SEC Filing | First Merchants Corporation

Page 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY RETORT UNDER SECTION 13 or 15 (d) of THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended June 30, 2000 Commission File Number 0-17071 First Merchants Corporation - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Indiana 35-1544218 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) 200 East Jackson Street - Muncie, IN 47305-2814 - -------------------------------------------------------------------------------- (Address of principal executive office) (Zip code) (765) 747-1500 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable - -------------------------------------------------------------------------------- (Former name former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days, Yes X No --- As of July 31, 2000 there were outstanding 11,691,133 common shares, without par value, of the registrant. The exhibit index appears on page 2. This report including the cover page contains a total of 23 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.................................................15 PART II. Other Information: Item 4. Submission of Matters to a Vote of Security Holders.........21 Item 6. Exhibits and Reports of Form 8-K............................21 Signatures ............................................................22

FIRST MERCHANTS CORPORATION FORM 10-Q PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CONSOLIDATED CONDENSED BALANCE SHEET (Dollars in thousands) (Unaudited) June 30, December 2000 31, 1999 ---------- ---------- ASSETS: Cash and due from banks.................................................... $ 46,204 $ 58,893 Federal funds sold......................................................... 6,525 25,400 ----------- ----------- Cash and cash equivalents................................................ 52,729 84,293 Interest-bearing deposits.................................................. 1,725 1,730 Investment securities available for sale................................... 311,202 329,668 Investment securities held to maturity..................................... 15,088 14,303 Mortgage loans held for sale............................................... 61 Loans...................................................................... 1,156,029 998,895 Less: Allowance for loan losses......................................... (12,171) (10,128) ----------- ----------- Net loans.............................................................. 1,143,858 988,767 Premises and equipment..................................................... 24,143 20,073 Federal Reserve and Federal Home Loan Bank Stock........................... 6,465 5,858 Interest receivable........................................................ 12,753 11,279 Core deposit intangibles and goodwill...................................... 21,558 2,885 Others assets.............................................................. 20,893 15,131 ----------- ----------- Total assets........................................................... $1,610,413 $1,474,048 =========== =========== LIABILITIES: Deposits: Noninterest-bearing...................................................... $ 159,930 $ 140,547 Interest-bearing......................................................... 1,085,046 1,006,656 ----------- ----------- Total deposits......................................................... 1,244,976 1,147,203 Borrowings................................................................. 207,617 189,862 Interest payable........................................................... 5,388 4,599 Other liabilities.......................................................... 5,219 6,088 ----------- ----------- Total liabilities...................................................... 1,463,200 1,347,752 STOCKHOLDERS' EQUITY: Perferred stock, no-par value: Authorized and unissued-500,000 shares................................... Common Stock, $.125 stated value: Authorized --- 50,000,000 shares......................................... Issued and outstanding - 11,666,948 and 10,936,617 shares................ 1,458 1,367 Additional paid-in capital................................................. 43,224 25,481 Retained earnings.. .................................................... 108,500 103,640 Accumulated other comprehensive income (loss).............................. (5,969) (4,192) ----------- ----------- Total stockholders' equity............................................. 147,213 126,296 ----------- ----------- Total liabilities and stockholders' equity............................. $1,610,413 $1,474,048 =========== =========== 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 Six Months Ended June 30 June 30 ------------------- ------------------- 2000 1999 2000 1999 ------- ------- ------- ------- Interest Income: Loans receivable Taxable..................................................................... $22,918 $19,204 $44,348 $37,784 Tax exempt.................................................................. 76 59 148 112 Investment securities: Taxable..................................................................... 3,634 3,994 7,378 7,489 Tax exempt.................................................................. 1,127 1,323 2,269 2,633 Federal funds sold............................................................ 197 198 248 426 Deposits with financial institutions.......................................... 19 30 33 34 Federal Reserve and Federal Home Loan Bank stock.............................. 126 108 247 208 ------- ------- ------- ------- Total interest income..................................................... 28,097 24,916 54,671 48,686 ------- ------- ------- ------- Interest expense: Deposits...................................................................... 11,782 9,339 22,685 18,680 Borrowings.................................................................... 2,525 2,114 4,923 3,704 ------- ------- ------- ------- Total interest expense...................................................... 14,307 11,453 27,608 22,384 ------- ------- ------- ------- Net Interest Income............................................................. 13,790 13,463 27,063 26,302 Provision for loan losses....................................................... 665 522 1,144 1,027 ------- ------- ------- ------- Net Interest Income After Provision for Loan Losses............................. 13,125 12,941 25,919 25,275 ------- ------- ------- ------- Other Income: Net realized gains (losses) on sales of available-for-sale securities......... 13 142 (185) 157 Other income.................................................................. 4,086 3,622 7,989 7,035 ------- ------- ------- ------- Total other income.............................................................. 4,099 3,764 7,804 7,192 Total other expenses............................................................ 9,881 9,488 19,288 18,178 ------- ------- ------- ------- Income before income tax........................................................ 7,343 7,217 14,435 14,289 Income tax expense.............................................................. 2,340 2,568 4,612 4,997 ------- ------- ------- ------- Net Income...................................................................... $ 5,003 $ 4,649 $ 9,823 $ 9,292 ======= ======= ======= ======= Per share: Net Income: Basic....................................................................... $ .45 $ .39 $ .89 $ .78 Diluted..................................................................... .45 .39 .89 .77 Dividends....................................................................... .22 .20 .44 .40 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 Six Months Ended June 30 June 30 ---------------------- ---------------------- 2000 1999 2000 1999 --------- --------- --------- --------- Net Income...................................................................... $ 5,003 $ 4,649 $ 9,823 $ 9,292 Other comprehensive income, net of tax: Unrealized (losses) gains on securities available for sale: Unrealized holding (losses) gains arising during the period, net of income tax (expense) benefit of $610, $1,748, $1,258, and $2,209........ (916) (2,622) (1,888) (3,314) Less: Reclassification adjustment for gains (losses) included in net income, net of income tax (expense) benefit of $6, $57, $(74)and $63.............................................................. 7 85 (111) 94 --------- --------- --------- --------- (923) (2,707) (1,777) (3,408) --------- --------- --------- --------- Comprehensive income............................................................ $ 4,080 $ 1,942 $ 8,046 $ 5,884 ========= ========= ========= ========= FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (Dollar Amounts in thousands) (Unaudited) 2000 1999 --------- --------- Balances, January 1.......................................................... $126,296 $153,891 Net income................................................................... 9,823 9,292 Cash dividends............................................................... (4,963) (4,457) Other comprehensive income (loss), net of tax................................ (1,777) (3,408) Issuance of stock related to acquisition..................................... 21,358 Stock issued under dividend reinvestment and stock purchase plan............. 373 338 Stock options exercised...................................................... 417 123 Stock Redeemed............................................................... (4,314) (339) --------- --------- Balances, June 30............................................................. $147,213 $155,440 ========= ========= See notes to consolidated condensed financial statements

FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited) Six Months Ended June 30, ----------------------------- 2000 1999 --------- --------- Cash Flows From Operating Activities: Net income...................................................................... $ 9,823 $ 9,292 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses..................................................... 1,144 1,027 Depreciation and amortization................................................. 1,526 1,379 Securities amortization, net.................................................. 112 176 Securities losses (gains), net................................................ 186 (157) Gains on sale of premises and equipment....................................... (105) Mortgage loans originated for sale............................................ 811 (4,837) Proceeds from sales of mortgage loans......................................... (750) 5,547 Change in interest receivable................................................. (443) (346) Change in interest payable.................................................... 532 236 Other adjustments............................................................. (2,079) 589 --------- --------- Net cash provided by operating activities................................... 10,747 12,906 --------- --------- Cash Flows From Investing Activities: Net change in interest-bearing deposits......................................... 488 217 Purchases of Securities available for sale................................................. (5,093) (127,380) Proceeds from maturities of Securities available for sale................................................. 24,384 78,635 Securities held to maturity................................................... 3,066 4,552 Proceeds from sales of Securities available for sale................................................. 10,844 13,692 Net change in loans............................................................. (66,905) (30,846) Purchases of premises and equipment............................................. (2,766) (2,311) Proceeds from sale of fixed assets.............................................. 512 461 Cash received in acquisition.................................................... 392 --------- --------- Net cash provided (used) by investing activities.............................. (35,078) (63,902) --------- --------- (continued)

FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited) Six Months Ended June 30 ----------------------------- 2000 1999 --------- --------- Cash Flows From Financing Activities: Net change in Demand and savings deposits................................................... $ 3,649 $ (5,201) Certificates of deposit and other time deposits............................... (12,932) 10,738 Borrowings.................................................................... 10,537 37,473 Cash dividends.................................................................. (4,963) (4,457) Stock issued under dividend reinvestment and stock purchase plan............. 373 338 Stock options exercised......................................................... 417 123 Stock repurchased............................................................... (4,314) (339) --------- --------- Net cash provided (used) by financing activities.............................. (7,233) 38,675 --------- --------- Net Change in Cash and Cash Equivalents........................................... (31,564) (12,321) Cash and Cash Equivalents, January 1.............................................. 84,293 80,769 --------- --------- Cash and Cash Equivalents, June 30................................................ $ 52,729 $ 68,448 ========= ========= 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 supersedes 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 is effective for all fiscal quarters of all fiscal years beginnings 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.

FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited) NOTE 3. Business Combinations On May 31, 2000, the Corporation acquired Decatur Financial Inc., the holding company of Decatur Bank and Trust Company. Decatur Bank and Trust Company is a state chartered savings bank with branches located in eastcentral Indiana. Decatur Financial Inc. was merged into the Corporation and Decatur Bank and 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. Decatur Financial Inc.'s results of operations are included in the Corporation's consolidated income statement beginning June 1, 2000. Shareholders of Decatur Financial Inc. on May 31, 2000, had the right to convert their shares into 9.13 shares of First Merchants Corporation stock or receive $237.39 in cash. The company issued 878,242 shares of its common stock at a cost of $24.31875 per share and $12,164,000 in cash to complete the transaction. The purchase had a recorded acquisition cost of $33,681,000 and goodwill of $16,859,000. Goodwill is being amortized over 20 years utilizing the straight-line method. Additionally core deposit intangibles totaling $2,046,000 were recognized and will be amortized over 10 years using 150% declining balance method. The purchase resulted in the Corporation recording net loans of $89,332,000, held to maturity and available for sale securities of $3,921,000 and 14,132,000 respectively, deposit liabilities of $107,056,000 and borrowings of 7,217,000. All assets and liabilities were recorded at fair values as of May 31, 2000. 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. Six Months Ended June 30 ---------------------- 2000 1999 --------- --------- Net Interest Income: First Merchants Corporation................. $ 26,733 $ 25,906 Decatur Financial Inc....................... 2,196 2,328 --------- --------- $ 28,929 $ 28,234 ========= ========= Net Income: First Merchants Corporation................. $ 9,627 $ 9,057 Decatur Financial Inc....................... (181) 468 --------- --------- $ 9,447 $ 9,528 ========= ========= Net Income per share - combined: Basic....................................... $ .81 $ .74 Diluted..................................... .80 .73

