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, 1997
COMMISSION FILE NUMBER 0-11595
MERCHANTS BANCSHARES, INC.
(A DELAWARE CORPORATION)
EMPLOYER IDENTIFICATION NO. 03-0287342
164 College 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
4,427,873 Shares Common Stock $.01 Par Outstanding March 31, 1997
MERCHANTS BANCSHARES, INC.
INDEX TO FORM 10-Q
PART I
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996 1
Consolidated Statements of Operations
For the three months ended March 31, 1997 and 1996 2
Consolidated Statement of Stockholders' Equity
For the three months ended March 31, 1997 and 1996 and the
Year ended December 31, 1996 3
Consolidated Statements of Cash Flows
For the three months ended March 31, 1997 and 1996 4
Footnotes to Financial Statements as of March 31, 1997 5
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-11
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 12
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 14
MERCHANTS BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED
MARCH 31 DECEMBER 31,
(All figures in thousands except 1997 1996
shares outstanding and per share data)
ASSETS
Cash and Due from Banks $ 28,487 $ 29,726
Trading Securities 500 500
Investments:
Debt Securities Available for Sale $ 38,555 $ 57,656
Debt Securities Held to Maturity 103,029 86,904
Marketable Equity Securities 0 230
------- -------
Total Investments $ 141,584 $144,790
Loans 388,036 387,233
Reserve for possible loan losses 16,103 15,700
------- -------
Net Loans $ 371,933 $371,533
Federal Home Loan Bank Stock 2,841 2,841
Bank Premises and Equipment, Net 14,165 13,791
Investments in Real Estate Limited
Partnerships 2,457 2,499
Other Real Estate Owned 516 1,925
Other Assets 14,548 14,031
------- -------
Total Assets $ 577,031 $581,636
======= =======
LIABILITIES
Deposits:
Demand $ 75,998 $ 80,576
Savings, NOW and Money Market Accounts 261,870 263,882
Time Certificates of Deposit
$100,000 and over 20,544 20,370
Other Time 141,687 143,452
-------- --------
Total Deposits $ 500,099 $508,280
Demand Note Due US Treasury 3,150 3,599
Other Short Term Borrowings 9,000 6,000
Other Liabilities 10,818 11,088
-------- -------
Total Liabilities $ 523,067 $528,967
Long-Term Debt 6,419 6,420
STOCKHOLDERS' EQUITY
Common Stock, $.01 Par Value 44 44
Shares Authorized 4,700,000
Outstanding, Current Period 4,292,763
Previous 4,290,342
Preferred Stock Class A Non-Voting
Authorized - 200,000, Outstanding 0 0
Preferred Stock Class B Voting
Authorized - 1,500,000, Outstanding 0 0
Treasury Stock (At Cost) - 141,857 current period
(2,017) (2,038)
Surplus 33,157 33,154
Undivided Profits 16,266 14,845
Unrealized Gain (Loss) on Securities 95 244
------ ------
Total Stockholders' Equity $ 47,545 $ 46,249
------ ------
Total Liabilities and
Stockholders' Equity $ 577,031 $581,636
======= =======
Book Value Per Common Share $10.74 $10.78
===== =====
Note: As of March 31, 1997, the Bank had off-balance sheet liabilities
in the form of standby letters of credit to customers in the amount of $6,092.
