SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934
For the fiscal year ended December 31, 1994 Commission file number 33-9540
First Merchants Bancorp, Inc.
(Exact name of registrant as specified in its charter)
West Virginia 55-0670580
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
P. O. Box 1109
Montgomery, West Virginia 25136
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (304) 442-2475
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $2 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding twelve months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [N/A]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 30, 1995:
Common Stock, $2 Par Value - $11,457,263
The Number of shares outstanding of the issuer's classes of common stock,
net of shares held in treasury as of March 30, 1995:
Common Stock, $2 Par Value - 576,000 shares
(page 1 of 48)
FIRST MERCHANTS BANCORP, INC.
FORM 10-K
DECEMBER 31, 1994
TABLE OF CONTENTS Page
PART I
Item 1 - Description of Business . . . . . . . . . . . . . 3
Item 2 - Properties . . . . . . . . . . . . . . . . . . . 13
Item 3 - Legal Proceedings . . . . . . . . . . . . . . . . 13
Item 4 - Submission of Matters to a Vote of
Stockholders . . . . . . . . . . . . . . . . . 13
PART II
Item 5 - Market for Registrant's Common Stock and
Related Stockholder Matters . . . . . . . . . . 14
Item 6 - Selected Financial Data . . . . . . . . . . . . . 16
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . 17
Item 8 - Financial Statements and Supplementary Data . . . 23
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . 39
PART III
Item 10 - Directors and Executive Officers of the
Registrant . . . . . . . . . . . . . . . . . . 40
Item 11 - Executive Compensation . . . . . . . . . . . . . 42
Item 12 - Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . 43
Item 13 - Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . . 45
PART IV
Item 14 - Exhibits, Financial Statement Schedules
and Reports on Form 8-K . . . . . . . . . . . 46
Signatures . . . . . . . . . . . . . . . . . . . . . . . . 47
Index to Exhibits . . . . . . . . . . . . . . . . . . . . 48
(2)
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
First Merchants Bancorp, Inc. ("First Merchants") is a one bank holding company
which was incorporated in the State of West Virginia on June 26, 1986. First
Merchants commenced operations on March 5, 1987, acquiring The Merchants
National Bank ("Merchants National") in Montgomery, West Virginia and The
Gauley National Bank ("Gauley National") in Gauley Bridge, West Virginia.
First Merchants operated as a multi-bank holding company from March 5, 1987 to
March 1, 1990, at which time it merged Gauley National with and into Merchants
National. First Merchants expanded into Charleston, West Virginia on September
17, 1993 when it was announced that the Company's subsidiary, Merchants
National, was 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 Association (Evergreen), a failed thrift institution.
First Merchants is subject to the routine filing requirements of the Securities
and Exchange Commission and the subsidiary bank is subject to various
regulatory guidelines at the federal and state levels. Merchants National's
primary regulator is the Office of the Comptroller of the Currency; however,
the bank is also regulated by the Federal Reserve Bank and the Federal Deposit
Insurance Corporation. In addition to being regulated by the Securities and
Exchange Commission, First Merchants is regulated by the Federal Reserve Bank
and the West Virginia Department of Banking.
As a bank holding company, First Merchants' operations consist of the
operations of its bank subsidiary. Merchants National is a consumer-oriented
community bank which offers a full range of deposit and lending services to
customers in its primary market area. The markets in which it operates are
determined by the locations of its main facility and its branches. Merchants
National's main facility is located in Montgomery, West Virginia; however, it
also operates branches in the Cedar Grove / Glasgow, Gauley Bridge, and
Charleston, West Virginia.
As of December 31, 1994, First Merchants had a total of 78 employees, as
compared with a total of 78 and 64 employees at December 31, 1993 and 1992,
respectively. Absent further expansion, management does not anticipate any
material change in the Company's workforce.
I. Distribution of Assets, Liabilities, and Stockholders' Equity; Interest
Rates and Interest Differential
A schedule reflecting the distribution of assets, liabilities, stockholders'
equity and interest differential follows on the next page.
(3)
ITEM 1 (Continued)
------------------ Year Ended Year Ended
December 31, 1994 December 31, 1993
--------------------------- ---------------------------
Avg. Interest Avg. Interest
Balance Inc./Exp. Yield Balance Inc./exp. Yield
--------------------------- ---------------------------
ASSETS (IN THOUSANDS OF DOLLARS)
Earning Assets:
Int. bearing deposits
with other banks $1,144 80 6.99% $873 $38 6.63%
Federal funds sold 1,179 47 3.99% 1,625 49 3.02%
Sec. avail for sale 4,098 323 7.88%
Taxable invest. sec. 30,016 1,861 6.20% 24,119 1,528 6.34%
Tax exempt securi 12,494 1,153 9.23% 13,062 1,222 9.36%
Loans (1) 55,871 4,900 8.77% 51,332 4,356 8.49%
Less: allowance for
loan loss (457) (386)
------- ------- ------- -------
Total Earning Assets 100,247 8,041 8.02% 94,723 7,516 7.93%
Nonearning Assets:
Cash and due
from banks 3,666 3,302
Bank premises
and equipment 3,484 2,766
Other assets 2,884 2,171
------- -------
TOTAL ASSETS $110,281 $102,962
======== ========
LIABILITIES AND EQUITY
Interest-bearing Liabilities:
Demand deposits $13,283 365 2.75% $12,120 $363 3.00%
Savings deposits 34,329 1,030 3.00% 32,026 1,096 3.42%
Time deposits 34,717 1,373 3.95% 30,021 1,205 4.01%
Short-term borrow 4,263 159 3.73% 7,346 214 2.91%
------- ------- ------- ------- ------- -------
Total Int.-bearing 86,592 2,927 3.38% 81,513 2,878 3.53%
Noninterest-bearing
Liabilities:
Demand deposits 12,886 11,278
Other liabilities 1,076 1,119
Total Stockholders'
Equity 9,727 9,052
------- -------
TOTAL LIABILITIES
AND EQUITY $110,281 $102,962
======== ========
Net Interest Earnings $5,114 $4,638
======== ========
Net Yield on Earning Assets 5.10% 4.90%
======== ========
(1) Weighted average yields on assets exempt from federal taxes have been
computed on a fully tax-equivalent basis assuming a tax rate of 34
percent.
For purposes of this report, nonaccruing loans have been included in the
average balance.
(4)
ITEM 1 - (Continued)
The following table sets forth for the periods indicated, a summary of the
changes in interest income and expense resulting form changes in volume and
changes in rates. Changes not solely due to volume or rate have been allocated
to the most significant component.
