<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, 1997
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
registrant'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
---- ----
Issuer's revenues for its most recent fiscal year: $19,572,101
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, 1997 -
$22,912,872.
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, 1997 - 742,651.
DOCUMENTS INCORPORATED BY REFERENCE: PAGE 2
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DOCUMENTS INCORPORATED BY REFERENCE
Description of Document Incorporated into Part/Item No.
----------------------- -------------------------------
1997 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 24, Part III, Items 9 through 12
1998.
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MERCHANTS CAPITAL CORPORATION
1997 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, Mississippi and Edwards,
Mississippi. In addition, the Bank has a loan production office in
Jackson, 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 assets of Data Services
were merged into the Bank.
Also, Data Services was dissolved as of August 12, 1994.
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During 1989, the Registrant's wholly-owned bank subsidiary, Merchants Bank,
established Merchants Credit Company (Merchants Credit) as a wholly-owned
subsidiary. Merchants Credit provided small loans to individuals to finance
consumer goods. Such activities involved the making, booking and collecting of
small consumer loans. Substantially all the assets of Merchants Credit were sold
during 1993 to an unrelated party. The corporate entity continues to exist as a
Mississippi corporation in good standing. In late 1997, the Bank created
Merchants Insurance Agency, Inc. as a wholly-owned subsidiary.
(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 ten automated teller machines at seven locations (multiple
machines at the casinos) 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, 1997, the Bank ranked 22 in total assets of
the 120 banks in the State of Mississippi, and employed 145 employees,
117 of which are full time. The Bank's primary service areas are in
Warren and western Hinds Counties, Mississippi.
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
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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 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
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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,
1997, 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 any
claim for a subsequent breach of such obligation will generally have priority
over most other unsecured claims.
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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, 1997, and the "Capital Adequacy" portion of
Management's Discussion and Analysis.
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.
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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. During
1997, the assessment rate on BIF deposits was $.0001256 per $100 of deposits.
The rate on Savings Association Insurance Fund (SAIF) deposits was $.000628 per
$100 of deposits for 1997. The Bank has SAIF deposits resulting from a savings
and loan purchase during the early 1990s.
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
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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.
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 26,689 square feet of the building; the remaining
approximately 5,310 square feet are leased to a private law firm (4,550 square
feet), a commercial entity (260 square feet) and a nonprofit foundation (500
square feet). The branches and the facilities of the Bank are located as
follows:
The terms of the leased space are as follows:
Law firm - $3,150 per month under a month-to-month lease;
Commercial entity - $300 per month under a three year lease
from May 1, 1995 to June 30, 1998; and
Nonprofit foundation - $400 per month under a month-to-month
lease.
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During 1996, the Bank purchased a 2,400 square feet building located
adjacent to the main office. Currently, this building is leased to a commercial
entity for a term of three years through December 1999, for $450 per month.
In addition, the Bank has approximately 3,900 square feet of storage
space in a separate building owned by the Bank.
Clay Street Branch
The Clay Street Branch is located at 2309 Clay Street, Vicksburg,
Mississippi. The building contains approximately 2,268 square feet. The building
and the property on which it is situated are leased at an annual rental of
$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.
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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 second of six three year options was exercised in 1996 at a monthly rental
of $1,180.57/month.
Edwards Branch
The Edwards Branch was acquired in a purchase of assets and assumption
of liabilities 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 of the ground on which the ATM is located for an additional five year
term, through September 2001. The monthly fee is $400/month.
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Highway 61 North Automated Teller Machine
The Bank operates a drive up automated teller machine on Highway 61
North, Vicksburg, Mississippi. In 1997, the Bank extended their previous lease
on the space housing the machine for an additional five year term through
September 2001. The monthly fee is $360/month.
Customer - Bank Communication Terminal (CBCT) Branches
The Bank has CBCT's located at the following locations:
1) Kroger (1) 3) Isle of Capri (3)
3405 Pemberton Square Boulevard 3990 Washington Street
Vicksburg, MS 39180 Vicksburg, MS 39180
2) Rainbow (2)
1540 Warrenton Road
Vicksburg, MS 39180
The Bank pays rent of $1 per year for the Kroger location. It pays
one-half of transaction fees assessed at all other locations.
None of these properties is subject to any encumbrance or lien.
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.
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.
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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 1997.
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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 1996 and 1997 are
presented below.
Period 1996 Dividends per
----------- -------------
Share
-----
First Quarter .23
Second Quarter .26
Third Quarter .26
Fourth Quarter .74
Period 1997
First Quarter .26
Second Quarter .30
Third Quarter .30
Fourth Quarter 1.05
(b) Holders
As of December 31, 1997, there were approximately 538 holders of
record of the Common Stock of the Company.
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(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, 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, 1997
and 1996;
- Consolidated Statements of Income - Years ended December 31, 1997
and 1996;
- Consolidated Statements of Changes in Stockholders' Equity - Years
ended December 31, 1997 and 1996;
- Consolidated Statements of Cash Flows - Years ended December 31, 1997
and 1996; and
- Notes to Consolidated Financial Statements.
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.
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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 24, 1998, in connection with its
annual meeting to be held April 21, 1998.
ITEM 10. EXECUTIVE COMPENSATION
Information required by this item is incorporated herein by reference to
the Registrant's Proxy Statement, dated March 24, 1998, in connection with its
annual meeting to be held April 21, 1998.
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 24, 1998, in connection with
its annual meeting to be held April 21, 1998.
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 24, 1998, in connection with its
annual meeting to be held April 21, 1998.
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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, 1997
21 Subsidiaries of the Registrant
27 Financial Data Schedules
All other exhibits are omitted as they are not applicable, or 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, 1997.
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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: 3/17/98 BY: /s/Howell N. Gage, Jr.
---------------- -----------------------------------------
Howell N. Gage, Jr., Chairman
and Chief Executive Officer
DATE: 3/17/98 BY: /s/Joel H. Horton
---------------- -----------------------------------------
Joel H. Horton, President and
Chief Operating Officer
DATE: 3/17/98 BY: /s/ James R. Wilkerson, Jr.
---------------- -----------------------------------------
James R. Wilkerson, Jr., Secretary
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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: 3/17/98 BY: /s/J.E. Blackburn, Jr.
------------- -----------------------------------------
J. E. Blackburn, Jr., Director
DATE: 3/17/98 BY: /s/Rodney E. Bounds
------------- -----------------------------------------
Rodney E. Bounds, Director
DATE: 3/17/98 BY: /s/Michael J. Chaney
------------- -----------------------------------------
Michael J. Chaney, Director
DATE: 3/17/98 BY: /s/Howell N. Gage, Jr.
------------- -----------------------------------------
Howell N. Gage, Jr., Director
DATE: 3/17/98 BY: /s/Dr. W.B. Hopson, Jr.
------------- -----------------------------------------
Dr. W. B. Hopson, Jr., Director
DATE: 3/17/98 BY: /s/Joel H. Horton
------------- -----------------------------------------
Joel H. Horton, Director
DATE: 3/17/98 BY: /s/C. Hays Latham
------------- -----------------------------------------
C. Hays Latham, Director
DATE: 3/17/98 BY: /s/Martin S. Lewis
------------- -----------------------------------------
Martin S. Lewis, Director
DATE: 3/17/98 BY: /s/Robert P. McConnell
------------- -----------------------------------------
Robert P. McConnell, Director
DATE: 3/17/98 BY: /s/Fred G. Peyton
------------- -----------------------------------------
Fred G. Peyton, Director
DATE: 3/17/98 BY: /s/Robert E. Pickett
------------- -----------------------------------------
Robert E. Pickett, Director
DATE: 3/17/98 BY: /s/Landman Teller, Jr.
------------- -----------------------------------------
Landman Teller, Jr., Director
DATE: 3/17/98 BY: /s/Ernest G. Thomas
------------- -----------------------------------------
Ernest G. Thomas, Director
DATE: 3/17/98 BY: /s/R.C. Wilkerson III
------------- -----------------------------------------
R. C. Wilkerson III, Director
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DATE: 3/17/98 BY: /s/James R. Wilkerson, Jr.
------------ ------------------------------------------
James R. Wilkerson, Jr., Director
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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 22
13 Annual report to shareholders for
year ended December 31, 1997 25
21 Subsidiaries of the Registrant 23
27 Financial Data Schedules -
</TABLE>
* As indicated in the column entitled "Description" this Exhibit is
incorporated by reference to another filing or document.
