<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 March 31, 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 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 March 31, 1996, the
Registrant had outstanding 2,574,091 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>
March 31, 1996 December 31, 1995
<S> <C> <C>
ASSETS
Cash and due from banks $ 35,812 $ 28,166
Federal funds sold 5,484 0
Securities available for sale 215,646 187,169
Loans held for sale 3,019 4,340
Loans 372,891 304,327
Allowance for loan losses 6,372 5,176
-------- --------
Net loans 366,519 299,151
Premises and equipment, net 11,985 9,504
Other real estate owned 608 566
Goodwill 7,609 0
Core deposit intangibles 2,755 329
Net assets of acquired subsidiaries, held
for sale 8,189 0
Accrued interest and other assets 7,526 10,536
-------- --------
Total assets $665,152 $539,761
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 90,329 $ 76,008
Interest-bearing 472,340 377,763
-------- --------
Total deposits 562,669 453,771
Federal funds purchased and securities
sold under repurchase agreements 26,976 22,726
Notes payable 14,000 3,000
Accrued interest and other liabilities 7,728 6,170
-------- --------
Total liabilities 611,373 485,667
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 18,369 18,344
Retained earnings 33,054 31,877
Unrealized net gain (loss) on securities
available for sale (73) 1,450
Treasury stock, at cost, 32,599 shares in
1996 and 33,687 shares in 1995 (178) (184)
-------- --------
Total stockholders' equity 53,779 54,094
-------- --------
Total liabilities and
stockholders' equity $665,152 $539,761
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MERCHANTS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 8,833 $ 6,702
Interest on securities:
Taxable 2,413 1,875
Tax-exempt 705 688
Interest on federal funds sold 112 4
------- -------
Total interest income 12,063 9,269
------- -------
INTEREST EXPENSE
Interest on deposits 5,487 3,507
Interest on federal funds purchased and
securities sold under repurchase agreements 339 524
Interest on note payable 170 12
------- -------
Total interest expense 5,996 4,043
------- -------
Net interest income 6,067 5,226
Provision for loan losses 483 405
------- -------
Net interest income after provision for
loan losses 5,584 4,821
------- -------
OTHER INCOME
Trust income 508 496
Mortgage banking income 516 170
Service charges and fees 892 603
Securities gains, net 20 5
Other income 254 184
------- -------
Total other income 2,190 1,458
------- -------
OTHER EXPENSE
Salaries and employee benefits 2,944 2,352
Occupancy expense, net 371 251
Furniture and equipment expense 379 308
Amortization of intangible assets 197 25
FDIC deposit assessment 0 228
Other expense 1,665 1,174
------- -------
Total other expense 5,556 4,338
------- -------
Income before income taxes 2,218 1,941
Provision for income taxes 681 544
------- -------
Net income $ 1,537 $ 1,397
------- -------
------- -------
Earnings per share $0.60 $0.54
Cash dividends declared per share $0.14 $0.12
Weighted average shares outstanding 2,573,282 2,568,313
Ending shares outstanding 2,574,091 2,568,788
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
MERCHANTS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,537 $ 1,397
Adjustments to reconcile net income to
cash from operating activities:
Depreciation and amortization 356 301
Provision for loan losses 483 405
Origination of mortgage loans held
for sale (11,430) (3,277)
Proceeds from sales of mortgage
loans held for sale 12,752 3,547
Net gain on sales of loans (101) (1)
Provision for deferred taxes 259 23
Increase (decrease) in net income
taxes payable 581 45
Decrease (increase) in accrued
interest and other assets 4,405 (261)
Decrease in accrued interest and
other liabilities (265) (1,579)
Discount accretion on securities (73) (39)
Premium amortization on securities 248 248
Other, net 109 (85)
-------- -------
Net cash from operating activities 8,861 724
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from matured securities available
for sale 18,789 2,633
Proceeds from sales of securities
available for sale 2,520 5,313
Purchases of securities available for sale (29,122) (8,066)
Purchases of securities held to maturity 0 (914)
Net principal disbursed or repaid on loans 5,209 (2,869)
Proceeds from sales of other real estate 179 95
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 (1,299) (273)
-------- -------
Net cash from investing activities (17,047) (4,081)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 11,009 (4,025)
Net increase in short-term borrowings 3,117 6,043
Repayment of notes payable (6,550) 0
Proceeds from notes payable 14,000 0
Dividends paid (360) (308)
-------- -------
