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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, 1995 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 10, 1995, there were outstanding 3,373,054 common shares, without par value, of the registrant. Page 1 of 20
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 . . . . . . . . . . 11 PART II. Other Information: Item 4. Submission of Matters to a Vote of Security Holders . . 19 Item 6. Exhibits and Reports of Form 8-K. . . . . . . . . . . . 19 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Page 2 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CONSOLIDATED CONDENSED BALANCE SHEET (Dollar amounts in thousands, except per share amounts) (Unaudited) March 31, December 31, 1995 1994 ---------- ----------- ASSETS: Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . $ 27,881 $ 42,684 Federal funds sold. . . . . . . . . . . . . . . . . . . . . . . . . 1,875 3,675 ---------- ----------- Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . 29,756 46,359 Interest-bearing time deposits. . . . . . . . . . . . . . . . . . . 51 23 Securities available for sale . . . . . . . . . . . . . . . . . . . 112,985 99,363 Securities held to maturity (Fair value $71,654 and $76,522). . . . 72,175 77,677 Federal Reserve and Federal Home Loan Bank stock. . . . . . . . . . 1,879 1,879 Loans: Loans, net of unearned interest. . . . . . . . . . . . . . . . . 404,701 401,605 Less: Allowance for loan losses. . . . . . . . . . . . . . . . 5,072 4,998 ---------- ----------- Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . 399,629 396,607 Premises and equipment. . . . . . . . . . . . . . . . . . . . . . . 9,874 9,545 Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . 5,505 5,627 Core deposit intangibles and goodwill . . . . . . . . . . . . . . . 1,944 1,977 Others assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,858 5,549 ---------- ----------- Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $ 639,656 $ 644,606 ---------- ----------- ---------- ----------- LIABILITIES: Deposits: Noninterest-bearing. . . . . . . . . . . . . . . . . . . . . . . $ 73,028 $ 99,667 Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . 449,320 430,163 ---------- ----------- Total deposits. . . . . . . . . . . . . . . . . . . . . . . . 522,348 529,830 Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . 36,949 39,189 Interest payable. . . . . . . . . . . . . . . . . . . . . . . . . . 1,527 1,320 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 5,149 3,249 ---------- ----------- Total liabilities . . . . . . . . . . . . . . . . . . . . . . 565,973 573,588 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 -- 3,370,965 and 3,366,346 shares . . . . 421 421 Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . 16,360 16,231 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . 58,333 56,886 Net unrealized losses on securities available for sale. . . . . . . (1,431) (2,520) ---------- ----------- Total stockholders' equity. . . . . . . . . . . . . . . . . . 73,683 71,018 ---------- ----------- Total liability and stockholders' equity. . . . . . . . . . . $ 639,656 $ 644,606 ---------- ----------- ---------- ----------- See notes to consolidated condensed financial statements. Page 3 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF INCOME (Dollar amounts in thousands, except per share amounts) (Unaudited) Three Months Ended March 31 --------------------- Interest Income: 1995 1994 --------- --------- Loans, including fees: Taxable. . . . . . . . . . . . . . . . . . . . . $ 8,937 $ 7,225 Tax exempt . . . . . . . . . . . . . . . . . . . 18 23 Securities: Taxable. . . . . . . . . . . . . . . . . . . . . 2,012 2,326 Tax exempt . . . . . . . . . . . . . . . . . . . 545 573 Federal funds sold. . . . . . . . . . . . . . . . . 42 38 Interest-bearing time deposits. . . . . . . . . . . 2 Federal Reserve and Federal Home Loan Bank stock. . 34 24 --------- --------- Total interest income . . . . . . . . . . . . 11,588 10,211 Interest expense: Deposits. . . . . . . . . . . . . . . . . . . . . . 