-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, INIMkwMw4bqKZnZ3oEwAcXjCSoHDDRW8JXHsN1NEj0dScbdSK7pnPgDSYBglDQTT 7AbXLVnlpTBhOA4jNo2BHA== 0001047469-98-020247.txt : 19980515 0001047469-98-020247.hdr.sgml : 19980515 ACCESSION NUMBER: 0001047469-98-020247 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST MERCHANTS CORP CENTRAL INDEX KEY: 0000712534 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 351544218 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-17071 FILM NUMBER: 98621115 BUSINESS ADDRESS: STREET 1: 200 E JACKSON ST STREET 2: PO BOX 792 CITY: MUNCIE STATE: IN ZIP: 47308-0792 BUSINESS PHONE: 3177471500 MAIL ADDRESS: STREET 1: 200 EAST JACKSON STREET CITY: MUNCIE STATE: IN ZIP: 47305 10-Q 1 10-Q 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, 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 May 1, 1998, there were outstanding 6,683,255 common shares, without par value, of the registrant. The exhibit index appears on page 19. This report including the cover page contains a total of 21 pages. FIRST MERCHANTS CORPORATION FORM 10-Q INDEX
Page No. PART I. Financial information: -------- Item 1. Financial Statements: Consolidated Condensed Balance Sheet 3 Consolidated Condensed Statement of Income 4 Consolidated Condensed Statement of Comprehensive Income 5 Consolidated Condensed Statement of Changes in Stockholders' Equity 6 Consolidated Condensed Statement of Cash Flows 7 Notes to Consolidated Condensed Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 PART II. Other Information: Item 4 Submission of Matters to a Vote of Security Holders 19 Item 6. Exhibits and Reports of Form 8-K 19 Signatures 20
FIRST MERCHANTS CORPORATION FORM 10-Q PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CONSOLIDATED CONDENSED BALANCE SHEET (Dollars in thousands, except per share amounts) (Unaudited) March 31, December 31, 1998 1997 --------- ---------- ASSETS: Cash and due from banks $ 30,576 $ 33,127 Federal funds sold 10,200 9,050 ---------- ----------- Cash and cash equivalents 40,776 42,177 Interest-bearing deposits 362 385 Investment securities available for sale 217,813 212,040 Investment securities held to maturity 29,684 35,332 Mortgage loans held for sale 536 471 Loans 701,658 703,313 Less: Allowance for loan losses (6,819) (6,778) ---------- ----------- Net loans 694,839 696,535 Premises and equipment 15,601 15,382 Federal Reserve and Federal Home Loan Bank stock 3,373 3,373 Interest receivable 8,189 8,968 Core deposit intangibles and goodwill 1,592 1,625 Others assets 5,084 3,848 ---------- ----------- Total assets $1,017,849 $1,020,136 ---------- ----------- ---------- ----------- LIABILITIES: Deposits: Noninterest-bearing $ 98,678 $ 115,613 Interest-bearing 736,747 728,199 ---------- ----------- Total deposits 835,425 843,812 Short-term borrowings 25,054 26,829 Federal Home Loan Bank advances 24,671 20,700 Interest payable 3,655 3,615 Other liabilities 4,980 3,211 ---------- ----------- Total liabilities 893,785 898,167 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 -- 6,678,365 and 6,664,439 shares 835 833 Additional paid-in capital 24,385 24,140 Retained earnings 97,404 95,449 Accumulated other comprehensive income 1,440 1,547 ---------- ----------- Total stockholders' equity 124,064 121,969 ---------- ----------- Total liabilities and stockholders' equity $ 1,017,849 $ 1,020,136 ---------- ----------- ---------- ----------- See notes to consolidated condensed financial statements.
