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, 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 May 5, 1997, there were outstanding 6,612,490 common shares, without par value, of the registrant. The exhibit index appears on page 19. This report including the cover page contains a total of 38 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.............. 19 Item 6. Exhibits and Reports of Form 8-K................................. 19 Signatures ................................................................. 20 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) <TABLE> <CAPTION> March 31, December 31, 1997 1996 --------- ------------ <S> <C> <C> ASSETS: Cash and due from banks........................... $ 35,020 $ 33,882 Federal funds sold................................ 1,560 1,150 --------- ------------ Cash and cash equivalents...................... 36,580 35,032 Interest-bearing deposits......................... 371 290 Investment securities available for sale.......... 230,973 228,379 Investment securities held to maturity............ 42,442 47,227 Mortgage Loans held for sale...................... 144 284 Loans............................................. 651,782 631,416 Less: Allowance for loan losses.............. (6,883) (6,622) --------- ------------ Net loans................................... 644,899 624,794 Premises and equipment............................ 15,284 15,303 Federal Reserve and Federal Home Loan Bank stock.. 3,090 3,090 Interest receivable............................... 8,289 8,643 Core deposit intangibles and goodwill............. 1,681 1,714 Others assets..................................... 4,078 3,237 --------- ------------ Total assets................................ $ 987,831 $ 967,993 --------- ------------ --------- ------------ LIABILITIES: Deposits: Noninterest-bearing............................ $ 95,886 $ 110,175 Interest-bearing............................... 686,007 684,276 -------- ------- Total deposits.............................. 781,893 794,451 Short-term borrowings............................. 71,626 45,037 Federal Home Loan Bank advances................... 12,450 9,150 Interest payable.................................. 3,476 3,376 Other liabilities................................. 4,596 3,292 --------- ------------ Total liabilities........................... 874,041 855,306 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 -- 6,610,357 and 6,603,319 shares........................... 827 825 Additional paid-in capital........................ 23,155 22,968 Retained earnings................................. 89,822 87,978 Net unrealized gain (loss) on securities available for sale......................................... (14) 916 --------- ------------ Total stockholders' equity.................. 113,790 112,687 --------- ------------ Total liabilities and stockholders' equity.. $ 987,831 $ 967,993 --------- ------------ --------- ------------ </TABLE> 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) <TABLE> <CAPTION> Three Months Ended March 31 ---------------------- 1997 1996 ---------- ---------- <S> <C> <C> Interest Income: Loans receivable Taxable......................................... $ 13,793 $ 12,480 Tax exempt...................................... 29 18 Investment securities: Taxable......................................... 2,949 3,290 Tax exempt...................................... 1,039 911 Federal funds sold................................. 27 270 Deposits with financial institutions............... 3 5 Federal Reserve and Federal Home Loan Bank stock... 44 36 ---------- ---------- Total interest income........................ 17,884 17,010 Interest expense: Deposits........................................... 7,502 7,365 Short-term borrowings.............................. 708 547 Federal Home Loan Bank advances.................... 133 125 ---------- ---------- Total interest expense.......................... 8,343 8,037 ---------- ---------- Net Interest Income................................... 9,541 8,973 Provision for loan losses............................. 287 280 ---------- ---------- Net Interest Income After Provision For Loan Losses... 9,254 8,693 Other Income: Net realized gains on sales of available-for-sale securities.................... 10 17 Other income....................................... 2,122 1,955 ---------- ---------- Total other income.................................... 2,132 1,972 Total other expenses.................................. 6,206 5,822 ---------- ---------- Income before income tax.............................. 5,180 4,843 Income tax expense.................................... 1,751 1,656 ---------- ---------- Net Income............................................ $ 3,429 $ 3,187 ---------- ---------- ---------- ---------- Per share: Net income......................................... $ .52 $ .49 Dividends (1)...................................... .24 .20 Weighted average shares outstanding................... 6,605,012 6,564,529 </TABLE> (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) <TABLE> <CAPTION> 1997 1996 -------- -------- <S> <C> <C> Balances, January 1......................................... $112,687 $104,967 Net income.................................................. 3,429 3,187 Cash dividends.............................................. (1,585) (1,122) Net change in unrealized loss on securities available for sale.................................................. (930) (1,338) Stock issued under dividend reinvestment and stock purchase plan............................................. 175 124 Stock options exercised..................................... 14 34 -------- -------- Balances, March 31...........................................