<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, 1999
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, 1999,
the Registrant had outstanding 5,181,071 shares of common stock, $1.00 par value
per share.
<PAGE>
MERCHANTS BANCORP, INC.
Form 10-Q Quarterly Report
Table of Contents
PART I
<TABLE>
<CAPTION>
Page Number
<S> <C>
Item 1. Financial Statements.......................................................................1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............................................6
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................12
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
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
MERCHANTS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
<S> <C> <C>
ASSETS
Cash and due from banks $ 25,295 $ 38,679
Federal funds sold 3,000 5,000
Securities available for sale 207,490 198,759
Loans held for sale 5,096 9,678
Loans 611,583 607,927
Allowance for loan losses (8,455) (8,507)
--------- ---------
Net loans 603,128 599,420
Premises and equipment, net 11,955 11,872
Other real estate owned 185 297
Mortgage servicing rights 2,678 2,440
Goodwill, net 6,303 6,397
Core deposit intangible assets, net 1,583 1,673
Accrued interest and other assets 10,598 9,647
--------- ---------
Total assets $ 877,311 $ 883,862
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 120,014 $ 132,153
Interest-bearing 614,135 609,904
--------- ---------
Total deposits 734,149 742,057
Securities sold under repurchase agreements 15,222 13,320
Federal Home Loan Bank term advances 42,250 42,250
Notes payable 5,906 6,125
Accrued interest and other liabilities 6,674 7,928
--------- ---------
Total liabilities 804,201 811,680
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value;
Authorized 500,000 shares; none issued - -
Common stock, $1 par value authorized 6,000,000 shares;
issued 5,222,392 in 1999 and in 1998 5,222 5,222
Surplus 16,348 16,348
Retained earnings 50,556 48,809
Unrealized net gain on securities available for sale 1,075 1,894
Treasury stock, at cost, 41,321 shares in
1999 and in 1998 (91) (91)
--------- ---------
Total stockholders' equity 73,110 72,182
--------- ---------
Total liabilities and stockholders' equity $ 877,311 $ 883,862
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MERCHANTS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 1999 and 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
INTEREST INCOME
Loans, including fees $12,546 $12,747
Loans held for sale 134 89
Securities:
Taxable 1,927 2,168
Tax-exempt 944 798
Federal funds sold 6 83
------- -------
Total interest income 15,557 15,885
INTEREST EXPENSE
Deposits 6,725 6,287
Federal funds purchased and overnight borrowings 107 473
Securities sold under repurchase agreements 161 301
Federal Home Loan Bank term advances 632 821
Notes payable 103 243
------- -------
Total interest expense 7,728 8,125
------- -------
Net interest income 7,829 7,760
Provision for loan losses 375 883
------- -------
Net interest income after provision for loan losses 7,454 6,877
OTHER INCOME
Trust income 743 650
Mortgage banking income 1,117 949
Service charges and fees 1,088 968
Securities gains (losses), net 12 76
Other income 436 231
------- -------
Total other income 3,396 2,874
OTHER EXPENSE
Salaries and employee benefits 3,994 3,763
Occupancy expense, net 577 530
Furniture and equipment expense 545 558
Amortization of goodwill 94 94
Amortization of core deposit intangible assets 89 96
Other expense 2,354 1,944
------- -------
Total other expense 7,653 6,985
------- -------
Income before income taxes 3,197 2,766
Provision for income taxes 829 804
------- -------
Net income $ 2,368 $ 1,962
------- -------
------- -------
Basic earnings per share $ 0.46 $ 0.38
Diluted earnings per share $ 0.45 $ 0.37
</TABLE>
2
<PAGE>
MERCHANTS BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended March 31, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Net Income $ 2,368 $ 1,962
Other comprehensive income (loss), net of tax (819) (91)
------- -------
Comprehensive income $ 1,549 $ 1,871
------- -------
------- -------
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,368 $ 1,962
Adjustments to reconcile net income to cash from operating activities:
Depreciation 512 485
Amortization of mortgage servicing rights 220 142
