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, 1997
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
4,430,373 Shares Common Stock $.01 Par Outstanding June 30, 1997
MERCHANTS BANCSHARES, INC.
INDEX TO FORM 10-Q
PART I
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 1
Consolidated Statements of Operations
For the three months ended June 30, 1997 and 1996 and
the six months ended June 30, 1997 and 1996 2
Consolidated Statement of Stockholders' Equity
For the six months ended June 30, 1997 and 1996 and the
Year ended December 31, 1996 3
Consolidated Statements of Cash Flows
For the six months ended June 30, 1997 and 1996 4
Footnotes to Financial Statements as of June 30, 1997 5
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-11
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 12-13
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 14
MERCHANTS BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
( UNAUDITED)
JUNE 30, DECEMBER 31,
(All figures in thousands except shares 1997 1996
outstanding and per share data)
ASSETS
Cash and Due from Banks $ 25,729 $ 29,726
Trading Securities 522 500
Investments:
Debt Securities Available for Sale $ 37,942 $ 57,656
Debt Securities Held to Maturity 100,831 86,904
Marketable Equity Securities 0 230
--------- ---------
Total Investments $ 138,773 $ 144,790
Loans 394,800 387,233
Reserve for possible loan losses 16,110 15,700
--------- ---------
Net Loans $ 378,690 $ 371,533
Federal Home Loan Bank Stock 2,296 2,841
Federal Fund Sold 4,500 0
Bank Premises and Equipment, Net 15,264 13,791
Investments in Real Estate Ltd Partnerships 2,274 2,499
Other Real Estate Owned 330 1,925
Other Assets 14,094 14,031
--------- ---------
Total Assets $ 582,472 $ 581,636
LIABILITIES ========= =========
Deposits:
Demand $ 79,282 $ 80,576
Savings, NOW and Money Market Accounts 259,875 263,882
Time Certof Deposit $100,000 and Over 20,244 20,370
Other Time 144,928 143,452
--------- ----------
Total Deposits $ 504,329 $ 508,280
Demand Note Due US Treasury 4,077 3,599
Other Short Term Borrowings 7,000 6,000
Other Liabilities 11,298 11,088
--------- ---------
Total Liabilities $ 526,704 $ 528,967
Long-Term Debt 6,420 6,420
STOCKHOLDERS' EQUITY
Common Stock, $.01 Par Value 44 44
Shares Auth 4,700,000
Outstanding 4,295,263
4,290,342
Preferred Stock Class A Non-Voting
Authorized - 200,000, Outstanding 0 0 0
Preferred Stock Class B Voting
Authorized - 1,500,000, Outstanding 0 0 0
Treasury Stock (At Cost)-139,857 current period
144,278 prior period (1,981) (2,038)
Surplus 33,157 33,154
Undivided Profits 17,900 14,845
Unrealized Gain (Loss) on Securities
Available For Sale 228 244
------- --------
Total Stockholders' Equi $ 49,348 $ 46,249
Total Liabilities and -------- ---------
Stockholders' Equity $ 582,472 $ 581,636
========= =========
Book Value Per Common Share $11.14 $10.78
Note: As of June 30, 1997, the Bank had off-balance sheet liabilities in the
in the form of standby letters of credit to customers in the amount
of $6,043.
