Report of Ernst & Young LLP Independent
Auditors Board of Directors and Stockholders
First Merchants Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of
First Merchants Bancorp, Inc. and subsidiary as of December 31, 1994 and
1993, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
First Merchants Bancorp, Inc. and subsidiary at December 31, 1994 and
1993, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1994,
in conformity with generally accepted accounting principles.
As discussed in the footnotes to the consolidated financial
statements, in 1993 First Merchants Bancorp, Inc. changed its method of
accounting for securities (Note D), postretirement benefits other than
pensions (Note I), and income taxes (Note J).
Ernst & Young, LLP
Charleston, West Virginia
January 27, 1995, except as to
March 14, 1995,
Note O.
First Merchants Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
DECEMBER 31
1994 1993
ASSETS
Cash and due from banks $ 5,211,650 $ 4,436,864
Federal funds sold 810,000 710,000
Cash and Cash Equivalents 6,021,650 5,146,864
Interest-bearing deposits in other banks 670,734 1,215,307
Securities available for sale (cost: 1994 - $16,204,906;
1993 - $20,547,829) 14,888,731 21,056,123
Investment securities (approximate market value: 1994 -
$28,304,476; 1993 - $22,312,255) 28,648,209 21,139,938
Loans - gross 59,015,396 55,067,019
Less:
Unearned income (141,203) (188,366)
Allowance for loan losses (460,000) (445,000)
Loans - Net 58,414,193 54,433,653
Premises and equipment 3,452,390 3,551,457
Other assets 3,195,202 2,603,663
Total Assets $115,291,109 $109,147,005
LIABILITIES
Deposits:
Noninterest-bearing $ 13,674,107 $ 10,882,479
Interest-bearing 81,867,045 81,742,940
Total Deposits 95,541,152 92,625,419
Short-term borrowings:
Securities sold under agreements to repurchase 8,634,139 4,947,012
Other short-term borrowings 509,881 595,807
Total Short-Term Borrowings 9,144,020 5,542,819
Other liabilities 1,144,151 1,207,401
Total Liabilities 105,829,323 99,375,639
STOCKHOLDERS' EQUITY
Common stock, $2 par value - 1,000,000 shares authorized;
576,000 shares issued and outstanding at
December 31, 1994 and 1993 1,152,000 1,152,000
Surplus 649,343 649,343
Retained earnings 8,450,153 7,665,033
Net unrealized (loss) gain on securities available for
sale,
net of the related tax effect: 1994 - ($526,465);
1993 - $203,304 (789,710) 304,990
Total Stockholders' Equity 9,461,786 9,771,366
Total Liabilities and
Stockholders' Equity $115,291,109 $109,147,005
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
First Merchants Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
YEAR ENDED DECEMBER 31
1994 1993 1992
INTEREST INCOME
Interest and fees on loans $4,899,930 $4,349,508 $4,272,442
Interest and dividends on securities:
Taxable 1,825,918 1,842,861 2,245,531
Nontaxable 761,162 806,764 750,040
Interest on federal funds sold 47,284 48,616 61,228
Interest on deposits with other banks 79,781 38,050 23,604
Total Interest Income 7,614,075 7,085,799 7,352,845
INTEREST EXPENSE
Interest on deposits 2,767,583 2,664,333 2,964,063
Interest on short-term borrowings 158,949 213,973 341,558
Total Interest Expense 2,926,532 2,878,306 3,305,621
Net Interest Income 4,687,543 4,207,493 4,047,224
Provision for loan losses 86,699 93,193 103,155
Net Interest Income after
Provision for Loan Losses 4,600,844 4,114,300 3,944,069
OTHER INCOME
Service charges on deposit accounts 326,698 306,879 272,619
Other service charges and fees 50,509 48,746 41,210
Securities gains, net 73,829 351,522 6,122
Other 151,024 151,001 111,205
Total Other Income 602,060 858,148 431,156
OTHER EXPENSE
Salaries and employee benefits 1,752,089 1,573,371 1,444,818
Occupancy expense of premises 298,126 237,402 204,785
Furniture and equipment expense 291,738 283,545 303,201
Other expenses 1,325,789 1,130,605 1,027,317
Total Other Expense 3,667,742 3,224,923 2,980,121
Income Before Income Taxes and Cumulative
Effect of Change in Accounting Principle 1,535,162 1,747,525 1,395,104
Income taxes 352,602 417,918 327,392
Income Before Cumulative
Effect of Change in Accounting Principle 1,182,560 1,329,607 1,067,712
Cumulative Effect of Change in Accounting
Principle For Postretirement Benefits,
Net of Tax Benefit of $77,953 - (116,930)
Net Income $1,182,560 $1,212,677 $1,067,712
Earnings Per Common Share:
Income before cumulative effect of change in
accounting principle $ 2.05 $ 2.31 $ 1.85
