<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 September 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)
P.O. BOX 289, 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 September
30, 1997, the Registrant had outstanding 5,164,034 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)
SEPTEMBER 30, 1997 DECEMBER 31, 1996
ASSETS
Cash and due from banks $ 40,461 $ 42,455
Federal funds sold 6,076 2,613
Securities available for sale 197,417 194,780
Loans held for sale 2,342 4,149
Loans 527,423 456,802
Allowance for loan losses 7,871 7,274
-------- --------
Net loans 519,552 449,528
Premises and equipment, net 11,887 12,100
Other real estate owned 398 333
Mortgage servicing rights 1,555 1,438
Goodwill, net 6,702 6,977
Core deposit intangible assets, net 2,154 2,452
Accrued interest and other assets 9,760 7,584
-------- --------
Total assets $798,304 $724,409
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $124,468 $112,203
Interest-bearing 519,904 488,767
-------- --------
Total deposits 644,372 600,970
Federal funds purchased and securities
sold under repurchase agreements 25,896 44,525
Federal Home Loan Bank advances 47,250 0
Notes payable 14,000 14,000
Accrued interest and other liabilities 3,781 6,716
-------- --------
Total liabilities 735,299 666,211
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value;
Authorized 500,000 shares; none issued -- --
Common stock, $1 par value authorized
6,000,000 shares; issued 5,213,380
shares in 1997, and 2,606,690 shares in 1996 5,213 2,607
Surplus 15,985 18,468
Retained earnings 40,967 36,962
Unrealized net gain on securities available
for sale 975 317
Treasury stock, at cost, 49,346 shares in 1997
and 57,214 shares in 1996 (135) (156)
-------- --------
Total stockholders' equity 63,005 58,198
-------- --------
Total liabilities and
stockholders' equity $798,304 $724,409
======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
MERCHANTS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 11,692 $ 9,327 $ 32,843 $ 26,946
Loans held for sale 39 62 104 180
Securities:
Taxable 2,256 2,590 6,844 7,559
Tax-exempt 737 654 2,139 2,076
Federal funds sold 43 159 121 359
---------- ---------- ----------- ----------
Total interest income 14,767 12,792 42,051 37,120
---------- ---------- ----------- ----------
INTEREST EXPENSE
Deposits 6,159 5,533 17,763 16,364
Federal funds purchased and securities
sold under repurchase agreements 559 416 1,565 1,241
Federal Home Loan Bank advances 618 0 618 0
Notes payable 245 130 724 464
---------- ---------- ----------- ----------
Total interest expense 7,581 6,079 20,670 18,069
---------- ---------- ----------- ----------
Net interest income 7,186 6,713 21,381 19,051
Provision for loan losses 519 654 1,702 1,627
---------- ---------- ----------- ----------
Net interest income after provision for
loan losses 6,667 6,059 19,679 17,424
---------- ---------- ----------- ----------
OTHER INCOME
Trust income 587 513 1,736 1,522
Mortgage banking income 638 558 1,619 1,671
Service charges and fees 1,079 947 3,142 2,786
Securities gains (losses), net (239) 109 (192) 152
Other income 386 375 869 884
---------- ---------- ----------- ----------
Total other income 2,451 2,502 7,174 7,015
---------- ---------- ----------- ----------
OTHER EXPENSE
Salaries and employee benefits 3,454 3,205 10,248 9,264
Occupancy expense, net 522 409 1,436 1,186
Furniture and equipment expense 454 426 1,301 1,208
Amortization of goodwill 91 96 275 289
Amortization of core deposit intangible assets 99 101 298 303
Other expense 2,016 1,948 6,071 5,645
---------- ---------- ----------- ----------
Total other expense 6,636 6,185 19,629 17,895
---------- ---------- ----------- ----------
Income before income taxes 2,482 2,376 7,224 6,544
Provision for income taxes 646 666 1,900 1,745
---------- ---------- ----------- ----------
Net income $ 1,836 $ 1,710 $ 5,324 $ 4,799
========== ========== =========== ==========
Earnings per share $ 0.36 $ 0.33 $ 1.03 $ 0.93
Cash dividends declared per share $ 0.09 $ 0.07 $ 0.26 $ 0.21
Weighted average shares outstanding 5,163,302 5,152,760 5,160,782 5,150,152
Ending shares outstanding 5,164,034 5,153,534 5,164,034 5,153,534
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
