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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 March 31, 1999 Commission File Number 0-17071 First Merchants Corporation - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Indiana 35-1544218 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) 200 East Jackson Street - Muncie, IN 47305-2814 - -------------------------------------------------------------------------------- (Address of principal executive office) (Zip code) (765) 747-1500 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable - -------------------------------------------------------------------------------- (Former name former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days, Yes X No --- --- As of May 3, 1999, there were outstanding 12,004,252 common shares, without par value, of the registrant. The exhibit index appears on page 2. 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 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 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) March 31, December 31, 1999 1998 ----------- ------------ ASSETS: Cash and due from banks $ 31,486 $ 33,908 Federal funds sold 3,525 37,315 ---------- ----------- Cash and cash equivalents 35,011 71,223 Interest-bearing deposits 280 855 Investment securities available for sale 338,422 308,507 Investment securities held to maturity 19,007 20,854 Mortgage loans held for sale 776 Loans 751,451 742,972 Less: Allowance for loan losses (7,711) (7,412) ---------- ----------- Net loans 743,740 735,560 Premises and equipment 17,065 16,954 Federal Reserve and Federal Home Loan Bank stock 3,723 3,723 Interest receivable 8,928 9,173 Core deposit intangibles and goodwill 3,040 3,117 Others assets 7,616 6,430 ---------- ----------- Total assets $1,176,832 $1,177,172 ========== =========== LIABILITIES: Deposits: Noninterest-bearing $ 102,130 $ 123,297 Interest-bearing 778,303 803,547 ---------- ----------- Total deposits 880,433 926,844 Borrowings 154,751 111,400 Interest payable 3,583 3,614 Other liabilities 5,424 3,817 ---------- ---------- Total liabilities 1,044,191 1,045,675 STOCKHOLDERS' EQUITY: Preferred stock, no-par value: Authorized and unissued -- 500,000 shares Common stock, $.125 stated value: Authorized --- 50,000,000 shares Issued and outstanding -- 10,082,402 and 10,086,083 shares 1,260 1,261 Additional paid-in capital 24,812 24,969 Retained earnings 104,995 103,076 Accumulated other comprehensive income 1,574 2,191 ---------- ---------- Total stockholders' equity 132,641 131,497 ---------- ---------- Total liabilities and stockholders' equity $1,176,832 $1,177,172 ========== ========== 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 March 31, 1999 1998 --------- --------- Interest Income: Loans receivable Taxable $ 15,434 $ 15,406 Tax exempt 41 52 Investment securities: Taxable 3,273 2,343 Tax exempt 1,218 1,098 Federal funds sold 118 156 Deposits with financial institutions 3 3 Federal Reserve and Federal Home Loan Bank stock 71 64 --------- --------- Total interest income 20,158 19,122 --------- --------- Interest expense: Deposits 7,805 8,233 Borrowing 1,529 737 --------- --------- Total interest expense 9,334 8,970 --------- --------- Net Interest Income 10,824 10,152 Provision for loan losses 435 411 --------- --------- Net Interest Income After Provision for Loan Losses 10,389 9,741 --------- --------- Other Income: Net realized gains on sales of available-for-sale securities 10 46 Other income 3,064 2,636 --------- --------- Total other income 3,074 2,682 Total other expenses 7,499 6,591 --------- --------- Income before income tax 5,964 5,832 Income tax expense 2,030 2,008 --------- --------- Net Income $ 3,934 $ 3,824 ========= ========= Per share: Net Income: Basic $ .39 $ .38 Diluted .39 .38 Dividends .20 .19 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 March 31, 1999 1998 -------- -------- Net Income $ 3,934 $ 3,824 -------- -------- Other comprehensive income, net of tax: Unrealized losses on securities available for sale: Unrealized holding losses arising during the period, net of income tax 408 and $54 (611) (80) Less: Reclassification adjustment for gains included in net income, net of income tax of $4 and $19 (6) (27) -------- -------- (617) (107) -------- -------- Comprehensive income $ 3,317 $ 3,717 ======== ========
