<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, 1998
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 March 31,
1998, the Registrant had outstanding 5,168,357 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 . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . . . 8
PART II
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . .15
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . .15
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . .15
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . .15
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . .15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .15
Form 10-Q Signature Page . . . . . . . . . . . . . . . . . . . . . . . . .16
<PAGE>
PART I - FINANCIAL INFORMATION
MERCHANTS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 45,282 $ 35,914
Federal funds sold 9,706 7,080
Securities available for sale 197,969 204,761
Loans held for sale 11,678 2,833
Loans 576,255 565,348
Allowance for loan losses (9,091) (8,360)
-------- --------
Net loans 567,164 556,988
Premises and equipment, net 11,305 11,295
Other real estate owned 195 178
Mortgage servicing rights 1,856 1,674
Goodwill, net 6,679 6,773
Core deposit intangible assets, net 1,959 2,055
Accrued interest and other assets 9,237 9,420
-------- --------
Total assets $863,030 $838,971
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $128,152 $118,187
Interest-bearing 541,710 532,531
-------- --------
Total deposits 669,862 650,718
Federal funds purchased and overnight borrowings 27,600 23,100
Securities sold under repurchase agreements 27,474 21,754
Federal Home Loan Bank term advances 54,750 59,750
Notes payable 13,781 14,000
Accrued interest and other liabilities 2,918 4,332
-------- --------
Total liabilities 796,385 773,654
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 5,213 5,213
Surplus 16,070 16,028
Retained earnings 43,911 42,544
Unrealized net gain on securities available for sale 1,562 1,653
Treasury stock, at cost, 45,023 shares in 1998 and
51,782 shares in 1997 (111) (121)
-------- --------
Total stockholders' equity 66,645 65,317
-------- --------
Total liabilities and stockholders' equity $863,030 $838,971
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
MERCHANTS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 12,747 $ 10,132
Loans held for sale 89 42
Securities:
Taxable 2,168 2,278
Tax-exempt 798 673
Federal funds sold 83 38
-------- --------
Total interest income 15,885 13,163
INTEREST EXPENSE
Deposits 6,287 5,642
Federal funds purchased and overnight borrowings 473 194
Securities sold under repurchase agreements 301 281
Federal Home Loan Bank term advances 821 0
Notes payable 243 237
-------- --------
Total interest expense 8,125 6,354
-------- --------
Net interest income 7,760 6,809
Provision for loan losses 883 486
-------- --------
Net interest income after provision for loan losses 6,877 6,323
OTHER INCOME
Trust income 650 552
Mortgage banking income 949 492
Service charges and fees 968 995
Securities gains (losses), net 76 42
Other income 231 232
-------- --------
Total other income 2,874 2,313
OTHER EXPENSE
Salaries and employee benefits 3,763 3,253
Occupancy expense, net 530 471
Furniture and equipment expense 558 420
Amortization of goodwill 94 92
Amortization of core deposit intangible assets 96 99
Other expense 1,944 1,990
-------- --------
Total other expense 6,985 6,325
-------- --------
Income before income taxes 2,766 2,311
Provision for income taxes 804 582
-------- --------
Net income $1,962 $1,729
-------- --------
-------- --------
Basic earnings per share $0.38 $0.34
Diluted earnings per share $0.37 $0.34
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net income $ 1,962 $ 1,729
Change in net unrealized gains on securities 10 8
-------- --------
Comprehensive income $ 1,972 $ 1,737
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
MERCHANTS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,962 $ 1,729
Adjustments to reconcile net income to cash from
operating activities:
Depreciation 485 413
Amortization of mortgage servicing rights 142 93
Provision for loan losses 883 486
Net change in mortgage loans held for sale (8,672) 2,209
Net gain on sales of loans (497) (98)
Change in net income taxes payable 731 (67)
Change in accrued interest and other assets 183 (1,906)
Change in accrued interest and other liabilities (2,098) (3,780)
Premium amortization and discount accretion on
securities 72 13
Securities losses (gains), net (76) (42)
Amortization of goodwill 94 92
Amortization of core deposit intangible assets 96 101
-------- --------
Net cash from operating activities (6,695) (757)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from matured securities available for sale 18,349 9,870
Proceeds from sales of securities available for sale 194 6,542
Purchases of securities available for sale (11,885) (15,417)
Net principal disbursed or repaid on loans (11,076) (8,641)
Property and equipment expenditures (495) (232)
-------- --------
Net cash from investing activities (4,913) (7,878)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 19,144 14,323
Net change in short term borrowings 10,220 (12,812)
Payments on Federal Home Loan Bank term advances (5,000) -
Payments on notes payable (219) -
Dividends paid, net of dividend reinvestments (543) (393)
-------- --------
Net cash from financing activities 23,602 1,118
-------- --------
Net change in cash and cash equivalents 11,994 (7,517)
Cash and cash equivalents at beginning of period 42,994 45,068
-------- --------
Cash and cash equivalents at end of period $ 54,988 $ 37,551
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<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 March 31, 1998 are not
necessarily indicative of the results expected for the year ending December
31, 1998.
