<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
or the quarterly period ended June 30, 1996
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
of incorporation or organization) Identification Number)
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, 1996, the
Registrant had outstanding 2,575,617 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, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
ASSETS
Cash and due from banks $45,086 $28,166
Federal funds sold 8,043 0
Securities available for sale 210,130 187,169
Loans held for sale 5,001 4,340
Loans 391,635 304,327
Allowance for loan losses 6,315 5,176
------------- -----------------
Net loans 385,320 299,151
Premises and equipment, net 12,256 9,504
Other real estate owned 487 566
Goodwill 7,513 0
Core deposit intangibles 2,655 329
Net assets of acquired subsidiaries, held for sale 8,189 0
Accrued interest and other assets 7,723 10,536
------------- -----------------
Total assets $692,403 $539,761
------------- -----------------
------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $111,101 $76,008
Interest-bearing 478,607 377,763
------------- -----------------
Total deposits 589,708 453,771
Federal funds purchased and securities
sold under repurchase agreements 32,054 22,726
Notes payable 14,000 3,000
Accrued interest and other liabilities 3,432 6,170
------------- -----------------
Total liabilities 639,194 485,667
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 18,406 18,344
Retained earnings 34,248 31,877
Unrealized net gain (loss) on securities available for sale (1,882) 1,450
Treasury stock, at cost, 31,073 shares in 1996 and
36,411 shares in 1995 (170) (184)
------------- -----------------
Total stockholders' equity 53,209 54,094
------------- -----------------
Total liabilities and
stockholders' equity $692,403 $539,761
------------- -----------------
------------- -----------------
</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,
1996 1995 1996 1995
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 8,904 $ 7,116 $ 17,737 $ 13,818
Interest on securities:
Taxable 2,556 1,650 4,969 3,525
Tax-exempt 717 947 1,422 1,635
Interest on federal funds sold 88 231 200 235
---------- --------- --------- ---------
Total interest income 12,265 9,944 24,328 19,213
---------- --------- --------- ---------
INTEREST EXPENSE
Interest on deposits 5,344 3,996 10,831 7,503
Interest on federal funds purchased and
securities sold under repurchase agreements 486 476 825 975
Interest on note payable 164 36 334 73
---------- --------- --------- ---------
Total interest expense 5,994 4,508 11,990 8,551
---------- --------- --------- ---------
Net interest income 6,271 5,436 12,338 10,662
Provision for loan losses 490 579 973 984
---------- --------- --------- ---------
Net interest income after provision for loan losses 5,781 4,857 11,365 9,678
---------- --------- --------- ---------
OTHER INCOME
Trust income 501 463 1,008 959
Mortgage banking income 597 338 1,113 508
Service charges and fees 947 674 1,839 1,277
Securities gains, net 23 14 43 19
Other income 255 310 509 494
---------- --------- --------- ---------
Total other income 2,323 1,799 4,512 3,257
---------- --------- --------- ---------
OTHER EXPENSE
Salaries and employee benefits 3,115 2,434 6,058 4,786
Occupancy expense, net 405 252 776 503
Furniture and equipment expense 404 293 782 601
Amortization of intangible assets 198 229 395 457
FDIC deposit assessment 1 25 4 50
Other expense 2,031 1,306 3,694 2,480
---------- --------- --------- ---------
Total other expense 6,154 4,539 11,709 8,877
---------- --------- --------- ---------
Income before income taxes 1,950 2,117 4,168 4,058
Provision for income taxes 398 621 1,079 1,165
---------- --------- --------- ---------
Net income $ 1,552 $ 1,496 $ 3,089 $ 2,893
---------- --------- --------- ---------
---------- --------- --------- ---------
Earnings per share $0.60 $0.58 $1.20 $1.12
Cash dividends declared per share $0.14 $0.12 $0.28 $0.24
Weighted average shares outstanding 2,575,114 2,569,820 2,574,417 2,569,066
Ending shares outstanding 2,575,617 2,570,279 2,575,617 2,570,279
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
MERCHANTS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,089 $ 2,893