Provision for loan losses 375 883
Net change in mortgage loans held for sale 4,784 (8,672)
Net gain on sales of loans (659) (497)
Change in net income taxes payable 828 731
Change in accrued interest and other assets (950) 183
Change in accrued interest and other liabilities (5,661) (2,098)
Premium amortization and discount accretion on securities 97 72
Securities losses (gains), net (12) (76)
Amortization of goodwill 94 94
Amortization of core deposit intangible assets 89 96
-------- --------
Net cash from operating activities 2,085 (6,695)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from matured securities available for sale 9,314 18,349
Proceeds from sales of securities available for sale 3,018 194
Purchases of securities available for sale (22,388) (11,885)
Net principal disbursed or repaid on loans (4,083) (11,076)
Proceeds from sales of other real estate 112 -
Property and equipment expenditures (595) (495)
-------- --------
Net cash from investing activities (14,622) (4,913)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (3,908) 19,144
Net change in short term borrowings 1,902 10,220
Payments on Federal Home Loan Bank term advances - (5,000)
Payments on notes payable (219) (219)
Dividends paid, net of dividend reinvestments (622) (543)
-------- --------
Net cash from financing activities (2,847) 23,602
-------- --------
Net change in cash and cash equivalents (15,384) 11,994
Cash and cash equivalents at beginning of period 43,679 42,994
-------- --------
Cash and cash equivalents at end of period $ 28,295 $ 54,988
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
MERCHANTS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
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, 1999 are not necessarily
indicative of the results expected for the year ending December 31, 1999.
Under a new accounting standard, comprehensive income is now reported for all
periods. Comprehensive income includes both net income and other comprehensive
income. Other comprehensive income includes the change in unrealized gains and
losses on securities available for sale, net of taxes.
NOTE 2: SECURITIES
Securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
March 31, 1999:
U.S. Treasury $ 3,005 $ 29 $ - $ 3,034
U.S. Government agencies 105,764 194 (655) 105,303
U.S. Government agency
mortgage backed securities 14,942 182 (30) 15,094
States and political subdivisions 76,833 2,210 (220) 78,823
Collateralized mortgage obligations 2,278 13 (12) 2,279
Equity securities 3,039 - (82) 2,957
--------- --------- -------- ---------
$ 205,861 $ 2,628 $ (999) $ 207,490
--------- --------- -------- ---------
--------- --------- -------- ---------
December 31, 1998:
U.S. Treasury $ 3,009 $ 51 $ - $ 3,060
U.S. Government agencies 96,521 550 (243) 96,828
U.S. Government agency
mortgage backed securities 16,351 187 (50) 16,488
States and political subdivisions 74,134 2,492 (43) 76,583
Collateralized mortgage obligations 2,834 23 (5) 2,852
Equity securities 3,041 - (93) 2,948
--------- --------- -------- ---------
$ 195,890 $ 3,303 $ (434) $ 198,759
--------- --------- -------- ---------
--------- --------- -------- ---------
</TABLE>
4
<PAGE>
MERCHANTS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 3: LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
<S> <C> <C>
Commercial and industrial $ 164,902 $ 175,402
Real estate - commercial 85,224 87,035
Real estate - construction 93,001 92,897
Real estate - residential 147,292 134,009
Installment 113,636 109,970
Credit card receivables 7,862 8,483
Other loans 461 1,233
--------- ---------
612,378 609,029
Unearned discount (677) (869)
Deferred loan fees (118) (233)
--------- ---------
Total loans $ 611,583 $ 607,927
--------- ---------
--------- ---------
</TABLE>
NOTE 4: ALLOWANCE FOR LOAN LOSSES
Allowance for loan losses as of March 31, is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Balance, January 1 $ 8,507 $ 8,360
Provision for loan losses 375 883
Loans charged-off (650) (299)
Recoveries 223 147
------- -------
Balance, end of period $ 8,455 $ 9,091
------- -------
------- -------
</TABLE>
NOTE 5: EMPLOYEE BENEFIT PLANS
The Company maintains an Employee Contributory Thrift Plan (the "Thrift Plan"),
which 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 $220,000,
and $243,000 for the three months ended March 31, 1999, and 1998.
