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 June 30, 2001 Commission File Number 0-17071 First Merchants Corporation (Exact name of registrant as specified in its charter) Indiana 35-1544218 (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) 200 East Jackson Street - Muncie, IN 47305-2814 (Address of principal executive office) (Zip code) (765) 747-1500 (Registrant's telephone number, including area code) Not Applicable (Former name former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days, Yes X No As of July 31, there were 12,116,993 outstanding common shares, without par value, of the registrant. This report including the cover page contains a total of 20 pages.
FIRST MERCHANTS CORPORATION FORM 10-Q INDEX Page No. PART I. Financial information: Item 1. Financial Statements: Consolidated Condensed Balance Sheet.........................3 Consolidated Condensed Statement of Income...................4 Consolidated Condensed Statement of Comprehensive Income.........................................5 Consolidated Condensed Statement of Stockholders' Equity .......................................5 Consolidated Condensed Statement of Cash Flows...............6 Notes to Consolidated Condensed Financial Statements.........7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................12 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................................18 PART II. Other Information: Item 4. Submission of Matters to a Vote of Security Holders.........19 Item 6. Exhibits and Reports of Form 8-K............................19 Signatures ............................................................20
<TABLE> <CAPTION> FIRST MERCHANTS CORPORATION FORM 10-Q PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CONSOLIDATED CONDENSED BALANCE SHEET (Dollars in thousands) (Unaudited) June 30, December 31, 2001 2000 ---------- ----------- <S> <C> <C> ASSETS: Cash and due from banks.................................................... $ 62,043 $ 52,563 Federal funds sold......................................................... 32,335 14,900 ----------- ----------- Cash and cash equivalents................................................ 94,378 67,463 Interest-bearing deposits.................................................. 1,260 883 Investment securities available for sale................................... 252,952 295,730 Investment Securities held to maturity..................................... 9,045 12,233 Mortgage loans held for sale............................................... 810 Loans, net of allowance for loan losses of $12,505 and $12,454............. 1,198,530 1,163,132 Premises and equipment..................................................... 23,062 23,868 Federal Reserve and Federal Home Loan Bank Stock........................... 7,190 7,185 Interest receivable........................................................ 11,737 13,135 Core deposit intangibles and goodwill...................................... 20,530 21,055 Cash surrender value of life insurance..................................... 6,306 6,312 Other assets............................................................... 10,470 10,067 ----------- ----------- Total assets........................................................... $1,636,270 $1,621,063 =========== =========== LIABILITIES: Deposits: Noninterest-bearing...................................................... $ 161,513 $ 157,053 Interest-bearing......................................................... 1,128,450 1,131,246 ----------- ----------- Total deposits......................................................... 1,289,963 1,288,299 Borrowings................................................................. 174,432 163,581 Interest payable........................................................... 6,304 6,335 Other liabilities.......................................................... 6,306 6,785 ----------- ----------- Total liabilities...................................................... 1,477,005 1,465,000 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 - 11,437,790 and 11,611,732 shares................ 1,430 1,451 Additional paid-in capital................................................. 37,658 41,665 Retained earnings.. .................................................... 118,632 113,244 Accumulated other comprehensive income (loss).............................. 1,545 (297) ----------- ----------- Total stockholders' equity............................................. 159,265 156,063 ----------- ----------- Total liabilities and stockholders' equity............................. $1,636,270 $1,621,063 =========== =========== See notes to consolidated condensed financial statements. </TABLE>
<TABLE> <CAPTION> FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF INCOME (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended Six Months Ended June 30 June 30 ------------------- ------------------- 2001 2000 2001 2000 ------- ------- ------- ------- <S> <C> <C> <C> <C> Interest Income: Loans receivable Taxable..................................................................... $24,980 $22,918 $50,170 $44,348 Tax exempt.................................................................. 112 76 204 148 Investment securities: Taxable..................................................................... 2,777 3,634 6,316 7,378 Tax exempt.................................................................. 1,024 1,127 2,051 2,269 Federal funds sold............................................................ 206 197 295 248 Deposits with financial institutions.......................................... 10 19 20 33 Federal Reserve and Federal Home Loan Bank stock.............................. 158 126 299 247 ------- ------- ------- ------- Total interest income..................................................... 