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 SEPTEMBER 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 September 30, 1995
MERCHANTS BANCSHARES, INC.
INDEX TO FORM 10-Q
PART I
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets
September 30, 1995 and 1994 and December 31, 1994 1
Consolidated Statements of Operations
For the three months ended September 30, 1995 and
1994 and the nine months ended September 30, 1995
and 1994 2
Consolidated Statement of Stockholders' Equity
For the nine months ended September 30, 1995 3
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1995 and 1994 4
Footnotes to Financial Statements as of
September 30, 1995 5-8
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-16
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 17
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 18
MERCHANTS BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET
UNAUDITED
SEPTEMBER 30 DECEMBER 31
ASSETS 1995 1994
Cash and Due from Banks $ 31,443,777 $ 34,851,401
Investments:
Debt Securities Available for Sale $ 67,631,772 $ 90,470,922
Debt Securities Held to Maturity 10,050,124 10,084,646
Marketable Equity Securities 250,758 1,195,897
------------ ------------
Total Investments $ 77,932,654 $ 101,751,465
Loans: 459,509,587 516,397,052
Reserve for possible loan losses 16,210,415 19,928,817
------------ ------------
Net Loans $ 443,299,172 $ 496,468,235
Federal Home Loan Bank Stock 2,598,000 6,856,200
Federal Funds Sold 9,700,000 0
Bank Premises and Equipment 15,531,379 16,620,173
Investments in Housing Partnerships 3,182,516 3,593,818
Other Real Estate Owned 6,203,933 7,388,807
Other Assets 28,167,510 27,306,440
------------ ------------
Total Assets $ 618,058,941 $ 694,836,539
LIABILITIES ============ ============
Deposits:
Demand $ 87,815,068 $ 94,467,122
Savings, NOW and Money Market Accounts 274,097,983 293,655,696
Time Certificates of Deposit $100,000 and Over 20,704,370 23,280,762
Other Time 162,711,651 170,820,804
------------ ------------
Total Deposits $ 545,329,072 $ 582,224,384
Federal Funds Purchased 0 15,000,000
Demand Note Due U/S Treasury 3,968,746 3,294,734
Other Liabilities 11,770,000 7,788,085
------------ ------------
Total Liabilities $ 561,067,818 $ 608,307,203
Long-Term Debt 17,825,901 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 31,117,923 30,647,120
Undivided Profits 7,728,390 12,462,820
Valuation Reserve - Marketable Equity Securities 276,006 (673,669)
------------ ------------
Total Stockholders' Equity $ 39,165,222 $ 42,299,970
Total Liabilities and ----------- ------------
Stockholders' Equity $ 618,058,941 $ 694,836,539
============ ============
Book Value Per Common Share $9.13 $10.00
======= =======
Note: As of September 30, 1995, the Bank had off-balance sheet liabilities in
the form of standby letters of credit to customers in the amount of $7,018,732
1
THE MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME
UNAUDITED
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
Interest Income 1995 1994 1995 1994
Interest on Loans $10,618,597 $11,482,403 $33,116,135 $33,960,273
Investment Income:
Obligations of US Government 866,432 761,228 2,851,173 2,333,666
Other 241,543 142,421 664,968 416,303
Federal Funds Sold 114,675 129,022 226,546 303,922
----------- ----------- ----------- -----------
$11,841,248 $12,515,074 $36,858,823 $37,014,164
----------- ----------- ----------- -----------
