<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 March 31, 1996
Commission File Number 0-17071
First Merchants Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its character)
Indiana 35-1544218
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
200 East Jackson Street - Muncie, IN 47305-2814
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip code)
(317) 747-1500
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days,
Yes X No
------- -------
As of May 6, 1996, there were outstanding 5,062,069 common shares,
without par value, of the registrant.
Page 1 of 20
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
INDEX
Page No.
--------
PART I. Financial information:
Item 1. Financial Statements:
Consolidated Condensed Balance Sheet. . . . . . . . . . . . 3
Consolidated Condensed Statement of Income. . . . . . . . . 4
Consolidated Condensed Statement of Changes in
Stockholders' Equity. . . . . . . . . . . . . . . . . . . . 5
Consolidated Condensed Statement of Cash Flows. . . . . . . 6
Notes to Consolidated Condensed Financial Statements. . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 11
PART II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders . . . . . 19
Item 6. Exhibits and Reports of Form 8-K. . . . . . . . . . . . . . . 19
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Page 2 of 20
<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)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
ASSETS:
Cash and due from banks. . . . . . . . . . . . . . . . . . . . . $ 21,196 $ 31,432
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . 13,300 37,500
-------- --------
Cash and cash equivalents . . . . . . . . . . . . . . . . . . 34,496 68,932
Interest-bearing deposits with financial institutions. . . . . . 142 155
Securities available for sale. . . . . . . . . . . . . . . . . . 146,915 143,120
Securities held to maturity. . . . . . . . . . . . . . . . . . . 53,372 58,214
Mortgage Loans held for sale . . . . . . . . . . . . . . . . . . 736
Loans:
Loans, net of unearned interest . . . . . . . . . . . . . . . 427,672 418,994
Less: Allowance for loan losses. . . . . . . . . . . . . . . (4,947) (4,957)
-------- --------
Net loans. . . . . . . . . . . . . . . . . . . . . . . . . 422,725 414,037
Premises and equipment . . . . . . . . . . . . . . . . . . . . . 10,345 10,476
Federal Reserve and Federal Home Loan Bank stock . . . . . . . . 1,892 1,892
Interest receivable. . . . . . . . . . . . . . . . . . . . . . . 5,901 6,187
Core deposit intangibles and goodwill. . . . . . . . . . . . . . 1,813 1,845
Others assets. . . . . . . . . . . . . . . . . . . . . . . . . . 3,669 2,265
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $681,270 $707,859
-------- --------
-------- --------
LIABILITIES:
Deposits:
Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . $ 73,199 $ 99,432
Interest-bearing. . . . . . . . . . . . . . . . . . . . . . . 483,269 488,724
-------- --------
Total deposits . . . . . . . . . . . . . . . . . . . . . . 556,468 588,156
Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . 36,594 33,975
Federal Home Loan Bank advance . . . . . . . . . . . . . . . . . 1,000 1,000
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . 1,907 1,866
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . 4,045 2,389
-------- --------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 600,014 627,386
STOCKHOLDERS' EQUITY:
Preferred stock, no-par value:
Authorized and unissued -- 500,000 shares
Common stock, $.125 stated value:
Authorized --- 20,000,000 shares
Issued and outstanding -- 5,060,661 and 5,053,901 shares. . . 633 632
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 16,009 15,852
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . 64,403 62,836
Net unrealized gain on securities available for sale . . . . . . 211 1,153
-------- --------
Total stockholders' equity . . . . . . . . . . . . . . . . 81,256 80,473
-------- --------
Total liabilities and stockholders' equity . . . . . . . . $681,270 $707,859
-------- --------
-------- --------
</TABLE>
See notes to consolidated condensed financial statements.