1
THE MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(All figures in thousands except shares
outstanding and per share data QUARTER ENDED MARCH 31,
1997 1996
Interest Income
Interest on Loans $ 9,043 $ 9,838
Investment Income:
Obligations of U.S. Government 2,342 1,501
Other 61 54
Federal Funds Sold 12 84
------- -------
$ 11,458 $ 11,477
Interest Expense
Interest on Deposits $ 4,215 $ 4,588
Interest on Other Borrowings 253 270
------- -------
$ 4,468 $ 4,858
Net Interest Income $ 6,990 $ 6,619
Provision for Possible Loan Losses 300 900
Net Interest Income after ------- -------
Provision for Loan Losses $ 6,690 $ 5,719
Other Income
Fees on Loans $ 426 $ 727
Service Charges on Deposits 787 847
Gain (Loss) on Sale and Write Down of Securities (40) 90
Gain on Branch Sale 0 299
Refund of VT Franchise Tax 0 527
Other 1,014 1,149
------ -------
Total Other Income $ 2,187 $ 3,639
Other Expenses
Salaries and Wages $ 2,124 $ 2,319
Employee Benefits 596 590
Occupancy Expense, Net 597 582
Equipment Expense 535 507
Provision for Impairment of Investment Security 229 0
Equity in Losses of Real Estate
Limited Partnerships 172 206
Expenses - Other Real Estate Owned 112 1,539
Loss on Disposition of Fixed Assets 156 0
Other 1,991 1,902
------- ------
Total Other Expenses $ 6,512 $ 7,645
Income before Provision for Income Taxes $ 2,365 $ 1,713
Provision for Income Taxes 501 344
------- -------
Net Income $ 1,864 $ 1,369
Per Common Share Net Income $ 0.42 $ 0.32
Weighted Average Common Shares
Outstanding 4,423,262 4,290,342
2
MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
UNAUDITED
Net
Unrealized
Appreciation
(Depreciation) Total
Common Undivided Treasury of Invesment Equity
Stock Surplus Profits Stock Securities Capital
------ ------ ------- ------ ---------- -------
Balance - December 31, 1995 $ 44 $ 33,155 $ 8,621 $(2,038) $ 467 $ 40,249
Net Loss 1,369 1,369
Net Change in Unrealized
Appreciation/(Depreciation)
of Investment Securities, Net of Tax (1,027) (1,027)
----- ------ ----- ----- ----- ------
Balance - March 31, 1996 $ 44 $ 33,155 $ 9,990 $(2,038) $ (560) $ 40,591
----- ------ ----- ----- ----- ------
Net Income 4,855 4,855
Net Change in Unrealized
Appreciation/(Depreciation) of Securities
Available for Sale, Net of Tax 668 668
Net Change in Unrealized Appreciation
(Depreciation) of Securities Transferred
to Held to Maturity Portfolio 136 136
---- ------ ------ ------ ------ -------
Balance - December 31, 1996 $ 44 $ 33,155 $14,845 $(2,038) $ 244 $ 46,250
---- ------- ------ ------ ------ -------
Net Income 1,864 1,864
Purchase of Treasury Stock (402) (402)
Sale of Treasury Stock 2 423 425
Dividends Paid ($.10/share) (443) (443)
Net Change in Unrealized
Appreciation/(Depreciation) of Securities
Available for Sale, Net of Tax (153) (153)
Net Change in Unrealized Appreciation
(Depreciation) of Securities Transferred
to Held to Maturity Portfolio, Net of Tax 4 4
---- ------- ------ ------ ------ -------
Balance - March 31, 1997 $ 44 $ 33,157 $16,266 $(2,017) $ 95 $ 47,545
==== ======= ====== ====== ====== =======
3
MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1997 1996
(All figures in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 1,864 $ 1,369
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by Operating Activities:
Provision for Possible Loan Losses 300 900
Provision for Possible Losses on Other Real Estate Owned 10 1,351
Provision for Possible Impairment of Investment Security 230 0
Provision for Depreciation and Amortization 545 921
Net (Gains) Losses on Sales of Investments 40 (90)
Net (Gains) Losses on Sales of Loans and Leases 0 172
Net (Gains) Losses on Sales of Premises and Equipment 77 (631)
Net (Gains) Lossses on Sales of Other Real Estate Owned 17 (9)
Equity in Losses of Real Estate Limited Partnerships 172 206
Changes in Assets and Liabilities:
Decrease in Interest Receivable 283 93
Increase (Decrease) in Interest Payable (107) 143
(Increase) Decrease in Other Assets (677) 1,670
Increase (Decrease) in Other Liabilities 163 (414)
------ -------
Net Cash Provided by Operating Activities $ 2,917 $ 5,680
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Investment Securities 20,727 15,888
Proceeds from Maturities of Investment Securities 0 12,000
Proceeds from Sales of Loans and Leases 2,211 6,005
Proceeds from Sales of FHLB Stock 0 1,203
Proceeds from Sales of Premises and Equipment 6 921
Proceeds from Sales of Other Real Estate Owned 1,574 2,827
Purchases of Available for Sale Investments 0 (36,327)
Purchases of Held to Maturity Investments (18,098) 0
Principal Repayments in Excess of (Less Than)
Loans Originated (3,236) 22,438
Investments in Real Estate Limited Partnerships (130) (167)
Purchases of Premises and Equipment (1,159) (1,075)
----- ------
Net Cash Provided by Investing Activities $ 1,895 $ 23,714
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Decrease in Deposits (8,181) (29,847)
Net Increase in Other Borrowed Funds 2,551 2,384
Principal Payments on Debt (1) (7,001)
Cash Dividends Paid ($.10 per share) (444) 0
Acquisition of Treasury Stock (402) 0
Sale of Treasury Stock 426 0
Net Cash Used in Financing Activities $ (6,051) $(34,464)
----- ------
Increase (Decrease) in Cash and Cash Equivalents (1,239) (5,070)
Cash and Cash Equivalents Beginning of Year 29,726 38,367
------ -------
Cash and Cash Equivalents End of Year $ 28,487 $ 33,297
====== =======
Total Interest Payments $ 4,575 $ 4,716
Total Income Tax Payments $ 0 $ 0
Transfer of Loans to Other Real Estate Owned $ 0 $ 907
MERCHANTS BANCSHARES, INC
MARCH 31, 1997
NOTES TO FINANCIAL STATEMENTS:
See the Form 10-K filed as of December 31, 1996 for additional information.
