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 percent for the same period in 2013. The return on average equity was 11.31 percent for the three months ended March 31, 2014, compared to 12.31percent 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:
March 31, December 31, March 31,
(In thousands) 2014 2013 2013
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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
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Total loans $ 1,171,737 $ 1,166,233 $ 1,101,713
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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 c ombine, 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
SOUTH BURLINGTON, VT--(Marketwired - April 22, 2014) - Merchants Bancshares, Inc