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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, 1997 Commission File Number 0-17071 First Merchants Corporation - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) 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) (765) 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, 1997, there were outstanding 6,659,602 common shares, without par value, of the registrant. The exhibit index appears on page 18. This report including the cover page contains a total of 22 pages. Page 1
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 . . . . . . . . . . . . . . . . 12 PART II. Other Information: Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . 18 Item 6. Exhibits and Reports of Form 8-K . . . . . . . . . . . . . . . . . . 18 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Page 2
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, 1997 1996 ------------- ------------- ASSETS: Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . $ 30,860 $ 33,882 Federal funds sold. . . . . . . . . . . . . . . . . . . . . . . . . . 1,150 ------------- ------------- Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . 30,860 35,032 Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . 261 290 Investment securities available for sale. . . . . . . . . . . . . . . 212,374 228,379 Investment securities held to maturity. . . . . . . . . . . . . . . . 36,846 47,227 Mortgage loans held for sale. . . . . . . . . . . . . . . . . . . . . 550 284 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 699,495 631,416 Less: Allowance for loan losses. . . . . . . . . . . . . . . . . (6,785) (6,622) ------------- ------------- Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 692,710 624,794 Premises and equipment. . . . . . . . . . . . . . . . . . . . . . . . 15,320 15,303 Federal Reserve and Federal Home Loan Bank stock. . . . . . . . . . . 3,361 3,090 Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . 9,084 8,643 Core deposit intangibles and goodwill . . . . . . . . . . . . . . . . 1,659 1,714 Others assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,686 3,237 ------------- ------------- Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,007,711 $ 967,993 ------------- ------------- ------------- ------------- LIABILITIES: Deposits: Noninterest-bearing. . . . . . . . . . . . . . . . . . . . . . . . . $ 93,285 $ 110,175 Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . 696,081 684,276 ------------- ------------- Total deposits. . . . . . . . . . . . . . . . . . . . . . . . . 789,366 794,451 Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . 72,802 45,037 Federal Home Loan Bank advances. . . . . . . . . . . . . . . . . . . 18,700 9,150 Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . 3,720 3,376 Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 3,409 3,292 ------------- ------------- Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 887,997 855,306 ------------- ------------- 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 -- 6,657,016 and 6,603,319 shares. . . . . . 832 825 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 23,918 22,968 Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . 93,613 87,978 Net unrealized gain on securities available for sale . . . . . . . . 1,351 916 ------------- ------------- Total stockholders' equity. . . . . . . . . . . . . . . . . . . 119,714 112,687 ------------- ------------- Total liabilities and stockholders' equity. . . . . . . . . . . $ 1,007,711 $ 967,993 ------------- ------------- ------------- ------------- See notes to consolidated condensed financial statements. Page 3
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF INCOME (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended Nine Months Ended September 30 September 30 ------------------------- ---------------------- 1997 1996 1997 1996 ---------- --------- -------- -------- Interest Income: Loans receivable Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,288 $ 13,176 $ 44,004 $ 38,326 Tax exempt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 22 87 59 Investment securities: Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,588 3,165 8,395 9,623 Tax exempt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,064 975 3,185 2,831 Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . 115 27 502 Deposits with financial institutions . . . . . . . . . . . . . . . . 6 5 12 13 Federal Reserve and Federal Home Loan Bank stock . . . . . . . . . . 68 53 196 159 ---------- --------- -------- -------- Total interest income . . . . . . . . . . . . . . . . . . . . . . 19,042 17,511 55,906 51,513 ---------- --------- -------- -------- Interest expense: Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,157 7,208 23,487 21,713 Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . 690 859 2,262 1,982 Federal Home Loan Bank advances. . . . . . . . . . . . . . . . . . . 