FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15 (d) of THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1997
Commission File Number 0-17071
First Merchants Corporation
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(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
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(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 August 4, 1997, there were outstanding 6,648,967 common shares,
without par value, of the registrant.
The exhibit index appears on page 18.
This report including the cover page contains a total of 49 pages.
Page 1
FIRST MERCHANTS CORPORATION
FORM 10-Q
INDEX
PAGE NO.
PART I. Financial information:
Item 1. Financial Statements:
Consolidated Condensed Balance Sheet. . . . . . . . . . . . . . . . .3
Consolidated Condensed Statement of Income . . . . . . . . . . . . .4
Consolidated Condensed Statement of Changes in
Stockholders' Equity. . . . . . . . . . . . . . . . . . . . . . . . .5
Consolidated Condensed Statement of Cash Flows. . . . . . . . . . . .6
Notes to Consolidated Condensed Financial Statements. . . . . . . . .7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . .12
PART II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . .18
Item 6. Exhibits and Reports of Form 8-K. . . . . . . . . . . . . . . . . . .18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Page 2
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEET
(Dollars in thousands, except per share amounts)
(Unaudited)
June 30, December 31,
1997 1996
----------- -----------
ASSETS:
Cash and due from banks . . . . . . . . . . $ 36,072 $ 33,882
Federal funds sold . . . . . . . . . . . . 1,150
----------- -----------
Cash and cash equivalents 36,072 35,032
Interest-bearing deposits 481 290
Investment securities available for sale 226,319 228,379
Investment securities held to maturity 39,794 47,227
Mortgage loans held for sale 491 284
Loans . . . . . . . . . . . . . . . . . . . 680,406 631,416
Less: Allowance for loan losses . . . . (6,710) (6,622)
----------- -----------
Net loans 673,696 624,794
Premises and equipment . . . . . . . . . . . 15,458 15,303
Federal Reserve and Federal Home
Loan Bank stock . . . . . . . . . . . . . 3,205 3,090
Interest receivable . . . . . . . . . . . . 8,979 8,643
Core deposit intangibles and goodwill . . . 1,649 1,714
Others assets. . . . . . . . . . . . . . . . 4,291 3,237
----------- -----------
Total assets . . . . . . . . . . . . . . $1,010,435 $ 967,993
----------- -----------
----------- -----------
LIABILITIES:
Deposits:
Noninterest-bearing . . . . . . . . . . . $ 99,870 $ 110,175
Interest-bearing . . . . . . . . . . . . . 721,198 684,276
----------- -----------
Total deposits . . . . . . . . . . . . 821,068 794,451
Short-term borrowings . . . . . . . . . . 49,120 45,037
Federal Home Loan Bank advances . . . . . 16,700 9,150
Interest payable . . . . . . . . . . . . . 3,689 3,376
Other liabilities . . . . . . . . . . . . 2,947 3,292
----------- -----------
Total liabilities . . . . . . . . . . . 893,524 855,306
STOCKHOLDERS' EQUITY:
Preferred stock, no-par value:
Authorized and unissued -- 500,000 shares
Common stock, $.125 stated value:
Authorized --- 20,000,000 shares
Issued and outstanding --
6,632,049 and 6,603,319 shares . . . 829 825
Additional paid-in capital . . . . . . . . 23,376 22,968
Retained earnings. . . . . . . . . . . . . 91,938 87,978
Net unrealized gain on securities
available for sale . . . . . . . . . 768 916
----------- -----------
Total stockholders' equity . . . . . . 116,911 112,687
----------- -----------
Total liabilities and stockholders'
equity . . . . . . . . . . . . . . . $1,010,435 $ 967,993
----------- -----------
----------- -----------
See notes to consolidated condensed financial statements.
