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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 September 30, 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 October 30, 1995, there were outstanding 5,049,873 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 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 I. FINANCIAL STATEMENTS CONSOLIDATED CONDENSED BALANCE SHEET (Dollar in thousands, except per share amounts) (Unaudited) September 30, December 31, 1995 1994 ------------- ------------- ASSETS: Cash and due from banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,849 $ 42,684 Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,998 3,675 --------- --------- Cash and cash equivalent . . . . . . . . . . . . . . . . . . . . . . . . . . 46,847 46,359 Interest-bearing time deposits . . . . . . . . . . . . . . . . . . . . . . . . 93 23 Securities available for sale. . . . . . . . . . . . . . . . . . . . . . . . . 135,819 99,363 Securities held to maturity (fair value $77,946 and $76,522) . . . . . . . . . 77,698 77,677 Federal Reserve and Federal Home Loan Bank stock . . . . . . . . . . . . . . . 1,892 1,879 Loans: Loans, net of unearned interest. . . . . . . . . . . . . . . . . . . . . . . 407,484 401,605 Less: Allowance for loan losses. . . . . . . . . . . . . . . . . . . . . . 5,114 4,998 --------- --------- Net loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402,370 396,607 Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,211 9,545 Interest receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,370 5,627 Core deposit intangibles and goodwill. . . . . . . . . . . . . . . . . . . . . 1,878 1,977 Others assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,126 5,549 --------- --------- Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 686,304 $ 644,606 --------- --------- --------- --------- LIABILITIES: Deposits: Noninterest bearing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,682 $ 99,667 Interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461,649 430,163 --------- --------- Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 537,331 529,830 Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,243 39,189 Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,926 1,320 Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,598 3,249 --------- --------- Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 608,098 573,588 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 -- 5,056,911 and 3,366,346 shares . . . . . . . . . . 632 421 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 15,929 16,231 Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,323 56,886 Net unrealized gains (losses) on securities available for sale . . . . . . . . 322 (2,520) --------- --------- Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 78,206 71,018 --------- --------- Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . $ 686,304 $ 644,606 --------- --------- --------- --------- 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 Nine Months Ended September 30, September 30, ---------------------- ---------------------- 1995 1994 1995 1994 --------- --------- --------- --------- Interest Income: Loans, including fees: Taxable. . . . . . . . . . . . . . . . . . . . . . . . . $ 9,590 $ 8,301 $ 27,952 $ 23,280 Tax exempt . . . . . . . . . . . . . . . . . . . . . . . 35 20 80 64 Securities:. . . . . . . . . . . . . . . . . . . . . . . . Taxable. . . . . . . . . . . . . . . . . . . . . . . . . 2,211 2,039 6,271 6,586 Tax exempt . . . . . . . . . . . . . . . . . . . . . . . 647 617 1,810 1,817 Federal Reserve and Federal Home Loan Bank stock . . . . . 37 25 110 73 Federal funds sold . . . . . . . . . . . . . . . . . . . . 275 14 594 84 Interest-bearing time deposits . . . . . . . . . . . . . . 1 2 2 --------- --------- --------- --------- Total interest income. . . . . . . . . . . . . . . . . 12,796 11,016 36,819 31,906 Interest Expense: Deposits . . . . . . . . . . . . . . . . . . . . . . . . . 5,088 3,600 14,090 10,440 Short-term borrowings. . . . . . . . . . . . . . . . . . . 752 591 1,846 1,448 --------- --------- --------- --------- Total interest expense . . . . . . . . . . . . . . . . 5,840 4,191 15,936 11,888 --------- --------- --------- --------- Net interest income. . . . . . . . . . . . . . . . . . . . . 6,956 6,825 20,883 20,018 Provision for loan losses. . . . . . . . . . . . . . . . . . 160 201 480 593 --------- --------- --------- --------- Net interest income after provision for loan losses. . . . . 6,796 6,624 20,403 19,425 Other Income: Securities gains (losses), net . . . . . . . . . . . . . . (66) 11 Other income . . . . . . . . . . . . . . . . . . . . . . . 1,902 1,557 5,179 4,686 --------- --------- --------- --------- Total other income . . . . . . . . . . . . . . . . . . . . . 1,902 1,557 5,113 4,697 Total other expenses . . . . . . . . . . . . . . . . . . . . 4,870 4,758 14,173 13,668 --------- --------- --------- --------- Income before income tax . . . . . . . . . . . . . . . . . . 3,828 3,423 11,343 10,454 Income tax expense . . . . . . . . . . . . . . . . . . . . . 