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FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 or 15 (d) of THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 1996 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 6, 1996, there were outstanding 5,062,069 common shares, without par value, of the registrant. Page 1 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q INDEX Page No. -------- PART I. Financial information: Item 1. Financial Statements: Consolidated Condensed Balance Sheet. . . . . . . . . . . . 3 Consolidated Condensed Statement of Income. . . . . . . . . 4 Consolidated Condensed Statement of Changes in Stockholders' Equity. . . . . . . . . . . . . . . . . . . . 5 Consolidated Condensed Statement of Cash Flows. . . . . . . 6 Notes to Consolidated Condensed Financial Statements. . . . 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . 11 PART II. Other Information: Item 4. Submission of Matters to a Vote of Security Holders . . . . . 19 Item 6. Exhibits and Reports of Form 8-K. . . . . . . . . . . . . . . 19 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Page 2 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CONSOLIDATED CONDENSED BALANCE SHEET (Dollars in thousands, except per share amounts) (Unaudited) March 31, December 31, 1996 1995 --------- ------------ ASSETS: Cash and due from banks. . . . . . . . . . . . . . . . . . . . . $ 21,196 $ 31,432 Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . 13,300 37,500 -------- -------- Cash and cash equivalents . . . . . . . . . . . . . . . . . . 34,496 68,932 Interest-bearing deposits with financial institutions. . . . . . 142 155 Securities available for sale. . . . . . . . . . . . . . . . . . 146,915 143,120 Securities held to maturity. . . . . . . . . . . . . . . . . . . 53,372 58,214 Mortgage Loans held for sale . . . . . . . . . . . . . . . . . . 736 Loans: Loans, net of unearned interest . . . . . . . . . . . . . . . 427,672 418,994 Less: Allowance for loan losses. . . . . . . . . . . . . . . (4,947) (4,957) -------- -------- Net loans. . . . . . . . . . . . . . . . . . . . . . . . . 422,725 414,037 Premises and equipment . . . . . . . . . . . . . . . . . . . . . 10,345 10,476 Federal Reserve and Federal Home Loan Bank stock . . . . . . . . 1,892 1,892 Interest receivable. . . . . . . . . . . . . . . . . . . . . . . 5,901 6,187 Core deposit intangibles and goodwill. . . . . . . . . . . . . . 1,813 1,845 Others assets. . . . . . . . . . . . . . . . . . . . . . . . . . 3,669 2,265 -------- -------- Total assets . . . . . . . . . . . . . . . . . . . . . . . $681,270 $707,859 -------- -------- -------- -------- LIABILITIES: Deposits: Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . $ 73,199 $ 99,432 Interest-bearing. . . . . . . . . . . . . . . . . . . . . . . 483,269 488,724 -------- -------- Total deposits . . . . . . . . . . . . . . . . . . . . . . 556,468 588,156 Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . 36,594 33,975 Federal Home Loan Bank advance . . . . . . . . . . . . . . . . . 1,000 1,000 Interest payable . . . . . . . . . . . . . . . . . . . . . . . . 1,907 1,866 Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . 4,045 2,389 -------- -------- Total liabilities. . . . . . . . . . . . . . . . . . . . . 600,014 627,386 STOCKHOLDERS' EQUITY: Preferred stock, no-par value: Authorized and unissued -- 500,000 shares Common stock, $.125 stated value: Authorized --- 20,000,000 shares Issued and outstanding -- 5,060,661 and 5,053,901 shares. . . 633 632 Additional paid-in capital . . . . . . . . . . . . . . . . . . . 16,009 15,852 Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . 64,403 62,836 Net unrealized gain on securities available for sale . . . . . . 211 1,153 -------- -------- Total stockholders' equity . . . . . . . . . . . . . . . . 81,256 80,473 -------- -------- Total liabilities and stockholders' equity . . . . . . . . $681,270 $707,859 -------- -------- -------- -------- See notes to consolidated condensed financial statements. Page 3 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF INCOME (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended March 31 ------------------------ 1996 1995 ---------- ---------- Interest Income: Loans, including fees: Taxable . . . . . . . . . . . . . . . . . . . . . . . $ 9,551 $ 8,937 Tax exempt. . . . . . . . . . . . . . . . . . . . . . 13 18 Investment securities: Taxable . . . . . . . . . . . . . . . . . . . . . . . 2,262 2,012 Tax exempt. . . . . . . . . . . . . . . . . . . . . . 636 545 Federal funds sold . . . . . . . . . . . . . . . . . . . 