NOTE 1: RECENT ACCOUNTING DEVELOPMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). This
Statement establishes standards for computing and presenting earnings per share
and applies to entities with publicly traded common stock or potential common
stock. SFAS 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997 and early adoption is not
permitted. When adopted, the statement will require restatement of prior
years' earnings per share. The Company will adopt this statement for its
quarter ended December 31, 1997. Assuming that SFAS No. 128 had been
implemented, basic earnings per share would not have differed materially
from those disclosed in the accompanying statements of operations.
The Bank adopted Statement of Financial Accounting Standards No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities (SFAS No. 125) commencing January 1, 1997. The
implementation of this statement had no impact on the accompanying
consolidated balance sheets and consolidated statements of operations.
NOTE 2: RECLASSIFICATION:
Certain amounts in the prior period's financial statements have been
reclassified to be consistent with the current period presentation.
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, 1997 and 1996 have been included in the financial statements.
The information was prepared from the books of Merchants Bancshares, Inc.
(the Company) and its subsidiaries, the Merchants Bank (the 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, 1997, the Bank was
obligated for $6.1 million of standby letters of credit. No losses are
anticipated in connection with these commitments.
RESULTS OF OPERATIONS
Net income for the first quarter of 1997 was $1.86 million, or $.42 per share,
compared to $1.37 million, or $.32 per share, for the same period a year
earlier. First quarter net interest income before the provision for
possible loan losses was $6.99 million in 1997 as compared to $6.62 million
for the year earlier quarter. This increase is due primarily to two
factors. The Bank has been able to increase the average yield on its
investment portfolio by 32 basis points to 6.68% at March 31, 1997 from 6.36%
at March 31, 1996. Additionally, the Bank has worked to decrease its
portfolio of nonperforming loans to $5.8 million at March 31, 1997 from
$19.8 million at March 31, 1996. This $14 million decrease in nonperforming
loans has had a significant impact on the Company's net interest income.
The decrease in nonperforming loans has also had a
positive impact on the provision for possible loan losses which totaled $300
thousand for the first quarter of 1997, as compared to $900 thousand for
the first quarter of 1996. This improvement in asset quality is due to a
combination of aggressive collections, returning loans to accruing status,
sales of nonperforming loans and charge offs and write downs of
nonperforming assets in previous periods.
Total non-interest expenses are down approximately $1.1 million (15%) from the
same quarter a year earlier. As the Bank has actively reduced its portfolio of
Other Real Estate Owned (OREO), expenses related to this portfolio have
decreased by approximately $1.4 million (92%) from the first quarter of
1996. The Bank recognized a loss of $156 thousand during the first quarter
of 1997 related to the retirement of certain fixed assets in connection with
the capital improvement project commenced in 1996. Additionally, during the
first quarter of 1997, the Bank determined that one of its investments was
permanently impaired, and made the decision to fully charge off the
investment, in the amount of $229,000.
BALANCE SHEET ANALYSIS
Total assets decreased approximately $4.6 million from December 31, 1996. This
decrease is comprised mainly of a $3.2 million decrease (2.2%) in the Bank's
investment portfolio, which is the result of principal paydowns on mortgage-
backed securities, and a $1.4 million decrease (73%) in Other Real Estate
Owned (OREO), resulting from strong efforts by
the Bank to reduce the OREO portfolio through sales.
Deposits at March 31, 1997 have decreased by $8.2 million (1.6%) from
December 31, 1996. Much of this decrease is attributable to seasonal
effects.
