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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File No.: 000-24715
MERRILL MERCHANTS BANCSHARES, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
MAINE 01-0471507
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
201 MAIN STREET, BANGOR, MAINE 04401
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(207) 942-4800
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
(TITLE OF CLASS)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The revenues for the issuer's fiscal year ended December 31, 1999 are
$17,846,000.
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, as of a specified date within the last 60 days. On
January 31, 2000: $15,378,020
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. The Company had 2,588,127
shares outstanding as of March 1, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement pursuant to Regulation 14A,
which was delivered to the Commission for filing on March 16, 2000, and the 1999
Annual Report to Shareholders for the fiscal year ended December 31, 1999, are
incorporated by reference into Part II and III of this report.
Transitional Small Business Disclosure Format (check one):
Yes No X
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS.........................................................1
ITEM 2. DESCRIPTION OF PROPERTY.........................................21
ITEM 3. LEGAL PROCEEDINGS...............................................22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............22
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS...........................................22
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................22
ITEM 7. FINANCIAL STATEMENTS............................................22
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................23
PART III
ITEM 9. DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT...............23
ITEM 10. EXECUTIVE COMPENSATION..........................................23
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT......................................................23
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................23
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K..........................23
SIGNATURES
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FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-KSB contains certain forward looking statements
consisting of estimates with respect to the financial condition, results of
operations and business of the Bank and the Company that are subject to various
factors which could cause actual results to differ materially from these
estimates. These factors include: changes in general, economic and market
conditions, or the development of an adverse interest rate environment that
adversely affects the interest rate spread or other income anticipated from the
Bank's or the Company's operations and investments.
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PART I
ITEM 1. BUSINESS
GENERAL
Merrill Merchants Bancshares, Inc. (the "Company"), a Maine corporation
organized in March 1992, is a registered bank holding company under the Bank
Holding Company Act of 1956, as amended ("BHCA"). The Company is also a
registered Financial Holding Company under BHCA. In October 1992, the Company
became the bank holding company for Merrill Merchants Bank (the "Bank") and
holds 100% of the Bank's outstanding common stock (the "Bank Stock"). In January
1999, the Company established Maine Acceptance Corporation ("MAC"), a finance
company. The Company, through its ownership of the Bank and MAC, is engaged in a
general commercial and retail banking business, along with trust and investment
services. Unless the context otherwise requires, references herein to the
Company shall include the Company and the Bank, on a consolidated basis.
The Company is an entity legally separate and distinct from the Bank.
The only sources of the Company's income and cash flow are any dividends paid on
the Bank Stock, tax benefits received by the Company and earnings from amounts
deposited by the Company in interest bearing accounts and investments.
The Bank was established in 1992 to purchase certain assets and assume
certain liabilities of certain branch banking offices formerly held by a large
out of state bank. Merrill Merchants Bank is headquartered in Bangor, Maine,
which is located 76 miles north of Augusta, Maine, the state capital. Presently,
the Bank maintains ten branch banking offices (collectively, the "Branch Banks")
in eight area communities. The three Bangor offices provide city-wide
convenience and are complemented by: (i) an office in Brewer, Bangor's sister
city located on the eastern shore of the Penobscot River; (ii) a branch in
Orono, home of the University of Maine, the State's flagship campus; (iii) a
branch in Pittsfield, a small rural town of 4,000 people located about 30 miles
southwest of Bangor; (iv) a convenience store branch in Orrington which serves
as a satellite office to the Brewer Branch; (v) a convenience store branch in
Milford which serves as a satellite office to the Orono Branch; (vi) a branch in
Holden, a small town located next to Brewer; and (vii) a supermarket branch in
Newport, a small town neighboring Pittsfield, approximately 25 miles southwest
of Bangor. The Newport Branch is located at the juncture of Interstate 95 and
Route 2, which is the main travel route to the winter and summer tourist area of
the Moosehead Lake Region. In addition to the Branch Banks, the Bank has seven
ATM locations in its primary market area.
The Bank conducts a general commercial and retail banking business that
includes the acceptance of deposits from the general public and the application
of those funds to the origination of a variety of commercial loans, commercial
and residential real estate loans and consumer loans. The Bank has also
established a Trust and Investment Services Department, which has grown since
inception in April 1994 to $189.4 million in assets under management as of
December 31, 1999. As of December 31, 1999, the Company had total assets of
$213.7 million, loans, net of allowances, of $133.9 million, total deposits of
$168.6 million and shareholders' equity of $21.3 million.
The Bank's income is derived principally from interest and fees earned
in connection with its lending activities, interest and dividends on investment
securities, and service charges and fees on deposit and trust accounts. Its main
expenses are the interest paid on deposits and operating expenses. The Bank's
customer deposits are insured, up to the applicable limits, by the Federal
Deposit Insurance Corporation ("FDIC").
COMMUNITY BANKING STRATEGY
Having identified the need for community banking services in its market
area, the Bank has worked to position itself as a service-oriented community
bank. The Bank is staffed by experienced management personnel, most of whom
reside in the area and who know the Bank's customers and are able to provide
personalized service for these customers. This strategy has been deliberately
developed and implemented at a time when consolidation within the industry has
resulted in an increasing depersonalization among the larger financial
institutions. The Bank has focused on fostering
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banking relationships with customers which include multiple financial services
that range from basic checking to investment management accounts.
As a part of this strategy, the Company and the Bank have attracted
local business people, who actively promote the Bank in the community, to serve
on their Boards of Directors. In an effort to broaden the community's awareness
of the Bank and attract new business, the Company has also obtained additional
investments in and support for the Bank from local investors.
The Bank is active in small business lending and has earned the
designation "Preferred Lender" by the Small Business Administration (SBA). The
Bank is the only community bank in the State to have been awarded this
distinction. The Bank is also active in residential mortgage lending, and a
number of products, including government insured loan programs, are available to
meet the demands of both the consumer and the commercial market. The Company's
affiliations with third party data processors have enabled the Bank to deliver
high technology products such as automated telephone banking, banking by
personal computer, and check imaging while maintaining a local, friendly flavor
in its Branch Banks. This same strategy has been implemented by the Trust and
Investment Services Department which is also serving many clients who appreciate
the personal attention and customer service provided locally. The depository
custody services and investment advisory services provided by the Trust
Department are supported through its affiliation with The Northern Trust
Company.
MARKET AREA AND COMPETITION
The Bank's primary market area, Greater Bangor, is at the center of
commercial activity for the northeastern and central region of the State of
Maine. Nearly 100,000 people live in the Bank's primary market area. The Bank is
part of a strategic link to Canada, as Bangor is the closest U.S. metropolitan
area to Eastern Quebec and the Canadian Maritime provinces. Many regional and
national companies site their operations in the Bangor area. Services, trades,
manufacturing and government are the four largest fields of employment in the
metropolitan Bangor region. Bangor is also a healthcare center for central,
eastern and northern Maine. The City is a regional financial center and is also
serviced by several statewide and regional accounting firms, law firms,
insurance companies and security and investment firms. Bangor is also a hub for
government services, with many local, state and federal offices located within
the city. Bangor is accessible by multiple exits from Interstate 95, a major
interstate highway which transits the eastern seaboard of the United States.
Major routes to all regions of the state bisect Bangor from various directions.
Bangor International Airport provides domestic and international passenger and
cargo service for a significant portion of the state. The Bank has targeted this
same area as its focus for possible expansion of the franchise. Any such
expansion would occur with carefully selected de novo branching or taking
advantage of opportunities created as the large regional banks consolidate and
sell or close branches.
The financial services landscape has changed considerably over the past
five years in the Bank's primary market area, Greater Bangor. Two large out of
state banks have continued to experience local change as a result of mergers and
acquisitions at the regional and national level. The State's largest Maine-based
bank, with a strong presence in the local market, has also experienced
considerable change as it has acquired greater market share through acquisitions
in-state and out-of-state. A large locally-based bank has expanded its line of
financial services and acquired an extensive branch network beyond the local
market. Credit unions have continued to expand their membership and the scope of
banking services offered. Non-banking entities such as brokerage houses,
mortgage companies and insurance companies are offering very competitive
products. Many of these entities and institutions have resources substantially
greater than those available to the Bank and are not subject to the same
regulatory restrictions as the Company and the Bank. Interstate banking also
could intensify competition if out of state institutions increasingly take
advantage of recent legislation liberalizing interstate banking and branching
opportunities in Maine.
Over the past decade, due to more liberal interstate banking laws,
northeastern and central Maine has seen an increase in acquisitions of
locally-owned Maine-based banks, including Maine-based banks in the Bank's
primary
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market area, by non-local entities. It has been the observation of the Company's
management that these acquisitions often result in customer dissatisfaction as
the decision-making on loans, marketing, and other aspects of the acquired
banks' businesses are shifted from local bank management possessing independent
decision-making power to management operating under policies and guidelines from
corporate headquarters in other states. The Company believes that this shift
often results in delayed decision-making by management which is not familiar
with the needs of the acquired bank's customers or the communities they serve.
Individuals and small businesses are particularly sensitive to these changes
since they may not fit the product parameters established by the larger banks.
Thus, the Company believes that there will continue to be a need for a
bank in the Bank's primary market area with local management having
decision-making power and emphasizing loans to small and medium sized businesses
and to individuals. The Bank has concentrated on extending business loans to
such customers in the Bank's primary market area and to extending trust services
to clients with accounts of all sizes. The Bank's management also makes
decisions based upon, among other things, the knowledge of the Bank's employees
regarding the communities and customers in the Bank's primary market area. The
individuals employed by the Bank, to a large extent, reside near the Branch
Banks and thus are generally familiar with the Branch Banks' communities and
customers. This is important in local decision-making and allows the Bank to
respond to customer questions and concerns on a timely basis and fosters quality
customer service.
The Trust and Investment Services Department of the Bank has taken
advantage of opportunities created as the larger banks have altered their
personal service commitment to clients not meeting established account criteria.
The Bank is able to offer a comprehensive array of trust and investments
services to individuals, businesses, non-profit organizations and municipalities
of varying asset size and to provide the highest level of personal service. The
staff includes attorneys as well as investment and employee benefits
professionals with trust and banking experience.
The Bank has worked and will continue to work to position itself to be
competitive in its market area. The Bank's ability to make decisions close to
the marketplace, management's commitment to providing quality banking products,
the caliber of the professional staff, and the community involvement of the
Bank's employees are all factors affecting the Bank's ability to be competitive.
If the Company and the Bank are unable to compete successfully, however, the
business and operations could be adversely affected.
LENDING ACTIVITIES
The Bank has experienced loan growth since it was established in
October 1992. One of the primary factors contributing to the growth has been an
experienced local lending group. Many commercial lending relationships have been
developed by the Bank as a result of long standing business associations over
many years. Many of the Bank's officers have held lending positions with Bangor
area banks for in excess of twenty years. Management believes that these
relationships have been not only instrumental in loan growth but in developing
quality customers.
The Company strives to provide a full range of financial products and
services to small and medium-sized businesses and consumers. The Bank has an
established Officer Loan Committee which meets weekly to review and approve
credits and a Director Loan Committee which meets monthly, or as necessary, to
approve credits in excess of $250,000. The Bank's loan mix is subject to the
discretion of its Board of Directors and the demands of the local marketplace.
Management has established relationships with local area legal and accounting
professionals to cultivate referrals by hosting informational meetings at the
Bank. Asset quality is a top priority for the Bank and a significant
consideration in business development efforts.
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COMMERCIAL AND COMMERCIAL REAL ESTATE LENDING
Loans in this category principally include loans to service, retail,
medical, wholesale and light manufacturing businesses. Commercial loans are made
based on the management, financial strength and repayment ability of the
borrower. As of December 31, 1999, commercial and commercial real estate loans
represented the largest class of loans at $82.8 million or 61% of total loans.
The Bank participates in government guaranteed lending including programs with
the Finance Authority of Maine (FAME) and Rural Development (RD). The Bank
originated the second highest number of SBA loans in the State of Maine for the
SBA Maine District Office during its 1999 and 1998 fiscal year. The Bank is the
only community bank in the state to have been awarded designation as a Preferred
Lender by the SBA.
The Bank's commercial real estate loans are ordinarily made at variable
rates of interest, and amortized up to fifteen years, although some loans are
originated for terms of five years or less at fixed rates of interest. A broad
range of short-to-medium term commercial loans, both collateralized and
uncollateralized are made available to businesses for working capital (including
inventory and receivables), business expansion (including acquisition and
development of real estate and improvements) and the purchase of equipment and
machinery. The purpose of a particular loan generally determines its structure.
The commercial real estate loans are secured by a variety of properties,
including buildings occupied by small-to-medium sized businesses, apartment
complexes and non-owner/user office and retail business.
The Bank's commercial loans primarily are underwritten in the Bank's
primary market area on the basis of the borrowers' ability to service such debt
from income. Many of these loans involve lines of credit written at variable
rates of interest on a demand basis, or for terms not exceeding one year, while
others are written on a term basis typically for up to five years, generally at
variable rates of interest. As a general practice, the Bank takes as collateral
a security interest in any available real estate, equipment or other chattel
although such loans may also be made on an uncollateralized basis. As additional
security for commercial loans, the Bank normally requires the personal guarantee
of the principals and may require financial performance covenants.
Commercial loans generally present a higher level of risk than
one-to-four-family residences due to the concentration of principal in a limited
number of loans and borrowers, the effect of general economic considerations in
commercial properties and the increased difficulty of evaluating and monitoring
these types of loans. In addition, the repayment of loans secured by commercial
real estate is typically dependent on the successful operation of the related
business activities.
RESIDENTIAL MORTGAGE LENDING
The Bank endeavors to meet the needs of its individual customers by
making residential mortgage loans. Residential loans include the origination of
conventional mortgages, residential lot loans and residential acquisition,
development and construction loans for the purchase or construction of
single-family housing or lots. The Bank offers fixed and adjustable rate
mortgages ("ARMs"). With these loans, the real estate normally constitutes the
primary collateral.
Loans in this category include both portfolio loans which are held by
the Bank until maturity and loans which are sold on the secondary market. In the
case of secondary market loans, all servicing rights are retained by the Bank
which maintains the service connection to the customer. The Bank participates in
government guaranteed programs and has also helped coordinate several innovative
programs including a partnership with Penquis Community Action Program in their
"Own Me" program which assists low income women in the purchase of a home, and
housing workshops for the hearing impaired.
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As of December 31, 1999, residential loans accounted for a total of
$23.4 million representing 17% of total loans. The Bank's secondary market
servicing portfolio stands at $66.2 million.
The Bank offers one-year ARMs with rate adjustments tied to the weekly
average rate of U.S. Treasury securities adjusted to a constant one-year
maturity with specified minimum and maximum interest rate adjustments. The
interest rates on a majority of these mortgages are adjusted yearly with
limitations on upward adjustments of 2% per adjustment period and 6% over the
life of the loan. The Bank generally charges a higher interest rate if the
property is not owner-occupied. It has been the Bank's experience that the
proportion of fixed-rate and adjustable-rate loan originations depends in large
part on the level of interest rates. As interest rates fall, there is generally
a reduced demand for ARMs and, as interest rates rise, there is generally an
increased demand for ARMs.
Fixed and adjustable rate mortgage loans collateralized by single
family residential real estate generally have been originated in amounts of no
more than 80% of appraised value. However, in some instances, the Bank may lend
in excess of 80% of the value of the property collateralizing the loan. The
Bank, in most cases, requires title, fire and extended casualty insurance to be
obtained by the borrower, and, where required by applicable regulations, flood
insurance. The Bank maintains its own errors and omissions insurance policy to
protect against loss in the event of failure of a mortgagor to pay premiums on
fire and other hazard insurance policies. Although the contractual loan payment
period for single family residential real estate loans is generally for a 15 to
30 year period, such loans often remain outstanding for significantly shorter
periods than their contractual terms. The Bank charges no penalty for prepayment
of mortgage loans. Mortgage loans originated by the Bank customarily include a
"due on sale" clause giving the Bank the right to declare a loan immediately due
and payable in the event, among other matters, that the borrower sells or
otherwise disposes of the real property subject to a mortgage. In general, the
Bank enforces due on sale clauses.
HOME EQUITY LENDING
The Company originates home equity loans on a fixed and variable
interest rate basis. At December 31, 1999, fixed rate loans totaled $10.7
million and variable rate loans amounted to $7.4 million. Fixed rate loans are
for terms of 5 to 10 years with monthly amortization required and interest rates
ranging from 8.5% to 12.5%. Interest rates on variable rate loans are 1.50% to
2.00% over the prime interest rate. These home equity loans are generally
secured by a second mortgage on the principal residential property.
CONSUMER LENDING
Consumer loans made by the Bank have included home improvement,
automobile, boat and recreation vehicle loans, credit cards and overdraft
protection accounts. The Bank's consumer loan portfolio consists primarily of
loans to individuals for various consumer purposes. A majority of these loans
are for terms of less than 60 months and although generally collateralized by
liens on various personal assets of the borrower may be made uncollateralized.
Consumer loans are made at fixed and variable interest rates.
Maine Acceptance Corporation, a finance company which opened for
business in Bangor on March 1, 1999, provides indirect auto and recreational
vehicle lending, as well as other types of direct loans, including personal
unsecured, recreational vehicle, auto, mobile home and home equity loans.
Consumer loans are attractive to the Company because they typically
have a shorter term and carry higher interest rates than that charged on other
types of loans. Consumer loans, however, do pose additional risks of
collectibility when compared to traditional types of loans granted by commercial
banks, such as residential mortgage loans. In many instances, the Company is
required to rely on the borrower's ability to repay since the collateral may be
of reduced value at the time of collection. Accordingly, the initial
determination of the borrower's ability to repay is of primary importance in the
underwriting of consumer loans.
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Consumer loans totaled approximately $10.0 million and represented 7%
of the Company's loan portfolio at December 31, 1999. Such loans bear interest
at fixed rates ranging from 9% to 18%.
M&M JOINT VENTURE
In 1996, the Bank and MSB Leasing, Inc. (a subsidiary of Machias
Savings Bank, a state chartered mutual savings bank) formed M&M Consulting
Limited Liability Company ("M&M"), a jointly owned subsidiary. M&M was
established to provide a review of various internal bank risk control functions.
M&M, which has a former FDIC examiner as one of its principals, provides the
Bank, Machias Savings Bank and approximately twenty other financial institutions
in Maine access to experienced individuals who are highly trained in loan
review, regulatory compliance, training and internal auditing in a
cost-efficient and timely manner.
BRANCH EXPANSION
The Company opened two new convenience store branches. The Orrington
branch opened in December 1999 and the Milford branch opened in January 2000.
Management believes that mini branches are a cost effective method of expanding
the Company's franchise and providing additional customer service.
