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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 September 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) dentification 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 October 30, 1996, there were outstanding 6,597,204 common shares, without par value, of the registrant.
FIRST MERCHANTS CORPORATION FORM 10-Q INDEX PART I. Financial information: Page No. -------- 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 12 PART II. Other Information: Item 4. Submission of Matters to a Vote of Security Holders 20 Item 6. Exhibits and Reports of Form 8-K 20 Signatures 21 Page 2 of 21
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) September 30, December 31, 1996 1995 ------------ ------------- ASSETS: Cash and due from banks $ 41,451 $ 34,893 Federal funds sold 2,250 37,500 ------------ ------------- Cash and cash equivalents 43,701 72,393 Interest-bearing deposits with financial institutions 444 155 Securities available for sale 207,012 203,909 Securities held to maturity 51,809 60,678 Mortgage loans held for sale 736 Loans: Loans 559,506 508,844 Less: Allowance for loan losses 6,038 6,101 ------------ ------------- Net loans 553,468 502,743 Premises and equipment 13,811 13,503 Federal Reserve and Federal Home Loan Bank stock 2,839 2,702 Interest receivable 7,754 7,917 Core deposit intangibles and goodwill 1,747 1,845 Others assets 4,135 2,356 ------------ ------------- Total assets $ 886,720 $ 868,937 ------------ ------------- ------------ ------------- LIABILITIES: Deposits: Noninterest-bearing $ 82,853 $ 107,238 Interest-bearing 605,661 613,257 ------------ ------------- Total deposits 688,514 720,495 Short-term borrowings 81,802 37,377 Federal Home Loan Bank advances 9,150 9,000 Interest payable 3,204 3,035 Other liabilities 3,424 2,816 ------------ ------------- Total liabilities 786,094 772,723 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 -- 6,030,868 and 5,996,586 shares 754 750 Additional paid-in capital 19,402 18,661 Retained earnings 80,311 74,955 Net unrealized gain on securities available for sale 159 1,848 ------------ ------------- Total stockholders' equity 100,626 96,214 ------------ ------------- Total liabilities and stockholders' equity $ 886,720 $ 868,937 ------------ ------------- ------------ ------------- See notes to consolidated condensed financial statements. Page 3 of 21
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF INCOME (Dollar amounts in thousands, except per share amounts) (Unaudited) Three Months Ended Nine Months Ended September 30 September 30 --------------------- ------------------- 1996 1995 1996 1995 --------- --------- --------- --------- Interest Income: Loans, including fees: Taxable $ 12,157 $11,488 $ 35,317 $ 33,413 Tax exempt 22 39 59 93 Securities: Taxable 2,955 2,983 9,000 8,478 Tax exempt 887 847 2,575 2,436 Federal funds sold 115 275 448 632 Interest-bearing deposits with financial institutions 2 3 7 6 Federal Reserve and Federal Home Loan Bank stock 53 49 159 144 --------- --------- --------- --------- Total interest income 16,191 15,684 47,565 45,202 Interest Expense: Deposits 6,575 6,670 19,841 18,643 Short-term borrowings 850 832 1,965 1,962 Federal Home Loan Bank advances 134 78 399 320 --------- --------- --------- --------- Total interest expense 7,559 7,580 22,205 20,925 --------- --------- --------- --------- Net Interest Income 8,632 8,104 25,360 24,277 Provision for loan losses 250 236 740 767 --------- --------- --------- --------- Net Interest Income After Provision For Loan Losses 8,382 7,868 24,620 23,510 Other Income: Net realized gains (losses) on sale of available for sale securities 24 (2) 50 (50) Other income 1,950 2,013 5,785 5,494 --------- --------- --------- --------- Total other income 1,974 2,011 5,835 5,444 Total other expenses 5,811 5,467 16,817 16,147 --------- --------- --------- --------- Income before income tax 4,545 4,412 13,638 12,807 Income tax expense 1,548 1,582 4,676 4,382 --------- --------- --------- --------- Net Income $ 2,997 $ 2,830 $ 8,962 $ 8,425 --------- --------- --------- --------- --------- --------- --------- --------- Per share: Net income (1) $ .50 $ .47 $ 1.49 $ 1.40 Dividends (1)(2) .24 .20 .64 .58 Weighted average shares outstanding (1) 6,025,472 6,005,433 6,009,747 5,999,253 (1) Restated for 3-for-2 stock split distributed October, 1995. (2) Dividends per share is for First Merchants Corporation, not restated for pooling transaction. See notes to consolidated financial statements. Page 4 of 21
