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 March 31, 2008
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 check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Smaller reporting company [ ]
(Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of April 30, 2008, there were 18,204,227 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.........................17
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 1.A. Risk Factors................................................28
Item 2. Unregistered Sales of Equity
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....................................................29
Signatures...................................................................30
Index to Exhibits............................................................31
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)
March 31, December 31,
2008 2007
------------ ------------
(Unaudited)
ASSETS:
Cash and due from banks ....................................... $ 89,961 $ 134,683
Interest-bearing deposits...................................... 21,280 24,931
Investment securities available for sale ...................... 415,638 440,836
Investment securities held to maturity ........................ 10,417 10,331
Mortgage loans held for sale................................... 3,494 3,735
Loans, net of allowance for loan losses of $29,094 and $28,228. 2,908,616 2,848,615
Premises and equipment ........................................ 44,526 44,445
Federal Reserve and Federal Home Loan Bank stock............... 25,345 25,250
Interest receivable ........................................... 21,212 23,402
Core deposit intangibles ...................................... 11,621 12,412
Goodwill ...................................................... 123,435 123,444
Cash surrender value of life insurance......................... 71,663 70,970
Other assets .................................................. 19,950 19,033
----------- -----------
Total assets .............................................. $ 3,767,158 $ 3,782,087
=========== ===========
LIABILITIES:
Deposits:
Noninterest-bearing ......................................... $ 380,364 $ 370,397
Interest-bearing ............................................ 2,432,763 2,473,724
----------- -----------
Total deposits ............................................ 2,813,127 2,844,121
Borrowings:
Federal funds purchased ..................................... 111,144 52,350
Securities sold under repurchase agreements ................. 103,024 106,497
Federal Home Loan Bank Advances ............................. 244,468 294,101
Subordinated debentures, revolving credit lines
and term loans ............................................ 115,826 115,826
----------- -----------
Total borrowings .......................................... 574,462 568,774
Interest payable .............................................. 7,621 8,325
Other liabilities.............................................. 23,107 20,931
----------- -----------
Total liabilities ......................................... 3,418,317 3,442,151
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Cumulative Preferred Stock, $1,000 par value:
Authorized -- 600 shares
Issued and outstanding - 125 shares.......................... 125
Preferred stock, no-par value:
Authorized and unissued - 500,000 shares
Common Stock, $.125 stated value:
Authorized -- 50,000,000 shares
Issued and outstanding - 17,978,263 and 18,002,787 shares.... 2,247 2,250
Additional paid-in capital .................................... 137,633 137,801
Retained earnings ............................................. 206,710 202,750
Accumulated other comprehensive income/(loss).................. 2,126 (2,865)
----------- -----------
Total stockholders' equity ................................ 348,841 339,936
----------- -----------
Total liabilities and stockholders' equity ................ $ 3,767,158 $ 3,782,087
=========== ===========
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
March 31,
2008 2007
Interest Income:
Loans receivable
Taxable ................................................... $51,101 $49,645
Tax exempt ................................................ 165 201
Investment securities
Taxable ................................................... 3,249 3,282
Tax exempt ................................................ 1,513 1,661
Federal funds sold .......................................... 8 1
Deposits with financial institutions ........................ 282 123
Federal Reserve and Federal Home Loan Bank stock ............ 335 328
------- -------
Total interest income ..................................... 56,653 55,241
------- -------
Interest Expense:
Deposits .................................................... 19,433 21,806
Borrowings .................................................. 6,411 6,360
------- -------
Total interest expense .................................... 25,844 28,166
------- -------
Net Interest Income ........................................... 30,809 27,075
Provision for loan losses ..................................... 3,823 1,599
------- -------
Net Interest Income After Provision for Loan Losses ........... 26,986 25,476
------- -------
Other Income:
Service charges on deposit accounts ......................... 2,931 2,883
Fiduciary activities ........................................ 2,142 2,036
Other customer fees ......................................... 1,679 1,491
Commission income ............................................ 1,669 1,638
Earnings on cash surrender value of life insurance .......... 738 685
Net gains and fees on sales of loans ........................ 643 532
Net realized gains/(losses) on sales of
available-for-sale securities ............................. 73 (1)
Other income ................................................ 652 540
------- -------
Total other income ............................................ 10,527 9,804
------- -------
Other expenses:
Salaries and benefits ....................................... 16,098 14,726
Net occupancy ............................................... 1,805 1,598
Equipment ................................................... 1,654 1,722
Marketing ................................................... 484 487
Outside data processing fees................................. 882 951
Printing and office supplies................................. 281 299
Core deposit amortization.................................... 790 791
Other expenses .............................................. 4,279 3,620
------- -------
Total other expenses .......................................... 26,273 24,194
------- -------
Income Before Income Tax ...................................... 11,240 11,086
Income tax expense ............................................ 3,114 3,315
------- -------
Net Income .................................................... $ 8,126 $ 7,771
======= =======
Per share:
Basic ..................................................... $ .45 $ .42
Diluted ................................................... .45 .42
Dividends ................................................. .23 .23
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
March 31,
----------------------
2008 2007
--------- ---------
Net Income...................................................................... $ 8,126 $ 7,771
Other comprehensive income net of tax:
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the period, net of
income tax benefit of $(1,824) and $(298)................................. 3,388 553
Unrealized gains on cash flow hedges:
Unrealized gains arising during the period, net of income tax of
$(1,183) and $(41) ....................................................... 1,774 62
Amortization of items previously recorded in accumulated other
comprehensive income, net of income tax expense of $85 and $0 .............. (127)
Reclassification adjustment for gains/(losses) included in net
income, net of income tax expense of $29 and $0 .............................. (44) 1
--------- ---------
4,991 616
--------- ---------
Comprehensive income ........................................................... $ 13,117 $ 8,387
========= =========
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)
2008 2007
--------- ---------
Balances, January 1 ............................................ $ 339,936 $ 327,325
Net income ..................................................... 8,126 7,771
Cash dividends on common stock ................................. (4,166) (4,260)
Other comprehensive income net of tax........................... 4,991 616
Stock issued under dividend reinvestment and stock purchase plan 272 291
Stock options exercised, net ................................... 1,160 140
Tax benefit from stock options exercised ....................... 96 17
