UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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 [ ]
As of July 20, 2005, there were 18,462,045 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)
June 30, December 31,
2005 2004
------------ ------------
(Unaudited)
ASSETS:
Cash and due from banks ....................................... $ 71,498 $ 69,960
Interest-bearing deposits...................................... 9,255 9,343
Investment securities available for sale ...................... 416,758 416,177
Investment securities held to maturity ........................ 3,927 5,358
Mortgage loans held for sale................................... 1,356 3,367
Loans, net of allowance for loan losses of $25,091 and $22,548. 2,415,815 2,405,503
Premises and equipment ........................................ 37,240 38,254
Federal Reserve and Federal Home Loan Bank stock............... 23,054 22,858
Interest receivable ........................................... 16,950 17,318
Goodwill ...................................................... 120,697 120,615
Core deposit intangibles ...................................... 19,102 20,669
Cash surrender value of life insurance......................... 42,827 42,061
Other assets .................................................. 22,819 20,185
----------- -----------
Total assets .............................................. $ 3,201,298 $ 3,191,668
=========== ===========
LIABILITIES:
Deposits:
Noninterest-bearing ......................................... $ 363,654 $ 330,685
Interest-bearing ............................................ 2,040,624 2,077,465
----------- -----------
Total deposits ............................................ 2,404,278 2,408,150
Borrowings .................................................... 454,400 440,891
Interest payable .............................................. 5,068 4,411
Other liabilities.............................................. 24,194 23,613
----------- -----------
Total liabilities ......................................... 2,887,940 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 - 18,415,725 and 18,573,997 shares.... 2,302 2,322
Additional paid-in capital .................................... 146,057 150,862
Retained earnings ............................................. 167,452 161,459
Accumulated other comprehensive income (loss).................. (2,453) (40)
----------- -----------
Total stockholders' equity ................................ 313,358 314,603
----------- -----------
Total liabilities and stockholders' equity ................ $ 3,201,298 $ 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 Six Months Ended
June 30, June 30,
2005 2004 2005 2004
Interest Income:
Loans receivable
Taxable ................................................... $38,831 $34,021 $ 75,653 $ 68,248
Tax exempt ................................................ 189 137 323 300
Investment securities
Taxable ................................................... 2,376 2,052 4,705 4,001
Tax exempt ................................................ 1,554 1,420 3,107 2,850
Federal funds sold .......................................... 112 37 139 55
Deposits with financial institutions ........................ 166 125 308 234
Federal Reserve and Federal Home Loan Bank stock ............ 285 307 593 635
------- ------- -------- --------
Total interest income ..................................... 43,513 38,099 84,828 76,323
------- ------- -------- --------
Interest expense:
Deposits .................................................... 10,829 7,879 20,535 16,069
Borrowings .................................................. 4,763 4,373 9,430 8,775
------- ------- ------- -------
Total interest expense .................................... 15,592 12,252 29,965 24,844
------- ------- ------- -------
Net Interest Income ........................................... 27,921 25,847 54,863 51,479
Provision for loan losses ..................................... 1,948 1,720 4,615 3,092
------- ------- ------- -------
Net Interest Income After Provision for Loan Losses ........... 25,973 24,127 50,248 48,387
------- ------- ------- -------
Other Income:
Net realized gains on sales of available-for-sale securities. 6 363 6 400
Other income ................................................ 8,756 8,893 17,802 17,072
------- ------- ------- -------
Total other income ............................................ 8,762 9,256 17,808 17,472
------- ------- ------- -------
Other expenses:
Salaries and benefits ....................................... 13,258 13,059 28,079 26,083
Other expenses .............................................. 9,941 9,563 19,351 19,103
------- ------- ------- -------
Total other expenses .......................................... 23,199 22,622 47,430 45,186
------- ------- ------- -------
Income before income tax ...................................... 11,536 10,761 20,626 20,673
Income tax expense ............................................ 3,615 3,406 6,138 6,383
------- ------- ------- -------
Net Income .................................................... $ 7,921 $ 7,355 $14,488 $14,290
======= ======= ======= =======
Per share:
Basic ..................................................... $ .43 $ .40 $ .78 $ .77
Diluted ................................................... .43 .40 .78 .77
Dividends ................................................. .23 .23 .46 .46
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 Six Months Ended
June 30 June 30
---------------------- ---------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Net Income...................................................................... $ 7,921 $ 7,355 $14,488 $14,290
