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 JUNE 30, 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
4,290,342 Shares Common Stock $.01 Par Outstanding June 30, 1995
MERCHANTS BANCSHARES, INC.
INDEX TO FORM 10-Q
PART I
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets
June 30, 1995 and 1994 and December 31, 1994 1
Consolidated Statements of Operations
For the three months ended June 30, 1995 and 1994
and the six months ended June 30, 1995 and 1994 2
Consolidated Statement of Stockholders' Equity
For the six months ended June 30, 1995 and 1994
and the year ended December 31, 1994 3
Consolidated Statements of Cash Flows for the
six months ended June 30, 1995 and 1994 4
Footnotes to Financial Statements as of
June 30, 1995 5-7
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-15
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 16
ITEM 2 Changes in Securities NONE
ITEM 3 Defaults upon Senior Securities NONE
ITEM 4 Submission of Matters to a Vote of Security Holders 16
ITEM 5 Other Information NONE
ITEM 6 Exhibits and Reports on Form 8-K NONE
SIGNATURES 17
MERCHANTS BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET
UNAUDITED
JUNE 30, DECEMBER 31
ASSETS 1995 1994
Cash and Due from Banks $ 34,661,392 $ 34,851,401
Investments:
Debt Securities Held for Sale $ 67,603,517 $ 90,470,922
Debt Securities Held to Maturity 10,061,691 10,084,646
Marketable Equity Securities 250,758 1,195,897
------------ ------------
Total Investments $ 77,915,965 $ 101,751,465
Loans: $ 479,959,827 $ 516,397,052
Reserve for possible loan losses 17,256,202 19,928,817
------------ ------------
Net Loans $ 462,703,625 $ 496,468,235
Federal Home Loan Bank Stock $ 2,597,100 $ 6,856,200
Bank Premises and Equipment 15,941,162 16,620,173
Other Real Estate Owned 7,569,371 7,388,807
Other Assets 25,764,915 30,900,258
------------ ------------
Total Assets $ 627,153,531 $ 694,836,539
LIABILITIES ============ ============
Deposits:
Demand $ 88,386,344 $ 94,467,122
Savings, NOW and Money Market Accounts 272,902,079 293,655,696
Time Certificates of Deposit $100,000 and Over 20,179,003 23,280,762
Other Time 168,131,600 170,820,804
------------ ------------
Total Deposits $ 549,599,025 $ 582,224,384
Federal Funds Purchased $ 4,000,000 $ 15,000,000
Demand Note Due U/S Treasury 4,613,930 3,294,734
Other Liabilities 7,418,427 7,788,085
------------ ------------
Total Liabilities $ 565,631,381 $ 608,307,203
Long-Term Debt $ 21,827,022 $ 44,229,366
STOCKHOLDERS' EQUITY
Common Stock, $.01 Par Value $ 42,903 $ 42,429
Shares Authorized 4,700,000
Outstanding, Current Year 4,290,342
Previous Year (Note 1) 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) 0 (178,730)
Surplus 31,117,916 30,647,120
Undivided Profits 8,450,326 12,462,820
Valuation Reserve - Marketable Equity Securities 83,983 (673,669)
------------ ------------
Total Stockholders' Equity $ 39,695,128 $ 42,299,970
Total Liabilities and ----------- ------------
Stockholders' Equity $ 627,153,531 $ 694,836,539
============ ============
Book Value Per Common Share $9.25 $10.00
======= =======
Note: As of June 30, 1995, the Bank had off-balance sheet liabilities in the
form of standby letters of credit to customers in the amount of $8,538,626.
