[Graphic: map; FIRST MERCHANTS CORPORATION MARKET AREA]
STOCKHOLDER INFORMATION
First Merchants Corporation of Muncie, Indiana, was organized in September,
1982, as the bank holding company for The Merchants National Bank, now First
Merchants Bank, N.A., an institution which has served Muncie and the surrounding
communities since 1893.
In November, 1988, First Merchants acquired Pendleton Banking Company of
Pendleton, Indiana, a commercial bank which was organized in 1872.
In July, 1991, the Corporation acquired First United Bank of Middletown,
Indiana, which was established in 1882.
First Merchants Corporation currently provides services through 21 offices
located in Delaware, Madison, and Henry counties, Indiana.
Subsidiaries of First Merchants Corporation conduct a full range of banking
operations, including commercial, industrial, consumer and real estate lending,
deposit and investment services, and other banking services. First Merchants
Bank, with more than $818,000,000 in fiduciary assets at market value, operates
one of the ten largest trust departments in Indiana.
First Merchants Corporation is committed to the sound management of its
subsidiaries and to leading its east central Indiana marketplace in meeting
customer banking needs and expectations.
STOCK PRICE AND DIVIDEND INFORMATION
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PRICE PER SHARE
QUARTER HIGH LOW DIVIDENDS DECLARED
1993 1992 1993 1992 1993 1992
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First Quarter $30.75 $25.83 $27.00 $18.83 $.22 $.20
Second Quarter 29.00 25.33 26.50 23.00 .21 .21
Third Quarter 30.50 28.00 26.50 24.00 .25 .22
Fourth Quarter 31.25 30.00 29.00 26.00 .25 .22
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The table above lists per share bid prices and dividend payments during 1992 and
1993, as adjusted for the 3-for-2 stock split of January, 1993.
Prices are as reported by the National Association of Securities Dealers
Automated Quotation - National Market System.
STOCK INFORMATION
COMMON STOCK LISTING
First Merchants Corporation common stock is traded over-the-counter on the
NASDAQ National Market System. Quotations are carried in many daily papers. The
NASDAQ symbol is FRME (Cusip #320817-10-9).
At the close of business on December 31, 1993, the number of shares outstanding
was 3,389,591. There were 1,046 stockholders of record on that date.
STOCK TRANSFER AGENT AND REGISTRAR
First Merchants Bank, N.A.
Corporate Trust Department
P.O. Box 792
Muncie, Indiana 47308-0792
GENERAL STOCKHOLDER INQUIRIES
Stockholders and interested investors may obtain information about the
Corporation upon written request or by calling:
Mr. Douglas B. Harris
Investor Services Officer
First Merchants Corporation
P.O. Box 792
Muncie, Indiana 47308-0792
317-747-1346
1-800-262-4261
MARKET MAKERS
The following firms make a market in First Merchants Corporation stock:
The Chicago Corporation
Herzog, Heine, Geduld, Inc.
Howe, Barnes & Johnson, Inc.
McDonald and Company
David A. Noyes and Company
Raffensperger, Hughes & Co.
Sandler, O'Neill & Partners, L.P.
FORM 10-K AND
FINANCIAL INFORMATION
First Merchants Corporation, upon request and without charge, will furnish
stockholders, security analysts, and investors a copy of Form 10-K filed with
the Securities and Exchange Commission. Please contact:
Mr. James Thrash
Senior Vice President
and Chief Financial Officer
First Merchants Corporation
P.O. Box 792
Muncie, Indiana 47308-0792
317-747-1390
1-800-262-4261
ANNUAL MEETING
The Annual Meeting of Stockholders of First Merchants Corporation will be held
Thursday, March 31, 1994, 3:30 p.m., at the Horizon Convention Center, 401 South
High Street, Muncie, Indiana.
INDEPENDENT AUDITOR'S REPORT
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To the Stockholders & Board of Directors
First Merchants Corporation
Muncie, Indiana
We have audited the consolidated balance sheet of First Merchants Corporation
and subsidiaries as of December 31, 1993 and 1992, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended December 31, 1993 (pages 7-22). These
consolidated financial statements are the responsibility of the Corporation'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 described above present
fairly, in all material respects, the consolidated financial position of First
Merchants Corporation and subsidiaries as of December 31, 1993 and 1992, and the
results of their operations and cash flows for each of the three years in the
period ended December 31, 1993, in conformity with generally accepted accounting
principles.
As discussed in the notes to the Consolidated Financial Statements, the
Corporation changed its method of accounting for income taxes in 1993.
GEO. S. OLIVE & CO.
Indianapolis, Indiana
January 21, 1994
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TABLE OF CONTENTS
FIVE-YEAR SUMMARY OF FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . 1
MANAGEMENT'S DISCUSSION & ANALYSIS . . . . . . . . . . . . . . . . . . . . 2
CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . 11
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FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1993 1992 1991 1990 1989
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OPERATIONS
Net Interest Income
Fully Taxable Equivalent Basis . . . . . . . . . $ 26,806 $ 26,400 $ 23,277 $ 20,055 $ 19,018
Less Tax Equivalent Adjustment . . . . . . . . . . . 1,298 1,190 1,320 983 715
-------- -------- -------- -------- --------
Net Interest Income. . . . . . . . . . . . . . . . . 25,508 25,210 21,957 19,072 18,303
Provision for Loan Losses. . . . . . . . . . . . . . 1,014 1,357 1,401 1,295 1,155
-------- -------- -------- -------- --------
Net Interest Income
After Provision for Loan Losses . . . . . . . . 24,494 23,853 20,556 17,777 17,148
Total Other Income . . . . . . . . . . . . . . . . . 6,588 5,576 5,229 4,671 4,531
Total Other Expenses . . . . . . . . . . . . . . . . 18,214 17,603 15,792 13,401 13,832
-------- -------- -------- -------- --------
Income Before Income Tax Expense . . . . . . . . . . 12,868 11,826 9,993 9,047 7,847
Income Tax Expense . . . . . . . . . . . . . . . . . 4,396 4,041 3,234 3,023 2,190
-------- -------- -------- -------- --------
Income Before Change in Accounting Method. . . . . . 8,472 7,785 6,759 6,024 5,657
Change in Accounting Method for Income Taxes . . . . 227
-------- -------- -------- -------- --------
Net Income . . . . . . . . . . . . . . . . . . . . . $ 8,699 $ 7,785 $ 6,759 $ 6,024 $ 5,657
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
PER SHARE DATA(1)
Income Before Change in Accounting Method. . . . . . $ 2.48 $ 2.30 $ 2.09 $ 1.90 $ 1.77
Net Income . . . . . . . . . . . . . . . . . . . . . 2.55 2.30 2.09 1.90 1.77
Cash Dividends Paid. . . . . . . . . . . . . . . . . .94 .85 .79 .71 .61
December 31 Book Value . . . . . . . . . . . . . . . 20.30 18.79 17.36 16.29 15.10
December 31 Market Value
(BID PRICE) . . . . . . . . . . . . . . . . . . . 29.00 28.50 18.67 13.83 15.83
AVERAGE BALANCES
Total Assets . . . . . . . . . . . . . . . . . . . . $626,398 $603,067 $560,412 $511,097 $487,284
Total Loans. . . . . . . . . . . . . . . . . . . . . 357,028 329,750 300,276 272,122 263,548
Total Deposits . . . . . . . . . . . . . . . . . . . 517,826 501,526 441,302 408,804 398,645
Total Stockholders' Equity . . . . . . . . . . . . . 66,887 61,246 54,473 49,906 46,398
YEAR-END BALANCES
Total Assets . . . . . . . . . . . . . . . . . . . . $626,113 $616,859 $596,573 $541,124 $522,798
Total Loans. . . . . . . . . . . . . . . . . . . . . 376,872 350,308 323,382 287,787 270,082
Total Deposits . . . . . . . . . . . . . . . . . . . 506,302 511,971 484,824 429,675 407,621
Total Stockholders' Equity . . . . . . . . . . . . . 68,804 63,935 58,472 51,277 48,219
FINANCIAL RATIOS
Return on Average Assets . . . . . . . . . . . . . . 1.39% 1.29% 1.21% 1.18% 1.16%
Return on Average Stockholders' Equity . . . . . . . 13.01 12.71 12.41 12.07 12.19
Average Earning Assets to
Total Assets . . . . . . . . . . . . . . . . . . 93.71 93.93 93.82 93.55 92.86
Allowance for Loan Losses
as % of Total Loans. . . . . . . . . . . . . . . 1.27 1.24 1.20 1.13 1.08
Dividend Payout Ratio. . . . . . . . . . . . . . . . 36.86 36.96 37.79 37.37 34.46
Average Stockholders' Equity to
Average Assets . . . . . . . . . . . . . . . . . 10.68 10.16 9.72 9.76 9.52
Tax Equivalent Yield on Earning Assets . . . . . . . 7.38 8.31 9.48 10.09 10.28
Cost of Supporting Liabilities . . . . . . . . . . . 2.81 3.65 5.05 5.90 6.08
Net Interest Margin on Earning Assets. . . . . . . . 4.57 4.66 4.43 4.19 4.20
<FN>
(1) Restated for 3-for-2 stock split distributed January, 1993.
The amounts include First United Bank, subsequent to its acquisition on July 31,
1991 (see Note 2 to Consolidated Financial Statements).
