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UNITED STATES
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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
COMMISSION FILE NUMBER: 0-49771
MERCHANTS BANCORP, INC.
(Exact name of registrant as specified in its charter)
Ohio 31-1467303
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 North High Street, Hillsboro, Ohio 45133
(Address of principal executive offices) (Zip Code)
(937) 393-1993
(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock - 2,666,650 shares outstanding at May 10, 2004
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
The accompanying information has not been audited by independent public
accountants; however, in the opinion of management such information reflects all
adjustments necessary for a fair presentation of the results for the interim
period. All such adjustments are of a normal and recurring nature.
The accompanying financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all of the disclosures
normally required by accounting principles generally accepted in the United
States of America or those made in the Registrant's 10-K. Accordingly, the
reader of the Form 10-Q should refer to the Registrant's 10-K for the year ended
December 31, 2003 for further information in this regard.
MERCHANTS BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND DECEMBER 31, 2003 (IN THOUSANDS EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2004 2003
(unaudited)
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and due from banks $ 8,199 $ 13,770
Federal funds sold 18,625 8,625
----------- -----------
Total cash and cash equivalents 26,824 22,395
----------- -----------
SECURITIES AVAILABLE FOR SALE
(amortized cost of $31,065 and $31,835, respectively) 32,501 33,085
----------- -----------
LOANS 289,554 288,624
Less allowance for loan losses (2,500) (2,432)
----------- -----------
Net loans 287,054 286,192
----------- -----------
OTHER ASSETS:
Bank premises and equipment, net 3,728 3,844
Accrued interest receivable 2,536 3,112
Deferred income taxes 199 262
Other 3,644 3,531
----------- -----------
Total other assets 10,107 10,749
----------- -----------
TOTAL $ 356,486 $ 352,421
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest bearing $ 29,181 $ 31,693
Interest bearing 249,125 238,739
----------- -----------
Total deposits 278,306 270,432
----------- -----------
Repurchase agreements 3,562 2,784
FHLB borrowings 43,307 43,706
Other liabilities 1,804 7,272
----------- -----------
Total liabilities 326,979 324,194
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock - no par value; 4,500,000 shares authorized
and 3,000,000 shares issued; outstanding shares of
2,666,650 and 2,945,000 at March 31, 2004 and December
31, 2003, respectively 2,000 2,000
Surplus 2,000 2,000
Retained earnings 31,728 30,571
Accumulated other comprehensive income 779 656
Treasury Stock, at cost 333,350 shares and 55,000 shares at
March 31, 2004 and December 31, 2003, respectively (7,000) (7,000)
----------- -----------
Total shareholders' equity 29,507 28,227
----------- -----------
TOTAL $ 356,486 $ 352,421
=========== ===========
See notes to condensed consolidated financial statements.
2
MERCHANTS BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (IN THOUSANDS EXCEPT PER
SHARE DATA)
2004 2003
(unaudited)
INTEREST INCOME:
Interest and fees on loans $ 4,686 $ 4,609
Interest and dividends on securities:
Taxable 139 213
Exempt from income taxes 244 250
Interest on federal funds sold 31 46
------- -------
Total interest income 5,100 5,118
------- -------
INTEREST EXPENSE:
Interest on deposits 1,176 1,392
Interest on repurchase agreements and federal funds purchased 26 31
Interest on FHLB borrowings 447 236
------- -------
Total interest expense 1,649 1,659
------- -------
NET INTEREST INCOME 3,451 3,459
PROVISION FOR LOAN LOSSES (153) (404)
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,298 3,055
------- -------
NONINTEREST INCOME - Service charges and fees 390 371
------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits 1,018 1,016
Occupancy 264 306
Legal and professional services 112 115
Franchise tax 66 84
Data processing 74 82
Advertising 68 41
Other 395 320
------- -------
Total noninterest expense 1,997 1,964
------- -------
INCOME BEFORE INCOME TAXES 1,691 1,462
INCOME TAXES (534) (457)
------- -------
NET INCOME $ 1,157 $ 1,005
======= =======
BASIC AND DILUTED EARNINGS PER SHARE $ 0.43 $ 0.34
======= =======
See notes to condensed consolidated financial statements.