Interest Expense
Interest on Deposits $ 4,907,342 $ 4,589,349 $14,630,885 $13,234,035
Interest on Capital Notes
and Other Borrowings 499,898 995,492 3,295,132 3,377,903
----------- ----------- ----------- -----------
$ 5,407,240 $ 5,584,841 $17,926,017 $16,611,938
----------- ----------- ----------- -----------
Net Interest Income $ 6,434,008 $ 6,930,233 $18,932,806 $20,402,226
Provision-Possible Loan Losses 900,000 1,750,000 11,200,000 4,250,000
----------- ----------- ----------- -----------
Net Interest Income after
Provision for Loan Losses $ 5,534,008 $ 5,180,233 $ 7,732,806 $16,152,226
----------- ----------- ----------- -----------
Other Income
Fees on Loans $ 618,711 $ 789,379 $ 2,015,382 $ 2,657,125
Service Charges on Deposits 779,072 846,406 2,373,183 2,652,995
Gain (Loss) Sale of Investments (24,826) 81,059 311,869 62,163
Other 1,207,011 1,291,670 3,580,391 3,842,807
Gain on Curtailment-Pension Plan 1,562,670 0 1,562,670 0
----------- ----------- ----------- -----------
Total Other Income $ 4,142,638 $ 3,008,514 $ 9,843,495 $ 9,215,090
----------- ----------- ----------- -----------
Other Expenses
Salaries and Wages $ 2,773,412 $ 2,789,858 $ 8,259,177 $ 8,023,235
Employee Benefits 851,344 768,851 2,288,614 2,093,271
Occupancy Expense, Net 547,707 535,080 1,651,191 1,780,508
Equipment Expense 517,861 549,489 1,560,169 1,458,902
Low Income Housing Partnerships 186,399 257,754 559,199 715,381
Expenses-Other Real Estate Owned 211,218 533,105 1,792,902 1,194,881
Other 2,330,977 1,987,967 6,479,571 6,554,887
Restructure Charges & Related
Consultants' Fees 3,696,883 0 3,696,883 0
----------- ----------- ----------- -----------
Total Other Expenses $11,115,802 $ 7,422,104 $26,287,707 $21,821,065
----------- ----------- ----------- -----------
Income before Income Taxes $(1,439,156)$ 766,643 $(8,711,406)$ 3,546,251
Provision for Income Taxes (717,231) (12,662) (3,976,976) 323,664
----------- ----------- ----------- -----------
Net Income $ (721,926)$ 779,305 $(4,734,431)$ 3,222,587
=========== =========== =========== ===========
Per Common Share Net Income $ -0.17 $ 0.18 $ -1.11 $ 0.76
=========== =========== =========== ===========
Weighted Average Common Shares
Outstanding 4,290,342 4,230,192 4,262,116 4,230,192
2
MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1994 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
UNAUDITED
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 3,222,587 3,222,587
Net Change in Unrealized
Depreciation of Investment
Securities (454,826) (454,826)
------- --------- --------- -------- --------- ---------
Balance - September 30, 1994 $42,429 $30,647,120 $18,575,431 $(178,730) $(598,483) $48,487,767
Net Income (Loss) (6,112,610) (6,112,610)
Net Change in Unrealized
Depreciation of Investment
Securities (75,186) (75,186)
------- --------- --------- -------- --------- ---------
Balance - December 31, 1994 $42,429 $30,647,120 $12,462,821 $(178,730) $(673,669) $42,299,971
Net Income (Loss) (4,734,431) (4,734,431)
Treasury Stock Transactions (44,598) 178,730 134,132
Issuance of Common Stock 474 515,401 515,875
Net Change in Unrealized
Depreciation of Investment
Securities 949,675 949,675
------- --------- --------- -------- --------- ---------
Balance - September 30, 1995 $42,903 $31,117,923 $ 7,728,390 $ 0 $ 276,006 $39,165,222
======= ========= ========= ======== ========= =========
3
Merchants Bancshares, Inc.
