FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
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 offices) (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 [ ]
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of October 17, 2005, there were 18,508,305 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.........................14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................24
Item 4. Controls and Procedures.....................................24
PART II. Other Information:
Item 1. Legal Proceedings...........................................25
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds..............................25
Item 3. Defaults Upon Senior Securities.............................25
Item 4. Submission of Matters to a Vote of Security Holders.........25
Item 5. Other Information...........................................25
Item 6. Exhibits....................................................26
Signatures...................................................................27
Index to Exhibits............................................................28
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,
2005 2004
------------ ------------
(Unaudited)
ASSETS:
Cash and due from banks ....................................... $ 81,310 $ 69,960
Interest-bearing deposits...................................... 10,708 9,343
Investment securities available for sale ...................... 424,818 416,177
Investment securities held to maturity ........................ 11,976 5,358
Mortgage loans held for sale................................... 5,026 3,367
Loans, net of allowance for loan losses of $25,149 and $22,548. 2,418,782 2,405,503
Premises and equipment ........................................ 38,473 38,254
Federal Reserve and Federal Home Loan Bank stock............... 23,165 22,858
Interest receivable ........................................... 19,561 17,318
Goodwill ...................................................... 121,266 120,615
Core deposit intangibles ...................................... 18,331 20,669
Cash surrender value of life insurance......................... 43,230 42,061
Other assets .................................................. 21,792 20,185
----------- -----------
Total assets .............................................. $ 3,238,438 $ 3,191,668
=========== ===========
LIABILITIES:
Deposits:
Noninterest-bearing ......................................... $ 346,318 $ 330,685
Interest-bearing ............................................ 2,118,975 2,077,465
----------- -----------
Total deposits ............................................ 2,465,293 2,408,150
Borrowings .................................................... 423,959 440,891
Interest payable .............................................. 5,643 4,411
Other liabilities.............................................. 25,153 23,613
----------- -----------
Total liabilities ......................................... 2,920,048 2,877,065
COMMITMENTS AND CONTINGENT LIABILITIES
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 - 18,507,970 and 18,573,997 shares.... 2,313 2,322
Additional paid-in capital .................................... 148,004 150,862
Retained earnings ............................................. 171,419 161,459
Accumulated other comprehensive income (loss).................. (3,346) (40)
----------- -----------
Total stockholders' equity ................................ 318,390 314,603
----------- -----------
Total liabilities and stockholders' equity ................ $ 3,238,438 $ 3,191,668
=========== ===========
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,
-------------------- ---------------------
2005 2004 2005 2004
------- ------- -------- --------
Interest Income:
Loans receivable
Taxable ................................................... $40,853 $35,342 $116,506 $103,590
Tax exempt ................................................ 160 143 483 443
Investment securities
Taxable ................................................... 2,427 2,146 7,132 6,147
Tax exempt ................................................ 1,595 1,679 4,702 4,529
Federal funds sold .......................................... 51 18 190 73
Deposits with financial institutions ........................ 185 154 493 388
Federal Reserve and Federal Home Loan Bank stock ............ 296 319 889 954
------- ------- -------- --------
Total interest income ..................................... 45,567 39,801 130,395 116,124
------- ------- -------- --------
Interest expense:
Deposits .................................................... 12,172 8,487 32,707 24,556
Borrowings .................................................. 5,255 4,522 14,685 13,297
------- ------- ------- -------
Total interest expense .................................... 17,427 13,009 47,392 37,853
------- ------- ------- -------
Net Interest Income ........................................... 28,140 26,792 83,003 78,271
Provision for loan losses ..................................... 1,794 1,380 6,409 4,472
------- ------- ------- -------
Net Interest Income After Provision for Loan Losses ........... 26,346 25,412 76,594 73,799
------- ------- ------- -------
Other Income:
Net realized gains on sales of available-for-sale securities. 16 332 22 732
Other income ................................................ 8,764 8,079 26,566 25,151
------- ------- ------- -------
Total other income ............................................ 8,780 8,411 26,588 25,883
------- ------- ------- -------
Other expenses:
Salaries and benefits ....................................... 13,384 13,087 41,463 39,170
Other expenses .............................................. 9,917 9,703 29,268 28,806
------- ------- ------- -------
Total other expenses .......................................... 23,301 22,790 70,731 67,976
------- ------- ------- -------
Income before income tax ...................................... 11,825 11,033 32,451 31,706
Income tax expense ............................................ 3,605 3,380 9,743 9,763
------- ------- ------- -------
Net Income .................................................... $ 8,220 $ 7,653 $22,708 $21,943
======= ======= ======= =======
Per share:
Basic ..................................................... $ .45 $ .41 $ 1.23 $ 1.18
Diluted ................................................... .44 .41 1.22 1.18
Dividends ................................................. .23 .23 .69 .69
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
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Net Income...................................................................... $ 8,220 $ 7,653 $ 22,708 $ 21,943
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period, net of
income tax (expense) benefit of $589, $(3,104), $2,195 and $(359)......... (883) 4,656 (3,293) 539
Less: Reclassification adjustment for gains included
in net income, net of income tax expense of $6, $133, $9 and $293......... 10 199 13 439
--------- --------- --------- ---------
(893) 4,457 (3,306) 100
