<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period from _______________ to _______________
Commission File Number 0-14484
MERCHANTS BANCORP, INC.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3182868
- - - - - - -------------------------------- -------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
34 SOUTH BROADWAY, AURORA, ILLINOIS 60507
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(708) 896-9000
-------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: As of September
30, 1995, the Registrant had outstanding 2,571,552 shares of common stock,
$1.00 par value per share.
<PAGE>
MERCHANTS BANCORP, INC.
Form 10-Q Quarterly Report
Table of Contents
PART I
Page Number
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . .1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . .6
PART II
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 12
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . 12
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 12
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . 12
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 12
Form 10-Q Signature Page . . . . . . . . . . . . . . . . . . . . . . . . 13
<PAGE>
PART I - FINANCIAL INFORMATION
MERCHANTS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
<S> <C> <C>
ASSETS
Cash and due from banks $ 26,699 $ 28,922
Securities available for sale 155,251 128,326
Securities held to maturity (fair value
of $41,306 in 1995 and $37,311 in 1994) 39,966 38,505
Loans held for sale 2,234 2,033
Loans 294,610 285,573
Allowance for loan losses 5,287 5,140
-------- --------
Net loans 289,323 280,433
Premises and equipment, net 9,408 9,337
Other real estate owned 596 845
Accrued interest and other assets 7,694 7,888
-------- --------
Total assets $531,171 $496,289
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 72,012 $ 74,931
Interest-bearing 382,718 338,810
-------- --------
Total deposits 454,730 413,741
Federal funds purchased and securities
sold under repurchase agreements 19,543 33,299
Notes payable 3,000 3,000
Accrued interest and other liabilities 3,002 2,793
-------- --------
Total liabilities 480,275 452,833
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value;
Authorized 500,000 shares; none issued -- --
Common stock, $1 par value authorized
6,000,000 shares; issued 2,606,690 2,607 2,607
Surplus 18,312 18,232
Retained earnings 30,559 26,915
Unrealized net loss on securities
available for sale (390) (4,083)
Treasury stock, at cost, 35,138 shares
in 1995 and 39,408 shares in 1994 (192) (215)
-------- --------
Total stockholders' equity 50,896 43,456
-------- --------
Total liabilities and stockholders'
equity $531,171 $496,289
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MERCHANTS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 7,097 $ 6,320 $ 20,915 $ 18,072
Interest on securities:
Taxable 2,110 1,546 5,635 4,422
Tax-exempt 719 654 2,354 1,967
Interest on federal funds sold 455 14 690 17
---------- ---------- ---------- ----------
Total interest income 10,381 8,534 29,594 24,478
---------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 4,507 3,000 12,010 8,361
Interest on federal funds purchased and securities
sold under repurchase agreements 473 387 1,448 1,028
Interest on note payable 37 37 110 115
---------- ---------- ---------- ----------
Total interest expense 5,017 3,424 13,568 9,504
---------- ---------- ---------- ----------
Net interest income 5,364 5,110 16,026 14,974
Provision for loan losses 397 512 1,381 1,856
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 4,967 4,598 14,645 13,118
---------- ---------- ---------- ----------
OTHER INCOME
Trust income 478 446 1,437 1,262
Mortgage banking income 350 227 858 946
Service charges and fees 716 649 1,993 1,824
Securities gains, net 2 26 21 383
Other income 194 228 688 661
---------- ---------- ---------- ----------
Total other income 1,740 1,576 4,997 5,076
---------- ---------- ---------- ----------
OTHER EXPENSE
Salaries and employee benefits 2,541 2,340 7,327 6,854
Occupancy expense, net 282 200 785 689
Furniture and equipment expense 311 297 912 800
FDIC deposit assessment (27) 212 430 634
Other expense 1,254 1,102 3,784 3,466
---------- ---------- ---------- ----------
Total other expense 4,361 4,151 13,238 12,443
---------- ---------- ---------- ----------
Income before income taxes 2,346 2,023 6,404 5,751
Provision for income taxes 669 576 1,834 1,595
---------- ---------- ---------- ----------
Net income $ 1,677 $ 1,447 $ 4,570 $ 4,156
========== ========== ========== ==========
Earnings per share $0.65 $0.56 $1.78 $1.62
Cash dividends declared per share $0.12 $0.10 $0.36 $0.27
Weighted average shares outstanding 2,571,123 2,567,282 2,569,759 2,567,282
Ending shares outstanding 2,571,552 2,567,282 2,571,552 2,567,282
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
MERCHANTS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,570 $ 4,156
Adjustments to reconcile net income to cash
from operating activities:
