<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
Commission File Number. 0-10898
MERCHANTS CAPITAL CORPORATION
(Name of small business issuer)
MISSISSIPPI 64-0655603
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
820 South Street
Vicksburg, Mississippi 39180
601-636-3752
(Address, including zip code, and telephone number, including area code, of
registrants's executive offices)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $5.00 per share
(Title of Class)
Check whether the issuer (1) filed, all reports to be filed by Section 13
or 15(d) of the Exchange Act during the past twelve months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Issuers's revenues for its most recent fiscal year: $16,821,894
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: As of February 28, 1996 - $14,211,568.
---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of February 28, 1996 -
674,054.
DOCUMENTS INCORPORATED BY REFERENCE: PAGE 2
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
Description of Document Incorporated into Part/Item No.
----------------------- -------------------------------
<S> <C>
1995 Annual Report to Shareholders Part II, Items 6 and 7
Part III, Items 9 through 12
Definitive Proxy Statement which
was filed with the Securities and
Exchange Commission on March 29,
1996. Part III, Items 9 through 12
</TABLE>
2
<PAGE> 3
MERCHANTS CAPITAL CORPORATION
1995 FORM 10-KSB
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) Development of Business
Merchants Capital Corporation (the "Registrant") is a one bank holding
company which owns all of the outstanding stock of Merchants Bank of
Vicksburg, Mississippi (the "Bank"). The Registrant was incorporated under
the Mississippi Business Corporation Act on November 11, 1980, for the
purpose of acquiring the outstanding stock of the Bank and for related
purposes. The acquisition of the Bank by the Registrant was accomplished by
means of an exchange offer to Bank shareholders which was consummated in
May, 1982. The Bank is the principal asset and the principal source of
revenue of the Registrant. The Bank, which was organized in 1886, operates
five banking locations in Vicksburg, and has an office in Utica,
Mississippi. In 1994, the Bank changed its legal status from a national
bank to a state bank and officially started its operations as a state bank
on September 26, 1994.
During 1985, the Registrant established Merchants Data Services, Inc.
("Data Services") as a wholly-owned subsidiary. Data Services provided data
processing services for the Bank, other banks and various individual
accounts. Such activities involved the collection, transcription,
processing and storage of banking or related economic data. In December,
1993, all of the net assets of Data Services were merged into the Bank.
Also, Data Services was dissolved as of August 12, 1994.
3
<PAGE> 4
During 1989, the Registrant's wholly-owned bank subsidiary, Merchants
Bank, established Merchants Credit Company (Merchants Credit) as a
wholly-owned subsidiary. Merchants Credit provides small loans to
individuals to finance consumer goods. Such activities involve the making,
booking and collecting of small consumer loans. The net assets of Merchants
Credit were sold during 1993 to an unrelated party.
(b) Business of Issuer
The Bank is engaged in the general retail banking business, and
provides services to individuals, farmers, and other small and medium-size
businesses. These services include conventional checking and savings
accounts; money market accounts; certificates of deposit; business loans;
Master Card, VISA and other consumer oriented financial services; and safe
deposit and night depository facilities. The Bank offers automated teller
machines at five locations in Vicksburg which provide 24-hour banking
services to customers of the Bank. The Bank also provides fiduciary
services to individuals and businesses, and administers (as trustee and in
other fiduciary and representative capacities) personal trusts and estates
and business benefit plans.
At December 31, 1995, the Bank ranked twenty-first in total assets of
the 111 banks in the State of Mississippi, and employed 123 employees, 105
of which are full time. The Bank's primary service areas are in Warren and
western Hinds Counties, Mississippi.
4
<PAGE> 5
Competition
All phases of the banking industry are highly competitive. The Bank
competes actively with national and state banks in its service areas for
deposits and loans, and trust and other financial services business. In
addition, the Bank competes in its service areas with other financial
institutions, including personal loan companies, finance companies, insurance
companies, credit unions, and brokerage companies. The deregulation of
depository institutions as well as the increased ability of nonbanking financial
institutions to provide services previously reserved for commercial banks has
intensified competition. Because nonbanking financial institutions are not
subject to the same regulatory restrictions as banks and bank holding companies,
in many instances they may operate with greater flexibility.
Environmental
The Registrant does not believe that there will be any material effect
on capital expenditures, results of operations, financial condition or the
competitive position of itself or any of its subsidiaries with regard to
compliance with federal, state or local requirements related to the general
protection of the environment.
Business Cycles and Major Customers
The business of the Bank is not materially seasonal nor is it dependent
upon a single customer or a few customers, the loss of any one or more of whom
would not produce a material adverse effect on the financial statements of the
Registrant.
Regulation and Supervision
The Registrant, as a registered bank holding company, is subject to
regulation and examination by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") under the Bank Holding Company Act of 1956
(the "Act"), and is required to file with the Federal Reserve Board an annual
report and such additional reports as the Federal Reserve Board may require. The
Act generally restricts activities of bank holding companies and their
subsidiaries
5
<PAGE> 6
to banking and the business of managing and controlling banks, and to other
activities which are determined by the Federal Reserve Board to be closely
related to banking or the management or control of banks. In addition, the Act
requires the prior approval of the Federal Reserve Board of the acquisition by
the Registrant of more than 5% of the voting shares of any additional bank, and
would prohibit acquisition by the Registrant of a bank located outside the State
of Mississippi unless the laws of the state in which such a bank is located
specifically authorize such acquisition.
The Bank is subject to supervision and examination by various regulatory
authorities. The Bank, as a state chartered bank, is subject to state and
federal banking laws and the general supervision of the Federal Reserve Board,
which conducts periodic examinations of the Bank. The Bank is also subject to
applicable state banking department supervision and examination. Funds on
deposit with the Bank are insured by, and the Bank is subject to, regulation,
supervision and examination by the Federal Deposit Insurance Corporation and is
also subject to requirements and restrictions under federal and state law,
including requirements to maintain reserves against deposits, restrictions on
the types and amounts of loans that may be granted and the interest that may be
charged thereon, and limitations on the types of investments that may be made
and types of services that may be offered. Various consumer laws and regulations
also affect the operations of the Bank. Regulatory limitations on the payment of
dividends to the Registrant by the Bank are discussed in Note K (Stockholders'
Equity and Regulatory Matters) of the Registrant's Consolidated Financial
Statements for the year ended December 31, 1995 and the "Capital" portion of
Management's Discussion and Analysis.
Holding Company Liability
Federal Reserve Board policy requires bank holding companies to serve as a
source of financial strength to their subsidiary banks by standing ready to use
available resources to provide adequate capital funds to subsidiary banks during
periods of financial stress or adversity. A bank holding company also could be
liable under certain provisions of a new banking law for the capital
deficiencies of an undercapitalized bank subsidiary. In the event of a bank
holding company's bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the
trustee will be deemed to have assumed and is required to cure immediately any
deficit under any commitment by the debtor to any of the federal banking
agencies to maintain the capital of an insured depository institution, and any
6
<PAGE> 7
claim for a subsequent breach of such obligation will generally have priority
over most other unsecured claims.
Transactions with Affiliates
The Bank is subject to restrictions under federal and state law which limit
a bank's extensions of credit to, and certain other transactions with,
affiliates. Such transactions by any subsidiary bank with any one affiliate are
limited in amount to 10 percent of such subsidiary bank's capital and surplus
and with all affiliates to 20 percent of such subsidiary bank's capital and
surplus. Furthermore, such loans and extensions of credit, as well as certain
other transactions, are required to be secured in accordance with specific
statutory requirements. The purchase of low quality assets from affiliates is
generally prohibited. Federal law also provides that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same, or
at least as favorable to the institution as those prevailing at the time for
comparable transactions involving other non-qualified companies or, in the
absence of comparable transactions, on terms and under circumstances, including
credit standards, that in good faith would be offered to, or would apply to,
non-affiliated companies.
Certain regulations require the maintenance of minimum risk-based capital
ratios, which are calculated with reference to risk-weighted assets, which
include on- and off-balance sheet exposures. The Federal Reserve Board has
established guidelines for both the Registrant and its Bank, which are generally
similar. The Federal Reserve Board has also adopted minimum leverage ratios for
bank holding companies and banks. For a further discussion concerning capital
guidelines and minimum leverage ratios, see Note K (Stockholders' Equity and
Regulatory Matters) of the Registrant's Consolidated Financial Statements for
the year ended December 31, 1995 and the "Capital" portion of Management's
Discussion and Analysis.
7
<PAGE> 8
Minimum Capital Requirements
On December 19, 1991, the President signed into law the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). FDICIA substantially
revised the depository institution regulatory and funding provisions of the
Federal Deposit Insurance Act and revised several other federal banking
statutes.
Among other things, FDICIA requires the federal banking regulators to take
prompt corrective action in respect of depository institutions that do not meet
minimum capital requirements. FDICIA establishes five capital categories: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized."
Under the regulations, a "well capitalized" institution has a minimum total
capital to total risk-weighted assets ratio of at least 10 percent, a minimum
Tier I capital to total risk- weighted assets ratio of at least 6 percent, a
minimum leverage ratio of at least 5 percent and is not subject to any written
order, agreement, or directive. An "adequately capitalized" institution has a
total capital to total risk-weighted assets ratio of at least 8 percent, a Tier
I capital to total risk-weighted assets ratio of at least 4 percent, and a
leverage ratio of at least 4 percent (3 percent if given the highest regulatory
rating and not experiencing significant growth ), but does not qualify as "well
capitalized." An "undercapitalized" institution fails to meet any one of the
three minimum capital requirements. A "significantly undercapitalized"
institution has a total capital to total risk-weighted assets ratio of less than
6 percent, a Tier I capital to total risk-weighted assets ratio of less than 3
percent or a leverage ratio of less than 3 percent. A "critically
undercapitalized" institution has a leverage ratio of 2 percent or less. Under
certain circumstances, a "well capitalized, " "adequately capitalized" or
undercapitalized" institution may be required to comply with supervisory actions
as if the institution was in the next lowest capital category.
FDIC Insurance Assessments
The Bank is subject to FDIC deposit insurance assessments. Pursuant to
FDICIA, the FDIC adopted a transitional risk-based system for determining
deposit insurance assessments that become effective on January 1, 1993. Under
the transitional risk-based system, an insured institution will be assessed at
rates in the range of .23 percent to .31 percent depending on its capital and
supervisory classifications, as assigned by its primary federal regulator.
Effective for the third
8
<PAGE> 9
quarter of 1995, the FDIC decreased the lowest assessment rate for deposits
insured through the BIF from $.23 per $100 of deposits to $.04.
Effects of Monetary Policy on Commercial Banking
All commercial banking operations are affected by the policies of monetary
authorities, including the Federal Reserve System, and these policies change
from time to time. One of the functions of the Federal Reserve System is to
regulate the national supply of bank credit in order to achieve economic results
deemed appropriate by the Board of Governors, including efforts to combat
unemployment, recession, and inflation. Among the instruments of monetary policy
used to implement these objectives are: (i) open market operations in U.S.
government securities; (ii) changes in the discount rate on member bank
borrowings; (iii) changes in reserve requirements against member bank deposits.
These means are used in varying combinations to influence overall growth of bank
loans, investments, and deposits.
The monetary policies of bank regulatory and other authorities have
affected the operating results of commercial banks in the past and are expected
to continue to do so in the future. In light of the changing conditions in the
national economy and in the money markets, as well as the effect of actions by
monetary and fiscal authorities, it is difficult to predict possible future
changes in interest rates, deposit levels, loan demand, or the Registrant's
business and earning potential.
Various other legislation, including proposals to overhaul the banking
regulatory system and to limit the investments that a depository institution may
make with insured funds are from time to time introduced in Congress. The
Corporation cannot determine the ultimate effect that FDICIA and the
implementing regulations to be adopted thereunder, or any other potential
legislation, if enacted, would have upon its financial condition or results of
operations.
9
<PAGE> 10
ITEM 2. Description of Property
Main Office
The main offices of the Registrant and of the Bank are located at 820
South Street, Vicksburg, Mississippi. The building is owned by the Bank. The
Bank occupies approximately 27,449 square feet of the building; the remaining
approximately 4,550 square feet are leased to a private law firm. The branches
and the facilities of the Bank are located as follows:
Belmont Branch
The Belmont Branch is located at 900 Belmont Street, Vicksburg. The
building contains approximately 1,570 square feet. The building and the property
on which it is situated are owned by the Bank.
