<PAGE>


                         SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, D.C. 20549

                                     FORM 10-Q


         [X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                         THE SECURITIES EXCHANGE ACT OF 1934
                  For the quarterly period ended September 30, 1996

                                      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
         of incorporation or organization          Identification Number)

                    34 SOUTH BROADWAY, AURORA, ILLINOIS        60507
                    ---------------------------------------------------
                    (Address of principal executive offices) (Zip Code)

                                    (630) 896-9000
                   ----------------------------------------------------
                   (Registrant's telephone number, including area code)


     Indicate by check mark whether the Registrant (1) has filed all reports 
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 
1934 during the preceding 12 months (or for such shorter period that the 
Registrant was required to file such reports), and (2) has been subject to 
such filing requirements for the past 90 days. Yes  X  No
                                                   ---    ---

     Indicate the number of shares outstanding of each of the issuer's 
classes of common stock as of the latest practicable date: As of September 30, 
1996, the Registrant had outstanding 2,576,767 shares of common stock, 
$1.00 par value per share.


<PAGE>


                               MERCHANTS BANCORP, INC.

                             Form 10-Q Quarterly Report

                                 Table of Contents


                                      PART 1
                                                                   PAGE NUMBER

ITEM 1.  FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . .   1
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
         FINANCIAL CONDITION AND RESULTS OF OPERATIONS  . . . . . . . . .   6


                                      PART II

ITEM 1.  LEGAL PROCEEDINGS  . . . . . . . . . . . . . . . . . . . . . . .  12
ITEM 2.  CHANGES IN SECURITIES  . . . . . . . . . . . . . . . . . . . . .  12
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES  . . . . . . . . . . . . . . . .  12
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  . . . . . .  12
ITEM 5.  OTHER INFORMATION  . . . . . . . . . . . . . . . . . . . . . . .  12
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . .  12

FORM 10-Q SIGNATURE PAGE  . . . . . . . . . . . . . . . . . . . . . . . .  13

<PAGE>
                        Part I - FINANCIAL INFORMATION

                           MERCHANTS BANCORP, INC.
                        CONSOLIDATED BALANCE SHEETS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>

ASSETS                                       SEPTEMBER 30, 1996      DECEMBER 31, 1995
<S>                                          <C>                     <C>
Cash and due from banks                                $  45,905              $  28,166
Federal funds sold                                         3,306                      0
Securities available for sale                            206,760                187,169
Loans held for sale                                        4,953                  4,340
Loans                                                    417,937                304,327
Allowance for loan losses                                  6,542                  5,176
                                                       ---------              ---------
   Net loans                                             411,395                299,151
Premises and equipment, net                               12,174                  9,504
Other real estate owned                                      380                    566
Goodwill                                                   7,417                      0
Core deposit intangibles                                   2,553                    329
Net sales of acquired subsidiaries, held for sale          8,189                      0
Accrued interest and other assets                          8,335                 10,536
                                                       ---------              ---------
   Total assets                                        $ 711,367              $ 539,761
                                                       =========              =========
                                                    
LIABILITIES AND STOCKHOLDERS' EQUITY                
Deposits:                                           
   Noninterest-bearing                                 $ 120,051              $  76,008
   Interest-bearing                                      479,732                377,763
                                                       ---------              ---------
     Total deposits                                      599,783                453,771
Federal funds purchased and securities              
   sold under repurchase agreements                       38,847                 22,726
Notes payable                                             14,000                  3,000
Accrued interest and other liabilities                     3,085                  6,170
                                                       ---------              ---------
   Total liabilities                                     655,715                485,667
                                                    
STOCKHOLDERS' EQUITY                                
Preferred stock, $1 per value;                      
   Authorized 500,000 shares; none issued                     --                     --
Common stock, $1 par value authorized 6,000,000 shares;
   issued 2,606,690                                        2,607                  2,607
Surplus                                                   18,435                 18,344
Retained earnings                                         35,595                 31,877
Unrealized net gain (loss) on securities available 
   for sale                                                 (822)                 1,450
Treasury stock, at cost, 29,923 shares in 1996 and
   36,411 shares in 1995                                    (163)                  (184)
                                                       ---------              ---------
   Total stockholders' equity                             55,652                 54,094
                                                       ---------              ---------
   Total liabilities and                            
     stockholders' equity                              $ 711,367              $ 539,761
                                                       =========              =========

</TABLE>
See accompanying notes to consolidated financial statements.


