<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 June 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 June 30, 1995, the
Registrant had outstanding 2,570,279 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 . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . 11
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 11
Form 10-Q Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . 12
<PAGE>
PART I - FINANCIAL INFORMATION
MERCHANTS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
June 30, 1995 December 31, 1994
<S> <C> <C>
ASSETS
Cash and due from banks $ 29,456 $ 28,922
Federal funds sold 34,900 --
Securities available for sale 138,003 128,326
Securities held to maturity (fair market value
of $40,648 in 1995 and $37,311 in 1994) 39,686 38,505
Loans held for sale 3,373 2,033
Loans 292,420 285,573
Allowance for loan losses 5,330 5,140
-------- --------
Net loans 287,090 280,433
Premises and equipment, net 9,118 9,337
Other real estate owned 715 845
Accrued interest and other assets 5,553 7,888
-------- --------
Total assets $547,894 $496,289
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 76,959 $ 74,931
Interest-bearing 383,619 338,810
-------- --------
Total deposits 460,578 413,741
Federal funds purchased and securities
sold under repurchase agreements 33,044 33,299
Notes payable 3,000 3,000
Accrued interest and other liabilities 1,693 2,793
-------- --------
Total liabilities 498,315 452,833
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 in 1995 and 2,606,690
in 1994 2,607 2,607
Surplus 18,287 18,232
Retained earnings 29,191 26,915
Unrealized net loss on securities available
for sale (307) (4,083)
Treasury stock, at cost, 36,411 shares in 1995
and 39,408 shares in 1994 (199) (215)
-------- --------
Total stockholders' equity 49,579 43,456
-------- --------
Total liabilities and stockholders' equity $547,894 $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 Six Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 7,116 $ 6,057 $13,818 $11,752
Interest on securities:
Taxable 1,650 1,479 3,525 2,876
Tax-exempt 947 662 1,635 1,313
Interest on federal funds sold 231 -- 235 3
------- ------- ------- -------
Total interest income 9,944 8,198 19,213 15,944
------- ------- ------- -------
INTEREST EXPENSE
Interest on deposits 3,996 2,754 7,503 5,361
Interest on federal funds purchased and
securities sold under repurchase agreements 476 369 975 641
Interest on note payable 36 36 73 78
------- ------- ------- -------
Total interest expense 4,508 3,159 8,551 6,080
------- ------- ------- -------
Net interest income 5,436 5,039 10,662 9,864
Provision for loan losses 579 512 984 1,344
------- ------- ------- -------
Net interest income after provision for loan losses 4,857 4,527 9,678 8,520
------- ------- ------- -------
OTHER INCOME
Trust income 463 414 959 816
Mortgage banking income 338 308 508 719
Service charges and fees 674 621 1,277 1,175
Securities gains, net 14 36 19 357
Other income 310 230 494 433
------- ------- ------- -------
Total other income 1,799 1,609 3,257 3,500
------- ------- ------- -------
OTHER EXPENSE
Salaries and employee benefits 2,434 2,288 4,786 4,514
Occupancy expense, net 252 241 503 489
Furniture and equipment expense 293 244 601 503
FDIC deposit assessment 229 211 457 422
Other expense 1,331 1,235 2,530 2,364
------- ------- ------- -------
Total other expense 4,539 4,219 8,877 8,292
------- ------- ------- -------
Income before income taxes 2,117 1,917 4,058 3,728
Provision for income taxes 621 532 1,165 1,019
------- ------- ------- -------
Net income $ 1,496 $ 1,385 $ 2,893 $ 2,709
------- ------- ------- -------
------- ------- ------- -------
Earnings per share $0.58 $0.54 $1.12 $1.06
Cash dividends declared per share $0.12 $0.085 $0.24 $0.17
Weighted average shares outstanding 2,569,820 2,567,282 2,569,066 2,567,282
Ending shares outstanding 2,570,279 2,567,282 2,570,279 2,567,282
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
MERCHANTS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,893 $ 2,709
Adjustments to reconcile net income to cash
from operating activities:
Depreciation and amortization 607 514
Provision for loan losses 984 1,344
Origination of mortgage loans held for sale (12,681) (27,632)
Proceeds from sales of mortgage loans held for
sale 11,464 31,714
Net gain on sales of loans (123) (379)
Provision for deferred taxes 45 57
Increase (decrease) in net income taxes payable (172) 453
Increase in accrued interest and other assets 2,335 (707)