29,267 28,097 59,355 54,671 ------- ------- ------- ------- Interest expense: Deposits...................................................................... 11,446 11,782 24,147 22,685 Securities sold under repurchase agreements................................... 884 962 1,848 2,052 Federal Home Loan Bank advances............................................... 1,565 1,021 3,121 1,971 Other Borrowings.............................................................. 102 542 279 900 ------- ------- ------- ------- Total interest expense...................................................... 13,997 14,307 29,395 27,608 ------- ------- ------- ------- Net Interest Income............................................................. 15,270 13,790 29,960 27,063 Provision for loan losses....................................................... 695 665 1,348 1,144 ------- ------- ------- ------- Net Interest Income After Provision for Loan Losses............................. 14,575 13,125 28,612 25,919 ------- ------- ------- ------- Net realized gains (losses) on available-for-sale securities.................... 12 (186) Other Income.................................................................... 4,617 4,087 9,011 7,990 ------- ------- ------- ------- Total other income.............................................................. 4,617 4,099 9,011 7,804 Total other expenses............................................................ 10,505 9,881 20,979 19,288 ------- ------- ------- ------- Income before income tax........................................................ 8,687 7,343 16,644 14,435 Income tax expense.............................................................. 3,113 2,340 5,964 4,612 ------- ------- ------- ------- Net Income...................................................................... $ 5,574 $ 5,003 $10,680 $ 9,823 ======= ======= ======= ======= Per share: Net Income: Diluted Cash Earnings....................................................... $ .51 $ .46 $ .97 $ .90 Basic Net Income............................................................ .49 .45 .93 .89 Diluted Net Income.......................................................... .48 .45 .92 .89 Cash Dividends Paid......................................................... .23 .22 .46 .44 See notes to consolidated condensed financial statements. </TABLE>
<TABLE> <CAPTION> FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF COMPREHENSIVE INCOME (Dollar amounts in thousands) (Unaudited) Three Months Ended Six Months Ended June 30 June 30 ---------------------- ---------------------- 2001 2000 2001 2000 --------- --------- --------- --------- <S> <C> <C> <C> <C> Net Income...................................................................... $ 5,574 $ 5,003 $10,680 $ 9,823 Other comprehensive income(loss), 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 $(41), $610, $(1,228), and $1,258....... 62 (916) 1,843 (1,888) Less: Reclassification adjustment for gains (losses) included in net income, net of income tax (expense) benefit of $5 and $(75)........ 7 (111) --------- --------- --------- --------- 62 (923) 1,843 (1,777) --------- --------- --------- --------- Comprehensive income............................................................ $ 5,636 $ 4,080 $12,523 $ 8,046 ========= ========= ========= ========= </TABLE> <TABLE> <CAPTION> FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (Dollar Amounts in thousands) (Unaudited) 2001 2000 --------- --------- <S> <C> <C> Balances, January 1 ............................................ $ 156,063 $ 126,296 Net income ..................................................... 10,680 9,823 Cash dividends ................................................. (5,294) (4,963) Other comprehensive income (loss), net of tax................... 1,843 (1,777) Issuance of stock related to acquisition........................ 21,358 Stock issued under dividend reinvestment and stock purchase plan 373 373 Stock options exercised ........................................ 92 417 Stock Redeemed ................................................. (4,492) (4,314) --------- --------- Balances, June 30 .............................................. $ 159,265 $ 147,213 ========= ========= </TABLE> See notes to consolidated condensed financial statements
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited) <TABLE> Six Months Ended June 30, ---------------------------------- 2001 2000 ---------------- -------------- <S> <C> <C> Cash Flows From Operating Activities: Net income........................................................................ $ 10,680 $ 9,823 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses....................................................... 1,348 1,144 Depreciation and amortization................................................... 2,124 1,526 Securities amortization, net................................................... (173) 112 Securities losses, net.......................................................... 186 Gains on sale of premises and equipment......................................... (64) (105) Mortgage loans originated for sale.............................................. (6,942) 811 Proceeds from sales of mortgage loans........................................... 6,132 (750) Change in interest receivable................................................... 1,398 (443) Change in interest payable...................................................... (31) 532 Other adjustments ............................................................ (2,206) (2,079) ---------------- --------------- Net cash provided by operating activities..................................... $ 12,266 $ 10,747 ---------------- --------------- Cash Flows From Investing Activities: Net change in interest-bearing deposits........................................... (377) 488 Purchases of Securities available for sale................................................... (10,761) (5,093) Proceeds from maturities of Securities available for sale................................................... 57,182 24,384 Securities held to maturity..................................................... 