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, 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 August 5, 1996, there were outstanding 6,023,829 common shares,
without par value, of the registrant.
Page 1 of 20
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
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,
1996 1995
-------- ------------
ASSETS:
Cash and due from banks $ 31,106 $ 31,432
Federal funds sold 15,100 37,500
-------- --------
Cash and cash equivalents 46,206 68,932
Interest-bearing deposits with financial
institutions 155
Securities available for sale 145,992 143,120
Securities held to maturity 51,015 58,214
Mortgage Loans held for sale 736
Loans:
Loans 439,926 418,994
Less: Allowance for loan losses (4,919) (4,957)
-------- --------
Net loans 435,007 414,037
Premises and equipment 10,467 10,476
Federal Reserve and Federal Home Loan Bank
stock 2,029 1,892
Interest receivable 6,244 6,187
Core deposit intangibles and goodwill 1,780 1,845
Others assets 5,469 2,265
-------- --------
Total assets $704,209 $707,859
-------- --------
-------- --------
LIABILITIES:
Deposits:
Noninterest-bearing $ 82,777 $ 99,432
Interest-bearing 491,448 488,724
-------- --------
Total deposits 574,225 588,156
Short-term borrowings 41,611 33,975
Federal Home Loan Bank advance 1,000
Interest payable 1,786 1,866
Other liabilities 4,086 2,389
-------- --------
Total liabilities 621,708 627,386
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 -- 5,065,470 and
5,053,901 shares 633 632
Additional paid-in capital 16,132 15,852
Retained earnings 65,971 62,836
Net unrealized gain (loss) on securities
available for sale (235) 1,153
-------- --------
Total stockholders' equity 82,501 80,473
-------- --------
Total liabilities and stockholders'
equity $704,209 $707,859
-------- --------
-------- --------
See notes to consolidated condensed financial statements.
Page 3 of 20
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED BALANCE SHEET
(Dollar amounts in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
--------------------- ---------------------
1996 1995 1996 1995
--------- --------- --------- ---------
Interest Income:
Loans, including fees:
Taxable. . . . . . . . . . . . . . $ 9,646 $ 9,425 $ 19,197 $ 18,362
Tax exempt . . . . . . . . . . . . 14 27 27 45
Securities:
Taxable. . . . . . . . . . . . . . 2,202 2,048 4,464 4,060
Tax exempt . . . . . . . . . . . . 652 618 1,288 1,163
Federal funds sold . . . . . . . . . . 111 277 322 319
Interest-bearing deposits with
financial institutions . . . . . . . 1 1 3 1
Federal Reserve and Federal Home
Loan Bank stock . . . . . . . . . . . 39 39 75 73
--------- --------- --------- ---------
Total interest income . . . 12,665 12,435 25,376 24,023
Interest Expense:
Deposits. . . . . . . . . . . . . . . 4,957 4,944 10,118 9,002
Short-term borrowings . . . . . . . . 518 490 1,029 1,093
Federal Home Loan Bank advance. . . . 14 1 29 1
--------- --------- --------- ---------
Total interest expense . . 5,489 5,435 11,176 10,096
--------- --------- --------- ---------
Net Interest Income . . . . . . . . . . . 7,176 7,000 14,200 13,927
Provision for loan losses . . . . . . . . 160 160 320 320
--------- --------- --------- ---------
Net Interest Income After Provision
For Loan Losses . . . . . . . . . . . . 7,016 6,840 13,880 13,607
Other Income:
Net realized gains (losses) on
sale of available for sale
securities. . . . . . . . . . . . . 10 (76) 20 (66)
Other income . . . . . . . . . . . . 1,795 1,644 3,590 3,277
--------- --------- --------- ---------
Total other income . . . . . . . . . . . 1,805 1,568 3,610 3,211
Total other expenses. . . . . . . . . . . 4,858 4,591 9,546 9,303
--------- --------- --------- ---------
Income before income tax. . . . . . . . . 3,963 3,817 7,944 7,515
Income tax expense. . . . . . . . . . . . 1,383 1,288 2,785 2,595
--------- --------- --------- ---------
Net Income. . . . . . . . . . . . . . . . $ 2,580 $ 2,529 $ 5,159 $ 4,920
--------- --------- --------- ---------
--------- --------- --------- ---------
Per share:
Net income (1). . . . . . . . . . . $ .51 $ .50 $ 1.02 $ .97
Dividends (1) . . . . . . . . . . . .20 .19 .40 .38
Weighted average shares outstanding (1) 5,059,199 5,055,723 5,062,259 5,053,478
(1) Restated for 3-for-2 stock split distributed October, 1995.
