STOCKHOLDER INFORMATION
[GRAPHIC: MAP; FIRST MERCHANTS CORPORATION MARKET AREA]
First
Merchants
Corporation
Market Area
Corporate Office
200 East Jackson Street
Muncie, IN 47305
317-747-1500
First Merchants Corporation currently provides services through 21 offices
located in Delaware, Madison, and Henry counties in Indiana.
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 $914,000,000 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.
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STOCKHOLDER INFORMATION
STOCK PRICE AND DIVIDEND INFORMATION
PRICE PER SHARE
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
QUARTER HIGH LOW DIVIDENDS DECLARED
1995 1994 1995 1994 1995 1994
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Quarter $22.17 $20.33 $20.83 $19.00 $.19 $.17
Second Quarter 23.50 19.67 21.33 18.67 .19 .17
Third Quarter 26.50 22.50 22.67 19.00 .20 .19
Fourth Quarter 26.75 22.33 25.75 20.33 .20 .19
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The table above lists per share prices and dividend payments during 1994 and
1995, as adjusted for the 3-for-2 stock split of October, 1995.
Prices are as reported by the National Association of Securities Dealers
Automated Quotation - National Market System.
Numbers rounded to the nearest cent when applicable.
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, 1995, the number of shares outstanding was 5,053,901. There were
1,115 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
Assistant Vice President
Investor Services
First Merchants Corporation
P.O. Box 792
Muncie, Indiana 47308-0792
317-747-1500
1-800-262-4261
MARKET MAKERS
The following firms make a market in First Merchants Corporation stock:
City Securities Corporation
Herzog, Heine, Geduld, Inc.
Howe, Barnes & Johnson, Inc.
McDonald and Company
NatCity Investments, Inc.
David A. Noyes and Company
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, April 4, 1996, 3:30 p.m., at the Horizon Convention Center, 401 South
High Street, Muncie, Indiana.
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INDEPENDENT AUDITOR'S REPORT
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, 1995 and 1994, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended December 31, 1995 (pages 8-24). 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, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in the notes to the Consolidated Financial Statements, the
Corporation changed its method of accounting for investments in securities in
1994 and for income taxes in 1993.
/S/ GEO S. OLIVE & CO. LLC
Indianapolis, Indiana
January 19, 1996,
except for Note 2 as to which
the date is January 24, 1996
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TABLE OF CONTENTS
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA. . . . . . . . . . . . 1
MANAGEMENT'S DISCUSSION & ANALYSIS . . . . . . . . . . . . . . . . 2
CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . 12
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(INSIDE COVER)
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
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(Dollars in Thousands, Except per Share Amounts)
1995 1994 1993 1992 1991
OPERATIONS
Net Interest Income
Fully Taxable Equivalent Basis. . . . . . . . . . . . . . . . . $ 29,245 $ 28,282 $ 26,806 $ 26,400 $ 23,277
Less Tax Equivalent Adjustment . . . . . . . . . . . . . . . . . . 1,364 1,299 1,298 1,190 1,320
-------- -------- -------- -------- --------
Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . 27,881 26,983 25,508 25,210 21,957
Provision for Loan Losses . . . . . . . . . . . . . . . . . . . . . 640 782 1,014 1,357 1,401
-------- -------- -------- -------- --------
Net Interest Income
After Provision for Loan Losses . . . . . . . . . . . . . . . . 27,241 26,201 24,494 23,853 20,556
Total Other Income . . . . . . . . . . . . . . . . . . . . . . . . 6,907 6,298 6,588 5,576 5,229
Total Other Expenses. . . . . . . . . . . . . . . . . . . . . . . . 18,842 18,434 18,214 17,603 15,792
-------- -------- -------- -------- --------
Income Before Income Tax Expense . . . . . . . . . . . . . . . . . . 15,306 14,065 12,868 11,826 9,993
Income Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . 5,448 4,907 4,396 4,041 3,234
-------- -------- -------- -------- --------
Income Before Change in Accounting Method . . . . . . . . . . . . . 9,858 9,158 8,472 7,785 6,759
Change in Accounting Method for Income Taxes . . . . . . . . . . . . 227
-------- -------- -------- -------- --------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,858 $ 9,158 $ 8,699 $ 7,785 $ 6,759
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
PER SHARE DATA (1)
Income Before Change in Accounting Method . . . . . . . . . . . . . $ 1.95 $ 1.80 $ 1.65 $ 1.53 $ 1.39
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.95 1.80 1.70 1.53 1.39
Cash Dividends Paid . . . . . . . . . . . . . . . . . . . . . . . . .77 .71 .63 .57 .57
December 31 Book Value . . . . . . . . . . . . . . . . . . . . . . 15.92 14.07 13.53 12.53 11.57
December 31 Market Value (Bid Price). . . . . . . . . . . . . . . . 25.75 20.83 19.33 19.00 12.45
AVERAGE BALANCES
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $665,347 $634,868 $626,398 $603,067 $560,412
Total Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413,940 388,639 357,028 329,750 300,276
Total Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 538,539 514,029 517,826 501,526 441,302
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . 76,001 70,104 66,887 61,246 54,473
YEAR-END BALANCES
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $707,859 $644,606 $626,113 $616,859 $596,573
Total Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 419,730 401,605 376,872 350,308 323,382
Total Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 588,156 529,830 506,302 511,971 484,824
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . 80,473 71,018 68,804 63,935 58,472
FINANCIAL RATIOS
Return on Average Assets . . . . . . . . . . . . . . . . . . . . . . . 1.48% 1.44% 1.39% 1.29% 1.21%
Return on Average Stockholders' Equity . . . . . . . . . . . . . . . . 12.97 13.06 13.01 12.71 12.41
Average Earning Assets to Total Assets. . . . . . . . . . . . . . . . 94.65 94.05 93.71 93.93 93.82
Allowance for Loan Losses as % of Total Loans. . . . . . . . . . . . . 1.18 1.24 1.27 1.24 1.20
Dividend Payout Ratio . . . . . . . . . . . . . . . . . . . . . . . . . 39.49 39.44 37.06 37.25 38.13
Average Stockholders' Equity to Average Assets. . . . . . . . . . . . . 11.42 11.04 10.68 10.16 9.72
Tax Equivalent Yield on Earning Assets. . . . . . . . . . . . . . . . . 8.15 7.44 7.38 8.31 9.48
Cost of Supporting Liabilities. . . . . . . . . . . . . . . . . . . . . 3.51 2.70 2.81 3.65 5.05
Net Interest Margin on Earning Assets . . . . . . . . . . . . . . . . . 4.64 4.74 4.57 4.66 4.43
(1) Restated for 3- for- 2 stock splits distributed January, 1993, and October,
1995.
The amounts include First United Bank, subsequent to its acquisition on July 31,
1991.
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MANAGEMENT'S DISCUSSION & ANALYSIS
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Asset quality has been a major factor in the Corporation's ability to generate
consistent profit improvement.
[Graphic; bar chart; Return on Average Assets]
[Graphic; bar chart; Return on Average Equity]
RESULTS OF OPERATIONS
Net income amounted to $9,858,000 or $1.95, an increase of 8.3 per cent
over 1994 at $1.80 per share.
Return on assets increased to a record level of 1.48 per cent, up from 1.44
per cent in 1994, and 1.39 per cent in 1993.
Return on equity was 12.97 per cent in 1995, 13.06 per cent in 1994, and
13.01 per cent in 1993.
In 1995, First Merchants Corporation ("Corporation") recorded the
twentieth 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 11.37 per cent at year-end 1995 and
11.02 per cent at December 31, 1994. At December 31, 1995, the Corporation had
a Tier I risk-based capital ratio of 16.99 per cent, total risk-based capital
ratio of 18.07 per cent, and a leverage ratio of 11.13 per cent. Regulatory
capital guidelines require a Tier I risk-based capital ratio of 4.0 per cent and
a total risk-based capital ratio of 8.0 per cent.
The Corporation has an employee stock purchase plan and an employee stock
option plan. Activity under these plans is described in Note 14 to the
Consolidated Financial Statements. The transactions under these plans have not
had a material effect on the Corporation's capital position.
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 indicates that the Corporation's loan quality
compares favorably with the peer group.
(continued)
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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
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . .16% N/A
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . .26 1.01%
1993 . . . . . . . . . . . . . . . . . . . . . . . . . . .30 1.55
1992 . . . . . . . . . . . . . . . . . . . . . . . . . . .41 1.85
1991 . . . . . . . . . . . . . . . . . . . . . . . . . . .86 2.59
(1) Accruing loans past due 90 days or more, and non-accruing loans, but
excluding restructured loans. December 31, 1995, peer group comparisons are not
yet available.
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At December 31, 1995, the allowance for loan losses was $4,957,000,
down slightly from year end 1994. As a per cent of loans, the allowance was
1.18 per cent, down from 1.24 per cent at year end 1994.
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.