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Dollar amounts in thousands) (Unaudited) 1996 1995 --------- -------- Balances, January 1 $ 96,214 $ 84,427 Net income 8,962 8,425 Cash dividends (3,606) (3,102) Net change in unrealized gain (loss) on securities available for sale (1,689) 3,483 Stock issued under employee benefit plans 298 277 Stock issued under dividend reinvestment and stock purchase plan 384 327 Stock options exercised 64 199 Stock redeemed (920) Cash paid in lien of issuing fractional shares (1) --------- -------- Balances, September 30 $ 100,626 $ 93,116 --------- -------- --------- -------- See notes to consolidated condensed financial statements. Page 5 of 21
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited) Nine Months Ended September 30 ---------------------- 1996 1995 ---------- -------- Cash Flows From Operating Activities: Net income $ 8,962 $ 8,425 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 740 767 Depreciation and amortization 1,095 1,052 Securities amortization, net 316 533 Mortgage loans originated for sale (1,458) (1,852) Proceeds from sale of mortgage loans 2,211 1,859 Change in interest receivable 163 (861) Change in interest payable 169 1,146 Other adjustments (131) 105 ---------- -------- Net cash provided by operating activities 12,067 11,174 Cash Flows From Investing Activities: Net change in interest-bearing deposits with financial institutions (289) (136) Purchases of: Securities available for sale (88,457) (63,250) Securities held to maturity (21,616) (30,762) Proceeds from maturities of: Securities available for sale 76,092 14,458 Securities held to maturity 30,335 29,339 Proceeds from sales of securities available for sale 7,407 13,695 Net change in loans (52,441) (13,820) Purchases of premises and equipment (1,403) (1,634) Other investing activities 180 219 ---------- -------- Net cash used by investing activities (50,192) (51,891) Cash Flows From Financing Activities: Net change in: Noninterest-bearing, NOW, money market and savings deposits (45,948) (43,905) Certificates of deposit and other time deposits 13,967 58,009 Short-term borrowings 44,425 29,308 Federal Home Loan Bank advances (150) Cash dividends (3,606) (3,102) Stock issued under employee benefit plans 298 277 Stock issued under dividend reinvestment and stock purchase plan 384 327 Stock options exercised 64 199 Stock redeemed (920) Cash paid in lieu of issuing fractional shares (1) ---------- -------- Net cash provided by financing activities 9,433 40,193 ---------- -------- Net Decrease in Cash and Cash Equivalents (28,692) (524) Cash and Cash Equivalents, January 1 72,393 50,022 ---------- -------- Cash and Cash Equivalents, September 30 $ 43,701 $49,498 ---------- -------- ---------- -------- See notes to consolidated condensed financial statements. Page 6 of 21
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 of a normal recurring nature and 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 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. Statement of Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights, was adopted by the Corporation on January 1, 1996. SFAS 122 eliminates the accounting distinction between mortgage servicing rights that are acquired through loan origination activities and those acquired through purchase transactions. Under SFAS 122, if a mortgage banking enterprise sells or securitizes loans and retains the mortgage servicing rights, the enterprise must allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the rights) based on their relative fair values if it is practicable to estimate those fair values. If it