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, 2002 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]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). Yes [x] No[ ]
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 $464,241,000 as of the last
business day of the registrant's most recently completed second fiscal quarter
(June 28, 2002).
As of March 15, 2003 there were 16,330,031 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, 2002
Portions of the Registrant's
Definitive Proxy Statement for
Annual Meeting of Shareholders
to be held April 10, 2003 Part III (Items 10 through 13)
Exhibit Index: Page 34
FORM 10-K TABLE OF CONTENTS
Form 10-K
Page
Number
Part I
Item 1 - Business............................................................3
Item 2 - Properties.........................................................22
Item 3 - Legal Proceedings..................................................22
Item 4 - Submission of Matters to a Vote of Security Holders................22
Supplemental Information - Executive Officers of the Registrant.............23
Part II
Item 5 - Market For the Registrant's Common Equity and
Related Stockholder Matters.......................................24
Item 6 - Selected Financial Data...........................................24
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................24
Item 7A- Quantitative and Qualitative Disclosures about Market Risk........24
Item 8 - Financial Statements and Supplementary Data.......................26
Item 9 - Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure...............................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 and Related Stockholder Matters.....................28
Item 13- Certain Relationships and Related Transactions.....................28
Item 14- Controls and Procedures............................................28
Part IV
Item 15- Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................................29
Signatures.........................................................31
Certifications Pursuant to Section 302 of
The Sarbanes-Oxley Act of 2002...................................32
Exhibit Index......................................................34
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.
("FMIS"). 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. On April 1, 2002, the
Corporation acquired Lafayette Bank and Trust Company ("Lafayette") a state
chartered commercial bank founded in 1899. On September 6, 2002, the Corporation
acquired Stephenson Insurance Service, Inc., which was merged into FMIS.
Effective January 1, 2003, the Corporation formed Merchants Trust Company,
National Association ("MTC"), a wholly-owned subsidiary of the Corporation. On
January 1, 2003, MTC purchased the trust operations of First Merchants, First
National and Lafayette, which united the trust and asset management services of
all affiliate banks of the Corporation. On March 1, 2003, the Corporation
acquired Commerce National Bank ("Commerce National"), a national banking
association incorporated in 1991.
As of December 31, 2002, the Corporation had consolidated assets of $2.679
billion, consolidated deposits of $2.037 billion and stockholders' equity of
$261.1 million.
The Corporation is headquartered in Muncie, Indiana, and is presently engaged in
conducting commercial banking business through the offices of its ten
banking subsidiaries. As of December 31, 2002, the Corporation and its
subsidiaries had 1,127 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.
The Corporation makes its Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, available on its website at www.firstmerchants.com without
charge, as soon as reasonably practicable after such reports are electronically
filed with, or furnished to, the Securities and Exchange Commission.
Additionally, the Corporation will also provide without charge, a copy of its
Form 10-K to any shareholder by mail. Requests should be sent to Mr. Brian
Edwards, Shareholder Relations Officer, First Merchants Corporation, P.O. Box
792, Muncie, IN 47308-0792.
Acquisition Policy
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.
Page 3
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COMPETITION
The Corporation's banking subsidiaries are located in Adams, Boone, Carroll,
Delaware, Fayette, Hamilton, Henry, Howard, Jasper, Jay, Madison, Miami,
Tippecanoe, Wabash, Wayne, White, Randolph, and Union counties in Indiana and
Butler and Franklin counties 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, 2002:
Corporation Regulatory Minimum
Requirement
Tier 1 Capital: 10.1% 4.0%
(to risk-weighted assets)
Total Capital: 11.2% 8.0%
BANK REGULATION
First Merchants, Union County, First National and Commerce 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, Frances Slocum and Lafayette are state banks chartered in Indiana and
are supervised, regulated and examined by the Indiana Department of Financial
Institutions. In addition, six of the Corporation's subsidiaries, Madison, First
United, Randolph County, Decatur, Frances Slocum and Lafayette 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, 2002.
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.
FDIC IMPROVEMENT ACT OF 1991
The Federal Deposit Insurance Corporation Improvement Act of 1991
("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, 2002, 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, 2002, the Corporation's affiliate banks had a total of $15,147,000
retained net profits available for 2003 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.
