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 September 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 October 31, 2001, there were 12,676,707 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.........................13 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................................19 PART II. Other Information: Item 4. Submission of Matters to a Vote of Security Holders.........20 Item 6. Exhibits and Reports of Form 8-K............................20 Signatures ............................................................21
<TABLE> <CAPTION> FIRST MERCHANTS CORPORATION FORM 10-Q PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CONSOLIDATED CONDENSED BALANCE SHEET (Dollars in thousands) (Unaudited) September 30, December 31, 2001 2000 ---------- ----------- <S> <C> <C> ASSETS: Cash and due from banks.................................................... $ 46,149 $ 52,563 Federal funds sold......................................................... 18,525 14,900 ----------- ----------- Cash and cash equivalents................................................ 64,674 67,463 Interest-bearing deposits.................................................. 3,119 883 Investment securities available for sale................................... 241,080 295,730 Investment Securities held to maturity..................................... 8,942 12,233 Mortgage loans held for sale............................................... 830 Loans, net of allowance for loan losses of $14,907 and $12,454............. 1,346,731 1,163,132 Premises and equipment..................................................... 27,184 23,868 Federal Reserve and Federal Home Loan Bank Stock........................... 7,856 7,185 Interest receivable........................................................ 13,556 13,135 Core deposit intangibles and goodwill...................................... 32,795 21,055 Cash surrender value of life insurance..................................... 6,387 6,312 Other assets............................................................... 8,517 10,067 ----------- ----------- Total assets........................................................... $1,761,671 $1,621,063 =========== =========== LIABILITIES: Deposits: Noninterest-bearing...................................................... $ 163,689 $ 157,053 Interest-bearing......................................................... 1,224,881 1,131,246 ----------- ----------- Total deposits......................................................... 1,388,570 1,288,299 Borrowings................................................................. 182,455 163,581 Interest payable........................................................... 6,593 6,335 Other liabilities.......................................................... 6,468 6,785 ----------- ----------- Total liabilities...................................................... 1,584,086 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 - 12,675,203 and 12,192,319 shares................ 1,584 1,524 Additional paid-in capital................................................. 50,817 41,592 Retained earnings.. .................................................... 121,711 113,244 Accumulated other comprehensive income (loss).............................. 3,473 (297) ----------- ----------- Total stockholders' equity............................................. 177,585 156,063 ----------- ----------- Total liabilities and stockholders' equity............................. $1,761,671 $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 Nine Months Ended September 30 September 30 ------------------- ------------------- 2001 2000 2001 2000 ------- ------- ------- ------- <S> <C> <C> <C> <C> Interest Income: Loans receivable Taxable..................................................................... $27,152 $25,522 $77,322 $69,870 Tax exempt.................................................................. 106 76 310 224 Investment securities: Taxable..................................................................... 3,027 3,623 9,343 11,001 Tax exempt.................................................................. 1,032 1,175 3,083 3,444 Federal funds sold............................................................ 109 28 404 276 Deposits with financial institutions.......................................... 12 28 32 61 Federal Reserve and Federal Home Loan Bank stock.............................. 120 164 419 411 ------- ------- ------- ------- Total interest income..................................................... 31,558 30,616 90,913 85,287 ------- ------- ------- ------- Interest expense: Deposits...................................................................... 11,670 13,028 35,817 35,713 Securities sold under repurchase agreements................................... 817 1,129 2,665 3,181 Federal Home Loan Bank advances............................................... 1,715 1,691 4,836 3,662 Other Borrowings.............................................................. 94 354 373 1,254 ------- ------- ------- ------- Total interest expense.................................................... 14,296 16,202 43,691 43,810 ------- ------- ------- ------- Net Interest Income............................................................. 17,262 14,414 47,222 41,477 Provision for loan losses....................................................... 1,023 603 2,371 1,747 ------- ------- ------- ------- Net Interest Income After Provision for Loan Losses............................. 