Net cash from financing activities 21,216 1,710
-------- -------
Net change in cash and cash equivalents 13,030 (1,647)
Cash and cash equivalents at beginning
of period 28,166 28,922
-------- -------
Cash and cash equivalents at end of
period $ 41,196 $27,275
-------- -------
-------- -------
Supplemental disclosures:
Income taxes paid $ 100 $ 499
Interest paid 5,958 3,948
Noncash transfer of loans to other real
estate 94 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 March 31, 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 Merchants Bancorp, Inc.,
Valley Banc Services Corp., 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:
<TABLE>
<CAPTION>
March 31, 1996
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury $ 26,885 $ 35 $ (191) $ 26,729
U.S. Government agencies 68,749 306 (526) 68,529
U.S. Government agency
mortgage backed securities 54,079 395 (436) 54,038
States and political
subdivisions 53,846 1,613 (876) 54,583
Collateralized mortgage
obligations 9,357 0 (216) 9,141
Other securities 2,841 11 (226) 2,626
-------- ------ ------- --------
$215,757 $2,360 $(2,471) $215,646
-------- ------ ------- --------
-------- ------ ------- --------
<CAPTION>
December 31, 1995
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
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
-------- ------ ------- --------
-------- ------ ------- --------
</TABLE>
4
<PAGE>
MERCHANTS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 3: LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Commercial and industrial $127,285 $109,872
Real estate - commercial 82,549 67,739
Real estate - construction 45,856 40,510
Real estate - residential 54,241 31,673
Installment 59,096 50,489
Credit card receivables 5,360 5,644
Other loans 854 455
-------- --------
375,241 306,382
Unearned discount (1,861) (1,743)
Deferred loan fees (489) (312)
-------- --------
Total loans $372,891 $304,327
-------- --------
-------- --------
</TABLE>
NOTE 4: ALLOWANCE FOR LOAN LOSSES
Following is a summary of changes in the allowance for loan losses for the
three months ended March 31:
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Balance, January 1 $5,176 $5,140
Balances of acquired subsidiaries
as of January 3 798 0
Provision charged to operations 483 405
Loans charged-off (444) (205)
Recoveries 359 174
------ ------
Balance, end of period $6,372 $5,514
------ ------
------ ------
</TABLE>
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 first quarter of 1996, or 1995. The Company also maintains a
contributory thrift plan. The Company contributed $74,000 and $73,000 in the
three month periods ended March 31, 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 Banc Services, Corp. 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 March
31, of each year presented, as if the acquisition of Valley had occurred on
January 1, 1995, in thousands.
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Net interest income $6,067 $6,144
Net income 1,537 1,294
Net income per share $0.60 $0.50
</TABLE>
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net income for the first quarter of 1996 was $1,537,000, or 60 cents per
share, a 10% increase compared to $1,397,000, or 54 cents per share earned in
the first quarter 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 $5.6 million and $4.8 million during the three months
ended March 31, 1996, and 1995, respectively, an increase of 16%. The
Company's net interest margin (tax equivalent net interest income as a percent
of earning assets) was 4.36% for the three months ended March 31, 1996, and
4.94% a year earlier. Average earning assets were $597 million during the
first three months of 1996, compared to $461 million during the first three
months of 1995.
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 $99 million in earning assets as of March 31, 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 $2,170,000 for the three
months ended March 31, 1996 and $1,453,000 for the same period in 1995, an
increase of $717,000, or 49%. Merchants Bank is currently the only subsidiary
operating trust and mortgage banking departments. Trust income increased
$12,000 (2.4%) for the quarter. Mortgage banking department fee income of
$516,000 for the first three months of 1996 reflected an increase of $346,000
(203%) from the same period in 1995. Mortgage banking income is seasonal, with
residential activity tending to decline in the winter months, and it is
sensitive to interest rate levels and expectations. The local market for
residential real estate was significantly stronger in the first quarter 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 $239 million as of March 31, 1996, compared to
$151 million a year earlier.
