FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the Quarterly period ended September 30, 1998
Commission File Number: 0-24715
MERRILL MERCHANTS BANCSHARES, INC.
MAINE 01-0471507
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
201 Main Street
Bangor, Maine 04401
(Address of Principal Executive Office)
Issuer's telephone number, including area code: 207-942-4800.
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes: [X] No: [ ]
The number of shares outstanding for the issuer's classes of common stock as of
November 12, 1998 are:
<TABLE>
<CAPTION>
(Class) (Outstanding)
<S> <C>
COMMON STOCK, $1.00 Par Value 2,358,591
</TABLE>
Transitional Small Business Disclosure Format: Yes: [ ] No: [X]
<PAGE>
MERRILL MERCHANTS BANCSHARES, INC.
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Financial Condition at
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income for the Three and Nine Months Ended
September 30, 1998 and September 30, 1997 4
Consolidated Statements of Shareholders' Equity and Comprehensive
Income for the Nine Months Ended September 30, 1998 and
September 30, 1997 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and September 30, 1997 6
Notes to Financial Statements 7-8
Item 2 Management's Discussion and Analysis of Condition
and Results of Operations 9-12
PART II OTHER INFORMATION 13
Item 1 Legal Proceedings 13
Item 2 Changes in Securities and Use of Proceeds 13
Item 3 Defaults upon Senior Securities 13
Item 4 Submission of Matters to a vote of Security Holders 13
Item 5 Other Information 13
Item 6 Exhibits and Reports on Form 8-K 13
Signature Page
</TABLE>
<PAGE>
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(In Thousands, Except Number of Shares and per Share Data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,475 $ 7,486
Interest-bearing deposits with banks 2,502 523
Federal funds sold 3,000 2,650
------- --------
Total cash and cash equivalents 11,977 10,659
Investment securities
Available for sale 48,343 42,864
To be held to maturity 1,006 1,962
Loans held for sale 636 508
Loans receivable 122,180 118,888
Less allowance for loan losses 1,971 1,717
------- ---------
Net loans receivable 120,209 117,171
Other real estate owned -- 43
Properties and equipment, net 2,813 2,806
Deferred income tax benefit 191 129
Accrued income and other assets 4,374 2,477
------- --------
Total assets $189,549 $178,619
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 22,723 $ 25,018
Savings and NOW deposits 70,199 64,513
Certificates of deposit 59,793 56,781
------- --------
Total deposits 152,715 146,312
Securities sold under agreements to
repurchase (term and demand) 12,308 11,897
Other borrowed funds 2,687 5,144
Accrued expenses and other liabilities 1,380 1,104
Long-term debt -- 2,895
Mandatory convertible debentures 300 300
------- -------
Total liabilities 169,390 167,652
------- -------
Shareholders' equity
Convertible cumulative preferred stock, par value $1; authorized 50,000
shares, issued and outstanding 19,566 shares 20 20
Common stock, par value $1; authorized 4,000,000 shares, issued and
outstanding 2,358,591 and 1,542,123 shares in 1998 and 1997,
respectively 2,359 1,542
Capital surplus 15,422 7,754
Retained earnings 2,200 1,647
Unrealized gain on securities available for sale, net of tax of $82 and
$2 in 1998 and 1997, respectively 158 4
------- --------
Total shareholders' equity 20,159 10,967
------- --------
Total liabilities and shareholders' equity $189,549 $178,619
======= =======
</TABLE>
3
<PAGE>
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
(In Thousands, Except Number of Shares and per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and dividend income
Interest and fees on loans $2,962 $2,728 $ 8,670 $ 7,841
Interest on investment securities 642 577 1,936 1,666
Dividends on investment securities 14 13 41 38
Interest on federal funds sold and interest-
bearing deposits 59 66 121 112
----- ------ ------- -------
Total interest and dividend income 3,677 3,384 10,768 9,657
----- ------ ------- -------
Interest expense
Interest on deposits 1,467 1,317 4,229 3,739
Interest on borrowed funds 191 242 687 687
------ ------ ------- -------
Total interest expense 1,658 1,559 4,916 4,426
------ ------ ------- -------
Net interest income 2,019 1,825 5,852 5,231
Provision for loan losses 90 75 270 225