Depreciation and amortization 920 801
Provision for loan losses 1,381 1,856
Origination of mortgage loans held for sale (29,274) (39,059)
Proceeds from sales of mortgage loans held for sale 29,313 45,613
Net gain on sales of loans (240) (437)
Provision for deferred taxes 77 (212)
Increase (decrease) in net income taxes payable (125) 501
Decrease (increase) in accrued interest and other assets 194 (1,977)
Decrease in accrued interest and other liabilities (1,646) (1,879)
Discount accretion on securities (122) (70)
Premium amortization on securities 657 743
Other, net 103 (242)
-------- --------
Net cash from operating activities 5,808 9,794
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from matured securities available for sale 19,332 11,965
Proceeds from sales of securities available for sale 9,682 15,249
Purchases of securities available for sale (51,131) (45,364)
Proceeds from matured securities held to maturity -- 600
Purchases of securities held to maturity (1,208) (2,446)
Net principal disbursed on loans (10,271) (12,156)
Proceeds from sales of other real estate 249 532
Property and equipment expenditures (991) (1,657)
-------- --------
Net cash from investing activities (34,338) (33,277)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 40,989 23,650
Net decrease in short-term borrowings (13,756) (1,502)
Payments on notes payable -- (450)
Dividends paid (926) (693)
-------- -------
Net cash from financing activities 26,307 21,005
-------- --------
Net change in cash and cash equivalents (2,223) (2,478)
Cash and cash equivalents at beginning of period 28,922 30,063
-------- --------
Cash and cash equivalents at end of period $ 26,699 $ 27,585
======== ========
Supplemental disclosures:
Income taxes paid $1,959 $1,598
Interest paid 13,199 9,357
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
MERCHANTS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS)
NOTE 1: BASIS OF PRESENTATION
The financial information of Merchants Bancorp, Inc. (the "Company") included
herein is unaudited; however, such information reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the interim
periods. The results of the interim period ended September 30, 1995 are not
necessarily indicative of the results expected for the year ending
December 31, 1995.
NOTE 2: SECURITIES
Amortized costs, gross of unrealized gains and losses, and fair values of
securities are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1995
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury $ 28,070 $ 38 $ 382 $ 27,726
U.S. Government agencies 63,904 252 333 63,823
U.S. Government agency
mortgage backed securities 47,695 370 584 47,481
States and political subdivisions 12,136 366 331 12,171
Collateralized mortgage obligations 2,164 14 1 2,177
Other securities 1,873 -- -- 1,873
-------- ------ ------ --------
155,842 1,040 1,631 155,251
-------- ------ ------ --------
Securities held to maturity:
States and political subdivisions 39,966 1,637 297 41,306
-------- ------ ------ --------
$195,808 $2,677 $1,928 $196,557
======== ====== ====== ========
December 31, 1994
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury $ 31,412 $ -- $1,558 $ 29,854
U.S. Government agencies 43,500 20 1,980 41,540
U.S. Government agency
mortgage backed securities 45,171 12 2,578 42,605
States and political subdivisions 10,531 153 284 10,400
Collateralized mortgage obligations 2,113 31 3 2,141
Equity securities 1,786 -- -- 1,786
-------- ------ ------ --------
134,513 216 6,403 128,326
-------- ------ ------ --------
Securities held to maturity:
States and political subdivisions 38,505 545 1,739 37,311
-------- ------ ------ --------
$173,018 $ 761 $8,142 $165,637
======== ====== ====== ========
</TABLE>
4
<PAGE>
MERCHANTS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 3: LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
<S> <C> <C>
Commercial and industrial $105,419 $112,828
Real estate - commercial 68,662 72,305
Real estate - construction 35,035 24,470
Real estate - residential 28,823 19,549
Installment 57,873 57,925
Other loans 957 937
-------- --------
296,769 288,014
Unearned discount (1,896) (2,054)
Deferred loan fees (263) (387)
-------- --------
Total loans $294,610 $285,573
======== ========
</TABLE>
NOTE 4: ALLOWANCE FOR LOAN LOSSES
Following is a summary of changes in the allowance for loan losses for the
nine months ended September 30:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Balance, January 1 $ 5,140 $ 4,705
Recoveries 552 929
Provision charged to operations 1,381 1,856
Loans charged-off (1,786) (2,495)
------- -------
Balance, end of period $ 5,287 $ 4,995
======= =======
</TABLE>
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan," which was amended by SFAS 118. These standards require that the
fair value of impaired loans be calculated and if the fair value is less than
the loan s carrying value, a valuation allowance be established. The adoption
of this statement has not had a material effect on the Company's financial
statements.
