FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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 office) (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 October 31, 2002, there were 16,309,848 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.........................................5
Consolidated Condensed Statements of Cash Flows..............6
Notes to Consolidated Condensed Financial Statements.........8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................26
Item 4. Disclosure Controls and Procedures..........................26
PART II. Other Information:
Item 1. Legal Proceedings...........................................27
Item 2. Changes in Securities and Use of Proceeds...................27
Item 3. Defaults Upon Senior Securities.............................27
Item 4. Submission of Matters to a Vote of Security Holders.........27
Item 5. Other Information...........................................27
Item 6. Exhibits and Reports of Form 8-K............................28
Signatures...................................................................30
Certifications Pursuant to Section 302 of
The Sarbanes-Oxley Act of 2002.............................................31
Certifications Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of
The Sarbanes-Oxley Act of 2002.............................................33
Exhibit Index................................................................34
Page 2
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
September 30, December 31,
2002 2001
---------- -----------
(Unaudited)
ASSETS:
Cash and due from banks.................................................... $ 73,223 $ 68,743
Federal funds sold......................................................... 8,750 34,285
----------- -----------
Cash and cash equivalents................................................ 81,973 103,028
Interest-bearing deposits.................................................. 10,222 3,871
Investment securities available for sale................................... 335,968 231,668
Investment Securities held to maturity..................................... 9,484 8,654
Mortgage loans held for sale............................................... 14,089 307
Loans, net of allowance for loan losses of $22,147 and $15,141............. 1,971,891 1,344,445
Premises and equipment..................................................... 39,179 27,684
Federal Reserve and Federal Home Loan Bank Stock........................... 11,097 8,350
Interest receivable........................................................ 18,622 12,024
Goodwill................................................................... 86,424 26,081
Core deposit intangibles................................................... 20,329 6,096
Cash surrender value of life insurance..................................... 14,143 6,470
Other assets............................................................... 16,065 8,357
----------- -----------
Total assets........................................................... $2,629,486 $ 1,787,035
=========== ===========
LIABILITIES:
Deposits:
Noninterest-bearing...................................................... $ 246,410 $ 186,987
Interest-bearing......................................................... 1,773,325 1,234,264
----------- -----------
Total deposits......................................................... 2,019,735 1,421,251
Borrowings................................................................. 328,933 174,404
Interest payable........................................................... 6,813 5,488
Other liabilities.......................................................... 14,132 6,764
----------- -----------
Total liabilities...................................................... 2,369,613 1,607,907
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 - 16,309,442 and 13,303,822 shares................ 2,039 1,663
Additional paid-in capital................................................. 116,204 50,563
Retained earnings.......................................................... 135,266 124,304
Accumulated other comprehensive income .................................... 6,364 2,598
----------- -----------
Total stockholders' equity............................................. 259,873 179,128
----------- -----------
Total liabilities and stockholders' equity............................. $2,629,486 $ 1,787,035
=========== ===========
See notes to consolidated condensed financial statements.
Page 3
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
Interest Income:
Loans receivable
Taxable..................................................................... $35,362 $27,152 $94,504 $77,322
Tax exempt.................................................................. 169 106 403 310
Investment securities
Taxable..................................................................... 2,442 3,027 6,986 9,343
Tax exempt.................................................................. 1,793 1,032 4,450 3,083
Federal funds sold............................................................ 123 109 388 404
Deposits with financial institutions.......................................... 53 12 159 32
Federal Reserve and Federal Home Loan Bank stock.............................. 206 120 527 419
------- ------- ------- -------
Total interest income..................................................... 40,148 31,558 107,417 90,913
------- ------- ------- -------
Interest expense:
Deposits...................................................................... 10,696 11,670 29,766 35,817
Borrowings.................................................................... 4,124 2,626 9,863 7,874
------- ------- ------- -------
Total interest expense.................................................... 14,820 14,296 39,629 43,691
------- ------- ------- -------
Net Interest Income............................................................. 25,328 17,262 67,788 47,222
Provision for loan losses....................................................... 1,821 1,023 4,297 2,371
------- ------- ------- -------
Net Interest Income After Provision for Loan Losses............................. 23,507 16,239 63,491 44,851
------- ------- ------- -------
Other Income:
Net realized gains (losses) on available-for-sale securities................ 162 (167) 570 (167)
Other Income................................................................ 7,484 4,798 19,291 13,809
------- ------- ------- -------
Total other income.............................................................. 7,646 4,631 19,861 13,642
Total other expenses............................................................ 19,187 11,980 51,129 32,959
------- ------- ------- -------
Income before income tax........................................................ 11,966 8,890 32,223 25,534
Income tax expense.............................................................. 4,139 2,870 10,983 8,834
------- ------- ------- -------
Net Income...................................................................... $ 7,827 $ 6,020 $21,240 $16,700
======= ======= ======= =======
Per share:
Basic Net Income(1)......................................................... .49 .45 1.39 1.29
Diluted Net Income(1)....................................................... .48 .44 1.37 1.28
Cash Dividends Paid......................................................... .23 .23 .69 .69
(1) Prior period per share amounts have been restated for the 5% stock
dividend paid in September, 2002.
See notes to consolidated condensed financial statements.
Page 4
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net Income...................................................................... $ 7,827 $ 6,020 $ 21,240 $ 16,700
Other comprehensive income, net of tax:
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the period, net of income
tax expense of $1,563, $1,219, $2,739, and $2,448......................... 2,345 1,827 4,109 3,670
Less: Reclassification adjustment for gains (losses) included in net
income, net of income tax (expense) benefit of $(65), $66, $(228) and $66. 97 (101) 342 (101)
--------- --------- --------- ---------
2,248 1,928 3,767 3,771
--------- --------- --------- ---------
Comprehensive income............................................................ $ 10,075 $ 7,948 $ 25,007 $ 20,471
========= ========= ========= =========
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
2002 2001
--------- ---------
Balances, January 1 ............................................ $ 179,128 $ 156,063
Net income ..................................................... 21,240 16,700
Cash dividends ................................................. (10,243) (8,233)
Other comprehensive income, net of tax.......................... 3,767 3,771
Stock issued under employee benefits plans...................... 658 504
Stock issued under dividend reinvestment and stock purchase plan 686 583
Stock options exercised ........................................ 458 176
Stock Redeemed ................................................. (4,333) (6,580)
Issuance of stock in acquisitions............................... 68,547 14,601
Cash paid in lieu of fractional shares.......................... (35)
--------- ---------
Balances, September 30 ......................................... $ 259,873 $ 177,585
========= =========
See notes to consolidated condensed financial statements
Page 5
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
------------------------------------
2002 2001
---------------- ----------------
Cash Flows From Operating Activities:
Net income........................................................................ $ 21,240 $ 16,700
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses....................................................... 4,297 2,371
Depreciation and amortization................................................... 4,969 3,430
Securities amortization, net................................................... 259 (127)
Securities losses (gains), net.................................................. (570) 167
Gains on sale of premises and equipment......................................... (70)
Mortgage loans originated for sale.............................................. (78,607) (14,285)
Proceeds from sales of mortgage loans........................................... 72,384 13,455
Change in interest receivable................................................... (513) 982
Change in interest payable...................................................... (524) (622)
Other adjustments ............................................................ (6,346) (981)
---------------- ----------------
Net cash provided by operating activities..................................... $ 16,589 $ 21,020
---------------- ----------------
Cash Flows From Investing Activities:
Net change in interest-bearing deposits........................................... 4,075 (2,236)
Purchases of
Securities available for sale................................................... (105,594) (15,933)
Proceeds from maturities of
Securities available for sale................................................... 91,640 82,347
Securities held to maturity..................................................... 2,935 3,295
Proceeds from sales of
Securities available for sale................................................... 16,908 770
Net change in loans............................................................... (87,704) (51,465)
Purchase of FHLB stock............................................................ (403) (98)
Purchases of premises and equipment............................................... (4,179) (1,256)
Proceeds from sale of fixed assets................................................ 162
Net cash received (paid) in acquisitions.......................................... (12,532) 5,261
---------------- ----------------
Net cash provided (used) by investing activities................................ (94,854) 20,847
---------------- ----------------
(continued)
Page 6
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
-----------------------------------
2002 2001
---------------- ---------------
Cash Flows From Financing Activities:
Net change in
Demand and savings deposits........................................... $ (27,333) $ (21,959)
Certificates of deposit and other time deposits....................... 18,536 (28,021)
Borrowings............................................................ 78,816 18,874
Cash dividends.......................................................... (10,243) (8,233)
Stock issued under employee benefit plans............................... 658 504
Stock issued under dividend reinvestment and stock purchase plan........ 686 583
Stock options exercised................................................. 458 176
Stock repurchased....................................................... (4,333) (6,580)
Cash paid in lieu of fractional shares.................................. (35)
---------------- ----------------
Net cash provided (used) by financing activities...................... 57,210 (44,656)
---------------- ----------------
Net Change in Cash and Cash Equivalents................................... (21,055) (2,789)
Cash and Cash Equivalents, January 1...................................... 103,028 67,463
---------------- ----------------
Cash and Cash Equivalents, September 30................................... $ 81,973 $ 64,674
================ ================
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, except for the change in method of accounting or adoption
of accounting pronouncements discussed more fully in Note 2. 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,
2001 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 period are not necessarily indicative of the
results to be expected for the year.
NOTE 2. Accounting Matters
ACCOUNTING FOR A BUSINESS COMBINATION
Statement of Financial Accounting Standards ("SFAS") No. 141 requires
that most all business combinations should be accounted for using the purchase
method of accounting; use of the pooling method is prohibited.