1
THE MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME
UNAUDITED
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30
Interest Income 1995 1994 1995 1994
Interest on Loans $ 11,382,447 $ 11,142,603 $ 22,497,538 $ 22,477,870
Investment Income:
Obligations of U.S. Govt 979,656 781,857 1,984,741 1,572,438
Other 216,097 143,180 423,425 273,882
Federal Funds Sold 78,999 113,223 111,871 174,898
------------ ------------ ------------ ------------
$ 12,657,198 $ 12,180,864 $ 25,017,574 $ 24,499,089
------------ ------------ ------------ ------------
Interest Expense
Interest on Deposits $ 4,955,413 $ 4,463,987 $ 9,723,543 $ 8,644,686
Interest on Capital Notes
and Other Borrowings 1,691,337 1,149,522 2,795,234 2,382,411
------------ ------------ ------------ ------------
$ 6,646,750 $ 5,613,508 $ 12,518,777 $ 11,027,096
------------ ------------ ------------ ------------
Net Interest Income $ 6,010,449 $ 6,567,356 $ 12,498,798 $ 13,471,993
Provision for Possible Loan Losses 7,600,000 1,250,000 10,300,000 2,500,000
------------ ------------ ------------ ------------
Net Interest Income after
Provision for Loan Losses $ (1,589,551)$ 5,317,356 $ 2,198,798 $ 10,971,993
------------ ------------ ------------ ------------
Other Income
Fees on Loans $ 704,054 $ 837,895 $ 1,396,671 $ 1,867,746
Service Charges on Deposits 808,905 915,533 1,594,111 1,806,589
Gain (Loss) on Sale of Investments 88,048 (18,896) 336,695 (18,896)
Other 1,196,917 1,338,172 2,373,380 2,551,137
------------ ------------ ------------ ------------
Total Other Income $ 2,797,925 $ 3,072,704 $ 5,700,858 $ 6,206,576
------------ ------------ ------------ ------------
Other Expenses
Salaries and Wages $ 2,688,184 $ 2,674,410 $ 5,485,765 $ 5,233,377
Employee Benefits 733,748 654,836 1,437,270 1,324,420
Occupancy Expense, Net 500,958 551,816 1,103,484 1,245,428
Equipment Expense 519,298 443,282 1,042,308 909,413
Low Income Housing Partnerships 186,400 223,026 372,800 457,627
Expenses - Other Real Estate Owned 1,102,458 337,668 1,581,684 661,776
Other 2,260,145 2,408,883 4,148,594 4,566,921
------------ ------------ ------------ ------------
Total Other Expenses $ 7,991,191 $ 7,293,920 $ 15,171,905 $ 14,398,961
------------ ------------ ------------ ------------
Income before Income Taxes $ (6,782,817)$ 1,096,140 $ (7,272,249)$ 2,779,607
Provision for Income Taxes (2,731,682) 90,831 (3,259,745) 336,326
------------ ------------ ------------ ------------
Net Income $ (4,051,135)$ 1,005,308 $ (4,012,504)$ 2,443,281
============ ============ ============ ============
Per Common Share Net Income $ -0.95 $ 0.24 $ -0.94 $ 0.58
============ ============ ============ ============
Weighted Average Common Shares
Outstanding 4,262,462 4,230,193 4,247,770 4,230,193
2
MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1994 AND
THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
UNAUDITED
Net
Unrealized
Depreciation Total
Common Undivided Treasury of Invest Equity
Stock Surplus Profits Stock Securities Capital
------ -------- -------- ------- ---------- -------
Balance - December 31, 1993 $42,429 $30,647,120 $15,352,844 $(178,730) $ (143,657) $45,720,006
Net Income 2,443,281 2,443,281
Net Change in Unrealized
Depreciation of Investment
Securities (574,925) (574,925)
------- --------- --------- -------- --------- ---------
Balance - June 30, 1994 $42,429 $30,647,120 $17,796,125 $(178,730) $ (718,582) $47,588,362
Net Income (Loss) (5,333,295) (5,333,295)
Net Change in Unrealized
Depreciation of Investment
Securities 44,913 44,913
------- --------- --------- -------- --------- ---------
Balance - December 31, 1994 $42,429 $30,647,120 $12,462,830 $(178,730) $ (673,669) $42,299,980
Net Income (Loss) (4,012,504) (4,012,504)
Treasury Stock Transactions 178,730 178,730
Issuance of Common Stock 474 470,796 471,270