On January 3, 2000, the Bank entered into an agreement to purchase a
branch in Holden, Maine. The Bank assumed ownership of the banking operation and
facility on February 25, 2000. The Holden Branch had $2.1 million of loans and
$6.5 million of deposits as of February 25, 2000.
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SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share data)
The following table presents selected consolidated financial data for
the Company. The data for the fiscal years ended December 31, 1999, 1998, 1997,
1996, and 1995 are derived from audited consolidated financial statements of the
Company. The selected financial data should be read in conjunction with, and is
qualified in its entirety by, the Consolidated Financial Statements and Notes
thereto, and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the Annual Report.
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AT OR FOR THE YEAR ENDED DECEMBER 31,
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1999 1998 1997 1996 1995
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FINANCIAL CONDITION DATA: (Dollars in Thousands)
Total assets.................................... $213,747 $199,743 $178,619 $158,425 $135,744
Cash and cash equivalents....................... 9,122 7,627 10,164 8,591 6,723
Investment securities........................... 61,475 55,909 45,321 41,014 30,257
Loans receivable, net (1)....................... 133,948 125,632 117,171 103,979 93,476
Deposits........................................ 168,578 164,128 146,312 126,704 111,340
Repurchase agreements........................... 13,791 11,747 11,897 12,164 10,173
Other borrowed funds............................ 5,278 1,461 5,144 2,832 192
Long-term debt.................................. -- -- 2,895 3,695 4,000
Mandatory convertible debentures................ 300 300 300 300 300
Shareholders' equity............................ 21,258 20,655 10,967 9,671 8,761
INCOME STATEMENT DATA:
Interest and dividend income.................... $ 15,244 $ 14,586 $ 13,215 $ 11,826 $ 10,349
Interest expense................................ 6,359 6,554 6,060 5,383 4,371
Net interest income............................. 8,885 8,032 7,155 6,443 5,978
Provision for loan losses....................... 345 360 355 360 355
Net interest income after provision for loan
losses ....................................... 8,540 7,672 6,800 6,083 5,623
Non-interest income............................. 2,602 2,211 1,724 1,489 1,302
Non-interest expense............................ 7,754 6,939 6,357 5,813 5,407
Income before income taxes...................... 3,388 2,944 2,167 1,759 1,518
Income tax expense.............................. 1,141 1,028 765 639 551
Net income...................................... 2,247 1,916 1,402 1,120 967
PER SHARE DATA:
Earnings per share-basic (2).................... .85 .91 .78 .62 .52
Earnings per share-diluted (2).................. .74 .74 .68 .55 .50
Cash dividends on Common Stock (2).............. .21 .13 .03 -- --
Book value (2)(3)............................... 8.62 8.20 6.45 5.69 5.08
Weighted average shares outstanding (2)......... 2,561,220 2,021,874 1,700,187 1,700,187 1,700,187
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Return on average assets........................ 1.11% 1.05% 0.86% 0.78% 0.80%
Return on average equity (3).................... 10.52 12.97 13.63 12.28 11.83
Net interest margin (4)......................... 4.69 4.66 4.67 4.72 5.25
Net interest spread............................. 3.89 3.89 3.98 3.97 4.48
Non-performing assets to total assets (5)....... 0.15 0.08 0.13 0.45 0.33
Non-performing loans to total loans (5)......... 0.19 0.12 0.15 0.36 0.15
Allowance for loan losses to total loans........ 1.67 1.58 1.44 1.38 1.18
Allowance for loan losses to non-performing
loans (5)..................................... 854.89 1330.92 933.15 384.62 760.40
Net loan charge-offs to average loans........... 0.07 0.04 0.08 0.04 0.21
Efficiency ratio (6)............................ 67.50 67.74 71.60 73.29 74.27
CAPITAL RATIOS:
Tier 1 risk-based capital (7)................... 15.96% 16.39% 9.77% 9.53% 9.03%
Total risk-based capital (7).................... 17.44 17.89 11.30 11.10 10.63
Leverage ratio (7) (8).......................... 10.23 110.31 10.31 6.06 5.84
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(1) Excludes loans held for sale.
(2) Adjusted to reflect the 9:1 Stock Split, 5% stock dividends in 1999, 1998
and 1997 and a 3% stock dividend in 1996.
(3) Excludes unrealized gain or loss on securities available for sale net of
taxes.
(4) Represents net interest income as a percentage of average interest earning
assets. Calculation is shown tax-effected for tax exempt interest income
assuming a federal tax rate of 34%.
(5) Non-performing assets consist of non-performing loans and other real estate
owned. Non-performing loans consist of non-accrual loans and accruing loans
90 days or more past due while other real estate owned consists of real
estate acquired through foreclosure and real estate acquired by acceptance
of a deed-in-lieu of foreclosure.
(6) Non-interest expense divided by the sum of net interest income plus
non-interest income.
(7) The minimum regulatory capital ratios in order for the Company to be
adequately capitalized are: Tier 1 capital - 4.00%; total risk-based
capital -- 8.00%; and leverage ratio -- 4.00%
(8) The leverage ratio is defined as the ratio of Tier 1 capital to average
total assets.
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LENDING ACTIVITIES
The following table summarizes the composition of the Bank's loan portfolio
by type of loan at the dates indicated:
LOAN PORTFOLIO COMPOSITION
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AT DECEMBER 31,
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1999 1998 1997 1996 1995
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AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
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(Dollars in thousands)
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Real Estate
Commercial......... $ 49,161 36% $ 48,896 38% $ 40,984 34% $ 34,908 33% $ 31,915 34%
Construction....... 1,937 2 1,833 1 3,012 3 1,941 1 1,420 2
Residential........ 23,390 17 22,279 18 26,638 22 23,827 23 21,051 22
Home equity........ 18,054 13 19,362 15 20,036 17 15,726 15 10,656 11
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Total real estate.. 92,542 68 92,370 72 90,670 76 76,402 72 65,042 69
Commercial........... 33,686 25 28,322 22 20,757 18 22,049 21 21,747 23
Consumer............. 9,994 7 6,963 6 7,461 6 6,978 7 7,820 8
-------- --- -------- --- -------- --- -------- -- -------- ---
Total loans...... $136,222 100% $127,655 100% $118,888 100% $105,429 100% $94,609 100%
==== ==== === === ===
Less allowance for
loan losses.......... (2,274) (2,023) (1,717) (1,450) (1,133)
-------- -------- -------- -------- --------
Total................ $133,948 $125,632 $117,171 $103,979 $ 93,476
======== ======== ======== ======== ========
</TABLE>
The following table sets forth as of December 31, 1999, loans by
scheduled due date for the periods indicated. Loans maturing after one year are
further distinguished between those with predetermined interest rates and loans
which have floating or adjustable interest rates.
LOAN MATURITY SCHEDULE
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
---------------------------------------------------------------------------
DUE IN
ONE YEAR OR DUE AFTER ONE YEAR DUE AFTER 5
LESS BUT BEFORE 5 YEARS YEARS TOTAL
---------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate............................... $18,183 $29,958 $44,401 $ 92,542
Commercial................................ 16,430 12,620 4,636 33,686
Consumer.................................. 3,713 4,792 1,489 9,994
------- ------- ------- --------
Total loans............................... $38,326 $47,370 $50,526 $136,222
======= ======= ======= ========
Loans maturing after one year:
Predetermined interest rates.............. $ 44,155
Floating or adjustable interest rates..... 53,741
--------
Total..................................... $ 97,896
========
</TABLE>
-8-
<PAGE>
The following is a summary of non-performing assets at December 31,
1999 and 1998:
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans:
Non-accrual loans............. $266 $148 $181 $250 $148
Loans 90 days or more past
due but still accruing........ - 4 3 127 1
Restructured loans............ - - - - -
---- ---- ---- ---- ----
Non-performing loans....... 266 152 184 377 149
OREO............................... 50 12 43 340 304
---- ---- ---- ---- ----
Non-performing assets......... $316 $164 $227 $717 $453
==== ==== ==== ==== ====
Non-performing loans as a
percentage of total loans.......... 0.19% 0.12% 0.15% 0.36% 0.15%
Non-performing assets as a
percentage of total assets......... 0.15% 0.08% 0.13% 0.45% 0.33%
Non-performing assets as a
percentage of total loans and
OREO............................... 0.23% 0.13% 0.19% 0.68% 0.47%
</TABLE>
At December 31, 1999, loans on non-accrual status totaled $266,000.
Interest income not recognized on non-accrual loans was $28,000 in 1999. There
was no interest income recognized on non-accrual loans in 1999.
ADVERSELY CLASSIFIED ASSETS
The Bank's management adversely classifies certain assets as "doubtful"
or "loss" based on criteria established under banking regulations. An asset is
considered substandard if inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any. Substandard
assets include those characterized by the "distinct possibility" that the
insured institution will sustain "some loss" if existing deficiencies are not
corrected. Assets classified as doubtful have all the weaknesses inherent in
those classified substandard with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted.
At December 31, 1999, the Bank had $1.9 million of loans that were
classified as substandard and $190,000 classified as doubtful. This compares to
$1.3 million and $341,000 of loans that were classified as substandard and
doubtful at December 31, 1998. The Bank had no loans which were classified as
loss at either date. Delinquent loans may or may not be adversely classified
depending upon management's judgment with respect to each individual loan. As of
December 31, 1999 and 1998, the portion of loans guaranteed by either the SBA,
RD or FAME amounted to approximately 17% and 25% of the total loan balances
adversely classified, respectively. At December 31, 1999, included in the $2.1
million of loans that were classified as substandard and doubtful were $2.0
million of performing loans. This compares to $1.5 million of adversely
classified performing loans as of December 31, 1998. These amounts constitute
loans that, in the opinion of management, could potentially migrate to
non-performing or loss status.
-9-
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The following table sets forth activity in the Bank's allowance for
loan losses during the years indicated:
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total net loans outstanding at the
end of year (1)..................... $133,948 $125,632 $117,171 $103,979 $93,476
Average net loans outstanding during
the year (1)........................ $127,595 $119,144 $109,263 $ 98,407 $86,034
Allowance for loan losses, beginning
of year ............................ $ 2,023 $ 1,717 $ 1,450 $ 1,133 $ 958
Loans charged off during the period:
Real estate:
Commercial............ (66) - (6) - (18)
Residential........... - (20) (16) - (140)
Home equity........... - (7) - - -
Commercial............... (10) (20) (23) (16) (10)
Consumer................. (49) (31) (55) (32) (15)
-------- -------- -------- -------- -------
Total.............. (125) (78) (100) (48) (183)
-------- -------- -------- -------- -------
Recoveries of loans previously
charged off:
Real estate:
Commercial............ - - - - -
Residential........... 22 22 12 - -
Home equity........... - - - - -
Commercial............... 7 - - 2 -
Consumer................. 2 2 - 3 3
-------- -------- -------- -------- -------
Total.............. 31 24 12 5 3
-------- -------- -------- -------- -------
Net loans charged off during the year (94) (54) (88) (43) (180)
-------- -------- -------- -------- -------
Provisions charged to income
statement........................... 345 360 355 360 355
-------- -------- -------- -------- -------
Allowance for loan losses, end of
year................................ $2,274 $2,023 $ 1,717 $ 1,450 $ 1,133
======== ======== ======== ======== =======
Ratios:
Net charge-offs to average loans
outstanding......................... 0.07% 0.04% 0.08% 0.04% 0.21%
Net charge-offs to loans, end of
period.............................. 0.07% 0.04% 0.07% 0.04% 0.19%
Allowance for loan losses to average
loans outstanding................... 1.75% 1.67% 1.55% 1.45% 1.30%
Allowance for loan losses to loans,
end of year......................... 1.67% 1.58% 1.44% 1.38% 1.18%
Allowance for loan losses to
non-performing loans................ 854.89% 1330.92% 933.15% 384.62% 760.40%
</TABLE>
- ------------------------------------
(1) Excludes loans held for sale.
-10-
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of an allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any other category.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------------------
% OF % OF % OF % OF % OF
LOANS TO LOANS TO LOANS TO LOANS TO LOANS TO
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
Commercial Real
Estate (1)....... $1,111 61% $ 999 60% $ 989 52% $ 696 54% $ 656 57%
Construction..... 10 2 9 1 15 3 10 1 7 2
Residential...... 122 17 120 18 134 22 123 23 109 22
Home equity...... 179 13 193 15 199 17 157 15 106 11
Consumer......... 272 7 179 6 200 6 161 7 160 8
Unallocated...... 580 - 523 - 180 - 303 - 95 -
------ --- ------ --- ------ --- ------ --- ------ ---
Total allowance
for loan losses.. $2,274 100% $2,023 100% $1,717 100% $1,450 100% $1,133 100%
====== === ====== === ====== === ====== === ====== ===
</TABLE>
- ---------------------------
(1) Commercial and commercial real estate loans have been combined in
allocating the allowance for loan losses as the Company utilizes an
internal risk rating system for these loans on a consolidated basis.
The unallocated portion of the allowance for loan losses increased to
$580,000 at December 31, 1999 from $523,000 at December 31, 1998. Management
determined an increase in the unallocated portion of the allowance to be
necessary in 1999 due to a number of factors impacting the local economy that
have not yet been fully reflected in the financial information provided by
borrowers. These factors include a continued deterioration in trade with Canada,
due to the currency exchange rate imbalance and provincial sales taxes; another
relatively weak holiday season for retailers; and depressed conditions in
certain natural resource-based industries, such as commercial fishing, timber
and agriculture. While these factors are not yet identifiable with respect to
specific borrowers, the bank has determined an overall increase in the allowance
for loan losses to be necessary to provide for resultant expected losses.
INVESTMENT ACTIVITIES
The Company's investment portfolio serves three important functions:
first, it enables the adjustment of the balance sheet's sensitivity to changes
in interest rate movements; second, it provides an outlet for investing excess
funds; and third, it provides liquidity. The investment portfolio is structured
to maximize the return on invested funds within conservative risk guidelines.
The composition of the investment portfolio as of December 31, 1999 was
51% U.S. Treasury notes and U.S. Government agencies and corporations, 35%
mortgage-backed securities and collateralized mortgage obligations and 14% other
securities. The comparable distributions for December 31, 1998 was 44% U.S.
Treasury notes and U.S. Government agencies and corporations, 38%
mortgage-backed securities and collateralized mortgage obligations and 18% other
securities.
-11-
<PAGE>
The following table sets forth the composition of the Company's
investment portfolio at the dates indicated:
INVESTMENT SECURITIES PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------
1999 1998 1997
(Dollars in thousands)
<S> <C> <C> <C>
Securities held to maturity (1):
Mortgage-backed securities and collateralized
mortgage obligations......................... $ 262 $ 668 $ 1,962
======= ======= =======
Securities available for sale (2):
U.S. Treasury securities..................... $15,005 $20,304 $21,043
U.S. Government agencies and corporations.... 16,477 4,034 3,579
Mortgage-backed securities and collateralized
mortgage obligations......................... 21,201 20,647 15,851
State and local government debt securities... 1,620 621 1,402
U.S. Government and agency money market
funds........................................ 2,632 5,081 166
Certificates of deposit...................... 2,971 3,664 495
Other securities (3)......................... 1,307 890 823
------- ------- -------
Total........................................ $61,213 $55,241 $43,359
======= ======= =======
</TABLE>
- ------------------------
(1) Carried at amortized cost.
(2) Carried at estimated market value.
(3) Includes FHLB stock, Federal Reserve stock, FNMA stock and marketable
equity securities.
MATURITY SCHEDULE OF SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
(AT MARKET VALUE)
----------------------------------------------------------------------------------------------------
ONE YEAR OVER ONE YEAR OVER 5 YEARS
OR LESS THROUGH 5 YEARS THROUGH 10 YEARS OVER 10 YEARS TOTAL
------- --------------- ---------------- ------------- -----
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
U.S. Treasury securities....... $ 7,008 5.48% $ 7,997 5.18% $ -- -- $ -- -- $15,005 5.32%
U.S. Government agencies and
corporations............... 3,689 5.39% 12,788 6.05% -- -- -- -- 16,477 5.90%
Mortgaged-backed securities
and collateralized mortgage
obligations ................. 179 6.28% 328 5.85% 6,617 6.06% 14,077 6.35% 21,201 6.25%
States and local government
debt securities.............. 958 6.17% 351 7.06% 311 7.33% -- -- 1,620 6.59%
U.S. Government and agency
money market funds........... 2,632 4.79% -- -- -- -- -- -- 2,632 4.79%
Certificates of deposit........ 2,971 5.99% -- -- -- -- -- -- 2,971 5.99%
Other securities............... 1,307 5.08% -- -- -- -- -- -- 1,307 5.08%
------ ---- ------- ---- ------ ---- ------- ---- ------- ----
Total.......................... $18,744 5.49% $21,464 5.74% $6,928 6.12% $14,077 6.35% $61,213 5.85%
======= ==== ======= ==== ====== ==== ======= ==== ======= ====
</TABLE>
- ------------------------
(1) Yield is adjusted for the effect of tax-exempt securities assuming a
Federal tax rate of 34%.
-12-
<PAGE>
MATURITY SCHEDULE OF SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
(AT AMORTIZED COST)
--------------------------------------------------------------------------------------------------
ONE YEAR OVER ONE YEAR OVER 5 YEARS
OR LESS THROUGH 5 YEARS THROUGH 10 YEARS OVER 10 YEARS TOTAL
------- --------------- ---------------- ------------- -----
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Mortgage-backed securities
and collateralized
mortgage obligations.... -- -- -- -- $262 5.91% -- -- $262 5.91%
</TABLE>
DEPOSIT ACTIVITIES
The following table sets forth the average balances and weighted
average rates for the Bank's categories of deposits for the periods indicated:
AVERAGE DEPOSIT BALANCES AND RATES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
1999 1998 1997
% OF % OF % OF
AVERAGE AVERAGE TOTAL AVERAGE AVERAGE TOTAL AVERAGE AVERAGE TOTAL
BALANCE RATE DEPOSITS BALANCE RATE DEPOSITS BALANCE RATE DEPOSITS
------- ---- -------- ------- ---- -------- ------- ---- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest checking..... $ 26,052 -- 16% $ 23,593 -- 16% $ 20,631 -- 15%
Interest checking and
money market.............. 28,884 2.13% 18% 25,772 2.32% 17% 23,794 2.29% 18%
Savings................... 48,486 3.82% 30% 43,007 4.36% 29% 32,717 4.40% 25%
Certificates of deposit... 58,757 5.38% 36% 57,220 5.66% 38% 55,306 5.68% 42%
-------- --- -------- --- -------- ---
Total..................... $162,179 100% $149,592 100% $132,448 100%
======== === ======== === ======== ===
</TABLE>
The Bank does not have a concentration of deposits from any one source,
the loss of which would have a material adverse effect on the business of the
Bank. Management believes that substantially all the Bank's depositors are
residents in its primary market area. The Bank has not sought brokered deposits
and does not intend to do so in the future.