This Statement requires that goodwill be initially recognized as an asset
in the financial statement and measured as the excess of the cost of an acquired
entity over the net of the amounts assigned to identifiable assets acquired and
liabilities assumed. In addition, SFAS No. 141 requires all other intangibles,
such as core deposit intangibles for a financial institution, to be identified.
The provisions of Statement No. 141 were effective for any business
combination that was initiated after June 30, 2001.
ACCOUNTING FOR GOODWILL
Under the provisions of SFAS No. 142, goodwill should not be amortized
but should be tested for impairment at the reporting unit level. Impairment test
of goodwill should be done on an annual basis unless events or circumstances
indicate impairment has occurred in the interim period. The annual impairment
test can be performed at any time during the year as long as the measurement
date is used consistently from year to year.
Impairment testing is a two step process, as outlined within the statement.
If the implied fair value of goodwill is less than its carrying value, then the
goodwill is deemed impaired and a loss recognized. Any impairment loss
recognized as a result of completing the transitional impairment test should be
treated as a change in accounting principle and recognized in the first interim
period financial statements.
The Corporation adopted these new accounting rules on January 1, 2002.
As a result, the Corporation will not amortize the goodwill it has recorded, but
will make an annual assessment of any impairment in goodwill and, if necessary,
recognize an impairment loss at that time. The Corporation had goodwill of
$86,424,000 at September 30, 2002 and identified no impairment loss.
Page 8
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 2. Accounting Matters (continued)
ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS
SFAS No. 147, "Acquisitions of Certain Financial Institutions" became
effective October 1, 2002. This standard requires any unidentifiable intangible
assets previously recorded as the result of a business combination to be
reclassified as goodwill, and the amortization of this asset will cease. This
standard has no immediate impact on the financial position and results of
operations of the Corporation, as the Corporation did not have any recorded
unidentified intangible assets or goodwill that had continued to be amortized.
NOTE 3. Business Combinations
Effective September 6, 2002, the Corporation acquired Stephenson Insurance
Service, Inc. ("SIS"), which was merged into First Merchants Insurance Services,
Inc. , a wholly-owned subsidiary of the Corporation. The Corporation issued
36,276 shares of its common stock at a cost of $27.47 per share to complete the
transaction. This acquisition was deemed to be an immaterial acquisition.
On August 28, 2002, the Corporation signed a definitive agreement to acquire
CNBC Bancorp ("CNBC"), Columbus ,Ohio. The acquisition will be accounted for
under the purchase method of accounting. Under the terms of the agreement, the
Corporation will exchange 1.01 shares of the Corporation's common stock or
$29.57 in cash for each of the outstanding shares of CNBC. However, no more than
$24,562,000 aggregate cash may be paid in the merger, and there may be
allocations of stock to certain shareholders if this threshold is exceeded. The
transaction is subject to approval by stockholders of CNBC, and appropriate
regulatory agencies. The Corporation anticipates amortizing core deposit
intangibles over ten years. As of December 31, 2001 CNBC had total assets and
shareholders' equity of $296,184,000 and $23,284,000 respectively.
On April 1, 2002, the Corporation acquired 100% of the outstanding stock of
Lafayette Bancorporation, the holding company of Lafayette Bank and Trust
Company, Lafayette, Indiana ("Lafayette"). Lafayette is a state chartered bank
with branches located in central Indiana. Lafayette Bancorporation was merged
into the Corporation, and Lafayette maintained its state charter as a subsidiary
of First Merchants Corporation. The Corporation issued approximately 2,911,712
shares of its common stock at a cost of $22.36 per share and approximately
$50,867,000 in cash to complete the transaction. As a result of the acquisition,
the Corporation will have an opportunity to increase its customer base and
continue to increase its market share. The purchase had a recorded acquisition
price of $115,978,000, including goodwill of $57,893,000 none of which is
deductible for tax purposes. Additionally, core deposit intangibles totaling
$15,458,000 were recognized and will be amortized over 10 years using the 150%
declining balance method.
The combination was accounted for under the purchase method of accounting. All
assets and liabilities were recorded at their fair values as of April 1, 2002.
The purchase accounting adjustments will be amortized over the life of the
respective asset or liability. Lafayette's results of operations are included in
the Corporation's consolidated income statement beginning April 1, 2002. The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition.
Investments....................... $104,717
Loans............................. 552,016
Premises and equipment............ 10,447
Core deposit intangibles.......... 15,458
Goodwill.......................... 57,893
Other............................. 64,490
--------
Total assets acquired.......... 805,021
--------
Deposits.......................... 607,281
Other............................. 81,762
--------
Total liabilities acquired..... 689,043
--------
Net assets acquired............ $115,978
--------
Page 9
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 3. Business Combinations (continued)
The following proforma disclosures, including the effect of the purchase
accounting adjustments, depict the results of operations as though the Lafayette
merger had taken place at the beginning of each period.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net Interest Income:........................ $ 25,328 $ 23,139 $ 73,720 $ 64,046
Net Income:................................. 7,827 7,718 21,420 21,281
Per share - combined:
Basic Net Income.......................... .49 .54 1.31 1.34
Diluted Net Income........................ .48 .54 1.30 1.34
Effective January 1, 2002, the Corporation acquired Delaware County Abstract
Company, Inc. and Beebe & Smith Title Insurance Company, Inc., which were merged
into Indiana Title Insurance Company, a wholly-owned subsidiary of the
Corporation. The Corporation issued approximately 108,919 shares of its common
stock at a cost of $22.38 per share to complete the transaction. The title
insurance operations were subsequently contributed to Indiana Title Insurance
Company, LLC in which the Corporation has a 52.12% ownership interest. This
acquisition was deemed to be an immaterial acquisition.
Page 10
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 4. Investment Securities
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale at September 30, 2002
U.S. Treasury ........................ $ 125 $ 125
Federal agencies...................... 29,267 $ 829 $ (31) 30,065
State and municipal .................. 143,817 7,378 (10) 151,185
Mortgage-backed securities ........... 124,767 2,279 (91) 126,955
Other asset-backed securities......... 7,879 114 7,993
Corporate obligations................. 12,083 439 12,522
Marketable equity securities.......... 7,153 69 (99) 7,123
-------- -------- -------- --------
Total available for sale ......... 325,091 11,108 (231) 335,968
Held to maturity at September 30, 2002
State and municipal................... 9,350 514 (5) 9,859
Mortgage-backed securities............ 134 134
-------- -------- -------- --------
Total held to maturity ........... 9,484 514 (5) 9,993
-------- -------- -------- --------
Total investment securities ...... $334,575 $ 11,622 $ (236) $345,961
======== ======== ======== ========
Page 11
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, 2001
U.S. Treasury ...................... $ 124 $ 124
Federal agencies ................... 30,808 $ 767 $ (2) 31,573
State and municipal ................ 74,776 1,644 (215) 76,205
Mortgage-backed securities ......... 100,811 1,710 (1) 102,520
Other asset-backed securities ...... 10,116 167 10,283
Corporate obligations .............. 3,498 116 3,614
Marketable equity securities ....... 7,472 (123) 7,349
-------- -------- -------- --------
Total available for sale ........ 227,605 4,404 (341) 231,668
-------- -------- -------- --------
Held to maturity at December 31, 2001
State and municipal ................ 8,426 166 (58) 8,534
Mortgage-backed securities ......... 228 228
-------- -------- -------- --------
Total held to maturity .......... 8,654 166 (58) 8,762
-------- -------- -------- --------
Total investment securities ..... $236,259 $ 4,570 $ (399) $240,430
======== ======== ======== ========
Page 12
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 5. Loans and Allowance
September 30, December 31,
2002 2001
---- ----
Loans:
Commercial and industrial loans .............................................. $ 396,517 $ 301,962
Agricultural production financing and other loans to farmers ................. 89,246 29,645
Real estate loans:
Construction ............................................................... 130,066 58,316
Commercial and farmland .................................................... 461,723 230,233
Residential ................................................................ 681,367 544,028
Individuals' loans for household and other personal expenditures ............. 210,321 179,325
Other loans .................................................................. 24,798 16,077
----------- -----------
1,994,038 1,359,586
Allowance for loan losses..................................................... (22,147) (15,141)
----------- -----------
Total Loans............................................................... $ 1,971,891 $ 1,344,445
=========== ===========
Nine Months Ended
September 30,
2002 2001
----------- -----------
Allowance for loan losses:
Balances, January 1 .......................................................... $ 15,141 $ 12,454
Allowance acquired in acquisition............................................. 6,902 2,085
Provision for losses ......................................................... 4,297 2,371
Recoveries on loans .......................................................... 959 464
Loans charged off ............................................................ (5,152) (2,467)
----------- -----------
Balances, September 30........................................................ $ 22,147 $ 14,907
=========== ===========
Page 13
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands, except per share amounts)
(Unaudited)
NOTE 6. Net Income Per Share
Three Months Ended September 30,
2002 2001
------------------------------------------- -------------------------------------------
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................. $ 7,827 16,265,998 $ .49 $ 6,020 13,346,954 $ .45
========== ==========
Effect of dilutive stock options........ 138,152 97,264
---------- ------------ ---------- ------------
Diluted net income per share:
Net income available to
common stockholders
and assumed conversions............. $ 7,827 16,404,150 $ .48 $ 6,020 13,444,218 $ .44
========== ============ ========== ========== ============ ==========
Options to purchase 226,223 and 108,772 share for the three months ended
September 30, 2002 and 2001 were not included in the earnings per share
calculation because the exercise price exceded the average market price.
