FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 or 15 (d) of THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 1994 Commission File Number 0-17071 First Merchants Corporation - - - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its character) Indiana 35-1544218 - - - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) 200 East Jackson Street - Muncie, IN 47305-2814 - - - -------------------------------------------------------------------------------- (Address of principal executive office) (Zip code) (317) 747-1500 - - - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable - - - -------------------------------------------------------------------------------- (Former name former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days, Yes X No ----- ----- As of May 5, 1994, there were outstanding 3,383,772 common shares, without par value, of the registrant. Page 1 of 19
FIRST MERCHANTS CORPORATION FORM 10-Q INDEX PAGE NO. PART I. Financial information: Item 1. Financial Statements: Consolidated Condensed Balance Sheet . . . . . . . . 3 Consolidated Condensed Statement of Income . . . . . 4 Consolidated Condensed Statement of Changes in Stockholders' Equity . . . . . . . . . . . . . . . . 5 Consolidated Condensed Statement of Cash Flows . . . 6 Notes to Consolidated Condensed Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . 10 PART II. Other Information: Item 4. Submission of Matters to a Vote of Security Holders . 17 Item 6. Exhibits and Reports of Form 8-K . . . . . . . . . . 18 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Page 2 of 19
FIRST MERCHANTS CORPORATION FORM 10-Q PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CONSOLIDATED CONDENSED BALANCE SHEET (Dollars in thousands, except per share amounts) (Unaudited) March 31, December 31, 1994 1993 ----------- ------------ ASSETS: Cash and due from banks. . . . . . . . . . . . $ 24,262 $ 24,942 Federal funds sold . . . . . . . . . . . . . . 4,350 1,625 ---------- ----------- Cash and cash equivalents. . . . . . . . . . 28,612 26,567 Interest-bearing time deposits . . . . . . . . 3 254 Securities available for sale. . . . . . . . . 110,770 Investment securities (market value $99,673 and $209,301). . . . . . . . . . . . . . . . 99,294 206,243 Loans: Loans, net of unearned interest . . . . . . 376,032 376,872 Less: Allowance for loan losses . . . . . . 4,790 4,800 ---------- ----------- Net loans. . . . . . . . . . . . . . . . 371,242 372,072 Premises and equipment . . . . . . . . . . . . 9,272 9,441 Interest receivable. . . . . . . . . . . . . . 5,274 5,665 Core deposit intangibles and goodwill. . . . . 2,075 2,108 Others assets. . . . . . . . . . . . . . . . . 3,997 3,763 ---------- ----------- Total assets . . . . . . . . . . . . . . $ 630,539 $ 626,113 ---------- ----------- ---------- ----------- LIABILITIES: Deposits: Noninterest bearing . . . . . . . . . . . . $ 64,911 $ 74,546 Interest bearing. . . . . . . . . . . . . . 431,131 431,756 ---------- ----------- Total deposits . . . . . . . . . . . . . 496,042 506,302 Short-term borrowings. . . . . . . . . . . . . 60,843 46,890 Interest payable . . . . . . . . . . . . . . . 1,201 1,226 Other liabilities. . . . . . . . . . . . . . . 2,927 2,891 ---------- ----------- Total liabilities. . . . . . . . . . . . 561,013 557,309 STOCKHOLDERS' EQUITY: Preferred stock, no-par value: Authorized and unissued -- 500,000 shares Common stock, $.125 stated value: Authorized --- 20,000,000 shares Issued and outstanding -- 3,388,457 and 3,389,591 shares. . . . . . . . . . . . . 423 424 Additional paid-in capital . . . . . . . . . . 17,033 17,068 Retained earnings. . . . . . . . . . . . . . . 52,711 51,312 Net unearned holding losses on securities available for sale, net of taxes . . . . . . (641) ---------- ----------- Total stockholders' equity . . . . . . . 69,526 68,804 ---------- ----------- Total liability and stockholders' equity . . . . . . . . . . . . . . . . $ 630,539 $ 626,113 ---------- ----------- ---------- ----------- See notes to consolidated condensed financial statements. Page 3 of 19