Page 3 of 20
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Interest Income:
Loans, including fees:
Taxable . . . . . . . . . . . . . . . . . . . . . . . $ 9,551 $ 8,937
Tax exempt. . . . . . . . . . . . . . . . . . . . . . 13 18
Investment securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . 2,262 2,012
Tax exempt. . . . . . . . . . . . . . . . . . . . . . 636 545
Federal funds sold . . . . . . . . . . . . . . . . . . . 211 42
Interest-bearing deposits with financial institutions. . 2
Federal Reserve and Federal Home Loan Bank stock . . . . 36 34
---------- ----------
Total interest income. . . . . . . . . . . . . . . 12,711 11,588
Interest expense:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . 5,161 4,058
Short-term borrowings. . . . . . . . . . . . . . . . . . 511 603
Federal Home Loan Bank advance . . . . . . . . . . . . . 15
---------- ----------
Total interest expense. . . . . . . . . . . . . . . . 5,687 4,661
---------- ----------
Net Interest Income . . . . . . . . . . . . . . . . . . . . 7,024 6,927
Provision for loan losses . . . . . . . . . . . . . . . . . 160 160
---------- ----------
Net Interest Income After Provision For Loan Losses . . . . 6,864 6,767
Other Income:
Securities gains, net. . . . . . . . . . . . . . . . . . 10 10
Other income . . . . . . . . . . . . . . . . . . . . . . 1,795 1,633
---------- ----------
Total other income. . . . . . . . . . . . . . . . . . . . . 1,805 1,643
Total other expenses. . . . . . . . . . . . . . . . . . . . 4,688 4,712
---------- ----------
Income before income tax. . . . . . . . . . . . . . . . . . 3,981 3,698
Income tax expense. . . . . . . . . . . . . . . . . . . . . 1,402 1,307
---------- ----------
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . $ 2,579 $ 2,391
---------- ----------
---------- ----------
Per share:
Net income (1) . . . . . . . . . . . . . . . . . . . . . $ .51 $ .47
Dividends (1). . . . . . . . . . . . . . . . . . . . . . .20 .19
Weighted average shares outstanding (1) . . . . . . . . . . 5,056,140 5,051,232
</TABLE>
(1) Restated for 3-for-2 stock split distributed October, 1995.
See notes to consolidated condensed financial statements.
Page 4 of 20
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Balances, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . $80,473 $71,018
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,579 2,391
Cash dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,012) (944)
Net change in unrealized gain (loss) on securities available for sale . . (942) 1,089
Stock issued under dividend reinvestment and stock purchase plan. . . . . 124 104
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . 34 25
------- -------
Balances, March 31. . . . . . . . . . . . . . . . . . . . . . . . . . . . $81,256 $73,683
------- -------
------- -------
</TABLE>
See notes to consolidated condensed financial statements.
Page 5 of 20
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------
1996 1995
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,579 $ 2,391
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 160 160
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . 308 289
Securities amortization, net. . . . . . . . . . . . . . . . . . . . . . . . . . 26 251
Mortgage loans originated for sale. . . . . . . . . . . . . . . . . . . . . . . (108) (98)
Proceeds from sales of mortgage loans . . . . . . . . . . . . . . . . . . . . . 853 97
Change in interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . 436 183
Change in interest payable. . . . . . . . . . . . . . . . . . . . . . . . . . . 41 207
Other adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 850 920
-------- --------
Net cash provided by operating activities. . . . . . . . . . . . . . . . . . 5,145 4,400
Cash Flows From Investing Activities:
Net change in interest-bearing deposits with financial institutions. . . . . . . . 13 (28)
Purchases of:
Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . (47,550) (13,766)
Securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . (16,526) (7,340)
Proceeds from maturities and sales of:
Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . 42,194 1,794
Securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . 21,354 12,754
Net change in loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,922) (3,314)
Purchases of premises and equipment. . . . . . . . . . . . . . . . . . . . . . . . (178) (618)
Other investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43) 52
-------- --------
Net cash used by investing activities . . . . . . . . . . . . . . . . . . . . . (9,658) (10,466)
Cash Flows From Financing Activities:
Net change in:
Noninterest-bearing, NOW, money market and savings deposits. . . . . . . . . . (36,743) (30,036)
Certificates of deposit and other time deposits. . . . . . . . . . . . . . . . 5,055 22,554
Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,619 (2,240)
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,012) (944)
Stock issued under dividend reinvestment and stock purchase plan . . . . . . . . . 124 104
Stock options exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 25
-------- --------
Net cash used by financing activities . . . . . . . . . . . . . . . . . . . . . (29,923) (10,537)
-------- --------
Net Decrease in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . (34,436) (16,603)
Cash and Cash Equivalents, January 1. . . . . . . . . . . . . . . . . . . . . . . . . 68,932 46,359
-------- --------
Cash and Cash Equivalents, March 31 . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,496 $ 29,756
-------- --------
-------- --------
</TABLE>
See notes to consolidated condensed financial statements.
