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, 1996
COMMISSION FILE NUMBER 0-11595
MERCHANTS BANCSHARES, INC.
(A DELAWARE CORPORATION)
EMPLOYER IDENTIFICATION NO. 03-0287342
164 College Street, Burlington, VT 05401
Telephone: (802) 658-3400
Indicate by check mark whether the registrant has filed all
reports required to be filed by section 13 or 15(D) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and has been subject to such filing
requirement for the past 90 days.
YES X NO
4,290,342 Shares Common Stock $.01 Par Outstanding June 30, 1996
MERCHANTS BANCSHARES, INC.
INDEX TO FORM 10-Q
PART I
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets
June 30, 1996 and 1995 and December 31, 1995 1
Consolidated Statements of Operations
For the three months ended June 30, 1996 and 1995
and the six months ended June 30, 1996 and 1995 2
Consolidated Statement of Stockholders' Equity
For the six months ended June 30, 1996 and 1995
and the year ended December 31, 1995 3
Footnotes to Financial Statements as of
June 30, 1996 4-5
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-13
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 14-15
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 16
MERCHANTS BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED
JUNE 30 DECEMBER 31
ASSETS 1996 1995
Cash and Due from Banks $ 26,615,598 $ 38,366,772
Trading Securities 500,000 500,000
Investments:
Debt Securities Available for Sale $ 107,817,247 $ 97,943,234
Debt Securities Held to Maturity 0 0
Marketable Equity Securities 310,017 309,508
------------ ------------
Total Investments $ 108,127,264 $ 98,252,742
Loans 399,586,380 449,724,017
Reserve for possible loan losses 15,630,815 16,234,481
------------ ------------
Net Loans $ 383,955,565 $ 433,489,536
Federal Home Loan Bank Stock 2,299,900 3,174,400
Federal Funds Sold 13,500,000 0
Bank Premises and Equipment, Net 13,396,043 12,454,708
Investments in Real Estate Limited Partnerships 2,871,755 3,141,245
Other Real Estate Owned 2,617,134 7,772,067
Other Assets 15,054,983 17,896,993
------------ ------------
Total Assets $ 568,938,242 $ 615,048,463
LIABILITIES ============ ============
Deposits:
Demand $ 78,023,584 $ 85,417,465
Savings, NOW and Money Market Accounts 258,301,047 278,241,601
Time Certificates of Deposit $100,000 and Over 21,322,033 20,473,321
Other Time 149,651,980 160,381,588
------------ ------------
Total Deposits $ 507,298,644 $ 544,513,975
Demand Note Due U/S Treasury 3,679,290 5,335,422
Other Liabilities 9,727,302 9,525,446
------------ ------------
Total Liabilities $ 520,705,236 $ 559,374,843
Long-Term Debt 6,422,423 15,424,757
STOCKHOLDERS' EQUITY
Common Stock, $.01 Par Value 44,346 44,346
Shares Authorized 4,700,000
Outstanding, Current Year 4,290,342
Previous Year 4,290,342
Preferred Stock Class A Non-Voting
Authorized - 200,000, Outstanding 0 0
Preferred Stock Class B Voting
Authorized - 1,500,000, Outstanding 0 0 0
Treasury Stock (At Cost) - 144,278 (2,037,927) (2,037,927)
Surplus 33,154,407 33,154,407
Undivided Profits 11,534,229 8,620,881
Unrealized Gain (Loss) on Securities
Available For Sale (884,472) 467,156
------------ ------------
Total Stockholders' Equity $ 41,810,583 $ 40,248,863
Total Liabilities and ----------- ------------
Stockholders' Equity $ 568,938,242 $ 615,048,463
============ ============
Book Value Per Common Share $9.75 $9.38
======= =======
Note: As of June 30, 1996, the Bank had off-balance sheet liabilities in the
form of standby letters of credit to customers in the amount of $6,448,915.