------ ------ ------- -------
Net interest income after provision for
loan losses 1,929 1,750 5,582 5,006
------ ------ ------- -------
Non-interest income
Service charges on deposit accounts 133 119 380 353
Other service charges and fees 134 132 367 356
Trust fees 173 140 488 386
Other 44 35 122 112
Net gain on sale of mortgage loans 85 22 203 42
------ ------ ------- -------
Total non-interest income 569 448 1,560 1,249
------ ------ ------- -------
Non-interest expense
Salaries and employee benefits 856 789 2,584 2,308
Occupancy expense 165 151 477 469
Equipment expense 119 112 353 359
Data processing 171 154 498 448
Other 401 407 1,160 1,125
------ ------ ------- -------
Total non-interest expense 1,712 1,613 5,072 4,709
------ ------ ------- -------
Income before income taxes 786 585 2,070 1,546
Income tax expense 275 220 728 572
------ ------ ------- -------
Net income $ 511 $ 365 $ 1,342 $ 974
====== ====== ======= =======
Per share data
Basic earnings per common share $ .24 $ .21 $ .72 $ .57
====== ====== ======= =======
Diluted earnings per common share $ .20 $ .19 $ .57 $ .49
====== ====== ======= =======
</TABLE>
4
<PAGE>
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
and Comprehensive Income
For the Nine Months Ended September 30, 1998 and 1997
(Unaudited)
(In Thousands, Except Number of Shares and per Share Data)
<TABLE>
<CAPTION>
Unrealized
Convertible Gain (Loss)
Cumulative on Securities Total
Preferred Common Capital Retained Available Shareholders'
Stock Stock Surplus Earnings for Sale Equity
----- ----- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $20 $1,469 $7,331 $ 861 $ (10) $ 9,671
Net income -- -- -- 974 -- 974
Change in unrealized gain (loss) on
securities available for sale, net
of deferred income taxes of $13 -- -- -- -- 24 24
--- ----- ------ ----- ----- ------
Total comprehensive income -- -- -- 974 24 998
5% common stock dividend
declared -- 73 423 (497) -- (1)
Convertible cumulative preferred
stock dividends declared, $2.92
per share -- -- -- (57) -- (57)
--- ----- ------ ----- ----- ------
Balance at September 30, 1997 $20 $1,542 $7,754 $1,281 $ 14 $10,611
== ===== ====== ===== ===== ======
Balance at December 31, 1997 $20 $1,542 $7,754 $1,647 $ 4 $10,967
Net income -- -- -- 1,342 -- 1,342
Change in unrealized gain on
securities available for sale, net
of deferred income taxes of $79 -- -- -- -- 154 154
--- ----- ------ ----- ----- ------
Total comprehensive income -- -- -- 1,342 154 1,496
Common stock options exercised,
48,000 shares -- 48 200 -- -- 248
5% common stock dividend declared -- 79 488 (568) -- (1)
Common stock offering -- 690 7,448 -- -- 8,138
Offering cost -- -- (468) -- -- (468)
Common stock cash dividend
declared,$.09 per share -- -- -- (164) -- (164)
Convertible cumulative preferred
stock dividends declared, $2.92
per share -- -- -- (57) -- (57)
--- ----- ------ ----- ----- ------
Balance at September 30, 1998 $20 $2,359 $15,422 $2,200 $ 158 $20,159
== ===== ====== ===== ===== ======
</TABLE>
5
<PAGE>
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1998 and 1997
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,342 $ 974
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation 259 223
Amortization 112 93
Net accretion of discounts on investment securities (24) (45)
Deferred income taxes 17 13
Originations of loans held for sale (20,441) (4,664)
Proceeds from sales of loans held for sale 20,370 4,390
Increase in accrued income and other assets (24) (273)
Increase in accrued expenses and other liabilities 132 360
Decrease in deferred loan fees, net (20) (18)
Provision for loan losses 270 225
Provision for losses on other real estate owned 5 20
Net gain on sale of mortgage loans (203) (42)
Net loss on property and equipment 2 9
------ ------
Net cash provided by operating activities 1,797 1,265
------ ------
Cash flows from investing activities
Net loans made to customers (3,288) (8,891)
Acquisition of premises and equipment (268) (667)
Purchase of investment securities available for sale (20,686) (34,024)
Proceeds from sales and maturities of investment securities
Sales and maturities of available for sale securities 15,466 29,235
Maturities of held to maturity securities 955 1,157
Proceeds from sale of other real estate owned 38 --
Acquisition of life insurance policy (1,854) (604)
----- ------
