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, 2005
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 10th, 2005
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, 2004 for further information in this regard.
2
MERCHANTS BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND DECEMBER 31, 2004 (IN THOUSANDS EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2005 2004
ASSETS (unaudited)
CASH AND CASH EQUIVALENTS:
Cash and due from banks $ 11,996 $ 12,499
Federal funds sold 11,575 16,225
---------- ---------
Total cash and cash equivalents 23,571 28,724
---------- ---------
SECURITIES AVAILABLE FOR SALE
(amortized cost of $34,679 and $30,985, respectively) 35,418 31,979
---------- ---------
LOANS 294,605 294,610
Less allowance for loan losses (2,558) (2,519)
---------- ---------
Net loans 292,047 292,091
---------- ---------
OTHER ASSETS:
Bank premises and equipment, net 3,524 3,623
Accrued interest receivable 2,594 2,679
Deferred income taxes 365 278
Other 4,854 4,607
---------- ---------
Total other assets 11,337 11,187
---------- ---------
TOTAL $ 362,373 $ 363,981
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest bearing $ 30,440 $ 34,834
Interest bearing 256,341 252,997
---------- ---------
Total deposits 286,781 287,831
---------- ---------
Repurchase agreements 2,632 2,944
FHLB borrowings 39,469 39,920
Other liabilities 1,774 2,508
---------- ---------
Total liabilities 330,656 333,203
---------- ---------
SHAREHOLDERS' EQUITY:
Common stock - no par value; 4,500,000 shares authorized
and outstanding shares of 2,666,650 2,000 2,000
Surplus 2,000 2,000
Retained earnings 34,418 33,311
Accumulated other comprehensive income 299 467
Treasury Stock, at cost 333,350 shares (7,000) (7,000)
---------- ---------
Total shareholders' equity 31,717 30,778
---------- ---------
TOTAL $ 362,373 $ 363,981
========== =========
See notes to condensed consolidated financial statements.
3
MERCHANTS BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (IN THOUSANDS EXCEPT PER
SHARE DATA)
2005 2004
(unaudited)
INTEREST INCOME:
Interest and fees on loans $ 4,713 $ 4,686
Interest and dividends on securities:
Taxable 191 139
Exempt from income taxes 225 244
Interest on federal funds sold 73 31
------- -------
Total interest income 5,202 5,100
------- -------
INTEREST EXPENSE:
Interest on de posits 1,384 1,176
Interest on re purchase agreements and federal funds purchased 16 26
Interest on FHLB borrowings 410 447
------- -------
Total interest expense 1,810 1,649
------- -------
NET INTEREST INCOME 3,392 3,451
PROVISION FOR LOAN LOSSES (180) (153)
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,212 3,298
------- -------
NONINTEREST INCOME - Service charges and fees 471 390
------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits 1,136 1,018
Occupancy 233 264
Legal and professional services 140 112
Franchise tax 78 66
Data processing 74 74
Advertising 51 68
Other 390 395
------- -------
Total noninterest expense 2,102 1,997
------- -------
INCOME BEFORE INCOME TAXES 1,581 1,691
INCOME TAXES (474) (534)
------- -------
NET INCOME $ 1,107 $ 1,157
======= =======
BASIC AND DILUTED EARNINGS PER SHARE $ 0.42 $ 0.43
======= =======
See notes to condensed consolidated financial statements.
4
MERCHANTS BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (IN THOUSANDS)
2005 2004
(unaudited)
OPERATING ACTIVITIES:
Net income $ 1,107 $ 1,157
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 143 154
Provision for loan losses 180 153
Gain on sale of mortgage loans (37) (38)
Proceeds from sale of mortgage loans 4,103 3,347
Mortgage loans originated for sale (4,066) (3,309)
Changes in assets and liabilities:
Accrued interest receivable 85 576
Other assets (247) (113)
Accrued interest, taxes and other liabilities (734) 377
-------- --------
Net cash provided by operating activities 534 2,304
-------- --------
INVESTING ACTIVITIES:
Proceeds from sales and maturities of securities available for sale 662 746
Purchases of securities available for sale (4,373)
Net increase in loans (136) (1,015)
Capital expenditures (27) (14)
-------- --------
Net cash used in investing activities (3,874) (283)
-------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits (1,050) 7,874
Net increase in repurchase agreements (312) 778
Stock repurchase payments (5,845)
FHLB payments (451) (399)
-------- --------
Net cash provided by (used in) financing activities (1,813) 2,408
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,153) 4,429
CASH AND CASH EQUIVALENTS:
Beginning of year 28,724 22,395
-------- --------
End of year $ 23,571 $ 26,824
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for federal income taxes $ 850 -
======== ========
Cash paid for interest $ 1,773 $ 1,644
======== ========
5
MERCHANTS BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
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, 2005 and the results of operations and cash flows
for the three months ended March 31, 2005 and 2004. 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, 2004 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, 2005 and 2004 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, 2004, 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, 2005 and 2004, the weighted
average number of shares the Company had outstanding was 2,666,650 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 did not have a material effect on the Company's
Condensed Consolidated Financial Statements.