The following table summarizes at December 31, 1999 the Bank's
certificates of deposit of $100,000 or more by time remaining until maturity:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------
(Dollars in thousands)
<S> <C>
Maturity Period:
Less than three months.............................. $ 3,454
Over three months through six months................ 3,914
Over six months through twelve months............... 3,223
Over twelve months.................................. 2,391
-------
Total............................................ $12,982
=======
</TABLE>
-13-
<PAGE>
SHORT-TERM BORROWINGS
The borrowings utilized by the Bank primarily have been securities sold
under agreements to repurchase. Other short-term borrowings generally include
federal funds purchased, FHLB advances, treasury tax and loan deposits and
interest-bearing demand notes due to the U.S. Treasury, which are repaid upon
notification by the U.S. Treasury.
The following table sets forth certain information regarding securities
sold under agreement to repurchase for the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Average balances outstanding................. $13,299 $12,163 $11,931
Maximum amount outstanding at any month-
end during the year....................... $14,502 $13,554 $12,991
Balance outstanding at end of year........... $13,791 $11,747 $11,897
Weighted average rate during the year........ 3.86% 4.23% 4.28%
Weighted average rate at end of year......... 4.35% 3.60% 4.30%
</TABLE>
FEDERAL AND STATE TAXATION
GENERAL
The Company, the Bank and MAC file a consolidated federal income tax
return on a fiscal year basis. Consolidated returns have the effect of
eliminating intercompany distributions, including dividends, from the
computation of consolidated taxable income for the taxable year in which the
distributions occur. Banks and bank holding companies are subject to federal
income taxes in the same manner as other corporations. In accordance with an
income tax sharing agreement, income tax charges or credits will be allocated to
the Company, the Bank and MAC on the basis of their respective taxable income or
loss included in the consolidated income tax return.
FEDERAL INCOME TAXATION
Although the Bank's income tax liability is determined under provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), which is
applicable to all taxpayers or corporations, Sections 581 through 597 of the
Code apply specifically to financial institutions.
The two primary areas in which the treatment of financial institutions
differ from the treatment of other corporations under the Code are in the areas
of bond gains and losses and bad debt deductions. Bond gains and losses
generated from the sale or exchange of portfolio instruments are generally
treated for financial institutions as ordinary gains and losses as opposed to
capital gains and losses for other corporations, as the Code considers bond
portfolios held by banks to be inventory in a trade or business rather than
capital assets. Banks are allowed a statutory method for calculating a reserve
for bad debt deductions. Based on the asset size of the Bank, it is permitted to
maintain a bad debt reserve calculated on an experience method, based on
charge-offs for the current and preceding five years or a "grandfathered" base
year reserve, if larger.
-14-
<PAGE>
STATE AND LOCAL TAXATION
The Company on a consolidated basis is subject to a separate state
franchise tax in lieu of state corporate income tax. The amount of the tax is
the sum of 1% of Maine net income and $.08 per $1,000 of Maine assets as defined
in Maine law. Maine assets are the corporation's total end of the year assets as
reported on the federal income tax return. Maine net income is the corporation's
net income or loss as reported on the federal income tax return which is
apportioned to Maine under Maine law.
SUPERVISION AND REGULATION
Bank holding companies and state banks are extensively regulated under
both federal and state law. These laws and regulations are intended to protect
depositors, not shareholders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in the applicable law or regulation may have a material effect on the business
and prospects of the Company and the Bank.
FINANCIAL HOLDING COMPANY REGULATION
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the "Act"),
federal legislation intended to modernize the financial services industry by
establishing a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service
providers.
Under the Act, bank holding companies may elect to be regulated as
financial holding companies. Financial holding companies may engage in
activities that are financial in nature or incidental or complementary to
activities which are financial in nature. Bank holding companies may qualify to
become a financial holding company if:
- each of its depository institution subsidiaries is "well
capitalized";
- each of its depository institution subsidiaries is "well
managed";
- each of its depository institution subsidiaries has at least a
"satisfactory" Community Reinvestment Act rating at its most
recent examination; and
- the bank holding company has filed a certification with the
Federal Reserve Board that it elects to become a financial
holding company.
The Company filed an election to be treated as a financial holding
company with the Federal Reserve Bank of Boston in March 2000. As a result, the
Company is currently regulated as a financial holding company. As a financial
holding company, the Company may conduct those activities which are considered
financial in nature under a new section 4(k) of the BHCA. These activities
include:
- Activities permissible for bank holding companies prior to the
enactment of the Act;
- Lending, exchanging, transferring, investing for others, or
safeguarding money or securities;
- Underwriting and selling insurance;
- Providing financial, investment, or advisory services;
-15-
<PAGE>
- Selling pools of assets;
- Underwriting, dealing in, or making a market in securities; and
- Merchant banking.
The FRB also has the power to determine by regulation or order
additional financial activities which would be permissible for financial holding
companies. In addition, in order to commence a new activity Merrill Merchants
Bank must have received a "satisfactory" on its latest CRA exam.
GENERAL
As a bank holding company and the financial holding company, the
Company is subject to the regulation and supervision of the Federal Reserve
under the BHCA. The Company is also subject to the regulation and supervision of
the Maine Bureau of Banking by virtue of provisions of Maine law which govern
financial institution holding companies such as the Company. Under applicable
federal law, the Company must obtain the approval of the Federal Reserve Board
before it acquires all or substantially all of the assets of a bank or another
bank holding company, merges or consolidates with another bank holding company,
or acquires direct or indirect ownership or control of any voting shares of a
bank or bank holding company if, after such acquisition, it would own or control
more than 5% of any class of voting shares of such bank or bank holding company
(unless it already owns or controls a majority of such shares). Similarly, under
applicable Maine law, the Company must obtain the prior approval of the Maine
Superintendent of the Bureau of Banking before acquiring more than 5% of the
voting shares of a Maine financial institution or of any financial institution
holding company which directly or indirectly controls a Maine financial
institution. Under certain circumstances, the Company may be required to obtain
Federal Reserve Board approval before redeeming any of its equity securities in
an amount in excess of 10% of its net worth in any twelve-month period.
Furthermore, under certain circumstances, any redemptions, dividends, or
distributions with respect to the Company's Common Stock and Preferred Stock may
be considered an unsafe or unsound practice by the Federal Reserve Board.
Before any "company," as defined in the BHCA, may acquire "control," as
defined in the BHCA, over the Company, the prior approval of the Federal Reserve
Board generally is required. In addition, before any individual or entity which
is not required to seek prior approval from the Federal Reserve Board may
acquire control of the Company, prior notice to the Federal Reserve Board
generally is required. Similarly, notice to and approval by the Maine
Superintendent of the Bureau of Banking is required before any "financial
institution holding company," as defined in the Maine Banking Code, may acquire
more than 5% of a Maine financial institution or Maine financial institution
holding company.
The Bank is also subject to continued regular supervision and
examination by applicable federal and state banking agencies. The Bank is a
Maine state-chartered bank that is a member of the Federal Reserve System. The
Federal Reserve exercises primary supervision over the Bank through periodic
examination. The Bank is also subject to regulation by the FDIC as well as the
Bureau. The FDIC has authority to terminate insurance for accounts pursuant to
procedures established for that purpose. The Bank must comply with various
requirements and restrictions under federal and state law, including
requirements to maintain reserves against deposits, restrictions on the types
and amounts of loans that may be granted and the interest that may be charged
thereon and limitations on the types of investments that may be made and the
types of services that may be offered. Various consumer laws and regulations
also affect the operations of the Bank. In addition to the impact of regulation,
commercial banks are affected significantly by the actions of the Federal
Reserve Board as it attempts to control the money supply and credit availability
in order to influence the economy.
-16-
<PAGE>
PAYMENT OF DIVIDENDS
The Company is a legal entity separate and distinct from the Bank. The
principal source of cash flow of the Company, including cash flow to pay
dividends on its stock or principal and interest on debt, if any, is dividends
from the Bank. There are statutory and regulatory limitations on the payment of
dividends by the Bank to the Company, as well as by the Company to its
shareholders.
In addition to the statutory prohibition against the withdrawal of any
portion of the Bank's capital and certain statutory limitations on the payment
of dividends, under Maine law the Bank may not pay dividends if it is insolvent
or if the payment of such dividends would render the Bank insolvent. In
addition, Maine law generally requires that dividends may be paid only out of
either unreserved and unrestricted earned surplus or out of the unreserved and
unrestricted net earnings of the then current and preceding fiscal years. If the
dividends are to be paid only out of net earnings, shareholders must be notified
of the source of the dividend and of the fact that there was no earned surplus
from which to pay the dividend.
The payment of dividends by any state bank that is a member of the
Federal Reserve System is affected by the requirement to maintain adequate
capital pursuant to the capital adequacy guidelines issued by the Federal
Reserve Board. The regulations and restrictions on dividends paid by the Bank
may limit the Company's ability to obtain funds from such dividends for its cash
needs, including funds for payment of operating expenses, and dividends on the
Common Stock.
If, in the opinion of the applicable federal bank regulatory authority,
a depository institution or holding company is engaged in or is about to engage
in an unsafe or unsound practice (which, depending on the financial condition of
the depository institution or holding company, could include the payment of
dividends), such authority may require, after notice and hearing (except in the
case of an emergency proceeding where there is no notice or hearing), that such
institution or holding company cease and desist from such practice. The federal
banking agencies have indicated that paying dividends that deplete a depository
institution's or holding company's capital base to an inadequate level would be
such an unsafe and unsound banking practice. Moreover, the Federal Reserve and
the FDIC have issued policy statements which provide that bank holding companies
and insured depository institutions generally should only pay dividends out of
current operating earnings. In addition, under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), a FDIC-insured depository
institution may not pay any dividend if payment would cause it to become
undercapitalized or once it is undercapitalized. See "FDICIA."
The payment of dividends by the Company and the Bank also may be
affected or limited by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines.
TRANSACTIONS WITH AFFILIATES AND INSIDERS
The Bank is subject to Section 23A of the Federal Reserve Act, which
places limits on the amount of loans or extensions of credit to, or investments
in, or certain other transactions with, affiliates, including the Company. In
addition, limits are placed on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. Most of these
loans and certain other transactions must be secured in prescribed amounts. The
Bank is also subject to Section 23B of the Federal Reserve Act, which, among
other things, prohibits an institution from engaging in transactions with
certain affiliates unless the transactions are on terms substantially the same,
or at least as favorable to such institution or its subsidiaries, as those
prevailing at the time for comparable transactions with non-affiliated
companies.
-17-
<PAGE>
CAPITAL ADEQUACY
The federal banking agencies have adopted risk-based capital guidelines
for banks and bank holding companies. The minimum guideline for the ratio of
total capital to risk-weighted assets ("Total Risk Based Capital" ratio) for
"adequately capitalized" institutions is 8%. The minimum adequate capitalization
guideline for the ratio of Tier 1 Capital to risk-weighted assets ("Tier 1 Risk
Based Capital" ratio) is 4%.
In addition, the federal banking agencies have established minimum
leverage ratio guidelines for banks and bank holding companies. Their guidelines
provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill
and certain other intangible assets (the "Leverage Ratio"), of 3% for banks that
meet certain specific criteria and 4% for other institutions. The Company's
Leverage Ratio at December 31, 1999 was 10.2%. Failure to meet capital
guidelines could subject a bank to a variety of enforcement remedies, including
the termination of deposit insurance by the FDIC, and to certain restrictions on
its business. See "FDICIA."
HOLDING COMPANY STRUCTURE AND SUPPORT OF THE BANK
Because the Company is the parent holding company of the Bank, its
right to participate in the assets of any subsidiary upon the Bank's liquidation
or reorganization will be subject to the prior claims of the subsidiary's
creditors (including depositors in the case of bank subsidiaries) except to the
extent that the Company may itself be a creditor with recognized claims against
the subsidiary.
Under the Federal Deposit Insurance Act (the "FDIA"), a depository
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by the FDIC in connection with (i) the
default of a commonly-controlled FDIC-insured depository institution or (ii) any
assistance provided by the FDIC to any commonly-controlled FDIC-insured
depository institution "in danger of default." "Default" is defined generally as
the appointment of a conservator or receiver and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
default is likely to occur in the absence of regulatory assistance. The FDIC's
claim for damages is superior to claims of depositors, secured creditors and
holders of subordinated debt (other than affiliates) of the commonly controlled
insured depository institution. The Bank is subject to these cross-guarantee
provisions.
The following table sets forth capital ratios required by the Federal
Reserve to be maintained by the Company in order for the Company to be
adequately capitalized, and the Company's actual ratios of capital to total
regulatory or risk-weighted assets, as applicable, at December 31, 1999.
<TABLE>
<CAPTION>
COMPANY REGULATORY
MINIMUM COMPANY BANK
------------------------------------------------------------------
<S> <C> <C> <C>
Tier 1 capital............... 4.00% 15.96% 12.35%
Total risk-based capital..... 8.00% 17.44% 13.60%
</TABLE>
FDICIA
The FDICIA requires the federal banking regulators to take "prompt
corrective action" in respect of FDIC insured depository institutions that do
not meet minimum capital requirements. The FDICIA established five capital
tiers: "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized." An
FDIC-insured depository institution is well capitalized if it maintains a
Leverage Ratio of at least 5%, a risk adjusted Tier 1 Capital Ratio of at least
6% and a Total Capital Ratio of at least 10% and is not subject to a directive,
order or written agreement to meet and maintain
-18-
<PAGE>
specific capital levels. An insured depository institution is defined to be
adequately capitalized if it meets all of its minimum capital requirements as
described above. In addition, an insured depository institution will be
considered undercapitalized if it fails to meet any minimum required measure,
significantly undercapitalized if it is significantly below any such measure and
critically undercapitalized if it fails to maintain a level of tangible equity
equal to not less than 2% of total assets. An insured depository institution may
be deemed to be in a capitalization category that is lower than is indicated by
its actual capital position if it receives an unsatisfactory examination rating.
The capital-based prompt corrective action provisions of FDICIA and
their implementing regulations apply to FDIC-insured depository institutions and
are not directly applicable to holding companies which control such institution.
However, the Federal Reserve Board has indicated that, in regulating bank
holding companies, it will take appropriate action at the holding company level
based on an assessment of the effectiveness of supervisory actions imposed upon
subsidiary depository institutions pursuant to such provisions and regulations.
FDICIA generally prohibits an FDIC-insured depository institution from
making any capital distribution (including payment of dividends) or paying any
management fee to its holding company if the depository institution would
thereafter be undercapitalized.
Undercapitalized depository institutions are subject to restrictions on
borrowing from the Federal Reserve. In addition, undercapitalized depository
institutions are subject to growth limitations and are required to submit
capital restoration plans. A depository institution's holding company must
guarantee the capital plan, up to an amount equal to the lesser of 5% of the
depository institution's assets at the time it becomes undercapitalized or the
amount of the capital deficiency when the institution fails to comply with the
plan. The federal banking agencies may not accept a capital plan without
determining, among other things, that the plan is based on realistic assumptions
and is likely to succeed in restoring the depository institution's capital. If a
depository institution fails to submit an acceptable plan, it is treated as if
it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject
to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized depository institutions are subject to appointment
of a receiver or conservator.
The Company and the Bank, at December 31, 1999 and 1998, were "well
capitalized" under the criteria discussed above.
FDIC INSURANCE PREMIUMS
The Bank is required to pay semiannual FDIC deposit insurance
assessments. Each financial institution is assigned to one of three capital
groups -- well capitalized, adequately capitalized or undercapitalized -- and
further assigned to one of three subgroups within a capital group, on the basis
of supervisory evaluations by the institution's primary federal and, if
applicable, state supervisors and other information relevant to the
institution's financial condition and the risk posed to the FDIC deposit
insurance fund. The actual assessment rate applicable to a particular
institution (and any applicable refund) will, therefore, depend in part upon the
risk assessment classification so assigned to the institution by the FDIC. The
FDIC is authorized by federal law to raise insurance premiums in certain
circumstances. Any increase in premiums would have an adverse effect on the Bank
and the Company's earnings. Under the FDIA, insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
and unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by a federal bank regulatory agency.
-19-
<PAGE>
INTERSTATE BANKING
The acquisition by the Company of more than 5% of the outstanding
voting securities or substantially all of the assets of a bank located outside
of the State of Maine is regulated by the BHCA. Such acquisition is also subject
to the law of the state in which the bank to be acquired is located. Under
certain circumstances, the Company might not be permitted to acquire an interest
in another bank located outside Maine. Further, any company attempting to
acquire control of the Company or the Bank also may be subject to certain
limitations on interstate banking. Even assuming that the law of the state in
which the bank is located permits acquisition, the Maine Banking Code requires
prior approval of the Superintendent of the Bureau of Banking for certain
acquisitions of more than 5% of a financial institution having operations
conducted outside of Maine.
The status of interstate banking legislation adopted by individual
states has been in a constant state of change in recent years. While federal law
has substantially liberalized interstate banking, a number of states have
adopted some form of legislation which limits interstate banking by bank holding
companies.
INTERSTATE ACT
Subject to certain conditions and exceptions, the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 ("Interstate Act"), (i)
permits bank holding company acquisitions of banks of a minimum age of up to
five years as established by state law in any state, (ii) permits mergers of
national and state banks across state lines unless the state has opted out of
the interstate bank merger provisions, (iii) permits branching de novo by
national and state banks into other states and (iv) permits certain interstate
bank agency activities one year after enactment. Subject to certain limitations,
Maine law permits out of state financial institutions, federal associations and
national banks to establish de novo branches or to acquire branches in Maine.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their jurisdiction, the Federal
Reserve, the FDIC, the Office of the Comptroller of the Currency and the Office
of Thrift Supervision evaluate the record of such financial institutions in
meeting the credit needs of their local communities, including low and moderate
income neighborhoods, consistent with the safe and sound operation of those
institutions. These factors are also considered in evaluating mergers,
acquisitions and applications to open a branch or facility.
OTHER REGULATIONS
Interest and certain other charges collected or contracted for by banks
are subject to state usury laws and certain federal laws concerning interest
rates. The Bank's loan operations are also subject to certain federal laws
applicable to credit transactions, such as the federal Truth-In-Lending Act
governing disclosures of credit terms to consumer borrowers, the Home Mortgage
Disclosure Act of 1975 requiring financial institutions to provide information
to enable the public and public officials to determine whether a financial
institution is fulfilling its obligation to help meet the housing needs of the
community it serves, the Equal Credit Opportunity Act prohibiting discrimination
on the basis of race, creed or other prohibited factors in extending credit, the
Fair Credit Reporting Act of 1978 governing the use and provision of information
to credit reporting agencies, the Fair Debt Collection Act governing the manner
in which consumer debts may be collected by collection agencies and the rules
and regulations of the various federal agencies charged with the responsibility
of implementing such federal laws. The deposit operations of the Bank also are
subject to the Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures for
complying
-20-
<PAGE>
with administrative subpoenas of financial records, and the Electronic Funds
Transfer Act and Regulation E issued by the Federal Reserve Board to implement
that act, which govern automatic deposits to and withdrawals from deposit
accounts and customers' rights and liabilities arising from the use of automated
teller machines and other electronic banking services.
ITEM 2. DESCRIPTION OF PROPERTY
Over the past seven years, the Company has made improvements to or
relocated from nearly all of the properties it acquired in connection with the
Bank's formation. The most significant project was the 1997 two-story expansion
and renovation of its headquarters building at 201 Main Street. This increased
the size of the structure from 8,000 to a total of 17,000 square feet, and
includes a large branch, commercial, trust and administrative offices as well as
a board room and two conference rooms. The property is located at the gateway to
downtown Bangor and the enhancements to the site have significantly improved the
area. The site suits the Company's present needs and further expansion is
available on the premises if the needs of the Company change in the future.
992 UNION STREET BRANCH, BANGOR
In 1997, the Bank relocated from a small, outdated facility at 559
Union Street to a new branch at the Airport Plaza Mall located at 992 Union
Street. This branch includes a spacious lobby, three comfortable offices, a
conference room and kitchen. Adequate parking and convenient access to the
multi-lane drive up and ATM are added benefits.
920 STILLWATER AVENUE, BANGOR
In 1994, the Bank relocated from an office within the Bangor Mall to a
spacious facility located in the CrossRoads Plaza. This office includes the
branch and the Residential Mortgage Department and its operational staff. This
location features a multi-lane drive up and ATM and provides service to another
ATM located inside the Bangor Mall.
366 WILSON STREET, BREWER
In 1995, the Company sold the original Brewer branch building on North
Main Street and relocated to the present location. This is a leased facility
which had been recently renovated by another bank. It features a multi-lane
drive-up and ATM and is conveniently located at the center of the Brewer
business district.
69 MAIN STREET, ORONO
The Orono branch is also located near the center of town on the first
floor of a former bank building. The Company assumed this lease in 1992 and has
made some cosmetic improvements to the facility since that time. In 1998, an ATM
was installed at the site to complement the existing drive-up services.
27 MAIN STREET, PITTSFIELD
The Pittsfield branch, which was acquired by the Bank as part of the
start-up, is a historic two story Main Street building with approximately 12,600
square feet of space.
-21-
<PAGE>
NEWPORT PLAZA, NEWPORT
In 1997, the Company opened its first branch in a locally owned
supermarket in Newport. This facility is unlike most supermarket banks in that
it includes a drive-up as well as in-store tellers and loan and customer service
personnel.
191 RIVER ROAD, ORRINGTON
In November 1999, the Bank opened its first mini branch in a newly
constructed convenience store owned by R. H. Foster. The branch occupies
approximately 300 square feet within the store and includes a traditional
teller station plus a customer service desk and ATM.
2 MAIN STREET, MILFORD
In January 2000, the Bank opened a second mini branch in an R. H.
Foster owned convenience store. The branch occupies approximately 250 square
feet of space within the store and includes a traditional teller station and
customer service desk, plus a drive-up window and an ATM.
1007 MAIN ROAD, HOLDEN
On February 25, 2000, the Bank acquired this branch from The First
National Bank of Bar Harbor. The branch is a free standing building constructed
in 1992 containing approximately 3,500 square feet of space. The branch includes
a multi-lane drive-up with a full-service ATM, full lobby, two offices, a
conference room, and a full basement.
ITEM 3. LEGAL PROCEEDINGS
Although the Bank and the Company, from time to time, are involved in
various legal proceedings in the normal course of business, there are no
material legal proceedings to which the Bank or the Company, its directors or
its officers is a party or to which any of its property is subject as of the
date of this Form 10-KSB.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The following information included in the Merrill Merchants Bancshares,
Inc. 1999 Annual Report to Stockholders (the "Annual Report") is incorporated
herein by reference: "Market for Common Stock."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following information included in the Annual Report is incorporated
herein by reference: "Selected Financial Highlights" on page 2 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 6 through 14 of the Annual Report.
-22-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following information included in the Annual Report is incorporated
herein by reference: "Audited Financial Statements and Notes to Consolidated
Financial Statements" on pages 15 through 32 of the Annual Report.
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The following information included in the Company's 1999 Proxy
Statement for the 2000 Annual Meeting of Shareholders ("Proxy Statement") is
incorporated herein by reference: "Election of Directors," "Nominees, Continuing
and Retiring Directors," "Executive Officers," and "Section 16(a) Beneficial
Ownership Reporting Compliance."
ITEM 10. EXECUTIVE COMPENSATION
The following information included in the Proxy Statement is
incorporated herein by reference: "Proposal 1 -- Election of Directors
- -- Directors' Compensation," "-- Compensation Table," "-- Stock Option Plan"
and "-- Transactions with Certain Related Persons."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following information included in the Proxy Statement is
incorporated herein by reference: "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information included in the Proxy Statement is
incorporated herein by reference: "Transactions with Certain Related Persons."
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) The following financial statements included in the 1999 Annual
Report are incorporated herein by reference:
Consolidated Statements of Financial Condition -- December 31,
1999 and 1998;
Consolidated Statements of Income -- Years Ended December 31,
1999 and 1998;
Consolidated Statements of Changes in Shareholders Equity --
December 31, 1999 and 1998;
Consolidated Statements of Cash Flows -- Years Ended December 31,
1999 and 1998; and
Notes to Consolidated Financial Statements -- Years Ended
December 31, 1999 and 1998.
-23-
<PAGE>
(b) Exhibits. The following exhibits are either filed as part of this
report or are incorporated herein by reference:
3.1 Articles of Incorporation of Merrill Merchants Bancshares, Inc.*
3.2 By-laws of Merrill Merchants Bancshares, Inc.*
4 Specimen Stock Certificate of Merrill Merchants Bancshares, Inc.*
10.1 Operating Agreement between the Company and M&M Consulting Limited
Liability Company.*
10.2 Services Agreements between the Company and M&M Consulting Limited
Liability Company.*
10.3 Data Processing Services Agreement between the Company and M&I Data
Services, a Division of Marshall & Ilsley Corporation.*
10.4 Financial Services Agreement with Financial Institutions Service
Corporation.*
10.5 Form of Life Insurance Endorsement Method Split Dollar Plan Agreement.*
10.6 Form of Unfunded Deferred Compensation Agreement.*
10.7 Form of Executive Supplemental Retirement Plan.*
10.8 Form of Mandatory Convertible Debentures.*
10.9 Correspondent Trust Services Agreement with Northern Trust Company.*
10.10 Stock Option Plan, as amended.*
10.11 Form of Stock Option Agreement.*
10.12 1998 Directors' Deferred Compensation Plan.*
13 Annual Report to Shareholders for the Year Ended December 31, 1999.
21 Subsidiaries of the Registrant.
23 Consent of Berry Dunn McNeil & Parker.
27 Financial Data Schedule.**
99 2000 Proxy Statement (previously filed on March 16, 2000).
- ---------------
*Incorporated by reference to the Company's Registration Statement on Form SB-2
(File No. 333-56197), and any amendments thereto filed with the Securities and
Exchange Commission.
**Filed in electronic format only.
(c) Reports on Form 8-K.
None.
-24-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MERRILL MERCHANTS BANCSHARES, INC.
By: /s/ Edwin N. Clift
-------------------------------------
PRESIDENT AND CHIEF EXECUTIVE OFFICER
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
<S> <C> <C>
/s/ Edwin N. Clift
- ------------------------------------ Director, President and Chief March 16, 2000
Edwin N. Clift Executive-Officer
(Principal executive officer)
/s/ Deborah A. Jordan
- ------------------------------------ Treasurer (Principal financial March 16, 2000
Deborah A. Jordan officer)
/s/ William C. Bullock, Jr. Chairman of the Board March 16, 2000
- ------------------------------------
William C. Bullock, Jr.
/s/ Joseph H. Cyr Director March 16, 2000
- ------------------------------------
Joseph H. Cyr
/s/ Perry B. Hansen Director March 16, 2000
- ------------------------------------
Perry B. Hansen
/s/ Leonard E. Minsky Director March 16, 2000
- ------------------------------------
Leonard E. Minsky
/s/ Frederick A. Oldenburg, Jr., M.D. Director March 16, 2000
- ------------------------------------
Frederick A. Oldenburg, Jr., M.D.
/s/ Dennis L. Shubert, M.D., Ph.D. Director March 16, 2000
- ------------------------------------
Dennis L. Shubert, M.D., Ph.D.
/s/ Susan B. Singer Director March 16, 2000
- ------------------------------------
Susan B. Singer
/s/ Harold S. Wright Director March 16, 2000
- ------------------------------------
Harold S. Wright
</TABLE>
-25-
<PAGE>
1999
ANNUAL REPORT
Merrill Merchants Bancshares, Inc.
<PAGE>
CONTENTS
Financial Highlights 2
Letter to Shareholders 3
Management's Analysis of Operations 6
Independent Auditors' Report 15
Audited Financial Statements 16
Employees 33
Corporate Directory 34
Corporate Information 36
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL HIGHLIGHTS
(Dollars in Thousands, Except Per Share Data)
- -----------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income $ 2,247 $ 1,916 $ 1,402 $ 1,120 $ 967
Net interest income 8,885 8,032 7,155 6,443 5,978
Non-interest income 2,602 2,211 1,724 1,489 1,302
Non-interest expense 7,754 6,939 6,357 5,813 5,407
- -----------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
- -----------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.85 $ 0.91 $ 0.78 $ 0.62 $ 0.52
Diluted 0.74 0.74 0.68 0.55 0.50
Dividends per share 0.21 0.13 0.03 - -
Book value per share (1) 8.62 8.20 6.45 5.69 5.08
Dividend payout ratio 24.71% 15.27% 3.23% - -
- -----------------------------------------------------------------------------------------------------------------------------
KEY RATIOS
- -----------------------------------------------------------------------------------------------------------------------------
Return on average assets 1.11% 1.05% 0.86% 0.78% 0.80%
Return on average equity (1) 10.52 12.97 13.63 12.28 11.83
Equity to assets at year end (1) 10.15 10.30 6.14 6.11 6.36
Non-performing assets to total assets 0.15 0.08 0.13 0.45 0.33
Net charge-offs to average loans 0.07 0.04 0.08 0.04 0.21
- -----------------------------------------------------------------------------------------------------------------------------
AT YEAR END
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $213,747 $199,743 $178,619 $158,425 $135,744
Loans receivable, net (2) 133,948 125,632 117,171 103,979 95,256
Investment securities 61,475 55,909 45,321 41,014 30,257
Deposits 168,578 164,128 146,312 126,704 111,340
Borrowed funds 19,069 13,508 20,236 18,991 14,665
Shareholders' equity 21,258 20,655 10,967 9,671 8,761
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes effect of unrealized gains or losses on
securities
(2) Excludes loans held for sale
Page 2
<PAGE>
Dear Shareholder:
As we look to the future and contemplate the challenge of competing in
the 21st century marketplace, we are confident that focusing on the basics of
banking will ensure our Company's long term success. Banking remains a people
business and certain principles will not change. There is no substitute for
quality people, and we believe our employees will continue to differentiate us
from our competitors. Our investment in them is returned by having a workforce
dedicated to excellence through a system of shared values. Their daily efforts
help create strong customer loyalty which ultimately yields shareholder value.
FINANCIAL PERFORMANCE
The Company reported net income of $2.2 million for 1999, an increase
of 17% over the previous year. Growth in the loan portfolio of $8.0 million
contributed to an 11% increase in the Company's net interest income. Fee income
grew 15% for 1999 while operating expenses increased by 12% for the year. In
December 1999, the Company increased its quarterly dividend rate to shareholders
to $ .06 per common share, representing a 20% increase.
EXPANSION
1999 was a year of expansion for our Company. In March we formed a new
subsidiary, Maine Acceptance Corporation (MAC), a finance company. In addition
to the auto and recreational vehicle dealer business the Company has developed,
MAC fills an existing void in the local consumer loan market. We are encouraged
by MAC's growth, which in nine months totaled $1.5 million in consumer loans.
During the fourth quarter we officially launched convenience store
banking in Maine with the opening of our first branch in Orrington. A second
mini branch, located in Milford, followed in early 2000. These branches are both
located in stores owned by R.H. Foster Energy, a large fuel distributor with
headquarters in Hampden. We believe convenience store branching will be a cost
effective method of expanding our banking franchise and enhancing service
delivery.
On January 3, 2000, our expansion continued when we signed an agreement
with the First National Bank of Bar Harbor (FNB) to acquire their Holden Branch.
This branch was built by FNB in 1992, and the purchase included the facility as
well as $2.1 million in loans and $6.5 million in deposits. We now have ten
branch offices throughout central Maine and fourteen automated teller machines.
TECHNOLOGY
In February 2000 we completed a data processing conversion to the Jack
Henry & Associates System. The new in-house system will provide long term cost
savings and immediate service enhancements, including Internet banking. We
anticipate that this investment in technology will streamline service delivery
and enhance operational capabilities and management reporting.
Page 3
<PAGE>
Our strategic plan includes a multi-faceted blueprint for growth, and
we intend to remain very focused on our mission of delivering quality customer
service. That service will continue to include both personal banking at a
traditional branch and alternate delivery channels, including Internet banking.
TRUST & INVESTMENT SERVICES
Our Trust & Investment Services Department experienced substantial
asset growth in 1999 as a result of new business development and strong
investment performance. Assets under administration ended the year at $189.4
million, an increase of $52.9 million or 39% over the previous year. New
business includes a mix of individual trust customers, as well as institutional,
municipal, and non-profit organizations.
Providing superior customer service remains a department priority. The
credentials of our staff enable us to offer clients extensive legal and
professional experience. Our investment performance continues to surpass
conventional benchmark indices allowing us to distinguish ourselves from the
competition.
The next decade will be one of challenge for the trust and investment
industry, and we are fully committed to developing and utilizing technology to
maximize the opportunities of 2000 and beyond.
LENDING ACTIVITIES
Small business lending continues to be a focus for our commercial
lenders and we were very pleased to be recognized for the second consecutive
year as the number two lender among all banks for the Small Business
Administration Maine District Office. This achievement is remarkable considering
Merrill Merchants originated only four loans less than the super regional bank
which finished first in the state.
Residential mortgage lending was steady throughout 1999 with $29.5
million in loans closed. We were particularly pleased with new construction
activity which accounted for more than 15% of total mortgage loans originated.
Our mortgage lenders continue to work closely with Penquis Community Action
Program (CAP) on the "Own ME" program which assists low-income individuals in
making home ownership a reality. The Federal Home Loan Bank of Boston recently
recognized the Bank, as project sponsor, and our two partners, Penquis CAP and
Acadia Recovery, by awarding three grants amounting to $345,000 in direct
subsidy from their 1999 Affordable Housing Program.
We remain committed to maintaining high credit standards, and are very
pleased with the quality of our loan assets. Non-performing loans totaled
$266,000 or .19% of total loans for the year ended December 31, 1999. The loan
loss reserve as of December 31, 1999, was $2.3 million representing 1.67% of
total loans.
COMMUNITY BUILDING
Our Bank continues to play a significant role in the communities we
serve, and this past year we joined the efforts of banks nationwide in support
of "America's Promise," The Alliance for Youth initiative spearheaded by General
Colin Powell. As a Bank of Promise we committed to increasing our support of
youth initiatives by 10%. In conjunction with this effort, we were very pleased
to provide financial support and
Page 4
<PAGE>
volunteer leadership to a number of educational, youth development, and
youth-at-risk activities including: the Bangor and Old Town-Orono YMCAs; the
Bangor-Brewer YWCA; Junior Achievement; Project Atrium; Maine Central Institute;
Abnaki Girl Scout Council; the Soap Box Derby of Eastern Maine; Shaw House;
Katahdin Area Boy Scouts; Bangor East Little League; and the University of
Maine.
In addition to youth-focused activities, the Bank provides additional
leadership and financial support to many other endeavors including efforts to
enhance economic development, education, professional, cultural and community
affairs. It has been a special privilege for your President to currently serve
as both a Director of the Federal Reserve Bank of Boston and Chairman of the
Maine Bankers Association, and it may be a unique honor that both your Chairman
and President have served in these capacities during our banking careers.
RECOGNIZING LEADERSHIP
During this year, we announced the promotion of three individuals to
executive vice president positions. William P. Lucy, Senior Vice President and
Senior Loan Officer has assumed additional management and administrative
responsibilities; Deborah A. Jordan, Senior Vice President and Chief Financial
Officer, has assumed additional responsibilities for corporate services and bank
operations; and Charles W. Hart, Senior Vice President, Retail Banking and
Branch Administration has assumed additional administrative responsibilities. We
believe that these individuals will play a significant role in helping to shape
our future.
We would also like to take this opportunity to thank two members of our
Board of Directors for the benefit of their wisdom and guidance over the past
seven years. Leonard E. Minsky and Harold S. Wright will be retiring as active
directors effective at the Annual Meeting in April. We have appreciated their
efforts on behalf of the Company and look forward to their continuing support as
Honorary Directors.
LOOKING AHEAD
Poised on the threshold of the 21st century, we recognize the many
challenges of our industry and, more particularly, the challenges that financial
stocks face. The present weakness in this market sector is due to rising
interest rates, surging valuations in technology stocks, and a departure from
value-style investing. In spite of the price decline in our Company's stock
during the fourth quarter, we were gratified that our price decline was less
than our peer group of publicly traded banks in Maine.
At Merrill Merchants we will continue to focus on providing service
excellence, improving operating efficiency, and increasing shareholder value.
Thank you for your past support and ongoing confidence in the future of our
Company.
/s/ Edwin N. Clift /s/ William C. Bullock, Jr.
Edwin N. Clift William C. Bullock, Jr.
President and Chief Executive Officer Chairman
January 31, 2000
Page 5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD LOOKING STATEMENTS
Management's discussion and analysis may contain forward-looking
statements that are provided to assist in the understanding of anticipated
future financial performance. However, such performance involves risk and
uncertainties which may cause actual results to differ materially from those
expressed in forward-looking statements. For a discussion of these risks and
uncertainties, see the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1999.
GENERAL
Merrill Merchants Bancshares, Inc. (Company) owns all of the common
stock of Merrill Merchants Bank (Bank) and Maine Acceptance Corporation (MAC).
The Bank is a full-service community bank headquartered in Bangor, Maine,
providing a wide range of consumer, commercial, and trust and investment
services through its ten branches located in central and eastern Maine.
Merrill Merchants Bank is committed to providing outstanding customer
service and building long term banking relationships with customers. Delivery on
this commitment through local decision-making and personal service has helped
distinguish Merrill Merchants from its competitors. This will continue to be
strategically significant as larger banks consolidate and their service delivery
channels become more depersonalized.
Maine Acceptance Corporation, a finance company which opened for
business in Bangor on March 1, 1999, provides indirect auto and recreational
vehicle lending, as well as other types of direct loans, including personal
unsecured, recreational vehicle, auto, mobile home and home equity loans.
The Company's goal is to sustain profitable, controlled growth by
focusing on increased loan and deposit market share; managing yields on earning
assets and rates on interest-bearing liabilities; increasing non-interest
income; and being prepared for acquisitions and expansion opportunities within
the financial services industry.
REVIEW OF FINANCIAL STATEMENTS
The Company declared a 5% stock dividend in both 1999 and 1998. In
addition, a 9-for-1 split of the Company's common stock was completed in 1998.
All financial data included herein has been restated to reflect the impact of
the stock dividends and split.
The discussion and analysis that follows focuses on the factors
affecting the Company's financial condition at December 31, 1999 and 1998 and
financial results of operations during 1999 and 1998. This discussion should be
read in conjunction with the consolidated financial statements and notes
included elsewhere in this report.
RESULTS OF OPERATIONS
OVERVIEW
The Company ended 1999 with consolidated assets of $213.7 million
representing growth of $14.0 million or 7%. The Company reported net income of
$2.2 million or $.85 per basic share and $.74 per diluted share in 1999, as
compared to $1.9 million or $.91 per basic share and $.74 per diluted share in
1998. This represented earnings growth of $331,000 or 17%. Return on average
assets increased to 1.11% in 1999 compared to 1.05% in 1998. The improved
operating results were attributable to growth in both the loan and investment
portfolios and an increase in non-interest income. Return on average equity
declined from 12.97% in 1998 to 10.52% in 1999 as a result of the initial public
offering in August 1998, which provided the Company with additional capital of
$7.7 million.
Page 6
<PAGE>
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
The following table sets forth, for the years indicated, information regarding
(i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average costs; (iii) net interest income; (iv) net interest rate spread; and (v)
net interest margin.
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Average Average
(In Thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans (1) $ 130,720 $ 12,032 9.20% $ 121,955 $ 11,655 9.56%
Investment securities (2) 57,127 3,129 5.48% 48,371 2,831 5.85%
Other earning assets 2,100 106 5.05% 2,113 111 5.25%
--------------------------------------------------------------------------
Total interest-earning assets 189,947 15,267 8.04% 172,439 14,597 8.47%
Non-earning assets 11,945 10,571
------------ ------------
Total assets $ 201,892 $ 183,010
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings deposits and interest-bearing
checking 77,370 2,468 3.19% 68,779 2,474 3.60%
Certificates of deposit 58,757 3,163 5.38% 57,220 3,236 5.66%
Securities sold under agreement to repurchase 13,299 513 3.86% 12,163 514 4.23%
Short-term borrowings 1,845 92 4.99% 1,922 106 5.52%
Long-term borrowings 1,932 123 6.37% 3,135 224 7.15%
----------------------------------- ------------------------------------
Total interest-bearing liabilities 153,203 6,359 4.15% 143,219 6,554 4.58%
----------------------------------- ------------------------------------
Other liabilities 27,452 24,947
Shareholders' equity 21,237 14,844
------------ ------------
Total liabilities and shareholders' equity $ 201,892 $ 183,010
============ ============
------------ ------------
Net interest income (2) $ 8,908 $ 8,043
============ ============
Net interest rate spread 3.89% 3.89%
=========== ============
Net interest margin 4.69% 4.66%
=========== ============
</TABLE>
(1) Non-accruing loans included in computation of average balance.
(2) Income from investment securities and net interest income is presented on a
tax-equivalent basis by adjusting income and yields earned on tax-exempt
securities assuming a federal tax of 34%.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table presents the components of the Company's net interest income
as attributed to volume and rate on a tax-equivalent basis assuming a Federal
tax rate of 34%. The net change attributable to the combined impact of volume
and rate has been solely allocated to the change in volume.
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands) Increase (Decrease) Due to Change in: Increase (Decrease) Due to Change in:
----------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $ 807 $ (430) $ 377 $ 1,046 $ (60) $ 986
Investment securities 480 (182) 298 546 (93) 453
Other earning assets (1) (4) (5) (56) (4) (60)
----------------------------------------------------------------------------
Total interest income 1,286 (616) 670 1,536 (157) 1,379
----------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings deposits and interest-bearing
checking 274 (280) (6) 441 50 491
Certificates of deposit 83 (156) (73) 108 (15) 93
Securities sold under agreement to
repurchase 44 (45) (1) 10 (7) 3
Short-term borrowings (4) (10) (14) (24) 6 (18)
Long-term borrowings (77) (24) (101) (70) (5) (75)
----------------------------------------------------------------------------
Total interest expense 320 (515) (195) 465 29 494
----------------------------------------------------------------------------
Change in net interest income $ 966 $ (101) $ 865 $ 1,071 $ (186) $ 885
============================================================================
</TABLE>
Page 7
<PAGE>
NET INTEREST INCOME
The Company's primary source of operating income is net interest
income. Net interest income on a taxable equivalent basis was $8.9 million for
1999 and $8.0 million for 1998. Net interest income is the difference between
the income earned on earning assets and the interest paid on interest-bearing
liabilities. Both net interest income and the net interest margin, which is net
interest income expressed as a percentage of average earning assets, are
affected by the volume and mix of earning assets and interest-bearing
liabilities and the interest rates earned or paid on them.
Net interest income increased by $865,000 or 11%, on a taxable
equivalent basis in 1999 compared to 1998. This increase was primarily due to
growth in the loan portfolio and investment securities. The Company's net
interest margin remained stable at 4.69% for 1999 and 4.66% for 1998 despite a
period of fluctuating interest rates as a result of the Company's management of
interest rate risk. The Federal Reserve reduced the Federal Funds rate from
5.50% to 4.75% during the fourth quarter of 1998 and increased the Federal Funds
rate during the third and fourth quarters of 1999 to 5.50%.
Interest income increased to $15.3 million or 5% in 1999. The increase
was driven by growth in the average earning assets of $17.5 million or 10% while
the Company experienced a decrease in the yield on average earning assets to
8.04% in 1999 from 8.47% in 1998.
Interest expense decreased to $6.4 million in 1999 from $6.6 million in
1998 representing a 3% decrease. This decrease was a result of growth in average
interest-bearing liabilities of $10.0 million or 7% which was offset by a
decline in the cost of funds to 4.15% in 1999 from 4.58% in 1998.
Management currently anticipates that net interest income will continue
to increase in 2000 due to expected growth in earning assets (primarily loans)
although a decline in the net interest margin is expected due to industry-wide
pricing pressure on loans and deposits.
NON-INTEREST INCOME
Non-interest income was $2.6 million for 1999 and $2.2 million for
1998. The $391,000 or 18% increase during 1999 was due to growth in almost all
the fee income categories including increases in trust fees of $154,000 and
merchant and credit card fees of $100,000.
Trust fees increased to $816,000 in 1999 compared to $662,000 in 1998.
The market value of client assets under administration increased $52.9 million,
or 39%, to $189.4 million at December 31, 1999 compared with trust assets of
$136.5 million at December 31, 1998. The increase in trust assets was achieved
through new business development and market value appreciation.
Lower interest rates on the national level in 1998 and the first half
of 1999 resulted in increased secondary market loan activity. The Company's
portfolio of residential mortgages of $66.2 million serviced for secondary
market investors increased by $9.5 million, or 17%, from December 31, 1998, to
December 31, 1999. Gains resulting from the sale of mortgages decreased to
$221,000 in 1999 compared to $297,000 for 1998 due to a significant decline in
mortgage refinancing activity due to higher interest rates on the national level
in the second half of 1999.
The generation of mortgage sale gains and trust fees is dependent on
the market and economic conditions and, as a result, there can be no assurance
that income levels reported in prior periods can be achieved in the future.
NON-INTEREST EXPENSE
Non-interest expense increased $815,000 or 12% for 1999. The increase
was primarily related to the increase in salaries and employee benefits of
$446,000. The Company's efficiency ratio (non-interest expense divided by the
sum of net interest income and fee income) improved to 67.5% for 1999 compared
to 67.7% for 1998.
Page 8
<PAGE>
Salaries and employee benefits expense totaled $4.0 million for 1999,
an increase of 13% as a result of normal annual salary increases, new staffing
needs for the finance company and two new convenience store branches, and
additional staffing required for an upcoming data processing system conversion.
Data processing expense increased by $83,000, or 12%, to $754,000 for 1999 due
to increased volume in loan and deposit transactions. Professional fees and
other costs associated with being a public company of $108,000 were incurred for
the first time in 1999. Merchant and credit card processing expense increased to
$354,000 for 1999 from $251,000 for 1998 as a result of attracting new business
accounts.
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.
BALANCE SHEET REVIEW
LOANS
The Bank offers a broad range of personal and business loan products.
Total loans (which excludes loans held for sale) of $136.2 million grew 7% from
$127.7 million at December 31, 1998. Growth in the loan portfolio was generated
from commercial and consumer loans. Commercial loan balances increased $5.4
million or 19% in 1999 and now represent 25% of the total loan portfolio
compared to 22% in 1998. Consumer loans ended the year at $10.0 million
representing growth of $3.0 million in 1999, a 44% increase over 1998. The
strong consumer loan activity was generated by new loans originated by MAC of
$1.5 million and Bank generated consumer loans of $1.5 million.
Loans secured by real estate (commercial, residential and home equity
loans) showed minimal growth in 1999 due to the refinancing boom experienced
during the first half of 1999. Many customers consolidated consumer debt and
refinanced existing mortgages and home equity loans at lower rates. Secondary
market mortgage lending remained strong in the first half of 1999 due to this
refinancing activity. Loans held for sale decreased to $381,000 at December 31,
1999 compared to $2.9 million at December 31, 1998 due to the decline in
refinancing activity.
The average yield on loans declined to 9.20% in 1999 from 9.56% in
1998. This decrease is the result of lower interest rates in 1999 (the prime
rate average was 8.02% for 1999 and 8.35% for 1998) and competitive pressure.
Management anticipates continued pressure on yields on loans due to increased
competition from banks and non-traditional credit providers.
INVESTMENT SECURITIES
The investment portfolio provides liquidity, diversification and
earnings to the Company. The investment portfolio represents 29% of the
Company's total assets. The portfolio is comprised primarily of U.S. Treasury
securities, U.S. Government agencies and collateralized mortgage obligations.
Substantially all of the Company's securities are AAA or equivalently rated.
Total investment securities increased by $5.6 million or 10% to $61.5 million at
December 31, 1999. The Company changed its investment mix during 1999 by
increasing its holdings in U.S. Government agency securities (which currently
represents 27% of the investment portfolio compared to 7% at December 31, 1998)
and reducing its U.S. Treasury security holdings to 24% at December 31, 1999,
compared to 36% the previous year. The average yield on the investment portfolio
decreased to 5.48% in 1999 compared to 5.85% in 1998 as a result of maturing
investments being reinvested at lower interest rates.
CASH AND CASH EQUIVALENTS
Total cash and cash equivalents of $9.1 million at December 31, 1999
increased by $1.5 million compared to 1998 year-end balances. The increase in
cash levels of 20% is directly related to Year 2000 liquidity concerns and the
Bank increasing vault cash reserves at year-end.
Page 9
<PAGE>
DEPOSITS
Deposits are the major source of the Company's funds for lending,
investing and other general business purposes. Deposits are attracted
principally from within the Company's primary market area through the offering
of a broad variety of deposit products, including checking accounts, money
market accounts, savings accounts, certificates of deposit (including jumbo
certificates in denominations of $100,000 or more) and retirement savings plans.
Total average deposits were $162.2 million for 1999 compared to $149.6
million for 1998, an increase of $12.6 million or 8%. The Company experienced
growth in the average balance of all deposit categories in 1999 with savings
accounts increasing 13%, interest checking and money markets increasing 12% and
non-interest checking balances increasing 10% over 1998. At December 31, 1999,
savings accounts represent 27% of the total deposits compared to 30% at December
31, 1998 and certificates of deposit as a percentage of total deposits increased
to 38% in 1999 from 36% in 1998.
Due to the lower interest rate environment, the average yield on
savings deposits and interest-bearing checking balances decreased to 3.19% in
1999 from 3.60% in 1998 and the average yield on certificates of deposit
declined to 5.38% in 1999 from 5.66% in 1998.
The Company's focus on quality customer service contributed to the
deposit growth in 1999. The Company continues to develop consumer and commercial
deposit relationships through referrals and additional contacts within its
market area.
BORROWINGS AND ACCRUED EXPENSES AND OTHER LIABILITIES
The Company's primary source of funding, other than deposits, is
securities sold under agreement to repurchase. Average balances for securities
sold under repurchase agreements were $13.3 million in 1999 and $12.2 million in
1998. These are collateralized by U.S. government obligations. Other short-term
borrowings include federal funds purchased, Federal Home Loan Bank (FHLB)
advances, treasury tax and loan deposits and interest-bearing demand notes due
to the U.S. Treasury. In August 1998, the Company paid off its long-term debt of
$2.9 million from proceeds received from the initial public offering.
Accrued expenses and other liabilities increased $3.1 million to $4.5
million at December 31, 1999. The increase is related to accruing for the
purchase of $3.0 million of investment securities that had a settlement date
after year-end.
ASSET QUALITY
Management seeks to maintain a high quality of assets through prudent
underwriting and sound lending practices. Approximately 24% of the Company's
loan portfolio is collateralized by first liens on primarily owner-occupied
residential homes which have historically carried a relatively low credit risk.
The Bank also maintains a commercial real estate portfolio comprised primarily
of owner-occupied commercial businesses.
The Bank participates in government guaranteed loan programs including
the Small Business Administration ("SBA"), Rural Development ("RD") and the
Finance Authority of Maine ("FAME"). At December 31, 1999, total loans under
these programs totaled $13.3 million of which $9.4 million, or 7% of the total
loan portfolio outstanding, is guaranteed by the various federal and state
government entities.
The Company continues to focus on asset quality issues and emphasizes
loan review and underwriting procedures. The Bank utilizes the services of a
consultant, M&M Consulting, LLC, (a joint venture owned 50% by the Company), to
perform periodic loan and documentation review. Management has established a
risk rating and review process with the objective of quickly identifying,
Page 10
<PAGE>
evaluating and initiating necessary corrective action for all commercial and
commercial real estate loans. The goal of the risk rating process is to address
the watch list, substandard and non-performing loans, as early as possible.
These components of risk management are integral elements of the Bank's loan
program which have contributed to the loan portfolio performance to date.
Nonetheless, management maintains a cautious outlook in attempting to anticipate
the potential effects of uncertain economic conditions (both locally and
nationally).
NONPERFORMING ASSETS
Nonperforming assets consist of non-accrual loans, other loans past due
over 90 days and other real estate owned. Non-performing assets at December 31,
1999, were $316,000 compared to $164,000 at December 31, 1998. Total
nonperforming assets as a percentage of total assets increased to .15% at
December 31, 1999, compared to .08% at December 31, 1998.
Loans are placed on non-accrual status when, in the judgment of
management, principal repayment is doubtful, whether current or past due. When a
loan is placed on non-accrual status, previously accrued but unpaid interest is
deducted from interest income. As a matter of policy, interest is generally not
accrued on loans past due 90 days or more. The Bank does not return a loan to
accrual status until it is brought current with respect to both principal and
interest, future payments are no longer in doubt, and the loan has been
performing for at least six consecutive months.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is a result of management's periodic
analysis of the adequacy of the allowance for loan losses. The provision for
loan losses was $345,000 for 1999 and $360,000 for 1998, a decrease of $15,000.
The allowance for loan losses represented 1.67% of loans outstanding at December
31, 1999, as compared to 1.58% at December 31, 1998. Net charge-offs were
$94,000 during 1999 or .07% of average loans outstanding, as compared to $54,000
in 1998 or .04%. The low level of net loan charge-offs is indicative of the
Company's loan quality and credit administration standards and the generally
good economic environment existing in the Company's primary market area.
The allowance for loan losses is maintained at a level determined to be
adequate by management to absorb future charge-offs of loans deemed
noncollectible. This allowance is increased by provisions charged to operating
expense and by recoveries on loans previously charged off. A high degree of
judgment is necessary to determine the appropriate level of allowance for loan
losses and requires management's ongoing evaluation of adequacy. The evaluation
process includes, 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.
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.
Future provisions for loan losses depend on such factors as asset
quality, net loan charge-offs, loan growth and other criteria discussed above.
The appropriate level of the allowance for loan losses and the corresponding
provision will continue to be determined quarterly. Management anticipates that
there will be a provision for loan losses in 2000; however, the specific amount
cannot be determined at this time. Changes in circumstances affecting the
various factors of the Company's methodology will determine the provision amount
in 2000.
Page 11
<PAGE>
YEAR 2000
Based on a review of the Bank's and the Company's business since
January 1, 2000, the Company has not experienced any material effects of the
year 2000 problem. Although the Company has not been informed of any material
risks associated with the year 2000 problem from third parties, there can be no
assurance that the Company will not be impacted in the future. The Company will
continuously monitor its business applications and maintain contact with its
third party vendors and key business partners to resolve any year 2000 problems
that may arise in the future.
The Company developed a formal customer due-diligence plan. The Company
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 is not aware of any year 2000
customer problems and the Company has not experienced any increase in customer
borrowing needs or deposit outflows. Management plans to continue its current
process of monitoring customers for year 2000 issues.
The Company estimated that total costs directly related to year 2000
issues, such as software modification and system testing would total $50,000.
Total direct costs were less than $48,000 (excluding employee hours). Purchased
hardware and software were 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 does not anticipate any additional year 2000 expenditures.
ASSET/LIABILITY MANAGEMENT
MARKET RISK
Market risk is the risk of loss in a financial instrument arising from
adverse changes in market rates/prices such as interest rates, foreign currency
exchange rates, commodity prices and equity prices. The Company's primary market
risk exposure is interest rate risk. The ongoing monitoring and management of
this risk is an important component of the Company's asset/liability management
process which is governed by policies established by its Board of Directors that
are reviewed and approved annually.
The Board of Directors delegates responsibility for carrying out the
asset/liability management policies to its Asset/Liability Committee ("ALCO").
In this capacity, ALCO develops guidelines and strategies impacting the
Company's asset/liability management process based upon estimated market risk
sensitivity, policy limits and overall market interest rate levels/trends.