1
<TABLE>
THE MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<CAPTION> QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
<S> <C> <C> <C> <C>
Interest Income 1996 1995 1996 1995
Interest on Loans $ 9,509,647 $ 11,382,447 $ 19,348,224 $ 22,497,538
Investment Income:
Obligations of U.S. Government 1,635,549 979,656 3,136,253 1,984,741
Other 48,104 216,097 102,294 423,425
Federal Funds Sold 71,162 78,999 154,679 111,871
------------- ------------- ------------- -------------
$ 11,264,462 $ 12,657,199 $ 22,741,450 $ 25,017,575
------------- ------------- ------------- -------------
Interest Expense
Interest on Deposits $ 4,439,997 $ 4,955,413 $ 9,028,484 $ 9,723,543
Interest on Capital Notes
and Other Borrowings 202,214 1,691,337 472,114 2,795,234
------------- ------------- ------------- -------------
$ 4,642,211 $ 6,646,750 $ 9,500,598 $ 12,518,777
------------- ------------- ------------- -------------
Net Interest Income $ 6,622,251 $ 6,010,449 $ 13,240,852 $ 12,498,798
Provision for Possible Loan Losses 900,000 7,600,000 1,800,000 10,300,000
------------- ------------- ------------- -------------
Net Interest Income after
Provision for Loan Losses $ 5,722,251 $ (1,589,551) $ 11,440,852 $ 2,198,798
------------- ------------- ------------- -------------
Other Income
Fees on Loans $ 725,746 $ 704,054 $ 1,452,969 $ 1,396,671
Service Charges on Deposits 831,587 808,905 1,678,371 1,594,111
Gain (Loss) on Sale of Investments 0 88,048 90,026 336,695
Gain on Branch Sale 0 0 299,071 0
Refund of VT Franchise Tax 271,643 0 799,413 0
Other 611,410 1,196,917 1,760,372 2,373,380
------------- ------------- ------------- -------------
Total Other Income $ 2,440,386 $ 2,797,924 $ 6,080,222 $ 5,700,857
------------- ------------- ------------- -------------
Other Expenses
Salaries and Wages $ 1,974,881 $ 2,688,184 $ 4,293,720 $ 5,485,765
Employee Benefits 489,678 733,748 1,080,010 1,437,270
Occupancy Expense, Net 519,727 500,958 1,101,808 1,103,484
Equipment Expense 482,006 519,298 989,182 1,042,308
Equity in Losses of Real Estate
Limited Partnerships 213,507 186,400 498,066 372,800
Expenses - Other Real Estate Owned 735,763 1,102,458 2,274,947 1,581,684
Other 1,763,841 2,260,145 3,586,820 4,148,594
------------- ------------- ------------- -------------
Total Other Expenses $ 6,179,403 $ 7,991,191 $ 13,824,553 $ 15,171,905
------------- ------------- ------------- -------------
Income (Loss) before Income Taxes $ 1,983,234 $ (6,782,818) $ 3,696,521 $ (7,272,250)
Provision (Benefit) for Income Taxes 439,053 (2,731,682) 783,169 (3,259,745)
------------- ------------- ------------- -------------
Net Income (Loss) $ 1,544,181 $ (4,051,136) $ 2,913,352 $ (4,012,505)
============= ============= ============= =============
Per Common Share Net Income (Loss) $ 0.36 $ -0.95 $ 0.68 $ -0.94
============= ============= ============= =============
Weighted Average Common Shares
Outstanding 4,290,342 4,262,462 4,290,342 4,247,770
2 2
</TABLE>
<TABLE>
MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995 AND
THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
UNAUDITED
<CAPTION> Net
Unrealized
Depreciation Total
Common Undivided Treasury of Invest Equity
Stock Surplus Profits Stock Securities Capital
------ -------- -------- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1994 $42,429 $30,647,120 $12,462,820 $ (178,730)$ (673,669)$42,299,970
Net Loss -- -- (4,012,504) -- -- (4,012,504)
Sale of Treasury Stock -- -- -- 178,730 -- 178,730
Issuance of Common Stock 474 470,796 -- -- -- 471,270
Net Change in Unrealized
Appreciation (Depreciation)
of Investment Securities -- -- -- -- 757,652 757,652
------ ---------- --------- --------- ------- ----------
Balance - June 30, 1995 $42,903 $31,117,916 $ 8,450,316 $ 0 $ 83,983 $39,695,118
Net Loss 170,561 -- -- 170,561
Purchase of Treasury Stock -- (44,598) -- (2,037,927) -- (2,082,525)
Issuance of Common Stock 1,443 2,081,089 -- -- -- 2,082,532