See notes to consolidated financial statements.
Page 4 of 20
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
(Unaudited)
1996 1995
------- -------
Balances, January 1 $80,473 $71,018
Net income 5,159 4,920
Cash dividends (2,024) (1,887)
Net change in unrealized gain (loss) on
securities available for sale (1,388) 2,579
Stock issued under dividend reinvestment and
stock purchase plan 235 201
Stock options exercised 46 187
Stock redeemed (392)
------- -------
Balances, June 30 $82,501 $76,626
------- -------
------- -------
See notes to consolidated condensed financial statements.
Page 5 of 20
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
Six Months Ended
June 30
-----------------
1996 1995
------- -------
Cash Flows From Operating Activities:
Net income $ 5,159 $ 4,920
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 320 320
Depreciation and amortization 619 592
Securities amortization, net 194 499
Mortgage loans originated for sale (464) (600)
Proceeds from sale of mortgage loans 1,212 604
Change in interest receivable 83 (442)
Change in interest payable (80) 368
Other adjustments (505) (233)
------- -------
Net cash provided by operating activities 6,538 6,028
Cash Flows From Investing Activities:
Net change in interest-bearing deposits with
financial institutions 155 (46)
Purchases of:
Securities available for sale (59,472) (34,036)
Securities held to maturity (18,186) (14,851)
Proceeds from maturities of:
Securities available for sale 50,508 7,991
Securities held to maturity 25,288 18,419
Proceeds from sales of securities available
for sale 3,551 11,196
Net change in loans (21,601) (18,046)
Purchases of premises and equipment (611) (920)
Other investing activities 142 118
------- -------
Net cash used by investing activities (20,226) (30,175)
Cash Flows From Financing Activities:
Net change in:
Noninterest-bearing, NOW, money market and
savings deposits (14,451) (2,423)
Certificates of deposit and other time
deposits 520 34,821
Short-term borrowings 7,636 13,685
Federal Home Loan Bank advance (1,000)
Cash dividends (2,024) (1,887)
Stock issued under dividend reinvestment and
stock purchase plan 235 201
Stock options exercised 46 187
Stock redeemed (392)
------- -------
Net cash provided (used) by financing
activities (9,038) 44,192
------- -------
Net Increase (Decrease) in Cash and Cash
Equivalents (22,726) 20,045
Cash and Cash Equivalents, January 1 68,932 46,359
------- -------
Cash and Cash Equivalents, June 30 $46,206 $66,404
------- -------
------- -------
See notes to consolidated condensed financial statements.
