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| MBVT > SEC Filings for MBVT > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-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 September 30, 2009, and for the three and nine months ended September 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 was 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 115 banks so far in 2009, compared to 25 bank closures for all of 2008. 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 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 $3.71 million and $8.68 million for the third quarter and first nine months of 2009, respectively, compared to net income of $3.31 million and $8.85 million for the third quarter and first nine months of 2008, respectively. The return on average assets for the quarter and nine months ended September 30, 2009 was 1.07% and 0.85%, respectively, compared to 1.01% and 0.93% for the quarter and nine months ended September 30, 2008, respectively. The return on average equity for the quarter and nine months ended September 30, 2009 was 17.37% and 13.93%, respectively, compared to 17.98% and 15.66% for the same periods in 2008. The following were the major factors contributing to the results for the quarter ended September 30, 2009, compared to the same period in 2008:
•
Net interest income is setting new records for Merchants. Taxable equivalent net interest income for the third quarter of 2009 was $12.79 million, an increase of $1.34 million, or 11.7% over the same period in 2008. For the nine months ended September 30, 2009 taxable equivalent net interest income was $37.55 million, an increase of $5.94 million, or 18.8% over the same period in 2008.
•
The Provision for credit losses was $600 thousand for the third quarter of 2009, compared to $575 thousand for the third quarter of 2008. Merchants had success in reducing the level of nonperforming loans during the third quarter of 2009, and also booked a small net recovery for the quarter. The year-to-date provision expense was $3.50 million for 2009 compared to $925 thousand for 2008, reflecting year-to-date increases in net charge-offs, classified loans and general economic weakness during 2009.
•
Loans ended the quarter at $929.24 million, an increase of $82.11 million or 9.7%, compared to year-end 2008 balances.
•
Merchants' investment portfolio decreased to $355.15 million at September 30, 2009 as Merchants has sold approximately $37.73 million of securities during 2009, consisting primarily of commercial mortgage backed securities and non Agency CMOs.
•
Merchants has been successful in growing its deposits; total deposits ended the quarter at $1.03 billion, compared to $931 million at December 31, 2008.
•
Merchants prepaid $9 million in FHLB debt during the third quarter of this year resulting in a $280 thousand prepayment penalty; year to date Merchants has prepaid a total of $27 million in FHLB debt and incurred a total of $584 thousand in prepayment penalties.
Net Interest Income
Merchants' taxable equivalent net interest income increased $1.34 million, or 11.68%, to $12.79 million for the third quarter of 2009, compared to 2008. Merchants' net interest margin increased 14 basis points to 3.77% over the same time frame. These increases were driven by a combination of an increase in average interest earning assets, a shift in the make-up of the balance sheet, and lower funding costs during 2009. Merchants' average interest earning assets increased $90.25 million, or 7.19%, to $1.35 billion for the third quarter of 2009, compared to $1.26 billion for the third quarter of 2008. The yield on average earning assets has decreased to 4.92% for the third quarter of 2009 from 5.59% for the third quarter of 2008. The make-up of those assets has changed over the last year as Merchants has shifted the asset side of the balance sheet away from investments and toward the loan portfolio. Merchants' average investments for the third quarter of this year decreased by 17.8% to $369.35 million, at an average yield of 4.79%, from $449.60 million, at an average yield of 5.05%, for the third quarter of 2008. At the same time, Merchants' average loans for the third quarter of this year increased by 15.3% to $922.70 million, at an average yield of 5.23%, from $800.13 million, at an average yield of 5.92%, for the third quarter of 2008. This shift to a higher yielding asset class helped to mitigate the effect of the overall lower interest rate environment, and the large cash position Merchants has accumulated over the last few months. Merchants has worked to shift the funding side of the balance sheet away from wholesale borrowed funds to less expensive deposits and customer repurchase agreements. Merchants' average interest bearing deposits for the third quarter of this year increased 10.3% to $909.94 million, at an average cost of 0.97%, compared to $824.77 million, at an average cost of 1.91%, for the third quarter of last year. Merchants offers its customers a cash management sweep arrangement that is secured by its investment portfolio by way of an overnight repurchase agreement. These funds are classified as borrowings on Merchants' balance sheet. Average balances in this funding source increased $36.43 million, or 46.7%, to $114.47 million for the third quarter of 2009, compared to the third quarter of 2008. At the same time Merchants' long-term debt and long-term repurchase agreements decreased 22.7% to $133.11 million, at an average cost of 3.43%, for the third quarter of 2009 from $172.23 million, at an average cost of 3.63%, for the third quarter of 2008. This decrease is a result of normal monthly amortization, combined with $27 million in prepayments of FHLB long term debt during 2009.