Cumulative effect of change in accounting principle
- (.20) -
Net Income $ 2.05 $ 2.11 $ 1.85
Average common shares outstanding 576,000 576,000 576,000
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
First Merchants Bancorp, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
NET UNREALIZED TOTAL
COMMON RETAINED GAIN (LOSS) ON STOCKHOLDERS'
STOCK SURPLUS EARNINGS SECURITIES EQUITY
Balance at January 1, 1992 $ 288,000 $649,343 $6,889,444 $(266,818) $7,559,969
Net income - - 1,067,712 - 1,067,712
Change in net unrealized loss
on marketable equity securities - - - 179,721 179,721
Cash dividends ($.46 per share) - - (266,400) - (266,400)
Balance at December 31, 1992 288,000 649,343 7,690,756 (87,097) 8,541,002
Net income - - 1,212,677 - 1,212,677
Change in net unrealized loss - - - (9,880) (9,880)
on marketable equity securities
Cash dividends ($.65 per share) - - (374,400) - (374,400)
Stock split effected in the 864,000 - (864,000) - -
form of a 3 for 1 stock dividend
Change in accounting method
for securities, net of taxes
of $203,304 - - - 401,967 401,967
Balance at December 31, 1993 1,152,000 649,343 7,665,033 304,990 9,771,366
Net income - - 1,182,560 - 1,182,560
Change in net unrealized loss
on securities - - - (1,094,700) (1,094,700)
Cash dividends ($.69 per share) - - (397,440) - (397,440)
Balance at December 31, 1994 $1,152,00 $649,343 $8,450,153 $ (789,710) $ 9,461,786
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
First Merchants Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
OPERATING ACTIVITIES 1994 1993 1992
Net income $ 1,182,560 $ 1,212,677 $ 1,067,712
Adjustments to reconcile net income to
net cash provided by
operating activities:
Cumulative effect of change in accounting principle 116,930 -
Net (accretion) amortization (8,846) (2,589) 41,013
Provision for loan losses 86,699 93,193 103,155
Depreciation 204,392 220,057 222,056
Deferred income tax (benefit) expense (5,547) 13,257 (124,951)
Securities gains, net (73,829) (351,522) (6,122)
Purchases of trading account securities (2,880,211) (5,177,674)
Proceeds from sales of trading account securities 2,880,211 5,177,674
Decrease in other assets 160,973 2,158 63,613
Decrease in other liabilities (63,250) (212,551) (129,869)
Net Cash Provided by
Operating Activities 1,483,152 1,091,610 1,236,607
INVESTING ACTIVITIES
Purchases of investment securities (11,588,316) (14,976,841) (17,392,904)
Purchases of securities available for sale (1,955,534)
Proceeds from sales of securities available for sale 6,361,604 6,303,206 -
Proceeds from maturities of securities available for sale - 1,591,843 -
Proceeds from maturities of investment securities 3,610,085 2,763,236 6,760,446
Proceeds from calls of investment securities 1,034,050 3,736,543 8,945,230
Net decrease in short-term investments 1,295,068
Net (increase) decrease in loans (4,141,203) 3,478,477 (5,960,120)
Net cash received in acquisition 5,843,968 -
Purchases of premises and equipment (105,325) (209,854) (200,848)
Proceeds from sale of other real estate owned 56,779 40,919 9,500
Net Cash (Used in) Provided By Investing
Activities (6,727,860) 9,866,565 (7,838,696)
FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits 2,791,628 655,298 1,332,764
Net increase (decrease) in interest-bearing deposits 124,105 (1,879,103) 2,701,535
Net increase (decrease) in repurchase agreements 3,687,128 (10,248,121) 4,738,724
Net (decrease) increase in other short-term borrowings (85,927) 12,111 198,045
Cash dividends paid (397,440) (420,479) (234,720)
Net Cash Provided by (Used in) Financing
Activities 6,119,494 (11,880,294) 8,736,348
Increase (Decrease) in Cash and Cash
Equivalents 874,786 (922,119) 2,134,259
Cash and cash equivalents at beginning of year 5,146,864 6,068,983 3,934,724
Cash and Cash Equivalents at End of Year 6,021,650 $ 5,146,864 $ 6,068,983
First Merchants Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
The accounting and reporting policies of First Merchants Bancorp,
Inc. and subsidiary (First Merchants) conform with generally accepted
accounting principles. The following is a summary of the more
significant policies:
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statements include the accounts of First Merchants Bancorp, Inc. and its
wholly- owned subsidiary, the Merchants National Bank (Merchants
National). All significant intercompany balances and transactions have
been eliminated.