Under a new accounting standard, comprehensive income is now reported for all
periods. Comprehensive income includes both other income and other
comprehensive income. Other comprehensive income includes the change in
unrealized gains and losses on securities available for sale.
NOTE 2: SECURITIES
Securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
March 31, 1998:
U.S. Treasury $ 11,052 $ 57 $ (10) $ 11,099
U.S. Government agencies 82,469 411 (109) 82,771
U.S. Government agency
mortgage backed securities 23,995 280 (57) 24,218
States and political subdivisions 62,946 1,976 (56) 64,866
Collateralized mortgage obligations 7,813 42 (39) 7,816
Other securities 7,327 - (128) 7,199
-------- ------ ----- --------
$195,602 $2,766 $(399) $197,969
-------- ------ ----- --------
-------- ------ ----- --------
December 31, 1997:
U.S. Treasury $ 14,063 $ 48 $ (19) $ 14,092
U.S. Government agencies 85,973 405 (124) 86,254
U.S. Government agency
mortgage backed securities 25,886 281 (75) 26,092
States and political subdivisions 60,840 2,176 (35) 62,981
Collateralized mortgage obligations 8,319 45 (54) 8,310
Equity securities 7,172 - (140) 7,032
-------- ------ ----- --------
$202,253 $2,955 $(447) $204,761
-------- ------ ----- --------
-------- ------ ----- --------
</TABLE>
6
<PAGE>
MERCHANTS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 3: LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------- -----------
<S> <C> <C>
Commercial and industrial $172,043 $168,899
Real estate - commercial 94,911 95,755
Real estate - construction 73,034 69,901
Real estate - residential 125,884 122,732
Installment 102,997 100,869
Credit card receivables 7,968 8,100
Other loans 915 813
-------- --------
577,752 567,069
Unearned discount (1,237) (1,324)
Deferred loan fees (260) (397)
-------- --------
Total loans $576,255 $565,348
-------- --------
-------- --------
</TABLE>
NOTE 4: ALLOWANCE FOR LOAN LOSSES
Allowance for loan losses as of March 31, is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Balance, January 1 $ 8,360 $ 7,274
Provision for loan losses 883 486
Loans charged-off (299) (465)
Recoveries 147 143
-------- --------
Balance, end of period $ 9,091 $ 7,438
-------- --------
-------- --------
</TABLE>
NOTE 5: EMPLOYEE BENEFIT PLANS
Prior to 1997, the Company maintained a noncontributory pension plan covering
substantially all full-time employees of the Company and Merchants National
Bank who had 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. During 1997, plan participants
were given the option to receive their vested benefits under the plan in the
form of lump sums, annuities, or rollovers to either the Company's Employee
Contributory Thrift Plan (the "Thrift Plan") or to an individual retirement
account. In addition, 25% of the excess assets remaining in the plan after
the vested benefits were paid were transferred to the Thrift Plan, a
"qualified benefit plan," as allowed in the Internal Revenue Code of 1986. As
of December 31, 1997, all vested benefit obligations had been settled and the
transfer to the Thrift Plan had been completed.
As a result of the termination and amendment of the plan, at December 31,
1997 the Company has recorded a receivable and income of approximately
$214,000 and accrued an excise tax liability of approximately $43,000, which
were received and paid in January 1998. No pension cost was recorded in 1997.
