<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 (IRS employer
incorporation or organization) identification
number)
5005 Woodway, Suite 300 77056
Houston, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 622-0042
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
NONE N/A
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
--------------
Common Stock, Par Value $1.00
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 [ ]
Indicate by check if disclosure of delinquent filers pursuant to Item 405 of
Regulations S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
There is no established market for the registrant's common stock. Accordingly,
the registrant is unable to estimate the value of shares held by non-affiliates.
On February 17, 1997, there were 1,954,970 shares of common stock issued and
outstanding. See Item 5, entitled "Market for the Registrant's Common Equity
and Related Shareholder Matters" for additional information concerning the
market for the registrant's common stock.
Documents incorporated by reference: Designated portions of the registrants
Proxy Statement for the Annual Meeting of Shareholders to be held May 20, 1997,
are incorporated by reference in Part III.
================================================================================
<PAGE>
PART I.
Item 1. BUSINESS
Merchants Bancshares, Inc. ("Merchants Bancshares" or "Company") is a Texas
bank holding company organized in 1982 under the Bank Holding Company Act of
1956, as amended (the "Holding Company Act"). Merchants Bancshares maintains
its principal offices at 5005 Woodway, Suite 300, Houston, Texas 77056
(telephone: (713) 622-0042).
As of December 31, 1996, Merchants Bancshares owned all of the outstanding
capital stock of Gulf Southwest Nevada Bancorp, Inc. ("Nevada Bancorp"), a
Nevada corporation and an intermediate bank holding company (unless otherwise
indicated, all references herein to Merchants Bancshares include Nevada
Bancorp). Nevada Bancorp owns 100.0% of the outstanding capital stock of
Merchants Bank (the "Subsidiary Bank").
Merchants Bancshares' principal activity is the ownership and management of the
Subsidiary Bank. The Subsidiary Bank is a state bank organized in the State of
Texas. The Subsidiary Bank offers a full range of banking services to its
customers, including demand and time deposits and various types of commercial
and consumer loans. The Subsidiary Bank draws substantially all of its deposits
and a majority of its loans from the Galveston County/Harris County area.
As a bank holding company, Merchants Bancshares may own or control, directly or
indirectly, one or more banks and furnish services to such banks. The banking
activities of Merchants Bancshares are conducted by the Subsidiary Bank. The
officers and directors of the Subsidiary Bank direct its operations. The
principal role of Merchants Bancshares is to provide management assistance with
respect to various aspects of the Subsidiary Bank operations, including the
areas of asset and liability management, business development, loan policies and
procedures, capital planning, advertising, data processing, credit and loan
administration, accounting, auditing, financial reporting and compliance with
legal and governmental regulations.
Banking Services
Merchants Bank is a state-chartered banking association organized in 1970.
The services offered by the Subsidiary Bank are generally those offered by
commercial banks of comparable size in the Subsidiary Bank's trade area. Such
services include short-term and medium-term loans, revolving credit
arrangements, inventory and accounts receivable financing, equipment financing,
real estate lending, Small Business Administration lending, letters of credit,
installment and other consumer loans, savings accounts and various savings
programs, including individual retirement accounts, and interest and non-
interest bearing checking accounts. These services are offered to commercial,
industrial, financial and individual customers.
Other than the Subsidiary Bank's charter to operate as a bank, the business
of Merchants Bancshares is not materially dependent upon any patent, trademark,
license, franchise or concession. The business of Merchants Bancshares is not
seasonal.
1
<PAGE>
Subsidiary Bank
The following table sets forth certain balance sheet and operating
information at December 31, 1996, with respect to the Subsidiary Bank:
<TABLE>
<CAPTION>
Merchants Bank
(In Thousands)
<S> <C>
At December 31, 1996
Balance Sheet:
Assets $491,325
Deposits 439,647
Loans 294,524
Allowance for Credit Losses 2,713
Total Equity 48,871
Results of Operations:
Interest Income $ 35,248
Interest Expense 11,161
Provision for Credit Losses 940
Net Earnings 6,395
</TABLE>
Merchants Bank's main office is at 999 North Shepherd, Houston, Texas with
thirteen branches located in Houston and the surrounding communities.
Subsidiary Bank Holding Company
Nevada Bancorp is a Nevada corporation organized in 1994, and is wholly owned
by Merchants Bancshares. The only activities of Nevada Bancorp relate to
holding the stock of the Subsidiary Bank. Nevada Bancorp currently has no
employees.
Expansion
Acquisition of Texas Gulf Coast Bancorp, Inc. On May 1, 1995, Nevada
Bancorp consummated its acquisition of Texas Gulf Coast Bancorp, Inc. ("Texas
Gulf"). Texas Gulf was a holding company which owned 100% of the stock of First
Bank Mainland in LaMarque, Texas and over 95% of the stock of each of Texas City
Bank in Texas City, Texas and First Bank Pearland, Pearland, Texas. As of May
1, 1995, Texas Gulf had consolidated assets of approximately $203 million.
On January 1, 1996, First Bank Mainland, First Bank Pearland and Texas City Bank
were merged with and into Merchants Bank, which was the surviving bank. The
banking facilities of the three merged banks operate as branch facilities of
Merchants Bank.
Branch Expansion. During 1996, two branch facilities were established in the
Houston area. The branch facility located at the corner of West Rittenhouse and
Interstate I-45 North in Houston commenced operations in September 1996 and the
branch facility at 5005 Woodway, Houston, Texas commenced operations in October
1996.
2
<PAGE>
Supervision and Regulation
Merchants Bancshares. As a bank holding company, Merchants Bancshares is
subject to regulation by the Federal Reserve Board ("FRB") and is required to
file with the FRB an annual report and to furnish such additional information as
the FRB may require pursuant to the Holding Company Act. The FRB may conduct
examinations of Merchants Bancshares and each of its subsidiaries.
Merchants Bancshares is required to obtain the prior approval of the FRB for
the acquisition of five percent or more of the voting shares or substantially
all the assets of any bank or bank holding company. In considering proposed
acquisitions, the FRB considers the expected benefits to the public, including
greater convenience, identifying and meeting the credit needs of the applicant's
entire community, increased competition or gains in efficiency, weighed against
the risks of possible adverse effects, such as undue concentration of resources,
lessening or elimination of competition, conflicts of interest or unsound
banking practices. If an application involves the acquisition of the voting
shares of a state or national bank in Texas, a copy of such application must be
submitted to the Texas Banking Commissioner ("Commissioner") pursuant to the
Texas Banking Act of 1995, as amended ("Act").
Bank holding companies are prohibited by law, except in certain instances
prescribed by statute, from acquiring a direct or indirect interest in or
control of more than five percent of the voting shares of any company which is
not a bank or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
providing service to its subsidiaries. Bank holding companies, however, may
engage in, and may own shares of companies engaged in, certain activities found
by the FRB to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. When an application concerning these
activities is filed with the FRB, a copy of such application also must be
submitted to the Commissioner pursuant to the Act for a determination as to
whether the application should be approved. The Commissioner is required to
oppose the application if the proposed activities would be detrimental to the
public's interest as the result of probable effects, such as undue concentration
of resources, competition, conflicts of interest or unsound banking practices.
Under the Holding Company Act and the FRB's regulations, a bank holding
company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or lease or sale of
property or furnishing of services. The FRB possesses enforcement powers
intended to prevent or eliminate practices of bank holding companies and their
non-bank subsidiaries deemed to be unsafe and unsound or in violation of
applicable laws.
Beginning June 1, 1997, a bank may merge with a bank located in another
state so long as one or both of the states have not opted out of interstate
branching. A bank whose home state opts out of interstate branching may not
participate in any interstate branching. The State of Texas has elected to opt
out of interstate branching through legislation that will expire September 2,
1999.
Subsidiary Bank. As a Texas state chartered bank, the Subsidiary Bank is
subject to regulation, supervision and periodic examination by the Texas
Department of Banking. Because the Subsidiary Bank is not a member of the
Federal Reserve System (i.e., a "non-member bank") and its' deposits are insured
by the Federal Deposit Insurance Corporation ("FDIC") to the extent authorized
by law, it is also subject to supervision and regulation, as well as
examination, by the FDIC. Various requirements of federal and Texas law affect
the operation of the Subsidiary Bank, including requirements relating to
maintenance of reserves against deposits, restrictions on the nature and the
amount of loans which may be made and the interest that may be charged thereon
and restrictions relating to investments and other activities.
Cash revenues derived from dividends paid by the Subsidiary Bank represent
the primary source of revenues for Merchants Bancshares. Under the Act, a state
bank may not reduce its capital and surplus through dividends without the prior
written approval of the Commissioner. Dividends may be paid out of the
undivided profits of the Subsidiary Bank. At December 31, 1996, there was an
aggregate amount of $28,900,000 available for the payment of dividends by the
Subsidiary Bank under these restrictions. The payment of dividends is further
subject to the authority of regulatory authorities to prohibit payment of
dividends if such payment is determined to be an unsafe or unsound banking
practice or if after making such distribution, the Subsidiary Bank would be
considered "undercapitalized".
3
<PAGE>
For further discussion of certain additional regulations affecting
Merchants Bancshares and the Subsidiary Bank, reference should be made to the
"Government Fiscal and Monetary Policies" discussion below.
Competition
The activities in which the Subsidiary Bank engages are highly competitive.
Each activity engaged in and geographic market served involves competition with
other banks, as well as with non-banking financial institutions and non-
financial enterprises. The Subsidiary Bank actively competes with other banks
in its efforts to obtain deposits and make loans, in the scope and type of
services offered, in interest rates paid on time deposits and charged on loans
and in other aspects of banking. At December 31, 1996, the Subsidiary Bank had
deposits of approximately $439,647,000.
In addition to competing with other commercial banks within and outside its
primary service area, the Subsidiary Bank competes with other financial
institutions engaged in the business of making loans or accepting deposits, such
as savings and loan associations, credit unions, industrial loan associations,
insurance companies, small loan companies, finance companies, mortgage
companies, real estate investment trusts, certain governmental agencies, credit
card organizations and other enterprises. In recent years, competition for
funds from securities brokers for money market accounts has intensified.
Additional competition for deposits comes from government and private issues of
debt obligations and other investment alternatives for depositors such as money
market funds and mutual funds.
Customers. The Subsidiary Bank is not dependent upon any single customer
or few customers; the loss of any one or more of which would have a materially
adverse effect upon its business.
Government Fiscal and Monetary Policies
The commercial banking business is affected not only by general economic
conditions but also by the fiscal and monetary policies of the FRB. Changes in
the discount rate on FRB borrowings, availability of borrowings at the FRB
"discount window," open market operations, the imposition of any changes in
reserve requirements against banks' deposits and assets of foreign branches, the
imposition of any changes in reserve requirements against certain borrowings by
banks and their affiliates and the placing of limits on interest rates which
banks may pay on time and savings deposits are some of the instruments of fiscal
and monetary policy available to the FRB. Fiscal and monetary policies
influence to a significant extent the overall growth of bank loans, investments
and deposits and the interest rates charged on loans or paid on time and savings
deposits. The nature of future monetary policies and the effect of such
policies on the future business and earnings of Merchants Bancshares and the
Subsidiary Bank cannot be predicted.
The FRB has cease and desist powers over bank holding companies, non-
banking subsidiaries or any institution-affiliated party thereof to forestall
activities which represent unsafe and unsound practices or constitute violations
of law or regulations. The FRB can also require affirmative actions to correct
a violation or practice through the issuance of a cease and desist order. In
certain instances, the FRB is empowered to assess civil penalties against
companies or individuals who violate the Holding Company Act or regulations or
orders issued pursuant thereto in amounts up to $1,000,000 for each day's
violation, to order termination of non-banking activities of non-banking
subsidiaries and to order termination of ownership and control of a non-bank
subsidiary by a bank holding company.
Section 18(j) of the Federal Deposit Insurance Act makes applicable to
state nonmember insured banks the provisions of Section 23A of the Federal
Reserve Act among other statutes. Section 23A of the Federal Reserve Act and
related statutes impose limits and collateralization requirements with respect
to the amount of loans, extensions of credit, or investments or certain other
transactions by member banks with their "affiliates". Merchants Bancshares,
Nevada Bancorp and Funds Management Group, Inc. are affiliates of the Subsidiary
Bank and, therefore, these restrictions are applicable to transactions by the
Subsidiary Bank with Merchants Bancshares, Nevada Bancorp and Funds Management
Group, Inc. In addition, Section 23B of the Federal Reserve Act prohibits a
bank that is an insured depository institution from engaging in certain
transactions (including, for example, loans) with certain affiliates unless the
transactions are substantially the same or at least as favorable to such bank or
its subsidiaries, as those prevailing at the time for comparable transactions
with or involving other nonaffiliated companies. In the absence of such
comparable
4
<PAGE>
transactions, any transaction between a member bank and its affiliates must be
on terms and under circumstances, including credit standards, that, in good
faith, would be offered to or would apply to nonaffiliated companies. The
Subsidiary Bank is also subject to certain prohibitions against tie-in
arrangements in connection with extensions of credit and certain other
transactions.
The Federal Deposit Insurance Corporation Improvement act of 1991
("FDICIA") places certain restrictions on activities of insured institutions
depending on their level of capital. An institution is categorized as either
"well capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized" or "critically undercapitalized." Federal banking regulators
are authorized to take prompt corrective action against institutions which are
in one of the undercapitalized categories. The capital classification of a bank
also affects the frequency of examinations of the bank and the deposit insurance
premiums paid by the bank. Under FDICIA, the FDIC is authorized to assess
insurance premiums on a bank's deposits at a variable rate depending on the
probability that the deposit insurance fund will incur a loss with respect to
the bank. Banks which are adequately capitalized or well capitalized presently
are not assessed premiums for deposit insurance. Currently, Merchants
Bancshares and the Subsidiary Bank are deemed to be well capitalized. This
capital category is determined only for purposes of applying the prompt
corrective action provisions of FDICIA and may not constitute an accurate
representation of the overall financial condition of Merchants Bancshares or the
Subsidiary Bank.
