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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
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 or 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 [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). Yes [x] No [ ]
As of October 31, 2003, there were 18,489,892 outstanding common shares, without
par value, of the registrant.
FIRST MERCHANTS CORPORATION
FORM 10-Q
INDEX
Page No.
PART I. Financial information:
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets........................3
Consolidated Condensed Statements of Income..................4
Consolidated Condensed Statements of
Comprehensive Income.........................................5
Consolidated Condensed Statements of
Stockholders' Equity.........................................6
Consolidated Condensed Statements of Cash Flows..............7
Notes to Consolidated Condensed Financial Statements.........8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................27
Item 4. Controls and Procedures.....................................27
PART II. Other Information:
Item 1. Legal Proceedings...........................................28
Item 2. Changes in Securities and Use of Proceeds...................28
Item 3. Defaults Upon Senior Securities.............................28
Item 4. Submission of Matters to a Vote of Security Holders.........28
Item 5. Other Information...........................................28
Item 6. Exhibits and Reports of Form 8-K............................29
Signatures...................................................................31
Exhibit Index................................................................32
Page 2
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
September 30, December 31,
2003 2002
------------ ------------
(Unaudited)
ASSETS:
Cash and due from banks ....................................... $ 87,619 $ 87,638
Federal funds sold ............................................ 31,400
----------- -----------
Cash and cash equivalents ................................... 87,619 119,038
Interest-bearing deposits...................................... 3,789 3,568
Investment securities available for sale ...................... 308,832 332,925
Investment securities held to maturity ........................ 8,020 9,137
Mortgage loans held for sale................................... 12,042 21,545
Loans, net of allowance for loan losses of $29,842 and $22,417. 2,321,563 1,981,960
Premises and equipment ........................................ 39,475 38,645
Federal Reserve and Federal Home Loan Bank Stock............... 14,057 11,409
Interest receivable ........................................... 17,139 17,346
Goodwill ...................................................... 118,679 87,640
Core deposit intangibles ...................................... 24,969 19,577
Cash surrender value of life insurance......................... 37,536 14,309
Other assets .................................................. 18,000 21,588
----------- -----------
Total assets .............................................. $ 3,011,720 $ 2,678,687
=========== ===========
LIABILITIES:
Deposits:
Noninterest-bearing ......................................... $ 316,058 $ 272,128
Interest-bearing ............................................ 1,994,146 1,764,560
----------- -----------
Total deposits ............................................ 2,310,204 2,036,688
Borrowings .................................................... 374,051 356,927
Interest payable .............................................. 5,200 6,019
Other liabilities.............................................. 21,064 17,924
----------- -----------
Total liabilities ......................................... 2,710,519 2,417,558
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 - 18,487,974 and 17,138,885 shares.... 2,311 2,142
Additional paid-in capital .................................... 149,810 116,401
Retained earnings ............................................. 147,559 138,110
Accumulated other comprehensive income ........................ 1,521 4,476
----------- -----------
Total stockholders' equity ................................ 301,201 261,129
----------- -----------
Total liabilities and stockholders' equity . $ 3,011,720 $ 2,678,687
=========== ===========
See notes to consolidated condensed financial statements.
Page 3
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
Interest Income:
Loans receivable
Taxable ................................................... $35,607 $35,362 $106,539 $94,504
Tax exempt ................................................ 185 169 512 403
Investment securities
Taxable ................................................... 1,342 2,442 4,621 6,986
Tax exempt ................................................ 1,562 1,793 4,819 4,450
Federal funds sold .......................................... 49 123 339 388
Deposits with financial institutions ........................ 13 53 54 159
Federal Reserve and Federal Home Loan Bank stock ............ 201 206 610 527
------- ------- -------- -------
Total interest income ................................... 38,959 40,148 117,494 107,417
------- ------- -------- -------
Interest expense:
Deposits .................................................... 8,623 10,696 26,555 29,766
Borrowings .................................................. 4,462 4,124 13,100 9,863
------- ------- ------- -------
Total interest expense .................................... 13,085 14,820 39,655 39,629
------- ------- ------- -------
Net Interest Income ........................................... 25,874 25,328 77,839 67,788
Provision for loan losses ..................................... 1,706 1,821 8,430 4,297
------- ------- ------- -------
Net Interest Income After Provision for Loan Losses ........... 24,168 23,507 69,409 63,491
------- ------- ------- -------
Other Income:
Net realized gains on sales of available-for-sale securities. 512 162 950 570
Other income ................................................ 8,364 7,484 27,365 19,291
------- ------- ------- -------
Total other income ............................................ 8,876 7,646 28,315 19,861
Total other expenses .......................................... 22,960 19,187 67,336 51,129
------- ------- ------- -------
Income before income tax ...................................... 10,084 11,966 30,388 32,223
Income tax expense ............................................ 2,735 4,139 8,636 10,983
------- ------- ------- -------
Net Income .................................................... $ 7,349 $ 7,827 $21,752 $21,240
======= ======= ======= =======
Per share:(1)
Basic ..................................................... $ .40 $ .47 $ 1.20 $ 1.32
Diluted ................................................... .39 .46 1.19 1.31
Dividends ................................................. .23 .22 .67 .66
(1) Prior period per share amounts have been restated for the 5% stock dividend
paid in September, 2003.
See notes to consolidated condensed financial statements.
