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 September 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 October 31, 2000 there were outstanding 11,687,627 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) September 30, December 2000 31, 1999 ---------- ---------- ASSETS: Cash and due from banks.................................................... $ 43,473 $ 58,893 Federal funds sold......................................................... 750 25,400 ----------- ----------- Cash and cash equivalents................................................ 44,223 84,293 Interest-bearing deposits.................................................. 1,251 1,730 Investment securities available for sale................................... 305,394 329,668 Investment securities held to maturity..................................... 13,094 14,303 Mortgage loans held for sale............................................... 61 Loans...................................................................... 1,165,430 998,895 Less: Allowance for loan losses......................................... (12,232) (10,128) ----------- ----------- Net loans.............................................................. 1,153,198 988,767 Premises and equipment..................................................... 23,810 20,073 Federal Reserve and Federal Home Loan Bank Stock........................... 7,189 5,858 Interest receivable........................................................ 13,353 11,279 Core deposit intangibles and goodwill...................................... 21,218 2,885 Others assets.............................................................. 18,208 15,131 ----------- ----------- Total assets........................................................... $1,600,938 $1,474,048 =========== =========== LIABILITIES: Deposits: Noninterest-bearing...................................................... $ 143,542 $ 140,547 Interest-bearing......................................................... 1,097,579 1,006,656 ----------- ----------- Total deposits......................................................... 1,241,121 1,147,203 Borrowings................................................................. 195,652 189,862 Interest payable........................................................... 6,062 4,599 Other liabilities.......................................................... 5,233 6,088 ----------- ----------- Total liabilities...................................................... 1,448,068 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 - 11,684,934 and 10,936,617 shares................ 1,461 1,367 Additional paid-in capital................................................. 43,332 25,481 Retained earnings.. .................................................... 111,089 103,640 Accumulated other comprehensive income (loss).............................. (3,012) (4,192) ----------- ----------- Total stockholders' equity............................................. 152,870 126,296 ----------- ----------- Total liabilities and stockholders' equity............................. $1,600,938 $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 Nine Months Ended September 30 September 30 ------------------- ------------------- 2000 1999 2000 1999 ------- ------- ------- ------- Interest Income: Loans receivable Taxable..................................................................... $25,522 $19,792 $69,870 $57,576 Tax exempt.................................................................. 76 56 224 168 Investment securities: Taxable..................................................................... 3,623 4,075 11,001 11,564 Tax exempt.................................................................. 1,175 1,302 3,444 3,935 Federal funds sold............................................................ 28 33 276 459 Deposits with financial institutions.......................................... 28 7 61 41 Federal Reserve and Federal Home Loan Bank stock.............................. 164 115 411 323 ------- ------- ------- ------- Total interest income..................................................... 30,616 25,380 85,287 74,066 ------- ------- ------- ------- Interest expense: Deposits...................................................................... 13,028 9,480 35,713 28,160 Borrowings.................................................................... 3,174 2,324 8,097 6,028 ------- ------- ------- ------- Total interest expense...................................................... 16,202 11,804 43,810 34,188 ------- ------- ------- ------- Net Interest Income............................................................. 14,414 13,576 41,477 39,878 Provision for loan losses....................................................... 603 590 1,747 1,617 ------- ------- ------- ------- Net Interest Income After Provision for Loan Losses............................. 13,811 12,986 39,730 38,261 ------- ------- ------- ------- Other Income: Net realized gains (losses) on sales of available-for-sale securities......... 5 12 (180) 169 Other income.................................................................. 4,374 3,722 12,363 10,757 ------- ------- ------- ------- Total other income.............................................................. 4,379 3,734 12,183 10,926 Total other expenses............................................................ 