What changed in this filing

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Item 1. Business

2025-02-24 compared with 2024-02-29 · 59 added, 75 removed, 684 unchanged (16% of the section changed)

3 unchanged sentences

The Bank also operates First Merchants Private Wealth Advisors (a division of First Merchants Bank).

The Bank includes 116 banking locations in Indiana, Ohio, Michigan and Illinois.

The Bank includes 110 banking locations in Indiana, Ohio, and Michigan.

In addition to its branch network, the Corporation offers comprehensive electronic and mobile delivery channels to its customers.

The Corporation’s business activities are currently limited to one significant business segment, which is community banking.

Through the Bank, the Corporation offers a broad range of financial services, including accepting time, savings and demand deposits;

making consumer, commercial, agri-business and real estate mortgage loans;

providing personal and corporate trust services;

offering full-service brokerage and private wealth management;

and providing letters of credit, repurchase agreements and other corporate services.

Through the Bank, the Corporation offers a broad range of commercial and consumer banking services to meet the diverse needs of our customers.

Our commercial banking team offers a full spectrum of debt capital, treasury management services and depository products.

The consumer banking group offers a variety of consumer deposit and lending products.

The mortgage banking team offers consumer mortgage solutions to assist with the purchase, refinance, construction or renovation of residential properties.

Private Wealth Advisors offers personal wealth management services with expertise in investment management, private banking, fiduciary estate and financial planning.

All inter-company transactions are eliminated during the preparation of consolidated financial statements.

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Our employees prepare, every day, to deliver a customer and colleague experience that grows the Corporation.

We seek to attract, retain and develop a team of diverse, committed colleagues who are capable of delivering a whole-bank delivery approach.

And, we promote a work culture of development, growth, internal promotion and career pathing as expressed in Our Team statement:

We are a collection of dynamic colleagues with diverse experiences and perspectives who share a passion for positively impacting lives.

We are genuinely committed to attracting and engaging teammates of diverse backgrounds.

We believe in the power of inclusion and belonging.

We seek to attract, retain and develop a team of committed colleagues who are capable of delivering a whole-bank delivery approach.

Best Places to Work / Employer of Choice :

The Bank will continue to participate in the Best Places to Work surveys in the four states we operate.

The Bank will continue to participate in the Best Places to Work surveys in the three states we operate.

We constantly strive to be an employer of choice.

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Results show consistently strong employee engagement with 65 percent of our employees considered to be “highly engaged.” Our response rates are high (85 percent) with the survey results providing valuable feedback that helps managers promote work satisfaction and high contribution.

The Corporation performed an in-depth investigation and review of its attrition metrics and developed a strategy to positively impact its retention statistics, including a focus on engagement, culture and compensation.

We offer specific and concerted effort in supporting our managers who score under 70 percent engagement.

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Our training completion rates are very high related to required development (99.7 percent completion for required courses) and our Learning Management System (LMS) archives all development in the Corporation.

Employee Resource Groups and Diversity, Equity and Inclusion :

We believe in attracting, retaining, and promoting a diverse workforce.

Diversity, Equity and Inclusion (“DEI”) initiatives are aimed at promoting the career growth and engagement of all First Merchants employees.

We continue that work through our highest profile employee resource groups (“ERGs”), First Women Connections and People of Color ERGs, by promoting the development and career growth of those employees.

In 2022, we launched two additional ERGs - Pride and Emerging Professionals.

In 2023, we added a Veterans ERG and announced the creation of an InterFaith ERG.

Employee Resource Groups :

The Corporation has several employee resource groups (“ERGs”), including First Women Connections, People of Color, Pride, Emerging Professionals, Veterans ERG and an InterFaith ERG.

All employee resource groups are open to all employees of the Corporation.

Additionally, we have created an Employee Community Call, which hosts monthly Zoom/TEAMS calls that are attended by over 150 employees.

Our DEI Steering Committee provides guidance on all efforts.

Talent Assessment, Succession Planning and Career Path :

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Certain merger or acquisition transactions, including those involving the acquisition of a depository institution or the assumption of the deposits of any depository institution, require formal approval from various bank regulatory authorities, which will be subject to a variety of factors and considerations.

On April 1, 2022, the Corporation acquired 100 percent of Level One Bancorp, Inc.

(“Level One”).

Level One was headquartered in Farmington Hills, Michigan and had 17 banking centers serving the Michigan market.