285 134 627 399 ---------- --------- -------- -------- Total interest expense. . . . . . . . . . . . . . . . . . . . . . . 9,132 8,201 26,376 24,094 ---------- --------- -------- -------- Net Interest Income. . . . . . . . . . . . . . . . . . . . . . . . . . 9,910 9,310 29,530 27,419 Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . 375 295 952 875 ---------- --------- -------- -------- Net Interest Income After Provision For Loan Losses. . . . . . . . . . 9,535 9,015 28,578 26,544 Other Income: Net realized gains (losses) on sales of available-for-sale securities (4) 24 (3) 50 Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,295 2,016 6,758 5,971 ---------- --------- -------- -------- Total other income . . . . . . . . . . . . . . . . . . . . . . . . . . 2,291 2,040 6,755 6,021 Total other expenses . . . . . . . . . . . . . . . . . . . . . . . . . 6,486 6,179 19,104 17,887 ---------- --------- -------- -------- Income before income tax . . . . . . . . . . . . . . . . . . . . . . . 5,340 4,876 16,229 14,678 Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . 1,804 1,655 5,557 4,997 ---------- --------- -------- -------- Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,536 $ 3,221 $ 10,672 $ 9,681 ---------- --------- -------- -------- ---------- --------- -------- -------- Per share: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .53 .49 $ 1.61 $ 1.48 Dividends (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 .24 .76 .64 Weighted average shares outstanding. . . . . . . . . . . . . . . . . . 6,649,993 6,591,219 6,624,576 6,575,465 (1) Dividends per share is for First Merchants Corporation only, not restated for pooling transactions. See notes to consolidated condensed financial statements. Page 4
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Dollar amounts in thousands) (Unaudited) 1997 1996 -------------- -------------- Balances, January 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 112,687 $ 104,967 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,672 9,681 Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,038) (3,785) Net change in unrealized gain (loss) on securities available for sale. . . 435 (1,789) Stock issued under employee benefit plans . . . . . . . . . . . . . . . . 292 298 Stock issued under dividend reinvestment and stock purchase plan . . . . . 539 384 Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . 127 64 Cash paid in lieu of issuing fractional shares . . . . . . . . . . . . . . (1) -------------- -------------- Balances, September 30 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 119,714 $ 109,819 -------------- -------------- -------------- -------------- See notes to consolidated condensed financial statements Page 5
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited) Nine Months Ended September 30 ------------------------ 1997 1996 -------- -------- Cash Flows From Operating Activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,672 $ 9,681 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 952 875 Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . Securities amortization, net. . . . . . . . . . . . . . . . . . . . . . . . . . . Securities losses (gains), net. . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage loans originated for sale. . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales of mortgage loans . . . . . . . . . . . . . . . . . . . . . . Change in interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . Change in interest payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . Other adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -------- -------- Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . . Cash Flows From Investing Activities: Net change in interest-bearing deposits. . . . . . . . . . . . . . . . . . . . . . Purchases of Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . Securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from maturities of. . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . Securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales of . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . Net change in loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of premises and equipment. . . . . . . . . . . . . . . . . . . . . . . . Other investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . -------- -------- Net cash used by investing activities . . . . . . . . . . . . . . . . . . . . . . (continued) Page 6