--------- --------- --------- ---------
Comprehensive income ........................................................... $ 7,327 $ 12,110 $ 19,402 $ 22,043
========= ========= ========= =========
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)
2005 2004
--------- ---------
Balances, January 1 ............................................ $ 314,603 $ 303,965
Net income ..................................................... 22,708 21,943
Cash dividends ................................................. (12,748) (12,777)
Other comprehensive income (loss), net of tax................... (3,306) 100
Stock issued under employee benefit plans....................... 913 903
Stock issued under dividend reinvestment and stock purchase plan 638 977
Stock options exercised ........................................ 2,114 981
Stock redeemed ................................................. (6,970) (2,430)
Issuance of stock in acquisition................................ 438
--------- ---------
Balances, September 30 ......................................... $ 318,390 $ 313,662
========= =========
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,
----------------------------------
2005 2004
---------------- ---------------
Cash Flows From Operating Activities:
Net income........................................................................ $ 22,708 $ 21,943
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses....................................................... 6,409 4,472
Depreciation and amortization................................................... 3,829 3,810
Mortgage loans originated for sale.............................................. (55,065) (66,111)
Proceeds from sales of mortgage loans........................................... 53,406 66,439
Change in interest receivable................................................... (2,243) (754)
Change in interest payable...................................................... 1,232 1,026
Other adjustments............................................................... 3,397 2,557
--------------- ---------------
Net cash provided by operating activities..................................... $ 33,673 $ 33,382
--------------- ---------------
Cash Flows From Investing Activities:
Net change in interest-bearing deposits........................................... $ (1,365) $ (4,063)
Purchases of securities available for sale........................................ (77,867) (170,719)
Proceeds from maturities of securities available for sale......................... 54,770 76,414
Proceeds from sales of securities available for sale.............................. 2,023 32,336
Purchase of Federal Reserve and Federal Home Loan Bank Stock...................... (307) (7,248)
Net change in loans............................................................... (19,688) (46,525)
Other adjustments................................................................. (4,048) (4,768)
--------------- ---------------
Net cash used by investing activities......................................... $ (46,482) $ (124,573)
--------------- ---------------
Cash Flows From Financing Activities:
Net change in
Demand and savings deposits..................................................... $ (171,585) $ 20,514
Certificates of deposit and other time deposits................................. 228,729 74,204
Borrowings...................................................................... 99,151 (4,641)
Repayment of borrowings......................................................... (116,083)
Cash dividends.................................................................... (12,748) (12,777)
Stock issued under employee benefit plans......................................... 913 903
Stock issued under dividend reinvestment and stock purchase plans................. 638 977
Stock options exercised........................................................... 2,114 981
Stock redeemed.................................................................... (6,970) (2,430)
--------------- ---------------
Net cash provided by financing activities..................................... 24,159 77,731
--------------- ---------------
Net Change in Cash and Cash Equivalents............................................. 11,350 (13,460)
Cash and Cash Equivalents, January 1................................................ 69,960 109,527
--------------- ---------------
Cash and Cash Equivalents, September 30............................................. $ 81,310 $ 96,067
=============== ===============
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, 2004 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 three and nine month periods ended
September 30, 2005 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. For all
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.
During the three months ended September 30, 2005, the Corporation
accelerated the vesting of options previously granted, and the vesting period
for 2005 grants was established so that those grants would be fully vested by
year-end. The term of the acceleration is such that no expense will be
recognized by the Corporation on those grants, although it will continue to
report the impact of the acceleration in its proforma disclosures of the
earnings per share.
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,
----------------------- ------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net income, as reported ..................................... $ 8,220 $ 7,653 $ 22,708 $ 21,943
Add: Total stock-based employee compensation
cost included in reported net income, net
of income taxes...........................................
Less: Total stock-based employee compensation
cost determined under the fair value based
method, net of income taxes .............................. (1,083) (140) (1,630) (599)
---------- ---------- ---------- ----------
Pro forma net income ........................................ $ 7,137 $ 7,513 $ 21,078 $ 21,344
========== ========== ========== ==========
Earnings per share:
Basic - as reported ...................................... $ .45 $ .41 $ 1.23 $ 1.18
Basic - pro forma ........................................ .39 .41 1.14 1.15
Diluted - as reported .................................... .44 .41 1.22 1.18
Diluted - pro forma ...................................... .38 .40 1.13 1.14
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. Impact of Accounting Changes
In June 2005, the FASB Board decided not to provide additional guidance on
the meaning of other-than-temporary impairment, but directed the FASB staff to
issue a staff position (FSP) which will be retitled FSP 115-1 "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments".
The final FSP will supersede EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments," and
EITF Topic No. D-44, "Recognition of Other-Than-Temporary Impairment upon the
Planned Sale of a Security Whose Cost Exceeds Fair Value."FSP FAS 115-1 will
replace guidance in EITF Issue 03-1 on loss recognition with references to
existing other-than-temporary impairment guidance, such as FASB Statement No.