INCOME TAXES
The Company recognized $240 thousand and $206 thousand, respectively, in low
income housing tax credits during the quarters ended March 31, 1997 and 1996,
representing the amount of the income tax credits earned during those
quarters. The recognition of these low income housing tax credits has
reduced the Company's effective tax rate to 21% at March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity, as it pertains to banking, can be defined as the ability to generate
cash in the most economical way to satisfy loan demand, deposit withdrawal
demand, and to meet other business opportunities which require cash. The
Bank has a number of sources of liquid funds, including $18 million in
available Federal Funds lines of credit at March 31, 1997; an overnight line
of credit with the Federal Home Loan Bank (FHLB) of $15 million; an
estimated additional borrowing capacity with FHLB of $38 million; and the
ability to borrow $60 million through the use of repurchase agreements,
collateralized by the Bank's investments, with certain approved counterparties.
The schedules on pages 10-11analyze interest and overhead management in
relation to total average assets and the yield analysis for the periods
reported.
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 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
Loans deemed impaired totaled $7.5 million. Impaired loans have been allocated
$678 thousand of the RPLL.
On June 4, 1993 the Bank acquired New First National Bank of Vermont (NFNBV).
The terms of the Purchase and Assumption Agreement (the agreement) required the
FDIC to reimburse the bank 80% of the net charge-offs up to $41 million on
any loans that qualify as loss sharing loans, for a period of three years
from the date of acquisition. Losses in excess of $41 million would be
reimbursed at 95%. The agreement expired effective June 30, 1996, with
respect to the reimbursement of losses. The Bank is required to
return to the FDIC 80% of any reimbursed losses recovered, during the two year
period following the expiration date. As of June 30, 1996, the remaining
balance of loss sharing loans aggregated $48,176,000; included in that
balance was $2,928,000 in non-performing loans.
Due to the expiration of the loss sharing agreement, management adjusted the
analysis of the adequacy of the RPLL to account for 100% of the loss exposure
associated with loans which qualified as loss sharing. The RPLL analysis
prepared the quarter ended March 31,
1996 showed an increase in the reserve requirement of approximately $1.4
million, due to the expiration of the agreement. Management maintained the
RPLL at a level adequate to offset the required increase in the reserve
requirement; therefore, no additional provision was necessary due to the
expiration of the agreement.
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 as of March 31,
1996, December 31, 1996 and March 31, 1997:
NPAs (000's omitted) March 31, 1997 December 31, 1996 March 31, 1996
Nonaccrual Loans $3,316 $4,091 $16,988
Loans past due 90 days or
more and still accruing $80 $217 $192
Restructured Loans $2,362 $2,403 $2,642
Total Non-performing Loans $5,758 $6,711 $19,822
Other Real Estate Owned $516 $1,925 $4,698
Total Non-performing Assets $6,274 $8,636 $24,520
Note: Included in nonaccrual loans are certain loans whose terms have been
substantially modified in troubled debt restructuring.
Ratios March 31, 1997 December 31, 1996 March 31, 1996
Percentage of Non-
performing Loans to
Total Loans 1.48% 1.73% 4.74%
Percentage of Non-
performing Assets to
Total Loans plus Other
Real Estate Owned 1.61% 2.22% 5.79%
Percentage of RPLL to
Total Loans 4.15% 4.05% 3.68%
Percentage of RPLL
to NPL 280% 234% 77.77%
Percentage of RPLL
to NPA 257% 182% 62.87%
As noted in the above tables management has made significant reductions in the
balance of non-performing assets; the balance has been reduced approximately
75% during the twelve months ended 3/31/97. The reduction was achieved through
a combination of loan sales, charge-offs and workout/collection efforts. It
should be noted, during this period the bank continued provisions to the
RPLL, thus increasing the ratio of RPLL to NPL to 280%, as of March 31, 1997.
The trends continue as non-performing loans (NPL) and non-performing assets
(NPA) decreased by $953 thousand and $2.4 million, respectively, from
December 31, 1996 to March 31, 1997. The decrease was due to continued efforts
to diminish loss exposure through active management of non-performing assets.
Approximately 86% of the NPL are secured by real estate which significantly
reduces the Company's exposure to loss. Based upon 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 March 31, 1997.
DISCUSSION OF EVENTS AFFECTING NPA
Significant events affecting the categories of NPA are discussed below:
Nonaccrual Loans:
During the first quarter of 1997 the Bank sold approximately $2.2 million of
non-performing and adversely-classified loans. The decrease due to the loan
sale was offset, in part, by approximately $900 thousand of transfers to
non-accrual. It should be noted, approximately 65% of the balance
transferred to non-accrual consisted of one relationship.
The net result was a significant reduction in non-accruing loans.
