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
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(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
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(Registrant's telephone number, including area code)
Not Applicable
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(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)
March 31, December 31,
1997 1996
--------- ------------
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
--------- ------------
--------- ------------
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
March 31
----------------------
1997 1996
---------- ----------
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
(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.................................................. 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
-------- --------
-------- --------
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)
Three Months Ended
March 31
---------------------
1997 1996
------ ------
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)
(continued)
Page 6
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
Three Months Ended
March 31
-----------------------
1997 1996
--------- -------
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
------- --------
------- --------
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:
Three Months Ended
March 31
1996
--------
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
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 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
--------- --------- ----------- --------
--------- --------- ----------- --------
Page 9
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, 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
------- ------ ----- -------
------- ------ ----- -------
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
March 31, December 31,
1997 1996
--------- -----------
Loans:
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
--------- --------
--------- --------
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.)
- -------------------------------------------------------------------------------
(Dollars in Thousands) March 31, December 31, December 31,
1997 1996 1995
- -------------------------------------------------------------------------------
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
------ ------ ------
------ ------ ------
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.
1997 (1) 1996 1995 1994
------ ------ ------ ------
(Dollars in Thousands)
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
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)
Beyond
1-180 Days 181-365 Days 1-5 Years 5 Years Total
---------- ------------ --------- ------- -------
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%
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.
- ---------------------------------------------------------------------------------------------------------------
EARNING ASSETS
(Dollars in Millions) March 31, December 31, December 31,
1997 1996 1995
--------- ------------ ------------
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
--------- -------- ---------
--------- -------- ---------
- ---------------------------------------------------------------------------------------------------------------
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.
- ---------------------------------------------------------------------------------------------------------------------------------
(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
- ---------------------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------------------
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.
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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.
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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