<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, 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
of incorporation or organization) Identification Number)
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 March 31, 1997, the
Registrant had outstanding 2,579,522 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. . . . . . . . . . . . . . . . . . . . . . 13
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . 13
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders. . . . . 13
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 13
Form 10-Q Signature Page . . . . . . . . . . . . . . . . . . . . . . . 14
<PAGE>
PART I - FINANCIAL INFORMATION
MERCHANTS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
<S> <C> <C>
ASSETS
Cash and due from banks $ 35,621 $ 42,455
Federal funds sold 1,930 2,613
Securities available for sale 192,182 194,780
Loans held for sale 2,038 4,149
Loans 464,940 456,802
Allowance for loan losses 7,438 7,274
-------- --------
Net loans 457,502 449,528
Premises and equipment, net 11,919 12,100
Other real estate owned 514 333
Mortgage servicing rights 1,457 1,438
Goodwill, net 6,885 6,977
Core deposit intangible assets, net 2,352 2,452
Accrued interest and other assets 9,377 7,584
-------- --------
Total assets $721,777 $724,409
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $111,564 $112,203
Interest-bearing 503,729 488,767
-------- --------
Total deposits 615,293 600,970
Federal funds purchased and securities
sold under repurchase agreements 31,713 44,525
Notes payable 14,000 14,000
Accrued interest and other liabilities 2,314 6,716
-------- --------
Total liabilities 663,320 666,211
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 18,505 18,468
Retained earnings 38,253 36,962
Unrealized net gain (loss) on securities available for sale (760) 317
Treasury stock, at cost, 27,168 shares in 1997 and
28,607 shares in 1996 (148) (156)
-------- --------
Total stockholders' equity 58,457 58,198
-------- --------
Total liabilities and
stockholders' equity $721,777 $724,409
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MERCHANTS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 10,132 $ 8,792
Loans held for sale 42 41
Securities:
Taxable 2,278 2,413
Tax-exempt 673 705
Federal funds sold 38 112
--------- ---------
Total interest income 13,163 12,063
--------- ---------
INTEREST EXPENSE
Deposits 5,642 5,487
Federal funds purchased and
securities sold under repurchase agreements 475 339
Notes payable 237 170
--------- ---------
Total interest expense 6,354 5,996
--------- ---------
Net interest income 6,809 6,067
Provision for loan losses 486 483
--------- ---------
Net interest income after provision for loan losses 6,323 5,584
--------- ---------
OTHER INCOME
Trust income 552 508
Mortgage banking income 492 516
Service charges and fees 995 892
Securities gains, net 42 20
Other income 232 254
--------- ---------
Total other income 2,313 2,190
--------- ---------
OTHER EXPENSE
Salaries and employee benefits 3,253 2,944
Occupancy expense, net 471 371
Furniture and equipment expense 420 379
Amortization of goodwill 92 96
Amortization of core deposit intangible assets 99 101
Other expense 1,990 1,665
--------- ---------
Total other expense 6,325 5,556
--------- ---------
Income before income taxes 2,311 2,218
Provision for income taxes 582 681
--------- ---------
Net income $ 1,729 $ 1,537
--------- ---------
--------- ---------
Earnings per share $0.67 $0.60
Cash dividends declared per share $0.17 $0.14
Weighted average shares outstanding 2,575,076 2,573,282
Ending shares outstanding 2,576,767 2,574,091
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
MERCHANTS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $1,729 $1,537
Adjustments to reconcile net income to cash from operating activities:
Depreciation 413 356
Amortization of mortgage servicing rights 93 61
Provision for loan losses 486 483
Net change in mortgage loans held for sale 2,209 1,422
Net gain on sales of loans (98) (101)
Provision for deferred taxes 44 259
Change in net income taxes payable (111) 581
Change in accrued interest and other assets (1,906) 4,405
Change in accrued interest and other liabilities (3,780) (265)
Premium amortization and discount accretion on securities 13 175
Securities gains, net (42) (20)
Amortization of goodwill 92 96
Amortization of core deposit intangible assets 101 101
Other, net 0 (229)
------- -------
Net cash from operating activities (757) 8,861
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from matured securities available for sale 9,870 18,789
Proceeds from sales of securities available for sale 6,542 2,520
Purchases of securities available for sale (15,417) (29,122)
Net principal disbursed or repaid on loans (8,641) 5,209
Proceeds from sales of other real estate 0 179
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 (232) (1,299)
------- -------
Net cash from investing activities (7,878) (17,047)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 14,323 11,009
