UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001 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 47305-2814
Muncie, Indiana (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (765) 747-1500
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section
12 (g) of the Act:
Common Stock, $.125 stated value per share
(Title of Class)
Indicate by check mark whether the registrant(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein,and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value (not necessarily a reliable indication of the price
at which more than a limited number of shares would trade) of the voting stock
held by non-affiliates of the registrant was $309,923,269 as of March 15, 2002.
As of March 15, 2002 there were 12,780,341 outstanding common shares, without
par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K
Documents Into Which Incorporated
Portions of the Registrant's Annual Report Part II (Items 5, 6, 7, 7A, 8 and 9)
to Shareholders for the year ended
December 31, 2001
Portions of the Registrant's
Definitive Proxy Statement for
Annual Meeting of Shareholders
to be held April 11, 2002 Part III (Items 10 through 13)
Exhibit Index: Page 31
FORM 10-K TABLE OF CONTENTS
Form 10-K
Page
Number
Part I
Item 1 - Business............................................................3
Item 2 - Properties.........................................................21
Item 3 - Legal Proceedings..................................................21
Item 4 - Submission of Matters to a Vote of Security Holders................21
Supplemental Information - Executive Officers of the Registrant.............22
Part II
Item 5 - Market For the Registrant's Common Equity and
Related Stockholder Matters.......................................23
Item 6 - Selected Financial Data...........................................23
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................23
Item 7A- Quantitative and Qualitative Disclosures about Market Risk........23
Item 8 - Financial Statements and Supplementary Data.......................26
Item 9 - Changes In and Disagreements With Accountants on
Accounting and Financial Disclosures..............................26
Part III
Item 10- Directors and Executive Officers of the Registrant.................27
Item 11- Executive Compensation.............................................27
Item 12- Security Ownership of Certain Beneficial
Owners and Management..............................................27
Item 13- Certain Relationships and Related Transactions.....................27
Part IV
Item 14- Financial Statement Schedules, Exhibits and
Reports on Form 8-K................................................28
Signatures.........................................................30
Page 2
PART I
ITEM 1. BUSINESS
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GENERAL
First Merchants Corporation (the "Corporation") was incorporated under Indiana
law on September 20, 1982, as the bank holding company for First Merchants Bank,
National Association ("First Merchants"), a national banking association
incorporated in 1893. Prior to December 16, 1991, First Merchants' name was The
Merchants National Bank of Muncie. On November 30, 1988, the Corporation
acquired Pendleton Banking Company ("Pendleton"), a state chartered commercial
bank organized in 1872. On July 31, 1991, the Corporation acquired First United
Bank ("First United"), a state chartered commercial bank organized in 1882. On
August 1, 1996, the Corporation acquired The Union County National Bank of
Liberty ("Union County"), a national banking association incorporated in 1872.
On October 2, 1996, the Corporation acquired The Randolph County Bank ("Randolph
County"), a state chartered commercial bank founded in 1865. On April 1, 1998,
Pendleton acquired the Muncie office of Insurance and Risk Management, Inc.,
which was renamed, on April 1, 1998, First Merchants Insurance Services, Inc. On
April 1, 1999, the Corporation acquired The First National Bank of Portland
("First National"), a national banking association incorporated in 1904. On
April 21, 1999, the Corporation acquired Anderson Community Bank ("Anderson"), a
state charted commercial bank founded in 1995. Pendleton and Anderson were
combined on April 21, 1999, to form Madison Community Bank ("Madison"). Decatur
Bank and Trust Company ("Decatur")a state chartered commercial bank organized in
1966 was acquired on June 1, 2000. On January 19, 2000, First Merchants
Reinsurance Company was formed to underwrite accident, health and credit life
insurance. On July 1, 2001, the Corporation acquired Frances Slocum Bank & Trust
Company ("Frances Slocum"), a state chartered commercial bank organized in 1963.
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. Such title insurance operations were subsequently contributed to
Indiana Title Insurance Company, LLC in which the Corporation has a 52.12%
ownership interest.
As of December 31, 2001, the Corporation had consolidated assets of $1.787
billion, consolidated deposits of $1.421 billion and stockholders' equity of
$179.1 million.
The Corporation is headquartered in Muncie, Indiana, and is presently engaged in
conducting commercial banking business through the offices of its eight
banking subsidiaries. As of December 31, 2001, the Corporation and its
subsidiaries had 783 full-time equivalent employees.
Through its bank subsidiaries, the Corporation offers a broad range of financial
services, including: accepting time, savings and demand deposits; making
consumer, commercial, agri-business and real estate mortgage loans; renting safe
deposit facilities; providing personal and corporate trust services; providing
full service brokerage; and providing other corporate services, letters of
credit and repurchase agreements. Through various nonbank subsidiaries, the
Corporation also offers personal and commercial lines of insurance and engages
in the title agency business and the reinsurance of credit life, accident, and
health insurance.
Acquisition Policy and Pending Transactions
The Corporation anticipates that it will continue its policy of geographic
expansion of its banking business through the acquisition of banks whose
operations are consistent with its community banking philosophy. Management
routinely explores opportunities to acquire financial institutions and other
financial services-related businesses and to enter into strategic alliances to
expand the scope of its services and its customer base.
On October 15, 2001, the Corporation and Lafayette Bancorporation jointly
announced the signing of a definitive agreement pursuant to which Lafayette
Bancorporation will be merged with and into the Corporation. As a result of the
merger, Lafayette Bank and Trust Company will become a wholly-owned subsidiary
of the Corporation. Although the merger is subject to various contingencies, it
is expected to be completed on April 1, 2002. All required shareholder and
regulatory approvals relating to the merger have been obtained.
Lafayette Bank and Trust Company operates 20 branches in the Indiana counties of
Carroll, Jasper, Tippecanoe and White. The Corporation intends to operate each
of these branches after the merger under the name Lafayette Bank and Trust
Company. At December 31, 2001, Lafayette Bancorporation had total assets of
approximately $762 million and deposits of approximately $618 million.
As part of the merger, shareholders of Lafayette Bancorporation will receive
approximately 2,773,059 shares of Corporation common stock and $50.9 million in
cash. The Corporation will account for the merger under the purchase method of
accounting.
Page 3
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COMPETITION
The Corporation's banking subsidiaries are located in Adams, Delaware, Fayette,
Hamilton, Henry, Howard, Jay, Madison, Miami, Wabash, Wayne, Randolph, and Union
counties in Indiana and Butler county in Ohio. In addition to the competition
provided by the lending and deposit gathering subsidiaries of national
manufacturers, retailers, insurance companies and investment brokers, the
banking subsidiaries compete vigorously with other banks, thrift institutions,
credit unions and finance companies located within their service areas.
REGULATION AND SUPERVISION
OF FIRST MERCHANTS AND SUBSIDIARIES
BANK HOLDING COMPANY REGULATION
The Corporation is registered as a bank holding company and has elected to be a
financial holding company. It is subject to the supervision of, and regulation
by the Board of Governors of the Federal Reserve System ("Federal Reserve")
under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). Bank
holding companies are required to file periodic reports with and are subject to
periodic examination by the Federal Reserve. The Federal Reserve has issued
regulations under the BHC Act requiring a bank holding company to serve as a
source of financial and managerial strength to its subsidiary banks. Thus, it is
the policy of the Federal Reserve that, a bank holding company should stand
ready to use its resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity. Additionally, under the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a
bank holding company is required to guarantee the compliance of any
subsidiary bank that may become "undercapitalized" (as defined in the FDICIA)
with the terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency. Under the BHC Act, the Federal Reserve has
the authority to require a bank holding company to terminate any activity
or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary
of a bank) upon the determination that such activity constitutes a serious risk
to the financial stability of any bank subsidiary.
The BHC Act requires the Corporation to obtain the prior approval of the Federal
Reserve before:
1. Acquiring direct or indirect control or ownership of any voting shares of
any bank or bank holding company if, after such acquisition, the bank
holding company will directly or indirectly own or control more than 5% of
the voting shares of the bank or bank holding company.
2. Merging or consolidating with another bank holding company; or
3. Acquiring substantially all of the assets of any bank.
The BHC Act generally prohibits bank holding companies that have not become
financial holding companies from (i) engaging in activities other than banking
or managing or controlling banks or other permissible subsidiaries, and
(ii) acquiring or retaining direct or indirect control of any company engaged in
the activities other than those activities determined by the Federal Reserve to
be closely related to banking or managing or controlling banks.
The BHC Act does not place territorial restrictions on such nonbanking-related
activities.
Page 4
CAPITAL ADEQUACY GUIDELINES FOR BANK HOLDING COMPANIES
The Corporation is required to comply with the Federal Reserve's
risk-based capital guidelines. These guidelines require a minimum ratio of
capital to risk-weighted assets of 8% (including certain off-balance sheet
activities such as standby letters of credit). At least half of the total
required capital must be "Tier 1 capital," consisting principally of common
shareholders' equity, noncumulative perpetual preferred stock, a limited amount
of cumulative perpetual preferred stock and minority interest in the equity
accounts of consolidated subsidiaries, less certain goodwill items. The
remainder may consist of a limited amount of subordinate debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, cumulative perpetual preferred stock, and a limited amount of
the general loan loss allowance.
In addition to the risk-based capital guidelines, the Federal Reserve has
adopted a Tier 1 (leverage) capital ratio under which the Corporation must
maintain a minimum level of Tier 1 capital to average total consolidated assets.
The ratio is 3% in the case of bank holding companies which have the highest
regulatory examination ratings and are not contemplating significant growth or
expansion. All other bank holding companies are expected to maintain a ratio of
at least 1% to 2% above the stated minimum.
The following are the Corporation's regulatory capital ratios as of
December 31, 2001:
Corporation Regulatory Minimum
Requirement
Tier 1 Capital: 10.6% 4.0%
(to risk-weighted assets)
Total Capital: 11.8% 8.0%
BANK REGULATION
First Merchants, Union County, and First National are national banks and
are supervised, regulated and examined by the Office of the Comptroller of the
Currency (the "OCC"). First United, Madison, Randolph County, Decatur and
Frances Slocum are state banks chartered in Indiana and are supervised,
regulated and examined by the Indiana Department of Financial Institutions. In
addition, five of the Corporation's subsidiaries, Madison, First United,
Randolph County, Decatur and Frances Slocum are supervised, regulated and
examined by the FDIC. Each regulator has the authority to issue cease-and-desist
orders if it determines that activities of the bank regularly represent an
unsafe and unsound banking practice or a violation of law.
Both federal and state law extensively regulate various aspects of the
banking business such as reserve requirements, truth-in-lending and
truth-in-savings disclosures, equal credit opportunity, fair credit reporting,
trading in securities and other aspects of banking operations. Current federal
law also requires banks, among other things, to make deposited funds available
within specified time periods.
Page 5
BANK REGULATION continued
Insured state-chartered banks are prohibited under FDICIA from engaging
as the principal in activities that are not permitted for national banks, unless
(i) the FDIC determines that the activity would pose no significant risk to the
appropriate deposit insurance fund, and (ii) the bank is, and continues to be,
in compliance with all applicable capital standards.
BANK CAPITAL REQUIREMENTS
The FDIC and the OCC have adopted risk-based capital ratio guidelines
to which state-chartered banks and national banks are subject. The guidelines
establish a framework that makes regulatory capital requirements more sensitive
to differences in risk profiles. Risk-based capital ratios are determined by
allocating assets and specified off-balance sheet commitments to four
risk-weighted categories, with higher levels of capital being required for the
categories perceived as representing greater risk.
Like the capital guidelines established by the Federal Reserve, these
guidelines divide a bank's capital into tiers. Banks are required to maintain a
total risk-based capital ratio of 8%. The FDIC or OCC may, however, set higher
capital requirements when a bank's particular circumstances warrant. Banks
experiencing or anticipating significant growth are expected to maintain capital
ratios, including tangible capital positions, well above the minimum levels.
In addition, the FDIC and the OCC established guidelines prescribing a
minimum Tier 1 leverage ratio (Tier 1 capital to adjusted total assets as
specified in the guidelines). These guidelines provide for a minimum Tier 1
leverage ratio of 3% for banks that meet specified criteria, including that they
have the highest regulatory rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier 1 leverage
ratio of 3% plus an additional 100 to 200 basis points.
All of the Corporation's affiliate banks exceed the risk-based capital
guidelines of the FDIC and/or the OCC as of December 31, 2001.
The Federal Reserve, the FDIC and the OCC have adopted rules to
incorporate market and interest rate risk components into their risk-based
capital standards. Amendments to the risk-based capital requirements,
incorporating market risk, became effective January 1, 1998. Under the new
market risk requirements, capital will be allocated to support the amount of
market risk related to a financial institution's ongoing trading activities.
FDICIA
FDICIA requires, among other things, federal bank regulatory
authorities to take "prompt corrective action" with respect to banks which do
not meet minimum capital requirements. For these purposes, FDICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. The FDIC has
adopted regulations to implement the prompt corrective action provisions of
FDICIA.
"Undercapitalized" banks are subject to growth limitations and are
required to submit a capital restoration plan. A bank's compliance with such
plan is required to be guaranteed by the bank's parent holding company. If an
"undercapitalized" bank fails to submit an acceptable plan, it is treated as if
it is significantly undercapitalized. "Significantly undercapitalized" banks are
subject to one or more restrictions, including an order by the FDIC to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cease receipt of deposits from correspondent banks, and
restrictions on compensation of executive officers. "Critically
undercapitalized" institutions may not, beginning 60 days after becoming
"critically undercapitalized," make any payment of principal or interest on
certain subordinated debt or extend credit for a highly leveraged transaction or
enter into any transaction outside the ordinary course of business. In addition,
"critically undercapitalized" institutions are subject to appointment of a
receiver or conservator.
Page 6
FDICIA continued
As of December 31, 2001, each bank subsidiary of First Merchants is
"well capitalized" based on the "prompt corrective action" ratios and deadlines
described above. It should be noted, however, that a bank's capital category is
determined solely for the purpose of applying the OCC's (or the FDIC's) "prompt
corrective action" regulations and that the capital category may not constitute
an accurate representation of the bank's overall financial condition or
prospects.
DEPOSIT INSURANCE
The Corporation's affiliated banks are insured up to regulatory limits by
the FDIC and, accordingly, are subject to deposit insurance assessments to
maintain the Bank Insurance Fund (the "BIF") and the Savings Association
Insurance Fund ("SAIF") administered by the FDIC. The FDIC has adopted
regulations establishing a permanent risk-related deposit insurance assessment
system. Under this system, the FDIC places each insured bank in one of nine risk
categories based on (i) the bank's capitalization, and (ii) supervisory
evaluations provided to the FDIC by the institution's primary federal regulator.
Each insured bank's insurance assessment rate is then determined by the risk
category in which it is classified by the FDIC.
The Deposit Insurance Funds Act of 1996 provides for assessments to be
imposed on insured depository institutions with respect to deposits insured by
the BIF and the SAIF (in addition to assessments currently imposed on depository
institutions with respect to BIF- and SAIF-insured deposits) to pay for the cost
of Financing Corporation ("FICO") funding. The FICO assessments do not vary
depending upon a depository institution's capitalization or supervisory
evaluations.
DIVIDEND LIMITATIONS
National and state banking laws restrict the amount of dividends that an
affiliate bank may declare in a year without obtaining prior regulatory
approval. National and state banks are limited to the bank's retained net income
(as defined) for the current year plus those for the previous two years. At
December 31, 2001, the Corporation's affiliate banks had no retained net profits
available for 2002 dividends to the Corporation without prior regulatory
approval.
BROKERED DEPOSITS
Under FDIC regulations, no FDIC-insured depository institution can
accept brokered deposits unless it (i) is well capitalized, or (ii) is
adequately capitalized and received a waiver from the FDIC. In addition, these
regulations prohibit any depository institution that is not well capitalized
from (a) paying an interest rate on deposits in excess of 76 basis points over
certain prevailing market rates or (b) offering "pass through" deposit insurance
on certain employee benefit plan accounts unless it provides certain notice to
affected depositors.
INTERSTATE BANKING AND BRANCHING
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 ("Riegle-Neal") subject to certain concentration limits, required
regulatory approvals and other requirements, (i) financial holding companies
such as the Corporation are permitted to acquire banks and bank holding
companies located in any state; (ii) any bank that is a subsidiary of a bank
holding company is permitted to receive deposits, renew time deposits, close
loans, service loans and receive loan payments as an agent for any other bank
subsidiary of that holding company; and (iii) banks are permitted to acquire
branch offices outside their home states by merging with out-of-state banks,
purchasing branches in other states, and establishing de novo branch offices in
other states.
Page 7
FINANCIAL SERVICES MODERNIZATION ACT
The Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization
Act") establishes a comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms, and other financial
service providers by revising and expanding the existing BHC Act. Under this
legislation, bank holding companies would be permitted to conduct essentially
unlimited securities and insurance activities as well as other activities
determined by the Federal Reserve Board to be financial in nature or related to
financial services. As a result, the Corporation is able to provide securities
and insurance services. Furthermore, under this legislation, the Corporation is
able to acquire, or be acquired by, brokerage and securities firms and insurance
underwriters. In addition, the Financial Services Modernization Act broadens the
activities that may be conducted by national banks through the formation of
financial subsidiaries. Finally, the Financial Services Modernization Act
modifies the laws governing the implementation of the Community Reinvestment Act
and addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.
A bank holding company may become a financial holding company if each of
its subsidiary banks is well capitalized, is well managed and has at least a
satisfactory rating under the Community Reinvestment Act, by filing a
declaration that the bank holding company wishes to become a financial holding
company. Also effective March 11, 2000, no regulatory approval is required for a
financial holding company to acquire a company, other than a bank or savings
association, engaged in activities that are financial in nature or incidental to
activities that are financial in nature, as determined by the Federal Reserve
Board. The Federal Reserve Bank of Chicago approved the Corporation's
application to become a Financial Holding Company effective September 13, 2000.
ADDITIONAL MATTERS
The Corporation and its affiliate banks are subject to the Federal Reserve
Act, which restricts financial transactions between banks and affiliated
companies. The statute limits credit transactions between banks, affiliated
companies and its executive officers and its affiliates. The statute prescribes
terms and conditions for bank affiliate transactions deemed to be consistent
with safe and sound banking practices, and restricts the types of collateral
security permitted in connection with the bank's extension of credit to an
affiliate. Additionally, all transactions with an affiliate must be on terms
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated parties.
In addition to the matters discussed above, the Corporation's affiliate
banks are subject to additional regulation of their activities, including a
variety of consumer protection regulations affecting their lending, deposit and
collection activities and regulations affecting secondary mortgage market
activities.
The earnings of financial institutions are also affected by general
economic conditions and prevailing interest rates, both domestic and foreign,
and by the monetary and fiscal policies of the United States Government and its
various agencies, particularly the Federal Reserve.
Additional legislation and administrative actions affecting the banking
industry may be considered by the United States Congress, state legislatures and
various regulatory agencies, including those referred to above. It cannot be
predicted with certainty whether such legislation or administrative action will
be enacted or the extent to which the banking industry in general or the
Corporation and its affiliate banks in particular would be affected.
Page 8
SPECIAL NOTE REGARDING 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-K, 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.
Page 9
STATISTICAL DATA
The following tables set forth statistical data relating the Corporation and its
subsidiaries.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
The daily average balance sheet amounts, the related interest income or expense,
and average rates earned or paid are presented in the following table.
