SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1994
COMMISSION FILE NUMBER 0-11595
MERCHANTS BANCSHARES, INC.
(A DELAWARE CORPORATION)
EMPLOYER IDENTIFICATION NO. 03-0287342
123 Church Street, Burlington, VT 05401
Telephone: (802) 658-3400
Indicate by check mark whether the registrant has filed all
reports required to be filed by Section 13 or 15(D) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and has been subject to such filing
requirement for the past 90 days.
Yes x No
4,242,927 Shares Common Stock, $.01 Par Outstanding June 30, 1994<PAGE>
<PAGE>
MERCHANTS BANCSHARES, INC.
INDEX TO FORM 10-Q
PART 1 PAGE
ITEM 1 FINANCIAL STATEMENTS 1
Consolidated Balance Sheets
June 30, 1994 and 1993 and December 31, 1993
Consolidated Statements of Income 2
for the three months ended June 30, 1994 and 1993
and the six months ended June 30, 1994 and 1993
Consolidated Statement of Stockholders' Equity 3
for the six months ended June 30, 1994 and 1993
and the year ended December 31, 1993
Consolidated Statements of Cash Flows for the 4
six months ended June 30, 1994 and 1993
ITEM 2 Management's Discussion and Analysis of Financial 5-15
Condition and Results of Operations
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 16
ITEM 2 Changes in Securities None
ITEM 3 Defaults upon Senior Securities None
ITEM 4 Submission of Matters to a Vote of Security Holders 16
ITEM 5 Other Information None
ITEM 6 Exhibits and Reports on Form 8-K None
<PAGE>
MERCHANTS BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET
UNAUDITED
(Dollar Amounts in Thousands)
June 30 June 30 December 31
1994 1993 1993
ASSETS -------- -------- --------
Cash and Due From Banks $ 31,909 $ 35,492 $ 30,588
Federal Funds Sold 3,400 1,600 0
Debt Securities Available for Sale 82,398 96,690 85,506
Marketable Equity Securities 1,692 2,790 1,452
--------- --------- --------
Total Investments 84,090 99,480 86,958
Loans 416,060 438,501 440,592
Segregated Assets 114,314 157,157 132,879
Less: Reserve for Possible Loan Losses (18,315) (13,275) (20,060)
--------- --------- ---------
Net Loans 512,059 582,383 553,411
FHLB Stock 6,856 5,661 5,574
Bank Premises and Equipment 16,021 14,068 16,148
Investment in Real Estate Ltd Partnerships 4,497 5,219 4,610
OREO and Insubstance Foreclosure 15,954 13,820 13,674
Other Assets 21,768 22,315 24,085
--------- --------- ---------
Total Assets $ 696,554 $ 780,038 $ 735,048
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 88,072 $ 83,337 $ 96,413
Savings, NOW and Money Market Accounts 301,314 342,965 321,821
Time CDs $100,000 and Over 25,200 21,910 21,215
Other Time 176,241 204,132 179,860
--------- --------- ---------
Total Deposits 590,827 652,344 619,309
Federal Funds Purchased/Short Term Borrowings 0 12,000 7,500
Securities Sold U/A to Repurchase 0 8,739 1,681
Demand Note Due U.S. Treasury 4,430 4,752 5,743
Other Liabilities 9,478 8,392 8,462
--------- --------- ---------
Total Liabilities 604,735 686,227 642,695
Long-Term Debt 44,231 46,635 46,633
Stockholders' Equity
Common Stock, $.01 Par Value 42 42 42
Shares Authorized 4,700,000
Outstanding, Current Year 4,242,927
Previous Year 4,242,927
December 31, 1993 4,242,927
Treasury Stock (at Cost) (179) (179) (179)
Surplus 30,647 30,647 30,647
Undivided Profits 17,797 16,666 15,354
Valuation Allowance - Investments (Net of Taxe (719) 0 (144)
--------- --------- ---------
Total Stockholders' Equity 47,588 47,176 45,720
-------- -------- --------
Total Liabilities and Sharehold Equity $ 696,554 $ 780,038 $ 735,048
========= ========= =========
Book Value per Share $11.25 $11.15 $10.74
<PAGE>
<TABLE>
MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
UNAUDITED
(Dollar Amounts in Thousands, Except for Per Share Data)
<CAPTION>
RESTATED
Quarter Ended June 30, Six Months Ended June 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Interest Income:
Interest on Loans $ 11,143 $ 9,623 $ 22,478 $ 18,624
Investment Income:
Obligations of U.S. Government 782 980 1,572 1,985
Obligations of States and
Political Subdivisions 0 9 0 9
Other 143 66 274 174
Federal Funds Sold 113 28 175 41