16,239 13,811 44,851 39,730 ------- ------- ------- ------- Net realized gains (losses) on available-for-sale securities.................... (167) 5 (167) (180) Other Income.................................................................... 4,798 4,374 13,809 12,363 ------- ------- ------- ------- Total other income.............................................................. 4,631 4,379 13,642 12,183 Total other expenses............................................................ 11,980 10,193 32,959 29,481 ------- ------- ------- ------- Income before income tax........................................................ 8,890 7,997 25,234 22,432 Income tax expense.............................................................. 2,870 2,722 8,834 7,334 ------- ------- ------- ------- Net Income...................................................................... $ 6,020 $ 5,275 $16,700 $15,098 ======= ======= ======= ======= Per share: Net Income:(1) Diluted Cash Earnings....................................................... $ .49 $ .45 $ 1.42 $ 1.31 Basic Net Income............................................................ .48 .43 1.36 1.28 Diluted Net Income.......................................................... .47 .43 1.35 1.27 Cash Dividends Paid......................................................... .23 .22 .67 .64 (1) Prior period per share earnings have been restated for the 5% stock dividend paid in September, 2001. 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 Nine Months Ended September 30 September 30 ---------------------- ---------------------- 2001 2000 2001 2000 --------- --------- --------- --------- <S> <C> <C> <C> <C> Net Income...................................................................... $ 6,020 $ 5,275 $ 16,700 $ 15,098 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 $(1,219), $(1,973), $(2,448), and $(715)....... 1,827 2,960 3,670 1,072 Less: Reclassification adjustment for gains (losses) included in net income, net of income tax (expense) benefit of $66, $(2), $66 and $72... (101) 3 (101) (108) --------- --------- --------- --------- 1,928 2,957 3,771 1,180 --------- --------- --------- --------- Comprehensive income............................................................ $ 7,948 $ 8,232 $ 20,471 $ 16,278 ========= ========= ========= ========= </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 ..................................................... 16,700 15,098 Cash dividends ................................................. (8,233) (7,644) Other comprehensive income (loss), net of tax................... 3,771 1,180 Issuance of stock related to acquisition........................ 14,601 21,173 Stock issued under employee benefits plans...................... 504 648 Stock issued under dividend reinvestment and stock purchase plan 583 430 Stock options exercised ........................................ 176 475 Stock Redeemed ................................................. (6,580) (4,786) --------- --------- Balances, September 30 ......................................... $ 177,585 $ 152,870 ========= ========= </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> Nine Months Ended September 30, ---------------------------------- 2001 2000 ---------------- -------------- <S> <C> <C> Cash Flows From Operating Activities: Net income........................................................................ $ 16,700 $ 15,098 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses....................................................... 2,371 1,747 Depreciation and amortization................................................... 3,430 2,916 Securities amortization, net................................................... (127) 36 Securities losses, net.......................................................... 167 180 Gains on sale of premises and equipment......................................... (70) (105) Mortgage loans originated for sale.............................................. (14,285) 1,224 Proceeds from sales of mortgage loans........................................... 13,455 (1,163) Change in interest receivable................................................... 982 (1,043) Change in interest payable...................................................... (622) 1,206 Other adjustments ............................................................ (981) 200 ---------------- --------------- Net cash provided by operating activities..................................... $ 21,020 $ 20,296 ---------------- --------------- Cash Flows From Investing Activities: Net change in interest-bearing deposits........................................... (2,236) 962 Purchases of Securities available for sale................................................... (15,933) (8,575) Proceeds from maturities of Securities available for sale................................................... 82,347 36,292 Securities held to maturity..................................................... 3,295 4,292 Proceeds from sales of Securities available for sale................................................... 770 12,440 Net change in loans............................................................... (51,465) (76,849) Purchase of FHLB stock............................................................ (98) (716) Purchases of premises and equipment............................................... (1,256) (3,497) Proceeds from sale of fixed assets................................................ 162 448 Net cash received in acquisition.................................................. 5,261 280 ---------------- --------------- Net cash provided (used) by investing activities................................ 20,847 (34,923) ---------------- --------------- </TABLE> (continued)
FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited) <TABLE> Nine Months Ended September 30, ----------------------------------- 2001 2000 ---------------- --------------- <S> <C> <C> Cash Flows From Financing Activities: Net change in Demand and savings deposits........................................... $ (21,959) $ (12,739) Certificates of deposit and other time deposits....................... (28,021) (399) Borrowings............................................................ 18,874 (1,428) Cash dividends.......................................................... (8,233) (7,644) Stock issued under employee benefit plans............................... 504 648 Stock issued under dividend reinvestment and stock purchase plan........ 583 430 Stock options exercised................................................. 176 475 Stock repurchased....................................................... (6,580) (4,786) ---------------- -------------- Net cash provided (used) by financing activities...................... (44,656) (25,443) ---------------- -------------- Net Change in Cash and Cash Equivalents................................... (2,789) (40,070) Cash and Cash Equivalents, January 1...................................... 67,463 84,293 ---------------- -------------- Cash and Cash Equivalents, September 30................................... $ 64,674 $ 44,223 ================ ============== </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 Note 2. All adjustments which are of a normal recurring nature and are in the opinion of management necessary for a fair statement of the results for the periods reported have been included in the accompanying consolidated condensed financial statements. NOTE 2. Accounting Matters Accounting for derivative instruments and hedging activities - During 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement requires companies to record derivatives on the balance sheet at their fair market value. Statement No. 133 also acknowledges that the method of recording a gain or loss depends on the use of the derivative. The new Statement applies to all entities. If hedge accounting is elected by the entity, the method of assessing the effectiveness of the hedging derivative and the measurement approach of determining the hedge's ineffectiveness must be established at the inception of the hedge. Statement No. 133 amends Statement No. 52 and 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 2. Accounting Matters (continued) Impact of New Accounting Standards Accounting for a Business Combination. Statement of Financial Accounting Standards ("SFAS") No. 141 requires that all business combinations should be accounted for using the purchase method of accounting; use of the pooling method is prohibited. This Statement requires that goodwill be initially recognized as an asset in the financial statement and measured as the excess of the cost of an acquired entity over the net of the amounts assigned to identifiable assets acquired and liabilities assumed. In addition, SFAS No. 141 requires all other intangibles, such as core deposit intangibles for a financial institution, to be identified. The provisions of Statement No. 141 are effective for any business combination that was initiated after June 30, 2001. Accounting for Goodwill. Under the provisions of SFAS No. 142, goodwill should not be amortized but should be tested for impairment at the reporting unit level. Impairment test of goodwill should be done on an annual basis unless events or circumstances indicate impairment has occurred in the interim period. The annual impairment test can be performed at any time during the year as long as the measurement date is used consistently from year to year. Impairment testing is a two step process, as outlined within the statement. If the fair value of goodwill is less than its carrying value, then the goodwill is deemed impaired and a loss recognized. Any impairment loss recognized as a result of completing the transitional impairment test should be treated as a change in accounting principle and recognized in the first interim period financial statements. The provisions of Statement No. 142 would be effective for fiscal years beginning after December 15, 2001. A calendar year end company cannot adopt early and must wait until January 1, 2002. Goodwill and intangible assets acquired in a transaction completed after June 30, 2001 but before this Statement is initially applied would be accounted for in accordance with the amortization and nonamortization provisions of the Statement. The useful economic life of previously recognized intangible assets should be reassessed upon adoption of the Statement, and remaining amortization periods should be adjusted accordingly. Intangible assets deemed to have an indefinite life would no longer be amortized. The Corporation will adopt these new accounting rules on January 1, 2002. As a result, the Corporation will not amortize the goodwill it has recorded prior to June 30, 2001, but will make an annual assessment of any impairment in goodwill and, if necessary, recognize an impairment loss at that time. The Corporation had goodwill of $26,457,000 at September 30, 2001 and amortization of $225,000 and $748,000 for the three and nine months ended September 30, 2001.