Page 6 of 20
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. GENERAL
The significant accounting policies followed by First Merchants Corporation
("Corporation") and its wholly owned subsidiaries for interim financial
reporting are consistent with the accounting policies followed for annual
financial reporting, except for the changes in methods of accounting
discussed more fully in Note 2. All adjustments which are in the opinion of
management necessary for a fair statement of the results for the periods
reported have been included in the accompanying consolidated financial
statements.
NOTE 2. CHANGE IN METHODS OF ACCOUNTING
Statement of Financial Accounting Standards ("SFAS") No. 123, Stock-Based
Compensation, is effective for the Corporation for 1996. This statement
establishes a fair value based method of accounting for stock-based
compensation plans. The Corporation intends to account for stock-based
compensation as prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees.
NOTE 3. ACQUISITIONS
On January 17, 1996, the Corporation signed a definitive agreement to acquire
all of the outstanding shares of Randolph County Bancorp, Winchester,
Indiana. Under terms of the agreement, the Corporation will issue
approximately 566,000 shares of its common stock. The transaction will be
accounted for under the pooling of interests method of accounting and is
subject to approval by stockholders of Randolph County Bancorp and
appropriate regulatory agencies. Although the corporation anticipates that
the merger will be consummated during the third quarter of 1996, there can
be no assurance that the acquisition will be completed. At December 31,
1995, Randolph County Bancorp, had total assets and stockholders'
equity of $73,333,000 and $8,867,000, respectively.
On January 24, 1996, the Corporation signed a definitive agreement to acquire
all of the outstanding shares of Union National Bancorp, Liberty, Indiana.
Under terms of the agreement, the Corporation will issue approximately
943,000 shares of its common stock. The transaction will be accounted for
under the pooling of interests method of accounting and is subject to
approval by stockholders of Union National Bancorp and appropriate regulatory
agencies. Although the Corporation anticipates that the merger will be
consummated during the second or third quarter of 1996, there can be no
assurance that the acquisition will be completed. At December 31, 1995,
Union National Bancorp had total assets and stockholders' equity of
$161,078,000 and $15,741,000, respectively.