10,193 9,235 29,481 27,413 ------- ------- ------- ------- Income before income tax........................................................ 7,997 7,485 22,432 21,774 Income tax expense.............................................................. 2,722 2,622 7,334 7,619 ------- ------- ------- ------- Net Income...................................................................... $ 5,275 $ 4,863 $15,098 $14,155 ======= ======= ======= ======= Per share: Net Income: Basic....................................................................... $ .45 $ .40 $ 1.34 $ 1.18 Diluted..................................................................... .45 .40 1.34 1.17 Dividends....................................................................... .23 .22 .67 .62 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 2000 1999 2000 1999 --------- --------- --------- --------- Net Income...................................................................... $ 5,275 $ 4,863 $15,098 $ 14,155 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 $(1,973), $1,032, $(715), and $3,241.... 2,960 (1,548) 1,072 (4,862) Less: Reclassification adjustment for gains (losses) included in net income, net of income tax (expense) benefit of $2, $5, $(72)and $68.............................................................. 3 7 (108) 101 --------- --------- --------- --------- 2,957 (1,555) 1,180 (4,963) --------- --------- --------- --------- Comprehensive income............................................................ $ 8,232 $ 3,308 $16,278 $ 9,192 ========= ========= ========= ========= 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................................................................... 15,098 14,155 Cash dividends............................................................... (7,644) (7,107) Other comprehensive income (loss), net of tax................................ 1,180 (4,963) Issuance of stock related to acquisition..................................... 21,173 Stock issued under employee benefits plans................................. 648 428 Stock issued under dividend reinvestment and stock purchase plan............. 430 511 Stock options exercised...................................................... 475 177 Stock Redeemed............................................................... (4,786) (339) --------- --------- Balances, September 30....................................................... $152,870 $156,753 ========= ========= 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, ----------------------------- 2000 1999 --------- --------- Cash Flows From Operating Activities: Net income...................................................................... $ 15,098 $ 14,155 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses..................................................... 1,747 1,617 Depreciation and amortization................................................. 2,916 2,193 Securities amortization, net.................................................. 36 266 Securities losses (gains), net................................................ 180 (169) Gains on sale of premises and equipment....................................... (105) Mortgage loans originated for sale............................................ 1,224 (5,801) Proceeds from sales of mortgage loans......................................... (1,163) 6,394 Change in interest receivable................................................. (1,043) (903) Change in interest payable.................................................... 1,206 (29) Other adjustments............................................................. 200 705 --------- --------- Net cash provided by operating activities................................... 20,296 18,428 --------- --------- Cash Flows From Investing Activities: Net change in interest-bearing deposits......................................... 962 (623) Purchases of Securities available for sale................................................. (8,575) (146,666) Proceeds from maturities of Securities available for sale................................................. 36,292 97,389 Securities held to maturity................................................... 4,292 5,807 Proceeds from sales of Securities available for sale................................................. 12,440 17,339 Net change in loans............................................................. (76,849) (86,620) Purchase of FHLB Stock.......................................................... (716) Purchases of premises and equipment............................................. (3,497) (2,965) Proceeds from sale of fixed assets.............................................. 448 (27) Cash received in acquisition.................................................... 280 --------- --------- Net cash provided (used) by investing activities.............................. (34,923) (116,366) --------- --------- (continued)

FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited) Nine Months Ended September 30 ----------------------------- 2000 1999 --------- --------- Cash Flows From Financing Activities: Net change in Demand and savings deposits................................................... $(12,739) $ (4,495) Certificates of deposit and other time deposits............................... (399) (23,476) Repurchase agreements and other borrowings.................................... 29,295 74,356 Federal Home Loan Bank advances............................................... 188,890 219,500 Repayment of Federal Home Loan Bank advances.................................. (161,023) (203,020) Cash dividends.................................................................. (7,644) (7,107) Stock issued under employee benefit plans..................................... 648 428 Stock issued under dividend reinvestment and stock purchase plan............. 430 511 Stock options exercised......................................................... 475 177 Stock repurchased............................................................... (4,786) (339) --------- --------- Net cash provided (used) by financing activities.............................. (25,443) 56,535 --------- --------- Net Change in Cash and Cash Equivalents........................................... (40,070) (41,403) Cash and Cash Equivalents, January 1.............................................. 84,293 80,769 --------- --------- Cash and Cash Equivalents, September 30........................................... $ 44,223 $ 39,366 ========= ========= 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. Nine Months Ended September 30 ---------------------- 2000 1999 --------- --------- Net Interest Income:.......................... $ 43,344 $ 42,840 Net Income:................................... $ 14,721 $ 14,462 Net Income per share - combined: Basic....................................... $ 1.19 $ 1.12 Diluted..................................... 1.18 1.11

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, 2000 U.S. Treasury...................................... $ 2,996 $ 12 $ 2,984 Federal agencies................................... 59,132 $ 86 710 58,508 State and municipal................................ 85,725 609 519 85,815 Mortgage-backed securities......................... 133,114 52 3,089 130,077 Other asset-backed securities...................... 20,531 646 19,885 Corporate obligations.............................. 7,244 104 7,140 Marketable equity securities....................... 1,210 225 985 --------- --------- --------- --------- Total available for sale....................... 309,952 747 5,305 305,394 --------- --------- --------- --------- Held to maturity at September 30, 2000 U.S. Treasury...................................... 250 1 249 State and municipal................................ 12,466 103 38 12,531 Mortgage-backed securities......................... 154 1 15 140 Other asset-backed securities...................... 224 224 --------- --------- --------- --------- Total held to maturity......................... 13,094 104 54 13,144 --------- --------- --------- --------- Total investment securities.................... $ 323,046 $ 851 $ 5,359 $ 318,538 ========= ========= ========= =========

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 September 30, December 31, 2000 1999 --------- --------- Loans: Commercial and industrial loans............................................... $251,182 $224,712 Agricultural production financing and other loans to farmers.................. 28,940 21,547 Real estate loans: Construction................................................................ 41,413 31,996 Commercial and farmland..................................................... 166,878 150,544 Residential................................................................. 453,969 380,596 Individuals' loans for household and other personal expenditures.............. 214,603 181,906 Tax-exempt loans.............................................................. 5,313 4,070 Other loans................................................................... 3,139 3,552 Unearned interest on loans.................................................... (7) (28) ----------- --------- Total..................................................................... $1,165,430 $998,895 =========== ========= Nine Months Ended September 30, ----------------------------- 2000 1999 -------- --------- Allowance for loan losses: Balances, January 1........................................................... $10,128 $ 9,209 Allowance acquired in acquisition............................................. 1,413 Provision for losses.......................................................... 1,747 1,617 Recoveries on loans........................................................... 461 342 Loans charged off............................................................. (1,517) (1,015) -------- --------- Balances, September 30........................................................ $12,232 $ 10,153 ======== =========

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 September 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.............. $5,275 11,688,699 $ .45 $4,863 12,043,381 $ .40 ====== ====== Effect of dilutive stock options..... 72,321 102,699 ------ ---------- ------ ---------- Diluted net income per share: Net income available to common stockholders and assumed conversions.......... $5,275 11,761,020 $ .45 $4,863 12,146,080 $ .40 ====== ========== ====== ====== ========== ======= Nine Months Ended September 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.............. $15,098 11,228,840 $ 1.34 $14,155 12,008,890 $ 1.18 ====== ====== Effect of dilutive stock options..... 78,225 106,239 ------- ---------- ------- ---------- Diluted net income per share: Net income available to common stockholders and assumed conversions.......... $15,098 11,307,065 $ 1.34 $14,155 12,115,129 $ 1.17 ======= ========== ====== ======= ========== ======