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF INCOME (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended March 31, 1998 1997 ---------- --------- Interest Income: Loans receivable Taxable $ 15,406 $ 13,793 Tax exempt 52 29 Investment securities: Taxable 2,343 2,949 Tax exempt 1,098 1,039 Federal funds sold 156 27 Deposits with financial institutions 3 3 Federal Reserve and Federal Home Loan Bank stock 64 44 ---------- --------- Total interest income 19,122 17,884 ---------- --------- Interest expense: Deposits 8,233 7,502 Short-term borrowings 380 708 Federal Home Loan Bank advances 357 133 ---------- --------- Total interest expense 8,970 8,343 ---------- --------- Net Interest Income 10,152 9,541 Provision for loan losses 411 287 ---------- --------- Net Interest Income After Provision for Loan Losses 9,741 9,254 ---------- --------- Other Income: Net realized gains (losses) on sales of available-for-sale securities 46 10 Other income 2,636 2,122 ---------- --------- Total other income 2,682 2,132 Total other expenses 6,591 6,206 ---------- --------- Income before income tax 5,832 5,180 Income tax expense 2,008 1,751 ---------- --------- Net Income $ 3,824 $ 3,429 ---------- --------- ---------- --------- Per share: Net Income: Basic $ .57 $ .52 Diluted .56 .51 Dividends .28 .24 See notes to consolidated condensed financial statements.
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF COMPREHENSIVE INCOME (Dollar amounts in thousands) (Unaudited) Three Months Ended March 31, 1998 1997 -------- -------- Net Income $ 3,824 $ 3,429 -------- -------- Other comprehensive income, net of tax: Unrealized losses on securities available for sale: Unrealized holding losses arising during the period (134) (936) Less: Reclassification adjustment for gains included in net income 27 6 -------- -------- (107) (930) -------- -------- Comprehensive income $ 3,717 $ 2,499 -------- -------- -------- --------
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Dollar amounts in thousands) (Unaudited) 1998 1997 ---------- ---------- Balances, January 1 $ 121,969 $ 112,687 Net income 3,824 3,429 Cash dividends (1,869) (1,585) Net change in accumulated other comprehensive income (107) (930) Stock issued under dividend reinvestment and stock purchase plan 145 175 Stock options exercised 102 14 ---------- ---------- Balances, March 31 $ 124,064 $ 113,790 ---------- ---------- ---------- ---------- See notes to consolidated condensed financial statements
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited) Three Months Ended March 31, 1998 1997 -------- --------- Cash Flows From Operating Activities: Net income $ 3,824 $ 3,429 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 411 287 Depreciation and amortization 465 443 Securities amortization, net 45 132 Securities losses (gains), net (46) (10) Mortgage loans originated for sale (2,452) (700) Proceeds from sales of mortgage loans 2,387 856 Change in interest receivable 779 438 Change in interest payable 40 100 Other adjustments 637 1,358 ---------- ---------- Net cash provided by operating activities 6,090 6,333 ---------- ---------- Cash Flows From Investing Activities: Net change in interest-bearing deposits 23 (81) Purchases of Securities available for sale (28,980) (20,939) Securities held to maturity (90) (1,151) Proceeds from maturities of Securities available for sale 21,769 15,153 Securities held to maturity 5,717 6,675 Proceeds from sales of Securities available for sale 1,282 Net change in loans 1,285 (19,961) Purchases of premises and equipment (929) (424) Other investing activities 245 8 ---------- ---------- Net cash provided (used) by investing activities 322 (20,720) ---------- ---------- (continued)
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited) Three Months Ended March 31, 1998 1997 ----------- ----------- Cash Flows From Financing Activities: Net change in Demand and savings deposits $ (16,935) $ (23,014) Certificates of deposit and other time deposits 8,548 10,456 Short-term borrowings (1,775) 26,589 Federal Home Loan Bank advances 4,000 3,300 Repayment of Federal Home Loan Bank advances (29) Cash dividends (1,869) (1,585) Stock issued under dividend reinvestment and stock purchase plan 145 175 Stock options exercised 102 14 ----------- ----------- Net cash provided (used) by financing activities (7,813) 15,935 ----------- ----------- Net Change in Cash and Cash Equivalents (1,401) 1,548 Cash and Cash Equivalents, January 1 42,177 35,032 ----------- ----------- Cash and Cash Equivalents, March 31 $ 40,776 $ 36,580 ----------- ----------- ----------- ----------- See notes to consolidated condensed financial statements.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS NOTE 1. General The significant accounting policies followed by First Merchants Corporation ("Corporation") and its wholly owned subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting, except for the change in method of accounting discussed more fully in Note 2. All adjustments which are of a normal recurring nature and are in the opinion of management necessary for a fair statement of the results for the periods reported have been included in the accompanying consolidated condensed financial statements. NOTE 2. Change in Methods of Accounting REPORTING COMPREHENSIVE INCOME. During 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 130, REPORTING COMPREHENSIVE INCOME, establishing standards for the reporting of comprehensive income and its components in financial statements. Statement No. 130 is applicable to all entities that provide a full set of financial statements. Enterprises that have no items of other comprehensive income in any period presented are excluded from the scope of this Statement. Statement No. 130 is effective for interim and annual periods beginning after December 15, 1997. The Corporation has adopted Statement No. 130 during fiscal the first quarter of 1998. See the Consolidated Condensed Statement of Comprehensive Income on page 5.