Non-accrual loans decreased $775 thousand during the first quarter of 1997.
Restructured Loans:
The decrease in restructured loans was due to amortization of the subject
loans.
Other Real Estate Owned:
OREO decreased $1.4 million or 73%, from December 31, 1996 to March 31, 1997,
as a result of property sales. Additions to OREO were immaterial for the
quarter.
MERCHANTS BANCSHARES, INC
SUPPLEMENTAL INFORMATION
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1996
(Figures in thousands) INTEREST INTEREST
Fully Taxable Equivalent AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
Includes Fees on Loans BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- -------- ------ ------- -------- ------
INTEREST EARNING ASSETS
Taxable Investments 145,981 2,403 6.68% 98,314 1,555 6.36%
Loans (1) 387,633 9,397 9.83% 431,928 10,336 9.62%
Federal Funds Sold 915 12 5.30% 6,127 84 5.51%
------- ----- ------ ------- ------ ------
Total Interest Earning
Assets 534,529 11,812 8.96% 536,369 11,975 8.98%
INTEREST BEARING LIABILITIES
Savings, NOW and Money
Market Accounts 262,122 2,043 3.16% 271,513 2,085 3.09%
Time Deposits 163,279 2,172 5.40% 177,544 2,525 5.72%
------- ------ ------ ------- ----- -----
Total Savings and Time 425,401 4,215 4.02% 449,057 4,610 4.13%
Federal Funds Purchased and Securities
Sold Under Agreements
to Repurchase 1,616 25 6.18% 718 10 5.60%
Short Term Borrowings 6,338 83 5.33%
Other Borrowed Funds 9,799 145 5.99% 13,804 251 7.31%
----- ---- ------ ------ ---- -----
Total Interest Bearing
Liabilities 443,154 4,468 4.09% 463,579 4,871 4.23%
Other Liabilities & Stockholders'
Equity (Net of Non-Interest
Earning Assets) 91,375 72,790
------- ------
Total Liabilities & Stockholders'
Equity (Net of Non-Interest
Earning Assets) $534,529 $536,369
======== ========
Rate Spread 4.87% 4.75%
===== =====
Net Yield on Interest Earning Assets 5.57% 5.33%
===== =====
(1) Includes principal balance of non-accrual loans.
MERCHANTS BANCSHARES, INC.
INTEREST MANAGEMENT AND OPERATING EXPENSE ANALYSIS
(TAXABLE EQUIVALENT BASIS)
QUARTER ENDED YEAR ENDED QUARTER ENDED
03/31/97 12/31/96 03/31/96
Total Average Assets $573,979 $580,860 $597,851
AMOUNT % OF AMOUNT % OF AMOUNT % OF
(Figures in thousands ASSETS ASSETS ASSETS
------------------------------------------------
INTEREST MANAGEMENT
Interest Income (T.E.) $11,483 8.00% $45,807 7.89% $11,539 7.72%
Interest Expense 4,468 3.11% 18,672 3.21% 4,858 3.25%
------ ----- ------ ----- ----- -----
Net Int Before Prov (T.E.)$7,015 4.89% $27,135 4.67% $6,681 4.47%
Prov for Loan Losses 300 0.21% 3,150 0.54% 900 0.60%
------ ----- ------- ----- ------ -----
Net Int. Income (T.E.) $6,715 4.68% $23,985 4.13% $5,781 3.87%
NET OPERATING EXPENSE
Non-Interest Expense:
Personnel $2,720 1.90% $10,013 1.72% $2,909 1.95%
Occupancy 597 0.42% 2,054 0.35% 582 0.39%
Equipment 535 0.37% 2,024 0.35% 507 0.34%
Other 2,431 1.69% 12,991 2.24% 3,647 2.44%
----- ----- ------- ----- ----- -----
Total $6,283 4.38% $27,082 4.66% $7,645 5.12%
Less Non-Interest Income:
Fees on Loans $426 0.30% $2,333 0.40% $727 0.49%
Service Charges on Deposits 787 0.55% 3,347 0.58% 847 0.57%
Other 745 0.52% 5,580 0.96% 2,066 1.38%
----- ----- ------ ----- ------ -----
Total $1,958 1.36% $11,260 1.94% $3,640 2.44%
------ ----- ------ ----- ------ -----
Net Operating Expense $4,325 3.01% $15,822 2.72% $4,005 2.68%
SUMMARY
Net Interest Income $6,715 4.68% $23,985 4.13% $5,781 3.87%
Less Net Operating Exense $4,325 3.01% $15,822 2.72% $4,005 2.68%
----- ---- ------ ----- ------ -----
Profit Before Taxes $2,390 1.67% $8,163 1.41% $1,776 1.19%
----- ----- ------ ------ ----- -----
NET PROFIT $1,864 1.30% $6,224 1.07% $1,369 0.92%
====== ===== ====== ====== ===== =====
MERCHANTS BANCSHARES, INC.