(Dollars in Thousands)
2001 2000 1999
------------------------------- ------------------------------- -------------------------------
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Balance Rate
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Assets:
Federal funds sold ........ $ 31,820 $ 899 2.8% $ 9,938 $ 666 6.7% $ 14,369 $ 657 4.6%
Interest-bearing deposits...... 2,060 106 5.1 1,807 103 5.7 1,105 59 5.3
Federal Reserve and
Federal Home Loan Bank stock. 7,657 559 7.3 6,456 585 9.1 5,121 446 8.7
Securities: (1)
Taxable ....................... 179,006 11,207 6.3 235,745 14,478 6.1 256,424 15,459 6.0
Tax-exempt .................... 85,288 6,312 7.4 95,836 7,057 7.4 111,437 8,066 7.2
---------- -------- ---------- -------- ---------- --------
Total Securities............. 264,294 17,519 6.6 331,581 21,535 6.5 367,861 23,525 6.4
Mortgage loans held for sale..... 481 41 8.5 75 8 10.7 125 15 12.0
Loans: (2)
Commercial .................... 612,031 49,786 8.1 492,793 45,373 9.2 416,757 35,616 8.5
Bankers' acceptance and
Commercial paper purchased... 371 18 4.9
Real estate mortgage........... 404,831 31,908 7.9 372,104 29,795 8.0 332,670 26,604 8.0
Installment ................... 245,978 21,388 8.7 233,966 20,622 8.8 183,534 16,113 8.8
Tax-exempt .................... 7,234 674 9.3 5,075 478 9.4 2,259 358 15.8
---------- -------- ---------- -------- ---------- --------
Total loans ................. 1,270,555 103,797 8.2 1,104,013 96,276 8.7 935,716 78,724 8.4
---------- -------- ---------- -------- ---------- --------
Total earning assets......... 1,576,386 122,880 7.8 1,453,795 119,165 8.2 1,324,172 103,411 7.8
---------- -------- ---------- -------- ---------- --------
Net unrealized gain (loss) on securities
available for sale............... 2,608 (13,421) (47)
Allowance for loan losses........ (13,736) (11,570) (10,821)
Cash and due from banks.......... 42,814 39,250 36,873
Premises and equipment .......... 25,265 22,349 19,794
Other assets .................... 56,357 42,308 27,259
--------- --------- ---------
Total assets ................ $1,689,694 $1,532,711 $1,397,230
========== ========== ==========
Liabilities:
Interest-bearing deposits:
NOW accounts ................ $ 192,573 2,475 1.3% $ 168,773 2,920 1.7% $ 152,268 2,642 1.7%
Money market deposit accounts 214,087 6,386 3.0 193,932 9,000 4.6 177,091 6,804 3.8
Savings deposits ............ 122,175 2,310 1.9 98,988 2,477 2.5 95,344 2,399 2.5
Certificates and other
time deposits ............. 655,477 34,655 5.3 612,605 35,210 5.7 518,624 26,694 5.1
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
deposits..................... 1,184,312 45,826 3.9 1,074,298 49,607 4.6 943,327 38,539 4.1
Borrowings ...................... 171,771 10,248 6.0 169,869 10,939 6.4 154,839 8,359 5.4
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
liabilities.................. 1,356,083 56,074 4.1 1,244,167 60,546 4.9 1,098,166 46,898 4.3
Noninterest-bearing deposits..... 147,318 134,717 129,747
Other liabilities ............... 20,061 12,381 19,595
---------- ---------- ----------
Total liabilities............ 1,523,462 1,391,265 1,247,508
Stockholders' equity ............ 166,232 141,446 149,722
---------- ---------- ----------
Total liabilities and
stockholders' equity........ $1,689,694 56,074 3.6(3)$1,532,711 60,546 4.2(3) $1,397,230 46,898 3.5(3)
========== -------- ========== -------- ========== --------
Net interest income ......... $ 66,806 $ 58,619 $ 56,513
======== ======== ========
Net interest margin.......... 4.2 4.0 4.3
(1) Average balance of securities is computed based on the average of the
historical amortized cost balances without the effects of the fair value
adjustment.
(2) Nonaccruing loans have been included in the average balances.
(3) Total interest expense divided by total earning assets adjustment
to convert tax exempt investment securities to fully taxable equivalent
basis, using marginal rate of 35% for 2001, 2000, and
1999.............................
$2,445 $2,637 $2,948
====== ====== ======
Page 10
STATISTICAL DATA (continued)
- ----------------
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table presents net interest income components on a tax-equivalent
basis and reflects changes between periods attributable to movement in either
the average balance or average interest rate for both earning assets and
interest-bearing liabilities. The volume differences were computed as the
difference in volume between the current and prior year times the interest rate
of the prior year, while the interest rate changes were computed as the
difference in rate between the current and prior year times the volume of the
prior year. Volume/rate variances have been allocated on the basis of the
absolute relationship between volume variances and rate variances.
2001 Compared to 2000 2000 Compared to 1999
Increase (Decrease) Due To Increase (Decrease) Due To
----------------------------------------- -----------------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(Dollars in Thousands on Fully Taxable Equivalent Basis)
Interest income:
Federal funds sold ............... $ 795 $ (562) $ 233 $ (240) $ 249 $ 9
Interest-bearing deposits ........ 14 (11) 3 40 4 44
Federal Reserve and Federal
Home Loan Bank stock ........... 98 (124) (26) 120 19 139
Securities ....................... (4,452) 436 (4,016) (2,351) 361 (1,990)
Mortgage loans held for sale ..... 35 (2) 33 (5) (2) (7)
Loans ............................ 13,843 (6,355) 7,488 14,593 2,966 17,559
-------- --------- --------- -------- --------- ---------
Totals ........................... 10,333 (6,618) 3,715 12,157 3,597 15,754
-------- --------- --------- -------- --------- ---------
Interest expense:
NOW accounts ..................... 374 (819) (445) 286 (8) 278
Money market deposit
accounts........................ 860 (3,474) (2,614) 689 1,507 2,196
Savings deposits.................. 511 (678) (167) 91 (13) 78
Certificates and other
time deposits................... 2,372 (2,927) (555) 5,181 3,335 8,516
Borrowings........................ 121 (812) (691) 864 1,716 2,580
-------- --------- --------- -------- --------- ---------
Totals.......................... 4,238 (8,710) (4,472) 7,111 (6,537) 13,648
-------- --------- --------- -------- --------- ---------
Change in net interest
income (fully taxable
equivalent basis)................ $ 6,095 $ 2,092 $ 8,187 $ 5,046 $ (2,940) $ 2,106
======== ========= ======== =========
Tax equivalent adjustment
using marginal rate
of 35% for 2001, 2000,
and 1999.......................... 192 311
---------- ----------
Change in net interest
income........................... $ 8,379 $ 2,417
========== ==========
Page 11
STATISTICAL DATA (continued)
INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
approximate market value of the investment securities at the dates indicated
were:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- --------------- -------------- --------------
(Dollars in Thousands)
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
======== ======== ======== ========
Available for sale at December 31, 2000:
U.S. Treasury.............................. $ 2,997 $ 2,997
Federal agencies........................... 55,403 $ 268 $ 155 55,516
State and municipal........................ 81,370 1,045 103 82,312
Mortgage-backed securities................. 127,907 139 922 127,124
Other asset-backed securities ............ 19,924 10 148 19,786
Corporate obligations .................... 7,238 9 395 6,852
Marketable equity securities............... 1,277 134 1,143
-------- -------- -------- --------
Total available for sale................ 296,116 1,471 1,857 295,730
-------- -------- -------- --------
Held to maturity at December 31, 2000:
U.S. Treasury............................... 250 250
State and municipal......................... 11,645 131 36 11,740
Mortgage-backed securities.................. 338 338
-------- -------- -------- --------
Total held to maturity................... 12,233 131 36 12,328
-------- -------- -------- --------
Total investment securities.............. $308,349 $ 1,602 $ 1,893 $308,058
======== ======== ======== ========
Page 12
- --------------------------------------------------------------------------------
STATISTICAL DATA (continued)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- -------------- ------------
Available for sale at December 31, 1999:
U.S. Treasury.............................. $ 7,337 $ 3 $ 72 $ 7,268
Federal agencies........................... 61,215 50 1,199 60,066
State and municipal........................ 94,598 568 945 94,221
Mortgage-backed securities................. 141,673 58 4,332 137,399
Other asset-backed securities ............ 21,773 758 21,015
Corporate obligations .................... 9,082 4 140 8,946
Marketable equity securities............... 915 162 753
--------- -------- ------- --------
Total available for sale................ 336,593 683 7,608 329,668
--------- -------- ------- --------
Held to maturity at December 31, 1999:
U.S. Treasury............................... 250 2 248
State and municipal......................... 13,243 77 13 13,307
Mortgage-backed securities.................. 311 1 1 311
Other asset-backed securities............... 499 81 418
--------- -------- ------- --------
Total held to maturity................... 14,303 78 97 14,284
--------- -------- ------- --------
Total investment securities.............. $ 350,896 $ 761 $ 7,705 $343,952
========= ======== ======= ========
Cost
----------------------------------------------------------
2001 2000 1999
---- ---- ----
Federal Reserve and Federal Home Loan
Bank stock at December 31:
Federal Reserve Bank stock .................... $ 493 $ 493 $ 493
Federal Home Loan Bank stock .................. 7,857 6,692 5,365
----- ----- -----
Total ..................................... $8,350 $7,185 $5,858
====== ====== ======
The Fair value of Federal Reserve and Federal Home Loan Bank stock approximates
cost.
The maturity distribution (dollars in thousands) and average yields for the
securities portfolio at December 31, 2001 were:
Securities available for sale December 31, 2001:
Within 1 Year 1-5 Years 5-10 Years
------------- --------- ----------
Amount Yield* Amount Yield* Amount Yield*
------ ------ ------ ------ ------ ------
U.S. Treasury...................... $ 124 2.1%
Federal Agencies................... 2,529 5.6 $21,145 5.0% $ 5,894 2.5%
State and Municipal................ 15,741 6.9 35,648 7.3 9,462 8.0
Corporate Obligations.............. 1,537 6.5 2,077 6.5
------- ------- -------
Total.......................... $19,931 6.7% $58,870 6.5% $15,356 5.9%
======= ======= =======
Page 13
- --------------------------------------------------------------------------------
STATISTICAL DATA (continued)
Marketable Equity,
Mortgage and Other
Due After Ten Years Asset-Backed Securities Total
------------------- ----------------------- -----
Amount Yield* Amount Yield* Amount Yield*
------ ------ ------ ------ ------ ------
U.S. Treasury........................ $ 124 2.1%
Federal Agencies..................... $ 2,005 2.5% 31,573 4.8
State and Municipal.................. 15,354 7.9 76,205 7.4
Corporate Obligations................ 3,614 6.5
Marketable Equity Security........... $ 7,349 5.6% 7,349 5.6
Mortgage-backed securities........... 102,520 6.4 102,520 6.4
Other asset-backed securities........ 10,283 5.7 10,283 5.7
-------- --------- --------
Total............................ $ 17,359 7.3% $ 120,152 6.3% $231,668 6.5%
======== ========= ========
Securities held to maturity at December 31, 2001:
Within 1 Year 1-5 Years 5-10 Years
------------- --------- ----------
Amount Yield* Amount Yield* Amount Yield*
------ ------ ------ ------ ------ ------
State and Municipal.................. $ 2,545 6.9% $ 3,217 7.4% $1,944 7.9%
Mortgage Backed
Due After Ten Years Securities Total
------------------- ------------ -----
Amount Yield* Amount Yield* Amount Yield*
------ ------ ------ ------ ------ ------
State and Municipal.................. $ 720 8.7% $ 8,426 7.5%
Mortgage-backed securities........... $ 228 8.2% 228 8.2
------- ------- -------
Total............................ $ 720 8.7% $ 228 8.2% $ 8,654 7.5%
======= ======= =======
*Interest yields on state and municipal securities are presented on a fully
taxable equivalent basis using a 35% rate.
Federal Reserve and Federal Home Loan Bank stock at December 31, 2001:
Amount Yield
Federal Reserve Bank Stock........... $ 493 6.00%
Federal Home Loan Bank stock......... 7,857 6.75
-------
Total............................ $8,350 6.71%
=======
Page 14
STATISTICAL DATA (continued)
LOAN PORTFOLIO
TYPES OF LOANS
The loan portfolio at the dates indicated is presented below:
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
Loans at December 31:
Commercial and
industrial loans........................... $ 301,962 $ 258,405 $224,712 $188,841 $178,696
Bankers acceptances and loans
to financial institutions.................. 900 705
Agricultural production
financing and other loans
to farmers................................. 29,645 24,547 21,547 21,951 16,764
Real estate loans:
Construction............................... 58,316 45,412 31,996 31,719 22,710
Commercial and farmland.................... 230,233 167,317 150,544 137,671 142,394
Residential................................ 544,028 466,660 380,596 361,611 331,405
Individuals' loans for
household and other
personal expenditures...................... 179,364 201,629 181,906 143,075 139,620
Tax-exempt loans............................. 7,277 6,093 4,070 2,652 2,598
Other loans.................................. 8,800 5,523 3,552 2,073 3,782
---------- ---------- --------- --------- ---------
1,359,625 1,175,586 998,923 890,493 838,674
Unearned interest on loans................... (39) (28) (137) (487)
---------- ---------- --------- --------- ---------
Total loans........................ $1,359,586 $1,175,586 $998,895 $890,356 $838,187
========== ========== ========= ========= =========
Residential Real Estate Loans Held for Sale at December 31, 2001, 2000, 1999,
1998, and 1997 were $307,000, $0, $61,000, $775,800, and $471,400.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
Presented in the table below are the maturities of loans (excluding commercial
real estate, banker acceptances, farmland, residential real estate and
individuals' loans) outstanding as of December 31, 2001. Also presented are the
amounts due after one year classified according to the sensitivity to changes in
interest rates.
Maturing
Within 1-5 Over
1 Year Years 5 Years Total
-------------- --------------- -------------- ------------
(Dollars in Thousands)
Commercial and industrial loans................ $ 218,241 $ 59,372 $ 24,349 $ 301,962
Agricultural production financing
and other loans to farmers................... 26,281 2,656 708 29,645
Real estate - Construction..................... 35,759 19,720 2,837 58,316
Tax-exempt loans............................... 144 3,969 3,164 7,277
Other loans.................................... 2,340 6,447 13 8,800
---------- --------- --------- ----------
Total.................................... $ 282,765 $ 92,164 $ 31,071 $ 406,000
========== ========= ========= ==========
Page 15
STATISTICAL DATA (continued)
Maturing
---------------------------------------------------
1 - 5 Over
Years 5 Years
----- -------
(Dollars in Thousands)
Loans maturing after one year with:
Fixed rate.............................. $ 55,141 $ 31,038
Variable rate........................... 37,023 33
------------- ------------
Total................................. $ 92,164 $ 31,071
============= ============
NONACCRUING, CONTRACTUALLY PAST DUE 90 DAYS OR MORE
OTHER THAN NONACCRUING AND RESTRUCTURED LOANS
December 31
--------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
Nonaccruing loans......................... $6,327 $2,370 $1,280 $1,073 $2,146
Loans contractually past due 90
days or more other than
nonaccruing............................. 4,828 2,483 2,826 2,334 2,034
Restructured loans........................ 3,511 3,085 908 1,110 1,086
Nonaccruing loans are loans which are reclassified to a nonaccruing status when
in management's judgment the collateral value and financial condition of the
borrower do not justify accruing interest. Interest previously recorded, but not
deemed collectible, is reversed and charged against current income. Interest
income on these loans is then recognized when collected.
Restructured loans are loans for which the contractual interest rate has been
reduced or other concessions are granted to the borrower, because of a
deterioration in the financial condition of the borrower resulting in the
inability of the borrower to meet the original contractual terms of the loans.
Interest income of $412,000 for the year ended December 31, 2001, was recognized
on the nonaccruing and restructured loans listed in the table above, whereas
interest income of $542,000 would have been recognized under their original loan
terms.
Potential problem loans:
Management has identified certain other loans totaling $18,798,000 as of
December 31, 2001, not included in the table above, or impaired loan table in
the footnotes to the consolidated financial statements, about which there are
doubts as to the borrowers' ability to comply with present repayment terms.
The Corporation's affiliate banks generate commercial, mortgage and consumer
loans from customers located primarily in central and east-central Indiana and
Butler County, Ohio. The Banks' loans are generally secured by specific items of
collateral, including real property, consumer assets, and business assets.
Although the Banks have diversified loan portfolios, a substantial portion of
their debtors' ability to honor their contracts is dependent upon economic
conditions in the automotive and agricultural industries.
Page 16
STATISTICAL DATA (continued)
- ----------------
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the loan loss experience for the years indicated.
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
Allowance for loan losses:
Balance at January 1.................... $ 12,454 $ 10,128 $ 9,209 $ 8,429 $ 8,010
Chargeoffs:
Commercial and industrial(1)........... 1,688 974 361 794 543
Real estate mortgage(3)................ 227 43 40 44 31
Individuals' loans for household and
other personal expenditures,
including other loans................ 1,632 1,274 1,368 1,393 1,375
-------- -------- -------- ------- -------
Total chargeoffs..................... 3,547 2,291 1,769 2,231 1,949
-------- -------- -------- ------- -------
Recoveries:
Commercial and industrial(2)........... 176 171 114 325 364
Real estate mortgage(4)................ 32 1 32 20 1
Individuals' loans for household and
other personal expenditures,
including other loans................ 365 407 301 294 268
-------- -------- -------- ------- -------
Total recoveries..................... 573 579 447 639 633
-------- -------- -------- ------- -------
Net chargeoffs........................... 2,974 1,712 1,322 1,592 1,316
-------- -------- -------- ------- -------
Provisions for loan losses............... 3,576 2,625 2,241 2,372 1,735
Allowance acquired in purchase........... 2,085 1,413
-------- -------- -------- ------- -------
Balance at December 31................... $15,141 $12,454 $10,128 $ 9,209 $ 8,429
======== ======== ======== ======= =======
(1)Category also includes the chargeoffs for bankers acceptances, loans to
financial institutions, tax-exempt loans and agricultural production
financing and other loans to farmers.
(2)Category also includes the recoveries for bankers acceptances, loans to
financial institutions, tax-exempt loans and agricultural production
financing and other loans to farmers.
(3)Category includes the chargeoffs for construction, commercial and farmland
and residential real estate loans.
(4)Category includes the recoveries for construction, commercial and farmland
and residential real estate loans.
Ratio of net chargeoffs during the
period to average loans
outstanding during the period.......... .23% .16% .14% .18% .16%
Page 17
STATISTICAL DATA (continued)
- ----------------
Allocation of the Allowance for Loan Losses at December 31:
Presented below is an analysis of the composition of the allowance for loan
losses and per cent of loans in each category to total loans:
2001 2000
------------------------- -------------------------
Amount Per Cent Amount Per Cent
-------- -------- -------- --------
(Dollars in Thousands)
Balance at December 31:
Commercial and industrial(1)................ $ 6,884 28.8% $ 4,478 28.0%
Real estate mortgage(2)..................... 2,655 56.9 1,554 53.9
Individuals' loans for household and
other personal expenditures,
including other loans..................... 5,502 14.3 4,622 18.1
Unallocated................................. 100 N/A 1,800 N/A
-------- ------ -------- ------
Totals...................................... $ 15,141 100.0% $ 12,454 100.0%
======== ====== ======== ======
1999 1998
------------------------- -------------------------
Amount Per Cent Amount Per Cent
-------- -------- -------- --------
(Dollars in Thousands)
Balance at December 31:
Commercial and industrial(1)................ $ 3,347 27.8% $ 2,954 27.3%
Real estate mortgage(2)..................... 1,297 53.2 1,313 56.1
Individuals' loans for household and
other personal expenditures,
including other loans..................... 3,914 19.0 3,514 16.6
Unallocated................................. 1,570 N/A 1,428 N/A
-------- ------ -------- ------
Totals...................................... $ 10,128 100.0% $ 9,209 100.0%
======== ====== ======== ======
1997
-------------------------
Amount Per Cent
-------- --------
Balance at December 31: (Dollars in Thousands)
Commercial and industrial(1)................ $ 3,230 26.1%
Real estate mortgage(2)..................... 1,319 56.5
Individuals' loans for household and
other personal expenditures,
including other loans..................... 2,122 17.4
Unallocated. .... .......................... 1,758 N/A
-------- ------
Totals...................................... $ 8,429 100.0%
======== ======
(1) Category also includes the allowance for loan losses and per cent of loans
for bankers acceptances, loans to financial institutions, tax-exempt loans
and agricultural production financing and other loans to farmers.
(2) Category includes the allowance for loan losses and per cent of loans for
construction, commercial and farmland and residential real estate loans.
Page 18
STATISTICAL DATA (continued)
- ----------------
Loan Loss Chargeoff Procedures
The Corporation's affiliate banks have weekly meetings at which loan
delinquencies, maturities and problems are reviewed. The Boards of Directors
receive and review reports on loans monthly.
The Executive Committee of the Corporation's Board of Directors meets bimonthly
to approve or disapprove all new loans in excess of $1,000,000 and the Board
reviews all commercial loans in excess of $50,000 which were made or renewed
during the preceding month. Madison's and First United's loan committees,
consisting of all loan officers and the president, meet as required to approve
or disapprove any loan which is in excess of an individual loan officer's
lending limit.