115, "Accounting for Certain Investments in Debt and Equity Securities". FSP
FAS 115-1 will clarify that an investor should recognize an impairment loss no
later than when the impairment is deemed other than temporary, even if a
decision to sell has not been made.
FSP FAS 115-1 will be effective for other-than-temporary impairment
analysis conducted in periods beginning after September 15, 2005. The
Corporation has consistently followed the loss recognition guidance in SFAS No.
115, so the adoption of FSP FAS 115-1 will not have any significant impact on
the Corporation's financial condition or results of operation.
On April 14, 2005, the SEC amended the compliance date for SFAS No. 123(R)
from the beginning of the first interim or annual period that begins after June
15, 2005 to the next fiscal year beginning after June 15, 2005. Early adoption
is permitted in periods in which financial statements have not yet been issued.
The Corporation expects to adopt SFAS No. 123(R) as of January 1, 2006. The
effect on the Corporation's results of operations will depend on the level of
future option grants and the calculation of the fair value of the options
granted at such future date, as well as the vesting periods provided, and so
cannot currently be predicted for future awards.
The FASB has issued a proposed amendment to SFAS No. 128, Earnings per
Share, to clarify guidance for mandatorily convertible instruments, the treasury
stock method, contingently issuable shares, and contracts that may be settled in
cash or shares. The primary impact on the Corporation of the proposed Statement
is the change to the treasury stock method for year-to-date diluted earnings per
share.
Currently SFAS No. 128 requires that the number of incremental shares
included in the denominator be determined by computing a year-to-date weighted
average of the number of incremental shares included in each quarterly diluted
EPS computation. Under this proposed Statement, the number of incremental shares
included in year-to-date diluted earnings per share would be computed using the
average market price of common shares for the year-to-date period, independent
of the quarterly computations. This computational change is not expected to have
a significant impact on the Corporation's diluted earnings per share.
Page 9
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 3. Investment Securities
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale at September 30, 2005
U.S. Treasury ........................ $ 1,495 $ (1) $ 1,494
U.S. Government-sponsored
agency securities................... 78,002 $ (965) 77,037
State and municipal .................. 162,982 3,325 (427) 165,880
Mortgage-backed securities ........... 173,121 213 (3,400) 169,934
Other asset-backed securities......... 16 16
Marketable equity securities.......... 10,870 (413) 10,457
-------- -------- -------- --------
Total available for sale ......... 426,486 3,538 (5,206) 424,818
-------- -------- -------- --------
Held to maturity at September 30, 2005
State and municipal................... 11,933 399 (275) 12,057
Mortgage-backed securities............ 43 43
-------- -------- -------- --------
Total held to maturity ........... 11,976 399 (275) 12,100
-------- -------- -------- --------
Total investment securities ...... $438,462 $ 3,937 $ (5,481) $436,918
======== ======== ======== ========
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale at December 31, 2004
U.S. Treasury ........................ $ 1,745 $ (1) $ 1,744
U.S. Government-sponsored
agency securities .................. 65,325 $ 73 (332) 65,066
State and municipal .................. 150,284 5,243 (82) 155,445
Mortgage-backed securities ........... 183,200 485 (1,980) 181,705
Other asset-backed securities......... 18 18
Marketable equity securities ......... 12,191 8 12,199
-------- -------- -------- --------
Total available for sale .......... 412,763 5,809 (2,395) 416,177
-------- -------- -------- --------
Held to maturity at December 31, 2004
State and municipal .................. 5,306 162 5,468
Mortgage-backed securities ........... 52 52
-------- -------- -------- --------
Total held to maturity ............ 5,358 162 5,520
-------- -------- -------- --------
Total investment securities ....... $418,121 $ 5,971 $ (2,395) $421,697
======== ======== ======== ========
Page 10
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 4. Loans and Allowance
September 30, December 31,
2005 2004
----------- -----------
Loans:
Commercial and industrial loans .............................................. $ 476,010 $ 451,227
Agricultural production financing and other loans to farmers ................. 94,262 98,902
Real estate loans:
Construction ............................................................... 171,667 164,738
Commercial and farmland .................................................... 719,154 709,163
Residential ................................................................ 746,777 761,163
Individuals' loans for household and other personal expenditures ............. 186,792 198,532
Tax-exempt loans ............................................................. 12,439 8,203
Lease financing receivables, net of unearned income........................... 9,538 11,311
Other loans .................................................................. 27,292 24,812
----------- -----------
2,443,931 2,428,051
Allowance for loan losses..................................................... (25,149) (22,548)
----------- -----------
Total Loans............................................................... $ 2,418,782 $ 2,405,503
=========== ===========
Nine Months Ended
September 30,
2005 2004
----------- -----------
Allowance for loan losses:
Balances, January 1 .......................................................... $ 22,548 $ 25,493
Provision for losses ......................................................... 6,409 4,472
Recoveries on loans .......................................................... 1,436 1,234
Loans charged off ............................................................ (5,244) (5,956)
----------- -----------
Balances, September 30 ....................................................... $ 25,149 $ 25,243
=========== ===========
Information on nonaccruing, contractually
past due 90 days or more other than
nonaccruing and restructured loans is September 30, December 31,
summarized below: 2005 2004
================================================================================
Non-accrual loans................................ $ 11,757 $ 15,355
Loans contractually past due 90 days
or more other than nonaccruing................. 3,560 1,907
Restructured loans............................... 454 2,019
-------- --------
Total........................................ $ 15,771 $ 19,281
======== ========
Page 11
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 5. Net Income Per Share
Three Months Ended September 30,
2005 2004
------------------------------------------- -------------------------------------------
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................. $ 8,220 18,478,154 $ .45 $ 7,653 18,548,041 $ .41
========== ==========
Effect of dilutive stock options........ 111,880 110,418
---------- ------------ ---------- ------------
Diluted net income per share:
Net income available to
common stockholders
and assumed conversions............. $ 8,220 18,590,034 $ .44 $ 7,653 18,658,459 $ .41
========== ============ ========== ========== ============ ==========
Options to purchase 207,349 and 415,186 shares for the three months ended
September 30, 2005 and 2004 were not included in the earnings per share
calculation because the exercise price exceeded the average market price.