Stock redeemed ................................................. (2,137) (3,503)
Cumulative preferred stock issued .............................. 125
Share-based compensation ....................................... 438 251
--------- ---------
Balances, March 31 ............................................. $ 348,841 $ 328,648
========= =========
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)
Three Months Ended
March 31,
----------------------------------
2008 2007
---------------- ----------------
Cash Flows From Operating Activities:
Net income........................................................................ $ 8,126 $ 7,771
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses....................................................... 3,823 1,599
Depreciation and amortization................................................... 1,126 1,150
Share-based compensation........................................................ 438 251
Tax benefits from stock options exercised....................................... (96) (17)
Mortgage loans originated for sale.............................................. (28,904) (28,046)
Proceeds from sales of mortgage loans........................................... 29,145 30,727
Change in interest receivable................................................... 2,190 2,404
Change in interest payable...................................................... (704) 1,508
Other adjustments............................................................... 1,310 1,546
--------------- ---------------
Net cash provided by operating activities..................................... $ 16,454 $ 18,893
--------------- ---------------
Cash Flows From Investing Activities:
Net change in interest-bearing deposits........................................... $ 3,651 $ 4,499
Purchases of
Securities available for sale................................................... (550) (25,137)
Securities held to maturity..................................................... (500)
Proceeds from maturities of
Securities available for sale................................................... 30,890 14,446
Securities held to maturity..................................................... 413 389
Purchase of Federal Reserve and
Federal Home Loan Bank Stock.................................................... (95)
Purchase of bank owned life insurance ............................................ (3,500)
Net change in loans............................................................... (63,824) (39,859)
Other adjustments................................................................. (1,207) (2,019)
--------------- ---------------
Net cash used by investing activities......................................... $ (31,222) $ (51,181)
--------------- ---------------
Cash Flows From Financing Activities:
Net change in
Demand and savings deposits..................................................... $ (11,318) $ (72,495)
Certificates of deposit and other time deposits................................. (19,674) 9,345
Borrowings........................................................................ 62,794 82,333
Repayment of borrowings........................................................... (57,106) (25,908)
Cash dividends on common stock.................................................... (4,166) (4,260)
Stock issued under dividend reinvestment and stock purchase plans................. 272 291
Stock options exercised........................................................... 1,160 140
Cumulative preferred stock issued................................................. 125
Tax benefit from stock options exercised.......................................... 96 17
Stock redeemed.................................................................... (2,137) (3,503)
--------------- ---------------
Net cash used by financing activities......................................... (29,954) (14,040)
--------------- ---------------
Net Change in Cash and Cash Equivalents............................................. (44,722) (46,328)
Cash and Cash Equivalents, January 1................................................ 134,683 89,957
--------------- ---------------
Cash and Cash Equivalents, March 31................................................. $ 89,961 $ 43,629
=============== ===============
Additional cash flows information:
Interest paid .................................................................... $ 26,548 $ 26,657
Income tax paid .................................................................. 1,500 500
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
Financial Statement Preparation
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,
2007 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 months ended March 31, 2008 are not necessarily
indicative of the results to be expected for the year.
NOTE 2. Share-Based Compensation
Stock options and restricted stock awards ("RSAs") have been issued to
directors, officers and other management employees under the Corporation's 1994
Stock Option Plan and The 1999 Long-term Equity Incentive Plan. The stock
options, which have a ten year life, become 100 percent vested ranging from
three months to two years and are fully exercisable when vested. Option exercise
prices equal the Corporation's common stock closing price on NASDAQ on the date
of grant. RSAs provide for the issuance of shares of the Corporation's common
stock at no cost to the holder and generally vest after three years. The RSAs
vest only if the employee is actively employed by the Corporation on the vesting
date and, therefore, any unvested shares are forfeited.
The Corporation's 2004 Employee Stock Purchase Plan ("ESPP") provides eligible
employees of the Corporation and its subsidiaries an opportunity to purchase
shares of common stock of the Corporation through annual offerings financed by
payroll deductions. The price of the stock to be paid by the employees may not
be less than 85 percent of the lesser of the fair market value of the
Corporation's common stock at the beginning or at the end of the offering
period. Common stock purchases are made annually and are paid through advance
payroll deductions of up to 20 percent of eligible compensation.
SFAS 123(R) required the Corporation to begin recording compensation expense in
2006 related to unvested share-based awards outstanding as of December 31, 2005,
by recognizing the unamortized grant date fair value of these awards over the
remaining service periods of those awards, with no change in historical reported
fair values and earnings. Awards granted after December 31, 2005 are valued at
fair value in accordance with provisions of SFAS 123(R) and are recognized on a
straight-line basis over the service periods of each award. To complete the
exercise of vested stock options, RSA's and ESPP options, the Corporation
generally issues new shares from its authorized but unissued share pool.
Share-based compensation for the three months ended March 31, 2008 and 2007
totaled $438,000 and $251,000, respectively. Share based compensation has been
recognized as a component of salaries and benefits expense in the accompanying
Consolidated Condensed Statements of Income.
Page 8
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 2. Share-Based Compensation continued
The estimated fair value of the stock options granted during 2008 and in prior
years was calculated using a Black Scholes option pricing model. The following
summarizes the assumptions used in the 2008 Black Scholes model:
Risk-free interest rate 2.69%
Expected price volatility 32.13%
Dividend yield 3.68%
Forfeiture rate 5.00%
Weighted-average expected life, until exercise 6.53 years
The Black Scholes model incorporates assumptions to value share-based awards.
The risk-free rate of interest, for periods equal to the expected life of the
option, is based on a zero-coupon U.S. government instrument over a similar
contractual term of the equity instrument. Expected price volatility is based on
historical volatility of the Corporation's common stock. In addition, the
Corporation generally uses historical information to determine the dividend
yield and weighted-average expected life of the options, until exercise.
Separate groups of employees that have similar historical exercise behavior with
regard to option exercise timing and forfeiture rates are considered separately
for valuation and attribution purposes.
Share-based compensation expense recognized in the Consolidated Condensed
Statements of Income is based on awards ultimately expected to vest and is
reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods,
if actual forfeitures differ from those estimates. Pre-vesting forfeitures were
estimated to be approximately 5 percent for the three months ended March 31,
2008, based on historical experience.