<PAGE>
                                 MERCHANTS BANCORP, INC.
                              CONSOLIDATED STATEMENTS OF INCOME
                        (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED      NINE MONTHS ENDED
                                                            SEPTEMBER 30,           SEPTEMBER 30,
                                                         1996        1995        1996        1995

<S>                                                      <C>         <C>         <C>         <C>
INTEREST INCOME
Interest and fees on loans                               $   9,389   $   7,097   $  27,126   $  20,915
Interst on securities:
   Taxable                                                   2,590       2,110       7,559       5,635
   Tax-exempt                                                  654         719       2,076       2,354
Interest on federal funds sold                                 159         455         359         690
                                                         ---------   ---------   ---------   ---------
   Total interest income                                    12,792      10,381      37,120      29,594
                                                         ---------   ---------   ---------   ---------
INTEREST EXPENSE
Interest on deposits                                         5,533       4,507      16,364      12,010
Interest on federal funds purchased and
   securities sold under repurchase agreements                 416         473       1,241       1,448
Interest on note payable                                       130          37         464         110
                                                         ---------   ---------   ---------   ---------
   Total interest expense                                    6,079       5,017      18,069      13,568
                                                         ---------   ---------   ---------   ---------
   Net interest income                                       6,713       5,364      19,051      16,026
Provision for loan losses                                      654         397       1,627       1,381
                                                         ---------   ---------   ---------   ---------
   Net interest income after provision for loan losses       6,059       4,967      17,424      14,645
                                                         ---------   ---------   ---------   ---------

OTHER INCOME
Trust income                                                   513         478       1,522       1,437
Mortgage banking income                                        558         350       1,671         858
Service charges and fees                                       947         716       2,786       1,993
Securities gains, net                                          109           2         152          21
Other income                                                   375         194         884         688
                                                         ---------   ---------   ---------   ---------
   Total other income                                        2,502       1,740       7,015       4,997
                                                         ---------   ---------   ---------   ---------

OTHER EXPENSE
Salaries and employee benefits                               3,205       2,541       9,264       7,327
Occupancy expense, net                                         409         282       1,186         785
Furniture and equipment expense                                426         311       1,208         912
Amortization of intangible assets                              197          25         592          75
Other expense                                                1,948       1,202       5,645       4,139
                                                         ---------   ---------   ---------   ---------
   Total other expense                                       6,185       4,361      17,895      13,238
                                                         ---------   ---------   ---------   ---------
Income before income taxes                                   2,376       2,346       6,544       6,404
Provision for income taxes                                     666         669       1,745       1,834
                                                         ---------   ---------   ---------   ---------
   Net income                                            $   1,710   $   1,677   $   4,799   $   4,570
                                                         =========   =========   =========   =========

Earnings per share                                           $0.66       $0.65       $1.86       $1.78
Cash dividends declared per share                            $0.14       $0.12       $0.42       $0.36
Weighted average shares outstanding                      2,576,380   2,571,123   2,575,076   2,569,759
Ending shares outstanding                                2,576,767   2,571,552   2,576,767   2,571,552

</TABLE>
See accompanying notes to consolidated financial statements.

                                            2

<PAGE>
<TABLE>
<CAPTION>

                                           MERCHANTS BANCORP, INC.
                                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
                                            (DOLLARS IN THOUSANDS)

                                                                                1996                1995
<S>                                                                        <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                                  $  4,799           $   4,570
Adjustments to reconcile net income to cash
 from operating activities:
   Depreciation and amortization                                               1,152                 920
   Provision for loan losses                                                   1,627               1,381
   Origination of mortgage loans held for sale                               (41,934)            (29,274)
   Proceeds from sales of mortgage loans held for sale                        41,641              29,313
   Net gain on sales of loans                                                   (320)               (240)
   Provision for deferred taxes                                                   61                  77
   Decrease in net income taxes payable                                          (46)               (125)
   Decrease in accrued interest and other assets                               3,570                 194
   Decrease in accrued interest and other liabilities                         (3,698)             (1,646)
   Discount accretion on securities                                             (274)               (122)
   Premium amortization on securities                                            682                 657
   Amortization of intangible assets                                             593                  75
   Other, net                                                                    111                  28
                                                                           ----------          ----------
Net cash from operating activities                                             7,964               5,808
                                                                           ----------          ----------

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from matured securities available for sale                           39,149              19,332
Proceeds from sales of securities available for sale                          19,974               9,682
Purchases of securities available for sale                                   (59,417)            (51,131)
Purchases of securities held to maturity                                           0              (1,208)
Net principal disbursed on loans                                             (40,811)            (10,271)
Proceeds from sales of other real estate                                         313                 249
Purchase of subsidiaries, net of cash and cash equivalents acquired           (5,134)                  0
Purchase of subsidiaries, net assets held for sale                            (8,189)                  0
Property and equipment expenditures                                           (2,284)               (991)
                                                                           ----------          ----------
 Net cash from investing activities                                          (56,399)            (34,338)
                                                                           ----------          ----------

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits                                                      48,123              40,989
Net increase (decrease) in short-term borrowings                              14,988             (13,756)
Repayment of notes payable                                                    (6,550)                  0
Proceeds from notes payable                                                   14,000                   0
Dividends paid                                                                (1,081)               (926)
                                                                           ----------          ----------
 Net cash from financing activities                                           69,480              26,307
                                                                           ----------          ----------
 Net change in cash and cash equivalents                                      21,045              (2,223)
 Cash and cash equivalents at beginning of period                             28,166              28,922
                                                                           ----------          ----------
 Cash and cash equivalents at end of period                                 $ 49,211           $  26,699
                                                                           ----------          ----------
                                                                           ----------          ----------