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 acquired Francor Financial, Inc., the holding company of Frances Slocum Bank & Trust Company. Frances Slocum Bank & Trust Company is a state chartered bank with branches located in eastcentral Indiana. Francor Financial, Inc. was merged into the Corporation, and Frances Slocum Bank & Trust Company will maintain its state charter as a subsidiary of First Merchants Corporation. The combination was accounted for under the purchase method of accounting. Francor Financial Inc.'s results of operations are included in the Corporation's consolidated income statement beginning July 1, 2001. Shareholders of Francor Financial, Inc. on July 1, 2001, had the right to convert their shares into either 4.32 shares of the Corporation's common stock, or 2.59 shares of the Corporation's common stock and $48.70 in cash, or $121.74 in cash. The Corporation issued 677,972 shares of its common stock at a cost of $21.536 per share and $14,490,985 in cash to complete the transaction. The purchase had a recorded acquisition cost of $29,454,000 and goodwill of $7,907,000. Additionally, core deposit intangibles totaling $4,804,000 were recognized and will be amortized over 10 years using the 150% declining balance method. All assets and liabilities were recorded at fair values as of July 1, 2001. The purchase accounting adjustments will be amortized over the life of the respective asset or liability. The following proforma discloses including the effect of the purchase accounting adjustments, depict the results of operations as though the merger had taken place at the beginning of each period. <TABLE> Nine Months Ended September 30, 2001 2000 ----------- ----------- <S> <C> <C> Net Interest Income:........................ $ 50,213 $ 46,226 Net Income:................................. 16,045 16,338 Per share - combined: Diluted Cash Earnings .................... $ 1.32 $ 1.34 Basic Net Income.......................... 1.26 1.31 Diluted Net Income........................ 1.25 1.30 </TABLE> On October 15, 2001, the Corporation signed a definitive agreement to acquire Lafayette Bancorporation, Lafayette, Indiana. The acquisition will be accounted for under the purchase method of accounting. Under the terms of the agreement, the Corporation will exchange 1.11 shares of the Corporation's common stock or $30.00 in cash for each of the outstanding shares of Lafayette Bancorporation. However, no more than $50,329,248 aggregate cash may be paid in the merger, and there may be allocations of stock to certain shareholders if this threshold is exceeded. The transaction is subject to approval by stockholders of Lafayette Bancorporation, and appropriate regulatory agencies. The Corporation anticipates amortizing core deposit intangibles over ten years. As of December 31, 2000, Lafayette Bancorporation had total assets and shareholders' equity of $741,147,000 and $52,801,000 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 September 30, 2001 U.S. Treasury ........................ $ 1,124 $ 6 $ 1,130 Federal agencies...................... 28,221 880 $ (13) 29,088 State and municipal .................. 78,830 2,208 (43) 80,995 Mortgage-backed securities ........... 112,313 2,213 114,526 Other asset-backed securities......... 10,275 226 10,501 Corporate obligations................. 3,500 133 3,633 Marketable equity securities.......... 1,316 (109) 1,207 -------- -------- -------- -------- Total available for sale ......... 235,579 5,666 (165) 241,080 -------- -------- -------- -------- Held to maturity at September 30, 2001 State and municipal................... 8,688 198 (29) 8,857 Mortgage-backed securities............ 254 254 -------- -------- -------- -------- Total held to maturity ........... 8,942 198 (29) 9,111 -------- -------- -------- -------- Total investment securities ...... $244,521 $ 5,864 $ (194) $250,191 ======== ======== ======== ======== </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> September 30, December 31, 2001 2000 ---- ---- <S> <C> <C> Loans: Commercial and industrial loans .............................................. $ 290,838 $ 258,405 Agricultural production financing and other loans to farmers ................. 34,786 24,547 Real estate loans: Construction ............................................................... 57,949 45,412 Commercial and farmland .................................................... 220,624 167,317 Residential ................................................................ 530,653 466,660 Individuals' loans for household and other personal expenditures ............. 206,492 201,629 Tax-exempt loans ............................................................. 7,912 6,093 Other loans .................................................................. 12,384 5,523 ----------- ----------- Total..................................................................... $ 1,361,638 $ 1,175,586 =========== =========== Nine Months Ended September 30, 2001 2000 ----------- ----------- Allowance for loan losses: Balances, January 1 .......................................................... $ 12,454 $ 10,128 Allowance acquired in acquisition............................................. 2,085 1,413 Provision for losses ......................................................... 2,371 1,747 Recoveries on loans .......................................................... 464 461 Loans charged off ............................................................ (2,467) (1,517) ----------- ----------- Balances, September 30........................................................ $ 14,907 $ 12,232 =========== =========== </TABLE> NOTE 6. Net Income Per Share <TABLE> Three Months Ended September 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................. $ 6,020 12,711,385 $ .48 $ 5,275 12,273,134 $ .43 ========== ========== Effect of dilutive stock options........ 92,632 75,937 ---------- ------------ --------- ------------ Diluted net income per share: Net income available to common stockholders and assumed conversions............. $ 6,020 12,804,017 $ .47 $ 5,275 12,349,071 $ .43 ========== ============ ========== ========== ============= ==========
