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 June 30, 1995
Commission File Number 0-17071
First Merchants Corporation
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(Exact name of registrant as specified in its character)
Indiana 35-1544218
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(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
200 East Jackson Street - Muncie, IN 47305-2814
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(Address of principal executive office) (Zip code)
(317) 747-1500
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(Registrant's telephone number, including area code)
Not Applicable
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(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 August 7, 1995, there were outstanding 3,381,189 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 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)
June 30, December 31,
1995 1994
--------- -----------
ASSETS:
Cash and due from banks . . . . . . . . . . . . . . . . . . . $ 26,154 $ 42,684
Federal funds sold. . . . . . . . . . . . . . . . . . . . . . 40,250 3,675
--------- ---------
Cash and cash equivalents. . . . . . . . . . . . . . . . . 66,404 46,359
Interest-bearing time deposits. . . . . . . . . . . . . . . . 69 23
Securities available for sale . . . . . . . . . . . . . . . . 118,086 99,363
Securities held to maturity (fair value $73,974 and $76,522). 73,926 77,677
Federal Reserve and Federal Home Loan Bank stock. . . . . . . 1,892 1,879
Loans:
Loans, net of unearned interest. . . . . . . . . . . . . . 419,288 401,605
Less: Allowance for loan losses . . . . . . . . . . . . . 5,096 4,998
--------- ---------
Net loans . . . . . . . . . . . . . . . . . . . . . . . 414,192 396,607
Premises and equipment. . . . . . . . . . . . . . . . . . . . 9,873 9,545
Interest receivable . . . . . . . . . . . . . . . . . . . . . 6,131 5,627
Core deposit intangibles and goodwill . . . . . . . . . . . . 1,911 1,977
Others assets . . . . . . . . . . . . . . . . . . . . . . . . 4,722 5,549
--------- ---------
Total assets. . . . . . . . . . . . . . . . . . . . . . $ 697,206 $ 644,606
--------- ---------
--------- ---------
LIABILITIES:
Deposits:
Noninterest-bearing. . . . . . . . . . . . . . . . . . . . $ 85,725 $ 99,667
Interest-bearing . . . . . . . . . . . . . . . . . . . . . 476,503 430,163
--------- ---------
Total deposits. . . . . . . . . . . . . . . . . . . . . 562,228 529,830
Short-term borrowing. . . . . . . . . . . . . . . . . . . . . 52,874 39,189
Interest payable. . . . . . . . . . . . . . . . . . . . . . . 1,688 1,320
Other liabilities . . . . . . . . . . . . . . . . . . . . . . 3,790 3,249
--------- ---------
Total liabilities . . . . . . . . . . . . . . . . . . . 620,580 573,588
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 -- 3,369,438 and 3,366,346 shares. 421 421
Additional paid-in capital . . . . . . . . . . . . . . . . . . 16,227 16,231
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . 59,919 56,886
Net unrealized gains/(losses) on securities available for sale 59 (2,520)
--------- ---------
Total stockholders' equity . . . . . . . . . . . . . . 76,626 71,018
--------- ---------
Total liability and stockholders' equity . . . . . . . $ 697,206 $ 644,606
--------- ---------
--------- ---------
See notes to consolidated condensed financial statements.
