<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, 1996
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: $18,361,052
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 December 31, 1996 -
$17,930,955.
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: As of
December 31, 1996 - 707,516.
DOCUMENTS INCORPORATED BY REFERENCE: PAGE 2
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
Description of Document Incorporated into Part/Item No.
----------------------- -------------------------------
1996 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 25,
1997. Part III, Items 9 through 12
<PAGE> 3
MERCHANTS CAPITAL CORPORATION
1996 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
four banking locations in Vicksburg, and has an office in Utica and
Edwards, 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.
<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 eight 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, 1996, the Bank ranked twenty-fifth in total assets of
the 125 banks in the State of Mississippi, and employed 119 employees, 107
of which are full time. The Bank's primary service areas are in Warren and
western Hinds Counties, Mississippi.
<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
<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 I
(Stockholders' Equity and Regulatory Matters) of the Registrant's Consolidated
Financial Statements for the year ended December 31, 1996 and the "Capital
Adequacy" 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
<PAGE> 7
any 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 I
(Stockholders' Equity and Regulatory Matters) of the Registrant's Consolidated
Financial Statements for the year ended December 31, 1996 and the "Capital
Adequacy" portion of Management's Discussion and Analysis.
<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
<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. During 1996,
the assessment rate on BIF deposits was zero. The rate on Savings Association
Insurance Fund (SAIF) deposits remained at $.23 per $100 of deposits for both
1995 and 1996. The Bank has SAIF deposits resulting from a savings and loan
purchase during the early 1990's. During late 1996, the bank was charged a
special assessment on these SAIF insured deposits of approximately $139,000.
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.
<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 were owned by the Bank. This Branch was closed
in 1996 and the related property was sold to an unrelated party in 1996.
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 $30,000. The first of three five year options was exercised in 1994
at an annual rental of $30,000. The Branch has a drive up automated teller
machine which is leased for 60 months at a lease amount of $729/month.
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 which is leased for 60 months at a lease
amount of $729/month. The building contains approximately 2,400 square feet.
The building and property on which it is situated are owned by the Bank.
<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
$13,591. The lease expired November 14, 1996. The second of six three year
options was exercised during the year at a monthly rental of $1,180.57/month.
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 leases a drive up automated teller machine at the
intersection of Indiana Avenue and the East Frontage road of Interstate 20,
Vicksburg for a lease term of 60 months at $729/month. In 1996, the Bank
extended their previous lease on the land where the ATM is located for an
additional five year term, through September, 2001. The monthly fee is
$400/month.
<PAGE> 12
Highway 61 North Automated Teller Machine
The Bank operates an automated teller machine on Highway 61 North,
Vicksburg, Mississippi. In 1996, the Bank extended their previous lease for an
additional five year term through September, 2001. The monthly fee is
$360/month.
Highway 61 South Automated Teller Machine
The Bank operated an automated teller machine on Highway 61 South,
Vicksburg, Mississippi. The machine was contained in the wall of a convenience
store and was owned by the Bank. The property on which it is situated was
leased through September, 1996 at $330/month. The lease was not renewed.
Customer - Bank Communication Terminal (CBCT) Branches
The Bank has CBCT's located at the following locations:
1) Kroger ATM (1) 3) Isle of Capri (3)
3405 Pemberton Square Boulevard 3990 Washington Street
Vicksburg, Mississippi 39180 Vicksburg, MS 39180
2) Rainbow ATM (2)
1540 Warrenton Road
Vicksburg, Mississippi 39180
The Bank pays rent of $1/year plus 1/2 of transaction fees assessed at
these locations.
None of these properties are subject to any encumbrance.
In the judgment 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.
<PAGE> 13
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 1996.
<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 1995 and 1996 are
presented below.
<TABLE>
<CAPTION>
Period 1995 Dividends per
----------- -------------
Share
-----
<S> <C>
First Quarter .22
Second Quarter .24
Third Quarter .24
Fourth Quarter .71
Period 1996
-----------
First Quarter .24
Second Quarter .275
Third Quarter .275
Fourth Quarter .775
</TABLE>
(b) Holders
As of December 31, 1996, there were approximately 535 holders of
record of the Common Stock of the Company.
<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 Adequacy"
portion of the Management's Discussion and Analysis and Note I 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, thereof, 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, 1996
and 1995;
- Consolidated Statements of Income - Years ended December 31, 1996
and 1995;
- Consolidated Statements of Changes in Stockholders' Equity - Years
ended December 31, 1996 and 1995;
- Consolidated Statements of Cash Flows - Years ended December 31, 1996
and 1995; and
- Notes to Consolidated Financial Statements.
<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.
<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 25, 1997, in connection with
its annual meeting to be held April 15, 1997.
ITEM 10. EXECUTIVE COMPENSATION
Information required by this item is incorporated herein by reference
to the Registrant's Proxy Statement, dated March 25, 1997, in connection with
its annual meeting to be held April 15, 1997.
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 25, 1997, in
connection with its annual meeting to be held April 15, 1997.
<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 25, 1997, in connection with
its annual meeting to be held April 15, 1997.
<PAGE> 19
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Title of Exhibit
-------------- ----------------
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, 1996
21 Subsidiaries of the Registrant
22 Proxy Statement
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.
(b) Reports on Form 8-K:
There were no reports on Form 8-K for the three months ended December
31, 1996.
<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)
DATE: 3/18/97 BY: /s/Howell N. Gage, Jr.
--------------------------------
Howell N. Gage, Jr., Chairman
and Chief Executive Officer
DATE: 3/18/97 BY: /s/Joel H. Horton
--------------------------------
Joel H. Horton, President and
Chief Operating Officer
DATE: 3/18/97 BY: /s/ James R. Wilkerson
--------------------------------
James R. Wilkerson, Secretary
<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:
DATE: 3/18/97 BY: /s/ J.E. Blackburn, Jr.
--------------------------------
J. E. Blackburn, Jr., Director
DATE: 3/18/97 BY: /s/ Rodney E. Bounds
--------------------------------
Rodney E. Bounds, Director
DATE: 3/18/97 BY:
--------------------------------
Michael J. Chaney, Director
DATE: 3/18/97 BY: /s/ Howell N. Gage, Jr.
--------------------------------
Howell N. Gage, Jr., Director
DATE: 3/18/97 BY: /s/ Dr. W.B. Hopson, Jr.
--------------------------------
Dr. W. B. Hopson, Jr., Director
DATE: 3/18/97 BY: /s/ Joel H. Horton
--------------------------------
Joel H. Horton, Director
DATE: 3/18/97 BY: /s/ C. Hays Latham
--------------------------------
C. Hays Latham, Director
DATE: 3/18/97 BY:
--------------------------------
Martin S. Lewis, Director
DATE: 3/18/97 BY: /s/ Robert P. McConnell
--------------------------------
Robert P. McConnell, Director
DATE: 3/18/97 BY: /s/ Fred G. Peyton
--------------------------------
Fred G. Peyton, Director
DATE: 3/18/97 BY: /s/ Robert E. Pickett
--------------------------------
Robert E. Pickett, Director
DATE: 3/18/97 BY: /s/ Landman Teller, Jr.
--------------------------------
Landman Teller, Jr., Director
DATE: 3/18/97 BY:
--------------------------------
Ernest G. Thomas, Director
DATE: 3/18/97 BY: /s/ R.C. Wilkerson, III
--------------------------------
R. C. Wilkerson, III, Director
DATE: 3/18/97 BY: /s/ James R. Wilkerson, Jr.
--------------------------------
James R. Wilkerson, Jr., Director
<PAGE> 22
Exhibit Index
Filed as Part of this Report on Form 10-KSB
<TABLE>
<CAPTION>
Designation Description Page No.
- ----------- ----------- --------
<S> <C> <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,
1996 26
21 Subsidiaries of the Registrant 25
22 Proxy Statement *
27 Financial Data Schedules --
</TABLE>
* As indicated in the column entitled "Description" this Exhibit is
incorporated by reference to another filing or document.
