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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission file number 0-14484
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MERCHANTS BANCORP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 36-3182868
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(State of Incorporation) (I.R.S. Employer Identification Number)
34 SOUTH BROADWAY, AURORA, ILLINOIS 60507
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(Address of principal executive offices, including Zip Code)
(708) 896-9000
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(Registrant's telephone number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of each exchange on which registered
NONE NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1.00 PAR VALUE
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(Title of Class)
PREFERRED STOCK PURCHASE RIGHTS
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(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by Reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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As of March 1, 1996, the aggregate market value of the registrant's common
stock held by non-affiliates of the registrant was approximately $72,074,548*
based upon the price of the last sale on that date. (This determination
includes 428,533 shares of the registrant's common stock held by the trust
department of the registrant's subsidiary, The Merchants National Bank of
Aurora.)
The number of shares outstanding of the registrant's common stock, par
value $1 per share, was 2,574,091 at March 1, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's 1995 Annual Report are incorporated by reference
into Parts I, II and IV.
Portions of the Company's Proxy Statement for the 1996 Annual Meeting of
Stockholders are incorporated by reference into Part III.
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* Based on the last reported price of an actual transaction in registrant's
common stock on March 1, 1996, and reports of beneficial ownership filed by
directors and executive officers of registrant and by beneficial owners of
more than 5% of the outstanding shares of common stock of registrant;
however, such determination of shares owned by affiliates does not
constitute an admission of affiliate status or beneficial interest in
shares of registrant's common stock.
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MERCHANTS BANCORP, INC.
FORM 10-K
INDEX
PART I Page No.
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Item 1 Business 1 - 15
Item 2 Properties 16
Item 3 Legal Proceedings 16
Item 4 Submission of Matters to a Vote of Security
Holders 16
PART II
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Item 5 Market for the Registrant's Common Stock and
Related Security Holder Matters 17
Item 6 Selected Financial Data 17
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 8 Financial Statements and Supplementary Data 17
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 17
PART III
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Item 10 Directors and Executive Officers of the
Registrant 17 - 18
Item 11 Executive Compensation 18
Item 12 Security Ownership of Certain Beneficial
Owners and Management 18
Item 13 Certain Relationships and Related Transactions 18
PART IV
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Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 19 - 21
Signatures 22 - 23
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PART I
Item 1. BUSINESS
THE CORPORATION
OVERVIEW
Merchants Bancorp, Inc. (the "Corporation" or the "Registrant") was
organized under the laws of Delaware on July 1, 1981. It is a registered bank
holding company under the Bank Holding Company Act of 1956 (the "Act"). The
Corporation's office is located at 34 South Broadway, Aurora, Illinois 60507,
and its telephone number is 708/896-9000.
The Corporation conducts a full service community banking and trust
business through its wholly-owned subsidiary bank, The Merchants National Bank
of Aurora (the "Bank"), a national banking association with its main office
located at 34 South Broadway, Aurora, Illinois 60507. The Bank operates full
service banking facilities located at 2998 Ogden Avenue, Aurora, Illinois 60505,
1851 West Galena Boulevard, Aurora, Illinois 60506, One Merchants Plaza, Oswego,
Illinois 60543 and 55 Constitution Drive, Aurora, Illinois 60506. The Bank
operates loan production offices located at 3 North Smith Street, Aurora,
Illinois, 60507, and 520 Countryside Center, Yorkville, Illinois 60560. A new
full service facility located at 1771 Merchants Drive, Geneva, Illinois 60134
was under construction as of December 31, 1995, and opened in March 1996.
Aurora is located in the Fox River Valley approximately 40 miles west of
Chicago, Illinois. Aurora and its surrounding communities are in one of the
fastest growing areas in northeastern Illinois. Aurora's population based upon
the 1990 census was approximately 100,000, an increase of approximately 22% from
the community's population recorded in the 1980 census. The Northeastern
Illinois Planning Commission estimates that Aurora's population will grow by a
further 60% in the 1990's to almost 160,000 by the year 2000.
The major contributor to this growth in the Aurora area has been the
expansion of the boundaries of metropolitan Chicago. As the Chicago suburbs
have expanded, Aurora has experienced a considerable influx of people as well
as a number of new employers. The local economy has experienced growth as a new
service-oriented business sector has developed to supplement Aurora's historical
manufacturing base. Aurora is located on U.S. Interstate Highway 88 which
provides easy access to the city of Chicago and is a major corridor of suburban
growth for Chicago.
As a large, community-oriented, independent financial institution in the
Aurora area, the Corporation is well positioned to take advantage of the growth
of Aurora and its surrounding communities. The Bank has continuously served the
Aurora community since it was chartered in 1888. The Corporation's local
management, coupled with its long record of service, has allowed it to compete
successfully in Aurora's banking market. The Bank ranked first in total
deposits among banks headquartered in Aurora, with approximately 45% of
deposits, based on September 30, 1995, information from Sheshunoff Information
Services, Inc. The Corporation operates as a traditional community bank with
conveniently located facilities and a professional, highly motivated staff which
is active in the community, focuses on long-term relationships with customers
and provides individualized quality service.
On January 3, 1996, the Company acquired 100% of the outstanding common
stock of Valley Banc Services Corp. ("Valley") for cash in the amount of $20.5
million. The Company borrowed $14 million to finance the transaction, which was
accounted for using the purchase method. At December 31, 1995, Valley had total
consolidated assets of approximately $167 million. Valley's subsidiary banks are
Fox Valley Bank, St. Charles, Illinois; Hinckley State Bank, Hinckley, Illinois;
State Bank of Osco, Osco, Illinois; and Anchor Bank, Grayslake, Illinois.
Management is currently considering the sale of the smaller banks located in
Osco and Grayslake, as they may not fit into the geographic focus of the
organization.
SUBSIDIARY OPERATIONS
The Bank's full service banking business includes the customary consumer
and commercial products and services which banks provide, including the
following: demand, savings, time deposit, individual retirement and Keogh
deposit accounts; commercial, industrial, consumer and real estate lending,
including installment loans, student loans, farm loans, lines of credit and
overdraft checking; safe deposit operations; trust services; and an extensive
variety of additional services tailored to the needs of individual customers,
such as the acquisition of U.S. Treasury notes and bonds, the sale of traveler's
checks, money orders, cashier's checks and foreign currency, direct deposit,
discount brokerage debit cards, credit cards, and other special services.
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Commercial and consumer loans are made to corporations, partnerships and
individuals, primarily on a secured basis. The commercial loan department
focuses on business, capital, construction, inventory and real estate lending.
The installment loan department of the Bank makes direct and indirect loans to
consumers and commercial customers. The mortgage division originates and
services residential mortgages and handles the secondary marketing of those
mortgages.
MARKET AREA
The Bank's primary market area is Aurora, Illinois, and its surrounding
communities. The city of Aurora is located in northeastern Illinois,
approximately 40 miles west of Chicago. Strategically situated on U.S.
Interstate 88 (the East-West Tollway), Aurora is near the center of the four
county area comprised of DuPage, Kane, Kendall and Will counties. Based upon
the 1990 census, these counties together represent a market of more than 1.4
million people. The city of Aurora has a current reported population of
approximately 100,000 residents which is forecast by the Northeastern Illinois
Planning Commission to grow by more than 60% through the rest of the decade.
The median income for households within a five mile radius of Aurora was
approximately $44,000, compared to an Illinois average of approximately $32,000,
as reported from 1990 census data. Major employers in the Bank's market area
include AT&T Technologies, Caterpillar Tractor, Dial Corporation, Farmers
Insurance, Hyundai Motor America, Lyon Metal, Metropolitan Life, Nissan, and
Toyota. Retail sales declared for tax purposes in Aurora reached $989 million
in 1990.
ACQUISITION AND EXPANSION STRATEGY
The Corporation seeks to diversify both its market area and asset base
while increasing profitability through acquisitions and expansion. The
Corporation's goal, as reflected by its acquisition policy, is to expand through
the acquisition of established financial service organizations, primarily
commercial banks or thrifts, to the extent suitable candidates can be identified
and acceptable business terms negotiated.
The Corporation's acquisition strategy is focused on traditional community
banks or thrifts located in potentially high growth areas within 15 miles to the
east of Aurora and up to 30 miles from Aurora in all other directions. At this
time, a large number of such financial institutions are located within this
geographic area. It is possible that as a result of consolidation within the
banking industry generally, as well as in the Aurora area, the Corporation may
in the future look beyond these geographic areas for acquisition opportunities.
In addition to price and terms, other factors considered by the Corporation in
determining the desirability of an acquisition candidate are financial
condition, earnings potential, quality of management, market area and
competitive environment.
The Corporation will also consider establishing branches, loan production
offices or other business facilities as a means of expanding its presence in
current or new market areas. An example of this is the Corporation's entry into
"supermarket banking" with the opening of a branch inside the Cub Foods store in
Aurora in 1993, and the opening of two loan production offices in 1994. The
Corporation will also consider the expansion into other lines of business
closely related to banking if it believes these lines could be profitable
without undue risk to the Corporation and if the Corporation can be competitive.
OPERATING STRATEGY
Corporate policy, strategy and goals are established by the Board of
Directors of the Corporation. Pursuant to the Corporation's philosophy,
operational and administrative policies for the Bank are also established by the
Corporation. Within this framework, the Bank focuses on providing personalized
services and quality products to its customers to meet the needs of the
communities in which it operates.
Recognizing the substantial changes and growth opportunities in its market,
beginning in 1989, the Corporation redirected its existing resources and
personnel to create an aggressive sales environment within the organization. In
addition to promotions from within the organization, the Corporation hired
experienced senior bank executives who were already familiar with the Aurora
market area, with an emphasis on the commercial lending and trust areas. These
changes have allowed the Corporation to continue to grow with the community and
compete successfully in Aurora's banking market.
The Corporation operates as a traditional community bank with conveniently
located facilities and a professional, highly motivated staff which is active in
the community, focuses on long-term relationships with customers and provides
individualized quality service. As part of its community banking approach, the
Corporation encourages officers of the Bank to actively participate in community
organizations. In addition, within credit and rate of return parameters, the
Corporation attempts to ensure that the Bank meets the credit needs of its
communities and that the Bank invests in local municipal securities.
The Corporation uses a variety of marketing strategies to attract and
retain customers, the most important of which is its officer call program.
Officers of the Bank regularly call on customers and potential customers to
maintain and develop deposit and other special service relationships, including
payroll, discount brokerage, cash management, lock box and trust services.
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The Corporation has an internal data processing division and has attempted
to remain at the forefront of the banking industry in new technological
innovations. The Corporation believes that retaining control of its data
processing leads to decreased operating costs, more effective service to its
customers and increased efficiencies. To provide a high level of customer
service and to manage effectively its growth, acquisition and operating
strategies, the Bank also focuses on continued improvement of its internal
operating systems.
LENDING ACTIVITIES
GENERAL
The Bank provides a range of commercial and retail lending services to
corporations, partnerships and individuals, including, but not limited to,
commercial business loans, commercial and residential real estate construction
and mortgage loans, loan participations, consumer loans, revolving lines of
credit and letters of credit. The installment loan department of the Bank makes
direct and indirect loans to consumers and commercial customers, and the
mortgage division originates and services residential mortgages and handles the
secondary marketing of those mortgages.
The Bank aggressively markets its services to qualified lending customers
in both the commercial and consumer sectors. The Bank's commercial lending
officers actively solicit the business of new companies entering the Aurora
market as well as longstanding members of the Aurora business community.
Through personalized professional service and competitive pricing, the Bank has
been successful in attracting new commercial lending customers. At the same
time, the Bank actively advertises its consumer loan products and continuously
attempts to make its lending officers more accessible. Through convenient
locations and regular advertising, the Bank has been successful in capitalizing
on the growing population of its market area, particularly with regard to
residential mortgages, home equity loans and installment loans.
COMMERCIAL LOANS
The Bank aggressively seeks new commercial loans in its market area and
much of the increase in these loans in recent years can be attributed to the
successful solicitation of new business. The Bank's areas of emphasis include,
but are not limited to, loans to wholesalers, manufacturers, building
contractors, developers, business services companies and retailers. The Bank
provides a wide range of commercial business loans, including lines of credit
for working capital purposes and term loans for the acquisition of equipment and
other purposes. Collateral for these loans generally includes accounts
receivable, inventory, equipment and real estate. Loans may be made on an
unsecured basis where warranted by the overall financial condition of the
borrower. Terms of commercial business loans generally range from one to five
years. The majority of the Bank's commercial business loans have floating
interest rates or reprice within one year. Management has also generated loans
which are guaranteed by the U.S. Small Business Administration. Management
believes that making such loans helps the local community as well as providing
the Bank with a source of income and solid future lending relationships as such
businesses grow and prosper. The primary repayment risk for commercial loans is
the failure of the business due to economic or financial factors. In most
cases, the Bank has collateralized these loans and/or taken personal guarantees
to help assure repayment.
The Bank regularly provides financing to developers who have demonstrated a
favorable record of performance for the construction of pre-sold homes. Home
sales have remained very strong in the Aurora area due to the growth in
population. Although development and construction lending has been a
significant portion of the commercial loan department's activity, these types of
loans represented less than 13% of the outstanding balance of the Bank's loan
portfolio as of December 31, 1995. No construction or development loan was on
nonaccrual status as of December 31, 1995.
During recent years, the Bank has undertaken several initiatives to improve
asset quality. The Bank's Board of Directors reviews, on a monthly basis, a
report of all criticized assets and considers all requests for new loans over $3
million. Requests for new loans over $1 million are reviewed by a Directors'
loan committee. Loan review personnel and commercial lenders interact with the
Bank's Board of Directors each month. Management has attempted to identify
problem loans at an early stage and to aggressively seek a resolution of these
situations. The result has been a below average level of problem loans compared
to the Bank's industry peer group in recent years.
MORTGAGE BANKING
The Bank conducts a mortgage origination operation through its mortgage
division. Prior to 1993, the Bank generally did not hold newly originated
residential mortgage loans in its portfolio, preferring instead to originate the
loans for outside investors and have the outside investors fund and service the
loans. Beginning in 1993, the Bank began funding all residential mortgage loans
and selling the majority of them in the secondary market with servicing
retained. In addition, in June, 1993, the Bank purchased the servicing on most
of the residential mortgage loans it originated in prior periods. In 1995, the
Bank purchased the servicing rights to approximately $62.6 million of mortgage
loans. As a result of such actions, the Bank has built its mortgage servicing
portfolio to approximately $235 million at December 31, 1995. Management
believes that the retention of mortgage servicing provides the Bank with a
relatively steady source of fee income as compared to fees generated solely from
mortgage origination operations.
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CONSUMER LENDING
The Bank's consumer lending department provides all types of consumer loans
including motor vehicle, home improvement, home equity, student, signature and
small personal credit lines. The Bank has designated funds to support various
special programs to benefit the first time borrower. During 1994, the Bank
entered the credit card market by issuing its own Visa Card. The Bank has
entered into a contract with a non-affiliated third party to provide credit card
processing for its operations. Through this program, the Bank hopes to increase
profits and augment its cross-selling opportunities by increasing its marketing
base. The consumer lending department's newest project, "Phone for a Loan,"
will provide easy means for customers to apply for a loan 24 hours a day.
TRUST DEPARTMENT
The Bank's trust department has been providing trust services to the Aurora
community for over 60 years. Currently, the Bank has over $371 million of
assets under management and provides a full complement of trust services for
individuals and corporations. The Bank has targeted the trust department as one
of its primary areas for future growth.
To build on the trust department's mainstay of personal trust
administration, its current focus will be in two major areas: (i) investment
management for individuals and (ii) administration and investment services for
employee benefit plans. In late 1992 and early 1993, the trust department hired
a staff of professionals with expertise in the employee benefit administration
and new business development areas. This group provides expanded employee
benefit retirement plan administration and investment services to sole
proprietors and corporations. The trust department has also converted its data
processing and delivery system to enhance the department's ability to continue
to provide a quality, highly personalized trust product to its customers.
COMPETITION
The Corporation's market area is highly competitive. Many financial
institutions based in Aurora's surrounding communities and in Chicago, Illinois,
operate banking offices in Aurora or actively compete for customers within the
Corporation's market area. The Bank also faces competition from finance
companies, insurance companies, mortgage companies, securities brokerage firms,
money market funds, loan production offices and other providers of financial
services.
The Corporation competes for loans principally through the range and
quality of the services it provides, interest rates and loan fees. The
Corporation believes that its long-standing presence in the community and
personal service philosophy enhances its ability to compete favorably in
attracting and retaining individual and business customers. The Corporation
actively solicits deposit-related clients and competes for deposits by offering
customers personal attention, professional service and competitive interest
rates.
EMPLOYEES
At December 31, 1995, the Corporation employed 261 full-time equivalent
employees. The Corporation places a high priority on staff development which
involves extensive training, including customer service training. New employees
are selected on the basis of both technical skills and customer service
capabilities. None of the Corporation's employees are covered by a collective
bargaining agreement with the Corporation. The Corporation offers a variety of
employee benefits and management considers its employee relations to be
excellent.
SUPERVISION AND REGULATION
GENERAL
The growth and earnings performance of the Corporation can be affected not
only by management decisions and general economic conditions, but also by the
policies of various governmental regulatory authorities including, but not
limited to, the Board of Governors of the Federal Reserve System (the "FRB"),
the Office of the Comptroller of the Currency (the "OCC"), the Federal Deposit
Insurance Corporation (the "FDIC"), the Internal Revenue Service and state
taxing authorities and the Securities and Exchange Commission (the "SEC").
Financial institutions and their holding companies are extensively regulated
under federal and state law. The effect of such statutes, regulations and
policies can be significant, and cannot be predicted with a high degree of
certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Corporation and its subsidiaries, regulate, among
other things, the scope of business, investments, reserves against deposits,
capital levels relative to operations, the nature and amount of collateral for
loans, the establishment of branches, mergers, consolidations and dividends. The
system of supervision and regulation applicable to the Corporation and its
subsidiaries establishes a comprehensive framework for their respective
operations and is intended primarily for the protection of the FDIC's deposit
insurance funds and the depositors, rather than the shareholders, of financial
institutions.
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The following references to material statutes and regulations affecting the
Corporation and its subsidiaries are brief summaries thereof and do not purport
to be complete, and are qualified in their entirety by reference to such
statutes and regulations. Any change in applicable law or regulations may have
a material effect on the business of the Corporation and its subsidiaries.
RECENT REGULATORY DEVELOPMENTS
On August 8, 1995, the FDIC amended its regulations to change the range of
deposit insurance assessments charged to members of the Bank Insurance Fund (the
"BIF"), such as the Bank, from the then-prevailing range of 0.23% to 0.31% of
deposits, to a range of 0.04% to 0.31% of deposits. Additionally, because the
change in BIF-assessments was applied retroactively to June 1, 1995, BIF-member
institutions, including the Bank, received a refund of the difference between
the amount of assessments previously paid at the higher assessment rates for the
period from June 30, 1995 through September 30, 1995, and the amount that would
have been paid for that period at the new rates. In the case of the Bank, this
refund totalled $255,000. The FDIC did not, however, change the assessment
rates charged to members of the Savings Association Insurance Fund (the "SAIF"),
and SAIF-insured institutions continue to pay assessments ranging from 0.23% to
0.31% of deposits.
The deposit insurance assessments paid by BIF-member institutions will
decrease further in calendar year 1996. On November 14, 1995, the FDIC reduced
the deposit insurance assessments for BIF-member institutions by four basis
points. As a result, the range of BIF assessments for the semi-annual
assessment period commencing January 1, 1996 will be between 0% and 0.27% of
deposits. BIF-member institutions which qualify for the 0% assessment category
will, however, still have to pay the $1000 minimum semi-annual assessment
required by federal statute.
The FDIC was able to change the range for BIF-member deposit insurance
assessments to their current levels because the ratio of the insurance reserves
of the BIF to total BIF-insured deposits exceeds the statutorily designated
reserve ratio of 1.25%. Because the SAIF does not meet this designated reserve
ratio, the FDIC is prohibited by federal law from reducing the deposit insurance
assessments charged to SAIF-member institutions to the same levels currently
charged BIF-member institutions. Legislative proposals pending before the
Congress would recapitalize the SAIF to the designated reserve ratio by imposing
a special assessment against SAIF-insured institutions. In conjunction with the
proposed recapitalization of the SAIF, legislation has also been introduced in
the Congress that would, among other things, require federal thrift institutions
to convert to state or national banks and merge the BIF and the SAIF into a
single deposit insurance fund administered by the FDIC. At this time, it is not
possible to predict whether, or in what form, any such legislation will be
adopted or the impact, if any, such legislation would have on the Corporation
and the Bank.
THE CORPORATION
GENERAL. The Corporation, as the sole shareholder of the Bank, is a bank
holding company. As a bank holding company, the Corporation is registered with,
and is subject to regulation by, the FRB under the Bank Holding Company Act, as
amended (the "BHC Act"). In accordance with FRB policy, the Corporation is
expected to act as a source of financial strength to the Bank and to commit
resources to support the Bank in circumstances where the Corporation might not
do so absent such policy. Under the BHC Act, the Corporation is subject to
periodic examination by the FRB and is required to file periodic reports of its
operations and such additional information as the FRB may require.
INVESTMENTS AND ACTIVITIES. Under the BHC Act, a bank holding company must
obtain FRB approval before: (i) acquiring, directly or indirectly, ownership or
control of any voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company.
Prior to September 29, 1995, the BHC Act prohibited the FRB from approving
any direct or indirect acquisition by a bank holding company of more than 5% of
the voting shares, or of all or substantially all of the assets, of a bank
located outside of the state in which the operations of the bank holding
company's banking subsidiaries are principally located unless the laws of the
state in which the bank to be acquired is located specifically authorize such an
acquisition. Pursuant to amendments to the BHC Act which took effect September
29, 1995, the FRB may now allow a bank holding company to acquire banks located
in any state of the United States without regard to geographic restrictions or
reciprocity requirements imposed by state law, but subject to certain
conditions, including limitations on the aggregate amount of deposits that may
be held by the acquiring holding company and all of its insured depository
institution affiliates.
The BHC Act also prohibits, with certain exceptions noted below, the
Corporation from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank and from engaging in
any business other than that of banking, managing and controlling banks or
furnishing services to banks and their subsidiaries, except that bank holding
companies may engage in, and may own shares of companies engaged in, certain
businesses found by the FRB to be "so closely related to banking ... as to be a
proper incident thereto." Under current regulations of the FRB, the Corporation
and its non-bank subsidiaries are permitted to engage in, among other
activities, such banking-related businesses as the operation of a thrift, sales
and consumer finance, equipment leasing, the
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operation of a computer service bureau, including software development, and
mortgage banking and brokerage. The BHC Act does not place territorial
restrictions on the activities of non-bank subsidiaries of bank holding
companies.
Federal legislation also prohibits the acquisition of "control" of a bank
or bank holding company, such as the Corporation, without prior notice to
certain federal bank regulators. "Control" is defined in certain cases as the
acquisition of 10% of the outstanding shares of a bank or bank holding company.
CAPITAL REQUIREMENTS. The FRB uses capital adequacy guidelines in its
examination and regulation of bank holding companies. If capital falls below
minimum guideline levels, a bank holding company, among other things, may be
denied approval to acquire or establish additional banks or non-bank businesses.
The FRB's capital guidelines establish the following minimum regulatory
capital requirements for bank holding companies: a risk-based requirement
expressed as a percentage of total risk-weighted assets, and a leverage
requirement expressed as a percentage of total assets. The risk-based
requirement consists of a minimum ratio of total capital to total risk-weighted
assets of 8%, of which at least one-half must be Tier 1 capital (which consists
principally of stockholders' equity). The leverage requirement consists of a
minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated
companies, with minimum requirements of 4% to 5% for all others.
The risk-based and leverage standards presently used by the FRB are minimum
requirements, and higher capital levels will be required if warranted by the
particular circumstances or risk profiles of individual banking organizations.
Further, any banking organization experiencing or anticipating significant
growth would be expected to maintain capital ratios, including tangible capital
positions (i.e., Tier 1 capital less all intangible assets), well above the
minimum levels.
As of December 31, 1995, the Corporation had regulatory capital in excess
of the FRB's minimum requirements, with a total risk-based capital ratio of
15.79% and a leverage ratio of 10.31%.
DIVIDENDS. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies. In the policy statement, the FRB expressed
its view that a bank holding company experiencing earnings weaknesses should not
pay cash dividends exceeding its net income or which could only be funded in
ways that weakened the bank holding company's financial health, such as by
borrowing. Additionally, the FRB possesses enforcement powers over bank holding
companies and their non-bank subsidiaries to prevent or remedy actions that
represent unsafe or unsound practices or violations of applicable statutes and
regulations. Among these powers is the ability to proscribe the payment of
dividends by banks and bank holding companies.
In addition to the restrictions on dividends imposed by the FRB, the
Delaware General Corporation Law would allow the Corporation to pay dividends
only out of its surplus, or if the Corporation has no such surplus, out of its
net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year.
FEDERAL SECURITIES REGULATION. The Corporation's common stock is
registered with the SEC under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Consequently,
the Corporation is subject to the information, proxy solicitation, insider
trading and other restrictions and requirements of the SEC under the Exchange
Act.