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Exhibit 11
Merchants Capital Corporation
Computation of Earnings Per Share
<TABLE>
<CAPTION>
December 31,
1997 1996
---------- ----------
<S> <C> <C>
Net income for basic
earnings per share $3,002,595 $2,626,273
========== ==========
Net income for
diluted earnings per
share $3,002,595 $2,626,273
========== ==========
Weighted average shares
outstanding for basic
earnings per share 742,651 742,651
Weighted average shares
outstanding for
diluted earnings per
share 742,651 742,651
Basic earnings per share $ 4.04 $ 3.54
Diluted earnings per share $ 4.04 $ 3.54
</TABLE>
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EXHIBIT 13
ANNUAL REPORT
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MERCHANTS CAPITAL CORPORATION
AND SUBSIDIARY
Consolidated Financial Statements
Years Ended December 31, 1997 and 1996
with
Independent Auditor's Reports
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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, 1997 and
1996, 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, 1997 and 1996,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
Vicksburg, Mississippi
January 20, 1998
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MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,988,522 $ 10,218,925
Interest bearing deposits with banks 96,209 86,731
Federal funds sold 3,473,703 16,080,078
Investment securities:
Available-for-sale (amortized cost of $68,008,306
and $42,836,946, respectively) 68,151,857 42,913,870
Loans 139,426,173 134,098,875
Less:
Unearned income (1,595,823) (1,689,189)
Allowance for loan losses (1,592,012) (1,545,820)
------------- -------------
Net loans 136,238,338 130,863,866
------------- -------------
Bank premises and equipment, net 2,698,060 2,752,777
Other real estate 181,280 128,849
Accrued interest receivable 1,997,240 1,760,153
Premium on purchased deposits and assets, less
amortization of $257,667 in 1997 and $208,533 in 1996 452,333 501,467
Deferred income taxes 313,473 303,300
Other assets 407,681 452,834
------------- -------------
TOTAL ASSETS $ 223,998,696 $ 206,062,850
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 5
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES:
Deposits:
Non-interest bearing $ 25,378,217 $ 22,434,563
Interest bearing 165,757,406 154,834,160
------------ ------------
191,135,623 177,268,723
Security participations 11,921,483 9,811,858
Accrued interest payable 903,348 822,785
Accrued taxes and other liabilities 639,198 606,770
Dividends declared but not paid 779,784 548,325
------------ ------------
Total liabilities 205,379,436 189,058,461
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $5 par value per share; 1,000,000 shares authorized; 742,651
and 707,516 shares issued and
outstanding in 1997 and 1996, respectively 3,713,255 3,537,580
Additional paid-in capital 13,877,419 12,823,369
Retained earnings 941,020 596,516
Net unrealized gains on securities available-for-sale,
net of taxes of $55,985 in 1997 and $30,000 in 1996 87,566 46,924
------------ ------------
Total stockholders' equity 18,619,260 17,004,389
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $223,998,696 $206,062,850
============ ============
</TABLE>
28
<PAGE> 6
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 12,685,422 $ 12,336,854
Interest and dividends on investment securities:
Taxable interest income 3,290,929 2,655,429
Exempt from federal income taxes 238,846 231,723
Dividends 57,966 53,768
Interest on federal funds sold 398,065 406,894
------------ ------------
Total interest income 16,671,228 15,684,668
------------ ------------
INTEREST EXPENSE:
Interest on deposits 6,755,254 6,530,964
Interest on federal funds purchased and security participations 647,782 373,008
------------ ------------
Total interest expense 7,403,036 6,903,972
------------ ------------
NET INTEREST INCOME 9,268,192 8,780,696
PROVISION FOR LOAN LOSSES 420,000 320,000
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 8,848,192 8,460,696
------------ ------------
OTHER INCOME:
Service charges on deposits 1,135,307 1,073,643
Fees for other customer services 837,894 849,977
Commission and fees from fiduciary activities 495,105 416,724
Net investment securities gains (losses) 18,639 (49,917)
Other 413,928 385,957
------------ ------------
Total other income 2,900,873 2,676,384
------------ ------------
</TABLE>
Continued
29
<PAGE> 7
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
OTHER EXPENSES:
Salaries 2,928,599 2,899,685
Employee benefits 880,363 885,205
Net occupancy expense 514,040 550,867
Equipment expense 567,437 560,858
Other 2,345,045 2,238,195
---------- ----------
Total other expenses 7,235,484 7,134,810
---------- ----------
INCOME BEFORE INCOME TAX EXPENSE 4,513,581 4,002,270
INCOME TAX EXPENSE 1,510,986 1,375,997
---------- ----------
NET INCOME $3,002,595 $2,626,273
========== ==========
BASIC EARNINGS PER SHARE $ 4.04 $ 3.54
========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC 742,651 742,651
========== ==========
DILUTED EARNINGS PER SHARE $ 4.04 $ 3.54
========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED 742,651 742,651
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
30
<PAGE> 8
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<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, 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
($1.49 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 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
Net income for the year 3,002,595 -- -- 3,002,595 --
Cash dividends declared
($1.91 per share) (1,419,941) -- -- (1,419,941) --
Stock dividend - 5%
(35,135 shares) -- 175,675 1,054,050 (1,229,725) --
Payment for fractional
shares (8,425) -- -- (8,425) --
Net change in unrealized
gains on securities
available-for-sale, net
of taxes of $25,985 40,642 -- -- -- 40,642
------------ ------------ ------------ ------------ ------------
BALANCE,
December 31, 1997 $ 18,619,260 $ 3,713,255 $ 13,877,419 $ 941,020 $ 87,566
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
31
<PAGE> 9
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,002,595 $ 2,626,273
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 420,000 320,000
Provision for depreciation and amortization 415,773 417,742
Amortization of premium on purchased
deposits and assets 49,134 49,133
Accretion on investment securities, net (647,303) (200,204)
Deferred income taxes benefit (36,158) (10,680)
Write-down of other real estate 23,020 9,220
Gain on sale of other real estate (55,106) (29,984)
Loss on sale of bank premises and equipment 1,071 5,760
Net investment securities (gain) loss (18,639) 49,917
(Increase) decrease in:
Accrued interest receivable (237,087) 206,402
Other assets 45,153 (83,714)
Increase (decrease) in:
Accrued interest payable 80,563 (8,154)
Accrued taxes and other liabilities 32,428 1,084
------------ ------------
Net cash provided by operating activities 3,075,444 3,352,795
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest bearing deposits with banks (9,478) 24,799
Proceeds from maturity of time deposit -- 692,126
Net (increase) decrease in federal funds sold 12,606,375 (13,280,078)
Purchase of available-for-sale securities (89,675,308) (35,561,120)
Proceeds from sale of available-for-sale securities 6,848,180 9,970,312
Proceeds from calls and maturities of available-for-sale
securities 58,321,710 35,461,724
Net increase in loans (6,054,498) (5,259,733)
Purchases of premises and equipment (362,127) (640,949)
</TABLE>
Continued
32
<PAGE> 10
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES-
CONTINUED:
Proceeds from sales of premises and equipment -- 80,000
Proceeds from sales of other real estate 239,681 153,964
Interest received on time deposit -- (24,458)
------------ ------------
Net cash used in investing activities (18,085,465) (8,383,413)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest and interest bearing
demand accounts 7,938,829 3,118,315
Net increase in time deposits 5,928,071 2,441,301
Payment of fractional shares from stock dividend (8,425) (8,184)
Cash dividends paid (1,188,482) (1,063,187)
Increase in security participations 2,109,625 3,198,303
------------ ------------
Net cash provided by financing activities 14,779,618 7,686,548
------------ ------------
NET INCREASE (DECREASE) IN CASH AND DUE
FROM BANKS (230,403) 2,655,930
CASH AND DUE FROM BANKS AT BEGINNING
OF YEAR 10,218,925 7,562,995
------------ ------------
CASH AND DUE FROM BANKS AT END OF YEAR $ 9,988,522 $ 10,218,925
============ ============
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Dividends declared but not paid $ 779,784 $ 548,325
============ ============
Transfer of loans foreclosed to other real estate $ 260,026 $ 123,050
============ ============
Stock dividends declared $ 1,229,725 $ 1,137,708
============ ============
Total increase in unrealized gains
on securities available-for-sale $ 66,627 $ 90,257
============ ============
Deferred income taxes on recorded unrealized
gains on securities available-for-sale $ (25,985) $ (35,200)
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
33
<PAGE> 11
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting principles followed by Merchants Capital Corporation
(the Company) and its wholly-owned subsidiary, Merchants Bank and
its wholly-owned subsidiaries, Merchants Credit Company and
Merchants Insurance Agency, Inc., are those which are generally
practiced within the banking industry. The methods of applying
those principles conform with generally accepted accounting
principles and have been applied on a consistent basis. The
principles which significantly affect the determination of
financial position, results of operations, changes in stockholders'
equity, and cash flows are summarized below.
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 subsidiaries,
Merchants Credit Company and Merchants Insurance Agency, Inc.. 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
Securities are being accounted for in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for
Investments in Debt and Equity Securities," which requires the
classification of securities as held to maturity, trading, or
available for sale.
Continued
34
<PAGE> 12
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Investment Securities - Continued
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 over the contractual lives.
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.
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. Realized gains and losses flow
through the Bank's yearly operations. 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 related deferred tax effect. The Bank does not
engage in trading account activities.
