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| MBVT > SEC Filings for MBVT > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
Forward Looking Statements
Except for the historical information contained herein, this Quarterly Report on
Form 10-Q of Merchants may contain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 (the "Exchange Act"). When used, the words "anticipate,"
"believe," "estimate," "expect," "intend," "may," "might," "plan," "project,"
"result," "should," "will" and similar expressions which do not relate solely to
historical matters are intended to identify forward-looking statements. These
statements include, among other things, statements regarding Merchants' intent,
belief or expectations with respect to economic conditions, trends affecting
Merchants' financial condition or results of operations, and Merchants' exposure
to market, interest rate and credit risk.
Investors 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, including, without limitation:
(i) the fact that Merchants' success is dependent, notwithstanding the state's perceived limited potential for growth, upon general economic conditions both globally and in Vermont and Vermont's ability to attract new business;
(ii) the fact that Merchants' earnings depend to a great extent upon the level of net interest income (the difference between interest income earned on loans and investments and the interest expense paid on deposits and other borrowings) generated by Merchants and thus Merchants' results of operations may be adversely affected by increases or decreases in interest rates or by the shape of the yield curve;
(iii) the fact that the banking business is highly competitive and the profitability of Merchants depends upon Merchants' ability to attract loans and deposits in Vermont, where Merchants competes with a variety of traditional banking and nontraditional institutions such as credit unions and finance companies;
(iv) the fact that at September 30, 2008, approximately 51% of Merchants' loan portfolio was comprised of commercial, commercial real estate, and construction loans with some relationships exceeding ten million dollars, exposing Merchants to the risks inherent in financings based upon analyses of credit risk, the value of underlying collateral, including real estate, and other more intangible factors, which are considered in making commercial loans;
8 (v) the fact that if real estate values in Merchants' market decline or become stagnant, business could be adversely affected. At September 30, 2008, approximately 86% of Merchants' loan portfolio was comprised of residential real estate and commercial real estate and construction loans, exposing Merchants to the risks inherent in financings based upon analyses of credit risk and the value of underlying collateral. Real estate prices in some parts of the country have recently become stagnant or declined and there has been a significant decline in real estate construction and housing starts. These trends could ultimately impact the value and liquidity of the real estate or other collateral securing Merchants' loans. Merchants' profitability may be negatively impacted by errors in risk analyses, by loan defaults, and the ability of certain borrowers to repay such loans may be adversely affected by any downturn in general economic conditions;
(vi) the fact that acts or threats of terrorism and actions taken by the United States or other governments as a result of such acts or threats, including possible military action, could further adversely affect business and economic conditions in the United States of America generally and in Merchants' markets, which could adversely affect Merchants' financial performance, that of Merchants' borrowers, the financial markets and the price of Merchants' common stock;
(vii) the fact that changes in the extensive laws, regulations and policies governing bank holding companies and their subsidiaries, including, among others, recently enacted legislation and programs in response to the crises affecting the banking system and financial markets, could alter Merchants' business environment or affect Merchants' operations;
(viii) the fact that the potential need to adapt to industry changes in information technology systems, on which Merchants is highly dependent to secure bank and customer financial information, could present operational issues, require significant capital spending or impact Merchants' reputation;
(ix) the fact that Merchants' customers conduct their business within global financial systems, which may subject Merchants' customers' businesses and their financial data to potential risks or weaknesses within those systems; and
(x) the fact that Merchants actively evaluates acquisition and other expansion opportunities and strategies, the implementation of which could affect Merchants' financial performance.
These factors, as well as general economic and market conditions in the United States of America, fears of a global recession, and continued market turmoil and credit issues, may materially and adversely affect the market price of shares of Merchants' common stock. Because of these and other factors, past financial performance should not be considered an indicator of future performance. The forward-looking statements contained herein represent Merchants' judgment as of the date of this Form 10-Q, and Merchants undertakes no duty to update these forward-looking statements. Merchants cautions readers not to place undue reliance on such statements.
