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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, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ________
Commission file number 0-14484
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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)
1851 WEST GALENA BOULEVARD, AURORA, ILLINOIS 60507
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(Address of principal executive offices, including Zip Code)
(630) 907-9000
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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. [ ]
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As of March 3, 1999, the aggregate market value of the registrant's
common stock held by non-affiliates of the registrant was approximately
$147,012,890* based upon the price of the last sale on that date. (This
determination includes 872,415 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 5,181,071 at March 3, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's 1998 Annual Report are incorporated by
reference into Parts I, II and IV.
Portions of the Company's Proxy Statement for the 1999 Annual Meeting
of Stockholders are incorporated by reference into Part III.
* Based on the last reported price of an actual transaction in
registrant's common stock on March 3, 1999 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
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PART I Page No.
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Item 1 Business 1 - 14
Item 2 Properties 15
Item 3 Legal Proceedings 15
Item 4 Submission of Matters to a Vote of Security Holders 15
PART II
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Item 5 Market for the Registrant's Common Stock and
Related Security Holder Matters 16
Item 6 Selected Financial Data 16
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 7A Quantitative and Qualitative Disclosures about Market Risk 16 - 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 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
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 19 - 20
Signatures 21
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PART I
ITEM 1. BUSINESS
THE CORPORATION
OVERVIEW
Merchants Bancorp, Inc. (the "Company" 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
Company's office is located at 1851 West Galena Boulevard, Aurora, Illinois
60507, and its telephone number is 630/907-9000.
The Company conducts a full service community banking and trust
business through its wholly-owned subsidiary bank, The Merchants National Bank
of Aurora ("Merchants Bank" or the "Bank"). During 1998, the Company simplified
its organizational structure by eliminating all but one of its subsidiaries
through mergers. It merged Hinckley State Bank and Fox Valley Bank into The
Merchants Bank and merged Valley Banc Services Corp. ("Valley") and VBH Corp.
into Merchants Bancorp, Inc. The mergers qualified as tax free reorganizations
and were accounted for as internal reorganizations.
Merchants Bank is a national banking association with its main office
located at 1851 West Galena Boulevard, Aurora, Illinois 60507. The Bank has a
loan production office located at 207 Hillcrest, Yorkville, Illinois 60560, and
full service banking facilities at the following locations:
1851 West Galena Boulevard, Aurora, Illinois 60507
34 South Broadway, Aurora, Illinois 60507
2998 Ogden Avenue, Aurora, Illinois 60505
55 Constitution Drive, Aurora, Illinois 60506
1771 Merchants Drive, Geneva, Illinois 60134
629 West State Street, Geneva, Illinois 60134
1600 East Main Street, St. Charles, Illinois 60174
1525 West Main Street, St. Charles, Illinois 60174
101 W. Lincoln, Hinckley, Illinois 60520
One Merchants Plaza, Oswego, Illinois 60543
80 N. Dugan Road, Sugar Grove, Illinois 60554
Aurora is located in the Fox River Valley approximately 40 miles west
of Chicago, Illinois, at the leading edge of the expanding boundaries of
metropolitan Chicago. Also passing through this area is U.S. Interstate Highway
88, which the State of Illinois has designated as a high-tech corridor. The
Company's market area stretches along the Fox River Valley, from Oswego to the
South to St. Charles to the North, and as far west as Hinckley, which is
approximately 17 miles west of Aurora. This is a dynamic and fast growing area
which is ideally suited to community banking. Aurora's population grew 22% in
the 1980's and is projected to grow 60% in the 1990's.
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 Company is well positioned to take advantage of the growth
of Aurora and its surrounding communities. Merchants 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 Company operates its locations as
traditional community banks with conveniently located facilities and
professional, highly motivated staffs which are active in the community, focus
on long-term relationships with customers and provide individualized quality
service.
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. Commercial lending focuses on
business, capital, construction, inventory and real estate lending. Installment
lending includes direct and indirect loans to consumers and commercial
customers. The mortgage division of Merchants Bank originates and services
residential mortgages and handles the secondary marketing of those mortgages.
MARKET AREAS
Merchants 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
120,000 residents.
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 Merchants Bank's
market area include Caterpillar Inc., Hollywood Casino Aurora, Metropolitan
Life, Dial Company, and Farmers Insurance. Retail sales declared for tax
purposes in Aurora reached $989 million in 1990.
St. Charles, like Aurora, is located along the Fox River Valley, and
has experienced similar growth in recent years. As of 1992, median household
income was $66,000, more than double the Illinois average reported in the 1990
census. Major employers include Central DuPage Hospital, System Sensor, Delnor
Community Hospital, DuKane Corp., and Arthur Andersen.
Hinckley is a rural community located approximately 17 miles west of
Aurora. Located along a significant east-west corridor, it is well positioned to
participate in the growth moving west through the Chicago suburbs. Many people
who are employed by the major employers in the Aurora area are buying or
building homes in the Hinckley area.
ACQUISITION AND EXPANSION STRATEGY
The Company has attempted to diversify both its market area and asset
base while increasing profitability through acquisitions and expansion. The
Company's goal, as reflected by its acquisition policy, has been to expand
through the acquisition of established financial service organizations,
primarily commercial banks or thrifts, to the extent suitable candidates have
been identified and acceptable business terms negotiated.
The Company's acquisition strategy has been 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 Company may in the future look beyond these geographic areas for
acquisition opportunities. In addition to price and terms, other factors
considered by the Company in determining the desirability of an acquisition
candidate are financial condition, earnings potential, quality of management,
market area and competitive environment.
The Company 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. The Company 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 Company and if the Company can be
competitive.
OPERATING STRATEGY
Corporate policy, strategy and goals are established by the Board of
Directors of the Company. Pursuant to the Company's philosophy, operational and
administrative policies for the Bank are also established by the Company. 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 Company redirected its existing resources and
personnel to create an aggressive sales environment within the organization. In
addition to promotions from within the organization, the Company 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 Company to continue to grow with the community and
compete successfully in Aurora's banking market.
The Company operates Merchants Bank as a traditional community bank
with conveniently located facilities and professional, highly motivated staffs
which are active in the communities they serve, focusing on long-term
relationships with customers and providing individualized quality service. As
part of its community banking approach, the Company encourages officers of the
Bank to actively
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participate in community organizations. In addition, within credit and rate of
return parameters, the Company attempts to ensure that the Bank meets the credit
needs of its communities and that the Bank invests in local municipal
securities.
The Company 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.
The Company has an internal data processing division and has attempted
to remain at the forefront of the banking industry in new technological
innovations. The Company 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 Company
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 Bank makes direct and indirect loans
to consumers and commercial customers, and the mortgage division of the Bank
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
bank's market area as well as longstanding members of their 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 the market area, particularly with regard to
residential mortgages, home equity loans, and installment loans.
COMMERCIAL LOANS. The Bank aggressively seeks new commercial loans in
the 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 area of
emphasis includes, but is 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 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 greater Aurora area,
including Hinckley and St. Charles, due to the growth in population. Development
and construction lending has been a significant portion of the commercial loan
activity and these types of loans represented approximately 15% of the loan
portfolio as of December 31, 1998. However, no construction or development loan
was on nonaccrual status as of December 31, 1998.
Merchants Bank's Board of Directors reviews, on a monthly basis, a
report of all criticized assets and considers all requests for new loans of over
$11 million. The director's loan committee may approve requests for new loans
over $6 million. Loan review is centralized for all locations, and 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. Prior to 1993, Merchants 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, Merchants 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 $320 million at December 31, 1998.
Management believes
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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.
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, and has entered into a contract with a non-affiliated third party to
provide credit card processing for the Bank's operations. Through this program,
the Bank hopes to increase profits and augment its cross-selling opportunities
by increasing its marketing base. The "Phone for a Loan" program 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 $486 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 systems to enhance the department's ability to continue
to provide a quality, highly personalized trust product to its customers.
COMPETITION
The Company's market area is highly competitive. Many financial
institutions based in Aurora's surrounding communities and in Chicago, Illinois,
operate banking offices in the greater Aurora area or actively compete for
customers within the Company's market area. The Company 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 Company competes for loans principally through the range and
quality of the services it provides, interest rates and loan fees. The Company
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 Company actively solicits deposit-related
clients and competes for deposits by offering customers personal attention,
professional service and competitive interest rates.
EMPLOYEES
At December 31, 1998, the Company employed 348 full-time equivalent
employees. The Company 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 Company's employees are covered by a collective
bargaining agreement with the Company. The Company offers a variety of employee
benefits and management considers its employee relations to be excellent.
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively
regulated under federal and state law. As a result, the growth and earnings
performance of the Company can be affected not only by management decisions and
general economic conditions, but also by the requirements of applicable state
and federal statutes and regulations and the policies of various governmental
regulatory authorities, including the Office of the Comptroller of the Currency
(the "OCC"), the Board of Governors of the Federal Reserve System (the "Federal
Reserve"), the Federal Deposit Insurance Company (the "FDIC"), the Internal
Revenue Service and state taxing authorities and the Securities and Exchange
Commission (the "SEC"). The effect of applicable statutes, regulations and
regulatory 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 Company and its subsidiary, 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 Company and its
subsidiary 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 is a summary of the material elements of the regulatory
framework that applies to the Company and its subsidiary. It does not describe
all of the statutes, regulations and regulatory policies that apply to the
Company and its subsidiary, nor does it restate all of the requirements of the
statutes, regulations and regulatory policies that are described. As such, the
following is qualified in its entirety by reference to the applicable statutes,
regulations and regulatory policies. Any change in applicable law, regulations
or regulatory policies may have a material effect on the business of the Company
and its subsidiary.
RECENT REGULATORY DEVELOPMENTS
PENDING LEGISLATION. Legislation has been introduced in the Congress
that would allow bank holding companies to engage in a wider range of nonbanking
activities, including greater authority to engage in securities and insurance
activities. The expanded powers generally would be available to a bank holding
company only if the bank holding company and its bank subsidiaries remain
well-capitalized and well-managed. At this time, the Company is unable to
predict whether the proposed legislation will be enacted and, therefore, is
unable to predict the impact such legislation may have on the Company and the
Bank.
THE COMPANY
GENERAL. The Company, as the sole shareholder of the Bank, is a bank
holding company. As a bank holding company, the Company is registered with, and
is subject to regulation by, the Federal Reserve under the Bank Holding Company
Act, as amended (the "BHCA"). In accordance with Federal Reserve policy, the
Company 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 Company might
not otherwise do so. Under the BHCA, the Company is subject to periodic
examination by the Federal Reserve. The Company is also required to file with
the Federal Reserve periodic reports of the Company's operations and such
additional information regarding the Company and its subsidiary as the Federal
Reserve may require.
INVESTMENTS AND ACTIVITIES. Under the BHCA, a bank holding company must
obtain Federal Reserve approval before: (i) acquiring, directly or indirectly,
ownership or control of any voting shares of another bank or bank holding
company if, after the acquisition, it would own or control more than 5% of the
shares of the other bank or bank holding company (unless it already owns or
controls the majority of such shares); (ii) acquiring all or substantially all
of the assets of another bank; or (iii) merging or consolidating with another
bank holding company. Subject to certain conditions (including certain deposit
concentration limits established by the BHCA), the Federal Reserve may allow a
bank holding company to acquire banks located in any state of the United States
without regard to whether the acquisition is prohibited by the law of the state
in which the target bank is located. In approving interstate acquisitions,
however, the Federal Reserve is required to give effect to applicable state law
limitations on the aggregate amount of deposits that may be held by the
acquiring bank holding company and its insured depository institution affiliates
in the state in which the target bank is located (provided that those limits do
not discriminate against out-of-state depository institutions or their holding
companies) and state laws which require that the target bank have been in
existence for a minimum period of time (not to exceed five years) before being
acquired by an out-of-state bank holding company.
The BHCA also generally prohibits the Company 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. This general prohibition is subject to a number of
exceptions. The principal exception allows bank holding companies to engage in,
and to own shares of companies engaged in, certain businesses found by the
Federal Reserve to be "so closely related to banking ... as to be a proper
incident thereto." Under current regulations of the Federal Reserve, bank
holding companies and their non-bank subsidiaries are permitted to engage in a
variety of banking-related businesses, including the operation of a thrift,
sales and consumer finance, equipment leasing, the operation of a computer
service bureau (including software development), and mortgage banking and
brokerage. The BHCA generally does not place territorial restrictions on the
domestic activities of non-bank subsidiaries of bank holding companies.
Federal law also prohibits any person or company from acquiring
"control" of a bank or a bank holding company without prior notice to the
appropriate federal bank regulator. "Control" is defined in certain cases as the
acquisition of 10% of the outstanding shares of a bank or bank holding company.
CAPITAL REQUIREMENTS. Bank holding companies are required to maintain
minimum levels of capital in accordance with Federal Reserve capital adequacy
guidelines. 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 Federal Reserve'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%, at least one-half of which must be Tier 1 capital. The leverage
requirement consists of a minimum ratio of Tier 1 capital to total assets of 3%
for the most highly rated companies, with a minimum requirement of 4% for all
others. For purposes of these capital standards, Tier 1 capital consists
primarily of permanent stockholders' equity less intangible assets (other than
certain mortgage servicing rights and purchased credit card relationships).
Total capital consists primarily of Tier 1 capital plus certain other debt and
equity instruments which do not qualify as Tier 1
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capital and a portion of the Company's allowance for loan and lease losses.
The risk-based and leverage standards described above are minimum
requirements. Higher capital levels will be required if warranted by the
particular circumstances or risk profiles of individual banking organizations.
For example, the Federal Reserve's capital guidelines contemplate that
additional capital may be required to take adequate account of, among other
things, interest rate risk, or the risks posed by concentrations of credit,
nontraditional activities or securities trading activities. 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, 1998, the Company had regulatory capital in excess
of the Federal Reserve's minimum requirements, with a risk-based capital ratio
of 10.98% and a leverage ratio of 7.30%.
DIVIDENDS. The Delaware General Company Law (the "DGCL") allows the
Company to pay dividends only out of its surplus (as defined and computed in
accordance with the provisions of the DGCL) or if the Company 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. Additionally, the Federal Reserve has
issued a policy statement with regard to the payment of cash dividends by bank
holding companies. The policy statement provides that a bank holding company
should not pay cash dividends which exceed its net income or which can only be
funded in ways that weaken the bank holding company's financial health, such as
by borrowing. The Federal Reserve also 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.
FEDERAL SECURITIES REGULATION. The Company's common stock is registered
with the SEC under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Consequently, the Company 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 FDIC's
Bank Insurance Fund ("BIF"), 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 FDIC has adopted 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 respective levels of capital and results of supervisory evaluations.
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. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
During the year ended December 31, 1998, BIF assessments ranged from 0%
of deposits to 0.27% of deposits. For the semi-annual assessment period
beginning January 1, 1999, BIF assessment rates will continue to range from 0%
of deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution (i)
has engaged or is engaging in unsafe or unsound practices, (ii) is in an unsafe
or unsound condition to continue operations or (iii) has violated any applicable
law, regulation, order, or any condition imposed in writing by, or written
agreement with, the FDIC. The FDIC 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 Company is not
aware of any activity or condition that could result in termination of the
deposit insurance of the Bank.
FICO ASSESSMENTS. Since 1987, a portion of the deposit insurance
assessments paid by members of the FDIC's Savings Association Insurance Fund
("SAIF") has been used to cover interest payments due on the outstanding
obligations of the Financing Company ("FICO"). FICO was created in 1987 to
finance the recapitalization of the Federal Savings and Loan Insurance Company,
the SAIF's predecessor insurance fund. As a result of federal legislation
enacted in 1996, beginning as of January 1, 1997, both SAIF members and BIF
members became subject to assessments to cover the interest payments on
outstanding FICO obligations. These FICO assessments are in addition to amounts
assessed by the FDIC for deposit insurance. Until January 1, 2000, the FICO
assessments made against BIF members may not exceed 20% of the amount of the
FICO assessments made against SAIF members. Between January 1, 2000 and the
final maturity of the outstanding FICO obligations in 2019, BIF members and SAIF
members will share the cost of the interest on the FICO bonds on a pro rata
basis. During the year ended December 31, 1998, the FICO assessment rate for
SAIF members ranged between approximately 0.061% of deposits and approximately
0.063% of deposits, while the FICO assessment rate for BIF members ranged
between approximately 0.012% of deposits and approximately 0.013% of deposits.
During the year ended December 31, 1998, the Bank paid FICO assessments totaling
$78,000.
6
<PAGE>
SUPERVISORY ASSESSMENTS. All national banks are required to pay
supervisory assessments to the OCC to fund the operations of the OCC. The amount
of the assessment is calculated using a formula which takes into account the
bank's size and its supervisory condition (as determined by the composite rating
assigned to the bank as a result of its most recent OCC examination). During the
year ended December 31, 1998, the Bank paid supervisory assessments to the OCC
totaling $160,000.
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 a minimum requirement of at least 4% 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. For purposes of these capital standards, Tier 1 capital
and total capital consist of substantially the same components as Tier 1 capital
and total capital under the Federal Reserve's capital guidelines for bank
holding companies (see "--The Company--Capital Requirements").
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, among other things, interest rate risk or the risks posed
by concentrations of credit, nontraditional activities or securities trading
activities.
During the year ended December 31, 1998, the Bank was not required by
the OCC to increase its capital to an amount in excess of the minimum regulatory
requirement. As of December 31, 1998, the Bank exceeded its minimum regulatory
capital requirements with a leverage ratio of 7.70% and a risk-based capital
ratio of 11.64%.
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," in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators' corrective
powers include: requiring the institution to submit a capital restoration plan;
limiting the institution's asset growth and restricting its activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions between the
institution and its 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. As of December 31, 1998, the Bank was well capitalized, as defined
by OCC regulations.
DIVIDENDS. The National Bank Act imposes limitations on the amount of
dividends that may be paid by a national bank, such as the Bank. Generally, a
national bank may pay dividends out of its undivided profits, in such amounts
and at such times as the bank's board of directors deems prudent. Without prior
OCC approval, however, a national bank may not pay dividends in any calendar
year which, in the aggregate, exceed the bank's year-to-date net income plus the
bank's retained net income 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, and a financial
institution generally is prohibited from paying any dividends if, following
payment thereof, the institution would be undercapitalized. As described above,
the Bank exceeded its minimum capital requirements under applicable guidelines
as of December 31, 1998. As of January 1, 1999, approximately $11.6 million was
available to be paid as dividends to the Company by the Bank. Notwithstanding
the availability of funds for dividends, however, the OCC may prohibit the
payment of any dividends by the Bank if the OCC determines such payment would
constitute an unsafe or unsound practice.
INSIDER TRANSACTIONS. The Bank is subject to certain restrictions
imposed by federal law on extensions of credit to the Company and its
subsidiary, on investments in the stock or other securities of the Company and
its subsidiary and the acceptance of the stock or other securities of the
Company or its subsidiary 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 Company and its
subsidiary, to principal stockholders of the Company, and to "related interests"
of such directors, officers and principal stockholders. In addition, federal law
and regulations may affect the terms upon which any person becoming a director
or officer of the Company or one of its subsidiary or a principal stockholder of
the Company may obtain credit from banks with which the Bank maintains a
correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS. The federal banking agencies have
adopted guidelines which establish operational and managerial standards to
promote the safety and soundness of federally insured depository institutions.
The guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings. In addition, in October 1998, the federal banking regulators issued
safety and soundness standards for achieving Year 2000 compliance, including
standards for developing and managing Year 2000 project plans, testing
remediation efforts and planning for contingencies.
7
<PAGE>
In general, the safety and soundness guidelines prescribe the goals to
be achieved in each area, and each institution is 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. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
BRANCHING AUTHORITY. National banks headquartered in Illinois, such as
the Bank, have the same branching rights in Illinois as banks chartered under
Illinois law. Illinois law grants Illinois-chartered banks the authority to
establish branches anywhere in the State of Illinois, subject to receipt of all
required regulatory approvals.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act"), both state and national banks are allowed 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 new 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
allowed 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 mergers beginning on June 1, 1997,
subject to certain conditions, including a prohibition against interstate
mergers involving an Illinois bank that has been in existence and continuous
operation for fewer than five years.
FEDERAL RESERVE SYSTEM. Federal Reserve regulations, as presently in
effect, require depository institutions to maintain non-interest earning
reserves against their transaction accounts (primarily NOW and regular checking
accounts), as follows: for transaction accounts aggregating $46.5 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $46.5 million, the reserve
requirement is $1.395 million plus 10% of the aggregate amount of total
transaction accounts in excess of $46.5 million. The first $4.9 million of
otherwise reservable balances are exempted from the reserve requirements. These
reserve requirements are subject to annual adjustment by the Federal Reserve.
The Bank is in compliance with the foregoing requirements.
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 1998 Annual Report herein incorporated by
reference (attached hereto as Exhibit 13). All dollars in the tables are
expressed in thousands.
8
<PAGE>
The following table sets forth certain information relating to the Company'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, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997
------------------------------------ ------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Securities:
Taxable $ 129,018 $ 8,132 6.29% $ 139,803 $ 9,177 6.50%
Non-taxable (tax equivalent) 66,378 5,047 6.81 56,773 4,387 8.07
--------- ------ ---- --------- ------ ----
Total securities 195,396 13,179 6.81 196,576 13,564 6.94
Federal funds sold 10,692 574 5.37 4,399 254 5.77
Loans held for sale 6,234 376 6.03 2,208 141 6.39
Net loans (tax equivalent) 582,358 51,457 8.84 500,634 45,248 9.04
--------- ------ ---- --------- ------ ----
Total interest earning assets 794,680 65,586 8.26 703,817 59,207 8.42
Cash and due from banks 35,575 -- -- 34,734 -- --
Allowance for loan losses (8,946) -- -- (7,718) -- --
Premises and equipment, net 11,605 -- -- 11,925 -- --
Accrued interest and other assets 20,036 -- -- 19,102 -- --
--------- ------ ---- --------- ------ ----
Total assets $ 852,950 65,586 7.70 $ 761,860 59,207 7.78
--------- ------ ---- --------- ------ ----
--------- ---------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing deposits:
NOW accounts $ 78,476 1,725 2.20 $ 76,664 1,798 2.35
Money market accounts 91,572 3,871 4.23 65,446 2,618 4.00
Savings 66,409 1,766 2.66 66,316 1,839 2.77
Time, $100,000 and over 104,740 5,879 5.61 88,467 4,987 5.64
Other time 222,055 13,050 5.88 218,045 12,840 5.89
Federal funds purchased and
other borrowed funds 42,342 2,270 5.36 42,545 2,584 6.07
FHLB term advances 48,997 2,951 6.02 19,866 925 4.66
Notes payable 13,556 939 6.93 14,000 969 6.92
--------- ------ ---- --------- ------ ----
Total interest bearing liabilities 668,147 32,451 4.86 591,349 28,560 4.83
Noninterest bearing deposits 111,930 -- -- 105,688 -- --
Accrued interest and other liabilities 4,288 -- -- 3,884 -- --
Stockholders' equity 68,585 -- -- 60,939 -- --
Total liabilities and
stockholders' equity $ 852,950 32,451 3.80 $ 761,860 28,560 3.75
--------- ------ ---- --------- ------ ----
--------- ---------
Net interest income (tax equivalent) $ 33,135 $ 30,647
--------- ---------
--------- ---------
Net interest income (tax equivalent)
to total earning assets 4.17% 4.35%
---- ----
---- ----
Interest bearing liabilities to
earnings assets 84.08% 84.02%
----- -----
----- -----
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------
Average
Balance Interest Rate
------- -------- ----
<S> <C> <C> <C>
ASSETS
Securities:
Taxable $ 156,701 $ 10,119 6.42%
Non-taxable (tax equivalent) 52,662 4,177 8.09
--------- ------ ----
Total securities 209,363 14,296 6.83
Federal funds sold 7,776 415 5.34
Loans held for sale 4,106 245 5.97
Net loans (tax equivalent) 399,546 37,074 9.28
--------- ------ ----
Total interest earning assets 620,791 52,030 8.38
Cash and due from banks 32,139 -- --
Allowance for loan losses (6,534) -- --
Premises and equipment, net 12,056 -- --
Accrued interest and other assets 25,326 -- --
--------- ------ ----
Total assets $ 683,778 52,030 7.91
--------- ------ ----
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing deposits:
NOW accounts $ 74,319 1,777 2.39
Money market accounts 54,535 1,759 3.23
Savings 67,425 1,890 2.80
Time, $100,000 and over 80,483 4,450 5.53
Other time 205,321 12,036 5.86
Federal funds purchased and
other borrowed funds 35,366 1,773 5.01
FHLB term advances -- -- --
Notes payable 14,567 453 3.11
--------- ------ ----
Total interest bearing liabilities 532,016 24,138 4.54
Noninterest bearing deposits 95,293 -- --
Accrued interest and other liabilities 2,709 -- --
Stockholders' equity 53,760 -- --
Total liabilities and --------- ------ ----
stockholders' equity $ 683,778 24,138 3.53
--------- ------ ----
---------
Net interest income (tax equivalent) $ 27,892
--------
--------
Net interest income (tax equivalent)
to total earning assets 4.49%
----
----
Interest bearing liabilities to
earnings assets 85.70%
-----
-----
</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 YEAR-TO-YEAR CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
--------------------------------- ---------------------------------
Change Due to Change Due to
-------------------- ---------------------
Average Average Total Average Average Total
Balance Rate Change Balance Rate Change
------- ---- ------ ------- ---- ------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS/INTEREST INCOME
Securities:
Taxable $ (690) $ (355) $(1,045) $(1,107) $ 165 $ (942)
Tax-exempt 731 (71) 660 320 (110) 210
Federal funds sold 338 (18) 320 (193) 32 (161)
Loans and loans held for sale 7,575 (1,131) 6,444 9,039 (969) 8,070
------- ------- ------- ------- ------- -------
TOTAL EARNING ASSETS 7,954 (1,575) 6,379 8,059 (882) 7,177
------- ------- ------- ------- ------- -------
LIABILITIES/INTEREST EXPENSE
Interest bearing deposits:
NOW accounts 41 (114) (73) 55 (34) 21
Money market accounts 1,097 156 1,253 391 468 859
Savings 3 (76) (73) (31) (20) (51)
Time, $100,000 and over 913 (21) 892 449 88 537
Other time 236 (26) 210 749 55 804
Federal funds purchased and
other borrowed funds 1,653 60 1,713 1,498 237 1,735
Note payable (31) 1 (30) (19) 535 516
------- ------- ------- ------- ------- -------
INTEREST BEARING LIABILITIES 3,912 (20) 3,892 3,092 1,329 4,421
------- ------- ------- ------- ------- -------
NET INTEREST INCOME $ 4,042 $(1,555) $ 2,487 $ 4,967 $(2,211) $ 2,756
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
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>
1998 1997 1996
---- ---- ----
% of % of % of
Amount Portfolio Amount Portfolio Amount Portfolio
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury securities $ 3,060 1.54% $ 14,092 6.88% $ 17,640 9.06%
U.S. Government agencies 96,828 48.72 86,254 42.12 76,980 39.52
U.S. Government agency mortgage backed securities 16,488 8.30 26,092 12.74 34,022 17.47
States and political subdivisions 76,583 38.53 62,981 30.76 54,827 28.15
Collateralized mortgage obligations 2,852 1.43 8,310 4.06 8,720 4.48
Equity securities 2,948 1.48 7,032 3.44 2,591 1.32
-------- ------ -------- ------ -------- ------
$198,759 100.00 $204,761 100.00 $194,780 100.00
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
</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") or the Federal National Mortgage Association
("FNMA"). Collateralized mortgage obligations are secured by FHLMC or FNMA
certificates. Other securities primarily consist of FHLB stock and Federal
Reserve Bank stock.