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited) NOTE 3. Investment Securities Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ----------- ---------- --------- Available for sale at March 31, 1998: U.S. Treasury $ 18,939 $ 109 $ 5 $ 19,043 Federal agencies 61,727 334 36 62,025 State and municipal 72,000 1,693 21 73,672 Mortgage-backed securities 46,348 346 77 46,617 Other asset-backed securities 413 1 41 373 Corporate obligations 15,747 112 26 15,833 Marketable equity security 250 250 --------- ------ ---- -------- Total available for sale 215,424 2,595 206 217,813 --------- ------ ---- -------- Held to maturity at March 31, 1998: U.S. Treasury 249 2 247 Federal agencies 2,007 3 1 2,009 State and municipal 22,412 223 22,635 Mortgage-backed securities 1,222 5 1 1,226 Other asset-backed securities 3,794 7 125 3,676 --------- ------ ---- -------- Total held to maturity 29,684 238 129 29,793 --------- ------ ---- -------- Total investment securities $ 245,108 $ 2,833 $ 335 $ 247,606 --------- ------ ---- -------- --------- ------ ---- --------
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited)
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ----------- ---------- --------- Available for sale at December 31, 1997: U.S. Treasury $ 19,207 $ 104 $ 11 $ 19,300 Federal agencies 66,783 405 48 67,140 State and municipal 67,842 1,815 28 69,629 Mortgage-backed securities 36,682 362 86 36,958 Other asset-backed securities 487 2 54 435 Corporate obligations 18,219 139 30 18,328 Marketable equity securities 250 250 --------- ------ ---- -------- Total available for sale 209,470 2,827 257 212,040 --------- ------ ---- -------- Held to maturity at December 31, 1997: U.S. Treasury 249 2 247 Federal agencies 3,412 6 1 3,417 State and municipal 26,206 252 2 26,456 Mortgage-backed securities 1,255 4 1 1,258 Other asset-backed securities 4,210 7 166 4,051 --------- ------ ---- -------- Total held to maturity 35,332 269 172 35,429 --------- ------ ---- -------- Total investment securities $ 244,802 $3,096 $429 $247,469 --------- ------ ---- -------- --------- ------ ---- --------
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited) NOTE 4. Loans and Allowance March 31, December 31, 1998 1997 ---------- ------------ Loans: Commercial and industrial loans $ 150,572 $ 148,281 Bankers' acceptances and loans to financial institutions 1,880 705 Agricultural production financing and other loans to farmers 15,651 16,764 Real estate loans: Construction 21,579 21,389 Commercial and farmland 95,128 97,503 Residential 288,694 287,072 Individuals' loans for household and other personal expenditures 123,965 125,706 Tax-exempt loans 2,533 2,598 Other loans 2,026 3,782 Unearned interest on loans (370) (487) ---------- ---------- Total $ 701,658 $ 703,313 ---------- ---------- ---------- ---------- Three Months Ended March 31 -------- 1998 1997 ---------- ---------- Allowance for loan losses: Balances, January 1 $ 6,778 $ 6,622 Provision for losses 411 287 Recoveries on loans 110 249 Loans charged off (480) (275) ---------- ---------- Balances, March 31 $ 6,819 $ 6,883 ---------- ---------- ---------- ----------
NOTE 5. Net Income Per Share
