<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 June 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 July 31, 1999 are:
(Class) (Outstanding)
COMMON STOCK, $1.00 Par Value 2,577,935
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
June 30, 1999 and December 31, 1999 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1999 and June 30, 1998 4
Consolidated Statements of Shareholders' Equity for the
Six Months Ended June 30, 1999 and June 30, 1998 5
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1999 and June 30, 1998 6
Notes to Financial Statements 7 - 9
Item 2 Management's Discussion and Analysis of Condition
and Results of Operations 10 - 15
PART II OTHER INFORMATION 15
Item 1 Legal Proceedings 15
Item 2 Changes in Securities and Use of Proceeds 15
Item 3 Defaults upon Senior Securities 15
Item 4 Submission of Matters to a vote of Security Holders 15
Item 5 Other Information 15
Item 6 Exhibits and Reports on Form 8-K 15
Signature Page 16
</TABLE>
Page 2
<PAGE>
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----- ----
<S> <C> <C>
(in thousands, except number of shares and per share data) (Unaudited)
ASSETS
Cash and due from banks $ 9,238 $ 6,081
Interest-bearing deposits with banks 29 46
Federal funds sold -- 1,500
--------- ---------
Total cash and cash equivalents 9,267 7,627
Investment securities
Available for sale 57,241 55,241
To be held to maturity 469 668
Loans held for sale 800 2,875
Loans receivable 131,788 127,655
Less allowance for loan losses 2,184 2,023
--------- ---------
Net loans receivable 129,604 125,632
Other real estate owned -- 12
Properties and equipment, net 2,568 2,777
Deferred income tax benefit 364 189
Accrued income and other assets 4,960 4,722
--------- ---------
Total assets $ 205,273 $ 199,743
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 25,183 $ 25,207
Savings and NOW deposits 76,736 79,737
Certificates of deposit 56,792 59,184
--------- ---------
Total deposits 158,711 164,128
Securities sold under agreements to
repurchase (term and demand) 13,699 11,747
Other borrowed funds 9,973 1,461
Accrued expenses and other liabilities 1,355 1,452
Mandatory convertible debentures 300 300
--------- ---------
Total liabilities 184,038 179,088
--------- ---------
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 2,577,935 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 1,749 2,638
Unrealized gain (loss) on securities available for sale, net of tax of $(92) and
$43 in 1999 and 1998, respectively (180) 82
Treasury stock at cost (5,106 shares in 1999) (60) --
--------- ---------
Total shareholders' equity 21,235 20,655
--------- ---------
Total liabilities and shareholders' equity $ 205,273 $ 199,743
--------- ---------
--------- ---------
</TABLE>
Page 3
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<TABLE>
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 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 $2,913 $2,881 $5,797 $5,708
Interest on investment securities 697 646 1,395 1,301
Dividends on investment securities 82 24 159 41
Interest on federal funds sold and interest-
bearing deposits 19 30 31 41
------ ------ ------ ------
Total interest and dividend income 3,711 3,581 7,382 7,091
------ ------ ------ ------
Interest expense
Interest on deposits 1,355 1,398 2,741 2,762
Interest on borrowed funds 182 247 330 496
------ ------ ------ ------
Total interest expense 1,537 1,645 3,071 3,258
------ ------ ------ ------
Net interest income 2,174 1,936 4,311 3,833
Provision for loan losses 86 90 161 180
------ ------ ------ ------
Net interest income after provision for
loan losses 2,088 1,846 4,150 3,653
------ ------ ------ ------
Non-interest income
Service charges on deposit accounts 154 127 277 247
Other service charges and fees 151 118 321 233
Trust fees 210 164 406 315
Other 96 38 196 83
Net gain on sale of mortgage loans 23 63 138 113
------ ------ ------ ------
Total non-interest income 634 510 1,338 991
------ ------ ------ ------
Non-interest expense
Salaries and employee benefits 1,006 876 1,952 1,728
Occupancy expense 154 146 313 312
Equipment expense 120 111 252 234
Data processing 178 167 355 327
Other 444 365 988 759
------ ------ ------ ------
Total non-interest expense 1,902 1,665 3,860 3,360
------ ------ ------ ------
Income before income taxes 820 691 1,628 1,284
Income tax expense 239 240 607 453
------ ------ ------ ------
Net income $ 581 $ 451 $ 1,021 $ 831
------ ------ ------ ------
------ ------ ------ ------
Per share data
Basic earnings per common share $ .22 $ .25 $ .38 $ .46
------ ------ ------ ------
------ ------ ------ ------
Diluted earnings per common share $ .19 $ .21 $ .34 $ .39
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
Page 4
<PAGE>
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 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 - -- -- -- 831 -- 831
Change in unrealized gain (loss) on
securities available for sale, net
of deferred income taxes of $19 -- -- -- -- 37 -- 37