3
MERCHANTS BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (IN THOUSANDS)
2004 2003
(unaudited)
OPERATING ACTIVITIES:
Net income $ 1,157 $ 1,005
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 154 227
Provision for loan losses 153 404
Gain on sale of mortgage loans (38) (78)
Proceeds from sale of mortgage loans 3,347 5,809
Mortgage loans originated for sale (3,309) (5,731)
Changes in assets and liabilities:
Accrued interest receivable 576 19
Other assets (113) (430)
Accrued interest, taxes and other liabilities 377 238
-------- --------
Net cash provided by operating activities 2,304 1,463
-------- --------
INVESTING ACTIVITIES:
Proceeds from sales and maturities of securities available for sale 746 2,959
Net increase in loans (1,015) (9,850)
Capital expenditures (14) (156)
-------- --------
Net cash used in investing activities (283) (7,047)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposits 7,874 7,496
Net increase in repurchase agreements 778 268
Stock repurchase payments (5,845)
FHLB borrowings 7,250
FHLB payments (399) (15)
-------- --------
Net cash provided by financing activities 2,408 14,999
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,429 9,415
CASH AND CASH EQUIVALENTS:
Beginning of year 22,395 22,202
-------- --------
End of year $ 26,824 $ 31,617
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,644 $ 1,638
======== ========
See notes to consolidated condensed financial statements.
4
MERCHANTS BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
The unaudited condensed consolidated financial statements include the
accounts of Merchants Bancorp, Inc. (the "Company") and its
wholly-owned subsidiary, Merchants National Bank. All significant
intercompany balances and transactions have been eliminated in
consolidation.
In the opinion of management, these condensed consolidated financial
statements include all adjustments (which consist of normal recurring
accruals) necessary to present the condensed consolidated financial
position as of March 31, 2004 and the results of operations and cash
flows for the three months ended March 31, 2004 and 2003. These
condensed consolidated financial statements have been prepared in
accordance with instructions to Form 10-Q, and therefore do not
include all information and footnote disclosures necessary for a fair
presentation of financial position, results of operations and cash
flows in conformity with accounting principles generally accepted in
the United States of America. Financial information as of December
31, 2003 has been derived from the audited Consolidated Financial
Statements of Merchants Bancorp, Inc. and subsidiary. The results of
operations and cash flows for the three months ended March 31, 2004
and 2003 are not necessarily indicative of the results to be expected
for the full year. For further information, refer to the Consolidated
Financial Statements and footnotes thereto for the year ended
December 31, 2003, included in the Company's 10-K.
EARNINGS PER SHARE - Basic earnings per share is computed using the
weighted average number of shares of common stock outstanding during
the period. For the three months ended March 31, 2004 and 2003, the
weighted average number of shares the Company had outstanding was
2,666,650 and 3,000,000 shares, respectively. There were no common
stock equivalents outstanding during the respective periods.
2. NEW ACCOUNTING PRONOUNCEMENTS
In March 2004, the Securities and Exchange Commission staff released
Staff Accounting Bulletin (SAB) No. 105, "Application of Accounting
Principles to Loan Commitments." This SAB disallows the inclusion of
expected future cash flows related to the servicing of a loan in the
determination of the fair value of a loan commitment. Further, no other
internally developed intangible asset should be recorded as part of the
loan commitment derivative. Recognition of intangible assets would only
be appropriate in a third-party transaction, such as a purchase of a
loan commitment or in a business combination. The SAB is effective for
all loan commitments entered into after March 31, 2004, but does not
require retroactive adoption for loan commitments entered into on or
before March 31, 2004. Adoption of this SAB will not have a material
effect on the Company's Condensed Consolidated Financial Statements.
