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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2002
------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-11595
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Merchants Bancshares, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 03-0287342
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
275 Kennedy Drive, South Burlington, Vermont, 05403
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(Address of principal executive offices) (Zip Code)
802 658-3400
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (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 requirement for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13, or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
6,166,462 Shares of $0.01 Par Common Stock Outstanding November 8, 2002
MERCHANTS BANCSHARES, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1 Financial Statements (Unaudited)
Consolidated Balance Sheets
September 30, 2002, and December 31, 2001 1
Consolidated Statements of Operations
For the three months ended September 30, 2002 and 2001, and
the nine months ended September 30, 2002 and 2001 2
Consolidated Statements of Comprehensive Income
For the three months ended September 30, 2002 and 2001, and
the nine months ended September 30, 2002 and 2001 3
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2002 and 2001 4
Footnotes to Financial Statements as of September 30, 2002 5-6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-13
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk 13
ITEM 4 Controls and Procedures 14
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 15
ITEM 2 Changes in Securities 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 15
Signatures 16
Certifications pursuant to Section 302
of the Sarbanes - Oxley Act of 2002 17 - 18
Merchants Bancshares, Inc.
Consolidated Balance Sheets
September 30, December 31,
(In thousands except share and per share data) 2002 2001
------------- ------------
Unaudited
ASSETS
Cash and Due from Banks $ 39,366 $ 35,688
Federal Funds Sold and Securities Purchased
Under Resale Agreements 12,000 51,000
Investments:
Securities Available for Sale 219,821 142,074
Securities Held to Maturity 58,263 69,350
(Fair Value of $61,794 and $71,308)
Trading Securities 796 1,030
-------------------------
Total Investments 278,880 212,454
-------------------------
Loans 489,147 479,685
Allowance for Loan Losses 8,679 8,815
-------------------------
Net Loans 480,468 470,870
-------------------------
Federal Home Loan Bank Stock 3,632 3,620
Bank Premises and Equipment, Net 11,507 11,837
Investment in Real Estate Limited Partnerships 3,564 3,581
Other Real Estate Owned 46 225
Other Assets 11,248 11,192
-------------------------
Total Assets $840,711 $800,467
=========================
LIABILITIES
Deposits:
Demand $ 98,218 $ 92,065
Savings, NOW and Money Market Accounts 468,766 450,949
Time Deposits $100 Thousand and Greater 30,827 30,924
Other Time 146,437 137,874
-------------------------
Total Deposits 744,248 711,812
-------------------------
Demand Note Due U.S. Treasury 3,598 1,248
Other Liabilities 5,609 9,589
Long-Term Debt 2,211 2,255
-------------------------
Total Liabilities 755,666 724,904
-------------------------
Commitments and Contingencies (Note 4)
STOCKHOLDERS' EQUITY
Preferred Stock Class A Non-Voting
Authorized - 200,000, Outstanding 0 -- --
Preferred Stock Class B Voting
Authorized - 1,500,000, Outstanding 0 -- --
Common Stock, $.01 Par Value 67 67
Shares Authorized 10,000,000
Outstanding Current Period 5,921,202
Prior Period 5,913,326
Capital in Excess of Par Value 33,535 33,229
Retained Earnings 54,126 48,885
Treasury Stock (At Cost) (10,736) (10,834)
Current Period Shares 730,558
Prior Period Shares 738,434
Deferred Compensation Arrangements 3,097 2,859
Accumulated Other Comprehensive Income 4,956 1,357
-------------------------
Total Stockholders' Equity 85,045 75,563
-------------------------
Total Liabilities and Stockholders' Equity $840,711 $800,467
=========================
The accompanying notes are an integral part of these consolidated financial
statements.
1
Merchants Bancshares, Inc.
Consolidated Statements of Operations
Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands except per share data) 2002 2001 2002 2001
------------------- -------------------
INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans $ 8,498 $10,006 $25,681 $30,478
Interest and Dividends on Investments
U.S. Treasury and Agency Obligations 2,861 2,493 8,388 8,015
Other 772 1,074 2,336 2,729
-------------------------------------------
Total Interest Income 12,131 13,573 36,405 41,222
-------------------------------------------
INTEREST EXPENSE
Savings, NOW and Money Market Accounts 1,376 2,496 4,225 8,638
Time Deposits $100 Thousand and Greater 311 384 1,004 1,174
Other Time Deposits 1,012 1,520 3,315 4,818
Short-Term Borrowings 6 20 20 72
Long-Term Debt 20 21 59 50
-------------------------------------------
Total Interest Expense 2,725 4,441 8,623 14,752
-------------------------------------------
Net Interest Income 9,406 9,132 27,782 26,470
Provision for Loan Losses (90) (72) (704) (371)
-------------------------------------------
Net Interest Income after Provision
for Loan Losses 9,496 9,204 28,486 26,841
-------------------------------------------
NONINTEREST INCOME
Trust Company Income 370 381 1,209 1,216
Service Charges on Deposits 1,021 975 2,974 2,926
Gain (Loss) on Sale of Investments 173 (145) 173 (224)
Other 1,149 797 1,831 2,100
-------------------------------------------
Total Noninterest Income 2,713 2,008 6,187 6,018
-------------------------------------------
NONINTEREST EXPENSES
Salaries and Wages 2,882 2,797 8,145 8,318
Employee Benefits 799 689 2,530 2,033
Occupancy Expense, Net 674 571 1,893 1,825
Equipment Expense 623 592 1,829 1,839
Legal and Professional Fees 337 554 1,086 1,506
Marketing 273 390 784 1,086
Equity in Losses of Real Estate
Limited Partnerships 318 233 965 633
Vermont Franchise Taxes (Refunds) 206 (429) 608 (57)
Other Real Estate Owned, Net 6 69 81 182
Other 1,237 1,261 3,595 3,657
-------------------------------------------
Total Noninterest Expenses 7,355 6,727 21,516 21,022
-------------------------------------------
Income Before Income Taxes 4,854 4,485 13,157 11,837
Provision for Income Taxes 1,381 1,152 3,661 2,984
-------------------------------------------
NET INCOME $ 3,473 $ 3,333 $ 9,496 $ 8,853
===========================================
Basic Earnings Per Common Share $ 0.56 $ 0.55 $ 1.54 $ 1.45
Diluted Earnings Per Common Share $ 0.56 $ 0.54 $ 1.52 $ 1.43
The accompanying notes are an integral part of these consolidated financial
statements.
