<PAGE>
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, 1999
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
October 31, 1999 are:
<TABLE>
<CAPTION>
(Class) (Outstanding)
<S> <C>
COMMON STOCK, $1.00 Par Value 2,582,702
Transitional Small Business Disclosure Format: Yes: / / No: /X/
</TABLE>
<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, 1999 and December 31, 1999 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1999 and September 30, 1998 4
Consolidated Statements of Shareholders' Equity for the
Nine Months Ended September 30, 1999 and September 30, 1998 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and September 30, 1998 6
Notes to Financial Statements 7 - 9
Item 2 Management's Discussion and Analysis of Condition
and Results of Operations 10 - 16
PART II OTHER INFORMATION 16
Item 1 Legal Proceedings 16
Item 2 Changes in Securities and Use of Proceeds 16
Item 3 Defaults upon Senior Securities 16
Item 4 Submission of Matters to a vote of Security Holders 16
Item 5 Other Information 16
Item 6 Exhibits and Reports on Form 8-K 16
Signature Page 17
</TABLE>
Page 2
<PAGE>
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(in thousands, except number of shares and per share data) (Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,678 $ 6,081
Interest-bearing deposits with banks 32 46
Federal funds sold 9,000 1,500
-------- --------
Total cash and cash equivalents 15,710 7,627
Investment securities
Available for sale 53,184 55,241
To be held to maturity 366 668
Loans held for sale 180 2,875
Loans receivable 133,438 127,655
Less allowance for loan losses 2,205 2,023
-------- --------
Net loans receivable 131,233 125,632
Other real estate owned 50 12
Properties and equipment, net 2,662 2,777
Deferred income tax benefit 416 189
Accrued income and other assets 4,868 4,722
-------- --------
Total assets $208,669 $199,743
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 27,181 $ 25,207
Savings and NOW deposits 76,140 79,737
Certificates of deposit 60,366 59,184
-------- --------
Total deposits 163,687 164,128
Securities sold under agreements to
repurchase (term and demand) 13,821 11,747
Other borrowed funds 7,836 1,461
Accrued expenses and other liabilities 1,388 1,452
Mandatory convertible debentures 300 300
-------- --------
Total liabilities 187,032 179,088
-------- --------
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 2,583,041 shares
and outstanding 2,578,500 shares in 1999 and 2,388,036 issued and outstanding
shares in 1998 2,583 2,388
Capital surplus 17,123 15,527
Retained earnings 2,228 2,638
Unrealized gain (loss) on securities available for sale, net of tax of $(134) and
$43 in 1999 and 1998, respectively (264) 82
Treasury stock at cost (4,541 shares in 1999) (53) -
-------- --------
Total shareholders' equity 21,637 20,655
-------- --------
Total liabilities and shareholders' equity $208,669 $199,743
-------- --------
-------- --------
</TABLE>
Page 3
<PAGE>
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except number of shares and per share data) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and dividend income
Interest and fees on loans $3,096 $2,962 $ 8,893 $ 8,670
Interest on investment securities 686 602 2,081 1,903
Dividends on investment securities 67 79 226 120
Interest on federal funds sold and interest-
bearing deposits 22 34 53 75
------ ------ ------- -------
Total interest and dividend income 3,871 3,677 11,253 10,768
------ ------ ------- -------
Interest expense
Interest on deposits 1,400 1,467 4,141 4,229
Interest on borrowed funds 200 191 530 687
------ ------ ------- -------
Total interest expense 1,600 1,658 4,671 4,916
------ ------ ------- -------
Net interest income 2,271 2,019 6,582 5,852
Provision for loan losses 88 90 249 270
------ ------ ------- -------
Net interest income after provision for
loan losses 2,183 1,929 6,333 5,582
------ ------ ------- -------
Non-interest income
Service charges on deposit accounts 151 133 428 380
Other service charges and fees 177 134 498 367
Trust fees 203 173 609 488
Other 57 39 253 122
Net gain on sale of mortgage loans 24 90 162 203
------ ------ ------- -------
Total non-interest income 612 569 1,950 1,560
------ ------ ------- -------
Non-interest expense
Salaries and employee benefits 985 856 2,937 2,584
Occupancy expense 151 165 464 477
Equipment expense 114 119 366 353
Data processing 186 171 541 498
Other 455 401 1,443 1,160
------ ------ ------- -------
Total non-interest expense 1,891 1,712 5,751 5,072
------ ------ ------- -------
Income before income taxes 904 786 2,532 2,070
Income tax expense 268 275 875 728
------ ------ ------- -------
Net income $ 636 $ 511 $ 1,657 $ 1,342
------ ------ ------- -------