Clay Street Branch
The Clay Street Branch is located at 2309 Clay Street, Vicksburg,
Mississippi. The building contains approximately 2,268 square feet. The building
and the property on which it is situated are leased at an annual rental of
$23,800. The lease expired on September 13, 1994. A five year option was
exercised during the year at an annual rental of $30,000. The Branch has a
walk-up automated teller machine.
Pemberton Boulevard Branch
The Pemberton Boulevard Branch is located at the corner of Pemberton
Boulevard and Pemberton Place, Vicksburg, Mississippi. The Branch has a drive-up
automated teller machine. The building contains approximately 2,400 square feet.
The building and property on which it is situated are owned by the Bank.
10
<PAGE> 11
Utica Branch
The Utica Branch is located at 106 Main Street, Utica, Mississippi. The
building contains approximately 4,065 square feet. The building and the property
on which it is situated are owned by the Bank.
Plaza Branch
The Plaza Branch opened December 7, 1987, and is located in Delchamps
Plaza at the intersection of Indiana Avenue and Interstate 20, Vicksburg,
Mississippi. The building contains approximately 1,200 square feet. The building
and property on which it is situated are leased at an annual rental of $15,028.
The lease expires November 14, 1996, but is subject to an option for five
additional terms of 3 years each, at rentals to be determined by formulas in the
lease contact.
Edwards Branch
The Edward Branch was acquired in a business combination on April 1, 1995.
This branch is located at 100 Magnolia Street, Edwards, Mississippi. The
building contains approximately 5,400 square feet. The building and the property
on which it is situated are owned by the Bank.
Indiana Avenue Automated Teller Machine
The Bank operates an automated teller machine at the intersection of
Indiana Avenue and the East Frontage road of Interstate 20, Vicksburg. The
facility contains approximately 192 square feet and is owned by the Bank. The
property on which it is situated is leased through January, 1997, at an annual
fee of $3,600.
11
<PAGE> 12
Highway 61 North Automated Teller Machine
The Bank operates an automated teller machine on Highway 61 North,
Vicksburg, Mississippi. The facility is contained in the wall of a convenience
store and is owned by the Bank. The property on which it is situated is leased
through November, 1996, at an annual rental of $4,200.
Highway 61 South Automated Teller Machine
The Bank operates an automated teller machine on Highway 61 South,
Vicksburg, Mississippi. The facility is contained in the wall of a convenience
store and is owned by the Bank. The property on which it is situated is leased
through May, 1997 at an annual rental of $4,200.
Customer - Bank Communication Terminal (CBCT) Branches
The Bank has CBCI's located at the following locations:
1) Kroger ATM (1)
3405 Pemberton Square Boulevard
Vicksburg, Mississippi 39180
2) Rainbow ATM (2)
1540 Warrenton Road
Vicksburg, Mississippi 39180
Electronic Terminal Off Premises
The Bank has an electronic terminal off premises at:
Vicksburg Outlet Mall
400 South Frontage Road
Vicksburg, Mississippi 39180
None of these properties is subject to any encumbrance.
12
<PAGE> 13
In the judgement of management, the premises occupied or leased by the
Registrant and its subsidiaries are considered to be well located and suitably
equipped to serve as banking facilities. Neither the location of any particular
office nor the unexpired term of any lease is deemed material to the business of
the registrant.
ITEM 3. LEGAL PROCEEDINGS
The Registrant and the Bank are involved in certain litigation incurred in
the normal course of business. In the opinion of management and legal counsel,
liabilities arising from such claims, if any, would not have a material effect
upon the Registrant's consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for a vote of security holders during
the fourth quarter of 1995.
13
<PAGE> 14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Registrant's common stock is not actively traded and management
knows of no market quotations by securities dealers. While a moderate
amount of trading in the Registrant's common stock has taken place
since issuance of its shares in 1982, the Registrant does not believe
that prices asked or paid for the common stock are necessarily
representative of the prices that would be quoted in an active trading
market.
Cash dividends declared by the Registrant in 1994 and 1995 are
presented below.
<TABLE>
<CAPTION>
Period 1994 Dividends per Share
----------- -------------------
<S> <C>
First Quarter .21
Second Quarter .23
Third Quarter .23
Fourth Quarter .23
Period 1995
First Quarter .23
Second Quarter .25
Third Quarter .25
Fourth Quarter .75
</TABLE>
(b) Holders
As of December 31, 1995, there were approximately 527 holders of
record of the Common Stock of the Company.
14
<PAGE> 15
(c) Dividends
Federal and State law applicable to banks generally restricts the
amount of cash dividends that a bank may pay. See "Capital" portion of
the Management's Discussion and Analysis and Note K to the Consolidated
Financial Statements.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
This information is incorporated by reference to the Company's Annual
Report to Shareholders which Annual Report is included as Exhibit 13 to this
Annual Report on Form 10-KSB.
ITEM 7. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and
subsidiaries are included in the Company's Annual Report to security holders,
which Annual Report is included as Exhibit 13 to this Annual Report on Form
10-KSB, and are herein incorporated by reference:
- Independent Auditor's Report;
- Consolidated Statements of Financial Condition -
December 31, 1995 and 1994;
- Consolidated Statements of Income -
Years ended December 31, 1995 and 1994;
- Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 1995 and 1994;
- Consolidated Statements of Cash Flows -
Years ended December 31, 1995 and 1994; and
- Notes to Consolidated Financial Statements.
15
<PAGE> 16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
There were no changes in or disagreements with accountants on
accounting and financial disclosures within the past two fiscal years.
16
<PAGE> 17
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS & CONTROL PERSONS: COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
Information required by this item is incorporated herein by reference
to the Registrant's Proxy Statement, dated March 29, 1996, in connection with
its annual meeting to be held April 16, 1996.
ITEM 10. EXECUTIVE COMPENSATION
Information required by this item is incorporated herein by reference
to the Registrant's Proxy Statement, dated March 29, 1996, in connection with
its annual meeting to be held April 16, 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to the Registrant's Proxy Statement, dated March 29, 1996, in
connection with its annual meeting to be held April 16, 1996.
17
<PAGE> 18
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated herein by reference
to the Registrant's Proxy Statement, dated March 29, 1996, in connection with
its annual meeting to be held April 16, 1996.
18
<PAGE> 19
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Title of Exhibit
-------------- ----------------
<S> <C>
3(i)(ii) Articles of Incorporation and by-laws
11 Statement re: computation of
per share earnings
13 Annual Report to shareholders for year ended December 31, 1995
21 Subsidiaries of the Registrant
27 Financial Data Schedules
All other exhibits are omitted as they are not applicable, are
not required by the related instructions.
The Exhibits listed on the Exhibit Index of this report are filed
herewith or are incorporated herein by reference.
</TABLE>
(b) Reports on Form 8-K:
There were no reports on Form 8-K for the three months ended December
31, 1995.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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 CAPITAL CORPORATION
(Registrant)
/s/ Howell N. Gage, Jr.
DATE: 3/19/96 BY:--------------------------------------------
--------------- Howell N. Gage, Jr., Chairman
and Chief Executive Officer
/s/ Joel H. Horton
DATE: 3/19/96 BY:--------------------------------------------
--------------- Joel H. Horton, President and
Chief Operating Officer
/s/ James R. Wilkerson
DATE: 3/19/96 BY:--------------------------------------------
--------------- James R. Wilkerson, Secretary
20
<PAGE> 21
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and dates indicated:
/s/J.E. Blackburn, Jr.
DATE: 3/19/96 BY:--------------------------------------------
--------------- J. E. Blackburn, Jr., Director
/s/Rodney E. Bounds
DATE: 3/19/96 BY:--------------------------------------------
--------------- Rodney E. Bounds, Director
/s/Michael J. Chaney
DATE: 3/19/96 BY:--------------------------------------------
--------------- Michael J. Chaney, Director
/s/Howell N. Gage, Jr.
DATE: 3/19/96 BY:--------------------------------------------
--------------- Howell N. Gage, Jr., Director
/s/Dr. W.B. Hopson, Jr.
DATE: 3/19/96 BY:--------------------------------------------
--------------- Dr. W.B. Hopson, Jr., Director
/s/Joel H. Horton
DATE: 3/19/96 BY:--------------------------------------------
--------------- Joel H. Horton, Director
/s/C. Hays Latham
DATE: 3/19/96 BY:--------------------------------------------
--------------- C. Hays Latham, Director
/s/Martin S. Lewis
DATE: 3/19/96 BY:--------------------------------------------
--------------- Martin S. Lewis, Director
/s/Robert P. McConnell
DATE: 3/19/96 BY:--------------------------------------------
--------------- Robert P. McConnell, Director
/s/Fred G. Peyton
DATE: 3/19/96 BY:--------------------------------------------
--------------- Fred G. Peyton, Director
/s/Robert E. Pickett
DATE: 3/19/96 BY:--------------------------------------------
--------------- Robert E. Pickett, Director
/s/Landman Teller, Jr.
DATE: 3/19/96 BY:--------------------------------------------
--------------- Landman Teller, Jr., Director
/s/Ernest G. Thomas
DATE: 3/19/96 BY:--------------------------------------------
--------------- Ernest G. Thomas, Director
21
<PAGE> 22
/s/R.C. Wilkerson, III
DATE: 3/19/96 BY:--------------------------------------------
--------------- R. C. Wilkerson, III, Director
/s/James R. Wilkerson, Jr.
DATE: 3/19/96 BY:--------------------------------------------
--------------- James R. Wilkerson, Jr., Director
22
<PAGE> 23
Exhibit Index
Filed as Part of this Report on Form 10-KSB
<TABLE>
<CAPTION>
Designation Description Page No.
----------- ----------- --------
<S> <C>
3(i)(ii) Articles of Incorporation and by-laws,
filed with Commission on December 31, 1994 *
11 Statement re: computation of
per share earnings 24
13 Annual report to shareholders for
year ended December 31, 1995 26
21 Subsidiaries of the Registrant 25
27 Financial Data Schedules
</TABLE>
* As indicated in the column entitled "Description" this Exhibit is
incorporated by reference to another filing or document.
23
<PAGE> 1
Exhibit 11
Merchants Capital Corporation
Computation of Earnings Per Share
<TABLE>
<CAPTION>
December 31,
1995 1994
----------- -----------
<S> <C> <C>
Net income for primary
earnings per share $ 2,204,602 $ 1,401,025
========== ==========
Net income for fully
diluted earnings per
share $ 2,204,602 $ 1,401,025
========== ==========
Weighted average shares
outstanding for primary
earnings per share 674,054 674,054
Weighted average shares
outstanding for fully
diluted earnings per
share 674,054 674,054
Primary earnings per share $3.27 $2.08
Fully diluted earnings per share $3.27 $2.08
</TABLE>
24
<PAGE> 1
EXHIBIT 13
ANNUAL REPORT
26
<PAGE> 2
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
WITH
INDEPENDENT AUDITOR'S REPORT
27
<PAGE> 3
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Merchants Capital Corporation
We have audited the accompanying consolidated statements of financial
condition of Merchants Capital Corporation and Subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Merchants Capital Corporation and Subsidiaries as of December 31, 1995 and 1994,
and the consolidated results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.