2
Merchants Bancshares, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2002 2001 2002 2001
------------------ -------------------
Net Income as Reported $3,473 $3,333 $ 9,496 $ 8,853
Change in Net Unrealized Appreciation of
Securities Available for Sale, Net of Tax 1,991 1,167 2,847 1,417
Change in Net Unrealized Appreciation
of Derivatives Qualifying as Hedges, Net of Tax 499 -- 878 --
Reclassification Adjustments for Securities
(Gains)/Losses Included in Net Income,
Net of Tax (112) 94 (112) 145
------------------------------------------
Comprehensive Income Before Transfers 5,851 4,594 13,109 10,415
Impact of Transfer of Securities from Available
for Sale to Held to Maturity (2) -- (14) 16
Impact of Transfer of Securities from Held to
Maturity to Available for Sale -- -- -- 402
------------------------------------------
Comprehensive Income $5,849 $4,594 $13,095 $10,833
==========================================
The accompanying notes are an integral part of these consolidated financial
statements.
3
Merchants Bancshares, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
For the nine months ended Septmeber 30, 2002 2001
---------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 9,496 $ 8,853
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Loan Losses (704) (371)
Depreciation and Amortization 2,675 1,643
Net (Gains) Losses on Sales of Investment Securities (173) 224
Net (Gains ) Losses on Disposition of Premises and Equipment (257) 2
Net Gains on Sales of Other Real Estate Owned (30) (23)
Equity in Losses of Real Estate Limited Partnerships 982 633
Changes in Assets and Liabilities:
(Increase) Decrease in Interest Receivable (751) 335
Decrease in Interest Payable (682) (854)
Decrease in Other Assets 389 115
Decrease in Other Liabilities (3,296) (848)
---------------------
Net Cash Provided by Operating Activities 7,649 9,709
---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Investment Securities Available for Sale 26,046 25,628
Proceeds from Maturities of Investment Securities Available for Sale 35,357 24,641
Proceeds from Maturities of Investment Securities Held to Maturity 11,032 16,651
Purchases of Investment Securities Available for Sale (135,648) (36,978)
Purchases of Investment Securities Held to Maturity -- (204)
Loan Originations in Excess of Principal Payments (9,242) (2,052)
Purchases of Federal Home Loan Bank Stock (12) (258)
Proceeds from Sales of Premises and Equipment 479 9
Proceeds from Sales of Other Real Estate Owned 255 154
Investments in Real Estate Limited Partnerships (964) (670)
Purchases of Premises and Equipment (1,356) (525)
---------------------
Net Cash (Used in) Provided by Investing Activities (74,053) 26,396
---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 32,436 32,488
Net Increase (Decrease) in Other Borrowed Funds 2,350 (1,816)
Proceeds from Federal Home Loan Bank Advances -- 1,000
Principal Payments on Debt (44) (40)
Cash Dividends Paid (3,422) (3,249)
Acquisition of Treasury Stock (722) (1,663)
Increase in Deferred Compensation Arrangements 239 251
Proceeds from the Exercise of Employee Stock Options 245 43
---------------------
Net Cash Provided by Financing Activities 31,082 27,014
---------------------
(Decrease) Increase in Cash and Cash Equivalents (35,322) 63,119
Cash and Cash Equivalents Beginning of Year 86,688 36,892
---------------------
Cash and Cash Equivalents End of Period $ 51,366 $100,011
=====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Total Interest Payments $ 9,305 $ 11,166
Total Income Tax Payments 4,650 4,800
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Distribution of Stock Under Deferred Compensation Arrangements 55 52
Transfer of Securities from Held to Maturity to Available for Sale -- 29,125
Distribution of Treasury Stock in Lieu of Cash Dividend 833 640
The accompanying notes are an integral part of these consolidated financial
statements.
4
MERCHANTS BANCSHARES, INC.
SEPTEMBER 30, 2002
NOTES TO FINANCIAL STATEMENTS:
See the Company's Annual Report on Form 10-K for additional information.