Effects of Interest Rates and Usury Laws. Texas usury laws limit the rate
of interest that may be charged by the Subsidiary Bank. Certain federal laws
provide a limited preemption of Texas usury laws. The maximum rate of interest
that the Subsidiary Bank may charge on business loans under Texas law varies
between 18% per annum and (i) 28% per annum for business loans above $250,000 or
(ii) 24% per annum for other loans. Texas' floating usury ceilings are tied to
the 26-week United States Treasury Bill auction rate. A 1980 federal statute
removed the interest ceiling under usury laws for loans by the Subsidiary Bank
which are secured by first liens on residential real property.
Employees. Merchants Bancshares and its subsidiary had approximately 331
employees as of December 31, 1996. None of the employees are represented by any
collective bargaining unit, and management believes it has excellent relations
with its employees.
Item 2. PROPERTIES
The executive offices of Merchants Bancshares are located at 5005 Woodway, Suite
300, Houston, Texas 77056. The building is owned by Merchants Bank and consists
of a three story building with approximately 45,000 square feet. The executive
offices occupy approximately 2,200 square feet, the branch facility utilizes
approximately 8,000 square feet and the remaining space is rentable office
space.
The principal office of the Subsidiary Bank is a leased facility located at 999
North Shepherd in Houston. In addition, the Subsidiary Bank also leases the
banking office located in Atascocita, Texas. The other twelve banking offices
are owned by Merchants Bank.
Item 3. LEGAL PROCEEDINGS
Neither Merchants Bancshares nor any of its subsidiaries is a party to any legal
proceedings, which, in management's judgment, based upon opinions of legal
counsel, would have a material adverse effect on the consolidated financial
position of Merchants Bancshares and its subsidiaries.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Since the annual shareholders' meeting held on June 11, 1996, no matters have
been submitted to a vote of the shareholders of Merchants Bancshares.
5
<PAGE>
PART II.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
There is no established public trading market for shares of the Company's common
stock, par value $1.00 per share (the "Common Stock"). The Board of Directors
of Merchants Bancshares has no present intention to arrange for the listing of
the Common Stock on any stock exchange. Notwithstanding the foregoing, a
limited market for the shares of the Common Stock exists, and such shares are
traded on a sporadic basis. During 1996, 51,379 shares of the Common Stock were
presented for transfer on the books of Merchants Bancshares.
The following table sets forth the number of shares of the Common Stock
presented for transfer on the books of Merchants Bancshares for each quarterly
period within the last two calendar years.
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
First Quarter 6,322 15,249
Second Quarter 290 7,388
Third Quarter 21,842 15,342
Fourth Quarter 18,249 13,400
</TABLE>
Because there is no public trading market for the Common Stock, the trading
price is determined by private negotiations between the buyer and the seller.
Holders
At March 1, 1997, the Common Stock was owned of record by approximately 984
shareholders. On such date, no shares of Merchants Bancshares' preferred stock
were issued and outstanding.
Dividends and Dividend Policy
Dividend Policy. Holders of Common Stock are entitled to receive such
dividends as are declared by Merchants Bancshares' Board of Directors in
accordance with Merchants Bancshares' dividend policy. Factors which Merchants
Bancshares' Board of Directors consider prior to declaring a dividend include
earnings, regulatory capital requirements, general business conditions and the
capital needs of its subsidiaries, as well as other factors which the Board of
Directors may deem relevant.
Dividends from Subsidiary Bank. Since Merchants Bancshares is a bank
holding company, it is dependent upon receipt of dividends from its Subsidiary
Bank for payment of dividends to shareholders. The payment of dividends by the
Subsidiary Bank is limited by applicable banking laws.
Dividend History. On March 14, 1995, the Company declared a cash dividend
of $.08 per share of Common Stock to shareholders of record on March 14, 1995,
payable on March 28, 1995 and on June 15, 1995, payable on June 30, 1995. On
September 26, 1995, the Company increased the quarterly cash dividend to $.10
per share of Common Stock, payable October 4, 1995 to shareholders of record on
September 26, 1995. The Company increased the fourth quarter cash dividend to
$.15 per share, payable on December 21, 1995 to shareholders of record on
December 12, 1995.
On March 12, 1996, the Company declared a cash dividend of $.17 per share of
Common Stock to shareholders of record on March 12, 1996, payable on March 28,
1996. The Company paid a quarterly cash dividend of $.20 per share of Common
Stock to shareholders of record on June 11, 1996 and September 17, 1996, payable
on June 25,1996 and October 1, 1996, respectively. Concurrent with increased
earnings, the Company increased the quarterly cash dividend to $.25 per share of
Common Stock to shareholders of record on December 17, 1996, payable on December
27, 1996.
6
<PAGE>
Item 6. SELECTED FINANCIAL DATA
Selected financial data presented below for the fiscal years ended December
31, 1996, 1995, 1994, 1993 and 1992 have been derived from the consolidated
financial statements of the Company. The audited historical financial data for
the fiscal years ended December 31, 1996, 1995 and 1994 are qualified in their
entirety by, and should be read in conjunction with, the financial statements
and the notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
December 31,
(In thousands, except per share data)
--------------------------------------------------------------
1996(1) 1995(1) 1994 1993 1992
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance sheet information:
Loans $ 294,524 $ 237,564 $ 144,459 $ 127,452 $ 123,456
Allowance for loan losses 2,713 2,411 2,063 1,986 1,725
Investment securities 143,272 152,033 56,852 52,329 47,672
Total assets 494,570 486,649 253,027 242,005 228,920
Deposits 439,043 431,381 226,064 218,942 207,968
Long-term debt 0 3,083 0 0 350
Shareholders' equity 53,511 49,322 25,539 21,932 19,637
Income information:
Interest income $ 35,339 $ 29,174 $ 16,965 $ 15,801 $ 16,317
Interest expense 11,169 9,577 4,796 4,943 5,898
---------- --------- ---------- ---------- ----------
Net interest income 24,170 19,597 12,169 10,858 10,419
Provision for loan losses 940 135 50 410 1,165
Noninterest income 5,677 4,655 3,238 2,979 2,811
Noninterest expense 19,888 15,878 10,393 10,494 9,919
---------- --------- ---------- ---------- ----------
Income before income taxes 9,019 8,239 4,964 2,933 2,146
Income tax expense 2,634 2,332 999 512 242
Accounting change 0 0 0 0 2,470
---------- --------- ---------- ---------- ----------
Net income $ 6,385 $ 5,907 $ 3,965 $ 2,421 $ 4,374
========== ========== ========== ========== ==========
Per share data:
Weighted average number of shares
of common stock outstanding 1,945,178 1,718,211 1,258,636 1,261,731 1,261,775
========== ========== ========== ========== ==========
Net income per common share $ 3.28 $ 3.44 $ 3.15 $ 1.92 $ 3.47
========== ========== ========== ========== ==========
Dividends per common share $ .82 $ 0.41 $ 0.20 $ 0.10 $ 0.00
========== ========== ========== ========== ==========
Book value per common share $ 27.37 $ 25.38 $ 20.29 $ 17.39 $ 15.56
========== ========== ========== ========== ==========
Return on average assets 1.32% 1.47% 1.61% 1.03% 1.99%
Return on average shareholders'
equity 12.42% 14.61% 16.93% 11.56% 25.38%
Dividend payout ratio 25.00% 11.92% 6.35% 5.21% N/A
Average equity to average assets 10.60% 10.04% 9.52% 8.89% 7.85%
Allowance for loan losses as a
percentage of nonperforming
loans 88.03% 60.65% 153.6% 122.4% 78.7%
</TABLE>
(1) The Company's financial statements for the fiscal year ended December 31,
1995 and all subsequent periods reflect the acquisition of Texas Gulf,
which occurred May 1, 1995. See note 2 to the Company's Consolidated
Financial Statements.
7
<PAGE>
Condensed Statements of Earnings
The following is a comparison of Merchants Bancshares' condensed statements of
earnings for the most recent five-year period (dollars in thousands).
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1996(1) 1995(1) 1994 1993 1992
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest income (2) $35,339 $29,174 $16,965 $15,801 $16,317
Interest expense 11,169 9,577 4,796 4,943 5,898
------- -------- -------- -------- --------
Net interest income (2) 24,170 19,597 12,169 10,858 10,419
Provision for loan losses 940 135 50 410 1,165
Noninterest income 5,677 4,655 3,238 2,979 2,811
Noninterest expense 19,888 15,878 10,393 10,494 9,919
------- -------- -------- -------- --------
Earnings before income
taxes 9,019 8,239 4,964 2,933 2,146
Income tax expense 2,634 2,332 999 512 242
------- -------- -------- -------- --------
Earnings before accounting
change 6,385 5,907 3,965 2,421 1,904
Accounting change 0 0 0 0 2,470
------- -------- -------- -------- --------
Net earnings $ 6,385 $ 5,907 $ 3,965 $ 2,421 $ 4,374
======= ======== ======== ======== ========
</TABLE>
(1) The Company's financial statements for the fiscal year ended December 31,
1995 and all subsequent periods reflect the acquisition of Texas Gulf,
which occurred May 1, 1995. See note 2 to the Company's Consolidated
Financial Statements.
(2) For the years ended December 31, 1996, 1995, 1994, 1993, and 1992, interest
income would have been $35,820, $29,565, $17,156, $16,071, and $16,688,
respectively, and net interest income would have been $24,651, $19,988,
$12,360, $11,128, and $10,790, respectively, if all such amounts were shown
using a comparable fully taxable equivalent basis (using a tax rate of
34%).
8
<PAGE>
Condensed Average Balance Sheets
Although year-end statistics present general trends, the daily average balance
sheets are more indicative of Merchants Bancshares' levels of activity
throughout the years indicated and less subject to day-to-day business activity
fluctuations. The following schedule sets forth a comparison of the most recent
five years' consolidated daily average balance sheets for Merchants Bancshares.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1996(1) 1995 (1) 1994 1993 1992
-------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 24,873 $ 20,745 $ 12,445 $ 12,123 $ 12,572
Loans, net 260,794 201,248 135,077 123,605 123,369
Interest-bearing deposits 6,291 1,419 1,372 1,573 2,889
Investment securities:
Taxable 129,561 103,893 52,704 42,795 34,099
Non-taxable 18,212 14,272 5,494 7,600 10,237
-------- -------- -------- -------- --------
Total Securities 147,773 118,165 58,198 50,395 44,336
-------- -------- -------- -------- --------
Federal funds sold and interest
bearing deposits with Federal
Home Loan Bank 24,573 44,066 30,304 36,420 26,094
Other assets 20,606 17,001 8,633 11,509 10,184
-------- -------- -------- ------- --------
Total Assets $484,910 $402,644 $246,029 $235,625 $219,444
======== ======== ======== ======== ========
Liabilities and Shareholders' Equity:
Deposits
Noninterest bearing demand $123,590 $101,883 $ 65,909 $ 59,577 $ 52,385
Interest bearing demand 103,102 83,104 46,103 46,643 46,377
Savings 51,862 46,549 29,097 28,035 25,617
Time 152,201 125,123 79,786 78,712 76,195
-------- -------- -------- -------- --------
Total Deposits 430,755 356,659 220,895 212,967 200,574
-------- -------- -------- -------- --------
Borrowings 92 2,536 0 321 350
Other liabilities 2,646 3,011 1,716 1,394 1,284
-------- -------- -------- -------- --------
Total Liabilities 433,493 362,206 222,611 214,682 202,208
-------- -------- -------- -------- --------
Shareholders' Equity 51,417 40,438 23,418 20,943 17,236
-------- -------- -------- -------- --------
Total Liabilities and
Shareholders' Equity $484,910 $402,644 $246,029 $235,625 $219,444
======== ======== ======== ======== ========
</TABLE>
(1) The Company's financial statements for the fiscal year ended December
31,1995, and all subsequent periods reflect the acquisition of Texas Gulf,
which occurred May 1, 1995. See note 2 to the Company's Consolidated
Financial Statements.
9
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Performance Summary
Net earnings for 1996 were $6.4 million, an increase of $478 thousand, or 8.10%
over the $5.9 million recorded for 1995. Net earnings for 1995 were $5.9
million, an increase of $1.9 million, or 49.0%, over the $4.0 million recorded
for 1994. These increases were primarily due to increased net interest income.
On a weighted average share basis, net earnings for 1996 were $3.28 per share of
Common Stock as compared to $3.44 per share for 1995 and $3.15 per share for
1994.
Two industry measures of the performance by a banking institution are its return
on average assets and return on average equity. Return on average assets
("ROA") measures net earnings in relation to average total assets and indicates
a company's ability to employ its resources profitably. During 1996, the
Company's ROA was 1.32%, as compared to 1.47% and 1.61% for 1995 and 1994,
respectively.
Return on average equity ("ROE") is determined by dividing annual net earnings
by average shareholders' equity and indicates how effectively a company can
generate net income on the capital invested by its shareholders. During 1996,
the Company's ROE was 12.42% compared to 14.61% and 16.93% for 1995 and 1994,
respectively.
Total assets increased to $494.6 million from $486.6 million, at December 31,
1996 and 1995, respectively, an increase of $8.0 million. The increase was
driven by strong loan growth. Deposits increased to $439.0 million at December
31, 1996 from $431.4 million at December 31, 1995, an increase of $7.6 million
or 1.8%. Total shareholders' equity was $53.5 million at December 31, 1996,
representing an increase of $4.2 million or 8.5% over total shareholders' equity
of $49.3 million at December 31, 1995.
Net Interest Income and Net Interest Margins
Net interest income represents the amount by which interest income on interest-
earning assets, including investment securities and loans, exceeds interest paid
on interest-bearing liabilities, including deposits and other borrowed funds.
Net interest income is the principal source of the Company's earnings. Interest
rate fluctuations, as well as changes in the amount and type of earning assets
and liabilities, combine to affect net interest income.