General
All adjustments necessary for a fair presentation of Merchants' interim
consolidated financial statements as of September 30, 2008, and for the three
and nine months ended September 30, 2008 and 2007, have been included. The
information was prepared from the unaudited financial statements of Merchants
and its subsidiaries, Merchants Bank, Merchants Trust Company, Merchants
Properties, Inc. and MBVT Statutory Trust I.
Recent Market Developments
Certain segments of the financial services industry are facing unprecedented
challenges in the face of the current national and global economic crisis. The
global and U.S. economies are experiencing significantly reduced business
activity as a result of disruptions in the financial system during the past
year, among other things. In some areas, dramatic declines in the housing market
during the past year, increasing foreclosures and rising unemployment, have
resulted in significant write-downs of asset values by financial institutions,
including government-sponsored entities and major commercial and investment
banks. These write-downs have caused many financial institutions to seek
additional capital; to merge with larger and stronger institutions; and, in some
cases, to fail. Merchants is fortunate that, to date, the markets it serves have
been impacted to a lesser extent than many areas around the country. However, a
prolonged recession and persistently adverse economic conditions would likely
impact these markets over time, and have a negative impact upon Merchants'
financial condition and performance.
In response to the financial crises affecting the banking system and financial markets, there have been several recent announcements of Federal programs designed to purchase or insure assets from, provide equity capital to, and guarantee the liquidity of, the industry.
On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the "EESA") was signed into law. The EESA authorizes the U.S. Treasury to purchase up to $700 billion of mortgages, mortgage-backed securities, and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets, among other things. EESA also immediately increases the FDIC deposit insurance limit from $100,000 to $250,000 through December 31, 2009.
9 On October 14, 2008, the U.S. Treasury announced that it will purchase equity stakes in a wide variety of banks and thrifts. Under this program, known as the Troubled Asset Relief Program Capital Purchase Program (the "TARP Capital Purchase Program"), the U.S. Treasury will make $250 billion of capital available (from the $700 billion authorized by the EESA) to U.S. financial institutions in the form of preferred stock. In conjunction with the purchase of preferred stock, the U.S. Treasury will receive warrants to purchase common stock with an aggregate market price equal to 15% of the preferred investment. Participating financial institutions will be required to adopt the U.S. Treasury's standards for executive compensation and corporate governance for the period during which the Treasury holds equity issued under the TARP Capital Purchase Program. The U.S. Treasury also announced that nine large financial institutions have already agreed to participate in the TARP Capital Purchase Program. Merchants is currently well capitalized, and continues to take advantage of opportunities in its markets to expand its loan portfolio. To date, Merchants has not made application for additional equity capital under the TARP Capital Purchase Program and will continue to review clarifications of these plans, or others if announced, to determine if Merchants should participate in these programs.
Results of Operations
Overview
Net income was $3.31 million and $8.85 million for the third quarter and first
nine months of 2008, respectively, compared to net income of $2.63 million and
$7.94 million for the third quarter and the first nine months of 2007,
respectively. The return on average assets for the quarter and nine months ended
September 30, 2008 were 1.01% and 0.93%, respectively, compared to 0.94% and
0.95%, respectively, for the quarter and nine months ended September 30, 2007.
The return on average equity for the quarter and nine months ended September 30,
2008 were 17.98% and 15.66%, respectively, compared to 15.04% and 15.14%,
respectively, for the same period in 2007. The following were the major factors
contributing to the results for the quarter and nine months ended September 30,
2008, compared to the same periods in 2007:
• Net interest income for the third quarter of 2008 was $11.43 million, a $1.92 million, or 20%, increase over the same period in 2007; net interest income for the first nine months of 2008 was $31.55 million, a $2.97 million, or 10%, increase over the same period in 2007. Merchants' net interest margin for the third quarter of 2008 was 3.63%, a six basis point increase over the same period in 2007; for the nine months ended September 30, 2008 Merchants' net interest margin was 3.51%, nine basis points lower than the comparable period in 2007. The net interest margin for the third quarter of 2008 was 15 basis points higher than the second quarter of this year. The increase in the net interest margin during the third quarter was a result of a combination of higher average yields on Merchants' investments and lower overall funding costs, partially offset by lower average yields on Merchants' loan portfolio.