5
3. LOANS
Major classifications of loans are summarized as follows (in
thousands):
MARCH 31, DECEMBER 31,
2004 2003
(unaudited)
Commercial real estate $ 61,641 $ 60,833
Commercial and industrial 26,481 25,165
Agricultural 39,446 40,362
Residential real estate 133,031 131,656
Installment 26,775 27,827
Other 2,180 2,781
---------- -----------
Total 289,554 288,624
Less allowance for loan losses (2,500) (2,432)
---------- -----------
$ 287,054 $ 286,192
========== ===========
4. FHLB BORROWINGS
All stock in the Federal Home Loan Bank ("FHLB") and qualifying first
mortgage residential loans are pledged as collateral on FHLB
borrowings. Final maturities and interest rates at March 31, 2004 are
as follows (dollars in thousands):
YEAR MATURING INTEREST AMOUNT
THROUGH RATE (UNAUDITED)
2008 4.78%-5.39% $ 4,000
2010 6.26% 3,000
2011 5.23% 174
2012 4.64% 10,000
2013 2.82%-3.13% 2,259
2018 2.95%-4.04% 9,315
2023 3.02%-4.24% 14,559
----------
Total $ 43,307
==========
The maximum amount available to the Company under FHLB borrowings was
approximately $67.9 million and $78.0 million as of March 31, 2004 and
December 31, 2003, respectively.
5. TREASURY STOCK
On August 28, 2003, the Company entered into a stock redemption
agreement with three shareholders. Under the terms of the agreement,
the redemption occurred over two separate dates. The first settlement
was for $1,155,000 for 55,000 shares and occurred on September 5, 2003.
The second settlement was for $5,845,349 for 278,350 shares and
occurred on January 5, 2004.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Merchants Bancorp, Inc. (the "Company") is a bank holding company and sole
shareholder of Merchants National Bank (the "Bank"), headquartered in Hillsboro,
Ohio. At March 31, 2004, the Company had total assets of approximately $356
million and total shareholders' equity of approximately $29.5 million.
The Company, through its banking affiliate, offers a broad range of banking
services to the commercial, industrial and consumer market segments which it
serves. The primary business of the Bank consists of accepting deposits through
various consumer and commercial deposit products, and using such deposits to
fund various loan products. The Bank's primary loan products are as follows: (1)
loans secured by residential real estate, including loans for the purchase of
one to four family residences which are secured by 1st and 2nd mortgages and
home equity loans; (2) consumer loans, including new and used automobile loans,
loans for the purchase of mobile homes and debt consolidation loans; (3)
agricultural loans, including loans for the purchase of real estate used in
connection with agricultural purposes, operating loans and loans for the
purchase of equipment; and (4) commercial loans, including loans for the
purchase of real estate used in connection with office or retail activities,
loans for the purchase of equipment and loans for the purchase of inventory.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the appropriate
application of certain accounting policies, many of which require us to make
estimates and assumptions about future events and their impact on amounts
reported in our financial statements and related notes. Since future events and
their impact cannot be determined with certainty, the actual results will
inevitably differ from our estimates. Such differences could be material to the
financial statements.
The Company believes the application of accounting policies and the estimates
required therein are reasonable. These accounting policies and estimates are
constantly reevaluated, and adjustments are made when facts and circumstances
dictate a change. Historically, the Company has found its application of
accounting policies to be appropriate, and actual results have not differed
materially from those determined using necessary estimates.
The Company's accounting policies are more fully described in Note 1 to the
condensed consolidated financial statements.
Management believes that the determination of the allowance for loan losses
represents a critical accounting policy. The Company maintains an allowance for
loan losses to absorb probable loan losses inherent in the portfolio. The
allowance for loan losses is maintained at a level management considers to be
adequate to absorb probable loan losses inherent in the portfolio, based on
evaluations of the collectibility and historical loss experience of loans.
Credit losses are charged and recoveries are credited to the allowance.
Provisions for loan losses are based on management's review of the historical
loan loss experience and such factors which, in management's judgment, deserve
consideration under existing economic conditions in estimating probable credit
losses. The allowance is based on ongoing assessments of the probable estimated
losses inherent in the loan portfolio. The Company's methodology for assessing
the appropriate allowance level consists of several key elements, as described
below.
7
Larger commercial loans that exhibit probable or observed credit weaknesses are
subject to individual review. Where appropriate, reserves are allocated to
individual loans based on management's estimate of the borrower's ability to
repay the loan given the availability of collateral, other sources of cash flow
and available legal options. Included in the review of individual loans are
those that are impaired as provided in Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended. Any specific reserves for impaired loans are measured based on the fair
value of the underlying collateral. The Company evaluates the collectibility of
both principal and interest when assessing the need for a specific reserve.