Net Change in Unrealized
Depreciation of Investment
Securities 757,652 757,652
------- --------- --------- -------- --------- ---------
Balance - June 30, 1995 $42,903 $31,117,916 $ 8,450,326 $ 0 $ 83,983 $39,695,128
======= ========= ========= ======== ========= =========
3
Merchants Bancshares, Inc
Consolidated Statement of Cash Flows
Unaudited
For the Six Months Ended June 30, 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES: ----------- -----------
Net Income (Loss) $ (4,012,504) $ 2,443,281
Adjustments to Reconcile Net (Loss) Income to Net
Cash Provided by Operating Activities:
Provision for Possible Loan Losses 10,300,000 2,500,000
Provision for Depreciation and Amortization 1,210,032 1,013,326
Net (Gains) Losses on Sales of Investment Securities (336,695) 18,896
Net Gains (Losses) on Sales of Loans and Leases 21,334 (109,995)
Equity in Losses of Real Estate Limited Partnerships 363,350 451,331
Decrease in Interest Receivable 1,055,008 109,031
Increase (Decrease) in Interest Payable (241,534) 304,517
(Increase) Decrease in Other Assets 486,517 (2,289,582)
Increase (Decrease) in Other Liabilities (128,372) 713,628
----------- -----------
Net Cash Provided by Operating Activities 8,717,136 5,154,433
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Investment Securities 27,126,860 0
Proceeds from Maturities of Investment Securities 34,000,000 0
Proceeds from Sales of Loans and Leases 16,927,022 28,598,728
Purchases of Available for Sale Investment Securities (36,059,463) 0
Loans Originated, net of Principal Repayments 13,607,319 9,951,856
Investments in Real Estate Limited Partnerships (147,897) (345,078)
Purchases of Premises and Equipment (302,479) (686,248)
Decrease in Net Investment in Leveraged Leases 0 27,586
----------- -----------
Net Cash Provided by (Used in) Investing Activities 55,151,362 37,546,844
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Decrease in Deposits (32,625,359) (28,485,535)
Net Decrease in Other Borrowed Funds (9,680,804) (10,493,589)
Principal Payments on Debt (22,402,344) (2,401,553)
Sale of Treasury and Common Stock 650,000 0
----------- -----------
Net Cash Used in Financing Activities (64,058,507) (41,380,677)
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents (190,009) 1,320,600
Cash and Cash Equivalents at Beginning of Period 34,851,401 30,587,986
----------- -----------
Cash and Cash Equivalents at End of Period $ 34,661,392 $ 31,908,586
=========== ===========
Total Interest Payments $ 25,259,108 $ 24,194,572
Total Income Tax Payments $ 0 $ 0
4
MERCHANTS BANCSHARES, INC
JUNE 30, 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 $2.4 million at June 30,
1995, and which requires semiannual interest payments and an annual
principal payment of $2.4 million through 1996. The Company's cash
on hand at June 30, 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 June 30, 1995, the Federal Reserve
has accepted the Company's 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 June 30, 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.
On July 14, the Federal Reserve completed the field work related
to their most recent examination of the Company as of March 31,
1995. No report has been received to date.
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 June 30, 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 June 30, 1995 required no
additional loan loss provision as a result of the adoption of this
standard. Loans deemed to be impaired by the Company totaled $40.6
million. Impaired loans in the amount of $40.6 million have been
allocated $5.4 million of the reserve for possible loan losses.
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. 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 recognized interest income on impaired loans
of $578,442 for the six months ended June 30, 1995.