1995 1994 1993 1992 1991
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(Dollars in Thousands)
Allowance for loan losses:
Balance at January 1 . . . . . . . . . . . . . . . . . $ 4,998 $ 4,800 $ 4,351 $ 3,867 $ 3,254
Addition resulting
from acquisition . . . . . . . . . . . . . . . . 252
Chargeoffs:
Commercial. . . . . . . . . . . . . . . . . . . . . 586 526 391 588 806
Real estate mortgage . . . . . . . . . . . . . . . . 41 129 100 41
Installment . . . . . . . . . . . . . . . . . . . . 296 346 388 552 511
--------- --------- --------- --------- ---------
Total chargeoffs . . . . . . . . . . . . . . . 882 913 908 1,240 1,358
--------- --------- --------- --------- ---------
Recoveries:
Commercial. . . . . . . . . . . . . . . . . . . . . 89 216 240 215 227
Real estate mortgage . . . . . . . . . . . . . . . . 4 30 5 38 7
Installment . . . . . . . . . . . . . . . . . . . 108 83 98 114 84
--------- --------- --------- --------- ---------
Total recoveries . . . . . . . . . . . . . . . 201 329 343 367 318
--------- --------- --------- --------- ---------
Net chargeoffs . . . . . . . . . . . . . . . . . . . . . 681 584 565 873 1,040
--------- --------- --------- --------- ---------
Provision for loan losses. . . . . . . . . . . . . . . . 640 782 1,014 1,357 1,401
--------- --------- --------- --------- ---------
Balance at December 31 . . . . . . . . . . . . . . . . . $ 4,957 $ 4,998 $ 4,800 $ 4,351 $ 3,867
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of net chargeoffs during
the period to average loans
outstanding during the period. . . . . . . . . . . . . . .16% .15% .16% .26% .35%
Peer Group . . . . . . . . . . . . . . . . . . . . . . . . . N/A .25% .49% .65% .95%
As a result of Management's assessment of loan quality and the
adequacy of the allowance for loan losses, the 1995 provision for loan losses
was reduced $142,000. Chargeoffs exceeded the amount provided by $41,000.
The Corporation adopted SFAS No. 114 and No. 118 ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN AND ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN -
INCOME RECOGNITION AND DISCLOSURE on January 1, 1995. Impaired loans totaled
$3,122,000 at December 31, 1995. An allowance for losses at December 31, 1995,
was not deemed necessary for impaired loans totaling $1,900,000, but an
allowance of $559,000 was recorded for the remaining balance of impaired loans
of $1,222,000. The average balance of impaired loans for 1995 was $1,682,000.
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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 liquidity, rates 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, 1995, remained adequate to meet the Corporation's primary goal
of achieving optimum interest margins while avoiding undue interest rate
risk. The table below presents the Corporation's interest rate sensitivity
analysis as of December 31, 1995.
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INTEREST-RATE SENSITIVITY ANALYSIS
(Dollars in Thousands)
AT DECEMBER 31, 1995
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 . . . . . . $ 37,655 $ 37,655
Securities available for sale. . . . . . . . 20,878 $ 10,544 $ 97,717 $ 13,981 143,120
Securities held to maturity. . . . . . . . . 11,823 7,882 35,023 3,486 58,214
Mortgage loans held for sale . . . . . . . . 736 736
Loans. . . . . . . . . . . . . . . . . . . . 216,417 46,588 105,521 50,468 418,994
Federal Reserve and
Federal Home Loan Bank stock . . . . . . . 1,585 307 1,892
-------- -------- -------- ------- -------
Total rate-sensitive assets . . . . . 288,358 65,014 238,261 68,978 660,611
-------- -------- -------- ------- -------
Rate Sensitive Liabilities:
Interest-bearing deposits. . . . . . . . . . 212,175 29,162 247,318 68 488,723
Short-term borrowings. . . . . . . . . . . . 33,975 33,975
Federal Home Loan Bank advance . . . . . . . 1,000 1,000
-------- -------- -------- ------- -------
Total rate-sensitive liabilities. . . 247,150 29,162 247,318 68 523,698
-------- -------- -------- ------- -------
Interest rate sensitivity gap by period. . . . $ 41,208 $ 35,852 $ (9,057) $ 68,910
Cumulative gap . . . . . . . . . . . . . . . . 41,208 77,060 68,003 136,913
Cumulative ratio at December 31, 1995. . . . . 116.67% 127.89% 112.99% 126.14%
EARNING ASSETS
Earning assets increased $76.4 million during 1995 after declining $.8
million during 1994.
The following table presents the earning asset mix for the years 1995, 1994
and 1993.
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EARNING ASSETS
(Dollars in Millions)
DECEMBER 31
1995 1994 1993
------ ------ ------
Federal funds sold and interest-bearing time deposits. . . . . . . . . $ 37.7 $ 3.7 $ 1.9
Securities available for sale. . . . . . . . . . . . . . . . . . . . . 143.1 99.3
Securities held to maturity. . . . . . . . . . . . . . . . . . . . . . 58.2 77.7 204.3
Mortgage loans held for sale . . . . . . . . . . . . . . . . . . . . . .7
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 419.0 401.6 376.9
Federal Reserve and Federal Home Loan Bank stock . . . . . . . . . . . 1.9 1.9 1.9
------ ------ ------
Total. . . . . . . . . . . . . . . . . . . . . $660.6 $584.2 $585.0
------ ------ ------
------ ------ ------
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MANAGEMENT'S DISCUSSION & ANALYSIS
(Dollars in Thousands)
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DEPOSITS, SHORT-TERM BORROWINGS AND FEDERAL HOME LOAN BANK ADVANCE
The following tables present the level of deposits and borrowed funds (Federal
funds purchased, repurchase agreements with customers, U.S. Treasury demand
notes and Federal Home Loan Bank stock) based on both year-end levels and daily
average balances for the past three years:
AS OF DECEMBER 31
SHORT-TERM FEDERAL HOME LOAN
DEPOSITS BORROWINGS BANK ADVANCE
-------- ---------- -----------------
1995 $ 588,156 $ 33,975 $ 1,000
1994 529,830 39,189
1993 506,302 46,890
AVERAGE BALANCES
SHORT-TERM FEDERAL HOME LOAN
DEPOSITS BORROWINGS BANK ADVANCE
-------- ---------- -----------------
1995 $ 538,539 $ 44,799 $ 515
1994 514,029 45,639
1993 517,826 35,317
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 table below presents the Corporation's asset yields, interest expense,
and net interest income as a per cent of average earning assets for the five-
year period ending in 1995.
Asset yields improved in 1995 ( .71 per cent), while interest expense
increased .81 per cent.
The resulting "spread" decrease of .10 per cent (4.64% vs 4.74%) was offset
by a $32.7 million increase in earning assets enabling fully taxable equivalent
net interest income to grow by $963,000.
INTEREST INCOME INTEREST EXPENSE NET INTEREST INCOME NET INTEREST INCOME
(FTE) as a Per Cent as a Per Cent (FTE) as a Per Cent AVERAGE on a
of Average of Average of Average EARNING Fully Taxable
Earning Assets Earning Assets Earning Assets ASSETS Equivalent Basis
------------------- ---------------- ------------------- ------- ------------------
1995 8.15% 3.51% 4.64% $ 629,784 $ 29,245
1994 7.44 2.70 4.74 597,102 28,282
1993 7.38 2.81 4.57 587,009 26,806
1992 8.31 3.65 4.66 566,467 26,400
1991 9.48 5.05 4.43 525,799 23,277
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 $6,907,000 in 1995, exceeding the prior year by
$609,000 or 9.7 per cent. Major factors included:
1. A $205,000 (8.0 per cent) increase in trust revenues.
2. A gain of $205,000 on the sale of approximately $8,000,000 of the
Corporation's student loans.
Other income declined in 1994 by $290,000, (4.4 per cent). The decline
is attributable to two factors:
1. Loss on the sale of securities of $31,000 compared to gains of
$395,000 in 1993, a change of $426,000.
2. A $126,000 (5.0 per cent) decline in deposit service charges.
The first factor is not relevant to the underlying fee income potential
of the Corporation. Without that change, fee income would have increased from
$6,194,000 to $6,239,000 (2.2 per cent).
OTHER EXPENSE
Total "other expenses" represent non-interest operating expenses of the
Corporation. Those expenses amounted to $18,842,000 in 1995, an increase of 2.2
per cent from the prior year.
Salary and benefit expenses, which account for over one-half of the
Corporation's non-interest operating expenses, increased by $510,000 (5.1 per
cent). Increases in occupancy, equipment, printing, and office supplies and
advertising expenses totaling $449,000 were offset by a $530,000 reduction in
the cost of deposit insurance and by a refund of $238,000 from the State of
Indiana for intangibles taxes paid in 1988 and 1989.
1994 expenses at $18,434,000 exceeded the prior year by $219,000 (1.2 per
cent). Salary and benefit expenses increased by $928,000 (10.2 per cent).
Approximately
(continued)
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MANAGEMENT'S DISCUSSION & ANALYSIS
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OTHER EXPENSE (continued)
one-fourth of that increase was attributable to the change in the corporation's
data processing function described below. This change resulted in a direct
reduction of computer processing fees amounting to $1,046,000.
In the fourth quarter of 1993, First Merchants assumed responsibility for
the data processing function for the Corporation and its subsidiaries. The
agreement with an outside party to provide data processing was terminated. The
cost of the conversion equipment and software was approximately $1,700,000.
The equipment and software costs will be depreciated on a straight-line
method based on useful lives of the assets. The Corporation estimates that data
processing costs declined under the new arrangement (net of additional salary,
benefit, equipment and software costs) by more than $400,000.
