Merchants Bancshares, Inc. Reports Third Quarter Results; Declares Dividend

SOUTH BURLINGTON, Vt., Oct. 27, 2016 /PRNewswire/ -- Merchants Bancshares, Inc. (NASDAQ: MBVT), the parent company of Merchants Bank, today announced net income of $3.9 million and $0.57 per diluted share for the third quarter of 2016 compared to net income of $4.4 million or $0.63 per diluted share in the second quarter of 2016 and $3.9 million in net income or $0.61 per diluted share in the third quarter of 2015. Excluding acquisition, merger, severance and retirement costs, net of tax, the Company's adjusted net income was $4.3 million or $0.62 per diluted share for the third quarter of 2016. This compares to adjusted net income of $4.2 million or $0.61 per diluted share on a linked quarter basis and adjusted net income of $4.3 million or $0.68 per diluted share in the third quarter of 2015.

For the nine months ended September 30, 2016, net income was $11.8 million, or $1.71 per diluted share, compared to net income of $10.3 million, or $1.62 per diluted share, for the same period in 2015. Excluding acquisition, merger, severance and retirement costs, net of tax, the Company's adjusted net income was $12.3 million or $1.79 per diluted share for the nine months of 2016. This compares to adjusted net income of $10.9 million or $1.72 per diluted share for the same period in 2015.

The return on average assets was 0.80% for the three months ended September 30, 2016, compared to 0.90% in the linked quarter and 0.88% for the same period in 2015. The return on average equity was 9.91% for the three months ended September 30, 2016, compared to 11.36% in the linked quarter and 11.93% for the same period in 2015.

The Company's Board of Directors approved a dividend of $0.28 per share, payable November 23, 2016, to stockholders of record as of November 10, 2016. Based on the closing price of $32.39 per share on September 30, 2016 and the annual dividend payout of $1.12 per share, the dividend represents an annualized yield of 3.46%.

Geoffrey Hesslink, Merchants Bancshares, Inc.'s President and Chief Executive Officer commented, "We look forward to becoming part of Community Bank System, Inc. as it enables us to further enhance the outstanding service and commitment that our customers and communities have come to expect from Merchants Bank. I thank our management team and talented employees for their continued focus on achieving our strategic priorities. We remain committed to delivering exceptional service to our customers."

Due to the pending transaction with Community Bank System, Inc., Merchants Bancshares will not have an earnings call for its third quarter results.

Third Quarter 2016 Financial Highlights

Balance Sheet:

• Total assets were $1.99 billion as of September 30, 2016, an increase of $95.9 million over the linked quarter and $176.3 million increase from the third quarter of 2015. The increase over the linked quarter was driven mainly by loan growth.
• Gross loans at September 30, 2016 totaled $1.48 billion, an increase of $81.9 million over the linked quarter and a $219.4 million increase from the third quarter of 2015. The linked quarter increase in ending and average loan balances since June 30, 2016 reflects growth in commercial real estate loans and normal seasonal increase in municipal loans. Municipal loans increased approximately $51.4 million from June 30, 2016. Total commercial loans, defined as commercial, commercial real estate and construction increased $37.1 million from June 30, 2016. The increase in loan balances from the third quarter of 2015 reflects organic growth and the addition of the acquired NUVO Bank & Trust Company ("NUVO") loan portfolio.
• Total deposits were $1.50 billion for the third quarter of 2016, an increase of $50.5 million over the linked quarter and an increase of $116.4 million from the third quarter of 2015. The increase on a linked quarter basis was primarily attributable to growth in money market and demand deposit balances partially offset by planned decrease in higher-cost NUVO time deposits. The increase from the third quarter of 2015 was primarily due to the acquisition of NUVO during the fourth quarter of 2015.
• Total stockholders' equity ended the quarter at $158.3 million. Tangible book value per share increased by $0.24 to $21.80 per share at September 30, 2016 from $21.56 per share at June 30, 2016. The increase over the linked quarter was due to growth of $0.57 per share in the net income, partially offset by dividends paid of $0.28 per share. Reported book value per share was $22.99 per share at September 30, 2016 as compared to $22.74 per share at June 30, 2016 and $20.93 per share at September 30, 2015.