Supplemental disclosures:
 Income taxes paid                                                          $  2,083           $   1,959
 Interest paid                                                                17,919              13,199
 Noncash transfer of loans to other real estate                                  132                  88

See accompanying notes to consolidated financial statements.
</TABLE>

                                                      3
<PAGE>
                             MERCHANTS BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          (TABLE AMOUNTS IN THOUSANDS)


NOTE 1: BASIS OF PRESENTATION

The financial information of Merchants Bancorp, Inc. (the "Company") included 
herein is unaudited: however, such information reflects all adjustments 
(consisting of normal recurring adjustments) which are, in the opinion of 
management, necessary for a fair statement of results for the interim 
periods. The results of the interim period ended September 30, 1996, are not 
necessarily indicative of the results expected for the year ending December 
31, 1996.

On January 3, 1996, the Company consummated the acquisition of Valley Banc 
Services Corp. ("Valley") for cash in the amount of $20.5 million. The 
Company borrowed $14 million to finance this transaction, which was accounted 
for using the purchase method. Goodwill resulting from this transaction is 
being amortized on a straight-line basis over a twenty year period, and core 
deposit intangibles are being amortized on an accelerated basis over ten 
years.

These financial statements fully consolidate the Company, Valley, Merchants 
National Bank, Hinckley State Bank, and Fox Valley Bank. Two of Valley's 
subsidiary banks, Anchor Bank and the State Bank of OSCO, are held for sale. 
As such, the subsidiaries held for sale are not fully consolidated, but are 
reflected as net assets held for sale in these financial statements. It is 
anticipated that the sale of the two banks will be consummated during the 
fourth quarter of 1996.

NOTE 2: SECURITIES

Amortized costs, gross of unrealized gains and losses, and fair values of 
securities are summarized as follows:

<TABLE>
<CAPTION>
                                                  September 30, 1996                                          
                                       ----------------------------------------
                                                    Gross       Gross
                                       Amortized  Unrealized  Unrealized  Fair
                                          Cost      Gains       Losses    Value
                                       ---------  ----------  ---------- ------
<S>                                     <C>        <C>      <C>         <C>
Securities available for sale:
  U.S. Treasury                        $  23,010   $     4   $   (133)  $ 22,881
  U.S. Government agencies                76,490       175       (899)    75,766
  U.S. Government agency 
   mortgage backed securities             44,736       238       (592)    44,382
  States and political subdivisions       51,733     1,142       (763)    52,112
  Collateralized mortgage obligations      9,256         6       (242)     9,020
  Other securities                         2,799         0       (200)     2,599
                                       ---------   -------   --------  ---------
                                       $ 208,024   $ 1,565   $ (2,829) $ 206,760
                                       ---------   -------   --------  ---------
                                       ---------   -------   --------  ---------

                                                  December 31, 1995                                          
                                       ----------------------------------------
                                                    Gross       Gross
                                       Amortized  Unrealized  Unrealized  Fair
                                          Cost      Gains       Losses    Value
                                       ---------  ----------  ---------- ------
<S>                                    <C>         <C>       <C>        <C>
Securities available for sale:
  U.S. Treasury                        $  24,968   $    48   $   (156)  $ 24,860
  U.S. Government agencies                53,044       542       (105)    53,481
  U.S. Government agency 
   mortgage backed securities             44,804       493       (122)    45,175
  States and political subdivisions       50,239     1,998       (417)    51,820
  Collateralized mortgage obligations     10,044        11        (95)     9,960
  Equity securities                        1,873         0          0      1,873
                                       ---------   -------   --------  ---------
                                       $ 184,972   $ 3,092   $   (895) $ 187,169
                                       ---------   -------   --------  ---------
                                       ---------   -------   --------  ---------
</TABLE>
                                       4
<PAGE>

                            MERCHANTS BANCORP, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE 3: LOANS

Major classifications of loans are as follows:

                                          September 30,       December 31,
                                              1996                1995
                                          -------------       ------------
     Commercial and industrial              $ 149,778           $ 109,872
     Real estate - commercial                  69,215              67,739
     Real estate - construction                47,932              40,510
     Real estate - residential                 76,426              31,673
     Installment                               68,670              50,489
     Credit card receivables                    6,284               5,644
     Other loans                                1,781                 455
                                            ---------           ---------
                                              420,086             306,382
     Unearned discount                         (1,654)             (1,743)
     Deferred loan fees                          (495)               (312)
                                            ---------           ---------
           Total loans                      $ 417,937           $ 304,327
                                            ---------           ---------
                                            ---------           ---------