---------- ---------- ---------- ----------
$ 12,181 $ 10,706 $ 24,499 $ 20,833
---------- ---------- ---------- ----------
Interest Expense:
Interest on Deposits $ 4,464 $ 3,817 $ 8,645 $ 7,408
Interest on Capital Notes
and Other Borrowings 1,150 1,212 2,382 2,400
---------- ---------- ---------- ----------
$ 5,614 $ 5,029 $ 11,027 $ 9,808
---------- ---------- ---------- ----------
Net Interest Income $ 6,567 $ 5,677 $ 13,472 $ 11,025
Provision for Possible Loan Losses 1,250 9,314 2,500 14,322
---------- ---------- ---------- ----------
Net Interest Income after
Provision for Possible Loan Losses $ 5,317 $ (3,637) $ 10,972 $ (3,297)
Other Income: ---------- ---------- ---------- ----------
Fees on Loans $ 838 $ 1,039 $ 1,868 $ 1,972
Service Charges on Deposits 916 837 1,807 1,584
Other 1,319 1,288 2,532 3,763
---------- ---------- ---------- ----------
$ 3,073 $ 3,164 $ 6,207 $ 7,319
Other Expenses: ---------- ---------- ---------- ----------
Salaries and Wages $ 2,674 $ 2,232 $ 5,233 $ 4,178
Employee Benefits 655 671 1,324 1,290
Occupancy Expense, Net 552 432 1,245 880
Equipment Expense 443 411 909 815
Losses on Real Estate Ltd Partnerships 120 237 662 470
Other 2,850 1,901 5,026 4,008
---------- ---------- ---------- ----------
$ 7,294 $ 5,884 $ 14,399 $ 11,641
---------- ---------- ---------- ----------
Income (Loss) Before Income Taxes $ 1,096 $ (6,357) $ 2,780 $ (7,619)
Provision (Benefit) for Income Taxes 91 (2,416) 337 (3,209)
---------- ---------- ---------- ----------
Net Income (Loss) $ 1,005 $ (3,941) $ 2,443 $ (4,410)
========== ========== ========== ==========
Per Common Share Net Income (Loss) $ 0.24 $ (0.93) $ 0.58 $ (1.05)
========== ========== ========== ==========
Dividends Paid Per Share $ 0.00 $ 0.00 $ 0.00 $ 0.20
========== ========== ========== ==========
Weighted Average Common Shares
Outstanding 4,230,193 4,229,818 4,230,193 4,202,366
</TABLE>
<PAGE>
<TABLE>
MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1993 AND
THE SIX MONTHS ENDED JUNE 30, 1994 AND 1993
UNAUDITED
(Thousands of Dollars)
<CAPTION>
Net
Unrealized
Depreciation Total
Common Undivided Treasury of Invest Equity
Stock Surplus Profits Stock Securities Capital
------ -------- -------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1992 $ 42 $ 30,636 $ 21,949 $ (424) $ 0 $ 52,203
Net Income (Loss) (4,410) (4,410)
Treasury Stock Transactions 11 (24) 245 232
Cash Dividends ($.20 per share) (849) (849)
----- ------ ------ ------- ---------- -------
Balance - June 30, 1993 $ 42 $ 30,647 $ 16,666 $ (179) $ 0 $ 47,176
Net Income (Loss) (1,372) (1,372)
Treasury Stock Transactions 60 60
Net Change in Unrealized
Depreciation of Investment
Securities (144)
----- ------ ------- ------- ---------- -------
Balance - December 31, 1993 $ 42 $ 30,647 $ 15,354 $ (179) $ (144) $ 45,720
Net Income 2,443 2,443
Net Change in Unrealized 0
Depreciation of Investment
Securities (575) (575)
----- ------- ------- ------- ---------- -------
Balance - June 30, 1994 $ 42 $ 30,647 $ 17,797 $ (179) $ (719) $ 47,588
===== ======= ======= ======= ========= =======
</TABLE>
<PAGE>
MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(Dollar Amounts in Thousands)
For the Six Months Ended June 30, 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES: ------- -------
Net Income (Loss) $ 2,443 $ (4,410)
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Possible Loan Losses 2,500 14,322
Provision for Depreciation and Amortization 1,012 816
Prepaid income taxes 279 (2,011)
Imputed Gain on Sale of Loans 41 (265)
Net Gains (Losses) on Sales of Investment Securities 19 (1,405)
Net Gains on Sales of Loans and Leases (110) (94)
Equity in Losses Real Estate Ltd Partnerships 457 470
(Increase) Decrease in Interest Receivable 7 88
Increase in Interest Payable (504) (235)
(Increase) Decrease in Other Assets 2,309 (8,976)
Increase (Decrease) in Other Liabilities (514) (137)
------- -------
Net Cash Provided by (Used in) Operating Activit $ 7,939 $ (1,837)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Investment Securities $ 0 $ 336,501
Proceeds from Sales of Loans and Leases 28,489 41,850