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF INCOME (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended March 31, ---------------------- Interest Income: 1994 1993 -------- -------- Loans, including fees: Taxable . . . . . . . . . . . . . . . . . . $ 7,225 $ 7,158 Tax exempt. . . . . . . . . . . . . . . . . 23 25 Securities: Taxable . . . . . . . . . . . . . . . . . . 2,350 2,724 Tax exempt. . . . . . . . . . . . . . . . . 573 531 Federal funds sold . . . . . . . . . . . . . . 38 135 Interest-bearing time deposits . . . . . . . . 2 20 -------- -------- Total interest income. . . . . . . . . . 10,211 10,593 Interest expense: Deposits . . . . . . . . . . . . . . . . . . . 3,340 4,082 Short-term borrowings. . . . . . . . . . . . . 428 257 -------- -------- Total interest expense. . . . . . . . . . . 3,768 4,339 -------- -------- Net Interest Income . . . . . . . . . . . . . . . 6,443 6,254 Provision for loan losses. . . . . . . . . . . 193 269 -------- -------- Net Interest Income After Provision For Loan Losses. . . . . . . . . . . . . . . . . . 6,250 5,985 Total other income . . . . . . . . . . . . . . 1,590 1,585 Total other expenses . . . . . . . . . . . . . 4,395 4,423 -------- -------- Income before income tax and cumulative effect of change in accounting method. . . . . 3,445 3,147 Income tax expense . . . . . . . . . . . . . . 1,199 1,092 -------- -------- Income before cumulative effect of change in accounting method . . . . . . . . . . . . . 2,246 2,055 Cumulative effect of change in method of accounting for income taxes. . . . . . . . . 227 -------- -------- Net Income. . . . . . . . . . . . . . . . . . . . $ 2,246 $ 2,282 -------- -------- -------- -------- Per share: Income before cumulative effect of change in accounting method. . . . . . . . . . . . . . $ .66 $ .60 Net income . . . . . . . . . . . . . . . . . . .66 .67 Weighted average shares outstanding . . . . . . . 3,388,666 3,407,803 See notes to consolidated condensed financial statements. Page 4 of 19
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Dollar amounts in thousands) (Unaudited) 1994 1993 ---------- ---------- Balances, January 1 . . . . . . . . . . . . . . . $ 68,804 $ 63,935 Net income. . . . . . . . . . . . . . . . . . . . 2,246 2,282 Cash dividends. . . . . . . . . . . . . . . . . . (847) (750) Stock issued under dividend reinvestment and stock purchase plan . . . . . . . . . . . . . . 89 64 Stock options exercised . . . . . . . . . . . . . 22 102 Stock redeemed. . . . . . . . . . . . . . . . . . (147) Cash paid in lieu of issuing fractional shares. . (4) Change in net unrealized holding losses on securities available for sale . . . . . . . . . (641) ---------- ---------- Balances, March 31. . . . . . . . . . . . . . . . $ 69,526 $ 65,629 ---------- ---------- ---------- ---------- See notes to consolidated condensed financial statements. Page 5 of 19
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited) Three Months Ended March 31 --------------------- 1994 1993 --------- --------- Cash Flows From Operating Activities: Net income. . . . . . . . . . . . . . . . . . . . $ 2,246 $ 2,282 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses. . . . . . . . . . . 193 269 Depreciation and amortization. . . . . . . . . 283 214 307 206 Change in interest receivable. . . . . . . . . 347 426 Change in interest payable . . . . . . . . . . (35) (12) Other adjustments. . . . . . . . . . . . . . . 112 (91) --------- ---------- Net cash provided by operating. . . . . . . 3,453 3,294 Cash Flows From Investing Activities: Net change in interest-bearing time deposits. . . 251 (3) Purchases of: Securities available for sale. . . . . . . . . (6,880) Investment securities. . . . . . . . . . . . . (18,061) (39,360) Proceeds from maturities and sales of: Securities available for sale. . . . . . . . . 4,293 Investment securities. . . . . . . . . . . . . 15,468 25,560 Net change in loans . . . . . . . . . . . . . . . 686 360 Purchases of premises and equipment . . . . . . . (114) (319) Other investing activities. . . . . . . . . . . . 139 46 --------- ---------- Net cash used in investing activities. . . . . (4,218) (13,716) Cash Flows From Financing Activities: Net change in noninterest-bearing, NOW, money market and savings deposits. . . . . . . . . . (7,871) (1,397) Net change in certificates of deposit and other time deposits. . . . . . . . . . . . . . (2,389) (4,437) Net change in short-term funds. . . . . . . . . . 13,953 (3,131) Cash dividends. . . . . . . . . . . . . . . . . . (847) (750) Stock issued under dividend reinvestment and stock purchase plan . . . . . . . . . . . . . . 