NOTE 1: RECENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-
lived assets and does not apply to goodwill or intangible assets that are
not being amortized and certain other long-lived assets. This statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" and the accounting and
reporting provisions of Accounting Policies Board ("APB") Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" for the disposal of a segment of a
business (as previously defined in that Opinion). The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with early adoption encouraged. Merchants Bancshares, Inc. (the
"Company") adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No.
144 did not have a material impact on the Company's financial position or
results of operations.
In June 2001 the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
the purchase accounting method be used for all business combinations
initiated after June 30, 2001. SFAS No. 142 establishes new accounting and
reporting standards for goodwill and intangible assets. Under the new
statement, goodwill is no longer subject to amortization over its useful
life. It will be subject to periodic (at least annual) assessments for
impairment by applying a fair value based test. In the event that the
recorded amount of goodwill exceeds its fair value, an impairment loss would
be recorded. The Company adopted SFAS No. 141 and SFAS No. 142 on January 1,
2002. The adoption of SFAS No. 141 and SFAS No. 142 did not have a material
impact on the Company's financial position or results of operations.
NOTE 2: EARNINGS PER SHARE
The following table presents a reconciliation of the calculations of basic
and diluted earnings per share for the three and nine month periods ended
September 30, 2002:
Weighted
Net Average Per Share
Three Months Ended September 30, 2002 Income Shares Amount
--------------------------------
(In thousands except share
and per share data)
Basic Earnings Per Common Share:
Net Income Available to Common
Shareholders $3,473 6,172,672 $0.56
Diluted Earnings Per Common Share:
Effect of Dilutive Stock Options -- 68,050
Net Income Available to Common
Shareholders Plus Assumed Conversions $3,473 6,240,722 $0.56
==============================
5
Weighted
Net Average Per Share
Nine Months Ended September 30, 2002 Income Shares Amount
--------------------------------
(In thousands except share
and per share data)
Basic Earnings Per Common Share:
Net Income Available to Common
Shareholders $9,496 6,159,731 $1.54
Diluted Earnings Per Common Share:
Effect of Dilutive Stock Options -- 75,320
Net Income Available to Common
Shareholders Plus Assumed Conversions $9,496 6,235,051 $1.52
==============================
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding for the three
and nine month periods ending September 30, 2002. As of September 30 2002,
there were no anti-dilutive stock options outstanding.
NOTE 3: STOCK REPURCHASE PROGRAM
In January 2001 the Company's Board of Directors approved a stock repurchase
program. In January 2002 the Board of Directors voted to extend the program
until January 2003. Under the program, the Company is authorized to
repurchase up to 300,000 shares of its own common stock. As of September 30,
2002, the Company had purchased 116,187 shares of its own common stock on
the open market, at an average per share price of $20.53.
NOTE 4: COMMITMENTS AND CONTINGENCIES:
On October 19, 2001, a judgment was entered in the United States District
Court for the District of Vermont for the Bank and against Pasquale and
Vatsala Vescio on all of their claims. Those claims had been asserted as
counterclaims to a foreclosure action by the Bank, and only the
counterclaims remained at issue at the time of judgment. The judgment was
based on a lengthy decision and findings of fact and conclusions of law by
District Judge William K Sessions, III. An appeal has been filed by the
Vescios in the United States Court of Appeals for the Second Circuit.
The litigation had arisen out of the Bank's foreclosure on certain real
estate and personal property delivered to the Bank as collateral by the
Vescios in connection with the financing of a supermarket and various other
projects in Brattleboro, Vermont. The Vescios had asserted several "lender
liability" claims dealing with a commercial development in Brattleboro. They
alleged that the Bank or its representatives violated supposed oral promises
in connection with the origination and funding of the project; claimed that
the Bank was liable to them for damages based on the Bank's supposed
"control" of the project and its alleged breach of covenants of "good faith"
supposedly implied from the loan documents; claimed that the Bank breached
duties of care allegedly owed; and claimed that the Bank should not have
exercised its contract rights when the loan went into default, but should
have resolved the default in a way that was more favorable to the Vescios.
The Vescios have filed their brief on appeal, arguing that a request for
jury trial was improperly denied, that they should have been granted a new
trial, and that there was some "due process" violation arising from the non-
reappointment for an additional term and/or recusal of the predecessor
(bankruptcy) judge. The Bank has filed its brief, asserting why the Vescio's
arguments are without merit. The Vescios have filed an optional reply brief.
The appeal appears likely to be argued by the end of 2002, although no
formal date has yet been set. The Bank believes that this appeal is without
merit, and intends to defend the appeal vigorously.
The Company and certain of its subsidiaries have been named as defendants in
various legal proceedings arising from their normal business activities.
Although the amount of any ultimate liability with respect to such
proceedings cannot be determined, in the opinion of management, based upon
the opinion of counsel on the outcome of such proceedings, any such
liability will not have a material effect on the consolidated financial
position of the Company and its subsidiaries.
NOTE 5: RECLASSIFICATION
Certain amounts reported for prior periods have been reclassified to be
consistent with the current period presentation.
