<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
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
--------------- ---------------- ---------------- -------- --------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET (PAGE 3), THE CONSOLIDATED CONDENSED STATEMENT OF
INCOME (PAGE 4) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 41,451
<INT-BEARING-DEPOSITS> 444
<FED-FUNDS-SOLD> 2,250
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 207,012
<INVESTMENTS-CARRYING> 51,809
<INVESTMENTS-MARKET> 52,285
<LOANS> 559,506
<ALLOWANCE> 6,038
<TOTAL-ASSETS> 886,720
<DEPOSITS> 688,514
<SHORT-TERM> 81,802
<LIABILITIES-OTHER> 6,628
<LONG-TERM> 9,150
0
0
<COMMON> 754
<OTHER-SE> 99,872
<TOTAL-LIABILITIES-AND-EQUITY> 886,720
<INTEREST-LOAN> 35,376
<INTEREST-INVEST> 11,575
<INTEREST-OTHER> 614
<INTEREST-TOTAL> 47,565
<INTEREST-DEPOSIT> 19,841
<INTEREST-EXPENSE> 22,205
<INTEREST-INCOME-NET> 25,360
<LOAN-LOSSES> 740
<SECURITIES-GAINS> 50
<EXPENSE-OTHER> 16,817
<INCOME-PRETAX> 13,638
<INCOME-PRE-EXTRAORDINARY> 8,962
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,962
<EPS-PRIMARY> 1.49
<EPS-DILUTED> 1.49
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