Nine Months Ended September 30,
2002 2001
------------------------------------------- -------------------------------------------
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................. $ 21,240 15,340,528 $ 1.39 $ 16,700 12,922,043 $ 1.29
========== ==========
Effect of dilutive stock options........ 142,159 87,606
---------- ------------ ---------- ------------
Diluted net income per share:
Net income available to
common stockholders
and assumed conversions............. $ 21,240 15,482,687 $ 1.37 $ 16,700 13,009,649 $ 1.28
========== ============ ========== ========== ============ ==========
Options to purchase 127,944 and 113,741 share for the nine months ended
September 30, 2002 and 2001 were not included in the earnings per share
calculation because the exercise price exceded the average market price.
Page 14
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
Note 7. Cumulative Trust Preferred Securities
On April 12, 2002, the Corporation and First Merchants Capital Trust I (the
"Trust") entered into an Underwriting Agreement with Stifel, Nicolaus & Company,
Incorporated and RBC Dain Rauscher Inc. for themselves and as co-representatives
for several other underwriters (the "Underwriting Agreement"). On April 17, 2002
and pursuant to the Underwriting Agreement, the Trust issued 1,850,000 8.75%
Cumulative Trust Preferred Securities (liquidation amount $25 per Preferred
Security) (the "Preferred Securities") with an aggregate liquidation value of
$46,250,000. On April 23, 2002 and pursuant to the Underwriting Agreement, the
Trust issued an additional 277,500 Preferred Securities with an aggregate
liquidation value of $6,937,500 to cover over-allotments. The proceeds from the
sale of the Preferred Securities were invested by the Trust in the Corporation's
8.75% Junior Subordinated Debentures due June 30, 2032 (the "Debentures"). The
proceeds from the issuance of the Debentures were used by the Corporation to
fund a portion of the cash consideration payable to the shareholders of
Lafayette Bancorporation in connection with the acquisition referenced in Note
3. The Preferred Securities are recorded as borrowings in the Corporation's
consolidated September 30, 2002, balance sheet.
Page 15
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 "estimate,"
"project," "intend," "anticipate," "expect" and 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 Indiana 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; and
* 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.
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.
Critical Accounting Policy
Certain policies are important to the portrayal of the Corporation's
financial condition, since they require management to make difficult, complex or
subjective judgments, some of which may relate to matters that are inherently
uncertain. Management believes that it's critical accounting policy includes
determining the allowance for loan losses, ("ALL"). The Critical Accounting
Policy 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.
Page 16
FIRST MERCHANTS CORPORATION
FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations (continued)
- -------------------------
Allowance for Loan Losses
The ALL is a significant estimate that can and does change based on management's
assumptions about specific borrowers and applicable economic and environmental
conditions, among other factors. The ALL is maintained to absorb losses inherent
in the loan portfolio. The allowance is based on ongoing, quarterly assessments
of the probable estimated losses inherent in the loan portfolio. The allowance
is increased by the provision for loan losses, which is charged against current
period operating results and decreased by the amount of chargeoffs, net of
recoveries. The Corporation's methodology for assessing the appropriateness of
the allowance consists of several key elements, which include the formula
allowance, specific allowances for identified problem loans, and the unallocated
allowance.
The formula allowance is calculated by applying loss factors to outstanding
loans and certain unused commitments, in each case based on the internal risk
grade of such loans, pools of loans or commitments. Changes in risk grades of
both performing and nonperforming loans affect the amount of the formula
allowance. Loss factors are based on our historical loss experience and may be
adjusted for significant factors that, in management's judgement, affect the
collectibility of the portfolio as of the evaluation date.
Specific allowances are established in cases where management has identified
significant conditions or circumstances related to a credit that management
believes indicate the probability that a loss has been incurred in excess of the
amount determined by the application of the formula allowance.
The unallocated allowance is based upon management's evaluation of various
conditions, the effects of which are not directly measured in the determination
of the formula and specific allowances. The evaluation of the inherent loss with
respect to these conditions is subject to a higher degree of uncertainty because
they are not identified with specific credits. The conditions evaluated in
connection with the unallocated allowance may include existing general economic
and business conditions affecting the Banks' key lending areas, credit quality
trends, collateral values, loan volumes and concentrations, seasoning of the
loan portfolio, specific industry conditions within portfolio segments, recent
loss experience in particular segments of the portfolio, duration of the current
business cycle, bank regulatory examination results, and findings of an
independent third party conducting reviews of the loan portfolio.
Results of Operations
Net income for the three months ended September 30, 2002, was
$7,827,000, compared to $6,020,000 earned in the same period of 2001. Diluted
earnings per share were $.48 an increase of $.04 over the $.44 reported for the
third quarter 2001.
Net income for the nine months ended September 30, 2002, was
$21,240,000, compared to $16,700,000 during the same period in 2001. Diluted
earnings per share were $1.37, a 7.0% increase over $1.28 in 2001.
Annualized returns on average assets and average stockholders' equity
for nine months ended September 30, 2002 were 1.22 percent and 12.45 percent,
respectively, compared with 1.35 percent and 13.66 percent for the same period
of 2001.
Page 17
FIRST MERCHANTS CORPORATION
FORM 10-Q
Capital
The Corporation's capital continues to exceed regulatory
minimums and management believes that its capital levels continue to be a
distinct advantage in the competitive environment in which the Corporation
operates.
The Corporation's Tier I capital to average assets ratio was 8.7
percent at year-end 2001 and 7.91 percent at September 30, 2002. At September
30, 2002, the Corporation had a Tier I risk-based capital ratio of 10.28 percent
and total risk-based capital ratio of 11.41 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. Banks with Tier I risk-based capital
ratios of 6.0 percent and total risk-based capital ratios of 10.0 percent are
considered "well capitalized."
Asset Quality/Provision for Loan Losses
Asset quality has been a major factor in the Corporation's ability to generate
consistent profit improvement. 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
provided by an outside accounting firm. The evaluation takes into consideration
identified credit problems, as well as the possibility of losses inherent in the
loan portfolio that cannot be specifically identified. However, the
Corporation's adequacy of the allowance for loan losses reflects increased
non-performing loans, increased specific reserves and increased impaired loans,
resulting in increased provision expense of $1,926,000 during the nine months
ended September 30, 2002, as compared to the same period in 2001. $1,260,000 of
this increase is a result of the acquisitions of Frances Slocum Bank and
Lafayette Bank & Trust Company. Current non-performing and impaired loan
balances indicate that some decline in loan asset quality has occured, which
management believes is a result of current economic conditions. Total
non-performing loans as a percent of total assets and total loans have increased
from .82% to .96% and from 1.08% to 1.27% respectively, at September 30, 2002 as
compared to the same period in 2001.
The following table summarizes the non-accrual, contractually past due 90
days or more other than non-accruing and restructured loans for the Corporation.
- --------------------------------------------------------------------------------
(Dollars in Thousands) September 30, December 31,
2001 2001
- --------------------------------------------------------------------------------
Non-accrual loans .................. $13,285 $ 6,327
Loans contractually past due 90 days
Or more other than nonaccruing
9,786 4,828
Restructured loans ................. 2,326 3,511
------- -------
Total ................ $25,397 $14,666
======= =======
- --------------------------------------------------------------------------------
At September 30, 2002, non-performing loans totaled $25,397,000, an
increase of $10,731,000 from December 31, 2001. This increase was primarily due
to the addition of $5,015,000 in non-performing loans related to the acquisition
of Lafayette Bancorporation and the general downturn in the economy.
At September 30, 2002, impaired loans totaled $46,726,000. In addition, an
allowance for losses was not deemed necessary for impaired loans totaling
$22,158,000, but an allowance of $6,577,000 was recorded for the remaining
balance of impaired loans of $24,568,000 and is included in the Corporation's
allowance for loan losses. The average balance of impaired loans for the third
quarter ended September 30, 2002 was $46,740,000. After consideration of an
additional $14,800,000 of impaired loans as of September 30, 2002, due to the
acquisition of Lafayette Bancorporation, the Corporation's impaired loans
increased by $10,765,000 from year end 2001. This increase is attributable to
management classifying several loans that had not been identified as being
impaired at December 31, 2001. The increase in impaired loans is a contributing
factor as to management increasing the loan losses provision, as discussed in
the following paragraph.
At December 31, 2001, impaired loans totaled $21,161,000. In addition,
an allowance for losses was not deemed necessary for impaired loans totaling
$10,780,000, but an allowance of $3,251,000 was recorded for the remaining
balance of impaired loans of $10,381,000 and is included in the Corporation's
allowance for loan losses. The average balance of impaired loans for 2001 was
$22,327,000.
Page 18
FIRST MERCHANTS CORPORATION
FORM 10-Q
At September 30, 2002, the allowance for loan losses increased by
$7,006,000, to $22,147,000, from year end 2001. The increase was primarily due
to the allowance acquired in the acquisition of Lafayette Bancorporation, which
totaled $6,902,000. As a percent of loans, the allowance was 1.10 percent, which
remains approximately the same as the 1.11 percent at year end 2001.
The nine month 2002 provision of $4,297,000 was up $1,926,000 from
$2,371,000 for the same period in 2001. Net charge offs amounted to $4,193,000
during the period, an increase of $2,190,000 from $2,003,000 for the same
period in 2001. The increased provision has helped maintain the allowance to
total loans at an adequate level as compared to the same period of 2001.
Nine Months Ended
September 30,
------------------
------------------
2002 2001
---- ----
(Dollars in Thousands)
Balance at beginning of period ......................... $15,141 $12,454
------- -------
Chargeoffs ............................................. (5,152) (2,467)
Recoveries ............................................. 959 464
------- -------
Net chargeoffs ......................................... (4,193) (2,003)
Provision for loan losses .............................. 4,297 2,371
Allowance acquired in acquisition....................... 6,902 2,085
------- -------
Balance at end of period................................ $22,147 $14,907
======= =======
Ratio of net chargeoffs during the period to average loans
outstanding during the period........................... .32%(1) .21%(1)
(1) First nine months annualized.