211 42 Interest-bearing deposits with financial institutions. . 2 Federal Reserve and Federal Home Loan Bank stock . . . . 36 34 ---------- ---------- Total interest income. . . . . . . . . . . . . . . 12,711 11,588 Interest expense: Deposits . . . . . . . . . . . . . . . . . . . . . . . . 5,161 4,058 Short-term borrowings. . . . . . . . . . . . . . . . . . 511 603 Federal Home Loan Bank advance . . . . . . . . . . . . . 15 ---------- ---------- Total interest expense. . . . . . . . . . . . . . . . 5,687 4,661 ---------- ---------- Net Interest Income . . . . . . . . . . . . . . . . . . . . 7,024 6,927 Provision for loan losses . . . . . . . . . . . . . . . . . 160 160 ---------- ---------- Net Interest Income After Provision For Loan Losses . . . . 6,864 6,767 Other Income: Securities gains, net. . . . . . . . . . . . . . . . . . 10 10 Other income . . . . . . . . . . . . . . . . . . . . . . 1,795 1,633 ---------- ---------- Total other income. . . . . . . . . . . . . . . . . . . . . 1,805 1,643 Total other expenses. . . . . . . . . . . . . . . . . . . . 4,688 4,712 ---------- ---------- Income before income tax. . . . . . . . . . . . . . . . . . 3,981 3,698 Income tax expense. . . . . . . . . . . . . . . . . . . . . 1,402 1,307 ---------- ---------- Net Income. . . . . . . . . . . . . . . . . . . . . . . . . $ 2,579 $ 2,391 ---------- ---------- ---------- ---------- Per share: Net income (1) . . . . . . . . . . . . . . . . . . . . . $ .51 $ .47 Dividends (1). . . . . . . . . . . . . . . . . . . . . . .20 .19 Weighted average shares outstanding (1) . . . . . . . . . . 5,056,140 5,051,232 (1) Restated for 3-for-2 stock split distributed October, 1995. See notes to consolidated condensed financial statements. Page 4 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Dollar amounts in thousands) (Unaudited) 1996 1995 ------- ------- Balances, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . $80,473 $71,018 Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,579 2,391 Cash dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,012) (944) Net change in unrealized gain (loss) on securities available for sale . . (942) 1,089 Stock issued under dividend reinvestment and stock purchase plan. . . . . 124 104 Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . 34 25 ------- ------- Balances, March 31. . . . . . . . . . . . . . . . . . . . . . . . . . . . $81,256 $73,683 ------- ------- ------- ------- See notes to consolidated condensed financial statements. Page 5 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited) Three Months Ended March 31 ------------------ 1996 1995 -------- -------- Cash Flows From Operating Activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,579 $ 2,391 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 160 160 Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . 308 289 Securities amortization, net. . . . . . . . . . . . . . . . . . . . . . . . . . 26 251 Mortgage loans originated for sale. . . . . . . . . . . . . . . . . . . . . . . (108) (98) Proceeds from sales of mortgage loans . . . . . . . . . . . . . . . . . . . . . 853 97 Change in interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . 436 183 Change in interest payable. . . . . . . . . . . . . . . . . . . . . . . . . . . 41 207 Other adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 850 920 -------- -------- Net cash provided by operating activities. . . . . . . . . . . . . . . . . . 5,145 4,400 Cash Flows From Investing Activities: Net change in interest-bearing deposits with financial institutions. . . . . . . . 13 (28) Purchases of: Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . (47,550) (13,766) Securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . (16,526) (7,340) Proceeds from maturities and sales of: Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . 42,194 1,794 Securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . 21,354 12,754 Net change in loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,922) (3,314) Purchases of premises and equipment. . . . . . . . . . . . . . . . . . . . . . . . (178) (618) Other investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43) 52 -------- -------- Net cash used by investing activities . . . . . . . . . . . . . . . . . . . . . (9,658) (10,466) Cash Flows From Financing Activities: Net change in: Noninterest-bearing, NOW, money market and savings deposits. . . . . . . . . . (36,743) (30,036) Certificates of deposit and other time deposits. . . . . . . . . . . . . . . . 5,055 22,554 Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,619 (2,240) Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,012) (944) Stock issued under dividend reinvestment and stock purchase plan . . . . . . . . . 