Net interest income for the year ended December 31, 1996 was $24.2 million, an
increase of $4.6 million, (23.5%) from $19.6 million for the year ended December
31, 1995. This resulted in a net interest margin of 5.61% and 5.48% and a net
interest spread of 4.51% and 4.38% for the years ended December 31, 1996 and
1995, respectively. The improvement in net interest income for 1996 was
primarily due to increases in the volume of interest-earning assets. Interest
income from loans increased to $24.9 million from $19.5 million for the year
ended December 31, 1996 and 1995, respectively, an increase of $5.4 million or
27.7%. The driving factor was a substantial increase in loans which was
partially offset by the yield on the loan portfolio decreasing to 9.55% from
9.69% for the years ended December 31, 1996 and 1995, respectively. Also,
interest income from the securities portfolio increased to $9.3 million for the
year ended 1996, from $7.4 million for the year ended 1995, a $1.9 million or
25.7% increase, on a tax equivalent basis. This was due primarily to a 25.1%
increase in average securities held by the Company. Partially offsetting the
interest income growth was higher interest expense which grew to $11.2 million
for the year ended December 31, 1996 compared to $9.6 million for the year ended
December 31, 1995, driven by strong growth in average deposits.
To provide a more in-depth analysis of net interest income, the following
average balance sheets and net interest income analysis detail the contribution
of interest-earning assets to overall net interest income and the impact of the
cost of funds.
10
<PAGE>
SUMMARY OF EARNING ASSETS AND INTEREST-BEARING LIABILITIES
(In Thousands)
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995 December 31,1 994
------------------------------ ---------------------------------- --------------------------------
Avg. Bal. Interest Avg. Rate Avg. Bal. Interest Avg. Rate Avg. Bal. Interest Avg. Rate
--------- -------- --------- --------- --------- ---------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities:
Taxable $129,561 $ 7,841 6.05% $103,893 $ 6,266 6.03% $ 52,704 $ 3,041 5.77%
Non-taxable 18,212 1,415 7.77% 14,272 1,149 8.05% 5,494 562 10.23%
Due from CD's 1,978 107 5.41% 1,419 76 5.36% 1,372 62 4.52%
Interest bearing deposits
with banks 4,312 210 4.87% 13,515 793 5.87% 0 0 0.00%
Federal Funds Sold 24,573 1,332 5.42% 30,551 1,780 5.83% 30,304 1,216 4.01%
Net loans 260,795 24,915 9.55% 201,248 19,501 9.69% 135,077 12,275 9.09%
--------- -------- --------- --------- --------- ---------- --------- -------- ---------
Total Interest earning
assets 439,431 35,820 8.15% 364,898 29,565 8.10% 224,951 17,156 7.63%
--------- -------- --------- --------- --------- ---------- --------- -------- ---------
Cash and due from banks 24,873 20,745 12,445
Premises, equipment and
other 20,606 17,001 8,633
--------- --------- ---------
$484,910 $402,644 $246,029
========= ========= =========
Deposits:
Demand - interest
bearing $103,102 2,594 2.52% $ 83,104 $ 2,031 2.44% $ 46,103 $ 954 2.07%
Savings 51,862 1,427 2.75% 46,549 1,336 2.87% 29,097 736 2.53%
Time 152,201 7,140 4.69% 125,123 5,990 4.79% 79,786 3,106 3.89%
Borrowings 92 8 8.70% 2,536 220 8.68% 0 0 0.00%
--------- -------- --------- --------- --------- ---------- --------- -------- ---------
Total interest bearing
liabilities 307,257 11,169 3.64% 257,312 9,577 3.72% 154,986 4,796 3.09%
--------- -------- --------- --------- --------- ---------- --------- -------- ---------
Deposits - non-interest
bearing 123,590 101,883 65,909
Other liabilities 2,646 3,011 1,716
Shareholders' equity 51,417 40,438 23,418
--------- --------- ---------
$484,910 $402,644 $246,029
========= ========= =========
Net interest earnings $24,651 $19,988 $12,360
========= ========= ========
Net yield on interest
earning assets 5.61% 5.48% 5.49%
========= ========= =========
Interest rate spread 4.51% 4.38% 4.54%
========= ========= =========
</TABLE>
Note: Average balances are based upon daily balances. The interest on non-
taxable securities has been calculated on a fully taxable equivalent
basis incorporating a tax rate of 34%. Non-accruing loans have been
included in assets for these computations, thereby reducing yields on
these investments.
11
<PAGE>
The following rate/volume variance has been allocated to the changes in rates.
Non-accrual loans are included in the calculations made below. The interest on
non-taxable investment income has been calculated on a fully taxable equivalent
basis incorporating an effective tax rate of 34%.
RATE/VOLUME ANALYSIS
CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
(In Thousands)
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
--------------------------------------------- -------------------------------------------
Changes from Changes in Changes in Changes from Changes in Changes in
Prior Year Volume Rates Prior Year Volume Rates
------------ ---------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Taxable securities $1,575 $1,548 $ 27 $ 3,225 $2,954 $ 271
Non-taxable securities 266 317 (51) 587 898 (311)
Due from CD's 31 30 1 14 2 12
Federal funds sold (448) (348) (100) 564 10 554
Deposits with financial
institutions (583) (540) (43) 793 0 793
Loans 5,414 5,770 (356) 7,226 6,013 1,213
------------ ---------- ---------- ------------ ----------- ----------
Total interest income 6,255 6,777 (522) 12,409 9,877 2,532
------------ ---------- ---------- ------------ ----------- ----------
Interest expense:
Deposits:
Demand - interest bearing 563 489 74 1,077 766 311
Savings 91 152 (61) 600 441 159
Time 1,150 1,296 (146) 2,884 1,765 1,119
Borrowings (212) (212) 0 220 0 220
------------ ---------- ---------- ------------ ----------- ----------
Total interest expense 1,592 1,725 (133) 4,781 2,972 1,809
------------ ---------- ---------- ------------ ----------- ----------
Net interest income $4,663 $5,052 $(389) $ 7,628 $6,905 $ 723
============ ========== ========== ============ =========== ==========
</TABLE>
12
<PAGE>
Loan Portfolio
The following tables show the composition of the loan portfolio at the end of
each of the last five years and the loan maturity distribution as of December
31, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $ 56,935 $ 44,651 $ 28,593 $ 27,935 $ 26,047
Real estate - construction 15,920 8,626 7,205 2,997 2,145
Real estate - other 156,472 123,130 80,472 68,837 65,842
Installment 63,833 59,765 27,786 27,428 29,322
Other 1,364 1,392 403 255 100
-------- -------- -------- -------- --------
Total loans, net of
unearned discount $294,524 $237,564 $144,459 $127,452 $123,456
======== ======== ======== ======== ========
December 31, 1996
------------------------------------------------
1 year 1 - 5 After
Due in: or less years 5 years
-------- ------------ ---------
<S> <C> <C> <C>
Commercial and industrial loans $ 28,236 $ 24,052 $ 4,647
Real estate construction 10,131 5,701 88
-------- -------- --------
Total $ 38,367 $ 29,753 $ 4,735
======== ======== ========
Loans due after 1 year which have
Predetermined interest rates $ 19,730
Floating or adjustable rates 14,758
--------
Total $ 34,488
========
</TABLE>
Loan Portfolio Composition
Total loans increased 24.0% from December 31, 1995 to December 31, 1996.
Commercial and industrial loans increased $12,284,000, or 27.5%, real estate
related loans increased $40,636,000, or 30.8%, and installment loans increased
$4,068,000, or 6.8%.
The composition of the loan portfolio at the end of the last three years is
displayed in the following table:
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Commercial and industrial 19.3% 18.8% 19.8%
Real estate - construction 5.4% 3.6% 5.0%
Real estate - other 53.1% 51.8% 55.7%
Individuals for household and
other consumer purposes 21.7% 25.2% 19.2%
Other .5% .6% .3%
</TABLE>
As of December 31, 1996, there was no concentration of loans to any one type of
industry exceeding 10% of total loans nor were there any loans classified as
highly-leveraged transactions.
13
<PAGE>
Allowance for Loan Losses
The allowance for loan losses at December 31, 1996 was $2,713,000, representing
.92% of outstanding loans. A year earlier, this ratio was 1.01%. The provision
for loan losses charged against earnings was $940,000 in 1996, $135,000 in 1995,
and $50,000 in 1994. For the year 1996, the Company had net losses totaling
$638,000 as compared to $525,000 in 1995 and net recoveries of $27,000 in 1994.
During 1996, the net charge-off ratio to average loans was .24% as compared to
.26% in 1995 and a net recovery ratio of .02% in 1994. The increase of $805,000
in the provision for 1996 as compared to 1995 is a result of the 24.0% increase
in loans for the same period.
To a very large extent, the Subsidiary Bank's loan portfolio remains secured and
current re-appraisals of collateral value have been received and undertaken in
an effort to further assess loss potential. Management has closely scrutinized
its loss potential on its non-performing assets, as well as on the entire loan
portfolio, and has, to the best of its knowledge and belief, reserved for losses
accordingly.
The transactions occurring in the allowance for loan losses for the five years
ended December 31, 1996, including a breakdown of net charge-offs by type of
loan, are as follows:
14
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
(In Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Average loans outstanding $260,795 $201,248 $135,077 $125,476 $125,199
======== ======== ======== ======== ========
Loans outstanding at
year-end $294,524 $237,564 $144,459 $127,452 $123,456
======== ======== ======== ======== ========
Allowance at beginning of
period $ 2,411 $ 2,063 $ 1,986 $ 1,725 $ 2,079
-------- -------- -------- -------- --------
Allowance of acquired banks 0 738 0 0 0
Provision charged to
expense 940 135 50 410 1,165
-------- -------- -------- -------- --------
Loans charged off:
Commercial and industrial (403) (499) (175) (197) (441)
Real estate - construction 0 0 0 0 0
Real estate - other (41) (14) (159) (54) (1,002)
Installment (347) (211) (103) (136) (201)
Other (9) (18) 0 0 0
-------- -------- -------- -------- --------
Total (800) (742) (437) (387) (1,644)
-------- -------- -------- -------- --------
Loans recovered:
Commercial and industrial 85 101 155 150 54
Real estate - construction 0 0 0 0 0
Real estate - other 19 64 296 44 20
Installment 52 50 13 44 51
Other 6 2 0 0 0
-------- -------- -------- -------- --------
Total 162 217 464 238 125
-------- -------- -------- -------- --------
Net loans (charged-off)
recovered (638) (525) 27 (149) (1,519)
-------- -------- -------- -------- --------
Allowance at end of period $ 2,713 $ 2,411 $ 2,063 $ 1,986 $ 1,725
======== ======== ======== ======== ========
Ratios:
Allowance as a percent
of loans
outstanding at year-end .92% 1.01% 1.43% 1.56% 1.40%
Allowance as a percent of
average loans 1.04% 1.20% 1.53% 1.58% 1.38%
Net loans charged-off
(recovered)
as a percent of
average loans
outstanding .24% .26% (.02%) 0.12% 1.20%
Allowance as a percentage
of nonperforming loans 88.03% 60.65% 153.60% 122.40% 78.70%
</TABLE>
15
<PAGE>
Management of the Subsidiary Bank continues to concentrate on identifying and
addressing credit problems. Efforts have been undertaken and are ongoing to
strengthen credit review policies and procedures. Intensive efforts are ongoing
to ensure that any existing or identifiable developing problem loans receive the
necessary effective attention. The Subsidiary Bank's procedures for reviewing
the adequacy of its allowance for credit losses involve a review of lending
policies and practices, the lending history of personnel involved in the lending
process and the compliance by those personnel with the policies. Consideration
also is given to (i) management's review of individual outstanding and proposed
credits, (ii) the current size and composition of the loan portfolio, (iii)
expectations of future economic conditions and their impact on particular
industries and specific borrowers, (iv) the level and composition of non-
performing loans, (v) evaluation of the underlying collateral for secured loans,
(vi) historical loan loss and recovery experience and (vii) comments made during
regular examinations or audits by banking regulators, the Subsidiary Bank's
internal loan review staff and independent auditors.
The allocation of the Subsidiary Bank's allowance for credit losses by loan
category for the five years ended December 31, 1996 is presented in the
following table (dollars in thousands).
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------- ------------- ------------- ------------- --------------
% of % of % of % of % of
Amount Loan Amount Loan Amount Loan Amount Loan Amount Loan
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
industrial $1,350 19.3% $1,621 18.8% $ 826 19.8% $1,010 21.9% $ 463 21.1%
Real estate -
construction * 5.4% * 3.6% * 5.0% * 2.4% * 1.7%
Real estate -
other 139 53.1% 50 51.8% 751 55.7% 277 54.0% 1,051 53.3%
Installment 1,224 21.7% 740 25.2% 486 19.2% 699 21.5% 211 23.8%
Other * .5% * .6% * .3% * . 2% * .1%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $2,713 100.0% $2,411 100.0% $2,063 100.0% $1,986 100.0% $1,725 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
* Less than $1,000
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. The Company had no material
renegotiated or troubled debt restructuring loans during the years 1992 through
1996.
The following table discloses information regarding non-performing assets for
each of the last five years (in thousands):
16
<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $2,129 $3,125 $1,215 $1,455 $1,737
Past due 90 days or
more 953 850 128 168 456
------ ------ ------ ------ ------
Total non-
performing loans 3,082 3,975 1,343 1,623 2,193
Other real estate
owned 890 1,697 1,461 1,578 3,037
------ ------ ------ ------ ------
Total non-
performing assets $3,972 $5,672 $2,804 $3,201 $5,230
====== ====== ====== ====== ======
</TABLE>
The Subsidiary Bank included in reported income for 1996, $44,000 of interest
received on non-accrual loans. Had these loans paid interest at their original
rates, the Subsidiary Bank would have reported $318,000 of interest on these
non-accrual loans.
Non-Interest Income
Non-interest income increased 22.0% in 1996 compared to an increase of 43.8% in
1995. Service charges on deposits, the largest component of non-interest
income, increased by 27.8% in 1996 as compared to an increase of 47.6% in 1995.