is not practicable, the entire cost should be allocated to the mortgage servicing rights. The adoption of this statement had no material impact on the Corporation's financial condition and results of operations. NOTE 3. Acquisitions On August 1, 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 was accounted for under the pooling of interests method of accounting. The financial information contained herein reflects the merger and reports the financial condition and results of operations as though the Corporation had been combined as of January 1, 1995. Separate operating results of Union National for the periods prior to the merger were as follows: Page 7 of 21
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands, except per share amounts) (Unaudited) Three Months Ended Nine Months Ended September 30 September 30 ------------------ ------------------ 1996 1995 1996 1995 ------- -------- -------- -------- Net interest income: First Merchants Corporation $8,202 $6,955 $22,402 $20,883 Union National Bancorp 430 1,149 2,958 3,394 ------- -------- -------- -------- Combined $8,632 $8,104 $25,360 $24,277 ------- -------- -------- -------- ------- -------- -------- -------- Net income: First Merchants Corporation 2,837 2,414 7,996 7,334 Union National Bancorp 160 416 966 1,091 ------- -------- -------- -------- Combined $2,997 $2,830 $ 8,962 $ 8,425 ------- -------- -------- -------- ------- -------- -------- -------- Net income per share: First Merchants Corporation .47 .40 1.33 1.22 Union National Bancorp .03 .07 .16 .18 ------- -------- -------- -------- Combined $ .50 $ .47 $ 1.49 $ 1.40 ------- -------- -------- -------- ------- -------- -------- -------- On October 2, 1996, the Corporation issued 565,705 shares of its common stock in exchange for all of the outstanding shares of Randolph County Bancorp, Winchester, Indiana (Randolph County). At December 31, 1995, Randolph County had total assets and shareholders' equity of $73,219,000 and $8,753,000, 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 Nine Months Ended September 30 September 30 ------------------ ------------------ 1996 1995 1996 1995 -------- -------- --------- ------- Net interest income $ 9,310 $ 8,779 $ 27,434 $26,230 Net income 3,221 3,051 9,651 8,999 Net income per share .49 .46 1.47 1.37 Page 8 of 21
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 September 30, 1996: U.S. Treasury $ 20,737 $ 62 $ 87 $ 20,712 Federal agencies 77,228 486 351 77,363 State and municipal 39,005 882 171 39,716 Mortgage and other asset-backed securities 43,074 201 651 42,624 Corporate obligations 26,198 90 197 26,091 Marketable equity securities 506 506 --------- ---------- --------- -------- Total available for sale 206,748 1,721 1,457 207,012 --------- ---------- --------- -------- Held to maturity at September 30, 1996: U.S. Treasury 850 1 10 841 Federal agencies 6,585 24 13 6,596 State and municipal 37,595 247 59 37,783 Mortgage and other asset-backed securities 4,482 9 4,491 Corporate obligations 2,297 11 12 2,296 --------- ---------- --------- -------- Total held to maturity 51,809 292 94 52,007 --------- ---------- --------- -------- Total investment securities $ 258,557 $ 2,013 $ 1,551 $259,019 --------- ---------- ---------- -------- --------- ---------- ---------- -------- Page 9 of 21
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 $ 12,530 $ 161 $ 3 $ 12,688 Federal agencies 79,155 1,501 83 80,573 State and municipal 31,963 1,207 50 33,120 Mortgage and other asset-backed securities 47,445 411 283 47,573 Corporate obligations 29,177 264 79 29,362 Marketable equity security 562 31 593 --------- ----------- ----------- --------- Total available for sale 200,832 3,575 498 203,909 --------- ----------- ----------- --------- 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 40,393 574 57 40,910 Mortgage and other asset-backed securities 5,037 17 21 5,033 Corporate obligations 500 1 499 --------- ----------- ----------- --------- Total held to maturity 60,678 668 102 61,244 --------- ----------- ----------- --------- Total investment securities $261,510 $4,243 $ 600 $265,153 --------- ----------- ----------- --------- --------- ----------- ----------- --------- Page 10 of 21
