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, 1999
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 [ ]
--- ---
4,357,375 Shares Common Stock $.01 Par Outstanding September 30, 1999
MERCHANTS BANCSHARES, INC.
INDEX TO FORM 10-Q
PART I
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 1
Consolidated Statements of Operations
For the three months ended September 30, 1999 and 1998 and
the nine months ended September 30, 1999 and 1998 2
Consolidated Statements of Comprehensive Income
For the three months ended September 30, 1999 and 1998 and
the nine months ended September 30, 1999 and 1998 3
Consolidated Statement of Changes in Stockholders' Equity
For the nine months ended September 30, 1999 and 1998 and
the Year ended December 31, 1998 4
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1999 and 1998 5
Footnotes to Financial Statements as of September 30, 1999 6-7
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-16
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 17-18
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 19
Merchants Bancshares, Inc.
Consolidated Balance Sheets
Unaudited
September 30, December 31,
(In thousands except share and per share data) 1999 1998
- -------------------------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 25,511 $ 30,528
Investments:
Debt Securities Held for Sale 62,990 72,205
Debt Securities Held to Maturity 124,551 103,851
(Fair Value of $122,365 and $108,198)
Trading Securities 1,037 1,095
------------------------
Total Investments 188,578 177,151
------------------------
Loans 426,857 405,492
Reserve for possible loan losses 11,345 11,300
------------------------
Net Loans 415,512 394,192
------------------------
Federal Home Loan Bank Stock 2,951 2,482
Federal Funds Sold 4,000 --
Bank Premises and Equipment, Net 12,446 13,185
Investment in Real Estate Limited Partnerships 2,856 2,860
Other Real Estate Owned 28 470
Other Assets 14,935 14,005
------------------------
Total Assets $666,817 $634,873
========================
LIABILITIES
Deposits:
Demand $ 83,515 $ 85,998
Savings, NOW and Money Market Accounts 347,971 309,897
Time Deposits $100 thousand and Greater 23,789 22,746
Other Time 122,600 131,821
------------------------
Total Deposits 577,875 550,462
------------------------
Demand Note Due U.S. Treasury 4,000 283
Other Short-Term Borrowings 9,000 9,000
Other Liabilities 5,834 7,890
Long-Term Debt 6,634 6,409
------------------------
Total Liabilities 603,343 574,044
------------------------
Commitments and Contingencies (Note 4)
STOCKHOLDERS' EQUITY
Preferred Stock Class A Non-Voting
Authorized - 200,000, Outstanding 0 -- --
Preferred Stock Class B Voting
Authorized - 1,500,000, Outstanding 0 -- --
Common Stock, $.01 Par Value 44 44
Shares Authorized 7,500,000
Outstanding, Current Period 4,215,097
Prior Period 4,259,278
Treasury Stock (At Cost) (4,237) (3,133)
Current Period 219,523
Prior Period 175,342
Capital in Excess of Par Value 33,081 33,073
Retained Earnings 33,393 28,308
Deferred Compensation Arrangements 2,317 2,166
Unrealized Gains (losses) on Securities
Available for Sale, Net (1,124) 371
------------------------
Total Stockholders' Equity 63,474 60,829
------------------------
Total Liabilities and Stockholders' Equity $666,817 $634,873
========================
Book Value Per Common Share $ 14.57 $ 13.84
========================
The accompanying notes are an integral part of these consolidated financial
statements.
Merchants Bancshares, Inc.
Consolidated Statements of Operations
Unaudited
Quarter Ended September 30, Nine months ended September 30,
(In thousands except per share data) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans $ 9,312 $ 9,073 $27,267 $27,692
Interest and Dividends on Investments
U.S. Treasury and Agency Obligations 2,603 2,701 7,890 7,987
Other 431 195 974 338
---------------------------------------------------
Total Interest Income 12,346 11,969 36,131 36,017
---------------------------------------------------
INTEREST EXPENSE
Savings, NOW and Money Market Accounts 2,555 2,393 7,313 6,814
Time Deposits $100 Thousand and Greater 366 401 1,028 1,182
Other Time Deposits 1,449 1,751 4,549 5,290
Other Borrowed Funds 79 26 373 271
Debt 118 116 351 344
---------------------------------------------------
Total Interest Expense 4,567 4,687 13,614 13,901
---------------------------------------------------
Net Interest Income 7,779 7,282 22,517 22,116
Provision for Possible Loan Losses (134) -- (134) (119)
---------------------------------------------------
Net Interest Income after Provision
for Loan Losses 7,913 7,282 22,651 22,235
---------------------------------------------------
NONINTEREST INCOME
Trust Company Income 426 410 1,339 1,329
Service Charges on Deposits 774 649 2,171 2,072
Settlement proceeds -- -- 1,326 120
Gain (Loss) on Sale of Investments, Net -- 44 -- 44
Other 325 315 889 999
---------------------------------------------------
Total Noninterest Income 1,525 1,418 5,725 4,564
---------------------------------------------------
NONINTEREST EXPENSES
Salaries and Wages 2,508 2,309 7,185 6,767
Employee Benefits 547 420 1,806 1,527
Occupancy Expense, Net 473 473 1,714 1,513
Equipment Expense 568 636 1,690 1,895
Legal and Professional Fees 587 323 1,579 1,626
Marketing 315 315 889 758
Equity in Losses of Real Estate
Limited Partnerships 143 94 397 263
(Income) Expenses - Other Real Estate Owned (280) 51 (133) 175
Loss on Disposition of Fixed Assets 46 45 148 100
Other 1,151 913 3,263 2,952
---------------------------------------------------
Total Noninterest Expenses 6,058 5,579 18,538 17,576
---------------------------------------------------
Income Before Income Taxes 3,380 3,121 9,838 9,223
Provision for Income Taxes 779 789 2,249 2,337
---------------------------------------------------
NET INCOME $ 2,601 $ 2,332 $ 7,589 $ 6,886
===================================================
Basic Earnings Per Common Share $ 0.59 $ 0.53 $ 1.73 $ 1.55
Diluted Earnings Per Common Share $ 0.59 $ 0.53 $ 1.73 $ 1.55
The accompanying notes are an integral part of these consolidated financial
statements.
Merchants Bancshares, Inc.