Consolidated Statements of Cash Flows
UNAUDITED
For the Nine Months Ended September 30, 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES: ----------- -----------
Net Income (Loss) $ (4,734,431)$ 3,222,587
Adjustments to Reconcile Net (Loss) Income to Net
Cash Provided by Operating Activities:
Provision for Possible Loan Losses 11,200,000 4,250,000
Provision for Depreciation and Amortization 2,410,660 1,566,564
Net (Gains) Losses on Sales of Investment Securities (311,869) (62,163)
Net (Gains) Losses on Sales of Loans and Leases 40,661 (175,802)
Net (Gains) Losses on Sales of Premises & Equipment (223,001) 0
Equity in Losses of Real Estate Limited Partnerships 545,024 700,697
Decrease in Interest Receivable 329,069 44,219
Increase (Decrease) in Interest Payable (217,118) 493,345
(Increase) Decrease in Other Assets (1,190,139) (403,197)
Increase (Decrease) in Other Liabilities 4,199,034 853,922
----------- -----------
Net Cash Provided by Operating Activities 12,047,890 10,490,172
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Investment Securities 27,126,860 651,000
Proceeds from Maturities of Investment Securities 36,000,000 0
Proceeds from Sales of Loans and Leases 23,904,753 36,610,110
Purchases of Available for Sale Investment Securities(38,123,932) (20,201,000)
Loans Originated, net of Principal Repayments 13,364,146 12,775,404
Investments in Real Estate Limited Partnerships (147,897) (345,078)
Purchases of Premises and Equipment (620,364) (1,834,443)
Decrease in Net Investment in Leveraged Leases 0 32,353
----------- -----------
Net Cash Provided by (Used in) Investing Activities 61,503,566 27,688,346
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Decrease in Deposits (36,897,626) (23,183,406)
Net Decrease in Other Borrowed Funds (14,307,988) (10,719,252)
Principal Payments on Long-term Debt (26,403,465) (2,402,461)
Issuance of Treasury and Common Stock 649,999 0
----------- -----------
Net Cash Used in Financing Activities (76,959,080) (36,305,119)
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents (3,407,624) 1,873,399
Cash and Cash Equivalents at Beginning of Period 34,851,401 30,587,986
----------- -----------
Cash and Cash Equivalents at End of Period $ 31,443,777 $ 32,461,385
=========== ===========
Total Interest Payments $ 25,259,108 $ 24,194,572
Total Income Tax Payments $ 0 $ 0
4
MERCHANTS BANCSHARES, INC
SEPTEMBER 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 September
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 September 30, 1995 is sufficient to
service the senior debt until May, 1996.
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
had 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. The FDIC and the Commissioner are requiring
management to continue its efforts to correct certain
administrative and legal violations and enhance certain operating
policies. 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 September 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, 1995, the Federal Reserve completed the field work
related to their most recent examination of the Company as of March
31, 1995. No substantive issues were brought up as a result of the
examination. However, it appears that the Written Agreement will
remain in place until at least the next examination.
5
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 September 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 September 30, 1995
required no additional loan loss provision as a result of the
adoption of this standard. Impaired loans in the amount of $25.9
million have been allocated $2.6 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 $776,800 for the nine months ended September 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.
6
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 second 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, on June 30, 1995 the Bank 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.
NOTE 5: RESTRUCTURING
During the quarter ended September 30, 1995, the Bank began a
restructuring project to reduce ongoing operating costs and
increase noninterest income. As a result, the Bank has implemented
a plan to reduce its workforce by approximately 250 employees. All
employees were offered the opportunity to voluntarily terminate
their employment which would entitle them to a severance package
equal to one week's pay for each year of service plus four
additional weeks. Employees whose age plus years of service with
the Bank equalled 60 were offered an early retirement option,
whereby, in lieu of the plan described above, five years would be
added to both their years of service and their age for purposes of
7
determining vested benefits through the pension plan. The total
minimum severance charges anticipated to be realized by the Bank as
a result of the restructure plan is approximately $1.5 million,
which has been recognized in the current quarter. The incremental
cost of the early retirement option will be approximately $600,000
and will be recognized during the fourth quarter of 1995 when these
benefits were accepted by the employees.
In conjunction with the restructuring changes, the Bank
engaged a consulting firm to assist in the identification of
potential workforce reductions and the implementation of the
restructure plan. The fee earned by these consultants is
contingent upon actual future operating cost reductions and the
increase in noninterest income. Based on the anticipated results
and level of effort to be provided by the consultants, the Bank
recorded a fee payable to the consultants of $2.2 million in the
third quarter of 1995.
NOTE 6: CURTAILMENT OF PENSION PLAN
During the quarter ended September 30, 1995, the Bank
curtailed its pension plan. This action followed a temporary
freeze as of December 31, 1994, when all participants were vested
in the benefits they had earned to that date. No additional year
of service or age was accrued during 1995. As a result of the
permanent curtailment, the Bank recognized a gain in the amount of
$1,562,670.
NOTE 7: CORE DEPOSIT INTANGIBLE
Bank management reviewed the value of the core deposit
intangible from the purchase of the New First National Bank of
Vermont during the quarter ended September 30, 1995 by comparing
purchased deposit levels to current deposit levels in the branches
purchased. Management determined that significant deposit runoff
had occurred and determined it to be permanent in nature. As a
result of this permanent impairment, the asset was written down by
$458,300 to a recorded value which reflects the net realizable
value.