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited) Nine Months Ended September 30 ------------------------ 1997 1996 -------- -------- Cash Flows From Financing Activities: Net change in Demand and savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ Certificates of deposit and other time deposits . . . . . . . . . . . . . . . . . Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal Home Loan Bank advances. . . . . . . . . . . . . . . . . . . . . . . . . . Repayment of Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,038) (3,785) Stock issued under employee benefit plans. . . . . . . . . . . . . . . . . . . . . 292 298 Stock issued under dividend reinvestment and stock purchase plan . . . . . . . . . 539 384 Stock options exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 64 Cash paid in lieu of issuing fractional shares . . . . . . . . . . . . . . . . . . (1) -------- -------- Net cash used by financing activities . . . . . . . . . . . . . . . . . . . . . . -------- -------- Net Change in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . (4,172) (32,233) Cash and Cash Equivalents, January 1. . . . . . . . . . . . . . . . . . . . . . . . 35,032 77,874 -------- -------- Cash and Cash Equivalents, September 30 . . . . . . . . . . . . . . . . . . . . . . $ 30,860 $ 45,641 -------- -------- -------- -------- See notes to consolidated condensed financial statements. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 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 change in method 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 condensed financial statements. NOTE 2. Change in Methods of Accounting Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, is effective for the Corporation's 1997 annual financial statements. This statement simplifies the calculations of earnings per share. The Corporation does not expect that the new disclosure from basic earnings per share will be substantially different from the primary earnings per share as currently calculated and disclosed. Additional disclosures include diluted earnings per share, which will reflect the potential dilution that could occur from unexercised stock options under the Corporation's stock option plans. Page 7
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands, except per share amounts) (Unaudited) NOTE 3. Business Combinations 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. This 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, 1996. Separate operating results of Randolph County Bancorp for the periods prior to the merger are as follows: Three Months Nine Months Ended Ended September 30 September 30 1996 1996 ------------ ------------ Net Interest Income: First Merchants Corporation . . . . . . . . . . $ 8,787 $ 25,501 Randolph County Bancorp . . . . . . . . . . . . 523 1,918 ------------ ------------ Combined. . . . . . . . . . . . . . . . . . . $ 9,310 $ 27,419 ------------ ------------ ------------ ------------ Net Income: First Merchants Corporation . . . . . . . . . . $ 3,047 $ 9,042 Randolph County Bancorp . . . . . . . . . . . . 174 639 ------------ ------------ Combined. . . . . . . . . . . . . . . . . . . $ 3,221 $ 9,681 ------------ ------------ ------------ ------------ Net Income Per Share: First Merchants Corporation . . . . . . . . . . $ .46 $ 1.38 Randolph County Bancorp . . . . . . . . . . . . .03 .10 ------------ ------------ Combined. . . . . . . . . . . . . . . . . . . $ .49 $ 1.48 ------------ ------------ ------------ ------------ Page 8
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, 1997: U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . $ 18,728 $ 92 $ 14 $ 18,806 Federal agencies. . . . . . . . . . . . . . . . . . . . . 72,222 443 59 72,606 State and municipal . . . . . . . . . . . . . . . . . . . 65,111 553 66 65,598 Mortgage-backed securities. . . . . . . . . . . . . . . . 33,261 409 128 33,542 Other asset-backed securities . . . . . . . . . . . . . . 566 1 68 499 Corporate obligations . . . . . . . . . . . . . . . . . . 20,607 494 40 21,061 Marketable equity security. . . . . . . . . . . . . . . . 262 262 ------------ ------------ ------------ ------------ Total available for sale . . . . . . . . . . . . . . . . 210,757 1,992 375 212,374 ------------ ------------ ------------ ------------ Held to maturity at September 30, 1997: U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . 249 4 245 Federal agencies. . . . . . . . . . . . . . . . . . . . . 3,417 12 2 3,427 State and municipal . . . . . . . . . . . . . . . . . . . 27,905 242 5 28,142 Mortgage-backed securities. . . . . . . . . . . . . . . . 1,303 1 2 1,302 Other asset-backed securities . . . . . . . . . . . . . . 3,972 6 239 3,739 ------------ ------------ ------------ ------------ Total held to maturity . . . . . . . . . . . . . . . . . 36,846 261 252 36,855 ------------ ------------ ------------ ------------ Total investment securities. . . . . . . . . . . . . . . $ 247,603 $ 2,253 $ 627 $ 249,229 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Page 9
