Merchants Bancshares announces Q2 2014 results

"We have continued to transition and strengthen the balance sheet by reducing exposure to price volatility in the investment portfolio, increasing liquidity andbuildingcapital.Allof this isinresponse tomarket conditions that do not favor asset extension or compensate adequately for credit risk. At the same time, we are making a significant investment in the company with our core conversion project that will negatively impact results for the next quarter, though with expected benefits starting to be seen in the fourth quarter and into 2015," said Michael R Tuttle, President and Chief Executive Officer.

According to the quarterly statement, shareholders' equity reached another record high of $124.96 million, and our book value per share increased to $19.75 per share at June 30, 2014 from $18.93 at December 31, 2013. Capital ratios remain strong atJune 30, 2014. Tier 1 leverage ratio was 8.79%, total risk-based capital ratio increased to 16.76% and our tangible capital ratio increased to 7.77%.

Taxable equivalent net interest income was $12.14 million and $24.50 million for the three and six months ended June 30, 2014, respectively, compared to $12.80 million and $25.53 million for the same periods in 2013. Taxable equivalent net interest margin was3.06% and 3.08% for the quarter and six months endedJune 30, 2014, comparedto 3.17% and 3.18% for the same periods in 2013. The margin decreased by four basis points during the second quarter of 2014, primarily a result of reduced asset yields which decreased by four basis points during the second quarter. Both the net interest margin and average asset yields were unchanged from the fourth quarter of 2013 to the first quarter of 2014. We have increased liquidity andreducedpricevolatility exposurein our investment portfolio byallowingthe investment portfolio to run off and holding a larger percentage of our balance sheet in cash, which has compressed asset yields.

These changes have shortened assets and caused MB to give up some current income, but have reduced price volatility exposure on its balance sheet and better positioned it for rising rates. At the same time our loan yields have continued to compress due to a combination of the extended low interest rate environment,tighter credit spreads andcompetitive pressures. Additionally, MB has increased its variable rate loan portfolio. Average variable rate loans for the second quarter of 2014 were $328.98 million, a $44.46 million increase over the second quarter of 2013. These loans have a lower current yield than fixed rate loans, but will have higher yields when rates start to rise.

Quarterly average loan balances for the second quarter of 2014were $1.17 billion, $47.14 million higher than quarterly average balances for the second quarter of 2013. Ending loan balances at June 30, 2014 were impacted by seasonal fluctuations in municipal cash flows, causing municipal loan balances at June 30, 2014 to be $46.82 million lower than at March 31, 2014; as of July 10, 2014, municipal loan balances had increased by$40.49 million to $86.85 million.

The following table summarizes the components of MB's loan portfolio as of the periods indicated:

Growth in our commercial loan categories has been driven by new customer acquisition and expansion of existing relationships, offset by increased prepayment activity. Mortgage refinancing activity has slowed considerably, leading to reduced residential real estate balances. We expect this trend to continue in our residential real estate portfolio.

Werecordeda $50 thousand and $150thousand provisionfor credit losses duringthe threeandsix months ended June 30, 2014, compared to $150 thousand and $400 thousand for the three and six months ended June30,2013. Credit quality improvedfurtherduringthequarter, weareconsistently atop performer in this measure. Our nonperforming loans were 0.08% of total loans at June 30, 2014, loans past due 30-89 days were 0.01% of total loans at June 30, 2014. Net charge-offs during 2014 have been negligible.

Theaverageinvestmentportfolio forthesecond quarterof 2014 was$352.90 million, a reduction of $50.08 million from average balances for the fourth quarter of 2013. The ending balance in the investment portfolio atJune 30, 2014 was $33 5 .44 million, compared to $365.34 million at March 31, 2014 and $393.34 million atDecember 31, 2013. The book balance of the portfolio at June 30, 2014 includes a $2.24 million unrealized gain on the available for sale portion of the investment portfolio, compared to an unrealized loss of ($220) thousandat December 31, 2013. Interest rates have trended down over the course of 2014 which has positively impacted the value of our largely fixed rate investment portfolio. We sold $19 million in securities during the quarter for a small gain. We sold bonds that had higher than average price volatility and lower than average yields to continue to reduce the exposure to rising rates and the risk to tangible capital in the investment portfolio. We also took advantage of an opportunity to continue to unwind our remaining CLO portfolio. Our remaining CLO position totals $9.41 million.

Quarterly average deposits for the second quarter of 2014 were $1.32 billion, a $45.43 million increase over quarterly average deposits for the second quarter of 2013. Total deposits at June 30, 2014 were $1.31 billion, a$12.88 million decrease compared to balances at December 31, 2013. Strong growth in demand deposits and money market categories has been offset by reduced time deposit balances. Securities sold under agreement to repurchase, which represent collateralized customer accounts, declined to $141.06 million at June 30, 2014from $250.31 million at December 31, 2013 as a result of seasonal municipal cash flows.