Effective January 1, 1996, the Company adopted SFAS 122, "Accounting for
Mortgage Servicing Rights." Pursuant to SFAS 122, for loans sold, the loan
cost 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 $140,000
in the first quarter of 1996.
Sales of securities available for sale resulted in gains of $20,000 in the
first quarter of 1996, and $5,000 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 $2,352,000 during the three months
ended March 31, 1995, to $2,944,000 for the same period in 1996, an increase
of $592,000 (25%), primarily as a result of the acquisition. The full-time
equivalent number of employees was 262 as of March 31, 1995, and 330 as of
March 31, 1996. The newly acquired Valley subsidiary banks accounted for 48
full-time equivalent employees as of March 31, 1996.
Occupancy expenses were $120,000 higher during the first quarter of 1996,
compared to the same period in 1995, $89,000 of which was a result of the
acquisition. During the first three months of 1996, furniture and equipment
expenses increased $71,000 (23%), $46,000 of which was a result of the
acquisition.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The FDIC Bank Insurance Fund ("BIF") 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 do not pay
an FDIC deposit assessment. The Company's assessment was $228,000 in the first
quarter of 1995, and no assessment was incurred in the first quarter of 1996.
Other expenses were $1,665,000, or $491,000 (42%) higher in the first quarter
of 1996, than in the first quarter of 1995. The acquired Valley banks
accounted for $268,000 of this total. 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 $68.5 million (23%) to $372.8 million as of March 31,
1996, from $304.3 million as of December 31, 1995. Total loans of the newly
acquired banks were $73.6 million as of March 31, 1996. Residential real
estate loans increased more than any other category, growing to $54.2 million
as of March 31, 1996, from $31.7 million as of December 31, 1995, an increase
of $22.5 million (71%). Commercial loans increased $17.3 million (16%), from
$109.9 million as of December 31, 1995, to $127.2 million as of March 31,
1996. Commercial real estate loans increased $14.8 million (22%) and
installment loans increased $8.6 million (17%) during the first quarter of
1996. In addition to the acquisition, the increases in real estate related
categories reflects the continued strength of the local 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 $5.5 million as of March 31, 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 $483,000 for the first three
months of 1996, compared to $405,000 a year earlier. Net charge-offs for the
three months ended March 31, were $85,000 and $31,000 in 1996 and 1995,
respectively. The allowance for loan losses as a percentage of total loans was
1.71% as of March 31, 1996 and 1.70% as of December 31, 1995. In management's
judgment, an adequate allowance for possible future losses has been
established.
Nonaccrual loans increased to $2,212,000 as of March 31, 1996, from $1,135,000
as of December 31, 1995. Loans past due ninety days or more and still accruing
were $69,000 as of March 31, 1996, and there were no such loans as of December
31, 1995. Renegotiated loans declined $71,000 to $1,064 million as of March
31, 1996. The renegotiated loans were primarily loans to a single borrower
which were renegotiated during 1995, and are fully collateralized.
Other real estate owned increased from $566,000 as of December 31, 1995, to
$608,000 as of March 31, 1996, as a result of the acquisition. 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 March 31, 1996, net unrealized losses of $111,000,
reduced by deferred income taxes
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
of $38,000, resulted in a decrease in equity capital of approximately $73,000.
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 $28.5 million (15%)
during the first three months of 1996, to $215.7 million as of March 31, 1996,
from $187.2 million as of December 31, 1995. The fair value of securities at
the acquired subsidiaries was $21.8 million as of March 31, 1996. U.S.
government agency securities grew from $53.5 million as of December 31, 1995,
to $68.5 million as of March 31, 1996, an increase of $15 million (28%). U.S.
government agency mortgage backed securities grew $8.9 million (20%), from
$45.2 million as of December 31, 1995, to $54.1 million as of March 31, 1996.
DEPOSITS AND BORROWED FUNDS
Total deposits of $562.7 million as of March 31, 1996, represented an increase
of $108.9 million (24%) from $453.8 million as of December 31, 1995. Deposits
of the Valley subsidiaries were $99.5 million as of March 31, 1996.