NOTE 5: EMPLOYEE BENEFIT PLANS
The Company maintains a non-contributory, trusteed pension plan which covers
substantially all full time employees who have completed age and service
requirements. A provision of $117,000 was recorded in the third quarter of
1995, for early retirement benefits offered to employees meeting certain
requirements. No provision for periodic expense was made during the nine
months ended September 30, 1994. The Company also maintains a contributory
thrift plan. The Company contributed $210,000 and $212,000 in the nine month
periods ended September 30, 1995 and 1994, respectively. The Company
recognizes this expense in the same period in which the contribution is made.
NOTE 6: COMMON STOCK
During the third quarter of 1994, the Company adopted a Dividend Reinvestment
and Stock Purchase Plan (the "Plan"). The Plan provides holders of common
stock of the Company the opportunity to purchase additional shares of the
Company's common stock by reinvesting cash dividends, and to purchase
additional shares of common stock. Stockholders who participate in the Plan
will have the cash dividends paid on their shares of common stock
automatically reinvested in shares of common stock. Participants may also
make optional cash purchases of not less than $25 and not more than $3,000
per quarter.
5
<PAGE>
MERCHANTS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 7: ACQUISITION
On June 30, 1995, the Company executed a definitive agreement to affiliate
with Valley Banc Services Corporation through the merger of Valley Banc
Services Corporation with a wholly owned subsidiary of the Company. The
proposed affiliation received the approval of the Valley Banc Services
Corporation stockholders on August 31, 1995, and by the Federal Reserve Bank.
Upon approval by the Illinois State Commissioner of Banks, it is anticipated
that the proposed transaction will be consummated during the first quarter of
1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net income for the third quarter of 1995 was $1,677,000, or 65 cents per
share, a 16% increase compared to $1,447,000, or 56 cents per share earned in
the third quarter of 1994. Net income was $4,570,000, or $1.78 per share for
the nine months ended September 30, 1995, an increase of 10% from the nine
months ended September 30, 1994. In comparing the nine months periods,
several factors have influenced the growth in earnings. A higher level of
earning assets has resulted in an increase in net interest income, a Federal
Deposit Insurance Corporation ("FDIC") refund resulting from a retroactive
reduction in the assessment rate, and a decline in the provision for loan
losses were the largest contributors to the increase in year to date net
income.
NET INTEREST INCOME
Net interest income was $16 and $15 million during the nine months ended
September 30, 1995, and 1994, respectively, an increase of 8%. For the three
months ended September 30, net interest income was $5.4 million and $5.1
million in 1995 and 1994, respectively, an increase of 7%. The Company's net
interest margin (tax equivalent net interest income as a percent of earning
assets) was 4.76% for the nine months ended September 30, 1995, and 4.95% a
year earlier. Average earning assets were $482 million during the first nine
months of 1995, compared to $432 million during the first nine months of
1994, an increase of $50 million (12%).
The net interest margin was 4.50% during the third quarter of 1995, compared
to 4.90% a year earlier. The decline in the margin began in the second
quarter, during which the net interest margin was 4.86%, and continued into
the third quarter. There were two primary reasons for the decline. First,
temporary funds, in the form of repurchase agreements and certificates of
deposit of $100,000 or more, were at high levels during portions of the
second and third quarter. These funds are typically short term, and are
acquired at a relatively low margin. Second, a certificate of deposit
promotion was offered at 6.75% for an eleven month maturity. This program was
successful in attracting new deposits, but had an adverse effect on the net
interest margin in the near term. When the certificates mature in the second
quarter of 1996, efforts will be directed toward retaining these deposits at
then market rates.