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 $(916), $4,183, $1,606 and $2,745......... 1,374 (6,274) (2,409) (4,117)
Less: Reclassification adjustment for gains included
in net income, net of income tax expense of $2, $145, $2 and $160......... 4 218 4 240
--------- --------- --------- ---------
1,370 (6,492) (2,413) (4,357)
--------- --------- --------- ---------
Comprehensive income ........................................................... $ 9,291 $ 863 $12,075 $ 9,933
========= ========= ========= =========
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 ...................................................... 14,488 14,290
Cash dividends .................................................. (8,495) (8,510)
Other comprehensive loss, net of tax ............................ (2,413) (4,357)
Stock issued under dividend reinvestment and stock purchase plans 335 674
Stock options exercised ......................................... 1,631 636
Stock redeemed .................................................. (6,791) (2,430)
--------- ---------
Balances, June 30 ............................................... $ 313,358 $ 304,268
========= =========
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)
Six Months Ended
June 30,
----------------------------------
2005 2004
---------------- ---------------
Cash Flows From Operating Activities:
Net income........................................................................ $ 14,488 $ 14,290
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses....................................................... 4,615 3,092
Depreciation and amortization................................................... 2,463 2,549
Mortgage loans originated for sale.............................................. (29,737) (47,746)
Proceeds from sales of mortgage loans........................................... 31,748 46,788
Change in interest receivable................................................... 368 1,897
Change in interest payable...................................................... 657 (464)
Other adjustments............................................................... 474 1,302
--------------- ---------------
Net cash provided by operating activities..................................... $ 25,076 $ 21,708
--------------- ---------------
Cash Flows From Investing Activities:
Net change in interest-bearing deposits........................................... $ 88 $ (12,283)
Purchases of securities available for sale........................................ (44,581) (126,522)
Proceeds from maturities of securities available for sale......................... 39,493 44,001
Proceeds from sales of securities available for sale.............................. 1,735 23,180
Purchase of Federal Reserve and Federal Home Loan Bank Stock...................... (196) (6,992)
Net change in loans............................................................... (14,927) (14,952)
Other adjustments................................................................. (1,467) (3,830)
--------------- ---------------
Net cash used by investing activities......................................... $ (19,855) $ (97,398)
--------------- ---------------
Cash Flows From Financing Activities:
Net change in
Demand and savings deposits..................................................... $ (123,516) $ (26,586)
Certificates of deposit and other time deposits................................. 119,644 36,594
Borrowings...................................................................... 13,508 38,216
Cash dividends.................................................................... (8,494) (8,510)
Stock issued under dividend reinvestment and stock purchase plans................. 335 674
Stock options exercised........................................................... 1,631 637
Stock redeemed.................................................................... (6,791) (2,430)
--------------- ---------------
Net cash provided/(used) by financing activities.............................. (3,683) 38,595
--------------- ---------------
Net Change in Cash and Cash Equivalents............................................. 1,538 (37,095)
Cash and Cash Equivalents, January 1................................................ 69,960 109,527
--------------- ---------------
Cash and Cash Equivalents, June 30.................................................. $ 71,498 $ 72,432
=============== ===============
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 six month periods ended June
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.
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 Six Months Ended
June 30, June 30,
2005 2004 2005 2004
------------------------- -------------------------
Net income, as reported ..................................... $ 7,921 $ 7,355 $ 14,488 $ 14,290
Less: Total stock-based employee compensation
cost determined under the fair value based
method, net of income taxes .............................. (271) (229) (547) (459)
---------- ---------- ---------- ----------
Pro forma net income ........................................ $ 7,650 $ 7,126 $ 13,941 $ 13,831
========== ========== ========== ==========
Earnings per share:
Basic - as reported ...................................... $ .43 $ .40 $ .78 $ .77
Basic - pro forma ........................................ .42 .38 .75 .75
Diluted - as reported .................................... .43 .40 .78 .77
Diluted - pro forma ...................................... .41 .38 .75 .74
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.