2,707 3,066 Proceeds from sales of Securities available for sale................................................... 10,844 Securities held to maturity..................................................... (66,905) Net change in loans............................................................... (36,746) (2,766) Purchases of premises and equipment............................................... (706) 512 Proceeds from sale of fixed assets................................................ 156 392 ---------------- --------------- Net cash provided (used) by investing activities................................ 11,455 (35,078) ---------------- --------------- </TABLE> (continued)
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited) <TABLE> Six Months Ended June 30, ----------------------------------- 2001 2000 ---------------- --------------- <S> <C> <C> Cash Flows From Financing Activities: Net change in Demand and savings deposits........................................... $ 4,460 $ 3,649 Certificates of deposit and other time deposits....................... (2,796) (12,932) Borrowings............................................................ 10,851 10,537 Cash dividends.......................................................... (5,294) (4,963) Stock issued under dividend reinvestment and stock purchase plan........ 373 373 Stock options exercised................................................. 92 417 Stock repurchased....................................................... (4,492) (4,314) ---------------- -------------- Net cash provided (used) by financing activities...................... 3,194 (7,233) ---------------- -------------- Net Change in Cash and Cash Equivalents................................... 26,915 (31,564) Cash and Cash Equivalents, January 1...................................... 67,463 84,293 ---------------- -------------- Cash and Cash Equivalents, June 30........................................ $ 94,378 $ 52,729 ================ ============== </TABLE> See notes to consolidated condensed financial statements. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS NOTE 1. General The significant accounting policies followed by First Merchants Corporation ("Corporation") and its wholly owned subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting, except for the change in method of accounting or adoption of accounting pronouncements discussed more fully in Note2. 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 supercedes 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. Statement No. 133 was adopted on July 1, 2000 and did not have a material impact on the operations of the Corporation.
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited) NOTE 3. Business Combinations On July 1, 2001, the Corporation completed the acquisition of Francor Financial, Inc., Wabash, Indiana. The acquisition will be accounted for under the purchase method of accounting. Under the terms of the agreement, the Corporation will issue 676,000 shares of its common stock and $14,949,000 cash in exchange for all of the common stock of Francor Financial, Inc. The Corporation anticipates amortizing core deposit intangibles over ten years. As of December 31, 2000, Francor Financial, Inc., had total assets and shareholders' equity of $165,009,000 and $18,393,000 respectively.
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited) <TABLE> NOTE 4. Investment Securities Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value <S> <C> <C> <C> <C> Available for sale at June 30, 2001 U.S. Treasury .................... $ 99 $ 77 $ 176 Federal agencies.................. 34,466 435 $ (20) 34,881 State and municipal .............. 75,490 1,653 (59) 77,084 Mortgage-backed securities ....... 123,623 859 (191) 124,291 Other asset-backed securities..... 10,372 126 (14) 10,484 Corporate obligations............. 4,983 80 (213) 4,850 Marketable equity securities...... 1,316 (130) 1,186 -------- -------- -------- -------- Total available for sale ..... 250,349 3,230 (627) 252,952 -------- -------- -------- -------- Held to maturity at June 30, 2001 State and municipal............... 8,765 182 (18) 8,929 Mortgage-backed securities........ 280 280 -------- -------- -------- -------- Total held to maturity ....... 9,045 182 (18) 9,209 -------- -------- -------- -------- Total investment securities .. $259,394 $ 3,412 $ (645) $262,161 ======== ======== ======== ======== </TABLE>
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited) <TABLE> Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value <S> <C> <C> <C> <C> Available for sale at December 31, 2000: U.S. Treasury ....................... $ 2,997 $ 2,997 Federal agencies .................... 55,403 $ 268 $ 155 55,516 State and municipal ................. 81,370 1,045 103 82,312 Mortgage-backed securities .......... 127,907 139 922 127,124 Other asset-backed securities ....... 19,924 10 148 19,786 Corporate obligations ............... 7,238 9 395 6,852 Marketable equity securities ........ 1,277 134 1,143 -------- -------- -------- -------- Total available for sale ......... 296,116 1,471 1,857 295,730 -------- -------- -------- -------- Held to maturity at December 31, 2000: U.S. Treasury ....................... 250 250 State and municipal ................. 11,645 131 36 11,740 Mortgage-backed securities .......... 338 338 -------- -------- -------- -------- Total held to maturity ........... 12,233 131 36 12,328 -------- -------- -------- -------- Total investment securities ...... $308,349 $ 1,602 $ 1,893 $308,058 ======== ======== ======== ======== </TABLE>