THE BANK
GENERAL. The Bank is a national bank, chartered by the OCC under the
National Bank Act. The deposit accounts of the Bank are insured by the BIF of
the FDIC, and the Bank is a member of the Federal Reserve System. As a BIF-
insured national bank, the Bank is subject to the examination, supervision,
reporting and enforcement requirements of the OCC, as the chartering authority
for national banks, and the FDIC, as administrator of the BIF.
DEPOSIT INSURANCE. As an FDIC-insured institution, the Bank is required to
pay deposit insurance premium assessments to the FDIC. The amount each
institution pays for FDIC deposit insurance coverage is determined in accordance
with a risk-based assessment system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums based upon their level of capital and supervisory evaluation.
Institutions classified as well-capitalized (as defined by the FDIC) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. For the semi-annual assessment
period ended December 31, 1995, BIF assessments ranged from 0.04% to 0.31% of
deposits. Risk classification of all insured institutions is made by the FDIC
for each semi-annual assessment period.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, order, or any condition imposed in writing by, or written agreement
with, the FDIC. The FDIC
6
<PAGE>
may also suspend deposit insurance temporarily during the hearing process for a
permanent termination of insurance if the institution has no tangible capital.
Management of the Corporation is not aware of any activity or condition that
could result in termination of the deposit insurance of the Bank.
CAPITAL REQUIREMENTS. The OCC has established the following minimum
capital standards for national banks, such as the Bank: a leverage requirement
consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the
most highly-rated banks with minimum requirements of 4% to 5% for all others,
and a risk-based capital requirement consisting of a minimum ratio of total
capital to total risk-weighted assets of 8%, at least one-half of which must be
Tier 1 capital.
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, the regulations of the
OCC provide that additional capital may be required to take adequate account of
the risks posed by concentrations of credit, nontraditional activities and the
institution's ability to manage such risks. Additionally, on August 2, 1995, the
federal banking regulators, including the OCC, published amendments to their
respective risk-based capital standards designed to take into account interest
rate risk ("IRR") exposure. The amendments provide that a bank's exposure to
declines in the economic value of its capital due to changes in interest rates
will be among the factors considered by the agencies in evaluating a bank's
capital adequacy. Management does not anticipate that this amendment will
adversely affect the ability of the Bank to maintain compliance with applicable
capital requirements.
During the year ended December 31, 1995, the Bank was not required by the
OCC to increase its capital to an amount in excess of the minimum regulatory
requirements. As of December 31, 1995, the Bank exceeded its minimum regulatory
capital requirements with a risk-based ratio of 12.87% and a leverage ratio of
8.27%.
Federal law provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," as defined by regulation. Depending upon the capital category
to which an institution is assigned, the regulators' corrective powers include:
requiring the submission of a capital restoration plan; placing limits on asset
growth and restrictions on activities; requiring the institution to issue
additional capital stock (including additional voting stock) or to be acquired;
restricting transactions with affiliates; restricting the interest rate the
institution may pay on deposits; ordering a new election of directors of the
institution; requiring that senior executive officers or directors be dismissed;
prohibiting the institution from accepting deposits from correspondent banks;
requiring the institution to divest certain subsidiaries; prohibiting the
payment of principal or interest on subordinated debt; and ultimately,
appointing a receiver for the institution.
DIVIDENDS. The National Bank Act imposes limitations on the amount of
dividends that a national bank, such as the Bank, may pay without prior
regulatory approval. Generally, the amount is limited to the national bank's
current year's net earnings plus the adjusted retained earnings for the two
preceding years.
The payment of dividends by any financial institution or its holding
company is affected by the requirement to maintain adequate capital pursuant to
applicable capital adequacy guidelines and regulations. As described above, the
Corporation and the Bank each exceeded its minimum capital requirements under
applicable guidelines as of December 31, 1995. As of January 1, 1996,
approximately $12 million was available to be paid as dividends to the
Corporation by the Bank.
INSIDER TRANSACTIONS. The Bank is subject to certain restrictions imposed
by the Federal Reserve Act on any extensions of credit to the Corporation and
its subsidiaries, on investments in the stock or other securities of the
Corporation and its subsidiaries and the acceptance of the stock or other
securities of the Corporation or its subsidiaries as collateral for loans.
Certain limitations and reporting requirements are also placed on extensions of
credit by the Bank to its directors and officers, to directors and officers of
the Corporation and its subsidiaries, to principal stockholders of the
Corporation, and to "related interests" of such directors, officers and
principal stockholders. In addition, such legislation and regulations may
affect the terms upon which any person becoming a director or officer of the
Corporation or one of its subsidiaries or a principal stockholder of the
Corporation may obtain credit from banks with which the Bank maintains a
correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS. On July 10, 1995, the federal banking
regulators, including the OCC, published final guidelines establishing
operational and managerial standards to promote the safety and soundness of
federally insured depository institutions. The guidelines, which took effect on
August 9, 1995, establish standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, and compensation, fees and benefits. In general, the
guidelines prescribe the goals to be achieved in each area, and each institution
will be responsible for establishing its own procedures to achieve those goals.
If an institution fails to comply with any of the standards set forth in the
guidelines, the institution's primary federal regulator may require the
institution to submit a plan for achieving and maintaining compliance. The
preamble to the guidelines states that the agencies expect to require a
compliance plan from an institution whose failure to meet one or more of the
standards is of such severity that it could threaten the safe and sound
operation of the institution. Failure to submit an acceptable compliance plan,
or failure to adhere to a compliance
7
<PAGE>
plan that has been accepted by the appropriate regulator, would constitute
grounds for further enforcement action. The federal banking agencies have also
published for comment proposed asset quality and earnings standards which, if
adopted, would be added to the safety and soundness guidelines. This proposal,
like the final guidelines, would establish the goals to be achieved with respect
to asset quality and earnings, and each institution would be responsible for
establishing its own procedures to meet such goals.
BRANCHING AUTHORITY. Illinois-chartered banks have the authority under
Illinois law to establish branches any where in the State of Illinois, subject
to receipt of all required regulatory approvals. Federal law grants the same
branching authority to national banks, such as the Bank, which are headquartered
in Illinois. Effective June 1, 1997 (or earlier if expressly authorized by
applicable state law), the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act") allows banks to establish
interstate branch networks through acquisitions of other banks, subject to
certain conditions, including certain limitations on the aggregate amount of
deposits that may be held by the surviving bank and all of its insured
depository institution affiliates. The establishment of DE NOVO interstate
branches or the acquisition of individual branches of a bank in another state
(rather than the acquisition of an out-of-state bank in its entirety) is allowed
by the Riegle-Neal Act only if specifically authorized by state law. The
legislation allows individual states to "opt-out" of certain provisions of the
Riegle-Neal Act by enacting appropriate legislation prior to June 1, 1997.
Illinois has enacted legislation permitting interstate bank mergers beginning on
June 1, 1997.
STATISTICAL DATA
The statistical data required by Guide 3 of the Guides for Preparation and
Filing of Reports and Registration Statements under the Securities Exchange Act
of 1934 is set forth in the following pages. This data should be read in
conjunction with the consolidated financial statements, related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" as set forth in the 1995 Annual Report herein incorporated by
reference (attached hereto as Exhibit 13). All dollars int he tables are
expressed in thousands.
8
<PAGE>
The following table sets forth certain information relating to the
Corporation's average consolidated balance sheets and reflects the yield on
average earning assets and cost of average liabilities for the years indicated.
Such yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities. Average balances are derived from daily
balances.
ANALYSIS OF AVERAGE BALANCES,
TAX EQUIVALENT INTEREST AND RATES
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------- --------------------------- ----------------------------
Average Rate Average Rate Average Rate
Balance Interest (%) Balance Interest (%) Balance Interest (%)
-------- -------- ----- -------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Securities:
Taxable $128,963 $ 8,123 6.23 $105,681 $ 5,851 5.64 $ 82,919 $ 5,099 6.15
Non-taxable (tax equivalent) 51,042 4,264 8.37 46,285 4,005 8.62 35,075 3,223 9.19
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total securities 180,005 12,387 6.83 151,966 9,856 7.05 117,994 8,322 7.05
Federal funds sold 11,883 732 6.16 1,584 79 4.99 6,127 183 2.99
Loans held for sale 2,408 224 9.30 4,089 207 5.06 4,290 262 6.11
Net loans (tax equivalent) 291,181 28,034 9.63 278,819 24,476 8.78 256,888 21,897 8.52
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest earning assets 485,477 41,377 8.50 436,458 34,618 7.96 385,299 30,664 7.96
Cash and due from banks 25,376 - - 28,676 - - 28,911 - -
Allowance for loan losses (5,314) - - (5,089) - - (4,643) - -
Premises and equipment, net 9,353 - - 9,110 - - 8,032 - -
Accrued interest and other assets 6,543 - - 6,094 - - 5,413 - -
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total assets $521,435 41,377 7.91 $475,249 34,618 7.31 $423,012 30,664 7.25
-------- ------- ------ -------- ------- ------ -------- ------- ------
-------- -------- --------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing deposits:
NOW accounts $ 66,687 1,571 2.36 $ 70,565 1,577 2.23 $ 66,365 1,650 2.49
Money market accounts 31,604 1,138 3.60 33,196 885 2.67 34,379 924 2.69
Savings 54,263 1,480 2.73 57,567 1,527 2.65 50,109 1,385 2.76
Time, $100,000 and over 59,964 3,323 5.54 43,246 1,922 4.44 32,952 1,411 4.28
Other time 153,214 8,988 5.87 119,839 5,880 4.91 109,132 5,397 4.95
Federal funds purchased and
securities sold under
repurchase agreements 32,848 1,776 5.41 34,166 1,285 3.76 23,360 750 3.21
Notes payable 3,000 147 4.90 3,104 152 4.90 3,167 164 5.18
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest bearing liabilities 401,580 18,423 4.59 361,683 13,228 3.66 319,464 11,681 3.66
Noninterest bearing deposits 69,167 - - 67,947 - - 69,109 - -
Accrued interest and other liabilities 2,406 - - 1,552 - - 1,605 - -
Stockholders' equity 48,282 - - 44,067 - - 32,834 - -
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total liabilities and
stockholders' equity $521,435 18,423 3.53 $475,249 13,228 2.78 $423,012 11,681 2.76
-------- ------- ------ -------- ------- ------ -------- ------- ------
-------- -------- --------
Net interest income (tax equivalent) $22,954 $21,390 $18,983
------- ------- -------
------- ------- -------
Net interest income (tax equivalent)
to total earning assets 4.73 4.92 4.93
------ ------ ------
------ ------ ------
Interest bearing liabilities to
earnings assets 82.72% 82.87% 82.91%
-------- -------- --------
-------- -------- --------
</TABLE>
Notes: Nonaccrual loans are included in the above stated average balances.
Tax equivalent basis is calculated using a marginal tax rate of 34%.
Yields on securities available for sale are based on amortized cost.
9
<PAGE>
The following table allocates the changes in net interest income to changes in
either average balances or average rates for earnings assets and interest
bearing liabilities. The changes in interest due to both volume and rate have
been allocated proportionately to the change due to balance and due to rate.
Interest income is measured on a tax equivalent basis using a 34% rate.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
1995 Compared to 1994 1994 Compared to 1993
-------------------------- --------------------------
Change Due to Change Due to
---------------- ----------------
Volume Rate Net Volume Rate Net
------ ------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS/INTEREST INCOME
Securities:
Taxable $1,398 $ 874 $2,272 $1,297 $(545) $ 752
Tax-exempt 402 (143) 259 979 (197) 782
Federal funds sold 631 22 653 (184) 80 (104)
Loans and loans held for sale 1,010 2,565 3,575 1,898 626 2,524
------ ------ ------ ------ ----- ------
TOTAL EARNING ASSETS 3,441 3,318 6,759 3,990 (36) 3,954
------ ------ ------ ------ ----- ------
LIABILITIES/INTEREST EXPENSE
Interest bearing deposits:
NOW accounts (90) 84 (6) 100 (173) (73)
Money market accounts (44) 297 253 (32) (7) (39)
Savings (89) 42 (47) 200 (58) 142
Time, $100,000 and over 855 546 1,401 456 55 511
Other time 1,826 1,282 3,108 526 (43) 483
Federal funds purchased and securities
sold under repurchase agreements (52) 543 491 390 145 535
Notes payable (5) - (5) (3) (9) (12)
------ ------ ------ ------ ----- ------
TOTAL INTEREST BEARING LIABILITIES 2,401 2,794 5,195 1,637 (90) 1,547
------ ------ ------ ------ ----- ------
NET INTEREST INCOME $1,040 $ 524 $1,564 $2,353 $ 54 $2,407
------ ------ ------ ------ ----- ------
------ ------ ------ ------ ----- ------
</TABLE>
10
<PAGE>
Differences in the repricing dates of assets and liabilities are a primary
component of risk to net interest income. A positive sensitivity gap implies
that net interest income will increase as interest rates increase and decline
as interest rates decline, assuming other factors remain unchanged. The
repricing gap of earning assets and interest bearing liabilities as of December
31, 1995, is as follows:
INTEREST SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
0-3 Months 4-12 Months 1-5 Years Over 5 Years Total
----------- ----------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
EARNING ASSETS:
Securities $29,977 $33,856 $81,881 $41,455 $187,169
Loans held for sale 4,340 - - - 4,340
Total loans 144,415 41,322 68,600 49,990 304,327
-------- -------- -------- ------- --------
TOTAL EARNING ASSETS $178,732 $ 75,178 $150,481 $91,445 $495,836
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
INTEREST BEARING LIABILITIES:
Interest-bearing deposits:
NOW accounts $ 63,027 $ - $ - $ - $63,027
Money market accounts 33,808 - - - 33,808
Savings 51,935 - - - 51,935
Time, $100,000 and over 24,089 23,241 15,298 - 62,628
Other time 34,395 48,590 83,380 - 166,365
-------- -------- -------- ------- --------
TOTAL INTEREST BEARING DEPOSITS 207,254 71,831 98,678 - 377,763
Federal funds purchased and securities
sold under repurchase agreements 9,969 12,757 - - 22,726
Note payable 3,000 - - - 3,000
-------- -------- -------- ------- --------
TOTAL INTEREST BEARING LIABILITIES $220,223 $ 84,588 $ 98,678 $ - $403,489
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
Interest sensitivity gap $(41,491) $ (9,410) $51,803 $91,445 $ 92,347
Cumulative gap (41,491) (50,901) 902 92,347 92,347
Interest sensitivity gap to total assets -7.7% -1.7% 9.6% 16.9% 17.1%
Cumulative sensitivity gap to total assets -7.7% -9.4% 0.2% 17.1% 17.1%
</TABLE>
Note: Callable investment securities are reported at the earlier of
maturity or call date.
Loans are placed in the earliest time frame in which maturity or
repricing may occur.
The following table presents the composition of the securities portfolio by
major category as of December 31, of each year indicated:
SECURITIES PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
1995 1994 1993
------------------- ------------------- -------------------
% of % of % of
Amount Portfolio Amount Portfolio Amount Portfolio
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE OR HELD FOR SALE
U.S. Treasury securities $ 24,860 13.28% $ 29,854 17.90% $ 23,569 16.69%
U.S. government agencies 53,481 28.57 41,540 24.90 45,717 32.36
U.S. government agency mortgage backed securities 45,175 24.14 37,243 22.32 23,325 16.51
States and political subdivisions 51,820 27.69 10,400 6.23 10,615 7.51
Collateralized mortgage obligations 9,960 5.32 7,503 4.50 1,498 1.06
Equity securities 1,873 1.00 1,786 1.07 1,560 1.11
-------- ------ -------- ------ -------- ------
187,169 100.00 128,326 76.92 106,284 75.24
-------- ------ -------- ------ -------- ------
SECURITIES HELD TO MATURITY
States and political subdivisions - - 38,505 23.08 34,980 24.76
-------- ------ -------- ------ -------- ------
Total $187,169 100.00% $166,831 100.00% $141,264 100.00%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
</TABLE>
Mortgage-backed securities are comprised of investments in pools of residential
mortgages. The mortgage pools are issued and guaranteed by the Federal Home
Loan Mortgage Corporation ("FHLMC"), the Government National Mortgage
Association ("GNMA"), or the Federal National Mortgage Association ("FNMA").
Collateralized mortgage obligations are secured by FHLMC, GNMA, or FNMA
certificates.
11
<PAGE>
As of December 31, 1995, and 1994, the Corporation held structured notes, which
were in the available for sale category, carried ar fair values of $6,415,000
and $10,569,000, respectively. The amortized cost of these securities was
$6,462,000 and $11,536,000 as of December 31, 1995, and 1994, respectively.
These securities were issued by the FHLB, the FNMA, and the Student Loan
Marketing Association.
The following table presents the maturities and weighted average yield of
securities by major category as of December 31, 1995. Yields are calculated on
a tax equivalent basis using a 34% rate.
SECURITIES PORTFOLIO - MATURITY AND YIELDS
<TABLE>
<CAPTION>
After One But After Five But
Within Within Within After
One Year Five Years Ten Years Ten Years Total
--------------- -------------- --------------- -------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- ------- ----- ------- ----- ------- ----- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities $ 9,601 4.70% $15,259 5.08% $ - -% $ - -% $ 24,860 4.93%
U.S. government agencies 5,563 6.68 24,342 6.42 22,572 6.68 1,004 7.00 53,481 6.57
U.S. government agency
mortgage backed securities 546 8.00 4,563 6.26 14,508 6.27 25,558 7.07 45,175 6.74
States and political subdivisions 868 5.51 7,510 5.96 38,220 5.40 5,222 5.27 51,820 5.47
Collateralized mortgage obligations - - 983 5.52 2,028 5.71 6,949 6.19 9,960 6.03
Equity securities 1,873 5.94 - - - - - - 1,873 5.94
------- ---- ------- ---- ------- ---- ------- ---- -------- ----
Total $18,451 5.56% $52,657 5.94% $77,328 5.95% $38,733 6.67% $187,169 6.05%
------- ---- ------- ---- ------- ---- ------- ---- -------- ----
------- ---- ------- ---- ------- ---- ------- ---- -------- ----
</TABLE>
As of December 31, 1993, the Corporation implemented Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Under this standard, securities available for sale are
carried at market value, with related unrealized gains or losses, net of
deferred income taxes, recorded as an adjustment to equity capital. As of
December 31, 1995, net unrealized gains of approximately $2.2 million, reduced
by deferred income taxes of approximately $747,000, resulted in an increase in
equity capital of approximately $1.5 million. As of December 31, 1994, net
unrealized losses of approximately $6.2 million, reduced by deferred income
taxes of $2.1 million, resulted in an increase in equity capital of
approximately $4.1 million.
As permitted by "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities," the Company exercised a one
time opportunity to reassess the appropriateness of the classifications of all
securities held. Based on this review, in order to enhance liquidity and tax
planning opportunities, the Company reclassified securities having an amortized
cost of $39,664,000 and a net unrealized gain of $1,461,000 at Decemebr 15,
1995 from held to maturity to available for sale.
There were no significant concentrations of investments (greater than 10% of
the Company's stockholders' equity) in any individual security issue except for
U.S. Treasury securities and obligations of U.S. government agencies and
corporations. Although the Corporation held securities issued by municipalities
within the states of Illinois and Wisconsin which in the aggregate exceeded 10%
of stockholders' equity, none of the holdings from individual municipal issuers
exceeded this threshold.
12
<PAGE>
The following table presents the composition of the loan portfolio at December
31, in the years indicated:
LOAN PORTFOLIO
<TABLE>
1995 1994 1993 1992 1991*
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $109,872 $112,828 $104,711 $103,265 $100,328
Real estate - commercial 67,739 72,305 53,334 33,149 *
Real estate - construction 40,510 24,470 35,249 22,873 14,355
Real estate - residential 31,673 19,549 11,356 7,796 23,562
Installment 50,489 53,806 73,861 78,416 76,504
Credit card receivables 5,644 4,119 - - -
Other loans 455 937 293 438 799
-------- -------- -------- -------- --------
Gross loans 306,382 288,014 278,804 245,937 215,548
Unearned discount (1,743) (2,054) (3,807) (5,849) (6,369)
Deferred loan fees (312) (387) (330) (111) (97)
-------- -------- -------- -------- --------
Total loans 304,327 285,573 274,667 239,977 209,082
Allowance for loan losses (5,176) (5,140) (4,705) (4,161) (2,879)
-------- -------- -------- -------- --------
Loans, net $299,151 $280,433 $269,962 $235,816 $206,203
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
* Real estate - construction loans were previously included in commercial and
industrial loans. Real estate - residential was previously called real
estate - mortgage, and included commercial mortgages.
The following table sets forth the remaining maturities for certain loan
categories at December 31, 1995, based on contractual maturities:
MATURITY AND RATE SENSITIVITY OF LOANS
<TABLE>
Over 1 Year
Through 5 Years Over 5 Years
------------------- -----------------
One Year Fixed Floating Fixed Floating
or Less Rate Rate Rate Rate Total
-------- -------- -------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial $ 47,968 $37,163 $19,788 $ 457 $4,191 $109,567
Real estate - commercial 15,442 40,705 9,355 633 1,604 67,739
Real estate - construction 31,742 1,754 7,014 - - 40,510
Real estate - residential 1,248 4,741 19,706 5,928 28 31,651
Installment 35,667 12,111 595 382 6 48,761
Credit card receivables 5,644 5,644
Other loans 455 - - - - 455
-------- ------- ------- ------ ------ --------
Total $138,166 $96,474 $56,458 $7,400 $5,829 $304,327
-------- ------- ------- ------ ------ --------
-------- ------- ------- ------ ------ --------
</TABLE>
The following table sets forth the amounts of nonperforming assets at December
31, of the years indicated:
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $1,135 $1,397 $1,956 $2,065 $2,089
Loans past due 90 days or more
and still accruing interest - - - - -
Restructured loans 1,047 2,102 - - -
------ ------ ------ ------ ------
Total nonperforming loans 2,182 3,499 1,956 2,065 2,089
Other real estate 566 845 223 164 770
------ ------ ------ ------ ------
Total nonperforming assets $2,748 $4,344 $2,179 $2,229 $2,859
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
Other problem assets - At December 31, 1995, there were no classified assets,
other than the loans shown above.
During 1994, the Bank agreed to modify the terms of three loans to one borrower
totalling $3,077,000. Under the modified terms, the Bank accepted a parcel of
real estate in partial settlement and rewrote the remaining loan balances into
two notes which had a total carrying value
13
<PAGE>
of $2,028,000 at December 31, 1994, and fixed interest rates of 8.5% on each
note, which was the market rate of interest for similar borrowers at the
restructure date. Both notes were performing as modified at December 31, 1995,
and totaled $1,047,000. These modifications resulted in a $168,000 loss charged
to the allowance for loan losses in 1994. No interest income was recognized on
the loan in 1994 prior to the modifications. After the restructuring, interest
income recorded on the restructured loans was $129,000 for 1994 and $110,000 in
1995.
At December 31, 1995, the balances of the impaired loans and the portion of the
allowance for loan losses allocated to the impaired loan balances amounted to
$921,000 and $631,000, respectively. Impaired loans averaged $2,378,000 for the
year ended December 31, 1995. Interest income recognized on impaired loans for
the year approximated $305,000, which included cash basis income of
approximately $302,000.
Accrual of interest is discontinued on a loan when principal or interest is
ninety days or more past due, unless the loan is well secured and in the
process of collection. When a loan is placed on nonaccrual status, interest
previously accrued but not collected in the current period is reversed against
current period interest income. Interest accrued in prior years but not
collected is charged against the allowance for possible loan losses.
Interest income of approximately $83,000 was recorded during 1995 on loans in
nonaccrual status at December 31, 1995. Interest income which would have been
recognized during 1995 had these loans been on an accrual basis throughout the
year was approximately $167,000.
The following table summarizes, for the years indicated, activity in the
allowance for loan losses, including amounts charged off, amounts of
recoveries, additions to the allowance charged to operating expense, and the
ratio of net charge-offs to average loans outstanding:
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Average total loans (exclusive of loans held for sale) $291,181 $278,819 $256,888 $221,762 $196,634
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Allowance at beginning of year $ 5,140 $ 4,705 $ 4,161 $ 2,879 $ 2,600
Charge-offs:
Commercial and industrial 1,248 1,321 839 938 1,248
Real estate - commercial 272 393 375 374 182
Real estate - construction - 20 - - -
Real estate - residential - 150 * * *
Installment and other loans 993 1,058 1,367 1,187 1,208
-------- -------- -------- -------- --------
Total charge-offs 2,513 2,942 2,581 2,499 2,638
-------- -------- -------- -------- --------
Recoveries:
Commercial and industrial 223 384 147 372 706
Real estate - commercial 83 236 147 50 -
Real estate - construction - - - - -
Real estate - residential - 13 * * *
Installment and other loans 460 446 408 297 261
-------- -------- -------- -------- --------
Total recoveries 766 1,079 702 719 967
-------- -------- -------- -------- --------
Net charge-offs 1,747 1,863 1,879 1,780 1,671
Provision for loan losses 1,783 2,298 2,423 3,062 1,950
-------- -------- -------- -------- --------
Allowance at end of period $ 5,176 $ 5,140 $ 4,705 $ 4,161 $ 2,879
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net charge-offs to average loans 0.60% 0.67% 0.73% 0.80% 0.85%
Allowance at year end to average loans 1.78% 1.84% 1.83% 1.88% 1.46%
</TABLE>
* Charge-offs and recoveries of real estate - residential loans are reported
above in real estate - commercial for years prior to 1994.