In April 2005, the SEC issued an amendment to SFAS No. 123(R), which
allows companies to implement SFAS 123(R) at the beginning of their next fiscal
year, instead of the next reporting period, that begins after June 15, 2005. The
new rule does not change the accounting required by SFAS No. 123(R), it only
changes the dates for compliance with the standard. Early adoption is permitted
in periods in which financial statemetns have not yet been issued. The
Corporation expects to adopt SFAS No. 123(R) on January 1, 2006.
NOTE 3. Investment Securities
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale at June 30, 2005
U.S. Treasury .................... $ 1,732 $ (1) $ 1,731
Federal agencies.................. 72,443 $ 14 (682) 71,775
State and municipal .............. 156,227 3,614 (243) 159,598
Mortgage-backed securities ....... 176,847 260 (2,839) 174,268
Other asset-backed securities..... 16 16
Marketable equity securities...... 9,791 (421) 9,370
-------- -------- -------- --------
Total available for sale ..... 417,056 3,888 (4,186) 416,758
-------- -------- -------- --------
Held to maturity at June 30, 2005
State and municipal............... 3,882 148 4,030
Mortgage-backed securities........ 45 45
-------- -------- -------- --------
Total held to maturity ....... 3,927 148 4,075
-------- -------- -------- --------
Total investment securities .. $420,983 $ 4,036 $ (4,186) $420,833
======== ======== ======== ========
Page 9
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale at December 31, 2004
U.S. Treasury .........................$ 1,745 $ (1) $ 1,744
Federal agencies ...................... 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
June 30, December 31,
2005 2004
---- ----
Loans:
Commercial and industrial loans .............................................. $ 463,002 $ 451,227
Agricultural production financing and other loans to farmers ................. 93,274 98,902
Real estate loans:
Construction ............................................................... 166,367 164,738
Commercial and farmland .................................................... 723,099 709,163
Residential ................................................................ 759,003 761,163
Individuals' loans for household and other personal expenditures ............. 182,362 198,532
Tax-exempt loans ............................................................. 14,135 8,203
Lease financing receivables, net of unearned income........................... 10,533 11,311
Other loans .................................................................. 29,131 24,812
----------- -----------
2,440,906 2,428,051
Allowance for loan losses..................................................... (25,091) (22,548)
----------- -----------
Total Loans............................................................... $ 2,415,815 $ 2,405,503
=========== ===========
Six Months Ended
June 30,
2005 2004
----------- -----------
Allowance for loan losses:
Balances, January 1 .......................................................... $ 22,548 $ 25,493
Provision for losses ......................................................... 4,615 3,092
Recoveries on loans .......................................................... 893 632
Loans charged off ............................................................ (2,965) (3,707)
----------- -----------
Balances, June 30 ............................................................ $ 25,091 $ 25,510
=========== ===========
Information on nonaccruing, contractually
past due 90 days or more other than
nonaccruing and restructured loans is June 30, December 31,
summarized below: 2005 2004
================================================================================
Non-accrual loans................................ $ 11,626 $ 15,355
Loans contractually past due 90 days
or more other than nonaccruing................. 3,696 1,907
Restructured loans............................... 531 2,019
-------- --------
Total........................................ $ 15,853 $ 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 June 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................. $ 7,921 18,435,677 $ .43 $ 7,355 18,511,190 $ .40
========== ==========
Effect of dilutive stock options........ 100,460 122,111
---------- ------------ ---------- ------------
Diluted net income per share:
Net income available to
common stockholders
and assumed conversions............. $ 7,921 18,536,137 $ .43 $ 7,355 18,633,301 $ .40
========== ============ ========== ========== ============ ==========
Options to purchase 329,286 and 234,282 shares for the three months ended June
30, 2005 and 2004 were not included in the earnings per share calculation
because the exercise price exceeded the average market price.