Net change in short-term borrowings (12,812) 3,117
Payments on notes payable 0 (6,550)
Proceeds from notes payable 0 14,000
Dividends paid, net of dividend reinvestments (393) (360)
------- -------
Net cash from financing activities 1,118 21,216
------- -------
Net change in cash and cash equivalents (7,517) 13,030
Cash and cash equivalents at beginning of period 45,068 28,166
------- -------
Cash and cash equivalents at end of period $37,551 $41,196
------- -------
------- -------
</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, 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>
March 31, 1997
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury $ 13,629 $ 1 $ (88) $ 13,542
U.S. Government agencies 82,556 88 (1,076) 81,568
U.S. Government agency
mortgage backed securities 32,328 150 (378) 32,100
States and political subdivisions 53,767 1,278 (785) 54,260
Collateralized mortgage obligations 8,792 3 (168) 8,627
Other securities 2,260 0 (175) 2,085
-------- ------ ------- --------
$193,332 $1,520 $(2,670) $192,182
-------- ------ ------- --------
-------- ------ ------- --------
<CAPTION>
December 31, 1996
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
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:
March 31, December 31
1997 1996
--------- -----------
Commercial and industrial $155,211 $161,847
Real estate - commercial 81,946 75,449
Real estate - construction 56,811 54,513
Real estate - residential 88,211 85,107
Installment 76,686 73,918
Credit card receivables 6,814 6,697
Other loans 1,056 1,188
-------- --------
466,735 458,719
Unearned discount (1,436) (1,535)
Deferred loan fees (359) (382)
-------- --------
Total loans $464,940 $456,802
-------- --------
-------- --------
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:
1997 1996
------ ------
Balance, January 1 $7,274 $5,176
Balances of acquired subsidiaries
as of January 3 0 798
Provision charged to operations 486 483
Loans charged-off (465) (444)
Recoveries 143 359
------ ------
Balance, end of period $7,438 $6,372
------ ------
------ ------
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. Hinckley State Bank and Fox Valley Bank employees were given
full credit for past employment service. 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 $210,000, and $74,000 for the three months ended
March 31, 1997 and 1996.
5
<PAGE>
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%.
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 considered to be 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 first quarter of 1997 was $1,729,000, or 67 cents per share,
a 12.5% increase compared to $1,537,000, or 60 cents per share earned in the
first quarter of 1996. Net interest income grew 12.2%, to $6,809,000 in the
first quarter of 1997 compared with the first quarter of 1996. Noninterest
income grew 5.6% to $2,313,000, and noninterest expenses grew 13.8% to
$6,325,000.
NET INTEREST INCOME
Net interest income was $6.8 million and $6.0 million during the three months
ended March 31, 1997, and 1996, an increase of about 12%. The Company's net
interest margin (tax equivalent net interest income as a percentage of earning
assets) was 4.45% for the three months ended March 31, 1997, and 4.36% a year
earlier. Net interest income rose because of an increase in earning assets, from
an average of $596.7 million during the first quarter of 1996, to $655.5 million
during the first quarter of 1997. A greater proportion of earning assets were
invested in loans in the first 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 $2,271,000 for the three
months ended March 31, 1997 and $2,170,000 for the same period in 1996, an
increase of $101,000, or 4.7%. Trust income increased $44,000, or about 8.7% for
the quarter. Mortgage banking fee income of $492,000, reflected a $24,000 (4.7%)
decline. 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 $260 million as of March 31, 1997, compared to
$239 million a year earlier.
Service charges and fees increased $103,000 (11.6%) from $892,000 in the first
quarter of 1996, to $955,000 in the first quarter of 1997. Service charges and
fees includes service charges on deposit accounts, which may be expected to
increase, in the aggregate, as deposits grow. Deposits grew $52.6 million (9.4%)
from March 31, 1996, to March 31, 1997.
Sales of securities available for sale resulted in gains of $42,000 in the first
three months of 1997, and $20,000 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 $2,944,000 during the three months
ended March 31, 1996, to $3,253,000 for the same period in 1997, an increase of
$309,000 (10.5%). The full-time equivalent number of employees was 330 as of
March 31, 1996, and 332 as of March 31, 1997. Due to changes in the management
of retirement benefits (Note 5), contributions to the Company's Thrift Plan
increased approximately $110,000, to $210,000 in the first quarter of 1997. The
remaining increase in salaries and benefits was primarily the result of
increases in salaries and commissions.
Occupancy expenses of $471,000 during the first quarter of 1997, were $100,000
(27%) higher the in the first quarter of 1996. Furniture and equipment expenses
were $41,000 (11%) higher during the first quarter of 1997,
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
compared to the same period in 1996. Occupancy and fixed asset expenses
increased, 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 $1,990,000, or $325,000 (20%) higher in the first quarter of
1997, than in the first quarter of 1996. Debit card and ATM fee expenses
increased $91,000. Fees paid to correspondents to originate mortgage loans
increased $59,000. Other factors contributing to the increase in expenses were
legal fees related to corporate activities and to loan workout situations,
amortization of mortgage servicing, and increases in general operating costs.
FINANCIAL CONDITION
LOANS, LOANS HELD FOR SALE, AND PROVISION FOR LOAN LOSSES
Total loans increased $8.1 million (1.8%) to $464.9 million as of March 31,
1997, from $456.8 million as of December 31, 1996. Commercial loans decreased
$6.6 million (4.1%), from $161.8 million as of December 31, 1996, to $155.2
million as of March 31, 1997. Commercial real estate loans increased more than
any other category, growing to $81.9 million as of March 31, 1997, from $75.4
million as of December 31, 1996, an increase of $6.5 million (8.6%).
Construction loans increased $2.3 million (4.2%), to $56.8 million as of March
31, 1997. Residential real estate loans increased $3.1 million (3.7%), to $88.2
million, from $85.1 million as of December 31, 1996. These 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 $2.0 million as of March 31, 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 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 $486,000 for the first three months
of 1997, compared to $483,000 a year earlier. Net charge-offs for the three
months ended March 31, were $322,000 and $85,000 in 1997 and 1996, respectively.
The level of charge-offs in the first quarter of 1997, was more indicative of an
expected level of charge-offs than the first quarter of 1996. The allowance for
loan losses as a percentage of total loans was 1.60% as of March 31, 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 $3,930,000 as of March 31, 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 as of either March 31, 1997, or December 31, 1996.
Renegotiated loans increased $138,000 to $497,000 as of March 31, 1997. Most of
this total represents loans to a single borrower which were renegotiated during
1995, and are fully collateralized and are in accordance with the modified
terms.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Other real estate owned increased from $333,000 as of December 31, 1996, to
$514,000 as of March 31, 1997, as some property was transferred from loans.
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, 1997, net unrealized losses of $1,150,000, reduced by
deferred income taxes of $391,000, resulted in a decrease in equity capital of
approximately $760,000. 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 declined $2.6 million (1%)
during the first three months of 1997, to $192.2 million as of March 31, 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 $13.5 million as of March 31,
1997, a 23% decline. U.S. government agency securities grew from $77.0 million
as of December 31, 1996, to $81.6 million as of March 31, 1997, an increase of
$4.6 million (6%). U.S. government agency mortgage backed securities declined
$1.9 million (6%), from $34.0 million as of December 31, 1996, to $32.1 million
as of March 31, 1997. Management does not consider any of these changes to
represent a change in the management philosophy of the investment portfolio.
DEPOSITS AND BORROWED FUNDS
Total deposits of $615.3 million as of March 31, 1997, represented an increase
of $14.3 million (2.4%) from $601.0 million as of December 31, 1996.
Noninterest-bearing deposits were $111.6 million as of March 31, 1997, nearly
unchanged from $112.2 million as of December 31, 1996. At the same time,
interest-bearing deposits increased $13.7 million (2.8%), including $6.0 million
in certificates of deposit of $100,000 or more, and $8.0 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 quarter
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.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
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.
Minimum capital requirements are:
<TABLE>
<CAPTION>
Total Capital to Risk Tier I Capital to Risk Tier I Capital to
Weighted Assets Weighted Assets Average Assets
--------------------- ---------------------- -----------------
<S> <C> <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 March 31,
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.