89 64 Stock options exercised . . . . . . . . . . . . . 22 102 Stock redeemed. . . . . . . . . . . . . . . . . . (147) Cash paid in lieu of issuing fractional shares. . (4) --------- ---------- Net cash provided (used) in financing activities . . . . . . . . . . . . . . . . . 2,810 (9,553) --------- ---------- Net Increase (Decrease) in Cash and Cash activities. . . . . . . . . . . . . . . . . . . . 2,045 (19,975) Cash and Cash Equivalents, January 1 . . . . . . . . 26,567 53,696 --------- ---------- Cash and Cash Equivalents, March 31. . . . . . . . . $ 28,612 $ 33,721 --------- ---------- --------- ---------- See notes to consolidated condensed financial statements. Page 6 of 19
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited) NOTE 1. General The significant accounting policies followed by First Merchants Corporation ("Corporation") and its subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting, except for the change in method of accounting for investment securities discussed more fully in Note 2. All adjustments which are in the opinion of management necessary for a fair statement of the results for the periods reported have been included in the accompanying consolidated financial statements. NOTE 2. Change In Method of Accounting for Investment Securities In May, 1993, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards No. 115 (SFAS No. 115), ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. The statement requires that securities be classified in three categories and provides specific accounting treatment for each. Trading securities are bought and held primarily for sale in the near term and are carried at fair value, with unrealized holding gains and losses included in earnings; held-to-maturity securities, for which the intent is to hold to maturity, are carried at amortized cost; and available-for- sale securities are all others and are carried at fair value with unrealized holding gains and losses excluded from earnings and reported as a separate component of stockholders' equity. The Corporation adopted SFAS No. 115 on January 1, 1994. At that date, securities with an approximate carrying value of $107,569,000 were reclassified as available for sale. This reclassification resulted in an increase in total stockholders' equity, net of tax, of $644,000. NOTE 3. Securities Available for Sale Gross Gross Approximate Amortized Unrealized Unrealized Market Cost Gains Losses Value ---------- ---------- ---------- --------- Securities available for sale at March 31, 199 31, U.S. Treasury . . . . . . . . $ 12,012 $ 23 $ 190 $ 11,845 Federal agencies . . . . . . . 27,313 20 296 27,037 State and municipal . . . . . 9,077 54 217 8,914 Mortgage and other asset-backed securities . . . . . . . . . 22,524 205 376 22,353 Federal Reserve stock . . . . 307 307 Federal Home Loan Bank stock . 1,572 1,572 Corporate obligations . . . . 39,025 278 561 38,742 --------- ----------- ---------- --------- Totals . . . . . . . $ 111,830 $ 580 $ 1,640 $ 110,770 --------- ----------- ---------- --------- --------- ----------- ---------- --------- Page 7 of 19
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited) NOTE 4. Investment Securities Gross Gross Approximate Amortized Unrealized Unrealized Market Cost Gains Losses Value ---------- ---------- ---------- --------- Investment Securities at March 31, 1994: U.S. Treasury . . . . . . . . . . . $ 24,026 $ 258 $ 72 $ 24,212 Federal agencies . . . . . . . . . . 26,182 324 128 26,378 State and municipal . . . . . . . . 45,324 444 427 45,341 Mortgage and other asset-backed securities . . . . . . . . . . . 694 6 700 Corporate obligations . . . . . . . 3,068 6 32 3,042 ---------- ----------- ----------- ---------- Totals . . . . . . . . . . . . $ 99,294 $ 1,038 $ 659 $ 99,673 ---------- ----------- ----------- ---------- ---------- ----------- ----------- ---------- Gross Gross Approximate Amortized Unrealized Unrealized Market Cost Gains Losses Value ---------- ------------ ---------- ----------- Investment Securities at December 31, 1993: U.S. Treasury . . . . . . . . . . . . $ 45,397 $ 654 $ 1 $ 46,050 Federal agencies . . . . . . . . . . . 53,452 691 62 54,081 State and municipal . . . . . . . . . 44,866 1,211 55 46,022 Mortgage and other asset-backed securities . . . . . . . . . . . . 23,690 219 93 23,816 Federal Reserve stock . . . . . . . . 307 307 Federal Home Loan Bank stock . . . . . 1,572 1,572 Corporate obligations . . . . . . . . 36,959 581 87 37,453 ---------- ------------ ----------- ---------- Totals . . . . . . . . . . . . . $ 206,243 $ 3,356 $ 298 $ 209,301 ---------- ------------ ----------- ---------- ---------- ------------ ----------- ---------- Page 8 of 19