<PAGE> 1
Exhibit 11
Merchants Capital Corporation
Computation of Earnings Per Share
<TABLE>
<CAPTION>
December 31,
1996 1995
---------- ----------
<S> <C> <C>
Net income for primary
earnings per share $2,626,273 $2,204,602
========== ==========
Net income for fully
diluted earnings per
share $2,626,273 $2,204,602
========== ==========
Weighted average shares
outstanding for primary
earnings per share 707,516 707,516
Weighted average shares
outstanding for fully
diluted earnings per
share 707,516 707,516
Primary earnings per share $ 3.71 $ 3.12
Fully diluted earnings per share $ 3.71 $ 3.12
</TABLE>
<PAGE> 1
EXHIBIT 13
ANNUAL REPORT
<PAGE> 2
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
WITH
INDEPENDENT AUDITOR'S REPORT
<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 Subsidiary as of
December 31, 1996 and 1995, 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 audits
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatements. 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 Subsidiary as of December 31,
1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
Vicksburg, Mississippi
January 17, 1997
<PAGE> 4
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
December 31,
1996 1995
------------- -------------
<S> <C> <C>
Cash and due from banks $ 10,218,925 $ 7,562,995
Interest bearing deposits with banks 86,731 111,530
Federal funds sold 16,080,078 2,800,000
Time deposit -- 667,668
Investment securities-
Available-for-sale (amortized cost of $42,836,946 and
$52,557,575, respectively) 42,913,870 52,544,242
Loans 134,098,875 129,286,096
Less: Unearned income (1,689,189) (1,772,073)
Allowance for loan losses (1,545,820) (1,466,840)
------------- -------------
Net loans 130,863,866 126,047,183
------------- -------------
Bank premises and equipment, net 2,752,777 2,615,330
Other real estate 128,849 138,999
Accrued interest receivable 1,760,153 1,966,555
Premium on purchased deposits and assets, less
amortization of $208,533 in 1996 and $159,400 in 1995 501,467 550,600
Deferred income taxes 303,300 327,820
Other assets 452,834 369,120
------------- -------------
Total assets $ 206,062,850 $ 195,702,042
============= =============
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 5
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
1996 1995
------------- -------------
<S> <C> <C>
LIABILITIES:
Deposits:
Non-interest bearing $ 22,434,563 $ 19,934,570
Interest bearing 154,834,160 151,774,537
------------- -------------
177,268,703 171,709,107
Security participations 9,811,858 6,613,555
Accrued interest payable 822,785 830,939
Accrued taxes and other liabilities 606,770 605,686
Dividends declared but not paid 548,325 505,540
------------- -------------
Total liabilities 189,058,461 180,264,827
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $5 par value per share;
1,000,000 shares authorized; 707,516
and 674,054 shares issued and outstanding
in 1996 and 1995, respectively 3,537,580 3,370,270
Additional paid-in capital 12,823,369 11,852,971
Retained earnings 596,516 222,107
Net unrealized gain (loss) on securities available-
for-sale, net of taxes of $30,000 in 1996 and
($5,200) in 1995 46,924 (8,133)
------------- -------------
Total stockholders' equity 17,004,389 15,437,215
------------- -------------
Total liabilities and stockholders' equity $ 206,062,850 $ 195,702,042
============= =============
</TABLE>
<PAGE> 6
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
December 31,
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,626,273 $ 2,204,602
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 320,000 140,000
Provision for depreciation and amortization 417,742 495,852
Amortization of premium on purchased
deposits and assets 49,133 43,300
Accretion on investment securities, net (200,204) (144,665)
Deferred income taxes benefit (10,680) (100,120)
Write-down of other real estate 9,220 6,185
(Gain) loss on sale of other real estate (29,984) 1,594
(Gain) loss on sale of bank premises and equipment 5,760 (7,062)
Net investment securities (gain) loss 49,917 (8,207)
(Increase) decrease in:
Accrued interest receivable 206,402 (351,808)
Other assets (83,714) 216,531
Increase (decrease) in:
Accrued interest payable (8,154) 126,938
Accrued taxes and other liabilities 1,084 295,607
------------ ------------
Net cash provided by operating activities 3,352,795 2,918,747
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest bearing deposits with banks 24,799 (38,498)
Cash received from Bank of Edwards -- 894,182
Proceeds from maturity of time deposit 692,126 --
Net decrease (increase) in federal funds sold (13,280,078) 10,825,000
Proceeds from sale of held-to-maturity securities -- 761,796
Purchase of held-to-maturity securities -- (1,544,428)
Proceeds from maturities of held-to-maturity
securities -- 4,277,205
</TABLE>
Continued.........
<PAGE> 7
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Years Ended
December 31,
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES - CONTINUED:
Purchase of available-for-sale securities (35,561,120) (37,486,347)
Proceeds from sale of available-for-sale securities 9,970,312 --
Proceeds from calls and maturities of available-
for-sale securities 35,461,724 29,638,315
Net increase in loans (5,259,733) (19,892,063)
Purchases of premises and equipment (640,949) (340,692)
Proceeds from sales of premises and equipment 80,000 14,344
Proceeds from sales of other real estate 153,964 131,838
Interest received on time deposit (24,458) (35,402)
------------ ------------
Net cash used in investing activities (8,383,413) (12,794,750)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest and interest bearing
demand accounts 3,118,315 6,764,957
Net increase (decrease) in time deposits 2,441,301 (1,364,970)
Payment of fractional shares from stock dividend (8,184) (5,238)
Cash dividends paid (1,063,187) (643,521)
Increase in security participations 3,198,303 2,815,452
------------ ------------
Net cash provided by financing activities 7,686,548 7,566,680
------------ ------------
NET INCREASE (DECREASE) IN
CASH AND DUE FROM BANKS 2,655,930 (2,309,323)
CASH AND DUE FROM BANKS AT
BEGINNING OF YEAR 7,562,995 9,872,318
------------ ------------
CASH AND DUE FROM BANKS AT
END OF YEAR $ 10,218,925 $ 7,562,995
============ ============
</TABLE>
Continued.........
<PAGE> 8
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Years Ended
December 31,
1996 1995
------------ ------------
<S> <C> <C>
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Dividends declared but not paid $ 548,325 $ 505,540
============ ============
Transfer of loans foreclosed to other real estate $ 123,050 $ 124,502
============ ============
Stock dividends declared $ 1,137,708 $ 1,373,985
============ ============
Total increase (decrease) in unrealized gains (losses) on
securities available-for-sale $ 90,257 $ (863,641)
============ ============
Deferred income taxes on recorded unrealized gains
(losses) on securities available-for-sale $ (35,200) $ 336,820
============ ============
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.
<PAGE> 9
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended
December 31,
1996 1995
------------ ------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 12,336,854 $ 10,987,315
Interest and dividends on investment securities:
Taxable interest income 2,655,429 3,028,981
Exempt from federal income taxes 231,723 159,535
Dividends 53,768 54,827
Interest on federal funds sold 406,894 391,352
------------ ------------
Total interest income 15,684,668 14,622,010
------------ ------------
INTEREST EXPENSE:
Interest on deposits 6,530,964 6,122,895
Interest on federal funds purchased
and security participations 373,008 239,547
------------ ------------
Total interest expense 6,903,972 6,362,442
------------ ------------
NET INTEREST INCOME 8,780,696 8,259,568
PROVISION FOR LOAN LOSSES 320,000 140,000
------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 8,460,696 8,119,568
------------ ------------
OTHER INCOME:
Service charges on deposits 1,073,643 985,798
Fees for other customer services 849,977 490,634
Commission and fees from fiduciary activities 416,724 395,497
Net investment securities gains (losses) (49,917) 8,207
Other 385,957 319,748
------------ ------------
Total other income 2,676,384 2,199,884
------------ ------------
</TABLE>
Continued.........
<PAGE> 10
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
<TABLE>
<CAPTION>
Years Ended
December 31,
1996 1995
---------- ----------
<S> <C> <C>
OTHER EXPENSES:
Salaries 2,899,685 2,748,865
Employee benefits 885,205 874,456
Net occupancy expense 550,867 512,584
Equipment expense 560,858 614,698
Other 2,238,195 2,242,401
---------- ----------
Total other expenses 7,134,810 6,993,004
---------- ----------
INCOME BEFORE INCOME TAX EXPENSE 4,002,270 3,326,448
INCOME TAX EXPENSE 1,375,997 1,121,846
---------- ----------
NET INCOME $2,626,273 $2,204,602
========== ==========
NET INCOME PER SHARE $ 3.71 $ 3.12
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 707,516 707,516
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 11
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Unrealized Gains
(Losses)
on Securities
Additional Available-for
Common Paid In Retained sale, Net of
Total Stock Capital Earnings Taxes
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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
($1.41 per share) (995,814) -- -- (995,814) --
Stock dividend-10% (61,066 shares) -- 305,330 1,068,655 (1,373,985) --
Payment for fractional shares (5,238) -- -- (5,238) --
Net change in unrealized gains
(losses) on securities available-for-
sale, net of taxes of $336,820 526,821 -- -- -- 526,821
------------ ------------ ------------ ------------ ------------
BALANCE,
December 31, 1995 15,437,215 3,370,270 11,852,971 222,107 (8,133)
Net income for the year 2,626,273 2,626,273
Cash dividends declared
($1.565 per share) (1,105,972) (1,105,972)
Stock dividend-5% (33,462 shares) 167,310 970,398 (1,137,708)
Payment for fractional shares (8,184) (8,184)
Net change in unrealized gains
(losses) on securities available-
for-sale, net of taxes of $35,200 55,057 55,057
------------ ------------ ------------ ------------ ------------
BALANCE,
December 31, 1996 $ 17,004,389 $ 3,537,580 $ 12,823,369 $ 596,516 $ 46,924
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 12
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts
of Merchants Capital Corporation (the Company) and its
wholly-owned subsidiary, Merchants Bank and its wholly-owned
subsidiary, Merchants Credit Company. All material intercompany
profits, balances and transactions have been eliminated.
NATURE OF OPERATIONS
The Bank operates under a state bank charter and provides
full banking services, including trust services. The area served
by the Bank is the west central region of Mississippi and
services are provided at five branch offices.
USE OF ESTIMATES
The preparation of consolidated 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.
INVESTMENT SECURITIES
Management determines the appropriate classification of
securities at the time of purchase. If management has the
positive intent and the Bank has the ability at the time of
purchase to hold bonds, notes and debentures 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 equity securities include stock in the
Federal Reserve Bank, and the Federal Home Loan Bank, which are
restricted and are carried at cost.
Continued.........
<PAGE> 13
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
INVESTMENT SECURITIES - CONTINUED
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 Bank's yearly operations. The Bank does
not engage in trading account activities.
LOANS
Loans generally 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. Loan
origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the
related loan. 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.
The Bank generally discontinues the accrual of interest
income when a loan becomes 90 days past due as to principal or
interest; 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. Interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments
as they become due. Any unpaid interest previously accrued on
nonaccrual loans is reversed from income or charged to the
allowance for loan losses. 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.........
<PAGE> 14
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
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 write-down at the time of
foreclosure is charged to the allowance for loan losses.