124 104 Stock options exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 25 -------- -------- Net cash used by financing activities . . . . . . . . . . . . . . . . . . . . . (29,923) (10,537) -------- -------- Net Decrease in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . (34,436) (16,603) Cash and Cash Equivalents, January 1. . . . . . . . . . . . . . . . . . . . . . . . . 68,932 46,359 -------- -------- Cash and Cash Equivalents, March 31 . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,496 $ 29,756 -------- -------- -------- -------- See notes to consolidated condensed financial statements. Page 6 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) NOTE 1. GENERAL The significant accounting policies followed by First Merchants Corporation ("Corporation") and its wholly owned subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting, except for the changes in methods of accounting discussed more fully in Note 2. All adjustments which are in the opinion of management necessary for a fair statement of the results for the periods reported have been included in the accompanying consolidated financial statements. NOTE 2. CHANGE IN METHODS OF ACCOUNTING Statement of Financial Accounting Standards ("SFAS") No. 123, Stock-Based Compensation, is effective for the Corporation for 1996. This statement establishes a fair value based method of accounting for stock-based compensation plans. The Corporation intends to account for stock-based compensation as prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. NOTE 3. ACQUISITIONS On January 17, 1996, the Corporation signed a definitive agreement to acquire all of the outstanding shares of Randolph County Bancorp, Winchester, Indiana. Under terms of the agreement, the Corporation will issue approximately 566,000 shares of its common stock. The transaction will be accounted for under the pooling of interests method of accounting and is subject to approval by stockholders of Randolph County Bancorp and appropriate regulatory agencies. Although the corporation anticipates that the merger will be consummated during the third quarter of 1996, there can be no assurance that the acquisition will be completed. At December 31, 1995, Randolph County Bancorp, had total assets and stockholders' equity of $73,333,000 and $8,867,000, respectively. On January 24, 1996, the Corporation signed a definitive agreement to acquire all of the outstanding shares of Union National Bancorp, Liberty, Indiana. Under terms of the agreement, the Corporation will issue approximately 943,000 shares of its common stock. The transaction will be accounted for under the pooling of interests method of accounting and is subject to approval by stockholders of Union National Bancorp and appropriate regulatory agencies. Although the Corporation anticipates that the merger will be consummated during the second or third quarter of 1996, there can be no assurance that the acquisition will be completed. At December 31, 1995, Union National Bancorp had total assets and stockholders' equity of $161,078,000 and $15,741,000, respectively. Page 7 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited) NOTE 4. INVESTMENT SECURITIES Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- Available for sale at March 31, 1996: U.S. Treasury. . . . . . . . . . . . . $ 12,271 $ 14 $ 46 $ 12,239 Federal agencies . . . . . . . . . . . 65,949 633 278 66,304 State and municipal. . . . . . . . . . 20,821 273 80 21,014 Mortgage and other asset-backed securities. . . . . . . 22,550 110 189 22,471 Corporate obligations. . . . . . . . . 24,725 108 196 24,637 Marketable equity security . . . . . . 250 250 -------- ------ ---- -------- Total available for sale . . . . 146,566 1,138 789 146,915 -------- ------ ---- -------- Held to maturity at March 31, 1996: U.S. Treasury. . . . . . . . . . . . . 2,350 3 8 2,345 Federal agencies . . . . . . . . . . . 8,123 44 22 8,145 State and municipal. . . . . . . . . . 38,322 323 89 38,556 Mortgage and other asset-backed securities. . . . . . . 4,077 3 4,080 Corporate obligations. . . . . . . . . 500 500 -------- ------ ---- -------- Total held to maturity . . . . . 53,372 373 119 53,626 -------- ------ ---- -------- Total investment securities. . . $199,938 $1,511 $908 $200,541 -------- ------ ---- -------- -------- ------ ---- -------- Page 8 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited) Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- Available for sale at December 31, 1995: U.S. Treasury. . . . . . . . . . . . . . $ 4,531 $ 26 $ 3 $ 4,554 Federal agencies . . . . . . . . . . . . 