10-Q 1 september10q.txt PERIOD ENDING SEPTEMBER 30, 2001 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001. [ ] 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 000-22469 LAFAYETTE BANCORPORATION (Exact name of registrant as specified in its charter) INDIANA 35-1605492 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 133 North 4th Street, Lafayette, Indiana 47902 (Address of principal executive offices) (Zip Code) (765) 423-7100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1994 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding at November 9, 2001 Common Stock, without par value 3,961,589 shares LAFAYETTE BANCORPORATION INDEX PART I. FINANCIAL INFORMATION Item 1. Consolidated Balance Sheets -- September 30, 2001 and December 31, 2000 Consolidated Statements of Income and Comprehensive Income -- Three Months Ended September 30, 2001 and 2000 Consolidated Statements of Income and Comprehensive Income -- Nine Months Ended September 30, 2001 and 2000 Consolidated Statements of Cash Flows -- Nine Months Ended September 30, 2001 and 2000 Notes to Consolidated Financial Statements -- September 30, 2001 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a) Exhibits b) Reports on Form 8-K SIGNATURES ITEM 1. LAFAYETTE BANCORPORATION CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands) ------------------------------------------------------------------------------- (Unaudited) September 30, December 31, 2001 2000 ---- ---- ASSETS Cash and due from banks $ 22,416 $ 26,452 Interest-bearing balances with other financial institutions 14,942 21,820 Federal funds sold 8,800 25,200 -------------- ------------- Total cash and cash equivalents 46,158 73,472 Securities available-for-sale (at market) 94,235 78,857 Securities held-to-maturity (market value $4,095 and $4,580) 3,918 4,484 Loans held for sale 9,253 5,949 Loans 555,238 537,725 Less: Allowance for loan losses (5,445) (5,071) -------------- ------------- Loans, net 549,793 532,654 Federal Home Loan Bank stock (at cost) 2,344 2,200 Premises, furniture and equipment, net 10,756 11,353 Intangible assets 12,470 13,007 Accrued interest receivable and other assets 18,626 19,171 -------------- ------------- Total assets $ 747,553 $ 741,147 ============== ============= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Noninterest-bearing deposits $ 65,432 $ 70,866 Interest-bearing demand and savings deposits 259,973 230,984 Interest-bearing time deposits 278,055 276,447 -------------- ------------- Total deposits 603,460 578,297 Short-term borrowings 32,519 55,572 FHLB advances 35,066 35,737 Note payable 10,500 11,550 Accrued interest payable and other liabilities 7,354 7,190 -------------- ------------- Total liabilities 688,899 688,346

------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. Shareholders' equity Common stock, no par value: 20,000,000 shares authorized; 3,961,589 and 3,953,616 shares issued and outstanding 3,962 3,954 Additional paid-in capital 38,119 38,024 Retained earnings 15,461 11,086 Accumulated other comprehensive income 1,112 (263) -------------- -------------- Total shareholders' equity 58,654 52,801 -------------- ------------- Total liabilities and shareholders' equity $ 747,553 $ 741,147 ============== =============

------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. LAFAYETTE BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the three months ended September 30, 2001 and 2000 (Dollar amounts in thousands, except per share data) (Unaudited) ------------------------------------------------------------------------------- 2001 2000 ---- ---- Interest income Loans $ 11,747 $ 12,036 Taxable securities 838 826 Tax exempt securities 427 413 Other 361 152 -------------- ------------- Total interest income 13,373 13,427 Interest expense Deposits 5,468 6,069 Short-term borrowings 393 416 Other borrowings 677 716 -------------- ------------- Total interest expense 6,538 7,201 -------------- ------------- Net interest income 6,835 6,226 Provision for loan losses 300 300 -------------- ------------- Net interest income after provision for loan losses 6,535 5,926 Noninterest income Income from fiduciary activities 296 245 Service charges on deposit accounts 541 507 Net realized gain on securities - (12) Net gain on loan sales 527 193 Other service charges and fees 267 271 Investment product commissions 93 135 Other operating income 126 64 -------------- ------------- Total noninterest income 1,850 1,403 -------------- ------------- Noninterest expense Salaries and employee benefits 3,156 2,776 Occupancy expenses, net 320 325 Equipment expenses 466 446 Intangible amortization 179 185 Other operating expenses 1,279 1,203 -------------- ------------- Total noninterest expense 5,400 4,935 -------------- ------------- Income before income taxes 2,985 2,394 Income taxes 966 760 -------------- ------------- Net income 2,019 1,634 -------------- ------------- Other comprehensive income, net of tax: Change in unrealized gains / (losses) on securities 709 460 -------------- ------------- Comprehensive income $ 2,728 $ 2,094 ============== ============= Basic earnings per share $ .51 $ .41 ============== ============= Diluted earnings per share $ .50 $ .41 ============== ============= Dividend per share $ .11 $ .10 ============== =============