STATEMENT OF CASH FLOWS: For purposes of the statement of cash
flows, First Merchants considers cash and due from banks and federal
funds sold as cash and cash equivalents. Income taxes paid approximated
$348,000 in 1994, $529,000 in 1993, and $453,000 in 1992. Interest paid
on deposits and short-term borrowings approximated $2,888,000 in 1994,
$2,886,000 in 1993, and $3,461,000 in 1992.
SECURITIES: Management determines the appropriate classification of
debt securities at the time of purchase and reevaluates such designation
as of each balance sheet date. Debt securities are classified as
held-to-maturity when First Merchants has the positive intent and
ability to hold the securities to maturity. Held-to-maturity securities
are stated at amortized cost. Trading account securities are held for
resale in anticipation of short-term market movements and are stated at
fair value. Gains and losses on trading securities, both realized and
unrealized, are included in other income. No securities were held in the
trading account at December 31, 1994 or 1993. Debt securities not
classified as held-to-maturity or trading and marketable equity
securities not classified as trading are classified as
available-for-sale. Available-for-sale securities are stated at fair
value, with the unrealized gains and losses, net of tax, reported in a
separate component of stockholders' equity. The amortized cost of debt
securities classified as held-to-maturity or available-for-sale is
adjusted for amortization of premiums and accretion of discounts to
maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Realized gains and losses, and declines
in value estimated to be other-than-temporary are included in net
securities gains (losses). The cost of securities sold is based on the
specific identification method.
REVENUE RECOGNITION: Interest on loans is accrued and credited to
operations based upon the principal amount outstanding. The accrual of
interest generally is discontinued when a loan becomes 90 days past due
as to principal or interest. When interest accruals are discontinued,
unpaid interest recognized in income in the current year is reversed,
and interest accrued in prior years is charged to the allowance for loan
losses. Management may elect to continue the accrual of interest when
the estimated net realizable value of collateral is sufficient to cover
principal and accrued interest, and the loan is in the process of
collection.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is
established through a provision charged to operations. The allowance
represents an amount which, in management's judgment, will be adequate
to absorb potential losses on existing loans which may become
uncollectible. Management's judgment in determining the adequacy of the
allowance is based on quarterly evaluations which take into
consideration such factors as changes in the nature and volume of the
loan portfolio, current economic conditions which may affect the
borrower's ability to pay, overall portfolio quality, and review of
specific problem loans. Loans deemed to be uncollectible are charged
against the allowance for loan losses.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost
less accumulated depreciation. The provision for depreciation is
computed principally by the straight-line method over the estimated
useful lives of the assets.
INCOME TAXES: The consolidated provision for income taxes is based
upon reported income and expense. Deferred income taxes (included in
other assets or other liabilities, as applicable) are provided for
temporary differences between the financial reporting and tax bases of
assets and liabilities.
First Merchants and its subsidiary file a consolidated income tax
return. The subsidiary provides for income taxes on a separate return
basis and remits amounts determined to be currently payable to First
Merchants.
LOAN FEES AND COSTS: Loan origination fees and direct loan
origination costs are being recognized as collected and incurred. The
use of this method of recognition does not produce results that are
materially different from results which would have been produced if such
costs and fees were deferred and amortized as an adjustment of loan
yield over the life of the related loan.