67,518 1,299 72 68,745 State and municipal. . . . . . . . . . . 18,769 398 37 19,130 Mortgage and other asset-backed securities . . . . . . . 24,023 210 121 24,112 Corporate obligations. . . . . . . . . . 26,120 264 55 26,329 Marketable equity security . . . . . . . 250 250 -------- ------ ---- -------- Total available for sale. . . . . . . 141,211 2,197 288 143,120 -------- ------ ---- -------- Held to maturity at December 31, 1995: U.S. Treasury. . . . . . . . . . . . . . 3,103 8 2 3,109 Federal agencies . . . . . . . . . . . . 11,645 69 21 11,693 State and municipal. . . . . . . . . . . 40,013 483 57 40,439 Mortgage and other asset-backed securities . . . . . . . 2,953 8 2,961 Corporate obligations. . . . . . . . . . 500 1 499 -------- ------ ---- -------- Total held to maturity. . . . . . . . 58,214 568 81 58,701 -------- ------ ---- -------- Total investment securities . . . . . $199,425 $2,765 $369 $201,821 -------- ------ ---- -------- -------- ------ ---- -------- Page 9 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited) NOTE 5. LOANS AND ALLOWANCE March 31, December 31, 1996 1995 -------- -------- Loans: Commercial and industrial loans . . . . $ 96,713 $ 85,690 Bankers' acceptances and loans to financial institutions . . . . . . . 4,175 2,925 Agricultural production financing and other loans to farmers. . . . . . 5,045 5,796 Real estate loans: Construction . . . . . . . . . . . . 9,695 9,913 Commercial and farmland . . . . . . 65,834 66,749 Residential. . . . . . . . . . . . . 167,583 166,414 Individuals' loans for household and other personal expenditures . . . . . 77,039 79,993 Tax-exempt loans. . . . . . . . . . . . 814 863 Other loans . . . . . . . . . . . . . . 774 651 -------- -------- Total loans . . . . . . . . . . . $427,672 $418,994 -------- -------- -------- -------- Three Months Ended March 31 ------------------------- 1996 1995 -------- -------- Allowance for loan losses: Balances, January 1 . . . . . . . . . . $ 4,957 $ 4,998 Provision for losses. . . . . . . . . . 160 160 Recoveries on loans . . . . . . . . . . 55 53 Loans charged off . . . . . . . . . . . (225) (139) -------- -------- Balances, March 31. . . . . . . . . . . $ 4,947 $ 5,072 -------- -------- -------- -------- 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 20 consecutive years of growth in operating earnings per share, reaching $1.95 in 1995, an increase of 8.3 per cent over 1994. Return on assets, which exceeded 1 per cent for the first time in 1988, rose to 1.48 per cent in 1995, from 1.44 per cent in 1994, and 1.39 per cent in 1993. Return on equity, which exceeded 12 per cent for the first time in 1989, was 13.01 per cent in 1993, 13.06 per cent in 1994, and 12.97 in 1995. Following are the levels achieved in each of these ratios during the first quarter of 1996, as compared to the same period in 1995. - Earnings per share were $.51, up 8.5 per cent from $.47 - Return on assets was 1.51 per cent decreasing from 1.52 per cent - Return on equity totaled 12.75 per cent compared to 13.22 per cent for the first quarter of 1995 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 11.02 per cent at December 31, 1994, 11.37 per cent at December 31, 1995, and 11.93 per cent at March 31, 1996. At March 31, 1996, the Corporation had a Tier I risk-based capital ratio of 17.76 per cent, total risk-based capital ratio of 18.86 per cent and a leverage ratio of 11.71 per cent. Regulatory capital guidelines require a Tier I risk-based capital ratio of 4.0 per cent and a total risk-based capital ratio of 8.0 per cent. The Corporation has an employee stock purchase plan and an employee stock option plan. Activity under this program is detailed in the Consolidated Condensed Statement of Changes in Stockholders' Equity. The transactions under these plans have not had a material effect in the Corporation's capital position. Page 11 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q ASSET QUALITY/PROVISION FOR LOAN LOSSES First Merchants Corporation's asset quality and loan loss experience has consistently been superior to that of its peer group, as summarized below. Asset quality has been a major factor in the Corporation's ability to generate consistent profit improvement. The allowance for loan losses is maintained through the provision for loan losses, which is a charge against earnings. The amount provided for loan losses, and the determination of the adequacy of the allowance are based on a continuous review of the loan portfolio, including an internally administered loan "watch" list. The evaluation takes into consideration identified credit problems as well as the possibility of losses inherent in the loan portfolio that cannot be specifically identified. The following table summarizes the risk elements for First Merchants Corporation and its peer group, consisting of bank holding companies with average assets between $500 million and $1 billion. The statistics were provided by the Federal Reserve System. Non-Performing Loans (1) at December 31 as a Per Cent of Loans ------------------------ First Merchants Peer Corporation Group ----------- ------- 1996 (March 31) . . . . . . . . . . . . . . . .89% N/A 1995 . . . . . . . . . . . . . . . . . . . . . .16 .91% 1994 . . . . . . . . . . . . . . . . . . . . . .26 1.01 1993 . . . . . . . . . . . . . . . . . . . . . .30 1.55 1992 . . . . . . . . . . . . . . . . . . . . . .41 1.85 1991 . . . . . . . . . . . . . . . . . . . . . .86 2.54 (1) Accruing loans past due 90 days or more, and non-accruing loans, but excluding restructured loans. On March 31, 1996, the loan loss reserve stood at $4,947,000. As a per cent of loans, the reserve stood at 1.16 per cent compared to 1.18 per cent at year end 1995, and 1.24 per cent at year end 1994. The provision for loan losses for the first quarter of 1996 remained at $160,000 equal to the same period of 1995. The Corporation adopted SFAS No. 114 and No. 118, Accounting by Creditors for Impairment of a Loan and Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures on January 1, 1995. Impaired loans totaled $3,122,000 at December 31, 1995. An allowance for losses at December 31, 1995, was not deemed necessary for impaired loans totaling $1,900,000, but an allowance of $559,000 was recorded for the remaining balance of impaired loans of $1,222,000. The balance of impaired loans has not changed significantly since December 31, 1995. 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). 1996 (1) 1995 1994 1993 1992 -------- -------- -------- -------- -------- Allowance for loan losses: Balance at January 1. . . $4,957 $4,998 $4,800 $4,351 $3,867 Chargeoffs: Commercial. . . . . . . . 58 586 526 391 588 Real estate mortgage 41 129 100 Installment . . . . . . . 167 296 346 388 552 -------- -------- -------- -------- -------- Total chargeoffs . . . 225 882 913 908 1,240 -------- -------- -------- -------- -------- Recoveries: Commercial. . . . . . . . 16 89 216 240 215 Real estate mortgage. . . 4 4 30 5 38 Installment . . . . . . . 35 108 83 98 114 -------- -------- -------- -------- -------- Total recoveries . . . 55 201 329 343 367 -------- -------- -------- -------- -------- Net chargeoffs . . . . . . . 170 681 584 565 873 -------- -------- -------- -------- -------- Provision for loan losses. . 160 640 782 1,014 1,357 -------- -------- -------- -------- -------- Balance at December 31 . . . $4,947 $4,957 $4,998 $4,800 $4,351 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Ratio of net chargeoffs during the period to average loans outstanding during the period. . . . . .16%(2) .16% .15% .16% .26% Peer Group . . . . . . . . . N/A .26% .25% .49% .65% (1) Through March 31, 1996 (2) Annualized Page 13 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q LIQUIDITY AND INTEREST SENSITIVITY Asset/Liability Management has been an important factor in the Corporation's ability to record consistent earnings growth through periods of interest rate volatility and product deregulation. Management and the Board of Directors monitor the Corporation's liquidity and interest sensitivity positions at regular meetings to ensure that changes in interest rates will not adversely affect earnings. Decisions regarding investment and the pricing of loan and deposit products are made after analysis of reports designed to measure liquidity, rate sensitivity, the Corporation's exposure to changes in net interest income given various rate scenarios, and the economic and competitive environments. First Merchants Corporation's liquidity and interest sensitivity position at March 31, 1996, 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, 1996 (table dollar amounts in thousands). Interest-Rate Sensitivity Analysis At March 31, 1996 ------------------------------------------------ 1-180 181-365 1-5 Beyond Days Days Years 5 Years Total -------- -------- -------- -------- -------- Rate-sensitive assets: Federal funds sold and interest-bearing deposits with financial institutions . . . . . . . . . . $ 13,442 $ 13,442 Investment securities . . . . . . 34,134 $ 26,657 $127,718 $ 11,778 200,287 Loans . . . . . . . . . . . . . . 