The following table summarizes the components of the Corporation's share-based
compensation awards recorded as expense:
Three Months Ended
March 31,
2008 2007
----------- -----------
Stock and ESPP Options:
Pre-tax compensation expense ........................................$ 181 $ 119
Income tax benefit .................................................. (15) (7)
---------- ----------
Stock and ESPP option expense, net of income taxes .......................$ 166 $ 112
========== ==========
Restricted Stock Awards:
Pre-tax compensation expense ........................................$ 257 $ 132
Income tax benefit .................................................. (90) (46)
---------- ----------
Restricted stock awards expense, net of income taxes .....................$ 167 $ 86
========== ==========
Total Share-Based Compensation:
Pre-tax compensation expense ........................................$ 438 $ 251
Income tax benefit .................................................. (105) (53)
---------- ----------
Total share-based compensation expense, net of income taxes ..............$ 333 $ 198
========== ==========
Page 9
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 2. Share-Based Compensation continued
As of March 31, 2008, unrecognized compensation expense related to stock
options, RSAs and ESPP options totaling $551,000, $2,531,000 and $46,000,
respectively, is expected to be recognized over weighted-average periods of
1.42, 2.00 and 0.25 years, respectively.
Stock option activity under the Corporation's stock option plans as of March 31,
2008 and changes during the three months ended March 31, 2008 were as follows:
Weighted-
Average
Weighted- Remaining
Number Average Contractual Aggregate
of Exercise Term Intrinsic
Shares Price (in Years) Value
---------- ------------ ----------- ----------
Outstanding at January 1, 2008 .................. 1,054,430 $ 24.30
Granted ......................................... 72,300 27.93
Exercised ....................................... (100,722) 22.59
Cancelled ....................................... (13,390) 22.32
----------
Outstanding at March 31, 2008 ................... 1,012,618 $ 24.76 5.68 $3,832,357
==========
Vested and Expected to Vest at March 31, 2008 ... 999,957 $ 24.72 5.64 $3,815,778
Exercisable at March 31, 2008 ................... 882,768 $ 24.39 5.13 $3,662,314
The weighted-average grant date fair value was $6.54 for stock options granted
during the three months ended March 31, 2008.
The aggregate intrinsic value in the table above represents the total pre-tax
intrinsic value (the difference between the Corporation's closing stock price on
the last trading day of the first three months of 2008 and the exercise price,
multiplied by the number of in-the-money options) that would have been received
by the option holders had all option holders exercised their stock options on
March 31, 2008. The amount of aggregate intrinsic value will change based on the
fair market value of the Corporation's common stock.
The aggregate intrinsic value of stock options exercised during the first three
months of 2008 was $502,000. Exercise of options during this same period
resulted in cash receipts of $1,160,000. The Corporation recognized a tax
benefit of approximately $96,000 in the first three months of 2008, related to
the exercise of employee stock options and has been recorded as an increase to
additional
paid-in capital.
The following table summarizes information on unvested restricted stock awards
outstanding as of March 31, 2008:
Weighted-Average
Number of Grant-Date Fair
Shares Value
---------- -----------
Unvested RSAs at January 1, 2008 ............. 98,027 $ 27.12
Granted ...................................... 61,525 27.81
Forfeited .................................... (1,227) 25.67
Vested ....................................... (488) 25.97
----------
Unvested RSAs at March 31, 2008 .............. 157,837 $ 27.85
==========
Page 10
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 2. Share-Based Compensation continued
The grant date fair value of ESPP options was estimated at the beginning of the
July 1, 2007 offering period and approximates $184,000. The ESPP options vests
during the twelve month period ending June 30, 2008. At March 31, 2008, total
unrecognized compensation expense related to unvested ESPP options was $46,000,
which is expected to be recognized over a period of three months.
Note 3. Disclosures About Fair Value of Assets and Liabilities
Effective January 1, 2008, the Corporation adopted Statement of Financial
Accounting Standards No. 157, Fair Value Measurements (FAS 157). FAS 157 defines
fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. FAS 157 has been applied
prospectively as of the beginning of the year.
FAS 157 defines fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. FAS 157 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. The standard
describes three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilites
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilites; quoted prices in active markets that are
not active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets
or liabilities
Level 3 Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or liabilities
Following is a description of the valuation methodologies used for instruments
measured at fair value on a recurring basis and recognized in the accompanying
balance sheet, as well as the general classification of such instruments
pursuant to the valuation hierarchy.
Available-for-sale securities
Where quoted market prices are available in an active market, securities are
classified within Level 1 of the valuation hierarchy. There are no securities
classified within Level 1 of the hierarchy. If quoted market prices are not
available, then fair values are estimated by using pricing models, quoted prices
of securities with similar characteristics or discounted cash flows. Level 2
securities include treasury securities, agencies, mortgage backs, state and
municipal, corporate obligations, and marketable equity securities. In certain
cases where Level 1 or Level 2 inputs are not available, securities are
classified within Level 3 of the hierarchy and include mortgage backed
securities and corporate obligations.
The following table presents the fair value measurements of assets and
liabilities recognized in the accompanying balance sheet measured at fair value
on a recurring basis and the level within the FAS 157 fair value hierarchy in
which the fair value measurements fall at March 31, 2008.
Fair Value Measurements Using
-----------------------------------------------------------------
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs
Fair Value (Level 1) (Level 2) (Level 3)
--------------------------------------------------------------------------------
Available-for-sale securities $415,638 $404,477 $11,161
Page 11
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
The following is a reconciliation of the beginning and ending balances of
recurring fair value measurements recognized in the accompanying balance sheet
using significant unobservable Level 3 inputs:
Available-for-Sale
Securities
-----------------
Beginning balance $ 12,023
Total realized and unrealized gains and losses
Included in other comprehensive income (862)
----------
Ending balance $ 11,161
==========
There were no gains or losses included in the first quarter earnings
attributable to the change in unrealized gains or losses related to assets and
liabilites still held at March 31, 2008.
Following is a description of valuation methodologies used for instruments
measured at fair value on a non-recurring basis and recognized in the
accompanying balance sheet, as well as the general classification of such
instruments pursuant to the valuation hierarchy.
Impaired Loans
Loan impairment is reported when scheduled payments under contractual terms are
deemed uncollectible. Impaired loans are carried at the present value of
estimated future cash flows using the loan's existing rate, or the fair value of
collateral if the loan is collateral dependent. A portion of the allowance for
loan losses is allocated to impaired loans if the value of such loans is deemed
to be less than the unpaid balance. If these allocations cause the allowance for
loan losses to increase, such increase is reported as a component of the
provision for loan losses. Loan losses are charged against the allowance when
management believes the uncollectability of the loan is confirmed. During the
first quarter of 2008, certain impaired loans were partially charged-off or
re-evaluated, resulting in a remaining balance for these loans, net of specific
reserve, of $13,679,000 as of March 31, 2008. The valuation would be considered
Level 3, consisting of appraisals of underlying collateral and discounted cash
flow analysis.