------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. LAFAYETTE BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the nine months ended September 30, 2001 and 2000 (Dollar amounts in thousands, except per share data) (Unaudited) ------------------------------------------------------------------------------- 2001 2000 ---- ---- Interest income Loans $ 35,581 $ 34,276 Taxable securities 2,473 2,508 Tax exempt securities 1,279 1,239 Other 1,571 405 -------------- ------------- Total interest income 40,904 38,428 Interest expense Deposits 17,876 16,696 Short-term borrowings 1,291 1,241 Other borrowings 2,114 1,884 -------------- ------------- Total interest expense 21,281 19,821 -------------- ------------- Net interest income 19,623 18,607 Provision for loan losses 900 900 -------------- ------------- Net interest income after provision for loan losses 18,723 17,707 Noninterest income Income from fiduciary activities 890 878 Service charges on deposit accounts 1,551 1,373 Net realized gain on securities - (12) Net gain on loan sales 1,397 464 Other service charges and fees 793 796 Investment product commissions 308 574 Other operating income 376 216 -------------- ------------- Total noninterest income 5,315 4,289 -------------- ------------- Noninterest expense Salaries and employee benefits 9,226 7,806 Occupancy expenses, net 965 907 Equipment expenses 1,395 1,279 Intangible amortization 537 555 Other operating expenses 3,732 3,536 -------------- ------------- Total noninterest expense 15,855 14,083 -------------- ------------- Income before income taxes 8,183 7,913 Income taxes 2,580 2,674 -------------- ------------- Net income 5,603 5,239 -------------- ------------- Other comprehensive income, net of tax: Change in unrealized gains / (losses) on securities 1,375 543 -------------- ------------- Comprehensive income $ 6,978 $ 5,782 ============== ============= Basic earnings per share $ 1.41 $ 1.33 ============== ============= Diluted earnings per share $ 1.40 $ 1.31 ============== ============= Dividend per share $ .31 $ .28 ============== =============

------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. LAFAYETTE BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended September 30, 2001 and 2000 (Dollar amounts in thousands) (Unaudited) ------------------------------------------------------------------------------- 2001 2000 ---- ---- Cash flows from operating activities Net income $ 5,603 $ 5,239 Adjustments to reconcile net income to net cash from operating activities Depreciation 1,092 983 Net amortization 572 546 Provision for loan losses 900 900 Net realized (gain) loss on sale of : Securities - 12 Other real estate (5) (5) Change in assets and liabilities: Loans originated for sale (93,225) (37,190) Loans sold 89,921 36,818 Accrued interest receivable and other assets (244) (1,206) Accrued interest payable and other liabilities 164 442 ----------- ----------- Net cash from operating activities 4,778 6,539 Cash flows from investing activities Purchase of securities available-for-sale (79,877) (49,160) Proceeds from sales of securities available-for-sale - 2,375 Proceeds from maturities of securities available-for-sale 66,746 49,520 Proceeds from maturities of securities held-to-maturity 566 229 Loans made to customers, net of payments collected (18,314) (45,687) Purchase of Federal Home Loan Bank stock (144) (303) Property and equipment expenditures (495) (1,975) Proceeds from sales of other real estate 162 470 ----------- ----------- Net cash from investing activities (31,356) (44,531) Cash flows from financing activities Net change in deposit accounts 25,163 35,434 Net change in short-term borrowings (23,053) 791 Proceeds from FHLB advances - 17,000 Payments on FHLB advances (671) (16,204) Payments on note payable (1,050) (1,050) Common stock issued 103 98 Dividends paid (1,228) (1,113) ------------ ------------ Net cash from financing activities (736) 34,956 ------------ ------------ Net change in cash and cash equivalents (27,314) (3,036) Cash and cash equivalents at beginning of period 73,472 30,570 ----------- ----------- Cash and cash equivalents at end of period $ 46,158 $ 27,534 =========== ===========

Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 21,694 $ 19,386 Income taxes 3,040 2,610 Non-cash investing activity Loans transferred to other real estate $ 298 $ 50