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Dollar amounts in thousands) (Unaudited) 1999 1998 --------- --------- Balances, January 1 $131,497 $121,969 Net income 3,934 3,824 Cash dividends (2,016) (1,869) Other comprehensive income, net of tax . (617) (107) Stock issued under dividend reinvestment and stock purchase plan 182 145 Stock options exercised 102 Stock Redeemed (339) --------- --------- Balances, March 31 $132,641 $124,064 ========= ========= See notes to consolidated condensed financial statements
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited) Three Months Ended March 31 1999 1998 ---------- ---------- Cash Flows From Operating Activities: Net income $ 3,934 $ 3,824 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 435 411 Depreciation and amortization 572 465 Securities amortization, net 3 45 Securities losses (gains), net (10) (46) Mortgage loans originated for sale (3,376) (2,452) Proceeds from sales of mortgage loans 4,152 2,387 Change in interest receivable 245 779 Change in interest payable (31) 40 Other adjustments 905 637 ---------- ---------- Net cash provided by operating activities 6,829 6,090 ---------- ---------- Cash Flows From Investing Activities: Net change in interest-bearing deposits 575 23 Purchases of Securities available for sale (85,219) (28,980) Securities held to maturity (90) Proceeds from maturities of Securities available for sale 52,401 21,769 Securities held to maturity 1,778 5,717 Proceeds from sales of Securities available for sale 1,955 1,282 Net change in loans (8,615) 1,285 Purchases of premises and equipment (700) (929) Other investing activities 17 245 ---------- ---------- Net cash provided by investing activities (37,808) 322 ---------- ---------- (continued)
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited) Three Months Ended March 31 1999 1998 ---------- ---------- Cash Flows From Financing Activities: Net change in Demand and savings deposits $(21,167) $ (16,935) Certificates of deposit and other time deposits (25,244) 8,548 Repurchase agreements and other borrowings 34,351 (1,775) Federal Home Loan Bank advances 9,000 4,000 Repayment of Federal Home Loan Bank advances (29) Cash dividends (2,016) (1,869) Stock issued under dividend reinvestment and stock purchase plan 182 145 Stock options exercised 102 Stock redeemed (339) ---------- ---------- Net cash provided by financing activities (5,233) (7,813) ---------- ---------- Net Change in Cash and Cash Equivalents (36,212) (1,401) Cash and Cash Equivalents, January 1 71,223 42,177 ---------- ---------- Cash and Cash Equivalents, March 31 $ 35,011 $ 40,776 ========== ========== 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 or adoption of accounting pronouncement 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 OR ADOPTION OF ACCOUNTING PRONOUNCEMENTS ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - During 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement requires companies to record derivatives on the balance sheet at their fair value. Statement No. 133 also acknowledges that the method of recording a gain or loss depends on the use of the derivative. The new Statement applies to all entities. If hedge accounting is elected by the entity, the method of assessing the effectiveness of the hedging derivative and the measurement approach of determining the hedge's ineffectiveness must be established at the inception of the hedge. Statement No. 133 amends Statement No. 52 and supersedes Statements No. 80, 105, and 119. Statement No. 107 is amended to include the disclosure provisions about the concentrations of credit risk for Statement No. 105. Several Emerging Issues Task Force consensuses are also changed or nullified by the provisions of Statement No. 133.