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.
Notes payable at March 31, 1999 consisted of a $5,906,250 fixed rate note that
bears interest at a rate of 7.03%. Scheduled principal reductions on the note
are $218,750 per quarter.
5
<PAGE>
MERCHANTS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 7: EARNINGS PER SHARE
Earnings per share for the three months ended March 31, is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Basic Earnings Per Share:
Weighted-average common shares outstanding 5,181,071 5,167,707
Net income available to common stockholders $ 2,368 $ 1,962
Basic earnings per share $ 0.46 $ 0.38
Diluted Earnings Per Share:
Weighted-average common shares outstanding 5,181,071 5,167,707
Dilutive effect of stock options 61,329 76,780
---------- ----------
Diluted average common shares outstanding 5,242,400 5,244,487
---------- ----------
---------- ----------
Net income available to common stockholders $ 2,368 $ 1,962
Diluted earnings per share $ 0.45 $ 0.37
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net income for the first quarter of 1999 was $2,368,000, or diluted earnings per
share of 45 cents, a 20.7% increase compared to $1,962,000, or 37 cents per
share, in the first quarter of 1998. Net interest income for the quarter
increased slightly over the previous year, while net interest income after
provision for loan losses grew 8.4% to $7,454,000 in the first quarter of 1999
compared to $6,877,000 in the first quarter of 1998. This increase was primarily
due to the lower provision for loan loss expense of $375,000 in the first
quarter of 1999 compared to $883,000 in the first quarter of 1998. Noninterest
income grew 18.2% to $3,396,000, while noninterest expenses grew only 9.6% to
$7,653,000.
NET INTEREST INCOME
Net interest income was $7,829,000 and $7,760,000 during the three months ended
March 31, 1999 and 1998. The Company's net interest margin was 4.16% for the
three months ended March 31, 1999, and 4.26% a year earlier. The net interest
margin has been relatively stable for four consecutive quarters, ranging from
4.13% to 4.16%. During this time, the tax equivalent yield on average earning
assets has declined from 8.26% to 7.98%. However, the reduced yields were offset
by a decline in the cost of funds from 4.13% to 3.82%.
OTHER INCOME
Noninterest income was $3,396,000 during the first quarter of 1999 and
$2,874,000 in the first quarter of 1998, an increase of $522,000, or 18.2%.
Mortgage banking income was one of the primary sources of the increase in
noninterest income for the first quarter. Mortgage banking income was $1,117,000
in the first quarter of 1999 and $949,000 in the first quarter of 1998, an
increase of $168,000, or 17.7%. Most fixed rate mortgages that the Company
originates are sold and the servicing is retained. The portfolio of loans
serviced for others totaled $334 million as of March 31, 1999 compared to $283
million a year earlier.
Trust income of $743,000 in the first quarter of 1999 was $93,000, or 14.3%
higher than the first quarter 1998. Service charges and fees increased $120,000,
or 12.4%, to $1,088,000 in the first quarter of 1999, as compared to $968,000 in
the first quarter of 1998. There were no significant changes in the fee
structure for deposit accounts. Most of the increase was attributable to an
increase in total deposits.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Sales of securities available for sale resulted in gains of $12,000 in the first
three months of 1999. In 1998, securities gains were $76,000 in the first three
months. 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 noninterest income was $436,000 in the first quarter 1999 as compared to
$231,000 in the first quarter of 1998, an increase of $205,000 or 88.7%,
primarily due to ATM surcharge income.
OTHER EXPENSE
Salary and benefit expenses increased from $3,763,000 during the three months
ended March 31, 1998, to $3,994,000 for the same period in 1999, an increase of
$231,000 (6.1%). The full-time equivalent number of employees was 345 as of
March 31, 1998, and 332 as of March 31, 1999. The increase in salary and benefit
expenses was the result of increased medical insurance, severance, and general
salary adjustments. Commissions were $284,000 in the first quarter of 1999,
compared with $292,000 in the first quarter of 1998.