Page 4
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net Income...................................................................... $ 7,349 $ 7,827 $21,752 $ 21,240
Other comprehensive income, net of tax:
Unrealized gains on securities available for sale:
Unrealized holding gains (losses) arising during the period, net of
income tax (expense) benefit of $2,753, $(1,563), $1,590, and $(2,739).... (4,129) 2,345 (2,385) 4,109
Less: Reclassification adjustment for gains included
in net income, net of income tax expense of $205 $65, $380 and $228....... 307 97 570 342
--------- --------- --------- ---------
(4,436) 2,248 (2,955) 3,767
--------- --------- --------- ---------
Comprehensive income............................................................ $ 2,913 $ 10,075 $18,797 $ 25,007
========= ========= ========= =========
See notes to consolidated condensed financial statements
Page 5
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
2003 2002
--------- ---------
Balances, January 1 ............................................ $ 261,129 $ 179,128
Net income ..................................................... 21,752 21,240
Cash dividends ................................................. (12,302) (10,243)
Other comprehensive income (loss), net of tax................... (2,955) 3,767
Stock issued under employee benefits plans...................... 819 658
Stock issued under dividend reinvestment and stock purchase plan 887 686
Stock options exercised ........................................ 838 458
Stock Redeemed ................................................. (301) (4,333)
Issuance of stock in acquisitions............................... 31,218 68,547
Cash paid in lieu of fractional shares.......................... 116 (35)
--------- ---------
Balances, September 30 ......................................... $ 301,201 $ 259,873
========= =========
See notes to consolidated condensed financial statements
Page 6
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------------------
2003 2002
---------------- ---------------
Cash Flows From Operating Activities:
Net income........................................................................ $ 21,752 $ 21,240
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses....................................................... 8,430 4,297
Depreciation and amortization................................................... 3,495 4,969
Mortgage loans originated for sale.............................................. (190,639) (78,607)
Proceeds from sales of mortgage loans........................................... 200,142 72,384
Change in interest receivable................................................... 1,069 (513)
Change in interest payable...................................................... (1,175) (524)
Other adjustments ............................................................ 564 (6,657)
---------------- ----------------
Net cash provided by operating activities..................................... $ 43,638 $ 16,589
---------------- ----------------
Cash Flows From Investing Activities:
Net change in interest-bearing deposits........................................... (221) 4,075
Purchases of
Securities available for sale................................................... (188,244) (105,594)
Proceeds from maturities of
Securities available for sale................................................... 144,172 91,640
Securities held to maturity..................................................... 2,935
Proceeds from sales of
Securities available for sale................................................... 58,245 16,908
Net change in loans............................................................... (49,331) (87,704)
Net cash received (paid) in acquisitions.......................................... (7,793) (12,532)
Other adjustments................................................................. (3,207) (4,582)
---------------- ----------------
Net cash provided (used) by investing activities................................ $ (46,379) $ (94,854)
---------------- ----------------
Cash Flows From Financing Activities:
Net change in
Demand and savings deposits..................................................... $ 7,023 $ (27,333)
Certificates of deposit and other time deposits................................. (5,044) 18,536
Borrowings...................................................................... (20,713) 78,816
Cash dividends.................................................................... (12,604) (10,243)
Stock issued under employee benefit plans......................................... 887 658
Stock issued under dividend reinvestment and stock purchase plan.................. 838 686
Stock options exercised........................................................... 819 458
Stock repurchased................................................................. (4,333)
Cash paid in lieu of fractional shares............................................ 116 (35)
---------------- ----------------
Net cash provided (used) by financing activities................................. (28,678) 57,210
---------------- ----------------
Net Change in Cash and Cash Equivalents............................................. (31,419) (21,055)
Cash and Cash Equivalents, January 1................................................ 119,038 103,028
---------------- ----------------
Cash and Cash Equivalents, September 30............................................. $ 87,619 $ 81,973
================ ================
See notes to consolidated condensed financial statements.
Page 7
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
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. 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.
The consolidated condensed balance sheet of the Corporation as of December 31,
2002 has been derived from the audited consolidated balance sheet of the
Corporation as of that date. Certain information and note disclosures normally
included in the Corporation's annual financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted. These consolidated condensed financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Corporation's Form 10-K annual
report filed with the Securities and Exchange Commission.
The results of operations for the period are not necessarily indicative of the
results to be expected for the year.
Stock options are granted for a fixed number of shares to employees. The
Corporation's stock option plans are accounted for in accordance with Accounting
Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to
Employees, and related interpretations. APB No. 25 requires compensation expense
for stock options to be recognized only if the market price of the underlying
stock exceeds the exercise price on the date of the grant. Accordingly, the
Corporation recognized compensation expense of $2,000 for the three months ended
September 30, 2003 and $12,000 for the nine months ended September 30, 2003,
related to specific grants in which the market price exceeded the exercise
price. For all remaining grants, no stock-based employee compensation cost is
reflected in net income, as options granted under those plans had an exercise
price equal to the market value of the underlying common stock on the grant
date.
The following table illustrates the effect on net income and earnings per share
if the Corporation has applied the fair value provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------------------------- -------------------------
Net income, as reported ..................................... $ 7,349 $ 7,827 $ 21,752 $ 21,240
Add: Total stock-based employee compensation
cost included in reported net income, net
of income taxes........................................... 2 6 12 18
Less: Total stock-based employee compensation
cost determined under the fair value based
method, net of income taxes .............................. (149) (197) (641) (542)
---------- ---------- ---------- ----------
Pro forma net income ........................................ $ 7,202 $ 7,636 $ 21,123 $ 20,716
========== ========== ========== ==========
Earnings per share:
Basic - as reported ...................................... $ .40 $ .47 $ 1.20 $ 1.32
Basic - pro forma ........................................ .39 .45 1.16 1.29
Diluted - as reported .................................... .39 .46 1.19 1.31
Diluted - pro forma ...................................... .39 .44 1.16 1.27
Options to purchase 167,483 and 237,534 shares for the three months ended
September 30, 2003 and 2002 and options to purchase 289,909 and 134,341 shares
for the nine months ended September 30, 2003 were not included in the earnings
per share calculation because the exercise price exceeded the average market
price.
Page 8
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 1. General (continued)
The Corporation makes its Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, available on its website at www.firstmerchants.com without
charge, as soon as reasonably practicable after such reports are electronically
filed with, or furnished to, the Securities and Exchange Commission.
Additionally, upon request the Corporation will also provide without charge, a
copy of its Form 10-Q to any shareholder by mail. Requests should be sent to Mr.
Brian Edwards, Shareholder Relations Officer, First Merchants Corporation, P.O.
Box 792, Muncie, IN 47308-0792.
NOTE 2. Accounting Matters
Statement of Financial Accounting Standards No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity" was
issued in May of 2003 and is effective for financial instruments entered into or
modified after May 31, 2003. This statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability. The
Corporation currently classifies its obligated mandatory redeemable capital
securities and cumulative trust preferred securities as liabilities. Therefore,
this pronouncement has no impact on the Corporation's financial statements.
Page 9
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 3. Business Combinations
On March 1, 2003, the Corporation acquired 100% of the outstanding stock of CNBC
Bancorp, the holding company of Commerce National Bank ("Commerce National"),
CNBC Retirement Services, Inc. ("CRS, Inc.") and CNBC Statutory Trust I (the
"Trust"). Commerce National is a national chartered bank located in Columbus,
Ohio. CNBC Bancorp was merged into the Corporation, and Commerce National
maintained its national charter as a wholly-owned subsidiary of the Corporation.
