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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended: March 31, 2003
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
Merchants Bancshares, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 03-0287342
------------------------------ -------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
275 Kennedy Drive, South Burlington, Vermont 05403
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
802-658-3400
--------------------------------------------------
Registrant's telephone number, including area code
----------------------------------------------------
(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 requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[X] Yes [ ] No
Indicate the number of shares of each of the issuer's classes of common
stock, as of the latest practicable date: As of May 8, 2003, the registrant
had outstanding 6,182,543 shares of $0.01 Par Common Stock.
MERCHANTS BANCSHARES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 Financial Statements (Unaudited)
Consolidated Balance Sheets
March 31, 2003, and December 31, 2002 1
Consolidated Statements of Operations
For the three months ended March 31, 2003 and 2002 2
Consolidated Statements of Comprehensive Income
For the three months ended March 31, 2003 and 2002 3
Consolidated Statements of Cash Flows
For the three months ended March 31, 2003 and 2002 4
Footnotes to Financial Statements as of March 31, 2003 5 - 7
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 14
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk 14 - 15
ITEM 4 Controls and Procedures 15
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 16
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 Issues None
ITEM 6 Exhibits and Reports on Form 8-K 16
Signatures 17
Certifications pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 18 - 19
MERCHANTS BANCSHARES, INC.
PART I
ITEM 1 - FINANCIAL STATEMENTS
Merchants Bancshares, Inc.
Consolidated Balance Sheets
March 31, December 31,
(In thousands except share and per share data) 2003 2002
- ------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Cash and Due from Banks $ 39,462 $ 37,046
Federal Funds Sold and Securities Purchased
Under Resale Agreements 11,011 31,500
Investments:
Securities Available for Sale 232,630 217,755
Securities Held to Maturity 47,110 51,614
(Fair Value of $49,544 and $54,972)
Trading Securities 673 846
- ----------------------------------------------------------------------------------------------
Total Investments 280,413 270,215
- ----------------------------------------------------------------------------------------------
Loans 515,527 495,588
Less: Allowance for Loan Losses 8,480 8,497
- ----------------------------------------------------------------------------------------------
Net Loans 507,047 487,091
- ----------------------------------------------------------------------------------------------
Federal Home Loan Bank Stock 3,632 3,632
Bank Premises and Equipment, Net 11,255 11,400
Investment in Real Estate Limited Partnerships 4,626 3,551
Other Real Estate Owned 57 57
Other Assets 9,869 10,003
- ----------------------------------------------------------------------------------------------
Total Assets $867,372 $854,495
==============================================================================================
LIABILITIES
Deposits:
Demand $ 94,245 $102,554
Savings, NOW and Money Market Accounts 477,964 467,430
Time Deposits $100 Thousand and Greater 42,530 37,916
Other Time 153,265 147,374
- ----------------------------------------------------------------------------------------------
Total Deposits 768,004 755,274
- ----------------------------------------------------------------------------------------------
Demand Note Due U.S. Treasury 504 4,000
Other Liabilities 8,375 10,086
Long-Term Debt 6,340 2,377
- ----------------------------------------------------------------------------------------------
Total Liabilities 783,223 771,737
- ----------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 5)
STOCKHOLDERS' EQUITY
Preferred Stock Class A Non-Voting
Shares Authorized - 200,000, Outstanding 0 -- --
Preferred Stock Class B Voting
Shares Authorized - 1,500,000, Outstanding 0 -- --
Common Stock, $.01 Par Value 67 67
Shares Authorized 10,000,000
Issued, Current Period 6,651,760
Prior Period 6,651,760
Outstanding Current Period 5,929,205
Prior Period 5,925,082
Capital in Excess of Par Value 33,748 33,664
Retained Earnings 57,078 55,827
Treasury Stock (At Cost) (11,069) (10,980)
Current Period Shares 722,555
Prior Period Shares 726,678
Deferred Compensation Arrangements 3,238 3,194
Accumulated Other Comprehensive Income 1,087 986
- ----------------------------------------------------------------------------------------------
Total Stockholders' Equity 84,149 82,758
- ----------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $867,372 $854,495
==============================================================================================
See accompanying notes to the consolidated financial statements
1
Merchants Bancshares, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
(In thousands except per share data) 2003 2002
- -----------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans $ 8,032 $ 8,656
Interest and Dividends on Investments
U.S. Treasury and Agency Obligations 2,425 2,716
Other 867 759
- -----------------------------------------------------------------
Total Interest and Dividend Income 11,324 12,131
- -----------------------------------------------------------------
INTEREST EXPENSE
Savings, NOW and Money Market Accounts 878 1,470
Time Deposits $100 Thousand and Greater 346 358