Vicksburg, Mississippi
January 12, 1996
28
<PAGE> 4
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
December 31,
1995 1994
------------ ------------
Cash and due from banks:
<S> <C> <C>
Non-interest bearing $ 7,562,995 $ 9,872,318
Interest bearing 111,530 73,032
----------- -----------
Total cash and due from banks 7,674,525 9,945,350
Federal funds sold 2,800,000 13,625,000
Time deposit 667,668 -
Investment securities:
Held-to-maturity - 21,722,246
Available-for-sale 52,544,242 22,127,650
Loans, less unearned income of $1,772,073
in 1995 and $1,760,329 in 1994
and allowance for loan losses of
$1,466,840 in 1995 and $1,273,160 in 1994 126,047,183 99,555,905
Bank premises and equipment, net 2,615,330 2,477,772
Other real estate 138,999 154,114
Accrued interest receivable 1,966,555 1,448,035
Premium on purchased deposits and
assets, less amortization of
$159,400 in 1995 and $116,100 in 1994 550,600 243,900
Deferred income taxes 354,473 591,173
Other assets 342,467 409,584
----------- -----------
Total assets $195,702,042 $172,300,729
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
29
<PAGE> 5
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
1995 1994
------------ -----------
<S> <C> <C>
LIABILITIES:
Deposits:
Non-interest bearing $ 19,934,570 $ 20,486,461
Interest bearing 151,774,537 133,655,515
----------- -----------
171,709,107 154,141,976
Securities sold under repurchase agreement 6,613,555 3,348,103
Accrued interest payable 830,939 640,480
Accrued taxes and other liabilities 605,686 310,079
Dividends declared but not paid 505,540 153,247
----------- -----------
Total liabilities 180,264,827 158,593,885
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $5 par value per share;
1,000,000 shares authorized; 674,054
and 612,988 shares issued and outstanding
in 1995 and 1994, respectively 3,370,270 3,064,940
Additional paid in capital 11,852,971 10,784,316
Retained earnings 222,107 392,542
Unrealized loss on securities available-
for-sale, net of applicable deferred
income taxes (8,133) (534,954)
----------- -----------
Total stockholders' equity 15,437,215 13,706,844
----------- -----------
Total liabilities and stockholders' equity $195,702,042 $172,300,729
=========== ===========
</TABLE>
30
<PAGE> 6
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994
------------ ------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 10,987,315 $ 8,508,833
Interest on investment securities:
Taxable interest income 3,028,981 3,024,660
Exempt from federal income taxes 159,535 87,281
Dividends 54,827 40,245
Interest on federal funds sold 391,352 333,466
----------- -----------
Total interest income 14,622,010 11,994,485
INTEREST EXPENSE:
Interest on deposits 6,122,895 4,745,967
Interest on capital lease obligations - 910
Interest on federal funds purchased
and securities sold under
repurchase agreement 239,547 140,925
----------- -----------
Total interest expense 6,362,442 4,887,802
----------- -----------
NET INTEREST INCOME 8,259,568 7,106,683
PROVISION FOR LOAN LOSSES 140,000 190,000
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 8,119,568 6,916,683
----------- -----------
OTHER INCOME:
Service charges on deposits 985,798 925,797
Other service, collection and
exchange charges 490,634 289,358
Commission and fees from
fiduciary activities 395,497 335,998
Net investment securities gains (losses) 8,207 (135,397)
Other 319,748 312,675
----------- -----------
Total other income 2,199,884 1,728,431
----------- -----------
</TABLE>
Continued.........
31
<PAGE> 7
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994
---------- ---------
OTHER EXPENSES:
<S> <C> <C>
Salaries 2,748,865 2,583,964
Employee benefits 874,456 645,719
Net occupancy expense 512,584 473,915
Equipment expense 614,698 597,985
Other 2,242,401 2,192,680
----------- -----------
Total other expenses 6,993,004 6,494,263
----------- -----------
INCOME BEFORE INCOME TAX EXPENSE 3,326,448 2,150,851
INCOME TAX EXPENSE 1,121,846 749,826
----------- -----------
NET INCOME $ 2,204,602 $ 1,401,025
=========== ===========
NET INCOME PER SHARE:
Primary earnings per share $3.27 $2.08
==== ====
Fully Diluted $3.27 $2.08
==== ====
WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary 674,054 674,054
======= =======
Fully Diluted 674,054 674,054
======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
32
<PAGE> 8
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Unrealized
loss on
Securities
Available-
for-sale,
Net of
Additional Applicable
Common Paid In Retained Deferred
Total Stock Capital Earnings Income Taxes
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 $13,445,440 $ 2,787,320 $ 9,673,836 $ 984,284 $ -
Net income for the year 1,401,025 - - 1,401,025 -
Cash dividends declared
($.90 per share) (599,107) - - (599,107) -
Stock dividend (55,524 shares) - 277,620 1,110,480 (1,388,100) -
Payment for fractional shares (5,560) - - (5,560) -
Change in unrealized loss on
securities available-for-
sale, net of applicable
deferred income taxes (534,954) - - (534,954)
---------- ---------- ----------- ----------- -----------
BALANCE, December 31, 1994 13,706,844 3,064,940 10,784,316 392,542 (534,954)
Net income for the year 2,204,602 - - 2,204,602 -
Cash dividends declared
($1.48 per share) (995,814) - - (995,814) -
Stock dividend (61,066 shares) - 305,330 1,068,655 (1,373,985) -
Payment for fractional shares (5,238) - - (5,238) -
Change in unrealized loss on
securities available-for-
sale, net of applicable
deferred income taxes 526,821 - - - 526,821
---------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1995 $15,437,215 $ 3,370,270 $ 11,852,971 $ 222,107 $ (8,133)
========== ========== =========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
33
<PAGE> 9
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 2,204,602 $ 1,401,025
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 140,000 190,000
Provision for depreciation
and amortization 495,852 469,310
Amortization of premium on
purchased deposits and assets 43,300 25,800
Amortization (accretion) of
premium (discount) on investment
securities, net (144,665) 29,665
Deferred income taxes (benefit) (100,120) (60,783)
Writedown of other real estate 6,185 47,595
(Gain) loss on sale of other real estate 1,594 (12,153)
Gain on sale of bank premises
and equipment (7,062) -
Net investment securities (gain) loss (8,207) 135,397
(Increase) decrease in:
Accrued interest receivable (351,808) 49,147
Other assets 216,531 (64,574)
Increase (decrease) in:
Accrued interest payable 126,938 13,944
Accrued taxes and other
liabilities 295,607 (174,451)
----------- -----------
Net cash provided by
operating activities 2,918,747 2,049,922
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received from Bank of Edwards 894,182 -
Net decrease (increase) in federal
funds sold 10,825,000 (6,275,000)
Proceeds from sale of held-to-maturity
securities 761,796 -
Purchase of held-to-maturity securities (1,544,428) (4,196,784)
</TABLE>
Continued.........
34
<PAGE> 10
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES - CONTINUED:
Proceeds from maturities of
held-to-maturity securities 4,277,205 3,983,482
Purchase of available-for-sale
securities (37,486,347) (53,964,246)
Proceeds from sale of available-for-
sale securities - 18,089,768
Proceeds from maturities of available-
for-sale securities 29,638,315 50,950,759
Net increase in loans (19,892,063) (9,411,407)
Purchases of premises and equipment (340,692) (408,366)
Proceeds from sales of fixed assets 14,344 18,479
Proceeds from sales of other
real estate 131,838 52,621
Interest compounded on time deposit (35,402) -
----------- ----------
Net cash used in investing
activities (12,756,252) (1,160,694)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest
and interest bearing demand accounts $ 6,764,957 $ 6,125,383
Net change in time deposits (1,364,970) (6,763,188)
Payment of fractional
shares from stock dividend (5,238) (5,560)
Cash dividends paid (643,521) (863,957)
Increase in securities sold under
repurchase agreement 2,815,452 1,802,400
----------- -----------
Net cash provided by
financing activities 7,566,680 295,078
----------- -----------
NET INCREASE (DECREASE) IN
CASH AND DUE FROM BANKS (2,270,825) 1,184,306
CASH AND DUE FROM BANKS AT
BEGINNING OF YEAR 9,945,350 8,761,044
----------- -----------
CASH AND DUE FROM BANKS AT
END OF YEAR $ 7,674,525 $ 9,945,350
=========== ===========
</TABLE>
Continued.........
35
<PAGE> 11
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994
------------ -----------
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
<S> <C> <C>
Dividends declared but not paid $ 505,540 $ 153,247
=========== ===========
Transfer of loans foreclosed to
other real estate $ 124,502 $ -
=========== ==========
Stock dividends declared $ 1,373,985 $ 1,388,100
=========== ===========
Total increase (decrease) in
unrealized losses on securities
available-for-sale $ (863,641) $ 876,973
=========== ===========
Deferred income taxes on recorded
unrealized losses on securities
available-for-sale $ 336,820 $ (342,019)
=========== ===========
Purchase of Bank of Edwards:
Cash and due from banks 558,102
Time deposit 632,266
Investment securities 3,324,374
Loans, net 6,863,717
Bank premises and equipment 300,000
Accrued interest receivable 166,712
Premium on purchased deposits 350,000
Other assets 149,414
Deposits (12,167,144)
Federal funds purchased (450,000)
Accrued interest payable (63,521)
-----------
Cash received from seller $ (336,080)
===========
</TABLE>
See accompanying notes to the consolidated financial statements.
36
<PAGE> 12
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts
of Merchants Capital Corporation and its wholly-owned
subsidiaries, Merchants Data Services, Inc., and Merchants Bank
and its wholly-owned subsidiary, Merchants Credit Company. All
material intercompany profits, balances and transactions have been
eliminated. Merchants Bank changed its legal status from a
national bank to a state bank in 1994. Merchants Bank officially
started its operations as a state bank on September 26, 1994.
Also, Merchants Data Services, Inc., a Merchants Capital
Corporation subsidiary, was dissolved as of August 12, 1994.
Nature of Operations
The Company operates under a state bank charter and
provides full banking services, including trust services. The area
served by the Company is the west central region of Mississippi
and services are provided at six branch offices.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance
for losses on loans and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans. In
connection with the determination of the allowances for losses on
loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
While management uses available information to recognize
losses on loans and foreclosed real estate, future additions to
the allowances may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral part
of their examination process, periodically review the Bank's
allowances for losses on loans and foreclosed real estate. Such
agencies may require the Bank to recognize additions to the
allowances based on their judgements about information available
to them at the time of their examination. Because of these
factors, it is reasonably possible that the allowances for losses
on loans and foreclosed real estate may change materially in the
near term.
Continued.........
37
<PAGE> 13
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Investment Securities
Management determines the appropriate classification of
securities at the time of purchase. If management has the intent
and the Bank has the ability at the time of purchase to hold
securities until maturity, they are classified as held-to-maturity
and carried at cost, adjusted for amortization of premiums and
accretion of discounts using methods approximating the interest
method. Available for sale securities include securities that
management intends to use as part of its asset and liability
management strategy and that may be sold in response to changes in
interest rates, resultant prepayment risk and other factors
related to interest rate and resultant prepayment risk changes.
These securities are carried at fair value. Other securities
include stock in the Federal Reserve Bank and the Federal Home
Loan Bank and are carried at cost.
Realized gains and losses on dispositions are based on the
net proceeds and the adjusted book value of the securities sold,
using the specific identification method. Unrealized gains and
losses on investment securities available-for-sale are based on
the difference between book value and fair value of each security.
These gains and losses are credited or charged to stockholders'
equity, net of applicable taxes. Realized gains and losses flow
through the Company's yearly operations. The Bank does not engage
in trading account activities. Reference should also be made to
Note B regarding a change to this method of accounting for
securities.
Loans
Loans are stated at the amount of principal outstanding,
reduced by unearned income and an allowance for loan losses and
net deferred loan fees if applicable. Unearned income on
installment loans is recognized as income over the terms of the
loans by a method which approximates the interest method. Interest
on other loans is calculated by using the simple interest method
on daily balances of the principal amount outstanding. Loans are
ordinarily placed on nonaccrual when a loan is specifically
determined to be impaired or when principal or interest is
delinquent for 90 days or more; however, management may elect to
continue the accrual when the estimated net realizable value of
collateral is sufficient to cover the principal balance and the
accrued interest. Any unpaid interest previously accrued on
nonaccrual loans is reversed from income. Interest income
generally is not recognized on specific impaired loans unless the
likelihood of further loss is remote. Interest payments received
on such loans are applied as a reduction of the loan principal
balance. Interest income on other nonaccrual loans is recognized
only to the extent of interest payments received.
Continued.........
38
<PAGE> 14
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Allowance for Loan Losses
The allowance is an amount that management believes will be
adequate to absorb possible losses on existing loans that may
become uncollectible, based on evaluations of the collectibility
of loans and prior loan loss experience. The evaluations take into
consideration such factors as changes in the nature and volume of
the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the
borrower's ability to pay. Allowances for impaired loans are
generally determined based on collateral values or the present
value of estimated cash flows. Credits deemed uncollectible are
charged to the allowance. Provisions for loan losses and
recoveries on loans previously charged off are added to the
allowance.