In May 1995, the FASB issued SFAS No. 122, "Accounting for
Mortgage Servicing Rights." This Statement requires the
recognition of a separate asset for the rights to service mortgage
loans for others however those servicing rights are created. SFAS
No. 122 will impact the Bank as loan originations having terms in
excess of 8 years are generally sold in the secondary mortgage
market with the servicing of the related loan retained by the Bank.
In such cases, the Bank is required to allocate a portion of the
cost of the loan to the mortgage servicing right based on the
relative fair values of such servicing right and the loan. The
value of such servicing rights are to be periodically assessed for
impairment based on the fair value of those rights.
Upon adoption, SFAS No. 122 is to be applied on a prospective
basis. This Statement must be adopted no later than January 1,
1996, although earlier application is encouraged. The impact upon
adoption will be dependent primarily upon the level of loan
originations. Management is currently reviewing whether it will
adopt SFAS No. 122 in 1995 or 1996.
NOTE 3: DISPOSITION OF TROUBLED ASSETS
During the quarter ended June 30, 1995, the Bank took steps to
address the portfolio of troubled assets. On June 25, 1995, an
auction was held to sell properties held in the Other Real Estate
Owned portfolio. Twenty three properties were sold which reduced
the portfolio carrying balance by $1.3 million and generated cash
in the amount of $1.1 million. A loss of approximately $300,000
was recognized, which includes expenses of the sale.
Additionally during the quarter, the Bank entered into an
agreement to sell $6.3 million in non-performing loans. All
anticipated losses and associated expenses relating to the sale
including an additional provision for possible loan losses in the
amount of $1.3 million were recognized during the second quarter
and no additional losses from the transactions are expected to be
recognized in the third quarter. The sale closed on July 22, 1995.
Furthermore, the Bank has provided an additional amount for
the allowance for possible loan losses of approximately $5 million
to cover further exposure identified during loan renewals and
restructures.
NOTE 4: PREPAYMENT OF SUBORDINATED DEBT
On June 30, 1995, in accordance with a specific plan
authorized by the Federal Reserve Bank, the Bank prepaid the
outstanding $18 million of Subordinated Debt, which carried an
interest rate of 9.81%. The Bank was released from any further
obligations under the Subordinated Debt Agreement. A prepayment
premium of $701,400 was paid to the noteholders. The debt was
contractually scheduled to be repaid as follows: April 19, 1996 -
$2,000,000; April 19, 1997 - $12,000,000; April 19, 1998 -
$2,000,000; April 19, 1999 - $1,000,000; April 19, 2000 -
$1,000,000. The prepayment premium is reflected in interest
expense in the accompanying statement of operations.
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 six months
ended June 30, 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 June 30,
1995, the Bank was obligated for $8,538,626 of standby letters of
credit. No losses are anticipated in connection with these
commitments.
RESULTS OF OPERATIONS
1. ANALYSIS OF QUARTERLY STATEMENTS OF OPERATIONS
The net loss for the second quarter of 1995 was $4,051,135
compared to net income for the same period a year earlier of
$1,005,308. On a per share basis, the net loss represented $.95
per share compared net income of $.24 for 1994. Second quarter net
interest income before the provision for possible loan losses was
$6.01 million in 1995 as compared to $6.56 million 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 the prepayment premium on the early retirement of
the Bank's Subordinated Notes (see Footnote 4).
The provision for possible loan losses totalled $7.6 million for
the second quarter of 1995 compared to $1.25 million for the same
quarter in 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 June 30, 1995, the Company recognized
$88,000 in gains on the sale of investments, as compared to a loss
in the amount of $19,000 for the same quarter a year earlier.
Total non-interest expenses are up approximately 9.6% from the
same quarter a year ago due to higher expenses relating to the
Other Real Estate Owned portfolio (see Footnote 3).
The Company recognized $240,000 in low income housing tax credits
during each of the quarters ended June 30, 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 BANCSHARES, INC.