Pursuant to the merger agreement, each common shareholder of Level One received, for each outstanding share of Level One common stock held, (a) a 0.7167 share of the Corporation’s common stock, and (b) a cash payment of $10.17.

The Corporation issued 5.6 million shares of common stock and paid $79.3 million in cash in exchange for all outstanding shares of Level One common stock.

Additionally, the Corporation issued 10,000 shares of newly created 7.5 percent non-cumulative perpetual preferred stock, with a liquidation preference of $2,500 per share, in exchange for the outstanding Level One Series B preferred stock.

As part of the preferred stock exchange, each outstanding Level One depositary share representing a 1/100th interest in a share of the Level One Series B preferred stock was converted into a depositary share of the Corporation representing a 1/100th interest in a share of its newly issued preferred stock (Nasdaq:

Details of the Level One acquisition can be found in NOTE 2.

ACQUISITIONS of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

The Bank is located in Indiana, Ohio, Michigan and Illinois counties where other financial services companies provide similar banking services.

The Bank is located in Indiana, Ohio, and Michigan counties where other financial services companies provide similar banking services.

The Bank faces substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and have more financial resources.

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The Corporation is registered as a bank holding company and has elected to be a financial holding company.

It is subject to the supervision of, and regulation by the Board of Governors of the Federal Reserve under the BHC Act, as amended.

It is subject to the supervision of, and regulation by the Board of Governors of the Federal Reserve (“Federal Reserve”) under the BHC Act, as amended.

Bank holding companies are required to file periodic reports with and are subject to periodic examination by the Federal Reserve.

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As a result, while the Corporation’s total assets exceeded $15 billion as of December 31, 2021, the Corporation had continued to treat its trust preferred securities as tier 1 capital as of such date.

However, under certain amendments to the “transition rules” of Basel III, if a bank holding company that held less than $15 billion of assets as of December 31, 2009 (which would include the Corporation) acquires a bank holding company with under $15 billion in assets at the time of acquisition (which would include Level One), and the resulting organization has total consolidated assets of $15 billion or more as reported on the resulting organization’s call report for the period in which the transaction occurred, the resulting organization must begin reflecting its trust preferred securities as tier 2 capital at such time.

(“Level One”), which the Corporation acquired on April 1, 2022), and the resulting organization has total consolidated assets of $15 billion or more as reported on the resulting organization’s call report for the period in which the transaction occurred, the resulting organization must begin reflecting its trust preferred securities as tier 2 capital at such time.

As a result, effective with the April 1, 2022 consummation of the Level One merger, the Corporation began reflecting all of its trust preferred securities as tier 2 capital.

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(1) The Basel III Minimum Capital Required are inclusive of the 2.5 percent capital conservation buffer where applicable.

As of December 31, 2024, the Corporation was “well capitalized” based on the required Basel III Minimum Capital ratios described above.

Impact of CECL Implementation on Regulatory Capital

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As a result, because implementation of the CECL standard was delayed by the Corporation until January 1, 2021, it began phasing in the cumulative effect of the adoption on its regulatory capital, at a rate of 25 percent per year, over a three-year transition period that began on January 1, 2021.

Under that phase-in schedule, the cumulative effect of the adoption will be fully reflected in regulatory capital on January 1, 2024.

Under that phase-in schedule, the cumulative effect of the adoption was fully reflected in regulatory capital on January 1, 2024.

Bank Regulation

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The “prompt corrective action” regulations require the following for “well capitalized” status:

• a minimum CET1 risk-based capital ratio of a least 6.5 percent;

• a minimum CET1 risk-based capital ratio of at least 6.5 percent;

• a minimum tier 1 risk-based capital ratio of at least 8.0 percent;

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Government or other municipal securities and trading conducted (i) in certain capacities as a broker or other agent, or as a fiduciary on behalf of customers, (ii) to satisfy a debt previously contracted, (iii) pursuant to repurchase and securities lending agreements, and (iv) in risk-mitigating hedging activities.

The Volcker Rule also prohibits banking institutions from having an ownership interest in a hedge fund or private equity fund.

The Volcker Rule also prohibited banking institutions from having an ownership interest in a hedge fund or private equity fund.

In June 2020, the federal bank regulatory agencies finalized amendments to the Volcker Rule’s restrictions on ownership interests in and relationships with covered funds.

Among other things, these amendments permit banking entities to have relationships with and offer additional financial services to additional types of funds and investment vehicles.