Increase (decrease) in accrued interest and
other liabilities (2,919) (714)
Discount accretion on securities (80) (41)
Premium amortization on securities 456 289
Other, net 71 (399)
-------- --------
Net cash from operating activities 2,880 7,208
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from matured securities available for sale 2,265 10,858
Proceeds from sales of securities available for sale 15,629 11,809
Purchases of securities available for sale (22,492) (36,554)
Proceeds from matured securities held to maturity -- 495
Purchases of securities held to maturity (914) (2,200)
Net principal disbursed on loans (7,641) (8,970)
Proceeds from sales of other real estate 130 314
Property and equipment expenditures (388) (1,037)
-------- --------
Net cash from investing activities (13,411) (25,285)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 46,837 1,751
Net increase (decrease) in short-term borrowings (255) 9,545
Payments on notes payable -- (450)
Dividends paid (617) (436)
-------- --------
Net cash from financing activities 45,965 10,410
-------- --------
Net change in cash and cash equivalents 35,434 (7,667)
Cash and cash equivalents at beginning of period 28,922 30,063
-------- --------
Cash and cash equivalents at end of period $ 64,356 $ 22,396
-------- --------
-------- --------
Supplemental disclosures:
Income taxes paid $ 1,337 $ 390
Interest paid 8,281 6,075
</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 June 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>
June 30, 1995
-------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury $ 29,175 $ 49 $ 401 $ 28,823
U.S. Government agencies 45,582 306 424 45,464
U.S. Government agency mortgage backed securities 48,937 480 548 48,869
States and political subdivisions 10,601 279 224 10,656
Collateralized mortgage obligations 2,301 18 1 2,318
Other securities 1,873 -- -- 1,873
-------- ------ ------ --------
138,469 1,132 1,598 138,003
-------- ------ ------ --------
Securities held to maturity:
States and political subdivisions 39,686 1,440 478 40,648
-------- ------ ------ --------
$178,155 $2,572 $2,076 $178,651
-------- ------ ------ --------
-------- ------ ------ --------
<CAPTION>
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>
June 30, December 31,
1995 1994
-------- ------------
<S> <C> <C>
Commercial and industrial $106,641 $112,828
Real estate - commercial 75,159 72,305
Real estate - construction 32,167 24,470
Real estate - residential 21,443 19,549
Installment 58,948 57,925
Other loans 335 937
-------- --------
294,693 288,014
Unearned discount (1,957) (2,054)
Deferred loan fees (316) (387)
-------- --------
Total loans $292,420 $285,573
-------- --------
-------- --------
</TABLE>
NOTE 4: ALLOWANCE FOR LOAN LOSSES
Following is a summary of changes in the allowance for loan losses for the
six months ended June 30, 1995:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Balance, January 1 $ 5,140 $4,161
Recoveries 403 372
Provision charged to operations 984 1,134
Loans charged-off (1,197) (985)
------- ------
Balance, end of period $ 5,330 $4,682
------- ------
------- ------
</TABLE>
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan." SFAS 114 requires 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. No provision for periodic pension expense was made during the six
months ended June 30, 1995 and 1994. The Company also maintains a contributory
thrift plan. The Company contributed $142,000 and $141,000 in the six month
periods ended June 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.
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 requires the approval of the Valley Banc Services Corporation
stockholders and applicable regulatory agencies. It is anticipated that the
proposed tranaction will be consummated during the first quarter of 1996.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net income for the second quarter of 1995 was $1,496,000, or 58 cents per
share, an 8.0% increase compared to $1,385,000, or 54 cents per share earned
in the second quarter of 1994. Net income was $2,893,000, or $1.12 per share
for the six months ended June 30, 1995, an increase of 6.8% from the six
months ended June 30, 1994. Most of the rise in net income was due to
increased net interest income, which increased approximately 8.0% for both
the quarter and the six month period. Net interest income increased $397,000
in the second quarter of 1995, and $798,000 for the six months ended June 30,
1995, when compared to the same periods in 1994.