Liquidity, Interest Sensitivity, and Disclosures About Market Risk
Asset/Liability Management has been an important factor in the
Corporation's ability to record consistent earnings growth through periods of
interest rate volatility and product deregulation. Management and the Board of
Directors monitor the Corporation's liquidity and interest sensitivity positions
at regular meetings to review how changes in interest rates may affect earnings.
Decisions regarding investment and the pricing of loan and deposit products are
made after analysis of reports designed to measure liquidity, rate sensitivity,
the Corporation's exposure to changes in net interest income given various rate
scenarios and the economic and competitive environments.
It is the objective of the Corporation to monitor and manage risk
exposure to net interest income caused by changes in interest rates. It is the
goal of the Corporation's Asset Liability function to provide optimum and stable
net interest income. To accomplish this, management uses two asset liability
tools. GAP/Interest Rate Sensitivity Reports and Net Interest Income Simulation
Modeling are both constructed, presented, and monitored quarterly.
Management believes that the Corporation's liquidity and interest
sensitivity position at September 30, 2002, remained adequate to meet the
Corporation's primary goal of achieving optimum interest margins while avoiding
undue interest rate risk.
Page 19
FIRST MERCHANTS CORPORATION
FORM 10-Q
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.
The comparative rising and falling scenarios for the period ended September 30,
2003 assume further interest rate changes in addition to the base simulation
discussed above. These changes are immediate and parallel changes to the base
case senario. 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 September 30, 2003 are as follows:
Driver Rates RISING FALLING
================================================================================
Prime 200 Basis Points (200)Basis Points
Federal Funds 200 (75)
One-Year T-Bill 200 (42)
Two-Year T-Bill 200 (68)
Interest Checking 100 -
MMIA Savings 100 (26)
Money Market Index 100 (40)
CD's 200 (145)
FHLB Advances 200 (182)
Results for the base, rising and falling interest rate scenarios are listed
below, based upon the Corporation's rate sensitive assets at September 30, 2002.
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
================================================================================
Net Interest Income (dollars in thousands) $ 96,321 $ 94,382 $ 92,313
Variance from base $ (1,939) $ (4,008)
Percent of change from base (2.01)% (4.16)%
Page 20
FIRST MERCHANTS CORPORATION
FORM 10-Q
The comparative rising and falling scenarios for the year ended December 31,
2002 assume further interest rate changes in addition to the base simulation
discussed above. These changes are immediate and parallel changes to the base
case senario. 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 year ended December 31, 2002 are as follows:
Driver Rates RISING FALLING
================================================================================
Prime 200 Basis Points (150)Basis Points
Federal Funds 200 (100)
One-Year T-Bill 200 (100)
Two-Year T-Bill 200 (100)
Interest Checking 100 (25)
MMIA Savings 75 (25)
Money Market Index 200 (100)
CD's 170 (130)
FHLB Advances 200 (100)
Results for the base, rising and falling interest rate scenarios are listed
below, based upon the Corporation's rate sensitive assets at December 31, 2001.
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
================================================================================
Net Interest Income (dollars in thousands) $ 74,029 $ 74,356 $ 71,540
Variance from base $ 327 $ (2,489)
Percent of change from base .44% (3.36)%
Page 21
FIRST MERCHANTS CORPORATION
FORM 10-Q
Earning Assets
The following table presents the earning asset mix as of September 30,
2002, and December 31, 2001. At September 30, 2002, earning assets increased by
$736.8 million from year end 2001. This increase was primarily due to the
addition of $712,000 million in earnings assets related to the acquisition of
Lafayette Bancorporation.
Excluding increases due to the acquisition of Lafayette Bancorporation,
loans grew by over $35 million from December 31, 2001 to September 30, 2002.
Commercial and farmland related real estate loans increased $47 million.
Residential real estate loans decreased by $35 million, while commercial and
industrial loans increased by more than $38 million.
- ----------------------------------------------------------------------------------------------------
EARNING ASSETS
(Dollars in Millions) September 30, December 31,
2001 2001
- ----------------------------------------------------------------------------------------------------
Federal funds sold and interest-bearing deposits $ 19.0 $ 38.2
Investment securities available for sale ....... 336.0 231.7
Investment securities held to maturity ......... 9.5 8.7
Mortgage loans held for sale ................... 14.1 .3
Loans .......................................... 1,994.0 1,359.6
Federal Reserve and Federal Home Loan Bank stock 11.1 8.4
---------- ----------
Total ..................... $ 2,383.7 $ 1,646.9
========== ==========
- --------------------------------------------------------------------------------
Deposits and Borrowings
The following table presents the level of deposits and borrowed funds
(Federal funds purchased (FFP), repurchase agreements, U.S. Treasury demand
notes, Federal Home Loan Bank advances, trust preferred securities and other
borrowed funds)at September 30, 2002 and December 31, 2001.
- --------------------------------------------------------------------------------
(Dollars in Millions) September 30, December 31,
2002 2001
---------- ------------
Deposits ........................................ $ 2,019.7 $ 1,421.3
Securities sold under repurchase agreements...... 71.1 45.6
FFP and U.S. Treasury demand notes............... 11.9 16.8
Federal Home Loan Bank advances ................. 173.4 103.5
Trust preferred securities....................... 53.2
Other borrowed funds ............................ 19.3 8.5
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.
Trust preferred securities are classified as Tier I Capital when computing risk
based capital ratios due to the long-term nature of the investment. The interest
rate risk is included as part of the Corporation's interest simulation discussed
in Management's Discussion and Analysis under the heading Liquidity, Interest
Sensitivity, and Disclosures about Market Risk.
Page 22
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 nine months ended September 30, 2002 and 2001.
Annualized net interest income (FTE) for the nine months ended
September 30, 2002 increased by $28,459,000, or 43.5 percent over the same
period in 2001, due to an increase in average earning assets of over $736
million. For the same period, interest income and interest expense, as a percent
of average earning assets, decreased 106 basis points and 127 basis points,
respectively.
- --------------------------- ------------------- -------------------- -------------------- -------------- --------------------
(Dollars in Thousands)
Interest Income Net Interest Income Annualized
(FTE) as a Percent Interest Expense (FTE) as a Percent Net Interest Income
of Average as a Percent of Average Average On a
Earning Assets of Average Earning Assets Earning Fully Taxable
Earning Assets Assets Equivalent Basis
- --------------------------- ------------------- -------------------- -------------------- -------------- --------------------
For the three months
Ended September 30,
2002 6.92% 2.49% 4.43% $2,379,092 $105,536
2001 7.79% 3.46% 4.33% $1,652,318 $ 71,526
- -----------------------------------------------------------------------------------------------------------------------------
- -------------------------- ------------------- -------------------- -------------------- -------------- ---------------------
(Dollars in Thousands)
Interest Income Net Interest Income Annualized
(FTE) as a Percent Interest Expense (FTE) as a Percent Net Interest Income
of Average as a Percent of Average Average On a
Earning Assets of Average Earning Assets Earning Fully Taxable
Earning Assets Assets Equivalent Basis
- -------------------------- ------------------- -------------------- -------------------- -------------- ---------------------
For the nine months
Ended September30,
2002 6.94% 2.50% 4.44% $2,112,777 $93,867
2001 8.00% 3.77% 4.23% $1,545,820 $65,408
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.
- -----------------------------------------------------------------------------------------------------------------------------
Page 23
FIRST MERCHANTS CORPORATION
FORM 10-Q
Other Income
The Corporation has placed emphasis on the growth of non-interest
income in recent years by offering a wide range of fee-based services. Fee
schedules are regularly reviewed by a pricing committee to ensure that the
products and services offered by the Corporation are priced to be competitive
and profitable.
Other income in the third quarter of 2002 exceeded the same quarter in
the prior year by $3,015,000, or 65.1 percent.
Four major areas account for most of the increase:
1. Service charges on deposit accounts increased $1,122,000 or 74.6
percent due to increased number of accounts, price adjustments and
approximately $1,045,000 of additional service charge income related to
the April 1, 2002 acquisition of Lafayette Bank and Trust Company
("Lafayette").
2. Revenues from fiduciary activities increased $303,000 or 22.5 percent
due primarily to additional fees received related to the acquisition of
Lafayette.
3. Net realized gains on sales of available-for-sale securities totaled
$162,000 in the third quarter of 2002, while net realized losses on
sales of availiable-for-sale securities totaled $(167,000) for the same
period in 2001.
4. The Corporation sold its Purchase Money Order ("PMO) business in the
third quarter of 2002, resulting in a net gain on sale of $514,000.
Other income in the first nine months of 2002 exceeded the same period
in the prior year by $6,219,000 or 45.6 percent.
Five major areas account for most of the increase:
1. Service charges on deposit accounts increased $2,529,000 or 61.6
percent due to increased number of accounts, price adjustments and
approximately $2,050,000 of additional service charge income related to
the April 1, 2002 acquisition of Lafayette.
2. Net realized gains on sales of available-for-sale securities totaled
$570,000 in the first nine months of 2002, while net realized losses
on sales of availiable-for-sale securities totaled $(167,000) during
the same period in 2001.
3. Revenues from fidicuiary activities increased $654,000 or 15.9 percent
due primarily to additional fees received related to the acquisition
of Lafayette.
4. The Corporation sold its PMO business in the first nine months of 2002,
resulting in a net gain on sale of $514,000.
5. Abstract, title insurance and other related income increased $628,000
in the first nine months of 2002, related to the January 1, 2002
acquisition of Delaware County Abstract Company, Inc. and Beebe & Smith
Title Insurance Company, Inc.
