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| MBVT > SEC Filings for MBVT > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
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, which are included in more detail in Section 1A
- "Risk Factors" beginning on page 30 of this document.
General
All adjustments necessary for a fair presentation of Merchants' interim consolidated financial statements as of June 30, 2009, and for the three and six months ended June 30, 2009 and 2008, have been included. The information was prepared from the unaudited financial statements of Merchants and its subsidiaries, Merchants Bank, Merchants Trust Company and MBVT Statutory Trust I. Merchants Bank recently applied for, and received, approval to merge Merchants Trust Company into the bank. The merger is expected to be completed as of September 30, 2009. There will be no effect on the consolidated balance sheet or statement of operations of Merchants.
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, 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. The FDIC has closed over 69 banks so far in 2009, more than double 2008's level. 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. Pursuant to the EESA, the U.S. Treasury was given the authority to, among other things, 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. EESA also immediately increased the FDIC deposit insurance limit from $100,000 to $250,000 through December 31, 2009. On May 19, 2009, Congress extended the $250,000 deposit insurance limit through December 31, 2013.
Results of Operations
Overview
Net income was $2.06 million and $4.97 million for the second quarter and first six months of 2009, respectively, compared to net income of $2.88 million and $5.54 million for the second quarter and first six months of 2008, respectively. The return on average assets for the quarter and six months ended June 30, 2009 was 0.61% and 0.74%, respectively, compared to 0.90% and 0.89% for the quarter and six months ended July 30, 2008. The return on average equity for the quarter and six months ended June 30, 2009 was 9.87% and 12.14% compared to 15.26% and 14.54%, respectively, for the same periods in 2008. The following were the major factors contributing to the results for the quarter ended June 30, 2009, compared to the same period in 2008:
•
Merchants recorded a pre-tax $625 thousand expense related to the FDIC's special assessment on all banks during the quarter.
•
Net interest income for the second quarter of 2009 was $12.38 million, a $1.89 million, or 18.0%, increase over the same period in 2008; Merchants net interest income for the first half of 2009 was $24.72 million, a $4.59 million, or 22.8% increase over the same period last year. Merchants' net interest margin for the second quarter of 2009 was 3.81%, a 33 basis point increase over the same period in 2008. The increase in net interest income and net interest margin was primarily a result of strong growth in both loans and deposits and a result of funding costs falling more rapidly than asset repricing over the last year.
•
Merchants recorded a $2.00 million provision for credit losses during the second quarter of 2009 and a $2.90 million provision year to date compared to a $50 thousand loan loss provision for the second quarter of 2008, and $350 thousand for the first six months of last year. The increase in the provision was primarily a result of increased levels of non-performing and classified loans, combined with increased net charge-offs, continued economic uncertainty and strong loan growth over the first six months of 2009.
•
Merchants' quarterly average loans were $895.98 million, an increase of $133.22 million, or 17.46% over the second quarter of 2008, and were $30.02 million, or 3.47% higher on a linked quarter basis. Loans ended the second quarter of 2009 at $896.09 million, an increase of $48.96 million over December 31, 2008 ending balances of $847.13 million.
•
Merchants' quarterly average investment portfolio was $387.23 million, a decrease of $58.31 million compared to the same quarter of 2008 as Merchants used cash flows from the investment portfolio to fund, in part, growth in the loan portfolio. Total investments ended the second quarter of 2009 at $374.30 million, a $57.31 million decrease from year end 2008 balances.
•
Quarterly average deposits were $1.00 billion, an increase of $79.03 million, or 8.6%, over the same quarter of 2008. Deposits ended the quarter at $1.02 billion, an increase of $84.60 million over year-end 2008 balances of $930.80 million.
•
Total non-interest income increased to $2.41 million for the second quarter of 2009 from $2.31 million for the second quarter of 2008, and decreased to $4.34 million for the first six months of this year from $4.55 million for the same period last year. Non-interest income excluding gains/losses on investment securities increased to $4.54 million for the first half of 2009, from $4.47 million for the first half of last year. Total noninterest expense increased $1.39 million to $10.34 million for the second quarter of 2009 from $8.95 million for the second quarter of 2008; and increased $2.80 million to $19.88 million for the first six months of 2009, compared to the same period in 2008.