Period Ended March 31, 1998 1997 ------------------------------- ------------------------------ Weighted- Weighted- Average Per Share Average Per Share Income Shares Amount Income Shares Amount ------ -------- --------- ------ -------- --------- Basic net income per share: Net income available to common stockholders $3,824 6,670,027 $ .57 $3,429 6,605,012 $ .52 ------ ------ ------ ------ Effect of dilutive stock options 120,906 87,962 ------- ------ Diluted net income per share: Net income available to common stockholders and assumed conversions $3,824 6,790,933 $ .56 $3,429 6,692,974 $ .51 ------ --------- ------ ------ --------- ------ ------ --------- ------ ------ --------- ------
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. RESULTS OF OPERATIONS The Corporation has recorded 22 consecutive years of growth in diluted earnings per share, reaching $2.14 in 1997, an increase of 8.1 percent over 1996. Return on assets rose to 1.45 percent in 1997, from 1.41 percent in 1996, and 1.35 percent in 1995. Return on equity, was 12.28 percent in 1997, 12.16 percent in 1996, and 12.17 percent in 1995. Following are the levels achieved in each of these ratios during the first quarter of 1998, as compared to the same period in 1997. - Diluted earnings per share were $.56, up 9.8 percent from $.51 - Return on assets was 1.51 percent increasing from 1.42 percent - Return on equity totaled 12.43 percent compared to 12.11 percent for the first three months of 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 12.0 percent at March 31, 1998. At March 31, 1998, the Corporation had a Tier I risk-based capital ratio of 17.4 percent, total risk-based capital ratio of 18.4 percent, and a leverage ratio of 12.0 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. FIRST MERCHANTS CORPORATION FORM 10-Q
The following table summarizes the risk elements for the Corporation. - ------------------------------------------------------------------------------ (Dollars in Thousands) March 31, December 31, December 31, 1998 1997 1996 - ------------------------------------------------------------------------------ Non-accrual loans $ 935 $ 1,410 $ 2,777 Loans contractually past due 90 days or more other than nonaccruing 2,140 1,972 1,699 Restructured loans 508 282 1,540 -------- -------- -------- Total $ 3,583 $ 3,664 $ 6,016 -------- -------- -------- -------- -------- --------
- ------------------------------------------------------------------------------ The reduction in non-performing loans from periods December 31, 1996, to December 31, 1997, is primarily attributable to two loans. One in the amount of $1,000,000 was removed from non-accrual status and one in the amount of $651,000 was removed from restructured status. 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 were $1,942,000 at March 31, 1998. At December 31, 1997, the allowance for loan losses was $6,778,000, up slightly from year end 1996. As a percent of loans, the allowance was .96 percent, down from 1.05 percent at year end 1996. The decline in the allowance ratio is attributable to significant loan growth. The provision for loan losses in 1997 was $1,297,000 compared to $1,253,000 in 1996. At March 31, 1998, the allowance for loan losses increased by $41,000 to $6,819,000, or .97 percent of total loans. The first quarter 1998 provision of $411,000 was up from $287,000 for the same quarter in 1997. Net charge-offs amounted to $370,000 during the period. 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.
