<PAGE>
FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the Quarterly period ended September 30, 2000
Commission File Number: 0-24715
MERRILL MERCHANTS BANCSHARES, INC.
MAINE 01-0471507
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
201 Main Street
Bangor, Maine 04401
(Address of Principal Executive Office)
Issuer's telephone number, including area code: 207-942-4800.
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes: [ X ] No: [ ]
The number of shares outstanding for the issuer's classes of common stock as of
October 31, 2000 are:
(Class) (Outstanding)
COMMON STOCK, $1.00 Par Value 2,596,396
Transitional Small Business Disclosure Format: Yes: [ ] No: [ X ]
<PAGE>
MERRILL MERCHANTS BANCSHARES, INC.
INDEX TO FORM 10-QSB
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Independent Accountants' Report 3
Consolidated Statements of Financial Condition at
September 30, 2000 and December 31, 1999 4
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2000 and September 30, 1999 5
Consolidated Statements of Shareholders' Equity for the
Nine Months Ended September 30, 2000 and September 30, 1999 6
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and September 30, 1999 7
Notes to Financial Statements 8-10
Item 2 Management's Discussion and Analysis of Condition
and Results of Operations 11-14
PART II OTHER INFORMATION 14
Item 1 Legal Proceedings 14
Item 2 Changes in Securities and Use of Proceeds 14
Item 3 Defaults upon Senior Securities 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 5 Other Information 14
Item 6 Exhibits and Reports on Form 8-K 14
Signature Page 15
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INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors and Shareholders
Merrill Merchants Bancshares, Inc.
We have reviewed the accompanying interim consolidated financial information of
Merrill Merchants Bancshares, Inc. and Subsidiaries as of September 30, 2000,
and for the three and nine month periods then ended. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is to express an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
/s/ BERRY, DUNN, McNEIL & PARKER
Portland, Maine
November 9, 2000
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MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(in thousands, except number of shares and per share data) (Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,485 $ 9,081
Interest-bearing deposits with banks 58 41
Federal funds sold 2,800 -
--------- ---------
Total cash and cash equivalents 10,343 9,122
Investment securities
Available for sale 55,378 61,213
To be held to maturity - 262
Loans held for sale 85 381
Loans receivable 162,347 136,222
Less allowance for loan losses 2,571 2,274
--------- ---------
Net loans receivable 159,776 133,948
Other real estate owned 90 50
Properties and equipment, net 3,705 3,074
Deferred income tax benefit 748 570
Accrued income and other assets 6,433 5,127
--------- ---------
Total assets $ 236,558 $ 213,747
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 30,794 $ 27,639
Savings and NOW deposits 82,407 77,759
Certificates of deposit 77,070 63,180
--------- ---------
Total deposits 190,271 168,578
Securities sold under agreements to
repurchase (term and demand) 14,840 13,791
Other borrowed funds 6,568 5,278
Accrued expenses and other liabilities 2,083 4,542
Mandatory convertible debentures 300 300
--------- ---------
Total liabilities 214,062 192,489
--------- ---------
Shareholders' equity
Convertible cumulative preferred stock, par value $1; authorized
50,000 shares, issued and outstanding 19,566 shares 20 20
Common stock, par value $1; authorized 4,000,000 shares, issued
2,661,450 shares and outstanding 2,592,916 shares in 2000
and issued 2,583,986 shares and outstanding 2,517,739
shares in 1999 2,661 2,584
Capital surplus 17,918 17,220
Retained earnings 2,948 2,618
Unrealized loss on securities available for sale, net of
tax of $(166) and $(224) in 2000 and 1999, respectively (324) (435)
Treasury stock, at cost (68,534 shares in 2000 and 66,247 shares in 1999) (727) (749)
--------- ---------
Total shareholders' equity 22,496 21,258
--------- ---------
Total liabilities and shareholders' equity $ 236,558 $ 213,747
========= =========
</TABLE>
Page 4
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MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except number of shares and per share data) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and dividend income
Interest and fees on loans $ 3,867 $ 3,096 $10,718 $ 8,893
Interest on investment securities 803 686 2,407 2,081
Dividends on investment securities 23 67 90 226
Interest on federal funds sold and interest-
bearing deposits 23 22 76 53
------- ------- ------- -------