1
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MANAGEMENT'S DISCUSSION & ANALYSIS
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[Graphic; bar chart; Return on Average Assets]
[Graphic; bar chart; Return on Average Equity]
RESULTS OF OPERATION
Net income in 1993 reached $8,699,000, exceeding 1992's figure of
$7,785,000 by 11.7 per cent. Earnings per share increased 10.9 per cent, from
$2.30 to $2.55, compared with 1991 net income of $2.09 per share.
Earnings per share for 1993 includes $.07 per share resulting from the
required adoption in the first quarter of Statement of Financial Accounting
Standard No. 109 (SFAS No. 109), ACCOUNTING FOR INCOME TAXES, a non-recurring
event. Operating earnings per share before this change were up 7.8 per cent for
the year.
Return on assets, which exceeded 1 per cent for the first time in 1988,
rose to 1.39 per cent, from 1.29 per cent in 1992 and 1.21 per cent in 1991.
Return on equity was 13.01 per cent in 1993, 12.71 per cent in 1992, and
12.41 per cent in 1991.
In 1993, First Merchants Corporation ("Corporation") recorded the
eighteenth consecutive year of improvement in net income on both an aggregate
and per share basis.
CAPITAL
The Corporation's capital strength continues to exceed regulatory minimums
and peer group averages. Management believes that strong capital is a distinct
advantage in the competitive environment in which the Corporation operates and
will provide a solid foundation for continued growth.
The Corporation's capital ratio was 10.99 per cent at year-end 1993 and
10.36 per cent at December 31, 1992. At December 31, 1993, the Corporation had a
Tier I risk-based capital ratio of 16.36 per cent, total risk-based capital
ratio of 17.53 per cent, and a leverage ratio of 10.41 per cent. Regulatory
capital guidelines required a Tier I risk-based capital ratio of 4.0 per cent
and a total risk-based capital ratio of 8.0 per cent by the end of 1992.
The Corporation has an employee stock purchase plan and an employee stock
option plan. Activity under these plans is described in Note 12 to the
Consolidated Financial Statements. The transactions under these plans have not
had a material effect on the Corporation's capital position.
On December 14, 1993, the Board of Directors adopted the 1994 Stock Option
Plan. Under the terms of the plan, 210,000 shares of Corporation common stock
will be reserved for the granting of options to certain employees and non-
employee directors. The exercise price of the shares may not be less than the
fair market value of the shares upon the grant of the option. Options become 100
per cent vested when granted and fully exercisable generally six months after
the date of the grant, for a period of ten years. The 1994 Stock Option Plan is
subject to stockholder approval.
On December 14, 1993, the Board of Directors adopted the 1994 Employee
Stock Purchase Plan, subject to stockholder approval. A total of 112,500 shares
of the Corporation's common stock are to be reserved for issuance pursuant to
the plan. The terms of the plan are similar to the current stock purchase plan.
ASSET QUALITY/PROVISION FOR LOAN LOSSES
The Corporation's asset quality and loan loss experience has consistently
been superior to that of its peer group, as summarized on the following page.
Asset quality has been a major factor in the Corporation's ability to generate
consistent profit improvement.
The allowance for loan losses is maintained through the provision for loan
losses, which is a charge against earnings.
The amount provided for loan losses and the determination of the adequacy
of the allowance are based on a continuous review of the loan portfolio,
including an internally administered loan review program. The evaluation takes
into consideration identified credit problems, as well as the possibility of
losses inherent in the loan portfolio that cannot be specifically identified.
The following table summarizes the risk elements for the Corporation and
its peer group consisting of bank holding companies with average assets between
$500 million and $1 billion. The peer group statistics were provided by the
Federal Reserve System. The table reflects significant improvement in the
Corporation's loan quality during 1992 and 1993.
2
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MANAGEMENT'S DISCUSSION & ANALYSIS
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ASSET QUALITY/PROVISION FOR LOAN LOSSES (CONTINUED)
[Graphic; bar chart; Net Loan Losses]
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NON-PERFORMING LOANS(1) at DECEMBER 31 as a PER CENT of LOANS
FIRST MERCHANTS PEER
CORPORATION GROUP
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1993 . . . . . . . . . . . . . . . . . . . . . . .28% NA
1992 . . . . . . . . . . . . . . . . . . . . . . .41 1.87%
1991 . . . . . . . . . . . . . . . . . . . . . . .86 2.59
1990 . . . . . . . . . . . . . . . . . . . . . . 1.09 2.62
1989 . . . . . . . . . . . . . . . . . . . . . . 1.54 2.12
<FN>
(1) Accruing loans past due 90 days or more, and non-accruing loans, but
excluding restructured loans. December 31, 1993, peer group comparisons are
not yet available.
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At December 31, 1993, the allowance for loan losses was $4,800,000, up 10.3
per cent from year end 1992. As a per cent of loans, the reserve was 1.27 per
cent, up from 1.24 per cent at year end 1992.
The table below presents loan loss experience for the years indicated and
compares the Corporation's loss experience to that of its peer group. Again, the
Corporation compares favorably.
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1993 1992 1991 1990 1989
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(DOLLARS IN THOUSANDS)
Allowance for loan losses:
Balance at January 1. . . . . . . . . $4,351 $3,867 $3,254 $2,915 $2,739
Addition resulting
from acquisition . . . . . . . . . 252
------ ------ ------ ------ ------
Chargeoffs:
Commercial . . . . . . . . . . . . 391 588 806 614 914
Real estate mortgage . . . . . . . 129 100 41 46
Installment. . . . . . . . . . . . 388 552 511 590 383
------ ------ ------ ------ ------
Total chargeoffs. . . . . . . . 908 1,240 1,358 1,250 1,297
------ ------ ------ ------ ------
Recoveries:
Commercial . . . . . . . . . . . . 240 215 227 195 255
Real estate mortgage . . . . . . . 5 38 7 1
Installment. . . . . . . . . . . . 98 114 84 98 63
------ ------ ------ ------ ------
Total recoveries. . . . . . . . 343 367 318 294 318
------ ------ ------ ------ ------
Net chargeoffs. . . . . . . . . . . . 565 873 1,040 956 979
------ ------ ------ ------ ------
Provision for loan losses . . . . . . 1,014 1,357 1,401 1,295 1,155
------ ------ ------ ------ ------
Balance at December 31. . . . . . . . $4,800 $4,351 $3,867 $3,254 $2,915
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratio of net chargeoffs during
the period to average loans
outstanding during the period. . . . . .16% .26% .35% .35% .37%
Peer Group . . . . . . . . . . . . . . . NA .63 .95 .93 .71
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As a result of improved loan quality and a decline in net chargeoffs, the
1993 provision for loan losses at $1,014,000 represented a $343,000 decrease
from 1992. The amount provided exceeded net chargeoffs by $449,000.
3
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MANAGEMENT'S DISCUSSION & ANALYSIS
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LIQUIDITY AND INTEREST SENSITIVITY
Asset/Liability Management has been an important factor in the
Corporation's ability to record consistent earnings growth through periods of
interest rate volatility and product deregulation. Management and the Board of
Directors monitor the Corporation's liquidity and interest sensitivity positions
at regular meetings to ensure that changes in interest rates will not adversely
affect earnings. Decisions regarding investment and the pricing of loan and
deposit products are made after analysis of reports designed to measure
liquidity, rate sensitivity, the Corporation's exposure to changes in net
interest income given various rate scenarios, and the economic and competitive
environments.
The Corporation's liquidity and interest sensitivity position at December
31, 1993, remained adequate to meet the Corporation's primary goal of achieving
optimum interest margins while avoiding undue interest rate risk. The table
below represents the Corporation's interest rate sensitivity analysis as of
December 31, 1993.
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INTEREST-RATE SENSITIVITY ANALYSIS
(DOLLARS IN THOUSANDS)
AT DECEMBER 31, 1993
1-180 DAYS 181-365 DAYS 1-5 YEARS BEYOND 5 YEARS TOTAL
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Rate-Sensitive Assets:
Federal funds sold and
interest-bearing time deposits . . . . . . . $ 1,879 $ 1,879
Investment securities. . . . . . . . . . . . . 37,048 $ 26,323 $126,850 $16,022 206,243
Loans. . . . . . . . . . . . . . . . . . . . . 213,913 44,659 85,646 32,653 376,871
-------- -------- -------- -------- --------
Total rate-sensitive assets. . . . . . . . . 252,840 70,982 212,496 48,675 584,993
-------- -------- -------- -------- --------
Rate-Sensitive Liabilities:
Savings and time deposits. . . . . . . . . . . 223,406 22,505 185,845 431,756
Other borrowed funds . . . . . . . . . . . . . 46,890 46,890
-------- -------- -------- -------- --------
Total rate-sensitive liabilities . . . . . . 270,296 22,505 185,845 478,646
-------- -------- -------- -------- --------
Interest rate sensitivity gap by period. . . . . $(17,456) $ 48,477 $ 26,651 $48,675
Cumulative gap . . . . . . . . . . . . . . . . . (17,456) 31,021 57,672 106,347
Cumulative ratio at December 31, 1993. . . . . . 93.54% 110.59% 112.05% 122.22%
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EARNING ASSETS
Earning assets grew $12.7 million during 1993 and $16.7 million during
1992. The growth occurred primarily in loans with investment securities
increasing slightly.
The following table presents the earnings asset mix for the years ended
1993, 1992, and 1991.