Page 3
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1997 1996 1997 1996
-------- -------- -------- --------
Interest Income:
Loans receivable
Taxable . . . . . . . . . $ 14,923 $ 12,670 $ 28,716 $ 25,150
Tax exempt . . . . . . . 30 19 59 37
Investment securities:
Taxable . . . . . . . . . 2,858 3,168 5,807 6,458
Tax exempt . . . . . . . 1,082 945 2,121 1,856
Federal funds sold . . . . . . 117 27 387
Deposits with financial
institutions. . . . . . . 3 3 6 8
Federal Reserve and
Federal Home Loan Bank stock 84 70 128 106
-------- -------- -------- --------
Total interest income . . 18,980 16,992 36,864 34,002
Interest expense:
Deposits . . . . . . . . . . . 7,828 7,140 15,330 14,505
Short-term borrowings . . . . 864 576 1,572 1,123
Federal Home Loan Bank advances 209 140 342 265
-------- -------- -------- --------
Total interest expense . 8,901 7,856 17,244 15,893
-------- -------- -------- --------
Net Interest Income . . . . . . 10,079 9,136 19,620 18,109
Provision for loan losses . . . 290 300 577 580
-------- -------- -------- --------
Net Interest Income After
Provision For Loan Losses 9,789 8,836 19,043 17,529
Other Income:
Net realized gains (losses)
on sales of available-
for-sale securities . . . (9) 9 1 26
Other income . . . . . . 2,360 2,000 4,463 3,955
-------- -------- -------- --------
Total other income . . . . . . . 2,351 2,009 4,464 3,981
Total other expenses . . . . . . 6,431 5,888 12,618 11,710
-------- -------- -------- --------
Income before income tax . . . . 5,709 4,957 10,889 9,800
Income tax expense . . . . . . . 2,002 1,684 3,753 3,340
-------- -------- -------- --------
Net Income . . . . . . . . . . . $ 3,707 $ 3,273 $ 7,136 $ 6,460
-------- -------- -------- --------
-------- -------- -------- --------
Per share:
Net income. . . . . . . . $ .56 $ .50 $ 1.08 $ .99
Dividends (1) . . . . . . .24 .20 .48 .40
Weighted average shares
outstanding . . . . . . .6,618,723 6,570,648 6,611,867 6,567,589
(1) Dividends per share is for First Merchants Corporation only, not restated
for pooling transactions.
See notes to consolidated condensed financial statements.
Page 4
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
(Unaudited)
1997 1996
---------- ----------
Balances, January 1 . . . . . . . . . . . . . . $ 112,687 $ 104,967
Net income. . . . . . . . . . . . . . . . . . . 7,136 6,460
Cash dividends. . . . . . . . . . . . . . . . . (3,176) (2,242)
Net change in unrealized gain (loss) on
securities available for sale . . . . . . . . (148) (2,126)
Stock issued under dividend reinvestment and
stock purchase plan . . . . . . . . . . . . . 345 235
Stock options exercised . . . . . . . . . . . . 67 46
---------- ----------
Balances, June 30. . . . . . . . . . . . . . . . $ 116,911 $ 107,340
---------- ----------
---------- ----------
See notes to consolidated condensed financial statements.
