FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 or 15 (d) of THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended June 30, 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 August 4, 1997, there were outstanding 6,648,967 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 49 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) June 30, December 31, 1997 1996 ----------- ----------- ASSETS: Cash and due from banks . . . . . . . . . . $ 36,072 $ 33,882 Federal funds sold . . . . . . . . . . . . 1,150 ----------- ----------- Cash and cash equivalents 36,072 35,032 Interest-bearing deposits 481 290 Investment securities available for sale 226,319 228,379 Investment securities held to maturity 39,794 47,227 Mortgage loans held for sale 491 284 Loans . . . . . . . . . . . . . . . . . . . 680,406 631,416 Less: Allowance for loan losses . . . . (6,710) (6,622) ----------- ----------- Net loans 673,696 624,794 Premises and equipment . . . . . . . . . . . 15,458 15,303 Federal Reserve and Federal Home Loan Bank stock . . . . . . . . . . . . . 3,205 3,090 Interest receivable . . . . . . . . . . . . 8,979 8,643 Core deposit intangibles and goodwill . . . 1,649 1,714 Others assets. . . . . . . . . . . . . . . . 4,291 3,237 ----------- ----------- Total assets . . . . . . . . . . . . . . $1,010,435 $ 967,993 ----------- ----------- ----------- ----------- LIABILITIES: Deposits: Noninterest-bearing . . . . . . . . . . . $ 99,870 $ 110,175 Interest-bearing . . . . . . . . . . . . . 721,198 684,276 ----------- ----------- Total deposits . . . . . . . . . . . . 821,068 794,451 Short-term borrowings . . . . . . . . . . 49,120 45,037 Federal Home Loan Bank advances . . . . . 16,700 9,150 Interest payable . . . . . . . . . . . . . 3,689 3,376 Other liabilities . . . . . . . . . . . . 2,947 3,292 ----------- ----------- Total liabilities . . . . . . . . . . . 893,524 855,306 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 -- 6,632,049 and 6,603,319 shares . . . 829 825 Additional paid-in capital . . . . . . . . 23,376 22,968 Retained earnings. . . . . . . . . . . . . 91,938 87,978 Net unrealized gain on securities available for sale . . . . . . . . . 768 916 ----------- ----------- Total stockholders' equity . . . . . . 116,911 112,687 ----------- ----------- Total liabilities and stockholders' equity . . . . . . . . . . . . . . . $1,010,435 $ 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 Six Months Ended June 30 June 30 ------------------ ---------------- 1997 1996 1997 1996 -------- -------- -------- -------- Interest Income: Loans receivable Taxable . . . . . . . . . $ 14,923 $ 12,670 $ 28,716 $ 25,150 Tax exempt . . . . . . . 30 19 59 37 Investment securities: Taxable . . . . . . . . . 2,858 3,168 5,807 6,458 Tax exempt . . . . . . . 1,082 945 2,121 1,856 Federal funds sold . . . . . . 117 27 387 Deposits with financial institutions. . . . . . . 3 3 6 8 Federal Reserve and Federal Home Loan Bank stock 84 70 128 106 -------- -------- -------- -------- Total interest income . . 18,980 16,992 36,864 34,002 Interest expense: Deposits . . . . . . . . . . . 7,828 7,140 15,330 14,505 Short-term borrowings . . . . 864 576 1,572 1,123 Federal Home Loan Bank advances 209 140 342 265 -------- -------- -------- -------- Total interest expense . 8,901 7,856 17,244 15,893 -------- -------- -------- -------- Net Interest Income . . . . . . 10,079 9,136 19,620 18,109 Provision for loan losses . . . 290 300 577 580 -------- -------- -------- -------- Net Interest Income After Provision For Loan Losses 9,789 8,836 19,043 17,529 Other Income: Net realized gains (losses) on sales of available- for-sale securities . . . (9) 9 1 26 Other income . . . . . . 2,360 2,000 4,463 3,955 -------- -------- -------- -------- Total other income . . . . . . . 2,351 2,009 4,464 3,981 Total other expenses . . . . . . 6,431 5,888 12,618 11,710 -------- -------- -------- -------- Income before income tax . . . . 5,709 4,957 10,889 9,800 Income tax expense . . . . . . . 2,002 1,684 3,753 3,340 -------- -------- -------- -------- Net Income . . . . . . . . . . . $ 3,707 $ 3,273 $ 7,136 $ 6,460 -------- -------- -------- -------- -------- -------- -------- -------- Per share: Net income. . . . . . . . $ .56 $ .50 $ 1.08 $ .99 Dividends (1) . . . . . . .24 .20 .48 .40 Weighted average shares outstanding . . . . . . .6,618,723 6,570,648 6,611,867 6,567,589 (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. . . . . . . . . . . . . . . . . . . 