1994 COMPARED WITH 1993 1993 COMPARED WITH 1992
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------- --------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- -------- -------- -------- --------
INTEREST INCOME ON:
Interest bearing deposits
with other banks 39 3 42 16 (2) 14
Federal funds sold (18) 16 (2) (4) (8) (12)
Sec. held for sale (323) 0 (323) 111 (44) 67
Taxable invest. sec. 363 (30) 333 (71) (402) (473)
Tax exempt invest. (52) (17) (69) 158 (72) 86
Loans 400 144 544 251 (175) 76
-------- -------- -------- -------- -------- --------
TOTAL EARNING ASSETS 409 116 525 461 (703) (242)
======== ======== ======== ======== ======== ========
INTEREST EXPENSE ON:
Demand deposits 32 (30) 2 47 (50) (3)
Savings deposits 69 (135) (66) 197 (204) (7)
Time deposits 186 (18) 168 (11) (279) (290)
Short-term borrow (115) 60 (55) (85) (43) (128)
Long-term borrowing 0
-------- -------- -------- -------- -------- --------
TOTAL INTEREST
BEARING LIAB. 172 (123) 49 148 (576) (428)
======== ======== ======== ======== ======== ========
Change in net
interest income 237 239 476 313 $(127) $186
======== ======== ======== ======== ======== ========
Weighted average yields on assets exempt from federal taxes have been computed
on a fully tax-equivalent basis assuming a tax rate of 34 percent.
(5)
ITEM 1 (Continued)
II. INVESTMENT PORTFOLIO
The following tables set forth the maturities of debt securities as of
December 31, 1994, along with the related weighted average yields.
0 - 1 YEAR 1 - 5 YEARS
------------------- -------------------
AMOUNT YIELD AMOUNT YIELD
-------- -------- -------- --------
(In thousands of dollars)
U.S. Treasury and other
U.S. Government agencies
and corporations $2,501 6.59% $22,630 6.14%
States and political
subdivisions (1) 0 0.00 1,905 7.87
Other debt securities 10 5.50 250 5.00
-------- --------
TOTAL $2,511 6.59% $24,785 6.26%
======== ========
5 - 10 YEARS 10 YEARS +
------------------- -------------------
AMOUNT YIELD AMOUNT YIELD
-------- -------- -------- --------
(In thousands of dollars)
U.S. Treasury and other
U.S. Government agencies
and corporations $3,475 6.72% $1,508 8.49
States and political
subdivisions (1) 9,022 9.08 1,808 7.98
-------- --------
TOTAL $12,497 8.42% $3,316 8.21%
======== ========
(1) Weighted average yields on assets exempt from federal taxes have been
computed on a fully tax-equivalent basis assuming a tax rate of 34 percent.
(6)
ITEM 1 (Continued)
INVESTMENT CONCENTRATIONS
As of December 31, 1994, the aggregate book value of investment securities of
no single issuer (except for U.S. Government Agencies and Corporations)
exceeded 10% of Stockholders' Equity.
III. LOAN PORTFOLIO
MAJOR LOAN CLASSIFICATIONS
The following table presents the balance in each of the major loan
classifications for the periods indicated.
December 13
1994 1993
-------------------------
(In thousands of dollars)
Commercial loans $26,941 $23,544
Residential Real Estate Loans 20,679 21,143
Consumer loans 11,395 10,380
-------------------------
Total $59,015 $55,067
=========================
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
Commercial loans outstanding as of December 31, 1994, will mature based upon
the following payment schedule. Additionally, commercial loans due after one
year are classified according to their sensitivity to changes in interest
rates.
MATURING WITHIN
-----------------------------
0 - 1 1 - 5 5+
YEAR YEARS YEARS TOTAL
------- ------- ------- -------
(In thousands of dollars)
Commercial loans 20,663 5,690 588 26,941
Commercial loans maturing
after one year with:
Fixed rates 55
Variable rates 5,635
-------
5,690
=======
As of December 31, 1994, the Company had no real estate construction loans.
(7)
ITEM 1 (Continued)
RISK ELEMENTS
Nonperforming Loans
The following table summarizes nonperforming loans as of the indicated periods.
December 31
1994 1993
-------------------------
(In thousands of dollars)
Nonaccrual loans 14 35
Troubled debt restructuring 0 79
Loans which are contractually past due
90 days or more as to interest and
principal, but have not been placed
in a nonaccrual status 202 65
The difference between the interest income which would have been recorded on
nonaccrual loans under their original terms and that recorded was not material
nor was the actual income recorded on such loans.
(8)
ITEM 1 (Continued)
Summary of Loan Loss Experience
The following table summarizes changes in the allowance for loan losses arising
from loans charged off and recoveries on loans previously charged off, by loan
category, and additions to the allowance which have been charged to expense.
Year Ended December 31
1994 1993
---------------------------
(In thousands of dollars)
Balance of the allowance for loan
losses at the beginning of
the period $ 445 $ 350
Loans charged off:
Commercial 27 9
Real estate 9 19
Consumer 51 50
------- -------
Total 87 78
Recoveries of loans previously
Charged off:
Commercial 1
Real estate 2
Consumer 14 17
------- -------
Total 15 19
Net loans charged off 72 59
Additions to allowance charged
to expense 87 93
Allowance on acquired loans 61
------- -------
Balance of the allowance for
loan losses at the end of
the period $ 460 $ 445
======= =======
Ratio of net charge-offs during
the period to average loans
outstanding (1) 0.15% 0.15%
(1) For purposes of calculating the above ratio, loans represented by bankers
acceptances, collateralized mortgage obligations, commercial loan
participations, and commercial paper were excluded from average loans
outstanding. In management's opinion, these are extremely low risk instruments
which do not warrant an allocation in terms of the allowance for loan losses.
(9)
ITEM 1 - (Continued)
The allowance for loan losses is established through charges to operating
expenses in the form of a provision for loan losses. Loan losses or recoveries
are charged or credited directly to the allowance. The provision for loan
losses is determined by senior management upon consideration of several
factors, including its loss experience in relation to outstanding loans and
the existing level of the allowance, specific analysis of large loans and
loans adversely classified internally or by regulatory authorities, and
analysis of anticipated economic conditions in the market area served by the
Bank.
The Bank charges-off any loan or that portion of any loan which management
considers to represent a loss, in whole or in part. In making this
determination, management evaluates the adequacy and marketability of the
collateral, the strength of any guarantors, the adequacy of the borrower's
secondary resources for repayment and the amount and likelihood of further
collections based upon the borrower's financial condition and general economic
conditions in the borrower's industry.
Although management considers itself generally able to identify borrowers with
financial difficulties at a reasonably early date, there is no precise method
of predicting loan losses, and decisions made to charge-off any loan, in whole
or in part, are an exercise in judgment. Similarly, the determination of the
adequacy of the allowance for loan losses can be made only on a judgmental
basis involving estimates and assumptions with respect to subsequent economic
conditions and other factors relating to individual borrowers and specific
industries.
The allowance for loan losses has been allocated according to the amount deemed
to be reasonably necessary to provide for the possibility of losses being
incurred within the following categories of loans as of the dates indicated:
December 31
1994 1993
-----------------------------------------------------------
(In thousands of dollars)
Percentage of Percentage of
Loans in Each Loans in Each
Category to Category to
Allowance Total Loans Allowance Total Loans
--------- ------------- --------- -------------
Commercial $ 70 45.65% $120 42.37%
Real estate 169 35.04 148 38.36
Consumer 75 19.31 72 19.27
Unallocated 146 105
--------- ------------- --------- -------------
TOTAL $460 100.00% $445 100.00%
========= ============= ========= =============
(10)
ITEM 1 (Continued)
Deposits
Maturities of certificates of deposit of $ 100,000 or more which were
outstanding as of December 31, 1994 are summarized below (in thousands of
dollars):
3 months or less $1,346
3 - 6 months 635
6 - 12 months 600
Over 12 months 1,113
-------
TOTAL $3,694
=======
Return on Equity and Assets
The following table shows consolidated operating and capital ratios of the
Company for each of the last two years:
Year Ended December 31
1994 1993
-----------------------
Return on:
Average stockholders' equity(1) 12.16% 14.69%
Daily average total assets(1) 1.07 1.29
Dividend payout ratio(1) 33.61 28.14
Average stockholders' equity
to daily average total assets 8.82 8.79
(1)Based on income before cumulative effect of change in accounting principle.