MERCHANTS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,324 $ 4,799
Adjustments to reconcile net income to cash from
operating activities:
Depreciation 1,286 1,152
Amortization of mortgage servicing rights 288 212
Provision for loan losses 1,702 1,627
Net change in mortgage loans held for sale 1,712 (505)
Net gain on sales of loans (310) (320)
Provision for deferred taxes 174 61
Change in net income taxes payable (1,300) (46)
Change in accrued interest and other assets (2,176) 3,570
Change in accrued interest and other liabilities (2,199) (3,698)
Premium amortization and discount accretion on securities 43 408
Securities losses (gains), net 192 (152)
Amortization of goodwill 275 289
Amortization of core deposit intangible assets 298 303
Other, net 0 264
-------- --------
Net cash from operating activities 5,309 7,964
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from matured securities available for sale 27,248 39,149
Proceeds from sales of securities available for sale 14,375 19,974
Purchases of securities available for sale (43,447) (59,417)
Net principal disbursed or repaid on loans (71,907) (40,811)
Proceeds from sales of other real estate 116 313
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 (1,073) (2,284)
-------- --------
Net cash from investing activities (74,688) (56,399)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 43,402 48,123
Net change in Federal funds sold and securities
sold under repurchase agreements (18,629) 14,988
Proceeds from Federal Home Loan Bank advances 47,250 0
Payments on notes payable 0 (6,550)
Proceeds from notes payable 0 14,000
Dividends paid, net of dividend reinvestments (1,175) (1,081)
-------- --------
Net cash from financing activities 70,848 69,480
-------- --------
Net change in cash and cash equivalents 1,469 21,045
Cash and cash equivalents at beginning of period 45,068 28,166
-------- --------
Cash and cash equivalents at end of period $ 46,537 $ 49,211
======== ========
</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 periods ended September 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>
SEPTEMBER 30, 1997
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury $ 13,361 $ 47 $ (27) $ 13,381
U.S. Government agencies 82,916 357 (238) 83,035
U.S. Government agency
mortgage backed securities 35,995 230 (170) 36,055
States and political subdivisions 57,173 1,758 (326) 58,605
Collateralized mortgage obligations 1,025 0 (2) 1,023
Other securities 5,470 0 (152) 5,318
-------- ------ -------- --------
$195,940 $2,392 $ (915) $197,417
======== ====== ======== ========
DECEMBER 31, 1997
------------------------------------------------------
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:
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ -----------
Commercial and industrial $157,482 $161,847
Real estate - commercial 92,222 75,449
Real estate - construction 61,639 54,513
Real estate - residential 114,521 85,107
Credit card receivables 8,199 6,697
Other loans 1,182 1,188
-------- --------
529,115 458,719
Unearned discount (1,363) (1,535)
Deferred loan fees (329) (382)
-------- --------
Total loans $527,423 $456,802
======== ========
NOTE 4: ALLOWANCE FOR LOAN LOSSES
Following is a summary of changes in the allowance for loan losses for the
nine months ended September 30:
1997 1996
------------ -----------
Balance, January 1 $ 7,274 $ 5,176
Balances of acquired subsidiaries as
of January 3 0 798
Provision charged to operations 1,702 1,627
Loans charged-off (1,480) (1,779)
Recoveries 375 720
-------- --------
Balance, end of period $ 7,871 $ 6,542
======== ========
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 $613,000, and $236,000 for the nine months ended September
30, 1997 and 1996.
5
<PAGE>
MERCHANTS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 6: BORROWINGS
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 ("FHLB")
System gives it the ability to borrow funds from the FHLB of Chicago for
short or long term purposes under a variety of programs. During the third
quarter of 1997, Merchants National Bank borrowed $15 million under the FHLB
Open-Line, which may be drawn upon or repaid, in whole or in part, on a daily
basis. In addition, approximately $32 million was borrowed under term
advances during the third quarter of 1997.