1,414 1,196 4,009 3,621 --------- --------- --------- --------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,414 $ 2,227 $ 7,334 $ 6,833 --------- --------- --------- --------- --------- --------- --------- --------- Per Share: Net income . . . . . . . . . . . . . . . . . . . . . . . . $ .48 $ .44 $ 1.45 $ 1.35 Dividends. . . . . . . . . . . . . . . . . . . . . . . . . .20 .19 .57 .52 Weighted average shares outstanding. . . . . . . . . . . . . 5,062,748 5,086,058 5,056,568 5,080,419 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) 1995 1994 --------- --------- BALANCES, JANUARY 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 71,018 $ 68,804 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,334 6,833 Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,898) (2,640) Stock issued under employee benefit plans. . . . . . . . . . . . . . . . . . . . 277 250 Stock issued under dividend reinvestment and stock purchase plan . . . . . . . . 327 261 Stock options exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 94 Stock redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (893) (638) Change in net unrealized gains (losses) on securities available for sale . . . . 2,842 (1,690) --------- --------- BALANCES, SEPTEMBER 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 78,206 $ 71,274 --------- --------- --------- --------- 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) NINE MONTHS ENDED SEPTEMBER 30, ------------------- 1995 1994 -------- -------- OPERATING ACTIVITIES: Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,334 $ 6,833 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480 593 Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . 899 842 Securities amortization, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 533 825 Change in interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . (620) (214) Change in interest payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 606 1 Loans originated for resale . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,852) Proceeds from sales of loans. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,859 Other adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 8 -------- -------- Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . 9,303 8,888 INVESTING ACTIVITIES: Net change in interest-bearing time deposits. . . . . . . . . . . . . . . . . . . . (70) 254 Purchases of: Securities available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . (53,645) (18,204) Securities held for maturity . . . . . . . . . . . . . . . . . . . . . . . . . . (29,107) (28,382) Proceeds from maturities of: Securities available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . 10,318 23,870 Securities held to maturity. . . . . . . . . . . . . . . . . . . . . . . . . . . 28,856 34,875 Proceeds from sales of securities available for sale . . . . . . . . . . . . . . . 11,196 Net change in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,518) (17,044) Purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . (1,565) (540) Other investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 467 -------- -------- Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . (40,382) (4,704) FINANCING ACTIVITIES: Net change in noninterest-bearing, NOW, money market and savings deposits . . . . . (39,766) (4,076) Net change in certificates of deposit and other time deposits . . . . . . . . . . . 47,267 3,469 Net change in short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . 27,054 (4,357) Cash dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,898) (2,640) Stock issued under employee benefit plans . . . . . . . . . . . . . . . . . . . . . 277 250 Stock issued under dividend reinvestment and stock purchase plan. . . . . . . . . . 327 261 Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 94 Stock redeemed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (893) (638) -------- -------- Net cash provided (used) by financing activities. . . . . . . . . . . . . . . . . 31,567 (7,637) -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents . . . . . . . . . . . . . . . . 488 (3,453) Cash and Cash Equivalents, January 1 . . . . . . . . . . . . . . . . . . . . . . . . 46,359 26,567 -------- -------- Cash and Cash Equivalents, September 30. . . . . . . . . . . . . . . . . . . . . . . $ 46,847 $ 23,114 -------- -------- -------- -------- See notes to consolidated condensed financial statements. Page 6 of 19
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENT (Dollar amounts in thousands) (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 Method 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 Standards 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 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 No. 114 did not have a material impact on the financial condition or the results of operations of the Corporation. NOTE 3. Securities GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- -------- Securities available for sale at September 30, 1995: U.S. Treasury . . . . . . . . . . . . . . . . . . . . . $ 2,544 $ 12 $ 13 $ 2,543 Federal agencies. . . . . . . . . . . . . . . . . . . . 64,191 772 258 64,705 State and municipal . . . . . . . . . . . . . . . . . . 16,567 307 90 16,784 Mortgage and other asset-backed securities. . . . . . . 25,167 154 215 25,106 Other Securities. . . . . . . . . . . . . . . . . . . . 250 250 Corporate obligations . . . . . . . . . . . . . . . . . 26,566 120 255 26,431 --------- ---------- ---------- -------- Total . . . . . . . . . . . . . . . . . . . . . . . . $135,285 $1,365 $831 $135,819 --------- ---------- ---------- -------- --------- ---------- ---------- -------- Page 7 of 19