Net Change in Unrealized
Appreciation (Depreciation)
of Investment Securities 383,173 383,173
------ ---------- --------- --------- ------- ----------
Balance - December 31, 1995 $44,346 $33,154,407 $ 8,620,877 $(2,037,927)$ 467,156 $40,248,859
Net Income 2,913,352 2,913,352
Net Change in Unrealized
Appreciation (Depreciation)
of Investment Securities (1,351,628) (1,351,628)
------ ---------- --------- --------- ------- ----------
Balance - June 30, 1996 $44,346 $33,154,407 $11,534,229 $(2,037,927)$ (884,472)$41,810,583
====== ========== ========= ========= ======= ==========
3
</TABLE>
MERCHANTS BANCSHARES, INC
JUNE 30, 1996
NOTES TO FINANCIAL STATEMENTS:
See the Form 10-K filed as of December 31, 1995 for additional
information.
NOTE 1: CURRENT OPERATING ENVIRONMENT AND REGULATORY MATTERS
As a result of a joint field examination of the Bank by the Federal
Deposit Insurance Corporation (the FDIC) and the State of Vermont
Department of Banking, Insurance and Securities (the Commissioner)
as of March 31, 1993, 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%, and refrain from declaring dividends. The dividend
limitation includes dividends paid by the Bank to the Company.
In June, 1996, the FDIC and the Commissioner completed the field
work related to their most recent examination of the Bank as of
March 31, 1996. Based on this examination, and actions taken by
the Bank in response to regulators' suggestions and directions,
management believes the Bank is in substantial compliance with the
MOU as of June 30, 1996.
In December, 1994, the FDIC and the Commissioner completed field
work related to their examination of the Merchants Trust Company as
of September 26, 1994. On February 17, 1995 the Trust Company
entered into a Memorandum of Understanding (MOU) with the FDIC and
the Commissioner to affect corrective actions relating to certain
operating, technical and regulatory issues. In June, 1996, the
FDIC and the Commissioner completed the field work related to their
most recent examination of the Merchants Trust Company as of March
31, 1996. Based on the examination and actions taken by the Trust
Company in response to regulators' suggestions and directions,
management believes the Trust Company is in substantial compliance
with the MOU as of June 30, 1996.
In February, 1994, the Company and the Federal Reserve entered into
an agreement. Under this agreement, among other things, the
Company may not declare or pay a dividend or incur any debt without
the approval of the Federal Reserve. The Company operated under
the agreement beginning in February 1994 until the removal of the
agreement on June 3, 1996.
NOTE 2: RECENT ACCOUNTING DEVELOPMENTS
In March, 1995 the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be
Disposed Of." This statement requires a review for impairment of
long-lived assets and certain identifiable intangibles to be held
and used by an entity when events or changes in circumstances
indicate that the carrying amount of the assets may not be
recoverable. An impairment loss would be recognized if the sum of
the future cash flows expected to result from the use and eventual
disposition of the asset is less than the carrying amount of the
asset. The amount by which the carrying amount of the asset
exceeds the asset's fair value is the total impairment loss to be
recognized. The statement also requires that for certain long-
lived assets to be disposed of, the amount by which the carrying
amount of the asset exceeds the fair value less costs to sell, is
an impairment loss to be recognized. This statement does not apply
to financial instruments, core deposit intangibles, mortgage and
other servicing rights, or deferred tax assets. The Bank adopted
this new standard on January 1, 1996. There was no impact on the
Bank's consolidated financial condition and results of operations
upon adoption as of June 30, 1996.