Six Months Ended June 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................. $ 14,488 18,497,328 $ .78 $ 14,290 18,514,716 $ .77
========== ==========
Effect of dilutive stock options........ 116,348 130,237
---------- ------------ ---------- ------------
Diluted net income per share:
Net income available to
common stockholders
and assumed conversions............. $ 14,488 18,613,676 $ .78 $ 14,290 18,644,953 $ .77
========== ============ ========== ========== ============ ==========
Options to purchase 319,256 and 234,283 shares for the six months ended June 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 six months
ended June 30, 2005.
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
-------------------------- --------------------------
Pension Cost
- ------------
Service cost............................................ $ 145 $ 410 $ 290 $ 960
Interest cost .......................................... 658 697 1,316 1,394
Expected return on plan assets ......................... (768) (742) (1,537) (1,402)
Amortization of the transition asset.................... (7) (38) (14) (75)
Amortization of prior service cost...................... 1 34 3 69
Amortization of the net loss............................ 24 88 47 176
Curtailment loss........................................ 1,630
---------- ---------- ---------- ----------
Total Pension Cost................................ $ 53 $ 449 $ 1,735 $ 1,122
========== ========== ========== ==========
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 68 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 June 30, 2005, equaled
$7,921,000, compared to $7,355,000 in the same period of 2004. Diluted earnings
per share were $.43, an increase of 7.5 percent from the $.40 reported for the
second quarter 2004. The increase in earnings per share is primarily a result of
the increase in the net interest margin of 12 basis points from the same period
of 2004.
Net income for the six months ended June 30, 2005, equaled $14,488,000,
compared to $14,290,000 during the same period in 2004. Diluted earnings per
share were $.78, a 1.3 percent increase from the $.77 reported in 2004.
Annualized returns on average assets and average stockholders' equity
for the three months ended June 30, 2005, were .99 percent and 10.13 percent,
respectively, compared with .96 percent and 9.56 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 six months ended June 30, 2005 were .91 percent and 9.23 percent,
respectively, compared with .93 percent and 9.30 percent for the same period of
2004. The decreases in return on average shareholders' equity and return on
average assets for the six months ended June 30, 2005, were primarily due to
increased provision for loan losses and a pension accounting loss resulting from
the curtailment of the accumulation of defined benefits in the Corporation's
defined benefit pension plan. These losses were somewhat mitigated by an
increase in net interest margin of 6 basis points from the same period in 2004.
For further analysis, see the respective sections of Management's Discussion and
Analysis of Financial Condition and Results of Operations.
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 7.6 percent at June 30, 2005 and 7.5 percent at year end 2004.
In addition, at June 30, 2005, the Corporation had a Tier I risk-based capital
ratio of 9.7 percent and total risk-based capital ratio of 11.8 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 June 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 5.9 percent as of June 30, 2005, and 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.
June 30, December 31,
(Dollars in thousands) 2005 2004
Average Goodwill .......................... $ 112,281 $ 112,281
Average Core Deposit Intangible (CDI) ..... 19,766 22,164
Average Deferred Tax on CDI ............... (7,236) (8,105)
----------- -----------
Intangible Adjustment ................... $ 124,811 $ 126,340
=========== ===========
Average Stockholders' Equity (GAAP Capital) $ 313,961 $ 310,004
Intangible Adjustment ..................... (124,811) (126,340)
----------- -----------
Average Tangible Capital ................ $ 189,150 $ 183,664
=========== ===========
Average Assets ............................ $ 3,178,420 $ 3,109,104
Intangible Adjustment ..................... (124,811) (126,340)
----------- -----------
Average Tangible Assets ................. $ 3,053,609 $ 2,982,764
=========== ===========
Net Income ................................ $ 14,488 $ 29,411
CDI Amortization, net of tax .............. 988 2,133
----------- -----------
Tangible Net Income ..................... $ 15,476 $ 31,544
=========== ===========
Diluted Earnings per Share ................ $ 0.78 $ 1.58
Diluted Tangible Earnings per Share ....... $ 0.83 $ 1.69
Return on Average GAAP Capital ............ 9.23% 9.49%
Return on Average Tangible Capital ........ 16.36% 17.49%
Return on Average Assets .................. 0.91% 0.95%
Return on Average Tangible Assets ......... 1.01% 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 independent 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 June 30, 2005, non-performing loans totaled $15,853,000, a
decrease of $3,428,000 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 June 30, 2005, impaired loans totaled $44,885,000, a decrease
of $4,526,000 from December 31, 2004. At June 30, 2005, an allowance for losses
was not deemed necessary for impaired loans totaling $35,959,000, but an
allowance of $3,081,000 was recorded for the remaining balance of impaired loans
of $8,925,000 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 June 30, 2005, the allowance for loan losses was $25,091,000, an
increase of $2,543,000 from year end 2004. As a percent of loans, the allowance
was 1.03 percent at June 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 six months of 2005 was
$4,615,000, an increase of $1,523,000 from $3,092,000 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 June 30, 2005, total borrowings from the FHLB were $230,558,000.