INCOME TAXES
The increase in 1995 tax expense of $541,000 is attributable primarily to a
$1,241,000 increase in net pre-tax income. Likewise, the $512,000 increase in
1994 resulted from a $1,198,000 increase in pre-tax net income.
- --------------------------------------------------------------------------------
FEDERAL and STATE INCOME TAXES
- --------------------------------------------------------------------------------
(Dollars in Thousands)
1995 1994 1993
- --------------------------------------------------------------------------------
Federal taxes $ 4,146 $ 3,735 $ 3,272
State taxes 1,302 1,172 1,124
--------- --------- ---------
Total $ 5,448 $ 4,907 $ 4,396
--------- --------- ---------
--------- --------- ---------
ACCOUNTING MATTERS
Derivative Financial Instruments and Fair Value of Financial Statements
SFAS No. 119 ("SFAS 119") requires disclosure about derivative financial
instruments-futures, forwards, swap and option contracts and other financial
instruments with similar characteristics (e.g., interest rate caps or floors and
loan commitments). The definition of derivatives excludes all on-balance sheet
receivables and payables, including those that "derive" their values or cash
flows from the price of another security or index, such as mortgage-backed
securities and interest-only obligations.
SFAS 119 requires disclosures about amounts, nature and terms of
derivatives that are not subject to SFAS No. 105 because they do not result in
off-balance sheet risk of accounting loss. It requires that a distinction be
made between financial instruments held or issued for trading purposes and
financial instruments held or issued for purposes other than trading. The
required disclosures, either in the body of the financial statements or in the
footnotes, include: (i) the face or contract amount (or notional principal
amount) and ii) the nature and terms, including at a minimum, a discussion of:
(1) the credit and market risk of those instruments, (2) the cash requirements
of those instruments, and (3) the related accounting policy.
SFAS 119 amends SFAS No. 105 and No. 107 to require disaggregation of
information about financial instruments with off-balance sheet risk of
accounting loss and to require that fair value information be presented without
combining, aggregating or netting the fair values of derivatives with fair value
of nonderivatives and be presented together with the related carrying amounts in
the body of the financial statements, a single footnote or a summary table in a
form that makes it clear whether the amounts represent assets or liabilities.
SFAS 119 was effective for the Company's financial statements issued for the
year ended December 31, 1995.
At December 31, the Corporation did not have any derivative financial
instruments as defined in SFAS 115.
Accounting for Mortgage Servicing Rights
During 1995, the FASB issued SFAS No. 122 ("SFAS 122") ACCOUNTING FOR
MORTGAGE SERVICING RIGHTS. SFAS 122 pertains to mortgage banking enterprises
and financial institutions that conduct operations that are substantially
similar to the primary operations of a mortgage banking enterprise. SFAS 122
eliminates the accounting distinction between mortgage servicing rights that are
acquired through loan origination activities and those acquired through purchase
transactions. Under SFAS 122, if a mortgage banking enterprise sells or
securitizes loans and retains the mortgage servicing rights, the enterprise must
allocate the total cost of the mortgage loans to the mortgage servicing rights
and the loans (without the rights) based on their relative fair values if
(continued)
-6-
MANAGEMENT'S DISCUSSION & ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ACCOUNTING MATTERS (continued)
it is practicable to estimate those fair values. If it is not practicable, the
entire cost should be allocated to the mortgage loans and no cost should be
allocated to the mortgage servicing rights. As entity would measure impairment
of mortgage service rights and loans based on the excess of the carrying amount
of the mortgage servicing rights portfolio over the fair value of that
portfolio.
SFAS 122 is to be applied prospectively in fiscal years beginning after
December 15, 1995, to transactions in which an entity acquires mortgage
servicing rights and to impairment evaluations of all capitalized mortgage
servicing rights. The Company has not yet determined the impact of SFAS 122 on
its financial condition and results of operations.
Accounting for Stock-based Compensation
The FASB issued SFAS 123, STOCK-BASED COMPENSATION. In December, 1994, the
FASB decided to require expanded disclosures rather than recognition of
compensation cost for fixed, at the money, options rather than recognition of
compensation expense as was originally proposed in the ED.
This statement establishes a fair value based method of accounting for
stock-based compensation plans. The FASB encourages employers to recognize the
related compensation expense; however, employers are permitted to continue to
apply the provisions of APB Opinion No. 25. Employers that choose to continue
to follow APB No. 25 are required to disclose in notes to the financial
statements the pro forma effects on their net income and earnings per share of
the new accounting method.
SFAS 123 is effective for the Corporation in 1996. The Corporation has not
yet determined the impact of adopting SFAS 123 on net income or financial
position in the year of adoption.
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.
-7-
CONSOLIDATED BALANCE SHEET
DECEMBER 31
-----------
1995 1994
---- ----
ASSETS
Cash and due from banks. . . . . . . . . . . . . $ 31,432,299 $ 42,684,174
Federal funds sold . . . . . . . . . . . . . . . 37,500,000 3,675,000
------------ ------------
Cash and cash equivalents. . . . . . . . . . . 68,932,299 46,359,174
Interest-bearing time deposits . . . . . . . . . 155,441 23,117
Investment securities
Available for sale . . . . . . . . . . . . . . 143,119,910 99,363,240
Held to maturity . . . . . . . . . . . . . . . 58,213,962 77,676,818
------------ ------------
Total investment securities . . . . . . . . 201,333,872 177,040,058
Mortgage loans held for sale . . . . . . . . . . 735,522
Loans. . . . . . . . . . . . . . . . . . . . . . 418,994,250 401,604,848
Less: Allowance for loan losses . . . . . . . (4,957,467) (4,997,847)
------------ ------------
Net Loans. . . . . . . . . . . . . . . . . . 414,036,783 396,607,001
Premises and equipment . . . . . . . . . . . . . 10,475,935 9,545,153
Federal Reserve and Federal Home Loan Bank
stock. . . . . . . . . . . . . . . . . . . . . 1,891,800 1,879,300
Interest receivable. . . . . . . . . . . . . . . 6,187,277 5,627,391
Core deposit intangibles and goodwill. . . . . . 1,845,417 1,976,594
Other assets . . . . . . . . . . . . . . . . . . 2,264,833 5,548,184
------------ ------------
Total assets. . . . . . . . . . . . . . . . $707,859,179 $644,605,972
------------ ------------
------------ ------------
LIABILITIES
Deposits:
Noninterest bearing. . . . . . . . . . . . . . $ 99,432,455 $ 99,667,435
Interest bearing . . . . . . . . . . . . . . . 488,723,230 430,162,771
------------ ------------
Total deposits . . . . . . . . . . . . . . . 588,155,685 529,830,206
Short-term borrowings. . . . . . . . . . . . . . 33,975,269 39,188,990
Federal Home Loan Bank advance . . . . . . . . . 1,000,000
Interest payable . . . . . . . . . . . . . . . . 1,866,499 1,319,917
Other liabilities. . . . . . . . . . . . . . . . 2,389,037 3,248,790
------------ ------------
Total liabilities. . . . . . . . . . . . . . 627,386,490 573,587,903
STOCKHOLDERS' EQUITY
Preferred stock, no par value:
Authorized and unissued--500,000 shares
Common stock, $.125 stated value:
Authorized--20,000,000 shares
Issued and outstanding--5,053,901 and
3,366,346 shares . . . . . . . . . . . . . . . 631,737 420,793
Additional paid-in capital . . . . . . . . . . . 15,852,082 16,230,765
Retained earnings. . . . . . . . . . . . . . . . 62,836,310 56,886,450
Net unrealized gain (loss) on securities
available for sale . . . . . . . . . . . . . . 1,152,560 (2,519,939)
------------ ------------
Total stockholders' equity. . . . . . . . . . . 80,472,689 71,018,069
------------ ------------
Total liabilities and stockholders'equity. . $707,859,179 $644,605,972
------------ ------------
------------ ------------
See Notes to Consolidated Financial Statements.