Loans
Loans are stated at the amount of principal outstanding, reduced by
unearned income and an allowance for loan losses and net deferred
loan fees, if applicable. Loan origination fees and certain direct
origination costs are capitalized and recognized as an adjustment
of the yield of the related loan. Interest income on installment
loans is recognized and included in interest 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
Continued
35
<PAGE> 13
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Loans - Continued
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.
Allowance for Loan Losses
The allowance for loan losses is an amount which in management's
judgment believes is adequate to absorb potential losses on
existing loans. The allowance for loan losses is based upon
management's review and evaluation of the loan portfolio. Factors
considered in the establishment of the allowance for loan losses
include management's evaluation of specific loans, the level and
composition of classified loans, historical loss experience,
results of examinations by regulatory agencies, an internal asset
review process, expectations of future economic conditions and
their impact on particular borrowers, and other judgmental factors.
Allowances for impaired loans are generally determined based on
collateral values or the present value of estimated cash flows.
The allowance for loan losses is based on estimates of potential
future losses, and ultimate losses may vary from the current
estimates. These estimates are reviewed periodically and as
adjustment become necessary, the effect of the change in estimate
is charged to operating expenses in the period incurred. All losses
are charged to the allowance for loan losses when the loss actually
occurs or when management believes that the collectibility of the
principal is unlikely. Recoveries are credited to the allowance at
the time of recovery.
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 for financial reporting purposes and
accelerated methods for income tax purposes.
Continued
36
<PAGE> 14
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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 assets 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.
Continued
37
<PAGE> 15
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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. Options to
purchase 1,000 shares of common stock at $35 per share were
outstanding during the last three quarters of 1997, but were not
included in the computation of diluted EPS because the options'
exercise price was equal to the average market price of the common
shares. The options, which expire on March 2007, were still
outstanding at the end of year 1997. All shares held by the
Employee Stock Ownership Plan (ESOP) are treated as outstanding in
computing income per share.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into
off-balance-sheet financial instruments consisting of commitments
to extend credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they
become payable.
Cash Flows
For purposes of the consolidated statements of cash flows, the
Company considers only cash and due from banks (including cash
items in process of clearing) to be cash equivalents.
The Company paid income taxes approximating $1,521,000 in 1997 and
$1,450,000 in 1996. Interest paid on deposit liabilities and other
borrowings approximated $7,328,000 in 1997 and $6,912,000 in 1996.
Reclassifications
Certain prior period amounts have been reclassified to conform with
the 1997 presentation.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes
new standards for reporting comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. This statement is effective
for fiscal years beginning after December 15, 1997. The Company
does not expect the adoption of SFAS No. 130 to have a material
effect on its financial statements.
Continued
38
<PAGE> 16
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
In June 1997, the Financial Accounting Standards Board also issued
SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information. SFAS No. 131 establishes new standards for the
way public business enterprises report information about operating
segments in financial statements. This statement is effective for
fiscal years beginning after December 15, 1997. The Company does
not expect the adoption of SFAS No. 131 to have a material effect
on its financial statements.
NOTE B. CASH AND DUE FROM BANKS
The Bank is required to maintain average cash reserve balances.
This requirement approximates $1,428,000 at December 31, 1997, and
$1,200,000 at December 31, 1996. The Bank is in compliance with
this requirement.
NOTE C. INVESTMENT SECURITIES
The amortized costs and fair values of investment securities
available-for-sale at December 31, 1997 and 1996 were:
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Government agencies $ 58,484,725 $ 109,908 $ (43,773) $ 58,550,860
Mortgage-backed securities 4,192,279 38,930 (24,122) 4,207,087
Obligations of states and
political subdivisions 4,356,402 62,677 (69) 4,419,010
Other equity securities 974,900 -- -- 974,900
------------ ------------ ------------ ------------
$ 68,008,306 $ 211,515 $ (67,964) $ 68,151,857
============ ============ ============ ============
</TABLE>
Continued
39
<PAGE> 17
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE C. INVESTMENT SECURITIES - CONTINUED
<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 61,436 (59,081) 10,370,578
Obligations of states and
political subdivisions 3,584,093 79,934 (1,723) 3,662,303
Other equity securities 924,200 -- -- 924,200
------------ ------------ ------------ ------------
$ 42,836,946 $ 190,804 $ (113,880) $ 42,913,870
============ ============ ============ ============
</TABLE>
Gross realized gains of $19,756 and gross realized losses of $1,117
resulted from sale of available-for-sale securities in 1997. There
were $-0- realized gains or losses on held-to-maturity securities
during 1997. Gross realized gains of $-0- and gross realized losses
of $49,917 were realized on available-for-sale security
dispositions in 1996. There were no realized gains or losses on
held-to-maturity securities in 1996.
Investment securities with an amortized cost of approximately
$45,487,061 (fair value $45,581,718) at December 31, 1997, and
$32,946,000 (fair value $32,975,000) at December 31, 1996, 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, 1997, 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.
Continued
40
<PAGE> 18
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE C. INVESTMENT SECURITIES - CONTINUED
<TABLE>
<CAPTION>
Securities availale-for-sale
----------------------------
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Due in one year or less $35,235,772 $35,230,808
Due after one year but less than five years 31,014,127 31,124,055
Due after five years but less than ten years 1,140,407 1,178,994
Other securities 618,000 618,000
----------- -----------
$68,008,306 $68,151,857
=========== ===========
</TABLE>
NOTE D. LOANS
The loan portfolio at December 31, 1997 and 1996, consists of the
following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Agricultural $ 1,042,613 $ 1,510,437
Commercial and industrial 104,371,061 103,117,837
Real estate - construction 4,746,600 5,742,457
Real estate - mortgage 7,735,935 8,567,614
Installment 21,529,964 15,160,530
------------ ------------
Total loans $139,426,173 $134,098,875
============ ============
</TABLE>
Loans on which accrual of interest has been discontinued or reduced
amounted to approximately $264,000 and $1,100,000 at December 31,
1997 and 1996, respectively. If interest on these loans had been
accrued, such income would have been approximately $59,000 and
$88,000 in 1997 and 1996, respectively.
Continued
41
<PAGE> 19
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE D. LOANS - CONTINUED
Impaired loans having recorded investments of $544,000 (majority of
which is on a nonaccrual basis) and $1,394,000 at December 31, 1997
and 1996, 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 1997 and 1996 was $894,000 and $1,243,000,
respectively. The amount of interest income recognized on impaired
loans for both 1997 and 1996 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 $4,721,000 and $5,487,000 at
December 31, 1997 and 1996, respectively. These loans were made on
substantially the same terms, including interest rate and
collateral, as those prevailing at the time for comparable
transactions with other persons and did not involve more than
normal risk of collectibility or present other unfavorable
features.
Changes in these loans are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Balance at January 1 $ 5,486,973 $ 6,395,939
New loans 2,660,843 2,052,141
Repayments (3,426,659) (2,961,107)
----------- -----------
Balance at December 31 $ 4,721,156 $ 5,486,973
=========== ===========
</TABLE>
NOTE E. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Balance at January 1 $ 1,545,820 $ 1,466,840
----------- -----------
Credits charged off (638,544) (538,647)
Recoveries 264,736 297,627
----------- -----------
Net (credits charged off) recoveries (373,808) (241,020)
Provision for loan losses 420,000 320,000
----------- -----------
Balance at December 31 $ 1,592,012 $ 1,545,820
=========== ===========
</TABLE>
Continued
42
<PAGE> 20
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE F. BANK PREMISES AND EQUIPMENT
A summary of Bank premises and equipment is as follows:
<TABLE>
<CAPTION>
December 31
1997 1996
---------- ----------
<S> <C> <C>
Land $ 531,013 $ 531,013
Buildings 2,244,552 2,224,136
Furniture and equipment 3,649,366 3,416,713
Leasehold improvements 131,558 151,521
---------- ----------
6,556,489 6,323,383
Less accumulated depreciation and amortization 3,858,429 3,570,606
---------- ----------
Bank premises and equipment, net $2,698,060 $2,752,777
========== ==========
</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, 1997 and 1996, consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Non-interest bearing demand deposits $ 25,378,217 $ 22,434,563
NOW accounts 30,490,580 28,276,738
Money market deposit accounts 7,110,070 8,263,876
Savings accounts 57,707,520 53,772,381
Certificates of deposit 70,449,236 64,521,165
------------ ------------
$191,135,623 $177,268,723
============ ============
</TABLE>
Continued
43
<PAGE> 21
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE H. DEPOSITS - CONTINUED
Maturities of time certificates of deposit of $100,000 or more
outstanding at December 31, 1997 and 1996, are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Time remaining until maturity:
Three months or less $12,626,258 $ 1,306,659
Over three through six months 4,573,689 2,173,368
Over six through twelve months 1,446,468 2,599,663
Over twelve months 2,387,143 7,253,394
----------- -----------
$21,033,558 $13,333,084
=========== ===========
</TABLE>
At December 31, 1997, the scheduled maturities of time certificates
of deposit are as follows:
<TABLE>
<S> <C>
1998 $52,015,144
1999 12,079,534
2000 4,396,794
2001 741,557
2002 1,095,131
Thereafter 121,076
-----------
$70,449,236
===========
</TABLE>
NOTE I. STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
In 1997 and 1996, the Board of Directors approved a 5% stock
dividend, 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 $1,974,356,
$1,231,762, and $1,022,540 for the years 1997, 1996 and 1995.