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." The EITF reached a consensus on an
other-than temporary impairment model for debt and equity securities
accounted for under SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," and cost method investments. The basic model
6
developed to evaluate whether an investment within the scope of Issue 03-1
is other-than temporarily impaired involves a three-step process
including, determining whether an investment is impaired (fair value less
than cost), evaluating whether the impairment is other-than-temporary and,
if other-than-temporary, requiring recognition of an impairment loss equal
to the difference between the investment's cost and its fair value. In
September 2004, the FASB issued Staff Position ("FSP") No. EITF 03-01-1,
"Effective Date of Paragraphs 10-20 of EITF Issue No. 03-01." This FSP
delays the effective date of the measurement and recognition guidance
contained in paragraphs 10-20 of Issue 03-01. The amount of any
other-than-temporary impairment that may need to be recognized in the
future will be dependent on market conditions, the occurrence of certain
events or changes in circumstances relative to an investee, the Company's
intent and ability to hold the impaired investments at the time of
valuation and measurement and recognition guidance defined in a future FSP
issuance.
3. LOANS
Major classifications of loans are summarized as follows (in thousands):
MARCH 31,
2005 DECEMBER 31,
(unaudited) 2004
Commercial real estate $ 66,130 $ 64,460
Commercial and industrial 26,883 26,350
Agricultural 39,890 39,970
Residential real estate 134,880 136,165
Installment 24,273 25,080
Other 2,549 2,585
--------- ---------
Total 294,605 294,610
Less allowance for loan losses (2,558) (2,519)
--------- ---------
$ 292,047 $ 292,091
========= =========
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, 2005 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% 85
2012 4.64% 10,000
2013 2.82%-3.13% 1,836
2018 2.83%-4.04% 7,920
2023 3.02%-4.24% 12,628
--------
Total $ 39,469
========
The maximum amount available to the Company under FHLB borrowings was
approximately $77.6 million and $77.7 million as of March 31, 2005 and
December 31, 2004, respectively.
7
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, 2005, the Company had total assets of approximately $362
million and total shareholders' equity of approximately $31.7 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
consolidated financial statements for the year ended December 31, 2004.
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.
8
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 two-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 Corporation has not substantively changed any aspect of its overall approach
in the determination of the allowance for loan losses. Excluding the refinement
from a five year to a two year trend in the calculation of the allowance for
loan loss for homogeneous loans, 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.
Based on the procedures discussed above, management believes the allowance for
loan losses was adequate to absorb estimated loan losses associated with the
loan portfolio at March 31, 2005.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND
2004
The Company reported net income of $1,107,000 and $1,157,000 for the three
months ended March 31, 2005 and 2004, respectively. During the same periods,
basic and diluted earnings per share were $.42 and $.43, respectively. On an
annualized basis, return on average assets was 1.23% and return on average
equity was 14.25% for the three months ended March 31, 2005, compared to 1.30%
and 16.29%, respectively, for the comparable period in 2004.
9
Net interest income for the three months ended March 31, 2004, was $3,392,000, a
decrease of $59,000, or 1.71%, compared to net interest income of $3,451,000 for
the comparable period in 2004. Net interest margin was 3.95% for the three
months ended March 31, 2005, compared to 4.11% for the comparable period in
2004. The average annualized yield on earning assets decreased to 6.06% for the
three months ended March 31, 2005, from 6.07% for the comparable period in 2004.
The average cost of interest-bearing funds was 2.45% for the three months ended
March 31, 2005, an increase from 2.26% for the comparable period in 2004.