-8-
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31
-----------------------------------------
1995 1994 1993
---- ---- ----
INTEREST INCOME
Loans receivable:
Taxable. . . . . . . . . . . . . . . . . . . . . .$ 37,750,745 $ 31,721,626 $28,704,848
Tax exempt . . . . . . . . . . . . . . . . . . . . 55,295 83,412 122,422
Investment securities:
Taxable. . . . . . . . . . . . . . . . . . . . . . 8,623,701 8,552,888 10,264,922
Tax exempt . . . . . . . . . . . . . . . . . . . . 2,474,920 2,434,992 2,396,031
Federal funds sold . . . . . . . . . . . . . . . . . 906,564 217,035 453,805
Deposits with financial institutions . . . . . . . . 3,728 1,743 35,295
Federal Reserve and Federal Home Loan Bank stock 149,110 102,785 28,933
------------ ----------- ----------
Total interest income. . . . . . . . . . . . . . . 49,964,063 43,114,481 42,006,256
------------ ----------- ----------
INTEREST EXPENSE
Deposits . . . . . . . . . . . . . . . . . . . . . . 19,565,304 14,294,358 15,431,588
Short-term borrowings. . . . . . . . . . . . . . . . 2,489,963 1,836,794 1,066,592
Federal Home Loan Bank advance . . . . . . . . . . . 27,502
------------ ----------- ----------
Total interest expense . . . . . . . . . . . . . . 22,082,769 16,131,152 16,498,180
------------ ----------- ----------
NET INTEREST INCOME. . . . . . . . . . . . . . . . . . 27,881,294 26,983,329 25,508,076
Provision for loan losses. . . . . . . . . . . . . . 640,000 782,000 1,013,765
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES. . . . . . . . . . . . . . 27,241,294 26,201,329 24,494,311
------------ ----------- ----------
OTHER INCOME
Fiduciary activities . . . . . . . . . . . . . . . . 2,754,667 2,549,660 2,408,632
Service charges on deposit accounts. . . . . . . . . 2,377,712 2,380,166 2,506,483
Other customer fees. . . . . . . . . . . . . . . . . 1,159,421 1,061,332 1,049,751
Net realized gains(losses) on
sale of available-for-sale securities. . . . . . (66,404) (31,317) 394,551
Other income . . . . . . . . . . . . . . . . . . . . 681,142 337,927 228,794
------------ ----------- ----------
Total other income . . . . . . . . . . . . . . . . 6,906,538 6,297,768 6,588,211
------------ ----------- ----------
OTHER EXPENSES
Salaries and employee benefits . . . . . . . . . . . 10,561,065 10,051,455 9,123,874
Net occupancy expenses . . . . . . . . . . . . . . . 1,209,807 1,106,107 1,096,771
Equipment expenses . . . . . . . . . . . . . . . . . 1,674,234 1,586,398 1,138,180
Computer processing fees . . . . . . . . . . . . . . 138,463 130,882 1,176,957
Deposit insurance expense. . . . . . . . . . . . . . 604,019 1,134,194 1,138,463
Printing and office supplies . . . . . . . . . . . . 915,703 760,646 771,593
Advertising expense. . . . . . . . . . . . . . . . . 586,738 484,657 525,685
Other expenses . . . . . . . . . . . . . . . . . . . 3,151,836 3,179,536 3,243,368
------------ ----------- ----------
Total other expenses . . . . . . . . . . . . . . . 18,841,865 18,433,875 18,214,891
------------ ----------- ----------
INCOME BEFORE INCOME TAX AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING METHOD. . . . . . . . . . . . . . . . . . . 15,305,967 14,065,222 12,867,631
Income tax expense . . . . . . . . . . . . . . . . . 5,448,153 4,907,459 4,395,920
------------ ----------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING METHOD. . . . . . . . . . . . . . 9,857,814 9,157,763 8,471,711
CUMULATIVE EFFECT OF CHANGE IN METHOD
OF ACCOUNTING FOR INCOME TAXES . . . . . . . . . . . . 227,329
------------ ----------- ----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . .$ 9,857,814 $ 9,157,763 $ 8,699,040
------------ ----------- ----------
------------ ----------- ----------
PER SHARE. . . . . . . . . . . . . . . . . . . . . . .
Income before cumulative effect of change
in accounting method . . . . . . . . . . . . . . . .$ 1.95 $ 1.80 $ 1.65
Net Income . . . . . . . . . . . . . . . . . . . . .$ 1.95 $ 1.80 $ 1.70
WEIGHTED AVERAGE SHARES OUTSTANDING. . . . . . . . . . 5,055,169 5,077,307 5,124,626
See Notes to Consolidated Financial Statements.
-9-
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NET UNREALIZED
ADDITIONAL GAIN (LOSS) ON
COMMON STOCK PAID-IN RETAINED SECURITIES
SHARES AMOUNT CAPITAL EARNINGS AVAILABLE FOR SALE TOTAL
--------- --------- ----------- ----------- ------------------ -----------
BALANCES, JANUARY 1, 1993 . . . . 3,402,213 $ 425,277 $17,683,626 $45,825,656 $63,934,559
Net income for 1993 . . . . . . 8,699,040 8,699,040
Cash dividends ($.63 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
Net income for 1994. . . . . . . 9,157,763 9,157,763
Cash dividends ($.71 per share). (3,583,282) (3,583,282)
Cumulative effect of change in
method of accounting for
securities, net of taxes
of $422,334 . . . . . . . . . $ 643,896 643,896
Net change in unrealized gain
(loss) on securities available
for sale, net of taxes
of $2,075,170 . . . . . . . . (3,163,835) (3,163,835)
Stock issued under employee
benefit plans . . . . . . . . . 10,543 1,318 248,485 249,803
Stock issued under dividend
reinvestment and stock
purchase plan. . . . . . . . . 11,670 1,459 355,745 357,204
Stock options exercised. . . . . 4,875 609 107,275 107,884
Stock redeemed . . . . . . . . . ( 50,333) ( 6,292) ( 1,549,343) (1,555,635)
--------- --------- ----------- ----------- ------------------ -----------
BALANCES, DECEMBER 31, 1994 . . . 3,366,346 420,793 16,230,765 56,886,450 ( 2,519,939) 71,018,069
Net income for 1995 9,857,814 9,857,814
Cash dividends ($.77 per share). ( 3,907,954) (3,907,954)
Net change in unrealized gain
(loss) on securities
available for sale,
net of taxes of $2,408,806. . 3,672,499 3,672,499
Stock issued under employee
benefit plans . . . . . . . . . 11,175 1,397 275,254 276,651
Stock issued under dividend
reinvestment and stock purchase
plan . . . . . . . . . . . . . 13,928 1,741 1,454,498 456,239
Stock options exercised. . . . . 9,267 1,158 191,251 192,409
Stock redeemed . . . . . . . . . (30,000) (3,750) (1,085,125) (1,088,875)
Three-for-two stock split. . . . 1,683,344 210,418 ( 210,418)
Cash paid in lieu of issuing
fractional shares . . . . . . . (159) (20) ( 4,143) ( 4,163)
--------- --------- ----------- ----------- ------------------ -----------
BALANCES, DECEMBER 31, 1995 . . . 5,053,901 $ 631,737 $15,852,082 $ 62,836,310 $ 1,152,560 $80,472,689
--------- --------- ----------- ----------- ------------------ -----------
--------- --------- ----------- ----------- ------------------ -----------
See Note to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31
------------------------------------------------------------
1995 1994 1993
---- ---- ----
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,857,814 $ 9,157,763 $ 8,699,040
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses. . . . . . . . . . . . . . . . . . . . . 640,000 782,000 1,013,765
Depreciation and amortization. . . . . . . . . . . . . . . . . . . 1,145,833 1,125,697 696,782
Amortization of goodwill and intangibles . . . . . . . . . . . . . 131,177 131,177 131,181
(continued)
-10-
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
YEAR ENDED DECEMBER 31
----------------------------------------------------
1995 1994 1993
-------- ---------- ---------
Deferred income tax. . . . . . . . . . . . . . . . . . . . . . . . . . $ 340,302 $( 127,976) $( 542,266)
Securities amortization, net. . . . . . . . . . . . . . . . . . . . . 597,523 1,161,783 987,365
Securities losses (gains), net. . . . . . . . . . . . . . . . . . . . 66,404 31,317 ( 394,551)
Mortgage loans originated for sale. . . . . . . . . . . . . . . . . . ( 4,491,484)
Proceeds from sales of mortgage loans . . . . . . . . . . . . . . . . 3,785,283
Net change in:
Interest receivable. . . . . . . . . . . . . . . . . . . . . . . . . 497,818 28,505 191,612
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . 546,582 93,750 ( 279,409)
Other adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . ( 300,938) 163,867 829,887
----------- ----------- -----------
Net cash provided by operating activities. . . . . . . . . . . . . . 11,820,678 12,490,873 11,333,406
----------- ----------- -----------
INVESTING ACTIVITIES:
Net change in interest-bearing deposits . . . . . . . . . . . . . . . ( 132,324) 230,737 1,250,620
Purchases of:
Securities available for sale. . . . . . . . . . . . . . . . . . . . (71,857,503) ( 24,216,114)
Securities held to maturity. . . . . . . . . . . . . . . . . . . . . (31,786,823) ( 30,833,553) (120,299,746)
Proceeds from maturities of:
Securities available for sale. . . . . . . . . . . . . . . . . . . . 26,537,062 12,424,651
Securities held to maturity. . . . . . . . . . . . . . . . . . . . . 46,522,672 49,498,914 104,327,097
Proceeds from sales of:
Securities available for sale. . . . . . . . . . . . . . . . . . . . 11,695,656 15,083,461
Securities held to maturity. . . . . . . . . . . . . . . . . . . . . 5,430,571
Net change in loans . . . . . . . . . . . . . . . . . . . . . . . . . (18,560,933) ( 25,767,003) ( 27,530,846)
Purchases of premises and equipment . . . . . . . . . . . . . . . . . ( 2,076,615) ( 1,230,215) ( 2,642,213)
Other investing activities. . . . . . . . . . . . . . . . . . . . . . 375,190 707,118 683,511
----------- ----------- -----------
Net cash used by investing activities. . . . . . . . . . . . . . . (39,283,618) ( 4,102,004) ( 38,781,006)
----------- ----------- -----------
FINANCING ACTIVITIES:
Net change in:
Noninterest-bearing, interest-bearing
and savings deposits. . . . . . . . . . . . . . . . . . . . . . . . 6,602,698 24,818,997 12,890,301
Certificates of deposit and other time deposits. . . . . . . . . . . 51,722,781 ( 1,290,957) (18,559,253)
Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . ( 5,213,721) ( 7,701,137) 9,817,127
Federal Home Loan Bank advance. . . . . . . . . . . . . . . . . . . . 1,000,000
Cash dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 3,907,954) ( 3,583,282) ( 3,212,727)
Stock issued under employee benefit plans . . . . . . . . . . . . . . 276,651 249,803 247,763
Stock issued under dividend reinvestment
and stock purchase plan. . . . . . . . . . . . . . . . . . . . . . . 456,239 357,204 286,949
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . 192,409 107,884 154,385
Stock redeemed. . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 1,088,875) ( 1,555,635) ( 1,301,438)
Cash paid in lieu of issuing fractional shares. . . . . . . . . . . . ( 4,163) ( 4,260)
----------- ----------- -----------
Net cash provided by financing activities. . . . . . . . . . . . . . 50,036,065 11,402,877 318,847
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 22,573,125 19,791,746 (27,128,753)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . 46,359,174 26,567,428 53,696,181
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,932,299 $ 46,359,174 $ 26,567,428
----------- ----------- -----------
----------- ----------- -----------
ADDITIONAL CASH FLOWS INFORMATION:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,536,187 $ 16,037,402 $ 16,777,589
Income tax paid . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,065,558 4,997,385 5,004,469
See Notes to Consolidated Financial Statements.