The provision for loan losses is based upon management's estimate of
anticipated loan losses and its evaluation of the adequacy of the allowance for
loan losses. Factors which influence management's judgement in estimating loan
losses are the composition of the portfolio, past loss experience, loan
delinquencies, nonperforming loans, and other factors that, in management's
judgment, deserve evaluation in estimating loan losses.
14
<PAGE>
The following table shows the Corporation's allocation of the allowance for loan
losses by types of loans and the amount of unallocated allowance, at December
31, of the years indicated:
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------------------ ----------------- ----------------- ----------------- -----------------
Loan Type Loan Type Loan Type Loan Type Loan Type
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ---------- ------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial $3,441 36.1% $3,227 39.2% $3,369 37.6% $2,874 42.0% $1,404 46.5%
Real estate - commercial 152 22.3 199 25.1 213 19.1 26 13.5 38 6.6
Real estate - construction 193 13.3 193 8.5 70 12.6 32 9.3 23 -
Real estate - residential 135 10.4 55 6.8 - 4.1 - 3.2 - 11.0
Installment and other loans 594 17.9 865 20.4 966 26.6 923 32.0 1,242 35.9
Unallocated 661 601 87 306 172
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $5,176 100.0% $5,140 100.0% $4,705 100.0% $4,161 100.0% $2,879 100.0%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
</TABLE>
Notes: Allocations of the allowance for loan losses for real estate -
residential loans are reported above in real estate - commercial for
years prior to 1994. Loan type to total loans in 1991 includes Real
estate - construction loans in commercial and industrial loans. Real
estate - residential was previously called real estate - mortgage,
and included commercial mortgages.
The following table sets forth the amount and maturities of deposits of $100,000
or more at December 31, 1995:
TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<S> <C>
3 months or less $24,089
Over 3 months through 6 months 10,874
Over 6 months through 12 months 12,367
Over 12 months 15,298
-------
$62,628
-------
-------
</TABLE>
The following table reflects categories of short-term borrowings having average
balances during the year greater than 30% of stockholders' equity of the
Company at the end of the year. During each year reported, securities sold
under repurchase agreements are the only category meeting this criteria.
Information presented is as of or for the year ended December 31, for the years
indicated:
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Balance at end of year $22,626 $29,725 $26,608
Weighted average interest rate 5.26% 4.97% 2.68%
Maximum amount outstanding during the year $48,546 $29,860 $28,887
Average amount outstanding during the year $31,198 $27,103 $23,360
Weighted average interest rate during the year 5.33% 3.59% 3.18%
</TABLE>
The following table presents selected financial ratios as of or for the year
ended December 31, for the years indicated:
SELECTED RATIOS
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ -------
<S> <C> <C> <C>
Return on average total assets:
Before cumulative effect of a change in accounting method 1.19% 1.15% 1.05%
After cumulative effect of a change in accounting method 1.19% 1.15% 1.12%
Return on equity:
Before cumulative effect of a change in accounting method 12.83% 12.39% 13.50%
After cumulative effect of a change in accounting method 12.83% 12.39% 14.42%
Average equity to average assets 9.26% 9.27% 7.76%
Tier 1 capital to risk-adjusted assets 14.54% 13.92% 13.11%
Total capital to risk adjusted assets 15.79% 15.18% 14.36%
Tier 1 leverage ratio 10.31% 9.91% 10.05%
Dividend payout ratio 19.91% 17.40% 15.27%
</TABLE>
Note: Unrealized gains (losses) on securities available for sale are included
in the average balances used to calculate these ratios.
15
<PAGE>
ITEM 2. PROPERTIES
The principal offices of both the Corporation and the Bank are located in
the Bank's main office building located at 34 South Broadway, Aurora, Illinois.
The Bank's main office is owned by the Bank and consists of a four-story
building built in 1872. It is constructed of brick exterior walls and in the
early 1970's a granite, limestone and metal exterior was added to the south and
west sides. The west side facade was extended to include three additional
buildings north of the Bank building. The entire office complex currently
comprises approximately 60,500 square feet. The Bank also owns three adjacent
parking lots which can accommodate approximately 210 cars.
Management is currently studying alternatives regarding the future of the
Bank's main office building. The building is in need of renovation to improve
work flow and effectively serve customers. As part of this process, some
departments of the Bank may be relocated to other Corporation-owned facilities
or to an as yet unidentified location. Additional investment in the
Corporation's properties is anticipated, but specific plans, including costs and
timing, have not yet been determined.
The Bank's downtown drive-up facility is located at 205 East Downer Place
in Aurora and comprises approximately 9,950 square feet. The one-story building
is owned by the Bank and has eight drive-up windows. The basement of this
facility houses the Bank's data processing department.
The Bank's Fox Valley Villages branch is a full-service facility located at
Long Grove Drive and Route 34 in Aurora. The one-story building is owned by the
Bank and comprises approximately 3,400 square feet. The branch has three drive-
up lanes and four teller stations. The basement of this building contains a
safe deposit vault and is also being used for storage, a conference room and
rental space.
The Bank's Douglas Square branch is a full-service facility located at 1
Merchants Plaza in Oswego, Illinois. The 16,300 square foot building is owned
by the Bank and was built in 1989. The three-story brick building has six
drive-in lanes and six teller stations. The Bank uses approximately 11,000
square feet of the total building, rents approximately 5,400 square feet to
tenants. The basement of this building is being used as a training room, and
employee lounge and for storage. There is a parking lot which can accommodate a
total of approximately 85 cars.
The Bank's West Plaza branch is a full-service facility with six
drive-up lanes located at 1851 West Galena Boulevard in Aurora. The
two-story, 28,100 square foot building is owned by the Bank and was
constructed in 1962. During 1994, the Bank completed remodeling the entire
first and second floors of this building to provide space for the Bank's
trust department and mortgage division. The Bank also rents 5,000 square feet
of space available at this location. There are two parking lots which can
accommodate 90 cars.
The Bank also has a branch located in the Cub Foods store in Aurora at 55
Constitution Drive. The Bank entered into a Facility License and Construction
Agreement with International Banking Technologies, Inc. in June, 1992, under
which the Bank is permitted to operate a bank branch in the Cub Foods store for
a term of 20 years, ending January 25, 2013.
The Bank's Randall Square branch is a full service facility with 4 drive-up
lanes located at 1771 Merchants Drive in Geneva, Illinois. he one-story, 6,200
square foot building is owned by the Bank and construction was completed in the
first quarter of 1996.
The Bank has a loan production office located at 3 North Smith Street in
Aurora. The Bank leases approximately 1,200 square feet under a three year lease
entered into in September, 1994, which may be extended for an additional three
years at the option of the Bank.
The Bank has a loan production office located in Yorkville, Illinois, at
520 Countryside Center. The Bank leases approximately 1,100 square feet under a
three year lease entered into in June, 1994, which may be extended for an
additional three years at the option of the Bank.
ITEM 3. LEGAL PROCEEDINGS
The Bank has certain collection suits in the ordinary course of business
against its debtors and is a defendant in legal actions arising from normal
business activities. Management, after consultation with legal counsel,
believes that the ultimate liabilities, if any, resulting from these actions
will not have a material adverse effect on the financial position of the Bank or
on the consolidated financial position of the Corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
16
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SECURITY HOLDER MATTERS
The Corporation incorporates by reference the information contained on
page 40 of the 1995 Annual Report (attached hereto as Exhibit 13) under the
caption "Market for the Registrant's Common Stock and Related Security Holder
Matters." As of March 1, 1996, there were 777 holders of record of the
Corporation's common stock.
The Corporation also incorporates by reference the information contained
on page 25 of the 1995 Annual Report (attached hereto as Exhibit 13) under
the "Notes to Consolidated Financial Statements Note 14 - Stockholder Rights
Plan."
The Corporation also incorporates by reference the information contained
on page 24 of the 1995 Annual Report (attached hereto as Exhibit 13) under
the "Notes to Consolidated Financial Statements Note 13 - Capital Matters."
ITEM 6. SELECTED FINANCIAL DATA
The Corporation incorporates by reference the information contained on
page 8 of the 1995 Annual Report (attached hereto as Exhibit 13) under the
caption "Merchants Bancorp, Inc. and Subsidiary Financial Highlights."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Corporation incorporates by reference the information contained on
pages 29 - 39 of the 1995 Annual Report (attached hereto as Exhibit 13) under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Corporation incorporates by reference the following financial
statements and related notes from the 1995 Annual Report (attached hereto as
Exhibit 13):
ANNUAL REPORT
PAGE NO.
Consolidated Balance Sheets 9
Consolidated Statements of Income 10
Consolidated Statements of Cash Flows 11
Consolidated Statements of Changes in Stockholders' Equity 12
Notes to Consolidated Financial Statements 13-27
Independent Auditors' Report 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Corporation incorporates by reference the information contained on
pages 1,2 and 3 of the Proxy Statement for the 1996 Annual Meeting of
Stockholders (attached hereto as exhibit 99) under the caption "Election of
Directors."
17
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT AND SUBSIDIARY
<TABLE>
<CAPTION>
NAME, AGE AND YEAR POSITIONS WITH REGISTRANT AND
BECAME EXECUTIVE OFFICER BUSINESS EXPERIENCE DURING
OF THE REGISTRANT PAST FIVE YEARS
- ------------------------- -------------------------------
<S> <C>
Calvin R. Myers Chairman of the Board, President and Chief Executive Officer
Age 53 1982 (1987-present), Director of the Corporation (1986-present); Chairman of
the Board and CEO (1987-1991), Director of First American
Bank (1985-1991); Chairman of the Board and CEO (1987-present), President
(1989-present), Director of the Bank (1986-present).
Frank K. Voris Vice President of the Corporation (1993-present); Executive Vice President
Age 56 1985 and Chief Operating Officer (1990-present), Senior Vice President (1985-1987),
Director of the Bank (1990-present); President of First
American Bank (1987-1991).
Randal A. Wright Executive Vice President, Commercial Banking Division (1993-present); Senior
Age 44 1989 Vice President and Director of Commercial Banking of the Bank (1989-1993);
President and CEO of First National Bank of Oelwein, Iowa (1985-1989).
Terence L. Kothe Executive Vice President, Trust and Financial Services (1992-present) of the Bank;
Age 52 1992 Vice President, Senior Trust and Investment Officer
(1973-1992) of Old Second National Bank of Aurora.
J. Douglas Cheatham Vice President and Chief Financial Officer of the Corporation (1993-present);
Age 39 1990 Vice President and Financial Officer (1990-present), Financial Officer (1988-1990),
Analyst of the Bank (1987-1988).
Gerald M. Lanigan Senior Vice President and Trust Officer of the Bank (1985-present).
Age 46 1984
Scott B. Everhart Senior Vice President of Operations (1990-present), Director of Operations
Age 44 1988 (1988-present), Management Analysis Director of the Bank (1986-1988).
</TABLE>
There are no arrangements or understandings between any of the executive
officers or any other persons pursuant to which any of the executive officers
have been selected for their respective positions.
ITEM 11. EXECUTIVE COMPENSATION
The Corporation incorporates by reference the information contained on page
3 of the Proxy Statement for the 1996 Annual Meeting of Stockholders (attached
hereto as exhibit 99) under the caption "Compensation of Directors," and on
pages 5 - 10 under the caption "Executive Compensation." The sections in the
Proxy Statement marked "Board Compensation Committee Report on Executive
Compensation" and "Stockholder Return Performance Presentation" are furnished
for the information of the Commission and are not deemed to be "filed" as part
of this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Corporation incorporates by reference the information contained on
pages 3 - 5 of the Proxy Statement for the 1996 Annual Meeting of Stockholders
(attached hereto as exhibit 99) under the caption "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Corporation incorporates by reference the information contained on page
11 of the Proxy Statement for the 1996 Annual Meeting of Stockholders (attached
hereto as exhibit 99) under the caption "Transactions with Management."
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) INDEX TO FINANCIAL STATEMENTS
The following consolidated financial statements and related notes are
incorporated by reference from the 1995 Annual Report (attached hereto as
Exhibit 13).
ANNUAL REPORT
PAGE NO.
Consolidated Balance Sheets 9
Consolidated Statements of Income 10
Consolidated Statements of Cash Flows 11
Consolidated Statements of Changes in
Stockholders' Equity 12
Notes to Consolidated Financial Statements 13-27
Independent Auditors' Report 28
(a)(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules as required by Item 8 and Item 14 of Form
10-K have been omitted because the information requested is either not
applicable or has been included in the consolidated financial statements or
notes thereto.
19
<PAGE>
(a)(3) EXHIBITS
The following exhibits required by Item 601 of Regulation S-K are included
along with this 10-K filing:
ITEM 601
TABLE II. NO.
-------------
(3)(a) Its Restated Certificate of Incorporation (filed
as an exhibit to the Corporation's Registration
Statement on Form S-14, No.2-96562, which was
filed with the Securities and Exchange
Commission on March 21, 1985; a Certificate of
Amendment to the Certificate of Incorporation as
filed as an exhibit to the Corporation's Form
8-A, which was filed with the Securities and
Exchange Commission on April 30, 1986 and a
Certificate of Amendment to the Certificate of
Incorporation as filed as Exhibit 3(b) of the
Corporation's 10-K for the fiscal year ended
December 31, 1987, a Certificate of Designation,
Preferences and Rights of Series A Junior
Participating Preferred Stock filed as Exhibit A
to Exhibit 1 to the Corporation's Form 10-K,
which was filed with the Securities and Exchange
Commission on January 12, 1989, and a
Certificate of Designation, Preferences and
Rights of Series A Junior Participating
Preferred Stock filed as Exhibit 4.4 to the
Corporation's Amendment 1 to Form S-2, No. 33-68684,
which was filed with the Securities and
Exchange Commission on October 8, 1993, all of
which are incorporated herein by reference)
(3)(b) By-laws of Merchants Bancorp, Inc. (filed as
Exhibit 3(c) of the Corporation's 10-K for the
fiscal year ended December 31, 1987, and
incorporated herein by reference)
(4)(a) Article Fourth of its Restated Certificate of
Incorporation (filed as Exhibit 3(a) to its
Registration Statement on Form S-14, No.
2-96562, which was filed with the Securities and
Exchange Commission on March 21, 1985, and
incorporated herein by reference)
(4)(b) Article II and Article VII, Section 1, of its
By-laws, as amended February 17, 1987 (filed as
Exhibit 3(c) of the Corporation's 10-K for the
year ended December 31, 1987, and incorporated
herein by reference)
(4)(c) Rights Agreement dated January 4, 1989, between
the Corporation and The Merchants National Bank
of Aurora (filed as Exhibit 1 on the
Corporation's Form 8-K as filed with the
Securities and Exchange Commission on January
12, 1989, and incorporated herein by reference)
(10)(a) Rights Agreement dated January 4, 1989 between
the Corporation and The Merchants Bank of
Aurora (filed as Exhibit 1 to the Corporation's
Form 8-K as filed with the Securities and
Exchange Commission on January 12, 1989, and
incorporated herein by reference)
(10)(b) Agreement for Facility License and Construction
Agreement dated June 18, 1992, between
International Banking Technologies, Inc., a
Georgia corporation, and The Merchants National
Bank of Aurora (filed as Exhibit 10(g) of the
Corporation's Form 10-K for the year ended
December 31, 1992, and incorporated herein by
reference)
(10)(c) Employment Agreement dated August 30, 1993,
between the Corporation and Calvin R. Myers
(filed as Exhibit 10.8 to its Registration
Statement on Form S-2, No. 33-68684, which was
filed with the Securities and Exchange
Commission on October 8, 1993, and incorporated
herein by reference)
(13) The Corporation's 1995 Annual Report to Stockholders
(22) A list of all subsidiaries of the Corporation
(23) Consent of Crowe, Chizek & Company LLP
(27) Financial Data Schedule
20
<PAGE>
(99) The Corporation's Proxy Statement for the annual
meeting of stockholders to be held April 16,
1996. The sections marked "Board Compensation
Committee Report on Executive Compensation" and
"Stockholder Return Performance Presentation"
are furnished for the information of the
Commission and are not deemed to be "filed" as
part of this 10-K.
(b) REPORTS ON FORM 8-K
None
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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.
BY: /s/Calvin R. Myers
---------------------------------------
Calvin R. Myers, Chairman of the Board,
President and Chief Executive Officer
BY: /s/J. Douglas Cheatham
-----------------------------------------
J. Douglas Cheatham,
Vice President and Chief Financial Officer
DATE: March 29, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- -----
<S> <C> <C>
/s/ Calvin R. Myers Chairman of the Board; Director; March 29, 1995
- ----------------------- President and Chief Executive Officer
Calvin R. Myers
/s/ C. Tell Coffey Director March 29, 1995
- ------------------------
C. Tell Coffey
/s/ William C. Glenn Director March 29, 1995
- ------------------------
William C. Glenn
/s/ John M. Lies Director March 29, 1995
- ------------------------
John M. Lies
/s/ James D. Pearson Director March 29, 1995
- ------------------------
James D. Pearson
/s/ Frank A. Sarnecki Director March 29, 1995
- ------------------------
Frank A. Sarnecki
/s/ John J. Swalec Director March 29, 1995
- ------------------------
John J. Swalec
22
<PAGE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Norman L. Titiner Director March 29, 1995
- ------------------------
Norman L. Titiner
/s/ William S. Wake Director March 29, 1995
- ------------------------
William S. Wake
/s/ J. Douglas Cheatham Vice President and Chief Financial March 29, 1995
- ------------------------ Officer
J. Douglas Cheatham
</TABLE>
23
<PAGE>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION OF EXHIBITS PAGE NO.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(3)(a) Its Restated Certificate of Incorporation (filed as --
an exhibit to the Corporation's Registration
Statement on Form S-14, No.2-96562, which was filed
with the Securities and Exchange Commission on March
21, 1985; a Certificate of Amendment to the
Certificate of Incorporation as filed as an exhibit
to the Corporation's Form 8-A, which was filed with
the Securities and Exchange Commission on April 30,
1986 and a Certificate of Amendment to the
Certificate of Incorporation as filed as Exhibit 3(b)
of the Corporation's 10-K for the fiscal year ended
December 31, 1987, a Certificate of Designation,
Preferences and Rights of Series A Junior
Participating Preferred Stock filed as Exhibit A to
Exhibit 1 to the Corporation's Form 10-K, which was
filed with the Securities and Exchange Commission on
January 12, 1989, and a Certificate of Designation,
Preferences and Rights of Series A Junior
Participating Preferred Stock filed as Exhibit 4.4 to
the Corporation's Amendment 1 to Form S-2, No. 33-68684,
which was filed with the Securities and
Exchange Commission on October 8, 1993, all of which
are incorporated herein by reference)
- -------------------------------------------------------------------------------
(3)(b) By-laws of Merchants Bancorp, Inc. (filed as Exhibit --
3(c) of the Corporation's 10-K for the fiscal year
ended December 31, 1987, and incorporated herein by
reference)
- -------------------------------------------------------------------------------
(4)(a) Article Fourth of its Restated Certificate of --
Incorporation (filed as Exhibit 3(a) to its
Registration Statement on Form S-14, No. 2-96562,
which was filed with the Securities and Exchange
Commission on March 21, 1985, and incorporated herein
by reference)
- -------------------------------------------------------------------------------
(4)(b) Article II and Article VII, Section 1, of its --
By-laws, as amended February 17, 1987 (filed as
Exhibit 3(c) of the Corporation's 10-K for the year
ended December 31, 1987, and incorporated herein by
reference)
- -------------------------------------------------------------------------------
(4)(c) The Rights Agreement dated January 4, 1989, between --
the Corporation and The Merchants National Bank of
Aurora (filed as Exhibit 1 on the Corporation's Form
8-K as filed with the Securities and Exchange
Commission on January 12, 1989, and incorporated
herein by reference)
- -------------------------------------------------------------------------------
(10)(a) Rights Agreement dated January 4, 1989 between the --
Corporation and The Merchants Bank of Aurora (filed
as Exhibit 1 to the Corporation's Form 8-K as filed
with the Securities and Exchange Commission on
January 12, 1989, and incorporated herein by
reference)
- -------------------------------------------------------------------------------
(10)(b) Agreement for Facility License and Construction --
Agreement dated June 18, 1992, between International
Banking Technologies, Inc., a Georgia corporation,
and The Merchants National Bank of Aurora (filed as
Exhibit 10(g) of the Corporation's Form 10-K for the
year ended December 31, 1992, and incorporated herein
by reference)
- -------------------------------------------------------------------------------
(10)(c) Employment Agreement dated August 30, 1993, between --
the Corporation and Calvin R. Myers (filed as Exhibit
10.8 to its Registration Statement on Form S-2, No.
33-68684, which was filed with the Securities and
Exchange Commission on October 8, 1993, and
incorporated herein by reference)
- -------------------------------------------------------------------------------
(13) The Corporation's 1995 Annual Report to Stockholders 25 - 68
- -------------------------------------------------------------------------------
(22) A list of all subsidiaries of the Corporation 69
- -------------------------------------------------------------------------------
(23) Consent of Crowe, Chizek & Company LLP 70
- -------------------------------------------------------------------------------
(27) Financial Data Schedule --
- -------------------------------------------------------------------------------
(99) The Corporation's Proxy Statement for the annual 71 - 85
meeting of stockholders to be held April 18, 1995.
The sections marked "Board Compensation Committee
Report on Executive Compensation" and "Stockholder
Return Performance Presentation" are furnished for
the information of the Commission and are not deemed
to be "filed" as part of this 10-K.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
MERCHANTS BANCORP, INC.
AND SUBSIDIARY
FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT SUMMARY
Interest income . . . . . . . . . . . . $ 39,875 $ 33,233 $ 29,546 $ 28,323 $ 28,963
Interest expense . . . . . . . . . . . . 18,423 13,228 11,681 12,000 15,388
---------- ---------- ---------- ---------- ----------
Net interest income . . . . . . . . . . 21,452 20,005 17,865 16,323 13,575
Provision for loan losses . . . . . . . 1,783 2,298 2,423 3,062 1,950
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses . . . . . . 19,669 17,707 15,442 13,261 11,625
Other income . . . . . . . . . . . . . . 6,918 6,564 6,606 5,794 4,322
Other expenses . . . . . . . . . . . . . 17,889 16,733 16,177 13,893 12,648
---------- ---------- ---------- ---------- ----------
Income before income
taxes and cumulative
effect of a change in
accounting principle . . . . . . . . 8,698 7,538 5,871 5,162 3,299
Provision for income taxes . . . . . . . 2,502 2,079 1,437 1,112 725
---------- ---------- ---------- ---------- ----------
Income before cumulative
effect of a change in
accounting principle . . . . . . . . 6,196 5,459 4,434 4,050 2,574
Cumulative effect of a
change in accounting
principle . . . . . . . . . . . . . . -- -- 300 -- --
---------- ---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . . . $ 6,196 $ 5,459 $ 4,734 $ 4,050 $ 2,574
========== ========== ========== ========== ==========
PER SHARE INFORMATION*
Earnings before cumulative
effect of a change in
accounting principle . . . . . . . . $ 2.41 $ 2.13 $ 2.11 $ 2.03 $ 1.29
Cumulative effect of a
change in accounting
principle . . . . . . . . . . . . . . -- -- 0.14 -- --
---------- ---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . . . $ 2.41 $ 2.13 $ 2.25 $ 2.03 $ 1.29
========== ========== ========== ========== ==========
Dividends . . . . . . . . . . . . . . . $ 0.48 $ 0.37 $ 0.34 $ 0.28 $ 0.24
========== ========== ========== ========== ==========
Weighted average shares
outstanding . . . . . . . . . . . . . 2,570,453 2,567,282 2,103,309 1,992,282 1,992,282
*Restated to reflect a three-for-one stock split in 1993.
