Page 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY RETORT UNDER SECTION 13 or 15 (d) of THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2000
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 10, 2000 there were outstanding 10,786,575 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 22 pages.
<PAGE>
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
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
<PAGE>
<TABLE>
<CAPTION>
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
March 31, December
2000 31, 1999
---------- ----------
<S> <C> <C>
ASSETS:
Cash and due from banks.................................................... $ 37,418 $ 58,893
Federal funds sold......................................................... 1,800 25,400
----------- -----------
Cash and cash equivalents................................................ 39,218 84,293
Interest-bearing deposits.................................................. 482 1,730
Investment securities available for sale................................... 305,929 329,668
Investment securities held to maturity..................................... 11,951 14,303
Mortgage loans held for sale............................................... 227 61
Loans...................................................................... 1,043,567 998,895
Less: Allowance for loan losses......................................... (10,468) (10,128)
----------- -----------
Net loans.............................................................. 1,033,326 988,767
Premises and equipment..................................................... 20,552 20,073
Federal Reserve and Federal Home Loan Bank Stock........................... 5,858 5,858
Interest receivable........................................................ 10,843 11,279
Core deposit intangibles and goodwill...................................... 2,820 2,885
Others assets.............................................................. 15,199 15,131
----------- -----------
Total assets........................................................... $1,446,178 $1,474,048
=========== ===========
LIABILITIES:
Deposits:
Noninterest-bearing...................................................... $ 138,022 $ 140,547
Interest-bearing......................................................... 1,005,741 1,006,656
----------- -----------
Total deposits......................................................... 1,143,763 1,147,203
Borrowings................................................................. 166,312 189,862
Interest payable........................................................... 5,114 4,599
Other liabilities.......................................................... 6,201 6,088
----------- -----------
Total liabilities...................................................... 1,321,390 1,347,752
STOCKHOLDERS' EQUITY:
Perferred stock, no-par value:
Authorized and unissued-500,000 shares...................................
Common Stock, $.125 stated value:
Authorized --- 50,000,000 shares.........................................
Issued and outstanding - 10,809,430 and 10,936,617 shares................ 1,351 1,367
Additional paid-in capital................................................. 22,419 25,481
Retained earnings.. .................................................... 106,064 103,640
Accumulated other comprehensive income (loss).............................. (5,046) (4,192)
----------- -----------
Total stockholders' equity............................................. 124,788 126,296
----------- -----------
Total liabilities and stockholders' equity............................. $1,446,178 $1,474,048
=========== ===========
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, 2000
-------------------
2000 1999
------- -------
<S> <C> <C>
Interest Income:
Loans receivable
Taxable..................................................................... $21,430 $18,580
Tax exempt.................................................................. 72 53
Investment securities:
Taxable..................................................................... 3,744 3,495
Tax exempt.................................................................. 1,142 1,310
Federal funds sold............................................................ 51 228
Deposits with financial institutions.......................................... 14 4
Federal Reserve and Federal Home Loan Bank stock.............................. 121 100
------- -------
Total interest income..................................................... 26,574 23,770
------- -------
Interest expense:
Deposits...................................................................... 10,903 9,341
Borrowings.................................................................... 2,398 1,590
------- -------
Total interest expense...................................................... 13,301 10,931
------- -------
Net Interest Income............................................................. 13,273 12,839
Provision for loan losses....................................................... 479 505
------- -------
Net Interest Income After Provision for Loan Losses............................. 12,794 12,334
------- -------
Other Income:
Net realized gains (losses) on sales of available-for-sale securities......... (198) 15
Other income.................................................................. 3,903 3,413
------- -------
Total other income.............................................................. 3,705 3,428
Total other expenses............................................................ 9,407 8,690
------- -------
Income before income tax........................................................ 7,092 7,072
Income tax expense.............................................................. 2,272 2,429
------- -------
Net Income...................................................................... $ 4,820 $ 4,643
======= =======
Per share:
Net Income:
Basic....................................................................... $ .44 $ .39
Diluted..................................................................... .44 .38
Dividends....................................................................... .22 .20
See notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
(Unaudited)
Three Months Ended
March 31, 2000
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Net Income...................................................................... $ 4,820 $ 4,643