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Statement No. 133 will be effective for all fiscal years beginning after June 15, 1999. The Statement may not be applied retroactively to financial statements of prior periods. The adoption of this Statement will have no material impact on the Corporation's financial condition or result of operations. ACCOUNTING FOR MORTGAGE-BACKED SECUIRITES RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE -Also in 1998, the FASB issued Statement No. 134, Accounting for Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. It establishes accounting standards for certain activities of mortgage banking enterprises and for other enterprises with similar mortgage operations. This Statement amends Statement No. 65. Statement No. 134, as previously amended by Statements No. 115 and 125, required a mortgage banking enterprise to classify a mortgage-backed security as a trading security following the securitization of the mortgage loan held for sale. This Statement further amends Statement No. 65 to require that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities must classify the resulting mortgage-backed security or other retained interests based on the entity's ability and intent to sell or hold those investments. The determination of the appropriate classification for securities retained after the securitization of mortgage loans by a mortgage banking enterprise now conformas to Statement No. 115. The only new requirement is that if an entity has a sales commitment in place, the security must be classified into trading. This Statement is effective for the first fiscal quarter beginning after December 15, 1998. On the date this Statement is initially applied, an entity may reclassify mortgage-backed securities and other beneficial interests retained after the securitization of mortgage loans held for sale from the trading category, except for those with sales commitments in place. Those securities and other interests shall be classified based on the entity's present ability and intent to hold the investments. The adoption of this Statement had no material impact on the Corporation's financial condition and result of operations. REPORTING ON THE COSTS OF START-UP ACTIVITIES - During 1998, the Accounting Standards Executive Committee (AcSEC) issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities. Statement of Position 98-5 will affect all non-governmental entities, including not-for-profits, reporting start-up costs in their financial statements. Some existing industry practices result in the capitalization and amortization of start-up costs. This Statement of Position requires that start-up activities and organizational costs associated with both development stage and established operating entities. According to Statement of Position 98-5, start-up activities are "those one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer or beneficiary, initiating a new process in an existing facility, or commencing some new operation. Start-up activities include activities related to organizing a new entity (commonly referred to as organizational costs.)" Statement of Position 98-5 is effective for fiscal years beginning on or after December 15, 1998. Earlier application is encouraged in fiscal years during which annual financial statements have not yet been issued. The adoption of this Statement did not have a material impact on the Corporation's financial condition or result of operations.
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited) NOTE 3. SUBSEQUENT EVENTS - ACQUISITIONS On April 1, 1999, the Corporation issued 1,098,795 shares of its common stock in exchange for all of the outstanding shares of Jay Financial Corporation Portland, Indiana. At December 31, 1998, Jay Financial Corporation had total assets and shareholders' equity of $114,895,000 and $14,903,000, respectively. The transaction will be accounted for under the pooling -of -interests method of accounting. The financial information herein does not reflect the merger. On April 21, 1999, the Corporation issued 810,642 shares of its common stock in exchange for all of the outstanding shares of Anderson Community Bank, Anderson, Indiana. At December 31, 1998, Anderson Community Bank had total assets and shareholders' equity of $77,984,000 and $7,740,000, respectively. The transaction will be accounted for under the pooling -of-interests method of accounting. The financial information herein does not reflect the merger. The Proforma unaudited results of operations assuming the two mergers had occurred on January 1, 1998, are as follows: Three Months Ended March 31, 1999 1998 ---------- ---------- Net interest income $ 12,865 $ 11,969 Net income 4,643 4,393 Basic net income per share .39 .37 Diluted net income per share .38 .36 NOTE 4. INVESTMENT SECURITIES Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- Available for sale at March 31, 1999: U.S. Treasury $ 11,836 $ 59 $ 11,895 Federal agencies 52,402 346 $ 65 52,683 State and municipal 91,540 2,278 45 93,773 Mortgage-backed securities 149,865 235 227 149,873 Other asset-backed securities 19,233 1 19,234 Corporate obligations 10,635 98 19 10,714 Marketable equity security 250 250 ---------- ---------- ---------- ---------- Total available for sale 335,761 3,017 356 338,422 ---------- ---------- ---------- ---------- Held to maturity at March 31, 1999: U.S. Treasury 250 1 251 Federal agencies 500 500 State and municipal 16,204 296 16,500 Mortgage-backed securities 711 2 713 Other asset-backed securities 1,342 2 49 1,295 ---------- ---------- ---------- ---------- Total held to maturity 19,007 301 49 19,259 ---------- ---------- ---------- ---------- Total investment securities $ 354,768 $ 3,318 $ 405 $ 357,681 ========== ========== ========== ==========