Adjustments to reconcile net income to cash
from operating activities:
Depreciation and amortization 749 607
Provision for loan losses 973 984
Origination of mortgage loans held for sale (28,559) (12,681)
Proceeds from sales of mortgage loans held for sale 28,099 11,464
Net gain on sales of loans (201) (123)
Provision for deferred taxes (18) 45
Increase (decrease) in net income taxes payable (300) (172)
Decrease (increase) in accrued interest and other assets 4,182 2,335
Decrease in accrued interest and other liabilities (2,472) (2,919)
Discount accretion on securities (142) (80)
Premium amortization on securities 488 456
Amortization of intangible assets 395 0
Other, net 75 71
-------- --------
Net cash from operating activities 6,358 2,880
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from matured securities available for sale 31,146 2,265
Proceeds from sales of securities available for sale 4,936 15,629
Purchases of securities available for sale (41,290) (22,492)
Purchases of securities held to maturity 0 (914)
Net principal disbursed on loans (14,082) (7,641)
Proceeds from sales of other real estate 206 130
Purchase of subsidiaries, net of cash and cash equivalents acquired (5,134) 0
Purchase of subsidiaries, net assets held for sale (8,189) 0
Property and equipment expenditures (1,963) (388)
-------- --------
Net cash from investing activities (34,370) (13,411)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 38,048 46,837
Net increase (decrease) in short-term borrowings 8,195 (255)
Repayment of notes payable (6,550) 0
Proceeds from notes payable 14,000 0
Dividends paid (718) (617)
-------- --------
Net cash from financing activities 52,975 45,965
-------- --------
Net change in cash and cash equivalents 24,963 35,434
Cash and cash equivalents at beginning of period 28,166 28,922
-------- --------
Cash and cash equivalents at end of period $53,129 $64,356
-------- --------
-------- --------
Supplemental disclosures:
Income taxes paid $765 $1,337
Interest paid 11,864 8,281
Noncash transfer of loans to other real estate 132 0
</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, 1996, are not necessarily
indicative of the results expected for the year ending December 31, 1996.
On January 3, 1996, the Company consummated the acquisition of Valley Banc
Services Corp. ("Valley") for cash in the amount of $20.5 million. The Company
borrowed $14 million to finance this transaction, which was accounted for using
the purchase method. Goodwill resulting from this transaction is being amortized
on a straight-line basis over a twenty year period, and core deposit intangibles
are being amortized on an accelerated basis over ten years.
These financial statements fully consolidate the Company, Valley, Merchants
National Bank, Hinckley State Bank, and Fox Valley Bank. Two of Valley's
subsidiary banks, Anchor Bank and the State Bank of Osco, are held for sale. As
such, the subsidiaries held for sale are not fully consolidated, but are
reflected as net assets held for sale in these financial statements.
NOTE 2: SECURITIES
Amortized costs, gross of unrealized gains and losses, and fair values of
securities are summarized as follows:
June 30, 1996
-----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Securities available for sale:
U.S. Treasury $26,525 $21 $(225) $26,321
U.S. Government agencies 64,115 128 (1,420) 62,823
U.S. Government agency
mortgage backed securities 55,257 264 (934) 54,587
States and political subdivisions 54,164 1,038 (1,144) 54,058
Collateralized mortgage obligations 10,100 0 (364) 9,736
Other securities 2,819 0 (214) 2,605
--------- ---------- ---------- --------
$212,980 $1,451 $(4,301) $210,130
--------- ---------- ---------- --------
--------- ---------- ---------- --------
December 31, 1995
-----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Securities available for sale:
U.S. Treasury $24,968 $48 $(156) $24,860
U.S. Government agencies 53,044 542 (105) 53,481
U.S. Government agency
mortgage backed securities 44,804 493 (122) 45,175
States and political subdivisions 50,239 1,998 (417) 51,820
Collateralized mortgage obligations 10,044 11 (95) 9,960
Equity securities 1,873 0 0 1,873