Page 5
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
Six Months Ended
June 30
-------------------------
1997 1996
---------- ----------
Cash Flows From Operating Activities:
Net income. . . . . . . . . . . . . . . . . . $ 7,136 $ 6,460
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses . . . . . . . . 577 580
Depreciation and amortization . . . . . . 887 790
Securities amortization, net. . . . . . . 148 311
Securities losses (gains), net. . . . . . (1) (26)
Mortgage loans originated for sale. . . . (1,762) (464)
Proceeds from sales of mortgage loans . . 1,586 1,212
Change in interest receivable . . . . . . (252) 77
Change in interest payable. . . . . . . . 313 116
Other adjustments . . . . . . . . . . . . (194) (854)
---------- ----------
Net cash provided by operating
activities . . . . . . . . . . . . . 8,438 8,202
Cash Flows From Investing Activities:
Net change in interest-bearing deposits . . . (191) 103
Purchases of
Securities available for sale . . . . . . (35,638) (69,509)
Securities held to maturity . . . . . . . (1,301) (18,472)
Proceeds from maturities of
Securities available for sale . . . . . . 33,763 60,201
Securities held to maturity . . . . . . . 9,271 25,892
Proceeds from sales of
Securities available for sale . . . . . . 3,289 4,521
Net change in loans . . . . . . . . . . . . . (51,256) (34,015)
Purchases of premises and equipment . . . . . (1,041) (717)
Other investing activities. . . . . . . . . . 220 180
---------- ----------
Net cash used by investing activities . . (42,884) (31,816)
(continued)
Page 6
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
Six Months Ended
June 30
-------------------------
1997 1996
---------- ----------
Cash Flows From Financing Activities:
Net change in
Demand and savings deposits. . . . . . . $ (7,144) $ (17,379)
Certificates of deposit and other
time deposits. . . . . . . . . . . . . 33,761 5,922
Short-term borrowings. . . . . . . . . . 4,083 11,009
Federal Home Loan Bank advances. . . . . . . 7,550 6,000
Repayment of Federal Home Loan Bank
advances . . . . . . . . . . . . . . . . . (6,000)
Cash dividends . . . . . . . . . . . . . . . (3,176) (2,242)
Stock issued under dividend reinvestment
and stock purchase plan. . . . . . . . . . 345 235
Stock options exercised. . . . . . . . . . . 67 46
---------- ----------
Net cash used by financing activities . . 35,486 (2,409)
---------- ----------
Net Change in Cash and Cash Equivalents . . . . 1,040 (26,023)
Cash and Cash Equivalents, January 1. . . . . . 35,032 77,874
---------- ----------
Cash and Cash Equivalents, June 30. . . . . . . $ 36,072 $ 51,851
---------- ----------
---------- ----------
See notes to consolidated condensed financial statements.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. General
The significant accounting policies followed by First Merchants Corporation
("Corporation") and its wholly owned subsidiaries for interim financial
reporting are consistent with the accounting policies followed for annual
financial reporting, except for the change in method of accounting discussed
more fully in Note 2. All adjustments which are of a normal recurring nature
and are in the opinion of management necessary for a fair statement of the
results for the periods reported have been included in the accompanying
consolidated condensed financial statements.
NOTE 2. Change in Methods of Accounting
Statement of Financial Accounting Standards ("SFAS") No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, was adopted by the Corporation on January 1, 1997. SFAS No. 125
provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are considered secured borrowings.
A transfer of financial assets in which the transferor surrenders control
over those assets is accounted for as a sale to the extent that consideration
other than beneficial interests in the transferred assets is received in
exchange. The transferor has surrendered control over transferred assets
only if all specific conditions are met. This Statement provides detailed
measurement standards for assets and liabilities included in these
transactions. The adoption of this Statement had no material impact on the
Corporation's financial condition and results of operations.
Page 7
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands, except per share amounts)
(Unaudited)
NOTE 3. Business Combinations
On August 1, 1996, the Corporation issued 942,685 shares of its common stock
in exchange for all of the outstanding shares of Union National Bancorp,
Liberty, Indiana. On October 2, 1996, the Corporation issued 565,705 shares
of its common stock in exchange for all of the outstanding shares of Randolph
County Bancorp, Winchester, Indiana. These transactions were accounted for
under the pooling-of-interests method of accounting. The financial
information contained herein reflects the mergers and reports the financial
condition and results of operations as though the Corporation had been
combined as of January 1, 1996. Separate operating results of Union National
Bancorp and Randolph County Bancorp for the periods prior to the merger were
as follows:
Three Months Six Months
