<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For Quarter ended June 30, 1998 COMMISSION FILE NUMBER 0-10898
------------------ ---------
MERCHANTS CAPITAL CORPORATION
------------------------------
(Exact name of registrant as specified in charter)
MISSISSIPPI 64-0655603
- -------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
820 South Street
Vicksburg, Mississippi 39180
- -------------------------------- --------------------
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (601) 636-3752
--------------------
Not Applicable
- -------------------------------------------------------------------------------
Former name, former address and former fiscal year; if changed since last
report
Indicate by check mark whether the registrants (1) has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
742,651 common shares were outstanding as of June 30, 1998.
1
<PAGE> 2
MERCHANTS CAPITAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
Number
<S> <C> <C>
Part 1. Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition 3
June 30, 1998 (Unaudited) and December 31, 1997
(Unaudited)
Consolidated Statements of Income, Three Months 4
Ended and Six Months Ended June 30, 1998 and 1997
(Unaudited)
Consolidated Statements of Changes in Stockholders' 5
Equity, Six Months Ended June 30, 1998 and
1997 (Unaudited)
Consolidated Statements of Cash Flows 6
Six Months Ended June 30, 1998 and 1997
(Unaudited)
Notes to Consolidated Financial Statements 7
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Part 2. Other Information
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
2
<PAGE> 3
MERCHANTS CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30, 1998 Dec. 31, 1997
(Unaudited) (Unaudited)
--------------- -------------
<S> <C> <C>
ASSETS:
Cash & due from banks $9,539,798 $10,084,731
Federal funds sold 15,598,185 3,473,703
Investment securities:
Available-for-sale 53,422,321 68,151,857
Loans - net 137,637,058 136,238,338
Bank premises & equipment - net 2,515,380 2,698,060
Other real estate 80,389 181,280
Accrued interest receivable 2,153,049 1,997,240
Other assets 782,144 721,154
Premuim paid on purchased assets &
deposits less amortization 427,767 452,333
------------- -------------
TOTAL ASSETS $222,156,091 $223,998,696
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing deposits $22,157,839 $25,378,217
Interest bearing deposits 162,629,166 165,757,406
------------- -------------
Total Deposits 184,787,005 191,135,623
Securities Sold Under Repurchase Agreement 16,311,238 11,921,483
Accrued interest payable 809,519 903,348
Accrued taxes and other liabilities 583,813 1,418,982
------------- -------------
TOTAL LIABILITIES 202,491,575 205,379,436
STOCKHOLDERS' EQUITY:
Common stock, $5 par value per share:
Authorized - 1,000,000 shares
Issued & outstanding 742,651 shares 3,713,255 3,713,255
Additional paid-in capital 13,877,419 13,877,419
Retained earnings 1,931,561 941,020
Accumulated other comprehensive income
Unrealized gain on securities 142,281 87,566
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 19,664,516 18,619,260
------------- -------------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $222,156,091 $223,998,696
============= =============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
MERCHANTS CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Interest Income: ---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Interest and fees on loans $ 3,279,959 $ 3,141,746 $ 6,553,645 $ 6,165,330
Interest on investment securities
Taxable interest income 801,141 858,695 1,685,343 1,641,001
Interest income exempt from
federal income taxes 52,866 44,745 101,162 91,599
Interest on federal funds sold 82,459 113,592 155,231 224,356
----------- ----------- ----------- -----------
TOTAL INTEREST INCOME 4,216,425 4,158,778 8,495,381 8,122,286
Interest Expense:
Interest on deposits 1,688,156 1,681,500 3,433,501 3,311,399
Interest on fed funds pur & sec sold u/repo 172,941 173,337 320,800 320,927
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE 1,861,097 1,854,837 3,754,301 3,632,326
----------- ----------- ----------- -----------
NET INTEREST INCOME 2,355,328 2,303,941 4,741,080 4,489,960
Provision for loan losses 105,000 105,000 210,000 210,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,250,328 2,198,941 4,531,080 4,279,960
Other Income:
Service charges on deposits 407,884 408,538 810,428 789,193
Trust service income 139,016 114,680 265,156 218,053
Insurance premium and commissions 142,363 153,036 272,007 289,292
Other 38,669 57,891 91,181 119,254
----------- ----------- ----------- -----------
TOTAL OTHER INCOME 727,932 734,145 1,438,772 1,415,792
Other Expenses:
Salaries 782,126 780,272 1,577,997 1,563,608
Employee benefits 153,021 168,909 325,440 360,488
Net occupancy expense 121,946 119,126 246,100 250,346
Equipment expense 145,085 144,798 293,951 279,259
Other 634,503 624,857 1,343,908 1,169,412
----------- ----------- ----------- -----------
TOTAL OTHER EXPENSES 1,836,681 1,837,962 3,787,396 3,623,113