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited) NOTE 5. Loans and Allowance March 31, December 31, 1994 1993 ---------- ------------ Loans: Commercial and industrial loans . . . . . . . . . . . . . . . . . $ 69,696 $ 76,760 Bankers' acceptances and loans to financial institutions . . . . . 3,100 3,000 Agricultural production financing and other loans to farmers . . . 5,399 5,591 Real estate loans: Construction . . . . . . . . . . . . . . . . . . . . . . . . . 5,265 8,127 Commercial and farmland . . . . . . . . . . . . . . . . . . . . 60,773 58,235 Residential . . . . . . . . . . . . . . . . . . . . . . . . . . 155,254 150,572 Individuals' loans for household and other personal expenditures . 73,864 70,347 Tax exempt loans . . . . . . . . . . . . . . . . . . . . . . . . . 1,305 1,474 Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,376 2,766 ---------- ---------- Total loans . . . . . . . . . . . . . . . . . . . . . . . . $ 376,032 $ 376,872 ---------- ---------- ---------- ---------- Nonperforming loans: Nonaccruing loans . . . . . . . . . . . . . . . . . . . . . . . . $ 355 $ 527 Loans contractually past due 90 days or more other than nonaccruing . . . . . . . . . . . . . . . . 885 616 Restructured loans . . . . . . . . . . . . . . . . . . . . . . . . 848 879 Three Months Ended March 31 ------------------------- 1994 1993 ---------- --------- Allowance for loan losses: Balances, January 1 . . . . . . . . . . . . . . . . . . . . . . . $ 4,800 $ 4,351 Provision for losses . . . . . . . . . . . . . . . . . . . . . . . 193 269 Recoveries on loans . . . . . . . . . . . . . . . . . . . . . . . 44 74 Loans charged off . . . . . . . . . . . . . . . . . . . . . . . . (247) (194) ----------- ---------- Balances, March 31 . . . . . . . . . . . . . . . . . . . . . . . . $ 4,790 $ 4,500 ----------- ---------- ----------- ---------- NOTE 6. Commitments and Contingent Liabilities On May 11, 1993, the Corporation and First Merchants Bank, N.A., ("First Merchants") approved a change in the data processing function. In the fourth quarter of 1993, First Merchants assumed responsibility for the data processing function for the Corporation and its wholly owned subsidiaries. The data processing agreement with an outside party to provide data processing services was terminated three months early. The cost of the conversion, equipment and software was approximately $1,700,000. The equipment and software cost will be depreciated on a straight-line method based on the estimated useful lives of the assets. Page 9 of 19
FIRST MERCHANTS CORPORATION FORM 10-Q Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS The Corporation has recorded 18 consecutive years of growth in operating earnings per share, reaching $2.48 in 1993 up 7.8 per cent from the prior year. Including the accounting adjustment described below, earnings per share totalled $2.55. Return on assets, which exceeded 1 per cent for the first time in 1988, rose to 1.39 per cent in 1993, from 1.29 per cent in 1992 and 1.21 per cent in 1991. Return on equity exceeded 12 per cent for the first time in 1989, was 12.41 per cent in 1991, 12.71 per cent in 1992, and 13.01 per cent in 1993. Improvement was achieved in each of these ratios during the first quarter of 1994, as compared to the same period in 1993. 1993 ratios exclude the accounting adjustment described below. - Earning per share were $.66, up 10.0 per cent from $.60 - Return on assets was 1.41 per cent increasing from 1.35 per cent - Return on equity totalled 12.99 per cent compared to 12.64 per cent for the first quarter of 1993 In February 1992, The Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 109 (SFAS 109) on accounting for income taxes. The Corporation adopted SFAS 109 on January 1, 1993, the effect of which was to increase 1993 earnings by $227,000 or $.07 per share in the first quarter of 1993. CAPITAL First Merchants Corporation's capital strength continues to exceed regulatory minimums and peer group averages. Management believes