INTEREST MANAGEMENT AND OPERATING EXPENSE ANALYSIS
(TAXABLE EQUIVALENT BASIS)
QUARTER ENDED QUARTER ENDED QUARTER ENDED
06/30/95 12/31/94 06/30/94
Total Average Assets $651,245,049 $698,846,951 $714,124,732
------------------------ ----------------- ----------------- -----------------
AMOUNT % OF AMOUNT % OF AMOUNT % OF
ASSETS ASSETS ASSETS
INTEREST MANAGEMENT
Interest Income (T.E.) $12,700,857 7.80% $12,623,295 7.23% $12,319,388 6.90%
------------------------- ----------- ------ ---------- ------ ----------- -----
Interest Expense 6,646,750 4.08% 5,764,715 3.30% 5,613,508 3.14%
------------------------- ----------- ------ ----------- ------ ----------- -----
Net Int before Prov (T.E.) $6,054,107 3.72% $6,858,580 3.93% $6,705,880 3.76%
------------------------- ----------- ------ ----------- ------ ----------- -----
Prov for Loan Losses 7,600,000 4.67% 5,750,000 3.29% 1,250,000 0.70%
------------------------- ----------- ------ ----------- ------ ----------- -----
Net Int. Income (T.E.) ($1,545,893) -0.95% $1,108,580 0.63% $5,455,880 3.06%
------------------------- ----------- ------ ----------- ------ ----------- -----
NET OPERATING EXPENSE
Non-Interest Expense:
Personnel $3,421,932 2.10% $3,079,885 1.76% $3,329,246 1.86%
------------------------- ----------- ------ ----------- ------ ----------- -----
Occupancy 500,958 0.31% 543,663 0.31% 551,816 0.31%
------------------------- ----------- ------ ----------- ------ ----------- -----
Equipment 519,298 0.32% 545,450 0.31% 443,282 0.25%
------------------------- ----------- ------ ----------- ------ ----------- -----
Other 3,549,003 2.18% 9,474,097 5.42% 2,969,577 1.66%
------------------------- ----------- ------ ----------- ------ ----------- -----
Total $7,991,191 4.91% $13,643,095 7.81% $7,293,921 4.09%
------------------------- ----------- ------ ----------- ------ ----------- -----
Less Non-Interest Income:
Fees on Loans $704,054 0.43% $914,198 0.52% $837,895 0.47%
------------------------- ----------- ------ ----------- ------ ----------- -----
Service Charges on Dep 808,905 0.50% 798,512 0.46% 915,533 0.51%
------------------------- ----------- ------ ----------- ------ ----------- -----
Other 1,284,965 0.79% 1,432,403 0.82% 1,319,276 0.74%
------------------------- ----------- ------ ----------- ------ ----------- -----
Total $2,797,924 1.72% $3,145,113 1.80% $3,072,704 1.72%
------------------------- ----------- ------ ----------- ------ ----------- -----
Net Operating Expense $5,193,267 3.19% $10,497,982 6.01% $4,221,217 2.36%
------------------------- ----------- ------ ----------- ------ ----------- -----
SUMMARY
Net Interest Income ($1,545,893) -0.95% $1,108,580 0.63% $5,455,880 3.06%
------------------------- ----------- ------ ----------- ------ ----------- -----
Less Net Operating Exp. $5,193,267 3.19% $10,497,982 6.01% $4,221,217 2.36%
------------------------- ----------- ------ ----------- ------ ----------- -----
Profit Before Taxes ($6,739,160) -4.14% ($9,389,402) -5.37% $1,234,663 0.69%
------------------------- ----------- ------ ----------- ------ ----------- -----
NET PROFIT (LOSS) ($4,051,135) -2.49% ($6,112,611) -3.50% $1,005,308 0.56%
------------------------- ----------- ------ ----------- ------ ----------- -----
9
MERCHANTS BANCSHARES, INC
SUPPLEMENTAL INFORMATION
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1995 JUNE 30, 1994
Fully Taxable Equivalent AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAG
Includes Fees on Loans BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
----------- ----- ----------- ----- ----------- ----- ----------- -----
INTEREST EARNING ASSETS
Taxable Investments $ 89,948,218 5.32% $ 92,825,981 3.99% $ 86,067,872 5.61% $ 92,059,156 4.02%
Loans 504,512,003 9.55% 548,514,611 9.07% 499,717,562 9.53% 538,137,405 9.12%
