Filed by First Merchants Corporation pursuant to
Rule 425 under the Securities Act of 1933
Subject Company: First Merchants Corporation
Registration Statement File No.: 333-153656
On October 22, 2008, Lincoln Bancorp issued the following press release:
October 22, 2008
LINCOLN BANCORP ANNOUNCES THIRD QUARTER LOSS
DUE TO MERGER RELATED CHARGES
Lincoln Bancorp (NASDAQ GM: LNCB), the holding company of Lincoln Bank,
announced today that excluding certain charges related to its proposed merger as
discussed below, Lincoln's net income for the third quarter ended September 30,
2008 would have been $932,000 or $.18 for both basic and diluted earnings per
share. Despite a difficult economic climate, Lincoln recorded increases in net
interest income and net interest margin for the quarter compared to the third
quarter of 2007. However, as a result of accounting charges related to the
Lincoln's proposed merger - most significantly a write-down of goodwill on the
books from previous acquisitions - Lincoln will show a net loss for financial
reporting purposes.
As announced on September 3, 2008, Lincoln entered an Agreement of
Reorganization and Merger with First Merchants Corporation. In all merger
transactions, goodwill recorded on the books of the company being acquired as a
result of prior acquisitions of other companies is eliminated at the time of the
merger. In the case of the proposed merger between Lincoln and First Merchants
and the exchange ratio contained in the merger agreement, accounting rules
required that an evaluation of goodwill for impairment be performed. This
evaluation determined that goodwill from previous acquisitions should be
eliminated immediately rather than at the conclusion of the merger.
The following table summarizes the effects of the merger charges including:
accounting, legal and investment bank expenses and the elimination of goodwill
as discussed above, on net income and earnings per share (EPS) for both quarter
to date and year to date ending September 30, 2008.
--------------------------------- ------------------------------ -------------------- -----------------------
$ in 000's except EPS figures Excluding merger costs and Merger Costs and Actual results
goodwill elimination goodwill
elimination
-------------------------------------------------------------------------------------------------------------
Net income after tax-
quarter ending September 30,2008 $ 932 $(24,240) $(23,308)
Net income after tax-
-nine-month period ending
September 30,2008 $2,076 $(24,240) $(22,164)
Quarter-to-date EPS basic $.18 $(4.78) $(4.60)
Quarter-to-date EPS diluted $.18 $(4.78) $(4.60)
Year-to-date EPS basic $.41 $(4.80) $(4.39)
Year-to-date EPS diluted $.41 $(4.80) $(4.39)
--------------------------------- ------------------------------ -------------------- -----------------------
This accounting charge for the elimination of goodwill had no effect on
Lincoln's cash flow or the regulatory capital of Lincoln Bancorp or Lincoln
Bank. Regulatory capital measurements used to assess the strength of individual
banks, as well as the safety and soundness of the entire banking system, ignore
goodwill as a component of capital.
The Bank remains "well-capitalized" with a Tier 1 Risk-Based Capital Ratio of
10.38%, a Leverage Ratio of 8.67%, and a Total Risk-Based Capital Ratio of
11.55%. Lincoln Bancorp remains "well capitalized" with respect to Tier 1
Risk-Based and Leverage Ratios of 10.31% and 8.61%, respectively, and "well
capitalized" with respect to Total Risk-Based Capital at 11.47%.
Minimum capital adequacy regulatory ratios are 4.00% for Tier 1 Risk-Based,
4.00% for Leverage Ratio and 8.00% for Total Risk-Based capital.
Jerry Engle, the Company's President and Chief Executive Officer stressed, "This
accounting entry for goodwill, prompted by our agreement to merge with First
Merchants Corporation, has absolutely no effect on Lincoln Bank's soundness as a
financial institution, the bank's cash flow or the regulatory capital of Lincoln
Bank or Lincoln Bancorp. Our customers can expect the same high level of service
they are accustomed to." Mr. Engle also noted, "We are pleased with our core
earnings during this time of financial uncertainty. Lincoln has maintained its
community bank focus and our merger with First Merchants Corporation will allow
us to continue that emphasis going forward."
