Merchants Bancshares reports Q1 results, to merge on May 12

Submitted by tim on Thu, 04/20/2017 - 12:49

Vermont Business Magazine In what will likely be its final quarterly report, Merchants Bancshares, Inc (NASDAQ:MBVT), the parent company of Merchants Bank, today announced net incomeof $3.6 million and $0.52 per diluted share for the first quarter of 2017 compared to net income of $3.1 million or $0.45 per diluted share in the fourth quarter of 2016 and $3.5 million in net income or $0.50 per diluted share in the first quarter of 2016. Excluding Community Bank System, Inc merger costs, net of tax, the company's adjusted net income was $4.5 million or $0.66 per diluted share for the first quarter of 2017. This compares to adjusted net income of $5.1 million or $0.73 per diluted share on a linked quarter basis and adjusted net income of $3.8 million or $0.55 per diluted share in the first quarter of 2016.

Community Bank System announced last fall that it would acquire Merchants in mid-2017. The boards and shareholders of both banking companies have approved the transaction. Merchants sent a letter to customers dated April 12 that the merger would take place the weekend of May 12-14, subject to regulatory approval. Assuming that goes as planned, the letter goes on to say that, "Merchants Bank and/or NUVO accounts will become Community Bank NA accounts and all Merchant Bank branches will become Community Bank NA branches after close of business on Friday, May 12, 2017." NUVO is a division of Merchants.

For the quarter ended March 31, 2017, the return on average assets was 0.71% compared to 0.62% for the quarter ended December 31, 2016 and 0.71% for the quarter ended March 31, 2016. For the quarter ended March 31, 2017, the return on average equity was 9.06% compared to 7.83% for the quarter ended December 31, 2016 and 9.32% for the quarter ended March 31, 2016.

The Company's Board of Directors approved a dividend of $0.28 per share, payable May 10, 2017, to stockholders of record as of May 1, 2017. Based on the closing price of $48.70 per share on March 31, 2017 and the annual dividend payout of $1.12 per share, the dividend represents an annualized yield of 2.30%.

Due to the pending transaction with Community Bank System, Inc., Merchants Bancshares will not have an earnings call for its first quarter results.

Q1 2017 Financial Highlights

Balance Sheet:

Total assets were $2.02 billion as of March 31, 2017, a decrease of $39.1 million over the linked quarter and $59.9 million increase from March 31, 2016. The decrease in total assets over the linked quarter was due primarily to a decrease in investment balances partially offset by an increase in loan balances. The increase in total assets from March 31, 2016 was due primarily to an increase in loan balances partially offset by decreases in the investment balances and interest earning cash and other short-term investments.
Gross loans as of March 31, 2017 totaled $1.54 billion, an increase of $28.5 million over the linked quarter and a $121.1 million increase from March 31, 2016. The increase in gross loans over the linked quarter consisted primarily of growth in commercial and commercial real estate loans partially offset by a decline in residential real estate and construction loans. Total commercial loans, defined as commercial, commercial real estate and construction, increased $39.2 million over the linked quarter. The increase in gross loans from March 31, 2016 was primarily due to an increase of $115.9 million in commercial real estate loans partially offset by a decline in residential real estate loans.
Total deposits were $1.51 billion as of March 31, 2017, a decrease of $15.8 million over the linked quarter and a decrease of $15.1 million from March 31, 2016. The decrease in total deposits over the linked quarter was driven by a decrease in non-interest bearing deposits and a planned decrease in higher cost acquired time deposits at the NUVO division. The decrease in total deposits over the first quarter of 2016 was attributable to a planned decrease in higher cost acquired time deposits at the NUVO division.
Total stockholders' equity as of March 31, 2017 was $158.6 million. Tangible book value per share was $21.76 per share at March 31, 2017 compared to $21.54 at December 31, 2016 and $21.06 per share at March 31, 2016. Book value per share was $22.94 per share at March 31, 2017 compared to $22.72 at December 31, 2016 and $22.25 per share at March 31, 2016.