------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Dollar amounts in thousands, except per share data) (Unaudited) ------------------------------------------------------------------------------- NOTE 1 - BASIS OF PRESENTATION The significant accounting policies followed by Lafayette Bancorporation (the "Corporation") for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. The consolidated interim financial statements have been prepared in accordance with Generally Accepted Accounting Principles and in accordance with instructions to Form 10-Q and may not include all information and footnotes normally disclosed for full annual financial statements. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements and all such adjustments are of a normal recurring nature. Certain prior period information has been reclassified to correspond with the 2001 presentation. NOTE 2 - PENDING MERGER On October 15, 2001, Lafayette Bancorporation signed a definitive agreement with First Merchants Corporation, located in Muncie, Indiana, to merge with and into First Merchants Corporation. Under the terms of the agreement, upon the closing of this transaction, Lafayette Bank and Trust Company will be a wholly-owned subsidiary of First Merchants Corporation. The transaction is subject to shareholder and regulatory approval and is expected to be effective in the first quarter of 2002. NOTE 3 - PER SHARE DATA The following illustrates the computation of basic and diluted earnings per share, and includes the weighted average number of shares used in calculating earnings and dividends per share amounts for the periods presented. The weighted average number of shares has been retroactively restated for stock dividends and splits. Nine Months Ended ----------------- September 30, September 30, 2001 2000 ---- ---- Basic earnings per share Net income $ 5,603 $ 5,239 Weighted average shares outstanding 3,958,906 3,949,445 ------------- -------------- Basic earnings per share $ 1.41 $ 1.33 ============= ============== Diluted earnings per share Net income $ 5,603 $ 5,239 Weighted average shares outstanding 3,958,906 3,949,445 Dilutive effect of assumed exercise of Stock Options 38,634 40,400 ------------- -------------- Diluted average shares outstanding 3,997,540 3,989,845 -------------- -------------- Diluted earnings per share $ 1.40 $ 1.31 ============== ==============

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Dollar amounts in thousands, except per share data) (Unaudited) ------------------------------------------------------------------------------- Three Months Ended ------------------ September 30, September 30, 2001 2000 ---- ---- Basic earnings per share Net income $ 2,019 $ 1,634 Weighted average shares outstanding 3,961,589 3,952,256 ------------- -------------- Basic earnings per share $ .51 $ .41 ============= ============== Diluted earnings per share Net income $ 2,019 $ 1,634 Weighted average shares outstanding 3,961,589 3,952,256 Dilutive effect of assumed exercise of Stock Options 48,139 25,089 ------------- -------------- Diluted average shares outstanding 4,009,728 3,977,345 ------------- -------------- Diluted earnings per share $ .50 $ .41 ============= ==============

NOTE 4 - SECURITIES The amortized cost and estimated fair values of securities are as follows at September 30, 2001: Amortized Estimated Cost Fair Value Securities Available-for-Sale U.S. Government and its agencies $ 3,000 $ 3,030 Obligations of states and political subdivisions 31,352 32,109 Corporate obligations 10,108 10,534 Mortgage-backed and other asset-backed securities 45,379 45,996 Other securities 2,554 2,566 ----------- ----------- $ 92,393 $ 94,235 =========== =========== Securities Held-to-Maturity Obligations of states and political subdivisions $ 3,918 $ 4,095 =========== ===========

The amortized cost and estimated fair values of securities are as follows at December 31, 2000: Amortized Estimated Cost Fair Value Securities Available-for-Sale U.S. Government and its agencies $ 4,201 $ 4,193 Obligations of states and political subdivisions 30,880 31,012 Corporate obligations 3,953 4,001 Mortgage-backed and other asset-backed securities 37,699 37,105 Other securities 2,560 2,546 ----------- ----------- $ 79,293 $ 78,857 =========== =========== Securities Held-to-Maturity Obligations of states and political subdivisions $ 4,484 $ 4,580 =========== ===========

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Dollar amounts in thousands, except per share data) (Unaudited) ------------------------------------------------------------------------------- NOTE 5 - LOANS Loans are comprised of the following: September 30, December 31, 2001 2000 ---- ---- Commercial and agricultural loans $ 228,914 $ 215,087 Real estate construction loans 64,171 54,768 Residential real estate loans 210,843 212,190 Installment loans to individuals 46,323 50,696 Commercial paper 4,987 4,984 ---------------- --------------- Total loans $ 555,238 $ 537,725 ================ ===============

NOTE 6 - ALLOWANCE FOR LOAN LOSSES The activity in the allowance for loan losses is as follows: 2001 2000 ---- ---- Balance, January 1 $ 5,071 $ 4,618 Provision charged to operations 900 900 Loans charged-off (605) (527) Recoveries on loans previously charged-off 79 95 ------------- -------------- Balance, September 30 $ 5,445 $ 5,086 ============= ==============

NOTE 7 - SHORT-TERM BORROWINGS Short-term borrowings are comprised of the following: September 30, December 31, 2001 2000 ---- ---- Repurchase agreements $ 29,719 $ 54,275 Treasury tax and loan open-end note 2,800 1,297 ---------------- --------------- Total short-term borrowings $ 32,519 $ 55,572 ================ ===============

