<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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)
(630) 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, 1997, the
Registrant had outstanding 2,580,931 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 . . . . . . . . . . . 7
PART II
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . 14
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . 14
Form 10-Q Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . 15
<PAGE>
PART I - FINANCIAL INFORMATION
MERCHANTS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
June 30, 1997 December 31, 1996
ASSETS
Cash and due from banks $ 46,910 $ 42,455
Federal funds sold 1,619 2,613
Securities available for sale 197,919 194,780
Loans held for sale 2,249 4,149
Loans 511,101 456,802
Allowance for loan losses 7,775 7,274
--------- --------
Net loans 503,326 449,528
Premises and equipment, net 11,765 12,100
Other real estate owned 362 333
Mortgage servicing rights 1,473 1,438
Goodwill, net 6,793 6,977
Core deposit intangible assets, net 2,253 2,452
Accrued interest and other assets 8,544 7,584
--------- --------
Total assets $783,213 $724,409
--------- --------
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $124,161 $112,203
Interest-bearing 518,327 488,767
--------- --------
Total deposits 642,488 600,970
Federal funds purchased and securities
sold under repurchase agreements 53,327 44,525
Notes payable 24,000 14,000
Accrued interest and other liabilities 2,537 6,716
--------- --------
Total liabilities 722,352 666,211
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 18,549 18,468
Retained earnings 39,569 36,962
Unrealized net gain on securities
available for sale 277 317
Treasury stock, at cost, 25,759 shares in
1997 and 31,073 shares in 1996 (141) (156)
--------- --------
Total stockholders' equity 60,861 58,198
--------- --------
Total liabilities and
stockholders' equity $783,213 $724,409
--------- --------
--------- --------
See accompanying notes to consolidated financial statements.
1
<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,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 11,019 $ 8,827 $ 21,151 $ 17,619
Loans held for sale 23 77 65 118
Securities:
Taxable 2,310 2,556 4,588 4,969
Tax-exempt 729 717 1,402 1,422
Federal funds sold 40 88 78 200
-------- -------- -------- --------
Total interest income 14,121 12,265 27,284 24,328
-------- -------- -------- --------
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 5,962 5,344 11,604 10,831
Federal funds purchased and
securities sold under repurchase agreements 531 486 1,006 825
Notes payable 242 164 479 334
-------- -------- -------- --------
Total interest expense 6,735 5,994 13,089 11,990
-------- -------- -------- --------
Net interest income 7,386 6,271 14,195 12,338
Provision for loan losses 697 490 1,183 973
-------- -------- -------- --------
Net interest income after provision for loan losses 6,689 5,781 13,012 11,365
-------- -------- -------- --------
OTHER INCOME
Trust income 597 501 1,149 1,008
Mortgage banking income 489 597 981 1,113
Service charges and fees 1,068 947 2,063 1,839
Securities gains, net 5 23 47 43
Other income 251 255 483 509
-------- -------- -------- --------
Total other income 2,410 2,323 4,723 4,512
-------- -------- -------- --------
OTHER EXPENSE
Salaries and employee benefits 3,541 3,115 6,794 6,058
Occupancy expense, net 443 405 914 776
Furniture and equipment expense 427 404 847 782
Amortization of goodwill 92 97 184 193
Amortization of core deposit intangible assets 100 101 199 202
Other expense 2,065 2,032 4,055 3,698
-------- -------- -------- --------
Total other expense 6,668 6,154 12,993 11,709
-------- -------- -------- --------
Income before income taxes 2,431 1,950 4,742 4,168
Provision for income taxes 672 398 1,254 1,079
-------- -------- -------- --------
Net income $ 1,759 $ 1,552 $ 3,488 $ 3,089
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per share $0.68 $0.60 $1.35 $1.20
Cash dividends declared per share $0.17 $0.14 $0.34 $0.28
Weighted average shares outstanding 2,580,466 2,575,114 2,579,750 2,574,417
Ending shares outstanding 2,580,931 2,575,617 2,580,931 2,575,617
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
MERCHANTS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $3,488 $3,089
Adjustments to reconcile net income to cash from operating activities:
Depreciation 824 749
Amortization of mortgage servicing rights 189 130
Provision for loan losses 1,183 973
Net change in mortgage loans held for sale 2,082 (460)
Net gain on sales of loans (406) (492)