Page 12
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 March 31, 2008
U.S. Treasury ........................ $ 1,501 $ 32 $ 1,533
U.S. Government-sponsored
agency securities................... 51,880 776 52,656
State and municipal .................. 146,266 3,805 $ 5 150,066
Mortgage-backed securities ........... 190,303 4,199 187 194,315
Corporate obligations ................ 13,700 2,146 11,554
Marketable equity securities.......... 6,215 701 5,514
-------- -------- -------- --------
Total available for sale ......... 409,865 8,812 3,039 415,638
-------- -------- -------- --------
Held to maturity at March 31, 2008
State and municipal................... 10,405 453 113 10,745
Mortgage-backed securities............ 12 12
-------- -------- -------- --------
Total held to maturity ........... 10,417 453 113 10,757
-------- -------- -------- --------
Total investment securities ...... $420,282 $ 9,265 $ 3,152 $426,395
======== ======== ======== ========
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale at December 31, 2007
U.S. Treasury ........................ $ 1,501 $ 18 $ 1,519
U.S. Government-sponsored
agency securities .................. 67,793 240 $ 98 67,935
State and municipal .................. 150,744 2,324 156 152,912
Mortgage-backed securities ........... 199,591 1,654 1,444 199,801
Corporate obligations ................ 13,740 1,294 12,446
Marketable equity securities ......... 6,835 612 6,223
-------- -------- -------- --------
Total available for sale .......... 440,204 4,236 3,604 440,836
-------- -------- -------- --------
Held to maturity at December 31, 2007
State and municipal .................. 10,317 237 298 10,256
Mortgage-backed securities ........... 14 14
-------- -------- -------- --------
Total held to maturity ............ 10,331 237 298 10,270
-------- -------- -------- --------
Total investment securities ....... $450,535 $ 4,473 $ 3,902 $451,106
======== ======== ======== ========
Page 13
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 5. Loans and Allowance
March 31, December 31,
2008 2007
----------- -----------
Loans:
Commercial and industrial loans .............................................. $ 724,643 $ 662,701
Agricultural production financing and other loans to farmers ................. 123,314 114,324
Real estate loans:
Construction ............................................................... 178,171 165,425
Commercial and farmland .................................................... 961,431 947,234
Residential ................................................................ 728,956 744,627
Individuals' loans for household and other personal expenditures ............. 174,857 187,880
Tax-exempt loans ............................................................. 11,646 16,423
Lease financing receivables, net of unearned income........................... 8,438 8,351
Other loans .................................................................. 26,254 29,878
----------- -----------
2,937,710 2,876,843
Allowance for loan losses..................................................... (29,094) (28,228)
----------- -----------
Total Loans............................................................... $ 2,908,616 $ 2,848,615
=========== ===========
Three Months Ended
March 31,
2008 2007
----------- -----------
Allowance for loan losses:
Balances, January 1 .......................................................... $ 28,228 $ 26,540
Provision for losses ......................................................... 3,823 1,599
Recoveries on loans .......................................................... 913 231
Loans charged off ............................................................ (3,870) (1,551)
----------- -----------
Balances, March 31 ........................................................... $ 29,094 $ 26,819
=========== ===========
March 31, December 31,
Non Performing Assets: 2008 2007
================================================================================
Non-accrual loans................................ $ 27,465 $ 29,031
Renegotiated loans............................... 142 145
-------- --------
Non performing loans (NPL)....................... 27,607 29,176
Real estate owned and repossessed assets......... 7,372 2,573
-------- --------
Non performing assets (NPA)...................... 34,979 31,749
90+ days delinquent.............................. 4,996 3,578
-------- --------
NPAS & 90+ days delinquent....................... $ 39,975 $ 35,327
======== ========
Page 14
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 6. Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted-
average shares outstanding during the reporting period. Diluted net income per
share is computed by dividing net income by the combination of all dilutive
common share equivalents, comprised of shares issuable under the Corporation's
share-based compensation plans, and the weighted-average shares outstanding
during the reporting period.
Dilutive common share equivalents include the dilutive effect of in-the-money
share-based awards, which are calculated based on the average share price for
each period using the treasury stock method. Under the treasury stock method,
the exercise price of share-based awards, the amount of compensation expense, if
any, for future service that the Corporation has not yet recognized, and the
amount of estimated tax benefits that would be recorded in additional
paid-in-captial when share-based awards are exercised, are assumed to be used to
repurchase common stock in the current period.
Three Months Ended March 31,
2008 2007
------------------------------------------- ------------------------------------------
Weighted- Weighted-
Net Average Per Share Net Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic net income per share:
Net income available to
common stockholders......................$ 8,126 17,938,442 $ .45 $ 7,771 18,410,958 $ .42
========== ==========
Effect of dilutive stock options............. 116,525 85,576
---------- ------------ ---------- ------------
Diluted net income per share:
Net income available to
common stockholders
and assumed conversions..................$ 8,126 18,054,967 $ .45 $ 7,771 18,496,534 $ .42
========== ============ ========== ========== ============ ==========
Stock options to purchase 571,407 and 610,971 shares for the three months ended
March 31, 2008 and 2007 were not included in the earnings per share calculation
because the exercise price exceeded the average market price.
Page 15
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
Note 7. Impact of Accounting Changes
EFFECT OF NEWLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (FAS 159) became effective for the
Corporation on January 1, 2008. FAS 159 allows companies an option to report
selected financial assets and liabilities at fair value. Because we did not
elect the fair value measurement provision for any of our financial assets or
liabilities, the adoption of SFAS 159 did not have any impact on our 2008
consolidated financial statements. Presently, we have not determined whether we
will elect the fair value measurement provisions for future transactions.
Effective January 1, 2008, the Corporation adopted EITF 06-4, Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements and EITF 06-10, Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Collateral Assignment
Split-Dollar Life Insurance Arrangements. The adoption of EITF 06-4 and EITF
06-10 did not have any impact on our 2008 consolidated financial statements.