--------- ---------- ---------- --------
$184,972 $3,092 $(895) $187,169
--------- ---------- ---------- --------
--------- ---------- ---------- --------
4
<PAGE>
MERCHANTS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 3: LOANS
Major classifications of loans are as follows:
June 30, December 31,
1996 1995
-------- ------------
Commercial and industrial $144,500 $109,872
Real estate - commercial 75,740 67,739
Real estate - construction 42,545 40,510
Real estate - residential 60,472 31,673
Installment 63,449 50,489
Credit card receivables 6,067 5,644
Other loans 1,107 455
-------- ------------
393,880 306,382
Unearned discount (1,728) (1,743)
Deferred loan fees (517) (312)
-------- ------------
Total loans $391,635 $304,327
-------- ------------
-------- ------------
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:
1996 1995
------ ------
Balance, January 1 $5,176 $5,140
Balances of acquired subsidiaries as of January 3 798 0
Provision charged to operations 973 984
Loans charged-off (1,157) (1,197)
Recoveries 525 403
------ ------
Balance, end of period $6,315 $5,330
------ ------
------ ------
NOTE 5: EMPLOYEE BENEFIT PLANS
The Company maintains a non-contributory, trusteed pension plan which covers
substantially all full time employees of Merchants National Bank who have
completed age and service requirements. No provision for periodic expense was
made during the six months of 1996, or 1995. The Company also maintains a
contributory thrift plan. The Company contributed $148,000 and $142,000 in the
six month periods ended June 30, 1996 and 1995, respectively. The Company
recognizes this expense in the same period in which the contribution is made.
NOTE 6: NOTES PAYABLE
Notes payable consists of two notes of $7 million each, the proceeds of which
were used to finance the acquisition of Valley on January 3, 1996. One note
bears a fixed interest rate of 7.03%, and requires no principal reductions for
the first two years, followed by quarterly principal reductions over the
following five years. The other note bears interest at a variable rate which is
tied to either the prevailing Federal funds rate or LIBOR, at the quarterly
election of the Company.
NOTE 7: PRO FORMA FINANCIAL INFORMATION
The following table presents consolidated financial information, as of June 30,
of each year presented, as if the acquisition of Valley had occurred on January
1, 1995, in thousands.
1996 1995
-------- --------
Net interest income $ 12,338 $ 12,353
Net income 3,089 2,620
Net income per share $1.20 $1.02
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 1996 was $1,552,000, or 60 cents per share,
a 3.7% increase compared to $1,496,000, or 58 cents per share earned in the
second quarter of 1995. Through the first six months of 1996, net income was
$3,089,000, or $1.20 per share, an increase of 6.8% from the first half of 1995.
Although the acquisition of Valley Banc Services Corp. ("Valley") on January 3,
1996, has caused many statement categories to increase, amortization of purchase
intangibles and the cost of debt incurred to consummate the transaction offset
these increases to a large degree in the first quarter of 1996. The increase in
net income can therefore be attributed primarily to the operation of Merchants
National Bank.
NET INTEREST INCOME
Net interest income was $6.3 million and $5.4 million during the three months
ended June 30, 1996, and 1995, respectively, an increase of about 15%. The
Company's net interest margin (tax equivalent net interest income as a
percentage of earning assets) was 4.47% for the three months ended June 30,
1996, and 4.86% a year earlier. For the six months ended June 30, net interest
income was $12.3 million in 1996, and $10.7 million in 1995, while the net
interest margin was 4.37% and 4.90%, respectively.
Net interest income increased because of the increase in earning assets, which
was enhanced by the acquisition of Valley on January 3, 1996. Although Valley
added $103 million in earning assets as of June 30, 1996, the decline in net
interest margin is also partly the result of the acquisition. In addition to the
lower margin at Valley, changes in market interest rates have contributed to the
decline in the net interest margin.