The Loan/Discount Committee of Union County's Board meets monthly to approve or
disapprove all loans to borrowers with aggregate loans in excess of $300,000.
The Loan Committee of Randolph County's Board meets weekly to approve or
disapprove any loan which is in excess of an individual loan officer's lending
limit.
All chargeoffs are approved by the senior loan officer and are reported to the
Banks' Boards. The Banks charge off loans when a determination is made that all
or a portion of a loan is uncollectible or as a result of examinations by
regulators and the independent auditors.
Provision for Loan Losses
In banking, loan losses are one of the costs of doing business. Although the
Banks' management emphasize the early detection and chargeoff of loan losses, it
is inevitable that at any time certain losses exist in the portfolio which have
not been specifically identified. Accordingly, the provision for loan losses is
charged to earnings on an anticipatory basis, and recognized loan losses are
deducted from the allowance so established. Over time, all net loan losses must
be charged to earnings. During the year, an estimate of the loss experience for
the year serves as a starting point in determining the appropriate level for the
provision. However, the amount actually provided in any period may be greater or
less than net loan losses, based on management's judgment as to the appropriate
level of the allowance for loan losses. The determination of the provision in
any period is based on management's continuing review and evaluation of the loan
portfolio, and its judgment as to the impact of current economic conditions on
the portfolio. The evaluation by management includes consideration of past loan
loss experience, changes in the composition of the loan portfolio, and the
current condition and amount of loans outstanding.
Impaired loans are measured by the present value of expected future cash flows,
or the fair value of the collateral of the loans, if collateral dependent.
Information on impaired loans is summarized below:
2001 2000 1999
--------------- --------------- ----------------
(Dollars in Thousands)
For the year ending December 31:
Impaired loans with an allowance................... $ 10,381 $ 7,862 $ 2,742
Impaired loans for which the discounted
cash flows or collateral value exceeds the
carrying value of the loan....................... 10,780 6,977 4,398
------------ ------------ ------------
Total impaired loans......................... $ 21,161 $ 14,839 $ 7,140
============ ============ ============
Allowance for impaired loans (included in the
Corporation's allowance for loan losses)......... $ 3,251 $ 2,253 $ 1,061
Average balance of impaired loans.................. 22,327 15,053 8,770
Interest income recognized on impaired loans....... 1,538 1,361 705
Cash basis interest included above................. 1,555 1,080 637
Page 19
- --------------------------------------------------------------------------------
STATISTICAL DATA (continued)
DEPOSITS
The average balances, interest income and expense and average rates on deposits
for the years ended December 2001, 2000 and 1999 are presented within the
Distribution of Assets, Liabilities and Stockholders' Equity table on page 10 of
this Form 10-K.
As of December 31, 2001, certificates of deposit and other time deposits of
$100,000 or more mature as follows:
Maturing
-------------------------------------------------
3 Months 3-6 6-12 Over 12
or less Months Months Months Total
------------- -------------- -------------- -------------- --------------
(Dollars in Thousands)
Certificates of deposit and
other time deposits.......... $ 84,008 $ 31,571 $ 40,524 $ 36,297 $192,400
Per cent....................... 44% 16% 21% 19% 100%
RETURN ON EQUITY AND ASSETS
2001 2000 1999
----------------- ----------------- -----------------
Return on assets (net income divided by
average total assets).................... 1.31% 1.30% 1.37%
Return on equity (net income divided by
average equity).......................... 13.36 14.10 12.75
Dividend payout ratio (dividends per
share divided by net income per share)... 51.69 51.81 53.33
Equity to assets ratio (average equity
divided by average total assets)......... 9.84 9.23 10.72
SHORT-TERM BORROWINGS
2001 2000 1999
----------------- ----------------- -----------------
(Dollars in Thousands)
Balance at December 31:
Securities sold under repurchase
agreements (short-term portion)........ $ 22,732 $ 31,956 $ 42,957
Federal funds purchased.................. 10,500 975 28,885
U.S. Treasury demand notes............... 6,273 4,968 9,506
--------- --------- ---------
Total short-term borrowings......... $ 39,505 $ 37,899 $ 81,348
========= ========= =========
Page 20
Securities sold under repurchase agreements are borrowings maturing within one
year and are secured by U.S. Treasury and Federal agency obligations.
Pertinent information with respect to short-term borrowings is summarized below:
2001 2000 1999
----------------- ----------------- -----------------
(Dollars in Thousands)
Weighted average interest rate on outstanding
balance at December 31:
Securities sold under repurchase
agreements(short-term portion).............. 3.3% 6.2% 5.5%
Total short-term borrowings..................... 2.4 5.6 5.3
Weighted average interest rate during the year:
Securities sold under repurchase
Agreements (short-term portion)............. 3.7% 5.6% 4.5%
Total short-term borrowings..................... 4.0 5.0 4.5
Highest amount outstanding at any month end
during the year:
Securities sold under repurchase
agreements (short-term portion)............. $ 17,750 $ 14,505 $ 19,700
Total short-term borrowings..................... 46,195 56,099 55,893
Average amount outstanding during the year:
Securities sold under repurchase
agreements (short-term portion)............. $ 14,036 $ 12,116 $ 17,696
Total short-term borrowings..................... 22,126 33,165 36,157
ITEM 2. PROPERTIES.
- --------------------------------------------------------------------------------
The headquarters of the Corporation and First Merchants are located in a
five-story building at 200 East Jackson Street, Muncie, Indiana. The building is
owned by First Merchants.
The Corporation's affiliate banks conduct business through numerous facilities
owned and leased by the respective affiliate banks. Of the 48 banking offices
operated by the Corporation's affiliate banks, 40 are owned by the respective
banks and 8 are leased from non-affiliated third parties.
None of the properties owned by the Corporation's affiliate banks are subject to
any major encumbrances. The net investment of the Corporation and subsidiaries
in real estate and equipment at December 31, 2001 was $27,684,000.
- --------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS.
There is no pending legal proceeding, other than ordinary routine litigation
incidental to the business of the Corporation or its subsidiaries, of a material
nature to which the Corporation or its subsidiaries is a party or of which any
of their properties are subject. Further, there is no material legal proceeding
in which any director, officer, principal shareholder, or affiliate of the
Corporation, or any associate of any such director, officer or principal
shareholder, is a party, or has a material interest, adverse to the Corporation
or any of its subsidiaries.
None of the routine legal proceedings, individually or in the aggregate, in
which the Corporation or its affiliates are involved are expected to have a
material adverse impact on the financial position or the results of operations
of the Corporation.
- --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of 2001 to a vote of
security holders, through the solicitation of proxies or otherwise.
Page 21
SUPPLEMENTAL INFORMATION - EXECUTIVE OFFICERS OF THE REGISTRANT.
- --------------------------------------------------------------------------------
The names, ages, and positions with the Corporation and subsidiary banks of all
executive officers of the Corporation and all persons chosen to become executive
officers are listed below.
Offices with the Corporation Principal Occupation
Name and Age And Subsidiary Banks During Past Five Years
- ------------------------------------------- ---------------------------------------- ----------------------------------------
Michael L. Cox President, Chief Executive Officer Chief Executive Officer of the
57 Corporation Corporation since April 1999;
President First Merchants from
April 1999 to September 2000;
President and Chief Operating Officer,
Corporation since August 1998 and
May, 1994 to April 1999 respectively;
President and Chief Operating Officer,
First Merchants from April, 1996 to
April 1999; Director, Corporation
and First Merchants since December, 1984
Roger M. Arwood Executive Vice President, Corporation President and Chief Executive Officer First
50 and President and CEO First Merchants Merchants since September 2000, Bank of
America from 1983 to February 2000.
Executive Vice President of the
Corporation and First Merchants since
February of 2000
Larry R. Helms Executive Vice President, Corporation Executive Vice President, Corporation
61 and First Merchants; General Counsel since September 2000; Senior Vice President
and Secretary, Corporation General Counsel, Corporation 1982 to September
2000 Corporation since 1990 and Secretary
since January 1, 1997; Senior Vice
President, First Merchants since
January 1979; Director of First United
Bank since 1991 and Pendleton Banking
Company since 1992
James L. Thrash(1) Senior Vice President, Corporation Senior Vice President and Chief
52 and First Merchants; Chief Financial Financial Officer of the Corporation
Officer, Corporation since 1990; Senior Vice President,
First Merchants since 1990
Roy A. Eon Senior Vice President of Operations Senior Vice President One Valley Bancorp;
50 and Technology, Corporation and First Senior Vice President and National Manager of
Merchants since January 8, 2001 Deposit Operations, Banc One Corporation;
Senior Vice President State Operations Manager
for Kentucky, Banc One Corporation.
Mark K. Hardwick(1) Vice President, Corporate Controller, Corporate Controller, Corporation since
31 Corporation November 1997; Senior Accountant, Geo. S.
Olive & Company from September 1994 to October
1997
(1) On April 12, 2002, Mr. Hardwick will replace Mr. Thrash as the Corporation's
Chief Financial Officer. Mr. Thrash will become the head of First Merchants
Trust and Investment Services division.
Page 22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
- --------------------------------------------------------------------------------
Except as noted below, the information required under this item is incorporated
by reference to page 44 of the Corporation's 2001 Annual Report to Stockholders
under the caption "Stock Information," Exhibit 13.
On July 1, 2001, the Corporation issued nonqualified stock options to acquire
7,350 shares of common stock of the Corporation to directors of its lead
subsidiary bank, First Merchants. The stock option exercise price was $21.75,
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 of
1933 ("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.
ITEM 6. SELECTED FINANCIAL DATA.
- --------------------------------------------------------------------------------
The information on page 2 of the Corporation's 2001 Annual Report to
Stockholders - Financial Review under the caption "Five-Year Summary of Selected
Financial Data", is expressly incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
- --------------------------------------------------------------------------------
The information on page 3 through 11 of the Corporation's 2001 Annual Report to
Stockholders - Financial Review under the caption "Management's Discussion &
Analysis of Financial Condition and Results of Operations", is expressly
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE 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.
Page 23
Management believes that the Corporation's liquidity and interest
sensitivity position at December 31, 2001, remained adequate to meet the
Corporation's primary goal of achieving optimum interest margins while avoiding
undue interest rate risk. The following table presents the Corporation's
interest rate sensitivity analysis as of December 31, 2001.
INTEREST RATE SENSITIVITY ANALYSIS
(dollars in thousands) At December 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
1-180 DAYS 181-365 DAYS 1-5 YEARS BEYOND 5 YEARS TOTAL
====================================================================================================================================
Rate-Sensitive Assets:
Federal funds sold and interest-bearing deposits ......... $ 38,156 $ 38,156
Investment securities .................................... 49,359 $ 48,319 $ 99,688 $ 42,956 240,322
Loans .................................................... 651,749 103,333 479,332 125,211 1,359,625
Federal Reserve and Federal Home Loan Bank stock ......... 8,350 8,350
---------- ---------- ---------- ---------- ----------
Total rate-sensitive assets ......................... 747,614 151,652 579,020 168,167 1,646,453
---------- ---------- ---------- ---------- ----------
Rate-Sensitive Liabilities:
Interest-bearing deposits ................................ 508,028 345,873 344,841 35,522 1,234,264
Securities sold under repurchase agreements .............. 22,732 22,900 45,632
Other short-term borrowings .............................. 16,773 16,773
Federal Home Loan Bank advances .......................... 4,756 14,422 59,069 25,252 103,499
Other borrowed funds ..................................... 8,500 8,500
---------- ---------- ---------- ---------- ----------
Total rate-sensitive liabilities .................... 552,289 368,795 426,810 60,774 1,408,668
---------- ---------- ---------- ---------- ----------
Interest rate sensitivity gap by period ..................... $ 195,325 $ (217,143) $ 152,210 $ 107,393
Cumulative rate sensitivity gap ............................. 195,325 (21,818) 130,392 237,785
Cumulative rate sensitivity gap ratio
at December 31, 2001 ..................................... 135.4% 97.6% 109.7% 116.9%
at December 31, 2000 ..................................... 94.1% 77.0% 102.1% 116.3%
The Corporation had a cumulative negative gap of $21,818,000 in the one-year
horizon at December 31, 2001, just over 1.2 percent of total assets. Net
interest income at financial institutions with negative gaps tends to increase
when rates decrease and decrease as interest rates increase.
The Corporation places its greatest credence in net interest income simulation
modeling. The GAP/Interest Rate Sensitivity Report is believed by the
Corporation's management to have two major shortfalls. The GAP/Interest Rate
Sensitivity Report fails to precisely gauge how often an interest rate sensitive
product reprices, nor is it able to measure the magnitude of potential future
rate movements.
Net interest income simulation modeling, or earnings-at-risk, measures the
sensitivity of net interest income to various interest rate movements. The
Corporation's asset liability process monitors simulated net interest income
under three separate interest rate scenarios; base, rising and falling.
Estimated net interest income for each scenario is calculated over a 12-month
horizon. The immediate and parallel changes to the base case scenario used in
the model are presented below. The interest rate scenarios are used for
analytical purposes and do not necessarily represent management's view of future
market movements. Rather, these are intended to provide a measure of the degree
of volatility interest rate movements may introduce into the earnings of the
Corporation.
The base scenario is highly dependent on numerous assumptions embedded in the
model, including assumptions related to future interest rates. While the base
sensitivity analysis incorporates management's best estimate of interest rate
and balance sheet dynamics under various market rate movements, the actual
behavior and resulting earnings impact will likely differ from that projected.
For mortgage-related assets, the base simulation model captures the expected
prepayment behavior under changing interest rate environments. Assumptions and
methodologies regarding the interest rate or balance behavior of indeterminate
maturity products, e.g., savings,money market, NOW and demand deposits reflect
management's best estimate of expected future behavior.
Page 24
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)%
The comparative rising and falling scenarios for the year ended December 31,
2001 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, 2001 are as follows:
Driver Rates RISING FALLING
================================================================================
Prime 200 Basis Points (200)Basis Points
Federal Funds 200 (200)
90-Day T-Bill 200 (200)
One-Year T-Bill 200 (200)
Three-Year T-Bill 200 (200)
Five-Year T-Note 200 (200)
Ten-Year T-Note 200 (200)
Interest Checking 67 (67)
MMIA Savings 200 (200)
Money Market Index 200 (200)
Regular Savings 67 (67)
Results for the base, rising and falling interest rate scenarios are listed
below, based upon the Corporation's rate sensitive assets at December 31, 2000.
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) $ 57,657 $ 55,554 $ 57,713
Variance from base $ (2,104) $ 55
Percent of change from base (3.65)% .10%
Page 25
Item 7A. includes forward-looking statements. Readers are cautioned that, by
their nature, forward-looking statements are based on assumptions and are
subject to risks, uncertainties, and other factors. Actual results may differ
materially from the expectations of the Corporation that are expressed or
implied by any forward-looking statement. Factors that could cause the
Corporation's actual results to vary materially from those expressed or implied
by any forward-looking statements include the effects of competition,
technological changes and legal and regulatory developments; acquisitions of
other businesses by the Corporation and integration of such acquired businesses;
changes in fiscal, monetary and tax policies; market, economic, operational,
liquidity, credit and interest rate risks associated with the Corporation's
business; inflation; competition in the financial services industry; changes in
general economic conditions, either nationally or regionally, resulting in,
among other things, credit quality deterioration; changes in the securities
markets; and the continued availability of earnings and excess capital
sufficient for the lawful and prudent declaration and payment of cash dividends.
Investors should consider these risks, uncertainties, and other factors in
addition to those mentioned by the Corporation from time to time in the
Corporation's other SEC reports when considering any forward-looking statement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- --------------------------------------------------------------------------------
Pages 12 through 42 of the Corporation's 2001 Annual Report to Stockholders -
Financial Review, are expressly incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
- --------------------------------------------------------------------------------
In connection with its audits for the two most recent fiscal years ended
December 31, 2001, there have been no disagreements with the Corporation's
independent certified public accountants on any matter of accounting principles
or practices, financial statement disclosure or audit scope or procedure, nor
have there been any changes in accountants.
Page 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- --------------------------------------------------------------------------------
The information in the Corporation's Proxy Statement dated February 26, 2002
furnished to its stockholders in connection with an annual meeting to be held
April 11, 2002 (the "2002 Proxy Statement"), under the captions "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance", is
expressly incorporated herein by reference. The information required under this
item relating to executive officers is set forth in Part I, "Supplemental
Information - Executive Officers of the Registrant" of this annual report on
Form 10-K and is expressly incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
- --------------------------------------------------------------------------------
The information in the Corporation's 2002 Proxy Statement, under the captions,
"Compensation of Directors", "Compensation of Executive Officers", "Compensation
and Human Resources Committee Interlocks and Insider Participation",
"Compensation and Human Resources Committee Report on Executive Compensation"
and "Performance Graph," is expressly incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- --------------------------------------------------------------------------------
The information in the Corporation's 2002 Proxy Statement, under the caption,
"Security Ownership of Certain Beneficial Owners and Management," is expressly
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------------------------------
The information in the Corporation's 2002 Proxy Statement, under the caption
"Interest of Management in Certain Transactions," is expressly incorporated
herein by reference.
Page 27
PART IV
ITEM 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K.
- --------------------------------------------------------------------------------
(a) 1. Financial Statements:
Independent accountant's report
Consolidated balance sheets at
December 31, 2001 and 2000
Consolidated statements of income,
years ended December 31, 2001,
2000 and 1999
Consolidated statements of comprehensive income,
years ended December 31, 2001, 2000 and 1999
Consolidated statements of stockholders' equity,
years ended December 31, 2001, 2000 and 1999
Consolidated statements of cash flows,
years ended December 31, 2001,
2000 and 1999
Notes to consolidated financial
statements
(a) 2. Financial statement schedules:
All schedules are omitted because
they are not applicable or not required,
or because the required information is included in the
consolidated financial statements or related notes.
(a) 3. Exhibits:
Exhibit No: Description of Exhibits:
- ----------- ------------------------
2 Agreement of Reorganization and Merger between First Merchants
Corporation and Lafayette Bancorporation dated October 14, 2001.
(Incorporated by reference to registrant's Form 8-K filed on
October 15, 2001)
3a First Merchants Corporation Articles of Incorporation.
(Incorporated by reference to registrant's Form 10-Q for quarter
ended June 30, 1999)
3b First Merchants Corporation Bylaws (Incorporated by reference to
registrant's Form 10-Q/A for quarter ended September 30, 2001 and
filed on December 19, 2001)
10a First Merchants Corporation and First Merchants Bank,
National Association Management Incentive Plan.
(Incorporated by reference to registrant's Form 10-K for year
ended December 31, 1996)(1)
10b First Merchants Corporation Senior Management Incentive
Compensation Program, as amended. (Incorporated by reference to
the registrant's Form 10-K for the year ended December 31,
2000)(1)
10c First Merchants Bank, National Association Unfunded Deferred
Compensation Plan, as amended. (Incorporated by reference to
registrant's Form 10-K for year ended December 31, 1996)(1)
10d First Merchants Corporation 1994 Stock Option Plan.
(Incorporated by reference to Registrant's Form 10-K for year
ended December 31, 1993)(1)
Page 28
ITEM 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON
FORM 8-K (continued)
- --------------------------------------------------------------------------------
10e First Merchants Corporation Change of Control Agreement with
Roy A. Eon dated February 13, 2001(1)(2)
10f First Merchants Corporation change of Control Agreement with
Roger M. Arwood dated November 14, 2000(1)(2)
10g First Merchants Corporation Change of Control Agreement with
Larry R. Helms dated November 14, 2000(1)(2)
10h First Merchants Corporation Change of Control Agreement with
James L. Thrash dated May 11, 1999(1)(2)
10i First Merchants Change of Control Agreement with Michael L.
Cox dated May 11, 1999(1)(2)
10j First Merchants Corporation Unfunded Deferred Compensation
Plan. (Incorporated by reference to registrant's Form 10-K
for year ended December 31, 1996)(1)
10k First Merchants Corporation Supplemental Executive Retirement
Plan and amendments thereto. (Incorporated by reference to
registrant's Form 10-K for year ended December 31, 1997)(1)
10l First Merchants Corporation 1999 Long-term Equity Incentive
Plan. (Incorporated by reference to registrant's
registration statement on Form S-8 (SEC File No. 333-80117)
effective on June 7, 1999)(1)
13 2001 Annual Report to Stockholders (except for the pages and
information expressly incorporated by reference in
this Form 10-K, the Annual Report to Stockholders is provided
solely for the information of the Securities and Exchange
Commission and is not deemed "filed" as part of this Form
10-K(2)
21 Subsidiaries of Registrant(2)
23 Consent of Independent Accountants(2)
24 Limited Power of Attorney(2)
99.1 Financial statements and independent accountant's report for
First Merchants Corporation Employee Stock Purchase Plan(2)
(1) Management contract or compensatory plan.