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited) NOTE 5. Loans and Allowance <TABLE> June 30, December 31, 2001 2000 ---- ---- <S> <C> <C> Loans: Commercial and industrial loans .............................................. $ 279,881 $ 258,405 Agricultural production financing and other loans to farmers ................. 27,633 24,547 Real estate loans: Construction ............................................................... 50,629 45,412 Commercial and farmland .................................................... 176,077 167,317 Residential ................................................................ 472,450 466,660 Individuals' loans for household and other personal expenditures ............. 191,204 201,629 Tax-exempt loans ............................................................. 5,238 6,093 Other loans .................................................................. 7,925 5,523 Unearned interest on loans.................................................... (2) ----------- ----------- Total..................................................................... 1,211,035 1,175,586 =========== =========== Six Months Ended June 30 2001 2000 ----------- ----------- Allowance for loan losses: Balances, January 1 .......................................................... $ 12,454 $ 10,128 Allowance acquired in acquisition............................................. 1,413 Provision for losses ......................................................... 1,348 1,144 Recoveries on loans .......................................................... 292 290 Loans charged off ............................................................ (1,589) (804) ----------- ----------- Balances, June 30............................................................. $ 12,505 $ 12,171 =========== =========== </TABLE> NOTE 6. Net Income Per Share <TABLE> Three Months Ended June 30, 2001 2000 ------------------------------------------- ------------------------------------------ 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................. $ 5,574 11,452,258 $ .49 $ 5,003 11,091,226 $ .45 ========== ========== Effect of dilutive stock options........ 76,478 67,546 ---------- ------------ --------- ------------ Diluted net income per share: Net income available to common stockholders and assumed conversions............. 5,574 11,528,736 $ .48 $ 5,003 11,158,772 $ .45 ========== ============ ========== ========== ============= ==========
</TABLE> <TABLE> <CAPTION> Six Months Ended June 30, 2001 2000 ------------------------------------------- ------------------------------------------ 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................. $ 10,680 11,524,777 $ .93 $ 9,823 10,997,638 $ .89 ========== ========== Effect of dilutive stock options........ 78,161 83,123 ---------- ------------ --------- ------------ Diluted net income per share: Net income available to common stockholders and assumed conversions............. $ 10,680 11,602,938 $ .92 $ 9,823 11,080,761 $ .89 ========== ============ ========== ========== ============= ========== </TABLE> 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 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 June 30, 2001, was $5,574,000, compared to $5,003,000 earned in the same period of 2000. Diluted earnings per share were $.48 and increase of $.03 over the $.45 reported for the first quarter 2000. Net income for the six months ended June 30, 2001, was $10,680,000, compared to $9,823,000 during the same period in 2000. Diluted earnings per share were $.92, a 3.4% increase over $.89 in 2000. Cash basis earnings per share for the quarter increased 10.1% to $.51 up $.05 from $.46. Year to date cash basis earnings per share increased 7.8% to $.97 from $.90 in 2000 Annualized returns on average assets and average shareholder's equity for six months ended June 30, 2001 were 1.34 percent and 13.51 percent, respectively, compared with 1.34 percent and 14.80 percent for the same period of 2000.
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 8.7 percent at year-end 2000 and 8.7 percent at June 30, 2001. At June 30, 2001, the Corporation had a Tier I risk-based capital ratio of 11.4 percent, total risk-based capital ratio of 12.5 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." All of the Banks remain "well capitalized" as of June 30, 2001. 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> - --------------------------------------------------------------------------------------------------- (Dollars in Thousands) June 30, December 31, December 31, 2001 2000 1999 - --------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Non-accrual loans .................. $2,643 $2,370 $1,280 Loans contractually past due 90 days Or more other than nonaccruing 2,447 2,465 2,327 Restructured loans ................. 3,132 3,085 908 ------ ------ ------ Total ................ $8,213 $7,920 $4,515 ====== ====== ====== - --------------------------------------------------------------------------------------------------- </TABLE> At December 31, 2000, non-performing loans totaled $7,920,000. As of December 31, 2000, impaired loans included in the table above totaled $1,900,000. The Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 114 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, 2000, impaired loans totaled $14,839,000. An allowance for losses was not deemed necessary for impaired loans totaling $6,977,000, but an allowance of $2,253,000 was recorded for the remaining balance of impaired loans of $7,862,000. The average balance of impaired loans for 2000 was $15,053,000. At June 30, 2001, the allowance for loan losses increased by $51,000, to $12,505,000, up slightly from year end 2000. As a percent of loans, the allowance was 1.03 percent, down from 1.07 percent at year end 2000.