Net Interest Income
Merchants' net interest income increased $1.89 million, or 18.0%, to $12.38 million for the second quarter of 2009 compared to 2008, and increased $4.59 million, or 22.8%, to $24.72 million for the first half of 2009 compared to 2008. This increase was a result of strong growth in both loans and deposits, and a result of funding costs falling more rapidly than asset repricing over the last year. Average interest earning assets for the quarter were $1.31 billion, compared to $1.22 billion for the second quarter of 2008; and were $1.30 billion for the first half of 2009 compared to $1.18 billion for the same period in 2008. Merchants' net interest margin for the second quarter of 2009 was 3.81%, 33 basis points higher than the second quarter of 2008, and was 3.84% for the first half of 2009, a 40 basis point increase over the same period in 2008. Merchants' net interest margin for the second quarter of 2009 decreased by four basis points from the first quarter of this year. Merchants' average earning assets were essentially flat from the first quarter of 2009 to the second as loan growth was primarily funded through run off from the investment portfolio. At the same time Merchants experienced very strong deposit growth, this was invested short term, contributing to the decrease in the rate earned on average interest earning assets to 5.14% from 5.32% for the first quarter of this year. Additionally, Merchants has experienced increases in its non-performing asset portfolio during the quarter (see the credit quality discussion beginning on page 24 for further information on non-performing assets) further straining the net interest margin.
The average rate on interest earning assets for the second quarter of 2009 was 47 basis points lower than for the second quarter of 2008, and was 46 basis points lower when comparing the first six months of 2009 to the same period in 2008. This decrease was primarily due to decreased loan rates for 2009 compared to 2008, a result of dramatic decreases in the prime lending rate during 2008, and a large short term investment portfolio that is invested at very low rates in the current interest rate environment.
Merchants was able to reduce its overall funding costs by 91 basis points for the second quarter of 2009 compared to 2008 and by 99 basis points when comparing the first six months of this year to the same period in the prior year. Much of this decrease came in the cost of time deposits as these funds repriced in a lower interest rate environment, the cost of this funding source decreased 149 basis points when comparing the second quarter of this year to last, and decreased by 155 basis points for the first six months of 2009 compared to 2008. Additionally, the cost of Merchants' Savings, NOW and money market accounts decreased 50 basis points for the second quarter of this year compared to last, and by 51 basis points for the first half of the year.
Merchants' cost of borrowed funds decreased 55 basis points when comparing the second quarter of 2009 to 2008 and by 98 basis points for the first six months of 2009 compared to 2008. This decrease is primarily a result of the 400 basis points decrease in the target federal funds rate over the course of 2008. Merchants used some of its excess cash to prepay $18 million in long term FHLB debt during May of 2009 and incurred a $304 thousand prepayment penalty in conjunction with the prepayment; this penalty is included in Other Noninterest Expenses. Merchants estimates that it will earn this prepayment penalty back in approximately six months.
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 six months ended June 30, 2009. 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:
Analysis of Changes in Fully Taxable Equivalent Net Interest Income
Three Months Ended June 30,
Increase Due to
(In thousands) 2009 2008 (Decrease) Volume Rate
Fully taxable equivalent interest
income:
Loans $ 11,975 $ 11,392 $ 583 $ 1,886 $ (1,303)
Investments 4,759 5,518 (759) (717) (42)
Federal funds sold, securities sold
under
agreements to repurchase and
interest
bearing deposits with banks 10 51 (41) 37 (78)
Total interest income 16,744 16,961 (217) 1,206 (1,423)
Less interest expense:
Savings, money market & NOW
accounts 515 993 (478) 107 (585)
Time deposits 2,165 3,385 (1,220) 285 (1,505)
Federal funds purchased, Federal
Home Loan
Bank and other short-term
borrowings -- 35 (35) (9) (26)
Securities sold under agreements to
repurchase
and other short-term debt 47 380 (333) -- (333)
Securities sold under agreement to
repurchase,
long-term 494 564 (70) (124) 54
Other long-term debt 819 797 22 123 (101)
Junior subordinated debt 298 298 -- -- --
Total interest expense 4,338 6,452 (2,114) 382 (2,496)
Net interest income $ 12,406 $ 10,509 $ 1,897 $ 824 $ 1,073
Six Months Ended June 30,
Increase Due to
(In thousands) 2009 2008 (Decrease) Volume Rate
Fully taxable equivalent interest
income:
Loans $ 23,761 $ 22,977 $ 784 $ 3,681 $ (2,897)
Investments 10,022 10,150 (128) (123) (5)
Federal funds sold, securities sold
under
agreements to repurchase and
interest
bearing deposits with banks 14 302 (288) (45) (243)
Total interest income 33,797 33,429 368 3,513 (3,145)
Less interest expense:
Savings, money market & NOW
accounts 1,063 2,054 (991) 181 (1,172)
Time deposits 4,453 6,840 (2,387) 678 (3,065)
Federal funds purchased, Federal
Home Loan
Bank and other short-term
borrowings 20 44 (24) 37 (61)
Securities sold under agreements to
repurchase
and other short-term debt 112 1,009 (897) 4 (901)
Securities sold under agreement to
repurchase,
long-term 970 1,124 (154) (122) (32)
Other long-term debt 1,819 1,597 222 477 (255)
Junior subordinated debt 595 595 -- -- --
Total interest expense 9,032 13,263 (4,231) 1,255 (5,486)
Net interest income $ 24,765 $ 20,166 $ 4,599 $ 2,258 $ 2,341
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The following table sets forth certain information regarding net interest margin for the three and six months ended June 30, 2009 and 2008. 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.