Consolidated Statements of Comprehensive Income
Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 1999 1998 1999 1998
- -------------- ------------------------------------------
Net Income as Reported $2,601 $2,332 $7,589 $6,886
Change in Net Unrealized Appreciation (Depreciation)
of Securities, Net of Tax 557 335 (845) 236
Less: Reclassification Adjustments for
Securities Gains Included in Net Income,
Net of Taxes -- (29) -- (29)
------------------------------------------
Comprehensive Income Before Transfers
From Available for Sale to Held to Maturity 3,158 2,638 6,744 7,093
Impact of transfer from Available for Sale to
Held to Maturity (648) 1 (650) (1)
------------------------------------------
Comprehensive Income $2,510 $2,639 $6,094 $7,092
==========================================
The accompanying notes are an integral part of these consolidated financial
statements.
Merchants Bancshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
For the Year Ended December 31, 1998 and
the nine months ended September 30, 1999 and 1998
Unaudited
Net Unrealized
Appreciation
Capital in Deferred (Depreciation)
Common Excess of Retained Treasury Compensation of Investment
(In thousands) Stock Par Value Earnings Stock Arrangements Securities Total
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $44 $33,223 $21,537 $(2,220) $ (10) $ 362 $52,936
Net Income -- -- 6,886 -- -- -- 6,886
Purchase of Treasury Stock -- -- -- (846) -- -- (846)
Sale of Treasury Stock -- (61) -- 344 -- -- 283
Issuance of Stock under
Employee Stock Option Plans -- (76) -- 225 -- -- 149
Dividends Paid -- -- (2,213) (24) -- -- (2,237)
Unearned Compensation --
Restricted Stock Awards -- -- -- -- (14) -- (14)
Deferred Compensation -- -- -- -- 2,131 -- 2,131
Change in Net Unrealized Appreciation
(Depreciation) of Securities
Available for Sale, Net of Tax -- -- -- -- -- 207 207
Change in Net Unrealized Appreciation
of Securities Transferred to the Held
to Maturity Portfolio, Net of Tax -- -- -- -- -- (1) (1)
----------------------------------------------------------------------------------
Balance September 30, 1998 44 33,086 26,210 (2,521) 2,107 568 59,494
Net Income -- -- 2,936 -- -- -- 2,936
Purchase of Treasury Stock -- -- -- (574) -- -- (574)
Sales of Treasury Stock -- 61 -- (344) -- -- (283)
Issuance of Stock under
Employee Stock Option Plans -- (134) -- 149 -- -- 15
Tax Benefit Related to Stock
Option Exercises -- 60 -- -- -- -- 60
Issuance of Stock under
Deferred Compensation Arrangements -- -- -- 133 -- -- 133
Dividends Paid -- -- (838) 24 -- -- (814)
Unearned Compensation --
Restricted Stock Awards -- -- -- -- (6) -- (6)
Deferred Compensation -- -- -- -- 65 -- 65
Change in Net Unrealized Appreciation
(Depreciation) of Securities
Available for Sale, Net of Tax -- -- -- -- -- (196) (196)
Change in Net Unrealized Appreciation
of Securities Transferred to the Held
to Maturity Portfolio, Net of Tax -- -- -- -- -- (1) (1)
----------------------------------------------------------------------------------
Balance, December 31, 1998 44 33,073 28,308 (3,133) 2,166 371 60,829
Net Income -- -- 7,589 -- -- -- 7,589
Purchase of Treasury Stock -- -- -- (1,238) -- -- (1,238)
Sale of Treasury Stock -- -- -- 103 -- -- 103
Issuance of Stock under
Deferred Compensation Arrangements -- -- -- 31 (31) --
Dividends Paid -- -- (2,504) -- -- -- (2,504)
Unearned Compensation --
Restricted Stock Awards -- 8 -- -- 182 -- 190
Change in Net Unrealized Appreciation
(Depreciation) of Securities
Available for Sale, Net of Tax -- -- -- -- -- (845) (845)
Change in Net Unrealized Appreciation
of Securities Transferred to the Held
to Maturity Portfolio, Net of Tax -- -- -- -- -- (650) (650)
----------------------------------------------------------------------------------
Balance, September 30, 1999 $44 $33,081 $33,393 $(4,237) $2,317 $(1,124) $63,474
The accompanying notes are an integral part of these consolidated financial
statements.
Merchants Bancshares, Inc.
Consolidated Statement of Cash Flows
Unaudited
For the nine months ended September 30, 1999 1998
- -------------------------------------------------------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 7,589 $ 6,886
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Possible Loan Losses (134) (119)
Provision for Possible Losses on Other Real Estate Owned -- 7
Provision for Depreciation and Amortization 1,862 1,967
Net Gains on Sales of Investment Securities -- (44)
Net Gains on Sales of Loans and Leases -- (213)
Net Losses on Sales of Premises and Equipment 148 100
Net Gains on Sales of Other Real Estate Owned (330) (73)
Equity in Losses of Real Estate Limited Partnerships 396 224
Changes in Assets and Liabilities:
Increase in Interest Receivable (336) (369)
Decrease in Interest Payable (501) (143)
Increase in Other Assets (596) (3,920)
Decrease in Other Liabilities (1,556) (3,563)
--------------------
Net Cash Provided by (Used in) Operating Activities 6,542 740
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Investment Securities Available for Sale -- 14,053
Proceeds from Maturities of Securities Available for Sale 9,507 13,239
Proceeds from Maturities of Securities Held to Maturity 21,894 13,266
Proceeds from Sales of Loans and Leases -- 14,231
Purchases of Federal Home Loan Bank Stock (468) (186)
Proceeds from Sales of Other Real Estate Owned 947 731
Purchases of Available for Sale Investment Securities (23,303) (48,157)
Purchases of Held to Maturity Investment Securities (21,919) (5,232)
Loan Originations in Excess of Principal Repayments (20,595) (20,547)
Investments in Real Estate Limited Partnerships (416) (418)
Purchases of Premises and Equipment (694) (1,099)
---------------------
Net Cash Used in Investing Activities (35,047) (20,119)
---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 27,414 26,173
Net Increase (Decrease) in Other Borrowed Funds 3,717 (6,623)
Principal Payments on Debt (35) (4)
Cash Dividends Paid (2,504) (2,237)
Acquisition of Treasury Stock (1,238) (294)
Proceeds From Sales of Treasury Stock 103 283
Issuance of Stock Under Deferred Compensation Arrangements 31 --
Proceeds From Exercise of Employee Stock Options -- 149
--------------------
Net Cash Provided by Financing Activities 27,488 17,447
--------------------
Increase (Decrease) in Cash and Cash Equivalents (1,017) (1,932)
Cash and Cash Equivalents Beginning of Year 30,528 20,139
--------------------
Cash and Cash Equivalents End of Period $ 29,511 $ 18,207
====================
Total Interest Payments $ 14,115 $ 14,044
Total Income Tax Payments 3,800 1,420
Transfer of Loans and Premises to Other Real Estate Owned 161 381
The accompanying notes are an integral part of these consolidated financial
statements.