Nine Months Ended September 30,
2005 2004
--------------------------------------- ---------------------------------------
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................. $ 22,708 18,490,866 $ 1.23 $ 21,943 18,525,947 $ 1.18
========== ==========
Effect of dilutive stock options........ 115,042 123,632
---------- ------------ ---------- ------------
Diluted net income per share:
Net income available to
common stockholders
and assumed conversions............. $ 22,708 18,605,908 $ 1.22 $ 21,943 18,649,579 $ 1.18
========== ============ ========== ========== ============ ==========
Options to purchase 170,312 and 295,025 shares for the nine months ended
September 30, 2005 and 2004 were not included in the earnings per share
calculation because the exercise price exceeded the average market price.
Page 12
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
Note 6. Defined Benefit Pension Costs
The Corporation has defined benefit pension plans covering substantially
all employees. The plans provide benefits that are based on the employees'
compensation and years of service. The Corporation uses an actuarial calculation
to determine pension plan costs.
In January 2005, the Board of Directors of the Corporation approved
the curtailment of the accumulation of defined benefits for future services
provided by certain participants in the First Merchants Corporation Retirement
Pension Plan (the "Plan"). Employees of the Corporation and certain of its
subsidiaries who are participants in the Plan were notified that, on and after
March 1, 2005, no additional pension benefits will be earned by employees who
have not both attained the age of fifty-five (55) and accrued at least ten (10)
years of "Vesting Service". As a result of this action, the Corporation recorded
a $1,630,000 pension curtailment loss to record previously unrecognized prior
service costs in accordance with SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Plans and for Termination
Benefits." This loss was recognized and recorded by the Corporation in the first
quarter of 2005.
The following represents the pension cost for the three and nine months
ended September 30, 2005.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Pension Cost
------------
Service cost............................................ $ 145 $ 480 $ 434 $ 1,440
Interest cost .......................................... 658 697 1,974 2,091
Expected return on plan assets ......................... (768) (701) (2,305) (2,103)
Amortization of the transition asset.................... (7) (37) (20) (113)
Amortization of prior service cost...................... 1 34 4 103
Amortization of the net loss............................ 24 88 70 264
Curtailment loss........................................ 1,630
---------- ---------- ---------- ----------
Total Pension Cost................................ $ 53 $ 561 $ 1,787 $ 1,682
========== ========== ========== ==========
Page 13
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 "believe",
"continue", "pattern", "estimate", "project", "intend", "anticipate", "expect"
and similar expressions or future or conditional verbs such as "will", "would",
"should", "could", "might", "can", "may", or 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 economy, 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;
* 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;
* acquisitions of other businesses by the Corporation and integration of
such acquired businesses;
* changes in market, economic, operational, liquidity, credit and interest
rate risks associated with the Corporation's business; and
* the continued availability of earnings and excess capital sufficient
for the lawful and prudent declaration and payment of cash dividends.
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 14
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 2004 Annual Report. 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" within the Corporation's 2004 Annual Report.
BUSINESS SUMMARY
The Corporation is a financial holding company headquartered in Muncie,
Indiana. Since its organization in 1982, the Corporation has grown to include 9
affiliate banks with 65 locations in 17 Indiana and 3 Ohio counties. In addition
to its branch network, the Corporation's delivery channels include ATMs, check
cards, interactive voice response systems and internet technology.