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited) NOTE 5. Loans and Allowance September 30, December 31, 1996 1995 ------------- ------------- Loans: Commercial and industrial loans $ 107,432 $ 94,343 Bankers' acceptances and loans to financial institutions 2,625 2,925 Agricultural production financing and other loans to farmers 12,979 11,140 Real estate loans: Construction 11,780 9,989 Commercial and farmland 85,669 84,570 Residential 236,827 213,233 Individuals' loans for household and other personal expenditures 96,640 89,274 Tax-exempt loans 1,229 1,119 Other loans 4,325 2,251 ------------- ------------- Total loans $ 559,506 $ 508,844 ------------- ------------- ------------- ------------- Nine Months Ended September 30 ------------------- 1996 1995 -------- -------- Allowance for loan losses: Balances, January 1 $ 6,101 $ 6,114 Provision for losses 740 767 Recoveries on loans 197 156 Loans charged off (1,000) (821) -------- -------- Balances, September 30 $ 6,038 $ 6,216 -------- -------- -------- -------- Page 11 of 21
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 $1.90 in 1995, an increase of 8.6 per cent over 1994. Return on assets was 1.40 per cent in 1995, up from 1.36 per cent in 1994. Return on equity was 12.59 per cent in 1995 and 12.65 in 1994. Following are the levels achieved in each of these ratios during the first nine months of 1996, as compared to the same period in 1995. - Earnings per share were $1.49, up 6.4 per cent from $1.40 - Return on assets was 1.41 per cent increasing from 1.37 per cent - Return on equity totaled 12.23 per cent compared to 12.60 per cent for the first nine months 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 11.07 per cent at December 31, 1995, and 11.35 per cent at September 30, 1996. At September 30, 1996, the Corporation had a Tier I risk-based capital ratio of 17.09 per cent, total risk-based capital ratio of 18.13 per cent and a leverage ratio of 11.56 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 12 of 21
FIRST MERCHANTS CORPORATION FORM 10-Q ASSET QUALITY/PROVISION FOR LOAN LOSSES 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 31, 1995 to September 30, 1996 is primarily attributable to two loans placed in non-accrual status during the first half of 1996. These loans were included in impaired loans at December 31, 1995 for which an allowance was recorded. Management is in the process of resolving these loan situations and anticipates that no additional provision for loan losses is required. 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 (table dollar amounts in thousands). September 30, December 31, September 30, 1996 1995 1995 ------------- ------------- -------------- Non-accrual Loans $ 4,105 $ 587 $ 797 Loans contractually past due 90 days or more other than nonaccruing 1,748 1,188 1,039 Restructured loans 902 1,075 1,141 ------------- ------------- -------------- Total $ 6,755 $2,850 $2,977 ------------- ------------- -------------- ------------- ------------- -------------- On September 30, 1996, the loan loss reserve stood at $6,038,000. As a per cent of loans, the reserve stood at 1.08 per cent compared to 1.20 per cent at year end 1995. The provision for loan losses for the first nine months of 1996 was $740,000 compared to $767,000 for 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 $4,181,000 at December 31, 1995. An allowance for losses at December 31, 1995, was not deemed necessary for impaired loans totaling $1,972,600, but an allowance of $1,104,000 was recorded for the remaining balance of impaired loans of $2,208,400. The balance of impaired loans has not changed significantly since December 31, 1995. Page 13 of 21