------ ------ ------- -------
Per share data
Basic earnings per common share $ .24 $ .23 $ .62 $ .69
------ ------ ------- -------
------ ------ ------- -------
Diluted earnings per common share $ .21 $ .19 $ .54 $ .54
------ ------ ------- -------
------ ------ ------- -------
</TABLE>
Page 4
<PAGE>
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(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 Treasury Shareholders'
Stock Stock Surplus Earnings for Sale Stock Equity
---------- ------ ------- -------- ------------ ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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 (loss) 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 - 79 489 (569) - - (1)
Common stock offering - 690 7,448 - - - 8,138
Offering cost - - (468) - - - (468)
Common stock cash dividend declared,
$0.09 per share - - - (164) - - (164)
Convertible cumulative preferred
stock dividends declared, $2.92
per share - - - (57) - - (57)
-- ----- ------- ------ ---- ----- -------
Balance at September 30, 1998 $20 $2,359 $15,423 $2,199 $158 $ - $20,159
-- ----- ------- ------ ---- ----- -------
Balance at December 31, 1998 $20 $2,388 $15,527 $2,638 $ 82 $ - $20,655
Net income - - - - 1,657 - - 1,657
Change in unrealized gain (loss) on
securities available for sale, net
of deferred income taxes of $(178) - - - - (346) - (346)
-- ----- ------- ------ ---- ----- -------
Total comprehensive income - - - 1,657 (346) - 1,311
Treasury stock purchased (14,100 shares
at an average price of $11.70) - - - - - (165) (165)
Common stock options exercised,
90,985 shares - 73 172 (81) - 112 276
5% common stock dividend declared - 122 1,424 (1,546) - - -
Common stock cash dividend
declared, $0.15 per share- - - (387) - - (387)
Convertible cumulative preferred
stock dividends declared, $2,61
per share - - - (53) - - (53)
-- ----- ------- ------ ---- ----- -------
Balance at September 30, 1999 $20 $2,583 $17,123 $2,228 $(264) $(53) $21,637
-- ----- ------- ------ ---- ----- -------
-- ----- ------- ------ ---- ----- -------
</TABLE>
Page 5
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MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands) 1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $1,657 $ 1,342
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation 220 259
Amortization 125 112
Net amortization (accretion) on investment securities 195 (24)
Deferred income taxes (227) 17
Origination of loans held for sale (16,825) (20,441)
Proceeds from sales of loans held for sale 19,520 20,370
Increase in accrued income and other assets (14) (24)
(Decrease) increase in accrued expenses and other liabilities (64) 132
Decrease in deferred loan fees, net (2) (20)
Provision for loan losses 249 270
Provision for losses on other real estate owned - 5
Net gain on sale of mortgage loans and property and equipment (183) (201)
------- -------
Net cash provided by operating activities 4,651 1,797
------- -------
Cash flows from investing activities
Net loans made to customers (5,911) (3,288)
Acquisition of premises and equipment (220) (268)
Proceeds from the sale of premises and equipment 152 -
Purchase of investment securities available for sale (32,117) (20,686)
Proceeds from sales and maturities of investment securities
Sales and maturities of available for sale securities 33,454 15,466
Maturities of held to maturity securities 302 955
Acquisition of life insurance policies - (1,854)
Proceeds from sale of other real estate owned 92 38
------- -------
Net cash used by investing activities (4,248) (9,637)
------- -------
Cash flows from financing activities
Net (decrease) increase in demand, savings and NOW deposits (1,623) 3,391
Net increase in certificates of deposit 1,182 3,012
Net increase in securities sold under agreement to repurchase 2,074 411
Net increase (decrease) in other borrowed funds 6,375 (2,457)
Payment of long-term debt - (2,895)
Dividends paid on convertible cumulative preferred stock and common stock (440) (222)
Purchase of treasury stock (165) -
Proceeds from stock issuance, net of cost 277 7,918
------- -------
Net cash provided by financing activities 7,680 9,158
------- -------
Net increase in cash and cash equivalents 8,083 1,318
Cash and cash equivalents, beginning of period 7,627 10,659
------- -------
Cash and cash equivalents, end of period $15,710 $11,977
------- -------
------- -------
Supplemental disclosures of cash flow information
Cash paid for interest $ 4,648 $ 4,950
Transfers to other real estate owned 130 -
Income tax paid 956 806
</TABLE>
Page 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 three and nine month
periods ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-KSB for the year
ended December 31, 1998.