The components of other charges and fees consist of miscellaneous fees such as
collection fees, credit card fees, safe deposit rentals, research fees, check
printing income and wire transfer fees. These fees correlate to the level of
transactions in each of the referenced categories. Other operating income
increased $35,000, or 3.8%, from 1995 to 1996. The majority of other operating
income is derived from the operations of the mortgage division which includes
origination fees, as well as fees charged for servicing the underlying
mortgages.
The following table sets forth by category the non-interest income and the
percentage from the prior year for the most recent three years:
(In Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- ----------------
% % %
Amount Change Amount Change Amount Change
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Service charges on deposit
accounts $4,436 27.8% $3,472 47.6% $2,353 (1.4)%
Other service charges and
fees 281 9.8% 256 15.3% 222 11.0%
Other operating income 962 3.8% 927 39.8% 663 82.6%
Securities transactions (2) N/A 0 0.0% 0 0.0%
------ ------ ------ ------ ------ ------
Total $5,677 22.0% $4,655 43.8% $3,238 8.7%
====== ====== ====== ====== ====== ======
</TABLE>
17
<PAGE>
Non-Interest Expense
Total non-interest expense increased by 25.3% for 1996 as compared to an
increase of 52.8% in 1995. Salaries and benefits, the most significant non-
interest expense, increased $2,800,000, or 33.7%, for 1996. The merger of the
former data processing subsidiary into the bank subsidiary was the primary cause
for the increase in salaries and benefits.
Occupancy, furniture and equipment expense increased $998,000, or 40.0%, in 1996
as compared to 47.9% in 1995. The increases in 1996 are primarily due to
expansion with the openings of three new branch facilities. The increases in
1995 are attributable to the acquisition of Texas Gulf Coast.
Management continually monitors overhead expenses. A key measure used to
monitor the Company's progress in controlling overhead expenses is the overhead
ratio. The overhead ratio is the Company's noninterest expenses, divided by the
sum of net interest income, and non-interest income exclusive of gains or losses
on the sale of investment securities. This ratio was 66.6%, 65.5% and 67.5% for
1996, 1995 and 1994, respectively,
The following table sets forth by category the operating expenses and the
percentage change from the prior year for the most recent three years:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ---------------- ------------------
% % %
Amount Change Amount Change Amount Change
-------- ------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee
benefits $11,117 33.7% $ 8,317 72.4% $ 4,825 1.2%
Occupancy expense 1,915 14.9% 1,666 44.4% 1,154 25.4%
Furniture and equipment
expense 1,573 90.9% 824 55.5% 530 10.7%
Other real estate expense 283 (2.4%) 290 (36.1)% 454 (52.3)%
Other operating expense 5,000 4.6% 4,781 39.4% 3,430 1.7%
------- ------ ------- ------ ------- ------
Total $19,888 25.3% $15,878 52.8% $10,393 (1.0)%
======= ====== ======= ====== ======= ======
</TABLE>
Income Taxes
The provision for income taxes was $2,634,000 for 1996 compared to $2,333,000
for 1995, an increase of $301,000, or 12.9%. The effective income tax rate on
pretax income was 29.2%, 28.3% and 20.1% for 1996, 1995 and 1994, respectively.
For more information concerning income taxes, see Note 10, Federal Income Taxes
in Notes to Consolidated Financial Statements.
Impact of Inflation
The effects of inflation on the local economy and on the Company's operating
results have been relatively modest for the past several years. Since
substantially all of the Company's assets and liabilities are monetary in
nature, such as cash, investments, loans and deposits, their values are less
sensitive to the effects of inflation than to changing interest rates, which do
not necessarily change in accordance with inflation rates. The Company tries to
control the impact of interest rate fluctuations by managing the relationship
between its interest rate sensitive assets and liabilities.
Balance Sheet Management
During 1996, total average earning assets increased $74.5 million or 20.4%.
Average loans increased $59.6 million, average investment securities increased
$29.6 million and average short-term money market instruments decreased $14.6
million (these investments include federal funds sold and interest bearing
deposits in financial institutions and the Federal Home Loan Bank). An increase
of $74.1 million, or 20.8%, in deposits is responsible for the increase in
earning assets.
18
<PAGE>
During 1995, total average earning assets increased $139.9 million or 62.2% from
1994. Average loans increased $66.2 million and average investment securities
increased $60.0 million. The acquisition of Texas Gulf Coast accounts for the
majority of the increases.
The following table presents the Company's average balance sheet composition on
a percentage basis:
Balance Sheet Composition - Percentage of Total Assets
<TABLE>
<CAPTION>
1996 1995 1994
------ ----- ------
<S> <C> <C> <C>
Investment securities:
Taxable 26.7% 25.8% 21.4%
Non-taxable 3.8 3.5 2.2
Due from CD's .4 .4 .6
Federal funds sold 6.0 11.0 12.3
Net loans 53.8 50.0 54.9
------ ----- ------
Total earning assets 90.7 90.7 91.4
Cash and due from banks 5.1 5.1 5.1
Premises, equipment and other 4.2 4.2 3.5
------ ----- ------
Total Assets 100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
Percentage of Total Liabilities and Shareholders' Equity
<TABLE>
<CAPTION>
1996 1995 1994
------ ----- ------
<S> <C> <C> <C>
Deposits - interest bearing 63.3% 63.3% 63.0%
Borrowings 0 .6 .0
----- ----- -----
Total interest bearing liabilities 63.3 63.9 63.0
Deposits - non-interest bearing 25.5 25.3 26.8
Other liabilities .6 .8 .7
Shareholders' Equity 10.6 10.0 9.5
----- ----- -----
Total Liabilities and
Shareholders' Equity 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Investment Securities
The book and market values of investment securities held by the Company as of
dates indicated are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995 1994
------- -------- ---------
<S> <C> <C> <C>
Book Value (amortized cost):
U. S. Treasury & Agencies $117,937 $129,110 $ 50,340
States and Political Subdivisions 20,196 21,382 6,505
Other 5,017 227 7
------- -------- ---------
Total $143,150 $150,719 $ 56,852
======== ======== =========
Market Value $143,727 $152,447 $ 55,766
======== ======== =========
</TABLE>
19
<PAGE>
The Financial Accounting Standard Board ("FASB") Statement No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" requires bank holding
companies to divide their securities holdings among three categories: held-to-
maturity, available-for-sale and trading securities. The accounting standard
provides a different accounting treatment for each category.
Held-to-maturity securities are those debt securities which an institution has
the positive intent and ability to hold to maturity. These debt securities are
reported at amortized cost.
Trading securities are those debt and equity securities that the Company buys
and holds principally for the purpose of selling in the near term. Trading
securities are reported at fair value, with unrealized changes in value reported
directly in the income statement as a part of the Company's earnings.
Available-for-sale securities are those debt securities which the Company does
not have the positive intent and ability to hold to maturity, yet does not
intend to trade actively as part of its trading account. Available-for-sale
securities must be reported at fair value with any unrealized appreciation or
depreciation in the value of these securities, net of tax effects, reported
directly as a separate component of equity capital. Thus, unrealized changes in
the value of these securities will have no effect on the reported earnings of
the Company.
The following table shows as of December 31, 1996, the distribution of
maturities and the weighted average interest yields to maturity of the Company's
investment securities (dollars in thousands).
<TABLE>
<CAPTION>
Held to Maturity
----------------------------------------------------------------------
States & Political Subdivisions
U. S. Treasury ---------------------------------
& Agencies Taxable Non-Taxable Other Total
-------------- ------------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C>
Due within one year:
Book Value $ 0 $ 895 $ 1,891 $ 0 $ 2,786
Market Value 0 897 1,899 0 2,796
Yield 0 5.67% 8.09% 0 7.31%
Due after one but within five years:
Book Value $ 0 $ 498 $10,448 $ 0 $10,946
Market Value 0 504 10,632 0 11,136
Yield 0 6.32% 7.02% 0 6.99%
Due after five but within ten years:
Book Value $ 0 $ 599 $ 5,592 $ 0 $ 6,191
Market Value 0 611 5,829 0 6,440
Yield 0 7.15% 7.73% 0 7.67%
Due after ten years:
Book Value $ 0 $ 0 $ 273 $ 0 $ 273
Market Value 0 0 278 0 278
Yield 0 0 6.90% 0 6.90%
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Available for Sale
----------------------------------------------------------------------
States & Political Subdivisions
U. S. Treasury ---------------------------------
& Agencies Taxable Non-Taxable Other Total
-------------- ------------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C>
Due within one year:
Book Value $32,649 $ 0 $ 0 $ 0 $32,649
Market Value 32,730 0 0 0 32,730
Yield 5.93% 0 0 0 5.93%
Due after one but within five years:
Book Value $78,360 $ 0 $ 0 $ 0 $78,360
Market Value 78,417 0 0 0 78,417
Yield 6.06% 0 0 0 6.06%
Due after five but within ten years:
Book Value $ 6,847 $ 0 $ 0 $ 0 $ 6,847
Market Value 6,831 0 0 0 6,831
Yield 6.15% 0 0 0 6.15%
Due after ten years:
Book Value $ 81 $ 0 $ 0 $5,017 $ 5,098
Market Value 82 0 0 5,017 5,099
Yield 8.23% 0 0 5.20% 5.25%
</TABLE>
The interest on non-taxable investment securities has been calculated on a fully
taxable equivalent basis incorporating an effective tax rate of 34%.
At December 31, 1996, the Company did not hold any securities that would be
categorized as "trading securities".
Liquidity Management
Liquidity involves the Company's ability to raise funds to support asset growth
or reduce assets to meet deposits, withdrawals and other payment obligations, to
maintain reserve requirements and otherwise to operate the Company on an ongoing
basis. In the past, the Company's liquidity needs have primarily been met by
growth in core deposits. Although access to purchased funds from correspondent
banks is available, the Company does not generally rely on these external
funding sources. Generally, the cash and federal funds sold position,
supplemented by amortizing investment and loan portfolios, have created an
adequate liquidity position.
A financial service company's activities consist primarily of financing and
investing activities. These activities result in large cash flows. Merchants
Bancshares' Consolidated Statement of Cash Flows on pages 31 and 32 indicates
the sources of these cash flows.
Capital Commitments
Merchants Bancshares believes that it has sufficient capital and financial
resources to meet its current and anticipated capital commitments.
Deposits
The most important source of the Subsidiary Bank's funds is deposits. The type
of deposits that were in the Subsidiary Bank on a daily average basis and the
related average rate paid during each of the last three years are broken down as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------------- -------------- --------------
Rate Rate Rate
Amount Paid Amount Paid Amount Paid
-------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Demand - non-interest bearing $123,590 0.00% $101,883 0.00% $65,909 0.00%
Demand - interest bearing 103,102 2.52% 83,104 2.44% 46,103 2.07%
Savings 51,862 2.75% 46,549 2.87% 29,097 2.53%
Time 152,201 4.69% 125,123 4.79% 79,786 3.89%
</TABLE>
21
<PAGE>
The following table provides certain information regarding certificates of
deposit issued by the Subsidiary Bank in amounts equal to or exceeding $100,000
at December 31, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
Three (3) months or less $18,471
Over three (3) months through six (6) months 8,237
Over six (6) months through twelve (12) months 7,982
Over twelve (12) months 3,487
-------
Total $38,177
=======
</TABLE>
Interest Rate Sensitivity
The objectives of monitoring and managing the interest rate risk position of the
balance sheet are to contribute to earnings and to minimize the adverse changes
in net interest income. The potential for earnings to be affected by changes in
interest rates is inherent in a financial institution.
Interest rate sensitivity is the relationship between changes in market interest
rates and changes in net interest income due to the repricing characteristics of
assets and liabilities. An asset sensitive position in a given period will
result in more assets being subject to repricing; therefore, market interest
rate changes will be reflected more quickly in asset rates. If interest rates
decline, such a position will normally have an adverse effect on net interest
income. Conversely, in a liability sensitive position, where liabilities
reprice more quickly than assets in a given period, a decline in rates will
benefit net interest income.
One way to analyze interest rate risk is to evaluate the balance of the interest
sensitivity position. A mix of assets and liabilities that are roughly equal in
volume and repricing represents a matched interest sensitivity position. Any
excess of assets or liabilities results in an interest sensitivity gap. The
purpose of this analysis is to be aware of the potential risk on future earnings
resulting from the impact of possible future changes in interest rates on
currently existing net asset or net liability positions. However, this type of
analysis is as of a point in time, when in fact that position can quickly change
as market conditions, customer needs, and management strategies change.
Additionally, interest rate changes do not affect all categories of assets and
liabilities equally or at the same time.
The following table presents the interest sensitivity position of the Company at
December 31, 1996 (dollars in thousands):
<TABLE>
<CAPTION> Rate Sensitive Within
----------------------------- Nonrate
30-Day 90-Day 180-Day One Year Total Sensitive Total
-------- --------- ------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loan, Net of Unearned
Discount $ 79,503 $ 14,269 $20,975 $33,704 $148,451 $146,073 $294,524
Investment Securities 25,210 5,345 8,948 17,416 56,919 86,353 143,272
Federal Funds Sold 6,375 0 0 0 6,375 0 6,375
Interest Deposits in Bank 1,000 0 0 0 1,000 0 1,000
-------- --------- ------- --------- -------- ----------- --------
Total Earning Assets 112,088 19,614 29,923 51,120 212,745 232,426 445,171
-------- --------- ------- --------- -------- ----------- --------
Interest Bearing Liabilities:
Interest Bearing Deposits 191,654 29,643 32,851 32,516 286,664 23,064 309,728
-------- --------- ------- --------- -------- ----------- --------
Total Interest Bearing
Liabilities 191,654 29,643 32,851 32,516 286,664 23,064 309,728
-------- --------- ------- --------- -------- ----------- --------
Interest Sensitivity Gap $(79,566) $(10,029) $(2,928) $18,604 $(73,919)
======== ======== ======= ======== ========
Ratio of Earning Assets to
Interest Bearing Liabilities 58.48% 66.17% 91.09% 157.21% 74.21%
======== ======== ======= ======== ========
</TABLE>
The Company had a negative interest rate sensitive gap position in the 30-day
period of approximately $79.6 million. Declining interest rates would have a
positive impact on the above-referenced asset/liability mix. Conversely, rising
interest rates would have a negative impact upon the above referenced
asset/liability mix.