NET INTEREST INCOME
Net interest income was $10.7 and $9.9 million during the six months ended June
30, 1995, and 1994, respectively, an increase of 8%. For the three months ended
June 30, net interest income was $5.4 million and $5.0 million in 1995 and 1994,
respectively, an increase of 8%. The Company's net interest margin (tax
equivalent net interest income as a percent of earning assets) was 4.90% for the
six months ended June 30, 1995, and 4.98% a year earlier. Average earning assets
were $469 million during the first half of 1995, compared to $427 million during
the first half of 1994, an increase of $42 million (9.8%).
Management has consistently managed the balance sheet with the objective of
maintaining a stable net interest margin over the long term, regardless of
changes in market interest rates, so that asset growth should result in a
corresponding increase in net interest income. The prime rate of interest was
6.00% during most of the first quarter of 1994, changing to 6.25% just prior to
quarter-end and 7.25% in about the middle of the second quarter. The prime rate
began 1995 at 8.50% and moved to 9.00% early in the first quarter, where it
stayed through the end of the second quarter. While interest rates were
significantly higher in the first half of 1995 than in the first half of 1994,
the net interest margin has declined only eight basis points, from 4.98% to
4.90% over this period of time.
OTHER INCOME
Noninterest income excluding securities gains was $1,785,000 for the three
months ended June 30, 1995 and $1,573,000 for the same period in 1994, an
increase of $212,000, or 13%. For the six months ended June 30, noninterest
income excluding securities gains was $3,238,000 in 1995, and $3,143,000 in
1994, an increase of $95,000, or 3%. Trust income increased $49,000 (12%), for
the quarter and $143,000 (18%) for the year to date. The Trust and Financial
Service Department has earned more in each successive quarter for an extended
period of time, and has implemented a number of innovative programs in an
attempt to continue this trend.
Mortgage department fee income of $508,000 for the first six months of 1995
reflected a decline of $211,000 (29%) over the same period in 1994. However,
second quarter mortgage fee income was $338,000 in 1995 and $308,000 in 1994, an
increase of $30,000, or 10%. Fixed rate mortgage interest rates were lower in
the second quarter of 1995, than in the first quarter. The resulting increase in
residential market activity resulted in second quarter of 1995 earnings which
doubled the $170,000 earned in the first quarter of 1995.
Sales of securities available for sale resulted in gains of $14,000 in the
second quarter of 1995, and $36,000 a year earlier. For the six months ended
June 30, securities gains were $19,000 in 1995, and $357,000 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 $4,219,000 during the three months ended June
30, 1994, to $4,539,000 for the same period in 1995, an increase of $320,000
(7.6%). For the six months ended June 30, noninterest expense increased from
$8,292,000 in 1994, to $8,877,000 in 1994, an increase of $585,000 (7.1%).
Salaries and benefits increased $272,000 (6.0%) in the six months ended June 30,
1995, compared to the same period a year earlier. Base salaries increased
$207,000 (6.1%) while commissions and other performance based compensation
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- CONTINUED
increased $29,000 (7.6%). From June 30, 1994, to June 30, 1995, the full-time
equivalent number of employees declined from 261 to 255.
Occupancy expenses were $11,000 higher during the three months ended June 30,
1995, compared to the same period in 1994, and $14,000 higher for the six
month period ended June 30, 1995. Purchases of furniture and equipment, and
leasing of computer equipment, resulted in an increase in furniture and
equipment expenses. Furniture and equipment expenses were $293,000 during the
three months ended June 30, 1995, an increase of $49,000 (20%) compared to
the same period in 1994. During the first six months of 1995, furniture and
equipment expenses increased $98,000 (19%). 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.
FDIC insurance was $457,000 in the first half of 1995, and $422,000 in the
first half of 1994. The increase of 8.3% is attributable to deposit growth
during the periods under comparison, as the assessment rate has remained 23
cents per $100 in deposits during both periods represented.
Other expense was $96,000 (7.8%) higher in the second quarter of 1995, than
in the second quarter of 1994. For the six month ended June 30, 1995, other
expense was $166,000 (7.0%) higher than a year earlier. Consulting fees
included in other expense were $137,000 in the first half of 1995, compared
with $24,000 in the first half of 1994. This 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.
FINANCIAL CONDITION
LOANS AND PROVISION FOR LOAN LOSSES
Total loans increased $6.8 million (2.3%) to $292.4 million as of June 30,
1995, from $285.6 million as of December 31, 1994. Construction loans
increased more than any other category, growing to $32.2 million as of June
30, 1995, from $24.5 million as of December 31, 1994. This 31.4% increase in
construction loans is affected by the seasonality of this type of loan.