OTHER INCOME
Noninterest income excluding securities gains was $1,738,000 for the three
months ended September 30, 1995 and $1,550,000 for the same period in 1994,
an increase of $188,000, or 12%. For the nine months ended September 30,
noninterest income excluding securities gains was $4,976,000 in 1995, and
$4,693,000 in 1994, an increase of $283,000, or 6%. Trust income increased
$32,000 (7%) for the quarter and $175,000 (14%) for the year to date. Annual
trust income has consistently increased at double-digit rates, and this trend
is expected to continue through the remainder of 1995.
Mortgage department fee income of $858,000 for the first nine months of 1995
reflected a decline of $88,000 (9%) from the same period in 1994. However,
third quarter mortgage fee income was $350,000 in 1995 and $227,000 in 1994,
an increase of $123,000, or 54%. Mortgage income is seasonal, with
residential activity tending to decline in the winter months, and it is
sensitive to interest rate levels and expectations. Most fixed rate mortgages
are sold and the servicing is retained. The servicing portfolio provides a
source of income which is generally more stable than origination fees. The
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
portfolio of loans serviced for others totaled $193 million as of
September 30, 1995, compared to $150 million a year earlier.
Sales of securities available for sale resulted in gains of $2,000 in the
third quarter of 1995, and $26,000 a year earlier. For the nine months ended
September 30, securities gains were $21,000 in 1995, and $383,000 in 1994.
Securities available for sale are held for indefinite periods of time, and
include securities that will be used as a part of the Company's
asset/liability management strategy. Such securities may be sold in response
to changes in interest rates, liquidity needs, or significant prepayment risk.
OTHER EXPENSE
Noninterest expense increased from $4,151,000 during the three months ended
September 30, 1994, to $4,361,000 for the same period in 1995, an increase of
$210,000 (5%). For the nine months ended September 30, noninterest expense
increased from $12,443,000 in 1994, to $13,238,000 in 1995, an increase of
$795,000 (6%).
Salaries and benefits increased $473,000 (7%) in the nine months ended
September 30, 1995, compared to the same period a year earlier. Base salaries
increased $229,000 (4%) while commissions and other performance based
compensation increased $67,000 (12%). The full-time equivalent number of
employees was 261 as of September 30, 1994, 265 as of December 31, 1994, and
has declined to 252 as of September 30, 1995.
Occupancy expenses were $82,000 higher during the three months ended
September 30, 1995, compared to the same period in 1994, and $96,000 higher
for the nine month period ended September 30, 1995. Furniture and equipment
expenses were $311,000 during the three months ended September 30, 1995, an
increase of $14,000 (5%) compared to the same period in 1994. During the
first nine months of 1995, furniture and equipment expenses increased
$112,000 (15%). Management believes strongly in the use of technology to
achieve operational efficiency and quality of results. The increase in
furniture and equipment expenses reflects, in part, a commitment to this
strategy.
The FDIC Bank Insurance Fund ("BIF") reached its congressionally mandated
level during the second quarter of 1995. In September, new assessment rates
were retroactively put into effect as of June 1, 1995. As a result, all BIF
insured institutions received refunds representing the difference between the
old and new rates, plus interest. On September 15, 1995, Merchants National
Bank of Aurora (the "Bank") received a refund of approximately $255,000,
which included $3,000 in interest. The $255,000 refund exceeded the amount of
the FDIC deposit assessment expense otherwise incurred in the third quarter
of 1995, and resulted in a decrease in the year to date expense from $634,000
in 1994, to $430,000 in 1995. The Bank continues to pay the lowest assessment
rate, now reduced to 4 cents per $100 in deposits from 23 cents per $100 in
deposits, which is applied to well capitalized institutions in the
supervisory group representing the least risk.
Other expense was $152,000 (14%) higher in the third quarter of 1995, than in
the third quarter of 1994. For the nine months ended September 30, 1995,
other expense was $318,000 (9%) higher than a year earlier. Consulting fees
were $40,000 in the third quarter of 1995, and $17,000 in the third quarter
of 1994. Consulting fees were $194,000 in the first nine months of 1995,
compared to $49,000 in the first nine months of 1994. The increase is
primarily the result of an initiative in which a consulting firm was engaged
to work with management to increase earnings through changes in a wide array
of areas, including product pricing, operating procedures, and staffing.