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EARNING ASSETS
(DOLLARS IN MILLIONS)
DECEMBER 31 1993 INCREASE
1993 1992 1991 (DECREASE) OVER 1992
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Federal funds sold and interest-bearing time deposits. . . . . . . $ 1.9 $ 25.7 $ 22.9 $(23.8)
Investment securities. . . . . . . . . . . . . . . . . . . . . . . 206.2 196.3 209.3 9.9
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 376.9 350.3 323.4 26.6
------ ------ ------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $585.0 $572.3 $555.6 $ 12.7
------ ------ ------ ------
------ ------ ------ ------
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4
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MANAGEMENT'S DISCUSSION & ANALYSIS
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DEPOSITS AND BORROWINGS
Total deposits increased $27 million in 1992, or 5.6 per cent, and declined
by $5.7 million in 1993. Average deposits, however, grew $16.3 million in 1993,
up 3.3 per cent from the same figure in 1992. Borrowed funds (Federal funds
purchased and repurchase agreements with customers) amounted to $46.9 million at
December 31, 1993, compared to $37.1 million at December 31, 1992, and $49.1
million at December 31, 1991.
NET INTEREST INCOME
Net interest income is the primary source of the Corporation's earnings. It
is a function of net interest margin and the level of average earning assets.
The tables below indicate that the Corporation's asset yields declined each
year as interest rates in general have fallen. During the period of 1991-1992,
interest costs declined by an even greater amount, and consequently net interest
margins grew by nearly 25 basis points each year. Coupled with earning asset
growth this resulted in growth in net interest income of more than $3 million in
both years.
In 1993, however, asset yields fell .93 per cent while interest expense
declined .84 per cent, so margins declined slightly (.09 per cent). Earning
assets grew 3.6 per cent in 1993, offsetting the decline in interest margins and
accounting for the $400,000 increase in net interest income on a fully taxable
equivalent basis (FTE).
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INTEREST INCOME INTEREST EXPENSE NET INTEREST INCOME
(FTE) AS A PER CENT AS A PER CENT (FTE) AS A PER CENT
OF AVERAGE OF AVERAGE OF AVERAGE
EARNINGS ASSETS EARNING ASSETS EARNING ASSETS
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1993 7.38% 2.81% 4.57%
1992 8.31 3.65 4.66
1991 9.48 5.05 4.43
1990 10.09 5.90 4.19
1989 10.28 6.08 4.20
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NET INTEREST NET INTEREST
INCOME ON A MARGIN ON A AVERAGE
FULLY TAXABLE FULLY TAXABLE EARNING
EQUIVALENT BASIS EQUIVALENT BASIS ASSETS
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(DOLLARS IN THOUSANDS)
1993 $26,806 4.57% $587,009
1992 26,400 4.66 566,167
1991 23,277 4.43 525,799
1990 20,055 4.19 478,113
1989 19,018 4.20 453,098
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OTHER INCOME
The Corporation has placed emphasis on the growth of non-interest income in
recent years by offering a wide range of fee-based services. Fee schedules are
regularly reviewed by a pricing committee to ensure that the products and
services offered by the Corporation are priced to be competitive and profitable.
Other income reached $6,588,000 in 1993, an increase of 18.2 per cent over
the prior year. Most of the increase was experienced in the major categories:
1. Trust revenues grew $180,000, or 8.1 per cent;
2. Service charges on deposit accounts were up by $250,000, or 11.1 per
cent;
3. Securities gains totalled $395,000, an increase of $328,000, or 493.4
per cent.
Other income in 1992 exceeded 1991 by $347,000, or 6.6 per cent. Trust fees
grew $110,000, or 5.2 per cent, while service charges on deposit accounts
increased by $346,000, of which about $129,000 is attributable to the
acquisitions of First United Bank. Offsetting these increases was a decline in
securities gains of $125,000.
OTHER EXPENSE
Total "other expenses" represent non-interest operating expenses of the
Corporation. Those expenses reached $18,215,000 in 1993, up $611,000 or 3.5 per
cent, from 1992. Salary and benefit expenses increased by $330,000, or 3.8 per
cent, and premises and equipment expense rose $254,000, or 12.8 per cent.
Such expenses grew nearly $1,812,000 in 1992, or 11.5 per cent. Most of the
increase is due to three factors:
1. Expenses at First United Bank, acquired in July, 1991, amounted to
$1,651,000 during the twelve months of 1992, compared to $662,000 for
the five-month period in 1991, an increase of $989,000.
5 (CONTINUED)
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MANAGEMENT'S DISCUSSION & ANALYSIS
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OTHER EXPENSE (CONTINUED)
2. Salary and benefit expense at the other two bank affiliates increased
$556,000, or 7.5 per cent.
3. F.D.I.C. insurance premiums increased $117,000 at the bank affiliates,
not including First United Bank.
On May 11, 1993, the Corporation and First Merchants Bank, N.A., ("First
Merchants") approved a change in the data processing function. In the fourth
quarter of 1993, First Merchants assumed responsibility for the data processing
function for the Corporation and its wholly owned subsidiaries. The data
processing agreement with an outside party to provide data processing management
was terminated three months early. The estimated cost of the conversion,
equipment, and software is approximately $1,700,000. The equipment and software
costs will be depreciated on a straight-line method based on the estimated
useful lives of the assets. The Corporation expects data processing costs to
decline under the new arrangement.
Management's expense control program is designed to ensure that dollars are
spent where necessary, but wisely. This is accomplished through the assignment
of accountability to individuals and divisions responsible for various expenses,
along with the appropriate management information reports designed to monitor
these expenses.
INCOME TAXES
The increase in 1993 tax expense of $355,000 is attributable to a
$1,042,000 increase in net pre-tax income.
Income tax expense in 1992 exceeded 1991 by $807,000. The increase in 1992
tax expense is attributable to a $1,833,000 increase in pre-tax net income, and
a decline in tax-free income from the prior year of $250,000.
The following is a breakdown, by year, of federal and state income taxes:
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FEDERAL AND STATE INCOME TAXES
1993 1992
- ---------------------------------------------
- ---------------------------------------------
Federal taxes $3,272,000 $3,033,000
State taxes 1,124,000 1,008,000
---------- ----------
Total $4,396,000 $4,041,000
- ---------------------------------------------
During 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 (SFAS No. 109), ACCOUNTING FOR INCOME TAXES. As a result, the
beginning deferred tax asset was increased by $227,329, which is reported as the
cumulative effect of a change in accounting method in the income statement.
ACCOUNTING MATTERS
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 114 (SFAS No. 114), ACCOUNTING
BY CREDITORS FOR IMPAIRMENT OF A LOAN. The Statement requires that impaired
loans that are within the scope of SFAS No. 114 be measured based on the present
value of expected future cash flows, discounted at the loan's effective interest
rate; at the loan's observable market price; or the fair value of the
collateral, if the loan is collateral dependent. Adoption of SFAS No. 114 is
required in January, 1995, with earlier adoption permitted. The Corporation has
not determined the impact of SFAS No. 114 on its financial condition and results
of operations, but expects it to be immaterial.
Also in May, 1993, the FASB issued Statement of Financial Accounting
Standards No. 115 (SFAS No. 115), ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES. This Statement requires that investment securities be
classified as either held-to-maturity securities, which are reported at
amortized cost; trading securities, which are reported at fair value, with
unrealized gains and losses included in earnings; or available-for-sale
securities, which are reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of stockholders'
equity. SFAS No. 115 was adopted as of January 1, 1994. At that date, securities
with a carrying value of $107,569,000 were reclassified as available for sale.
This reclassification resulted in an increase in total stockholders' equity, net
of tax, of $644,000.
INFLATION
Changing prices of goods, services, and capital affect the financial
position of every business enterprise. The level of market interest rates and
the price of funds loaned or borrowed fluctuate due to changes in the rate of
inflation and various other factors, including government monetary policy.
Fluctuating interest rates affect the Corporation's net interest income,
loan volume, and other operating expenses, such as employees' salaries and
benefits, reflecting the effects of escalating prices, as well as increased
levels of operations and other factors. As the inflation rate increases, the
purchasing power of the dollar decreases. Those holding fixed-rate monetary
assets incur a loss, while those holding fixed rate monetary liabilities enjoy a
gain. The nature of a bank holding company's operations is such that there will
be an excess of monetary assets over monetary liabilities, and, thus, a bank
holding company will tend to suffer from an increase in the rate of inflation
and benefit from a decrease.
