<PAGE>
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.
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
PART I. Financial information: --------
<S> <C>
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
---------- ----------
<S> <C> <C>
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
-------- -------- -------- -------
<S> <C> <C> <C> <C>
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
======== ======== ======== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
(Unaudited)
1998 1997
---------- -----------
<S> <C> <C>
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
Six Months Ended
June 30,
1998 1997
-------- --------
<S> <C> <C>
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
Six Months Ended
June 30,
1998 1997
------- --------
<S> <C> <C>
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.
</TABLE>
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.
<PAGE>
<TABLE>
<CAPTION>
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
--------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
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
========= ====== ==== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
--------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
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
========= ====== ===== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
---------- ------------
<S> <C> <C>
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
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
NOTE 5. Net Income Per Share
<TABLE>
<CAPTION>
Quarter Ended March 31,
1998 1997
------------------------------- ------------------------------
Weighted- Weighted-
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ -------- --------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
====== ========= ====== ====== ========= ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
------ -------- --------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
====== ========= ====== ====== ========= ======
</TABLE>
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.
<PAGE>
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.
<TABLE>
<CAPTION>
The following table summarizes the risk elements for the Corporation.
- --------------------------------------------------------------------------------
(Dollars in Thousands) June 30, December 31, December 31,
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
----------------- -------------------------
1998 1997 1996 1995
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
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%
</TABLE>
(1) First six months annualized
<PAGE>
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.
<TABLE>
<CAPTION>
Rising Falling
---------------------------------------
<S> <C> <C>
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:
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST MERCHANTS CORPORATION
FORM 10-Q
Flat/Base Rising Falling
----------------------------------
<S> <C> <C> <C>
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)%
</TABLE>
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
EARNING ASSETS
(Dollars in Millions) June 30, December 31, December 31,
1998 1997 1996
-------- ------------ ------------
<S> <C> <C> <C>
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
======== ======= =======
- -----------------------------------------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
DEPOSITS, SHORT-TERM BORROWINGS AND
FEDERAL HOME LOAN BANK ADVANCES
(Dollars in Millions) June 30, December 31, December 31,
1998 1997 1996
-------- ------------ ------------
<S> <C> <C> <C>
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
</TABLE>
<PAGE>
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
Vote Count
For Against Abstained
------------ --------- ---------
<S> <C> <C> <C>
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.
- ----------------------------------------------------------------
</TABLE>
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.
<PAGE>
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
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 35,650
<INT-BEARING-DEPOSITS> 275
<FED-FUNDS-SOLD> 36,825
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 228,489
<INVESTMENTS-CARRYING> 26,878
<INVESTMENTS-MARKET> 27,038
<LOANS> 719,013
<ALLOWANCE> 7,041
<TOTAL-ASSETS> 1,077,506
<DEPOSITS> 883,538
<SHORT-TERM> 36,222
<LIABILITIES-OTHER> 6,871
<LONG-TERM> 24,671
0
0
<COMMON> 837
<OTHER-SE> 125,367
<TOTAL-LIABILITIES-AND-EQUITY> 1,077,506
<INTEREST-LOAN> 31,214
<INTEREST-INVEST> 6,992
<INTEREST-OTHER> 652
<INTEREST-TOTAL> 38,858
<INTEREST-DEPOSIT> 16,978
<INTEREST-EXPENSE> 18,401
<INTEREST-INCOME-NET> 20,457
<LOAN-LOSSES> 822
<SECURITIES-GAINS> 51
<EXPENSE-OTHER> 13,392
<INCOME-PRETAX> 11,671
<INCOME-PRE-EXTRAORDINARY> 7,622
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,622
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.12
<YIELD-ACTUAL> 4.42
<LOANS-NON> 1,366
<LOANS-PAST> 1,322
<LOANS-TROUBLED> 428
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,778
<CHARGE-OFFS> 754
<RECOVERIES> 195
<ALLOWANCE-CLOSE> 7,041
<ALLOWANCE-DOMESTIC> 7,041
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