Page 7 of 20
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
(Unaudited)
NOTE 4. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Available for sale at March 31, 1996:
U.S. Treasury. . . . . . . . . . . . . $ 12,271 $ 14 $ 46 $ 12,239
Federal agencies . . . . . . . . . . . 65,949 633 278 66,304
State and municipal. . . . . . . . . . 20,821 273 80 21,014
Mortgage and other
asset-backed securities. . . . . . . 22,550 110 189 22,471
Corporate obligations. . . . . . . . . 24,725 108 196 24,637
Marketable equity security . . . . . . 250 250
-------- ------ ---- --------
Total available for sale . . . . 146,566 1,138 789 146,915
-------- ------ ---- --------
Held to maturity at March 31, 1996:
U.S. Treasury. . . . . . . . . . . . . 2,350 3 8 2,345
Federal agencies . . . . . . . . . . . 8,123 44 22 8,145
State and municipal. . . . . . . . . . 38,322 323 89 38,556
Mortgage and other
asset-backed securities. . . . . . . 4,077 3 4,080
Corporate obligations. . . . . . . . . 500 500
-------- ------ ---- --------
Total held to maturity . . . . . 53,372 373 119 53,626
-------- ------ ---- --------
Total investment securities. . . $199,938 $1,511 $908 $200,541
-------- ------ ---- --------
-------- ------ ---- --------
</TABLE>
Page 8 of 20
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Available for sale at December 31, 1995:
U.S. Treasury. . . . . . . . . . . . . . $ 4,531 $ 26 $ 3 $ 4,554
Federal agencies . . . . . . . . . . . . 67,518 1,299 72 68,745
State and municipal. . . . . . . . . . . 18,769 398 37 19,130
Mortgage and other
asset-backed securities . . . . . . . 24,023 210 121 24,112
Corporate obligations. . . . . . . . . . 26,120 264 55 26,329
Marketable equity security . . . . . . . 250 250
-------- ------ ---- --------
Total available for sale. . . . . . . 141,211 2,197 288 143,120
-------- ------ ---- --------
Held to maturity at December 31, 1995:
U.S. Treasury. . . . . . . . . . . . . . 3,103 8 2 3,109
Federal agencies . . . . . . . . . . . . 11,645 69 21 11,693
State and municipal. . . . . . . . . . . 40,013 483 57 40,439
Mortgage and other
asset-backed securities . . . . . . . 2,953 8 2,961
Corporate obligations. . . . . . . . . . 500 1 499
-------- ------ ---- --------
Total held to maturity. . . . . . . . 58,214 568 81 58,701
-------- ------ ---- --------
Total investment securities . . . . . $199,425 $2,765 $369 $201,821
-------- ------ ---- --------
-------- ------ ---- --------
</TABLE>
Page 9 of 20
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
(Unaudited)
NOTE 5. LOANS AND ALLOWANCE
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------- --------
<S> <C> <C>
Loans:
Commercial and industrial loans . . . . $ 96,713 $ 85,690
Bankers' acceptances and loans to
financial institutions . . . . . . . 4,175 2,925
Agricultural production financing
and other loans to farmers. . . . . . 5,045 5,796
Real estate loans:
Construction . . . . . . . . . . . . 9,695 9,913
Commercial and farmland . . . . . . 65,834 66,749
Residential. . . . . . . . . . . . . 167,583 166,414
Individuals' loans for household and
other personal expenditures . . . . . 77,039 79,993
Tax-exempt loans. . . . . . . . . . . . 814 863
Other loans . . . . . . . . . . . . . . 774 651
-------- --------
Total loans . . . . . . . . . . . $427,672 $418,994
-------- --------
-------- --------
<CAPTION>
Three Months Ended
March 31
-------------------------
1996 1995
-------- --------
<S> <C> <C>
Allowance for loan losses:
Balances, January 1 . . . . . . . . . . $ 4,957 $ 4,998
Provision for losses. . . . . . . . . . 160 160
Recoveries on loans . . . . . . . . . . 55 53
Loans charged off . . . . . . . . . . . (225) (139)
-------- --------
Balances, March 31. . . . . . . . . . . $ 4,947 $ 5,072
-------- --------
-------- --------
</TABLE>
Page 10 of 20
<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 $1.95 in 1995, an increase
of 8.3 per cent over 1994.
Return on assets, which exceeded 1 per cent for the first time in
1988, rose to 1.48 per cent in 1995, from 1.44 per cent in 1994, and 1.39 per
cent in 1993.
Return on equity, which exceeded 12 per cent for the first time in
1989, was 13.01 per cent in 1993, 13.06 per cent in 1994, and 12.97 in 1995.
Following are the levels achieved in each of these ratios during the
first quarter of 1996, as compared to the same period in 1995.
- Earnings per share were $.51, up 8.5 per cent from $.47
- Return on assets was 1.51 per cent decreasing from 1.52 per cent
- Return on equity totaled 12.75 per cent compared to 13.22 per cent
for the first quarter of 1995
CAPITAL
First Merchants Corporation's capital strength continues to exceed
regulatory minimums and peer group averages. Management believes that strong
capital is a distinct advantage in the competitive environment in which the
Corporation operates, and will provide a solid foundation for continued
growth, and instilling customer confidence. First Merchants Corporation and
its subsidiaries have received honors from various financial rating services
recognizing the Banks for safety and soundness. Earnings asset quality and
capital strength were considered in the ratings.