A banking entity that engages in proprietary trading (which excludes the exceptions discussed above) or covered fund-related activities or investments, and has total consolidated assets of more than $10 billion for two years, must implement and maintain a compliance program that meets certain minimum requirements and must also maintain certain documentation with respect to covered fund activities, in each case, as described in the Volcker Rule.

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The FDIC has authority to raise or lower assessment rates on insured banks in order to achieve statutorily required reserve ratios in the Deposit Insurance Fund and to impose special additional assessments.

Additionally, the Bank’s Indiana public funds (state of Indiana and its political subdivisions) are insured by the the Public Deposit Insurance Fund (“PDIF”).

Additionally, the Bank’s Indiana public funds (state of Indiana and its political subdivisions) are insured by the Public Deposit Insurance Fund (“PDIF”).

The PDIF provides insurance to those Indiana public funds deposited in approved financial institutions which exceed the limits of coverage provided by any federal deposit insurance.

101 unchanged sentences

Commercial 8,687,638 641,393 7.38 8,519,706 603,611 7.08 7,877,271 380,621 4.83

8,519,706 603,611 7.08 7,877,271 380,621 4.83 6,818,968 276,368 4.05

Real estate mortgage 2,158,743 94,890 4.40 2,035,488 82,183 4.04 1,471,802 51,853 3.52

Installment 830,006 60,751 7.32 785,520 37,302 4.75 683,925 26,111 3.82

HELOC and installment 830,079 65,577 7.90 830,006 60,751 7.32 785,520 37,302 4.75

Tax-exempt (2)

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(5) Net Interest Margin (FTE) is interest income expressed as a percentage of average earning assets minus interest expense expressed as a percentage of average earning assets.

(6) Commercial loans included $2.7 million, $4.7 million and $106.6 million of PPP loans at December 31, 2023, 2022 and 2021, respectively.

ANALYSIS OF CHANGES IN NET INTEREST INCOME

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(a) independent spot testing of the data is conducted by the Corporation through obtaining market quotes from various brokers on a periodic basis;

and (b) actual gains or loss resulting from the sale of certain securities has proven the data to be accurate over time.

and (b) actual gains or losses resulting from the sale of certain securities has proven the data to be accurate over time.

Fair value of securities classified as Level 3 in the valuation hierarchy were determined using a discounted cash flow model that incorporated market estimates of interest rates and volatility in markets that have not been active.

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Available for sale at December 31, 2023

Treasury $ 2,501 $ — $ 42 $ 2,459

Government-sponsored agency securities $ 111,521 $ — $ 16,214 $ 95,307

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If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

Unrealized losses that have not been recorded through an allowance for credit losses are recognized in other comprehensive income (loss).

Adjustments to the allowance are reported in the income statement as a component of the provision for credit loss.

Unrealized losses that have not been recorded through an allowance for credit losses are recognized in other comprehensive loss.

Adjustments to the allowance are reported in the income statement as a component of the provision for credit losses.

The Corporation has made the accounting policy election to exclude accrued interest receivable on investment securities available for sale from the estimate of credit losses.

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Investment securities held to maturity are charged off against the allowance when deemed uncollectible.

Adjustments to the allowance are reported in the income statement as a component of the provision for credit loss.

Adjustments to the allowance are reported in the income statement as a component of the provision for credit losses.

The Corporation measures expected credit losses on investment securities held to maturity on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

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With regard to U.S.

Government-sponsored agency and mortgage-backed securities, all these securities are issued by a U.S.

Government-sponsored agency and U.S.

Government-sponsored mortgage-backed securities, all these securities are issued by a U.S.

government-sponsored entity and have an implicit or explicit government guarantee;

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Furthermore, as of December 31, 2024, there were no past due principal and interest payments associated with these securities.

At CECL adoption, an allowance for credit losses of $245,000 was recorded on the state and municipal securities classified as held to maturity based on applying the long-term historical credit loss rate, as published by Moody’s, for similarly rated securities.

The balance of the allowance for credit losses on investments securities remained unchanged at $245,000 as of December 31, 2023.

The balance of the allowance for credit losses on investment securities held to maturity remained unchanged at $245,000 as of December 31, 2024 and December 31, 2023 based on application of the long-term historical credit rate, as published by Moody’s, for similarly rated securities.

The cost and yield for Federal Home Loan Bank stock is included in the table below.

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The Corporation’s Federal Home Loan Bank stock is primarily in the Federal Home Loan Bank of Indianapolis and it continued to produce sufficient financial results to pay dividends.