Page 3 of 20
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED BALANCE SHEET
(Dollar amounts in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
------ ------ ------ ------
Interest Income:
Loans, including fees:
Taxable . . . . . . . . . . . . . . . . . . . . . $ 9,425 $ 7,754 $ 18,362 $ 14,979
Tax exempt. . . . . . . . . . . . . . . . . . . . 27 21 45 44
Securities:
Taxable . . . . . . . . . . . . . . . . . . . . . 2,048 2,221 4,060 4,547
Tax exempt. . . . . . . . . . . . . . . . . . . . 618 627 1,163 1,200
Federal funds sold . . . . . . . . . . . . . . . . . 277 32 319 70
Interest-bearing time deposits . . . . . . . . . . . 1 1 2
Federal Reserve and Federal Home Loan Bank Stock . . 39 24 73 48
--------- --------- --------- ----------
Total interest income. . . . . . . . . . . . 12,435 10,679 24,023 20,890
Interest expense:
Deposits. . . . . . . . . . . . . . . . . . . . . 4,944 3,500 9,002 6,840
Short-term borrowings . . . . . . . . . . . . . . 491 429 1,094 857
--------- --------- --------- ----------
Total interest expense . . . . . . . . . . . 5,435 3,929 10,096 7,697
--------- --------- --------- ----------
Net Interest Income. . . . . . . . . . . . . . . . . 7,000 6,750 13,927 13,193
Provision for loan losses. . . . . . . . . . . . . . 160 199 320 392
--------- --------- --------- ----------
Net Interest Income After Provision For Loan Losses. 6,840 6,551 13,607 12,801
Other Income:
Securities gains (losses), net. . . . . . . . . . (76) 1 (66) 11
Other income. . . . . . . . . . . . . . . . . . . 1,644 1,549 3,277 3,129
--------- --------- --------- ----------
Total other income . . . . . . . . . . . . . . . . . 1,568 1,550 3,211 3,140
Total other expenses . . . . . . . . . . . . . . . . 4,591 4,515 9,303 8,910
--------- --------- --------- ----------
Income before income tax . . . . . . . . . . . . . . 3,817 3,586 7,515 7,031
Income tax expense . . . . . . . . . . . . . . . . . 1,288 1,226 2,595 2,425
--------- --------- --------- ----------
Net Income . . . . . . . . . . . . . . . . . . . . . $ 2,529 $ 2,360 $ 4,920 $ 4,606
--------- --------- --------- ----------
--------- --------- --------- ----------
Per share:
Net income. . . . . . . . . . . . . . . . . . . . $ .75 $ .70 $ 1.46 $ 1.36
Dividends . . . . . . . . . . . . . . . . . . . . .28 .25 .56 .50
Weighted average shares outstanding. . . . . . . . . 3,370,482 3,381,468 3,368,985 3,385,047
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, except per share amounts)
(Unaudited)
1995 1994
-------- --------
Balances, January 1. . . . . . . . . . . . . . . . . . $ 71,018 $ 68,804
Net Income . . . . . . . . . . . . . . . . . . . . . . 4,920 4,606
Cash dividends . . . . . . . . . . . . . . . . . . . . (1,887) (1,691)
Stock issued under dividend reinvestment and stock
purchase plan. . . . . . . . . . . . . . . . . . . . . 201 170
Stock options exercised. . . . . . . . . . . . . . . . 187 41
Stock redeemed . . . . . . . . . . . . . . . . . . . . (392) (480)
Change in net unrealized gains/(losses) on
securities available for sale. . . . . . . . . . . . . 2,579 (1,552)
-------- --------
Balances, June 30. . . . . . . . . . . . . . . . . . . $ 76,626 $ 69,898
-------- --------
-------- --------
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, except per share amounts)
(Unaudited)
Six Months Ended
June 30
----------
1995 1994
--------- --------
Cash Flows From Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,920 $ 4,606
Adjustments to reconcile net income to net cash provided by operating activities:.
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 320 392
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . 592 563
Securities amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499 563
Change in interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . (442) (409)
Change in interest payable. . . . . . . . . . . . . . . . . . . . . . . . . . . 368 (33)
Other adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (229) (212)
--------- --------
Net cash provided by operating activities. . . . . . . . . . . . . . . . . 6,028 5,470
Cash Flows From Investing Activities:
Net change in interest-bearing time deposits . . . . . . . . . . . . . . . . . . . (46) 254
Purchases of:
Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . (34,036) (12,559)
Securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . (14,851) (27,653)
Proceeds from maturities of:
Securities available for sale. . . . . . . . . . . . . . . . . . . . . . . 7,991 6,452
Securities held to maturity. . . . . . . . . . . . . . . . . . . . . . . . 18,419 24,127
Proceed from sales of securities available for sale. . . . . . . . . . . . . . . . 11,196 9,564
Net change in loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,046) (14,010)
Purchases of premises and equipment. . . . . . . . . . . . . . . . . . . . . . . . (920) (268)
Other investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 286
--------- --------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . (30,175) (13,807)
Cash Flows From Financing Activities:
Net change in
Noninterest-bearing, NOW, money market and savings deposits . . . . . . . . . . (2,423) 13,109
Certificates of deposit and other time deposits . . . . . . . . . . . . . . . . 34,821 (982)
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,685 5,491
Cash dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,887) (1,691)
Stock issued under dividend reinvestment and stock purchase plan. . . . . . . . 201 170
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 41
Stock redeemed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (392) (480)
--------- --------
Net cash provided by financing activities. . . . . . . . . . . . . . . . . 44,192 15,658
--------- --------
Net Increase in Cash and Cash Equivalents. . . . . . . . . . . . . . . . . . . . . 20,045 7,321
Cash and Cash Equivalents, January 1 . . . . . . . . . . . . . . . . . . . . . . . 46,359 26,567
--------- --------
Cash and Cash Equivalents, June 30 . . . . . . . . . . . . . . . . . . . . . . . . $ 66,404 $ 33,888
--------- --------
--------- --------
See notes to consolidated condensed financial statements.