Income Statement:

Taxable equivalent net interest income was $14.8 million for the first quarter of 2017, which represents an increase of $0.4 million over the linked quarter and an increase of $0.5 million over the same period in 2016. GAAP net interest income in the first quarter of 2017 was $14.2 million, compared to $13.9 million in the linked quarter and $13.7 million in the same period of 2016. The increases in GAAP net interest income over the linked quarter and the same period in 2016 were due to a growth in gross loans.
Taxable equivalent net interest margin for the first quarter of 2017 was 3.02%, an increase of 4 basis points over the linked quarter and was unchanged from the same period in 2016. The linked quarter increase reflected higher asset yields.
Provision for credit losses was $500 thousand for the first quarter of 2017, compared to $200 thousand in the linked quarter and $205 thousand in the same period in 2016. The increase in the provision for credit losses over the linked quarter and the same quarter in 2016 primarily reflected new loan growth.
Noninterest income for the first quarter of 2017 was $3.3 million, a decrease of $149 thousand over the linked quarter and an increase of $339 thousand from the same period in 2016. The decrease over the linked quarter is due to a decline in trust fees offset by a net gain on the sale of investment securities. The increase over the same period in 2016 was due primarily to a net gain on the sale of investment securities.
Noninterest expense was $12.0 million for the first quarter of 2017, compared to $13.1 million in the linked quarter and $11.9 million in the same period in 2016. The decrease in noninterest expense over the linked quarter was due primarily to greater expenses incurred in connection with the pending merger with Community Bank System, Inc. during the fourth quarter of 2016. Adjusted noninterest expense (excluding acquisition, merger, severance and retirement costs) was $10.7 million in the first quarter of 2017, compared to $10.6 million in the linked quarter and $11.5 million in the same period in 2016.
The effective tax rate for the quarter ended March 31, 2017 was 28% compared to 22% for the linked quarter and 23% for the quarter ended March 31, 2016. The increases over the linked quarter and the same period in 2016 were due primarily to an increase in estimated non-deductible merger expenses.

Credit Quality and Capital Ratios:

The allowance for loan losses ("ALL") as of March 31, 2017 was $13.2 million, or 0.85% of gross loans, compared to $12.7 million, or 0.84% of gross loans as of December 31, 2016 and $12.2 million, or 0.86% of gross loans, as of March 31, 2016.
Nonperforming loans were $4.2 million, or 0.27% of gross loans, at March 31, 2017, compared to $3.2 million, or 0.21% of gross loans at December 31, 2016 and $4.6 million, or 0.33% of gross loans at March 31, 2016. ALL as a percentage of nonperforming loans was 313% at March 31, 2017 compared to 398% at December 31, 2016 and 262% at March 31, 2016. Accruing loans 31 to 90 days past due as a percent of total loans were 0.09% at March 31, 2017 compared to 0.03% at December 31, 2016 and 0.28% at March 31, 2016. Merchants Bank continues to experience excellent credit quality.
Estimated regulatory capital ratios at March 31, 2017:
- Common Equity Tier 1 – 12.38%
- Tier 1 Leverage – 8.63%
- Total Risk-Based Capital – 15.09%
- Tangible Capital – 7.47%

Proposed Transaction with Community Bank System, Inc.

On October 22, 2016, Merchants Bancshares and Community Bank System, Inc. (NYSE: CBU) entered into a definitive agreement under which Community Bank System, Inc. will acquire Merchants Bancshares in a cash and stock transaction. The combination will provide natural market extension for both companies, joining two high-quality, low-risk franchises with long histories of service to their customers and communities.

Under the terms of the agreement, shareholders of Merchants Bancshares will have the option to receive, at their election, consideration per share equal to (i) 0.963 shares of Community Bank System, Inc. common stock, (ii) $40.00 in cash or (iii) the combination of 0.6741 shares of Community Bank System, Inc. common stock and $12.00 in cash, subject to an overall proration to 70% stock and 30% cash. The merger is expected to close in the second quarter of 2017 and is subject to customary closing conditions, including the required regulatory approvals. Additional information about the transaction can be found in the joint press release issued on October 24, 2016, which is available on the Investor Relations section of the Company's website at www.mbvt.com.