On January 1, 1996, the Bank adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights." This statement requires the
recognition of a separate asset for the rights to service mortgage
loans for others regardless of how those servicing rights were
created. The value of such servicing rights are to be periodically
assessed for impairment based on the fair value of those rights.
The effect of the adoption of this statement did not have a
significant impact on earnings in the first or second quarters of
1996.
NOTE 3: RESTRUCTURING
The Company began a restructuring project during the latter half of
1995 to reduce ongoing operating costs and increase noninterest
income. As a result, the Bank implemented a plan during the fourth
quarter of 1995 to reduce its workforce by approximately 250
employees.
In conjunction with the restructuring project the Company engaged
a consulting firm to assist in the identification of possible
workforce reductions and the implementation of the restructure
plan. The fee earned by these consultants is, in part, contingent
upon actual future operating cost reductions and the increase in
noninterest income. The Company remains subject to an agreement
with these consultants whereby the Company is required to remit
additional funds to the consultants in the event actual cost
reductions and increases in noninterest income in 1996 exceed the
amounts anticipated. An additional $39,167 in expenses related to
these consultants' fees have been realized during the quarter ended
June 30, 1996.
NOTE 4: REFUND OF VERMONT FRANCHISE TAXES
During the second quarter of 1996 the Bank recognized income
related to a refund of its 1995 Vermont Franchise Taxes of
$271,643.
5
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 six months
ended June 30, 1996 and 1995 have been included in the financial
statements. The information was prepared from the books of
Merchants Bancshares, Inc. (the Company) and its subsidiaries, the
Merchants Bank (the 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 June 30,
1996, the Bank was obligated for $6,448,915 of standby letters of
credit. No losses are anticipated in connection with these
commitments.
RESULTS OF OPERATIONS
Net income for the second quarter of 1996 was $1,544,181, compared
to a net loss for the same period a year earlier of ($4,051,136).
Second quarter 1996 net income represents $.36 per share compared
to a net loss of ($.95) per share for the second quarter of 1995.
Second quarter net interest income before the provision for
possible loan losses was $6,622,251 in 1996 as compared to
$6,010,449 for the year earlier quarter. This increase is due
primarily to two factors. The Bank has seen its portfolio of
nonaccruing and past due loans decrease to $17 million at June 30,
1996 from $44 million at June 30, 1995. This $27 million decrease
in nonperforming loans has had a significant impact on the
Company's net interest income. Additionally, the Bank has been
able to increase the yield on its investment portfolio to 6.27% at
June 30, 1996 from 5.32% at June 30, 1995. This 95 basis point
increase in yield has also contributed to the the Bank's net
interest income. The provision for possible loan losses totalled
$900,000 for the second quarter of 1996 compared to $7,600,000 for
the same quarter in 1995, due to a healthier loan portfolio
achieved through substantial writeoffs and non-performing asset
sales during 1995.
Total non-interest expenses are down approximately $1.8 million
(26%) from the same quarter a year earlier. During the third
quarter of 1995 the Bank began a restructuring project. As a
result of the restructuring the Bank has reduced its workforce from
447 full time equivalent employees at June 30, 1995 to 243 at June
30, 1996. This has translated into a reduction in salaries and
related expenses of $958 thousand (28%). Additionally, the Bank
has aggressively worked to decrease its portfolio of foreclosed
assets and has decreased the Other Real Estate (ORE) portfolio to
$2.6 million at June 30, 1996 from $7.7 million at December 31, 1995.
This decrease in ORE resulted in a decrease in expenses related to
ORE of $367 thousand (33%).