that strong capital is a distinct advantage in the competitive environment in which the Corporation operates, and will provide a solid foundation for continued growth, and instilling customer confidence. First Merchants Corporation and its subsidiaries have received honors from various financial rating services recognizing the Banks for safety and soundness. Earnings asset quality and capital strength were considered in the ratings. The Corporation's capital to assets ratio was 10.36 per cent at year end 1992, 10.99 per cent at December 31, 1993, and 11.03 per cent at March 31, 1994. At March 31, 1994, the Corporation had a Tier I risk-based capital ratio of 16.13 per cent, total risk-based capital ratio of 17.26 per cent and a leverage ratio of 10.82 per cent. Regulatory capital guidelines require a Tier I risk- based capital ratio of 4.0 per cent and a total risk-based capital ratio of 8.0 per cent. The Corporation has an employee stock purchase plan and an employee stock option plan. Activity under this program is detailed in the Consolidated Condensed Statement of Changes in Stockholders' Equity. The transactions under these plans have not had a material effect in the Corporation's capital position. Page 10 of 19
FIRST MERCHANTS CORPORATION FORM 10-Q ASSET QUALITY/PROVISION FOR LOAN LOSSES First Merchants Corporation's asset quality and loan loss experience has consistently been superior to that of its peer group, as summarized below. Asset quality has been a major factor in the Corporation's ability to generate consistent profit improvement. The allowance for loan losses is maintained through the provision for loan losses, which is a charge against earnings. The amount provided for loan losses, and the determination of the adequacy of the allowance are based on a continuous review of the loan portfolio, including an internally administered loan "watch" list. The evaluation takes into consideration identified credit problems as well as the possibility of losses inherent in the loan portfolio that cannot be specifically identified. The following table summarizes the risk elements for First Merchants Corporation and its peer group, consisting of bank holding companies with average assets between $500 million and $1 billion. The statistics were provided by the Federal Reserve System. Non-Performing Loans (1) at December 31 as a Per Cent of Loans ---------------------------- First Peer Merchants Group --------- ----- 1994 (March 31) . . . . . . . . . . . . . .33% N/A 1993 . . . . . . . . . . . . . . . . . . .28 1.55% 1992 . . . . . . . . . . . . . . . . . . .41 1.87 1991 . . . . . . . . . . . . . . . . . . .86 2.59 1990 . . . . . . . . . . . . . . . . . . 1.09 2.62 1989 . . . . . . . . . . . . . . . . . . 1.54 2.12
(1) Accruing loans past due 90 days or more, and non-accruing loans, but excluding restructured loans. On March 31, 1994, the loan loss reserve stood at $4,790,000. As a per cent of loans, the reserve stood at 1.27 per cent compared to 1.27 per cent at year end 1993, and 1.24 per cent at year end 1992. Activity to the reserve is detailed in the following table. The provision for loan losses for the first quarter of 1994 declined to $193,000 from $269,000 for the same period of 1993, based on management's analysis of the adequacy of the reserve in light of improving credit quality in the loan portfolio. Page 11 of 19 FIRST MERCHANTS CORPORATION FORM 10-Q The following table presents loan loss experience for the years indicated and compares the Corporation's loss experience to its peer group. 1994 (1) 1993 1992 1991 1990 -------- ---- ---- ---- ---- (Dollar amount in thousands) Allowance for loan losses Balance at January 1 . . . . . . . . . . . $ 4,800 $ 4,351 $ 3,867 $ 3,254 $ 2,915 Addition resulting from acquisition . . . 252 --------- --------- --------- --------- --------- Chargeoffs: Commercial . . . . . . . . . . . . . . . . 170 391 588 806 614 Real estate mortgage . . . . . . . . . . . 0 129 100 41 46 Installment . . . . . . . . . . . . . . . 77 388 552 511 590 --------- --------- --------- --------- --------- Total chargeoffs . . . . . . . . . . . 247 908 1,240 1,358 1,250 --------- --------- --------- --------- --------- Recoveries: Commercial . . . . . . . . . . . . . . . . 22 240 215 227 195 Real estate mortgage . . . . . . . . . . . 3 5 38 7 1 Installment . . . . . . . . . . . . . . . 