The Corporation's business activities are currently limited to one
significant business segment, which is community banking. The Corporation's
financial service affiliates include 9 nationally chartered banks: First
Merchants Bank, N.A., The Madison Community Bank, N.A., First United Bank, N.A.,
United Communities National Bank, First National Bank, Decatur Bank and Trust
Company, N.A., Frances Slocum Bank & Trust Company, N.A., Lafayette Bank and
Trust Company, N.A. and Commerce National Bank. The banks provide commercial and
retail banking services. In addition, the Corporation's trust company,
multi-line insurance company and title company provide trust asset management
services, retail and commercial insurance agency services and title services,
respectively.
Management believes that its mission, guiding principles and strategic
initiatives produce profitable growth for stockholders. Our vision is to satisfy
all the financial needs of our customers, help them succeed financially and be
recognized as the premier financial services company in our markets. Our primary
strategy to achieve this vision is to increase product usage and focus on
providing each customer with all of the financial products that fulfill their
needs. Our cross-sell strategy and diversified business model facilitate growth
in strong and weak economic cycles.
Management believes it is important to maintain a well controlled
environment as we continue to grow our businesses. Sound credit policies are
maintained and have resulted in declining nonperforming loans and net
charge-offs as a percentage of loans outstanding from the prior period. Interest
rate and market risks inherent in our asset and liability balances are managed
within prudent ranges, while ensuring adequate liquidity and funding. Our
stockholder value has continued to increase due to customer satisfaction and the
balanced way we manage our business risk.
RESULTS OF OPERATIONS
Net income for the three months ended September 30, 2005, equaled
$8,220,000, compared to $7,653,000 in the same period of 2004. Diluted earnings
per share were $.44, an increase of 7.3 percent from the $.41 reported for the
third quarter 2004. The increase in earnings is primarily due to an increase in
net interest margin, which is partially offset by an increase of the provision
for loan losses during the period. These factors are discussed within the
respective sections of Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Net income for the nine months ended September 30, 2005, equaled
$22,708,000, compared to $21,943,000 during the same period in 2004. Diluted
earnings per share were $1.22, a 3.4 percent increase from the $1.18 reported in
2004. The increase in earnings is primarily due to an increase in net interest
margin, which is partially offset by an increase of the provision for loan
losses during the period. These factors are discussed within the respective
sections of Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Annualized returns on average assets and average stockholders' equity
for the three months ended September 30, 2005, were 1.03 percent and 10.38
percent, respectively, compared with .98 percent and 9.88 percent for the same
period of 2004.
Page 15
FIRST MERCHANTS CORPORATION
FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations continued
------------------------
RESULTS OF OPERATIONS (continued)
Annualized returns on average assets and average stockholders' equity
for the nine months ended September 30, 2005 were .95 percent and 9.62 percent,
respectively, compared with .95 percent and 9.50 percent for the same period of
2004.
CAPITAL
The Corporation's regulatory capital continues to exceed regulatory
"well capitalized" standards. Tier I regulatory capital consists primarily of
total stockholders' equity and subordinated debentures issued to business trusts
categorized as qualifying borrowings, less non-qualifying intangible assets and
unrealized net securities gains. The Corporation's Tier I capital to average
assets ratio was 7.7 percent at September 30, 2005 and 7.5 percent at year end
2004. In addition, at September 30, 2005, the Corporation had a Tier I
risk-based capital ratio of 9.8 percent and total risk-based capital ratio of
11.9 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.
The Corporation's GAAP capital ratio, defined as total stockholders'
equity to total assets, equaled 9.8 percent at September 30, 2005 and 9.9
percent at December 31, 2004. When the Corporation acquires other companies for
stock, GAAP capital increases by the entire amount of the purchase price.
The Corporation's tangible capital ratio, defined as total
stockholders' equity less intangibles net of tax to total assets less
intangibles net of tax, equaled 6.0 percent as of September 30, 2005, and 5.9
percent at December 31, 2004.
Management believes that all of the above capital ratios are meaningful
measurements for evaluating the safety and soundness of the Corporation.
Additionally, management believes the following table is also meaningful when
considering performance measures of the Corporation. The table details and
reconciles tangible earnings per share, return on tangible capital and tangible
assets to traditional GAAP measures.
September 30, December 31,
(Dollars in thousands) 2005 2004
Average Goodwill .......................... $ 112,281 $ 112,281
Average Core Deposit Intangible (CDI) ..... 19,382 22,164
Average Deferred Tax on CDI ............... (7,097) (8,105)
----------- -----------
Intangible Adjustment ................... $ 124,566 $ 126,340
=========== ===========
Average Stockholders' Equity (GAAP Capital) $ 314,856 $ 310,004
Intangible Adjustment ..................... (124,566) (126,340)
----------- -----------
Average Tangible Capital ................ $ 190,290 $ 183,664
=========== ===========
Average Assets ............................ $ 3,185,815 $ 3,109,104
Intangible Adjustment ..................... (124,566) (126,340)
----------- -----------
Average Tangible Assets ................. $ 3,061,249 $ 2,982,764
=========== ===========
Net Income ................................ $ 22,708 $ 29,411
CDI Amortization, net of tax .............. 1,474 2,133
----------- -----------
Tangible Net Income ..................... $ 24,182 $ 31,544
=========== ===========
Diluted Earnings per Share ................ $ 1.22 $ 1.58
Diluted Tangible Earnings per Share ....... $ 1.30 $ 1.69
Return on Average GAAP Capital ............ 9.62% 9.49%
Return on Average Tangible Capital ........ 16.94% 17.49%
Return on Average Assets .................. 0.95% 0.95%
Return on Average Tangible Assets ......... 1.05% 1.06%
Page 16
FIRST MERCHANTS CORPORATION
FORM 10-Q
ASSET QUALITY/PROVISION FOR LOAN LOSSES
The Corporation's primary business focus is middle market commercial
and residential real estate, auto and small consumer lending, which results in
portfolio diversification. Management ensures that appropriate methods to
understand and underwrite risk are utilized. Commercial loans are individually
underwritten and judgmentally risk rated. They are periodically monitored and
prompt corrective actions are taken on deteriorating loans. Retail loans are
typically underwritten with statistical decision-making tools and are managed
throughout their life cycle on a portfolio basis.