Other Time Deposits 873 1,209
Other Borrowed Funds 2 10
Long-Term Debt 27 19
- -----------------------------------------------------------------
Total Interest Expense 2,126 3,066
- -----------------------------------------------------------------
Net Interest Income 9,198 9,065
Provision for Loan Losses -- (433)
- -----------------------------------------------------------------
Net Interest Income after Provision
for Loan Losses 9,198 9,498
- -----------------------------------------------------------------
NONINTEREST INCOME
Trust Company Income 345 389
Service Charges on Deposits 1,050 922
Gains on Sales of Investment Securities 217 --
Other 469 432
- -----------------------------------------------------------------
Total Noninterest Income 2,081 1,743
- -----------------------------------------------------------------
NONINTEREST EXPENSES
Salaries and Wages 2,737 2,676
Employee Benefits 1,080 885
Occupancy Expense, Net 693 634
Equipment Expense 599 595
Legal and Professional Fees 311 326
Marketing 301 250
Equity in Losses of Real Estate
Limited Partnerships 402 318
Vermont Franchise Taxes 146 199
Other Real Estate Owned, Net 24 31
Other 1,278 1,193
- -----------------------------------------------------------------
Total Noninterest Expenses 7,571 7,107
- -----------------------------------------------------------------
Income Before Provision for Income Taxes 3,708 4,134
Provision for Income Taxes 974 1,128
- -----------------------------------------------------------------
NET INCOME $ 2,734 $ 3,006
=================================================================
Basic Earnings Per Common Share $ 0.44 $ 0.49
Diluted Earnings Per Common Share $ 0.44 $ 0.48
See accompanying notes to the consolidated financial statements
2
Merchants Bancshares, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
March 31,
(In thousands) 2003 2002
- ---------------------------------------------------------------------------------
Net Income $2,734 $ 3,006
Change in Net Unrealized Appreciation of Securities
Available for Sale, Net of Taxes of $137 and ($713) 254 (1,324)
Reclassification Adjustments for Securities
Gains Included in Net Income, Net of Taxes of $76 (141) --
- ---------------------------------------------------------------------------------
Comprehensive Income Before Impact of Prior Year Transfers 2,847 1,682
Impact of Transfer of Securities from Available for Sale
to Held to Maturity, Net of Tax benefit of ($6) and ($4) (12) (7)
- ---------------------------------------------------------------------------------
Comprehensive Income $2,835 $ 1,675
=================================================================================
See accompanying notes to the consolidated financial statements
3
Merchants Bancshares, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
For the three months ended March 31, 2003 2002
- ------------------------------------------------------------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,734 $ 3,006
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Loan Losses -- (433)
Depreciation and Amortization 1,157 800
Net Gains on Sales of Investment Securities (217) --
Net Gains on Disposition of Premises and Equipment -- (6)
Equity in Losses of Real Estate Limited Partnerships 402 318
Changes in Assets and Liabilities:
Decrease (Increase) in Interest Receivable 78 (316)
Decrease in Interest Payable (23) (273)
Increase in Other Assets (2,554) (424)
Decrease in Other Liabilities (1,683) (1,201)
- ------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Operating Activities (106) 1,471
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Investment Securities Available for Sale 21,904 --
Proceeds from Maturities of Investment Securities Available for Sale 14,171 11,173
Proceeds from Maturities of Investment Securities Held to Maturity 4,488 4,679
Purchases of Investment Securities Available for Sale (48,621) (59,599)
Loan Originations (in Excess) Less Than of Principal Payments (19,572) 8,971
Proceeds from Sales of Premises and Equipment -- 6
Investments in Real Estate Limited Partnerships (1,477) (447)
Purchases of Bank Premises and Equipment (309) (324)
- ------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (29,416) (35,541)
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 12,730 12,110
Net (Decrease) Increase in Short Term Borrowings (3,496) 2,752
Proceeds from Long-Term Debt 4,000 --
Principal Payments on Long-Term Debt (37) (4)
Cash Dividends Paid (1,454) (1,142)
Acquisition of Treasury Stock (238) (173)
Increase in Deferred Compensation Arrangements 43 89
Distributions Under Deferred Compensation Arrangements (141) (147)
Proceeds from the Exercise of Employee Stock Options 42 107
- ------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 11,449 13,592
- ------------------------------------------------------------------------------------------------
Decrease in Cash and Cash Equivalents (18,073) (20,478)
Cash and Cash Equivalents Beginning of Year 68,546 86,688
- ------------------------------------------------------------------------------------------------
Cash and Cash Equivalents End of Period $ 50,473 $ 66,210
================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Total Interest Payments $ 2,153 $ 3,339
Total Income Tax Payments 2,657 2,000
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Distribution of Stock Under Deferred Compensation Arrangements 55 55
Distribution of Treasury Stock in Lieu of Cash Dividend 216 271
See accompanying notes to the consolidated financial statements
4
NOTES TO FINANCIAL STATEMENTS:
See Merchants Bancshares, Inc. ("Merchants") Annual Report on Form 10-K for
additional information.
