SOURCE: Merchants Bancshares

Merchants Bancshares

April 22, 2014 16:01 ET

Merchants Bancshares, Inc. Announces First Quarter 2014 Results, Loans Up 6% From March 31, 2013

SOUTH BURLINGTON, VT--(Marketwired - Apr 22, 2014) -  Merchants Bancshares, Inc. (NASDAQ: MBVT), the parent company of Merchants Bank, today announced net income of $3.40 million, or diluted earnings per share of $0.54 for the three months ended March 31, 2014, compared to net income of $3.61 million, or diluted earnings per share of $0.57 for the three months ended March 31, 2013. The return on average assets was 0.81% for the three months ended March 31, 2014, compared to 0.86% for the same period in 2013. The return on average equity was 11.31% for the three months ended March 31, 2014, compared to 12.31% for the same period in 2013. We previously announced the declaration of a dividend of $0.28 per share, payable May 15, 2014, to shareholders of record as of May 1, 2014.

"During the past quarter we continued our process of reducing exposure to price volatility in the investment portfolio and shifting more of our assets to loans. Although loan originations were a bit slower than we had anticipated during the winter we expect activity to pick up in the second quarter. The reduction in our overall balance sheet coupled with added investment in our infrastructure will negatively impact earnings for the next two quarters, but we will be well positioned to improve our performance in 2015 and beyond," commented Michael R. Tuttle, our President and Chief Executive Officer.

During the quarter we incurred $171 thousand in pre-tax expenses, which represents $.02 per share after tax, related to the conversion of our core banking systems. The conversion is scheduled to occur during the fourth quarter of this year. In total we expect to incur approximately $1.21 million in expenses related to the core conversion during 2014 and expect to realize annual cost savings and additional revenue opportunities of approximately $800 thousand starting in November of this year.

Shareholders' equity reached another record high of $122.24 million at March 31, 2014. Our book value per share increased to $19.34 at March 31, 2014 from $18.93 at December 31, 2013. Our capital ratios remain strong at March 31, 2014. Our Tier 1 leverage ratio increased to 8.57%, total risk-based capital ratio increased to 16.40% and our tangible capital ratio increased to 7.35% at March 31, 2014.

Ending loan balances at March 31, 2014 increased to $1.17 billion, an increase of $5.50 million over ending loan balances at December 31, 2013. Year over year loans have grown by 6.4%.

The following table summarizes the components of our loan portfolio as of the periods indicated:

             
(In thousands)   March 31, 2014   December 31, 2013   March 31, 2013
Commercial, financial and agricultural   $ 190,841   $ 172,810   $ 168,500
Municipal loans     93,176     94,007     85,211
Real estate loans - residential     482,775     489,706     473,795
Real estate loans - commercial     372,154     371,319     354,639
Real estate loans - construction     27,567     31,841     14,115
Installment loans     4,993     5,655     5,192
All other loans     231     895     261
Total loans   $ 1,171,737   $ 1,166,233   $ 1,101,713
                   

Growth in our commercial loan portfolio was driven by new customer acquisition and increased line of credit utilization, offset by increased prepayment activity. Mortgage refinance activity has slowed considerably, leading to reduced residential real estate balances. We expect this trend to continue in our residential real estate portfolio.

We recorded a $100 thousand and $250 thousand provision for credit losses during the three months ended March 31, 2014, and 2013. Asset quality remains very strong and continues to be a core strength for our company. Loan growth was the primary factor for the provision during the first quarter of 2014. Our nonperforming loan totals were 0.09% of total loans at March 31, 2014, compared to 0.08% of total loans at December 31, 2013 and 0.31% of total loans at March 31, 2013. Accruing loans past due 30-89 days were 0.17% of total loans at March 31, 2014. We booked a small net recovery during the first quarter of 2014. 

The average investment portfolio balance for the first quarter of 2014 was $380 million, a reduction of $124 million from the first quarter of 2013. The ending balance in the investment portfolio at March 31, 2014 was $365 million, compared to $508 million at March 31, 2013. We have allowed the investment portfolio to run off during the past year to fund loan growth, as well as to control asset growth, and strengthen our capital ratios.