(2) Filed here within.
Page 29
(b) Reports on Form 8-K:
A report on Form 8-K, dated October 15, 2001, was filed under report item
number 5, concerning the Registrant and Lafayette Bancorporation
("Lafayette") jointly announcing the signing of a definitive agreement
pursuant to which Lafayette will be merged with and into the Registrant
(the "Merger"). The Agreement of Reorganization and Merger between the
Corporation and Lafayette dated October 14, 2001, was attached to this
Form 8-K as Exhibit 2 and incorporated therein by reference.
A report on Form 8-K, dated November 27, 2001, was filed under report
item number 5, filing audited consolidated financial statements of
Lafayette as of December 31, 2000 and 1999 and for each of the three
years in the period ended December 31, 2000; unaudited consolidated
financial statements of Lafayette as of September 30, 2001 and for each
of the three and nine month periods ended September 30, 2001 and 2000;
and unaudited proforma combined consolidated financial information for
Registrant and for Lafayette giving effect to the Merger as of September
30, 2001, for the nine month period ended September 30, 2001, and for the
year ended December 31, 2000. In addition, this Form 8-K announced the
execution of two agreements pursuant to which the Registrant would
acquire Delaware County Abstract Company, Inc. and Beebe & Smith
Title Insurance Company, Inc. (the "Acquisitions"). A copy of the
November 27, 2001 press release announcing the Acquisitions was
attached to this Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, on this 1st day of April,
2002.
FIRST MERCHANTS CORPORATION
By /s/ Michael L.Cox
-----------------------------
Michael L. Cox, President
& Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
on Form 10-K has been signed by the following persons on behalf of the
registrant and in the capacities indicated, on this 1st day of April, 2002.
/s/ Michael L. Cox /s/James L. Thrash
- -------------------------------------- --------------------------------------
Michael L. Cox President and James L. Thrash Sr. Vice President
Chief Executive and Chief Financial
Officer (Principal Officer (Principal
Executive Officer) Financial and
Accounting Officer)
/s/ Stefan S. Anderson* /s/ Thomas B. Clark*
- ----------------------------------- ------------------------------------
Stefan S. Anderson Director Thomas B. Clark Director
/s/Roger M. Arwood* /s/ Michael L. Cox
- ------------------------------------ ------------------------------------
Roger M. Arwood Director Michael L. Cox Director
/s/ Barry J. Hudson*
- ------------------------------------ ------------------------------------
James F. Ault Director Barry J. Hudson Director
/s/ Jerry M. Ault* /s/ Norman M. Johnson*
- ------------------------------------ ------------------------------------
Jerry M. Ault Director Norman M. Johnson Director
/s/ Dennis A. Bieberich*
- ------------------------------------ ------------------------------------
Dennis A. Bieberich Director George A. Sissel Director
- ------------------------------------ ------------------------------------
Blaine M. Brownell Director Robert M. Smitson Director
/s/ Dr. John E. Worthen*
- ------------------------------------ ------------------------------------
Frank A. Bracken Director Dr. John E. Worthen Director
* By James L. Thrash as Attorney-in Fact pursuant to a limited Power of Attorney
executed by the directors listed above, which Power of Attorney is being filed
with the Securities and Exchange Commission as an exhibit hereto.
By /s/ James L. Thrash
------------------------------
James L. Thrash
As Attorney-in-Fact
April 1, 2002
Page 30
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
(a)3. Exhibits:
Exhibit No: Description of Exhibit:
2 Agreement of Reorganization and Merger between First Merchants
Corporation and Lafayette Bancorporation dated October 14, 2001.
(Incorporated by reference to registrant's Form 8-K filed on
October 15, 2001)
3a First Merchants Corporation Articles of Incorporation.
(Incorporated by reference to registrant's Form 10-Q for quarter
ended June 30, 1999)
3b First Merchants Corporation Bylaws (Incorporated by reference to
registrant's Form 10-Q/A for quarter ended September 30, 2001 and
filed on December 19, 2001)
10a First Merchants Corporation and First Merchants Bank,
National Association Management Incentive Plan.
(Incorporated by reference to registrant's Form 10-K for year
ended December 31, 1996)(1)
10b First Merchants Corporation Senior Management Incentive
Compensation Program, as amended. (Incorporated by reference to
the registrant's Form 10-K for the year ended December 31,
2000)(1)
10c First Merchants Bank, National Association Unfunded Deferred
Compensation Plan, as amended. (Incorporated by reference to
registrant's Form 10-K for year ended December 31, 1996)(1)
10d First Merchants Corporation 1994 Stock Option Plan.
(Incorporated by reference to Registrant's Form 10-K for year
ended December 31, 1993)(1)
10e First Merchants Corporation Change of Control Agreement with
Roy A. Eon dated February 13, 2001(1)(2)
10f First Merchants Corporation change of Control Agreement with
Roger M. Arwood dated November 14, 2000(1)(2)
10g First Merchants Corporation Change of Control Agreement with
Larry R. Helms dated November 14, 2000(1)(2)
10h First Merchants Corporation Change of Control Agreement with
James L. Thrash dated May 11, 1999(1)(2)
10i First Merchants Change of Control Agreement with Michael L.
Cox dated May 11, 1999(1)(2)
10j First Merchants Corporation Unfunded Deferred Compensation
Plan. (Incorporated by reference to registrant's Form 10-K
for year ended December 31, 1996)(1)
10k First Merchants Corporation Supplemental Executive Retirement
Plan and amendments thereto. (Incorporated by reference to
registrant's Form 10-K for year ended December 31, 1997)(1)
10l First Merchants Corporation 1999 Long-term Equity Incentive
Plan. (Incorporated by reference to registrant's
registration statement on Form S-8 (SEC File No. 333-80117)
effective on June 7, 1999)(1)
13 2001 Annual Report to Stockholders (except for the pages and
information expressly incorporated by reference in
this Form 10-K, the Annual Report to Stockholders is provided
solely for the information of the Securities and Exchange
Commission and is not deemed "filed" as part of this Form
10-K(2)
21 Subsidiaries of Registrant(2)
23 Consent of Independent Accountants(2)
24 Limited Power of Attorney(2)
99.1 Financial statements and independent accountant's report for
First Merchants Corporation Employee Stock Purchase Plan(2)
(1) Management contract or compensatory plan.
(2) Filed here within.
Page 31
EXHIBIT 10e
CHANGE OF CONTROL AGREEMENT
This Agreement is made and entered into this 13th day of February, 2001,
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"), a wholly-owned subsidiary of
the Corporation, both with their principal offices located at 200 East Jackson
Street, Muncie, Indiana, and Roy A. Eon (hereinafter referred to as
"Executive"), of Muncie, Indiana.
WHEREAS, the Corporation and the Bank consider 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 desire to assure the continued
services of the Executive on behalf of the Corporation and the Bank; and
WHEREAS, the Corporation and the Bank recognize 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 desire 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 and the Bank as its Senior Vice
President of Operations and Technology, the Corporation, 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, 2001;
provided, however, that commencing on December 31, 2001 and each December 31
thereafter, the term of this Agreement shall automatically be extended for one
additional year unless, not later than October 31, 2001 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.
(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 or the Bank
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 or 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 or the Bank 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 the Bank (or similar transaction) in
which no person acquires fifty percent (50%) or more
of the combined voting power 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.
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 their
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;
(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 by 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;
(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 Section 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 Section 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
their 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.
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 Executive's 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 13th day of February, 2001.
"CORPORATION" "EXECUTIVE"
FIRST MERCHANTS CORPORATION
By ______________________________ By ______________________________
Stefan S. Anderson, Roy A. Eon
Chairman of the Board
"BANK"
FIRST MERCHANTS BANK, NATIONAL ASSOCIATION
By ______________________________
Stefan S. Anderson,
Chairman of the Board
EXHIBIT 10f
CHANGE OF CONTROL AGREEMENT
This Agreement is made and entered into this 14th day of November, 2000,
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"), a wholly-owned subsidiary of
the Corporation, both with their principal offices located at 200 East Jackson
Street, Muncie, Indiana, and Roger M. Arwood (hereinafter referred to as
"Executive"), of Muncie, Indiana.
WHEREAS, the Corporation and the Bank consider 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 desire to assure the continued
services of the Executive on behalf of the Corporation and the Bank; and
WHEREAS, the Corporation and the Bank recognize 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 desire 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 Executive Vice President and the Bank as its President
and Chief Executive Officer, the Corporation, 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, 2001;
provided, however, that commencing on December 31, 2001 and each December 31
thereafter, the term of this Agreement shall automatically be extended for one
additional year unless, not later than October 31, 2001 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.
(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 or the Bank
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 or 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 or the Bank 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 the Bank (or similar transaction) in
which no person acquires fifty percent (50%) or more
of the combined voting power 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.
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 their
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;
(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 by 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 and ninety-nine
hundredths (2.99) 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;
(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 Section 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 Section 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
their 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.
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 Executive's 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 14th day of November, 2000.
"CORPORATION" "EXECUTIVE"
FIRST MERCHANTS CORPORATION
By ______________________________ By ______________________________
Stefan S. Anderson, Roger M. Arwood
Chairman of the Board
"BANK"
FIRST MERCHANTS BANK, NATIONAL ASSOCIATION
By ______________________________
Stefan S. Anderson,
Chairman of the Board
EXHIBIT 10g
CHANGE OF CONTROL AGREEMENT
This Agreement is made and entered into this 14th day of November, 2000,
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"), a wholly-owned subsidiary of
the Corporation, both with their principal offices located at 200 East Jackson
Street, Muncie, Indiana, and Larry R. Helms (hereinafter referred to as
"Executive"), of Muncie, Indiana.
WHEREAS, the Corporation and the Bank consider 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 desire to assure the continued
services of the Executive on behalf of the Corporation and the Bank; and
WHEREAS, the Corporation and the Bank recognize 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 desire 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 and Corporate Counsel and the Bank
as its Executive Vice President, the Corporation, 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, 2001;
provided, however, that commencing on December 31, 2001 and each December 31
thereafter, the term of this Agreement shall automatically be extended for one
additional year unless, not later than October 31, 2001 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.
(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 or the Bank
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 or 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 or the Bank 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 the Bank (or similar transaction) in
which no person acquires fifty percent (50%) or more
of the combined voting power 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.
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 their
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;
(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 by 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;
(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 Section 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 Section 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
their 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.
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 Executive's 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 14th day of November, 2000.
"CORPORATION" "EXECUTIVE"
FIRST MERCHANTS CORPORATION
By ______________________________ By ______________________________
Stefan S. Anderson, Larry R. Helms
Chairman of the Board
"BANK"
FIRST MERCHANTS BANK, NATIONAL ASSOCIATION
By ______________________________
Stefan S. Anderson,
Chairman of the Board
EXHIBIT 10h
CHANGE OF CONTROL AGREEMENT
This Agreement is made and entered into this 11th day of May, 1999,
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"), a 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 consider 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 desire to assure the continued
services of the Executive on behalf of the Corporation and the Bank; and
WHEREAS, the Corporation and the Bank recognize 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 desire 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 and Chief Financial Officer and
the Bank as its Senior Vice President, the Corporation, 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, 1999;
provided, however, that commencing on December 31, 1999 and each December 31
thereafter, the term of this Agreement shall automatically be extended for one
additional year unless, not later than October 31, 1999 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.
(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 or the Bank
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 or 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 or the Bank 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 the Bank (or similar transaction) in
which no person acquires fifty percent (50%) or more
of the combined voting power 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.
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 their
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;
(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 by 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 one and
one-half (1.50) 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;
(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 Section 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 Section 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
their 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.
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 Executive's 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 11th day of May, 1999.
"CORPORATION" "EXECUTIVE"
FIRST MERCHANTS CORPORATION
By ______________________________ By ______________________________
Stefan S. Anderson, James L. Thrash
Chairman of the Board
"BANK"
FIRST MERCHANTS BANK, NATIONAL ASSOCIATION
By ______________________________
Stefan S. Anderson,
Chairman of the Board
EXHIBIT 10i
CHANGE OF CONTROL AGREEMENT
This Agreement is made and entered into this 11th day of May, 1999,
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"), a wholly-owned subsidiary of
the Corporation, both with their principal offices located at 200 East Jackson
Street, Muncie, Indiana, and Michael L. Cox (hereinafter referred to as
"Executive"), of Muncie, Indiana.
WHEREAS, the Corporation and the Bank consider 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 desire to assure the continued
services of the Executive on behalf of the Corporation and the Bank; and
WHEREAS, the Corporation and the Bank recognize 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 desire 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 and the Bank as their President and Chief Executive Officer,
the Corporation, 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, 1999;
provided, however, that commencing on December 31, 1999 and each December 31
thereafter, the term of this Agreement shall automatically be extended for one
additional year unless, not later than October 31, 1999 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.
(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 or the Bank
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 or 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 or the Bank 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 the Bank (or similar transaction) in
which no person acquires fifty percent (50%) or more
of the combined voting power 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.
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 their
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;
(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 by 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 and ninety-nine
hundredths (2.99) 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;
(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 Section 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 Section 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
their 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.
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 Executive's 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 11th day of May, 1999.
"CORPORATION" "EXECUTIVE"
FIRST MERCHANTS CORPORATION
By ______________________________ By ______________________________
Stefan S. Anderson, Michael L. Cox
Chairman of the Board
"BANK"
FIRST MERCHANTS BANK, NATIONAL ASSOCIATION
By ______________________________
Stefan S. Anderson,
Chairman of the Board
EXHIBIT 13
2001 ANNUAL REPORT TO STOCKHOLDERS - FINANCIAL REVIEW
EXHIBIT 13--2001 ANNUAL REPORT TO STOCKHOLDERS - FINANCIAL REVIEW
================================================================================
Financial Review
================================================================================
FIVE-YEAR SUMMARY OF
SELECTED FINANCIAL DATA 2
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 3
INDEPENDENT ACCOUNTANT'S REPORT 12
CONSOLIDATED
FINANCIAL STATEMENTS 13
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS 17
STOCKHOLDER INFORMATION 43
================================================================================
1
================================================================================
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
================================================================================
(in thousands, except share data) 2001 2000 1999 1998 1997
====================================================================================================================================
Operations
Net Interest Income
Fully Taxable Equivalent (FTE) Basis ............... $ 66,806 $ 58,619 $ 56,513 $ 52,463 $ 49,403
Less Tax Equivalent Adjustment .......................... 2,445 2,637 2,948 2,767 2,611
---------- ---------- ---------- ---------- ----------
Net Interest Income ..................................... 64,361 55,982 53,565 49,696 46,792
Provision for Loan Losses ............................... 3,576 2,625 2,241 2,372 1,735
---------- ---------- ---------- ---------- ----------
Net Interest Income
After Provision for Loan Losses .................... 60,785 53,357 51,324 47,324 45,057
Total Other Income ...................................... 18,543 16,634 14,573 12,880 10,146
Total Other Expenses .................................... 45,195 40,083 36,710 32,741 30,016
---------- ---------- ---------- ---------- ----------
Income Before Income Tax Expense ................... 34,133 29,908 29,187 27,463 25,187
Income Tax Expense ...................................... 11,924 9,968 10,099 9,556 8,704
---------- ---------- ---------- ---------- ----------
Net Income .............................................. $ 22,209 $ 19,940 $ 19,088 $ 17,907 $ 16,483
========== ========== ========== ========== ==========
Per share data (1)
Basic Net Income ........................................ $ 1.79 $ 1.67 $ 1.51 $ 1.43 $ 1.33
Diluted Net Income ...................................... 1.78 1.66 1.50 1.41 1.31
Cash Dividends Paid (2) ................................. .92 .86 .80 .73 .66
December 31 Book Value .................................. 14.14 12.80 11.00 12.24 11.38
December 31 Market Value (Bid Price) .................... 24.01 21.55 24.34 24.76 23.17
Average balances
Total Assets ............................................ $1,689,694 $1,532,691 $1,397,230 $1,254,223 $1,151,081
Total Loans ............................................. 1,270,555 1,104,013 935,716 870,317 799,430
Total Deposits .......................................... 1,331,631 1,209,015 1,073,074 1,016,629 825,808
Securities Sold Under Repurchase Agreements
(long-term portion) ................................ 44,394 53,309 56,181 34,900
Total Federal Home Loan Bank Advances ................... 103,941 80,008 57,062 30,742 18,238
Total Stockholders' Equity .............................. 166,232 141,446 149,727 148,052 135,958
Year-end balances
Total Assets ............................................ $1,787,035 $1,621,063 $1,474,048 $1,362,527 $1,181,359
Total Loans ............................................. 1,359,893 1,175,586 998,956 891,132 838,658
Total Deposits .......................................... 1,421,251 1,288,299 1,147,203 1,085,952 976,972
Securities Sold Under Repurchase Agreements
(long-term portion) ............................... 32,500 32,500 35,000 28,000
Total Federal Home Loan Bank Advances ................... 103,499 93,182 73,514 47,068 25,500
Total Stockholders' Equity .............................. 179,128 156,063 126,296 153,891 141,794
Financial ratios
Return on Average Assets ................................ 1.31% 1.30% 1.37% 1.43% 1.43%
Return on Average Stockholders' Equity (3) .............. 13.36 14.10 12.75 12.09 12.12
Average Earning Assets to Total Assets .................. 93.29 94.85 94.77 94.80 94.62
Allowance for Loan Losses as % of Total Loans ........... 1.11 1.06 1.01 1.03 1.01
Dividend Payout Ratio ................................... 51.69 51.81 53.33 51.77 50.38
Average Stockholders' Equity to Average Assets .......... 9.84 9.23 10.72 11.80 11.81
Tax Equivalent Yield on Earning Assets (4) .............. 7.80 8.19 7.81 8.15 8.34
Cost of Supporting Liabilities .......................... 3.56 4.16 3.54 3.74 3.80
Net Interest Margin on Earning Assets ................... 4.24 4.03 4.27 4.41 4.54
(1) Restated for a five percent (5%) stock dividend distributed September,
2001.
(2) Dividends per share is for First Merchants Corporation only, not restated
for pooling transactions.
(3) Average stockholders' equity is computed by averaging the last five
quarters ending balance.
(4) 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.
2
================================================================================
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
The Corporation's financial data has been restated for all mergers accounted for
as pooling of interests.
RESULTS OF OPERATIONS
Net income for the year 2001 reached $22,209,000, up from $19,940,000 in
2000. Diluted earnings per share totaled $1.78, a 7.2% increase over $1.66
reported for 2000. Cash basis earnings per share were $1.86, an increase of 7.5%
over the 2000 level of $1.73. Cash basis earnings per share are computed based
upon earnings, excluding amortization costs of intangible assets and goodwill,
which totaled $1,064,000 for the year ended December 31, 2001. In 2001, First
Merchants Corporation ("Corporation") recorded the twenty-sixth consecutive year
of improvement in net income on both an aggregate and per share basis.
Net income for the year 2000 reached $19,940,000 up from $19,088,000 in
1999. Diluted earnings per share totaled $1.66, a 10.7% increase over $1.50
reported for 1999. Cash basis earnings per share were $1.73, an increase of
13.8% over the 1999 level of $1.52. Cash basis earning per share are computed
based upon earnings, excluding amortization costs of intangible assets and
goodwill, which totaled $765,000 for the year ended December 31, 2000.
Return on equity was 13.36 percent in 2001, as compared to the 2000 and
1999 figures of 14.10 percent and 12.75 percent.
Return on assets was 1.31 percent in 2001, 1.30 percent in 2000 and 1.37
percent in 1999.
CAPITAL
The Corporation's capital strength 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 December 31, 2001 and 2000. In addition, at December 31, 2001, the
Corporation had a Tier I risk-based capital ratio of 10.6 percent and total
risk-based capital ratio of 11.8 percent. Regulatory capital guidelines require
a Tier I risk-based capital ratio of 4.0 percent and a total risk-based capital
ratio of 8.0 percent.
The Corporation has an employee stock purchase plan and an employee stock
option plan. Activity under these plans is described in Note 14 to the
Consolidated Financial Statements. The transactions under these plans have not
had a material effect on the Corporation's capital position.
3
================================================================================
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
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 are not specifically identified.