Ended Ended
June 30 June 30
1996 1996
------------ ------------
Net Interest Income:
First Merchants Corporation. . . . . . $ 7,176 $ 14,200
Union National Bancorp . . . . . . . . 1,273 2,514
Randolph County Bancorp. . . . . . . . 687 1,395
------------ ------------
Combined. . . . . . . . . . . . . $ 9,136 $ 18,109
------------ ------------
------------ ------------
Net Income:
First Merchants Corporation. . . . . . $ 2,580 $ 5,159
Union National Bancorp . . . . . . . . 465 836
Randolph County Bancorp. . . . . . . . 228 465
------------ ------------
Combined. . . . . . . . . . . . . $ 3,273 $ 6,460
------------ ------------
------------ ------------
Net Income Per Share:
First Merchants Corporation. . . . . . $ .40 $ .79
Union National Bancorp . . . . . . . . .07 .13
Randolph County Bancorp. . . . . . . . .03 .07
------------ ------------
Combined. . . . . . . . . . . . . $ .50 $ .99
------------ ------------
------------ ------------
Page 8
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
(Unaudited)
NOTE 4. Investment Securities
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Available for sale at June 30, 1997:
U.S. Treasury. . . . . . . . . . . . . . $ 19,834 $ 60 $ 36 $ 19,858
Federal agencies . . . . . . . . . . . . 81,858 333 180 82,011
State and municipal . . . . . . . . . . 61,156 1,140 144 62,152
Mortgage-backed securities . . . . . . . 37,860 353 236 37,977
Other asset-backed securities . . . . . 540 7 13 534
Corporate obligations . . . . . . . . . 23,277 83 85 23,275
Marketable equity security . . . . . . . 512 512
---------- ---------- ---------- ----------
Total available for sale . . . . . . . 225,037 1,976 694 226,319
---------- ---------- ---------- ----------
Held to maturity at June 30, 1997:
U.S. Treasury . . . . . . . . . . . . . 249 7 242
Federal agencies . . . . . . . . . . . . 3,421 11 4 3,428
State and municipal . . . . . . . . . . 30,540 191 23 30,708
Mortgage-backed securities . . . . . . . 4,013 9 4,004
Other asset-backed securities . . . . . 1,571 120 1,451
---------- ---------- ---------- ----------
Total held to maturity . . . . . . . . 39,794 202 163 39,833
---------- ---------- ---------- ----------
Total investment securities . . . . . $ 264,831 $ 2,178 $ 857 $ 266,152
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
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
June December 31,
1997 1996
-------- -------------
Loans:
Commercial and industrial loans . . . . . . . . . . . . . . . . . . . . . $ 139,938 $ 132,134
Bankers' acceptances and loans to financial institutions . . . . . . . . . 1,040 625
Agricultural production financing and other loans to farmers . . . . . . . 17,839 18,906
Real estate loans:
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,005 13,167
Commercial and farmland . . . . . . . . . . . . . . . . . . . . . . . . 102,734 97,596
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276,320 253,530
Individuals' loans for household and other personal expenditures . . . . . 122,876 113,507
Tax-exempt loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,334 1,643
Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,128 1,672
Unearned interest on loans . . . . . . . . . . . . . . . . . . . . . . . . (808) ( 1,364)
--------- ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 680,406 $ 631,416
--------- ------------
--------- ------------
Six Months Ended
June 30
------------------------
Allowance for loan losses: 1997 1996
---------- ----------
Balances, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,622 $ 6,696
Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 577 580
Recoveries on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 331 144
Loans charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . (820) (789)
---------- ----------
Balances, June 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,710 $ 6,631
---------- ----------
---------- ----------
Page 11
FIRST MERCHANTS CORPORATION
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Corporation's financial data for periods prior to mergers accounted
for as pooling of interests has been restated.
RESULTS OF OPERATIONS
The Corporation has recorded 21 consecutive years of growth in earnings
per share, reaching $2.00 in 1996, an increase of 8.7 per cent over 1995.
Return on assets rose to 1.41 per cent in 1996, from 1.35 per cent in
1995, and 1.22 per cent in 1994.
Return on equity, was 12.16 per cent in 1996, 12.17 per cent in 1995,
and 12.42 per cent in 1994.
Following are the levels achieved in each of these ratios during the
first half of 1997, as compared to the same period in 1996.
- Earnings per share were $1.08, up 9.1 per cent from $.99
- Return on assets was 1.46 per cent increasing from 1.41 per cent
- Return on equity totaled 12.47 per cent compared to 12.19 per cent for
the first half of 1996
CAPITAL
The Corporation's capital strength continues to exceed regulatory
minimums and peer group averages. Management believes that strong capital is
a distinct advantage in the competitive environment in which the Corporation
operates and will provide a solid foundation for continued growth.