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 ongoing loan review. 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.
At September 30, 2005, non-performing loans totaled $15,771,000,
a decrease of $3,510,000 from December 31, 2004, as noted in Note 4. Loans and
Allowance, included within the Notes to Consolidated Condensed Financial
Statements of this Form 10-Q.
At September 30, 2005, impaired loans totaled $43,357,000, a decrease
of $6,054,000 from December 31, 2004. At September 30, 2005, an allowance for
losses was not deemed necessary for impaired loans totaling $34,818,000, but an
allowance of $2,427,000 was recorded for the remaining balance of impaired loans
of $8,538,000 and is included in the Corporation's allowance for loan losses.
At December 31, 2004, impaired loans totaled $49,411,000. An allowance
for losses was not deemed necessary for impaired loans totaling $41,683,000, but
an allowance of $1,673,000 was recorded for the remaining balance of impaired
loans of $7,728,000 and is included in the Corporation's allowance for loan
losses. The average balance of impaired loans for 2004 was $59,568,000.
At September 30, 2005, the allowance for loan losses was $25,149,000,
an increase of $2,601,000 from year end 2004. As a percent of loans, the
allowance was 1.03 percent at September 30, 2005 and .93 percent at December 31,
2004. The allowance for loan losses increased due to additional provision for
loan losses expense recorded, which is discussed below.
The provision for loan losses for the first nine months of 2005
was $6,409,000, an increase of $1,937,000 from $4,472,000 for the same period in
2004. The Corporation's provision for loan losses increased primarily due to an
increase in the five-year rolling historical loan charge-off ratio utilized
within the Corporation's allowance for loan losses calculation.
Page 17
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 funding
sources. At September 30, 2005, total borrowings from the FHLB were
$231,448,000. 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, 2005, was $90,126,000. At
September 30, 2005, the Corporation's revolving line of credit had a balance of
$13,500,000 and a remaining borrowing capacity of $6,500,000.
The principal source of asset-funded liquidity is investment securities
classified as available-for-sale, the market values of which totaled
$424,818,000 at September 30, 2005, an increase of $8,641,000 or 2.1 percent
over December 31, 2004. 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 $1,053,000 at September 30, 2005. 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, 2005 are as follows:
At September 30,
(Dollars in thousands) 2005
================================================================================
Amounts of commitments:
Loan commitments to extend credit ............................... $ 546,209
Standby letters of credit ....................................... 27,462
----------
$ 573,671
==========
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, 2005 are as follows:
2005 2006 2007 2008 2009 2010 Total
(Dollars in thousands) remaining and after
=======================================================================================================
Operating leases ......... $ 438 $ 1,515 $ 1,144 $ 880 $ 829 $ 2,286 $ 7,092
Long-term debt ........... 99,555 48,859 32,495 31,882 11,385 199,783 423,959
-------- -------- -------- -------- -------- -------- --------
Total .................... $ 99,993 $ 50,374 $ 33,639 $ 32,762 $ 12,214 $202,069 $431,051
======== ======== ======== ======== ======== ======== ========
Page 18
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, 2005, 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 19
FIRST MERCHANTS CORPORATION
FORM 10-Q
The comparative rising and falling scenarios for the period ended August
31, 2006 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 August 31, 2006 are as follows:
Driver Rates RISING FALLING
=============================================================
Prime 200 Basis Points (200) Basis Points
Federal Funds 200 (200)
One-Year CMT 200 (200)
Two-Year CMT 200 (200)
CD's 200 (91)
FHLB Advances 200 (200)
Results for the base, rising and falling interest rate scenarios are
listed below, based upon the Corporation's rate sensitive assets and liabilities
at August 31, 2005. 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
(Dollars in thousands)
=========================================================================
Net Interest Income $106,411 $110,914 $100,179
Variance from base $ 4,504 $ (6,232)
Percent of change from base 4.2% (5.9)%
The comparative rising and falling scenarios for the period ended December
31, 2005 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, 2005 are as follows:
Driver Rates RISING FALLING
=============================================================
Prime 200 Basis Points (200) Basis Points
Federal Funds 200 (200)
One-Year CMT 200 (200)
Two-Year CMT 200 (200)
CD's 200 (74)
FHLB Advances 200 (200)
Results for the base, rising and falling interest rate scenarios are listed
below. 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
(Dollars in thousands)
=========================================================================
Net Interest Income $109,311 $117,212 $ 97,757
Variance from base $ 7,901 $(11,554)
Percent of change from base 7.2% (10.6)%
Page 20
FIRST MERCHANTS CORPORATION
FORM 10-Q
EARNING ASSETS
The following table presents the earning asset mix as of September
30, 2005, and December 31, 2004.