Michael Rechin, President and Chief Executive Officer of First Merchants
Corporation commented, "We look forward to the conclusion of our announced
merger with Lincoln Bancorp. These merger charges were fully anticipated by us
prior to our September 3rd announcement to merge with Lincoln Bancorp. All
required applications for approval have been filed and, at this time, no delays
are expected in completing the transaction by our announced target date of
December 31, 2008."
Net income excluding merger expenses and goodwill elimination was $932,000 for
the quarter ended September 30, 2008 or $.18 for both basic and diluted earnings
per share. This compares to net income in the third quarter of 2007 totaling
$521,000, or $.10 for both basic and diluted earnings per share.
Excluding the merger related charges and goodwill elimination, net income was
$2,076,000 for the nine-month period ended September 30, 2008 or $.41 for both
basic and diluted earnings per share.
Assets totaled $831.1 million at September 30, 2008, a decrease from December
31, 2007 of $58.2 million. The largest decrease in assets occurred in securities
available for sale, down $26.0 million and net loans, down $11.2 million.
Additionally, other assets declined $23.9 million from the elimination of
goodwill. The decline in loans occurred in residential real estate mortgages,
down $13.5 million and indirect consumer loans, down $8.8 million. Both of these
declines are in line with management's expectations. The majority of our fixed
rate mortgage product is currently being sold in the secondary market and
indirect activity has been substantially reduced due to competition. Home equity
loans increased by $14.2 million and commercial loans increased by $2.7 million
from December 31, 2007. The increase in allowance for loan losses accounted for
$1.7 million of the decline in net loans. Cash and cash equivalents increased
$1.0 million from year end 2007 as federal funds sold increased temporarily. The
decline in investment securities available for sale was primarily from called
securities during the first quarter with proceeds not reinvested, but instead
utilized to offset reductions in public fund money market deposits.
Total deposits were $594.5 million at September 30, 2008, a decrease of $61.9
million from year end December 31, 2007. The decline occurred primarily in money
market deposits down $49.0 million and certificates of deposit, down $36.3
million. This decline in money market deposits was due to the outflow of public
fund deposits as local governments paid bills as well as sought higher interest
rate alternatives. These were partially offset by increases in lower cost
deposits such as noninterest-bearing and interest-bearing demand deposit
accounts, up $1.5 million and $19.2 million, respectively, and savings accounts,
up $2.5 million from December 31, 2007. Borrowings increased by $31.1 million
from year end 2007 to $140.3 million at September 30, 2008 as wholesale
borrowing costs declined below competitive rates for public funds and certain
single service certificate of deposit customers.
Net interest income for the third quarter of 2008 was $6,152,000 compared to
$5,501,000 for the same period in 2007. Net interest margin improved to 3.11%
for the three-month period ended September 30, 2008 compared to 2.69% for the
same period in 2007. The average yield on earning assets declined 83 basis
points in the third quarter of 2008 compared to the same period in 2007 while
the average cost of interest-bearing liabilities decreased 141 basis points for
the same period. This improved the interest rate spread to 2.80% for the three
month period ended September 30, 2008 from 2.22% for the same period in 2007, or
58 basis points.
Net interest income for the nine months ended September 30, 2008 was $18,057,000
compared to $16,198,000, an increase of $1,859,000 or over 11%. Net interest
margin increased to 3.02% from 2.62% in the same period a year ago. The average
earning asset yield for the first nine months in 2008 decreased by 54 basis
points while the cost of interest bearing liabilities decreased by 108 basis
points. This improved our spread to 2.69% in 2008 from 2.15% in 2007 or 54 basis
points.
The Bank's provision for loan losses for the third quarter of 2008 was $356,000
compared to $150,000 for the same period in 2007. For the nine-month period
ended September 30, 2008, the provision for loan losses totaled $2,162,000
compared to $457,000 for the same period in 2007. The difference between the
periods was the result of the additional provision taken during the first
quarter of 2008. Nonperforming loans to total loans at September 30, 2008
increased to 2.08% from 1.22% at December 31, 2007. Nonperforming loans
increased $5.3 million to $13.2 million since December 31, 2007. More than half
of this increase was related to one specific relationship that had been
considered in our analysis of the allowance for loan losses at March 31, 2008
and provided accordingly through additional provision at that time. We continue
to work towards resolution on this credit and, at this time, believe we are
adequately reserved. Nonperforming assets to total assets were 1.71% at
September 30, 2008 compared to .95% at December 31, 2007. The allowance for loan
losses as a percent of total loans was 1.31% at September 30, 2008 compared to
1.02% at December 31, 2007. For the first three quarters of 2008, the Bank
recognized $426,000 in net charged-off loans compared to $304,000 of net
charge-offs in the same period of 2007.