Total deposits at March 31, 2014 were $1.33 billion, unchanged from balances at December 31, 2013 and $56.28 million higher than balances at March 31, 2013. Quarterly average balances increased by $63.16 million to $1.32 billion, a 5% increase over quarterly averages for the first quarter of 2013. Securities sold under agreement to repurchase, which represent collateralized customer accounts, were $182.65 million at March 31, 2014, a reduction of $67.67 million from $250.31 million at December 31, 2013, and a reduction of $60.56 million from balances at March 31, 2013. The decreases are a result of seasonal municipal cash flows combined with migration to deposit products.

Our taxable equivalent net interest income was $12.36 million for the three months ended March 31, 2014, compared to $12.73 million for the same period in 2013, and $12.74 million for the quarter ended December 31, 2013. Our taxable equivalent net interest margin for the three months ended March 31, 2014 was 3.10%, unchanged from the fourth quarter of 2013 and a decrease of nine basis points from 3.19% at March 31, 2013.

Total noninterest income increased $263 thousand to $2.91 million for the first quarter of 2014 compared to the first quarter of 2013. Excluding a gain on the sale of investments of $126 thousand, total noninterest income increased $137 thousand for the first quarter of 2014 compared to the same period in 2013. Trust Division Income increased $94 thousand to $852 thousand for the quarter ended March 31, 2014, compared to the quarter ended March 31, 2013, as the trust assets under management have demonstrated strong growth and now total $616 million. Service charges on deposits decreased $41 thousand for the first quarter of 2014 compared to 2013, a result of reduced overdraft fee income, which was partially offset by increases in cash management fees and business checking service charges. Other noninterest income has increased since the first quarter of 2013, a result of increased income generated by check cashing fees and income related to our recent investment in Bank Owned Life Insurance.

Total noninterest expense increased $405 thousand to $10.15 million for the first quarter of 2014 compared to the same period in 2013. Compensation and benefits increased by $128 thousand for the first quarter of 2014 compared to the first quarter of 2013. Salaries and wages were $179 thousand higher for the first quarter of 2014 compared to 2013, a result of lower credits related to loan originations because of lower loan volumes, and additional investments we have made in the Finance and Risk areas. Employee benefits were $51 thousand lower for the first quarter of 2014 compared to 2013, a result of lower cost for health and group insurance, and a larger credit from our overfunded pension plan. Occupancy and equipment costs were $241 thousand higher for the first quarter of 2014 compared to 2013, a result of expenses related to the core conversion of $111 thousand, combined with the cost of amortization of the investments we have made recently to update, and in some cases combine, our facilities. Legal and professional fees were $698 thousand for the first quarter of 2014, an $11 thousand increase over the first quarter of 2013. Included in legal and professional fees for the first quarter of 2014 were $60 thousand in core conversion costs.

During the first quarter of 2014 we adopted, and applied retrospectively, Financial Accounting Standards Board Accounting Standards Update 2014-01, "Accounting for Investments in Qualified Affordable Housing Projects" which allows investors in low income housing tax credit entities that meet certain conditions to account for the investments entirely in income tax expense, which we believe more accurately reflects the economics of the investment. The application of this standard reduced total noninterest expense by $327, $270 and $273 thousand for the quarters ended March 31, 2014, March 31, 2013 and December 31, 2013, respectively, and increased income tax expense by an equivalent amount. The application of the standard also increased our effective tax rate to 24%, 26%, and 24% from 18%, 22%, and 20% for the same periods.

Michael R. Tuttle, our President and Chief Executive Officer, Janet P. Spitler, our Chief Financial Officer and Executive Vice President, and Geoffrey R. Hesslink, our Senior Lender and Executive Vice President, will host a conference call to discuss these earnings results, business highlights and outlook at 9:00 a.m. Eastern Time on Wednesday April 23, 2014. Interested parties may participate in the conference call by dialing U.S. number (888) 317-6016, Canada number (855) 669-9657 or international number (412) 317-6016. The title of the call is Merchants Bancshares, Inc. Q1 2014 Earnings. Participants are asked to call a few minutes prior to register. A replay will be available until 9:00 a.m. Eastern Time on Thursday, May 1, 2014. The U.S. replay dial-in telephone number is (877) 344-7529. The international replay telephone number is (412) 317-0088. The replay access code for both replay telephone numbers is 10037005.