8
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, 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 September
30, 1995, the Bank was obligated for $7,018,732 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 third quarter of 1995 was $721,926 compared
to net income for the same period a year earlier of $779,305. On
a per share basis, the net loss represented $.17 per share compared
net income of $.18 for 1994. Third quarter net interest income
before the provision for possible loan losses was $6.43 million in
1995 as compared to $6.93 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 a smaller balance sheet
during 1995.
The provision for possible loan losses totalled $900,000 for the
third quarter of 1995 compared to $1.75 million for the same
quarter in 1994, due to a healthier loan portfolio after
substantial writeoffs and non-performing asset sales during the
second quarter of 1995.
As discussed in the footnotes to the financial statements, the
Bank recognized a curtailment gain from the pension plan of $1.56
million, restructure charges and related consultants' fees of $3.7
million and wrote down the core deposit intangible by $458,300 due
to permanent impairment.
Total non-interest expenses are up approximately 50% from the
same quarter a year ago due to primarily to the recognition of $3.7
million in restructuring charges and related consultants fees (see
Footnote 5 to the financial statements).
The Company recognized $240,000 in low income housing tax credits
during each of the quarters ended September 30, 1995 and 1994
representing the amount of the income tax credits 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.
On a year-to-date basis, the Company has lost $4.7 million in
1995 as compared to earning $3.2 million the previous year, due
primarily to the factors discussed above during the third quarter
and provisions for possible loan losses of $11.2 million in 1995 as
compared to $4.25 million during the first nine months of the
previous year.
9
MERCHANTS BANCSHARES, INC
SUPPLEMENTAL INFORMATION
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1994 SEPTEMBER 30, 1995 SEPTEMBER 30, 1994
Fully Taxable Equivalent AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
Includes Fees on Loans BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
----------- ----- ----------- ----- ----------- ----- ----------- -----
INTEREST EARNING ASSETS
Taxable Investments $ 86,884,159 5.10% $ 92,000,770 3.94% $ 85,271,624 5.51% $ 93,099,936 3.95%
Loans 498,624,633 9.05% 539,585,247 9.14% 493,237,790 9.53% 531,817,813 9.30%
Federal Funds Sold 7,987,391 5.74% 9,911,553 5.21% 5,115,659 5.90% 10,217,582 3.97%
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total Interest Earning Assets $ 593,496,183 8.43% $ 641,497,570 8.33% $ 583,625,073 8.91% $ 635,135,331 8.43%
=========== ===== =========== ===== =========== ===== =========== =====
INTEREST BEARING LIABILITIES
Savings, NOW & Money Market $ 281,136,445 3.19% $ 315,226,338 2.67% $ 280,445,205 3.24% $ 314,039,004 2.61%
Time Deposits 193,143,140 5.49% 199,279,516 4.96% 191,585,899 5.40% 200,306,017 4.66%
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total Savings & Time Deposits 474,279,585 4.12% 514,505,854 3.56% 472,031,104 4.11% 514,345,021 3.41%
Federal Funds Purchased &
Securities Sold Under
Agreements to Repurchase 12,480 5.77% 853,342 3.26% 1,173,736 5.89% 722,268 3.29%
Other Borrowed Funds 29,431,380 6.29% 65,031,456 6.20% 45,678,145 9.51%(1) 62,642,370 7.32%
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total Interest Bearing Liabilities 503,723,445 4.25% 580,390,652 3.85% 518,882,985 4.59% 577,709,659 3.83%
Other Liabilities & Stockholders' Equity
(Net of Non-Interest
Earning Assets) 89,772,738 61,106,918 64,742,088 57,425,672
----------- ----------- ----------- -----------
Total Liabilities & Stockholders' Equity
(Net of Non-Interest
Earning Assets) $ 593,496,183 $ 641,497,570 $ 583,625,073 $ 635,135,331
=========== =========== =========== ===========
Rate Spread 4.18% 4.48% 4.32% 4.59%
===== ===== ===== =====
Net Yield on Interest Earning Assets 4.82% 4.85% 4.83% 4.94%
===== ===== ===== =====
(1) Net of prepayment premium on early repayment of Subordinated Debt.