6
---
---
CONSOLIDATED BALANCE SHEET
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
DECEMBER 31
1993 1992
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks. . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,942,428 $ 29,546,181
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,625,000 24,150,000
------------ ------------
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . 26,567,428 53,696,181
Interest-bearing time deposits . . . . . . . . . . . . . . . . . . . . . . 253,854 1,504,474
Investment securities
(approximate market value $209,301,000 and $201,002,000) . . . . . . . . 206,242,590 196,284,640
Loans:
Loans, net of unearned interest. . . . . . . . . . . . . . . . . . . . . 376,871,651 350,307,536
Less: Allowance for loan losses. . . . . . . . . . . . . . . . . . . . . 4,800,366 4,351,118
------------ ------------
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372,071,285 345,956,418
Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 9,440,635 7,596,850
Interest receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,664,780 5,892,408
Core deposit intangibles and goodwill. . . . . . . . . . . . . . . . . . . 2,107,771 2,238,949
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,764,616 3,688,981
------------ ------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $626,112,959 $616,858,901
------------ ------------
------------ ------------
LIABILITIES
Deposits:
Noninterest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . $ 74,546,331 $ 72,132,365
Interest bearing. . . . . . . . . . . . . . . . . . . . . . . . . . . . 431,755,835 439,839,134
------------ ------------
Total deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 506,302,166 511,971,499
Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . 46,890,127 37,073,000
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,226,167 1,505,576
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,890,228 2,374,267
------------ ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 557,308,688 552,924,342
------------ ------------
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY
Preferred stock, no-par value:
Authorized and uninsured--500,000 shares
Common stock, $.125 stated value:
Authorized--20,000,000 shares
Issued and outstanding--3,389,591 and 3,402,213 shares . . . . . . . . . 423,699 425,277
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 17,068,603 17,683,626
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,311,969 45,825,656
------------ ------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . 68,804,271 63,934,559
------------ ------------
Total liabilities and stockholders' equity. . . . . . . . . . . . . . $626,112,959 $616,858,901
------------ ------------
------------ ------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
---
---
CONSOLIDATED STATEMENT OF INCOME
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
1993 1992 1991
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans, including fees:
Taxable. . . . . . . . . . . . . . . . . . . . . . . . . $28,704,848 $29,636,313 $30,710,401
Tax exempt . . . . . . . . . . . . . . . . . . . . . . . 122,422 155,339 191,854
Investment securities:
Taxable. . . . . . . . . . . . . . . . . . . . . . . . . 10,292,105 13,358,703 14,746,674
Tax exempt . . . . . . . . . . . . . . . . . . . . . . . 2,397,781 2,155,426 2,371,109
Federal funds sold . . . . . . . . . . . . . . . . . . . . 453,805 475,065 386,312
Interest-bearing time deposits . . . . . . . . . . . . . . 35,295 124,023 139,395
----------- ----------- -----------
Total interest income . . . . . . . . . . . . . . . . 42,006,256 45,904,869 48,545,745
----------- ----------- -----------
INTEREST EXPENSE
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . 15,431,588 19,313,198 23,003,345
Short-term borrowings. . . . . . . . . . . . . . . . . . . 1,066,592 1,381,953 3,585,850
----------- ----------- -----------
Total interest expense. . . . . . . . . . . . . . . . 16,498,180 20,695,151 26,589,195
----------- ----------- -----------
NET INTEREST INCOME. . . . . . . . . . . . . . . . . . . . . 25,508,076 25,209,718 21,956,550
Provision for loan losses. . . . . . . . . . . . . . . . . 1,013,765 1,356,536 1,401,000
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES. . . . . . . . . . . . . . . . . . 24,494,311 23,853,182 20,555,550
----------- ----------- -----------
OTHER INCOME
Trust fees . . . . . . . . . . . . . . . . . . . . . . . . 2,408,632 2,228,936 2,118,819
Service charges on deposit accounts . . . . . . . . . . . 2,506,483 2,256,646 1,910,831
Other customer fees. . . . . . . . . . . . . . . . . . . . 1,049,751 793,743 718,240
Investment securities gains, net . . . . . . . . . . . . . 394,551 66,488 191,683
Other operating income . . . . . . . . . . . . . . . . . . 228,794 230,218 289,426
----------- ----------- -----------
Total other income. . . . . . . . . . . . . . . . . . 6,588,211 5,576,031 5,228,999
----------- ----------- -----------
OTHER EXPENSES
Salaries and employee benefits . . . . . . . . . . . . . . 9,123,874 8,793,835 7,733,005
Net occupancy expenses . . . . . . . . . . . . . . . . . . 1,096,771 1,000,987 1,033,024
Equipment expenses . . . . . . . . . . . . . . . . . . . . 1,138,180 979,755 868,816
Computer processing fees . . . . . . . . . . . . . . . . . 1,176,957 1,341,464 1,227,514
Deposit insurance expense . . . . . . . . . . . . . . . . 1,138,463 1,087,072 912,015
Printing and office supplies . . . . . . . . . . . . . . . 771,593 688,813 588,077
Marketing expense. . . . . . . . . . . . . . . . . . . . . 525,685 494,629 418,767
Other operating expenses . . . . . . . . . . . . . . . . . 3,243,368 3,217,229 3,010,478
----------- ----------- -----------
Total other expenses. . . . . . . . . . . . . . . . . 18,214,891 17,603,784 15,791,696
----------- ----------- -----------
INCOME BEFORE INCOME TAX AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING METHOD. . . . . . . . . . . . . . . . . . . . . . 12,867,631 11,825,429 9,992,853
Income tax expense . . . . . . . . . . . . . . . . . . . . 4,395,920 4,040,729 3,233,879
----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING METHOD. . . . . . . . . . . . . . . . . 8,471,711 7,784,700 6,758,974
CUMULATIVE EFFECT OF CHANGE IN METHOD
OF ACCOUNTING FOR INCOME TAXES . . . . . . . . . . . . . . . 227,329
----------- ----------- -----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,699,040 $ 7,784,700 $ 6,758,974
----------- ----------- -----------
----------- ----------- -----------
PER SHARE
Income before cumulative
effect of change in
accounting method. . . . . . . . . . . . . . . . . . . . $ 2.48 $ 2.30 $ 2.09
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 2.55 $ 2.30 $ 2.09
WEIGHTED AVERAGE
SHARES OUTSTANDING. . . . . . . . . . . . . . . . . . . . . 3,416,417 3,385,349 3,230,951
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
8
---
---
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
ADDITIONAL RETAINED
SHARES AMOUNT PAID-IN CAPITAL EARNINGS TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
BALANCES, JANUARY 1, 1991. . . . . . . . . . . . . . . 2,098,032 $262,254 $14,280,680 $36,734,190 $51,277,124
Net income for 1991. . . . . . . . . . . . . . . . . 6,758,974 6,758,974
Cash dividends ($1.18 per share) . . . . . . . . . . (2,562,126) (2,562,126)
Stock issued in acquisition
of First United Bank . . . . . . . . . . . . . . . 152,612 19,077 3,159,068 3,178,145
Stock issued under employee benefit plans. . . . . . 9,024 1,128 180,085 181,213
Stock options exercised. . . . . . . . . . . . . . . 725 90 16,272 16,362
Stock redeemed . . . . . . . . . . . . . . . . . . . (15,546) (1,943) (375,532) (377,475)
--------- --------- ----------- ----------- -----------
BALANCES, DECEMBER 31, 1991. . . . . . . . . . . . . . 2,244,847 280,606 17,260,573 40,931,038 58,472,217
Net income for 1992. . . . . . . . . . . . . . . . . 7,784,700 7,784,700
Cash dividends ($1.28 per share) . . . . . . . . . . (2,890,082) (2,890,082)
Stock issued under employee benefit plans. . . . . . 9,499 1,187 189,564 190,751
Stock issued under dividend reinvestment
and stock purchase plan. . . . . . . . . . . . . . 4,787 599 185,130 185,729
Stock options exercised. . . . . . . . . . . . . . . 9,850 1,231 220,819 222,050
Stock redeemed . . . . . . . . . . . . . . . . . . . (841) (105) (30,701) (30,806)
Three-for-two stock split. . . . . . . . . . . . . . 1,134,071 141,759 (141,759)
--------- --------- ----------- ----------- -----------
BALANCES, DECEMBER 31, 1992. . . . . . . . . . . . . . 3,402,213 425,277 17,683,626 45,825,656 63,934,559
Net income for 1993. . . . . . . . . . . . . . . . . 8,699,040 8,699,040
Cash dividends ($.94 per share). . . . . . . . . . . (3,212,727) (3,212,727)
Stock issued under employee benefit plans. . . . . . 11,817 1,477 246,286 247,763
Stock issued under dividend reinvestment
and stock purchase plan. . . . . . . . . . . . . . 9,858 1,232 285,717 286,949
Stock options exercised. . . . . . . . . . . . . . . 9,299 1,163 153,222 154,385
Stock redeemed . . . . . . . . . . . . . . . . . . . (43,500) (5,438) (1,296,000) (1,301,438)
Cash paid in lieu of
issuing fractional shares. . . . . . . . . . . . . (96) (12) (4,248) (4,260)
--------- --------- ----------- ----------- -----------
BALANCES, DECEMBER 31, 1993. . . . . . . . . . . . . . 3,389,591 $423,699 $17,068,603 $51,311,969 $68,804,271
--------- --------- ----------- ----------- -----------
--------- --------- ----------- ----------- -----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
1993 1992 1991
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 8,699,040 $ 7,784,700 $ 6,758,974
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses. . . . . . . . . . . . . . . . 1,013,765 1,356,536 1,401,000
Depreciation and amortization. . . . . . . . . . . . . . 827,963 750,510 640,854
Deferred income tax. . . . . . . . . . . . . . . . . . . (542,266) (647,526) (384,450)
Investment securities amortization, net. . . . . . . . . 987,365 868,416 310,739
Investment securities gains, net. . . . . . . . . . . . . (394,551) (66,488) (191,683)
9 (CONTINUED)
---
---
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(CONTINUED)
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
1993 1992 1991
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Net change in:
Interest receivable. . . . . . . . . . . . . . . . . . $ 191,612 $ 1,246,585 $ 521,341