For the nine months ended September 30, 2009 Merchants' taxable equivalent net interest income increased $5.94 million, or 18.78%, to $37.55 million compared to the first nine months of 2008; and Merchants' net interest margin increased by 30 basis points to 3.81%. These increases were driven by the same changes that impacted the third quarter of 2009 discussed previously. Merchants' average earning assets increased $111.26 million, or 9.23% to $1.32 billion for the first nine months of 2009, compared to $1.20 billion for the same period in 2008. The yield on average earning assets has decreased 53 basis points to 5.13% for 2009, compared to 5.66% for 2008. The make-up of the earning asset base has shifted here as well. Average loans were $128.14 million, or 16.7%, higher for the first nine months of 2009, compared to the first nine months of 2008; and average investments for the same period in 2009 were $31.02 million, or 7.3%, lower than for the same time period in 2008. Merchants' funding base has also changed on a year-to-date basis. Average interest bearing liabilities have increased $99.84 million, or 9.4%, for the first nine months of 2009, compared to the first nine months of 2008. $82.46 million of this increase was in interest bearing deposits, which increased to $881.17 million, at an average cost of 1.18%, from $798.71 million, at an average cost of 2.15%, a 10.3% increase. The balance of the increase was in short-term customer repurchase agreements, which increased 15.1% to $95.19 million, at an average cost of 0.44% for the first nine months of 2009, compared to $82.68 million at an average cost of 2.17% for the first nine months of last year.
Merchants' net interest margin contracted by four basis points to 3.77% for the third quarter of 2009 from 3.81% for the second quarter of 2009. Net interest income was $382 thousand, or 3.1%, higher for the third quarter compared to the second; average interest bearing assets were $39.34 million, or 3.0%, higher and average interest bearing liabilities were $29.91, or 2.6% higher. At the same time Merchants' short term cash position more than doubled compared to the second quarter; at an average rate of 0.31% this position creates a drag on the margin. Merchants is working to deploy this cash by purchasing high quality Agency investments, and by paying down FHLB debt. Please see the balance sheet discussion for more information on these changes.
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, 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 September 30,
Increase Due to
(In thousands) 2009 2008 (Decrease) Volume Rate
Fully taxable equivalent interest
income:
Loans $ 12,171 $ 11,900 $ 271 $ 1,731 $ (1,460)
Investments 4,458 5,710 (1,252) (970) (282)
Federal funds sold, securities sold
under
agreements to repurchase and
interest
bearing deposits with banks 42 32 10 58 (48)
Total interest income 16,671 17,642 (971) 819 (1,790)
Less interest expense:
Savings, money market & NOW
accounts 429 1,040 (611) 113 (724)
Time deposits 1,806 2,926 (1,120) 228 (1,348)
Federal funds purchased, Federal
Home Loan
Bank and other short-term
borrowings -- 22 (22) (9) (13)
Securities sold under agreements to
repurchase
and other short-term debt 201 333 (132) 116 (248)
Securities sold under agreement to
repurchase,
long-term 500 638 (138) (160) 22
Other long-term debt 649 934 (285) (174) (111)
Junior subordinated debt 298 298 -- -- --
Total interest expense 3,883 6,191 (2,308) 114 (2,422)