Future Accounting Matters
Financial Accounting Standards Board Statement No. 141 (SFAS 141R), "Business
Combinations (Revised 2007)," was issued in December 2007 and replaces SFAS 141
which applies to all transactions and other events in which one entity obtains
control over one or more other businesses. SFAS 141R requires an acquirer, upon
initially obtaining control of another entity, to recognize the assets,
liabilities and any non-controlling interest in the acquiree at fair value as of
the acquisition date. Contingent consideration is required to be recognized and
measured at fair value on the date of acquisition rather than at a later date
when the amount of that consideration may be determinable beyond a reasonable
doubt. This fair value approach replaces the cost allocation process required
under SFAS 141 whereby the cost of an acquisition was allocated to the
individual asset acquired and liabilities assumed based on their estimated fair
value. SFAS 141R requires acquirers to expense acquisition-related costs as
incurred rather than allocating such costs to the assets acquired and
liabilities assumed. Under SFAS 141R, the requirements of SFAS 146, "Accounting
for Costs Associated with Exit or Disposal Activities," would have to be met in
order to accrue for a restructuring plan in purchase accounting. Pre-acquisition
contingencies are to be recognized at fair value, unless it is a non-contractual
contingency that is not likely to materialize, in which case, nothing should be
recognized in purchase accounting. Instead, that contingency would be subject to
the probable and estimable recognition criteria under SFAS 5, "Accounting for
Contingencies." The Corporation is evaluating the requirements of SFAS 141R to
determine if it will have a significant impact on the Corporation's financial
condition or results of operations.
Financial Accounting Standards Board Statement No. 160 (SFAS 160),
"Noncontrolling Interest in Consolidated Financial Statements, an amendment of
ARB Statement No. 51," was issued in December 2007 and establishes accounting
and reporting standards for the non-controlling interest in a subsidiary and for
the deconsolidation of a subsidiary. SFAS 160 clarifies that a non-controlling
interest in a subsidiary, which is sometimes referred to as a minority interest,
is an ownership interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements. Among other
requirements, SFAS 160 requires consolidated net income to be reported at
amounts that are attributable to both the parent and the non-controlling
interest. It also requires disclosure, on the face of the consolidated income
statement, of the amounts of consolidated net income attributable to the parent
and to the non-controlling interest. SFAS 160 is effective for the Corporation
on January 1, 2009 and is not expected to have a significant impact on the
Corporation's financial statements.
Financial Accounting Standards Board Statement No. 161 (SFAS 161), "Disclosures
About Derivative Instruments and Hedging Activities, an Amendment of FASB
Statement No. 133," was issued in March 2008 and amends and expands the
disclosure requirements of SFAS 133 to provide greater transparency about (i)
how and why an entity uses derivative instruments, (ii) how derivative
instruments and related hedge items are accounted for under SFAS 133 and its
related interpretations, and (iii) how derivative instruments and related hedged
items affect an entity's financial position, results of operations and cash
flows. To meet those objectives, SFAS 161 requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of gains and losses on derivative instruments and disclosures
about credit-risk-related contingent features in derivative agreements. SFAS 161
is effective for the Corporation on January 1, 2009 and is not expected to have
a significant impact on the Corporation's financial statements.
Page 16
FIRST MERCHANTS CORPORATION
FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
--------------
FORWARD-LOOKING STATEMENTS
We from time to time include forward-looking statements in our oral and written
communication. We 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. We intend 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 we are 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 our goals, intentions and expectations;
* statements regarding our business plan and growth strategies;
* statements regarding the asset quality of our loan and investment
portfolios; and
* estimates of our 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 our net interest margin, asset valuations
and expense expectations;
* adverse changes in the economy, which might affect our business
prospects and could cause credit-related losses and expenses;
* adverse developments in our loan and investment portfolios;
* competitive factors in the banking industry, such as the trend towards
consolidation in our market;
* changes in the banking legislation or the regulatory requirements of
federal and state agencies applicable to bank holding companies and
banks like our affiliate banks;
* acquisitions of other businesses by us and integration of such acquired
businesses;
* changes in market, economic, operational, liquidity, credit and interest
rate risks associated with our 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, our actual future results may be
materially different from the results indicated by these forward- looking
statements. In addition, our past results of operations do not necessarily
indicate our anticipated future results.
Page 17
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 us to apply
significant judgments to various accounting, reporting and disclosure matters.
We must use assumptions and estimates to apply these principles where actual
measurement is not possible or practical. For a complete discussion of our
significant accounting policies, see "Notes to the Consolidated Financial
Statements" in our Annual Report on Form 10-K for the year ended December 31,
2007. 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. We have
reviewed the application of these policies with the Audit Committee of our Board
of Directors.
We believe there have been no significant changes during the quarter ended March
31, 2008 to the items that we disclosed as our critical accounting policies and
estimates in Management's Discussion and Analysis of Financial Condition and
Results of Operations in our Annual Report on Form 10-K for the year ended
December 31, 2007.
BUSINESS SUMMARY
We are a diversified financial holding company headquartered in Muncie, Indiana.
Since its organization in 1982, the Corporation has grown to include 65 banking
center locations in 18 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. As of March 31, 2008, the
Corporation's financial service affiliates included four nationally chartered
banks: First Merchants Bank, National Association, First Merchants Bank of
Central Indiana, National Association, Lafayette Bank and Trust Company,
National Association and Commerce National Bank. The banks provide commercial
and retail banking services. In addition, our trust company, multi-line
insurance company and a title company provide trust asset management services,
retail and commercial insurance agency services and title services,
respectively.
Management believes that its vision, mission, culture statement and core values
produce profitable growth for stockholders. Management also believes it is
important to maintain a strong control environment as we continue to grow our
businesses. Interest rate and market risks inherent in our asset and liability
balances are managed within prudent ranges, while ensuring adequate liquidity
and funding. Sound credit policies are maintained and interest rate and market
risks inherent in our asset and liability balances are managed within prudent
ranges, while ensuring adequate liquidity and funding.
RESULTS OF OPERATIONS
Net income for the three months ended March 31, 2008, equaled $8,126,000,
compared to $7,771,000 in the same period of 2007. Diluted earnings per share
were $.45, an increase of 7.1 percent from the $.42 reported for the first
quarter 2007.
Annualized returns on average assets and average stockholders' equity for the
three months ended March 31, 2008, were .86 percent and 9.43 percent,
respectively, compared with .88 percent and 9.47 percent for the same period of
2007.
Page 18
FIRST MERCHANTS CORPORATION
FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations continued
------------------------
CAPITAL
Our 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. Our Tier I capital to average assets ratio was 7.3 percent at
March 31, 2008 and 7.2 percent at year end 2007. In addition, at March 31, 2008,
we had a Tier I risk-based capital ratio of 8.6 percent and total risk-based
capital ratio of 11.2 percent. Regulatory capital guidelines require a Tier I
risk-based capital ratio of at least 4.0 percent and a total risk-based capital
ratio of at least 8.0 percent.