Page 6 of 20
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands, except per share amounts)
(Unaudited)
NOTE 1. General
The significant accounting policies followed by First Merchants Corporation
("Corporation") and its wholly owned subsidiaries for interim financial
reporting are consistent with the accounting policies followed for annual
financial reporting, except for the changes in methods of accounting
discussed more fully in Note 2. All adjustments which are 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 which has been approved by Randolph
County Bancorp shareholders, 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
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 July 31, 1996, the Corporation issued 942,685 shares of its common stock
in exchange for all of the outstanding shares of Union National Bancorp,
Liberty, Indiana (Union National). At December 31, 1995, Union National had
total assets and shareholders' equity of $161,078,000 and $15,741,000,
respectively. The transaction will be accounted for under the pooling of
interests method of accounting. The financial information contained herein
does not reflect the merger. Pro forma unaudited results of operations
assuming the merger had occurred on January 1, 1995, are as follows:
Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
1996 1995 1996 1995
------ ------ ------- -------
Net interest income. . . . . $8,458 $8,132 $16,726 $16,174
Net income . . . . . . . . . 3,028 2,849 5,975 5,594
Net income per share . . . . .50 .47 1.00 .93
Page 7 of 20
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
(Unaudited)
NOTE 4. Investment Securities
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
Available for sale at June 30, 1996:
U.S. Treasury $ 12,227 $ 11 $ 83 $ 12,155
Federal agencies 68,394 381 447 68,328
State and municipal 22,067 227 106 22,188
Mortgage and other asset-backed securities 20,278 63 259 20,082
Corporate obligations 23,165 71 247 22,989
Marketable equity security 250 250
--------- ---------- ---------- ---------
Total available for sale 146,381 753 1,142 145,992
--------- ---------- ---------- ---------
Held to maturity at June 30, 1996:
U.S. Treasury 850 1 10 841
Federal agencies 8,100 28 23 8,105
State and municipal 37,741 253 94 37,900
Mortgage and other asset-backed securities 4,324 18 4,342
--------- ---------- ---------- ---------
Total held to maturity 51,015 300 127 51,188
--------- ---------- ---------- ---------
Total investment securities $197,396 $ 1,053 $ 1,269 $ 197,180
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
Page 8 of 20
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
(Unaudited)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
Available for sale at December 31, 1995:
U.S. Treasury . . . . . . . . . . . . . . . . . . $ 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
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
Page 9 of 20
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
(Unaudited)
NOTE 5. Loans and Allowance
June 30, December 31,
1996 1995
-------- ------------
Loans:
Commercial and industrial loans $ 98,670 $ 85,690
Bankers' acceptances and loans to financial
institutions 1,465 2,925
Agricultural production financing and other
loans to farmers 6,414 5,796
Real estate loans:
Construction 10,864 9,913
Commercial and farmland 67,665 66,749
Residential 173,284 166,414
Individuals' loans for household and other
personal expenditures 79,711 79,993
Tax-exempt loans 917 863
Other loans 936 651
-------- ------------
Total loans $439,926 $418,994
-------- ------------
-------- ------------
Six Months Ended
June 30
-------------------------
1996 1995
-------- ------------
Allowance for loan losses:
Balances, January 1 $4,957 $ 4,998
Provision for losses 320 320
Recoveries on loans 105 94
Loans charged off (463) (316)
-------- ------------
Balances, June 30 $4,919 $ 5,096
-------- ------------
-------- ------------
Page 10 of 20
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 half of 1996, as compared to the same period in 1995.
- Earnings per share were $1.02, up 5.2 per cent from $.97
- Return on assets was 1.51 per cent decreasing from 1.53 per cent
- Return on equity totaled 12.67 per cent compared to 13.34 per
cent for the first half 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 June 30, 1996, the Corporation had a Tier I risk-based
capital ratio of 17.34 per cent, total risk-based capital ratio of 18.39 per
cent and a leverage ratio of 11.88 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
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 increase in non-performing loans
from December 1, 1995 to June 30, 1996 is primarily attributable to two loans
placed in non-accrual status during the first half. Management is in the
process of resolving these loan situations and anticipates that no material
losses will occur.
The allowance for loan losses is maintained through the provision for
loan losses, which is a charge against earnings. The amount provided for
loan losses, and the determination of the adequacy of the allowance are based
on a continuous review of the loan portfolio, including an internally
administered loan "watch" list and an independent loan review provided by an
outside accounting firm. The evaluation takes into consideration identified
credit problems as well as the possibility of losses inherent in the loan
portfolio that cannot be specifically identified.