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 June 30, 2005, was $97,579,000. At June 30, 2005,
the Corporation's revolving line of credit had a balance of $16,583,000 and a
remaining borrowing capacity of $3,417,000.
The principal source of asset-funded liquidity is investment securities
classified as available-for-sale, the market values of which totaled
$416,758,000 at June 30, 2005, an increase of $581,000 or .4 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
$90,000 at June 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 June 30, 2005 are as follows:
At June 30,
(Dollars in thousands) 2005
================================================================================
Amounts of commitments:
Loan commitments to extend credit ............................... $ 511,145
Standby letters of credit ....................................... 22,640
----------
$ 533,785
==========
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 June 30, 2005 are as follows:
2005 2006 2007 2008 2009 2010 Total
(Dollars in thousands) remaining and after
=======================================================================================================
Operating leases ......... $ 873 $ 1,515 $ 1,144 $ 880 $ 829 $ 2,286 $ 7,527
Long-term debt ........... 132,503 50,942 32,475 29,178 9,289 199,713 454,100
-------- -------- -------- -------- -------- -------- --------
Total .................... $133,376 $ 52,457 $ 33,619 $ 30,058 $ 10,118 $201,999 $461,627
======== ======== ======== ======== ======== ======== ========
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 June 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 May 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 May 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 May 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 $105,476 $109,870 $ 95,533
Variance from base $ 4,394 $ (9,943)
Percent of change from base 4.17% (9.43)%
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 June 30,
2005, and December 31, 2004.
Loans increased approximately $12,855,000 from December 31, 2004 to June
30, 2005, while investment securities decreased by approximately $850,000 during
the same period. Real estate construction, real estate commercial and farmland,
commercial and industrial loans and other loans increased approximately
$37,584,000 during the first six months of 2005 as compared to the balances
outstanding at December 31, 2004. These increases were mitigated by declines in
agricultural loans, residential real estate loans, leases and loans to
individuals of approximately $24,730,000.
- ----------------------------------------------------------------------------------------------------
EARNING ASSETS
(Dollars in thousands) June 30, December 31,
2005 2004
- ----------------------------------------------------------------------------------------------------
Federal funds sold and interest-bearing time deposits $ 9,255 $ 9,343
Investment securities available for sale ............ 416,758 416,177
Investment securities held to maturity .............. 3,927 5,358
Mortgage loans held for sale ........................ 1,356 3,367
Loans ............................................... 2,440,906 2,428,051
Federal Reserve and Federal Home Loan Bank stock 23,054 22,858
---------- ----------
Total .......................... $2,895,256 $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 June 30, 2005 and December 31, 2004.
(Dollars in thousands) June 30, December 31,
2005 2004
---------- ----------
Deposits ........................................ $2,404,278 $2,408,150
Federal funds purchased.......................... 28,500 32,550
Securities sold under repurchase agreements...... 89,803 87,472
Federal Home Loan Bank advances ................. 230,558 223,663
Subordinated debentures, revolving credit lines
and term loans................................ 105,539 97,206
---------- ----------
$2,858,678 $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 six months ended June 30, 2005 and 2004.