-11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands, Except Per Share Amounts)
NOTE 1
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Merchants Corporation
("Corporation"), and its wholly owned subsidiaries, First Merchants Bank, N.A.
("First Merchants"), Pendleton Banking Company ("Pendleton"), and First United
Bank ("First United"), (collectively "the Banks",) conform to generally accepted
accounting principles and reporting practices followed by the banking industry.
The more significant of the policies are described below.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Corporation is a bank holding company whose principal activity is the
ownership and management of the Banks. First Merchants operates under a
national bank charter and provides full banking services, including trust
services. As a national bank, First Merchants is subject to the regulation of
the Office of the Comptroller of the Currency and the Federal Deposit Insurance
Corporation. Pendleton and First United operate under state bank charters and
provide full banking services, including trust services. As state banks,
Pendleton and First United are subject to the regulation of the Department of
Financial Institutions, State of Indiana, and the Federal Deposit Insurance
Corporation.
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. Although the Banks have a diversified
loan portfolio, a substantial portion of their debtors' ability to honor their
contracts is dependent upon economic conditions in the automotive industry.
CONSOLIDATION - The consolidated financial statements include the accounts of
the Corporation and the Banks, after elimination of all material intercompany
transactions and accounts.
INVESTMENT SECURITIES - The Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES, on January 1, 1994.
Debt securities are classified as held to maturity when the Company has the
positive intent and ability to hold the securities to maturity. Securities held
to maturity are carried at amortized cost.
Debt securities not classified as held to maturity are classified as
available for sale. Securities available for sale are carried at fair value
with unrealized gains and losses reported separately through stockholders'
equity, net of tax.
Amortization of premiums and accretion of discounts are recorded as
interest income from securities. Realized gains and losses are recorded as net
security gains (losses). Gains and losses on sales of securities are determined
on the specific-identification method.
At January 1, 1994, investment 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
taxes, of $644,000.
Prior to the adoption of SFAS No. 115, investment securities were carried
at cost, adjusted for amortization of premiums and discounts, and securities
held for sale and marketable equity securities were carried at the lower of
aggregate cost or market. Realized gains and losses on sales were included in
other income. Unrealized losses on securities held for sale were included in
other income. Unrealized losses on marketable equity securities were charged to
stockholders' equity. Gains and losses on the sale of securities were
determined on the specific-identification method.
MORTGAGE LOANS HELD FOR SALE are carried at the lower of aggregate cost or
market. Net unrealized losses are recognized through a valuation allowance by
charges to income.
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 nonaccrual loans is then recognized as income when
collected. Loans are considered impaired when it becomes probable that the
Banks will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Interest income on these loans is recognized as
described above depending on the accrual status of the loan. 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
(continued)
-12-
NOTE 1
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
management includes consideration of past loss experience, changes in the
composition of the loan portfolio, the current condition and amount of loans
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses
is based on estimates that are particularly susceptible to significant changes
in the economic environment and market conditions. Management believes that,
as of December 31, 1995, the allowance for loan losses is adequate based on
information currently available. A worsening or protracted economic decline in
the area within which the Corporation operates would increase the likelihood of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
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.
FEDERAL RESERVE AND FEDERAL HOME LOAN BANK STOCK are required investments for
institutions that are members of the Federal Reserve Bank ("FRB") and Federal
Home Loan Bank ("FHLB") systems. The required investment in the common stock is
based on a predetermined formula.
ADVERTISING COSTS are expensed as incurred.
INTANGIBLE ASSETS are being amortized on the straight-line basis over
periods ranging from 10 to 25 years. Such assets are periodically evaluated
as to the recoverability of their carrying value.
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 adopted the provisions of SFAS No. 109, ACCOUNTING
FOR INCOME TAXES, during 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
and on October 27, 1995. Common stock equivalents, consisting of shares
issuable under employee benefit plans, were not included since their effect on
dilution was insignificant.
NOTE 2
ACQUISITIONS
On January 18, 1996, the Corporation signed a definitive agreement to
acquire all of the outstanding shares of Randolph County Bancorp, Inc.,
Winchester, Indiana. Under terms of the agreement, the Corporation will issue
approximately 566,000 shares of its common stock. The transaction will be
accounted for under the pooling of interests method of accounting and is subject
to approval by stockholders of Randolph County Bancorp, Inc., and appropriate
regulatory agencies. Although the corporation anticipates that the merger will
be consummated during the second quarter of 1996, there can be no assurance that
the acquisition will be completed. At December 31, 1995, Randolph County
Bancorp, Inc., had total assets and stockholders' equity of $73,333,000 and
$8,867,000, respectively.
On January 24, 1996, the Corporation signed a definitive agreement to
acquire all of the outstanding shares of Union National Bancorp, Liberty,
Indiana. Under terms of the agreement, the Corporation will issue approximately
943,000 shares of its common stock. The transaction will be accounted for under
the pooling of interests method of accounting and is subject to approval by
stockholders of Union National Bancorp and appropriate regulatory agencies.
Although the Corporation anticipates that the merger will be consummated during
the second quarter of 1996, there can be no assurance that the acquisition will
be completed. At December 31, 1995, Union National Bancorp had total assets and
stockholders' equity of $161,078,000 and $15,741,000, respectively.
-13-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands, Except Per Share Amounts)
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, 1995, was $10,159,000.
NOTE 4
INVESTMENT SECURITIES
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
Available for sale at December 31, 1995:
U.S. Treasury . . . . . . . . . . . . . $ 4,531 $ 26 $ 3 $ 4,554
Federal agencies. . . . . . . . . . . . 67,518 1,299 72 68,745
State and municipal . . . . . . . . . . 18,769 398 37 19,130
Mortgage and other
asset-backed securities . . . . . . . 24,023 210 121 24,112
Corporate obligations . . . . . . . . . 26,120 264 55 26,329
Marketable equity security. . . . . . . 250 250
-------- ------ ----- --------
Total available for sale . . . . . 141,211 2,197 288 143,120
Held to maturity at December 31, 1995:
U.S. Treasury . . . . . . . . . . . . . 3,103 8 2 3,109
Federal agencies. . . . . . . . . . . . 11,645 69 21 11,693
State and municipal . . . . . . . . . . 40,013 483 57 40,439
Mortgage and other
asset-backed securities . . . . . . . 2,953 8 2,961
Corporate obligations . . . . . . . . . 500 1 499
-------- ------ ----- --------
Total held to maturity . . . . . . 58,214 568 81 58,701
-------- ------ ----- --------
Total investment securities. . . . $199,425 $ 2,765 $ 369 $201,821
-------- ------ ----- --------
-------- ------ ----- --------
Available for sale at December 31, 1994:
U.S. Treasury . . . . . . . . . . . . $ 11,817 $ 550 $ 11,267
Federal agencies. . . . . . . . . . . 35,565 1,271 34,294
State and municipal . . . . . . . . . 9,762 $ 31 385 9,408
Mortgage and other asset-backed
securities . . . . . . . . . . . . . 22,171 29 836 21,364
Corporate obligations . . . . . . . . 24,221 4 1,195 23,030
-------- ------ ----- --------
Total available for sale . . . . . 103,536 64 4,237 99,363
Held to maturity at December 31, 1994:
U.S. Treasury . . . . . . . . . . . . 12,630 21 222 12,429
Federal agencies. . . . . . . . . . . 24,529 29 469 24,089
State and municipal . . . . . . . . . 38,117 211 680 37,648
Mortgage and other
asset-backed securities. . . . . . 370 370
Corporate obligations . . . . . . . . 2,031 45 1,986
-------- ------ ----- --------
Total held to maturity. . . . . . . 77,677 261 1,416 76,522
-------- ------ ----- --------
Total investment securities . . . . $181,213 $ 325 $5,653 $175,885
-------- ------ ----- --------
-------- ------ ----- --------
The amortized cost and estimated fair value of securities held to
maturity and available for sale at December 31, 1995, 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.