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Dollar amounts in thousands, except per share data) (Unaudited) ------------------------------------------------------------------------------- NOTE 8 - SEGMENT INFORMATION The Corporation's operations include three primary segments: banking, mortgage banking, and trust. Through its banking subsidiary's locations in Tippecanoe, White, and Jasper Counties, the Corporation provides traditional community banking services, such as accepting deposits and making commercial, residential and consumer loans. Mortgage banking activities include the origination of residential mortgage loans for sale on a servicing released basis to various investors. The Corporation's trust department provides both personal and corporate trust services. The Corporation's three reportable segments are determined by the products and services offered. Interest on loans, investments and deposits comprise the primary revenues and expenses of the banking operation, net gains on loans sold account for the revenues in the mortgage banking segment, and trust administration fees provide the primary revenues in the trust department. The following segment financial information has been derived from the internal profitability reporting system utilized by management to monitor and manage the financial performance of the Corporation. The accounting policies of the three segments are the same as those described in the summary of significant accounting policies of the annual report. The Corporation evaluates segment performance based on profit or loss before income taxes. The evaluation process for the mortgage banking and trust segments include only direct expenses, while certain indirect expenses, including goodwill, are absorbed by the banking operation. The difference between segment totals and consolidated totals are holding company amounts and income tax expense. Quarter ended September 30: 2001 Mortgage Total ---- Banking Banking Trust Segments Net interest income $ 6,894 $ 81 $ - $ 6,975 Net gain on loan sales - 527 - 527 Other revenue 1,027 - 296 1,323 Noncash items: Depreciation 347 14 12 373 Provision for loan loss 300 - - 300 Segment profit 2,864 287 92 3,243 Segment assets 737,532 9,408 145 747,085

2000 Mortgage Total ---- Banking Banking Trust Segments Net interest income $ 6,434 $ 35 $ - $ 6,469 Net gain on loan sales - 193 - 193 Other revenue 965 - 245 1,210 Noncash items: Depreciation 324 13 12 349 Provision for loan loss 300 - - 300 Segment profit 2,646 (21) 62 2,687 Segment assets 682,097 3,700 191 685,988

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Dollar amounts in thousands, except per share data) (Unaudited) ------------------------------------------------------------------------------- Nine months ended September 30: 2001 Mortgage Total ---- Banking Banking Trust Segments Net interest income $ 19,912 $ 207 $ - $ 20,119 Net gain on loan sales - 1,397 - 1,397 Other revenue 3,027 1 890 3,918 Noncash items: Depreciation 1,013 43 36 1,092 Provision for loan loss 900 - - 900 Segment profit 8,018 692 230 8,940 Segment assets 737,532 9,408 145 747,085

2000 Mortgage Total ---- Banking Banking Trust Segments Net interest income $ 19,201 $ 105 $ - $ 19,306 Net gain on loan sales - 464 - 464 Other revenue 2,941 6 878 3,825 Noncash items: Depreciation 912 35 36 983 Provision for loan loss 900 - - 900 Segment profit 7,993 85 312 8,390 Segment assets 682,097 3,700 191 685,988

NOTE 9 - NEW ACCOUNTING PRONOUNCEMENT In 2001, new accounting guidance was issued that will, beginning in 2002, revise the accounting for goodwill and intangible assets. Intangible assets with indefinite lives and goodwill will no longer be amortized, but will periodically be reviewed for impairment and written down if impaired. Additional disclosures about intangibles assets and goodwill may be required. An initial goodwill impairment test is required during the first six months of 2002. The Corporation's management is currently evaluating the impact of this new guidance. ITEM 2. LAFAYETTE BANCORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar amounts in thousands, except per share data) Lafayette Bancorporation (the "Corporation") is a one-bank holding company located in Lafayette, Indiana. The Corporation's wholly-owned subsidiary, Lafayette Bank and Trust Company ("Bank") conducts business from its main office and seventeen offices in Tippecanoe, White, and Jasper Counties, Indiana. The Corporation provides a wide range of commercial and personal banking activities, including accepting deposits; making commercial and consumer loans; originating mortgage loans; providing personal and corporate trust services; providing investment advisory and brokerage services; and providing auto, homeowners, and other insurance products. On October 15, 2001, Lafayette Bancorporation signed a definitive agreement with First Merchants Corporation, located in Muncie, Indiana, to merge with and into First Merchants Corporation. Under the terms of the agreement, upon the closing of this transaction, Lafayette Bank and Trust Company will be a wholly-owned subsidiary of First Merchants Corporation. The transaction is subject to shareholder and regulatory approval and is expected to be effective in the first quarter of 2002. On March 14, 2001, the Corporation established a loan production office in Flora, Indiana. This Carroll County Loan Center, which provides a full-range of lending products, is currently staffed by four individuals. In order to meet all the banking needs of Carroll County residents, the Corporation plans to open a full-service branch in Flora later this year. On March 15, 2000, the Corporation opened a full-service branch located in the Super Wal-Mart in Monticello, Indiana. Also, on July 19, 2000, a similar full-service branch was opened in the Super Wal-Mart in Lafayette, Indiana. Both of these locations are open seven days a week to serve the Corporation's customers. The Corporation established a new mortgage line of business during the second quarter of 2000, which assists customers in securing financing who do not meet the qualifications of conventional or traditional mortgage loan programs. The Mortgage Alternative Department only offers mortgage products, such as first and second mortgages and lines of credit, that are secured by real estate. Loans originated in this department are pre-approved for sale and are sold in the secondary mortgage market with no servicing retained. RESULTS OF OPERATIONS Net Income The Corporation earned $2,019, or $.51 per share for the third quarter of 2001 compared to $1,634, or $.41 per share for the third quarter of 2000. Net income increased $364, or 6.9% to $5,603 for the nine month period ending September 30, 2001 compared to the same 2000 time period. Basic earnings per share were $1.41 and $1.33 for the nine month periods ending September 30, 2001 and 2000. Although the Federal Reserve reduced interest rates a total of 75 basis points during the third quarter, the Corporation's net interest margin increased slightly when compared to the net interest margin during the second quarter of 2001. This increased was primarily caused by approximately 20% of the Corporation's interest-bearing time deposits maturing and ultimately repricing at significantly lower rates, given the 350 basis point reduction in interest rates through the nine months ended September 30, 2001. Also contributing to 2001 earnings were increases in service charges, net gain on loan sales, and other operating income. The increase in 2001 noninterest income was partially offset by lower investment product commissions and higher noninterest expenses. Salaries and employee benefits and occupancy and equipment expenses increased, predominately due to the full-year effect in 2001 of the two Wal-Mart branches and Mortgage Alternative Department, in addition to the Carroll County Loan Center, located in Flora, Indiana, which was established in March 2001. Return on average assets (ROA) and return on average equity (ROE) are summarized below. Three Months Ending Nine Months Ending September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- ROA 1.08% .96% 1.01% 1.05% ROE 14.03% 13.11% 13.43% 14.52%