Net interest income $ 12,788 $ 11,451 $ 1,337 $ 705 $ 632
Nine Months Ended September 30,
Increase Due to
(In thousands) 2009 2008 (Decrease) Volume Rate
Fully taxable equivalent interest
income:
Loans $ 35,932 $ 34,876 $ 1,056 $ 5,386 $ (4,330)
Investments 14,480 15,860 (1,380) (1,159) (221)
Federal funds sold, securities sold
under
agreements to repurchase and
interest
bearing deposits with banks 56 334 (278) 180 (458)
Total interest income 50,468 51,070 (602) 4,407 (5,009)
Less interest expense:
Savings, money market & NOW
accounts 1,492 3,094 (1,602) 298 (1,900)
Time deposits 6,259 9,766 (3,507) 904 (4,411)
Federal funds purchased, Federal
Home Loan
Bank and other short-term
borrowings 20 67 (47) 37 (84)
Securities sold under agreements to
repurchase
and other short-term debt 313 1,342 (1,029) 177 (1,206)
Securities sold under agreement to
repurchase,
long-term 1,470 1,761 (291) (288) (3)
Other long-term debt 2,468 2,531 (63) 296 (359)
Junior subordinated debt 893 893 -- -- --
Total interest expense 12,915 19,454 (6,539) 1,424 (7,963)
Net interest income $ 37,553 $ 31,616 $ 5,937 $ 2,983 $ 2,954
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The following table sets forth certain information regarding net interest margin for the three and nine months ended September 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
September 30, 2009 September 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) $ 922,704 $ 12,171 5.23% $ 800,126 $ 11,900 5.92%
Investments (b) (c) 369,353 4,458 4.79% 449,597 5,710 5.05%
Federal funds sold, securities
purchased under
agreements to resell and interest
bearing
deposits with banks 53,576 42 0.31% 5,664 32 2.22%
Total interest earning assets 1,345,633 $ 16,671 4.92% 1,255,387 $ 17,642 5.59%
Allowance for loan losses (10,958) (8,509)
Cash and cash equivalents 25,369 34,347
Bank premises and equipment, net 11,867 10,357
Other assets 22,546 15,441
Total assets $ 1,394,457 $ 1,307,023
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LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing deposits: Savings, NOW & money market accounts $ 492,532 $ 429 0.35% $ 439,427 $ 1,040 0.94% Time deposits 417,412 1,806 1.72% 385,339 2,926 3.02% Total interest bearing deposits 909,944 2,235 0.97% 824,766 3,966 1.91% Federal funds purchased -- -- -- 1,196 6 2.14% Federal Home Loan Bank and other short-term borrowings 981 -- -- 3,566 16 1.82% Securities sold under agreements to repurchase and other short-term debt 114,466 201 0.70% 78,032 333 1.70% Securities sold under agreements to repurchase, long-term 54,000 500 3.67% 72,913 638 3.48% Other long-term debt (d) 79,107 649 3.25% 99,355 934 3.74% Junior subordinated debentures issued to Unconsolidated subsidiary trust 20,619 298 5.77% 20,619 298 5.77% Total borrowed funds 269,173 1,648 2.43% 275,681 2,225 3.21% Total interest bearing liabilities 1,179,117 $ 3,883 1.31% 1,100,447 $ 6,191 2.24% Noninterest bearing deposits 116,583 122,908 Other liabilities 13,209 9,979 Shareholders' equity 85,548 73,689 Total liabilities and shareholders' equity $ 1,394,457 $ 1,307,023 Net interest earning assets $ 166,516 $ 154,940 Net interest income (fully taxable equivalent) $ 12,788 $ 11,451 Tax equivalent adjustment (92) (25) Net interest income $ 12,696 $ 11,426 Net interest rate spread 3.61% 3.35% Net interest margin 3.77% 3.63% |
(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 $280 thousand
Merchants Bancshares, Inc.