Note 1: Recent Accounting Developments
In December 2002 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure - an Amendment of
FASB Statement No. 123", to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-
based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. This statement is effective for fiscal years ending
after December 15, 2002. Merchants adopted SFAS No. 148 on January 1,
2003. The adoption of this statement did not have a material impact on the
Merchants' financial position or results of operations.
In October 2002 the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions". This statement amends SFAS No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions", SFAS No. 144, and
FASB Interpretation No. 9. Except for transactions between two or more
mutual enterprises, this statement removes acquisitions of financial
institutions from the scope of both SFAS No. 72 and FASB Interpretation No.
9 and requires that those transactions be accounted for in accordance with
SFAS No. 141 and SFAS No. 142. In addition, this statement amends SFAS No.
144 to include in its scope long-term customer-relationship intangible
assets of financial institutions. The provisions of this statement are to
be applied retroactively to January 1, 2002, and are effective after
September 30, 2002. The adoption of this statement did not have a material
impact on Merchants' financial position or results of operations.
In June 2002 the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses financial accounting and
reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)".
This statement is effective for exit or disposal activities initiated after
December 31, 2002. Merchants will review the impact of applying this
standard to any exit or disposal activities initiated after December 31,
2002.
Note 2: Stock-Based Compensation
Merchants has granted stock options to certain key employees. The options
granted vest after two years and are immediately exercisable upon vesting.
Nonqualified stock options may be granted at any price determined by the
Compensation Committee of Merchants' Board of Directors. All stock options
have been granted at or above fair market value at the date of grant.
Merchants accounts for its stock-based compensation plans in accordance
with the provisions of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. On
January 1, 1996, Merchants adopted SFAS No. 123, "Accounting for Stock-
Based Compensation," which permits entities to recognize as expense over
the vesting period the fair value of all stock based awards measured on the
date of the grant. Alternatively, SFAS No. 123 allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net
income and earnings per share disclosures for employee stock-based grants
made in 1995 and future years as if the fair value based method defined in
SFAS No. 123 had been applied. Merchants has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
of SFAS No. 123.
The fair value of each option grant is estimated on the grant date using
the Black-Scholes option-pricing model. No options have been granted since
August 2001. Had compensation cost for awards under Merchants' stock-based
compensation plans been determined consistent with the method set forth
under SFAS No. 123, Merchants' net income and earnings per share would have
been the same as those reported in the financial statements in Part I. Pro
forma compensation expense for options granted is reflected over the
vesting period; therefore, future pro forma compensation expense may be
greater as additional options are granted.
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions. Because Merchants' employee stock options
have characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially
affect the fair
5
value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
Note 3: Earnings Per Share
The following table presents a reconciliation of the calculations of basic
and diluted earnings per share for the three month period ended March 31,
2003
Weighted
Net Average Per Share
Three Months Ended March 31, 2003 Income Shares Amount
(In thousands except share and per share data)
- -------------------------------------------------------------------------------------------
Basic Earnings Per Common Share:
Net Income Available to Common
Shareholders $2,734 6,140,604 $0.44
Diluted Earnings Per Common Share:
Effect of Dilutive Stock Options - 53,858
Net Income Available to Common
Shareholders Plus Assumed Conversions $2,734 6,194,462 $0.44
Weighted
Net Average Per Share
Three Months Ended March 31, 2002 Income Shares Amount
(In thousands except share and per share data)
- -------------------------------------------------------------------------------------------
Basic Earnings Per Common Share:
Net Income Available to Common
Shareholders $3,006 6,143,961 $0.49
Diluted Earnings Per Common Share:
Effect of Dilutive Stock Options - 73,297
Net Income Available to Common
Shareholders Plus Assumed Conversions $3,006 6,217,258 $0.48
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
month period ending March 31, 2003. As of March 31, 2003 and 2002, there
were no anti-dilutive stock options outstanding.
Note 4: Stock Repurchase Program
In January 2001 Merchants' Board of Directors approved a stock repurchase
program. In January 2003 the Board of Directors voted to extend the
program until January 2004. Under the program, Merchants is authorized to
repurchase up to 300,000 shares of its own common stock. As of March 31,
2003, Merchants had purchased 157,881 shares of its own common stock on the
open market, at an average per share price of $21.24.
Note 5: Commitments and Contingencies
Merchants is involved in routine legal proceedings occurring in the
ordinary course of business, which in the aggregate are believed by
management to be immaterial to its financial condition and results of
operations
Note 6: Guarantees
Merchants does not issue any guarantees that would require liability
recognition or disclosure, other than its standby letters of credit.
Standby and other letters of credit are conditional commitments issued by
Merchants to guarantee the performance of a customer to a third party.
Standby letters of credit generally arise in connection with lending
relationships. The credit risk involved in issuing these instruments is
essentially the same as that involved in extending loans to customers.