Loans increased approximately $8,641,000 from December 31, 2004 to
September 30, 2005, and investment securities increased by approximately
$15,259,000 during the same period. Real estate construction, real estate
commercial and farmland, commercial and industrial loans, tax exempt loans and
other loans increased approximately $48,419,000 during the first nine months of
2005 as compared to the balances outstanding at December 31, 2004. These
increases were offset by a $30,880,000 decline in agricultural loans,
residential real estate loans, leases and loans to individuals.
----------------------------------------------------------------------------------------------------
EARNING ASSETS
(Dollars in thousands) September 30, December 31,
2005 2004
----------------------------------------------------------------------------------------------------
Federal funds sold and interest-bearing time deposits $ 10,708 $ 9,343
Investment securities available for sale ............ 424,818 416,177
Investment securities held to maturity .............. 11,976 5,358
Mortgage loans held for sale ........................ 5,026 3,367
Loans ............................................... 2,443,931 2,428,051
Federal Reserve and Federal Home Loan Bank stock 23,165 22,858
---------- ----------
Total .......................... $2,919,624 $2,885,154
========== ==========
--------------------------------------------------------------------------------
DEPOSITS AND BORROWINGS
The table below reflects the level of deposits and borrowed funds
(federal funds purchased; repurchase agreements; Federal Home Loan Bank
advances; and subordinated debentures, revolving credit lines and term loans)
based on period ending amounts as of September 30, 2005 and December 31, 2004.
(Dollars in thousands) September 30, December 31,
2005 2004
---------- ----------
Deposits ........................................ $2,465,293 $2,408,150
Federal funds purchased.......................... 19,450 32,550
Securities sold under repurchase agreements...... 70,605 87,472
Federal Home Loan Bank advances ................. 231,448 223,663
Subordinated debentures, revolving credit lines
and term loans................................ 102,456 97,206
---------- ----------
$2,889,252 $2,849,041
========== ==========
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. The interest
rate risk is included as part of the Corporation's interest simulation discussed
in Management's Discussion and Analysis of Financial Condition and Results of
Operations under the headings "LIQUIDITY" and "INTEREST SENSITIVITY AND
DISCLOSURES ABOUT MARKET RISK".
Page 21
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, 2005 and 2004.
During the nine months ended September 30, 2005, asset yields increased
44 basis points (FTE) and interest costs increased 37 basis points resulting in
a seven basis point (FTE) increase in net interest income as compared to the
same period in 2004. The improvement in margin was primarily a result of five 25
basis point overnight federal funds rate increases by the Federal Open Market
Committee during this period. As a result, the Corporation's prime lending rates
increased accordingly, while offsetting deposit rate increases were less
significant.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
(Dollars in Thousands) 2005 2004 2005 2004
---------- ---------- ---------- ----------
Annualized Net Interest Income........................ $ 112,560 $ 107,168 $ 110,670 $ 104,362
Annualized FTE Adjustment............................. $ 3,781 $ 3,924 $ 3,723 $ 3,569
Annualized Net Interest Income
On a Fully Taxable Equivalent Basis................. $ 116,341 $ 111,092 $ 114,393 $ 107,931
Average Earning Assets................................ $2,908,431 $2,818,392 $2,891,142 $2,772,189
Interest Income (FTE) as a Percent
of Average Earning Assets........................... 6.40% 5.79% 6.15% 5.71%
Interest Expense as a Percent
of Average Earning Assets........................... 2.40% 1.85% 2.19% 1.82%
Net Interest Income (FTE) as a Percent
of Average Earning Assets........................... 4.00% 3.94% 3.96% 3.89%
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 22
FIRST MERCHANTS CORPORATION
FORM 10-Q
OTHER INCOME
Other income in the third quarter of 2005 was $369,000 or 4.4 percent
higher than the same quarter of 2004. Most of the increase was related to an
increase in fees for debit card usage.
Other income in the first nine months of 2005 was $705,000 or 2.7
percent higher than the same period of 2004.
Four items primarily account for the change:
1. Insurance commissions increased by $714,000, due to the receipt of
larger profit sharing payments from insurance underwriters, as compared
to the same period in 2004.
2. An increase of $542,000 in fees for debit card usage.
3. A cash payment was received of approximately $232,000, related to the
Corporation's membership in a credit card network that was merged with
another card network.