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in Thousands) 2005 2004 2005 2004
Annualized Net Interest Income........................ $ 111,683 $ 103,389 $ 109,725 $ 102,958
Annualized FTE Adjustment............................. $ 3,753 $ 3,352 $ 3,694 $ 3,292
Annualized Net Interest Income
On a Fully Taxable Equivalent Basis................. $ 115,435 $ 106,741 $ 113,419 $ 106,250
Average Earning Assets................................ $2,897,984 $2,758,369 $2,882,354 $2,748,832
Interest Income (FTE) as a Percent
of Average Earning Assets........................... 6.14% 5.65% 6.01% 5.68%
Interest Expense as a Percent
of Average Earning Assets........................... 2.15% 1.78% 2.08% 1.81%
Net Interest Income (FTE) as a Percent
of Average Earning Assets........................... 3.99% 3.87% 3.93% 3.87%
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 second quarter of 2005 was $494,000 or 5.3 percent
lower than the same quarter of 2004. Gains on loan sales decreased by $573,000
from the same period in 2004 as stabilizing mortgage rates caused reduced volume
from refinancing of mortgage loans.
Other income in the first six months of 2005 was $336,000 or 1.9
percent higher than the same period of 2004.
Three items primarily account for the change:
1. Insurance commissions increased by $531,000, due to the receipt of
larger profit sharing payments from insurance underwriters, as compared
to the same period in 2004.
2. A cash payment was received of approximately $200,000, related to the
Corporation's membership in a credit card network that was merged with
another card network.
3. 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 second quarter of 2005 increased
from the second quarter of 2004 by $2,244,000 or 5.0 percent.
Two areas account for most of the change in the first six months:
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 six months ended June 30, 2005, decreased
by $245,000 from the same period in 2004. The effective tax rate was 29.8 and
30.9 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. None
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 June 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)
------ ---------------- -------------- ------------------------- ------------------------
04/01/05 - 04/30/05 75,000(2) $25.10 0 0
05/01/05 - 05/31/05 50,608(3) $25.53 0 0
06/01/05 - 06/30/05 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, the Corporation's Board authorized management to repurchase an additional
6,500 shares of the Corporation's Common Stock. These authorizations were not
publicly announced and expire February 14, 2006. There were no remaining shares
that may yet be purchased pursuant to such authorizations as of June 30, 2005.
(2) These shares were purchased in open-market transactions pursuant to the
Board's authorization to repurchase shares.
(3) 50,000 of these shares were purchased in open-market transactions pursuant
to the Board's authorization to repurchase shares. The remaining 608 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
- ------------------------------------------------------------
a. The Annual Meeting of Shareholders of the Corporation was held on
April 14, 2005.
b. No response is required.
c. The following matters were voted on by shareholders:
i) Election of Directors - The following directors were elected for a
term of three years, except for Charles E. Schalliol who was
elected for a term of two years.
Vote Count
------------------------------------------------
Vote For Vote Against Vote Abstained
---------------- -------------- --------------
Thomas B. Clark 14,635,384 0 242,675
Roderick English 14,647,346 0 230,713
Jo Ann M. Gora 14,576,143 0 301,916
Charles E. Schalliol 14,668,769 0 209,290
Jean L. Wojtowicz 14,659,005 0 219,054
ii) Ratification of the appointment of Registered Independent Public
Accounting Firm - BKD, LLP, Indianapolis, Indiana: Votes For -
14,737,725, Votes Against - 40,542, Votes Abstained - 99,791.
d. Not applicable.
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.:
------------ ------------------------- -------------------
10.1 First Merchants Corporation 29
Senior Management Incentive
Compensation Program, as
amended on June 6, 2005
10.2 First Merchants Corporation
Change of Control Agreement
with Shawn Blackburn dated
May 2, 2005. (Incorporated by
reference to registrant's
Form 8-K filed on May 4,
2005.)