CRS, Inc. and the Trust are also maintained as wholly-owned subsidiaries of the
Corporation. The Corporation issued approximately 1,166,897 shares of its common
stock and approximately $24,562,000 in cash to complete the transaction. As a
result of the acquisition, the Corporation will have an opportunity to increase
its customer base and continue to increase its market share. The purchase had a
recorded acquisition price of $55,729,000, including goodwill of $30,291,000
none of which is deductible for tax purposes. Additionally, core deposit
intangibles totaling $8,171,000 were recognized and will be amortized over 10
years using the 150% declining balance method.
The combination was accounted for under the purchase method of accounting. All
assets and liabilities were recorded at their fair values as of March 1, 2003.
The purchase accounting adjustments will be amortized over the life of the
respective asset or liability. Commerce National's results of operations are
included in the Corporation's consolidated income statement beginning March 1,
2003. The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.
Investments....................... $ 12,500
Loans............................. 298,702
Premises and equipment............ 1,293
Core deposit intangibles.......... 8,171
Goodwill.......................... 30,291
Other............................. 20,789
--------
Total assets acquired.......... 371,746
--------
Deposits.......................... 271,537
Other............................. 44,480
--------
Total liabilities acquired..... 316,017
--------
Net assets acquired............ $ 55,729
========
The following proforma disclosures, including the effect of the purchase
accounting adjustments, depict the results of operations as though the CNBC
Bancorp merger had taken place at the beginning of each period.
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------ ------ ------ ------
Net Interest Income........... $25,874 $27,714 $79,453 $75,121
Net Income.................... 7,349 8,145 17,871 22,652
Per Share - combined:
Basic Net Income........... .40 .41 .97 1.31
Diluted Net Income......... .39 .41 .96 1.30
Effective January 1, 2003, the Corporation formed Merchants Trust Company,
National Association ("MTC"), a wholly-owned subsidiary of the Corporation,
through a capital contribution totaling approximately $2,038,000. On January 1,
2003, MTC purchased the trust operations of First Merchants Bank, N.A., First
National Bank and Lafayette Bank and Trust Company for a fair value acquisition
price of $20,687,000. MTC unites the trust and asset management services of all
affiliate banks of the Corporation. All intercompany transactions related to
this purchase by MTC have been eliminated in the consolidated condensed
financial statements of the Corporation.
Page 10
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 4. Investment Securities
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale at September 30, 2003
U.S. Treasury .................... $ 1,497 $ $ 1,497
Federal agencies.................. 25,024 251 $ (46) 25,229
State and municipal .............. 124,422 5,932 (38) 130,316
Mortgage-backed securities ....... 132,600 891 (2,604) 130,887
Other asset-backed securities..... 3,115 14 3,129
Corporate obligations............. 999 24 1,023
Marketable equity securities...... 16,790 15 (54) 16,751
-------- -------- -------- --------
Total available for sale ..... 304,447 7,127 (2,742) 308,832
-------- -------- -------- --------
Held to maturity at September 30, 2003
State and municipal............... 7,933 449 8,382
Mortgage-backed securities........ 87 87
-------- -------- -------- --------
Total held to maturity ....... 8,020 449 8,469
-------- -------- -------- --------
Total investment securities .. $312,467 $ 7,576 $ (2,742) $317,301
======== ======== ======== ========
Page 11
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale at December 31, 2002
U.S. Treasury ....................... $ 125 $ 125
Federal agencies .................... 27,630 $ 814 $ (8) 28,436
State and municipal ................. 135,715 5,787 (178) 141,324
Mortgage-backed securities .......... 117,724 2,448 (54) 120,118
Other asset-backed securities ....... 1,000 1,000
Corporate obligations ............... 12,101 465 12,566
Marketable equity securities ........ 29,452 20 (116) 29,356
-------- -------- -------- --------
Total available for sale ......... 323,747 9,534 (356) 332,925
-------- -------- -------- --------
Held to maturity at December 31, 2002
State and municipal ................. 9,013 448 9,461
Mortgage-backed securities .......... 124 124
-------- -------- -------- --------
Total held to maturity ........... 9,137 448 9,585
-------- -------- -------- --------
Total investment securities ...... $332,884 $ 9,982 $ (356) $342,510
======== ======== ======== ========
Page 12
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 5. Loans and Allowance
September 30, December 31,
2003 2002
---- ----
Loans:
Commercial and industrial loans .............................................. $ 425,945 $ 406,644
Agricultural production financing and other loans to farmers ................. 100,734 85,059
Real estate loans:
Construction ............................................................... 149,456 133,896
Commercial and farmland .................................................... 558,407 401,561
Residential ................................................................ 852,333 746,349
Individuals' loans for household and other personal expenditures ............. 196,439 206,083
Tax-exempt loans ............................................................. 20,542 12,615
Other loans .................................................................. 47,549 12,170
----------- -----------
2,351,405 2,004,377
Allowance for loan losses..................................................... (29,842) (22,417)
----------- -----------
Total Loans............................................................... $ 2,321,563 $ 1,981,960
=========== ===========
Nine Months Ended
September 30
2003 2002
----------- -----------
Allowance for loan losses:
Balances, January 1 .......................................................... $ 22,417 $ 15,141
Allowance acquired in acquisition............................................. 3,727 6,902
Provision for losses ......................................................... 8,430 4,297
Recoveries on loans .......................................................... 1,539 959
Loans charged off ............................................................ (6,271) (5,152)
----------- -----------
Balances, September 30........................................................ $ 29,842 $ 22,147
=========== ===========
Information on nonaccruing, contractually
past due 90 days or more other than
nonaccruing and restructured loans is September 30, December 31,
summarized below: 2003 2002
================================================================================
As of:
Non-accrual loans................................ $ 20,093 $ 14,134
Loans contractually past due 90 days
or more other than nonaccruing................. 4,790 6,676
Restructured loans............................... 647 2,508
-------- --------
Total........................................ $ 25,530 $ 23,318
======== ========
Page 13
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 6. Net Income Per Share
Three Months Ended September 30,
2003 2002
------------------------------------------- --------------------------------------------
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................. $ 7,349 18,466,678 $ .40 $ 7,827 17,079,298 $ .47
========== ==========
Effect of dilutive stock options........ 155,628 145,060
---------- ------------ ---------- ------------
Diluted net income per share:
Net income available to
common stockholders
and assumed conversions............. $ 7,349 18,622,306 $ .39 $ 7,827 17,224,358 $ .46
========== ============ ========== ========== ============ ==========
Options to purchase 167,483 and 237,534 share for the three months ended
September 30, 2003 and 2002 were not included in the earnings per share
calculation because the exercise price exceded the average market price.
