SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 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 preceeding 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 March 31, 1994.
Merchants Bancshares, Inc.
Index to form 10 - Q
Part 1 Page
Item 1 Financial Statements 1
Consolidated Balance Sheets March 31, 1994 and 1993
and December 31, 1993
Consolidated Statements of Income for the three 2
months ended March 31, 1994 and 1993
Consolidated Statement of Stockholders' Equity for 3
the three months ended March 31, 1994 and 1993 and
the year ended December 31, 1993
Consolidated Statments of Cash Flows for the three 4
months ended March 31, 1994 and 1993
Footnotes to Financial Statements as of March 31, 1994 5-7
Item 2 Management's discussion and Analysis of Financial 8-15
Condition and results of operations
Part II - Other Information 16
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 None
Item 5 Other information None
Item 6 Exhibits and reports on form 8 - K None
Signatures 17
MERCHANTS BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET
UNAUDITED
(Dollar Amounts in Thousands)
RESTATED
March 31 March 31 DECEMBER 31
1994 1993 1993
ASSETS --------- --------- ---------
Cash and Due From Banks $ 28,191 $ 25,841 $ 30,588
Federal Funds Sold 8,800 0 0
Debt Securities Available for Sale 83,697 109,248 85,506
Marketable Equity Securities 1,487 1,226 1,452
--------- --------- ---------
Total Investments 85,184 110,474 86,958
Loans 415,255 425,120 440,592
Segregated Assets 121,773 0 132,879
Less: Reserve for Possible Loan Losses (16,642) (11,598) (20,060)
--------- --------- ---------
Net Loans 520,386 413,522 553,411
FHLB Stock 6,856 4,117 5,574
Bank Premises and Equipment 15,839 14,299 16,148
Investment in Housing Partnerships 4,751 5,456 4,610
OREO and Insubstance Foreclosure 15,214 12,333 13,674
Other Assets 25,550 14,156 24,085
--------- --------- ---------
Total Assets $ 710,771 $ 600,198 $ 735,048
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 82,858 $ 60,879 $ 96,413
Savings, NOW and Money Market Accounts 311,887 281,379 321,821
Certificates of Deposit $100,000 and Over 17,960 7,156 21,215
Other Time 178,415 116,356 179,860
--------- --------- ---------
Total Deposits 591,120 465,770 619,309
Fed Funds Purchased & Short Term Borrowings 12,000 14,600 7,500
Securities Sold U/A to Repurchase 0 6,338 1,681
Demand Note Due U/S Treasury 4,381 3,921 5,743
Other Liabilities 9,887 9,563 8,462
--------- --------- ---------
Total Liabilities 617,388 500,192 642,695
Long-Term Debt 46,632 49,036 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) (353) (179)
Surplus 30,648 30,644 30,647
Undivided Profits 16,838 20,637 15,354
Valuation Allowance-Investments (Net of Taxes) (598) 0 (144)
--------- --------- ---------
Total Stockholders' Equity 46,751 50,970 45,720
-------- -------- --------
Total Liabilities and Sharehold Equity $ 710,771 $ 600,198 $ 735,048
========= ========= =========
Book Value per Share $11.05 $12.08 $10.74
1
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MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
UNAUDITED
(Dollar Amounts in Thousands, Except for Per Share Data)
RESTATED
Quarter Ended March 31,
1994 1993
Interest Income:
Interest on Loans $ 11,335 $ 9,002
Investment Income:
Obligations of U.S. Government 791 1,005
Other 131 107
Federal Funds Sold 62 13
---------- ----------
$ 12,319 $ 10,127
---------- ----------
Interest Expense:
Interest on Deposits $ 4,181 $ 3,590
Interest on Capital Notes
and Other Borrowings 1,233 1,189
---------- ----------
$ 5,414 $ 4,779
---------- ----------
Net Interest Income $ 6,905 $ 5,348
Provision for Possible Loan Losses 1,250 5,008
---------- ----------
Net Interest Income after
Provision for Possible Loan Losses $ 5,655 $ 340
Other Income: ---------- ----------
Fees on Loans $ 1,030 $ 933
Service Charges on Deposits 891 747
Other 1,213 2,475
---------- ----------
$ 3,134 $ 4,155
Other Expenses: ---------- ----------
Salaries and Wages $ 2,559 $ 1,947
Employee Benefits 670 619
Occupancy Expense, Net 693 448
Equipment Expense 466 404
Low Income Housing Losses 223 232
Expenses Other Real Estate Owned 338 620
Other 2,156 1,487
