,280,762
Other Time 178,261,758 170,820,804
------------ ------------
Total Deposits $ 559,542,534 $ 582,224,384
Federal Funds Purchased & S.T. Borrowings 0 15,000,000
Demand Note Due U/S Treasury 2,182,161 3,294,734
Other Liabilities 8,553,139 7,788,085
------------ ------------
Total Liabilities $ 570,277,834 $ 608,307,203
Long-Term Debt 44,228,117 44,229,366
STOCKHOLDERS' EQUITY
Common Stock, $.01 Par Value 42,429 42,429
Shares Authorized 4,700,000
Outstanding, Current Year 4,242,927
Previous Year 4,242,927
Preferred Stock Class A Non-Voting
Authorized - 200,000, Outstanding 0 0 0
Preferred Stock Class B Voting
Authorized - 1,500,000, Outstanding 0 0 0
Treasury Stock (At Cost) (108,555) (178,730)
Surplus 30,436,550 30,647,120
Undivided Profits 12,692,096 12,462,820
Valuation Allowance - Investments (Net of Taxes) (231,904) (673,669)
------------ ------------
Total Stockholders' Equity $ 42,830,616 $ 42,299,970
Total Liabilities and ------------ ------------
Stockholders' Equity $ 657,336,567 $ 694,836,539
============ ============
Book Value Per Common Share $10.12 $10.00
======= =======
MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME
UNAUDITED
For the Quarters Ended March 31, 1995 1994
Interest Income
Interest on Loans $ 11,115,091 $ 11,335,267
Investment Income:
Obligations of U.S. Government 1,005,085 790,581
Other 207,328 130,702
Federal Funds Sold 32,872 61,675
------------ ------------
Total Interest Income $ 12,360,377 $ 12,318,225
------------ ------------
Interest Expense
Interest on Deposits $ 4,768,130 $ 4,180,699
Interest on Capital Notes
and Other Borrowings 1,103,897 1,232,889
------------ ------------
Total Interest Expense $ 5,872,027 $ 5,413,588
------------ ------------
Net Interest Income $ 6,488,350 $ 6,904,637
Provision for Possible Loan Losses 2,700,000 1,250,000
------------ ------------
Net Interest Income after
Provision for Loan Losses $ 3,788,350 $ 5,654,637
------------ ------------
Other Income
Fees on Loans $ 692,617 $ 1,029,851
Service Charges on Deposits 785,206 891,056
Gain (Loss) on Sale of Investments 248,647 (18,896)
Other 1,176,463 1,231,861
------------ ------------
$ 2,902,933 $ 3,133,872
------------ ------------
Other Expenses
Salaries and Wages $ 2,797,581 $ 2,558,967
Employee Benefits 703,522 669,584
Occupancy Expense, Net 602,526 693,612
Equipment Expense 523,010 466,131
Low Income Housing Partnerships 186,400 223,026
Expenses - Other Real Estate Owned 479,226 337,668
Other 1,888,449 2,156,053
------------ ------------
$ 7,180,715 $ 7,105,041
------------ ------------
Income (Loss) Before Income Taxes (489,432) 1,683,468
Provision for Income Taxes (528,063) 245,495
------------ ------------
Net Operating Income $ 38,632 $ 1,437,973
============ ============
Per Common Share Net Income $ 0.01 $ 0.34
============ ============
Weighted Average Common Shares
Outstanding 4,232,971 4,230,193
Merchants Bancshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
For Each of the Two Years in the Period Ended March 31, 1995
UNAUDITED
Net Unrealized
Capital in Depreciation
Common Excess of Retained of Investment Treasury
Stock Par Value Earnings Securities Stock Total
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 $ 42,429 $ 30,647,120 $ 15,400,132 $ (143,657) $ (178,730) $ 45,767,294
Net Income --- --- 1,437,973 --- --- 1,437,973
Chng - Net Unreal Depr
of Invest Securities
Avail for Sale, Net of Taxes --- --- --- (454,258) --- (454,258)
- ------------------------------------- ---------- ------------- ------------- -------------- ------------- -------------
Balance, March 31, 1994 $ 42,429 $ 30,647,120 $ 16,838,105 $ (597,915) $ (178,730) $ 46,751,009
Net Loss --- --- (4,375,285) --- --- (4,375,285)
Chng - Net Unreal Depr
of Invest Securities
Avail for Sale, Net of Taxes (75,754) --- (75,754)
- ------------------------------------- ---------- ------------- ------------- -------------- ------------- ------------
Balance, December 31, 1994 $ 42,429 $ 30,647,120 $ 12,462,820 $ (673,669) $ (178,730) $ 42,299,970
Net Income --- --- 38,632 --- --- 38,632
Treasury Stock Transactn (210,570) 190,644 70,175 50,249
Chng - Net Unreal Depr
of Invest Securities
Avail for Sale, Net of Taxes --- --- --- 441,765 --- 441,765
- ------------------------------------- ---------- ------------- ------------- -------------- ------------- ------------
Balance, March 31, 1995 $ 42,429 $ 30,436,550 $ 12,692,096 $ (231,904) $ (108,555) $ 42,830,616
- ----------------------------------=== ========== ============= ============= ============== ============= ============
Merchants Bancshares, Inc.