(continued)
-14-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands, Except Per Share Amounts)
NOTE 4
INVESTMENT SECURITIES (continued)
AVAILABLE FOR SALE HELD TO MATURITY
------------------------ -----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- -------- --------- --------
Maturity distribution at December 31, 1995:
Due in one year or less . . . . . . . . . . $ 24,867 $ 24,886 $ 19,193 $ 19,251
Due after one through five years. . . . . . 82,767 84,204 32,582 32,891
Due after five through ten years. . . . . . 9,554 9,918 2,866 2,978
Due after ten years . . . . . . . . . . . . 620 620
-------- -------- -------- --------
117,188 119,008 55,261 55,740
Mortgage and other asset-backed
securities 24,023 24,112 2,953 2,961
-------- -------- -------- --------
Totals. . . . . . . . . . . . . . . . . . $141,211 $143,120 $ 58,214 $ 58,701
-------- -------- -------- --------
-------- -------- -------- --------
Securities with a carrying value of approximately $91,090,000
and $83,411,000 were pledged at December 31, 1995 and 1994, to secure
certain deposits and for other purposes as permitted or required by law.
Proceeds from sales of securities available for sale during 1995
and 1994 were $11,696,000 and $15,083,000. Gross gains of $47,000 and
$167,000 and gross losses of $113,000 and $198,000 were realized on
those sales.
Proceeds from sales of securities held to maturity during 1993
were $5,431,000. Gross gains of $395,000 and gross losses of $500 were
realized on those sales.
On December 28, 1995, the Corporation transferred certain
securities from held to maturity to available for sale in accordance with a
transition reclassification allowed by the Financial Accounting Standards
Board. Such securities had a carrying value of $4,421,000 and a fair value
of $4,418,000.
NOTE 5
LOANS AND ALLOWANCE
1995 1994
------- -------
Loans at December 31:
Commercial and industrial loans . . . . . . . $ 85,690 $ 78,943
Bankers' acceptances and loans to financial
institutions. . . . . . . . . . . . . . . . 2,925
Agricultural production financing and other
loans to farmers. . . . . . . . . . . . . . 5,796 5,310
Real estate loans:
Construction. . . . . . . . . . . . . . . . 9,913 8,126
Commercial and farmland . . . . . . . . . . 66,749 64,110
Residential . . . . . . . . . . . . . . . . 166,414 164,760
Individuals' loans for household
and other personal expenditures . . . . . . 79,993 78,041
Tax-exempt loans. . . . . . . . . . . . . . . 863 1,204
Other loans . . . . . . . . . . . . . . . . . 651 1,111
--------- ---------
Total loans . . . . . . . . . . . . . . . . $ 418,994 $ 401,605
--------- ---------
--------- ---------
1995 1994 1993
-------- -------- --------
Allowance for loan losses:
Balance, January 1 . . . . . . . . $ 4,998 $ 4,800 $ 4,351
Provision for losses . . . . . . . 640 782 1,014
Recoveries on loans. . . . . . . . 201 329 343
Loans charged off. . . . . . . . . (882) (913) (908)
-------- -------- --------
Balance, December 31 . . . . . . . $ 4,957 $ 4,998 $ 4,800
-------- -------- --------
-------- -------- --------
(continued)
-15-
NOTE 5
LOANS AND ALLOWANCE (continued)
The Corporation adopted SFAS No. 114 and No. 118 ACCOUNTING BY CREDITORS
FOR IMPAIRMENT OF A LOAN and ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN -
INCOME RECOGNITION AND DISCLOSURES on January 1, 1995. Impaired loans
totaled $3,122,000 at December 31, 1995. An allowance for losses at December
31, 1995, was not deemed necessary for impaired loans totaling $1,900,000,
but an allowance of $559,000 was recorded for the remaining balance of
impaired loans of $1,222,000. The average balance of impaired loans for 1995
was $1,682,000. Interest income and cash receipts of interest totaled $34,000
and $5,000 during the period in 1995 that the loans were impaired.
Nonaccruing and restructured loans totaled $1,080,000 and $1,406,000 at
December 31, 1994 and 1993.
Additional interest income of $39,000 for 1994 and $39,000 for 1993
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 Banks 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 shown below:
Balances, December 31, 1994 . . . . . . . . . . . $ 12,880
New loans, including renewals . . . . . . . . . . 5,727
Payments, etc., including renewals. . . . . . . . (8,279)
--------
Balances, December 31, 1995 . . . . . . . . . . . $ 10,328
--------
--------
NOTE 6
PREMISES AND EQUIPMENT
1995 1994
-------- --------
Cost at December 31:
Land . . . . . . . . . . . . . . . . . . . . . $ 1,850 $ 1,324
Buildings and leasehold improvements . . . . . 9,706 9,231
Equipment. . . . . . . . . . . . . . . . . . . 10,328 9,310
------- --------
Total cost . . . . . . . . . . . . . . . . . 21,884 19,865
Accumulated depreciation . . . . . . . . . . . . (11,408) (10,320)
------- --------
Net. . . . . . . . . . . . . . . . . . . . . $ 10,476 $ 9,545
------- --------
------- --------
The Corporation is committed under various noncancelable lease contracts
for certain subsidiary office facilities. Total lease expense for 1995, 1994
and 1993 was $127,000, $113,000, and $110,000, respectively. The future
minimum rental commitments required under the operating leases in effect at
December 31, 1995, expiring at various dates through the year 2016, follow on
the right for the years ending December 31:
1996 . . . . . . . . . . . . . . . . . . . . . . . $ 106
1997 . . . . . . . . . . . . . . . . . . . . . . . 255
1998 . . . . . . . . . . . . . . . . . . . . . . . 85
1999 . . . . . . . . . . . . . . . . . . . . . . . 72
2000 . . . . . . . . . . . . . . . . . . . . . . . 63
After 2000 . . . . . . . . . . . . . . . . . . . . 318
-----
Total future minimum obligations . . . . . . . . $ 899
-----
-----
-16-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands, Except Per Share Amounts)
NOTE 7
DEPOSITS
1995 1994
------- -------
Deposits at December 31:
Noninterest-bearing . . . . . . . . . . . . . . . . . . . . $ 99,432 $ 99,667
Interest-bearing demand . . . . . . . . . . . . . . . . . . 105,957 91,806
Savings deposits . . . . . . . . . . . . . . . . . . . . . 137,134 144,447
Certificates and other time deposits of $100,000 or more . 49,216 33,622
Other certificates and time deposits . . . . . . . . . . . 196,417 160,288
--------- --------
Total deposits. . . . . . . . . . . . . . . . . . . . . . $ 588,156 $529,830
--------- --------
--------- --------
Certificates maturing in years ending December 31:
1996 . . . . . . . . . . . $ 155,357
1997 . . . . . . . . . . . 41,862
1998 . . . . . . . . . . . 27,939
1999 . . . . . . . . . . . 15,132
2000 . . . . . . . . . . . 5,273
After 2000 . . . . . . . . 70
---------
$ 245,633
---------
---------
NOTE 8
SHORT-TERM BORROWINGS
1995 1994
------- -------
Short-term borrowings at December 31:
Federal funds purchased . . . . . . . . . . . . $ 100 $12,198
Securities sold under repurchase agreements . . 27,293 17,776
U.S. Treasury demand notes. . . . . . . . . . . 6,582 9,215
------- -------
Total short-term borrowings . . . . . . . . . $33,975 $39,189
------- -------
------- -------
Securities sold under agreements to repurchase consist of obligations of
the Banks to other parties. The obligations are secured by U.S. Treasury and
Federal agency obligations and generally mature within one to 185 days from
the transaction date. The following table summarizes certain information on
these repurchase agreements.
As of and for the Year Ended December 31:
1995 1994
------- -------
Book value . . . . . . . . . . . . . . . . . . . . $ 27,293 $ 17,776
Collateral book value. . . . . . . . . . . . . . . 40,471 40,664
Collateral market value. . . . . . . . . . . . . . 40,748 40,539
Average balance of agreements during year. . . . . 33,632 23,389
Highest month-end balance during year. . . . . . . 54,670 29,115
Interest payable at end of year. . . . . . . . . . 87 41
Weighted average interest rate at end of year. . . 5.29% 4.86%
NOTE 9
FEDERAL HOME LOAN BANK ADVANCE
At December 31, 1995, the Corporation had a $1,000,000 Federal
Home Bank advance maturing June 20, 1996, with an interest rate of 5.79
per cent.
The advance is secured by investment securities with a carrying value of
$1,561,000. The advance is subject to restrictions or penalties in the event
of prepayment.
NOTE 10
LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheet. The loans are serviced primarily for the Federal
Home Loan Mortgage Corporation and the unpaid balances totaled $3,546,000 at
December 31, 1995.
