<PAGE>
FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the Quarterly period ended June 30, 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
July 31, 2000 are:
(Class) (Outstanding)
COMMON STOCK, $1.00 Par Value 2,603,633
Transitional Small Business Disclosure Format: Yes: / / No: / X /
<PAGE>
MERRILL MERCHANTS BANCSHARES, INC.
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Independent Accountants' Report 3
Consolidated Statements of Financial Condition at
June 30, 2000 and December 31, 1999 4
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2000 and June 30, 1999 5
Consolidated Statements of Shareholders' Equity for the
Six Months Ended June 30, 2000 and June 30, 1999 6
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and June 30, 1999 7
Notes to Financial Statements 8 - 10
Item 2 Management's Discussion and Analysis of Condition
and Results of Operations 10 - 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
</TABLE>
Page 2
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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 June 30, 2000, and for
the six-month period 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, LLC
Portland, Maine
August 8, 2000
Page 3
<PAGE>
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 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 $ 8,973 $ 9,081
Interest-bearing deposits with banks 34 41
Federal funds sold 5,000 --
--------- ---------
Total cash and cash equivalents 14,007 9,122
Investment securities
Available for sale 54,405 61,213
To be held to maturity 65 262
Loans held for sale 92 381
Loans receivable 154,121 136,222
Less allowance for loan losses 2,475 2,274
--------- ---------
Net loans receivable 151,646 133,948
Other real estate owned 90 50
Properties and equipment, net 3,795 3,074
Deferred income tax benefit 804 570
Accrued income and other assets 6,224 5,127
--------- ---------
Total assets $ 231,128 $ 213,747
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 29,035 $ 27,639
Savings and NOW deposits 82,031 77,759
Certificates of deposit 77,165 63,180
--------- ---------
Total deposits 188,231 168,578
Securities sold under agreements to
repurchase (term and demand) 9,893 13,791
Other borrowed funds 8,709 5,278
Accrued expenses and other liabilities 2,123 4,542
Mandatory convertible debentures 300 300
--------- ---------
Total liabilities 209,256 192,489
--------- ---------
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 2,592,284 shares in 2000 and issued 2,583,986 shares and
outstanding 2,517,739 shares in 1999 2,661 2,584
Capital surplus 17,917 17,220
Retained earnings 2,527 2,618
Unrealized loss on securities available for sale, net of tax of $(267) and
$(224) in 2000 and 1999, respectively (518) (435)
Treasury stock, at cost (69,166 shares in 2000 and 66,247 shares in 1999) (735) (749)
--------- ---------
Total shareholders' equity 21,872 21,258
--------- ---------
Total liabilities and shareholders' equity $ 231,128 $ 213,747
========= =========
</TABLE>
Page 4
<PAGE>
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 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 $3,600 $2,913 $6,851 $5,797
Interest on investment securities 780 697 1,604 1,395
Dividends on investment securities 30 82 67 159
Interest on federal funds sold and interest-
bearing deposits 49 19 53 31
------ ------ ------ ------
Total interest and dividend income 4,459 3,711 8,575 7,382
------ ------ ------ ------
Interest expense
Interest on deposits 1,763 1,355 3,311 2,741
Interest on borrowed funds 229 182 501 330
------ ------ ------ ------
Total interest expense 1,992 1,537 3,812 3,071
------ ------ ------ ------
Net interest income 2,467 2,174 4,763 4,311
Provision for loan losses 103 86 213 161
------ ------ ------ ------
Net interest income after provision for
loan losses 2,364 2,088 4,550 4,150
------ ------ ------ ------
Non-interest income
Service charges on deposit accounts 166 154 328 277
Other service charges and fees 186 151 388 321
Trust fees 262 210 499 406
Other 95 96 400 196
Net gain on sale of mortgage loans 43 23 77 138
------ ------ ------ ------
Total non-interest income 752 634 1,692 1,338
------ ------ ------ ------
Non-interest expense
Salaries and employee benefits 1,100 1,006 2,400 1,952
Occupancy expense 167 154 342 313
Equipment expense 154 120 302 252
Data processing 107 178 252 355
Other 590 444 1,122 988
------ ------ ------ ------
Total non-interest expense 2,118 1,902 4,418 3,860
------ ------ ------ ------
Income before income taxes 998 820 1,824 1,628
Income tax expense 339 239 621 607
------ ------ ------ ------
Net income $ 659 $ 581 $1,203 $1,021
====== ====== ====== ======
Per share data
Basic earnings per common share $ .25 $ .21 $ .45 $ .37
====== ====== ====== ======
Diluted earnings per common share $ .22 $ .18 $ .40 $ .33
====== ====== ====== ======
</TABLE>
Page 5
<PAGE>
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
Unrealized
Convertible Gain (Loss)
Cumulative on Securities Total
Preferred Common Capital Retained Available Treasury Shareholders'
Stock Stock Surplus Earnings for Sale Stock Equity
----------- ------ ------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 20 $ 2,388 $ 15,527 $ 2,638 $ 82 $ -- $ 20,655
Net income - -- -- -- 1,021 -- -- 1,021
Change in unrealized gain (loss) on
securities available for sale, net
of deferred income taxes of $(135) -- -- -- -- (262) -- (262)
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income -- -- -- 1,021 (262) -- 759
Treasury stock purchased (14,100 shares
at an average price of $11.70) -- -- -- -- -- (165) (165)
Common stock options exercised,
84,880 shares -- 73 172 (71) -- 105 279
5% common stock dividend declared -- 122 1,424 (1,546) -- -- --
Common stock cash dividend declared,
$0.10 per share -- -- -- (258) -- -- (258)
Convertible cumulative preferred
stock dividends declared, $1.77
per share -- -- -- (35) -- -- (35)
-------- -------- -------- -------- -------- -------- --------
Balance at June 30, 1999 $ 20 $ 2,583 $ 17,123 $ 1,749 $ (180) $ (60) $ 21,235
======== ======== ======== ======== ======== ======== ========
Balance at December 31, 1999 $ 20 $ 2,584 $ 17,220 $ 2,618 $ (435) $ (749) $ 21,258
Net income - -- -- -- 1,203 -- 1,203
Change in unrealized gain (loss) on
securities available for sale, net
of deferred income taxes of $(43) -- -- -- -- (83) -- (83)
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income -- -- -- 1,203 (83) -- 1,120
Treasury stock purchased (30,015 shares
at an average price of $10.02) -- -- -- -- -- (301) (301)
Common stock options exercised,
27,260 shares -- -- -- (169) -- 315 146
3% common stock dividend declared -- 77 697 (775) -- -- (1)
Common stock cash dividend
declared, $0.12 per share -- -- -- (310) -- -- (310)
Convertible cumulative preferred
stock dividends declared, $2.05
per share -- -- -- (40) -- -- (40)
-------- -------- -------- -------- -------- -------- --------
Balance at June 30, 2000 $ 20 $ 2,661 $ 17,917 $ 2,527 $ (518) $ (735) $ 21,872
======== ======== ======== ======== ======== ======== ========
</TABLE>
Page 6
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MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands) 2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,203 $ 1,021
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation 202 144
Amortization 142 101
Net amortization (accretion) on investment securities (1) 145
Deferred income taxes (234) (175)
Provision for loan losses 213 161
Gain on equity securities received from demutualization of insurance Company (297) --
Net gain on sale of mortgage loans and property and equipment (111) (159)
Net change in:
Loans held for sale 289 (287)
Deferred loan fees, net (3) (1)
Accrued income and other assets (123) (83)
Accrued expenses and other liabilities 562 (97)
-------- --------
Net cash provided by operating activities 1,842 770
-------- --------
Cash flows from investing activities
Net loans made to customers (16,008) (1,850)
Acquisition of premises and equipment and computer software (1,004) (49)
Proceeds from the sale of premises and equipment 20 152
Purchase of investment securities available for sale (15,542) (26,260)
Proceeds from sales and maturities of investment securities
Sales and maturities of available for sale securities 19,701 23,718
Maturities of held to maturity securities 197 199
Proceeds from sale of other real estate owned -- 92
-------- --------
Net cash used by investing activities (12,636) (3,998)
-------- --------
Cash flows from financing activities
Net increase (decrease) in demand, savings and NOW deposits 2,062 (3,025)
Net increase (decrease) in certificates of deposit 11,322 (2,392)
Net (decrease) increase in securities sold under agreement to repurchase (4,164) 1,952
Net increase in other borrowed funds 2,490 7,644
Long term advances from the Federal Home Loan Bank 1,000 1,000
Payments on long term advances (59) (132)
Cash received in branch acquisition 3,534 --
Dividends paid on convertible cumulative preferred stock and common stock (351) (293)
Purchase of treasury stock (301) (165)
Proceeds from stock issuance 146 279
-------- --------
Net cash provided by financing activities 15,679 4,868
-------- --------
Net increase in cash and cash equivalents 4,885 1,640
Cash and cash equivalents, beginning of period 9,122 7,627
-------- --------
Cash and cash equivalents, end of period $ 14,007 $ 9,267
======== ========
Supplemental disclosures of cash flow information
Cash paid for interest $ 3,631 $ 4,287
Transfers to other real estate owned 40 80
Income tax paid 585 668
</TABLE>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. All significant intercompany transactions and balances are
eliminated in consolidation. The income reported for the 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.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the six months ended June 30:
<TABLE>
<CAPTION>
(in thousands, except for number of shares and per-share data) 2000 1999
----------- -----------
<S> <C> <C>
Basic earnings per share
Net income, as reported $ 1,203 $ 1,021
Preferred stock dividends declared (40) (35)
----------- -----------
Income available to common shareholders $ 1,163 $ 986
=========== ===========