(11)
ITEM 1 (continued)
Short-term Borrowings
The following table shows the distribution of those short-term borrowings for
which the average balance outstanding exceeds 30% of stockholders' equity and
the weighted average interest rates thereon at the end of each of the last two
years. Also provided are the maximum amount of borrowings and the average
amounts of borrowings as well as the weighted average interest rates for the
last two years.
Securities Sold
Under Agreements
to Repurchase
---------------------------
(In thousands of dollars)
Year ended December 31:
1994 $ 8,634
1993 4,947
Weighted average interest
rate at year end:
1994 4.92%
1993 2.65
Maximum amount outstanding
at any month's end:
1994 $ 8,634
1993 14,486
Average amount outstanding
during the year:
1994 $3,925
1993 6,915
Weighted average interest
rate during the year:
1994 3.78%
1993 2.93
At December 31, 1994, securities sold under agreements to repurchase included
approximately $1,242,000 in overnight sweep accounts. The remaining balance
consisted of agreements having maturities ranging from 5 to 63 days. The rates
offered on these funds vary according to movements in the federal funds and
other short term market rates.
(12)
ITEM 2 - PROPERTIES
The principal offices of First Merchants are located at the same location as
the offices of Merchants National, at Fourth Avenue and Washington Street, in
Montgomery, Fayette County, West Virginia. This facility consists of a full-
service banking lobby as well as office space for the various other banking
services offered by Merchants National. In November, 1987, Merchants National
placed in service a new facility which connects with the main structure via an
aerial walkway. This new facility features a full-service walkup lobby and
five drive through lanes at ground level and additional office space on the
second floor.
Merchants National opened its first full-service branch in Glasgow, Kanawha
County, West Virginia on January 2, 1987. This facility offers a full-service
banking lobby as well as five drive through lanes. On March 1, 1990, First
Merchants merged its two subsidiary banks, Merchants National and Gauley
National. Gauley National, which is now a branch of Merchants National, is
located at One Main Street, Gauley Bridge, Fayette County, West Virginia. This
facility consists of a full-service banking lobby and three drive through lanes
at ground level and additional office space on the second floor.
On September 17, 1993, Merchants National acquired two locations in Charleston,
WV. These facilities, which formerly operated as the main office and branch
office of Evergreen Federal Savings and Loan, opened as branches of Merchants
National on September 20, 1993. One office is located at 200 Bradford St,
Charleston, Kanawha County, West Virginia. This facility consists of a full-
service banking lobby and two drive through lanes at ground level and
additional office space in the basement. The second facility is located at
4315 MacCorkle Ave. SE, Charleston, Kanawha County, West Virginia. This office
consists of a full-service banking lobby and two drive through lanes.
Merchants National currently operates four automatic teller machines at the
following locations: (i) at the main banking facility, (ii) at the Glasgow, WV
branch (iii) at the Gauley Bridge, WV branch, and (iv) at the MacCorkle Ave,
Charleston, WV branch.
ITEM 3 - LEGAL PROCEEDINGS
Merchants National is presently a party to certain legal proceedings arising
from transactions occurring in the normal course of business. In the opinion
of Merchants National's management, based on the advice of legal counsel, the
ultimate resolution of these proceedings will not have a material effect on the
Company's financial position.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
None
(13)
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
First Merchants is authorized to issue 1,000,000 shares of common stock with a
par value of $2 per share. As of December 31, 1994, there were 576,000 shares
issued and outstanding. First Merchants' stockholders are entitled to one vote
for each share of common stock owned on all matters subject to a vote of the
stockholders. The unissued portion of First Merchants' authorized common stock
is available when and if the Board of Directors deems advisable. While there
are no present plans to issue any additional shares of First Merchants' stock,
except to directors for qualifying shares as required under national banking
law, additional shares could be issued for the purpose of raising capital, in
connection with the acquisition of other businesses, or for other appropriate
purposes. First Merchants' stockholders do not have preemptive rights;
therefore, shares of the authorized, but unissued stock of First Merchants may
be issued without first offering the shares to First Merchants' stockholders.
First Merchants' stock was held by approximately 223 stockholders of record as
of December 31, 1994.
First Merchants has only one class of stock, common stock, and all voting
rights are in the holders of that stock. First Merchants paid cash dividends on
its common stock as follows in 1994 and 1993:
1994
Declared 3-17-94, paid 4-5-94 - $ .13 per share
Declared 6-21-94, paid 7-1-94 - $ .13 per share
Declared 9-20-94, paid 10-5-94- $ .13 per share
Declared 12-20-94,paid 1-6-94 - $ .30 per share
1993
Declared 3-23-93, paid 4-1-93 - $ .13 per share
Declared 6-15-93, paid 7-1-93 - $ .13 per share
Declared 9-21-93, paid 10-1-93- $ .13 per share
Declared 12-22-93,paid 1-3-94- $ .27 per share
Dividends paid by Merchants National to First Merchants are the primary source
of funds available to First Merchants for the payment of dividends to its
stockholders. There are certain restrictions on the payment of dividends to
First Merchants from the subsidiary bank as described in Management's
Discussion and Analysis and Note H of Notes to Consolidated Financial
Statements.
(14)
First Merchants' stock is not widely traded and the volume of trading is
limited. There is no established market for First Merchants' stock. Most
transactions occur in the local area and bid and ask prices are not available.
The following table presents, on a historical basis, the high and low prices of
First Merchants' stock, for the periods indicated, for the transactions of
which First Merchants has knowledge.
STOCK PRICES NUMBER OF SHARES
HIGH LOW BOUGHT / SOLD *
---------------------- ------------------
1994
First Quarter $ 26 $ 21 4,828
Second Quarter 26 25 2,840
Third Quarter 26 25 80
Fourth Quarter 28 27 400
1993
First Quarter $ - $ - -
Second Quarter 16 15 3,120
Third Quarter 20 16 3,734
Fourth Quarter 21 20 1,670
* The number of shares bought and sold indicated in this column does not
include shares transferred without monetary consideration, such as a
transfer by an estate to an heir.
All per share data have been restated to reflect a stock split effected
in the form of a 3 for 1 stock dividend which occurred in 1993.
On March 14, 1995, the Company's board of directors approved a plan whereunder
the Compny will be acquired by City Holding Company. The merger is subject to
approvals of shareholders and regulators, and is expected to be consummated in
the summer of 1995.