22
<PAGE>
Capital Resources
At December 31, 1996, shareholders' equity totaled $53.5 million or 10.8% of
total assets. At December 31, 1995, shareholders' equity totaled $49.3 million
or 10.1% of total assets, compared with $25.5 million or 10.1% of total assets
at December 31, 1994.
Bank regulatory authorities in the United States have issued risk-based capital
standards by which all bank holding companies and banks are evaluated in terms
of capital adequacy. These guidelines relate an institution's capital to the
risk profile of its assets. The risk-based capital standards required for all
banks are Tier 1 capital of at least 4% and total capital (Tier 1 and Tier 2) of
at least 8% of risk-adjusted assets. Tier 1 capital includes common
stockholders' equity and qualifying perpetual preferred stock together with
related surpluses and retained earnings. Tier 2 capital may be comprised of
limited life preferred stock, qualifying debt instruments and the reserves for
credit losses up to 1.25% of the risk-weighted assets.
Banking regulators have also issued leverage ratio requirements. The leverage
ratio requirement is measured as the ratio of Tier 1 capital to adjusted assets.
The table below provides a comparison of the Company's risk-based capital ratios
and leverage ratio to the minimum regulatory requirements for the periods
indicated:
<TABLE>
<CAPTION>
December 31, Minimum
---------------------- Regulatory
1996 1995 1994 Requirements
------ ------ ------ -------------
<S> <C> <C> <C> <C>
Risk based capital ratios:
Tier 1 16.70% 18.85% 16.81% 4.00%
Total Capital 17.56% 19.79% 18.19% 8.00%
Leverage Ratio 10.76% 11.98% 9.90% 3.00%(1)
</TABLE>
(1) The Federal Reserve Board may require any bank holding company to
maintain a leverage ratio of up to 200 basis points above the required
minimum.
23
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................... 25
Merchants Bancshares, Inc. and Subsidiaries :
Consolidated Balance Sheet - December 31, 1996 and 1995. 26
Consolidated Statement of Income -
For each of the three years in the period
ended December 31, 1996............................ 28
Consolidated Statement of Stockholders' Equity -
For each of the three years in the period
ended December 31, 1996............................ 30
Consolidated Statement of Cash Flows -
For each of the three years in the period
ended December 31, 1996............................ 31
Merchants Bancshares, Inc. (Parent Company Only):
Balance Sheet - December 31, 1996 and 1995.............. 34
Statement of Income -
For each of the three years in the period
ended December 31, 1996............................ 35
Statement of Stockholders' Equity -
For each of the three years in the period
ended December 31, 1996............................ 30
Statement of Cash Flows -
For each of the three years in the period
ended December 31, 1996............................ 36
Notes to Financial Statements................................ 37
</TABLE>
All other schedules or supplementary data are omitted as the required
information is inapplicable or the information is presented in the financial
statements or related notes.
24
<PAGE>
Hidalgo, Banfill, Zlotnik & Kermali, P.C.
C E R T I F I E D P U B L I C A C C O U N T A N T S
(Originally Founded in 1949)
Board of Directors and Shareholders
Merchants Bancshares, Inc.
Houston, Texas
Independent Auditors' Report
We have audited the accompanying consolidated balance sheet of Merchants
Bancshares, Inc. (formerly Gulf Southwest Bancorp, Inc.) and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996, and the balance sheet of Merchants Bancshares, Inc.
(parent company only) as of December 31, 1996 and 1995, and the related
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Merchants
Bancshares, Inc. (formerly Gulf Southwest Bancorp, Inc.) and subsidiaries and
the financial position of Merchants Bancshares, Inc. (parent company only) as of
December 31, 1996 and 1995, and the respective results of their operations and
their cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
Hidalgo, Banfill, Zlotnik & Kermali, P.C.
Houston, Texas
February 14, 1997
3555 TIMMONS LANE, SUITE 460 - HOUSTON, TEXAS 77027 - (713) 963-8008
25
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash and due from bank (Note 3) $ 30,072,740 $ 29,848,206
Interest bearing deposits with bank - 23,529,402
Time deposits with financial institutions 1,000,000 898,000
Federal funds sold 6,375,000 28,175,000
Investment securities (Note 4):
Available-for-sale 123,076,038 130,650,980
Held-to-maturity (Market value
1996 - $ 20,650,858
1995 - $ 21,796,181) 20,196,377 21,381,584
Loans (Note 5):
Loans, net of unearned income
of $ 6,285,388 in 1996 and
$ 6,263,627 in 1995 294,523,715 237,564,299
Less allowance for possible
loan losses 2,712,864 2,410,815
------------ ------------
Total loans, net 291,810,851 235,153,484
Bank premises and equipment (Note 6) 14,797,074 8,692,194
Accrued interest receivable 3,662,988 3,929,904
Real estate and other loan-related assets 959,347 1,770,207
Other assets 2,620,007 2,619,917
------------ ------------
Total Assets $494,570,422 $486,648,878
============ ============
</TABLE>
26
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
Deposits:
Non-interest bearing $129,314,210 $120,058,131
Interest bearing (Note 7) 309,728,402 311,322,873
------------ ------------
439,042,612 431,381,004
Accrued interest, taxes and other
liabilities 2,016,475 2,576,113
Borrowings (Note 8) - 3,082,960
Minority interest - 286,697
------------ ------------
Total Liabilities 441,059,087 437,326,774
------------ ------------
Commitments and Contingencies (Note 11) - -
Stockholders' Equity (Notes 9, 12 and 15):
Preferred stock $ 20 par value,
authorized 2,000,000 shares - -
Common stock, $ 1 par value,
authorized 10,000,000 shares,
issued 1,977,855 shares in 1996
and 1995 1,977,855 1,977,855
Paid-in capital 25,766,675 25,766,675
Retained earnings 25,954,348 21,166,586
Net unrealized gain (loss) on
investment securities available-for-sale
(net of income taxes) 81,024 859,555
------------ ------------
53,779,902 49,770,671
Less cost of stock held in treasury:
Common, 22,885 shares in 1996 and
34,885 in 1995 (268,567) (448,567)
------------ ------------
Total Stockholders' Equity 53,511,335 49,322,104
------------ ------------
Total Liabilities and
Stockholders' Equity $494,570,422 $486,648,878
============ ============
</TABLE>
See notes to financial statements.
27
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Interest Income:
Interest and fees
on loans $24,915,315 $19,500,532 $12,274,698
Investment securities:
Taxable interest 7,841,312 6,265,941 3,041,308
Non-taxable interest 933,985 758,059 370,726
Interest bearing deposits with bank 209,595 793,023 -
Time deposits with financial
institutions 106,857 76,140 62,363
Federal funds sold 1,332,412 1,780,062 1,216,142
----------- ----------- -----------
Total Interest Income 35,339,476 29,173,757 16,965,237
----------- ----------- -----------
Interest Expense:
Deposits 11,160,623 9,356,469 4,796,133
Long-term borrowings 8,642 220,418 -
----------- ----------- -----------
Total Interest Expense 11,169,265 9,576,887 4,796,133
----------- ----------- -----------
Net interest income 24,170,211 19,596,870 12,169,104
Provision for possible loan
losses (Note 5) 940,000 135,000 50,000
----------- ----------- -----------
Net interest income after
provision for possible
loan losses 23,230,211 19,461,870 12,119,104
----------- ----------- -----------
Noninterest Income:
Service charges on deposit
accounts 4,436,228 3,472,492 2,353,282
Other service charges
and fees 280,453 256,110 222,001
Other operating income 962,249 926,841 662,771
Securities transactions
(Note 4) (1,625) (40) -
----------- ----------- -----------
Total Noninterest Income 5,677,305 4,655,403 3,238,054
----------- ----------- -----------
Noninterest Expense:
Salaries and employee
benefits 11,116,967 8,316,752 4,825,183
Occupancy expense 1,915,379 1,665,812 1,153,620
Furniture and equipment
expense 1,573,489 824,168 529,730
Other real estate expense 282,925 290,364 454,216
Other operating expense
(Note 16) 4,999,688 4,780,721 3,430,091
----------- ----------- -----------
Total Noninterest Expense 19,888,448 15,877,817 10,392,840
----------- ----------- -----------
</TABLE>
See notes to financial statements.
28
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (Continued)
<TABLE>
Year Ended December 31,
----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Income before provision for
income taxes 9,019,068 8,239,456 4,964,318
Provision for income taxes
(Note 10) 2,634,100 2,332,700 999,300
----------- ----------- -----------
Net Income $ 6,384,968 $ 5,906,756 $ 3,965,018
=========== =========== ===========
Weighted Average Number
of Common Shares
Outstanding 1,945,178 1,718,211 1,258,636
=========== =========== ===========
Net Income per Common Share $ 3.28 $ 3.44 $ 3.15
=========== =========== ===========
</TABLE>
See notes to financial statements.
29
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES (Consolidated)
AND
MERCHANTS BANCSHARES, INC. (Parent Company Only)
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
on
Securities
Preferred Common Paid-In Retained Available- Treasury
Stock Stock Capital Earnings for-Sale Stock
--------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1994 $ - $1,281,650 $ 8,630,862 $12,289,467 $ - $(270,226)
Net income - - - 3,965,018
Cash dividend declared -
common stock,
$.20 per share - - - (251,727) - -
Change in accounting
method - - - - 49,656
Net change in unrealized
gain (loss) on investment
securities available-for-sale - - - - (112,384) -
Acquired 2,607 shares
of treasury stock - - - - - (43,218)
--------- ---------- ----------- ----------- ---------- -----------
Balance at
December 31, 1994 - 1,281,650 8,630,862 16,002,758 (62,728) (313,444)
Net income - - - 5,906,756 - -
Cash dividend declared -
common stock,
$.41 per share - - - (742,928) - -
Net change in unrealized
gain (loss) on investment
securities available-for-sale - - - - 1,001,073 -
Common stock issued - 696,205 17,135,813 - (78,790) -
Acquired 15,328 shares
of treasury stock - - - - - (174,256)
Sold 3,457 shares
of treasury stock - - - - - 39,133
--------- ---------- ----------- ----------- ---------- -----------
Balance at
December 31, 1995 - 1,977,855 25,766,675 21,166,586 859,555 (448,567)
Net income - - - 6,384,968 - -
Cash dividend declared -
common stock,
$.82 per share - - - (1,597,206) - -
Net change in unrealized
gain (loss) on investment
securities available-for-sale - - - - (778,531) -
Sold 12,000 shares
of treasury stock - - - - - 180,000
--------- ---------- ----------- ----------- ---------- -----------
Balance at
December 31, 1996 $ - $1,977,855 $25,766,675 $25,954,348 $ 81,024 $(268,567)
========= ========== =========== =========== ========== ===========
</TABLE>
See notes to financial statements.
30
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Cash Flows From Operating
Activities:
Net income $ 6,384,968 $5,906,756 $3,965,018
----------- ---------- ----------
Adjustments to Reconcile
Net
Income to Cash Flows
from Operating Activities:
Provision for possible
loan losses 940,000 135,000 50,000
Discount (Accretion)
amortized to income 647,568 246,698 465,510
Loss (Gain) on sale or
maturity of investment
securities 1,625 40 -
Origination of mortgage
loans for sale (10,878,114) (7,419,281) -
Proceeds from mortgage
loans sold 10,965,560 7,336,361 -
Depreciation and
amortization 1,148,126 888,835 520,777
Loss (Gain) on sale of
premises and equipment (58,652) 24,216 (10,475)
Provision for losses on real
estate and other
loan-related assets 176,446 109,900 245,343
Loss (Gain) on sale of real
estate and other loan-
related assets (17,922) 11,528 1,571
Decrease (Increase) in
accrued interest
receivable 266,916 (164,755) (322,899)
Decrease (Increase) in other
assets 287,206 (110,580) 876,537
Increase (Decrease) in
accrued interest, taxes
and other liabilities (559,638) 219,740 292,418
----------- ---------- ----------
Total Adjustments 2,919,121 1,277,702 2,118,782
----------- ---------- ----------
Net Cash Flows From
Operating Activities 9,304,089 7,184,458 6,083,800
----------- ---------- ----------
</TABLE>
31
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1996 1995 1994
---------- ----------- ----------
<S> <C> <C> <C>
Cash Flows From Investing
Activities:
Net decrease (increase) in time
deposits in financial institutions (102,000) 1,096,000 (700,000)
Proceeds from the maturities of
held-to-maturity investment securities 2,525,000 19,036,859 6,830,000
Proceeds from sales of available-for-sale
investment securities 6,989,472 - -
Proceeds from the maturities of
available-for-sale
investment securities 53,584,174 19,311,807 7,500,000
Purchase of held-to-maturity
investment securities (1,368,028) (24,717,436) (17,924,547)
Purchase of available-for-sale
investment securities (54,811,429) (20,152,737) (1,488,750)
Net (increase) (56,082,964) (13,919,914) (17,417,795)
Rebates (1,471,245) (1,033,599) (470,934)
Recoveries 162,295 216,986 464,273
Proceeds from sale of premises
and equipment 124,524 24,738 28,300
Capital expenditures (7,192,938) (599,288) (946,806)
Proceeds from sale of real estate and
other loan-related assets 359,437 423,356 305,600
------------ ------------ ------------
Net Cash Flows From
Investing Activities (57,283,702) (20,313,228) (23,820,659)
------------ ------------ ------------
Cash Flows From Financing Activities:
Net increase in demand deposits,
NOW accounts and savings accounts 6,103,772 14,980,594 7,132,080
Net increase (decrease) in time deposits 1,557,836 9,311,209 (9,940)
Repayment of long-term borrowings (3,082,960) (374,045) -
Proceeds from sale of treasury stock 180,000 39,133 -
Purchase of treasury stock - (174,256) (43,218)
Dividends paid (1,597,206) (742,928) (251,727)
Purchase Minority interest (286,697) - -
------------ ------------ ------------
Net Cash Flows From Financing Activities 2,874,745 23,039,707 6,827,195
------------ ------------ ------------
Net Increase (decrease) in
Cash and Cash Equivalents (45,104,868) 9,910,937 (10,909,664)
Cash and Cash Equivalents at
Beginning of Period 81,552,608 41,912,004 52,821,668
Cash Received in Acquisition of Banks - 29,729,667 -
------------ ------------ ------------
Cash and Cash Equivalents
at End of Period $ 36,447,740 $ 81,552,608 $ 41,912,004
============ ============ ============
Interest Paid $ 11,243,162 $ 9,489,152 $ 4,814,583
============ ============ ============
Federal Income Taxes Paid $ 2,435,309 $ 1,635,366 $ 289,000
============ ============ ============
</TABLE>
See notes to financial statements.