4,058 3,340 Short-term borrowings . . . . . . . . . . . . . . . 603 428 --------- --------- Total interest expense . . . . . . . . . . . . . 4,661 3,768 --------- --------- Net Interest Income. . . . . . . . . . . . . . . . . . 6,927 6,443 Provision for loan losses . . . . . . . . . . . . . 160 193 --------- --------- Net Interest Income After Provision For Loan Losses. . 6,767 6,250 Other Income: Securities gains, net . . . . . . . . . . . . . . . 10 10 Other income. . . . . . . . . . . . . . . . . . . . 1633 1580 --------- --------- Total other income. . . . . . . . . . . . . . . . . 1,643 1,590 Total other expenses. . . . . . . . . . . . . . . . 4,712 4,395 --------- --------- Income before income tax . . . . . . . . . . . . . . . 3,698 3,445 Income tax expense. . . . . . . . . . . . . . . . . 1,307 1,199 --------- --------- Net Income . . . . . . . . . . . . . . . . . . . . . . $ 2,391 $ 2,246 --------- --------- --------- --------- Per share: Net income. . . . . . . . . . . . . . . . . . . . . $ .71 $ .66 Weighted average shares outstanding. . . . . . . . . . 3,367,488 3,388,666 See notes to consolidated condensed financial statements. Page 4 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Dollar amounts in thousands) (Unaudited) 1995 1994 ---------- ----------- Balances, January 1. . . . . . . . . . . . . . . . . . $ 71,018 $ 68,804 Net income . . . . . . . . . . . . . . . . . . . . . . 2,391 2,246 Cash dividends . . . . . . . . . . . . . . . . . . . . (944) (847) Stock issued under dividend reinvestment and stock purchase plan. . . . . . . . . . . . . . . . . . . . 104 89 Stock options exercised. . . . . . . . . . . . . . . . 25 22 Stock redeemed . . . . . . . . . . . . . . . . . . . . (147) Net change in unrealized gain (loss) on securities available for sale . . . . . . . . . . . . . . . . . 1,089 (641) ---------- ----------- Balances, March 31 . . . . . . . . . . . . . . . . . . $ 73,683 $ 69,526 ---------- ----------- ---------- ----------- See notes to consolidated condensed financial statements. Page 5 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited) Three Months Ended March 31 ------------------------------ 1995 1994 ---------- ----------- Cash Flows From Operating Activities: Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,391 $ 2,246 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses. . . . . . . . . . . . . . . . . . . . 160 193 Depreciation and amortization. . . . . . . . . . . . . . . . . . 289 283 Securities amortization, net . . . . . . . . . . . . . . . . . . 251 307 Change in interest receivable. . . . . . . . . . . . . . . . . . 183 347 Change in interest payable . . . . . . . . . . . . . . . . . . . 207 (35) Other adjustments. . . . . . . . . . . . . . . . . . . . . . . . 919 112 ---------- ---------- Net cash provided by operating activities . . . . . . . . . . 4,400 3,453 Cash Flows From Investing Activities: Net change in interest-bearing time deposits. . . . . . . . . . . . (28) 251 Purchases of: Securities available for sale. . . . . . . . . . . . . . . . . . (13,766) (6,880) Securities held to maturity. . . . . . . . . . . . . . . . . . . (7,340) (18,061) Proceeds from maturities and sales of: Securities available for sale. . . . . . . . . . . . . . . . . . 1,794 4,293 Securities held to maturity. . . . . . . . . . . . . . . . . . . 12,754 15,468 Net change in loans . . . . . . . . . . . . . . . . . . . . . . . . (3,314) 686 Purchases of premises and equipment . . . . . . . . . . . . . . . . (618) (114) Other investing activities. . . . . . . . . . . . . . . . . . . . . 52 139 ---------- ---------- Net cash used in investing activities. . . . . . . . . . . . . . (10,466) (4,218) Cash Flows From Financing Activities: Net change in: Noninterest-bearing, NOW, money market and savings deposits. . . (30,036) (7,871) Certificates of deposit and other time deposits. . . . . . . . . 22,554 (2,389) Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . (2,240) 13,953 Cash dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . (944) (847) Stock issued under dividend reinvestment and stock purchase plan. . 