Bank Premises and Equipment
Bank premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation is charged
to expense over the estimated useful lives of the assets.
Leasehold improvements are amortized over the terms of the
respective leases or the estimated useful lives of the
improvements, whichever is shorter. Depreciation and amortization
expense are computed by the straight-line method.
Other Real Estate
Other real estate, consisting primarily of foreclosed
property, is stated at the unpaid loan balance or estimated market
value of property acquired less estimated selling costs, whichever
is lower. Any resultant writedown at the time of foreclosure is
charged to the allowance for loan losses. Subsequent writedowns
associated with the assets fair value declining below their
carrying value are reflected in earnings in the year the decline
is noted. The fair value of foreclosed properties is determined
based upon appraised value, utilizing either the estimated
replacement cost, the selling price of properties utilized for
similar purposes or discounted cash flow analyses of the
properties' operations. Revenue and expense associated with owning
and operating other real estate, and gains and losses on
disposition of such assets are recorded in earnings in the period
incurred.
Continued.........
39
<PAGE> 15
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Income Taxes
Provisions for income taxes are based on taxes payable or
refundable for the current year (after exclusion of nontaxable
income such as interest on state and municipal securities) and
deferred taxes on temporary differences between the amount of
taxable and pretax financial income and between the tax bases of
assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are included in
the financial statements at currently enacted income tax rates
applicable to the period in which the deferred tax asset and
liabilities are expected to be realized or settled as prescribed
in FASB Statement No. 109, "Accounting for Income Taxes." As
changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
The Company and its wholly owned subsidiaries file a
consolidated federal income tax return. Consolidated income tax
expense is allocated on the basis of each company's income
adjusted for permanent differences.
Premium on Purchased Deposits and Assets
The portion of the premium on purchased deposits and assets
applicable to core deposits ($710,000) is being amortized by the
straight-line method over the estimated lives of the existing
relationship.
Income Per Share
Primary income and fully diluted earnings per common share
are calculated on the basis of the weighted average number of
shares outstanding after giving retroactive effect to the stock
dividend distributed.
All shares held by the Employee Stock Ownership Plan (ESOP)
are treated as outstanding in computing the income per share.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Bank has entered
into off-balance-sheet financial instruments consisting of
commitments to extend credit and standby letters of credit. Such
financial instruments are recorded in the financial statements
when they become payable.
Continued.........
40
<PAGE> 16
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Cash Flows
For purposes of the statements of cash flows, the Company
considers only cash and due from banks to be cash equivalents.
The Company paid income taxes approximating $1,135,400 in
1995 and $872,000 in 1994. Interest paid on deposit liabilities
and other borrowings approximated $6,171,983 in 1995 and
$4,872,948 in 1994.
Reclassifications
Certain prior period amounts have been reclassified to
conform with the 1995 presentation.
Recent Accounting Pronouncements
The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-lived Assets for Long-lived Assets to be
Disposed of", which becomes effective for years beginning after
December 15, 1995. This statement established accounting standards
for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and
used for long-lived assets and certain identifiable intangibles to
be disposed of. The effect of the implementation of this standard
is not expected to be material.
The Financial Accounting Standards Board also issued
Statement No. 122, "Accounting for Mortgage Servicing Rights"
which becomes effective for years beginning after December 15,
1995. The statement generally requires that a mortgage banking
enterprise recognize as separate assets rights to service mortgage
loans for others however, those servicing rights are acquired. The
Bank has determined that this statement is not applicable to them
based on their current practice of releasing service rights.
The Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation", which becomes effective for years
beginning after December 15, 1995. The Statement established
financial accounting and reporting standards for stockbased
employee compensation plans. Currently, the Bank is not offering
such a plan.
Continued.........
41
<PAGE> 17
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE B. INVESTMENT SECURITIES
The Financial Accounting Standards Board has issued
Statement No. 115, "Accounting for Investments in Debt and Equity
Securities." The statement establishes accounting and reporting
standards for investments in debt and equity securities that have
a readily determinable fair value. This statement was required to
be adopted for years beginning after December 15, 1993. The net
effect, as of the first reporting period in 1994, was to decrease
stockholders' equity by $259,860 (net of $133,867 in deferred
income taxes).
The amortized cost and fair values of investment securities
available-for-sale at December 31, 1995 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U. S. Treasury and other
U. S. Government agencies $36,064,436 $ 104,630 $ (161,713) $36,007,353
Mortgage-backed securities 12,696,096 101,936 (104,152) 12,693,880
Obligations of states and
political subdivisions 2,952,694 52,864 (6,899) 2,998,659
Other securities 844,350 - - 844,350
---------- ----------- ------------ -----------
$52,557,576 $ 259,430 $ (272,764) $52,544,242
========== ========= ========== ==========
</TABLE>
The amortized cost and fair values of investment securities
available-for-sale at December 31, 1994 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Government agencies $ 20,613,775 $ 18,384 $ (842,867) $19,789,292
Mortgage-backed securities 1,596,198 4,231 (56,721) 1,543,708
Other securities 794,650 - - 794,650
----------- --------- ---------- -----------
$ 23,004,623 $ 22,615 $ (899,588) $22,127,650
=========== ========= ========== ==========
</TABLE>
The amortized cost and fair values of investment securities
held-to-maturity at December 31, 1994 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Government agencies $ 5,992,089 $ - $ (410,689) $ 5,581,400
Mortgage-backed securities 14,489,917 69,006 (672,188) 13,886,735
Obligations of states and
political subdivisions 1,240,240 12,814 (21,625) $ 1,231,429
----------- --------- ---------- -----------
$ 21,722,246 $ 81,820 $(1,104,502) $20,699,564
=========== ========= ========== ==========
</TABLE>
Continued.........
42
<PAGE> 18
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE B. INVESTMENT SECURITIES - CONTINUED
Gross gains of $8,207 and gross losses of $-0- were
realized on held-to-maturity security sales in 1995. There were no
realized gains or losses on available-for-sale securities in 1995.
Gross realized gains of $178,003 and gross realized losses of
$313,400 resulted from sale of available-for-sale securities in
1994. There were no realized gains or losses on held-to-maturity
securities during 1994.
In 1995, debt securities with an amortized cost of
$19,315,647 were transferred from held-to-maturity to
available-for-sale because of the reclassification opportunity
allowed for in the FASB 115 Implementation Guide. The securities
had an unrealized gain of $1,923. There were no securities
transferred between classifications during 1994.
Investment securities with an amortized cost of
approximately $29,341,000 (market value $29,272,000) at December
31, 1995, and $33,653,000 (market value $32,169,000) at December
31, 1994 were pledged to collateralize public deposits, and for
other purposes as required by law or agreement.
The amortized cost and fair values of investment securities
held-to-maturity and available-for-sale at December 31, 1995, by
contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or
prepayment penalties. Mortgage backed securities are included in
the table based on contractual maturity.
<TABLE>
<CAPTION>
Securities held-to-maturity Securities available-for-sale
--------------------------- -----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Due in one year or less $ $ $15,240,873 $15,225,063
Due after one year
but less than five years 24,587,807 24,565,889
Due after five years
but less than ten years 2,577,921 2,641,156
Due after ten years 9,306,625 9,267,784
Other securities 844,350 844,350
---------- ---------- ---------- ----------
$ - $ - $52,557,576 $52,544,242
========== ========== ========== ==========
</TABLE>
Continued.........
43
<PAGE> 19
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE C. LOANS
The Bank's loan portfolio at December 31, 1995 and 1994,
consists of the following:
<TABLE>
<CAPTION>
1995 1994
------------ --------
<S> <C> <C>
Agricultural $ 1,714,082 $ 1,992,587
Commercial and industrial 98,747,237 75,694,611
Real estate - construction 8,206,698 4,061,067
Real estate - mortgage 4,279,069 3,988,030
Installment 16,339,010 16,853,099
----------- -----------
Total loans $129,286,096 $102,589,394
=========== ===========
</TABLE>
Loans on which accrual of interest has been discontinued or
reduced amounted to approximately $762,000 and $668,000 at
December 31, 1995 and 1994, respectively. If interest on these
loans had been accrued, such income would have approximated
$34,000 and $45,000 in 1995 and 1994, respectively.
Prior to 1995, the Bank agreed to modify the terms of loans
to borrowers in bankruptcy. The aggregate investment in these
loans for 1995 and 1994 is approximately $228,000 and $303,000,
respectively. Had the terms not been modified, interest income
related to these loans would have been approximately $15,000 and
$60,000 in 1995 and 1994, respectively. Interest income associated
with these loans in the amount of $12,477 and $5,049 is included
in operations in 1995 and 1994, respectively. There have been no
new commitments to extend additional credit to these borrowers.
At December 31, 1995, the Bank had loans amounting to
approximately $328,000 that were specifically classified as
impaired. The average balance of these loans amounted to
approximately $142,000 for the year ended December 31, 1995. The
following is a summary of cash receipts on these loans and how
they were applied in 1995:
<TABLE>
<S> <C>
Cash receipts applied to
reduce principal balance $ 41,000
Cash receipts recognized as
interest income 6,000
Total cash receipts $ 47,000
=======
</TABLE>
Continued.........
44
<PAGE> 20
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE C. LOANS - CONTINUED
In the ordinary course of business, the Bank makes loans to
its executive officers, directors and to their affiliates. Loans
made to such borrowers (including companies in which they are
principal owners) amounted to approximately $6,396,000 and
$6,933,000 at December 31, 1995 and 1994, respectively. These
loans were made on substantially the same terms, including
interest rate and collateral, as those prevailing at the time for
comparable transactions with other persons and did not involve
more than normal risk of collectibility or present other
unfavorable features.
Changes in these loans are as follows:
<TABLE>
<S> <C>
BALANCE, at January 1, 1995 $ 6,933,190
New loans 3,560,209
Repayments (3,598,448)
Transfers - resignations (499,012)
-----------
BALANCE, at December 31, 1995 $ 6,395,939
===========
</TABLE>
NOTE D. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Balance at January 1, $ 1,273,160 $ 1,232,881
----------- -----------
Credits charged off (236,610) (351,280)
Recoveries 290,290 201,559
----------- -----------
Net credits charged off 53,680 (149,721)
----------- -----------
Provision for loan
losses 140,000 190,000
----------- -----------
Balance at December 31, $ 1,466,840 $ 1,273,160
=========== ===========
</TABLE>
Continued.........
45
<PAGE> 21
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE E. BANK PREMISES AND EQUIPMENT
A summary of Bank premises and equipment is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1995 1994
------------ ------------
<S> <C> <C>
Land $ 527,013 $ 512,013
Buildings 2,067,070 1,817,338
Furniture and equipment 3,102,163 2,821,536
Leasehold improvements 150,109 145,606
----------- -----------
5,846,355 5,296,493
Less accumulated depreciation
and amortization 3,231,025 2,818,721
----------- -----------
Bank premises and equipment, net $ 2,615,330 $ 2,477,772
=========== ===========
</TABLE>
NOTE F. LEASES
The Bank had a lease commitment for a branch banking
premise which expired in 1994. Leased property capitalized in the
consolidated financial statements is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
------------ --------
<S> <C> <C>
Land and buildings $ - $ 252,500
Less accumulated depreciation - 252,500
----------- -----------
$ - $ -
=========== ==========
</TABLE>
The interest rate, implicit in the lease, used in the
calculation was approximately 7.2% and was equivalent to the rate
the Bank would have incurred to borrow over similar terms for the
funds necessary to purchase the leased assets. The amortization of
the capital lease asset was included in depreciation expense.
Continued.........
46
<PAGE> 22
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE F. LEASES - CONTINUED
The future minimum rental commitments for other
non-cancelable operating leases as of December 31, 1995, are as
follows:
<TABLE>
<CAPTION>
Non-
cancelable
Operating
Leases
<S> <C>
1996 $ 77,230
1997 66,000
1998 66,000
1999 56,000
2000 12,000
-----------
Total minimum lease payments $ 277,230
===========
</TABLE>
Rental expense of approximately $79,000 in 1995 and $35,000
in 1994, included amounts for short-term cancelable leases and
minimum rentals under non-cancelable operating leases.