At December 31, 2001, non-performing loans totaled $14,666,000, an increase
of $6,728,000, as noted in the table below. This increase was primarily due to
the addition of $2,606,000 in non-performing loans related to the acquisition of
Francor Financial, Inc. and the general downturn in the economy.
At December 31, 2001, impaired loans totaled $21,161,000, an increase of
$6,322,000. The increase was primarily attributable to the addition of impaired
loans related to the acquisition of Francor Financial, Inc. and four borrowers
whose loans are considered impaired at December 31, 2001, but were not impaired
at December 31, 2000. At December 31, 2001, 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.
At December 31, 2001, the allowance for loan losses was $15,141,000, an
increase of $2,687,000 from year end 2000. As a percent of loans, the allowance
was 1.11 percent, up from 1.06 percent at year-end 2000.
The provision for loan losses in 2001 was $3,576,000, up $951,000 or 36.2%
from $2,625,000 in 2000, primarily due to the general downturn in the economy
and an increase in non-performing loans.
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) December 31,
- --------------------------------------------------------------------------------
2001 2000
================================================================================
Non-accrual loans .............................. $ 6,327 $2,370
Loans contractually
past due 90 days or more
other than non-accruing ..................... 4,828 2,483
Restructured loans ............................. 3,511 3,085
------- ------
Total ....................................... $14,666 $7,938
======= ======
4
================================================================================
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
The table below presents loan loss experience for the years indicated.
(Dollars in Thousands) 2001 2000 1999
====================================================================================================================================
Allowance for loan losses:
Balance at January 1 ............................................... $12,454 $10,128 $ 9,209
------- ------- -------
Chargeoffs ......................................................... 3,547 2,291 1,769
Recoveries ......................................................... 573 579 447
------- ------- -------
Net chargeoffs ..................................................... 2,974 1,712 1,322
Provision for loan losses .......................................... 3,576 2,625 2,241
Allowance acquired in acquisition................................... 2,085 1,413
------- ------- -------
Balance at December 31 ............................................. $15,141 $12,454 $10,128
======= ======= =======
Ratio of net chargeoffs during the period to
average loans outstanding during the period ....................... .23% .16% .14%
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 December 31, 2001, remained adequate to meet the
Corporation's primary goal of achieving optimum interest margins while avoiding
undue interest rate risk. The following table presents the Corporation's
interest rate sensitivity analysis as of December 31, 2001.
5
================================================================================
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
INTEREST RATE SENSITIVITY ANALYSIS
(dollars in thousands) At December 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
1-180 DAYS 181-365 DAYS 1-5 YEARS BEYOND 5 YEARS TOTAL
====================================================================================================================================
Rate-Sensitive Assets:
Federal funds sold and interest-bearing deposits ......... $ 38,156 $ 38,156
Investment securities .................................... 49,359 $ 48,319 $ 99,688 $ 42,956 240,322
Loans .................................................... 651,749 103,333 479,332 125,211 1,359,625
Federal Reserve and Federal Home Loan Bank stock ......... 8,350 8,350
---------- ---------- ---------- ---------- ----------
Total rate-sensitive assets ......................... 747,614 151,652 579,020 168,167 1,646,453
---------- ---------- ---------- ---------- ----------
Rate-Sensitive Liabilities:
Interest-bearing deposits ................................ 508,028 345,873 344,841 35,522 1,234,264
Securities sold under repurchase agreements .............. 22,732 22,900 45,632
Other short-term borrowings .............................. 16,773 16,773
Federal Home Loan Bank advances .......................... 4,756 14,422 59,069 25,252 103,499
Other borrowed funds ..................................... 8,500 8,500
---------- ---------- ---------- ---------- ----------
Total rate-sensitive liabilities .................... 552,289 368,795 426,810 60,774 1,408,668
---------- ---------- ---------- ---------- ----------
Interest rate sensitivity gap by period ..................... $ 195,325 $ (217,143) $ 152,210 $ 107,393
Cumulative rate sensitivity gap ............................. 195,325 (21,818) 130,392 237,785
Cumulative rate sensitivity gap ratio
at December 31, 2001 ..................................... 135.4% 97.6% 109.7% 116.9%
at December 31, 2000 ..................................... 94.1% 77.0% 102.1% 116.3%
The Corporation had a cumulative negative gap of $21,818,000 in the one-year
horizon at December 31, 2001, just over 1.2 percent of total assets. Net
interest income at financial institutions with negative gaps tends to increase
when rates decrease and decrease as interest rates increase.
EARNING ASSETS
Earning assets increased $140.4 million during 2001. The table below
reflects the earning asset mix for the years 2001 and 2000 (at December 31).
Loans grew by $184.3 million while investment securities declined by $67.5
million. The acquisition of Francor Financial, Inc. combined with increased loan
demand resulted in a 15.7% increase in the Corporation's loan portfolio. The
decline in investment securities was the result of corporate loan growth,
investment maturities and cash required for the acquistion.
EARNING ASSETS
(dollars in millions) December 31,
================================================================================
2001 2000
-------- --------
Federal funds sold and interest-bearing time deposits $ 38.2 $ 15.8
Securities available for sale ....................... 231.7 295.7
Securities held to maturity ......................... 8.7 12.2
Loans ............................................... 1,359.9 1,175.6
Federal Reserve and Federal Home Loan Bank stock .... 8.4 7.2
-------- --------
Total ........................................... $1,646.9 $1,506.5
======== ========
6
================================================================================
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
DEPOSITS AND BORROWINGS
The table below reflects the level of deposits and borrowed funds (Federal
funds purchased, repurchase agreements, U.S. Treasury demand notes, Federal
Home Loan Bank advances and other borrowed funds) based on year-end levels at
December 31, 2001 and 2000.
As of December 31
(dollars in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITIES SOLD UNDER OTHER SHORT-TERM FEDERAL HOME LOAN OTHER BORROWED
DEPOSITS REPURCHASE AGREEMENTS BORROWINGS BANK ADVANCES FUNDS
====================================================================================================================================
2001 $1,421.3 $45.6 $16.8 $103.5 $8.5
2000 1,288.3 64.5 5.9 93.2
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 reflects the Corporation's asset yields, interest expense, and
net interest income as a percent of average earning assets for the three-year
period ending in 2001.
In 2001, asset yields decreased 39 basis points (FTE) and interest cost
decreased 60 basis points, resulting in a 21 basis point (FTE) increase in net
interest income. Increased loan activity, especially in commercial and mortgage
lending, contributed to this result.
(dollars in thousands)
- --------------------------------------------------------------------------------------------------------------
INTEREST INCOME INTEREST EXPENSE NET INTEREST INCOME NET INTEREST INCOME
(FTE) as a Percent as a Percent (FTE)as a Percent AVERAGE On a
of Average of Average of Average EARNING Fully Taxable
Earning Assets Earning Assets Earning Assets ASSETS Equivalent Basis
==============================================================================================================
2001 7.80% 3.56% 4.24% $1,576,334 $66,806
2000 8.19 4.16 4.03 1,453,795 58,619
1999 7.81 3.54 4.27 1,324,172 56,513
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.
7
================================================================================
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
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 2001 amounted to $18,543,000 or 11.5 percent higher than in
2000. The increase of $1,909,000 is primarily attributable to the following
factors:
1. Service charges on deposit accounts increased $953,000, or 20.0 percent due
to increased number of accounts and price adjustments.
2. Gains on sale of mortgage loans included in other income increased by
$611,000, or 97.9 percent, due to increased mortgage volume. In addition,
decreasing mortgage loan interest rates caused an increase in refinancing
volume, which facilitated an increase in loan sales activity.
OTHER INCOME
Other income in 2000 amounted to $16,634,000 or 14.1 percent higher than in
1999. The increase of $2,061,000 is primarily attributable to the following
factors:
1. Other customer fees increased $430,000, or 13.9 percent, due to increased
fees from electronic card usage and price adjustments.
2. Commission income increased $421,000, or 27.5 percent, due to
increased sales initiatives in 2000.
3. Revenues from fiduciary activity grew $372,000, or 8.1 percent, due to
strong new business activity and markets.
4. Service charges on deposit accounts increased $326,000 or 7.3 percent due
to increased number of accounts and price adjustments.
5. Other income increased $876,000, or 135.2 percent due primarily to
$209,000 of new revenue resulting from First Merchants Reinsurance
Company, and a $147,000 gain on sale of a Bank building in 2000.
8
================================================================================
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
OTHER EXPENSES
Other expenses represent non-interest operating expenses of the
Corporation. Other expenses in 2001 amounted to $45,195,000, an increase of 12.8
percent from the prior year, or $5,112,000.
Three major areas account for most of the increase:
1. Salary and benefit expenses grew by $3,293,000, or 15.4 percent, due to
normal salary increases, staff additions and additional salary cost related
to the acquisition of Frances Slocum Bank and Trust Company.
2. Data processing fees increased by $507,000, or 29.2 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 year.
3. Goodwill and core deposit amortization increased by $786,000, or 87.7
percent, due to utilization of the purchase method of accounting for the
Corporation's June 1, 2000 acquisition of Decatur Bank and Trust Company
and July 1, 2001 acquisition of Frances Slocum Bank and Trust Company.
Other expenses amounted to $40,083,000 in 2000, an increase of 9.2
percent from the prior year, or $3,373,000.
Two major areas account for most of the increase:
1. Salary and benefit expenses, which account for over one-half of the
Corporation's non-interest operating expenses, grew by $1,598,000, or 8.1
percent, due to normal salary increases and staff additions and the
additional salary cost related to the acquisition of Decatur Bank and Trust
Company.
2. Equipment expenses increased $584,000, or 15.7 percent, reflecting the
Corporation's capital investments in it's operation center and it's efforts
to improve efficiency and provide electronic service delivery to its
customers.
9
================================================================================
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
INCOME TAXES
The increase in 2001 tax expenses of $1,956,000 is attributable primarily
to a $4,225,000 increase in net pre-tax income. The decrease in 2000 tax expense
of $131,000 is attributable primarily to decreased state taxes as a result of
changes in the state tax laws. In addition, the effective tax rates for the
periods ending December 31, 2001, 2000 and 1999 were 34.9%, 33.3% and 34.6%,
respectively.
ACCOUNTING MATTERS
ACCOUNTING FOR A BUSINESS COMBINATION
Statement of Financial Accounting Standards ("SFAS") No. 141 requires
that 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 are 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 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.
10
================================================================================
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
The provisions of Statement No. 142 would be effective for fiscal
years beginning after December 15, 2001. A calendar year end company cannot
adopt early and must wait until January 1, 2002. Goodwill and intangible assets
acquired in a transaction completed after June 30, 2001 but before this
Statement is initially applied would be accounted for in accordance with the
amortization and nonamortization provisions of the Statement. The useful
economic life of previously recognized intangible assets should be reassessed
upon adoption of the Statement, and remaining amortization periods should be
adjusted accordingly. Intangible assets deemed to have an indefinite life would
no longer be amortized.
The Corporation adopted these new accounting rules on January 1, 2002.
As a result, the Corporation will not amortize the goodwill it has recorded
prior to June 30, 2001, 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 $26,081,000 at December 31, 2001 and amortization
of $1,003,000 for the period ended December 31, 2001.
INFLATION
Changing prices of goods, services and capital affect the financial
position of every business enterprise. The level of market interest rates and
the price of funds loaned or borrowed fluctuate due to changes in the rate of
inflation and various other factors, including government monetary policy.
Fluctuating interest rates affect the Corporation's net interest income,
loan volume and other operating expenses, such as employee salaries and
benefits, reflecting the effects of escalating prices, as well as increased
levels of operations and other factors. As the inflation rate increases, the
purchasing power of the dollar decreases. Those holding fixed-rate monetary
assets incur a loss, while those holding fixed-rate monetary liabilities enjoy a
gain. The nature of a financial holding company's operations is such that there
will generally be an excess of monetary assets over monetary liabilities, and,
thus, a financial holding company will tend to suffer from an increase in the
rate of inflation and benefit from a decrease.
11
================================================================================
INDEPENDENT ACCOUNTANT'S REPORT
================================================================================
To the Stockholders and Board of Directors
First Merchants Corporation
Muncie, Indiana
We have audited the accompanying consolidated balance sheets of First Merchants
Corporation as of December 31, 2001 and 2000, and the related consolidated
statements of income, comprehensive income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of First Merchants Corporation as of December 31, 2001
and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
BKD LLP
Indianapolis, Indiana
January 18, 2002
12
================================================================================
CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) December 31,
====================================================================================================================================
2001 2000
Assets
Cash and due from banks ........................................................... $ 68,743 $ 52,563
Federal funds sold ................................................................ 34,285 14,900
----------- -----------
Cash and cash equivalents ......................................................... 103,028 67,463
Interest-bearing time deposits .................................................... 3,871 883
Investment securities
Available for sale ............................................................. 231,668 295,730
Held to maturity (fair value of $8,762 and $12,328)............................. 8,654 12,233
----------- -----------
Total investment securities .................................................. 240,322 307,963
Mortgage loans held for sale ...................................................... 307
Loans, net of allowance for loan losses of $15,141 and $12,454..................... 1,344,445 1,163,132
Premises and equipment ............................................................ 27,684 23,868
Federal Reserve and Federal Home Loan Bank stock .................................. 8,350 7,185
Interest receivable ............................................................... 12,024 13,135
Core deposit intangibles ............ ............................................. 6,096 1,936
Goodwill........................................................................... 26,081 19,119
Cash surrender value of life insurance............................................. 6,470 6,312
Other assets ...................................................................... 8,357 10,067
----------- -----------
Total assets ................................................................. $ 1,787,035 $ 1,621,063
=========== ===========
Liabilities
Deposits
Noninterest-bearing ............................................................. $ 186,987 $ 157,053
Interest-bearing ................................................................ 1,234,264 1,131,246
----------- -----------
Total deposits ............................................................ 1,421,251 1,288,299
Borrowings ........................................................................ 174,404 163,581
Interest payable .................................................................. 5,488 6,335
Other liabilities ................................................................. 6,764 6,785
----------- -----------
Total liabilities ......................................................... 1,607,907 1,465,000
COMMITMENTS AND CONTINGENT LIABILITIES
Stockholders' equity
Preferred stock, no-par value
Authorized and unissued -- 500,000 shares
Common stock, $.125 stated value
Authorized -- 50,000,000 shares
Issued and outstanding -- 12,670,307 and 12,192,319 shares ..................... 1,584 1,524
Additional paid-in capital ........................................................ 50,642 41,592
Retained earnings ................................................................. 124,304 113,244
Accumulated other comprehensive income (loss)...................................... 2,598 (297)
----------- -----------
Total stockholders' equity ................................................... 179,128 156,063
----------- -----------
Total liabilities and stockholders' equity ................................... $ 1,787,035 $ 1,621,063
=========== ===========
See notes to consolidated financial statements.
13
================================================================================
CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data) Year Ended December 31,
====================================================================================================================================
2001 2000 1999
Interest income
Loans receivable
Taxable ............................................................. $103,123 $ 95,798 $ 78,366
Tax exempt .......................................................... 438 311 233
Investment securities
Taxable ............................................................. 11,207 14,478 15,459
Tax exempt .......................................................... 4,103 4,587 5,243
Federal funds sold .................................................... 899 666 657
Deposits with financial institutions .................................. 106 103 59
Federal Reserve and Federal Home Loan Bank stock ...................... 559 585 446
-------- -------- --------
Total interest income ............................................. 120,435 116,528 100,463
-------- -------- --------
Interest expense
Deposits .............................................................. 45,856 49,607 38,539
Securities sold under repurchase agreements ........................... 3,208 4,263 4,273
Federal Home Loan Bank advances ....................................... 6,556 5,315 3,260
Other borrowings ...................................................... 454 1,361 826
-------- -------- --------
Total interest expense ........................................... 56,074 60,546 46,898
-------- -------- --------
Net interest income ...................................................... 64,361 55,982 53,565
Provision for loan losses ............................................. 3,576 2,625 2,241
-------- -------- --------
Net interest income
after provision for loan losses .......................................... 60,785 53,357 51,324
-------- -------- --------
Other income
Fiduciary activities .................................................. 5,429 4,972 4,600
Service charges on deposit accounts ................................... 5,729 4,776 4,450
Other customer fees ................................................... 3,166 3,519 3,089
Net realized gains (losses) on
sales of available-for-sale securities .............................. (200) (107) 257
Commission income ..................................................... 1,945 1,950 1,529
Other income .......................................................... 2,474 1,524 648
-------- -------- --------
Total other income ............................................... 18,543 16,634 14,573
-------- -------- --------
Other expenses
Salaries and employee benefits ........................................ 24,711 21,418 19,820
Net occupancy expenses ................................................ 2,729 2,471 2,139
Equipment expenses .................................................... 4,521 4,299 3,715
Marketing expenses..................................................... 1,072 1,010 869
Deposit insurance expenses............................................. 259 240 129
Outside data processing fees .......................................... 2,243 1,736 1,647
Printing and office supplies .......................................... 1,143 1,144 1,275
Merger-related expenses ............................................... 804
Goodwill and core deposit amortization................................. 1,682 896 223
Other expenses ........................................................ 6,835 6,869 6,089
-------- -------- --------
Total other expenses ............................................. 45,195 40,083 36,710
-------- -------- --------
Income before income tax ................................................. 34,133 29,908 29,187
Income tax expense .................................................... 11,924 9,968 10,099
-------- -------- --------
Net income ............................................................... $ 22,209 $ 19,940 $ 19,088
======== ======== ========
Net income per share:
Basic ................................................................. $ 1.79 $ 1.67 $ 1.51
Diluted ............................................................... 1.78 1.66 1.50
See notes to consolidated financial statements.
14
================================================================================
CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31,
(in thousands) 2001 2000 1999
====================================================================================================================================
Net income ............................................................................. $ 22,209 $ 19,940 $ 19,088
-------- -------- --------
Other comprehensive income, net of tax:
Unrealized gains (loss) on securities available for sale:
Unrealized holding gains (loss) arising during the period,
net of income tax (expense) benefit of $(1,848), $(2,610), $4,258.................. 2,775 3,831 (6,249)
Less: Reclassification adjustment for gains (loss) included in net income,
net of income tax (expense) benefit of $80, $43, $(103).......................... (120) (64) 154
-------- -------- --------
2,895 3,895 (6,403)
-------- -------- --------
COMPREHENSIVE INCOME $ 25,104 $ 23,835 $ 12,685
======== ======== ========
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
----------------------- ADDITIONAL RETAINED ACCUMULATED OTHER
SHARES AMOUNT PAID-IN CAPITAL EARNINGS COMPREHENSIVE TOTAL
INCOME (LOSS)
----------- -------- -------------- --------- -------------------- -------
Balances, January 1, 1999 ...................... 11,975,955 $ 1,497 $ 31,263 $ 118,920 $ 2,211 $ 153,891
Net income for 1999........................... 19,088 19,088
Cash dividends ($ .80 per share) ............. (9,759) (9,759)
Other comprehensive loss, net of tax ....... (6,403) (6,403)
Stock issued under employee benefit plans .... 20,870 3 454 457
Stock issued under dividend reinvestment
and stock purchase plan ................... 30,227 4 718 722
Stock options exercised ...................... 55,234 6 265 271
Stock redeemed ............................... (1,145,669) (7,384) (24,609) (32,136)
Tax benefit of stock dispositions ............ (143) 165 165
----------- -------- -------- --------- --------- ---------
Balances, December 31, 1999 .................... 10,936,617 1,367 25,481 103,640 (4,192) 126,296
Net income for 2000........................... 19,940 19,940
Cash dividends ($ .86 per share) ............. (10,331) (10,331)
Other comprehensive income, net of tax ....... 3,895 3,895
Stock issued under employee benefit plans .... 26,778 3 478 481
Stock issued under dividend reinvestment
and stock purchase plan ................... 35,611 5 806 811
Stock options exercised ...................... 33,906 4 506 510
Stock redeemed ............................... (292,000) (37) (6,670) (5) (6,712)
Issuance of stock related to acquisition...... 870,957 109 21,068 21,177
Cash paid in lieu of fractional shares........ (137) (4) (4)
----------- -------- -------- --------- --------- ---------
Balances, December 31, 2000 .................. 11,611,732 1,451 41,665 113,244 (297) 156,063
Net income for 2001........................... 22,209 22,209
Cash dividends ($.92 per share)............... (11,127) (11,127)
Other comprehensive income, net of tax ....... 2,895 2,895
Stock issued under employee benefit plans .... 28,466 4 500 504
Stock issued under dividend reinvestment
and stock purchase plan ................... 35,348 4 799 803
Stock options exercised ...................... 19,627 2 223 225
Stock redeemed ............................... (306,966) (38) (6,985) (7,023)
Issuance of stock related to acquisition...... 677,972 85 14,516 14,601
Five percent (5%) stock dividend.............. 604,128 76 (76)
Cash paid in lieu of fractional shares........ (22) (22)
----------- -------- -------- --------- --------- ---------
Balances, December 31, 2001 12,670,307 $ 1,584 $ 50,642 $ 124,304 $ 2,598 $ 179,128
=========== ======== ======== ========= ========= =========
See notes to consolidated financial statements.