4. Gains on loan sales decreased by $697,000 or 32.4 percent from the
same period in 2004 as stabilizing mortgage rates caused reduced volume
from refinancing of mortgage loans.
OTHER EXPENSES
Total other expenses represent non-interest expenses of the
Corporation. Total other expenses during the third quarter of 2005 increased
from the third quarter of 2004 by $511,000 or 2.2 percent.
Other expense in the first nine months of 2005 was $2,755,000 or 4.1
percent higher than the same period in 2004.
Two areas account for most of the change:
1. A pension accounting loss, totaling approximately $1,630,000, recorded
during the first quarter of 2005. The loss resulted from the
curtailment of the accumulation of defined benefits in the
Corporation's defined benefit pension plan.
2. In 2004, the Corporation reversed an accrual of $260,000 on a claim
that was settled for less than the accrued amount causing a reduction
in other expenses in the second quarter of 2004.
Page 23
FIRST MERCHANTS CORPORATION
FORM 10-Q
INCOME TAXES
Income tax expense, for the nine months ended September 30, 2005,
decreased by $20,000 from the same period in 2004. The effective tax rate was
30.0 and 30.8 percent for the 2005 and 2004 periods.
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 24
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
None
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
---------------------------------------------------
a. On September 1, 2005, the Corporation issued 16,762 unregistered
shares of its common stock pursuant to a Merger Agreement dated
September 1, 2005, between the Corporation, First Merchants
Insurance Services, Inc. and Trustcorp Financial Services of
Greenville, Inc. ("Trustcorp"). The Corporation issued the
unregistered shares to the shareholders of Trustcorp, at a value of
$25.95 per share, in exchange for all the common stock of
Trustcorp. The issuance by the Corporation of its shares of common
stock were not registered under the Securities Act of 1933, as
amended ("Securities Act"). The shares were issued pursuant to the
exemption contemplated in Section 4 (2) of the Securities Act, for
transactions not involving a public offering.
b. None
c. Issuer Purchases of Equity Securities
The following table presents information relating to the Corporation's purchases
of its equity securities during the quarter ended September 30, 2005, as
follows(1):
MAXIMUM NUMBER OF
TOTAL NUMBER OF SHARES THAT MAY YET
TOTAL NUMBER OF AVERAGE PRICE SHARES PURCHASED AS PART BE PURCHASED UNDER
PERIOD SHARES PURCHASED PAID PER SHARE OF BOARD AUTHORIZATION(1) BOARD AUTHORIZATION(1)
------ ---------------- -------------- ------------------------- ------------------------
07/01/05 - 07/31/05 5,967(2) $26.67 0 0
08/01/05 - 08/31/05 693(2) $26.00 0 0
09/01/05 - 09/30/05 0 0 0 0
(1) On February 8, 2005, the Corporation's Board authorized management to
repurchase up to 250,000 shares of the Corporation's Common Stock. On June 14,
2005 and August 9, 2005, the Corporation's Board authorized management to
repurchase additional shares of the Corporation's Common Stock, totaling 6,500
and 243,500 shares, respectively. These authorizations were not publicly
announced and expire February 14, 2006. There were 243,500 remaining shares that
may yet be purchased pursuant to such authorizations as of September 30, 2005.
(2) All shares were purchased in connection with the exercise of certain
outstanding options.
Item 3. Defaults Upon Senior Securities
----------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
None
Item 5. Other Information
--------------------------
a. None
b. None
Page 25
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART II. OTHER INFORMATION
Item 6. Exhibits
-----------------------------------------
Exhibit No.: Description of Exhibit: Form 10-Q Page No.:
------------ ------------------------- -------------------
31.1 Certification of Chief 29
Executive Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
31.2 Certification of Chief 30
Financial Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
32 Certifications Pursuant to 31
18 U.S.C. Section 1350, as
Adopted Pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002
Page 26
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: November 9, 2005 by /s/ Michael L. Cox
-------------------------- -------------------------------------
Michael L. Cox
President and Chief Executive Officer
Date: November 9, 2005 by /s/ Mark K. Hardwick
-------------------------- -------------------------------------
Mark K. Hardwick
Senior Vice President and
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
Page 27
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 29
Executive Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
31.2 Certification of Chief 30
Financial Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
32 Certifications Pursuant to 31
18 U.S.C. Section 1350, as
Adopted Pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002
Page 28
EXHIBIT-31.1
FIRST MERCHANTS CORPORATION
FORM 10-Q
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
-------------
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 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)) and internal
control over financial reporting (as defined in the Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) 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
(d) 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 9, 2005 /s/Michael L. Cox
----------------------------------------
Michael L. Cox
President and Chief Executive Officer
Page 29
EXHIBIT-31.2
FIRST MERCHANTS CORPORATION
FORM 10-Q
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
-------------
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 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)) and internal
control over financial reporting (as defined in the Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) 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
(d) 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 9, 2005 /s/Mark K. Hardwick
----------------------------------------
Mark K. Hardwick
Senior Vice President and
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
Page 30
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, 2005 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: November 9, 2005 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, 2005 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: November 9, 2005 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 31