OTHER INCOME
Noninterest income excluding securities gains was $2,300,000 for the three
months ended June 30, 1996 and $1,785,000 for the same period in 1995, an
increase of $515,000, or 29%. Merchants Bank is currently the only subsidiary
operating trust and mortgage banking departments. Trust income increased $38,000
(8.2%) for the quarter and $49,000 (5.1%) for the year to date. Mortgage banking
department fee income of $597,000 during the second quarter reflected an
increase of $259,000 (76.6%) from the same period in 1995. For the six month
period, mortgage fee income was $1,113,000 in 1996, and $508,000 in 1995, an
increase of 119.1%. Mortgage banking income is seasonal, with residential
activity tending to decline in the winter months, and also sensitive to interest
rate levels and expectations. The local market for residential real estate was
significantly stronger in the first half of 1996, than a year earlier. 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 portfolio of loans serviced for others totaled $244
million as of June 30, 1996, compared to $159 million a year earlier.
Effective January 1, 1996, the Company adopted SFAS 122, "Accounting for
Mortgage Servicing Rights." Pursuant to SFAS 122, the loan cost of loans sold is
allocated to the servicing rights retained and to the loan that is sold, based
on their relative fair values. Mortgage servicing rights are amortized in
proportion to and over the period of estimated net servicing income, and are
evaluated for impairment based on their fair value. The impact of this
pronouncement was an increase in mortgage banking income of $291,000 in the
first half of 1996.
Sales of securities available for sale resulted in gains of $43,000 in the first
half of 1996, and $19,000 a year earlier. 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
Salary and benefit expenses increased from $2,434,000 during the three months
ended June 30, 1995, to $3,115,000 for the same period in 1996, an increase of
$681,000 (28%), primarily as a result of the acquisition. For the six month
period, salaries and employee benefits were $6,059,000 in 1996, and $4,786,000
in 1995, an increase of 26.6%. The full-time equivalent number of employees was
255 as of June 30, 1995, and 341 as of June 30, 1996. The newly acquired Valley
subsidiary banks accounted for 47 full-time equivalent employees as of June 30,
1996.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Occupancy expenses were $153,000 (61%) higher during the second quarter of 1996,
and $273,000 (54%) higher for the first six months of 1996 compared to the same
periods in 1995. Furniture and equipment expenses were $111,000 (38%) higher
during the second quarter of 1996, and $181,000 (30%) higher for the first six
months of 1996 compared to the same periods in 1995. Fixed asset expenses
increased due to the acquisition and due the opening of a new branch of
Merchants National Bank at Randall Square in Geneva, Illinois in March, 1996.
The Bank Insurance Fund of the Federal Deposit Insurance Corporation (the
"FDIC") reached its congressionally mandated level during the second quarter of
1995. As a result, well capitalized institutions in the supervisory group
representing the least risk pay an FDIC deposit assessment of $1,000 per year.
The Company's assessment was $457,000 in the first half of 1995, and the minimum
assessment was incurred in the first half of 1996.
Other expenses were $2,031,000, or $725,000 (56%) higher in the second quarter
of 1996, than in the second quarter of 1995. Other expenses were $3,694,000, or
$1,214,000 (49%) higher in the first six months of 1996, than in the like period
a year earlier. other operating costs of the acquired Valley banks accounted for
$597,000 of this total in the first half of 1996. Other factors contributing to
the increase in expenses were amortization of mortgage servicing, ATM costs, and
increases in general operating costs.
FINANCIAL CONDITION
LOANS, LOANS HELD FOR SALE, AND PROVISION FOR LOAN LOSSES
Total loans increased $87.3 million (29%) to $391.6 million as of June 30, 1996,
from $304.3 million as of December 31, 1995. Total loans of the newly acquired
banks were $74.9 million as of June 30, 1996. On a percentage basis, residential
real estate loans increased more than any other category, growing to $60.5
million as of June 30, 1996, from $31.7 million as of December 31, 1995, an
increase of $28.8 million (91%). These loans are primarily adjustable rate
mortgages. Commercial loans increased $34.6 million (32%), from $109.9 million
as of December 31, 1995, to $144.5 million as of June 30, 1996. Commercial real
estate loans increased $8 million (12%) and installment loans increased $13
million (26%) during the first half of 1996. In addition to the acquisition, the
increases reflect the continued strength of the Fox Valley economy in general,
and the real estate market in particular.