Page 6 of 20
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(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 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 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 STATEMENT
(Dollar amounts in thousands)
(Unaudited)
Note 3. Investment Securities
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ----------- ---------- ----------
Securities available for sale at June 30, 1995:
U.S. Treasury . . . . . . . . . . . . . . . . . . $ 2,022 $ 12 $ 15 $ 2,019
Federal agencies. . . . . . . . . . . . . . . . . 48,978 710 302 49,386
State and municipal . . . . . . . . . . . . . . . 15,051 220 127 15,144
Mortgage and other asset-backed securities. . . . 25,567 127 306 25,388
Other Securities. . . . . . . . . . . . . . . . . 250 250
Corporate obligations . . . . . . . . . . . . . . 26,120 106 327 25,899
--------- ----------- ---------- ----------
Total. . . . . . . . . . . . . . . . . . . . $ 117,988 $ 1,175 $ 1,077 $ 118,086
--------- ----------- ---------- ----------
--------- ----------- ---------- ----------
Securities held to maturity at June 30, 1995:
U.S. Treasury . . . . . . . . . . . . . . . . . . $ 8,112 $ 17 $ 36 8,093
Federal agencies. . . . . . . . . . . . . . . . . 19,748 56 108 19,696
State and municipal . . . . . . . . . . . . . . . 42,117 350 226 42,241
Mortgage and other asset-backed securities. . . . 1,316 6 1,322
Corporate obligations . . . . . . . . . . . . . . 2,633 11 2,622
--------- ----------- ---------- ----------
Total. . . . . . . . . . . . . . . . . . . . $ 73,926 $ 429 $ 381 $ 73,974
--------- ----------- ---------- ----------
--------- ----------- ---------- ----------
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 STATEMENT
(Dollar amounts in thousands)
(Unaudited)
Gross Gross
Amortized Unrealized Unrealized Fair
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
-----------------------
June 30, December 31,
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 9 of 20
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENT
(Dollar amounts in thousands)
(Unaudited)
NOTE 4. Loans and Allowance
June 30, December 31,
1995 1994
----------- ------------
Loans:
Commercial and industrial loans . . . . . . . . . . . . . . . . . . $ 86,003 $ 78,943
Bankers' acceptances and loans to financial institutions. . . . . . 2,200
Agricultural production financing and other loans to farmers. . . . 6,735 5,310
Real estate loans:
Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . 7,992 8,126
Commercial and farmland . . . . . . . . . . . . . . . . . . . . . 56,680 64,110
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . 176,148 164,760
Individuals' loans for household and other personal expenditures . . 80,725 78,041
Tax exempt loans . . . . . . . . . . . . . . . . . . . . . . . . . . 950 1,204
Other loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,855 1,111
--------- ---------
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . $ 419,288 $ 401,605
--------- ---------
--------- ---------
Nonperforming Loans:
Nonaccruing loans. . . . . . . . . . . . . . . . . . . . . . . . . . $ 346 $ 326
Loans contractually past due 90 days or more other than nonaccruing. 499 703
Restructured loans . . . . . . . . . . . . . . . . . . . . . . . . . 705 754
Six Months Ended
June 30
--------------------------
Allowance for loan losses: 1995 1994
----------- -----------
Balances, January 1 . . . . . . . . . . . . . . . . . . . . . . . $ 4,998 $ 4,800
Provision for losses. . . . . . . . . . . . . . . . . . . . . . . 320 392
Recoveries on loans . . . . . . . . . . . . . . . . . . . . . . . 94 84
Loans charged off . . . . . . . . . . . . . . . . . . . . . . . . (316) (353)
---------- ----------
Balances, June 30 . . . . . . . . . . . . . . . . . . . . . . . . $ 5,096 $ 4,923
---------- ----------
---------- ----------
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 two of these ratios during the first half of
1995, as compared to the same period in 1994.