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 June 30, 2000 U.S. Treasury...................................... $ 2,994 $ 24 $ 2,970 Federal agencies................................... 58,149 $ 28 1,246 56,931 State and municipal................................ 89,201 401 849 88,753 Mortgage-backed securities......................... 140,311 14 6,420 133,905 Other asset-backed securities...................... 20,945 806 20,139 Corporate obligations.............................. 7,749 180 7,569 Marketable equity securities....................... 1,169 234 935 --------- --------- --------- --------- Total available for sale....................... 320,518 443 9,759 311,202 --------- --------- --------- --------- Held to maturity at June 30, 2000 U.S. Treasury...................................... 250 2 248 State and municipal................................ 13,932 44 40 13,936 Mortgage-backed securities......................... 189 1 15 175 Other asset-backed securities...................... 240 240 Corporate obligations.............................. 477 477 --------- --------- --------- --------- Total held to maturity......................... 15,088 45 57 15,076 --------- --------- --------- --------- Total investment securities.................... $ 335,606 $ 488 $ 9,816 $ 326,278 ========= ========= ========= =========

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, 1999: U.S. Treasury...................................... $ 7,337 $ 3 $ 72 $ 7,268 Federal agencies................................... 61,215 50 1,199 60,066 State and municipal................................ 94,598 568 945 94,221 Mortgage-backed securities......................... 141,673 58 4,332 137,399 Other asset-backed securities...................... 21,773 758 21,015 Corporate obligations.............................. 9,082 4 140 8,946 Marketable equity securities....................... 915 162 753 --------- ------ ------- -------- Total available for sale....................... 336,593 683 7,608 329,668 --------- ------ ------- -------- Held to maturity at December 31, 1999: U.S. Treasury...................................... 250 2 248 State and municipal................................ 13,243 77 13 13,307 Mortgage-backed securities......................... 311 1 1 311 Other asset-backed securities...................... 499 0 81 418 --------- ------ ------- -------- Total held to maturity......................... 14,303 78 97 14,284 --------- ------ ------- -------- Total investment securities.................... $ 350,896 $ 761 $ 7,705 $343,952 ========= ====== ======= ========

FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited) NOTE 5. Loans and Allowance June 30, December 31, 2000 1999 --------- --------- Loans: Commercial and industrial loans............................................... $259,061 $224,712 Agricultural production financing and other loans to farmers.................. 27,323 21,547 Real estate loans: Construction................................................................ 39,708 31,996 Commercial and farmland..................................................... 162,039 150,544 Residential................................................................. 446,511 380,596 Individuals' loans for household and other personal expenditures.............. 212,023 181,906 Tax-exempt loans.............................................................. 5,407 4,070 Other loans................................................................... 3,970 3,552 Unearned interest on loans.................................................... (13) (28) ----------- --------- Total..................................................................... $1,156,029 $998,895 =========== ========= Six Months Ended June 30, ----------------------------- 2000 1999 -------- --------- Allowance for loan losses: Balances, January 1........................................................... $10,128 $ 9,209 Allowance acquired in acquisition............................................. 1,413 Provision for losses.......................................................... 1,144 1,027 Recoveries on loans........................................................... 290 223 Loans charged off............................................................. (804) (601) -------- --------- Balances, June 30.............................................................. $12,171 $ 9,858 ======== =========

FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited) NOTE 6. Net Income Per Share Three Months Ended June 30, 2000 1999 ------------------------------------------- ------------------------------------------ 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.............. $5,003 11,091,226 $ .45 $4,649 12,004,475 $ .39 ====== ====== Effect of dilutive stock options..... 67,546 97,282 ---------- ---------- Diluted net income per share: Net income available to common stockholders and assumed conversions.......... $5,003 11,158,772 $ .45 $4,649 12,101,757 $ .39 ====== ========== ====== ====== ========== ======= Six Months Ended June 30, 2000 1999 ------------------------------------------- ------------------------------------------ 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.............. $9,823 10,997,638 $ .89 $9,292 11,989,955 $ .78 ====== ====== Effect of dilutive stock options..... 83,123 108,551 ---------- ---------- Diluted net income per share: Net income available to common stockholders and assumed conversions.......... $9,823 11,080,761 $ .89 $9,292 12,098,506 $ .77 ====== ========== ====== ====== ========== ======