19 98 114 84 84 98 --------- --------- --------- --------- --------- Total recoveries . . . . . . . . . . . 44 343 367 318 294 --------- --------- --------- --------- --------- Net chargeoffs . . . . . . . . . . . . . . . 203 565 873 1,040 956 --------- --------- --------- --------- --------- Provision for loan losses . . . . . . . . . . 193 1,014 1,357 1,401 1,295 --------- --------- --------- --------- --------- Balance at December 31 . . . . . . . . . . . $ 4,790 $ 4,800 $ 4,351 $ 3,867 $ 3,254 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Ratio of net chargeoffs during the period to average loans outstanding during the period . . . . . . . . . . . . . . . . .05% .16% .26% .35% .35% Peer Group . . . . . . . . . . . . . . . . . N/A .46% .63% .95% .93%
(1) Through March 31, 1994 Page 12 of 19 FIRST MERCHANTS CORPORATION FORM 10-Q LIQUIDITY AND INTEREST SENSITIVITY Asset/Liability Management has been an important factor in the Corporation's ability to record consistent earnings growth through periods of interest rate volatility and product deregulation. Management and the Board of Directors monitor the Corporation's liquidity and interest sensitivity positions at regular meetings to ensure that changes in interest rates will not adversely affect earnings. Decisions regarding investment and the pricing of loan and deposit products are made after analysis of reports designed to measure liquidity, rate sensitivity, the Corporation's exposure to changes in net interest income given various rate scenarios, and the economic and competitive environments. First Merchants Corporation's liquidity and interest sensitivity position at March 31, 1994, remained adequate to meet the Corporation's primary goal of achieving optimum interest margins while avoiding undue interest rate risk. the table below represents the Corporation's interest rate sensitivity analysis as of March 31, 1994. Interest-Rate Sensitivity Analysis (Dollar amounts in thousands) At March 31, 1994 1-180 181-365 1-5 Beyond Days Days Years 5 Years Total ------- ------- ----- ------- ----- Rate-sensitive assets: Federal funds sold and interest-bearing time deposits . . . . . . . . . . . . . $ 4,353 $ 4,353 Securities . . . . . . . . . . . . . . . . 35,810 $ 36,503 $123,864 $ 13,887 210,064 Loans . . . . . . . . . . . . . . . . . . 235,319 20,802 90,516 29,395 376,032 -------- -------- -------- -------- -------- Total rate-sensitive assets . . . . . . . . . $275,482 $ 57,305 $214,380 $ 43,282 $590,449 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Rate-sensitive liabilities: Interest-bearing deposits . . . . . . . . $223,491 $ 21,055 $186,585 $431,131 Other borrowed funds . . . . . . . . . . . 60,843 60,843 -------- -------- -------- -------- Total rate-sensitive liabilities . . . . . . $284,334 $ 21,055 $186,585 $491,974 -------- -------- -------- -------- -------- -------- -------- -------- Interest rate sensitivity gap by period . . . $ (8,852) $ 36,250 $27,795 $ 43,282 Cumulative gap . . . . . . . . . . . . . . . (8,852) 27,398 55,193 98,475 Cumulative ratio at March 31, 1994 . . . . . 96.89% 108.97% 111.22% 120.02% Page 13 of 19
FIRST MERCHANTS CORPORATION FORM 10-Q EARNING ASSETS Earning assets grew $12.7 million in 1993 and $5.4 million during the first quarter of 1994. The growth occurred in loans with securities and short term investments declining over the 15 month period. The following table presents the earning asset mix for the years ended 1992, 1993 and at March 31, 1994. Earning Assets (Dollars in Millions) March 31, December 31, December 31, 1994 1993 1992 ---- ---- ---- Federal funds sold and interest bearing time deposits . . . $ 4.4 $ 1.9 $ 25.7 Securities . . . . . . . . 210.0 206.2 196.3 Loans . . . . . . . . . . . . 376.0 376.9 350.3 ------- ------- ------- Total . . . . . . . . . . $ 590.4 $ 585.0 $ 572.3 ------- ------- ------- ------- ------- ------- DEPOSITS AND BORROWINGS Total deposits declined by $5.7 million in 1993. Average deposits, however, grew $16.3 million in 1993, up 3.3 per cent from the same figure in 1992. At March 31, 1994, deposits totalled at $496 million, down 2 per cent from year end 1993. Historically, the Corporation's deposits have peaked at year end, due to large corporate deposits, declined during the first quarter, then resumed growth. Average deposits during the period equalled $505.8 million or about .1 of 1 per cent below year end deposits. Borrowed funds increased $14 million during the quarter, replacing the deposit decline of $10.3 million and funding the asset growth of $4.4 million. Page 14 of 19