7,136 6,460 Cash dividends. . . . . . . . . . . . . . . . . (3,176) (2,242) Net change in unrealized gain (loss) on securities available for sale . . . . . . . . (148) (2,126) Stock issued under dividend reinvestment and stock purchase plan . . . . . . . . . . . . . 345 235 Stock options exercised . . . . . . . . . . . . 67 46 ---------- ---------- Balances, June 30. . . . . . . . . . . . . . . . $ 116,911 $ 107,340 ---------- ---------- ---------- ---------- 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) Six Months Ended June 30 ------------------------- 1997 1996 ---------- ---------- Cash Flows From Operating Activities: Net income. . . . . . . . . . . . . . . . . . $ 7,136 $ 6,460 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses . . . . . . . . 577 580 Depreciation and amortization . . . . . . 887 790 Securities amortization, net. . . . . . . 148 311 Securities losses (gains), net. . . . . . (1) (26) Mortgage loans originated for sale. . . . (1,762) (464) Proceeds from sales of mortgage loans . . 1,586 1,212 Change in interest receivable . . . . . . (252) 77 Change in interest payable. . . . . . . . 313 116 Other adjustments . . . . . . . . . . . . (194) (854) ---------- ---------- Net cash provided by operating activities . . . . . . . . . . . . . 8,438 8,202 Cash Flows From Investing Activities: Net change in interest-bearing deposits . . . (191) 103 Purchases of Securities available for sale . . . . . . (35,638) (69,509) Securities held to maturity . . . . . . . (1,301) (18,472) Proceeds from maturities of Securities available for sale . . . . . . 33,763 60,201 Securities held to maturity . . . . . . . 9,271 25,892 Proceeds from sales of Securities available for sale . . . . . . 3,289 4,521 Net change in loans . . . . . . . . . . . . . (51,256) (34,015) Purchases of premises and equipment . . . . . (1,041) (717) Other investing activities. . . . . . . . . . 220 180 ---------- ---------- Net cash used by investing activities . . (42,884) (31,816) (continued) Page 6
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited) Six Months Ended June 30 ------------------------- 1997 1996 ---------- ---------- Cash Flows From Financing Activities: Net change in Demand and savings deposits. . . . . . . $ (7,144) $ (17,379) Certificates of deposit and other time deposits. . . . . . . . . . . . . 33,761 5,922 Short-term borrowings. . . . . . . . . . 4,083 11,009 Federal Home Loan Bank advances. . . . . . . 7,550 6,000 Repayment of Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . (6,000) Cash dividends . . . . . . . . . . . . . . . (3,176) (2,242) Stock issued under dividend reinvestment and stock purchase plan. . . . . . . . . . 345 235 Stock options exercised. . . . . . . . . . . 67 46 ---------- ---------- Net cash used by financing activities . . 35,486 (2,409) ---------- ---------- Net Change in Cash and Cash Equivalents . . . . 1,040 (26,023) Cash and Cash Equivalents, January 1. . . . . . 35,032 77,874 ---------- ---------- Cash and Cash Equivalents, June 30. . . . . . . $ 36,072 $ 51,851 ---------- ---------- ---------- ---------- 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. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was adopted by the Corporation on January 1, 1997. SFAS No. 125 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are considered secured borrowings. A transfer of financial assets in which the transferor surrenders control over those assets is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. The transferor has surrendered control over transferred assets only if all specific conditions are met. This Statement provides detailed measurement standards for assets and liabilities included in these transactions. The adoption of this Statement had no material impact on the Corporation's financial condition and results of operations. 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 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. 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. These transactions were accounted for under the pooling-of-interests method of accounting. The financial information contained herein reflects the mergers 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 Union National Bancorp and Randolph County Bancorp for the periods prior to the merger were as follows: Three Months Six Months Ended Ended June 30 June 30 1996 1996 ------------ ------------ Net Interest Income: First Merchants Corporation. . . . . . $ 7,176 $ 14,200 Union National Bancorp . . . . . . . . 1,273 2,514 Randolph County Bancorp. . . . . . . . 687 1,395 ------------ ------------ Combined. . . . . . . . . . . . . $ 9,136 $ 18,109 ------------ ------------ ------------ ------------ Net Income: First Merchants Corporation. . . . . . $ 2,580 $ 5,159 Union National Bancorp . . . . . . . . 465 836 Randolph County Bancorp. . . . . . . . 228 465 ------------ ------------ Combined. . . . . . . . . . . . . $ 3,273 $ 6,460 ------------ ------------ ------------ ------------ Net Income Per Share: First Merchants Corporation. . . . . . $ .40 $ .79 Union National Bancorp . . . . . . . . .07 .13 Randolph County Bancorp. . . . . . . . .03 .07 ------------ ------------ Combined. . . . . . . . . . . . . $ .50 $ .99 ------------ ------------ ------------ ------------ Page 8