32
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1996 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
Non-Cash Transactions:
Bank loans for real estate
and other loan-related
assets sold $1,067,492 $ 607,832 $ 749,330
Foreclosed properties
transferred to real
estate and other loan
related assets $ 774,593 $ 736,956 $ 1,216,352
Investment securities
transferred to securities
available-for-sale $ - $ - $14,185,179
Issued 696,205 shares of
common stock for the
merger with Texas Gulf
Coast Bancorp, Inc. $ - $17,753,228 $ -
</TABLE>
33
<PAGE>
MERCHANTS BANCSHARES, INC.
(Parent Company Only)
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
----------- ----------
<S> <C> <C>
Cash $ 609,223 $2,341,817
Certificates of deposit 1,000,000 -
Due from non-bank
subsidiary - 59,000
Due from bank subsidiary 1,356,268 1,750,000
Investment in bank
subsidiary 50,096,619 44,568,002
Equipment 82,403 23,850
Excess of cost of
subsidiaries over
equity in net assets
acquired, net of
accumulated amortization
of $ 292,857 in 1996 and
$ 278,466 in 1995 282,809 297,200
Deferred and other taxes 84,330 301,679
----------- -----------
Total Assets $53,511,652 $49,341,548
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ 317 $ 19,444
----------- -----------
Total Liabilities 317 19,444
----------- -----------
Commitments and
Contingencies (Note 11) - -
Stockholders' Equity
(Notes 9, 12 and 15):
Preferred stock, $ 20 par
value, authorized
2,000,000 shares - -
Common stock, $1 par
value, authorized
10,000,000 shares,
issued 1,977,855
shares in 1996
and 1995 1,977,855 1,977,855
Paid-in capital 25,766,675 25,766,675
Retained earnings 25,954,348 21,166,586
Net unrealized gain
(loss) on investment
securities available-
for-sale (net of
income taxes) 81,024 859,555
----------- -----------
53,779,902 49,770,671
Less costof stock
held in treasury:
Common, 22,885 shares in
1996 and 34,885 in 1995 (268,567) (448,567)
----------- -----------
Total Stockholders'
Equity 53,511,335 49,322,104
----------- -----------
Total Liabilities and
Stockholders' Equity $53,511,652 $49,341,548
=========== ===========
</TABLE>
See notes to financial statements.
34
<PAGE>
MERCHANTS BANCSHARES, INC.
(Parent Company Only)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Income:
Cash dividends from subsidiary $ - $3,000,000 $ -
Interest income 91,736 13,072 14,097
---------- ---------- ----------
91,736 3,013,072 14,097
---------- ---------- ----------
Expenses:
Operating expenses 212,916 197,568 177,276
---------- ---------- ----------
212,916 197,568 177,276
---------- ---------- ----------
Income (loss) before
income tax benefit and
equity in undistributed
income of subsidiary (121,180) 2,815,504 (163,179)
Income tax benefit 199,000 299,400 621,900
---------- ---------- ----------
Income before equity
in undistributed income
of subsidiary 77,820 3,114,904 458,721
Equity in undistributed
income of subsidiary 6,307,148 2,791,852 3,506,297
---------- ---------- ----------
Net income $6,384,968 $5,906,756 $3,965,018
========== ========== ==========
</TABLE>
See notes to financial statements.
35
<PAGE>
MERCHANTS BANCSHARES, INC.
(Parent Company Only)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating
Activities:
Net Income $ 6,384,968 $ 5,906,756 $ 3,965,018
Adjustments to Reconcile Net
Income to Cash Flows From
Operating Activities:
Equity in undistributed
income of subsidiary (6,307,148) (2,791,852) (3,506,297)
Amortization and depreciation 24,250 17,040 14,390
Increase (Decrease) in
accrued expenses (19,127) (119,222) 89,319
Decrease (Increase) in due from subsidiary 452,732 (862,944) (449,300)
Decrease in deferred and other taxes 217,349 427,000 499,400
----------- ----------- -----------
Net Cash Flows From Operating Activities 753,024 2,576,778 612,530
----------- ----------- -----------
Cash Flows From Investing Activities:
(Decrease) in due to Bank subsidiary - (43,472) -
Purchase of equipment (68,412) (26,500) -
----------- ----------- -----------
Net Cash Flows From Investing Activities (68,412) (69,972) -
----------- ----------- -----------
Cash Flows From Financing Activities:
Proceeds from sale of treasury stock 180,000 39,133 -
Purchase of treasury stock - (174,256) (43,218)
Dividends paid (1,597,206) (742,928) (251,727)
----------- ----------- -----------
Net Cash Flows From Financing Activities (1,417,206) (878,051) (294,945)
----------- ----------- -----------
Net Increase (Decrease) in Cash
and Cash Equivalents (732,594) 1,628,755 317,585
Cash and Cash Equivalents at
Beginning of Year 2,341,817 713,062 395,477
----------- ----------- -----------
Cash and Cash Equivalents at
End of Year $ 1,609,223 $ 2,341,817 $ 713,062
=========== =========== ===========
Interest Paid $ - $ - $ -
=========== =========== ===========
Taxes Paid $ 2,435,309 $ 1,635,366 $ 289,000
=========== =========== ===========
Non-Cash Transactions:
Issued 696,205 shares of common stock
for the merger with Texas Gulf
Coast Bancorp, Inc. $ - $17,753,228 $ -
=========== =========== ===========
</TABLE>
See notes to financial statements.
36
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
In June of 1996, Gulf Southwest Bancorp, Inc. changed its name to Merchants
Bancshares, Inc.
The accounting and reporting policies of Merchants Bancshares, Inc. (Company)
and its subsidiaries conform to generally accepted accounting principles and
practices within the banking industry.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period, the
most significant of which relates to the allowance for possible loan losses.
Actual results could differ from those estimates.
The Company and its subsidiaries offer a full range of financial services to
commercial, industrial, financial and individual customers in the greater
Houston, Texas and surrounding area, including short-term and medium-term loans,
revolving credit arrangements, inventory and accounts receivable financing,
equipment financing, real estate lending, Small Business Administration lending,
letters of credit, installment and other consumer loans, savings accounts and
various savings programs, including individual retirement accounts, and interest
and non-interest-bearing checking accounts. Other services include federal tax
depository, safe deposit and night depository services. A summary of the more
significant accounting policies follows:
Financial Statement Presentation
The consolidated financial statements include the accounts of the parent company
and its wholly-owned subsidiary, Gulf Southwest Nevada Bancorp, Inc. and its
wholly-owned subsidiary Merchants Bank. All significant intercompany accounts
and transactions have been eliminated in consolidation. Investment in
subsidiary is accounted for on the equity method of accounting in the Parent
Company Only financial statements.
Investment Securities
Investment securities are classified in three categories and accounted for as
follows: debt securities that the Company has the intent and ability to hold to
maturity are classified as held-to-maturity and are carried at amortized cost;
debt and equity securities bought and held principally for the purpose of
reselling, of which the Company has none, are classified as trading securities
and are carried at fair value, with unrealized gains and losses included in
income; debt or equity securities not classified as either held-to-maturity or
trading securities are deemed available-for-sale and are carried at fair value,
with unrealized gains and losses, net of applicable income taxes, reported as a
separate component of stockholders' equity.
Interest income on investment securities, including amortization of premiums and
accretion of discounts, is recognized using the interest method. The specific
identification method is used to determine realized gains and losses on sales of
securities, which are reported in securities transactions.
Loans
Loans are stated at the principal amount outstanding, net of unearned income and
the allowance for possible loan losses. Interest on commercial, real estate and
other loans is accrued over the term of the loan based on the amount of
principal outstanding except where serious doubt exists as to the collectibility
of a loan, in which case the accrual of interest is discontinued. Interest
income on installment loans is computed primarily on sum-of-the-months-digit
method which, in the aggregate, does not differ materially from the interest
method. Net loan origination and commitment fees are being deferred and
amortized into income over the term of the loan as an adjustment of the yield.
37
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (Continued)
Loans (continued)
Nonaccrual loans are those on which the accrual of interest has ceased. Loans
are placed on nonaccrual status if in the opinion of management, principal or
interest is not likely to be paid in accordance with the terms of the loan or
when principal or interest is past due 90 days or more and collateral is
insufficient to cover principal and interest. Interest accrued but not
collected at the date a loan is placed on nonaccrual status is reversed against
interest income. All cash receipts, whether designated as principal or interest
are used to reduce the carrying value of the loan when it is in the nonaccrual
status. Loans are restored to accrual status when principal and interest
payments are brought current and future payments in accordance with loan terms
are reasonably assured.
Effective January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairments of a Loan" (SFAS
114") and Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures", ("SFAS
118"). SFAS 114 requires that the carrying value of an impaired loan be based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, the loans observable market price or the fair value of
the collateral, if the loan is collateral dependent. Under SFAS 114, a loan is
considered impaired when, based on current information, it is probable that the
borrower will be unable to pay contractual interest or principal payments as
scheduled in the loan agreement. Generally, the Company applies SFAS 114 to
nonaccrual loans.
SFAS 118 permits a creditor to use existing methods for recognizing interest
income on impaired loans. The Company recognizes interest income on impaired
loans pursuant to the discussion above for nonaccrual loans.
Allowance For Possible Loan Losses
The allowance for possible loan losses is established by a charge to income as a
provision for loan losses. Actual loan losses or recoveries are charged or
credited directly to this allowance. The amount of the allowance is determined
based upon evaluation of the loan portfolio, a review of past loan loss
experience and management's judgment with respect to current and expected
economic conditions and their potential impact on the loan portfolio.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation expense is computed on the straight-line method based upon the
estimated useful lives of the assets. Amortization of leasehold improvements is
based on the estimated useful lives of the improvements or the term of the
respective lease, whichever is shorter. At the time of a retirement or sale,
the related cost and accumulated depreciation are removed from the accounts, and
any resulting gain or loss is recorded in income. Maintenance and repairs are
charged to expense as incurred. Renewals and betterments, expenditures which
generally increase the value of the property or extend its useful life, are
capitalized.
Real Estate and Other Loan Related Assets
Real estate and other loan related assets are stated at the lower of cost or
estimated fair value, less the estimated costs to sell. Any reduction from cost
(loan value) to estimated fair value at the time of foreclosure is charged to
the allowance for possible loan losses. Subsequent valuation adjustments are
charged to current earnings through the provision for revaluation of real estate
and other loan related assets. Losses on dispositions are recognized in the
period of occurrence while gains are not recognized until all criteria for
income recognition have been met. Also, any income received or expense incurred
during the period the assets are owned is recognized as income or expense during
the period in which it is received or incurred and is included in other real
estate expense.
38
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (Continued)
Excess of Cost Over Equity in Net Assets Acquired
The fair value of the net assets acquired in transactions accounted for as
purchases is recorded as an investment by the parent company. The excess of the
cash or market value of the consideration given in the transactions over the
fair value of the net assets acquired is recorded as the excess of cost over
fair value of assets acquired, which is amortized into other operating expenses
on a straight-line basis over periods of 15 to 40 years.
Income Taxes
The Company and its subsidiaries file a consolidated Federal income tax return.
The subsidiaries record income tax expense by applying the statutory tax rate to
their income as adjusted for tax exempt interest and other temporary differences
and remit the portion of Federal income taxes currently due to the parent
company. The parent company records, as a tax benefit, the difference between
total taxes reflected by the subsidiaries and the consolidated provision for
income taxes. Deferred tax assets and liabilities are recognized for balance
sheet basis differences for tax and financial reporting purposes. The deferred
taxes represent future tax return consequences of those differences. Investment
tax credits and alternative minimum tax credits are recognized as a reduction of
Federal income taxes when such credits are utilized.
Earnings Per Share
Earnings per share of common stock are computed by dividing earnings by the
weighted average number of shares outstanding during the year.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks, interest bearing deposits with bank and federal funds sold.
Generally, federal funds are purchased and sold for one-day periods.
Reclassifications
Certain amounts in the 1995 and 1994 financial statements have been reclassified
to conform with the 1996 presentation.
Note 2 - Acquisition and Mergers
On May 1, 1995, the Company through its wholly owned subsidiary Gulf Southwest
Nevada Bancorp, Inc. acquired all of the outstanding common stock of Texas Gulf
Coast Bancorp, Inc. by issuing 696,205 shares (with a fair value of $ 25.50 per
share) of Merchants Bancshares, Inc. (formerly Gulf Southwest Bancorp, Inc.)
common stock plus cash of $ 52,231 for fractional and dissenter shares to effect
the merger. The acquisition and merger was accounted for as a purchase
transaction. The excess of cost of the acquired Company over the sum of the
amounts assigned to identifiable assets acquired less liabilities assumed of $
194,650 was recorded as excess of cost over the net equity in net assets
acquired and is being amortized over 15 years.
The operations of Texas Gulf Coast Bancorp, Inc. since May 1, 1995 are included
in the accompanying financial statements.
On January 1, 1996, Gulf Southwest Nevada Bancorp, Inc. a wholly owned
subsidiary of the Company merged all of its subsidiary Banks into its Merchants
Bank subsidiary and the former subsidiary Banks became branches of Merchants
Bank. In January of 1996, Merchants Bank purchased the data processing equipment
of G.S.W. Data Processing, Inc. and Central Data Processing, Inc. at net book
value. The two wholly owned subsidiaries were then liquidated into their
parent, Gulf Southwest Nevada Bancorp, Inc.