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 provides a safe harbor for such disclosure, or in other words, protection from unwarranted litigation if actual results are not the same as management's expectations. First Merchants Corporation desires to provide its shareholders with sound information about past performance and future trends. Consequently, this Quarterly Report, including Management's Discussion and Analysis of financial Condition and Results of Operations, contains forward-looking statements that are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those contained in or implied by First Merchants Corporation's statements due to a variety of factors including: changes in economic conditions; movements in interest rates; competitive pressures on product pricing and services; success and timing of business strategies; the successful integration of acquired businesses; the nature and extent of governmental actions and reform; and extended disruption of vital infrastructure. The management of First Merchants Corporation encourages readers of this report to understand forward-looking statements to be strategic objectives rather than absolute targets of future performance. Results of Operations Net income for the three months ended June 30, 2000, was $5,003,000, compared to $4,649,000 earned in the same period of 1999. Diluted earnings per share were $.45 a 15.4% increase over $.39 reported for the second quarter 1999. Diluted net income per share for the six month ended June 30, 2000, was $.89 compared to $.77 for the first six months of 1999. The 15.6% increase in diluted earnings per share was a result of a $531,000 increase in net income from $9,292,000 in the prior year to $9,823,000 at June 30, 2000. The increase in earnings was primarily due to growth in earning assets and non-interest income. Net interest income increased $761,000 or 2.9 percent over the first six months of 1999 due to growth in average assets of 8.4 percent. Non-interest income increased $612,000 or 8.5 percent over the first six months of 1999 due primarily to increased revenues from fiduciary activities and commission income. Annualized returns on average assets and average shareholder's equity for the quarter ended June 30, 2000 were 1.34 percent and 14.72 percent, respectively, compared with 1.34 percent and 11.94 percent for the same period of 1999. Annualized returns on average assets and average shareholder's equity for the first six months ended June 30, 2000, were 1.34 percent and 14.80 percent, respectively, compared with 1.37 percent and 11.97 percent in 1999.

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 9.2 percent at year-end 1999 and 9.4 percent at June 30, 2000. At June 30, 2000, the Corporation had a Tier I risk-based capital ratio of 12.0 percent, total risk-based capital ratio of 13.1 percent, and a leverage ratio of 9.4 percent. Regulatory capital guidelines require a Tier I risk-based capital ratio of 4.0 percent and a total risk-based capital ratio of 8.0 percent. Banks with Tier I risk-based capital ratios of 6.0 percent and total risk-based capital ratios of 10.0 percent are considered "well capitalized." Asset Quality/Provision for Loan Losses The Corporation's asset quality and loan loss experience have consistently been superior to that of its peer group, as summarized on the following page. Asset quality has been a major factor in the Corporation's ability to generate consistent profit improvement. The allowance for loan losses is maintained through the provision for loan losses, which is a charge against earnings. The amount provided for loan losses and the determination of the adequacy of the allowance are based on a continuous review of the loan portfolio, including an internally administered loan "watch" list and an independent loan review provided by an outside accounting firm. The evaluation takes into consideration identified credit problems, as well as the possibility of losses inherent in the loan portfolio that cannot be specifically identified. The following table summarizes the risk elements for the Corporation. - --------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) June 30, December 31, December 31, 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Non-accrual loans............................................ $1,643 $1,280 $1,073 Loans contractually past due 90 days Or more other than nonaccruing............................. 2,415 2,327 2,334 Restructured loans........................................... 3,022 908 1,110 ------ ------ ------ Total.......................................... $7,080 $4,515 $4,517 ====== ====== ====== - --------------------------------------------------------------------------------------------------------------------- At June 30, 2000, non-performing loans totaled $7,080,000, an increase of $2,565,000 from December 31, 1999. Impaired loans at December 31, 1999 included in the table above totaled $1,380,000. At December 31, 1999, impaired loans totaled $7,140,000, a decrease of $1,947,000 from December 31, 1998. On December 31, 1999 an allowance for losses was not deemed necessary for impaired loans totaling $4,398,000, but an allowance of $1,061,000 was recorded for the remaining balance of impaired loans of $2,742,000. The average balance of impaired loans for 1999 was $8,770,000. At June 30, 2000, the allowance for loan losses increased by $2,043,000 to $12,171,000, up significantly from year end 1999. The Corporation added $1,413,000, to the allowance through the acquisition of Decatur Financial Inc. on May 31, 2000. As a percent of loans, the allowance was 1.05 percent, up from 1.01 percent at year end 1999.

