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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 June 30, 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 August 5, 1996, there were outstanding 6,023,829 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) June 30, December 31, 1996 1995 -------- ------------ ASSETS: Cash and due from banks $ 31,106 $ 31,432 Federal funds sold 15,100 37,500 -------- -------- Cash and cash equivalents 46,206 68,932 Interest-bearing deposits with financial institutions 155 Securities available for sale 145,992 143,120 Securities held to maturity 51,015 58,214 Mortgage Loans held for sale 736 Loans: Loans 439,926 418,994 Less: Allowance for loan losses (4,919) (4,957) -------- -------- Net loans 435,007 414,037 Premises and equipment 10,467 10,476 Federal Reserve and Federal Home Loan Bank stock 2,029 1,892 Interest receivable 6,244 6,187 Core deposit intangibles and goodwill 1,780 1,845 Others assets 5,469 2,265 -------- -------- Total assets $704,209 $707,859 -------- -------- -------- -------- LIABILITIES: Deposits: Noninterest-bearing $ 82,777 $ 99,432 Interest-bearing 491,448 488,724 -------- -------- Total deposits 574,225 588,156 Short-term borrowings 41,611 33,975 Federal Home Loan Bank advance 1,000 Interest payable 1,786 1,866 Other liabilities 4,086 2,389 -------- -------- Total liabilities 621,708 627,386 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 -- 5,065,470 and 5,053,901 shares 633 632 Additional paid-in capital 16,132 15,852 Retained earnings 65,971 62,836 Net unrealized gain (loss) on securities available for sale (235) 1,153 -------- -------- Total stockholders' equity 82,501 80,473 -------- -------- Total liabilities and stockholders' equity $704,209 $707,859 -------- -------- -------- -------- 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 --------------------- --------------------- 1996 1995 1996 1995 --------- --------- --------- --------- Interest Income: Loans, including fees: Taxable. . . . . . . . . . . . . . $ 9,646 $ 9,425 $ 19,197 $ 18,362 Tax exempt . . . . . . . . . . . . 14 27 27 45 Securities: Taxable. . . . . . . . . . . . . . 2,202 2,048 4,464 4,060 Tax exempt . . . . . . . . . . . . 652 618 1,288 1,163 Federal funds sold . . . . . . . . . . 111 277 322 319 Interest-bearing deposits with financial institutions . . . . . . . 1 1 3 1 Federal Reserve and Federal Home Loan Bank stock . . . . . . . . . . . 39 39 75 73 --------- --------- --------- --------- Total interest income . . . 12,665 12,435 25,376 24,023 Interest Expense: Deposits. . . . . . . . . . . . . . . 4,957 4,944 10,118 9,002 Short-term borrowings . . . . . . . . 518 490 1,029 1,093 Federal Home Loan Bank advance. . . . 14 1 29 1 --------- --------- --------- --------- Total interest expense . . 5,489 5,435 11,176 10,096 --------- --------- --------- --------- Net Interest Income . . . . . . . . . . . 7,176 7,000 14,200 13,927 Provision for loan losses . . . . . . . . 160 160 320 320 --------- --------- --------- --------- Net Interest Income After Provision For Loan Losses . . . . . . . . . . . . 7,016 6,840 13,880 13,607 Other Income: Net realized gains (losses) on sale of available for sale securities. . . . . . . . . . . . . 10 (76) 20 (66) Other income . . . . . . . . . . . . 1,795 1,644 3,590 3,277 --------- --------- --------- --------- Total other income . . . . . . . . . . . 1,805 1,568 3,610 3,211 Total other expenses. . . . . . . . . . . 4,858 4,591 9,546 9,303 --------- --------- --------- --------- Income before income tax. . . . . . . . . 3,963 3,817 7,944 7,515 Income tax expense. . . . . . . . . . . . 1,383 1,288 2,785 2,595 --------- --------- --------- --------- Net Income. . . . . . . . . . . . . . . . $ 2,580 $ 2,529 $ 5,159 $ 4,920 --------- --------- --------- --------- --------- --------- --------- --------- Per share: Net income (1). . . . . . . . . . . $ .51 $ .50 $ 1.02 $ .97 Dividends (1) . . . . . . . . . . . .20 .19 .40 .38 Weighted average shares outstanding (1) 5,059,199 5,055,723 5,062,259 5,053,478 (1) Restated for 3-for-2 stock split distributed October, 1995. See notes to consolidated 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 5,159 4,920 Cash dividends (2,024) (1,887) Net change in unrealized gain (loss) on securities available for sale (1,388) 2,579 Stock issued under dividend