Total interest and dividend income 4,716 3,871 13,291 11,253
------- ------- ------- -------
Interest expense
Interest on deposits 1,902 1,400 5,213 4,141
Interest on borrowed funds 227 200 728 530
------- ------- ------- -------
Total interest expense 2,129 1,600 5,941 4,671
------- ------- ------- -------
Net interest income 2,587 2,271 7,350 6,582
Provision for loan losses 105 88 318 249
------- ------- ------- -------
Net interest income after provision for
loan losses 2,482 2,183 7,032 6,333
------- ------- ------- -------
Non-interest income
Service charges on deposit accounts 167 151 495 428
Other service charges and fees 209 177 597 498
Trust fees 238 203 737 609
Other 59 57 459 253
Net gain on sale of mortgage loans 47 24 124 162
------- ------- ------- -------
Total non-interest income 720 612 2,412 1,950
------- ------- ------- -------
Non-interest expense
Salaries and employee benefits 1,128 985 3,528 2,937
Occupancy expense 176 151 518 464
Equipment expense 171 114 473 366
Data processing 132 186 384 541
Other 555 455 1,677 1,443
------- ------- ------- -------
Total non-interest expense 2,162 1,891 6,580 5,751
------- ------- ------- -------
Income before income taxes 1,040 904 2,864 2,532
Income tax expense 338 268 959 875
------- ------- ------- -------
Net income $ 702 $ 636 $ 1,905 $ 1,657
======= ======= ======= =======
Per share data
Basic earnings per common share $ .26 $ .23 $ .71 $ .61
======= ======= ======= =======
Diluted earnings per common share $ .23 $ .20 $ .63 $ .53
======= ======= ======= =======
</TABLE>
Page 5
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MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
CONVERTIBLE GAIN (LOSS) TOTAL
CUMULATIVE ON SECURITIES SHARE-
PREFERRED COMMON CAPITAL RETAINED AVAILABLE TREASURY HOLDERS'
STOCK STOCK SURPLUS EARNINGS FOR SALE STOCK EQUITY
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 20 $ 2,388 $ 15,527 $ 2,638 $ 82 $ -- $ 20,655
Net income -- -- -- 1,657 -- -- 1,657
Change in unrealized gain (loss) on
securities available for sale, net
of deferred income taxes of $(178) -- -- -- -- (346) -- (346)
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income -- -- -- 1,657 (346) -- 1,311
Treasury stock purchased (14,100 shares
at an average price of $11.70) -- -- -- -- -- (165) (165)
Common stock options exercised,
90,985 shares -- 73 172 (81) -- 112 276
5% common stock dividend declared -- 122 1,424 (1,546) -- -- --
Common stock cash dividend declared,
$0.15 per share -- -- -- (387) -- -- (387)
Convertible cumulative preferred
stock dividends declared, $2.61
per share -- -- -- (53) -- -- (53)
-------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1999 $ 20 $ 2,583 $ 17,123 $ 2,228 $ (264) $ (53) $ 21,637
======== ======== ======== ======== ======== ======== ========
Balance at December 31, 1999 $ 20 $ 2,584 $ 17,220 $ 2,618 $ (435) $ (749) $ 21,258
Net income -- -- -- 1,905 -- -- 1,905
Change in unrealized loss on
securities available for sale, net
of deferred income taxes of $58 -- -- -- -- 111 -- 111
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income -- -- -- 1,905 111 -- 2,016
Treasury stock purchased (42,592 shares
at an average price of $10.19) -- -- -- -- -- (434) (434)
Common stock options exercised,
40,469 shares -- -- -- (272) -- 456 184
3% common stock dividend declared -- 77 698 (775) -- -- --
Common stock cash dividend
declared,$0.18 per share -- -- -- (466) -- --
(466)
Convertible cumulative preferred
stock dividends declared, $3.15
per share -- -- -- (62) -- -- (62)
-------- -------- -------- -------- -------- -------- --------
Balance at September 30, 2000 $ 20 $ 2,661 $ 17,918 $ 2,948 $ (324) $ (727) $ 22,496
======== ======== ======== ======== ======== ======== ========
</TABLE>
Page 6
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MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands) 2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,905 $ 1,657
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation 315 220
Amortization 250 125
Net amortization (accretion) on investment securities 36 195
Deferred income taxes (178) (227)
Provision for loan losses 318 249
Gain on equity securities received from demutualization of insurance company (297) -
Net gain on sale of mortgage loans and property and equipment (142) (183)
Net change in:
Loans held for sale 296 2,695
Deferred loan fees, net (3) (2)
Accrued income and other assets (461) (14)
Accrued expenses and other liabilities 522 (64)
-------- ---------
Net cash provided by operating activities 2,561 4,651
-------- ---------
Cash flows from investing activities
Net loans made to customers (24,234) (5,911)
Acquisition of premises and equipment and computer software (1,086) (220)