10
<PAGE>
The following table presents the expected maturities or call dates and weighted
average yield of securities by major category as of December 31, 1998. Yields
are calculated on a tax equivalent basis using a 34% rate.
SECURITIES AVAILABLE FOR SALE - MATURITY AND YIELDS
<TABLE>
<CAPTION>
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years Total
--------------- ----------------- ---------------- --------------- -----
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 2,013 6.13% $ 1,047 6.11% $ -- -- % $ -- -- % $ 3,060 6.12%
U.S. government agencies 46,249 6.33 50,579 6.03 -- -- -- -- 96,828 6.17
U.S. government agency --
mortgage backed
securities 4,190 6.14 4,808 6.72 2,050 6.33 5,440 6.67 16,488 6.51
States and political
subdivisions 4,540 8.54 51,688 7.89 19,892 6.90 463 9.56 76,583 7.68
Collateralized mortgage
obligations -- -- 839 6.94 -- -- 2,013 6.46 2,852 6.60
Other securities 2,948 5.58 -- -- -- -- -- -- 2,948 5.58
-------- ---- -------- ---- -------- ---- ------- ---- -------- ----
Total $ 59,940 6.44% $108,961 6.95% $ 21,942 6.84% $ 7,916 6.79% $198,759 6.78%
-------- ---- -------- ---- -------- ---- ------- ---- -------- ----
-------- ---- -------- ---- -------- ---- ------- ---- -------- ----
</TABLE>
As of December 31, 1998, net unrealized gains of $2,869,000, reduced by deferred
income taxes of $975,000, resulted in an increase in equity capital of
$1,894,000. As of December 31, 1997, net unrealized gains of $2,508,000, reduced
by deferred income taxes of $855,000, resulted in an increase in equity capital
of $1,653,000.
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 Company 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.
The following table presents the composition of the loan portfolio at December
31, in the years indicated:
LOAN PORTFOLIO
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial and industrial $ 175,402 $ 168,899 $ 161,847 $ 109,872 $ 112,828
Real estate - commercial 87,035 95,755 75,449 67,739 72,305
Real estate - construction 92,897 69,901 54,513 40,510 24,470
Real estate - residential 134,009 122,732 85,107 31,673 19,549
Installment 109,970 100,869 73,918 50,489 53,806
Credit card receivables 8,483 8,100 6,697 5,644 4,119
Other loans 1,233 813 1,188 455 937
--------- --------- --------- --------- ---------
Gross loans 609,029 567,069 458,719 306,382 288,014
Unearned discount (869) (1,324) (1,535) (1,743) (2,054)
Deferred loan fees (233) (397) (382) (312) (387)
--------- --------- --------- --------- ---------
Total loans 607,927 565,348 456,802 304,327 285,573
Allowance for loan losses (8,507) (8,360) (7,274) (5,176) (5,140)
--------- --------- --------- --------- ---------
Loans, net $ 599,420 $ 556,988 $ 449,528 $ 299,151 $ 280,433
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
11
<PAGE>
The following table sets forth the remaining contractual maturities for certain
loan categories at December 31, 1998:
MATURITY AND RATE SENSITIVITY OF LOANS
<TABLE>
<CAPTION>
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 $ 84,524 $ 61,424 $ 14,611 $ 13,184 $ 1,659 $175,402
Real estate - commercial 9,051 64,100 716 6,693 6,475 87,035
Real estate - construction 55,951 33,568 3,378 -- -- 92,897
Real estate - residential 1,393 5,729 192 681 126,014 134,009
Installment 10,669 73,665 6,435 2,181 17,020 109,970
Credit card receivables 8,483 -- -- -- -- 8,483
Other loans 1,233 -- -- -- -- 1,233
-------- -------- -------- -------- -------- --------
Total $171,304 $238,486 $ 25,332 $ 22,739 $151,168 $609,029
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
The following table sets forth the amounts of nonperforming assets at December
31, of the years indicated:
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $5,164 $4,623 $2,970 $1,135 $1,397
Loans past due 90 days or more
and still accruing interest -- -- -- -- --
Restructured loans 404 447 359 1,047 2,102
------ ------ ------ ------ ------
Total nonperforming loans 5,568 5,070 3,329 2,182 3,499
Other real estate 297 178 333 566 845
------ ------ ------ ------ ------
Total nonperforming assets $5,865 $5,248 $3,662 $2,748 $4,344
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
Impaired loans were as follows:
<TABLE>
<CAPTION>
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Year-end loans with no allowance for loan losses allocated $2,446 $2,234 $ 523 $ --
Year-end loans with allowance for loan losses allocated 1,201 1,325 905 921
Amount of the allowance allocated 846 473 363 631
Average of impaired loans during the year 2,762 2,705 1,480 2,378
Interest income recognized during impairment 19 277 191 305
Cash-basis interest income recognized 259 174 89 302
</TABLE>
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 loan losses. Interest income of approximately
$245,000, $225,000, and $101,000 was recorded during 1998, 1997, and 1996, on
loans in nonaccrual status at year end. Interest income which would have been
recognized during 1998, 1997, and 1996, had these loans been on an accrual basis
throughout the year was approximately $461,000, $356,000, and $335,000.
12
<PAGE>
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>
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average total loans (exclusive of loans held for sale) $592,358 $500,634 $399,546 $291,181 $278,819
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Allowance at beginning of year $ 8,360 $ 7,274 $ 5,176 $ 5,140 $ 4,705
Increase due to the acquisition of Valley -- -- 798 -- --
Charge-offs:
Commercial and industrial 843 650 1,193 1,248 1,321
Real estate - commercial 547 164 126 272 393
Real estate - construction -- -- -- -- 20
Real estate - residential 80 80 5 -- 150
Installment and other loans 1,093 1,228 917 993 1,058
-------- -------- -------- -------- --------
Total charge-offs 2,563 2,122 2,241 2,513 2,942
-------- -------- -------- -------- --------
Recoveries:
Commercial and industrial 243 162 509 223 384
Real estate - commercial -- 23 658 83 236
Real estate - construction -- -- -- -- --
Real estate - residential 40 54 -- -- 13
Installment and other loans 315 333 360 460 446
-------- -------- -------- -------- --------
Total recoveries 598 572 1,527 766 1,079
-------- -------- -------- -------- --------
Net charge-offs 1,965 1,550 714 1,747 1,863
Provision for loan losses 2,112 2,636 2,014 1,783 2,298
-------- -------- -------- -------- --------
Allowance at end of period $ 8,507 $ 8,360 $ 7,274 $ 5,176 $ 5,140
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net charge-offs to average loans 0.33% 0.31% 0.18% 0.60% 0.67%
Allowance at year end to average loans 1.44% 1.67% 1.82% 1.78% 1.84%
</TABLE>
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.
The following table shows the Company'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>
1998 1997 1996 1995 1994
------------------ ------------------ ----------------- ------------------- -------------------
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 $3,952 28.8% $2,259 29.8% $2,316 35.3% $3,441 36.1% $3,227 39.2%
Real estate - commercial 442 14.3 436 16.9 117 16.4 152 22.3 199 25.1
Real estate - construction 754 15.3 341 12.3 265 11.9 193 13.3 193 8.5
Real estate - residential 324 22.0 270 21.6 383 18.6 135 10.4 55 6.8
Installment and other loans 1,607 19.6 2,299 19.4 1,209 17.8 594 17.9 865 20.4
Unallocated 1,428 2,755 2,984 661 601
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $8,507 100.0% $8,360 100.0% $7,274 100.0% $5,176 100.0% $5,140 100.0%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
</TABLE>
13
<PAGE>
The following table sets forth the amount and maturities of deposits of $100,000
or more at December 31, 1998:
TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<S> <C>
3 months or less $ 77,577
Over 3 months through 6 months 18,291
Over 6 months through 12 months 13,949
Over 12 months 27,189
--------
$ 137,006
--------
--------
</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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at end of year $ 13,320 $ 21,754 $ 19,225
Weighted average interest rate 4.34% 5.76% 5.52%
Maximum month-end amount outstanding during the year $ 34,160 $ 28,179 $ 30,975
Average amount outstanding during the year $ 19,568 $ 23,849 $ 26,587
Weighted average interest rate during the year 4.98% 5.13% 4.94%
</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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Return on average total assets 0.99% 0.96% 0.95%
Return on average equity 12.27 12.05 12.14
Average equity to average assets 8.04 8.00 7.86
Tier 1 capital to risk-adjusted assets 9.73 9.15 9.02
Total capital to risk adjusted assets 10.98 10.42 10.26
Tier 1 leverage ratio 7.30 6.91 6.90
Dividend payout ratio 25.54 23.96 22.13
</TABLE>
Note: Unrealized gains (losses) on securities available for sale are included in
the average balances used to calculate these ratios.
14
<PAGE>
ITEM 2. PROPERTIES
The principal offices of both the Company and Merchants Bank are
located in Merchants Bank's main office building located at 1851 West Galena
Boulevard, Aurora, Illinois. The two-story, 28,100 square foot building is owned
by Merchants Bank and was constructed in 1962. During 1994, the entire first and
second floors of this building were remodeled to provide space for the trust
department and mortgage division. There are two parking lots which can
accommodate 90 cars.
Merchants Bank's former main office building is located at 34 South
Broadway, Aurora, Illinois. During 1997, Merchants Bank donated the 60,500
square foot building with a carrying value of $850,000, to a charitable
organization. Merchants Bank leases a portion of the building for a full service
branch. The building was appraised at $4,130,000, which resulted in charitable
tax credits of $1,504,000, which were recorded in 1997.
Merchants Bank's downtown Aurora 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 Merchants Bank and has seven drive-up windows.
The 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
Merchants Bank and comprises approximately 3,400 square feet. The branch has
four drive-up lanes and four teller stations. The basement of this building
contains a safe deposit vault and is also being used for storage and a
conference room.
The 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
Merchants Bank and was built in 1989. The three-story brick building has six
drive-in lanes and six teller stations. The basement of this building is being
used as a training room, an employee lounge and for storage. There is a parking
lot which can accommodate a total of approximately 85 cars.
There is also a branch located in the Cub Foods store in Aurora at 55
Constitution Drive. A Facility License and Construction Agreement with
International Banking Technologies, Inc. was entered into in June, 1992, under
which Merchants Bank is permitted to operate a bank branch in the Cub Foods
store for a term of 20 years, ending January 25, 2013.
A loan production office is located in Yorkville, Illinois, at 207
Hillcrest Avenue. Approximately 900 square feet are leased under a five year
agreement entered into in July, 1998, which may be extended for an additional
five years at the option of the Merchants Bank.
The branch in Hinckley, Illinois, is located at 101 W. Lincoln. The two
story, 10,900 square foot building is owned and occupied entirely by the Bank.
A branch is located at 80 N. Dugan Road, Sugar Grove. This 1,900 square
foot facility was built in 1993 and is owned and occupied entirely by the Bank.
Merchants Bank has two locations in St. Charles, Illinois. One is
located at 1600 East Main Street. The location consists of 5,100 square feet of
leased office space. The Bank also leases a 1,800 square foot full service
facility located at 1525 West Main Street.
Two branches are located in Geneva, Illinois. One is a full service
facility located in 2,500 square feet of leased office space located at 629 West
State Street. The Bank's Randall Square branch is a full service facility with 4
drive-up lanes located at 1771 Merchants Drive. The one-story, 6,200 square foot
building is owned by Merchants Bank and construction was completed in the first
quarter of 1996.
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 Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SECURITY HOLDER MATTERS
The Company incorporates by reference the information contained on page
39 of the 1998 Annual Report (attached hereto as Exhibit 13) under the caption
"Market for the Company's Common Stock and Related Security Holder Matters." As
of March 3, 1999, there were 724 holders of record of the Company's common
stock.
The Company also incorporates by reference the information contained on
page 25 of the 1998 Annual Report (attached hereto as Exhibit 13) under the
"Notes to Consolidated Financial Statements Note 17: Stockholder Rights Plan."
The Company also incorporates by reference the information contained on
page 22 of the 1998 Annual Report (attached hereto as Exhibit 13) under the
"Notes to Consolidated Financial Statements Note 12: Capital"
ITEM 6. SELECTED FINANCIAL DATA
The Company incorporates by reference the information contained on page
8 of the 1998 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 Company incorporates by reference the information contained on
pages 29 - 38 of the 1998 Annual Report (attached hereto as Exhibit 13) under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company incorporates by reference the information contained on
pages 36 and 37 of the 1998 Annual Report (attached hereto as Exhibit 13) under
the caption "Sensitivity to Market Risk." In addition, the following tables
present the expected maturity of interest-earning assets and interest-bearing
liabilities as of December 31, 1998 and 1997.
EXPECTED MATURITY OF INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
Expected Maturity Dates
---------------------------------------------------------------------- Fair
1 Year 2 Years 3 Years 4 Years 5 Years Thereafter Total Value
------ ------- ------- ------- ------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING Assets
Fixed rate loans $101,164 $ 56,739 $ 48,756 $ 59,818 $ 71,583 $ 20,602 $358,662 $362,940
Average interest rate 7.80% 8.92% 8.56% 8.56% 7.92% 7.80%
Adjustable Rate Loans $111,976 $ 31,625 $ 30,476 $ 26,389 $ 26,250 $ 22,549 $249,265 $249,265
Average interest rate 8.42% 8.38% 8.56% 8.83% 8.69% 7.54%
Securities $ 66,703 $ 47,147 $ 16,331 $ 18,597 $ 13,146 $ 36,835 $198,759 $198,759
Average interest rate 6.29% 5.97% 5.95% 5.52% 5.14% 4.91%
Federal Funds Sold $ 5,000 $ -- $ -- $ -- $ -- $ -- $ 5,000 $ 5,000
Average interest rate 4.25%
-------- -------- -------- -------- -------- -------- -------- --------
Total $284,843 $135,511 $ 95,563 $104,804 $110,979 $ 79,986 $811,686 $815,964
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
INTEREST-BEARING
LIABILITIES
Interest-bearing deposits $306,734 $ 85,419 $ 46,252 $ 33,754 $ 33,190 $104,558 $609,907 $611,911
Average interest rate 4.95% 5.16% 4.16% 3.95% 4.09% 2.76%
Borrowed Funds $ 26,695 $ 13,375 $ 5,625 $ 13,375 $ 875 $ 1,750 $ 61,695 $ 62,476
Average interest rate 5.60% 6.09% 6.34% 5.94% 7.03% 7.03%
-------- -------- -------- -------- -------- -------- -------- --------
Total $333,429 $ 98,794 $ 51,877 $ 47,129 $ 34,065 $106,308 $671,602 $674,387
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
16
<PAGE>
EXPECTED MATURITY OF INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
Expected Maturity Dates
---------------------------------------------------------------------- Fair
1 Year 2 Years 3 Years 4 Years 5 Years Thereafter Total Value
-------- -------- -------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Fixed rate loans $114,440 $ 52,809 $ 50,784 $ 32,957 $ 63,311 $ 18,986 $333,287 $338,946
Average interest rate 10.44% 8.91% 9.14% 9.24% 8.60% 7.73%
Adjustable Rate Loans $126,555 $ 36,981 $ 21,507 $ 17,757 $ 18,256 $ 13,838 $234,894 $234,894
Average interest rate 8.64% 9.37% 9.54% 9.61% 9.39% 9.80%
Securities $ 51,201 $ 18,159 $ 16,697 $ 24,651 $ 29,405 $ 64,648 $204,761 $204,761
Average interest rate 5.84% 6.59% 5.87% 6.34% 6.36% 6.26%
Federal Funds Sold $ 7,080 $ -- $ -- $ -- $ -- $ -- $ 7,080 $ 7,080
Average interest rate 4.25%
-------- -------- -------- -------- -------- -------- -------- --------
Total $299,276 $107,949 $ 88,988 $ 75,365 $110,972 $ 97,472 $780,022 $785,681
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
INTEREST-BEARING
LIABILITIES
Interest-bearing deposits $231,876 $ 84,865 $ 57,060 $ 31,492 $ 29,283 $ 97,955 $532,531 $532,781
Average interest rate 5.28% 5.13% 5.25% 4.14% 4.33% 3.03%
Borrowed Funds $ 63,229 $ 13,375 $ 13,375 $ 5,625 $ 13,375 $ 9,625 $118,604 $118,272
Average interest rate 5.80% 6.03% 6.08% 6.32% 5.93% 6.90%
-------- -------- -------- -------- -------- -------- -------- --------
Total $295,105 $ 98,240 $ 70,435 $ 37,117 $ 42,658 $107,580 $651,135 $651,053
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company incorporates by reference the following financial
statements and related notes from the 1998 Annual Report (attached hereto as
Exhibit 13):
<TABLE>
<CAPTION>
ANNUAL REPORT
PAGE NO.
--------
<S> <C>
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
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
---------------------------------------------
None
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company incorporates by reference the information contained on
pages 1, 2 and 3 of the Proxy Statement for the 1999 Annual Meeting of
Stockholders (attached hereto as exhibit 99) under the caption "Election of
Directors."
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
Age 56 1982 Officer (1987-present); Director of the Company
(1986-present).
Frank K. Voris Vice President of the Company (1993-present);
Age 59 1985 Executive Vice President and Chief Operating Officer
of the Bank (1990-present); Director of the Bank
(1990-present).
Randal A. Wright Executive Vice President, Commercial Banking Division
Age 47 1989 (1993-present).
Terence L. Kothe Executive Vice President, Trust and Financial
Age 55 1992 Services (1992-present).
J. Douglas Cheatham Vice President and Chief Financial Officer of the
Age 42 1990 Company (1993-present).
Edward H. St. Jules Vice President, Retail Banking Division (1996-present);
Age 42 1998 Vice President & Manager, Residential Lending
(1992-1996).
</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 Company incorporates by reference the information contained on page
3 of the Proxy Statement for the 1999 Annual Meeting of Stockholders (attached
hereto as exhibit 99) under the caption "Compensation of Directors," and on
pages 6 - 9 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 Company incorporates by reference the information contained on
pages 3 - 5 of the Proxy Statement for the 1999 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 Company incorporates by reference the information contained on page
11 of the Proxy Statement for the 1999 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 1998 Annual Report (attached hereto as
Exhibit 13).
<TABLE>
<CAPTION>
ANNUAL REPORT
PAGE NO.
--------
<S> <C>
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
</TABLE>
(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.
(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 Company'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
Company'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 Company'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 Company'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 Company'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 Company's 10-K for the fiscal year ended December 31,
1987, and incorporated herein by reference)
(3)(c) Amended Certificate of Designation of Series A Junior
Participating Preferred Stock of Merchants Bancorp, Inc.,
dated November 12 1998.
(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
Company's 10-K for the year ended December 31, 1987, and
incorporated herein by reference)
19
<PAGE>
(4)(c) Amended and Restated Rights Agreement dated October 23, 1998,
between the Company and Merchants National Bank of Aurora
(filed as Exhibit 99.1 on the Company's Amendment No. 1 to
form 8-A as filed with the Securities and Exchange Commission
on January 21, 1998, and incorporated herein by reference)
(4)(d) Amended Certificate of Designation of Series A Junior
Participating Preferred Stock of Merchants Bancorp, Inc.,
dated November 12, 1998 (see Exhibit (3)(c) of this Form 10-K)
(10)(a) Amended and Restated Rights Agreement dated October 23, 1998,
between the Company and Merchants National Bank of Aurora
(filed as Exhibit 99.1 on the Company's Amendment No. 1 to
Form 8-A as filed with the Securities and Exchange Commission
on January 21, 1998, 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
Company's Form 10-K for the year ended December 31, 1992, and
incorporated herein by reference)
(10)(c) Amended and Restated Employment Agreement entered into as of
January 1, 1998, between the Company and Calvin R. Myers
(10)(d) Form of Change of Control Agreement dated as of January 1,
1998, by and between the Company and certain executives, as
set forth on Schedule A attached to the Form of Change of
Control Agreement
(13) The Company's 1998 Annual Report to Stockholders
(22) A list of all subsidiaries of the Company
(23) Consent of Crowe, Chizek & Company LLP
(27) Financial Data Schedule
(99) The Company's Proxy Statement for the annual meeting of
stockholders to be held April 20, 1999. 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
20
<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 26, 1999
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.
SIGNATURE TITLE DATE
/s/ Calvin R. Myers Chairman of the Board; Director; March 26, 1999
- ------------------ President and Chief Executive
Calvin R. Myers Officer
/s/ C. Tell Coffey Director March 26, 1999
- ------------------
C. Tell Coffey
/s/ William C. Glenn Director March 26, 1999
- --------------------
William C. Glenn
/s/ William F. Hejna Director March 26, 1999
- --------------------
William F. Hejna
/s/ John M. Lies Director March 26, 1999
- ----------------
John M. Lies
/s/ James D. Pearson Director March 26, 1999
- -------------------
James D. Pearson
/s/ Frank A. Sarnecki Director March 26, 1999
- --------------------
Frank A. Sarnecki
/s/ John J. Swalec Director March 26, 1999
- ----------------
John J. Swalec
/s/ Norman L. Titiner Director March 26, 1999
- -------------------
Norman L. Titiner
/s/ J. Douglas Cheatham Vice President and Chief March 26, 1999
- ---------------------- Financial Officer
21
<PAGE>
J. Douglas Cheatham
22
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBITS SEQUENTIAL
NO. PAGE NO.
- -------------- ----------------------- -------------
<S> <C> <C>
(3)(a) Its Restated Certificate of Incorporation (filed as an exhibit --
to the Company'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
Company'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 Company'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 Company'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 Company'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 Company's 10-K for the fiscal year ended December 31,
1987, and incorporated herein by reference)
(3)(c) Amended Certificate of Designation of Series A Junior --
Participating Preferred Stock of Merchants Bancorp, Inc.,
dated November 12 1998.