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 June 30, 1997: U.S. Treasury. . . . . . . . . . . . . . $ 19,834 $ 60 $ 36 $ 19,858 Federal agencies . . . . . . . . . . . . 81,858 333 180 82,011 State and municipal . . . . . . . . . . 61,156 1,140 144 62,152 Mortgage-backed securities . . . . . . . 37,860 353 236 37,977 Other asset-backed securities . . . . . 540 7 13 534 Corporate obligations . . . . . . . . . 23,277 83 85 23,275 Marketable equity security . . . . . . . 512 512 ---------- ---------- ---------- ---------- Total available for sale . . . . . . . 225,037 1,976 694 226,319 ---------- ---------- ---------- ---------- Held to maturity at June 30, 1997: U.S. Treasury . . . . . . . . . . . . . 249 7 242 Federal agencies . . . . . . . . . . . . 3,421 11 4 3,428 State and municipal . . . . . . . . . . 30,540 191 23 30,708 Mortgage-backed securities . . . . . . . 4,013 9 4,004 Other asset-backed securities . . . . . 1,571 120 1,451 ---------- ---------- ---------- ---------- Total held to maturity . . . . . . . . 39,794 202 163 39,833 ---------- ---------- ---------- ---------- Total investment securities . . . . . $ 264,831 $ 2,178 $ 857 $ 266,152 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- </TABLE> Page 9
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, 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 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- </TABLE> 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 <TABLE> <CAPTION> June December 31, 1997 1996 -------- ------------- <S> <C> <C> Loans: Commercial and industrial loans . . . . . . . . . . . . . . . . . . . . . $ 139,938 $ 132,134 Bankers' acceptances and loans to financial institutions . . . . . . . . . 1,040 625 Agricultural production financing and other loans to farmers . . . . . . . 17,839 18,906 Real estate loans: Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,005 13,167 Commercial and farmland . . . . . . . . . . . . . . . . . . . . . . . . 102,734 97,596 Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276,320 253,530 Individuals' loans for household and other personal expenditures . . . . . 122,876 113,507 Tax-exempt loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,334 1,643 Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,128 1,672 Unearned interest on loans . . . . . . . . . . . . . . . . . . . . . . . . (808) ( 1,364) --------- ------------ Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 680,406 $ 631,416 --------- ------------ --------- ------------ Six Months Ended June 30 ------------------------ Allowance for loan losses: 1997 1996 ---------- ---------- Balances, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,622 $ 6,696 Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 577 580 Recoveries on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 331 144 Loans charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . (820) (789) ---------- ---------- Balances, June 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,710 $ 6,631 ---------- ---------- ---------- ---------- </TABLE> 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 half of 1997, as compared to the same period in 1996. - Earnings per share were $1.08, up 9.1 per cent from $.99 - Return on assets was 1.46 per cent increasing from 1.41 per cent - Return on equity totaled 12.47 per cent compared to 12.19 per cent for the first half 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 June 30, 1997. At June 30, 1997, the Corporation had a Tier I risk-based capital ratio of 16.7 per cent, total risk-based capital ratio of 17.68 per cent, and a leverage ratio of 11.53 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. 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. <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) June 30, December 31, December 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,527 $2,777 $ 576 Loans contractually past due 90 days or more other than nonaccruing . . . . . . . . . . . . . . . . . . . . . 