Other income for the three months ended September 30, 2008 was $1,728,000
compared to $1,577,000 for the same quarter of 2007. Service charges on deposit
accounts and point of sale income increased $103,000 or 17% and $62,000 or 26%,
respectively, over the same quarter in 2007 as the results of our effort to
increase the number of checking account customers continue.
Other income for the nine months ended September 30, 2008 was $5,527,000
compared to $3,281,000 for the same period of 2007. Excluding the items related
to the restructuring during the first and second quarters of 2007, other income
would have been $4,759,000. On an adjusted basis, the nine-month period in 2008
would have exceeded 2007 by $768,000 or over 16%.
Excluding the merger related charges and goodwill elimination, other expenses
were $6,390,000 for the three months ended September 30, 2008 compared to
$6,331,000 for the same three months of 2007. The largest increase was in
salaries and employee benefits totaling $3,168,000 for the third quarter of 2008
compared to $3,009,000 during the same quarter of 2007, an increase of $159,000
or 5%. The primary reasons for the increase were annual salary increases and an
increase in full time equivalent employees to 234 from 228 for the third quarter
of 2008 compared to 2007.
Excluding the merger related charges and goodwill elimination, other expenses
for the nine month period ended September 30, 2008 were $19,190,000 compared to
$18,463,000 for the same period in 2007 or an increase of 4%. Salaries and
benefits increased $623,000 or 7%. The primary reasons for the increase were
similar to the quarterly explanation above. Data processing costs increased to
$2,107,000 for the nine months compared to $1,904,000 in the same period of 2007
or 11%. This increase was the direct result of additional new checking account
relationships added through our marketing campaign begun late in the first
quarter of 2007. Advertising and business development expenses declined by
$151,000 or 17% to $727,000 for the nine months ended September 30, 2008
compared to the same period in 2007. This was the result of reducing the costs
of our direct marketing program during the second quarter of 2008.
Lincoln Bancorp and Lincoln Bank are headquartered in Plainfield, Indiana with
additional offices in Avon, Bargersville, Brownsburg, Crawfordsville, Frankfort,
Franklin, Greenwood, Mooresville, Morgantown, Nashville and Trafalgar. The Bank
also has two loan production offices located in Carmel and Greenwood, Indiana.
First Merchants Corporation has filed a Registration Statement on Form S-4
concerning the merger with the Securities and Exchange Commission ("SEC"), which
includes the proxy statement that will be mailed to Lincoln's shareholders. This
Registration Statement has not yet been declared effective by the SEC. WE URGE
INVESTORS TO READ THESE DOCUMENTS BECAUSE THEY CONTAIN IMPORTANT INFORMATION.
Investors will be able to obtain the documents free of charge, when filed, at
the SEC's website, www.sec.gov. In addition, documents filed with the SEC by
First Merchants are available free of charge from the Secretary of First
Merchants at 200 E. Jackson Street, Muncie, IN 47305, telephone (765) 747-1500.
Documents filed with the SEC by Lincoln are available free of charge from the
Secretary of Lincoln at 905 Southfield Drive, Plainfield, IN 46168, telephone
(317) 839-6539. INVESTORS SHOULD READ THE PROXY STATEMENT CAREFULLY BEFORE
MAKING A DECISION CONCERNING THE MERGER. Copies of all recent proxy statements
and annual reports are also available free of charge from the respective
companies by contacting the company secretary.
First Merchants and Lincoln and their respective directors and executive
officers may be deemed to be participants in the solicitation of proxies to
approve the Merger. Information about the participants may be obtained through
the SEC's website from the definitive proxy statement filed with the SEC on
March 19, 2008, with respect to First Merchants and the definitive proxy
statement filed with the SEC on March 13, 2008, with respect to Lincoln.
Statements contained in this press release that are not historical facts may
constitute forward-looking statements (within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended) which involve significant risks and
uncertainties. Lincoln and the Bank intend such forward-looking statements to be
covered in the Private Securities Litigation Reform Act of 1995, and are
including this statement for purposes of invoking these safe harbor provisions.