Net cash used in investing activities (9,637) (13,794)
----- ------
Cash flows from financing activities
Net increase in demand, savings and NOW deposits 3,391 9,965
Net increase in certificates of deposit 3,012 3,598
Net increase (decrease) in securities sold under agreement to repurchase 411 (450)
Net increase (decrease) in other borrowed funds (2,457) 4,468
Payment of long-term debt (2,895) (600)
Dividends paid on convertible cumulative preferred stock and common stock (222) (58)
Proceeds from stock issuance, net of cost 7,918 --
------ ------
Net cash provided by financing activities 9,158 16,923
------ ------
Net increase in cash and cash equivalents 1,318 4,394
Cash and cash equivalents, beginning of period 10,659 8,591
------ ------
Cash and cash equivalents, end of period $11,977 $12,985
====== ======
Supplemental disclosures of cash flow information
Cash paid for interest $ 4,950 $ 4,425
Transfers to other real estate owned -- 28
Income tax paid 806 520
</TABLE>
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. All significant intercompany transactions and balances are
eliminated in consolidation. The income reported for the 1998 period is not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Merrill Merchants Bancshares,
Inc. and Subsidiary's Form SB-2 registration filing.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
loan losses and the carrying value of real estate owned, management obtains
independent appraisals for significant properties.
The allowance for loan losses is maintained at a level adequate to absorb
probable losses. Management determines the adequacy of the allowance based upon
reviews of individual credits, recent loss experience, current economic
conditions, the risk characteristics of the various categories of loans and
other pertinent factors. Credits deemed uncollectible are charged to the
allowance. Provisions for loan losses and recoveries on loans previously
charged off are added to the allowance.
NOTE 2 -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the nine months ended September 30 (in thousands, except for number of
shares and per-share data):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Basic earnings per share
Net income, as reported $ 1,342 $ 974
Preferred stock dividends declared (57) (57)
----------- -----------
Income available to common shareholders $ 1,285 $ 917
=========== ===========
Weighted-average shares outstanding 1,775,138 1,619,226
=========== ===========
Basic earnings per share $ 0.72 $ 0.57
=========== ===========
Diluted earnings per share
Net income, as reported $ 1,342 $ 974
7
<PAGE>
Interest on mandatory convertible debentures, net of tax 14 14
----------- -----------
Income available to common shareholders $ 1,356 $ 988
=========== ===========
Weighted-average shares outstanding 1,775,138 1,619,226
Effect of stock options, net of assumed treasury stock purchases 325,179 111,519
Effect of convertible preferred stock 66,654 66,654
Effect of mandatory convertible debentures 199,935 199,935
----------- -----------
Adjusted weighted-average shares outstanding 2,366,906 1,997,334
=========== ===========
Diluted earnings per share $ 0.57 $ 0.49
=========== ===========
</TABLE>
The basic earnings per share computation is based upon the weighted-average
number of shares of stock outstanding during the period. Potential common stock
is considered in the calculation of weighted-average shares outstanding for
diluted earnings per share.
The Company declared a 5% stock dividend in 1998 and 1997. In addition, the
Company declared a stock split effected in the form of an 800% stock dividend in
1998. Earnings and cash dividends per share and weighted-average shares
outstanding have been retroactively restated to reflect the stock dividends.
NOTE 3 -- IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," in 1998. The Statement contains certain
presentation and disclosure requirements concerning the components of
comprehensive income and the changes therein. The consolidated statement of
changes in shareholders' equity has been presented in accordance with the
requirements of the Statement.
The Company has presented earnings per share data in accordance with SFAS No.
128, "Earnings per Share." The Statement requires publicly traded entities to
present basic and diluted earnings per common share.