3 Months Ended Year Ended March 31, December 31, --------------- -------------------------- 1998 1997 1996 1995 ---- ---- ---- ---- (Dollars in Thousands) Allowance for loan losses: Balance at beginning of period $6,778 $6,622 $6,696 $6,603 Chargeoffs 480 1,609 1,636 1,554 Recoveries 110 468 309 259 ------ ------ ------ ------ Net chargeoffs 370 1,141 1,327 1,295 Provision for loan losses 411 1,297 1,253 1,388 ------ ------ ------ ------ Balance at end of period $6,819 $6,778 $6,622 $6,696 Ratio of net chargeoffs during the period to average loans outstanding during the period .21%(1) .17% .23% .24% Peer Group N/A .29% .26% .27%
(1) First three months annualized FIRST MERCHANTS CORPORATION FORM 10-Q LIQUIDITY, INTEREST SENSITIVITY, AND DISCLOSURES ABOUT MARKET RISK Asset/Liability management has been an important factor in the Corporation's ability to record consistent earnings growth through periods of interest rate volatility and product deregulation. Management and the Board of Directors monitor the Corporation's liquidity and interest sensitivity positions at regular meetings to ensure that changes in interest rates will not adversely affect earnings. Decisions regarding investment and the pricing of loan and deposit products are made after analysis of reports designed to measure liquidity, rate sensitivity, the Corporation's exposure to changes in net interest income given various rate scenarios, and the economic and competitive environments. The Corporation's liquidity and interest sensitivity position at March 31, 1998, remained adequate to meet the Corporation's primary goal of achieving optimum interest margins while avoiding undue interest rate risk. The table below presents the Corporation's interest rate sensitivity analysis as of March 31, 1998.
INTEREST-RATE SENSITIVITY ANALYSIS At March 31, 1998 (Dollars in Thousands) Beyond 1-180 Days 181-365 Days 1-5 Years 5 Years Total ---------- ------------ --------- ------- ----- Rate-Sensitive Assets: Federal funds sold and interest-bearing deposits $ 10,562 $ 10,562 Investment securities 43,318 $ 45,154 $128,089 $ 30,936 247,497 Loans 286,346 78,300 255,835 81,713 702,194 Federal Reserve and Federal Home Loan Bank stock 2,976 397 3,373 --------- --------- -------- --------- --------- Total rate-sensitive assets. 343,202 123,454 383,924 113,046 963,626 --------- --------- -------- --------- --------- Rate-Sensitive Liabilities: Interest bearing deposits 318,961 103,879 313,334 573 736,747 Borrowed funds 25,054 25,054 Federal Home Loan Bank advances 294 4,144 15,428 4,805 24,671 --------- --------- -------- --------- --------- Total rate-sensitive liabilities 344,309 108,023 328,762 5,378 786,472 --------- --------- -------- --------- --------- Interest rate sensitivity gap by period (1,107) 15,431 55,162 107,668 Cumulative rate sensitivity gap (1,107) 14,324 69,486 177,154 177,154 Cumulative rate sensitivity gap ratio March 31, 1998 99.7% 103.2% 108.9% 122.5%
The Corporation had a cumulative positive gap of $14,324,000 in the one year horizon at March 31, 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. 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 GAP/Interest Rate Sensitive Report is a tool which displays repricing timing differences between interest sensitive assets and liabilities. The Corporation elects to categorize its non-maturity deposits as all to reprice in 13 months. The 181-365 day Sensitivity Gap Ratio depicts the institution is asset sensitive (103.2%). 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 simulation modeling product used by the Corporation is a personal computer based system known as Asset Liability Model System (ALMS) supported by Alltel, Inc., of Little Rock, AK. The system provides software sophisticated enough to measure; basis risk, yield curve risk, option risk, and interest rate risk. More specifically the software considers yield curve changes, prepayment speeds, caps, floors, and allows the user to tie different products to different interest rate drivers which can be assumed to change at different speeds and magnitudes. 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 10 percent. Assumed interest rate changes are simulated to move incrementally over 18 months. The total rate movement (beginning point less ending point) to noteworthy interest rate indexes are as follows:
Rising Falling -------------------------------------- Prime 300 Basis Points (300) Basis Points Federal Funds 300 (300) 90 Day T-Bill 310 (275) One Year T-Bill 290 (255) Three Year T-Note 290 (235) Five Year T-Note 290 (215) Ten Year T-Note 290 (195) Interest Checking 100 ( 67) MMIA Savings 150 (100) Money Market Index 292 (259) 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:
Flat/Base Rising Falling ---------------------------------- Net Interest Income (Dollars in Thousands) $ 59,730 $ 59,544 $ 58,669 Change vs. Flat/Base Scenario (186) (1,061) Percent Change (.31)% ( 1.81)%
FIRST MERCHANTS CORPORATION FORM 10-Q EARNING ASSETS The following table presents the earning asset mix for the years ended 1997 and 1996 and at March 31, 1998. Loans grew by more than $72 million from December 31, 1996, to December 31, 1997, while investment securities declined. This reflects the Corporation's strategy to change the balance sheet mix to emphasize loans which generally carry higher yields than investment securities and often provide collateral business. (Maturities in the investment portfolio helped fund the loan growth.) There were no material changes in the level or mix of earning assets during the first quarter of 1998.