Banking regulations limit the amount of dividends that may be paid
without prior approval of the Bank's regulatory agency.
Continued
44
<PAGE> 22
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE I. STOCKHOLDERS' EQUITY AND REGULATORY MATTERS - CONTINUED
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, 1997, that the Bank meets
all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the
regulators 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.
Continued
45
<PAGE> 23
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE I. STOCKHOLDERS' EQUITY AND REGULATORY MATTERS - CONTINUED
The Bank's actual capital amounts and ratios are also presented
in the table.
<TABLE>
<CAPTION>
To be Well Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
---------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ----- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
AS OF
DECEMBER 31, 1997
Total Capital (to Risk
-Weighted Assets) $ 18,368,164 12.64% $ 11,626,000 > or = 8.0% $ 14,532,501 > or = 10.0%
Tier I Capital (to Risk
-Weighted Assets) $ 16,776,156 11.54% $ 5,813,000 > or = 4.0% $ 8,719,500 > or = 6.0%
Tier I Capital (to
Average Assets) $ 16,776,156 7.45% $ 9,005,385 > or = 4.0% $ 11,256,732 > or = 5.0%
AS OF
DECEMBER 31, 1996
Total Capital (to Risk
-Weighted Assets) $ 17,234,000 12.31% $ 11,204,400 > or = 8.0% $ 14,005,500 > or = 10.0%
Tier I Capital (to Risk
-Weighted Assets) $ 15,688,000 11.20% $ 5,602,200 > or = 4.0% $ 8,403,300 > or = 6.0%
Tier I Capital (to
Average Assets) $ 15,688,000 7.70% $ 8,154,760 > or = 4.0% $ 10,193,450 > or = 5.0%
</TABLE>
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 51,724 shares at December 31, 1997, and 45,156 at
December 31, 1996. Contributions to all employee benefit plans
totaled $103,000 in 1997 and $102,797 in 1996.
Continued
46
<PAGE> 24
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE J. EMPLOYEE BENEFIT PLANS - CONTINUED
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 retired 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.
The following tables set forth the plan's combined funds status
reconciled with the amount shown in the Bank's statement of
financial condition.
Continued
47
<PAGE> 25
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE J. EMPLOYEE BENEFIT PLANS - CONTINUED
Accumulated post-retirement benefit obligation:
<TABLE>
<CAPTION>
December 31
1997 1996
--------- ---------
<S> <C> <C>
Retirees $ 260,383 $ 263,470
Plan assets at fair value -- --
--------- ---------
Accumulated post-retirement benefit oblitation
in excess of plan assets 260,383 263,470
Unrecognized transition obligation (132,535) (148,809)
--------- ---------
Accrued post-retirement benefit cost on the
balance sheet $ 127,848 $ 114,661
========= =========
The Bank's post-retirement health care plan is underfunded.
Post-retirement expense includes the following components:
</TABLE>
<TABLE>
<CAPTION>
Years Ended
December 31
1997 1996
------- -------
<S> <C> <C>
Interest cost on accumulated post-retirement
benefit obligation $18,443 $19,547
Amortization of transition obligation over 14 years 14,881 30,672
------- -------
Post-retirement expense $33,324 $50,219
======= =======
</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 1997, 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, 1997, by approximately $7,000. The
effect of this change on the aggregate interest cost for 1997 would
be immaterial. The supplemental retirement benefits are assumed at
a constant rate.
Continued
48
<PAGE> 26
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE K. STOCK OPTIONS
On March 25, 1997, the Board of Directors adopted a stock incentive
plan for certain officers and key employees of the Company. The
stock incentive plan was approved by the Company's shareholders at
its annual meeting held on April 15, 1997. Options may be granted
under the provisions of the Company's plans to purchase common
stock of the Company at a price not less than the fair market value
on the date of grant. Stock options for officers and key employees
are exercisable upon the fifth anniversary from the date of grant.
All options expire 10 years from the date of grant. As of December
31, 1997, options granted were 1,000. There were approximately
24,000 shares available for option plan grants at December 31,
1997. The summary of stock option activity is shown below:
<TABLE>
<CAPTION>
Average
Options Exercise
Outstanding Price
----------- --------
<S> <C> <C>
DECEMBER 31, 1996 -- $ --
Options granted 1,000 $ 35.00
Stock options exercised -- $ --
Stock options canceled -- $ --
-----------
DECEMBER 31, 1997 1,000 $ 35.00
===========
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Average
Remaining
Exercise Options Contractual
Price Outstanding Life
- --------- ----------- -----------
<S> <C> <C>
$ 35.00 1,000 10 years
</TABLE>
Continued
49
<PAGE> 27
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE K. STOCK OPTIONS - CONTINUED
During fiscal 1997, the Company adopted SFAS No. 123, Accounting
for Stock-Based Compensation, which requires companies to estimate
the fair value for stock options on date of grant. Under SFAS No.
123, the Company is required to record the estimated fair value of
stock options issued as compensation expense in its income
statements over the related service periods or, alternatively,
continue to apply accounting methodologies as prescribed by
Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and disclose the pro forma effects of
the estimated fair value of stock options issued in the
accompanying footnotes to its financial statements. The
determination of fair value is only required for stock options
issued beginning in 1996. In adopting SFAS No. 123, the Company
decided to continued to follow the accounting methodologies as
prescribed by APB Opinion No. 25.
The pro forma effects of the total compensation expense that would
have been recognized under SFAS No. 123 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) December 31,
1997
------------
<S> <C>
Net income, as reported $ 3,002
Pro forma net income $ 3,002
Earnings per share, as reported $ 4.04
Pro forma earnings per share $ 4.04
</TABLE>
In adopting SFAS No. 123, the Company utilized the Black Scholes
Option Pricing Model to estimate the fair value of stock options
granted using the following assumptions:
<TABLE>
<CAPTION>
1997
------------
<S> <C>
Expected dividend yield 4.63%
Expected option lives 7.5 yrs
Expected volatility 2.5%
Risk-free interest rates 5.5%
</TABLE>
Continued
50
<PAGE> 28
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE K. STOCK OPTIONS - CONTINUED
Based on the results of the model, the fair value of the stock
options issued on the date of grant are as follows:
<TABLE>
<CAPTION>
Average
Grant Date
Number Fair Value
Issued per Option
------ ----------
<S> <C> <C>
1997 1,000 $ 1.7239
</TABLE>
NOTE L. OTHER EXPENSES
Other expenses for the years ended December 31, 1997 and 1996,
include the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
FDIC assessment $ 17,796 $203,621
General operating supplies $220,305 $212,682
Telephone $153,410 $183,522
Outside data processing $225,135 $207,600
Miscellaneous outside service fees $348,561 $149,038
</TABLE>
NOTE M. INCOME TAX PROVISION
The provision for income taxes included in the consolidated
statements of income is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current $ 1,547,144 $ 1,386,677
Deferred (36,158) (10,680)
----------- -----------
$ 1,510,986 $ 1,375,997
=========== ===========
</TABLE>
Income taxes refundable of $36,922 in 1997 is included in other
assets. Income taxes payable of $60,414 in 1996 is included in
accrued taxes and other liabilities.
Continued
51
<PAGE> 29
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE M. INCOME TAX PROVISION - CONTINUED
Deferred tax assets and liabilities at December 31, 1997 and 1996,
consist of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 307,378 $ 289,364
Deferred compensation 48,254 43,600
Post-retirement liability 49,861 44,718
Core deposit intangible 3,819 5,307
Other real estate 3,705 8,236
Accelerated depreciation and amortization 2,174 --
----------- -----------
Total gross deferred tax asset 415,191 391,225
----------- -----------
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Accretion of discounts on securities (79,884) (53,966)
Unrealized securities gains (21,834) (30,000)
Accelerated depreciation and amortization -- (3,959)
----------- -----------
Total gross deferred tax liability (101,718) (87,925)
----------- -----------
Net deferred tax asset $ 313,473 $ 303,300
=========== ===========
</TABLE>
The provision for federal income taxes in comparison to that
computed by applying the statutory rate of 39% in 1997 and 39% in
1996, is indicated in the following analysis:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Tax based on statutory rate $ 1,760,297 $ 1,560,885
Effect of tax-exempt income (194,478) (139,429)
Accretion (35,825) (19,184)
State income tax (26,576) (34,709)
Other 7,568 8,434
----------- -----------
$ 1,510,986 $ 1,375,997
=========== ===========
</TABLE>
Continued
52
<PAGE> 30
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE M. 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 $7,270 and $(19,500) in 1997 and 1996, respectively,
resulting from securities transactions.