The Corporation's capital to assets ratio was 11.02 per cent at
December 31, 1994, 11.37 per cent at December 31, 1995, and 11.93 per cent at
March 31, 1996. At March 31, 1996, the Corporation had a Tier I risk-based
capital ratio of 17.76 per cent, total risk-based capital ratio of 18.86 per
cent and a leverage ratio of 11.71 per cent. Regulatory capital guidelines
require a Tier I risk-based capital ratio of 4.0 per cent and a total
risk-based capital ratio of 8.0 per cent.
The Corporation has an employee stock purchase plan and an employee
stock option plan. Activity under this program is detailed in the
Consolidated Condensed Statement of Changes in Stockholders' Equity. The
transactions under these plans have not had a material effect in the
Corporation's capital position.
Page 11 of 20
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
ASSET QUALITY/PROVISION FOR LOAN LOSSES
First Merchants Corporation's asset quality and loan loss experience
has consistently been superior to that of its peer group, as summarized
below. Asset quality has been a major factor in the Corporation's ability to
generate consistent profit improvement.
The allowance for loan losses is maintained through the provision
for loan losses, which is a charge against earnings. The amount provided for
loan losses, and the determination of the adequacy of the allowance are based
on a continuous review of the loan portfolio, including an internally
administered loan "watch" list. The evaluation takes into consideration
identified credit problems as well as the possibility of losses inherent in
the loan portfolio that cannot be specifically identified.
The following table summarizes the risk elements for First Merchants
Corporation and its peer group, consisting of bank holding companies with
average assets between $500 million and $1 billion. The statistics were
provided by the Federal Reserve System.
Non-Performing Loans (1)
at December 31 as a
Per Cent of Loans
------------------------
First
Merchants Peer
Corporation Group
----------- -------
1996 (March 31) . . . . . . . . . . . . . . . .89% N/A
1995 . . . . . . . . . . . . . . . . . . . . . .16 .91%
1994 . . . . . . . . . . . . . . . . . . . . . .26 1.01
1993 . . . . . . . . . . . . . . . . . . . . . .30 1.55
1992 . . . . . . . . . . . . . . . . . . . . . .41 1.85
1991 . . . . . . . . . . . . . . . . . . . . . .86 2.54
(1) Accruing loans past due 90 days or more, and non-accruing loans,
but excluding restructured loans.
On March 31, 1996, the loan loss reserve stood at $4,947,000. As a per
cent of loans, the reserve stood at 1.16 per cent compared to 1.18 per cent
at year end 1995, and 1.24 per cent at year end 1994. The provision for loan
losses for the first quarter of 1996 remained at $160,000 equal to the same
period of 1995. The Corporation adopted SFAS No. 114 and No. 118, Accounting
by Creditors for Impairment of a Loan and Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures on January 1,
1995. Impaired loans totaled $3,122,000 at December 31, 1995. An allowance
for losses at December 31, 1995, was not deemed necessary for impaired loans
totaling $1,900,000, but an allowance of $559,000 was recorded for the
remaining balance of impaired loans of $1,222,000. The balance of impaired
loans has not changed significantly since December 31, 1995.
Page 12 of 20
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
The following table presents loan loss experience for the years
indicated and compares the Corporation's loss experience to its peer group
(table dollar amounts in thousands).