Merchants Bancshares, Inc.
Average Balance Sheets and Average Rates
(Unaudited)
Three Months Ended
June 30, 2009 June 30, 2008
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) $ 895,981 $ 11,975 5.36% $ 762,761 $ 11,392 6.01%
Investments (b) (c) 387,226 4,759 4.93% 445,534 5,518 4.98%
Federal funds sold, securities
purchased under
agreements to resell and interest
bearing
deposits with banks 23,082 10 0.17% 7,627 51 2.71%
Total interest earning assets 1,306,289 $ 16,744 5.14% 1,215,922 $ 16,961 5.61%
Allowance for loan losses (9,985) (8,423)
Cash and cash equivalents 24,341 34,012
Bank premises and equipment, net 11,762 11,824
Other assets 21,369 24,489
Total assets $ 1,353,776 $ 1,277,824
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LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing deposits: Savings, NOW & money market accounts $ 479,648 $ 515 0.43% $ 428,681 $ 993 0.93% Time deposits 414,768 2,165 2.09% 380,558 3,385 3.58% Total interest bearing deposits 894,416 2,680 1.20% 809,239 4,378 2.18% Federal funds purchased 11 -- 0.44% 3,352 18 2.16% Federal Home Loan Bank and other short-term borrowings 1,035 -- 0.09% 3,451 17 2.00% Securities sold under agreements to repurchase and other short-term debt 82,903 47 0.23% 82,982 380 1.84% Securities sold under agreements to repurchase, long-term 54,000 494 3.67% 71,143 564 3.19% Other long-term debt (d) 96,223 819 3.42% 82,682 797 3.88% Junior subordinated debentures issued to Unconsolidated subsidiary trust 20,619 298 5.77% 20,619 298 5.77% Total borrowed funds 254,791 1,658 2.61% 264,229 2,074 3.16% Total interest bearing liabilities 1,149,207 $ 4,338 1.51% 1,073,468 $ 6,452 2.42% Noninterest bearing deposits 106,498 112,645 Other liabilities 14,474 16,094 Shareholders' equity 83,597 75,617 Total liabilities and shareholders' equity $ 1,353,776 $ 1,277,824 Net interest earning assets $ 157,082 $ 142,454 Net interest income (fully taxable equivalent) $ 12,406 $ 10,509 Tax equivalent adjustment (31) (19) Net interest income $ 12,375 $ 10,490 Net interest rate spread 3.63% 3.19% Net interest margin 3.81% 3.48% |
(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. Includes FHLB stock.
Tax exempt interest has been converted to a tax equivalent basis using the Federal tax rate of 35%.
Excludes prepayment penalty of $304 thousand.
Merchants Bancshares, Inc.