INCOME TAXES
The Company recognized $216,000 and $240,000 in low income housing
tax credits during each of the quarters ended June 30, 1996 and
1995, respectively, representing the amount of the income tax
credits earned during the those quarters. The recognition of these
low income housing tax credits has reduced the Company's effective
tax rate from 34% to 20% at June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity, as it pertains to banking, can be defined as the ability
to generate cash in the most economical way to satisfy loan demand,
deposit withdrawal demand, and to meet other business opportunities
which require cash. The Bank has a number of sources of liquid
funds, among them are: the ability to draw on $80 million overnight
repurchase agreements; $12 million in Federal Funds lines of
credit; a $15 million overnight line of credit with the Federal
Home Loan Bank, as well as $38 million in estimated additional
borrowing capacity with the Federal Home Loan Bank.
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
<TABLE>
MERCHANTS BANCSHARES, INC.
INTEREST MANAGEMENT AND OPERATING EXPENSE ANALYSIS
(TAXABLE EQUIVALENT BASIS)
<CAPTION>
QUARTER ENDED YEAR ENDED QUARTER ENDED
06/30/96 12/31/95 06/30/95
Total Average Assets $572,441,171 $642,487,000 $651,245,049
------------------------ --------------------- --------------------- ---------------------
AMOUNT % OF AMOUNT % OF AMOUNT % OF
ASSETS ASSETS ASSETS
<S> <C> <C> <C> <C> <C> <C>
INTEREST MANAGEMENT
Interest Income (T.E.) $11,298,995 7.87% $49,109,437 7.64% $12,700,857 7.80%
--------------------------- --------------------- --------------------- ---------------------
Interest Expense 4,642,211 3.23% 23,001,635 3.58% 6,646,750 4.08%
--------------------------- --------------------- --------------------- ---------------------
Net Int before Prov (T.E.) $6,656,784 4.64% $26,107,802 4.06% $6,054,107 3.72%
--------------------------- --------------------- --------------------- ---------------------
Prov for Loan Losses 900,000 0.63% 12,100,000 1.88% 7,600,000 4.67%
--------------------------- --------------------- --------------------- ---------------------
Net Int. Income (T.E.) $5,756,784 4.01% $14,007,802 2.18% ($1,545,893) -0.95%
--------------------------- --------------------- --------------------- ---------------------
NET OPERATING EXPENSE
Non-Interest Expense:
Personnel $2,464,559 1.72% $13,433,905 2.09% $3,421,932 2.10%
--------------------------- ------------------------------------------- ---------------------
Occupancy 519,727 0.36% 2,177,612 0.34% 500,958 0.31%
--------------------------- --------------------- --------------------- ---------------------
Equipment 482,006 0.34% 2,068,991 0.32% 519,298 0.32%
--------------------------- --------------------- --------------------- ---------------------
Other 2,713,111 1.89% 15,974,501 2.49% 3,549,003 2.18%
--------------------------- --------------------- --------------------- ---------------------
Total $6,179,403 4.31% $33,655,009 5.24% $7,991,191 4.91%
--------------------------- --------------------- --------------------- ---------------------
Less Non-Interest Income:
Fees on Loans $725,746 0.51% $2,491,825 0.39% $704,054 0.43%
--------------------------- --------------------- --------------------- ---------------------
Service Charges on Dep 831,587 0.58% 3,183,525 0.50% 808,905 0.50%
--------------------------- --------------------- --------------------- ---------------------
Other 883,053 0.62% 6,631,552 1.03% 1,284,965 0.79%
--------------------------- --------------------- --------------------- ---------------------
Total $2,440,386 1.70% $12,306,902 1.92% $2,797,924 1.72%
--------------------------- --------------------- --------------------- ---------------------
Net Operating Expense $3,739,017 2.61% $21,348,107 3.32% $5,193,267 3.19%
--------------------------- --------------------- --------------------- ---------------------
SUMMARY
Net Interest Income $5,756,784 4.01% $14,007,802 2.18% ($1,545,893) -0.95%
--------------------------- --------------------- --------------------- ---------------------