Historical loss rates are applied to other commercial loans not subject to
specific reserve allocations.
Homogenous loans, such as consumer installment and residential mortgage loans,
are not individually reviewed by management. Reserves are established for each
pool of loans based on the expected net charge-offs. Loss rates are based on the
average five-year net charge-off history by loan category.
Historical loss rates for commercial and consumer loans may be adjusted for
significant factors that, in management's judgment, reflect the impact of any
current conditions on loss recognition. Factors which management considers in
the analysis include the effects of the local economy, trends in the nature and
volume of loans (delinquencies, charge-offs, nonaccrual and problem loans),
changes in the internal lending policies and credit standards, collection
practices, and examination results from bank regulatory agencies and the
Company's internal credit review function.
An unallocated reserve is maintained to recognize the imprecision in estimating
and measuring loss when evaluating reserves for individual loans or pools of
loans.
Specific reserves on individual loans and historical loss rates are reviewed
throughout the year and adjusted as necessary based on changing borrower and/or
collateral conditions and actual collection and charge-off experience.
The Company has not substantively changed any aspect of its overall approach in
the determination of the allowance for loan losses since January 1, 2004. There
have been no material changes in assumptions or estimation techniques as
compared to prior years that impacted the determination of the current year
allowance.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND
2003
The Company reported net income of $1,157,000 and $1,005,000 for the three
months ended March 31, 2004 and 2003, respectively. During the same periods,
basic and diluted earnings per share were $.43 and $.34, respectively. On an
annualized basis, return on average assets was 1.30% and return on average
equity was 16.29% for the three months ended March 31, 2004, compared to 1.24%
and 12.01%, respectively, for the comparable period in 2003. The large increase
in the return on average equity is primarily due to a treasury stock transaction
which occurred in August, 2003 and resulted in capital reduction of
approximately $7,000,000.
Net interest income for the three months ended March 31, 2004, was $3,451,000, a
decrease of $8,000, or .23%, compared to net interest income of $3,459,000 for
the comparable period in 2003. Net interest margin was 4.11% for the three
months ended March 31, 2004, compared to 4.53% for the comparable period in
2003. The average annualized yield on earning assets decreased to 6.07% for the
three months ended March 31, 2004, from 6.71% for the comparable period in 2003.
The average cost of interest-bearing funds was 2.26% for the three months ended
March 31, 2004, a decrease to 2.55% for the comparable period in 2003.
Management attributes the decrease in net interest margin to the recording of
lower yielding 1-4 family loans and to loans continuing to reprice downward.
Additionally, while loan rates continue to reprice downward, deposits have
little room for downward repricing. For these reasons the net interest margin
continues to fall.
8
The provision for loan losses was $153,000 and $404,000 for the three months
ended March 31, 2004 and 2003, respectively, representing a decrease of 62%. Net
charge-offs for the three-months ended March 31, 2004 were $86,000 compared to
$195,000 experienced during the three months ended March 31, 2003. Management
had increased the provision for loan losses during the first three months of
2003 to reflect the increased estimate of probable loan losses in 2003,
primarily related to three borrowers within the agricultural portfolio, which
were identified by management. The loan loss provision is significantly less in
2004 than in 2003 because the conditions and potential losses in the loan
portfolio have improved considerably from first quarter 2003.
Total noninterest income was $390,000 for the three months ended March 31, 2004,
an increase of $19,000, or 5.1%, from $371,000 for the comparable period in
2003. The increase is due to increased volumes of transactions, resulting in
higher service charges on customers' deposit account transactions.
Total noninterest expense was $1,997,000 for the three months ended March 31,
2004, an increase of $33,000, or 1.7%, from $1,964,000 for the comparable period
in 2003. It is typically expected for noninterest expense to increase 5-10% each
year. The increase is significantly less partially due to a reduction in
depreciation expense as a result of some assets becoming fully depreciated while
the salaries and benefits expense have remained consistent compared to the same
period last year. Salaries and benefits comprises the largest component of
noninterest expense, with totals of $1,018,000 and $1,016,000 for the three
months ended March 31, 2004 and 2003, respectively.