Proceeds from the sale of premises and equipment 20 152
Purchase of investment securities available for sale (20,894) (32,117)
Proceeds from sales and maturities of investment securities
Sales and maturities of available for sale securities 24,339 33,454
Maturities of held to maturity securities 262 302
Proceeds from sale of other real estate owned - 92
-------- ---------
Net cash used by investing activities (21,593) ( 4,248)
-------- ---------
Cash flows from financing activities
Net increase (decrease) in demand, savings and NOW deposits 4,197 (1,623)
Net increase in certificates of deposit 11,227 1,182
Net increase in securities sold under agreement to repurchase 783 2,074
Net increase in other borrowed funds 458 5,575
Long term advances from the Federal Home Loan Bank 1,000 1,000
Payments on long term advances (168) (200)
Cash received in branch acquisition 3,534 -
Dividends paid on convertible cumulative preferred stock and common stock (528) (440)
Purchase of treasury stock (434) (165)
Proceeds from stock issuance 184 277
-------- ---------
Net cash provided by financing activities 20,253 7,680
-------- ---------
Net increase in cash and cash equivalents 1,221 8,083
Cash and cash equivalents, beginning of period 9,122 7,627
-------- ---------
Cash and cash equivalents, end of period $10,343 $15,710
======== =========
Supplemental disclosures of cash flow information
Cash paid for interest $ 5,725 $ 4,648
Transfers to other real estate owned 40 130
Income tax paid 1,093 956
</TABLE>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
Merrill Merchants Bancshares, Inc. is a one-bank holding company that owns all
of the common stock of Merrill Merchants Bank (the Bank) and Maine Acceptance
Corporation (the finance company). The accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. All significant
intercompany transactions and balances are eliminated in consolidation. The
income reported for the 2000 period is not necessarily indicative of the results
that may be expected for the year ending December 31, 2000. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-KSB for the year
ended December 31, 1999.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
loan losses and the carrying value of real estate owned, management obtains
independent appraisals for significant properties.
The allowance for credit losses is maintained at a level adequate to absorb
probable losses. Management determines the adequacy of the allowance based upon
reviews of individual credits, recent loss experience, current economic
conditions, the risk characteristics of the various categories of loans and
other pertinent factors. Credits deemed uncollectible are charged to the
allowance. Provisions for credit losses and recoveries on loans previously
charged off are added to the allowance.
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NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the three and nine months ended September 30:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
(in thousands, except for number of shares and per-share data)
<S> <C> <C> <C> <C>
Basic earnings per share
Net income, as reported $ 702 $ 636 $ 1,905 $ 1,657
Preferred stock dividends declared (21) (18) (62) (53)
---------- ----------- ---------- -----------
Income available to common shareholders $ 681 $ 618 $ 1,843 $ 1,604
========== =========== ========== ===========
Weighted-average shares outstanding 2,595,871 2,655,364 2,592,795 2,644,141
========== =========== ========== ===========
Basic earnings per share $ 0.26 $ 0.23 $ 0.71 $ 0.61
========== =========== ========== ===========
Diluted earnings per share
Net income, as reported $ 702 $ 636 $ 1,905 $ 1,657
Interest on mandatory convertible debentures,
net of tax 5 5 15 13
---------- ----------- ---------- -----------
Income available to common shareholders $ 707 $ 641 $ 1,920 $ 1,670
========== =========== ========== ===========
Weighted-average shares outstanding 2,595,871 2,655,364 2,592,795 2,644,141
Effect of stock options, net of assumed treasury
stock purchases 196,907 233,018 184,255 235,318
Effect of convertible preferred stock 216,352 216,352 216,352 216,352
Effect of mandatory convertible debentures 72,114 72,114 72,114 72,114
---------- ----------- ---------- -----------
Adjusted weighted-average shares outstanding 3,081,244 3,176,848 3,065,516 3,167,925
========== =========== ========== ===========
Diluted earnings per share $ 0.23 $ 0.20 $ 0.63 $ 0.53
========== =========== ========== ===========
</TABLE>
The basic earnings per share computation is based upon the weighted-average
number of shares of stock outstanding during the period. Potential common stock
is considered in the calculation of weighted-average shares outstanding for
diluted earnings per share.