NET INCOME PER COMMON SHARE: Net income per common share is based on
the weighted average common shares outstanding during each year. Net
income per share has been restated for all periods prior to 1993
presented to reflect a stock split, effected in the form of a 3 for 1
stock dividend, which occurred in 1993.
NOTE B - ACQUISITIONS
In March, 1987, First Merchants acquired Gauley National Bank
(Gauley National), which has subsequently been merged with and into
Merchants National. The acquisition was accounted for under the purchase
method of accounting. Accordingly, the identifiable tangible and
intangible assets and liabilities of Gauley National were adjusted to
their estimated fair market values at the date the transaction was
consummated.
In September 1993, Merchants National was declared the successful
bidder for the purchase of certain assets and the assumption of the
insured deposits and certain other liabilities of Evergreen Federal
Savings and Loan (Evergreen) following its closure by the Office of
Thrift Supervision. Merchants National assumed deposits of approximately
$15 million in exchange for net loans of approximately $6 million, cash
and cash equivalents (net of the premium paid by Merchants National of
approximately $900,000) of approximately $6 million, and certain other
assets. This acquisition was accounted for under the purchase method of
accounting. Accordingly, the results of operations of Evergreen have
been included in the related consolidated totals from the date of
acquisition.
Intangible assets representing the present value of future net
income to be earned from the acquired deposits of Gauley National and
Evergreen ($459,000) are being amortized on an accelerated basis over
ten and seven years, respectively. Accumulated amortization approximated
$221,000 and $149,000 at December 31, 1994 and 1993, respectively. The
excess of purchase price over the fair market value of the net assets
acquired in the Gauley National and Evergreen transactions ($1,008,000)
is being amortized on a straight-line basis over 15 years. Accumulated
amortization approximated $259,000 and $193,000 at December 31, 1994 and
1993, respectively.
NOTE C - RESTRICTIONS ON CASH AND DUE FROM BANKS
Merchants National is required to maintain balances in cash on hand
or on deposit with the Federal Reserve Bank. The average amount of
required reserve balances was approximately $737,000 for the year ended
December 31, 1994.
NOTE D - SECURITIES
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." First Merchants
elected to adopt the provisions of the new standard at the end of 1993.
The cumulative effect as of December 31, 1993 of adopting Statement 115
had no effect on the results of operations. The ending balance of
stockholders' equity was decreased as of December 31, 1994 by $789,710
(net of $526,465 in deferred income taxes) to reflect the net unrealized
holding loss and increased as of December 31, 1993 by $401,967 (net of
$203,304 in deferred income taxes) to reflect the net unrealized holding
gain on securities classified as available-for-sale.
The aggregate carrying and approximate market values of securities
follow. Fair values are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
DECEMBER 31, 1994
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
HELD-TO-MATURITY
U. S. Treasury securities and
obligations of U. S. Government
corporations and agencies $15,059,378 $ 8,812 $ (332,508) $14,735,682
Obligations of states and political
subdivisions 10,928,045 262,041 (160,170) 11,029,916
Mortgage-backed securities 2,400,786 (112,788) 2,287,998
Other debt securities 260,000 (9,120) 250,880
Totals $28,648,209 $270,853 $ (614,586) $28,304,476
AVAILABLE-FOR-SALE
U. S. Treasury securities and
obligations of U. S. Government
corporations and agencies $13,152,520 $ 7,278 $ (1,042,429) $12,117,369
Obligations of states and political
subdivisions 1,308,011 5,478 (45,579) 1,267,910
Total debt securities 14,460,531 12,756 (1,088,008) 13,385,279
Equity securities 1,744,375 (240,923) 1,503,452
Totals $16,204,906 $ 12,756 $ (1,328,931) 14,888,731
DECEMBER 31, 1993
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
HELD-TO-MATURITY
U. S. Treasury securities and
obligations of U. S. Government
corporations and agencies $ 6,497,581 $ 127,669 $ (20,207) $ 6,605,043
Obligations of states and political
subdivisions 11,904,049 985,913 (3,401) 12,886,561
Mortgage-backed securities 2,168,308 81,193 - 2,249,501
Other debt securities 570,000 3,550 (2,400) 571,150
Totals $21,139,938 $1,198,325 $ (26,008) $22,312,255
AVAILABLE-FOR-SALE
U. S. Treasury securities and
obligations of U. S. Government
corporations and agencies $15,216,839 $ 419,682 $ (67,594) $15,568,927
Obligations of states and political
subdivisions 2,395,685 219,433 - 2,615,118
Total debt securities 17,612,524 639,115 (67,594) 18,184,045
Equity securities 2,935,305 33,750 (96,977) 2,872,078
Totals $20,547,829 $ 672,865 $(164,571) $21,056,123
The amortized cost and estimated market value of debt securities at
December 31, 1994, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because the issuers
of the securities may have the right to call or prepay obligations with
or without call or prepayment penalties.
