<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended MARCH 31, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number 0-11033
MERCHANTS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0045946
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5005 WOODWAY, SUITE 300
HOUSTON, TEXAS 77056
(Address of principal executive offices) (zip code)
(713) 622-0042
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) 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 (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of May 1, 1997, Registrant had outstanding 1,954,970 shares of its $1.00 par
value per share common stock.
1
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MERCHANTS BANCSHARES, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The March 31,1997 an 1996 financial statements included herein are
unaudited; however, such information reflects all adjustments (consisting
solely of normal recurring adjustments), which are, in the opinion of
management of the registrant, necessary to a fair statement of the
results for the interim periods.
PAGE
NO.
Consolidated Balance Sheets at March 31, 1997 and
at December 31,1996........................................ 3
Consolidated Statements of Income for the Three Months
Ended March 31, 1997 and 1996.............................. 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1997 and 1996.............................. 5-6
Notes to Interim Consolidated Financial Statements
for the Period Ended March 31,1997......................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................. 8-12
PART II -OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................... 13
ITEM 2. CHANGE IN SECURITIES........................................ 13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................. 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 13
ITEM 5. OTHER INFORMATION........................................... 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 13
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
ASSETS
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
Cash and due from banks $ 26,208 $ 30,073
Time deposits in banks 1,000 1,000
Federal funds sold 11,475 6,375
Investment securities:
Available-for-Sale 120,954 123,076
Held-to-Maturity 18,353 20,196
Loans, net of allowance for
loan losses 305,582 291,811
Bank premises and equipment 14,850 14,797
Accrued interest receivable 3,705 3,663
Other assets 3,948 3,579
-------- --------
Total Assets $506,075 $494,570
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $127,499 $129,314
Interest bearing 322,047 309,729
-------- -------
449,546 439,043
Accrued interest, taxes and
other liabilities 2,376 2,016
-------- -------
Total Liabilities 451,922 441,059
-------- -------
Stockholders' Equity:
Common stock 1,978 1,978
Paid-in capital 25,767 25,767
Retained earnings 26,928 25,954
Unrealized securities gains (losses) (251) 81
-------- -------
54,422 53,780
-------- -------
Less cost of stock held in treasury:
Common Stock (269) (269)
-------- -------
Total Stockholders' Equity 54,153 53,511
-------- -------
Total Liabilities and
Stockholders' Equity $506,075 $494,570
======== ========
See Notes to Interim Consolidated Financial Statements.
3
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MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
-------- --------
Interest Income:
Interest and fees on loans $ 6,904 $ 5,639
Investment securities:
Taxable 1,819 2,012
Non-taxable 220 231
Interest bearing deposits with bank 0 137
Time deposits with banks 13 28
Federal funds sold 249 505
-------- --------
Total Interest Income 9,205 8,552
-------- --------
Interest Expense:
Interest bearing deposits 2,933 2,820
Borrowed funds 0 9
-------- --------
Total Interest Expense 2,933 2,829
-------- --------
Net interest income 6,272 5,723
Provision for possible loan losses 435 80
-------- --------
Net interest income after provision
for loan losses 5,837 5,643
-------- --------
Non-Interest Income:
Service charges and fees 1,184 1,167
Other operating income 291 232
-------- --------
Total Non-Interest Income 1,475 1,399
-------- --------
Non-Interest Expense:
Salaries and employee benefits 2,812 2,798
Furniture, equipment and
occupancy expense 960 724
Other operating expenses 1,432 1,390
-------- --------
Total Non-Interest Expense 5,204 4,912
-------- --------
Income before income taxes 2,108 2,130
Income taxes 645 660
-------- --------
Net Income $ 1,463 $ 1,470
======== ========
Per Share:
Net Income $ .75 $ .76
======== ========
Dividends - Common Stock $ .25 $ .17
======== ========
See Notes to Interim Consolidated Financial Statements.
4
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MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,463 $ 1,470
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Provision for loan losses 435 80
Depreciation and amortization 335 246
Discount (accretion) amortized
to income 124 171
Origination of mortgage loans for sale (1,455) (3,110)
Proceeds from mortgage loans sold 1,639 2,981
Provision for losses on real
estate and other assets 5 122
(Increase) decrease in interest
receivable (42) 64
(Decrease) increase in accrued
interest and other liabilities 360 120
Other - net (56) 324
-------- --------
Total Adjustments 1345 998
-------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITES 2,808 2,468
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in time deposits
in banks 0 (1,100)
Proceeds from the maturities of held-to-
maturity investment securities 1,835 1,510
Proceeds from the maturities of available-
for-sale investment securities 9,721 11,033
Purchase of held-to-maturity
investment securities 0 (253)
Purchase of available-for-sale
investment securities (8,218) (14,197)
Net decrease (increase) in loans (14,236) (6,367)
Purchase of bank premise and equipment (369) (2,863)
Proceeds from sale of real estate
and other loan related assets 101 151
Other (421) (181)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (11,587) (12,267)
-------- --------
See Notes to Interim Consolidated Financial Statements.