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. This amount was increased starting in 1996 in order to
mitigate the impact of the termination of the pension plan (discussed above). 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 $243,000, and $210,000 for the three
months ended March 31, 1998, and 1997.
7
<PAGE>
MERCHANTS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 6: BORROWINGS
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. The Company has
pledged first mortgage loans on residential property in an amount equal to at
least 167% of the outstanding advances. An open-line advance of $12.5 million
is included in overnight borrowings as of March 31, 1998.
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%.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net income for the first quarter of 1998 was $1,962,000, or diluted earnings
per share of 37 cents, a 13.5% increase compared to $1,729,000, or 34 cents
per share earned in the first quarter of 1997. Net interest income grew
14.0%, to $7,760,000 in the first quarter of 1998 compared with the first
quarter of 1997. Noninterest income grew 24.3% to $2,874,000, and noninterest
expenses grew 10.4% to $6,985,000.
NET INTEREST INCOME
Net interest income was $7.8 million and $6.4 million during the three months
ended March 31, 1998 and 1997, an increase of about 14%. The Company's net
interest margin (tax equivalent net interest income as a percentage of
earning assets) was 4.26% for the three months ended March 31, 1998, and
4.45% a year earlier. Net interest income rose because of an increase in
earning assets, from an average of $655.5 million during the first quarter of
1997, to $787.0 million during the first quarter of 1998.
A greater proportion of earning assets was invested in loans in the first
quarter of 1998, than a year earlier. Because loans generally have a higher
interest rate than securities, this resulted in an increase in the average
yield on earning assets, from 8.38% in the first quarter of 1997 to 8.45% in
the first quarter of 1998. Interest bearing deposits and borrowed funds
increased more than noninterest bearing deposits. As a result, the average
interest cost to funds earning assets (interest expense as a percent of
average earning assets) increased from 3.93% in the first quarter of 1997 to
4.19% in the first quarter of 1998.
OTHER INCOME
Noninterest income excluding securities gains was $2,798,000 for the three
months ended March 31, 1998 and $2,271,000 for the same period in 1997, an
increase of $527,000, or 23.2%. Trust income increased $98,000, or about
17.8% for the quarter. Mortgage banking fee income of $949,000 reflected a
$457,000 (92.9%) increase. Mortgage banking income is seasonal and is also
sensitive to interest rate levels and expectations. Most fixed rate mortgages
that the Company originates are sold and the servicing is retained. The
servicing portfolio provides a source of income that is generally more stable
than origination fees. The portfolio of loans serviced for others totaled
$283 million as of March 31, 1998 compared to $260 million a year earlier.
Service charges and fees decreased $27,000 (2.7%) from $995,000 in the first
quarter of 1997, to $968,000 in the first quarter of 1998. There were no
significant changes in the fee structure for deposit accounts.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Sales of securities available for sale resulted in gains of $76,000 in the first
three months of 1998, and $42,000 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 $3,253,000 during the three months
ended March 31, 1997, to $3,763,000 for the same period in 1998, an increase of
$510,000 (15.7%). The full-time equivalent number of employees was 332 as of
March 31, 1997, and 345 as of March 31, 1998. Commissions were $292,000 in the
first quarter of 1998, compared with $132,000 in the first quarter of 1997. Most
of the increase in commissions was directly associated with the increase in
mortgage banking income.
Occupancy expenses of $530,000 during the first quarter of 1998, were $59,000
(12.5%) higher than in the first quarter of 1997. Furniture and equipment
expenses were $138,000 (32.9%) higher during the first quarter of 1998, compared
to the same period in 1997. Most of the increase was the result of moving to a
new administration center in late 1997, and the move of the commercial banking
department of Merchants National Bank from the downtown location to the West
Plaza Branch location in 1998. Other capital purchases involving computer and
related equipment also contributed to the increased costs.
Other expenses were $1,944,000, or $46,000 (2.3%) lower in the first quarter of
1998, than in the first quarter of 1997. Mortgage servicing rights,
correspondent mortgage fees, and other mortgage expenses have increased. At the
same time, there has been continued improvement in controlling operating
expenses throughout the Company.