Provision for deferred taxes 75 (18)
Change in net income taxes payable (867) (300)
Change in accrued interest and other assets (960) 4,182
Change in accrued interest and other liabilities (3,417) (2,472)
Premium amortization and discount accretion on securities (7) 346
Securities gains, net (47) 43
Amortization of goodwill 184 193
Amortization of core deposit intangible assets 199 202
Other, net 0 203
------- -------
Net cash from operating activities 2,520 6,368
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from matured securities available for sale 16,203 31,146
Proceeds from sales of securities available for sale 10,857 4,936
Purchases of securities available for sale (30,155) (41,290)
Net principal disbursed or repaid on loans (55,162) (14,082)
Proceeds from sales of other real estate 152 206
Acquisition of Valley Banc Services Corp., net of cash
and cash equivalents acquired 0 (5,134)
Purchase of subsidiaries, net assets held for sale 0 (8,189)
Property and equipment expenditures (489) (1,963)
------- -------
Net cash from investing activities (58,594) (34,370)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 41,518 38,048
Net change in short-term borrowings 18,802 8,195
Payments on notes payable 0 (6,550)
Proceeds from notes payable 0 14,000
Dividends paid, net of dividend reinvestments (785) (718)
------- -------
Net cash from financing activities 59,535 52,975
------- -------
Net change in cash and cash equivalents 3,461 24,973
Cash and cash equivalents at beginning of period 45,068 28,166
------- -------
Cash and cash equivalents at end of period $48,529 $53,139
------- -------
------- -------
See accompanying notes to consolidated financial statements.
</TABLE>
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, 1997, are not necessarily
indicative of the results expected for the year ending December 31, 1997.
NOTE 2: SECURITIES
Amortized costs, gross of unrealized gains and losses, and fair values of
securities are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury $13,376 $23 $(48) $13,351
U.S. Government agencies 85,772 247 (551) 85,468
U.S. Government agency
mortgage backed securities 30,617 170 (220) 30,567
States and political subdivisions 56,142 1,435 (418) 57,159
Collateralized mortgage obligations 8,977 12 (118) 8,871
Other securities 2,667 0 (164) 2,503
--------- ---------- ----------- ---------
$197,551 $1,887 $(1,519) $197,919
--------- ---------- ----------- ---------
--------- ---------- ----------- ---------
December 31, 1996
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ----------- ---------
Securities available for sale:
U.S. Treasury $17,685 $28 $(73) $17,640
U.S. Government agencies 76,998 396 (414) 76,980
U.S. Government agency
mortgage backed securities 34,148 134 (260) 34,022
States and political subdivisions 53,864 1,419 (456) 54,827
Collateralized mortgage obligations 8,878 0 (158) 8,720
Equity securities 2,778 0 (187) 2,591
--------- ---------- ----------- ---------
$194,351 $1,977 $(1,548) $194,780
--------- ---------- ----------- ---------
--------- ---------- ----------- ---------
</TABLE>
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,
1997 1996
----------- -------------
Commercial and industrial $162,688 $161,847
Real estate - commercial 92,085 75,449
Real estate - construction 57,706 54,513
Real estate - residential 102,772 85,107
Installment 85,982 73,918
Credit card receivables 7,171 6,697
Other loans 4,545 1,188
-------- --------
512,949 458,719
Unearned discount (1,407) (1,535)
Deferred loan fees (441) (382)
-------- --------
Total loans $511,101 $456,802
-------- --------
-------- --------
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:
1997 1996
------ ------
Balance, January 1 $7,274 $5,176
Balances of acquired subsidiaries as of January 3 0 798
Provision charged to operations 1,184 973
Loans charged-off (959) (1,157)
Recoveries 276 525
------ ------
Balance, end of period $7,775 $6,315
------ ------
------ ------
NOTE 5: EMPLOYEE BENEFIT PLANS
The Company maintains a noncontributory pension plan covering substantially all
full-time employees of the Company and the Merchants National Bank who have
completed age and service requirements. On January 5, 1996, all pension plan
benefits were frozen, with the intent of considering alternative methods of
providing retirement benefits to employees. In December, 1996, the Company
approved terminating the pension plan, which is expected to be completed during
1997. A discretionary contribution to the employee contributory thrift plan was
increased in order to mitigate the impact of this decision on employees.