MERCHANTS BANCSHARES, INC.
SEPTEMBER 30, 1999
NOTES TO FINANCIAL STATEMENTS:
See the Form 10-K filed as of December 31, 1998 for additional information.
NOTE 1: RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities". This statement
establishes standards for reporting and accounting for derivative
instruments ("derivatives") and hedging activities. The statement requires
that derivatives be reported as assets or liabilities in the Consolidated
Balance Sheets and that derivatives be reported at fair value. The statement
establishes criteria for accounting for changes in the fair value of
derivatives based on the intended use of the derivatives. The statement is
effective for all fiscal quarters of fiscal years beginning after June 15,
2000. Based on Merchants Bank's (the Bank's) current use of derivatives
Merchants Bancshares, Inc. (the Company) does not expect the adoption of
SFAS No. 133 to have a material impact on the Company's financial position
or results of operations.
NOTE 2: EARNINGS PER SHARE
The following table presents a reconciliation of the calculations of basic
and diluted earnings per share for the quarter and nine-months ended
September 30, 1999:
Net Per Share
Quarter Ended September 30, 1999 Income Shares Amount
- -------------------------------- --------------------------------------------
(In thousands except share and per share data)
Basic Earnings Per Share:
Income Available to Common
Shareholders $2,601 4,365,774 $0.59
Diluted Earnings Per Share:
Options issued to Executives -- 8,524
Income available to Common Shareholders
Plus Assumed Conversions $2,601 4,374,298 $0.59
================================
Net Per Share
Nine Months Ended September 30, 1999 Income Shares Amount
- ------------------------------------ --------------------------------------------
(In thousands except share and per share data)
Basic Earnings Per Share:
Income Available to Common
Shareholders $7,589 4,376,388 $1.73
Diluted Earnings Per Share:
Options issued to Executives -- 7,160
Income available to Common Shareholders
Plus Assumed Conversions $7,589 4,383,497 $1.73
================================
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
quarter. The computation of diluted earnings per share for the quarter ended
September 30, 1999 excludes the effect of assuming the exercise of certain
outstanding stock options because the effect would be anti-dilutive. As of
September 30, 1999 there were 51,070 of such options outstanding with an
exercise price of $27.75, 48,345 of such options outstanding with an
exercise price of $30.50, and 56,597 of such options with an exercise price
of $26.25.
NOTE 3: STOCK REPURCHASE PROGRAM
On October 21, 1999 the Company announced that its Board of Directors has
authorized the Company to repurchase, through October 31, 2000, up to 120
thousand shares of its own securities. Under the repurchase plan the stock
may be purchased from time to time, subject to prevailing market conditions.
Purchases are to be made on the open market and funded from available cash.
The Company's previous stock repurchase program expired September 4, 1999.
The Company purchased 83 thousand of its own shares at a total cost of $2
million under that program.
NOTE 4: COMMITMENTS AND CONTINGENCIES:
The Bank is a counterclaim defendant in a litigation entitled Pasquale and
Vatsala Vescio, Counterclaim Plaintiffs v. The Merchants Bank, Counterclaim
Defendant, now pending in the United States Bankruptcy Court for the
District of Vermont.
In this litigation, the Vescios have made a number of "lender liability"
claims dealing with a commercial development known as Brattleboro West in
Brattleboro, Vermont. The pending litigation arose out of a suit to
foreclose on several real estate mortgages and personal property delivered
to the Bank as collateral by the Vescios in connection with the financing of
a supermarket in the Brattleboro West project and various other projects.
Among other things, the Vescios have alleged that the Bank or its
representatives violated supposed oral promises in connection with the
origination and funding of the financing, and have claimed that the Bank is
liable to them for damages based on the Bank's supposed "control" of the
project and its alleged breach of covenants of "good faith" which the
plaintiffs believe are to be implied from the loan documents. In addition,
the plaintiffs have contended that the Bank breached a duty of care they
believe it owed to them, and have claimed that the Bank should not have
exercised its contract rights when the loan went into default, but should
have worked out the default in a way that was more favorable to the
borrowers. Trial concluded in United States Bankruptcy Court in November
1998. In June of 1999, before entry of any findings or a decision on the
merits, the trial judge recused himself from all cases involving the Bank.
He completed his term as bankruptcy judge on July 31, 1999. On September 30,
1999, United States District Court Judge William Sessions withdrew the
reference of the case to the Bankruptcy Court and ruled that he would decide
the case himself on the basis of a combination of the Bankruptcy Court trial
record and rehearing certain testimony of certain witnesses. That hearing is
now scheduled for February, 2000. The timing of a decision on the merits
of the case at the trial level cannot be predicted at this time. Although it
is not possible at this stage to predict the outcome of this litigation, the
Bank believes that it has meritorious defenses to the plaintiffs'
allegations. The Bank intends to vigorously defend itself against these
claims.
On March 25, 1999 the Trust Company received, as trustee, a recovery of $4.8
million on account of settlement of a 1994 class action suit filed in the
United States District Court for the District of Minnesota. The Trust
Company's claims, and the class action, arose from investments made in 1994
and earlier in the so-called Piper Jaffray Institutional Government Income
Portfolio ("Piper Jaffray"). In the first quarter of 1999, the company
realized $1.3 million as a result of that recovery. During the third quarter
of 1999 the Trust Company disbursed the recovery, partly to itself and the
balance in accordance with instructions provided by the Company's insurance
carrier, pursuant to an agreement made with the carrier in December of
1994.
Lawyers representing the beneficiaries of five Trust Company accounts have
asserted that their clients (the "Named Customers") and others similarly
situated have not been fully reimbursed for damages allegedly suffered
because of certain investments made by the Trust Company during 1993 and
1994 in Piper Jaffray. The Companies believe full reimbursement has been
provided and that the Trust Company has no further liability on account of
the Piper Jaffray investment. On July 15, 1999 the Trust company filed an
action with the United States District Court for the District of Vermont
seeking a declaratory judgement that the Trust Company has no further
liability to the Named Customers.
Merchants Bancshares, Inc. and certain of its subsidiaries have been named
as defendants in various other legal proceedings arising from their normal
business activities. Although the amount of any ultimate liability with
respect to such proceedings cannot be determined, in the opinion of
management, based upon the opinion of counsel on the outcome of such
proceedings, any such liability will not have a material effect on the
consolidated financial position of Merchants Bancshares, Inc. and its
subsidiaries.