Less Net Operating Exp. $3,739,017 2.61% $21,348,107 3.32% $5,193,267 3.19%
--------------------------- --------------------- --------------------- ---------------------
Profit Before Taxes $2,017,767 1.41% ($7,340,305) -1.14% ($6,739,160) -4.14%
--------------------------- --------------------- --------------------- ---------------------
NET PROFIT (LOSS) $1,544,181 1.08% ($3,841,939) -0.60% ($4,051,135) -2.49%
--------------------------- --------------------- --------------------- ---------------------
</TABLE>
9
<TABLE>
MERCHANTS BANCSHARES, INC
SUPPLEMENTAL INFORMATION
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1995
Fully Taxable Equivalent AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
Includes Fees on Loans BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
----------- ------- ----------- ------- ----------- ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Taxable Investments $ 107,599,722 6.27% $ 89,948,218 5.32% 103,793,608 6.06% $ 86,067,872 5.61%
Loans 412,949,411 9.94% 504,512,003 9.55% 422,635,213 9.84% 499,717,562 9.53%
Federal Funds Sold 5,401,114 5.30% 3,765,729 5.74% 5,761,701 5.38% 5,318,681 4.21%
----------- ---- ----------- ---- ----------- ---- ----------- ----
Total Interest Earning Assets $ 525,950,247 9.14% $ 598,225,950 8.89% 532,190,522 9.05% $ 591,104,115 8.91%
=========== ==== =========== ==== =========== ==== =========== ====
INTEREST BEARING LIABILITIES
Savings, NOW and Money Market Deposits $ 261,542,725 3.12% $ 281,845,609 3.26% 267,109,018 3.09% $ 278,586,583 3.28%
Time Deposits 172,603,170 5.61% 194,676,247 5.42% 175,353,750 5.65% 193,596,483 5.27%
----------- ---- ----------- ---- ----------- ---- ----------- ----
Total Savings and Time Deposits 434,145,895 4.11% 476,521,856 4.14% 442,462,768 4.11% 472,183,066 4.10%
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase 1,531,351 5.55% 1,723,154 5.86% 1,120,620 5.71% 416,530 5.59%
Other Borrowed Funds 11,785,349 6.68% 53,399,259 7.51%(1) 12,794,893 6.34% 50,683,363 8.26%
----------- ---- ----------- ---- ----------- ---- ----------- ----
Total Interest Bearing Liabilities 447,462,595 4.18% 531,644,269 4.49% 456,378,281 4.17% 523,282,959 4.50%
Other Liabilities & Stockholders' Equity
(Net of Non-Interest Earning Assets) 78,487,652 66,581,681 75,812,241 67,821,156
----------- ----------- ----------- -----------
Total Liabilities & Stockholders' Equity
(Net of Non-Interest Earning Assets) $ 525,950,247 $ 598,225,950 532,190,522 $ 591,104,115
=========== =========== =========== ===========
Rate Spread 4.96% 4.41% 4.88% 4.41%
==== ==== ==== ====
Net Yield on Interest Earning Assets 5.51% 4.91% 5.47% 4.93%
==== ==== ==== ====
(1) Net of prepayment premium on early repayment of subordinated debt.
</TABLE>
10
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 loss. As part of the Merchants
Bancshares, Inc.'s analysis of specific credit risk, a detailed and
extensive review is completed on larger credits and problematic
credits identified on the watched asset list, non-performing asset
listings, and risk rating reports.
The Financial Accounting Standards Board ("FASB") issued
revised accounting guidance which affected the RPLL. Statement of
Financial Accounting Standards No. 114 ("SFAS No. 114"),
"Accounting by Creditors for Impairment of a Loan," requires, among
other things, that the creditors measure impaired loans at the
present value of expected future cash flows, discounted at the
loan s effective interest rate or, as a practical expedient, at the
loan s observable market price or the fair value of the collateral
if the loan is collateral dependent. For purposes of this
statement a loan is considered impaired when it is probable that a
creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. The FASB also issued
SFAS No. 118, which amended SFAS No. 114, by allowing creditors to
use their existing methods of recognizing interest income on
impaired loans. Merchants Bancshares, Inc. adopted the methodology
of SFAS No. 114, incorporating the amendments of SFAS No. 118, on
January 1, 1995.