Consolidated Statements of Cash Flows
UNAUDITED
For the Quarters Ended March 31, 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES: ----------- -----------
Net Income $ 38,632 $ 1,437,973
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Possible Loan Losses 2,700,000 1,250,000
Provision for Depreciation and Amortization 577,685 511,711
Net (Gains) Losses on Sales of Investment Securities (247,647) 18,896
Net Gains on Sales of Loans and Leases 3,375 39,288
Equity in Losses of Real Estate Limited Partnerships 181,675 220,926
(Increase) Decrease in Interest Receivable (5,043) 120,630
Increase (Decrease) in Interest Payable 678,786 280,746
(Increase) Decrease in Other Assets 7,756,922 (1,149,958)
Increase (Decrease) in Other Liabilities 86,268 1,145,360
----------- -----------
Net Cash Provided by Operating Activities 11,770,653 3,875,572
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Investment Securities 10,616,572 0
Proceeds from Maturities of Investment Securities 31,000,000 0
Proceeds from Sales of Loans and Leases 9,069,100 18,206,165
Purchases of Available for Sale Investment Secur (23,952,169) 0
Loans Originated, net of Principal Repayments (2,795,404) 3,074,159
Investments in Real Estate Limited Partnerships 0 (363,834)
Purchases of Premises and Equipment (140,732) (479,021)
Decrease in Net Investment in Leveraged Leases 0 23,548
----------- -----------
Net Cash Prov by (Used in) Investing Activities 23,797,367 20,461,017
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase (Decrease) in Deposits (22,681,850) (28,189,574)
Net Increase (Decrease) in Other Borrowed Funds (16,112,573) 1,456,571
Principal Payments on Debt (1,249) (1,015)
Sale of Treasury Stock 50,000 0
----------- -----------
Net Cash Prov by (Used in) Financing Activities (38,745,672) (26,734,018)
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents (3,177,652) (2,397,429)
Cash and Cash Equivalents at Beginning of Period 34,851,401 30,587,986
----------- -----------
Cash and Cash Equivalents at End of Period $ 31,673,749 $ 28,190,557
=========== ===========
Total Interest Payments $ 5,193,241 $ 5,132,842
Total Income Tax Payments $ 0 $ 0
MERCHANTS BANCSHARES, INC
MARCH 31, 1995
NOTES TO FINANCIAL STATEMENTS:
See the Form 10-K filed as of December 31, 1994 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 March 31,
1995, 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 March 31, 1995. The repayment of such
advances, together with the Company's cash on hand at March 31,
1995 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 March 31, 1995, the Company has
submitted drafts of the requested plans and is working with the
Federal Reserve to develop acceptable plans. In addition, the
Company may not declare or pay a dividend without the approval of
the Federal Reserve.
On April 27, 1995, the FDIC and the Commissioner completed the
field work related to their most recent examination of the bank as
of December 31, 1994. Although the examination report has not been
received, indications are that the FDIC and the Commissioner will
require management to continue its efforts to correct certain
administrative and legal violations and enhance certain operating
policies when the report is issued. In addition, it appears that
the MOU will remain in place until at least the next examination.
Management believes that it is in substantial compliance with the
MOU and the Written Agreement as of March 31, 1995.
Failure to maintain the minimum leverage capital ratio of 5.5%
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: RECENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 114 (SFAS No.
114"), "Accounting for Impairment of a Loan," which the Company
adopted on January 1, 1995. SFAS No. 114 requires, among other
things, that 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.