Management believes the changes that have been implemented, or will be
implemented, as a result of this initiative will result in significant
earnings improvement over time.
FINANCIAL CONDITION
LOANS AND PROVISION FOR LOAN LOSSES
Total loans increased $9.0 million (3%) to $294.6 million as of September 30,
1995, from $285.6 million as of December 31, 1994. Construction loans
increased more than any other category, growing to $35.0 million as of
September 30, 1995, from $24.5 million as of December 31, 1994, an increase
of $10.5 million (43%). Residential real estate loans increased $9.3 million
(48%), from $19.5 million as of December 31, 1994, to $28.8 million as of
September 30, 1995. Commercial real estate loans declined $3.6 million (5%)
and installment loans remained stable at $57.9 million as of September 30,
1995. The increases in real estate related categories reflects the continued
strength of the local economy in general, and
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
the real estate market in particular. Commercial and industrial loans
declined $7.4 million (7%) in the first nine months of 1995. Credit card
receivables, included in installment loans, were $5.4 million as of September
30, 1995, compared to $4.1 million as of December 31, 1994.
Most of the residential mortgage loans originated by the Company's mortgage
banking department are sold in the secondary market, with servicing rights
retained. A portion of the loans originated, typically adjustable rate
mortgages, are retained in the Bank's portfolio, as reflected in the increase
in residential real estate loans. At any point in time, loans will be at
various stages of this process. Loans held for sale were $2.0 million as of
December 31, 1994, and $2.2 million as of September 30, 1995. The carrying
value of these loans approximated the market value at that time.
The adequacy of the allowance for loan losses is determined by management
based on factors that include the overall composition of the loan portfolio,
types of loans, past loss experience, loan delinquencies, potential
substandard and doubtful credits, and other factors that, in management's
judgement, deserve evaluation in estimating loan losses. The adequacy of the
allowance for loan losses is monitored by the loan review staff, and reported
to management and the Board of Directors.
The Company's provision for loan losses was reduced to $1,381,000 for the
first nine months of 1995, compared to $1,856,000 a year earlier. Net
charge-offs for the nine months ended September 30, were $1,234,000 and
$1,566,000, in 1995 and 1994, respectively. The allowance for loan losses as
a percentage of total loans was 1.79% as of September 30, 1995 and 1.80% as
of December 31, 1994. In management's judgment, an adequate allowance for
possible future losses has been established.
Nonaccrual loans increased to $2,185,000 as of September 30, 1995, from
$1,397,000 as of December 31, 1994. The increase was primarily associated
with a single borrower. There were no loans past due ninety days or more and
still accruing as of either date. Renegotiated loans declined from $2.1
million as of December 31, 1994 to $1.1 million as of September 30, 1995. The
renegotiated loans were primarily loans to a single borrower which were
renegotiated during 1994, and are fully collateralized.
Other real estate owned declined from $845,000 as of December 31, 1994, to
$596,000 as a result of activity during the first nine months of 1995.
Property acquired from a single borrower in the first quarter of 1994
comprised most of the balance as of each date. The recorded values of these
properties were supported by current appraisals.
SECURITIES
Securities are classified as available for sale if they may be sold as part
of the Company's asset/liability management strategy in response to changes
in interest rates, liquidity needs, or significant prepayment risk.
Securities available for sale are carried at fair value, with related
unrealized net gains or losses, net of deferred income taxes, recorded as an
adjustment to equity capital. As of September 30, 1995, net unrealized losses
of $594,000, reduced by deferred income taxes of $201,000, resulted in a
decrease in equity capital of approximately $390,000. As of December 31,
1994, net unrealized losses of $6.2 million, net of deferred income taxes of
$2.1 million, resulted in a reduction in equity capital of $4.1 million.