Nine Months Ended September 30,
2003 2002
------------------------------------------- -------------------------------------------
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................. $ 21,752 18,144,970 $ 1.20 $ 21,240 16,107,554 $ 1.32
========== ==========
Effect of dilutive stock options........ 128,352 142,159
---------- ------------ ---------- ------------
Diluted net income per share:
Net income available to
common stockholders
and assumed conversions............. $ 21,752 18,273,322 $ 1.19 $ 21,240 16,249,713 $ 1.31
========== ============ ========== ========== ============ ==========
Options to purchase 289,909 and 134,341 share for the nine months ended
September 30, 2003 and 2002 were not included in the earnings per share
calculation because the exercise price exceded the average market price.
Page 14
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
Note 7. Borrowings
CUMULATIVE TRUST PREFERRED SECURITIES
In April 2002, the Corporation and FMC Trust I (the "Trust") entered into an
Underwriting Agreement with Stifel, Nicolaus & Company, Incorporated and RBC
Dain Rauscher, Inc. for themselves and as co-representatives for several other
underwriters (the "Underwriting Agreement"). In April 2002, and pursuant to the
Underwriting Agreement, the Trust issued 2,127,500 8.75% Cumulative Trust
Preferred Securities (liquidation amount $25 per Preferred Security) (the
"Preferred Securities") with an aggregate liquidation value of $53,187,500. The
proceeds from the sale of the Preferred Securities were invested by the Trust in
the Corporation's 8.75% Junior Subordinated Debentures due June 30, 2032 (the
"Debentures"). The Preferred Securities are recorded as borrowings in the
Corporation's consolidated September 30, 2003, balance sheet and treated as Tier
1 Capital for regulatory capital purposes. The Debentures will mature and the
Preferred Securities must be redeemed on June 30, 2032. The Trust has the option
of shortening the maturity date to a date not earlier than June 30, 2007,
requiring prior approval of the Board of Governors of the Federal Reserve
System.
OBLIGATED MANDATORY REDEEMABLE CAPITAL SECURITIES
As part of the March 1, 2003, acquisition of CNBC Bancorp ("CNBC"), referenced
in Note 3 to the consolidated condensed financial statements, the Corporation
assumed $4.0 million of 10.20% fixed rate obligated mandatory redeemable capital
securities issued in February 2001 through a subsidiary trust of CNBC as part of
a pooled offering. The Corporation may redeem them, in whole or in part, at its
option commencing February 22, 2011, at a redemption price of 105.10% of the
outstanding principal amount and, thereafter, at a premium which declines
annually. On or after February 22, 2021, the securities may be redeemed at face
value with prior approval of the Board of Governors of the Federal Reserve
System. The securities are recorded as borrowings in the Corporation's
consolidated September 30, 2003, balance sheet and treated as Tier 1 Capital for
regulatory capital purposes.
SUBORDINATED DEBENTURES, REVOLVING CREDIT LINES AND TERM LOANS
On September 30, 2003, other borrowed funds included $40,594,000 which
represents the outstanding balance of a Loan and Subordinated Debenture Loan
Agreement entered into with LaSalle Bank, N.A. on March 25, 2003. The Agreement
includes three credit facilities:
* The Term Loan of $5,000,000 matures on March 25, 2010. Interest is
calculated at a floating rate equal to the lender's prime rate or
LIBOR plus 1.50%. The Term Loan is secured by 100% of the common
stock of First Merchants Bank, National Association, Muncie, Indiana
and 100% of the common stock of Lafayette Bank and Trust Company,
Lafayette, Indiana. The Agreement contains several restrictive
covenants, including the maintenance of various capital adequacy
levels, asset quality and profitability ratios, and certain
restrictions on dividends and other indebtedness.
* The Revolving Loan had a balance of $10,594,000 at September 30,
2003. Interest is payable quarterly based on LIBOR plus 1%.
Principal and interest are due on or before March 23, 2004. The total
principal amount outstanding at any one time may not exceed
$20,000,000.
* The Subordinated Debt of $25,000,000 matures on March 25, 2010.
Interest is calculated at a floating rate equal to, at the
Corporation's option, either the lender's prime rate or LIBOR plus
2.50%. The Agreement is secured by 100% of the common stock of First
Merchants Bank, National Association, Muncie, Indiana and 100% of the
common stock of Lafayette Bank and Trust Company, Lafayette, Indiana.
The Agreement contains several restrictive covenants, including the
maintenance of various capital adequacy levels, asset quality and
profitability ratios, and certain restrictions on dividends and other
indebtedness. The Subordinated Debentures are recorded as borrowings
in the Corporation's consolidated balance sheet and treated as
Tier 2 capital for regulatory capital purposes.
Page 15
FIRST MERCHANTS CORPORATION
FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- --------------
FORWARD-LOOKING STATEMENTS
The Corporation from time to time includes forward-looking statements in
its oral and written communication. The Corporation may include forward-looking
statements in filings with the Securities and Exchange Commission, such as this
Form 10-Q, in other written materials and in oral statements made by senior
management to analysts, investors, representatives of the media and others. The
Corporation intends these forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and the Corporation is including this
statement for purposes of these safe harbor provisions. Forward-looking
statements can often be identified by the use of words like "estimate,"
"project," "intend," "anticipate," "expect" and similar expressions. These
forward-looking statements include:
* statements of the Corporation's goals, intentions and expectations;
* statements regarding the Corporation's business plan and growth
strategies;
* statements regarding the asset quality of the Corporation's loan and
investment portfolios; and
* estimates of the Corporation's risks and future costs and benefits.
These forward-looking statements are subject to significant risks,
assumptions and uncertainties, including, among other things, the following
important factors which could affect the actual outcome of future events:
* fluctuations in market rates of interest and loan and deposit pricing,
which could negatively affect the Corporation's net interest margin,
asset valuations and expense expectations;
* adverse changes in the Indiana and Ohio economies, which might affect
the Corporation's business prospects and could cause credit-related
losses and expenses;
* adverse developments in the Corporation's loan and investment
portfolios;
* competitive factors in the banking industry, such as the trend towards
consolidation in the Corporation's market; and
* changes in the banking legislation or the regulatory requirements of
federal and state agencies applicable to bank holding companies and
banks like the Corporation's affiliate banks.
Because of these and other uncertainties, the Corporation's actual future
results may be materially different from the results indicated by these forward-
looking statements. In addition, the Corporation's past results of operations
do not necessarily indicate its future results.