The following table summarizes the risk elements for First Merchants
Corporation 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 (June 30) .94% 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 June 30, 1996, the loan loss reserve stood at $4,919,000. As a per
cent of loans, the reserve stood at 1.12 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 half of 1996 remained at $320,000 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
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).
1996 (1) 1995 1994 1993 1992
-------- ------ ------ ------ ------
Allowance for loan losses:
Balance at January 1 $4,957 $4,998 $4,800 $4,351 $3,867
Chargeoffs:
Commercial 101 586 526 391 588
Real estate mortgage 41 129 100
Installment 362 296 346 388 552
-------- ------ ------ ------ ------
Total chargeoffs 463 882 913 908 1,240
-------- ------ ------ ------ ------
Recoveries:
Commercial 41 89 216 240 215
Real estate mortgage 5 4 30 5 38
Installment 59 108 83 98 114
-------- ------ ------ ------ ------
Total recoveries 105 201 329 343 367
-------- ------ ------ ------ ------
Net chargeoffs 358 681 584 565 873
-------- ------ ------ ------ ------
Provision for loan losses 320 640 782 1,014 1,357
-------- ------ ------ ------ ------
Balance at December 31 $4,919 $4,957 $4,998 $4,800 $4,351
-------- ------ ------ ------ ------
-------- ------ ------ ------ ------
Ratio of net chargeoffs during
the period to average loans
outstanding during the period .17%(2) .16% .15% .16% .26%
Peer Group N/A .26% .25% .49% .65%
(1) Through June 30, 1996
(2) Annualized
Page 13 of 20
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 June 30, 1996, remained adequate to meet the Corporation's primary goal of
achieving optimum interest margins while avoiding undue interest rate risk.
The table below represents the Corporation's interest rate sensitivity
analysis as of June 30, 1996 (table dollar amounts in thousands).
Interest-Rate Sensitivity Analysis
At June 30, 1996
---------------------------------------------------
1-180 181-365 1-5 Beyond
Days Days Years 5 Years Total
-------- ------- -------- -------- --------
Rate-sensitive assets:
Federal funds sold and interest-bearing
deposits with financial institutions $ 15,100 $ 15,100
Investment securities 30,528 $27,328 $128,632 $ 10,519 197,007
Loans 230,703 40,876 116,211 52,136 439,926
Federal Reserve and Federal Home
Loan Bank stock 1,722 307 2,029
-------- ------- -------- -------- --------
Total rate-sensitive assets 278,053 68,204 244,843 62,962 654,062
-------- ------- -------- -------- --------
Rate-sensitive liabilities:
Interest-bearing deposits 213,124 42,829 235,425 70 491,448
Short-term borrowing 41,611 41,611
-------- ------- -------- -------- --------
Total rate-sensitive liabilities 254,735 42,829 235,425 70 533,059
-------- ------- -------- -------- --------
Periodic rate sensitivity gap $ 23,318 $25,375 $ 9,418 $ 62,892
Cumulative rate sensitivity gap 23,318 48,693 58,111 121,003
Cumulative rate sensitivity gap ratio
June 30, 1996 109% 116% 111% 123%
December 31, 1995 117% 128% 113% 126%
Page 14 of 20
FIRST MERCHANTS CORPORATION
FORM 10-Q
EARNING ASSETS
Earning assets increased $76.4 million during 1995 but declined $6.6
million during the first half of 1996.
The following table presents the earning asset mix for the years ended
1994, 1995 and at June 30, 1996 (table dollar amounts in millions).
Earning Assets
----------------------------------------
June 30, December 31, December 31,
1996 1995 1994
-------- ------------ ------------
Federal funds sold and interest-bearing
deposits with financial institutions $ 15.1 $ 37.7 $ 3.7
Securities available for sale 146.0 143.1 99.3
Securities held to maturity 51.0 58.2 77.7
Mortgage loans held for sale .7
Federal Reserve and Federal Home
Loan Bank stock 2.0 1.9 1.9
Loans 439.9 419.0 401.6
-------- ------------ ------------
Total $654.0 $660.6 $584.2
-------- ------------ ------------
-------- ------------ ------------
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 the six month period
ended June 30, 1996 (table dollar amounts in thousands).