Interest payable . . . . . . . . . . . . . . . . . . . (279,409) (509,719) (494,365)
Other adjustments. . . . . . . . . . . . . . . . . . . . 829,887 (86,524) 956,803
------------ ------------ ------------
Net cash provided by operating activities. . . . . . . 11,333,406 10,696,490 9,519,213
------------ ------------ ------------
INVESTING ACTIVITIES:
Net change in interest-bearing time deposits . . . . . . . 1,250,620 2,147 2,748,745
Purchases of investment securities . . . . . . . . . . . . (120,299,746) (97,182,863) (103,486,420)
Proceeds from investment securities maturities . . . . . . 104,327,097 104,880,500 62,454,510
Proceeds from investment securities sales. . . . . . . . . 5,430,571 4,506,249 40,633,000
Net change in loans. . . . . . . . . . . . . . . . . . . . (27,530,846) (28,659,226) (9,291,680)
Purchases of premises and equipment. . . . . . . . . . . . (2,642,213) (1,374,976) (1,083,442)
Cash and cash equivalents of bank
acquired, net of cash paid . . . . . . . . . . . . . . . 2,510,922
Other investing activities . . . . . . . . . . . . . . . . 683,511 698,700 1,147,395
------------ ------------ ------------
Net cash used by investing activities. . . . . . . . . (38,781,006) (17,129,469) (4,366,970)
------------ ------------ ------------
FINANCING ACTIVITIES:
Net change in:
Noninterest-bearing, NOW,
money market and savings deposits. . . . . . . . . . . 12,890,301 31,562,748 7,065,771
Certificates of deposit and other time deposits. . . . . (18,559,253) (4,392,319) 3,716,749
Short-term borrowings. . . . . . . . . . . . . . . . . . 9,817,127 (11,990,228) (7,189,699)
Cash dividends . . . . . . . . . . . . . . . . . . . . . . (3,212,727) (2,890,082) (2,562,126)
Stock issued under employee benefit plans. . . . . . . . . 247,763 190,751 181,213
Stock issued under dividend reinvestment
and stock purchase plan. . . . . . . . . . . . . . . . . 286,949 185,729
Stock options exercised. . . . . . . . . . . . . . . . . . 154,385 222,050 16,362
Stock redeemed . . . . . . . . . . . . . . . . . . . . . . (1,301,438) (30,806) (377,475)
Cash paid in lieu of issuing fractional shares . . . . . . (4,260)
------------ ------------ ------------
Net cash provided by financing activities. . . . . . . 318,847 12,857,843 850,795
------------ ------------ ------------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . (27,128,753) 6,424,864 6,003,038
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR. . . . . . . . . . . . . . . . . . . . . 53,696,181 47,271,317 41,268,279
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR. . . . . . . . . . . . . . . . . . . . . . . $ 26,567,428 $ 53,696,181 $ 47,271,317
------------ ------------ ------------
------------ ------------ ------------
ADDITIONAL CASH FLOWS INFORMATION:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . $ 16,777,589 $ 21,204,870 $ 27,083,560
Income tax paid. . . . . . . . . . . . . . . . . . . . . . 5,004,469 4,615,519 3,610,326
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
10
----
----
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
NOTE 1
ACCOUNTING POLICIES
The accounting and reporting policies of First Merchants Corporation
("Corporation"), and its wholly owned subsidiaries, First Merchants Bank, N.A.,
Pendleton Banking Company, and First United Bank ("Banks"), conform to generally
accepted accounting principles and reporting practices followed by the banking
industry. The more significant of the policies are described below.
CONSOLIDATION--The consolidated financial statements include the accounts
of the Corporation and the Banks, after elimination of all material intercompany
transactions and accounts.
DESCRIPTION OF BUSINESS--The Banks generate commercial, mortgage, and
consumer loans and receive deposits from customers located primarily in central
Indiana. The Banks' loans are generally secured by specific items of collateral,
including real property, consumer assets, and business assets.
INVESTMENT SECURITIES are carried at cost, adjusted for amortization of
premiums and discounts, because management has the ability and intent to hold to
maturity. Gains and losses on the sale of investment securities are determined
on the specific-identification method.
In May, 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 (SFAS No. 115), ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES. This statement requires that
securities be classified in three categories and provides specific accounting
treatment for each. Trading securities are bought and held primarily for sale in
the near term and are carried at fair value, with unrealized holding gains and
losses included in earnings; held-to-maturity securities, for which the intent
is to hold to maturity, are carried at amortized cost; and available-for-sale
securities are all others and are carried at fair value with unrealized holding
gains and losses excluded from earnings and reported as a separate component of
stockholders' equity.
The Corporation adopted SFAS No. 115 on January 1, 1994. At that date,
securities with an approximate carrying value of $107,569,000 were reclassified
as available for sale. This reclassification resulted in an increase in total
stockholders' equity, net of tax, of $644,000.
LOANS are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans. Loans are placed in a nonaccrual
status when the collection of interest becomes doubtful. Interest income
previously accrued, but not deemed collectible, is reversed and charged against
current income. Interest on these loans is then recognized as income when
collected. Certain loan fees and direct costs are being deferred and amortized
as an adjustment of yield on the loans.
ALLOWANCE FOR LOAN LOSSES is maintained to absorb potential loan losses
based on management's continuing review and evaluation of the loan portfolio and
its judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loan loss experience,
changes in the composition of the loan portfolio, and the current condition and
amount of loans outstanding.
PREMISES AND EQUIPMENT are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based on the estimated
useful lives of the assets. Maintenance and repairs are expensed as incurred,
while major additions and improvements are capitalized. Gains and losses on
dispositions are included in current operations.
INCOME TAX in the consolidated statement of income includes deferred income
tax provisions or benefits for all significant temporary differences in
recognizing income and expenses for financial reporting and income tax purposes.
The Corporation has adopted the provisions of Statement of Financial Accounting
Standards No. 109 (SFAS No. 109), ACCOUNTING FOR INCOME TAXES, for the year
ended December 31, 1993. The Corporation files consolidated income tax returns
with its subsidiaries.
EARNINGS PER SHARE have been computed based upon the weighted average
common shares outstanding during each year and have been restated to give effect
to a three-for-two stock split distributed to stockholders on January 25, 1993.
Common stock equivalents, consisting of shares issuable under employee benefit
plans, were not included since their effect on dilution was insignificant.
RECLASSIFICATIONS of certain amounts in the 1992 and 1991 consolidated
financial statements have been made to conform to the 1993 presentation.
11
----
----
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
NOTE 2
BUSINESS ACQUISITION
On July 31, 1991, the Corporation acquired 64,017 shares, or all of the
common stock, of First United Bancorp, Inc., Middletown, Indiana, ("First
United"). The Corporation issued 152,612 shares (prior to the 1993 stock split)
of its common shares and $2,482,944 as payment in cash for the stock and now
owns all outstanding shares of First United. The acquisition has been accounted
for as a purchase and, accordingly, the assets acquired ($48,804,236) and
liabilities assumed ($44,699,506) have been recorded at their estimated fair
values at date of acquisition. The excess of $1,082,388 of the purchase price
over estimated fair value of the underlying net assets is being amortized over a
twenty-five year period from acquisition date. The operating results of First
United from August 1, 1991, are included in the consolidated statement of
income.
Pro forma information of the Corporation for the year ended December 31,
1991, is presented as if First United had been acquired on January 1 of that
year (unaudited, dollars in thousands, except for per share data).
- -----------------------------------
- -----------------------------------
Net interest income.........$23,051
Net income.................. 6,869
Net income per share........ 2.13
- -----------------------------------
NOTE 3
RESTRICTION ON CASH AND DUE FROM BANKS
The Banks are required to maintain reserve funds in cash and/or on deposit
with the Federal Reserve Bank. The reserve required at December 31, 1993, was
$8,965,000.
NOTE 4
INVESTMENT SECURITIES
- ---------------------------------------------------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Securities at December 31, 1993:
U.S. Treasury. . . . . . . . . . . . . $ 45,397 $ 654 $ 1 $ 46,050
Federal agencies . . . . . . . . . . . 53,452 691 62 54,081
State and municipal. . . . . . . . . . 44,866 1,211 55 46,022
Mortgage and other
asset-backed securities. . . . . . . 23,690 219 93 23,816
Federal Reserve stock. . . . . . . . . 307 307
Federal Home Loan Bank Stock . . . . . 1,572 1,572
Corporate obligations. . . . . . . . . 36,959 581 87 37,453
-------- -------- -------- --------
Totals . . . . . . . . . . . . . . . $206,243 $3,356 $298 $209,301
-------- -------- -------- --------
-------- -------- -------- --------
Securities at December 31, 1992:
U.S. Treasury. . . . . . . . . . . . . $ 53,120 $1,348 $105 $ 54,363
Federal agencies . . . . . . . . . . . 66,778 1,544 85 68,237
State and municipal. . . . . . . . . . 33,203 911 76 34,038
Mortgage and other
asset-backed securities . . . . . . . 16,073 508 2 16,579
Federal Reserve stock. . . . . . . . . 307 307
Corporate obligations. . . . . . . . . 26,804 710 36 27,478
-------- -------- -------- --------
Totals . . . . . . . . . . . . . . . $196,285 $5,021 $304 $201,002
-------- -------- -------- --------
-------- -------- -------- --------
The amortized cost and estimated market value of investment securities at
December 31, 1993, by contractual maturity, are shown on the following page.