Commercial real estate loans increased $2.9 million (4.0%), residential real
estate loans increased $1.9 million (9.7%) and installment loans increased
$1.0 million (1.7%) during the six months ended June 30, 1995. Commercial and
industrial loans declined $6.2 million (5.5%) in the first half of 1995.
Credit card receivables, included in installment loans, were $4,898,000 as of
June 30, 1995, compared to $4,119,000 as of December 31, 1994.
The Company's mortgage banking department originates residential mortgage
loans to be sold in the secondary market, with servicing rights retained. 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 $3.4 million as
of June 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 $984,000 for the first six months of
1995, compared to $1,344,000 a year earlier. Net charge-offs for the six months
ended June 30, were $794,000 and $850,000, in 1995 and 1994, respectively. The
allowance for loan losses as a percentage of total loans was 1.82% as of June
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 $2,687,000 as of June 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 $1.2 million as of June 30,
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- CONTINUED
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
$715,000 as a result of activity during the first half 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 June 30, 1995, net unrealized losses of $466,000, reduced by
deferred income taxes of $159,000, resulted in a decrease in equity capital of
approximately $307,000. 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 $9.7 million (7.6%)
during the first six months of 1995, to $138.0 million as of June 30, 1995,
from $128.3 million as of December 31, 1994. U.S. government agency mortgage
backed securities grew, from $42.6 million as of December 31, 1994, to $48.9
million as of June 30, 1995, an increase of $6.3 million (14.8%). U.S.
government agency securities grew $4.0 million (9.6%), from $41.5 million as
of December 31, 1994, to $45.5 million as of June 30, 1995. Partially
offsetting these increases, holdings of U.S. Treasury securities declined
$1.1 million (3.7%), from $29.9 million to $28.8 million.
Securities held to maturity increased $3.3 million (8.8%), from $37.3 million
as of December 31, 1994, to $40.6 million as of June 30, 1995. All of the
securities held to maturity are obligations of states and political
subdivisions. Such securities are not available for sale under any
foreseeable circumstance.
DEPOSITS AND BORROWED FUNDS
Total deposits of $460.5 million, as of June 30, 1995, represented an
increase of $46.8 million (11.3%) from $413.7 million as of December 31,
1994. Noninterest-bearing deposits were $77.0 million as of June 30, 1995, an
increase of $2.1 million (2.8%) from $74.9 million as of December 31, 1994.
At the same time, interest-bearing deposits increased $44.8 million (13.2%),
including $15.6 million in certificates of deposit of $100,000 or more, $24.2
million in commercial NOW and money market accounts, and $5.0 million in
other time and savings deposits. Real estate tax collections of local
municipalities, which are short term deposits, caused a significant portion
of this increase. Promotion of retail certificates of deposit have also
contributed to the increase.
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 June 30, 1995, repurchase agreements were $33.0 million,
compared to $33.3 million as of December 31, 1994.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- CONTINUED
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>
June 30, 1995 December 31, 1994
-------------------------- --------------------------
Amount Ratio Amount Ratio
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Risk-Based Capital Ratios:(1)
Tier 1 capital $ 49,814 12.95% $ 47,109 13.92%
Tier 1 capital minimum requirement 15,386 4.00% 13,536 4.00%
-------- ------ -------- ------
Excess $34,428 8.95% $33,573 9.92%
-------- ------ -------- ------
-------- ------ -------- ------
Total capital $ 54,633 14.20% $ 51,356 15.18%
Total capital minimum requirement 30,772 8.00% 27,073 8.00%
-------- ------ -------- ------
Excess $ 23,861 6.20% $ 24,283 7.18%
-------- ------ -------- ------
-------- ------ -------- ------
Total risk adjusted assets $384,652 $338,409
-------- --------
-------- --------
Leverage Capital Ratio:(2)(3)
Tier 1 capital $ 49,814 9.88% $ 47,109 9.91%
Minimum requirement 25,205 5.00% 23,762 5.00%
-------- ------ -------- ------
Excess $24,609 4.88% $ 23,347 4.91%
-------- ------ -------- ------
-------- ------ -------- ------
Average adjusted assets $504,109 $475,249
-------- --------
-------- --------
<FN>
-----------------------
(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>
If the pending acquisition of Valley Banc Services Corp. for cash is
consumated, 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
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- CONTINUED
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 $13.4 million in the first six
months of 1995, compared to $25.3 million a year earlier. Most outflows from
investing activities are the result of new loan activity and securities
purchases. In the first six months of 1995, net principal disbursed on loans
accounted for $7.6 million, and securities transactions aggregated a net outflow
of $5.5 million. In the first six months of 1994, net principal disbursed on
loans accounted for $9.0 million, and securities transactions resulted in net
outflows of $15.6 million.