- Earning per share were $1.46, up 7.4 per cent from $1.36
- Return on assets was 1.53 per cent increasing from 1.45 per cent
- Return on equity totalled 13.11 per cent compared to 13.27 per cent for the
first half 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 (table dollar amounts in thousands).
June 30, December 31, June 30,
1995 1994 1994
-------- ------------ --------
Capital to Asset . . . . . . . . . . . . 10.99% 11.02% 10.85%
Tier 1 risk-based capital ratio. . . . . 16.33 16.28 15.98
Total risk-based capital ratio . . . . . 17.44 17.41 17.11
Leverage ratio . . . . . . . . . . . . . 11.35 11.54 10.98
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
as a Per Cent of Loans
--------------------------
First Merchants Peer
Corporation Group
--------------- -----
June 30, 1995 . . . . . . . . . . . . . .20% 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
<FN>
(1) Accruing loans past due 90 days or more, and non-accruing loans, but
excluding restructured loans.
On June 30, 1995, the loan loss reserve stood at $5,096,000. As a per cent
of loans, the reserve stood at 1.22 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 half of 1995 declined to $320,000 from $392,000 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 (table dollar
amounts in thousands).
June 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. . . . . . . . . . . . . . 69 526 391 588 806
Real estate mortgage. . . . . . . . . 41 129 100 41
Installment . . . . . . . . . . . . . 247 346 388 552 511
------- -------- -------- -------- --------
Total chargeoffs . . . . . . . . . 316 913 908 1,240 1,358
------- -------- -------- -------- --------
Recoveries:
Commercial. . . . . . . . . . . . . . 44 216 240 215 227
Real estate mortgage. . . . . . . . . 3 30 5 38 7
Installment . . . . . . . . . . . . . 47 83 98 114 84
------- -------- -------- -------- --------
Total recoveries . . . . . . . . . 94 329 343 367 318
------- -------- -------- -------- --------
Net chargeoffs . . . . . . . . . . . . . 222 584 565 873 1,040
------- -------- -------- -------- --------
Provision for loan losses. . . . . . . . 320 782 1,014 1,357 1,401
------- -------- -------- -------- --------
Balance, end of period . . . . . . . . . $ 5,096 $ 4,998 $ 4,800 $ 4,351 $ 3,867
------- -------- -------- -------- --------
------- -------- -------- -------- --------
Ratio of net chargeoffs during
the period to average loans
during the period annualized . . . . . .10% .15% .16% .26% .35%
Peer Group . . . . . . . . . . . . . . . N/A .25% .49% .65% .95%
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
June 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
June 30, 1995 (table dollar amounts in thousands).
Interest-Rate Sensitivity Analysis
At June 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. . . . . . . . . . . . . $ 40,319 $ 40,319
Investment Securities . . . . . . . . . . 38,211 $ 22,445 $119,596 $ 13,652 193,904
Loans . . . . . . . . . . . . . . . . . . 233,528 38,910 96,437 50,413 419,288
-------- --------- ------- --------- --------
Total rate-sensitive assets. . . . . . . . . 312,058 61,355 216,033 64,065 653,511
-------- --------- ------- --------- --------
Rate-sensitive liabilities:
Interest-bearing deposits . . . . . . . . 209,424 43,845 223,179 55 476,503
Other borrowed funds. . . . . . . . . . . 51,874 1,000 52,874
-------- --------- ------- --------- --------
Total rate-sensitive liabilities . . . . . . 261,298 44,845 223,179 55 529,377
-------- --------- ------- --------- --------
Interest rate sensitivity gap by period. . . $ 50,760 $ 16,510 $ (7,146) $ 64,010
Cumulative gap . . . . . . . . . . . . . . . 50,760 67,270 60,124 124,134
Cumulative ratio at June 30, 1995. . . . . . 119% 122% 111% 123%
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 but increased $ 69.3
million during the first half of 1995. Growth over the eighteen month period
occurred primarily in loans and short term investments with securities
declining.