FIRST MERCHANTS CORPORATION FORM 10-Q NET INTEREST INCOME Net interest income is the primary source of the Corporation's earnings. It is a function of net interest margin and the level of average earnings assets. The table below indicates that the Corporation's asset yields have historically been more rate sensitive (volatile) than its cost of funds. Consequently, interest margins have tended to decline during falling interest rate environments since interest income declines at a faster rate than interest expense. The reverse has been true in a rising interest rate environment. During 1992 , however, the opposite occurred as is demonstrated in the table below. Costs declined faster than interest income, allowing the margin to improve. Two major factors caused asset yields to "hold up" fairly well despite the falling rate environment. First, deposit rates declined more rapidly than the Corporation's base lending rate. Second, significant portfolio investments were made in a higher rate environment so that the Corporation's investment portfolio is currently yielding well above current market levels. During 1993 and the first quarter of 1994, margins declined slightly as the rate of decline in asset yield exceeded the decline in costs. The decline in margin was offset by growth in earning assets resulting in increases in net interest income during 1993 and the first quarter of 1994. Net Interest Income Net Interest Margin Average on a Fully Taxable on a Fully Taxable Earning Equivalent Basis Equivalent Basis Assets ---------------- ---------------- ------ (Dollars in Thousands) 1994 (1st Quarter) $ 6,750 4.55% $593,820 1993 26,806 4.57 587,009 1992 26,400 4.66 566,467 1991 23,277 4.43 525,799 1990 20,055 4.19 478,113 1989 19,018 4.20 453,098 Interest Income Interest Expense Net Interest (FTE) as a Per Cent as a Per Cent Income (FTE) as a of Average of Average Per Cent of Average Earning Assets Earning Assets Earning Assets -------------- -------------- -------------- 1994 7.09% 2.54% 4.55% 1993 7.38 2.81 4.57 1992 8.31 3.65 4.66 1991 9.48 5.05 4.43 1990 10.09 5.90 4.19 1989 10.28 6.08 4.20 Page 15 of 19
FIRST MERCHANTS CORPORATION FORM 10-Q Recent action by the Federal Reserve has pushed interest rates higher. This would serve to widen interest margins except for the fact that depositors may opt for longer term liabilities which pay higher rates of interest. The Corporation does, as mentioned earlier, consider the effect of changing rates in its loan and deposit pricing decisions and expects no significant change in the level of net interest margin as a result of higher interest rates. OTHER INCOME The Corporation has placed emphasis on the growth of non-interest income in recent years by offering a wide range of fee-based services. Fee schedules are regularly reviewed by a pricing committee to ensure that the products and services offered by the Corporation are priced to be competitive and profitable. Other income reached $6,588,000 in 1993, an increase of 18.2 per cent over the prior year. Trust revenues grew $180,000, or 8.1 per cent while service charges on deposit accounts were up by $250,000, or 11.1 per cent. Securities gains totalled $395,000, an increase of $328,000, or 493.4 per cent. Other income during the first quarter of 1994 exceeded the same quarter in 1993 by $5,000 or .3 per cent. Service charge income declined by about $60,000 when compared to the same quarter of 1993 due primarily to timing differences in the assessment of charges to large corporate accounts. That decline was mostly offset by a $44,000 (7.6 per cent) increase in trust fees. OTHER EXPENSE Total "other expenses" represent non-interest operating expenses of the Corporation. Those expenses reached $18,215,000 in 1993, up $611,000, or 3.5 per cent, from 1992. Salary and benefit expenses increased by $330,000, or 3.8 per cent, and premises and equipment expense rose $254,000, or 12.8 per cent. First quarter 1994 other expenses were down $28,000 or .6 per cent from the same quarter in 1993. Increased salary and benefit expense of $201,000 (9.2 per cent) was offset by declines in several other