Occupancy expense of $577,000 during the first quarter of 1999, was $47,000 or
8.9% higher than in the first quarter of 1998. Furniture and equipment expenses
were $13,000 or, 2.3% lower during the first quarter of 1999, compared to the
same period in 1998.
Other expense was $2,354,000, or $410,000 (21.1%), higher in the first quarter
of 1999, than in the first quarter of 1998. The increase can be attributed to an
ATM related recovery during the first quarter of 1998, an increase of $77,000 in
amortization of mortgage servicing rights, and increases in general operating
expenses.
FINANCIAL CONDITION
LOANS, LOANS HELD FOR SALE, AND PROVISION FOR LOAN LOSSES
Total loans increased $3.7 million (0.6%) to $611.6 million as of March 31,
1999, from $608.0 million as of December 31, 1998. Commercial loans decreased to
$164.9 million as of March 31, 1999, from $175.4 million as of December 31,
1998, a $10.5 million (6.0%) decrease. Commercial real estate loans decreased to
approximately $85.2 million as of March 31, 1999, from $87.0 million as of
December 31, 1998. Construction loans remained level, while, residential real
estate loans increased $13.2 million (9.9%), to $147.3 million, from $134.0
million as of December 31, 1998. Residential real estate loans are primarily
adjustable rate mortgages. The Company's loan levels 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
$5.1 million as of March 31, 1999, and $9.7 million as of December 31, 1998.
Although the amount of loans held sale for was lower, it remains within a normal
range. 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 and reported to management and the Board of Directors.
Provisions for loan losses were $375,000 in the first quarter of 1999 and
$883,000 in the first quarter of 1998. Net charge-offs for the three months
ended March 31, were $427,000 and $152,000
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
in 1999 and 1998, respectively. The ratio of the allowance for loan losses to
total loans was 1.38% as of March 31, 1999, and 1.58% as of March 31, 1998.
Although, net charge offs increased in the first quarter of 1999, the
allowance for loan losses to total nonperforming loans (generally considered
to be nonaccrual, restructured, or past due ninety days and still accruing)
was 162.7% as of March 31, 1999, and 152.8% as of December 31, 1998.
While there can be no assurance that the allowance for loan losses will be
adequate to cover all losses, management believes that the allowance for loan
losses was adequate at December 31, 1998. While management uses available
information to provide for losses on loans, the ultimate collectibility of a
substantial portion of the loan portfolio and the need for future additions to
the allowance will be based upon changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to make additional provisions to the allowance based upon
their judgments about information available to them at the time of their
examinations.
Nonaccrual loans decreased to $5,197,000 as of March 31, 1999, from $5,568,000
as of December 31, 1998. 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, 1999, or December 31, 1998. Other real estate owned decreased
from $297,000 as of December 31, 1998, to $185,000 as of March 31, 1999, as some
property was sold. 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, 1999, net unrealized gains of $1,629,000, reduced by
deferred income taxes of $554,000, resulted in an increase in equity capital of
approximately $1,075,000. As of December 31, 1998, net unrealized gains of
$2,869,000, net of deferred income taxes of $975,000, resulted in an increase in
equity capital of $1,894,000.
The fair value of securities available for sale increased $8.7 million (4.4%)
during the first three months of 1999, to $207.5 million as of March 31, 1999,
from $198.8 million as of December 31, 1998. U.S. Treasury securities remained
level at $3.0 million as of December 31, 1998, and March 31, 1999. U.S.
government agency securities increased from $96.8 million as of December 31,
1998, to $105.3 million as of March 31, 1999, an increase of $8.5 million
(8.8%). U.S. government agency mortgage backed securities declined $1.4 million
(9.3%), from $16.5 million as of December 31, 1998, to $15.1 million as of March
31, 1999.
DEPOSITS AND BORROWED FUNDS
Total deposits of $734.2 million as of March 31, 1999, represented a decrease of
$7.9 million (1.1%) from $742.0 million as of December 31, 1998.