Page 16
FIRST MERCHANTS CORPORATION
FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations continued
- ------------------------
CRITICAL ACCOUNTING POLICIES
Generally accepted accounting principles are complex and require
management to apply significant judgments to various accounting, reporting and
disclosure matters. Management of the Corporation must use assumptions and
estimates to apply these principles where actual measurement is not possible or
practical. For a complete discussion of the Corporation's significant accounting
policies, see "Notes to the Consolidated Financial Statements" in the
Corporation's 2002 Annual Report on pages 23 to 27. Certain policies are
considered critical because they are highly dependent upon subjective or complex
judgments, assumptions and estimates. Changes in such estimates may have a
significant impact on the financial statements. Management has reviewed the
application of these policies with the Audit Committee of the Corporation's
Board of Directors. For a discussion of applying critical accounting policies,
see "Critical Accounting Policies" on page 4 in the Corporation's 2002 Annual
Report.
RESULTS OF OPERATIONS
Net income for the three months ended September 30, 2003, equaled
$7,349,000, compared to $7,827,000 in the same period of 2002. Diluted earnings
per share were $.39 a decrease of $.07 from the $.46 reported for the third
quarter 2002.
Net income for the nine months ended September 30, 2003, equaled
$21,752,000, compared to $21,240,000 during the same period in 2002. Diluted
earnings per share were $1.19, a 8.6% decrease from $1.31 in 2002.
Annualized returns on average assets and average stockholders' equity
for nine months ended September 30, 2003 were .99 percent and 9.98 percent,
respectively, compared with 1.22 percent and 12.45 percent for the same period
of 2002.
The declines in diluted earnings per share, return on equity and return
on assets are primarily due to increased provision for loan losses, which is
discussed in the "ASSET QUALITY/PROVISION FOR LOAN LOSSES" section of
Management's Discussion & Analysis of Financial Condition and Results of
Operations.
Page 17
FIRST MERCHANTS CORPORATION
FORM 10-Q
CAPITAL
The Corporation's capital continues to exceed regulatory minimums and
management believes that its capital levels continue to be a distinct advantage
in the competitive environment in which the Corporation operates.
The Corporation's Tier I capital to average assets ratio was 7.9
percent at year-end 2002 and 7.3 percent at September 30, 2003. At September 30,
2003, the Corporation had a Tier I risk-based capital ratio of 9.3 percent and
total risk-based capital ratio of 11.7 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 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 are not specifically identified. (See the "CRITICAL ACCOUNTING POLICIES"
section of Management's Discussion & Analysis of Financial Condition and Results
of Operations).
At September 30, 2003, non-performing loans totaled $25,530,000, an
increase during the period of $2,212,000 from December 31, 2002, as noted in the
table on the following page. This increase was primarily due to two loans
totaling $7,167,000, related to declining collateral values of a single
borrower, being placed on non-accrual status, while loans 90 days past due other
than non-accrual and restructured loans decreased by $3,747,000.
At September 30, 2003, impaired loans totaled $44,905,000, an increase of
$554,000 from December 31, 2002. At September 30, 2003, an allowance for losses
was not deemed necessary for impaired loans totaling $30,364,000, but an
allowance of $7,510,000 was recorded for the remaining balance of impaired loans
of $14,541,000 and is included in the Corporation's allowance for loan losses.
The average balance of impaired loans for the first nine months of 2003 was
$49,537,000.
At December 31, 2002, impaired loans totaled $44,351,000. An allowance
for losses was not deemed necessary for impaired loans totaling $27,450,000, but
an allowance of $7,299,000 was recorded for the remaining balance of impaired
loans of $16,901,000 and is included in the Corporation's allowance for loan
losses. The average balance of impaired loans for 2002 was $49,663,000.
At September 30, 2003, the allowance for loan losses was $29,842,000,
an increase of $7,695,000 from year end 2002. As a percent of loans, the
allowance was 1.26 percent at September 30, 2003 compared with 1.11 percent at
December 31, 2002.
Page 18
FIRST MERCHANTS CORPORATION
FORM 10-Q
The provision for loan losses for the first nine months of 2003 was
$8,430,000, an increase of $4,133,000 from $4,297,000 for the same period in
2002. The Corporation's adequacy of the allowance for loan losses reflects
increased non-performing loans, increased specific reserves and increased
impaired loans, resulting in increased provision expense. Of the $4.1 million
increase, $2.8 million is due to declining collateral values of a single
commercial borrower, with the remaining based on the regular ongoing evaluation
of the loan portfolios of the Corporation's bank subsidiaries. Current
non-performing and impaired loan balances indicate that some decline in loan
asset quality has occurred, which management believes is a result of current
economic conditions.
The following table summarizes the non-accrual, contractually past due 90 days
or more other than non-accruing and restructured loans for the Corporation.
(dollars in thousands) September 30, December 31,
2003 2002
================================================================================
Non-accrual loans .............................. $20,093 $14,134
Loans contractually
past due 90 days or more
other than non-accruing ..................... 4,790 6,676
Restructured loans ............................. 647 2,508
------- -------
Total non-performing loans .................. $25,530 $23,318
======= =======
Nine Months Ended
September 30,
------------------
2003 2002
---- ----
(Dollars in Thousands)
Balance at beginning of period ......................... $22,417 $15,141
------- -------
Chargeoffs ............................................. 6,271 5,152
Recoveries ............................................. 1,539 959
------- -------
Net chargeoffs ......................................... 4,732 4,193
Provision for loan losses .............................. 8,430 4,297
Allowance acquired in acquisition....................... 3,727 6,902
------- -------
Balance at end of period ............................... $29,842 $22,147
======= =======
Ratio of net chargeoffs during the period to average loans
outstanding during the period (1)....................... .28% .32%
(1) First nine months annualized
Page 19
FIRST MERCHANTS CORPORATION
FORM 10-Q
LIQUIDITY
Liquidity management is the process by which the Corporation ensures that
adequate liquid funds are available for the Corporation and its subsidiaries.
These funds are necessary in order for the Corporation and its subsidiaries to
meet financial commitments on a timely basis. These commitments include
withdrawals by depositors, funding credit obligations to borrowers, paying
dividends to shareholders, paying operating expenses, funding capital
expenditures, and maintaining deposit reserve requirements. Liquidity is
monitored and closely managed by the asset/liability committees at each
subsidiary and by the Corporation's asset/liability committee.
The liquidity of the Corporation is dependent upon the receipt of
dividends from its bank subsidiaries, which are subject to certain regulatory
limitations and access to other funding sources. Liquidity of the Corporation's
bank subsidiaries is derived primarily from core deposit growth, principal
payments received on loans, the sale and maturity of investment securities, net
cash provided by operating activities, and access to other funding sources. The
most stable source of liability-funded liquidity for both the long-term and
short-term is deposit growth and retention in the core deposit base. In
addition, the Corporation utilizes advances from the Federal Home Loan Bank
("FHLB") and a revolving line of credit with LaSalle Bank, N.A. as a funding
source. At September 30, 2003, total borrowings from the FHLB were $211,369,000.