USA PATRIOT ACT
As part of the USA Patriot Act, signed into law on October 26, 2001, Congress
adopted the International Money Laundering Abatement and Financial
Anti-Terrorism Act of 2001 (the "Act"). The Act authorizes the Secretary of the
Treasury, in consultation with the heads of other government agencies, to adopt
special measures applicable to financial institutions such as banks, bank
holding companies, broker-dealers and insurance companies. Among its other
provisions, the Act requires each financial institution: (i) to establish an
anti-money laundering program; (ii) to establish due diligence policies,
procedures and controls that are reasonably designed to detect and report
instances of money laundering in United States private banking accounts and
correspondent accounts maintained for non-United States persons or their
representatives; and (iii) to avoid establishing, maintaining, administering, or
managing correspondent accounts in the United States for, or on behalf of, a
foreign shell bank that does not have a physical presence in any country. In
addition, the Act expands the circumstances under which funds in a bank account
may be forfeited and requires covered financial institutions to respond under
certain circumstances to requests for information from federal banking agencies
within 120 hours.
Treasury regulations implementing the due diligence requirements were issued in
2002. These regulations required minimum standards to verify customer identity,
encouraged cooperation among financial institutions, federal banking agencies,
and law enforcement authorities regarding possible money laundering or terrorist
activities, prohibited the anonymous use of "concentration accounts," and
required all covered financial institutions to have in place an anti-money
laundering compliance program.
The Act also amended the Bank Holding Company Act and the Bank Merger Act to
require the federal banking agencies to consider the effectiveness of a
financial institution's anti-money laundering activities when reviewing an
application under these acts.
Page 8
THE SARBANES-OXLEY ACT
The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act"), which became law on July
30, 2002, added new legal requirements for public companies affecting corporate
governance, accounting and corporate reporting.
The Sarbanes-Oxley Act provides for, among other things:
* a prohibition on personal loans made or arranged by the issuer to its
directors and executive officers (except for loans made by a bank
subject to Regulation O);
* independence requirements for audit committee members;
* independence requirements for company auditors;
* certification of financial statements on Forms 10-K and 10-Q reports by
the chief executive officer and the chief financial officer;
* the forfeiture by the chief executive officer and chief financial
officer of bonuses or other incentive-based compensation and profits
from the sale of an issuer's securities by such officers in the
twelve month period following initial publication of any financial
statements that later require restatement due to corporate misconduct;
* disclosure of off-balance sheet transactions;
* two-business day filing requirements for insiders filing Form 4s;
* disclosure of a code of ethics for financial officers and filing a
Form 8-K for a change in or waiver of such code;
* the reporting of securities violations "up the ladder" by both in-house
and outside attorneys;
* restrictions on the use of non-GAAP financial measures in press releases
and SEC filings;
* the formation of a public accounting oversight board; and
* various increased criminal penalties for violations of securities laws.
The Sarbanes-Oxley Act contains provisions which became effective upon enactment
on July 30, 2002 and provisions which will become effective from within 30 days
to one year from enactment. The SEC has been delegated the task of enacting
rules to implement various provisions. In addition, each of the national stock
exchanges has proposed new corporate governance rules, including rules
strengthening director independence requirements for boards, the adoption of
corporate governance codes and charters for the nominating, corporate governance
and audit committees.
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 9
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 10
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)
2002 2001 2000
------------------------------ ------------------------------- -------------------------------
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Balance Rate Balance Expense Rate Balance Expense Rate
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Assets:
Federal funds sold ............ $ 39,239 $ 557 1.4% $ 31,820 $ 899 2.8% $ 9,938 $ 666 6.7%
Interest-bearing deposits...... 2,866 141 4.9 2,060 106 5.1 1,807 103 5.7
Federal Reserve and
Federal Home Loan Bank stock. 12,327 735 6.0 7,657 559 7.3 6,456 585 9.1
Securities: (1)
Taxable ....................... 170,937 9,086 5.3 179,006 11,207 6.3 235,745 14,478 6.1
Tax-exempt .................... 131,145 9,523 7.3 85,288 6,312 7.4 95,836 7,057 7.4
---------- -------- ---------- -------- ---------- --------
Total Securities............. 302,082 18,609 6.2 264,294 17,519 6.6 331,581 21,535 6.5
Mortgage loans held for sale..... 21,545 503 2.3 481 41 8.5 75 8 10.7
Loans: (2)
Commercial .................... 1,010,232 66,736 6.6 612,031 49,786 8.1 492,793 45,373 9.2
Bankers' acceptance and
Commercial paper purchased...