Contingent obligations under standby letters of credit totaled
approximately $6.2 million at March 31, 2003, and represent the maximum
potential future payments the Bank could be required to make. Typically,
these instruments have terms of 12 months or less and expire unused;
therefore, the total amounts do not necessarily represent future cash
requirements. Each customer is evaluated individually for creditworthiness
6
under the same underwriting standards used for commitments to extend credit
and on-balance sheet instruments. Bank policies governing loan collateral
apply to standby letters of credit at the time of credit extension. Loan-
to-value ratios are generally consistent with loan-to-value requirements
for other commercial loans secured by similar types of collateral. The fair
value of the Merchants' standby letters of credit at March 31, 2003, was
insignificant.
Note 7: Reclassification
Certain amounts reported for prior periods have been reclassified to be
consistent with the current period presentation.
7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
Except for the historical information contained herein, this Quarterly
Report on Form 10-Q of Merchants Bancshares, Inc. may contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. Investors are
cautioned that forward-looking statements are inherently uncertain. Actual
performance and results of operations may differ materially from those
projected or suggested in the forward-looking statements due to certain risks
and uncertainties, including, without limitation,
(i) the fact that Merchants' success is dependent upon general
economic conditions in Vermont and Vermont's ability to
attract new business;
(ii) the fact that Merchants' earnings depend to a great extent
upon the level of net interest income (the difference between
interest income earned on loans and investments and the
interest expense paid on deposits and other borrowings)
generated by Merchants and thus Merchants' results of
operations may be adversely affected by increases or decreases
in interest rates;
(iii) the fact that the banking business is highly competitive and
the profitability of Merchants depends upon Merchants' ability
to attract loans and deposits in Vermont, where Merchants
competes with a variety of traditional banking and
nontraditional institutions such as credit unions and finance
companies;
(iv) the fact that at March 31, 2003, a significant portion of
Merchants' loan portfolio was comprised of commercial loans,
exposing Merchants to the risks inherent in financings based
upon analyses of credit risk, the value of underlying
collateral, including real estate, and other more intangible
factors, which are considered in making commercial loans;
(v) approximately 80% of Merchants' loan portfolio is comprised of
real estate loans exposing Merchants to the risks inherent in
financings based upon analyses of credit risk and the value of
underlying collateral. Accordingly, Merchants' profitability
may be negatively impacted by errors in risk analyses, by loan
defaults, and the ability of certain borrowers to repay such
loans may be adversely affected by any downturn in general
economic conditions;
(vi) acts or threats of terrorism and actions taken by the United
States or other governments as a result of such acts or
threats, including possible military action, could further
adversely affect business and economic conditions in the
United States generally and in our markets, which could have
an adverse effect on our financial performance and that of our
borrowers and on the financial markets and the price of our
common stock;
(vii) changes in the extensive laws, regulations and policies
governing bank holding companies and their subsidiaries could
alter our business environment or affect our operations; and
(viii) the potential need to adapt to industry changes in information
technology systems, on which we are highly dependent, could
present operational issues or require significant capital
spending.
These factors, as well as general economic and market conditions in the
United States, may materially and adversely affect the market price of
shares of Merchants' common stock. Because of these and other factors,
past financial performance should not be considered an indicator of future
performance. The forward-looking statements contained herein represent
Merchants' judgment as of the date of this Form 10-Q, and Merchants
cautions readers not to place undue reliance on such statements.
General
All adjustments necessary for a fair presentment of the financial
statements of Merchants as of and for the three months ended March 31, 2003
and 2002, have been included. The information was prepared from the
unaudited financial statements of Merchants Bancshares, Inc. and its
subsidiaries, Merchants Bank (the "Bank"), Merchants Trust Company and
Merchants Properties, Inc.
8
Overview
Merchants earned net income of $2.73 million, or basic and diluted earnings
per share of 44 cents for the quarter ended March 31, 2003, compared to
$3.01 million, or basic earnings per share of 49 cents and diluted earnings
per share of 48 cents for the same period a year earlier. The return on
average assets and return on average equity for the first quarter of 2003
were 1.29% and 13.16% respectively, compared to 1.48% and 15.75% for the
first quarter of 2002.
Results of Operations
Net Interest Income: Net interest income for the first quarter of 2003 was
$9.2 million compared to $9.1 million for the first quarter of 2002. In
the first quarter of 2003 the net interest margin was 4.67%, compared to
4.82% for the first quarter of 2002 and 4.81% for the fourth quarter of
2002. However, net interest income was $129 thousand higher than the first
quarter of 2002, as a result of growth in average deposits and loans over
the first quarter of last year of 5.6% and 5.4% respectively. The decrease
in Merchants' margin reflects the effect of the current prolonged low
interest rate environment, which, if it continues, is likely to negatively
impact the net interest margin for the remainder of 2003. The quarterly
yield on interest earning assets decreased 71 basis points and the
quarterly cost of interest bearing liabilities decreased 69 basis points
compared with the first quarter of 2002. This caused Merchants' interest
rate spread to decrease slightly from the first quarter of 2002 to the
first quarter of 2003, and to decrease 12 basis points from the fourth
quarter of 2002 to the first quarter of 2003. 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
70 basis points from the first quarter of 2002 to the first quarter of
2003, and averaged 1.29% during the quarter. The schedule on page 10 shows
the yield analysis for the periods reported.