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, 1998: U.S. Treasury $ 20,269 $ 95 $ 20,364 Federal agencies 52,598 577 $ 19 53,156 State and municipal 86,537 2,620 4 89,153 Mortgage-backed securities 126,329 424 183 126,570 Other asset-backed securities 265 1 11 255 Corporate obligations 18,624 143 8 18,759 Marketable equity securities 250 250 ---------- ---------- ---------- ---------- Total available for sale 304,872 3,860 225 308,507 ---------- ---------- ---------- ---------- Held to maturity at December 31, 1998: U.S. Treasury 249 4 253 Federal agencies 500 1 501 State and municipal 17,480 348 1 17,827 Mortgage-backed securities 864 3 867 Other asset-backed securities 1,761 2 27 1,736 ---------- ---------- ---------- ---------- Total held to maturity 20,854 358 28 21,184 ---------- ---------- ---------- ---------- Total investment securities $ 325,726 $ 4,218 $ 253 $ 329,691 ========== ========== ========== ==========
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, 1999 1998 ------------- ------------- Loans: Commercial and industrial loans $ 173,362 $ 169,685 Bankers' acceptances and loans to financial institutions 580 900 Agricultural production financing and other loans to farmers 15,817 16,661 Real estate loans: Construction 23,210 26,426 Commercial and farmland 100,183 95,172 Residential 302,363 302,680 Individuals' loans for household and other personal expenditures 131,630 128,253 Tax-exempt loans 2,788 2,115 Other loans 1,611 1,217 Unearned interest on loans (93) (137) ------------- ------------- Total $ 751,451 $ 742,972 ============= ============= Nine Months Ended March 31 1999 1998 ---------- ---------- Allowance for loan losses: Balances, January 1 $ 7,412 $ 6,778 Provision for losses 435 411 Recoveries on loans 155 110 Loans charged off (291) (480) ---------- ---------- Balances, March 31 $ 7,711 $ 6,819 ========== ========== NOTE 6. NET INCOME PER SHARE Three Months Ended March 31, 1999 1998 --------------------------------- ------------------------------- 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 $3,934 10,079,953 $ .39 $3,824 10,005,041 $ .38 ====== ====== Effect of dilutive stock options 115,812 181,359 ------ ---------- ------ ---------- Diluted net income per share: Net income available to common stockholders and assumed conversions $3,934 10,195,765 $ .39 $3,824 10,186,400 $ .38 ====== ========== ====== ====== ========== ======
FIRST MERCHANTS CORPORATION FORM 10-Q ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Congress passed the Private Securities Litigation Report Act of 1995 to encourage corporations to provide investors with information about the company's anticipated future financial performance, goals, and strategies. The act anticipated future financial performance, goals, and strategies. The act provides a safe harbor for such disclosure, or in other words, protection from unwarranted litigation if actual results are not the same as management's expectations. First Merchants Corporation desires to provide its shareholders with sound information about past performance and future trends. Consequently, this Quarterly Report, including Management's Discussion and Analysis of financial Condition and Results of Operations, contains forward-looking statements that are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those contained in or implied by First Merchants Corporation's statements due to a variety of factors including: changes in economic conditions; movements in interest rates; competitive pressures on product pricing and services; success and timing of business strategies; the successful integration of acquired businesses; the nature and extent of governmental actions and reform; and extended disruption of vital infrastructure. The management of First Merchants Corporation encourages readers of this report to understand forward-looking statements to be strategic objectives rather than absolute targets of future performance. RESULTS OF OPERATIONS Net income for the three months ended March 31, 1999, was $3,934,000, compared to $3,824,000 earned in the same period of 1998. Diluted net income per share was $.39 for the three months ended March 31, 1999, compared to $.38 for the three months ended March 31, 1998. The increase in earnings was primarily due to growth in earning assets and non-interest income. Net interest income increased $672,000 or 6.6 percent over the fisrt three months of 1998 due to growth in earning assets of 12.8 percent. Noninterest income increased $392,000 or 14.6 percent over the first three months of 1998 due primarily to increased revenues from fiduciary activities and commission income. Annualized returns on average assets and average shareholder's equity for quarter ended March 31, 1999 were 1.38 percent and 11.91 percent, respectively, compared with 1.51 percent and 12.43 percent for the same period of 1998. 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 1998 and 11.2 percent at March 31, 1999. At March 31, 1999, the Corporation had a Tier I risk-based capital ratio of 16.6 percent, total risk-based capital ratio of 17.6 percent, and a leverage ratio of 11.6 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."