• Merchants recorded a $575 thousand loan loss provision during the quarter compared to a $700 thousand loan loss provision for the same quarter of 2007 and $50 thousand for the second quarter of the current year; the provision for the first nine months of 2008 was $925 thousand compared to $850 thousand for the same period in 2007. Increased loan production, as well as increased nonperforming loans and net charge-offs resulted in a higher provision expense for the third quarter of 2008 when compared to the first half of this year.
• Merchants' quarterly average loans were $800.13 million, an increase of $72.97 million, or 10% over the third quarter of 2007, and were $37.37 million, or 5% higher on a linked quarter basis. Loans ended the third quarter of 2008 at $814.60 million, an increase of $83.09 million over December 31, 2007 ending balances of $731.51 million.
• Merchants' quarterly average investment portfolio was $449.60 million, an increase of $145.98 million, or 48%, over the same quarter of 2007.
• Quarterly average deposits were $947.67 million, an increase of $75.71 million, or 9%, over the same quarter of 2007 and were $25.79 million, or 3% higher on a linked quarter basis. Deposits ended the quarter at $949.52 million, an increase of $82.08 million over year end balances of $867.44 million.
• Total non-interest income decreased slightly to $2.29 million for the third quarter of 2008 from $2.32 million for the third quarter of 2007. Non-interest income excluding gains/losses on investment securities decreased slightly to $6.75 million for the first nine months of 2008, compared to $6.81 million for the first nine months of 2007. Total non-interest expense increased $1.06 million to $8.78 million for the third quarter of 2008 from $7.72 million for the third quarter of 2007; and increased $1.72 million to $25.86 million for the first nine months of 2008, compared to 2007.
Net Interest Income
Merchants' net interest income increased $1.92 million, or 20.2%, for the third
quarter of 2008 compared to 2007 and was $2.97 million, or 10.4%, higher for the
first nine months of 2008 compared to 2007. Net interest income for the third
quarter of this year was also 8.9% higher than the second quarter of 2008. These
increases are a result of strong growth in
10 both loans and deposits, and a result of the leverage that Merchants has put on over the last year to take advantage of the favorable interest rate environment. Average interest earning assets for the quarter were $1.26 billion, compared to $1.06 billion for the third quarter of 2007 and $1.22 billion for the second quarter of 2008. Merchants' net interest margin for the third quarter of 2008 was 3.63%, six basis points higher than the third quarter of 2007; the net interest margin for the first nine months of 2008 was 3.51%, a nine basis point decrease from the same period in 2007.
The average rate on interest earning assets for the current quarter was 41 basis points lower than the third quarter of 2007 and was 39 basis points lower for the first nine months of 2008 compared to the same period in 2007. This decrease was primarily due to decreased loan rates for 2008 compared to 2007, primarily a result of decreases in the prime lending rate, and overall lower interest rates during the year. Lower loan rates were partially offset by a higher average yield on Merchants' primarily fixed rate investment portfolio for 2008 when compared to 2007.
Merchants was able to reduce its overall funding costs by 57 basis points for the third quarter of 2008 compared to 2007, and by 36 basis points for the first nine months of 2008 compared to 2007. The average cost of deposits decreased by 49 basis points when comparing the third quarter of this year to the same period in the prior year and 23 basis points for the first nine months of 2008 compared to 2007. Most of this decrease came in the cost of time deposits as this funding source repriced in a lower interest rate environment. Merchants' cost of borrowed funds decreased 148 basis points when comparing the third quarter of 2008 to 2007, and 134 basis points for the first nine months of this year compared to last year. Merchants' cost of securities sold under agreements to repurchase and other short-term debt decreased 242 basis points for the third quarter of 2008 compared to 2007, a result of the 275 basis points decrease in the target federal funds rate over the last twelve months. Additionally, Merchants has continued to layer on long-term borrowings at attractive rates during 2008, Merchants' average cost of long-term borrowed funds for the third quarter of 2008 was 143 basis points lower than the third quarter of 2007 and decreased 124 basis points for the first nine months of 2008 compared to the same period in 2007.