BALANCE SHEET SUMMARY -- END OF YEAR
Total assets . . . . . . . . . . . . . . $ 539,761 $ 496,289 $ 462,483 $ 386,849 $ 353,035
Total deposits . . . . . . . . . . . . . 453,771 413,741 383,600 335,056 297,489
Total stockholders' equity . . . . . . . 54,094 43,456 44,308 28,338 24,852
Allowance for loan losses . . . . . . . 5,176 5,140 4,705 4,161 2,879
</TABLE>
8
<PAGE>
MERCHANTS BANCORP, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1995 and 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,166 $ 28,922
Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . 187,169 128,326
Securities held to maturity (fair value of $37,311 in 1994) . . . . . . . . . . . -- 38,505
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,340 2,033
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304,327 285,573
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,176) (5,140)
---------- ----------
299,151 280,433
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,504 9,337
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 566 845
Accrued interest and other assets . . . . . . . . . . . . . . . . . . . . . . . . 10,865 7,888
---------- ----------
$ 539,761 $ 496,289
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76,008 $ 74,931
Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 377,763 338,810
---------- ----------
453,771 413,741
Federal funds purchased and securities sold under repurchase agreements . . . . . 22,726 33,299
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 3,000
Accrued interest and other liabilities . . . . . . . . . . . . . . . . . . . . . 6,170 2,793
---------- ----------
485,667 452,833
---------- ----------
Commitments and contingent liabilities . . . . . . . . . . . . . . . . . . . . . -- --
STOCKHOLDERS' EQUITY
Preferred stock: $1 par 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,344 18,232
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,877 26,915
Unrealized gain (loss) on securities available for sale, net of tax of
$747 in 1995, and ($2,104) in 1994 . . . . . . . . . . . . . . . . . . . . . . 1,450 (4,083)
Treasury stock, at cost, 33,687 shares in 1995 and 39,408 shares in 1994 . . . . (184) (215)
---------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,094 43,456
---------- ----------
$ 539,761 $ 496,289
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE>
MERCHANTS BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Income
Years Ended December 31, 1995, 1994, and 1993
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans . . . . . . . . . . . . . . . . . . . . $ 28,046 $ 24,453 $ 21,875
Interest on loans held for sale . . . . . . . . . . . . . . . . . 161 207 262
Interest on securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,122 5,851 5,099
Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . 2,814 2,643 2,127
Interest on federal funds sold . . . . . . . . . . . . . . . . . . 732 79 183
---------- ---------- ----------
39,875 33,233 29,546
---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits . . . . . . . . . . . . . . . . . . . . . . . 16,500 11,791 10,767
Interest on federal funds purchased and
securities sold under repurchase agreements . . . . . . . . . . 1,769 1,285 750
Interest on notes payable . . . . . . . . . . . . . . . . . . . . 154 152 164
---------- ---------- ----------
18,423 13,228 11,681
---------- ---------- ----------
Net interest income . . . . . . . . . . . . . . . . . . . . . . 21,452 20,005 17,865
Provision for loan losses . . . . . . . . . . . . . . . . . . . . 1,783 2,298 2,423
---------- ---------- ----------
Net interest income after provision for loan losses . . . . . . 19,669 17,707 15,442
---------- ---------- ----------
NONINTEREST INCOME
Trust income . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,925 1,722 1,422
Mortgage banking income . . . . . . . . . . . . . . . . . . . . . 1,267 1,153 1,857
Service charges and fees . . . . . . . . . . . . . . . . . . . . . 2,713 2,472 2,364
Securities gains, net . . . . . . . . . . . . . . . . . . . . . . 133 373 281
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . 880 844 682
---------- ---------- ----------
6,918 6,564 6,606
---------- ---------- ----------
NONINTEREST EXPENSES
Salaries and employee benefits . . . . . . . . . . . . . . . . . . 9,893 9,180 8,793
Occupancy expenses, net . . . . . . . . . . . . . . . . . . . . . 1,030 944 932
Furniture and equipment expenses . . . . . . . . . . . . . . . . . 1,238 1,090 940
FDIC deposit assessment . . . . . . . . . . . . . . . . . . . . . 475 846 756
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 5,253 4,673 4,756
---------- ---------- ----------
17,889 16,733 16,177
---------- ---------- ----------
Income before income taxes and cumulative effect
of a change in accounting principle . . . . . . . . . . . . . . 8,698 7,538 5,871
Provision for income taxes . . . . . . . . . . . . . . . . . . . . 2,502 2,079 1,437
---------- ---------- ----------
Income before cumulative effect of a change in
accounting principle . . . . . . . . . . . . . . . . . . . . . 6,196 5,459 4,434
Cumulative effect, on years prior to 1993, of a change
in accounting principle . . . . . . . . . . . . . . . . . . . . -- -- 300
---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 6,196 $ 5,459 $ 4,734
========== ========== ==========
Earnings per share:
Before cumulative effect of a change in accounting
principle . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.41 $ 2.13 $ 2.11
Cumulative effect of a change in accounting principle . . . . . -- -- 0.14
---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.41 $ 2.13 $ 2.25
========== ========== ==========
Weighted average shares outstanding . . . . . . . . . . . . . . . 2,570,453 2,567,282 2,103,309
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE>
MERCHANTS BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1995, 1994, and 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,196 $ 5,459 $ 4,734
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 1,236 1,106 942
Provision for loan losses . . . . . . . . . . . . . . . . . 1,783 2,298 2,423
Origination of mortgage loans held for sale . . . . . . . . (48,799) (38,729) (78,065)
Proceeds from sales of mortgage loans . . . . . . . . . . . 46,833 44,888 71,512
Net gains on sales of loans . . . . . . . . . . . . . . . . (341) (491) (1,148)
Provision for deferred taxes . . . . . . . . . . . . . . . . (72) 90 (544)
Increase (decrease) in net income taxes payable . . . . . . (415) (419) 258
Decrease (increase) in accrued interest and
other assets . . . . . . . . . . . . . . . . . . . . . . (4,594) (642) 493
Increase (decrease) in accrued interest and other
liabilities . . . . . . . . . . . . . . . . . . . . . . . 2,578 (1,091) 285
Premium amortization and discount accretion
on securities . . . . . . . . . . . . . . . . . . . . . . 696 878 653
Securities gains, net . . . . . . . . . . . . . . . . . . . (133) (373) (281)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . 100 (29) --
---------- ---------- ----------
Net cash from operating activities . . . . . . . . . . . . . . 5,068 12,945 1,262
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from matured securities available for sale . . . . . . . 40,368 11,226 --
Proceeds from sales of securities available for sale . . . . . . . 23,804 17,886 --
Purchases of securities available for sale . . . . . . . . . . . . (75,481) (59,733) --
Proceeds from matured securities held to maturity . . . . . . . . -- 1,119 27,829
Purchases of securities held to maturity . . . . . . . . . . . . . (1,209) (4,693) (15,374)
Proceeds from sales of securities held for sale . . . . . . . . . -- -- 11,381
Purchases of securities held for sale . . . . . . . . . . . . . . -- -- (50,708)
Proceeds from sales of investment securities . . . . . . . . . . . -- -- 4,078
Net principal disbursed on loans . . . . . . . . . . . . . . . . . (20,589) (14,189) (37,917)
Proceeds from sales of other real estate . . . . . . . . . . . . . 268 773 615
Property and equipment expenditures . . . . . . . . . . . . . . . (1,403) (1,946) (1,809)
---------- ---------- ----------
Net cash from investing activities . . . . . . . . . . . . . . (34,242) (49,557) (61,905)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits . . . . . . . . . . . . . . . . . . . . . 40,030 30,141 48,544
Net increase (decrease) in short-term borrowings . . . . . . . . . (10,573) 6,691 5,212
Payments on notes payable . . . . . . . . . . . . . . . . . . . . -- (450) (300)
Proceeds from Federal Home Loan Bank advance . . . . . . . . . . . -- -- 3,000
Net proceeds from stock offering . . . . . . . . . . . . . . . . . -- -- 10,681
Dividends paid, net of dividend reinvestments . . . . . . . . . . (1,039) (911) (671)
---------- ---------- ----------
Net cash from financing activities . . . . . . . . . . . . . . 28,418 35,471 66,466
---------- ---------- ----------
Net change in cash and cash equivalents . . . . . . . . . . . . (756) (1,141) 5,823
Cash and cash equivalents at beginning of year . . . . . . . . 28,922 30,063 24,240
---------- ---------- ----------
Cash and cash equivalents at end of year . . . . . . . . . . . $ 28,166 $ 28,922 $ 30,063
========== ========== ==========
Supplemental disclosures:
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . $ 1,552 $ 1,871 $ 1,423
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . 17,952 12,925 11,682
Noncash investing activities:
Transfers from loans to other real estate owned . . . . . . 88 1,420 674
Transfer of securities to securities
available for sale, at fair value . . . . . . . . . . . . 41,125 -- 106,284
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE>
MERCHANTS BANCORP, INC.
AND SUBSIDIARY
Consolidated Statements of Changes
in Stockholders' Equity
Years Ended December 31, 1995, 1994, and 1993
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Unrealized Gain
(Loss) on
Securities Total
Available For Stock-
Common Retained Sale, Net Treasury holders'
Stock Surplus Earnings of Tax Stock Equity
-------- -------- -------- --------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 . . . . . . . . . . . $ 10,158 $ -- $ 18,395 $ -- $ (215) $ 28,338
Net income . . . . . . . . . . . . . . . . . . . . -- -- 4,734 -- -- 4,734
Cash dividends declared, $.34 per share . . . . . -- -- (723) -- -- (723)
Par value of common stock reduced
from $15 to $1 per share . . . . . . . . . . . (8,126) 8,126 -- -- -- --
Net proceeds from issuance of 575,000
shares of common stock . . . . . . . . . . . . 575 10,106 -- -- -- 10,681
Adjustment of unrealized net gain
on securities available for sale,
net of tax of $658 . . . . . . . . . . . . . . -- -- -- 1,278 -- 1,278
-------- -------- -------- -------- -------- --------
Balance at December 31, 1993 . . . . . . . . . . . 2,607 18,232 22,406 1,278 (215) 44,308
Net income . . . . . . . . . . . . . . . . . . . . -- -- 5,459 -- -- 5,459
Cash dividends declared, $.37 per share . . . . . (950) (950)
Adjustment of unrealized net gain (loss)
on securities available for sale,
net of tax of $2,762 . . . . . . . . . . . . . -- -- -- (5,361) -- (5,361)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1994 . . . . . . . . . . . 2,607 18,232 26,915 (4,083) (215) 43,456
Net income . . . . . . . . . . . . . . . . . . . . -- -- 6,196 -- -- 6,196
Cash dividends declared, $.48 per share . . . . . -- -- (1,234) -- -- (1,234)
Issuance of 5,721 shares of treasury
common stock in connection with
dividend reinvestment plan . . . . . . . . . . -- 112 -- -- 31 143
Adjustment of unrealized net gain (loss)
due to transfer of securities from
held maturity to available for sale,
net of deferred tax of $497 . . . . . . . . . . -- -- -- 964 -- 964
Adjustment of unrealized net gain (loss)
on securities available for sale,
net of deferred tax of $2,354 . . . . . . . . . -- -- -- 4,569 -- 4,569
-------- -------- -------- -------- -------- --------
Balance at December 31, 1995 . . . . . . . . . . . $ 2,607 $ 18,344 $ 31,877 $ 1,450 $ (184) $ 54,094
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE>
MERCHANTS BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1995, 1994, and 1993
(TABLE AMOUNTS IN THOUSANDS)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION: The consolidated financial
statements of Merchants Bancorp, Inc. ("Company") include the accounts of the
Company and its wholly owned subsidiary, The Merchants National Bank of
Aurora ("Bank"). Significant intercompany transactions have been eliminated.
NATURE OF OPERATIONS: The Company and the Bank provide full banking
services, including trust services, to customers located in Aurora, Illinois
and in the western Chicago suburbs and surrounding areas. The consolidated
entity is subject to regulations of the Board of Governors of the Federal
Reserve System, The Office of the Comptroller of the Currency, and the
Federal Deposit Insurance Corporation.
ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Future results could differ from those estimates.
SECURITIES: Debt securities are classified as either held to maturity or
available for sale. Securities available for sale may be sold prior to
maturity due to changes in interest rates, prepayment risks, yield and
availability of alternative investments, liquidity needs, or other factors.
Securities identified as being available for sale are carried at fair value.
Unrealized gains and losses, net of tax, are included as a separate component
of stockholders' equity. Securities identified as being held to maturity are
those which the Company has the positive intent and ability to hold to
maturity.
Interest income, adjusted for amortization of premiums and accretion of
discounts, is included in earnings. Gains or losses on disposition of
available for sale securities are based on the net proceeds and the adjusted
carrying amount of the securities sold, using the specific identification
method.
On December 31, 1993, the Company adopted Statement of Financial Accounting
Standards No. 115 ("SFAS 115") and, accordingly, increased stockholders'
equity by $1,278,000 at December 31, 1993, for the after-tax effect of the
adjustment from amortized cost to fair value for securities available for
sale at that date.
As permitted by "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities," the Company exercised a
one time opportunity to reassess the appropriateness of the classifications
of all securities held. Based on this review, in order to enhance liquidity
and tax planning opportunities, the Company reclassified securities having an
amortized cost of $39,664,000 and a net unrealized gain of $1,461,000 at
December 15, 1995 from held to maturity to available for sale.
LOANS HELD FOR SALE: Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost, net of loan fees
collected, or estimated fair value in the aggregate. Net unrealized losses
are recognized in a valuation allowance by charges to income. Cost
approximated market value for loans held for sale as of December 31, 1995
and 1994.
13
<PAGE>
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
LOANS, INTEREST INCOME AND FEES: Loans are stated at the amount of unpaid
principal, reduced by unearned discount, deferred loan fees and the allowance
for loan losses. Interest on discounted loans is recognized based on methods
which approximate the interest method. Interest on all other loans is accrued
over the term of the loan based upon the amount of principal outstanding.
Loan fees are deferred and recognized over the life of a loan as a yield
adjustment.
The accrual of interest income is discontinued on a loan when principal or
interest is ninety days or more past due, unless the loan is well secured and
in the process of collection. When a loan is placed on nonaccrual status,
interest previously accrued but not collected in the current period is
reversed against current period interest income. Interest accrued in prior
years but not collected is charged against the allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is established
through provisions charged to expense. Loans are charged against the
allowance when management believes that the collectibility of the principal
is unlikely. The allowance is an amount that management believes will be
adequate to absorb losses on existing loans that may become uncollectible,
based on evaluations of the collectibility of loans and prior loan loss
experience. The evaluations take into consideration such factors as changes
in the nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, and current economic conditions that may
affect the borrowers' ability to pay. Although management may periodically
allocate portions of the allowance for specific problem loan situations, the
whole allowance is available for any loan charge-offs that occur.
While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank's allowance
for loan losses. Such agencies may require the Bank to provide additions to
the allowance based on their judgements at the time of their examinations.
Statement of Financial Accounting Standards No. 114 and No. 118 became
effective January 1, 1995 and require recognition of loan impairment. Loans
are considered impaired if full principal or interest payments are not
anticipated. Each impaired loan is carried at the present value of expected
cash flows discounted at the loan's effective interest rate or at the fair
value of the collateral if the loan is collateral dependent. A portion of the
allowance for loan losses is allocated to an impaired loan if the present
value of cash flows or collateral value indicate the need for an allowance.
The effect of adopting these standards is included in 1995 bad debt expense,
and was not material.
Smaller-balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one-to-four family
residences, residential construction loans, and automobile, home equity and
second mortgage loans. Commercial loans and mortgage loans secured by other
properties are evaluated individually for impairment.
Loans evaluated individually for impairment are rated on a scale of 1 to 6,
with 4 being special mention, 5 substandard, and 6 doubtful. Loans are moved
to nonaccrual status when 90 days or more past due. Loans graded 6, all
commercial and non-residential mortgage nonaccrual loans, and loans
restructured after January 1, 1995 are defined as impaired loans. Impaired
loans, or portions thereof, are charged off when deemed uncollectable.
Disclosures for impaired loans are generally comparable to disclosures of
nonaccrual, renegotiated, and past-due loans. Increases or decreases in the
carrying value of impaired loans are reported as reductions or increases in
bad debt expense.
14
<PAGE>
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
OTHER REAL ESTATE OWNED: Other real estate owned includes properties acquired
in settlement of problem loans. The properties are recorded at the lower of
cost (fair value at date of foreclosure) or fair value less estimated selling
costs. Losses arising at the time of acquisition of such properties are
charged to the allowance for loan losses. Subsequently, when the fair value
less selling expenses is less than the cost of the asset, valuation
allowances are recognized. Any subsequent changes in the valuation allowance
caused by changes in the value of the property or the selling costs are
charged, or credited, to income.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation and amortization which are computed on the
straight-line method over the estimated useful lives of the assets.
TRUST ASSETS AND FEES: Assets held in fiduciary or agency capacities are not
included in the consolidated balance sheets because such amounts are not
assets of the Company or the Bank. Income from trust fees is recorded on the
accrual basis.
INTANGIBLE ASSETS: Included in other assets in the consolidated balance
sheets is the purchase premium paid in conjunction with the acquisition of
First American Bank of Aurora in 1984, which was subsequently merged into the
Bank in 1990. This premium is being amortized on the straight-line basis over
15 years. The unamortized balance was approximately $329,000 and $430,000 at
December 31, 1995 and 1994, respectively.
PURCHASED MORTGAGE SERVICING RIGHTS ("PMSRs"): The cost of PMSRs is generally
amortized in proportion to, and over the estimated life of, net servicing
revenues. The unamortized cost is periodically evaluated in relation to
estimated discounted future net servicing revenues based on management's best
estimate of remaining loan lives. An adjustment is charged to income if the
unamortized cost of PMSRs exceeds the estimated future net servicing income.
PENSION PLAN: The Company has a noncontributory pension plan covering
substantially all employees. It is the Company's policy to make contributions
to the plan that are actuarially determined and are tax deductible. The
actuarially determined expense of the plan is recorded annually.
INCOME TAXES: The Company and the Bank file consolidated Federal and state
income tax returns. In January 1993, the Company adopted Statement of
Financial Accounting Standards No. 109 ("SFAS 109"). The cumulative effect of
this change recorded in 1993 was $300,000 and primarily represents the impact
of adjusting deferred taxes to reflect current tax rates. The Company records
income tax expense based on the amount of taxes due on its tax return plus
deferred taxes computed based on the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets
and liabilities, using enacted tax rates.
EARNINGS PER SHARE: The computation of earnings per share in each year is
based on the weighted average number of common shares outstanding, adjusted
for any stock splits. When dilutive, stock options are included as share
equivalents using the treasury stock method. Primary and fully diluted
earnings per share are the same for each of these years.
STATEMENT OF CASH FLOWS: For purposes of the statement of cash flows, the
Company considers cash and due from banks and Federal funds sold to be cash
and cash equivalents. Generally Federal funds are sold for one-day periods.
The Company reports net cash flows for short term investments, and for
customer loan, deposit and repurchase agreement transactions.
15
<PAGE>
NOTE 2 -- SECURITIES
Amortized costs, gross unrealized gains and losses, and fair values of
securities as of December 31, are summarized as follows:
<TABLE>
<CAPTION>
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 -- -- 1,873
--------- ---------- ---------- ---------
$ 184,972 $ 3,092 $ (895) $ 187,169
========= ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
1994
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury . . . . . . . . . . . . . . . . . . . $ 31,412 $ -- $ (1,558) $ 29,854
U.S. Government agencies . . . . . . . . . . . . . 43,500 20 (1,980) 41,540
U.S. Government agency
mortgage backed securities . . . . . . . . . . . 39,321 12 (2,090) 37,243
States and political subdivisions . . . . . . . . . 10,531 153 (284) 10,400
Collateralized mortgage obligations . . . . . . . . 7,963 31 (491) 7,503
Equity securities . . . . . . . . . . . . . . . . . 1,786 -- -- 1,786
--------- ---------- ---------- ---------
134,513 216 (6,403) 128,326
Securities held to maturity:
States and political subdivisions . . . . . . . . . 38,505 545 (1,739) 37,311
--------- ---------- ---------- ---------
$ 173,018 $ 761 $ (8,142) $ 165,637
========= ========== ========== =========
</TABLE>
Mortgage-backed securities are comprised of investments in pools of
residential mortgages. The mortgage pools are issued and guaranteed by the
Federal Home Loan Mortgage Corporation ("FHLMC"), the Government National
Mortgage Association ("GNMA") or the Federal National Mortgage Association
("FNMA"). Collateralized mortgage obligations are secured by FHLMC, GNMA, or
FNMA certificates. Equity securities consist of Federal Home Loan Bank stock
and Federal Reserve Bank stock.
As of December 31, 1995, and 1994, the Company held structured notes, which
were in the available for sale category, carried at fair values of $6,415,000
and $10,569,000, respectively. The amortized cost of these securities was
$6,462,000 and $11,536,000 as of December 31, 1995, and 1994, respectively.
These securities were issued by the Federal Home Loan Bank ("FHLB"), FNMA,
and the Student Loan Marketing Association ("SLMA").
16
<PAGE>
NOTE 2 -- SECURITIES -- (CONTINUED)
The carrying amount and fair value of securities available for sale at
December 31, 1995, by contractual maturities, are shown below. Actual
maturities will differ from contractual maturities, because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- ---------
<S> <C> <C>
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . $ 16,020 $ 16,032
Due after one year through five years . . . . . . . . . . . . . . . . . 46,707 47,109
Due after five years through ten years . . . . . . . . . . . . . . . . 59,402 60,794
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . 6,122 6,226
--------- ---------
128,251 130,161
Mortgage-backed securities and collateralized mortgage obligations . . 54,848 55,135
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,873 1,873
--------- ---------
$ 184,972 $ 187,169
========= =========
</TABLE>
Information on security sales was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Securities available for sale (held for sale in 1993):
Proceeds of sales . . . . . . . . . . . . . . . . . . . . $ 23,804 $ 17,886 $ 11,381
Gross realized gains . . . . . . . . . . . . . . . . . . 219 405 251
Gross realized losses . . . . . . . . . . . . . . . . . . 86 32 1
Securities held to maturity:
Proceeds of sales . . . . . . . . . . . . . . . . . . . . -- -- 4,078
Gross realized gains . . . . . . . . . . . . . . . . . . -- -- 54
Gross realized losses . . . . . . . . . . . . . . . . . . -- -- 23
</TABLE>
There were no significant concentrations of investments (greater than 10% of
stockholders' equity) in any individual security issue except for U.S.
Treasury securities and obligations of U.S. Government agencies and
corporations. Although the Company holds securities issued by municipalities
within the states of Illinois and Wisconsin which in the aggregate exceeds
10% of stockholders' equity, none of the holdings from individual municipal
issuers exceed this threshold.
Investment securities with a carrying amount of approximately $124,873,000
and $119,537,000 at December 31, 1995 and 1994, respectively, were pledged to
secure public deposits and securities sold under repurchase agreements and
for other purposes required or permitted by law. Amounts owed to brokers for
securities purchased in December and settled in the following January, are
included in accrued interest and other liabilities. These amounts were
$1,560,000 and $608,000 as of December 31, 1995 and 1994, respectively.
Amounts due to the Company for securities that matured in December, with
proceeds received in January, are included in accrued interest and other
assets. This amount was $3,687,000 at December 31, 1995. There was no such
amount due at December 31, 1994.
17
<PAGE>
NOTE 3 -- LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . $ 109,872 $ 112,828
Real estate -- commercial . . . . . . . . . . . . . . . . . . . . . . . . 67,739 72,305
Real estate -- construction . . . . . . . . . . . . . . . . . . . . . . . 40,510 24,470
Real estate -- residential . . . . . . . . . . . . . . . . . . . . . . . 31,673 19,549
Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,489 53,806
Credit card receivables . . . . . . . . . . . . . . . . . . . . . . . . . 5,644 4,119
Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455 937
--------- ---------
306,382 288,014
Unearned discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,743) (2,054)
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . (312) (387)
--------- ---------
$ 304,327 $ 285,573
========= =========
</TABLE>
Loans on which accrual of interest has been discontinued or reduced amounted
to approximately $1,135,000 and $1,397,000 at December 31, 1995 and 1994,
respectively. Interest income recorded on these loans amounted to
approximately $83,000, $65,000, and $60,000 in 1995, 1994, and 1993,
respectively. Interest income which would have been recognized had these
loans been on an accrual basis throughout the year was approximately
$167,000, $159,000, and $159,000 in 1995, 1994, and 1993, respectively.
At December 31, 1995, the balances of the impaired loans and the portion of
the allowance for loan losses allocated to the impaired loan balance amounted
to $921,000 and $631,000, respectively. Impaired loans averaged $2,378,000
for the year ended December 31, 1995. Interest income recognized on impaired
loans for the year approximated $305,000, which included cash basis income of
approximately $302,000.
During 1994, the Bank agreed to modify the terms of three loans to one
borrower totalling $3,077,000. Under the modified terms, the Bank accepted a
parcel of real estate in partial settlement and rewrote the remaining loan
balances into two notes which have a total carrying value of $1,047,000 and
$2,028,000 at December 31, 1995 and 1994, respectively, and fixed interest
rates of 8.5% on each note, which was the market rate of interest for similar
borrowers at the restructure date. Both notes were performing as agreed at
December 31, 1995. These modifications resulted in a $168,000 loss charged
to the allowance for loan losses in 1994. No interest income was recognized
on the loan in 1994 prior to the modifications. After the restructuring,
interest income recorded on the restructured loans was $110,000 for 1995 and
$129,000 for 1994.
NOTE 4 -- ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year . . . . . . . . . . . . . . . . . $ 5,140 $ 4,705 $ 4,161
Provision charged to operations . . . . . . . . . . . . . . . 1,783 2,298 2,423
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . (2,513) (2,942) (2,581)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . 766 1,079 702
-------- -------- --------
Balance at end of year . . . . . . . . . . . . . . . . . . . . $ 5,176 $ 5,140 $ 4,705
======== ======== ========
</TABLE>
18
<PAGE>
NOTE 5 -- MORTGAGE BANKING
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans are
summarized as follows as of December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Mortgage loan portfolios serviced for:
Federal Home Loan Mortgage Corporation . . . . . . . . . . . . . . . . $ 152,473 $ 116,274
Federal National Mortgage Association . . . . . . . . . . . . . . . . 79,061 33,370
Other investors . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,938 3,895
--------- ---------
$ 235,472 $ 153,539
========= =========
</TABLE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $201,000 at December 31, 1995, and $1,318,000 at
December 31, 1994.
During 1995, the Company purchased the servicing rights to approximately
$62,599,000 of one to four family mortgage loans. These loans are comprised
of mortgages on properties located in the Company's market area. The
unamortized cost of purchased mortgage servicing rights are classified with
other assets on the consolidated balance sheet. Following is a summary of the
changes in the unamortized cost of purchased mortgage servicing rights:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year . . . . . . . . . . . . . . . . . $ 412 $ 480 $ --
Purchase price of mortgage servicing rights . . . . . . . . . 876 -- 796
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . (123) (68) (316)
-------- -------- --------
Balance at end of year . . . . . . . . . . . . . . . . . . . . $ 1,165 $ 412 $ 480
======== ======== ========
</TABLE>
In 1993, the Company began selling most fixed rate residential real estate
loans it originated and funded, with servicing retained by the Company.
Selected information related to loans sold follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Interest on loans held for sale . . . . . . . . . . . . . . . . $ 161 $ 207 $ 262
Net gains on sales of loans . . . . . . . . . . . . . . . . . . 341 491 1,148
Loan servicing income . . . . . . . . . . . . . . . . . . . . . 559 432 232
Amortization of purchased mortgage servicing rights . . . . . . 123 68 316
</TABLE>
NOTE 6 -- PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,158 $ 1,158
Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,112 10,109
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . 6,432 5,843
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . 705 --
-------- --------
18,407 17,110
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . (8,903) (7,773)
-------- --------
$ 9,504 $ 9,337
======== ========
</TABLE>
Depreciation expense amounted to approximately $1,236,000, $1,106,000, and
$942,000 for years ended December 31, 1995, 1994, and 1993, respectively.
The Company began construction on a branch facility in Geneva, Illinois
during 1995. The remaining construction costs at December 31, 1995, are
estimated to be $1,134,000.
19
<PAGE>
NOTE 7 -- DEPOSITS
The major components of deposits are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Noninterest-bearing -- demand and other . . . . . . . . . . . . . . . . . $ 76,008 $ 74,931
Interest-bearing:
NOW accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,027 65,686
Money market accounts . . . . . . . . . . . . . . . . . . . . . . . . 33,808 31,443
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,935 56,822
Time, $100,000 and over . . . . . . . . . . . . . . . . . . . . . . . 62,628 49,477
Other time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166,365 135,382
--------- ---------
$ 453,771 $ 413,741
========= =========
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
NOW accounts . . . . . . . . . . . . . . . . . . . . . . . $ 1,571 $ 1,577 $ 1,650
Money market accounts . . . . . . . . . . . . . . . . . . 1,139 885 924
Savings . . . . . . . . . . . . . . . . . . . . . . . . . 1,480 1,527 1,385
Time, $100,000 and over . . . . . . . . . . . . . . . . . 3,323 1,922 1,411
Other time . . . . . . . . . . . . . . . . . . . . . . . . 8,987 5,880 5,397
--------- --------- ---------
$ 16,500 $ 11,791 $ 10,767
========= ========= =========
</TABLE>
NOTE 8 -- NOTE PAYABLE
The note payable at December 31, 1995 and 1994, consisted of a FHLB advance
which matures on February 26, 1996, bears a fixed interest rate of 4.83%,
requires no principal reductions prior to maturity, and, pursuant to a
collateral agreement with the FHLB, is secured by all stock in the FHLB and a
blanket lien on $3,000,000 of the Bank's qualifying first mortgage loans.
NOTE 9 -- INCOME TAXES
A summary of Federal and state income taxes on operations is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current . . . . . . . . . . . . . . . . . . . . . . . . $ 2,179 $ 1,685 $ 1,477
Deferred . . . . . . . . . . . . . . . . . . . . . . . (47) 74 (214)
State:
Current . . . . . . . . . . . . . . . . . . . . . . . . 395 304 204
Deferred . . . . . . . . . . . . . . . . . . . . . . . (25) 16 (30)
--------- --------- ---------
$ 2,502 $ 2,079 $ 1,437
========= ========= =========
</TABLE>
20
<PAGE>
NOTE 9 -- INCOME TAXES -- (CONTINUED)
In addition to the preceding taxes on operations, taxes allocated for net
unrealized gains (losses) on securities available for sale were $2,851,000,
($2,762,000), and $658,000 in 1995, 1994, and 1993, respectively. These
amounts include the tax effect of transfers into available for sale in 1995
and 1993.
The following are the components of the deferred tax assets and liabilities
at December 31, 1995 and 1994. The net deferred tax asset is included in
accrued interest and other assets at December 31, 1995, and the net deferred
tax liability is included in accrued interest and other liabilities at
December 31, 1994.
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Gross deferred tax liabilities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (442) $ (434)
Unrealized gain on securities available for sale . . . . . . . . . . . . (747) --
Discount accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . (35) (44)
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . (64) (87)
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . (273) (194)
-------- --------
Gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . (1,561) (759)
-------- --------
Gross deferred tax assets:
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . 1,016 892
Unrealized loss on securities available for sale . . . . . . . . . . . . -- 2,104
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 155
Purchased mortgage servicing rights . . . . . . . . . . . . . . . . . . 5 22
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 28
-------- --------
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . 1,224 3,201
-------- --------
Net deferred tax asset (liability) . . . . . . . . . . . . . . . . . (337) 2,442
Valuation allowance for deferred tax assets . . . . . . . . . . . . . -- --
-------- --------
Net deferred tax asset (liability) . . . . . . . . . . . . . . . . . $ (337) $ 2,442
======== ========
</TABLE>
A reconciliation of the statutory Federal income tax of 34% to the income tax
provision before the cumulative effect of an accounting change included in
the consolidated statements of income is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Tax at statutory Federal income tax rate . . . . . . . . . . . $ 2,957 $ 2,563 $ 1,996
Nontaxable interest income,
net of disallowed interest deduction . . . . . . . . . . . (856) (815) (665)
State income taxes, net of Federal benefit . . . . . . . . . . 244 211 118
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . 157 120 (12)
-------- -------- --------
$ 2,502 $ 2,079 $ 1,437
======== ======== ========
</TABLE>
NOTE 10 -- BENEFIT PLANS
The Company maintains a noncontributory pension plan covering substantially
all full-time employees of the Company and the Bank who have completed age
and service requirements. The total pension expense (income) under the
pension plan approximated $28,000, ($5,000), and $31,000 for the years ended
December 31, 1995, 1994, and 1993, respectively, and was comprised of the
following components:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Service cost -- benefits earned during the year . . . . . . . . $ 134 $ 142 $ 136
Interest cost on projected benefit obligation . . . . . . . . . 288 275 272
Actual return on plan assets . . . . . . . . . . . . . . . . . (801) 74 (663)
Net amortization and deferral . . . . . . . . . . . . . . . . . 407 (496) 286
-------- -------- --------
$ 28 $ (5) $ 31
======== ======== ========
</TABLE>
21
<PAGE>
NOTE 10 -- BENEFIT PLANS -- (CONTINUED)
The following table sets forth the pension plan's funded status and amounts
recognized in the Company's consolidated financial statements at December 31:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Vested benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,674 $ 2,907
======== ========
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,733 $ 2,940
======== ========
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,455 $ 3,492
Plan assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,129 3,600
-------- --------
Plan assets in excess of (less than) projected benefit obligation . . . . . . (326) 108
Unrecognized net asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (222) (259)
Unrecognized net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 595 176
Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . (43) (47)
-------- --------
Net pension asset (liability) recorded in the balance sheet at December 31 . . $ 4 $ (22)
======== ========
</TABLE>
Plan assets consist primarily of common stocks and corporate bonds and
included approximately $626,000 and $472,000 of the Company's common stock at
December 31, 1995 and 1994, respectively. Other selected information as of
December 31 related to the pension plan is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.50% 7.90%
Expected long-term rate of return on plan assets . . . . . . . . . . . . . . . . 10.00 10.00
Expected annual compensation increase . . . . . . . . . . . . . . . . . . . . . . 4.00 4.00
</TABLE>
The Company also maintains an Employee Contributory Thrift Plan (the "Thrift
Plan"). The Company contributes an amount determined by the Board of
Directors to all eligible participants. In addition, for each dollar the
participant deposits up to 6% of annual salary, the Company will contribute
an additional fifty cents. Total contributions under the Thrift Plan
amounted to approximately $259,000, $245,000, and $189,000 for the years
ended December 31, 1995, 1994, and 1993, respectively.
Statement of Financial Accounting Standards No. 106 ("SFAS 106") "Employer's
Accounting for Postretirement Benefits Other than Pensions" was issued in
December 1990, and became effective for the Company in 1993. The effect on
the Company's financial statements of adopting SFAS 106 was not material.
In April, 1994, the stockholders approved a Stock Incentive Plan (the
"Incentive Plan"), which authorizes the issuance of up to 250,000 shares of
the Company's common stock, including the granting of qualified stock options
("Incentive Stock Options"), nonqualified stock options, restricted stock and
stock appreciation rights. Subject to the terms and provisions of the
Incentive Plan, stock based awards may be granted to selected directors and
officers or employees at the discretion of the Board of Directors. The
Incentive Plan requires the exercise price of any incentive stock option
issued to an employee to be at least equal to the fair market value of
Company common stock on the date the option is granted. In addition, all
stock options are granted for a maximum term of ten years.
Incentive Stock Options granted during the years ended December 31, 1995 and
1994, are as indicated in the table below. No compensation expense was
recorded upon issuance of the stock options, since the exercise price was the
market value at the date of the grant. None of these options had been
exercised as of December 31, 1995.
<TABLE>
<CAPTION>
Date Granted Number of Options Exercise Price Expiration Date
------------ ----------------- -------------- ---------------
<S> <C> <C> <C>
May 17, 1994 18,373 $24.625 May 17, 2004
May 16, 1995 18,579 24.750 May 16, 2005
</TABLE>
Nonqualified stock options may be granted to directors based upon a formula.
These and other awards under the Incentive Plan may be granted subject to a
vesting requirement and would become fully vested upon a merger or change in
control of the Company. As of December 31, 1995, there were no nonqualified
stock options, stock appreciation rights, or restricted stock issued under
the Incentive Plan.
22
<PAGE>
NOTE 11 -- COMMITMENTS AND CONTINGENT LIABILITIES
The Company and its subsidiary are defendants in legal actions arising from
normal business activities. Management, after consultation with legal
counsel, believes that the ultimate liability, if any, resulting from these
actions will not have an adverse material effect on the Company's
consolidated financial position.
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and standby letters of credit. Loan commitments and guarantees written have
off-balance-sheet risk because only origination fees are recognized in the
statement of financial position until the commitments are fulfilled or the
guarantees expire. Credit risk represents the accounting loss that would be
recognized at the reporting date if counterparties failed completely to
perform as contracted. The credit risk amounts are equal to the contractual
amounts, assuming that the amounts are fully advanced and that collateral or
other security is of no value.
The Company has entered into agreements to sell mortgage loans to the FHLMC
and the FNMA. The amounts remaining with FHLMC and FNMA, under these
agreements, at December 31, 1995 and 1994 were as follows.
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Federal Home Loan Mortgage Corporation . . . . . . . . . $ 6,365 $ 15,927
Federal National Mortgage Association . . . . . . . . . -- 4,514
</TABLE>
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet investments. At
December 31, 1995 and 1994, the contract amounts of such commitments and
conditional obligations were as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Commitments to extend credit
Fixed rate . . . . . . . . . . . . . . . . . . . . . $ 17,585 $ 25,068
Variable rate . . . . . . . . . . . . . . . . . . . 74,479 63,490
Standby letters of credit . . . . . . . . . . . . . . . 19,150 17,877
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates of up to one year or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Company
upon extension of credit, is based on management's credit evaluation of the
borrower. Collateral held varies, but may include real estate, accounts
receivable, inventory, property, plant, equipment, and income producing
properties.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those standby
letters of credit are primarily issued in favor of municipalities and
insurance companies. The credit risk involved in issuing standby letters of
credit is essentially the same as that involved in extending loan facilities
to customers.
The Company provides several types of loans to its customers including
residential, construction, commercial, and installment loans. Lending
activities are conducted with customers in a wide variety of industries as
well as with individuals with a wide variety of credit requirements. The
Company does not have a concentration of loans in any specific customer or
industry. Credit risk tends to be geographically concentrated in that the
majority of the Company's customer base lies within the City of Aurora and
the surrounding communities.
The Bank maintained reserves in accordance with Federal Reserve requirements
of approximately $8,829,000 and $8,360,000 at December 31, 1995 and 1994,
respectively.
23
<PAGE>
NOTE 12 -- RELATED PARTY TRANSACTIONS
A summary of loans made by the Bank in the ordinary course of business to
or for the benefit of directors, executive officers, or principal holders
of equity securities of the Company is as follows for the year ended
December 31, 1995:
<TABLE>
<S> <C>
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . $ 8,652
New loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,344
Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (34,270)
--------
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . $ 10,726
========
</TABLE>
NOTE 13 -- CAPITAL MATTERS
On April 20, 1993, the stockholders approved a three-for-one stock split. As
a result, the total number of shares authorized increased from 2,000,000 to
6,000,000; the total number of shares issued at that time increased from
677,230 to 2,031,690; the total number of treasury shares increased from
13,136 to 39,408; and the par value of common stock was reduced from $15 to
$5 per share. Concurrently, the stockholders approved reducing the par value
of the common stock from $5 to $1 per share. Unless otherwise noted, all
references to the number of shares and per share data in the consolidated
financial statements have been adjusted to reflect the stock split on a
retroactive basis.
During 1993, the Company sold 575,000 shares of common stock at $20.50 per
share. Proceeds of approximately $11,788,000 were offset by stock issuance
commissions and costs of $1,107,000.
Bank holding companies are required to comply with the Federal Reserve
Board's risk-based capital guidelines. The minimum ratio of total capital to
risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) is 8%. At least half of the total capital is
required to be Tier I Capital. Under these guidelines, Tier I Capital
consists of common and qualifying preferred stockholders' equity and minority
interests in equity accounts of consolidated subsidiaries, less goodwill.
Tier II Capital consists of, in addition to Tier I Capital, mandatory
convertible debt, preferred stock not qualifying as Tier I Capital,
subordinated and other qualifying term debt and the allowance for loan
losses. Risk-based capital ratios are calculated with reference to
risk-weighted assets which include both on and off-balance sheet exposures.
The effect of the unrealized gains (losses) on securities available for sale
is excluded from these calculations.
In addition to the risk-based capital requirement, the Federal Reserve Board
has adopted a minimum leverage ratio of 3% for the most highly-rated bank
holding companies, with minimum ratios of 4% to 5% for all others. The
leverage ratio is defined as the ratio of Tier I Capital to average total
assets. Management of the Company has established a minimum target leverage
ratio of 5%.
The Company exceeded all regulatory capital requirements at December 31,
1995. The following table presents the Company's approximate regulatory
capital ratios as of December 31, 1995:
<TABLE>
<CAPTION>
Leverage Risk-Based Capital
Ratio Tier I Tier II
--------- --------- ---------
<S> <C> <C> <C>
Required percentage . . . . . . . . . . . . . . . . . . . 5.00% 4.00% 8.00%
Actual percentage . . . . . . . . . . . . . . . . . . . . 10.31% 14.54% 15.79%
Required regulatory capital . . . . . . . . . . . . . . . $ 26,072 $ 14,794 $ 29,588
Actual regulatory capital . . . . . . . . . . . . . . . . 53,765 53,765 58,399
Excess regulatory capital . . . . . . . . . . . . . . . . 27,693 38,971 28,811
</TABLE>
Dividends from the Bank are the Company's primary source of funds. National
and state bank regulations and capital guidelines limit the amount of
dividends that may be paid by the Bank without prior regulatory approval. At
January 1, 1996, approximately $11,965,000 was available for the payment of
dividends by the Bank to the Company.
24
<PAGE>
NOTE 14 -- STOCKHOLDER RIGHTS PLAN
Pursuant to a plan adopted by the Company in January, 1989, and after the
Company's three-for-one stock split in April, 1993, each share of the
Company's common stock carries one-third of a right (referred to as a
"Right") to purchase one hundredth of a share of Series A Preferred Stock,
$1.00 par value ("Preferred Stock"), at a price of $125.00 (subject to
adjustment). The Rights are tradeable only with the Company's common stock
until they become exercisable. The Rights become exercisable ten business
days after the earlier of the date a person acquires or commences a tender
offer to acquire 15% or more of the Company's common stock. The Rights are
subject to redemption by the Company at a price of $0.01 per Right, subject
to certain limitations, and will expire on January 13, 1999. The Preferred
Stock Right carries preferential dividend and liquidation rights and certain
voting and other rights.
If after the Rights become exercisable, the Company or its assets are
acquired in certain merger or other transactions, except under certain
circumstances, each holder of a Right may purchase at the exercise price of
the Right shares of common stock of the acquiring or surviving company having
a market value of two times the exercise price of the Right. In addition, if
after the Rights become exercisable, any person becomes the owner of 20% of
the Company's outstanding common stock, or the Company is involved in certain
"self-dealing" transactions involving any person owning 15% or more of the
Company's outstanding common stock, each holder of a Right may purchase at
the exercise price of the Right, shares of the Company's common stock (or in
certain cases, cash, property, or other securities of the Company) having a
market value of twice the exercise price of the Right. Rights held by an
acquiring person become void upon the occurrence of such events.
NOTE 15 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practical to estimate
that value. Considerable judgement is required to develop the estimates of
fair value and, therefore, the estimates provided below are not necessarily
indicative of the amount that could be realized in a current market exchange.
SHORT TERM FINANCIAL INSTRUMENTS: These instruments are valued at their
carrying amounts included in the balance sheets, which are reasonable
estimates of fair value due to the relatively short period to maturity of
these instruments. This approach applies to cash and cash equivalents,
accrued receivables and certain other liabilities.
SECURITIES: Fair value for these instruments equals quoted market prices or
dealer quotes.
LOANS HELD FOR SALE: The fair value of loans held for sale is estimated
based upon the anticipated sale price of each loan.
LOANS: The fair value of loans is estimated by discounting future cash flows
using current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities. Loan
prepayments are assumed to occur at the same rate as in previous periods when
interest rates were at levels similar to current levels. The fair value of
impaired loans is also estimated on a present value basis, using each loan's
effective interest rate.
DEPOSITS: The fair value of demand deposits, savings accounts, and money
market deposits is the amount payable on demand at the reporting date. The
fair value of certificates of deposit is estimated by discounting future cash
flows using the current rates for deposits of similar remaining maturities.
The intangible value of long-term relationships with depositors is not taken
into account in estimating the fair values disclosed.
FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS:
Federal funds purchased are for a term of one day and the carrying amount is
a reasonable estimate of fair value. The fair value of securities sold under
repurchase agreements is estimated by discounting future cash flows using the
current rates for funds of similar remaining maturities.
NOTE PAYABLE: The FHLB advance is at a fixed rate and the fair value is
estimated using the current rates for advances of similar remaining
maturities.
25
<PAGE>
NOTE 15 -- DISCLOSURES ABOUT FAIR VALUE OF
FINANCIAL INSTRUMENTS -- (CONTINUED)
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT: The fee that
would be charged to enter similar commitments today is the fair value. All
commitments to extend credit and standby letters of credit are issued on a
short-term or floating rate basis. The fair value of these instruments is
not material.
The carrying values and estimated fair values of the Company's financial
instruments as of December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------ ------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks . . . . . . . . . $ 28,166 $ 28,166 $ 28,922 $ 28,922
Securities available for sale . . . . . . 187,169 187,169 128,326 128,326
Securities held to maturity . . . . . . . -- -- 38,505 37,311
Loans held for sale . . . . . . . . . . . 4,340 4,340 2,033 2,033
Loans . . . . . . . . . . . . . . . . . . 304,327 301,077 285,573 277,962
Allowance for loan losses . . . . . . . . (5,176) (5,176) (5,140) (5,140)
Accrued interest receivable . . . . . . . 4,063 4,063 3,647 3,647
Due from broker . . . . . . . . . . . . . 3,687 3,687 -- --
Financial liabilities:
Deposits . . . . . . . . . . . . . . . . . $ (453,771) $ (455,875) $ (413,741) $ (412,066)
Federal funds purchased and securities
sold under repurchase agreements . . . (22,726) (22,726) (33,299) (33,299)
Notes payable . . . . . . . . . . . . . . (3,000) (3,000) (3,000) (2,911)
Accrued interest payable . . . . . . . . . (1,703) (1,703) (1,232) (1,232)
Due to broker . . . . . . . . . . . . . . (1,560) (1,560) (608) (608)
</TABLE>
NOTE 16 -- CONDENSED FINANCIAL INFORMATION -- COMPANY ONLY
Presented below are the condensed balance sheets and condensed statements of
income and cash flows for Merchants Bancorp, Inc.
CONDENSED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Repurchase agreement with bank subsidiary . . . . . . . . . . . . . . . . . $ 9,631 $ 9,000
Noninterest-bearing deposit with bank subsidiary . . . . . . . . . . . . . 919 1,341
Investment in bank subsidiary, at equity . . . . . . . . . . . . . . . . . 43,442 33,211
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480 184
-------- --------
$ 54,472 $ 43,736
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued interest and other liabilities . . . . . . . . . . . . . . . . . . $ 378 $ 280
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,094 43,456
-------- --------
$ 54,472 $ 43,736
======== ========
</TABLE>
26
<PAGE>
NOTE 16 -- CONDENSED FINANCIAL INFORMATION -- COMPANY ONLY
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
OPERATING INCOME
Cash dividends received from bank subsidiary . . . . . . . . . $ 1,395 $ 1,001 $ 1,060
Interest income on repurchase agreement with
bank subsidiary . . . . . . . . . . . . . . . . . . . . . . 457 291 3
-------- -------- --------
1,852 1,292 1,063
-------- -------- --------
OPERATING EXPENSES
Interest on note payable . . . . . . . . . . . . . . . . . . . -- 5 40
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . 280 227 65
-------- -------- --------
280 232 105
-------- -------- --------
Income before income taxes and equity in
undistributed net income of bank subsidiary . . . . . . . . 1,572 1,060 958
Income tax expense (benefit) . . . . . . . . . . . . . . . . . 73 24 (42)
Income before equity in undistributed
net income of bank subsidiary . . . . . . . . . . . . . . . 1,499 1,036 1,000
Equity in undistributed net income
of bank subsidiary . . . . . . . . . . . . . . . . . . . . . 4,697 4,423 3,734
-------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 6,196 $ 5,459 $ 4,734
======== ======== ========
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,196 $ 5,459 $ 4,734
Adjustments to reconcile net income to
net cash from operating activities:
Equity in undistributed net income of
bank subsidiary . . . . . . . . . . . . . . . . . . . (4,697) (4,423) (3,734)
Other, net . . . . . . . . . . . . . . . . . . . . . . . (251) (158) 35
-------- -------- --------
Net cash from operating activities . . . . . . . . . . . 1,248 878 1,035
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on note payable . . . . . . . . . . . . . . -- (450) (300)
Net proceeds from stock offering . . . . . . . . . . . . . . . -- -- 10,681
Dividends paid, net of dividend reinvestments . . . . . . . . . (1,039) (911) (671)
-------- -------- --------
Net cash from financing activities . . . . . . . . . . . . . (1,039) (1,361) 9,710
-------- -------- --------
Net change in cash and cash equivalents . . . . . . . . . . 209 (483) 10,745
Cash and cash equivalents at beginning of year . . . . . . . 10,341 10,824 79
-------- -------- --------
Cash and cash equivalents at end of year . . . . . . . . . . $ 10,550 $ 10,341 $ 10,824
======== ======== ========
</TABLE>
NOTE 17 -- SUBSEQUENT EVENT
On June 30, 1995, the Company entered into an agreement to acquire 100% of
the outstanding common stock of Valley Banc Services Corp. for cash in the
amount of $20,500,000. The Company borrowed $14 million to finance this
transaction, which was consummated on January 3, 1996, and accounted for
using the purchase method. Selected financial information for Valley Banc
Services Corp. is as follows (in thousands):
Consolidated assets at December 31, 1995 . . . . . . . . . . $ 167,527
Net interest income for the year ended December 31, 1995 . . 5,987
Net income for the year ended December 31, 1995 . . . . . . 389
27
<PAGE>
[ CROWE CHIZEK LETTERHEAD ]
Independent Auditors' Report
Stockholders and Board of Directors
Merchants Bancorp, Inc.
Aurora, Illinois
We have audited the accompanying consolidated balance sheets of Merchants
Bancorp, Inc. and Subsidiary as of December 31, 1995 and 1994 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Merchants
Bancorp, Inc. and Subsidiary as of December 31, 1995 and 1994 and the results
of its operations and its cash flows for each of the three years in the
period ended December 31, 1995 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of computing income tax expense and accounting for
securities in 1993.
/s/ CROWE, CHIZEK AND COMPANY LLP
Crowe, Chizek and Company LLP
Oak Brook, Illinois
February 9, 1996
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Merchants Bancorp, Inc., a bank holding company headquartered in Aurora,
Illinois, is one of the leading commercial banking and trust institutions in
Aurora and surrounding communities. The Company conducts a full service
community banking and trust business through its wholly-owned subsidiary
bank, The Merchants National Bank of Aurora, which has its main office and
three locations in Aurora and one additional location in Oswego, Illinois. A
new branch under construction in Geneva, Illinois, will open in early 1996.
The Bank also operates two loan production offices, in Aurora and Yorkville,
Illinois. On January 3, 1996, the Company purchased Valley Banc Services
Corp., a $167 million bank holding company with banks located in St. Charles,
Hinckley, Osco, and Grayslake, Illinois.
As a large, community-oriented, independent financial institution in the
Aurora area, the Company is well positioned to take advantage of the growth
of Aurora and its surrounding communities. The Bank has continuously served
the Aurora community since it was chartered in 1888. The Company's local
management, coupled with its long record of service, has allowed it to
compete successfully in Aurora's banking market. The Bank operates as a
traditional community bank with conveniently located facilities and a
professional, highly motivated staff which is active in the community,
focuses on long-term relationships with customers and provides individualized
quality service.
The Company's earnings performance and financial condition were solid during
1995, with a return on average assets of 1.19% and total capital to risk
adjusted assets of 15.79%. Contributing to this performance has been a
stable, well managed net interest margin. Fee revenue, including both trust
and mortgage banking revenues is expected to be a growing source of income.
Trust revenue, increased approximately 12% from 1994, and mortgage banking
revenue increased 10% in 1995, after declining 38% during the mortgage
industry slow-down of 1994. The ratio of nonperforming loans to total assets
was cut in half to 0.35% from 0.71% at December 31, 1995 and 1994,
respectively. The allowance for loan losses was strengthened to cover 248.3%
of nonperforming loans at December 31, 1995, up from 146.9% at the end of
1994. Loans charged off as a percent of average loans declined to 0.60% in
1995, from 0.68% in 1994.
The Company's earnings performance has shown continuous growth during the
past three years. The Company's net income was a record $6,196,000 during
1995, compared to $5,459,000 in 1994, and $4,734,000 in 1993. In 1993, net
income before the cumulative effect of a change in accounting principle, due
to the adoption of SFAS 109, was $4,434,000. Net income before the
cumulative effect of a change in accounting principle increased 13.5% in 1995
over 1994, compared to a 1994 increase of 23% over 1993. Most of the
increase in 1995 resulted from greater net interest income, which resulted
from a 10.3% increase in total interest earning assets and a net interest
margin of 4.73% in 1995, 4.92% in 1994, and 4.93% in 1993.
Results of Operations
Net Interest Income
Net interest income is the difference between interest income earned on
earning assets and interest expense paid on interest bearing liabilities. As
such, net interest income is affected by changes in the volume and yields on
earning assets, and the volume and rates paid on interest bearing
liabilities. Net interest margin is the ratio of tax equivalent net interest
income to average earning assets.
A review of overall trends shows that net
interest income grew during the last three years. The primary cause for
these increases was the growth in earning assets and deposits of the Company.
Net interest income was $21.5 million, $20.0 million, and $17.9 million in
1995, 1994, and 1993, respectively. Net interest income to average total
earning assets on a fully tax equivalent basis was 4.73% in 1995, 4.92% in
1994, and 4.93% in 1993.
The tax equivalent yield on earning assets increased from 7.96% in 1994, to
9.08% in 1995, as interest rates were generally higher in 1995 than in 1994.
The average interest rate paid on interest bearing liabilities increased from
3.66% in 1994 to 4.59% in 1995. When 1993 and 1994 are compared, the
Company's asset yields and cost of funds, on
29
<PAGE>
average, had not changed. The tax equivalent yield on earning assets was
7.96% in both 1994 and 1993, while the average interest rate paid on interest
bearing liabilities was also unchanged at 3.66% in both years.
Management has consistently managed the balance sheet with the objective of
maintaining a stable net interest margin over the long term, regardless of
changes in market interest rates, so that asset growth results in a
corresponding increase in net interest income. Average interest rates are
the result of the volume and interest rates of new assets and liabilities and
the volume and interest rates of matured, sold, or repaid assets and
liabilities.
The table below demonstrates that most of the growth in net interest income
has come as a direct result of balance sheet growth, rather than changes in
interest rates. This table allocates the changes in tax equivalent net
interest income to changes in either average balances or average rates for
earning assets and interest bearing liabilities. The change in net interest
income due to both volume and rate has been allocated proportionately to the
change due to balance and due to rate. Tax exempt interest income is
measured on a tax equivalent basis using a 34% rate.
Provision for Loan Losses
The quality of the Company's loan portfolio has allowed management to
decrease its provision for loan losses. The Company's provision for loan
losses was $1,783,000 in 1995, $2,298,000 in 1994, and $2,423,000 in 1993.
Provisions for loan losses are made to recognize current period net charge
off activity, and to provide for possible future losses on loans which are
identified in the loan review process. The allowance for loan losses as a
percent of total loans was 1.70%, 1.80%, and 1.71% as of December 31, 1995,
1994, and 1993, respectively. Net charge-offs were $1,747,000, $1,863,000,
and $1,879,000, respectively, in 1995, 1994, and 1993. Net charge-offs as a
percentage of average loans has declined each year, to 0.60% in 1995, from
0.67% in 1994, and 0.73% in 1993.
The Company adopted Statement of Financial Accounting Standards No. 114 and
No. 118, "Accounting by Creditors for Impairment of a Loan" as of January 1,
1995. Adopting these statements did not impact the Company's budgeted
provision for loan losses or the allowance for loan losses. For a further
discussion see "Nonperforming Loans and Assets."
Noninterest Income
The table on the following page shows the Company's noninterest income for
the years indicated.
Total noninterest income increased $354,000 (5%), during 1995, after a
decline of $42,000, or less than 1%, from 1993 to 1994. All noninterest
categories except securities gains increased from 1994 to 1995. Trust income
increased $203,000 (12%) to $1,925,000 in 1995, from $1,722,000 in 1994, and
grew $300,000 (21%) during 1994, from $1,422,000 in 1993. Assets under
management grew to $371 million at December 31, 1995, from $326 million at
December 31, 1994, and $315 million at December 31, 1993, representing growth
of approximately 13.8% and 3.5% during 1995 and 1994, respectively. Emphasis
on certain types of accounts, including employee benefit accounts, resulted
in an increase in income and assets under management in 1995 and 1994.
In 1995 and 1993, the Company purchased servicing rights on portfolios of
mortgage loans totaling approximately $62.6
- -------------------------------------------------------------------------------
Analysis of Changes in Interest Income (In thousands)
<TABLE>
<CAPTION>
Change Due to
---------------------
Total Average Average
Change Balance Rate
-------- -------- --------
<S> <C> <C> <C>
1995 Compared to 1994:
Earning assets . . . . . . . . . . . . . . . . . . . . . . . . $ 6,759 $ 3,441 $ 3,318
Interest bearing liabilities . . . . . . . . . . . . . . . . . 5,195 2,401 2,794
-------- -------- --------
Net interest income . . . . . . . . . . . . . . . . . . . . . . $ 1,564 $ 1,040 $ 524
======== ======== ========
1994 Compared to 1993:
Earning assets . . . . . . . . . . . . . . . . . . . . . . . . $ 3,954 $ 3,990 $ (36)
Interest bearing liabilities . . . . . . . . . . . . . . . . . 1,547 1,637 (90)
-------- -------- --------
Net interest income . . . . . . . . . . . . . . . . . . . . . . $ 2,407 $ 2,353 $ 54
======== ======== ========
</TABLE>
30
<PAGE>
million and $71.8 million, respectively. The serviced loans are located
primarily in the Company's market area and in Northern Illinois. In addition,
beginning in 1993, the Company began to retain the servicing rights on new
mortgage loans originated and sold. The total servicing portfolio, including
purchased and originated loans, was $235 million and $153 million at December
31, 1995 and 1994, respectively. Management's plans are to continue
increasing the size of the servicing portfolio.
Servicing income was $232,000 in 1993 and grew to $432,000 in 1994 and
$559,000 in 1995. Purchased mortgage servicing rights totaled $1,165,000 and
$412,000 at December 31, 1995 and 1994, respectively. Amortization of this
asset was $123,000, $68,000, and $316,000 in 1995, 1994, and 1993,
respectively.
The Company will adopt Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights" ("SFAS 122"), effective January 1,
1996. Under SFAS 122, the Company recognizes a separate asset for both
purchased and originated mortgage servicing rights.
As discussed further below under "Securities," the Company adopted SFAS 115
at December 31, 1993. Sales of securities available for sale totaled $23.8
million during 1995 and $17.9 million during 1994, resulting in net gains of
$133,000 and $373,000, respectively. These securities were sold due to
changes in interest rates, availability of alternative investments, liquidity
needs, and other factors. Sales of securities classified as held for sale
resulted in net gains of $250,000 during 1993. During 1993, approximately $4
million in securities classified as held to maturity at December 31, 1992,
were sold at a net gain of $31,000, principally as a result of realigning the
portfolio in order to implement SFAS 115.
Other noninterest income was $880,000, $844,000, and $682,000 in 1995, 1994,
and 1993, respectively. In 1995, fees related to ATMs remained stable at
$465,000 as compared to $456,000 in 1994, following an increase from $238,000
in fees during 1993. Debit card fees, a new source of income introduced in
late 1995, totaled $17,000.
Noninterest Expense
The table on page 32 shows the Company's noninterest expense for the years
indicated.
Noninterest expense increased 6.9% to $17.9 million in 1995, compared to
$16.7 million in 1994. This followed a $556,000 increase (3.4%) in 1994, to
$16.7 million, compared to 1993 noninterest expense of $16.2 million.
Salaries and benefits increased $713,000 (7.8%) to $9.9 million in 1995,
compared to $9.2 million in 1994, and $8.8 million in 1993. The full time
equivalent number of employees was 261, 265, and 254 as of December 31, 1995,
1994, and 1993, respectively. The increased expense in 1995 included a
one-time charge of $234,000 to recognize the cost of an early retirement plan
offered to employees meeting certain service requirements.
Occupancy expenses were $86,000 (9.1%) higher in 1995 than in 1994, after an
increase of $12,000 (1.3%) in 1994, compared to 1993. Remodeling of the West
Plaza branch, which is also the location of both the mortgage department and
the trust department, was completed in 1994. A new branch being constructed
in Geneva, Illinois, is expected to be completed in March, 1996, at a cost of
approximately $1.8 million. The added occupancy expense of the new location
will be reflected in 1996 operating results.
Furniture and equipment expenses increased $148,000 (13.6%) in 1995, and
$150,000 (16.0%) in 1994. Management believes strongly in the use of
technology to achieve operational efficiency and quality of results.
Investments in new systems to manage information have contributed to the
increase in equipment expenses during the years presented. Some of these
projects have involved specific product areas, such as the
- -------------------------------------------------------------------------------
Noninterest Income (In thousands)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Trust income . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,925 $ 1,722 $ 1,422
Mortgage banking income . . . . . . . . . . . . . . . . . . . . 1,267 1,153 1,857
Service charges and fees . . . . . . . . . . . . . . . . . . . 2,713 2,472 2,364
Securities gains, net . . . . . . . . . . . . . . . . . . . . . 133 373 281
Other income . . . . . . . . . . . . . . . . . . . . . . . . . 880 844 682
-------- -------- --------
Total noninterest income . . . . . . . . . . . . . . . . . . $ 6,918 $ 6,564 $ 6,606
======== ======== ========
</TABLE>
31
<PAGE>
introduction of the debit card in 1995, and some are designed to improve
operational efficiency and customer service. Also, each of the remodeling and
expansion projects mentioned above also involved the purchase of furniture
and equipment.
The cost of insurance premiums assessed by the Federal Deposit Insurance
Corporation (the "FDIC") was $475,000 in 1995, compared to $846,000 in 1994,
and $756,000 in 1993. The FDIC Bank Insurance Fund ("BIF") reached its
congressionally mandated level during the second quarter of 1995. In
September, new assessment rates were retroactively put into effect as of June
1, 1995. As a result, all BIF insured institutions received refunds
representing the difference between the old and new rates, plus interest. On
September 15, 1995, the Bank received a refund of approximately $255,000,
which included $3,000 in interest. The Bank continues to pay the lowest
assessment rate, reduced to .04% of average deposits as of June 1, 1995, and
to zero as of January 1, 1996, from the previous level of .23% of average
deposits. The lowest assessment rate is applied to well capitalized
institutions in the supervisory group representing the least risk.
Other expenses increased $580,000 (12.4%) in 1995, compared to 1994, after a
decrease of $83,000 (1.7%) in 1994 compared to 1993. Consulting fees
increased $176,000, to $245,000 in 1995, from $69,000 in 1994. Most of the
increase in consulting fees was the result of an initiative in which a
consulting firm was engaged to work with management to increase earnings
through changes in a wide array of areas, including product pricing,
operating procedures, and staffing. Management believes the changes that have
been implemented, or will be implemented, as a result of this initiative will
result in significant earnings improvement over time. Losses on dispositions
of other real estate owned were $86,000 in 1995, compared to $4,000 in 1994.
Amortization of mortgage servicing increased $55,000, from $68,000 in 1994 to
$123,000 in 1995.
Income Taxes
SFAS 109, "Accounting for Income Taxes," was adopted by the Company in the
first quarter of 1993. The cumulative effect of this change in accounting
principle increased net income by $300,000 during 1993.
The Company's provision for income taxes was $2,502,000, $2,079,000,
and $1,437,000 for the years ended December 31, 1995, 1994, and 1993,
respectively. The increased provisions were attributed to increased
earnings of the Company.
Financial Condition
Lending Activities
The Company's major source of income is interest on loans, and the
composition of the portfolio reflects the communities served by the Bank. The
table on page 33 presents the composition of the Company's loan portfolio at
the end of the periods indicated.
Total loans increased $18.7 million, or 6.5%, to $304.3 million as of
December 31, 1995, from $285.6 million at December 31, 1994. This compares to
an increase of $10.9 million or 4.0% in 1994.
The commercial loan portfolio decreased somewhat in 1995 following a
substantial increase in 1994. Commercial and industrial loans decreased $2.9
million (2.6%) during 1995, to $109.9 million as of December 31, 1995, after
increasing $8.1 million (7.7%) during 1994, to $112.8 million as of December
31, 1994. Commercial real estate loans decreased $4.6 million (6.4%) from
$72.3 million as of December 31, 1994, to $67.7 million as of December 31,
1995. This compares to a balance of $53.3 million as of December 31, 1993.
These loans are made on the basis of borrowers' cash flows and do not rely
upon the sale of the property to repay the loans. As added security, these
loans are backed by the value of the collateral properties, which are
supported by recent appraisals. The Company has
- -------------------------------------------------------------------------------
Noninterest Expense (In thousands)
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Salaries and employee benefits..............................$ 9,893 $ 9,180 $ 8,793
Occupancy expenses, net..................................... 1,030 944 932
Furniture and equipment expenses............................ 1,238 1,090 940
FDIC deposit assessment..................................... 475 846 756
Other expenses.............................................. 5,253 4,673 4,756
---------- ---------- ----------
Total noninterest expense.................................$ 17,889 $ 16,733 $ 16,177
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
32
<PAGE>
benefitted in the commercial lending area, including commercial real estate,
from a growing local economy and a strong sales culture, which emphasizes
community and customer relationships, supported by an active calling program.
This approach gives the Company a competitive advantage over institutions in
the area that have been acquired and may lack the locally owned profile and
community orientation that has been developed and maintained by the Company.
The category that grew the most during 1995 was real estate construction,
which increased $16.0 million (65.3%) from $24.5 million as of December 31,
1994, to $40.5 million as of December 31, 1995. This compares to a balance of
$35.2 million as of December 31, 1993. These loans are typically of a short
duration and reflect the continued growth of the Aurora area. The majority of
these loans were to experienced developers of pre-sold homes in the price
range of $100,000 to $150,000.
The Company's residential real estate loans consist of loans secured by one
to four family homes. This category increased $12.1 million (62.0%) in 1995
and $8.1 million (72.1%) in 1994, primarily as a result of adjustable rate
mortgages added to the portfolio. The Company sells most fixed rate
residential real estate loans, primarily to the FHLMC and to the FNMA. Loans
held for sale were $4.3 million and $2.0 million as of December 31, 1995 and
1994, respectively. Minimum commitments under these agreements to sell loans
were $6.4 million to FHLMC as of December 31, 1995, and no commitments were
outstanding to FNMA as of that date.
Total installment loans have declined in each of the past two years. The
primary source of installment lending has been in single pay and amortizing
loans used to finance automobiles, recreation vehicles, home improvements,
durable goods and other consumer uses, with the most common of these being
automobile financing. Competition from manufacturer financing and from
institutions willing to accept lower interest rates has caused a decline in
the yield available on these loans. Because other lending opportunities were
available, the Company elected not to aggressively pursue these lower
yielding credits.
Nonperforming Loans and Assets
The Company utilizes a loan review function which is separate from the
lending function and is responsible for the review of new and existing loans.
Potential problem credits are monitored by the loan review staff and are
submitted for review to a credit committee consisting of loan officers and
Board members.
The loan review department rates all commercial loans and mortgage loans
secured by commercial properties or five-plus family residences. These loans
are rated 1 to 6, with 4 being special mention, 5 substandard, and 6
doubtful. Loans over 90 days past due are normally either charged off or, if
well secured and in the process of collection, placed in nonaccrual status.
The Company adopted Statement of Financial Accounting Standards No. 114 and
No. 118 for impaired loans effective January 1, 1995. Under
- -------------------------------------------------------------------------------
Loan Portfolio (In thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Commercial and industrial...................................$ 109,872 $ 112,828 $ 104,711
Real estate - commercial.................................... 67,739 72,305 53,334
Real estate - construction.................................. 40,510 24,470 35,249
Real estate - residential................................... 31,673 19,549 11,356
Installment................................................. 50,489 53,806 73,861
Credit card receivables..................................... 5,644 4,119 -
Other loans................................................. 455 937 293
---------- ---------- ----------
Gross loans.............................................. 306,382 288,014 278,804
Unearned discount........................................... (1,743) (2,054) (3,807)
Deferred loan fees.......................................... (312) (387) (330)
---------- ---------- ----------
Total loans.............................................. 304,327 285,573 274,667
Allowance for loan losses................................... (5,176) (5,140) (4,705)
---------- ---------- ----------
Loans, net...............................................$ 299,151 $ 280,433 $ 269,962
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
33
<PAGE>
these standards, the Company defined loans that will be individually
evaluated for impairment to include commercial loans and mortgages secured by
commercial properties or five-plus family residences. All other smaller
balance homogeneous loans are evaluated for impairment in total.
The Company defines impaired loans to include all commercial loans and
mortgage loans secured by commercial properties or five-plus family
residences that are graded 6, in nonaccrual status, or restructured after
January 1, 1995.
Impaired loans totaled $921,000 at December 31, 1995. Impaired loans with an
allowance for loan losses allocation, and the related allocation, were
$921,000 and $631,000, respectively, at December 31, 1995.
There were no loans past due ninety days or more and still accruing, as of
December 31, 1995, or 1994. Restructured loans totaled $949,000 and
$2,102,000 as of December 31, 1995 and 1994, respectively. The majority of
these balances consisted of loans to a single borrower. Nonaccrual loans
decreased to $1,135,000 as of December 31, 1995, compared to $1,397,000 as of
December 31, 1994. Other real estate owned decreased from $845,000 at
December 31, 1994, to $566,000 at December 31, 1995. Values placed on
properties are based on current independent appraisals. The ratio of
nonaccrual and restructured loans to total loans was 0.68% and 1.23% as of
December 31, 1995 and 1994, respectively. The restructured loans were
performing in accordance with the terms of the new agreements. The ratio of
nonaccrual loans to total loans was 0.31% and 0.49% as of December 31, 1995
and 1994, respectively.
During 1994, the Bank agreed to modify the terms of three loans to one
borrower totaling $3,077,000. Under the modified terms the Bank accepted a
parcel of real estate in partial settlement. The remaining loan balances were
rewritten into two notes which had a total carrying value of $1,047,000 and
$2,028,000 at December 31, 1995 and 1994, respectively, and are fully
collateralized. Each note carries a fixed interest rate of 8.5%, which was
the market rate of interest for similar borrowers at the restructure date.
These modifications resulted in a $168,000 loss charged to the allowance for
loan losses in 1994. No interest income was recognized in 1994 on these loans
prior to the modifications. After the restructuring, interest income recorded
on the restructured loans was $129,000 in 1994.
Allowance for Loan Losses
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
judgment, deserve evaluation in estimating loan losses. The adequacy of the
allowance for loan losses is monitored by the loan review staff, and reported
to management and the Board of Directors. The ratio of the allowance for loan
losses to total loans was 1.70% and 1.80% as of December 31, 1995, and
December 31, 1994, respectively. While there can be no assurance that the
allowance for loan losses will be adequate to cover all losses, management
believes that the allowance for loan losses was adequate at December 31,
1995. While management uses available information to provide for losses on
loans, the ultimate collectibility of a substantial portion of the loan
portfolio and the need for future additions to the allowance will be based
upon changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review the Company's allowance for loan losses. Such agencies may require the
Company to make additional provisions to the allowance based upon their
judgments about information available to them at the time of their
examinations.
Securities
The objectives regarding the securities portfolio are to provide the Company
with a source of liquidity and earnings. As of December 31, 1993, the Company
implemented SFAS 115. Under this standard, securities available for sale are
carried at fair value, with related unrealized gains or losses, net of
deferred income taxes, recorded as an adjustment to equity capital. In
addition, as permitted by the SFAS 115 implementation guide released in 1995,
the Company exercised a one time opportunity to reassess the appropriateness
of the classifications of all securities held. Based on the review, the
Company reclassified securities having an amortized cost of $39,664,000 and a
net unrealized gain of $1,461,000 at December 15, 1995 from held to maturity
to available for sale.
34
<PAGE>
As of December 31, 1995, net unrealized gains of approximately $2.2 million,
reduced by deferred income taxes of approximately $747,000, resulted in an
increase in equity capital of approximately $1.5 million. As of December 31,
1994, net unrealized losses of approximately $6.2 million, reduced by
deferred income taxes of $2.1 million resulted in a decrease in equity
capital of approximately $4.1 million.
During 1995, the securities portfolio grew $12 million (6.9%), as measured by
amortized cost, to $185 million as of December 31, 1995, from $173 million as
of December 31, 1994. As of December 31, 1995, U.S. Treasury securities, at
$25 million, comprised 13.5% of the total portfolio, compared with 18.2% as
of December 31, 1994. U.S. Government agency mortgage backed securities grew
from $39.3 million, or 22.7% of the portfolio, as of December 31, 1994, to
$44.8 million, or 24.2% of the portfolio as of December 31, 1995. The
increase in the proportion of the total portfolio invested in U.S. Government
agency mortgage backed securities was primarily due to the higher yields
available on these securities. Mortgage backed securities are comprised of
investments in pools of residential mortgages. The mortgage pools are issued
and guaranteed by the FHLMC, the GNMA, or the FNMA.
As of December 31, 1995, and 1994, the Company held structured notes, which
were in the available for sale category, carried at fair values of $6.4
million and $10.6 million, respectively. These securities were issued by the
FHLB, the FNMA, and the SLMA. These obligations offer the investor periodic
coupon increases over a given time horizon, and are generally subject to call
after the first coupon readjustment date. All such securities are stress
tested, to assess the probable price sensitivity in response to an immediate
and sustained change in market interest rates. In addition, each security's
total return is computed to each call date, as if it were to be called on
that date, and the resulting annual return is compared with other investments
with maturities similar to the call dates of the security.
Deposits and Borrowed Funds
The Company has a relatively stable deposit base from within its market area.
Deposits of $453.8 million reflected growth of $40.1 million (9.7%) during
1995, when compared to $413.7 million as of December 31, 1994. Noninterest
bearing deposits grew $1.1 million (1.5%), while interest bearing deposits
increased $39.0 million (11.5%). Most of the growth was in time deposits, as
time deposits in denominations of $100,000 or more grew $13.1 million (26.6%)
and time deposits under $100,000 grew $31.0 million (22.9%), during 1995.
Interest-bearing transaction accounts and savings accounts declined 3.4% in
the aggregate, at $154.0 million as of December 31, 1994, compared to $148.8
million as of December 31, 1995.
In 1992, the Bank purchased stock of the FHLB of Chicago, thereby giving the
Bank the ability to borrow funds from the FHLB for short or long term
purposes under a variety of programs. During the first quarter of 1993, the
Bank borrowed $3 million under a three year agreement which is reflected in
the financial statements as a note payable. This note matures in the first
quarter of 1996. During 1994, the Company elected to repay a note in full
from an unaffiliated financial institution which had totaled $450,000 at
December 31, 1993.
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 requirements or create an expense related to FDIC insurance
on deposits. Although the balance of repurchase agreements is subject to
variation, particularly seasonal variation, the account relationships
represented by these balances are local businesses and municipalities that
have other account relationships with the Bank.
Capital Resources
The Company significantly increased its capital during 1993 through the sale
of 575,000 shares of its common stock. Net proceeds to the Company from the
sale of stock were approximately $10,681,000, and have been used to support
consolidated asset growth of the Company and for acquisitions. Total
stockholders' equity increased $10.6 million during 1995, to $54.1 million as
of December 31, 1995. Equity increased $5.1 million due to the 1995
operations of the Company, less cash dividends paid or reinvested. The
remaining increase of approximately $5.5 million is related to the change in
the net unrealized gains on securities available for sale, as discussed in
"Securities" above.