Management is continuing to evaluate other ways in which retirement benefits may
be enhanced.
The Company also maintains an Employee Contributory Thrift Plan (the "Thrift
Plan"). The Thrift Plan covers employees who work a minimum of 1,000 hours per
year and have been with the Company at least one year. Vesting in Company
contributions to the Thrift Plan is scheduled over seven years from the date of
employment. The Company contributes an amount determined by the Board of
Directors to all eligible participants. In addition, for each dollar the
participant deposits up to 6% of annual salary, the Company will contribute an
additional fifty cents. Total contributions under the Thrift Plan amounted to
approximately $420,000, and $148,000 for the six months ended June 30, 1997 and
1996.
5
<PAGE>
MERCHANTS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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. ("Valley") on
January 3, 1996. A revolving note bears interest at the prevailing Federal funds
rate or 1% above LIBOR, at the quarterly election of the Company. A fixed rate
note bears interest at a rate of 7.03%.
Merchants National 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. Merchants National Bank
had a short term advance of $10 million outstanding as of June 30, 1997.
NOTE 7: PENDING ACCOUNTING CHANGES
Financial Accounting Standard No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities," was issued by the
Financial Accounting Standards Board ("FASB") in 1996. It revises the accounting
for transfers of financial assets, such as loans and securities, and for
distinguishing between sales and secured borrowings. It is effective for some
transactions in 1997 and others in 1998. The effect on the financial statements
is not material.
On March 3, 1997, the FASB issued Statement No. 128, Earnings Per Share, which
is effective for financial statements beginning with year end 1997. Basic
earnings per share for 1997 and later will be calculated solely on average
common shares outstanding. Diluted earnings per share will reflect the potential
dilution of stock options and other common stock equivalents. All prior
calculations will be restated to be comparable to the new methods. As the
Company has not had significant dilution from stock options, the new calculation
methods will not significantly affect the future basic earnings per share and
diluted earnings per share.
6
<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 1997 was $1,759,000, or 68 cents per share,
a 13.3% increase compared to $1,552,000, or 60 cents per share earned in the
second quarter of 1996. For the six months ended June 30, 1997, net income was
$3,488,000, or $1.35 per share, compared to $3, 89,000, or $1.20 per share for
the first six months of 1996. Net interest income grew 17.8%, to $7,386,000 in
the second quarter of 1997 compared with the second quarter of 1996. Noninterest
income grew 3.8% to $2,410,000, and noninterest expenses grew 8.4% to
$6,668,000.
NET INTEREST INCOME
Net interest income was $7.4 million and $6.3 million during the three months
ended June 30, 1997, and 1996, an increase of about 17%. For the first half of
the year, net interest income was $14.2 million in 1997, and $12.3 million in
1996. The Company's net interest margin (tax equivalent net interest income as a
percentage of earning assets) was 4.59% for the three months ended June 30,
1997, and 4.52% for the six month period, compared to 4.36% and 4.39% a year
earlier. Net interest income rose primarily because of an increase in earning
assets, from an average of $600.6 million during the second quarter of 1996, to
$682.4 million during the second quarter of 1997. Additionally, greater
proportion of earning assets were invested in loans in the second quarter of
1997, than a year earlier. Because loans generally have a higher interest rate
than securities, this contributed to the increase in the net interest margin.