Subsequent write-downs 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 significant
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.........
<PAGE> 15
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
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 subsidiary 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 approximately fifteen years.
INCOME PER SHARE
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 income per share.
Continued.........
<PAGE> 16
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
CASH FLOWS
For purposes of the consolidated statements of cash flows,
the Company considers only cash and due from banks to be cash
equivalents.
The Company paid income taxes approximating $1,450,000 in
1996 and $1,135,400 in 1995. Interest paid on deposit liabilities
and other borrowings approximated $6,912,000 in 1996 and
$6,172,000 in 1995.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to
conform with the 1996 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement
on Financial Accounting Standards No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," which becomes effective for transfers and
servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996. The standards are based on the
constant application of the "financial-components approach,"
which recognizes that financial assets and liabilities can be
divided into various components. Under that approach, an entity
recognizes all financial assets and servicing it controls and
liabilities it has incurred and would derecognize financial
assets when control has been surrendered and liabilities when
extinguished. The effect of the implementation of this standard
is not expected to be material. The Financial Accounting
Standards Board subsequently issued Statement No. 127, "Deferral
of the Effective Date of Certain Provisions of FASB Statement No.
125." This statement defers, for one year, certain provisions
contained in Statement No. 125.
Continued.........
<PAGE> 17
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE B. CASH AND DUE FROM BANKS
The Bank is required to maintain average reserves at the
Federal Reserve Bank. This requirement approximates $1,200,000 at
December 31, 1996, and $992,000 at December 31, 1995. The Bank is
in compliance with this requirement.
NOTE C. INVESTMENT SECURITIES
The amortized cost and fair values of investment
securities available-for-sale at December 31, 1996 and 1995 were:
<TABLE>
<CAPTION>
1996
----------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U. S. Treasury and other
U. S. Government agencies $ 27,960,431 $ 49,434 $ (53,076) $ 27,956,789
Mortgage-backed securities 10,368,222 61,437 (59,081) 10,370,578
Obligations of states and
political subdivisions 3,584,093 79,933 (1,723) 3,662,303
Other equity securities 924,200 -- -- 924,200
------------ ------------ ------------ ------------
$ 42,836,946 $ 190,804 $ (113,880) $ 42,913,870
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
1995
----------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U. S. Treasury and other
U. S. Government agencies $ 36,064,435 $ 104,631 $ (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 equity securities 844,350 -- -- 844,350
------------ ------------ ------------ ------------
$ 52,557,575 $ 259,431 $ (272,764) $ 52,544,242
============ ============ ============ ============
</TABLE>
Continued.........
<PAGE> 18
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE C. INVESTMENT SECURITIES - CONTINUED
Gross realized gains of $-0- and gross realized losses of
$49,917 resulted from sale of available-for-sale securities in
1996. There were $-0- realized gains or losses on
held-to-maturity securities during 1996. Gross realized gains of
$8,207 and gross realized losses of $-0- were realized on
held-to-maturity security dispositions in 1995. These
dispositions qualified for the exception in FASB 115. There were
no realized gains or losses on available-for-sale securities in
1995.
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.
Investment securities with an amortized cost of
approximately $32,946,000 (market value $32,975,000) at December
31, 1996, and $29,341,000 (market value $29,272,000) at December
31, 1995 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 available-for-sale at December 31, 1996, 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 available-for-sale
-----------------------------
Amortized Fair
Cost Value
------------- -------------
<S> <C> <C>
Due in one year or less $ 20,442,569 $ 20,427,774
Due after one year but less than five years 12,686,579 12,755,525
Due after five years but less than ten years 4,194,861 4,264,846
Due after ten years 4,588,737 4,541,525
Other securities 924,200 924,200
------------- -------------
$ 42,836,946 $ 42,913,870
============= =============
</TABLE>
Continued.........
<PAGE> 19
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE D. LOANS
The Bank's loan portfolio at December 31, 1996 and 1995,
consists of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Agricultural $ 1,510,437 $ 1,714,082
Commercial and industrial 103,117,837 98,747,237
Real estate - construction 5,742,457 8,206,698
Real estate - mortgage 8,567,614 4,279,069
Installment 15,160,530 16,339,010
------------ ------------
Total loans $134,098,875 $129,286,096
============ ============
</TABLE>
Loans on which accrual of interest has been discontinued
or reduced amounted to approximately $1,100,000 and $762,000 at
December 31, 1996 and 1995, respectively. If interest on these
loans had been accrued, such income would have approximated
$88,000 and $34,000 in 1996 and 1995, respectively.
Impaired loans having recorded investments of $1,394,000
(majority of which is on a nonaccrual basis and $1,090,000) at
December 31, 1996 and 1995, respectively, have been recognized in
conformity with FASB Statement No. 114 as amended by FASB
Statement No. 118. As a result of direct write-downs, the
specific allowance related to these impaired loans is immaterial.
The average recorded investment in impaired loans during 1996 and
1995 was $1,243,000 and $904,000, respectively. The amount of
interest income recognized on impaired loans for both 1996 and
1995 was immaterial. There have been no new commitments to extend
additional credit to these borrowers.
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 $5,487,000 and
$6,396,000 at December 31, 1996 and 1995, 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.
Continued.........
<PAGE> 20
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE D. LOANS - CONTINUED
Changes in these loans are as follows:
<TABLE>
<S> <C>
Balance at January 1, 1996 $ 6,395,939
New loans 2,052,141
Repayments (2,961,107)
-----------
Balance at December 31, 1996 $ 5,486,973
===========
</TABLE>
NOTE E. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Balance at January 1, $ 1,466,840 $ 1,273,160
Credits charged off (538,647) (236,610)
Recoveries 297,627 290,290
----------- -----------
Net (credits charged off) recoveries (241,020) 53,680
----------- -----------
Provision for loan losses 320,000 140,000
----------- -----------
Balance at December 31, $ 1,545,820 $ 1,466,840
=========== ===========
</TABLE>
Continued.........
<PAGE> 21
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE F. BANK PREMISES AND EQUIPMENT
A summary of Bank premises and equipment is as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
---------- ----------
<S> <C> <C>
Land $ 531,013 $ 527,013
Buildings 2,224,136 2,067,070
Furniture and equipment 3,416,713 3,102,163
Leasehold improvements 151,521 150,109
---------- ----------
6,323,383 5,846,355
Less accumulated depreciation
and amortization 3,570,606 3,231,025
---------- ----------
Bank premises and equipment, net $2,752,777 $2,615,330
========== ==========
</TABLE>
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
Deposits at December 31, 1996 and 1995, consist of the
following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Non-interest bearing demand deposits $ 22,434,563 $ 19,934,570
NOW accounts 28,276,738 26,024,959
Money market deposit accounts 8,263,876 8,348,312
Savings accounts 53,772,381 55,320,762
Certificates of deposit 64,521,165 62,080,504
------------ ------------
$177,268,723 $171,709,107
============ ============
</TABLE>
Continued.........
<PAGE> 22
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE H. DEPOSITS - CONTINUED
Maturities of time certificates of deposit of $100,000 or
more outstanding at December 31, 1996 and 1995, are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
----------- -----------
<S> <C> <C>
Time remaining until maturity:
Three months or less $ 1,306,659 $ 5,259,847
Over three through six months 2,173,368 2,344,007
Over six through twelve months 2,599,663 351,000
Over twelve months 7,253,394 1,932,859
----------- -----------
$13,333,084 $ 9,887,713
=========== ===========
</TABLE>
At December 31, 1996, the scheduled maturities of time
certificates of deposit are as follows:
<TABLE>
<S> <C>
1997 $ 46,069,483
1998 11,367,187
1999 4,046,146
2000 2,174,939
2001 710,905
Thereafter 152,505
------------
$ 64,521,165
============
</TABLE>
Continued.........
<PAGE> 23
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE I. STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
In 1996 and 1995, the Board of Directors approved 5% and
10% stock dividends, respectively, 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 subsidiary, Merchants Bank.
Dividends paid by Merchants Bank to the Capital Corporation
amounted to $1,231,762, $1,022,540, and $580,520 for the years
1996, 1995 and 1994. Dividends paid by Merchants Data Services,
Inc. to the Capital Corporation amount to $-0-, $-0-, and
$559,093 for the years ended 1996, 1995 and 1994. Banking
regulations limit the amount of dividends that may be paid
without prior approval of the Bank's regulatory agency.
The Bank is subject to various regulatory capital
requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory---and possibly additional discretionary---actions by
regulators that, if undertaken, could have a direct material
effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under
regulatory accounting practices.
The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital
(as defined in the regulation) to risk-weighted assets (as
defined), and of Tier I capital (as defined) to average assets
(as defined). Management believes, as of December 31, 1996, that
the Bank meets all capital adequacy requirements to which it is
subject.
Continued.......
<PAGE> 24
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE I. STOCKHOLDERS' EQUITY AND REGULATORY MATTERS - CONTINUED
As of December 31, 1995, the most recent notification from the
Federal Reserve categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as
set forth in the table. There are no conditions or events since
that notification that management believes have changed the
institution's category.
The Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total Capital
(to Risk-Weighted Assets) $ 17,234,000 12.31% $ 11,204,400 )8.0% $ 14,005,500 )10.0%
- -
Tier I Capital
(to Risk-Weighted Assets) $ 15,688,000 11.20% $ 5,602,200 )4.0% $ 8,403,300 ) 6.0%
- -
Tier I Capital
(to Average Assets) $ 15,688,000 7.70% $ 8,154,760 )4.0% $ 10,193,450 ) 5.0%
- -
As of December 31, 1995
Total Capital
(to Risk-Weighted Assets) $ 15,855,000 12.00% $ 10,594,000 )8.0% $ 13,243,000 )10.0%
- -
Tier I Capital
(to Risk-Weighted Assets) $ 14,230,000 10.75% $ 5,297,000 )4.0% $ 7,646,000 ) 6.0%
- -
Tier I Capital
(to Average Assets) $ 14,230,000 7.27% $ 7,827,000 )4.0% $ 9,784,000 ) 5.0%
- -
</TABLE>
Continued.......
<PAGE> 25
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE J. 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
in retained earnings. The ESOP plan held 45,156 shares at 1996
and 43,020 at 1995. Contributions to all employee benefit plans
totaled $102,797 in 1996 and $100,106 in 1995.
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 post-retirement 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,
the result was an unfunded benefit plan.
Beginning in 1993, Statement on Financial Accounting
Standard (SFAS) No. 106 "Employers' Accounting for
Post-retirement Benefits Other Than Pensions" required that costs
of retiree benefits other than pensions be recognized in the
financial statements during the employees' working career.
SFAS No. 106 required that the unrecorded accumulated
post-retirement 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 post-retirement benefit costs.
The Bank has elected the delayed recognition. The unrecorded
post-retirement 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.
Continued.........
<PAGE> 26
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE J. EMPLOYEE BENEFIT PLANS - CONTINUED
The following table sets forth the plan's combined funds
status reconciled with the amount shown in the Bank's balance
sheet.
Accumulated post-retirement benefit obligation:
<TABLE>
<CAPTION>
December 31,
1996 1995
--------- ---------
<S> <C> <C>
Retirees $ 263,470 $ 392,155
Plan assets at fair value -- --
--------- ---------
Accumulated post-retirement benefit
obligation in excess of plan assets 263,470 392,155
Unrecognized transition obligation (148,809) (293,927)
--------- ---------
Accrued post-retirement benefit
cost on the balance sheet $ 114,661 $ 98,228
========= =========
</TABLE>
The Bank's post-retirement health care plan is underfunded.
Post-retirement expense includes the following components:
<TABLE>
<CAPTION>
Years ended
December 31,
1996 1995
-------- --------
<S> <C> <C>
Interest cost on accumulated
post-retirement benefit obligation $ 19,547 $ 24,183
Amortization of transition obligation
over 14 years 30,672 43,797
-------- --------
Post-retirement expense $ 50,219 $ 67,980
======== ========
</TABLE>
The accumulated post-retirement benefit obligation was
determined using an assumed discount rate of 6.00%. The assumed
health care cost trend rate used in measuring the accumulated
post-retirement benefit obligation was 4.5% in 1996, declining
ratably to an ultimate flat rate. The health care cost trend rate
assumption has a significant effect on the amounts reported.
Increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated
post-retirement benefit obligation as of December 31, 1996 by
approximately $9,000. The effect of this change on the aggregate
interest cost for 1996 would be immaterial. The supplemental
retirement benefits are assumed at a constant rate.
Continued.........
<PAGE> 27
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE K. OTHER EXPENSES
Other expenses includes the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
FDIC assessment $203,621 $215,471
General operating supplies $212,682 $214,124
Telephone $183,522 $170,495
Outside data processing $207,600 $163,867
</TABLE>
NOTE L. INCOME TAX PROVISION
The provision for income taxes included in the consolidated
statements of income is as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Current $ 1,386,677 $ 1,221,966
Deferred (10,680) (100,120)
----------- -----------
$ 1,375,997 $ 1,121,846
=========== ===========
</TABLE>
Income taxes refundable of $60,414 in 1996 is included in
other assets. Income taxes payable of $16,825 in 1995 is included
in accrued taxes and other liabilities.
Continued.........
<PAGE> 28
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE L. INCOME TAX PROVISION - CONTINUED
Deferred tax assets and liabilities at December 31,
consist of the following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 289,364 $ 258,562
Deferred compensation 43,600 39,076
Post-retirement liability 44,718 38,309
Core deposit intangible 5,307 7,155
Other real estate 8,236 5,740
Unrealized securities losses -- 5,200
--------- ---------
Total gross deferred tax asset 391,225 354,042
--------- ---------
Deferred tax liabilities:
Accretion of discounts on securities (53,966) (25,153)
Unrealized securities gains (30,000) --
Accelerated depreciation and amortization (3,959) (1,069)
--------- ---------
Total gross deferred tax liability (87,925) (26,222)
--------- ---------
Net deferred tax asset $ 303,300 $ 327,820
========= =========
</TABLE>
The provision for federal income taxes in comparison to
that computed by applying the statutory rate of 39% in 1996 and
1995, is indicated in the following analysis:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Tax based on statutory rate $ 1,560,885 $ 1,297,315
Effect of tax-exempt income (139,429) (119,630)
Accretion (19,184) (14,613)
State income tax (34,709) (28,492)
Other 8,434 (12,734)
----------- -----------
$ 1,375,997 $ 1,121,846
=========== ===========
</TABLE>
Continued........
<PAGE> 29
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE L. INCOME TAX PROVISION - CONTINUED
The Company has evaluated the need for a valuation
allowance and, based on the weight of the available evidence, has
determined that it is more likely than not that all deferred tax
assets will eventually be realized. The income tax provision
includes approximately $(19,468) in 1996 and $2,800 in 1995,
resulting from securities transactions.
NOTE M. OFF-BALANCE SHEET INSTRUMENTS
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.
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.
Continued.........
<PAGE> 30
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE M. OFF-BALANCE SHEET INSTRUMENTS- CONTINUED
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,
1996 1995
----------- -----------
<S> <C> <C>
Commitments to extend credit $24,396,757 $23,215,288
Standby letters of credit $ 2,139,573 $ 2,104,300
</TABLE>
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.........
<PAGE> 31
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE N. BUSINESS COMBINATION - CONTINUED
The following summarizes the pro forma (unaudited)
information assuming the acquisition occurred on January 1, 1995:
UNAUDITED PRO FORMA INFORMATION
<TABLE>
<CAPTION>
December 31, 1995
-----------------
<S> <C>
Net interest income $8,418,317
==========
Provision for loan losses $ 140,000
==========
Consolidated pro forma net income $2,164,143
==========
Weighted average shares outstanding 674,054
==========
Pro forma consolidated income per share $ 3.21
==========
</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 D. The distribution of commitments to extend credit
approximates the distribution of loans outstanding. Standby
letters of credit are granted primarily to commercial borrowers.
Continued.........
<PAGE> 32
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE P. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107
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
Company 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, Due From Banks and Interest-bearing Deposits With Other
Banks
Fair value equals the carrying value of such assets.
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.
Continued........
<PAGE> 33
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE P. FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
Loans, Net Allowance
For variable rate loans, those repricing within six months
or less, fair values were based on carrying values. Variable rate
loans that repriced after six months were valued using their
repricing dates. The fair value of all fixed rate loans were
based on discounted cash flows. A 10% prepayment speed was
assumed for installment loans. The prepayment speed for mortgage
loans was based on a Bloomberg estimate of loans with similar
characteristics. The fair value of mortgage loans in process of
sale approximates the carrying value, because they are sold
within 30 days. Credit card loans were assumed to mature between
one and five years and were valued using discounted cash flows.
Discount rates used to determine the present value of these loans
were based on interest rates currently 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.
Deposits
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.
Security Participations
The fair value of security participations approximates
their carrying values, because they reprice within six months or
less.
Continued.........
<PAGE> 34
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE P. FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
The estimated fair values of the Bank's financial
instruments are as follows:
<TABLE>
<CAPTION>
1996
---------------------------
Carrying Fair
Amount Value
------------ ------------
<S> <C> <C>
Financial assets:
Cash and due from banks $ 10,219,000 $ 10,219,000
Interest-bearing deposits with banks $ 87,000 $ 87,000
Federal funds sold $ 16,080,000 $ 16,080,000
Investment securities:
Available-for-sale $ 42,914,000 $ 42,914,000
Loans, net of allowance $130,864,000 $131,148,000
Financial liabilities:
Deposits $177,269,000 $177,652,000
Security participation $ 9,812,000 $ 9,812,000
Other:
Commitments to extend credit $ -- $ 24,397,000
Standby letters of credit $ -- $ 2,140,000
</TABLE>
<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 $ 0 $ 23,215,000
Standby letters of credit $ 0 $ 2,104,000
</TABLE>
Continued........
<PAGE> 35
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE Q. COMMITMENTS AND CONTINGENCIES
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.
The future minimum rental commitments for other
non-cancelable operating leases as of December 31, 1996, are as
follows:
<TABLE>
<S> <C> <C>
1997 $ 115,291
1998 115,291
1999 115,291
2000 47,124
2001 19,082
-----------
$ 412,079
===========
</TABLE>
Rental expense of approximately $91,000 in 1996 and
$79,000 in 1995, included amounts for short-term cancelable
leases and minimum rentals under non-cancelable operating leases.
Continued.......
<PAGE> 36
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
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,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS:
Cash $ 1,314,664 $ 1,165,758
Investments in Merchants Bank 16,236,154 14,772,284
Other assets 1,896 4,713
----------- -----------
$17,552,714 $15,942,755
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Other liabilities $ 548,325 $ 505,540
Stockholders' equity 17,004,389 15,437,215
----------- -----------
$17,552,714 $15,942,755
=========== ===========
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995
---------- ----------
<S> <C> <C>
REVENUES:
Dividends received-
Merchants Bank $1,231,762 $1,022,540
Interest earned 197 198
---------- ----------
1,231,959 1,022,738
EXPENSES 14,499 19,287
---------- ----------
1,217,460 1,003,451
EQUITY IN UNDISTRIBUTED EARNINGS-
Merchants Bank 1,408,813 1,201,151
---------- ----------
NET INCOME $2,626,273 $2,204,602
========== ==========
</TABLE>
Continued.........