Expected maturities will differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
12
----
----
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
NOTE 4
INVESTMENT SECURITIES (CONTINUED)
- --------------------------------------------------------------------------------
AMORTIZED APPROXIMATE
COST MARKET VALUE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Maturity distribution at December 31, 1993:
Due in one year or less. . . . . . . . . . . . . . . $ 45,950 $ 46,485
Due after one through five years . . . . . . . . . . 120,210 122,233
Due after five through ten years . . . . . . . . . . 13,246 13,594
Due after ten years. . . . . . . . . . . . . . . . . 1,268 1,294
-------- --------
180,674 183,606
Mortgage and other asset-backed securities . . . . . 23,690 23,816
Federal Reserve stock. . . . . . . . . . . . . . . . 307 307
Federal Home Loan Bank stock . . . . . . . . . . . . 1,572 1,572
-------- --------
Totals. . . . . . . . . . . . . . . . . . . . . . $206,243 $209,301
-------- --------
-------- --------
- --------------------------------------------------------------------------------
Securities with a total amortized cost of approximately $77,758,000 and
$88,977,000 were pledged at December 31, 1993 and 1992, to secure certain
deposits and for other purposes as permitted or required by law.
Proceeds from sales of investments in debt securities during 1993, 1992,
and 1991 were $5,431,000, $4,506,000, and $40,633,000. Gross gains of $395,000,
$115,000, and $288,000, and gross losses of $550, $49,000 and $96,000 were
realized on those sales.
NOTE 5
LOANS AND ALLOWANCE
1993 1992
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Loans at December 31:
Commercial and industrial loans. . . . . . . . . . . . . . . . . . . . . . . . $ 76,760 $ 70,959
Bankers' acceptances and loans to financial institutions . . . . . . . . . . . 3,000 9,496
Agricultural production financing and other loans to farmers . . . . . . . . . 5,591 6,240
Real estate loans:
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,127 2,619
Commercial and farmland. . . . . . . . . . . . . . . . . . . . . . . . . . . 58,235 52,402
Residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,572 140,526
Individuals' loans for household and other personal expenditures . . . . . . . 70,347 60,625
Tax-exempt loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,474 2,402
Other loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,766 5,039
-------- --------
Total loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $376,872 $350,308
-------- --------
-------- --------
1993 1992 1991
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Allowance for loan losses:
Balances, January 1. . . . . . . . . . . . . . . . . . . . . . . $4,351 $3,867 $3,254
Addition resulting from acquisition. . . . . . . . . . . . . . . 252
Provision for losses . . . . . . . . . . . . . . . . . . . . . . 1,014 1,357 1,401
Recoveries on loans. . . . . . . . . . . . . . . . . . . . . . . 343 367 318
Loans charged off. . . . . . . . . . . . . . . . . . . . . . . . (908) (1,240) (1,358)
------ ------ ------
Balances, December 31. . . . . . . . . . . . . . . . . . . . . . $4,800 $4,351 $3,867
------ ------ ------
------ ------ ------
Nonperforming loans at December 31:
Nonaccruing loans. . . . . . . . . . . . . . . . . . . . . . . . $ 527 $ 493 $1,434
Loans contractually past due 90 days or
more other than nonaccruing. . . . . . . . . . . . . . . . . . 616 949 1,356
Restructured loans . . . . . . . . . . . . . . . . . . . . . . . 879 548 828
(CONTINUED)
13
----
----
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
NOTE 5
LOANS AND ALLOWANCE (CONTINUED)
Additional interest income of $39,000 for 1993, $80,000 for 1992, and
$148,000 for 1991, would have been recorded had income on nonaccruing and
restructured loans been considered collectible and accounted for on the accrual
basis under the original terms of the loans.
The Corporation's banking subsidiaries have entered into transactions with
certain directors, executive officers, significant stockholders, and their
affiliates or associates (related parties). Such transactions were made in the
ordinary course of business on substantially the same terms and conditions,
including interest rates and collateral, as those prevailing at the same time
for comparable transactions with other customers, and did not, in the opinion of
management, involve more than normal credit risk or present other unfavorable
features.
The aggregate amount of loans, as defined, to such related parties were as
follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Balances, December 31, 1992 . . . . . . . . . . . . . . . $ 13,153
Changes in composition of related parties . . . . . . . . (428)
New loans, including renewals . . . . . . . . . . . . . . 12,226
Payments, etc., including renewals. . . . . . . . . . . . (11,894)
---------
Balances, December 31, 1993 . . . . . . . . . . . . . . . $ 13,057
---------
---------
- --------------------------------------------------------------------------------
NOTE 6
PREMISES AND EQUIPMENT
1993 1992
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
Cost at December 31:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 955 $ 903
Buildings and leasehold improvements . . . . . . . . . . . 8,694 8,482
Equipment. . . . . . . . . . . . . . . . . . . . . . . . . 9,457 7,371
------- -------
Total cost. . . . . . . . . . . . . . . . . . . . . . 19,106 16,756
Accumulated depreciation . . . . . . . . . . . . . . . . . . 9,665 9,159
------- -------
Net . . . . . . . . . . . . . . . . . . . . . . . . . $9,441 $7,597
------- -------
------- -------
- -----------------------------------------------------------------------------------
The Corporation is committed under various noncancelable lease contracts
for certain subsidiary office facilities. Total lease expense for 1993, 1992,
and 1991 was $110,000, $89,000, and $104,000, respectively. The future minimum
rental commitments required under the operating leases in effect at December 31,
1993, expiring at various dates through the year 2016, follow for the years
ending December 31:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 96
1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
After 1998. . . . . . . . . . . . . . . . . . . . . . . . . 430
----
Total future minimum obligations. . . . . . . . . . . $827
----
----
- --------------------------------------------------------------------------------
14
----
----
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
NOTE 7
DEPOSITS
1993 1992
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
Deposits at December 31:
Noninterest bearing . . . . . . . . . . . . . . . . . . . $ 74,546 $ 72,132
NOW accounts . . . . . . . . . . . . . . . . . . . . . . . 88,539 85,161
Money market deposit accounts. . . . . . . . . . . . . . . 95,258 92,058
Savings deposits . . . . . . . . . . . . . . . . . . . . . 52,759 48,860
Certificates and other time deposits of $100,000 or more . 38,423 41,849
Other certificates and time deposits . . . . . . . . . . . 156,777 171,911
-------- --------
Total deposits. . . . . . . . . . . . . . . . . . . . . $506,302 $511,971
-------- --------
-------- --------
- -----------------------------------------------------------------------------------
NOTE 8
SHORT-TERM BORROWINGS
1993 1992
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
Short-term borrowings at December 31:
Federal funds purchased. . . . . . . . . . . . . . . . . . $ 5,300
Securities sold under repurchase agreements. . . . . . . . 26,363 $27,340
U.S. Treasury demand notes . . . . . . . . . . . . . . . . 15,227 9,733
------- -------
Total short-term borrowings. . . . . . . . . . . . . . $46,890 $37,073
------- -------
------- -------
NOTE 9
INCOME TAX
1993 1992 1991
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Income tax expense:
Currently payable:
Federal. . . . . . . . . . . . . . . . . . . . . . . . . $ 3,576 $ 3,632 $ 2,734
State. . . . . . . . . . . . . . . . . . . . . . . . . . 1,135 1,056 884
Deferred:
Federal. . . . . . . . . . . . . . . . . . . . . . . . . (304) (598) (342)
State. . . . . . . . . . . . . . . . . . . . . . . . . . (11) (49) (42)
------- ------- -------
Total income tax expense . . . . . . . . . . . . . . . $ 4,396 $ 4,041 $ 3,234
------- ------- -------
------- ------- -------
Deferred provision (benefit) relating to:
Provision for loan losses. . . . . . . . . . . . . . . . . $ (469) $ (327)
Deferred loan fees . . . . . . . . . . . . . . . . . . . . (115) (90)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . (63) 33
------- -------
Deferred benefit . . . . . . . . . . . . . . . . . . . . $ (647) $ (384)
------- -------
------- -------
Reconciliation of federal statutory
to actual tax expense:
Federal statutory income tax at 34%. . . . . . . . . . . . $ 4,375 $ 4,021 $ 3,398
Tax-exempt interest. . . . . . . . . . . . . . . . . . . . (759) (696) (742)
Effect of state income taxes . . . . . . . . . . . . . . . 742 665 556
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 38 51 22
------- ------- -------
Actual tax expense . . . . . . . . . . . . . . . . . . . $ 4,396 $ 4,041 $ 3,234
------- ------- -------
------- ------- -------
Deferred tax benefit at December 31. . . . . . . . . . . . . $ 1,615 $ 968
------- -------
------- -------
15
----
----
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
NOTE 9
INCOME TAX (CONTINUED)
Tax expense applicable to investment security sales for the years ended
December 31, 1993, 1992, and 1991, was $156,000, $27,000, and $65,000,
respectively.
A cumulative deferred tax asset of $2,157,486 is included in other assets.
At December 31, 1993, the components of the asset are as shown in the table
below.
No valuation allowance at December 31, 1993, was considered necessary.
During 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 (SFAS No. 109), ACCOUNTING FOR INCOME TAXES. As a result, the
beginning deferred tax asset was increased by $227,329, which is reported as the
cumulative effect of a change in accounting method.