Total noninterest income increased $184 thousand to $2.95 million for the second quarter of 2014 compared to the second quarter of 2013 and increased $447 thousand for the first six months of 2014 compared to the first six months of 2013. Excluding net gains on investment securities, total noninterest income increased $153 thousand and $291 thousand for the second quarter and first half of 2014 compared to the same periods in 2013. Trust division income increased $69 thousand and $163 thousand for the three and six months endedJune 30, 2014, respectively, compared to the same periods in 2013 as trust division assets under management have continued to show strong growth and now total $632 million. Service charges on deposits increased $22 thousand and $43 thousand for the three and six months ended June 30, 2014 compared to the same period in 2013, a result of increased in cash management fees and business checking service charges. Overdraft fees decreased $33 thousand and $94 thousand for the three and six months ended June 30, 2014. This revenue source continues to come under pressure, but the rate of decrease has slowed.

Total noninterest expense increased $519 thousand to $10.10 million for the second quarter of 2014 compared to the same period in 2013 and increased $924 thousand to $20.25 million for the first six months of 2014 compared to the same periods in 2013. Excluding core system conversion costs total noninterest expense increased $302 thousand to $9.88 million for the second quarter of 2014 compared to the same period in 2013 and increased $536 thousand to $19.86 million for the first six months of 2014 compared to the same period in 2013. Pre-tax expenses related to the conversion of our core banking systems incurred during the quarter and six months ended June 30, 2014 were $217 thousand and $388 thousand, respectively, which represents $.02and $.04 per share after tax. The conversion is scheduled to occur during the fourth quarter of this year. In total, we expect to incur approximately $1.20 million in expenses related to the core conversion during 2014 and expect to realize annual cost savings and additional revenue opportunities of approximately $800 thousandstarting in November of this year.

Compensation and benefits increased $328 thousand and $456 thousand for the three and six months endedJune 30, 2014, respectively, compared to the same periods in 2013. The increase was a result of additional investments we have made in the Finance and Risk areas combined with lower credits related to loan originations. Additionally expenses associated with our self-funded employee health insurance plan were higher for the first half of 2014 compared to 2013. During the second quarter of 2013, we reversed $225 thousand of our accrued health insurance expense as a result of positive claims experience. This increase in health insurance expense was partially offset by a larger credit from our overfunded pension plan.

Occupancy and equipment costs were $97 thousand higher for the second quarter of 2014 compared to 2013, and were $227 thousand higher for the first half of 2014 compared to 2013, a result of investments we have made recently to update, and in some cases, combine our facilities. Legal and professional fees were $74 thousand higher for the second quarter of 2014 compared to 2013, and were $25 thousand higher for the first half of 2014 compared to 2013, a result of additional resources for our compliance and risk areas. Marketing expenses for the second quarter of 2014 were $323 thousand, $162 thousand lower than the second quarter of 2013, and were $642 thousand year to date, $123 thousand lower than the first half of 2013, a result of our transition to a new marketing partner which will push some expenses later in the year.

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 thousand and $654 thousand for the quarter and six months ended June 30, 2014, respectively; and by $270 thousand and $540 thousand for the quarter and six months ended June 30, 2013, respectively and increased income tax expense by an equivalent amount. The application of the standard also increased our effective tax rate to 23% for the three and six months ended June 30, 2014 and 24% and 25% for the three and six months ended June 30, 2013.

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 Chief Operating Officer and Senior Lender, will host a conference call to discuss these earnings results, business and outlook at 9:00 a.m. Eastern Time onWednesday, July 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. Q2 2014 Earnings Call. Participants are asked to call a few minutes prior to register. A replay will be available until 9:00 a.m. Eastern Time on July 31, 2014. The U.S. replay dial-in telephone number is (877) 344-7529. The Canada replay telephone number is (855) 669-9658. The international replay telephone number is (412) 317-0088. The replay access code for all replay telephone numbers is 10037007. Additionally, a recording of the call will be available on our website at www.mbvt.com.

Established in 1849, Merchants Bank is Vermont's largest and sole remaining statewide independent bank. Consumer, business, municipal and investment customers enjoy personalized relationships, sophisticated online and mobile banking options, and 32 branches statewide. 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 have earned several "Best Places to Work in Vermont" awards. American Banker ranks Merchants Bank a "Top 200" 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 $525 thousand for the three months endedJune 30, 2014, and $485 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.

SOURCE: SOUTHBURLINGTON, Vt., July 22, 2014 /PRNewswire/ --Merchants Bancshares, Inc.