---------- ----------
$ 7,105 $ 5,757
---------- ----------
Income (Loss) Before Income Taxes $ 1,684 $ (1,262)
Provision (Benefit) for Income Taxes 246 (792)
---------- ----------
Net Income (Loss) $ 1,438 $ (470)
========== ==========
Per Common Share Net Income (Loss) $ 0.34 $ (0.11)
========== ==========
Dividends Paid Per Share $ 0.00 $ 0.20
========== ==========
Weighted Average Common Shares 4,230,193 4,174,914
2
<PAGE>
<TABLE>
MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1993 AND
THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
UNAUDITED
(Thousands of Dollars)
<CAPTION>
Net
Unrealized Total
Common Undivided Treasury Depreciation 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 Loss (470) (470)
Treasury Stock Transactions 8 7 71 86
Cash Dividend ($.20 per share) (849) (849)
------- ------ ------- ------- -------- -------
Balance - March 31, 1993 $ 42 $ 30,644 $ 20,637 $ (353) $ 0 $ 50,970
Net Loss (5,311) (5,311)
Treasury Stock Transactions 4 27 174 205
Change in Net Unrealized
Depreciation of Investment
Securities (144) (144)
------- ------ ------- ------- -------- -------
Balance - December 31, 1993 $ 42 $ 30,648 $ 15,353 $ (179) $ (144) $ 45,720
Net Income 1,485 1,485
Change in Net Unrealized
Depreciation of Investment
Securities (454) (454)
------- ------- ------- ------- -------- -------
Balance - March 31, 1994 $ 42 $ 30,648 $ 16,838 $ (179) $ (598) $ 46,751
======= ======= ======= ======= ======== =======
3
</TABLE>
<PAGE>
MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(Dollar Amounts in Thousands)
For the Three Months Ended March 31, 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES: ------- -------
Net Income (Loss) $ 1,438 $ (470)
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Possible Loan Losses 1,250 5,008
Provision for Depreciation and Amortization 512 407
Prepaid income taxes 226 (1,375)
Imputed Gain on Sale of Loans (65) (84)
Net Gains on Sales of Investment Securities 0 1,275
Net Gains on Sales of Loans and Leases (39) (14)
Equity in Losses Real Estate Ltd Partnerships 223 232
(Increase) Decrease in Interest Receivable (410) 1,186
Increase in Interest Payable 941 547
(Increase) Decrease in Other Assets (1,072) 813
Increase (Decrease) in Other Liabilities 485 2,210
------- -------
Net Cash Provided by Operating Activities $ 3,489 $ 9,735
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Investment Securities $ 0 $ 144,509
Proceeds from Sales of Loans and Leases 18,167 17,295
Purchases of Investment Securities 0 (147,890)
Loans Originated, Net of Principal Repayments 11,936 (12,075)
Purchases of Premises and Equipment (480) (38)
Decrease in Net Investment - Leases 24 214
------- -------
Net Cash Provided by Investing Activities $ 29,647 $ 2,015
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Decrease in Deposits $ (28,189) $ (38,283)
Net Increase in Short-term Borrowing 1,457 16,394
Principal Payments on Long-Term Debt (1) (1)
Acquisition of Treasury Stock 0 (132)
Cash Dividends Paid 0 (843)
Sale of Treasury Stock 0 212
------- -------
Net Cash Used in Financing Activities $ (26,733) $ (22,653)
------- -------
Decrease in Cash and Cash Equivalents 6,403 (10,903)
Cash and Cash Equivalents at January 1 30,588 36,744
------- -------
Cash and Cash Equivalents at March 31 $ 36,991 $ 25,841
======= =======
Total Interest Payments $ 4,473 $ 4,233
Total Income Tax Payments $ 0 $ 0
4
<PAGE>
MERCHANTS BANCSHARES, INC
MARCH 31, 1994
NOTES TO FINANCIAL STATEMENTS:
NOTE 1: CURRENT OPERATING ENVIRONMENT AND REGULATORY MATTERS
As of March31, 1993, the Federal DepositInsurance 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 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 $3.3
million which were outstanding at March 31, 1994. The repayment
of such advances, together with the Company's cash on hand at
March 31, 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. In addition, the Company may
not declare or pay a dividend without the approval of the Federal
Reserve.
Managementbelieves the Bank andthe Company are in substantial
compliance with the provisions of the MOU and the written
agreement with the Federal Reserve as of March 31, 1994.