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollar amounts in thousands) (Unaudited) GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- -------- Securities held to maturity at September 30, 1995: U.S. Treasury . . . . . . . . . . . . . . . . . . . . . $ 7,104 $ 8 $ 25 $ 7,087 Federal agencies. . . . . . . . . . . . . . . . . . . . 22,227 44 89 22,182 State and municipal . . . . . . . . . . . . . . . . . . 44,104 412 132 44,384 Mortgage and other asset-backed securities. . . . . . . 2,143 34 2,177 Corporate obligations . . . . . . . . . . . . . . . . . 2,120 2 6 2,116 -------- ---- ------ ------- Total . . . . . . . . . . . . . . . . . . . . . . . . $ 77,698 $500 $ 252 $77,946 -------- ---- ------ ------- -------- ---- ------ ------- 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 -------- ---- ------ ------- -------- ---- ------ ------- 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 ------------------- SEPT. 30, DEC. 30, 1995 1994 --------- -------- Federal Reserve and Federal Home Loan Bank stock: Federal Reserve Bank stock. . . . . . . . . . . . . . . . $ 307 $ 307 Federal Home Loan stock . . . . . . . . . . . . . . . . . 1,585 1,572 ------ ------ Total . . . . . . . . . . . . . . . . . . . . . . . . . $1,892 $1,879 ------ ------ ------ ------ Page 8 of 19
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollar amounts in thousands) (Unaudited) NOTE 4. Loans and Allowance September 30, December 31, 1995 1994 ------------- ------------ Loans: Commercial and industrial loans. . . . . . . . . . . . . . . . . . . . . . . $ 76,789 $ 78,943 Bankers' acceptances and loans to financial institutions . . . . . . . . . . 2,600 Agricultural production financing and other loans to farmers . . . . . . . . 7,002 5,310 Real estate loans: Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,244 8,126 Commercial and farmland . . . . . . . . . . . . . . . . . . . . . . . . . 66,367 64,110 Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166,672 164,760 Individuals' loans for household and other personal expenditures . . . . . . 75,815 78,041 Tax exempt loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 889 1,204 Other loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,106 1,111 ------------- ------------ Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $407,484 $401,605 ------------- ------------ ------------- ------------ Nonperforming Loans: Nonaccruing loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 354 $ 326 Loans contractually past due 90 days or more other than nonaccruing. . . . . 902 703 Restructured loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 689 754 Nine Months Ended September 30, ----------------- 1995 1994 ------ ------ Allowance for loan losses: Balances, January 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,998 $4,800 Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480 593 Recoveries on loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 249 Loans charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (489) (522) ------ ------ Balances, September 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,114 $5,120 ------ ------ ------ ------ NOTE 5. Stockholders' Equity On August 8, 1995, the Board of Directors of the Corporation declared a three-for-two stock split on its common shares. The new shares were distributed on October 27, 1995, to holders of record on October 20, 1995. All per share and weighted average share amounts have been restated to give effect of the stock split. 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 19 consecutive years of growth in operating earnings per share, reaching $1.81 in 1994, an increase of 9.1 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 nine months of 1995, as compared to the same period in 1994. - Earning per share were $1.45, up 7.4 per cent from $1.35 - Return on assets was 1.50 per cent increasing from 1.44 per cent - Return on equity totalled 13.06 per cent compared to 13.04 per cent for the first nine months 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. Regulatory capital guidelines require a Tier I risk-based capital ratio of 4.0 per cent, a total risk-based capital ratio of 8.0 per cent and a leverage ratio of 4.0 per cent. The Corporation's capital ratios exceed regulatory requirements as shown in the following table. September 30, December 31, September 30, 1995 1994 1994 ------------- ------------ ------------- Capital to Asset . . . . . . . . . . . . . . . 11.40% 11.02% 11.42% Tier 1 risk-based capital ratio. . . . . . . . 17.00 16.28 16.68 Total risk-based capital ratio . . . . . . . . 18.15 17.41 17.87 Leverage ratio . . . . . . . . . . . . . . . . 