OTHER INCOME
Noninterest income excluding securities gains was $2,405,000 for the three
months ended June 30, 1997 and $2,300,000 for the same period in 1996, an
increase of $105,000, or 4.6%. During the first half of the year, noninterest
income excluding securities gains was $4,676,000 in 1997, and $4,469,000 in
1996, also an increase of 4.6%. Trust income increased $96,000, or about 19.2%
for the quarter and $141,000, or 14.0% for the year to date. Mortgage banking
fee income of $489,000 for the second quarter of 1997, reflected a $108,000
(18.1%) decline. During the six months ended June 30, 1997, mortgage fees were
$981,000, compared to $1,113,000 for the like period in 1996, a decline of
11.9%. Mortgage banking income is seasonal, with residential activity tending to
decline in the winter months, and is also sensitive to interest rate levels and
expectations. Most fixed rate mortgages which the Company originates 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 $263 million as of June 30, 1997, compared to
$244 million a year earlier.
Service charges and fees increased $121,000 (12.8%) from $947,000 in the second
quarter of 1996, to $1,068,000 in the second quarter of 1997. For the six month
period, service charges and fees increased $224,000, or 12.2%, to $2,063,000 for
the six months ended June 30, 1997. Service charges and fees include service
charges on deposit accounts, which may be expected to increase, in the
aggregate, as deposits grow. Deposits grew $52.8 million (9.0%) from June 30,
1996, to June 30, 1997.
Sales of securities available for sale resulted in gains of $5,000 in the second
quarter of 1997, and $47,000 for the six months ended June 30, 1997. Securities
gains were $23,000 in the second quarter of 1996, and $43,000 for the six months
ended June 30, 1996. 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.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
OTHER EXPENSE
Salary and benefit expenses increased from $3,115,000 during the three months
ended June 30, 1996, to $3,541,000 for the same period in 1997, an increase of
$426,000 (13.7%). Salaries and benefits were $6,794,000 during the six months
ended June 30, 1997, compared to $6,058,000 during the six months ended June 30,
1996, an increase of $736,000 (12.1%). Due to changes in the management of
retirement benefits (Note 5), contributions to the Company's Thrift Plan
increased approximately $272,000, to $420,000 in the first half of 1997. The
remaining increase in salaries and benefits was primarily the result of
increases in salaries and commissions. The full-time equivalent number of
employees was 341 as of June 30, 1996, and 336 as of June 30, 1997.
Occupancy expenses of $443,000 during the first quarter of 1997, were $38,000
(9.4%) higher than in the first quarter of 1996. Occupancy expenses during the
six months ended June 30, 1997, were $138,000 (17.8%), higher than in the like
period a year earlier. Furniture and equipment expenses were $23,000 (6.7%)
higher during the second quarter of 1997, compared to the same period in 1996,
and $65,000 (8.3%) higher for the six months ended June 30, 1997. The higher
rate of increase for the six month period in both occupancy and fixed asset
expenses was primarily due to the opening of a new branch of Merchants National
Bank at Randall Square in Geneva, Illinois in March, 1996.
Other expenses were $2,065,000, or $33,000 (1.6%) higher in the second quarter
of 1997 than in the second quarter of 1996. For the six months ended June 30,
1997, other expenses were $4,055,000, or $357,000 (9.7%) higher than in the
first half of 1996. A significant portion of the increase in expenses was the
result of the expanding mortgage and credit card product lines. As mortgage
volume has increased, amortization of mortgage servicing rights, correspondent
mortgage fees, and other related expenses have increased. Similarly, as credit
card volume has increased, expenses directly related to the credit card program
have also increased.
FINANCIAL CONDITION
LOANS, LOANS HELD FOR SALE, AND PROVISION FOR LOAN LOSSES
Total loans increased $54.3 million (11.9%) to $511.1 million as of June 30,
1997, from $456.8 million as of December 31, 1996. Commercial loans were nearly
unchanged, at $162.7 million as of June 30, 1997, compared to $161.8 million as
of December 31, 1996, an increase of about one-half percent. Commercial real
estate loans increased to $92.1 million as of June 30, 1997, from $75.4 million
as of December 31, 1996, an increase of $16.7 million (22.1%). Construction
loans increased $3.2 million (5.9%), to $57.7 million as of June 30, 1997.