(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
Company's 10-K for the year ended December 31, 1987, and
incorporated herein by reference)
(4)(c) Amended and Restated Rights Agreement dated October 23, 1998, --
between the Company and Merchants National Bank of Aurora
(filed as Exhibit 99.1 on the Company's Amendment No. 1 to
form 8-A as filed with the Securities and Exchange Commission
on January 21, 1998, and incorporated herein by reference)
(4)(d) Amended Certificate of Designation of Series A Junior --
Participating Preferred Stock of Merchants Bancorp, Inc.,
dated November 12, 1998 (see Exhibit (3)(c) of this Form 10-K)
(10)(a) Amended and Restated Rights Agreement dated October 23, 1998, --
between the Company and Merchants National Bank of Aurora
(filed as Exhibit 99.1 on the Company's Amendment No. 1 to
Form 8-A as filed with the Securities and Exchange Commission
on January 21, 1998, 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
Company's Form 10-K for the year ended December 31, 1992, and
incorporated herein by reference)
(10)(c) Amended and Restated Employment Agreement entered into as of --
January 1, 1998, between the Company and Calvin R. Myers
(10)(d) Form of Change of Control Agreement dated as of January 1, --
1998, by and between the Company and certain executives, as
set forth on Schedule A attached to the Form of Change of
Control Agreement
(13) The Company's 1998 Annual Report to Stockholders 23 - 62
(22) A list of all subsidiaries of the Company 63
(23) Consent of Crowe, Chizek & Company LLP 64
(27) Financial Data Schedule --
(99) The Company's Proxy Statement for the annual meeting of 65 - 77
stockholders to be held April 20, 1999. 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.
</TABLE>
23
<PAGE>
Exhibit 3.(c)
AMENDED CERTIFICATE OF DESIGNATION
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
MERCHANTS BANCORP, INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
MERCHANTS BANCORP, INC., a corporation organized and existing
under the General Corporation Law of the State of Delaware, in accordance with
the provisions of Section 103 thereof, DOES HEREBY CERTIFY:
That pursuant to the authority vested in the Board of Directors
in accordance with the provisions of the Restated Certificate of Incorporation
of the said Corporation, the said Board of Directors on October 19, 1998 adopted
the following resolution:
WHEREAS, pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions
of the Restated Certificate of Incorporation, a series of
Preferred Stock of the Corporation designated as "Series A Junior
Participating Preferred Stock" was created by the filing of a
Certificate of Designation of the Corporation therefor with the
Secretary of State of the State of Delaware on January 13, 1989;
and
WHEREAS, the designation and number of shares of Series A
Junior Participating Preferred Stock and the voting and other
powers, preferences and relative, participating, optional or
other rights of the shares of such series and the qualifications,
limitations and restrictions thereof were amended in their
entirety pursuant to a Certificate of Designation of the
Corporation therefor filed with the Secretary of State of the
State of Delaware on September 7, 1993; and
WHEREAS, no shares of Series A Junior Participating
Preferred Stock have been issued;
NOW, THEREFORE, BE IT AND IT HEREBY IS
RESOLVED, that pursuant to the authority vested in the
Board of Directors of this Corporation in accordance with the
provisions of the Restated Certificate of Incorporation, the
designation and number of
20
<PAGE>
shares of Series A Junior Participating Preferred Stock and the
voting and other powers, preferences and relative, participating,
optional or other rights of the shares of such series and the
qualifications, limitations and restrictions thereof are amended
to read in their entirety as follows:
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
1. DESIGNATION AND AMOUNT. There shall be a series of Preferred
Stock that shall be designated as "Series A Junior Participating Preferred
Stock," and the number of shares constituting such series shall be 50,000. Such
number of shares may be increased or decreased by resolution of the Board of
Directors; provided, however, that no decrease shall reduce the number of shares
of Series A Junior Participating Preferred Stock to less than the number of
shares then issued and outstanding plus the number of shares issuable upon
exercise of outstanding rights, options or warrants or upon conversion of
outstanding securities issued by the Corporation.
2. DIVIDENDS AND DISTRIBUTION.
(A) Subject to the prior and superior rights of the holders
of any shares of any class or series of stock of the Corporation ranking prior
and superior to the shares of Series A Junior Participating Preferred Stock with
respect to dividends, the holders of shares of Series A Junior Participating
Preferred Stock, in preference to the holders of shares of any class or series
of stock of the Corporation ranking junior to the Series A Junior Participating
Preferred Stock in respect thereof, shall be entitled to receive, when, as and
if declared by the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash on the last business day of
January, April, July and October, in each year (each such date being referred to
herein as a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or fraction
of a share of Series A Junior Participating Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) the
Adjustment Number (as defined below) times the aggregate per share amount of all
cash dividends, and the Adjustment Number times the aggregate per share amount
(payable in kind) of all non-cash dividends or other distributions other than a
dividend payable in shares of Common Stock or a subdivision of the outstanding
shares of Common Stock (by reclassification or otherwise), declared on the
Common Stock, par value $1.00 per share, of the Corporation (the "Common Stock")
since the immediately preceding Quarterly Dividend Payment Date, or, with
respect to the first Quarterly Dividend Payment Date, since the first issuance
of any share or fraction of a share of Series A Junior Participating Preferred
Stock. The "Adjustment Number" shall initially be 600. In the event the
Corporation shall at any time after October 23, 1998 (i) declare and pay any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the Adjustment Number in effect
immediately prior to such event shall be adjusted by multiplying such Adjustment
Number by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after
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such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or
distribution on the Series A Junior Participating Preferred Stock as provided in
paragraph (A) above immediately after it declares a dividend or distribution on
the Common Stock (other than a dividend payable in shares of Common Stock).
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Junior Participating Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of issue of such shares
of Series A Junior Participating Preferred Stock, unless the date of issue of
such shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue from the date
of issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of holders
of shares of Series A Junior Participating Preferred Stock entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment Date, in either of
which events such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the shares of Series A Junior Participating
Preferred Stock in an amount less than the total amount of such dividends at the
time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of
Series A Junior Participating Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record date shall be no more
than 60 days prior to the date fixed for the payment thereof.
3. VOTING RIGHTS. The holders of shares of Series A Junior
Participating Preferred Stock shall have the following voting rights:
(A) Each share of Series A Junior Participating Preferred
Stock shall entitle the holder thereof to a number of votes equal to the
Adjustment Number on all matters submitted to a vote of the stockholders of the
Corporation.
(B) Except as required by law, by Section 3(C) and by
Section 10 hereof, holders of Series A Junior Participating Preferred Stock
shall have no special voting rights and their consent shall not be required
(except to the extent they are entitled to vote with holders of Common Stock as
set forth herein) for taking any corporate action.
(C) If, at the time of any annual meeting of stockholders
for the election of directors, the equivalent of six quarterly dividends
(whether or not consecutive) payable on any share or shares of Series A Junior
Participating Preferred Stock are in default, the number of directors
constituting the Board of Directors of the Company shall be increased by two. In
addition to voting together with the holders of Common Stock for the election of
other directors of the Company, the holders of record of the Series A Junior
Participating Preferred Stock, voting separately as a class to the exclusion of
the holders of Common Stock, shall be
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entitled at said meeting of stockholders (and at each subsequent annual meeting
of stockholders), unless all dividends in arrears on the Series A Junior
Participating Preferred Stock have been paid or declared and set apart for
payment prior thereto, to vote for the election of two directors of the Company,
the holders of any Series A Junior Participating Preferred Stock being entitled
to cast a number of votes per share of Series A Junior Participating Preferred
Stock as is specified in paragraph (A) of this Section 3. Until the default in
payments of all dividends which permitted the election of said directors shall
cease to exist, if any director who shall have been so elected pursuant to the
provisions of this Section 3(C) resigns, is removed or dies or such directorship
otherwise becomes vacant, the holders of the shares of Series A Junior
Participating Preferred Stock may fill any such vacancy. If and when such
default shall cease to exist, the holders of the Series A Junior Participating
Preferred Stock shall be divested of the foregoing special voting rights,
subject to revesting in the event of each and every subsequent like default in
payments of dividends. Upon the termination of the foregoing special voting
rights, the terms of office of all persons who may have been elected directors
pursuant to said special voting rights shall forthwith terminate, and the number
of directors constituting the Board of Directors shall be reduced by two. The
voting rights granted by this Section 3(C) shall be in addition to any other
voting rights granted to the holders of the Series A Junior Participating
Preferred Stock in this Section 3.
4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Junior Participating Preferred Stock as
provided in Section 2 are in arrears, thereafter and until all accrued and
unpaid dividends and distributions, whether or not declared, on shares of Series
A Junior Participating Preferred Stock outstanding shall have been paid in full,
the Corporation shall not:
(i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for consideration
any shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Junior Participating Preferred Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to dividends
or upon liquidation, dissolution or winding up) with the Series A Junior
Participating Preferred Stock, except dividends paid ratably on the Series A
Junior Participating Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts to which
the holders of all such shares are then entitled; or
(iii) purchase or otherwise acquire for consideration
any shares of Series A Junior Participating Preferred Stock, or any shares of
stock ranking on a parity with the Series A Junior Participating Preferred
Stock, except in accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all holders of Series A
Junior Participating Preferred Stock, or to such holders and holders of any such
shares ranking on a parity therewith, upon such terms as the Board of Directors,
after
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consideration of the respective annual dividend rates and other relative rights
and preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective series or
classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
5. REACQUIRED SHARES. Any shares of Series A Junior Participating
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired promptly after the acquisition thereof. All such
shares shall upon their retirement become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject to
any conditions and restrictions on issuance set forth herein.
6. LIQUIDATION, DISSOLUTION OR WINDING UP. (A) Upon any
liquidation, dissolution or winding up of the Corporation, voluntary or
otherwise, no distribution shall be made to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Junior Participating Preferred Stock unless, prior
thereto, the holders of shares of Series A Junior Participating Preferred Stock
shall have received an amount per share (the "Series A Liquidation Preference")
equal to the greater of (i) $1.00 plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment, or (ii) the Adjustment Number times the per share amount of all
cash and other property to be distributed in respect of the Common Stock upon
such liquidation, dissolution or winding up of the Corporation.
(B) In the event, however, that there are not sufficient
assets available to permit payment in full of the Series A Liquidation
Preference and the liquidation preferences of all other classes and series of
stock of the Corporation, if any, that rank on a parity with the Series A Junior
Participating Preferred Stock in respect thereof, then the assets available for
such distribution shall be distributed ratably to the holders of the Series A
Junior Participating Preferred Stock and the holders of such parity shares in
proportion to their respective liquidation preferences.
(C) Neither the merger or consolidation of the Corporation
into or with another corporation nor the merger or consolidation of any other
corporation into or with the Corporation shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of this Section
6.
7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the outstanding shares of Common Stock are exchanged for or changed into other
stock or securities, cash and/or any other property, then in any such case each
share of Series A Junior Participating Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share equal to
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the Adjustment Number times the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case may be, into which or
for which each share of Common Stock is changed or exchanged.
8. NO REDEMPTION. Shares of Series A Junior Participating
Preferred Stock shall not be subject to redemption by the Company.
9. RANKING. The Series A Junior Participating Preferred Stock
shall rank junior to all other series of the Preferred Stock as to the payment
of dividends and as to the distribution of assets upon liquidation, dissolution
or winding up, unless the terms of any such series shall provide otherwise, and
shall rank senior to the Common Stock as to such matters.
10. AMENDMENT. At any time that any shares of Series A Junior
Participating Preferred Stock are outstanding, the Restated Certificate of
Incorporation of the Corporation shall not be amended in any manner which would
materially alter or change the powers, preferences or special rights of the
Series A Junior Participating Preferred Stock so as to affect them adversely
without the affirmative vote of the holders of two-thirds of the outstanding
shares of Series A Junior Participating Preferred Stock, voting separately as a
class.
11. FRACTIONAL SHARES. Series A Junior Participating Preferred
Stock may be issued in fractions of a share that shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Junior Participating Preferred Stock.
IN WITNESS WHEREOF, the undersigned has executed this Certificate
this 12th day of November 1998.
MERCHANTS BANCORP, INC.
By: /S/ CALVIN R. MYERS
-------------------------------------
Calvin R. Myers
President and Chief Executive Officer
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Exhibit 10.(c)
CALVIN R. MYERS
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement"), is made and entered into
as of the 30th day of August, 1993, (the "Effective Date") by and between
MERCHANTS BANCORP, INC., a Delaware corporation (the "Employer"), and CALVIN R.
MYERS (the "Executive").
RECITALS
A. The Executive is currently serving as the President, Chief Executive
Officer and Chairman of the Board of Directors (the "Board") of the Employer and
has served in such capacity for the past four years.
B. The Employer desires to continue to employ the Executive as an
officer of the Employer for a specified term and the Executive is willing to
continue such employment upon the terms and conditions hereinafter set forth.
C. The Employer recognizes that circumstances may arise in which a
change of control of the Employer through acquisition or otherwise occurs
thereby causing uncertainty of employment without regard to the competence or
past contributions of the Executive which uncertainty may result in the loss of
valuable services of the Executive and the Employer and the Executive wish to
provide reasonable security to the Executive against changes in the employment
relationship in the event of any such change of control.
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter contained, it is covenanted and agreed by and between
the parties hereto as follows:
AGREEMENTS
1. POSITION AND DUTIES. The Employer hereby employs the Executive as
its President and Chief Executive Officer or in such other senior executive
capacity as shall be mutually agreed between the Employer and the Executive.
During the period of the Executive's employment hereunder, the Executive shall
devote his best efforts and full business time, energy, skills and attention to
the business and affairs of the Employer. The Executive's duties and authority
shall consist of and include all duties and authority customarily performed and
held by persons holding equivalent positions with business organizations similar
in nature and size to the Employer, as such duties and authority are reasonably
defined, modified and delegated from time to time by the Board. The Executive
shall have the powers necessary to perform the duties assigned to him and shall
be provided such supporting services, staff, secretarial and other assistance,
office space and accoutrements as shall be reasonably necessary and appropriate
in the light of such assigned duties.
2. COMPENSATION. As compensation for the services to be provided by the
<PAGE>
Executive hereunder, the Executive shall receive the following compensation,
expense reimbursement and other benefits:
(a) BASE COMPENSATION. The Executive shall receive an
aggregate annual minimum base salary at the rate of one hundred and eighty six
thousand dollars ($186,000) payable in installments in accordance with the
regular payroll schedule of the Employer. Such base compensation shall be
subject to review annually commencing in 1994 and shall be maintained or
increased during the term hereof in accordance with the Employer's established
management compensation policies and plans.
(b) REIMBURSEMENT OF EXPENSES. The Executive shall be
reimbursed, upon submission of appropriate vouchers and supporting
documentation, for all travel, entertainment and other out-of-pocket expenses
reasonably and necessarily incurred by the Executive in the performance of his
duties hereunder and shall be entitled to attend seminars, conferences and
meetings relating to the business of the Employer consistent with the Employer's
established policies in that regard.
(c) OTHER BENEFITS. The Executive shall be entitled to all
benefits specifically established for him and, when and to the extent he is
eligible therefor, to participate in all plans and benefits generally accorded
to senior executives of the Employer, including, but not limited to, pension,
profit-sharing, supplemental retirement, incentive compensation, bonus,
disability income, split-dollar life insurance, group life, medical and
hospitalization insurance, and similar or comparable plans, and also to
perquisites extended to similarly situated senior executives, PROVIDED, HOWEVER,
that such plans, benefits and perquisites shall be no less than those made
available to all other employees of the Employer.
(d) VACATIONS. The Executive shall be entitled to an annual
vacation in accordance with the vacation policy of the Employer which vacation
shall be taken at a time or times mutually agreeable to the Employer and the
Executive.
(e) CLUB MEMBERSHIP. The Employer shall pay (or reimburse
Executive for) monthly dues and entertainment expenses at the Aurora Country
Club.
(f) WITHHOLDING. The Employer shall be entitled to withhold
from amounts payable to the Executive hereunder, any federal, state or local
withholding or other taxes or charges which it is from time to time required to
withhold. The Employer shall be entitled to rely upon the opinion of its legal
counsel with regard to any question concerning the amount or requirement of any
such withholding.
3. CONFIDENTIALITY AND LOYALTY. The Executive acknowledges that
heretofore or hereafter during the course of his employment he has produced and
may hereafter produce and have access to material, records, data, trade secrets
and information not generally available to the public (collectively,
"Confidential Information") regarding the Employer and its subsidiaries and
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affiliates. Accordingly, during and subsequent to termination of this Agreement,
the Executive shall hold in confidence and not directly or indirectly disclose,
use, copy or make lists of any such Confidential Information, except to the
extent that such information is or thereafter becomes lawfully available from
public sources, or such disclosure is authorized in writing by the Employer,
required by a law or any competent administrative agency or judicial authority,
or otherwise as reasonably necessary or appropriate in connection with
performance by the Executive of his duties hereunder. All records, files,
documents and other materials or copies thereof relating to the Employer's
business which the Executive shall prepare or use, shall be and remain the sole
property of the Employer, shall not be removed from the Employer's premises
without its written consent, and shall be promptly returned to the Employer upon
termination of the Executive's employment hereunder. The Executive agrees to
abide by the Employer's reasonable policies, as in effect from time to time,
respecting avoidance of interests conflicting with those of the Employer.
4. TERM AND TERMINATION.
(a) BASIC TERM. The Executive's employment hereunder shall be
for a term of three (3) years commencing as of the Effective Date, and shall
automatically extend for one (1) additional year commencing on each anniversary
of the Effective Date, unless terminated by either party effective as of the
last day of the then current three (3) year period by written notice to that
effect delivered to the other not less than ninety (90) days prior to the
anniversary of such Effective Date.
(b) PREMATURE TERMINATION.
(i) In the event of the termination of this Agreement
by the Employer for any reason prior to the last day of the then
current term, other than a termination in accordance with the
provisions of paragraph (d) of this Section 4, then, notwithstanding
any mitigation of damages by the Executive, the Employer shall continue
to pay the Executive his base salary then payable and shall continue to
provide coverage for the Executive under the health, life and
disability insurance programs maintained by the Employer for the
remainder of the then current three (3) year term of the Agreement;
provided, however, that the payment of these amounts by the Employer
shall not offset or diminish any compensation or benefits accrued as of
the date of termination.
(ii) Payment to the Executive will be made in
twenty-four (24) equal monthly payments. At the election of the
Employer, payments may be made in a lump sum. Such payments shall not
be reduced in the event the Executive obtains other employment
following the termination of employment by the Employer.
(iii) If the Employer is not in compliance with its
minimum capital requirements or if the payments required under
subparagraph (i) above would cause the Employer's capital to be reduced
below its minimum capital requirements, such payments
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shall be deferred until such time as the Employer is in capital
compliance.
(C) CONSTRUCTIVE TERMINATION. If at any time during
the term of this Agreement, except in connection with a termination
pursuant to paragraph (d) of this Section 4, the Executive is
Constructively Discharged (as hereinafter defined) then the Executive
shall have the right, by written notice to the Employer within sixty
(60) days of such Constructive Discharge, to terminate his services
hereunder, effective as of thirty (30) days after such notice, and the
Executive shall have no rights or obligations under this Agreement
other than as provided in Section 5 hereof. The Executive shall in such
event be entitled to a lump sum payment of the compensation and
continuation of the health, life and disability insurance as provided
under paragraph (b) of this Section 4.
For purposes of this Agreement, the Executive shall be "Constructively
Discharged" upon the occurrence of any one of the following events:
(i) The Executive is removed from the positions with
the Employer set forth in Section 1 hereof, other than as a result of
the Executive's election or appointment to positions of equal or
superior scope and responsibility; or
(ii) The Executive shall fail to be vested by the
Employer with the powers, authority and support services of any of said
offices; or
(iii) The Employer changes the primary employment
location of the Executive to a place that is more than twenty-five (25)
miles from the primary employment location as of the Effective Date of
this Agreement; or
(iv) The Employer otherwise commits a material breach
of its obligations under this Agreement.
(d) TERMINATION FOR CAUSE. This Agreement may be terminated
for cause as hereinafter defined. "Cause" shall mean: (i) the Executive's death
or his permanent disability, which shall mean the Executive's inability, as a
result of physical or mental incapacity, substantially to perform his duties
hereunder for a period of six (6) consecutive months; (ii) a material violation
by the Executive of any applicable material law or regulation respecting the
business of the Employer; (iii) the Executive being found guilty of a felony, an
act of dishonesty in connection with the performance of his duties as an officer
of the Employer, or which disqualifies the Executive from serving as an officer
or director of the Employer; or (iv) the willful or negligent failure of the
Executive to perform his duties hereunder in any material respect. The Executive
shall be entitled to at least thirty (30) days' prior written notice of the
Employer's intention to terminate his employment for any cause (except the
Executive's death) specifying the grounds for such termination, a reasonable
opportunity to cure any conduct or act, if curable, alleged as grounds for such
termination, and a reasonable opportunity to present to the Board his position
regarding any dispute relating to the existence of such cause.
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(e) TERMINATION UPON DEATH. In the event payments are due and
owing under this Agreement at the death of the Executive, payment shall be made
to such beneficiary as Executive may designate in writing, or failing such
designation, to the executor of his estate, in full settlement and satisfaction
of all claims and demands on behalf of the Executive. Such payments shall be in
addition to any other death benefits of the Employer for the benefit of the
Executive and in full settlement and satisfaction of all payments provided for
in this Agreement.
(f) TERMINATION UPON DISABILITY. The Employer may terminate
the Executive's employment after the Executive is determined to be disabled
under the current Employer program. The Executive shall be entitled to the
compensation and benefits provided for under this Agreement for any period
during the term of this Agreement and prior to the establishment of the
Executive's Disability during which the Executive is unable to work due to a
physical or mental infirmity. Notwithstanding anything contained in this
Agreement to the contrary, until the date specified in a notice of termination
relating to the Executive's Disability, the Executive shall be entitled to
return to his position with the Employer as set forth in this Agreement in which
event no Disability of the Executive will be deemed to have occurred.
(g) TERMINATION UPON CHANGE OF CONTROL.
(i) In the event of a Change in Control (as defined
below) of the Employer and the termination of the Executive's
employment under either A or B below, the Executive shall be entitled
to a lump sum payment equal to three (3) times: (1) his base salary
then payable; (2) the value of any bonus or incentive payments the
Executive would have received had he remained employed; and (3) the
value of the contributions that would have been made or credited by the
Employer under all employee retirement plans for the benefit of the
Executive. The Employer shall also continue to provide coverage for the
Executive under the health, life and disability insurance programs for
three (3) years following such termination. Payments under this
paragraph shall be subject to the provisions of subparagraph (g)(iii)
of this Section 4. The following shall constitute termination under
this paragraph:
A. The Executive terminates his
employment under this Agreement by a
written notice to that effect
delivered to the Board within one
(1) year after the Change in
Control.
B. The Agreement is terminated by the
Employer or its successor either in
contemplation of or after the Change
in Control.
(ii) For purposes of this paragraph, the term "Change
in Control" shall mean the following:
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A. The consummation of the acquisition
by any person (as such term is
defined in Section 13(d) or 14(d) of
the Securities Exchange Act of 1934,
as amended (the "1934 Act")) of
beneficial ownership (within the
meaning of Rule 13d-3 promulgated
under the 1934 Act) of thirty-three
percent (33%) or more of the
combined voting power of the then
outstanding voting securities; or
B. The individuals who, as of the date
hereof, are members of the Board
cease for any reason to constitute a
majority of the Board, unless the
election, or nomination for election
by the stockholders, of any new
director was approved by a vote of a
majority of the Board, and such new
director shall, for purposes of this
Agreement, be considered as a member
of the Board; or
C. Approval by stockholders of: (1) a
merger or consolidation if the
stockholders immediately before
such merger or consolidation do
not, as a result of such merger or
consolidation, own, directly or
indirectly, more than sixty-seven
percent (67%) of the combined
voting power of the then
outstanding voting securities of
the entity resulting from such
merger or consolidation in
substantially the same proportion
as their ownership of the combined
voting power of the voting
securities outstanding immediately
before such merger or
consolidation; or (2) a complete
liquidation or dissolution or an
agreement for the sale or other
disposition of all or substantially
all of the assets of the entity.
Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because thirty-three percent (33%) or more of the
combined voting power of the then outstanding securities is acquired by
(1) a trustee or other fiduciary holding securities under one or more
employee benefit plans maintained for employees of the entity or (2)
any corporation which, immediately prior to such acquisition, is owned
directly or indirectly by the stockholders in the same proportion as
their ownership of stock immediately prior to such acquisition.