FINANCIAL CONDITION
LOANS, LOANS HELD FOR SALE, AND PROVISION FOR LOAN LOSSES
Total loans increased $10.9 million (1.9%) to $576.3 million as of March 31,
1998, from $565.3 million as of December 31, 1997. Commercial loans increased to
$172.0 million as of March 31, 1998, from $168.9 million as of December 31,
1997, a $3.1 million (1.9%) increase. Commercial real estate loans decreased to
approximately $94.9 million as of March 31, 1998, from $95.8 million as of
December 31, 1997, while declining $844,000 (0.9%). Construction loans increased
$3.1 million (4.5%) to $73.0 million as of March 31, 1998. Residential real
estate loans increased $3.2 million (2.6%), to $125.9 million, from $122.7
million as of December 31, 1997. 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
$11.7 million as of March 31, 1998, and $2.8 million as of December 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.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Provisions for loan losses were $883,000 in the first quarter of 1998 and
$486,000 in the first quarter of 1997. Net charge-offs for the three months
ended March 31, were $152,000 and $322,000 in 1998 and 1997, respectively. The
increase in the provision for loan losses in 1998 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 1.58% as of
March 31, 1998 and 1.60% as of March 31, 1997. In management's judgment, an
adequate allowance for possible future losses has been established.
Nonaccrual loans decreased to $3,912,000 as of March 31, 1998, from $4,623,000
as of December 31, 1997. Nonaccrual loans principally consist of loans that are
well collateralized and are not expected to result in material losses. There
were no loans past due ninety days or more and still accruing interest as of
either March 31, 1998, or December 31, 1997. Other real estate owned increased
slightly from $178,000 as of December 31, 1997, to $195,000 as of March 31,
1998, as some property was transferred from the loan portfolio. 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, 1998, net unrealized gains of $2,367,000, reduced by
deferred income taxes of $805,000, resulted in an increase in equity capital of
approximately $1,562,000. As of December 31, 1997, net unrealized gains of
$2,508,000, net of deferred income taxes of $855,000, resulted in an increase in
equity capital of $1,653,000.
The fair value of securities available for sale decreased $6.7 million (3%)
during the first three months of 1998, to $198.0 million as of March 31, 1998,
from $204.8 million as of December 31, 1997. U.S. Treasury securities declined
from $14.1 million as of December 31, 1997, to $11.1 million as of March 31,
1998, a 21% decline. U.S. government agency securities declined from $86.0
million as of December 31, 1997, to $82.5 million as of March 31, 1998, an
decrease of $3.5 million (4%). U.S. government agency mortgage backed securities
declined $1.9 million (7%), from $25.9 million as of December 31, 1997, to $24.0
million as of March 31, 1998. The decline in the size of the portfolio was used
to fund loan growth.
DEPOSITS AND BORROWED FUNDS
Total deposits of $669.9 million as of March 31, 1998, represented an increase
of $19.1 million (2.9%) from $650.7 million as of December 31, 1997.
Noninterest-bearing deposits were $128.2 million as of March 31, 1998, an
increase of $10.0 million (8.4%) from $118.2 million as of December 31, 1997. At
the same time, interest-bearing deposits increased $9.2 million (1.7%). There
were no significant changes in deposit structure or management's strategies in
acquiring deposits in the first three months of 1998
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.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
During the first quarter of 1998, Merchants repaid $5 million in a term
advance from the FHLB. The FHLB Open-Line was $12.5 million as of March 31,
1998.
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.
The Company and the Banks were categorized as well capitalized as of March 31,
1998. 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.