224,216 44,681 108,478 50,297 427,672 Federal Reserve and Federal Home Loan Bank stock . . . . . . . . . . . 1,585 307 1,892 -------- -------- -------- -------- -------- Total rate-sensitive assets. . . . . . . . . . . . . . 273,377 71,338 236,196 62,382 643,293 -------- -------- -------- -------- -------- Rate-sensitive liabilities: Interest-bearing deposits . . . . 218,657 41,333 223,209 70 483,269 Short-term borrowing. . . . . . . 36,344 250 36,594 Federal Home Loan Bank advance. . . . . . . . . . . . . 1,000 1,000 -------- -------- -------- -------- -------- Total rate-sensitive liabilities . . . . . . . . . . . 256,001 41,583 223,209 70 519,863 -------- -------- -------- -------- -------- Periodic rate sensitivity gap. . . $ 17,376 $ 29,955 $ 12,987 $ 62,312 Cumulative rate sensitivity gap. . 17,376 47,131 60,118 122,430 Cumulative rate sensitivity gap at March 31, 1996 . . . . . . . . 107% 116% 112% 124% Cumulative rate sensitivity gap at December 31, 1995. . . . . . . 117% 128% 113% 126% Page 14 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q EARNING ASSETS Earning assets increased $76.4 million during 1995 but declined $17.3 million during the first quarter of 1996. Growth over the fifteen month period occurred in loans and securities with short term investments declining. The following table presents the earning asset mix for the years ended 1994, 1995 and at March 31, 1996 (table dollar amounts in millions). Earning Assets -------------------------------- March 31, December 31, December 31, 1996 1995 1994 ------ ------ ------ Federal funds sold and interest-bearing deposits with financial institutions. . . . $ 13.4 $ 37.7 $ 3.7 Securities available for sale. . . . . . . . . 146.9 143.1 99.3 Securities held to maturity. . . . . . . . . . 53.4 58.2 77.7 Mortgage loans held for sale . . . . . . . . . .7 Federal Reserve and Federal Home Loan Bank stock . . . . . . . . . . . . . . 1.9 1.9 1.9 Loans. . . . . . . . . . . . . . . . . . . . . 427.7 419.0 401.6 ------ ------ ------ Total . . . . . . . . . . . . . . . . . . . $643.3 $660.6 $584.2 ------ ------ ------ ------ ------ ------ DEPOSITS AND BORROWINGS The following tables present the level of deposits and borrowed funds (Federal funds purchased, repurchase agreements with customers, U.S. Treasury demand notes, and Federal Home Loan Bank advance) based on period end levels and average daily balances for the past two years and most recent quarter (table dollar amounts in thousands). Period End Balance ------------------------------------- Federal Home Short-term Loan Bank Deposits Borrowings Advance ---------- ---------- ------------ March 31, 1996. . . . . . . . . . . . . . $556,468 $ 36,594 $ 1,000 December 31, 1995 . . . . . . . . . . . . 588,156 33,975 1,000 December 31, 1994 . . . . . . . . . . . . 529,830 39,189 Average Balances ------------------------------------- Federal Home Short-term Loan Bank Deposits Borrowings Advance ---------- ---------- ------------ March 31, 1996. . . . . . . . . . . . . . $554,669 $ 38,565 $ 1,000 December 31, 1995 . . . . . . . . . . . . 538,539 44,799 515 December 31, 1994 . . . . . . . . . . . . 514,029 45,639 Page 15 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q NET INTEREST INCOME Net interest income is the primary source of the Corporation's earnings. It is a function of net interest margin and the level of average earning assets. The table below presents the Corporation's interest income, interest expense, and net interest income as a per cent of average earning assets for the four-year period ending in 1995 and the first quarter of 1996. (Table dollar amounts in thousands.) Asset yields improved .71 per cent in 1995, while interest expense increased .81 per cent. The resulting "spread" decrease of .10 per cent (4.64% vs 4.74%) was offset by a $32.7 million increase in average earning assets, enabling fully taxable equivalent net interest income to increase by $963,000. During the first quarter of 1996, interest income (FTE) grew $251,000 on an annualized basis due to growth in average earning assets of $10.6 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. Interest Income Interest Expense Net Interest (FTE) as a Per as a Per Cent Income (FTE) as Average Net Interest Income Cent of Average of Average a Per Cent of Earning on a Fully Taxable Earning Assets Earning Assets Earning Assets Assets Equivalent Basis -------------- --------------- --------------- --------- ------------------- 1996(1) 8.16% 3.55% 4.61% $640,418 $29,496 1995 8.15 3.51 4.64 629,784 29,245 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 (1) First quarter annualized. Page 16 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q OTHER INCOME The Corporation has placed emphasis on the growth of non-interest income in recent years by offering a wide range of fee-based services. Fee schedules are regularly reviewed by a pricing committee to ensure that the products and services offered by the Corporation are priced to be competitive and profitable. Other income reached $6,907,000 in 1995, exceeding the prior year by $609,000 or 9.7 per cent. Major factors include: 1. A $205,000 (8.0 per cent) increase in trust revenues. 