$113,790 $105,852 -------- -------- -------- -------- </TABLE> 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) <TABLE> <CAPTION> Three Months Ended March 31 --------------------- 1997 1996 ------ ------ <S> <C> <C> Cash Flows From Operating Activities: Net income.......................................................................... $ 3,429 $ 3,187 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses......................................................... 287 280 Depreciation and amortization..................................................... 443 394 Securities amortization, net...................................................... 132 2 Securities losses (gains), net.................................................... 10 17 Mortgage loans originated for sale................................................ (700) (108) Proceeds from sales of mortgage loans............................................. 856 853 Change in interest receivable..................................................... 438 741 Change in interest payable........................................................ 100 21 Other adjustments................................................................. 1,338 1,127 ------- -------- Net cash provided by operating activities....................................... 6,333 6,514 Cash Flows From Investing Activities: Net change in interest-bearing deposits............................................. (81) (101) Purchases of Securities available for sale..................................................... (20,939) (60,357) Securities held to maturity....................................................... (1,151) (16,526) Proceeds from maturities of Securities available for sale..................................................... 15,153 51,818 Securities held to maturity....................................................... 6,675 21,657 Proceeds from sales of Securities available for sale..................................................... 970 Net change in loans.................................................................. (19,961) (12,704) Purchases of premises and equipment.................................................. (424) (278) Other investing activities........................................................... 8 (58) ------- -------- Net cash used by investing activities........................................... (20,720) (15,579) </TABLE> (continued) Page 6
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited) <TABLE> <CAPTION> Three Months Ended March 31 ----------------------- 1997 1996 --------- ------- <S> <C> <C> Cash Flows From Financing Activities: Net change in Demand and savings deposits......................................... (23,014) (38,911) Certificates of deposit and other time deposits..................... 10,456 8,433 Short-term borrowings............................................... 26,589 2,947 Federal Home Loan Bank Advances....................................... 3,300 5,000 Repayment of Federal Home Loan Bank Advances.......................... (5,000) Cash dividends........................................................ (1,585) (1,122) Stock issued under dividend reinvestment and stock purchase plan...... 175 124 Stock options exercised............................................... 14 34 ------- -------- Net cash used by financing activities............................. 15,935 (28,495) ------- -------- ------- -------- Net Change in Cash and Cash Equivalents................................ 1,548 (37,560) Cash and Cash Equivalents, January 1................................... 35,032 77,874 ------- -------- Cash and Cash Equivalents, March 31.................................... $ 36,580 $ 40,314 ------- -------- ------- -------- </TABLE> 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 period prior to the merger were as follows: <TABLE> <CAPTION> Three Months Ended March 31 1996 -------- <S> <C> Net Interest Income: First Merchants Corporation................................... $ 7,024 Union National Bancorp........................................ 1,241 Randolph County Bancorp....................................... 708 ------- Combined................................................. $ 8,973 ------- ------- Net Income: First Merchants Corporation.................................. $ 2,579 Union National Bancorp....................................... 371 Randolph County Bancorp...................................... 237 ------- Combined................................................... $ 3,187 ------- ------- Net Income Per Share: First Merchants Corporation.................................. $ .39 Union National Bancorp....................................... .06 Randolph County Bancorp...................................... .04 -------- Combined.................................................... $ .49 -------- Page 8 </TABLE>
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited) <TABLE> <CAPTION> NOTE 4. Investment Securities Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------ <S> <C> <C> <C> <C> Available for sale at March 31, 1997: U.S. Treasury..................................... $ 20,562 $ 26 $ 108 $ 20,480 Federal agencies.................................. 81,707 271 594 81,384 State and municipal............................... 57,765 883 320 58,328 Mortgage-backed securities........................ 38,930 280 395 38,815 Other asset-backed securities..................... 620 5 625 Corporate obligations............................. 31,000 75 242 30,833 Marketable equity security........................ 508 508 --------- --------- ---------- -------- Total available for sale 231,092 1,540 1,659 230,973 --------- --------- ---------- -------- Held to maturity at March 31, 1997: U.S. Treasury..................................... 249 11 238 Federal agencies.................................. 3,424 10 15 3,419 State and municipal............................... 32,868 173 107 32,934 Mortgage-backed securities........................ 3,083 1 14 3,070 Other asset-backed securities..................... 1,820 3 101 1,722 Corporate obligations............................. 