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
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
---------- -----------
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.
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
------- ------- ------- -------
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.
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
--------- --------- --------- ---------
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
========= ========= ========= =========
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollar Amounts in thousands)
(Unaudited)
2001 2000
--------- ---------
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
========= =========
See notes to consolidated condensed financial statements
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------------------
2001 2000
---------------- --------------
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)
---------------- ---------------
(continued)
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
Nine Months Ended
September 30,
-----------------------------------
2001 2000
---------------- ---------------
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
================ ==============
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.
Nine Months Ended
September 30,
2001 2000
----------- -----------
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
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)
NOTE 4. Investment Securities
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
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
======== ======== ======== ========
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
(Unaudited)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale at December 31, 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
======== ======== ======== ========
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
(Unaudited)
NOTE 5. Loans and Allowance
September 30, December 31,
2001 2000
---- ----
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
=========== ===========
NOTE 6. Net Income Per Share
Three Months Ended September 30,
2001 2000
------------------------------------------- ------------------------------------------
Weighted- Weighted-
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic net income per share:
Net income available to
common stockholders................. $ 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
========== ============ ========== ========== ============= ==========
Nine Months Ended September 30,
2001 2000
------------------------------------------- ------------------------------------------
Weighted- Weighted-
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic net income per share:
Net income available to
common stockholders................. $ 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
========== ============ ========== ========== ============= ==========
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.
- --------------------------------------------------------------------------------
(Dollars in Thousands) September 30, December 31,
2001 2000
- --------------------------------------------------------------------------------
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
====== ======
- --------------------------------------------------------------------------------
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.
Nine Months Ended
September 30,
------------------
------------------
2001 2000
---- ----
(Dollars in Thousands)
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%
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:
Base Case
Flat Rates Rising Falling
-----------------------------------------------------------------------------------------------------------
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)%
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.
- ------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
(Dollars in Millions) September 30, December 31, December 31,
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
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
========== ========== ==========
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.
- --------------------------- ------------------- -------------------- -------------------- -------------- --------------------
(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,
2001 7.79% 3.46% 4.33% $1,652,318 $71,526
2000 8.20% 4.24% 3.96% $1,527,890 $60,486
- -----------------------------------------------------------------------------------------------------------------------------
- -------------------------- ------------------- -------------------- -------------------- -------------- ---------------------
(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,
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.
- -----------------------------------------------------------------------------------------------------------------------------
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
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