Capital levels and minimum required levels (dollars in thousands):
<TABLE>
<CAPTION>
Minimum Required for
Capital Minimum Required to
Actual Adequacy Purposes be Well Capitalized
--------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ----- -------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
March 31, 1997:
Total capital to risk weighted assets
Consolidated $ 56,552 10.46% $ 43,237 8.00% $ 54,046 10.00%
Merchants National Bank 51,652 11.46 36,051 8.00 45,064 10.00
Tier 1 capital to risk weighted assets
Consolidated 49,790 9.21 21,618 4.00 32,428 6.00
Merchants National Bank 46,005 10.21 18,026 4.00 27,038 6.00
Tier 1 capital to average assets
Consolidated 49,790 7.10 28,066 4.00 35,083 5.00
Merchants National Bank 46,005 7.79 23,629 4.00 29,537 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
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
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 $8.0 million in the first three
months of 1997, compared to $17.2 million a year earlier. In the first three
months of 1997, net principal disbursed on loans accounted for net outflows of
$8.6 million, and securities transactions aggregated a net inflow of $995,000.
In the first three months of 1996, net principal disbursed or repaid on loans
accounted for a net inflow of $5.2 million, and securities transactions resulted
in net outflows of $7.8 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 1997
associated with an increase in deposits were $14.3 million. This compares with a
net inflow of $11.0 million for the same period in 1996. Short term borrowings
resulted in net cash outflows of $12.8 million in the first three months of
1997, and inflows of $3.1 million in the first three months of 1996.
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 Banks may purchase Federal funds
from correspondent banks. The Merchants National 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 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.
Mortgage lending activity resulted in operating net cash inflows of
approximately $2.1 million during the first three months of 1997, compared to
$1.3 million in 1996. Total cash outflows from operating activities exceeded
operating outflows by $645,000 for the three months ended March 31, 1997. During
the first three months of 1996, net cash inflows from operating activities were
$9.0 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
Various bills have been introduced in the Congress 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. While the scope of
permissible nonbanking activities and the conditions under which the new powers
could be exercised varies among the bills, 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. The bills 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.
Additionally, legislation has been introduced in Illinois that would generally
allow banks to engage in insurance activities, subject to various conditions,
including restriction on the manner in which insurance products are
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
marketed to bank customers and requirements that banks selling insurance
provide certain disclosures to customers. The Illinois legislature is also
considering legislation that would prohibit out-of-state banks from acquiring
a bank located in Illinois unless the Illinois-based bank has been in
existence and continuously operated for a period of at least five years.
At this time, the Company is unable to predict whether any of the pending bills
will be enacted and, therefore, is unable to predict the impact such legislation
may have on the operations of the Company and its bank subsidiaries.
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.
12
<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.
27. Financial Data Schedule
Reports on Form 8-K.
A report was filed on Form 8-K, as of January 6, 1997, pursuant to
Item 5, regarding the December 12, 1996, sale of the State Bank of
Osco and the December 20, 1996, sale of Anchor Bank.
13
<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 13, 1997
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 35,621
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,930
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 192,182
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 464,940
<ALLOWANCE> 7,438
<TOTAL-ASSETS> 721,777
<DEPOSITS> 615,293
<SHORT-TERM> 31,713
<LIABILITIES-OTHER> 2,314
<LONG-TERM> 14,000
0
0
<COMMON> 2,607
<OTHER-SE> 55,850
<TOTAL-LIABILITIES-AND-EQUITY> 721,777
<INTEREST-LOAN> 10,132
<INTEREST-INVEST> 2,951
<INTEREST-OTHER> 80
<INTEREST-TOTAL> 13,163
<INTEREST-DEPOSIT> 5,642
<INTEREST-EXPENSE> 6,354
<INTEREST-INCOME-NET> 6,809
<LOAN-LOSSES> 486
<SECURITIES-GAINS> 42
<EXPENSE-OTHER> 6,325
<INCOME-PRETAX> 2,311
<INCOME-PRE-EXTRAORDINARY> 2,311
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,729
<EPS-PRIMARY> .67
<EPS-DILUTED> .67
<YIELD-ACTUAL> 4.45
<LOANS-NON> 3,930
<LOANS-PAST> 0
<LOANS-TROUBLED> 497
<LOANS-PROBLEM> 4,427
<ALLOWANCE-OPEN> 7,274
<CHARGE-OFFS> 465
<RECOVERIES> 143
<ALLOWANCE-CLOSE> 7,438
<ALLOWANCE-DOMESTIC> 7,438
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