------ ------- -------- --------- ------- -------- --------
Total comprehensive income -- -- -- 831 37 -- 868
Common stock options exercised,
47,799 shares -- 48 200 -- -- -- 248
5% common stock dividend declared -- 79 489 (569) -- -- (1)
Common stock cash dividend declared,
$0.06 per share -- -- -- (92) -- -- (92)
Convertible cumulative preferred
stock dividends declared, $1.94
per share -- -- -- (38) -- -- (38)
------ ------- -------- --------- ------- -------- --------
Balance at June 30, 1998 $ 20 $ 1,669 $ 8,443 $ 1,779 $ 41 $ -- $ 11,952
------ ------- -------- --------- ------- -------- --------
------ ------- -------- --------- ------- -------- --------
Balance at December 31, 1998 $ 20 $ 2,388 $ 15,527 $ 2,638 $ 82 $ -- $ 20,655
Net income - -- -- -- 1,021 -- 1,021
Change in unrealized gain (loss) on
securities available for sale, net
of deferred income taxes of $(135) -- -- -- -- (262) -- (262)
------ ------- -------- --------- ------- -------- --------
Total comprehensive income -- -- -- 1,021 (262) -- 759
Treasury stock purchased (14,100 shares
at an average price of $11.70) -- -- -- -- -- (165) (165)
Common stock options exercised,
84,880 shares -- 73 172 (71) -- 105 279
5% common stock dividend declared -- 122 1,424 (1,546) -- -- --
Common stock cash dividend
declared, $0.10 per share -- -- -- (258) -- -- (258)
Convertible cumulative preferred
stock dividends declared, $1.77
per share -- -- -- (35) -- -- (35)
------ ------- -------- --------- ------- -------- --------
Balance at June 30, 1999 $ 20 $ 2,583 $ 17,123 $ 1,749 $ (180) $ (60) $ 21,235
------ ------- -------- --------- ------- -------- --------
------ ------- -------- --------- ------- -------- --------
</TABLE>
Page 5
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MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands) 1999 1998
----- -----
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,021 $ 831
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation 144 172
Amortization 101 71
Net amortization (accretion) on investment securities 145 (27)
Deferred income taxes (175) (42)
Origination of loans held for sale (13,843) (14,384)
Proceeds from sales of loans held for sale 15,918 14,097
Increase in accrued income and other assets (83) (205)
Decrease in accrued expenses and other liabilities (97) (39)
Decrease in deferred loan fees, net (1) (12)
Provision for loan losses 161 180
Provision for losses on other real estate owned -- 5
Net gain on sale of mortgage loans and property and equipment (159) (112)
-------- --------
Net cash provided by operating activities 3,132 535
-------- --------
Cash flows from investing activities
Net loans made to customers (4,212) (3,522)
Acquisition of premises and equipment (49) (244)
Proceeds from the sale of premises and equipment 152 --
Purchase of investment securities available for sale (26,260) (10,090)
Proceeds from sales and maturities of investment securities
Sales and maturities of available for sale securities 23,718 12,166
Maturities of held to maturity securities 199 454
Acquisition of life insurance policies -- (1,847)
Proceeds from sale of other real estate owned 92 38
-------- --------
Net cash used by investing activities (6,360) (3,045)
-------- --------
Cash flows from financing activities
Net (decrease) increase in demand, savings and NOW deposits (3,025) 3,570
Net decrease in certificates of deposit (2,392) (1,067)
Net increase (decrease) in securities sold under agreement to repurchase 1,952 (167)
Net increase in other borrowed funds 8,512 1,982
Payment of long-term debt -- (150)
Dividends paid on convertible cumulative preferred stock and common stock (293) (131)
Purchase of treasury stock (165) --
Proceeds from stock issuance 279 248
-------- --------
Net cash provided by financing activities 4,868 4,285
-------- --------
Net increase in cash and cash equivalents 1,640 1,775
Cash and cash equivalents, beginning of period 7,627 10,164
-------- --------
Cash and cash equivalents, end of period $ 9,267 $ 11,939
-------- --------
-------- --------
Supplemental disclosures of cash flow information
Cash paid for interest $ 4,287 $ 3,858
Transfers to other real estate owned 80 --
Income tax paid 668 540
</TABLE>
Page 6
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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 1999 period is 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 six months ended June 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 $ 1,021 $ 831
Preferred stock dividends declared (35) (38)
----------- -----------
Income available to common shareholders $ 986 $ 793
----------- -----------
----------- -----------
Weighted-average shares outstanding 2,561,588 1,738,170
----------- -----------
----------- -----------
Basic earnings per share $ 0.38 $ 0.46
----------- -----------
----------- -----------
</TABLE>
Page 7
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<TABLE>
<S> <C> <C>
Diluted earnings per share
Net income, as reported $ 1,021 $ 831
Interest on mandatory convertible debentures, net of tax 8 9
