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, 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 April 30, there were 11,423,815 outstanding 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.
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.........................14 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................................21 PART II. Other Information: Item 4. Submission of Matters to a Vote of Security Holders.........22 Item 6. Exhibits and Reports of Form 8-K............................22 Signatures ............................................................23
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) <TABLE> March 31, December 31, 2001 2000 ----------- ----------- <S> <C> <C> ASSETS: Cash and due from banks ....................................... $ 22,194 $ 52,563 Federal funds sold ............................................ 1,400 14,900 ----------- ----------- Cash and cash equivalents ................................... 23,594 67,463 Interest-bearing deposits...................................... 1,632 883 Investment securities available for sale ...................... 269,410 295,730 Investment securities held to maturity ........................ 10,013 12,233 Mortgage loans held for sale................................... 460 Loans, net of allowance for loan losses of $12,727 and $12,454. 1,173,711 1,163,132 Premises and equipment ........................................ 23,466 23,868 Federal Reserve and Federal Home Loan Bank Stock............... 7,185 7,185 Interest receivable ........................................... 11,952 13,135 Core deposit intangibles and goodwill ......................... 20,574 21,055 Cash surrender value of life insurance......................... 6,287 6,312 Others assets ................................................. 10,954 10,067 ----------- ----------- Total assets .............................................. $ 1,559,238 $ 1,621,063 =========== =========== LIABILITIES: Deposits: Noninterest-bearing ......................................... $ 130,124 $ 157,053 Interest-bearing ............................................ 1,100,693 1,131,246 ----------- ----------- Total deposits ............................................ 1,230,817 1,288,299 Borrowings .................................................... 154,864 163,581 Interest payable .............................................. 6,568 6,335 Other liabilities.............................................. 7,889 6,785 ----------- ----------- Total liabilities ......................................... 1,400,138 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 - 11,554,677 and 11,611,732 shares.... 1,445 1,451 Additional paid-in capital .................................... 40,487 41,665 Retained earnings ............................................. 115,685 113,244 Accumulated other comprehensive income (loss) ................. 1,483 (297) ----------- ----------- Total stockholders' equity ................................ 159,100 156,063 ----------- ----------- Total liabilities and stockholders' equity . $ 1,559,238 $ 1,621,063 =========== =========== </TABLE> 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) <TABLE> Three Months Ended March 31, <S> <C> <C> 2001 2000 Interest Income: Loans receivable Taxable ................................................... $ 25,190 $ 21,430 Tax exempt ................................................ 92 72 Investment securities: Taxable ................................................... 3,539 3,744 Tax exempt ................................................ 1,027 1,142 Federal funds sold .......................................... 89 51 Deposits with financial institutions ........................ 10 14 Federal Reserve and Federal Home Loan Bank stock ............ 141 121 -------- -------- Total interest income ................................... 30,088 26,574 Interest expense: Deposits .................................................... 12,701 10,903 Borrowings .................................................. 2,698 2,398 -------- -------- Total interest expense .................................... 15,399 13,301 -------- -------- Net Interest Income ........................................... 14,689 13,273 Provision for loan losses ..................................... 653 479 -------- -------- Net Interest Income After Provision for Loan Losses ........... 14,036 12,794 -------- -------- Other Income: Net realized losses on sales of available-for-sale securities (198) Other income ................................................ 4,394 3,903 -------- -------- Total other income ............................................ 4,394 3,705 Total other expenses .......................................... 10,474 9,407 -------- -------- Income before income tax ...................................... 7,957 7,092 Income tax expense ............................................ 2,851 2,272 -------- -------- Net Income .................................................... $ 5,106 $ 4,820 ======== ======== Per share: <F1> Diluted Cash Earnings(1)................................... $ .46 $ .44 Basic ..................................................... .44 .44 Diluted ................................................... .44 .44 Dividends ................................................. .23 .22 <FN> (1) Net income excluding goodwill and core deposit intangible amortization. </FN> </TABLE> See notes to consolidated condensed financial statements.