Purchases of Investment Securities 0 (334,113)
Cash Received - Acquisition of NFNBVT 0 17,102
Loans Originated, Net of Principal Repayments 10,332 (15,323)
Purchases of Premises and Equipment (685) (182)
Decrease in Net Investment - Leases 24 338
------- -------
Net Cash Provided by Investing Activities $ 38,160 $ 46,173
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Decrease in Deposits $ (28,482) $ (57,714)
Net Increase (Decrease) in Short-term Borrowing (10,494) 6,226
Principal (Payments) Borrowings on Long-Term Debt (2,402) (2,402)
Acquisition of Treasury Stock 0 (132)
Cash Dividends Paid 0 (843)
Sale of Treasury Stock 0 377
------- -------
Net Cash Used in Financing Activities $ (41,378) $ (54,488)
------- -------
Increase (Decrease) in Cash and Cash Equivalents 4,721 (10,152)
Cash and Cash Equivalents at January 1 30,588 47,244
------- -------
Cash and Cash Equivalents at June 30 $ 35,309 $ 37,092
======= =======
Total Interest Payments $ 10,523 $ 10,790
Total Income Tax Payments $ 0 $ 1,190
<PAGE>
MERCHANTS BANCSHARES, INC
JUNE 30, 1994
NOTES TO FINANCIAL STATEMENTS:
NOTE 1: CURRENT OPERATING ENVIRONMENT AND REGULATORY MATTERS
As of March 31, 1993, the Federal Deposit Insurance Corporation
(the FDIC) and the State of Vermont Department of Banking,
Insurance and Securities (the Commissioner) conducted a joint
field examination of the Bank. As a result of this examination,
the Bank entered into a Memorandum of Understanding (MOU) with
the FDIC and the Commissioner on October 29, 1993. Under the
terms of the MOU, the Bank is required to, among other things,
maintain a leverage capital ratio of at least 5.5%, revise
certain operating policies, enhance certain loan review
procedures, refrain from declaring dividends and correct certain
technical exceptions and violations of applicable regulations.
The dividend limitation includes dividends paid by the Bank to
the Company. The Company services senior subordinated debt,
which totalled $4.8 million at June 30, 1994, and which requires
semiannual interest payments and an annual principal payment
of $2.4 million through 1996. The MOU permits the repayment of
certain advances totaling approximately $940,000 which were out-
standing at June 30, 1994. The repayment of such advances,
together with the Company's cash on hand at June 30, 1994 is
sufficient to service the senior debt until May, 1995.
The Bank was also directed by the FDIC to increase the
reserve for possible loan losses by approximately $12 million and
to charge off loans totaling approximately $8 million at the
conclusion of the examination in June, 1993. Based on subsequent
discussions with the FDIC and additional review of certain credit
information in connection with the examination, management
decided to amend the Bank's call reports and Forms 10-Q for the
quarters ended March 31, 1993 and June 30, 1993 to allocate $3
million of the additional provision for possible loan losses
originally recorded in the quarter ended June 30, 1993 to the
quarter ended March 31, 1993.
As of February 18, 1994, the Company and the Federal Reserve
Bank of Boston (the Federal Reserve) entered into an agreement
requiring the Company to submit to the Federal Reserve, among
other things, a capital plan, a dividend policy, a debt service
plan and a management assessment. As of June 30, 1994, the
Company has submitted drafts of the requested plans and is
working with the Federal Reserve to develop acceptable plans by
September 6, 1995. In addition, the Company may not declare or
pay a dividend without the approval of the Federal Reserve.
On March 31, 1994, the FDIC and the Commissioner completed the
field work related to their most recent examination of the bank
as of December 31, 1993. The examination report, received in
early July, requires management to correct certain administrative
and legal violations and enhance certain operating policies.
Management believes that it is in substantial compliance with the
MOU and that the results of the examination will not have a
significant impact on the Company's financial statements.