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 credit 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 credit 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:
<TABLE>
<CAPTION>
(in thousands, except for number of shares and per-share data) 1999 1998
---- ----
<S> <C> <C>
Basic earnings per share
Net income, as reported $ 1,657 $ 1,342
Preferred stock dividends declared (53) (57)
------- -------
Income available to common shareholders $ 1,604 $ 1,285
------- -------
------- -------
</TABLE>
Page 7
<PAGE>
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Weighted-average shares outstanding 2,567,127 1,865,376
--------- ---------
Basic earnings per share $ 0.62 $ 0.69
--------- ---------
--------- ---------
Diluted earnings per share
Net income, as reported $ 1,657 $ 1,342
Interest on mandatory convertible debentures, net of tax 13 14
--------- ---------
Income available to common shareholders $ 1,670 $ 1,356
--------- ---------
Weighted-average shares outstanding 2,567,127 1,865,376
Effect of stock options, net of assumed treasury stock purchases 228,464 358,510
Effect of convertible preferred stock 209,798 209,798
Effect of mandatory convertible debentures 69,930 69,930
--------- ---------
Adjusted weighted-average shares outstanding 3,075,319 2,503,614
--------- ---------
--------- ---------
Diluted earnings per share $ 0.54 $ 0.54
--------- ---------
--------- ---------
</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 1999 and 1998. 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. The Company adopted the
SOP in 1999 resulting in a write-off of $44,000 included in other expenses in
the consolidated statement of income for the period ended September 30, 1999.
This item represents a cumulative effect of accounting change, net of tax of
$28,000. This write-off reduced basic earnings per share by $.02 and reduced
diluted earnings per share by $.01.
Page 8
<PAGE>
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, the statement imposes no additional disclosure
requirements on the Company.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," is
effective for years beginning after June 15, 2000. 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 - STOCK OPTIONS
A summary of the status of the Employee and Director Stock Option Plan as of
September 30, 1999, and changes during the nine months then ended, is presented
below.
<TABLE>
<CAPTION>
Number Weighted
of Shares Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at beginning of period 493,131 $ 5.16
Granted during the period 27,000 10.63
Expired/cancelled during the period (10,389) 5.93
Exercised during the period (90,985) 4.77
Additional shares for which options are exercisable
due to stock dividends 22,400 -
-------- -----
Outstanding at end of period 441,157 $5.29
-------- -----
-------- -----
</TABLE>
Page 9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 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. COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND
DECEMBER 31, 1998
Total assets increased $8.9 million or 4% to $208.7 million at September 30,
1999. The increase was the result of growth in the loan portfolio of $5.6
million and an increase in short-term federal funds of $7.5 million. Loans held
for sale decreased $2.7 million since December 31, 1998. Loan growth since
year-end is primarily in the commercial loan area which grew 15% or $4.3
million. Low interest rates in the first half of 1999 stimulated secondary
market saleable loan opportunities resulting in a decline in portfolio
residential and home equity loan balances.
Total deposits decreased $441,000 since the seasonally high year-end balances.
Growth in both demand deposits of 8% and certificates of deposit of 2% was
offset by a decline in savings and NOW deposit balances of 5%. Other borrowed
funds, that represents short-term treasury tax and loan notes, increased $6.4
million and created a temporary increase in federal funds sold.
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 $2.2
million at September 30, 1999 (1.65% of total loans), an increase of $182,000
over the Bank's $2.0 million allowance for loan losses at December 31, 1998.