NOTE 5: RECLASSIFICATION
Certain amounts reported for prior periods 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 nine months ended
September 30, 1999 and 1998 have been included in the financial statements.
The information was prepared from the books of Merchants Bancshares, Inc.
(the Company) and its subsidiaries, Merchants Bank (the Bank) and Merchants
Properties, Inc., without audit.
In the ordinary course of business, Merchants Bank makes commitments for
possible future extensions of credit. On September 30, 1999, the Bank was
obligated to fund $7.6 million of standby letters of credit. No losses are
anticipated in connection with these commitments.
OVERVIEW
Merchants Bancshares, Inc. earned net income of $2.60 million, or basic and
diluted earnings per share of $.59 for the quarter ended September 30, 1999,
compared to $2.33 million, or basic and diluted earnings per share of $.53
per share for the same period a year earlier. The return on average assets
and return on average equity for the third quarter of 1999 were 1.58% and
16.58%, respectively, compared to 1.54% and 16.52% for the third quarter of
1998.
During the quarter the Bank recognized a recovery on a previously charged
down loan of $134 thousand. This amount was credited to income through the
provision for loan losses. Additionally, the Bank recovered $43 thousand in
previously unrecognized interest income on the same relationship. The Bank
also recognized $317 thousand in gains pursuant to the sale of certain
foreclosed real estate. Legal expenses of $296 thousand, net of $54 thousand
in recoveries, related to certain ongoing litigation were also recorded
during the quarter. See Part II, Item 1 "Legal Proceedings" for more
information on this litigation.
Merchants Bank acquired two Vermont National Bank branches from Chittenden
Corporation on November 1, 1999, This acquisition was part of the branch
divestiture resulting from the merger of Chittenden Corporation and Vermont
Financial Services Corporation, the parent company of Vermont National Bank.
The Bank purchased $34.8 million in loans and assumed $38.8 million in
deposits at a 3.2% premium. Costs incurred related to the branch acquisition
totaled $23 thousand for the quarter and $123 thousand year to date.
The Bank has worked for the past two years to develop alternative delivery
options for its core retail products. It recently signed an agreement with a
Middlebury, Vermont based group of insurance companies, which markets its
products under the name Co-operative Insurance Companies (The "Co-op").
Under the agreement Co-op agents will sell the Bank's products and will be
paid commissions based on product sales. Initially Co-op agents will market
the Bank's residential mortgage products, and it is anticipated among the
parties that the retail deposit products of the Bank will be introduced to
the agent network, pending regulatory approval.
RESULTS OF OPERATIONS
Net Interest Income: The Bank continued to experience margin compression,
due primarily to the flat yield curve that has been prevalent for much of
1999, compared to 1998. The Bank's net interest margin was eight basis
points lower for the third quarter of 1999 compared to the third quarter of
1998; and was 28 basis points lower for the first nine months of 1999
compared to the same period in 1998. However, after decreasing for the first
six months of the year, the Bank's margin started to rebound in the third
quarter of 1999, increasing eight basis points over the second quarter of
the current year. The Bank's average interest earning assets were $42
million higher for the first nine months of 1999 than they were for the
first nine months of 1998. At the same time, the Bank's interest bearing
liabilities were $41 million higher than the same period in 1998. The Bank's
average yield on interest earning assets decreased 58 basis points for the
first nine months of 1999 compared to the same period in 1998; while the
cost of funds has decreased by 41 basis points. The interest rate spread
decreased 16 basis points period over period. This decrease in yield on
interest earning assets is attributable to the flat yield curve that has
been predominant for much of the year, and the Bank's ongoing efforts to de-
emphasize higher risk commercial real estate loans in favor of lower risk,
and generally lower yielding, residential real estate loans. The schedule on
pages 14 and 15 shows the yield analysis for the periods reported.
Provision for Loan Losses: The improved asset quality achieved over the last
few years will be maintained as the portfolio grows in adherence to the
strong underwriting standards that have been established. Management's
analysis of the reserve adequacy concluded that a provision for possible
loan losses was not necessary during the first nine months of 1999.
Additionally, the Bank recognized a recovery on a previously charged down
loan of $134 thousand. This amount was credited to income through the
provision for loan losses. See the discussion of Non-Performing Assets on
page 12 for more information on the loan loss reserve.
Non-interest income: Excluding gains on investment sales of $44 thousand in
1998, as well as certain litigation settlement proceeds of $1.3 million
received in 1999 and $120 thousand received in 1998; non-interest income was
flat for the first nine months of 1999 compared to 1998. (For more
information on the settlement proceeds see Part II, Item 1, Legal
Proceedings.) Other noninterest income decreased by $110 thousand (11%) for
the first nine months of 1999 compared to 1998, and increased $10 thousand
(3.2%) for the third quarter of 1999 compared to the third quarter of 1998.
There are several factors contributing to these changes. The Bank sold loans
totaling $13 million on June 30, 1998, and recognized a gain of $213
thousand on that sale; there have been no gains on loan sales during 1999.
This decrease in revenue was offset by increased ATM and debit card fee
income. The Bank implemented an ATM surcharge for non-Bank customers during
the fourth quarter of 1998. ATM and debit card fees were $205 thousand
higher for the first nine months of 1999 compared to 1998, and were $45
thousand higher for the third quarter of 1999 compared to the third quarter
of 1998. The Bank's total deposit service charge revenue was $99 thousand
(4.7%) higher for the first nine months of 1999 compared to the first nine
months of 1998. This increase is primarily attributable to an increase in
the Bank's overdraft charges, a component of Service Charges on Deposits.
The increase in the overdraft charges took effect May 1, 1999; net overdraft
revenue for the third quarter of 1999 was $132 thousand higher than the
third quarter of 1998, and was $221 thousand higher for the first nine
months of 1999 than the comparable period in 1998. The increase in overdraft
revenue has been offset by a decrease in monthly service charge revenue.
Monthly service charges decreased by $17 thousand for the third quarter of
1999 compared to the third quarter of 1998 and decreased by $112 thousand
for the first nine months of the current year compared to the first nine
months of 1998. The decrease in service charge revenue is due primarily to
the success of the Bank's FreedomLYNX(r) checking account product, which
generally charges no monthly fees. The Bank changed its method of reporting
credit card merchant income and expenses during the third quarter. Credit
card merchant discount fee income, net of assessment expenses, is now
reported as a component of the "Other" line-item in the non-interest income
section of the Consolidated Statement of Operations.