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 summarizes the risk elements for the Corporation. - -------------------------------------------------------------------------------- (Dollars in Thousands) March 31, December 31, December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Non-accrual loans $ 726 $ 735 $1,410 Loans contractually past due 90 days or more other than nonaccruing 3,342 2,275 1,972 Restructured loans 821 926 282 ------ ------ ------ Total $4,889 $3,936 $3,664 ====== ====== ====== - -------------------------------------------------------------------------------- Impaired loans included in the table above, totaled $2,222,000 at December 31, 1998. An allowance for losses at December 31, 1998, was not deemed necessary for impaired loans totaling $6,882,000, but an allowance of $712,000 was recorded for impaired loans totaling $1,946,000. The average balance of impaired loans for 1998 was $8,318,000. At March 31, 1999, the allowance for loan losses increased by $299,000, to $7,711,000, up slightly from year end 1998. As a percent of loans, the allowance was 1.02 percent, up from .99 percent at year end 1998. The first quarter 1999 provision of $435,000 was up $24,000 from $411,000 for the same quarter in 1998. Net charge-offs amounted to $136,000 during the quarter. 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. Three Months Ended Year Ended March 31, December 31, ------------------ ------------------ 1998 1998 1997 1996 ---- ---- ---- ---- (Dollars in Thousands) Allowance for loan losses: Balance at beginning of period $7,412 $6,778 $6,622 $6,696 ------ ------ ------ ------ Chargeoffs 291 1,881 1,609 1,636 Recoveries. 155 531 468 309 ------ ------ ------ ------ Net chargeoffs 136 1,350 1,141 1,327 Provision for loan losses. 435 1,984 1,297 1,253 ------ ------ ------ ------ Balance at end of period $7,711 $7,412 $6,778 $6,622 ====== ====== ====== ====== Ratio of net chargeoffs during the period to average loans outstanding during the period .07 (1) .18 .17% .23% Peer Group N/A .26 .29% .26% (1) First three 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 March 31, 1999, 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 negative gap of $75,235,000 in the six month horizon at March 31, 1999, or just over 17.5 percent of total assets. Net interest income at a financial institution with a negative gap tends to decrease when rates rise and generally increase 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 liability sensitive 82.5 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 ( 57) MMIA Savings 150 (100) Money Market Index 309 (226) Regular Savings 100 ( 57) 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: Flat/Base Rising Falling --------------------------------- Net Interest Income (Dollars in Thousands) $64,587 $63,494 $62,578 Change vs. Flat/Base Scenario (1,093) (2,009) Percent Change (1.69%) (3.11%)
FIRST MERCHANTS CORPORATIONs FORM 10-Q EARNING ASSETS The following table presents the earning asset mix for the years ended 1998 and 1997 and at March 31, 1999. Loans grew by more than $7.7 million from December 31, 1998, to March 31, 1999, while investment securities grew by more than $28.0 million during the same period. - ----------------------------------------------------------------------------------------------------- EARNING ASSETS (Dollars in Millions) March 31, December 31, December 31, 1999 1998 1997 ------------- ------------ ------------ Federal funds sold and interest-bearing deposits $ 3.8 $ 38.2 $ 9.4 Investment securities available for sale 338.4 308.5 212.0 Investment securities held to maturity 19.0 20.9 35.3 Mortgage loans held for sale 0.8 0.5 Loans 751.5 743.0 703.3 Federal Reserve and Federal Home Loan Bank stock 3.7 3.7 3.4 ------------- ------------ ------------ Total $ 1,116.4 $ 1,115.1 $ 963.9 ============= ============ ============ - ----------------------------------------------------------------------------------------------------- DEPOSITS AND BORROWINGS 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 1998 and 1997 and at March 31, 1999. - ----------------------------------------------------------------------------------------------------- DEPOSITS AND BORROWINGS (Dollars in Millions) March 31, December 31, December 31, 1999 1998 1997 ------------- ------------ ------------ Deposits $ 880.4 $ 926.8 $ 843.8 Securities sold under repurchase agreements 84.7 48.8 15.4 Federal funds purchased 14.2 17.1 4.1 U.S. Treasury demand notes 3.6 2.2 7.4 Federal Home Loan Bank advances 52.3 43.3 20.7
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 three months ended March 31, 1998 and 1999. Net interest income (FTE) for the three months ended March 31, 1999 increased by $731,000, or 6.8 percent over the same period in 1998, due to an increase in earning assets of over $118 million. For the same period interest income and interest expense, as a percent of average earning assets, declined .50 and .28 percent respectively, due to a decline in interest rates and margin compression. - ------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) Interest Income Interest Expense Net Interest Income Annualized Net Interest (FTE) as a Percent as a Percent (FTE) as a Percent Average Income on a Fully of Average of Average of Average Earning Fully Taxable Earning Assets Earning Assets Earning Assets Assets Equivalent Basis - ------------------------------------------------------------------------------------------------------------------------------ For the three months ended March 31, 1999 7.73% 3.46% 4.27% $1,077,898 $46,006 1998 8.23 3.74 4.49 959,958 43,084 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. Other income in the first quarter of 1999 exceeded the same quarter in the prior year by $392,000, or 14.6 percent. Two major areas account for most of the increase: 1. Revenues from fiduciary activities grew $171,000, or 18.7 percent, due to strong new business activity and markets. 2. Commission income increased $258,000, due primarily to the acquisition of First Merchants Insurance Services, Inc., on April 1, 1998. OTHER EXPENSE Total "other expenses" represent non-interest operating expenses of the Corporation. First quarter other expense in 1999 exceeded the same quarter of the prior year by $908,000, or 13.8 percent. Two major areas account for most of the increase: 1. Salaries and benefit expense grew $650,000, or 18.9 percent, due to normal salary increases, staff additions, and the acquisition of First Merchants Insurance Services, Inc., on April 1, 1998. 2. Net occupancy and equipment expense grew by $211,000, or 20.1 percent, due to an increasing branch network.