Page 24
FIRST MERCHANTS CORPORATION
FORM 10-Q
Other Expenses
Total other expenses represent non-interest operating expenses of the
Corporation. Total other expense during the third quarter of 2002 exceeded the
same period of the prior year by $7,207,000, or 60.2 percent.
Four major areas account for most of the increase:
1. Salaries and benefit expense grew $4,156,000 or 64.4 percent, due to
normal salary increases, staff additions and additional salary cost
related to the April 1, 2002 acquisition of Lafayette.
2. Core deposit intangible amortization increased by $304,000, due to
utilization of the purchase method of accounting for the Corporation
related to the April 1, 2002 acquisition of Lafayette.
3. Equipment expense increased by $739,000 or 64.8%, primarily related to
the April 1, 2002 acquisition of Lafayette.
4. Telephone expenses increased by $507,000 or 192.0%, primarily due to
additional telephone costs related to the acquisition of Lafayette.
In addition, increased service contract charges related to greater
usage of telephone lines, contributed to this increase.
Total other expenses during the first nine months in 2002 exceeded the
same period of the prior year by $18,170,000, or 55.1 percent.
Five major areas account for most of the increase:
1. Salaries and benefit expense grew $10,207,000, or 56.4 percent, due to
normal salary increases, staff additions and additional salary cost of
$6,403,000 related to the April 1, 2002 acquisition of Lafayette.
2. Telephone expenses increased by $1,174,000 or 146.9%, primarily due to
additional telephone costs related to the acquisition of Lafayette. In
addition, increased service contract charges related to greater usage
of telephone lines, contributed to this increase.
3. Equipment expenses increased by $1,566,000 or 47.7%, primarily related
to the April 1, 2002 acquisition of Lafayette.
4. Core deposit intangible amortization increased by $656,000, due to
utilization of the purchase method of accounting for the Corporation
related to the April 1, 2002 acquisition of Lafayette.
5. Data processing fees increased by $759,000, or 38.6 percent, primarily
due to increases in processing expenses related to greater usage of
debit/ATM cards by customers and increases in loans originated and
processed during the first nine months in 2002.
Page 25
FIRST MERCHANTS CORPORATION
FORM 10-Q
Income Taxes
Income tax expense, for the nine months ended September 30, 2002,
increased by $2,149,000 over the same period in 2001. The effective tax rate was
34.1 and 35.0 percent for the 2002 and 2001 periods. The .9 percent decrease
is primarily a result of the Lafayette Bank and Trust Company tax strategy
benefits obtained as a result of its April 1, 2002 acquisition by the
Corporation.
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 heading Liquidity, Interest Sensitivity, and Disclosures About Market Risk.
Item 4. Disclosure Controls and Procedures
- -------------------------------------------------------------------
Within the 90 days prior to the filing date of 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 our 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 significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
we carried out this evaluation.
Page 26
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
None
Item 2. Changes in Securities and Use of Proceeds
- --------------------------------------------------
a. None
b. None
c. On September 6, 2002, the Corporation issued a total of 36,276
unregistered shares of its common stock pursuant to a Merger
Agreement dated September 6, 2002, between the Corporation and SIS,
as previously discussed in Note 3 to the notes to consolidated
condensed financial statements. The Corporation issued the
unregistered shares to the sole shareholder of SIS, at a value of
$27.47 per share, in exchange for all the common stock of SIS.
The issuance by the Corporation of its shares of common stock were
not registered under the Securities Act of 1933, as amended
("Securities Act"). The shares were issued pursuant to the
exemption contemplated in Section 4(2) of the Securities Act, for
transactions not involving a public offering.
On July 1, 2002, the Corporation issued nonqualified stock options
to acquire 7,718 shares of common stock of the Corporation to
directors of its founding subsidiary bank, First Merchants Bank,
National Association. The stock option exercise price was $28.28,
and no consideration was paid by the directors for such stock
options. The options, which have a ten year life, become 100
percent vested after six months from the date of grant and are
fully exercisable when vested.
The stock options were issued without registration under the
Securities Act in reliance on an exemption under Section 3 (a) (11)
of the Securities Act and Rule 147 promulgated thereunder. As
provided under Rule 147, both the Corporation and directors are
deemed to be a resident of the State of Indiana. In addition, the
Corporation is deemed to be doing business in the State of Indiana,
and the Rule 147 resale limitations and precautions against
interstate offers and sales are being strictly adhered to.
d. None
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None
Item 5. Other Information
- --------------------------
None
Page 27
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a. Exhibits
Exhibit No.: Description of Exhibit: Form 10-Q Page No.:
------------ ------------------------- -------------------
2 Agreement of Reorganization *
and Merger between First
Merchants Corporation and
CNBC Bancorp
10a First Merchants Corporation 35
Change of Control Agreement
with Robert R. Connors dated
August 26, 2002
10b First Merchants Corporation 41
Change of Control Agreement
with James L. Thrash dated
June 18, 2002
* Incorporated by reference to Registrant's Current Report on Form 8-K filed
August 28, 2002.
Page 28
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K (continued)
- -----------------------------------------------------
b. Reports on Form 8-K
A report on Form 8-K, dated August 13, 2002, was filed on August
16, 2002 under report item number 5, concerning the Corporation's
declaration of a five percent (5%) stock dividend on its shares of
common stock. The dividend was payable to shareholders of record
on August 30, 2002. The date of delivery of shares to be issued
pursuant to the stock dividend was September 13, 2002.
Under report item number 7, the following exhibit was included in
this Form 8-K.
(c) Exhibit.
(99) Press release dated August 16, 2002
A report on Form 8-K dated August 28, 2002, was filed on August 28,
2002, under report item number 5, concerning the Corporation and
CNBC Bancorp ("CNBC") jointly announcing the signing of a
definitive agreement pursuant to which CNBC will be merged with and
into the Corporation. The Agreement of Reorganization and Merger
between the Corporation and CNBC dated August 28, 2002, was
filed as an exhibit to this Form 8-K.
Page 29
FIRST MERCHANTS CORPORATION
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
First Merchants Corporation
---------------------------
(Registrant)
Date 11/14/02 by /s/ Michael L. Cox
--------------------------- -------------------------------------
Michael L. Cox
President and Chief Executive Officer
Date 11/14/02 by /s/ Mark K. Hardwick
--------------------------- -------------------------------------
Mark K. Hardwick
Senior Vice President and
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
Page 30
FIRST MERCHANTS CORPORATION
FORM 10-Q
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Michael L. Cox, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Merchants
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
by: /s/ Michael L. Cox
----------------------
Michael L. Cox
President and Chief Executive Officer
Page 31
CERTIFICATION
- -------------
I, Mark K. Hardwick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Merchants
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
by: /s/ Mark K. Hardwick
--------------------
Mark K. Hardwick
Senior Vice President and
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
Page 32
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of First Merchants Corporation (the
"Corporation") on Form 10-Q for the period ending September 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"), I
Michael L. Cox, President & 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 11/14/02 by /s/ Michael L. Cox
--------------------------- -------------------------------------
Michael L. Cox
President and Chief Executive Officer
In connection with the quarterly report of First Merchants Corporation (the
"Corporation") on Form 10-Q for the period ending September 30, 2002 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 11/14/02 by /s/ Mark K. Hardwick
--------------------------- -------------------------------------
Mark K. Hardwick
Senior Vice President and
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
Page 33
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.:
------------ ------------------------- -------------------
2 Agreement of Reorganization *
and Merger between First
Merchants Corporation and
CNBC Bancorp
10a First Merchants Corporation 35
Change of Control Agreement
with Robert R. Connors dated
August 26, 2002
10b First Merchants Corporation 41
Change of Control Agreement
with James L. Thrash dated
June 18, 2002
* Incorporated by reference to Registrant's Current Report on Form 8-K filed
August 28, 2002.
Page 34
FIRST MERCHANTS CORPORATION
Exhibit 10a
CHANGE OF CONTROL AGREEMENT
This Agreement is made and entered into as of August 14, 2002, by and
between First Merchants Corporation, an Indiana corporation (hereinafter
referred to as "Corporation"), with its principal office located at 200 East
Jackson Street, Muncie, Indiana, and Robert R. Connors (hereinafter referred to
as 'Executive'), of Indianapolis, Indiana.
WHEREAS, the Corporation considers the continuance of proficient
and experienced management to be essential to protecting and enhancing the best
interests of the Corporation and its shareholders; and
WHEREAS, the Corporation desires to assure the continued services
of the Executive on behalf of the Corporation; and
WHEREAS, the Corporation recognizes that if faced with a
proposal for a Change of Control, as hereinafter defined, the Executive will
have a significant role in helping the Board of Directors assess the options and
advising the Board of Directors on what is in the best interests of the
Corporation and its shareholders; and it is necessary for the Executive to be
able to provide this advice and counsel without being influenced by the
uncertainties of the Executive's own situation; and
WHEREAS, the Corporation desires to provide fair and reasonable
benefits to the Executive on the terms and subject to the conditions set forth
in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings herein contained and the continued employment of the Executive by
the Corporation as its Senior Vice President of Operations and Technology, the
Corporation and the Executive, each intending to be legally bound, covenant and
agree as follows:
1. Term of Agreement.
This Agreement shall continue in effect through December 31, 2003;
provided, however, that commencing on December 31, 2003 and each December 31
thereafter, the term of this Agreement shall automatically be extended for one
additional year unless, not later than October 31, 2003 or October 31
immediately preceding any December 31 thereafter, the Corporation shall have
given the Executive notice that it does not wish to extend this Agreement; and
provided further, that if a Change of Control of the Corporation, as defined in
Section 2, shall have occurred during the original or extended term of this
Agreement, this Agreement shall continue in effect for a period of not less than
twenty-four (24) months beyond the month in which such Change of Control
occurred.