1
MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(All figures in thousands except shares
outstanding and per share data)
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1997 1996 1997 1996
Interest Income
Interest on Loans $ 9,204 $ 9,510 $ 18,247 $ 19,348
Investment Income:
Obligations of U.S. Government 2,339 1,636 4,681 3,136
Other 50 48 111 102
Federal Funds Sold 26 71 38 155
-------- --------- --------- --------
$ 11,619 $ 11,265 $ 23,077 $ 22,741
Interest Expense
Interest on Deposits $ 4,303 $ 4,440 $ 8,518 $ 9,028
Interest on Other Borrowings 273 202 525 472
-------- -------- -------- --------
$ 4,576 $ 4,642 $ 9,043 $ 9,500
Net Interest Income $ 7,043 $ 6,623 $ 14,034 $ 13,241
Provision for Possible Loan Losses 0 900 300 1,800
-------- --------- --------- ---------
Net Interest Income after
Provision for Loan Losses $ 7,043 $ 5,723 $ 13,734 $ 11,441
Other Income
Fees on Loans $ 398 $ 640 $ 824 $ 1,367
Service Charges on Deposits 782 831 1,569 1,678
Gain (Loss) on Sale and Write (15) 0 (56) 90
Down of Investment Security
Gain on Branch Sale 0 0 0 299
Refund of VT Franchise Tax 0 272 0 799
Other 948 1,253 1,962 2,402
-------- --------- -------- --------
Total Other Income $ 2,113 $ 2,996 $ 4,299 $ 6,635
Other Expenses
Salaries and Wages $ 2,140 $ 1,975 $ 4,264 $ 4,294
Employee Benefits 470 490 1,066 1,080
Occupancy Expense, Net 517 520 1,114 1,102
Equipment Expense 530 482 1,065 989
Provision for Impairment of 0 0 229 0
Investment Security
Equity in Losses of Real Estate
Limited Partnerships 172 214 344 420
Expenses-Other Real Estate Owned 248 736 360 2,275
Loss on Disposition of Fixed Assets 130 0 286 0
Other 2,261 2,319 4,252 4,220
-------- --------- -------- --------
Total Other Expenses $ 6,468 $ 6,736 $ 12,980 $ 14,380
Income before Provision for Taxes $ 2,688 $ 1,983 $ 5,053 $ 3,696
Provision for Income Taxes 610 439 1,111 783
-------- --------- -------- --------
Net Income $ 2,078 $ 1,544 $ 3,942 $ 2,913
======== ========= ======== ========
Per Common Share Net Income $ 0.47 $ 0.36 $ 0.89 $ 0.68
======== ========= ======== ========
Weighted Average Common Shares
Outstanding 4,424,324 4,290,342 4,427,321 4,290,342
2
<TABLE>
MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
UNAUDITED
<CAPTION>
Net
Unrealized
Appreciation
(Depreciation) Total
Common Undivided Treasury of Investment Equity
Stock Surplus Profits Stock Securities Capital
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31,1995 $ 44 $ 33,155 $ 8,621 $(2,038) $ 467 $ 40,249
Net Loss 2,913 2,913
Net Change in Unrealized
Appreciation/(Depreciation)
of Investment Securities, Net of Tax (1,351) (1,351)
------ ------ ------ ------ -------- ------
Balance - June 30, 1996 $ 44 $ 33,155 $11,534 $(2,038) $ (884) $ 41,811
Net Income 3,311 3,311
Net Change in Unrealized
Appreciation/(Depreciation) of Securities
Available for Sale, Net of Tax 992 992
Net Change in Unrealized Appreciation
(Depreciation) of Securities Transferred
to Held to Maturity Portfolio, Net of Tax 136 136
-------- -------- ------- -------- -------- --------
Balance - December 31, 1996 $ 44 $ 33,155 $14,845 $(2,038) $ 244 $ 46,250
Net Income 3,942 3,942
Purchase of Treasury Stock (402) (402)
Sale of Treasury Stock (25) 459 434
Dividends Paid ($.10/share) 27 (887) (860)
Net Change in Unrealized
Appreciation/(Depreciation) of Securities
Available for Sale, Net of Tax (22) (22)
Net Change in Unrealized Appreciation
(Depreciation) of Securities Transferred
to Held to Maturity Portfolio, Net of Tax 6 6
------- -------- ------- --------- ------- --------
Balance - June 30, 1997 $ 44 $ 33,157 $17,900 $(1,981) $ 228 $ 49,348
======== ======== ======= ======== ======= ========
3
</TABLE>
MERCHANTS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1997 1996
(All figures in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,942 $ 2,913
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Possible Loan Losses 300 1,800
Provision for Possible Losses on Other Real Estate Owned 0 2,673
Provision for Possible Impairment of Investment Securities 229 0
Provision for Depreciation and Amortization 1,172 1,505
Prepaid Income Taxes (2,606)
Net (Gains) Losses on Sales of Investment Securities (173) (90)
Net (Gains) Losses on Sales of Loans and Leases 0 278
Net (Gains) Losses on Sales of Premises and Equipment 25 (681)
Net (Gains) Losses on Sales of Other Real Estate Owned (298) (182)
Equity in Losses of Real Estate Limited Partnerships 344 420
Changes in Assets and Liabilities:
Decrease in Interest Receivable 364 475
Increase (Decrease) in Interest Payable (242) (543)
(Increase) Decrease in Other Assets 302 (8,527)
Increase (Decrease) in Other Liabilities (453) 745
--------- ---------
Net Cash Provided by Operating Activities $ 5,512 $ (1,820)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Investment
Securities Avai1able for Sale 8,067 19,140
Proceeds from Maturities of Investment Securities
Available for Sale 0 16,000
Proceeds from Sales of Loans and Leases 0 8,019
Proceeds from Sales of FHLB Stock 545 1,203
Proceeds from Sales of Premises and Equipment 6 1,762
Proceeds from Sales of Other Real Estate Owned 2,144 4,650
Purchases of FHLB Stock 0 (328)
Purchases of Available for Sale Investment Securities 0 (47,302)
Purchases of Held to Maturity Investment Securities (18,098) 0
Principal Repayments in Excess of (Less than)
Loans Originated (6,449) 38,388
Investments in Real Estate Limited Partnerships (130) (150)
Purchases of Premises and Equipment (2,291) (3,438)
-------- ---------
Net Cash Provided by Investing Activities $ (6,206) $ 37,943
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Decrease in Deposits (3,951) (37,215)
Net Decrease in Other Borrowed Funds 1,478 (1,656)
Principal Payments on Debt (1) (9,002)
Cash Dividends Paid ($.10 per share) (860) 0
Acquisition of Treasury Stock (402) 0
Sale of Treasury Stock 434 0
-------- --------
Net Cash Used in Financing Activities $ (3,302) $(47,873)
-------- --------
Increase (Decrease) in Cash and Cash Equivalents $ (3,997) (11,751)
Cash and Cash Equivalents Beginning of Year 29,726 38,367
-------- --------
Cash and Cash Equivalents End of Year $ 25,729 $ 26,616
-------- --------
Total Interest Payments $ 9,360 $ 10,054
Total Income Tax Payments $ 1,000 $ 0
Transfer of Loans to Other Real Estate Owned $ 189 $ 1,568
4
MERCHANTS BANCSHARES, INC
JUNE 30, 1997
NOTES TO FINANCIAL STATEMENTS:
See the Form 10-K filed as of December 31, 1996 for additional
information.
NOTE 1: RECENT ACCOUNTING DEVELOPMENTS
In February 1997, the Financial Accounting Standards Board (the
FASB) issued Statement of Financial Accounting Standards No. 128,
Earnings per Share (SFAS 128). This Statement establishes
standards for computing and presenting earnings per share and
applies to entities with publicly traded common stock or potential
common stock. SFAS 128 is effective for financial statements for
both interim and annual periods ending after December 15, 1997 and
early adoption is not permitted. When adopted, the statement will
require restatement of prior years' earnings per share. The
Company will adopt this statement for its quarter ended December
31, 1997. Assuming that SFAS No. 128 had been implemented, basic
earnings per share would not have differed materially from those
disclosed in the accompanying statements of operations.
The Bank adopted Statement of Financial Accounting Standards No.
125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities (SFAS No. 125) commencing
January 1, 1997. The implementation of this statement had no
impact on the accompanying consolidated balance sheets and
consolidated statements of operations.
NOTE 2: RECLASSIFICATION:
Certain amounts in the prior period's financial statements have
been reclassified to be consistent with the current period
presentation.
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 three months ended June
30, 1997 and 1996 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, 1997, the Bank was obligated
for $6 million of standby letters of credit. No losses are anticipated in
connection with these commitments.
RESULTS OF OPERATIONS
Net income for the second quarter of 1997 was $2.08 million, or $.47 per share,
compared to $1.54 million, or $.36 per share, for the same period a year
earlier. Second quarter net interest income before the provision for possible
loan losses was $7.04 million in 1997 as compared to $6.62 million for the year
earlier quarter. This increase is due primarily to two factors. The Bank has
been able to increase the average yield on its investment portfolio by 43 basis
points to 6.70% for the quarter ended June 30, 1997 from 6.27% for the same
quarter one year earlier; and by 58 basis points to 6.64% for the six months
ended June 30, 1997 from 6.06% for the six months ended June 30, 1996.
Additionally, the Bank has worked to decrease its portfolio of non performing
loans to $6.1 million at June 30, 1997 from $17.1 million at June 30, 1996.