6
MERCHANTS BANCSHARES, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, this Quarterly
Report on Form 10-Q may contain forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Act of 1934. Investors are cautioned that forward-looking
statements are inherently uncertain. Forward-looking statements relate to
expectations, beliefs, projections, future plans and strategies, anticipated
events or trends and similar expressions concerning matters that are not
historical facts. The forward-looking statements reflect our current views
about future events and are subject to risks, uncertainties, assumptions and
changes in circumstances that may cause our actual results to differ
significantly from those expressed in any forward-looking statement. You
should not rely on forward-looking statements since they involve known and
unknown risks, uncertainties and other factors which are, in some cases,
beyond the Company's control and which could materially affect actual
results. The factors that could cause actual results to differ materially
from current expectations include, among others, changes in general economic
conditions in Vermont, changes in interest rates, changes in competitive
product and pricing pressures among financial institutions within the
Company's markets, and changes in the financial condition of the Company's
borrowers. The forward-looking statements contained herein represent the
Company's judgment as of the date of this Form 10-Q, and the Company
cautions readers not to place undue reliance on such statements. For a more
detailed discussion of factors that could affect the Company's results
please refer to the Company's other SEC filings.
All adjustments necessary for a fair statement of the three and nine months
ended September 30, 2002 and 2001, have been included in the financial
statements. The information was prepared from the unaudited financial
statements of Merchants Bancshares, Inc. (the "Company") and its
subsidiaries, Merchants Bank (the "Bank"), Merchants Trust Company and
Merchants Properties, Inc.
OVERVIEW
Merchants Bancshares, Inc. earned net income of $3.47 million, or basic and
diluted earnings per share of 56 cents for the quarter ended September 30,
2002, compared to $3.33 million, or basic earnings per share of 55 cents and
diluted earnings per share of 54 cents for the same period a year earlier.
The return on average assets and return on average equity for the third
quarter of 2002 were 1.68% and 16.95% respectively, compared to 1.71% and
18.51% for the third quarter of 2001. The Company earned $9.50 million, or
basic earnings per share of $1.54 and diluted earnings per share of $1.52
for the nine months ended September 30, 2002, compared to $8.85 million or
basic earnings per share of $1.45 and diluted earnings per share of $1.43
for the same period in 2001. The return on average assets and return on
average equity for the nine months ended September 30, 2002, were 1.56% and
16.07% respectively, compared to 1.56% and 16.85% respectively.
RESULTS OF OPERATIONS
Net Interest Income: Net interest income for the third quarter of 2002 was
$9.4 million compared to $9.1 million for the third quarter of 2001, and was
$27.8 million for the first three quarters of 2002, compared to $26.5
million for the first three quarters of 2001. The quarterly yields on
interest earning assets decreased 121 basis points and the quarterly cost of
interest bearing liabilities decreased 122 basis points compared with the
third quarter of 2001. These decreases are primarily the result of the low
interest rate environment in existence throughout 2002. The Bank's net yield
on interest earning assets, or net interest margin, decreased 18 basis
points from the third quarter of 2001 to the third quarter of 2002, and
decreased two basis points from the fourth quarter of 2001 to the third
quarter of this year. At the same time the Bank's interest rate spread
increased slightly from the third quarter of 2001 to the third quarter of
2002, and increased 10 basis points from the fourth quarter of 2001 to the
third quarter of 2002. The Bank's mix of interest earning assets has changed
over the course of the last year, a larger portion of the Bank's interest
earning asset base is in the investment portfolio, which earns approximately
200 basis points less than the loan portfolio. The Bank continues to fund
the loan and investment portfolios with short-term, inexpensive core
deposits, the average rate paid on interest bearing deposits has decreased
122 basis points from the third quarter of 2001 to the third quarter of
2002, and averaged 1.67% during the quarter. The schedule on pages 10 and 11
shows the yield analysis for the periods reported.
The makeup of the Bank's loan portfolio has continued to shift over the
course of the year. The commercial real estate portfolio has experienced a
substantial shift from fixed rate to lower yielding variable rate loans
during 2002.
7
The fixed rate commercial real estate portfolio has decreased by
approximately $66 million, and the variable rate portfolio has increased by
a similar amount. The average rate on these loans decreased more than 300
basis points. Since the end of last year the Bank's commercial real estate
portfolio, which comprised approximately 38% of the loan portfolio at
December 31, 2001, has shifted from a mix of 72% fixed rate and 28% variable
rate to 32% fixed rate and 68% variable rate. This had the impact of
reducing interest income on this portion of the loan portfolio. To mitigate
the effect on interest income of this shift in the loan portfolio from fixed
rate to variable rate, the Bank entered into a $25 million, three year,
interest rate swap early in the second quarter. The Bank received a fixed
interest rate and paid prime under this swap. As of September 30, 2002, this
interest rate swap had a fair market value of $1.3 million. The Bank
terminated the swap and realized a $1.3 million gain during October, 2002.
The gain will be accreted into income monthly, using the effective yield
method, through April 2005.
Provision for Loan Losses: The Bank continued to have success at recovering
previously charged off obligations during the first nine months of 2002. The
Bank recorded gross recoveries of $90 thousand and $704 thousand and gross
charge-offs of $116 thousand and $136 thousand for the third quarter and
first nine months of 2002, respectively. The recoveries have been recorded
as a negative provision for loan losses. See the discussion of Non-
Performing Assets on pages 12 and 13 for more information on the allowance
for loan losses.