998 1 999 --------- --------- --------- -------- Total held to maturity......................... 42,442 188 248 42,382 --------- --------- ---------- -------- Total investment securities.................... $ 273,534 $ 1,728 $ 1,907 $273,355 --------- --------- ----------- -------- --------- --------- ----------- -------- </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) <TABLE> <CAPTION> NOTE 5. Loans and Allowance March 31, December 31, 1997 1996 <S> --------- ----------- Loans: <C> <C> Commercial and industrial loans..................................... $ 135,195 $ 132,134 Bankers' acceptances and loans to financial institutions............ 965 625 Agricultural production financing and other loans to farmers........ 16,253 18,906 Real estate loans: Construction....................................................... 14,808 13,167 Commercial and farmland............................................ 102,594 97,596 Residential........................................................ 261,644 253,530 Individuals' loans for household and other personal expenditures.... 117,060 113,507 Tax-exempt loans.................................................... 1,286 1,643 Other loans......................................................... 3,044 1,672 Unearned interest on loans.......................................... (1,067) ( 1,364) -------- -------- Total.............................................................. $ 651,782 $ 631,416 -------- -------- -------- -------- Three Months Ended March 31 -------------------- 1997 1996 --------- -------- Allowance for loan losses: Balances, January 1................................................. $ 6,622 $ 6,696 Provision for losses................................................ 287 280 Recoveries on loans................................................. 249 77 Loans charged off................................................... (275) ( 499) --------- -------- Balances, March 31.................................................. $ 6,883 6,554 --------- -------- --------- -------- </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 quarter of 1997, as compared to the same period in 1996. -Earnings per share were $.52, up 6.1 per cent from $.49 -Return on assets was 1.42 per cent increasing from 1.39 per cent -Return on equity totaled 12.11 per cent compared to 12.10 per cent for the first quarter 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 March 31, 1997. At March 31, 1997, the Corporation had a Tier I risk-based capital ratio of 16.8 per cent, total risk-based capital ratio of 17.8 per cent, and a leverage ratio of 11.6 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. Page 12
FIRST MERCHANTS CORPORATION FORM 10-Q ASSET QUALITY/PROVISION FOR LOAN LOSSES The Corporation's asset quality and loan loss experience have consistently been superior to that of its peer group, as summarized on the following page. 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 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 summarized the risk elements for the Corporation (table dollar amounts in thousands.) <TABLE> <CAPTION> - ------------------------------------------------------------------------------- (Dollars in Thousands) March 31, December 31, December 31, 1997 1996 1995 - ------------------------------------------------------------------------------- <S> <C> <C> <C> Non-accrual loans..................... $2,408 $2,777 $ 576 Loans contractually past due 90 days or more other than nonaccruing....... 1,560 1,699 1,119 Restructured loans.................... 1,212 1,540 1,075 ------ ------ ------ Total......................... $5,180 $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 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, 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. Page 13
FIRST MERCHANTS CORPORATION FORM 10-Q At March 31, 1997, the allowance for loan losses increased by $261,000 to $6,883,000, or 1.06 per cent of total loans. The first quarter 1997 provision of $287,000 was up only slightly from the same quarter in 1996, and was offset by only $26,000 in net charge-offs. 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............................ 275 1,636 1,554 1,488 Recoveries............................ 249 309 259 422 ------ ------ ------ ------ Net chargeoffs........................ 26 1,327 1,295 1,066 Provision for loan losses............. 287 1,253 1,388 1,202 ------ ------ ------ ------ Balance at December 31................ $6,883 $6,622 $6,696 $6,603 ------ ------ ------ ------ ------ ------ ------ ------ Ratio of net chargeoffs during the period to average loans outstanding during the period..................... .02% (2) .23% .24% .21% Peer Group............................. N/A .26% .26% .25% (1) Through March 31, 1997 (2) First three months annualized </TABLE> Page 14
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 March 31, 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 March 31, 1997. INTEREST-RATE SENSITIVITY ANALYSIS At March 31, 1997 (Dollars in Thousands) <TABLE> <CAPTION> 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....... $ 1,931 $ 1,931 Investment securities 51,840 $ 44,479 $ 140,424 $ 36,672 273,415 Loans............................ 311,822 76,142 212,566 51,396 651,926 Federal Reserve and Federal Home Loan Bank stock............ 2,693 397 3,090 ---------- ------------ --------- ------- ------- Total rate-sensitive assets.... 368,286 120,621 352,990 88,465 930,362 ---------- ------------ --------- ------- ------- Rate-Sensitive Liabilities: Interest bearing deposits........ 302,945 78,596 303,134 1,332 686,007 Short-term borrowings............ 71,626 71,626 Federal Home Loan Bank Advances........................ 75 2,072 7,870 2,433 12,450 ---------- ------------ --------- ------- -------- Total rate-sensitive liabilities 374,646 80,668 311,004 3,765 770,083 ---------- ------------ --------- ------- --------- Interest rate sensitivity gap by period............................ $ (6,360) $ 39,953 $ 41,986 $ 84,700 Cumulative rate sensitivity gap.... (6,360) 33,593 75,579 160,279 Cumulative rate sensitivity gap ratio at March 31, 1997........... 98.3% 107.4% 109.9% 120.8% </TABLE> The Corporation had a cumulative positive gap of $33,593,000 in the one year horizon at March 31, 1997 or 3.4 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. The .25 per cent increase in the prime lending rate which occurred in late March, 1997 should have a modest positive effect on the Corporation's net interest income. Page 15