The Company declared a 3% and 5% stock dividend in 2000 and 1999, respectively.
Earnings and cash dividends per share and weighted-average shares outstanding
have been retroactively restated to reflect the stock dividends.
NOTE 3 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1998, the American Institute of Certified Public Accountants issued Statement
of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up Activities." The
SOP requires costs of start-up activities to be expensed as incurred. The SOP is
effective for years beginning after December 15, 1998. The Company adopted the
SOP in 1999 resulting in a write-off of $44,000 included in other expenses in
the consolidated statement of income for the nine month period ended September
30, 1999. This item represents a cumulative
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effect of accounting change, net of tax of $28,000. This write-off reduced both
basic and diluted earnings per share by $.01.
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, and
SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," are effective for years beginning after September 15, 2000. These
statements set accounting and reporting standards for derivative instruments and
hedging activities. They require an entity to recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. These statements are expected to have no impact on the Company as
it has not engaged in any derivative transactions.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" is effective for transfers occurring after Marc
31, 2001. SFAS No. 140 replaces SFAS No. 125. This statement is expected to have
no material impact to the Company's consolidated financial condition and results
of operations.
NOTE 4 - STOCK OPTIONS
A summary of the status of the Employee and Director Stock Option Plan as of
September 30, 2000, and changes during the nine months then ended, is presented
below.
Number Weighted
Number Average
OF SHARES EXERCISE PRICE
--------- --------------
Outstanding at beginning of period 433,120 $5.28
Granted during the period 24,500 8.75
Exercised during the period (40,469) 4.79
Forfeited during the period (12,746) 4.87
Additional shares for which
options are exercisable
due to stock dividends 12,450 -
-------- --------
Outstanding at end of period 416,855 $5.11
======== ========
NOTE 5 - BRANCH ACQUISITION
On February 25, 2000, the Bank completed its acquisition of a branch located in
Holden, Maine. The Holden Branch had $2.1 million of loans and investments and
$6.5 million of deposits and borrowings. Goodwill of $340,000 is being amortized
using the straight-line method over seven years.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain matters discussed in this Report on Form 10-QSB are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Such risks and uncertainties
include, but are not limited to, those described in Management's Discussion and
Analysis of Financial Condition and Results of Operations. Changes to such risks
and uncertainties, which could impact future financial performance, include,
among other things, (1) competitive pressures in the banking industry; (2)
changes in the interest rate environment; (3) general economic conditions,
either nationally or regionally; (4) changes in the regulatory environment; (5)
changes in business conditions and inflation; and (6) changes in security
markets. Therefore, the information set forth therein should be carefully
considered when evaluating the business prospects of the Company and the Bank.
I. COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2000 AND
DECEMBER 31, 1999
During 2000, the Company's total assets increased $22.8 million or 11% to $236.6
million at September 30, 2000. The increase was the result of net growth in the
loan portfolio of $25.8 million or 19% (including $1.8 million of loans
purchased in the branch acquisition). Strong loan demand driven by small
business lending resulted in a 28% growth rate in the commercial loan portfolio
or an increase from year-end of $9.5 million. Real estate activity resulted in a
16% or $7.9 million increase in commercial real estate balances while
construction loans in process increased by $2.2 million. The installment
consumer loan portfolio grew $3.8 million or 39% since year-end from activity
generated by the finance company and the Bank. Investment securities decreased
$6.1 million since year-end while federal funds sold increased $2.8 million.
Excess cash flows are funding the Company's loan growth.
Total deposits increased $21.7 million or 13% to $190.3 million for the first
nine months of 2000. The increase is due to several factors including the
acquisition of a branch resulting in the assumption of $6.3 million of deposits.
As the result of higher interest rates on both the national and local level, the
Company has experienced an increase in certificates of deposit balances of $13.9
million or 22%. In addition, money market accounts increased $9.8 million or 94%
due to the success of a new money market product that is indexed to the U.S.