NOTE G. TRUST DEPARTMENT ASSETS
Property (other than cash deposits) held by the Bank in
fiduciary or agency capacities for its customers is not included
in the accompanying consolidated statements of financial condition
as such items are not assets of the Bank. Trust fees are reported
on the cash basis. The difference between cash basis and the
accrual basis is immaterial.
NOTE H. DEPOSITS
Maturities of time certificates of deposit of $100,000 or
more outstanding at December 31, 1995 and 1994, are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1995 1994
------------ ------------
<S> <C> <C>
Time remaining until maturity:
Three months or less $ 5,259,847 $ 2,762,166
Over three through six months 2,344,007 1,777,725
Over six through twelve months 351,000 250,000
Over twelve months 1,932,859 1,741,664
----------- -----------
$ 9,887,713 $ 6,531,555
=========== ===========
</TABLE>
Continued.........
47
<PAGE> 23
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE H. DEPOSITS - CONTINUED
Deposits at December 31, 1995 and 1994 consists of the
following:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1995 1994
------------- ------------
<S> <C> <C>
Non-interest bearing demand deposits $ 19,941,993 $ 20,486,461
NOW accounts 26,024,959 54,812,471
Money market deposit accounts 8,340,889 9,435,281
Savings accounts 55,320,762 12,310,194
Certificates of deposits 62,080,504 57,097,569
----------- -----------
$171,709,107 $154,141,976
=========== ===========
</TABLE>
NOTE I. EMPLOYEE BENEFIT PLANS
Employees of the Bank participate in a profit sharing and
savings retirement plan and an ESOP covering all employees who
qualify as to length of service. The Bank also has a contributory
401(k) savings plan covering substantially all employees. The
401(k) plan allows eligible employees to contribute up to a fixed
percentage of their compensation, with the Bank matching a portion
of each employee's contribution. The Bank's contributions to the
plans are made at the discretion of the Board of Directors.
Dividends on ESOP shares are recorded as a reduction of retained
earnings. The ESOP plan held 43,020 shares at 1995 and 38,963
shares at 1994. Contributions to all employee benefit plans
totaled $100,106 in 1995 and $101,000 in 1994.
In addition to providing pension benefits, the Bank covers
retirees under their group health care plan. The arrangement is
that the Bank will pay a percentage of the retirees' health
insurance premiums. Also, the Bank pays a supplemental retirement
benefit to retired individuals who have received 100% of their
pension retirement from other Bank qualified plans. Under the
present arrangement these postretirement benefits will only be
available to those individuals who have met the retirement
eligibility requirements of the Bank and who retire prior to 1995.
Prior to 1993, the Bank's practice was generally to expense
the cost of these benefits as they were paid; therefore resulting
in an unfunded benefit plan. Beginning in 1993, Statement on
Financial Accounting Standard (SFAS) No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions"
required that costs of retiree benefits other than pensions be
recognized in the financial statements during the employees'
working career.
Continued.........
48
<PAGE> 24
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE I. EMPLOYEE BENEFIT PLANS - CONTINUED
SFAS No. 106 required that the unrecorded accumulated
postretirement benefit obligation be either charged in the income
statement as a cumulative effect of a change in accounting
principle in the period of adoption or delayed and amortized over
future periods as part of future postretirement benefit costs. The
Bank has elected the delayed recognition. The unrecorded
postretirement benefit obligation will be amortized using the
straight line method over the average remaining life expectancy
period of the plan participants since all or almost all of the
plan participants are inactive.
The following table sets forth the plan's combined funds
status reconciled with the amount shown in the Bank's balance
sheet.
Accumulated postretirement benefit obligation:
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1994
--------- ---------
<S> <C> <C>
Retirees $ 392,155 $ 519,572
Plan assets at fair value - -
-------- -------
Accumulated postretirement benefit
obligation in excess of plan
assets 392,155 519,572
Unrecognized transition obligation (293,927) (453,897)
-------- --------
Accrued postretirement benefit
cost on the balance sheet $ 98,228 $ 65,675
======== ========
</TABLE>
Continued.........
49
<PAGE> 25
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE I. EMPLOYEE BENEFIT PLANS - CONTINUED
The Bank's postretirement health care plan is underfunded.
Postretirement expense includes the following components:
<TABLE>
<CAPTION>
Years ended
December 31,
1995 1994
--------- -------
<S> <C> <C>
Interest cost on accumulated
postretirement benefit obligation $ 24,183 $ 31,056
Amortization of transition obligation
over 14 years 43,797 37,395
--------- ---------
Postretirement expense $ 67,980 $ 68,451
========= =========
</TABLE>
The accumulated postretirement benefit obligation was
determined using an assumed discount rate of 6.00%. The assumed
health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 5% in 1995, declining
ratably to an ultimate flat rate over a period of nine years. The
health care cost trend rate assumption has a significant effect on
the amounts reported. In increasing the assumed health care cost
trend rates by one percentage point in each year would increase
the accumulated postretirement benefit obligation as of December
31, 1995 by approximately $18,000. The effect of this change on
the aggregate interest cost for 1995 would be an increase of
approximately $1,000. The supplemental retirement benefits are
assumed at a constant rate.
NOTE J. INCOME TAX PROVISION
The provision for income taxes included in the consolidated
statements of income is as follows:
<TABLE>
<CAPTION>
1995 1994
------------ --------
<S> <C> <C>
Current $ 1,221,966 $ 810,609
Deferred (100,120) (60,783)
----------- -----------
$ 1,121,846 $ 749,826
=========== ===========
</TABLE>
Income taxes payable of $16,825 in 1995 is included in
accrued taxes and other liabilities and income taxes receivable of
$69,172 in 1994 is included in other assets.
Continued.........
50
<PAGE> 26
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE J. INCOME TAX PROVISION - CONTINUED
Amounts for deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
1995 1994
--------- -------
<S> <C> <C>
Deferred tax liability $ (25,908) $ (31,240)
========= =========
Deferred tax asset, net of valuation
allowance of $-0- $ 380,381 $ 622,413
========= =========
</TABLE>
Temporary differences giving rise to the deferred tax
liability and assets consist primarily of the accumulated
depreciation, amortization of core deposits, accretion of bond
discounts, accrued employee benefits and writedowns on other real
estate.
The deferred tax provision (credit) consists of the
following temporary differences:
<TABLE>
<CAPTION>
1995 1994
------------ --------
<S> <C> <C>
Provision for loan losses $ (75,535) $ (13,695)
Other real estate transactions 13,916 (15,543)
Amortization of core deposit 2,494 2,815
Depreciation (28,258) (2,131)
Postretirement costs (12,696) (11,370)
Utilization of net operating
loss for state purposes - 8,219
Sale of investment securities
with previous writedowns - 22,532
Accretion of bond discounts 22,380 (49,904)
Other (22,421) (1,706)
----------- -----------
$ (100,120) $ (60,783)
=========== ===========
</TABLE>
The provision for federal income taxes in comparison to
that computed by applying the statutory rate of 39% in 1995 and
1994, is indicated in the following analysis:
<TABLE>
<CAPTION>
1995 1994
-------- ------
<S> <C> <C>
Tax based on statutory
rate $1,297,315 $838,832
Effect of tax-exempt
income (119,630) (92,900)
Accretion (14,613) (234)
State income tax (28,492) (14,754)
Other (12,734) 18,882
--------- -------
$1,121,846 $749,826
========= =======
</TABLE>
Continued........
51
<PAGE> 27
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE J. INCOME TAX PROVISION - CONTINUED
The income tax provision includes approximately $2,800 in
1995 and $(46,000) in 1994, resulting from securities
transactions.
NOTE K. STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
In 1995 and 1994 the Board of Directors approved 10% stock
dividends, which resulted in the transfer of the market value of
the stock from retained earnings to common stock and surplus.
The primary sources of revenue of Merchants Capital
Corporation are dividends from its subsidiaries, Merchants Bank
and Merchants Data Services, Inc. Dividends paid by Merchants Bank
to the Capital Corporation amounted to $1,022,540, $580,520 and
$828,050 for the years 1995, 1994 and 1993. Dividends paid by
Merchants Data Services, Inc. to the Capital Corporation amounted
to $-0-, $559,093 and $100,000 for the years 1995, 1994 and 1993.
Banking regulations limit the amount of dividends that may be paid
without prior approval of the Bank's regulatory agency.
The Bank is also required to maintain minimum amounts of
capital to total "risk weighted" assets, as defined by the banking
regulators. At December 31, 1995, the Bank is required to have
minimum Tier 1 and total capital ratios of 4.00% and 8.00%,
respectively. At December 31, 1995, the Bank was in compliance
with the risk-based capital ratio requirements maintaining a
11.25% Tier 1 ratio and a total capital ratio of 12.50%. The
Bank's leverage ratio was 7.61% at December 31, 1995.
NOTE L. COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of
credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amounts recognized
in the consolidated statements of financial condition.
The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instruments for
commitments to extend credit and standby letters of credit is
represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for
on-balance-sheet instruments.
Continued.........
52
<PAGE> 28
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE L. COMMITMENTS AND CONTINGENCIES - CONTINUED
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The amount and
type of collateral obtained, if deemed necessary by the Bank upon
extension of credit, varies and is based on management's credit
evaluation of the counterparty.
Standby letters of credit are conditional commitments
issued by the Bank to guarantee the performance of a customer to a
third party. Standby letters of credit generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan
facilities to customers. The Bank's policy for obtaining
collateral, and the nature of such collateral, is essentially the
same as that involved in making commitments to extend credit.
The Bank's maximum exposure to credit loss is represented
by the contractual amount of the commitments to extend credit and
letters of credit as follows:
<TABLE>
<CAPTION>
December 31,
1995 1994
------------ ------------
<S> <C> <C>
Commitments to extend credit $ 23,215,288 $ 14,235,744
Standby letters of credit $ 2,104,300 $ 1,591,800
</TABLE>
The Bank has an agreement with its Chairman whereby, if
certain conditions are met, specified supplemental benefits are
available upon termination of employment.
The Bank is involved in certain litigation incurred in the
normal course of business. In the opinion of management and legal
counsel, liabilities arising from such claims, if any, would not
have a material effect upon the Bank's consolidated financial
statements.
Continued.........
53
<PAGE> 29
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE M. CASH AND DUE FROM BANKS
The Bank is required to maintain average reserves at the
Federal Reserve Bank. This requirement approximates $992,000 at
December 31, 1995, and $1,800,000 at December 31, 1994.
NOTE N. BUSINESS COMBINATION
On April 1, 1995, the Company acquired the Bank of Edwards
in a business combination accounted for as a purchase. The Bank of
Edwards was primarily engaged in banking activities. The results
of operations of the Bank of Edwards are included in the
accompanying financial statements since the date of acquisition.
Pursuant to a Purchase and Assumption Agreement, the company
assumed $12,680,665 of deposits and other specific liabilities,
and purchased assets having a cost of $13,132,458. The Company
purchased these assets at a discount of $787,873. This amount
consisted of an increase of $89,419 to bank premises and equipment
based on assessed values and will be depreciated over the
estimated remaining useful lives of the assets. Core deposits of
$350,000 were recorded and will be amortized over the estimated
useful life of fifteen years. Investments were reduced to fair
market value by reflecting a decline in recorded value of $127,898
which will be amortized using the constant yield method. The
purchased loans are shown net of the discount of $1,099,394 at
April 1, 1995, to cover anticipated losses in the acquired Bank's
portfolio of loans. The Company has received funds from the
acquired bank in the amount of $336,080 representing the
difference between fair value of assets acquired and liabilities
assumed.
Continued.........