5
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 10,503 (11,277)
Dividends paid (489) (331)
Sale of Treasury stock 0 15
Repayment of borrowings 0 (3,083)
Purchase minority interest 0 (287)
-------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 10,014 (14,963)
-------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,235 (24,762)
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD 36,448 81,552
-------- --------
CASH AND CASH EQUIVALENTS
END OF PERIOD 37,683 $ 56,790
======== ========
For the three months ended March 31:
Interest paid $ 2,898 $ 2,959
======== ========
Income taxes paid $ 0 $ 0
======== ========
Non-Cash Transactions:
Foreclosed properties transferred
to other real estate and loan
related assets $322,000 $124,000
Bank loans for other real estate
and loan related assets sold $139,000 $700,000
See Notes to Interim Consolidated Financial Statements.
6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. PRESENTATION OF FINANCIAL INFORMATION
The accompanying unaudited consolidated interim financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim financial information and with the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of Management, all adjustments (consisting of normal recurring
items) considered necessary for a fair presentation have been included. The
Results of Operations for the three months ended March 31, 1997, are not
necessarily indicative of results that may be expected for the entire year
ending December 31, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto included in the annual report on
Form 10-K of Merchants Bancshares, Inc. (the "Company"), for the year ended
December 31, 1996.
NOTE 2. EARNINGS PER SHARE
Earnings per share amounts have been computed using the weighted average number
of common shares and common share equivalents outstanding during the period.
The number of such primary shares were 1,954,970 and 1,943,137 for the periods
ended March 31, 1997 and 1996, respectively.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ANALYSIS OF STATEMENT OF INCOME
The following analysis discusses material changes in the results of operations
for the first quarter of 1997 as compared to the first quarter of 1996.
Merchants Bancshares, Inc. recorded earnings of $1,463,000 in the first quarter
of 1997. This level of earnings represented a decrease of $7,000 from the
$1,470,000 earned in the first quarter of 1996.
NET INTEREST INCOME
Net interest income increased 9.6% in the first quarter of 1997 when compared to
the same quarter of 1996. The increase of $549,000 resulted from a $653,000
(7.6%) increase in interest income on earning assets, partially offset by an
increase of $104,000 (3.7%) in interest expense. Higher volumes of interest
earning assets, particularly loans, were the primary reasons for the increase in
net interest income.
The Company's subsidiary bank (the "Subsidiary Bank") attempts to adjust the
rates paid or earned on interest bearing liabilities and interest earning assets
to maintain a consistent net interest margin to the extent possible.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses increased by $355,000 for the first
quarter of 1997 compared to the first quarter of 1996. The ratio of the
allowance for possible loan losses to outstanding loans decreased to .96% at
March 31, 1997 from 1.00% at March 31, 1996.
The Company's Subsidiary Bank's policy is to maintain a level in the allowance
for possible loan losses that is adequate to cover the loan losses sustained
plus provide for any future possible losses on problem loans. The adequacy of
the allowance is continually monitored and management considers the current
level to be appropriate based on an evaluation of the Subsidiary Bank's loan
portfolio. The transactions in the allowance for possible loan losses were as
follows:
8
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PROVISION FOR POSSIBLE LOAN LOSSES (CONTINUED)
FOR THE QUARTER
ENDED MARCH 31,
-------------------------
1997 1996
----------- -----------
Loans outstanding at period end $308,554,000 $244,599,000
============ ============
Allowance at beginning of period $ 2,713,000 $ 2,411,000
------------ ------------
Provision charged to expense 435,000 80,000
------------ ------------
Loans charged off:
Commercial and industrial (13,000) (14,000)
Real estate (20,000) (15,000)
Installment (167,000) (83,000)
------------ ------------
Total (200,000) (112,000)
------------ ------------
Loans recovered:
Commercial and industrial 3,000 48,000
Real estate 3,000 2,000
Installment 18,000 24,000
------------ ------------
Total 24,000 74,000
------------ ------------
Net Loans recovered (charged off) (176,000) (38,000)
------------ ------------
Allowance at end of period $ 2,972,000 $ 2,453,000
============ ============
Ratios:
Allowance as a percent of
loans outstanding .96% 1.00%
============ ============
Allowance as a percent of
nonperforming loans 108.2% 58.6%
============ ============
NON-PERFORMING ASSETS
All loans which cause management to have doubt as to the borrower's ability to
substantially comply with present loan repayment terms are included in the
schedule of non-performing loans.