Although the average balances of the loan portfolio increased from the
first quarter of 2002 to the same period in 2003, the average interest rate
earned on the loan portfolio decreased from 7.29% in the first quarter of
2002 to 6.55% in the first quarter of 2003. This is a result of both lower
interest rates, and the continued shift in the makeup of Merchants'
commercial loan portfolio from fixed rate to lower yielding variable rate
loans, as commercial borrowers have sought to refinance their current debt
to take advantage of the favorable interest rate environment. The makeup of
the Bank's loan portfolio has continued to shift over the course of the
last year. The commercial real estate portfolio, which makes up just under
40% of the Bank's loan portfolio, has experienced a substantial shift from
fixed rate to lower yielding variable rate loans. The portfolio has changed
from an almost even mix of fixed and variable rate loans, to a mix of
approximately 73% variable rate loans. The average rate on the variable
rate loans is almost 350 basis points lower than the fixed rate loans. The
Bank's commercial loan portfolio has undergone a similar shift, and has
changed from an almost even mix of fixed and variable to just under 70%
variable rate loans. These shifts have had the impact of reducing interest
income on this portion of the loan portfolio. Although this shift has
exacerbated the current margin compression, it has had the effect of moving
Merchants' balance sheet to an almost neutral interest rate gap position.
Provision for Loan Losses: In recent years, Merchants has recorded its
recoveries on previously charged off obligations as a negative loan loss
provision. As a result of declines in the unallocated portion of the
reserve, Merchants has discontinued its practice of recording these
recoveries as negative loan loss provisions. Merchants recorded charge-
offs of $49 thousand and recoveries of $32 thousand during the first
quarter of 2003. The amount of the negative provision for the first quarter
of 2002 was $433 thousand. The allowance for loan losses is reviewed by
management quarterly and continues to be deemed adequate under current
market conditions. See the discussion of Non-Performing Assets on pages 12
- - 14 for more information on the allowance for loan losses.
Noninterest income: Total noninterest income increased $338 thousand during
the first quarter of 2003 compared to the same period in 2002. Excluding
gains on sales of investment securities of $217 thousand this increase was
$121 thousand. The increase was due primarily to continued increases in
overdraft service charge revenue. Merchants' net overdraft fee revenue
increased $105 thousand from $560 thousand in the first quarter of 2002 to
$665 thousand in the first quarter of 2003. The increase in revenue is
primarily a result of an overall larger deposit base, and an increase in
the overdraft fee from $18 to $20 during the second quarter of 2002.
Merchants Trust Company fee income for the first quarter of this year was
$44 thousand less than the same quarter of 2002. This decrease was
primarily due to continuing reductions in asset market values, changes in
the Trust Company's fee schedule and the realignment of resources as a
result of the decision made in 2002 to discontinue brokerage advisory and
discount brokerage services.
9
Merchants Bancshares, Inc.
Supplemental Information
(Unaudited)
(Dollars in Thousands, Fully Taxable Equivalent) Three Months Ended
-----------------------------------------------------------------------
March 31, 2003 March 31, 2002
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
--------------------------------- ---------------------------------
Loans (1) (2) $497,976 $ 8,037 6.55% $472,617 $ 8,499 7.29%
Taxable Investments 281,372 3,228 4.65% 239,371 3,318 5.62%
Federal Funds Sold and Securities Purchased
Under Agreements to Resell 18,680 64 1.39% 38,213 157 1.67%
------------------------------- -------------------------------
Total Interest Earning Assets $798,028 $11,329 5.76% $750,201 $11,974 6.47%
------------------------------- -------------------------------
Noninterest Earning Assets 50,935 50,637
-------- --------
Total Assets 848,963 800,838
======== ========
Interest Bearing Deposits:
Savings, NOW and Money Market Deposits $468,540 $ 878 0.76% $448,918 $ 1,470 1.33%
Time Deposits 189,880 1,219 2.60% 171,239 1,566 3.71%
------------------------------- -------------------------------
Total Savings and Time Deposits 658,420 2,097 1.29% 620,157 3,036 1.99%
------------------------------- -------------------------------
Short-Term Borrowings 754 2 1.08% 2,632 10 1.54%
Long-Term Debt 3,231 27 3.39% 2,426 20 3.34%
------------------------------- -------------------------------
Total Interest Bearing Liabilities 662,405 2,126 1.30% 625,215 3,066 1.99%
------------------------------- -------------------------------
Noninterest Bearing Deposits 93,041 91,200
Other Liabilities 10,406 7,957
Sotckholders' Equity 83,111 76,639
-------- --------
Total Liabilities and Stockholders' Equity 848,963 801,011
======== ========
Net Earning Assets $135,623 $124,986
======== ========
Net Interest Income (Fully Taxable Equivalent) 9,203 8,908
======= =======
Net Interest Rate Spread 4.46% 4.48%
Net Interest Margin 4.68% 4.82%
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 2002.