ESTIMATED
AMORTIZED MARKET
COST VALUE
HELD-TO-MATURITY
Due in one year or less $ 2,510,693 $ 2,503,105
Due after one year through five years 14,381,652 13,992,987
Due after five years through ten years 10,248,204 10,369,524
Due after ten years 1,507,660 1,438,860
$ 28,648,209 $28,304,476
AVAILABLE-FOR-SALE
Due in one year or less $ - $ -
Due after one year through five years 10,403,167 9,611,325
Due after five years through ten years 2,249,353 2,043,444
Due after ten years 1,808,011 1,730,510
$ 14,460,531 $13,385,279
During 1994, gross gains of approximately $134,000 and gross losses
of approximately $96,000 were realized on securities sales. During 1993
and 1992, respectively, gross gains of approximately $353,000 and
$209,000, and gross losses of $1,000 and $2,000 were realized on
securities sales.
Securities with a carrying value of approximately $11,086,030 and
$8,089,179, respectively, have been pledged to secure public deposits
and for other purposes as required or permitted by law as of December
31, 1994 and 1993, respectively.
NOTE E - LOANS
Major classifications of loans as of December 31 are summarized as
follows:
1994 1993
Commercial loans:
Commercial paper and loan participations $ 10,500,455 $ 9,318,614
Other commercial and industrial 16,440,210 14,225,357
26,940,665 23,543,971
Consumer loans:
Installment loans 10,615,351 9,851,982
Revolving credit 780,551 528,513
11,395,902 10,380,495
Residential real estate loans 20,678,829 21,142,553
Total Loans 59,015,396 55,067,019
Less unearned income on loans 141,203 188,366
58,874,193 54,878,653
Less allowance for loan losses 460,000 445,000
Net Loans $ 58,414,193 $54,433,653
Changes in the allowance for loan losses for each of the three years
ended December 31 were as follows:
1994 1993 1992
Balance, January 1 $445,000 $350,000 $ 360,000
Allowance on acquired loans 61,000
Provision for loan losses 86,699 93,193 103,155
Charge-offs (87,182) (77,852) (128,201)
Recoveries 15,483 18,659 15,046
Balance, December 31 $460,000 $445,000 $ 350,000
Certain directors and executive officers of First Merchants,
including their immediate families and companies in which they are
principal owners, are loan customers of Merchants National. Such loans
were made in the ordinary course of business on the Bank's normal credit
terms including interest rate and collateralization and did not
represent more than a normal risk of collection. The aggregate amount of
loans outstanding at December 31, 1994 and 1993, attributable directly
and indirectly to these parties was approximately $3,150,000 and
$3,090,000, respectively. During 1994, $733,000 of new loans were made
and repayments totaled $673,000.
The FASB has issued SFAS No. 114, "Accounting By Creditors for
Impairment of a Loan." The provisions of SFAS No. 114 are effective for
fiscal years beginning after December 15, 1994. SFAS No. 114 requires
that impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or fair
value of the collateral if the loan is collateral dependent. First
Merchants has not yet completed the complex analysis required to
estimate the impact of these new rules and does not expect to implement
SFAS No. 114 prior to its first quarter 1995 effective date.
