Merchants Bancshares Inc. Reports Operating Results (10-Q)
Merchants Bancshares Inc. is a bank holding company for Merchants Bank. Merchants Bancshares Inc. has a market cap of $121.7 million; its shares were traded at around $21.09 with a P/E ratio of 10.5 and P/S ratio of 1.7. The dividend yield of Merchants Bancshares Inc. stocks is 5.3%. Merchants Bancshares Inc. had an annual average earning growth of 9.5% over the past 5 years. Highlight of Business Operations: Merchants quarterly average loans were $865.96 million, an increase of $128.35 million, or 17% over the first quarter of 2008, and were $40.57 million, or 5% higher on a linked quarter basis. Loans ended the first quarter of 2009 at $892.58 million, an increase of $45.45 million over December 31, 2008 ending balances of $847.13 million.
Total non-interest income decreased to $1.93 million for the first quarter of 2009 from $2.24 million for the first quarter of 2008. Non-interest income excluding gains/losses on investment securities and asset sales decreased to $1.95 million for the first quarter of 2009, compared to $2.16 million for the first quarter of 2008. Total non-interest expense increased $1.42 million to $9.54 million for the first quarter of 2009 from $8.12 million for the first quarter of 2008.
Provision for Credit Losses: Merchants recorded a $900 thousand provision for credit losses during the first quarter of 2009 compared to $300 thousand for the first quarter of 2008. The increase in the provision is primarily a result of overall loan growth combined with increased net charge-offs and continued economic uncertainty. The allowance for loan losses was $9.45 million; 1.06% of total loans and 82% of nonperforming loans at March 31, 2009, compared to $8.89 million, 1.05% of total loans and 76% of nonperforming loans at December 31, 2008; and $8.31 million, 1.10% of total loans and 116% of nonperforming loans at March 31, 2008. Nonperforming loans decreased slightly to $11.52 million at March 31, 2009 from $11.64 million at December 31, 2008. Additions to nonperforming loans during the quarter were offset by principal pay downs, scheduled amortization and charge-downs. Approximately 75% of nonaccruing loans are concentrated in five relationships. Additionally, approximately $3.1 million of the loans in nonperforming status carry some form of government guarantee. Gross loans ended the first quarter of 2009 at $892.58 million, a $45.45 million increase over year end balances. Merchants recorded net charge-offs of $348 thousand for the first three months of 2009 and recorded net recoveries of $10 thousand for the same period in 2008. All of these factors are taken into consideration during managements 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 17-18 for additional information on the provision, the Allowance and the allowance for loan losses.
Noninterest Income: Total noninterest income decreased to $1.93 million for the first quarter of 2009 from $2.24 million for the first quarter of 2008. Merchants closed its branch in Windsor VT on December 31, 2008. The building was sold during the first quarter of 2009 for a gain of $180 thousand. Merchants sold three securities with a combined book value of $12.68 million during the first quarter of 2009 at a combined loss of $205 thousand. For more information about this security sale please see Balance Sheet Analysis below. Excluding both the gain on the sale of the building and gains/losses on investment securities noninterest income decreased to $1.95 million for the first quarter of 2009 compared to $2.16 million for the first quarter of 2008. Trust Company income decreased to $401 thousand from $505 thousand for the first quarter 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. Additionally, Merchants has experienced slight decreases in overdraft income and net ATM/debit card income for the first quarter of this year compared to last as customers react to the current economic uncertainty by spending less and by managing overdraft activity more closely.
Noninterest Expense: Total noninterest expense increased $1.42 million to $9.54 million for the first quarter of 2009 from $8.12 million for the first quarter of 2008. Salaries and Wages increased $328 thousand to $3.42 million for the first quarter of 2009 compared to the same period in 2008. This increase is a result of normal pay increases combined with additional staff that Merchants hired in the corporate banking, executive and trust areas over the course of 2008. Employee benefits increased $328 thousand to $1.26 million for the first quarter of 2009 compared to 2008. This increase is a result of substantial increases in health insurance costs and pension plan expenses for 2009 over 2008. Legal and professional fees were $689 thousand for the first quarter, a $106 thousand increase over last year. These increases are a result of a combination of overall increased third party provider fees and professional fees related to specific projects. Other noninterest expenses increased $606 thousand to $1.89 million for the first quarter of 2009 compared to the first quarter of 2008. Merchants FDIC insurance expense increased by $289 thousand for the first quarter of this year compared to last year. Expenses related to OREO and problem loans increased to $133 thousand for the first quarter of 2009 compared to a credit balance of $10 thousand for 2008 as Merchants has more loans in various stages of workout this year compared to last year. Additionally, most categories of operating expenses have increased for 2009 compared to 2008.
Merchants investment portfolio totaled $399.06 million at March 31, 2009, a decrease of $32.55 million from December 31, 2008 ending balances of $431.61 million. Merchants sold three bonds with a book value of $12.68 million during the first quarter of 2009. One of the bonds was a non-agency Collateralized Mortgage Obligation (CMO) that was downgraded below single A during the quarter; after careful review and analysis Merchants determined that the potential loss severities in this bond could potentially be quite high, and decided to sell the bond. The bond was sold at a loss of $542 thousand. The other two bonds sold were an agency CMO and an agency MBS, both with a 6% coupon. Both of the bonds had very short average lives, and prepayments at this coupon level are expected to be elevated in light of current interest rate levels. Merchants decided to sell these two bonds to lock in the embedded gain. These bonds were sold at a combined gain of $337 thousand. All remaining securities in Merchants investment portfolio, with the exception of four bonds, were either Agency guaranteed or rated AAA by all rating agencies at March 31, 2009. The four securities have a split rating, with at least one rating agency continuing to carry a AAA rating and one or two others downgrading the bonds. One of these four securities was downgraded below A by one of the rating agencies during 2008. Merchants wrote this security down to its estimated fair value during the fourth quarter of 2008. Merchants, with the help of its investment advisor, has performed extensive cash flow analysis on its non-agency CMO portfolio. Merchants is closely tracking the performance of the underlying collateral on this portion of the portfolio. Merchants is also closely tracking the performance of its Commercial Mortgage-Backed Securities portfolio. Management has reviewed servicer reports on the underlying collateral that provide detail about defeasance levels, delinquencies, default rate and servicer watch lists. At this point, Merchants does not consider any of its securities to be other than temporarily impaired and has the intent and ability to hold these investments until a market price recovery, which could be maturity. Merchants has no corporate debt exposure on its books, including any perpetual preferred stock issued by FNMA or FHLMC nor any interests in pooled trust preferred securities.
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