In 1998, the American Institute of Certified Public Accountants issued Statement
of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up Activities." The
SOP requires costs of start-up activities to be expensed as incurred. The SOP is
effective for years beginning after December 15, 1998. Adoption of the SOP is
expected to have no effect on net income for 1999.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for years beginning after December 31, 1997. This
Statement requires a company to disclose certain income statement and balance
sheet information by operating segment. Since the Company's operations consist
entirely of banking activities, no additional disclosure requirements will be
imposed on the Company.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," is
effective for years beginning after June 15, 1999. This Statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. As the Company currently holds no derivative instruments, the
Statement is expected to have no impact on the Company's financial statements.
NOTE 4 -- SIGNIFICANT EVENTS
The Company's initial public offering in August 1998 resulted in the issuance of
690,000 shares of common stock and additional capital of $7.7 million, net of
offering cost. A portion of the capital proceeds was used to repay long-term
debt of $2.9 million.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed in this Report on Form 10-QSB are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Such risks and uncertainties
include, but are not limited to, those described in Management's Discussion and
Analysis of Financial Condition and Results of Operations. Changes to such risks
and uncertainties, which could impact future financial performance, include,
among other things, (1) competitive pressures in the banking industry; (2)
changes in the interest rate environment; (3) general economic conditions,
either nationally or regionally; (4) changes in the regulatory environment; (5)
changes in business conditions and inflation; and (6) changes in security
markets. Therefore, the information set forth therein should be carefully
considered when evaluating the business prospects of the Company and the Bank.
I. FINANCIAL CONDITION
Total assets increased $10.9 million or 6.1% to $189.5 million during the first
nine months of 1998. The increase was the result of increases in the investment
portfolio of $4.5 million or 10.1%, the loan portfolio of $3.4 million or 2.9%,
interest-bearing deposits with banks of $2.0 million and accrued income and
other assets of $1.9 million. Asset growth was funded by a combination of
deposit growth and proceeds from the Company's initial public offering of common
stock. The investment portfolio mix has changed since December 31, 1997 with
U.S. Government and Agency money market funds increasing from $166,000 to $8.4
million at September 30, 1998. Loan growth was generated from the commercial
arena with increases in both commercial and commercial real estate loans of $3.0
million and $5.5 million, respectively. These increases were offset by declines
in the residential, home equity and consumer loan balances due to a lower level
of general interest rates resulting in refinancing. Other assets primarily
increased due to an insurance premium payment of $1.8 million for the
supplemental executive retirement plan that is treated as cash surrender value
of life insurance.
Total deposits increased $6.4 million or 4.4% to $152.7 million for the first
nine months of 1998. The increase in the savings and NOW deposits of $5.7
million is primarily attributable to continued success with a passbook savings
product offered at a premium interest rate. Certificates of deposit balances
increased by $3.0 million and demand deposits decreased $2.3 million from a
normal seasonally high balance of $25.0 million at December 31, 1997. The
completion of the Company's initial public offering in August 1998 resulted in
additional capital of $7.7 million. A portion of the capital proceeds was used
to repay long-term debt of $2.9 million.
In originating loans, the Bank recognizes that loan losses will be experienced
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan and,
in the case of collateralized loans, the quality of the collateral for the loan
as well as general economic conditions. It is management's policy to attempt to
maintain an adequate allowance for loan losses based on, among other things,
industry standards, management's experience, the Bank's historical loan loss
experience, evaluation of economic conditions and regular reviews of
delinquencies and loan portfolio quality.
Management continues to actively monitor the Bank's asset quality and to charge
off loans against the allowance for loan losses when appropriate or to provide
specific loan allowances when necessary. Although management believes it uses
the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ from the economic conditions in the assumptions used in making
the final determinations. The Bank's allowance for loan losses amounted to $2.0
million at September 30, 1998 (1.61% of total loans), an increase of $254,000
over the Bank's $1.7 million allowance for loan losses at December 31, 1997.
9
<PAGE>
II. RESULTS OF OPERATIONS
Net income for the nine months ended September 30, 1998 was $1.3 million, an
increase of $368,000 or 37.8% from the same period in 1997. The increase in
earnings between the periods is due to an increase in net interest income
resulting from growth in loans and investment securities and a 24.9% increase in
non-interest income. Third quarter earnings of $511,000 for 1998 exceeded third
quarter 1997 earnings of $365,000 primarily as a result of an increase in net
interest income. Although earnings for the third quarter of 1998 exceeded 1997
by 40%, diluted earnings per share increased only 5% from $0.19 per share for
the third quarter of 1997 to $0.20 for the same period in 1998. This is due to
the increase in the weighted average shares outstanding in August 1998 by an
additional 690,000 common shares.