MARCH 31, 1997
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Reference is made to the Form 10-K filed for the year ended December 31, 1996
for disclosure to current legal proceedings against the Company, the Bank,
the Merchants Trust Company and certain directors and trustees of the
companies.
During the fall of 1994, lawsuits were brought against the Company, the Bank,
the Trust Company (collectively referred to as "the Companies") and certain
directors of the Companies. These lawsuits related to certain investments
managed for Trust company clients and placed in the Piper Jaffray
Institutional Government Income Portfolio. Separately, and before the
suits were filed, the Companies had initiated a review of those
investments. As a result of the review, the Trust Company paid to the affected
Trust Company clients a total of approximately $9.2 million in December 1994.
The payments do not constitute a legal settlement of any claims of the
lawsuits. However, based on consultation with legal counsel, management
believes that further liability, if any, of the Companies on account of
matters complained of in the lawsuits will not have a material
adverse effect on the consolidated financial position and results of operations
of the Company. In December 1994, the Trust Company received a payment of
$6,000,000 from its insurance carriers in connection with these matters,
which was treated as a reduction in amounts reimbursed to Trust customers.
The Companies are separately pursuing claims against Piper Jaffray Companies,
Inc. and others on account of the losses that gave rise to the $9.2 million
payment by the Companies. The Companies' claims against Piper Jaffray
Companies were joined with claims of other investors in the Piper Fund in a
class action in the United States District Court for the District of
Minnesota. The class action was settled by the parties, and on December 14,
1995, the settlement was approved by the Court. By order dated January 11,
1996, the Court ordered the share of the settlement proceeds attributable to
Merchants Trust Company investments not be paid pending further
order. On February 18, 1997, the District Court entered an Order for Final
Judgment. That Order provides, among other matters, that except to the extent
(if at all) any other court with jurisdiction has given leave for some or all
of the proceeds to be deposited with that court pursuant to Vermont rule of
Civil Procedure 67, Federal Rule of Civil Procedure 67, or such other rule
as may apply, and absent an appeal, the entire net settlement proceeds
attributable to the Trust Company investments are to be paid to the Trust
Company starting approximately sixty-one days after the date of the Order. Any
recovery of settlement proceeds is subject to the terms of an agreement between
the Companies and their insurance carriers. The attorneys representing the
plaintiffs in one of the lawsuits discussed above have taken the position
that amounts recovered by the Companies on these claims should be paid to
the affected Trust Company clients (net of legal fees paid to attorneys) in
addition to the $9.2 million already paid. On or about March 17, 1997 those
attorneys filed a Notice of Appeal of the Order.
The attorneys representing the plaintiffs in one of the lawsuits discussed
above requested an award of attorneys' fees for allegedly causing the
Companies to make the $9.2 million payment and asked the Court to order the
Trust company to withhold payment of $500,000. The Trust Company resisted
the claims for payment of such fees and as a result was directed to place
the sum of $500,000 into escrow pending a ruling by the Court. On appeal by
the Companies, the United States Court of Appeals affirmed in part, vacated in
part, and reversed for further proceedings the lower court's judgment. The
attorneys representing the plaintiffs in that lawsuit have indicated that
they intend to seek damages as well as attorneys' fees. There is the
possibility that the Companies will be required to remit all or part of the
escrowed funds, or to pay damages. By a report and recommendation delivered
orally on March 14, 1997, Magistrate Judge Niedermeier found that the
lawsuit "propelled" the Bank to make the $9.2 million payment and that this was
sufficient to justify an award of attorneys' fees. Judge Niedermeier then
ordered that the full $500,000 being held in escrow, including interest
thereon, be paid to those attorneys. Counsel have advised that under the
current law applicable in the State of Vermont and the United States
District Courts for the Second Judicial district, they believe there was no
substantial basis for that award of attorneys' fees, and that even
if an award were justified that the amount substantially exceeds what is
permitted under applicable law. The Companies intend to appeal
Judge Niedermeier's decision.
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, 1997
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
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Joseph L. Boutin, President
\s\ Janet P. Spitler
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Janet P. Spitler, Treasurer
April 30, 1997
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Date