</TABLE> <TABLE> <CAPTION> Nine Months Ended September 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................. $ 16,700 12,306,708 $ 1.36 $ 15,098 11,790,275 $ 1.28 ========== ========== Effect of dilutive stock options........ 83,434 82,117 ---------- ------------ --------- ------------ Diluted net income per share: Net income available to common stockholders and assumed conversions............. $ 16,700 12,390,142 $ 1.35 $ 15,098 11,872,392 $ 1.27 ========== ============ ========== ========== ============= ========== </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 September 30, 2001, was $6,020,000, compared to $5,275,000 earned in the same period of 2000. Diluted earnings per share were $.47 an increase of $.04 over the $.43 reported for the first quarter 2000. Net income for the nine months ended September 30, 2001, was $16,700,000, compared to $15,098,000 during the same period in 2000. Diluted earnings per share were $1.35, a 6.3% increase over $1.27 in 2000. Cash basis earnings per share for the quarter increased 8.9% to $.49 up $.04 from $.45. Year to date cash basis earnings per share increased 8.4% to $1.42 from $1.31 in 2000. Annualized returns on average assets and average shareholder's equity for nine months ended September 30, 2001 were 1.35 percent and 13.66 percent, respectively, compared with 1.32 percent and 14.61 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 ratio was 8.7 percent at year-end 2000 and 8.1 percent at September 30, 2001. At September 30, 2001, the Corporation had a Tier I risk-based capital ratio of 11.0 percent and total risk-based capital ratio of 12.1 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 September 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) September 30, December 31, 2001 2000 - -------------------------------------------------------------------------------- <S> <C> <C> Non-accrual loans .................. $3,330 $2,370 Loans contractually past due 90 days Or more other than nonaccruing 2,978 2,465 Restructured loans ................. 2,886 3,085 ------ ------ Total ................ $9,194 $7,920 ====== ====== - -------------------------------------------------------------------------------- </TABLE> At September 30, 2001, non-performing loans totaled $9,194,000, an increase of $1,274,000 from December 31, 2000. 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 September 30, 2001, the allowance for loan losses increased by $2,453,000, to $14,907,000, up from year end 2000. The increase was primarily due to the allowance acquired in the acquisition of Francor Financial, Inc., which totaled $2,085,000. As a percent of loans, the allowance was 1.09 percent, up from 1.06 percent at year end 2000.
FIRST MERCHANTS CORPORATION FORM 10-Q For the nine months ended September 30, 2001, the provision totaled $2,371,000. The provision was $624,000 more than the $1,747,000 provision from the comparable period in 2000, primarily due to the general downturn in the economy and an increase in non-performing loans. Net charge offs amounted to $2,003,000 during the nine months ended September 30, 2001. The third quarter 2001 provision of $1,023,000 increased $420,000 from $603,000 for the same quarter in 2000, primarily due to the general downturn in the economy and an increase in non-performing loans. Net charge offs amounted to $706,000 during the quarter. <TABLE> Nine Months Ended September 30, ------------------ ------------------ 2001 2000 ---- ---- (Dollars in Thousands) <S> <C> <C> Balance at beginning of period ......................... $12,454 $10,128 ------- ------- Allowance acquired in acquisition....................... 2,085 1,413 Chargeoffs ............................................. (2,467) (1,517) Recoveries ............................................. 464 461 ------- ------- Net chargeoffs ......................................... (2,003) (1,056) Provision for loan losses .............................. 2,371 1,747 ------- ------- Balance at end of period................................ $14,907 $12,232 ======= ======= Ratio of net chargeoffs during the period to average loans outstanding during the period - annualized.............. .21% .13% </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 believes the March 31, 2001, data, on the following page, materially reflects the Corporation's interest sensitivity position on September 30, 2001. This data is presented rather than September 30, 2001 information, as the Corporation is currently in process of converting and revising its software utilized for modeling and reporting purposes. Upon completion of this process, the September 30, 2001 results for the flat, rising (rate shock), and falling (rate shock) interest scenarios will be presented in an amendment to the September 30, 2001, Form 10-Q filing.