Our ability to predict results or the actual effect of future plans or
strategies is inherently uncertain and involves a number of risks and
uncertainties, some of which have been set forth in our most recent annual
reports on Form 10-K, which disclosures we incorporate by reference in this
release. The fact that there are various risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements.
###
For additional information, contact:
Jerry R. Engle, President / CEO
Lincoln Bancorp
317-839-6539
LINCOLN BANCORP
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
(Unaudited)
(Dollars in Thousands, Except Per Share Amounts)
September 30 December 31
2008 2007
------------- -------------
Balance Sheet Data:
Total assets $ 831,106 $ 889,314
Loans, net (including loans held for sale) 628,627 639,791
Cash and cash equivalents 14,109 13,115
Investment securities available for sale 124,380 150,406
Deposits 594,458 656,405
Securities sold under repurchase agreements 14,843 16,767
Borrowings 140,258 109,177
Stockholders' equity 71,621 98,986
Shares outstanding 5,403,515 5,312,981
Equity to assets 8.62% 11.13%
Non-performing assets to total assets 1.71% 0.95%
Non-performing loans to total loans 2.08% 1.22%
Allowance for loan losses to total loans 1.31% 1.02%
Three Months Ended September 30 Nine Months Ended September 30
2008 2007 2008 2007
------------- ------------- ------------- -------------
Operating Data:
Interest and Dividend Income:
Loans $ 9,723 $ 11,083 $ 30,059 $ 33,052
Investment securities 1,667 2,372 5,241 6,593
Deposits with financial institutions and federal funds sold 14 47 59 363
Dividend income 116 99 352 302
------------- ------------- ------------- -------------
Total interest and dividend income 11,520 13,601 35,711 40,310
------------- ------------- ------------- -------------
Interest Expense:
Deposits 4,019 6,953 13,792 20,466
Borrowings 1,349 1,147 3,862 3,646
------------- ------------- ------------- -------------
Total interest expense 5,368 8,100 17,654 24,112
------------- ------------- ------------- -------------
Net Interest Income 6,152 5,501 18,057 16,198
Provision for loan losses 356 150 2,162 457
------------- ------------- ------------- -------------
Net Interest Income After Provision for Loan Losses 5,796 5,351 15,895 15,741
------------- ------------- ------------- -------------
Other Income:
Service charges on deposit accounts 724 621 2,061 1,807
Net gains (losses) on sales of loans 243 217 1,033 (956)
Net realized and unrealized gains (losses) on sales of securities - 14 70 (39)
Point of sale income 300 238 860 666
Loan servicing fees 89 98 275 250
Increase in cash value of life insurance 206 213 615 636
Other 166 176 613 917
------------- ------------- ------------- -------------
Total other income 1,728 1,577 5,527 3,281
------------- ------------- ------------- -------------
Other Expenses:
Salaries and employee benefits 3,168 3,009 9,797 9,174
Net occupancy expenses 595 632 1,852 1,769
Equipment expenses 380 420 1,202 1,265
Data processing fees 734 698 2,107 1,904
Professional fees 180 329 608 650
Advertising and business development 259 300 727 878
Core deposit intangible amortization 121 126 362 401
Merger related expenses including goodwill impairment 24,457 - 24,457 -
Other 953 817 2,535 2,422
------------- ------------ ------------ ------------
Total other expenses 30,847 6,331 43,647 18,463
------------- ------------ ------------ ------------
Income (Loss) Before Income Taxes (23,323) 597 (22,225) 559
Income tax expense (benefit) (15) 76 (61) (340)
------------- ------------- ------------- -------------
Net Income $ (23,308) $ 521 $ (22,164) $ 899
============ ============= ============= =============
Basic Earnings per Share $ (4.60) $ 0.10 $ (4.39) $ 0.18
Diluted Earnings per Share $ (4.60) $ 0.10 $ (4.39) $ 0.17
============ ============ ============ ============
Other Data:
Interest rate spread 2.80% 2.22% 2.69% 2.15%
Net interest margin 3.11% 2.69% 3.02% 2.62%
Return on average assets -10.84% 0.23% -3.40% 0.13%
Return on average equity -96.36% 2.11% -30.06% 1.21%