11
<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>
March 31, 1998:
Total capital to risk weighted assets
Consolidated $65,551 10.57% $49,623 8.00% $62,029 10.00%
Merchants National Bank 58,175 10.90% 42,689 8.00% 53,361 10.00%
Tier 1 capital to risk weighted assets
Consolidated 57,683 9.30% 24,812 4.00% 37,217 6.00%
Merchants National Bank 51,487 9.65% 21,345 4.00% 32,017 6.00%
Tier 1 capital to average assets
Consolidated 57,683 6.94% 33,241 4.00% 41,552 5.00%
Merchants National Bank 51,487 7.30% 28,202 4.00% 35,253 5.00%
December 31, 1997:
Total capital to risk weighted assets
Consolidated 63,285 10.42% 48,594 8.00% 60,743 10.00%
Merchants National Bank 56,965 10.89% 41,842 8.00% 52,303 10.00%
Tier 1 capital to risk weighted assets
Consolidated 55,583 9.15% 24,297 4.00% 36,446 6.00%
Merchants National Bank 50,415 9.64% 20,921 4.00% 31,382 6.00%
Tier 1 capital to average assets
Consolidated 55,583 6.91% 32,166 4.00% 40,207 5.00%
Merchants National Bank 50,415 7.44% 27,097 4.00% 33,871 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 $4.9 million in the first
quarter of 1998, compared to $7.9 million a year earlier. In the first three
months of 1998, net principal disbursed on loans accounted for net outflows
of $11.1 million, and securities transactions aggregated a net inflow of $6.7
million. In the first three months of 1997, net principal disbursed or repaid
on loans accounted for a net outflow of $15.4 million, and securities
transactions resulted in net inflows of $995,000.
Cash inflows from financing activities in the first quarter of 1998
associated with an increase in deposits were $19.1 million. This compares
with a net inflow of $14.3 million for the same period in 1997. Short-term
borrowings resulted in net cash inflows of $10.2 million in the first quarter
of 1998, and outflows of $12.8 million in the first quarter of 1997. FHLB
term advances declined $5 million in the first quarter of 1998, and were
unchanged in the first quarter of 1997.
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
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
for short or long term purposes under a variety of programs. Merchants
National Bank had term advances of $54.8 million outstanding as of March 31,
1998.
Origination of mortgage loans held for sale resulted in operating net cash
outflows of approximately $8.7 million during the first three months of 1998,
compared to inflows of $2.1 million in 1997. Total cash outflows from operating
activities exceeded operating outflows by $6.7 million for the three months
ended March 31, 1998. During the first three months of 1997, net cash outflows
from operating activities were $757,000. Interest received net of interest paid
was a principal source of operating cash inflows in both periods reported.
Management of investing and financing activities, and market conditions,
determine the level and the stability of net interest cash flows. Management's
policy is to mitigate the impact of changes in market interest rates to the
extent possible, so that balance sheet growth is the principal determinant of
growth in net interest cash flows.
YEAR 2000 COMPLIANCE
The federal banking regulators have issued several statements providing guidance
to financial institutions on the steps the regulators expect financial
institutions to take to become Year 2000 compliant. Each of the federal banking
regulators is also examining the financial institutions under its jurisdiction
to assess each institution's compliance with the outstanding guidance. If an
institution's progress in addressing the Year 2000 problem is deemed by its
primary federal regulator to be less than satisfactory, the institution will be
required to enter into a memorandum of understanding with the regulator which
will, among other things, require the institution to promptly develop and submit
an acceptable plan for becoming Year 2000 compliant and to provide periodic
reports describing the institution's progress in implementing the plan. Failure
to satisfactorily address the Year 2000 problem may also expose a financial
institution to other forms of enforcement action that its primary federal
regulator deems appropriate to address the deficiencies in the institution's
Year 2000 remediation program.
The Company utilizes and is dependent upon data processing systems and software
to conduct its business. The data processing systems and software include those
developed and maintained by the Company's data processing provider and purchased
software which is run on in-house computer networks. 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. The Company's data processing
provider and those vendors who have been contacted indicate that their hardware
and/or software will be Year 2000 compliant by the end of 1998. This will allow
time for compliance testing, Additionally, alarms, heating and cooling systems
and other computer controlled mechanical devices on which the Company relies
have been evaluated. Those found not to be in compliance will be modified or
replaced with a compliant product. While there will be some expenses incurred
during the next two years, the Company has not identified any situations at this
time that will require material cost expenditures to become fully compliant. The
Company has initiated a program to communicate with key bank customers to ensure
that they are properly prepared for the year 2000 and will not suffer serious
adverse consequences. Nevertheless, if not properly addressed, Year 2000 related
computer issues could result in interruptions to the operations of the Banks and
have a material adverse effect on file Company's results of operations.
13
<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.
14
<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
15
<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: April 15, 1998
16
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<CURRENCY> U.S. DOLLARS
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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