Failure to maintain the minimumleverage capital ratio of 5.5%
included in the MOU or compliance with other provisions of the
MOU, or the agreement with the Federal Reserve, could subject the
Bank or the Company to additional actions by the regulatory
authorities.
<PAGE>
NOTE 2: ACQUISITION
On June 4, 1993, the Bank purchased certain assets and assumed
the deposits and certain other liabilities of the New First
National Bank of Vermont (NFNBV) from the FDIC. NFNBV had been
taken over by the FDIC in January 1993. The acquisition involved
an assumption of net deposits and liabilities which resulted in
the Bank receiving a cash payment from the FDIC of approximately
$5.7 million. The Bank subsequently acquired certain NFNBV
property and equipment from the FDIC for approximately $1.5
million which was paid to the FDIC in April, 1994. The
acquisition was accounted for using the purchase method of
accounting and accordingly, the acquired assets and liabilities
were recorded at their estimated fair market values at the date
of acquisition. The operating results related to NFNBV are
included in the Company's statement of operations since the date
of the acquisition.
Included in the purchase price allocation is the establishment
of an allowance for possible loan losses of $2 million and a core
deposit intangible of approximately $4.5 million, being amortized
over 15 years using the straight line method. The fair market
value of assets acquired and liabilities assumed was:
(Dollar amounts in thousands)
Cash $ 5,290
Federal Funds Sold 6,075
Investment Securities 4,118
Loans 23,909
Segregated Assets 154,537
Allowance for Possible Loan Losses (2,000)
Premises and Equipment 1,509
Other Assets 1,523
Core Deposit Intangible 4,478
Deposits (203,031)
Other Liabilities (537)
--------
Cash Payment From the FDIC, Net of
Settlement Amount for Premises $ 4,129
==========
Summarized below are the results of operation on an unaudited
pro forma basis, as if NFNBV had been acquired on January 1,
1992, based on the Company's audited historical results of
operations for 1992 and NFNBV's unaudited historical results of
operations for the period October 1, 1991 to September 30, 1992,
giving effect to certain pro forma adjustments. This information
does not purport to be indicative of the results of operations
that would have occurred had the purchase been made on January 1,
1992 or of future results of operations of the combined
companies. No pro forma information is presented for the period
January 1, 1993 to the date of the acquisition because no
accurate financial information is available relative to NFNBV's
operations from the FDIC.
Pro Forma 1992
(In thousands except per share data) --------------
Net Interest Income $36,185
Net Income 7,463
Earnings Per Share 1.83
<PAGE>
In computing the pro forma net income, adjustments were
recognized to give effect to a reduced provision for possible
loan losses and other real estate owned (OREO) expenses,
resulting from loss sharing and the transfer of problem loans and
OREO to the FDIC prior to acquisition, amortization of the core
deposit intangible and reduced operating expenses relating to
regulatory actions.
Under the terms of the acquisition, the Company will receive
financial assistance (loss sharing) with respect to certain
acquired loans charged-off by the Company during the three years
subsequent to the acquisition. The FDIc will reimburse the
Company, on a quarterly basis, 80% of net charge-offs and certain
expenses related to loans subject to loss sharing up to
cumulative losses aggregating $41.1 million, after which the
reimbursement rate will be 95% of net charge-offs on the loans.
Acquired loans subject to loss sharing are classified as
Segregated Assets in the accompanying consolidated balance
sheets.
In addition, under the terms of the acquisition approval
received from the State of Vermont Department of Banking,
Insurance and Securities, the Bank is required to, among other
things, maintain Tier 1 leverage capital at the higher of 5.5% or
the minimum regulatory leverage capital required by the FDIC, and
to refrain from paying dividends from the Bank to the Company if
the Bank's capital is below the minimum capital requirement. The
Bank and the Company were in compliance with all the terms of the
acquisition approval agreement with the State of Vermont during
1993 and throughout the first half of 1994.
NOTE 3: INVESTMENTS
Investments in debt securitiesare classified as available for
sale as of December 31, 1993 and June 30, 1994 and as held for
sale as of June 30, 1993. Marketable equity securities are
classified as available for sale at June 30, 1994 and December
31, 1993 and are stated at their estimated fair value.