NOTE F - PREMISES AND EQUIPMENT
The major categories of premises and equipment are summarized as
follows:
DECEMBER 31
1994 1993
Land $ 913,561 $ 913,561
Buildings 3,171,351 3,126,560
Furniture and equipment 2,144,560 2,084,026
6,229,472 6,124,147
Less accumulated depreciation 2,777,082 2,572,690
Premises and Equipment - Net $3,452,390 $3,551,457
NOTE G - DEPOSITS The major categories of deposits are summarized as
follows:
DECEMBER 31
1994 1993
Demand deposits:
Non-interest-bearing $13,674,107 $10,882,479
Interest-bearing 13,942,620 13,176,640
Savings deposits 32,360,660 34,209,274
Certificates of deposits < $100,000 31,869,979 30,835,601
Certificates of deposits > $100,000 3,693,786 3,521,425
Total Deposits $95,541,152 $92,625,419
NOTE H - RESTRICTIONS ON SUBSIDIARY DIVIDENDS
First Merchants's primary source of funds for payment of dividends to
stockholders is dividends received from Merchants National. Certain
restrictions exist regarding the ability of Merchants National to
transfer funds to First Merchants in the form of cash dividends. Federal
banking regulations require regulatory approval prior to declaring
dividends in excess of the current year's net income, combined with
retained net income for the two preceding years. During 1995, Merchants
National can, without prior regulatory approval, declare dividends of
approximately $1,610,000 to First Merchants, plus retained net profits
for the interim period through the date of such dividend declaration.
NOTE I - EMPLOYEE BENEFITS
Merchants National participates in a noncontributory defined benefit
retirement plan which covers all full-time employees with one year of
service who have attained the age of 21. Employee benefits are based on
years of service and employee compensation earned during employment. The
Bank's funding policy is to contribute annually the maximum amount that
can be deducted for federal income tax purposes. 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.
The following table sets forth the Plan's funded status and the
amounts recognized in First Merchants's balance sheets at December 31,
based on actuarial valuations performed as of November 1:
1994 1993
Actuarial present value of accumulated benefit
obligations - (substantially vested in full) $1,143,000 $1,191,000
Projected benefit obligation for service rendered to date $1,341,000 $1,402,000
Plan assets at fair value, primarily listed common stocks
and investments in various mutual bond and stock
funds 1,702,000 1,777,000
Funded Status - Plan Assets in
Excess of
Projected
Benefit Obligation 361,000 375,000
Unrecognized net gain from past experience different
from that assumed and effects of changes in
assumptions (239,000) (263,000)
Unrecognized prior service cost (23,000) (25,000)
Unrecognized net asset (overfunding) at date of adoption
of FASB No. 87 (145,000) (95,000)
Net Accrued Pension Cost
Included in Other Liabilities $ (46,000) $ (8,000)
Net periodic pension cost for each of the three years ended December
31 included the following components:
1994 1993 1992
Service cost - benefits earned during the period $ 42,000 $ 65,000 $ 76,000
Interest cost on projected benefit obligation 102,000 97,000 90,000
Actual return on plan assets 34,000 (207,000) (157,000)
Deferred gains (181,000) 68,000 20,000
Amortization of unrecognized net gains (6,000) (14,000) (14,000)
Amortization of unrecognized prior service cost
(2,000) (2,000) (2,000)
Amortization of plan overfunding at date of
adoption (16,000) (10,000) (10,000)
Net Periodic Pension (Benefit) Expense $ (27,000) $ (3,000) $ 3,000
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of
the projected benefit obligation were 8.5% and 6%, respectively, and
7.5% and 6%, respectively, at November 1, 1994 and 1993. The expected
long-term rate of return on plan assets was 8.5% in 1994, 1993, and
1992. The overfunding as of the date of adoption of FASB No. 87, the net
deferred gain from past experience different from that assumed, and the
effects of changes in assumptions are being amortized as a net credit
against pension cost over the average future working lifetime of the
participants expected to receive benefits under the Plan which
approximates 17 years.
In addition to the defined benefit pension plan, Merchants National
sponsors contributory defined benefit health care and life insurance
plans that provide postretirement medical and life insurance benefits to
qualifying retirees. Full-time employees who retire on or after age 62
with 15 years of service, or after age 65 with 10 years of service are
eligible for medical benefits. The postretirement medical plan covers a
stated percentage of eligible expenses, reduced by deductibles and other
coverages, as applicable. The cost- sharing provisions of the medical
plan require covered retirees to fund 50% of the total cost of employee
coverage and 100% of any dependent coverage. Life insurance coverage is
available only to employees who retired prior to January 1, 1993 and
otherwise met the service requirements indicated above for medical
benefits. The cost-sharing provisions of the postretirement life
insurance plan require covered retirees to fund 50% of the total cost.