OnMarch 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. Although the FDIC and the Commissioner
have not yet issued the formal examination report, management
believes that the results of the examination will not have a
significant impact on the Company's financial statements.
Failure to maintainthe minimum leverage 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.
5
<PAGE>
NOTE 2: ACQUISITION
OnJune 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 was a
three bank holding company conducting banking activities
primarily in central and northern Vermont. 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 purchaseprice 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
6
<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 quarter of 1994.
NOTE 3: INVESTMENTS
Investments in debt securitiesare classified as available for
sale as of December 31, 1993 and March 31, 1994 and as held for
sale as of March 31, 1993. Marketable equity securities are
classified as available for sale at March 31, 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 March 31, 1993. The amortized cost and estimated fair
values are as follows:
(In Thousands)
March 31, 1994 December 31, 1993 March 31, 1993
----------------- ----------------- ----------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
----------------- ------------------ ----------------
US Gov't $ 84,859 $ 83,697 $ 85,945 $ 85,506 $109,248 $109,300
Other 1,231 1,487 1,231 1,452 1,226 1,314
----------------- ----------------- -----------------
Total $ 86,090 $ 85,184 $ 87,179 $ 86,958 $114,591 $110,614
================= ================= =================
7
<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 March 31, 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 makes
commitments for possible future extensions of credit. On March
31, 1994, the Bank was obligated for $11,542,200 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 first quarter of 1994 was $1,437,973
compared to a net loss a year earlier of $469,510. On a per
share basis, the net income represented $.34 per share compared
to a loss of $.11 for 1993. The primary reason for the loss
during 1993 was the carryback of $3,000,000 of an approximate
$12,000,000 additional provision for possible loan losses
recognized on June 30, 1993. Had that additional provision not
been recognized, net income for the period would have been
approximately $1,510,500, however, the Company recognized
$867,000 in securities gains (after taxes) during that quarter.
The net interest income before the provision for possible loan
losses aggregated $6.9 million in 1994 compared to $5.3 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 quarter.
The provision for possible loan losses totalled $1.25 million
for the first quarter of 1994 compared to $5.01 million for the
first quarter of 1993, due to larger reserve balances during 1994
which were built up during the previous year and a slowly
improving economic environment.
During the quarter endedMarch 31, 1994, theCompany recognized
a loss on the sale of an investment of $19,000.
Total non-interest expenses are up approximately 23% 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 representing the amount earned during the first 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
8
<PAGE>
MERCHANTS BANCSHARES, INC.
INTEREST MANAGEMENT AND OPERATING EXPENSE ANALYSIS
(IN THOUSANDS - TAXABLE EQUIVALENT BASIS)
RESTATED
QUARTER ENDED QUARTER ENDED QUARTER ENDED
03/31/94 12/31/93 03/31/93
Total Average Assets $721,409 $755,667 $612,887
------------------------ ----------------- ----------------- -----------------
AMOUNT % OF AMOUNT % OF AMOUNT % OF
ASSETS ASSETS ASSETS
INTEREST MANAGEMENT
Interest Income (T.E.) $12,388 6.87% $12,915 6.84% $10,257 6.69%
------------------------- ----------------- ----------------- -----------------
Interest Expense 5,414 3.00% 5,786 3.06% 4,779 3.12%
------------------------- ----------------- ----------------- -----------------
Net Int before Prov (T.E.) $6,974 3.87% $7,129 3.77% $5,478 3.58%
------------------------- ----------------- ----------------- -----------------
Prov for Loan Losses 1,250 0.69% 6,750 3.57% 5,008 3.27%
------------------------- ----------------- ----------------- -----------------
Net Int. Income (T.E.) $5,724 3.17% $379 0.20% $470 0.31%
------------------------- ----------------- ----------------- -----------------
NET OPERATING EXPENSE
Non-Interest Expense:
Personnel $3,229 1.79% $3,541 1.87% $2,566 1.67%
------------------------- ----------------- ----------------- -----------------
Occupancy 694 0.38% 565 0.30% 448 0.29%
------------------------- ----------------- ----------------- -----------------
Equipment 466 0.26% 571 0.30% 404 0.26%
------------------------- ----------------- ----------------- -----------------