NOTE 7: STOCK SPLIT
On September 30, 1997, the Company implemented a two-for-one stock split in
the form of a 100% stock dividend. As a result, the total number of shares of
common stock authorized remains 6,000,000, the number of shares issued
increased from 2,606,690 to 5,213,380, and the number of shares of treasury
stock increased from 24,673 to 49,346. All references to the number of shares
and per share data in these statements have been adjusted to reflect the
stock split on a retroactive basis.
NOTE 8: 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 third quarter of 1997 was $1,836,000, or 36 cents per
share, a 7.4% increase compared to $1,710,000, or 33 cents per share earned
in the third quarter of 1996. For the nine months ended September 30, 1997,
net income was $5,324,000, or $1.03 per share, compared to $4,799,000, or
93 cents per share for the first nine months of 1996. Net interest income
grew 7.0%, to $7,186,000 in the third quarter of 1997 compared with the third
quarter of 1996. Noninterest income excluding securities transactions grew
12.4% to $2,690,000, and noninterest expenses grew 7.5% to $6,646,000.
NET INTEREST INCOME
Net interest income was $7.2 million and $6.7 million during the three months
ended September 30, 1997, and 1996, an increase of about 7%. For the first
nine months of the year, net interest income was $21.4 million in 1997, and
$19.1 million in 1996. The Company's net interest margin (tax equivalent net
interest income as a percentage of earning assets) was 4.20% for the three
months ended September 30, 1997, and 4.41% for the nine month period,
compared to 4.51% and 4.42% a year earlier. Net interest income rose
primarily because of an increase in earning assets, from an average of
$625.4 million during the third quarter of 1996, to $720.5 million during the
third quarter of 1997. A greater proportion of earning assets were invested
in loans in the third quarter of 1997 than a year earlier, which had a
positive impact on the net interest margin. However, the cost of funds
increased over the same period of time.
OTHER INCOME
Noninterest income excluding securities gains was $2,690,000 for the three
months ended September 30, 1997 and $2,393,000 for the same period in 1996,
an increase of $297,000, or 12.4%. During the first nine months of the year,
noninterest income excluding securities gains was $7,366,000 in 1997, and
$6,863,000 in 1996, an increase of 7.3%. Trust income increased $74,000, or
about 14.4% for the quarter and $214,000, or 14.1% for the year to date.
Mortgage banking fee income of $638,000 for the third quarter of 1997,
reflected an $80,000 (14.3%) increase. During the nine months ended
September 30, 1997, mortgage fees were $1,619,000, compared to $1,671,000 for
the like period in 1996, a decline of 3.1%. 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 $267 million as of September 30, 1997, compared to
$250 million a year earlier.
Service charges and fees increased $132,000 (13.9%) from $947,000 in the
third quarter of 1996, to $1,079,000 in the third quarter of 1997. For the
nine month period, service charges and fees increased $356,000, or 12.8%, to
$3,142,000 for the nine months ended September 30, 1997. Service charges and
fees include service charges on deposit accounts, which may be expected to
increase as deposits grow. In addition to deposit growth, the effects of
increases in some charges are evident in these results.
Sales of securities available for sale resulted in net losses of $239,000 in
the third quarter of 1997, and $192,000 for the nine months ended September
30, 1997. Securities gains were $109,000 in the third quarter of 1996, and
$152,000 for the nine months ended September 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
Total other expenses increased from $6,185,000 during the third quarter of
1996 to $6,646,000 during the third quarter of 1997, an increase of
$461,000 (7.5%). For the nine months ended September 30, 1997, total other
expenses were $1,734,000, or 9.7% higher than a year earlier. Salary and
benefit expenses increased from $3,205,000 during the three months ended
September 30, 1996, to $3,454,000 for the same period in 1997, an increase of
$249,000 (7.8%). Salaries and benefits were $9,264,000 during the nine months
ended September 30, 1997, compared to $10,248,000 during the nine months
ended September 30, 1996, an increase of $984,000 (10.6%). Due to changes in
the management of retirement benefits (Note 5), contributions to the
Company's Thrift Plan increased to approximately $613,000, in the first nine
months of 1997, from $236,000 in the first nine months of 1996. 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 September 30, 1996, and 336 as of September 30, 1997.