Effective January 1, 1993, First Merchants adopted FASB Statement No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." The cumulative effect as of January 1, 1993 of adopting
Statement 106 decreased net income by $116,930 (net of $77,953 in
deferred income tax benefit), or $.20 per share. Adoption of the
Statement also increased 1993 net periodic postretirement benefit cost
by approximately $11,000. Postretirement benefit costs for 1992, which
was recorded on a cash basis, has not been restated.
The following table presents combined details of the amounts
recognized in First Merchants's statement of financial position relative
to the respective unfunded postretirement benefit plans:
DECEMBER 31
1994 1993
Accumulated postretirement benefit obligation:
Retirees $136,441 $128,789
Fully eligible active plan participants 17,657 16,665
Other active plan participants 63,894 60,321
Accrued Postretirement Benefit Cost $217,992 $205,775
Net periodic postretirement benefit cost for the years ended
December 31, included the following components:
1994 1993
Service cost $ 6,777 $ 6,477
Interest cost 15,291 14,616
Net Periodic Postretirement Benefit Cost $22,068 $21,093
The weighted-average annual assumed rates of increase in the per
capita cost of covered benefits are 11% (pre-age 65 benefits) and 9%
(post-age 65 benefits) for 1994 (the rates previously assumed for 1993
were 11.5% and 9.5%, respectively) and are assumed to decrease .5%
annually to an ultimate level of 5%. The annual assumed rate of increase
in per capita cost of life insurance benefits (i.e., salary increases)
is 5%. The health care cost trend rate assumption has a significant
effect on the amounts reported. For example, increasing the assumed
health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation as of
December 31, 1993 by approximately $30,000, and the aggregate of the
service and interest cost components of net periodic postretirement
benefit cost for 1993 by approximately $5,000. The weighted-average
discount rate used in determining the accumulated postretirement benefit
obligation was 7.5% at December 31, 1994 and 1993.
NOTE J - INCOME TAXES Effective January 1, 1993, First Merchants
changed its method of accounting for income taxes from the deferred
method to the liability method required by FASB Statement No. 109,
"Accounting for Income Taxes." The cumulative effect of adopting
Statement 109 as of January 1, 1993, was not material to First
Merchants's consolidated financial statements.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of First Merchants's deferred tax
liabilities and assets as of December 31 are as follows:
Deferred tax liabilities: 1994 1993
Unrealized gains on securities for sale - $203,000
Premises and equipment $179,000 185,000
Federal income tax allowance for loan losses 166,000 167,000
Other 42,000 34,000
Total Deferred Liabilities 387,000 589,000
Deferred tax assets:
Unrealized losses on securities available for sale 526,000 -
Allowance for loan losses 180,000 176,000
OPEB liability 86,000 81,000
Accrued liabilities 10,000 31,000
Other 38,000 54,000
Total Deferred Tax Assets 840,000 342,000
Net Deferred Tax Assets $483,000 $247,000
Income taxes included in earnings for each of the three years ended
December 31 are composed of:
DEFERRED
LIABILITY METHOD METHOD
1994 1993 1992
Federal:
Current $275,564 $306,289 $ 340,343
Deferred expense (benefit) (5,547) 13,257 (124,951)
270,017 319,546 215,392
State 82,585 98,372 112,000
Total $352,602 $417,918 $ 327,392
Current income tax expense attributable to securities transactions
approximated $29,000, $141,000, and $2,000 in 1994, 1993, and 1992,
respectively.
The provision for income taxes differs from the federal statutory
rate for the following reasons:
LIABILITY METHOD DEFERRED METHOD
1994 % 1993 % 1992 %
Computed tax at statutory federal rate $ 521,955 34.00% $ 594,159 34.00% $ 474,335 34.00%
Add state income taxes net of federal tax
benefit 53,478 3.48 63,789 3.65 59,469 4.26
Increase (decrease) in taxes resulting from:
Tax-exempt interest (239,141) (15.58) (252,876) (14.47) (231,801) (16.62)
Amortization of purchase accounting
adjustments - - - - 20,003 1.43
Other 16,310 1.06 12,846 .73 5,386 .40
$ 352,602 22.96% $ 417,918 23.91% $ 327,392 23.47%
NOTE K - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, Merchants National offers a
variety of financial products to customers to aid them in meeting their
requirements for liquidity and credit enhancement. Generally accepted
accounting principles recognize these transactions as contingent
liabilities and, accordingly, they are not reflected in the accompanying
financial statements. Following is a discussion of these transactions.