INTEREST RATE RISK
Interest rate risk represents the sensitivity of earnings to changes in
market interest rates. As interest rates change, the interest income and expense
streams associated with the Company's financial instruments also change thereby
impacting net interest income ("NII"), the primary component of the Company's
earnings. ALCO utilizes the results of a detailed and dynamic simulation model
to quantify the estimated exposure of NII to sustained interest rate changes.
While ALCO routinely monitors simulated NII sensitivity over a rolling two-year
horizon, it also utilizes additional tools to monitor potential longer-term
interest rate risk.
The simulation model captures the impact of changing interest rates on
the interest income received and interest expense paid on all assets and
liabilities reflected on the Company's statement of financial condition. This
sensitivity analysis is compared to ALCO policy limits which specify a maximum
tolerance level for NII exposure over a one year horizon, assuming no balance
sheet growth, given both a 200 basis point (bp) upward and downward shift in
interest rates. A parallel and pro rata shift in rates over a 12 month period is
assumed.
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<PAGE>
LIQUIDITY
Liquidity represents the ability to meet both asset growth and deposit
withdrawals. Many factors affect a company's ability to meet liquidity needs,
including changes in the markets served, its asset-liability mix, its reputation
and credit standing in the market and general economic conditions. In addition
to traditional in-market deposit sources, the Company has other sources of
liquidity, including proceeds from maturing investment securities and loans, the
sale of investment securities, Federal Funds through correspondent bank
relationships and FHLB borrowings. Additional liquidity is available in the loan
portfolio through sale of residential mortgages and the guaranteed portion of
SBA loans. Management believes that the current level of liquidity is sufficient
to meet current and future funding requirements.
CAPITAL
At December 31, 1999, shareholders' equity totaled $21.3 million or
10.0% of total assets, as compared to $20.7 million or 10.3% at December 31,
1998. The increase in shareholders' equity was attributable to: net income of
$2.2 million and stock option exercises of $301,000, less net share repurchases
of $749,000; change in unrealized loss on securities of $517,000; and $610,000
in cash dividends.
Capital guidelines issued by the Federal Reserve Board require the
Company to maintain certain ratios. The Company's risk based capital ratios for
Tier 1 and Tier 2 Capital (as defined by federal banking agency regulations) at
December 31, 1999 of 15.96% and 17.44%, respectively, exceed regulatory
guidelines for a "well capitalized" financial institution. The Company's Tier 1
and Tier 2 risk based capital ratios at December 31, 1998 were 16.39% and
17.89%, respectively. The Bank is also subject to federal regulatory capital
requirements. At December 31, 1999, the Bank was deemed to be "well capitalized"
under the applicable regulations.
On January 20, 2000, the Board of Directors approved the repurchase of
up to 126,000 shares of the Company's common stock. These shares will be
repurchased into treasury for the purpose of funding the expected exercise of
stock options. As of December 31, 1999, the Company repurchased 80,258 shares
into treasury.
SUBSEQUENT EVENT
On January 3, 2000, Merrill Merchants Bank entered into an agreement to
purchase a branch in Holden, Maine. Subject to regulatory approval, the Bank
will assume ownership of the banking operation and facility during the first
quarter of 2000. The Holden Branch had $2.1 million of loans and $6.5 million of
deposits as of February 25, 2000.
IMPACT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137,
is effective for years beginning June 15, 2000. This statement sets accounting
and reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
This statement is expected to have no impact on the Company as it has not
engaged in any derivative transactions.
IMPACT OF ENACTMENT OF THE GRAMM-LEACH BLILEY ACT
On November 12, 1999, President Clinton signed the Gramm-Leach Bliley
Act, which among other things, establishes a comprehensive framework to permit
affiliations among commercial banks, insurance companies and securities firms.
Generally, the new law (i) repeals the historical restrictions and eliminates
many federal and state law barriers to affiliations among banks and securities
firms, insurance companies and other financial service providers, (ii) provides
a uniform framework for the
Page 13
<PAGE>
activities of banks, savings institutions and their holding companies, (iii)
broadens the activities that may be conducted by subsidiaries of national banks
and state banks, (iv) provides an enhanced framework for protecting the privacy
of information gathered by financial institutions regarding their customers and
consumers, (v) adopts a number of provisions related to the capitalization,
membership, corporate governance and other measures designed to modernize the
Federal Home Loan Bank system, (vi) requires public disclosure of certain
agreements relating to funds expended in connection with an institution's
compliance with the Community Reinvestment Act and (vii) addresses 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 and insurance activities.
Bank holding companies are permitted to engage in a wider variety of
financial activities than permitted under prior law, particularly with respect
to insurance and securities activities. In addition, in a change from prior law,
bank holding companies are in a position to be owned, controlled or acquired by
any company engaged in financially related activities.
We do not believe that the new law will have a material adverse
effect upon our operations in the near term. However, to the extent the new law
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.
MARKET FOR COMMON STOCK
The common stock of Merrill Merchants Bancshares, Inc. (ticker symbol
"MERB") began trading on the Nasdaq National Market System in August 1998. Prior
to that date, the stock was not traded on any exchange and the common stock was
subject to trading restrictions. Market prices (as quoted on Nasdaq since the
initial public offering) and cash dividends paid, per share of the Company's
common stock, by calendar quarter for the past two years were as follows:
<TABLE>
<CAPTION>
1999
- -------------------------------------------------------------------------------------------------------------------------------
Fourth Quarter Third Quarter Second Quarter First Quarter
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High $12.25 $12.13 $12.25 $13.25
Low 9.00 10.88 10.50 10.48
Close 9.25 11.50 11.75 11.50
Dividend Paid .06 .05 .05 .05
1998
- -------------------------------------------------------------------------------------------------------------------------------
Fourth Quarter Third Quarter Second Quarter First Quarter
- -------------------------------------------------------------------------------------------------------------------------------
High $13.10 $14.52 na na
Low 10.71 11.91 na na
Close 10.71 13.10 na na
Dividend Paid .05 .03 .03 .03
</TABLE>
As of December 31, 1999, the Company had approximately 1,000
shareholders of record and 2,517,739 shares outstanding.
There are significant regulatory limitations on the Company's ability
to pay dividends depending on the dividends it receives from its subsidiary,
Merrill Merchants Bank, which are subject to regulations and the Bank's
continued compliance with all regulatory capital requirements and the overall
health of the institution. In addition, the Company has a class of cumulative
preferred stock, meaning that if dividends are not paid when declared, they will
accumulate and be payable in full before any dividends are paid on common stock.
See notes 14 and 17 of the notes to the consolidated financial statements for a
discussion of the preferred stock and the Bank's regulatory matters,
respectively.
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Merrill Merchants Bancshares, Inc.
We have audited the consolidated statements of financial condition of
Merrill Merchants Bancshares, Inc. and Subsidiaries as of December 31, 1999 and
1998 and the related consolidated statements of income, changes in shareholders'
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Merrill Merchants Bancshares, Inc. and Subsidiaries at December 31, 1999 and
1998 and the consolidated results of their operations and their consolidated
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/Berry, Dunn, McNeil & Parker
BERRY DUNN MCNEIL & PARKER
Bangor, Maine
January 13, 2000
<PAGE>
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
ASSETS
DECEMBER 31,
1999 1998
<S> <C> <C>
Cash and due from banks $ 9,081 $ 6,081
Interest-bearing deposits with banks 41 46
Federal funds sold -- 1,500
-------- --------
Total cash and cash equivalents 9,122 7,627
Investment securities
Available for sale 61,213 55,241
To be held to maturity 262 668
Loans held for sale 381 2,875
Loans receivable 136,222 127,655
Less allowance for loan losses 2,274 2,023
-------- --------
Net loans receivable 133,948 125,632
Other real estate owned 50 12
Properties and equipment, net 3,074 2,777
Deferred income tax benefit 570 189
Accrued income and other assets 5,127 4,722
-------- --------
Total assets $213,747 $199,743
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 27,639 $ 25,207
Savings and NOW deposits 77,759 79,737
Certificates of deposit 63,180 59,184
-------- --------
Total deposits 168,578 164,128
Securities sold under agreements to
repurchase (term and demand) 13,791 11,747
Other borrowed funds 5,278 1,461
Accrued expenses and other liabilities 4,542 1,452
Mandatory convertible debentures 300 300
-------- --------
Total liabilities 192,489 179,088
-------- --------
Commitments (Notes 6, 7, 13, 17 and 18)
Shareholders' equity
Convertible cumulative preferred stock, par value
$1; authorized 50,000 shares, issued and outstanding
19,566 shares 20 20
Common stock, $1 par value; 4,000,000 shares authorized;
shares issued 2,583,986 and outstanding 2,517,739 in
1999; and shares issued and outstanding 2,388,036 in 1998 2,584 2,388
Capital surplus 17,220 15,527
Retained earnings 2,618 2,638
Unrealized gain (loss) on securities available for sale, net of tax
of $(224) and $43 in 1999 and 1998, respectively (435) 82
Treasury stock, at cost - 66,247 shares in 1999 (749) --
-------- --------
Total shareholders' equity 21,258 20,655
-------- --------
Total liabilities and shareholders' equity $213,747 $199,743
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 16
<PAGE>
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA) YEARS ENDED DECEMBER 31
1999 1998
<S> <C> <C>
Interest and dividend income
Interest and fees on loans $12,032 $11,655
Interest on investment securities 2,826 2,512
Dividends on investment securities 280 216
Interest on federal funds sold 106 203
------- -------
Total interest and dividend income 15,244 14,586
------- -------
Interest expense
Interest on deposits 5,631 5,710
Interest on borrowed funds 728 844
------- -------
Total interest expense 6,359 6,554
------- -------
Net interest income 8,885 8,032
Provision for loan losses 345 360
------- -------
Net interest income after provision for loan losses 8,540 7,672
------- -------
Other income
Service charges on deposit accounts 583 516
Other service charges and fees 689 523
Trust fees 816 662
Net gain on sale of mortgage loans 221 297
Other 293 213
------- -------
Total other income 2,602 2,211
------- -------
Other expense
Salaries and employee benefits 3,956 3,510
Occupancy expense 633 635
Equipment expense 484 511
Data processing 754 671
Other 1,927 1,612
------- -------
Total other expense 7,754 6,939
------- -------
Income before income taxes 3,388 2,944
Income tax expense 1,141 1,028
------- -------
Net income $ 2,247 $ 1,916
======= =======
Per share data
Basic earnings per common share $ 0.85 $ 0.91
======= =======
Diluted earnings per common share $ 0.74 $ 0.74
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 17
<PAGE>
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
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 - - - 1,916 - - 1,916
Change in unrealized gain (loss)
on securities available for sale,
net of deferred income taxes
of $41 - - - - 78 - 78
--- ------ ------- ------ ----- ----- -------
Total comprehensive income - - - 1,916 78 - 1,994
Common stock options exercised
77,244 shares - 77 309 - - - 386
5% common stock dividend declared - 79 489 (569) - - (1)
Common stock offering - 690 7,448 - - - 8,138
Offering cost - - (473) - - - (473)
Common stock cash dividend
declared, $.14 per share - - - (281) - - (281)
Convertible cumulative preferred
stock dividends declared,
$3.84 per share - - - (75) - - (75)
--- ------ ------- ------ ----- ----- -------
Balance at December 31, 1998 $20 $2,388 $15,527 $2,638 $ 82 $ - $20,655
Net income - - - 2,247 - - 2,247
Change in unrealized gain (loss)
on securities available for
sale, net of deferred income
taxes of $(267) - - - - (517) - (517)
--- ------ ------- ------ ----- ----- -------
Total comprehensive income - - - 2,247 (517) - 1,730
Common stock options exercised,
96,132 shares - 74 177 (111) - 161 301
5% common stock dividend
declared - 122 1,424 (1,546) - - -
Treasury stock purchased (80,258
shares at an average price of
$11.34) - - - - - (910) (910)
Tax benefit related to exercise of
stock options - - 92 - - - 92
Common stock cash dividend
declared, $.21 per share - - - (538) - - (538)
Convertible cumulative preferred
stock dividends declared, $3.68
per share - - - (72) - - (72)
--- ------ ------- ------ ----- ----- -------
Balance at December 31, 1999 $20 $2,584 $17,220 $2,618 $(435) $(749) $21,258
=== ====== ======= ====== ===== ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 18
<PAGE>
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS) YEARS ENDED DECEMBER 31
1999 1998
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,247 $ 1,916
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 298 375
Amortization 170 59
Net amortization on investment securities 196 3
Deferred income taxes (114) (101)
Originations of loans held for sale (17,419) (32,927)
Proceeds from sale of loans held for sale 19,913 30,666
Increase in accrued income and other assets (312) (182)
Increase in accrued expenses and other liabilities 181 348
Decrease in deferred loan fees, net (4) (22)
Provision for loan losses 345 360
Provision for losses on other real estate owned - 5
Net gain on sale of mortgage loans,
investment securities, and property and equipment (158) (295)
-------- --------
Net cash provided by operating activities 5,343 205
-------- --------
Cash flows from investing activities
Net loans made to customers (8,838) (8,781)
Acquisition of premises and equipment (726) (348)
Purchase of investment securities available for sale (50,136) (54,590)
Proceeds from sales and maturities of investment securities
Sales and maturities of available for sale securities 46,151 42,824
Maturities of held to maturity securities 407 1,293
Proceeds from sale of other real estate owned 49 38
Proceeds from sale of premises and equipment 153 -
Acquisition of life insurance policies - (1,960)
-------- --------
Net cash used in investing activities (12,940) (21,524)
-------- --------
Cash flows from financing activities
Net increase in demand, savings and NOW deposits 454 15,413
Net increase in certificates of deposit 3,996 2,403
Net increase (decrease) in securities sold under
agreement to repurchase 2,044 (150)
Net increase (decrease) in other borrowed funds 3,817 (3,683)
Payment of long-term debt - (2,895)
Dividends paid on convertible cumulative preferred stock
and common stock (610) (357)
Proceeds from stock issuance, net of cost 301 8,051
Purchase of treasury stock (910) -
-------- --------
Net cash provided by financing activities 9,092 18,782
-------- --------
Net (decrease) increase in cash and cash equivalents 1,495 (2,537)
Cash and cash equivalents, beginning of year 7,627 10,164
-------- --------
Cash and cash equivalents, end of year $ 9,122 $ 7,627
======== ========
Supplemental disclosures of cash flow information
Cash paid for interest $ 6,342 $ 6,633
Transfers to other real estate owned 177 12
Income tax paid 1,327 1,118
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 19
<PAGE>
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(PRESENTED IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies conform to generally accepted
accounting principles and to general practice within the banking
industry. The following is a summary of the significant accounting and
reporting policies.
NATURE OF BUSINESS
Merrill Merchants Bancshares, Inc. is a one-bank holding company
that owns all of the common stock of Merrill Merchants Bank (Bank) and
Maine Acceptance Corporation (MAC). The Bank operates branches in Bangor
(three offices), Brewer, Milford, Newport, Orono, Orrington, and
Pittsfield, Maine.
The Bank's lending activities are conducted principally in central
Maine. The Bank grants single family and multi-family residential loans,
commercial real estate loans, commercial loans, and a variety of consumer
loans. In addition, the Bank grants loans for the construction of
residential homes, multi-family properties and commercial real estate
properties. Most loans granted by the Bank are either collateralized by
real estate or guaranteed by federal and local governmental authorities.
The ability and willingness of the single family residential and consumer
borrowers to honor their repayment commitments is generally dependent on
the level of overall economic activity within the borrowers' geographic
areas and real estate values. The ability and willingness of commercial
real estate, commercial and construction loan borrowers to honor their
repayment commitments is generally dependent on the health of the real
estate economic sector in the borrowers' geographic areas and the general
economy.
Maine Acceptance Corporation, a finance company located in Bangor,
Maine, provides indirect auto and recreational vehicle lending, as well
as other types of loans, including personal unsecured, recreational
vehicles, automobiles, mobile homes, and home equity loans.
The Bank is under the supervision of the Board of Governors of the
Federal Reserve System and the Maine Bureau of Banking, and its deposits
are insured by the Federal Deposit Insurance Corporation (FDIC).
ESTIMATES
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.
FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements include the accounts
of Merrill Merchants Bancshares, Inc. and its wholly-owned subsidiaries,
Merrill Merchants Bank, a state-chartered bank and Maine Acceptance
Corporation. All intercompany accounts and transactions have been
eliminated in the consolidated financial statements.
Page 20
<PAGE>
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires a company to disclose certain income statement and
balance sheet information by operating segment. Since the Company's
operations include only its banking and financing activities, no
additional disclosure standards are required by the Statement.
INVESTMENT SECURITIES
Investment debt securities that management has the ability and intent
to hold to maturity are classified as held to maturity and carried at
amortized cost. Other marketable securities are classified as available
for sale and are carried at fair value. Unrealized gains and losses on
securities available for sale, net of income taxes, are recognized as
direct increases or decreases in shareholders' equity. Cost of securities
sold is recognized using the specific identification method.
Premiums are amortized and discounts are accreted using methods
approximating the interest method.
LOANS HELD FOR SALE
Residential mortgage loans originated and intended for sale in the
secondary market are carried at the lower of aggregate cost or estimated
market value. Gains or losses on sales of loans are recognized at the
time of sale and are based upon the difference between the selling price
and the carrying amount of loans sold.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) includes real estate and repossessed
personal property held for sale which have been acquired principally
through foreclosure or a similar conveyance of title. Real estate may be
considered to be in-substance foreclosed and included in OREO, prior to
the conveyance of title when specific criteria are met. Both foreclosed
and in-substance foreclosed real estate, as well as repossessed personal
property, are carried at the lower of their recorded amounts or fair
value less estimated costs of disposal. Any write-downs at, or prior to,
the dates of acquisition are charged to the allowance for loan losses.
Subsequent write-downs are recorded in other expense. Expenses incurred
in connection with holding such assets and gains and losses upon sale are
included in other expense or other income.
LOANS RECEIVABLE
Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for
loan losses, and any deferred fees or costs.
Interest on loans is accrued and credited to income based on the
principal amount outstanding. The accrual of interest on loans is
discontinued when, in the opinion of management, there is an indication
that the borrower may be unable to meet payments as they become due or
the loan becomes past due 90 days or more. Upon such discontinuance, all
unpaid accrued interest is reversed. Interest income is subsequently
recognized only to the extent cash payments are received.
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. Loans deemed
uncollectible are charged to the allowance. Provisions for loan losses
and recoveries on loans previously charged off are added to the
allowance.
Loans considered to be impaired are reduced to the present value of
expected future cash flows or to the fair value of collateral, by
allocating a portion of the allowance for loan losses to such loans. If
these allocations cause the allowance for loan losses to require an
increase, such increase is included in the provision for loan losses.