10
Noninterest expenses: Total noninterest expense increased $464 thousand
from $7.11 million to $7.57 million for the first quarter of 2003 compared
to 2002. Salaries and employee benefits increased $256 thousand for the
first quarter of this year compared to last year. Merchants is continuing
its salary administration evaluation project, and related salary increases
are being phased in over the course of 2003. Merchants has also increased
its staffing levels to accommodate the opening of its new branch in St.
Albans, Vermont during April 2003. Additionally, Merchants pension plan
expense increased by $63 thousand for the first quarter of 2003 compared to
2002.
Merchants' marketing expenses increased by $51 thousand for the first
quarter of 2003 compared to 2002. Merchants has increased marketing
efforts in anticipation of its de novo branch expansion into the St. Albans
and White River Junction, Vermont markets during the second and third
quarters of this year. Additionally, equity in losses of real estate
limited partnerships increased $84 thousand this quarter as Merchants
continued to invest in community-based affordable housing partnerships.
Merchants finds these investments attractive because they provide an
opportunity for us to invest in affordable housing in the communities in
which it does business, as well as providing federal tax credits which can
be used as an offset to the income tax provision.
Balance Sheet Analysis
First quarter 2003 growth in average deposits and loans over the first
quarter of last year was 5.6% and 5.4% respectively. Merchants annualized
growth for the first quarter of this year over year-end was 16.1% in the
loan portfolio and 6.7% in deposits. Average deposits for the first
quarter of 2003 were $751 million, compared to $711 million for the first
quarter of last year. Quarter-end deposits were $768 million, an increase
of $12.7 million over year-end 2002. Average loans for the first quarter of
2003 were $498 million, compared to $473 million for the first quarter of
2002. Quarter-end loan balances were $516 million, an increase of $19.9
million over year-end loan balances of $496 million. During the first
quarter Merchants introduced a 10-year fully-amortizing residential
mortgage product at a rate of 4.95%. As of March 31, 2003, approximately
$35 million in loans have been originated in this product, with approximately
an additional $11 million in the pipeline. This product has allowed
Merchants to deploy its increased core funding at a reasonable spread; at
the same time shortening its balance sheet, which will provide strong cash
flow to reinvest at current market levels going forward. This product has
also afforded Merchants the opportunity to establish full service banking
relationships with many new customers.
In the ordinary course of business the Bank makes commitments for possible
future extensions of credit. On March 31, 2003, the Bank was obligated to
fund $6.2 million of standby letters of credit. No losses are anticipated
in connection with these commitments.
Income Taxes
Merchants 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 $974 thousand for the first quarter of 2003,
compared to $1.13 million for the same period in 2002. Merchants
recognized favorable tax benefits of $330 thousand for the first quarter of
2003, compared to $342 thousand for the same period in 2002, representing
the amount of the federal tax credits earned during those periods.
Merchants' statutory tax rate was 35% for all periods. The recognition of
low income housing tax credits has contributed to Merchants' effective tax
rate of 26% for the first quarter of 2003.
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 March 31, 2003; an
overnight line of credit with the Federal Home Loan Bank ("FHLB") of $15
million; an estimated additional borrowing capacity with FHLB of $121
million; and the ability to borrow $60 million through the use of
repurchase agreements, collateralized by the Bank's investments, with
certain approved counterparties. Merchants' investment portfolio, which
totaled $280 million at March 31, 2003, is managed by Merchants' Asset /
Liability committee and is a strong source of cash flow for Merchants.
11
As of March 31, 2003, Merchants exceeded all applicable regulatory capital
requirements. The following table represents the actual capital ratios and
capital adequacy requirements for Merchants as of March 31, 2003 and 2002:
For Capital
Actual Adequacy Purposes
(In thousands) Amount Percent Amount Percent
- ---------------------------------------------------------------------------
As of March 31, 2003
Merchants Bancshares, Inc.:
Tier 1 Risk-Based Capital $78,669 14.08% $22,346 4.00%
Total Risk-Based Capital 85,671 15.34% 44,693 8.00%
Tier 1 Leverage Capital 78,669 9.28% 33,899 4.00%
As of March 31, 2002
Merchants Bancshares, Inc.:
Tier 1 Risk-Based Capital $74,204 15.03% $19,750 4.00%
Total Risk-Based Capital 80,408 16.29% 39,500 8.00%
Tier 1 Leverage Capital 74,204 9.31% 31,882 4.00%
Non-Performing Assets and the Allowance for Loan Losses
Stringent credit quality is a major strategic focus of Merchants. The
Bank's consistently low levels of problem assets is evidence of the
success of this effort. Although the Bank has been successful to date
in minimizing its problem assets, there is no assurance that the Bank
will not have increased levels of problem assets in the future,
particularly in light of current or future economic conditions.