The Company has determined after review of its Credit Quality
Monitoring policies and procedures and an analysis of the loans
outstanding at March 31, 1995, that loans recognized by the Company
as nonaccrual and restructured are equivalent to "impaired loans"
as defined by SFAS No. 114. The Company has also determined that
the reserve for possible loan losses at March 31, 1995 did not
require an additional loan loss provision as a result of the
adoption of this standard. Loans deemed to be impaired by the
Company totaled $45 million. Impaired loans in the amount of $45
million have been allocated $4.9 million of the reserve for
possible loan losses. Interest payments received on impaired
loans are recorded as interest income unless collection of the
remaining recorded investment is doubtful at which time payments
received are recorded as reductions of principal. The Bank recog-
nized interest income on impaired loans of $341,861 for the first
quarter of 1995.
SFAS No. 114 also requires that in-substance foreclosures (ISF)
be reclassified as loans and the ISF valuation reserve be included
in the reserve for possible loan losses. The effect at January 1,
1995, the date of adoption of SFAS No. 114, on the Company's
balance sheet was an increase to loans of $5.84 million and a
decrease in other real estate owned (OREO) of $5.84 million. In
addition, prior period balances have been reclassified to reflect
the loans and OREO on a basis comparable to the classification that
would have been used under SFAS No. 114.
NOTE 3: POSSIBLE DISPOSITION OF TROUBLED ASSETS
The Bank is currently in the process of determining the most
beneficial approach to address the portfolio of troubled assets.
This approach will most likely include the disposition of a portion
of the loan and OREO portfolios, including sale by auction, bulk
sales or some other means of disposing of troubled assets. At this
time, management is unable to determine the likely outcome of such
a plan and the impact, if any, on the earnings of the Bank.
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 three
months ended March 31, 1995 and 1994 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 March 31,
1995, the Bank was obligated for $8,305,000 of standby letters of
credit. No losses are anticipated in connection with these
commitments.
RESULTS OF OPERATIONS
1. ANALYSIS OF QUARTERLY STATEMENTS OF OPERATIONS
Net income for the first quarter of 1995 was $38,632 compared to
net income for the same period a year earlier of $1,437,973. On a
per share basis, the net income represented $.01 per share compared
to $.34 for 1994. First quarter net interest income before the
provision for possible loan losses was $6.5 million in 1995 as
compared to $6.9 for the year earlier quarter. This reduction is
due to the cost of interest bearing liabilities rising faster than
the yield on loans and investments and a significant reduction in
the total interest earning assets and interest bearing liabilities.
The provision for possible loan losses totalled $2.7 million for
the first quarter of 1995 compared to $1.25 million for the first
quarter of 1994. (For a discussion as to the reasons for this
increase, see the "Loan Quality and Reserves for Possible Loan
Losses (RPLL)" later in this section.
During the quarter ended March 31, 1995, the Company recognized
$248,647 in gains on the sale of investments, as compared to a loss
in the amount of $18,896 for the same quarter a year earlier.
Total non-interest expenses are up approximately 1.1% from the
same quarter a year ago due to higher employee expenses but lower
miscellaneous expenses. Net expenses of other real estate owned
are up 41.9% from the previous year.
The Company recognized $240,000 in low income housing tax credits
during the quarters March 31, 1995 and 1994 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 BA BANCSHARES, INC.
INTEREST MANAGEMENT AND OPERATING EXPENSE ANALYSIS
(IN THOUSANDS - TAXABLE EQUIVALENT BASIS)
QUARTER ENDED QUARTER ENDED QUARTER ENDED
03/31/95 12/31/94 03/31/94
Total Average Assets $676,086,553 $698,846,951 $721,409,327
- ---------------------- ----------------- ------------------ ------------------
AMOUNT % OF AMOUNT % OF AMOUNT % OF
ASSETS ASSETS ASSETS
INTEREST MANAGEMENT
Interest Income (T.E.) $12,430,377 7.35% $12,623,295 7.23% $12,388,225 6.87%
- ---------------------- ------------------ ------------------ ------------------
Interest Expense 5,872,027 3.47% 5,764,715 3.30% 5,413,588 3.00%
- ---------------------- ------------------ ------------------ ------------------