Other comprehensive income, net of tax:
Unrealized (losses) gains on securities available for sale:
Unrealized holding (losses) gains arising during the period, net of
income tax (expense) benefit of $648, and $461.......................... (972) (692)
Less: Reclassification adjustment for gains (losses) included
in net income, net of income tax (expense) benefit of $80 and $(6)........ (118) 9
--------- ---------
(854) (701)
--------- ---------
Comprehensive income............................................................ $ 3,966 $ 3,942
========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollar Amounts in thousands)
(Unaudited)
2000 1999
--------- ---------
<S> <C> <C>
Balances, January 1.......................................................... $126,296 $153,891
Net income................................................................... 4,820 4,643
Cash dividends............................................................... (2,392) (2,111)
Other comprehensive income (loss), net of tax................................ (854) (701)
Stock issued under dividend reinvestment and stock purchase plan............. 192 182
Stock options exercised...................................................... 322 166
Stock Redeemed............................................................... (3,596) (339)
--------- ---------
Balances, March 31........................................................... $124,788 $155,731
========= =========
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,
-----------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income...................................................................... $ 4,820 $ 4,643
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses..................................................... 479 505
Depreciation and amortization................................................. 758 649
Securities amortization, net.................................................. 66 3
Securities losses (gains), net................................................ 198 (15)
Gains on sale of premises and equipment....................................... (105)
Mortgage loans originated for sale............................................ 240 (3,376)
Proceeds from sales of mortgage loans......................................... (406) 4,152
Change in interest receivable................................................. 436 287
Change in interest payable.................................................... (515) 26
Other adjustments............................................................. 1,886 4,111
--------- ---------
Net cash provided by operating activities................................... $ 7,857 $ 10,985
--------- ---------
Cash Flows From Investing Activities:
Net change in interest-bearing deposits......................................... 1,248 (175)
Purchases of
Securities available for sale................................................. (86,845)
Proceeds from maturities of
Securities available for sale................................................. 12,928 52,401
Proceeds from sales of
Securities available for sale................................................. 2,312 1,778
Securities held to maturity................................................... 9,151 1,955
Net change in loans............................................................. (45,040) (9,967)
Purchases of premises and equipment............................................. (1,579) (1,231)
Proceeds from sale of fixed assets.............................................. 512 17
--------- ---------
Net cash provided (used) by investing activities.............................. (20,468) (42,067)
--------- ---------
</TABLE>
(continued)
<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
-----------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash Flows From Financing Activities:
Net change in
Demand and savings deposits................................................... $ (2,525) $(22,781)
Certificates of deposit and other time deposits............................... (915) (22,865)
Borrowings.................................................................... (23,550) 44,975
Cash dividends.................................................................. (2,392) (2,111)
Stock issued under dividend reinvestment and stock purchase plan............. 192 182
Stock options exercised......................................................... 322 166
Stock repurchased............................................................... (3,596) (339)
--------- ---------
Net cash provided (used) by financing activities.............................. (32,464) (2,773)
--------- ---------
Net Change in Cash and Cash Equivalents........................................... (45,075) (33,855)
Cash and Cash Equivalents, January 1.............................................. 84,293 77,769
--------- ---------
Cash and Cash Equivalents, March 31............................................... $ 39,218 $ 43,914
========= =========
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 pronouncements 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. Accounting Matters
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 market 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 from Statement No. 105. Several Emerging
Issues Task Force consensuses are also changed or nullified by the provisions of
Statement No. 133.
Statement No. 133 was originally effective for all fiscal years beginning after
June 15, 2000 and is not expected to have a material impact on the operations of
the Corporation. The Statement may not be applied retroactively to financial
statements of prior periods.
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
(Unaudited)
NOTE 3. Subsequent Event--Acquisition
On January 21, 2000, the Corporation signed a definitive agreement to acquire
Decatur Financial Inc., Decatur, Indiana. The acquisition will be accounted for
under the purchase method of accounting. Under the terms of the agreement, the
Corporation will issue 1,346,000 shares of its common stock in exchange for all
of the common stock of Decatur Financial, Inc. The transaction is subject to
approval by stockholders of Decatur Financial, Inc., and appropriate regulatory
agencies. The Corporation anticipates amortizing core deposit intangibles over
eight years and goodwill over twenty years. As of December 31, 1999, Decatur
Financial, Inc., had total assets and shareholders'equity of $128,140,000 and
$14,253,000 respectively.