35
<PAGE>
Bank regulatory bodies have adopted capital standards by which all banks and
bank holding companies will be evaluated. These standards require a minimum
ratio of Tier 1 capital (consisting of stockholders' equity) to total assets
of 3% for the most highly-rated banks and bank holding companies, with
minimum ratios of 4% to 5% for all others (referred to as the leverage ratio)
and a minimum ratio of total capital to total risk-weighted assets (including
off-balance sheet commitments) of 8%, at least one-half of which must be Tier
1 capital (referred to as the risk-based ratio). The Company's capital ratios
for the dates indicated are listed in the table below.
Capital expenditures are in process for a new branch under construction in
Geneva, Illinois, at a total cost of approximately $1.8 million.
On January 3, 1996, the Company purchased Valley Banc Services Corp., a $167
million bank holding company, for $20.5 million in cash, facilitated with $14
million in new borrowing.
Additional capital expenditures are anticipated in association with
the future of the Company's main banking facility in downtown Aurora.
Management is currently studying alternatives regarding this location.
The building is in need of updating to improve work flow and
facilitate efficient customer service. As part of this process, some
departments may be relocated to other facilities currently owned by
the Company or to an as yet unidentified location. Additional
investment in premises is anticipated, but specific plans, including
costs and timing, have not yet been determined.
Liquidity
Liquidity measures the ability of the Company to meet maturing obligations
and its existing commitments, to withstand fluctuations in deposit levels, to
fund its operations and to provide for customers' credit needs. The liquidity
of the Company principally depends on cash flows from operating activities,
investment in and maturity of assets, changes in balances of deposits and
borrowings and its ability to borrow funds in the money or capital markets.
- -------------------------------------------------------------------------------
Capital Ratios (In thousands)
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1995 1994 1993
--------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Risk-Based Capital Ratios: (1)
Tier 1 capital......................$ 53,765 14.54% $ 47,109 13.92% $ 42,499 13.11%
Minimum requirement................. 14,794 4.00 13,536 4.00 12,970 4.00
---------- --------- ---------- --------- ---------- ---------
Excess..............................$ 38,971 10.54% $ 33,573 9.92% $ 29,529 9.11%
---------- --------- ---------- --------- ---------- ---------
---------- --------- ---------- --------- ---------- ---------
Total capital.......................$ 58,399 15.79% $ 51,356 15.18% $ 46,567 14.36%
Minimum requirement................. 29,588 8.00 27,073 8.00 25,941 8.00
---------- --------- ---------- --------- ---------- ---------
Excess..............................$ 28,811 7.79% $ 24,283 7.18% $ 20,626 6.36%
---------- --------- ---------- --------- ---------- ---------
---------- --------- ---------- --------- ---------- ---------
Total risk adjusted assets..........$ 369,850 $ 338,409 $ 324,261
---------- ---------- ----------
---------- ---------- ----------
Leverage Capital Ratio: (2)
Tier 1 capital......................$ 53,765 10.31% $ 47,109 9.91% $ 42,499 10.05%
Minimum requirement................. 26,072 5.00 23,762 5.00 21,151 5.00
---------- --------- ---------- --------- ---------- ---------
Excess..............................$ 27,693 5.31% $ 23,347 4.91% $ 21,348 5.05%
---------- --------- ---------- --------- ---------- ---------
---------- --------- ---------- --------- ---------- ---------
Average adjusted assets.............$ 521,435 $ 475,249 $ 423,012
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(1) Based on the fully phased in risk-based capital guidelines of 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%.
(2) 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.
36
<PAGE>
Cash inflows from operating activities exceeded operating outflows by $5.1
million in 1995, by $12.9 million in 1994, and by $1.3 million in 1993.
Mortgage banking activities resulted in operating cash outflows of $48.8
million and inflows of $46.8 million in 1995, outflows of $38.7 million and
inflows of $44.9 million in 1994, and outflows of $78.1 million and inflows
of $71.5 million in 1993. The net outflows or inflows in each year reflects
the amount of mortgage loans held for sale as of December 31 of each year,
offset by net gains on sales of mortgage loans of $341,000 in 1995, $491,000
in 1994, and $1,148,000 in 1993. Interest received net of interest paid is
the principal source of net operating cash inflows in all periods reported.
Management of investing and financing activities, and market conditions,
determine the level and the stability of net interest cash flows.
Management's policy is to mitigate the impact of changes in market interest
rates to the extent possible, so that balance sheet growth is the principal
determinant of growth in net interest cash flows.
Net cash outflows from investing activities were $34.2 million in 1995,
compared to $49.6 million in 1994, and $61.9 million in 1993. Securities
purchases, net of securities matured or sold, resulted in net cash outflows
of $12.5 million, $34.2 million, and $22.8 million in 1995, 1994, and 1993,
respectively. Net principal disbursed on loans totaled $20.6 million in 1995,
$14.2 million in 1994, and $37.9 million in 1993. The decline in 1994 was
due, in part, to the increase in interest rates and a reduction in
construction activity. Future investing activity may be expected to be
allocated to the lending and securities portfolios in approximate proportion
to the current outstanding balances.
Cash inflows from financing activities in 1995, 1994, and 1993, were
primarily associated with deposit growth. Deposits grew $40.0 million in
1995, compared to an increase of $30.1 million in 1994, and $48.5 million in
1993. During 1995, the amount of short term borrowing declined $10.6 million.
Net cash inflows from short term borrowing were $6.7 million and $5.2 million
in 1994 and 1993, respectively. Cash inflows from an advance from the FHLB
were $3 million in 1993. The Company will continue to emphasize deposit
growth as its principal financing source. The sale of 575,000 shares of the
Company's common stock, during 1993, resulted in net cash inflows of
approximately $10.7 million.
In the event of short term liquidity needs, the Bank may purchase Federal
funds from correspondent banks. This source is used from time to time on a
limited basis. The Bank may borrow funds from the Federal Reserve Bank of
Chicago, but has not done so during any period covered in this report. The
Bank's membership in the FHLB system gives it the ability to borrow funds
from the FHLB for short or long term purposes under a variety of programs.
Asset/Liability Management
Movements in general market interest rates are a key element in changes in
the net interest margin. The impact on earnings of changes in interest rates,
known as interest rate risk, must be measured and managed to avoid
unacceptable levels of risk. This process is aided by analysis of the
interest sensitivity of assets relative to that of liabilities. The Company
uses two approaches to analyze the effect of changes in interest rates on net
interest income and to manage interest rate risk. First, the Company uses
computer simulation to estimate changes in net interest income in response to
various interest rate scenarios. This analysis considers current portfolio
rates, existing maturities, repricing opportunities, and market interest
rates, and accommodates management assumptions regarding anticipated growth
and prepayments. The computer simulation indicates that the balance sheet is
structured such that changes in net interest income in response to changes in
market interest rates would be minimal, all other factors held constant.
Second, interest rate risk is analyzed by examining the extent to which
assets and liabilities are interest rate sensitive. The interest sensitivity
gap is defined as the difference between the amount of interest earning
assets maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest sensitive assets
exceeds the amount of interest sensitive liabilities. A gap is considered
negative when the amount of interest sensitive liabilities exceeds the amount
of interest sensitive assets. Gap analysis implicitly assumes that all assets
and liabilities would reprice by the same magnitude in the event of a change
in market interest rates. During a period of rising interest rates, a
negative gap would tend to result in a decrease in net
37
<PAGE>
interest income while a positive gap would tend to positively affect net
interest income.
The Company's policy is to manage the balance sheet such that fluctuations in
the net interest margin are minimized regardless of the level of interest
rates. Reports to management and the Board of Directors include both of the
above described analytical approaches. Computer simulation provides a
quantified view of all known or assumed factors, while gap analysis provides
an objective, less analytical, perspective. The Company has positioned its
balance sheet so that the impact of changes in interest rates on the net
interest margin has been minimized to the extent possible.
The table "Analysis of Changes in Interest Income," included under "Interest
Income" in this discussion, demonstrates the effectiveness of interest rate
risk management. During 1995, the prime rate of interest began the year at
8.50%, rose to 9.00%, and returned to 8.50% by the end of the year. The
change in tax equivalent net interest income attributable to changes in
interest rates was $524,000 in 1995, or about 2% of the tax equivalent net
interest income of approximately $23.0 million for the year. During 1994, the
prime rate of interest increased from 6.00% at the beginning of the year, to
8.50% by year-end. Although interest rates increased significantly during the
year, changes in tax equivalent net interest income due to changes in average
interest rates were $54,000, or only one-quarter of one percent of tax
equivalent net interest income of approximately $21.4 million.
The following table does not necessarily indicate the future impact of
general interest rate movements on the Company's net interest income because
the repricing of certain assets and liabilities is discretionary and is
subject to competitive and other pressures. As a result, assets and
liabilities indicated as repricing within the same period may in fact reprice
at different times and at different rate levels. Assets and liabilities are
reported in the earliest time frame in which maturity or repricing may occur.
Although
- -------------------------------------------------------------------------------
Interest Sensitivity Gap Analysis (1) (In thousands)
<TABLE>
<CAPTION>
December 31, 1995
--------------------------------------------------------
0-3 Mos. 4-12 Mos. 1-5 Years Over 5 Yrs. Total
---------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Earning Assets
Securities.........................$ 29,977 $ 33,856 $ 81,881 $ 41,455 $ 187,169
Loans held for sale................ 4,340 - - - 4,340
Total loans........................ 144,415 41,322 68,600 49,990 304,327
---------- --------- --------- ----------- ---------
Total Earning Assets.................$ 178,732 $ 75,178 $ 150,481 $ 91,445 $ 495,836
---------- --------- --------- ----------- ---------
---------- --------- --------- ----------- ---------
Interest-Bearing Liabilities
Interest-bearing deposits:
NOW accounts.....................$ 63,027 $ - $ - $ - $ 63,027
Money market accounts............ 33,808 - - - 33,808
Savings.......................... 51,935 - - - 51,935
Time, $100,000 and over.......... 24,089 23,241 15,298 - 62,628
Other time....................... 34,395 48,590 83,380 - 166,365
---------- --------- --------- ----------- ---------
Total interest-bearing deposits.... 207,254 71,831 98,678 - 377,763
Federal funds purchased and
securities sold under
repurchase agreements.......... 9,969 12,757 - - 22,726
Notes payable.................... 3,000 - - - 3,000
---------- --------- --------- ----------- ---------
Total Interest-Bearing Liabilities...$ 220,223 $ 84,588 $ 98,678 $ - $ 403,489
---------- --------- --------- ----------- ---------
---------- --------- --------- ----------- ---------
Interest sensitivity gap.............$ (41,491) $ (9,410) $ 51,803 $ 91,445 $ 92,347
Cumulative gap....................... (41,491) (50,901) 902 92,347 92,347
Interest sensitivity gap to
total assets....................... -7.70% -1.70% 9.60% 16.90% 17.10%
Cumulative sensitivity gap to
total assets....................... -7.70 -9.40 0.20 17.10 17.10
</TABLE>
(1) Callable investment securities are reported at the earlier of
maturity or call date, and prepayments of mortgage-backed
securities are assumed to occur. Loans are placed in the earliest
time frame in which maturity or repricing may occur.
38
<PAGE>
securities available for sale are reported in the earliest time frame in
which maturity or repricing may occur, these securities may be sold in
response to changes in interest rates or liquidity needs.
Effects of Inflation
Consolidated financial data included herein has been prepared in accordance
with generally accepted accounting principles. Changes in the relative value
of money due to inflation or recession are generally not considered.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in
the inflation rate. While interest rates are greatly influenced by changes in
the inflation rate, they do not change at the same rate or in the same
magnitude as the inflation rate. Rather, interest rate volatility is based on
changes in the expected rate of inflation, as well as on changes in monetary
and fiscal policies. A financial institution's ability to be relatively
unaffected by changes in interest rates is a good indicator of its capability
to perform in today's volatile economic environment. The Company seeks to
insulate itself from interest rate volatility by ensuring that rate sensitive
assets and rate sensitive liabilities respond to changes in interest rates in
a similar time frame and to a similar degree.
Acquisition
Pursuant to an Agreement and Plan of Merger dated June 30, 1995, and
effective January 3, 1996, the Company acquired all of the common stock of
Valley Banc Services Corp. ("Valley") for $20.5 million in cash, which was
partially funded by $14 million in borrowing. The transaction was recorded
using the purchase method of accounting. Valley is a four bank holding
company with facilities in St. Charles, Hinckley, Osco, and Grayslake,
Illinois. The acquisition of the St. Charles and Hinckley locations gives the
Company a significant presence in new markets which are normal extensions of
the Company's traditional base in Aurora and surrounding communities. Below
is a brief summary of selected consolidated financial information of Valley
for the years ended December 31, 1995 and 1994.
New Accounting
Pronouncements
Effective January 1, 1996, the Company adopted SFAS 122, "Accounting for
Mortgage Servicing Rights." For mortgage loan sales after that date, the loan
cost is allocated to the servicing rights retained and to the loan that is
sold, based on their relative fair values. Mortgage servicing rights are
amortized in proportion to and over the period of estimated net servicing
income, and are evaluated for impairment based on their fair value. The
impact of this pronouncement on future earnings will depend on mortgage
banking volume.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard No. 123 ("SFAS 123"), "Accounting for Stock Based
Compensation." This statement encourages companies to use a fair value method
to account for stock based compensation plans. If such a method is not used,
companies must disclose the proforma effect on net income and earnings per
share had this method been adopted. Management does not believe that this
statement will have a material effect on the Company.
- -------------------------------------------------------------------------------
Selected Financial Information
of Valley Banc Services Corp. (In thousands)
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Securities available for sale.........................$ 39,131 $ 4,605
Securities held to maturity........................... - 25,706
Loans, net............................................ 108,289 94,489
Deposits.............................................. 151,799 127,690
Notes payable......................................... 3,550 3,700
Shareholders' equity.................................. 9,745 9,045
Net interest income................................... 5,987 5,375
Provision for loan losses............................. 673 307
Noninterest income.................................... 692 604
Noninterest expense................................... 5,281 4,728
Net income............................................ 389 620
</TABLE>
39
<PAGE>
MARKET FOR THE COMPANY'S COMMON STOCK
AND RELATED SECURITY HOLDER MATTERS
The Company's common stock is listed on the Nasdaq Stock Market under the
symbol "MBIA." Harris Trust and Savings Bank acts as the transfer agent for
the common stock. As of December 31, 1995, the Company had 777 holders of
record of its common stock.
The table below indicates the high and low prices and the dividends declared
per share for the common stock during the periods indicated. Sale prices, as
reported by Nasdaq, are indicated for subsequent periods.
<TABLE>
<CAPTION>
High Low Cash Dividends
------ ------ --------------
<S> <C> <C> <C> <C>
1994 First quarter.................$22.50 $21.25 $0.085
Second quarter................ 26.25 21.25 0.085
Third quarter................. 27.00 25.25 0.100
Fourth quarter................ 26.00 21.00 0.100
1995 First quarter................. 24.25 21.50 0.100
Second quarter................ 25.75 23.75 0.120
Third quarter................. 27.50 24.94 0.120
Fourth quarter................ 28.50 26.75 0.120
1996 First quarter (through February 23)... 29.75 27.75 0.120
</TABLE>
The holders of the common stock are entitled to receive dividends as declared
by the Board of Directors of the Company, which considers payment of
dividends quarterly. The ability of the Company to pay dividends is dependent
upon its receipt of dividends from the Bank. In determining cash dividends,
the Company's Board of Directors considers the earnings, capital
requirements, debt servicing requirements, financial ratio guidelines
established by the Board of Directors, financial condition of the Company,
and other relevant factors. The Bank's ability to pay dividends to the
Company and the Company's ability to pay dividends to its stockholders are
also subject to certain regulatory restrictions.
The Company has paid regular quarterly cash dividends on the common stock
since it commenced operations in 1982. The Company currently anticipates that
cash dividends comparable to those that have been paid in the past will
continue to be paid in the future. There can be no assurance, however, that
any such dividends will be paid by the Company or that such dividends will
not be reduced or eliminated in the future. The timing and amount of
dividends will depend upon the earnings, capital requirements, and financial
condition of the Company and the Bank. Currently, there are no restrictions
in any loan agreement to which the Company is a party restricting the payment
of dividends. During 1994, the Company adopted a dividend reinvestment plan
which permits stockholders to reinvest cash dividends in common stock and to
purchase additional shares in amounts up to $3,000 per quarter.
REPORT ON FORM 10-K
A copy of the Company's 1995 Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission, will be furnished without charge to each
stockholder upon written request to: J. Douglas Cheatham, Vice President and
Chief Financial Officer, Merchants Bancorp, Inc., 34 South Broadway, Aurora,
Illinois 60507.
40
<PAGE>
Exhibit 21
LIST OF SUBSIDIARIES
SUBSIDIARIES OF THE CORPORATION
The Merchants National Bank of Aurora, a bank chartered under the laws of
the United States.
Merserco, Inc., a Delaware corporation.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement on
Form S-3 of Merchants Bancorp, Inc. to the Merchants Bancorp, Inc. Dividend
Reinvestment and Stock Purchase Plan and in the Registration Statement on Form
S-8 of Merchants Bancorp, Inc. to the Merchants Bancorp, Inc. 1993 Stock
Incentive Plan, of our report dated February 9, 1996 on the Company's 1995
consolidated financial statements included in the Form 10-K of Merchants
Bancorp, Inc. for the year ended December 31, 1995
Crowe, Chizek and Company LLP
Oak Brook, Illinois
April 1, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 28,166
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 187,169
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 304,327
<ALLOWANCE> 5,176
<TOTAL-ASSETS> 539,761
<DEPOSITS> 453,771
<SHORT-TERM> 22,726
<LIABILITIES-OTHER> 6,170
<LONG-TERM> 3,000
0
0
<COMMON> 2,607
<OTHER-SE> 51,487
<TOTAL-LIABILITIES-AND-EQUITY> 539,761
<INTEREST-LOAN> 28,046
<INTEREST-INVEST> 10,936
<INTEREST-OTHER> 893
<INTEREST-TOTAL> 39,875
<INTEREST-DEPOSIT> 16,500
<INTEREST-EXPENSE> 18,423
<INTEREST-INCOME-NET> 21,452
<LOAN-LOSSES> 1,783
<SECURITIES-GAINS> 133
<EXPENSE-OTHER> 17,889
<INCOME-PRETAX> 8,698
<INCOME-PRE-EXTRAORDINARY> 8,698
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,196
<EPS-PRIMARY> 2.41
<EPS-DILUTED> 2.41
<YIELD-ACTUAL> 4.73
<LOANS-NON> 1,135
<LOANS-PAST> 0
<LOANS-TROUBLED> 949
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,140
<CHARGE-OFFS> 2,513
<RECOVERIES> 766
<ALLOWANCE-CLOSE> 5,176
<ALLOWANCE-DOMESTIC> 5,176
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
[MERCHANTS BANCORP, INC. LETTERHEAD]
March 13, 1996
Dear Stockholder:
You are cordially invited to attend the 1996 Annual Meeting of Stockholders
of Merchants Bancorp, Inc. to be held at the Copley Theatre, North Island
Center, 8 East Galena Boulevard, Aurora, Illinois on Tuesday, April 16, 1996 at
9:30 a.m.
As more fully described in the attached Notice of Annual Meeting of
Stockholders and the accompanying Proxy Statement, the principal business to be
addressed at the meeting is the election of directors and the ratification of
the appointment of Crowe, Chizek and Company LLP as independent public
accountants for the current fiscal year. In addition, we will review with you
the affairs and progress of the Company during the past fiscal year.
Your participation at this meeting is very important, regardless of the
number of shares you hold. Whether or not you contemplate attending the meeting,
we would appreciate your dating, signing and mailing the enclosed proxy as
promptly as possible in the accompanying envelope. If you attend the meeting,
you may revoke your proxy and vote your shares in person.
We look forward with pleasure to seeing and visiting with you at the
meeting.
Sincerely,
CALVIN R. MYERS
CHAIRMAN AND PRESIDENT
34 South Broadway - Aurora, Illinois 60507 - (708) 896-9000
<PAGE>
[MERCHANTS BANCORP, INC. LETTERHEAD]
34 SOUTH BROADWAY
AURORA, ILLINOIS 60507-0289
(708) 896-9000
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 16, 1996
TO THE STOCKHOLDERS OF MERCHANTS BANCORP, INC., AURORA, ILLINOIS:
The Annual Meeting of Stockholders of Merchants Bancorp, Inc. (the
"Company") will be held at the Copley Theatre, North Island Center, 8 East
Galena Boulevard, Aurora, Illinois 60506, on Tuesday, April 16, 1996, at
9:30 a.m., for the following purposes:
1. To elect three individuals to serve in Class C for a term of three
years.
2. To elect one individual to serve in Class A for a term of one year.
3. To ratify the appointment of Crowe, Chizek and Company LLP as
independent public accountants for the Company for the year ending
December 31, 1996.
4. To act upon such other business as may properly come before the
meeting or any adjournments or postponements thereof.
Stockholders of record on the books of the Company at the close of business
on March 1, 1996, will be entitled to vote at the meeting. STOCKHOLDERS ARE
REQUESTED TO DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
ENVELOPE, WHETHER OR NOT THEY PLAN TO ATTEND THE MEETING. Stockholders giving
proxies retain the right to revoke them at any time before they are voted by
written notice of revocation to the Secretary of the Company, and stockholders
present at the meeting may revoke their proxies and vote in person.
For further information concerning individuals nominated as directors, use
of the proxy, and other related matters, you are respectfully urged to read the
Proxy Statement on the following pages. Enclosed is a copy of the Company's
1995 Annual Report to Stockholders.
By order of the Board of Directors,
DANA K. HOPP
ADMINISTRATIVE ASSISTANT
AND SECRETARY-TREASURER
Aurora, Illinois
March 13, 1996
<PAGE>
MERCHANTS BANCORP, INC.
34 SOUTH BROADWAY, AURORA, ILLINOIS 60507-0289
(708) 896-9000
PROXY STATEMENT
This Proxy Statement is furnished to stockholders of record on March 1,
1996, of Merchants Bancorp, Inc. (the "Company") in connection with the
solicitation on behalf of the Board of Directors of proxies to be used at the
Annual Meeting of Stockholders, or any adjournments or postponements thereof.
The meeting will be held at the Copley Theatre, North Island Center, 8 East
Galena Boulevard, Aurora, Illinois 60506, on Tuesday, April 16, 1996, at
9:30 a.m. The Company is a bank holding company which has been the parent of The
Merchants National Bank of Aurora, Aurora, Illinois ("Merchants Bank") since
1982. On January 3, 1996, the Company purchased Valley Banc Services Corp., a
bank holding company with banks located in St. Charles, Hinckley, Osco and
Grayslake, Illinois.
The Board of Directors would like to have all stockholders represented at
the meeting. Whether or not you plan to attend, please complete, sign and date
the enclosed proxy and return it in the accompanying postpaid return envelope as
promptly as possible. Stockholders giving proxies retain the right to revoke
them at any time before they are voted by written notice of revocation to the
Secretary of the Company, and stockholders present at the meeting may revoke
their proxy and vote in person. A proxy, when properly executed and not so
revoked, will be voted in accordance therewith. A majority of the shares of the
Common Stock, present in person or represented by proxy, shall constitute a
quorum for purposes of the meeting. Abstentions and broker non-votes will be
counted for purposes of determining a quorum.
Stockholders of record on the books of the Company, at the close of
business on March 1, 1996, will be entitled to vote at the meeting. As of
March 1, 1996, the Company had outstanding 2,574,091 shares of Common Stock, par
value $1.00 per share, with each share entitling its owner to one vote on each
matter submitted to a vote at the Annual Meeting. In all matters other than the
election of directors, the affirmative vote of the majority of shares present in
person or represented by proxy at the meeting and entitled to vote on the
subject matter shall be required to constitute stockholder approval. Directors
shall be elected by a plurality of the votes present in person or represented by
proxy at the meeting and entitled to vote. Abstentions will be treated as votes
against a proposal and broker non-votes will have no effect on the vote.
The cost of soliciting proxies will be borne by the Company. In addition to
use of the mails, proxies may be solicited personally or by telephone, courier
or facsimile transmission by officers, directors and certain employees of the
Company who will not be specially compensated for such solicitation. This Proxy
Statement and the accompanying proxy card were mailed or given to stockholders
commencing on or about March 13, 1996.
ELECTION OF DIRECTORS
At the Annual Meeting of the Stockholders to be held on April 16, 1996, the
stockholders will be entitled to elect three (3) Class C directors for a term
expiring in 1999 and one (1) Class A director for a term expiring in 1997. The
directors of the Company are divided into three classes having staggered terms
of three years. All of the nominees for election as Class C directors are
incumbent directors. The nominee for election as a Class A director is newly
nominated to serve on the Company's Board of Directors. The Company has no
knowledge that any of the nominees will refuse or be unable to serve, but if any
of the nominees becomes unavailable for election, the holders of the proxies
reserve the right to substitute another person of their choice as a nominee when
voting at the meeting.
Set forth below is information concerning the nominees for election and for
the other persons whose terms of office will continue after the meeting,
including age, year first elected a director and business experience during the
previous five years of each, as of March 1, 1996. Each of the three nominees
for Class C director, if elected
<PAGE>
at the Annual Meeting of Stockholders, will serve as a Class C director for a
three year term expiring in 1999. The nominee for Class A director, if elected
at the Annual Meeting, will serve as a Class A director for a one year term
expiring in 1997. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE YOUR SHARES
FOR EACH OF THE NOMINEES.