Management attributes the decrease in net interest margin to the recording of
lower yielding 1-4 family loans. Additionally, while prime rates continue to
reprice upward, deposits are repricing upwards faster than loan rates. For these
reasons the net interest margin continues to fall.
The provision for loan losses was $180,000 and $153,000 for the three months
ended March 31, 2005 and 2004, respectively, representing an increase of 18%.
Net charge-offs for the three-months ended March 31, 2005 were $140,000 compared
to $86,000 experienced during the three month ended March 31, 2004.
Approximatley $17,000 has been identified as losses in the loan loss provision
analysis as of March 31, 2005. Management does not foresee any large losses in
the portfolio at this time.
Total noninterest income was $471,000 for the three months ended March 31, 2005,
an increase of $81,000, or 20.8%, from $390,000 for the comparable period in
2004. The increase is due to increased volumes of transactions, resulting in
higher service charges on customers' deposit account transactions and the
recording of miscellaneous fee income during the first quarter.
Total noninterest expense was $2,102,000 for the three months ended March 31,
2005, an increase of $105,000, or 5.25%, from $1,997,000 for the comparable
period in 2004. It is typically expected for noninterest expense to increase
5-10% each year. Salaries and benefits comprise the largest component of
noninterest expense, with totals of $1,136,000 and $1,018,000 for the three
months ended March 31, 2005 and 2004, respectively. The employment taxes, which
are included in salaries and benefits, increased approximately $60,000 due to
the difference in bonus paid in 2004 verses 2005, 6% and 23% of salary,
respectivley.
FINANCIAL CONDITION
The Company's total assets decreased slightly to $362.3 million as of March 31,
2005 from $364 million as of December 31, 2004, a decrease of .44% or $1.6
million. The balance sheet remained relatively constant in the first quarter
2005 from year end with federal funds sold and securities changing the most on
the asset side with a net decrease of $1.2 million and deposits decreasing $1.0
million on the liability side. The federal funds sold decreased by $4.6 million
while securities increased $3.4 million. The reallocation of assets was due to
investment activity.
LOANS AND ALLOWANCE FOR LOAN LOSSES
The Company reported total loans of $292.0 million as of March 31, 2005 and
$292.1 million as of December 31, 2004. The portfolio composition has remained
relatively consistent during the period, with a slight decrease in residential
mortgage loans and a slight increase in commercial real estate.
10
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 its overall approach in the determination of the allowance
for loan losses from year end. 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 0.87% of total loans as of March 31, 2005 and
0.86% as of December 31, 2004.
The amount of nonaccrual loans slightly increased to $747,000 as of March 31,
2005 from $728,000 at December 31, 2004. 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 $75,000
for estimated losses on nonaccrual loans in the loan loss reserve calculation.
As a percentage of total loans, nonaccrual loans represented 0.25% as of March
31, 2005 and 0.25% as of December 31, 2004.
The category of accruing loans which are past due 90 days or more increased to
$847,000 as of March 31, 2005 from $452,000 as of December 31, 2004. As a
percentage of total loans, loans past due 90 days and still accruing interest
represented 0.29% as of March 31, 2005 and 0.15% as of December 31, 2004. Of the
increase of $395,000, $167,000 can be attributed to one customer. The customer
is a farm borrower with more than adequate collateral and the bank has started
foreclosure procedures on the property. The company does not anticipate any loss
on the loan. The remaining increase is attributed to approximately nine other
borrowers with relatively small loan balances. Management believes that
liquidation of the underlying collateral will be sufficient to mitigate any
significant loss on the above loans.
As a percentage of the allowance for loan losses, total nonaccrual loans and
loans past due 90 days or more were 62.3% as of March 31, 2005 and 46.8% as of
December 31, 2004.
DEPOSITS
Deposits totaled $286.8 million as of March 31, 2005, a decrease of $1.0
million, or 0.36%, from $287.8 million as of December 31, 2004. The slight
decrease is insignificant and is considered normal in the day to day operations
of a bank.
FHLB BORROWINGS
Federal Home Loan Bank borrowings decreased $451,000 to $39.5 million as of
March 31, 2005 from $39.9 million as of December 31, 2004. The decrease was a
result of principal loan payments made on the borrowings.