Income Statement:

• Taxable equivalent net interest income was $14.4 million for the three months ended September 30, 2016, which is consistent with the $14.4 million for the quarter ending June 30, 2016, but an increase from $12.6 million for the same period in 2015. GAAP net interest income in the third quarter of 2016 was $13.8 million, compared to $13.8 million in the linked quarter and $12.1 million in the third quarter of 2015. The increase in the net interest margin over the same period year ago is driven by the acquisition of NUVO.
• The taxable equivalent net interest margin for the three months ended September 30, 2016 was 3.03%, a decrease of 5 basis points on a linked quarter basis and an increase of 7 basis points from the third quarter of 2015. The linked quarter decrease reflected lower asset yields. Interest earning assets increased by $8.7 million over the linked quarter, mainly driven by the increase in average loan balances. The increase in the net interest margin from the same period in 2015 was driven by higher loan yields and changes in the loan mix.
• Provision for credit losses was $500 thousand in the third quarter of 2016, compared to $200 thousand in the linked quarter and $150 thousand in the third quarter of 2015. Provision expense was elevated in the third quarter mainly due to new loan growth.
• Noninterest income for the third quarter of 2016 was $3.1 million, a decrease of $90 thousand on a linked quarter basis and a decline of $318 thousand from the third quarter of 2015. The decrease on a linked quarter basis was attributable to lower debit card and other fee income. The decrease from the third quarter of 2015 was primarily due to a non-recurring miscellaneous income of $440 thousand in the same period year ago.
• Noninterest expense was $11.4 million for the third quarter of 2016, compared to $10.8 million in the second quarter of 2016 and $10.6 million in the third quarter of 2015. Noninterest expense increased by $587 thousand over the linked quarter primarily due to increase in compensation expense. Noninterest expense grew by $829 thousand over the third quarter of 2015 mainly due to the acquisition of NUVO in December 2015. Adjusted noninterest expense (excl. merger, acquisition, severance and retirements costs) was $10.9 million in the third quarter, compared to $11.0 million in the linked quarter and $10.0 million in the third quarter 2015.
• The effective tax rate was 24% for the nine months ended on September 30, 2016 compared to 20% for the corresponding period in 2015, mainly due to changes in business mix composition which increased the taxable portion of pre-tax income and related tax provision.

Credit Quality and Capital Ratios:

• The allowance for loan losses ("ALL") as of September 30, 2016 was $12.5 million, or 0.85% of gross loans, compared to $12.4 million, or 0.89% of gross loans, on a linked quarter basis and $12.2 million, or 0.97% of gross loans, as of September 30, 2015. ALL as a percentage of gross loans decreased on a linked quarter basis due to a charge-off on a purchased loan in the third quarter. ALL as a percentage of gross loans for the third quarter of 2016 has decreased from the third quarter in 2015 due to the addition of loan balances acquired from NUVO. These loans were acquired at fair value on the acquisition date, without carryover of any of NUVO's allowance for loan losses as required by accounting standards.
• Nonperforming loans were $4.2 million, or 0.29% of total loans, at September 30, 2016, compared to 0.32% of total loans at June 30, 2016 and 0.06% of total loans at September 30, 2015. ALL as a percentage of nonperforming loans was 296% at September 30, 2016 compared to 1600% at September 30, 2015. Accruing loans past due 31-90 days were 0.06% for the third quarter of 2016 compared to 0.06% in the second quarter of 2016 and 0.01% in the third quarter of 2015. Merchants Bank continues to experience excellent credit quality.
• Estimated regulatory capital ratios at September 30, 2016:
  • Common Equity Tier 1 – 12.78%
  • Tier 1 Leverage – 8.84%
  • Total Risk-Based Capital – 15.59%
  • Tangible Capital – 7.55%

Proposed Transaction with Community Bank System, Inc.On October 22, 2016, Merchants Bancshares and Community Bank System, Inc. (NYSE: CBU) entered into a definitive agreement under which Community Bank System, Inc. will acquire Merchants Bancshares in a cash and stock transaction for total consideration valued at approximately $304 million.  The combination will provide natural market extension for both companies, joining two high-quality, low-risk franchises with long histories of service to their customers and communities.

Under the terms of the agreement, shareholders of Merchants Bancshares will have the option to receive, at their election, consideration per share equal to (i) 0.963 shares of Community Bank System, Inc. common stock, (ii) $40.00 in cash or (iii) the combination of 0.6741 shares of Community Bank System, Inc. common stock and $12.00 in cash, subject to an overall proration to 70% stock and 30% cash. The cash and stock consideration would be equivalent to $44.02 for each share of Merchants Bancshares common stock based upon the closing price of Community Bank System, Inc. common stock as of October 21, 2016. The merger is expected to close in the second quarter of 2017 and is subject to customary closing conditions, including approval by the shareholders of Merchants Bancshares and required regulatory approvals. Additional information about the transaction can be found in the joint press release issued on October 24, 2016, which is available on the Investor Relations section of the Company's website at www.mbvt.com.

Non-GAAP Financial Measures. In addition to results presented in accordance with generally accepted accounting principles ("GAAP"), this press release contains certain non-GAAP financial measures, such as core net income, tangible capital ratio and fully taxable equivalent net interest income. 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. Merchants Bancshares believes 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. Additionally, capital ratios as presented are preliminary and will not be finalized until the Company completes and files its regulatory reporting.