The Corporation's bank subsidiaries have pledged certain mortgage loans and
certain investments to the FHLB. The total available remaining borrowing
capacity from the FHLB at September 30, 2003, was $203,255,000. At September 30,
2003, the Corporation's revolving line of credit had a balance of $10,594,000
and a remaining borrowing capacity of $9,406,000. The principal source of
asset-funded liquidity is investment securities classified as
available-for-sale, the market values of which totaled $308,832,000 at September
30, 2003, a decrease of $24,093,000 or 6.5% over December 31, 2002. Securities
classified as held-to-maturity that are maturing within a short period of time
can also be a source of liquidity. Securities classified as held-to-maturity and
that are maturing in one year or less totaled $1,415,000 at September 30, 2003.
In addition, other types of assets such as cash and due from banks, federal
funds sold and securities purchased under agreements to resell, and loans and
interest-bearing deposits with other banks maturing within one year are sources
of liquidity.
In the normal course of business, the Corporation is a party to a number
of other off-balance sheet activities that contain credit, market and
operational risk that are not reflected in whole or in part in the Corporation's
consolidated financial statements. Such activities include: traditional
off-balance sheet credit-related financial instruments, commitments under
operating leases and long-term debt.
The Corporation provides customers with off-balance sheet credit support
through loan commitments and standby letters of credit. Summarized
credit-related financial instruments at September 30, 2003 are as follows:
At September 30,
(Dollars in thousands) 2003
================================================================================
Amounts of commitments:
Loan commitments to extend credit ............................... $ 429,284
Standby letters of credit ....................................... 24,716
----------
$ 454,000
==========
Since many of the commitments are expected to expire unused or be only
partially used, the total amount of unused commitments in the preceding table
does not necessarily represent future cash requirements.
In addition to owned banking facilities, the Corporation has entered into a
number of long-term leasing arrangements to support the ongoing activities of
the Corporation. The required payments under such commitments and long-term debt
at September 30, 2003 are as follows:
2003 2004 2005 2006 2007 2008 Total
(Dollars in thousands) remaining and after
=======================================================================================================
Operating leases ......... $ 224 $ 795 $ 533 $ 567 $ 345 $ 324 $ 2,788
Trust preferred securities 57,188 57,188
Long-term debt ........... 60,300 42,594 23,000 22,403 14,495 154,071 316,863
-------- -------- -------- -------- -------- -------- --------
Total .................... $ 60,524 $ 43,389 $ 23,533 $ 22,970 $ 14,840 $211,583 $376,839
======== ======== ======== ======== ======== ======== ========
Page 20
FIRST MERCHANTS CORPORATION
FORM 10-Q
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 review how changes in interest rates may 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.
Management believes that the Corporation's liquidity and interest
sensitivity position at September 30, 2003, remained adequate to meet the
Corporation's primary goal of achieving optimum interest margins while avoiding
undue interest rate risk.
The Corporation places its greatest credence in net interest income
simulation modeling. The GAP/Interest Rate Sensitivity Report is believed by the
Corporation's management 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.
Net interest income simulation modeling, or earnings-at-risk, measures
the sensitivity of net interest income to various interest rate movements. The
Corporation's asset liability process monitors simulated net interest income
under three separate interest rate scenarios; base, rising and falling.
Estimated net interest income for each scenario is calculated over a 12-month
horizon. The immediate and parallel changes to the base case scenario used in
the model are presented below. The interest rate scenarios are used for
analytical purposes and do not necessarily represent management's view of future
market movements. Rather, these are intended to provide a measure of the degree
of volatility interest rate movements may introduce into the earnings of the
Corporation.
The base scenario is highly dependent on numerous assumptions embedded
in the model, including assumptions related to future interest rates. While the
base sensitivity analysis incorporates management's best estimate of interest
rate and balance sheet dynamics under various market rate movements, the actual
behavior and resulting earnings impact will likely differ from that projected.
For mortgage-related assets, the base simulation model captures the expected
prepayment behavior under changing interest rate environments. Assumptions and
methodologies regarding the interest rate or balance behavior of indeterminate
maturity products, e.g., savings, money market, NOW and demand deposits reflect
management's best estimate of expected future behavior.
Page 21
FIRST MERCHANTS CORPORATION
FORM 10-Q
The comparative rising and falling scenarios for the period ended September 30,
2004 assume further interest rate changes in addition to the base simulation
discussed above. These changes are immediate and parallel changes to the base
case senario. In addition, total rate movements (beginning point minus ending
point) to each of the various driver rates utilized by management in the base
simulation for the period ended September 30, 2004 are as follows:
Driver Rates RISING FALLING
================================================================================
Prime 200 Basis Points (50) Basis Points
Federal Funds 200 (50)
One-Year T-Bill 200 (25)
Two-Year T-Bill 200 (25)
Three-Year T-Bill 200 (25)
Interest Checking 100 --
MMIA Savings 100 --
First Flex 100 (25)
CD's 200 (50)
FHLB Advances 200 (50)
Results for the base, rising and falling interest rate scenarios are listed
below, based upon the Corporation's rate sensitive assets at September 30, 2003.
The net interest income shown represents cumulative net interest income over a
12-month time horizon. Balance sheet assumptions used for the base scenario are
the same for the rising and falling simulations.
BASE RISING FALLING
================================================================================
Net Interest Income (dollars in thousands) $112,043 $116,290 $109,678
Variance from base $ 4,247 $ (2,365)
Percent of change from base 3.79% (2.11)%
The comparative rising and falling scenarios for the period ended December 31,
2003 assume further interest rate changes in addition to the base simulation
discussed above. These changes are immediate and parallel changes to the base
case scenario. In addition, total rate movements (beginning point minus ending
point) to each of the various driver rates utilized by management in the base
simulation for the period ended December 31, 2003 are as follows:
Driver Rates RISING FALLING
================================================================================
Prime 200 Basis Points (50) Basis Points
Federal Funds 200 (50)
One-Year T-Bill 200 (20)
Two-Year T-Bill 200 (59)
Interest Checking 100 --
MMIA Savings 100 --
First Flex 100 (25)
CD's 200 (53)
FHLB Advances 200 (66)
Results for the base, rising and falling interest rate scenarios are listed
below, based upon the Corporation's rate sensitive assets at December 31, 2002.