Non-interest expenses: Total non-interest expenses for the nine months ended
September 30, 1999 have increased $962 thousand (5.5%) over the same period
in 1998, and have increased $238 thousand for the third quarter of 1999
compared to 1998. Marketing expenses were $131 thousand higher for the first
nine months of 1999 compared to the same period in 1998, and were flat for
the third quarter of 1999 compared to 1998. The Bank launched two major
marketing campaigns during the first half of the year, celebrating its 150th
birthday and promoting its "Free Checking for Life" initiative. Through
September 30, 1999 the Bank dropped all electronic requirements for its
FreedomLYNX(r) account and offered the account free for life. The "Free
Checking for Life" campaign has helped to more than double FreedomLYNX(r)
sales activity. These sales efforts have served to fuel the continued strong
core deposit growth the Bank has experienced this year (see Balance Sheet
Analysis).
Salaries, wages and employee benefits have increased by $326 thousand
(12.1%) for the third quarter of 1999 compared to the third quarter of 1998;
and $697 thousand (8.4%) for the first nine months of 1999 compared to the
first nine months of 1998. The Bank's incentive payments have increased by
$157 thousand (25%) year to date compared to 1998. These higher payments are
a result of the Bank's successful sales efforts and overall increased
profitability. Additionally, the Bank's costs for employee health insurance
have increased $127 thousand (28%) for the first nine months of 1999
compared to 1998 due to higher premiums. The Bank has also seen incremental
increases in salary costs related to Year 2000 testing and preparation.
Occupancy expenses were flat for the third quarter of 1999 compared to the
third quarter of 1998, and were $201 thousand higher (13%) for the first
nine months of 1999 compared to the same period in 1998. This increase is
due primarily to a one-time charge taken as a result of the Bank's vacating
a property under lease. Legal and professional fees have increased $264
thousand (82%) quarter over quarter, but have decreased by $47 thousand year
over year. The increase for the quarter is the result of the timing of
expenses incurred by the Bank as it defends itself in certain litigation.
Expenses of $296 thousand, net of $54 thousand in recoveries, related to
this ongoing litigation were recorded during the quarter. For more
information on this litigation see Part II, Item 1, Legal Proceedings. The
Bank's expenses related to Other Real Estate Owned decreased $331 thousand
for the third quarter and $308 thousand year to date. This decrease is
primarily a result of the recognition of $317 thousand in gains pursuant to
the sale of certain foreclosed real estate.
BALANCE SHEET ANALYSIS
Quarterly average deposits for the third quarter of 1999 were $33.1 million
(5.7%) higher than the third quarter of 1998. Deposit balances at quarter-
end were $27.4 million (4.98%) higher than balances at December 31, 1998.
The Bank's continued focused sales efforts have fueled this growth. The
sales program, LYNX Banking, has as its foundation fewer products that have
potential lifetime appeal to the Bank's customers. The Bank's FreedomLYNX(r)
checking account has no minimum balance requirements, pays interest on
balances over a minimum amount, and generally charges no fees. Due to the
efforts of our sales staff more than 9,100 new FreedomLYNX(r) accounts were
opened during the first nine months of the year and total balances at
September 30, 1999 were $36.5 million, an increase of $16.7 million (84.7%)
over year-end. The cost of funds for this product is approximately 1.38%.
The Bank's MoneyLYNXtm and CommerceLYNXtm money market accounts have also
been a great success. These products, although only one year old, had $113
million in balances at quarter end. Money market account balances overall
have grown $39.5 million (23%) over the course of the first nine months of
the year from $166.6 million to $206.1 million at a current cost of funds of
approximately 4.12%. In line with the Bank's strategic focus on lower cost
checking and money market products, time deposit balances have continued to
decline slowly, from $154.5 million at December 31, 1998 to $146.4 million.
As of September 30, 1999, the current cost of funds for the Bank's time
deposits is 4.87%.
Total loans have increased $21.4 million (5.3%) for the first nine months of
the year, and $5.2 million during the third quarter. The Bank continued to
experience growth in its streamlined portfolio mortgage product, RealLYNXtm,
during 1999. Balances grew $18.6 million (17.3%) during the first nine
months of the year. The Bank's commercial loan portfolio grew 3.8%, from
$64.6 million to $67.1 million over the first nine months of the year. At
the same time the Bank continues to de-emphasize its commercial real estate
portfolio, which increased approximately $1.6 million from $187.7 million to
$189.3 million during the first nine months of 1999. Commercial business
development efforts are being concentrated on the small business sector.
Installment loans and Homelines decreased $141 thousand during the year, a
reflection of the current highly competitive environment for these types of
credits. The Bank's investment portfolio has grown $11.4 million (6.4%)
during the first nine months of the year as excess deposits have been
redeployed into the investment portfolio.
The Bank has taken steps to protect its variable rate funding sources. The
Bank has entered into three-year interest rate cap contracts to mitigate the
effects on net interest income in the event interest rates on variable rate
deposits increase. The aggregate notional amount of these contracts is $50
million. The Bank has also entered into a three-year interest rate floor to
mitigate the effect of net interest income in the event interest rates on
floating rate loans decline. The notional amount of the contract is $10
million. Total income recorded on interest rate floors year to date is $41
thousand.
YEAR 2000
Introduction: The Company, like most users of computers, computer software,
and equipment utilizing computer software, faces a critical challenge
regarding the Year 2000 date change. The Year 2000 issue, which is common to
most corporations, and especially important to banks, concerns the inability
of information systems, primarily computer software programs, to properly
recognize and process date sensitive information as the Year 2000
approaches. If not corrected, many computer applications could fail or
create inaccurate results. The bank regulatory agencies which regulate the
conduct of the Company, the Bank and the Trust Company, through the auspices
of the Federal Financial Institutions Examination Council (FFIEC) have
issued compliance guidelines requiring financial institutions to develop and
implement plans to address the Year 2000 issue. During the past two years,
the Company has devoted substantial time and resources toward ensuring that
the Company's and its subsidiaries' operations will not be adversely
impacted by the pending date change. The Bank's primary regulator, the
Federal Deposit Insurance Corporation/State of Vermont, has been monitoring,
and continues to monitor, the Bank's planning and implementation process on
a regular basis. The Company has also contracted with a national accounting
firm to perform an independent review of the Company's Year 2000
preparations. These reviews commenced during the fourth quarter of 1998 and
have continued into 1999. The Company's management remains committed to the
continued deployment of the necessary internal and external resources toward
addressing the Year 2000 issue.