31.1 Certification of Chief 35
Executive Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
31.2 Certification of Chief 36
Financial Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
32 Certifications Pursuant to 37
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: August 9, 2005 by /s/ Michael L. Cox
-------------------------- -------------------------------------
Michael L. Cox
President and Chief Executive Officer
Date: August 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.:
------------ ------------------------- -------------------
10.1 First Merchants Corporation 29
Senior Management Incentive
Compensation Program, as
amended on June 6, 2005
10.2 First Merchants Corporation
Change of Control Agreement
with Shawn Blackburn dated
May 2, 2005. (Incorporated by
reference to registrant's
Form 8-K filed on May 4,
2005.)
31.1 Certification of Chief 35
Executive Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
31.2 Certification of Chief 36
Financial Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
32 Certifications Pursuant to 37
18 U.S.C. Section 1350, as
Adopted Pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002
Page 28
EXHIBIT-10.1
First Merchants Corporation
Senior Management Incentive
Compensation Program
Approved February 1, 2005
Amended June 6, 2005
I. Purpose
The Board of Directors of First Merchants Corporation (FMC) has established an
executive compensation program, which is designed to provide incentives to
executive officers to achieve short-term and long-term corporate strategic
management goals, with the ultimate objective of obtaining a superior return on
the shareholders' investment. The purpose of the plan is to: (1) incorporate
modern incentive plan techniques; (2) incorporate executive retention features;
and (3) to closely align the interests of executives with those of shareholders.
II. Administration
This plan will be administered solely by the Compensation and Human Resources
Committee (Committee) of FMC, with supporting documentation and recommendations
provided by the Chief Executive Officer (CEO) of FMC. The Committee will
annually review the targets for applicability and competitiveness.
The Committee will have the authority to: (a) modify the formal plan document;
(b) make the final award determinations; (c) set conditions for eligibility and
awards; (d) define extraordinary accounting events in calculating earnings; (e)
establish future payout schedules; (f) determine circumstances/causes for which
payouts can be withheld; and (g) abolish the plan.
III. Covered Individuals by Title and Position Description
A. President and Chief Executive Officer of FMC;
B. Executive Vice President and Chief Operating Officer of FMC;
C. Senior Executives of FMC as recommended by CEO;
D. Affiliate Bank CEOs; and
E. Non-Bank Affiliate CEOs.
In order to receive an award, a participant must be employed at the time of the
award except for conditions of death, disability or retirement.
Page 29
IV. Implementation Parameters
A. The FMC CEO and COO earnings component payouts will be determined
by changes in FMC EPS calculated on both a GAAP and "cash basis".
When an FMC earnings component is included in the plans of all
other participants, it will be based on cash basis EPS growth.
Payouts to affiliate participants on their respective company
earnings component will be determined by changes in "operating
earnings" (net income plus or minus non-operating items
including goodwill amortization and corporate administrative
charges.)
B. To calculate the payouts under the plan, the prior year payouts
will weight at 40% and the current year will weight at 60%.
C. Affiliate participants' bonus will be determined by a balanced
scorecard tailored to each unit incorporating a specific
weighting on various operating initiatives as set by the CEO and
COO.
D. Two-thirds (2/3) of the bonus will be paid in cash after approval
of the bonus by the Committee following the end of the applicable
plan year and one-third (1/3) in deferred stock units payable not
later than the last day of February after the end of the second
plan year following the plan year for which the deferred stock
units were allocated, unless the deferred component is less
than $1,000 in which event the entire bonus will be paid in cash.
The deferred stock units, when paid, will be paid in cash at a
value equal to the fair market value of FMC stock on the December
31 preceding the payment date plus accumulated dividends.
Termination for cause or voluntary termination, excluding
retirement, death or disability, prior to the payment date will
cancel these deferred stock units.
E. Participants may elect to defer all or part of the cash bonus to
be paid at a future time determined by the participant. Such
deferral elections must be made no later than June 30 of each
year and will be credited quarterly at an interest factor
equivalent to the current five-year Treasury bond.
Page 30
V. Plan Structure
All payouts will be determined from the attached schedules of
percentage change in EPS (Section VI, B) and ROE attainment
(Section VI, C).