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, 1996: U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . $ 21,570 $ 92 $ 46 $ 21,616 Federal agencies. . . . . . . . . . . . . . . . . . . . . 79,130 540 180 79,490 State and municipal . . . . . . . . . . . . . . . . . . . 52,026 1,173 106 53,093 Mortgage-backed securities. . . . . . . . . . . . . . . . 41,441 297 275 41,463 Other asset-backed securities . . . . . . . . . . . . . . 709 709 Corporate obligations . . . . . . . . . . . . . . . . . . 31,470 156 128 31,498 Marketable equity securities. . . . . . . . . . . . . . . 510 510 ------------ ------------ ------------ ------------ Total available for sale . . . . . . . . . . . . . . . . 226,856 2,258 735 228,379 ------------ ------------ ------------ ------------ Held to maturity at December 31, 1996: U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . 249 7 242 Federal agencies. . . . . . . . . . . . . . . . . . . . . 5,729 23 5 5,747 State and municipal . . . . . . . . . . . . . . . . . . . 36,405 381 21 36,765 Mortgage-backed securities. . . . . . . . . . . . . . . . 2,730 13 2,717 Other asset-backed securities . . . . . . . . . . . . . . 2,114 17 108 2,023 ------------ ------------ ------------ ------------ Total held to maturity . . . . . . . . . . . . . . . . . 47,227 421 154 47,494 ------------ ------------ ------------ ------------ Total investment securities. . . . . . . . . . . . . . . $ 274,083 $ 2,679 $ 889 $ 275,873 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Page 10
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, 1997 1996 ------------- ------------ Loans: Commercial and industrial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 145,639 $ 132,134 Bankers' acceptances and loans to financial institutions. . . . . . . . . . . . . . . . . . . . 1,020 625 Agricultural production financing and other loans to farmers. . . . . . . . . . . . . . . . . . 19,802 18,906 Real estate loans: Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,515 13,167 Commercial and farmland. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,974 97,596 Residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283,476 253,530 Individuals' loans for household and other personal expenditures. . . . . . . . . . . . . . . . 126,662 113,507 Tax-exempt loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,235 1,643 Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,796 1,672 Unearned interest on loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (624) (1,364) ------------- ------------ Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 699,495 $ 631,416 ------------- ------------ ------------- ------------ Nine Months Ended September 30 -------------------------------- Allowance for loan losses: 1997 1996 ------------- ------------ Balances, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,622 $ 6,696 Provision for losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 952 875 Recoveries on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 386 219 Loans charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,175) (1,043) ------------- ------------ Balances, September 30. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,785 $ 6,747 ------------- ------------ ------------- ------------ Page 11
FIRST MERCHANTS CORPORATION FORM 10-Q ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Corporation's financial data for periods prior to mergers accounted for as pooling of interests has been restated. RESULTS OF OPERATIONS The Corporation has recorded 21 consecutive years of growth in earnings per share, reaching $2.00 in 1996, an increase of 8.7 per cent over 1995. Return on assets rose to 1.41 per cent in 1996, from 1.35 per cent in 1995, and 1.22 per cent in 1994. Return on equity, was 12.16 per cent in 1996, 12.17 per cent in 1995, and 12.42 per cent in 1994. Following are the levels achieved in each of these ratios during the first nine months of 1997, as compared to the same period in 1996. - Earnings per share were $1.61, up 8.8 per cent from $1.48 - Return on assets was 1.44 per cent increasing from 1.40 per cent - Return on equity totaled 11.73 per cent compared to 11.59 per cent for the first nine months of 1996 CAPITAL The 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. The Corporation's Tier I capital to average assets ratio was 11.6 per cent at year-end 1996 and 11.7 per cent at September 30, 1997. At September 30, 1997, the Corporation had a Tier I risk-based capital ratio of 16.5 per cent, total risk-based capital ratio of 17.6 per cent, and a leverage ratio of 11.7 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. Banks with Tier I risk-based capital ratios of 6.0 per cent and total risk-based capital ratios of 10.0 per cent are considered "well capitalized." ASSET QUALITY/PROVISION FOR LOAN LOSSES 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. Page 12