-17-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands, Except Per Share Amounts)
NOTE 11
INCOME TAX
1995 1994 1993
------- ------- --------
Income tax expense, for the year ended December 31:
Currently payable:
Federal . . . . . . . . . . . . . . . . . . . . . $ 3,879 $ 3,845 $ 3,576
State . . . . . . . . . . . . . . . . . . . . . . 1,229 1,190 1,135
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . 267 (110) (304)
State . . . . . . . . . . . . . . . . . . . . . . 73 (18) (11)
-------- -------- ---------
Total income tax expense. . . . . . . . . . . . $ 5,448 $ 4,907 $ 4,396
-------- -------- ---------
-------- -------- ---------
Reconciliation of federal statutory to
actual tax expense (benefit):
Federal statutory income tax at 34% . . . . . . . . $ 5,204 $ 4,782 $ 4,375
Tax exempt interest . . . . . . . . . . . . . . . . (727) (759) (759)
Effect of state income taxes . . . . . . . . . . . 859 774 742
Other . . . . . . . . . . . . . . . . . . . . . . . 112 110 38
-------- -------- ---------
Actual tax expense. . . . . . . . . . . . . . . . $ 5,448 $ 4,907 $ 4,396
-------- -------- ---------
-------- -------- ---------
Tax expense (benefit) applicable to security gains and losses
for the years ended December 31, 1995, 1994, and 1993, was ($22,600),
($12,000) and $156,000, respectively.
The components of the deferred tax asset included in other
assets are as shown in the table below.
No valuation allowance at December 31, 1995, was considered
necessary.
During 1993, the Corporation adopted 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.
1995 1994
-------- --------
Deferred Tax Asset at December 31:
Differences in depreciation methods. . . . . . . . . $ (701) $ (595)
Differences in accounting for loans and securities . (58) (44)
Differences in accounting for loan fees. . . . . . . 368 532
Differences in accounting for loan losses. . . . . . 2,107 2,124
Deferred compensation. . . . . . . . . . . . . . . . 280 275
Differences in accounting for pensions and
other employee benefits. . . . . . . . . . . . . . 85 147
Net unrealized (gain) loss on securities available
for sale . . . . . . . . . . . . . . . . . . . . . (756) 1,653
State income tax . . . . . . . . . . . . . . . . . . (134) (159)
Other. . . . . . . . . . . . . . . . . . . . . . . . (2) 5
------- -------
Total. . . . . . . . . . . . . . . . . . . . . . . $ 1,189 $ 3,938
------- -------
------- -------
Assets. . . . . . . . . . . . . . . . . . . . . . . . $ 2,840 $ 4,736
Liabilities (1,651) (798)
------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . $ 1,189 $ 3,938
------- -------
------- -------
-18-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands, Except Per Share Amounts)
NOTE 12
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:
1995 1994
-------- -------
Commitments to extend credit . . . . . . . . . . . . . . $120,649 $87,244
Standby letters of credit . . . . . . . . . . . . . . . 2,820 2,649
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 13
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, 1995, available for 1996
dividends to the Corporation is $15,923,000. As a practical matter,
subsidiaries restrict dividends to a lesser amount because of the need to
maintain an adequate capital structure.
Total stockholders' equity for all subsidiaries at December 31, 1995,
was $78,940,000, of which $63,017,000 was restricted from dividend distribution
to the Corporation.
The Corporation has a 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. At December 31, 1995,
386,046 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. On
August 8, 1995, the Board of Directors of the Corporation declared a three-for-
two stock split on its common shares. The new shares were distributed on
October 27, 1995, to holders of record on October 20, 1995.
-19-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands, Except Per Share Amounts)
NOTE 14
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 $201,000 for 1995, $193,000 for
1994 and $56,000 for 1993.
The following table sets forth the plan's funded status and amounts
recognized in the consolidated balance sheet at December 31:
1995 1994
-------- --------
Actuarial present value of:
Accumulated benefit obligation including vested
benefits of $8,997 and $7,595 . . . . . . . . . . . . . . . . . . . . $ 9,181 $ 7,720
-------- --------
-------- --------
Projected benefit obligation for service rendered to date . . . . . . . $(10,971) $(9,189)
Plan assets at fair value, primarily interest-bearing deposits
and corporate bonds and securities. . . . . . . . . . . . . . . . . . . 12,049 9,740
-------- --------
Plan assets in excess of projected benefit obligation . . . . . . . . . . 1,078 551
Unrecognized net loss from experience different than
that assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 569) ( 121)
Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . ( 71) ( 52)
Unrecognized net asset at January 1, 1987, being
recognized over 15 years. . . . . . . . . . . . . . . . . . . . . . . . ( 650) ( 755)
-------- --------
Accrued pension cost included in the balance sheet. . . . . . . . . . . . $ ( 212) $( 377)
-------- --------
-------- --------
1995 1994 1993
-------- -------- --------
Pension expense includes the following components:
Service cost benefits earned during the year . . . . . . $ 405 $ 483 $ 389
Interest cost on projected benefit obligation . . . . . . 740 678 619
Actual return on plan assets. . . . . . . . . . . . . . . (2,387) ( 124) ( 1,072)
Net amortization and deferral . . . . . . . . . . . . . . 1,443 ( 844) 120
-------- -------- --------
$ 201 $ 193 $ 56
-------- -------- --------
-------- -------- --------
1995 1994 1993
-------- -------- --------
Assumptions used in the accounting as of December 31 were:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . 7.50% 8.25% 6.85%
Rate of increase in compensation. . . . . . . . . . . . . . 4.50% 4.50% 4.50%
Expected long-term rate of return on assets . . . . . . . . 8.75% 8.75% 8.75%
(continued)
-20-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands, Except Per Share Amounts)
NOTE 14
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 grant, for a period of ten years. There were no shares available for
grant at December 31, 1995.
On March 31, 1994, stockholders approved the 1994 Stock Option
Plan, reserving 315,000 shares of Corporation common stock 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. There were 198,075 shares available for
grant at December 31, 1995.
1995 1994 1993
-------- -------- --------
Shares under option after restatement for stock splits:
Outstanding at beginning of year . . . . . . . . . . . . 179,807 127,345 113,400
Adjustment for fractional shares . . . . . . . . . . . . (6)
Granted during the year. . . . . . . . . . . . . . . . . 57,150 59,775 30,150
Expired during the year. . . . . . . . . . . . . . . . . (2,250)
Exercised during the year. . . . . . . . . . . . . . . . (13,898) (7,313) (13,949)
Outstanding at end of year . . . . . . . . . . . . . . . 223,059 179,807 127,345
Exercisable at end of year . . . . . . . . . . . . . . . 165,909 120,032 97,646
Average option price at end of year. . . . . . . . . . . $ 18.07 $ 15.81 $ 13.72
Price of options exercised
Low . . . . . . . . . . . . . . . . . . . . . . . . . $ 9.11 $ 10.78 $ 9.11
High. . . . . . . . . . . . . . . . . . . . . . . . . $ 19.42 $ 18.33 $ 17.22
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 11,175 shares (prior
to stock split) in 1995 at $24.7563 per share. The fair market value per
share on the purchase date was $34.125.
On March 31, 1994, the stockholders approved the 1994
Employee Stock Purchase Plan. A total of 168,750 shares of the
Corporation's common stock are reserved for issuance pursuant to the
plan. The terms of the plan are similar to the 1989 Employee Stock
Purchase Plan.
At December 31, 1995, 136,173 shares of Corporation common
stock were reserved for purchase under the plan, and $152,725 has been
deducted from compensation, plus interest, toward the purchase of
shares after June 30, 1996, the end of the annual offering period.
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 $68,000
for 1995, $61,000 for 1994 and $52,000 for 1993.
SFAS No. 123, STOCK-BASED COMPENSATION, is effective for the
Corporation in 1996. This statement establishes a fair value based method of
accounting for stock-based compensation plans. The Corporation has not yet
determined the impact of adopting SFAS No. 123 on net income or financial
position in the year of adoption.
-21-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands, Except Per Share Amounts)
NOTE 15
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to
estimate the fair value of each class of financial instrument:
Cash and Cash Equivalents--The fair value of cash
and cash equivalents approximates carrying value.
Interest-Bearing Time Deposits--The fair value of interest-bearing
time deposits approximates carrying value.
Securities--Fair values are based on quoted market prices.
Mortgage Loans Held for Sale--The fair value of mortgages
held for sale approximates carrying values.
Loans--For both 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 value for other loans, are estimated
using discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality.
Interest Receivable/Payable--The fair values of interest
receivable/payable approximate carrying values.
Federal Reserve and Federal Home Loan Bank Stock--The fair
value of FRB and FHLB stock is based on the price at which it may be
resold to the FRB and FHLB.
Deposits--The fair values of noninterest-bearing demand accounts and
interest-bearing demand accounts are equal to the amount payable on demand
at the balance sheet date. The carrying amounts for variable rate, fixed-term
certificates of deposit approximate their fair values at the balance sheet
date. Fair values for fixed-rate certificates of deposit and other time
deposits are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on such time deposits.
Federal Funds Purchased, Securities Sold Under Repurchase Agreements and
U.S. Treasury Demand Notes--These financial instruments are short-term
borrowing arrangements. The rates at December 31, 1995 and 1994, approximate
market rates, thus the fair value approximates carrying value.
Federal Home Loan Bank Advance--The fair value of the Federal Home Loan
Bank advance approximates carrying value.