Non-interest income: Total noninterest income increased $705 thousand during
the third quarter of 2002, and $169 thousand for the first nine months of
2002 compared to the same periods in 2001. Other noninterest income
increased by $352 thousand during the third quarter of 2002, and decreased
by $269 thousand for the first nine months of this year. There have been a
number of nonrecurring items recognized during both years that impact this
change:
* The Bank sold a branch building during the third quarter of 2002 for a
gain of $562 thousand. Of that amount, $272 thousand has been recognized
as income during the current quarter. The Bank has leased back the portion
of the building that serves as a branch, the balance of the gain of $290
thousand associated with the remaining portion of the building has been
deferred and will be accreted into income over 10 years, the term of the
lease;
* The Bank recognized net income of $449 thousand from resolution of a
claim by the Company against its previous insurance carrier during the
third quarter of 2002. In this claim the Company had sought
reimbursement for amounts paid by the Company in previous fiscal years
to defend and settle certain litigation against the Company and others.
Nonrecurring items from 2001 included:
* The Bank sold its credit card merchants servicing portfolio during the
third quarter of 2001 generating a gain of $81 thousand on that
transaction;
* The Bank received a $622 thousand refund of its 1999 Vermont Franchise
taxes during the third quarter of 2001 and received related interest
totaling $115 thousand, which was included in Other non-interest income;
* The Bank received litigation proceeds totaling $265 thousand during the
second quarter of 2001;
* The Bank recognized a gain of $53 thousand upon the sale of a portion of
its loan servicing portfolio during the first quarter of 2001.
Additionally, credit card non-interest income has decreased by $245 thousand
during 2002 as a result of the sale of the portfolio during the fourth
quarter of 2001.
Non-interest expenses: Total non-interest expenses for the third quarter of
2002 increased $628 thousand compared to the third quarter of 2001, and $494
thousand for the first nine months of 2002 versus the first nine months of
2001. Salaries and wages increased $85 thousand and decreased $173 thousand
respectively, due primarily to changes in estimates of anticipated incentive
payments. Employee benefits increased $110 thousand and $497 thousand
respectively. During the first nine months of this year the Company
recognized pension expense totaling $75 thousand compared to income of $179
thousand in the first nine months of 2001, the amount for 2001 included a
one-time adjustment of $119 thousand. The Company's pension plan, frozen in
1995, has historically generated income for the Company, as the value of the
plan assets has grown faster than the projected benefit obligation.
Currently the projected growth in the value of plan assets is lower than the
forecasted growth in the projected benefit obligation. Additionally, the
Company's health insurance expense increased by $33 thousand over the same
quarter a year ago, and $128 thousand year to date. Legal and Professional
fees decreased $217 thousand and $420 thousand respectively, primarily due
to the timing of expenses as the Bank defended itself or settled certain
ongoing litigation. Marketing expenses were down $117 thousand and $302
thousand respectively, due primarily to the timing of anticipated expenses
related to the opening of a planned new branch location. The Bank received a
$622
8
thousand refund of its 1999 Vermont franchise taxes during the third quarter
of 2001. The refund was related to a net operating loss generated for State
tax purposes in 1999.
The Bank has continued its practice of investing in low income and elderly
housing partnerships. These partnerships provide tangible support in our
communities for those most in need, as well as providing tax benefits. The
expense related to these investments increased $85 thousand for the third
quarter and $332 thousand year-to-date, compared to the same periods in
2001.
BALANCE SHEET ANALYSIS
Deposit growth has been strong for the first nine months of 2002. Average
deposits for the third quarter of 2002 were $28.2 million higher than the
fourth quarter of 2001, and quarter end balances were $32.4 million higher
than year end 2001. Annualized average deposit growth for 2002 is 5.2%;
annualized average deposit growth during the third quarter was 9.3%.
Quarter end loan balances were $9.5 million higher than year-end balances,
and average total loans increased $2.5 million from the fourth quarter of
2001 to the third quarter of 2002. The increase in the average loan balances
was primarily due to an increase of $11.8 million in average commercial and
industrial loan balances and $2.7 million in average residential real estate
balances, while commercial real estate balances decreased $6.9 million. The
increase in commercial and industrial loans is the result of the Bank's
success with its sustained statewide calling program. Additionally, market
conditions have been more favorable, and the Bank has been able to obtain
new business without compromising price or credit standards. The increase in
residential real estate is due to the continued success of the Bank's
streamlined residential mortgage product and the low interest rate
environment during the first three quarters of the year.
The Bank's average investment portfolio increased $71.7 million from the
fourth quarter of 2001 to the third quarter of 2002, and quarter end
balances were $66.4 million higher than the fourth quarter of 2001. At the
same time the Bank's average short-term funds position decreased by $41.6
million as the Bank re-deployed these funds into the investment portfolio.
In the ordinary course of business the Bank makes commitments for possible
future extensions of credit. On September 30, 2002, the Bank was obligated
to fund $6.4 million of standby letters of credit. No losses are anticipated
in connection with these commitments.
INCOME TAXES
The Company and its subsidiaries are taxed on income by the IRS at the
federal level. The State of Vermont levies franchise taxes on banks based
upon average deposit levels in lieu of taxing income. Franchise taxes are
included in non-interest expenses in the consolidated statements of
operations.