Marketable equity securities were carried at the lower of cost or
market at June 30, 1993. The amortized cost and estimated fair
values are as follows:
(In Thousands)
June 30, 1994 December 31, 1993 June 30, 1993
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
US Gov't $83,924 $82,398 $85,945 $85,506 $96,690 $96,690
Other 1,231 1,692 1,231 1,452 2,790 3,092
------- ------- ------- ------- ------- -------
Total $85,155 $84,090 $87,179 $86,958 $99,480 $99,782
======= ======= ======= ======= ======= =======
<PAGE>
MERCHANTS BANCSHARES, INC
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
All adjustments necessary for a fair statement of the
three months ended June 30, 1994 and 1993 have been included in
the financial statements. The information was prepared from the
books of Merchants Bancshares, Inc. and its subsidiaries, the
Merchants Bank and Merchants Properties, Inc., without audit.
In the ordinary course of business, the Merchants Bank
makescommitments for possible future extensions of credit. On
June 30,1994, the Bank was obligated for $12,820,220 of standby
letters of credit. No losses are anticipated in connection with
these commitments.
RESULTS OF OPERATIONS
1. ANALYSIS OF QUARTERLY STATEMENTS OF OPERATIONS
Net income for the second quarter of 1994 was $1,005,308
compared to a net loss a year earlier of $3,940,665. On a per
share basis, the net income represented $.24 per share compared to
a loss of $.93 for 1993. The primary reason for the loss during
1993 was the recognition of $9,000,000 of additional provision for
possible loan losses recognized on June 30, 1993. The net
interest income before the provision for possible loan losses
aggregated $6.7million in 1994 compared to $5.7 million a year
earlier, due in part to the effects of the acquisition of NFNBV
(see footnote 2) and also due to a slight increase in interest
rates during the first half of 1994.
The provision for possible loan losses totalled $1.25 million
for the second quarter of 1994 compared to $9.31 million for the
second quarter of 1993. The decrease in provisioning is due to a
slowly improving portfolio of nonperforming assets and a slowly
improving economic environment during 1994.
During the quarter ended June 30, 1994, the Company recognized
no gains or losses on the sale of investments.
Total non-interest expenses are up approximately 39%from the
same quarter a year ago due to the acquisition of NFNBV and the
resulting addition of 11 branches and nearly 100 employees.
Expenses of other real estate owned are down 45% from the
previous year.
The Company recognized $240,000 in low income housing tax
credits during the quarters ended June 30, 1994 and 1993
representing the amount earned during the second quarters of 1994
and 1993.
The schedules on the following pages analyze interest and
overhead management in relation to total average assets and the
yield analysis for the periods reported.
<PAGE>
MERCHANTS BANCSHARES, INC.
INTEREST MANAGEMENT AND OPERATING EXPENSE ANALYSIS
(IN THOUSANDS - TAXABLE EQUIVALENT BASIS)
RESTATED
QUARTER ENDED QUARTER ENDED QUARTER ENDED
06/30/94 12/31/93 06/30/93
Total Average Assets $714,124 $755,667 $628,771
------------------------ --------------- --------------- ---------------
AMOUNT % OF AMOUNT % OF AMOUNT % OF
ASSETS ASSETS ASSETS
INTEREST MANAGEMENT
Interest Income (T.E.) $12,319 6.90% $12,915 6.84% $10,773 6.85%
--------------------------- --------------- --------------- ---------------
Interest Expense 5,614 3.14% 5,786 3.06% 5,029 3.20%
--------------------------- --------------- --------------- ---------------
Net Int before Prov (T.E.) $6,705 3.76% $7,129 3.77% $5,744 3.65%
--------------------------- --------------- --------------- ---------------
Prov for Loan Losses 1,250 0.70% 6,750 3.57% 9,314 5.93%
--------------------------- --------------- --------------- ---------------
Net Int. Income (T.E.) $5,455 3.06% $379 0.20% ($3,570) -2.27%
--------------------------- --------------- --------------- ---------------
NET OPERATING EXPENSE
Non-Interest Expense:
Personnel $3,329 1.86% $3,541 1.87% $2,903 1.85%
--------------------------- --------------- --------------- ---------------
Occupancy 552 0.31% 565 0.30% 432 0.27%
--------------------------- --------------- --------------- ---------------
Equipment 443 0.25% 571 0.30% 411 0.26%
--------------------------- --------------- --------------- ---------------