During the first three months of 2003 approximately $980 thousand of
additions to nonaccrual loans were offset in part by approximately $50
thousand in reductions. One relationship with a commercial customer, with
loan balances of $884 thousand, was placed in nonaccrual during the
quarter. Loans comprising seven small residential and commercial
relationships were also placed in nonaccrual during the first quarter.
Loans past due 90 days or more and still accruing interest increased $43
thousand during the first three months of 2003. 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.
During the first three months of 2003 there were no changes of note in
restructured loans, which consist primarily of loans to a customer that
supplies services to the telecommunications industry. Payments from this
customer are current and interest income was recognized on a cash basis.
Additionally approximately $946 thousand of the loans in this category are
secured by cash and marketable securities.
The Bank's other real estate owned ("OREO") portfolio consisted of one
residential property at March 31, 2003, unchanged from the end of 2002.
This property was sold for a small gain during April 2003.
The following table summarizes the Bank's non-performing assets as of March
31, 2003, December 31, 2002, and March 31, 2002:
(In thousands) March 31, 2003 December 31, 2002 March 31, 2002
- -----------------------------------------------------------------------------------------------
Nonaccrual Loans $2,858 $1,925 $1,965
Loans Past Due 90 Days or More and
Still Accruing 89 46 81
Restructured Loans 1,737 1,728 193
- -------------------------------------------------------------------------------------------
Total Non-performing Loans ("NPL") 4,684 3,699 2,239
Other Real Estate Owned 57 57 225
- -------------------------------------------------------------------------------------------
Total Non-performing Assets ("NPA") $4,741 $3,756 $2,464
===========================================================================================
Non-performing assets have increased over the last year. This increase is
clearly reflective of a weak local and national economy, which, if it
continues, may contribute to further increases in levels of non-performing
assets. The
12
individual components of the non-performing asset portfolio remain fluid
with the total maintained at a manageable and modest level.
The following table summarizes the Bank's Allowance for Loan Losses
("Allowance") as of March 31, 2003 and 2002:
(In thousands) March 31, 2003 March 31, 2002
- -----------------------------------------------------------------------
Allowance Beginning of Year $8,497 $8,815
Charge-Off:
Commercial, Lease Financing
and all Other Loans (39) --
Real Estate - Mortgage (2) --
Installment (8) (3)
- -------------------------------------------------------------------
Total Loans Charged Off (49) (3)
- -------------------------------------------------------------------
Recoveries:
Commercial, Lease Financing
and all Other Loans 13 237
Real Estate - Mortgage 19 180
Installment & Credit Cards -- 15
- -------------------------------------------------------------------
Total Recoveries 32 432
- -------------------------------------------------------------------
Net Loan Recoveries (Charge-Offs) (17) 429
- -------------------------------------------------------------------
Provision for Loan Losses
Charged to Operations -- (433)
- -------------------------------------------------------------------
Allowance End of Period $8,480 $8,811
===================================================================
The 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 non-performing 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, non-performing 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 criticized and
classified loans over $500 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
March 31, 2003, 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. Management considered the balance of the Allowance adequate at
March 31, 2003.
13
The following table reflects the Bank's non-performing asset and coverage
ratios as of March 31, 2003, December 31, 2002, and March 31, 2002:
March 31, 2003 December 31, 2002 March 31, 2002
- -----------------------------------------------------------------------------------------------
Non-performing Loans to
Total Loans 0.91% 0.75% 0.47%
Non-performing Assets to
Total Loans plus Other Real Estate
Owned 0.92% 0.76% 0.52%
Allowance for Loan Losses to
Total Loans 1.64% 1.71% 1.87%
Allowance for Loan Losses to
Non-performing Loans 181% 230% 394%
Allowance for Loan Losses to
Non-performing Assets 179% 226% 358%
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
Management and the Board of Directors of Merchants are committed to sound
risk management practices throughout the organization. Merchants has
developed and implemented a centralized risk management monitoring program.
Risks associated with Merchants' business activities and products are
identified and measured as to probability of occurrence and impact on
Merchants (low, moderate, or high), and the control or other activities in
place to manage those risks are identified and assessed. Periodically,
department-level and senior managers re-evaluate and report on the risk
management processes for which they are responsible. This documented
program provides management with a comprehensive framework for monitoring
Merchants' risk profile from a macro perspective, while also serving as a
tool for assessing internal controls over financial reporting as required
under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA").