FIRST MERCHANTS CORPORATION FORM 10-Q The following table presents loan loss experience for the periods indicated and compares the Corporations loss experience to its peer group consisting of bank holding companies with average assets between $500 million and $1 billion. The statistics were provided by the Federal Reserve System (table dollar amounts in thousands). 1996(1) 1995 1994 ------- ------- -------- Allowance for loan losses: Balance at January 1 $ 6,101 $ 6,114 $ 5,900 Chargeoffs: Commercial 413 549 846 Real estate mortgage 14 1 41 Installment 573 680 384 ------- ------- -------- Total chargeoffs 1,000 1,230 1,271 ------- ------- -------- Recoveries: Commercial 59 121 265 Real estate mortgage 6 4 30 Installment 132 112 108 ------- ------- -------- Total recoveries 197 237 403 ------- ------- -------- Net chargeoffs 803 993 868 ------- ------- -------- Provision for loan losses 740 980 1,082 ------- ------- -------- Balance at December 31 $ 6,038 $ 6,101 $6,114 ------- ------- -------- ------- ------- -------- Ratio of net chargeoffs during the period to average loans outstanding during the period .20%(2) .20% .18% Peer Group N/A .26 .25 (1) Through September 30, 1996 (2) Annualized Page 14 of 21
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 September 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 September 30, 1996 (table dollar amounts in thousands). Interest-Rate Sensitivity Analysis At September 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 $ 2,694 $ 2,694 Investment securities 47,107 $ 31,363 $152,763 $ 27,588 258,821 Loans 260,818 59,206 166,239 73,243 559,506 Federal Reserve and Federal Home Loan Bank stock 2,532 307 2,839 -------- ------- -------- -------- -------- Total rate-sensitive assets 313,151 90,569 319,002 101,138 823,860 -------- ------- -------- -------- -------- Rate-sensitive liabilities: Interest-bearing deposits 254,530 92,475 257,359 1,297 605,661 Short-term borrowing 81,802 81,802 Federal Home Loan Bank advance 2,000 7,150 9,150 -------- ------- -------- -------- -------- Total rate-sensitive liabilities 338,332 92,475 264,509 1,297 696,613 -------- ------- -------- -------- -------- Periodic rate sensitivity gap $(25,181) $(1,906) $ 54,493 $ 99,841 Cumulative rate sensitivity gap (25,181) (27,087) 27,406 127,247 Cumulative rate sensitivity gap ratio 93% 94% 1.04% 1.18% Although rate sensitivity GAPS constantly change as funds are acquired and invested, Page 15 of 21
FIRST MERCHANTS CORPORATION FORM 10-Q the Corporation had a negative GAP of $27,087,000 or 94 per cent at one year or less as of September 30, 1996. This, in the opinion of management is a relative balanced position. Net interest income at financial institutions with negative GAPS tends to decline as interest rates increase and generally increase as interest rates decline. EARNING ASSETS Earning assets increased $92.4 million during 1995 and increased $9.3 million during the first nine months of 1996. The following table presents the earning asset mix for the years ended 1994, 1995 and at September 30, 1996 (table dollar amounts in millions). Earning Assets --------------------------------------------- September 30, December 31, December 31, 1996 1995 1994 ------------- ------------- ------------- Federal funds sold and interest-bearing deposits with financial institutions $ 2.7 $ 37.7 $ 4.3 Securities available for sale 207.0 203.9 122.2 Securities held to maturity 51.8 60.7 108.0 Mortgage loans held for sale .7 Federal Reserve and Federal Home Loan Bank stock 2.8 2.7 2.7 Loans 559.5 508.8 484.9 ------------- ------------- ------------- Total $823.8 $814.5 $722.1 ------------- ------------- ------------- ------------- ------------- ------------- The Corporation has placed an emphasis on increasing the loan portfolio to improve net interest income. Loan growth has outpaced deposit growth resulting in a reduction in Federal Funds sold and interest-bearing deposits with financial institutions. 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 advances) based on period end levels and average daily balances for the past two years and the nine month period ended September 30, 1996 (table dollar amounts in thousands). Period End Balances ------------------------------------------- Federal Home Short-term Loan Bank Deposits Borrowings Advances --------- ---------- -------------- September 30, 1996 $688,514 $ 81,802 $ 9,150 December 31, 1995 720,495 37,377 9,000 December 31, 1994 651,228 40,631 8,000 Page 16 of 21