Other 2,970 1.66% 2,976 1.58% 2,138 1.36%
--------------------------- --------------- --------------- ---------------
Total $7,294 4.09% $7,653 4.05% $5,884 3.74%
--------------------------- --------------- --------------- ---------------
Less Non-Interest Income:
Fees on Loans $838 0.47% $1,470 0.78% $1,039 0.66%
--------------------------- --------------- --------------- ---------------
Service Charges on Dep 916 0.51% 1,026 0.54% 837 0.53%
--------------------------- --------------- --------------- ---------------
Other 1,319 0.74% 1,463 0.77% 1,288 0.82%
--------------------------- --------------- --------------- ---------------
Total $3,073 1.72% $3,959 2.10% $3,164 2.01%
--------------------------- --------------- --------------- ---------------
Net Operating Expense $4,221 2.36% $3,694 1.96% $2,720 1.73%
--------------------------- --------------- --------------- ---------------
SUMMARY
Net Interest Income $5,455 3.06% $379 0.20% ($3,570) -2.27%
--------------------------- --------------- --------------- ---------------
Less Net Operating Exp. $4,221 2.36% $3,694 1.96% $2,720 1.73%
--------------------------- --------------- --------------- ---------------
Profit Before Taxes $1,234 0.69% ($3,315) -1.75% ($6,290) -4.00%
--------------------------- --------------- --------------- ---------------
NET PROFIT (LOSS) $1,005 0.56% ($2,212) -1.17% ($3,941) -2.51%
--------------------------- --------------- --------------- ---------------
<PAGE>
MERCHANTS BANCSHARES, INC
YIELD ANALYSIS
(UNAUDITED)
(Dollar amounts in thousands) SIX MONTHS ENDED
JUNE 30, 1994 JUNE 30, 1993
Fully Taxable Equivalent AVERAGE AVERAGE AVERAGE AVERAGE
Includes Fees on Loans BALANCE RATE BALANCE RATE
--------- ------- -------- -------
INTEREST EARNING ASSETS
Investments $ 92,059 4.02% $ 108,314 4.04%
Loans 538,137 9.12% 444,811 9.45%
Federal Funds Sold 9,606 3.12% 2,797 2.87%
--------- ------- -------- -------
Total Interest Earning Assets $ 639,802 8.30% $ 555,922 8.36%
========= ======= ======== =======
INTEREST BEARING LIABILITIES
Savings, NOW and Money Market Deposits $ 316,414 2.56% $ 283,331 2.75%
Time Deposits 198,253 4.57% 137,394 4.90%
--------- ------- -------- -------
Total Savings and Time Deposits 514,667 3.33% 420,725 3.45%
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase 984 3.12% 8,672 3.27%
Other Borrowed Funds 67,421 7.22% 72,083 6.69%
--------- ------- -------- -------
Total Interest Bearing Liabilities 583,072 3.78% 501,480 3.91%
Other Liabilities & Stockholders' Equity
(Net of Non-Interest Earning Assets) 56,730 54,442
--------- --------
Other Liabilities & Stockholders' Equity
(Net of Non-Interest Earning Assets) $ 639,802 $ 555,922
========= ========
Rate Spread 4.52% 4.45%
======= =======
Net Yield on Interest Earning Assets 4.85% 4.83%
======= =======
<PAGE>
MERCHANTS BANCSHARES, INC.
BALANCE SHEET
Average assets decreased $7million during the quarter ended
June 30, 1994, down $41.5 million from the December 31, 1993
level and increased $85.3 million from the same date a year ago.
Virtually all of the growth from the previous year is due to the
acquisition of NFNBV. Period end investment balances remained
approximately level during the quarter, but have decreased $15
million since June 30, 1993 as the Bank sold US Treasury issues
during the fall for liquidity purposes. Gross loans, including
segregated assets, are down $6 million during the quarter, and
have decreased $65 million from the same date a year ago.
Short term borrowings decreased $21.2 million over the last
12 months, and are down $12 million since March. Effective
January 1, 1994, the Bank no longer issues overnight repurchase
agreements to its cash management customers, rather, this product
is handled by the trust company subsidiary on an off-balance
sheet basis. Additionally, the Bank borrowed $12 million on a
short-term basis from the Federal Home Loan Bank of Boston in
January and repaid the note during June, 1994. Deposits have
decreased $293,000 during the quarter, and are down $61.5 million
from the same date a year ago.
Shareholders' equity increased $837,000 during the quarter,
due to net income earned less an adjustment of $168,000 to write
the investment portfolio down to the market value at June 30,
1994. Tier 1 leverage capital at the Company level was 6.3%,
5.7% and 5.5% at June 30, 1994, December 31, 1993 and June 30,
1993, respectively.