Residential real estate loans increased $17.7 million (20.8%), to $102.8
million, from $85.1 million as of December 31, 1996. Residential real estate
loans are primarily adjustable rate mortgages. These 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 National 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
$4.1 million as of December 31, 1996, and $2.2 million as of June 30, 1997. 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
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
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 provision for loan losses was $697,000 for the second quarter of 1997,
and $1,183,000 for the six months ended June 30, 1997. The provision for loan
losses was $490,000 for the second quarter of 1996, and $973,000 for the six
months ended June 30, 1996. Net charge-offs for the six months ended June 30,
were $683,000 and $632,000 in 1997 and 1996, respectively. The increase in
the provision for loan losses is closely tied to the increase in the loan
portfolio. One measure of the adequacy of the allowance for loan losses is
the ratio of the allowance to total loans. Although some decline in the ratio
is natural when loan volume increases substantially, additional provisions
have been made to ensure that an adequate level has been maintained. The
allowance for loan losses as a percentage of total loans was 1.52% as of June
30, 1997 and 1.59% as of December 31, 1996. In management's judgment, an
adequate allowance for possible future losses has been established.
Nonaccrual loans increased to $3,542,000 as of June 30, 1997, from $2,970,000 as
of December 31, 1996. Most of the difference in nonaccrual loans is related to
three commercial loans which were moved to this status while these situations
are being addressed. Management does not believe that this represents a decline
in the overall quality of the loan portfolio. There were no loans past due
ninety days or more and still accruing interest as of either June 30, 1997, or
December 31, 1996. Renegotiated loans increased $157,000 to $516,000 as of June
30, 1997. Most of this total represents loans to a single borrower which were
renegotiated during 1995, are fully collateralized, and are in accordance with
the modified terms.
Other real estate owned increased from $333,000 as of December 31, 1996, to
$362,000 as of June 30, 1997, as some property was transferred from the loan
portfolio. 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, 1997, net unrealized gains of $419,000, reduced by
deferred income taxes of $142,000, resulted in an increase in equity capital of
approximately $277,000. As of December 31, 1996, net unrealized gains of
$429,000, net of deferred income taxes of $112,000, resulted in an increase in
equity capital of $317,000.
The fair value of securities available for sale increased $3.2 million (2%)
during the first six months of 1997, to $198.0 million as of June 30, 1997, from
$194.8 million as of December 31, 1996. U.S. Treasury securities declined from
$17.6 million as of December 31, 1996, to $13.4 million as of June 30, 1997, a
24% decline. U.S. government agency securities grew from $77.0 million as of
December 31, 1996, to $85.5 million as of June 30, 1997, an increase of $8.5
million (11%). U.S. government agency mortgage backed securities declined $3.5
million (10%), from $34.0 million as of December 31, 1996, to $30.5 million as
of June 30, 1997. Management does not consider any of these changes to represent
a change in the management philosophy of the investment portfolio.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
DEPOSITS AND BORROWED FUNDS
Total deposits of $642.5 million as of June 30, 1997, represented an increase
of $41.5 million (6,9%) from $601.0 million as of December 31, 1996.
Noninterest-bearing deposits were $124.2 million as of June 30, 1997, an
increase of $12.0 million (10.7%) from $112.2 million as of December 31,
1996. At the same time, interest-bearing deposits increased $29.5 million
(6.0%), including $12.6 million in certificates of deposit of $100,000 or
more, and $9.4 million in certificates of deposit under $100,000. There were
no significant changes in deposit structure or management's strategies in
acquiring deposits in the first half of 1997.
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.
CAPITAL RESOURCES
The Company and its three subsidiary banks (the "Banks") are subject to
regulatory capital requirements administered by federal banking agencies.