The increase in ROA and ROE for the three months ending September 30, 2001 was primarily due to the increased net interest margin. Although the net interest margin increased for the three months ending September 30, 2001, the lower net interest margin for the nine months ending September 30, 2001 accounted for the lower ROA and ROE for that period. Net Interest Income Net interest income is the most significant component of the Corporation's earnings. Net interest income is the difference between interest and fees realized on earning assets, primarily loans and securities, and interest paid on deposits and other borrowed funds. The net interest margin is this difference expressed as a percentage of average earning assets. Net interest income is determined by several factors, including the volume of earning assets and liabilities, the mix of earning assets and liabilities, and interest rates. For the nine months ended September 30, 2001 and 2000, net interest income was $19,623 and $18,607, respectively. The 2001 amount was a $1,016, or 5.5% increase over the prior year and was attributed to the combination of the volume of earning assets increasing at a faster pace than interest-bearing liabilities, along with the volume of interest-bearing liabilities that repriced at a significantly lower rate during 2001. From September 30, 2000 to September 30, 2001, total average earning assets increased approximately $61,424, or 9.9%, while total interest-bearing liabilities increased approximately $50,808, or 8.9%. Net interest income for the third quarter of 2001 increased $609, or 9.8% from that same three month period ending September 30, 2000. Total interest income for the nine month periods ending September 30, 2001 and 2000 was $40,904 and $38,428, respectively, an increase in 2001 of $2,476, or 6.4%. Total interest income for the third quarter of 2001 decreased $54, or .4% from that same 2000 quarter. Interest and fees on loans increased $1,305, or 3.8% to $35,581 for the first nine months of 2001 compared to $34,276 for the first nine months of 2000. For the third quarter of 2001, interest and fees on loans decreased $289, or 2.4% compared to the third quarter of 2000. Although the Corporation's average loan balances have increased approximately $21,873, or 4.1% from September 30, 2000 to September 30, 2001, the lower rate environment that existed resulted in lower interest and fees on loans recorded during the third quarter of 2001. Other interest income increased $235 and $1,171, respectively, for the three and nine month periods ending September 30, 2001. The Corporation continued to experience a high level of liquidity during the third quarter, apparently due to the instability of consumer's confidence and the prolonged downturn in the economy. Management believes customers have placed their funds in high interest-bearing money market accounts and short-term certificate of deposits, rather than investing such funds in the stock market. Because management believes these funds are short-term in nature, the Corporation's strategy is not to fund longer-term loans or investment securities with these particular deposits. Total interest expense for the nine month period ending September 30, 2001 and 2000 was $21,281 and $19,821, respectively. For the third quarter of 2001, total interest expense decreased $663, or 9.2%, compared to the third quarter of 2000. From September 30, 2000 to September 30, 2001, total average interest-bearing liabilities, including short-term and long-term borrowings, increased $50,808, or 8.9%. In general, the increased volume of interest-bearing liabilities led to the higher interest expense recorded for the nine month period ending September 30, 2001. This increase, however, was significantly offset during the third quarter as a result of approximately $55,000, or 19.7% of total time deposits maturing and repricing downward approximately 200-300 basis points. The following table summarizes the Corporation's net interest income (on a tax-equivalent basis) for each of the periods presented. A marginal federal income tax rate of 34% for each period was used. Nine Months Change from Ended September 30, Prior Period 2001 2000 Amount Percent ---- ---- ------ ------- Interest income $41,624 $39,094 $2,530 6.5% Interest expense 21,281 19,821 1,460 7.4% ------ ------ ------ Net interest income $20,343 $19,273 $1,070 5.6% ======= ======= =======