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 Merchants 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 the mortgage banking process. Loans held for sale were $4.3
million as of December 31, 1995, and $5.0 million as of June 30, 1996. 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 $973,000 for the first six months of
1996, compared to $984,000 a year earlier. Net charge-offs for the six months
ended June 30, were $632,000 and $794,000 in 1996 and 1995, respectively. The
allowance for loan losses as a percentage of total loans was 1.61% as of June
30, 1996 and 1.70% as of December 31, 1995. The decline in the ratio resulted
from the acquisition of Valley, which has maintained a lower ratio than was
maintained by the Company in prior periods. In management's judgment, an
adequate allowance for possible future losses has been established.
Nonaccrual loans increased to $3,092,000 as of June 30, 1996, from $2,210,000 as
of December 31, 1995. The June 30, 1996, total includes $567,000 in nonaccrual
loans of the Valley banks, accounting for most of the increase. Loans past due
ninety days or more and still accruing were $346,000 as of June 30, 1996, all of
which were Valley loans, and there were no such loans as of December 31, 1995.
Renegotiated loans declined $89,000 to $1,046 million as of June 30, 1996.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The renegotiated loans were primarily loans to a single borrower which were
renegotiated during 1995, and are fully collateralized.
Other real estate owned declined from $566,000 as of December 31, 1995, to
$487,000 as of June 30, 1996, as some property was sold. Property acquired from
a single borrower in the first quarter of 1995 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, 1996, net unrealized losses of $2,850,000, reduced by
deferred income taxes of $968,000, resulted in a decrease in equity capital of
approximately $1,882,000. As of December 31, 1995, net unrealized gains of
$2,197,000, net of deferred income taxes of $747,000 million, resulted in an
increase in equity capital of $1,450 million.
The fair value of securities available for sale grew $23 million (12%) during
the first half of 1996, to $210.1 million as of June 30, 1996, from $187.2
million as of December 31, 1995. The fair value of securities at the acquired
subsidiaries was $20.4 million as of June 30, 1996. U.S. government agency
securities grew from $53.5 million as of December 31, 1995, to $62.8 million as
of June 30, 1996, an increase of $9.3 million (17%). U.S. government agency
mortgage backed securities grew $9.4 million (21%), from $45.2 million as of
December 31, 1995, to $54.6 million as of June 30, 1996. None of these changes
represent a change in the management of the investment portfolio.
DEPOSITS AND BORROWED FUNDS
Total deposits of $589.7 million as of June 30, 1996, represented an increase
of $135.9 million (30%) from $453.8 million as of December 31, 1995. Deposits
of the Valley subsidiaries were $105.5 million as of June 30, 1996.
Noninterest-bearing deposits were $111.1 million as of June 30, 1996, an
increase of $35.1 million (46%) from $76.0 million as of December 31, 1995.
At the same time, interest-bearing deposits increased $100.8 million (27%),
including $21.2 million in certificates of deposit of $100,000 or more, and
$37.8 million in certificates of deposit under $100,000. Most of the
increases in all deposit categories were the result of the acquisition during
the first quarter 1996.
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. 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, 1996, repurchase agreements were
$32 million, compared to $23 million as of December 31, 1995.
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)
June 30, 1996 December 31, 1995
----------------- ------------------
Amount Ratio Amount Ratio
-------- ------ -------- ------
Risk-Based Capital Ratios:(1)
Tier 1 capital $44,520 9.21% $53,765 14.54%
Tier 1 capital minimum requirement 19,339 4.00% 14,794 4.00%
-------- ------ -------- ------
Excess $25,181 5.21% $38,971 10.54%
-------- ------ -------- ------
-------- ------ -------- ------
Total capital $50,835 10.51% $58,399 15.79%
Total capital minimum requirement 38,679 8.00% 29,588 8.00%
-------- ------ -------- ------
Excess $12,156 2.51% $28,811 7.79%
-------- ------ -------- ------
-------- ------ -------- ------
Total risk adjusted assets $483,482 $369,850
-------- --------
-------- --------
Leverage Capital Ratio:(2)(3)
Tier 1 capital $44,520 6.75% $53,765 10.31%
Minimum requirement 32,971 5.00% 23,762 5.00%
-------- ------ -------- ------
Excess $11,549 1.75% $30,003 5.31%
-------- ------ -------- ------
-------- ------ -------- ------
Average adjusted assets $659,429 $521,435
-------- --------
-------- --------
- -----------------------
(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.