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<PAGE>
II. RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998
Net income for the nine months ended September 30, 1999 was $1.7 million, an
increase of $315,000 or 24% from the same period in 1998. 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 25% increase in
non-interest income. Net income for the third quarter of 1999 increased $125,000
or 25% to $636,000 compared with the third quarter of 1998.
Although earnings for the first nine months of 1999 exceeded the same period in
1998, diluted earnings per share remained the same at $0.54 per share. This is
due to the increase in the weighted average shares outstanding as a result of
the initial public offering in August 1998 and the exercise of stock options.
The annualized return on average assets for the nine months ended September 30,
1999 and 1998 was 1.11% and 1.01%, respectively and for the third quarter of
1999 and 1998 was 1.24% and 1.11%, respectively. Return on average shareholders'
equity on an annualized basis for the nine months ended September 30, 1999 and
1998 was 10.44% and 13.54%, 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 interest bearing deposits 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, 1999 was $6.6
million, a 13% increase over the net interest income for the first nine months
of 1998 of $5.9 million. This increase is attributable to an increase in average
earning assets (both loans and investment securities) from $168.1 million in
1998 to $184.1 million in 1999. This was accompanied by a decline in the average
rate earned on interest-earning assets from 8.51% to 8.13% for the nine months
ended September 30, 1998 and 1999, respectively. The decrease in rates is due to
the Federal Reserve reducing the federal funds rate from 5.50% to 4.75% during
the fourth quarter of 1998 and aggressive loan pricing competition.
The average interest rate incurred on interest-bearing liabilities for the nine
month period in 1999 and 1998 was 4.12% and 4.67%, respectively on average
interest-bearing liabilities of $151.7 million in 1999 and $140.9 million in
1998. Despite the decrease in general interest rates, the Company's net interest
margin increased to 4.73% for the nine months ended September 30, 1999 compared
to
Page 11
<PAGE>
4.60% for the same period in 1998. The net interest margin increased in 1999
due to additional capital of $7.7 million raised in the initial public offering
in August 1998. Management currently anticipates a future decline in the net
interest margin due to the low interest rate environment and industry-wide
pricing pressure on loans and deposits.
The yield on average earning assets for the three month period ended September
30, 1999 was 8.07% and the average interest rate incurred on interest-bearing
liabilities was 4.18%.
IV. NON-INTEREST INCOME
Non-interest income for the nine months ended September 30, 1999 and 1998
totaled $2.0 million and $1.6 million, respectively, an increase of $390,000 or
25%. The Company has experienced growth in most fee income categories including
an increase in trust fees of $121,000, merchant processing fees of $76,000 and
additional income of $73,000 from the cash surrender value of life insurance. In
addition, a $22,000 gain was realized from the sale of a facility which was
formerly the Union Street branch office. Trust fees have increased due to growth
of trust assets under management to $161.1 million at September 30, 1999
compared with trust assets of $121.1 million at September 30, 1998.
Non-interest income for the third quarter of 1999 was $612,000 compared with
$569,000 for the same period in 1998, representing an increase of $43,000 or 8%.
The increase in fee income for the three month period ended September 30, 1999
compared with September 30, 1998 is at a lower rate than the comparable nine
month period. This is due to a decline in gains on mortgage loan sales from
$90,000 in the third quarter of 1998 to $24,000 for the same period in 1999. Low
interest rates in 1998 and the first half of 1999 resulted in significant
refinancing activity that contributed to additional fee income to the Company.
Management anticipates a reduction in mortgage refinancing due to higher
interest rates thus reducing future gains on loan sales.
V. NON-INTEREST EXPENSE
Non-interest expense increased by $679,000, an increase of 13%, for the nine
months ended September 30, 1999 as compared to the same period in 1998. Salaries
and employee benefits increased by $353,000 or 14% for the nine months ended
1999 compared to 1998. This increase was the result of normal annual increases
and the addition of employees. Professional fees and stockholders' expenses
increased $138,000 in the nine months ended September 30, 1999 due to the
additional cost of operating as a public stock institution. For the nine months
ended September 30, 1999, other expenses include a $44,000 write-off of
organization costs related to the adoption of Statement of Position No. 98-5.
Annual operating expenses are also expected to increase in future periods due to
future branching, product expansion and data processing conversion in the first
quarter of 2000.