Three Months Change from Ended September 30, Prior Period 2001 2000 Amount Percent ---- ---- ------ ------- Interest income $13,611 $13,661 ($ 50) (.4%) Interest expense 6,538 7,201 (663) (9.2%) ----- ----- ----- Net interest income $7,073 $6,460 $ 613 9.5% ====== ====== ======

The net interest margin, on a tax equivalent basis for the nine months ending September 30, 2001 and 2000 was 3.93% and 4.24%, respectively. Provision for Loan Losses and Asset Quality The provision for loan losses represents charges made to earnings to maintain an adequate allowance for loan losses. The allowance is maintained at an amount believed by management to be sufficient to absorb losses inherent in the credit portfolio. Management conducts, on a quarterly basis, a detailed evaluation of the adequacy of the allowance. The consolidated provision for loan losses was $900 for the nine months ending September 30, 2001 and 2000. The allowance for loan losses was $5,445 and $5,071 at September 30, 2001 and December 31, 2000, respectively. The allowance as a percentage of loans was .98% and .94% at September 30, 2001 and December 31, 2000, respectively. Although net charge-offs increased $94, or 21.8% in 2001, the provision for loan losses remained unchanged from that of the prior year primarily due to only a slight 3.26% increase in the outstanding loan balances during the current year. Nonperforming loans include nonaccrual loans, restructured loans, and loans delinquent 90 days or more. Loans are classified as nonaccrual when management believes that collection of interest is doubtful, typically when payments are past due 90 days, unless the loans are well secured and in the process of collection. The following table indicated the composition of nonperforming loans: September 30, December 31, 2001 2000 ---- ---- Loans past due 90 days or more $ 543 $ 1,052 Nonaccrual loans 2,355 2,718 Restructured loans 27 55 ---------------- --------------- Total nonperforming loans $ 2,925 $ 3,825 ================ ===============