----------- -----------
Income available to common shareholders $ 1,029 $ 840
=========== ===========
Weighted-average shares outstanding 2,561,588 1,738,170
Effect of stock options, net of assumed treasury stock purchases 230,596 144,651
Effect of convertible preferred stock 209,798 209,798
Effect of mandatory convertible debentures 69,930 69,930
----------- -----------
Adjusted weighted-average shares outstanding 3,071,912 2,162,549
=========== ===========
Diluted earnings per share $ 0.34 $ 0.39
=========== ===========
</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.
131, "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 June 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 had no impact on diluted earnings per share.
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.
Page 8
<PAGE>
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
June 30, 1999, and changes during the six 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 26,000 10.63
Exercised during the period (97,539) 4.78
Additional shares for which options are exercisable
due to stock dividends 22,400 -
-------- ------
Outstanding at end of period 443,992 $5.30
-------- ------
-------- ------
</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 JUNE 30, 1999 AND DECEMBER 31, 1998
Total assets increased $5.5 million or 3% to $205.3 million during the first
half of 1999. The increase was the result of growth in the loan portfolio of
$4.1 million and an increase in investment securities of $1.8 million. Loans
held for sale decreased $2.1 million since December 31, 1998. Loan growth
since year-end is primarily in the commercial loan area which grew 15% to
$32.6 million. Low interest rates continue to stimulate secondary market
saleable loan opportunities resulting in a decline in portfolio residential
and home equity loan balances.
Total deposits decreased $5.4 million or 3% to $158.7 million for the first
six months of 1999. Interest bearing checking account (NOW) balances
decreased $2.8 million since December 31, 1998 and certificate of deposit
balances decreased by $2.4 million since year end. The decrease in NOW
accounts is consistent with the Bank's cycle during which deposits typically
dip to their lowest levels early in the year and trend steadily upward to
their highest levels during the fourth quarter. Due to the decline in total
deposits, other borrowed funds increased $8.5 million since year-end. Other
borrowed funds is primarily comprised of overnight federal funds purchased
and short-term treasury tax and loan notes.
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 June 30, 1999 (1.65% of total loans), an increase
of $161,000 over the Bank's $2.0 million allowance for loan losses at
December 31, 1998.
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II. RESULTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE
30, 1999 AND 1998
Net income for the six months ended June 30, 1999 was $1,021,000, an increase
of $190,000 or 23% 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 35% increase in
non-interest income. Net income for the second quarter of 1999 increased
$130,000 or 29% to $581,000 compared with the second quarter of 1998.
Although earnings for the first six months of 1999 exceeded the same period
in 1998, diluted earnings per share decreased from $0.39 per share for the
first half of 1998 to $0.34 for the same period in 1999. 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 six months ended June 30,
1999 and 1998 was 1.04% and .95%, respectively and for the second quarter of
1999 and 1998 was 1.17% and 1.02%, respectively. Return on average
shareholders' equity on an annualized basis for the first half of 1999 and
1998 was 9.79% and 14.60%, 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 six months ended June 30, 1999 was $4.3 million,
a 12% increase over the net interest income for the first six months of 1998
of $3.8 million. This increase is attributable to an increase in average
earning assets (both loans and investment securities) from $166.1 million in
1998 to $186.1 million in 1999. This was accompanied by a decline in the
average rate earned on interest-earning assets from 8.55% to 7.95% for the
six months ended June 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
six month period in 1999 and 1998 was 4.11% and 4.68%, respectively on
average interest-bearing liabilities of $150.8 million in 1999 and $140.4
million in 1998. Despite the decrease in general interest rates, the
Company's net interest margin increased to 4.62% for the six months ended
June 30, 1999 compared to 4.59% 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
Page 11
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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 June 30,
1999 was 7.92% and the average interest rate incurred on interest-bearing
liabilities was 4.07%. The net interest margin remained stable at 4.62% for
the second quarter of 1999 as compared with the first quarter of 1999.