<TABLE>
<CAPTION>
1996 (1) 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance at January 1. . . $4,957 $4,998 $4,800 $4,351 $3,867
Chargeoffs:
Commercial. . . . . . . . 58 586 526 391 588
Real estate mortgage 41 129 100
Installment . . . . . . . 167 296 346 388 552
-------- -------- -------- -------- --------
Total chargeoffs . . . 225 882 913 908 1,240
-------- -------- -------- -------- --------
Recoveries:
Commercial. . . . . . . . 16 89 216 240 215
Real estate mortgage. . . 4 4 30 5 38
Installment . . . . . . . 35 108 83 98 114
-------- -------- -------- -------- --------
Total recoveries . . . 55 201 329 343 367
-------- -------- -------- -------- --------
Net chargeoffs . . . . . . . 170 681 584 565 873
-------- -------- -------- -------- --------
Provision for loan losses. . 160 640 782 1,014 1,357
-------- -------- -------- -------- --------
Balance at December 31 . . . $4,947 $4,957 $4,998 $4,800 $4,351
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratio of net chargeoffs
during the period to
average loans outstanding
during the period. . . . . .16%(2) .16% .15% .16% .26%
Peer Group . . . . . . . . . N/A .26% .25% .49% .65%
</TABLE>
(1) Through March 31, 1996
(2) Annualized
Page 13 of 20
<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 March 31, 1996, remained adequate to meet the Corporation's
primary goal of achieving optimum interest margins while avoiding undue
interest rate risk. The table below represents the Corporation's interest
rate sensitivity analysis as of March 31, 1996 (table dollar amounts in
thousands).
Interest-Rate Sensitivity Analysis
<TABLE>
<CAPTION>
At March 31, 1996
------------------------------------------------
1-180 181-365 1-5 Beyond
Days Days Years 5 Years Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Federal funds sold
and interest-bearing
deposits with financial
institutions . . . . . . . . . . $ 13,442 $ 13,442
Investment securities . . . . . . 34,134 $ 26,657 $127,718 $ 11,778 200,287
Loans . . . . . . . . . . . . . . 224,216 44,681 108,478 50,297 427,672
Federal Reserve and
Federal Home Loan
Bank stock . . . . . . . . . . . 1,585 307 1,892
-------- -------- -------- -------- --------
Total rate-sensitive
assets. . . . . . . . . . . . . . 273,377 71,338 236,196 62,382 643,293
-------- -------- -------- -------- --------
Rate-sensitive liabilities:
Interest-bearing deposits . . . . 218,657 41,333 223,209 70 483,269
Short-term borrowing. . . . . . . 36,344 250 36,594
Federal Home Loan Bank
advance. . . . . . . . . . . . . 1,000 1,000
-------- -------- -------- -------- --------
Total rate-sensitive
liabilities . . . . . . . . . . . 256,001 41,583 223,209 70 519,863
-------- -------- -------- -------- --------
Periodic rate sensitivity gap. . . $ 17,376 $ 29,955 $ 12,987 $ 62,312
Cumulative rate sensitivity gap. . 17,376 47,131 60,118 122,430
Cumulative rate sensitivity gap
at March 31, 1996 . . . . . . . . 107% 116% 112% 124%
Cumulative rate sensitivity gap
at December 31, 1995. . . . . . . 117% 128% 113% 126%
</TABLE>
Page 14 of 20
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
EARNING ASSETS
Earning assets increased $76.4 million during 1995 but declined $17.3
million during the first quarter of 1996. Growth over the fifteen month
period occurred in loans and securities with short term investments declining.
The following table presents the earning asset mix for the years ended
1994, 1995 and at March 31, 1996 (table dollar amounts in millions).
<TABLE>
<CAPTION>
Earning Assets
--------------------------------
March 31, December 31, December 31,
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Federal funds sold and interest-bearing
deposits with financial institutions. . . . $ 13.4 $ 37.7 $ 3.7
Securities available for sale. . . . . . . . . 146.9 143.1 99.3
Securities held to maturity. . . . . . . . . . 53.4 58.2 77.7
Mortgage loans held for sale . . . . . . . . . .7
Federal Reserve and Federal Home
Loan Bank stock . . . . . . . . . . . . . . 1.9 1.9 1.9
Loans. . . . . . . . . . . . . . . . . . . . . 427.7 419.0 401.6
------ ------ ------
Total . . . . . . . . . . . . . . . . . . . $643.3 $660.6 $584.2
------ ------ ------
------ ------ ------
</TABLE>
DEPOSITS AND BORROWINGS
The following tables present the level of deposits and borrowed funds
(Federal funds purchased, repurchase agreements with customers, U.S. Treasury
demand notes, and Federal Home Loan Bank advance) based on period end levels
and average daily balances for the past two years and most recent quarter
(table dollar amounts in thousands).