Management believes overall asset quality remains satisfactory, as nonperforming loan totals have declined $900 since year-end. Loans past due 90 days or more have declined $509 since December 31, 2000, with approximately 47% of that balance change related to two mortgage loans being placed on nonaccrual status. Likewise, nonaccrual loan balances have declined $363 since year-end. A majority of the decrease related to one large commercial loan being removed from nonaccrual status and a portion charged-off to the allowance for loan losses. Total nonperforming loans as a percentage of assets declined to .39% at September 30, 2001, compared to .52% at December 31, 2000. Noninterest Income and Expense Noninterest income totaled $5,315 for the first nine months of 2001 compared to $4,289 for the same period in 2000, an increase of $1,026, or 23.9%. Noninterest income for the third quarter of 2001 increased $447, or 31.9%, to $1,850 compared to the prior year. Income from fiduciary activities increased for the first nine months and also for the third quarter of 2001 when compared to the same 2000 time periods. The higher fees recorded were a direct result of the increases recognized in the trust and farm management services provided. Service charges on deposit accounts comprise the largest component of noninterest income. The $178, or 13.0% increase in revenue for the first nine months of 2001 was attributed to the combination of a larger deposit base being assessed fees, along with the full period effect of an increase in the fee structure made in June 2000. For the third quarter of 2001, service charges on deposit accounts increased $34, or 6.7%, compared to the prior year. Net gain on loans originated and sold in the secondary mortgage market were $1,397 and $464 for the nine months ending September 30, 2001 and 2000, respectively, an increase of $933, or 201.1%. For the third quarter of 2001, net gain on loans sold in the secondary mortgage market was $334, or 173.1%, higher than the 2000 time period. The continued lower interest rate environment led to additional new home purchases and refinancing activities of existing homeowners, and the increase in market activity has also increased profit margins on loan sales. Loan fundings for the nine months ended September 30, 2001 increased $53,103, or 144.2% compared to the prior year, while fundings for the three months ended September 30, 2001 rose $19,898, or 143.3% when compared to that same time period one year earlier. For customers of the Investment Center, a full service brokerage operation offered exclusively through Raymond James Financial Services, Inc., member NASD/SIPC, the lackluster performance of the stock market resulted in a decline in investor activity. This decline led to a 46.3% and 31.1% decrease in investment product commissions recorded for the nine and three month periods ending September 30, 2001. Other operating income increased $160, or 74.1%, to $376 for the first nine months of 2001, while also increasing $62, or 96.9% for the third quarter of 2001 when compared to the corresponding prior year time periods. These increases were attributed to the income earned on the additional $2,995 director's life insurance coverage purchased in November 2000. Noninterest expense totaled $15,855 for the first nine months of 2001, compared to $14,083 for that same 2000 period, an increase of $1,772, or 12.6%. Total noninterest expense for the third quarter of 2001 increased $465, or 9.4% from the prior year. Salaries and employee benefits expense was $9,226 for the nine months ending September 30, 2001, an increase of $1,420, or 18.2% from the $7,806 recorded in the first nine months of 2000. Total salaries and benefits expense for the third quarter of 2001 increased $380, or 13.7%, to $3,156 compared to $2,776 recorded for the three months ending September 30, 2000. The valuation of the stock appreciation rights granted to certain senior executives accounted for a large portion of the increases reported in each of these periods, as an increase of $450 and $31 was recorded for the nine months and three months ending September 30, 2001, respectively. The remaining increases were predominately associated with staff additions in the new Wal-Mart branches, the Mortgage Alternative Department, and the Carroll County Loan Center. Occupancy and equipment expenses increased $58, or 6.4% and $116, or 9.1%, respectively for the nine months ending September 30, 2001. For the three months ending September 30, 2001, occupancy expenses decreased $5, or 1.5%, while equipment expenses increased $20, or 4.5%. Expenses associated with the Wal-Mart branches, the Mortgage Alternative Department, and the Carroll County Loan Center, such as rent, depreciation, and utilities, accounted for the majority of the recorded increases. Other operating expenses increased $196, or 5.5% to $3,732 for the first nine months of 2001 compared to the same 2000 time period. For the third quarter, other operating expenses increased $76, or 6.3%, to $1,279 compared to $1,203 for the three months ending September 30, 2000. Accounting for the majority of the increases in both periods were higher advertising, marketing, and legal expenses, along with increased operational costs of the new Carroll County Loan Center, such as telephone and postage. Mortality costs associated with the additional $2,995 of director's life insurance coverage purchased and increased fees associated with higher ATM volumes also led to higher costs incurred. Income Taxes The Corporation's effective tax rate for the nine months ended September 30, 2001 and 2000 was 31.5% and 33.8%, respectively. The current year-to-date effective tax rate is lower primarily due to a change in state tax law reflected beginning in late 2000. For the three months ended September 30, 2001 and 2000, the effective tax rate for the Corporation was 32.4% and 31.7% respectively. FINANCIAL CONDITION Total assets were $747,553 at September 30, 2001 compared to $741,147 at December 31, 2000, an increase of $6,406. Investment securities, loans held for sale, and net loans increased $14,812, $3,304, and $17,139, respectively, while cash and cash equivalents and accrued interest receivable and other assets decreased $27,314 and $545, respectively. Total deposits increased $25,163 to $603,460 at September 30, 2001 compared to $578,297 at December 31, 2000. Short-term borrowings, consisting primarily of repurchase agreements, and FHLB advances decreased $23,053 and $671, respectively, while quarterly principal repayments on the note payable totaled $1,050. Capital The Corporation and Bank are subject to various regulatory capital guidelines as required by federal and state banking agencies. These guidelines define the various components of core capital and assign risk weights to various categories of assets. Tier 1 capital consists of shareholders' equity less goodwill and core deposit intangibles, as defined by bank regulators. The definition of Tier 2 capital includes the amount of allowance for loan losses which does not exceed 1.25% of gross risk weighted assets. Total capital is the sum of Tier 1 and Tier 2 capital. The minimum requirements under the capital guidelines are a 4.00% leverage ratio (Tier 1 capital divided by average assets less intangible assets and unrealized gains/losses), a 4.00% Tier 1 risk-based capital ratio (Tier 1 capital divided by risk-weighted assets), and an 8.00% total capital ratio (Tier 1 capital plus Tier 2 capital divided by risk-weighted assets). The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) required federal regulatory agencies to define capital tiers. These are: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Under these regulations, a "well-capitalized" institution must achieve a Tier 1 risk-based capital ratio of at least 6.00%, a total capital ratio of at least 10.00%, and a leverage ratio of at least 5.00% and not be under a capital directive order. Failure to meet capital requirements can initiate regulatory action. If an institution is only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions, asset growth, and expansion may be limited, and the institution may be required to submit a capital restoration plan. At September 30, 2001, management was not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have, or are reasonably likely to have, a material effect on the Corporation's consolidated liquidity, capital resources or operations. The Corporation's actual consolidated capital amounts are presented in the following table. September 30, December 31, 2001 2000 ---- ---- Tier 1 capital Shareholders' equity $ 58,654 $ 52,801 Less: Intangibles (12,470) (13,007) Net unrealized losses on available-for-sale equity securities - (14) Add/less: Unrealized loss/(gain) on securities (1,112) 263 ----------------- --------------- TOTAL TIER 1 CAPITAL $ 45,072 $ 40,043 ================ =============== Total capital Tier 1 capital $ 45,072 $ 40,043 Allowable allowance for loan losses 5,445 5,071 ---------------- --------------- TOTAL CAPITAL $ 50,517 $ 45,114 ================ =============== RISK WEIGHTED ASSETS $ 562,410 $ 541,362 ================ =============== AVERAGE ASSETS $ 735,872 $ 692,178 ================ ===============