Net Int bef Prov (T.E.) $6,558,350 3.88% $6,858,580 3.93% $6,974,637 3.87%
- ---------------------- ------------------ ------------------ ------------------
Prov for Loan Losses 2,700,000 1.60% 5,750,000 3.29% 1,250,000 0.69%
- ---------------------- ------------------ ------------------ ------------------
Net Int. Income (T.E.) $3,858,350 2.28% $1,108,580 0.63% $5,724,637 3.17%
- ---------------------- ------------------ ------------------ ------------------
NET OPERATING EXPENSE
Non-Interest Expense:
Personnel $3,501,103 2.07% $3,079,885 1.76% $3,228,551 1.79%
- ----------------------- ----------------- ------------------ ------------------
Occupancy 602,526 0.36% 543,663 0.31% 693,612 0.38%
- ----------------------- ----------------- ------------------ ------------------
Equipment 523,010 0.31% 545,450 0.31% 466,131 0.26%
- ----------------------- ----------------- ------------------ ------------------
Other 2,554,075 1.51% 9,474,097 5.42% 2,716,747 1.51%
- ----------------------- ----------------- ------------------ ------------------
Total $7,180,714 4.25% $13,643,095 7.81% $7,105,041 3.94%
---------------------- ----------------- ------------------ ------------------
Less Non-Interest Income:
Fees on Loans $692,617 0.41% $914,198 0.52% $1,029,851 0.57%
- ----------------------- ----------------- ------------------ ------------------
Svc Charges - Dep 785,206 0.46% 798,512 0.46% 891,056 0.49%
- ----------------------- ----------------- ------------------ ------------------
Other 1,425,110 0.84% 1,432,403 0.82% 1,212,965 0.67%
- ----------------------- ------------------ ----------------- ------------------
Total $2,902,933 1.72% $3,145,113 1.80% $3,133,872 1.74%
- ----------------------- ----------------- ------------------ ------------------
Net Operating Expense $4,277,781 2.53% $10,497,982 6.01% $3,971,169 2.20%
- ----------------------- ----------------- ------------------ ------------------
SUMMARY
Net Interest Income $3,858,350 2.28% $1,108,580 0.63% $5,724,637 3.17%
- ----------------------- ----------------- ------------------ ------------------
Less Net Operating Exp. $4,277,781 2.53% $10,497,982 6.01% $3,971,169 2.20%
- ----------------------- ----------------- ------------------ ------------------
Profit (Loss) Bef Taxes ($419,431)-0.25% ($9,389,402)-5.37% $1,753,468 0.97%
- ----------------------- ----------------- ------------------ ------------------
NET PROFIT (LOSS) $38,632 0.02% ($6,112,611)-3.50% $1,437,973 0.80%
- ----------------------- ----------------- ------------------ ------------------
MERCHANTS BANCSHARES, INC
YIELD ANALYSIS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, 1995 MARCH 31, 1994
Fully Taxable Equivalent AVERAGE AVERAGE AVERAGE AVERAGE
Includes Fees on Loans BALANCE RATE BALANCE RATE
----------- ------- ----------- -------
INTEREST EARNING ASSETS
Investments $ 93,828,565 5.18% $ 92,982,129 3.98%
Loans 509,306,439 9.31% 548,514,611 9.07%
Federal Funds Sold 2,212,777 5.94% 7,781,111 3.17%
----------- ------- ----------- -------
Total Interest Earning Assets $ 605,347,781 8.66% $ 649,277,851 8.27%
=========== ======= =========== =======
INTEREST BEARING LIABILITIES
Savings, NOW & Money Mkt $ 285,104,635 3.19% $ 320,654,986 2.49%
Time Deposits 195,756,010 4.99% 196,750,349 4.51%
----------- ------- ----------- -------
Tot Savings & Time Dep 480,860,645 3.92% 517,405,335 3.26%
Fed Funds Purch & Securities
Sold Under Agmts to Repurch 3,738,529 4.63% 1,961,993 3.09%
Other Borrowed Funds 56,114,461 7.96% 69,716,646 6.96%
----------- ------- ----------- -------
Tot Int Bearing Liabilities 540,713,635 4.34% 589,083,974 3.69%
Other Liab's & Stkhldrs' Equity
(Net of Non-Int Earng Assets) 64,634,146 60,193,877
----------- -----------
Tot Liab's & Stkhldrs' Equity
(Net Non-Int Earning Assets) $ 605,347,781 $ 649,277,851
=========== ===========
Rate Spread 4.31% 4.57%
======= =======
Net Yield on Interest Earning Assets 4.78% 4.91%
======= =======
MERCHANTS BANCSHARES, INC.
MARCH 31, 1995
BALANCE SHEET
Average assets decreased $22.8 million during the quarter
ended March 31, 1995 from the December 31, 1994 level. Period end
investment balances decreased approximately $17.4 million during
the quarter as the Bank paid off short-term debt from funds made
available from a maturing U.S. Treasury Bond. Gross loans,
including segregated assets, are down $5.1 million during the
quarter, and other assets decreased approximately $6.5 million due
primarily to the receipt of tax refunds from the 1993 operating
loss.