Cautionary Note Regarding Forward-Looking StatementsCertain statements contained in this press release that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties. These statements, which are based on certain assumptions and describe Merchants Bancshares' future plans, strategies and expectations, can generally be identified by the use of the words "may," "will," "should," "could," "would," "plan," "potential," "estimate," "project," "believe," "intend," "anticipate," "expect," "target" and similar expressions. Forward-looking statements are based on the current assumptions and beliefs of management and are only expectations of future results. Actual results could differ materially from those projected in the forward-looking statements as a result of, among others; costs or difficulties related to the integration of NUVO; weakness in general, national, regional or local economic conditions, the performance of the investment portfolio, quality of credits or the overall demand for services; changes in loan default and charge-off rates which could affect the allowance for credit losses; declines in the equity and financial markets; reductions in deposit levels which could necessitate increased and/or higher cost borrowing to fund loans and investments; declines in mortgage loan refinancing, equity loan and line of credit activity which could reduce net interest and non-interest income; changes in the domestic interest rate environment and inflation; changes in the carrying value of investment securities and other assets; misalignment of interest-bearing assets and liabilities; increases in loan repayment rates affecting interest income and the value of mortgage servicing rights; changing business, banking, or regulatory conditions or policies, or new legislation affecting the financial services industry that could lead to changes in the competitive balance among financial institutions, restrictions on bank activities, changes in costs (including deposit insurance premiums), increased regulatory scrutiny, declines in consumer confidence in depository institutions, or changes in the secondary market for bank loan and other products; changes in accounting rules, federal and state laws, IRS regulations, and other regulations and policies governing financial holding companies and their subsidiaries which may impact Merchants Bancshares' ability to take appropriate action to protect financial interests in certain loan situations; the ability of the Company and Community Bank System, Inc. ("CBU") to satisfy the conditions set forth in the Merger Agreement (as defined and discussed below), disruptions to the Company's business during the pendency of the Merger (as defined and discussed below; and the proposed merger with CBU.

You should not place undue reliance on forward-looking statements, and 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 the Annual Report on Form 10-K, as updated by Quarterly Reports on Form 10-Q and other filings submitted to the Securities and Exchange Commission ("SEC"). Merchants Bancshares' does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.

ADDITIONAL INFORMATION AND WHERE TO FIND ITIn connection with the proposed merger with CBU, CBU will file with the SEC a registration statement on Form S-4 that will include a proxy statement of the Company and a prospectus of CBU, as well as other relevant documents concerning the proposed merger.  Investors and stockholders are urged to read the registration statement and the proxy statement/prospectus and the other relevant materials filed with the SEC when they become available, as well as any amendments or supplements to those documents, because they will contain important information. A free copy of the proxy statement/prospectus, when available, as well as other filings containing information about the Company and CBU, may be obtained at the SEC's Internet site (http://www.sec.gov).  You will also be able to obtain these documents, when available, free of charge from the Company at http://www.mbvt.com/ under the heading "Investor Relations" and then "SEC Filings" or from CBU by accessing its website at www.communitybankna.com under the heading of "Investor Relations" and then "SEC Filings & Annual Report."  Copies of the proxy statement/prospectus can also be obtained, free of charge and when available, by directing a request to Merchants Bancshares, Inc., P.O. Box 1009, Burlington, Vermont 05402, Attention: Investor Relations, Telephone: (900) 322-5222 or to Community Bank System, Inc., 5790 Widewaters Parkway, DeWitt, New York 13214, Attention: Investor Relations, Telephone: (315) 445-2282.

PARTICIPANTS IN SOLICITATIONThe Company and CBU and certain of their respective directors and executive officers may be deemed to participate in the solicitation of proxies from the stockholders of the Company in connection with the proposed merger.  Information about the directors and executive officers of the Company and their ownership of the Company common stock is set forth in the proxy statement for its 2016 annual meeting of stockholders, as filed with the SEC on Schedule 14A on April 15, 2016 and the definitive additional proxy soliciting materials for the Company's 2016 annual meeting of stockholders, as filed with the SEC on May 3, 2016.  Information about the directors and executive officers of CBU and their ownership of CBU common stock is set forth in the proxy statement for its 2016 annual meeting of stockholders, as filed with the SEC on Schedule 14A on April 1, 2016.  Additional information regarding the interests of those participants and other persons who may be deemed participants in the transaction may be obtained by reading the proxy statement/prospectus regarding the proposed merger when it becomes available.  Free copies of this document when available may be obtained as described in the preceding paragraph.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONTACT: Jamie Oberle, Merchants Bank, at (802) 865-1603

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SOURCE Merchants Bancshares, Inc.