Established in 1849, Merchants Bank is the largest Vermont-based bank, independent and locally operated. Consumer, business, municipal and investment customers enjoy personalized relationships, sophisticated online and mobile banking options, more than 30 community bank locations statewide, plus a nationwide network of over 55,000 surcharge-free Allpoint ATMs. Merchants Bank (Member FDIC, Equal Housing Lender) (NASDAQ: MBVT), and Merchants Trust Company employ approximately 300 full-time employees and 40 part-time employees statewide, and has earned several "Best Place to Work in Vermont" awards. American Banker ranks Merchants Bank #10 in America among 851 peers. www.mbvt.com 

Non-GAAP Financial Measure. In addition to results presented in accordance with generally accepted accounting principles ("GAAP"), this press release contains certain non-GAAP financial measures. In several places net interest income is presented on a fully taxable equivalent basis. Specifically included in interest income was tax-exempt interest income from certain tax-exempt loans. An amount equal to the tax benefit derived from this tax exempt income is added back to the interest income total, to produce net interest income on a fully taxable equivalent basis. The amount added back was $533 thousand for the three months ended March 31, 2014, and $482 thousand for the same period in 2013. An additional non-GAAP financial measure we use is the tangible equity ratio. Because we have no intangible assets, our tangible equity is the same as our book equity. We believe that the supplemental non-GAAP information is utilized by regulators and market analysts to evaluate a company's financial condition and therefore, such information is useful to investors. These disclosures should not be viewed as a substitute for financial results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names.

Certain statements contained in this press release that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties. These statements, which are based on certain assumptions and describe Merchants' future plans, strategies and expectations, can generally be identified by the use of the words "may," "will," "should," "could," "would," "plan," "potential," "estimate," "project," "believe," "intend," "anticipate," "expect," "target" and similar expressions. Forward-looking statements are based on the current assumptions and beliefs of management and are only expectations of future results. Our actual results could differ materially from those projected in the forward-looking statements as a result of, among others, continued weakness in general, national, regional or local economic conditions, the performance of our investment portfolio, quality of credits or the overall demand for services; changes in loan default and charge-off rates which could affect the allowance for credit losses; declines in the equity and financial markets; reductions in deposit levels which could necessitate increased and/or higher cost borrowing to fund loans and investments; declines in mortgage loan refinancing, equity loan and line of credit activity which could reduce net interest and non-interest income; changes in the domestic interest rate environment and inflation; changes in the carrying value of investment securities and other assets; misalignment of our interest-bearing assets and liabilities; increases in loan repayment rates affecting interest income and the value of mortgage servicing rights; changing business, banking, or regulatory conditions or policies, or new legislation affecting the financial services industry that could lead to changes in the competitive balance among financial institutions, restrictions on bank activities, changes in costs (including deposit insurance premiums), increased regulatory scrutiny, declines in consumer confidence in depository institutions, or changes in the secondary market for bank loan and other products; and changes in accounting rules, federal and state laws, IRS regulations, and other regulations and policies governing financial holding companies and their subsidiaries which may impact our ability to take appropriate action to protect our financial interests in certain loan situations. 

You should not place undue reliance on our forward-looking statements, and are cautioned that forward-looking statements are inherently uncertain. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to certain risks and uncertainties, which are included in more detail in our Annual Report on Form 10-K, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the Securities and Exchange Commission. We do not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.