LOAN QUALITY AND RESERVES FOR POSSIBLE LOAN LOSSES (RPLL)
Merchants Bancshares, Inc. reviews the adequacy of the RPLL
at least quarterly. The method used in determining the amount of
the RPLL is not based upon maintaining a specific percentage of
RPLL to total loans or total non-performing assets, but rather a
comprehensive analytical process of assessing the credit risk
inherent in the loan portfolio. This assessment incorporates a
broad range of factors which are indicative of both general and
specific credit risk, as well as a consistent methodology for
quantifying probable credit losses. As part of the Merchants
Bancshares, Inc.'s analysis of specific credit risk, a detailed
and extensive review is done on larger credits and problematic
credits identified on the watched asset list, non-performing
asset listings, and credit rating reports.
The more significant factors considered in the evaluation of
the adequacy of the RPLL based on the analysis of general and
specific credit risk include:
Status of non-performing loans
Status of adversely-classified credits
Historic charge-off experience by major loan category
Size and composition of the loan portfolio
Concentrations of credit risk
Renewals and extensions
Current local and general economic conditions and
trends
<PAGE>
Loan growth trends in the portfolio
Off balance sheet credit risk relative to
commitments to lend
Overall, management maintains the RPLL at a level deemed to be
adequate, in light of historical, current and prospective
factors, to reflect the level of risk in the loan portfolio.
NON-PERFORMING ASSETS
The following tables summarize the Bank's non-performing
assets. The first table shows balances of nonperforming assets at
June 30, 1994 covered by a loss sharing arrangement related to
the acquisition of the NFNBV On June 4, 1993. The terms of the
Purchase and Assumption Agreement related to the purchase of
NFNBV require that the FDIC pay the Bank 80% of net charge-offs
up to $41,100,000 on any loans that qualify as loss sharing
loans for a period of three years from the date of the
acquisition. If net charge offs on qualifying loss sharing loans
exceed $41,100,000 during the three year period, the FDIC is
required to pay 95% of such qualifying charge offs. This
arrangement significantly reduces the exposure that the Bank
faces on NPAs that are covered by loss sharing. As of June 30,
1994 NPAs covered by loss sharing totaled $14,641,000. The
aggregate amount of loans covered by the loss sharing arrangement
at June 30, 1994 totaled $114,314,000.
Loss Sharing
Regular Assets Assets Total
Nonaccrual Loans $26,169,584 $12,996,070 $39,165,654
Restructured Loans 2,825,083 67,330 2,892,413
Loans Past Due 90
Days or more and
Still Accruing 558,198 97 558,295
Other Real Estate
Owned 14,376,737 1,577,222 15,953,959
----------- ----------- -----------
Total: $43,929,602 $14,640,719 $58,570,321
=========== =========== ===========
The second table shows nonperforming assets as of through March
31, 1994 and June 30, 1994 (in thousands):
March 31, 1994 June 30, 1994
Nonaccrual Loans $43,091 $39,166
Loans Past Due 90 Days or
More and Still Accruing 109 558
Restructured Loans 1,915 2,892
------- -------
Total Non-Performing Loans $45,115 $42,616
------- -------
Other Real Estate Owned 15,214 15,954
Total Non-Performing Assets $60,329 $58,570
======= =======
<PAGE>
Percentage of Non-Performing
Loans to Total Loans 8.40% 8.04%
Percentage of Non-Performing
Assets to Total Loans plus
Other Real Estate Owned 10.92% 10.72%
Percentage of RPLL to Total
Loans 3.10% 3.45%
Percentage of RPLL to NPL 36.87% 42.98%
Percentage of RPLL to NPA 27.59% 31.27%
Nonperforming Loans (NPL) declined by $2,499,000 from March
31, 1994 to June 30, 1994. Non-performing Assets (NPA) declined
by $1,759,000 during the same period. Gross charge offs of
$955,000 were responsible for part of the decline in NPAs and
NPLs. Payoffs accounted for the remainder of the decrease in
NPAs and NPLs. The RPLL increased by $1,673,000 March 31, 1994
to June 30, 1994 as the result of the quarterly provision for
loan losses and recoveries aggregating $1,378,000 during the
quarter.
As previously mentioned, the loss sharing arrangement reduces
the exposure the Company faces on NPLs. Adjusting the NPL total
for the 80% FDIC coverage on qualifying loss sharing loans
results in significantly larger RPLL to NPL ratios. The loss
sharing, adjusted ratios of RPLL to NPLs at March 31, 1994 and
June 30, 1994 were 50% and 57% respectively. This level of
coverage is considered adequate based upon management's
evaluation of known and inherent risks in the portfolio.
Approximately 85% of the NPLs are secured by real estate which
significantly reduces the Company's exposure to loss. Based upon
the combination of loss sharing coverage of some of the NPLs, the
secured nature of a significant portion of the NPLs,
strengthening in the local real estate market, and management's
assessment of the current and prospective level of risk in the
loan portfolio, the balance of the RPLL is considered adequate at
June 30, 1994.