2. Definitions.
For purposes of this Agreement, the following definitions shall apply:
A. Cause: "Cause" shall mean:
(1) professional incompetence;
(2) willful misconduct;
(3) personal dishonesty;
(4) breach of fiduciary duty involving personal
profit;
(5) intentional failure to perform stated
duties;
(6) willful violation of any law, rule or
regulation (other than traffic violations
or similar offenses) or final cease and
desist orders; and
(7) any intentional material breach of any
term, condition or covenant of this
Agreement.
Page 35
(B) Change of Control: "Change of Control" shall mean:
(1) any person (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange
Act of 1934 ["Exchange Act"]), other than
the Corporation, is or becomes the
Beneficial Owner (as defined in Rule 13d-3
under the Exchange Act) directly or
indirectly of securities of the
Corporation representing twenty-five percent
(25%) or more of the combined voting
power of the Corporation=s then outstanding
securities;
(2) persons constituting a majority of the Board
of Directors of the Corporation were not
directors of the Corporation for at
least the twenty-four (24)
preceding months;
(3) the stockholders of the Corporation approve
a merger or consolidation of the Corporation
with any other corporation, other than
(a) a merger or consolidation which would
result in the voting securities of the
Corporation outstanding immediately prior
thereto continuing to represent (either
by remaining outstanding or by being
converted into voting securities of the
surviving entity) more than fifty percent
(50%) of the combined voting power of the
voting securities of the Corporation
or such surviving entity outstanding
immediately after such a merger or
consolidation, or (b) a merger or
consolidation effected to implement a
recapitalization of the Corporation (or
similar transaction) in which no person
acquires fifty percent (50%) or more of
the combined voting power of the
Corporation's then outstanding securities;
or
(4) the stockholders of the Corporation approve
a plan of complete liquidation of the
Corporation or an agreement for the sale or
disposition by the Corporation of all or
substantially all of the Corporation's
assets.
(C) Date of Termination: "Date of Termination" shall
mean the date stated in the Notice of Termination
(as hereinafter defined) or thirty (30) days from
the date of delivery of such notice, as hereinafter
defined, whichever comes first.
(D) Disability: "Disability" shall mean the definition
of such term as used in the disability policy
then in effect for the Corporation, and a
determination of full disability by the Corporation;
provided that in the event there is no disability
insurance then in force, "disability" shall mean
incapacity due to physical or mental illness which
will have caused the Executive to have been unable
to perform his duties with the Corporation on a
full time basis for one hundred eighty (180)
consecutive calendar days.
(E) Notice of Termination: "Notice of Termination"
shall mean a written notice, communicated to
the other parties hereto, which shall
indicate the specific termination provisions of
this Agreement relied upon and set forth in
reasonable detail the facts and circumstances
claimed to provide a basis for termination of the
Executive's employment under the provisions so
indicated.
(F) Retirement: "Retirement" shall mean termination of
employment by the Executive in accordance with the
Corporation's normal retirement policy generally
applicable to its salaried employees in effect at the
time of a Change of Control.
Page 36
3. Termination.
(A) General. If any of the events described in Section 2
constituting a Change in Control of the Corporation
shall have occurred, the Executive shall be
entitled to the benefits described in Section 4
upon the subsequent termination of the Executive's
employment during the term of this Agreement,
unless such termination is (a) because of the death
or Disability of the Executive, (b) by the
Corporation for Cause, or (c) by the Executive
other than on account of Constructive Termination
(as hereinafter defined).
(B) If, following a Change of Control, the Executive's
employment shall be terminated for Cause, the
Corporation shall pay him his salary through the
Date of Termination at the rate in effect on the
date of the Notice of Termination, and the
Corporation shall have no further obligations
under this Agreement. If, following a Change of
Control, the Executive=s employment shall be
terminated as a result of death or Disability,
compensation to the Executive shall be made
pursuant to the Corporation's then existing
policies on death or Disability, and the
Corporation shall have no further obligations under
this Agreement. If, following a Change of Control,
the Executive's employment is terminated by and at
the request of the Executive as a result of
Retirement, compensation to the Executive shall be
made pursuant to the Corporation's normal retirement
policy generally applicable to its salaried
employees at the time of the Change of Control, and
the Corporation shall have no further obligations
under this Agreement.
(C) Constructive Termination. The Executive shall be
entitled to terminate his employment upon the
occurrence of Constructive Termination. For
purposes of this Agreement, "Constructive
Termination" shall mean, without the Executive's
express written consent, the occurrence, after a
Change of Control of the Corporation, of any of the
following circumstances:
(1) the assignment to the Executive of any
duties inconsistent (unless in the
nature of a promotion) with the position in
the Corporation that the Executive held
immediately prior to the Change of Control
of the Corporation, or a significant
adverse reduction or alteration in the
nature or status of the Executive's
position, duties or responsibilities or
the conditions of the Executive's
employment from those in effect immediately
prior to such Change of Control;
(2) a reduction in the Executive's annual base
salary, as in effect immediately prior to
the Change of Control of the Corporation
or as the same may be adjusted from time
to time, except for across-the-board
salary reductions similarly affecting all
management personnel of the Corporation;
(3) the Corporation requires the Executive to
be relocated anywhere other than its
offices in Muncie, Indiana;
(4) the taking of any action to deprive the
Executive of any material fringe benefit
enjoyed by him at the time of the Change of
Control, or the failure to provide him
with the number of paid vacation days to
which he is entitled on the basis of years
of service with the Corporation and in
accordance with the Corporation's normal
vacation policy in effect at the time of
the Change of Control;
Page 37
(5) the failure to continue to provide the
Executive with benefits substantially
similar to those enjoyed by the Executive
under any of the Corporation's life
insurance, medical, health and accident,
or disability plans in which the
Executive was participating at the time
of the Change of Control of the
Corporation, or the taking of any action
which would directly or indirectly
materially reduce any of such benefits; or
(6) the failure of the Corporation to continue
this Agreement in effect, or to obtain a
satisfactory agreement from any successor
to assume and agree to perform this
Agreement, as contemplated in Section 5
hereof.
4. Compensation Upon Termination.
Following a Change of Control, if his employment by the Corporation
shall be terminated by the Executive on account of Constructive Termination or
by the Corporation other than for Cause, death, Disability, or Retirement (by
and at the request of the Executive), then the Executive shall be entitled to
the benefits provided below:
(A) No later than the fifth day following the Date of
Termination, the Corporation shall pay to the
Executive his full base salary through the Date of
Termination, at the rate in effect at the time
Notice of Termination is given, plus all other
amounts to which the Executive is entitled under any
incentive, bonus or other compensation plan of the
Corporation in effect at the time such payments are
due;
(B) In lieu of any further salary payments to the
Executive for periods subsequent to the Date of
Termination, no later than the fifth day following
the Date of Termination, the Corporation shall pay
to the Executive a lump sum severance payment,
in cash, equal to two (2.00) times the sum of (a) the
Executive's annual base salary rate as in effect on
the date of the Notice of Termination, and (b) the
largest bonus received by the Executive during the
two (2) years immediately preceding the Date of
Termination under the Corporation's Management
Incentive Plan covering the Executive;
(C) During the period beginning with the Executive's
Date of Termination and continuing until the
earlier of (a) the second anniversary of such Date
of Termination, or (b) Executive's sixty-fifth
(65th) birthday, the Corporation shall arrange to
provide the Executive with life, disability,
accident and health insurance benefits substantially
similar to those which the Executive was receiving
immediately prior to the Notice of Termination and
shall pay the same percentage of the cost of such
benefits as the Corporation was paying on the
Executive's behalf on the date of such Notice;
(D) In lieu of shares of common stock of the Corporation
("Corporation Shares") issuable upon the exercise
of outstanding options ("Options"), if any, granted
to the Executive under any Corporation stock option
plan (which Options shall be cancelled upon the
making of the payment referred to below), the
Executive shall receive an amount in cash equal to
the product of (a) the excess of the higher of
the closing price of Corporation Shares as reported
on the NASDAQ National Market System, the
American Stock Exchange or the New York Stock
Exchange, wherever listed, on or nearest the Date
of Termination or the highest per share price for
Corporation Shares actually paid in connection
with any Change of Control of the Corporation, over
the per share exercise price of each Option held by
the Executive (whether or not then fully
exercisable), times (b) the number of Corporation
Shares covered by each such Option;
Page 38
(E) If the payments or benefits, if any, received or
to be received by the Executive (whether under
this Agreement or under any other plan,
arrangement, or agreement between the Executive
and the Corporation), in connection with
termination or Constructive Termination of the
Executive's employment following a Change of Control,
constitute an "excess parachute payment" within
the meaning of '280G of the Internal Revenue Code
("Code"), the Corporation shall pay to the
Executive, no later than the fifth day following the
Date of Termination, an additional amount (as
determined by the Corporation's independent public
accountants) equal to the excise tax, if any,
imposed on the "excess parachute payment" under
'4999 of the Code; provided, however, if the amount
of such excise tax is finally determined to be
more or less than the amount paid to the Executive
hereunder, the Corporation (or the Executive if
the finally determined amount is less than the
original amount paid) shall pay the difference
between the amount originally paid and the finally
determined amount to the other party no later than
the fifth day following the date such final
determination is made;
(F) The Corporation shall pay to the Executive all
reasonable legal fees and expenses incurred by the
Executive as a result of such termination (including
all such fees and expenses, if any, incurred in
contesting or disputing any such termination or
in seeking to obtain or enforce any right or benefit
provided by this Agreement), unless the
decision-maker in any proceeding, contest, or
dispute arising hereunder makes a formal finding
that the Executive did not have a reasonable basis
for instituting such proceeding, contest, or dispute;
(G) The Corporation shall provide the Executive with
individual out-placement services in accordance
with the general custom and practice generally
accorded to an executive of the Executive's position.