Occupancy expenses of $522,000 during the third quarter of 1997 were
$113,000 (27.6%) higher than in the third quarter of 1996. Occupancy expenses
during the nine months ended September 30, 1997 were $250,000 (21.1%), higher
than in the like period a year earlier. The increase in occupancy expenses
was primarily the result of the move of most operations and administrative
functions to a leased location in Aurora. Additional office space was needed
for those functions, and the improved layout is expected to enhance back-room
efficiency in the long run. Furniture and equipment expenses were
$28,000 (6.6%) higher during the third quarter of 1997, compared to the same
period in 1996, and $93,000 (7.7%) higher for the nine months ended
September 30, 1997.
Other expense was $2,026,000, or $78,000 (4.0%) higher in the third quarter
of 1997 than in the third quarter of 1996. For the nine months ended
September 30, 1997, other expense was $6,071,000, or $426,000 (7.5%) higher
than in the first nine months 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 $70.6 million (15.5%) to $527.4 million as of September
30, 1997, from $456.8 million as of December 31, 1996. Commercial loans
declined to $157.5 million as of September 30, 1997, from $161.8 million as
of December 31, 1996, a $4.6 million (2.7%) decline. Commercial real estate
loans increased to $92.2 million as of September 30, 1997, from $75.4 million
as of December 31, 1996, an increase of $16.8 million (22.2%). Construction
loans increased $7.1 million (13.1%), to $61.6 million as of September 30,
1997. Residential real estate loans increased $29.4 million (34.6%), to
$114.5 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 $2.3 million as of
September 30, 1997. The carrying value of these loans approximated the market
value at that time.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
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 provision for loan losses was $519,000 for the third quarter of 1997, and
$1,702,000 for the nine months ended September 30, 1997. The provision for
loan losses was $654,000 for the third quarter of 1996, and $1,627,000 for
the nine months ended September 30, 1996. Net charge-offs for the nine months
ended September 30, were $1,105,000 and $1,059,000 in 1997 and 1996,
respectively. The increase in the provision for loan losses for the nine
month period was 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 1.49% as of September 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 $4,741,000 as of September 30, 1997, from
$2,970,000 as of December 31, 1996. The increase principally consisted of
loans that are well-collateralized and are not expected to result in
material losses. 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 September 30,
1997, or December 31, 1996. Renegotiated loans increased $100,000 to $459,000
as of September 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
$398,000 as of September 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 September 30, 1997, net unrealized gains
of $1,477,000, reduced by deferred income taxes of $502,000, resulted in an
increase in equity capital of approximately $975,000. 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 $2.6 million (1%)
during the first nine months of 1997, to $197.4 million as of September 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
September 30, 1997, a 24% decline. U.S. government agency securities grew
from $77.0 million as of December 31, 1996, to $83.0 million as of September
30, 1997, an increase of $6.0 million (8%). U.S. government agency mortgage
backed securities grew $2.0 million (6%), from $34.0 million as of December
31, 1996, to $36.0 million as of September 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 $644.4 million as of September 30, 1997, represented an
increase of $43.4 million (7.2%) from $601.0 million as of December 31, 1996.
Noninterest-bearing deposits were $124.5 million as of September 30, 1997, an
increase of $12.3 million (10.9%) from $112.2 million as of December 31, 1996.
At the same time, interest-bearing deposits increased $31.1 million (6.4%),
including $15.1 million in certificates of deposit of $100,000 or more, and
$11.9 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 nine months 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.
Merchants National Bank's membership in the Federal Home Loan Bank ("FHLB")
System gives it the ability to borrow funds from the FHLB of Chicago for short
or long term purposes under a variety of programs. During the third quarter of
1997, Merchants borrowed $15 million under the FHLB Open-Line, which may be
drawn upon or repaid, in whole or in part, on a daily basis. In addition,
approximately $32 million was borrowed under term advances during the third
quarter of 1997. The increased borrowing was used to fund loan growth.