   
Merchants Bancshares, Inc.  
Financial Highlights (unaudited)  
(Dollars in thousands except share and per share data)  
                         
                         
    March 31,     December 31,     March 31,     December 31,  
    2014     2013     2013     2012  
Balance Sheets - Period End                                
Total assets   $ 1,662,045     $ 1,725,469     $ 1,692,596     $ 1,708,550  
Loans     1,171,737       1,166,233       1,101,713       1,082,923  
Allowance for loan losses ("ALL")     12,174       12,042       11,796       11,562  
Net loans     1,159,563       1,154,191       1,089,917       1,071,361  
Investments-available for sale, taxable     214,957       252,513       507,994       508,681  
Investments-held to maturity, taxable     150,382       140,826       366       407  
Federal Home Loan Bank ("FHLB") stock     7,496       7,496       7,496       8,145  
Cash and due from banks     31,130       30,434       25,287       34,547  
Interest earning cash and other short-term investments     45,354       85,037       17,736       42,681  
Other assets     53,163       54,972       43,800       42,728  
Non-interest bearing deposits     271,704       266,299       225,884       240,491  
Savings, interest bearing checking and money market accounts     770,980       752,171       708,797       700,191  
Time deposits     283,373       305,106       335,096       330,398  
Total deposits     1,326,057       1,323,576       1,269,777       1,271,080  
Short-term borrowings     -       -       30,900       -  
Securities sold under agreement to repurchase, short-term     182,647       250,314       243,204       287,520  
Other long-term debt     2,382       2,403       2,463       2,483  
Junior subordinated debentures issued to unconsolidated subsidiary trust     20,619       20,619       20,619       20,619  
Other liabilities     8,102       8,946       6,479       8,627  
Shareholders' equity     122,238       119,611       119,154       118,221  
                                 
Balance Sheets - Quarter-to-Date Averages                                
Total assets   $ 1,678,407     $ 1,685,103     $ 1,681,130     $ 1,682,673  
Loans     1,167,067       1,169,935       1,086,289       1,074,007  
Allowance for loan losses     12,117       12,256       11,689       11,542  
Net loans     1,154,950       1,157,679       1,074,600       1,062,465  
Investments-available for sale, taxable     236,120       265,667       503,462       510,129  
Investments-held to maturity, taxable     143,716       137,319       387       428  
FHLB stock     7,490       7,496       7,993       8,145  
Cash and due from banks     28,164       29,626       25,469       28,730  
Interest earning cash and other short-term investments     59,516       47,624       18,442       26,036  
Other assets     48,451       39,692       50,777       46,740  
Non-interest bearing deposits     263,120       267,838       223,245       235,007  
Savings, interest bearing checking and money market accounts     759,068       744,634       696,160       680,330  
Time deposits     294,752       310,817       334,373       332,678  
Total deposits     1,316,940       1,323,289       1,253,778       1,248,015  
Short-term borrowings     -       198       13,873       34,347  
Securities sold under agreement to repurchase, short-term     209,589       212,313       264,884       250,355  
Other long-term debt     2,390       2,409       2,470       2,490  
Junior subordinated debentures issued to unconsolidated subsidiary trust     20,619       20,619       20,619       20,619  
Other liabilities     8,564       9,297       8,241       9,430  
Shareholders' equity     120,305       116,978       117,265       117,417  
Earning assets     1,613,909       1,628,041       1,616,573       1,618,745  
Interest bearing liabilities     1,286,418       1,290,990       1,332,379       1,320,819  
                                 
Ratios and Supplemental Information - Period End                                
Book value per share   $ 20.29     $ 19.94     $ 19.91     $ 19.84  
Book value per share (1)   $ 19.34     $ 18.93     $ 18.94     $ 18.82  
Tier I leverage ratio     8.57 %     8.44 %     8.22 %     8.08 %
Total risk-based capital ratio     16.40 %     16.12 %     16.12 %     16.00 %
Tangible capital ratio (2)     7.35 %     6.93 %     7.04 %     6.92 %
Period end common shares outstanding (1)     6,320,531       6,318,708       6,289,748       6,282,385  
                                 
Credit Quality - Period End                                
Nonperforming loans ("NPLs")   $ 1,006     $ 906     $ 3,415     $ 2,912  
Nonperforming assets ("NPAs")   $ 1,091     $ 1,015     $ 3,415     $ 2,912  
NPLs as a percent of total loans     0.09 %     0.08 %     0.31 %     0.27 %
NPAs as a percent of total assets     0.07 %     0.06 %     0.20 %     0.17 %
ALL as a percent of NPLs     1210 %     1329 %     345 %     397 %
ALL as a percent of total loans     1.04 %     1.03 %     1.07 %     1.07 %
   
(1) This book value and period end common shares outstanding includes 294,673; 319,854; 305,231; and 324,515 Rabbi Trust shares for the periods noted above, respectively.
(2) The tangible capital ratio is calculated by dividing tangible equity by tangible assets. Because we have no intangible assets, our tangible shareholder's equity is the same as our shareholder's equity.
   
