<PAGE>
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
<PAGE>
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
<PAGE>
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)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
---------- -----------
<S> <C> <C>
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
---------- -----------
---------- -----------
</TABLE>
See notes to consolidated condensed financial statements.
Page 3 of 20
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(Dollar amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------------------
Interest Income: 1995 1994
--------- ---------
<S> <C> <C>
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
</TABLE>
See notes to consolidated condensed financial statements.
Page 4 of 20
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1995 1994
---------- -----------
<S> <C> <C>
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
---------- -----------
---------- -----------
</TABLE>
See notes to consolidated condensed financial statements.
Page 5 of 20
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------------------
1995 1994
---------- -----------
<S> <C> <C>
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
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated condensed financial statements.
Page 6 of 20
<PAGE>
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
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(Unaudited)
NOTE 3. Investment Securities
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
--------- --------- -------- ---------
--------- --------- -------- ---------
</TABLE>
Page 8 of 20
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Gross Gross Fair
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
--------- --------- -------- ---------
--------- --------- -------- ---------
</TABLE>
<TABLE>
<CAPTION>
Cost
--------------------------
1995 1994
---------- --------
<S> <C> <C>
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
---------- --------
---------- --------
</TABLE>
Page 9 of 20
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(Unaudited)
NOTE 4. Loans and Allowance
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
---------- ------------
<S> <C> <C>
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
<CAPTION>
Three Months Ended
March 31
-------------------------
1995 1994
----------- -----------
<S> <C> <C>
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
----------- -----------
----------- -----------
</TABLE>
Page 10 of 20
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Non-Performing Loans (1)
at December 31 as a
Per Cent of Loans
------------------------
First Peer
Merchants Group
--------- -----
<S> <C> <C>
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
<FN>
(1) Accruing loans past due 90 days or more, and non-accruing loans, but
excluding restructured loans.
</TABLE>
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
<PAGE>
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>
<CAPTION>
1995 (1) 1994 1993 1992 1991
---------- ---------- ---------- --------- ---------
(Dollar amount in thousands)
<S> <C> <C> <C> <C> <C>
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%
<FN>
(1) Through March 31, 1995
</TABLE>
Page 13 of 20
<PAGE>
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)
<TABLE>
<CAPTION>
At March 31, 1995
---------------------------------------------------------------------
1-180 181-365 1-5 Beyond
Days Days Years 5 Years Total
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
Page 14 of 20
<PAGE>
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.
<TABLE>
<CAPTION>
Earning Assets
----------------------------
(Dollar Amounts in Millions)
March 31 December 31, December 31,
1995 1994 1993
-------- ------------ ------------
<S> <C> <C> <C>
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
----------- --------- -------
----------- --------- -------
</TABLE>
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:
<TABLE>
<CAPTION>
Period End Balances
-------------------
(Dollar Amounts in Millions)
Short-term
Deposits Borrowings
-------- ----------
<S> <C> <C>
March 31, 1995 . . . . . . . . $ 522.3 $ 36.9
December 31, 1994 . . . . . . 529.8 39.2
December 31, 1993 . . . . . . 506.3 46.9
<CAPTION>
Average Balances
----------------------------
(Dollar Amounts in Millions)
Short-term
Deposits Borrowings
-------- ----------
<S> <C> <C>
March 31, 1995 . . . . . . . . $ 506.2 $ 44.0
December 31, 1994 . . . . . . 514.0 45.6
December 31, 1993 . . . . . . 517.8 35.3
</TABLE>
Page 15 of 20
<PAGE>
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.
<TABLE>
<CAPTION>
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
-------------------- ----------------- --------------------- --------- -------------------
<S> <C> <C> <C> <C> <C>
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
<FN>
(1) First quarter annualized.
</TABLE>
Page 16 of 20
<PAGE>
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
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
The following is a breakdown, by year, of federal and state income taxes.
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, December 31,
---------------------------- ----------------------------
1995 1994 1994 1993
-------------- ------------- ----------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
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
-------------- ------------- ----------- -------------
-------------- ------------- ----------- -------------
</TABLE>
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
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AND CONSOLIDATED CONDENSED STATEMENT OF
INCOME FOUND ON PAGE 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> MAR-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 27,881
<INT-BEARING-DEPOSITS> 51
<FED-FUNDS-SOLD> 1,875
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 112,985
<INVESTMENTS-CARRYING> 72,175
<INVESTMENTS-MARKET> 71,654
<LOANS> 404,701
<ALLOWANCE> 5,072
<TOTAL-ASSETS> 639,656
<DEPOSITS> 522,348
<SHORT-TERM> 36,949
<LIABILITIES-OTHER> 5,149
<LONG-TERM> 0
<COMMON> 421
0
0
<OTHER-SE> 73,262
<TOTAL-LIABILITIES-AND-EQUITY> 639,656
<INTEREST-LOAN> 8,955
<INTEREST-INVEST> 2,591
<INTEREST-OTHER> 42
<INTEREST-TOTAL> 11,588
<INTEREST-DEPOSIT> 4,058
<INTEREST-EXPENSE> 4,661
<INTEREST-INCOME-NET> 6,927
<LOAN-LOSSES> 160
<SECURITIES-GAINS> 10
<EXPENSE-OTHER> 1,633
<INCOME-PRETAX> 3,698
<INCOME-PRE-EXTRAORDINARY> 2,391
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,391
<EPS-PRIMARY> .71
<EPS-DILUTED> .71
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