Noninterest-bearing deposits were $120.0 million as of March 31, 1999, a
decrease of $12.1 million (9.2%) from $132.2 million as of December 31, 1998. At
the same time, interest-bearing deposits increased $4.2 million (.7%). There
were no significant changes in deposit structure or management's strategies in
acquiring deposits in the first three months of 1999.
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
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
variation, the account relationships represented by these balances are
principally local and have been maintained for relatively long periods of
time.
During the three months ended March 31, 1999, term advances from the FHLB
remained unchanged at $42.3 million. Additionally, there were no advances on the
open line with the FHLB.
CAPITAL RESOURCES
The Company and its subsidiary bank 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 Bank were categorized as well capitalized as of March 31,
1999. Management is not aware of any conditions or events since the most recent
regulatory notification that would change the Company's or the Bank's
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>
March 31, 1999:
Total capital to risk weighted assets
Consolidated $72,638 11.41% $50,918 8.00% $63,647 10.00%
Merchants National Bank 76,825 12.20% 50,358 8.00% 62,947 10.00%
Tier 1 capital to risk weighted assets
Consolidated 64,762 10.18% 25,459 4.00% 38,188 6.00%
Merchants National Bank 68,949 10.95% 25,179 4.00% 37,768 6.00%
Tier 1 capital to average assets
Consolidated 64,762 7.49% 34,604 4.00% 43,255 5.00%
Merchants National Bank 68,949 7.97% 34,604 4.00% 43,255 5.00%
December 31, 1998:
Total capital to risk weighted assets
Consolidated 70,947 10.98% 51,697 8.00% 64,621 10.00%
Merchants National Bank 74,376 11.64% 51,137 8.00% 63,921 10.00%
Tier 1 capital to risk weighted assets
Consolidated 62,859 9.73% 25,848 4.00% 38,773 6.00%
Merchants National Bank 66,288 10.37% 25,568 4.00% 38,353 6.00%
Tier 1 capital to average assets
Consolidated 62,859 7.30% 34,423 4.00% 43,029 5.00%
Merchants National Bank 66,288 7.70% 34,423 4.00% 43,029 5.00%
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
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 $14.6 million in the three
months ended March 31, 1999, compared to $4.9 million a year earlier. In the
first three months of 1999, net principal disbursed on loans accounted for net
outflows of $4.1 million, and securities transactions aggregated a net outflow
of $10.1 million. In the first three months of 1998, net principal disbursed or
repaid on loans accounted for a net outflow of $11.1 million, and securities
transactions resulted in net inflows of $6.7 million.
Cash outflows from financing activities in the first three months of 1999
associated with a decline in deposits were $3.9 million. This compares with a
net inflow of $19.1 million for the same period in 1998. Short-term borrowings
resulted in net cash inflows of $1.9 million in the first three months of 1999,
and inflows of $10.2 million in the first three months of 1998. Payments on FHLB
term advances resulted in cash outflows of $5.0 million in the first three
months of 1998.
In the event of short-term liquidity needs, the Merchants National Bank may
purchase Federal funds from correspondent banks. The Bank may also borrow funds
from the Federal Reserve Bank of Chicago. The 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. The Bank had term advances of
$42.25 million outstanding as of March 31, 1999.
Origination of mortgage loans held for sale resulted in operating net cash
inflows of $4.8 million during the first quarter of 1999, compared to outflows
of $8.7 million in 1998. Total cash outflows from operating activities exceeded
operating outflows by $2.1 million during the first quarter of 1999. Net cash
outflows from operating activities were $6.7 million during the first quarter of
1998. 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
The Year 2000 has posed a unique set of challenges to those industries reliant
on information technology. As a result of methods employed by earlier
programmers, many software applications and operational programs may be unable
to distinguish the Year 2000 from the Year 1900. If not effectively addressed,
this problem could result in the production of inaccurate data, or, in the worst
cases, the inability of the systems to continue to function altogether.
Financial institutions are particularly vulnerable during the industry's
dependence on electronic data processing systems.