Non-performing loans consist of loans on which interest is not being accrued and
loans which are 90 days or more past due as to principal and/or interest payment
and not yet in a non-accruing status. The policy of the Subsidiary Bank is to
continue to accrue interest on loans which are 90 days or more past due if
periodic payments are being made on the loans. If a loan is classified as past
due and payments then resume on the loan, it continues to be classified as past
due until all past due amounts are paid.
9
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NON-PERFORMING ASSETS (CONTINUED)
The following table discloses information regarding non-performing assets for
the indicated periods:
MARCH 31,
-----------------------
1997 1996
---------- ----------
Non-accrual loans $2,480,000 $2,856,000
Past due 90 days or more 266,000 1,332,000
---------- ----------
Total 2,746,000 4,188,000
Other real estate owned 930,000 1,087,000
---------- ----------
Total non-performing assets $3,676,000 $5,275,000
========== ==========
NON-INTEREST INCOME
The components included in non-interest
income for the indicated periods are
as follows:
FOR THE QUARTER
ENDED MARCH 31,
-----------------------
1997 1996
---------- ----------
Service charges and fees $1,184,000 $1,167,000
Other operating income 291,000 232,000
Securities transactions 0 0
---------- ----------
Total non-interest income $1,475,000 $1,399,000
========== ==========
Non-interest income increased $76,000 or 5.4% for the first quarter of 1997 over
the first quarter of 1996. This increase is primarily due to higher levels of
transactional fees.
The Company maintains a policy of constantly monitoring and evaluating service
charges and fees to ensure that the fees charged reflect the cost of service
provided and remain competitive with other financial institutions located in the
Subsidiary Bank's market area.
NON-INTEREST EXPENSE
Non-interest expense increased by 5.9% for the first quarter of 1997 over the
first quarter of 1996. The totals were as follows:
FOR THE QUARTER
ENDED MARCH 31,
-----------------------
1997 1996
---------- ----------
Salaries and employee benefits $2,812,000 $2,798,000
Furniture, equipment and occupancy
expense 960,000 724,000
Other operating expenses 1,432,000 1,390,000
---------- ----------
Total non-interest expenses $5,204,000 $4,912,000
========== ==========
Salaries and employee benefits are the most significant operating expenses of
the Company. These expenses increased by $14,000 or .5% for the first quarter
of 1997 as compared to the first quarter of 1996.
Furniture, equipment and occupancy expense increased by 32.6% for the first
quarter of 1997 over the first quarter of 1996. Other operating expenses
increased by 3.0% for the first quarter of 1997 over the comparable period of
1996. The increases in non-interest expenses are primarily attributable to the
opening of two additional branch facilities in the latter part of 1996.
10
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The major components of other operating expenses are legal and accounting fees,
data processing, supplies and advertising expenses. Also included are expenses
related to real estate held for sale and other loan-related assets acquired
through foreclosure.
ANALYSIS OF BALANCE SHEET
EARNING ASSETS
When comparing the total of earning assets at March 31, 1997, to the total at
December 31, 1996, earning assets increased 3.4%. The increase of $15,165,000
was due to increases of $5,100,000 and $14,030,000 in federal funds sold and
loans, respectively. The increases were partially offset by a decrease of
$3,965,000 in investment securities.
Included in the total of earning assets at March 31, 1997 are loans totaling
$2,480,000 which are on a non-accrual status. This compares to non-accrual
loans totaling $2,856,000 and $2,129,000 at March 31, 1996 and December 31,
1996, respectively.
DEPOSITS
The most important funding source for earning asset growth is deposits. Total
deposits increased by 2.4% from December 31, 1996 to March 31, 1997, compared to
a decrease of 2.6% from December 31, 1995, to March 31, 1996. Non-interest
bearing deposits decreased 1.4% from December 31, 1996 to March 31, 1997, while
interest bearing deposits increased 4.0% for the same period.
CAPITAL
Shareholders' equity increased $642,000, or 1.2% for the three months ended
March 31, 1997, as compared to an increase of .8% for the three months ended
March 31, 1996. The ratio of shareholders' equity to total assets was 10.7% on
March 31, 1997, as compared to 10.8% on December 31, 1996.