<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, 2000
U.S. Treasury...................................... $ 2,993 $ 28 $ 2,965
Federal agencies................................... 57,877 1,290 56,587
State and municipal................................ 82,001 $ 394 977 81,418
Mortgage-backed securities......................... 140,928 42 5,320 135,650
Other asset-backed securities...................... 21,327 846 20,481
Corporate obligations.............................. 8,253 179 8,074
Marketable equity securities....................... 915 161 754
--------- --------- --------- ---------
Total available for sale....................... 314,294 436 8,801 305,929
--------- --------- --------- ---------
Held to maturity at March 31, 2000
U.S. Treasury...................................... 250 2 248
State and municipal................................ 11,124 49 19 11,154
Mortgage-backed securities......................... 311 1 15 297
Other asset-backed securities...................... 266 1 265
--------- --------- --------- ---------
Total held to maturity......................... 11,951 50 37 11,964
--------- --------- --------- ---------
Total investment securities.................... $ 326,245 $ 486 $ 8,838 $ 317,893
========= ========= ========= =========
</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, 1999:
U.S. Treasury...................................... $ 7,337 $ 3 $ 72 $ 7,268
Federal agencies................................... 61,215 50 1,199 60,066
State and municipal................................ 94,598 568 945 94,221
Mortgage-backed securities......................... 141,673 58 4,332 137,399
Other asset-backed securities...................... 21,773 758 21,015
Corporate obligations.............................. 9,082 4 140 8,946
Marketable equity securities....................... 915 162 753
--------- ------ ------- --------
Total available for sale....................... 336,593 683 7,608 329,668
--------- ------ ------- --------
Held to maturity at December 31, 1999:
U.S. Treasury...................................... 250 2 248
State and municipal................................ 13,243 77 13 13,307
Mortgage-backed securities......................... 311 1 1 311
Other asset-backed securities...................... 499 0 81 418
--------- ------ ------- --------
Total held to maturity......................... 14,303 78 97 14,284
--------- ------ ------- --------
Total investment securities.................... $ 350,896 $ 761 $ 7,705 $343,952
========= ====== ======= ========
</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,
2000 1999
--------- ---------
<S> <C> <C>
Loans:
Commercial and industrial loans............................................... $253,604 $224,712
Agricultural production financing and other loans to farmers.................. 22,485 21,547
Real estate loans:
Construction................................................................ 32,810 31,996
Commercial and farmland..................................................... 149,171 150,544
Residential................................................................. 383,413 380,596
Individuals' loans for household and other personal expenditures.............. 193,999 181,906
Tax-exempt loans.............................................................. 4,765 4,070
Other loans................................................................... 3,339 3,552
Unearned interest on loans.................................................... (19) (28)
----------- ---------
Total..................................................................... $1,043,567 $998,895
=========== =========
Three Months Ended
March 31
2000 1999
-------- ---------
Allowance for loan losses:
Balances, January 1........................................................... $10,128 $ 9,209
Provision for losses.......................................................... 479 505
Recoveries on loans........................................................... 149 163
Loans charged off............................................................. (288) (321)
-------- ---------
Balances, March 31............................................................ $10,468 $ 9,556
======== =========
</TABLE>
NOTE 6. Net Income Per Share
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
------------------------------------------- ------------------------------------------
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.............. $4,820 10,904,050 $ .44 $4,643 11,978,451 $ .39
====== ======
Effect of dilutive stock options..... 103,344 119,963
---------- ----------
Diluted net income per share:
Net income available to
common stockholders
and assumed conversions.......... $4,820 11,007,394 $ .44 $4,643 12,098,414 $ .38
====== ========== ====== ====== ========== =======
</TABLE>
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The Corporation's financial data for periods prior to mergers accounted for as
pooling of interests has been restated.
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
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, 2000, was $4,820,000,
compared to $4,643,000 earned in the same period of 1999. Diluted earnings per
share were $.44 a 15.8% increase over $.38 reported for the first quarter 1999.
The increase in earnings was primarily due to growth in earning assets
and non-interest income. Net interest income increased $434,000 or 3.4 percent
over the first three months of 1999 due to growth in average assets of 8.4
percent. Non-interest income increased $277,000 or 8.1 percent over the first
three months of 1999 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, 2000 were 1.34 percent and 15.36 percent,
respectively, compared with 1.40 percent and 11.97 percent for the same period
of 1999.
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
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 ration was 9.2
percent at year-end 1999 and 8.8 percent at March 31, 2000. At March 31, 2000,
the Corporation had a Tier I risk-based capital ratio of 12.3 percent, total
risk-based capital ratio of 13.3 percent, and a leverage ratio of 8.8 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.
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.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) March 31, December 31, December 31,
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual loans............................................ $1,115 $1,280 $1,073
Loans contractually past due 90 days
Or more other than nonaccruing............................. 2,466 2,327 2,334
Restructured loans........................................... 2,802 908 1,110
------ ------ ------
Total.......................................... $6,383 $4,515 $4,517
====== ====== ======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
At March 31, 2000, non-performing loans totaled $6,383,000, an
increase of $1,868,000 from December 31, 1999. Impaired loans at December 31,
1999 included in the table above totaled $1,380,000.