A. CEO of FMC
1. Target bonus of 45% of base compensation
2. A weighting of % change in:
a. Operating EPS at 40%;
b. Diluted GAAP EPS at 30%; and
c. 30% based on a target ROE of 15%
B. EVP & COO of FMC
1. Target bonus of 40% of base compensation
2. A weighting of % change in:
a. Operating EPS at 40%;
b. Diluted GAAP EPS at 30%; and
c. 30% based on a target ROE of 15%
C. SVP of FMC
1. Target bonus of 30% of base compensation.
2. A weighting of % change in:
a. FMC Operating EPS at 70%; and
b. Personal objectives at 30%.
D. Senior Officers of FMC
1. Target bonus of 25% of base compensation
2. A weighting of % change in:
a. FMC Operating EPS at 70%; and
b. Personal objectives at 30%
E. Division Heads of FMC
1. Target bonus of 15% of base compensation
2. A weighting of % change in:
a. FMC Operating EPS at 70%; and
b. Personal objectives at 30%
Page 31
F. Affiliate Bank CEOs (see attached balanced scorecard schedule)
1. Target bonus of 25% of base compensation
2. A % weighting of: (to be determined annually by CEO
& COO)
a. Balanced scorecard objectives;
b. FMC Operating EPS; and
c. Personal objectives
G. Non-Bank Affiliate CEOs
1. Target bonus of 25% of base compensation
2. A weighting of % change in:
a. Affiliate revenue growth predetermined by
FMC CEO;
b. Affiliate operating earnings predetermined
by CEO; and
c. Personal objectives
VI. Supporting Parameters
A. Where individual components are applicable, they must be
measurable with both beginning points and standard targets cited.
B. Schedule Determining both Operating earnings and EPS and GAAP
earnings and EPS Payouts for Year 2005
Operating Earnings % Change* Payout %
<3% 0%
3% 30%
4% 40%
5% 50%
6% 60%
7% 70%
8% 80%
9% 90%
Target 10% 100%
12% 120%
14% 140%
16% 160%
18% 180%
20% 200%
*Operating earnings adds back charges for amortization of goodwill
and other non-operating expenses as determined by the Committee.
Page 32
C. Schedule ROE Payouts for Year 2005
Operating ROE*Payout %
<10% 0%
10% 10%
11% 20%
12% 40%
13% 60%
14% 80%
Target 15% 100%
16% 120%
17% 140%
18% 160%
19% 180%
20% 200%
*Operating earnings adds back charges for amortization of goodwill
and other non-operating expenses as determined by the Committee.
D. Schedule Determining Operating Earnings Payouts for Year 2005 for
Non-Bank Affiliates
Operating Earnings % Change* Payout %
<15% 0%
15% 30%
20% 40%
25% 50%
30% 60%
35% 70%
40% 80%
45% 90%
Target >50% 100%
*Operating earnings adds back charges for amortization of goodwill
and other non-operating expenses as determined by the Committee.
Page 33
E. Schedule of Participants (referenced in Section III)
Section Group Name
VII, A FMC CEO Michael L. Cox
VII, B FMC COO Roger M. Arwood
VII, C FMC SVP Bob Connors
Kim Ellington
Mark Hardwick
Larry R. Helms
VII, D FMC Senior Officers
VII, E FMC Division Heads Jeff Davis
Stephan Fluhler
Phil Fortner
Chris Hoyt
Jeff Lorentson
Gary Marshall
Pam Miller
David Ortega
Bob Rhoades
VII, F Affiliate Bank CEOs Tony Albrecht
Mike Baker
Bob Bell
Dennis Bieberich
Jack Demaree
John Finnerty
Hal Job
Jim Meinerding
Tom McAuliffe
James Thrash
VII, G Non-Bank Affiliate CEOs Dan VanTreese
Page 34
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: August 9, 2005 /s/Michael L. Cox
----------------------------------------
Michael L. Cox
President and Chief Executive Officer
Page 35
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: August 9, 2005 /s/Mark K. Hardwick
----------------------------------------
Mark K. Hardwick
Senior Vice President and
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
Page 36
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 June 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 August 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 June 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 August 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 37