(15)
ITEM 6 - SELECTED FINANCIAL DATA
1994 1993 1992 1991 1990
------------------------------------------------
(In thousands of dollars,
except per share data)
Total interest income $7,614 $7,086 $7,353 $8,103 $8,470
Total interest expense 2,926 2,878 3,306 4,495 5,235
-------- -------- -------- -------- --------
Net interest income 4,688 4,208 4,047 3,608 3,235
Provision for loan losses 87 93 103 73 135
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 4,601 4,115 3,944 3,535 3,100
Total noninterest income 602 858 431 497 458
Total noninterest expense 3,668 3,225 2,980 2,897 2,727
-------- -------- -------- -------- --------
Income before income taxes
and cumulative effect of
change in accounting prin. 1,535 1,748 1,395 1,135 831
Income taxes 352 418 327 305 216
-------- -------- -------- -------- --------
Income before cumulative
effect of change in
accounting principle 1,183 1,330 1,068 830 615
Cumulative effect of change
in accounting principle (117)
-------- -------- -------- -------- --------
Net income 1,183 1,213 $1,068 $ 830 $ 615
======== ======== ======== ======== ========
Per common share data:
Cash dividends declared $0.69 $0.65 $0.46 $0.40 $0.38
Income before cumulative
effect of change in
accounting principle $2.05 $2.31 $1.85 $1.44 $1.07
Cumulative effect of change
in accounting principle (.20)
-------- -------- -------- -------- --------
Net income $2.05 $2.11 1.85 1.44 1.07
Total assets as of
December 31 115,291 109,147 104,492 94,638 93,792
OTHER DATA
------------------------------
(In thousands of dollars)
Total average assets $110,281 $102,962 $96,501 $94,099 $93,475
Total average long-term debt 278
Total average
stockholders' equity 9,727 9,052 8,148 7,280 6,757
Average equity as
a percent of
average assets 8.82% 8.79% 8.44% 7.74% 7.23%
Return on average equity 12.16 14.69 13.11 11.40 9.10
Return on average assets 1.07 1.29 1.11 0.88 0.66
(16)
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SUMMARY OF CHANGES IN FINANCIAL POSITION
Total deposits as reflected in the consolidated Balance Sheets increased
approximately $2.9 million during 1994. This increase in the Company's primary
source of funds was complimented by an increase in the level of securities sold
under agreements to repurchase of approximately $3.7 million.
Net loans outstanding, exclusive of certain short-term instruments classified
as loans, increased approximately $2.8 million OR 6.2% during 1994. This
compares with the loan growth experienced in 1993 of $2.7 million or 7.22%,
exclusive of the loans purchased from Evergreen. For financial statement
purposes, purchases of commercial loan participations and commercial paper are
classified as net loans outstanding. The following table provides a
comparative analysis of the loan portfolio segregated by the typical loan
products offered by Merchants National to its customers and short-term
financial instruments classified as loans:
DECEMBER 31
1994 1993 1992
----------- ----------- -----------
Loans, net of unearned income
and allowance for loan losses $47,913,738 $45,115,039 $36,957,493
Short-term financial instruments
classified as loans 10,500,455 9,318,614 15,170,749
----------- ----------- -----------
Net loans outstanding $58,414,193 $54,433,653 $52,128,242
=========== =========== ===========
Historically, the Company has purchased the short-term financial instruments
classified as loans to match maturities of repurchase agreements and volatile
deposits. Management has elected to maintain a higher volume of these
instruments, relative to the volume of volatile funds, in an effort to reduce
the Company's liability sensitive financial position and corresponding interest
rate risk. Management has also directed its marketing efforts towards
generating additional loan demand through more competitive pricing of its loan
products in an effort to preserve its net yield on earning assets.
Net unrealized (loss) gain, on securities available for sale declined by
approximately $1,095,000 (net of related taxes) during 1994. This decline can
be attributed to the rising interest rate environment in effect throughout the
year which has resulted in declining market values of securities classified as
available for sale.
As of December 31, 1994, management is not aware of any current recommendations
by regulatory authorities, which if implemented, would have or are reasonably
likely to have a material effect on the Company's liquidity, capital resources
or operations. There are also no known trends, demands, commitments, or
uncertainties that have had, or that are reasonably expected to have, a
material favorable or unfavorable impact on the financial results of the
Company.
SUMMARY OF RESULTS OF OPERATIONS
Net income for 1994 was $1,182,560, as compared to $1,212,677 and $1,067,712
for 1993 and 1992, respectively.
(17)
NET INTEREST INCOME
The Company's net interest income increased approximately $480,000 during 1994
when compared with 1993 and approximately $160,000 during 1993 when compared
with 1992. The Company's net yield on earning assets increased to a level of
5.09% in 1994 from 4.90% in 1993 after decreasing from a level of 4.98% in
1992. The following table presents the weighted yield on earning assets,
weighted cost of funds and net yield on earning assets for each of the periods
presented:
1994 1993 1992
--------- --------- ---------
WEIGHTED YIELD ON EARNING ASSETS (1) 8.02% 7.93% 8.68%
WEIGHTED COST OF RATE SENSITIVE LIABILITIES 3.38 3.53 4.26
NET YIELD ON EARNING ASSETS 5.10 4.90 4.98
(1) Weighted average yields on assets exempt from federal income taxes have
been computed on a fully tax equivalent basis assuming a tax rate of 34
percent.
(18)
The following tables present the Bank's asset (liability) sensitivity position:
REPRICING FREQUENCY
at December 31, 1994
------------------------------------------
0 - 30 31 - 90 91 - 365 365+
DAYS DAYS DAYS DAYS TOTAL
--------- --------- --------- --------- ---------
(In Thousands of Dollars)
Interest bearing
deposits with
other banks 29 642 671
Federal funds sold 810 810
Securities available
for sale 7,246 7,247 396 14,889
Securities held
to maturity 750 510 1,001 26,387 28,648
Loans 20,262 6,612 12,000 19,540 58,414
--------- --------- --------- --------- ---------
TOTAL EARNING ASSETS 29,097 7,122 20,890 46,323 103,432
Interest bearing
demand deposits 13,942 13,942
Savings deposits 3,225 6,450 22,686 32,361
Time deposits 4,457 5,525 13,803 $11,779 35,564
Short-term borrowings 5,952 3,192 9,144
--------- --------- --------- --------- ---------
TOTAL RATE SENSITIVE
LIABILITIES 27,576 15,167 36,489 11,779 91,011
--------- --------- --------- --------- ---------
ASSET (LIABILITY)
SENSITIVITY
AT 12-31-94 1,521 (8,045) (15,599) 34,544 12,421
========= ========= ========= ========= =========
Cumulative gap 1,521 (6,524) (22,123) 12,421
========= ========= ========= =========
(19)
REPRICING FREQUENCY
at December 31, 1993
------------------------------------------
0 - 30 31 - 90 91 - 365 365+
DAYS DAYS DAYS DAYS TOTAL
--------- --------- --------- --------- ---------
(In Thousands of Dollars)
Interest bearing
deposits with
other banks 1,215 1,215
Federal funds sold 710 710
Securities available
for sale 21,056 21,056
Securities held
to maturity 564 190 2,227 18,159 21,140
Loans 20,745 4,083 11,679 18,455 54,962
--------- --------- --------- --------- ---------
TOTAL EARNING ASSETS 44,290 4,273 13,906 36,614 99,083
Interest bearing
demand deposits 13,176 13,176
Savings deposits 34,209 34,209
Time deposits 4,280 6,328 13,573 10,177 34,358
Short-term borrowings 3,893 1,650 5,543
--------- --------- --------- --------- ---------
TOTAL RATE SENSITIVE
LIABILITIES 55,558 7,978 13,573 10,177 87,286
--------- --------- --------- --------- ---------
ASSET (LIABILITY)
SENSITIVITY
AT 12-31-93 (11,268) (3,705) 333 26,437 11,797
========= ========= ========= ========= =========
Cumulative gap (11,268) (14,973) (14,640) 11,797
========= ========= ========= =========
The analysis above is a "static gap" presentation applicable at a particular
point in time. Various assumptions and estimates have been made by management
in determining maturity and repayment patterns for purposes of these tables.