104 89 Stock options exercised . . . . . . . . . . . . . . . . . . . . . . 25 22 Stock redeemed. . . . . . . . . . . . . . . . . . . . . . . . . . . (147) ---------- ---------- Net cash provided (used) in financing activities . . . . . . . . (10,537) 2,810 ---------- ---------- Net Increase (Decrease) in Cash and Cash Equivalents . . . . . . . . . (16,603) 2,045 Cash and Cash Equivalents, January 1 . . . . . . . . . . . . . . . . . 46,359 26,567 ---------- ---------- Cash and Cash Equivalents, March 31. . . . . . . . . . . . . . . . . . $ 29,756 $ 28,612 ---------- ---------- ---------- ---------- See notes to consolidated condensed financial statements. Page 6 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) NOTE 1. General The significant accounting policies followed by First Merchants Corporation ("Corporation") and its wholly owned subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting, except for the changes in methods of accounting 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. Changes In Methods of Accounting 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. In May 1993, the Financial Accounting Standard Board issued Statement of Financial Accounting Standards No. 114 (SFAS No. 114), Accounting by Creditors for Impairment of a Loan. The statement requires that impaired loans that are within the scope of this Statement be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical or expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The Corporation adopted SFAS No. 114 on January 1, 1995. The adoption of SFAS No. 114 did not have a material impact on the financial condition or the results of operations of the Corporation. Page 7 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollar amounts in thousands) (Unaudited) NOTE 3. Investment Securities Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- Securities available for sale at March 31, 1995: U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . $ 11,780 $ 8 $ 305 $ 11,483 Federal agencies . . . . . . . . . . . . . . . . . . . . 44,319 142 719 43,742 State and municipal . . . . . . . . . . . . . . . . . . . 12,818 130 226 12,722 Mortgage and other asset-backed securities . . . . . . . 21,523 41 665 20,899 Other Securities . . . . . . . . . . . . . . . . . . . . 250 250 Corporate obligations . . . . . . . . . . . . . . . . . . 24,665 6 782 23,889 --------- --------- -------- --------- Total . . . . . . . . . . . . . . . . . . . . . . . . $ 115,355 $ 327 $ 2,697 $ 112,985 --------- --------- -------- --------- --------- --------- -------- --------- Securities held to maturity at March 31, 1995: U.S. Treasury . . . . . . . . . . . . . . . . . . . . . $ 8,621 $ 18 $ 115 $ 8,524 Federal agencies . . . . . . . . . . . . . . . . . . . . 20,760 36 265 20,531 State and municipal . . . . . . . . . . . . . . . . . . . 40,333 266 439 40,160 Mortgage and other asset-backed securities . . . . . . . 322 322 Corporate obligations . . . . . . . . . . . . . . . . . . 2,139 22 2,117 --------- --------- -------- --------- Total . . . . . . . . . . . . . . . . . . . . . . . . $ 72,175 $ 320 $ 841 $ 71,654 --------- --------- -------- --------- --------- --------- -------- --------- Securities available for sale at December 31, 1994: U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . $ 11,817 $ 550 $ 11,267 Federal agencies . . . . . . . . . . . . . . . . . . . . 35,565 1,271 34,294 State and municipal . . . . . . . . . . . . . . . . . . . 9,762 $ 31 385 9,408 Mortgage and other asset-backed securities . . . . . . . 22,171 29 836 21,364 Corporate obligations . . . . . . . . . . . . . . . . . . 24,221 4 1,195 23,030 --------- --------- -------- --------- Total . . . . . . . . . . . . . . . . . . . . . . . . $ 103,536 $ 64 $ 4,237 $ 99,363 --------- --------- -------- --------- --------- --------- -------- --------- Page 8 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited) Gross Gross Fair Amortized Unrealized Unrealized Market Cost Gains Losses Value ---------- ---------- ---------- ---------- Securities held to maturity at December 31, 1994: U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . $ 12,630 $ 21 $ 222 $ 12,429 Federal agencies. . . . . . . . . . . . . . . . . . . . . 