CONSOLIDATED CONDENSED STATEMENT OF COMPREHENSIVE INCOME FIRST MERCHANTS CORPORATION FORM 10-Q (Dollar amounts in thousands) (Unaudited) <TABLE> Three Months Ended March 31, 2001 2000 <S> <C> <C> Net Income ............................................................ $ 5,106 $ 4,820 ------- ------- 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 of $1,187, and $461................................. 1,781 (972) Less: Reclassification adjustment for losses included in net income, net of income tax of $0 and $6.................... (118) ------- ------- 1,781 (854) ------- ------- Comprehensive income .................................................. $ 6,887 $ 3,966 ======= ======= </TABLE>
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (Dollar Amounts in thousands) (Unaudited) <TABLE> 2001 2000 --------- --------- <S> <C> <C> Balances, January 1 ............................................ $ 156,063 $ 126,296 Net income ..................................................... 5,106 4,820 Cash dividends ................................................. (2,665) (2,392) Other comprehensive income (loss), net of tax................... 1,781 (854) Stock issued under dividend reinvestment and stock purchase plan 210 192 Stock options exercised ........................................ 20 322 Stock Redeemed ................................................. (1,415) (3,596) --------- --------- Balances, March 31 ............................................. $ 159,100 $ 124,788 ========= ========= </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> Three Months Ended March 31, ---------------------------------- 2001 2000 ---------------- -------------- <S> <C> <C> Cash Flows From Operating Activities: Net income........................................................................ $ 5,106 $ 4,820 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses....................................................... 653 479 Depreciation and amortization................................................... 1,207 758 Securities amortization, net................................................... (79) 66 Securities losses, net.......................................................... 198 Gains on sale of premises and equipment......................................... (105) Mortgage loans originated for sale.............................................. (5,206) 240 Proceeds from sales of mortgage loans........................................... 4,746 (406) Change in interest receivable................................................... 1,183 436 Change in interest payable...................................................... 233 (515) Other adjustments ............................................................ (712) 1,886 ---------------- -------------- Net cash provided by operating activities..................................... $ 7,131 $ 7,857 ---------------- -------------- Cash Flows From Investing Activities: Net change in interest-bearing deposits........................................... (749) 1,248 Purchases of Securities available for sale................................................... (4,169) Proceeds from maturities of Securities available for sale................................................... 33,279 12,928 Securities held to maturity..................................................... 2,244 Proceeds from sales of Securities available for sale................................................... 2,312 Securities held to maturity..................................................... 9,151 Net change in loans............................................................... (11,232) (45,040) Purchases of premises and equipment............................................... (324) (1,579) Proceeds from sale of fixed assets................................................ 512 ---------------- -------------- Net cash provided (used) by investing activities................................ 19,049 (20,468) ---------------- -------------- </TABLE> (continued)
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited) <TABLE> Three Months Ended March 31 ----------------------------------- 2001 2000 ---------------- --------------- <S> <C> <C> Cash Flows From Financing Activities: Net change in Demand and savings deposits........................................... $ (26,929) $ (2,525) Certificates of deposit and other time deposits....................... (30,553) (915) Borrowings............................................................ (8,717) (23,550) Cash dividends.......................................................... (2,665) (2,392) Stock issued under dividend reinvestment and stock purchase plan........ 210 192 Stock options exercised................................................. 20 322 Stock repurchased....................................................... (1,415) (3,596) ---------------- --------------- Net cash provided (used) by financing activities...................... (70,049) (32,464) ---------------- --------------- Net Change in Cash and Cash Equivalents................................... (43,869) (45,075) Cash and Cash Equivalents, January 1...................................... 