FIRST MERCHANTS CORPORATION FORM 10-Q The second quarter 2000 provision of $665,000 was up $143,000 from $522,000 for the same quarter in 1999. Net charge offs amounted to $375,000 during the quarter. This table below presents loan loss experience for the periods indicated and compares the Corporation's loss experience to that of its peer group, consisting of bank holding companies with assets between $1 billion and $3 billion. Six Months Ended Year Ended June 30, December 31, ----------------- ---------------------------------------- 2000 1999 1998 1997 ------- -------- ------ ------ (Dollars in Thousands) Allowance for loan losses: Balance at beginning of period............................ $10,128 $ 9,209 $8,429 $8,010 ------- -------- ------ ------ Chargeoffs................................................ 804 1,769 2,231 1,949 Recoveries................................................ 290 447 639 633 ------- -------- ------ ------ Net chargeoffs............................................ 514 1,322 1,592 1,316 Provision for loan losses................................. 1,144 2,241 2,372 1,735 Allowance acquired in acquisition......................... 1,413 ------- -------- ------ ------ Balance at end of period.................................. $12,171 $10,128 $9,209 $8,429 ======= ======= ====== ====== Ratio of net chargeoffs during the period to average loans outstanding during the period............................. .10%(1) .14% .18% .16% Peer Group N/A N/A .26% .29% (1) First six months annualized 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 June 30, 2000, remained adequate to meet the Corporation's primary goal of achieving optimum interest margins while avoiding undue interest rate risk. The Corporation had a cumulative negative gap of $101,714 in the six month horizon at June 30, 2000, or just over 82 percent of total assets. Net interest income at a financial institution with a negative gap tends to decrease when rates rise and generally increase as interest rates decline.

FIRST MERCHANTS CORPORATION FORM 10-Q The Corporation places its greatest credence in net interest income simulation modeling. The GAP/Interest Rate Sensitivity Report is known to have two major shortfalls. The GAP/Interest Rate Sensitivity Report fails to precisely gauge how often an interest rate sensitive product reprices nor is it able to measure the magnitude of potential future rate movements. The Corporation's asset liability process monitors simulated net interest income under three separate interest rate scenarios; rising (rate shock), falling (rate shock) and base case (flat rates). Net Interest Income is simulated over a 12-month horizon. By policy, the variance between rising rates and base case nor falling rates and base case can be more than a negative 5 percent. Assumed interest rate changes are simulated to move immediate and parallel. The rate movement to noteworthy interest rate indexes appear below: Rising Falling - -------------------------------------------------------------------------------- Prime 200 Basis Points (200) Basis Points Federal Funds 200 (200) 90 Day T-Bill 200 (200) One Year T-Bill 200 (200) Three Year T-Note 200 (200) Five Year T-Note 200 (200) Ten Year T-Note 200 (200) Interest Checking 67 ( 67) MMIA Savings 200 (200) Money Market Index 200 (200) Regular Savings 67 ( 67) Results for the flat, rising (rate shock), and falling (rate shock) interest scenarios are listed below. The net interest income shown represents cumulative net interest income over an 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) $59,215 $56,946 $60,339 Change vs. Base Case ($ 2,270) $ 1,123 Percent Change (3.83%) 1.90% Policy Limitation (5.00%) (5.00%)