Cash inflows from financing activities in the first three months of 1995 were
primarily associated with an increase in deposits of $46.8 million. This
compares with $1.8 million for the same period in 1994. Short term borrowings
decreased $255,000 in the first half of 1995, and increased $9.5 million in the
first half of 1994.
In the event of short term liquidity needs, the Company's wholly owned
subsidiary, The Merchants National Bank of Aurora ("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 of approximately
$12.7 million and inflows of approximately $11.5 million during the first six
months of 1995, compared to $27.6 million and $31.7 million, respectively, in
1994. Total cash inflows from operating activities exceeded operating outflows
by $2.9 million for the six months ended June 30, 1995. During the first six
months of 1994, net cash outflows from operating activities were $7.2 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
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan." SFAS 114 requires 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.
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
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.
10
<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
Meeting of Stockholders.
The Annual Meeting of Stockholders was held on April 18, 1995.
Election of Directors.
Messrs. William C. Glenn, John M. Lies and Norman L. Titiner were
elected to serve as Class B directors of the Company (term
expiring at the 1998 Annual Meeting of Stockholders) at the
Annual Meeting. Continuing as Class C directors (term expires in
1996) are Messrs. C. Tell Coffey, Calvin R. Myers, and John J.
Swalec. Continuing as Class A directors (term expires in 1997)
are Messrs. James D. Pearson, Frank A. Sarnecki and William S.
Wake.
Matters Voted Upon at the Meeting.
In addition to the election of directors, the stockholders
ratified the adoption of Crowe, Chizek & Company as independent
public accountants for the Company for the year ending December
31, 1995. The voting on each item at the Annual Meeting was as
follows:
<TABLE>
<CAPTION>
For Withheld Total
<S> <C> <C> <C>
Election of Directors
William C. Glenn 2,124,980 21,507 2,146,487
John M. Lies 2,124,280 22,207 2,146,487
Norman L. Titiner 2,135,149 11,338 2,146,487
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits.
None
Reports on Form 8-K.
On April 28, 1995, the Company filed a Form 8-K with the Securities
and Exchange Commission to report under Item 5 of the Form 8-K that on
April 21, 1995, the Company executed a letter of intent to affiliate
with Valley Banc Services Corporation through the merger of Valley
Banc Services Corporation with a wholly owned subsidiary of the
Company.
11
<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: August 7, 1995
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY>U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1
<CASH> 29,456
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 35,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 138,003
<INVESTMENTS-CARRYING> 39,686
<INVESTMENTS-MARKET> 40,648
<LOANS> 292,420
<ALLOWANCE> 5,330
<TOTAL-ASSETS> 547,894
<DEPOSITS> 460,578
<SHORT-TERM> 33,044
<LIABILITIES-OTHER> 1,693
<LONG-TERM> 3,000
<COMMON> 2,607
0
0
<OTHER-SE> 46,972
<TOTAL-LIABILITIES-AND-EQUITY> 547,894
<INTEREST-LOAN> 13,818
<INTEREST-INVEST> 5,395
<INTEREST-OTHER> 13,818
<INTEREST-TOTAL> 19,213
<INTEREST-DEPOSIT> 7,503
<INTEREST-EXPENSE> 8,551
<INTEREST-INCOME-NET> 10,662
<LOAN-LOSSES> 984
<SECURITIES-GAINS> 19
<EXPENSE-OTHER> 8,877
<INCOME-PRETAX> 4,058
<INCOME-PRE-EXTRAORDINARY> 4,058
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,893
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.12
<YIELD-ACTUAL> 4.90
<LOANS-NON> 2,687
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,153
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,140
<CHARGE-OFFS> 1,197
<RECOVERIES> 403
<ALLOWANCE-CLOSE> 5,330
<ALLOWANCE-DOMESTIC> 5,330
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