Non-interest expense for the second quarter of 1999 was $1.9 million, an
increase of $179,000 or 11% compared with the same period in 1998.
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<PAGE>
VI. CAPITAL
A 5% common stock dividend was declared on February 18, 1999. Cash dividends per
share declared on common stock were $.05 each for the first, second and third
quarters of 1999.
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, 1999, of 16.49% and 17.97%, respectively, exceeded
regulatory guidelines for a "well capitalized" financial institution. The
Company's ratios at December 31, 1998 were 16.39% and 17.89%.
On February 18, 1999, the Board of Directors approved the repurchase of up to
45,000 shares of the Company's common stock. The shares will be repurchased
into treasury for the purpose of funding the expected exercise of stock
options pursuant to the Company's stock option plan. As of September 30,
1999, the Company repurchased 14,100 shares into treasury.
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 Company 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.
During 1998, the Company completed the awareness and assessment phase,
identified mission-critical systems, developed a testing strategy, worked on
contingency plans and undertook steps to verify that significant vendors,
suppliers and other related business parties will be ready for the year 2000.
Testing and validation of the Bank's mission-critical systems was completed in
the first half of 1999.
The Company is conducted tests of its mission critical systems and is in
compliance with the Federal Financial Institutions Examination Council's time
frames. The following table identifies each phase and the estimated timetable
for completion by the Company:
<TABLE>
<CAPTION>
Phase Status
<S> <C>
1. Awareness Completed
2. Assessment Completed
</TABLE>
Page 13
<PAGE>
<TABLE>
<CAPTION>
Phase Status
<S> <C>
3. Renovation Completed
4. Validation/Testing Completed
5. Implementation/Monitoring Implementation completed/monitoring
through year 2000
6. Contingency Planning Completed
</TABLE>
The Company utilizes various third party service providers to perform its most
mission critical applications. Each service provider has informed the Company
that the software programming for its applications has been completed. The
following identifies each mission critical application and the current status of
testing:
LOANS, DEPOSITS AND GENERAL LEDGER
Testing of programs commenced in October 1998 and proxy testing and
validation was completed in March 1999. On-line connectivity tests were
successfully completed in March 1999. Interface testing was
successfully conducted in May 1999.
ITEM PROCESSING/CASH LETTER PRESENTMENT
Renovations were completed by the service provider in September 1998.
Validation was completed in December 1998 and implementation and
interface testing was completed in May 1999.
WIRE TRANSFER FUNCTION
Century roll-over and leap year testing have been successfully
completed.
MERCHANT AND CREDIT CARD PROCESSING
Renovation of all critical systems was completed in November 1998.
Testing by the service provider was completed. Proxy testing was
successfully performed and the results were published in April 1999.
TRUST AND INVESTMENT OPERATIONS
Renovation has been completed. Implementation and validation are
completed. Proxy testing was successfully performed and the results
were published in March 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, loan renewal and monitoring process. During the third
quarter of 1999, the Company has focused on customer communication that included
additional staff training in responding to Year 2000 inquiries and periodic
information mailings to customers.
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 Company. The Year 2000 budget for 1999 is
$50,000. Total direct costs for the nine months ended September 30, 1999 totaled
$29,000 (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 potentially 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
Page 14
<PAGE>
Company expects to be able to implement manual contingency systems without
serious impact on the Company's financial condition. The Company has created
several basic contingency plans including a liquidity plan and has assessed
these plans for the possible impact of Year 2000 failures. This activity was
substantially completed in the first quarter of 1999 and was finalized in May
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 Company or its customers.
VIII. EXPANSION STRATEGY
The Company formed a new subsidiary, Maine Acceptance Corporation (MAC), a
finance company, which opened for business in Bangor on March 1, 1999.
Management believes MAC will fill an existing void in the local consumer loan
market. MAC will provide credit products commonly referred to as "sub-prime"
lending, which usually denotes a weakness in credit history or a high
loan-to-value on collateral. MAC provides indirect auto lending, as well as
other types of loans, including personal unsecured loans, recreational vehicle
loans, auto loans, mobile home loans and home equity loans. As of September 30,
1999, MAC's consumer loan portfolio amounted to $795,000.