The Corporation and Bank's actual capital ratios and minimum required levels are presented in the following table. Actual ratios as of Minimum September 30, December 31, Capital Adequacy Well-Capitalized 2001 2000 Requirement Requirement ---- ---- ----------- ----------- Tier I Capital (to average assets) Consolidated 6.12% 5.79% 4.00% 5.00% Lafayette Bank and Trust 7.45% 7.29% 4.00% 5.00% Tier I Capital (to risk weighted assets) Consolidated 8.01% 7.40% 4.00% 6.00% Lafayette Bank and Trust 9.71% 9.26% 4.00% 6.00% Total Capital (to risk weighted assets) Consolidated 8.98% 8.33% 8.00% 10.00% Lafayette Bank and Trust 10.68% 10.19% 8.00% 10.00%

Management believes the Bank met all the capital requirements as of September 30, 2001 and December 31, 2000, and was well-capitalized under the regulatory framework for prompt corrective action. The Corporation was adequately capitalized as of September 30, 2001 and December 31, 2000. While the Corporation's total capital status was below the well-capitalized category as a result of the Jasper County branch acquisitions in 1999, capital ratios have improved each quarter since the transaction occurred, and management anticipates maintaining its adequately capitalized status for the foreseeable future. The Federal Reserve Bank considers the holding company capital adequacy in connection with any application activity which requires their approval. Further, since the Corporation's capital levels are below the well-capitalized category, the use of expedited Federal Reserve Bank procedures in any application activity which requires their approval will not be available to the Corporation until it once again becomes well-capitalized. Certain statements in this paragraph relating to future capital levels of the Corporation and Bank are forward-looking which may or may not be accurate due to the impossibility of predicting future economic and business events, including the ability of the Corporation to raise additional capital, if needed, as well as other factors that are beyond the control of the Corporation. Liquidity The consolidated statement of cash flows illustrates the elements which gave rise to the change in the Corporation's cash and cash equivalents for the nine months ended September 30, 2001 and 2000. Including net income of $5,603, the net cash from operating activities for the nine months of 2001 generated $4,778 of available cash. Net cash from investing activities utilized $31,356 of available cash primarily as a result of $12,565 of net purchases of securities and $18,314 of net loan fundings by the Corporation. Net cash from financing activities utilized $736 of available cash as a result of an $25,163 increase in deposits, offset by a $23,053 decrease in short-term borrowings, $1,050 of note payable principal repayments, and $1,228 in dividends paid. Total cash outflows for the nine-month period in 2001 exceeded cash inflows by $27,314 resulting in a cash and cash equivalent balance of $46,158 at September 30, 2001. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk of the Corporation encompasses exposure to both liquidity and interest rate risk and is reviewed quarterly by the Funds Management Committee and the Board of Directors. There have been no material changes in the quantitative and qualitative disclosures about market risks as of September 30, 2001 from the analysis and disclosures provided in the Corporation's Form 10-K for the year ended December 31, 2000. PART II. OTHER INFORMATION Item 5. Other Events On October 15, 2001, Lafayette Bancorporation signed a definitive agreement with First Merchants Corporation, located in Muncie, Indiana, to merge with and into First Merchants Corporation. Under the terms of the agreement, upon the closing of this transaction, Lafayette Bank and Trust Company will be a wholly-owned subsidiary of First Merchants Corporation. The transaction is subject to shareholder and regulatory approval and is expected to be effective in the first quarter of 2002. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits No exhibits were filed with the submission of Form 10-Q for the quarter ended September 30, 2001 (b) Reports on Form 8-K No Form 8-K was filed with the SEC during the quarter ended September 30, 2001. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 9, 2001 By /s/ Robert J. Weeder --------------------------------------- Robert J. Weeder President and CEO Date: November 9, 2001 By /s/ Marvin S. Veatch --------------------------------------- Marvin S. Veatch Vice President and Controller

LAFAYETTE BANCORPORATION 10-Q