Our GAAP capital ratio, defined as total stockholders' equity to total assets,
equaled 9.3 percent at March 31, 2008 and 9.0 percent at December 31, 2007. When
we acquire other companies for stock, GAAP capital increases by the entire
amount of the purchase price.
Our 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 March 31, 2008, and 5.7 percent at December 31, 2007.
We believe that all of the above capital ratios are meaningful measurements for
evaluating our safety and soundness. Additionally, we believe the following
table is also meaningful when considering our performance measures. The table
details and reconciles tangible earnings per share, return on tangible capital
and tangible assets to traditional GAAP measures.
March 31, December 31,
(Dollars in thousands) 2008 2007
=========== ===========
Average goodwill .......................... $ 123,435 $ 123,191
Average core deposit intangible (CDI) ..... 11,978 13,868
Average deferred tax on CDI ............... (3,178) (3,659)
----------- -----------
Intangible adjustment ................... $ 132,235 $ 133,400
=========== ===========
Average stockholders' equity (GAAP capital) $ 344,780 $ 330,786
Intangible adjustment ..................... (132,235) (133,400)
----------- -----------
Average tangible capital ................ $ 212,545 $ 197,386
=========== ===========
Average assets ............................ $ 3,758,491 $ 3,639,772
Intangible adjustment ..................... (132,235) (133,400)
----------- -----------
Average tangible assets ................. $ 3,626,256 $ 3,506,372
=========== ===========
Net income ................................ $ 8,126 $ 31,639
CDI amortization, net of tax .............. 480 1,919
----------- -----------
Tangible net income ..................... $ 8,606 $ 33,558
=========== ===========
Diluted earnings per share ................ $ .45 $ 1.73
Diluted tangible earnings per share ....... $ .48 $ 1.83
Return on average GAAP capital ............ 9.43% 9.56%
Return on average tangible capital ........ 16.42% 17.00%
Return on average assets .................. .86% .87%
Return on average tangible assets ......... .95% .96%
Page 19
FIRST MERCHANTS CORPORATION
FORM 10-Q
ASSET QUALITY/PROVISION FOR LOAN LOSSES
Our primary business focus is middle market commercial and residential real
estate, auto and small consumer lending, which results in portfolio
diversification. We ensure 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 March 31, 2008, non-performing assets, which includes nonaccrual loans,
restructured loans, and other real estate owned totaled $34,979,000, an increase
of $3,203,000 from December 31, 2007 as noted in Note 5 Loans and Allowance,
included within the Notes to Consolidated Condensed Financial Statements of this
Form 10Q. Other real estate owned increased $4,799,000 from December 31, 2007,
primarily due to one borrower. Non-performing loans will increase or decrease
going forward due to portfolio growth, routine problem loan recognition and
resolution through collections, sales or charge-offs. The performance of any
loan can be affected by external factors, such as economic conditions, or
factors particular to a borrower, such as actions of a borrower's management.
At March 31, 2008, impaired loans totaled $93,718,000, an increase of $6,769,000
from December 31, 2007. At March 31, 2008, an allowance for losses was not
deemed necessary for impaired loans totaling $71,890,000, as there was no
identified loss on these credits. An allowance of $6,121,000 was recorded for
the remaining balance of impaired loans of $21,828,000 and is included in our
allowance for loan losses. The increase of total impaired loans is primarily due
to the increase of performing, substandard classified loans, which comprise a
portion of our total impaired loans. A loan is deemed impaired when, based on
current information or events, it is probable all amounts due of principle
interest according to the contractual terms of the loan agreement will not be
collected. All of our criticized loans, including substandard, doubtful and loss
credits, are included in the impaired loan total.
At March 31, 2008, the allowance for loan losses was $29,094,000, an increase of
$866,000 from year end 2007. As a percent of loans, the allowance was .99
percent at March 31, 2008 and .98 percent at December 31, 2007.
The provision for loan losses for the first three months of 2008 was $3,823,000,
an increase of $2,224,000 from $1,599,000 for the same period in 2007. The
increase from the prior quarter was a result of increased net charge offs of
$1,637,000. The determination of the provision in any period is based on
management's continuing review and evaluation of the loan portfolio, and its
judgment as to the impact of current economic conditions on the portfolio. The
evaluation by management includes consideration of past loan loss experience,
changes in the composition of the loan portfolio, and the current condition and
amount of loans outstanding.
Page 20
FIRST MERCHANTS CORPORATION
FORM 10-Q
LIQUIDITY
Liquidity management is the process by which we ensure that adequate liquid
funds are available for us and our subsidiaries. These funds are necessary in
order 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 our asset/liability committee.
Our liquidity is dependent upon our receipt of dividends from our bank
subsidiaries, which are subject to certain regulatory limitations and access to
other funding sources. Liquidity of our 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, we utilize advances from the Federal Home Loan Bank ("FHLB") and a
revolving line of credit with LaSalle Bank, N.A. as funding sources. At March
31, 2008, total borrowings from the FHLB were $244,468,000. Our bank
subsidiaries have pledged certain mortgage loans and investments to the FHLB.
The total available remaining borrowing capacity from the FHLB at March 31,
2008, was $35,029,000. At March 31, 2008, our revolving line of credit had no
balance and a remaining borrowing capacity of $25,000,000. On February 15, 2008,
we paid down the outstanding $25,000,000 balance on the revolving line of credit
through an increase of the subordinated debenture with LaSalle.
The principal source of asset-funded liquidity is investment securities
classified as available-for-sale, the market values of which totaled
$415,638,000 at March 31, 2008, a decrease of $25,198,000 or 5.7 percent below
December 31, 2007. 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
$1,033,000 at March 31, 2008. 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, we are 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 our consolidated financial
statements. Such activities include: traditional off-balance sheet
credit-related financial instruments, commitments under operating leases and
long-term debt.