Period End Balance
------------------------------------------
Federal Home
Short-term Loan Bank
Deposits Borrowing Advance
---------- ------------- --------------
June 30, 1996 . . . . . . . . . $574,225 $41,611
December 31, 1995 . . . . . . . 588,156 33,975 $1,000
December 31, 1994 . . . . . . . 529,830 39,189
Average Balances
------------------------------------------
Federal Home
Short-term Loan Bank
Deposits Borrowing Advance
---------- ------------- --------------
June 30, 1996 . . . . . . . . . $555,362 $39,577 $ 940
December 31, 1995 . . . . . . . 538,539 44,799 515
December 31, 1994 . . . . . . . 514,029 45,639
Page 15 of 20
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 half 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 six months of 1996, interest income (FTE) grew $572,000
on an annualized basis due to growth in average earning assets of $12.5
million. Net interest income (FTE) as a per cent of earning assets remained
level with the prior year as yields (FTE) and expenses both declined by .03
per cent of average earning assets.
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.
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
--------------- ---------------- --------------- --------- --------------------
1996(1) 8.12% 3.48% 4.64% $642,301 $29,817
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
(1) First six months annualized.
Page 16 of 20
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 six months of 1996 amounted to $3,610,000 or
12.4 per cent higher than the first six months of 1995. $369,000 of the
increase of $399,000 is attributable to four factors:
1. Trust revenues increased $104,000 (8.1 per cent).
2. Deposit service charges increased $99,000 (8.1 per cent).
3. Interchange fees for the Corporation's credit and debit card programs
grew by $80,000 (55.9 per cent) due to increased product offerings.
4. The Corporation recorded securities gains of $20,000 compared to losses
of $66,000 last year, an increase of $86,000.
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 half 1996 expenses of $9,546,000 were $243,000 or 2.6 per cent
above the same period of 1995. The following table details the change in
"Other Expense".
1996 "Other Expense" Compared to 1995
(through June 30)
- -------------------------------------------------------------------------------
1. Salary and benefit expense increased 4.2 per cent $228,000
2. Various other operating expenses increased 351,000
3. FDIC deposit insurance premiums declined (574,000)
4. 1995 "other expense" included a refund from the State of
Indiana for taxes paid in 1988 and 1989. This served to
reduce 1995 "Other Expense". 238,000
--------
Net Change $243,000
--------
--------
INCOME TAXES
The increase in 1995 tax expense was attributable to a $1,241,000
increase in pre-tax net income.
During the first half of 1996, income tax expense grew $190,000 from the
same period one year earlier, primarily due to a $429,000 increase in pre-tax
net income.
Page 17 of 20
FIRST MERCHANTS CORPORATION
FORM 10-Q
The following is a breakdown, by year, of federal and state income taxes
(table dollar amounts in thousands).
Six Months Ended Twelve Months Ended
June 30, December 31,
---------------- -------------------
1996 1995 1995 1994
------ ------ ------ ------
Federal taxes . . . . . . . . . $2,103 $1,976 $4,146 $3,735
State taxes . . . . . . . . . . 682 619 1,302 1,172
------ ------ ------ ------
Total . . . . . . . . . . . $2,785 $2,595 $5,448 $4,907
------ ------ ------ ------
------ ------ ------ ------
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
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 June 30,
1996.
Page 19 of 20
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 12, 1996 by /s/ Stefan S. Anderson
-------------------- -----------------------------
Stefan S. Anderson
President and Director
Date August 12, 1996 by /s/ James L. Thrash
-------------------- -----------------------------
James L. Thrash
Chief Financial & Principal
Accounting Officer
Page 20 of 20