Noninterest-bearing deposits were $90.3 million as of March 31, 1996, an
increase of $14.3 million (19%) from $76.0 million as of December 31, 1995. At
the same time, interest-bearing deposits increased $94.6 million (25%),
including $17.6 million in certificates of deposit of $100,000 or more, and
$41.7 million in certificates of deposit under $100,000. Most of the increases
in all deposit categories were the result of the first quarter 1996,
acquisition.
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 March 31, 1996, repurchase
agreements were $27 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)
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
---------------------- --------------------
Amount Ratio Amount Ratio
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Risk-Based Capital Ratios:(1)
Tier 1 capital $ 44,626 10.05% $ 53,765 14.54%
Tier 1 capital minimum
requirement 17,760 4.00% 14,794 4.00%
-------- ----- -------- -----
Excess $ 26,866 6.05% $ 38,971 10.54%
-------- ----- -------- -----
-------- ----- -------- -----
Total capital $ 50,314 11.33% $ 58,399 15.79%
Total capital minimum
requirement 35,519 8.00% 29,588 8.00%
-------- ----- -------- -----
Excess $ 14,795 3.33% $ 28,811 7.79%
-------- ----- -------- -----
-------- ----- -------- -----
Total risk adjusted
assets $443,993 $369,850
-------- --------
-------- --------
Leverage Capital Ratio:(2)(3)
Tier 1 capital $ 44,626 6.90% $ 53,765 10.31%
Minimum requirement 32,360 5.00% 23,762 5.00%
-------- ----- -------- -----
Excess $ 12,266 1.90% $ 30,003 5.31%
-------- ----- -------- -----
-------- ----- -------- -----
Average adjusted assets $647,205 $521,435
-------- --------
-------- --------
</TABLE>
- - -----------------
(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 to 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 $17.0 million in the first
three months of 1996, compared to $4.1 million a year earlier. In the first
three months of 1996, net principal repaid on loans accounted for a net
inflow of $5.2 million, and securities transactions aggregated a net outflow
of $7.8 million. In the first three months of 1995, net principal disbursed
on loans accounted for a net inflow of $2.9 million, and securities
transactions resulted in net outflows of $3.9 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 three months of 1996
associated with an increase in deposits were $11.0 million. This compares
with a net outflow of $4.0 million for the same period in 1995. Short term
borrowings decreased $3.1 million in the first three months of 1996, and $6.0
million in the first three months 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 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 $11.5 million and inflows of approximately $12.8 million during
the first three months of 1996, compared to $3.3 million and $3.5 million,
respectively, in 1995. Total cash inflows from operating activities exceeded
operating outflows by $8.9 million for the three months ended March 31, 1996.
During the first three months of 1995, net cash outflows from operating
activities were $724,000. 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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits.
None
Reports on Form 8-K.
(a) A report was filed on Form 8-K, dated January 3,
1996, pursuant to Item 2, regarding the
acquisition of Valley Banc Services Corp.
(b) A report was filed on Form 8-K, dated March 18,
1996, pursuant to Item 7, regarding the January 3,
1996, acquisition of Valley Banc Services Corp.
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: May 10, 1996
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 35,812
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,484
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 215,646
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 372,991
<ALLOWANCE> 6,372
<TOTAL-ASSETS> 665,152
<DEPOSITS> 562,669
<SHORT-TERM> 26,976
<LIABILITIES-OTHER> 7,728
<LONG-TERM> 14,000
0
0
<COMMON> 2,607
<OTHER-SE> 51,172
<TOTAL-LIABILITIES-AND-EQUITY> 665,152
<INTEREST-LOAN> 8,833
<INTEREST-INVEST> 3,118
<INTEREST-OTHER> 112
<INTEREST-TOTAL> 12,063
<INTEREST-DEPOSIT> 5,487
<INTEREST-EXPENSE> 5,996
<INTEREST-INCOME-NET> 6,067
<LOAN-LOSSES> 483
<SECURITIES-GAINS> 20
<EXPENSE-OTHER> 5,556
<INCOME-PRETAX> 2,218
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,537
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.60
<YIELD-ACTUAL> 4.36
<LOANS-NON> 2,212
<LOANS-PAST> 69
<LOANS-TROUBLED> 1,064
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,176
<CHARGE-OFFS> 444
<RECOVERIES> 359
<ALLOWANCE-CLOSE> 6,372
<ALLOWANCE-DOMESTIC> 6,372
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