FINANCIAL CONDITION
The Company's total assets increased to $356 million as of March 31, 2004 from
$352 million as of December 31, 2003, an increase of 1.1% or $4 million. The
balance sheet remained relatively consistent in the first quarter 2004 from year
end with cash and cash equivalents increasing the most on the asset side by $4.2
million and deposits increasing $7.9 million on the liability side. The fed
funds sold increased by $10 million while cash and due from banks decreased $5.6
million. Due from banks decreased primarily as a result of timing of
incoming/outgoing cash letters. The year to date average was $8.1 million. Fed
funds increased partially due to the $7.9 million increase in deposits and only
$1 million increase in loan growth.
LOANS AND ALLOWANCE FOR LOAN LOSSES
The Company reported total loans of $289.6 million as of March 31, 2004 and
$288.6 million as of December 31, 2003, an increase of $1.0 million, or .34%.
The portfolio composition has remained relatively consistent during the period,
with a slight increase in residential mortgage loans.
Federal regulations and generally accepted accounting principles require that
the Company establish prudent allowances for loan losses. The Company maintains
an allowance for loan losses to absorb probable loan losses inherent in the
portfolio, based on evaluations of the collectibility and historical loss
experience of loans. Loan losses are charged and recoveries are credited to the
allowance. Provisions for loan losses are based on management's review of the
historical loan loss experience and such factors which, in management's
judgment, deserve consideration under existing economic conditions in estimating
probable loan losses. The allowance is based on ongoing assessments of the
probable estimated losses inherent in the loan portfolio. The Company has not
substantively changed any aspect of its overall approach in the determination of
the allowance for loan losses during 2004. There have been no material changes
in assumptions or estimation techniques as compared to prior years that impacted
the determination of the current year allowance.
The allowance for loan losses was 0.86% of total loans as of March 31, 2004 and
0.84% as of December 31, 2003.
9
The amount of nonaccrual loans increased to $1,585,000 as of March 31, 2004 from
$1,462,000 at December 31, 2003. The increase can be attributed to mainly one
customer with a balance of approximately $175,000, which has filed for
bankruptcy. Management believes that if liquidation is necessary, the underlying
collateral will be sufficient to mitigate any significant losses on the loan.
The Company has specifically allocated $144,000 for estimated losses on
nonaccrual loans in the loan loss reserve calculation. As a percentage of total
loans, nonaccrual loans represented .55% as of March 31, 2004 and 0.51% as of
December 31, 2003.
The category of accruing loans which are past due 90 days or more increased to
$2,064,000 as of March 31, 2004 from $1,441,000 as of December 31, 2003. As a
percentage of total loans, loans past due 90 days and still accruing interest
represented .71% as of March 31, 2004 and 0.51% as of December 31, 2003. The
increase of $623,000 can primarily be attributed to 2 customers. One customer
with outstanding balances of approximately $290,000 and a residential home as
collateral was put into OREO in April with $25,000 of original balance charged
off in March 2004. The loan did not go to nonaccrual status because the customer
was willing to sign the property back to the bank. Currently management believes
there is sufficient collateral to cover the balance recorded into OREO. The
second customer was a farm mortgage that had lower than expected cash flows. The
cosigner on the loan made the payment to bring the loan current. The collateral
is in the process of being sold by the customer. Management believes that
liquidation of the underlying collateral will be sufficient to mitigate any
significant loss on the loan.
As a percentage of the allowance for loan losses, total nonaccrual loans and
loans past due 90 days or more were 146% as of March 31, 2004 and 119.5% as of
December 31, 2003.
DEPOSITS
Deposits totaled $278.3 million as of March 31, 2004, an increase of $7.9
million, or 2.9%, from $270.4 million as of December 31, 2003. Three million of
the increase is primarily due to two savings deposits that are expected to be
short term. The remaining growth is part of the normal growth of the Company.
FHLB BORROWINGS
Federal Home Loan Bank borrowings decreased $1 million to $42.7 million as of
March 31, 2004 from $43.7 million as of December 31, 2003. The decrease was a
result of principal loan payments made on the borrowings.
LIQUIDITY AND CAPITAL RESOURCES
The declaration and payment of dividends by the Company are subject to the
discretion of the Board of Directors and to the earnings and financial condition
of the Company and applicable laws and regulations. The Company did not pay any
dividends during the three months ended March 31, 2004 and 2003.