NOTE N. OFF-BALANCE-SHEET INSTRUMENTS
The Company 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
risk in excess of the amounts recognized in the consolidated
statements of financial condition.
The Company'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 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
53
<PAGE> 31
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE N. 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>
1997 1996
----------- -----------
<S> <C> <C>
Commitments to extend credit $22,362,476 $24,396,757
Standby letters of credit $ 1,683,150 $ 2,139,573
</TABLE>
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.
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.
Continued
54
<PAGE> 32
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE P. FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
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.
Loans, Net of Allowance
For variable rate loans, fair values are based on repricing dates.
The fair value of certain mortgage loans is based on discounted
cash flows with prepayment speeds based on similar mortgage
securities. Fixed rate commercial loans and installment loans were
valued using discounted cash flows. The discount rates used to
determine the present value of these loans were based on interest
rates currently being charged by the bank on comparable loans as to
credit risk and term.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness
of the parties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates
and the committed rates. The fair value of letters of credit is
based on fees currently charged for similar agreements at the
reporting date. The fees associated with these financial
instruments, or the estimated cost to terminate, as applicable, are
immaterial.
Continued
55
<PAGE> 33
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE P. FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
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 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.
The estimated approximate fair values of the Bank's financial
instruments are as follows:
<TABLE>
<CAPTION>
1997
-----------------------------
Carrying Fair
Amount Value
------------ ------------
<S> <C> <C>
Financial assets:
Cash and due from banks $ 9,989,000 $ 9,989,000
Interest-bearing deposits with banks $ 96,000 $ 96,000
Federal funds sold $ 3,474,000 $ 3,474,000
Investment securities:
Available-for-sale $ 68,152,000 $ 68,152,000
Loans, net of allowance $136,238,000 $136,391,000
Financial liabilities:
Deposits $191,136,000 $191,327,000
Security participations $ 11,921,000 $ 11,921,000
</TABLE>
Continued
56
<PAGE> 34
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE P. FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
<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 participations $ 9,812,000 $ 9,812,000
</TABLE>
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, 1997, are as follows:
<TABLE>
<S> <C>
1998 $ 115,291
1999 105,291
2000 47,124
2001 19,082
2002 --
------------
Total minimum lease payments $ 286,788
============
</TABLE>
Rental expense of approximately $90,000 in 1997 and $91,000 in
1996, includes amounts for short-term cancelable leases and minimum
rentals under non-cancelable operating leases.
Continued
57
<PAGE> 35
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
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,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS:
Cash $ 2,079,267 $ 1,314,664
Investments in Merchants Bank 17,316,055 16,236,154
Other assets 3,722 1,896
----------- -----------
$19,399,044 $17,552,714
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Other liabilities $ 779,784 $ 548,325
Stockholders' equity 18,619,260 17,004,389
----------- -----------
$19,399,044 $17,552,714
=========== ==========
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996
----------- -----------
<S> <C> <C>
REVENUE:
Dividends received-
Merchants Bank $ 1,974,356 $1,231,762
Interest earned -- 197
----------- -----------
1,974,356 1,231,959
EXPENSES 11,020 14,499
----------- -----------
1,963,336 1,217,460
EQUITY IN UNDISTRIBUTED EARNINGS-
Merchants Bank 1,039,259 1,408,813
----------- -----------
NET INCOME $ 3,002,595 $2,626,273
=========== ==========
</TABLE>
Continued
58
<PAGE> 36
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE R. SUMMARIZED FINANCIAL INFORMATION OF MERCHANTS CAPITAL
CORPORATION - CONTINUED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 3,002,595 $ 2,626,273
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings of affiliates (1,039,259) (1,408,813)
(Increase) decrease in other assets (1,826) 2,817
----------- -----------
Net cash provided by operating activities 1,961,510 1,220,277
----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payment of fractional shares (8,425) (8,184)
Dividends paid (1,188,482) (1,063,187)
----------- -----------
Net cash used in financing activities (1,196,907) (1,071,371)
----------- -----------
INCREASE IN CASH 764,603 148,906
CASH AT BEGINNING OF YEAR 1,314,664 1,165,758
----------- -----------
CASH AT END OF YEAR $ 2,079,267 $ 1,314,664
=========== ===========
SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Dividends declared but not paid $ 779,784 $ 548,325
=========== ===========
Stock dividends declared $ 1,229,725 $ 1,137,708
=========== ===========
Change in unrealized gains on securities
available-for-sale, net of deferred
income taxes $ 40,642 $ 55,057
=========== ===========
</TABLE>
59
<PAGE> 37
MERCHANTS CAPITAL CORPORATION AND SUBSIDIARY
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 subsidiaries, Merchants Credit
Company and Merchant Insurance Agency, Inc.
Merchants Bank is engaged primarily in the same business operations as most
independent commercial banks, with special emphasis in retail banking, including
the acceptance of checking and savings 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 1997
Merchants Capital Corporation enjoyed net income for the year 1997 of $3.0
million compared to $2.6 million for the same period in 1996. An increase in net
earning assets of approximately 11.1% with a slight decrease in net interest
margin of 1.4% provided for a significant portion of the increase in 1997.
Earnings per common share were $4.04 and $3.54 for the years ended 1997 and
1996, respectively. Return on average assets was 1.4% for the current year, and
1.29% in the same period of 1996. For the years ended 1997 and 1996, return on
average equity was 16.72% and 16.00%, respectively.
During the year 1997, in comparison with the same period of 1996, average loans
outstanding increased approximately $2 million or 1.5% due to an increased loan
demand. Average total deposits for the year 1997 increased $9.5 million or 5.1%
when compared to average total deposits for the same period of 1996. Average
total assets for the current year increased $11.2 million or 5.5% when compared
to the total average assets of the year 1996. Average shareholders' equity for
1997 was $17.9 million, an increase of 9.4% over the average shareholders'
equity for 1996.
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 earnings for the Bank.
For analytical purposes, net interest income is presented on a tax equivalent
basis. A 34% tax rate is used for 1997, 1996, and 1995. 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.
60
<PAGE> 38
Net interest income on a fully tax equivalent basis (FTE) increased
approximately $491 thousand or 5.5%. Net interest income (FTE) for 1997 was $9.4
million compared to $8.9 million for the prior year. When comparing the results
of 1996 to 1995, net interest income (FTE) increased $558 thousand or 6.7% from
$8.3 million to $8.9 million.
NET INTEREST INCOME (FULLY TAXABLE EQUIVALENT)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest Income $16,671,228 $15,684,668 $14,622,010
Interest Expense 7,403,036 6,903,972 6,362,442
----------- ----------- -----------
Net Interest Income 9,268,192 8,780,696 8,259,568
Tax Equivalent Adjustment
to Interest Income 123,041 119,372 82,185
----------- ----------- -----------
Net Interest Income
(Fully Taxable Equivalent) $ 9,391,233 $ 8,900,068 $ 8,341,753
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
INCREASE (DECREASE) INCREASE (DECREASE)
1997 TO 1996 1996 TO 1995
------------------- -------------------
<S> <C> <C>
Interest Income $ 986,560 $1,062,658
Interest Expense 499,064 541,530
----------- ----------
Net Interest Income 487,496 521,128
Tax Equivalent Adjustment
to Interest Income 3,669 37,187
----------- ----------
Net Interest Income
(Fully Taxable Equivalent) $ 491,165 $ 558,315
=========== ==========
</TABLE>
EARNING ASSETS, INTEREST BEARING LIABILITIES, AND NET INTEREST SPREAD - Average
earning assets increased $11 million or 5.9% to $201 million during 1997.
Average earning assets were $190 million in 1996 and $175 million in 1995. This
was driven by a 1.5% increase in average loans and a 20.2% increase in average
securities. The trend in earning assets over the years compared shows a shift in
the mix of earning assets toward the loan 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. The loan portfolio comprises 66% of the
average earning assets in 1997 as compared to 69% in 1996. The trend over the
years compared shows the mix of interest bearing liabilities shifted to higher
interest bearing certificates of deposit and interest sensitive deposits from
the 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.
61
<PAGE> 39
The table of Average Balance Sheets and Interest Rate Analysis for the periods
ended December 31, 1997, December 31, 1996, and December 31, 1995, 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.