FIRST MERCHANTS CORPORATION FORM 10-Q EARNING ASSETS Earning assets increased $30.3 million during 1996. The following table presents the earning asset mix for the years ended 1996 and 1995 and at March 31, 1997. Loans grew by more than $79 million 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 quarter of 1997. Loans grew by more than $20 million, accounting for all of the growth in earning assets. <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------- EARNING ASSETS (Dollars in Millions) March 31, December 31, December 31, 1997 1996 1995 --------- ------------ ------------ <S> <C> <C> <C> Federal funds sold and interest-bearing deposits............. $ 1.9 $ 1.4 $ 39.2 Investment securities available for sale .................... 231.0 228.4 225.9 Investment securities held to maturity ...................... 42.4 47.2 60.7 Mortgage loans held for sale ................................ .1 0.3 0.7 Loans ....................................................... 651.8 631.4 552.3 Federal Reserve and Federal Home Loan Bank stock............. 3.1 3.1 2.7 --------- -------- --------- Total.................................................... $ 930.3 $ 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 March 31, 1997. Lack of deposit growth coupled with loan growth has resulted in a greater reliance on borrowed funds. The Corporation plans to place further emphasis on deposit growth going forward through advertising and product development. - ----------------------------------------------------------- DEPOSITS, SHORT-TERM BORROWINGS AND FEDERAL HOME LOAN BANK ADVANCES (Dollars in Millions) Federal Short-Term Home Loan Deposits Borrowings Bank Advances ---------------------------------------------- March 31, 1997.......... $781.9 $ 71.6 $ 12.5 December 31, 1996....... 794.5 45.0 9.2 December 31, 1995....... 783.9 37.4 9.0 --------------------------------------------- Page 16
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 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 quarter of 1997. 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 quarter of 1997, both interest yields and interest costs declined, with yields falling .08 per cent, but costs by only .03 per cent. The resulting .05 per cent decline in margin was offset by earning asset growth of $37 million. <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) 8.05% 3.64% 4.41% $917,774 $40,464 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 Three 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 percent) due to stronger business activity and markets. 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 17
FIRST MERCHANTS CORPORATION FORM 10-Q Other income in the first quarter of 1997 exceeded the same quarter in the prior year by $160,000 or 8.1 per cent. Two categories accounted for most of this increase: 1. Trust fees grew by $38,000 or 5.5 per cent, again due to stronger activity and positive investment returns. 2. Deposit service charges increased by $82,000 or 10.8 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 quarter other expense in 1997 exceeded the same quarter one year earlier by $384,000 or 6.6 per cent. Four primary areas account for this increase: 1. Salaries and benefits grew by $182,000 or 5.6 per cent due primarily to normal annual salary adjustments. 2. Business supply expense grew by $50,000 or nearly 27 per cent primarily due to increased use of data processing supplies and personal money order forms. 3. Equipment expense grew $29,000 or 5.4 per cent, again reflecting the Corporation's investment in technology to increase productivity and improve customer service. 4. Marketing expense increased $29,000 (almost 18 per cent). INCOME TAXES 1996 income tax expense increased by $698,000 primarily due to a $1,792,000 increase in net pre-tax income. Likewise, the increase of $95,000 in the first quarter of 1997, as compared to the same quarter in 1996, results from a $337,000 increase in pre-tax net income which was partially offset by a $139,000 increase in tax exempt income. OTHER The Securities and Exchange Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including the Corporation, and that the address is (http://www.sec.gov). Page 18
FIRST MERCHANTS CORPORATION FORM 10-Q PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None during the period covered by this report. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: FORM 10-Q PAGE EXHIBIT NO.: DESCRIPTION OF EXHIBIT: NUMBER ------------ ----------------------- --------- 10.1 First Merchants Corporation Supplemental Executive Retirement Plan.... 21 10.2 Trust Under First Merchants Corporation Supplemental Executive Retirement Plan.... 28 27.1 Financial Data Schedule, Quarter Ended March 31, 1997............................ 36 27.2 Restated Financial Data Schedule, Quarter Ended March 31, 1996...................... 37 27.3 Restated Financial Data Schedule, Quarter Ended March 31, 1995...................... 38 (b) Reports on Form 8-K: No reports were filed on Form 8-K during the quarter ended March 31, 1997. Page 19
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 12, 1997 by /s/ Stefan S. Anderson ----------------- --------------------------------- Stefan S. Anderson President and Director Date May 12, 1997 by /s/ James L. Thrash ---------------- --------------------------------- James L. Thrash Chief Financial & Principal Accounting Officer Page 20