The Corporation's Tier I capital to average assets ratio was 11.6 per
cent at year-end 1996 and 11.7 per cent at June 30, 1997. At June 30, 1997,
the Corporation had a Tier I risk-based capital ratio of 16.7 per cent, total
risk-based capital ratio of 17.68 per cent, and a leverage ratio of 11.53 per
cent. Regulatory capital guidelines require a Tier I risk-based capital ratio
of 4.0 per cent and a total risk-based capital ratio of 8.0 per cent.
ASSET QUALITY/PROVISION FOR LOAN LOSSES
The allowance for loan losses is maintained through the provision for
loan losses, which is a charge against earnings.
The amount provided for loan losses and the determination of the adequacy
of the allowance are based on a continuous review of the loan portfolio,
including an internally administered loan "watch" list and an independent loan
review provided by an outside accounting firm. The evaluation takes into
consideration identified credit problems, as well as the possibility of losses
inherent in the loan portfolio that cannot be specifically identified.
Page 12
FIRST MERCHANTS CORPORATION
FORM 10-Q
The following table summarized the risk elements for the Corporation.
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) June 30, December 31, December 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,527 $2,777 $ 576
Loans contractually past due 90 days
or more other than nonaccruing . . . . . . . . . . . . . . . . . . . . . 3,705 1,699 1,119
Restructured loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,237 1,540 1,075
------ ------ ------
Total $8,469 $6,016 $2,770
------ ------ ------
------ ------ ------
- -------------------------------------------------------------------------------------------------------------------
The increase in non-performing loans from December 31, 1995, to December
31, 1996, is primarily attributable to one loan placed in non-accrual status
during 1996. This loan is included in impaired loans at December 31, 1996,
for which an allowance was recorded. Management is in the process of
resolving this loan situation and anticipates that no additional provision
for loan losses will be required. The increase at June 30, 1997, is
primarily due to one loan of $1.7 million which is performing but which the
Corporation refused to renew. The Corporation will be paid when financing
arrangements with another bank are completed.
The Corporation adopted SFAS No. 114 and No. 118 ACCOUNTING BY CREDITORS
FOR IMPAIRMENT OF A LOAN AND ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A
LOAN-INCOME RECOGNITION AND DISCLOSURES on January 1, 1995. Impaired loans
included in the table above, totaled $3,992,000 at December 31, 1996. An
allowance for loan losses was not deemed necessary for impaired loans
totaling $868,000, but an allowance of $1,092,000 was recorded for the
remaining balance of impaired loans of $3,124,000. The average balance of
impaired loans for 1996 was $5,213,000. The balance of impaired loans has
not changed significantly since December 31, 1996.
At December 31, 1996, the allowance for loan losses was $6,622,000, down
slightly from year end 1995. As a per cent of loans, the allowance was 1.05
per cent, down from 1.21 per cent at year end 1995. The provision for loan
losses in 1996 was $1,253,000 compared to $1,388,000 in 1995.
At June 30, 1997, the allowance for loan losses stood at $6,710,000 or
.99 per cent of loans. $577,000 was provided for loan losses in the first
half of 1997 compared to $580,000 in the same period of 1996.
The table below presents loan loss experience for the years indicated
and compares the Corporation's loss experience to that of its peer group,
consisting of bank holding companies with assets between $500 million and $1
billion.