39
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
Note 3 - Reserve Requirements
Cash and due from banks of approximately $ 12,315,000 and $ 8,344,000 at
December 31, 1996 and 1995, respectively, were maintained to satisfy regulatory
reserve and other requirements.
Note 4 - Investment Securities
The amortized cost and estimated fair value of available-for-sale and held-to-
maturity investment securities were as follows:
Available-for-Sale Investment Securities:
<TABLE>
<CAPTION>
Unrealized Gross
December 31, 1996: Amortized -------------------- Fair
Cost Gains Losses Value
------------- ---------- -------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Government agencies $117,936,759 $ 652,515 $529,753 $118,059,521
Other 5,016,517 - - 5,016,517
------------- ---------- -------- ------------
$122,953,276 $ 652,515 $529,753 $123,076,038
============= ========== ======== ============
Unrealized Gross
December 31, 1995: Amortized -------------------- Fair
Cost Gains Losses Value
------------- ---------- -------- ------------
U.S. Treasury and other
U.S. Government agencies $129,110,288 $1,662,989 $349,464 $130,423,813
Other 227,167 - - 227,167
------------- ---------- -------- ------------
$129,337,455 $1,662,989 $349,464 $130,650,980
============= ========== ======== ============
Held-to-Maturity Investment Securities:
Unrealized Gross
December 31, 1996: Amortized --------------------- Fair
Cost Gains Losses Value
------------- ----------- -------- ------------
State, county and
municipal obligations $ 20,196,377 $ 462,085 $ 7,604 $ 20,650,858
============= =========== ======== ============
Unrealized Gross
December 31, 1995: Amortized -------------------- Fair
Cost Gains Losses Value
------------- ---------- -------- ------------
State, county and
municipal obligations $ 21,381,584 $ 462,228 $ 47,631 $ 21,796,181
============= ========== ======== ============
</TABLE>
Cash proceeds from the maturity of held-to-maturity investment securities
during 1996, 1995 and 1994 were $ 2,525,000, $19,036,859 and $ 6,830,000,
respectively. Cash proceeds from the maturity and sales of available-for-sale
investment securities during 1996, 1995 and 1994 were $ 60,573,646, $
19,311,807, and $ 7,500,000 respectively. Net gains or losses from the sale
of available-for-sale investment securities for 1996, 1995 and 1994 amounted to
$ (1,625), (gross gains of $ 13 and gross losses of $1,638), $ 0 and $ 0,
respectively. There were no sales of held-to-maturity securities in 1996, 1995,
and 1994. During 1995 early redemption of held-to-maturity investment
securities resulted in a net loss of $ 40 (gross gains of $ 53 and gross losses
of $93).
40
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
Note 4 - Investment Securities (Continued)
The amortized cost and estimated fair value of investment securities at December
31, 1996 by contractual maturity were as follows:
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
------------------------------ ------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 32,648,558 $ 32,730,038 $ 2,786,257 $ 2,795,715
Due after one year through
five years 78,359,648 78,416,529 10,945,823 11,135,473
Due after five years through
ten years 6,847,322 6,831,054 6,191,039 6,440,089
Due after ten years 5,097,748 5,098,417 273,258 279,581
------------ ------------ ----------- -----------
Total Investment Securities $122,953,276 $123,076,038 $20,196,377 $20,650,858
============ ============ =========== ===========
</TABLE>
Investment securities with amortized costs of $ 61,273,539 and $ 74,309,085 at
December 31, 1996 and 1995, were pledged to secure public deposits and for other
purposes as required by law.
Note 5 - Loans
The loan portfolio was comprised of the following categories at December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Commercial and industrial $ 56,934,963 $ 44,650,607
Real estate - construction 15,920,334 8,626,413
Real estate - other 156,471,949 123,129,892
Installment loans 70,117,783 66,029,009
Mortgage loans held for resale 212,219 299,665
Other loans 1,151,855 1,092,340
------------ ------------
Total loans 300,809,103 243,827,926
Less:
Unearned income (6,285,388) (6,263,627)
Allowance for possible
loan losses (2,712,864) (2,410,815)
------------ ------------
Net Loans $291,810,851 $235,153,484
============ ============
</TABLE>
41
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
Note 5 - Loans (continued)
Loans on which interest was not being accrued and past due loans (90 days or
more) amounted to $ 2,129,094 and $ 952,700, respectively at December 31, 1996,
compared to $ 3,125,506 and $ 849,588, respectively at December 31, 1995.
The allowance for loan losses related to these impaired loans was $ 217,148 and
$ 226,208 in 1996 and 1995, respectively.
Interest income lost on impaired loans and the average balance of impaired loans
was as follows for the year ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Interest income that would have
been recorded $ 318,314 $ 262,583 $ 105,740
Interest income recognized 43,684 61,858 1,059
---------- ---------- ----------
Interest income lost $ 274,630 $ 200,725 $ 104,681
========== ========== ==========
Average balance $2,340,463 $2,179,898 $1,433,000
========== ========== ==========
</TABLE>
Some of the directors and executive officers of the Company and its
subsidiaries and their related parties are loan customers at the Company's
subsidiary bank. In management's judgment, such borrowings were on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with others and do
not involve other than normal risk of collectibility.
An analysis of loans to these parties, exclusive of loans to such persons that
in the aggregate do not exceed $ 60,000, is as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Balance at beginning of year $11,768,064 $ 4,083,674
New loans 4,474,637 9,784,932
Amounts collected (2,780,363) (6,722,794)
Loans to customers no longer or new
related parties and other (5,149,420) 4,622,252
----------- -----------
Balance at end of year $ 8,312,918 $11,768,064
=========== ===========
</TABLE>
Transactions in the allowance for possible loan losses were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year $2,410,815 $ 2,062,786 $ 1,986,438
Allowance of acquired banks - 737,941 -
Provision charged to expense 940,000 135,000 50,000
Loan losses:
Charge-offs (800,245) (741,898) (437,925)
Recoveries 162,294 216,986 464,273
---------- ----------- -----------
Net loan losses (637,951) (524,912) 26,348
---------- ----------- -----------
Balance at end of year $2,712,864 $ 2,410,815 $ 2,062,786
========== =========== ===========
</TABLE>
42
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
Note 6 - Bank Premises and Equipment
Bank premises and equipment were comprised of the following at December 31:
<TABLE>
<CAPTION>
Estimated
Useful Lives 1996 1995
------------ -------- --------
<S> <C> <C> <C>
Land $ 3,146,964 $ 1,700,175
Bank premises and
leasehold improvements 5 to 40 yrs. 12,536,132 8,512,827
Furniture and equipment 3 to 10 yrs. 7,337,963 5,722,127
Automobiles 3 to 5 yrs. 478,223 492,601
Construction in progress - 599,788
Less - accumulated depreciation
and amortization (8,702,208) (8,335,324)
----------- ----------
Net balance at end of year $14,797,074 $8,692,194
=========== ==========
</TABLE>
Depreciation and amortization charged to operating expense was $1,022,186 in
1996, $814,045 in 1995, and $506,385 in 1994.
Note 7 - Interest Bearing Deposits
Interest bearing deposits were comprised of the following categories at
December 31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Interest bearing demand $104,314,922 $108,598,126
Savings 53,811,662 52,680,765
Time 113,424,591 113,219,057
Time over $100,000 38,177,227 36,824,925
------------ ------------
$309,728,402 $311,322,873
============ ============
</TABLE>
Note 8 - Borrowings
The Company had the following indebtedness at December 31:
<TABLE>
<CAPTION>
Subsidiaries 1996 1995
- ------------ --------- ---------
<S> <C> <C>
Note payable in the original amount of $3,400,000.
Principal payments of $175,000 a quarter beginning
June 30, 1995, and quarterly thereafter until maturity
at March 31, 1997. Interest was payable quarterly
beginning June 30, 1995, at the prime rate (8.5% at
December 31, 1995). The note is collateralized by
all the shares of common stock of three bank
subsidiaries owned by Merchants Bancshares, Inc. $ - $ 3,050,000
Note payable in monthly installments of $2,441
including interest at 8%. The note is collateralized
by computer equipment. - 32,960
----------- ------------
$ - $ 3,082,960
=========== ============
</TABLE>
In January of 1996 the above borrowings were repaid.
43
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
Note 9 - Dividends from Subsidiaries
Dividends paid by the company's subsidiaries are the primary source of funds
available to the company for payment of dividends to stockholders and other
operating needs. Dividends paid by the company's subsidiary bank are subject to
restrictions by certain regulatory agencies.
At December 31, 1996, approximately $ 28,818,000 of the subsidiary banks' net
assets were available for payment of dividends under these restrictions.
Note 10 - Federal Income Taxes
Deferred income taxes result from differences between amounts of assets and
liabilities as measured for income tax and financial reporting purposes. The
significant components of Federal deferred tax assets and liabilities as of
December 31, are as follows:
1996 1995
------ ------
Deferred Tax Assets:
Carrying value of other real
estate owned $ 15,900 $ 212,000
Allowance for possible loan
losses 394,600 266,200
Alternative minimum tax credit - 301,700
---------- ----------
410,500 779,900
---------- ----------
Deferred Tax Liabilities:
Accretion on municipal bonds 51,500 42,400
Accumulated depreciation 206,700 285,900
Unrealized investment securities
gains 41,700 446,600
---------- ----------
299,900 774,900
---------- ----------
Net Deferred Tax $ 110,600 $ 5,000
========== ==========
The consolidated provision for income taxes for the years ended December 31,
consists of the following:
1996 1995 1994
------ ------ ------
Currently payable $2,334,800 $1,556,600 $330,000
Deferred 299,300 776,100 669,300
---------- ---------- --------
$2,634,100 $2,332,700 $999,300
========== ========== ========
The income tax expense applicable to securities gains and losses for the years
1996, 1995 and 1994 was $(553), $(12) and $-0-, respectively.
44
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
Note 10 - Federal Income Taxes (Continued)
The difference between the effective tax rate on consolidated income before
income taxes and the statutory rate is attributed to the following:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Federal income tax provision at statutory rate $3,066,500 $2,801,400 $1,687,900
Tax exempt income (334,600) (257,800) (126,000)
Nondeductible (deductible) expenses 20,900 (115,100) (162,800)
Tax benefits and tax rate differences (118,700) (95,800) (399,800)
---------- ---------- ----------
$2,634,100 $2,332,700 $ 999,300
========== ========== ==========
</TABLE>
Deferred income taxes result from temporary differences between the carrying
value of assets and liabilities for financial reporting and tax reporting
purposes. The sources and related tax effects of these differences are as
follows:
<TABLE>
<CAPTION>
Tax effect of temporary differences: 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Other real estate owned $ 196,100 $ 73,900 $199,700
Allowance for loan losses (128,400) (24,800) (17,000)
Accumulated depreciation (79,200) 36,500 -
Accretion on municipal bonds 9,100 (9,500) (12,400)
Use of net operating loss - 282,900 499,000
Use of alternative minimum tax credit 301,700 321,300 -
Use of investment tax credit - 95,800 -
--------- -------- --------
$ 299,300 $776,100 $669,300
========= ======== ========
</TABLE>
Note 11 - Commitments and Contingencies
In the normal course of business, the Company's subsidiary bank is a party to
financial instruments with off balance sheet risk to meet the financing needs of
its customers. These financial instruments include commitments to extend credit
and standby letters of credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amounts recognized in the consolidated
balance sheet.
The Company's subsidiary bank uses the same credit policies in making
commitments as it does for on-balance sheet instruments. Collateral is required
to support the off-balance sheet instruments when it is deemed necessary.
Collateral held varies, but may include: deposits held in financial
institutions, accounts receivable, inventory and property, plant and equipment.
Financial instruments whose contract amounts represent potential credit risk are
as follows at December 31:
1996 1995
------ ------
Commitments to extend credit $50,461,880 $38,592,479
Standby and commercial letters of credit $ 1,061,723 $ 691,349
Letters of guaranty $ 159,579 $ 94,000
45
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
Note 11 - Commitments and Contingencies (Continued)
The Company and subsidiaries have non-cancelable operating leases covering
certain equipment and buildings. The following is a schedule of future
minimum lease payments as of December 31, 1996:
<TABLE>
<CAPTION>
Year Ending December 31, Buildings Equipment
- ------------------------ --------- ---------
<S> <C> <C>
1997 $ 379,588 $157,665
1998 379,588 96,750
1999 323,429 -
2000 323,429 -
2001 323,429 -
2002 and after 2,102,291 -
---------- --------
$3,831,754 $254,415
========== ========
</TABLE>
Rent expense incurred under operating leases amounted to $ 591,596, $ 519,882
and $ 402,859 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Various lawsuits are pending against the Company's subsidiary bank.
Management, after reviewing these suits with legal counsel, considers that the
aggregate liability, if any, would not have a material adverse effect on the
Company's financial position.
Note 12 - Flexible Stock Option Plan
The Company's 1986 Flexible Stock Option Plan terminated in 1996. No options
were ever granted under the plan.
Note 13 - Employee Benefit Plans
The Company has a noncontributory defined benefit pension plan covering
substantially all full time employees. Benefits are based on an employee's years
of service and compensation. The Company makes contributions to the plan
annually based upon actuarial valuations. The plan assets are managed and
invested by a corporate trustee. The plan assets are invested in several
equity, bond and common trust investment funds managed by the trustee.
The Company's pension plan was adopted on September 1, 1994. The Texas Gulf
Coast Bancorp, Inc. noncontributory defined benefit pension plan was merged with
the Company's pension plan on December 31, 1995.
Unrecognized prior service cost of the Company's pension plan is being amortized
on a straight line basis over fifteen years.