The Corporation adopted Statement of Financial Accounting Standards ("SFAS") No.
113 and No. 118, Accounting by Creditors for Impairment of a Loan and Accounting
by Creditors for Impairment of a Loan - Income recognition and Disclosures, on
January 1, 1995. At December 31, 1999, impaired loans totaled $7,140,000, a
decrease of $1,947,000 from December 31, 1998. On December 31, 1999 an allowance
for losses was not deemed necessary for impaired loans totaling $4,398,000,
but an allowance of $1,061,000 was recorded for the remaining balance of
impaired loans of $2,742,000. The average balance of impaired loans for 1999 was
$8,770,000.
At March 31, 2000, the allowance for loan losses increased by $340,000,
to $10,468,000, up slightly from year end 1999. As a percent of loans, the
allowance was 1.00 percent, down from 1.01 percent at year end 1999.
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
The first quarter 2000 provision of $479,000 was down $26,000 from
$505,000 for the same quarter in 1999. Net charge offs amounted to $139,000
during the quarter.
This 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,
---------------------------- -------------------------
2000 1999 1999 1998
------- -------- ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Allowance for loan losses:
Balance at beginning of period............................ $10,128 $ 9,209 $8,429 $8,010
------- -------- ------ ------
Chargeoffs................................................ 288 1,769 2,231 1,949
Recoveries................................................ 149 447 639 633
------- -------- ------ ------
Net chargeoffs............................................ 139 1,322 1,592 1,316
Provision for loan losses................................. 479 2,241 2,372 1,735
------- -------- ------ ------
Balance at end of period.................................. $10,468 $10,128 $9,209 $8,429
======= ======= ====== ======
Ratio of net chargeoffs during the period to average loans
outstanding during the period............................. .06%(1) .14% .18% .16%
Peer Group N/A N/A .26% .29%
(1) First three months annualized
</TABLE>
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, 2000, 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 $95,837,000 in the
three month horizon at March 31, 2000, or just over 6.6 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 with a rate sensitive asset to rate sensitive liability ratio of 76.5
percent.
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
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 base case (flat rates). Net Interest Income is
simulated over a 12-month horizon. By policy, the variance between rising rates
and base case nor falling rates and base case can be more than a negative 5
percent.
Assumed interest rate changes are simulated to move immediate and
parallel. The rate movement to noteworthy interest rate indexes appear below:
<TABLE>
<CAPTION>
Rising Falling
- --------------------------------------------------------------------------------
<S> <C> <C>
Prime 200 Basis Points (200) Basis Points
Federal Funds 200 (200)
90 Day T-Bill 200 (200)
One Year T-Bill 200 (200)
Three Year T-Note 200 (200)
Five Year T-Note 200 (200)
Ten Year T-Note 200 (200)
Interest Checking 67 ( 67)
MMIA Savings 200 (200)
Money Market Index 200 (200)
Regular Savings 67 ( 67)
Results for the flat, rising (rate shock), and falling (rate shock)
interest scenarios are listed below. The net interest income shown represents
cumulative net interest income over an 12-month time horizon. Balance sheet
assumptions are the same under all scenarios:
</TABLE>
<TABLE>
<CAPTION>
Base Case
Flat Rates Rising Falling
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Interest Income (Dollars in Thousands) $54,782 $52,312 $56,504
Change vs. Base Case ($ 2,470) $ 1,722
Percent Change (4.51%) 3.14%
Policy Limitation (5.00%) (5.00%)
</TABLE>
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
Earning Assets
The following table presents the earning asset mix as of March 31,
2000, and December 31, 1999, and December 31, 1998.
Loans grew by $44.7 million from December 31, 1999, to March 31,
2000, while investment securities declined by $26.1 million during the same
period. Commercial and industrial loans increased by more than $28.9 million,
while individuals' loans for household and personal expenditures grew by nearly
$12.1 million.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
(Dollars in Millions) March 31, December 31, December 31,
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds sold and interest-bearing deposits........... $ 1.8 $ 27.1 $ 46.3
Investment securities available for sale................... 305.9 329.7 329.5
Investment securities held to maturity..................... 12.0 14.3 21.7
Mortgage loans held for sale............................... 0.2 0.8
Loans...................................................... 1,043.6 998.9 890.4
Federal Reserve and Federal Home Loan Bank stock........... 5.8 5.8 4.5
--------- --------- ---------
Total................................. $ 1,369.3 $ 1,375.8 $ 1,293.2
========= ========= =========
Deposits, Securities Sold Under Repurchase Agreements, Federal Funds Sold and Other Short-tern Borrowing
</TABLE>
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 1999 and
1998 and at March 31, 2000.