State of Readiness: As required by the Company's and its subsidiaries'
regulatory agencies, the Company, through its Year 2000 Committee (the
Committee), has developed a Year 2000 compliance plan. The Company's plan
addresses the five basic phases of achieving Year 2000 compliance; (i)
project management, (ii) awareness, (iii) assessment, (iv) testing and (v)
renovation and implementation. Project management began in the middle of
1997 as the Committee was formed. Since its formation, the Committee has met
on a regular basis to discuss and plan the specific actions that the
Company, the Bank and the Trust Company need to take to verify that the
Company and its subsidiaries will be prepared for the date change. In
addition, the Company has developed a strategy to ensure that its software
vendors are also taking steps to address the Year 2000 date change. The
Committee is comprised of senior executive officers of the Company, the Bank
and the Trust Company. The Committee is chaired by the Bank's Senior
Operations Officer, and includes the Company's Chief Financial Officer, the
Bank's Chief Auditor/Risk Management Officer, the Bank's Information Systems
Manager, the Bank's Credit Manager, the Bank's Deposit Operations Manager, a
Trust Company Officer and the Bank's Facilities/Security Administration
Manager. The Committee provides progress reports to the Company's senior
management and reports at least quarterly to the Company's Board of
Directors.
Through the Committee, the Company has also taken steps to promote awareness
of the Year 2000 issue throughout its entire organization. In addition, the
Company has sought to raise the awareness of its vendors, service providers
and larger borrowing customers as to the Year 2000 issue in light of the
critical role these entities play in the operations of the Company. The
Committee has contacted each of these entities and requested a Year 2000
plan and testing information. The Company has received responses from 100%
of its vendors and service providers. The majority (96%) of the Company's
significant borrowers have also responded. The Committee intends to follow-
up with these customers throughout 1999 and into the Year 2000.
Assessment is the process of identifying all mission-critical applications
that could be adversely affected by the date change. The Company's
assessment phase is substantially complete. Throughout its history,
independent of Year 2000 issues, the Company has sought to purchase its
critical core hardware and software from vendors who it perceives as having
strong reputations as leading financial industry service providers. The
Company has received and installed Year 2000 compliant software upgrades
from all mission critical vendors. Substantial progress has been made with
respect to the fourth phase of the Company's Year 2000 plan, testing.
Testing of the Company's core computer and peripheral equipment
infrastructure and the infrastructure of the Company's personal computer
desktop network has been successfully completed. Testing of mission critical
customer accounting software applications was completed successfully on June
16, 1999, in advance of the June 30, 1999 FFIEC suggested testing completion
date. Since June 1999, we have been testing our less critical systems for
Year 2000 compliance, and, as with our mission critical tests, these systems
are testing successfully. In the Plan each of these non-mission critical
systems has an established target date by which steps must be taken to
replace any non-compliant systems. The Company is confident that all tests
will be completed in advance of those target dates.
The final phase of the Plan, renovation and implementation involves
obtaining and implementing renovated software applications provided by the
Company's vendors. As noted above, this phase of the Plan has already
commenced and will continue throughout 1999. To date, the Company has not
identified any system which presents a material risk of not being Year 2000
compliant in a timely fashion or for which a suitable alternative cannot be
implemented.
Costs to Address the Year 2000 Issue: The total financial costs associated
with the Year 2000 problem cannot be predicted at this time with absolute
certainty. As may be expected, the Committee currently estimates that there
will be costs associated with replacing certain non-compliant software
and/or hardware. The Company has hired a full-time project coordinator to
oversee the testing phase of the Year 2000 project. Although no other staff
additions are currently planned, the Committee estimates that approximately
30-35 people (about 10% of our staff) are spending some portion of their
time working on the Year 2000 project. Additionally, the Company has hired a
third party to evaluate the Bank's loan loss reserve adequacy in light of
Year 2000 concerns. At this time, the Company does not anticipate a need for
any additional loan loss provision related specifically to Year 2000 risks.
The Company has replaced all of the Bank's ATMs as well as upgraded certain
software and equipment. Management had approved the replacement of the ATMs
prior to Year 2000 budget planning since most were 15 to 20 years old. Out
of the total estimated $1.2 million in capital costs, $838 thousand is
budgeted to upgrade the ATM network. The Bank spent $680 thousand for ATM
and other Year 2000 upgrades during 1998 and $452 thousand for the first
nine months of 1999. These costs have been, and when incurred in the future
will be, capitalized and depreciated over the estimated useful lives of the
assets, as such assets represent replacement of existing equipment, which
are not mainly being remediated for Year 2000. The Bank has incurred direct
(non-capital expenditures) Year 2000 expenses totaling $87 thousand for the
first nine months of 1999, and $163 thousand for all of 1998; these expenses
have been charged to expense as incurred. Additional expenses related to the
project are currently estimated to be $129 thousand and will be charged to
expense as incurred.
Risks of Year 2000 Issues: The Year 2000 issue presents potential risks to
the Company, its subsidiaries and their operations. As stated above, the
Company purchases substantially all of its technology applications from
third parties that face the same Year 2000 challenge as the Company. Thus,
the Company's operations could be adversely affected if the Year 2000 issue
adversely affects the operations of these third parties. Most significantly,
the Company faces risks that are specific to the business of banking.
Included among these risks is the risk that the Year 2000 date change may
result in the inability to process and underwrite loan applications, to
credit deposits and withdrawals from customer accounts, to credit loan
payments or track delinquencies, to properly reconcile and record daily
activity or to engage in similar normal banking activities. Additionally, if
the Bank's commercial loan customers are not Year 2000 compliant and suffer
adverse effects with respect to their own operations, their ability to meet
their obligations to the Bank could be adversely affected. Furthermore, as a
commercial bank, the Bank could potentially experience deposit run-off prior
to the Year 2000 date change as a result of customer concern about the
potential availability of their funds or a change in interest rates.
Moreover, to the extent that the risks posed by the Year 2000 problem are
pervasive in data processing and transmission and communications services
worldwide, the Company cannot predict with any certainty that its operations
will remain materially unaffected after January 1, 2000 or on dates
preceding this date at which time post-January 1, 2000 dates become
significant within the Bank's systems. Finally, to the extent that certain
utility and communication services used by the Company face Year 2000
problems, the Company's operations could be disrupted.
Contingency Plans: In light of these risks and uncertainties, the Company
has developed and will continue to monitor contingency plans to mitigate the
risks associated with the Year 2000 date change and to provide a business
continuity strategy. The Company has developed these plans through building
on its internal Disaster Recovery/Contingency plans, which were updated
during the second quarter of 1998. This planning effort included a Business
Impact Analysis relating to mission critical systems and is the foundation
documentation that was used to finalize the Year 2000 mission critical
service provider Contingency plans.
RISK MANAGEMENT
There have been no significant changes in the Company's risk profile, or
management's risk management practices, since year-end.