This $11million decrease in nonperforming loans has had a significant impact on
the Company's net interest income. Due to the continued strength of the Bank's
asset quality, and management's assessment of the adequacy of the loan loss
reserve as an indicator of that strength, the Bank did not take a provision for
loan losses for the second quarter of 1997; a $900 thousand provision was taken
during the second quarter of 1996. The continued improvement in asset quality
is due to a combination of aggressive collections, the return of certain loans
to accruing status, the sale of non performing loans, as well as charge offs and
write downs of non performing assets in previous periods. This quality will be
maintained by the prudent growth of the loan portfolio through credits which
meet the high standards for asset quality that have been established.
Total other income is $883 thousand (29%) lower than the same quarter a year
earlier. This decrease is due primarily to two factors. The Bank made a
strategic decision a year ago to hold many of its originated mortgages in
portfolio rather than sell them in the secondary market. The bank has made a
firm commitment to grow within the marketplaces currently serviced, and has
embarked upon an advertising campaign to assist in that endeavor. As we start
to see increased loan balances as a result of our marketing efforts we will
reevaluate our decision to hold these types of mortgages in portfolio. The other
factor leading to the decrease in Other Income was the one time $272 thousand
refund of Vermont Franchise Taxes which was received during the second quarter
of last year.
Total non-interest expenses are down approximately $268 thousand (4%) from the
same quarter a year earlier. As the Bank has actively reduced its portfolio of
Other Real Estate Owned (OREO), expenses related to this portfolio have
decreased by approximately $488 thousand (66%) from the second quarter of 1996.
The Bank recognized a loss of $130 thousand during the second quarter of 1997
related to the retirement of certain fixed assets in connection with the capital
improvement project commenced in 1996.
The Bank is taking measures to address the impact of the Year 2000 issue on its
information systems. The Year 2000 issue, which is common to most corporations,
concerns the inability of information systems, primarily computer software
programs, to properly recognize and process date sensitive information as the
year 2000 approaches. The Bank's core software provider has been working to
solve the Year 2000 issue for over two years, and has reported to the Bank that
the bulk of the reprogramming is complete. This core software is our most
significant Year 2000 risk. The Bank is in the process of completing an
assessment of all of its systems and is developing a specific workplan to
address the many testing and compliance issues that will be raised as this
process continues. The Bank currently believes it will be able to modify or
replace its affected systems in time to minimize any detrimental effects on
operations. While it is not possible, at present, to give an accurate estimate
of the cost of this work, the Bank expects to allocate the necessary staff
and/or monetary resources to address this issue and does not expect that such
costs will be material to the Company's results of operations.
BALANCE SHEET ANALYSIS
Total assets have increased slightly from December 31, 1996. The Bank's
investment portfolio has decreased by $6 million (4.2%), primarily the result of
principal paydowns on mortgage-backed securities. These funds have been
redeployed into our loan portfolio, which has increased $7.6 million (1.9%),
during the six months ended June 30, 1997. The Bank's strategic decision to
focus on small business and residential lending and to de-emphasize commercial
real estate is showing results. From December 31, 1996 to June 30, 1997, the
residential real estate portfolio has increased $4 million (5.37%), the
commercial and industrial portfolio has increased $18 million (32.7%) and the
commercial real estate portfolio has decreased by $14 million (6.9%). The
Bank's Other Real Estate (ORE) portfolio has decreased $1.6 million (83%), the
primary reasons for this are continued strong efforts by the Bank to reduce the
portfolio through sales of these assets, as well as the improved quality of the
loan portfolio, which helps to minimize the migration to the ORE portfolio.
Deposits at June 30, 1997 have started to rebound from their first quarter
seasonal decline, and are now $4 million below their December 31, 1996 level, a
decrease of less than 1%. Management continues to emphasize growing the
deposit base through the collection of core deposit funds, with less emphasis on
the use of short term certificates of deposit.
INCOME TAXES
The Company recognized $240 thousand and $216 thousand, respectively, in low
income housing tax credits during the quarters ended June 30, 1997 and 1996,
representing the amount of the income tax credits earned during those quarters.
The recognition of these low income housing tax credits has helped to reduce the
Company's effective tax rate from 34% to 23% at June 30, 1997.
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 that require cash. The Bank
has a number of sources of liquid funds, including $18 million in available
Federal Funds lines of credit at June 30, 1997; an overnight line of credit with
the Federal Home Loan Bank (FHLB) of $15 million; an estimated additional
borrowing capacity with FHLB of $31 million; and the ability to borrow $60
million through the use of repurchase agreements, collateralized by the Bank's
investments, with certain approved counterparties.
The schedules on pages 10-11analyze interest and overhead management in relation
to total average assets and the yield analysis for the periods reported.