The net interest income shown represents cumulative net interest income over a
12-month time horizon. Balance sheet assumptions used for the base scenario are
the same for the rising and falling simulations.
BASE RISING FALLING
===============================================================================
Net Interest Income (dollars in thousands) $105,138 $113,855 $ 98,793
Variance from base $ 8,717 $ (6,345)
Percent of change from base 8.29% (6.03)%
Page 22
FIRST MERCHANTS CORPORATION
FORM 10-Q
EARNING ASSETS
The following table presents the earning asset mix as of September 30,
2003, and December 31, 2002.
Loans grew approximately $347 million from December 31, 2002 to
September 30, 2003, while investment securities decreased by $25.2 million
during the same period. $309.5 million of the increase in loans is attributable
to the March 1, 2003 acquisition of CNBC Bancorp. Excluding increases related to
this acquisition, loans increased by $37.5 million and investments decreased by
$38 million during the nine month period.
- ----------------------------------------------------------------------------------------------------
EARNING ASSETS
(Dollars in Millions) September 30, December 31,
2003 2002
- ---------------------------------------------------------------------------------------------------
Federal funds sold and interest-bearing deposits $ 3.8 $ 35.0
Investment securities available for sale ....... 308.8 332.9
Investment securities held to maturity ......... 8.0 9.1
Mortgage loans held for sale ................... 12.0 21.5
Loans .......................................... 2,351.4 2,004.4
Federal Reserve and Federal Home Loan Bank stock 14.0 11.4
---------- ----------
Total ..................... $ 2,698.0 $ 2,414.3
========== ==========
- --------------------------------------------------------------------------------
DEPOSITS AND BORROWINGS
The following table presents the level of deposits and borrowed funds
(Federal funds purchased, repurchase agreements, U.S. Treasury demand notes,
Federal Home Loan Bank advances, trust preferred securities and other borrowed
funds)at September 30, 2003, and December 31, 2002.
- --------------------------------------------------------------------------------
(Dollars in Millions) September 30, December 31,
2003 2002
---------- ------------
Deposits ........................................ $ 2,310.2 $ 2,036.7
Securities sold under repurchase agreements...... 63.3 89.6
FFP and U.S. Treasury demand notes...............
Federal Home Loan Bank advances ................. 211.4 184.7
Trust preferred securities....................... 57.2 53.2
Subordinated debentures, revolving credit lines
and term loans................................ 40.6 19.3
Other borrowed funds ............................ 1.6 10.2
The Corporation has continued to leverage its 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.
Trust preferred securities are classified as Tier I Capital and the Subordinated
Debenture of $25,000,000 is classified as Tier II Capital when computing risk
based capital ratios due to the long-term nature of the investment. The interest
rate risk is included as part of the Corporation's interest simulation discussed
in Management's Discussion and Analysis under the headings "LIQUIDITY" and
"INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET RISK".
Page 23
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, 2003 and 2002.
Annualized net interest income (FTE)for the nine months ended September
30, 2003 increased by $13.7 million, or 14.6 percent over the same period in
2002, due to an increase in average earning assets of over $516 million. For the
same period interest income and interest expense, as a percent of average
earning assets, decreased 83 basis points and 49 basis points respectively.
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in Thousands) 2003 2002 2003 2002
Annualized Net Interest Income........................ $ 103,496 $ 101,312 $ 103,785 $ 90,383
Annualized FTE Adjustment............................. $ 3,809 $ 4,224 $ 3,827 $ 3,484
Annualized Net Interest Income
On a Fully Taxable Equivalent Basis................. $ 107,305 $ 105,536 $ 107,612 $ 93,867
Average Earning Assets................................ $2,712,070 $2,379,092 $2,628,319 $2,112,777
Interest Income (FTE) as a Percent
of Average Earning Assets........................... 5.89% 6.92% 6.11% 6.94%
Interest Expense as a Percent
of Average Earning Assets........................... 1.93% 2.49% 2.01% 2.50%
Net Interest Income (FTE) as a Percent
of Average Earning Assets........................... 3.96% 4.43% 4.10% 4.44%
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. In addition,
annualized amounts are computed utilizing a 30/360 day basis.
Page 24
FIRST MERCHANTS CORPORATION
FORM 10-Q
OTHER INCOME
The Corporation has placed emphasis on the growth of non-interest
income in recent years by offering a wide range of fee-based services. Fee
schedules are regularly reviewed by a pricing committee to ensure that the
products and services offered by the Corporation are priced to be competitive
and profitable.
Other income in the third quarter of 2003 exceeded the same quarter in
the prior year by $1,230,000, or 16.1 percent.
One major area accounts for most of the increase. Gains on sales of
mortgage loans included in other income increased by $876,000 due to increased
mortgage volume. In addition, decreasing mortgage loan rates caused an increase
in refinancing volume, which facilitated an increase in loan sales activity.
Other income for the first nine months of 2003 exceeded the same period
in the prior year by $8,454,000 or 42.6 percent.
Five major areas account for most of the increase:
1. Gains on sales of mortgage loans included in other income increased by
$4,628,000 due to increased mortgage volume. In addition, decreasing
mortgage loan rates caused an increase in refinancing volume, which
facilitated an increase in loan sales activity.
2. Service charges on deposit accounts increased $1,753,000 or 26.4
percent due to increased number of accounts, price adjustments and
approximately $948,000 of additional service charge income related to
April 1, 2002 acquisition of Lafayette.
3. A gain on life insurance proceeds included in other income was $535,000
for the first nine months of 2003 compared to $0 for the same period
last year. The gain represented the net insurance proceeds received.
4. Insurance Commissions increased by $483,000 or 37.9 percent primarily
as a result of the September 6, 2002 acquisition of Stephenson
Insurance Services, Inc.
5. Revenues from fiduciary activities increased $362,000 or 7.6 percent
due primarily to the additional fees related to the acquisition of
Lafayette.
Page 25
FIRST MERCHANTS CORPORATION
FORM 10-Q
OTHER EXPENSES
Total other expenses represent non-interest operating expenses of the
Corporation. Total other expense during the third quarter of 2003 exceeded the
same period of the prior year by $3,773,000, or 19.7 percent.
Two major areas account for most of the increase:
1. Salaries and benefit expense grew $2,601,000 or 24.5 percent, due to
normal salary increases, staff additions and additional salary cost
related to the March 1, 2003 acquisition of Commerce National Bank.
2. Net occupancy expenses increased by $190,000 or 19.0 percent primarily
due to the acquisition of Commerce National Bank.