11.33 11.54 11.32 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. On August 8, 1995, the Board of Directors of the Corporation declared a three-for-two stock split on its common shares. The new shares were distributed on October 27, 1995, to holders of record on October 20, 1995. All per share and weighted average share amounts have been restated to give effect of the stock split. 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 as a Per Cent of Loans ------------------------ First Merchants Peer Corporation Group --------------- ----- September 30, 1995 . . . . . . . . . . . .31% N/A December 31, 1994. . . . . . . . . . . . .26 .98% December 31, 1993. . . . . . . . . . . . .30 1.62 December 31, 1992. . . . . . . . . . . . .41 1.82 December 31, 1991. . . . . . . . . . . . .86 2.54 December 31, 1990. . . . . . . . . . . . 1.09 2.57 (1) Accruing loans past due 90 days or more, and non-accruing loans, but excluding restructured loans. On September 30, 1995, the loan loss reserve stood at $5,114,000. As a per cent of loans, the reserve stood at 1.26 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 nine months of 1995 declined to $480,000 from $593,000 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 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 (table dollar amounts in thousands). Sept. 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1995 1994 1993 1992 1991 --------- -------- -------- -------- -------- 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 . . . . . . . . . . . . . . . . 134 526 391 588 806 Real estate mortgage . . . . . . . . . . . 41 129 100 41 Installment. . . . . . . . . . . . . . . . 355 346 388 552 511 ------- ------- ------- ------- ------- Total chargeoffs . . . . . . . . . . . . 489 913 908 1,240 1,358 ------- ------- ------- ------- ------- Recoveries: Commercial . . . . . . . . . . . . . . . . 61 216 240 215 227 Real estate mortgage . . . . . . . . . . . 3 30 5 38 7 Installment. . . . . . . . . . . . . . . . 61 83 98 114 84 ------- ------- ------- ------- ------- Total recoveries . . . . . . . . . . . . 125 329 343 367 318 ------- ------- ------- ------- ------- Net chargeoffs . . . . . . . . . . . . . . . 364 584 565 873 1,040 ------- ------- ------- ------- ------- Provision for loan losses. . . . . . . . . . 480 782 1,014 1,357 1,401 ------- ------- ------- ------- ------- Balance, end of period . . . . . . . . . . . $ 5,114 $ 4,998 $ 4,800 $ 4,351 $ 3,867 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Ratio of net chargeoffs during the period to average loans during the period - annualized. . . . . . . . . . . . . . . . . .12% .15% .16% .26% .35% Peer Group . . . . . . . . . . . . . . . . . N/A .25% .49% .65% .95% 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 September 30, 1995, remained adequate to meet the Corporation's primary goal of achieving optimum interest margins while avoiding undue interest rate risk. The table below presents the Corporation's interest rate sensitivity analysis as of September 30, 1995 (table dollar amounts in thousands). Interest-Rate Sensitivity Analysis At September 30, 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. . . . . . . . . . . . . . . $ 21,091 $ 21,091 Securities. . . . . . . . . . . . . . . . . 57,655 $ 19,420 $ 124,698 $ 13,636 215,409 Loans . . . . . . . . . . . . . . . . . . . 210,278 43,171 105,125 48,910 407,484 --------- -------- --------- --------- --------- Total rate-sensitive assets . . . . . . . . . 289,024 62,591 229,823 62,546 643,984 --------- -------- --------- --------- --------- Rate-sensitive liabilities: Interest-bearing deposits . . . . . . . . . 206,679 34,282 220,632 56 461,649 Short-term borrowings . . . . . . . . . . . 65,243 1,000 66,243 --------- -------- --------- --------- --------- Total rate-sensitive liabilities. . . . . . . 271,922 35,282 220,632 56 527,892 --------- -------- --------- --------- --------- Interest rate sensitivity gap by period . . . $ 17,102 $ 27,309 $ 9,191 $ 62,490 Cumulative gap. . . . . . . . . . . . . . . . 17,102 44,411 53,602 116,092 Cumulative ratio at September 30, 1995. . . . 106% 114% 110% 122% Cumulative ratio at December 31, 1994 . . . . 106% 121% 114% 125% Page 13 of 19
FIRST MERCHANTS CORPORATION FORM 10-Q EARNING ASSETS Earning assets declined $.8 million during 1994 but increased $59.8 million during the first nine months of 1995. Growth over the nine month period, ending September 30, 1995, occurred in loans, short-term investments, and securities. The following table presents the earning asset mix for the years ended 1993, 1994 and at September 30, 1995 (table dollar amounts in millions.) Earning Assets ------------------------------------------- September 30, December 31, December 31, 1995 1994 1993 ------------- ------------ ------------ Federal funds sold and interest bearing time deposits . . . . . . . . . . . . . $ 21.1 $ 3.7 $ 1.9 Securities available for sale. . . . . . . 135.8 99.3 Securities held to maturity. . . . . . . . 77.7 77.7 204.3 Federal Reserve and Federal Home Loan Bank stock . . . . . . . . . . . . . 1.9 1.9 1.9 Loans. . . . . . . . . . . . . . . . . . . 