LOAN QUALITY AND RESERVES FOR POSSIBLE LOAN LOSSES (RPLL)
Merchants Bancshares, Inc. reviews the adequacy of the RPLL 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
that 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.
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, March 31, 1997 and June 30, 1997:
NPAs (000's omitted) June 30, 1997 March 31, 1997 June 30, 1996
Nonaccrual Loans $3,295 $3,316 $13,335
Loans past due 90 days
or more and still accruing $634 $80 $1,159
Restructured Loans $2,198 $2,361 $2,604
------ ------ -------
Total Non-performing Loans $6,127 $5,758 $17,098
Other Real Estate Owned $330 $576 $2,617
------ ------ -------
Total Non-performing Assets $6,457 $6,274 $19,715
====== ====== =======
Note: Included in nonaccrual loans are certain loans whose terms have been
substantially modified in troubled debt restructuring.
Ratios June 30, 1997 March 31, 1997 June 30, 1996
Percentage of
non-performing Loans
to Total Loans 1.55% 1.48% 4.28%
Percentage of
non-performing Assets
to Total Loans plus
Other Real Estate Owned 1.63% 1.61% 4.90%
Percentage of
RPLL to Total Loans 4.08% 4.15% 3.91%
Percentage of RPLL to NPL 249% 280% 91.42%
Percentage of RPLL to NPA 249% 257% 79.28%
Loans deemed impaired totaled $8.7 million. Impaired loans have been allocated
$648 thousand of the RPLL.
As noted in the above tables management has made significant reductions in the
balance of non-performing assets; the balance has been reduced approximately 67%
during the twelve months ended 6/30/97. The reduction was achieved through a
combination of loan sales, charge-offs and workout/collection efforts. The
combined reduction in NPLs and continued provisions to the RPLL increased the
ratio of RPLL to NPL to 249% as of June 30, 1997. This twelve month trend was
offset slightly by results for the quarter ended June 30, 1997. This is
entirely attributableto an increase in loans past due 90 days as balances for
all other categories were reduced during the quarter. Loans past due 90 days
were all in the process of collection and analysis of these loans did not
indicate significant risk of loss as the majority of the balances were
guaranteed by the U. S. Small Business Administration.
Approximately 77% 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, 1997.
Management's assessment of the adequacy of the RPLL concluded that a provision
was not necessary during the second quarter of 1997.
DISCUSSION OF EVENTS AFFECTING NPA
Significant events affecting the categories of NPA are discussed below:
Nonaccrual Loans:
During the second quarter of 1997 approximately $1 million in reductions to
nonaccrual loans was offset by a matching amount of additions.
Loans Past Due 90 Days:
Loans past due 90 days increased significantly from $80 thousand at March 31,
1997 to $634 thousand at June 30, 1997. Although the increase was significant,
management determined the potential impact should be modest as 93% of the loan
balances carried guarantees from the U.S. Small Business Administration. The
increase did not appear to indicate any discernable trend toward deterioration
in the loan portfolio or local economy in general.
Restructured Loans:
The decrease in restructured loans was due to amortization of the subject loans
and a transfer to nonaccruing status.
Other Real Estate Owned:
OREO decreased $186 thousand or 38%, from March 31, 1997 to June 30, 1997, as a
result of property sales. Additions to OREO were less than $50 thousand for the
quarter.