<TABLE>
<CAPTION>
Period End Balance
-------------------------------------
Federal Home
Short-term Loan Bank
Deposits Borrowings Advance
---------- ---------- ------------
<S> <C> <C> <C>
March 31, 1996. . . . . . . . . . . . . . $556,468 $ 36,594 $ 1,000
December 31, 1995 . . . . . . . . . . . . 588,156 33,975 1,000
December 31, 1994 . . . . . . . . . . . . 529,830 39,189
<CAPTION>
Average Balances
-------------------------------------
Federal Home
Short-term Loan Bank
Deposits Borrowings Advance
---------- ---------- ------------
<S> <C> <C> <C>
March 31, 1996. . . . . . . . . . . . . . $554,669 $ 38,565 $ 1,000
December 31, 1995 . . . . . . . . . . . . 538,539 44,799 515
December 31, 1994 . . . . . . . . . . . . 514,029 45,639
</TABLE>
Page 15 of 20
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
NET INTEREST INCOME
Net interest income is the primary source of the Corporation's earnings.
It is a function of net interest margin and the level of average earning
assets.
The table below presents the Corporation's interest income, interest
expense, and net interest income as a per cent of average earning assets for
the four-year period ending in 1995 and the first quarter of 1996. (Table
dollar amounts in thousands.)
Asset yields improved .71 per cent in 1995, while interest expense
increased .81 per cent.
The resulting "spread" decrease of .10 per cent (4.64% vs 4.74%) was
offset by a $32.7 million increase in average earning assets, enabling fully
taxable equivalent net interest income to increase by $963,000.
During the first quarter of 1996, interest income (FTE) grew $251,000 on
an annualized basis due to growth in average earning assets of $10.6 million.
The Corporation does consider the effect of changing rates in its loan
and deposit pricing and structure decisions, and in its investment strategy;
and expects no significant change in net interest income as a result of
interest rate changes.
<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) 8.16% 3.55% 4.61% $640,418 $29,496
1995 8.15 3.51 4.64 629,784 29,245
1994 7.44 2.70 4.74 597,102 28,282
1993 7.38 2.81 4.57 587,009 26,806
1992 8.31 3.65 4.66 566,467 26,400
</TABLE>
(1) First quarter annualized.
Page 16 of 20
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
OTHER INCOME
The Corporation has placed emphasis on the growth of non-interest income
in recent years by offering a wide range of fee-based services. Fee
schedules are regularly reviewed by a pricing committee to ensure that the
products and services offered by the Corporation are priced to be competitive
and profitable.
Other income reached $6,907,000 in 1995, exceeding the prior year by
$609,000 or 9.7 per cent. Major factors include:
1. A $205,000 (8.0 per cent) increase in trust revenues.
2. A gain of $205,000 on the sale of approximately $8,000,000 of
the Corporation's student loans.
Other income in the first quarter of 1996 was $1,805,000 or 9.9 per cent
higher than the first quarter of 1995. Interchange fees for the Corporation's
credit and debit card programs doubled, growing by $68,000 due to expanded
product offerings, and trust fees grew by $43,000 or 6.7 per cent.
OTHER EXPENSE
Total "other expenses" represent non-interest operating expenses of the
Corporation. Those expenses amounted to $18,842,000 in 1995, an increase of
2.2 per cent from the prior year.
Salary and benefit expenses, which account for over one-half of the
Corporation's non-interest operating expenses, increased by $510,000 (5.1 per
cent). Increases in occupancy, equipment, printing and office supplies and
advertising expenses totaling $449,000 were offset by a $530,000 reduction in
the cost of deposit insurance and by a refund of $238,000 from the State of
Indiana for intangibles taxes paid in 1988 and 1989.