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Differences in accounting for other real estate. . . . . . . . . . . $ 6
Differences in depreciation methods. . . . . . . . . . . . . . . . . (446)
Differences in accounting for loans and investment securities. . . . (43)
Differences in accounting for loan fees. . . . . . . . . . . . . . . 431
Differences in accounting for loan losses. . . . . . . . . . . . . . 2,004
Deferred compensation. . . . . . . . . . . . . . . . . . . . . . . . 269
Differences in accounting for pensions
and other employee benefits. . . . . . . . . . . . . . . . . . . . 74
State income tax . . . . . . . . . . . . . . . . . . . . . . . . . . (163)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
-------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,157
-------
-------
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,855
Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (698)
-------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,157
-------
-------
- -----------------------------------------------------------------------------
16
----
----
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
NOTE 10
COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements. The
Banks' exposure to credit loss in the event of nonperformance by the other party
to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual or notional amount of those
instruments. The Banks use the same credit policies in making such commitments
as they do for instruments that are included in the consolidated balance sheet.
Financial instruments whose contract amount represents credit risk as of
December 31, were as follows:
1993 1992
- ----------------------------------------------------
- ----------------------------------------------------
Commitments to extend credit $63,529 $72,135
Standby letters of credit 2,420 2,940
- ----------------------------------------------------
Commitments to extend credit are agreements to lend to a customer, as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Banks evaluate each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Banks upon extension of credit, is based on management's credit
evaluation. Collateral held varies, but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Banks
to guarantee the performance of a customer to a third party.
The Corporation and Banks are also subject to claims and lawsuits which
arise primarily in the ordinary course of business. It is the opinion of
management that the disposition or ultimate resolution of such claims and
lawsuits will not have a material adverse effect on the consolidated
financial position of the Corporation.
NOTE 11
STOCKHOLDERS' EQUITY
National and state banking laws restrict the maximum amount of dividends
that a bank may pay in any calendar year. National banks are limited to the
bank's retained net income (as defined by the Comptroller of the Currency) for
that year and the two preceding years. State banks are limited to retained
earnings, as defined. The amount at December 31, 1993, available for 1994
dividends to the Corporation is $10,327,000. As a practical matter, the
subsidiaries restrict dividends to a lesser amount because of the need to
maintain an adequate capital structure.
Total net assets (stockholder's equity) of all subsidiaries at December 31,
1993, was $67,727,000, of which $57,400,000 was restricted from dividend
distribution to the Corporation.
On November 12, 1991, the Board of Directors approved the Dividend
Reinvestment and Stock Purchase Plan, enabling stockholders to elect to have
their cash dividends on all shares held automatically reinvested in additional
shares of the Corporation's common stock. In addition, stockholders may elect to
make optional cash payments up to an aggregate of $2,500 per quarter for the
purchase of additional shares of common stock. The stock is credited to
participant accounts at fair market value. Dividends are reinvested on a
quarterly basis on the applicable dividend payment that began with the first
quarter of 1992 dividend payment. At December 31, 1993, 282,962 shares of common
stock were reserved for purchase under the plan.
On December 1, 1992, the Board of Directors of the Corporation declared a
three-for-two stock split on its common shares and approved an increase in the
authorized common stock shares to 20,000,000 shares. The new shares were
distributed on January 25, 1993, to holders of record on January 18, 1993.
17
----
----
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
NOTE 12
EMPLOYEE BENEFIT PLANS
The Corporation's defined-benefit pension plan covers substantially all of
the Banks' employees. The benefits are based primarily on years of service and
employees' pay near retirement. Contributions are intended to provide not only
for benefits attributed to service to date, but also for those expected to be
earned in the future. Pension expense was $56,000 for 1993, $64,000 for 1992,
and $69,000 for 1991.
The following table sets forth the plan's funded status and amounts
recognized in the consolidated balance sheet at December 31:
- ----------------------------------------------------------------------------------------------------
1993 1992
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Actuarial present value of:
Accumulated benefit obligation including vested
benefits of $8,100 and $6,458. . . . . . . . . . . . . . . . . . . . . $ 8,279 $ 6,603
-------- --------
-------- --------
Projected benefit obligation for service rendered to date. . . . . . . . . $(10,116) $(8,166)
Plan assets at fair value, primarily interest-bearing deposits
and corporate bonds and securities . . . . . . . . . . . . . . . . . . . 10,013 9,332
-------- --------
Plan assets in excess of (less than) projected benefit obligation . . . . (103) 1,166
Unrecognized net (gain) loss from experience
different than that assumed. . . . . . . . . . . . . . . . . . . . . . . 837 (202)
Unrecognized prior service cost. . . . . . . . . . . . . . . . . . . . . . (59) (66)
Unrecognized net asset at January 1, 1987, being
recognized over 15 years . . . . . . . . . . . . . . . . . . . . . . . . (859) (1,026)
-------- --------
Accrued pension cost included in the balance sheet . . . . . . . . . . . . $ (184) $ (128)
-------- --------
-------- --------
- -------------------------------------------------------------------------------------------------------------------
1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Pension expense includes the following components:
Service cost--benefits earned during the year. . . . . . . . . . . . . . $ 389 $ 336 $ 292
Interest cost on projected benefit obligation. . . . . . . . . . . . . . 619 569 549
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . (1,072) (1,000) (829)
Net amortization and deferral. . . . . . . . . . . . . . . . . . . . . . 120 159 57
------- ------- -------
$ 56 $ 64 $ 69
------- ------- -------
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------
1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Assumptions used in the accounting as of December 31 were:
Discount rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.85% 7.75% 8.0%
Rate of increase in compensation . . . . . . . . . . . . . . . . . . . . 4.5% 5.0% 5.0%
Expected long-term rate of return on assets. . . . . . . . . . . . . . . 8.75% 8.5% 8.5%
- -------------------------------------------------------------------------------------------------------------------
18 (CONTINUED)
----
----
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
NOTE 12
EMPLOYEE BENEFIT PLANS (CONTINUED)
In 1989, stockholders approved the 1989 Stock Option Plan, reserving
112,500 shares of Corporation common stock for the granting of options to
certain employees. The exercise price of the shares may not be less than the
fair market value of the shares upon grant of the option. Options become 100 per
cent vested when granted and are fully exercisable generally six months after
the date of the grant, for a period of ten years. There were 337 shares
available for grant at December 31, 1993.
On December 14, 1993, the Board of Directors adopted the 1994 Stock Option
Plan. Under the terms of the plan, 210,000 shares of Corporation common stock
will be reserved for the granting of options to certain employees and non-
employee directors. The exercise price of the shares may not be less than the
fair market value of the shares upon the grant of the option. Options become 100
per cent vested when granted and are fully exercisable generally six months
after the date of the grant, for a period of ten years. The 1994 Stock Option
Plan is subject to stockholder approval.
- ------------------------------------------------------------------------------------------------------------------------
1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Shares under option after restatement for stock split:
Outstanding at beginning of year . . . . . . . . . . . . . . . . . . . . 75,600 71,175 49,237
Adjustment for fractional shares . . . . . . . . . . . . . . . . . . . . (4)
Granted during the year. . . . . . . . . . . . . . . . . . . . . . . . . 20,100 19,200 23,025
Expired during the year. . . . . . . . . . . . . . . . . . . . . . . . . (1,500)
Exercised during the year. . . . . . . . . . . . . . . . . . . . . . . . (9,299) (14,775) (1,087)
Outstanding at end of year . . . . . . . . . . . . . . . . . . . . . . . 84,897 75,600 71,175
Exercisable at end of 1993 . . . . . . . . . . . . . . . . . . . . . . . 65,097
Average option price at end of year. . . . . . . . . . . . . . . . . . . $ 20.58 $ 18.48 $ 15.65
Price of options exercised
Low. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13.66 $ 13.66 $ 13.66
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25.83 $ 17.00 $ 16.17
- ------------------------------------------------------------------------------------------------------------------------
In 1989, the stockholders also approved the Employee Stock Purchase Plan,
enabling eligible employees to purchase the Corporation's common stock. The
price of the stock to be paid by the employees is determined by the
Corporation's compensation committee, but may not be less than 85 per cent of
the lesser of the fair market value of the Corporation's common stock at the
beginning or at the end of the offering period. Common stock purchases are made
annually and are paid through advance payroll deductions of up to 20 per cent of
eligible compensation.
Participants under the plan purchased 11,817 shares in 1993 at $20.96667
per share. The market value per share on the purchase date was $28.25. At
December 31, 1993, 58,331 shares of common stock were reserved for purchase
under the plan, and $135,321 has been deducted from compensation, plus interest,
toward the purchase of shares after June 30, 1994, the end of the annual
offering period.
On December 14, 1993, the Board of Directors adopted the 1994 Employee
Stock Purchase Plan, subject to stockholder approval. The total of 112,500
shares of the Corporation's common stock are to be reserved for issuance
pursuant to the plan. The terms of the plan are similar to the 1989 Employee
Stock Purchase Plan.
The Banks have a retirement savings 401(k) plan in which substantially all
employees may participate. The Banks match employees' contributions at the rate
of 25 per cent for the first 5 per cent of base salary contributed by
participants. The Banks' expense for the plan was $52,395 for 1993, $61,700 for
1992 and $40,200 for 1991.
In December, 1990, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 106 (SFAS No. 106), EMPLOYERS'
ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. SFAS No. 106
requires the accrual of health care and life insurance benefits during the years
that employees render the service.
The Corporation does not provide health care and life insurance benefits to
retired employees.