Market Risk
Market risk is the risk of loss in a financial instrument arising from
adverse changes in market rates/prices such as interest rates, foreign
currency exchange rates, commodity prices, and equity prices. Merchants'
primary market risk exposure is interest rate risk. The ongoing monitoring
and management of this risk is an important component of Merchants'
asset/liability management process which is governed by policies
established by its Board of Directors that are reviewed and approved
annually. The Board of Directors delegates responsibility for carrying out
the asset/liability management policies to the Bank's Asset-Liability
Committee ("ALCO"). In this capacity the ALCO develops guidelines and
strategies impacting Merchants' asset/liability management related activities
based upon estimated market risk sensitivity, policy limits and overall market
interest rate levels/trends. During the course of the last two quarters
Merchants has increased its position in corporate debt securities from
approximately $9 million to just over $20 million. Management feels that
opportunities for increased yield, without taking on undue risk, exist in the
corporate market. Merchants currently limits its position in corporate debt
securities to 50% of capital. Merchants recently partnered with a new
investment advisor who will help us identify these types of opportunities
for increased yield, without significantly increasing risk, in the
investment portfolio. The firm specializes in stable value and fixed
income portfolios, and has a staff of investment professionals who research
and track each bond. The goal is to enhance performance on an absolute and a
risk-adjusted basis.
Interest Rate Risk
The 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 sheet,
and to perform a variety of other analyses. The consultant's most recent
review was as of February 28, 2003. At that time, because of the current rate
environment, the consultant modified the rate shock model and modeled a 100
basis point decrease and a 200 basis point increase, as well as a
rate
14
shock with a flattening yield curve. At that time the change in net
interest income for the next 12 months from Merchants' expected or "most
likely" forecast was as follows:
Net Interest
Rate Change Income Sensitivity
--------------------------------------------
Up 200 basis points 1.68%
Down 100 basis points (2.35%)
The consultant also ran a simulation using the Bank's current growth
assumptions. 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 preceding sensitivity analysis does not represent a Company forecast
and should not be relied upon as being indicative of expected operating
results. These hypothetical estimates are based upon numerous assumptions
including: the nature and timing of interest rate levels including yield
curve shape, prepayments on loans and securities, deposit run-off rates,
pricing decisions on loans and deposits, reinvestment/replacement of asset
and liability cash flows, and others. While assumptions are developed based
upon current economic and local market conditions, Merchants cannot make
any assurances as to the predictive nature of these assumptions including
how customer preferences or competitor influences might change.
As market conditions vary from those assumed in the sensitivity analysis,
actual results will likely differ due to: the varying impact of changes in
the balances and mix of loans and deposits differing from those assumed,
the impact of possible off balance sheet hedging strategies, and other
internal/external variables. Furthermore, the sensitivity analysis does not
reflect all actions that ALCO might take in responding to or anticipating
changes in interest rates.
The model used to perform the balance sheet simulation assumes a parallel
shift of the yield curve over twelve months and reprices every interest-
bearing asset and liability on the Company's balance sheet. The model uses
contractual repricing dates for variable products, contractual maturities
for fixed rate products, and product-specific assumptions for deposits such
as FreedomLYNX(R) accounts and Money Market accounts which are subject to
repricing based on current market conditions. Investment securities with
call provisions are examined on an individual basis in each rate
environment to estimate the likelihood of a call. The model also assumes
that the rate at which certain mortgage related assets prepay will vary as
rates rise and fall, prepayment estimates are derived from the Office of
Thrift Supervision Net Portfolio Value Model.
Credit Risk
A network of loan officers manages credit risk, with review by Merchants'
Credit Department and oversight by Merchants' Board of Directors. The
Board of Directors grants each loan officer the authority to originate
loans on behalf of Merchants and establishes policies regarding loan
portfolio diversification and loan officer lending limits. Merchants' loan
portfolio is continuously monitored for performance, creditworthiness and
strength of documentation through the use of a variety of management
reports and with the assistance of an external loan review firm. Credit
ratings are assigned to commercial loans and are routinely reviewed. Loan
officers or the loan workout function take remedial actions to assure full
and timely payment of loan balances when necessary. Merchants' policy is
to discontinue the accrual of interest on loans when scheduled payments
become contractually past due 90 or more days and the ultimate
collectibility of principal or interest becomes doubtful.
ITEM 4 - CONTROLS AND PROCEDURES
Merchants management, including the Chief Executive Officer and the Chief
Financial Officer, have conducted an evaluation of the effectiveness of
disclosure controls and procedures within 90 days before the filing of this
report pursuant to the Securities Exchange Act of 1934 as amended 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.
15
MERCHANTS BANCSHARES, INC.
PART II
ITEM 1 - LEGAL PROCEEDINGS
Merchants is involved in routine legal proceedings occurring in the
ordinary course of business, which in the aggregate are believed by
management to be immaterial to its financial condition and results of
operations
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
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
Current Reports on Form 8-K
Merchants Bancshares, Inc. filed a Current Report on Form 8-K on
January 16, 2003.
16
MERCHANTS BANCSHARES, INC.
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
Chief Financial Officer & Treasurer
May 13, 2003
------------
Date
17
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: May 13, 2003
------------
/s/ Joseph L. Boutin
- -----------------------------------
Joseph L. Boutin
President & Chief Executive Officer
18
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: May 13, 2003
------------
/s/ Janet P. Spitler
- -----------------------------------
Janet P. Spitler
Chief Financial Officer & Treasurer
19