One such assumption is that the entire portfolio of securities available-for-
sale is available for use in the Company's current operations.
PROVISION FOR LOAN LOSSES
The provision for loan losses is an estimate based upon management's continuing
assessment of the adequacy of the allowance for loan losses in relation to
anticipated losses. The provision for loan losses is determined based on
quarterly reviews of the adequacy of the allowance, given current trends and
existing economic conditions, along with estimates of exposure to losses
applicable to specific higher risk loans.
During 1994, loans totaling approximately $87,000 were charged-off and
recoveries of previously charged-off amounts totaled approximately $15,000.
The resulting net charge-offs of $72,000 are higher than net charge-offs for
1993 of $59,000 and lower than 1992 net charge-offs of $113,000. The provision
charged to operations in 1994 was $86,699 as compared with $93,193 and $103,155
in 1993 and 1992, respectively.
(20)
The allowance for loan losses represented 0.96%, .099%, and 0.94% of
outstanding loans at December 31, 1994, 1993, and 1992, respectively.
Management is not aware of any significant potential problem loans as of
December 31, 1994. For purposes of calculating the percentage of the allowance
for loan losses to outstanding loans, short-term financial instruments
classified as loans were excluded from total loans outstanding. In
management's opinion, these are extremely low risk instruments which do not
warrant an allocation in terms of the allowance for loan losses.
Nonperforming loans at December 31, 1994, approximated $216,000 as compared
with $179,000 and $322,000 at December 31, 1993 and 1992, respectively. The
ratio of the allowance for loan losses to nonperforming loans was 213% at
December 31, 1994, as compared to a coverage ratio of 229% at December 31,
1993. Management does not anticipate significant ultimate losses on any of
these nonperforming credits.
The average balance of nonaccrual loans was approximately $31,000 and $33,000
for 1994 and 1993, respectively. Therefore, the interest earnings foregone on
these funds were immaterial, as was the income collected and recorded in
interest income on the cash basis.
NONINTEREST INCOME AND EXPENSES
Total noninterest income decreased approximately $256,000 during 1994 when
compared with 1993 as a result of a decline in securities gains of
approximately $278,000. The increase in total noninterest income from 1992 to
1993 also resulted primarily from securities gains and losses. The 1992 net
gains are inclusive of a write-down (other than temporary loss) of
approximately $200,000 on certain equity securities.
Total noninterest expenses increased approximately $443,000 during 1994 when
compared with 1993, and approximately $245,000 during 1993 when compared with
1992. The increase in total noninterest expenses during 1994 is attributable
to increases in salaries and employee benefits, occupancy expense of premises,
and other operating expenses. The primary reason for these increases is that
1994 was the first full year of ownership and operation of the two former
Evergreen locations. The increase in total noninterest expense during 1993 is
primarily attributable to expenses incurred in connection with the acquisition
of Evergreen.
As more fully discussed in Note I to the audited consolidated financial
statements, the Company adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," effective January 1, 1993. The
adoption of the Statement decreased 1993 net income by approximately $124,000
consisting of a one-time charge in the first quarter of approximately $117,000
and additional expense during the year for the excess of expense under SFAS no.
106 over amounts resulting from the cash method of accounting previously
employed. The Company's capital strength influenced management's decision to
recognize the SFAS No. 106 transition Liability immediately, which will reduce
reported benefit costs in future periods.
INCOME TAXES
First Merchants' effective income tax rate for 1994 was 22.97% as compared with
23.91% and 23.47% for 1993 and 1992, respectively. The principal reason for
the difference between the effective and statutory tax rates during each period
was tax-exempt interest income.
As more fully discussed in Note J to the audited consolidated financial
statements, the Company prospectively adopted the liability method of
accounting for income taxes during 1993, without material effect. As of
December 31, 1994 gross deferred tax assets total approximately $840,000 as
compared to $342,000 as of December 31, 1993. The increase in these assets, as
well as their composition, is primarily unrealized losses on securities
available for sale.
(21)
Pursuant to management's evaluation for the quarter ended December 31, 1994, no
valuation allowance has been allocated to the deferred tax assets. The
quarterly evaluation process employed by management is based upon the expected
reversal period of the assets, in consideration of taxes paid by the Company in
the carry back years and expected reversals of existing taxable temporary
differences.
Those assets for which realization is expected to be dependent on future events
are subjected to further evaluation. Management's analysis has shown that
realization of the deferred tax asset related to the OPEB accrual will likely
be dependent on future events. After considering such factors as the magnitude
of the asset relative to historical levels of financial reporting income and
taxable income, the period over which future taxable income would have to be
earned to realize the asset, and budgeted future results of operations,
management has concluded it is more likely than not that the asset arising from
the OPEB accrual and all other deferred tax assets existing at December 31,
1994, will be realized. At present, management does not expect implementation
of tax planning strategies will be necessary to ensure realization. The need
for a valuation allowance will continue to be addressed by management each
quarter and any changes in the valuation allowance will be reported
concurrently in the Company's quarterly results of operations.
CAPITAL RESOURCES
The ratio of average equity to average assets increased from 8.79% in 1993 to
8.82% in 1994. The increase, which is due to retained net profits, was
minimized by unrealized losses on securities available-for-sale. While First
Merchants is not subject to the risk-based capital regulations because its
total assets are presently less than $150 million, a similar exemption based
upon size is not available to the subsidiary bank. Accordingly, Merchants
National is required to meet a minimum ratio for qualifying total capital to
risk-weighted total assets of 8% as of December 31, 1994. Furthermore, its
Tier One capital, or common stockholders' equity less goodwill, must equal at
least 4% of risk-weighted total assets at December 31, 1994.
At December 31, 1994, Merchants National's risk-based capital ratios in both
the total qualifying capital and Tier One capital categories approximated
14.11% and 13.43%, respectively. This posture is indicative of management's
conservative lending and investment policies.
LIQUIDITY
First Merchants currently has a strong liquidity position and material changes
in such position are not expected. In addition to assuring the availability of
adequate funds to meet its cash flow requirements, First Merchants' management
closely monitors its liquidity position in order to reduce exposure to interest
rate risk. This is accomplished largely by matching maturities of assets and
liabilities, particularly volatile funds such as securities sold under
agreements to repurchase and large denomination certificates of deposit.