AVERAGE EARNING ASSET STRUCTURE
IN THOUSANDS
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------------
% Of % Of % Of
Average Earnings Average Earnings Average Earnings
Balances Assets Balances Assets Balances Assets
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Time Deposits $ -- 0.00% $ 548 0.29% $ 383 0.22%
Federal Funds Sold 7,423 3.68% 7,867 4.14% 6,718 3.83%
Securities
Taxable 57,418 28.50% 47,118 24.77% 51,728 29.51%
Non-taxable 4,079 2.02% 4,026 2.12% 2,747 1.57%
Loans - Net 132,620 65.80% 130,637 68.68% 113,729 64.87%
-------- -------- -------- -------- -------- --------
TOTAL AVERAGE EARNING ASSETS $201,540 100.00% $190,196 100.00% $175,305 100.00%
======== ======== ======== ======== ======== ========
</TABLE>
AVERAGE DEPOSIT STRUCTURE
IN THOUSANDS
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------------
AVERAGE % OF AVERAGE % OF AVERAGE % OF
BALANCES DEPOSITS BALANCES DEPOSITS BALANCES DEPOSITS
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Noninterest Bearing Deposits $ 21,933 12.20% $ 20,933 $ 11.90% 20,162 12.30%
Interest Bearing Demand Deposits 79,774 44.40% 76,328 43.60% 71,353 43.50%
Savings Accounts 11,203 6.20% 11,866 6.80% 12,274 7.50%
Certificates of Deposits less than $100,000 45,522 25.40% 52,480 30.00% 50,395 30.70%
-------- -------- -------- -------- -------- --------
TOTAL AVERAGE CORE DEPOSITS 158,432 88.20% 161,607 92.30% 154,184 94.00%
Certificates of Deposits greater than $100,000 21,034 11.80% 13,333 7.70% 9,888 6.00%
-------- -------- -------- -------- -------- --------
TOTAL AVERAGE DEPOSITS $179,466 100.00% $174,940 100.00% $164,072 100.00%
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<S> <C> <C> <C>
Average Interest Bearing Liabilities
as a percentage of Earning Assets 86.08% 86.73% 86.14%
Average Core Deposits
as a percentage of Total Average Assets 73.71% 79.32% 82.34%
</TABLE>
For the year ended 1997, the average yield on earning assets was 8.33%, while
the average cost of interest bearing funds was 4.27%, producing a net interest
spread (FTE) of 4.06%. The net interest margin (FTE) was 4.66% for the year
ended 1997. In comparison, the net interest margin (FTE) for the year ended 1996
was 4.67%. The increase in net interest income resulted from an increase in
interest earning assets offset by an increase in interest bearing liabilities.
62
<PAGE> 40
AVERAGE BALANCE SHEETS AND INTEREST RATE ANALYSIS
<TABLE>
<CAPTION>
1997
---------------------------------------------
AVERAGE INCOME/ YIELD/
ASSETS BALANCE EXPENSE RATE
- ------ ------------ ----------- -----
<S> <C> <C> <C>
Loans (1) (2) $132,619,767 $12,685,422 9.57%
------------ -----------
Investment Securities:
U. S. Government and Other 56,450,651 3,290,929 5.83%
State and Municipal (3) 4,079,175 361,887 8.87%
Other Securities 966,991 57,966 5.99%
------------ -----------
Total Investment Securities 61,496,817 3,710,782 6.03%
Federal Funds Sold 7,422,950 398,065 5.36%
Time Deposits 0 0 0
------------ -----------
TOTAL EARNING ASSETS 201,539,534 $16,794,269 8.33%
===========
Allowance for Loan Losses (1,642,960)
Cash and Due from Banks 7,221,758
Bank Premises and Equipment 2,684,535
Market Value Adjustment - Investments 27,085
Other Assets 5,106,379
------------
TOTAL ASSETS $214,936,331
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Bearing Deposits:
Interest Bearing Demand Deposits $ 79,774,260 $ 3,049,822 3.82%
Savings 11,203,097 277,922 2.48%
Certificates of Deposit 66,555,932 3,427,510 5.15%
------------ -----------
TOTAL INTEREST BEARING DEPOSITS 157,533,289 6,755,254 4.29%
Other Borrowings 15,947,833 647,782 4.06%
------------ -----------
TOTAL INTEREST BEARING LIABILITIES 173,481,122 $7,403,036 4.27%
===========
Non-interest Bearing Deposits 21,933,255
Other Liabilities 1,559,830
Stockholders' Equity 17,962,124
------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $214,936,331
============
Net Interest Income -
Tax Equivalent Basis $ 9,391,233
Tax Equivalent Adjustment (123,041)
-----------
NET INTEREST INCOME $ 9,268,192
===========
Interest Income and Rate Earned $16,794,269 8.33%
Interest Expense and Rate Paid 7,403,036 4.27%
----------- ----
INTEREST RATE SPREAD 4.06%
====
NET INTEREST INCOME AND NET YIELD ON
AVERAGE EARNING ASSETS $ 9,391,233 4.66%
=========== ====
</TABLE>
63
<PAGE> 41
<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 and Other 46,210,934 2,617,004 5.66%
State and 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 $ 5,804,040 8.31%
===========
Allowance for Loan Losses (1,590,744)
Cash and Due from Banks 6,808,281
Bank Premises and Equipment 2,784,454
Market Value Adjustment - Investments (60,061)
Other Assets 5,600,609
------------
TOTAL ASSETS $203,738,412
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Bearing Deposits:
Interest Bearing Demand 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 $203,738,412
STOCKHOLDERS' EQUITY ============
Net Interest Income - $ 8,900,068
Tax Equivalent Basis (119,372)
Tax Equivalent Adjustment -----------
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 AND NET YIELD ON
AVERAGE EARNING ASSETS $ 8,900,068 4.67%
=========== ====
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------------------------
AVERAGE INCOME/ YIELD/
ASSETS BALANCE EXPENSE RATE
- ------ ------------ ----------- -----
<S> <C> <C> <C>
Loans (1) (2) $113,729,061 $10,987,315 9.66%
------------ -----------
Investment Securities:
U. S. Government and Other 50,886,807 2,990,707 5.88%
State and Municipal (3) 2,746,504 241,720 8.80%
Other Securities 841,010 54,827 6.52%
------------ ----------
Total Investment Securities 54,474,321 3,287,254 6.03%
Federal Funds Sold 6,718,178 391,352 5.83%
Time Deposits 383,125 38,274 9.99%
------------ -----------
TOTAL EARNING ASSETS 175,304,685 $14,704,195 8.39%
===========
Allowance for Loan Losses (1,716,222)
Cash and Due from Banks 6,766,234
Bank Premises and Equipment 2,573,162
Market Value Adjustment - Investments (445,454)
Other Assets 4,763,441
-----------
TOTAL ASSETS
$187,245,846
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Bearing Deposits:
Interest Bearing Demand Deposits $ 71,352,976 $ 2,780,065 3.90%
Savings 12,274,310 341,931 2.79%
Certificates of Deposit 60,283,289 3,000,899 4.98%
------------ -----------
TOTAL INTEREST BEARING DEPOSITS 143,910,575 6,122,895 4.25%
Other Borrowings 7,093,189 239,547 3.38%
------------ -----------
TOTAL INTEREST BEARING LIABILITIES 151,003,764 $ 6,362,442 4.21%
===========
20,161,526
Non-interest Bearing Deposits 1,508,526
Other Liabilities 14,572,030
Stockholders' Equity -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $187,245,846
============
Net Interest Income -
Tax Equivalent Basis $ 8,341,753
Tax Equivalent Adjustment (82,185)
-----------
NET INTEREST INCOME $ 8,259,568
===========
Interest Income and Rate Earned $14,704,195 8.39%
Interest Expense and Rate Paid 6,362,442 4.21%
----------- ----
INTEREST RATE SPREAD 4.18%
====
NET INTEREST INCOME AND NET YIELD ON
AVERAGE EARNING ASSETS $ 8,341,753 4.76%
=========== ====
</TABLE>
(1) Nonaccrual loans are included in average balances for yield computations
(2) Includes loan fees and late charges in both interest income and yield
computations
(3) Tax equivalent basis - 34% rate for 1997, 1996 and 1995
64
<PAGE> 42
The following table (Interest Differentials) provides additional information
relating to the effect change in interest yield has on net income:
INTEREST DIFFERENTIALS
<TABLE>
<CAPTION>
1997/1996
-------------------------------------------------------------
CHANGE IN CHANGE IN CHANGES IN TOTAL
VOLUME RATE RATE/VOLUME CHANGE
----------- ----------- ----------- -----------
INTEREST EARNING ASSETS
<S> <C> <C> <C> <C>
Federal Funds Sold $ (22,977) $ 14,995 $ (847) $ (8,829)
Securities:
Taxable 579,893 76,975 17,057 673,925
Nontaxable 4,666 6,046 80 10,792
Other securities 3,554 604 40 4,198
Time deposits (38,425) (38,425) 38,425 (38,425)
Loans 187,228 158,928 2,412 348,568
----------- ----------- ----------- -----------
Total Interest Income 713,939 219,123 57,167 990,229
----------- ----------- ----------- -----------
INTEREST BEARING LIABILITIES
Interest Bearing Demand Deposits 130,008 39,026 1,763 170,797
Savings (16,710) (4,709) 262 (21,157)
Certificates of Deposit 37,843 36,397 411 74,651
Other Borrowings 170,533 71,536 32,705 274,774
----------- ----------- ----------- -----------
Total Interest Expense 321,672 142,250 35,141 499,063
----------- ----------- ----------- -----------
Increase (Decrease) in
Interest Differential $ 392,266 $ 76,873 $ 22,026 $ 491,165
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1997/1996
-------------------------------------------------------------
CHANGE IN CHANGE IN CHANGES IN TOTAL
VOLUME RATE RATE/VOLUME CHANGE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NTEREST 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 Demand Deposits 193,820 (88,678) (6,180) 98,962
Savings (11,373) (32,564) 1,083 (42,854)
Certificates of Deposit 275,275 70,243 6,443 351,961
Other Borrowings 130,057 2,206 1,198 133,461
----------- ----------- ----------- -----------
Total Interest Expense 587,779 (48,793) 2,544 541,530
----------- ----------- ----------- -----------
Increase (Decrease) in
Interest Differential $ 971,171 $ (369,752) $ (43,104) $ 558,315
=========== =========== =========== ===========
</TABLE>
65
<PAGE> 43
PROVISION FOR LOAN LOSSES
Provision for loan losses was $420 thousand for 1997, an increase of $100
thousand from the provision for loan losses of $320 thousand for 1996. Net
charge offs were $374 thousand for 1997 as compared to $241 thousand for 1996.