Total income tax expense was $1.38 million and $3.66 million for the third
quarter of 2002 and the first nine months of 2002 respectively, compared to
$1.15 million and $2.98 million for the same periods in 2001. The Company
recognized favorable tax benefits of $343 thousand and $1 million for the third
quarter of 2002 and the first nine months of 2002 respectively, compared to
$356 thousand and $1.1 million for the same periods in 2001, representing
the amount of the income tax credits earned during those periods. The
Company's statutory tax rate was 35% for all periods. The recognition of low
income housing tax credits has contributed to the Company's effective tax
rate of 28% for the nine months ended September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity, as it pertains to banking, can be defined as the ability to
generate cash in the most economical way to satisfy loan demand, deposit
withdrawal demand, and to meet other business opportunities which require
cash. The Bank has a number of sources of liquid funds; including $25
million in available Federal Funds lines of credit at September 30, 2002; an
overnight line of credit with the Federal Home Loan Bank (FHLB) of $15
million; an estimated additional borrowing capacity with FHLB of $118
million; and the ability to borrow $60 million through the use of repurchase
agreements, collateralized by the Bank's investments, with certain approved
counterparties.
9
Merchants Bancshares, Inc.
Supplemental Information
Unaudited
Three Months Ended
------------------------------------------------------------------
September 30, 2002 September 30, 2001
(In thousands) ------------------------------- -------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
(Fully Taxable Equivalent) Balance Expense Rate Balance Expense Rate
------- -------- ------- ------- -------- -------
INTEREST EARNING ASSETS
Loans (1) $480,743 $ 8,512 7.02% $481,954 $10,018 8.25%
Taxable Investments 278,404 3,557 5.07% 195,769 3,134 6.35%
Federal Funds Sold and Securities
Purchased Under Agreements to Resell 17,815 76 1.69% 49,441 433 3.47%
----------------------------- -----------------------------
Total Interest Earning Assets $776,962 $12,145 6.20% $727,164 $13,585 7.41%
============================= =============================
INTEREST BEARING LIABILITIES
Savings, NOW and Money Market Deposits $467,073 $ 1,376 1.17% $442,898 $ 2,496 2.24%
Time Deposits 174,540 1,323 3.01% 161,780 1,904 4.67%
----------------------------- -----------------------------
Total Savings and Time Deposits 641,613 2,699 1.67% 604,678 4,400 2.89%
Short-Term Borrowings 1,794 6 1.33% 2,333 20 3.40%
Long-Term Debt 2,388 20 3.32% 2,465 21 3.38%
----------------------------- -----------------------------
Total Interest Bearing Liabilities 645,795 2,725 1.67% 609,476 4,441 2.89%
Other Liabilities & Stockholders' Equity
(Net of Non-Interest Earning Assets) 131,167 117,688
-------- --------
Total Liabilities & Stockholders' Equity
(Net of Non-Interest Earning Assets) $776,962 $727,164
======== ========
Rate Spread 4.53% 4.52%
==== ====
Net Yield on Interest Earning Assets 4.81% 4.99%
==== ====
Includes principal balance of non-accrual loans and fees on loans.
10
Merchants Bancshares, Inc.
Supplemental Information
Unaudited
Nine Months Ended
------------------------------------------------------------------
September 30, 2002 September 30, 2001
(In thousands) ------------------------------- -------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
(Fully Taxable Equivalent) Balance Expense Rate Balance Expense Rate
------- -------- ------- ------- -------- -------
INTEREST EARNING ASSETS
Loans (1) (2) $475,173 $25,545 7.19% $479,315 $30,528 8.52%
Taxable Investments 260,027 10,403 5.35% 200,446 9,825 6.55%
Federal Funds Sold and Securities
Purchased Under Agreements to Resell 25,695 321 1.67% 29,107 919 4.22%
----------------------------- -----------------------------
Total Interest Earning Assets $760,895 $36,269 6.37% $708,868 $41,272 7.78%
============================= =============================
INTEREST BEARING LIABILITIES
Savings, NOW and Money Market Deposits $457,021 $ 4,225 1.24% $428,930 $ 8,638 2.69%
Time Deposits 173,348 4,319 3.33% 160,978 5,992 4.98%
----------------------------- -----------------------------
Total Savings and Time Deposits 630,369 8,544 1.81% 589,908 14,630 3.32%
Federal Funds Purchased -- -- 131 6 6.12%
Short-Term Borrowings 1,858 20 1.44% 2,065 66 4.27%
Long-Term Debt 2,411 59 3.27% 2,068 50 3.23%
----------------------------- -----------------------------
Total Interest Bearing Liabilities 634,638 8,623 1.82% 594,172 14,752 3.32%
Other Liabilities & Stockholders' Equity
(Net of Non-Interest Earning Assets) 126,257 114,696
-------- --------
Total Liabilities & Stockholders' Equity
(Net of Non-Interest Earning Assets) $760,895 $708,868
======== ========
Rate Spread 4.55% 4.46%
==== ====
Net Yield on Interest Earning Assets 4.86% 5.00%
==== ====
Includes principal balance of non-accrual loans and fees on loans.
Excludes prepayment fees of $165 related to early payments by certain
loan customers in the first quarter of 2002.