In early 1997, the Company began developing their Year 2000 Plan, following the
guidelines established by the FFIEC. The plan was approved by the Board of
Directors of the Company and reviewed by the Office of the Comptroller of the
Currency. An integral part of the plan was to utilize the Company's Technology
Planning Committee, which is comprised of representatives from the key areas
throughout the organization. The each area must identify, for the Committee,
issues related to the Year 2000 and initiate remedial measures designed to
eliminate any adverse effects on the Company's operations. The Committee reviews
all Year 2000 related issues
10
<PAGE>
and the progress toward implementation of the plan. The Committee has
developed a comprehensive, prioritized inventory of all hardware, software,
and material third party providers that may be adversely affected by the Year
2000 date change, and has contacted vendors requesting their status as it
relates to the Year 2000. This inventory includes both information technology
("IT") and non-IT systems, such as alarms, building access, elevators and
heating and cooling systems, which typically contain embedded technology such
as microcontrollers. This inventory is periodically reevaluated to ensure
that previously assigned priorities remain accurate and to track the progress
each vendor is making in resolving the problems associated with the issue.
The Company relies on software purchased from third-party vendors rather than
internally-generated software. The Company is currently in the process of
upgrading systems and testing to validate Year 2000 compliance. The Company
expects to have all mission critical systems renovated and tested prior to
June 30, 1999. The Company is currently operating on the Year 2000 compliant
releases for core systems supported by its third party data processor.
The Technology Planning Committee has also developed a communication plan that
updates the Board of Directors, management, and employees on the Company's Year
2000 status. In addition, the Committee has developed a separate plan in order
to manage the Year 2000 risks posed by commercial borrowing customers. This plan
has identified material loan customers, assessed their preparedness, evaluated
their credit risk to the Company, and implemented appropriate controls to
mitigate the risk.
In accordance with regulatory guidelines, the Company is developing a
comprehensive contingency plan, which will be completed by June 30, 1999, in the
event that Year 2000 related failures are experienced. The plan lists the
various strategies and resources available to restore core business process.
These strategies include relying on back-up systems that do not utilize
computers and, in some cases, switching vendors. In the case of utility
providers, the Company is researching the alternative of utilizing an electric
power generator at it's main processing facility.
Management anticipates that the total out-of-pocket expenditures required for
bringing the systems into compliance for the Year 2000 will be approximately
$100,000, of which approximately one half has been expended through March 31,
1999. Management believes that these required expenditures will not have a
material adverse impact on operations, cash flow, or financial condition. This
amount, including costs for upgrading equipment specifically for the purpose of
Year 2000 compliance, fees to outside consulting firms, and certain
administrative expenditures, has been provided for in the Company's Year 2000
budget. Although management is confident that the Company has identified all
necessary upgrades, and budgeted accordingly, no assurance can be made that Year
2000 compliance can be achieved without additional unanticipated expenditures.
It is not possible at this time to quantify the estimated future costs due to
business disruption caused by vendors, suppliers, customers or even the possible
loss of electric power or telephone service; however, such costs could be
substantial. As a result of the Year 2000 project, the Company has not had any
material delay regarding its information systems projects.
ITEM 3. QUANITITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The impact of movements in general market interest rates on a financial
institution's financial condition, including capital adequacy, earnings, and
liquidity, is known as interest rate risk. Interest rate risk is the Company's
primary market risk. As a financial institution, accepting and managing this
risk is an inherent aspect of the Company's business. However, safe and sound
management of interest rate risk requires that it be maintained at prudent
levels.
The Company's interest rate risk exposure is reviewed by management and the
board of directors. Interest rate risk is analyzed by examining the extent to
which assets and liabilities are interest rate sensitive. The interest
sensitivity gap is defined as the difference between the amount of interest
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest sensitive
assets exceeds the amount of interest sensitive liabilities. A gap is considered
negative when the amount of interest sensitive liabilities exceeds the amount of
interest sensitive assets. During a period of rising interest rates, a negative
gap would tend to result
11
<PAGE>
in a decrease in net interest income while a positive gap would tend to
positively affect net interest income.