The major internal sources of liquidity are balances maintained by Merchants
National with its correspondent banks as well as cash on hand. A significant
volume of securities available-for-sale and short-term financial instruments
classified as loans complement the balance of cash and cash equivalents. First
Merchants has also demonstrated the ability to obtain external financing in the
event such needs arise.
In management's opinion, the liquidity of First Merchants is adequate to
accommodate any anticipated cash requirements, and exposure to future changes
in market interest rates has been effectively minimized.
(22)
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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).
Charleston, West Virginia
January 27, 1995, except as to Note O,
the date of which is March 14, 1995
(23)
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
FIRST MERCHANTS BANCORP, INC. AND SUBSIDIARY
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: 12-31-94 -
$16,204,906: 12-31-93 - $20,547,829) 14,888,731 21,056,123
Securities held to maturity (approximate market
value: 12-31-94 - $28,304,476;
12-31-93 - $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 AND STOCKHOLDERS' EQUITY
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 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 related tax effect:
1994 $(526,465); and 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.
(24)
CONSOLIDATED STATEMENTS OF INCOME
FIRST MERCHANTS BANCORP, INC. AND SUBSIDIARY
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 operating 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 METHOD OF ACCOUNTING 1,535,162 1,747,525 1,395,104
INCOME TAXES 352,602 417,918 327,392
---------- ---------- ----------
Income Before Cumulative Effect
of Change in Method of Accounting $1,182,560 $1,329,607 1,067,712
Cumulative Effect as of January
1, 1993 of change in Method of
Accounting for Other Postretirement
Benefits, Net of income 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 method of accounting $2.05 $2.31 $1.85
Cumulative effect of change
in method of accounting (.20)
-------- -------- --------
Net income $2.05 $2.11 $1.85
======== ======== ========
AVERAGE SHARES OUTSTANDING 576,000 576,000 576,000
======== ======== ========
See notes to consolidated financial statements. (25)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FIRST MERCHANTS BANCORP, INC. AND SUBSIDIARY
Net
Unrealized Total
Gain
Common Retained (Loss) on St'holders'
Stock Surplus Earnings Securities Equity
--------- ---------- ---------- ---------- ----------
Bal. at Jan. 1, 1992 $288,000 $649,343 $6,889,444 ($266,818) $7,559,969
Net income 1,067,712 1,067,712
Cash dividends declared
($0.46 per share) (266,400) (266,400)
Change in net unrealized
loss on marketable equity
securities 179,721 179,721
---------- ---------- ---------- ---------- ----------
Bal. at Dec. 31, 1992 $288,000 $649,343 $7,690,756 $(87,097) $8,541,002
Net income 1,212,677 1,212,677
Cash dividends declared
($ .65 per share) (374,400) (374,400)
Change in net unrealized
loss on marketable equity
securities (9,880) (9,880)
Stock split effected in
the form of a 3 for 1
stock dividend 864,000 (864,000)
Change in accounting method
forsecurities, net of taxes
of $203,304 401,967 401,967
---------- ---------- ---------- ---------- ----------
Bal.at Dec. 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)
---------- ---------- ---------- ---------- ----------
Bal.at Dec. 31, 1994 $1,152,000 $649,343 $8,450,153 $(789,710) $9,461,786
========== ========== ========== ========== ==========
See notes to consolidated financial statements.
(26)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRST MERCHANTS BANCORP, INC. AND SUBSIDIARY
THE 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 net cash provided by (used in)
operating activities:
Cumulative effect of change in
accounting principle 116,930
Net 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 expense (benefit) (5,547) 13,257 (124,951)
Securities, gain net 73,829 (351,522) (6,122)
Purchases of trading securities 0 (2,880,211) (5,177,674)
Proceeds from sales of trading
securities 0 2,880,211 5,177,674
Increase in other assets 160,973 2,158 63,613
Decrease in other liabilities (63,250) (212,551) (129,869)
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITY 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 AFS (1,955,534)
Proceeds from sales of securities AFS 6,361,604 6,303,206
Proceeds from maturities of sec. AFS 1,591,843
Proceeds from maturities of invest.sec. 3,610,085 2,763,236 6,760,446
Proceeds from calls of invest. sec. 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 OREO 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 inc.in noninterest-bearing deposits 2,791,628 655,298 1,332,764
Net inc. (dec.)in interest-bearing dep. 124,105 (1,879,103) 2,701,535
Net inc. (dec.)in repurchase agreements 3,687,128 (10,248,121) 4,738,724
Net increase (decrease) 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
---------- ---------- ----------
NET (DEC.) INC. IN CASH AND CASH EQUIV. 874,786 (922,119) 2,134,259
Cash and cash equiv. at start of period 5,146,864 6,068,983 3,934,724
---------- ---------- ----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $6,021,650 $5,146,864 $6,068,983
========== ========== ==========
See notes to consolidated financial statements.
(27)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST MERCHANTS BANCORP, INC. AND SUBSIDIARY
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 for loan losses is
established through a provision charged to operations. The allowance
represents an amount which, in management's judgement, will be adequate to
absorb potential losses on existing loans which may become uncollectible.
Management's judgement 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.
(28)
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 basis 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 presented prior to 1993 to reflect a
stock split, effected in the form of a 3 for 1 stock dividend, which occurred
in 1993.
NOTE B - ACQUISITION
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 Association
(Evergreen) following its closure by the Office of Thrift Supervision.
Merchants National assumed deposits and other liabilities of approximately $15
million in exchange for net loans of $6 million, and cash and cash equivalents
(net of 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 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.
(29)
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
operation. The ending balance of stockholder' 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.
(30)
December 31, 1994
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
HELD-TO-MATURITY ----------------------------------------------------
U.S. Treasury sec. and
oblig. of U.S. Govern't
Corp's and agencies $15,059,378 $ 8,812 $(332,508) $14,735,682
Oblig. 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 sec. and
oblig. of U.S. Govern't
corp's and agencies $13,152,520 $ 7,278 $(1,042,429) $12,117,369
Obligations of state 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 sec. and
oblig. of U.S. Govern't
corp's and agencies $ 6,497,581 $ 127,669 $ (20,207) $ 6,605,043
Obligations of state 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 sec. and
oblig. of U.S. Govern't
corp's 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.
(31)
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 $54,443,653
=================================
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
==================================
(32)
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 in 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
it 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 Merchant'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. (33)
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 plans funded status and the amounts
recognized in First Merchant'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
======================
Proj. benefit oblig. for service rendered to date $1,341,000 $1,402,000
Plan assets at fair value, primarily listed
common stocks and investments is 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 of increase in future compensation levels
used in determining the actuarial present value of the projected benefit
obligation were 8.5% 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. (34)
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 coverage, 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 Merchant'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, 1994 by approximately $30,000, and the aggregate of the
service and interest cost components of net periodic postretirement benefit
cost for 1994 by approximately $5,000. The weighed-average discount rate used
in determining the accumulated postretirement benefit obligation was 7.5% at
December 31, 1994 and 1993.