NOTE 4: ALLOWANCE FOR LOAN LOSSES

Following is a summary of changes in the allowance for loan losses for the 
nine months ended September 30:

                                                   1996                1995
                                               ------------        ------------
     Balance, January 1                          $   5,176           $   5,140
     Balances of acquired subsidiaries
       as of January 3                                 798                   0
     Provision charged to operations                 1,627               1,381
     Loans charged-off                              (1,779)             (1,786)
     Recoveries                                        720                 552
                                                 ---------           ---------
           Balance, end of period                $   6,542           $   5,287
                                                 ---------           ---------
                                                 ---------           ---------

NOTE 5: EMPLOYEE BENEFIT PLANS

The Company maintains a non-contributory, trusteed pension plan which covers 
substantially all full time employees of Merchants National Bank who have 
completed age and service requirements. No provision for periodic expense was 
made during the nine months of 1996, or 1995. The Company also maintains a 
contributory thrift plan. The Company contributed $236,000 and $210,000 in 
the nine month periods ended September 30, 1996 and 1995, respectively. The 
Company recognizes this expense in the same period in which the contribution 
is made.

NOTE 6: NOTES PAYABLE

Notes payable consists of two notes of $7 million each, the proceeds of which 
were used to finance the acquisition of Valley on January 3, 1996. One note 
bears a fixed interest rate of 7.03%, and requires no principal reductions 
for the first two years, followed by quarterly principal reductions over the 
following five years. The other note bears interest at a variable rate which 
is tied to either the prevailing Federal funds rate or LIBOR, at the 
quarterly election of the Company and interest is paid quarterly.

NOTE 7: PRO FORMA FINANCIAL INFORMATION

The following table presents consolidated financial information, as of 
September 30, of each year presented, as if the acquisition of Valley had 
occurred on January 1, 1995, in thousands.

                                               1996         1995
                                             --------     --------
            Net interest income              $ 19,051     $ 15,592
            Net income                          4,779        4,173
            Net income per share                $1.86        $1.62

                                       5
<PAGE>

                 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Net income for the third quarter of 1996 was $1,710,000, or 66 cents per 
share, a 2% increase compared to $1,677,000, or 65 cents per share earned in 
the third quarter of 1995. Through the first nine months of 1996, net income 
was $4,799,000, or $1.86 per share, an increase of 5% from the first nine 
months of 1995. Although the acquisition of Valley Banc Services Corp. 
("Valley") on January 3, 1996, has caused many statement categories to 
increase, amortization of purchase intangibles and the cost of debt incurred 
to consummate the transaction offset these increases to a large degree in 
1996. Thus, the increase in net income was primarily due to the operation of 
Merchants National Bank.

NET INTEREST INCOME

Net interest income was $6.7 million and $5.4 million during the three months 
ended September 30, 1996, and 1995, respectively, an increase of about 25%. 
The Company's net interest margin (tax equivalent net interest income as a 
percentage of earning assets) was 4.51% for the three months ended September 
30, 1996, and 4.50% a year earlier. For the nine months ended September 30, 
net interest income was $19.1 million in 1996, and $16.0 million in 1995, 
while the net interest margin was 4.42% and 4.76%, respectively.

Net interest income increased because of the increase in earning assets, 
which was enhanced by the acquisition of Valley on January 3, 1996. Although 
Valley added $103 million in earning assets as of September 30, 1996, the 
decline in net interest margin was also partly the result of the acquisition. 
In addition to the lower margin at Valley, changes in market interest rates 
contributed to the decline in the net interest margin.

OTHER INCOME

Noninterest income excluding securities gains was $2,393,000 for the three 
months ended September 30, 1996 and $1,738,000 for the same period in 1995, 
an increase of $655,000, or 38%. Merchants National Bank is currently the 
only subsidiary operating trust and mortgage banking departments. Trust 
income increased $35,000 (7.3%) for the quarter and $85,000 (5.9%) for the 
year to date. Mortgage banking department fee income of $558,000 during the 
third quarter reflected an increase of $208,000 (59.4%) from the same period 
in 1995. For the nine month period, mortgage fee income was $1,671,000 in 
1996, and $858,000 in 1995, an increase of 94.8%. Mortgage banking income is 
seasonal, with residential activity tending to decline in the winter months, 
and also sensitive to interest rate levels and expectations. The local market 
for residential real estate was significantly stronger in the first nine 
months of 1996, than a year earlier. Most fixed rate mortgages are sold and 
the servicing is retained. The servicing portfolio provides a source of 
income which is generally more stable than origination fees. The portfolio of 
loans serviced for others totaled $250 million as of September 30, 1996, 
compared to $193 million a year earlier.

Effective January 1, 1996, the Company adopted SFAS 122, "Accounting for 
Mortgage Servicing Rights." Pursuant to SFAS 122, the cost of loans sold is 
allocated to the servicing rights retained and to the loan that is sold, 
based on their relative fair values. Mortgage servicing rights are amortized 
in proportion to and over the period of estimated net servicing income, and 
are evaluated for impairment based on their fair value. The impact of this 
pronouncement was an increase in mortgage banking income of $435,000 in the 
first nine months of 1996.