The Company's policy is to manage the balance sheet such that fluctuations in
the net interest margin are minimized regardless of the level of interest rates.
In the following table, deposits that do not have specified maturities are
assumed to have a 15% decay rate. Loans, which include loans held for sale,
represent management judgements regarding prepayment. The following table
presents the expected maturity of interest-earning assets and interest-bearing
liabilities as of March 31, 1999.
EXPECTED MATURITY OF INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
<TABLE>
<CAPTION>
Expected Maturity Dates
--------------------------------------------------------------------- Fair
1 Year 2 Years 3 Years 4 Years 5 Years Thereafter Total Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Fixed rate loans $ 61,207 $ 41,626 $ 48,979 $ 68,365 $ 93,711 $ 34,931 $348,819 $353,097
Average interest rate 8.61% 8.63% 8.59% 8.50% 7.85% 7.65%
Adjustable Rate Loans $118,177 $ 34,565 $ 31,471 $ 27,277 $ 27,936 $ 23,338 $262,764 $262,764
Average interest rate 8.27% 8.17% 8.35% 8.55% 8.52% 8.27%
Securities $ 81,307 $ 36,732 $ 19,639 $ 17,541 $ 13,604 $ 38,667 $207,490 $207,490
Average interest rate 6.09% 5.86% 5.76% 6.20% 5.08% 4.84%
Federal Funds Sold $ 3,000 $ - $ - $ - $ - $ - $ 3,000 $ 3,000
Average interest rate 5.00%
-------- -------- -------- -------- -------- -------- -------- --------
Total $263,691 $112,923 $100,089 $113,183 $135,251 $ 96,936 $822,073 $826,351
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
INTEREST-BEARING LIABILITIES
Interest-bearing deposits $292,979 $ 94,140 $ 49,703 $ 46,580 $ 43,383 $ 87,350 $614,135 $616,139
Average interest rate 5.50% 4.82% 4.03% 3.77% 3.45% 3.01%
Borrowed Funds $ 28,378 $ 13,375 $ 5,625 $ 13,375 $ 875 $ 1,750 $ 63,378 $ 64,149
Average interest rate 5.62% 6.09% 6.34% 5.94% 7.03% 7.03%
-------- -------- -------- -------- -------- -------- -------- --------
Total $321,357 $107,515 $ 55,328 $ 59,955 $ 44,258 $ 89,100 $677,513 $680,288
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
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
12
<PAGE>
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
<TABLE>
<S> <C>
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
</TABLE>
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: May 14, 1999
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 25,295
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 207,490
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 611,583
<ALLOWANCE> 8,455
<TOTAL-ASSETS> 877,311
<DEPOSITS> 734,149
<SHORT-TERM> 15,222
<LIABILITIES-OTHER> 6,674
<LONG-TERM> 48,156
0
0
<COMMON> 5,222
<OTHER-SE> 67,888
<TOTAL-LIABILITIES-AND-EQUITY> 877,311
<INTEREST-LOAN> 12,546
<INTEREST-INVEST> 2,871
<INTEREST-OTHER> 140
<INTEREST-TOTAL> 15,557
<INTEREST-DEPOSIT> 6,725
<INTEREST-EXPENSE> 7,728
<INTEREST-INCOME-NET> 7,829
<LOAN-LOSSES> 375
<SECURITIES-GAINS> 12
<EXPENSE-OTHER> 7,653
<INCOME-PRETAX> 3,197
<INCOME-PRE-EXTRAORDINARY> 2,368
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,368
<EPS-PRIMARY> .46
<EPS-DILUTED> .45
<YIELD-ACTUAL> 4.16
<LOANS-NON> 4,811
<LOANS-PAST> 0
<LOANS-TROUBLED> 386
<LOANS-PROBLEM> 5,197
<ALLOWANCE-OPEN> 8,507
<CHARGE-OFFS> 650
<RECOVERIES> 224
<ALLOWANCE-CLOSE> 8,456
<ALLOWANCE-DOMESTIC> 8,456
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