15
================================================================================
CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
====================================================================================================================================
Year Ended December 31,
(in thousands, except share data) 2001 2000 1999
====================================================================================================================================
Operating activities:
Net income .......................................................... $ 22,209 $ 19,940 $ 19,088
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses ......................................... 3,576 2,625 2,241
Depreciation ...................................................... 2,984 3,198 2,517
Amortization of goodwill and intangibles .......................... 1,682 896 232
Deferred income tax ............................................... 616 (767) (1,122)
Securities amortization, net ...................................... 8 72 358
Securities losses (gains), net .................................... 200 107 (257)
Loss (gain) on sale of premises and equipment ..................... 2 (105) (4)
Mortgage loans originated for sale ................................ (22,705) (2,111) (6,179)
Proceeds from sales of mortgage loans ............................. 22,398 2,172 6,894
Net change in
Interest receivable ........................................... 2,514 (825) (482)
Interest payable .............................................. (1,727) 1,479 465
Other adjustments ................................................. (545) 3,104 1,932
--------- --------- ---------
Net cash provided by operating activities ..................... 31,212 29,785 25,683
--------- --------- ---------
Investing activities:
Net change in interest-bearing deposits ............................. (2,988) 1,330 (722)
Purchases of
Securities available for sale ..................................... (34,500) (11,437) (148,210)
Securities held to maturity ....................................... (2,667)
Proceeds from maturities of
Securities available for sale ..................................... 108,692 49,975 120,509
Securities held to maturity ....................................... 3,612 5,617 7,226
Proceeds from sales of
Securities available for sale ..................................... 770 14,654 19,627
Net change in loans ................................................. (50,384) (87,658) (109,861)
Purchase of Federal Home Loan Bank stock ............................ (592) (712) (1,403)
Purchases of premises and equipment ................................. (2,438) (4,409) (3,679)
Proceeds from sale of fixed assets .................................. 37 449 56
Net cash received in acquisition..................................... 5,261
Other investing activities .......................................... 280
--------- --------- ---------
Net cash provided (used) by investing activities .............. 27,470 (31,911) (119,124)
--------- --------- ---------
Financing activities:
Net change in
Demand and savings deposits ....................................... 55,640 772 17,411
Certificates of deposit and other time deposits ................... (72,940) 33,268 43,840
Repurchase agreements and other borrowings ........................ 506 (51,385) 49,713
Federal Home Loan Bank advances ..................................... 60,930 199,396 314,500
Repayment of Federal Home Loan Bank advances ........................ (50,613) (181,510) (288,054)
Cash dividends ...................................................... (11,127) (10,331) (9,759)
Stock issued under employee benefit plans ........................... 504 481 457
Stock issued under dividend reinvestment
and stock purchase plan ........................................... 803 811 722
Stock options exercised ............................................. 225 510 271
Stock redeemed ...................................................... (7,023) (6,712) (32,136)
Cash paid in lieu of issuing fractional shares ...................... (22) (4)
--------- --------- ---------
Net cash provided (used) by financing activities .............. (23,117) (14,704) 96,965
--------- --------- ---------
Net change in cash and cash equivalents ................................ 35,565 (16,830) 3,524
Cash and cash equivalents, beginning of year ........................... 67,463 84,293 80,769
--------- --------- ---------
Cash and cash equivalents, end of year ................................. $ 103,028 $ 67,463 $ 84,293
========= ========= =========
Additional cash flows information:
Interest paid ....................................................... $ 56,921 $ 58,810 $ 46,433
Income tax paid ..................................................... 12,440 9,544 10,157
See notes to consolidated financial statements.
16
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 1
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Merchants Corporation
("Corporation"), and its wholly owned subsidiaries, First Merchants Bank, N.A.
("First Merchants"), Madison Community Bank ("Madison"), First United Bank
("First United"), The Randolph County Bank ("Randolph County"), Union County
National Bank ("Union National"), First National Bank ("First National"),
Decatur Bank and Trust Company ("Decatur"), and Frances Slocum Bank & Trust
Company ("Frances Slocum"), (collectively "the Banks"), First Merchants
Insurance Services, Inc. ("FMIS"), and First Merchants Reinsurance Company
("FMRC"), conform to generally accepted accounting principles and reporting
practices followed by the banking industry. The more significant of the policies
are described below.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Corporation is a financial holding company whose principal activity is
the ownership and management of the Banks and operates in a single significant
business segment. First Merchants, Union National and First National operate
under national bank charters and provide full banking services, including trust
services. As national banks, First Merchants, First National and Union National
are subject to the regulation of the Office of the Comptroller of the Currency
and the Federal Deposit Insurance Corporation ("FDIC"). Madison, First United,
Randolph County, Decatur and Frances Slocum operate under state bank charters
and provide full banking services, including trust services. As state banks,
Madison, First United, Randolph County, Decatur and Frances Slocum are subject
to the regulation of the Department of Financial Institutions, State of Indiana,
and the FDIC.
The Banks generate commercial, mortgage, and consumer loans and receive
deposits from customers located primarily in central and east central Indiana
and Butler County, Ohio. The Banks' loans are generally secured by specific
items of collateral, including real property, consumer assets and business
assets. Although the Banks have a diversified loan portfolio, a substantial
portion of their debtors' ability to honor their contracts is dependent upon
economic conditions in the automotive and agricultural industries.
CONSOLIDATION
The consolidated financial statements include the accounts of the
Corporation and all its subsidiaries, after elimination of all material
intercompany transactions.
17
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 1
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
INVESTMENT SECURITIES-Debt securities are classified as held to maturity when
the Corporation has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity are classified as available for
sale. Securities available for sale are carried at fair value with unrealized
gains and losses reported separately in accumulated other comprehensive income,
net of tax.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
LOANS HELD FOR SALE are carried at the lower of aggregate cost or market. Market
is determined using the aggregate method. Net unrealized losses, if any, are
recognized through a valuation allowance by charges to income based on the
difference between estimated sales proceeds and aggregate cost.
LOANS are carried at the principal amount outstanding. Certain nonaccrual and
substantially delinquent loans may be considered to be impaired. A loan is
impaired when, based on current information or events, it is probable that the
Banks will be unable to collect all amounts due (principal and interest)
according to the contractual terms of the loan agreement. In applying the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 114, the
Corporation considers its investment in one-to-four family residential loans and
consumer installment loans to be homogeneous and therefore excluded from
separate identification for evaluation of impairment. Interest income is accrued
on the principal balances of loans, except for installment loans with add-on
interest, for which a method that approximates the level yield method is used.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed when
considered uncollectable. Interest income is subsequently recognized only to the
extent cash payments are received. Certain loan fees and direct costs are being
deferred and amortized as an adjustment of yield on the loans.
18
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 1
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
ALLOWANCE FOR LOAN LOSSES 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.
19
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 1
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
PREMISES AND EQUIPMENT are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line and declining balance methods
based on the estimated useful lives of the assets. Maintenance and repairs are
expensed as incurred, while major additions and improvements are capitalized.
Gains and losses on dispositions are included in current operations.
FEDERAL RESERVE AND FEDERAL HOME LOAN BANK STOCK are required investments for
institutions that are members of the Federal Reserve Bank ("FRB") and Federal
Home Loan Bank ("FHLB") systems. The required investment in the common stock is
based on a predetermined formula.
INTANGIBLE ASSETS that are subject to amortization, including goodwill and core
deposit intangibles, are being amortized on both the straight-line and
accelerated basis over periods ranging from 7 to 25 years. Intangible assets are
periodically evaluated as to the recoverability of their carrying value.
INCOME TAX in the consolidated statements of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The
Corporation files consolidated income tax returns with its subsidiaries.
STOCK OPTIONS are granted for a fixed number of shares to employees. The
Corporation accounts for stock option grants in accordance with APB Opinion
No. 25, Accounting for Stock Issued to Employees, and accordingly, recognizes
compensation expense for the stock option grants which have been granted with
an exercise price less than the fair value of the shares at the date of grant.
EARNINGS PER SHARE have been computed based upon the weighted average common and
common equivalent shares outstanding during each year and have been restated to
give effect to a five percent (5%) stock dividend on its shares of outstanding
common stock distributed to stockholders on September 24, 2001.
20
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 2
BUSINESS COMBINATIONS
On October 15, 2001, the Corporation signed a definitive agreement to
acquire Lafayette Bancorporation, Lafayette, Indiana. The acquisition will be
accounted for under the purchase method of accounting. Under the terms of the
agreement, the Corporation will exchange 1.11 shares, which are subject to
adjustment in certain circumstances, of the Corporation's common stock or $30.00
in cash for each of the outstanding shares of Lafayette Bancorporation. However,
no more than $50,329,248 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 the Corporation,
Lafayette Bancorporation and appropriate regulatory agencies. As of December 31,
2001, Lafayette Bancorporation had total assets and stockholders' equity of
$762,318,000 and $59,120,000 respectively.
On July 1, 2001, the Corporation acquired 100% of the outstanding
stock of Francor Financial, Inc., the holding company of Frances Slocum. Frances
Slocum is a state chartered bank with branches located in east-central Indiana.
Francor Financial, Inc. was merged into the Corporation, and Frances Slocum
maintained its state charter as a subsidiary of First Merchants Corporation. The
Corporation issued 711,871 shares of its common stock at a cost of $21.536 per
share and $14,490,985 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 $29,454,000, including goodwill of $7,907,000, none of
which is deductible for tax purposes. Additionally, core deposit intangibles
totaling $4,804,000 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 July 1,
2001. The purchase accounting adjustments will be amortized over the life of the
respective asset or liability. Francor Financial Inc.'s results of operations
are included in the Corporation's consolidated income statement beginning July
1, 2001. The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.
Loans........................... $ 134,505
Premises and equipment.......... 4,401
Core deposit intangibles........ 4,804
Goodwill........................ 7,907
Other........................... 34,581
---------
Total assets acquired......... 186,198
---------
Deposits........................ 150,252
Other........................... 6,492
---------
Total liabilities acquired.... 156,744
---------
Net assets acquired........... $ 29,454
=========
21
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 2
BUSINESS COMBINATIONS continued
The following proforma disclosures, including the effect of the purchase
accounting adjustments, depict the results of operations as though the merger
had taken place at the beginning of each period.
Year Ended
December 31,
2001 2000
----------- -----------
Net Interest Income......................... $ 67,352 $ 62,296
Net Income.................................. 21,876 21,438
Per share - combined:
Basic Net Income.......................... 1.71 1.70
Diluted Net Income........................ 1.70 1.69
On May 31, 2000, the Corporation acquired Decatur Financial Inc., the
holding company of Decatur Bank and Trust Company. Decatur Bank and Trust
Company is a state chartered commercial bank with branches located in
east-central Indiana. Decatur Financial Inc. was merged into the Corporation
through the exchange of 914,505 shares of newly issued common stock and
$12,355,000 of cash. The combination was accounted for under the purchase method
of accounting. Decaturs' results of operations are included in the Corporation's
consolidated income statement beginning June 1, 2000. The purchase resulted in
core deposit intangibles of $2,046,000, which are being amortized over 10 years
using 150% declining balance method. The purchase had a recorded acquisition
price of $33,299,000, including goodwill of $17,040,000.
The purchase resulted in the Corporation recording net loans of
$89,332,000, held to maturity and available for sale securities of $3,921,000
and $14,132,000 respectively, deposit liabilities of $107,056,000 and borrowings
of $7,218,000. All assets and liabilities were recorded at fair values as of May
31, 2000. The purchase accounting adjustments will be amortized over the life of
the respective asset or liability.
The following proforma disclosures including the effect of the purchase
accounting adjustments, depict the results of operations as though the merger
had taken place at the beginning of each period.
Year Ended
December 31
----------------------
2000 1999
--------- ---------
Net Interest Income:.......................... $ 57,849 $ 57,577
Net Income:................................... $ 19,563 $ 19,474
Net Income per share - combined:
Basic ....................................... $ 1.55 $ 1.44
Diluted ..................................... 1.54 1.43
22
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 2
Business Combinations continued
On April 1, 1999, the Corporation issued 1,153,735 shares of its common
stock in exchange for all of the outstanding shares of Jay Financial
Corporation, Portland, Indiana. At December 31, 1998, Jay Financial Corporation
had total assets and stockholders' equity of $114,895,000 and $14,903,000,
respectively. The transaction was accounted for under the
pooling-of-interests method of accounting.
On April 21, 1999, the Corporation issued 851,174 shares of its common
stock in exchange for all of the outstanding shares of Anderson Community Bank,
Anderson, Indiana. At December 31, 1998, Anderson Community Bank had total
assets and stockholders' equity of $77,984,000 and $7,740,000, respectively.
The transaction was accounted for under the pooling-of-interests method of
accounting. The financial information contained herein reflects the mergers and
reports the financial condition and results of operations as though the
Corporations had been combined as of January 1, 1999. Separate operating results
of Jay Financial Corporation and Anderson Community Bank for the period prior
to the merger were as follows:
1999
Net interest income:
First Merchants Corporation ............................. $ 50,175
Jay Financial Corporation ............................... 2,250
Anderson Community Bank ................................. 1,140
----------
Combined .............................................. $ 53,565
==========
Net income:
First Merchants Corporation ............................. $ 17,934
Jay Financial Corporation ............................... 703
Anderson Community Bank ................................. 451
----------
Combined .............................................. $ 19,088
==========
Net income per share:
Basic:
First Merchants Corporation ............................. $ 1.42
Jay Financial Corporation ............................... .06
Anderson Community Bank ................................. .04
----------
Combined .............................................. $ 1.52
==========
Diluted:
First Merchants Corporation ............................. $ 1.41
Jay Financial Corporation ............................... .06
Anderson Community Bank ................................. .04
----------
Combined .............................................. $ 1.51
==========
NOTE 3
RESTRICTION ON CASH AND DUE FROM BANKS
The Banks are required to maintain reserve funds in cash and/or on deposit
with the Federal Reserve Bank. The reserve required at December 31, 2001, was
$21,653,000.
23
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 4
INVESTMENT SECURITIES
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
======== ======== ======== ========
Available for sale at December 31, 2000
U.S. Treasury ........................................... $ 2,997 $ 2,997
Federal agencies ........................................ 55,403 $ 268 $ 155 55,516
State and municipal ..................................... 81,370 1,045 103 82,312
Mortgage-backed securities .............................. 127,907 139 922 127,124
Other asset-backed securities ........................... 19,924 10 148 19,786
Corporate obligations ................................... 7,238 9 395 6,852
Marketable equity securities ............................ 1,277 134 1,143
-------- -------- -------- --------
Total available for sale ............................. 296,116 1,471 1,857 295,730
-------- -------- -------- --------
Held to maturity at December 31, 2000
U.S. Treasury ........................................... 250 250
State and municipal ..................................... 11,645 131 36 11,740
Mortgage-backed securities .............................. 338 338
-------- -------- -------- --------
Total held to maturity ............................... 12,233 131 36 12,328
-------- -------- -------- --------
Total investment securities .......................... $308,349 $ 1,602 $ 1,893 $308,058
======== ======== ======== ========
24
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 4
INVESTMENT SECURITIES continued
The amortized cost and fair value of securities available for sale and held
to maturity at December 31, 2001, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
- ------------------------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE
====================================================================================================================================
Maturity distribution at December 31, 2001:
Due in one year or less........................................... $ 19,844 $ 19,931 $ 2,545 $ 2,571
Due after one through five years ................................. 57,109 58,870 3,217 3,331
Due after five through ten years ................................. 14,966 15,356 1,944 1,899
Due after ten years .............................................. 17,287 17,359 720 733
-------- -------- -------- --------
109,206 111,516 8,426 8,534
Mortgage-backed securities ....................................... 100,811 102,520 228 228
Other asset-backed securities .................................... 10,116 10,283
Marketable equity securities ..................................... 7,472 7,349
-------- -------- -------- --------
Totals ......................................................... $227,605 $231,668 $ 8,654 $ 8,762
======== ======== ======== ========
Securities with a carrying value of approximately $106,476,000 and
$149,266,000 were pledged at December 31, 2001 and 2000 to secure certain
deposits and securities sold under repurchase agreements, and for other purposes
as permitted or required by law.
In addition, all otherwise unpledged securities are pledged as collateral
for Federal Home Loan Bank advances with qualified first mortgage loans.
Proceeds from sales of securities available for sale during 2001, 2000 and
1999 were $770,000, $14,654,000 and $19,627,000. Gross losses of $200,000 and
$107,000 in 2001 and 2000, and gross gains of $257,000 in 1999 were realized on
those sales.
25
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 5
LOANS AND ALLOWANCE
2001 2000
===========================================================================================================
Loans at December 31:
Commercial and industrial loans ..........................................$ 301,962 $ 258,405
Agricultural production financing and other loans to farmers ............. 29,645 24,547
Real estate loans:
Construction ........................................................ 58,316 45,412
Commercial and farmland ............................................. 230,233 167,317
Residential ......................................................... 544,028 466,660
Individuals' loans for household and other personal expenditures ......... 179,364 201,629
Tax-exempt loans ......................................................... 7,277 6,093
Other loans .............................................................. 8,800 5,523
--------- ---------
1,359,625 1,175,586
Unearned interest on loans............................................... (39)
Allowance for loan losses................................................ (15,141) (12,454)
--------- ---------
Total loans .........................................................$1,344,445 $1,163,132
========= =========
2001 2000 1999
===========================================================================
Allowance for loan losses:
Balance, January 1 .............. $ 12,454 $ 10,128 $ 9,209
Allowance acquired in acquisition 2,085 1,413
Provision for losses ............ 3,576 2,625 2,241
Recoveries on loans ............. 573 579 447
Loans charged off ............... (3,547) (2,291) (1,769)
-------- -------- --------
Balance, December 31 ............ $ 15,141 $ 12,454 $ 10,128
======== ======== ========
Information on impaired loans is summarized below: 2001 2000 1999
==================================================================================================================
As of, and for the year ending December 31:
Impaired loans with an allowance .......................... $10,381 $ 7,862 $2,742
Impaired loans for which the discounted
cash flows or collateral value exceeds the
carrying value of the loan ............................ 10,780 6,977 4,398
------- ------- ------
Total impaired loans ............................... $21,161 $14,839 $7,140
======= ======= ======
Allowance for impaired loans (included in the
Corporation's allowance for loan losses) .............. $ 3,251 $ 2,253 $1,061
Average balance of impaired loans ......................... 22,327 15,053 8,770
Interest income recognized on impaired loans .............. 1,538 1,361 705
Cash basis interest included above ........................ 1,555 1,080 637
The Corporation has entered into transactions with certain directors,
executive officers, significant stockholders, and their affiliates or associates
("related parties"). Such transactions were made in the ordinary course of
business on substantially the same terms and conditions, including interest
rates and collateral, as those prevailing at the same time for comparable
transactions with other customers, and did not, in the opinion of management,
involve more than normal credit risk or present other unfavorable features.