Bank holding companies and their bank subsidiaries are required to maintain
certain capital ratios. The Federal Reserve Board's guidelines classify capital
into two tiers, referred to as Tier 1 and Tier 2. Tier 1 capital consists of
common and qualifying preferred shareholders' equity less goodwill. Tier 2
capital consists of mandatory convertible debt, preferred stock not qualifying
as Tier 1, qualifying subordinated debt and the allowance for loan losses up to
1.25% of risk-weighted assets. The minimum ratio for the sum of Tier 1 and Tier
2 to risk weighted assets is 8.0%, at least one-half of which should be in the
form of Tier 1 capital. At March 31, 1997, core capital (Tier 1) and total
capital (Tier 1 and Tier 2) as a percentage of risk-weighted assets was 16.51%
and 17.43%, respectively. The Company's Subsidiary Bank at March 31, 1996 had
core capital of 15.30% and total capital of 16.23% as a percentage of risk
weighted assets.
In addition to the foregoing ratios, bank holding companies are required to
maintain a minimum ratio of core capital to total assets (hereinafter referred
to as the "Leverage Ratio") of at least 3.0%. At March 31, 1997, the Company's
Leverage Ratio was 10.49%. A similar leverage ratio applicable to the Company's
Subsidiary Bank has been adopted by the FDIC. At March 31, 1997, the Company's
Subsidiary Bank's ratio was 9.72%.
LIQUIDITY AND CAPITAL COMMITMENTS
Liquidity is the ability of the Company and its Subsidiary Bank to meet their
short-term needs for cash arising from demands such as operating expenses,
withdrawal of deposits and demand for loans. The liquidity of the Company is
primarily provided by dividends from the Subsidiary Bank and interest on time
deposits in financial institutions.
11
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LIQUIDITY AND CAPITAL COMMITMENTS (CONTINUED)
The Subsidiary Bank's liquidity is primarily provided by maturing loans,
deposits, cash, short-term investments, time deposits in other banks, federal
funds sold and profits. With bank regulators critically reviewing liquidity,
the Company has adopted a policy of maintaining a minimum liquidity level of 20%
as measured by the FDIC formula, at the Subsidiary Bank. As of March 31, 1997,
the liquidity level of the Subsidiary Bank was 33.3%.
The Company believes that both it and the Subsidiary Bank have sufficient
capital and financial resources to meet its current and anticipated capital
commitments.
12
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PART II - OTHER INFORMATION
Item 1. Legal proceedings.
Not applicable
Item 2. Changes in securities.
Not applicable
Item 3. Defaults upon senior securities.
Not applicable
Item 4. Submission of matters to a vote of security holders.
Not applicable
Item 5. Other information.
Not applicable
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports of Form 8-K
No reports on Form 8-K were filed during the period ending
March 31, 1997.
13
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
Exhibit 27.1 Financial Data Schedule
The required Financial Data Schedule
has been included as Exhibit 27.1 of
the Form 10-Q filed electronically with
the Securities and Exchange Commission.
14
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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.
Date: April 30, 1997 BY: /s/J. W. Lander, Jr.
---------------------------
J.W. Lander, Jr., Chairman
Date: April 30, 1997 BY: /s/J. W. Lander, III
---------------------------
J.W. Lander, III, President
(principal financial and
chief accounting officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 26,208,000
<INT-BEARING-DEPOSITS> 1,000,000
<FED-FUNDS-SOLD> 11,475,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 120,954,000
<INVESTMENTS-CARRYING> 139,307,000
<INVESTMENTS-MARKET> 139,568,000
<LOANS> 308,554,000
<ALLOWANCE> 2,972,000
<TOTAL-ASSETS> 506,075,000
<DEPOSITS> 449,546,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,376,000
<LONG-TERM> 0
0
0
<COMMON> 1,978,000
<OTHER-SE> 52,175,000
<TOTAL-LIABILITIES-AND-EQUITY> 506,075,000
<INTEREST-LOAN> 6,904,000
<INTEREST-INVEST> 2,039,000
<INTEREST-OTHER> 262,000
<INTEREST-TOTAL> 9,205,000
<INTEREST-DEPOSIT> 2,933,000
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 6,272,000
<LOAN-LOSSES> 435,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,204,000
<INCOME-PRETAX> 2,108,000
<INCOME-PRE-EXTRAORDINARY> 2,108,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,463,000
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.75
<YIELD-ACTUAL> 5.49
<LOANS-NON> 2,480,000
<LOANS-PAST> 266,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,713,000
<CHARGE-OFFS> 200,000
<RECOVERIES> 24,000
<ALLOWANCE-CLOSE> 2,972,000
<ALLOWANCE-DOMESTIC> 2,972,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
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