11
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, 2005 and 2004.
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 preceeding years.
At March 31, 2005, consolidated Tier 1 risk based capital was 11.75%, and total
risk-based capital was 12.71%. 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.
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, 2005 was 102.7%
compared to 102.4% as of December 31, 2004. Loans to total assets were 81.3% at
March 31, 2005 compared to 80.9% at the end of 2004. The securities portfolio is
available for sale and consists of securities that are readily marketable.
Approximately 85% 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
88% 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
$26.7 million as of March 31, 2005. The Company has the ability to obtain
deposits in the brokered certificate of deposit market to help provide liquidity
to fund loan growth, if necessary. Generally, the Company uses short-term
borrowings to fund overnight and short-term funding needs in the Company's
balance sheet. Longer-term borrowings have been primarily used to fund
mortgage-loan originations. This has occurred when FHLB longer-term rates are a
more economical source of funding than traditional deposit gathering activities.
Additionally, the Company occasionally uses FHLB borrowings to fund larger
commercial loans.
As of March 31, 2005, management is not aware of any current recommendations by
banking regulatory authorities which, if they were to be implemented, would
have, or would be reasonably likely to have, a material adverse impact on the
Company's liquidity, capital resources, or operations.
12
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The Company has certain obligations and commitments to make future payments
under contracts. At March 31, 2005, the aggregate contractual obligations and
commercial commitments are:
Payments Due by Period
Contractual Obligations Less than 1-3 3-5 After 5
($ in thousands) Total One Year Years Years Years
- ------------------------------- -------- --------- -------- --------- --------
Total Deposits $286,781 237,471 39,876 9,434 -
FHLB Borrowings 39,469 3,829 5,312 11,069 19,259
Int. Expense on FHLB Borrowing 8,768 1,543 2,707 2,059 2,459
Repurchase Agreements 2,632 2,632
-------- -------- -------- -------- --------
Total $337,650 $245,475 $ 47,895 $ 22,562 $ 21,718
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 $27,138 $ 10,470 $ 5,174 $ 1,239 $10,255
Letters of Credit 71 71
------- -------- ------- ------- -------
Total $27,209 $ 10,541 $ 5,174 $ 1,239 $10,255
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 risk analysis that perform simulation modeling that
measures the effect of rate changes on net interest income and economic market
value of equity under different rate scenarios. The current policy imposes
limits on earnings at risk over a twelve month period.
In the Company's simulation models, each asset and liability balance is
projected over a time horizon.
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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.
The Company applies hypothetical interest rate movements for up and down
interest rate movements of 100, 200, and 300 basis points. The interest
movements move in equal amounts, known as ramping, each quarter to give a more
likely and meaningful scenerio should rates change.
Simulation models are also performed under an instantaneous parallel 300 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.
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, 2005, 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, 2004.
ITEM 4. CONTROLS AND PROCEDURES
The Registrant maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Registrant's Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to the Registrant's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
The Registrant has carried out an evaluation, under the supervision and with the
participation of the Registrant's management, including the Registrant's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Registrant's disclosure controls and procedures.
Based on the foregoing, the Registrant's Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
report, the Registrant's disclosure controls and procedures were effective, in
all material respects, to in ensuring that information required to be disclosed
in the reports the Registrant files and submits under the Exchange Act is
recorded, processed, summarized and reported as and when required.
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There was no change in the Company's internal control over financial reporting
that occurred during the Company's fiscal quarter ended March 31, 2005, 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 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 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the shareholders of Merchants Bancorp, Inc. was held on
April 26, 2005. At the meeting, the following individuals were elected as
members to Class II of the Company's board of directors: William Butler, Jack
Walker, Charles Davis. 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. 420,718 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:
William Butler For: 2,236,821
Withheld: 9,110
Jack Walker For: 2,243,796
Withheld: 2,135
Charles Davis For: 2,128,905
Withheld: 117,026
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ITEM 6. EXHIBITS
(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 Exhibit
3.1 and 3.2)
31. Rule 13a-14(a) Certification
32. Section 1350 Certification
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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, 2005 By: /s/ Paul W. Pence, Jr.
Paul W. Pence, Jr., President
and Principal Financial Officer
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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
Exhibit 3.1 and 3.2)
31. Rule 13a-14(a) Certification
32. Section 1350 Certification
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