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 difference between the best performing and the worst performing rate scenarios are not allowed to show a variance greater than 5 percent. Assumed interest rate changes are simulated to move incrementally over 12 months. The total rate movement (beginning point minus ending point) to noteworthly interest rate indexes are as follows: 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 September 30, 2001, and December 31, 2000, and December 31, 1999. Loans grew by over $186 million from December 31, 2000 to September 30, 2001, which included $134.5 million of loans acquired as part of the Francor Financial, Inc. acquisition. Investment securities declined by $57.9 million during the same period. Commercial and industrial loans increased by more than $32 million, while individuals' loans for household and personal expenditures increased by nearly $4.9 million. <TABLE> - ------------------------------------------------------------------------------------------------------------------------ EARNING ASSETS (Dollars in Millions) September 30, December 31, December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Federal funds sold and interest-bearing deposits $ 21.6 $ 15.8 $ 27.1 Investment securities available for sale ....... 241.1 295.7 329.7 Investment securities held to maturity ......... 8.9 12.2 14.3 Mortgage loans held for sale ................... .8 Loans .......................................... 1,361.6 1,175.6 998.9 Federal Reserve and Federal Home Loan Bank stock 7.9 7.2 5.8 ---------- ---------- ---------- Total ..................... $ 1,641.9 $ 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 nine months ended September 30, 2001 and 2000. Annualized net interest income (FTE) for the nine months ended September 30, 2001 increased by $7,472,000, or 12.9 percent over the same period in 2000, due to an increase in average earning assets of over $109 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 September 30, <S> <C> <C> <C> <C> <C> 2001 7.79% 3.46% 4.33% $1,652,318 $71,526 2000 8.20% 4.24% 3.96% $1,527,890 $60,486 - ----------------------------------------------------------------------------------------------------------------------------- </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 nine months Ended September30, <S> <C> <C> <C> <C> <C> 2001 8.00% 3.77% 4.23% $1,545,820 $65,408 2000 8.10% 4.07% 4.03% $1,436,429 $57,936 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 third quarter of 2001 exceeded the same quarter in the prior year by $424,000, or 9.7 percent. Two major areas account for most of the increase: 1. Service charges on deposit accounts increased $265,000 or 21.4 percent due to increased number of accounts and price adjustments. 2. Gains on sale of mortgage loans increased by $240,000 due to declining interest rates and increased mortgage volume. Other income in the first nine months of 2001 exceeded the same period in the prior year by $1,446,000, or 11.7 percent. Three major areas account for most of the increase: 1. Service charges on deposit accounts increased $618,000 or 17.7 percent due to increased number of accounts and price adjustments. 2. Revenues from fiduciary activities increased $366,000 or 9.8 percent due primarily to increased sales efforts of First Merchants Insurance Services, Inc. 3. Gains on sale of mortgage loans increased by $592,000 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 third quarter of 2001 exceeded the same period of the prior year by $1,787,000, or 17.5 percent. Three major areas account for most of the increase: 1. Salaries and benefit expense grew $971,000 or 17.7 percent, due to normal salary increases and staff additions. 2. Processing expense increased by $123,000 or 17.8 percent, due to an increased volume of activity. 3. Other outside services expense increased by $114,000, primarily attributed to an increased use of such services. Total other expense during the first nine months in 2001 exceeded the same period of the prior year by $3,478,000, or 11.8 percent. Three major areas account for most of the increase: 1. Salaries and benefit expense grew $1,971,000 or 12.2 percent, due to normal salary increases and staff additions. 2. Goodwill amortization increased by $604,000, due to utilization of the purchase method of accounting for the Corporation's June 1, 2000 acquisition of Decatur Bank & Trust Company. 3. Equipment expense grew $265,000 or 23.2%, due to decisions made to maintain and repair equipment items, rather than purchasing new equipment.
FIRST MERCHANTS CORPORATION FORM 10-Q Income Taxes Income tax expense during the third quarter totaled $2,870,000, an increase of $148,000 over the $2,722,000 reported in the same quarter of 2000. Income tax expense, for the nine months ended September 30, 2001, increased by $1,500,000 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 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 11/14/01 by /s/ Michael L. Cox --------------------------- ------------------------------------- Michael L. Cox President and Chief Executive Officer Date 11/14/01 by /s/ James L. Thrash --------------------------- ------------------------------------- James L. Thrash Chief Financial & Principal Accounting Officer - -----END PRIVACY-ENHANCED MESSAGE-----