3,705 1,699 1,119 Restructured loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,237 1,540 1,075 ------ ------ ------ Total $8,469 $6,016 $2,770 ------ ------ ------ ------ ------ ------ - ------------------------------------------------------------------------------------------------------------------- </TABLE> 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 increase at June 30, 1997, is primarily due to one loan of $1.7 million which is performing but which the Corporation refused to renew. The Corporation will be paid when financing arrangements with another bank are completed. 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 June 30, 1997, the allowance for loan losses stood at $6,710,000 or .99 per cent of loans. $577,000 was provided for loan losses in the first half of 1997 compared to $580,000 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 $500 million and $1 billion. <TABLE> <CAPTION> 1997 (1) 1996 1995 1994 -------- ------ ------ ------ (Dollars in Thousands) <S> <C> <C> <C> <C> Allowance for loan losses: Balance at January 1 . . . . . . . . . . . . . . . . $6,622 $6,696 $6,603 $6,467 ------ ------ ------ ------ Chargeoffs . . . . . . . . . . . . . . . . . . . . . 820 1,636 1,554 1,488 Recoveries . . . . . . . . . . . . . . . . . . . . . 331 309 259 422 ------ ------ ------ ------ Net chargeoffs . . . . . . . . . . . . . . . . . . . 489 1,327 1,295 1,066 Provision for loan losses . . . . . . . . . . . . . 577 1,253 1,388 1,202 ------ ------ ------ ------ Balance at December 31 . . . . . . . . . . . . . . . $6,710 $6,622 $6,696 $6,603 ------ ------ ------ ------ ------ ------ ------ ------ Ratio of net chargeoffs during the period to average loans outstanding during the period . . . . . . . . . . . . .15% (2) .23% .24% .21% Peer Group . . . . . . . . . . . . . . . . . . . . . . N/A .26% .26% .25% (1) Through June 30, 1997 (2) First six months annualized </TABLE> 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 June 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 June 30, 1997. <TABLE> <CAPTION> INTEREST-RATE SENSITIVITY ANALYSIS At June 30, 1997 (Dollars in Thousands) Beyond 1-180 Days 181-365 Days 1-5 Years 5 Years Total ---------- ------------ --------- ------- --------- <S> <C> <C> <C> <C> <C> Rate-Sensitive Assets: Federal funds sold and interest-bearing deposits . . . . . . . . $ 481 $ 481 Investment securities . . . . . . . . . . 57,463 $ 51,208 $ 126,091 $ 31,351 266,113 Loans . . . . . . . . . . . . . . . . . . 310,511 76,688 230,062 63,636 680,897 Federal Reserve and Federal Home Loan Bank stock . . . . . . . . . . 2,808 397 3,205 --------- --------- --------- --------- ------- Total rate-sensitive assets. . . . . . . 371,263 127,896 356,153 95,384 950,696 Rate-Sensitive Liabilities: Interest bearing deposits . . . . . . . . 336,435 78,755 303,913 2,095 721,198 Short-term borrowings . . . . . . . . . . 48,425 695 49,120 Federal Home Loan Bank advances . . . . . . . . . . . . . . . . 149 2,144 9,578 4,829 16,700 -------- -------- -------- -------- ------- Total rate-sensitive liabilities . . . . 385,009 81,594 313,491 6,924 787,018 Interest rate sensitivity gap by period . . (13,746) 46,302 42,662 88,460 Cumulative rate sensitivity gap . . . . . . (13,746) 32,556 75,218 163,678 Cumulative rate sensitivity gap ratio. . . . June 30, 1997 . . . . . . . . . . . . . . 96.4% 107.0% 109.6% 120.8% March 31, 1997 . . . . . . . . . . . . . . 97.1 106.3 109.2 120.1 </TABLE> The Corporation had a cumulative positive gap of $32,556,000 in the one year horizon at June 30, 1997 or 3.2 per cent 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 $38.9 million during the first half of 1997. The following table presents the earning asset mix for the years ended 1996 and 1995 and at June 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 half of 1997. Loans grew by more than $49.5 million, accounting for all of the growth in earning assets. <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------- EARNING ASSETS (Dollars in Millions) June 30, December 31, December 31, 1997 1996 1995 -------- ------------ ------------ <S> <C> <C> <C> Federal funds sold and interest-bearing deposits . . . . $ 0.5 $ 1.4 $ 39.2 Investment securities available for sale . . . . . . . . 226.3 228.4 225.9 Investment securities held to maturity . . . . . . . . . 39.8 47.2 60.7 Mortgage loans held for sale . . . . . . . . . . . . . . 0.5 0.3 0.7 Loans . . . . . . . . . . . . . . . . . . . . . . . . . 680.4 631.4 552.3 Federal Reserve and Federal Home Loan Bank stock . . . . 