<PAGE> 37
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE R. SUMMARIZED FINANCIAL INFORMATION OF MERCHANTS CAPITAL
CORPORATION - CONTINUED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,626,273 $ 2,204,602
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings of affiliates (1,408,813) (1,201,151)
Decrease in other assets 2,817 4,569
Decrease in other liabilities -- (1)
----------- -----------
Net cash provided by operating activities 1,220,277 1,008,019
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of fractional shares (8,184) (5,238)
Dividends paid (1,063,187) (643,521)
----------- -----------
Net cash used in financing activities (1,071,371) (648,759)
----------- -----------
INCREASE IN CASH 148,906 359,260
CASH AT BEGINNING OF YEAR 1,165,758 806,498
----------- -----------
CASH AT END OF YEAR $ 1,314,664 $ 1,165,758
=========== ===========
</TABLE>
Continued........
<PAGE> 38
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE R. SUMMARIZED FINANCIAL INFORMATION OF MERCHANTS CAPITAL
CORPORATION - CONTINUED
STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995
----------- -----------
<S> <C> <C>
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Dividends declared but not paid $ 548,325 $ 505,540
=========== ===========
Stock dividends declared $ 1,137,708 $ 1,373,985
=========== ===========
Change in unrealized gain (loss) on
securities available-for-sale,
net of deferred income taxes $ 55,057 $ (526,821)
=========== ===========
</TABLE>
<PAGE> 39
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE BUSINESS OF MERCHANTS CAPITAL CORPORATION
Merchants Capital Corporation (the Company) is comprised of one
subsidiary, Merchants Bank (the Bank) and its wholly owned subsidiary,
Merchants Credit Company.
Merchants Bank is engaged in primarily the same business operations as
any independent commercial bank, with special emphasis in retail banking,
including the acceptance of checking and saving deposits, and the making of
commercial, real estate, personal, home improvement, automobile and other
installment and term loans. The Bank also offers, among services, travelers'
cheques, safe deposit boxes, and other customary bank services to its
customers, including trust services. In addition, the Bank offers drive up
teller services, automated teller machines and night depository facilities.
Merchants Bank is insured under the Federal Deposit Insurance Act and is a
member of the Federal Reserve System.
OVERVIEW OF 1996
Merchants Capital Corporation enjoyed net income for the year 1996 of
$2.6 million compared to $2.2 million for the same period in 1995. An increase
in net interest earning assets of approximately 3.9% with a slight decrease in
net interest margin of 1.2% provided for a significant portion of the increase
in 1996. Earnings per common share were $3.71 and $3.12 for the years ended
1996 and 1995, respectively. Return on average assets was 1.29% for the current
year, and 1.18% in the same period of 1995. For the years ended 1996 and 1995,
return on average equity was 16.00% and 15.13%, respectively.
During the year 1996, in comparison with the same period of 1995,
average loans outstanding increased approximately $17 million or 15% due to an
increase loan demand. Average total deposits for the year 1996 increased $15
million or 9% when compared to average total deposits for the same period of
1995. Average total assets for the current year increased $ 16.5 million or
8.8% when compared to the total average assets of the year 1995. Average
shareholders' equity for 1996 was $16.4 million, an increase of 12.6% over the
average shareholders' equity for 1995.
EARNINGS ANALYSIS
NET INTEREST INCOME - Net interest income is the difference between
interest and fees generated from interest earning assets and the interest
expense for interest bearing liabilities and is the primary source of earning
for the Bank. For analytical purposes, net interest income is presented on a
tax equivalent basis. A 34% tax rate is used for 1996, 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 compatible
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.
<PAGE> 40
Net interest income on a fully tax equivalent basis (FTE) increased
approximately $558 thousand or 6.7%. Net interest income(FTE) for 1996 was $
8.9 million compared to $ 8.3 million for the prior year. When comparing the
results of 1995 to 1994, net interest income (FTE) increased $1.2 million or
16.6% from $7.1 million to $8.3 million.
Net Interest Income (Fully Taxable Equivalent)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Interest Income $15,684,668 $14,622,010 $11,994,485
Interest Expense 6,903,972 6,362,442 4,887,802
----------- ----------- -----------
Net Interest Income 8,780,696 8,259,568 7,106,683
Tax Equivalent Adjustment
to Interest Income 119,372 82,185 44,963
----------- ----------- -----------
Net Interest Income
(Fully Taxable Equivalent) $ 8,900,068 $ 8,341,753 $ 7,151,646
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Increase (Decrease) Increase (Decrease)
1996 to 1995 1995 to 1994
--------------- ---------------
<S> <C> <C>
Interest Income $ 1,062,658 $ 2,627,525
Interest Expense 541,530 1,474,640
--------------- ---------------
Net Interest Income 521,128 1,152,885
Tax Equivalent Adjustment
To Interest Income 37,187 37,222
--------------- ---------------
Net Interest Income
(Fully Taxable Equivalent) $ 558,315 $ 1,190,107
=============== ===============
</TABLE>
EARNING ASSETS, INTEREST BEARING LIABILITIES, AND NET INTEREST SPREAD
- - Average earning assets increased $15 million or 8.5% to $190 million during
1996. Average earning assets were $175 million in 1995 and $162 million in
1994. The trend in earning assets over the years compared shows a shift in the
mix of earning assets toward the loan portfolio from the securities portfolio
as shown in the table Average Earning Asset Structure. Management has
strategized to increase the Bank's earning asset mix to include a greater
percentage of higher yielding loans over lower yielding securities. Management
believes the greater loan demand will exist in the near future due to
opportunities that were non-existent over the last decade caused by economic
challenges experienced in the west central portion of the State of Mississippi.
However, there is no guarantee that the Bank will continue to experience the
loan growth enjoyed over the last twelve months. The current loan demand, in
the Bank's primary market area, appears to be the result of an improving
economic climate and lower interest rates compared to years past. The trend
over the years compared shows the mix of interest bearing liabilities shifted
to higher interest bearing certificates of deposit, security participations and
interest bearing deposits from lower interest bearing savings. The growth is
attributed to a concerted effort by the Bank to attract a broader core deposit
base consisting of commercial and personal customers.
<PAGE> 41
Average Earning Asset Structure
In Thousands
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Average % of Average % of Average % of
Balances Assets Balances Assets Balances Assets
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Time Deposits $ 548 0.29% $ 383 0.22% $ -- 0.00%
Federal Funds Sold 7,867 4.14% 6,718 3.83% 8,186 5.06%
Securities
Taxable 47,118 24.77% 51,728 29.51% 55,611 34.34%
Non-taxable 4,026 2.12% 2,747 1.57% 1,394 0.86%
Loans - Net 130,637 68.68% 113,729 64.87% 96,743 59.74%
-------- ------ -------- ------ -------- ------
Total Average Earning Assets $190,196 100.00% $175,305 100.00% $161,934 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
Average Deposit Structure
In thousands
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
% Of % Of % Of
Average Earning Average Earning Average Earning
Balances Deposits Balances Deposits Balances Deposits
-------- ------ -------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Noninterest Bearing Deposits $ 20,933 11.26% $ 20,162 11.78% $ 19,755 12.30%
Interest Bearing Deposits 76,328 41.06% 71,353 41.69% 57,542 35.82%
Savings Accounts 11,866 6.38% 12,274 7.17% 13,474 8.39%
Security Participations 10,944 5.89% 7,093 4.14% 5,357 3.33%
Certificates of Deposits less than $100,000 52,480 28.23% 50,395 29.44% 57,989 36.10%
-------- ------ -------- ------ -------- ------
Total Average Core Deposits 172,551 92.83% 161,277 94.22% 154,117 95.93%
Certificates of Deposits greater than $100,000 13,333 7.17% 9,888 5.78% 6,532 4.07%
-------- ------ -------- ------ -------- ------
Total Average Deposits $185,884 100.00% $171,165 100.00% $160,649 100.00%
======== ====== ======== ====== ======== ======
Average Interest Bearing Liabilities
as a percentage of Earning Assets 86.73% 86.14% 87.00%
Average Core Deposits
as a percentage of Total Average Assets 84.69% 86.13% 87.91%
</TABLE>
For the year ended 1996, the average yield on earning assets was
8.31%, while the average cost of interest bearing funds was 4.19%, producing a
net interest spread (FTE) of 4.12%. The net interest margin (FTE) was 4.67% for
the year ended 1996. In comparison, the net interest margin (FTE) for the year
ended 1995 was 4.76%. The increase in net interest income resulted from mainly
a greater increase in the volume of loans than the increase in the volume of
interest bearing liabilities with a slight decrease in yield for both interest
bearing assets and liabilities.
The table of Average Balance Sheets and Interest Rate Analysis for the
periods ended December 31, 1996, December 31, 1995, and December 31, 1994 and
the corresponding table of Interest Differentials detail the effect a change in
average balances outstanding and the change in interest yield and costs have on
net interest income for the respective periods. Also, the tables of Average
Earning Asset Structure and Average Deposit Structure show a more condensed,
descriptive analysis of the common size percentage changes in average earning
assets and average deposit mix over the annual periods analyzed.