Capital adequacy guidelines and prompt corrective action regulations involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators about
components, risk weights, and other factors, and the regulators can lower
classifications in certain cases. Failure to meet various capital requirements
can initiate regulatory action that could have a direct material effect on the
financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
<TABLE>
<CAPTION>
Minimum capital requirements are:
Total Capital to Risk Tier I Capital to Risk Tier I Capital to
Weighted Assets Weighted Assets Average Assets
--------------------- ---------------------- ------------------
<S> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
</TABLE>
The Company and the Banks were categorized as well capitalized as of June 30,
1997. Management is not aware of any conditions or events since the most recent
regulatory notification that would change the Company's or the Banks'
categories.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Capital levels and minimum required levels (dollars in thousands):
<TABLE>
<CAPTION>
Minimum Required Minimum Required
for Capital to be Well
Actual Adequacy Purposes Capitalized
---------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1997:
Total capital to risk weighted assets
Consolidated $ 59,545 10.22% $ 46,621 8.00% $ 58,276 10.00%
Merchants National Bank 53,180 10.78 39,484 8.00 49,355 10.00
Tier 1 capital to risk weighted assets
Consolidated 52,196 8.96 23,310 4.00 34,965 6.00
Merchants National Bank 46,998 9.52 19,742 4.00 29,613 6.00
Tier 1 capital to average assets
Consolidated 52,196 7.12 29,335 4.00 36,668 5.00
Merchants National Bank 46,998 7.61 24,709 4.00 30,886 5.00
December 31, 1996:
Total capital to risk weighted assets
Consolidated 54,487 10.26 42,477 8.00 53,097 10.00
Merchants National Bank 51,000 11.61 35,148 8.00 43,935 10.00
Tier 1 capital to risk weighted assets
Consolidated 47,872 9.02 21,239 4.00 31,858 6.00
Merchants National Bank 45,494 10.35 17,574 4.00 26,361 6.00
Tier 1 capital to average assets
Consolidated 47,872 6.90 27,768 4.00 34,709 5.00
Merchants National Bank 45,494 7.82 23,262 4.00 29,078 5.00
</TABLE>
LIQUIDITY
Liquidity measures the ability of the Company to meet maturing obligations and
its existing commitments, to withstand fluctuations in deposit levels, to fund
its operations, and to provide for customers' credit needs. The liquidity of the
Company principally depends on cash flows from operating activities, investment
in and maturity of assets, changes in balances of deposits and borrowings, and
its ability to borrow funds in the money or capital markets.
Net cash outflows from investing activities were $58.6 million in the first six
months of 1997, compared to $34.4 million a year earlier. In the first half of
1997, net principal disbursed on loans accounted for net outflows of $55.2
million, and securities transactions aggregated a net outflow of $3.1 million.
In the first half of 1996, net principal disbursed or repaid on loans accounted
for a net outflow of $14.1 million, and securities transactions resulted in net
outflows of $5.2 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 1997
associated with an increase in deposits were $41.5 million. This compares with a
net inflow of $38.0 million for the same period in 1996. Short term borrowings
resulted in net cash inflows of $18.8 million in the first six months of 1997,
including a $10 million
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
advance from the Federal Home Loan Bank of Chicago, and inflows of $8.2
million in the first six months of 1996.
During the first half 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 Banks may purchase Federal funds
from correspondent banks. The Merchants National Bank may also borrow funds from
the Federal Reserve Bank of Chicago. The Merchants National 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. Merchants National Bank had a short term advance of $10
million outstanding as of June 30, 1997.
Mortgage lending activity resulted in operating net cash inflows of
approximately $1.9 million during the first six months of 1997, compared to
outflows of $661,000 in 1996. Total cash outflows from operating activities
exceeded operating outflows by $2.5 million for the six months ended June 30,
1997. During the first six months of 1996, net cash inflows from operating
activities were $6.4 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.
RECENT REGULATORY DEVELOPMENTS
The Committee on Banking and Financial Services of the U. S. House of
Representatives has approved legislation that would allow bank holding companies
to engage in a wider range of nonbanking activities, including greater authority
to engage in securities and insurance activities. The expanded powers generally
would be available to a bank holding company only if the bank holding company
and its bank subsidiaries remain well-capitalized and well-managed, and if each
of the depository institution subsidiaries of the bank holding company had
received at least a "satisfactory" rating under the Community Reinvestment Act.