24,529 29 469 24,089 State and municipal . . . . . . . . . . . . . . . . . . . 38,117 211 680 37,648 Mortgage and other asset-backed securities. . . . . . . . 370 370 Corporate obligations . . . . . . . . . . . . . . . . . . 2,031 45 1,986 --------- --------- -------- --------- Total . . . . . . . . . . . . . . . . . . . . . . . $ 77,677 $ 261 $ 1,416 $ 76,522 --------- --------- -------- --------- --------- --------- -------- --------- Cost -------------------------- 1995 1994 ---------- -------- Federal Reserve and Federal Home Loan Bank stock on March 31: Federal Reserve Bank Stock . . . . . $ 307 $ 307 Federal Home Loan Stock . . . . . . 1,572 1,572 ---------- -------- Total . . . . . . . . . . . . $ 1,879 $ 1,879 ---------- -------- ---------- -------- Page 9 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollar amounts in thousands) (Unaudited) NOTE 4. Loans and Allowance March 31, December 31, 1995 1994 ---------- ------------ Loans: Commercial and industrial loans . . . . . . . . . . . . . . . . . . . . . . . $ 82,246 $ 78,943 Bankers' acceptances and loans to financial institutions. . . . . . . . . . . 1,400 Agricultural production financing and other loans to farmers. . . . . . . . . 4,915 5,310 Real estate loans: Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,312 8,126 Commercial and farmland. . . . . . . . . . . . . . . . . . . . . . . . . . 64,232 64,110 Residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166,649 164,760 Individuals' loans for household and other personal expenditures. . . . . . . 76,239 78,041 Tax exempt loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,042 1,204 Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 666 1,111 ----------- ----------- Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 404,701 $ 401,605 ----------- ----------- ----------- ----------- Nonperforming loans: Nonaccruing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 292 $ 326 Loans contractually past due 90 days or more other than nonaccruing . . . . . 752 703 Restructured loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 729 754 Three Months Ended March 31 ------------------------- 1995 1994 ----------- ----------- Allowance for loan losses: Balances, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,998 $ 4,800 Provision for losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160 193 Recoveries on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 44 Loans charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (139) (247) ----------- ----------- Balances, March 31. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,072 $ 4,790 ----------- ----------- ----------- ----------- Page 10 of 20
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 19 consecutive years of growth in operating earnings per share, reaching $2.71 in 1994, an increase of 9.3 per cent over 1993. Return on assets, which exceeded 1 per cent for the first time in 1988, rose to 1.44 per cent in 1994, from 1.39 per cent in 1993, and 1.29 per cent in 1992. Return on equity exceeded 12 per cent for the first time in 1989, was 12.71 per cent in 1992, 13.01 per cent in 1993 and 13.06 per cent in 1994. Improvement was achieved in each of these ratios during the first quarter of 1995, as compared to the same period in 1994. - Earnings per share were $.71, up 7.6 per cent from $.66 - Return on assets was 1.52 per cent increasing from 1.41 per cent - Return on equity totalled 13.22 per cent compared to 12.99 per cent for the first quarter of 1994 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 10.99 per cent at December 31, 1993, 11.02 per cent at December 31, 1994 and 11.52 per cent at March 31, 1995. At March 31, 1995, the Corporation had a Tier I risk-based capital ratio of 17.03 per cent, total risk-based capital ratio of 18.03 per cent and a leverage ratio of 11.68 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 11 of 20