Total other expenses during the first nine months in 2003 exceeded the
same period of the prior year by $16,207,000, or 31.7 percent.
Six major areas account for most of the increase:
1. Salaries and benefit expense grew $9,585,000 or 33.9 percent, due to
normal salary increases, staff additions and additional salary cost
related to the April 1, 2002 acquisition of Lafayette and the March 1,
2003 acquisition of Commerce National Bank.
2. Net occupancy expenses increased by $781,000 or 28.9 percent primarily
due to the acquisitions of Lafayette and Commerce National Bank.
3. Equipment expense increased by $1,008,000 or 20.8 percent primarily due
to the acquisitions of Lafayette and Commerce National Bank.
4. Core deposit intangible amortization increased by $940,000, due to
utilization of the purchase method of accounting for the Corporation
related to the acquisitions of Lafayette and Commerce National Bank.
5. The Corporation accrued $460,000 in anticipation of a settlement from a
claim made against First Merchants Corporation, which is presently
being negotiated.
6. Prepayment penalties for early prepayment of FHLB advances increased
by $340,000 for the first nine months of 2003 over the same period in
2002.
Page 26
FIRST MERCHANTS CORPORATION
FORM 10-Q
INCOME TAXES
Income tax expense, for the nine months ended September 30, 2003,
decreased by $1,247,000 from the same period in 2002. The effective tax rate was
28.4 and 34.1 percent for the 2003 and 2002 periods. Most of this decrease is a
result of increases in tax exempt earnings from bank-owned life insurance
contracts, tax exempt interest income and reduced state taxes, resulting from
the effect of state income apportionment.
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 of Financial Condition and Results of Operations, under
the headings "LIQUIDITY" and "INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET
RISK".
Item 4. Controls and Procedures
- -------------------------------------------------------------------
At the end of the period covered by this report, the Corporation carried out an
evaluation, under the supervision and with the participation of the
Corporation's management, including the Corporation's Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
it's disclosure controls and procedures. Based upon that evaluation, the
Corporation's Chief Executive Officer and Chief Financial Officer concluded that
the Corporation's disclosure controls and procedures are effective. Disclosure
controls and procedures are controls and procedures that are designed to ensure
that information required to be disclosed in Corporation reports filed or
submitted under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
There have been no changes in the Corporation's internal controls over financial
reporting identified in connection with the evaluation referenced above that
occurred during the Corporation's last fiscal quarter that have materially
affected, or is reasonably likely to materially affect, the Corporation's
internal control over financial reporting.
Page 27
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
None
Item 2. Changes in Securities and Use of Proceeds
- --------------------------------------------------
a. None
b. None
c. None
d. None
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None
Item 5. Other Information
- --------------------------
None
Page 28
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a. Exhibits
Exhibit No.: Description of Exhibit: Form 10-Q Page No.:
------------ ------------------------- -------------------
31.1 Certification of Chief 33
Executive Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
31.2 Certification of Chief 34
Financial Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
32 Certifications Pursuant to 35
18 U.S.C. Section 1350, as
Adopted Pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002
Page 29
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K continued
- ---------------------------------------------------
b. Reports on Form 8-K
A report on Form 8-K, dated July 21, 2003, was filed on
July 21, 2003 under report items number 9 and 7, concerning the
Press Release announcing second quarter 2003 earnings.
Under report item number 7, the following exhibit was included in
this Form 8-K.
(c) Exhibit
(99) Press Release, dated July 21, 2003, issued by
First Merchants Corporation
A report on Form 8-K, dated August 15, 2003, was filed on August
15, 2003 under report item number 5, concerning the Corporation's
declaration of a five percent (5%) stock dividend on its shares of
common stock. The dividend was payable to shareholders of record
on August 29, 2003. The date of delivery of shares to be issued
pursuant to the stock dividend was September 12, 2003.
Under report item number 7, the following exhibit was included in
the Form 8-K.
(c) Exhibit
(99) Press release dated August 15, 2003.
Page 30
FIRST MERCHANTS CORPORATION
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
First Merchants Corporation
---------------------------
(Registrant)
Date 11/14/03 by /s/ Michael L. Cox
--------------------------- -------------------------------------
Michael L. Cox
President and Chief Executive Officer
Date 11/14/03 by /s/ Mark K. Hardwick
--------------------------- -------------------------------------
Mark K. Hardwick
Senior Vice President and
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
Page 31
FIRST MERCHANTS CORPORATION
FORM 10-Q
INDEX TO EXHIBITS
INDEX TO EXHIBITS
(a)3. Exhibits:
Exhibit No.: Description of Exhibit: Form 10-Q Page No.:
------------ ------------------------- -------------------
31.1 Certification of Chief 33
Executive Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
31.2 Certification of Chief 34
Financial Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
32 Certifications Pursuant to 35
18 U.S.C. Section 1350, as
Adopted Pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002
Page 32
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Michael L. Cox, President and Chief Executive Officer of First Merchants
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Merchants
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report, based on such evaluation;
and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board or directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 14, 2003 /s/Michael L. Cox
----------------------------------------
Michael L. Cox
President and Chief Executive Officer
Page 33
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Mark K. Hardwick, Senior Vice President and Chief Financial Officer of First
Merchants Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Merchants
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report, based on such evaluation;
and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board or directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 14, 2003 /s/Mark K. Hardwick
----------------------------------------
Mark K. Hardwick
Senior Vice President and
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
Page 34
Exhibit 32
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of First Merchants Corporation (the
"Corporation") on Form 10-Q for the period ending September 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"), I
Michael L. Cox, President and Chief Executive Officer of the Corporation, do
hereby certify, in accordance with 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)); and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Corporation.
Date 11/14/03 by /s/ Michael L. Cox
--------------------------- -------------------------------------
Michael L. Cox
President and Chief Executive Officer
A signed copy of this written statement required by Section 906 has been
provided to First Merchants Corporation and will be retained by First Merchants
Corporation and furnished to the Securities and Exchange Commission or its staff
upon request.
In connection with the quarterly report of First Merchants Corporation (the
"Corporation") on Form 10-Q for the period ending September 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"), I
Mark K. Hardwick, Senior Vice President and Chief Financial Officer of the
Corporation, do hereby certify, in accordance with 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)); and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Corporation.
Date 11/14/03 by /s/ Mark K. Hardwick
--------------------------- -------------------------------------
Mark K. Hardwick
Senior Vice President and
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
A signed copy of this written statement required by Section 906 has been
provided to First Merchants Corporation and will be retained by First Merchants
Corporation and furnished to the Securities and Exchange Commission or its staff
upon request.
Page 35