CAPITAL RESOURCES
The Company completed a two-for-one split of its common stock during the third
quarter of 1997. The split was in the form of a stock dividend and was payable
on September 30, 1997, to the shareholders of record at the close of business on
September 15, 1997.
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.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
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
September 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.
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>
September 30, 1997:
Total capital to risk weighted assets
Consolidated $ 61,428 10.16% $ 46,621 8.00% $ 58,276 10.00%
Merchants National Bank 54,627 10.62 39,484 8.00 49,355 10.00
Tier 1 capital to risk weighted assets
Consolidated 53,806 8.90 23,310 4.00 34,965 6.00
Merchants National Bank 48,188 9.37 19,742 4.00 29,613 6.00
Tier 1 capital to average assets
Consolidated 53,806 7.00 29,335 4.00 36,668 5.00
Merchants National Bank 48,188 7.42 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 $74.7 million in the first
nine months of 1997, compared to $56.4 million a year earlier. In the first
nine months of 1997, net principal disbursed on loans accounted for
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
net outflows of $71.9 million, and securities transactions aggregated a net
outflow of $1.8 million. In the first nine months of 1996, net principal
disbursed or repaid on loans accounted for a net outflow of $40.8 million,
and securities transactions resulted in net outflows of $294,000. 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 nine months of 1997
associated with an increase in deposits were $43.4 million. This compares
with a net inflow of $48.1 million for the same period in 1996. Securities
sold under repurchase agreements resulted in cash inflows of $6.6 million in
the first nine months of 1997, and cash inflows of $15.0 million during the
first nine months of 1996. Short term borrowings resulted in net cash
outflows of $10.2 million in the first nine months of 1997, and no cash flows
in the first nine months of 1996.
During the first nine months 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 FHLB System gives it the ability to borrow funds from the
FHLB of Chicago for short or long term purposes under a variety of programs.
Merchants National Bank had advances of $46.3 million outstanding as of
September 30, 1997.
Mortgage lending activity resulted in operating net cash inflows of
approximately $1.7 million during the first nine months of 1997, compared to
outflows of $505,000 in 1996. Total cash outflows from operating activities
exceeded operating outflows by $5.3 million for the nine months ended
September 30, 1997. During the first nine months of 1996, net cash inflows
from operating activities were $8.0 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.
YEAR 2000 COMPLIANCE
The Company utilizes and is dependent upon data processing systems and
software to conduct its business. In 1997 the Company initiated a review and
assessment of all hardware and software to confirm that it will function
properly in the year 2000. To date, indications are that all systems are or
will be Year 2000 compliant, with no material costs anticipated.
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
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
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
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
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: November 13, 1997
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 40,461
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,076
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 197,417
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 527,423
<ALLOWANCE> 7,871
<TOTAL-ASSETS> 798,304
<DEPOSITS> 644,372
<SHORT-TERM> 73,146
<LIABILITIES-OTHER> 3,781
<LONG-TERM> 14,000
0
0
<COMMON> 5,217
<OTHER-SE> 57,792
<TOTAL-LIABILITIES-AND-EQUITY> 798,304
<INTEREST-LOAN> 11,692
<INTEREST-INVEST> 2,993
<INTEREST-OTHER> 82
<INTEREST-TOTAL> 14,767
<INTEREST-DEPOSIT> 6,159
<INTEREST-EXPENSE> 7,581
<INTEREST-INCOME-NET> 7,186
<LOAN-LOSSES> 519
<SECURITIES-GAINS> (239)
<EXPENSE-OTHER> 6,636
<INCOME-PRETAX> 2,482
<INCOME-PRE-EXTRAORDINARY> 2,482
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,836
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
<YIELD-ACTUAL> 4.20
<LOANS-NON> 4,741
<LOANS-PAST> 0
<LOANS-TROUBLED> 459
<LOANS-PROBLEM> 5,200
<ALLOWANCE-OPEN> 7,274
<CHARGE-OFFS> 1,480
<RECOVERIES> 375
<ALLOWANCE-CLOSE> 7,871
<ALLOWANCE-DOMESTIC> 7,871
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