Federal Funds Sold 3,765,729 5.74% 7,781,111 3.17% 5,318,681 4.21% 9,605,524 3.12%
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total Interest Earning Assets $598,225,950 8.89% $649,121,703 8.27% $591,104,115 8.91% $639,802,085 8.30%
=========== ===== =========== ===== =========== ===== =========== =====
INTEREST BEARING LIABILITIES
Savings, NOW & Money Market Deposits $281,845,609 3.26% $320,654,986 2.49% $278,586,583 3.28% $316,413,672 2.56%
Time Deposits 194,676,247 5.42% 196,750,349 4.51% 193,596,483 5.27% 198,253,015 4.57%
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total Savings and Time Deposits 476,521,856 4.14% 517,405,335 3.26% 472,183,066 4.10% 514,666,687 3.33%
Federal Funds Purchased & Securities Sold
Under Agreements to Repurchase 1,723,154 5.86% 1,961,993 3.09% 416,530 5.59% 984,416 3.12%
Other Borrowed Funds 53,399,259 7.51%(1) 69,716,646 6.80% 50,683,363 8.26%(1) 67,420,540 7.22%
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total Interest Bearing Liabilities 531,644,269 4.49% 589,083,974 3.68% 523,282,959 4.50% 583,071,643 3.78%
Other Liabilities & Stockholders' Equity
(Net of Non-Interest Earning Assets) 66,581,681 60,037,729 67,821,156 56,730,442
----------- ----------- ----------- -----------
Total Liabilities & Stockholders' Equity
(Net of Non-Interest Earning Assets) $598,225,950 $649,121,703 $591,104,115 $639,802,085
=========== =========== =========== ===========
Rate Spread 4.40% 4.59% 4.41% 4.52%
===== ===== ===== =====
Net Yield on Interest Earning Assets 4.91% 4.93% 4.93% 4.85%
===== ===== ===== =====
(1) Net of prepayment premium on early repayment of Subordinated Debt.
10
MERCHANTS BANCSHARES, INC.
JUNE 30, 1995
BALANCE SHEET
Average assets decreased $24.8 million during the quarter
ended June 30, 1995 from the March 31, 1995 level. Period end
investment balances decreased approximately $6.47 million during
the quarter as the Bank paid off its Subordinated Debt using funds
available and the sale of a $5 million U.S. Treasury Bond. Gross
loans, including segregated assets, are down $25.5 million during
the quarter, while other assets increased approximately $5 million
due primarily to the increase in the deferred tax asset as a result
of the quarter's operating loss.
Short term borrowings increased $6.4 million since March 31,
1995. Deposits have decreased $9.9 million during the quarter,
following historic trends of reduced deposits during the first half
of the calendar year.
Shareholders' equity decreased $3.2 million during the
quarter, due to the net loss for the quarter, a reduction of the
valuation allowance on the investment portfolio of $316,000, and
the sale of treasury and authorized but unissued common stock to
the Bank's 401(k) plan in the amount of approximately $650,000.
Tier 1 leverage capital at the Company level was 5.84% and 5.96% at
June 30, 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 loss. As part of the Merchants
Bancshares, Inc.'s analysis of specific credit risk, a detailed and
extensive review is completed on larger credits and problematic
credits identified on the watched asset list, non-performing asset
listings, and risk 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 is 90 days past due and still accruing
- 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 June 30, 1995 did
not require an additional loan loss provision as a result of the
adoption of SFAS No. 114. Loans deemed impaired totaled $40.6
million. Impaired loans have been allocated $5.4 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 June 30,
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 NPA that are covered by
loss sharing. As of June 30, 1995, NPA covered by loss sharing
totaled $10,473,000. The aggregate amount of loans covered by the
loss sharing arrangement at June 30, 1995 totaled $82,883,000.