54
<PAGE> 30
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE N. BUSINESS COMBINATION - CONTINUED
The following summarizes the pro forma (unaudited)
information assuming the acquisition occurred on January 1, 1994:
UNAUDITED PRO FORMA INFORMATION
<TABLE>
<CAPTION>
December 31,
1995 1994
---------- ----------
<S> <C> <C>
Net interest income $8,418,317 $7,660,241
========= =========
Provision for loan losses $ 140,000 $ 190,000
========= =========
Consolidated pro forma net income $2,164,143 $1,547,775
========= =========
Weighted average shares outstanding 674,054 674,054
========= =========
Pro forma consolidated income per share $3.21 $2.30
==== ====
</TABLE>
The above amounts reflect adjustments for discount on
loans, amortization of core deposits, depreciation on revalued
bank premises and equipment, deferred tax asset revaluation and
market value adjustments on investments.
NOTE O. CONCENTRATIONS OF CREDIT
The Bank provides deposit and loan products and other
financial services to consumer and corporate customers located
principally in Mississippi. Securities and short-term investment
activities are conducted with a diverse group of domestic
governments, corporations and depository and other financial
institutions. The Bank evaluates the counterparty's
creditworthiness and the need for collateral on a case by case
basis. The concentrations of credit by type of loan are set forth
in Note C. The distribution of commitments to extend credit
approximates the distribution of loans outstanding. Standby
letters of credit are granted primarily to commercial borrowers.
Continued.........
55
<PAGE> 31
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE P. OTHER INCOME AND EXPENSE
Other income includes the following:
<TABLE>
<CAPTION>
1995 1994
------------ --------
<S> <C> <C>
Income (loss) from other
real estate, net $ (7,763) $ (25,192)
Other expenses include the following:
1995 1994
------------ --------
F.D.I.C. assessment $ 215,471 $ 367,298
General operating supplies $ 214,124 $ 191,878
Telephone $ 170,495 $ 146,891
</TABLE>
NOTE Q. FAIR VALUE OF FINANCIAL INSTRUMENTS
In December of 1991, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 107
relative to disclosures about fair values of financial
instruments. The statement requires disclosure of financial
instruments' fair values, as well as the methodology and
significant assumptions used in estimating fair values. These
requirements have been incorporated throughout the notes to the
consolidated financial statements. In cases where quoted market
prices are not available, fair values are based on estimates using
present value techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair
value estimates for those assets or liabilities cannot be
substantiated by comparison to independent markets and, in many
cases, could not be realized in immediate settlement of the
instrument. All nonfinancial instruments, by definition, have been
excluded from these disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the
underlying value of the Corporation and may not be indicative of
amounts that might ultimately be realized upon disposition or
settlement of those assets and liabilities.
The following methods and assumptions are used to estimate
the fair value of each class of financial instruments for which it
is possible to estimate that value:
Cash and Due From Banks
Fair value equals the carrying value of such assets.
Continued........
56
<PAGE> 32
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE Q. FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
Investments Securities
Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of
comparable instruments.
Federal Funds Sold
Due to the short-term nature of these assets, the carrying
values of these assets approximate their fair value.
Loans
For variable rate loans, those repricing within six months
or less, fair values are based on carrying values. The fair value
of certain mortgage loans are based on quoted market prices of
similar loans sold in conjunction with securitization
transactions, adjusted for any differences in loan
characteristics, with servicing retained. Fixed rate commercial
loans, installment loans, and certain real estate mortgage loans
were valued using discounted cash flows. The discount rates used
to determine the present value of these loans was based on
interest rates currently being charged by the Bank on comparable
loans as to credit risk and term.
Off-balance Sheet Instruments
Loan commitments are negotiated at current market rates and
are relatively short-term in nature. Therefore, the estimated
value of loan commitments approximates the carrying amount.
Deposit Liabilities
The fair values of demand deposits are, as required by FAS
107, equal to the carrying value of such deposits. Demand deposits
include non-interest bearing demand deposits, savings accounts,
NOW accounts, and money market demand accounts. The fair value of
variable rate term deposits, those repricing within six months or
less, approximated the carrying value of these deposits.
Discounted cash flows have been used to value fixed rate term
deposits. The discount rate used is based on interest rates
currently being offered by the bank on comparable deposits as to
amount and term.
Short-term Borrowings
The carrying value of federal fund purchased, securities
sold under agreements to repurchase and other short-term
borrowings approximates their carrying values.
Continued.........
57
<PAGE> 33
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE Q. FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
The estimated fair values of the Bank's financial
instruments are as follows:
<TABLE>
<CAPTION>
1995
---------------------------------
Carrying Fair
Amount Value
------------ ------------
<S> <C> <C>
Financial assets:
Cash and due from banks $ 7,675,000 $ 7,675,000
Time deposits $ 668,000 $ 668,000
Federal funds sold $ 2,800,000 $ 2,800,000
Investment securities:
Available-for-sale $ 52,544,000 $ 52,544,000
Loans, net of allowance $126,047,000 $126,406,000
Financial liabilities:
Deposits $171,709,000 $172,107,000
Security participation $ 6,614,000 $ 6,614,000
Other:
Commitments to extend credit $ 23,215,000 $ 23,215,000
Standby letters of credit $ 2,104,000 $ 2,104,000
<CAPTION>
1994
---------------------------------
Carrying Fair
Amount Value
------------ ------------
<S> <C> <C>
Financial assets:
Cash and due from banks $ 9,945,000 $ 9,945,000
Federal funds sold $ 13,625,000 $ 13,625,000
Investment securities:
Held-to-maturity $ 21,722,000 $ 20,700,000
Available-for-sale $ 22,128,000 $ 22,128,000
Loans, net of allowance $ 99,556,000 $ 91,996,000
Financial liabilities:
Deposits $154,142,000 $154,460,000
Security participation $ 3,348,000 $ 3,348,000
Other:
Commitments to extend credit $ 14,236,000 $ 14,236,000
Standby letters of credit $ 1,592,000 $ 1,592,000
</TABLE>
Continued........
58
<PAGE> 34
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE R. SUMMARIZED FINANCIAL INFORMATION OF MERCHANTS CAPITAL CORPORATION
Summarized financial information of Merchants Capital
Corporation, parent company only, is as follows:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
---------------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS:
Cash $ 1,165,758 $ 806,498
Investments in-
Merchants Bank 14,772,284 13,044,312
Other assets 4,713 9,282
----------- -----------
$ 15,942,755 $ 13,860,092
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Other liabilities $ 505,540 $ 153,248
Stockholders' equity 15,437,215 13,706,844
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,942,755 $ 13,860,092
=========== ===========
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1995 1994
------------ ------------
<S> <C> <C>
REVENUE:
Dividends received:
Merchants Bank $ 1,022,540 $ 580,520
Merchants Data Services, Inc. - 559,093
Interest earned 198 188
----------- -----------
1,022,738 1,139,801
EXPENSES 19,287 25,678
----------- -----------
1,003,451 1,114,123
EQUITY IN UNDISTRIBUTED EARNINGS:
Merchants Bank 1,201,151 845,995
Merchants Data Services, Inc. - (559,093)
----------- -----------
NET INCOME $ 2,204,602 $ 1,401,025
=========== ===========
</TABLE>
Continued.........
59
<PAGE> 35
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE R. SUMMARIZED FINANCIAL INFORMATION OF MERCHANTS CAPITAL CORPORATION -
CONTINUED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1995 1994
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 2,204,602 $ 1,401,025
Adjustments to reconcile net income
to net cash provided by operating
activities:
Deferred income taxes - 5,076
Undistributed earnings of
affiliates (1,201,151) (286,902)
(Increase) decrease in other assets 4,569 7,460
Decrease in other liabilities (1) (2)
----------- -----------
Net cash provided by
operating activities 1,008,019 1,126,657
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of fractional shares (5,238) (5,560)
Dividends paid (643,521) (863,957)
----------- -----------
Net cash used in
financing activities (648,759) (869,517)
----------- -----------
INCREASE IN CASH 359,260 257,140
CASH AT BEGINNING OF YEAR 806,498 549,358
----------- -----------
CASH AT END OF YEAR $ 1,165,758 $ 806,498
=========== ===========
</TABLE>
Continued........
60
<PAGE> 36
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE R. SUMMARIZED FINANCIAL INFORMATION OF MERCHANTS CAPITAL CORPORATION -
CONTINUED
STATEMENTS OF CASH FLOWS - CONTINUED
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
<TABLE>
<CAPTION>
1995 1994
------------ --------
<S> <C> <C>
Dividends declared but not paid $ 505,540 $ 153,247
=========== ===========
Stock dividends declared $ 1,373,985 $ 1,388,100
=========== ===========
Change in unrealized losses on
securities available-for-sale,
net of deferred income taxes $ (526,821) $ 534,954
=========== ===========
</TABLE>
61
<PAGE> 37
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion is intended to further your understanding of the
consolidated financial condition and results of operations of Merchants Capital
Corporation and subsidiaries ("the Company"). It should be read in conjunction
with the consolidated financial statements and notes included elsewhere in this
report.
OVERVIEW OF 1995
A wider net interest margin and lower provision for loan losses
were the primary factors in the $803,577 increase in the Company's net income
for the year ended 1995. Net income for the year 1995 was $2,204,602 compared to
$1,401,025 for the same period of 1994. Earnings per common share were $3.27 and
$2.08 for the years ended 1995 and 1994, respectively. Return on average assets
was 1.17% for the current year and .80% in the same period of 1994. For the
years ended 1995 and 1994, return on average equity was 15.12% and 10.21%,
respectively. Other income was $2,199,884 in the current year, 21.43% higher
than $1,728,431 in the year 1994 due primarily to service charges on ATM
machines.
Net interest income for 1995 was $8,259,568, 16.22% greater than
$7,106,683 from the year 1994, due to a wider net interest margin. The net
interest spread was 4.17% for the current year versus 3.97% for the same period
of 1994.
During the year 1995, in comparison with the same period of 1994,
average loans outstanding increased $16,985,759 or 17.56% due to an increased
loan demand and a business combination. Average total deposits for the year 1995
increased $8,373,419 or 6.18% when compared to the average total deposits for
the same period of 1994. Average total assets for the current year increased
$11,934,769 or 6.8% when compared to the total average assets of the year 1994.
Average stockholders' equity for 1995 was $14,572,030, an increase of 6.17% over
the average stockholders' equity for 1994.
EARNINGS ANALYSIS
NET INTEREST INCOME - Net interest income, which is the difference
between interest and fees generated from interest earning assets and the
interest expense for interest bearing liabilities, is the primary source of
earnings for the Bank. For analytical purposes, net interest income is presented
on a tax equivalent basis. A 34% tax rate is used for 1995 and 1994. Certain
earning assets are exempt from income taxes, therefore, a tax equivalent
adjustment is included so that tax exempt earning assets will be comparable with
other earning assets. The primary factors that affect net interest income are
the changes in volume and mix of earning assets and interest bearing
liabilities, along with the change in market rates.
62
<PAGE> 38
Net interest income on a fully tax equivalent basis (FTE)
increased $1,190,107 or 16.64%. Net interest income (FTE) for 1995 was
$8,341,753 compared to $7,151,646 for the prior year.
Net Interest Income (Fully Taxable Equivalent)
<TABLE>
<CAPTION>
1995 1994
---------- -------
<S> <C> <C>
Interest Income $14,622,010 $11,994,485
Interest Expense 6,362,442 4,887,802
---------- ----------
Net Interest Income 8,259,568 7,106,683
Tax Equivalent Adjustment
to Interest Income 82,185 44,963
---------- ----------
Net Interest Income
(Fully Taxable Equivalent) $ 8,341,753 $ 7,151,646
========== ==========
Increase (Decrease)
1995 to 1994
-------------------
Interest Income $ 2,627,525
Interest Expense 1,474,640
----------
Net Interest Income 1,152,885
Tax Equivalent Adjustment
To Interest Income 37,222
Net Interest Income
(Fully Taxable Equivalent) $ 1,190,107
==========
</TABLE>
EARNING ASSETS - Average earning assets increased $13,757,451 or 8.52%
to $175,304,685 during 1995. Average earning assets were $161,547,234 in 1994.
When comparing balance outstanding during 1995 to 1994, average net loans
increased 17.56% while investment securities decreased 3.79% and federal funds
sold decreased 17.93%. For 1995, as a percentage of earning assets, loans were
64.88%, investment securities were 31.1%, and federal funds sold were 3.8%,
while time deposits satisfied the remainder. In comparison in 1994, as a
percentage of earning assets, loans were 59.9%, investment securities were 35.1%
and federal funds sold were 5%. Time deposits did not exist. The Company
reinvested the proceeds from lower yielding, short-term investments into loans
to compensate for the strong growth it was experiencing in commercial and
consumer lending.