IV. NON-INTEREST INCOME
Non-interest income for the six months ended June 30, 1999 and 1998 totaled
$1.3 million and $991,000, respectively, an increase of $347,000 or 35%. The
Company has experienced growth in all fee income categories including an
increase in trust fees of $91,000, merchant processing fees of $56,000 and
additional income of $35,000 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 $161.7 million at June 30, 1999
compared with trust assets of $111.9 million at June 30, 1998.
Non-interest income for the second quarter of 1999 was $634,000 compared with
$510,000 for the same period in 1998, representing an increase of $124,000 or
24%. The increase in fee income for the three month period ended June 30,
1999 compared with June 30, 1998 is at a lower rate than the comparable six
month period. This is due to a decline in gains on mortgage loan sales from
$63,000 in the second quarter of 1998 to $23,000 for the same period in 1999.
Low interest rates in 1998 and the first quarter 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 $500,000, an increase of 15%, for the six
months ended June 30, 1999 as compared to the same period in 1998. Salaries
and employee benefits increased by $224,000 or 13% in the first half of 1999
compared to 1998. This increase was the result of normal annual increases and
the addition of employees. Professional fees and stockholders' expenses
increased $114,000 in the six months ended June 30, 1999 due to the
additional cost of operating as a public stock institution. For the six
months ended June 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 and product expansion.
Non-interest expense for the second quarter of 1999 was $1.9 million, an
increase of $237,000 or 14% compared with the same period in 1998.
VI. CAPITAL
A 5% common stock dividend was declared on February 18, 1999. Cash dividends
per share declared on common stock were $.05 for the first quarter and $.05
for the second quarter of 1999.
Page 12
<PAGE>
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 June 30, 1999, of 16.44% and 17.93%, respectively,
exceed 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 June 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 currently conducting 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
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 applica-
Page 13
<PAGE>
tions 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 will be focusing on
customer communication. This will include 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 six months ended June 30, 1999
totaled $26,000 (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 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
and is currently 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 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
Page 14
<PAGE>
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
June 30, 1999, MAC's consumer loan portfolio amounted to $228,000.
Management is cognizant of the competitive challenges community banks face,
and is aggressively exploring alternative service delivery channels,
including convenience store banking. 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.
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 15
<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.
<TABLE>
<C> <S>
Date: 8/12/99 By: /s/ Edwin N. Clift
--------------------------- ----------------------------
Edwin N. Clift
President and Chief Executive
Officer
(Principal Executive Officer)
Date: 8/12/99 By: /s/ Deborah A. Jordan
--------------------------- ----------------------------
Deborah A. Jordan
Senior Vice President and
Treasurer (Principal Financial
and Accounting Officer)
</TABLE>
Page 16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 9,238
<INT-BEARING-DEPOSITS> 29
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 57,241
<INVESTMENTS-CARRYING> 469
<INVESTMENTS-MARKET> 468
<LOANS> 131,788
<ALLOWANCE> 2,184
<TOTAL-ASSETS> 205,273
<DEPOSITS> 158,711
<SHORT-TERM> 23,672
<LIABILITIES-OTHER> 1,355
<LONG-TERM> 300
0
20
<COMMON> 2,583
<OTHER-SE> 18,632
<TOTAL-LIABILITIES-AND-EQUITY> 205,273
<INTEREST-LOAN> 5,797
<INTEREST-INVEST> 1,554
<INTEREST-OTHER> 31
<INTEREST-TOTAL> 7,382
<INTEREST-DEPOSIT> 2,741
<INTEREST-EXPENSE> 3,071
<INTEREST-INCOME-NET> 4,311
<LOAN-LOSSES> 161
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,860
<INCOME-PRETAX> 1,628
<INCOME-PRE-EXTRAORDINARY> 1,021
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,021
<EPS-BASIC> 0.38
<EPS-DILUTED> 0.34
<YIELD-ACTUAL> 4.62
<LOANS-NON> 251
<LOANS-PAST> 1
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,023
<CHARGE-OFFS> 18
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 2,184
<ALLOWANCE-DOMESTIC> 1,539
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 645
</TABLE>