Merchants Bancshares, Inc.
Financial Highlights (unaudited)
(Dollars in thousands except share and per share data)

	March31,		December 31,		March 31,
	2017		2016		2016
Balance Sheets - Period End
Cash and due from banks	$	29,466	$	26,116	$	27,586
Interest earning cash and other short-term investments		30,296		56,837		53,054
Investments-available for sale, taxable		287,989		333,998		294,048
Investments-held to maturity, taxable		80,991		85,694		115,392
Loans		1,542,718		1,514,209		1,421,603
Allowance for loan losses ("ALL")		13,187		12,659		12,173
Net loans		1,529,531		1,501,550		1,409,430
Federal Home Loan Bank ("FHLB") stock		7,044		4,976		3,863
Bank premises and equipment, net		12,597		13,078		14,532
Investment in real estate limited partnerships		7,560		6,356		5,827
Bank owned life insurance		10,805		10,758		10,606
Core deposit intangible		1,113		1,156		1,309
Goodwill		7,011		7,011		6,872
Other assets		19,141		15,128		21,111
Total assets		2,023,544		2,062,658		1,963,630
Non-interest bearing deposits		630,718		640,922		620,190
Savings, interest bearing checking and money market accounts		690,448		687,340		677,600
Time deposits		190,510		199,208		228,998
Total deposits		1,511,676		1,527,470		1,526,788
Short-term borrowings		75,000		40,000		—
Securities sold under agreement to repurchase, short-term		249,582		312,118		249,003
Other long-term debt		3,630		3,651		4,716
Junior subordinated debentures issued to unconsolidated subsidiary trust		20,619		20,619		20,619
Other liabilities		4,389		2,297		9,903
Total liabilities		1,864,896		1,906,155		1,811,029
Stockholders' equity		158,648		156,503		152,601

Balance Sheets - Quarter-to-Date Averages
Cash and due from banks	$	25,375	$	30,138	$	31,058
Interest earning cash and other short-term investments		38,058		49,005		74,294
Investments-available for sale, taxable		311,861		296,292		279,327
Investments-held to maturity, taxable		82,989		88,391		117,390
Loans		1,538,136		1,488,960		1,417,710
Allowance for loan losses		12,775		12,600		12,073
Net loans		1,525,361		1,476,360		1,405,637
FHLB stock		7,162		4,994		3,784
Bank owned life insurance		10,775		10,728		10,571
Other assets		44,075		49,141		51,411
Total assets		2,045,656		2,005,049		1,973,472
Non-interest bearing deposits		626,936		635,512		616,553
Savings, interest bearing checking and money market accounts		687,259		671,126		671,823
Time deposits		196,039		203,969		239,818
Total deposits		1,510,234		1,510,607		1,528,194
Short-term borrowings		72,789		13,380		—
Securities sold under agreement to repurchase, short-term		276,755		288,343		259,999
Other long-term debt		3,637		3,659		4,833
Junior subordinated debentures issued to unconsolidated subsidiary trust		20,619		20,619		20,619
Other liabilities		2,025		10,138		9,973
Total liabilities		1,886,059		1,846,746		1,823,618
Stockholders' equity		159,597		158,303		149,854
Earning assets		1,978,206		1,927,642		1,892,505
Interest bearing liabilities		1,257,098		1,201,096		1,197,092

Merchants Bancshares, Inc.
Financial Highlights (unaudited)
(Dollars in thousands except share and per share data)

Loan Portfolios:

	March 31,		December 31,		March 31,
	2017		2016		2016
Period End
Commercial, financial and agricultural	$	276,915	$	257,078	$	247,074
Municipal loans		113,875		114,509		105,433
Real estate loans - residential		438,424		447,527		461,009
Real estate loans - commercial		672,712		636,755		556,836
Real estate loans - construction		35,964		52,533		42,209
Installment loans		4,813		5,790		9,009
All other loans		15		17		33
Total Loans	$	1,542,718	$	1,514,209	$	1,421,603