Real estate mortgage........... 484,267 35,704 7.4 404,831 31,908 7.9 372,104 29,795 8.0
Installment ................... 318,277 26,649 8.4 245,978 21,388 8.7 233,966 20,622 8.8
Tax-exempt .................... 8,108 725 8.9 7,234 674 9.3 5,075 478 9.4
---------- -------- ---------- -------- ---------- --------
Total loans ................. 1,842,429 130,317 7.1 1,270,555 103,797 8.2 1,104,013 96,276 8.7
---------- -------- ---------- -------- ---------- --------
Total earning assets......... 2,198,943 150,359 6.8 1,576,386 122,880 7.8 1,453,795 119,165 8.2
---------- -------- ---------- -------- ---------- --------
Net unrealized gain (loss) on securities
available for sale............... 6,214 2,608 (13,421)
Allowance for loan losses........ (20,187) (13,736) (11,570)
Cash and due from banks.......... 66,510 42,814 39,250
Premises and equipment .......... 44,088 25,265 22,329
Other assets .................... 110,683 56,357 42,308
--------- --------- ---------
Total assets ................ $2,406,251 $1,689,694 $1,532,691
========== ========== ==========
Liabilities:
Interest-bearing deposits:
NOW accounts ................ $ 273,126 3,680 1.3% $ 192,573 2,475 1.3% $ 168,773 2,920 1.7%
Money market deposit accounts 332,811 3,290 1.0 214,087 6,386 3.0 193,932 9,000 4.6
Savings deposits ............ 184,849 2,184 1.2 122,175 2,310 1.9 98,988 2,477 2.5
Certificates and other
time deposits ............. 838,272 30,546 3.6 655,477 34,655 5.3 612,605 35,210 5.7
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
deposits..................... 1,629,058 39,700 2.4 1,184,312 45,826 3.9 1,074,298 49,607 4.6
Borrowings ...................... 277,709 14,060 5.1 171,771 10,248 6.0 169,869 10,939 6.4
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
liabilities.................. 1,906,767 53,760 2.8 1,356,083 56,074 4.1 1,244,167 60,546 4.9
Noninterest-bearing deposits..... 227,995 147,318 134,717
Other liabilities ............... 33,914 20,061 12,361
---------- ---------- ----------
Total liabilities............ 2,168,676 1,523,462 1,391,245
Stockholders' equity ............ 237,575 166,232 141,446
---------- ---------- ----------
Total liabilities and
stockholders' equity........ $2,406,251 53,760 2.4(3)$1,689,694 56,074 3.6(3)$1,532,691 60,546 4.2(3)
========== -------- ========== -------- ========== --------
Net interest income ......... $ 96,599 $ 66,806 $ 58,619
======== ======== ========
Net interest margin.......... 4.4 4.2 4.0
(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 2002, 2001, and
2000.............................
$3,676 $2,445 $2,637
====== ====== ======
Page 11
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.
2002 Compared to 2001 2001 Compared to 2000
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 ............... $ 176 $ (518) $ (342) $ 795 $ (562) $ 233
Interest-bearing deposits ........ 49 42 91 14 (11) 3
Federal Reserve and Federal
Home Loan Bank stock ........... 293 (117) 176 98 (124) (26)
Securities ....................... 2,386 (1,296) 1,090 (4,452) 436 (4,016)
Mortgage loans held for sale ..... 513 (51) 462 35 (2) 33
Loans ............................ 40,558 (14,556) 26,002 13,843 (6,355) 7,488
-------- --------- --------- -------- --------- ---------
Totals ........................... 43,975 (16,496) 27,479 10,333 (6,618) 3,715
-------- --------- --------- -------- --------- ---------
Interest expense:
NOW accounts ..................... 1,080 125 1,205 374 (819) (445)
Money market deposit
accounts........................ 2,468 (5,564) (3,096) 860 (3,474) (2,614)
Savings deposits.................. 928 (1,054) (126) 511 (678) (167)
Certificates and other
time deposits................... 8,244 (12,353) (4,109) 2,372 (2,927) (555)
Borrowings........................ 5,552 (1,741) 3,811 121 (812) (691)
-------- --------- --------- -------- --------- ---------
Totals.......................... 18,272 (20,587) (2,315) 4,238 (8,710) (4,472)
-------- --------- --------- -------- --------- ---------
Change in net interest
income (fully taxable
equivalent basis)................ $25,703 $ 4,091 29,794 $ 6,095 $ 2,092 8,187
======== ========= ======== =========
Tax equivalent adjustment
using marginal rate
of 35% for 2002, 2001,
and 2000.......................... (1,232) 192
---------- ----------
Change in net interest
income........................... $ 28,562 $ 8,379
========== ==========
Page 12
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, 2002
U.S. Treasury ............................... $ 125 $ 125
Federal agencies ............................ 27,630 $ 814 $ 8 28,436
State and municipal ......................... 135,715 5,787 178 141,324
Mortgage-backed securities .................. 117,724 2,448 54 120,118
Other asset-backed securities ............... 1,000 1,000
Corporate obligations ....................... 12,101 465 12,566
Marketable equity securities ................ 29,452 20 116 29,356
-------- -------- -------- --------
Total available for sale ................. 323,747 9,534 356 332,925
-------- -------- -------- --------
Held to maturity at December 31, 2002
