Merchants Bancshares, Inc. Announces 2007 First Quarter Results

SOUTH BURLINGTON, Vt., April 30 /PRNewswire-FirstCall/ -- Merchants Bancshares, Inc. , the parent company of Merchants Bank, today announced net income of $2.62 million or diluted earnings per share of $0.42 for the quarter ended March 31, 2007. This compares with net income of $2.72 million or diluted earnings per share of $0.43 for the first quarter of 2006. The return on average assets was 0.93% for the quarter ended March 31, 2007, compared to 1.01% for the same period in 2006. The return on average equity was 15.05% and 16.47% for the first quarters of 2007 and 2006, respectively.

Total assets increased $41.19 million to $1.14 billion at March 31, 2007 from $1.10 billion at March 31, 2006 and increased $4.2 million from December 31, 2006. Total loans increased $72.51 million to $694.38 million at March 31, 2007 from the March 31, 2006 balance of $621.87 million. Average loans for the first quarter of 2007 were $690.05 million, compared to $608.88 million for the first quarter of 2006 and $685.28 million for the fourth quarter of 2006. The rate of Merchants' first quarter loan growth during 2007 was slower than that of first quarter 2006. Residential real estate and commercial loans made up the bulk of the increase in loans since the fourth quarter of 2006.

Deposits ended the quarter at $890.71 million, an increase of $38.26 million over the March 31, 2006 balance of $852.45 million. Average deposits for the first quarter of 2007 were $874.78 million, compared to $846.62 million for the first quarter of 2006 and $864.97 million for the fourth quarter of 2006. While the numbers of Merchants' accounts and households continue to increase, the shift within deposit categories continues as depositors seek higher yields. Quarterly average savings, NOW and money market balances have decreased by $8.06 million from the fourth quarter of 2006 to the first quarter of 2007, while average time deposit balances have increased by $24.05 million during this time period.

Merchants' net interest income decreased $115 thousand for the first quarter of 2007, compared to 2006. Merchants' net interest margin decreased 23 basis points to 3.60% from 3.83% for the first quarter of 2007 compared to 2006, and decreased by two basis points when comparing the first quarter of 2007 to the fourth quarter of 2006. These decreases are attributable to a number of factors. Merchants' liability sensitivity has continued to increase due to changes in its balance sheet mix throughout the past year, while short- term interest rates rose higher, accompanied by a sustained flat yield curve. Merchants' average yield on interest earning assets increased by five basis points during the first quarter of 2007, and by 30 basis points during the last year, while its cost of interest bearing liabilities increased by eight basis points during the course of the first quarter of 2007, and 61 basis points throughout the last year. The shift from variable-rate to fixed-rate in Merchants' combined commercial mortgage and commercial loan portfolios has continued as customers locked in their rates in the current flat yield curve environment. At the same time, Merchants' deposits have continued to shift from lower cost savings, NOW and money market accounts to higher rate time deposits. Merchants has continued to make adjustments to its time deposit rates, rather than make even greater changes in money market account rates. Merchants' interest rate on long-term debt has increased five basis points during the first quarter of 2007 as long-term debt taken out in a lower interest rate environment runs off. The cost of short-term securities sold under agreements to repurchase has decreased by 12 basis points from the fourth quarter of 2006 to the first quarter of 2007 as Merchants has been able to make small downward adjustments to these rates and still remain competitive.

Total noninterest income decreased $24 thousand to $1.84 million for the first quarter of 2007 from $1.87 million for the first quarter of 2006. Merchants sold one security during the first quarter due to concerns about the company's exposure to the sub-prime mortgage market. A $37 thousand loss was recognized on the sale. There were no security gains or losses during the first quarter of 2006. Excluding the security losses, noninterest income increased by $13 thousand for the first quarter of 2007 compared to 2006. This increase was driven primarily by increased Trust department revenue, as well as increases in net ATM/debit card revenue.

Total noninterest expense was $7.97 million for the first quarter of 2007 compared to $7.94 million for the first quarter of 2006. Salaries and employee benefits decreased $132 thousand to $3.94 million from $4.07 million for the first quarter of 2007 compared to 2006. This decrease is primarily a result of a decrease in the employer match in Merchants' 401(k) plan. Legal and professional fees increased $109 thousand to $646 thousand from $537 thousand related to special projects undertaken during the first quarter of 2007. Marketing expenses decreased $56 thousand to $284 thousand from $340 thousand during the first quarter related to the timing of services and expenses. Other noninterest expenses increased $91 thousand to $1.59 million for the first quarter of 2007 from $1.50 million for the first quarter of 2006. Merchants experienced a defalcation during the quarter; insurance coverage was subject to a $100 thousand deductible.