The fair value of securities available for sale grew $27 million (21%) during
the first nine months of 1995, to $155.3 million as of September 30, 1995,
from $128.3 million as of December 31, 1994. Of the $27 million increase, $22
million was the result of net purchases, sales, and maturities, and $5
million was due to fluctuations in investment valuations, which are primarily
affected by interest rates. U.S. government agency mortgage backed securities
grew from $42.6 million as of December 31, 1994, to $47.5 million as of
September 30, 1995, an increase of $4.9 million (12%). U.S. government agency
securities grew $22.3 million (54%), from $41.5 million as of December 31,
1994, to $62.8 million as of September 30, 1995. Partially offsetting these
increases, holdings of U.S. Treasury securities declined $2.2 million (7%),
from $29.9 million to $27.7 million.
The amortized cost of securities held to maturity increased $2.5 million
(4%), from $38.5 million as of December 31, 1994, to $40.0 million as of
September 30, 1995. All of the securities held to maturity are obligations of
states and political subdivisions.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
DEPOSITS AND BORROWED FUNDS
Total deposits of $454.7 million, as of September 30, 1995, represented an
increase of $41.0 million (10%) from $413.7 million as of December 31, 1994.
Noninterest-bearing deposits were $72.0 million as of September 30, 1995, a
decrease of $2.9 million (4%) from $74.9 million as of December 31, 1994. At
the same time, interest-bearing deposits increased $43.9 million (13%),
including $25.5 million in certificates of deposit of $100,000 or more, and
$28.8 million in certificates of deposit under $100,000. The Bank promoted
certificates of deposit during part of the second quarter by offering a 6.75%
certificate with an eleven month maturity. This program was highly successful
in raising deposits. Efforts will be directed toward retaining these funds at
maturity.
NOW accounts declined $4.1 million, money market accounts declined $2.0
million, and savings deposits declined $4.3 million. Businesses and other
organizations, including public bodies, accounted for most of the decline in
NOW and money market accounts. These balances are typically subject to
greater variation over time than retail deposits.
The Company also utilizes securities sold under repurchase agreements as a
source of funds. Most local municipalities, and some other organizations,
must have funds insured or collateralized as a matter of their own policies.
Repurchase agreements provide a source of funds and do not increase the
Company's reserve requirement or create an expense related to FDIC insurance
on deposits. Although the balance of repurchase agreements is subject to
variation, particularly seasonal variation, the account relationships
represented by these balances are principally local and have been maintained
for relatively long periods of time. As of September 30, 1995, repurchase
agreements were $19.5 million, compared to $33.3 million as of December 31,
1994.
CAPITAL RESOURCES
Bank regulatory agencies have adopted capital standards by which all banks
and bank holding companies will be evaluated. Under the risk-based method of
measurement, the resulting ratio is dependent upon not only the level of
capital and assets, but the composition of assets and capital and the amount
of off-balance sheet commitments. The Company's capital ratios were as
follows for the dates indicated:
CAPITAL RATIOS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------ -----------------
Amount Ratio Amount Ratio
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Risk-Based Capital Ratios:(1)
Tier 1 capital $ 50,510 14.16% $ 47,109 13.92%
Tier 1 capital minimum requirement 14,264 4.00% 13,536 4.00%
-------- ------ -------- ------
Excess $ 36,246 10.16% $ 33,573 9.92%
======== ====== ======== ======
Total capital $ 54,982 15.42% $ 51,356 15.18%
Total capital minimum requirement 28,529 8.00% 27,073 8.00%
-------- ------ -------- ------
Excess $ 26,453 7.42% $ 24,283 7.18%
======== ====== ======== ======
Total risk adjusted assets $356,608 $338,409
======== ========
Leverage Capital Ratio:(2)(3)
Tier 1 capital $ 50,510 9.75% $ 47,109 9.91%
Minimum requirement 25,902 5.00% 23,762 5.00%
-------- ------ -------- ------
Excess $ 24,608 4.75% $ 23,347 4.91%
======== ====== ======== ======
Average adjusted assets $518,034 $475,249
======== ========
_______________________
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
<TABLE>
<S> <C>
(1) In accordance with the guidelines of the Federal Reserve, unrealized net
gains and losses net of deferred income taxes, which are recorded as an
adjustment to equity capital on the financial statements, are not included
in the calculation of these capital ratios.
(2) Based on the risk-based capital guidelines of the Board of Governors of
the Federal Reserve System (the "Federal Reserve"), a bank holding company
is required to maintain a Tier 1 capital to risk-adjusted assets ratio of
4.00% and total capital to risk-adjusted assets ratio of 8.00%.