The proposed legislation would also impose various restrictions on transactions
between the depository institution subsidiaries of bank holding companies and
their nonbank affiliates. These restrictions are intended to protect the
depository institutions from the risks of the new nonbanking activities
permitted to such affiliates. At this time, the Company is unable to predict
whether the proposed legislation will be enacted and, therefore, is unable to
predict the impact such legislation may have on the operations of the Company
and its subsidiaries.
Additionally, legislation has been enacted in Illinois that would allow Illinois
banks, effective October 1, 1997, to engage in insurance activities, subject to
various conditions, including restrictions on the manner in which insurance
products are marketed to bank customers and requirements that banks selling
insurance provide certain disclosures to customers. Legislation has also been
enacted in Illinois that would prohibit out-of-state banks from acquiring an
Illinois bank unless the Illinois bank has been in existence and continuously
operated for a period of at least five years.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identifiable by use of the words, "believe," "expect,"
"intend," "anticipate," "estimate," "project," or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material
adverse affect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, changes in: interest rates,
general economic conditions, legislative/regulatory changes, monetary and
fiscal policies of the U.S. Government, including policies of the U.S.
Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles, policies and guidelines. These risks and uncertainties
should be considered in evaluating forward-looking statements and undue
reliance should not be placed on such statements. Further information
concerning the Company and its business, including additional factors that
could materially affect the Company's financial results, is included in the
Company's filings with the Securities and Exchange Commission.
13
<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 15, 1997.
Election of Directors.
Messrs. William F. Hejna, James D. Pearson, and Frank A. Sarnecki
were elected to serve as Class A directors of the Company (term
expiring at the 2000 Annual Meeting of Stockholders). Continuing
as Class B directors (term expires in 1998) are Messrs. William
C. Glenn, John M. Lies, and Norman L. Titiner. Continuing as
Class C directors (term expires in 1999) are Messrs. C. Tell
Coffey, Calvin R. Myers, and John J. Swalec.
Matters Voted Upon at the Meeting.
In addition to the election of directors, stockholders ratified
the adoption of Crowe, Chizek and Company LLP as independent
public accountants for the Company for the year ending December
31, 1997. 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 F. Hejna 2,001,370.465 84,567.544 2,085,938.009
James D. Pearson 2,082,995.180 2,942.829 2,085,938.009
John J. Swalec 2,003,995.180 81,942.829 2,085,938.009
For Not For Abstain Non-votes Total
---------- ---------- ---------- ---------- ----------
Ratification of Accountants 2,079,578.009 2,640.000 3,720.000 0.000 2,085,938.009
</TABLE>
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.
14
<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 1, 1997
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 46,910
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,619
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 197,919
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 511,101
<ALLOWANCE> 7,775
<TOTAL-ASSETS> 783,213
<DEPOSITS> 642,488
<SHORT-TERM> 63,327
<LIABILITIES-OTHER> 2,537
<LONG-TERM> 14,000
0
0
<COMMON> 2,607
<OTHER-SE> 58,254
<TOTAL-LIABILITIES-AND-EQUITY> 783,213
<INTEREST-LOAN> 11,019
<INTEREST-INVEST> 3,039
<INTEREST-OTHER> 63
<INTEREST-TOTAL> 14,121
<INTEREST-DEPOSIT> 5,962
<INTEREST-EXPENSE> 6,735
<INTEREST-INCOME-NET> 7,386
<LOAN-LOSSES> 697
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 6,668
<INCOME-PRETAX> 2,431
<INCOME-PRE-EXTRAORDINARY> 2,431
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,759
<EPS-PRIMARY> .68
<EPS-DILUTED> .68
<YIELD-ACTUAL> 4.59
<LOANS-NON> 3,542
<LOANS-PAST> 0
<LOANS-TROUBLED> 516
<LOANS-PROBLEM> 4,058
<ALLOWANCE-OPEN> 7,274
<CHARGE-OFFS> 959
<RECOVERIES> 276
<ALLOWANCE-CLOSE> 7,775
<ALLOWANCE-DOMESTIC> 7,775
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