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 impaired loans as defined under SFAS No.
114
* 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
* Loan growth trends in the portfolio
* Off balance sheet credit risk relative to commitments
to lend
In accordance with SFAS No. 114 management has defined an
impaired loan as meeting any of the following criteria:
* A loan which is 90 days past due and still accruing
* A loan which has been placed in non-accrual and is 45
days past due
* A loan which is rated Substandard and is 45 days past
due
* A loan which is rated Doubtful or Loss
* A loan which has been classified as a Troubled Debt
Restructuring
* A loan which has been assigned a specific allocation
Loans deemed impaired totaled $20.8 million. Impaired loans
have been allocated $2.2 million of the RPLL.
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
as of March 31, 1996 and June 30, 1996:
NPAs (000's ommited) March 31, 1996 June 30, 1996
Nonaccrual Loans $16,988 $13,335
Loans past due 90
days or more and
still accruing $192 $1,159
Restructured Loans $2,642 $2,604
Total Non-performing
Loans $19,822 $17,098
Other Real Estate
Owned $4,698 $2,617
Total Non-performing
Assets $24,520 $19,715
Note: Included in nonaccrual loans are certain loans whose terms have been
substantially modified in troubled debt restructuring.
Ratios March 31, 1996 June 30, 1996
Percentage of Non-performing Loans to
Total Loans 4.74% 4.28%
Percentage of Non-performing Assets to
Total Loans plus Other Real Estate Owned 5.79% 4.90%
Percentage of RPLL to Total Loans 3.68% 3.91%
Percentage of RPLL to NPL 77.77% 91.42%
Percentage of RPLL to NPA 62.87% 79.28%
Non-performing Loans (NPL) and Non-performing Assets (NPA)
decreased by $2.7 million and $4.8 million, respectively, from
March 31, 1996 to June 30, 1996. The decrease was due to
management s continuing review of the portfolio in an effort to
diminish any loss exposure.
The ratios of RPLL to NPL at March 31, 1996 and June 30, 1996
were 78% and 91%, respectively. This level of coverage is
considered adequate based upon management's evaluation of known and
inherent risks in the portfolio. Approximately 82% of the NPL are
secured by real estate which significantly reduces the Company's
exposure to loss. Based upon the secured nature of a significant
portion of the NPL, 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, 1996.
DISCUSSION OF EVENTS AFFECTING NPA
Significant events affecting the categories of NPA are discussed
below:
Nonaccrual Loans:
Nonaccrual loans decreased $3.7 million during the first quarter
of 1996. A review of the more significant non-accrual loan
relationships noted transfers to non-accrual for the quarter were
approximately $1.5 million. This amount was offset by
approximately $1 million in payments and pay-offs; $300 thousand in
charge-offs; $400 thousand in loans transferred to OREO; and $1.5
million in loans returned to accrual status.
Loans past due 90 days or more and still accruing:
The increase in the category was due primarily to two relationships
which, due to extenuating circumstances of the borrowers, were not
renewed until the third quarter. It is expected that the category will
return to a historical level in the following quarter.
Restructured Loans:
The decrease in restructured loans was due to amortization of
the subject loans.
Other Real Estate Owned:
OREO decreased $2 million from March 31, 1996 to June 30, 1996.
A significant write-down on one property attributed to $675
thousand of the decrease in OREO. The write-down was made to
reduce the carrying value of this property to a marketable level.
In addition, various property sales closed during the quarter,
including one property with a carrying value of $1 million.
MERCHANTS BANCSHARES, INC.