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,141,579 1,095,124 2,182,456 2,072,639
INCOME TAX PROVISION 384,984 298,292 727,758 625,908
----------- ----------- ----------- -----------
NET INCOME $ 756,595 $ 796,832 $ 1,454,698 $ 1,446,731
Other comprehensive income before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period 39,518 150,328 89,696 21,684
Less: Reclassification adjustment for
gain included in net income 0 0 0 (12,309)
----------- ----------- ----------- -----------
OTHER COMPREHENSIVE INCOME BEFORE TAX 39,518 150,328 89,696 9,375
INCOME TAX (EXPENSE) BENEFIT (15,412) (58,628) (34,981) (3,656)
----------- ----------- ----------- -----------
24,106 91,700 54,715 5,719
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME, NET OF TAX $ 780,701 $ 888,532 $ 1,509,413 $ 1,452,450
=========== =========== =========== ===========
Basic earnings per common share (Note 5) $ 1.02 $ 1.07 $ 1.96 $ 1.95
Diluted earnings per common share (Note 5) $ 1.02 $ 1.07 $ 1.96 $ 1.95
Dividends per common share $ 0.325 $ 0.325 $ 0.625 $ 0.56
Average number of shares of common
stock outstanding 742,651 742,651 742,651 742,651
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
MERCHANTS CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unadited)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income
Additional ------------
Common Paid-In Retained Unrealized Gain
Stock Capital Earnings (Loss) on Sec. Total
------------ ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997 $3,537,580 $12,823,369 $596,516 $46,924 $17,004,389
Net income 1,446,731 1,446,731
Cash dividends declared
(.56 per share) (417,362) (417,362)
Stock dividend (5%) 175,675 1,054,050 (1,229,725) -
Factional Shares
purchased (240.8 shares
@ $35.00 per share) (8,428) (8,428)
Other comprehensive income 5,719 5,719
------------ ------------- ------------- ------------ ------------
BALANCE, June 30, 1997 $3,713,255 $13,877,419 $387,732 $52,643 $18,031,049
============ ============= ============= ============ ============
BALANCE, January 1, 1998 $3,713,255 $13,877,419 $941,020 $87,566 $18,619,260
Net income 1,454,698 1,454,698
Cash dividends declared
(.625 per share) (464,157) (464,157)
Other comprehensive income 54,715 54,715
------------ ------------- ------------- ------------ ------------
BALANCE, June 30, 1998 $3,713,255 $13,877,419 $1,931,561 $142,281 $19,664,516
============ ============= ============= ============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
MERCHANTS CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,454,698 $ 1,446,731
Adjustments to reconcile net income to net
cash provided by operating
activities:
Provision for loan losses 210,000 210,000
Provision for depreciation and amortization 234,854 234,076
Net accretion on AFS securities (245,265) (400,704)
Gain on sale of securities -- (12,309)
Loss (gain) on sale of real estate 20,143 (13,535)
Increase in accrued interest receivable (155,809) (163,004)
(Increase) decrease in other assets (15,224) 19,062
Decrease in accrued interest payable (93,829) (8,043)
Decrease in taxes and other liabilities (296,746) (198,203)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,112,822 1,114,071
------------ ------------
INVESTING ACTIVITIES:
(Increase) decrease in federal funds sold (12,124,482) 16,080,078
Purchase of investment securities-AFS (12,078,495) (52,455,867)
Proceeds from maturities of investment securities-AFS 25,927,168 29,565,309
Proceeds from sales of investment securities-AFS -- 789,125
Prepayments on mortgage backed securities 1,215,824 1,195,581
Net (increase) decrease in loans (1,608,720) 152,398
Purchases of premises and equipment (27,608) (108,842)
------------ ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 1,303,687 (4,782,218)
------------ ------------
FINANCING ACTIVITIES:
Net decrease in deposits (6,348,618) (551,260)
Cash dividends paid (1,002,579) (742,892)
Payment of fractional shares from stock dividend -- (8,428)
Net increase in Sec. sold-repurchase agreement 4,389,755 4,235,260
------------ ------------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (2,961,442) 2,932,680
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (544,933) (735,467)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 10,084,731 10,305,656
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9,539,798 $ 9,570,189
============ ============
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Dividends declared but not paid $ 241,362 $ 222,795
Total increase in unrealized gain (loss) on securities
available for sale net of deferred taxes $ 54,715 $ 5,719
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
MERCHANTS CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Consolidated Financial Statements
The consolidated financial statement include Merchants Capital Corporation
and its wholly owned subsidiary, Merchants Bank and its wholly owned
subsidiary Merchants Credit Company. All intercompany profits, transactions
and balances have been eliminated.