- ----------------------------------------------------------------------------------------- EARNING ASSETS (Dollars in Millions) March 31, December 31, December 31, 1998 1997 1996 --------- ------------ ------------ Federal funds sold and interest-bearing deposits $ 10.6 $ 9.4 $ 1.4 Investment securities available for sale 217.8 212.0 228.4 Investment securities held to maturity 29.7 35.3 47.2 Mortgage loans held for sale 0.5 0.5 0.3 Loans 701.7 703.3 631.4 Federal Reserve and Federal Home Loan Bank stock 3.4 3.4 3.1 ------- ------- ------- Total $ 963.7 $ 963.9 $ 911.8 ------- ------- ------- ------- ------- ------- - -------------------------------------------------------------------------------------------
DEPOSITS, SHORT-TERM BORROWINGS AND FEDERAL HOME LOAN BANK ADVANCES The following table presents the level of deposits and borrowed funds (Federal funds purchased, repurchase agreements with customers, U.S. Treasury demand notes and Federal Home Loan Bank advances) for the years ended 1997 and 1996 and at March 31, 1998.
- ------------------------------------------------------------------------------------------- DEPOSITS, SHORT-TERM BORROWINGS AND FEDERAL HOME LOAN BANK ADVANCES (Dollars in Millions) March 31, December 31, December 31, 1998 1997 1996 --------- ------------ ------------ Deposits $ 835.4 $ 843.8 $ 794.5 Short-term borrowings 25.1 26.8 45.0 Federal Home Loan Bank advances 24.7 20.7 9.2
FIRST MERCHANTS CORPORATION FORM 10-Q NET INTEREST INCOME Net Interest Income is the primary source of the Corporation's earnings. It is a function of net interest margin and the level of average earning assets. The table below presents the Corporation's asset yields, interest expense, and net interest income as a percent of average earning assets for the three- year period ending in 1997 and the first quarter of 1998. Asset yields improved .14 percent (FTE) in 1997, due primarily to a shift in the Corporation's asset mix (a larger percentage in higher-yielding loans, and a smaller percentage in investments.) Interest costs rose by a similar amount (.12 percent) resulting in a .02 percent increase in net interest income (FTE) as a percent of average earnings assets. This "spread" increase accounted for only a small portion of the growth in net interest income. Most of the $2.9 million increase is attributable to growth in earning assets which exceeded $60 million. Net interest income increased 2.3 percent (annualized) during the first quarter of 1998. Most of the increase is attributable to growth in earning assets.