The following table presents the earning asset mix for the years ended
1993, 1994 and at June 30, 1995 (table dollar amounts in millions.)
Earning Assets
------------------------------------
June 30, December 31, December 31,
1995 1994 1993
-------- ------------ ------------
Federal funds sold and interest-bearing
time deposits . . . . . . . . . . . . $ 40.3 $ 3.7 $ 1.9
Securities available for sale. . . . . . 118.1 99.3
Securities held to maturity . . . . . . 73.9 77.7 204.3
Federal Reserve and Federal Home
Loan Bank stock . . . . . . . . . . . 1.9 1.9 1.9
Loans. . . . . . . . . . . . . . . . . . 419.3 401.6 376.9
-------- ------- -------
Total . . . . . . . . . . . . . . . . $ 653.5 $ 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 (table dollar amounts in
millions).
Period End Balance
---------------------------
Short-term
Deposits Borrowings
---------- ------------
June 30, 1995 . . . $ 562.2 $ 52.9
December 31, 1994 . 529.8 39.2
December 31, 1993 . 506.3 46.9
Average Balances
------------------------------
Short-term
Deposits Borrowings
------------ ----------
June 30, 1995. . . $ 526.2 $ 39.8
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 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 half of 1995 (table dollar amounts in thousands).
Interest Income Interest Expense Net Interest
(FTE) as a Per Cent as a Per Cent Income (FTE) as Average Net Interest
of Average of Average a Per Cent of Average Earning Income
Earning Assets Earning Assets Earning Assets Assets (FTE)
------------------- ----------------- ---------------------- --------- -------------
1995 (1) 8.09% 3.32% 4.77% $608,164 $29,157
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 six 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 half of 1995, interest income (FTE) as a per cent of
average earning assets increased .65 per cent while interest expense as a per
cent of average earning assets grew by just .62 per cent. Consequently, net
interest income (FTE) as a per cent of average earning assets grew .03 per
cent, contributing to the increase in net interest income (FTE-annualized.)
Most of the increase in net interest income (FTE) is due to growth in average
assets of just over $11 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 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 half of 1995, other income equalled $3,211,000, or 2.3 per
cent above the first half 1994 level of $3,140,000. Trust revenues grew
$40,000, or 3.2 per cent while service charges on deposits were up by $21,000
accounting for most of the $71,000 improvement in other income. Securities
losses totaled $66,000 as compared to securities gains in 1994 of $11,000.
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 six months of 1995 other expenses were $9,303,000, up
$393,000 or 4.4 per cent from the same period in 1994. Salary and benefit
expenses grew $392,000, 8.1 per cent, accounting for most of the increase.
Also affecting expenses for the first half of 1995 was a refund from the
State of Indiana for intangible taxes paid in 1988 and 1989. The refund served
to reduce "other expense" by $238,000.
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, also due to a $484,000 increase in pre-tax net
income.
Page 17 of 20
FIRST MERCHANTS CORPORATION
FORM 10-Q
The following is a breakdown, of federal and state income taxes (table
dollar amount in thousands).
Six Months Ended Twelve Months Ended
June 30, December 31,
-------------------- ---------------------
1995 1994 1994 1993
------- ------- ------- -------
Federal taxes. . . . $ 1,976 $ 1,835 $ 3,735 $ 3,272
State taxes. . . . . 619 590 1,172 1,124
------- ------- ------- -------
Total . . . . . . $ 2,595 $ 2,425 $ 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 18 of 20
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART II. OTHER INFORMATION
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 June
30, 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 August 10, 1995 by /s/ Stefan S. Anderson
------------------------ ---------------------------
Stefan S. Anderson
President and Director
Date August 10, 1995 by /s/ James L. Thrash
------------------------ -------------------------
James L. Thrash
Chief Financial & Principal
Accounting Officer
Page 20 of 20
TOTAL P.27