As a percentage of average loans, net charge offs (recoveries) were .28% in 1997
and .18% in 1996. Gross charge offs were .48% in 1997 and .41% in 1996.
Recoveries as a percentage of gross charge offs were 41.5% in 1997 and 55.3% in
1996.
The provision for loan losses in 1995 was $140 thousand. In 1995, net recoveries
were $54 thousand, or (.05)% of average loans. Gross charge offs were .21% of
average loans and recoveries were 122.7% 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 1997 was $2.9 million, compared to $2.7 million in 1996.
Exclusive of securities transactions other income increased $156 thousand.
Service charges on deposit accounts were $1.135 million for 1997, an increase of
$61 thousand or 5.7% over 1996. Service charges on deposit accounts were $1.074
million in 1996. The primary reason for the increase in 1997 was a $77 thousand
increase in nonsufficient funds charges on deposit accounts.
Fees for other customer services were $838 thousand for 1997, a decrease of $12
thousand or 1.4% over 1996. Fees for other customer services were $850 thousand
in 1996. 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 decrease in 1997, was fewer commissions, approximately $17 thousand, earned
on credit life policies written for the Bank's loans. ATM related charges
increased $5 thousand from 1996 to 1997.
Trust fees increased $78 thousand or 18.8% from 1996 largely due to growth in
the number of accounts managed by the trust department since 1996 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
$67,000,000 in assets under its administration.
Net investment securities gains increased other income by $19 thousand for 1997,
compared to a net loss on investment securities of $50 thousand in 1996.
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 1997 was $414 thousand compared to the 1996 total of
$386 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 $28 thousand for 1997 was an
increase of $16 thousand in sale of other real estate, an increase of $23
thousand in alternative investment fee income and an increase of $7 thousand in
rentals of bank premises. Areas that noted declines were data processing fee
income of $12 thousand and check sales of $12 thousand.
66
<PAGE> 44
OTHER EXPENSES
Other expenses totaled $7.2 million in 1997, a 1.4% increase over the 1996 total
of $7.1 million. Salary and employee benefits increased $24 thousand or .64%, to
$3.8 million for 1997 when compared to $3.7 million for 1996. This increase is
due to the effects of employee and management raises for 1997.
Net occupancy expense was $514 thousand for 1997, versus $551 thousand for 1996,
a decrease of $37 thousand or 6.7%. The main factor contributing to this
decrease was a $25 thousand decline in utilities costs.
Equipment expense totaled $567 thousand for 1997 as compared to $561 thousand in
1996. This $6 thousand or 1% increase is mainly attributed to increased costs of
outside equipment rentals amounting to $20 thousand in 1997 with a resulting
decrease in repairs and maintenance of equipment of $14 thousand.
Other operating expenses totaled $2.345 million for 1997 compared to $2.238 for
1996, an increase of $107 thousand or 5%. For further analysis of other
operating expense see Note L.
APPLICABLE INCOME TAXES
Applicable income taxes for 1997, 1996 and 1995 were $1.5 million, $1.4 million
and $1.1 million, respectively, producing an effective tax rate of 33.5%, 34.3%,
and 33.7%, 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 funds is the Bank's core deposit base. At
December 31, 1997, the average core deposits were approximately $174 million or
89% of total average deposits and 81% 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 in funding future
loan commitments.
67
<PAGE> 45
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 utilizes computerized interest rate simulation analysis as its
primary measure of interest rate sensitivity. Management's analysis indicates
that the Bank is liability sensitive for the first three months and over 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 three months, four to twelve months, one
to five years, over five years, and on a cumulative basis. The following table
shows interest sensitivity gaps as of December 31, 1997.
<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 $ 16,731 $ 23,485 $ 24,870 $ 3,066 $ -- $ 68,152
Loans, Net of
Unearned Income 49,444 30,723 52,351 3,720 -- 136,238
Federal Funds Sold 3,474 -- -- -- -- 3,474
Other Assets -- -- -- -- 16,135 16,135
-------- -------- -------- ------- -------- --------
Total Assets $ 69,649 $ 54,208 $ 77,221 $ 6,786 $ 16,135 $223,999
======== ======== ======== ======== ======== ========
Liabilities
Interest Bearing
Demand Deposits $ 42,723 $ 3,388 $ 25,501 $ 12,751 $ -- $ 84,363
Savings Deposits 3,649 -- 4,865 2,432 -- 10,946
Certificates of
Deposit 24,935 27,103 16,471 1,940 -- 70,449
Demand Deposits -- -- -- -- 25,378 25,378
Other Liabilities 7,853 -- -- 3,974 2,417 14,244
Stockholders' Equity -- -- -- -- 18,619 18,619
-------- -------- -------- ------- -------- --------
Total Liabilities
and Stockholders'
Equity $ 79,160 $ 30,491 $ 46,837 $ 21,097 $ 46,414 $223,999
======== ======== ======== ======== ======== ========
Interest Rate
Sensitivity Gap $ (9,511) $ 23,717 $ 30,384 $(14,311) $(30,279)
Cumulative Interest
Rate Sensitivity Gap $ (9,511) $ 14,206 $ 44,590 $ 30,279 $ --
</TABLE>
68
<PAGE> 46
Changes in the mix of earning assets or supporting liabilities can either
increase or decrease the net interest margin without affecting interest rate
sensitivity. In addition, the interest rate spread between an asset and its
supporting liability can vary significantly while the timing of repricing for
both the asset and liability remains the same, thus impacting net interest
income. Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest sensitivity analysis report. These prepayments may have significant
effects on the Bank's net interest margin. Because of these factors, an interest
sensitivity gap report may not provide a complete assessment of exposure to
changes in interest rates.
Management also evaluates the condition of the economy, the pattern of market
interest rates and other economic data to determine the appropriate mix and
repricing characteristics of assets and liabilities required to produce an
optimal net interest margin.
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 at December 31, 1997, were $22 million and $24 million at
December 31, 1996. The Bank has letters of credit of $2 million issued at
December 31, 1997. Additionally, the Bank has deposit customers who have credit
lines available to them through their deposit accounts. At December 31, 1997,
the available portion of these credit lines was $540 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 standby
letters of credit described above.
The Bank began issuing credit cards during 1989. As of December 31, 1997 and
1996, the aggregate credit available was $6.5 million and $6.4 million,
respectively. 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, 1997, 1996, 1995, 1994, and
1993, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Commercial, industrial and agricultural $105,413,674 $104,628,274 $100,461,319 $ 77,687,198 $ 67,288,411
Real estate - construction 4,746,600 5,742,457 8,206,698 4,061,067 5,690,354
Real estate - mortgage 7,735,935 8,567,614 4,279,069 3,988,030 3,629,264
Installment 21,529,964 15,160,530 16,339,010 16,853,099 16,666,710
------------ ------------ ------------ ------------ ------------
$139,426,173 $134,098,875 $129,286,096 $102,589,394 $ 93,274,739
============ ============ ============ ============ ============
</TABLE>
<PAGE> 47
Following is the detail of maturities and sensitivity of loans to changes in
interest rates at December 31, 1997.
<TABLE>
<CAPTION>
December 31, 1997 Loans to Mature
---------------------------------------------------------------
Less than One to Greater than
One Year Five Years Five Years Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Commercial $ 48,916,967 $ 50,888,633 $ 4,565,461 $104,371,061
Mortgage 1,199,995 2,749,097 3,786,843 7,735,935
Installment 7,729,227 13,659,428 141,309 21,529,964
------------ ------------ ------------ ------------
Total $ 57,846,189 $ 67,297,158 $ 8,493,613 $133,636,960
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Loans Due After One Year at December 31, 1997
Interest Rates
----------------------------------------------
Predetermined Adjustable Total
------------- ------------ ------------
<S> <C> <C> <C>
Commercial $ 45,164,945 $ 9,839,149 $ 55,454,094
Mortgage 3,874,923 2,661,017 6,535,940
Installment 13,800,737 -- 13,800,737
------------ ------------ ------------
Total $ 63,290,605 $ 12,500,165 $ 75,790,771
============ ============ ============
</TABLE>
The Company has no foreign loans
SECURITIES
Following is the detail of maturities and weighted average yield for each
maturity group at December 31, 1997.