The capital ratios detailed above declined as a result of two factors. First,
although the level of stockholders' equity was not directly affected, intangible
assets were 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 increased significantly with the acquisition, thus reducing capital
in percentage terms. The Company remains well 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.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Net cash outflows from investing activities were $34.4 million in the first six
months of 1996, compared to $13.4 million a year earlier. In the first six
months of 1996, net principal disbursed on loans accounted for net outflows of
$14.1 million, and securities transactions aggregated a net outflow of $5.2
million. In the first six months of 1995, net principal disbursed on loans
accounted for a net outflow of $7.6 million, and securities transactions
resulted in net outflows of $5.5 million. During the first quarter of 1996, the
acquisition of Valley resulted in a net outflow of $5.1 for the subsidiaries to
be retained, net of cash and cash equivalents acquired with those subsidiaries,
and an outflow of $8.2 million for the net assets of the subsidiaries held for
sale.
Cash inflows from financing activities in the first six months of 1996
associated with an increase in deposits were $38.0 million. This compares with a
net outflow of $46.8 million for the same period in 1995. Short term borrowings
increased $8.2 million in the first six months of 1996, and declined $255,000 in
the first half of 1995.
During the first quarter of 1996, the Company repaid a $3 million note payable
with the Federal Home Loan Bank of Chicago, and a $3.5 million note payable
assumed with the Valley acquisition. $14 million in proceeds from notes payable
were used to finance the Valley acquisition.
In the event of short term liquidity needs, the Company's subsidiary banks may
purchase Federal funds from correspondent banks. The Merchants National Bank
("MNB") may also borrow funds from the Federal Reserve Bank of Chicago, but has
not done so during any period covered in this report. MNB'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
$28.6 million and inflows of approximately $28.1 million during the first half
of 1996, compared to $12.7 million and $11.5 million, respectively, in 1995.
Total cash inflows from operating activities exceeded operating outflows by $6.4
million for the six months ended June 30, 1996. During the first six months of
1995, net cash inflows from operating activities were $2.9 million. 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.
10
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company
or its subsidiaries are 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 16, 1996.
Election of Directors.
Messrs. C. Tell Coffey, Calvin R. Myers, and John J. Swalec were
elected to serve as Class C directors of the Company (term
expires at the 1999 Annual Meeting of Stockholders) and William
F. Hejna was elected to serve as a Class A director of the
Company (term expires at the 1997 Annual Meeting of Stockholders)
at the Annual Meeting. Continuing as Class A directors (term
expires in 1997) are Messrs. James D. Pearson, Frank A. Sarnecki,
and William S. Wake. Continuing as Class B directors (term
expires in 1998) are Messrs. William C. Glenn, John M. Lies, and
Norman L. Titiner.
Matters Voted Upon at the Meeting.
In addition to the election of directors, stockholders ratified
the adoption of Crowe, Chizek & Company, LLP as independent
public accountants for the Company for the year ending December
31, 1996. The voting on each item at the Annual Meeting was as
follows:
For Withheld Total
--------- -------- ---------
Election of Directors
C. Tell Coffey 1,589,298 19,776 1,609,074
Calvin R. Myers 1,586,853 22,221 1,609,074
John J. Swalec 1,588,821 20,253 1,609,074
William F. Hejna 1,606,904 2,170 1,609,074
For Not For Abstain Non-votes Total
--------- ------- ------- --------- ---------
Ratification of Accountants 1,580,072 2,650 26,352 0 1,609,074
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits.
27. Financial Data Schedule
Reports on Form 8-K.
None
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 12, 1996
12
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