reinvestment and stock purchase plan 235 201 Stock options exercised 46 187 Stock redeemed (392) ------- ------- Balances, June 30 $82,501 $76,626 ------- ------- ------- ------- 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) Six Months Ended June 30 ----------------- 1996 1995 ------- ------- Cash Flows From Operating Activities: Net income $ 5,159 $ 4,920 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 320 320 Depreciation and amortization 619 592 Securities amortization, net 194 499 Mortgage loans originated for sale (464) (600) Proceeds from sale of mortgage loans 1,212 604 Change in interest receivable 83 (442) Change in interest payable (80) 368 Other adjustments (505) (233) ------- ------- Net cash provided by operating activities 6,538 6,028 Cash Flows From Investing Activities: Net change in interest-bearing deposits with financial institutions 155 (46) Purchases of: Securities available for sale (59,472) (34,036) Securities held to maturity (18,186) (14,851) Proceeds from maturities of: Securities available for sale 50,508 7,991 Securities held to maturity 25,288 18,419 Proceeds from sales of securities available for sale 3,551 11,196 Net change in loans (21,601) (18,046) Purchases of premises and equipment (611) (920) Other investing activities 142 118 ------- ------- Net cash used by investing activities (20,226) (30,175) Cash Flows From Financing Activities: Net change in: Noninterest-bearing, NOW, money market and savings deposits (14,451) (2,423) Certificates of deposit and other time deposits 520 34,821 Short-term borrowings 7,636 13,685 Federal Home Loan Bank advance (1,000) Cash dividends (2,024) (1,887) Stock issued under dividend reinvestment and stock purchase plan 235 201 Stock options exercised 46 187 Stock redeemed (392) ------- ------- Net cash provided (used) by financing activities (9,038) 44,192 ------- ------- Net Increase (Decrease) in Cash and Cash Equivalents (22,726) 20,045 Cash and Cash Equivalents, January 1 68,932 46,359 ------- ------- Cash and Cash Equivalents, June 30 $46,206 $66,404 ------- ------- ------- ------- See notes to consolidated condensed financial statements. Page 6 of 20
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands, except per share amounts) (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 which has been approved by Randolph County Bancorp shareholders, 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 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 July 31, 1996, the Corporation issued 942,685 shares of its common stock in exchange for all of the outstanding shares of Union National Bancorp, Liberty, Indiana (Union National). At December 31, 1995, Union National had total assets and shareholders' equity of $161,078,000 and $15,741,000, respectively. The transaction will be accounted for under the pooling of interests method of accounting. The financial information contained herein does not reflect the merger. Pro forma unaudited results of operations assuming the merger had occurred on January 1, 1995, are as follows: Three Months Ended Six Months Ended June 30 June 30 ------------------ ----------------- 1996 1995 1996 1995 ------ ------ ------- ------- Net interest income. . . . . $8,458 $8,132 $16,726 $16,174 Net income . . . . . . . . . 3,028 2,849 5,975 5,594 Net income per share . . . . .50 .47 1.00 .93 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 June 30, 1996: U.S. Treasury $ 12,227 $ 11 $ 83 $ 12,155 Federal agencies 68,394 381 447 68,328 State and municipal 22,067 227 106 22,188 Mortgage and other asset-backed securities 20,278 63 259 20,082 Corporate obligations 23,165 71 247 22,989 Marketable equity security 250 250 --------- ---------- ---------- --------- Total available for sale 146,381 753 1,142 145,992 --------- ---------- ---------- --------- Held to maturity at June 30, 1996: U.S. Treasury 850 1 10 841 Federal agencies 8,100 28 23 8,105 State and municipal 37,741 253 94 37,900 Mortgage and other asset-backed securities 4,324 18 4,342 --------- ---------- ---------- --------- Total held to maturity 51,015 300 127 51,188 --------- ---------- ---------- --------- Total investment securities $197,396 $ 1,053 $ 1,269 $ 197,180 --------- ---------- ---------- --------- --------- ---------- ---------- --------- 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 