Non-Performing Assets
(000's omitted) Regular Loss Sharing
Assets Assets Total
Nonaccrual Loans $31,767 $9,367 $41,134
Restructured Loans 2,607 66 2,673
Loans past due 90 days or
more and still accruing 446 99 545
Other Real Estate Owned 6,768 941 7,709
Total $41,588 $10,473 $52,061
The second table shows nonperforming assets as of March 31, 1995
and June 30, 1995:
NPAs (000's ommited) March 31, 1995 June 30, 1995
Nonaccrual Loans $43,637 $41,134
Loans past due 90 days or
more and still accruing 108 545
Restructured Loans 2,667 2,673
Total Non-performing Loans $46,412 $44,352
Other Real Estate Owned 9,336 7,709
Total Non-performing Assets $55,748 $52,061
Ratios March 31, 1995 June 30, 1995
Percentage of Non-performing
Loans to Total Loans 9.18% 9.24%
Percentage of Non-performing
Assets to Total Loans plus
Other Real Estate Owned 10.83% 10.68%
Percentage of RPLL to Total Loans 3.98% 3.60%
Percentage of RPLL to NPL 43.31% 38.91%
Percentage of RPLL to NPA 36.06% 33.15%
Non-performing Loans (NPL) and Non-performing Assets (NPA)
decreased by $2.0 million and $3.7 million, respectively, from
March 31, 1995 to June 30, 1995. The decrease was due to
management's continuing review of the portfolio in an effort to
charge-off any loss exposure. Losses associated with the
disposition of troubled assets (see Note 3) were reflected as of
quarter end. In addition, one large relationship was transferred to
OREO.
As previously mentioned, the loss sharing arrangement reduces
the exposure the Company faces on NPL. 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 NPL at March 31, 1995 and June 30, 1995
were 53% and 47% respectively. This level of coverage is
considered adequate based upon management's evaluation of known and
inherent risks in the portfolio. Approximately 77% of the NPL 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 NPL, the secured nature of a significant
portion of the NPL, strengthening in the local real estate market,
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 June 31, 1995.
DISCUSSION OF EVENTS AFFECTING NPA:
Significant events affecting the categories of NPA are discussed
below:
Nonaccrual Loans:
Nonaccrual loans decreased $2.5 million during the second
quarter of 1995. A review of the more significant non-accrual
loan relationships noted transfers to non-accrual for the quarter
were approximately $11.5 million. This amount was offset by
approximately $2.4 million in transfers out of non-accrual and
payments; $6.8 million in charge-offs; and $4.5 million in
transfers to OREO.
Restructured Loans:
The change in Restructured Loans was immaterial.
Other Real Estate Owned:
OREO decreased $1.6 million from March 31, 1995 to June 30,
1995. The majority of the decrease can be attributed primarily to
the sales related to the OREO Auction held by the bank on June 25,
1995, as well as other sales of OREO.
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 June 30,
1995. As of June 30, 1995, all the Bank's capital measurements
exceeded regulatory minimums.
MERCHANTS BANCSHARES, INC.
JUNE 30, 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
The annual meeting of Merchants Bancshares, Inc. was held
April 24, 1995 and the following resolution was approved by the
shareholders:
To elect the five individuals listed as nominees in the
Proxy Statement to the Board of Directors of the Company.
Item 5 - Other Issues - NONE
Item 6 - Exhibits and Reports on Form 8-K - NONE
MERCHANTS BANCSHARES, INC.
FORM 10-Q
JUNE 30, 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
AUGUST 10, 1995
Date