Sales of securities available for sale resulted in gains of $152,000 in the 
first nine months of 1996, and $21,000 a year earlier. Securities available 
for sale are held for indefinite periods of time, and include securities that 
will be used as a part of the Company's asset/liability management strategy. 
Such securities may be sold in response to changes in interest rates, 
liquidity needs, or significant prepayment risk.

                                          6

<PAGE>

                        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 
                         CONDITION AND RESULTS OF OPERATIONS - CONTINUED

OTHER EXPENSE

Salary and benefit expenses increased from $2,541,000 during the three months 
ended September 30, 1995, to $3,205,000 for the same period in 1996, an 
increase of $664,000 (26%), primarily as a result of the acquisition. For the 
nine month period, salaries and employee benefits were $6,264,000 in 1996, 
and $7,327,000 in 1995, an increase of 26.4%. The full-time equivalent number 
of employees was 252 as of September 30, 1995, and 342 as of September 30, 
1996. Expansion of the mortgage department, and the opening of the Randall 
Square branch of the Merchants National Bank each contributed to the 
increase. The newly acquired Valley subsidiary banks accounted for 49 
full-time equivalent employees as of September 30, 1996.

Occupancy expenses were $127,000 (45%) higher during the third quarter of 
1996, and $401,000 (51%) higher for the first nine months of 1996 compared to 
the same periods in 1995. Furniture and equipment expenses were $115,000 
(37%) higher during the third quarter of 1996, and $296,000 (32%) higher for 
the first nine months of 1996 compared to the same periods in 1995. Fixed 
asset expenses increased due to the acquisition and due the opening of a new 
branch of Merchants National Bank at Randall Square in Geneva, Illinois in 
March, 1996.

The Bank Insurance Fund of the Federal Deposit Insurance Corporation (the 
"FDIC") reached its congressionally mandated level during the third quarter 
of 1995. As a result, well capitalized institutions in the supervisory group 
representing the least risk pay an FDIC deposit assessment of $1,000 per 
year. The Company's assessment was $430,000 in the first nine months of 1995, 
and the minimum assessment was incurred in the first nine months of 1996. 
See, "Recent Regulatory Developments."

Other expenses were $1,948,000, or $746,000 (62%) higher in the third quarter 
of 1996, than in the third quarter of 1995. Other expenses were $5,645,000, 
or $1,506,000 (36%) higher in the first nine months of 1996, than in the like 
period a year earlier. Other operating costs of the acquired Valley banks 
accounted for $855,000 of this total in the first nine months of 1996. 
Mortgage banking operating expenses increased $893,000, although this was 
more than offset by mortgage interest income and fees. Other factors 
contributing to the increase in other expenses were amortization of mortgage 
servicing, ATM costs, and increases in general operating costs.

FINANCIAL CONDITION

LOANS, LOANS HELD FOR SALE, AND PROVISION FOR LOAN LOSSES

Total loans increased $113.6 million (37%) to $417.9 million as of September 
30, 1996, from $304.3 million as of December 31, 1995. Total loans of the 
newly acquired banks were $73.8 million as of September 30, 1996. On a 
percentage basis, residential real estate loans increased more than any other 
category, growing to $76.4 million as of September 30, 1996, from $31.7 
million as of December 31, 1995, an increase of $44.7 million (141%). These 
loans are primarily adjustable rate mortgages originated and held at 
Merchants National Bank. Commercial loans increased $39.9 million (36%), from 
$109.9 million as of December 31, 1995, in $149.8 million as of September 30, 
1996. Commercial real estate loans increased $1.4 million (2%) and 
installment loans increased $18 million (36%) during the first nine months of 
1996. In addition to the acquisition, the increases reflected the continued 
strength of the Fox Valley economy in general, and the real estate market in 
particular.

Most of the residential mortgage loans originated by the Company's mortgage 
banking department are sold in the secondary market, with servicing rights 
retained. A portion of the loans originated, typically adjustable rate 
mortgages, are retained in Merchants National Bank's portfolio, as reflected 
in the increase in residential real estate loans. At any point in time, loans 
will be at various stages of the mortgage banking process. Loans held for 
sale were $4.3 million as of December 31, 1995, and $5.0 million as of 
September 30, 1996. 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.

                                        7


<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS - CONTINUED


The adequacy of the allowance for loan losses is monitored by the loan review 
staff, and reported to management and the Board of Directors.