(iii) If it is determined, in the opinion of the
certified public accountants then regularly retained by the Employer in
consultation with legal counsel acceptable to the Executive, that any
amount payable to the Executive by the Employer under this Agreement,
or any other plan or agreement under which the Executive participates
or is a party, would constitute an "Excess Parachute Payment" within
the meaning of Section
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280G of the Internal Revenue Code of 1986, as amended (the "Code") and
be subject to the excise tax imposed by Section 4999 of the Code (the
"Excise Tax"), the Employer shall pay to the Executive the amount of
such Excise Tax and all federal and state income or other taxes with
respect to the payment of the amount of such Excise Tax, including all
such taxes with respect to any such additional amount. If at a later
date, the Internal Revenue Service assesses a deficiency against the
Executive for the Excise Tax which is greater than that which was
determined at the time such amounts were paid, the Employer shall pay
to the Executive the amount of such Excise Tax plus any interest,
penalties and professional fees or expenses, incurred by the Executive
as a result of such assessment, including all such taxes with respect
to any such additional amount. The highest marginal tax rate applicable
to individuals at the time of payment of such amounts will be used for
purposes of determining the federal and state income and other taxes
with respect thereto. The Employer shall withhold from any amounts paid
under this Agreement the amount of any Excise Tax or other federal,
state or local taxes then required to be withheld. Computations of the
amount of any supplemental compensation paid under this subparagraph
shall be made by the independent public accountants then regularly
retained by the Employer in consultation with legal counsel acceptable
to Executive. The Employer shall pay all accountant and legal counsel
fees and expenses.
(H) REGULATORY SUSPENSION AND TERMINATION.
(i) If the Executive is suspended from office
and/or temporarily prohibited from participating in the conduct of
the Employer's affairs by a notice served under Section 8(e)(3) (12
U.S.C. Section 1818(e)(3)) or 8(g) (12 U.S.C. Section 1818(g)) of
the Federal Deposit Insurance Act, as amended, the Employer's
obligations under this contract shall be suspended as of the date of
service, unless stayed by appropriate proceedings. If the charges in
the notice are dismissed, the Employer may in its discretion (A) pay
the Executive all or part of the compensation withheld while their
contract obligations were suspended and (B) reinstate (in whole or
in part) any of the obligations which were suspended.
(ii) If the Executive is removed and/or
permanently prohibited from participating in the conduct of the
Employer's affairs by an order issued under Section 8(e) (12 U.S.C.
Section 1818(e)) or 8(g) (12 U.S.C. Section 1818(g)) of the Federal
Deposit Insurance Act, as amended, all obligations of the Employer
under this contract shall terminate as of the effective date of the
order, but vested rights of the contracting parties shall not be
affected.
(iii) If the Employer is in default as defined in
Section 3(x) (12 U.S.C. Section 1813(x)(1)) of the Federal Deposit
Insurance Act, as amended, all obligations of the Employer under
this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting
parties.
7
<PAGE>
(iv) All obligations of the Employer under this
contract shall be terminated, except to the extent determined that
continuation of the contract is necessary for the continued
operation of the institution by the Federal Deposit Insurance
Corporation (the "FDIC"), at the time the FDIC enters into an
agreement to provide assistance to or on behalf of the Employer
under the authority contained in Section 13(c) (12 U.S.C. Section
1823(c)) of the Federal Deposit Insurance Act, as amended, or when
the Employer is determined by the FDIC to be in an unsafe or unsound
condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(v) Any payments made to the Executive pursuant to
this Agreement, or otherwise, are subject to and conditioned upon
their compliance with Section 18(k) (12 U.S.C. Section 1828(k)) of
the Federal Deposit Insurance Act, as amended, and any regulations
promulgated thereunder.
5. NON-COMPETITION COVENANT.
(a) RESTRICTIVE COVENANT. The Employer and the Executive have
jointly reviewed the customer lists and operations of the Employer and have
agreed that the primary service area of the Employer's lending and deposit
taking functions in which the Employer has actively participated extends to an
area encompassing a twenty-five (25) mile radius from the main office of the
Employer. Therefore, as an essential ingredient of and in consideration of this
Agreement and the payment of the amounts described in Sections 2 and 4, the
Executive hereby agrees that, except with the express prior written consent of
the Employer, for a period of one (1) year after the termination of the
Executive's employment with the Employer (the "Restrictive Period"), he will not
directly or indirectly compete with the business of the Employer, including, but
not by way of limitation, by directly or indirectly owning, managing, operating,
controlling, financing, or by directly or indirectly serving as an employee,
officer or director of or consultant to, or by soliciting or inducing, or
attempting to solicit or induce, any employee or agent of Employer to terminate
employment with Employer and become employed by any person, firm, partnership,
corporation, trust or other entity which owns or operates, a bank, savings and
loan association, credit union or similar financial institution (a "Financial
Institution") within a twenty-five (25) mile radius of the Employer's main
office (the "Restrictive Covenant"). If the Executive violates the Restrictive
Covenant and the Employer brings legal action for injunctive or other relief,
the Employer shall not, as a result of the time involved in obtaining such
relief, be deprived of the benefit of the full period of the Restrictive
Covenant. Accordingly, the Restrictive Covenant shall be deemed to have the
duration specified in this Section 5(a) computed from the date the relief is
granted but reduced by the time between the period when the Restrictive Period
began to run and the date of the first violation of the Restrictive Covenant by
the Executive. The foregoing Restrictive Covenant shall not prohibit the
Executive from owning directly or indirectly capital stock or similar securities
which are listed on a securities exchange or quoted on the National Association
of Securities Dealers Automated Quotation System which do not represent more
than one percent (1%) of the outstanding capital stock of any Financial
Institution.
8
<PAGE>
(b) REMEDIES FOR BREACH OF RESTRICTIVE COVENANT. The Executive
acknowledges that the restrictions contained in Sections 3 and 5(a) of this
Agreement are reasonable and necessary for the protection of the legitimate
business interests of the Employer, that any violation of these restrictions
would cause substantial injury to the Employer and such interests, that the
Employer would not have entered into this Agreement with the Executive without
receiving the additional consideration offered by the Executive in binding
himself to these restrictions and that such restrictions were a material
inducement to the Employer to enter into this Agreement. In the event of any
violation or threatened violation of these restrictions, the Employer, in
addition to and not in limitation of, any other rights, remedies or damages
available to the Employer under this Agreement or otherwise at law or in equity,
shall be entitled to preliminary and permanent injunctive relief to prevent or
restrain any such violation by the Executive and any and all persons directly or
indirectly acting for or with his, as the case may be.
6. INTERCORPORATE TRANSFERS. If the Executive shall be voluntarily
transferred to an affiliate of the Employer, such transfer shall not be deemed
to terminate or modify this Agreement and the employing corporation to which the
Executive shall have been transferred shall, for all purposes of this Agreement,
be construed as standing in the same place and stead as the Employer as of the
date of such transfer. For purposes hereof, an affiliate of the Employer shall
mean any corporation directly or indirectly controlling, controlled by, or under
common control with the Employer.
7. INTEREST IN ASSETS. Neither the Executive nor his estate shall
acquire hereunder any rights in funds or assets of the Employer, otherwise than
by and through the actual payment of amounts payable hereunder; nor shall the
Executive or his estate have any power to transfer, assign, anticipate,
hypothecate or otherwise encumber in advance any of said payments; nor shall any
of such payments be subject to seizure for the payment of any debt, judgment,
alimony, separate maintenance or be transferable by operation of law in the
event of bankruptcy, insolvency or otherwise of the Executive.
8. INDEMNIFICATION.
(a) The Employer shall provide the Executive (including his
heirs, personal representatives, executors and administrators) for the term of
this Agreement with coverage under a standard directors' and officers' liability
insurance policy at its expense.
(b) In addition to the insurance coverage provided for in
paragraph (a) of this Section 8, the Employer shall hold harmless and indemnify
the Executive (and his heirs, executors and administrators) to the fullest
extent permitted under applicable law against all expenses and liabilities
reasonably incurred by him in connection with or arising out of any action, suit
or proceeding in which he may be involved by reason of his having been an
officer of the Employer (whether or not he continues to be an officer at the
time of incurring such expenses or liabilities), such expenses and liabilities
to include, but not be limited to, judgments, court
9
<PAGE>
costs and attorneys' fees and the cost of reasonable settlements.
(c) In the event the Executive becomes a party, or is
threatened to be made a party, to any action, suit or proceeding for which the
Employer has agreed to provide insurance coverage or indemnification under this
Section 8, the Employer shall, to the full extent permitted under applicable
law, advance all expenses (including reasonable attorneys' fees), judgments,
fines and amounts paid in settlement (collectively "Expenses") incurred by the
Executive in connection with the investigation, defense, settlement, or appeal
of any threatened, pending or completed action, suit or proceeding, subject to
receipt by the Employer of a written undertaking from the Executive (i) to
reimburse the Employer for all Expenses actually paid by the Employer to or on
behalf of the Executive in the event it shall be ultimately determined that the
Executive is not entitled to indemnification by the Employer for such Expenses
and (ii) to assign to the Employer all rights of the Executive to
indemnification, under any policy of directors' and officers' liability
insurance or otherwise, to the extent of the amount of Expenses actually paid by
the Employer to or on behalf of the Executive.
9. GENERAL PROVISIONS.
(a) SUCCESSORS; ASSIGNMENT. This Agreement shall be binding
upon and inure to the benefit of the Executive, the Employer and his and its
respective personal representatives, successors and assigns, and any successor
or assign of the Employer shall be deemed the "Employer" hereunder. The Employer
shall require any successor to all or substantially all of the business and/or
assets of the Employer, whether directly or indirectly, by purchase, merger,
consolidation, acquisition of stock, or otherwise, by an agreement in form and
substance satisfactory to the Executive, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent as the Employer
would be required to perform if no such succession had taken place.
(b) ENTIRE AGREEMENT; MODIFICATIONS. This Agreement
constitutes the entire agreement between the parties respecting the subject
matter hereof, and supersedes all prior negotiations, undertakings, agreements
and arrangements with respect thereto, whether written or oral. Except as
otherwise explicitly provided herein, this Agreement may not be amended or
modified except by written agreement signed by the Executive and the Employer.
(c) ENFORCEMENT AND GOVERNING LAW. The provisions of this
Agreement shall be regarded as divisible and separate; if any of said provisions
should be declared invalid or unenforceable by a court of competent
jurisdiction, the validity and enforceability of the remaining provisions shall
not be affected thereby. This Agreement shall be construed and the legal
relations of the parties hereto shall be determined in accordance with the laws
of the state of Illinois without reference to the law regarding conflicts of
law.
(d) ARBITRATION. Any dispute or controversy arising under or
in connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three
10
<PAGE>
arbitrators sitting in a location selected by the Executive within fifty (50)
miles from the location of the Employer, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that the
Executive shall be entitled to seek specific performance of his right to be paid
through the date of termination during the pendency of any dispute or
controversy arising under or in connection with this Agreement.
(e) LEGAL FEES. All reasonable legal fees paid or incurred by
the Executive pursuant to any dispute or question of interpretation relating to
this Agreement shall be paid or reimbursed by the Employer if the Executive is
successful on the merits pursuant to a legal judgment, arbitration or
settlement.
(f) WAIVER. No waiver by either party at any time of any
breach by the other party of, or compliance with, any condition or provision of
this Agreement to be performed by the other party, shall be deemed a waiver of
any similar or dissimilar provisions or conditions at the same time or any prior
or subsequent time.
(g) NOTICES. Notices pursuant to this Agreement shall be in
writing and shall be deemed given when received; and, if mailed, shall be mailed
by United States registered or certified mail, return receipt requested, postage
prepaid; and if to the Employer, addressed to the principal headquarters of the
Employer, attention: Chairman; or, if to the Executive, to the address set forth
below the Executive's signature on this Agreement, or to such other address as
the party to be notified shall have given to the other.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
MERCHANTS BANCORP, INC. CALVIN R. MYERS
By: /S/ William C. Glenn /S/ Calvin R. Myers
--------------------------------- ------------------------------
Name: William C. Glenn 1612 Southlawn Place
--------------------------------- ------------------------------
Title: Chairman Executive Committee Aurora, Illinois 60506
--------------------------------- ------------------------------
11
<PAGE>
Exhibit 10.(d)
FORM OF CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement (this "Agreement"), is made and
entered into as of the 1st day of January, 1998, (the "Effective Date") by and
between Merchants Bancorp, Inc., a Delaware corporation (the "Employer"), and
________________ (the "Executive").
RECITALS
A. The Executive is currently serving as the __________________ of
Merchants Bank (the "Bank").
B. The Employer owns all of the issued and outstanding capital stock of
the Bank.
C. The Employer desires to continue to employ the Executive as an
officer of the Employer and the Executive is willing to continue such
employment.
D. In addition, the Employer recognizes that circumstances may arise in
which a change of control of the Employer through acquisition or otherwise may
occur thereby causing uncertainty of employment without regard to the competence
or past contributions of the Executive, which uncertainty may result in the loss
of valuable services of the Executive, and the Employer and the Executive wish
to provide reasonable security to the Executive against changes in the
employment relationship in the event of any such change of control.
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter contained, it is covenanted and agreed by and between
the parties hereto as follows:
AGREEMENTS
1. TERM AND TERMINATION.
(a) BASIC TERM. The term of this Agreement shall be for two
(2) year(s) commencing as of the Effective Date. In the event of a Change of
Control (as defined below) during the term of this Agreement, the Agreement
shall remain in effect for __________ (___) year(s) from the date of such Change
of Control.
(b) TERMINATION UPON CHANGE OF CONTROL.
(i) In the event of a Change in Control (as defined
below) of the Employer and the termination of the Executive's
employment or a Change in Duties of the Executive (as defined below)
within the six (6) months preceding or the _______ (___) year(s)
following the Change in Control, the Executive shall be entitled to a
lump sum payment equal to _______ (___) time(s) his annual salary and
bonus for the immediately preceding calendar year less any salary and
bonus amounts paid to the Executive during the period from the date of
the Change of Control until the date of the termination of the
Executive's employment, payable at the later of the date of the Change
in Control or employment termination. The Employer shall also continue
to
<PAGE>
provide coverage for the Executive under the Employer sponsored health
insurance program for the ________ (___) year(s) following the Change
in Control, upon the same terms and conditions as apply to similarly
situated employees of the Employer.
(ii) For purposes of this paragraph, the term "Change
in Control" shall mean the following:
A. The consummation of the acquisition by any person (as
such term is defined in Section 13(d) or 14(d) of the
Securities Exchange Act of 1934, as amended (the
"1934 Act")) of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the 1934 Act)
of thirty-three percent (33%) or more of the combined
voting power of the then outstanding voting
securities of the Employer; or
B. The individuals who, as of the date hereof or any
renewal date, are members of the Board of Directors
of the Employer (the "Board") cease for any reason to
constitute a majority of the Board, unless the
election, or nomination for election by the
stockholders of the Employer, of any new director was
approved by a vote of a majority of the Board, and
such new director shall, for purposes of this
Agreement, be considered as a member of the Board; or
C. The consummation of: (1) a merger or consolidation if
the stockholders of the Employer immediately before
such merger or consolidation do not, as a result of
such merger or consolidation, own, directly or
indirectly, more than sixty-seven percent (67%) of
the combined voting power of the then outstanding
voting securities of the entity resulting from such
merger or consolidation in substantially the same
proportion as their ownership of the combined voting
power of the voting securities of the Employer
outstanding immediately before such merger or
consolidation; or (2) a complete liquidation or
dissolution or an agreement for the sale or other
disposition of all or substantially all of the assets
of the Employer.
Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because thirty-three percent (33%) or more of the
combined voting power of the then outstanding securities of the
Employer is acquired by: (1) a trustee or other fiduciary holding
securities under one or more employee benefit plans maintained for
employees of the Employer; or (2) any corporation which, immediately
prior to such acquisition, is owned directly or indirectly by the
stockholders of the Employer in the same proportion as their ownership
of stock immediately prior to such acquisition.
(iii) For purposes of this paragraph, the term
"Change in Duties" shall mean the following:
2
<PAGE>
A. A significant change in the nature or scope of the
Executive's authority or duties;
B. A reduction in the Executive's annual salary;
C. A diminution in the Executive's eligibility to
participate in bonus, stock option, incentive award
and other compensation plans which provide
opportunities to receive compensation, from the
opportunities provided by the successor of the
Employer (including its affiliates) for executives
with comparable duties;
D. A diminution in employee benefits (including but not
limited to medical, dental, life insurance and
long-term disability plans) and perquisites
applicable to the Executive, from the employee
benefits and perquisites provided by the successor of
the Employer (including its affiliates) to executives
with comparable duties; or
E. A change, without the Executive's written agreement,
in the location of the Executive's principal place of
employment with the Employer (including its
affiliates) by more than twenty-five (25) miles from
the location where he is principally employed.
(iv) If it is determined, in the opinion of the
certified public accountants then regularly retained by the Employer in
consultation with legal counsel acceptable to the Executive, that any
amount payable to the Executive by the Employer under this Agreement,
or any other plan or agreement under which the Executive participates
or is a party, would constitute an "Excess Parachute Payment" within
the meaning of Section 280G of the Internal Revenue Code of 1986, as
amended (the "Code") and be subject to the excise tax imposed by
Section 4999 of the Code (the "Excise Tax"), the Employer shall pay to
the Executive the amount of such Excise Tax and all federal and state
income or other taxes with respect to the payment of the amount of such
Excise Tax, including all such taxes with respect to any such
additional amount. If at a later date, the Internal Revenue Service
assesses a deficiency against the Executive for the Excise Tax which is
greater than that which was determined at the time such amounts were
paid, the Employer shall pay to the Executive the amount of such Excise
Tax plus any interest, penalties and professional fees or expenses,
incurred by the Executive as a result of such assessment, including all
such taxes with respect to any such additional amount. The highest
marginal tax rate applicable to individuals at the time of payment of
such amounts will be used for purposes of determining the federal and
state income and other taxes with respect thereto. The Employer shall
withhold from any amounts paid under this Agreement the amount of any
Excise Tax or other federal, state or local taxes then required to be
withheld. Computations of the amount of any supplemental compensation
paid under this subparagraph shall be made by the independent public
accountants then regularly retained by the Employer in consultation
with legal counsel acceptable to Executive. The Employer shall pay all
accountant and legal counsel fees and expenses.
3
<PAGE>
(c) REGULATORY SUSPENSION AND TERMINATION.
(i) If the Executive is suspended from office and/or
temporarily prohibited from participating in the conduct of the
Employer's affairs by a notice served under Section 8(e)(3) (12
U.S.C. Section 1818(e)(3)) or 8(g) (12 U.S.C. Section 1818(g)) of
the Federal Deposit Insurance Act, as amended, the Employer's
obligations under this Agreement shall be suspended as of the date
of service, unless stayed by appropriate proceedings. If the charges
in the notice are dismissed, the Employer may in its discretion (A)
pay the Executive all or part of the compensation withheld while
their Agreement obligations were suspended and (B) reinstate (in
whole or in part) any of the obligations which were suspended.
(ii) If the Executive is removed and/or permanently
prohibited from participating in the conduct of the Employer's
affairs by an order issued under Section 8(e) (12 U.S.C. Section
1818(e)) or 8(g) (12 U.S.C. Section 1818(g)) of the Federal Deposit
Insurance Act, as amended, all obligations of the Employer under
this Agreement shall terminate as of the effective date of the
order, but vested rights of the contracting parties shall not be
affected.
(iii) If the Employer is in default as defined in Section
3(x) (12 U.S.C. Section 1813(x)(1)) of the Federal Deposit Insurance
Act, as amended, all obligations of the Employer under this
Agreement shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting
parties.
(iv) All obligations of the Employer under this Agreement
shall be terminated, except to the extent determined that
continuation of this Agreement is necessary for the continued
operation of the institution by the Federal Deposit Insurance
Corporation (the "FDIC"), at the time the FDIC enters into an
agreement to provide assistance to or on behalf of the Employer
under the authority contained in Section 13(c) (12 U.S.C. Section
1823(c)) of the Federal Deposit Insurance Act, as amended, or when
the Employer is determined by the FDIC to be in an unsafe or unsound
condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(v) Any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their
compliance with Section 18(k) (12 U.S.C. Section 1828(k)) of the
Federal Deposit Insurance Act, as amended, and any regulations
promulgated thereunder.
2. WITHHOLDING. The Employer shall be entitled to withhold from amounts
payable to the Executive hereunder, any federal, state or local withholding or
other taxes or charges which it is from time to time required to withhold. The
Employer shall be entitled to rely upon the opinion of its legal counsel with
regard to any question concerning the amount or requirement of any such
withholding.
4
<PAGE>
3. INTERCORPORATE TRANSFERS. If the Executive shall be voluntarily
transferred to an affiliate of the Employer, such transfer shall not be deemed
to terminate or modify this Agreement and the employing corporation to which the
Executive shall have been transferred shall, for all purposes of this Agreement,
be construed as standing in the same place and stead as the Employer as of the
date of such transfer. For purposes hereof, an affiliate of the Employer shall
mean any corporation directly or indirectly controlling, controlled by, or under
common control with the Employer.
4. INTEREST IN ASSETS. Neither the Executive nor his estate shall
acquire hereunder any rights in funds or assets of the Employer, otherwise than
by and through the actual payment of amounts payable hereunder; nor shall the
Executive or his estate have any power to transfer, assign, anticipate,
hypothecate or otherwise encumber in advance any of said payments; nor shall any
of such payments be subject to seizure for the payment of any debt, judgment,
alimony, separate maintenance or be transferable by operation of law in the
event of bankruptcy, insolvency or otherwise of the Executive.
5. NOT AN EMPLOYMENT AGREEMENT. Nothing in this Agreement shall give
the Executive any rights (or impose any obligations) to continued employment by
the Employer or successor of the Employer, nor shall it give the Employer any
rights (or impose any obligations) for the continued performance of duties by
the Executive for the Employer or successor of the Employer.
6. GENERAL PROVISIONS.
(a) SUCCESSORS; ASSIGNMENT. This Agreement shall be binding
upon and inure to the benefit of the Executive, the Employer and his and its
respective personal representatives, successors and assigns, and any successor
or assign of the Employer shall be deemed the "Employer" hereunder. The Employer
shall require any successor to all or substantially all of the business and/or
assets of the Employer, whether directly or indirectly, by purchase, merger,
consolidation, acquisition of stock, or otherwise, by an agreement in form and
substance satisfactory to the Executive, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent as the Employer
would be required to perform if no such succession had taken place.
(b) ENTIRE AGREEMENT; MODIFICATIONS. This Agreement
constitutes the entire agreement between the parties respecting the employment
of the Executive, and supersedes all prior negotiations, undertakings,
agreements and arrangements with respect thereto, whether written or oral.
Except as otherwise explicitly provided herein, this Agreement may not be
amended or modified except by written agreement signed by the Executive and the
Employer.
(c) ENFORCEMENT AND GOVERNING LAW. The provisions of this
Agreement shall be regarded as divisible and separate; if any of said provisions
should be declared invalid or unenforceable by a court of competent
jurisdiction, the validity and enforceability of the remaining provisions shall
not be affected thereby. This Agreement shall be construed and the
5
<PAGE>
legal relations of the parties hereto shall be determined in accordance with the
laws of the state of Illinois without reference to the law regarding conflicts
of law.
(d) ARBITRATION. Any dispute or controversy arising under
or in connection with this Agreement shall be settled exclusively by
arbitration, conducted before a panel of three arbitrators sitting in a
location selected by the Executive within fifty (50) miles of the principal
office of the Employer, in accordance with the rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction.
(e) LEGAL FEES. All reasonable legal fees paid or incurred by
the prevailing party pursuant to any dispute or question of interpretation
relating to this Agreement shall be paid or reimbursed by the losing party if
the prevailing party is successful on the merits pursuant to a legal judgment,
arbitration or settlement.
(f) WAIVER. No waiver by either party at any time of any
breach by the other party of, or compliance with, any condition or provision of
this Agreement to be performed by the other party, shall be deemed a waiver of
any similar or dissimilar provisions or conditions at the same time or any prior
or subsequent time.
(g) NOTICES. Notices pursuant to this Agreement shall be in
writing and shall be deemed given when received; and, if mailed, shall be mailed
by United States registered or certified mail, return receipt requested, postage
prepaid; and if to the Employer, addressed to the principal headquarters of the
Employer, attention: Chairman; or, if to the Executive, to the address set forth
below the Executive's signature on this Agreement, or to such other address as
the party to be notified shall have given to the other.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
MERCHANTS BANCORP, INC. EXECUTIVE
/S/ CALVIN R. MYERS
- ---------------------------------- ---------------------------
Calvin R. Myers, President ---------------------------
---------------------------
(Address)
6
<PAGE>
SCHEDULE A TO EXHIBIT 10(D)
<TABLE>
<CAPTION>
Term of Agreement Once
Executive's Name Change of Control Occurs
- ---------------- ------------------------
<S> <C>
J. Douglas Cheatham 2 years
Terence L. Kothe 2 years
Richard A. Samuelson 1 year
Helmut Seffert 1 year
Edward St. Jules 2 years
Frank K. Voris 3 years
Randal A. Wright 2 years
</TABLE>
<PAGE>
Exhibit 13
MERCHANTS BANCORP, INC. AND SUBSIDIARY
FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT SUMMARY
Interest income ................. $ 63,464 $ 57,519 $ 50,460 $ 39,875 $ 33,233
Interest expense ................ 32,451 28,559 24,138 18,423 13,228
---------- ---------- ---------- ---------- -----------
Net interest income ............. 31,013 28,960 26,322 21,452 20,005
Provision for loan losses ....... 2,112 2,636 2,014 1,783 2,298
---------- ---------- ---------- ---------- -----------
Net interest income after
provision for loan losses .... 28,901 26,324 24,308 19,669 17,707
Noninterest income .............. 12,555 9,660 9,541 6,918 6,564
Noninterest expenses ............ 29,825 27,754 24,865 17,889 16,733
---------- ---------- ---------- ---------- -----------
Income before income taxes ...... 11,631 8,230 8,984 8,698 7,538
Provision for income taxes ...... 3,217 889 2,456 2,502 2,079
---------- ---------- ---------- ---------- -----------
Net income ...................... $ 8,414 $ 7,341 $ 6,528 $ 6,196 $ 5,459
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
PER SHARE INFORMATION*
Basic earnings per share ........ $ 1.63 $ 1.42 $ 1.27 $ 1.21 $ 1.06
Diluted earnings per share ...... 1.60 1.41 1.26 1.20 1.06
Dividends ....................... 0.40 0.36 0.28 0.24 0.19
*Restated to reflect a two-for-one stock split in 1997.