63
<PAGE> 39
INTEREST BEARING LIABILITIES - Average interest bearing liabilities were
$151,003,764 for 1995, an increase of 7.2% over the average interest bearing
liabilities for 1994 of $140,893,793. For 1995, as a percentage of interest
bearing liabilities, interest bearing demand deposits were 47%, savings were 8%,
certificates of deposit were 40% and other borrowings, primarily security
participation agreements, were 5%. In comparison in 1994, as a percentage of
interest bearing liabilities, interest bearing demand accounts were 41%, savings
were 10%, certificates of deposit were 46% and other borrowings were 3%.
Interest bearing liabilities funded 86% of earning assets in 1995 and 87% in
1994.
NET INTEREST SPREAD - Net interest spread is the difference between the
average rate earned on interest earning assets and the average rate paid on
interest bearing liabilities. Net interest spread increased from 3.97% to 4.17%
or 20 basis points from 1994 to 1995. The average rate earned on interest
earning assets increased 94 basis points from 7.45% in 1994 to 8.39% in 1995. In
comparison to this increase of 94 basis points in interest rate earned, the
average rate paid for interest bearing liabilities increased 74 basis points.
The average rate paid for deposit liabilities during 1995 was 4.21%, compared to
3.47% in 1994. With a 17.5% increase in average loan volume and a higher
interest yield on loans, the Company experienced a 29% increase in interest and
fees on loans from 1994 to 1995.
The following table (Average Balance Sheets and Interest Rate Analysis)
provides additional information relating to average balances, interest earned or
paid, and average rates earned or paid for the periods shown. Yields and costs
are derived by dividing income or expense by the average balance of assets or
liabilities, respectively. Average balances are derived from average monthly
balances.
64
<PAGE> 40
AVERAGE BALANCE SHEETS AND INTEREST RATE ANALYSIS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995
----------------------------------------------
Average Income/ Yield/
Balance Expense Rate
------------ ----------- ------
<S> <C> <C> <C>
ASSETS
Loans (1) (2) $113,729,061 $10,987,315 9.66%
Investment Securities:
U. S. government & other 50,886,807 2,990,707 5.88%
State & municipal (3) 2,746,504 241,720 8.80%
Other securities 841,010 54,827 6.52%
------------ ----------- ------
Total investment securities 54,474,321 3,287,254 6.03%
Federal funds sold 6,718,178 391,352 5.83%
Time Deposits 383,125 38,274 9.99%
------------ ----------- ------
Total earning assets 175,304,685 14,704,195 8.39%
Allowance for loan losses (1,716,222)
Cash & Due from banks 6,766,234
Bank premises & equipment 2,573,162
Market Value Adjustment - Investments (445,454)
Other assets 4,763,441
------------
TOTAL ASSETS $187,245,846
============
Average Income/ Yield/
Balance Expense Rate
------------ ----------- ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits:
Interest bearing deposits $ 71,352,976 $ 2,780,065 3.90%
Savings 12,274,310 341,931 2.79%
Certificates of deposit 60,283,289 3,000,899 4.98%
------------ ----------- ------
Total interest bearing deposits 143,910,575 6,122,895 4.25%
Other borrowings 7,093,189 239,547 3.38%
------------ ----------- ------
Total interest bearing liabilities 151,003,764 6,362,442 4.21%
Non-interest bearing deposits 20,161,526
Other liabilities 1,508,526
Stockholders' equity 14,572,030
-----------
Total liabilities and
stockholders' equity $187,245,846
============
Net Interest Income -
Tax Equivalent Basis $ 8,341,753
Tax Equivalent Adjustment (82,185)
-----------
Net Interest Income $ 8,259,568
===========
Interest income and rate earned $14,704,195 8.39%
Interest expense and rate paid 6,362,442 4.21%
----------- -----
Interest rate spread 4.17%
=====
NET INTEREST INCOME & NET YIELD ON
AVERAGE EARNING ASSETS $ 8,341,753 4.76%
=========== =====
</TABLE>
(1) Nonaccrual loans are included in average balances for yield computations
(2) Includes loan fees and late charges in both interest income and yield
computations
(3) Tax equivalent basis - 34% rate for 1995 and 1994
65
<PAGE> 41
<TABLE>
<CAPTION>
1994
----------------------------------------------
Average Income/ Yield/
Balance Expense Rate
------------ ----------- ------
<S> <C> <C>
$ 96,743,302 $ 8,508,833 8.80%
54,816,316 3,024,660 5.52%
1,394,159 132,244 9.49%
794,650 40,245 5.06%
------------ ----------- ------
57,005,125 3,197,149 5.61%
8,185,720 333,466 4.07%
0 0 0
------------ ----------- ------
161,934,147 12,039,448 7.43%
(1,285,600)
7,783,703
2,526,689
(386,913)
4,739,051
------------
$175,311,077
============
Average Income/ Yield/
Balance Expense Rate
------------ ----------- ------
$ 57,541,508 $ 1,829,304 3.18%
13,474,285 366,257 2.72%
64,521,363 2,550,406 3.95%
------------ ----------- ------
135,537,156 4,745,967 3.50%
5,356,637 141,835 2.65%
------------ ----------- ------
140,893,793 4,887,802 3.47%
19,755,334
936,280
13,725,670
------------
$175,311,077
============
$ 7,151,646
(44,963)
-----------
$ 7,106,683
=========== =====
$12,039,448 7.43%
4,887,802 3.47%
----------- -----
3.97%
=====
$ 7,151,646 4.42%
=========== =====
</TABLE>
66
<PAGE> 42
The following table (Interest Differentials) provides additional
information relating to the effect change in interest yield has on net interest
income.
INTEREST DIFFERENTIALS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995/1994
---------------------------------------------------------------
Change due to Change in Total
Volume Rate Rate/Volume Change
------------- ---------- ----------- ----------
Interest Earning Assets
<S> <C> <C> <C> <C>
Federal Funds Sold $ (59,784) $ 143,374 $(25,704) $ 57,886
Securities:
Taxable (194,515) 185,812 (10,667) (19,370)
Nontaxable 128,278 (9,544) (9,258) 109,476
Time deposits 38,273 0 0 38,273
Loans 1,493,943 837,495 147,044 2,478,482
---------- ---------- -------- ----------
Total Interest Income 1,406,195 1,157,137 101,415 2,664,747
---------- ---------- -------- ----------
Interest Bearing Liabilities
Interest Bearing Deposits 439,081 412,637 99,044 950,762
Savings (32,618) 9,102 (811) (24,327)
Certificates of Deposits (167,523) 661,464 (43,448) 450,493
Other Borrowings 45,981 39,066 12,665 97,712
---------- ---------- -------- ----------
Total Interest Expense 284,921 1,122,269 67,450 1,474,640
---------- ---------- -------- ----------
Increase (Decrease) in
Interest Differential $1,121,274 $ 34,868 $ 33,965 $1,190,107
========== ========== ======== ==========
<CAPTION>
1994/1993
---------------------------------------------------------------
Change due to Change in Total
Volume Rate Rate/Volume Change
------------- ---------- ----------- ----------
Interest Earning Assets
<S> <C> <C> <C> <C>
Federal Funds Sold $ (109,146) $ 145,289 $(46,166) $ (10,023)
Securities:
Taxable (198,764) (20,229) 3,902 (215,091)
Nontaxable (16,553) 5,411 (622) (11,764)
Time deposits 0 0 0 0
Loans 1,058,449 (414,224) (55,358) 588,867
---------- ---------- -------- ----------
Total Interest Income 733,986 (283,753) (98,244) 351,989
---------- ---------- -------- ----------
Interest Bearing Liabilities
Interest Bearing Deposits 189,366 187,351 24,849 401,566
Savings (16,012) (14,753) 596 (30,169)
Certificates of Deposits (178,342) (112,956) 7,107 (284,191)
Other Borrowings 124,157 (9,430) (23,250) 91,477
---------- ---------- -------- ----------
Total Interest Expenses 119,169 50,212 9,302 178,683
---------- ---------- -------- ----------
Increase (Decrease) in
Interest Differential $ 614,817 $(333,965) $(107,546) $173,306
========== ========== ======== ==========
</TABLE>
67
<PAGE> 43
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
<TABLE>
<CAPTION>
December 31, 1995
Loans to Mature
---------------------------------------------------------------------------
Less than One to Greater than
One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
Commercial $40,217,872 $58,653,884 $ 9,796,261 $108,668,017
---------- ---------- ---------- -----------
Mortgage 1,204,328 3,074,741 4,279,069
---------- ---------- ---------- -----------
Installment 5,172,679 11,166,331 16,339,010
---------- ---------- ---------- -----------
Total $46,594,879 $72,894,956 $ 9,796,261 $129,286,096
========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Loans Due After
One Year at
December 31, 1995
Interest Rates
---------------------------------------------------------
Predetermined Adjustable Total
------------- ---------- -----------
<S> <C> <C> <C>
Commercial $ 57,175,913 $11,274,232 $ 68,450,145
------------ ---------- -----------
Mortgage 3,074,741 3,074,741
------------ ---------- -----------
Installment 11,166,331 11,166,331
------------ ---------- -----------
Total $ 71,416,985 $11,274,232 $ 82,691,217
============ ========== ===========
</TABLE>
68
<PAGE> 44
INVESTMENT ANALYSIS
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------
Weighted
Average Book
Yield Value
U.S. Government Securities:
<S> <C> <C>
Within 1 year 5.01% $ 1,249,239
After 1 year, but within 5 years 5.35% 7,292,888
After 5, but within 10 years 0.00% -
After 10 years 0.00% -
----- ---------
Total U.S. Government Securities 5.30% $ 8,542,127
===== ==========
Securities of U.S. Government
Agencies and Corporations:
Within 1 year 5.32% 13,732,426
After 1 year, but within 5 years 5.69% 15,654,179
After 5, but within 10 years 7.26% 2,065,175
After 10 years 7.10% $ 8,766,627
----- ----------
Total Securities of
U.S. Government Agencies
and Corporations 5.95% $40,218,407
===== ==========
Obligations of States and Political
Subdivisions:
Within 1 year 4.79% 259,206
After 1 year, but within 5 years 5.06% 1,640,740
After 5, but within 10 years 5.98% 512,747
After 10 years 5.51% $ 540,000
----- ----------
Total Obligations of States
and Political Subdivisions 5.28% $ 2,952,693
===== ==========
Other Securities-
Stocks of The Federal Reserve Bank 6.28% 844,350
----- ----------
Total Other Securities 6.28% $ 844,350
===== ==========
</TABLE>
69
<PAGE> 45
PROVISION FOR LOAN LOSSES
Provision for loan losses was $140,000 for 1995, a decrease of $50,000 from
the provision for loan losses of $190,000 for 1994. Net chargeoffs (recoveries)
were $(53,680) for 1995, down from $149,721 for 1994. As a percentage of average
loans, net chargeoffs (recoveries) were (.05)% in 1995 and .15% in 1994. Gross
chargeoffs were .21% in 1995 and .36% in 1994. Recoveries as a percentage of
gross chargeoffs were 122.69% in 1995 and 57.38% in 1994.
OTHER INCOME
Other income for 1995 was $2,199,884, an increase of $471,453 or 27.3% over
the prior year results of $1,728,431. Exclusive of securities transactions,
other income increased $327,849.
Service charges on deposit accounts were $985,798 for 1995, an increase of
6.48% over 1994. Service charges on deposit accounts were $925,797 in 1994. The
primary reasons for the increase in 1995 are an increased number of deposit
accounts and increased non sufficient funds service charges.
Other service, collection and exchange charges increased $201,276 (69.5%)
from 1994. The Company installed several new ATM machines, resulting in higher
volume during the 1995 year. ATM fees increased $200,174 (1276.29%) as the
result of this expansion. Loan origination fees on the sale of mortgage loans
decreased $20,285 or 15.7%. Due to the stabilization of the mortgage market, the
Company originated fewer loans in 1995 as compared to 1994. Commissions on
credit life policies written during 1995 increased $18,751 (29.3%) as compared
to 1994. The increase is directly related to the number of policies written by
the loan officers of the Bank.