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 --------- ----- 1995 (March 31) . . . . . . . . . . . . . . .26% N/A% 1994 . . . . . . . . . . . . . . . . . . . . .26 .98 1993 . . . . . . . . . . . . . . . . . . . . .30 1.62 1992 . . . . . . . . . . . . . . . . . . . . .41 1.82 1991 . . . . . . . . . . . . . . . . . . . . .86 2.54 1990 . . . . . . . . . . . . . . . . . . . . 1.09 2.57
(1) Accruing loans past due 90 days or more, and non-accruing loans, but excluding restructured loans. On March 31, 1995, the loan loss reserve stood at $5,072,000. As a per cent of loans, the reserve stood at 1.25 per cent compared to 1.24 per cent at year end 1994, and 1.27 per cent at year end 1993. The provision for loan losses for the first quarter of 1995 declined to $160,000 from $193,000 for the same period of 1994, based on management's analysis of the adequacy of the reserve in light of improving credit quality in the loan portfolio. Page 12 of 20 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. 1995 (1) 1994 1993 1992 1991 ---------- ---------- ---------- --------- --------- (Dollar amount in thousands) Allowance for loan losses Balance at January 1. . . . . . . . . . . $ 4,998 $ 4,800 $ 4,351 $ 3,867 $ 3,254 Addition resulting from acquisition . . . 252 ---------- ---------- ---------- --------- --------- Chargeoffs: Commercial. . . . . . . . . . . . . . . . 21 526 391 588 806 Real estate mortgage. . . . . . . . . . . 41 129 100 41 Installment . . . . . . . . . . . . . . . 118 346 388 552 511 ---------- ---------- ---------- --------- --------- Total chargeoffs . . . . . . . . . . . 139 913 908 1,240 1,358 ---------- ---------- ---------- --------- --------- Recoveries: Commercial. . . . . . . . . . . . . . . . 25 216 240 215 227 Real estate mortgage. . . . . . . . . . . 2 30 5 38 7 Installment . . . . . . . . . . . . . . . 26 83 98 114 84 ---------- ---------- ---------- --------- --------- Total recoveries . . . . . . . . . . . 53 329 343 367 318 ---------- ---------- ---------- --------- --------- Net chargeoffs . . . . . . . . . . . . . . . 86 584 565 873 1,040 ---------- ---------- ---------- --------- --------- Provision for loan losses. . . . . . . . . . 160 782 1,014 1,357 1,401 ---------- ---------- ---------- --------- --------- Balance at December 31 . . . . . . . . . . . $ 5,072 $ 4,998 $ 4,800 $ 4,351 $ 3,867 ---------- ---------- ---------- --------- --------- ---------- ---------- ---------- --------- --------- Ratio of net chargeoffs during the period to average loans during the period - annualized . . . . . . .09% .15% .16% .26% .35% Peer Group . . . . . . . . . . . . . . . . . N/A .25% .49% .65% .95%
(1) Through March 31, 1995 Page 13 of 20 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, 1995, 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, 1995. Interest-Rate Sensitivity Analysis (Dollar amounts in thousands) At March 31, 1995 --------------------------------------------------------------------- 1-180 181-365 1-5 Beyond Days Days Years 5 Years Total --------- --------- --------- --------- ---------- Rate-sensitive assets: Federal funds sold and interest-bearing time deposits. . . . . . . . . . . . . $ 1,926 $ 1,926 Investment Securities . . . . . . . . . . 31,784 $ 33,103 $ 113,847 $ 8,305 187,039 Loans . . . . . . . . . . . . . . . . . . 215,415 45,452 96,698 47,136 404,701 --------- --------- --------- --------- ---------- Total rate-sensitive assets. . . . . . . . . $ 249,125 $ 78,555 $ 210,545 $ 55,441 $ 593,666 --------- --------- --------- --------- ---------- --------- --------- --------- --------- ---------- Rate-sensitive liabilities: Interest-bearing deposits . . . . . . . . $ 203,751 $ 39,762 $ 205,742 $ 65 $ 449,320 Other borrowed funds. . . . . . . . . . . 36,949 36,949 --------- --------- --------- --------- ---------- Total rate-sensitive liabilities . . . . . . $ 240,700 $ 39,762 $ 205,742 $ 65 $ 486,269 --------- --------- --------- --------- ---------- --------- --------- --------- --------- ---------- Interest rate sensitivity gap by period. . . $ 8,425 $ 38,793 $ 4,803 $ 55,376 Cumulative gap . . . . . . . . . . . . . . . 