National Banking laws restrict the maximum amount of dividends that a bank may
pay in any calendar year. Dividends are limited to the Bank's retained profits
(as defined by the Office of the Comptroller of the Currency) for that year and
the two preceding years. During 2003 and as a result of tax planning efforts,
the Bank made a special dividend totaling $8,000,000. As a result, the Bank
exceeded the amount of retained earnings available for cash dividends and must
obtain approval from the Office of the Comptroller of the Currency for
additional future dividends.
At March 31, 2004, consolidated Tier 1 risk based capital was 10.94%, and total
risk-based capital was 11.90%. The minimum Tier 1 and total risk-based capital
ratios required by the Board of Governors of the Federal Reserve are 4% and 8%,
respectively.
10
Effective liquidity management ensures that the cash flow requirements of
depositors and borrowers, as well as company cash needs, are met. The Company
manages liquidity on both the asset and liability sides of the balance sheet.
Community bank liquidity management currently involves the challenge of
attracting deposits while maintaining positive loan growth at a reasonable
interest rate spread. The loan to deposit ratio at March 31, 2004 was 104.0%
compared to 106.7% as of December 31, 2003. Loans to total assets were 81.2% at
March 31, 2004 compared to 81.9% at the end of 2003. The securities portfolio is
available for sale and consists of securities that are readily marketable.
Approximately 94% of the available for sale portfolio is pledged to secure
public deposits, short-term and long-term borrowings and for other purposes as
required by law. The balance of the available for sale securities could be sold
if necessary for liquidity purposes. Also, a stable deposit base, consisting of
89% core deposits, makes the Company less susceptible to large fluctuations in
funding needs. The Company also has both short- and long-term borrowings
capacity available through FHLB with unused available credit of approximately
$10.7 million as of March 31, 2004. The Company has the ability to obtain
deposits in the brokered certificate of deposit market to help provide liquidity
to fund loan growth, if necessary. Generally, the Company uses short-term
borrowings to fund overnight and short-term funding needs in the Company's
balance sheet. Longer-term borrowings have been primarily used to fund
mortgage-loan originations. This has occurred when FHLB longer-term rates are a
more economical source of funding than traditional deposit gathering activities.
Additionally, the Company occasionally uses FHLB borrowings to fund larger
commercial loans.
As of March 31, 2004, management is not aware of any current recommendations by
banking regulatory authorities which, if they were to be implemented, would
have, or would be reasonably likely to have, a material adverse impact on the
Company's liquidity, capital resources, or operations.
Contractual Obligations and Commercial Commitments
The Company has certain obligations and commitments to make future payments
under contracts. At March 31, 2004, the aggregate contractual obligations and
commercial commitments are:
Payments Due by Period
Contractual Obligations Less than 1-3 3-5 After 5
($ in thousands) Total One Year Years Years Years
- ------------------------------------------------------------------------
Total Deposits $278,306 236,577 41,284 433 12
FHLB Borrowings 43,307 4,444 6,054 4,653 28,156
Repurchase Agreements 3,562 3,562
-------- -------------------------------------
Total $325,175 $ 244,583 $ 47,338 $ 5,086 $28,168
Amount of Unused Commitments - Expiration by Period
Other Commercial Commitments Less than 1-3 3-5 After 5
(in thousands) Total One Year Years Years Years
- ------------------------------------------------------------------------------------------
Commitments to Extend Credit $24,087 $ 10,947 $ 2,777 $ 1,554 $ 8,809
Letters of Credit 74 74
------- ---------------------------------------------------
Total $24,161 $ 11,021 $ 2,777 $ 1,554 $ 8,809
11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to variations in interest rates, exchange rates,
equity price risk and commodity prices. The Company does not maintain a trading
account for any class of financial instrument, and is not currently subject to
currency exchange rate risk, equity price risk or commodity price risk. The
Company's market risk is composed primarily of interest rate risk.