Net periodic pension cost for the pension plan was as follows for December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Service cost-benefit earned during $ 384,439 $ 400,863
the year
Interest cost on projected benefit 143,107 189,701
obligation
Actual (gain) on plan assets (135,776) (148,629)
Net amortization and deferrals 10,974 9,127
----------- -----------
Net pension cost $ 402,744 $ 451,062
=========== ===========
</TABLE>
46
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
Note 13 - Employee Benefit Plans (Continued)
Significant assumptions used in determining pension cost for the Company are as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Discount rate 7.5% 7.0%
Expected rate of increase in compensation 3.0% 4.0%
Expected long-term rate of return on
plan assets 8.0% 8.0%
</TABLE>
Funded status of the pension plan at December 31, is as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Projected benefit obligation $(2,735,566) $(2,756,095)
Plan assets at fair value 2,632,427 2,033,964
----------- -----------
Plan assets (less) than projected
benefit obligation (103,139) (722,131)
Unrecognized net (gains) loss (680,710) (362,190)
Unrecognized net (assets) obligation
being amortized over 15 years (237,143) (258,701)
Unrecognized prior service cost 602,086 638,948
----------- -----------
(Accrued) prepaid pension cost $ (418,906) $ (704,074)
=========== ===========
</TABLE>
The Company has a qualified employee benefit plan under section 401(k) of the
Internal Revenue Code. Employees can contribute up to 15% of their compensation
to the plan on a pretax basis subject to regulatory limits and the Company at
its discretion can match up to 100 percent of 6 percent of the participant's
compensation. The administrative cost of the plan is paid by the Company at no
cost to the participants.
Note 14 - Estimated Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, Disclosure about Fair
Value of Financial Instruments. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required
to interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Cash and cash equivalents - - For cash and due from banks, interest bearing
deposits with bank, time deposits in financial institutions and federal funds
sold, the carrying amount is a reasonable estimate of fair value.
Investment securities - - Investment securities fair value equals quoted
market price, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities. See Note
One for valuation methodologies used for investment securities.
Loans - - The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
47
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
Note 14 - Estimated Fair Value of Financial Instruments (Continued)
Deposits - - The fair value of demand deposits, savings accounts and certain
money market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of deposit is estimated using the
rates currently offered for deposits of similar remaining maturities.
Borrowings - - The fair value of borrowings is estimated based upon current
market interest rates for Companies with like credit ratings and similar
maturities.
Commitments to extend credit and standby letters of credit - - The fair value
of commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counter parties. For fixed-rate
commitments, fair value also considers the difference between current levels of
interest rates and committed rates. The fair value of letters of credit is
based on fees currently charged for similar letters of credit.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 37,447,740 $ 37,447,740 $ 82,450,608 $ 82,450,608
Investment securities $143,272,415 $143,726,896 $152,032,564 $152,447,161
Loans, net $291,810,851 $290,970,172 $235,153,484 $232,867,020
Liabilities:
Deposits $439,042,612 $439,187,121 $431,381,004 $431,836,141
Borrowings $ - - $ 3,082,960 $ 3,082,960
Off-balance sheet instruments
Letters of credit fees $ - $ 6,565 $ - $ 7,776
</TABLE>
Note 15 - Capital Adequacy
The Company and its subsidiary bank are subject to various regulatory capital
requirements administered by federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements.
Under the risk-based capital guidelines, different categories of assets are
assigned different risk weights, based upon the perceived credit risk of the
asset. These risk weights are multiplied by corresponding asset balances and
certain off-balance sheet items to determine a "risk weighted" asset base.
These quantitative measures require that banking organizations achieve minimum
ratios of total capital to risk weighted assets of 8.0%, (of which at least 4.0%
should be in the form of Tier 1 capital). Total capital is defined as the sum
of Tier 1 and Tier 2 capital elements with Tier 2 being limited to 100 percent
of Tier 1. For bank holding companies, Tier 1 capital includes with certain
restrictions, common stockholders' equity, perpetual preferred stock and
minority interest in consolidated subsidiaries. Tier 2 capital includes, with
certain restrictions, certain forms of perpetual preferred stock, maturing
capital instruments and the allowance for possible credit losses.
48
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
Note 15 - Capital Adequacy (Continued)
In addition to the risked-based capital guidelines, regulatory authorities have
adopted the use of a leverage ratio as an additional tool to evaluate the
capital adequacy of banks and bank holding companies. The leverage ratio is
defined to be a company's "Tier 1" capital divided by its adjusted average total
assets. The leverage ratio adopted by the federal banking agencies requires a
ratio of 3.0% "Tier 1" capital to adjusted average total assets for banks with a
CAMEL rating of 1 or for bank holding companies with a BOPEL rating of 1. All
other institutions will be expected to maintain a leverage ratio of 4.0% to
5.0%.
The following table summarizes the Company's Tier 1, Total Capital and leverage
ratio as of December 31:
<TABLE>
<CAPTION>
1996 1995
------------------ -------------------
Amount Ratio Amount Ratio
---------- ----- ---------- ------
<S> <C> <C> <C> <C>
Tier 1 Capital $52,298,251 16.70% $48,409,312 18.85%
Tier 1 Capital Minimum
Requirement 12,530,072 4.00% 10,272,120 4.00%
----------- ----- ----------- -----
Excess Tier 1 Capital $39,768,179 12.70% $38,137,192 14.85%
=========== ===== =========== =====
Total Capital $55,011,115 17.56% $50,820,127 19.79%
Total Capital Minimum
Requirement 25,060,144 8.00% 20,544,240 8.00%
----------- ----- ----------- -----
Excess Total Capital $29,950,971 9.56% $30,275,887 11.79%
=========== ===== =========== =====
Tier 1 Capital - Leverage Ratio $52,298,251 10.76% $48,409,312 11.98%
Tier 1 Capital Requirement 14,588,204 3.00% 12,118,317 3.00%
----------- ----- ----------- -----
Excess Tier 1 Capital $37,710,047 7.76% $36,290,995 8.98%
=========== ===== =========== =====
</TABLE>
The following table summarized the Company's subsidiary bank's Tier 1, Total
Capital and leverage ratio as of December 31:
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
Amount Ratio Amount Ratio
---------- ----- ----------- -----
<S> <C> <C> <C> <C>
Tier 1 Capital $48,789,800 15.62% $46,487,121 18.14%
Tier 1 Capital Minimum Requirement 12,490,826 4.00% 10,253,320 4.00%
----------- ----- ----------- -----
Excess Tier 1 Capital $36,298,974 11.62% $36,223,801 14.14%
=========== ===== =========== =====
Total Capital $51,502,664 16.49% $48,897,936 19.08%
Total Capital Minimum Requirement 24,981,652 8.00% 20,506,640 8.00%
----------- ----- ----------- -----
Excess Total Capital $26,521,012 8.49% $28,391,296 11.08%
=========== ===== =========== =====
Tier 1 Capital - Leverage Ratio $48,789,800 10.10% $46,487,121 11.59%
Tier 1 Capital Requirement 14,496,664 3.00% 12,028,257 3.00%
----------- ----- ----------- -----
Excess Tier 1 Capital $34,293,136 7.10% $34,458,864 8.59%
=========== ===== =========== =====
</TABLE>
As of December 31, 1996 and 1995 the most recent notification from the Federal
Reserve Bank of Dallas, as to the Company and the Texas Department of Banking,
as to the Company's subsidiary bank categorized each of them as well capitalized
under the regulatory framework for prompt corrective action. There are no
conditions or events since notification that management believes have changed
these categories.
49
<PAGE>
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
Note 16 - Other Operating Expense
Other operating expense for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Stationery, supplies and printing $ 785,927 $ 357,924 $ 277,648
Legal, accounting and professional 702,733 542,437 464,815
Data processing 157,701 729,121 486,560
Advertising 428,284 297,435 225,532
Insurance 113,233 418,856 539,192
Postage and freight 373,307 420,876 244,703
Other 2,438,503 2,014,072 1,191,641
---------- ---------- ----------
$4,999,688 $4,780,721 $3,430,091
========== ========== ==========
</TABLE>
50
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(Incorporated by reference to the section entitled "Nominees for Election as
Directors" of Merchants Bancshares' Proxy Statement for its 1997 annual meeting
of shareholders.)
Item 11. EXECUTIVE COMPENSATION
(Incorporated by reference to the section entitled "Executive Compensation" of
Merchants Bancshares' Proxy Statement for its 1997 annual meeting of
shareholders.)
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(Incorporated by reference to the section entitled "Ownership of Common Stock"
of Merchants Bancshares' Proxy Statement for its 1997 annual meeting of
shareholders.)
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(Incorporated by reference to the section entitled "Certain Relationships and
Related Transactions" of Merchants Bancshares' Proxy Statement for its 1997
annual meeting of shareholders.)
PART IV.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) List of documents filed as part of this report
(1) Financial Statements
See index to financial statements at Item 8 of this report.
(2) Exhibits
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
(If applicable)
Incorporated by reference from
---------------------------------
(c) Exhibit number and description Form Date File No. Exhibit
------------------------------ ---- ---- -------- -------
(3) Articles of Incorporation and Bylaws
3.1 Articles of Incorporation, together
with amendments thereto 10-K 12/31/90 0-11033 3.1
51
<PAGE>
(If applicable)
Incorporated by reference from
---------------------------------
(c) Exhibit number and description Form Date File No. Exhibit
3.2 Bylaws of the Registrant 10 03/31/83 0-11033 3.2
3.3 Amended Articles of Incorporation
and Bylaws 8-K 07/19/96 0-11-33 3.3
(4) Instruments defining rights of security
holders, including indentures
4.1 Form of specimen certificate representing
the Common Stock, par value $1.00 per
share of the Registrant S-4 07/06/90 33-35767 4.1
(10) Material contracts
10.3 Merchants Bancshares, Inc.
401 (k) Plan 10-K 12/31/89 0-11033 10.3
10.4 Merchants Bancshares, Inc.
Defined Benefit Pension Plan 10-K 12/31/94 0-11033 10.4
(21) Subsidiary of the Registrant
21.1 List of subsidiaries N/A N/A N/A N/A
(27) Financial Data Schedule
27.1 Financial Data Schedule N/A N/A N/A N/A
52
<PAGE>
Pursuant to the requirements of Section 13 or 15 (d) 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.
BY: /s/ J. W. Lander, Jr.
----------------------------------
J. W. Lander, Jr.
Chief Executive Officer
Date: March 25, 1997
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Norman H. Bird Director, Secretary, March 25, 1997
- ------------------------ and Vice
Norman H. Bird
President
/s/ A. Harrel Blackshear Director March 25, 1997
- ------------------------
A. Harrel Blackshear
/s/ Donald Harding Director March 25, 1997
- -------------------------
Donald Harding
/s/ J. W. Lander, Jr. Director, Chairman, March 25, 1997
- -------------------------- and Chief Executive
J. W. Lander, Jr. Officer
/s/ J. W. Lander, III Director, President and March 25, 1997
- -------------------------- Principal Financial and
J. W. Lander, III Accounting Officer
53
<PAGE>
INDEX TO EXHIBITS
(If applicable)
Incorporated by reference from
------------------------------
Exhibit number and description Form Date File No. Exhibit
- ------------------------------ ---- ---- -------- -------
(2) Plan of acquisition, reorganization,
arrangement, liquidation or succession
2.1 Agreement and Plan of Reorganization S-4 11/25/94 33-86750 2.1
(3) Articles of Incorporation and Bylaws
3.1 Articles of Incorporation, together
with amendments thereto 10-K 12/31/90 0-11033 3.1
3.2 Bylaws of the Registrant 10 03/31/83 0-11033 3.2
(4) Instruments defining rights of security
holders, including indentures
4.1 Form of specimen certificate
representing the Common Stock, par
value $1.00 per share of the
Registrant S-4 07/06/90 33-35767 4.1
(10) Material contracts
10.3 Merchants Bancshares, Inc.
401 (k) Plan 10-K 12/31/89 0-11033 10.3
10.4 Merchants Bancshares, Inc.
Defined Benefit Pension Plan 10-K 12/31/94 0-11033 10.4
(21) Subsidiary of the Registrant
21.1 List of subsidiary N/A N/A N/A N/A
(27) Financial Data Schedule
27.1 Financial Data Schedule N/A N/A N/A N/A
54
<PAGE>
EXHIBIT 21.1
SUBSIDIARY OF THE REGISTRANT
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
Percentage of Jurisdiction
Name of Subsidiary Stock Owned of Incorporation
------------------ ------------- ----------------
<S> <C> <C>
1. Gulf Southwest Nevada Bancorp, Inc. 100.0% Nevada
Subsidiary of Gulf Southwest Percentage of Jurisdiction
Nevada Bancorp, Inc. Stock Owned of Incorporation
---------------------------- ------------- ----------------
1. Merchants Bank 100.0% Texas
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 30,072,740
<INT-BEARING-DEPOSITS> 1,000,000
<FED-FUNDS-SOLD> 6,375,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 123,076,038
<INVESTMENTS-CARRYING> 20,196,377
<INVESTMENTS-MARKET> 20,650,858
<LOANS> 294,523,715
<ALLOWANCE> 2,712,864
<TOTAL-ASSETS> 494,570,422
<DEPOSITS> 439,042,612
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,016,475
<LONG-TERM> 0
0
0
<COMMON> 1,977,855
<OTHER-SE> 51,533,480
<TOTAL-LIABILITIES-AND-EQUITY> 494,570,422
<INTEREST-LOAN> 24,915,315
<INTEREST-INVEST> 8,775,297
<INTEREST-OTHER> 1,648,864
<INTEREST-TOTAL> 35,339,476
<INTEREST-DEPOSIT> 11,160,623
<INTEREST-EXPENSE> 11,169,265
<INTEREST-INCOME-NET> 24,170,211
<LOAN-LOSSES> 940,000
<SECURITIES-GAINS> (1,625)
<EXPENSE-OTHER> 19,888,448
<INCOME-PRETAX> 9,019,068
<INCOME-PRE-EXTRAORDINARY> 9,019,068
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,384,968
<EPS-PRIMARY> 3.28
<EPS-DILUTED> 3.28
<YIELD-ACTUAL> 5.61
<LOANS-NON> 2,129,000
<LOANS-PAST> 953,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,411,000
<CHARGE-OFFS> 800,000
<RECOVERIES> 162,000
<ALLOWANCE-CLOSE> 2,713,000
<ALLOWANCE-DOMESTIC> 2,713,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