(3) The leverage ratio is defined as the ratio of Tier 1 capital to average
total assets. Management of the Company has established a minimum target
leverage ratio of 5%. Based on Federal Reserve guidelines, a bank holding
company generally is required to maintain a leverage ratio of 3% plus an
additional cushion of at least 100 to 200 basis points.
</TABLE>
When the pending acquisition of Valley Banc Services Corp. for cash is
consummated, the capital ratios detailed in the accompanying table will be
somewhat reduced. Two factors contribute to this result. First, although the
level of stockholders' equity will not be affected, intangible assets will be
recorded as part of the required purchase accounting method. Intangible
assets are required to be deducted from capital during the calculation of the
capital ratios. Second, the level of total assets and risk based assets will
increase significantly with the acquisition, thus reducing capital in
percentage terms. Management projects that the revised ratios will result in
the Company being at least adequately capitalized, according to regulatory
standards, in all categories.
LIQUIDITY
Liquidity measures the ability of the Company to meet maturing obligations
and its existing commitments, to withstand fluctuations in deposit levels, to
fund its operations, and to provide for customers' credit needs. The
liquidity of the Company principally depends on cash flows from operating
activities, investment in and maturity of assets, changes in balances of
deposits and borrowings, and its ability to borrow funds in the money or
capital markets.
Net cash outflows from investing activities were $34.3 million in the first
nine months of 1995, compared to $33.3 million a year earlier. Most outflows
from investing activities are the result of new loan activity and securities
purchases. In the first nine months of 1995, net principal disbursed on loans
accounted for $10.3 million, and securities transactions aggregated a net
outflow of $23.3 million. In the first nine months of 1994, net principal
disbursed on loans accounted for $12.2 million, and securities transactions
resulted in net outflows of $20.0 million.
Cash inflows from financing activities in the first nine months of 1995 were
primarily associated with an increase in deposits of $41.0 million. This
compares with $23.7 million for the same period in 1994. Short term
borrowings decreased $13.8 million in the first nine months of 1995, and $1.5
million in the first nine months of 1994.
In the event of short term liquidity needs, the Bank may purchase Federal
funds from correspondent banks. The Bank may also borrow funds from the
Federal Reserve Bank of Chicago, but has not done so during any period
covered in this report. The Bank's membership in the Federal Home Loan Bank
System gives it the ability to borrow funds from the Federal Home Loan Bank
of Chicago for short or long term purposes under a variety of programs.
Mortgage lending activity resulted in operating cash outflows and inflows
both of approximately $29.3 million during the first nine months of 1995,
compared to $39.1 million and $45.6 million, respectively, in 1994. Total
cash inflows from operating activities exceeded operating outflows by $5.8
million for the nine months ended September 30, 1995. During the first nine
months of 1994, net cash outflows from operating activities were $9.9
million. Most of the difference between the periods under comparison was the
result of mortgage activity. Interest received net of interest paid was a
principal source of operating cash inflows in both periods reported.
Management of investing and financing activities, and market conditions,
determine the level and the stability of net interest cash flows.
Management's policy is to mitigate the impact of changes in market interest
rates to the extent possible, so that balance sheet growth is the principal
determinant of growth in net interest cash flows.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard ("SFAS") No. 122, "Accounting for
Mortgage Servicing Rights" issued in May, 1995, requires capitalization of
the cost of the rights to service mortgages for others when those rights were
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
acquired through loan origination activities. SFAS 122 is effective for years
beginning after December 15, 1995, but early adoption is encouraged.
Management is currently studying the impact of this standard. And whether to
adopt in 1995, or 1996.