The annualized return on average assets for the nine months ended September 30,
1998 and 1997 was 1.01% and .82%, respectively. Return on average shareholders'
equity on an annualized basis for the same 1998 and 1997 nine month periods was
13.54% and 12.88%, respectively.
III. NET INTEREST INCOME
Net interest income is interest earned on interest-earning assets less interest
incurred on interest-bearing liabilities. Interest-earning assets are
categorized as loans, investment securities and other earning assets, which
include Federal Funds sold and certificates of deposit issued from other
financial institutions. Interest-bearing liabilities are categorized as customer
deposits, time and savings deposits and borrowings including repurchase
agreements, short-term borrowings and long-term debt. Net interest income
depends on the volume of average interest-earning assets and average
interest-bearing liabilities and the interest rates earned or incurred on them.
Net interest income for the nine months ended September 30, 1998 was $5.9
million, an 11.9% increase over the net interest income for the first nine
months of 1997 of $5.2 million. This increase is attributable to an increase in
average earning assets (both loans and investment securities) from $149.3
million in 1997 to $168.1 million in 1998. This was accompanied with a slight
decline in the average rate earned on interest-earning assets from 8.59% to
8.51% for the nine months ended September 30, 1997 and 1998, respectively.
The average interest rate incurred on interest-bearing liabilities for the nine
month period in 1998 and 1997 was 4.67% and 4.66%, respectively on average
interest-bearing liabilities of $127.1 million in 1997 and $140.9 million in
1998. The net interest margin for those periods declined from 4.62% in 1997 to
4.60% in 1998.
IV. NON-INTEREST INCOME
Non-interest income for the nine months ended September 30, 1998 and 1997
totaled $1.6 million and $1.2 million, respectively, an increase of $311,000 or
24.9%. The increase is primarily due to an increase in gain on sale of mortgage
loans of $161,000 and trust fees of $102,000. Lower interest rates on the
national level have resulted in increased secondary market loan activity
translating to increases in gains on mortgage loan sales. Trust fees have
increased due to growth of trust assets to $121.3 million at September 30, 1998
compared with trust assets of $82.0 million at September 30, 1997.
Non-interest income increased by $121,000 or 27.0% for the third quarter of 1998
over the same period in 1997. The increase is primarily related to increases in
mortgage loan sale gains and trust fees.
10
<PAGE>
V. NON-INTEREST EXPENSE
Non-interest expense increased by $363,000, an increase of 7.7%, for the nine
months ended September 30, 1998 as compared to the same period in 1997. Salaries
and employee benefits increased by $276,000 or 12.0% in the first nine months of
1998 compared to 1997. This increase was the result of normal annual increases
and the addition of employees (including additions of employees at the Newport
branch established in April 1997). Also, data processing expense increased by
$50,000 or 11.2% for the nine months ended September 30, 1998 as compared to
1997 due to increases in both loan and deposit volume.
Non-interest expense increased by $99,000 or 6.1% for the third quarter of 1998
over the same period in 1997. The increase is primarily related to increases in
salaries and employee benefits and data processing fees.
Annual operating expenses are also expected to increase in future periods due to
future branching and product expansion and the increased cost of operating as a
public stock institution.
VI. CAPITAL
The Company's initial public offering in August 1998 resulted in the issuance of
690,000 shares of common stock and additional capital of $7.7 million. Cash
dividends per share declared on common stock were $.03 for the third quarter of
1998.
Under Federal Reserve Board guidelines, bank holding companies such as the
Company are required to maintain capital based on "risk-adjusted" assets. These
guidelines apply to the Company on a consolidated basis. Under the current
guidelines, banking organizations must maintain a risk-based capital ratio of
eight percent. The Company's risk based capital ratios for Tier 1 and Tier 2
capital at September 30, 1998, of 16.85% and 18.37%, respectively, exceed
regulatory guidelines for a "well capitalized" financial institution. The
Company's ratios at December 31, 1997 were 9.77% and 11.30%.