FIRST MERCHANTS CORPORATION FORM 10-Q The following table summarized the risk elements for the Corporation. --------------------------------------------------------------------------------------- (Dollars in Thousands) September 30, December 31, December 31, 1997 1996 1995 --------------------------------------------------------------------------------------- Non-accrual loans . . . . . . . . . . $ 1,842 $ 2,777 $ 576 Loans contractually past due 90 days or more other than nonaccruing . . . 2,025 1,699 1,119 Restructured loans . . . . . . . . . 2,936 1,540 1,075 ------- ------- ------- Total . . . . . . . . . . . . $ 6,803 $ 6,016 $ 2,770 ------- ------- ------- ------- ------- ------- --------------------------------------------------------------------------------------- The increase in non-performing loans from December 31, 1995, to December 31, 1996, is primarily attributable to one loan placed in non-accrual status during 1996. This loan is included in impaired loans at December 31, 1996, for which an allowance was recorded. Management is in the process of resolving this loan situation and anticipates that no additional provision for loan losses will be required. 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 included in the table above, totaled $3,992,000 at December 31, 1996. An allowance for loan losses was not deemed necessary for impaired loans totaling $868,000, but an allowance of $1,092,000 was recorded for the remaining balance of impaired loans of $3,124,000. The average balance of impaired loans for 1996 was $5,213,000. The balance of impaired loans has not changed significantly since December 31, 1996. At December 31, 1996, the allowance for loan losses was $6,622,000, down slightly from year end 1995. As a per cent of loans, the allowance was 1.05 per cent, down from 1.21 per cent at year end 1995. The provision for loan losses in 1996 was $1,253,000 compared to $1,388,000 in 1995. At September 30, 1997, the allowance for loan losses stood at $6,785,000 or .97 per cent of loans. $952,000 was provided for loan losses in the first nine months of 1997 compared to $875,000 in the same period of 1996. The table below presents loan loss experience for the years indicated and compares the Corporation's loss experience to that of its peer group, consisting of bank holding companies with assets between $1 billion and $3 billion. 1997 (1) 1996 1995 ---- ---- ---- (Dollars in Thousands) Allowance for loan losses: Balance at January 1 . . . . . . . . . . . . $6,622 $6,696 $6,603 ------ ------ ------ Chargeoffs . . . . . . . . . . . . . . . . . 1,175 1,636 1,554 Recoveries . . . . . . . . . . . . . . . . . 386 309 259 ------ ------ ------ Net chargeoffs . . . . . . . . . . . . . . . 789 1,327 1,295 Provision for loan losses. . . . . . . . . . 952 1,253 1,388 ------ ------ ------ Balance at December 31 . . . . . . . . . . . $6,785 $6,622 $6,696 ------ ------ ------ ------ ------ ------ Ratio of net chargeoffs during the period to average loans outstanding during the period . .16% .23% .24% Peer Group . . . . . . . . . . . . . . . . . . .27%(3) .26% .27% (1) Through September 30, 1997 (2) First nine months annualized (3) Through June 30, 1997 Page 13
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. The Corporation's liquidity and interest sensitivity position at September 30, 1997, remained adequate to meet the Corporation's primary goal of achieving optimum interest margins while avoiding undue interest rate risk. The table below presents the Corporation's interest rate sensitivity analysis as of September 30, 1997. INTEREST-RATE SENSITIVITY ANALYSIS At September 30, 1997 (Dollars in Thousands) Beyond 1-180 Days 181-365 Days 1-5 Years 5 Years Total ---------- ------------ --------- --------- --------- Rate-Sensitive Assets: Federal funds sold and interest-bearing deposits . . . . . . . . . $ 261 $ 261 Investment securities. . . . . . . . . . . . 62,925 $ 35,358 $ 117,099 $ 33,838 249,220 Loans. . . . . . . . . . . . . . . . . . . . 296,339 71,872 264,516 67,318 700,045 Federal Reserve and Federal Home Loan Bank stock. . . . . . . . . . . . 2,964 397 3,361 ---------- ------------ --------- --------- --------- Total rate-sensitive assets. . . . . . . . 362,489 107,230 381,615 101,553 952,887 Rate-Sensitive Liabilities: Interest bearing deposits. . . . . . . . . . 296,281 88,852 309,754 1,194 696,081 Short-term borrowings. . . . . . . . . . . . 72,802 72,802 Federal Home Loan Bank advances. . . . . . . . . . . . . . . . . . 2,149 144 11,578 4,829 18,700 ---------- ------------ --------- --------- --------- Total rate-sensitive liabilities . . . . . 371,232 88,996 321,332 6,023 787,583 Interest rate sensitivity gap by period . . . (8,743) 18,234 60,283 95,530 Cumulative rate sensitivity gap . . . . . . . (8,743) 9,491 69,774 165,304 Cumulative rate sensitivity gap ratio September 30, 1997 . . . . . . . . . . . . . 97.6% 102.1% 108.9% 121.0% June 30, 1997. . . . . . . . . . . . . . . . 96.4% 107.0% 109.6% 120.8% The Corporation had a cumulative positive gap of $9,491,000 in the one year horizon at September 30, 1997 or .94 percent of total assets. Net interest income at financial institutions with positive gaps tends to increase when rates increase and generally decrease as interest rates decline. Page 14