The aggregate amount of loans, as defined, to such related parties is as
follows:
Balances, January 1, 2001 ........ $12,118
New loans,
including renewals............. 493
Payments, etc.,
including renewals............. (3,357)
-------
Balances, December 31, 2001 ...... $ 9,254
=======
26
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 6
PREMISES AND EQUIPMENT
2001 2000
================================================================================
Cost at December 31:
Land .......................................... $ 5,626 $ 4,020
Buildings and leasehold improvements .......... 26,747 21,662
Equipment ..................................... 26,127 24,284
-------- --------
Total cost ................................ 58,500 49,966
Accumulated depreciation and amortization ..... (30,816) (26,098)
-------- --------
Net ....................................... $ 27,684 $ 23,868
======== ========
The Corporation is committed under various noncancelable lease contracts
for certain subsidiary office facilities. Total lease expense for 2001, 2000 and
1999 was $771,000, $515,000, and $336,000, respectively. The future minimum
rental commitments required under the operating leases in effect at December 31,
2001, expiring at various dates through the year 2013 are as follows for the
years ending December 31:
====================================================
2002 ................................ $ 630
2003 ................................ 471
2004 ................................ 308
2005 ................................ 169
2006 ................................ 145
After 2006 ........................... 450
------
Total future minimum obligations $2,173
======
NOTE 7
DEPOSITS
2001 2000
================================================================================
Deposits at December 31:
Demand deposits ............................. $ 418,481 $ 354,911
Savings deposits ............................ 366,084 299,868
Certificates and other time deposits
of $100,000 or more ....................... 192,400 199,410
Other certificates and time deposits ........ 444,286 434,110
---------- ----------
Total deposits .......................... $1,421,251 $1,288,299
========== ==========
=====================================================
Certificates and other time deposits maturing
in years ending December 31:
2002 ....................... $448,074
2003 ....................... 105,192
2004 ....................... 58,332
2005 ....................... 17,704
2006 ....................... 7,010
After 2006 ................. 374
--------
$636,686
========
27
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 8
BORROWINGS
2001 2000
================================================================================
Borrowings at December 31:
Securities sold under repurchase agreements ....... $ 45,632 $ 64,456
Federal funds purchased ........................... 10,500 975
U. S. Treasury demand notes ....................... 6,273 4,968
Federal Home Loan Bank advances ................... 103,499 93,182
Other borrowed funds............................... 8,500
-------- --------
Total borrowings .............................. $174,404 $163,581
======== ========
Securities sold under repurchase agreements consist of obligations of the
Banks to other parties. The obligations are secured by U.S. Treasury, Federal
agency obligations and corporate asset-backed securities. The maximum amount of
outstanding agreements at any month-end during 2001 and 2000 totaled $68,546,000
and $80,489,000, and the average of such agreements totaled $59,365,000 and
$69,953,000.
Maturities of Federal Home Loan Bank advances and securities sold under
repurchase agreements as of December 31, 2001, are as follows:
FEDERAL HOME LOAN SECURITIES SOLD UNDER
BANK ADVANCES REPURCHASE AGREEMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
AMOUNT INTEREST RATE AMOUNT INTEREST RATE
====================================================================================================================================
Maturities in years ending December 31:
2002 .............. $ 25,790 6.26% $22,732 3.27%
2003 .............. 12,000 4.86 13,800 5.80
2004 .............. 16,000 4.96 9,100 5.68
2005 .............. 11,500 5.51
2006 .............. 13,000 5.45
After 2006 ........ 25,209 5.60
-------- -------
Total ...... $103,499 5.55% $45,632 4.51%
======== =======
The terms of a security agreement with the FHLB require the Corporation to
pledge, as collateral for advances, qualifying first mortgage loans and all
otherwise unpledged investment securities in an amount equal to at least 160
percent of these advances. Advances are subject to restrictions or penalties in
the event of prepayment.
Other borrowed funds consists of an unsecured revolving credit note payable
to the Northern Trust Company with interest payable monthly based upon the
Federal Funds Rate plus .875%. Principal and remaining interest are due on or
before July 9, 2002. The total principal amount outstanding at any one time may
not exceed $10,000,000.
The Corporation has filed a registration statement with the Securities
and Exchange Commission for the issuance of trust preferred securities by newly
created business trusts. The aggregate initial offering price of the preferred
securities offered by the trusts will not exceed $70,000,000. The trusts will
offer the preferred securities in amounts, at prices and on terms to be
determined by market conditions at the time of the offerings.
28
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 8
BORROWINGS continued
The proceeds of the offering will be loaned to the Corporation by the
trusts in exchange for subordinated debentures with terms that are similar to
the preferred securities and will be recorded as debt in the Corporation's
consolidated financial statements. The subordinated debentures will be the sole
asset of the trusts. Issuance costs will be amortized over the life of the
preferred securities. The Corporation will guarantee the preferred securities
and distributions.
NOTE 9
LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The loans are serviced primarily for the Federal
Home Loan Mortgage Corporation, and the unpaid balances totaled $37,909,000,
$22,591,000 and $22,769,000 at December 31, 2001, 2000 and 1999.
NOTE 10
INCOME TAX
2001 2000 1999
====================================================================================================================================
Income tax expense for the year ended December 31:
Currently payable:
Federal ................................................................. $ 9,098 $ 9,236 $ 8,491
State ................................................................... 2,210 1,499 2,730
Deferred:
Federal ................................................................. 406 (715) (939)
State ................................................................... 210 (52) (183)
-------- -------- --------
Total income tax expense ............................................. $ 11,924 $ 9,968 $ 10,099
======== ======== ========
Reconciliation of federal statutory to actual tax expense:
Federal statutory income tax at 34% ..................................... $ 11,539 $ 10,169 $ 9,924
Tax-exempt interest ..................................................... (1,319) (1,308) (1,555)
Graduated tax rates ..................................................... 312 299 291
Effect of state income taxes ............................................ 1,597 941 1,656
Other ................................................................... (205) (133) (217)
-------- -------- --------
Actual tax expense ................................................... $ 11,924 $ 9,968 $ 10,099
======== ======== ========
Tax expense (benefit) applicable to security gains and losses for the years
ended December 31, 2001, 2000 and 1999, was ($80,000), $(43,000), and $103,000,
respectively.
29
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 10
INCOME TAX continued
A cumulative net deferred tax asset is included in other assets. The components
of the asset are as follows:
2001 2000
=====================================================================================================================
Deferred tax asset at December 31:
Assets:
Differences in accounting for loan losses ............................. $5,103 $5,110
Deferred compensation ................................................. 1,069 923
Net unrealized loss on securities available for sale .................. 88
Other ................................................................. 268 217
------ ------
Total assets ...................................................... 6,440 6,338
------ ------
Liabilities:
Differences in depreciation methods ................................... 838 754
Differences in accounting for loans and securities .................... 2,137 173
Differences in accounting for loan fees ............................... 436 413
Differences in accounting for pensions
and other employee benefits ......................................... 315 177
State income tax ...................................................... 115 256
Net unrealized gain on securities available for sale................... 1,464
Other ................................................................. 756 455
------ ------
Total liabilities ................................................. 6,061 2,228
------ ------
Net deferred tax asset ............................................ $ 379 $4,110
====== ======
NOTE 11
COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements. The
Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual or notional amount
of those instruments. The Banks use the same credit policies in making such
commitments as they do for instruments that are included in the consolidated
balance sheets.
Financial instruments whose contract amount represents credit risk as of
December 31, were as follows:
2001 2000
-------- --------
Commitments
to extend credit $199,656 $220,613
Standby letters
of credit 9,806 6,558
30
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 11
COMMITMENTS AND CONTINGENT LIABILITIES continued
Commitments to extend credit are agreements to lend to a customer, as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Banks evaluate each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Banks upon extension of credit, is based on management's credit
evaluation. Collateral held varies, but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Banks
to guarantee the performance of a customer to a third party.
The Corporation and subsidiaries are also subject to claims and lawsuits,
which arise primarily in the ordinary course of business. It is the opinion of
management that the disposition or ultimate resolution of such claims and
lawsuits will not have a material adverse effect on the consolidated financial
position of the Corporation.
NOTE 12
STOCKHOLDERS' EQUITY
National and state banking laws restrict the maximum amount of dividends
that a bank may pay in any calendar year. National and state banks are limited
to the bank's retained net income (as defined) for the current year plus those
for the previous two years. At December 31, 2001, the Banks' had no retained net
profits available for 2002 dividends to the Corporation without prior regulatory
approval.
Total stockholders' equity for all subsidiaries at December 31, 2001, was
$180,048,000, of which $178,245,000 was restricted from dividend distribution to
the Corporation.
The Corporation has a Dividend Reinvestment and Stock Purchase Plan,
enabling stockholders to elect to have their cash dividends on all shares held
automatically reinvested in additional shares of the Corporation's common
stock. In addition, stockholders may elect to make optional cash payments up to
an aggregate of $2,500 per quarter for the purchase of additional shares of
common stock. The stock is credited to participant accounts at fair market
value. Dividends are reinvested on a quarterly basis. At December 31, 2001,
there were 388,176 shares of common stock reserved for purchase under the plan.
31
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 12
STOCKHOLDERS' EQUITY continued
On August 14, 2001, the Board of Directors of the Corporation declared a
five percent (5%) stock dividend on its outstanding common shares. The new
shares were distributed on September 24, 2001, to holders of record on September
3, 2001.
NOTE 13
REGULATORY CAPITAL
The Corporation and Banks are subject to various regulatory capital
requirements administered by the federal banking agencies and are assigned to a
capital category. The assigned capital category is largely determined by three
ratios that are calculated according to the regulations: total risk adjusted
capital, Tier 1 capital, and Tier 1 leverage ratios. The ratios are intended to
measure capital relative to assets and credit risk associated with those assets
and off-balance sheet exposures of the entity. The capital category assigned to
an entity can also be affected by qualitative judgments made by regulatory
agencies about the risk inherent in the entity's activities that are not part of
the calculated ratios.
There are five capital categories defined in the regulations, ranging from
well capitalized to critically undercapitalized. Classification of a bank in any
of the undercapitalized categories can result in actions by regulators that
could have a material effect on a bank's operations.
At December 31, 2001, the management of the Corporation believes that it
meets all capital adequacy requirements to which it is subject. The most recent
notifications from the regulatory agencies categorized the Corporation and Banks
as well capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Banks must maintain a minimum total
capital to risk-weighted assets, Tier I capital to risk-weighted assets and Tier
I capital to average assets of 10 percent, 6 percent and 5 percent,
respectively. There have been no conditions or events since that notification
that management believes have changed this categorization.
32
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 13
REGULATORY CAPITAL continued
Actual and required capital amounts and ratios are listed below.
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
REQUIRED FOR REQUIRED FOR
ACTUAL ADEQUATE CAPITAL (1) ACTUAL ADEQUATE CAPITAL (1)
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
====================================================================================================================================
December 31
Total Capital (1)(to risk-weighted assets)
Consolidated ...................... $159,315 11.75% $108,514 8.00% $147,609 12.72% $ 92,814 8.00%
First Merchants ................... 70,562 11.69 48,281 8.00 62,220 10.92 45,600 8.00
Madison ........................... 19,329 11.61 13,320 8.00 19,860 12.24 12,979 8.00
First United ...................... 8,245 13.17 5,009 8.00 7,982 11.49 5,560 8.00
Randolph County ................... 7,009 11.97 4,684 8.00 6,665 10.46 5,096 8.00
Union County ...................... 17,897 13.50 10,606 8.00 17,867 13.21 10,821 8.00
First National .................... 10,387 12.34 6,731 8.00 9,386 11.12 6,750 8.00
Decatur ........................... 11,871 14.41 6,588 8.00 10,678 12.37 6,904 8.00
Frances Slocum..................... 13,634 10.25 10,638 8.00
Tier I Capital (1)(to risk-weighted assets)
Consolidated ...................... $144,174 10.63% $ 54,257 4.00% $135,155 11.65% $ 46,407 4.00%
First Merchants ................... 64,817 10.74 24,140 4.00 57,403 10.07 22,800 4.00
Madison ........................... 17,852 10.72 6,660 4.00 18,094 11.15 6,489 4.00
First United ...................... 7,546 12.05 2,504 4.00 7,306 10.51 2,780 4.00
Randolph County ................... 6,277 10.72 2,342 4.00 5,868 9.21 2,548 4.00
Union County ...................... 16,332 12.32 5,303 4.00 16,227 12.00 5,411 4.00
First National .................... 9,389 11.16 3,366 4.00 8,331 9.87 3,375 4.00
Decatur ........................... 10,834 13.16 3,294 4.00 9,593 11.12 3,452 4.00
Frances Slocum..................... 12,007 9.03 5,319 4.00
Tier I Capital (1) (to average assets)
Consolidated ...................... $144,174 8.70% $ 66,298 4.00% $135,155 8.72% $ 62,023 4.00%
First Merchants ................... 64,817 8.17 31,737 4.00 57,403 7.47 30,742 4.00
Madison ........................... 17,852 8.24 8,667 4.00 18,094 8.80 8,228 4.00
First United ...................... 7,546 9.52 3,171 4.00 7,306 8.12 3,597 4.00
Randolph County ................... 6,277 7.73 3,250 4.00 5,868 7.13 3,293 4.00
Union County ...................... 16,332 7.94 8,227 4.00 16,227 7.26 8,946 4.00
First National .................... 9,389 7.93 4,736 4.00 8,331 7.30 4,562 4.00
Decatur ........................... 10,834 8.40 5,159 4.00 9,593 7.49 5,123 4.00
Frances Slocum..................... 12,007 7.05 6,809 4.00
(1) as defined by regulatory agencies
NOTE 14
EMPLOYEE BENEFIT PLANS
The Corporation's defined-benefit pension plans cover substantially all of
the Corporation's employees. The benefits are based primarily on years of
service and employees' pay near retirement. Contributions are intended to
provide not only for benefits attributed to service-to-date, but also for those
expected to be earned in the future.
33
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 14
EMPLOYEE BENEFIT PLANS continued
The table below sets forth the plans' funded status and amounts recognized
in the consolidated balance sheets at December 31:
December 31
2001 2000
===========================================================================
Change in benefit obligation
Benefit obligation at beginning of year ...... $ 16,953 $ 15,806
Service cost ................................. 926 714
Interest cost ................................ 1,269 1,181
Actuarial loss ............................... 1,969 180
Benefits paid ................................ (1,024) (928)
-------- --------
Benefit obligation at end of year ............ 20,093 16,953
-------- --------
Change in plan assets
Fair value of plan assets at beginning of year 23,967 22,325
Actual return (loss) on plan assets .......... (2,305) 2,570
Benefits paid ................................ (1,024) (928)
-------- --------
Fair value of plan assets at end of year ..... 20,638 23,967
-------- --------
Funded status ................................ 545 7,014
Unrecognized net actuarial (gain) loss........ 363 (6,315)
Unrecognized prior service cost .............. (107) (119)
Unrecognized transition asset ................ (69) (206)
-------- --------
Prepaid benefit cost ......................... $ 732 $ 374
======== ========
2001 2000 1999
==============================================================================================
Pension benefit includes the following components:
Service cost-benefits earned during the year ............ $ 926 $ 714 $ 737
Interest cost on projected benefit obligation ........... 1,269 1,181 1,081
Actual (return) loss on plan assets ..................... 2,305 (2,570) (3,871)
Net amortization and deferral ........................... (4,858) 160 1,915
------- ------- -------
Total pension benefit ................................ $ (358) $ (515) $ (138)
======= ======= =======
2001 2000 1999
==============================================================================================
Assumptions used in the accounting as of December 31 were:
Discount rate ........................................ 7.11% 7.70% 7.68%
Rate of increase in compensation ..................... 4.00% 4.00% 4.00%
Expected long-term rate of return on assets .......... 9.00% 9.00% 9.00%
The 1994 Stock Option Plan reserved 496,125 shares of Corporation common
stock for the granting of options to certain employees and non-employee
directors. The exercise price of the shares may not be less than the fair market
value of the shares upon the grant of the option. Options become 100 percent
vested when granted and are fully exercisable generally six months after the
date of the grant, for a period of ten years. There were no shares available for
grant.
34
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 14
EMPLOYEE BENEFIT PLANS continued
The 1999 Long-term Equity Incentive Plan reserved 1,260,000 shares
of Corporation common stock for the granting of options to certain employees and
non-employee directors. The maximum number of options granted in any given year
cannot exceed 1.5% of the shares outstanding at the end of the prior fiscal
year. Options,which have a ten year life, become 100 percent vested ranging from
six month to two years and are fully exercisable when vested. There were
984,504 shares available for grant at December 31, 2001.
The table below is a summary of the status of the Corporation's stock
option plans and changes in those plans as of and for the years ended December
31, 2001, 2000 and 1999. The number of shares and prices have been restated to
give effect to the Corporation's 2001 stock dividend.
Year Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
====================================================================================================================================
Outstanding, beginning of year ................ 597,089 $ 18.89 596,695 $ 18.63 521,854 $ 16.78
Granted ....................................... 127,829 21.72 135,398 20.29 143,220 21.15
Exercised ..................................... (24,237) 10.81 (50,297) 15.37 (67,040) 9.34
Cancelled ..................................... (3,701) 21.88 (84,707) 21.27 (1,339) 23.41
------- ------- -------
Outstanding, end of year ...................... 696,980 $ 19.75 597,089 $ 18.89 596,695 $ 18.63
======= ======= =======
Options exercisable at year end ............... 471,392 469,646 465,156
Weighted-average fair value of
options granted during the year ............ $ 6.30 $ 5.22 $ 5.50
As of December 31, 2001, other information by exercise price range for options
outstanding and exercisable is as follows:
OUTSTANDING EXERCISABLE
- --------------------------------------------------------------------------------- -------------------------------
EXERCISE PRICE NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OF SHARES EXERCISE PRICE REMAINING CONTRACTUAL LIFE OF SHARES EXERCISE PRICE
==========================================================================================================================
$ 0.00 - $19.92 265,534 $15.43 3.8 years 263,270 $15.56
20.09 - 21.75 319,664 21.15 8.7 years 96,351 21.44
22.56 - 28.99 111,782 25.99 6.9 years 111,771 25.99
------- -------
696,980 $19.75 6.5 years 471,392 $19.23
======= =======
The Corporation's stock option plans are accounted for in accordance with
Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued
to Employees, and related interpretations. APB No. 25 requires compensation
expense for stock options to be recognized only if the market price of the
underlying stock exceeds the exercise price on the date of the grant.
Accordingly, the Corporation recognized compensation expense of $23,000 in 2001,
$23,000 in 2000 and $35,000 in 1999.
Although the Corporation has elected to follow APB No. 25, SFAS No. 123
requires pro forma disclosures of net income and earnings per share as if the
Corporation had accounted for its employee stock options under that Statement.
35
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 14
EMPLOYEE BENEFIT PLANS continued
The fair value of each option grant was estimated on the grant date using
an option-pricing model with the following assumptions:
2001 2000 1999
Risk-free interest rates........ 5.32% 6.01% 5.72%
Dividend yields................. 3.59% 3.38% 3.23%
Volatility factors of expected
market price common stock... 30.95% 22.86% 21.98%
Weighted-average expected
life of the options ........ 8.50 years 8.50 years 8.50 years
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this statement are shown as follows:
2001 2000 1999
Net Income
As reported.................... $22,209 $19,940 $19,088
Pro Forma...................... 21,630 19,481 18,661
Earnings per share
Basic:
As reported.................... $1.79 $1.67 $1.51
Pro forma...................... 1.74 1.63 1.47
Diluted:
As reported.................... $1.78 $1.66 $1.50
Pro forma...................... 1.73 1.62 1.46
The 1999 Employee Stock Purchase Plan enables eligible employees to
purchase the Corporation's common stock. A total of 262,500 shares of the
Corporation's common stock were initially reserved for issuance pursuant to the
plan. The price of the stock to be paid by the employees is determined by the
Corporation's compensation committee, but may not be less than 85 percent of the
lesser of the fair market value of the Corporation's common stock at the
beginning or at the end of the offering period. Common stock purchases are made
annually and are paid through advance payroll deductions of up to 20 percent of
eligible compensation. Participants under the plan purchased 28,466 in 2001 at
$17.69 per share. The fair value on the purchase date was $19.41.
36
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 14
EMPLOYEE BENEFIT PLANS continued
At December 31, 2001, there were 221,534 shares of Corporation common stock
reserved for purchase under the plan, and $336,000 has been withheld from
compensation, plus interest, toward the purchase of shares after June 30, 2002,
the end of the annual offering period.
The Corporation's Employee Stock Purchase Plan is accounted for in
accordance with APB No. 25. Although the Corporation has elected to follow APB
No. 25, SFAS No. 123 requires pro forma disclosures of net income and earnings
per share as if the Corporation had accounted for the purchased shares under
that statement. The pro forma disclosures are included in the table on the
previous page and were estimated using an option pricing model with the
following assumptions for 2001, 2000 and 1999, respectively: dividend yield of
3.59, 3.38, and 3.23 percent; an expected life of one year for all years;
expected volatility of 30.95, 22.86, and 21.98 percent; and risk-free interest
rates of 5.32, 6.01 and 5.72 percent. The fair value of those purchase rights
granted in 2001, 2000 and 1999 was $5.63, $4.01 and $4.50 respectively.