Ratios and Supplemental Information:

	March31,			December 31,			March 31,
	2017			2016			2016
Ratios and Supplemental Information - Period End
Book value per share	$	22.94		$	22.72		$	22.25
Tangible book value per share (1)	$	21.76		$	21.54		$	21.06
Common Equity Tier 1		12.38	%		12.42	%		12.95	%
Tier I leverage ratio		8.63	%		8.71	%		8.53	%
Total risk-based capital ratio		15.09	%		15.14	%		15.85	%
Tangible capital ratio (1)		7.47	%		7.22	%		7.39	%
Period end common shares outstanding		6,916,443			6,887,856			6,858,473

Credit Quality - Period End
Nonperforming loans ("NPLs") (2)	$	4,212		$	3,182		$	4,641
Nonperforming assets ("NPAs") (2)	$	4,289		$	3,258		$	4,713
NPLs as a percent of total loans (2)		0.27	%		0.21	%		0.33	%
NPAs as a percent of total assets (2)		0.21	%		0.16	%		0.24	%
ALL as a percent of NPLs (2)		313	%		398	%		262	%
ALL as a percent of total loans		0.85	%		0.84	%		0.86	%
Accruing loans 31 to 90 days past due as a percent of total loans		0.09	%		0.03	%		0.28	%

(1)	The tangible book value per share is calculated by dividing tangible equity by period end common shares outstanding. The tangible capital ratio is calculated by dividingtangible equity by tangible assets. See our non-GAAP reconciliation titled "Tangible Capital Ratio & Tangible Book Value per Share (Non-GAAP)" on page 7.
(2)	Non-performing loans have been updated to exclude accruing troubled debt-restructured loans. Prior periods have been reclassified to be consistent with the current periodpresentation.

Merchants Bancshares, Inc.
Financial Highlights (unaudited)
(Dollars in thousands except share and per share data)

	FortheThreeMonthsEnded
	March 31,		December 31,		March 31,
	2017		2016		2016
Operating Results
Interest income
Interest and fees on loans	$	13,507	$	13,170	$	12,804
Interest and dividends on investments		1,836		1,752		1,997
Interest on interest earning deposits with banks and other short-term investments		82		63		81
Total interest and dividend income		15,425		14,985		14,882
Interest expense
Savings, interest bearing checking and money market accounts		471		442		440
Time deposits		265		295		391
Total deposits		736		737		831
Short-term borrowings		140		16		—
Securities sold under agreement to repurchase, short-term		152		135		109
Long-term debt		161		217		210
Total interest expense		1,189		1,105		1,150
Net interest income		14,236		13,880		13,732
Provision for credit losses		500		200		205
Net interest income after provision for credit losses		13,736		13,680		13,527
Noninterest income
Trust division income		824		1,164		867
Net debit card income		760		802		649
Overdraft income		597		638		631
Service charges on deposits		423		433		415
Net gains on investment securities		255		—		—
Other noninterest income		403		375		362
Total noninterest income		3,262		3,412		2,924
Noninterest expense
Compensation and benefits		5,823		5,427		6,308
Occupancy expense		1,101		1,128		1,139
Equipment expense		650		635		719
Telephone expense		171		159		198
Legal and professional fees		414		632		593
Mobile & internet banking		346		333		366
Core / Item processing		453		496		517
Marketing expenses		120		206		192
State franchise taxes		399		390		398
FDIC insurance		217		133		254
Community Bank System, Inc. merger costs		1,302		2,543		—
NUVO Bank & Trust Company acquisition costs		—		—		133
Core deposit intangible amortization		43		51		51
Other noninterest expense		914		946		1,051
Total noninterest expense		11,953		13,079		11,919
Income before provision for income taxes		5,045		4,013		4,532
Provision for income taxes		1,434		897		1,042
Net income		3,611		3,116		3,490

Amounts reported for prior periods are reclassified, where necessary, to be consistent with the current period presentation.