5. Successors; Binding Agreement.
(A) The Corporation shall require any successor (whether
direct or indirect, by purchase,
merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of
the Corporation to expressly assume and agree to
perform this Agreement in the same manner and to
the same extent that the Corporation would be
required to perform it if no such succession had
taken place. Failure of the Corporation to
obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a
breach of this Agreement and shall entitle the
Executive to compensation from the Corporation in
the same amount and on the same terms to which the
Executive would be entitled hereunder if the
Executive terminates his employment on account of
Constructive Termination following a Change of
Control of the Corporation, except that for the
purposes of implementing the foregoing, the date
on which any such succession becomes effective shall
be deemed the Date of Termination. As used in this
Agreement, "the Corporation" shall mean the
Corporation and any successor to its business and/or
assets as aforesaid which assumes and agrees to
perform this Agreement, by operation of law or
otherwise.
(B) This Agreement shall inure to the benefit of and be
enforceable by the Executive and his personal or
legal representatives, executors, administrators,
successors, heirs, distributees, devisees and
legatees. If the Executive should die while any
amount would still be payable to the Executive
hereunder had the Executive continued to live, all
such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this
Agreement to the devisee, legatee or other designee
or, if there is no such designee, to his estate.
Page 39
6. Miscellaneous.
No provision of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing and signed
by the Executive and such officer as may be specifically designated by the
Corporation. No waiver by either party hereto at the time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreement or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Indiana without regard to its conflicts of law
principles. All references to a section of the Exchange Act or the Code shall be
deemed also to refer to any successor provisions to such section. Any payments
provided for hereunder shall be paid net of any applicable withholding required
under federal, state or local law. The obligations of the Corporation under
Section 4 shall survive the expiration of the term of this Agreement.
7. Validity.
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
8. Counterparts.
This Agreement may be executed in several counterparts, each of which
shall be deemed to be an original, but all of which together shall constitute
one and the same instrument.
9. Arbitration.
Any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration, conducted before a
panel of three (3) arbitrators in Muncie, Indiana in accordance with the rules
of the American Arbitration Association then in effect. Judgment may be entered
on the arbitrator's award in any court having jurisdiction; provided, however,
that the Executive shall be entitled to seek specific performance of his right
to be paid until the Date of Termination during the pendency of any dispute or
controversy arising under or in connection with this Agreement.
10. Entire Agreement.
This Agreement sets forth the entire agreement of the parties
hereto in respect of the subject matter contained herein and supersedes all
prior agreements, promises, covenants, arrangements, communications,
representations or warranties, whether oral or written, by any officer, employee
or representative of any party hereto; and any prior agreement of the parties
hereto in respect of the subject matter contained herein is hereby terminated
and cancelled.
IN WITNESS WHEREOF, the Corporation and the Bank have caused this
Agreement to be executed by their duly authorized officers, and the Executive
has hereunder subscribed his name, as of the day and year first above written.
"CORPORATION" "EXECUTIVE"
FIRST MERCHANTS CORPORATION
By ______________________________ By ______________________________
Stefan S. Anderson, Robert R. Connors
Chairman of the Board
Page 40
FIRST MERCHANTS CORPORATION
Exhibit 10b
CHANGE OF CONTROL AGREEMENT
This Agreement is made and entered into as of June 18, 2002, by and
between First Merchants Corporation, an Indiana corporation (hereinafter
referred to as "Corporation"), and First Merchants Bank, National Association
(hereinafter referred to as "Bank"), and wholly-owned subsidiary of the
Corporation, both with their principal offices located at 200 East Jackson
Street, Muncie, Indiana, and James L. Thrash (hereinafter referred to as
'Executive'), of Muncie, Indiana.
WHEREAS, the Corporation and the Bank considers the continuance of
proficient and experienced management to be essential to protecting and
enhancing the best interests of the Corporation, the Bank, and the Corporation's
shareholders; and
WHEREAS, the Corporation and the Bank desires to assure the continued
services of the Executive on behalf of the Corporation and the Bank; and
WHEREAS, the Corporation and the Bank recognizes that if faced with a
proposal for a Change of Control, as hereinafter defined, the Executive will
have a significant role in helping the Board of Directors assess the options and
advising the Board of Directors on what is in the best interests of the
Corporation, the Bank, and the Corporation's shareholders: and it is necessary
for the Executive to be able to provide this advice and counsel without being
influenced by the uncertainties of the Executive's own situation; and
WHEREAS, the Corporation and the Bank desires to provide fair and
reasonable benefits to the Executive on the terms and subject to the conditions
set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings herein contained and the continued employment of the Executive by
the Bank as its Senior Vice President, the Corporation and the Bank and the
Executive, each intending to be legally bound, covenant and agree as follows:
1. Term of Agreement.
This Agreement shall continue in effect through December 31, 2003;
provided, however, that commencing on December 31, 2003 and each December 31
thereafter, the term of this Agreement shall automatically be extended for one
additional year unless, not later than October 31, 2003 or October 31
immediately preceding any December 31 thereafter, the Corporation or the Bank
shall have given the Executive notice that it does not wish to extend this
Agreement; and provided further, that if a Change of Control of the Corporation
or the Bank, as defined in Section 2, shall have occurred during the original or
extended term of this Agreement, this Agreement shall continue in effect for a
period of not less than twenty-four (24) months beyond the month in which such
Change of Control occurred.
2. Definitions.
For purposes of this Agreement, the following definitions shall apply:
A. Cause: "Cause" shall mean:
(1) professional incompetence;
(2) willful misconduct;
(3) personal dishonesty;
(4) breach of fiduciary duty involving personal
profit;
(5) intentional failure to perform stated
duties;
(6) willful violation of any law, rule or
regulation (other than traffic violations
or similar offenses) or final cease and
desist orders; and
(7) any intentional material breach of any
term, condition or covenant of this
Agreement.
Page 41
(B) Change of Control: "Change of Control" shall mean:
(1) any person (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange
Act of 1934 ["Exchange Act"]), other than
the Corporation or the Bank, is or becomes
the Beneficial Owner (as defined in Rule
13d-3 under the Exchange Act) directly or
indirectly of securities of the
Corporation representing twenty-five percent
(25%) or more of the combined voting
power of the Corporation's or the Bank's
then outstanding securities;
(2) persons constituting a majority of the Board
of Directors of the Corporation and the Bank
were not directors of the respective Board
for at least the twenty-four (24)
preceding months;
(3) the stockholders of the Corporation or the
Bank approve a merger or consolidation of
the Corporation or the Bank with any other
corporation, other than (a) a merger or
consolidation which would result in the
voting securities of the Corporation or the
Bank outstanding immediately prior
thereto continuing to represent (either
by remaining outstanding or by being
converted into voting securities of the
surviving entity) more than fifty percent
(50%) of the combined voting power of the
voting securities of the Corporation's
or the Bank's then outstanding securities;
or
(4) the stockholders of the Corporation approve
a plan of complete liquidation of the
Corporation or the Bank or an agreement for
the sale or disposition by the Corporation
or the Bank of all or substantially all of
the Corporation's or the Bank's assets.
(C) Date of Termination: "Date of Termination" shall
mean the date stated in the Notice of Termination
(as hereinafter defined) or thirty (30) days from
the date of delivery of such notice, as hereinafter
defined, whichever comes first.
(D) Disability: "Disability" shall mean the definition
of such term as used in the disability policy
then in effect for the Corporation or the Bank, and
a determination of full disability by the Corporation
or the Bank; provided that in the event there is
no disability insurance then in force, "disability"
shall mean incapacity due to physical or mental
illness which will have caused the Executive to have
been unable to perform his duties with the
Corporation and/or the Bank on a full time basis for
one hundred eighty (180) consecutive calendar days.
(E) Notice of Termination: "Notice of Termination"
shall mean a written notice, communicated to
the other parties hereto, which shall
indicate the specific termination provisions of
this Agreement relied upon and set forth in
reasonable detail the facts and circumstances
claimed to provide a basis for termination of the
Executive's employment under the provisions so
indicated.
(F) Retirement: "Retirement" shall mean termination of
employment by the Executive in accordance with the
Corporation's or the Bank's normal retirement policy
generally applicable to its salaried employees in
effect at the time of a Change of Control.
Page 42
3. Termination.
(A) General. If any of the events described in Section 2
constituting a Change in Control of the Corporation
or the Bank shall have occurred, the Executive
shall be entitled to the benefits described in
Section 4 upon the subsequent termination of the
Executive's employment during the term of this
Agreement, unless such termination is (a) because of
the death or Disability of the Executive, (b) by the
Corporation or the Bank for Cause, or (c) by the
Executive other than on account of Constructive
Termination (as hereinafter defined).
(B) If, following a Change of Control, the Executive's
employment shall be terminated for Cause, the
Corporation and/or the Bank shall pay him his salary
through the Date of Termination at the rate in effect
on the date of the Notice of Termination, and the
Corporation and the Bank shall have no further
obligations under this Agreement. If, following a
Change of Control, the Executive's employment shall
be terminated as a result of death or Disability,
compensation to the Executive shall be made
pursuant to the Corporation's and the Bank's then
existing policies on death or Disability, and the
Corporation and the Bank shall have no further
obligations under this Agreement. If, following a
Change of Control, the Executive's employment is
terminated by and at the request of the Executive
as a result of Retirement, compensation to the
Executive shall be made pursuant to the Corporation's
and the Bank's normal retirement policy generally
applicable to its salaried employees at the time of
the Change of Control, and the Corporation and the
Bank shall have no further obligations under this
Agreement.