67,463 84,293 ---------------- --------------- Cash and Cash Equivalents, March 31....................................... $ 23,594 $ 39,218 ================ =============== </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 February 8, 2001, the Corporation signed a definitive agreement to acquire 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 1,191,000 shares of its common stock in exchange for all of the common stock of Francor Financial, Inc. The transaction is subject to approval by stockholders of Francor 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, 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 March 31, 2001 U.S. Treasury .................... $ 3,097 $ 8 $ 3,105 Federal agencies.................. 36,902 517 $ 18 37,401 State and municipal .............. 75,570 1,678 32 77,216 Mortgage-backed securities ....... 132,711 649 116 133,244 Other asset-backed securities..... 10,481 102 10 10,573 Corporate obligations............. 6,983 53 354 6,682 Marketable equity securities...... 1,317 128 1,189 -------- -------- -------- -------- Total available for sale ..... 267,061 3,007 658 269,410 -------- -------- -------- -------- Held to maturity at March 31, 2001 State and municipal............... 9,702 233 9,935 Mortgage-backed securities........ 311 311 -------- -------- -------- -------- Total held to maturity ....... 10,013 233 10,246 -------- -------- -------- -------- Total investment securities .. $277,074 $ 3,240 $ 658 $279,656 ======== ======== ======== ======== </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> March 31, December 31, 2001 2000 ---- ---- <S> <C> <C> Loans: Commercial and industrial loans .............................................. $ 273,057 $ 258,405 Agricultural production financing and other loans to farmers ................. 23,755 24,547 Real estate loans: Construction ............................................................... 48,044 45,412 Commercial and farmland .................................................... 168,424 167,317 Residential ................................................................ 467,435 466,660 Individuals' loans for household and other personal expenditures ............. 195,804 201,629 Tax-exempt loans ............................................................. 7,376 6,093 Other loans .................................................................. 2,543 5,523 ----------- ----------- 1,186,438 1,175,586 Allowance for loan losses..................................................... (12,727) (12,454) ----------- ----------- Total Loans............................................................... $ 1,173,711 $ 1,163,132 =========== =========== Three Months Ended March 31 2001 2000 ----------- ----------- Allowance for loan losses: Balances, January 1 .......................................................... $ 12,454 $ 10,128 Provision for losses ......................................................... 653 479 Recoveries on loans .......................................................... 125 149 Loans charged off ............................................................ (505) (288) ----------- ----------- Balances, March 31 ........................................................... $ 12,727 $ 10,468 =========== =========== </TABLE> NOTE 6. Net Income Per Share <TABLE> Three Months Ended March 31, 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................. $ 5,106 11,598,378 $ .44 $ 4,820 10,904,050 $ .44 ========== ========== Effect of dilutive stock options........ 80,042 103,344 ---------- ------------ --------- ------------ Diluted net income per share: Net income available to common stockholders and assumed conversions............. 5,106 11,678,420 $ .44 $ 4,820 11,007,394 $ .44 ========== ============ ========== ========== ============= ========== </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 March 31, 2001, was $5,106,000, compared to $4,820,000 earned in the same period of 2000. Diluted earnings per share were $.44 equaling the $.44 reported for the first quarter 2000. Cash basis earnings per share increased 4.5% to $.46 up $.02 from $.44 in 2000. Annualized returns on average assets and average shareholder's equity for quarter ended March 31, 2001 were 1.28 percent and 13.03 percent, respectively, compared with 1.34 percent and 15.36 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 8.8 percent at March 31, 2001. At March 31, 2001, the Corporation had a Tier I risk-based capital ratio of 11.9 percent, total risk-based capital ratio of 13.0 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. The following table summarizes the risk elements for the Corporation. <TABLE> - --------------------------------------------------------------------------------------------------- (Dollars in Thousands) March 31, December 31, December 31, 2001 2000 1999 - --------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Non-accrual loans .................. $2,939 $2,370 $1,280 Loans contractually past due 90 days Or more other than nonaccruing 2,964 2,465 2,327 Restructured loans ................. 3,170 3,085 908 ------ ------ ------ Total ................ $9,073 $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 March 31, 2001, the allowance for loan losses increased by $273,000, to $12,727,000, up slightly from year end 2000. As a percent of loans, the allowance was 1.08 percent, up from 1.07 percent at year end 2000.