BALANCE SHEET SUMMARY -- END OF YEAR
Total assets .................... $ 883,862 $ 838,971 $ 724,409 $ 539,761 $ 496,289
Total deposits .................. 742,057 650,718 600,970 453,771 413,741
Long term debt .................. 35,875 49,250 7,000 3,000 3,000
Total stockholders' equity ...... 72,182 65,317 58,198 54,094 43,456
Allowance for loan losses ....... 8,507 8,360 7,274 5,176 5,140
</TABLE>
8
<PAGE>
MERCHANTS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks ............................................... $ 38,679 $ 35,914
Federal funds sold .................................................... 5,000 7,080
---------- ----------
Cash and cash equivalents ....................................... 43,679 42,994
Securities available for sale ......................................... 198,759 204,761
Loans held for sale ................................................... 9,678 2,833
Loans ................................................................. 607,927 565,348
Allowance for loan losses ............................................. (8,507) (8,360)
---------- ----------
Net loans ....................................................... 599,420 556,988
Premises and equipment, net ........................................... 11,872 11,295
Other real estate owned ............................................... 297 178
Mortgage servicing rights, net ........................................ 2,440 1,674
Goodwill, net ......................................................... 6,397 6,773
Core deposit intangible assets, net ................................... 1,673 2,055
Accrued interest and other assets ..................................... 9,647 9,420
---------- ----------
Total assets .................................................... $ 883,862 $ 838,971
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing ................................................ $ 132,153 $ 118,187
Interest-bearing ................................................... 609,904 532,531
---------- ----------
Total deposits .................................................. 742,057 650,718
Federal funds purchased and overnight borrowings ...................... - 23,100
Securities sold under repurchase agreements ........................... 13,320 21,754
Federal Home Loan Bank term advances .................................. 42,250 59,750
Notes payable ......................................................... 6,125 14,000
Accrued interest and other liabilities ................................ 7,928 4,332
---------- ----------
Total liabilities ............................................... 811,680 773,654
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value; authorized 500,000 shares; none issued.. -- --
Common stock, $1 par value; authorized 6,000,000 shares;
issued 5,222,392 in 1998 and 5,213,380 in 1997 ..................... 5,222 5,213
Surplus ............................................................... 16,348 16,028
Retained earnings ..................................................... 48,809 42,544
Unrealized net gain on securities available for sale .................. 1,894 1,653
Treasury stock, at cost, 41,321 shares in 1998 and
46,910 shares in 1997 .............................................. (91) (121)
---------- ----------
Total stockholders' equity ...................................... 72,182 65,317
---------- ----------
Total liabilities and stockholders' equity ...................... $ 883,862 $ 838,971
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE>
MERCHANTS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997, and 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees ..................................... $ 51,051 $ 45,052 $ 36,924
Loans held for sale ....................................... 376 141 245
Securities:
Taxable ................................................ 8,132 9,177 10,119
Tax-exempt ............................................. 3,331 2,895 2,757
Federal funds sold ........................................ 574 254 415
---------- ---------- -----------
Total interest income ............................... 63,464 57,519 50,460
INTEREST EXPENSE
Deposits .................................................. 26,291 24,082 21,912
Federal funds purchased and overnight borrowings .......... 1,290 1,360 466
Securities sold under repurchase agreements ............... 980 1,224 1,307
Federal Home Loan Bank term advances ...................... 2,951 924 23
Notes payable ............................................. 939 969 430
---------- ---------- -----------
Total interest expense .............................. 32,451 28,559 24,138
---------- ---------- -----------
Net interest income .................................... 31,013 28,960 26,322
Provision for loan losses ................................. 2,112 2,636 2,014
---------- ---------- -----------
Net interest income after provision for loan losses .... 28,901 26,324 24,308
NONINTEREST INCOME
Trust income .............................................. 2,622 2,315 2,028
Mortgage banking income ................................... 4,228 2,358 2,202
Service charges and fees .................................. 4,228 4,235 3,796
Securities gains (losses), net ............................ 96 (380) 196
Other income .............................................. 1,381 1,132 1,319
---------- ---------- -----------
Total noninterest income ............................ 12,555 9,660 9,541
NONINTEREST EXPENSE
Salaries and employee benefits ............................ 15,238 13,598 12,924
Occupancy expense, net .................................... 2,120 1,907 1,612
Furniture and equipment expense ........................... 2,250 1,838 1,650
Amortization of goodwill .................................. 376 367 385
Amortization of core deposit intangible assets ............ 382 397 405
Amortization of mortgage servicing rights ................. 763 397 295
Building contribution ..................................... - 850 -
Other expense ............................................. 8,696 8,400 7,594
---------- ---------- -----------
Total noninterest expense ........................... 29,825 27,754 24,865
---------- ---------- -----------
Income before income taxes ................................ 11,631 8,230 8,984
Provision for income taxes ................................ 3,217 889 2,456
---------- ---------- -----------
Net income .......................................... $ 8,414 $ 7,341 $ 6,528
---------- ---------- -----------
---------- ---------- -----------
Basic earnings per share .................................. $ 1.63 $ 1.42 $ 1.27
Diluted earnings per share ................................ 1.60 1.41 1.26
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE>
MERCHANTS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997, and 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................. $ 8,414 $ 7,341 $ 6,528
Adjustments to reconcile net income to cash
from operating activities:
Depreciation ......................................... 1,976 1,798 1,620
Amortization of mortgage servicing rights ............ 763 397 295
Provision for loan losses ............................ 2,112 2,636 2,014
Net change in mortgage loans held for sale ........... (5,990) 1,789 604
Net gain on sales of loans ........................... (2,384) (1,106) (981)
Provision for deferred income taxes .................. (34) (2,053) (668)
Change in net income taxes payable ................... 301 (705) (572)
Change in accrued interest and other assets .......... (227) (1,999) (531)
Change in accrued interest and other liabilities ..... 2,606 (366) 601
Premium amortization and discount accretion
on securities ..................................... 305 69 402
Securities losses (gains), net ....................... (96) 380 (196)
Amortization of goodwill ............................. 376 367 385
Amortization of core deposit intangible assets ....... 382 397 405
Building contribution ................................ - 850 -
---------- ---------- ----------
Net cash from operating activities ...................... 8,504 9,795 9,906
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from matured securities available for sale ........ 69,416 35,833 59,136
Proceeds from sales of securities available for sale ....... 14,230 31,957 32,395
Purchases of securities available for sale ................. (76,889) (76,144) (74,282)
Net principal disbursed or repaid on loans ................. (44,961) (110,277) (79,331)
Proceeds from sales of other real estate ................... 298 336 360
Acquisition, net of cash and cash equivalents acquired ..... - - (13,459)
Proceeds from sale of net assets held for sale ............. - - 8,668
Property and equipment expenditures ........................ (2,553) (1,843) (2,678)
---------- ---------- ----------
Net cash from investing activities ...................... (40,459) (120,138) (69,191)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits ..................................... 91,339 49,748 49,310
Net change in short term borrowings ........................ (31,534) 329 20,666
Federal Home Loan Bank term advances ....................... - 59,750 -
Payments on Federal Home Loan Bank term advances ........... (17,500) - -
Proceeds from notes payable ................................ - - 14,000
Payments on notes payable .................................. (7,875) - (6,550)
Proceeds from exercise of incentive stock options .......... 157 - -
Dividends paid, net of dividend reinvestments .............. (1,947) (1,558) (1,239)
---------- ---------- ----------
Net cash from financing activities ...................... 32,640 108,269 76,187
---------- ---------- ----------
Net change in cash and cash equivalents ................. 685 (2,074) 16,902
Cash and cash equivalents at beginning of period ........ 42,994 45,068 28,166
---------- ---------- ----------
Cash and cash equivalents at end of period .............. $ 43,679 $ 42,994 $ 45,068
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE>
MERCHANTS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997, and 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on Total
Securities Stock-
Common Retained Available Treasury holders'
Stock Surplus Earnings For Sale Stock Equity
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 .............. $ 2,607 $ 18,344 $ 31,877 $ 1,450 $ (184) $ 54,094
Comprehensive income:
Net income ........................... - - 6,528 - - 6,528
Unrealized loss on securities
available for sale, net of
reclassification and tax effects .. - - - (1,133) - (1,133)
--------
Total comprehensive income ........ 5,395
Dividend declared, $.28 per share ....... - - (1,443) - - (1,443)
Issuance of 5,080 shares of
treasury common stock ................ - 124 - - 28 152
-------- -------- -------- -------- -------- --------
Balance, December 31, 1996 .............. 2,607 18,468 36,962 317 (156) 58,198
Comprehensive income:
Net income ........................... - - 7,341 - - 7,341
Unrealized gain on securities
available for sale, net of
reclassification and tax effects .. - - - 1,336 - 1,336
--------
Total comprehensive income ........ 8,677
Dividend declared, $.36 per share ....... - - (1,759) - - (1,759)
Issuance of 6,370 shares of
treasury common stock ................ - 166 - - 35 201
Two-for-one stock split at par value
(additional shares issued of
2,606,690 and 24,673
of treasury shares) .................. 2,606 (2,606) - - - -
-------- -------- -------- -------- -------- --------
Balance, December 31, 1997 .............. 5,213 16,028 42,544 1,653 (121) 65,317
Comprehensive income:
Net income ........................... - - 8,414 - - 8,414
Unrealized gain on securities
available for sale, net of
reclassification and tax effects .. - - - 241 - 241
--------
Total comprehensive income ........ 8,655
Dividend declared, $.40 per share ....... - - (2,149) - - (2,149)
Issuance of 5,589 shares of
treasury common stock ................ - 172 - - 30 202
Exercise of stock options ............... 9 148 - - - 157
-------- -------- -------- -------- -------- --------
Balance, December 31, 1998 .............. $ 5,222 $ 16,348 $ 48,809 $ 1,894 $ (91) $ 72,182
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE>
MERCHANTS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(TABLE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: The consolidated financial
statements include Merchants Bancorp, Inc. and its wholly-owned subsidiary, The
Merchants National Bank of Aurora, together referred to as "the Company."
Intercompany transactions and balances are eliminated in consolidation. During
1998, the Company simplified its organizational structure by eliminating all but
one of its subsidiaries through mergers. It merged Hinckley State Bank and Fox
Valley Bank into The Merchants Bank of Aurora ("Merchants Bank") and merged
Valley Banc Services Corp. ("Valley") and V.B.H. Corp. into Merchants Bancorp,
Inc. The mergers qualified as tax free reorganizations and were accounted for as
internal reorganizations. Accordingly, the notes to the consolidated financial
statements have been restated to reflect the internal reorganizations as if they
had occurred on January 1, 1996.
The Company provides financial services through its offices in Aurora, Oswego,
Hinckley, St. Charles, and Geneva, Illinois to the western Chicago suburbs and
surrounding areas. Its primary deposit products are checking, savings, and
certificates of deposit, and its primary lending products are residential and
commercial mortgages, construction lending, commercial, and installment loans. A
major portion of loans are secured by various forms of collateral including real
estate, business assets, consumer property, and other items, although borrower
cash flow may also be a primary source of repayment. Merchants Bank also engages
in mortgage banking and trust operations.
Use of Estimates: To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions based
on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and future
results could differ. The allowance for loan losses, fair values of financial
instruments, and status of contingencies are particularly subject to change.
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 customer loan,
deposit, and repurchase agreement transactions. Net cash flows are also reported
for Federal funds purchased and overnight funds. Inflows and outflows are
reported separately for Federal Home Loan Bank ("FHLB") term advances.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported in other comprehensive income.
Other securities, such as FHLB and Federal Reserve Bank stock, are carried at
cost. Interest income includes amortization of purchase premium or discount.
Realized gains and losses are determined based on the amortized cost of the
specific security sold. Securities are written down to fair value when a decline
in fair value is not temporary.
Loans: Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an allowance for loan losses. Loans
held for sale are reported at the lower of cost or market, on an aggregate
basis. Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term. The accrual
of interest income is discontinued when full loan repayment is in doubt,
typically when the loan is impaired or payments are ninety days or more past
due. Payments received on such loans are reported as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable credit losses, increased by the provision for loan losses
and decreased by charge-offs less recoveries. Management estimates the allowance
balance required using past loan loss experience, known and inherent risks in
the portfolio, information about specific borrower situations and estimated
collateral values, economic conditions, and other factors. Allocations of the
allowance may be made for specific loans, but the entire allowance is available
for any loan that, in management's judgment, should be charged-off.
13
<PAGE>
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral. Loans
are evaluated for impairment when payments are delayed, typically 90 days or
more, or when it is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation, which is computed on the straight-line method over the
estimated useful lives of the assets.
Other Real Estate Owned: Real estate acquired in settlement of loans is recorded
at fair value when acquired. If fair value declines after acquisition, a
valuation allowance reduces the reported amount to the lower of the initial
amount or fair value less costs to sell. Costs after acquisition are expensed.
Mortgage Servicing Rights: Servicing rights are recognized as assets for
purchased rights and for the allocated value of servicing rights retained on
loans sold. Servicing rights are expensed in proportion to, and over the period
of, estimated net servicing revenues. Impairment is evaluated based on the fair
value of the rights, using groupings of the underlying loans as to interest
rates and then, secondarily, as to geographic and prepayment characteristics.
Any impairment of a grouping is reported as a valuation allowance. There was no
such valuation allowance recorded at year-end 1998 or 1997.
Goodwill and Core Deposit Intangibles: Goodwill is the excess of purchase price
over identified net assets in the 1996 acquisition of Valley. The goodwill is
being amortized on the straight-line basis over 20 years. The core deposit
intangibles recorded in conjunction with the acquisition of Valley are being
amortized using an accelerated method over 10 years.
Long-term Assets: These assets are reviewed for impairment when events indicate
their carrying amount may not be recoverable from future undiscounted cash
flows. If impaired, the assets are recorded at discounted amounts.
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. Income from trust fees is recorded on the accrual basis.
Thrift Plan: Thrift plan expense is the amount contributed determined in part by
formula and in part at the discretion of the board of directors.
Stock Options: No expense for stock options is recorded, as the grant price
equals the market price of the stock at grant date. Pro-forma disclosures show
the effect on income and earnings per share had the option's fair value been
recorded, using an option pricing model.
Common Stock Split: The board of directors declared a two-for-one stock split on
the Company's common stock effective on September 30, 1997. Par value remained
unchanged at $1. The effect of the stock split has been reflected since
September 30, 1997, in the consolidated balance sheet and statement of
stockholders' equity. All references to the number of common shares and per
share amounts elsewhere in the consolidated financial statements and related
footnotes have been restated as appropriate to reflect the effect of the split
for all periods presented.
Income Taxes: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
Earnings Per Share: Basic earnings per share is net income divided by the
weighted average number of common shares outstanding during the year. Diluted
earnings per common share includes the dilutive effects of additional potential
common shares issuable under stock options. Earnings and dividends per share are
restated for all stock splits and dividends through the date of issue of the
consolidated financial statements.
14
<PAGE>
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as separate
components of equity. The accounting standard that requires reporting
comprehensive income first applied for 1998, with prior information restated to
be comparable.
Segment Reporting: Beginning January 1, 1998, Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS No. 131") requires reporting of information regarding
reportable operating segments. The Company has identified three operating
segments; banking, trust, and mortgage banking. A segment is reportable when it
meets certain thresholds relating to revenues, profits or losses, and assets.
Since banking is the only reportable operating segment, separate disclosures
were not deemed meaningful and were not presented.
New Accounting Pronouncements: Beginning January 1, 2000, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected to
have a material effect on the consolidated financial statements, but will depend
on the derivative holdings when this standard applies.
Dividend Restriction: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the Merchants Bank to the Company or
by the Company to shareholders.
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Note 2: SECURITIES
Year-end securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1998
U.S. Treasury .................................... $ 3,009 $ 51 $ - $ 3,060
U.S. Government agencies ......................... 96,521 550 (243) 96,828
U.S. Government agency
mortgage backed securities .................... 16,351 187 (50) 16,488
States and political subdivisions ................ 74,134 2,492 (43) 76,583
Collateralized mortgage obligations .............. 2,834 23 (5) 2,852
Equity securities ................................ 3,041 - (93) 2,948
---------- ---------- ---------- ----------
$ 195,890 $ 3,303 $ (434) $ 198,759
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
1997
U.S. Treasury .................................... $ 14,063 $ 48 $ (19) $ 14,092
U.S. Government agencies ......................... 85,973 405 (124) 86,254
U.S. Government agency
mortgage backed securities .................... 25,886 281 (75) 26,092
States and political subdivisions ................ 60,840 2,176 (35) 62,981
Collateralized mortgage obligations .............. 8,319 45 (54) 8,310
Equity securities ................................ 7,172 - (140) 7,032
---------- ---------- ---------- ----------
$ 202,253 $ 2,955 $ (447) $ 204,761
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</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") or the Federal National Mortgage Association
("FNMA"). Collateralized mortgage obligations are secured by FHLMC or FNMA
certificates. Other securities primarily consist of FHLB stock and Federal
Reserve Bank stock.
15
<PAGE>
Note 2: SECURITIES (CONTINUED)
Contractual maturities of debt securities at December 31, 1998 were as follows.
Securities not due at a single maturity date, primarily mortgage backed
securities, collateralized mortgage obligations and equity securities, are shown
separately.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---------- ----------
<S> <C> <C>
Due in one year or less ............................................. $ 4,726 $ 4,762
Due after one year through five years ............................... 58,214 59,043
Due after five years through ten years .............................. 97,662 99,437
Due after ten years ................................................. 13,075 13,242
---------- ----------
173,677 176,484
Mortgage backed securities and collateralized mortgage obligations .. 19,172 19,327
Equity securities ................................................... 3,041 2,948
---------- ----------
$ 195,890 $ 198,759
---------- ----------
---------- ----------
</TABLE>
Sales of securities available for sale were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Proceeds of sales ........................................ $ 14,230 $ 31,957 $ 32,395
Gross realized gains ..................................... 104 88 385
Gross realized losses .................................... 8 468 189
</TABLE>
The 1997 gross losses above includes $168,000 related to the write-off of a
municipal security which is of doubtful collectibility. 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 exceed 10% of stockholders' equity, none of the
holdings from individual municipal issuers exceeded this threshold.
Securities with a carrying amount of approximately $171,849,000 and $144,325,000
at December 31, 1998, and 1997, 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 $1,045,000 and $442,000 as of December 31, 1998,
and 1997.
Note 3: LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Commercial and industrial .......................................... $ 175,402 $ 168,899
Real estate - commercial ........................................... 87,035 95,755
Real estate - construction ......................................... 92,897 69,901
Real estate - residential .......................................... 134,009 122,732
Installment ........................................................ 109,970 100,869
Credit card receivables ............................................ 8,483 8,100
Other loans ........................................................ 1,233 813
---------- ----------
609,029 567,069
Unearned discount .................................................. (869) (1,324)
Deferred loan fees ................................................. (233) (397)
---------- ----------
$ 607,927 $ 565,348
---------- ----------
---------- ----------
</TABLE>
Past due and nonaccrual loans were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Nonaccrual loans ............................................... $ 5,164 $ 4,623 $ 2,970
Interest income recorded on nonaccrual loans ................... 245 225 101
Interest income which would have been accrued
on nonaccrual loans ......................................... 461 356 335
Loans 90 days or more past due and still accruing interest ..... - - -
</TABLE>
16
<PAGE>
Note 3: LOANS (CONTINUED)
Impaired loans were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Year-end loans with no allowance for loan losses allocated ..... $ 2,446 $ 2,234 $ 523
Year-end loans with allowance for loan losses allocated ........ 1,201 1,325 905
Amount of the allowance allocated .............................. 846 473 363
Average of impaired loans during the year ...................... 2,762 2,705 1,480
Interest income recognized during impairment ................... 19 277 191
Cash-basis interest income recognized .......................... 259 174 89
</TABLE>
Note 4: ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year ................................... $ 8,360 $ 7,274 $ 5,176
Increase due to acquisition of Valley .......................... - - 798
Provision for loan losses ...................................... 2,112 2,636 2,014
Loans charged-off .............................................. (2,563) (2,122) (2,241)
Recoveries ..................................................... 598 572 1,527
---------- ---------- ----------
Balance at end of year ......................................... $ 8,507 $ 8,360 $ 7,274
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Note 5: PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land .............................................................. $ 1,194 $ 1,194
Premises .......................................................... 11,306 10,690
Furniture and equipment ........................................... 10,225 9,558
---------- ----------
22,725 21,442
Accumulated depreciation .......................................... (10,853) (10,147)
---------- ----------
$ 11,872 $ 11,295
---------- ----------
---------- ----------
</TABLE>
Depreciation expense amounted to approximately $1,976,000, $1,798,000, and
$1,620,000 for the years ended December 31, 1998, 1997, and 1996. During 1997,
Merchants Bank contributed its building in downtown Aurora, Illinois, to a
charitable organization. At the time of the donation the building was carried at
a net depreciated amount of $850,000.
Note 6: DEPOSITS
Time deposits of $100,000 or more were $137,006,000 and $91,220,000 at year-end
1998 and 1997.
At year-end 1998, scheduled maturities of time deposits were as follows:
<TABLE>
<S> <C>
1999 ................................................................................. $ 262,605
2000 ................................................................................. 55,372
2001 ................................................................................. 20,714
2002 ................................................................................. 12,046
2003 ................................................................................. 14,753
----------
Total ............................................................................. $ 365,490
----------
----------
</TABLE>
17
<PAGE>
Note 7: BORROWING
Federal funds purchased, securities sold under agreements to repurchase, and
treasury tax and loan deposits are financing arrangements. Securities sold under
repurchase agreements with the State of Illinois are held by the State of
Illinois. Physical control is maintained for all other securities sold under
repurchase agreements.
The Company has pledged first mortgage loans on residential property in an
amount equal to at least 167% of the outstanding FHLB advances. FHLB term
advances at December 31, 1998, mature as follows:
<TABLE>
<CAPTION>
Amount Interest Rate
---------- -------------
<S> <C> <C>
1999 ..................................................................... $ 12,500 5.97%
2000 ..................................................................... 12,500 6.02
2001 ..................................................................... 4,750 6.21
2002 ..................................................................... 12,500 5.86
----------
Total and weighted average interest rate .............................. $ 42,250 5.98
----------
----------
</TABLE>
Notes payable at December 31, 1998 consisted of a $6,125,000 fixed rate note
which bears interest at a rate of 7.03%. Scheduled principal reductions on the
note were as follows:
<TABLE>
<S> <C>
1999 ..................................................................... $ 875
2000 ..................................................................... 875
2001 ..................................................................... 875
2002 ..................................................................... 875
2003 ..................................................................... 875
Thereafter ............................................................... 1,750
----------
Total ................................................................. $ 6,125
----------
----------
</TABLE>
Note 8: EMPLOYEE BENEFIT PLANS
Prior to 1997, the Company maintained a noncontributory pension plan covering
substantially all full-time employees of the Company and Merchants Bank who had
completed age and service requirements. On January 5, 1996, all pension plan
benefits were frozen, with the intent of considering alternative methods of
providing retirement benefits to employees. In December 1996, the Company
approved terminating the pension plan. During 1997, plan participants were given
the option to receive their vested benefits under the plan in the form of lump
sums, annuities, or rollovers to either the Company's Employee Contributory
Thrift Plan (the "Thrift Plan") or to an individual retirement account. In
addition, 25% of the excess assets remaining in the plan after the vested
benefits were paid were transferred to the Thrift Plan, a "qualified benefit
plan," as allowed in the Internal Revenue Code of 1986. As of December 31, 1997,
all vested benefit obligations had been settled and the transfer to the Thrift
Plan had been completed.