Treasury Bill rate. Customers have shifted lower yielding savings account
balances to either certificates of deposit or money market accounts thus
resulting in a decrease in savings balances of $6.2 million since year end.
Securities sold under agreement to repurchase increased $1.0 million since year
end and other borrowed funds increased $1.3 million. The decrease in accrued
expenses and other liabilities relates to the accrual of $3.0 million of
investment securities that were purchased in 1999 and settled in 2000.
In originating loans, the Company recognizes that loan losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan and, in the case of collateralized loans, the quality of the collateral
for the loan as well as general economic conditions. It is management's policy
to attempt to maintain an adequate allowance for loan losses based on, among
other things, industry standards, management's experience, the Bank's historical
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loan loss experience, evaluation of economic conditions and regular reviews of
delinquencies and loan portfolio quality.
Management continues to actively monitor the Company's asset quality and to
charge off loans against the allowance for loan losses when appropriate or to
provide specific loan allowances when necessary. Although management believes it
uses the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ from the economic conditions in the assumptions used in making
the final determinations. The Company's allowance for loan losses amounted to
$2.6 million at September 30, 2000 (1.58% of total loans), an increase of
$297,000 over the Company's $2.3 million allowance for loan losses at December
31, 1999.
II. RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999
Net income for the nine months ended September 30, 2000 was $1.9 million, an
increase of $248,000 or 15% from the same period in 1999. The increase in
earnings between the periods is due to an increase in net interest income
resulting from growth in loans and a 24% increase in non-interest income. Net
income for the third quarter of 2000 increased $66,000 or 10% to $702,000
compared with the third quarter of 1999.
Diluted earnings per share increased 19% to $.63 per share for the first nine
months of 2000 compared to $.53 per share for the same period in 1999. For the
three month periods ended September 30, 2000 and 1999, diluted earnings per
share was $.23 and $.20, respectively.
The annualized return on average assets for the nine months ended September 30,
2000 and 1999 was 1.14% and 1.11%, respectively and for the third quarter of
2000 and 1999 was 1.21% and 1.24%, respectively. Return on average shareholders'
equity on an annualized basis for the nine months of 2000 and 1999 was 11.43%
and 10.44%, respectively and for the third quarter of 2000 and 1999 was 12.39%
and 11.67%, respectively.
III. NET INTEREST INCOME
Net interest income is interest earned on interest-earning assets less interest
incurred on interest-bearing liabilities. Interest-earning assets are
categorized as loans, investment securities and other earning assets, which
include Federal Funds sold and interest bearing deposits from other financial
institutions. Interest-bearing liabilities are categorized as customer deposits,
time and savings deposits and borrowings including repurchase agreements,
short-term borrowings and long-term debt. Net interest income depends on the
volume of average interest-earning assets and average interest-bearing
liabilities and the interest rates earned or incurred on them.
Net interest income for the nine months ended September 30, 2000 was $7.4
million, a 12% increase over the net interest income for the nine months of 1999
of $6.6 million. This increase is attributable to an increase in average loans
to $149.8 million in 2000 from $129.3 million in 1999. This was accompanied by
an increase in the average rate earned on interest-earning assets to 8.48% from
7.96% for the nine months
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ended September 30, 2000 and 1999, respectively. The increase in rates is due to
the Federal Reserve increasing the federal funds rate from 5.00% starting in
July 1999 to 6.50% in May 2000.
The average interest rate incurred on interest-bearing liabilities for the nine
month period in 2000 and 1999 was 4.65% and 4.12%, respectively on average
interest-bearing liabilities of $170.6 million in 2000 and $151.7 million in
1999. Despite the volatility in general interest rates, the Company's net
interest margin remained constant at 4.66% for the nine months ended September
30, 2000 compared to 4.64% for the same period in 1999. Management currently
anticipates a future decline in the net interest margin due to industry-wide
pricing pressure on loans and deposits and the asset/liability position of the
Company.
The yield on average earning assets for the three month periods ended September
30, 2000 and 1999 was 8.70%, and 8.00%, respectively, and the average interest
rate incurred on interest-bearing liabilities was 4.85% and 4.14%, respectively.
The net interest margin increased to 4.75% for the third quarter of 2000 as
compared with 4.68% for the third quarter of 1999. The increase in interest
rates and the net interest margin between the two periods are the result of the
increase in the federal funds rate to 6.50% in May 2000.