Management is cognizant of the competitive challenges community banks face, and
is aggressively exploring alternative service delivery channels. The Company is
opening two new convenience store branches by the end of this year. This appears
to be a cost effective method of expanding our franchise and providing
additional customer service. The Company is also expanding its ATM services with
the addition of eight new terminals which will be placed in high traffic areas,
including convenience stores.
IX. FINANCIAL SERVICES MODERNIZATION BILL
The U.S. Congress recently passed legislation intended to modernize the
financial services industry by establishing a comprehensive framework to permit
affiliations among commercial banks, insurance companies and other financial
service providers. The legislation is being forwarded to the President for his
approval. Generally, the legislation would (i) repeal the historical
restrictions and eliminate many federal and state law barriers to affiliations
among banks and securities firms, insurance companies and other financial
service providers, (ii) provide a uniform framework for the activities of banks,
savings institutions and their holding companies, (iii) broaden the activities
that may be conducted by national banks and bank holding companies, (iv) provide
an enhanced framework for protecting the privacy of consumer's information, (v)
adopt a number of provisions related to the capitalization, membership,
corporate governance and other measures designed to modernize the Federal Home
Loan Bank system, (vi) modify the laws governing the implementation of the
Community Reinvestment Act and (vii) address a variety of other legal and
regulatory issues affecting both day-to-day operations and long-term activities
of financial institutions, including the functional regulation of bank
securities activities.
In addition, bank holding companies, such as the Company, would be permitted to
engage in a wider variety of financial activities than permitted under current
law, particularly with respect to insurance and securities activities. In
addition, in a change from current law, bank holding companies will be
Page 15
<PAGE>
in a position to be owned, controlled or acquired by any Company engaged in
financially related activities.
Further, the pending legislation would restrict certain of the powers that
unitary savings and loan association holding companies currently have. Unitary
savings and loan holding companies that are "grandfathered," i.e., became a
unitary savings and loan holding Company pursuant to an application filed with
the OTS before May 4, 1999 would retain their authority under current law. All
other savings and loan holding companies would be limited to financially related
activities permissible for bank holding companies, as defined under the new law.
The proposed legislation would also prohibit non-financial companies from
acquiring savings and loan association holding companies.
We do not believe that the proposed legislation, as publicly reported, would
have a material adverse effect on our operations in the near term. However, to
the extent the legislation permits banks, securities firms and insurance
companies to affiliate, the financial services industry may experience further
consolidation. This could result in a growing number of larger financial
institutions that offer a wider variety of financial services than we currently
offer and that can aggressively compete in the markets we currently serve.
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 Exh. 27-Financial Data Schedule *
</TABLE>
*Filed in electronic format only.
Page 16
<PAGE>
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.
Date: 11/12/99 By: /s/ Edwin N. Clift
-------------- -------------------------------
Edwin N. Clift
President and Chief Executive
Officer
(Principal Executive Officer)
Date: 11/12/99 By: /s/ Deborah A. Jordan
-------------- -------------------------------
Deborah A. Jordan
Senior Vice President and
Treasurer (Principal Financial
and Accounting Officer)
Page 17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,678
<INT-BEARING-DEPOSITS> 32
<FED-FUNDS-SOLD> 9,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,184
<INVESTMENTS-CARRYING> 366
<INVESTMENTS-MARKET> 366
<LOANS> 133,438
<ALLOWANCE> 2,205
<TOTAL-ASSETS> 208,669
<DEPOSITS> 163,687
<SHORT-TERM> 21,657
<LIABILITIES-OTHER> 1,388
<LONG-TERM> 300
0
20
<COMMON> 2,583
<OTHER-SE> 19,034
<TOTAL-LIABILITIES-AND-EQUITY> 208,669
<INTEREST-LOAN> 8,893
<INTEREST-INVEST> 2,307
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<INTEREST-TOTAL> 11,253
<INTEREST-DEPOSIT> 4,141
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<LOAN-LOSSES> 249
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<EXPENSE-OTHER> 5,751
<INCOME-PRETAX> 2,532
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<NET-INCOME> 1,657
<EPS-BASIC> 0.62
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<YIELD-ACTUAL> 4.73
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<CHARGE-OFFS> 92
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<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 557
</TABLE>