We provide customers with off-balance sheet credit support through loan
commitments and standby letters of credit. Summarized credit-related financial
instruments at March 31, 2008 are as follows:
At March 31,
(Dollars in thousands) 2008
================================================================================
Amounts of commitments:
Loan commitments to extend credit ............................... $ 764,722
Standby letters of credit ....................................... 25,009
----------
$ 789,731
==========
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, we have entered into a number of
long-term leasing arrangements to support our ongoing activities. The required
payments under such commitments and borrowings at March 31, 2008 are as follows:
2008 2009 2010 2011 2012 2013 Total
(Dollars in thousands) remaining and after
=======================================================================================================
Operating leases ......... $ 1,253 $ 1,420 $ 1,190 $ 961 $ 606 $ 79 $ 5,509
Borrowings ............... 234,794 55,348 58,071 18,944 65,874 141,431 574,462
-------- -------- -------- -------- -------- -------- --------
Total .................... $236,047 $ 56,768 $ 59,261 $ 19,905 $ 66,480 $141,510 $579,971
======== ======== ======== ======== ======== ======== ========
Page 21
FIRST MERCHANTS CORPORATION
FORM 10-Q
INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET RISK
Asset/Liability Management has been an important factor in our ability to record
consistent earnings growth through periods of interest rate volatility and
product deregulation. Management and the Board of Directors monitor our
liquidity and interest sensitivity positions at regular meetings to review how
changes in interest rates may affect earnings. Decisions regarding investments
and the pricing of loan and deposit products are made after analysis of reports
designed to measure liquidity, rate sensitivity, our exposure to changes in net
interest income given various rate scenarios and the economic and competitive
environments.
It is our objective to monitor and manage risk exposure to net interest income
caused by changes in interest rates. It is the goal of our Asset/Liability
function to provide optimum and stable net interest income. To accomplish this,
we use two asset liability tools. GAP/Interest Rate Sensitivity Reports and Net
Interest Income Simulation Modeling are both constructed, presented, and
monitored quarterly.
We believe that our liquidity and interest sensitivity position at March 31,
2008, remained adequate to meet our primary goal of achieving optimum interest
margins while avoiding undue interest rate risk.
Net interest income simulation modeling, or earnings-at-risk, measures the
sensitivity of net interest income to various interest rate movements. Our 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 on
the following page. The interest rate scenarios are used for analytical purposes
and do not necessarily represent our view of future market movements. Rather,
these are intended to provide a measure of the degree of volatility interest
rate movements may introduce into our earnings.
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 our 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
our best estimate of expected future behavior.
Page 22
FIRST MERCHANTS CORPORATION
FORM 10-Q
The comparative rising and falling scenarios below 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 us in the base simulation are as follows:
Driver Rates RISING FALLING
=============================================================
Prime 200 Basis Points (200) Basis Points
Federal Funds 200 (200)
One-Year CMT 200 (156)
Three-Year CMT 200 (182)
Five-Year CMT 200 (200)
CD's 200 (158)
FHLB Advances 200 (200)
Results for the base, rising and falling interest rate scenarios are listed
below, based upon our rate sensitive assets and liabilities at March 31,
2008. 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 $123,123 $123,353 $119,882
Variance from base $ 230 $ (3,241)
Percent of change from base (0.2)% (2.6)%
The comparative rising and falling scenarios below 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 us in the base simulation 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)
Three-Year CMT 200 (200)
Five-Year CMT 200 (200)
CD's 200 (193)
FHLB Advances 200 (200)
Results for the base, rising and falling interest rate scenarios are listed
below, based upon our rate sensitive assets and liabilities at December 31,
2007. 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 $117,693 $120,089 $116,063
Variance from base $ 2,396 $ (1,630)
Percent of change from base 2.0 % (1.4)%
Page 23
FIRST MERCHANTS CORPORATION
FORM 10-Q
EARNING ASSETS
The following table presents the earning asset mix as of March 31, 2008, and
December 31, 2007. Earning assets increased by $31,958,000 in the three months
ended March 31, 2008. Loans and loans held for sale increased by $60,626,000.
The three largest loan segments that increased were in commerical and industrial
at $61,492,000, commercial and farmland at $14,197,000, and real estate
construction at $12,746,000. Loan segments that decreased were residential real
estate of $15,671,000 and loans to individuals of $13,023,000. Investments
decreased by $25,000,000 as lower yielding investments matured and were
reinvested in higher yielding loans.
----------------------------------------------------------------------------------------------------
EARNING ASSETS
(Dollars in thousands) March 31, December 31,
2008 2007
----------------------------------------------------------------------------------------------------
Interest-bearing time deposits ...................... $21,280 $24,931
Investment securities available for sale ............ 415,638 440,836
Investment securities held to maturity .............. 10,417 10,331
Mortgage loans held for sale ........................ 3,494 3,735
Loans ............................................... 2,937,710 2,876,843
Federal Reserve and Federal Home Loan Bank stock 25,345 25,250
---------- ----------
Total .......................... $3,413,884 $3,381,926
========== ==========
--------------------------------------------------------------------------------
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 March 31, 2008 and December 31, 2007.
(Dollars in thousands) March 31, December 31,
2008 2007
---------- ----------
Deposits ........................................ $2,813,127 $2,844,121
Federal funds purchased.......................... 111,144 52,350
Securities sold under repurchase agreements...... 103,024 106,497
Federal Home Loan Bank advances ................. 244,468 294,101
Subordinated debentures, revolving credit lines,
term loans and other ......................... 115,826 115,826
---------- ----------
$3,387,589 $3,412,895
========== ==========
We have continued to leverage our 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 our 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 24
FIRST MERCHANTS CORPORATION
FORM 10-Q
NET INTEREST INCOME
Net Interest Income is the primary source of our earnings. It is a function of
net interest margin and the level of average earning assets. The table below
presents our asset yields, interest expense, and net interest income as a
percent of average earning assets for the three months ended March 31, 2008 and
2007.
During the three months ended March 31, 2008, asset yields decreased 23 basis
points on a fully taxable equivalent basis (FTE) and interest costs decreased 47
basis points (FTE), resulting in an 24 basis point (FTE) increase in net
interest income as compared to the same period in 2007.
Three Months Ended
March 31,
(Dollars in Thousands) 2008 2007
=========== ===========
Annualized net interest income........................ $ 123,237 $ 108,302
Annualized FTE adjustment............................. $ 3,615 $ 4,010
Annualized net interest income
On a fully taxable equivalent basis................. $ 126,852 $ 112,312
Average earning assets................................ $3,396,641 $3,209,807
Interest income (FTE) as a percent
of average earning assets........................... 6.78% 7.01%
Interest expense as a percent
of average earning assets........................... 3.04% 3.51%
Net interest income (FTE) as a percent
of average earning assets........................... 3.74% 3.50%
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.