2. A gain of $205,000 on the sale of approximately $8,000,000 of the Corporation's student loans. Other income in the first quarter of 1996 was $1,805,000 or 9.9 per cent higher than the first quarter of 1995. Interchange fees for the Corporation's credit and debit card programs doubled, growing by $68,000 due to expanded product offerings, and trust fees grew by $43,000 or 6.7 per cent. OTHER EXPENSE Total "other expenses" represent non-interest operating expenses of the Corporation. Those expenses amounted to $18,842,000 in 1995, an increase of 2.2 per cent from the prior year. Salary and benefit expenses, which account for over one-half of the Corporation's non-interest operating expenses, increased by $510,000 (5.1 per cent). Increases in occupancy, equipment, printing and office supplies and advertising expenses totaling $449,000 were offset by a $530,000 reduction in the cost of deposit insurance and by a refund of $238,000 from the State of Indiana for intangibles taxes paid in 1988 and 1989. First quarter 1996 expenses of $4,688,000 were $24,000 or 0.5 per cent below the same quarter of 1995. Increases in salary and benefit expense ($120,000 or 4.7 per cent) and premises and equipment expense ($73,000 or 10.7 per cent) were offset by a $286,000 decrease in deposit insurance premiums. INCOME TAXES The increase in 1995 tax expense was attributable to a $1,241,000 increase in pre-tax net income. During the first quarter of 1996, income tax expense grew $95,000 from the same period one year earlier, also due to a $283,000 increase in pre-tax net income. Page 17 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q The following is a breakdown, by year, of federal and state income taxes (table dollar amounts in thousands). Three Months Ended Twelve Months Ended March 31, December 31, ---------------- ---------------- 1996 1995 1995 1994 ------ ------ ------ ------ Federal taxes . . . . . . . . . $1,049 $ 982 $4,146 $3,735 State taxes . . . . . . . . . . 353 325 1,302 1,172 ------ ------ ------ ------ Total . . . . . . . . . . . $1,402 $1,307 $5,448 $4,907 ------ ------ ------ ------ ------ ------ ------ ------ INFLATION Changing prices of goods, services and capital affect the financial position of every business enterprise. The level of market interest rates and the price of funds loaned or borrowed fluctuate due to changes in the rate of inflation and various other factors, including government monetary policy. Fluctuating interest rates affect First Merchants' net interest income, loan volume, and other operating expenses, such as employees' salaries and benefits, reflecting the effects of escalating prices, as well as increased levels of operations and other factors. As the inflation rate increases, the purchasing power of the dollar decreases. Those holding fixed rate monetary assets incur a loss while those holding fixed rate monetary liabilities enjoy a gain. The nature of a bank holding company's operations is such that there will be an excess of monetary assets over monetary liabilities and, thus, a bank holding company will tend to suffer from an increase the rate of inflation and benefit from a decrease. Page 18 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q PART II. OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The 1996 Annual Meeting of Stockholders was held on April 4, 1996. 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, 1996. Page 19 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. First Merchants Corporation (Registrant) Date May 10, 1996 by /s/ Stefan S. Anderson ------------------- --------------------------- Stefan S. Anderson President and Director Date May 10, 1996 by /s/ James L. Thrash ------------------- --------------------------- James L. Thrash Chief Financial & Principal Accounting Officer Page 20 of 20
9 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 21,196 142 13,300 0 146,915 53,372 53,626 427,672 4,947 681,270 556,468 36,594 6,952 0 0 0 633 80,623 681,270 9,564 2,898 249 12,711 5,161 5,687 7,024 160 10 4,688 3,981 2,579 0 0 2,579 .51 .51 0 0 0 0 0 0 0 0 0 0 0 0