Merchants Bancshares, Inc. Reports Second Quarter EPS of $0.63; Declares Dividend

For the six months ended June 30, 2016, net income was $7.9 million, or $1.14 per diluted share, compared to net income of $6.5 million, or $1.02 per diluted share, for the same period in 2015.

The return on average assets was 0.90% for the three months ended June 30, 2016, compared to 0.71% in the linked quarter and 0.72% for the same period in 2015. The return on average equity was 11.36% for the three months ended June 30, 2016, compared to 9.32% in the linked quarter and 9.73% for the same period in 2015.

The Company's Board of Directors approved a dividend of $0.28 per share, payable August 18, 2016, to stockholders of record as of August 4, 2016. Based on the closing price of $30.48 per share on June 30, 2016 and the annual dividend payout of $1.12 per share, the dividend represents annualized yield of 3.67%.

Geoffrey Hesslink, Merchants Bancshares, Inc.'s President and Chief Executive Officer commented, "Improved second quarter results reflect successful integration of NUVO bank into the Merchants franchise. We are focusing on growing our loan portfolio and expanding our customer base in western Massachusetts and Vermont markets. We are also executing on our strategy to deliver high-quality products and services to our customers." Mr. Hesslink also noted, "The interest rate environment continues to present industry challenges. We remain focused on control of non-interest expenses, managing net interest margin and strong credit standards. Our disciplined approach will benefit our stockholders over the long term."

Second Quarter 2016 Financial Highlights

Balance Sheet:

• Total assets were $1.90 billion for the second quarter of 2016, a decrease of $64.9 million over the linked quarter and $222.8 million increase from the second quarter of 2015. The decrease over the linked quarter was due to seasonal declines in loan and investment portfolio balances.
• Loans at June 30, 2016 totaled $1.40 billion, a decrease of $26.2 million on a linked quarter basis and $191.7 million increase from the second quarter of 2015. The linked quarter decrease was mainly driven by $44.8 million seasonal run-off in municipal loans and $4.9 million decrease in residential portfolio. These declines were partially offset by $24.9 million increase in total commercial loans, defined as commercial, commercial real estate and construction.  Loan balances increased by $191.7 million from the second quarter of 2015, which reflects organic growth and the addition of the acquired NUVO loan portfolio. Average loan balances increased by $9.3 million in the second quarter of 2016 over the linked quarter due to growth in total commercial loans.
• The investment portfolio ended the second quarter of 2016 at $391.1 million, a decrease of $18.3 million from the linked quarter and an increase of $2.3 million from the second quarter of 2015. The linked quarter decrease was largely due to seasonality.  
• Total deposits were $1.45 billion for the second quarter of 2016, a decrease of $73.5 million on a linked quarter basis and an increase of $106.5 million from the second quarter of 2015. The decrease on a linked quarter basis was primarily attributable to a seasonal drop in municipal deposits and planned run-off of high-cost NUVO time deposits. The increase from the second quarter of 2015 was largely due to the addition of NUVO deposits and partially due to modest growth.
• Total stockholders' equity ended the quarter at $156.3 million. The tangible book value per share at June 30, 2016 was $21.56 per share, an increase of $0.50 per share from $21.06 at March 31, 2016. The major components of the linked quarter increase were $0.63 of earnings and $0.15 mark to market securities gains, offset by $0.28 of dividends paid.

Income Statement:

• Net interest income on a fully-taxable basis was $14.4 million for the three months ended June 30, 2016, compared to $14.3 million for the quarter ending March 31, 2016, and $12.3 million for the same period in 2015. The increases in net interest income reflected higher average loan balances.
• The taxable equivalent net interest margin for the three months ended June 30, 2016 was 3.08%, an increase of 6 basis points on a linked quarter basis and an increase of 13 basis points from the second quarter of 2015. The linked quarter increase reflected a decrease in the cost of interest-bearing deposits, the planned run-off of high cost NUVO time deposits, and higher loan yields. Additionally, seasonally lower levels of average interest-earning assets contributed to the increase in margin. The improvement from the second quarter of 2015 was driven by higher loan yields and a decrease in the cost of borrowings.
• The Company recorded a $200 thousand provision for credit losses during the second quarter of 2016 and was slightly below the linked quarter provision of $205 thousand. In the second quarter of 2015, the provision for credit losses was $100 thousand.
• Noninterest income for the second quarter of 2016 was $3.2 million, an increase of $297 thousand on a linked quarter basis and an increase of $468 thousand from the second quarter of 2015. The increase on a linked quarter basis was attributable to higher debit card and other fee income. The improvement from the second quarter of 2015 was driven by increases in overdraft income, deposit fees and other fee income.                                      
• Noninterest expense was $10.8 million for the second quarter of 2016, a decrease of $1.1 million on a linked quarter basis and an increase of $352 thousand from the second quarter of 2015.  Excluding merger and severance costs, core non-interest expense was $11.0 million in the second quarter of 2016 compared to $11.5 million in the first quarter of 2016 and $10.5 million in the second quarter of 2015. Core non-interest expense decreased over the linked quarter mainly due to lower compensation expenses. The increase in noninterest expense from the second quarter of 2015 was due to the acquisition of NUVO in December 2015.
• The effective tax rate was 25.5% for the six months ended on June 30, 2016 compared to 20.7% for the corresponding period in 2015, mainly due to a change in business loan composition and partially reflects reduced Low Income Housing Partnership tax credits.

Credit Quality and Capital Ratios:

• The allowance for loan losses ("ALL") as of June 30, 2016 was $12.4 million, or 0.89% of gross loans, compared to $12.2 million, or 0.86% of gross loans, on a linked quarter basis and $12.2 million, or 1.01% of gross loans, as of June 30, 2015. ALL as a percentage of gross loans increased on a linked quarter basis due to a second quarter provision and modest loan growth. ALL as a percentage of gross loans for the second quarter of 2016 has decreased from the second quarter in 2015 due to the addition of loan balances acquired from NUVO. These loans were acquired at fair value on the acquisition date.
• Nonperforming loans were $4.69 million, or 0.34% of total loans, at June 30, 2016, compared to 0.34% of total loans at March 31, 2016 and 0.12% of total loans at June 30, 2015. ALL as a percentage of nonperforming loans was 265% at June 30, 2016 compared to 251% at March 31, 2016. Accruing loans past due 31-90 days were 0.06% for the second quarter of 2016 compared to 0.28% in the first quarter of 2016 and 0.04% in the second quarter of 2015. The bank continues to experience strong credit quality.
• Regulatory Capital Ratios at June 30, 2016:
  • Common Equity Tier 1 – 13.03%
  • Tier 1 Leverage – 8.78%
  • Total Risk-Based Capital – 15.92%
  • Tangible Capital – 7.84%

Geoffrey R. Hesslink, President and Chief Executive Officer, Eric A. Segal, Interim PFO, PAO and Treasurer, and Marie Thresher, Executive Vice President and Chief Operating Officer, will host a conference call to discuss these earnings results, business and outlook at 10:00 a.m. Eastern Time on Friday, July 22, 2016. Interested parties may participate in the conference call by dialing U.S. number (866) 218-2405, Canada number (855) 669-9657, or international number (412) 902-4124. The title of the call is Merchants Bancshares, Inc. Q2 2016 Earnings Call. Participants are asked to call a few minutes prior to register. A replay will be available until 12:01 a.m. Eastern Time on Friday, August 5, 2016. The U.S. replay dial-in telephone number is (877) 344-7529. The Canada replay telephone number is (855) 669-9658, the international replay telephone number is (412) 317-0088. The replay access code for all replay telephone numbers is 10068680. Additionally, a recording of the call will be available on Merchants website at www.mbvt.com

Non-GAAP Financial Measure. 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 Bank completes and files its regulatory reporting.

Cautionary Note Regarding Forward-Looking Statements
Certain 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; and 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.

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. 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.