- --------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Interest Income Interest Expense Net Interest Income Net Interest Income (FTE) as a Percent as a Percent (FTE) as a Percent Average on a of Average of Average of Average Earning Fully Taxable Earning Assets Earning Assets Earning Assets Assets Equivalent Basis - --------------------------------------------------------------------------------------------------------------------- For the three months ended March 31, 1998 8.23 % 3.74 % 4.49 % $959,958 $ 43,084 1997 8.05 3.64 4.41 917,774 40,464 For the year ended December 31, 1997 8.27 3.79 4.48 941,351 42,139 1996 8.13 3.67 4.46 880,729 39,258 Average earning assets include the average balance of securities classified as available for sale, computed based on the average of the historical amortized cost balances without the effects of the fair value adjustment. - ---------------------------------------------------------------------------------------------------------------------
OTHER INCOME The Corporation has placed emphasis on the growth of non-interest income in recent years by offering a wide range of fee-based services. Fee schedules are regularly reviewed by a pricing committee to ensure that the products and services offered by the Corporation are priced to be competitive and profitable. Other income in 1997 amounted to $9,229,000, or 10.6 percent higher than in 1996. The increase of $887,000 is primarily attributable to the following factors: 1. Revenues from fiduciary activity grew $388,000, or 13.1 percent, due to strong new business activity and markets. 2. Service charges on deposit accounts increased $341,000, or 11.3 percent, due to account growth and some minor price adjustments. 3. Personal money order agent fees increased $71,000, or 14.6 percent, due to increased sales volume. FIRST MERCHANTS CORPORATION FORM 10-Q Other income in the first quarter of 1998 exceeded the same quarter in the prior year by $550,000, or 25.8 percent. Three major areas account for most of the increase: 1. Revenues from fiduciary activities grew $186,000, or 23.5 percent, due to strong new business activity and markets. 2. Service charges on deposit accounts increased $62,000, or 7.4 percent, due to account growth and some minor price adjustments. 3. Other customer fees as a whole increased $118,000, or 25.8 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. Those expenses amounted to $25,748,000 in 1997, an increase of 6.7 percent from the prior year, or $1,613,000. Four major areas account for most of the increase: 1. Salary and benefit expenses, which account for over one-half of the Corporation's non-interest operating expenses, grew by $889,000, or 6.6 percent, due to normal salary increases and staff additions. 2. Equipment expenses increased $193,000, or 9.0 percent, reflecting the Corporation's efforts to improve efficiency and provide electronic service delivery to its customers. 3. Marketing expenses rose $145,000, or 20.5 percent, due to more aggressive product promotion. 4. Outside data processing fees grew by $176,000, or 19.5 percent, due to increased debit card, credit card, and trust activity. First quarter other expense in 1998 exceeded the same quarter of the prior year by $385,000, or 6.2 percent. Two major areas account for most of the increase: 1. Salaries and benefit expense grew $177,000, or 5.1 percent, due to normal salary increases and staff additions. 2. Equipment expense increased $68,000, or 12.1 percent, reflecting the Corporation's efforts to improve efficiency and provide electronic service delivery to its customers. INCOME TAXES 1997 income tax expense increased by $602,000 due to a $1,833,000 increase in net pre-tax income, mitigated somewhat by a $514,000 increase in tax-exempt income. Likewise, the increase of $257,000 in the first quarter of 1998, as compared to the same period in 1997, results from a $652,000 increase in pre-tax net income, mitigated somewhat by a $82,000 increase in tax exempt income. OTHER The Securities and Exchange Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including the Corporation, and that address is (http://www.sec.gov). ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required under this item is included as part of Management's Discussion and Analysis under the heading Liquidity, Interest Sensitivity, and Disclosures About Market Risk. FIRST MERCHANTS CORPORATION FORM 10-Q PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Form 10-Q Page Exhibit No.: Description of Exhibit: Number ------------ ----------------------- ------ 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 March 31, 1998. FIRST MERCHANTS CORPORATION FORM 10-Q SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST MERCHANTS CORPORATION (Registrant) Date May 12, 1998 by /s/ Michael L. Cox ------------------ -------------------------------------- Michael L. Cox Executive Vice President and Director Date May 12, 1998 by /s/ James L. Thrash ------------------ -------------------------------------- James L. Thrash Chief Financial & Principal Accounting Officer EX-27 2 EXHIBIT 27
9 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 30,576 362 10,200 0 217,813 29,684 29,793 702,194 6,819 1,017,849 835,425 25,054 8,635 24,671 0 0 835 123,229 1,017,849 15,458 3,441 223 19,122 8,233 8,970 10,152 411 46 6,591 5,832 3,824 0 0 3,824 .57 .56 4.49 935 2,140 508 0 6,778 480 110 6,819 6,819 0 0
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