FIRST MERCHANTS CORPORATION FORM 10-Q INCOME TAXES Income tax expense, for the three months ended March 31, 1999, increased by $22,000 over the same period in 1998, due to a $131,000 increase in pre-tax net income, mitigated somewhat by a $109,000 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 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 sytem failure or miscalculations. The Corporation is utilizing both internal and external resources to identify, correct and test the systems for the Year 2000 compliance. The Corporation began the testing phase during the third quarter of 1998. Core application testing was completed as of March 31, 1999. However, due to the acquisitions of Jay Financial Corporation and Anderson Community Bank on April 1 and April 22, 1999, respectively, the Corporation expects to have these two subsidiaries Year 2000 compliant by June 30, 1999. The Corporation has contacted the companies that supply or service its material operations to certify that their respective computer systems are Year 2000 compliant. In addition to possible expenses related to the Corporation's systems and those of the Corporation's service providers, the Corporation could incur losses if Year 2000 problems affect any of its depositors or borrowers. Such problems could include delayed loan payments, due to Year 2000 problems affecting any of its significant borrowers or impairing the payroll systems of large employers in its market area. Because the Corporation's loan portfolio to corporate and individual borrowers is diversified and its market area does not depend significantly upon one employer or industry, the Corporation does not expect any such Year 2000 related difficulties that may affect its depositors and borrowers to significantly affect its net earnings or cash flows. The Board of Directors reviews, on a quarterly basis, the progress in addressing Year 2000 issues. The Corporation believes that its costs related to upgrading systems and software for Year 2000 compliance will not exceed $1,025,000. As of March 31, 1999, the Corporation has spent approximately $750,000 in connection with Year 2000 compliance. Of the $750,000, approximately $650,000 has been capitalized as the Corporation replaced and upgraded non-compliant systems. Although the Corporation believes it is taking the necessary steps to address the Year 2000 compliance issue, no assurances can be given that some problems will not occur or that the Corporation will not incur significant additional expenses in future periods. 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 NONE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Form 10-Q Page Exhibit No.: Description of Exhibit: Number ------------ ----------------------- --------- 2 Plans of acquisition/reorganization are incorporated by reference to forms S-4 filed on December 29, 1998 and January 7, 1999. 27 Financial Data Schedule, Period Ending March 31, 1999 21 (b) Reports on Form 8-K: None
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 14, 1999 by /s/ Michael L. Cox ------------------------------- ------------------------------- Michael L. Cox Executive Vice President and Director Date May 14, 1999 by /s/ James L. Thrash ------------------------------- ------------------------------- James L. Thrash Chief Financial & Principal Accounting Officer
9 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 31,486 280 3,525 0 338,422 19,007 19,259 741,451 7,711 1,176,832 880,433 86,549 9,007 68,202 0 0 1,260 131,381 1,176,832 15,475 4,491 192 20,158 7,805 9,334 10,824 435 10 7,499 5,964 3,934 0 0 3,934 .39 .39 4.27 726 3,342 0 0 7,412 291 155 7,711 7,711 0 0