INCOME TAXES
The Company recognized $1.1 million in low income housing tax credits for
the first nine months of 1999 and $720 thousand for the same period in 1998,
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 23% for the quarter and nine
months ended September 30, 1999.
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 $25
million in available Federal Funds lines of credit at September 30, 1999; an
overnight line of credit with the Federal Home Loan Bank (FHLB) of $15
million; an estimated additional borrowing capacity with FHLB of $76
million; and the ability to borrow through the use of repurchase agreements,
collateralized by the Bank's investments, with certain approved
counterparties.
NON-PERFORMING ASSETS AND THE RESERVE FOR POSSIBLE LOAN LOSSES
The following tables summarize the Bank's non-performing assets as of
September 30, 1999, December 31, 1998, and September 30, 1998:
(In thousands) September 30, 1999 December 31, 1998 September 30, 1998
- ------------- ------------------------------------------------------------
Nonaccrual Loans $2,021 $2,103 $4,752
Loans Past Due 90 Days or More and Still Accruing 24 170 279
Restructured Loans 703 320 327
----------------------------------------------
Total Non-performing Loans (NPL) 2,748 2,593 5,358
Other Real Estate Owned 28 470 818
----------------------------------------------
Total Non-performing Assets (NPA) $2,776 $3,063 $6,176
==============================================
Note: Included in nonaccrual loans are certain loans whose terms have
been substantially modified in troubled debt restructuring.
Discussion of events affecting NPA: Significant events affecting the
categories of NPA are discussed below:
Nonaccrual Loans:
- -----------------
During the third quarter of 1999 approximately $267 thousand in
reductions to nonaccrual loans were offset in part by approximately
$355 thousand of additions. Of the reported increase, approximately
$149 thousand was concentrated in one account, with the remaining
balance comprised of loans from six borrowers.
Loans Past Due 90 Days:
- -----------------------
Loans past due 90 days decreased $24 thousand in the third quarter,
after dropping $15 thousand in the quarter ended June 30, 1999.
Restructured Loans:
- -------------------
There was a net increase of $234 thousand in restructured loans during
the third quarter of 1999 primarily attributable to the addition of
one loan with a $282 thousand outstanding balance.
Other Real Estate Owned:
- ------------------------
Four properties with a total net book value of $185 thousand were
removed from this category during the period, while one property with
a net book value of $22 thousand was added.
The reserve for possible loan losses is based on management's estimate of
the amount required to reflect the risks in the loan portfolio, based on
circumstances and conditions at each reporting date. Merchants Bank reviews
the adequacy of the Reserve for Possible Loan Losses ("RPLL") at least
quarterly. Factors considered in evaluating the adequacy of the reserve
include previous loss experience, current economic conditions and their
effect on the borrowers, the performance of individual loans in relation to
contract terms and estimated fair values of properties to be foreclosed. The
method used in determining the amount of the RPLL is not based on
maintaining a specific percentage of RPLL to total loans or total
nonperforming assets. Rather, the methodology is a comprehensive analytical
process of assessing the credit risk inherent in the loan portfolio. This
assessment incorporates a broad range of factors, which indicate both
general and specific credit risk, as well as a consistent methodology for
quantifying probable credit losses. Losses are charged against the RPLL when
management believes that the collectibility of principal is doubtful. To the
extent management determines the level of anticipated losses in the
portfolio have significantly increased or diminished, the RPLL is adjusted
through current earnings. As part of the Bank's analysis of specific credit
risk, detailed and extensive reviews are done on larger credits and
problematic credits identified on the watched asset list, nonperforming
asset listings and internal credit rating reports. Loans deemed impaired at
September 30, 1999 totaled $3.0 million, of this total $2.4 million are
included as non-performing assets in the table above. Impaired loans have
been allocated $346 thousand of the RPLL.
The continued high level of the RPLL reflects management's current
strategies and efforts to maintain the reserve at a level adequate to
provide for loan losses based on an evaluation of known and inherent risks
in the loan portfolio. Among the factors that management considers in
establishing the level of the reserve are overall findings from an analysis
of individual loans, the overall risk characteristics and size of the loan
portfolio, past credit loss history, management's assessment of current
economic and real estate market conditions and estimates of the current
value of the underlying collateral.
The following table reflects the Bank's non-performing asset and coverage
ratios as of September 30, 1999, December 31, 1998 and September 30, 1998:
September 30, 1999 December 31, 1998 September 30, 1998
-------------------------------------------------------------
Percentage of Non-performing Loans to Total Loans 0.64% 0.64% 1.36%
Percentage of Non-performing Assets
to Total Loans plus Other Real Estate
Owned 0.65% 0.75% 1.56%
Percentage of RPLL to Total Loans 2.66% 2.79% 3.47%
Percentage of RPLL to NPL 413% 436% 256%
Percentage of RPLL to NPA 409% 369% 222%
Management considers the balance of the RPLL adequate at September 30, 1999.
Management's assessment of the adequacy of the RPLL concluded that a
provision was not necessary during the first three quarters of 1999.
Merchants Bancshares, Inc.