The Company's provision for loan losses was $1,627,000 for the first nine 
months of 1996, compared to $1,381,000 a year earlier. Net charge-offs for 
the nine months ended September 30, were $1,059,000 and $1,234,000 in 1996 
and 1995, respectively. The allowance for loan losses as a percentage of 
total loans was 1.57% as of September 30, 1996 and 1.79% as of December 31 
1995. The decline in the ratio resulted from the acquisition of Valley, which 
has maintained a lower ratio than was maintained by the Company in prior 
periods. In management's judgment, an adequate allowance for possible future 
losses has been established.

Nonaccrual loans increased to $2,877,000 as of September 30, 1996, from 
$2,210,000 as of December 31, 1995. The September 30, 1996, total includes 
$432,000 in nonaccrual loans of the Valley banks, accounting for most of the 
increase. Loans past due ninety days of more and still accruing were 
$151,000 as of September 30, 1996, all of which were Valley loans, and there 
were no such loans as of December 31, 1995. Renegotiated loans declined 
$41,000 to $1,108 million as of September 30, 1996. The renegotiated loans 
were primarily loans to a single borrower which were renegotiated during 
1995, and are fully collateralized.

Other real estate owned declined from $566,000 as of December 31, 1995, to 
$380,000 as of September 30, 1996, as some properties were sold. Property 
acquired from a single borrower in the first quarter of 1995 comprised most 
of the balance as of each date. The recorded values of these properties were 
supported by current appraisals.

SECURITIES

Securities are classified as available for sale if they may be sold as part 
of the Company's asset/liability management strategy in response to changes 
in interest rates, liquidity needs, or significant prepayment risk. 
Securities available for sale are carried at fair value, with related 
unrealized net gains or losses, net of deferred income taxes, recorded as an 
adjustment to equity capital. As of September 30, 1996, net unrealized losses 
of $1,264,000, reduced by deferred income taxes of $442,000, resulted in a 
decrease in equity capital of approximately $822,000. As of December 31, 
1995, net unrealized gains of $2,197,000, net of deferred income taxes of 
$747,000 million, resulted in an increase in equity capital of $1,450 million.

The carrying value of securities available for sale grew $19.6 million (10%) 
during the first nine months of 1996, to $206.8 million as of September 30, 
1996, from $187.2 million as of December 31, 1995. The fair value of 
securities at the acquired subsidiaries was $25.0 million as of September 30, 
1996. U.S. Treasury securities decreased from $24.9 million as of December 
31, 1995, to $22.9 million as of September 30, 1996, an 8% decline. U.S. 
government agency securities grew from $53.5 million as of December 31, 
1995, to $75.8 million as of September 30, 1996, an increase of $22.3 million 
(42%). U.S. government agency mortgage backed securities declined $0.8 million 
(2%), from $45.2 million as of December 31, 1995, to $44.4 million as of 
September 30, 1996. Municipal securities declined slightly from $52.1 million 
to $51.8 million during this period. None of these changes represented a 
change in the management of the investment portfolio.

DEPOSITS AND BORROWED FUNDS

Total deposits of $599.9 million as of September 30, 1996, represented an 
increase of $146.0 million (32%) from $453.8 million as of December 31, 1995. 
Deposits of the Valley subsidiaries were $103.5 million as of September 30, 
1996. Noninterest-bearing deposits were $120.1 million as of September 30, 
1996, an increase of $44.1 million (58%) from $76.0 million as of December 
31, 1995. At the same time, interest-bearing deposits increased $102.0 
million (27%), including $24.9 million in certificates of deposit of $100,000 
or more, and $41.0 million in certificates of deposit under $100,000.

The Company also utilizes securities sold under repurchase agreements as a 
source of funds. Most local municipalities, and some other organizations, must 
have funds insured or collateralized as a matter of their own policies. 
Repurchase agreements provide a source of funds and do not increase the 
Company's reserve requirement. Although the balance of repurchase agreements 
is subject to variation, particularly seasonal variation, the account 
relationships represented

                                       8


<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS - CONTINUED


by these balances are principally local and have been maintained for 
relatively long periods of time. As of September 30, 1996, repurchase 
agreements were $25 million, compared to $23 million as of December 31, 1995. 
Federal funds purchased, which are used to meet short term liquidity needs, 
totaled $14.3 million as of September 30, 1996, and there were no such 
purchased funds as of September 30, 1995.

CAPITAL RESOURCES

Bank regulatory agencies have adopted capital standards by which all banks 
and bank holding companies will be evaluated. Under the risk-based method of 
measurement, the resulting ratio is dependent upon not only the level of 
capital and assets, but the composition of assets and capital and the amount 
of off-balance sheet commitments. The Company's capital ratios were as 
follows for the dates indicated:

                                CAPITAL RATIOS
                            (Dollars in thousands)

<TABLE>
<CAPTION>

                                         September 30, 1996       December 31, 1995
                                         ------------------       -----------------
                                          Amount    Ratio          Amount    Ratio
                                         --------  --------       --------  -------
<S>                                     <C>        <C>            <C>       <C>
Risk-based Capital Ratios:(1)
  Tier 1 capital                         $ 46,128   11.13%         $ 53,765  14.54%
  Tier 1 capital minimum requirement       16,577    4.00%           14,794   4.00%
                                         --------   ------         --------  ------
  Excess                                 $ 29,551    7.13%         $38,971   10.54%
                                         --------   ------         --------  ------
                                         --------   ------         --------  ------