Average Balance Sheets and Average Rates
(Unaudited)
Nine Months Ended
September 30, 2009 September 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) $ 895,090 $ 35,932 5.37% $ 766,955 $ 34,876 6.07%
Investments (b) (c) 393,585 14,480 4.92% 424,604 15,860 4.99%
Federal funds sold, securities
purchased under
agreements to resell and interest
bearing
deposits with banks 27,421 56 0.27% 13,281 334 3.36%
Total interest earning assets 1,316,096 $ 50,468 5.13% 1,204,840 $ 51,070 5.66%
Allowance for loan losses (10,066) (8,354)
Cash and cash equivalents 25,281 34,606
Bank premises and equipment, net 11,740 11,320
Other assets 21,103 20,189
Total assets $ 1,364,154 $ 1,262,601
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LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing deposits: Savings, NOW & Money Market accounts $ 471,555 $ 1,492 0.42% $ 426,524 $ 3,094 0.97% Time deposits 409,617 6,259 2.04% 372,189 9,766 3.51% Total interest bearing deposits 881,172 7,751 1.18% 798,713 12,860 2.15% Federal funds purchased 381 1 0.46% 1,559 26 2.21% Federal Home Loan Bank and other short-term borrowings 8,744 19 0.29% 2,670 41 2.08% Securities sold under agreement to repurchase and other short term debt 95,188 313 0.44% 82,684 1,342 2.17% Securities sold under agreement to repurchase, long term 54,000 1,470 3.64% 64,748 1,761 3.63% Other long-term debt (d) 96,340 2,468 3.43% 85,613 2,531 3.95% Junior subordinated debentures issued to Unconsolidated subsidiary trust 20,619 893 5.77% 20,619 893 5.77% Total borrowed funds 275,272 5,164 2.51% 257,893 6,594 3.42% Total interest bearing liabilities 1,156,444 $ 12,915 1.49% 1,056,606 $ 19,454 2.46% Noninterest bearing deposits 111,089 117,538 Other liabilities 13,502 13,092 Shareholders' equity 83,119 75,365 Total liabilities and shareholders' equity $ 1,364,154 $ 1,262,601 Net interest earning assets $ 159,652 $ 148,234 Net interest income (fully taxable equivalent) $ 37,553 $ 31,616 Tax equivalent adjustment (141) (62) Net interest income $ 37,412 $ 31,554 Net interest rate spread 3.64% 3.20% Net interest margin 3.81% 3.51% |
(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 $584 thousand
Provision for Credit Losses: Merchants recorded a $600 thousand provision for credit losses during the third quarter of 2009 and $3.50 million year-to-date, compared to $575 thousand and $925 thousand for the third quarter and first nine months of 2008, respectively. The increase in the year-to-date provision compared to 2008 is a result of increased levels of classified loans when compared to year-end balances, and year-to-date net charge-offs; combined with continued economic uncertainty as well as strong loan growth during 2009. The provision for the third quarter of 2009 was $25 thousand more than the same period in 2008, but was $1.40 million lower than the previous quarter of the current year. The decrease from the second quarter to the third quarter of 2009 is primarily a result of decreased levels of nonperforming and classified assets, combined with a small net recovery for the third quarter of 2009. The allowance for loan losses was $11.18 million, 1.20% of total loans and 106% of nonperforming loans at September 30, 2009, compared to $8.89 million, 1.05% of total loans and 76% of nonperforming loans at December 31, 2008. Nonperforming loans decreased to $10.58 million at September 30, 2009 from $11.64 million at December 31, 2008. Approximately 65% of nonaccruing loans are concentrated in six relationships. Additionally, approximately $970 thousand of the loans in nonperforming status carry some form of government guarantee. Gross loans ended the third quarter of 2009 at $929.24 million, a $82.11 million, or 9.7%, increase over year-end 2008 balances. Merchants recorded net charge-offs of $884 thousand for the first nine months of 2009 and recorded net charge-offs of $582 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 reasonable at September 30, 2009. 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 noninterest income increased to $2.60 million for the third quarter of 2009 from $2.29 million for the third quarter of 2008, and increased to $6.94 million for the first nine months of this year from $6.83 million for the same period last year. Excluding net gains on security sales, noninterest income increased slightly to $2.34 million for the third quarter of 2009 from $2.29 million for the same period last year, and increased to $6.88 million for the first nine months of 2009, compared to $6.75 million for the same period in 2008. Although the value of Trust Company assets under management has rebounded during 2009, values have not returned to their early 2008 levels and as a result Trust Company income has continued to decrease during 2009 . . .
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