9
<TABLE>
MERCHANTS BANCSHARES, INC
SUPPLEMENTAL INFORMATION
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
(Figures in thousands) INTEREST INTEREST INTEREST INTEREST
Fully Taxable Equivalent AVERAGE INCOME/ AVG AVERAGE INCOME/ AVG AVERAGE INCOME/ AVG AVERAGE INCOME/ AVG
Includes Fees on Loans BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Taxable Investments 142,670 2,389 6.70% 107,600 1,684 6.27% 144,317 4,792 6.64% 103,794 3,136 6.06%
Loans (1) 391,723 9,602 9.80% 412,949 10,236 9.94% 389,620 19,071 9.79% 422,635 20,731 9.84%
Federal Funds Sold 1,868 26 5.57% 5,401 71 5.30% 1,420 38 5.35% 5,762 155 5.38%
------- ------ ----- ------- ------ ----- ------- ------ ----- ------- ------ -----
Total Interest Earning Assets 536,261 12,017 8.96% 525,950 11,991 9.14% 535,357 23,901 8.93% 532,191 24,022 9.05%
INTEREST BEARING LIABILITIES
Savings, NOW and Money
Market Deposits 262,489 2,086 3.18% 261,543 2,027 3.12% 263,842 4,128 3.13% 267,109 4,120 3.09%
Time Deposits 165,585 2,218 5.36% 172,603 2,413 5.61% 164,151 4,390 5.35% 175,354 4,908 5.65%
------- ----- ----- ------- ----- ----- ------- ----- ----- ------- ------ -----
Total Savings/Time Deposits 428,074 4,304 4.02% 434,146 4,440 4.11% 427,993 8,518 3.98% 442,463 9,028 4.11%
Federal Funds Purchased and Securities
Sold Under Agreements to Repurch 805 11 5.68% 1,531 21 5.55% 1,210 36 6.02% 1,121 32 5.71%
Short Term Borrowings 7,981 113 5.67% 0 0 0.00% 7,174 196 5.47%
Other Borrowed Funds 8,771 147 6.69% 11,785 181 6.68% 8,697 292 6.71% 12,795 440 6.34%
------- ----- ----- ------- ----- ----- ------ ----- ----- ------- ------ -----
Total Interest Bearing Liabilities445,632 4,576 4.16% 447,462 4,642 4.18% 445,074 9,043 4.06% 456,379 9,500 4.17%
Other Liabilities & Stockholders' Equity
(Net of Non-Int Earning Assets) 90,629 78,488 90,283 75,812
------- ------- ------- -------
Total Liabilities & Stockholders' Equity
(Net of Non-Int Earning Assets) 536,261 525,950 535,357 532,191
======= ======= ======= =======
Rate Spread 4.80% 4.96% 4.87% 4.88%
===== ===== ===== =====
Net Yield on Interest Earning Assets 5.57% 5.51% 5.57% 5.47%
===== ===== ===== =====
(1) Includes principal balance of non-accrual loans.
</TABLE>
MERCHANTS BANCSHARES, INC.
INTEREST MANAGEMENT AND OPERATING EXPENSE ANALYSIS
(TAXABLE EQUIVALENT BASIS)
QUARTER ENDED YEAR ENDED QUARTER ENDED
6/30/97 12/31/96 6/30/96
Total Average Assets $574,969 $580,860 $572,441
AMOUNT % OF AMOUNT % OF AMOUNT % OF
(Figures in thousands) ASSETS ASSETS ASSETS
INTEREST MANAGEMENT
Interest Income (T.E.) $11,643 8.10% $45,807 7.89% $11,299 7.90%
Interest Expense 4,576 3.18% 18,672 3.21% 4,642 3.24%
------- ----- ------- ----- ------ -----
Net Int before Prov (T.E.) $7,067 4.92% $27,135 4.67% $6,657 4.65%
Prov for Loan Losses 0 0.00% 3,150 0.54% 900 0.63%
------ ------ ------- ----- ------ -----
Net Int. Income (T.E.) $7,067 4.92% $23,985 4.13% $5,757 4.02%
------ ----- ------- ----- ------ -----
NET OPERATING EXPENSE
Non-Interest Expense:
Personnel $2,610 1.82% $10,013 1.72% $2,465 1.72%
Occupancy 517 0.36% 2,054 0.35% 520 0.36%
Equipment 530 0.37% 2,024 0.35% 482 0.34%
Other 2,811 1.96% 12,991 2.24% 2,713 1.90%
------ ----- ------- ----- ------ -----
Total $6,468 4.50% $27,082 4.66% $6,180 4.32%
------ ----- ------- ----- ------ -----
Less Non-Interest Income:
Fees on Loans $398 0.28% $2,333 0.40% $726 0.51%
Service Charges on Dep 782 0.54% 3,347 0.58% 832 0.58%
Other 933 0.65% 5,580 0.96% 883 0.62%
------ ----- ------- ----- ------ -----
Total $2,113 1.47% $11,260 1.94% $2,441 1.71%
------ ----- ------- ----- ------ -----
Net Operating Expense $4,355 3.03% $15,822 2.72% $3,739 2.61%
------ ----- ------- ----- ------ -----
SUMMARY
Net Interest Income $7,067 4.92% $23,985 4.13% $5,757 4.02%
Less Net Operating Exp. $4,355 3.03% $15,822 2.72% $3,739 2.61%
------ ----- ------- ----- ------ -----
Profit Before Taxes $2,712 1.89% $8,163 1.41% $2,018 1.41%
NET PROFIT $2,078 1.45% $6,224 1.07% $1,544 1.08%
11
MERCHANTS BANCSHARES, INC.