10
MERCHANTS BANCSHARES, INC.
INTEREST MANAGEMENT AND OPERATING EXPENSE ANALYSIS
(TAXABLE EQUIVALENT BASIS)
QUARTER ENDED QUARTER ENDED QUARTER ENDED
09/30/95 12/31/94 09/30/94
Total Average Assets $622,606,236 $698,846,951 $699,705,500
------------------------ -------------------- --------------------- ---------------------
AMOUNT % OF AMOUNT % OF AMOUNT % OF
ASSETS ASSETS ASSETS
INTEREST MANAGEMENT
Interest Income (T.E.) $11,881,600 7.63% $12,623,295 7.23% $12,571,276 7.19%
--------------------------- -------------------- --------------------- ---------------------
Interest Expense 5,407,240 3.47% 5,764,715 3.30% 5,584,841 3.19%
--------------------------- -------------------- --------------------- ---------------------
Net Int before Prov (T.E.) $6,474,360 4.16% $6,858,580 3.93% $6,986,435 3.99%
--------------------------- -------------------- --------------------- ---------------------
Prov for Loan Losses 900,000 0.58% 5,750,000 3.29% 1,750,000 1.00%
--------------------------- -------------------- --------------------- ---------------------
Net Int. Income (T.E.) $5,574,360 3.58% $1,108,580 0.63% $5,236,435 2.99%
--------------------------- -------------------- --------------------- ---------------------
NET OPERATING EXPENSE
Non-Interest Expense:
Personnel $3,624,756 2.33% $3,079,885 1.76% $3,558,709 2.03%
--------------------------- -------------------- --------------------- ---------------------
Occupancy 547,707 0.35% 543,663 0.31% 535,080 0.31%
--------------------------- -------------------- --------------------- ---------------------
Equipment 517,861 0.33% 545,450 0.31% 549,489 0.31%
--------------------------- -------------------- --------------------- ---------------------
Other 6,425,478 4.13% 9,474,097 5.42% 2,778,826 1.59%
--------------------------- -------------------- --------------------- ---------------------
Total $11,115,802 7.14% $13,643,095 7.81% $7,422,104 4.24%
--------------------------- -------------------- --------------------- ---------------------
Less Non-Interest Income:
Fees on Loans $618,711 0.40% $914,198 0.52% $789,379 0.45%
--------------------------- -------------------- --------------------- ---------------------
Service Charges on Dep 779,072 0.50% 798,512 0.46% 846,406 0.48%
--------------------------- -------------------- --------------------- ---------------------
Other 2,744,855 1.76% 1,432,403 0.82% 1,372,729 0.78%
--------------------------- -------------------- --------------------- ---------------------
Total $4,142,638 2.66% $3,145,113 1.80% $3,008,514 1.72%
--------------------------- -------------------- --------------------- ---------------------
Net Operating Expense $6,973,164 4.48% $10,497,982 6.01% $4,413,590 2.52%
--------------------------- -------------------- --------------------- ---------------------
SUMMARY
Net Interest Income $5,574,360 3.58% $1,108,580 0.63% $5,236,435 2.99%
--------------------------- -------------------- --------------------- ---------------------
Less Net Operating Exp. $6,973,164 4.48% $10,497,982 6.01% $4,413,590 2.52%
--------------------------- -------------------- --------------------- ---------------------
Profit Before Taxes ($1,398,804) -0.90% ($9,389,402) -5.37% $822,845 0.47%
--------------------------- -------------------- --------------------- ---------------------
NET PROFIT (LOSS) ($721,926) -0.46% ($6,112,611) -3.50% $779,305 0.45%
--------------------------- -------------------- --------------------- ---------------------
11
MERCHANTS BANCSHARES, INC.
SEPTEMBER 30, 1995
BALANCE SHEET
Average assets decreased $15.1 million during the quarter
ended September 30, 1995 from the June 30, 1995 level. Period end
investment balances remained approximately constant during the
quarter at $77.9 million. Gross loans, including segregated
assets, are down $20.4 million during the quarter, while other
assets increased approximately $2.4 million due primarily to the
increase in the deferred tax asset as a result of the quarter's
operating loss and a prepaid asset recognized with the gain on the
curtailment of the pension plan.