The Corporation has a retirement savings 401(k) plans in which
substantially all employees may participate. The Corporation matches employees'
contributions at the rate of 25 to 50 percent for the first 5 to 6 percent of
base salary contributed by participants. The Corporations' expense for the plans
was $190,000 for 2001, $182,000 for 2000 and $191,000 for 1999.
NOTE 15
NET INCOME PER SHARE
==================================================================================================================================
Year Ended December 31, 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE PER SHARE WEIGHTED-AVERAGE PER SHARE WEIGHTED-AVERAGE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
==================================================================================================================================
Basic net income per share:
Net income available to
common stockholders .......... $22,209 12,399,985 $1.79 $19,940 11,909,457 $1.67 $19,088 12,608,560 $1.51
Effect of dilutive stock options . 89,344 ===== 82,819 ===== 114,194 =====
------- ---------- ------- ---------- ------- ----------
Diluted net income per share:
Net income available to
common stockholders
and assumed conversions ...... $22,209 12,489,329 $1.78 $19,940 11,992,276 $1.66 $19,088 12,722,754 $1.50
======= ========== ===== ======= ========== ===== ======= ========== =====
Options to purchase 112,024, 217,817 and 118,941 shares of common stock
with weighted average exercise prices of of $26.00, $23.75 and $25.87 at
December 31, 2001, 2000 and 1999 were excluded from the computation of diluted
net income per share because the options exercise price was greater than the
average market price of the common stock.
37
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 16
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS The fair value of cash and cash equivalents
approximates carrying value.
INTEREST-BEARING TIME DEPOSITS The fair value of interest-bearing time deposits
approximates carrying value.
INVESTMENT SECURITIES Fair values are based on quoted market prices.
MORTGAGE LOANS HELD FOR SALE The fair value of mortgages held for sale
approximates carrying values.
LOANS For both short-term loans and variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values. The fair value for other loans is estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
INTEREST RECEIVABLE/PAYABLE The fair values of interest receivable/payable
approximate carrying values.
FEDERAL RESERVE AND FEDERAL HOME LOAN BANK STOCK The fair value of FRB and FHLB
stock is based on the price at which it may be resold to the FRB and FHLB.
CASH SURRENDER VALUE OF LIFE INSURANCE The fair value of cash surrender value of
life insurance approximates carrying value.
DEPOSITS The fair values of noninterest-bearing demand accounts,
interest-bearing demand accounts and savings deposits are equal to the amount
payable on demand at the balance sheet date. The carrying amounts for variable
rate, fixed-term certificates of deposit approximate their fair values at the
balance sheet date. Fair values for fixed-rate certificates of deposit and other
time deposits are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on such time deposits.
38
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 16
FAIR VALUES OF FINANCIAL INSTRUMENTS continued
FEDERAL FUNDS PURCHASED, U.S. TREASURY DEMAND NOTES AND OTHER BORROWED FUNDS
These financial instruments are short-term borrowing arrangements. The rates at
December 31, approximate market rates, thus the fair value approximates carrying
value.
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND FEDERAL HOME LOAN BANK ADVANCES
The fair value of the these borrowings is estimated using a discounted cash flow
calculation, based on current rates for similar debt.
OFF-BALANCE SHEET COMMITMENTS
Loan commitments and letters-of-credit generally have short-term, variable-rate
features and contain clauses which limit the Banks' exposure to changes in
customer credit quality. Accordingly, their carrying values, which are
immaterial at the respective balance sheet dates, are reasonable estimates of
fair value.
The estimated fair values of the Corporation's financial instruments are as
follows:
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
====================================================================================================================================
Assets at December 31:
Cash and cash equivalents ................................... $ 103,028 $ 103,028 $ 67,463 $ 67,463
Interest-bearing time deposits .............................. 3,871 3,871 883 883
Investment securities available for sale .................... 231,668 231,668 295,730 295,730
Investment securities held to maturity ...................... 8,654 8,762 12,233 12,328
Mortgage loans held for sale ................................ 307 307
Loans ....................................................... 1,344,445 1,386,515 1,163,132 1,157,723
FRB and FHLB stock .......................................... 8,350 8,350 7,185 7,185
Interest receivable ......................................... 12,024 12,024 13,135 13,135
Cash surrender of life insurance............................. 6,470 6,470 6,312 6,312
Liabilities at December 31:
Deposits .................................................... 1,421,251 1,448,336 1,288,299 1,286,762
Borrowings:
Securities sold under repurchase agreements ............. 45,632 45,939 64,456 64,558
Federal funds purchased ................................. 10,500 10,500 975 975
U.S. Treasury demand notes .............................. 6,273 6,273 4,968 4,968
FHLB advances ........................................... 103,499 105,955 93,182 92,387
Other borrowed funds..................................... 8,500 8,500
Interest payable ............................................ 5,488 5,488 6,335 6,335
39
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 17
CONDENSED FINANCIAL INFORMATION (parent company only)
Presented below is condensed financial information as to financial
position, results of operations, and cash flows of the Corporation:
CONDENSED BALANCE SHEET
December 31,
2001 2000
================================================================================
Assets
Cash .............................................. $ 3,041 $ 13,184
Investment securities available for sale........... 3,500
Investment in subsidiaries ........................ 180,423 143,903
Goodwill .......................................... 448 485
Other assets ...................................... 1,396 378
-------- --------
Total assets ................................... $188,808 $157,950
======== ========
Liabilities
Borrowings ........................................ $ 8,500
Other liabilities ................................. 1,180 $ 1,887
-------- --------
Total liabilities .............................. 9,680 1,887
Stockholders' equity ................................. 179,128 156,063
-------- --------
Total liabilities and stockholders' equity ..... $188,808 $157,950
======== ========
CONDENSED STATEMENT OF INCOME
December 31,
2001 2000 1999
====================================================================================================================================
Income
Dividends from subsidiaries ................................................ $ 20,245 $ 71,705 $ 9,894
Gain on sale of available-for-sale securities .............................. 98
Administrative services fees................................................ 4,133
Other income ............................................................... 269 174 112
-------- -------- --------
Total income ............................................................ 24,647 71,879 10,104
-------- -------- --------
Expenses
Amortization of core deposit intangibles,
goodwill, and fair value adjustments ...................................... 66 50 43
Business combination expenses .............................................. 804
Interest expense............................................................ 88 788
Salaries and employee benefits.............................................. 4,767 185 388
Net occupancy expenses...................................................... 1,002 11 12
Equipment expenses.......................................................... 898 18 9
Telephone expenses.......................................................... 547
Other expenses.............................................................. 1,003 581 425
-------- -------- --------
Total expenses .......................................................... 8,371 1,633 1,681
-------- -------- --------
Income before income tax benefit and equity in
undistributed income of subsidiaries ......................................... 16,276 70,246 8,423
Income tax benefit ...................................................... (1,567) (496) (321)
-------- -------- --------
Income before equity in undistributed income of subsidiaries ................. 17,843 70,742 8,744
Equity in undistributed (distributions in excess of)
income of subsidiaries ................................................... 4,366 (50,802) 10,344
-------- -------- --------
Net Income ................................................................... $ 22,209 $ 19,940 $ 19,088
======== ======== ========
40
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 17
CONDENSED FINANCIAL INFORMATION (parent company only)
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31,
=====================================================================================================================
2001 2000 1999
=====================================================================================================================
Operating activities:
Net income ........................................................ $ 22,209 $ 19,940 $ 19,088
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization .................................................... 66 50 43
Distributions in excess of (equity in undistributed)
income of subsidiaries ............... ........................ (4,366) 50,802 (10,344)
Security gains .................................................. (98)
Net change in:
Other assets ................................................. (1,274) (36) (53)
Other liabilities ............................................ (842) 1,270 349
-------- -------- --------
Net cash provided by operating activities ................. 15,793 72,026 8,985
-------- -------- --------
Investing activities:
Net change in loans ............................................... 2,350 (850)
Purchase of securities available for sale.......................... (3,500)
Proceeds from sales of securities available for sale .............. 383
Investment in subsidiary .......................................... (14,296) (14,159)
Other investing activities ........................................ 55
-------- -------- --------
Net cash used by investing activities ..................... (17,796) (11,809) (412)
-------- -------- --------
Financing activities:
Cash dividends .................................................... (11,127) (10,331) (9,759)
Borrowing from affiliates ......................................... 13,000 32,000
Repayment of borrowings from affiliates ........................... (45,000)
Borrowings......................................................... 8,500
Stock issued under employee benefit plans ......................... 504 481 457
Stock issued under dividend reinvestment
and stock purchase plan ......................................... 803 811 722
Stock options exercised ........................................... 225 510 271
Stock redeemed .................................................... (7,023) (6,712) (32,136)
Cash paid in lieu of issuing fractional shares .................... (22) (4)
-------- -------- --------
Net cash used by financing activities ..................... (8,140) (47,245) (8,445)
-------- -------- --------
Net change in cash ................................................... (10,143) 12,972 128
Cash, beginning of year .............................................. 13,184 212 84
-------- -------- --------
Cash, end of year .................................................... $ 3,041 $ 13,184 $ 212
======== ======== ========
NOTE 18
NEW ACCOUNTING PRONOUNCEMENT
The FASB recently adopted SFAS 142, "Goodwill and Other Intangible Assets".
This Statement establishes new financial accounting and reporting standards for
acquired goodwill and other intangible assets. The Statement addresses how
intangible assets that are acquired individually or with a group of other assets
(but not those acquired in a business combination) should be accounted for in
financial statements upon their acquisition. It also addresses how goodwill and
other intangible assets (including those acquired in a business combination)
should be accounted for after they have been initially recognized in the
financial statements. SFAS 142 is effective for fiscal years beginning after
December 15, 2001. The Corporation expects to apply SFAS 142 in the first
quarter of its fiscal year ending December 31, 2002. Upon adoption of SFAS 142,
the Corporation will no longer amortize the goodwill it currently has recorded
in the consolidated financial statements. Goodwill will be reviewed for
impairment in accordance with SFAS 142. Amortization of goodwill for the period
ended December 31, 2001 totaled $1,003,000.
41
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 19
QUARTERLY RESULTS OF OPERATIONS (unaudited)
The following table sets forth certain quarterly results for the years ended
December 31, 2001 and 2000:
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE SHARES OUTSTANDING NET INCOME PER SHARE
QUARTER INTEREST INTEREST NET INTEREST PROVISION FOR NET -------------------------- --------------------
ENDED INCOME EXPENSE INCOME LOAN LOSSES INCOME BASIC DILUTED BASIC DILUTED
2001:
March ............ $ 30,088 $ 15,399 $ 14,689 $ 653 $ 5,106 12,178,006 12,262,050 $ .42 $ .42
June ............. 29,267 13,997 15,270 695 5,574 12,024,871 12,105,173 .46 .46
September......... 31,558 14,296 17,262 1,023 6,020 12,711,385 12,804,017 .48 .47
December.......... 29,522 12,382 17,140 1,205 5,509 12,676,774 12,782,452 .43 .43
---------- ---------- ----------- -------- -------- ----- -----
$ 120,435 $ 56,074 $ 64,361 $ 3,576 $ 22,209 12,399,985 12,489,329 $1.79 $1.78
========== ========== =========== ======== ======== ===== =====
2000:
March ............ $ 26,574 $ 13,301 $ 13,273 $ 479 $ 4,820 11,449,253 11,557,764 $ .41 $ .41
June ............. 28,097 14,307 13,790 665 5,003 11,645,787 11,716,711 .43 .43
September......... 30,616 16,202 14,414 603 5,275 12,273,134 12,349,071 .43 .43
December.......... 31,241 16,736 14,505 878 4,842 12,264,391 12,350,840 .40 .39
---------- ---------- ----------- -------- -------- ----- -----
$ 116,528 $ 60,546 $ 55,982 $ 2,625 $ 19,940 11,909,457 11,992,276 $1.67 $1.66
========== ========== =========== ======== ======== ===== =====
42
================================================================================
STOCKHOLDER INFORMATION
================================================================================
First Merchants Corporation, a financial holding company based in Muncie,
Indiana, was organized in September of 1982 as the bank holding company for
Merchants National Bank of Muncie, now First Merchants Bank, N.A. Since its
organization, First Merchants Corporation has grown to include eight affiliate
banks, multi-line insurance agency and an offshore reinsurance company with over
48 locations in 13 Indiana counties and one Ohio county.
Affiliates include First Merchants Bank, First Merchants Insurance Services,
Madison Community Bank in Madison County, First United Bank in Henry County, the
Randolph County Bank, First National Bank of Portland, Union County National
Bank, Decatur Bank & Trust Company and Frances Slocum Bank & Trust Company in
Miami County. The Company also operates a "non-chartered" branch affiliate,
First Merchants Bank-Hamilton County with six locations.
The Corporation's Trust Division, which operates through First Merchants Bank,
is one of the ten largest trust departments in Indiana with fiduciary assets in
excess of $1.37 billion dollars at market value through year-end 2001.
First Merchants Corporation completed its 26th consecutive year of increased
earnings at the end of 2001. In addition, the Corporation continues to receive
an A+ rating from Standard & Poor's for its common stock (NASDAQ symbol FRME).
First Merchants' operating philosophy is to be customer focused, value driven,
plan disciplined and managed for achievers from both an employee and shareholder
perspective.
Corporate Office
200 East Jackson Street
Muncie, Indiana 47305
765-747-1500
http://www.firstmerchants.com
43
================================================================================
ANNUAL MEETING
================================================================================
First Merchants Corporation currently provides services through offices located
in Adams, Delaware, Fayette, Hamilton, Henry, Howard, Jay, Madison, Miami,
Wabash, Wayne, Randolph and Union counties in Indiana and Butler county in Ohio.
The Annual Meeting of Stockholders
of First Merchants Corporation
will be held...
Thursday, April 11, 2002 at 3:30 p.m.
Horizon Convention Center
401 South High Street
Muncie, Indiana
STOCK INFORMATION
PRICE PER SHARE
QUARTER HIGH LOW DIVIDENDS DECLARED
================================================================================================================================
2001 2000 2001 2000 2001 2000
------------------------- -------------------------- ---------------------------
First Quarter ............. $ 24.05 $ 25.36 $ 19.94 $ 18.93 $ .230 $ .209
Second Quarter ............. 22.79 21.79 20.71 17.62 .230 .209
Third Quarter .............. 24.75 21.90 20.96 18.33 .230 .219
Fourth Quarter ............. 24.97 22.74 22.65 20.71 .230 .219
The table above lists per share prices and dividend payments during 2001 and
2000. Prices are as reported by the National Association of Securities Dealers.
Automated Quotation - National Market System.
Numbers rounded to nearest cent when applicable.
Common stock listing
First Merchants Corporation common stock is traded over-the-counter on the
NASDAQ National Market System. Quotations are carried in many daily papers. The
NASDAQ symbol is FRME (Cusip #320817-10-9). At the close of business on December
31, 2001, the number of shares outstanding was 12,670,307. There were 2,483
stockholders of record on that date.
General stockholder inquiries
Stockholders and interested investors may obtain information about the
Corporation upon written request or by calling:
Mr. Brian Edwards
Shareholder Relations Officer
First Merchants Corporation
P. O. Box 792
Muncie, Indiana 47308-0792
765-741-7278
1-800-262-4261 Ext. 7278
Stock transfer agent and registrar
First Merchants Bank, N.A.
Corporate Trust Department
P. O. Box 792
Muncie, Indiana 47308-0792
44
================================================================================
STOCK PRICE & DIVIDEND INFORMATION
================================================================================
MARKET MAKERS
The following firms make a market in First Merchants Corporation stock:
Midwest Research First Tennessee
Keefe, Bruyette & Woods, Inc.
Knight Securities, L.P.
Herzog, Heine, Geduld, Inc.
Howe Barnes Investments, Inc.
Sandler O'Neill & Partners
NatCity Investments, Inc.
Sherwood Securities Corp.
Spear, Leeds, & Kellog
Dain Rauscher, Inc.
Stifel, Nicolaus & Company, Inc.
FORM 10-K AND FINANCIAL INFORMATION
First Merchants Corporation, upon request and without charge, will furnish
stockholders, security analysts and investors a copy of Form 10-K filed with the
Securities and Exchange Commission.
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; that address is http://www.sec.gov
Please contact:
Mr. James Thrash
Senior Vice President
and Chief Financial Officer
First Merchants Corporation
P. O. Box 792
Muncie, Indiana 47308-0792
765-747-1390
1-800-262-4261 Ext. 1390
45
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT
- --------------------------------------------------------------------------------
State of
Name Incorporation
- ---- -------------
First Merchants Bank, National Association (also doing
business as First Merchants Bank of Hamilton County)....U.S.
The Madison Community Bank..............................Indiana
First United Bank.......................................Indiana
The Union County National Bank of Liberty.................U.S.
The Randolph County Bank................................Indiana
The First National Bank of Portland.......................U.S.
Decatur Bank & Trust Company.............................Indiana
Frances Slocum Bank & Trust Company......................Indiana
First Merchants Capital Trust I.........................Delaware
First Merchants Capital Trust II........................Delaware
First Merchants Capital Trust III.......................Delaware
First Merchants Insurance Services, Inc.................Indiana
First Merchants Reinsurance Co. Ltd.....................Providencials Turkes and
Caicos, Island
Indiana Title Insurance Company.........................Indiana
Indiana Title Insurance Company, LLC....................Indiana
EXHIBIT-23
CONSENT OF INDEPENDENT ACCOUNTANTS
EXHIBIT 23 - CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference to the Registration
Statement on Form S-8, File Numbers 333-50484, 333-80119 and 333-80117 of our
report dated January 18,2002, on the consolidated financial statements of First
Merchants Corporation which report is included in the Annual Report on Form 10-K
of First Merchants Corporation.
BKD LLP
Indianapolis, Indiana
March 29, 2002
EXHIBIT-24
LIMITED POWER OF ATTORNEY
EXHIBIT 24--LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned directors and officers of
First Merchants Corporation, an Indiana corporation, hereby constitute and
appoint James L. Thrash, the true and lawful agent and attorney-in-fact of the
undersigned with full power and authority in said agent and attorney-in-fact to
sign for the undersigned and in their respective names as directors and officers
of the Corporation the Form 10-K of the Corporation to be filed with the
Securities and Exchange Commission, Washington, D.C., under the Securities
Exchange Act of 1934, as amended, and to sign any amendment to such Form 10-K,
hereby ratifying and confirming all acts taken by such agent and
attorney-in-fact, as herein authorized.
Dated: February 12, 2002
/s/ Michael L. Cox /s/ Stefan S. Anderson
- -------------------------------------- ------------------------------------
Michael L. Cox President and Stefan S. Anderson Director
Chief Executive
Officer (Principal
Executive Officer)
/s/James L. Thrash /s/ Roger M. Arwood
- -------------------------------------- ------------------------------------
James L. Thrash Sr. Vice President Roger M. Arwood Director
and Chief Financial
Officer (Principal
Financial and
Accounting Officer)
------------------------------------
James F. Ault Director
/s/ Jerry M. Ault
------------------------------------
Jerry M. Ault Director
/s/ Dennis A. Bieberich
------------------------------------
Dennis A. Bieberich Director
------------------------------------
Blaine M. Brownell Director
------------------------------------
Frank A. Bracken Director
/s/ Thomas B. Clark
------------------------------------
Thomas B. Clark Director
/s/ Michael L. Cox
------------------------------------
Michael L. Cox Director
/s/ Barry J. Hudson
------------------------------------
Barry J. Hudson Director
/s/ Norman M. Johnson
------------------------------------
Norman M. Johnson Director
------------------------------------
George A. Sissel Director
------------------------------------
Robert M. Smitson Director
/s/ Dr. John E. Worthen
------------------------------------
Dr. John E. Worthen Director
EXHIBIT-99.1
ACCOUNTANT'S REPORT FOR FIRST MERCHANTS
EMPLOYEE STOCK PURCHASE PLAN
EXHIBIT 99.1--FINANCIAL STATEMENTS AND INDEPENDENT ACCOUNTANT'S REPORT FOR
FIRST MERCHANTS CORPORATION EMPLOYEE STOCK PURCHASE PLAN
- --------------------------------------------------------------------------------
The annual finanial statements and independent accountant's report thereon for
First Merchants Corporation Employee Stock Purchase Plan for the year ending
December 31, 2001, will be filed as an amendment to the 2001 Annual Report on
Form 10-K.