                   
                   
    For the Three Months Ended  
    March 31,     March 31,     December 31,  
    2014     2013     2013  
Operating Results                        
Interest income                        
Interest and fees on loans   $ 10,762     $ 10,750     $ 11,123  
Interest and dividends on investments     2,253       2,797       2,293  
Total interest and dividend income     13,015       13,547       13,416  
Interest expense                        
Deposits     902       746       928  
Securities sold under agreement to repurchase and other short-term borrowings     92       357       97  
Long-term debt     197       196       204  
Total interest expense     1,191       1,299       1,229  
Net interest income     11,824       12,248       12,187  
Provision for credit losses     100       250       -  
Net interest income after provision for credit losses     11,724       11,998       12,187  
Noninterest income                        
Trust division income     852       758       784  
Service charges on deposits     944       985       1,017  
Debit card income, net     621       654       761  
Gain (losses) on investment securities, net     126       -       -  
Other-than-temporary impairment losses on securities     -       -       (166 )
Gain on sale of other assets     -       -       884  
Other noninterest income     367       250       242  
Total noninterest income     2,910       2,647       3,522  
Noninterest expense                        
Compensation and benefits     4,923       4,795       5,106  
Occupancy and equipment expenses     2,251       2,010       2,204  
Legal and professional fees     698       687       754  
Marketing expenses     319       280       598  
State franchise taxes     377       357       357  
FDIC insurance     216       220       217  
Other real estate owned     16       13       37  
Other noninterest expense     1,354       1,387       1,396  
Total noninterest expense     10,154       9,749       10,669  
Income before provision for income taxes     4,480       4,896       5,040  
Provision for income taxes     1,077       1,287       1,217  
Net income   $ 3,403     $ 3,609     $ 3,823  
                         
Ratios and Supplemental Information                        
Weighted average common shares outstanding     6,320,349       6,286,838       6,315,936  
Weighted average diluted shares outstanding     6,326,745       6,299,561       6,330,303  
Basic earnings per common share   $ 0.54     $ 0.57     $ 0.61  
Diluted earnings per common share   $ 0.54     $ 0.57     $ 0.60  
Return on average assets     0.81 %     0.86 %     0.91 %
Return on average shareholders' equity     11.31 %     12.31 %     13.07 %
Average yield on loans     3.93 %     4.19 %     3.95 %
Average yield on investments     2.32 %     2.21 %     2.19 %
Average yield of earning assets     3.40 %     3.52 %     3.40 %
Average cost of interest bearing deposits     0.35 %     0.29 %     0.34 %
Average cost of borrowed funds     0.51 %     0.74 %     0.51 %
Average cost of interest bearing liabilites     0.38 %     0.40 %     0.37 %
Net interest rate spread     3.03 %     3.12 %     3.03 %
Net interest margin     3.10 %     3.19 %     3.10 %
Net interest income on a fully taxable equivalent basis   $ 12,356     $ 12,730     $ 12,735  
Net recoveries (charge-offs) to Average Loans     0.00 %     0.00 %     (0.01 )%
Net recoveries (charge-offs)   $ 1     $ 26     $ (162 )
Efficiency ratio (1)     63.94 %     60.74 %     66.20 %
   
(1) The efficiency ratio excludes amortization of intangibles, OREO expenses, gain/loss on sales of securities, state franchise taxes, and any significant nonrecurring items.
Note: As of March 31, 2014, Merchants Bank had off-balance sheet liabilities in the form of standby letters of credit to customers in the amount of $4.57 million.
Amounts reported for prior periods are reclassified, where necessary, to be consistent with the current period presentation.