STANDBY LETTERS OF CREDIT: These transactions are used by the Bank's
customers as a means of improving their credit standing in their
dealings with others. Under these agreements, the Bank agrees, in
exchange for a fee, to honor certain financial commitments in the event
that its customers are unable to do so. Amounts outstanding pursuant to
such standby letters of credit as of December 31, 1994 and 1993 were
$388,000 and $213,000, respectively. Management conducts regular reviews
of these instruments on an individual customer basis, and the results
are considered in assessing the adequacy of the allowance for loan
losses.
LOAN COMMITMENTS: As of December 31, 1994 and 1993, Merchants
National had commitments outstanding to extend credit totaling
approximately $2,633,000 and $682,000, respectively. These commitments
(lines of credit) generally require the customers to maintain certain
credit standards.
Both of the above arrangements have credit risk essentially the same
as that involved in extending loans to customers and are subject to the
Company's standard credit policies. Collateral is obtained based on
management's credit assessment of the customer. Management does not
anticipate any material losses as a result of these commitments.
NOTE L - OTHER INCOME AND EXPENSE The following items of other
income and expense exceeded one percent of total revenue for the periods
indicated:
1994 1993 1992
Other expense:
FDIC assessment $213,000 $179,000 $170,000
Marketing 96,000 87,000 65,000
Directors and committee fees 94,000 88,000 63,000
Printing stationery and supplies 102,000 93,000 75,000
Other income:
Credit life insurance premiums 97,000 94,000 88,000
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the FASB issued Statement No. 107, "Disclosures
about Fair Values of Financial Instruments." This statement requires the
disclosure of the fair value of substantially all financial instruments,
whether recognized or not recognized in the balance sheet. The statement
does not change any of the present requirements for recognition,
measurement, or classification of financial instruments in the financial
statements. Statement 107 is effective for financial statements issued
for fiscal years ending after December 15, 1995, for entities with less
than $150 million in total assets.
NOTE N - FIRST MERCHANTS BANCORP, INC. (PARENT ONLY) FINANCIAL
INFORMATION
CONDENSED BALANCE SHEETS
DECEMBER 31
1994 1993
ASSETS
Cash $ 56,137 $ 51,297
Investment in bank subsidiary 9,518,838 9,830,978
Other assets 175,000 160,000
Total Assets $9,749,975 $10,042,275
LIABILITIES
Other liabilities $ 288,189 $ 270,909
Total Liabilities 288,189 270,909
Stockholders' equity 9,461,786 9,771,366
Total Liabilities and
Stockholders' Equity $9,749,975 $10,042,275
CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
1994 1993 1992
INCOME
Dividends from bank subsidiary $ 400,000 $ 385,000 $ 275,000
Equity in undistributed earnings of subsidiary bank 782,560 827,677 792,712
Net Income $1,182,560 $1,212,677 $1,067,712
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
1994 1993 1992
OPERATING ACTIVITIES
Net income $1,182,560 $1,212,677 $1,067,712
Adjustments to reconcile net income to cash provided
by operating activities:
Equity in undistributed earnings of subsidiary (782,560) (827,677) (792,713)
(Increase) decrease in other assets (15,000) 45,000 (205,000)
Cash Provided by Operating Activities 385,000 430,000 69,999
FINANCING ACTIVITIES
Cash dividends paid (380,160) (420,479) (234,720)
Cash Used in Financing Activities (380,160) (420,479) (234,720)
Increase (Decrease) in Cash 4,840 9,521 (164,721)
Cash at beginning of year 51,297 41,776 206,497
Cash at End of Year $ 56,137 $ 51,297 $ 41,776
NOTE O - PENDING MERGER
On March 14, 1995, the Company's board of directors approved a plan
of merger whereunder the company will be acquired by City Holding
Company. The merger is subject to approval of shareholders and
regulators and is expected to be consummated in the summer of 1995.