As a result of the termination and amendment of the plan, at December 31, 1997,
the Company recorded a receivable and income of approximately $214,000 and
accrued an excise tax liability of approximately $43,000, which were received
and paid in January, 1998. No pension cost was recorded in 1997. The total
pension income under the pension plan approximated $181,000 during 1996, and was
composed of the following components:
18
<PAGE>
Note 8: EMPLOYEE BENEFIT PLANS (CONTINUED)
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Interest cost on projected benefit obligation ........................................... $ 262
Actual return on plan assets ............................................................ (916)
Net amortization and deferral ........................................................... 473
----------
$ (181)
----------
----------
</TABLE>
The Thrift Plan covers employees who work a minimum of 1,000 hours per year and
have been with the Company at least one year. Vesting in Company contributions
to the Thrift Plan is scheduled over seven years from the date of employment.
The Company contributes an amount determined by the Board of Directors to all
eligible participants. In addition, for each dollar the participant deposits up
to 6% of annual salary, the Company will contribute an additional fifty cents.
Total contributions under the Thrift Plan amounted to approximately $622,000,
$665,000, and $581,000 for the years ended December 31, 1998, 1997, and 1996.
Note 9: INCOME TAXES
Income tax expense (benefit) was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current federal ................................................ $ 2,602 $ 2,416 $ 2,672
Current state .................................................. 649 526 452
Deferred federal ............................................... (28) (1,720) (544)
Deferred state ................................................. (6) (333) (124)
---------- ---------- ----------
$ 3,217 $ 889 $ 2,456
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
In addition to the preceding taxes on operations, taxes allocated for components
of other comprehensive income, which were comprised of the net unrealized gains
(losses) on securities available for sale, were $120,000, $743,000, and
($635,000) in 1998, 1997, and 1996.
As noted previously, during 1997 Merchants Bank donated its former main office
building with a carrying value of $850,000 to a charitable organization. The
building was appraised at $4,130,000 during 1997. The Company recorded a tax
benefit of $1,504,000 during 1997 related to the charitable contribution tax
credits generated as a result of the contribution, which the Company projects
will all be utilized. At December 31, 1998, the Company had $2,403,000 of
charitable contribution carryforwards, which expire in 2002.
Effective tax rates differ from federal statutory rates applied to financial
statement income due to the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Tax at statutory federal income tax rate ....................... $ 3,955 $ 2,798 $ 3,055
Nontaxable interest income,
net of disallowed interest deduction ........................ (1,191) (947) (901)
Tax benefit of building donation ............................... - (1,031) -
State income taxes, net of federal benefit ..................... 441 119 216
Other, net ..................................................... 12 (50) 86
---------- ---------- ----------
$ 3,217 $ 889 $ 2,456
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
19
<PAGE>
Note 9: INCOME TAXES (Continued)
The following are the components of the deferred tax assets and liabilities:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Gross deferred tax liabilities:
Depreciation ............................................................. $ (290) $ (339)
Unrealized gain on securities available for sale ......................... (975) (855)
Discount accretion ....................................................... (82) (232)
Intangible assets ........................................................ (689) (840)
Mortgage servicing rights ................................................ (763) (378)
Other liabilities ........................................................ (436) (253)
---------- -----------
Gross deferred tax liabilities ........................................ (3,235) (2,897)
---------- -----------
Gross deferred tax assets:
Allowance for loan losses ................................................ 3,296 2,742
Deferred loan fees ....................................................... - 28
Charitable contribution carryover ........................................ 931 1,232
Other assets ............................................................. 57 30
---------- -----------
Gross deferred tax assets ............................................. 4,284 4,032
---------- -----------
Net deferred tax asset ................................................ 1,049 1,135
Valuation allowance for deferred tax assets ........................... - -
---------- -----------
Net deferred tax asset ................................................ $ 1,049 $ 1,135
---------- -----------
---------- -----------
</TABLE>
Note 10: RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates in 1998 were as
follows:
<TABLE>
<CAPTION>
<S> <C>
Beginning balance ........................................................ $ 20,980
New loans ................................................................ 2,894
Effect of changes in related parties ..................................... (2,958)
Repayments ............................................................... (6,633)
----------
Ending balance ........................................................... $ 14,283
----------
----------
</TABLE>
Note 11: STOCK OPTIONS
The Stock Incentive Plan (the "Incentive Plan") 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. 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. All
stock options are granted for a maximum term of ten years, with vesting
occurring over the first three years.
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, 1998, there were no nonqualified
stock options, stock appreciation rights, or restricted stock issued under the
Incentive Plan.
20
<PAGE>
Note 11: STOCK OPTIONS (CONTINUED)
A summary of activity in the Incentive Plan and options outstanding as of
year-end is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Beginning outstanding .................. 152,290 $ 14.69 112,380 $ 13.42 73,904 $ 12.34
Granted ................................ 28,134 26.63 39,910 18.25 38,476 15.50
Exercised .............................. (9,012) 12.34 - - - -
------- -------- -------- -------- ------- --------
Ending outstanding ..................... 171,412 $ 16.77 152,290 $ 14.69 112,380 $ 13.42
------- -------- -------- -------- ------- --------
------- -------- -------- -------- ------- --------
Options exercisable at year-end ........ 139,361 $ 15.30 112,872 $ 13.76 74,352 $ 12.88
Weighted average fair value
of options granted during
the year ............................ $ 11.79 $ 10.61 $ 1.47
</TABLE>
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------- -------------------
Weighted
Average Weighted
Remaining Average
Contractual Exercise
Range of Exercise Prices Number Life Number Price
- ------------------------ ------- ---- -------- --------
<S> <C> <C> <C> <C>
$12.31 - $15.50 ........................ 103,368 6.5 103,368 $ 13.52
$18.25 - $26.63 ........................ 68,044 8.6 35,993 20.43
- ------------------------ ------- ---- -------- --------
Outstanding at year end ................ 171,412 7.3 139,361 $ 15.30
- ------------------------ ------- ---- -------- --------
- ------------------------ ------- ---- -------- --------
</TABLE>
The following pro forma information presents net income and earnings per share
had the fair value method of Statement of Financial Accounting Standards No. 123
been used to measure compensation cost for stock option plans.
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income as reported .......................................... $ 8,414 $ 7,341 $ 6,528
Pro forma net income ............................................ 8,211 7,081 6,493
Basic earnings per share as reported ............................ 1.63 1.42 1.27
Pro forma basic earnings per share .............................. 1.59 1.37 1.26
Diluted earnings per share as reported .......................... 1.60 1.41 1.26
Pro forma diluted earnings per share ............................ 1.56 1.36 1.26
</TABLE>
The pro forma effects are computed using option pricing models with the
following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Risk free interest rate .......................................... 4.50% 5.50% 6.54%
Expected option life, in years ................................... 10 10 10
Expected stock price volatility .................................. 28.33% 17.28% 1.65%
Dividend yield ................................................... 1.75% 1.75% 1.75%
</TABLE>
21
<PAGE>
Note 12: CAPITAL
The Company and the Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators. Failure to meet capital requirements can
initiate regulatory action.
Prompt corrective action regulations provide five classifications: Well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. Actual and required
capital amounts (in thousands) and ratios are presented below at year-end.
As of the Company's and the Bank's most recent regulatory notification, the
Company and the Bank were categorized as well capitalized. Management is not
aware of any conditions or events since the most recent regulatory notification
that would change the Company's or the Bank's categories.
Capital levels and minimum required levels:
<TABLE>
<CAPTION>
Minimum Required Minimum Required
for Capital to be Well
Actual Adequacy Purposes Capitalized
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
1998
Total capital to risk weighted assets
Consolidated ..........................$ 70,947 10.98% $ 51,697 8.00% $ 64,621 10.00%
Merchants Bank ........................ 74,376 11.64 51,137 8.00 63,921 10.00
Tier 1 capital to risk weighted assets
Consolidated .......................... 62,859 9.73 25,848 4.00 38,773 6.00
Merchants Bank ........................ 66,288 10.37 25,568 4.00 38,353 6.00
Tier 1 capital to average assets
Consolidated .......................... 62,859 7.30 34,423 4.00 43,029 5.00
Merchants Bank ........................ 66,288 7.70 34,423 4.00 43,029 5.00
1997
Total capital to risk weighted assets
Consolidated .......................... 63,285 10.42 48,594 8.00 60,743 10.00
Merchants Bank* ....................... 67,943 11.26 48,272 8.00 60,340 10.00
Tier 1 capital to risk weighted assets
Consolidated .......................... 55,583 9.15 24,297 4.00 36,446 6.00
Merchants Bank* ....................... 60,288 9.99 24,139 4.00 36,209 6.00
Tier 1 capital to average assets
Consolidated .......................... 55,583 6.91 32,166 4.00 40,207 5.00
Merchants Bank* ....................... 60,288 7.50 32,154 4.00 40,192 5.00
</TABLE>
* Restated to reflect the 1998 merger of subsidiary banks accounted for as an
internal reorganization.
National and state bank regulations and capital guidelines limit the amount of
dividends that may be paid by Merchants Bank without prior regulatory approval.
At January 1, 1999, approximately $11,612,000 was available for the payment of
dividends by Merchants Bank to the Company.
22
<PAGE>
Note 13: OFF BALANCE SHEET ACTIVITIES
The Company and its subsidiaries 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, liquidity, or results of operations.
Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used. Off-balance-sheet
risk to credit loss exists up to the face amount of these instruments, although
material losses are not anticipated. The same credit policies are used to make
such commitments as are used for loans, including obtaining collateral at
exercise of the commitment.
Financial instruments with off-balance-sheet risk were as follows at year end:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Commitments to extend credit
Fixed rate ............................................................. $ 53,937 $ 33,807
Variable rate .......................................................... 84,298 115,501
Standby letters of credit ................................................. 24,116 24,682
</TABLE>
The Company has entered into agreements to sell mortgage loans to FHLMC. The
amounts remaining with FHLMC, under these agreements, at December 31, 1998, and
1997, were $20,114,000 and $19,623,000.
The Bank maintained reserves in accordance with Federal Reserve requirements of
$800,000 at December 31, 1998, and 1997.
The Company leases office space in two locations. One location is leased at a
market rate from a company in which a director of the Company has an ownership
interest. Obligations under these leases are as follows:
<TABLE>
<S> <C>
1999 ...................................................................... $ 268
2000 ...................................................................... 276
2001 ...................................................................... 280
2002 ...................................................................... 284
2003 ...................................................................... 287
Thereafter ................................................................ 703
----------
Total .................................................................. $ 2,098
----------
----------
</TABLE>
Note 14: FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair value approximates carrying amount for all items except those
described below. Estimated fair value for loans is based on the rates charged at
year end for new loans with similar maturities, applied until the loan is
assumed to reprice or be paid. Estimated fair value for time deposits and
repurchase agreements is based on the rates paid at year end for new deposits or
borrowings, applied until maturity. Estimated fair value of the fixed rate note
payable and term advances of the FHLB of Chicago are estimated using the current
rates for advances of similar remaining maturities. Estimated fair value for
other financial instruments and off-balance-sheet loan commitments are
considered nominal.
23
<PAGE>
Note 14: FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amount and estimated fair values of financial instruments were as
follows:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks .......................... $ 38,679 $ 38,679 $ 35,914 $ 35,914
Federal funds sold ............................... 5,000 5,000 7,080 7,080
Securities available for sale .................... 198,759 198,759 204,761 204,761
Loans held for sale .............................. 9,678 9,678 2,833 2,833
Loans, net ....................................... 599,420 603,698 556,988 562,647
Accrued interest receivable ...................... 5,005 5,005 5,260 5,260
Financial liabilities:
Deposits ......................................... $ (742,057) (744,061) $ (650,718) $ (650,968)
Federal funds purchased and securities
sold under repurchase agreements .............. (13,320) (13,320) (44,854) (44,854)
Notes payable .................................... (6,125) (6,323) (14,000) (14,000)
Accrued interest payable ......................... (2,775) (2,775) (2,610) (2,610)
Due to broker .................................... (1,045) (1,045) (442) (442)
FHLB term advances ............................... (42,250) (42,833) (59,750) (59,418)
</TABLE>
Note 15: SUPPLEMENTARY CASH FLOW INFORMATION
Supplemental disclosures to the consolidated statements of cash flows are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income taxes paid .............................................. $ 3,532 $ 3,593 $ 3,562
Interest paid .................................................. 32,286 27,969 23,821
Noncash transfers from loans to other real estate owned ........ 417 181 106
Purchase of Valley Banc Services Corp.:
Fair value of assets acquired ............................... -- -- $ 129,126
Debt assumed ................................................ -- -- (3,550)
Purchase price .............................................. -- -- (21,339)
----------
Liabilities assumed ......................................... -- -- $ 104,237
----------
----------
</TABLE>
Note 16: EARNINGS PER SHARE
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share:
Weighted-average common shares outstanding .................. 5,175,972 5,162,009 5,151,440
Net income available to common stockholders ................. $ 8,414 $ 7,341 $ 6,528
Basic earnings per share .................................... $ 1.63 $ 1.42 $ 1.27
Diluted Earnings Per Share:
Weighted-average common shares outstanding .................. 5,175,972 5,162,009 5,151,440
Dilutive effect of stock options ............................ 74,494 44,839 12,372
Diluted average common shares outstanding ................... 5,250,466 5,206,848 5,163,812
--------- --------- ---------
--------- --------- ---------
Net income available to common stockholders ................. $ 8,414 $ 7,341 $ 6,528
Diluted earnings per share .................................. $ 1.60 $ 1.41 $ 1.26
</TABLE>
24
<PAGE>
Note 17: STOCKHOLDER RIGHTS PLAN
Pursuant to a plan adopted by the Company in October, 1998, each share of the
Company's common stock carries a one-sixth of a right (referred to as a "Right")
to purchase one hundredth of a share of Series A Junior Participating Stock,
$1.00 par value ("Preferred Stock"), at a price of $450.00 (subject to
adjustment). The Rights are tradable 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 October 23, 2008. The Preferred Stock Rights carry
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 15% of the Company's
outstanding common stock, then 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 an event.
Note 18: PARENT COMPANY ONLY CONDENSEd FINANCIAL INFORMATION
Presented below are the condensed balance sheets and condensed statements of
income and cash flows for Merchants Bancorp, Inc. The balance sheet for 1997 and
the statement of cash flows for 1997 and 1996 were restated to reflect the 1998
internal reorganization.
CONDENSED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Noninterest-bearing deposit with bank subsidiary .............................. $ 2,982 $ 9,572
Investment in subsidiary, at equity ........................................... 75,611 70,021
Other assets .................................................................. 431 460
---------- ----------
$ 79,024 $ 80,053
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable ................................................................. $ 6,125 $ 14,000
Accrued interest and other liabilities ........................................ 717 736
Stockholders' equity .......................................................... 72,182 65,317
---------- ----------
$ 79,024 $ 80,053
---------- ----------
---------- ----------
</TABLE>
25
<PAGE>
Note 18: PARENT COMPANY ONLY CONDENSEd FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING INCOME
Cash dividends received from subsidiary ......................... $ 3,932 $ 2,678 $ 2,625
Other income .................................................... 32 - -
---------- ---------- ----------
3,964 2,678 2,625
---------- ---------- ----------
OPERATING EXPENSES
Interest on notes payable ....................................... 939 969 422
Other expenses .................................................. 507 373 367
---------- ---------- ----------
1,446 1,342 789
---------- ---------- ----------
Income before income taxes and equity in
undistributed net income of subsidiary ....................... 2,518 1,336 1,836
Income tax benefit .............................................. (547) (553) (309)
---------- ---------- ----------
Income before equity in undistributed
net income of subsidiary ..................................... 3,065 1,889 2,145
Equity in undistributed net income of subsidiary ................ 5,349 5,452 4,383
---------- ---------- ----------
Net income ................................................ $ 8,414 $ 7,341 $ 6,528
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................ $ 8,414 $ 7,341 $ 6,528
Adjustments to reconcile net income to net
cash from operating activities:
Equity in undistributed net income of subsidiaries .......... (5,349) (5,452) (4,383)
Other, net .................................................. 10 (864) 704
---------- ---------- -----------
Net cash from operating activities .......................... 3,075 1,025 2,849
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Valley Banc Services Corp., net .................... - - (21,336)
Net proceeds from sale of net assets available for sale ........... - - 8,831
---------- ---------- -----------
Net cash from investing activities ................................ - - (12,505)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of notes payable ......................................... - - 14,000
Principal payments on notes payable ............................... (7,875) - (3,550)
Proceeds from exercise of incentive stock options ................. 157 - -
Dividends paid, net of dividend reinvestments ..................... (1,947) (1,558) (1,239)
---------- ---------- -----------
Net cash from financing activities .......................... (9,665) (1,558) 9,211
---------- ---------- -----------
Net change in cash and cash equivalents ..................... (6,590) (533) (445)
Cash and cash equivalents at beginning of year .............. 9,572 10,105 10,550
---------- ---------- -----------
Cash and cash equivalents at end of year .................... $ 2,982 $ 9,572 $ 10,105
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
26
<PAGE>
Note 19: OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Unrealized holding gains (losses) on
securities available for sale .................................. $ 457 $ 1,699 $ (1,521)
Less reclassification adjustments for (gains) losses
recognized in income ........................................... (96) 380 (196)
---------- ---------- -----------
Net unrealized gains (losses) ..................................... 361 2,079 (1,717)
Tax effect ........................................................ (120) (743) 584
---------- ---------- -----------
Other comprehensive income (loss) ................................. $ 241 $ 1,336 $ (1,133)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
Note 20: MORTGAGE BANKING
Mortgage loans serviced for others are not reported as assets. The unpaid
principal balances of these loans and related escrow deposit balances were as
follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Mortgage loan portfolios serviced for:
Federal Home Loan Mortgage Corporation ......................... $ 237,289 $ 190,516
Federal National Mortgage Association .......................... 77,536 80,061
Other investors ................................................ 5,161 4,915
---------- ----------
$ 319,986 $ 275,492
---------- ----------
---------- ----------
Related escrow deposit balances ................................... $ 2,409 $ 2,043
---------- ----------
---------- ----------
</TABLE>
Activity for capitalized mortgage servicing rights was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year ...................................... $ 1,674 $ 1,438 $ 1,165
Origination of mortgage servicing rights .......................... 1,529 633 568
Amortization ...................................................... (763) (397) (295)
---------- ---------- ----------
Balance at end of year ............................................ $ 2,440 $ 1,674 $ 1,438
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
There was no valuation allowance recorded in the years presented.
Selected information was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Interest on loans held for sale ................................... $ 376 $ 141 $ 245
Net gains on sales of loans ....................................... 2,384 1,106 981
Loan servicing income ............................................. 903 845 785
Amortization of mortgage servicing rights ......................... 763 397 295
</TABLE>
27
<PAGE>
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, 1998 and 1997 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. 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, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ CROWE, CHIZEK AND COMPANY LLP
- ---------------------------------
Crowe, Chizek and Company LLP
Oak Brook, Illinois
February 5, 1999
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Merchants Bancorp, Inc. ("Company"), 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 ("Merchants Bank"). The Bank has
four locations in Aurora, two branches in each of Geneva and St. Charles, and
has branches in Hinckley, Oswego, and Sugar Grove, all of which are located in
Illinois. In addition, the Company's Administrative Center, serving all
locations, is located in Aurora.
Aurora is located in the Fox River Valley approximately 40 miles west of
Chicago, Illinois, at the leading edge of the expanding boundaries of
metropolitan Chicago. Also passing through this area is U.S. Interstate Highway
88, which the State of Illinois has designated as a high-tech corridor. The
Company's market area stretches along the Fox River Valley, from Oswego to the
South to St. Charles to the North, and as far west as Hinckley, which is
approximately 17 miles west of Aurora. This is a dynamic and fast growing area
which is ideally suited to community banking. Aurora's population grew 22% in
the 1980's and is projected to grow 60% in the 1990's.
As a large, community-oriented, independent financial institution in the greater
Aurora area, the Company is well positioned to take advantage of the growth of
Aurora and its surrounding communities. Merchants Bank has continuously served
the Aurora community since it was chartered in 1888. Each location 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. This strategy, coupled with a long record of service, has allowed it to
compete successfully in each banking market it serves.
During 1998, the Company simplified its organizational structure by eliminating
all but one of its subsidiaries through mergers. It merged Hinckley State Bank
and Fox Valley Bank into Merchants Bank and merged Valley and V.B.H. Corp. into
Merchants Bancorp, Inc. The mergers qualified as tax free reorganizations and
were accounted for as internal reorganizations. Accordingly, the notes to the
consolidated financial statements have been restated to reflect the internal
reorganizations as if they had occurred on January 1, 1996.
The Board of Directors declared a two-for-one stock split on the Company's
common stock effective September 30, 1997. Par value remained unchanged at $1
per share. References to earnings per share and dividends per share for all
periods have been restated to reflect the stock split.
Record net income of $8,414,000, or $1.63 per share was achieved in 1998, which
compares with $7,341,000, or $1.42 per share in 1997, and $6,528,000 or $1.27
per share in 1996. Diluted earnings per share was $1.60, $1.41, and $1.26 in
1998, 1997, and 1996. Increases in both net interest income and noninterest
income contributed to these increases. Net interest income grew $2.1 million
(7.1%) to $31.0 million in 1998, and grew $2.6 million (10.0%) to $29.0 million
in 1997, largely due to an increase in earning assets in each year. Noninterest
income, excluding securities gains and losses, grew $2,419,000 (24.1%) to $12.5
million in 1998, and grew $695,000 (7.4%) to $9.7 million in 1997. Increases in
noninterest income in the three-year period presented can be attributed to
increased mortgage banking income and trust income. Mortgage banking income has
nearly doubled and trust income has averaged over 14% annual growth during this
period.
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 each of
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 $31.0
million, $29.0 million, and $26.3 million in 1998, 1997, and 1996. Net interest
income to average total earning assets on a fully tax equivalent basis was 4.17%
in 1998, 4.35% in 1997, and 4.49% in 1996.
The net interest margin declined from 4.35% in 1997 to 4.17% in 1998. The
average yield on earning assets decreased from 8.42% in 1997 to 8.26% in 1998,
while the average rate on interest bearing liabilities increased slightly from
4.83% in 1997 to 4.86% in 1998. The net interest margin declined in
29
<PAGE>
1997, as the yield on earning assets increased from 8.38% to 8.42% while the
average rate on interest bearing liabilities increased from 4.54% in 1996 to
4.83% in 1997. The liabilities which have grown the most over the periods being
discussed are time deposits and borrowed funds, which generally bear higher
interest rates than other sources, such as checking and savings accounts.
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 Company's provision for loan losses was $2,112,000 in 1998, $2,636,000 in
1997, and $2,014,000 in 1996. Provisions for loan losses are made to recognize
current period net charge off activity, and to provide for future losses on
loans which are identified as possible in the loan review process. The allowance
for loan losses as a percentage of total loans was 1.40%, 1.48%, and 1.59% as of
December 31, 1998, 1997, and 1996. The rate of loan growth at Merchants Bank in
all years presented contributed to the decline in this ratio. Net charge-offs
were $1,965,000, $1,550,000, and $714,000, in 1998, 1997, and 1996. Net
charge-offs as a percentage of average loans 0.34% in 1998, from 0.31% in 1997,
and 0.18% in 1996.
The provision for loan losses is based on management's judgement of the amount
necessary to maintain the allowance for loan losses at an adequate level, as is
addressed in the "Allowance for Loan Losses" section of this discussion. The
decline in the amount provided in 1998, compared with the amount provided in
1997, is related to the detailed analysis of the adequacy of the allowance for
loan losses, which is updated at least quarterly. In addition, the rate of
growth in the portfolio is considered when management determines the level of
provisions for loan losses to be made in a given year. Total loans grew 50.1% in
1996, including the acquisition of Valley, and grew 26.9% in 1997. The amount of
new loans acquired through growth and the acquisition were considered when
provisions for loan losses were made in 1996 and 1997. Reduced loan growth of
7.5% in 1998, in addition to the detailed analysis of the adequacy of the
allowance for loan losses, contributed to the reduced provision for loan losses.
Noninterest Income
The table on page 31 shows the Company's noninterest income for the years
indicated.
During 1998, noninterest income excluding securities gains and losses grew
$2,419,000 (24%) to $12.5 million, primarily based on increases in trust income
and mortgage banking income. 1997 noninterest income excluding securities gains
increased $695,000 (7.4%) based on increases in trust income, mortgage banking
income, and service charges and fees. Trust income increased $307,000 (13%) to
$2,622,000 in 1998, and increased $287,000 (14%) to $2,315,000 in 1997, from
$2,028,000 in 1996. The rate of change in trust assets under management is not
the same as the rate of change in trust income because some services are not
based on the amount of assets under management. Assets under management
- --------------------------------------------------------------------------------
Analysis of Changes in Interest Income (In thousands)
<TABLE>
<CAPTION>
Change Due to
------------------------
Total Average Average
Change Balance Rate
---------- ---------- ----------
<S> <C> <C> <C>
1998 Compared to 1997:
Earning assets ................................................ $ 6,379 $ 7,954 $ (1,575)
Interest-bearing liabilities .................................. 3,892 3,912 (20)
---------- ---------- ----------
Net interest income ........................................... $ 2,487 $ 4,042 $ (1,555)
---------- ---------- ----------
---------- ---------- ----------
1997 Compared to 1996:
Earning assets ................................................ $ 7,177 $ 8,059 $ (882)
Interest-bearing liabilities .................................. 4,421 3,092 1,329
---------- ---------- ----------
Net interest income ........................................... $ 2,756 $ 4,967 $ (2,211)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
30
<PAGE>
increased to $486 million at December 31, 1998, after increasing to $440 million
at December 31, 1997, from $361 million at December 31, 1996.