FIRST MERCHANTS CORPORATION FORM 10-Q The provision totaled $1,348,000 as of June 30, 2001. The provision was $204,000 more than the $1,144,000 provision from 2000. Net charge offs amounted to $1,297,000 during same period. The second quarter 2001 provision of $695,000 increased $30,000 from $665,000 for the same quarter in 2000. Net charge offs amounted to $380,000 during the quarter. <TABLE> Six Months Ended June 30, ------------------ ------------------ 2001 2000 ---- ---- (Dollars in Thousands) <S> <C> <C> Balance at beginning of period ......................... $12,454 $10,128 ------- ------- Chargeoffs ............................................. 1,589 804 Recoveries ............................................. 292 290 ------- ------- Net chargeoffs ......................................... 1,297 514 Provision for loan losses .............................. 1,348 1,413 ------- ------- Balance at end of period ............................... $12,505 $12,171 ======= ======= Ratio of net chargeoffs during the period to average loans outstanding during the period .......................... .22(1) .10%(1) (1) First six 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, 2001, remained adequate to meet the Corporation's primary goal of achieving optimum interest margins while avoiding undue interest rate risk. First Merchants Corporation beleives the March 31, 2001 data, on the following page, materially reflects the Corpoations interest sensitivity position on June 30, 2001.
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%. Assumed interest rate changes are simulated to move immediate and parallel the rate movement to noteworthy interest rate indexes appear below: Rising Falling - -------------------------------------------------------------------------------- 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 a 12-month time horizon. Balance sheet assumptions are the same under all scenarios: <TABLE> Base Case Flat Rates Rising Falling ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Net Interest Income (Dollars in Thousands) $61,027 $59,570 $60,376 Change vs. Base Case (1,457) (651) Percent Change (2.39)% (1.07)% Policy Limitation (5.00)% (5.00)% </TABLE> FIRST MERCHANTS CORPORATION FORM 10-Q Earning Assets The following table presents the earning asset mix as of June 30, 2001, and December 31, 2000, and December 31, 1999. Loans grew by over $35.4 million from December 31, 2000 to June 30, 2001, while investment securities declined by $45.9 million during the same period. Commercial and industrial loans increased by more than $21.5 million, while individuals' loans for household and personal expenditures declined by nearly $10.4 million. <TABLE> - ----------------------------------------------------------------------------------------------------------------------- EARNING ASSETS (Dollars in Millions June 30, December 31, December 31, 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Federal funds sold and interest-bearing deposits $ 33.6 $ 15.8 $ 27.1 Investment securities available for sale ....... 253.0 295.7 329.7 Investment securities held to maturity ......... 9.0 12.2 14.3 Mortgage loans held for sale ................... .8 Loans .......................................... 1,211.0 1,175.6 998.9 Federal Reserve and Federal Home Loan Bank stock 7.2 7.2 5.8 ---------- ---------- ---------- Total ..................... $ 1,514.6 $ 1,506.5 $ 1,375.8 ========== ========== ========== </TABLE> - -------------------------------------------------------------------------------
FIRST MERCHANTS CORPORATION FORM 10-Q Net Interest Income Net Interest Income is the primary source of the Corporation's earnings. It is a function of net interest margin and the level of average earning assets. The table below presents the Corporation's asset yields, interest expense, and net interest income as a percent of average earning assets for the six months ended June 30, 2001 and 2000. Annualized net interest income (FTE) for the six months ended June 30, 2001 increased by $5,687,000, or 10.0 percent over the same period in 2000, due to an increase in average earning assets of over $102 million. <TABLE> - --------------------------- ------------------- -------------------- -------------------- -------------- --------------------- (Dollars in Thousands) Interest Income Net Interest Income Annualized (FTE) as a Percent Interest Expense (FTE) as a Percent Net Interest Income of Average as a Percent of Average Average On a Earning Assets of Average Earning Assets Earning Fully Taxable Earning Assets Assets Equivalent Basis - --------------------------- ------------------- -------------------- -------------------- -------------- --------------------- For the three months