NOMINEES
PRINCIPAL OCCUPATION FOR THE PAST YEAR ELECTED
NAME AND AGE FIVE YEARS AND OTHER DIRECTORSHIPS TO THE BOARD
- ------------ ---------------------------------- ------------
CLASS C
(TERM EXPIRES 1999)
C. Tell Coffey . . . . . Self employed, construction 1981(1)
(Age 67) business (1985-present)
Calvin R. Myers . . . . Chairman of the Board, 1986
(Age 53) President and CEO of Merchants
Bancorp, Inc. and of The
Merchants National Bank of
Aurora
John J. Swalec . . . . . President, Waubonsee Community 1988
(Age 61) College (1981-present)
CLASS A
(TERM EXPIRES 1997)
William F. Hejna, M.D. . Senior Attending Surgeon, Rush- Nominee
(Age 63) Presbyterian-St. Luke's Medical
Center, Chicago, Illinois;
Professor, Rush Medical College
and Rush College of Health
Sciences; Managing Partner,
Pain & Rehabilitation Clinic of
Chicago; Director, MacNeal
Memorial Hospital Association
CONTINUING DIRECTORS
CLASS A
(TERM EXPIRES 1997)
James D. Pearson . . . . President and Director, Aurora 1982(1)
(Age 58) Metals Division, LLC
(non-ferrous foundry)
(1981-present)
Frank A. Sarnecki . . . Director General, Moose 1994
(Age 60) International, Inc. (fraternal
organization)(1994-present);
Real Estate Appraiser, Joy
Appraisal Co. (1969-1994)
William S. Wake . . . . Chairman, Eby-Brown Company 1974(1)
(Age 69) (wholesale distributor)
(1957-present)
CLASS B
(TERM EXPIRES 1998)
William C. Glenn . . . . President and Director, Olsson 1977(1)
(Age 57) Roofing Company, Inc. (roofing
and sheet metal contractor)
John M. Lies . . . . . . Vice President and Treasurer, 1995
(Age 49) Arnold Lies Co. (real estate
investment and management
company)(1969-present)
2
<PAGE>
PRINCIPAL OCCUPATION FOR THE PAST YEAR ELECTED
NAME AND AGE FIVE YEARS AND OTHER DIRECTORSHIPS TO THE BOARD
- ------------ ---------------------------------- ------------
Norman L. Titiner . . . President, Carpetville, Inc. 1989
(Age 62) (retail floor coverings)
(1966-present)
___________
(1) The date shown is the year originally elected to the Board of Directors of
Merchants Bank, which pursuant to a reorganization in 1982 became a wholly-owned
subsidiary of the Company. Each director has served continuously since the date
indicated.
There are no arrangements or understandings between any of the directors,
executive officers or any other person pursuant to which any of the directors or
executive officers have been selected for their respective positions.
BOARD COMMITTEES AND MEETINGS
The Board of Directors of the Company has established an Executive
Committee. The directors of the Company who are members of the Executive
Committee are William C. Glenn, C. Tell Coffey, John M. Lies, James D. Pearson,
John J. Swalec and William S. Wake. This committee has the responsibility for
nominating persons for vacancies on the board and for reviewing and approving
the compensation of executive officers. The Executive Committee also handles
such other matters as are delegated to it by the Board of Directors, including,
without limitation, reviewing and recommending the dividend program and
personnel policies. The Executive Committee met 14 times in 1995. The Executive
Committee will consider suggestions for nominations of possible candidates for
directors submitted by stockholders. Stockholders who wish to suggest qualified
candidates should write to the Secretary of the Company at 34 South Broadway,
Aurora, Illinois 60507-0289, stating in detail the qualifications of such person
for consideration by the committee. In addition, such nominations must comply
with the other provisions of Article II, Section 10 of the Company's Bylaws.
The Board of Directors of the Company also has established an Examining
Committee. The directors of the Company who are members of the Examining
Committee are James D. Pearson, C. Tell Coffey and Frank A. Sarnecki. The
Examining Committee confers with the independent auditors of the Company and
otherwise reviews the standards of internal controls, reviews the scope and
results of the audits, assesses the accounting principles followed by the
Company and recommends the selection of independent auditors. The Examining
Committee met three times in 1995.
The Board of Directors of the Company had 13 meetings during 1995. All of
the directors during their terms of office in 1995 attended at least 75% of the
Board of Directors meetings and committee meetings on which they served.
COMPENSATION OF DIRECTORS
During 1995, directors' fees paid by the Company included $100 for each
meeting of the Board of Directors and $100 for each committee meeting attended,
except that Calvin R. Myers receives no fees for his services as a director of
the Company. Each of the Bank's directors is paid an annual retainer of $1,500
and fees of $200 and $100, respectively, for each board and committee meeting
attended, except that Messrs. Myers and Voris receive no fees for their
attendance at committee meetings. Directors' remuneration is paid monthly.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock at March 12, 1996, by each
person known by the Company to be the beneficial owner of more than
3
<PAGE>
5% of the outstanding Common Stock, by each director or nominee, by each
executive officer named in the Summary Compensation Table and by all directors
and executive officers of the Company as a group.
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL OR AMOUNT AND NATURE OF PERCENT
NUMBER OF INDIVIDUALS IN GROUP BENEFICIAL OWNERSHIP(1) OF CLASS
- ------------------------------ ----------------------- --------
<S> <C> <C>
DIRECTORS AND NOMINEES
C. Tell Coffey . . . . . . . . . . 10,000(2) *
William C. Glenn . . . . . . . . . 34,953(3) 1.36%
William F. Hejna, M.D. . . . . . . 1,000 *
John M. Lies . . . . . . . . . . . 3,017 *
Calvin R. Myers . . . . . . . . . . 24,426(4) *
James D. Pearson . . . . . . . . . 11,854 *
Frank A. Sarnecki . . . . . . . . . 310 *
John J. Swalec . . . . . . . . . . 1,355 *
Norman L. Titiner . . . . . . . . . 2,824 *
William S. Wake . . . . . . . . . . 11,316(5) *
OTHER EXECUTIVE OFFICERS
Frank K. Voris . . . . . . . . . . 27,317(6) 1.06%
Terence L. Kothe . . . . . . . . . 9,619(7) *
Randal A. Wright . . . . . . . . . 9,042(8) *
All directors and executive officers
as a group (16 persons) . . . . . 172,408(9) 6.65%
</TABLE>
_______________________
* Less than 1%
(1) The information contained in this column is based upon information
furnished to the Company by the individuals named above. The nature of
beneficial ownership for shares shown in this column is sole voting and
investment power, except as set forth in the footnotes below.
(2) Represents shares held by Merchants Bank as agent and over which Mr. Coffey
has no voting and sole investment power.
(3) Includes 12,500 shares held by Merchants Bank as agent and over which Mr.
Glenn has no voting and sole investment power. Excludes 1,326 shares
beneficially owned by Mr. Glenn's adult children. Mr. Glenn disclaims
beneficial ownership of all such excluded shares.
(4) Includes 9,141 shares held in joint tenancy with Mr. Myers' spouse and over
which voting and investment power is shared and 7,928 shares subject to options
awarded pursuant to the Merchants Bancorp, Inc. 1993 Stock Incentive Plan (the
"Stock Option Plan") which are presently exercisable and over which Mr. Myers
has no voting and sole investment power.
(5) Includes 10,914 shares held in joint tenancy with Mr. Wake's spouse and
over which voting and investment power is shared. Excludes 16,124 shares
beneficially owned by Mr. Wake's adult children, the beneficial ownership of
which shares is disclaimed by Mr. Wake.
(6) Includes 12,501 shares held in trust as part of the Estate of Frank Voris
over which Mr. Voris shares investment power but has no voting power and 3,596
shares subject to options awarded pursuant to the Stock Option Plan which are
presently exercisable and over which Mr. Voris has no voting and sole investment
power. Excludes 2,970 shares held by Mr. Voris' spouse and 1,129 shares
beneficially owned by Mr. Voris' adult children, the beneficial ownership of
which shares is disclaimed by Mr. Voris.
(7) Includes 2,266 shares subject to options awarded pursuant to the Stock
Option Plan which are presently exercisable and over which Mr. Kothe has no
voting and sole investment power.
4
<PAGE>
(8) Includes 1,663 shares held in joint tenancy with Mr. Wright's spouse and
over which voting and investment power is shared and 2,588 shares subject to
options awarded pursuant to the Company's Stock Option Plan which are presently
exercisable and over which Mr. Wright has no voting and sole investment power.
(9) Includes an aggregate of 18,446 shares subject to options awarded to
certain directors and officers pursuant to the Stock Option Plan which are
presently exercisable and over which the respective directors and/or officers
have no voting and sole investment power.
As of March 1, 1996, Merchants Bank held in its Trust Department in various
fiduciary capacities 425,762 shares of the Company's Common Stock (16.5% of the
total outstanding). Merchants Bank had full voting responsibility with respect
to 235,869 of such shares (9.2% of the total outstanding). Merchants Bank shared
voting responsibility with respect to 31,392 of such shares (1.2% of the total
outstanding). If Merchants Bank and the person or entity with which it shares
voting power do not agree on how these shares should be voted, these shares
would not be voted. It is the general policy of Merchants Bank to vote shares of
stock of the Company in accordance with the recommendations of the Board of
Directors. Merchants Bank had full investment power with respect to 155,796
shares (6.1% of the total outstanding) and shared investment power with respect
to 47,292 shares (1.8% of the total outstanding).
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's executive officers, directors and persons who own more than 10% of the
Company's Common Stock file reports of ownership and changes in ownership with
the Securities and Exchange Commission. Such persons are also required to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on the Company's review of the copies of such forms, and, if appropriate,
representations made to the Company by any such reporting person concerning
whether a Form 5 was required to be filed for 1995, the Company is not aware
that any of its directors, executive officers or 10% stockholders failed to
comply with the filing requirements of Section 16(a) during the period
commencing January 1, 1995 through December 31, 1995.
EXECUTIVE COMPENSATION
CASH COMPENSATION
The following table shows the compensation earned for the last three fiscal
years by the Chief Executive Officer and those executive officers of the Company
(including those employed by the Company's subsidiaries) whose 1995 salary and
bonus exceeded $100,000:
5
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- -------------------
(a) (b) (c) (d) (g) (i)
SECURITIES ALL OTHER
NAME AND UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($)(2) OPTIONS/SARS (#)(3) ($)(4)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Calvin R. Myers 1995 $ 216,231 $24,099 7,872 $ 6,920
Chairman of the Board, 1994 198,308 38,849 7,954 7,106
President and Chief 1993 179,127 29,047 --- 8,954
Executive Officer of the
Company and Merchants
Bank
Frank K. Voris 1995 $ 123,381 $10,608 3,540 $ 6,498
Vice President of the 1994 116,154 17,473 3,624 6,180
Company and Executive 1993 105,385 14,346 --- 5,269
Vice President and Chief
Operating Officer of
Merchants Bank
Terence L. Kothe 1995 $ 113,112 $ 6,646 2,218 $ 24,065
Executive Vice President, 1994 108,077 10,948 2,288 24,996
Trust and Financial 1993 105,000 12,085 --- 21,847
Services Division of
Merchants Bank
Randal A. Wright 1995 $ 115,559 $ 7,449 2,652 $ 5,935
Executive Vice President, 1994 109,715 13,088 2,555 5,794
Commercial Banking 1993 100,415 12,647 --- 5,019
Division of Merchants
Bank
</TABLE>
_______________
(1) Includes amounts deferred under the Merchants Bancorp, Inc. Thrift Plan.
(2) These amounts primarily include cash awards under the Management Incentive
Plan. The Management Incentive Plan provides for the payment of cash awards
based upon the executive's salary and the Company's return on equity for the
year. Management Incentive Plan awards are paid in the year following the year
earned.
(3) Represents options to buy Common Stock of the Company granted under the
Stock Option Plan.
(4) The total amounts in this column reflect the Company's contributions under
the Merchants Bancorp, Inc. Thrift Plan and, with respect to Mr. Kothe, such
amount also reflects compensation received under an incentive compensation
program relating to new accounts he is directly responsible for bringing to the
organization.
6
<PAGE>
STOCK OPTION INFORMATION
The following table sets forth certain information concerning the number
and value of stock options granted in the last fiscal year to the individuals
named in the Summary Compensation Table:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
OPTION GRANTS IN LAST FISCAL YEAR
- -------------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS
- -------------------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
FOR OPTION TERM
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
% OF TOTAL
OPTIONS OPTIONS GRANTED
GRANTED TO EMPLOYEES IN EXERCISE OR BASE PRICE EXPIRATION
NAME (#)(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Calvin R. Myers 7,872 42% $24.75 5/16/05 $122,567 $310,472
Frank K. Voris 3,540 19% 24.75 5/16/05 55,118 139,618
Terence L. Kothe 2,218 12% 24.75 5/16/05 24,534 87,478
Randal A. Wright 2,652 14% 24.75 5/16/05 41,292 104,595
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Options become exercisable in equal portions (rounded to nearest share) on
November 16, 1995, May 16, 1996 and May 16, 1997.
The following table sets forth certain information concerning the
exercisable and nonexercisable stock options at December 31, 1995 held by the
individuals named in the Summary Compensation Table:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION VALUES
- -------------------------------------------------------------------------------------------------------------------------------
SHARES NUMBER OF SECURITIES
ACQUIRED UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
ON VALUE OPTIONS AT FY-END THE-MONEY OPTIONS
NAME EXERCISE REALIZED (#)(D) AT FY-END ($)(E)
(#)(A) (#)(B) ($)(C) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Calvin R. Myers --- $ --- 7,928 7,899 $30,393 $ 29,949
Frank K. Voris --- --- 3,596 3,568 13,787 13,531
Terence L. Kothe --- --- 2,266 2,240 8,688 8,503
Randal A. Wright --- --- 2,588 2,619 9,918 9,821
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
EMPLOYMENT AGREEMENTS
The Company entered into a three-year employment agreement with Mr. Myers
on August 30, 1993. In the absence of a notice from either party to the
contrary, the employment term under the agreement extends for an additional year
on each anniversary of the agreement. Under this agreement, Mr. Myers received
an annual salary of $216,231 in 1995. The agreement includes provisions for
periodic increases of Mr. Myers' salary, incentive compensation and
participation in the Company's benefit plans.
7
<PAGE>
The agreement is terminable at any time by either the Company's Board of
Directors or Mr. Myers. The Company may terminate the agreement at any time for
cause without incurring any post-termination obligation to Mr. Myers. The
agreement provides severance benefits in the event Mr. Myers is terminated
without cause. The severance benefits are equal to two times his annual salary
and continued benefit plan participation for two years. The Company also must
pay Mr. Myers all accrued salary, vested deferred compensation and other
benefits due to him on the termination date. If Mr. Myers is terminated in
connection with a change in control, he is to be paid severance compensation
equal to three times his annual salary and other compensation at the rates then
in effect at the time of termination, and he will be entitled to continue
participating in other benefit plans for three years. Mr. Myers is prohibited
from competing with the Company or its subsidiaries within a 25-mile radius of
the Company's main office for a period of one year following the termination of
his employment.
PENSION PLAN
The Company maintains the Merchants Bancorp, Inc. Pension Plan (the "Plan")
for its employees. The Plan is a non-contributory, trusteed pension plan
originally was known as "The Merchants National Bank of Aurora Pension Plan,"
and integrates benefits with anticipated Social Security payments. The Plan, as
amended and restated effective January 1, 1986, is intended to meet the
requirements of Section 401(a) of the Internal Revenue Code of 1986 (the "Code")
and the Employee Retirement Income Security Act of 1974 ("ERISA").
The following table provides estimated annual benefits payable upon
retirement at specified compensation and service levels:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
FINAL AVERAGE ----------------
ANNUAL SALARY 15 20 25 30 35
- ------------- -- -- -- -- --
<S> <C> <C> <C> <C> <C>
$ 30,000 . . . . . . . $4,190 $5,586 $6,983 $8,379 $ 9,776
40,000 . . . . . . . 6,440 8,586 10,733 12,879 15,026
50,000 . . . . . . . 8,690 11,586 14,483 17,379 20,276
70,000 . . . . . . . 13,190 17,586 21,983 26,379 30,776
90,000 . . . . . . . 17,690 23,586 29,483 35,379 41,276
110,000 . . . . . . . 22,190 29,586 36,983 44,379 51,776
130,000 . . . . . . . 26,690 35,586 44,483 53,379 62,276
150,000 . . . . . . . 31,190 41,586 51,983 62,379 72,776
170,000 . . . . . . . 32,054 42,783 53,512 64,241 74,970
190,000 . . . . . . . 35,591 47,681 59,770 71,860 83,949
205,000 . . . . . . . 38,244 51,354 64,464 77,574 90,684
225,000 . . . . . . . 41,782 56,252 70,723 85,193 99,664
250,000 . . . . . . . 45,358 61,204 77,050 92,895 108,741
270,000 . . . . . . . 45,358 61,204 77,050 92,895 108,741
</TABLE>
The definition of compensation for the Pension Plan Table is base salary.
As of December 31, 1995, the credited years of service for the individuals named
in the Summary Compensation Table were as follows: Calvin R. Myers -- 18, Frank
K. Voris -- 10, Terence L. Kothe -- 3 and Randal A. Wright -- 6.
Benefits are payable upon retirement at age 65 (subject to an early
retirement option) and are based upon the number of years of a participant's
service and his or her final average monthly compensation. Final average monthly
compensation is defined as the participant's average monthly remuneration for
the three successive calendar years for which his or her remuneration was the
highest out of the ten calendar years immediately preceding the date of
termination of service for the participant. Remuneration for purposes of this
Plan is gross earnings received by a participant exclusive of overtime pay,
bonuses, commissions, expense allowances and all other forms of extraordinary
compensation. A monthly income payable at retirement is the product of 1.5% of
final average monthly compensation and the participant's years of credited
service, less 21.665% of the participant's monthly "Covered Compensation"
(reduced proportionately for less than 35 years of credited service at
retirement). Covered
8
<PAGE>
Compensation is the average of the Social Security taxable wage bases for the 35
year period ending with the year in which the participant attains his or her
Social Security retirement age. Covered Compensation for a participant retiring
at age 65 in 1996 is $27,576.
The amounts set aside or accrued in the last fiscal year for the Plan are
computed on an actuarial basis using an aggregate funding method, and cost
cannot satisfactorily be allocated to individual employees. Because of the
funded status of the Plan, contributions were not required for the 1995 fiscal
year.
THE INCORPORATION BY REFERENCE OF THIS PROXY STATEMENT INTO ANY DOCUMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE COMPANY SHALL NOT BE
DEEMED TO INCLUDE THE FOLLOWING REPORT UNLESS SUCH REPORT IS SPECIFICALLY STATED
TO BE INCORPORATED BY REFERENCE INTO SUCH DOCUMENT.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's compensation program is administered by the Executive
Committee of the Board of Directors. The Committee is comprised of six
independent, non-employee directors. The Chief Executive Officer serves on this
committee ex-officio, but not as Chairman. Following review and approval by the
Executive Committee, all matters regarding executive compensation are referred
to the Board of Directors for final approval.
In determining appropriate levels of executive compensation, the Committee
has at its disposal reference information regarding compensation ranges and
levels for executive positions in comparable companies. In determining
compensation to be paid to executive officers, primary consideration is given to
quality long-term earnings growth to be accomplished by achieving both financial
and non-financial goals such as the implementation of the sales program, asset
quality and growth and staff training. The objectives of this philosophy are to
(i) encourage a consistent and competitive return to stockholders, (ii) reward
bank and individual performance, (iii) provide financial rewards for performance
for those having significant impact on corporate profitability and (iv) provide
competitive compensation in order to attract and retain key personnel.
The two basic components to the total compensation of all key executives,
including the Chief Executive Officer, are base salary and an incentive
component. The salary component is reflective of levels of responsibility,
authority and performance relative to similar positions in the banking industry.
These criteria are quantified by an external, nationally-recognized compensation
consulting company and are converted to salary ranges for various positions
within the organization, including that of Chief Executive Officer. The
practice of the Compensation Committee for the expected level of performance by
an executive in that particular job position is to have base salary reflect a
level consistent with the mid-point of the relevant range.
The incentive portion is directly related to overall executive performance
as measured by growth in earnings per share, asset growth, return on equity, new
trust business or other organizational issues such as investigating the
appropriateness of new lines of business, various opportunities for expansion
and other measures reflective of organizational growth and progress. The
incentive portion of the Chief Executive Officer's compensation is a function of
the degree to which the incumbent has successfully met a variety of objectives
set forth in writing by the Board of Directors at the beginning of the year.
His percentage completion of these objectives is then used to determine the
degree to which he participates in the final incentive award.
The stock option portion of compensation closely follows the cash incentive
portion. The mid-point of the executive's salary range is adjusted downward by
a weighting factor and then multiplied by the same percentage of completion as
was used to determine the cash incentive portion. This figure is then divided
by a number provided by an independent, external consulting agency which
reflects the present value of the option, itself.
The 1995 compensation of the Chief Executive Officer was determined by the
Executive Committee based on the policies previously described. The Chief
Executive Officer, while compensated by Merchants Bank, has a range of
responsibility for the management of both the Company and its Subsidiaries which
is considered when establishing levels of compensation.
William C. Glenn, Chairman
C. Tell Coffey
John M. Lies
James D. Pearson
John J. Swalec
William S. Wake
9
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Myers served in an ex-officio capacity on the Executive Committee of
the Company during the past fiscal year. However, Mr. Myers did not participate
in any decision pertaining to his own compensation.
THE INCORPORATION BY REFERENCE OF THIS PROXY STATEMENT INTO ANY DOCUMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE COMPANY SHALL NOT BE
DEEMED TO INCLUDE THE FOLLOWING PERFORMANCE GRAPH AND RELATED INFORMATION UNLESS
SUCH GRAPH AND RELATED INFORMATION ARE SPECIFICALLY STATED TO BE INCORPORATED BY
REFERENCE INTO SUCH DOCUMENT.
STOCKHOLDER RETURN PERFORMANCE PRESENTATION
The following graph shows a five year comparison of cumulative total
returns for the Company, the Nasdaq Stock Market (US Companies) and an index of
Nasdaq Bank Stocks. The Common Stock of the Company trades in the
over-the-counter market and was first listed for quotation on the Nasdaq Stock
Market in October, 1993. The graph was prepared at the Company's request by
Research Data Group, San Francisco, California.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
ASSUMES $100 INVESTED ON DECEMBER 31, 1990
[GRAPH]
*TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS
10
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Cumulative Total Return
- ---------------------------------------------------------------------------------------------------------------------
12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Merchants Bancorp Inc. $100 $127 $227 $329 $338 $456
Nasdaq Stock Market - US $100 $161 $187 $215 $210 $296
Nasdaq Bank Index $100 $164 $239 $272 $271 $404
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
TRANSACTIONS WITH MANAGEMENT
Certain directors and executive officers of the Company (including their
affiliates, families and companies in which they are principal owners, officers
or directors) were loan customers of, and had other transactions with, the
Company and its subsidiaries in the ordinary course of business. Such loans and
lines of credit were made in the ordinary course of business on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for transactions with other persons and did not involve more than the
normal risk of collectibility or present other unfavorable features.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
The appointment of independent public accountants is approved annually by
the Board of Directors. The decision of the Board of Directors is based on the
recommendation of the Examining Committee. In making its recommendation, the
Examining Committee reviews both the audit scope and estimated fees for
professional services for the coming year. The Board of Directors has authorized
the engagement of Crowe, Chizek and Company LLP ("Crowe Chizek") as its
independent public accountants for the fiscal year 1996. Crowe Chizek has had
the responsibility for examining the consolidated financial statements of the
Company and its subsidiaries since 1992. A proposal will be presented at the
meeting to ratify the appointment of Crowe Chizek. If the appointment of Crowe
Chizek is not ratified, the matter of the appointment of independent public
accountants will be considered by the Board of Directors.
One or more representatives of Crowe Chizek are expected to be present at
the annual meeting with the opportunity to make a statement, if they desire to
do so, and to be available to respond to the appropriate questions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
A VOTE FOR RATIFICATION OF THIS APPOINTMENT.
STOCKHOLDER PROPOSALS FOR 1997 ANNUAL MEETING
For inclusion in the Company's Proxy Statement and form of proxy relating
to the 1997 Annual Meeting of Stockholders, stockholder proposals must be
received by the Company on or before November 13, 1996. In order to be
presented at such meeting, notice of the proposal must be received by the
Company on or before February 16, 1997, and must otherwise comply with the
Company's bylaws.
OTHER MATTERS
Management does not intend to present any other business at the meeting and
knows of no other matters which will be presented. However, if any other matters
come before the meeting, it is the intention of the persons named in the
accompanying proxy to vote in accordance with their best judgment on those
matters.
11
<PAGE>
VOTING OF PROXIES
Unless a stockholder indicates otherwise, shares represented by proxy will
be voted in favor of the election of the three nominees for Class C director and
the one nominee for Class A director named in this proxy statement (or such
other person designated by the Board of Directors in the event a nominee is
unable or declines to serve), and in favor of the ratification of the
appointment of Crowe Chizek as independent public accountants for the Company
for the year ending December 31, 1996.
By order of the Board of Directors,
DANA K. HOPP
ADMINISTRATIVE ASSISTANT
AND SECRETARY-TREASURER
Aurora, Illinois
March 13, 1996