RECENT REGULATORY DEVELOPMENTS
On August 8, 1995, the FDIC amended its regulations to change the range of
deposit insurance assessments charged to members of the Bank Insurance Fund
(the "BIF"), such as the Bank, from the then-prevailing range of .23% to .31%
of deposits, to a range of .04% to .31% deposits. The change in FDIC
assessments has significantly decreased the amount of deposit insurance
assessments that well-capitalized and well-managed BIF-insured institutions,
such as the Bank, pay to the FDIC. Additionally, because the change in
BIF-assessments was applied retroactively to June 1, 1995, BIF-member
institutions, including the Bank, became entitled to a refund of the
difference between the amount of assessments previously paid at the higher
assessment rates for the period from June 30, 1995 through September 30,
1995, and the amount that would have been paid for that period at the new
rates. On September 15, 1995, the Bank received a refund of approximately
$255,000, of which $63,000 represented the assessment overpayment for the
quarter ended June 30, 1995, and $189,000 represented the assessment
overpayment for the quarter ended September 30, 1995. The FDIC did not,
however, change the assessment rates charged to members of the Savings
Association Insurance Fund (the "SAIF"), and SAIF-insured institutions
continue to pay assessments ranging from .23 % to .31 % of deposits. As a
result of the change in the assessment rates charged to BIF-member
institutions, well-capitalized and well-managed SAIF members pay
significantly higher deposit insurance assessments than well-capitalized and
well-managed BIF members, such as the Bank.
The FDIC was able to change the range for BIF-member deposit insurance
assessments to their current levels because the ratio of the insurance
reserves of the BIF to total BIF-insured deposits equals or exceeds the
statutorily designated reserve ratio of 1.25%. Because the SAIF does not meet
this designated reserve ratio, the FDIC is prohibited by federal law from
reducing the deposit insurance assessments charged to SAIF-member
institutions to the same levels currently charged BIF-member institutions.
Legislative proposals pending before the Congress would recapitalize the SAIF
to the designated reserve ratio by imposing a special assessment against
SAIF-insured institutions, payable January 1, 1996, sufficient in the
aggregate to increase the ratio of the insurance reserves of the SAIF to
total SAIF-insured deposits to 1.25%. It is anticipated that this special
assessment, if enacted as proposed, would equal approximately .85% of the
deposits of each SAIF-insured institution. At such time as the SAIF meets the
designated reserve ratio of 1.25%, the assessment rates charged SAIF-member
institutions can be reduced to levels consistent with those charged to
BIF-member institutions.
Legislation has also been introduced in the Congress that would, among other
things, require federal thrift institutions to convert to state or national
banks and merge the BIF and the SAIF into a single deposit insurance fund
administered by the FDIC. At this time, it is not possible to predict
whether, or in what form, any such legislation will be adopted or the impact
such legislation would have on the Company or the Bank.
11
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the
Company or its subsidiary is a party other than ordinary routine
litigation incidental to their respective businesses.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits.
None
Reports on Form 8-K.
None
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERCHANTS BANCORP, INC.
(Registrant)
/s/ Calvin R. Myers
------------------------------------
Calvin R. Myers
President, Chairman of the Board and
Chief Executive Officer
/s/ J. Douglas Cheatham
------------------------------------
J. Douglas Cheatham
Vice President and Chief Financial Officer
Date: November 13, 1995
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 26,699
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 155,251
<INVESTMENTS-CARRYING> 39,966
<INVESTMENTS-MARKET> 41,306
<LOANS> 294,610
<ALLOWANCE> 5,287
<TOTAL-ASSETS> 531,171
<DEPOSITS> 454,730
<SHORT-TERM> 19,543
<LIABILITIES-OTHER> 3,002
<LONG-TERM> 3,000
<COMMON> 2,607
0
0
<OTHER-SE> 48,289
<TOTAL-LIABILITIES-AND-EQUITY> 531,171
<INTEREST-LOAN> 20,915
<INTEREST-INVEST> 7,989
<INTEREST-OTHER> 690
<INTEREST-TOTAL> 29,594
<INTEREST-DEPOSIT> 12,010
<INTEREST-EXPENSE> 13,568
<INTEREST-INCOME-NET> 16,026
<LOAN-LOSSES> 1,381
<SECURITIES-GAINS> 21
<EXPENSE-OTHER> 13,238
<INCOME-PRETAX> 6,404
<INCOME-PRE-EXTRAORDINARY> 6,404
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,570
<EPS-PRIMARY> 1.78
<EPS-DILUTED> 1.78
<YIELD-ACTUAL> 4.76
<LOANS-NON> 2,185
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,149
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,140
<CHARGE-OFFS> 1,786
<RECOVERIES> 552
<ALLOWANCE-CLOSE> 5,287
<ALLOWANCE-DOMESTIC> 5,287
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