Merchants declared a dividend on April 19, 2007, of 28 cents per share payable May 17, 2007, to shareholders of record as of May 3, 2007. For more information on the quarter, please refer to Merchants' quarterly Form 10-Q, which will be filed in early May and will be available on the SEC website at http://www.sec.gov/.

Mr. Michael Tuttle, Merchants' President and Chief Executive Officer, and Ms. Janet Spitler, Merchants' Chief Financial Officer, will host a conference call to discuss these earnings results at 9:30 a.m. Eastern Time on Friday, May 4, 2007. Interested parties may participate in the conference call by dialing [phone]; the title of the call is Earnings Release Conference Call for Merchants Bancshares, Inc. Participants are asked to call a few minutes prior to register. A replay will be available until noon on May 11, 2007. The U.S. replay dial-in telephone number is [phone]. The international replay telephone number is [phone]. The replay access code for both replay telephone numbers is 859450.

The continuing mission of Merchants Bank is to provide Vermonters with a state-wide community bank that blends a strong technology platform with a genuine appreciation for local markets. It fulfills this commitment through a branch-based system that includes 36 community bank offices and 43 ATMs throughout Vermont, Personal Bankers dedicated to top-quality customer service, and streamlined products: FreedomLYNX(R) Banking, which consists of Free Checking for Life(R), a low cost Money Market Account, Free Online Banking and Bill Pay, Overdraft Coverage, Direct Deposit, Free Debit Card and Free Automated Phone Banking; TimeLYNX(R) Flexible Certificates of Deposit; AutoLYNX(SM) Vehicle Loans; HomeLYNX(R) Home Equity Loans and Lines of Credit; RealLYNX(R) Residential Mortgages; CommerceLYNX(R) Business Banking; and Q- LYNX Quick Decision Business Loans. For more information about Merchants Bank, visit mbvt.com. Member FDIC. Equal Housing Lender. Merchants' stock is traded on the NASDAQ National Market system under the symbol MBVT.

Some of the statements contained in this press release constitute forward- looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. The forward-looking statements reflect Merchants' current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause Merchants' actual results to differ significantly from those expressed in any forward-looking statement. Forward- looking statements should not be relied on since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond Merchants' control and which could materially affect actual results. The factors that could cause actual results to differ materially from current expectations include changes in general economic conditions in Vermont, changes in interest rates, changes in competitive product and pricing pressures among financial institutions within Merchants' markets, and changes in the financial condition of Merchants' borrowers. The forward-looking statements contained herein represent Merchants' judgment as of the date of this report, and Merchants cautions readers not to place undue reliance on such statements. For further information, please refer to Merchants' reports filed with the Securities and Exchange Commission.