<TABLE>
<CAPTION>
(Dollars in Millions) March 31, December 31, December 31,
2000 1999 1998
-------------------------------------------------------
<S> <C> <C> <C>
Deposits......................................................... $1,143.8 $1,147.2 $1,086.0
Securities sold under repurchase agreements...................... 63.7 78.0 48.8
Other short-term borrowings...................................... 26.6 38.4 17.8
Federal Home Loan Bank advances.................................. 76.0 73.5 47.1
</TABLE>
The Corporation has continued to leverage its large capital position
with Federal Home Loan Bank advances, as well as, repurchase agreements which
are pledged against acquired investment securities as collateral for the
borrowings. The interest rate risk is included as part of the Corporation's
interest simulation discussed in Management's Discussion and Analysis under the
heading Liquidity, Interest Sensitivity, and Disclosures about Market Risk. The
effect on the Corporation" capital ratios is minimal as the Corporation remains
adequately capitalized.
<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, 2000 and 1999.
Net interest income (FTE) for the three months ended March 31, 2000
increased by $$354,000, or 2.6 percent over the same period in 1999, due to an
increase in average earning assets of over $$107 million. For the same period
interest income and interest expense, as a percent of average earning assets,
increased 19 basis points, 43 basis points respectively, due to lower interest
rates and increased non-deposit funding.
<TABLE>
<CAPTION>
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------------------
Interest Income Net Interest
(FTE) as a Interest Expense Income Net Interest Income
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 three months
Ended March 31,
2000 7.95% 3.89% 4.07% $1,369,343 $55,740
1999 7.76% 3.46% 4.30% $1,262,664 $54,288
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>
<PAGE>
FIRST MERCHANTS CORPORATION
FORM 10-Q
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 2000 exceeded the same quarter in
the prior year by $490,000, or 14.4 percent.
Two major areas account for most of the increase:
1.Serves charges on deposit accounts increased $136,000 or 14.2 percent
due to increased number of accounts and price adjustments.
2.Commission income increased $127,000 or 38.4 percent due primarily to
increased sales efforts of First Merchants Insurance Services, Inc.
Other Expense
Total other expenses represent non-interest operating expenses of the
Corporation. First quarter other expense in 2000 exceeded the same quarter of
the prior year by $717,000, or 8.3 percent.
Two major areas account for most of the increase:
1. Salaries and benefit expense grew $318,000 or 6.5 percent, due to
normal salary increases and staff additions.
2. Equipment expense increased by $138,000, or 16.6 percent,
reflecting the Corporation's efforts to improve efficiency and
provide electronic service delivery to its customers.
Income Taxes
Income tax expense, for the three months ended March 31, 2000,
decreased by $157,000 over the same period in 1999, due to reduced state income
tax liability.
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 March 24, 2000.
27 Financial Data Schedule, Period Ending March 31, 2000 21
<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 05/11-00 by /s/Michael L. Cox
------------------------ -------------------------------------
Michael L. Cox
President and Chief Executive Officer
Date 05/11/00 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 37,418
<INT-BEARING-DEPOSITS> 482
<FED-FUNDS-SOLD> 1,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 305,929
<INVESTMENTS-CARRYING> 11,951
<INVESTMENTS-MARKET> 11,964
<LOANS> 1,043,567
<ALLOWANCE> 10,468
<TOTAL-ASSETS> 1,446,178
<DEPOSITS> 1,143,763
<SHORT-TERM> 0
<LIABILITIES-OTHER> 200,549
<LONG-TERM> 0
0
0
<COMMON> 1,351
<OTHER-SE> 123,437
<TOTAL-LIABILITIES-AND-EQUITY> 1,446,178
<INTEREST-LOAN> 21,502
<INTEREST-INVEST> 4,886
<INTEREST-OTHER> 186
<INTEREST-TOTAL> 26,574
<INTEREST-DEPOSIT> 10,903
<INTEREST-EXPENSE> 13,301
<INTEREST-INCOME-NET> 13,273
<LOAN-LOSSES> 479
<SECURITIES-GAINS> (198)
<EXPENSE-OTHER> 9,407
<INCOME-PRETAX> 7,092
<INCOME-PRE-EXTRAORDINARY> 4,820
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,820
<EPS-BASIC> 0.44
<EPS-DILUTED> 0.44
<YIELD-ACTUAL> 4.07
<LOANS-NON> 1,115
<LOANS-PAST> 2,466
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,128
<CHARGE-OFFS> 288
<RECOVERIES> 149
<ALLOWANCE-CLOSE> 10,468
<ALLOWANCE-DOMESTIC> 10,468
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