FIRST MERCHANTS CORPORATION FORM 10-Q Earning Assets The following table presents the earning asset mix as of June 30, 2000, December 31, 1999 and December 31, 1998. Loans grew by $157.1 million from December 31, 1999, to June 30, 2000, while investment securities declined by $17.7 million during the same period. Residential real estate loans grew by $65.9 million, while commercial and industrial loans and individual loans for household expenditures grew by $34.3 million and $30.1 million, respectively. - -------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS (Dollars in Millions) June 30, December 31, December 31, 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- Federal funds sold and interest-bearing deposits........... $ 8.3 $ 27.1 $ 46.3 Investment securities available for sale................... 311.2 329.7 329.5 Investment securities held to maturity..................... 15.1 14.3 21.7 Mortgage loans held for sale............................... 0.8 Loans...................................................... 1,156.0 998.9 890.4 Federal Reserve and Federal Home Loan Bank stock........... 6.5 5.8 4.5 --------- --------- --------- Total................................. $ 1,497.1 $ 1,375.8 $ 1,293.2 ========= ========= ========= Deposits, Securities Sold Under Repurchase Agreements, Federal Funds Sold and Other Short-tern Borrowing The following table presents the level of deposits and borrowed funds (Federal funds purchased, repurchase agreements with customers, U.S. Treasury demand notes and Federal Home Loan Bank advances) for the years ended 1999 and 1998 and at June 30, 2000. (Dollars in Millions) June 30, December 31, December 31, 2000 1999 1998 ------------------------------------------------------- Deposits......................................................... $1,245.0 $1,147.2 $1,086.0 Securities sold under repurchase agreements...................... 69.0 78.0 48.8 Other short-term borrowings...................................... 44.3 38.4 17.8 Federal Home Loan Bank advances.................................. 94.3 73.5 47.1 The Corporation has continued to leverage its large capital position with Federal Home Loan Bank advances, as well as, repurchase agreements which are pledged against acquired investment securities as collateral for the borrowings. The interest rate risk is included as part of the Corporation's interest simulation discussed in Management's Discussion and Analysis under the heading Liquidity, Interest Sensitivity, and Disclosures about Market Risk. The effect on the Corporation's capital ratios is minimal as the Corporation remains "well" capitalized.

FIRST MERCHANTS CORPORATION FORM 10-Q Net Interest Income Net Interest Income is the primary source of the Corporation's earnings. It is a function of net interest margin and the level of average earning assets. The table below presents the Corporation's asset yields, interest expense, and net interest income as a percent of average earning assets for the three and six months ended June 30, 1999 and 2000. Annualized net interest income (FTE) for the three months ended June 30, 2000, increased by $815,000, or 1.4 percent over the same period in 1999, due to an increase in average earning assets of over $92 million. For the same period interest income and interest expense, as a percent of average earning assets, increased 35 basis points and 58 basis points respectively, due to higher interest rates and increased non-deposit funding. Interest income and interest expense, as a percent of average earning assets, increased 27 basis points and 50 basis points, respectively from June 30, 1999, to June 30, 2000. Annualized net interest imcome (FTE) increased $1,115,000 or 2.0 percent during the same period. (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------------ Interest Income Net Interest (FTE) as a Interest Expense Income Net Interest Income Percent as a Percent (FTE) as a Percent Average On a of Average of Average of Average Earning Fully Taxable Earning Assets Earning Assets Earning Assets Assets Equivalent Basis - ------------------------------------------------------------------------------------------------------------------------------ For the three months Ended June 30, 2000 8.15% 4.06% 4.09% $1,408,371 $57,619 1999 7.80% 3.48% 4.32% $1,315,932 $56,804 For the six months Ended June 30, 2000 8.05% 3.97% 4.08% $1,389,941 $56,661 1999 7.78% 3.47% 4.31% $1,289,445 $55,546 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, excluding securities gains and losses, in the second quarter of 2000 exceeded the same quarter in the prior year by $464,000, or 12.8 percent. Three major areas account for most of the increase: 1.Revenues from fiduciary activity grew $145,000, or 12.3%, due to strong new business activity and markets. 2.Other customer fees increased $146,000, or 20.5%, due to increased fees from electronic card usage and price adjustments. 3.Commission income increased $107,000 or 29.2%, due to increased sales efforts. Other income, excluding securities gains and losses, for the first six months of 2000 exceeded the prior year by $954,000, or 13.6 percent. Three major areas account for most of the increase: 1. Commission income increased $235,000, or 33.6%, due to increased sales efforts. 2. Other customer fees increased $234,000, or 15.9%, due to increased fees from electronic card usage and price adjustments. 3. Revenues from fiduciary activity grew $218,000, or 9.5%, due to strong new business activity and markets.