Mortgage banking noninterest income was $4,228,000 in 1998, compared with
$2,358,000 in 1997, and $2,202,000 in 1996. Included in these totals, mortgage
servicing income was $903,000 in 1998, $845,000 in 1997, and $785,000 in 1996.
Unamortized mortgage servicing rights totaled $2,440,000 and $1,674,000 at
December 31, 1998 and 1997. Amortization of this asset was $763,000, $397,000,
and $295,000 in 1998, 1997, and 1996, and is included in noninterest expenses,
as discussed below. The total servicing portfolio, including purchased and
originated loans, was $320 million and $275 million at December 31, 1998 and
1997. Management's plans are to continue increasing the size of the servicing
portfolio, primarily through retention of the servicing rights of mortgages
originated by the Company.
Management's strategy with regard to the mortgage banking business is to
generate earning assets for the Company at a minimal net cost of origination,
and to build profitable customer relationships. This strategy has been
successful. The residential loan portfolio, which was $134 million as of
December 31, 1998, is entirely composed of in-market mortgages. Mortgage
customers have an average of nearly three services through Merchants Bank.
Although mortgage assets can be built through purchasing mortgage loans or
mortgage-backed securities, the direct origination of mortgages is a more
profitable approach. Originated mortgages carry interest rates which are higher
than can typically be attained through the purchase of mortgage-backed
securities, and such securities would not offer the significant cross-sell
opportunities that are available through direct origination of mortgages.
Service charges and fees totaled $4,228,000, $4,235,000, and $3,796,000 in 1998,
1997, and 1996. The $439,000 (11.6%) increase in 1997 is attributable to changes
in fee structure and increased overdraft activity. In 1998, fees generated by
the overall increase in service charge activity, including items ranging from
check orders to brokerage and investment advisory fees, were offset by a decline
in overdrafts.
Sales of securities available for sale totaled $14.2 million during 1998, $32.0
million during 1997, and $32.4 million in 1996, resulting in net gains of
$96,000 in 1998, net losses of $380,000 in 1997, and net gains of $196,000 in
1996. These securities were sold due to changes in interest rates, availability
of alternative investments, liquidity needs, and other factors.
Other noninterest income was $1,381,000, $1,132,000, and $1,319,000 in 1998,
1997, and 1996. The increase of $249,000 (22.0%) in 1998 is primarily
attributable to an ATM surcharge fee which was instituted in 1998, and totaled
$211,000. The decline of $187,000 (14.2%) from 1996 to 1997 was primarily the
result of a recovery of prior period income which occurred in 1996 of
approximately $179,000.
Noninterest Expenses
The table on page 32 shows the Company's noninterest expenses for the years
indicated.
Noninterest expenses increased $2,071,000 (7.5%) in 1998, and increased
$2,889,000 (11.6%) in 1997. Excluding the building contribution in 1997, all
other expenses increased $2,921,000 (10.9%) in 1998, and $2,039,000 (8.2%) in
1997.
Salaries and benefits increased $1,640,000 (12.1%) to $15.2 million in 1998,
compared to $13.6 million in 1997, and $12.9 million in 1996. Commissions and
incentives, which are included in salaries and benefits, increased $487,000
(34.1%) to $1,915,000 in 1998 and increased $216,000 (17.8%), to $1,428,000 in
1997. The Company has pursued an employee compensation strategy which places
greater emphasis on achieving performance objectives. In addition, the
significant increase in mortgage activity in 1998 is associated with
commissioned mortgage originations. Upon termination of the defined benefit
pension plan in 1997, income of approximately $214,000 was recorded, reflecting
a reversion of plan assets to the Company. Contributions to the Company's Thrift
Plan totaled $622,000 in 1998, $665,000 in 1997, and $581,000 in 1996. The full
time equivalent number of employees was 348, 347, and 341 as of December 31,
1998, 1997, and 1996.
Occupancy expenses were $213,000 (11.1%) higher in 1998 than in 1997, after an
increase of $295,000
- --------------------------------------------------------------------------------
Noninterest Income (In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Trust income .................................................. $ 2,622 $ 2,315 $ 2,028
Mortgage banking income ....................................... 4,228 2,358 2,202
Service charges and fees ...................................... 4,228 4,235 3,796
Securities gains (losses), net ................................ 96 (380) 196
Other income .................................................. 1,381 1,132 1,319
---------- ---------- ----------
Total noninterest income ................................... $ 12,555 $ 9,660 $ 9,541
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
31
<PAGE>
(18.3%) in 1997, compared to 1996. In late 1997 the Company moved its
administrative and operations functions to a leased location in Aurora,
Illinois. The costs associated with the move and the lease cost of the new
location are the primary cause of the increase in occupancy expense in both 1998
and 1997. Functions which were spread among multiple locations now occupy a
single, modern facility.
Furniture and equipment expenses increased $412,000 (22.4%) in 1998, and
$188,000 (11.4%) in 1997. While the move described above added some furniture,
most of the increase is associated with investments in equipment. The growth of
the Company and advancements in available technologies have contributed to the
increase in equipment expenses during the years presented.
On January 3, 1996, the Company purchased 100% of the outstanding common stock
of Valley. As of the acquisition date, Valley's wholly-owned subsidiaries
included Hinckley State Bank, State Bank of Osco, Anchor Bank and V.B.H. Corp.
and V.B.H. Corp.'s wholly-owned subsidiary, Fox Valley Bank. When Valley was
acquired, the Company's intent was to sell State Bank of Osco and Anchor Bank.
Accordingly, those banks were classified as held for sale until they were sold
on December 12, 1996, and December 19, 1996.
Goodwill and core deposit intangible assets are associated with the acquisition
of Valley. The goodwill is being amortized on the straight line basis over 20
years. The core deposit intangible assets are being amortized using an
accelerated method over 10 years. Amortization of mortgage servicing rights is
associated with mortgages serviced for others, which totaled $320 million as of
December 31, 1998, and $275 million as of December 31, 1997. The portfolio is
appraised and carried at the lower of appraised value or amortized cost. During
the years presented, amortization expense was recorded as scheduled with no
additional charges needed as a result of a decline in value.
Other expenses increased $296,000 (3.5%) in 1998, to $8.7 million, after
increasing $806,000 (10.6%) to $8.4 million in 1997, from $7.9 million in 1996.
The significant increase in mortgage activity resulted in an increase of
$550,000 in 1998, after an increase of $208,000 in 1997. Costs associated with
the building contribution and the move to the administration center, included in
other expenses, also resulted in one-time expenses in 1997.
Income Taxes
The Company's provision for income taxes was $3,217,000, $889,000, and
$2,456,000 for the years ended December 31, 1998, 1997, and 1996. The average
effective income tax rate for these years was 27.66%, 10.80%, and 27.34%. As
noted previously, during 1997 the Merchants Bank donated its former main office
building with a carrying value of $850,000 to a charitable organization. The
building was appraised at $4,130,000 during 1997. The Company recorded a tax
benefit of $1,504,000 during 1997 related to the charitable contribution tax
credits generated as a result of the contribution, which the Company projects
will all be utilized. At December 31, 1998, the Company had $2,403,000 of
charitable contribution carryforwards, which expire in 2002.
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 Merchants 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 $42.6 million, or 7.5%, to $607.9 million as of December
31, 1998, from $565.3 million at December 31, 1997. The commercial loan
portfolio increased $6.5 million (3.9%) in 1998, from $168.9 million as of
December 31, 1997, and $161.8 million as of December 31, 1996. Commercial real
estate loans declined $8.7 million (9.1%) to $87.0 million as of December 31,
1998, after increasing $20.3 million (26.9%) during 1997, from $75.4 million as
of December 31, 1996. These loans are made on the basis of borrowers' cash
- --------------------------------------------------------------------------------
Noninterest Expenses (In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Salaries and employee benefits ................................ $ 15,238 $ 13,598 $ 12,924
Occupancy expenses, net ....................................... 2,120 1,907 1,612
Furniture and equipment expenses .............................. 2,250 1,838 1,650
Amortization of goodwill ...................................... 376 367 385
Amortization of core deposit intangible assets ................ 382 397 405
Amortization of mortgage servicing rights ..................... 763 397 295
Building contribution ......................................... - 850 -
Other expenses ................................................ 8,696 8,400 7,594
---------- ---------- ----------
Total noninterest expenses ................................. $ 29,825 $ 27,754 $ 24,865
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
32
<PAGE>
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.
Real estate construction loans increased $23.0 million (32.9%) to $92.9 million
as of December 31, 1998, after increasing $15.4 million (28.2%) from $54.5
million as of December 31, 1996, to $69.9 million as of December 31, 1997. 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 $11.3 million (9.2%) in 1998 and
$37.6 million (44.2%) in 1997, primarily as a result of adjustable rate
mortgages added to the portfolio. The Company sells most fixed rate residential
real estate loans, primarily to FHLMC and to FNMA. Loans held for sale were $9.7
million and $2.8 million as of December 31, 1998 and 1997.
Installment loans increased $9.1 million (9.0%) in 1998, after increasing $27.0
million (36.5%) in 1997. 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.
Nonperforming Loans
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.
<PAGE>
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. Interest income that is
accrued but uncollected is eliminated at the time a loan is placed in nonaccrual
status. The Company evaluates commercial loans and mortgages secured by
commercial properties or five-plus family residences for impairment on an
individual loan basis. 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 $3,647,000 as of December 31, 1998, and $3,559,000 as of
December 31, 1997. Impaired loans with no allowance for loan losses allocated
were $2,446,000 as of December 31, 1998, and were $2,234,000 as of December 31,
1997. Impaired loans with an allowance for loan losses allocation, and the
related allocation, were $1,201,000 and $846,000 as of December 31, 1998, and
were $1,325,000 and $473,000 as of December 31, 1997.
There were no loans past due ninety days or more and still accruing, as of
December 31, 1998 or 1997. Nonaccrual loans were $5,164,000 as of December 31,
1998, compared with $4,623,000 as of December 31, 1997. Restructured loans
declined from $447,000 as of December 31, 1997 to $404,000 as of December 31,
1998. Other real estate owned increased from $178,000 at December 31, 1997, to
$297,000 at December 31, 1998. Values placed on properties are based on current
independent
- --------------------------------------------------------------------------------
Loan Portfolio (In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Commercial and industrial ..................................... $ 175,402 $ 168,899 $ 161,847
Real estate - commercial ...................................... 87,035 95,755 75,449
Real estate - construction .................................... 92,897 69,901 54,513
Real estate - residential ..................................... 134,009 122,732 85,107
Installment ................................................... 109,970 100,869 73,918
Credit card receivables ....................................... 8,483 8,100 6,697
Other loans ................................................... 1,233 813 1,188
---------- ---------- ----------
Gross loans ................................................ 609,029 567,069 458,719
Unearned discount ............................................. (869) (1,324) (1,535)
Deferred loan fees ............................................ (233) (397) (382)
---------- ---------- ----------
Total loans ................................................ 607,927 565,348 456,802
Allowance for loan losses ..................................... (8,507) (8,360) (7,274)
---------- ---------- ----------
Loans, net ................................................. $ 599,420 $ 556,988 $ 449,528
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
33
<PAGE>
appraisals. The ratio of nonperforming loans to total loans was 0.96% and 0.93%
as of December 31, 1998 and 1997.
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 1.40% and 1.48% as of December 31, 1998, and December 31, 1997. The
allowance for loan losses to total nonperforming loans (generally considered to
be nonaccrual, restructured, or past due ninety days and still accruing) was
152.8% and 164.9% as of December 31, 1998, and December 31, 1997.
While there can be no assurance that the allowance for loan losses will be
adequate to cover all losses, management believes that the allowance for loan
losses was adequate at December 31, 1998. While management uses available
information to provide for losses on loans, the ultimate collectibility of a
substantial portion of the loan portfolio and the need for future additions to
the allowance will be based upon changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to make additional provisions to the allowance based upon
their judgments about information available to them at the time of their
examinations.
Securities
The objectives regarding the securities portfolio are to provide the Company
with a source of liquidity and earnings. 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.
As of December 31, 1998, net unrealized gains of $2,869,000, reduced by deferred
income taxes of $975,000 resulted in an increase in equity capital of
$1,894,000. As of December 31, 1997, net unrealized gains of $2.5 million,
reduced by deferred income taxes of $855,000, resulted in an increase in equity
capital of $1.7 million.
During 1998, the securities portfolio decreased by $6.4 million (3.1%), as
measured by amortized cost, to $195.9 million as of December 31, 1998, from
$202.3 million as of December 31, 1997. U.S. Treasury securities declined by
78.6% to $3.0 million, or 1.5% of the portfolio as of December 31, 1998, from
$14.1 million, or 6.9% of the portfolio as of December 31, 1997. U.S. Government
agency mortgage backed securities decreased from $25.9 million, or 12.8% of the
portfolio as of December 31, 1997, to $16.4 million, or 8.3% of the portfolio as
of December 31, 1998. Over the same period, U.S. Government agency securities
increased from $86.0 million, or 42.5% of the portfolio, to $96.5 million, or
49.3% of the portfolio. Municipal securities increased from $60.8 million or
30.1% of the portfolio, to $74.1, or 37.8% of the portfolio, in order to manage
the income tax obligations of the Company. The increase in the proportion of the
total portfolio invested in U.S. Government agency securities was based upon
considerations of yield, security, and suitability as collateral for deposits
and borrowings requiring pledged securities.
Deposits and Borrowed Funds
The table below shows the major components of deposits as of December 31, of the
years indicated.
The Company has a growing deposit base. Total deposits grew $91.3 million
(14.0%) during 1998, to $742.1 million as of December 31, 1997. During 1998,
noninterest-bearing deposits grew $14 million (11.8%), while interest-bearing
deposits grew $77.3 million (14.5%). During 1998, time deposits under $100,000
grew $5.6 million (2.5%) and time deposits in denominations of $100,000 or more
grew $45.8 million (50.0%). Interest-bearing transaction accounts and savings
accounts increased 11.9% in the aggregate, at $244.4 million as of December 31,
1998, compared to $218.4 million as of December
- --------------------------------------------------------------------------------
Deposits (In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Noninterest-bearing deposits .................................. $ 132,153 $ 118,187 $ 112,203
NOW accounts .................................................. 84,463 75,192 75,991
Money market accounts ......................................... 93,301 77,877 58,061
Savings ....................................................... 66,651 65,376 67,232
Time, $100,000 and over ....................................... 137,006 91,220 79,214
Other time .................................................... 228,483 222,866 208,269
---------- ---------- ----------
Total deposits ................................................ $ 742,057 $ 650,718 $ 600,970
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
34
<PAGE>
31, 1997. Deposits of $650.7 million as of December 31, 1997, reflected growth
of $49.7 million (8.3%) during 1997.
FHLB term advances at December 31, 1998, were $42,250,000. Advances from the
FHLB at December 31, 1997, consisted of $7.5 million in overnight funds,
included in Federal funds purchased and overnight borrowings, and term advances
of $59,750,000. The Company has pledged first mortgage loans on residential
property in an amount equal to at least 167% of the outstanding advances. The
term advances are used to finance mortgage lending, and are scheduled to mature
in each of the following four years.
Notes payable at December 31, 1998 consisted of a $6,125,000 fixed rate note
which bears interest at a rate of 7.03%. At December 31, 1997, notes payable
consisted of $7 million related to the fixed rate note and a revolving note,
also at $7 million, which bore interest at the prevailing Federal funds rate or
1% above LIBOR, at the quarterly election of the Company. This variable rate was
6.77% at December 31, 1997. The proceeds of these notes were used to finance the
acquisition of Valley on January 3, 1996. The Company capitalized $532,000 of
incremental interest costs during the holding period of the acquired Valley
subsidiaries held for sale.
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
Total stockholders' equity increased $6.9 million during 1998, from $65.3
million as of December 31, 1997, to $72.2 million as of December 31, 1998. Net
income of approximately $8.4 million, reduced by dividends of $2.1 million,
caused an increase in retained earnings of $6.3 million during 1998. Other
factors influencing the year to year change in total stockholders' equity were
an increase of $202,000 from the issuance of common stock in connection with the
dividend reinvestment plan offset by an increase of $241,000 as a result of the
change in the net unrealized gains on securities available for sale, as
discussed in "Securities" above. During 1998, an exercise of incentive stock
options resulted in an increase in total stockholders' equity of $157,000.
Bank regulatory bodies have adopted capital standards by which all banks and
bank holding companies will be evaluated (discussed in Note 12 to the
consolidated financial statements). The Company and Merchants Bank were
categorized as well capitalized as of December 31, 1998. Management is not aware
of any conditions or events since the most recent regulatory notification that
would change the Company's or the Bank's categories.
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.
Cash inflows from operating activities exceeded operating outflows by $8.5
million in 1998, by $9.8 million in 1997, and by $9.9 million in 1996. Changes
in the amount of mortgage loans held for sale as of December 31 of each year,
resulted in operating cash outflows of $5,990,000 in 1998, inflows of $1,789,000
in 1997, and inflows of $604,000 in 1996. Net gains on sales of mortgage loans
were $2,384,000 in 1998, $1,106,000 in 1997, and $981,000 in 1996. 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 $40.5 million in 1998, compared
to $120.1 million in 1997, and $69.2 million in 1996. Securities purchases, net
of securities matured or sold, resulted in net cash inflows of $6.8 million in
1998, outflows of $8.4 million in 1997, and inflows of $17.2 million in 1996.
Net principal disbursed on loans totaled $45.0 million in 1998, $110.3 million
in 1997, and $79.3 million in 1996. The Valley acquisition resulted in net
investing cash outflows, net of cash and cash equivalents acquired and debt
assumed, of $13.5 million in 1996. In addition, the sale of acquired Valley
subsidiaries during 1996 resulted in investing cash inflows of $8.8 million.
Cash inflows from financing activities in 1998, 1997, and 1996, were primarily
associated with deposit
35
<PAGE>
growth. Deposits grew $91.3 million in 1998, $49.7 million in 1997, and $49.3
million in 1996. Short-term borrowing resulted in net cash outflows of $31.5
million in 1998, inflows of $329,000 in 1997, and inflows of $20.7 million in
1996. Cash inflows from FHLB term advances were $59.8 million during 1997. Cash
outflows from payments on notes payable in 1996 related to $3,550,000 in debt
assumed in the Valley acquisition, which was repaid, and a $3.0 million advance
from the FHLB which was also repaid. Cash inflows of $14.0 million from proceeds
of notes payable in 1996 is associated with the financing of the Valley
acquisition.
In the event of short-term liquidity needs, the Merchants Bank may purchase
Federal funds from correspondent banks. This source is used from time to time on
a limited basis. Merchants Bank may borrow funds from the Federal Reserve Bank
of Chicago, but has not done so during any period covered in this report.
Merchants 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.
Sensitivity to Market Risk
The impact of movements in general market interest rates on a financial
institution's financial condition, including capital adequacy, earnings, and
liquidity, is known as interest rate risk. Interest rate risk is the Company's
primary market risk. As a financial institution, accepting and managing this
risk is an inherent aspect of the Company's business. However, safe and sound
management of interest rate risk requires that it be maintained at prudent
levels.
The Company's interest rate risk exposure is reviewed by management and the
Board of Directors. Interest rate risk is analyzed by examining the extent to
which assets and liabilities are interest rate sensitive. The interest
sensitivity gap is defined as the difference between the amount of interest
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest sensitive
assets exceeds the amount of interest sensitive liabilities. A gap is considered
negative when the amount of interest sensitive liabilities exceeds the amount of
interest sensitive assets. During a period of rising interest rates, a negative
gap would tend to result in a decrease in net interest income while a positive
gap would tend to positively affect net interest income.
The Company's policy is to manage the balance sheet such that fluctuations in
the net interest margin are minimized regardless of the level of interest rates.
The table "Analysis of Changes in Interest Income," included under "Interest
Income" in this discussion, demonstrates the effectiveness of interest rate risk
management. During 1998, the change in tax equivalent net interest income
attributable to changes in interest rates was a decrease of $1,555,000, or 2.4%,
of tax equivalent net interest income of $65.6 million. The change in tax
equivalent net interest income attributable to changes in interest rates was a
reduction of $2.2 million in 1997, or 7% of the tax equivalent net interest
income of $30.6 million for the year.
The table on page 37 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 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.
Year 2000 Compliance
The federal banking regulators recently issued guidelines establishing minimum
safety and soundness standards for achieving Year 2000 compliance. The
guidelines, which took effect October 15, 1998 and apply to all FDIC-insured
depository institutions, establish standards for developing and managing Year
2000 project plans, testing remediation efforts and
36
<PAGE>
planning for contingencies. The guidelines are based upon guidance previously
issued by the agencies under the auspices of the Federal Financial Institutions
Examination Council (the "FFIEC"), but are not intended to replace or supplant
the FFIEC guidance which will continue to apply to all federally insured
depository institutions.
The guidelines were issued under section 39 of the Federal Deposit Insurance
Act, as amended (the "FDIA"), which requires the federal banking regulators to
establish standards for the safe and sound operation of federally insured
depository institutions. Under section 39 of the FDIA, if an institution fails
to meet any of the standards established in the guidelines, the institution's
primary federal regulator may require the institution to submit a plan for
achieving compliance. If an institution fails to submit an acceptable compliance
plan, or fails in any material respect to implement a compliance plan that has
been accepted by its primary federal regulator, the regulator is required to
issue an order directing the institution to cure the deficiency. Such an order
is enforceable in court in the same manner as a cease and desist order. Until
the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. In addition to the enforcement procedures established in section
39 of the FDIA, noncompliance with the standards established by the guidelines
may also be grounds for other enforcement action by the federal banking
regulators, including cease and desist orders and civil money penalty
assessments.
The Year 2000 has posed a unique set of challenges to those industries reliant
on information technology. As a result of methods employed by earlier
programmers, many software applications and operational programs may be unable
to distinguish the Year 2000 from the Year 1900. If not effectively addressed,
this problem could result in the production of inaccurate data, or, in the worst
cases, the inability of the systems to continue to function altogether.
Financial institutions are particularly vulnerable due to the industry's
dependence on electronic data processing systems.
In early 1997, the Company began developing their Year 2000 Plan, following the
guidelines established by the FFIEC. The plan was approved by the Board of
Directors of the Company and reviewed by the Office of the Comptroller of the
Currency. An integral part of the plan was to utilize the Company's technology
planning committee, which is comprised of representatives from the key areas
throughout the organization. Each area must identify, for the
Expected Maturity of Interest-Earning Assets and Interest-Bearing Liabilities
<TABLE>
<CAPTION>
Expected Maturity Dates
------------------------------------------------------------ Fair
1 Year 2 Years 3 Years 4 Years 5 Years Thereafter Total Value
--------- ---------- --------- --------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning Assets
Fixed rate loans $ 101,164 $ 56,739 $ 48,756 $ 59,818 $ 71,583 $ 20,602 $ 358,662 $ 362,940
Average interest rate 7.80% 8.92% 8.56% 8.56% 7.92% 7.80%
Adjustable Rate Loans $ 111,976 $ 31,625 $ 30,476 $ 26,389 $ 26,250 $ 22,549 $ 249,265 $ 249,265
Average interest rate 8.42% 8.38% 8.56% 8.83% 8.69% 7.54%
Securities $ 66,703 $ 47,147 $ 16,331 $ 18,597 $ 13,146 $ 36,835 $ 198,759 $ 198,759
Average interest rate 6.29% 5.97% 5.95% 5.52% 5.14% 4.91%
Federal Funds Sold $ 5,000 $ - $ - $ - $ - $ - $ 5,000 $ 5,000
Average interest rate 4.25%
--------- ---------- --------- --------- -------- ---------- --------- ---------
Total $ 284,843 $ 135,511 $ 95,563 $ 104,804 $ 110,979 $ 79,986 $ 811,686 $ 815,964
--------- ---------- --------- --------- -------- ---------- --------- ---------
--------- ---------- --------- --------- -------- ---------- --------- ---------
Interest-bearing Liabilities
Interest-bearing
deposits $ 306,734 $ 85,419 $ 46,252 $ 33,754 $ 33,190 $ 104,558 $ 609,907 $ 611,911
Average interest rate 4.95% 5.16% 4.16% 3.95% 4.09% 2.76%
Borrowed Funds $ 26,695 $ 13,375 $ 5,625 $ 13,375 $ 875 $ 1,750 $ 61,695 $ 62,476
Average interest rate 5.60% 6.09% 6.34% 5.94% 7.03% 7.03%
--------- ---------- --------- --------- -------- ---------- --------- ---------
Total $ 333,429 $ 98,794 $ 51,877 $ 47,129 $ 34,065 $ 106,308 $ 671,602 $ 674,387
--------- ---------- --------- --------- -------- ---------- --------- ---------
--------- ---------- --------- --------- -------- ---------- --------- ---------
</TABLE>
37
<PAGE>
Committee, issues related to the Year 2000 and initiate remedial measures
designed to eliminate any adverse effects on the Company's operations. The
Committee reviews all Year 2000 related issues and the progress toward
implementation of the plan. The Committee has developed a comprehensive,
prioritized inventory of all hardware, software, and material third party
providers that may be adversely affected by the Year 2000 date change, and has
contacted vendors requesting their status as it relates to the Year 2000. This
inventory includes both information technology ("IT") and non-IT systems, such
as alarms, building access, elevators and heating and cooling systems, which
typically contain embedded technology such as microcontrollers. This inventory
is periodically reevaluated to ensure that previously assigned priorities remain
accurate and to track the progress each vendor is making in resolving the
problems associated with the issue. The Company relies on software purchased
from third-party vendors rather than internally-generated software. The Company
is currently in the process of upgrading systems and testing to validate Year
2000 compliance. The Company expects to have all mission critical systems
renovated and tested prior to April 30, 1999. The Company is currently operating
on the Year 2000 compliant releases for core systems supported by its third
party data processor.