Short term borrowings decreased $4 million since June 30,
1995. Deposits have decreased $4 million during the quarter,
following historic trends of reduced runoff during the last half of
the calendar year.
Shareholders' equity decreased $530,155 during the quarter,
due to the net loss for the quarter and an increase in the
valuation allowance on the investment portfolio of $192,023. Tier
1 leverage capital at the Bank level was 5.85% and 5.96% at
September 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.
The Financial Accounting Standards Board ("FASB") issued
revised 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
12
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 September 30, 1995
did not require an additional loan loss provision as a result of
the adoption of SFAS No. 114. Loans deemed impaired totaled $25.9
million. Impaired loans have been allocated $2.6 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
September 30, 1995 covered by a loss sharing arrangement related to
13
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 September 30, 1995, NPA covered by loss
sharing totaled $9,665,000. The aggregate amount of loans covered
by the loss sharing arrangement at June 30, 1995 totaled
$75,564,000.
NPA Regular Loss Sharing Total
(000's omitted) Assets Assets
Nonaccrual Loans $16,895 $8,917 $25,812
Restructured Loans 1,371 66 1,437
Loans past due 90
days or more and
still accruing 805 0 805
Other Real Estate Owned 5,522 682 6,204
Total $24,593 $9,665 $34,258
The second table shows nonperforming assets as of June 30, 1995 and
September 30, 1995:
NPAs (000's ommited) June 30, 1995 September 30, 1995
Nonaccrual Loans $41,134 $25,812
Loans past due 90 days or
more and still accruing 545 805
Restructured Loans 2,673 1,437
Total Non-performing Loans $44,352 $28,054
Other Real Estate Owned 7,709 6,204
Total Non-performing Assets $52,061 $34,258
Ratios June 30, 1995 September 30, 1995
Percentage of Non-performing
Loans to Total Loans 9.24% 6.11%
Percentage of Non-performing
Assets to Total Loans plus
Other Real Estate Owned 10.68% 7.36%
Percentage of RPLL to Total Loans 3.60% 3.51%
Percentage of RPLL to NPL 38.91% 57.46%
Percentage of RPLL to NPA 33.15% 47.05%
Non-performing Loans (NPL) and Non-performing Assets (NPA)
decreased by $16.3 million and $17.8 million, respectively, from
June 30, 1995 to September 30, 1995. The decrease was due to
14
management s continuing review of the portfolio in an effort to
diminish any loss exposure.
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 June 30, 1995 and September 30,
1995 were 47% and 77%, respectively. This level of coverage is
considered adequate based upon management's evaluation of known and
inherent risks in the portfolio. Approximately 84% 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, a minor 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 September 30, 1995.
DISCUSSION OF EVENTS AFFECTING NPA:
Significant events affecting the categories of NPA are discussed
below:
Nonaccrual Loans:
Nonaccrual loans decreased $15.3 million during the third
quarter of 1995. A review of the more significant non-accrual
loan relationships noted transfers to non-accrual for the quarter
were approximately $1.8 million. This amount was offset by
approximately $8.2 million in payments and pay-offs; $2.3 million
in charge-offs; and $3.7 million in proceeds from the non-
performing loan sale, which closed on July 22, 1995.
Restructured Loans:
Restructured loans decreased $1.2 million, during the third
quarter. The decrease was attributable to $574 thousand in
charge-offs and $655 thousand in payments and pay-offs.
Other Real Estate Owned:
OREO decreased $1.5 million from June 30, 1995 to September 30,
1995. The majority of the decrease can be attributed sales from
the OREO portfolio. Additions for the quarter were immaterial.
15
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 September
30, 1995. As of September 30, 1995, all the Bank's capital
measurements exceeded regulatory minimums.
16
MERCHANTS BANCSHARES, INC.
SEPTEMBER 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 -
NONE
Item 5 - Other Issues - NONE
Item 6 - Exhibits and Reports on Form 8-K - NONE
17
MERCHANTS BANCSHARES, INC.
FORM 10-Q
SEPTEMBER 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
November 7, 1995
Date
18