<PAGE> 42
AVERAGE BALANCE SHEETS AND INTEREST RATE ANALYSIS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996
------------------------------------
Average Income/ Yield/
ASSETS Balance Expense Rate
------------- ------------- ----
<S> <C> <C> <C>
Loans (1) (2) $ 130,637,173 $ 12,336,854 9.44%
------------- ------------- ----
Investment Securities:
U. S. government & other 46,210,934 2,617,004 5.66%
State & municipal (3) 4,025,673 351,095 8.72%
Other securities 907,042 53,768 5.93%
------------- ------------- ----
Total investment securities 51,143,649 3,021,867 5.90%
Federal funds sold 7,867,210 406,894 5.17%
Time Deposits 547,841 38,425 7.01%
------------- ------------- ----
Total earning assets 190,195,873 15,804,040 8.31%
Allowance for loan losses (1,590,744)
Cash & Due from banks 6,808,281
Bank premises & equipment 2,784,454
Market Value Adjustment - Investments (60,061)
Other assets 5,600,609
-------------
TOTAL ASSETS $ 203,738,412
=============
</TABLE>
<TABLE>
<CAPTION>
Average Income/ Yield/
LIABILITIES AND STOCKHOLDERS' EQUITY Balance Expense Rate
------------- ------------- ----
<S> <C> <C> <C>
Interest bearing deposits:
Interest bearing deposits $ 76,327,557 $ 2,879,027 3.77%
Savings 11,866,057 299,077 2.52%
Certificates of deposit 65,813,116 3,352,860 5.09%
------------- ------------- ----
Total interest bearing deposits 154,006,730 6,530,964 4.24%
Other borrowings 10,944,299 373,008 3.41%
------------- ------------- ----
Total interest bearing liabilities 164,951,029 6,903,972 4.19%
Non-interest bearing deposits 20,932,669
Other liabilities 1,442,504
Stockholders' equity 16,412,210
-------------
Total liabilities and
stockholders' equity $ 203,738,412
=============
Net Interest Income -
Tax Equivalent Basis $ 8,900,068
Tax Equivalent Adjustment (119,372)
-------------
Net Interest Income $ 8,780,696
=============
Interest income and rate earned $ 15,804,040 8.31%
Interest expense and rate paid 6,903,972 4.19%
------------- ----
Interest rate spread 4.12%
====
NET INTEREST INCOME & NET YIELD ON
AVERAGE EARNING ASSETS $ 8,900,068 4.67%
============= ====
</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 1996, 1995 and 1994
<PAGE> 43
<TABLE>
<CAPTION>
1995 1994
- --------------------------------------------------- ---------------------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- ------------ ----------- ---- ------------ ----------- ----
<C> <C> <C> <C> <C> <C>
$113,729,061 $10,987,315 9.66% $ 96,743,302 $ 8,508,833 8.80%
- ------------ ----------- ---- ------------ ----------- ----
50,886,807 2,990,707 5.88% 54,816,316 3,024,660 5.52%
2,746,504 241,720 8.80% 1,394,159 132,244 9.49%
841,010 54,827 6.52% 794,650 40,245 5.06%
- ------------ ----------- ---- ------------ ----------- ----
54,474,321 3,287,254 6.03% 57,005,125 3,197,149 5.61%
6,718,178 391,352 5.83% 8,185,720 333,466 4.07%
383,125 38,274 9.99% 0 0 0
- ------------ ----------- ---- ------------ ----------- ----
175,304,685 14,704,195 8.39% 161,934,147 12,039,448 7.43%
(1,716,222) (1,285,600)
6,766,234 7,783,703
2,573,162 2,526,689
(445,454) (386,913)
4,763,441 4,739,051
- ------------ ------------
$187,245,846 $175,311,077
============ ============
</TABLE>
<TABLE>
<CAPTION>
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- ------------ ----------- ---- ------------ ----------- ----
<C> <C> <C> <C> <C> <C>
$ 71,352,976 $ 2,780,065 3.90% $ 57,541,508 $ 1,829,304 3.18%
12,274,310 341,931 2.79% 13,474,285 366,257 2.72%
60,283,289 3,000,899 4.98% 64,521,363 2,550,406 3.95%
- ------------- ----------- ---- ------------ ----------- ----
143,910,575 6,122,895 4.25% 135,537,156 4,745,967 3.50%
7,093,189 239,547 3.38% 5,356,637 141,835 2.65%
- ------------- ----------- ---- ------------ ----------- ----
151,003,764 6,362,442 4.21% 140,893,793 4,887,802 3.47%
20,161,526 19,755,334
1,508,526 936,280
14,572,030 13,725,670
- ------------- ------------
$ 187,245,846 $175,311,077
============= ============
$ 8,341,753 $ 7,151,646
(82,185) (44,963)
----------- -----------
$ 8,259,568 $ 7,106,683
=========== ===========
$14,704,195 8.39% $12,039,448 7.43%
6,362,442 4.21% 4,887,802 3.47%
----------- ---- ----------- ----
4.17% 3.97%
==== ====
$ 8,341,753 4.76% $ 7,151,646 4.42%
=========== ==== =========== ====
</TABLE>
<PAGE> 44
The following table (Interest Differentials) provides additional
information relating to the effect change in interest yield has on net income:
INTEREST DIFFERENTIALS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996/1995
--------------------------------------------------------
Change in Change in Changes in Total
Volume Rate Rate/Volume Change
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest Earning Assets
Federal Funds Sold $ 66,934 $ (43,887) $ (7,505) $ 15,542
Securities:
Taxable (274,809) (108,900) 10,007 (373,702)
Nontaxable 112,580 (2,186) (1,018) 109,376
Other securities 4,305 (4,974) (391) (1,060)
Time deposits 16,455 (11,402) (4,902) 151
Loans 1,633,485 (247,196) (36,751) 1,349,538
----------- ----------- ----------- -----------
Total Interest Income 1,558,950 (418,545) (40,560) 1,099,845
----------- ----------- ----------- -----------
Interest Bearing Liabilities
Interest Bearing Deposits 193,820 (88,678) (6,180) 98,962
Savings (11,373) (32,564) 1,083 (42,854)
Certificates of Deposits 275,275 70,243 6,443 351,961
Other Borrowings 130,057 2,206 1,198 133,461
----------- ----------- ----------- -----------
Total Interest Expenses 587,779 (48,793) 2,544 541,530
----------- ----------- ----------- -----------
Increase (Decrease) in
Interest Differential $ 971,171 $ (369,752) $ (43,104) $ 558,315
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1995/1994
--------------------------------------------------------
Change in Change in Changes in Total
Volume Rate Rate/Volume Change
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest Earning Assets
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
=========== =========== =========== ===========
</TABLE>
<PAGE> 45
PROVISION FOR LOAN LOSSES
Provision for loan losses was $320 thousand for 1996, an increase of
$180 thousand from the provision for loan losses of $140 thousand for 1995. Net
chargeoffs were $241 thousand for 1996 as compared to net recoveries of $54
thousand for 1995. As a percentage of average loans net chargeoffs (recoveries)
were .18% in 1996 and (.05%) in 1995. Gross charge offs were .41% in 1996 and
.21% in 1995. Recoveries as a percentage of gross chargeoffs were 55% in 1996
and 122.7% in 1995.
The provision for loan losses in 1994 was $190 thousand. In 1994 net
chargeoffs were $150 thousand, or .15% of average loans. Gross charge offs were
.36% of average loans and recoveries were 57.38% of gross charge offs. More
specifics can be found in the sections entitled Allowance for Loan Losses and
Nonperforming Assets.
OTHER INCOME
Other income for 1996 was $2.7 million, compared to $2.2 million in
1995. Exclusive of security transactions other income increased $535 thousand.
Service charges on deposit accounts were $1.1 million for 1996, an
increase of $88 thousand or 9% over 1995. Service charges on deposit accounts
were $985 thousand in 1995. The primary reasons for the increase in 1996 was an
increased number of deposit accounts.
Fees for other customer services were $850 thousand for 1996, an
increase of $ 359 thousand or 73% over 1995. Fees for other customer services
were $491 thousand in 1995. Included in fees for other customer services are
ATM charges, release fees on mortgage loans sold, fees for originating credit
life insurance for underwriters and Visa/Mastercard handling charges for
merchants. One reason for the increase in 1996, was an increase in the number
of ATM machines owned or leased by the Bank and the ability, due to improved
technology of ATM's, to collect foreign fees from noncustomers utilizing the
Bank's ATM machines. ATM related charges increased $230 thousand from 1995 to
1996. The other reason is the doubling of mortgage loan closures from 1996 to
1995. Release fees on mortgage loans sold increased to $234 thousand in 1996
from $109 thousand in 1995.
Trust fees increased $21 thousand or 5% from 1995 largely due to
growth in the number of accounts managed by the trust department since 1995 and
asset value of the related trust accounts. The trust department of the Bank
provides asset management services for its trust customers. The trust
department has over $59,000,000 in assets under its administration.
Net investment securities losses decreased other income by $50
thousand for 1996, compared to a net gain on investment securities of $8
thousand in 1995. Transactions for both years, though small in the number of
transactions, were mainly to reposition the Bank's portfolio for the
possibility of a changing investment environment and the growth experienced in
the loan portfolio.
Other operating income for 1996 was $386 thousand compared to the 1995
total of $320 thousand. 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. The primary factor contributing to the increase of $66 thousand for
1996 was the providing of computer services for three outside entities for the
entire year as compared to fewer numbers in 1995.