  Total capital                          $ 51,872   12.52%         $ 58,399  15.79%
  Total capital minimum requirement        33,154    8.00%           29,588   8.00%
                                         --------   ------         --------  ------
  Excess                                 $ 18,718    4.52%         $28,811    7.79%
                                         --------   ------         --------  ------
                                         --------   ------         --------  ------
  Total risk adjusted assets             $414,421                  $369,850
                                         --------                  --------
                                         --------                  --------

Leverage Capital Ratio:(2)(3)
  Tier 1 capital                         $ 46,128    8.10%         $ 53,765  10.31%
  Minimum requirement                      23,762    5.00%           23,762   5.00%
                                         --------   ------         --------  ------
  Excess                                 $ 22,366    3.10%         $ 30,003   5.31%
                                         --------   ------         --------  ------
                                         --------   ------         --------  ------
  Average adjusted assets                $569,183                  $521,435
                                         --------                  --------
                                         --------                  --------
</TABLE>
-----------------------

(1)  In accordance with the guidelines of the Federal Reserve, unrealized net
     gains and losses of deferred income taxes, which are recorded as an 
     adjustment to equity capital on the financial statements, are not included
     in the calculation of these capital ratios.
(2)  based on the risk-based capital guidelines of the Board of Governors of 
     the Federal Reserve System (the "Federal Reserve"), a bank holding company
     is required to maintain a Tier 1 capital to risk-adjusted assets ratio of
     4.00% and total capital to risk-adjusted assets ratio of 8.00%.
(3)  The leverage ratio is defined as the ratio of Tier 1 capital to average 
     total assets. Management of the Company has established a minimum 
     target leverage ratio of 5%. Based on Federal Reserve guidelines, a bank 
     holding company generally is required to maintain a leverage ratio of 3%
     plus an additional cushion of at least 100 to 200 basis points.

The capital ratios detailed above declined as a result of two factors. First, 
although the level of stockholders' equity was not directly affected, 
intangible assets were recorded as part of the required purchase accounting 
method for the acquisition of Valley. Intangible assets are required to be 
deducted from capital during the calculation of the capital ratios. Second, 
the level of total assets and risk based assets increased significantly with 
the acquisition, thus reducing capital in percentage terms. The Company 
remains well capitalized, according to regulatory standards in all 
categories.

                                       9

<PAGE>

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 $56.4 million in the first
nine months of 1996, compared to $34.3 million a year earlier. In the first 
nine months of 1996, net principal disbursed on loans accounted for net 
outflows of $40.8 million, and securities transactions aggregated a net 
outflow of $294,000. In the first nine months of 1995, net principal 
disbursed on loans accounted for net outflow of $10.3 million, and securities 
transactions resulted in net outflows of $23.3 million. During the first 
quarter of 1996, the acquisition of Valley resulted in a net outflow of $5.1 
for the subsidiaries to be retained, net of cash and cash equivalents 
acquired with those subsidiaries, and an outflow of $8.2 million for the net 
assets of the subsidiaries held for sale.

     Cash inflows from financing activities in the first nine months of 1996 
associated with an increase in deposits were $48.1 million. This compares 
with a net inflow of $41.0 million for the same period in 1995. Short term 
borrowings increased $15.0 million in the first nine months of 1996, and 
declined $13.8 million in the first nine months of 1995.

     During the first quarter of 1996, the Company repaid a $3 million note 
payable to the Federal Home Loan Bank of Chicago, and a $3.5 million note 
payable assumed with the Valley acquisition. $14 million in proceeds from 
notes payable were used to finance the Valley acquisition.

     In the event of short term liquidity needs, the Company's subsidiary 
banks may purchase Federal funds from correspondent banks, The Merchants 
National Bank may also borrow funds from the Federal Reserve Bank of Chicago, 
but has not done so during any period covered in this report. The Merchants 
National Bank's membership in the Federal Home Loan Bank System gives it the 
ability to borrow funds from the Federal Home Loan Bank of Chicago for short 
or long term purposes under a variety of programs.

     Mortgage lending activity resulted in operating cash outflows of 
approximately $41.9 million and inflows of approximately $41.6 million during 
the first nine months of 1996, compared to $29.3 million and $29.3 million, 
respectively, in 1995. Total cash inflows from operating activities exceeded 
operating outflows by $8.0 million for the nine months ended September 30, 
1996. During the first nine months of 1995, net cash inflows from operating 
activities were $5.8 million. Interest received net of interest paid was a 
principal source of operating cash inflows in both periods reported. 
Management of investing and financing activities, and market conditions, 
determine the level and the stability of net interest cash flows. 
Management's policy is to mitigate the impact of changes in market interest 
rates to the extent possible, so that balance sheet growth is the principal 
determinant of growth in the net interest cash flows.

RECENT REGULATORY DEVELOPMENT

     On September 30, 1996, President Clinton signed into law the "Economic 
Growth and Regulatory Paperwork Reduction Act of 1996 (the "Regulatory 
Reduction Act"). Subtitle G of The Regulatory Reduction Act consists of The 
"Deposit Insurance Funds Act of 1996" (the "DIFA"). The DIFA provides for a 
one-time special assessment on each depository institution holding deposits 
subject to assessment by the FDIC for the Savings Association Insurance Fund 
(the "SAIF") in an amount which, in aggregate, will increase the designated 
reserve ratio of the SAIF (I.E., the ratio of the insurance reserves of the 
SAIF to total SAIF-insured deposits) to 1.25% on October 1, 1996. 
Subject to certain exceptions, the special assessment is payable in 
full on November 27, 1996. None of the Company's bank subsidiaries holds any 
SAIF-assessable deposits and, therefore, none of the Company's banks 
subsidiaries is subject to the special assessment.


                                      10


<PAGE>


     Prior to the enactment of the DIFA, a substantial amount of the SAIF 
assessment revenue was used to pay the interest due on hands issued by the 
FICO, the entity created in 1987 to finance the recapitalization of the 
Federal Savings and Loan Insurance Corporation, the SAIF predecessor 
insurance fund. Pursuant to the DIFA, the interest due on outstanding FICO 
bonds will be covered by assessments against both SAIF and BIF member 
institutions beginning January 1, 1997. Between January 1, 1997 
and December 31, 1999, FICO assessments against BIF-member institutions, 
such as the Company's bank subsidiaries, cannot exceed 20% of the 
FICO assessments charged SAIF-member institutions. From January 1, 2000 until 
the FICO bonds mature in 2019, FICO assessments will be shared by all 
FDIC-insured institutions on a PRO RATA basis. The FICO estimates that the 
FICO assessments for the period January 1, 1997 through December 31, 1999 
will be approximately 0.013% of deposits for BIF members versus 
approximately 0.064% of deposits for SAIF members, and will be less 
than 0.025% of deposits thereafter.

    The DIFA also provides for a merger of the BIF and SAIF on January 1, 1999, 
provided there are no state or federally chartered, FDIC-insured savings 
associations existing on the date. To facilitate the merger of the BIF and 
the SAIF, the DIFA directs the Treasury Department to conduct a study on the 
development of a common charter and to submit a report, along with appropriate 
legislative recommendations, to the Congress by March 31, 1997.

    In addition to the DIFA, the Regulatory Reduction Act includes a number 
of statutory changes designed to eliminate duplicative, redundant or 
unnecessary regulatory requirements. Among other things, the Regulatory 
Reduction Act establishes streamlined notice procedures for the commencement 
of new nonbanking activities by bank holding companies, eliminates the need 
to national banks to obtain OCC approval to establish an off-site ATM, 
excludes ATM closures and certain branch off relocations from prior notice 
requirements applicable to branch closings, significantly expands the 
authority of well-capitalized and well-managed national banks to invest in 
office premises without prior regulatory approval, and establishes time 
frames within which the FDIC must act on applications by state banks to 
engage in activities which, although permitted for the state bank under 
applicable state law, are not permissible activities for national banks. The 
Regulatory Reduction Act also clarifies the liability of a financial 
institution, when acting as a lender or a fiduciary capacity, under the 
federal environmental clean-up laws. Although the full impact of the 
Regulatory Reduction Act on the operations of the Company and its 
subsidiaries cannot be determined at this time, management believes that the 
legislation will reduce compliance costs to some extent and allow the Company 
and its subsidiaries somewhat greater operating flexibility.


                                       11




<PAGE>

                                    PART II


ITEM 1.   LEGAL PROCEEDINGS

          There are no material pending legal proceedings to which the Company
          or its subsidiaries are a party other than ordinary routine litigation
          incidental to their respective businesses.

ITEM 2.   CHANGES IN SECURITIES

          None

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

          None

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          None

ITEM 5.   OTHER INFORMATION

          None

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

          Exhibits.

          27.  Financial Data Schedule

          Reports on Form 8-K.

          None





                                       12

<PAGE>

                                   SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the 
Registrant has duly caused this report to be signed on its behalf by the 
undersigned thereunto duly authorized.


                                       MERCHANTS BANCORP, INC.
                                       (Registrant)


                   
                                      /s/ Calvin R. Myers
                                      ------------------------------------------
                                      Calvin R. Myers
                                      President, Chairman of the Board and
                                      Chief Executive Officer


        
                                      /s/ J. Douglas Cheatham
                                      ------------------------------------------
                                      J. Douglas Cheatham
                                      Vice President and Chief Financial Officer



Date:  November 12, 1996











                                       13