Other 2,717 1.51% 2,976 1.58% 2,338 1.53%
------------------------- ----------------- ----------------- -----------------
Total $7,106 3.94% $7,653 4.05% $5,756 3.76%
------------------------- ----------------- ----------------- -----------------
Less Non-Interest Income:
Fees on Loans $1,030 0.57% $1,470 0.78% $933 0.61%
------------------------- ----------------- ----------------- -----------------
Service Charges on Dep 891 0.49% 1,026 0.54% 747 0.49%
------------------------- ----------------- ----------------- -----------------
Other 1,213 0.67% 1,463 0.77% 2,475 1.62%
------------------------- ----------------- ----------------- -----------------
Total $3,134 1.74% $3,959 2.10% $4,155 2.71%
------------------------- ----------------- ----------------- -----------------
Net Operating Expense $3,972 2.20% $3,694 1.96% $1,601 1.04%
------------------------- ----------------- ----------------- -----------------
SUMMARY
Net Interest Income $5,724 3.17% $379 0.20% $470 0.31%
------------------------- ----------------- ----------------- -----------------
Less Net Operating Exp. $3,972 2.20% $3,694 1.96% $1,601 1.04%
------------------------- ----------------- ----------------- -----------------
Profit Before Taxes $1,752 0.97% ($3,315) -1.75% ($1,131) -0.74%
------------------------- ----------------- ----------------- -----------------
NET PROFIT (LOSS) $1,438 0.80% ($2,212) -1.17% ($470) -0.31%
------------------------- ----------------- ----------------- -----------------
9
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MERCHANTS BANCSHARES, INC
YIELD ANALYSIS
(UNAUDITED)
(Dollar amounts in thousands)
THREE MONTHS ENDED
MARCH 31, 1994 MARCH 31, 1993
Fully Taxable Equivalent AVERAGE AVERAGE AVERAGE AVERAGE
Includes Fees on Loans BALANCE RATE BALANCE RATE
------- ------- ------- -------
INTEREST EARNING ASSETS
Investments $ 92,982 3.98% $109,541 4.10%
Loans 548,515 9.07% 412,634 9.75%
Federal Funds Sold 7,781 3.17% 1,769 2.83%
------- ------- ------- -------
Total Interest Earning Assets $649,278 8.27% $523,944 8.54%
======== ======= ======= =======
INTEREST BEARING LIABILITIES
Savings, NOW and Money Market Deposits $320,655 2.49% $279,022 2.83%
Time Deposits 196,750 4.51% 125,147 4.94%
------- ------- ------- -------
Total Savings and Time Deposits 517,405 3.26% 404,169 3.48%
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase 1,962 3.09% 7,517 3.29%
Other Borrowed Funds 69,717 6.96% 66,648 7.21%
------- ------- ------- -------
Total Interest Bearing Liabilities 589,084 3.69% 478,334 4.00%
Other Liabilities and Stockholders' Equity
(Net of Non-Interest Earning Assets) 60,194 45,609
------- -------
Total Liabilities and Stockholders' Equity
(Net of Non-Interest Earning Assets) $649,278 $523,943
======= =======
Rate Spread 4.57% 4.55%
======= =======
Net Yield on Interest Earning Assets 4.91% 4.89%
======= =======
10
<PAGE>
MERCHANTS BANCSHARES, INC.
BALANCE SHEET:
Average assets decreased $34 million during the quarter
ended March 31, 1994 from the December 31, 1993 level and
increased $109 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 $25
million since March 31, 1993 as the Bank sold US Treasury issues
during the fall for liquidity purposes. Gross loans, including
segregated assets, are down $35 million during the quarter, and
have increased $113 million from the same date a year ago, again
due to the NFNBV transaction.
Short termborrowings decreased$8.4 million overthe last
12 months, but are up marginally ($1.4 million) since December.
Effective January 1, 1994, the Bank no longer issues overninght
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. This borrowing replaced short-term borrowings which were
paid off in December, 1993. Deposits have decreased $28 million
during the quarter, but are up $125 million from the same date a
year ago due to the NFNBV acquisition.
Shareholders' equity increased $1.03 million during the
quarter, due to net income earned less an adjustment of $454,000
to write the investment portfolio down to the market value at
March 31, 1994. Tier 1 leverage capital at the Company level was
6.0%, 5.7% and 7.6% at March 31, 1994, December 31, 1993 and
March 31, 1993, respecively.
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
11
<PAGE>
Size and composition of the loan portfolio
Concentrations of credit risk
Renewals and extensions
Current local and general economic conditions and
trends
Loan growth trends in the portfolio
Off balance sheet credit risk relative to
commitments to lend
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
March 31, 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 March 31,
1994 NPAs covered by loss sharing totaled $14,782,000. The
aggregate amount of loans covered by the loss sharing arrangement
at March 31, 1994 totaled $121,773,000.