Page 21
<PAGE>
LOAN SERVICING
The cost of mortgage servicing rights is amortized in proportion to,
and over the period of, estimated net servicing revenues. Impairment of
mortgage servicing rights is assessed based on the fair value of those
rights. Fair values are estimated using discounted cash flows based on a
current market interest rate. For purposes of measuring impairment, the
rights are stratified based on loan type, investor type, and interest
rate. The amount of impairment recognized is the amount by which the
capitalized mortgage servicing rights for a stratum exceed their fair
value.
PROPERTIES AND EQUIPMENT
Properties and equipment are stated at cost, less accumulated
depreciation. The provision for depreciation is computed on the
straight-line method and by accelerated methods over the estimated useful
lives of the assets.
GOODWILL AND ORGANIZATION COSTS
Goodwill is being amortized using the straight-line method over fifteen
years. Prior to 1999, organization costs were amortized using the
straight-line method over seven years. Upon adoption of Statement of
Position No. 98-5 in January 1999, the unamortized balance of
organization costs of $44 was expensed.
LOAN ORIGINATION FEES AND COSTS
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield on the related
loan.
INCOME TAXES
The Company records deferred tax assets and liabilities for future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Bank has entered into
off-balance-sheet financial instruments consisting of commitments to
extend credit, letters of credit and unadvanced commitments under
commercial and home equity lines of credit, credit cards, and overdraft
protection accounts. Such financial instruments are recorded in the
consolidated financial statements when they become payable.
CASH AND CASH EQUIVALENTS
For the purpose of presentation in the consolidated statements of cash
flows, cash and cash equivalents are defined as cash and due from banks,
interest-bearing deposits with banks and federal funds sold.
EARNINGS PER SHARE
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 5% stock dividends in 1999 and 1998. Earnings and
cash dividends per share and weighted-average shares outstanding have
been retroactively restated to reflect the stock dividends, as well as
the stock split effected in the form of an 800% stock dividend with an
effective date of July 20, 1998.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
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 had no effect on net income for 1999 as
organization costs would have been fully amortized by the end of 1999.
SFAS No. 133, "Accounting for Derivative Instruments and
Page 22
<PAGE>
Hedging Activities," as amended by SFAS No. 137, is effective for
years beginning after June 15, 2000. This statement sets accounting
and reporting standards for derivative instruments and hedging
activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those
instruments at fair value. This statement is expected to have no
impact on the Company as it has not engaged in any derivative
transactions.
2. CASH AND CASH EQUIVALENTS
The Federal Reserve Board requires the Bank to maintain a rolling
average compensating balance of $400 in amounts on deposit. The Company
maintains its cash in bank deposit accounts which, at times, may exceed
federally insured limits. The Company has not experienced any losses in
such accounts. The Company believes it is not exposed to any significant
risk with respect to these accounts.
3. INVESTMENT SECURITIES
The carrying amounts of investment securities as shown in the
consolidated statements of financial condition and their approximate fair
values at December 31, 1999 and 1998 were as follows:
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
U.S. Treasury securities $15,132 $ 2 $(129) $15,005
U.S. Government agencies and
corporations 16,617 - (140) 16,477
Mortgage-backed securities and
collateralized mortgage
obligations 21,524 - (323) 21,201
State and local government
debt securities 1,620 - - 1,620
U.S. Government and agency money
market funds 2,632 - - 2,632
Certificates of deposit 2,971 - - 2,971
Other securities 1,376 - (69) 1,307
------- ---- ----- -------
$61,872 $ 2 $(661) $61,213
======= ==== ===== =======
</TABLE>
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
Mortgage-backed securities and
collateralized mortgage obligations $ 262 $ - $ (1) $ 261
======= ==== ===== =======
</TABLE>
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
U.S. Treasury securities $20,181 $136 $ (13) $20,304
U.S. Government agencies and
corporations 4,028 10 (4) 4,034
Mortgage-backed securities and
collateralized mortgage obligations 20,650 54 (57) 20,647
State and local government debt securities 621 - - 621
U.S. Government and agency money
market funds 5,081 - - 5,081
Certificates of deposit 3,664 - - 3,664
Other securities 890 - - 890
------- ---- ----- -------
$55,115 $200 $(74) $55,241
======= ==== ===== =======
</TABLE>
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Mortgage-backed securities and
collateralized mortgage obligations $ 668 $ 1 $ - $ 669
======= ==== ===== =======
</TABLE>
At December 31, 1999, investment securities with amortized cost of
$30,070 and fair value of $29,769 were pledged to secure public deposits,
treasury tax and loan deposits and borrowings and for other purposes
required or permitted by law.
The amortized cost and fair value of debt securities at December 31,
1999 by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment
penalties.
Page 23
<PAGE>
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE SECURITIES HELD TO MATURITY
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Due in one year or less $14,841 $14,805 $ - $ -
Due from one to five years 21,703 21,464 - -
Due from five to ten years 7,026 6,928 262 261
Due after ten years 14,294 14,077 - -
------- ------- ---- ----
$57,864 $57,274 $262 $261
======= ======= ==== ====
</TABLE>
Mortgage-backed securities and collateralized mortgage obligations are
allocated among the above maturity groupings based on their final
maturity dates.
During 1999 and 1998, the Company sold U.S. Government and agency money
market funds securities available for sale for total proceeds of $17,512
and $25,019, respectively. The sales resulted in gross realized losses of
$36 for 1999 and no gains or losses for 1998.
4. LOANS RECEIVABLE
The components of loans receivable were as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Commercial $ 33,711 $ 28,352
Commercial real estate 49,161 48,896
Construction 1,937 1,833
Residential real estate 23,390 22,279
Home equity 18,054 19,362
Consumer 9,994 6,963
Less deferred loan fees (25) (30)
-------- --------
Total $136,222 $127,655
======== ========
</TABLE>
The Bank services residential mortgage loans sold to investors under
nonrecourse agreements amounting to 66,248 and $56,759 at December 31,
1999 and 1998, respectively. Mortgage servicing rights of $172 and $191
were capitalized in 1999 and 1998, respectively. Amortization of mortgage
servicing rights was $80 and $47 in 1999 and 1998, respectively.
Impaired loans recorded in conformity with SFAS No. 114, as amended by
SFAS No. 118, totaled $337 and $549 at December 31, 1999 and 1998,
respectively. The total allowance for loan losses related to these loans
was $130 and $215 at December 31, 1999 and 1998, respectively. The
average balance of outstanding impaired loans was $440 and $554 for 1999
and 1998, respectively. Interest income recognized for cash payments on
impaired loans during 1999 and 1998 was not material to the consolidated
financial statements.
5. ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses at December 31, 1999
and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Balance at beginning of year $2,023 $1,717
Add: Provision for loan losses 345 360
Recoveries of previous charge-offs 31 24
Less: Loans charged off (125) (78)
------ ------
Balance at end of year $2,274 $2,023
====== ======
</TABLE>
6. PROPERTIES AND EQUIPMENT
Properties and equipment are comprised of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Land and land improvements $ 385 $ 435
Bank premises 1,760 1,861
Furniture and equipment 2,850 2,152
Leasehold improvements 209 197
------ ------
Total cost 5,204 4,645
Less accumulated depreciation 2,130 1,868
------ ------
Net properties and equipment $3,074 $2,777
====== ======
</TABLE>
Certain Bank facilities and equipment are leased under various operating
leases. Rental expense was approximately $235 for both 1999 and 1998. Future
minimum rental commitments under noncancelable leases at December 31, 1999 are:
<TABLE>
<S> <C>
2000 $ 249
2001 248
2002 193
2003 147
2004 131
Thereafter 125
------
$1,093
======
</TABLE>
Page 24
<PAGE>
7. EMPLOYEE BENEFIT PLANS
The Company has established a defined contribution pension plan under
Section 401(k) of the Internal Revenue Code. Plan participants, who
consist of all employees meeting minimum age and service requirements who
elect to participate, are permitted to contribute a percentage of their
wages to the plan on a pre-tax basis. The Company matches a portion of
each employee's contribution, resulting in an expense of $70 and $60 for
1999 and 1998, respectively.
In 1997. the Company adopted a nonqualified supplemental executive
retirement plan for the benefit of key employees. In connection with this
plan, the previously existing nonqualified deferred compensation was
terminated. Life insurance policies were acquired for the purpose of
serving as the primary funding source. The amount of each annual benefit
is indexed to the financial performance of each insurance policy owned by
the Bank over the Bank's cost of funds expense. The present value of
these benefits is being expensed over the employment service period which
amounted to $92 for 1999 and $25 for 1998. The cash value of these
policies was $2,656 and $2,559 at December 31, 1999, and 1998,
respectively.
8. DEPOSITS
The aggregate amount of certificates of deposit with a minimum
denomination of $100 was $12,982 and $10,764 at December 31, 1999 and
1998, respectively.
At December 31, 1999, the scheduled maturities of certificates of
deposit are as follows:
<TABLE>
<S> <C>
2000 $43,127
2001 8,626
2002 10,354
2003 406
2004 and thereafter 667
-------
$63,180
=======
</TABLE>
9. BORROWED FUNDS
Securities sold under agreements to repurchase generally mature
within one to four days from the transaction date. Other borrowed funds
consist of Federal Home Loan Bank (FHLB) advances and treasury, tax and
loan deposits. Treasury tax and loan deposits are repaid upon
notification by the U.S. Treasury.
Information concerning securities sold under agreements to repurchase
is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Average balance during the year $13,299 $12,163
Average interest rate during the year 3.86% 4.23%
Average interest rate at end of the year 4.35% 3.60%
Maximum month-end balance during the year 14,502 13,554
</TABLE>
The Bank is required to own stock of the FHLB in order to borrow from
the FHLB. FHLB advances are collateralized by a pledge of certain
mortgage loans and by a lien on the Bank's FHLB stock of $583 at December
31, 1999, which is included in investment securities available for sale
in the consolidated statements of financial condition.
A summary of borrowing from the FHLB at December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
FINAL MATURITY INTEREST RATE AMOUNT
<S> <C> <C>
March 2000 5.19% $1,000
April 2001 5.81 12
September 2002 6.18 176
September 2007 6.47 580
------
$1,768
======
</TABLE>
Maturities on FHLB borrowings are as follows:
<TABLE>
<S> <C>
2000 $1,120
2001 139
2002 119
2003 72
2004 77
Thereafter 241
------
Total $1,768
======
</TABLE>
10. MANDATORY CONVERTIBLE DEBENTURES
The Company issued $300 of mandatory convertible debentures which bear
interest at 1% per annum in excess of the prime rate of interest of the
Bank of Boston N.A. Interest is payable on March 31, June 30, September
30, and
Page 25
<PAGE>
December 31 of each year until the debentures are paid in full or
converted into shares of common stock. On or prior to September 30, 2002,
the holders of the debentures must convert the entire principal amount
into shares of common stock of Merrill Merchants Bancshares, Inc. at a
conversion rate equal to $4.29 of principal amount of debentures for one
share of common stock, subject to adjustment for any recapitalization of
common stock, such as a split or reverse split of common stock.
The debentures are unsecured and any payment of interest or principal
will be subordinated to the timely payment of principal and interest on
all existing and future obligations of the Company for borrowed money
from any bank, trust company, insurance company or other financial
institution engaged in the business of lending money.
11. INCOME TAXES
The current and deferred components of income tax expense are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Current
Federal $1,216 $1,093
State 39 36
------ ------
1,255 1,129
Deferred (114) (101)
------ ------
$1,141 $1,028
====== ======
</TABLE>
The actual tax expense differs from the expected tax expense computed
by applying the applicable U.S. federal corporate income tax rate to
income before income taxes as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Computed tax expense $1,152 $1,001
Increase (reduction) in
income tax expense resulting from:
Income from life insurance (64) (37)
Tax exempt income (45) (33)
State taxes, net of federal benefit 26 24
Other 72 73
------ ------
$1,141 $1,028
====== ======
</TABLE>
The tax effects of temporary differences that give rise to deferred
income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1999 1998
ASSET LIABILITY ASSET LIABILITY
<S> <C> <C> <C> <C>
Allowance for loan losses $393 $ - $276 $ -
Unrealized gain/loss on
securities available for sale 224 - - 43
Start-up costs - - - 22
Mortgage servicing rights - 120 - 88
Deferred compensation 71 - 22 -
Other 12 10 55 11
---- ---- ---- ----
$700 $130 $353 $164
==== ==== ==== ====
</TABLE>
Management expects the Company will realize all deferred income tax
benefits to offset the income tax liabilities arising from the reversal
of taxable temporary differences and taxable income generated in future
years. Accordingly, the Company has not established a valuation allowance
for deferred income tax benefits.
12. RELATED PARTIES
The Bank has entered into loan transactions with its directors,
executive officers, significant shareholders and their affiliates
(related parties). Such transactions were made in the ordinary course of
business on substantially the same terms and conditions, including
interest rates and collateral, as those prevailing at the same time for
comparable transactions with other customers, and did not, in the opinion
of management, involve more than normal credit risk or present other
unfavorable features. Loans to related parties which in aggregate exceed
$60 were as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Balance, January 1 $ 4,999 $2,562
Loans made/advanced 2,842 3,041
Repayments (1,200) (604)
------- ------
Balance, December 31 $ 6,641 $4,999
======= ======
</TABLE>
Commitments, as described in Note 13, to related parties which in
aggregate exceed $60 totaled $4,360 and $4,004 at December 31, 1999 and
1998, respectively.
Page 26
<PAGE>
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers which involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the consolidated statements of
financial condition. The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual notional
amount of those instruments. The Bank follows the same credit policies in
making commitments and conditional obligations as it does for
on-balance-sheet instruments, including requiring collateral or other
security to support financial instruments with credit risk.
The Bank's commitments at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Commitments to extend credit $ 5,442 $ 6,735
Letters of credit 1,420 1,153
Unadvanced commitments
Commercial lines of credit 20,963 15,529
Construction lines of credit 1,598 774
Home equity lines of credit 9,248 10,193
Overdraft protection accounts 1,587 1,507
Credit card lines 2,554 2,386
</TABLE>
14. SHAREHOLDERS' EQUITY
On February 26, 1999 and February 28, 1998, the Company declared 5%
stock dividends on its common stock. Earnings per share for 1999 and 1998
have been restated to reflect this stock dividend.
In 1998, the Company increased the number of authorized shares of
common stock and declared a stock split effected in the form of an 800%
stock dividend, with an effective date of July 20, 1998. All share and
per share information presented in the accompanying consolidated
financial statements has been retroactively adjusted for the stock split.
Holders of preferred stock are entitled to dividends equal to the
total stated value of $46.00 per share multiplied by the prime rate in
effect from time to time as announced by Bank of Boston. The dividends
payable on the preferred stock are cumulative, meaning that if dividends
are not paid when declared, they will accumulate and be payable in full
before any dividends are paid on common stock. However, the payment of
any dividends on or the redemption of the preferred stock is subordinate
to the payment of any debt by the Company. The preferred stock is
non-voting.
Each share of preferred stock is convertible into 10.72 shares of
common stock, adjusted for recapitalization of the common stock (such as
a split or stock dividends). After October 1, 2002, and to the extent not
previously converted into common stock, the preferred stock may be
redeemed by the Company for a price equal to the sum of its stated value
plus unpaid and accrued dividends. However, the preferred stock may not
be called or redeemed by the Company unless approved in advance by the
Federal Reserve Bank of Boston.
15. OTHER EXPENSE
Other expense amounts are summarized as follows for 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Professional fees $ 368 $ 254
Merchant processing 354 251
Other 272 216
Advertising and promotion 221 204
Printing, postage, stationery, and supplies 200 197
Trust expense 136 110
Travel, meetings, conventions, and employee education 109 109
Telephone 101 99
Amortization 90 107
Insurance 76 65
------ ------
Total $1,927 $1,612
====== ======
</TABLE>
Page 27
<PAGE>
16. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except for number of shares and
per-share data):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Basic earnings per share
Net income, as reported $ 2,247 $ 1,916
Preferred stock dividends declared (72) (75)
---------- ----------
Income available to common shareholders $ 2,175 $ 1,841
========== ==========
Weighted-average shares outstanding 2,561,220 2,021,874
========== ==========
Basic earnings per share $ 0.85 $ 0.91
========== ==========
Diluted earnings per share
Net income, as reported $ 2,247 $ 1,916
Interest on mandatory convertible debentures,
net of tax 18 19
---------- ----------
Income available to common shareholders $ 2,265 $ 1,935
========== ==========
Weighted-average shares outstanding 2,561,220 2,021,874
Effect of stock options, net of assumed
treasury stock purchases 221,657 300,094
Effect of convertible preferred stock 209,798 209,798
Effect of mandatory convertible debentures 69,930 69,930
---------- ----------
Adjusted weighted-average
shares outstanding 3,062,605 2,601,696
========== ==========
Diluted earnings per share $ 0.74 $ 0.74
========== ==========
</TABLE>
17. REGULATORY MATTERS
The Company and Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and
possibly additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the Company and Bank's
consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Company and
Bank must meet specific capital guidelines that involve quantitative
measures of the Company's and Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and of
Tier I capital (as defined) to average assets (as defined). Management
believes as of December 31, 1999, that the Company and Bank meet all
capital adequacy requirements to which they are subject.
As of December 31, 1999, the most recent notification from the
Federal Reserve Bank categorized the Company and Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized "well capitalized," the Company and Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed this category.
The Company's and Banks actual capital amounts and ratios are also
presented in the table. No deduction was made from capital for
interest-rate risk in 1999 and 1998.
Page 28
<PAGE>
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER PROMPT
ACTUAL ADEQUACY PURPOSES CORRECTIVE ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total capital (to risk
weighted assets)
Consolidated $23,389 17.44% $10,728 8.00% N/A
Bank 17,857 13.60 10,503 8.00 $13,129 10.00%
Tier I capital (to risk
weighted assets)
Consolidated 21,404 15.96 5,364 4.00 N/A
Bank 16,209 12.35 5,252 4.00 7,877 6.00
Tier I capital (to
average assets)
Consolidated 21,404 10.23 8,371 4.00 N/A
Bank 16,209 7.95 6,117 3.00 10,195 5.00
As of December 31, 1998
Total capital (to risk
weighted assets)
Consolidated $22,099 17.89% $ 9,883 8.00% N/A
Bank 16,510 13.49 9,791 8.00 $12,239 10.00%
Tier I capital (to risk
weighted assets)
Consolidated 20,249 16.39 4,942 4.00 N/A
Bank 14,974 12.23 4,896 4.00 7,343 6.00
Tier I capital (to
average assets)
Consolidated 20,249 10.31 7,854 4.00 N/A
Bank 14,974 7.84 7,636 4.00 9,545 5.00
</TABLE>
18. STOCK OPTIONS
Under the Employee and Director Stock Option Plan, the incentive
stock option plan (ISO) for officers and employees and the nonstatutory
stock option plan (Non-ISO) for directors provide for the issuance of up
to 678,195 shares of common stock. The purchase price of the stock
covered by each option shall be its fair market value, which must be
equal to at least 100% of the book value of common stock, on the date
such option is granted. Options granted through 1997 were subject to an
initial vesting period which ended on December 31, 1997, after which
options become exercisable until May 26, 2003. Options granted in 1999
and 1998 were granted subject to an initial vesting period of one or two
years, after which options become exercisable until ten years from the
grant date.