The major source of the Company's interest rate risk is the difference in the
maturity and repricing characteristics between the Company's core banking assets
and liabilities - loans and deposits. This difference, or mismatch, poses a risk
to net interest income. Most significantly, the Company's core banking assets
and liabilities are mismatched with respect to repricing frequency, maturity
and/or index. Most of the Company's commercial loans, for example, reprice
rapidly in response to changes in short-term interest. In contrast, many of the
Company's consumer deposits reprice slowly, if at all, in response to changes in
market interest rates.
The Company's Senior Management is responsible for reviewing the interest rate
sensitivity position of the Company and establishing policies to monitor and
limit exposure to interest rate risk. The guidelines established by senior
management are approved by the Company's Board of Directors. The primary goal of
the asset/liability management function is to maximize net interest income
within the interest rate risk limits set by approved guidelines. Techniques used
include both interest rate gap management and simulation modeling that measures
the effect of rate changes on net interest income and market value of equity
under different rate scenarios.
In the Company's simulation models, each asset and liability balance is
projected over a time horizon. Net interest income is then projected based on
expected cash flows and projected interest rates under a stable rate scenario
and analyzed. The results of this analysis are factored into decisions made
concerning pricing strategies for loan and deposits, balance sheet mix,
securities portfolio strategies, liquidity and capital adequacy.
Simulation models are also performed under an instantaneous parallel 200 basis
point increase or decrease in interest rates. The model includes assumptions as
to repricing and expected prepayments, anticipated calls, and expected decay
rates of transaction accounts under the different rate scenarios. The results of
these simulations include changes in both net interest income and market value
of equity.
12
The Company's rate shock simulation models provide results in extreme interest
rate environments and results are used accordingly. Reacting to changes in
economic conditions, interest rates and market forces, the Company has been able
to alter the mix of short and long-term loans and investments, and increase or
decrease the emphasis on fixed and variable rate products in response to
changing market conditions. By managing the interest rate sensitivity of its
asset composition in this manner, the Company has been able to maintain a fairly
stable flow of net interest income.
Complicating management's efforts to control non-trading exposure to interest
rate risk is the fundamental uncertainty of the maturity, repricing, and/or
runoff characteristics of some of the Company's core banking assets and
liabilities. This uncertainty often reflects options embedded in these financial
instruments. The most important embedded options are contained in consumer
deposits and loans.
For example, many of the Company's interest bearing retail deposit products
(e.g., interest checking, savings and money market deposits) have no contractual
maturity. Customers have the right to withdraw funds from these deposit accounts
freely. Deposit balances may therefore run off unexpectedly due to changes in
competitive or market conditions. To forestall such runoff, rates on interest
bearing deposits may have to be increased more (or reduced less) than expected.
Such repricing may not be highly correlated with the repricing of prime
rate-based or U.S. Treasury-based loans. Finally, balances that leave the
banking franchise may have to be replaced with other more expensive retail or
wholesale deposits. Given the uncertainties surrounding deposit runoff and
repricing, the interest rate sensitivity of core bank liabilities cannot be
determined precisely.
Management believes as of March 31, 2004, there have been no material changes in
the Company's interest rate sensitive instruments which would cause a material
change in the market risk exposures which affect the quantitative and
qualitative risk disclosures as presented in the Company's 10-K filed for the
period ended December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's President and
Principal Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures as of March 31, 2004, pursuant
to Exchange Act Rule 13a-15. Based upon that evaluation, the President and
Principal Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of March 31, 2004, in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
There was no change in the Company's internal control over financial reporting
that occurred during the Company's fiscal quarter ended March 31, 2004, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. Economic circumstances, the Company's operation and the
Company's actual results could differ significantly from those discussed in the
forward-looking statements. Forward-looking statements are typically identified
by words or phrases
13
such as "believe," "expect," "anticipate," "intend," "estimate," "may increase,"