June 30, December 31, 1996 1995 -------- ------------ Loans: Commercial and industrial loans $ 98,670 $ 85,690 Bankers' acceptances and loans to financial institutions 1,465 2,925 Agricultural production financing and other loans to farmers 6,414 5,796 Real estate loans: Construction 10,864 9,913 Commercial and farmland 67,665 66,749 Residential 173,284 166,414 Individuals' loans for household and other personal expenditures 79,711 79,993 Tax-exempt loans 917 863 Other loans 936 651 -------- ------------ Total loans $439,926 $418,994 -------- ------------ -------- ------------ Six Months Ended June 30 ------------------------- 1996 1995 -------- ------------ Allowance for loan losses: Balances, January 1 $4,957 $ 4,998 Provision for losses 320 320 Recoveries on loans 105 94 Loans charged off (463) (316) -------- ------------ Balances, June 30 $4,919 $ 5,096 -------- ------------ -------- ------------ 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 half of 1996, as compared to the same period in 1995. - Earnings per share were $1.02, up 5.2 per cent from $.97 - Return on assets was 1.51 per cent decreasing from 1.53 per cent - Return on equity totaled 12.67 per cent compared to 13.34 per cent for the first half 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 June 30, 1996, the Corporation had a Tier I risk-based capital ratio of 17.34 per cent, total risk-based capital ratio of 18.39 per cent and a leverage ratio of 11.88 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 increase in non-performing loans from December 1, 1995 to June 30, 1996 is primarily attributable to two loans placed in non-accrual status during the first half. Management is in the process of resolving these loan situations and anticipates that no material losses will occur. 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 and an independent loan review provided by an outside accounting firm. 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 (June 30) .94% 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 June 30, 1996, the loan loss reserve stood at $4,919,000. As a per cent of loans, the reserve stood at 1.12 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 half of 1996 remained at $320,000 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 101 586 526 391 588 Real estate mortgage 41 129 100 Installment 362 296 346 388 552 -------- ------ ------ ------ ------ Total chargeoffs 463 882 913 908 1,240 -------- ------ ------ ------ ------ Recoveries: Commercial 41 89 216 240 215 Real estate mortgage 5 4 30 5 38 Installment 59 108 83 98 114 -------- ------ ------ ------ ------ Total recoveries 105 201 329 343 367 -------- ------ ------ ------ ------ Net chargeoffs 358 681 584 565 873 -------- ------ ------ ------ ------ Provision for loan losses 320 640 782 1,014 1,357 -------- ------ ------ ------ ------ Balance at December 31 $4,919 $4,957 $4,998 $4,800 $4,351 -------- ------ ------ ------ ------ -------- ------ ------ ------ ------ Ratio of net chargeoffs during the period to average loans outstanding during the period .17%(2) .16% .15% .16% .26% Peer Group N/A .26% .25% .49% .65% (1) Through June 30, 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 June 30, 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 June 30, 1996 (table dollar amounts in thousands). Interest-Rate Sensitivity Analysis At June 30, 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 $ 15,100 $ 15,100 Investment securities 30,528 $27,328 $128,632 $ 10,519 197,007 Loans 230,703 40,876 116,211 52,136 439,926 Federal Reserve and Federal Home Loan Bank stock 1,722 307 2,029 -------- ------- -------- -------- -------- Total rate-sensitive assets 278,053 68,204 244,843 62,962 654,062 -------- ------- -------- -------- -------- Rate-sensitive liabilities: Interest-bearing deposits 213,124 42,829 235,425 70 491,448 Short-term borrowing 41,611 41,611 -------- ------- -------- -------- -------- Total rate-sensitive liabilities 254,735 42,829 235,425 70 533,059 -------- ------- -------- -------- -------- Periodic rate sensitivity gap $ 23,318 $25,375 $ 9,418 $ 62,892 Cumulative rate sensitivity gap 23,318 48,693 58,111 121,003 Cumulative rate sensitivity gap ratio June 30, 1996 109% 116% 111% 123% 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 $6.6 million during the first half of 1996. The