19
----
----
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
NOTE 13
FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (SFAS No. 107),
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires that the
Corporation disclose estimated fair values for its financial instruments. The
following methods and assumptions were used to estimate the fair value of each
class of financial instrument for which quoted market rates are not available.
Disclosure of fair values for financial instruments with quoted market rates are
included elsewhere in the notes to the financial statements.
The fair values of cash and cash equivalents, interest-bearing deposits,
short-term borrowings, loan commitments and standby letters of credit are
estimated to be equal to their carrying value and are not included below.
For short-term loans and variable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are based on carrying
values. The fair values for other loans are estimated using discounted cash flow
analyses that apply interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
The fair values of noninterest-bearing and interest-bearing, NOW, money
market deposit and savings accounts are equal to the amount payable on demand at
the balance sheet date. The fair values for certificates of deposit and other
time deposits are estimated using discounted cash flow calculations that apply
interest rates currently being offered for deposits to a schedule of aggregated
expected monthly maturities on such time deposits.
- ----------------------------------------------------------------------------------------------------
1993 1992
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Loans at December 31:
Commercial loans . . . . . . . . . . . . $155,313 $155,880 $131,263 $132,841
Real estate loans. . . . . . . . . . . . 138,225 141,399 126,832 134,899
Installment loans. . . . . . . . . . . . 61,110 61,412 48,786 49,116
Other short-term loans . . . . . . . . . 22,224 22,224 43,427 43,427
-------- -------- -------- --------
Total loans. . . . . . . . . . . . $376,872 $380,915 $350,308 $360,283
-------- -------- -------- --------
-------- -------- -------- --------
Time deposits at December 31:
Certificates of deposit. . . . . . . . $156,850 $157,748 $183,065 $186,262
Other time deposits. . . . . . . . . . 38,350 38,482 30,695 30,695
-------- -------- -------- --------
Total time deposits. . . . . . . . $195,200 $196,230 $213,760 $216,957
-------- -------- -------- --------
-------- -------- -------- --------
- ----------------------------------------------------------------------------------------------------
20
----
----
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
NOTE 14
CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Presented below is condensed financial information as to financial
position, results of operations, and cash flows of the Corporation:
- ---------------------------------------------------------------------------------------------------
CONDENSED BALANCE SHEET
- ---------------------------------------------------------------------------------------------------
DECEMBER 31
1993 1992
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Assets
Cash on deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 342 $ 620
Investment in subsidiaries. . . . . . . . . . . . . . . . . . . . . . . 67,657 62,432
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749 786
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179 97
------- -------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $68,927 $63,935
------- -------
------- -------
Liabilities
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 123
-------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 123
-------
Stockholders' equity
Common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 424 $ 425
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . 17,068 17,684
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,312 45,826
------- -------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . 68,804 63,935
------- -------
Total liabilities and stockholders' equity. . . . . . . . . . . . . . $68,927 $63,935
------- -------
------- -------
- -----------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENT OF INCOME
- -----------------------------------------------------------------------------------------------------------------
DECEMBER 31
1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Income
Dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . $ 3,571 $ 2,890 $ 5,473
Other income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
------- ------- -------
Total income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,571 2,891 5,473
------- ------- -------
Expenses
Amortization of core deposit intangibles,
goodwill, and fair value adjustments. . . . . . . . . . . . . . . . . 19 4 (8)
Other expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 212
------- ------- -------
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 216 (8)
------- ------- -------
Income before income tax, equity in undistributed income of
subsidiaries and cumulative effect of change in accounting method . . . . 3,452 2,675 5,481
Income tax benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . (40) (79)
------- ------- -------
Income before equity in undistributed income of
subsidiaries and cumulative effect of change in accounting method . . . . 3,492 2,754 5,481
Equity in undistributed income of subsidiaries. . . . . . . . . . . . . 5,225 5,031 1,278
------- ------- -------
Income before cumulative effect of change in accounting method . . . . . . 8,717 7,785 6,759
Cumulative effect of change in method of accounting for income taxes . . . (18)
------- ------- -------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,699 $ 7,785 $ 6,759
------- ------- -------
------- ------- -------
- -------------------------------------------------------------------------------------------------------------------
21 (CONTINUED)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(TABLE DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 14
CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY, CONTINUED)
- --------------------------------------------------------------------------------
CONDENSED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------
DECEMBER 31
1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,699 $ 7,785 $ 6,759
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4 (8)
Equity in undistributed income of subsidiaries . . . . . . . . . . . . (5,225) (5,031) (1,278)
Net change in:
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64) (19)
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 123
------- ------- -------
Net cash provided by operating activities. . . . . . . . . . . . . 3,552 2,739 5,473
------- ------- -------
Investing activities:
Payment for purchase of First United . . . . . . . . . . . . . . . . . . (2,556)
-------
Net cash used by investing activities. . . . . . . . . . . . . . . (2,556)
-------
Financing activities:
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,213) (2,890) (2,562)
Stock issued under employee benefit plans. . . . . . . . . . . . . . . . 247 191 181
Stock issued under dividend reinvestment
and stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . 287 186
Stock options exercised. . . . . . . . . . . . . . . . . . . . . . . . . 154 222 16
Stock redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,301) (31) (377)
Cash paid in lieu of issuing fractional shares . . . . . . . . . . . . . (4)
------- ------- -------
Net cash used by financing activities. . . . . . . . . . . . . . . (3,830) (2,322) (2,742)
------- ------- -------
Net increase (decrease) in cash on deposit . . . . . . . . . . . . . . . . (278) 417 175
Cash on deposit, beginning of year . . . . . . . . . . . . . . . . . . . . 620 203 28
------- ------- -------
Cash on deposit, end of year . . . . . . . . . . . . . . . . . . . . . . . $ 342 $ 620 $ 203
------- ------- -------
------- ------- -------
NOTE 15
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth certain quarterly results for the years
ended December 31, 1993 and 1992:
- --------------------------------------------------------------------------------------------------------
NET PROVISION AVERAGE EARNINGS
QUARTER INTEREST INTEREST FOR LOAN NET SHARES PER
ENDED INCOME INCOME LOSSES INCOME OUTSTANDING SHARE
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
March, 1993. . . . . . . . . . $10,593 $ 6,254 $ 269 $2,282 3,407,803 $ .67
June, 1993 . . . . . . . . . . 10,707 6,475 270 2,319 3,411,165 .68
September, 1993. . . . . . . . 10,327 6,276 243 2,014 3,426,651 .59
December, 1993 . . . . . . . . 10,379 6,503 232 2,084 3,420,050 .61
------- ------- ------ ------- -----
$42,006 $25,508 $1,014 $8,699 3,416,417 $2.55
------- ------- ------ ------- -----
------- ------- ------ ------- -----
March, 1992. . . . . . . . . . $11,931 $ 6,307 $ 301 $1,984 3,369,593 $ .59
June, 1992 . . . . . . . . . . 11,590 6,255 328 2,044 3,376,214 .61
September, 1992. . . . . . . . 11,285 6,233 338 1,799 3,394,959 .53
December, 1992 . . . . . . . . 11,099 6,415 390 1,958 3,400,631 .57
------- ------- ------ ------- -----
$45,905 $25,210 $1,357 $7,785 3,385,349 $2.30
------- ------- ------ ------- -----
------- ------- ------ ------- -----
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22
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ANNUAL REPORT APPENDIX - GRAPHIC & IMAGE INFORMATION
- --------------------------------------------------------------------------------
Map: FIRST MERCHANTS CORPORATION MARKET AREA
This graphic is a map of Indiana showing the market area for First Merchants
Corporation ("Corporation"). The map illustrates the location of Delaware,
Madison and Henry counties, Indiana. The map identifies the communities with
Corporation offices. The following table summarizes the Corporation's office
locations:
LOCATION COUNTY
Muncie Delaware
Albany Delaware
Daleville Delaware
Eaton Delaware
Pendleton Madison
Edgewood Madison
Ingalls Madison
Lapel Madison
Markleville Madison
Middletown Henry
Sulphur Springs Henry
Mooreland Henry
- --------------------------------------------------------------------------------
Bar chart: RETURN ON AVERAGE ASSETS
A bar graph with the following plot points for the respective years.
RETURN ON AVERAGE ASSETS
(per cent)
YEAR 1991 1992 1993
Return on Average Assets 1.21% 1.29% 1.39%
A narrative discussion of this data is provided in the Management's Discussion &
Analysis, under the caption "Results of Operation".
- --------------------------------------------------------------------------------
ANNUAL REPORT APPENDIX - GRAPHIC & IMAGE INFORMATION (Continued)
- --------------------------------------------------------------------------------
Bar chart: RETURN ON AVERAGE EQUITY
A bar graph with the following plot points for the respective years.
RETURN ON AVERAGE EQUITY
(per cent)
YEAR 1991 1992 1993
Return on Average Equity 12.41% 12.71% 13.01%
A narrative discussion of this data is provided in the Management's Discussion &
Analysis, under the caption "Results of Operation".
- --------------------------------------------------------------------------------
Bar chart: NET LOAN LOSSES
A bar graph with the following plot points for the respective years.
NET LOAN LOSSES
(as a per cent of average loans)
YEAR 1991 1992 1993
Net Loan Losses
First Merchants Corporation .35% .26% .16%
Peer Group .95% .63% NA
A narrative discussion of this data is provided in the Management's Discussion &
Analysis, under the caption "Asset Quality/Provision for Loan Losses".