IV. NON-INTEREST INCOME
Non-interest income was $2.4 million for the nine months ended September 30,
2000, an increase of $462,000 or 24% over the same period last year. Other fee
income for 2000 includes a one-time gain of $297,000 resulting from the
demutualization of an insurance company for which the Company received common
stock and subsequently sold. The Company continues to experience growth in fee
income categories. Comparing the nine month periods ended September 30, 2000 and
September 30, 1999, service fees on deposit accounts increased 16%, trust fees
grew 21% and merchant processing fees were up 35%. Trust fees have increased due
to growth of trust assets under management to $225.5 million at September 30,
2000 compared with trust assets of $161.1 million at September 30, 1999.
Gains on the sale of mortgage loans decreased to $124,000 for the first nine
months of 2000 compared to $162,000 for the same period in 1999 due to the
decline in mortgage refinancing activity resulting from higher interest rates in
2000.
Non-interest income for the third quarter of 2000 was $720,000 compared with
$612,000 for the same period in 1999, representing an increase of $108,000 or
18%. Trust fees accounted for $35,000 of the increase and merchant processing
fees increased $29,000.
V. NON-INTEREST EXPENSE
Year-to-date non-interest expense was $6.6 million compared to $5.8 million for
the first nine months of 1999. The $829,000, or 14%, increase was due to an
increase in salaries and employee benefits of $591,000. Personnel costs in 2000
increased 12% when excluding a non-recurring charge of $238,000 resulting from
restructuring and amending the Company's supplemental executive retirement plan.
Salaries and employee benefits have also increased for the nine months ended
September 30, 2000 compared to the same period in 1999 due to normal annual
salary increases, new staffing needs for the two new convenience store branches,
the newly acquired Holden branch and additional staffing required for the data
processing system conversion. In addition, other non-interest expenses increased
16% for the nine months
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ended September 30, 2000 over the same period in 1999, reflecting increases in
delivery costs, telephone expenses, office supplies and merchant and credit card
processing expenses.
Non-interest expense for the third quarter of 2000 was $2.2 million, an increase
of $271,000 or 14% compared with the same period in 1999. Increase in salaries
and employee benefits of $143,000 and other non-interest expenses of $100,000
accounted for the overall increase.
VI. CAPITAL
A 3% common stock dividend was distributed on February 28, 2000. Cash dividends
per share declared on common stock were $.06 for the first, second and third
quarter of 2000.
Under Federal Reserve Board guidelines, bank holding companies such as the
Company are required to maintain capital based on "risk-adjusted" assets. These
guidelines apply to the Company on a consolidated basis. Under the current
guidelines, banking organizations must maintain a risk-based capital ratio of
eight percent. The Company's risk based capital ratios for Tier 1 and Tier 2
capital at September 30, 2000, of 13.78% and 15.22%, respectively, exceed
regulatory guidelines for a "well capitalized" financial institution. The
Company's ratios at December 31, 1999 were 15.96% and 17.44%. On April 28, 2000,
the Board of Directors approved its second stock repurchase program authorizing
the Company to repurchase up to 129,416 shares of the Company's common stock.
The second repurchase program will commence upon completion of the Company's
existing stock repurchase program, under which the Company has repurchased
122,850 shares of the 126,000 shares authorized under such program. The shares
will be repurchased into treasury for the purpose of funding the expected
exercise of stock options pursuant to the Company's stock option plan.
PART II. OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1 Legal Proceedings None
Item 2 Changes in Securities and Use of Proceeds None
Item 3 Defaults upon Senior Securities None
Item 4 Submission of Matters to a Vote of Security Holders None
Item 5 Other Information None
Item 6 Exhibits and Reports on Form 8-K See Exh. 27-Financial Data Schedule *
*Filed in electronic format only.
</TABLE>
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERRILL MERCHANTS BANCSHARES, INC.
Date: 11/13/00 By: /s/ Edwin N. Clift
----------------- ----------------------------
Edwin N. Clift
President and Chief
Executive Officer (Principal
Executive Officer)
Date: 11/13/00 By: /s/ Deborah A. Jordan
----------------- ----------------------------
Deborah A. Jordan
Executive Vice President and
Treasurer (Principal Financial
and Accounting Officer)
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