VII. YEAR 2000 ISSUES
The Company utilizes various computer software programs to provide banking
products and services to its customers. Many existing computer programs use only
two digits to identify a year in the date field and were not designed to
consider the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or at the
Year 2000. The Year 2000 issue affects virtually all companies and
organizations.
The Company adopted a plan to minimize the Year 2000 risk. The plan included the
formation of a Year 2000 Committee to assess, monitor and review vendor
compliance and certification and to identify all systems and equipment used in
the daily operations of the Bank that might be affected. The scope of the
project covers all computer systems including PC and network hardware and
software and mainframe software. It also covers all equipment and other systems
utilized in bank operations or in the premises from which the Company operates.
11
<PAGE>
During 1998, the Company has completed the awareness and assessment phase,
identified mission-critical systems, developed a testing strategy, worked on
contingency plans and undertaken steps to verify that significant vendors,
suppliers and other related business parties will be ready for the year 2000.
The following table identifies each phase and its estimated timetable for
completion:
<TABLE>
<CAPTION>
Phase Status
----- ------
<S> <C>
1. Awareness Completed
2. Assessment Completed
3. Renovation Completion by December 31, 1998
4. Testing Completion by March 31, 1999
5. Validation Completion by March 31, 1999
</TABLE>
The Company utilizes a third party service provider to perform its most mission
critical data processing services related to its loans, deposits, general ledger
and other financial applications. The service provider has informed the Company
that it has completed the software programming for its applications used by the
Company. Testing of the third party provider's programs commenced in October
1998 and proxy testing and validation are expected to be completed by March 31,
1999.
The Company has a formal customer due-diligence plan. The Company has
communicated with its large borrowers and corporate customers to determine the
extent to which the Company is vulnerable to those third parties if they fail to
resolve their Year 2000 issues. The Company has performed an initial assessment
of each major borrower and has established an ongoing assessment as part of the
Company's credit granting and loan renewal and monitoring process.
The Company has estimated that total costs directly related to Year 2000 issues,
such as software modification and system testing, will not have a material
effect on the performance of the Bank. The Year 2000 budget is currently
$50,000. Total direct costs to date are less than $5,000 (excluding employee
hours). Purchased hardware and software will be capitalized in accordance with
normal policy. The majority of costs associated with new software or upgraded
hardware would have been incurred in the normal course of operations regardless
of the Year 2000 issue.
The Company's most reasonable likely worst case Year 2000 scenarios may include
the failure of a vendor or third party provider, which is beyond the Company's
control. In the event a failure occurs, the Company expects to be able to
implement manual contingency systems without serious impact on the Company's
financial condition. As of September 1998, the Company has created several basic
contingency plans. The Company is in the process of assessing these plans for
the possible impact of Year 2000 failures. It will adjust its existing
contingency plans where appropriate and possible for those scenarios that may
have the most severe impact on its operations. This activity is expected to be
substantially complete in the first quarter of 1999. Management believes the
Company is adequately addressing the Year 2000 issue and that the current
preparations and testing being conducted all seek to minimize any potential
adverse effect on the Bank or its customers.
12
<PAGE>
PART II. OTHER INFORMATION
<TABLE>
<S> <C> <C>
Item 1 Legal Proceedings None
Item 2 Changes in Securities and Use of Proceeds None
Item 3 Defaults upon Senior Securities None
Item 4 Submission of Matters to a vote of Security Holders None
Item 5 Other Information None
Item 6 Exhibits and Reports on Form 8-K See Exhibit 27 -- Financial Data Schedule
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERRILL MERCHANTS BANCSHARES, INC.
<TABLE>
<S> <C> <C>
Date: 11/12/98 By: /s/ Edwin N. Clift
--------------------------- ----------------------------
Edwin N. Clift
President and Chief Executive Officer
(Principal Executive Officer)
Date: 11/12/98 By: /s/ Deborah A. Jordan
--------------------------- ----------------------------
Deborah A. Jordan
Senior Vice President and
Treasurer (Principal Financial
and Accounting Officer)
</TABLE>
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