407.5 401.6 376.9 ------------- ------------ ------------ Total . . . . . . . . . . . . . . . . . . $ 644.0 $ 584.2 $ 585.0 ------------- ------------ ------------ ------------- ------------ ------------ DEPOSITS AND BORROWINGS The following table presents the level of deposits and short-term borrowings (Federal funds purchased, repurchase agreements with customers, borrowing from Federal Home Loan Bank, and U.S. Treasury demand notes) based on period end levels and average daily balances for the past two years and most recent quarter (table dollar amounts in millions). Period End Balances Average Balances ----------------------- ---------------------- Short-term Short-term Deposits Borrowings Deposits Borrowings --------- ---------- -------- ---------- September 30, 1995 . . . $ 537.3 $ 66.2 $ 528.9 $ 44.5 December 31, 1994. . . . 529.8 39.2 514.0 45.6 December 31, 1993. . . . 506.3 46.9 517.8 35.3 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 earning assets. The table below presents the Corporation's interest income, interest expense, and net interest income on a fully taxable equivalent basis (FTE) as a per cent of average earning assets for the four-year period ending in 1994 and the first nine months of 1995 (table dollar amounts in thousands). Interest Income Interest Expense Net Interest (FTE) as a Per as a Per Cent Income (FTE) as Average Net Interest Cent of Average of Average a Per Cent of Earning Income Earning Assets Earning Assets Earning Assets Assets (FTE) --------------- ---------------- --------------- ----------- ------------ 1995 (1) . . 8.15% 3.43% 4.72% $619,008 $29,201 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 nine months annualized 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 net interest income (FTE). The remaining increase is attributable to growth in average earning assets of $10,093,000. During the first nine months of 1995, interest income (FTE) as a per cent of average earning assets increased .71 per cent while interest expense as a per cent of average earning assets grew by .73 per cent. Consequently, net interest income (FTE) as a per cent of average earning assets declined .02 per cent. The increase in net interest income (FTE) is due to growth in average earning assets of over $21.9 million. 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. Page 15 of 19
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 nine months of 1995, other income equaled $5,113,000, or $416,000 (8.9 per cent) above the first nine month 1994 level of $4,697,000. Trust revenues grew $101,000, or 5.3 per cent; and approximately $8,000,000 of the Corporations student aid loans were sold in July 1995 at a gain of $205,000, accounting for most of the increase.. 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 nine months of 1995 other expenses were $14,173,000, up $505,000 or 3.7 per cent from the same period in 1994. Salary and benefit expenses grew $428,000 (5.7 per cent), premises and equipment expense increased $166,000 (8.2 per cent), marketing expense rose $146,000 (42.0 per cent), and stationery printing and supplies expense increased by $135,000 (24.3 per cent). These increases totaled $875,000 in the aggregate, and were offset by a refund from the state of Indiana for intangibles taxes paid in 1988 and 1989 in the amount of $238,000 and by a reduction in deposit insurance premiums of $308,000. INCOME TAXES The increase in 1994 tax expense was attributable to a $1,198,000 increase in pre-tax net income. During the first six months of 1995, income tax expense grew $170,000 from the same period one year earlier, primarily due to a $889,000 increase in pre-tax net income. Page 16 of 19
FIRST MERCHANTS CORPORATION FORM 10-Q The following table presents a breakdown, of federal and state income taxes (table dollar amount in thousands). Nine Months Ended Twelve Months Ended September 30, December 31, ------------------ ------------------- 1995 1994 1994 1993 ------- ------- ------- ------- Federal taxes. . . $ 3,043 $ 2,733 $ 3,735 $ 3,272 State taxes. . . . 966 888 1,172 1,124 ------- ------- ------- ------- Total. . . . . $ 4,009 $ 3,621 $ 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 in the rate of inflation and benefit from a decrease. Page 17 of 19
FIRST MERCHANTS CORPORATION FORM 10-Q PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 27. Financial Data Schedule (b) Form 8-K was filed August 15, 1995 for a 3 for 2 stock split dividend effective October 27, 1995. 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 November 9, 1995 by /s/ STEFAN S. ANDERSON ----------------------- ----------------------------------------- Stefan S. Anderson President and Director Date November 9, 1995 by /s/ JAMES L. THRASH ----------------------- ----------------------------------------- James L. Thrash Chief Financial & Principal Accounting Officer Page 19 of 19
9 1,000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 25,849 93 20,998 0 135,819 77,698 77,946 407,484 5,114 686,304 537,331 66,243 4,524 0 632 0 0 77,574 686,304 28,032 8,191 596 36,819 14,090 15,936 20,883 480 (66) 14,173 11,343 7,334 0 0 7,334 1.45 1.45 0 0 0 0 0 0 0 0 0 0 0 0