categories, primarily data processing. On May 11, 1993, the Corporation and First Merchants approved a change in the data processing function. In the fourth quarter of 1993, First Merchants assumed responsibility for the data processing function for the Corporation and its wholly owned subsidiaries. The data processing agreement with an outside party to provide data processing management was terminated three months early. The cost of the conversion, equipment and software was approximately $1,700,000. The equipment and software costs will be depreciated on a straight-line method based on the estimated useful lives of the assets. The Corporation estimates that data processing costs declined under the new arrangement by more than $100,000 during the first quarter of 1994. INCOME TAXES The increase in 1993 tax expense was attributable to a $1,042,000 increase in pre-tax net income. During the first quarter of 1994, income tax expense grew slightly from the same period one year earlier, also due to a $298,000 increase in pre-tax net income. Page 16 of 19
FIRST MERCHANTS CORPORATION FORM 10-Q The following is a breakdown, by year, of federal and state income taxes. Twelve Months Ended December 31, --------------------------------- 1993 1992 ------------- ------------- (Dollars in Thousands) Federal taxes . . . . . . . . . . . . $ 3,272 $ 3,033 State taxes . . . . . . . . . . . . 1,124 1,008 ------------- ------------- Total . . . . . . . . . . . . . . . . $ 4,396 $ 4,041 ------------- ------------- ------------- ------------- Three Months Ended March 31, 1994 1993 ------------- ------------- Federal taxes . . . . . . . . . . . . $ 898 $ 825 State taxes . . . . . . . . . . . . . 301 267 ------------- ------------- Total . . . . . . . . . . . . . . . . $ 1,199 $ 1,092 ------------- ------------- ------------- ------------- In February, 1992, The Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 109 (SFAS 109) on accounting for income taxes. The Corporation adopted SFAS on January 1, 1993, the effect of which was to increase earnings by $227,000. INFLATION Changing prices of goods, services and capital affect the financial position of every business enterprise. The level of market interest rates and the price of funds loaned or borrowed fluctuate due to changes in the rate of inflation and various other factors, including government monetary policy. Fluctuating interest rates affect First Merchants' net interest income, loan volume, and other operating expenses, such as employees' salaries and benefits, reflecting the effects of escalating prices, as well as increased levels of operations and other factors. As the inflation rate increases, the purchasing power of the dollar decreases. Those holding fixed rate monetary assets incur a loss while those holding fixed rate monetary liabilities enjoy a gain. The nature of a bank holding company's operations is such that there will be an excess of monetary assets over monetary liabilities and, thus, a bank holding company will tend to suffer from an increase the rate of inflation and benefit from a decrease. Page 17 of 19
FIRST MERCHANTS CORPORATION FORM 10-Q PART II. OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The 1994 Annual Meeting of Stockholders was held on March 31, 1994. Set forth below are the matters, other than the election of directors and the ratification of the independent auditor, voted upon at the Annual Meeting and the result of the vote: - The adoption of the First Merchants Corporation Employee Stock Purchase Plan (1994). For 3,063,337 Against 30,331 Abstaining 29,621 - The adoption of the First Merchants Corporation 1994 Stock Option Plan. For 3,058,356 Against 33,085 Abstaining 31,849 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) No exhibits are required to be filed. (b) No reports were filed on Form 8-K during the quarter ended March 31, 1994. Page 18 of 19
FIRST MERCHANTS CORPORATION FORM 10-Q SIGNATURES Pursuant to the requirements 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 CORPORATION (Registrant) Date May 10, 1994 by /s/ Stefan S. Anderson ---------------------- -------------------------------- Stefan S. Anderson President and Director Date May 10, 1994 by /s/ James L. Thrash ---------------------- -------------------------------- James L. Thrash Chief Financial & Principal Accounting Officer Page 19 of 19