Supplemental Information
Three Months Ended
---------------------------------------------------------------
September 30, 1999 September 30, 1998
(In thousands except share and per share data)
Interest Interest
Average Income/ Average Average Income/ Average
(Fully Taxable Equivalent) Balance Expense Rate Balance Expense Rate
--------------------------------------------------------------
INTEREST EARNING ASSETS
Loans (1) $425,230 $ 9,326 8.70% $386,026 $ 9,092 9.34%
Taxable Investments 185,648 2,992 6.39% 170,403 2,744 6.39%
Federal Funds Sold and Securities Purchased
Under Agreements to Resell 3,307 42 5.04% 10,963 153 5.54%
--------------------------------------------------------------
Total Interest Earning Assets $614,185 $12,360 7.98% $567,392 $11,989 8.38%
==============================================================
INTEREST BEARING LIABILITIES
Savings, NOW and Money Market Deposits $346,892 $ 2,555 2.92% $292,303 $ 2,393 3.25%
Time Deposits 147,825 1,815 4.87% 158,674 2,153 5.38%
--------------------------------------------------------------
Total Savings and Time Deposits 494,717 4,370 3.50% 450,977 4,546 4.00%
Federal Funds Purchased 932 13 5.53% -- --
Other Borrowed Funds 5,192 67 5.08% 2,372 26 4.35%
Debt 6,637 117 6.99% 6,411 116 7.18%
--------------------------------------------------------------
Total Interest Bearing Liabilities 507,478 4,567 3.57% 459,760 4,688 4.05%
Other Liabilities & Stockholders' Equity
(Net of Non-Interest Earning Assets) 106,707 107,632
-----------------------------------------
Total Liabilities & Stockholders' Equity
(Net of Non-Interest Earning Assets) $614,185 $567,392
-----------------------------------------
Rate Spread 4.41% 4.40%
======================================
Net Yield on Interest Earning Assets 5.03% 5.11%
======================================
Nine Months Ended
----------------------------------------------------------------
September 30, 1999 September 30, 1998
(In thousands except share and per share data)
Interest Interest
Average Income/ Average Average Income/ Average
(Fully Taxable Equivalent) Balance Expense Rate Balance Expense Rate
----------------------------------------------------------------
INTEREST EARNING ASSETS
Loans (1) $416,966 $27,311 8.76% $389,091 $27,758 9.54%
Taxable Investments 183,118 8,791 6.42% 165,759 8,096 6.53%
Federal Funds Sold and Securities Purchased
Under Agreements to Resell 2,012 73 4.85% 5,061 220 5.81%
--------------------------------------------------------------
Total Interest Earning Assets $602,096 $36,175 8.03% $559,911 $36,074 8.61%
==============================================================
INTEREST BEARING LIABILITIES
Savings, NOW and Money Market Deposits $330,535 $ 7,313 2.96% $281,533 $ 6,814 3.24%
Time Deposits 149,025 5,578 5.00% 160,547 6,472 5.39%
--------------------------------------------------------------
Total Savings and Time Deposits 479,560 12,891 3.59% 442,080 13,286 4.02%
Federal Funds Purchased 1,499 58 5.17% 735 32 5.82%
Other Borrowed Funds 8,530 315 4.94% 6,020 239 5.31%
Debt 6,655 350 7.04% 6,412 344 7.18%
-------------------------------------------------------------
Total Interest Bearing Liabilities 496,244 13,614 3.67% 455,247 13,901 4.08%
Other Liabilities & Stockholders' Equity
(Net of Non-Interest Earning Assets) 105,852 104,664
-----------------------------------------
Total Liabilities & Stockholders' Equity
(Net of Non-Interest Earning Assets) $602,096 $559,911
=========================================
Rate Spread 4.37% 4.53%
=======================================
Net Yield on Interest Earning Assets 5.01% 5.29%
======================================
MERCHANTS BANCSHARES, INC.
SEPTEMBER 30, 1999
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Reference is made to the Form 10-K filed for the year ended December 31,
1998 for disclosure of current legal proceedings against the Company, the
Bank, the Merchants Trust Company (the "Trust Company") (the "Companies")
and certain directors and trustees of the Companies.
The Bank is a counterclaim defendant in a litigation entitled Pasquale and
Vatsala Vescio, Counterclaim Plaintiffs v. The Merchants Bank, Counterclaim
Defendant, now pending in the United States Bankruptcy Court for the
District of Vermont.
In this litigation, the Vescios have made a number of "lender liability"
claims dealing with a commercial development known as Brattleboro West in
Brattleboro, Vermont. The pending litigation arose out of a suit to
foreclose on several real estate mortgages and personal property delivered
to the Bank as collateral by the Vescios in connection with the financing of
a supermarket in the Brattleboro West project and various other projects.
Among other things, the Vescios have alleged that the Bank or its
representatives violated supposed oral promises in connection with the
origination and funding of the financing, and have claimed that the Bank is
liable to them for damages based on the Bank's supposed "control" of the
project and its alleged breach of covenants of "good faith" which the
plaintiffs believe are to be implied from the loan documents. In addition,
the plaintiffs have contended that the Bank breached a duty of care they
believe it owed to them, and have claimed that the Bank should not have
exercised its contract rights when the loan went into default, but should
have worked out the default in a way that was more favorable to the
borrowers. Trial concluded in United States Bankruptcy Court in November
1998. In June of 1999, before entry of any findings or a decision on the
merits, the trial judge recused himself from all cases involving the Bank.
He completed his term as bankruptcy judge on July 31, 1999. On September 30,
1999, United States District Court Judge William Sessions withdrew the
reference of the case to the Bankruptcy Court and ruled that he would decide
the case himself on the basis of a combination of the Bankruptcy Court trial
record and rehearing certain testimony of certain witnesses. That hearing is
now scheduled for February, 2000. The timing of a decision on the merits of
the case at the trial level cannot be predicted at this time. Although it is
not possible at this stage to predict the outcome of this litigation, the Bank
believes that it has meritorious defenses to the plaintiffs' allegations. The
Bank intends to vigorously defend itself against these claims.
On March 25, 1999 the Trust Company received, as trustee, a recovery of $4.8
million on account of settlement of a 1994 class action suit filed in the
United States District Court for the District of Minnesota. The Trust
Company's claims, and the class action, arose from investments made in 1994
and earlier in the so-called Piper Jaffray Institutional Government Income
Portfolio ("Piper Jaffray"). In the first quarter of 1999, the company
realized $1.3 million as a result of that recovery. During the third quarter
of 1999 the Trust Company disbursed the recovery, partly to itself and the
balance in accordance with instructions provided by the Company's insurance
carrier, pursuant to an agreement made with the carrier in December of
1994.
Lawyers representing the beneficiaries of five Trust Company accounts have
asserted that their clients (the "Named Customers") and others similarly
situated have not been fully reimbursed for damages allegedly suffered
because of certain investments made by the Trust Company during 1993 and
1994 in Piper Jaffray. The Companies believe full reimbursement has been
provided and that the Trust Company has no further liability on account of
the Piper Jaffray investment. On July 15, 1999 the Trust company filed an
action with the United States District Court for the District of Vermont
seeking a declaratory judgement that the Trust Company has no further
liability to the Named Customers.
Merchants Bancshares, Inc. and certain of its subsidiaries have been named
as defendants in various other legal proceedings arising from their normal
business activities. Although the amount of any ultimate liability with
respect to such proceedings cannot be determined, in the opinion of
management, based upon the opinion of counsel on the outcome of such
proceedings, any such liability will not have a material effect on the
consolidated financial position of Merchants Bancshares, Inc. and its
subsidiaries.
Item 2 - Changes in Securities - NONE
Item 3 - Defaults upon Senior Securities - NONE
Item 4 - Submission of Matters to a Vote of Security Holders - NONE
Item 5 - Other Issues - NONE
Item 6 - Exhibits and Reports on Form 8-K - NONE
MERCHANTS BANCSHARES, INC.
FORM 10-Q
SEPTEMBER 30, 1999
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/ Janet P. Spitler
---------------------------
Janet P. Spitler, Treasurer
November 12, 1999
---------------------------
Date