(C) Constructive Termination. The Executive shall be
entitled to terminate his employment upon the
occurrence of Constructive Termination. For
purposes of this Agreement, "Constructive
Termination" shall mean, without the Executive's
express written consent, the occurrence, after a
Change of Control of the Corporation or the Bank, of
any of the following circumstances:
(1) the assignment to the Executive of any
duties inconsistent (unless in the
nature of a promotion) with the position in
the Corporation or the Bank that the
Executive held immediately prior to the
Change of Control of the Corporation or the
Bank, or a significant adverse reduction
or alteration in the nature or status of
the Executive's position, duties or
responsibilities or the conditions of the
Executive's employment from those in effect
immediately prior to such Change of Control;
(2) a reduction in the Executive's annual base
salary, as in effect immediately prior to
the Change of Control of the Corporation
or the Bank or as the same may be adjusted
from time to time, except for across-the-
board salary reductions similarly affecting
all management personnel of the Corporation
or the Bank;
(3) the Bank and/or the Corporation requires
the Executive to be relocated anywhere other
than its offices in Muncie, Indiana;
(4) the taking of any action to deprive the
Executive of any material fringe benefit
enjoyed by him at the time of the Change of
Control, or the failure to provide him
with the number of paid vacation days to
which he is entitled on the basis of years
of service with the Corporation and/or the
Bank and in accordance with the
Corporation's or the Bank's normal vacation
policy in effect at the time of the Change
of Control;
Page 43
(5) the failure to continue to provide the
Executive with benefits substantially
similar to those enjoyed by the Executive
under any of the Corporation's or the Bank's
life insurance, medical, health and
accident, or disability plans in which the
Executive was participating at the time
of the Change of Control of the
Corporation or the Bank, or the taking of
any action which would directly or
indirectly materially reduce any of such
benefits; or
(6) the failure of the Corporation or the Bank
to continue this Agreement in effect, or to
obtain a satisfactory agreement from any
successor to assume and agree to perform
this Agreement, as contemplated in Section 5
hereof.
4. Compensation Upon Termination.
Following a Change of Control, if his employment by the Corporation or
the Bank shall be terminated by the Executive on account of Constructive
Termination or the Corporation or the Bank other than for Cause, death,
Disability, or Retirement (by and at the request of the Executive), then the
Executive shall be entitled to the benefits provided below:
(A) No later than the fifth day following the Date of
Termination, the Corporation or the Bank shall pay
to the Executive his full base salary through the
Date of Termination, at the rate in effect at the
time Notice of Termination is given, plus all other
amounts to which the Executive is entitled under any
incentive, bonus or other compensation plan of the
Corporation or the Bank in effect at the time such
payments are due;
(B) In lieu of any further salary payments to the
Executive for periods subsequent to the Date of
Termination, no later than the fifth day following
the Date of Termination, the Corporation or the Bank
shall pay to the Executive a lump sum severance
payment, in cash, equal to two (2.00) times the sum
of (a) the Executive's annual base salary rate as in
effect on the date of the Notice of Termination, and
(b) the largest bonus received by the Executive
during the two (2) years immediately preceding the
Date of Termination under the Corporation's
Management Incentive Plan covering the Executive;
(C) During the period beginning with the Executive's
Date of Termination and continuing until the
earlier of (a) the second anniversary of such Date
of Termination, or (b) Executive's sixty-fifth
(65th) birthday, the Corporation or the Bank shall
arrange to provide the Executive with life,
disability, accident and health insurance benefits
substantially similar to those which the Executive
was receiving immediately prior to the Notice of
Termination and shall pay the same percentage of
the cost of such benefits as the Corporation or the
Bank was paying on the Executive's behalf on the date
of such Notice;
(D) In lieu of shares of common stock of the Corporation
("Corporation Shares") issuable upon the exercise
of outstanding options ("Options"), if any, granted
to the Executive under any Corporation stock option
plan (which Options shall be cancelled upon the
making of the payment referred to below), the
Executive shall receive an amount in cash equal to
the product of (a) the excess of the higher of
the closing price of Corporation Shares as reported
on the NASDAQ National Market System, the
American Stock Exchange or the New York Stock
Exchange, wherever listed, on or nearest the Date
of Termination or the highest per share price for
Corporation Shares actually paid in connection
with any Change of Control of the Corporation, over
the per share exercise price of each Option held by
the Executive (whether or not then fully
exercisable), times (b) the number of Corporation
Shares covered by each such Option;
Page 44
(E) If the payments or benefits, if any, received or
to be received by the Executive (whether under
this Agreement or under any other plan,
arrangement, or agreement between the Executive
and the Corporation or the Bank), in connection
with termination or Constructive Termination of the
Executive's employment following a Change of Control,
constitute an "excess parachute payment" within
the meaning of '280G of the Internal Revenue Code
("Code"), the Corporation or the Bank shall pay to
the Executive, no later than the fifth day following
the Date of Termination, an additional amount (as
determined by the Corporation's independent public
accountants) equal to the excise tax, if any,
imposed on the "excess parachute payment" under
'4999 of the Code; provided, however, if the amount
of such excise tax is finally determined to be
more or less than the amount paid to the Executive
hereunder, the Corporation or the Bank (or the
Executive if the finally determined amount is less
than the original amount paid) shall pay the
difference between the amount originally paid and the
finally determined amount to the other party no later
than the fifth day following the date such final
determination is made;
(F) The Corporation or the Bank shall pay to the
Executive all reasonable legal fees and expenses
incurred by the Executive as a result of such
termination (including all such fees and expenses, if
any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any
right or benefit provided by this Agreement), unless
the decision-maker in any proceeding, contest, or
dispute arising hereunder makes a formal finding
that the Executive did not have a reasonable basis
for instituting such proceeding, contest, or dispute;
(G) The Corporation or the Bank shall provide the
Executive with individual out-placement services in
accordance with the general custom and practice
generally accorded to an executive of the Executive's
position.
5. Successors; Binding Agreement.
(A) The Corporation or the Bank shall require any
successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of
the Corporation or the Bank to expressly assume and
agree to perform this Agreement in the same manner
and to the same extent that the Corporation or the
Bank would be required to perform it if no such
succession had taken place. Failure of the
Corporation or the Bank to obtain such assumption and
agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and
shall entitle the Executive to compensation from the
Corporation or the Bank in the same amount and on
the same terms to which the Executive would be
entitled hereunder if the Executive terminates his
employment on account of Constructive Termination
following a Change of Control of the Corporation or
the Bank, except that for the purposes of
implementing the foregoing, the date on which any
such succession becomes effective shall be deemed
the Date of Termination. As used in this
Agreement, "the Corporation or the Bank" shall mean
the Corporation or the Bank and any successor to its
business and/or assets as aforesaid which assumes
and agrees to perform this Agreement, by operation
of law or otherwise.
(B) This Agreement shall inure to the benefit of and be
enforceable by the Executive and his personal or
legal representatives, executors, administrators,
successors, heirs, distributees, devisees and
legatees. If the Executive should die while any
amount would still be payable to the Executive
hereunder had the Executive continued to live, all
such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this
Agreement to the devisee, legatee or other designee
or, if there is no such designee, to his estate.
Page 45
6. Guarantee by Corporation and Bank.
In consideration of the value of the continued employment of the
Executive by the Corporation or the Bank, and the benefits derived by the
Corporation and the Bank from the Executives employment by the Corporation or
the Bank, the Corporation and the Bank hereby unconditionally and fully
guarantee and endorse the obligations of the other hereunder, and agree to be
fully bound by the terms of this Agreement in the event that the other fails to
perform, honor, or otherwise complete fully its obligations hereunder.
7. Miscellaneous.
No provision of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing and signed
by the Executive and such officer as may be specifically designated by the
Corporation. No waiver by either party hereto at the time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreement or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Indiana without regard to its conflicts of law
principles. All references to a section of the Exchange Act or the Code shall be
deemed also to refer to any successor provisions to such section. Any payments
provided for hereunder shall be paid net of any applicable withholding required
under federal, state or local law. The obligations of the Corporation and the
Bank under Section 4 shall survive the expiration of the term of this Agreement.
8. Validity.
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
9. Counterparts.
This Agreement may be executed in several counterparts, each of which
shall be deemed to be an original, but all of which together shall constitute
one and the same instrument.
10. Arbitration.
Any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration, conducted before a
panel of three (3) arbitrators in Muncie, Indiana in accordance with the rules
of the American Arbitration Association then in effect. Judgment may be entered
on the arbitrator's award in any court having jurisdiction; provided, however,
that the Executive shall be entitled to seek specific performance of his right
to be paid until the Date of Termination during the pendency of any dispute or
controversy arising under or in connection with this Agreement.
11. Entire Agreement.
This Agreement sets forth the entire agreement of the parties
hereto in respect of the subject matter contained herein and supersedes all
prior agreements, promises, covenants, arrangements, communications,
representations or warranties, whether oral or written, by any officer, employee
or representative of any party hereto; and any prior agreement of the parties
hereto in respect of the subject matter contained herein is hereby terminated
and cancelled.
IN WITNESS WHEREOF, the Corporation and the Bank have caused this
Agreement to be executed by their duly authorized officers, and the Executive
has hereunder subscribed his name, this _____ day of ___________, 2002.
"CORPORATION" "EXECUTIVE"
FIRST MERCHANTS CORPORATION
By ______________________________ By ______________________________
Stefan S. Anderson, James L. Thrash
Chairman of the Board
"BANK" "EXECUTIVE"
FIRST MERCHANTS BANK, NATIONAL ASSOCIATION
By ______________________________
Stefan S. Anderson,
Chairman of the Board
Page 46