Short term borrowings decreased $16.1 million since December
31, 1994. Deposits have decreased $22.6 million during the
quarter, following historic trends of reduced deposits during the
first half of the calendar year.
Shareholders' equity increased $530,646 during the quarter,
due to net income earned and a reduction of the valuation allowance
on the investment portfolio of $441,765. Tier 1 leverage capital
at the Company level was 6.34% and 5.96% at March 31, 1995 and
December 31, 1994, 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.
Recently, the Financial Accounting Standards Board ( FASB )
issued new accounting guidance which affected the RPLL. Statement
of Financial Accounting Standards No. 114 ( 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:
Status of impaired loans as defined under SFAS No.
114
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
In accordance with SFAS No. 114 management has defined an
impaired loan as meeting any of the following criteria:
A loan which has been placed in non-accrual and is 45
days past due
A loan which is rated Substandard and is 45 days past
due
A loan which is rated Doubtful or Loss
A loan which has been classified as a Troubled Debt
Restructuring
A loan which has been assigned a specific allocation
The company has determined that the RPLL at March 31, 1995 did
not require an additional loan loss provision as a result of the
adoption of SFAS No. 114. Loans deemed impaired totaled $45
million. Impaired loans have been allocated $4.9 million of the
RPLL.
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 non-performing assets at March
31, 1995 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 March 31, 1995 NPAs covered by loss sharing
totaled $12,549,000. The aggregate amount of loans covered by the
loss sharing arrangement at March 31, 1995 totaled $89,878,224.
NPAs Regular Loss Sharing Total
(000's omitted) Assets Assets
Nonaccrual Loans $33,176 $10,461 $43,637
Restructured Loans 2,601 66 2,667
Loans past due 90 days
or more and still
accruing 108 0 108
Other Real Estate Owned 7,314 2,022 9,336
------- ------- -------
Total $43,199 $12,549 $55,748
======= ======= =======
The second table shows nonperforming assets as of December 31, 1994
and March 31, 1995:
NPAs (000's ommited) December 31, 1994 March 31, 1995
Nonaccrual Loans $32,200 $43,637
Loans past due 90 days or more
and still accruing 668 108
Restructured Loans 5,083 2,667
------- -------
Total Non-performing Loans $37,951 $46,412
Other Real Estate Owned 13,231 9,336
------- -------
Total Non-performing Assets $51,182 $55,748
======= =======
Ratios December 31, 1994 March 31, 1995
Percentage of Non-performing
Loans to Total Loans 7.43% 9.18%
Percentage of Non-performing
Assets to Total Loans plus
Other Real Estate Owned 9.77% 10.83%
Percentage of RPLL to Tot Loans 3.90% 3.98%
Percentage of RPLL to NPL 52.51% 43.31%
Percentage of RPLL to NPA 38.94% 36.06%
Nonperforming Loans (NPL) increased by $8.5 million from
December 31, 1994 to March 31, 1995. Non-performing Assets (NPA)
increased by $4.6 million during the same period. The increase in
NPLs was due to the adoption of SFAS No. 114. In addition, one
large credit was transferred to non-accrual. The increases were
offset by gross charge-offs of $3.2 million.
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 December 31, 1994 and March 31,
1995 were 63% and 53% respectively. This level of coverage is
considered adequate based upon management's evaluation of known and
inherent risks in the portfolio. Approximately 88% 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 and management's assessment of the current and
prospective level of risk in the loan portfolio, the balance of the
RPLL is considered adequate at March 31, 1995.
DISCUSSION OF EVENTS AFFECTING NPAs:
Significant events affecting the categories of NPAs are
discussed below:
Nonaccrual Loans:
Nonaccrual loans increased $11,437,000 during the first quarter
of 1995 due primarily to the reclassification of ISF of $4,857,923,
as of March 31, 1995, and the transfer of one large credit to
nonaccrual for $5,498,267.
Restructured Loans:
Restructured Loans decreased $2,416,000. This resulted
primarily from the transfer of loans which had performed at market
rates and terms to performing status.
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.
MARCH 31, 1995
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Reference is made to the Form 10-K filed for the year ended
December 31, 1994 for disclosure to current legal proceedings
against the Company, the Bank, the Merchants Trust Company and
certain directors and trustees of the companies. No
substantative changes in those proceedings have occured.
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
MARCH 31, 1995
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
May 10, 1995
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Date