JUNE 30, 1997
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Reference is made to the Form 10-K filed for the year ended December 31,
1996 for disclosure to current legal proceedings against the Company, the
Bank, the Merchants Trust Company and certain directors and trustees of the
companies.
During 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 paid pending
further order. On February 18, 1997, the District Court entered an Order for
Final Judgment. That Order provides, among other matters, that except to the
extent (if at all) any other court with jurisdiction has given leave for some
or all of the proceeds to be deposited with that court pursuant to Vermont
rule of Civil Procedure 67, Federal Rule of Civil Procedure 67, or such other
rule as may apply, and absent an appeal, the entire net settlement proceeds
attributable to the Trust Company investments are to be paid to the Trust
Company starting approximately sixty-one days after the date of the Order.
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 discussed above 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 paid to
attorneys) in addition to the $9.2 million already paid. On or about March 17,
1997 those attorneys filed a Notice of Appeal of the Order.
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 into 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. By a report and recommendation delivered orally on
March 14, 1997, Magistrate Judge Niedermeier found that the lawsuit
propelled the Bank to make the $9.2 million payment and that this was
sufficient to justify an award of attorneys fees. Judge Niedermeier then
ordered that the full $500,000 being held in escrow, including interest
thereon, be paid to those attorneys. The Companies filed objections to Judge
Niedermeier's report and recommendation, and the objections on the award of
attorneys fees and on the incentive award were sustained by Chief Judge
Murtha. The matter of fees to be awarded to the plaintiffs attorneys, and
the matter of any incentive award to be granted to the plaintiffs, are
currently before Chief Judge Murtha for decision.
Merchants Bank (the "Bank") made certain loans to a single borrower during
1991-1994. The borrower subsequently went into default for failure to pay as
required under the terms of the Notes, and the Bank filed lawsuits for
foreclosure under the Notes and Mortgage Deed. During May of 1995 the
borrowers filed Answers to the Bank's Complaint and filed Counterclaims
against the Bank at that time. The Counterclaims are currently pending in
Federal Bankruptcy court and allege, among other things, lender liability,
breach of the implied covenant of good faith and fair dealing, and negligence.
The claims do not clarify the amount of damages sought by the plaintiffs.
Management believes these claims are without merit, and the Bank has dedicated
significant resources to vigorously defend itself against these claims.
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, 1997
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 13, 1997
- --------------------------
Date
14
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information exctracted from the June
30, 1997 10-Q and is qualified in its entirety by reference to such 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
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<INT-BEARING-DEPOSITS> 36
<FED-FUNDS-SOLD> 4,500
<TRADING-ASSETS> 522
<INVESTMENTS-HELD-FOR-SALE> 37,942
<INVESTMENTS-CARRYING> 100,831
<INVESTMENTS-MARKET> 99,666
<LOANS> 394,800
<ALLOWANCE> 16,110
<TOTAL-ASSETS> 582,472
<DEPOSITS> 504,329
<SHORT-TERM> 11,077
<LIABILITIES-OTHER> 11,298
<LONG-TERM> 6,420
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0
<OTHER-SE> 49,304
<TOTAL-LIABILITIES-AND-EQUITY> 582,472
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<INTEREST-INVEST> 4,792
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<INTEREST-TOTAL> 23,077
<INTEREST-DEPOSIT> 8,518
<INTEREST-EXPENSE> 52576
<INTEREST-INCOME-NET> 14,858
<LOAN-LOSSES> 300
<SECURITIES-GAINS> (56)
<EXPENSE-OTHER> 12,980
<INCOME-PRETAX> 5,053
<INCOME-PRE-EXTRAORDINARY> 5,053
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,942
<EPS-PRIMARY> .89
<EPS-DILUTED> .89
<YIELD-ACTUAL> 5.57
<LOANS-NON> 3,295
<LOANS-PAST> 634
<LOANS-TROUBLED> 2,198
<LOANS-PROBLEM> 10,491
<ALLOWANCE-OPEN> 15,700
<CHARGE-OFFS> (1,025)
<RECOVERIES> 1,135
<ALLOWANCE-CLOSE> 16,110
<ALLOWANCE-DOMESTIC> 16,110
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