<PAGE> 46
OTHER EXPENSES
Other expenses totaled $7.1 million in 1996, a 2% increase over the
1995 total of $7 million. Salary and employee benefits increased $161 thousand
or 4%, to $3.7 million for 1996 when compared to $3.6 million for 1995. This
increase is due to an increase in the number of employees, mainly part-time,
plus the effects of employee and management raises for 1996.
Net occupancy expense was $551 thousand for 1996, versus $513 thousand
for 1995, an increase of $38 thousand or 7%. The Bank realized the effect on
renegotiated operating lease increases during 1995 which amounted to an
increase of $12 thousand. The other factor contributing to this increase was a
$25 thousand increase in utility cost for the bank buildings.
Equipment expense totaled $561 thousand for 1996 as compared to $615
thousand in 1995. This $54 thousand or 9% decrease is mainly attributed to
depreciation expense declining in the later years of the Bank's equipment.
Other operating expenses totaled $2.238 million for 1996 compared to
$2.242 for 1995, a decrease of $4 thousand or .19%. For further analysis of
other operating expense see Note K.
APPLICABLE INCOME TAXES
Applicable income taxes for 1996 was $1.4 million, $1.1 million and
$750 thousand for 1995 and 1994, respectively, producing an effective tax rate
of 34%, 34%, 35%, respectively. The Company's effective income tax expense as a
percentage of pretax income is different from statutory rates (34% Federal and
5% State) because of tax-exempt income and the related nondeductible interest
expense. A portion of the Bank's interest income is from investments in state
and municipal bonds and is generally exempt from federal and state income
taxes.
LIQUIDITY
Liquidity management is the process of ensuring that the Bank's asset
and liability structure is the proper mix to meet the withdrawals of its'
depositors, and to fund loan commitments and other funding requirements.
Management's primary source of fund is the Bank's core deposit base. At
December 31, 1996, the average core deposits were approximately $173 million or
93% of total average deposits and 85% of total average assets. For a comparison
with prior period year ends, see the table entitled Average Deposit Structure.
Other sources of liquidity are maturities in the investment portfolio and loan
maturities and repayments . Management continually evaluates the maturities and
mix of its earning assets and interest-bearing liabilities to monitor its
ability to meet current and future obligations and to achieve maximum net
interest income. Due to the stability of the core deposit base as noted above
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.
<PAGE> 47
INTEREST RATE RISK
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
unforeseen, shifts in overall interest rates.
Management utilized computerized interest rate simulation analysis as
its primary measure of interest rate sensitivity. Management's analysis
indicates that the Bank is asset sensitive for the next five years. 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. An asset sensitive company will benefit from a rising interest rate
environment as the yields on earning assets rise faster than 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, 1996.
<TABLE>
<CAPTION>
0-90 91-365 1 Year- Over 5 Non-
Days Days 5 Years Years Sensitive Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Assets
Securities $ 16,179 $ 8,275 $ 15,616 $ 2,767 $ 42,837
Loans, Net of
Unearned Income 46,917 34,702 40,977 8,268 130,864
Federal Funds Sold 16,080 16,080
Other Assets 16,282 16,282
--------- --------- --------- --------- --------- ---------
Total Assets $ 79,176 $ 42,977 $ 56,593 $ 11,035 $ 16,282 $ 206,063
========= ========= ========= ========= ========= =========
Liabilities
Interest Bearing
Deposits $ 44,049 $ 2,207 $ 22,042 $ 11,021 $ 79,319
Savings Deposits 3,664 4,886 2,444 10,994
Certificates of
Deposits 21,181 26,314 16,905 121 64,521
Demand Deposits 22,435 22,435
Other Liabilities 6,541 3,271 1,977 11,789
Stockholders' Equity 17,005 17,005
--------- --------- --------- --------- --------- ---------
Total Liabilities
and Stockholders'
Equity $ 75,435 $ 28,521 $ 43,833 $ 16,857 $ 41,417 $ 206,063
========= ========= ========= ========= ========= =========
Interest Rate
Sensitivity Gap $ 3,741 $ 14,456 $ 12,760 $ (5,822) $ (25,135)
Cumulative Interest
Rate Sensitivity Gap $ 3,741 $ 18,197 $ 30,957 $ 25,135 $ -0-
</TABLE>
<PAGE> 48
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 and
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.
FINANCIAL INSTRUMENTS
In the normal course of business the Bank enters into agreements
which, for accounting purposes, are considered off-balance sheet activities.
These agreements are loans and lines of credit commitments to customers to
extend credit at specified rates, duration and purpose. The commitments adhere
to normal lending policy, collateral requirements, and credit reviews.
Available loan commitments as of December 31, 1996 were $24 million and $23
million at December 31, 1995. The Bank has letters of credit of $2 million
issued at December 31, 1996. Additionally, the Bank has deposit customers who
have credit lines available to them through their deposit accounts. At December
31, 1996 the available portion of these credit lines was $166 thousand. These
credit lines are immediately cancelable by the Bank. The credit lines provide a
source of income to the Bank through service fees charged and interest earned
on balances outstanding. The credit lines are reviewed regularly and do not
pose a material credit risk to the Bank. To date the Bank does not have
instruments outstanding that can be specifically described as a financial
guarantee which guarantees the performance of a customer to a third party other
than the financial standby letters of credit described above.
The Bank began issuing credit cards during 1989. As of December 31,
1996 the aggregate credit available is $6.4 million, and $5.7 million at
December 31, 1995. Applicants are reviewed through normal lending policies and
credit reviews.
The Bank is not a party to financial instruments defined as interest
rate exchange agreements, financial futures, or financial options. Therefore,
the Bank is not exposed to interest rate risk in excess of the amount
recognized in the consolidated balance sheets as that risk may apply to
interest rate exchange agreements, financial futures, or financial options.
LOANS
An analysis of the loan portfolio at December 31, 1996, 1995, 1994,
1993 and 1992, is as follows:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Commercial, industrial and agricultural $104,628,274 $100,461,319 $ 77,687,198 $ 67,288,411 $ 65,186,727
Real estate - construction 5,742,457 8,206,698 4,061,067 5,690,354 4,631,206
Real estate - mortgage 8,567,614 4,279,069 3,988,030 3,629,264 3,969,913
Installment 15,160,530 16,339,010 16,853,099 16,666,710 19,513,937
------------ ------------ ------------ ------------ ------------
$134,098,875 $129,286,096 $102,589,394 $ 93,274,739 $ 93,301,783
============ ============ ============ ============ ============
</TABLE>
<PAGE> 49
The following is the detail of maturities and sensitivity of loans to
changes in interest rates at December 31, 1996
<TABLE>
<CAPTION>
December 31, 1996 Loans to Mature
---------------------------------
Less than One to Greater than
One Year Five Years Five Years Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Commercial $48,570,385 $51,100,485 $ 3,446,967 $103,117,837
----------- ----------- ------------ ------------
Mortgage 1,025,747 2,888,524 4,653,343 8,567,614
----------- ----------- ------------ ------------
Installment 5,341,464 9,812,614 6,452 15,160,530
----------- ----------- ------------ ------------
Total $54,937,596 $63,801,623 $ 8,106,762 $126,845,981
=========== =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
Loans Due After One Year at December 31, 1996
Interest Rates
----------------------------------
Predetermined Adjustable Total
------------- ----------- ------------
<S> <C> <C> <C>
Commercial $ 46,836,672 $7,710,780 $ 54,547,452
------------- ----------- ------------
Mortgage 4,182,816 3,359,051 7,541,867
------------- ----------- ------------
Installment 9,819,066 -- 9,819,066
------------- ----------- ------------
Total $ 60,838,554 $11,069,831 $ 71,908,385
============= =========== ============
</TABLE>
The Company has no foreign loans.
SECURITIES
The following is the detail of maturities and weighted average yield
for each maturity group at December 31, 1996.
<TABLE>
<CAPTION>
December 31, 1996
-----------------
Weighted
Average Book
Yield Value
--------- -----------
<S> <C> <C>
U.S. Government Securities:
Within 1 year 5.45% $ 3,009,595
After 1 year, but within 5 years 6.05% 5,218,127
After 5, but within 10 years 0.00% --
After 10 years 0.00% --
--------- -----------
Total U.S. Government Securities 5.83% $ 8,227,722
========= ===========
Securities of U.S. Government
Agencies and Corporations:
Within 1 year 5.40% 16,978,063
After 1 year, but within 5 years 6.32% 6,167,023
After 5, but within 10 years 6.92% 2,677,109
After 10 years 6.67% 4,278,736
--------- -----------
Total Securities of
U.S. Government Agencies
and Corporations 5.90% $30,100,931
========= ===========
</TABLE>
<PAGE> 50
SECURITIES - CONTINUED
<TABLE>
<CAPTION>
Weighted
Average Book
Yield Value
------- ----------
<S> <C> <C>
Obligations of States and Political
Subdivisions' pre tax yields:
Within 1 year 4.79% 454,912
After 1 year, but within 5 years 5.23% 1,301,430
After 5, but within 10 years 6.34% 1,517,751
After 10 years 5.52% 310,000
------- ----------
Total Obligations of States
and Political Subdivisions 5.67% $3,584,093
======= ==========
Other Securities-
Stocks of The Federal Reserve Bank 5.80% 924,200
------- ----------
Total Other Securities 5.80% $ 924,200
======= ==========
</TABLE>
An analysis of the investment portfolio at December 31, 1996, 1995,
and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
U.S. Treasury and other U. S. Government
agencies and corporations $27,960,431 $36,064,435 $26,605,864
Mortgage-backed securities 10,368,222 12,696,096 16,086,115
States and political subdivisions 3,584,093 2,952,694 1,240,240
Other securities 924,200 844,350 794,650
----------- ----------- -----------
$42,836,946 $52,557,575 $44,726,869
=========== =========== ===========
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses was $1.545 million at year end 1996 or
1.15% of total loans outstanding. At year end 1995, the allowance for loan
losses was $1.467 million or 1.13% of total loans outstanding. The allowance
for loan losses account represent amounts available for possible future losses
based on modeling and 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 functions and
management's knowledge of the Bank's borrowers, the allowance for loan losses
in management's judgment, is adequate to absorb potential loan losses based on
current review of the quality of the loan portfolio. The Bank has established
the balances in the allowance for loan losses in order to absorb any adverse
loan relationships which have the potential to occur. As the Bank's loan volume
continues to increase, so does the potential to experience loan losses at a
rate greater than the Bank's historical loan loss experience.