FIRST MERCHANTS CORPORATION FORM 10-Q Other Expense Total other expenses represent non-interest operating expenses of the Corporation. Second quarter other expense in 2000 exceeded the same quarter of the prior year by $393,000, or 4.1 percent. Three major areas account for most of the increase: 1. Salaries and benefit expense grew $533,000 or 10.9 percent, due to normal salary increases and staff additions. 2. Equipment expense increased by $154,000, or 17.7 percent, reflecting the Corporation's efforts to improve efficiency and provide electronic service delivery to its customers. 3. Merger related costs declined by $648,000 resulting from the Corporation's 1999 acquisitions of Anderson Community Bank and Jay Financial, Inc. Total other expenses represent non-interest operating expenses of the Corporation. Other expense for the first six month of 2000 exceeded the prior year by $1,110, or 6.1 percent. Three major areas account for most of the increase: 1. Salaries and benefit expense grew $851,000, or 8.7 percent, due to normal salary increases and staff additions. 2. Equipment expense increased by $291,000, or 17.2 percent, reflecting the Corporation's efforts to improve efficiency and provide electronic service delivery to its customers. 3. Merger related costs declined by $648,000 resulting from the corporation's 1999 acquisition of Anderson Community Bank and Jay Financial, Inc. Income Taxes Income tax expense, for the three months ended June 30, 2000, decreased by $228,000 over the same period in 1999, due to reduced state income tax liability. Income tax expense, for the six months ended June 30, 2000 also decreased by $385,000 over the same period in 1999. Other The Securities and Exchange Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including the Corporation, and that address is (http://www.sec.gov). Item 3. Quantitative and Qualitative Disclosures About Market Risk The information required under this item is included as part of Management's Discussion and Analysis under the heading Liquidity, Interest Sensitivity, and Disclosures About Market Risk.

FIRST MERCHANTS CORPORATION FORM 10-Q PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders At the April 12, 2000 Annual Meeting of Shareholders, the following matters were submitted to a vote of the shareholders. Election of Directors - The following directors were elected for a term of three years. Vote Count - -------------------------------------------------------------------------------- For Against ----------- ----------- James F. Ault 9,520,632.92 9,942.34 Frank A. Bracken 9,503,788.03 26,787.23 Barry J. Hudson 9,518,726.91 11,848.35 Selection of Independent Public Accountants - Olive, LLP, Indianapolis, Indiana: Votes For - 9,446,961.51, Votes Against - 51,027.71, Votes Abstained - 32,586.04. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Form 10-Q Page Exhibit No.: Description of Exhibit: Number ------------ ----------------------- ------ 27 Financial Data Schedule, Period Ending June 30 , 2000 23

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 08/14/00 by /s/Michael L. Cox ------------------------ ------------------------------------- Michael L. Cox President and Chief Executive Officer Date 08/14/00 by /s/James L. Thrash ------------------------ ------------------------------------- James L. Thrash Chief Financial & Principal Accounting Officer

9 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 46,204 1,725 6,525 0 311,202 15,088 15,076 1,156,029 12,171 1,610,413 1,244,976 0 218,224 0 0 0 1,458 145,755 1,610,413 44,496 9,647 528 54,671 22,685 27,608 27,063 1,144 (185) 19,288 14,435 9,823 0 0 9,823 0.45 0.45 4.08 1,643 2,415 0 0 10,128 804 209 12,171 12,171 0 0