FIRST MERCHANTS CORPORATION FORM 10-Q Average Balances ------------------------------------------- Federal Home Short-term Loan Bank Deposits Borrowings Advances --------- ---------- -------------- September 30, 1996 $687,288 $ 48,621 $ 9,212 December 31, 1995 656,561 47,367 8,515 December 31, 1994 621,746 47,966 7,904 Deposits at December 31, 1995 included deposits seasonal in nature, such as deposits of States and political subdivisions, certain large corporations, financial institutions and trusts. Average balances reflect a relative steady increase in deposits since December 31, 1994. 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 1994, 1995 and the first nine months of 1996. (Table dollar amounts in thousands.) During the first nine months of 1996, interest income (FTE) as a per cent of average earning assets increased .14% while interest expense as a per cent of average earning assets increased .10% 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% 3.68% 4.44% $804,416 $ 35,706 1995 8.12 3.71 4.41 776,660 34,233 1994 7.46 2.93 4.53 731,328 33,100 (1) First nine months annualized. 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. Page 17 of 21
FIRST MERCHANTS CORPORATION FORM 10-Q Other income in the first nine months of 1996 amounted to $5,835,000 or 7.2 per cent higher than the first nine months of 1995. $343,000 of the increase of $391,000 is attributable to four factors: 1. Trust revenues increased $124,000 (6.1 per cent). 2. Deposit service charges increased $155,000 (7.7 per cent) primarily due to changes in pricing. 3. Interchange fees for the Corporation's credit and debit card programs grew by $119,000 (157 per cent) due to increased product offerings. 4. The Corporation recorded securities gains of $50,000 compared to losses of $50,000 last year, an increase of $100,000. OTHER EXPENSE Total "other expenses" represent non-interest operating expenses of the Corporation. "Other expenses" for the first nine months of 1996 were $16,817,000 or $670,000 (4.1 per cent) above the same period of 1995. Salary and benefit expenses, which account for over one-half of the Corporation's non-interest operating expenses, increased by $511,000 (5.7 per cent). Increases in equipment, data processing and advertising expenses totaling $179,000 were offset by a $664,000 reduction in the cost of deposit insurance. "Other expenses" for the first nine months of 1995 included a refund of $238,000 from the State of Indiana for intangible taxes paid in 1988 and 1989. INCOME TAXES During the first nine months of 1996, income tax expense grew $294,000 from the same period one year earlier, primarily due to a $831,000 increase in pre-tax net income. Page 18 of 21
FIRST MERCHANTS CORPORATION FORM 10-Q OTHER The Securities and Exchange Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including the Corporation, and that the address is (http://www.sec.gov). Page 19 of 21
FIRST MERCHANTS CORPORATION FORM 10-Q PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders None. Item 6. Exhibits and Reports on Form 8-K (a) No exhibits are required to be filed. (b) Form 8-K was filed August 15, 1996 for the acquisition and merger by the Corporation of all the assets of Union National Bancorp. Form 8-K included various financial statements and exhibits related to this merger. Page 20 of 21
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 November 13, 1996 by /s/ Stefan S. Anderson ------------------ ------------------------------------ Stefan S. Anderson President and Director Date November 13, 1996 by /s/ Gary D. Marshall ------------------ ------------------------------------ Gary D. Marshall Acting Chief Financial Officer Page 21 of 21
9 1,000 U.S DOLLARS 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 1 41,451 444 2,250 0 207,012 51,809 52,285 559,506 6,038 886,720 688,514 81,802 6,628 9,150 0 0 754 99,872 886,720 35,376 11,575 614 47,565 19,841 22,205 25,360 740 50 16,817 13,638 8,962 0 0 8,962 1.49 1.49 0 0 0 0 0 0 0 0 0 0 0 0