3.2 3.1 2.7 ------- --------- ----------- Total . . . . . . . . . . . . . . . . . . . . . $ 950.7 $ 911.8 $ 881.5 ------- ---------- -------- ------- ---------- -------- - --------------------------------------------------------------------------------------------------- </TABLE> 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 June 30, 1997. Lack of substantial 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. - -------------------------------------------------------------------------------- <TABLE> <CAPTION> DEPOSITS, SHORT-TERM BORROWINGS AND FEDERAL HOME LOAN BANK ADVANCES (Dollars in Millions) June 30, December 31, December 31, 1997 1996 1995 -------- ------------ ------------ <S> <C> <C> <C> Deposits . . . . . . . . . . . . . . . . . . . . . . . . $ 821.1 $ 794.5 $ 783.9 Short-term borrowings . . . . . . . . . . . . . . . . . 49.9 45.0 37.4 Federal Home Loan Bank advances . . . . . . . . . . . . 16.7 9.2 9.0 </TABLE> 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 half of 1997, both interest yields and interest costs remained stable, increasing by .03 per cent. All of the increase in net interest income is attributable to earning asset growth which amounted to nearly $52 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 half of 1997. <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------- (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 - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 1997 (1) 8.16% 3.70 % 4.46% $932,441 $ 41,588 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 Six Months Annualized - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- </TABLE> 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 half of 1997 exceeded the same period in the prior year by $487,000 or 8.1 per cent. Two categories accounted for most of this increase: 1. Trust fees grew by $203,000 or 14.5 per cent, again due to new business and positive investment returns. 2. Deposit service charges increased by $154,000 or 9.8 per cent due primarily to changes in pricing. 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. First half other expense in 1997 exceeded the same period of the prior year by $908,000 or 7.8 per cent. Four primary areas account for this increase: 1. Salaries and benefits grew by $277,000 or 4.1 per cent due primarily to normal annual salary adjustments. 2. Business supply expense grew by $85,000 or nearly 20.4 per cent primarily due to increased use of data processing supplies and personal money order forms. 3. Equipment expense grew $114,000 or 11.4 per cent, again reflecting the Corporation's investment in technology to increase productivity and improve customer service. 4. Deposit insurance expense increased $40,000 (571.4 per cent) due to higher insurance premiums. 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 $413,000 in the first half of 1997, as compared to the same period in 1996, results from a $1,089,000 increase in pre-tax net 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 The 1997 Annual Meeting of Stockholders was held on April 8, 1997. Set forth below are the matters, other than the election of directors and the ratification of the independent auditor, voted upon at the Annual Meeting and the resulting vote: - The adoption of an amendment to the Corporation's Articles of Incorporation to reduce the minimum number of directors to the Corporation from twelve to nine. Shares % of Voted Eligible Shares Voted --------- --------------------- For 6,015,368 91.09% Against 47,694 .72 Abstaining 56,191 .85 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Form 10-Q Page Exhibit No.: Description of Exhibit: Number ------------ ----------------------- ---------- 3.1 First Merchants Corporation Articles of Incorporation, as amended . . . 20 3.2 First Merchants Corporation Bylaws, as amended. . . . . . . . . . . . . 32 27.1 Financial Data Schedule, Period Ending June 30, 1997 . . . . . . . . . . . 47 27.2 Restated Financial Data Schedule, Period Ending June 30, 1996 . . . . . . . . . . . 48 27.3 Restated Financial Data Schedule, Period Ending June 30, 1995 . . . . . . . . . . . 49 (b) Reports on Form 8-K: No reports were filed on Form 8-K during the quarter ended June 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 August 6, 1997 by /s/ Michael L. Cox ------------------- ------------------------------- Michael L. Cox Executive Vice President and Director Date August 6, 1997 by /s/ James L. Thrash ------------------- ------------------------------- James L. Thrash Chief Financial & Principal Accounting Officer Page 19