The consolidated financial statements have been prepared by the Company
without an audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of their operations and their cash flows as of
June 30, 1998, and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The results of operations for the
periods ended June 30, 1998, are not necessarily indicative of operating
results for the full year. It is suggested these financial statements be read
in conjunction with the Company's Annual Report and proxy statements filed
with its Form 10-KSB for the year ended December 31, 1997.
2. Nonperforming Assets
Nonperforming assets at June 30, 1998 and December 31, 1997, were as
follows:
<TABLE>
<CAPTION>
6-30-98 12-31-97
---------- ----------
<S> <C> <C>
Nonaccrual loans $ 291,835 $ 263,686
Ninety days or more past due 353,026 565,249
---------- ----------
Total nonperforming loans $ 644,861 $ 828,935
Other real estate owned (net) 80,389 181,280
---------- ----------
Total nonperforming assets $ 725,250 $1,010,215
========== ==========
Nonperforming loans as a
percent of loans, net of
unearned interest 0.46% 0.60%
</TABLE>
7
<PAGE> 8
3. Allowance for Loan Losses
The following table reflects the transactions in the allowance for loan
losses for the six month periods ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Balance at beginning of year $ 1,592,012 $ 1,545,820
Provision charged to operations 210,000 210,000
Charge offs (314,866) (250,995)
Recoveries 105,741 156,620
----------- -----------
Balance at end of period $ 1,592,887 $ 1,661,445
=========== ===========
Allowance for loan losses as a
percent of loans, net of unearned
interest 1.14% 1.26%
</TABLE>
4. Recent Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share", which becomes effective
for periods ending after December 15, 1997. This statement requires companies
to present two types of earnings per share: "basic" and "diluted". It's
predecessor APB Opinion 15, only required companies with simple capital
structures to present earnings per common share and companies with complex
capital structures to present both the primary and fully diluted EPS.
The financial Accounting Standard Board also issued Statement No. 129,
"Disclosure of Information About Capital Structure" which becomes effective
for financial statements issued for periods ending after December 15, 1997.
This statement consolidates existing disclosures, many of which applied to
public companies. These disclosures will apply to rights and privileges of
outstanding securities, number of shares issued during an annual period and,
if applicable, the interim period presented, liquidation preferences of any
preferred stock and various aggregate and per share amounts upon redemption.
The financial Accounting Standard Board also issued Statement No. 130,
"Reporting Comprehensive Income", which becomes effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for
reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. This statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements.
5. Earning Per Share of Common Stock
Basic earning per share of common stock is based on the weighted average
number of shares outstanding during each period, after giving retroactive
effect to stock dividends.
8
<PAGE> 9
Diluted earnings per share is computed by dividing income by the weighted
average number of common shares outstanding during the period plus the number
of additional common shares that would have been outstanding if any dilutive
potential common stock had been issued.
6. Regulatory Matters
BancorpSouth, Inc., (NYSE/BXS) holding company of BancorpSouth Bank which
does business in Mississippi as Bank of Mississippi, and Merchants Capital
Corporation, holding company of Merchants Bank, announced on May 4, 1998, the
signing of a definitive agreement to merge Merchants Capital Corporation into
BancorpSouth, subject to approval of the shareholders of Merchants Capital
Corporation and federal and state regulatory authorities.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Changes In Financial Position and Liquidity
- -------------------------------------------
In the six months ended June 30, 1998, assets decreased by $1,842,605 or .82%.
This resulted from decreases of $544,933 in cash and due from banks, $14,729,536
in investment securities, $182,680 in bank premises & equipment, $100,891 in
other real estate, and $24,566 in premium paid on purchased assets and deposits.
These decreases were offset by increases of $12,124,482 in federal funds sold,
$1,398,720 in net loans, $155,809 in accrued interest receivable, and $60,990 in
other assets. The decrease in assets was also a result of net decreases of
$6,348,618 in deposits, $93,829 in accrued interest payable, and $835,169 in
accrued taxes and other liabilities. These decreases were offset by an increase
of $4,389,755 in securities sold under repurchase agreement, and $990,541 in
retained earnings resulting year-to-date net income of $1,454,698 less cash
dividends declared of $464,157. Also, assets and stockholders' equity were
increased by $54,715 due to an increase in net unrealized gain on securities
available for sale.
Nonperforming loans as of June 30, 1998 were $644,861 compared to $828,935 as
of Dec. 31, 1997. The nonaccrual loans increased by $28,149 while the ninety
days or more past due decreased by $212,223 as compared to Dec. 31, 1997. The
nonperforming loans as a percent of loans, net of unearned income, was .46% at
June 30, 1998 compared to .60% at December 31, 1997.