The following table attributes changes in Merchants' net interest income (on a fully taxable equivalent basis) to changes in either average balances or average rates for the three and nine months ended September 30, 2008. Changes due to both interest rate and volume have been allocated to change due to volume and change due to rate in proportion to the relationship of the absolute dollar amounts of the change in each category:
11
Analysis of Changes in Fully Taxable Equivalent Net Interest Income
Three Months Ended September 30,
--------------------------------------------------------------------------------------
Due to
Increase -----------------
(In thousands) 2008 2007 (Decrease) Volume Rate
---------------------------------------------
Fully taxable equivalent interest
income:
Loans $11,900 $12,093 $ (193) $1,135 $(1,328)
Investments 5,710 3,563 2,147 1,593 554
Federal funds sold, securities sold
under agreements to
repurchase and interest bearing
deposits with banks 32 348 (316) (182) (134)
--------------------------------------------------------------------------------------
Total interest income 17,642 16,004 1,638 2,546 (908)
--------------------------------------------------------------------------------------
Less interest expense:
Savings, money market & NOW accounts 1,040 1,200 (160) 41 (201)
Time deposits 2,926 3,318 (392) 559 (951)
Fed funds purchased and Federal Home
Loan Bank
short-term borrowings 22 20 2 17 (15)
Securities sold under agreements to
repurchase
and other short-term debt 333 819 (486) (9) (477)
Securities sold under agreement to
repurchase, long-term 638 291 347 502 (155)
Other long-term debt 934 536 398 531 (133)
Junior subordinated debt 298 298 -- -- --
--------------------------------------------------------------------------------------
Total interest expense 6,191 6,482 (291) 1,641 (1,932)
--------------------------------------------------------------------------------------
Net interest income $11,451 $ 9,522 $1,929 $ 905 $ 1,024
--------------------------------------------------------------------------------------
Nine Months Ended September 30,
--------------------------------------------------------------------------------------
Due to
Increase -----------------
(In thousands) 2008 2007 (Decrease) Volume Rate
---------------------------------------------
Fully taxable equivalent interest
income:
Loans $34,876 $35,328 $ (452) $2,876 $(3,328)
Investments 15,860 11,319 4,541 3,547 994
Federal funds sold, securities sold
under agreements to
repurchase and interest bearing
deposits with banks 334 1,434 (1,100) (692) (408)
--------------------------------------------------------------------------------------
Total interest income 51,070 48,081 2,989 5,731 (2,742)
--------------------------------------------------------------------------------------
Less interest expense:
Savings, money market & NOW accounts 3,094 3,633 (539) (17) (522)
Time deposits 9,766 9,776 (10) 1,350 (1,360)
Fed funds purchased and Federal Home
Loan Bank
short-term borrowings 67 59 8 40 (32)
Securities sold under agreements to
repurchase
and other short-term debt 1,342 2,544 (1,202) 78 (1,280)
Securities sold under agreement to
repurchase, long-term 1,761 865 896 1,319 (423)
Other long-term debt 2,531 1,680 851 1,174 (323)
Junior subordinated debt 893 893 -- -- --
--------------------------------------------------------------------------------------
Total interest expense 19,454 19,450 4 3,944 (3,940)
--------------------------------------------------------------------------------------
Net interest income $31,616 $28,631 $2,985 $1,787 $ 1,198
--------------------------------------------------------------------------------------
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The following tables set forth certain information regarding net interest margin for the three and nine months ended September 30, 2008 and 2007. For the periods indicated, the total dollar amount of interest income from average earning assets and the resultant yields, as well as the interest expense on average interest bearing liabilities, are expressed both in dollars and rates, and on a tax equivalent basis.
12
Merchants Bancshares, Inc.