FIRST MERCHANTS CORPORATION FORM 10-Q EARNING ASSETS Earning assets increased by $30.3 million during 1996, and $41.2 million during the first nine months of 1997. The following table presents the earning asset mix for the years ended 1996 and 1995 and at September 30, 1997. Loans grew by more than $79 million during 1996 while short-term investments and securities declined, reflecting the Corporation's intent to change the balance sheet mix to emphasize loans which generally carry higher yields than federal funds sold, interest-bearing deposits and investment securities, and often provide collateral business. The same trend continued during the first nine months of 1997. Loans grew by more than $68 million, accounting for all of the growth in earning assets. Maturities in the investment portfolio helped fund the loan growth. - -------------------------------------------------------------------------------- EARNING ASSETS (Dollars in Millions) September 30, December 31, December 31, 1997 1996 1995 ------------- ------------ ------------ Federal funds sold and interest-bearing deposits . . . . . . . . . . . . . $ .3 $ 1.4 $ 39.2 Investment securities available for sale . . . . . . . . . . . . . . . . . 212.4 228.4 225.9 Investment securities held to maturity . . . . . . . . . . . . . . . . . . 36.8 47.2 60.7 Mortgage loans held for sale . . . . . . . . . . . . . . . . . . . . . . . .6 0.3 0.7 Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 699.5 631.4 552.3 Federal Reserve and Federal Home Loan Bank stock . . . . . . . . . . . . . 3.4 3.1 2.7 ------ ------ ------ Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $953.0 $911.8 $881.5 ------ ------ ------ ------ ------ ------ - -------------------------------------------------------------------------------- DEPOSITS, SHORT-TERM BORROWINGS AND FEDERAL HOME LOAN BANK ADVANCES The following table presents 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) for the years ended 1996 and 1995 and at September 30, 1997. Lack of deposit growth coupled with loan growth has resulted in a greater reliance on borrowed funds. The Corporation plans to place further emphasis on deposit growth going forward through advertising and product development. - -------------------------------------------------------------------------------- DEPOSITS, SHORT-TERM BORROWINGS AND FEDERAL HOME LOAN BANK ADVANCES (Dollars in Millions) September 30, December 31, December 31, 1997 1996 1995 ------------- ------------ ------------ Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 789.4 $ 794.5 $ 783.9 Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . 72.8 45.0 37.4 Federal Home Loan Bank advances. . . . . . . . . . . . . . . . . . . . . . 18.7 9.2 9.0 Page 15
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. Asset yields improved slightly in 1996 (.04 per cent FTE) due to strong loan growth. Interest costs declined by a like amount, primarily due to rate reductions to three interest-bearing deposit products: interest checking, Money Market investment account and regular savings. The resulting "spread" increase of .08 per cent combined with earning asset growth of $35.5 million accounted for the growth in net interest income (FTE) of $2.2 million. During the first nine months of 1997, both interest yields and interest costs remained stable, increasing by .09 per cent. All of the increase in net interest income is attributable to earning asset growth which amounted to nearly $54.3 million. The table below presents the Corporation's asset yields, interest expense, and net interest income as a per cent of average earning assets for the three-year period ending in 1996 and the first nine months of 1997. - --------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Interest Income Interest Expense Net Interest Income Net Interest Income (FTE) as a Per Cent as a Per Cent (FTE) as a Per Cent Average on a of Average of Average of Average Earning Fully Taxable Earning Assets Earning Assets Earning Assets Assets Equivalent Basis - --------------------------------------------------------------------------------------------------------------------------------- 1997 (1) 8.22 % 3.76 % 4.46 % $ 935,023 $ 41,724 1996 8.13 3.67 4.46 880,729 39,258 1995 8.09 3.71 4.38 845,198 37,049 1994 7.42 2.96 4.46 805,987 35,909 Average earning assets include the average balance of securities classified as available for sale, computed based on the average of the historical amortized cost balances without the effects of the fair value adjustment. (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. Other income in 1996 amounted to $8,342,000 or 9.9 per cent higher than in 1995. The increase of $750,000 is primarily attributable to the following five factors: 1. Trust revenues increased $166,000 (5.9 per cent) due to stronger business activity and investment returns. 2. Deposit service charges increased $195,000 (6.9 per cent) primarily due to changes in pricing. 3. Interchange fees for the Corporation's credit and debit card programs grew by $169,000 (142 per cent) due to increased product offerings. 4. The Corporation recorded securities gains of $148,000 compared to losses of $30,000 last year, an increase of $178,000 as shorter maturity, available for sale securities were sold at gains and longer maturity, higher yielding investments were purchased. 5. Postal money order agent fees increased $79,000 (19.4 per cent) due to an increased client base. Page 16