The allowance for loan losses was $1,592,887 as of June 30, 1998 compared to
$1,661,445 as of June 30, 1997. The ratio of the allowance for possible losses
to loans, net of unearned income, decreased to 1.14% as of June 30, 1998
compared to 1.26% as of June 30, 1997. Management regularly reviews the level of
the allowance for possible loan losses and is of the opinion that it is adequate
at March 31, 1998.
9
<PAGE> 10
ITEM 2. (Continued)
Results of Operations
- ---------------------
In the second quarter ended June 30, 1998, net income decreased by $40,237
which represented a decrease of 5.05% over the second quarter income of 1997.
Net interest income increased by $51,387 or 2.23% as a result of an increase of
$57,647 or 1.39% in interest income and an increase of $6,260 or .34% in
interest expense. There was no change in the provision for loan losses. Other
income decreased by $6,213 or .85%; so did other expenses by $1,281 or .07%. The
income tax provision increased by $86,692 or 29.06%. The comprehensive income,
net of taxes, decreased by $67,594 or 73.71% compared to the second quarter in
June 30, 1997.
In the six months ended June 30, 1998, net income increased by $7,967,
which represented an increase of .55% over the second quarter income of 1997.
Net interest income increased by $251,120 or 5.59% as a result of an increase of
$373,095 or 4.59% in interest income and an increase of $121,975 or 3.36% in
interest expense. There was no change in the provision for loan losses. Other
income increased by $22,980 or 1.62%; so did other expenses by $164,283 or
4.53%, and the income tax provision by $101,850 or 16.27%. The comprehensive
income, net of taxes, increased by $48,996 or 856.72% compared to the six months
ended in June 30, 1998.
Capital Adequacy
- ----------------
The Company and the Bank must maintain certain levels of capitalization as
prescribed by the various regulators. The Company and the Bank must maintain
minimum amounts of capital to total "risk weighted" assets, as outlined under
the regulators' 1992 risk-based capital guidelines. The Company and the Bank are
required to have minimum Tier I and total capital ratios of 4% and 8%,
respectively. The actual ratios at June 30, 1998, were 13.11% and 14.20%
(Company) and 12.08% and 13.17% (Bank), respectively. The Company and the Bank's
leverage ratios at June 30, 1998, were 8.55% and 8.17%, respectively. The
minimum required leverage ratio is 3%-5% with an internal target ratio set at 6%
by management.
The main source of capital expansion for the Company and the Bank continues
to be the retention of earnings. However, if the need arises again, the Company
can use its borrowing ability to inject needed capital into the Bank. The net
change in stockholders' equity of $990,541 in the first six months was the
result of the retention of earnings and by a increase of the unrealized gain on
securities available for sale. At the present time, there are no planned capital
expenditures which would materially restrict capital growth.
10
<PAGE> 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Bank is involved in certain litigations incurred in the normal course
of business. In the opinion of management and legal councel, liabilities arising
from such claims, if any, would not have a material effect upon the Bank's
consolidated financial statements.
Item 2. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
Filed May 13, 1998.
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERCHANTS CAPITAL CORPORATION
---------------------------
Date August 10, 1998 /s/ Howell N. Gage
----------------- --------------------------------
(Signature)
Howell N. Gage
Chairman of the Board and
Chief Executive Officer
Date August 10, 1998 /s/ James R. Wilkerson, Jr.
----------------- --------------------------------
(Signature)
James R. Wilkerson, Jr.
Secretary
12
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 9,477
<INT-BEARING-DEPOSITS> 63
<FED-FUNDS-SOLD> 15,598
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,422
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 139,230
<ALLOWANCE> 1,593
<TOTAL-ASSETS> 222,156
<DEPOSITS> 184,787
<SHORT-TERM> 16,311
<LIABILITIES-OTHER> 1,394
<LONG-TERM> 0
0
0
<COMMON> 3,713
<OTHER-SE> 15,951
<TOTAL-LIABILITIES-AND-EQUITY> 222,156
<INTEREST-LOAN> 6,554
<INTEREST-INVEST> 1,786
<INTEREST-OTHER> 155
<INTEREST-TOTAL> 8,495
<INTEREST-DEPOSIT> 3,433
<INTEREST-EXPENSE> 321
<INTEREST-INCOME-NET> 4,741
<LOAN-LOSSES> 210
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,787
<INCOME-PRETAX> 2,182
<INCOME-PRE-EXTRAORDINARY> 2,182
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,455
<EPS-PRIMARY> 1.96
<EPS-DILUTED> 1.96
<YIELD-ACTUAL> 4.26
<LOANS-NON> 292
<LOANS-PAST> 353
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,592
<CHARGE-OFFS> 315
<RECOVERIES> 106
<ALLOWANCE-CLOSE> 1,593
<ALLOWANCE-DOMESTIC> 1,593
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