11
NON-PERFORMING ASSETS AND THE ALLOWANCE FOR LOAN LOSSES
- -------------------------------------------------------
The following tables summarize the Bank's non-performing assets as of
September 30, 2002, December 31, 2001, and September 30, 2001:
(In thousands) September 30, 2002 December 31, 2001 September 30, 2001
-------------------------------------------------------------
Nonaccrual Loans $2,009 $2,412 $2,580
Loans Past Due 90 Days or More
and Still Accruing 81 -- 228
Restructured Loans 1,796 198 201
-------------------------------------------------
Total Non-performing Loans (NPL) 3,886 2,610 3,009
Other Real Estate Owned 46 225 1,590
-------------------------------------------------
Total Non-performing Assets (NPA) $3,932 $2,835 $4,599
=================================================
Significant events affecting the categories of NPA are discussed below:
Nonaccrual Loans:
- -----------------
During the first nine months of 2002 approximately $1.3 million in
reductions to nonaccrual loans were offset in part by approximately
$875 thousand of additions. The reductions resulted primarily from the
refinance of two commercial relationships, totaling approximately $610
thousand, the payoff or return to accrual of several small commercial
loans, chargeoffs, and scheduled loan payments. Loans comprising seven
small retail and commercial relationships were placed in nonaccrual
during the third quarter.
Loans Past Due 90 Days or More and still accruing:
- --------------------------------------------------
Loans past due 90 days increased $81 thousand during the first nine
months of 2002. Management does not believe this increase represents a
significant trend, and the variation in this category is consistent
with the Bank's experience in this category over the last several
years.
Restructured Loans:
- -------------------
The increase in this category stems from the restructuring of one loan
to a customer that supplies services to the telecommunications
industry. Payments are current and interest income is recognized on a
cash basis.
Other Real Estate Owned (OREO):
- -------------------------------
The $179 thousand net decrease in the Bank's OREO portfolio during the
first nine months of 2002 is primarily attributable to the third
quarter sale of a building partially occupied by the Bank.
The Allowance for Loan Losses ("Allowance") is based on management's
estimate of the amount required to reflect the risks in the loan portfolio,
based on circumstances and conditions at each reporting date. Merchants Bank
reviews the adequacy of the Allowance at least quarterly. Factors considered
in evaluating the adequacy of the Allowance include previous loss
experience, current economic conditions and their effect on the borrowers,
the performance of individual loans in relation to contract terms and
estimated fair values of properties to be foreclosed. The method used in
determining the amount of the Allowance is not based on maintaining a
specific percentage of Allowance to total loans or total nonperforming
assets. Rather, the methodology is a comprehensive analytical process of
assessing the credit risk inherent in the loan portfolio. This assessment
incorporates a broad range of factors, which indicate both general, and
specific credit risk, as well as a consistent methodology for quantifying
probable credit losses. Losses are charged against the Allowance when
management believes that the collectibility of principal is doubtful. To the
extent management determines the level of anticipated losses in the
portfolio has significantly increased or diminished, the Allowance is
adjusted through current earnings. As part of the Bank's analysis of
specific credit risk, detailed and extensive reviews are done on larger
credits and problematic credits identified on the watched asset list,
nonperforming asset listings and internal credit rating reports. An outside
loan review firm examines the Bank's commercial loan portfolio three times
per year. Over the course of the year, approximately 75% of commercial loan
balances are reviewed, including all relationships over $750 thousand and
classified loans over $100 thousand. Issues addressed by the loan review
process include the accuracy of the Bank's internal risk ratings system,
loan quality, and adequacy of the Allowance. Loans deemed impaired at
September 30,
12
2002, totaled $2.2 million, of this total $2.0 million are included as non-
performing assets in the table above. Impaired loans have been allocated
$838 thousand of the Allowance.
The Allowance level reflects management's current strategies and efforts to
maintain the Allowance at a level adequate to provide for loan losses based
on an evaluation of known and inherent risks in the loan portfolio. Among
the factors that management considers in establishing the level of the
Allowance are overall findings from an analysis of individual loans, the
overall risk characteristics and size of the loan portfolio, past credit
loss history, management's assessment of current economic and real estate
market conditions and estimates of the current value of the underlying
collateral.
The following table reflects the Bank's non-performing asset and coverage
ratios as of September 30, 2002, December 31, 2001, and September 30, 2001:
September 30, 2002 December 31, 2001 September 30, 2001
-------------------------------------------------------------
Non-performing Loans to Total Loans 0.79% 0.54% 0.63%
Non-performing Assets to Total
Loans plus Other Real Estate Owned 0.80% 0.59% 0.96%
Allowance for Loan Losses to
Total Loans 1.77% 1.84% 2.07%
Allowance for Loan Losses to
Non-performing Loans 223% 338% 328%
Allowance for Loan Losses to
Non-performing Assets 221% 311% 215%
-----------------------------------------------
Management considers the balance of the Allowance adequate at September 30,
2002.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank's Asset-Liability committee (ALCO) is responsible for evaluating
and managing the interest rate risk which arises naturally from imbalances
in repricing, maturity and cash flow characteristics of the Bank's assets
and liabilities. The ALCO is responsible for ensuring that the Board of
Directors receives timely, accurate information regarding the Bank's
interest rate risk position at least quarterly. The ALCO uses an outside
consultant to perform rate shocks of the Bank's balance sheets, and to
perform a variety of other analyses. The consultant's most recent review was
as of August 31, 2002. At that time, in addition to modeling a 200 basis
point rate shock, the consultant ran a 200 and 400 basis point rate shock in
an increasing rate environment, with a flattening yield curve. These types
of dynamic analyses give the ALCO a more thorough understanding of how the
Bank's balance sheet will perform in a variety of rate environments. The
model used by the consultant is based on expected cash flows and repricing
characteristics for all financial instruments and incorporates assumptions
regarding the impact of changing interest rates on the prepayment
characteristics of these financial instruments. Assumptions based on the
historical behavior of deposit rates and balances in relation to changes in
interest rates are also incorporated into the model. These assumptions are
inherently uncertain and, as a result, the model cannot precisely measure
net interest income or precisely predict the impact of fluctuations in
interest rates on net interest income.