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 September 30, 2000, was $5,275,000, compared to $4,863,000 earned in the same period of 1999. Diluted earnings per share were $.45 a 12.5% increase over $.40 reported for the third quarter 1999. Diluted net income per share for the nine months ended September 30,2000, were $1.34 compared to $1.17 for the first nine months of 1999. The 14.5% increase in diluted earnings per share was a result of a $943,000 increase in net income from $14,155,000 in the prior year to $15,098,000 at September 30, 2000. The increase in earnings was primarily due to growth in earning assets and non-interest income. Net interest income increased $1,599,000 or 4.0 percent over the first nine months of 1999 due to growth in average assets of 10.3 percent. Non-interest income increased $1,257,000 or 11.5 percent over the first nine 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 September 30, 2000 were 1.32 percent and 14.06 percent, respectively, compared with 1.38 percent and 12.46 percent for the same period of 1999. Annualized returns on average assets and average shareholder's equity for the first nine months ended September 30, 2000, were 1.32 percent and 14.61 percent, respectively, compared with 1.37 percent and 12.13 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) September 30, December 31, December 31, 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Non-accrual loans............................................ $2,297 $1,280 $1,073 Loans contractually past due 90 days Or more other than nonaccruing............................. 3,356 2,327 2,334 Restructured loans........................................... 2,936 908 1,110 ------ ------ ------ Total.......................................... $8,589 $4,515 $4,517 ====== ====== ====== - --------------------------------------------------------------------------------------------------------------------- At September 30, 2000, non-performing loans totaled $8,589,000, an increase of $4,074,000 from December 31, 1999. The increase in non-performing assets is primarily attributable to one $2 million restructred loan which the Corporation believes is well collateralized and which the Corporation has not allocated a specific reserve. 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 September 30, 2000, the allowance for loan losses increased by $2,079,000 to $12,232,000, 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 third quarter 2000 provision of $603,000 increased $13,000 from $590,000 for the same quarter in 1999. Net charge offs amounted to $542,000 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. Nine Months Ended Year Ended September 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................................................ 1,517 1,769 2,231 1,949 Recoveries................................................ 461 447 639 633 ------- -------- ------ ------ Net chargeoffs............................................ 1,056 1,322 1,592 1,316 Provision for loan losses................................. 1,747 2,241 2,372 1,735 Allowance acquired in acquisition......................... 1,413 ------- -------- ------ ------ Balance at end of period.................................. $12,232 $10,128 $9,209 $8,429 ======= ======= ====== ====== Ratio of net chargeoffs during the period to average loans outstanding during the period............................. .13%(1) .14% .18% .16% Peer Group N/A .20% .26% .29% (1) First nine 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 September 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 $90,751,000 in the six month horizon at September 30, 2000, or just over 5.67 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) $55,435 $52,941 $56,563 Change vs. Base Case $(2,494) $ 1,128 Percent Change (4.50%) 2.30% 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, 2000, December 31, 1999 and December 31, 1998. Loans grew by $166.5 million from December 31, 1999, to September 30, 2000, while investment securities declined by $25.6 million during the same period. Residential real estate loans grew by $73.4 million, while commercial and industrial loans and individual loans for household expenditures grew by $26.5 million and $34.7 million, respectively. - -------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS (Dollars in Millions) September 30, December 31, December 31, 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- Federal funds sold and interest-bearing deposits........... $ 2.0 $ 27.1 $ 46.3 Investment securities available for sale................... 305.3 329.7 329.5 Investment securities held to maturity..................... 13.1 14.3 21.7 Mortgage loans held for sale............................... 0.8 Loans...................................................... 1,165.4 998.9 890.4 Federal Reserve and Federal Home Loan Bank stock........... 