DISCUSSION OF EVENTS AFFECTING NPAs:
Significant events affecting the categories of NPAs are
discussed below:
Nonaccrual Loans:
Nonaccrual loans declined $3,925,000 during the second quarter
of 1994 due partially to the classification of a loan for
$1,325,000 as troubled debt restructured (TDR). The loan had
previously been shown as nonaccruing but was returned to accrual
status. The loan has performed at market rates and terms for
over twelve months. Payoffs and a migration in OREO accounted
for the remaining deduction.
<PAGE>
Restructured Loans:
Restructured Loans increased from $1,915,000 at March31, 1994
to $2,892,000 at June 30, 1994. This resulted primarily from the
reclassification of the $1,325,000 loan mentioned in the
Nonaccrual section above. A reduction of approximately $350,000
in TDRs resulted in payoffs.
Other Real Estate Owned and Insubstance Foreclosure:
Theincrease in OREO and ISF of $740,000 from March 31, 1994
to June 30, 1994 results from various activity. ISF decreased
$235,000 during the first quarter as the result of payoffs.
Additions in OREO included residential rental properties
totalling $1,484,000 and a commercial building lot for $200,000.
Decreases from sales included a commercial building for $750,000.
OREO includes specific assets to which legal title has been
taken as the result of transactions related to real estate loans.
The criteria for designation of loans as in-substance
foreclosure are that the debtor has little or no equity in the
collateral, proceeds for repayment of the loan will come only
from the operation or sale of the collateral, and the debtor has
formally or effectively abandoned control of the assets or is not
expected to rebuild equity in the collateral. The collateral
underlying these loans is recorded at the lower of cost or market
value less estimated selling costs.
The total amount of Other Real Estate Owned and In-Substance
Foreclosure at March 31, 1994 and June 30, 1994 is as follows:
March 31, 1994 June 30, 1994
Other Real Estate Owned $9,784 $10,759
In-Substance Foreclosure 5,430 5,195
------- -------
Total: $15,214 $15,954
======= =======
CAPITAL RESOURCES
As a state chartered bank, the Bank's primary regulator is
the FDIC. Accordingly, the Bank is affected by the Financial
Institutions Reform, Recovery and Enforcement act of 1989
(FIRREA) which was enacted in August 1989 and the Federal Deposit
Insurance Corporation Improvement Act (FDICIA) enacted in
December 1992.
The Bank is subject to regulatory capital regulations which
provide for two capital requirements - a leverage requirement and
a risk-based capital requirement. The leverage requirement
provides for a minimum "core" capital consisting primarily of
common stockholders' equity of 3% of total adjusted assets for
those institutions with the most favorable composite regulatory
rating. Under the terms of the MOU, the Bank is required to
maintain a leverage capital ratio of at least 5.5% and refrain
from declaring dividends without the prior approval of the FDIC.
The Company is also required to refrain from declaring dividends
without the Federal Reserve's prior permission. The risk-based
capital requirement of FIRREA provides for minimum capital levels
based on the risk weighted assets of the Bank. The guidelines
require banks to meet a minimum Tier 1 risk-based capital ratio
of 4.0% and a total risk based capital ratio of 8.0% as of March
31, 1994. As of June 30, 1994, all the Bank's capital
measurements exceeded regulatory minimums.
<PAGE>
MERCHANTS BANCSHARES, INC.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Merchants Bank, a wholly-owned subsidiary, is involved in
various legal proceedings arising in the normal course of business.
Management believes that the resolution of these matters will not have
a materially adverse effect on the consolidated financial statements.
Item 2 - Changes in Securities - NONE
Item 3 - Defaults upon Senior Securities - NONE
Item 4 - Submission of Matters to a Vote of Security Holders -
The annual meeting of Merchants Bancshares, Inc. was held May 24,
1994 and the following resolutions were approved by the shareholders:
(1) To elect five individuals to the Board of Directors of the
Company as Class I directors serving three year terms.
(2) To ratify the selection of Arthur Andersen & Co as independent
auditors of the Company for 1994.
Item 5 - Other Issues - NONE
Item 6 - Exhibits and Reports on Form 8-K - NONE
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Merchants Bancshares, Inc.
/S/ Dudley H. Davis
------------------------------
Dudley H. Davis, President
/S/ Edward W. Haase
------------------------------
Date: August 11, 1994 Edward W. Haase, Treasurer
-------------------
<PAGE>