Ended June 30, <S> <C> <C> <C> <C> <C> 2001 8.01% 3.75% 4.26% $1,492,034 $63,523 2000 8.15% 4.06% 4.09% $1,408,371 $57,619 - ------------------------------------------------------------------------------------------------------------------------------ </TABLE> <TABLE> - --------------------------- ------------------- -------------------- -------------------- -------------- --------------------- (Dollars in Thousands) Interest Income Net Interest Income Annualized (FTE) as a Percent Interest Expense (FTE) as a Percent Net Interest Income of Average as a Percent of Average Average On a Earning Assets of Average Earning Assets Earning Fully Taxable Earning Assets Assets Equivalent Basis - --------------------------- ------------------- -------------------- -------------------- -------------- --------------------- For the six months Ended June 30, <S> <C> <C> <C> <C> <C> 2001 8.12% 3.94% 4.18% $1,491,688 $62,348 2000 8.05% 3.97% 4.08% $1,389,941 $56,661 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>
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. Total Other income in the second quarter of 2001 exceeded the same quarter in the prior year by $518,000, or 12.6 percent. Two major areas account for most of the increase: 1. Service charges on deposit accounts increased $197,000 or 17.1 percent due to increased number of accounts and price adjustments. 2. Revenues from fiduciary activities increased $112,000 or 8.4 percent due primarily to increased sales efforts of First Merchants Insurance Services, Inc. Other income in the first six months of 2001 exceeded the same period in the prior year by $1,207,000, or 15.5 percent. Two major areas account for most of the increase: 1. Service charges on deposit accounts increased $356,000 or 15.8 percent due to increased number of accounts and price adjustments. 2. Revenues from fiduciary activities increased $264,000 or 10.5 percent due primarily to increased sales efforts of First Merchants Insurance Services, Inc. 3. Gains on sale of mortgage loans increased by $352,000 due to declining interest rates and increased mortgage volume. Other Expense Total other expenses represent non-interest operating expenses of the Corporation. Other expense during the second quarter of 2001 exceeded the same period of the prior year by $624,000, or 6.3 percent. Two major areas account for most of the increase: 1. Salaries and benefit expense grew $371,000 or 6.8 percent, due to normal salary increases and staff additions. 2. Goodwill amortization increased by $171,000, due to utilization of the purchase method of accounting for the Corporations June 1, 2000 acquisition of Decatur Bank & Trust Company. Other expense during the first six months in 2001 exceeded the same period of the prior year by $1,691,000, or 8.8 percent. Two major areas account for most of the increase: 1. Salaries and benefit expense grew $1,001,000 or 9.4 percent, due to normal salary increases and staff additions. 2. Goodwill amortization increased by $485,000, due to utilization of the purchase method of accounting for the Corporations June 1, 2000 acquisition of Decatur Bank & Trust Company.
FIRST MERCHANTS CORPORATION FORM 10-Q Income Taxes Income tax expense during the second quarter totaled $3,113,000, an increase of $773,000 over the $2,340,000 reported in the same quarter of 2000. Income tax expense, for the six months ended June 30, 2001, increased by $1,352,000 over the same period in 2000. 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 - ------------------------------------------------------------ At the April 11, 2001 Annual Meeting of Shareholders, the following matters were submitted to a vote of the shareholders. Election of Directors - The following directors were elected for a term of three years. <TABLE> <CAPTION> Vote Count - -------------------------------------------------------------------------------- For Against ----------- ----------- <S> <C> <C> Dennis A. Bieberich 9,693,521.8597 9,223.7432 Michael L. Cox 9,314,040.8597 388,704.7432 George A. Sissel 9,690,123.3157 12,622.2872 Robert M. Smitson 9,686,819.8597 15,925.7432 Blaine A. Brownell 9,691,526.5917 11,219.0112 Roger M. Arwood 9,693,521.8597 9,223.7432 </TABLE> Item 6. Exhibits and Reports on Form 8-K None
FIRST MERCHANTS CORPORATION FORM 10-Q SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. First Merchants Corporation --------------------------- (Registrant) Date 8/14/01 by /s/ Michael L. Cox --------------------------- ------------------------------------- Michael L. Cox President and Chief Executive Officer Date 8/17/01 by /s/ James L. Thrash --------------------------- ------------------------------------- James L. Thrash Chief Financial & Principal Accounting Officer