Trust fees increased $59,499 (17.7%) largely due to the restructuring of
fees schedules for certain large accounts and growth in the number of accounts
managed by the trust department since 1994. The trust department of the Bank
provides asset management services for its trust customers. The trust department
has over $53,800,000 in assets under its administration.
Other operating income for 1995 was $319,748 compared to the 1994 total of
$312,675. Included in other operating income are fees earned for providing
computer services to other banks, bank premises rental, safe deposit box rentals
and other operating fees associated with the daily operations of the Bank.
Net gains on investment securities increased other income by $8,207 for
1995, compared to a net loss on investment securities in 1994 of $135,397.
Securities were sold to meet the growth in loan demand experienced by the Bank
in 1995.
OTHER EXPENSES
Other expenses totaled $6,993,004 in 1995, a 7.7% increase over the 1994
total of $6,494,263. The primary contributor to this increase was salaries and
employee benefits. Salaries and employee benefits increased $393,638, or 12.2%
to $3,623,321 for 1995 when compared to $3,229,683 for 1994. This increase is
due to a 4.2% increase in employees, plus the effects of raises and management
incentive programs for 1995. New employees were added as a result of the
acquisition of Bank of Edwards in April, 1995.
The $38,669 increase in net occupancy expense was primarily due to the
increase in monthly rental cost for the Jackson loan originating office and a
renegotiation on the operating lease for the Bank's Clay Street branch.
Other expenses increased $49,721 or 2.27% when comparing 1995 to 1994.
Advertising and promotional expenses increased approximately $30,000 as a result
of aggressive corporate marketing and product marketing campaigns during 1995.
During 1995, the FDIC reduced its assessment rates as a result of the Bank
Insurance Fund (BIF) achieving its previously desired reserve level. The Bank
began paying a lower
70
<PAGE> 46
assessment rate for deposits insured in mid 1995. This factor contributed to the
decrease in FDIC insurance for 1995 as compared to 1994 of $151,826 or 41.3%.
The Bank experienced an increase of approximately $140,000 in outside consultant
and processing and analysis charges in 1995 as compared to 1994. Contributing to
this increase was the outsourcing of the Bank's internal audit functions to
consultants, costs associated with the acquisition of Bank of Edwards and an
increase in correspondent bank analysis charges. The remainder of the increase
in 1995 was related to other various operational costs.
INCOME TAXES
Applicable income taxes for 1995 were $1,121,846 and for 1994 were $749,826,
producing an effective tax rate of 33.7% and 34.9%, respectively. The Company's
effective income tax expense as a percentage of pretax income is different from
statutory rates (Federal 34%, State 5%) mainly because of tax-exempt income. A
portion of the Company's interest income is from investments in state and
municipal bonds and is generally exempt from federal and state income taxes.
LIQUIDITY
Liquidity is a measure of a bank's ability to fund loan commitments and meet
deposit maturities and withdrawals in a timely and cost-effective way. These
needs can be met by generating profits, converting assets (such as short-term
investments and securities available for sale) to cash and attracting new
deposits. Management monitors liquidity through a periodic review of maturity
profiles, yield and rate behaviors, and loan and deposit forecasts to minimize
funding risks. Due to the stability of the core deposit base and the maturities
of the investment portfolio, management does not anticipate any difficulties in
meeting the needs of its depositors nor the ability to fund future loan
commitments.
INTEREST RATE SENSITIVITY
The primary assets of banks are portfolios of investment securities and
loans, while liabilities are primarily composed of interest bearing deposits and
borrowed funds. Assets and liabilities have varying maturities and the
associated rates may be fixed or variable. Asset/liability management techniques
are used to maintain appropriate levels and relationships between rate-sensitive
assets and liabilities to maximize overall returns to the extent possible, while
minimizing the risk of loss associated with significant, often unforseen, shifts
in overall interest rates.
71
<PAGE> 47
Management utilized computerized interest rate simulation analysis as its
primary measure of interest rate sensitivity. Management's analysis indicates
that the Bank is liability sensitive for the next three months. A liability
sensitive company will generally benefit from a falling interest rate
environment as the cost of interest bearing liabilities falls faster than the
yields on interest bearing assets, thus creating a widening of the net interest
margin. Conversely, an asset sensitive company will benefit from a rising
interest rate environment as the yields on earning assets rise faster tan costs
of interest bearing liabilities.
A traditional measure of interest rate sensitivity is the difference between
the volumes of assets and liabilities in the Company's current portfolio that
are subject to repricing at various time horizons. These differences are known
as interest sensitivity gaps: immediate to 3 months, 4 to 12 months, 1 to 5
years, over 5 years and on a cumulative basis. The following table shows
interest sensitivity gaps as of December 31, 1995.
72
<PAGE> 48
INTEREST RATE SENSITIVITY TABLE
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
0-90 91-365 1 year- Over 5 Non-
Days Days 5 Years Years Sensitive Total
------ ------ ------- ------- --------- -------
Assets
<S> <C> <C> <C> <C> <C>
Securities $ 15,673 $10,471 $24,105 $ 2,976 $ 53,225
Loans, Net of
Unearned Income 39,606 17,414 61,816 8,136 126,972
Federal Funds Sold 2,840 2,840
Other Assets 2 14,773 14,775
------- ------ ------ ------ ------ --------
Total Assets 58,119 27,885 85,921 11,114 14,773 197,812
Liabilities
Interest Bearing
Deposits $42,291 $2,316 $32,781 $ 77,388
Savings Deposits 4,060 8,246 12,306
Certificates of
Deposits 18,564 21,242 22,123 151 62,080
Demand Deposits 21,107 21,107
Other Liabilities 4,409 2,205 3,545 10,159
Stockholders' Equity 14,772 14,772
------ ------ ------ ------- ------- -------
Total Liabilities
and Stockholders'
Equity $69,324 $23,558 $63,150 $ 2,356 $ 39,424 $197,812
------ ------ ------ ------ ------- -------
Interest Rate
Sensitivity Gap $(11,205) $ 4,327 $22,771 $ 8,758 $(24,651)
Cumulative Interest
Rate Sensitivity Gap $(11,205) $(6,878) $15,893 $24,651 $ 0
</TABLE>
Changes in the mix of earning assets or supporting liabilities can either
increase or decrease the net interest margin without affecting interest rate
sensitivity. In addition, the interest rate spread between an asset and its
supporting liability can vary significantly while the timing of repricing for
both the asset and liability remains the same, thus impacting net interest
income. Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest sensitivity analysis report. These prepayments may have significant
effects on the Bank's net interest margin. Because of these factors an interest
sensitivity gap report may not provide a complete assessment of exposure to
changes in interest rates.
Management also evaluates the condition of the economy, the pattern of market
interest rates and other economic data to determine the appropriate mix and
repricing characteristics of assets and liabilities required to produce an
optimal net interest margin.
73
<PAGE> 49
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses was $1,466,840 at year end 1995 or 1.16% of net
loans outstanding. At year end 1994, the allowance for loan losses was
$1,273,160 or 1.28% of net loans outstanding. The allowance for loan losses
account represents amounts available for possible future losses based on
management's evaluation of the loan portfolio. To ascertain the potential losses
in the portfolio, management reviews past due loans on a monthly basis.
Additionally, the loan review function performs an ongoing review of the loan
portfolio. Loans are reviewed for compliance to the Bank's lending policy and
the borrower's current financial condition and ability to meet scheduled
repayment terms. Based on these exercises and management's knowledge of the
Bank's borrowers, the allowance for loan losses, in management's judgement, is
adequate to absorb potential loan losses based on current review of the quality
of the loan portfolio. See Note D of the consolidated financial statements for
an analysis of the activity in the allowance for loan losses account for the
past two years.
NONPERFORMING ASSETS
Nonperforming assets include nonaccrual (loans on which interest income is
not currently recognized) and restructured loans (loans with below-market
interest rates or other concessions due to the deteriorated financial condition
of the borrower) and other real estate (assets to which title has been assumed
in satisfaction of debt). Loans are considered nonaccrual when the principal or
interest becomes 90 days past due unless they are adequately collateralized and
in the process of collection. Nonaccrual loans at December 31, 1995, were
approximately $762,000, an increase of $94,000 from approximately $668,000 at
December 31, 1994. Loans 90 days past due and still accruing at December 31,
1995 and 1994 were $181,000 and $35,000, respectively. At December 31, 1995,
nonaccrual loans were .59% of gross loans outstanding and 51.9% of the allowance
for loan losses. At December 31, 1994, these ratios were .65% and 52.5%,
respectively.
Other real estate totaled $138,999 at year end 1995 and $154,114 at year end
1994. Improvements in commercial real estate and general economic conditions,
which allowed for a break-even disposition of previously foreclosed properties
were the primary factors in the decline.
As of December 31, 1995, the Company knows of no additional loans, other than
those identified above, that Management has serious doubts as to the ability of
such borrowers to repay principal and interest.
CAPITAL
The strength of a company is measured by the company's capital, earnings
history, asset quality, and management. Capital can be increased by the
retention of earnings and issuance of equity. Management feels the current
trends of earnings and dividend distribution is sufficient to maintain its
capital at adequate level. The dividend payout ratio (dividends declared divided
by net income) was approximately 45.3% in 1995 as compared to 43.3% in 1994. In
addition, average equity to average total assets remained constant for both
years at 7.8%.
Regulations prescribe minimum capital levels. These levels are based on
established guidelines which relate required capital to both risk-weighted
assets (risk-based capital ratios) and total assets (leverage ratio). In
accordance with risk-based guidelines, assets and off balance sheet financial
instruments are assigned a weight to measure their level of risk. Note K of the
consolidated financial statements discusses the total risk-based capital ratios
for the Company.
The Company's dividends are determined by its Board of Directors. The current
policy is to maintain dividends at a level which ensures the Company and the
Bank are able to maintain sufficient regulatory capital levels. The Company's
primary source of funds is the dividends received from the Bank. Under current
regulations, the Bank is required to get regulatory approval prior to the
payment of any
74
<PAGE> 50
dividends. The Company carries no debt; therefore, the liquidity needs are
limited to the payment of any declared dividends.
PRINCIPAL OCCUPATION OF THE COMPANY'S DIRECTORS AND EXECUTIVE OFFICERS
This information is included elsewhere in this report in conjunction with
listings of directors and officers.
75
<PAGE> 1
Exhibit 21
Subsidiaries of the Registrant
(1) Merchants Bank, a Mississippi corporation.
(2) Merchants Data Services, Inc., a Mississippi corporation (dissolved in
1994).
25
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MERCHANTS CAPITAL AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CONDITION AT
DECEMBER 31, 1995 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED
DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 7563
<INT-BEARING-DEPOSITS> 112
<FED-FUNDS-SOLD> 2800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 52544
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 127514
<ALLOWANCE> 1467
<TOTAL-ASSETS> 195702
<DEPOSITS> 171709
<SHORT-TERM> 6614
<LIABILITIES-OTHER> 1942
<LONG-TERM> 0
0
0
<COMMON> 3370
<OTHER-SE> 12067
<TOTAL-LIABILITIES-AND-EQUITY> 195702
<INTEREST-LOAN> 10987
<INTEREST-INVEST> 3243
<INTEREST-OTHER> 391
<INTEREST-TOTAL> 14622
<INTEREST-DEPOSIT> 6123
<INTEREST-EXPENSE> 240
<INTEREST-INCOME-NET> 8260
<LOAN-LOSSES> 140
<SECURITIES-GAINS> 8
<EXPENSE-OTHER> 6993
<INCOME-PRETAX> 3326
<INCOME-PRE-EXTRAORDINARY> 3326
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2205
<EPS-PRIMARY> 3.27
<EPS-DILUTED> 3.27
<YIELD-ACTUAL> 4.76
<LOANS-NON> 762
<LOANS-PAST> 181
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1273
<CHARGE-OFFS> 236
<RECOVERIES> 290
<ALLOWANCE-CLOSE> 1467
<ALLOWANCE-DOMESTIC> 1467
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