The Company accounts for these options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." As the exercise price of each option equals the market price
of the Company's stock on the date of grant, no compensation cost has
been recognized for the plan. Had compensation cost for the plan been
determined based on the fair value of the options at the grant dates
consistent with the method described in SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's 1999 and 1998 net income and
earnings per share would have been reduced to the pro forma amounts
indicated below.
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT FOR PER-SHARE DATA) EARNINGS PER SHARE
NET INCOME BASIC DILUTED
<S> <C> <C> <C>
1999
As reported $2,247 $0.85 $0.74
Pro forma 2,230 0.84 0.73
1998
As reported 1,916 0.91 0.74
Pro forma 1,848 0.88 0.72
</TABLE>
Page 29
<PAGE>
The fair value of each option is estimated on the date of grant using
the Black-Scholes options-pricing model with the following
weighted-average assumptions used for all grants in 1999 and 1998;
dividend yield of 2.59% in 1999 and 1.78% in 1998, risk-free interest
rate of 6%, expected lives of two years, and expected volatility of 27%.
A summary of the status of the plan as of December 31, 1999 and 1998,
and changes during the years then ended, is presented below.
<TABLE>
<CAPTION>
1999 1998
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE
<S> <C> <C> <C> <C>
Outstanding at beginning of year 493,131 $ 5.16 469,917 $5.09
Granted during the year 27,000 10.63 81,900 6.84
Exercised during the year (96,132) 6.38 (77,244) 5.01
Forfeited during the year (13,279) 4.77 (4,500) 6.87
Additional shares for which
options are exercisable due to
stock dividends 22,400 - 23,058 -
------- ------ ------- -----
Outstanding at end of year 433,120 $ 5.28 493,131 $5.16
======= =======
Weighted-average fair value
of options granted during the year $10.63 $6.52
</TABLE>
The following information applies to options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WTD. AVG.
NUMBER REMAINING WTD. AVG. NUMBER WTD. AVG.
OF CONTRACTUAL EXERCISE OF EXERCISE
RANGE OF EXERCISE PRICE SHARES LIFE PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C>
$ 4.37 - $ 6.55 408,120 2.4 $4.95 394,890 $4.90
$10.63 25,000 8.5 10.63 - -
</TABLE>
19. SUBSEQUENT EVENT
Subsequent to December 31, 1999, the Bank entered into an agreement
to buy a branch in Holden, Maine. The purchase price will be determined
by reference to the book value of branch assets and liabilities at the
closing date.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions are set forth below for
the Company's financial instruments.
CASH AND CASH EQUIVALENTS
The fair value of cash and due from banks, interest-bearing deposits
with banks and federal funds sold approximates their relative book values
at December 31, 1999 and 1998, as these financial instruments have short
maturities.
INVESTMENT SECURITIES
The fair values of investment securities are estimated based on bid
prices published in financial newspapers or bid quotations received from
securities dealers.
LOANS HELD FOR SALE
The fair values of loans held for sale are based on quoted market
prices from the Federal National Mortgage Association.
LOANS RECEIVABLE
Fair values are estimated for portfolios of loans receivable with
similar financial characteristics. The fair values approximate carrying
value for all loans with variable interest rates.
The fair values of fixed rate loans are calculated by discounting
scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the risk inherent in the loan. The
estimates of maturity are based on the Bank's historical experience with
repayments for each loan classification, modified, as required, by an
estimate of the effect of current economic and lending conditions, and
the effects of estimated prepayments.
Management has made estimates of fair value using discount rates that
it believes to be reasonable. However, because there is no market for
many of these financial instruments, management has no basis to determine
Page 30
<PAGE>
whether the fair value presented below would be indicative of the value
negotiated in the actual sale.
CASH SURRENDER VALUE OF LIFE INSURANCE
The fair value is based on the actual cash surrender value of life
insurance policies.
ACCRUED INTEREST RECEIVABLE
The fair value approximates the carrying value as this financial
instrument has a short maturity. It is the Bank's policy to stop accruing
interest on loans for which it is probable that the interest is not
collectible. Therefore, the fair value of this financial instrument has
been adjusted to reflect credit risk.
CAPITALIZED MORTGAGE SERVICING RIGHTS
The fair value of mortgage servicing rights is based on the expected
present value of future mortgage servicing income, net of estimated
servicing costs, considering market consensus loan prepayment
predictions.
DEPOSITS
The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings, NOW accounts and money
market accounts, is equal to the amount payable on demand. The fair value
of certificates of deposit is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
The fair value estimates do not include the benefit that results from
the low-cost funding provided by the deposits compared to the cost of
borrowing funds in the market. If that value were considered, the fair
value of the Bank's net assets could increase.
BORROWED FUNDS
The fair value approximates the carrying value as these financial
instruments have short maturities, variable interest rates, or both.
ACCRUED INTEREST PAYABLE
The fair value approximates the book value as this financial instrument
has a short maturity.
OFF-BALANCE SHEET INSTRUMENTS
The Company's off-balance sheet instruments consist of loan
commitments. Fair values for loan commitments have not been presented as
the future revenue derived from such financial instruments is not
significant.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These values do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on existing on and off balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Other significant assets and
liabilities that are not considered financial instruments include
property and equipment and other real estate owned. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not
been considered in any of the estimates.
Page 31
<PAGE>
A summary of the estimated fair values for the Company's significant
financial instruments at December 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
ESTIMATE OF
DECEMBER 31, 1999 CARRYING VALUE FAIR VALUE
<S> <C> <C>
Financial Assets
Cash and cash equivalents $ 9,122 $ 9,122
Investment securities 61,475 61,474
Loans held for sale 381 381
Loans receivable, net 133,948 133,801
Cash surrender value of life insurance 2,656 2,656
Accrued interest receivable 1,274 1,274
Capitalized mortgage servicing rights 352 352
Financial Liabilities
Deposits 168,578 168,373
Accrued interest payable 165 165
Borrowed funds 19,369 19,369
DECEMBER 31, 1998
Financial Assets
Cash and cash equivalents $ 7,627 $ 7,627
Investment securities 55,909 55,910
Loans held for sale 2,875 2,895
Loans receivable, net 125,632 126,835
Cash surrender value of life insurance 2,559 2,559
Accrued interest receivable 1,152 1,152
Capitalized mortgage servicing rights 259 334
Financial Liabilities
Deposits 164,128 164,486
Accrued interest payable 148 148
Borrowed funds 13,508 13,508
</TABLE>
21. PARENT COMPANY FINANCIAL INFORMATION
The following is summarized financial statement information for
Merrill Merchants Bancshares, Inc. as of December 31, 1999 and 1998 and
for the years then ended:
SUMMARIZED BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
ASSETS
1999 1998
<S> <C> <C>
Cash $ 7 $ 1
Investment securities (fair value of $3,809
and $5,576 at December 31, 1999 and 1998,
respectively) 3,809 5,576
Investment in subsidiaries 16,164 15,381
Loan receivable from subsidiary 1,518 -
Accrued income and other assets 18 22
Deferred income tax benefit 510 524
------- -------
Total assets $22,026 $21,504
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accrued expenses and other liabilities $ 468 $ 549
Mandatory convertible debentures 300 300
------- -------
Total liabilities 768 849
------- -------
Shareholders' equity
Convertible cumulative preferred stock 20 20
Common stock 2,584 2,388
Capital surplus 17,220 15,527
Retained earnings 2,618 2,638
Unrealized gain (loss) on securities available for sale (435) 82
Treasury stock (749) -
------- -------
Total shareholders' equity 21,258 20,655
------- -------
Total liabilities and shareholders' equity $22,026 $21,504
======= =======
</TABLE>
Page 32
<PAGE>
SUMMARIZED STATEMENTS OF INCOME INFORMATION
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Dividends from bank subsidiary $ 1,118 $ 705
Interest and dividend income on investments 304 111
------- -------
Total income 1,422 816
Interest expense on borrowed funds 27 153
Operating expenses 165 33
------- -------
Total expenses 192 186
------- -------
Income before income tax expense (benefit) 1,230 630
Income tax expense (benefit) 38 (25)
------- -------
Income before equity in undistributed net income (loss)
of subsidiaries 1,192 655
Equity in undistributed net income (loss) of subsidiaries 1,055 1,261
------- -------
Net income $ 2,247 $ 1,916
======= =======
</TABLE>
SUMMARIZED STATEMENTS OF CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,247 $ 1,916
Adjustments to reconcile net income to
net cash provided by operating activities
Deferred income tax benefit 14 (27)
Equity in undistributed net income (loss) of subsidiaries (1,055) (1,261)
Decrease (increase) in accrued income and other assets 4 (21)
Increase (decrease) in accrued expenses and other liabilities (22) 4
------- -------
Net cash provided by operating activities 1,188 611
------- -------
Cash flows from investing activities
Proceeds from sale of investment securities 6,806 3,019
Purchase of investment securities (5,086) (8,429)
Advances to subsidiaries (1,683) -
------- -------
Net cash provided (used) by investing activities 37 (5,410)
------- -------
Cash flows from financing activities
Dividends paid on convertible cumulative preferred stock (72) (75)
Dividends paid on common stock (538) (282)
Payment of long-term debt - (2,895)
Proceeds from issuance of common stock 301 8,524
Payment of offering cost - (473)
Purchase of treasury shares (910) -
------- -------
Net cash provided (used) by financing activities (1,219) 4,799
------- -------
Net increase in cash and cash equivalents 6 -
Cash and cash equivalents, beginning of year 1 1
------- -------
Cash and cash equivalents, end of year $ 7 $ 1
======= =======
</TABLE>
EMPLOYEES
Cindy L. Allen
Alison J. Bailey*
Nancy L. Bellfleur
Scott d. Bennett
Meris J. Bickford, Esquire*
Marla J. Billings
Albert C. Blanchard, Jr.
Alena J. Bonenfant
Jacqueline A. Bouchey*
Cynthia J. Brawn
Theresa M. Brooks
Fred A. Brown
Angela T. Butler*
Judy M. Byram
Eva M. Charity
Alyson A. Coffin
Jodi L. Cook
Jennifer C. Coutts
Stephen R. Crockett
George Dandaneau*
Marian Deschene
Jayne T. Dickey
Marjorie J. Downing
Patricia L. Eldridge
Linda G. England
Valerie G. Enos
Tabatha M. Estes
Joanne C. Fish
Brent A. Folster*
Shay B. Fox
Barbara Giovino*
Lynne M. Gray
Clarice J. Hannan
Marilyn M. Harlow
Diane Hewett
Bonita L. Hodgins
Jody E. Holmes
Jerry C. Jarrell*
Judith D. Kelly
Julie A. Kelly
Kathleen F. Kemp
Linda J. Kenney
Gwendolyn A. King
Janet L. Kochis
Jennifer D. Lander
Jonathan S. Lander*
Ronald J. Landry
Janet L. Lane
Darleen M. Lanphere
Cynthia L. Leighton
Floyd W. Libby*
Carol Littlefield
Linda M. Lizotte
Jill R. MacDonald
Suzanne M. Mercier
Michael J. Moody
Kimberly A. Morrison
Pamela J. Mugnai
Holly A. O'Halloran
Deanna L. Ouellette
Mary L. Page
Lori A. Pardun
Kim Patoka
Lewis H. Payne*
Donna M. Poland
Kathleen G. Prescott*
Priscilla A. Pullen
Andrew C. Reed*
Cindy L. Rickman
Carole L. Robinson
Micheline K. Ross
Dianne L. Roy
Patricia A. Roy
Kim A. Ryan
Stacie A. Severance
Kelly A. Shorey
Linda A. Sibley
Tanya M. Sibley
Betsy A. Simpson*
Jason D. Simsay
Valrie G. Smith
Kathleen Spruce
John P. Thayer*
Lorraine M. Therrien*
Marlene D. Thomas*
Tricia J. Tilton
Mark A. Trapela
Jerina K. Warner*
Jessica L. Welch
Danelle L. Weston
Ann M. Whitmore
Stacey Young
Ellen N. Ziobron
*Officers
Page 33
<PAGE>
Merrill Merchants Bank
BOARD OF DIRECTORS
William C. Bullock, Jr., Chairman
Merrill Merchants Bank, Bangor, Maine
Edwin N. Clift, President & Chief Executive Officer
Merrill Merchants Bank, Bangor, Maine
John S. Bacon, President
Bacon Printing Company, Bangor, Maine
Joseph H. Cyr, President
John T. Cyr & Sons, Inc., Old Town, Maine
John R. Graham III, President
Automatic Distributors, Bangor, Maine
Perry B. Hansen, Chairman & President
Auto Parts Express, LLC, Houston, Texas
Charles M. Hutchins, Vice President
Alternative Energy, Inc., Bangor, Maine
Joseph P. Irish, President
Waldo County Oil, Troy, Maine
Louis H. Kornreich, Esquire
Gross, Minsky, Mogul & Singal, Bangor, Maine
Robert E. Knowles, Investor
Unity, Maine
J. Donald Mackintosh, Investor
Lamoine, Maine
Leonard E. Minsky, Investor
Bangor, Maine
Frederick A. Oldenburg, Jr., M.D., President
Penobscot Respiratory, P.A., Bangor, Maine
Lloyd D. Robinson, Investor
Carmel, Maine
Dennis L. Shubert, M.D., Ph.D., President
Maine Neurosurgery, P.A., Bangor, Maine
Susan B. Singer, Vice President & Comptroller
MTL, Inc., Hermon, Maine
Harold S. Wright, Vice Chairman
Merrill Merchants Bank, Bangor, Maine
SENIOR MANAGEMENT
Chairman
William C. Bullock, Jr.
President & Chief Executive Officer
Edwin N. Clift
Vice President, Compliance & Security
Sara E. Carr
Executive Vice President, Retail Banking
Charles W. Hart
Executive Vice President, Chief Financial Officer
Deborah A. Jordan
Executive Vice President, Commercial Banking
William P. Lucy
Senior Vice President, Trust & Investment Services
James A. MacLeod, Esquire
Senior Vice President, Marketing & Human Resources
Jane H. Madigan
Senior Vice President, Trust & Investment Services
George H. Moore, Jr.
Vice President, Systems Administration
Susan L. Rush
Senior Vice President, Mortgage Banking
Lynne A. Spooner
Senior Vice President, Operations
Reginald C. Williams, Jr.
Page 34
<PAGE>
Merrill Merchants Bancshares, Inc.
BOARD OF DIRECTORS
William C. Bullock, Jr., Chairman
Merrill Merchants Bancshares, Inc., Bangor, Maine
Edwin N. Clift, President & Chief Executive Officer
Merrill Merchants Bancshares, Inc., Bangor, Maine
Joseph H. Cyr, President
John T. Cyr & Sons, Inc., Old Town, Maine
Perry B. Hansen, Chairman & President
Auto Parts Express, LLC, Houston, Texas
Leonard E. Minsky, Investor
Bangor, Maine
Frederick A. Oldenburg, Jr., M.D., President
Penobscot Respiratory, P.A., Bangor, Maine
Dennis L. Shubert, M.D., Ph.D., President
Maine Neurosurgery, P.A., Bangor, Maine
Susan B. Singer, Vice President & Comptroller
MTL, Inc., Hermon, Maine
Harold S. Wright, Investor
Merrill Merchants Bank, Bangor, Maine
OFFICERS
Chairman
William C. Bullock, Jr.
President & Chief Executive Officer
Edwin N. Clift
Treasurer
Deborah A. Jordan
Secretary
James A. MacLeod, Esquire
Clerk
Norman Minsky, Esquire
Page 35
<PAGE>
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
Merrill Merchants Bancshares, Inc.
201 Main Street
Bangor, Maine 04401
207-942-4800
INQUIRIES AND FINANCIAL INFORMATION
Analysts, shareholders and other investors seeking financial information
including our 1999 Annual Report on Form 10-KSB should contact Deborah Jordan,
Chief Financial Officer and Manager of Investor Relations at 207-942-2494.
News media and others seeking general information should contact Jane
Madigan, Senior Vice President and Manager of Media Relations at 207-990-4075.
INTERNET
Our internet address is WWW.MERRILLMERCHANTS.COM or via electronic mail:
[email protected]
STOCK LISTING
Merrill Merchants Bancshares, Inc. is traded over the counter on the
Nasdaq National Market system under the symbol MERB.
TRANSFER AGENT
Shareholder inquiries regarding change of address or title should be
directed to:
Trust & Investment Services Department
Merrill Merchants Bank
201 Main Street
Bangor, Maine 04401
207-990-4070
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Berry Dunn McNeil and Parker
36 Pleasant Street
Bangor, Maine 04401
ANNUAL SHAREHOLDER MEETING
The annual meeting of shareholders will be at 5:00 p.m. on Thursday,
April 27, 2000, at Pilot's Grill, 1528 Hammond Street, Bangor, Maine.
BRANCH LOCATIONS
BANGOR
201 Main Street
920 Stillwater Avenue
992 Union Street
BREWER
366 Wilson Street
HOLDEN
Route 1A
MILFORD
2 Main Street
NEWPORT
Newport Plaza
ORONO
69 Main Street
ORRINGTON
191 River Road
PITTSFIELD
27 Main Street
Page 36
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Name State of Incorporation Year Incorporated
Merrill Merchants Bank Maine 1992
Maine Acceptance Corporation Maine 1999
-26-
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement (NO. 333-63781) on Form S-8 of Merrill Merchants Bancshares, Inc. of
our report dated January 13, 2000, relating to the consolidated statements of
financial condition of Merrill Merchants Bancshares, Inc. and Subsidiaries as of
December 31, 1999 and 1998 and the related consolidated statements of income,
changes in shareholders' equity and cash flows for the years then ended, which
report is included in the December 31, 1999 annual report on Form 10-KSB of
Merrill Merchants Bancshares, Inc.
/s/ Berry, Dunn, McNeil & Parker
Bangor, Maine
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1999 FOR THE COMPANY AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 9,081
<INT-BEARING-DEPOSITS> 41
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 61,213
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<LOANS> 136,603
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0
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<COMMON> 2,584
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<TOTAL-LIABILITIES-AND-EQUITY> 213,747
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