following table presents the earning asset mix for the years ended 1994, 1995 and at June 30, 1996 (table dollar amounts in millions). Earning Assets ---------------------------------------- June 30, December 31, December 31, 1996 1995 1994 -------- ------------ ------------ Federal funds sold and interest-bearing deposits with financial institutions $ 15.1 $ 37.7 $ 3.7 Securities available for sale 146.0 143.1 99.3 Securities held to maturity 51.0 58.2 77.7 Mortgage loans held for sale .7 Federal Reserve and Federal Home Loan Bank stock 2.0 1.9 1.9 Loans 439.9 419.0 401.6 -------- ------------ ------------ Total $654.0 $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 the six month period ended June 30, 1996 (table dollar amounts in thousands). Period End Balance ------------------------------------------ Federal Home Short-term Loan Bank Deposits Borrowing Advance ---------- ------------- -------------- June 30, 1996 . . . . . . . . . $574,225 $41,611 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 Borrowing Advance ---------- ------------- -------------- June 30, 1996 . . . . . . . . . $555,362 $39,577 $ 940 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 half 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 six months of 1996, interest income (FTE) grew $572,000 on an annualized basis due to growth in average earning assets of $12.5 million. Net interest income (FTE) as a per cent of earning assets remained level with the prior year as yields (FTE) and expenses both declined by .03 per cent of average earning assets. 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) 8.12% 3.48% 4.64% $642,301 $29,817 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 six months 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 six months of 1996 amounted to $3,610,000 or 12.4 per cent higher than the first six months of 1995. $369,000 of the increase of $399,000 is attributable to four factors: 1. Trust revenues increased $104,000 (8.1 per cent). 2. Deposit service charges increased $99,000 (8.1 per cent). 3. Interchange fees for the Corporation's credit and debit card programs grew by $80,000 (55.9 per cent) due to increased product offerings. 4. The Corporation recorded securities gains of $20,000 compared to losses of $66,000 last year, an increase of $86,000. 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 half 1996 expenses of $9,546,000 were $243,000 or 2.6 per cent above the same period of 1995. The following table details the change in "Other Expense". 1996 "Other Expense" Compared to 1995 (through June 30) - ------------------------------------------------------------------------------- 1. Salary and benefit expense increased 4.2 per cent $228,000 2. Various other operating expenses increased 351,000 3. FDIC deposit insurance premiums declined (574,000) 4. 1995 "other expense" included a refund from the State of Indiana for taxes paid in 1988 and 1989. This served to reduce 1995 "Other Expense". 238,000 -------- Net Change $243,000 -------- -------- INCOME TAXES The increase in 1995 tax expense was attributable to a $1,241,000 increase in pre-tax net income. During the first half of 1996, income tax expense grew $190,000 from the same period one year earlier, primarily due to a $429,000 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). Six Months Ended Twelve Months Ended June 30, December 31, ---------------- ------------------- 1996 1995 1995 1994 ------ ------ ------ ------ Federal taxes . . . . . . . . . $2,103 $1,976 $4,146 $3,735 State taxes . . . . . . . . . . 682 619 1,302 1,172 ------ ------ ------ ------ Total . . . . . . . . . . . $2,785 $2,595 $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 June 30, 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 August 12, 1996 by /s/ Stefan S. Anderson -------------------- ----------------------------- Stefan S. Anderson President and Director Date August 12, 1996 by /s/ James L. Thrash -------------------- ----------------------------- James L. Thrash Chief Financial & Principal Accounting Officer Page 20 of 20
9 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 31,106 0 15,100 0 145,992 51,015 51,188 439,926 4,919 704,209 574,225 41,611 5,872 0 0 0 633 81,868 704,209 19,224 5,752 400 25,736 10,118 11,176 14,200 320 20 9,546 7,944 5,159 0 0 5,159 1.02 1.02 0 0 0 0 0 0 0 0 0 0 0 0