Average Balance Sheets and Average Rates
(Unaudited)
Six Months Ended
June 30, 2009 June 30, 2008
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) $ 881,054 $ 23,761 5.44% $ 750,187 $ 22,977 6.16%
Investments (b) (c) 405,901 10,022 4.98% 411,971 10,150 4.95%
Federal funds sold, securities
purchased under
agreements to resell and interest
bearing
deposits with banks 14,127 14 0.20% 17,131 302 3.55%
Total interest earning assets 1,301,082 $ 33,797 5.24% 1,179,289 $ 33,429 5.70%
Allowance for loan losses (9,613) (8,275)
Cash and cash equivalents 25,237 34,736
Bank premises and equipment, net 11,676 11,806
Other assets 20,369 22,589
Total assets $ 1,348,751 $ 1,240,145
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LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing deposits: Savings, NOW & Money Market accounts $ 460,893 $ 1,063 0.47% $ 420,001 $ 2,054 0.98% Time deposits 405,654 4,453 2.21% 365,541 6,840 3.76% Total interest bearing deposits 866,547 5,516 1.28% 785,542 8,894 2.28% Federal funds purchased 575 1 0.46% 1,742 19 2.24% Federal Home Loan Bank and other short-term borrowings 12,689 19 0.30% 2,217 25 2.26% Securities sold under agreement to repurchase and other short term debt 85,390 112 0.26% 85,036 1,009 2.39% Securities sold under agreement to repurchase, long term 54,000 970 3.62% 60,621 1,124 3.73% Other long-term debt (d) 105,099 1,819 3.49% 78,667 1,597 4.08% Junior subordinated debentures issued to Unconsolidated subsidiary trust 20,619 595 5.77% 20,619 595 5.77% Total borrowed funds 278,372 3,516 2.55% 248,902 4,369 3.53% Total interest bearing liabilities 1,144,919 $ 9,032 1.59% 1,034,444 $ 13,263 2.58% Noninterest bearing deposits 108,297 114,823 Other liabilities 13,650 14,665 Shareholders' equity 81,885 76,213 Total liabilities and shareholders' equity $ 1,348,751 $ 1,240,145 Net interest earning assets $ 156,163 $ 144,845 Net interest income (fully taxable equivalent) $ 24,765 $ 20,166 Tax equivalent adjustment (49) (38) Net interest income $ 24,716 $ 20,128 Net interest rate spread 3.65% 3.12% Net interest margin 3.84% 3.44% |
(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. Includes FHLB stock.
Tax exempt interest has been converted to a tax equivalent basis using the Federal tax rate of 35%.
Excludes prepayment penalty of $304 thousand.
Provision for Credit Losses: Merchants recorded a $2.00 million provision for credit losses during the second quarter of 2009 and $2.90 million year-to-date, compared to $50 thousand and $350 thousand for the second quarter and first six months of 2008, respectively. The increase in the provision during the second quarter is primarily a result of increased levels of non-performing and classified assets, combined with increased net charge-offs and continued economic uncertainty; the increase in the year to date provision is a result of the factors just described, combined with strong loan growth over the first six months of the year. The allowance for loan losses was $10.60 million, 1.18% of total loans and 78% of nonperforming loans at June 30, 2009, compared to $8.89 million, 1.05% of total loans and 76% of nonperforming loans at December 31, 2008. Nonperforming loans increased to $13.65 million at June 30, 2009 from $11.64 million at December 31, 2008. Approximately 71% of nonaccruing loans are concentrated in seven relationships. Additionally, approximately $2.58 million of the loans in non-performing status carry some form of government guarantee. Gross loans ended the second quarter of 2009 at $896.09 million, a $48.96 million, or 5.8%, increase over year-end 2008 balances. Merchants recorded net charge-offs of $979 thousand for the first six months of 2009 and recorded net recoveries of $65 thousand for the same period in 2008. All of these factors are taken into consideration during management's quarterly review of the Allowance for credit losses (the "Allowance") which management continues to deem adequate under current market conditions. See the discussion of Nonperforming Assets and the Allowance on pages 24-26 for additional information on the provision, the Allowance and the allowance for loan losses.
Noninterest Income: Total non-interest income increased to $2.41 million for the second quarter of 2009 from $2.31 million for the second quarter of 2008, and decreased to $4.34 million for the first six months of this year from $4.55 million for the same period last year. Non-interest income excluding gains/losses on investment securities increased to $4.54 million for the first half of 2009, from $4.47 million for the first half of last year. Trust Company income decreased to $413 thousand from $473 thousand for the second quarter of 2009 compared to 2008, and decreased to $814 thousand from $978 thousand for the first half of 2009 compared to 2008. Although Merchants has experienced increases in overall trust relationships, these increases have not generated enough additional revenue to offset lost revenue due to market value declines in the current volatile environment. Merchants experienced slight increases in its net overdraft income for the second quarter of 2009 compared to last year, which made up for decreases in this fee category in the first quarter of 2009. On a year to date basis, service charges on deposits for 2009 are slightly higher than 2008.
Noninterest Expense: Total noninterest expense increased $1.39 million, or 15.5%, to $10.34 million for the second quarter of 2009 from $8.95 million for the second quarter of 2008; and increased $2.80 million to $19.88 million for the first six months of 2009, compared to the same period in 2008. There are . . .
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