There were no issuers included in the investment security portfolio at December 31, 2023, 2022 or 2021 where the aggregate carrying value of any one issuer exceeded 10 percent of the Corporation’s stockholders’ equity at those dates.

There were no issuers included in the investment securities portfolio at December 31, 2024, 2023 or 2022 where the aggregate carrying value of any one issuer exceeded 10 percent of the Corporation’s stockholders’ equity at those dates.

The term “issuer” excludes the U.S.

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Securities available for sale December 31, 2024

Government-sponsored agency securities $ — — % $ 8,945 1.4 % $ — — %

State and municipal $ 1,795 2.8 % $ 7,026 2.7 % $ 144,031 3.2 %

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$ 1,129,147 2.6 % $ 641,513 2.6 % $ 2,074,465 2.6 %

_____________________________

(1) Interest yields are presented on a fully taxable equivalent basis using a 21 percent tax rate.

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At the time the accrual is discontinued, all unpaid accrued interest is reversed against earnings.

Interest income accrued in the prior year, if any, is charged to the allowance for credit losses.

Interest income accrued in the prior year, if any, is charged to the allowance for credit losses (“ACL - Loans”).

Payments subsequently received on non-accrual loans are applied to principal.

1 unchanged sentence

At December 31, 2024, non-accrual loans totaled $73.8 million, an increase of $20.2 million from December 31, 2023.

The primary increase was in the residential portfolio of $11.5 million.

The increase was primarily due to a $24.1 million increase in non-accrual balances within the construction loan class.

The increase was offset by a $3.6 million decrease in non-accrual balances within the residential loan class.

At December 31, 2024, 2023, 2022, 2021, and 2020, non-accrual loans include assets acquired of $3.6 million, $5.2 million, $8.2 million, $3.2 million, and $7.9 million, respectively.

Other real estate owned (“OREO”) at December 31, 2023 decreased $1.6 million from the December 31, 2022 balance of $6.4 million.

Other real estate owned (“OREO”) at December 31, 2024 increased $0.1 million from the December 31, 2023 balance of $4.8 million.

At December 31, 2024, 2023, 2022, 2021 and 2020, OREO did not include any acquired assets.

OREO did include assets that were acquired from MBT of $136,000 as of December 31, 2019.

For the year ended December 31, 2023, interest income of $3.2 million was recognized on the non-accruing and renegotiated loans listed in the table above, aligning with the amount of interest income that would have been recognized under their loan terms.

In addition to the nonperforming loans discussed above, management also identified loans totaling $746.1 million and $515.2 million as of December 31, 2024 and 2023, respectively, that were deemed to be risk graded criticized.

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(Dollars in Thousands) 2024 2023 2022 2021 2020

Allowance for credit losses:

Allowance for credit losses - loans:

Balances, January 1 $ 204,934 $ 223,277 $ 195,397 $ 130,648 $ 80,284

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Net Charge-offs (49,377) (25,643) (2,674) (9,306) (8,309)

Provisions for credit losses - loans 7,300 — — 58,673 2,800

CECL Day 1 non-PCD provision for credit losses — 13,955 — — —

CECL Day 1 PCD ACL — 16,599 — — —

Balance at December 31 $ 204,934 $ 223,277 $ 195,397 $ 130,648 $ 80,284

Provision for credit losses - loans 37,200 7,300 — — 58,673

CECL Day 1 non-PCD provision for credit losses - loans — — 13,955 — —

CECL Day 1 PCD ACL - loans — — 16,599 — —

Balances, December 31 $ 192,757 $ 204,934 $ 223,277 $ 195,397 $ 130,648

Ratio of net charge-offs during the period to average loans outstanding during the period 0.39 % 0.21 % 0.02 % 0.10 % 0.09 %

1 unchanged sentence

(2) Category includes commercial real estate, non-owner occupied and commercial real estate, owner occupied.

In calculating the allowance for credit losses, the loan portfolio was pooled into loan segments with similar credit risk characteristics.

In calculating the ACL - Loans, the loan portfolio was pooled into loan segments with similar credit risk characteristics.

The Corporation pooled consumer and residential loans into one segment at adoption of CECL on January 1, 2021, but prior to adoption, consumer and residential loans were classified in separate segments.

Additionally, prior to CECL adoption, construction loans were classified within the commercial real estate segment, but after CECL adoption, construction loans were classified as a separate segment.

Details of the Allowance for Credit Losses and nonperforming loans are discussed within the “LOAN QUALITY” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K.

Details of the ACL - Loans and nonperforming loans are discussed within the “LOAN QUALITY” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K.

ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES

Presented below is an analysis of the composition of the allowance for credit losses and percent of loans in each category to total loans, by collateral segment, as of the years indicated.

Presented below is an analysis of the composition of the ACL - Loans and percent of loans in each category to total loans, by collateral segment, as of the years indicated.

2024 2023 2022 2021 2020

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Totals $ 192,757 100.0 % $ 204,934 100.0 % $ 223,277 100.0 % $ 195,397 100.0 % $ 130,648 100.0 %

The allowance for credit losses decreased $18.3 million during the twelve months ended December 31, 2023.

The allowance decreased primarily due to $25.6 million of net charge-offs during the twelve months ended December 31, 2023.

The increase in net charge-offs was primarily related to two large commercial and industrial charge-offs of $13.7 million and $5.4 million in the third quarter of 2023.

The larger charge-off involved fraudulent activity by the borrower and was idiosyncratic in nature and not indicative of a larger portfolio credit issue.

There was $7.3 million in provision for credit losses during the twelve months ended December 31, 2023.

The ACL - Loans decreased $12.2 million during the year ended December 31, 2024.

The allowance decreased primarily due to $49.4 million of net charge-offs during the year ended December 31, 2024.

In 2024, the Corporation recorded $37.2 million in provision for credit losses - loans, which was offset by a release in reserve of $1.5 million related to the allowance for unfunded commitments, resulting in a net provision expense for the year ended December 31, 2024 of $35.7 million.

The increase in net charge-offs was primarily related to two commercial relationships that accounted for $42.7 million of charge-offs.

One borrower experienced a sudden change in revenue from the cancellation and inability to renegotiate their contracts with the U.S.

This negatively impacted the value of the borrower’s business and resulted in their inability to repay principal and interest.

The second borrower provided notification of its plans to cease operations.

The Corporation does not believe these charge-offs are indicative of the portfolio as a whole.

Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities, which would cause them to be similarly impacted by economic or other conditions.

At December 31, 2023, two concentrations of commercial loans within a single industry (as segregated by North American Industry Classification System “NAICS code”) were in excess of 10 percent of total loans.

Lessors of Residential Buildings and Dwellings and Lessors of Nonresidential Buildings represented 12.23 percent and 10.39 percent of total loans, respectively.

At December 31, 2024, one concentration of commercial loans within a single industry (as segregated by North American Industry Classification System “NAICS code”) was in excess of 10 percent of total loans.

Lessors of Residential Buildings and Dwellings represented 11.62 percent of total loans.

CREDIT LOSS CHARGE-OFF PROCEDURES

The Corporation maintains an allowance to cover estimated credit losses in its loan portfolio.

The allowance is increased by the provision for credit losses and decreased by charge-offs less recoveries.

The allowance is increased by the provision for credit losses - loans and decreased by charge-offs less recoveries.

All charge-offs are approved by the senior loan officers or loan committees, depending on the amount of the charge-off and are reported to the Risk and Credit Policy Committee of the Board of Directors.

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Although management emphasizes the early detection and charge-off of loan losses, it is inevitable that certain losses, which have not been specifically identified, exist in the portfolio.

Accordingly, the provision for credit losses is charged to earnings on an anticipatory basis and recognized credit losses, net of recoveries, are deducted from the established allowance.

Accordingly, the provision for credit losses - loans is charged to earnings on an anticipatory basis and recognized credit losses, net of recoveries, are deducted from the established allowance.

Over time, all net credit losses are charged to earnings.

Based on management’s judgment as to the appropriate level of the allowance for credit losses, the amount provided in any period may be greater or less than net credit losses for the same period.

In any period, the determination of the provision for credit losses is based on management’s continuing review and evaluation of the loan portfolio.

Based on management’s judgment as to the appropriate level of the ACL - Loans, the amount provided in any period may be greater or less than net credit losses for the same period.

In any period, the determination of the provision for credit losses - loans is based on management’s continuing review and evaluation of the loan portfolio.

The evaluation by management includes consideration of the current forecasted economic conditions, past loan loss experience, changes in the composition of the loan portfolio, reasonable and supportable economic forecasts as well as the current condition and amount of loans outstanding.

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Borrowings maturing in one year or less are included in the following table:

(Dollars in Thousands) 2023 2022 2021

Balance at December 31:

(Dollars in Thousands) December 31, 2024 December 31, 2023 December 31, 2022

Federal funds purchased $ 99,226 $ — $ 171,560

32 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business