Merchants Bancshares, Inc.
Financial Highlights (unaudited)
(Dollars in thousands except share and per share data)

Ratios and Supplemental Information:

	FortheThreeMonthsEnded
	March 31,			December 31,			March 31,
	2017			2016			2016
Ratios and Supplemental Information
Weighted average common shares outstanding		6,903,801			6,886,127			6,855,975
Weighted average diluted shares outstanding		6,928,613			6,923,006			6,965,886
Basic earnings per common share	$	0.52		$	0.45		$	0.51
Diluted earnings per common share	$	0.52		$	0.45		$	0.50
Return on average assets		0.71	%		0.62	%		0.71	%
Return on average stockholders' equity		9.06	%		7.83	%		9.32	%
Average yield on loans		3.70	%		3.67	%		3.78	%
Average yield on investments		1.83	%		1.80	%		2.01	%
Average yield of earning assets		3.26	%		3.21	%		3.28	%
Average cost of interest bearing deposits		0.34	%		0.33	%		0.37	%
Average cost of borrowed funds		0.49	%		0.45	%		0.45	%
Average cost of interest bearing liabilities		0.38	%		0.37	%		0.39	%
Net interest rate spread		2.88	%		2.84	%		2.89	%
Net interest margin		3.02	%		2.98	%		3.02	%
Net interest income on a fully taxable equivalent basis	$	14,787		$	14,358		$	14,265
Net (charge-offs) recoveries to average loans		(0.01)	%		(0.02)	%		(0.02)	%
Net (charge-offs) recoveries	$	(38)		$	(66)		$	(82)
Efficiency ratio (1)		57.30	%		57.13	%		64.27	%

(1) The efficiency ratio excludes amortization of intangibles, OREO expenses, gain/loss on sales of securities, state franchise taxes and any significant nonrecurring items.

Tangible Capital Ratio & Tangible Book Value per Share (Non-GAAP):

	March 31,			December 31,			March 31,
	2017			2016			2016
Period End
Total assets	$	2,023,544		$	2,062,658		$	1,963,630
Core deposit intangible		1,113			1,156			1,309
Goodwill		7,011			7,011			6,872
Tangible assets		2,015,420			2,054,491			1,955,449

Total stockholders' equity		158,648			156,503			152,601
Core deposit intangible		1,113			1,156			1,309
Goodwill		7,011			7,011			6,872
Tangible stockholders' equity		150,524			148,336			144,420

Tangible capital ratio		7.47	%		7.22	%		7.39	%

Period end common shares outstanding		6,916,443			6,887,856			6,858,473

Tangible book value per share	$	21.76		$	21.54		$	21.06

Adjusted Net Income (Non-GAAP):

	FortheThreeMonthsEnded
	March 31,		December 31,		March 31,
	2017		2016		2016
Adjusted Net Income
Community Bank System, Inc. merger costs	$	1,302	$	2,543	$	—
NUVO Bank & Trust Company acquisition costs		—		—		133
Severance and retirement costs		—		(24)		289
Tax effect		370		563		97
Adjustments, net of tax	$	932	$	1,956	$	325

GAAP net income as reported		3,611		3,116		3,490
Adjusted net income	$	4,543	$	5,072	$	3,815

Weighted average common shares outstanding		6,904		6,886		6,856
Weighted average diluted shares outstanding		6,929		6,923		6,966

Adjusted basic earnings per common share	$	0.66	$	0.74	$	0.56
Adjusted diluted earnings per common share	$	0.66	$	0.73	$	0.55

Fully Taxable Equivalent Net Interest Income (Non-GAAP):

	FortheThreeMonthsEnded
	March 31,		December 31,		March 31,
	2017		2016		2016
Fully Taxable Equivalent Net Interest Income
Net interest income	$	14,236	$	13,880	$	13,732
Tax equivalent adjustment		551		478		533
Fully taxable equivalent net interest income	$	14,787	$	14,358	$	14,265

Source: SOUTH BURLINGTON, Vt., April 20, 2017 /PRNewswire/ -- Merchants Bancshares, Inc