"may fluctuate," and similar expressions or future or conditional verbs such as
"will," "should," "would" and "could." These forward-looking statements involve
risks and uncertainties including, but not limited to, economic conditions,
portfolio growth, the credit performance of the portfolios, including
bankruptcies, and seasonal factors; changes in general economic conditions
including the performance of financial markets, the prices of crops, prevailing
inflation and interest rates, and losses on lending activities; results of
various investment activities; the effects of competitors' pricing policies, of
changes in laws and regulations on competition and of demographic changes on
target market populations' savings and financial planning needs; industry
changes in information technology systems on which we are dependent; and the
resolution of legal proceedings and related matters. In addition, the policies
and regulations of the various regulatory authorities could affect the Company's
results. These statements are representative only on the date hereof, and the
Company undertakes no obligation to update any forward-looking statements made.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of Maximum Number
Shares (or Approximate
Purchased as Dollar Value) of
Part of Publicly Shares that May
Total Number Announced yet be Purchased
of Shares Average Price Plans or Under the Plans or
Date Purchased Paid per Share Programs Programs
- ---------------------------------------------------------------------------------------
Jan. 1, 2004 thru
Jan. 31, 2004 278,350 $ 21.00 None None
Feb. 1, 2004 thru
Feb. 29, 2004 0 NA NA NA
March 1, 2004, thru
March 31, 2004 0 NA NA NA
Total 278,350 $ 21.00 None None
On August 28, 2003 Merchants Bancorp entered into a stock redemption agreement
with 3 shareholders of the Company. Collectively, the three shareholders owned
351,349.994 common shares of the Company or 11.71% of outstanding shares. They
desired to sell 333,349.994 of such shares (referred to herein as the "shares")
to the Company. The Company retained Austin Associates, LLC to determine a "fair
value" and issued a "fairness opinion" to the Company dated July 30, 2003. The
purchase was made in 2 separate settlements. The first settlement was for 55,000
shares and a total of $1,155,000 and occurred on September 5, 2003. The second
settlement occurred on January 5, 2004 for 278,349.994 remaining shares. The
dollar value of this settlement was $5,845,349.97. The total value of the
transaction was $7,000,349.87. The Company and its subsidiary bank, Merchants
National Bank, were "well capitalized' both before and after consummation of the
stock transaction.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the shareholders of Merchants Bancorp, Inc. was held on
April 27, 2004. At the meeting, the following individuals were elected as
members to Class I of the Company's board of directors: Paul W. Pence, Jr.,
James R. Vanzant and Robert Hammond. There were no other individuals nominated
for membership on the board, and no other matters were submitted for a vote at
the meeting.
Shareholders of the Company are permitted to vote cumulatively in the election
of directors. As of the record date established for the determination of shares
entitled to vote at the meeting, the Company had 2,666,650 common shares issued
and outstanding. 189,001 of the Company's common shares were not voted at the
meeting. Following is a break-down of the votes cast "for" or "withheld" as to
each individual nominated to Class I of the Company's board of directors:
Paul W. Pence, Jr For: 2,476,961
Withheld: 688
James R. Vanzant For: 2,468,887
Withheld: 8,762
Robert Hammond For: 2,476,916
Withheld: 733
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS - The following exhibits are filed as a part of this
report:
Exhibit No. Exhibit
- ----------- -------------------------------------------------------------------
3.1 Articles of Incorporation of Merchants Bancorp, Inc. filed as
Exhibit (3)(I) to the Form 10 filed with the SEC on April 30, 2002
and incorporated herein by reference.
3.2 Code of Regulations filed as Exhibit (3)(II) to the Form 10 filed
with the SEC on April 30, 2002 and incorporated herein by
reference.
4 Instruments Defining the Rights of Security Holders (See Exhibits
3.1 and 3.2).
31 Rule 13a-14(a) Certification
32 Section 1350 Certification
(B) REPORTS ON FORM 8-K
On January 8, 2004, the Company filed a report on Form 8-K to
announce its repurchase of 278,349.994 common shares, which
occurred as part of a privately negotiated transaction.
15
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.
Date: May 14, 2004 By: /s/ Paul W. Pence, Jr.
-----------------------------------
Paul W. Pence, Jr., President
and Principal Financial Officer
16
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
3.1 Articles of Incorporation of Merchants Bancorp, Inc. filed as
Exhibit (3)(I) to the Form 10 filed with the SEC on April 30, 2002
and incorporated herein by reference.
3.2 Code of Regulations filed as Exhibit (3)(II) to the Form 10 filed
with the SEC on April 30, 2002 and incorporated herein by
reference.
4 Instruments Defining the Rights of Security Holders (See Exhibits
3.1 and 3.2).
31 Rule 13a-14(a) Certification
32 Section 1350 Certification