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 . . . . . . . . . . . . . . . . . . . . . 820 1,636 1,554 1,488
Recoveries . . . . . . . . . . . . . . . . . . . . . 331 309 259 422
------ ------ ------ ------
Net chargeoffs . . . . . . . . . . . . . . . . . . . 489 1,327 1,295 1,066
Provision for loan losses . . . . . . . . . . . . . 577 1,253 1,388 1,202
------ ------ ------ ------
Balance at December 31 . . . . . . . . . . . . . . . $6,710 $6,622 $6,696 $6,603
------ ------ ------ ------
------ ------ ------ ------
Ratio of net chargeoffs during the period to average loans
outstanding during the period . . . . . . . . . . . . .15% (2) .23% .24% .21%
Peer Group . . . . . . . . . . . . . . . . . . . . . . N/A .26% .26% .25%
(1) Through June 30, 1997
(2) First six months annualized
Page 13
FIRST MERCHANTS CORPORATION
FORM 10-Q
LIQUIDITY AND INTEREST SENSITIVITY
Asset/Liability management has been an important factor in the
Corporation's ability to record consistent earnings growth through periods of
interest rate volatility and product deregulation. Management and the Board
of Directors monitor the Corporation's liquidity and interest sensitivity
positions at regular meetings to ensure that changes in interest rates will
not adversely affect earnings. Decisions regarding investment and the
pricing of loan and deposit products are made after analysis of reports
designed to measure liquidity, rate sensitivity, the Corporation's exposure
to changes in net interest income given various rate scenarios, and the
economic and competitive environments.
The Corporation's liquidity and interest sensitivity position at June
30, 1997, remained adequate to meet the Corporation's primary goal of
achieving optimum interest margins while avoiding undue interest rate risk.
The table below presents the Corporation's interest rate sensitivity analysis
as of June 30, 1997.
INTEREST-RATE SENSITIVITY ANALYSIS
At June 30, 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 . . . . . . . . $ 481 $ 481
Investment securities . . . . . . . . . . 57,463 $ 51,208 $ 126,091 $ 31,351 266,113
Loans . . . . . . . . . . . . . . . . . . 310,511 76,688 230,062 63,636 680,897
Federal Reserve and Federal
Home Loan Bank stock . . . . . . . . . . 2,808 397 3,205
--------- --------- --------- --------- -------
Total rate-sensitive assets. . . . . . . 371,263 127,896 356,153 95,384 950,696
Rate-Sensitive Liabilities:
Interest bearing deposits . . . . . . . . 336,435 78,755 303,913 2,095 721,198
Short-term borrowings . . . . . . . . . . 48,425 695 49,120
Federal Home Loan Bank
advances . . . . . . . . . . . . . . . . 149 2,144 9,578 4,829 16,700
-------- -------- -------- -------- -------
Total rate-sensitive liabilities . . . . 385,009 81,594 313,491 6,924 787,018
Interest rate sensitivity gap by period . . (13,746) 46,302 42,662 88,460
Cumulative rate sensitivity gap . . . . . . (13,746) 32,556 75,218 163,678
Cumulative rate sensitivity gap ratio. . . .
June 30, 1997 . . . . . . . . . . . . . . 96.4% 107.0% 109.6% 120.8%
March 31, 1997 . . . . . . . . . . . . . . 97.1 106.3 109.2 120.1
The Corporation had a cumulative positive gap of $32,556,000 in the one
year horizon at June 30, 1997 or 3.2 per cent of total assets. Net interest
income at financial institutions with positive gaps tends to increase when
rates increase and generally decrease as interest rates decline.
Page 14
FIRST MERCHANTS CORPORATION
FORM 10-Q
EARNING ASSETS
Earning assets increased by $30.3 million during 1996, and $38.9 million
during the first half of 1997.
The following table presents the earning asset mix for the years ended
1996 and 1995 and at June 30, 1997.
Loans grew by more than $79 million during 1996 while short-term
investments and securities declined, reflecting the Corporation's intent to
change the balance sheet mix to emphasize loans which generally carry higher
yields than federal funds sold, interest-bearing deposits and investment
securities and often provide collateral business. The same trend continued
during the first half of 1997. Loans grew by more than $49.5 million,
accounting for all of the growth in earning assets.
- ---------------------------------------------------------------------------------------------------
EARNING ASSETS
(Dollars in Millions) June 30, December 31, December 31,
1997 1996 1995
-------- ------------ ------------
Federal funds sold and interest-bearing deposits . . . . $ 0.5 $ 1.4 $ 39.2
Investment securities available for sale . . . . . . . . 226.3 228.4 225.9
Investment securities held to maturity . . . . . . . . . 39.8 47.2 60.7
Mortgage loans held for sale . . . . . . . . . . . . . . 0.5 0.3 0.7
Loans . . . . . . . . . . . . . . . . . . . . . . . . . 680.4 631.4 552.3
Federal Reserve and Federal Home Loan Bank stock . . . . 3.2 3.1 2.7
------- --------- -----------
Total . . . . . . . . . . . . . . . . . . . . . $ 950.7 $ 911.8 $ 881.5
------- ---------- --------
------- ---------- --------
- ---------------------------------------------------------------------------------------------------
DEPOSITS, SHORT-TERM BORROWINGS AND FEDERAL HOME LOAN BANK ADVANCES
The following table presents the level of deposits and borrowed funds
(Federal funds purchased, repurchase agreements with customers, U.S. Treasury
demand notes and Federal Home Loan Bank advances) for the years ended 1996
and 1995 and at June 30, 1997. Lack of substantial deposit growth coupled
with loan growth has resulted in a greater reliance on borrowed funds. The
Corporation plans to place further emphasis on deposit growth going forward
through advertising and product development.
- --------------------------------------------------------------------------------
DEPOSITS, SHORT-TERM BORROWINGS AND
FEDERAL HOME LOAN BANK ADVANCES
(Dollars in Millions) June 30, December 31, December 31,
1997 1996 1995
-------- ------------ ------------
Deposits . . . . . . . . . . . . . . . . . . . . . . . . $ 821.1 $ 794.5 $ 783.9
Short-term borrowings . . . . . . . . . . . . . . . . . 49.9 45.0 37.4
Federal Home Loan Bank advances . . . . . . . . . . . . 16.7 9.2 9.0
Page 15
FIRST MERCHANTS CORPORATION
FORM 10-Q
NET INTEREST INCOME
Net Interest Income is the primary source of the Corporation's earnings.
It is a function of net interest margin and the level of average earning
assets.
Asset yields improved slightly in 1996 (.04 per cent FTE) due to strong
loan growth. Interest costs declined by a like amount, primarily due to rate
reductions to three interest-bearing deposit products: interest checking,
Money Market investment account and regular savings.
The resulting "spread" increase of .08 per cent combined with earning
asset growth of $35.5 million accounted for the growth in net interest income
(FTE) of $2.2 million.
During the first half of 1997, both interest yields and interest costs
remained stable, increasing by .03 per cent. All of the increase in net
interest income is attributable to earning asset growth which amounted to
nearly $52 million.
The table below presents the Corporation's asset yields, interest
expense, and net interest income as a per cent of average earning assets for
the three-year period ending in 1996 and the first half of 1997.
- ----------------------------------------------------------------------------------------------------------------
(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) 8.16% 3.70 % 4.46% $932,441 $ 41,588
1996 8.13 3.67 4.46 880,729 39,258
1995 8.09 3.71 4.38 845,198 37,049
1994 7.42 2.96 4.46 805,987 35,909
Average earning assets include the average balance of securities classified as available for sale, computed based
on the average of the historical amortized cost balances without the effects of the fair value adjustment.
(1) First Six Months Annualized
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
OTHER INCOME
The Corporation has placed emphasis on the growth of non-interest income
in recent years by offering a wide range of fee-based services. Fee
schedules are regularly reviewed by a pricing committee to ensure that the
products and services offered by the Corporation are priced to be competitive
and profitable.
Other income in 1996 amounted to $8,342,000 or 9.9 per cent higher than
in 1995. The increase of $750,000 is primarily attributable to the following
five factors:
1. Trust revenues increased $166,000 (5.9 per cent) due to stronger
business activity and investment returns.
2. Deposit service charges increased $195,000 (6.9 per cent) primarily
due to changes in pricing.
3. Interchange fees for the Corporation's credit and debit card
programs grew by $169,000 (142 per cent) due to increased product
offerings.
4. The Corporation recorded securities gains of $148,000 compared to
losses of $30,000 last year, an increase of $178,000 as shorter
maturity, available for sale securities were sold at gains and
longer maturity, higher yielding investments were purchased.
5. Postal money order agent fees increased $79,000 (19.4 per cent) due
to an increased client base.
Page 16
FIRST MERCHANTS CORPORATION
FORM 10-Q
Other income in the first half of 1997 exceeded the same period in the
prior year by $487,000 or 8.1 per cent. Two categories accounted for most of
this increase:
1. Trust fees grew by $203,000 or 14.5 per cent, again due to new
business and positive investment returns.
2. Deposit service charges increased by $154,000 or 9.8 per cent due
primarily to changes in pricing.
OTHER EXPENSE
Total "other expenses" represent non-interest operating expenses of the
Corporation. Those expenses amounted to $24,135,000 in 1996, an increase of 5.0
per cent from the prior year, or $1,142,000.
Including an $813,000 reduction in deposit insurance premiums, remaining
operating expenses grew by $1,955,000. Four major areas account for most of
this increase:
1. Salary and benefit expenses, which account for over one-half of the
Corporation's non-interest operating expenses, increased by $640,000
(5.0 per cent) due to normal salary increases.
2. Equipment expense rose $223,000, reflecting the Corporation's
investment in technology to increase productivity and improve
customer service.
3. Expenses related to mergers with Union National Bancorp and Randolph
County Bancorp amounted to $258,000.
4. The previous year included a $238,000 refund from the State of
Indiana for intangibles taxes paid in 1988 and 1989.
First half other expense in 1997 exceeded the same period of the prior
year by $908,000 or 7.8 per cent. Four primary areas account for this
increase:
1. Salaries and benefits grew by $277,000 or 4.1 per cent due primarily
to normal annual salary adjustments.
2. Business supply expense grew by $85,000 or nearly 20.4 per cent
primarily due to increased use of data processing supplies and
personal money order forms.
3. Equipment expense grew $114,000 or 11.4 per cent, again reflecting
the Corporation's investment in technology to increase productivity
and improve customer service.
4. Deposit insurance expense increased $40,000 (571.4 per cent) due to
higher insurance premiums.
INCOME TAXES
1996 income tax expense increased by $698,000 due to a $1,792,000
increase in net pre-tax income. Likewise, the increase of $413,000 in the
first half of 1997, as compared to the same period in 1996, results from a
$1,089,000 increase in pre-tax net income.
OTHER
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, including the
Corporation, and that the address is (http://www.sec.gov).
Page 17
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1997 Annual Meeting of Stockholders was held on April 8, 1997. Set
forth below are the matters, other than the election of directors and the
ratification of the independent auditor, voted upon at the Annual Meeting and
the resulting vote:
- The adoption of an amendment to the Corporation's Articles of
Incorporation to reduce the minimum number of directors to the
Corporation from twelve to nine.
Shares % of
Voted Eligible Shares Voted
--------- ---------------------
For 6,015,368 91.09%
Against 47,694 .72
Abstaining 56,191 .85
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Form 10-Q
Page
Exhibit No.: Description of Exhibit: Number
------------ ----------------------- ----------
3.1 First Merchants Corporation
Articles of Incorporation, as amended . . . 20
3.2 First Merchants Corporation
Bylaws, as amended. . . . . . . . . . . . . 32
27.1 Financial Data Schedule, Period
Ending June 30, 1997 . . . . . . . . . . . 47
27.2 Restated Financial Data Schedule, Period
Ending June 30, 1996 . . . . . . . . . . . 48
27.3 Restated Financial Data Schedule, Period
Ending June 30, 1995 . . . . . . . . . . . 49
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter ended June 30,
1997.
Page 18
FIRST MERCHANTS CORPORATION
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Merchants Corporation
---------------------------
(Registrant)
Date August 6, 1997 by /s/ Michael L. Cox
------------------- -------------------------------
Michael L. Cox
Executive Vice President
and Director
Date August 6, 1997 by /s/ James L. Thrash
------------------- -------------------------------
James L. Thrash
Chief Financial & Principal
Accounting Officer
Page 19