HEDGING ACTIVITIES
On August 1, 2006, the Corporation purchased three prime-based interest rate
floor agreements with an aggregate notional amount of $250 million and strike
rates ranging from 6% to 7%. The combined purchase price of approximately
$550,000 was to be amortized on an allocated fair value basis over the
three-year term of the agreements. On March 19, 2008, the Corporation received
$5,216,000 in connection with the termination of the three interest rate floor
agreements. The contractual maturity of the floors was August 1, 2009. During
the life of the floors, pre-tax gains of approximately $4,662,500 were deferred
in accumulated other comprehensive income (AOCI) in accordance with cash flow
hedge accounting rules established by SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (as amended). The amounts deferred in AOCI
will be reclassified out of equity into earnings over the remaining sixteen
months of the original contract. SFAS 133 requires that amounts deferred in AOCI
be reclassified into earnings in the same periods during which the originally
hedged cash flows (prime-based interest payments on loan assets) affects
earnings, as long as the originally hedged cash flows remain probable of
occurring (i.e. the principal amount of designated prime-based loans match or
exceed the notional amount of the terminated floor through August 1, 2009). If
the principal amount of the originally hedged loans falls below the notional
amount of the terminate floors, then amounts in AOCI could be accelerated. The
Corporation decided to terminate the interest rate floor agreements only after
considering the impact of the transaction on its risk management objectives and
after alternative strategies were in place to mitigate the adverse impact of
falling interest rates on its net interest margin. At March 31, 2008, the
remaining pre-tax gains are approximately $4.2 million.
Page 25
FIRST MERCHANTS CORPORATION
FORM 10-Q
OTHER INCOME
Total other income in the first three months of 2008 was $723,000 or 7.4
percent higher than the same period of 2007.
Four items primarily account for the change:
1. Gains of $277,000 related to the termination of three interest rate floor
agreements occurred in the first quarter of 2008.
2. Other customer fees up $188,000 due to increased fees to customers and
increased interchange fees.
3. Net gains and fees on sales of mortgages loans increased $111,000 due to
additional loans sold in the secondary market.
4. Trust fees increased $106,000 as a result of increased trust business.
OTHER EXPENSES
Other expenses in the first three months of 2008 were $2,079,000 or 8.6 percent
higher than the same period in 2007.
Two items primarily account for the change:
1. Salary and employee benefit expenses were $1,372,000 higher in the first
quarter of 2008, as compared to the same period in 2007 primarily due to
staff additions and normal annual increases. Approximately $187,000 of the
increase is due to increases in share-based compensation expense.
2. Expenses related to other real estate owned and repossessed assets were
$193,000 higher in 2008 than in the same period in 2007.
Page 26
FIRST MERCHANTS CORPORATION
FORM 10-Q
INCOME TAXES
Income tax expense, for the three months ended March 31, 2008, decreased by
$201,000 from the same period in 2007. The effective tax rate was 27.7 and 29.9
percent for the 2008 and 2007 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 us, 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, we carried out an evaluation,
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures. Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our 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 our reports filed or submitted
under the Securities Exchange Act of 1934 are 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 our internal controls over financial reporting
identified in connection with the evaluation referenced above that occurred
during our last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Page 27
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
---------------------------
None
Item 1.A. Risk Factors
----------------------
There have been no material changes from the risk factors previously disclosed
in the Corporation's December 31, 2007 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
---------------------------------------------------
a. None
b. None
c. Issuer Purchases of Equity Securities
The following table presents information relating to our purchases of equity
securities during the quarter ended March 31, 2008, as follows(1):
MAXIMUM NUMBER (OR
TOTAL NUMBER OF APPROXIMATE DOLLAR VALUE)
SHARES PURCHASED AS PART OF SHARES THAT MAY YET
TOTAL NUMBER OF AVERAGE PRICE OF PUBLICLY ANNOUNCED BE PURCHASED UNDER
PERIOD SHARES PURCHASED PAID PER SHARE PLANS OR PROGRAMS THE PLANS OR PROGRAMS
------ ---------------- -------------- ------------------------- ------------------------
01/01/08 - 01/31/08 103,443(1) $22.64 95,000 390,000
02/01/08 - 02/29/08 30,308(2) 26.87 0 390,000
03/01/08 - 03/31/08 1,983(2) 29.44 0 390,000
(1) On December 4, 2007, the Corporation's Board authorized management to
repurchase up to 500,000 shares of the Corporation's Common Stock. This
authorization was publicly announced and expires December 31, 2008. Of the
103,443 shares referenced above, 95,000 shares were purchased in open
market transactions pursuant to this authorization. There were 390,000
remaining shares that may yet be purchased pursuant to such authorizations
as of March 31, 2008. The remaining 8,443 shares were purchased in
connection with the exercise of certain outstanding stock options.
(2) These shares were purchased in connection with the exercise of certain
outstanding stock 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 28
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 32
Executive Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
31.2 Certification of Chief 33
Financial Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
32 Certifications Pursuant to 34
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
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: May 9, 2008 by /s/ Michael C. Rechin
-------------------------- -------------------------------------
Michael C. Rechin
President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 9, 2008 by /s/ Mark K. Hardwick
-------------------------- -------------------------------------
Mark K. Hardwick
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Page 30
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 32
Executive Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
31.2 Certification of Chief 33
Financial Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
32 Certifications Pursuant to 34
18 U.S.C. Section 1350, as
Adopted Pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002
Page 31
EXHIBIT-31.1
FIRST MERCHANTS CORPORATION
FORM 10-Q
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
-------------
I, Michael C. Rechin, 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 of 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: May 9, 2008 by /s/ Michael C. Rechin
-------------------------------------
Michael C. Rechin
President and
Chief Executive Officer
(Principal Executive Officer)
Page 32
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, Executive 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 of 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: May 9, 2008 by: /s/Mark K. Hardwick
----------------------------------------
Mark K. Hardwick
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Page 33
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 March 31, 2008 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Michael C. Rechin, 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: May 9, 2008 by /s/ Michael C. Rechin
--------------------------- -------------------------------------
Michael C. Rechin
President and
Chief Executive Officer
(Principal 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 March 31, 2008 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Mark K. Hardwick, Executive 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: May 9, 2008 by /s/ Mark K. Hardwick
--------------------------- -------------------------------------
Mark K. Hardwick
Executive Vice President and
Chief Financial Officer
(Principal Financial 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 34