First quarter 1996 expenses of $4,688,000 were $24,000 or 0.5 per cent
below the same quarter of 1995. Increases in salary and benefit expense
($120,000 or 4.7 per cent) and premises and equipment expense ($73,000 or
10.7 per cent) were offset by a $286,000 decrease in deposit insurance
premiums.
INCOME TAXES
The increase in 1995 tax expense was attributable to a $1,241,000
increase in pre-tax net income.
During the first quarter of 1996, income tax expense grew $95,000 from
the same period one year earlier, also due to a $283,000 increase in pre-tax
net income.
Page 17 of 20
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
The following is a breakdown, by year, of federal and state income taxes
(table dollar amounts in thousands).
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
March 31, December 31,
---------------- ----------------
1996 1995 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Federal taxes . . . . . . . . . $1,049 $ 982 $4,146 $3,735
State taxes . . . . . . . . . . 353 325 1,302 1,172
------ ------ ------ ------
Total . . . . . . . . . . . $1,402 $1,307 $5,448 $4,907
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
INFLATION
Changing prices of goods, services and capital affect the financial
position of every business enterprise. The level of market interest rates
and the price of funds loaned or borrowed fluctuate due to changes in the
rate of inflation and various other factors, including government monetary
policy.
Fluctuating interest rates affect First Merchants' net interest income,
loan volume, and other operating expenses, such as employees' salaries and
benefits, reflecting the effects of escalating prices, as well as increased
levels of operations and other factors. As the inflation rate increases, the
purchasing power of the dollar decreases. Those holding fixed rate monetary
assets incur a loss while those holding fixed rate monetary liabilities enjoy
a gain. The nature of a bank holding company's operations is such that there
will be an excess of monetary assets over monetary liabilities and, thus, a
bank holding company will tend to suffer from an increase the rate of
inflation and benefit from a decrease.
Page 18 of 20
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1996 Annual Meeting of Stockholders was held on April 4, 1996.
Shareholders voted upon the election of directors and the ratification of the
independent auditor. No other matters were voted upon at the Annual Meeting.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits are required to be filed.
(b) No reports were filed on Form 8-K during the quarter ended
March 31, 1996.
Page 19 of 20
<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 May 10, 1996 by /s/ Stefan S. Anderson
------------------- ---------------------------
Stefan S. Anderson
President and Director
Date May 10, 1996 by /s/ James L. Thrash
------------------- ---------------------------
James L. Thrash
Chief Financial & Principal
Accounting Officer
Page 20 of 20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET (PAGE 3), CONSOLIDATED CONDENSED STATEMENT
OF INCOME (PAGE 4), AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 21,196
<INT-BEARING-DEPOSITS> 142
<FED-FUNDS-SOLD> 13,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 146,915
<INVESTMENTS-CARRYING> 53,372
<INVESTMENTS-MARKET> 53,626
<LOANS> 427,672
<ALLOWANCE> 4,947
<TOTAL-ASSETS> 681,270
<DEPOSITS> 556,468
<SHORT-TERM> 36,594
<LIABILITIES-OTHER> 6,952
<LONG-TERM> 0
0
0
<COMMON> 633
<OTHER-SE> 80,623
<TOTAL-LIABILITIES-AND-EQUITY> 681,270
<INTEREST-LOAN> 9,564
<INTEREST-INVEST> 2,898
<INTEREST-OTHER> 249
<INTEREST-TOTAL> 12,711
<INTEREST-DEPOSIT> 5,161
<INTEREST-EXPENSE> 5,687
<INTEREST-INCOME-NET> 7,024
<LOAN-LOSSES> 160
<SECURITIES-GAINS> 10
<EXPENSE-OTHER> 4,688
<INCOME-PRETAX> 3,981
<INCOME-PRE-EXTRAORDINARY> 2,579
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,579
<EPS-PRIMARY> .51
<EPS-DILUTED> .51
<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>