FIRST MERCHANTS CORPORATION FORM 10-Q The first quarter 2001 provision of $653,000 was up $174,000 from $479,000 for the same quarter in 2000. Net charge offs amounted to $380,000 during the quarter. <TABLE> Three Months Ended March 31, ------------------ ------------------ 2001 2000 ---- ---- (Dollars in Thousands) <S> <C> <C> Balance at beginning of period ......................... $12,454 $10,128 ------- ------- Chargeoffs ............................................. 518 288 Recoveries ............................................. 138 149 ------- ------- Net chargeoffs ......................................... 380 139 Provision for loan losses .............................. 653 479 ------- ------- Balance at end of period ............................... $12,727 $10,468 ======= ======= Ratio of net chargeoffs during the period to average loans outstanding during the period .......................... .03(1) .06%(1) (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, 2001, remained adequate to meet the Corporation's primary goal of achieving optimum interest margins while avoiding undue interest rate risk.
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 March 31, 2001, and December 31, 2000, and December 31, 1999. Loans grew by over $10.8 million from December 31, 2000, to March 31, 2001, while investment securities declined by $28.5 million during the same period. Commercial and industrial loans increased by more than $14.7 million, while individuals' loans for household and personal expenditures declined by nearly $5.8 million. <TABLE> - ----------------------------------------------------------------------------------------------------------------------- EARNING ASSETS (Dollars in Millions March 31, December 31, December 31, 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Federal funds sold and interest-bearing deposits $ 3.0 $ 15.8 $ 27.1 Investment securities available for sale ....... 269.4 295.7 329.7 Investment securities held to maturity ......... 10.0 12.2 14.3 Mortgage loans held for sale ................... .5 Loans .......................................... 1,186.4 1,175.6 998.9 Federal Reserve and Federal Home Loan Bank stock 7.2 7.2 5.8 ---------- ---------- ---------- Total ..................... $ 1,476.5 $ 1,506.5 $ 1,375.8 ========== ========== ========== - ----------------------------------------------------------------------------------------------------------------------- </TABLE> Deposits, Securities Sold Under Repurchase Agreements, Federal Funds Sold and Other Short-tern Borrowing 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 2000 and at March 31, 2001. - -------------------------------------------------------------------------------- <TABLE> (Dollars in Millions) March 31, December 31, December 31, 2001 2000 1999 ---------- ------------ ------------ <S> <C> <C> <C> Deposits ........................................ $ 1,230.8 $ 1,288.3 $ 1,147.2 Securities sold under repurchase agreements...... 64.6 64.5 78.0 Other short-term borrowings ..................... .9 5.9 38.4 Federal Home Loan Bank advances ................. 89.4 93.2 73.5 </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.
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, 2001 and 2000. Annualized net interest income (FTE) for the three months ended March 31, 2001 increased by $5,433,000, or 9.8 percent over the same period in 2000, due to an increase in average earning assets of over $122 million. For the same period interest income and interest expense, as a percent of average earning assets, increased 28 basis points, 24 basis points respectively, due to increased interest rates and increased non-deposit funding. <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 March 31, <S> <C> <C> <C> <C> <C> 2001 8.23% 4.13% 4.10% $1,491,338 $61,173 2000 7.95% 3.89% 4.06% $1,369,343 $55,740 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. Other income in the first quarter of 2001 exceeded the same quarter in the prior year by $491,000, or 12.6 percent. Two major areas account for most of the increase: 1. Service charges on deposit accounts increased $159,000 or 14.5 percent due to increased number of accounts and price adjustments. 2. Revenues from Fiduciary activities increased $152,000 or 12.9 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 2001 exceeded the same quarter of the prior year by $1,067,000, or 11.3 percent. Two major areas account for most of the increase: 1. Salaries and benefit expense grew $630,000 or 12.0 percent, due to normal salary increases and staff additions. 2. Goodwill amortization increased by $314,000, 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, for the three months ended March 31, 2001, increased by $579,000 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 - ------------------------------------------------------------ None Item 6. Exhibits and Reports on Form 8-K Form 8-K was filed on April 19, 2001 to disclose the repurchase of 118,088 shares of First Merchants Corporation's common stock.
FIRST MERCHANTS CORPORATION FORM 10-Q SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. First Merchants Corporation --------------------------- (Registrant) Date May 14, 2001 by /s/Michael L. Cox --------------------------- ------------------------------------- Michael L. Cox President and Chief Executive Officer Date May 14, 2001 by /s/James L. Thrash --------------------------- ------------------------------------- James L. Thrash Chief Financial & Principal Accounting Officer