<PAGE> 51
Activity in the allowance for loan losses, below, presents an analysis
of activity in the allowance for loan losses for the past five years.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Beginning balance $ 1,466,840 $ 1,273,160 $ 1,232,880 $ 1,431,262 $ 1,310,960
Loans charged off
Commercial, industrial and agricultural 292,853 81,055 144,313 341,304 361,278
Installment and others 237,048 155,555 206,966 219,271 312,082
Mortgage 8,746 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total Charged off 538,647 236,610 351,279 560,575 673,360
Loan Recoveries
Commercial, industrial and agricultural 161,605 198,617 75,307 108,837 150,518
Installment and others 136,022 91,673 126,252 153,356 143,144
Mortgage -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total Recoveries 297,627 290,290 201,559 262,193 293,662
Net loans charged off 241,020 (53,680) 149,720 298,382 379,698
Provision charged to expense 320,000 140,000 190,000 100,000 500,000
----------- ----------- ----------- ----------- -----------
Ending Balance $ 1,545,820 $ 1,466,840 $ 1,273,160 $ 1,232,880 $ 1,431,262
=========== =========== =========== =========== ===========
</TABLE>
NONPERFORMING ASSETS
Nonperforming assets include nonaccrual and impaired loans and other
real estate. Loans are considered for nonaccrual when the principal or interest
becomes 90 days past due or when there is uncertainty about the repayment of
principal and interest in accordance with the terms of the loans. Nonaccrual
loans at December 31, 1996 , were $1 million and $762 thousand at December 31,
1995. Loans past due 90 days and still accruing at December 31, 1996 and 1995
were $477 thousand and $181 thousand, respectively. At December 31, 1996,
nonaccrual loans were .82% of gross loans outstanding and 71% of the allowance
for loan losses. At December 31, 1995, these ratios were .59% and 51.9 %,
respectively.
The following table presents information on the amount of
nonperforming loans at December 31, 1996, 1995, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Nonaccrual $1,100,000 $ 762,000 $ 668,000 $ 493,000 $1,316,000
Accruing loans past due 90 days or more 477,000 181,000 36,000 184,000 334,185
Trouble debt restructurings 462,351 228,000 303,342 -- 250,933
</TABLE>
In the process of reviewing the loan portfolio, management acknowledge
certain potential problem loans which are not classified as impaired,
nonaccural, greater than 90 days delinquent, or restructured. Management does
not feel that any of these potential problem loans are reasonably likely to
have or will have a material effect on the Bank's liquidity, capital resources,
or results of operations.
Other real estate is properties held for sale acquired through
foreclosure or negotiated settlements of debt. Other real estate decreased $10
thousand during 1996. At December 31, 1996 and 1995, other real estate was $129
thousand and $139 thousand, respectively. Improvements in commercial real
estate and general economic conditions, which allowed for a $30 thousand gain
on disposition of previously foreclosed properties were the primary factors in
the decline.
<PAGE> 52
As of December 31, 1996, the Bank 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.
REGULATORY MATTERS
The Bank is subject to various capital requirements administered by
the Federal Banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly discretionary - actions by regulators
that, if undertaken, could have a material effect on the Bank's financial
statements. Various regulations require the Bank to meet specific capital
adequacy guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital classification is also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum amounts and ratios as set
forth in the section entitled Capital Adequacy below.
Management is unaware, based on recent regulatory examinations or
otherwise, of any known trends, events or uncertainties which are reasonably
likely to have or will have a material effect on the Company's liquidity,
capital resources, or results of operations
CAPITAL ADEQUACY
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 stock. Management feels the
current trend of earnings and dividend distribution is sufficient to maintain
its capital adequacy requirements.
Some of the more significant ratios are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Return on assets 1.29% 1.18% .80%
Return on equity 16.00% 15.13% 10.21%
Dividend payout 42.00% 45.00% 43.00%
Equity to assets 8.06% 7.78% 7.83%
</TABLE>
The Bank is required to maintain minimum amounts of capital to total
risk-weighted assets, as defined by the regulators. The guideline requires
total capital of 8.00%, half of which must be Tier 1 capital. The computation
of risk-weighted ratios follow the transitional rule, which currently does not
include the unrealized gain (loss) on securities available for sale in Tier 1
Capital.
The leverage ratio consists of Tier 1 capital as a percentage of
average total assets. The minimum leverage ratios for all banks and bank
holding companies is 3.00%. This minimum ratio is dependent upon the strength
of the individual bank or holding company and may be increased by regulatory
authorities on an individual basis. The 3.00% minimum was established to make
certain that all banks have a minimum capital level to support their assets,
regardless of risk profile. The regulators have not yet established minimum
leverage ratios for the Company. As shown in the table Capital Adequacy Ratios,
the Bank's ratios for the reporting periods exceed regulatory minimums.
<PAGE> 53
The Company dividends are determined by its Board of Directors. The
current policy is to maintain dividends at a level which ensures the Company
and Bank are able to maintain sufficient regulatory capital levels. The
Company's primary source of funds is dividends received from the Bank. Under
current regulations, the Bank is required to get regulatory approval prior to
the payment of any dividends. The Company carries no debt; therefore, future
liquidity needs are limited to the payment of any declared dividends.
Capital Adequacy Ratios
(In Thousands)
<TABLE>
<CAPTION>
December 31,
1996 1995
---------- ----------
<S> <C> <C> <C>
Tier 1 Capital $ 15,688 $ 14,230
Total Capital 17,234 15,885
Risk Weighted Ratios:
Tier 1 Capital 11.20% 10.75%
Total Capital 12.31% 12.00%
Leverage Ratio 7.70% 7.27%
</TABLE>
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.
PRINCIPAL MARKETS AND PRICES OF THE COMPANY'S STOCK
The Company had 535 stockholders as of December 31, 1996. 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 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 1995 and 1996 are
presented below.
<TABLE>
<CAPTION>
Period 1995 Dividends per Share
----------- -------------------
<S> <C>
First Quarter .22
Second Quarter .24
Third Quarter .24
Fourth Quarter .71
</TABLE>
<PAGE> 54
<TABLE>
<CAPTION>
Period 1996 Dividends per Share
----------- -------------------
<S> <C>
First Quarter .24
Second Quarter .275
Third Quarter .275
Fourth Quarter .775
</TABLE>
Federal and State law applicable to banks generally restricts the
amount of cash dividends that a bank may pay. See "Capital Adequacy" portion of
the Management's Discussion and Analysis.
SEC FORM 10-KSB
A copy of the annual report on Form 10-KSB, to be filed with the
Securities and Exchange Commission, may be obtained without charge by directing
a written request to:
Arthur R. Bardwell
Comptroller
P. O. Box 871
Vicksburg, MS 39181
<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).
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE MERCHANTS CAPITAL
AND SUBSIDIARY'S CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT 12/31/96 AND
THE CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED 12/31/96 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,219
<INT-BEARING-DEPOSITS> 87
<FED-FUNDS-SOLD> 16,080
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,914
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 132,410
<ALLOWANCE> 1,546
<TOTAL-ASSETS> 206,063
<DEPOSITS> 177,269
<SHORT-TERM> 9,812<F1>
<LIABILITIES-OTHER> 1,978
<LONG-TERM> 0
0
0
<COMMON> 3,538
<OTHER-SE> 13,467
<TOTAL-LIABILITIES-AND-EQUITY> 206,063
<INTEREST-LOAN> 12,337
<INTEREST-INVEST> 2,941
<INTEREST-OTHER> 407
<INTEREST-TOTAL> 15,685
<INTEREST-DEPOSIT> 6,531
<INTEREST-EXPENSE> 6,904
<INTEREST-INCOME-NET> 8,781
<LOAN-LOSSES> 320
<SECURITIES-GAINS> (50)
<EXPENSE-OTHER> 7,135
<INCOME-PRETAX> 4,002
<INCOME-PRE-EXTRAORDINARY> 4,002
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,626
<EPS-PRIMARY> 3.71
<EPS-DILUTED> 3.71
<YIELD-ACTUAL> 4.67
<LOANS-NON> 1,100
<LOANS-PAST> 477
<LOANS-TROUBLED> 462
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,467
<CHARGE-OFFS> 539
<RECOVERIES> 298
<ALLOWANCE-CLOSE> 1,546
<ALLOWANCE-DOMESTIC> 1,546
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Short-term borrowings include the following:
Securities sold under repurchase agreements 9,812
Other short-term borrowings 0
Total 9,812
Other liabilities include the following:
Accounts payable and accrued expenses 1,430
Other liabilities 548
Total 1,978
Other interest income includes the following:
Interest-bearing deposits with banks 0
Federal funds sold 407
Securities purchased under resale agreements 0
Securities borrowed 0
Total 407
</FN>
</TABLE>