JUNE 30, 1996
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Reference is made to the Form 10-K filed for the year ended
December 31, 1995 for disclosure to current legal proceedings
against the Company, the Bank, the Merchants Trust Company and
certain directors and trustees of the companies.
In the fall of 1994, lawsuits were brought against the
Company, the Bank, the Trust Company (collectively referred to as
"the Companies") and certain directors of the Companies. These
lawsuits related to certain investments managed for Trust company
clients and placed in the Piper Jaffray Institutional Government
Income Portfolio. Separately, and before the suits were filed,
the Companies had initiated a review of those investments. As a
result of the review, the Trust Company paid to the affected
Trust Company clients a total of approximately $9.2 million in
December 1994. The payments do not constitute a legal settlement
of any claims of the lawsuits. However, based on consultation
with legal counsel, management believes that further liability,
if any, of the Companies on account of matters complained of in
the lawsuits will not have a material adverse effect on the
consolidated financial position and results of operations of the
Company. In December 1994, the Trust Company received a payment
of $6,000,000 from its insurance carriers in connection with
these matters, which was treated as a reduction in amounts
reimbursed to Trust customers. The Companies are separately
pursuing claims against Piper Jaffray Companies, inc. and others
on account of the losses that gave rise to the $9.2 million
payment by the Companies. The Companies' claims against Piper Jaffray
Companies were joined with claims of other investors in the Piper Fund
in a class action in the United States District Court for the District of
Minnesota. The class action was settled by the parties, and on December
14, 1995, the settlement was approved by the Court. By order dated
January 11, 1996, the Court ordered the share of the settlement proceeds
attributable to Merchants Trust Company investments not be distributed
pending further order. On June 24, 1996, the District Court entered a
Preliminary Order which, among other matters, directed the Companies to
give notice of a proposed Order for Final Judgment, of the right to file
comments on or objections to the proposed Order for Final Judgment, and
the right to request a hearing. Unless subsequently modified by the
Minnesota District Court or otherwise ordered by a Vermont court prior to
distribution, the proposed Order for Final Judgment provides for the entire
Piper Jaffray settlement proceeds attributable to Merchants Trust Company
investments to be paid to the Companies. Any recovery of settlement proceeds
is subject to the terms of an agreement between the Companies and their
insurance carriers. The attorneys representing the plaintiffs in one of the
lawsuits have taken the position that amounts recovered by the Companies
on these claims should be paid to the affected Trust Company
clients (net of legal fees to those attorneys), in addition to
the $9.2 million already paid.
The attorneys representing the plaintiffs in one of the lawsuits discussed
above requested an award of attorneys' fees for allegedly causing the Companies
to make the $9.2 million payment and asked the court to order the Trust Company
to withhold payment of $500,000. The Trust Company resisted the claims for
payment of such fees and as a result was directed to place the sum of $500,000
in escrow pending a ruling by the Court. On appeal by the Companies, the
United States Court of Appeals affirmed in part, vacated in part, and reversed
for further proceedings the lower court's judgment. the attorneys representing
the plaintiffs in that lawsuit have indicated that they intend to seek
damages as well as attorneys' fees. There is the possibility that the
Companies will be required to remit all or part of the escrowed funds, or to
pay damages. However, based upon consultation with legal counsel, management
believes there is no substantial legal authority for an award of such fees
or damages in those proceedings.
Item 2 - Changes in Securities - NONE
Item 3 - Defaults upon Senior Securities - NONE
Item 4 - Submission of Matters to a Vote of Security Holders
- NONE
Item 5 - Other Issues - NONE
Item 6 - Exhibits and Reports on Form 8-K - NONE
MERCHANTS BANCSHARES, INC.
FORM 10-Q
JUNE 30, 1996
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Merchants Bancshares, Inc.
/s/ Joseph L Boutin
-------------------------
Joseph L Boutin, President
/s/ Janet P Spitler
--------------------------
Janet P Spitler, Treasurer
August 12, 1996
--------------------------
Date
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1995
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