8,425 47,218 52,021 107,397 Cumulative ratio at March 31, 1995 . . . . . 103% 116% 110% 122% Cumulative ratio at December 31, 1994 . . . 106% 121% 114% 125% Page 14 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q EARNING ASSETS Earning assets declined $ .8 million during 1994 and increased $9.5 million during the first quarter of 1995. Growth over the fifteen month period occurred in loans with securities and short term investments declining. The following table presents the earning asset mix for the years ended 1993, 1994 and at March 31, 1995. Earning Assets ---------------------------- (Dollar Amounts in Millions) March 31 December 31, December 31, 1995 1994 1993 -------- ------------ ------------ Federal funds sold and interest bearing time deposits . . . . . . $ 1.9 $ 3.7 $ 1.9 Securities available for sale. . . . 113.0 99.3 206.2 Securities held to maturity . . . . 72.2 77.7 204.3 Federal Reserve and Federal Home Loan Bank stock . . . . . . . . . 1.9 1.9 1.9 Loans. . . . . . . . . . . . . . . . 404.7 401.6 376.9 ----------- --------- ------- Total . . . . . . . . . . . . . . $ 593.7 $ 584.2 $ 585.0 ----------- --------- ------- ----------- --------- ------- DEPOSITS AND BORROWINGS The following tables present the level of deposits and short term borrowings (Federal funds purchased, repurchase agreements with customers, and U.S. Treasury demand notes) based on period end levels and average daily balances for the past two years and most recent quarter: Period End Balances ------------------- (Dollar Amounts in Millions) Short-term Deposits Borrowings -------- ---------- March 31, 1995 . . . . . . . . $ 522.3 $ 36.9 December 31, 1994 . . . . . . 529.8 39.2 December 31, 1993 . . . . . . 506.3 46.9 Average Balances ---------------------------- (Dollar Amounts in Millions) Short-term Deposits Borrowings -------- ---------- March 31, 1995 . . . . . . . . $ 506.2 $ 44.0 December 31, 1994 . . . . . . 514.0 45.6 December 31, 1993 . . . . . . 517.8 35.3 Page 15 of 20
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 earning assets. The table below presents the Corporation's interest income, interest expense, and net interest income as a per cent of average earning assets for the four-year period ending in 1994 and the first quarter of 1995. (Table dollar amounts in thousands.) Asset yields improved slightly in 1994 (.06 per cent), while interest expense declined 11 basis points. The resulting "spread" increase of .17 per cent (4.74% vs 4.57%) accounted for approximately two-thirds of the $1,476,000 increase in fully taxable equivalent ("FTE") net interest income. The remaining increase is attributable to growth in average earning assets of $10,093,000 (see table below.) During the first quarter of 1995, interest income (FTE) as a per cent of average earning assets increased .57 per cent while interest expense as a per cent of average earning assets grew by just .44 per cent. Consequently, net interest income (FTE) as a per cent of average earning assets grew .13 per cent, accounting for the increase in first quarter net interest income (FTE- annualized.) The Corporation does consider the effect of changing rates in its loan and deposit pricing and structure decisions, and in its investment strategy; and expects no significant change in net interest income as a result of interest rate changes. Interest Income Interest Expense Net Interest (FTE) as a Per Cent as a Per Cent Income (FTE) as a Average Net Interest Income of Average of Average a Per Cent of Average Earning on a Fully Taxable Earning Assets Earning Assets Earning Assets Assets Equivalent Basis -------------------- ----------------- --------------------- --------- ------------------- 1995 (1) 8.01% 3.14% 4.87% $ 593,542 $ 28,920 1994 7.44 2.70 4.74 597,102 28,282 1993 7.38 2.81 4.57 587,009 26,806 1992 8.31 3.65 4.66 566,467 26,400 1991 9.48 5.05 4.43 525,799 23,277