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<PAGE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Weighted-average shares outstanding 2,591,239 2,638,436
=========== ===========
Basic earnings per share $ 0.45 $ 0.37
=========== ===========
Diluted earnings per share
Net income, as reported $ 1,203 $ 1,021
Interest on mandatory convertible debentures, net of tax 10 8
----------- -----------
Income available to common shareholders $ 1,213 $ 1,029
=========== ===========
Weighted-average shares outstanding 2,591,239 2,638,436
Effect of stock options, net of assumed treasury stock purchases 190,130 237,514
Effect of convertible preferred stock 216,352 216,352
Effect of mandatory convertible debentures 72,114 72,114
----------- -----------
Adjusted weighted-average shares outstanding 3,069,835 3,164,416
=========== ===========
Diluted earnings per share $ 0.40 $ 0.33
=========== ===========
</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 six month period ended June 30,
1999. This item represents a cumulative 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 June 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.
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NOTE 4 - STOCK OPTIONS
A summary of the status of the Employee and Director Stock Option Plan as of
June 30, 2000, and changes during the six months then ended, is presented below.
<TABLE>
<CAPTION>
Number Weighted
of Shares Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at beginning of period 433,120 $ 5.28
Granted during the period 24,500 8.75
Exercised during the period (27,260) 4.99
Forfeited during the period (2,499) 7.32
Additional shares for which options are exercisable
due to stock dividends 12,450 --
-------- --------
Outstanding at end of period 440,311 $ 5.42
======== ========
</TABLE>
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain matters discussed in this Report on Form 10-QSB are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Such risks and uncertainties
include, but are not limited to, those described in Management's Discussion and
Analysis of Financial Condition and Results of Operations. Changes to such risks
and uncertainties, which could impact future financial performance, include,
among other things, (1) competitive pressures in the banking industry; (2)
changes in the interest rate environment; (3) general economic conditions,
either nationally or regionally; (4) changes in the regulatory environment; (5)
changes in business conditions and inflation; and (6) changes in security
markets. Therefore, the information set forth therein should be carefully
considered when evaluating the business prospects of the Company and the Bank.
I. COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2000 AND DECEMBER 31, 1999
Total assets increased $17.4 million or 8% to $231.1 million during the first
half of 2000. The increase was the result of growth in the loan portfolio of
$17.7 million or 13% (including $1.8 million of loans purchased by branch
acquisition). Strong loan demand spurred the commercial loan portfolio to a 39%
growth rate or an increase of $11.5 million. Consumer loans increased $2.3
million or 22% since year-end. Investment securities decreased $7.0 million
since year-end
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while federal funds sold increased $5.0 million. Excess cash flows are funding
the Company's loan growth.
Total deposits increased $19.7 million or 12% to $188.2 million for the first
six months of 2000. The increase is due to several factors including the
acquisition of a branch resulting in assuming $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 $14.0
million or 22%. In addition, money market accounts increased $9.8 million or 93%
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 $5.1 million since year end.
Securities sold under agreement to repurchase decreased $3.9 million since year
end while other borrowed funds increased $3.4 million to compensate for the
decrease in repurchase agreements. 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 Bank recognizes that loan losses will be experienced
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan and,
in the case of collateralized loans, the quality of the collateral for the loan
as well as general economic conditions. It is management's policy to attempt to
maintain an adequate allowance for loan losses based on, among other things,
industry standards, management's experience, the Bank's historical loan loss
experience, evaluation of economic conditions and regular reviews of
delinquencies and loan portfolio quality.
Management continues to actively monitor the Bank's asset quality and to charge
off loans against the allowance for loan losses when appropriate or to provide
specific loan allowances when necessary. Although management believes it uses
the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ from the economic conditions in the assumptions used in making
the final determinations. The Bank's allowance for loan losses amounted to $2.5
million at June 30, 2000 (1.60% of total loans), an increase of $201,000 over
the Bank's $2.3 million allowance for loan losses at December 31, 1999.
II. RESULTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
2000 AND 1999
Net income for the six months ended June 30, 2000 was $1.2 million, an increase
of $182,000 or 18% 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 27% increase in non-interest income. Net income for the
second quarter of 2000 increased $78,000 or 13% to $659,000 compared with the
second quarter of 1999.
Diluted earnings per share increased 21% to $.40 per share for the first six
months of 2000 compared to $.33 per share for the first half of 1999.
Page 11
<PAGE>
The annualized return on average assets for the six months ended June 30, 2000
and 1999 was 1.11% and 1.04%, respectively and for the second quarter of 2000
and 1999 was 1.19% and 1.17%, respectively. Return on average shareholders'
equity on an annualized basis for the first half of 2000 and 1999 was 10.98% and
9.79%, respectively.
III. NET INTEREST INCOME
Net interest income is interest earned on interest-earning assets less interest
incurred on interest-bearing liabilities. Interest-earning assets are
categorized as loans, investment securities and other earning assets, which
include Federal Funds sold and interest bearing deposits from other financial
institutions. Interest-bearing liabilities are categorized as customer deposits,
time and savings deposits and borrowings including repurchase agreements,
short-term borrowings and long-term debt. Net interest income depends on the
volume of average interest-earning assets and average interest-bearing
liabilities and the interest rates earned or incurred on them.
Net interest income for the six months ended June 30, 2000 was $4.8 million, an
11% increase over the net interest income for the first six months of 1999 of
$4.3 million. This increase is attributable to an increase in average loans to
$145.6 million in 2000 from $127.1 million in 1999. This was accompanied by an
increase in the average rate earned on interest-earning assets to 8.36% from
7.95% for the six months ended June 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 six
month period in 2000 and 1999 was 4.56% and 4.11%, respectively on average
interest-bearing liabilities of $168.2 million in 2000 and $150.8 million in
1999. Despite the volatility in general interest rates, the Company's net
interest margin remained constant at 4.61% for the six months ended June 30,
2000 compared to 4.62% 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.
The yield on average earning assets for the three month periods ended June 30,
2000 and June 30, 1999 were 8.52%, and 7.92%, respectively, and the average
interest rate incurred on interest-bearing liabilities was 4.66% and 4.07%,
respectively. The net interest margin increased to 4.68% for the second quarter
of 2000 as compared with 4.62% for the second quarter of 1999. The increase in
interest rates and the net interest margin between the two periods are the
result of rising interest rates on the national level.
IV. NON-INTEREST INCOME
Non-interest income was $1.7 million for the six months ended June 30, 2000, an
increase of $354,000 or 26% 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. The Company
continues to experience growth in fee income
Page 12
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categories. Comparing June 30, 2000 to June 30, 1999, service fees on deposit
accounts increased 18%, trust fees grew 23% and merchant processing fees were up
36%. Trust fees have increased due to growth of trust assets under management to
$205.9 million at June 30, 2000 compared with trust assets of $161.7 million at
June 30, 1999.
Gains on the sale of mortgage loans decreased to $77,000 for the first six
months of 2000 compared to $138,000 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 second quarter of 2000 was $752,000 compared with
$634,000 for the same period in 1999, representing an increase of $118,000 or
19%. Trust fees accounted for $52,000 of the increase.
V. NON-INTEREST EXPENSE
Year-to-date non-interest expense was $4.4 million compared to $3.9 million for
the first six months of 1999. The $558,000, or 14%, increase was due to an
increase in salaries and employee benefits of $448,000. Personnel costs in 2000
increased 11% 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 2000 compared to 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.
Non-interest expense for the second quarter of 2000 was $2.1 million, an
increase of $216,000 or 11% compared with the same period in 1999. Increase in
other non-interest expense of $146,000 and salaries and employee benefits of
$94,000 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 quarter and second
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 June 30, 2000, of 14.18% and 15.43%, 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 111,737 shares of the 126,000
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<PAGE>
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>
Item 1 Legal Proceedings None
Item 2 Changes in Securities and Use of Proceeds None
Item 3 Defaults upon Senior Securities None
Item 4 Submission of Matters to a Vote of Security Holders None
Item 5 Other Information None
Item 6 Exhibits and Reports on Form 8-K See Exh. 27-Financial Data Schedule *
</TABLE>
*Filed in electronic format only.
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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: 8/10/00 By: /s/ Edwin N. Clift
---------------------------- -----------------------------
Edwin N. Clift
President and Chief Executive
Officer
(Principal Executive Officer)
Date: 8/10/00 By: /s/ Deborah A. Jordan
---------------------------- -----------------------------
Deborah A. Jordan
Executive Vice President and
Treasurer (Principal Financial
and Accounting Officer)
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