Merchants Bancshares, Inc. Financial Highlights (In thousands except share and per share data) 03/31/07 12/31/06 03/31/06 12/31/05 Balance Sheets - Period End Total assets $1,141,178 $1,136,958 $1,099,987 $1,075,236 Loans 694,379 689,283 621,874 605,926 Allowance for loan losses ("ALL") 7,026 6,911 6,637 7,083 Net loans 687,353 682,372 615,237 598,843 Securities available for sale 315,253 333,958 403,245 382,797 Securities held to maturity 5,193 5,615 7,108 7,663 Fed funds sold and other short term investments 66,000 42,000 -- -- Other assets 67,379 73,013 74,397 85,933 Deposits 890,706 877,352 852,447 854,576 Securities sold under agreement to repurchase and other short-term borrowings 84,604 90,547 76,206 52,988 Securities sold under agreement to repurchase- long term 20,000 20,000 20,000 20,000 Other long-term debt 48,782 53,863 55,188 55,764 Junior subordinated debentures issued to unconsolidated subsidiary trust 20,619 20,619 20,619 20,619 Other liabilities 5,488 4,880 10,496 4,892 Shareholders' equity 70,979 69,697 65,031 66,397 Balance Sheets - Quarter- to-Date Averages Total assets $1,127,651 $1,130,370 $1,081,803 $1,059,923 Loans 690,045 685,284 608,881 598,159 Allowance for loan losses 6,942 6,882 7,109 7,101 Net loans 683,103 678,402 601,772 591,058 Investment securities, including Federal Home Loan Bank stock 336,886 358,008 411,947 396,034 Federal funds sold, securities purchased under agreements to resell, and interest bearing deposits with banks 44,917 26,815 228 58 Other assets 62,745 67,145 67,856 72,773 Deposits 874,777 864,966 846,620 854,591 Securities sold under agreement to repurchase and other short-term borrowings 86,660 92,779 72,801 50,741 Securities sold under agreement to repurchase- long term 20,000 20,000 20,000 851 Other long-term debt 50,273 55,778 52,399 59,365 Junior subordinated debentures issued to unconsolidated subsidiary trust 20,619 20,619 20,619 20,619 Other liabilities 5,780 6,710 3,279 9,249 Shareholders' Equity 69,542 69,518 66,085 64,507 Interest earning assets 1,071,848 1,070,107 1,021,056 994,251 Interest bearing liabilities 934,851 930,485 892,446 863,077 Ratios and Supplemental Information - Period End Book value per share $12.10 $11.87 $10.85 $11.11 Book value per share (1) $11.49 $11.25 $10.33 $10.55 Tier I leverage ratio 8.29% 8.24% 8.44% 8.54% Period end common shares outstanding 6,174,980 6,196,328 6,295,286 6,290,889 Credit Quality - Period End Nonperforming loans ("NPLs") $2,515 $2,698 $1,876 $2,364 Nonperforming assets ("NPAs") 2,773 2,956 2,188 2,364 NPLs as a percent of total loans 0.36% 0.39% 0.30% 0.39% NPAs as a percent of total assets 0.24% 0.26% 0.20% 0.22% ALL as a percent of NPLs 279% 256% 354% 300% ALL as a percent of total loans 1.01% 1.00% 1.07% 1.17% (1) This book value includes 311,403, 323,038, 303,296 and 314,602 Rabbi Trust shares for the periods noted above, respectively. Merchants Bancshares, Inc. Financial Highlights (In thousands except share and per share data) For the Three Months Ended March 31, March 31, December 31, 2007 2006 2006 Operating Results Interest income Interest and fees on loans $11,465 $9,905 $11,682 Interest and dividends on investments 4,595 4,630 4,564 Total interest income 16,060 14,535 16,246 Interest expense Deposits 4,448 3,093 4,191 Short-term borrowings 928 1,061 1,338 Long-term debt 1,170 752 956 Total interest expense 6,546 4,906 6,485 Net interest income 9,514 9,629 9,761 Provision for loan losses -- -- -- Net interest income after provision for loan losses 9,514 9,629 9,761 Noninterest income Trust Company income 487 458 443 Service charges on deposits 1,091 1,113 1,096 Gain (Loss) on sale of investments, net (37) -- (12) Equity in losses of real estate limited partnerships (451) (423) (399) Other noninterest income 752 718 796 Total noninterest income 1,842 1,866 1,924 Noninterest expense Salaries and employee benefits 3,936 4,068 3,964 Occupancy and equipment expenses 1,514 1,498 1,561 Legal and professional fees 646 537 712 Marketing expenses 284 340 407 Other noninterest expense 1,590 1,499 1,326 Total noninterest expense 7,970 7,942 7,970 Income before income taxes 3,386 3,553 3,715 Income taxes 769 831 883 Net income $2,617 $2,722 $2,832 Ratios and Supplemental Information Weighted average common shares outstanding 6,187,399 6,302,153 6,246,096 Weighted average diluted shares outstanding 6,205,009 6,328,067 6,267,318 Basic earnings per common share $0.42 $0.43 $0.45 Diluted earnings per common share 0.42 0.43 0.45 Return on average assets 0.93% 1.01% 1.00% Return on average shareholders' equity 15.05% 16.47% 16.30% Net interest rate spread 3.24% 3.55% 3.26% Net interest margin 3.60% 3.83% 3.62% Efficiency ratio (1) 65.22% 63.91% 64.78% (1) The efficiency ratio excludes amortization of intangibles, equity in losses of real estate limited partnerships, OREO expenses, gain/loss on sales of securities, state franchise taxes, and any significant nonrecurring items. Note: As of March 31, 2007, the Bank had off-balance sheet liabilities in the form of standby letters of credit to customers in the amount of $6.49 million.