(35)
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
Merchant's consolidated financial statements.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of asset and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of First Merchant's deferred tax liabilities and assets as of December 31 are
as follows:
Deferred tax liabilities 1994 1993
-----------------------
Unrealized gains on securities
available 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 sec. 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 (Liabilities) $ 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 (benefit) expense (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.
(36)
The provision for income taxes differs from the federal statutory rate for the
following reasons:
LIABILITY METHOD DEFERRED METHOD
-------------------------------------------------
1994 % 1993 % 1992 %
-------------------------------------------------
Comp. tax at stat. fed. 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 the 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.
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
(37)
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 sub 782,560 827,677 792,712
----------------------------------
Net Income $1,182,560 $1,212,677 $1,067,712
==================================
(38)
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 approvals of shareholders and regulators, and is expected to be
consummated in the summer of 1995.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
(39)
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The following is a listing of the names and ages of the directors of First
Merchants Bancorp, Inc., and the year each individual began continuous service
as a director of the Company. Also shown are their principal occupations at
present and during the past five years, as well as any other directorships they
may hold.
Linda G. Aguilar, age 47, has been a director of First Merchants since
1994. She currently serves as Secretary of First Merchants and Vice
President of Merchants National and has done so over the past five
years.
Gordon Billheimer, age 70, has been a director of First Merchants since
1987. He is currently in the practice of law in Montgomery, WV, and has
served in that capacity during the past five years. Mr. Billheimer
serves as President of The Kanawha Water Company and as a director of
First Merchants and Merchants National.
Thomas L. Carson, age 67, has been a director of First Merchants since
1987. He is a pharmacist and President of College Drug Store, Inc. in
Montgomery, WV, and has served in that capacity during the past five
years. Mr. Carson currently serves as a director of First Merchants,
Merchants National, the Upper Kanawha Valley Chamber of Commerce, the
Upper Kanawha Valley Economic Development Corporation and the West
Virginia Pharmacists Association.
Hugh R. Clonch, age 55, has been a director of First Merchants since
1991. He is President of Clonch Industries, Inc. in Dixie, WV, and has
served in that capacity during the past five years. Mr. Clonch
currently serves as a director of First Merchants and Merchants
National.
George F. Davis, age 67, has been a director of First Merchants since
1987. He is currently President, Chief Executive Officer and Chairman
of the Board of First Merchants and Merchants National, as well as Chief
Financial Officer of First Merchants. During the past five years, he
has served as President and Chief Executive Officer of Merchants
National. Mr. Davis currently serves as a director of First Merchants,
Merchants National, the Upper Kanawha Valley Economic Development
Corporation, the Upper Kanawha Valley Chamber of Commerce, the Buckskin
Council of the Boy Scouts of America and West Virginia Tech Foundation,
on which he also serves as President.
Kenneth R. Fultz, age 59, has been a director of First Merchants since
1987. He is currently President of Montgomery General Hospital in
Montgomery, WV, and has served in that capacity during the past five
years. Mr. Fultz currently serves as a director of First Merchants,
Merchants National, Montgomery General Hospital, Montgomery General
Elderly Care, Montgomery General Health Care System, Laird Health Care
Foundation, West Virginia Hospital Services, Inc., Valley Emergency
Medical Service and the West Virginia Institute of Technology Advisory
Board.
(40)
Robert C. Gillespie, age 52, has been a director of First Merchants
since 1987. During the past five years, Dr. Gillespie has served as
President of West Virginia Institute of Technology in Montgomery, WV,
having resigned from this position in August, 1992. Dr. Gillespie is
currently serving West Virginia Institute of Technology as a Regents
Professor, developing plans to meet the growing need for engineering and
technical education brought about by the rapid development of West
Virginia. In addition to his duties as a Regents Professor, Dr.
Gillespie consults in the areas of education, educational technology and
artificial intelligence. Dr. Gillespie currently serves as a director
of First Merchants, Merchants National, the Private Industry Council of
West Virginia, the West Virginia Experimental Program to Stimulate
Competitive Research, the State Council on Vocational Education, on
which he also serves as Vice Chair.
Robert L. Hardy, Sr., age 69, has been a director of First Merchants
since 1987. He is currently the owner of Hardy Realty in Smithers, WV,
and has served in that capacity during the past five years. Mr. Hardy
currently serves as a director of First Merchants and Merchants
National.
Thomas A. Jacobs, age 66, has been a director of First Merchants since
1987. He is a Public Accountant and Tax Consultant. Prior to December,
1993, Mr Jacobs was a consultant to the accounting firm of Trainer,
Wright & Paterno in Charleston, WV, and had served in that capacity
since 1987. He currently serves as a director of First Merchants and
Merchants National.
Carl L. Kennedy, age 61, has been a director of First Merchants since
1987. He is a dentist, doing business as Kennedy Dental Office, a
partnership, in Montgomery and Whitesville, WV, and has served in that
capacity during the past five years. Dr. Kennedy currently serves as a
director of First Merchants and Merchants National.
Giles E. Musick, age 67, has been a director of First Merchants since
1987. He is currently President of Brown Chevrolet, Oldsmobile,
Pontiac-Buick, Inc. in Montgomery, WV, and has served in that capacity
during the past five years. Mr. Musick currently serves as a director
of First Merchants and Merchants National.
James F. Neil, age 56, has been a director of First Merchants since
1987. During the past five years, Mr. Neil has served as a hydro
licensing consultant for Elkem Metals Co. in Alloy, WV from 1989 to
1991. Mr. Neil currently serves as a director of First Merchants,
Merchants National, the Upper Kanawha Valley Economic Development
Corporation, Summersville Memorial Hospital, the Gauley River National
Recreation Area Advisory Board and as Vice Chairman of the West Virginia
Institute of Technology Advisory Board.
Executive Officers
The following is a listing of the names and ages of the executive officers of
First Merchants Bancorp, Inc., and the year each individual began continuous
service as an executive officer of the Company. Also shown is their business
experience during the past five years.
George F. Davis, age 67, has been President, Chief Executive Officer and
Chief Financial Officer of First Merchants since 1987. During the past
five years, he has also served as President and Chief Executive Officer
of Merchants National.
(41)
Robert P. McDowell, age 48, has been Vice President of First Merchants
since 1987. He has served as Vice President of Merchants National since
1989 and President of Gauley National from 1987 to 1989.
Robert L. Neal, age 38, has been Vice President of First Merchants since
September, 1988. During the past five years he has served as Vice
President of Merchants National.
Linda G. Aguilar, age 47, has been Secretary of First Merchants since
1989. She served as Secretary-Treasurer from 1987 to 1989. During the
past five years, she has also served as Vice President of Merchants
National.
Steven D. Nunley, age 36, has been Treasurer of First Merchants since
1989. He has also served as Vice President and Cashier of Merchants
National since 1991, Cashier of Gauley National from 1988 to 1990 and
Cashier of Merchants National from 1987 to 1990.
ITEM 11 - EXECUTIVE COMPENSATION
All forms of compensation paid to the officers and directors of First
Merchants are paid by the subsidiary bank. The individual officers do
not receive additional compensation for their services with the Company.
