<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 March 31, 1999
Commission File Number 0-17071
First Merchants Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 35-1544218
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(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
200 East Jackson Street - Muncie, IN 47305-2814
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(Address of principal executive office) (Zip code)
(765) 747-1500
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days,
Yes X No
--- ---
As of 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.
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
INDEX
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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 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
</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)
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
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.
</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
March 31,
1999 1998
--------- ---------
<S> <C> <C>
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
(Unaudited)
Three Months Ended
March 31,
1999 1998
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
(Unaudited)
1999 1998
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<S> <C> <C>
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
Three Months Ended
March 31
1999 1998
---------- ----------
<S> <C> <C>
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
Three Months Ended
March 31
1999 1998
---------- ----------
<S> <C> <C>
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.
</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 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.
<PAGE>
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.
<PAGE>
<TABLE>
<CAPTION>
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
---------- ----------
<S> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
NOTE 4. INVESTMENT SECURITIES
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
========== ========== ========== ==========
</TABLE>
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<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, 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
========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
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<S> <C> <C>
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
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
<TABLE>
<CAPTION>
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
------ --------- --------- ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
====== ========== ====== ====== ========== ======
</TABLE>
<PAGE>
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."
<PAGE>
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.
<TABLE>
<CAPTION>
The following table summarizes the risk elements for the Corporation.
- --------------------------------------------------------------------------------
(Dollars in Thousands) March 31, December 31, December 31,
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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
====== ====== ======
- --------------------------------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
------------------ ------------------
1998 1998 1997 1996
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
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%
</TABLE>
(1) First three 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 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.
<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 ( 57)
MMIA Savings 150 (100)
Money Market Index 309 (226)
Regular Savings 100 ( 57)
</TABLE>
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>
<CAPTION>
Flat/Base Rising Falling
---------------------------------
<S> <C> <C> <C>
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%)
</TABLE>
<PAGE>
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
EARNING ASSETS
(Dollars in Millions) March 31, December 31, December 31,
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
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
============= ============ ============
- -----------------------------------------------------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
DEPOSITS AND BORROWINGS
(Dollars in Millions) March 31, December 31, December 31,
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
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
</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 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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(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
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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.
- ------------------------------------------------------------------------------------------------------------------------------
</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.
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.
<PAGE>
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.
<PAGE>
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
<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 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
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 31,486
<INT-BEARING-DEPOSITS> 280
<FED-FUNDS-SOLD> 3,525
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 338,422
<INVESTMENTS-CARRYING> 19,007
<INVESTMENTS-MARKET> 19,259
<LOANS> 741,451
<ALLOWANCE> 7,711
<TOTAL-ASSETS> 1,176,832
<DEPOSITS> 880,433
<SHORT-TERM> 86,549
<LIABILITIES-OTHER> 9,007
<LONG-TERM> 68,202
0
0
<COMMON> 1,260
<OTHER-SE> 131,381
<TOTAL-LIABILITIES-AND-EQUITY> 1,176,832
<INTEREST-LOAN> 15,475
<INTEREST-INVEST> 4,491
<INTEREST-OTHER> 192
<INTEREST-TOTAL> 20,158
<INTEREST-DEPOSIT> 7,805
<INTEREST-EXPENSE> 9,334
<INTEREST-INCOME-NET> 10,824
<LOAN-LOSSES> 435
<SECURITIES-GAINS> 10
<EXPENSE-OTHER> 7,499
<INCOME-PRETAX> 5,964
<INCOME-PRE-EXTRAORDINARY> 3,934
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,934
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
<YIELD-ACTUAL> 4.27
<LOANS-NON> 726
<LOANS-PAST> 3,342
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,412
<CHARGE-OFFS> 291
<RECOVERIES> 155
<ALLOWANCE-CLOSE> 7,711
<ALLOWANCE-DOMESTIC> 7,711
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