Loss Sharing
Regular Assets Assets Total
Nonaccrual Loans $28,377,070 $14,713,513 $43,090,583
Restructured Loans $1,846,806 $67,976 $1,914,782
Loans Past Due 90
Days or more and
Still Accruing $109,464 $17 $109,481
Other Real Estate Owned $15,214,029 $0 $15,214,029
----------- ----------- -----------
Total: $45,547,369 $14,781,506 $60,328,875
=========== =========== ===========
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The second table shows nonperforming assets as of year end 1993
through March 31, 1994 (in thousands):
March 31, 1994 December 31, 1993
Nonaccrual Loans $43,091 $47,069
Loans Past Due 90 Days or
More and Still Accruing 109 715
Restructured Loans 1,915 2,841
Total Non-Performing Loans 45,115 50,625
Other Real Estate Owned 15,214 13,674
Total Non-Performing Assets $60,329 $64,299
======= =======
Percentage of Non-Performing
Loans to Total Loans 8.40% 8.83%
Percentage of Non-Performing
Assets to Total Loans plus
Other Real Estate Owned 10.92% 10.95%
Percentage of RPLL to Total
Loans 3.10% 3.50%
Percentage of RPLL to NPL 36.87% 39.62%
Percentage of RPLL to NPA 27.59% 31.20%
Nonperforming Loans (NPL) declined by $5,510,000 from
December 31, 1993 to March 31, 1994. Non-performing Assets (NPA)
declined by $3,970,000 during the same period. Net charge offs
of $4,668,000 were primarily responsible for the decline in NPAs
and NPLs. The RPLL declined by $3,418,000 from December 31, 1993
to March 31, 1994 as the result of the aforementioned charge
offs. A discussion of some of the borrowing relationships that
led to the charge offs is presented under "Discussion of Events
Affecting NPAs" section.
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 December 31, 1993 and
March 31, 1994 were 54.7% and 50% 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, and management's assessment of the current and prospective
level of risk in the loan portfolio, the balance of the RPLL is
considered adequate at March 31, 1994.
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DISCUSSION OF EVENTS AFFECTING NPAs:
Significant events affecting the categories of NPAs are
discussed below:
Nonaccrual Loans:
Nonaccrual loans declined $3,978,000 during the first quarter
of 1994 due primarily to charge offs. Two relationships, one
involving construction financing on residential development and
another a vending machine company accounted for the largest
charge-offs - $1,827,000 and $599,000 respectively.
Approximately $1,150,000 consisting of five properties migrated
from Nonaccrual to OREO during the quarter.
Restructured Loans:
Restructured Loans declined from $2,841,000 at December 31,
1993 to $1,915,000 at March 31, 1994 as the result of a migration
to Nonaccrual.
Other Real Estate Owned and Insubstance Foreclosure:
The increase in OREO and ISF of $1,540,000 from December 31,
1993 to March 31, 1994 results from various activity. ISF
decreased $2,009,000 during the first quarter as the result of
the transfer of title of a residential development to the Bank
and a sale of a property by its owner with subsequent paydown to
the Bank of $275,000.
Significant additions in OREO included a vacant commercial
building lot for $775,000, as well as, the aforementioned ISF
transfer. Approximately $400,000 was reclassified from bank
premises to OREO and resulted from buildings no longer used for
banking purposes related to the NFNBV acquisition.
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 December 31, 1993 and March 31, 1994 is as
follows:
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March 31, 1994 December 31, 1993
Other Real Estate Owned $9,784 $6,235
In-Substance Foreclosure $5,430 $7,439
------ ------
Total $15,214 $13,674
======= =======
CAPITAL RESOURCES
As a statechartered bank, theBank's primary regulatoris
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.
TheBank issubject toregulatory capitalregulations 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 lease 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 March 31, 1994, all the Bank's capital
measurements exceeded regulatory minimums.
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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 - NONE
Item 5 - Other Issues - NONE
Item 6 - Exhibits and Reports on Form 8-K - NONE
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Merchants Bancshares, Inc.
\S DUDLEY H DAVIS
-----------------------------
Dudley H. Davis, President
\S EDWARD W. HAASE
-------------------------------
Edward W. Haase, Treasurer
Date: MAY 12, 1994
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