<TABLE>
<CAPTION>
December 31, 1997
----------------------
Weighted
Average Book
Yield Value
-------- -----------
<S> <C> <C>
U.S. Government Securities:
Within 1 year 5.87% $13,786,082
After 1 year, but within 5 years 6.02% 14,550,957
After 5, but within 10 years 0.00% --
After 10 years 0.00% --
---- -----------
Total U.S. Government Securities 5.94% $28,337,039
==== ===========
Securities of U.S. Government
Agencies and Corporations:
Within 1 year 5.38% $19,399,922
After 1 year, but within 5 years 5.98% 9,125,646
After 5, but within 10 years 6.85% 2,251,119
After 10 years 6.56% 3,563,278
---- ----------
Total Securities of
U.S. Government Agencies
and Corporations 5.75% $34,339,965
===========
</TABLE>
70
<PAGE> 48
SECURITIES - CONTINUED
<TABLE>
<CAPTION>
Weighted
Average Book
Yield Value
-------- -----------
<S> <C> <C>
Obligations of States and Political
Subdivisions' pre tax yields:
Within 1 year 6.19% $ 1,338,023
After 1 year, but within 5 years 5.12% 1,675,972
After 5, but within 10 years 6.26% 1,342,407
After 10 years 0.00% --
---- -----------
Total Obligations of States
and Political Subdivisions 5.81% $ 4,356,402
==== ===========
Other Securities-
Equity 5.83% $ 974,900
==== ===========
Total Other Securities 5.83% $ 974,900
==== ===========
</TABLE>
An analysis of the investment portfolio at December 31, 1997, 1996, and 1995, is
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
U.S. Treasury and other U. S. Government
agencies and corporations $58,484,725 $27,960,431 $36,064,435
Mortgage-backed securities 4,192,279 10,368,222 12,696,096
States and political subdivisions 4,356,402 3,584,093 2,952,694
Other securities 974,900 924,200 844,350
----------- ----------- -----------
$68,008,306 $42,836,946 $52,557,575
=========== =========== ===========
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses was $1.592 million at year end 1997 or 1.14% of
total loans outstanding. At year end 1996, the allowance for loan losses was
$1.545 million or 1.15% of total loans outstanding. The allowance for loan
losses account represents 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 the current quality of the
loan portfolio.
71
<PAGE> 49
Activity in Allowance for Loan Losses, below, presents an analysis of activity
in the allowance for loan losses for the past five years.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Beginning balance $ 1,545,820 $ 1,466,840 $ 1,273,160 $ 1,232,880 $ 1,431,262
----------- ----------- ----------- ----------- -----------
Loans charged off
Commercial, industrial and agricultural 348,522 292,853 81,055 144,313 341,304
Installment and others 290,022 237,048 155,555 206,966 219,271
Mortgage -- 8,746 -- -- --
----------- ----------- ----------- ----------- -----------
Total Charged off 638,544 538,647 236,610 351,279 560,575
----------- ----------- ----------- ----------- -----------
Loan Recoveries
Commercial, industrial and agricultural 135,308 161,605 198,617 75,307 108,837
Installment and others 129,428 136,022 91,673 126,252 153,356
Mortgage -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total Recoveries 264,736 297,627 290,290 201,559 262,193
----------- ----------- ----------- ----------- -----------
Net loans charged off 373,808 241,020 (53,680) 149,720 298,382
Provision charged to expense 420,000 320,000 140,000 190,000 100,000
----------- ----------- ----------- ----------- -----------
Ending Balance $ 1,592,012 $ 1,545,820 $ 1,466,840 $ 1,273,160 $ 1,232,880
=========== =========== =========== =========== ===========
</TABLE>
NONPERFORMING ASSETS
Nonperforming assets include nonaccrual and impaired loans and other real
estate. Loans are considered for nonaccrual status 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, 1997, were $264 thousand and $1.1 million at
December 31, 1996. Loans past due 90 days and still accruing at December 31,
1997 and 1996, were $565 thousand and $477 thousand, respectively. At December
31, 1997, nonaccrual loans were .18% of gross loans outstanding and 17% of the
allowance for loan losses. At December 31, 1996, these ratios were .82% and 71%,
respectively.
The following table presents information on the amounts of nonperforming loans
at December 31, 1997, 1996, 1995, 1994, and 1993:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Nonaccrual $ 264,000 $1,100,000 $ 762,000 $ 668,000 $ 493,000
Accruing loans past due 90 days or more $ 565,000 $ 477,000 $ 181,000 $ 36,000 $ 184,000
Trouble debt restructurings $ 377,000 $ 462,000 $ 228,000 $ 303,000 $ --
</TABLE>
In the process of reviewing the loan portfolio, management identifies certain
potential problem loans which are not classified as impaired, nonaccrual,
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 increased $52 thousand during
1997. At December 31, 1997 and 1996, other real estate was $181 thousand and
$129 thousand, respectively. Improvements in commercial real estate and general
economic conditions allowed for a $55 thousand gain on disposition of previously
foreclosed properties.
72
<PAGE> 50
As of December 31, 1997, 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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Return on assets 1.40% 1.29% 1.18%
Return on average equity 16.72% 16.00% 15.13%
Dividend payout 47.00% 42.00% 45.00%
Equity to assets 8.36% 8.06% 7.78%
</TABLE>
The Bank is required to maintain minimum amounts of capital to total
risk-weighted assets, as defined by the regulators. The guidelines require 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 a
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.
73
<PAGE> 51
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 adequate regulatory capital levels. The Company's primary
source of funds is dividends received from the Bank. Under current dividend
limitation 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,
1997 1996
-------- --------
<S> <C> <C>
Tier 1 Capital $ 16,776 $ 15,688
Total Capital $ 18,368 $ 17,234
Risk Weighted Ratios:
Tier 1 Capital 11.54% 11.20%
Total Capital 12.64% 12.31%
Leverage Ratio 7.45% 7.70%
</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 538 stockholders as of December 31, 1997. 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 1997 and 1996 are presented below.
<TABLE>
<CAPTION>
Period 1996 Dividends per Share
----------- -------------------
<S> <C>
First Quarter .23
Second Quarter .26
Third Quarter .26
Fourth Quarter .74
</TABLE>
74
<PAGE> 52
<TABLE>
<CAPTION>
Period 1997 Dividends per Share
----------- -------------------
<S> <C>
First Quarter .26
Second Quarter .30
Third Quarter .30
Fourth Quarter 1.05
</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
75
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Registrant
(1) Merchants Bank, a Mississippi corporation.
(2) Merchants Data Services, Inc., a Mississippi corporation (dissolved in
1994).
23
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM MERCHANTS CAPITAL AND
SUBSIDIARY'S CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT 12/31/97 AND THE
CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED 12/31/97 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,989
<INT-BEARING-DEPOSITS> 96
<FED-FUNDS-SOLD> 3,474
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 68,152
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 137,830
<ALLOWANCE> 1,592
<TOTAL-ASSETS> 223,999
<DEPOSITS> 191,136
<SHORT-TERM> 11,921<F1>
<LIABILITIES-OTHER> 2,322
<LONG-TERM> 0
3,713
0
<COMMON> 0
<OTHER-SE> 14,906
<TOTAL-LIABILITIES-AND-EQUITY> 223,999
<INTEREST-LOAN> 12,685
<INTEREST-INVEST> 3,584
<INTEREST-OTHER> 402
<INTEREST-TOTAL> 16,671
<INTEREST-DEPOSIT> 6,755
<INTEREST-EXPENSE> 648
<INTEREST-INCOME-NET> 9,268
<LOAN-LOSSES> 420
<SECURITIES-GAINS> 19
<EXPENSE-OTHER> 7,235
<INCOME-PRETAX> 4,514
<INCOME-PRE-EXTRAORDINARY> 4,514
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,003
<EPS-PRIMARY> 4.04
<EPS-DILUTED> 4.04
<YIELD-ACTUAL> 4.66
<LOANS-NON> 264
<LOANS-PAST> 565
<LOANS-TROUBLED> 377
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,546
<CHARGE-OFFS> 639
<RECOVERIES> 265
<ALLOWANCE-CLOSE> 1,592
<ALLOWANCE-DOMESTIC> 1,592
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Short-term borrowings include the following:
Securities sold under repurchase agreements 11,921
Other short-term borrowings 0
Total 11,921
Other liabilites include the following:
Accounts payable and accrued expenses 1,542
Other liabilities 780
Total 2,322
Other interest income includes the following:
Interest-bearing deposits with banks 4
Federal funds sold 398
Securities purchased under resale agreements 0
Securities borrowed 0
Total 402
</FN>
</TABLE>