Off-Balance Sheet Standby Letters of Credit--The fair value of standby
letters of credit are based upon fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing.
The estimated fair values of the Corporation's financial instruments are
as follows:
1995 1994
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- --------- -------
ASSETS AT DECEMBER 31:
Cash and cash equivalents . . . . . . . . . . . $ 68,932 $ 68,932 $ 46,359 $ 46,359
Interest-bearing time deposits. . . . . . . . . 155 155 23 23
Investment securities available for sale. . . . 143,120 143,120 99,363 99,363
Investment securities held to maturity. . . . . 58,214 58,701 77,677 76,522
Mortgage loans held for sale. . . . . . . . . . 736 736
Loans . . . . . . . . . . . . . . . . . . . . . 418,994 420,424 401,605 400,174
Federal Reserve and
Federal Home Loan Bank stock. . . . . . . . . 1,892 1,892 1,879 1,879
Interest receivable . . . . . . . . . . . . . . 6,187 6,187 5,627 5,627
LIABILITIES AT DECEMBER 31:
Deposits. . . . . . . . . . . . . . . . . . . . 588,156 590,015 529,830 529,191
Short-term borrowings:
Federal funds purchased . . . . . . . . . . . 100 100 12,198 12,198
Securities sold under repurchase agreements . 27,293 27,293 17,776 17,776
U.S. Treasury demand notes . . . . . . . . . 6,582 6,582 9,215 9,215
Federal Home Loan Bank advance. . . . . . . . . 1,000 1,000
Interest payable . . . . . . . . . . . . . . . 1,866 1,866 1,320 1,320
Off-balance sheet standby letters of credit . 56 53
-22-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands, Except Per Share Amounts)
NOTE 16
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
----------------------
1995 1994
--------- --------
ASSETS
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 591 $ 137
Investment security available for sale . . . . . . . . . 250
Investment in subsidiaries. . . . . . . . . . . . . . . . 78,877 70,089
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . 673 711
Other assets. . . . . . . . . . . . . . . . . . . . . . . 287 233
--------- ---------
Total assets. . . . . . . . . . . . . . . . . . . . . . $ 80,678 $ 71,170
--------- ---------
--------- ---------
LIABILITIES
Other liabilities . . . . . . . . . . . . . . . . . . . . $ 205 $ 152
--------- ---------
Total liabilities . . . . . . . . . . . . . . . . . . . 205 152
STOCKHOLDERS' EQUITY. . . . . . . . . . . . . . . . . . . . $ 80,473 71,018
--------- ---------
Total liabilities and stockholders' equity. . . . . . . $ 80,678 $ 71,170
--------- ---------
--------- ---------
CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31
-----------------------------------
1995 1994 1993
---------- --------- ----------
INCOME
Dividends from subsidiaries . . . . . . . . . . . . . . . $ 4,857 $ 4,335 $ 3,571
---------- --------- ----------
Total income. . . . . . . . . . . . . . . . . . . . . 4,857 4,335 3,571
---------- --------- ----------
EXPENSES
Amortization of core deposit intangibles,
goodwill and fair value adjustments . . . . . . . . . . 38 32 19
Other expenses. . . . . . . . . . . . . . . . . . . . . . 153 170 100
---------- --------- ----------
Total expenses. . . . . . . . . . . . . . . . . . . . 191 202 119
---------- --------- ----------
Income before income tax, equity in undistributed income
of subsidiaries and cumulative effect of change in
accounting method . . . . . . . . . . . . . . . . . . . . 4,666 4,133 3,452
Income tax benefit. . . . . . . . . . . . . . . . . . (76) ( 73) ( 40)
---------- --------- ----------
Income before equity in undistributed income of
subsidiaries and cumulative effect of change in
accounting method . . . . . . . . . . . . . . . . . . . . 4,742 4,206 3,492
Equity in undistributed income of subsidiaries. . . . 5,116 4,952 5,225
---------- --------- ----------
Income before cumulative effect of change in
accounting method . . . . . . . . . . . . . . . . . . . . 9,858 9,158 8,717
Cumulative effect of change in method of accounting for
income taxes. . . . . . . . . . . . . . . . . . . . . . . ( 18)
---------- --------- ----------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 9,858 $ 9,158 $ 8,699
---------- --------- ----------
---------- --------- ----------
(continued)
-23-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Per Share Amounts)
NOTE 16
CONDENSED FINANCIAL INFORMATION (Parent Company Only, continued)
CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31
-----------------------------------
1995 1994 1993
---------- --------- ----------
OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 9,858 $ 9,158 $ 8,699
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization. . . . . . . . . . . . . . . . . . . . . . 38 32 19
Equity in undistributed income of subsidiaries. . . . . (5,116) ( 4,952) ( 5,225)
Net change in:
Other assets. . . . . . . . . . . . . . . . . . . . . ( 54) ( 48) ( 64)
Other liabilities . . . . . . . . . . . . . . . . . . 53 29 123
---------- --------- ----------
Net cash provided by operating activities . . . . . 4,779 4,219 3,552
---------- --------- ----------
INVESTING ACTIVITY:
Purchase of security available for sale . . . . . . ( 250)
----------
Net cash used by investing activities . . . . . . . ( 250)
-----------
FINANCING ACTIVITIES:
Cash dividends. . . . . . . . . . . . . . . . . . . . . . ( 3,908) ( 3,583) (3,213)
Stock issued under employee benefit plans . . . . . . . . 278 250 247
Stock issued under dividend reinvestment
and stock purchase plan . . . . . . . . . . . . . . . . 456 357 287
Stock options exercised . . . . . . . . . . . . . . . . . 192 108 154
Stock redeemed. . . . . . . . . . . . . . . . . . . . . . ( 1,089) ( 1,556) (1,301)
Cash paid in lieu of issuing fractional shares . . . . . ( 4) ( 4)
---------- --------- ----------
Net cash used by financing activities . . . . . . . . ( 4,075) ( 4,424) (3,830)
---------- --------- ----------
Net increase (decrease) in cash on deposit 454 ( 205) ( 278)
Cash on deposit, beginning of year. . . . . . . . . . . . . 137 342 620
---------- --------- ----------
Cash on deposit, end of year. . . . . . . . . . . . . . . . $ 591 $ 137 $ 342
---------- --------- ----------
---------- --------- ----------
NOTE 17
QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The following table sets forth certain quarterly results for the
years ended December 31, 1995 and 1994:
NET PROVISION AVERAGE
INTEREST INTEREST INTEREST FOR LOAN NET SHARES EARNINGS
QUARTER ENDED INCOME EXPENSE INCOME LOSSES INCOME OUTSTANDING PER SHARE
------------- -------- -------- -------- --------- ------ ----------- ---------
March, 1995. . . . $ 11,588 $ 4,661 $ 6,927 $ 160 $ 2,391 5,051,232 $ .47
June, 1995 . . . . 12,435 5,435 7,000 160 2,529 5,055,723 .50
September, 1995. . 12,796 5,840 6,956 160 2,414 5,062,748 .48
December, 1995 . . 13,145 6,147 6,998 160 2,524 5,050,974 .50
-------- -------- -------- -------- ------- -------
$ 49,964 $ 22,083 $ 27,881 $ 640 $ 9,858 5,055,169 $ 1.95
-------- -------- -------- -------- ------- -------
-------- -------- -------- -------- ------- -------
March, 1994. . . . $ 10,211 $ 3,768 $ 6,443 $ 193 $ 2,246 5,082,999 $ .44
June, 1994 . . . . 10,679 3,929 6,750 199 2,360 5,072,202 .47
September, 1994. . 11,106 4,281 6,825 201 2,227 5,086,058 .44
December, 1994 . . 11,118 4,153 6,965 189 2,325 5,067,968 .45
-------- -------- -------- -------- ------- -------
$ 43,114 $ 16,131 $ 26,983 $ 782 $ 9,158 5,077,307 $ 1.80
-------- -------- -------- -------- ------- -------
-------- -------- -------- -------- ------- -------
-24-
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
Delaville Delaware
Eaton Delaware
Pendleton Madison
Edgewood Madison
Ingalls Madison
Lapel Madison
Markleville Madison
Middletown Henry
Bulphur Springs Henry
Mooreland Henry
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ANNUAL REPORT APPENDIX - GRAPHIC & IMAGE INFORMATION (Continued)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bar chart: RETURN ON AVERAGE ASSETS
A bar graph with the following plot points for the respective years.
RETURN ON AVERAGE ASSETS
(per cent)
1993 1994 1995
Return on Average Assets 1.39% 1.44% 1.48%
A narrative discussion of this data is provided in the Management's Discussion
& Analysis, under the caption "Results of Operations."
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bar chart: RETURN ON AVERAGE EQUITY
A bar graph with the following plot points for the respective years.
RETURN ON AVERAGE EQUITY
(per cent)
1993 1994 1995
Return on Average Equity 13.01% 13.06% 12.97%
A narrative discussion of the data is provided in the Management's Discussion
& Analysis, under the caption "Results of Operations."
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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)
1993 1994 1995
First Merchants Corporation .16% .15% .16%
Peer Group .49% .25% NA
A narrative discussion of this data is provided in the Management's Discussion
& Analysis, under the caption "Asset Quality/Provision for Loan Losses."
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .