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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, 1998 Commission File Number 0-17071 First Merchants Corporation - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Indiana 35-1544218 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) 200 East Jackson Street - Muncie, IN 47305-2814 - ------------------------------------------------------------------------------- (Address of principal executive office) (Zip code) (765) 747-1500 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable - ------------------------------------------------------------------------------- (Former name former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days, Yes X No --- --- As of July 29, 1998, there were outstanding 6,713,498 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 20 pages.
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 Comprehensive Income 5 Consolidated Condensed Statement of Changes in Stockholders' Equity 6 Consolidated Condensed Statement of Cash Flows 7 Notes to Consolidated Condensed Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 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
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, 1998 1997 ---------- ---------- ASSETS: Cash and due from banks $ 35,650 $ 33,127 Federal funds sold 36,825 9,050 ---------- ----------- Cash and cash equivalents 72,475 42,177 Interest-bearing deposits 275 385 Investment securities available for sale 228,489 212,040 Investment securities held to maturity 26,878 35,332 Mortgage loans held for sale 203 471 Loans 719,013 703,313 Less: Allowance for loan losses (7,041) (6,778) ---------- ----------- Net loans 711,972 696,535 Premises and equipment 17,098 15,382 Federal Reserve and Federal Home Loan Bank stock 3,723 3,373 Interest receivable 8,734 8,968 Core deposit intangibles and goodwill 3,039 1,625 Others assets 4,620 3,848 ---------- ----------- Total assets $1,077,506 $1,020,136 ========== =========== LIABILITIES: Deposits: Noninterest-bearing $ 119,938 $ 115,613 Interest-bearing 763,600 728,199 ---------- ----------- Total deposits 883,538 843,812 Short-term borrowings 36,222 26,829 Federal Home Loan Bank advances 24,671 20,700 Interest payable 3,742 3,615 Other liabilities 3,129 3,211 ---------- ----------- Total liabilities 951,302 898,167 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 -- 6,697,656 and 6,664,439 shares 837 833 Additional paid-in capital 24,633 24,140 Retained earnings 99,331 95,449 Accumulated other comprehensive income 1,403 1,547 ---------- ----------- Total stockholders' equity 126,204 121,969 ---------- ----------- Total liabilities and stockholders' equity $1,077,506 $1,020,136 ========== =========== See notes to consolidated condensed financial statements.
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, 1998 1997 1998 1997 ---------- ---------- ---------- --------- Interest Income: Loans receivable Taxable $ 15,704 $ 14,923 $ 31,110 $ 28,716 Tax exempt 52 30 104 59 Investment securities: Taxable 2,431 2,858 4,774 5,807 Tax exempt 1,120 1,082 2,218 2,121 Federal funds sold 353 509 27 Deposits with financial institutions 7 3 10 6 Federal Reserve and Federal Home Loan Bank stock 69 84 133 128 ---------- ---------- ---------- --------- Total interest income 19,736 18,980 38,858 36,864 ---------- ---------- ---------- --------- Interest expense: Deposits 8,745 7,828 16,978 15,330 Short-term borrowings 307 864 687 1,572 Federal Home Loan Bank advances 379 209 736 342 ---------- ---------- ---------- --------- Total interest expense 9,431 8,901 18,401 17,244 ---------- ---------- ---------- --------- Net Interest Income 10,305 10,079 20,457 19,620 Provision for loan losses 411 290 822 577 ---------- ---------- ---------- --------- Net Interest Income After Provision for Loan Losses 9,894 9,789 19,635 19,043 ---------- ---------- ---------- --------- Other Income: Net realized gains (losses) on sales of available-for-sale securities 5 (9) 51 1 Other income 2,741 2,360 5,377 4,463 ---------- ---------- ---------- --------- Total other income 2,746 2,351 5,428 4,464 Total other expenses 6,801 6,431 13,392 12,618 ---------- ---------- ---------- --------- Income before income tax 5,839 5,709 11,671 10,889 Income tax expense 2,041 2,002 4,049 3,753 ---------- ---------- ---------- --------- Net Income $ 3,798 $ 3,707 $ 7,622 $ 7,136 ========== ========== ========== ========= Per share: Net Income: Basic $ .57 $ .56 $ 1.14 $ 1.08 Diluted .56 .55 1.12 1.06 Dividends .28 .24 .56 .48 See notes to consolidated condensed financial statements.
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF COMPREHENSIVE INCOME (Dollar amounts in thousands) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 -------- -------- -------- ------- Net Income $ 3,798 $ 3,707 $ 7,622 $ 7,136 -------- -------- -------- ------- Other comprehensive income, net of tax: Unrealized losses on securities available for sale: Unrealized holding gains (losses) arising during the period (40) 787 (174) (149) Less: Reclassification adjustment for gains (losses) included in net income 3 (5) 30 1 -------- -------- -------- ------- (37) 782 (144) (148) -------- -------- -------- ------- Comprehensive income $ 3,761 $ 4,489 $ 7,478 $ 6,988 ======== ======== ======== =======
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Dollar amounts in thousands) (Unaudited) 1998 1997 ---------- ----------- Balances, January 1 $ 121,969 $ 112,687 Net income 7,622 7,136 Cash dividends (3,741) (3,176) Net change in accumulated other comprehensive income (144) (148) Stock issued under dividend reinvestment and stock purchase plan 329 345 Stock options exercised 169 67 ---------- ---------- Balances, June 30 $ 126,204 $ 116,911 ========== ========== See notes to consolidated condensed financial statements
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited) Six Months Ended June 30, 1998 1997 -------- -------- Cash Flows From Operating Activities: Net income $ 7,622 $ 7,136 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 822 577 Depreciation and amortization 945 887 Securities amortization, net 95 148 Securities losses (gains), net (51) (1) Mortgage loans originated for sale (3,551) (1,762) Proceeds from sales of mortgage loans 3,819 1,586 Change in interest receivable 234 (252) Change in interest payable 127 313 Other adjustments (673) (194) -------- -------- Net cash provided by operating activities 9,389 8,438 -------- -------- Cash Flows From Investing Activities: Net change in interest-bearing deposits 110 (191) Purchases of Securities available for sale (54,165) (35,638) Securities held to maturity (90) (1,301) Proceeds from maturities of Securities available for sale 36,206 33,763 Securities held to maturity 8,487 9,271 Proceeds from sales of Securities available for sale 1,284 3,289 Net change in loans (16,259) (51,256) Purchases of premises and equipment (2,917) (1,041) Other investing activities (1,594) 220 -------- -------- Net cash provided by investing activities (28,938) (42,884) -------- -------- (continued)
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited) Six Months Ended June 30, 1998 1997 ------- -------- Cash Flows From Financing Activities: Net change in Demand and savings deposits $ 4,325 $ (7,144) Certificates of deposit and other time deposits 35,401 33,761 Short-term borrowings 9,393 4,083 Federal Home Loan Bank advances 4,000 7,550 Repayment of Federal Home Loan Bank advances (29) Cash dividends (3,741) (3,176) Stock issued under dividend reinvestment and stock purchase plan 329 345 Stock options exercised 169 67 -------- -------- Net cash provided by financing activities 49,847 35,486 -------- -------- Net Change in Cash and Cash Equivalents 30,298 1,040 Cash and Cash Equivalents, January 1 42,177 35,032 -------- -------- Cash and Cash Equivalents, June 30 $ 72,475 $ 36,072 ======== ======== 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 Reporting Comprehensive Income. During 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 130, REPORTING COMPREHENSIVE INCOME, establishing standards for the reporting of comprehensive income and its components in financial statements. Statement No. 130 is applicable to all entities that provide a full set of financial statements. Enterprises that have no items of other comprehensive income in any period presented are excluded from the scope of this Statement. Statement No. 130 is effective for interim and annual periods beginning after December 15, 1997. The Corporation has adopted Statement No. 130 during fiscal the first quarter of 1998. See the Consolidated Condensed Statement of Comprehensive Income on page 5.
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited) NOTE 3. Investment Securities Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ----------- ---------- --------- Available for sale at June 30, 1998: U.S. Treasury $ 18,919 $ 96 $ 3 $ 19,012 Federal agencies 62,597 332 22 62,907 State and municipal 77,302 1,651 18 78,935 Mortgage-backed securities 51,465 342 104 51,703 Other asset-backed securities 355 34 321 Corporate obligations 15,272 106 17 15,361 Marketable equity security 250 250 --------- ------ ---- --------- Total available for sale 226,160 2,527 198 228,489 --------- ------ ---- --------- Held to maturity at June 30, 1998: U.S. Treasury 249 1 248 Federal agencies 2,002 2 2,004 State and municipal 20,561 209 20,770 Mortgage-backed securities 1,149 6 1,155 Other asset-backed securities 2,917 5 61 2,861 --------- ------ ---- --------- Total held to maturity 26,878 222 62 27,038 --------- ------ ---- --------- Total investment securities $ 253,038 $2,749 $260 $ 255,527 ========= ====== ==== =========
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, 1997: U.S. Treasury $ 19,207 $ 104 $ 11 $ 19,300 Federal agencies 66,783 405 48 67,140 State and municipal 67,842 1,815 28 69,629 Mortgage-backed securities 36,682 362 86 36,958 Other asset-backed securities 487 2 54 435 Corporate obligations 18,219 139 30 18,328 Marketable equity securities 250 250 --------- ------ ---- --------- Total available for sale 209,470 2,827 257 212,040 --------- ------ ---- --------- Held to maturity at December 31, 1997: U.S. Treasury 249 2 247 Federal agencies 3,412 6 1 3,417 State and municipal 26,206 252 2 26,456 Mortgage-backed securities 1,255 4 1 1,258 Other asset-backed securities 4,210 7 166 4,051 --------- ------ ----- --------- Total held to maturity 35,332 269 172 35,429 --------- ------ ----- --------- Total investment securities $ 244,802 $3,096 $ 429 $ 247,469 ========= ====== ===== =========
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited) NOTE 4. Loans and Allowance June 30, December 31, 1998 1997 ---------- ------------ Loans: Commercial and industrial loans $ 153,852 $ 148,281 Bankers' acceptances and loans to financial institutions 2,215 705 Agricultural production financing and other loans to farmers 19,574 16,764 Real estate loans: Construction 23,747 21,389 Commercial and farmland 94,634 97,503 Residential 294,564 287,072 Individuals' loans for household and other personal expenditures 124,642 125,706 Tax-exempt loans 2,589 2,598 Other loans 3,467 3,782 Unearned interest on loans (271) (487) ---------- ---------- Total $ 719,013 $ 703,313 ========== ========== Six Months Ended June 30, -------- 1998 1997 ---------- ---------- Allowance for loan losses: Balances, January 1 $ 6,778 $ 6,622 Provision for losses 822 577 Recoveries on loans 195 331 Loans charged off (754) (820) ---------- ---------- Balances, June 30 $ 7,041 $ 6,710 ========== ========== NOTE 5. Net Income Per Share Quarter Ended March 31, 1998 1997 ------------------------------- ------------------------------ Weighted- Weighted- Average Per Share Average Per Share Income Shares Amount Income Shares Amount ------ -------- --------- ------ -------- --------- Basic net income per share: Net income available to common stockholders $3,798 6,683,287 $ .57 $3,707 6,618,723 $ .56 ====== ====== Effect of dilutive stock options 123,629 83,986 ------- ------ Diluted net income per share: Net income available to common stockholders and assumed conversions $3,798 6,806,916 $ .56 $3,707 6,702,709 $ .55 ====== ========= ====== ====== ========= ======
FIRST MERCHANTS CORPORATION FORM 10-Q Period Ended June 30, 1998 1997 ------------------------------- ------------------------------ Weighted- Weighted- Average Per Share Average Per Share Income Shares Amount Income Shares Amount ------ -------- --------- ------ -------- --------- Basic net income per share: Net income available to common stockholders $7,622 6,676,657 $ 1.14 $7,136 6,611,867 $ 1.08 ====== ====== Effect of dilutive stock options 121,182 85,975 ------- ------ Diluted net income per share: Net income available to common stockholders and assumed conversions $7,622 6,797,839 $ 1.12 $7,136 6,697,842 $ 1.06 ====== ========= ====== ====== ========= ====== Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net income for the three months ended June 30, 1998, was $3,798,000, compared to $3,707,000 earned in the same period of 1997. Diluted net income per share was $.56 for the three months ended June 30, 1998, compared to $.55 for the three months ended June 30, 1997. Net income for the first six months of 1998 was $7,622,000 compared to $7,136,000 earned in the same period of 1997, an increase of 6.8 percent. Diluted net income per share was $1.12 and $1.06 for the six months ended June 30, 1998 and 1997, respectively. The increase in earnings was primarily due to growth in earning assets and non-interest income. Net interest income increased $837,000 or 4.3 percent over the first six months of 1997 due to growth in earning assets of 6.8 percent. Annualized returns on average assets and average shareholder's equity for quarter ended June 30, 1998 were 1.44 percent and 12.31 percent, respectively, compared with 1.49 percent and 12.85 percent for the same period of 1997. For the six months ended June 30, 1998, annualized returns on average assets and shareholder's equity were 1.48 percent and 12.40 percent, respectively, compared to 1.46 percent and 12.47 percent for the same six month period in 1997. 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 11.9 percent at year-end 1997 and 11.9 percent at June 30, 1998. At June 30, 1998, the Corporation had a Tier I risk-based capital ratio of 16.9 percent, total risk-based capital ratio of 17.9 percent, and a leverage ratio of 11.9 percent. Regulatory capital guidelines require a Tier I risk-based capital ratio of 4.0 percent and a total risk-based capital ratio of 8.0 percent. Banks with Tier I risk-based capital ratios of 6.0 percent and total risk-based capital ratios of 10.0 percent are considered "well capitalized." 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.
FIRST MERCHANTS CORPORATION FORM 10-Q 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 the Corporation. - -------------------------------------------------------------------------------- (Dollars in Thousands) June 30, December 31, December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Non-accrual loans $ 1,366 $ 1,410 $ 2,777 Loans contractually past due 90 days or more other than nonaccruing 1,322 1,972 1,699 Restructured loans 428 282 1,540 -------- -------- -------- Total $ 3,116 $ 3,664 $ 6,016 ======== ======== ======== - -------------------------------------------------------------------------------- Impaired loans included in the table above, totaled $2,551,000 at December 31, 1997. An allowance for losses at December 31, 1997, was not deemed necessary for impaired loans totaling $1,075,000, but an allowance of $407,000 was recorded for the remaining balance of impaired loans of $1,476,000. The average balance of impaired loans for 1997 was $3,414,000. Impaired loans totaled $2,642,000 at June 30, 1998. At June 30, 1998, the allowance for loan losses increased by $263,000, to $7,041,000, up slightly from year end 1997. As a percent of loans, the allowance was .98 percent, up from .96 percent at year end 1997. The second quarter 1998 provision of $411,000 was up from $290,000 for the same quarter in 1997. Net charge-offs amounted to $189,000 during the period. The provision of $822,000 for the six months ended June 30, 1998 was up $245,000 from the six months ended June 30, 1997. Net charge offs amounted to $559,000 during the first six months of 1998. The table below presents loan loss experience for the periods indicated and compares the Corporation's loss experience to that of its peer group, consisting of bank holding companies with assets between $1 billion and $3 billion. Six Months Ended Year Ended June 30, December 31, ----------------- ------------------------- 1998 1997 1996 1995 ---- ---- ---- ---- (Dollars in Thousands) Allowance for loan losses: Balance at beginning of period $6,778 $6,622 $6,696 $6,603 Chargeoffs 754 1,609 1,636 1,554 Recoveries 195 468 309 259 ------ ------ ------ ------ Net chargeoffs 559 1,141 1,327 1,295 Provision for loan losses 822 1,297 1,253 1,388 ------ ------ ------ ------ Balance at end of period $7,041 $6,778 $6,622 $6,696 ====== ====== ====== ====== Ratio of net chargeoffs during the period to average loans outstanding during the period .16%(1) .17% .23% .24% Peer Group N/A .29% .26% .27% (1) First six months annualized
FIRST MERCHANTS CORPORATION FORM 10-Q LIQUIDITY, INTEREST SENSITIVITY, AND DISCLOSURES ABOUT MARKET RISK 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. It is the objective of the Corporation to monitor and manage risk exposure to net interest income caused by changes in interest rates. It is the goal of the Corporation's Asset Liability function to provide optimum and stable net interest income. To accomplish this, management uses two asset liability tools. GAP/Interest Rate Sensitivity Reports and Net Interest Income Simulation Modeling are both constructed, presented, and monitored quarterly. The Corporation's liquidity and interest sensitivity position at June 30, 1998, remained adequate to meet the Corporation's primary goal of achieving optimum interest margins while avoiding undue interest rate risk. The Corporation had a cumulative positive gap of $12,129,000 in the six month horizon at June 30, 1998, or just over 1 percent of total assets. Net interest income at a financial institution with a positive gap tends to increase when rates rise and generally decrease as interest rates decline. The GAP/Interest Rate Sensitive Report is a tool which displays repricing timing differences between interest sensitive assets and liabilities. The 0-180 day Sensitivity Gap Ratio depicts the institution is asset sensitive 103.2 percent. The Corporation places its greatest credence in net interest income simulation modeling. The GAP/Interest Rate Sensitivity Report is known to have two major shortfalls. The GAP/Interest Rate Sensitivity Report fails to precisely gauge how often an interest rate sensitive product reprices nor is it able to measure the magnitude of potential future rate movements. The Corporation's asset liability process monitors simulated net interest income under three separate interest rate scenarios; rising (rate shock), falling (rate shock) and flat. Net Interest income is simulated over an 18 month horizon. By policy, the difference between the best performing and the worst performing rate scenarios are not allowed to show a variance greater than 5 percent. Rising Falling --------------------------------------- Prime 300 Basis Points (300) Basis Points Federal Funds 300 (300) 90 Day T-Bill 310 (275) One Year T-Bill 290 (270) Three Year T-Note 290 (265) Five Year T-Note 290 (255) Ten Year T-Note 290 (245) Interest Checking 100 ( 67) MMIA Savings 150 (100) Money Market Index 289 (246) Regular Savings 100 ( 67) Results for the flat, rising (rate shock), and falling (rate shock) interest rate scenarios are listed below. The net interest income shown represents cumulative net interest income over an 18 month time horizon. Balance sheet assumptions are the same under both scenarios:
FIRST MERCHANTS CORPORATION FORM 10-Q Flat/Base Rising Falling ---------------------------------- Net Interest Income (Dollars in Thousands) $ 61,881 $ 61,691 $ 59,978 Change vs. Flat/Base Scenario (190) (1,903) Percent Change (0.307)% (3.075)% EARNING ASSETS The following table presents the earning asset mix for the years ended 1997 and 1996 and at June 30, 1998. Loans grew by nearly $16 million from December 31, 1997, to June 30, 1998, while investment securities grew by more than $8 million during the same period. - ----------------------------------------------------------------------------------------- EARNING ASSETS (Dollars in Millions) June 30, December 31, December 31, 1998 1997 1996 -------- ------------ ------------ Federal funds sold and interest-bearing deposits $ 37.1 $ 9.4 $ 1.4 Investment securities available for sale 228.5 212.0 228.4 Investment securities held to maturity 26.9 35.3 47.2 Mortgage loans held for sale .2 0.5 0.3 Loans 719.0 703.3 631.4 Federal Reserve and Federal Home Loan Bank stock 3.7 3.4 3.1 -------- ------- ------- Total $1,015.4 $ 963.9 $ 911.8 ======== ======= ======= - ----------------------------------------------------------------------------------------- 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 1997 and 1996 and at June 30, 1998. - ----------------------------------------------------------------------------------------- DEPOSITS, SHORT-TERM BORROWINGS AND FEDERAL HOME LOAN BANK ADVANCES (Dollars in Millions) June 30, December 31, December 31, 1998 1997 1996 -------- ------------ ------------ Deposits $ 883.5 $ 843.8 $ 794.5 Short-term borrowings 36.2 26.8 45.0 Federal Home Loan Bank advances 24.7 20.7 9.2
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 percent of average earning assets for the six months ended June 30, 1997 and 1998. The years ended December 31, 1997 and 1998 are presented below as well. Asset yield during the six months ended June 30, 1998 declined .10 percent (FTE) from the year ended December 31, 1997, due primarily to a continuing decline in interest rates. During the same period interest costs declined .04 percent resulting in a .06 percent decline in net interest income (FTE) as a percent of average earnings assets. Most of the $1.3 million increase in Net Interest Income from December 31, 1997 to June 30, 1998 is attributable to growth in earning assets which exceeded $40 million. - -------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Interest Income Interest Expense Net Interest Income Net Interest Income (FTE) as a Percent as a Percent (FTE) as a Percent Average on a of Average of Average of Average Earning Fully Taxable Earning Assets Earning Assets Earning Assets Assets Equivalent Basis - -------------------------------------------------------------------------------------------------------------------------- For the six months ended June 30, 1998 8.17% 3.75% 4.42% $981,681 $ 43,414 1997 8.16 3.70 4.46 932,441 41,588 For the year ended December 31, 1997 8.27 3.79 4.48 941,351 42,139 1996 8.13 3.67 4.46 880,729 39,258 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. - -------------------------------------------------------------------------------------------------------------------------- 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.
FIRST MERCHANTS CORPORATION FORM 10-Q OTHER INCOME Other income in the second quarter of 1998 exceeded the same quarter in the prior year by $395,000, or 16.8 percent. Two major areas account for most of the increase: 1. Revenues from fiduciary activities grew $201,000, or 23.0 percent, due to strong new business activity and markets. 2. Other customer fees as a whole increased $114,000, or 25.5 percent, due to an increased ATM network, increased sales volume of personal money order agent fees, and increased pricing. Other income for the six months ended June 30, 1998 exceeded the same period in the prior year by $964,000, or 21.6 percent. Two major areas account for most of the increase: 1. Revenues from fiduciary activities grew $386,000, or 24.1 percent, due to strong new business activity and markets. 2. Other customer fees as a whole increased $231,000, or 25.6 percent, due to an increased ATM network, increased sales volume of personal money order agent fees, and increased pricing. OTHER EXPENSE Total "other expenses" represent non-interest operating expenses of the Corporation. Second quarter other expense in 1998 exceeded the same quarter of the prior year by $370,000, or 5.8 percent. Two major areas account for most of the increase: 1. Salaries and benefit expense grew $233,000, or 6.6 percent, due to normal salary increases and staff additions. 2. Equipment expense increased $117,000, or 21.1 percent, reflecting the Corporation's efforts to improve efficiency and provide electronic service delivery to its customers. Total "other expenses" represent non-interest operating expenses of the Corporation. Other expenses for the period ended June 30, 1998 exceeded the same period of the prior year by $774,000, or 6.1 percent. Two major areas account for most of the increase: 1. Salaries and benefit expense grew $410,000, or 5.9 percent, due to normal salary increases and staff additions. 2. Equipment expense increased $185,000, or 16.6 percent, reflecting the Corporation's efforts to improve efficiency and provide electronic service delivery to its customers.
FIRST MERCHANTS CORPORATION FORM 10-Q INCOME TAXES Income tax expense, for the three months ended June 30, 1998, increased by $39,000 over the same period in 1997, due to a $130,000 increase in pre-tax net income, mitigated somewhat by a $60,000 increase in tax-exempt income. Likewise, the increase of $296,000 for the six months ended June 30, 1998, as compared to the same period in 1997, results from a $782,000 increase in pre-tax net income, mitigated somewhat by a $142,000 increase in tax exempt income. YEAR 2000 The Corporation has conducted a comprehensive review of its computer systems to identify the systems that could be affected by the Year 2000 Issue and has developed an implementation plan to resolve the issue. The Year 2000 Issue is the result of the computer programs being written using two digits rather than four to define the applicable year. Any of the Corporation's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations. The Corporation is utilizing both internal and external resources to identify, correct or reprogram and test the systems for the Year 2000 compliance. It is anticipated that all reprogramming efforts will be complete by December 31, 1998, allowing adequate time for testing. 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 address is (http://www.sec.gov). ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required under this item is included as part of Management's Discussion and Analysis under the heading Liquidity, Interest Sensitivity, and Disclosures About Market Risk.
FIRST MERCHANTS CORPORATION FORM 10-Q PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the April 17, 1998 Annual Meeting of Shareholders, the following matters were submitted to a vote of the shareholders. Election of Directors - The following directors were elected for a term of three years. - ---------------------------------------------------------------- Vote Count For Against Abstained ------------ --------- --------- Michael L. Cox 6,018,074.10 54,661.27 17,360.00 Norman M. Johnson 6,064,588.10 8,147.27 17,360.00 George A.Sissel 6,024,136.92 48,598.45 17,360.00 Robert M. Smitson 6,072,694.10 41.27 0.26 Selection of Independent Public Accountants - Geo. S. Olive & Co., LLC, Indianapolis, Indiana Votes For - 6,071,102.87, Votes Against - 15,195.31, Votes Abstained - 3,797.19. - ---------------------------------------------------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Form 10-Q Page Exhibit No.: Description of Exhibit: Number ------------ ----------------------- ------ 27 Financial Data Schedule, Period Ending March 31, 1998 . . . . . .. . 21 (b) Reports on Form 8-K: No reports were filed on Form 8-K during the quarter ended June 30, 1998.
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 10, 1998 by /S/ Michael L. Cox --------------------- -------------------------------------- Michael L. Cox Executive Vice President and Director Date August 10, 1998 by /s/ James L. Thrash --------------------- -------------------------------------- James L. Thrash Chief Financial & Principal Accounting Officer
9 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 35,650 275 36,825 0 228,489 26,878 27,038 719,013 7,041 1,077,506 883,538 36,222 6,871 24,671 0 0 837 125,367 1,077,506 31,214 6,992 652 38,858 16,978 18,401 20,457 822 51 13,392 11,671 7,622 0 0 7,622 1.14 1.12 4.42 1,366 1,322 428 0 6,778 754 195 7,041 7,041 0 0