The technology planning committee has also developed a communication plan that
updates the Board of Directors, management, and employees on the Company's Year
2000 status. In addition, the Committee has developed a separate plan in order
to manage the Year 2000 risks posed by commercial borrowing customers. This plan
will identify material loan customers, assess their preparedness, evaluate their
credit risk to the Company, and implement appropriate controls to mitigate the
risk.
In accordance with regulatory guidelines, the Company is developing a
comprehensive contingency plan, which will be completed by June 30, 1999, in the
event that Year 2000 related failures are experienced. The plan lists the
various strategies and resources available to restore core business processes.
These strategies include relying on back-up systems that do not utilize
computers and, in some cases, switching vendors. In the case of utility
providers, the Company is installing an electric power generator at its main
processing facility.
Management anticipates that the total out-of-pocket expenditures required for
bringing the systems into compliance for the Year 2000 will be approximately
$100,000, of which approximately one half has been expended through December 31,
1998. Management believes that these required expenditures will not have a
material adverse impact on operations, cash flow, or financial condition. This
amount, including costs for upgrading equipment specifically for the purpose of
Year 2000 compliance, fees to outside consulting firms, and certain
administrative expenditures, has been provided for in the Company's Year 2000
budget. Although management is confident that the Company has identified all
necessary upgrades, and budgeted accordingly, no assurance can be made that Year
2000 compliance can be achieved without additional unanticipated expenditures.
It is not possible at this time to quantify the estimated future costs due to
business disruption caused by vendors, suppliers, customers or even the possible
loss of electric power or telephone service; however, such costs could be
substantial. As a result of the Year 2000 project, the Company has not had any
material delay regarding its information systems projects.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This report, including the Chairman's Letter to Stockholders, contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Company intends such forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in the
Private Securities Reform Act of 1995, and is including this statement for
purposes of these safe harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe future plans, strategies and
expectations of the Company, are generally identifiable by use of the words,
"believe," "expect," "intend," "anticipate," "estimate," "project," or similar
expressions. The Company's ability to predict results, or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a
material adverse affect on the operations and future prospects of the Company
and the subsidiary include, but are not limited to, changes in: Interest rates,
general economic conditions, legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality or composition of the loan or investment
portfolios, demand for loan products, deposit flows, competition, demand for
financial services in the Company's market area and accounting principles
policies and guidelines. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements. Further information concerning the Company and its business,
including additional factors that could materially affect the Company's
financial results, is included in the Company's filings with the Securities and
Exchange Commission.
38
<PAGE>
MARKET FOR THE COMPANY'S COMMON STOCK
AND RELATED SECURITY HOLDER MATTERS
The Company's common stock trades 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, 1998, the Company had 724 holders of record of its
common stock.
The table below indicates the reported high and low prices and the dividends
paid per share for the common stock during the periods indicated.
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.
<TABLE>
<CAPTION>
Cash
High Low Dividends
--------- --------- ----------
<S> <C> <C> <C>
1997 First quarter ........................................ $ 19.25 $ 15.50 $ 0.070
Second quarter ....................................... 19.63 18.00 0.085
Third quarter ........................................ 24.69 19.13 0.085
Fourth quarter ....................................... 28.38 22.75 0.085
1998 First quarter ........................................ 33.25 27.25 0.100
Second quarter ....................................... 37.25 31.25 0.100
Third quarter ........................................ 32.50 21.25 0.100
Fourth quarter ....................................... 31.00 21.75 0.100
1999 First quarter (through March 3, 1999) ................ 28.38 26.75 0.100
</TABLE>
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. The Company has 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 1998 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., P.O. Box 289, Aurora, Illinois
60507.
39
<PAGE>
Exhibit 22
LIST OF SUBSIDIARIES
SUBSIDIARIES OF THE COMPANY
The Merchants National Bank of Aurora, a bank chartered under the laws
of the United States.
Merserco, Inc., a Delaware corporation.
<PAGE>
Exhibit 23
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 5, 1999 on the Company=s 1998
consolidated financial statements included in the Form 10-K of Merchants
Bancorp, Inc. for the year ended December 31, 1998.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
March 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 38,679
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 198,759
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 607,927
<ALLOWANCE> 8,507
<TOTAL-ASSETS> 883,862
<DEPOSITS> 742,057
<SHORT-TERM> 13,320
<LIABILITIES-OTHER> 7,928
<LONG-TERM> 48,375
0
0
<COMMON> 5,222
<OTHER-SE> 66,960
<TOTAL-LIABILITIES-AND-EQUITY> 883,862
<INTEREST-LOAN> 51,051
<INTEREST-INVEST> 11,463
<INTEREST-OTHER> 950
<INTEREST-TOTAL> 63,464
<INTEREST-DEPOSIT> 26,291
<INTEREST-EXPENSE> 32,451
<INTEREST-INCOME-NET> 31,013
<LOAN-LOSSES> 2,112
<SECURITIES-GAINS> 96
<EXPENSE-OTHER> 29,825
<INCOME-PRETAX> 11,631
<INCOME-PRE-EXTRAORDINARY> 11,631
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,414
<EPS-PRIMARY> 1.63
<EPS-DILUTED> 1.60
<YIELD-ACTUAL> 4.17
<LOANS-NON> 5,164
<LOANS-PAST> 0
<LOANS-TROUBLED> 404
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,360
<CHARGE-OFFS> 2,563
<RECOVERIES> 598
<ALLOWANCE-CLOSE> 8,507
<ALLOWANCE-DOMESTIC> 8,507
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
MERCHANTS BANCORP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
-----------------------------------------------------------------------
(4) Date Filed:
-----------------------------------------------------------------------
<PAGE>
[LOGO]
March 22, 1999
Dear Stockholder:
You are cordially invited to attend the 1999 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 20, 1999 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,
[SIGNATURE]
CALVIN R. MYERS
CHAIRMAN, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
1851 WEST GALENA BOULEVARD - AURORA, ILLINOIS 60507 - (630) 896-9000
<PAGE>
[LOGO]
1851 WEST GALENA BOULEVARD
AURORA, ILLINOIS 60507-0289
(630) 896-9000
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 20, 1999
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 20, 1999, 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 ratify the appointment of Crowe, Chizek and Company LLP as
independent public accountants for the Company for the year ending
December 31, 1999.
3. 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 8, 1999, 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 1998
Annual Report to Stockholders.
By order of the Board of Directors,
[SIGNATURE]
DANA K. HOPP
ADMINISTRATIVE ASSISTANT
AND SECRETARY-TREASURER
Aurora, Illinois
March 22, 1999
<PAGE>
MERCHANTS BANCORP, INC.
1851 WEST GALENA BOULEVARD,
AURORA, ILLINOIS 60507-0289
(630) 896-9000
PROXY STATEMENT
This Proxy Statement is furnished to stockholders of record on March 8,
1999, 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 20, 1999, at 9:30
a.m. The Company is a bank holding company which is the parent of The Merchants
National Bank of Aurora, Aurora, Illinois ("Merchants Bank").
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 8, 1999, will be entitled to vote at the meeting. As of March 8, 1999,
the Company had outstanding 5,181,071 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 22, 1999.
ELECTION OF DIRECTORS
At the Annual Meeting of the Stockholders to be held on April 20, 1999, the
stockholders will be entitled to elect three (3) Class C directors for a term
expiring in 2002. The directors of the Company are divided into three classes
having staggered terms of three years. Of the nominees for election as Class C
directors, Mr. Myers is an incumbent director. Mrs. Henning and Mr. Voris are
newly elected to the Board to replace Mr. C. Tell Coffey, who is retiring as a
director after serving on the Board since 1982, and Dr. John J. Swalec, who is
not standing for reelection as a director after serving on the Board since 1988.
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.
1
<PAGE>
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 8, 1999. Each of the three nominees for
Class C director, if elected at the Annual Meeting of Stockholders, will serve
as a Class C director for a three year term expiring in 2002. THE BOARD OF
DIRECTORS RECOMMENDS THAT YOU VOTE YOUR SHARES FOR EACH OF THE NOMINEES.
NOMINEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION FOR THE PAST YEAR ELECTED
NAME AND AGE FIVE YEARS AND OTHER DIRECTORSHIPS TO THE BOARD
- ------------------------------------ ------------------------------------------------------------- ------------
<S> <C> <C>
CLASS C
(TERM EXPIRES 2002)
Jacqueline E. Henning .............. Community Leader; Director, Merchants National Bank Nominee
(Age 49) (1990-present)
Calvin R. Myers .................... Chairman of the Board, President and CEO of Merchants 1986
(Age 56) Bancorp, Inc. and of The Merchants National Bank of Aurora;
Director and President, VBH Corp. (1996-1998); Director and
President, Valley Banc Services Corp. (1996-1998); Director,
Fox Valley Bank of St. Charles (1996-1998)
Frank K. Voris ..................... Vice President of Merchants Bancorp, Inc. (1993-present); Nominee
(Age 59) Director, Executive Vice President and COO of Merchants
National Bank of Aurora (1990-present); Director of Hinckley
State Bank (1996-1998)
CONTINUING DIRECTORS
CLASS A
(TERM EXPIRES 2000)
William F. Hejna ................... Retired (1998-present); Senior Attending Surgeon, 1996
(Age 66) Rush-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
James D. Pearson ................... President and Director, Aurora Metals Division, LLC 1982
(Age 61) (non-ferrous foundry) (1981-present); Director, Merchants
National Bank (1982-present)
Frank A. Sarnecki .................. Director General, Moose International, Inc. (fraternal 1994
(Age 63) organization)(1994-present); Director, Merchants National
Bank (1994-present)
CLASS B
(TERM EXPIRES 2001)
William C. Glenn ................... President and Director, Olsson Roofing Company, Inc. (roofing 1982
(Age 60) and sheet metal contractor); Director, Merchants National
Bank (1977-present)
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION FOR THE PAST YEAR ELECTED
NAME AND AGE FIVE YEARS AND OTHER DIRECTORSHIPS TO THE BOARD
- ------------------------------------ ------------------------------------------------------------- ------------
<S> <C> <C>
John M. Lies ....................... President (1998-present); Vice President and Treasurer, 1995
(Age 52) Arnold Lies Co. (real estate investment and management
company)(1969-1998); Director, Merchants National Bank
(1989-present)
Norman L. Titiner .................. President, Carpetville, Inc. (retail floor coverings) 1989
(Age 65) (1966-present); Director, Merchants National Bank
(1988-present)
</TABLE>
- ------------------------
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 C. Tell Coffey, William C. Glenn, John M. Lies, James D. Pearson,
Frank A. Sarnecki, and John J. Swalec. 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, acting in lieu of the full Board of Directors between
regularly scheduled quarterly meetings. The Executive Committee met four times
in 1998. 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 1851 West Galena Boulevard, 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 C. Tell Coffey, William F. Hejna 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 four times in 1998.
The Board of Directors of the Company had five meetings during 1998. All of
the directors during their terms of office in 1998 attended at least 75% of the
Board of Directors meetings and committee meetings on which they served, except
Mr. Sarnecki who attended 69% of such meetings.
COMPENSATION OF DIRECTORS
Through December, 1998, directors' fees paid by the Company included $500
for each quarterly meeting of the Board of Directors attended, $250 for each
Executive Committee meeting attended and $200 for each Examining Committee
meeting attended. Mr. Myers receives no fees for his services as a director of
the Company and, in addition to the above fees, Dr. Hejna receives an annual
retainer of $1,800. Directors' remuneration is paid quarterly.
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 15, 1999, by each
person known by the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock, by each director or nominee, by each executive
3
<PAGE>
officer named in the Summary Compensation Table and by all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF
NAME OF INDIVIDUAL OR BENEFICIAL PERCENT
NUMBER OF INDIVIDUALS IN GROUP OWNERSHIP(1) OF CLASS
- ----------------------------------------------------------------------------------- ------------------- -----------
<S> <C> <C>
5% STOCKHOLDERS.................................................................... 157,310(2) 6.10%
The Banc Funds Company, L.L.C.
208 South LaSalle Street
Chicago, IL 60604
DIRECTORS AND NOMINEES
William C. Glenn................................................................... 75,906(3) 1.47%
William F. Hejna, M.D.............................................................. 3,000 *
Jacqueline E. Henning.............................................................. 2,885 *
John M. Lies....................................................................... 7,545 *
Calvin R. Myers.................................................................... 99,259(4) 1.92%
James D. Pearson................................................................... 30,067 *
Frank A. Sarnecki.................................................................. 1,444 *
Norman L. Titiner.................................................................. 5,920 *
Frank K. Voris..................................................................... 78,996(5) 1.52%
OTHER EXECUTIVE OFFICERS
Terence L. Kothe................................................................... 26,666(6) *
Randal A. Wright................................................................... 31,037(7) *
J. Douglas Cheatham................................................................ 21,981(8) *
All directors and executive officers as a group (13 persons)....................... 387,944(10) 7.49%
</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) As reported in a 13(d) filed on June 10, 1997.
(3) Includes 29,000 shares held by Merchants Bank as agent and over which Mr.
Glenn has no voting and sole investment power. Excludes 2,652 shares
beneficially owned by Mr. Glenn's adult children. Mr. Glenn disclaims
beneficial ownership of all such excluded shares.
(4) Includes 8,400 shares held in a trust of Mr. Myers' spouse, over which
shares Mr. Myers has no voting or investment power and 65,686 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 25,000 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
29,106 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 5,940 shares held by Mr. Voris' spouse and
3,581 shares beneficially
4
<PAGE>
owned by Mr. Voris' adult children, the beneficial ownership of which shares
is disclaimed by Mr. Voris.
(6) Includes 10,642 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.
(7) Includes 21,508 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.
(8) Includes 16,943 shares subject to options awarded pursuant to the Company's
Stock Option Plan which are presently exercisable and over which Mr.
Cheatham has no voting and sole investment power.
(9) Includes an aggregate of 145,193 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 8, 1999, Merchants Bank held in its Trust Department in various
fiduciary capacities 872,415 shares of the Company's Common Stock (16.8% of the
total outstanding). Merchants Bank had full voting responsibility with respect
to 409,601 of such shares (7.9% of the total outstanding). Merchants Bank shared
voting responsibility with respect to 54,084 of such shares (1.0% 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 276,363
shares (5.3% of the total outstanding) and shared investment power with respect
to 75,324 shares (1.5% 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 1998, 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, 1998 through December 31, 1998, except that Mr. Pearson
reported a purchase of 535 shares which occurred on September 23, 1998 on a Form
4 filed on December 16, 1998 and Mr. Sarnecki reported a purchase of 200 shares
which occurred on November 2, 1998 on a Form 4 filed on December 16, 1998.
5
<PAGE>
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 1998 salary and
bonus exceeded $100,000:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
(A) (B) (C) (D) (G) (I)
SECURITIES ALL OTHER
NAME AND UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($)(2) OPTIONS/SARS(#)(3) ($)(4)
<S> <C> <C> <C> <C> <C>
Calvin R. Myers 1998 $ 307,519 $ 16,986 10,934 $ 36,497
Chairman of the Board, President 1997 288,456 45,377 16,082 18,729
and Chief Executive Officer of 1996 250,001 53,754 16,022 12,000
the Company and Merchants Bank
Frank K. Voris 1998 $ 155,000 $ 7,603 4,220 $ 27,545
Vice President of the Company 1997 146,769 19,024 6,968 13,589
and Executive Vice President and 1996 134,500 24,073 7,318 11,609
Chief Operating Officer of
Merchants Bank
Terence L. Kothe 1998 $ 133,050 $ 4,177 3,059 $ 36,140
Executive Vice President, 1997 126,308 14,449 4,854 37,736
Trust and Financial Services 1996 118,750 10,936 5,366 25,741
Division of Merchants Bank
Randal A. Wright 1998 $ 139,530 $ 4,680 3,339 $ 43,939
Executive Vice President, 1997 133,231 17,602 5,068 12,044
Commercial Banking Division of 1996 124,063 12,012 5,488 10,510
Merchants Bank
J. Douglas Cheatham 1998 $ 99,500 $ 4,310 2,521 $ 34,285
Chief Financial Officer of the 1997 93,215 15,907 3,722 8,631
Company and Merchants Bank 1996 84,400 10,830 4,282 7,304
</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 as adjusted for a 2 for 1 stock split on September 30,
1997.
(4) The total amounts in this column reflect the Company's contributions under
the Merchants Bancorp, Inc. Thrift Plan as follows: Calvin R. Myers,
$19,559; Frank K. Voris, $14,088; Terence L.
6
<PAGE>
Kothe, $13,020; Randal A. Wright, $13,318; and J. Douglas Cheatham, $9,705.
Other compensation includes a one-time supplemental payout as a result of
the termination of the Company's Defined Benefit Plan. With respect to Mr.
Kothe, $11,239 reflects compensation received under an incentive
compensation program relating to new accounts he is directly responsible for
bringing to the organization.
STOCK OPTION INFORMATION
The following table sets forth certain information concerning the number and
value of stock options granted in the last fiscal year to the individuals named
in the Summary Compensation Table:
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
OPTION TERM
(A) (B) (C) (D) (E) (F) (G)
% OF TOTAL
OPTIONS OPTIONS GRANTED EXERCISE OR
GRANTED TO EMPLOYEES IN BASE PRICE EXPIRATION
NAME (#)(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
Calvin R. Myers 10,934 39% $ 28.625 1/20/08 $ 196,835 $ 498,819
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Frank K. Voris 4,220 15% 28.625 1/20/08 75,969 192,520
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Terence L. Kothe 3,059 11% 28.625 1/20/08 55,068 139,554
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Randal A. Wright 3,339 12% 28.625 1/20/08 60,109 152,328
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
J. Douglas Cheatham 2,521 9% 28.625 1/20/08 45,383 115,010
</TABLE>
(1) Options become exercisable in equal portions (rounded to nearest share) on
July 20, 1998, January 20, 1999, and January 20, 2000.
The following table sets forth certain information concerning the
exercisable and nonexercisable stock options at December 31, 1998 held by the
individuals named in the Summary Compensation Table:
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FY-END IN-THE-MONEY OPTIONS
ACQUIRED VALUE (#)(D) AT FY-END ($)(E)
NAME ON EXERCISE REALIZED
(#)(A) (#)(B) ($)(C) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Calvin R. Myers -- $ -- 65,686 9,004 $ 812,237 $ 52,234
Frank K. Voris -- -- 29,106 3,728 366,619 22,693
Terence L. Kothe 9,012 193,724 10,642 2,637 100,012 15,798
Randal A. Wright -- -- 21,508 2,801 268,579 16,463
J. Douglas Cheatham -- -- 16,943 2,080 213,935 12,085
</TABLE>
7
<PAGE>
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 $307,519 in 1998. The agreement includes provisions for periodic
increases of Mr. Myers' salary, incentive compensation and participation in the
Company's benefit plans.
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 his base salary and continued benefit
plan participation for the remainder of the then current three (3) year term of
the agreement. 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.
The Company maintains severance agreements with certain key individuals
(including the additional four persons named in the cash compensation table)
providing for guaranteed severance payments equal to two times the sum of annual
compensation (including amounts paid under the Company's Management Incentive
Plan), legal fees, and the continuation of life and health insurance benefits
for two years if there is a change of control of the Company and the employee is
terminated within two years thereafter. These agreements also provide for a cash
payment of the amount necessary to compensate the employees for the costs
resulting from the imposition of excise taxes payable under the Internal Revenue
Code.
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.
8
<PAGE>
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
weighing 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 1998 compensation of the Chief Executive Officer was determined by the
Executive Committee based on the policies previously described. The Chief
Executive Officer, while primarily 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
Frank A. Sarnecki
John J. Swalec
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, 1993
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MERCHANTS BANCORP, INC. NASDAQ STOCK MARKET - US NASDAQ BANK
<S> <C> <C> <C>
12/93 $100 $100 $100
12/94 $103 $98 $100
12/95 $139 $138 $148
12/96 $154 $170 $196
12/97 $286 $209 $328
12/98 $289 $293 $325
</TABLE>
*TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
<S> <C> <C> <C> <C> <C> <C>
Merchants Bancorp Inc..................... $ 100 $ 103 $ 139 $ 154 $ 286 $ 289
Nasdaq Stock Market--US................... $ 100 $ 98 $ 138 $ 170 $ 209 $ 293
Nasdaq Bank Index......................... $ 100 $ 100 $ 148 $ 196 $ 328 $ 325
</TABLE>
10
<PAGE>
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.
Mr. C. Tell Coffey, a director of the Company, holds a 48% beneficial
interest in the real estate that Merchants Bank leases at 2255 Sullivan Road,
Ste. B, Aurora, Illinois 60506. The term of the lease is from May 1, 1997 and
will terminate on April 30, 2004. The monthly rental payments are $18,791 until
April 30, 1999 and then increase at the rate of 2% annually thereafter until
April 30, 2004.
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 1999. 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 2000 ANNUAL MEETING
For inclusion in the Company's Proxy Statement and form of proxy relating to
the 2000 Annual Meeting of Stockholders, stockholder proposals must be received
by the Company on or before November 22, 1999. In order to be presented at such
meeting, notice of the proposal must be received by the Company on or before
February 21, 2000, 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
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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
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, 1999.
By order of the Board of Directors,
[SIGNATURE]
DANA K. HOPP
ADMINISTRATIVE ASSISTANT
AND SECRETARY-TREASURER
Aurora, Illinois
March 22, 1999
12
<PAGE>
PROXY PROXY
MERCHANTS BANCORP, INC.
PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS -- APRIL 20, 1999
The undersigned hereby appoints Walter E. Deuchler, Jr., Edward J.
McWethy and Ralph D. Voris, or any of them acting in the absence of the
others, with full power of substitution, attorneys and proxies, for and in
the name and place of the undersigned, to vote the number of shares of Common
Stock that the undersigned would be entitled to vote if then personally
present at the Annual Meeting of Stockholders of Merchants Bancorp, Inc., to
be held at the Copley Theatre, North Island Center, 8 East Galena Boulevard,
Aurora, Illinois 60506, on Tuesday, April 20, 1999, at 9:30 a.m., local time,
or any adjournments or postponements thereof, upon the matters set forth in
the Notice of Annual Meeting and Proxy Statement (receipt of which is hereby
acknowledged) as designated on the reverse side, and in their discretion, the
proxies are authorized to vote upon such other business as may come before
the meeting.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH SPECIFICATION MADE. IF NO
CHOICES ARE INDICATED, THIS PROXY WILL BE VOTED FOR ALL PROPOSALS.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
<PAGE>
MERCHANTS BANCORP, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. / /
For Withhold For All
All All (Except Nominee(s)
written below)
1. ELECTION OF DIRECTORS -- Class C / / / / / /
NOMINEES: Jacqueline E. Henning,
Calvin R. Myers and Frank K. Voris
For Against Abstain
2. To ratify the selection of Crowe, / / / / / /
Chizek & Company LLP as independent
auditors for the Company for 1999.
3. Check here if you plan to attend the / /
meeting.
Check here for address change. / /
New Address: _______________________________________________________________
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL PROPOSALS.
Dated:______________________, 1999
Signature(s)________________________________________________________________
____________________________________________________________________________
NOTE: Please sign exactly as your name(s) appears. For joint accounts, each
owner should sign. When signing as executor, administrator, attorney, trustee,
or guardian, etc., please give your full title.