Over $66 million (approximately 38%) of the Bank's commercial real estate
portfolio shifted from fixed rate to variable rate during 2002. To mitigate
the effect on net interest income of this shift in the loan portfolio from
fixed rate to variable rate the Bank entered into a $25 million, three year
interest rate swap early in the second quarter, under which the Bank
receives a fixed interest rate and pays prime. The swap was terminated in
early October 2002 for a gain of $1.3 million, which will be accreted into
income through April 2005.
Except for the changes in the commercial loan portfolio noted above, there
have been no significant changes in the Company's risk profile, or
management's risk management practices, since year-end.
13
ITEM 4 - CONTROLS AND PROCEDURES
Merchants Bancshares, Inc. management, including the Chief Executive Officer
and the Chief Financial Officer, have conducted an evaluation of the
effectiveness of disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures are
effective in ensuring that all material information required to be filed in
this quarterly report has been made known to them in a timely fashion. There
have been no significant changes in internal controls, or in factors that
could significantly affect internal controls, subsequent to the date the
Chief Executive Officer and Chief Financial Officer completed their
evaluation.
14
MERCHANTS BANCSHARES, INC.
SEPTEMBER 30, 2002
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On October 19, 2001, a judgment was entered in the United States District
Court for the District of Vermont for the Bank and against Pasquale and
Vatsala Vescio on all of their claims. Those claims had been asserted as
counterclaims to a foreclosure action by the Bank, and only the
counterclaims remained at issue at the time of judgment. The judgment was
based on a lengthy decision and findings of fact and conclusions of law by
District Judge William K Sessions, III. An appeal has been filed by the
Vescios in the United States Court of Appeals for the Second Circuit.
The litigation had arisen out of the Bank's foreclosure on certain real
estate and personal property delivered to the Bank as collateral by the
Vescios in connection with the financing of a supermarket and various other
projects in Brattleboro, Vermont. The Vescios had asserted several "lender
liability" claims dealing with a commercial development in Brattleboro. They
alleged that the Bank or its representatives violated supposed oral promises
in connection with the origination and funding of the project; claimed that
the Bank was liable to them for damages based on the Bank's supposed
"control" of the project and its alleged breach of covenants of "good faith"
supposedly implied from the loan documents; claimed that the Bank breached
duties of care allegedly owed; and claimed that the Bank should not have
exercised its contract rights when the loan went into default, but should
have resolved the default in a way that was more favorable to the Vescios.
The Vescios have filed their brief on appeal, arguing that a request for
jury trial was improperly denied, that they should have been granted a new
trial, and that there was some "due process" violation arising from the non-
reappointment for an additional term and/or recusal of the predecessor
(bankruptcy) judge. The Bank has filed its brief, asserting why the Vescio's
arguments are without merit. The Vescios have filed an optional reply brief.
The appeal appears likely to be argued by the end of 2002, although no
formal date has yet been set. The Bank believes that this appeal is without
merit, and intends to defend the appeal vigorously.
The Company and certain of its subsidiaries have been named as defendants in
various legal proceedings arising from their normal business activities.
Although the amount of any ultimate liability with respect to such
proceedings cannot be determined, in the opinion of management, based upon
the opinion of counsel on the outcome of such proceedings, any such
liability will not have a material effect on the consolidated financial
position of the Company and its subsidiaries.
Item 2 - Changes in Securities - NONE
Item 3 - Defaults upon Senior Securities - NONE
Item 4 - Submission of Matters to a Vote of Security Holders - NONE
Item 5 - Other Issues - NONE
Item 6 - Exhibits and Reports on Form 8-K
Exhibits:
99.1 Certification of Chief Executive Officer of the Company pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
99.2 Certification of Chief Financial Officer of the Company pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
15
MERCHANTS BANCSHARES, INC.
FORM 10-Q
SEPTEMBER 30, 2002
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.
Merchants Bancshares, Inc.
/s/ Joseph L. Boutin
--------------------
Joseph L. Boutin, President &
Chief Executive Officer
/s/ Janet P. Spitler
--------------------
Janet P. Spitler, Treasurer
(Chief Financial Officer)
November 14, 2002
-----------------
Date
16
MERCHANTS BANCSHARES, INC.
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Joseph L. Boutin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Merchants
Bancshares, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
/s/ Joseph L. Boutin
- --------------------
Joseph L. Boutin
President and Chief Executive Officer
17
MERCHANTS BANCSHARES, INC.
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
- -------------
I, Janet P. Spitler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Merchants
Bancshares, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
/s/Janet P. Spitler
- -------------------
Janet P. Spitler
Treasurer
(Chief Financial Officer)
18