(1) First quarter annualized. Page 16 of 20 FIRST MERCHANTS CORPORATION FORM 10-Q 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 declined in 1994 by $290,000, or 4.4 per cent. The decline is attributable to two factors: 1. Loss on the sale of securities of $31,000 compared to gains of $395,000 in 1993, a change of $426,000. 2. A $126,000 (5.0 per cent) decline in deposit service charges. The first factor is not relevant to the underlying fee income potential of the Corporation. Without that change, fee income would have increased from $6,194,000 to $6,329,000 (2.2 per cent). During the first quarter of 1995, other income equalled $1,643,000, or 3.3 per cent above the first quarter 1994 level of $1,590,000. Increases in deposit service charges ($22,000) and data processing fees ($19,000) accounted for most of the $53,000 improvement. OTHER EXPENSE Total "other expenses" represent non-interest operating expenses of the Corporation. Those expenses amounted to $18,434,000 in 1994, an increase of $219,000 or 1.2 per cent from the prior year. Most of the change in 1994 is attributable to two factors: 1. During the fourth quarter of 1993, First Merchants Bank, N.A. assumed responsibility for the data processing function for the Corporation and its subsidiaries. The agreement with an outside party to provide data processing was terminated. The cost of conversion equipment and software was approximately $1,700,000. The equipment and software costs are being depreciated on a straight-line method based on useful life of the assets. The Corporation estimates that data processing costs under the new arrangement declined by approximately $400,000 (net of additional salary, employee benefit, equipment, and software costs.) 2. Salary and benefit expense increased by $928,000 or 10.2 per cent. About one-fourth of that increase is attributable to the change in data processing (described above). The rest is attributable to normal salary increases and key additions to staff. During the first quarter of 1995 other expenses were $4,712,000, up $317,000 or 7.2 per cent from the same quarter in 1994. Salary and benefit expenses grew $215,000 (9.2 per cent), accounting for most of the increase. INCOME TAXES The increase in 1994 tax expense was attributable to a $1,198,000 increase in pre-tax net income. During the first quarter of 1995, income tax expense grew slightly from the same period one year earlier, also due to a $253,000 increase in pre-tax net income. Page 17 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q The following is a breakdown, by year, of federal and state income taxes. Three Months Ended Twelve Months Ended March 31, December 31, ---------------------------- ---------------------------- 1995 1994 1994 1993 -------------- ------------- ----------- ------------- (Dollars in Thousands) Federal taxes. . $ 982 $ 898 $ 3,735 $ 3,272 State taxes. . . 325 301 1,172 1,124 -------------- ------------- ----------- ------------- Total . . . . $ 1,307 $ 1,199 $ 4,907 $ 4,396 -------------- ------------- ----------- ------------- -------------- ------------- ----------- ------------- 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 18 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q PART II. OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The 1995 Annual Meeting of Stockholders was held on March 30, 1995. Shareholders voted upon the election of directors and the ratification of the independent auditor. No other matters were voted upon at the Annual Meeting. 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, 1995. Page 19 of 20
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 11, 1995 by /s/ Stefan S. Anderson ------------------------------ ---------------------------------- Stefan S. Anderson President and Director Date May 11, 1995 by /s/ James L. Thrash ------------------------------ ---------------------------------- James L. Thrash Chief Financial & Principal Accounting Officer Page 20 of 20
9 1,000 3-MOS DEC-31-1995 MAR-01-1995 MAR-31-1995 27,881 51 1,875 0 112,985 72,175 71,654 404,701 5,072 639,656 522,348 36,949 5,149 0 421 0 0 73,262 639,656 8,955 2,591 42 11,588 4,058 4,661 6,927 160 10 1,633 3,698 2,391 0 0 2,391 .71 .71 0 0 0 0 0 0 0 0 0 0 0 0