Average Balance Sheets and Average Rates
(Unaudited)
Three Months Ended
------------------------------------------------------------
September 30, 2008 September 30, 2007
---------------------------- -----------------------------
Interest Interest
(In thousands, fully taxable Average Income/ Average Average Income/ Average
equivalent) Balance Expense Rate Balance Expense Rate
---------------------------- -----------------------------
ASSETS:
Loans, including fees on loans
(a) $ 800,126 $11,900 5.92% $ 727,159 $12,093 6.60%
Investments (b) (c) 449,597 5,710 5.05% 303,619 3,563 4.66%
Federal funds sold and interest
bearing
deposits with banks 5,664 32 2.22% 26,389 348 5.23%
---------------------------- -----------------------------
Total interest earning
assets 1,255,387 $17,642 5.59% 1,057,167 $16,004 6.00%
---------------------------- -----------------------------
Allowance for loan losses (8,509) (7,217)
Cash and cash equivalents 34,347 35,108
Bank premises and equipment, net 10,357 11,774
Other assets 15,441 16,572
----------- -----------
Total assets $1,307,023 $1,113,404
----------- -----------
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LIABILITIES AND SHAREHOLDERS'
EQUITY::
Interest bearing deposits:
Savings, NOW & money market
accounts $ 439,427 $ 1,040 0.94% $ 424,103 $ 1,200 1.12%
Time deposits 385,339 2,926 3.02% 323,783 3,318 4.07%
---------------------------- -----------------------------
Total interest bearing
deposits 824,766 3,966 1.91% 747,886 4,518 2.40%
---------------------------- -----------------------------
Federal funds purchased 1,196 6 2.14% -- -- --
Federal Home Loan Bank
short-term borrowings 3,566 16 1.82% 1,695 20 4.59%
Securities sold under agreements
to repurchase
and other short-term debt 78,032 333 1.70% 78,884 819 4.12%
Securities sold under agreements
to repurchase,
long-term 72,913 638 3.48% 20,000 291 5.78%
Other long-term debt 99,355 934 3.74% 44,843 536 4.74%
Junior subordinated debentures
issued to
Unconsolidated subsidiary
trust 20,619 298 5.77% 20,619 298 5.77%
---------------------------- -----------------------------
Total borrowed funds 275,681 2,225 3.21% 166,041 1,964 4.69%
---------------------------- -----------------------------
Total interest bearing
liabilities 1,100,447 $ 6,191 2.24% 913,927 $ 6,482 2.81%
---------------------------- -----------------------------
Noninterest bearing deposits 122,908 124,083
Other liabilities 9,979 5,458
Shareholders' equity 73,689 69,936
----------- -----------
Total liabilities and
shareholders' equity 1,307,023 $1,113,404
----------- -----------
Net interest earning assets $ 154,940 $ 143,240
----------- -----------
Net interest income (fully
taxable equivalent) $11,451 $ 9,522
-------- ---------
Tax equivalent adjustment (25) (20)
-------- ---------
Net interest income $11,426 $ 9,502
-------- ---------
Net interest rate spread 3.35% 3.19%
------- -------
Net interest margin 3.63% 3.57%
------- -------
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(a) Includes principal balance of non-accrual loans and fees on loans.
(b) Available for sale securities are included at fair value, held to maturity
securities are included at amortized cost.
(c) Tax exempt interest has been converted to a tax equivalent basis using the
Federal tax rate of 35%.
13
Merchants Bancshares, Inc.
Average Balance Sheets and Average Rates
(Unaudited)
Nine Months Ended
-----------------------------------------------------------
September 30, 2008 September 30, 2007
---------------------------- ----------------------------
Interest Interest
(In thousands, fully taxable Average Income/ Average Average Income/ Average
equivalent) Balance Expense Rate Balance Expense Rate
---------------------------- ----------------------------
ASSETS:
Loans, including fees on loans
(a) $ 766,955 $34,876 6.07% $ 707,198 $35,328 6.68%
Investments (b) (c) 424,604 15,860 4.99% 319,462 11,319 4.74%
Federal funds sold, securities
purchased under
agreements to resell and
interest bearing
. . .
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