7.2 5.8 4.5 --------- --------- --------- Total................................. $ 1,493.0 $ 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 September 30, 2000. (Dollars in Millions) September 30, December 31, December 31, 2000 1999 1998 ------------------------------------------------------- Deposits......................................................... $1,241.1 $1,147.2 $1,086.0 Securities sold under repurchase agreements...................... 70.4 78.0 48.8 Other short-term borrowings...................................... 22.1 38.4 17.8 Federal Home Loan Bank advances.................................. 103.2 73.5 47.1 The Corporation has continued to leverage its capital 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 nine months ended September 30, 1999 and 2000. Annualized net interest income (FTE) for the three months ended September 30, 2000, increased by $3,230,000, or 5.6 percent over the same period in 1999, due to an increase in average earning assets of over $198 million. For the same period interest income and interest expense, as a percent of average earning assets, increased 34 basis points and 69 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 29 basis points and 57 basis points, respectively from September 30, 1999, to September 30, 2000. Annualized net interest imcome (FTE) increased $1,820,000 or 3.2 percent during the same period. (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------------ Interest Income Net Interest Annualized (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 September 30, 2000 8.20% 4.24% 3.96% $1,527,890 $60,486 1999 7.86% 3.55% 4.31% $1,329,464 $57,256 For the nine months Ended September 30, 2000 8.10% 4.07% 4.03% $1,436,429 $57,936 1999 7.81% 3.50% 4.31% $1,302,931 $56,116 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 third quarter of 2000 exceeded the same quarter in the prior year by $652,000, or 17.5 percent. Three major areas account for most of the increase: 1.Commission income increased $188,000 or 44.8%, due to increased sales efforts. 2.Other customer fees increased $168,000, or 21.2%, due to increased fees from electronic card usage and price adjustments. 3.Revenues from fiduciary activity grew $102,000, or 8.9%, due to strong new business activity and markets. Other income, excluding securities gains and losses, for the first nine months of 2000 exceeded the prior year by $1,606,000, or 14.9 percent. Three major areas account for most of the increase: 1. Commission income increased $423,000, or 37.8%, due to increased sales efforts. 2. Other customer fees increased $402,000, or 17.8%, due to increased fees from electronic card usage and price adjustments. 3. Revenues from fiduciary activity grew $320,000, or 9.3%, 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. Third quarter other expense in 2000 exceeded the same quarter of the prior year by $958,000, or 10.4 percent. Three major areas account for most of the increase: 1. Salaries and benefit expense grew $458,000 or 9.2 percent, due to normal salary increases and staff additions. 2. Goodwill and core deposit intangible amortization increased $284,000 during the quarter. The 449 percent increase is due to using the purchase method of accounting for the May 31, 2000, acquisition of Decatur Financial, Inc. 3. Net occupancy expense increased by $102,000, or 19.6 percent, reflecting the Corporation's efforts to improve efficiency and provide electronic service delivery to its customers. Total other expenses represent non-interest operating expenses of the Corporation. Other expense for the first nine month of 2000 exceeded the prior year by $2,068,000 or 7.5 percent. Three major areas account for most of the increase: 1. Salaries and benefit expense grew $1,309,000, or 8.8 percent, due to normal salary increases and staff additions. 2. Merger related costs declined by $734,000 resulting from the corporation's 1999 acquisition of Anderson Community Bank and Jay Financial, Inc. 3. Goodwill and core deposit intangible amortization increased $373,000 year to date. The increase is due to using the purchase method of accounting for the May 31, 2000, acquisition of Decatur Financial, Inc. 4. Equipment expense increased by $349,000, or 12.8 percent, reflecting the Corporation's efforts to improve efficiency and provide electronic service delivery to its customers. Income Taxes Income tax expense, for the three months ended September 30, 2000, increased by $100,000 over the same period in 1999. Income tax expense, for the nine months ended September 30, 2000 decreased by $285,000 over the same period in 1999, due to reduced state income tax liability. 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 (a) Exhibits: Form 10-Q Page Exhibit No.: Description of Exhibit: Number ------------ ----------------------- ------ 27 Financial Data Schedule, Period Ending September 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 10/10/00 by /s/Michael L. Cox ------------------------ ------------------------------------- Michael L. Cox President and Chief Executive Officer Date 10/10/00 by /s/James L. Thrash ------------------------ ------------------------------------- James L. Thrash Chief Financial & Principal Accounting Officer

9 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 43,473 1,251 750 0 305,394 13,094 13,144 1,165,430 12,232 1,600,938 1,241,121 0 206,947 0 0 0 1,461 151,409 1,600,938 70,094 14,445 748 85,287 35,713 43,810 41,477 1,747 (180) 29,481 22,432 15,098 0 0 15,098 1.34 1.34 4.03 2,297 3,356 0 0 10,128 1,517 461 12,232 12,232 0 0