The following information is given with respect to the executive officers
of First Merchants whose direct aggregate cash remuneration exceeded $100,000
in 1994.
Name of Individual Principal
and Number of Persons Capacities in Cash
in Group Which Served Compensation
------------------------ ----------------- --------------
George F. Davis President $140,000
Executive Officers as a
Group (5 persons in group,
including the person
listed above) Executive Officers $408,000
There was no other compensation paid to Mr. Davis or the executive officers as
a group during 1994.
(42)
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following individuals are known to management to beneficially own greater
than five percent of the issued and outstanding shares of First Merchants'
stock.
Amount and
Name and Nature of
Title Address of Beneficial Percent
of Class Beneficial Owner Ownership (1) of Class
---------- ---------------------- --------------- ----------
Common Hugh R. Clonch 52,484 9.11%
Box 93
Belva, WV
Common Beatrice K. Kincaid 31,248 5.43%
Drawer 149
Charlton Heights, WV
Common Giles E. Musick 30,568 5.31%
503 Fourth Ave.
Montgomery, WV
In addition, two families own in excess of five percent of First Merchants'
common stock, though no one member exercises voting and investment power over
greater than five percent. Three siblings and the widow of a fourth sibling of
the Morton family own common stock as follows: Sadie M. Harlan -6,432 shares;
F. Hurxthal Morton, Jr. and Frances Garnett Morton -5,600 shares; Paul Morton -
12,800 shares; and Lois W. Morton - 10,272 shares. Collectively, these
individuals own 6.09% of First Merchants' common stock. Similarly, members of
the Blackwell family own in excess of five percent of First Merchants' common
stock as follows: Mary F. Blackwell - 12,000 shares; Lyle M. Blackwell - 5,200
shares; Matthew F. Blackwell - 2,000 shares; Walter J. Fitzgerald - 4,800
shares and Walter J. Fitzgerald and Margaret B. Fitzgerald - 7,200 shares.
Collectively, these individuals own 5.42% of First Merchants' common stock.
(43)
The following table presents the number of shares beneficially owned by each
director (excluding qualifying shares), and the number of shares beneficially
owned by each director and executive officer of First Merchants (excluding
qualifying shares) as a group.
Amount and
Name and Nature of
Title Address of Beneficial Percent
of Class Beneficial Owner Ownership (1) of Class
--------- --------------------- ------------- --------
Common Linda G. Aguilar 9,076 1.58%
PO Box 195
Ansted, WV
Common Gordon Billheimer 891 .15%
311 Washington St.
Montgomery, WV
Common Thomas L. Carson 5,924 1.03%
501 Monroe St.
Montgomery, WV
Common Hugh R. Clonch 52,396 9.10%
Box 93
Belva, WV
Common George F. Davis 3,987 .69%
Box 325
Charlton Heights, WV
Common Kenneth R. Fultz 1,907 .33%
307 E. Seventh St.
Belle, WV
Common Robert C. Gillespie 263 .05%
2050 Oak Ridge Drive
Charleston, WV
Common Robert L. Hardy, Sr. 1,907 .33%
Box 241
Smithers, WV
Common Thomas A. Jacobs 2,307 .40%
Box 219
Pratt, WV
Common Carl L. Kennedy 2,427 .42%
410 Fourth Ave.
Montgomery, WV
Common Giles E. Musick 30,475 5.29%
503 Fourth Ave.
Montgomery, WV
Common James F. Neil 2,307 .40%
626 Holley Dr.
Summersville, WV
Common Directors and 124,302 21.58%
executive officers
as a group (15
persons)
(44)
(1) All of the shares reported are owned individually by each director and
executive officer unless otherwise indicated below.
(a) Thomas L. Carson - 4,404 shares are owned individually, 720 shares
are owned by College Drug Store, Inc., of which he is President, 480
shares are owned by his brother and 320 shares are owned jointly with
his wife.
(b) Hugh R. Clonch - 5,756 shares are owned individually, 42,932 shares
are owned by Clonch Industries, Inc., of which he is President, 3,456
shares are owned jointly with his wife, 252 shares are owned by his
children. In addition, 7,368 shares are owned by his brother and his
wife. Mr. Clonch exercises no voting or investment power over the
shares owned by his brother and his wife.
(c) George F. Davis - 2,307 shares are owned individually and 1,680
shares are owned jointly with his wife.
(d) Robert C. Gillespie - 107 shares are owned individually and 156
shares are owned by his wife.
(e) Carl L. Kennedy - 2,307 shares are owned individually and 120
shares are owned by his wife.
(f) Giles E. Musick - 25,875 shares are owned individually, 3,600
shares are owned by his wife and 1,000 shares are owned by his children.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The requirements for ITEM 13 have been included in Note E of Notes To The
Financial Statements in Item 8.
(45)
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Index
(a) (1) Financial Statements
Requirements for this Item have been
included in Item 8 of this report.
(a) (2) Financial Statement Schedules
All schedules are omitted, as the required information
is inapplicable or the information is presented in the
Consolidated Financial Statements or related notes.
(a) (3) Exhibits to be Filed by Item 601 of Regulation S-K
and 14(c) of Form 10-K
See Index to Exhibits submitted as a separate section
of this report.
(b) Reports on Form 8-K
First Merchants Bancorp did not file any reports on Form 8-K
during 1994.
(c) Exhibits
See Item 14(a)(3) above.
(d) Financial Statement Schedules
See Item 14(a)(2) above.
(46)
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST MERCHANTS BANCORP, INC.
/S/George F. Davis
---------------------------------
George F. Davis
President, Chief Executive Officer,
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated.
/s/George F. Davis
----------------------------- -----------------------------
George F. Davis Robert C. Gillespie
President, Chief Executive Director
Officer, Chief Financial
Officer and Director
/s/Robert L. Hardy, Sr.
----------------------------- -----------------------------
Gordon Billheimer Robert L. Hardy, Sr.
Director Director
/s/Linda G. Aguilar
----------------------------- -----------------------------
Linda G. Aguilar Thomas A. Jacobs
Secretary and Director Director
/s/Carl L. Kennedy
----------------------------- -----------------------------
Thomas L. Carson Carl L. Kennedy
Director Director
/s/Giles E. Musick
----------------------------- -----------------------------
Hugh R. Clonch Giles E. Musick
Director Director
/s/Kenneth R. Fultz /s/James F. Neil
----------------------------- -----------------------------
Kenneth R. Fultz James F. Neil
Director Director
(47)
INDEX TO EXHIBITS
The following exhibits are filed herewith or are incorporated herein by
reference.
Reference to
Exhibit Prior Filing or
Number Description Location Herein
--------- ---------------------------- -------------------
3 Articles of Incorporation and as filed with
Bylaws, as amended 12-31-1993 Form 10-K
22 Subsidiaries of First Merchants as filed with
12-31-1993 Form 10-K
23 Consent of Independent Auditors as attached
(48)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation in this Annual Report (Form 10-K) of First
Merchants Bancorp, Inc. of our report dated January 27, 1995, included in the
1994 Annual Report to Shareholders of First Merchants Bancorp, Inc.
/s/Ernst & Young
Charleston, West Virginia
March 30, 1995