FIRST MERCHANTS CORPORATION FORM 10-Q Other income in the first nine months of 1997 exceeded the same period in the prior year by $734,000 or 12.2 per cent. Three categories accounted for most of this increase: 1. Trust fees grew by $260,000 or 12.0 per cent, again due to new business and positive investment returns. 2. Deposit service charges increased by $226,000 or 9.9 per cent due primarily to changes in pricing. 3. Other customer fees increased by $282,000 or 24.4 per cent due primarily to an increase in sales of personal money orders. OTHER EXPENSE Total "other expenses" represent non-interest operating expenses of the Corporation. Those expenses amounted to $24,135,000 in 1996, an increase of 5.0 per cent from the prior year, or $1,142,000. Including an $813,000 reduction in deposit insurance premiums, remaining operating expenses grew by $1,955,000. Four major areas account for most of this increase: 1. Salary and benefit expenses, which account for over one-half of the Corporation's non-interest operating expenses, increased by $640,000 (5.0 per cent) due to normal salary increases. 2. Equipment expense rose $223,000, reflecting the Corporation's investment in technology to increase productivity and improve customer service. 3. Expenses related to mergers with Union National Bancorp and Randolph County Bancorp amounted to $258,000. 4. The previous year included a $238,000 refund from the State of Indiana for intangibles taxes paid in 1988 and 1989. Other expense in the first nine months of 1997 exceeded the same period of the prior year by $1,217,000 or 6.8 per cent. Five primary areas account for this increase: 1. Salaries and benefits grew by $427,000 or 4.2 per cent due primarily to normal annual salary adjustments. 2. Business supply expense grew by $95,000 or nearly 14.3 per cent primarily due to increased use of data processing supplies and personal money order forms. 3. Equipment expense grew $184,000 or 12.0 per cent, again reflecting the Corporation's investment in technology to increase productivity and improve customer service. 4. Deposit insurance expense increased $61,000 (610 per cent) due to higher insurance premiums. 5. Marketing expense increased $82,000 or 13.5 per cent due primarily to the promotion of deposit products and and home banking services. INCOME TAXES 1996 income tax expense increased by $698,000 due to a $1,792,000 increase in net pre-tax income. Likewise, the increase of $560,000 in the first nine months of 1997, as compared to the same period in 1996, results from a $1,551,000 increase in pre-tax net income, mitigated somewhat by a $382,000 increase in tax exempt income. 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 17
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) Exhibits: FORM 10-Q PAGE EXHIBIT NO.: DESCRIPTION OF EXHIBIT: NUMBER ------------ ----------------------- --------- 27.1 Financial Data Schedule, Period Ending September 30, 1997 . . . . . . . . 20 27.2 Restated Financial Data Schedule, Period Ending September 30, 1996 . . . . . . . . 21 27.3 Restated Financial Data Schedule, Period Ending September 30, 1995 . . . . . . . . 22 (b) Reports on Form 8-K: No reports were filed on Form 8-K during the quarter ended September 30, 1997. Page 18
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 12, 1997 By /s/ Michael L. Cox -------------------------------- Michael L. Cox Executive Vice President and Director Date November 12, 1997 By /s/ James L. Thrash --------------------------------- James L. Thrash Chief Financial & Principal Accounting Officer Page 19
9 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 30,860 261 0 0 212,374 36,846 36,851 700,045 6,785 1,007,711 789,366 72,802 7,129 18,700 0 0 832 118,882 1,007,711 44,091 11,580 235 55,906 23,487 26,376 29,530 952 (3) 19,104 16,229 10,672 0 0 10,672 1.61 1.61 0 0 0 0 0 0 0 0 0 0 0 0
9 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-01-1996 43,391 444 2,250 0 229,297 51,809 52,285 605,960 6,747 959,409 749,733 83,671 7,030 9,150 0 0 825 108,994 959,409 38,385 12,454 674 51,513 21,713 24,094 27,419 875 50 17,887 14,678 9,681 0 0 9,681 1.48 1.48 0 0 0 0 0 0 0 0 0 0 0 0
9 1,000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 30,663 259 0 0 165,103 128,791 129,820 543,141 6,708 914,367 727,859 69,939 6,990 8,000 0 0 821 100,758 914,367 36,378 11,960 676 49,014 20,781 23,073 25,941 857 (50) 17,318 13,625 8,991 0 0 8,991 1.37 1.37 0 0 0 0 0 0 0 0 0 0 0 0