State and municipal ......................... 9,013 448 9,461
Mortgage-backed securities .................. 124 124
-------- -------- -------- --------
Total held to maturity ................... 9,137 448 9,585
-------- -------- -------- --------
Total investment securities .............. $332,884 $ 9,982 $ 356 $342,510
======== ======== ======== ========
Available for sale at December 31, 2001
U.S. Treasury ............................... $ 124 $ 124
Federal agencies ............................ 30,808 $ 767 $ 2 31,573
State and municipal ......................... 74,776 1,644 215 76,205
Mortgage-backed securities .................. 100,811 1,710 1 102,520
Other asset-backed securities ............... 10,116 167 10,283
Corporate obligations ....................... 3,498 116 3,614
Marketable equity securities ................ 7,472 123 7,349
-------- -------- -------- --------
Total available for sale ................. 227,605 4,404 341 231,668
-------- -------- -------- --------
Held to maturity at December 31, 2001
State and municipal ......................... 8,426 166 58 8,534
Mortgage-backed securities .................. 228 228
-------- -------- -------- --------
Total held to maturity ................... 8,654 166 58 8,762
-------- -------- -------- --------
Total investment securities .............. $236,259 $ 4,570 $ 399 $240,430
======== ======== ======== ========
Page 13
- --------------------------------------------------------------------------------
STATISTICAL DATA (continued)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- -------------- ------------
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
======== ======== ======== ========
Cost
----------------------------------------------------------
2002 2001 2000
---- ---- ----
Federal Reserve and Federal Home Loan
Bank stock at December 31:
Federal Reserve Bank stock .................... $ 493 $ 493 $ 493
Federal Home Loan Bank stock .................. 10,916 7,857 6,692
------- ----- -----
Total ..................................... $11,409 $8,350 $7,185
======= ====== ======
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, 2002 were:
Securities available for sale December 31, 2002:
Within 1 Year 1-5 Years 5-10 Years
------------- --------- ----------
Amount Yield* Amount Yield* Amount Yield*
------ ------ ------ ------ ------ ------
U.S. Treasury...................... $ 125 1.2%
Federal Agencies................... 7,311 5.0 $15,069 3.7% $ 4,054 3.9%
State and Municipal................ 12,132 4.5 45,572 4.4 44,508 4.6
Corporate Obligations.............. 3,059 6.6 9,507 6.1
------- ------- -------
Total.......................... $22,627 4.9% $70,148 4.5% $48,562 4.6%
======= ======= =======
Page 14
- --------------------------------------------------------------------------------
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........................ $ 125 1.2%
Federal Agencies..................... $ 2,002 2.7% 28,436 4.0
State and Municipal.................. 39,112 4.5 141,324 4.5
Corporate Obligations................ 12,566 6.3
Marketable Equity Securities......... $ 29,356 1.3% 29,356 1.3
Mortgage-backed securities........... 120,118 5.1 120,118 5.1
Other asset-backed securities........ 1,000 3.8 1,000 3.8
-------- --------- --------
Total............................ $ 41,114 4.4% $ 150,474 4.3% $332,925 4.4%
======== ========= ========
Securities held to maturity at December 31, 2002:
Within 1 Year 1-5 Years 5-10 Years
------------- --------- ----------
Amount Yield* Amount Yield* Amount Yield*
------ ------ ------ ------ ------ ------
State and Municipal.................. $ 1,286 5.1% $ 4,857 5.2% $2,015 5.4%
Mortgage Backed
Due After Ten Years Securities Total
------------------- ------------ -----
Amount Yield* Amount Yield* Amount Yield*
------ ------ ------ ------ ------ ------
State and Municipal.................. $ 855 6.0% $ 9,013 5.3%
Mortgage-backed securities........... $ 124 8.4% 124 8.4
------- ------- -------
Total............................ $ 855 6.0% $ 124 8.4% $ 9,137 5.4%
======= ======= =======
*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, 2002:
Amount Yield
Federal Reserve Bank Stock........... $ 493 6.0%
Federal Home Loan Bank stock......... 10,916 5.8
-------
Total............................ $11,409 5.9%
=======
Page 15
STATISTICAL DATA (continued)
LOAN PORTFOLIO
TYPES OF LOANS
The loan portfolio at the dates indicated is presented below:
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in Thousands)
Loans at December 31:
Commercial and
industrial loans........................... $ 406,644 $ 301,962 $ 258,405 $224,712 $188,841
Bankers acceptances and loans
to financial institutions.................. 900
Agricultural production
financing and other loans
to farmers................................. 85,059 29,645 24,547 21,547 21,951
Real estate loans:
Construction............................... 133,896 58,316 45,412 31,996 31,719
Commercial and farmland.................... 401,561 230,233 167,317 150,544 137,671
Residential................................ 746,349 544,028 466,660 380,596 361,611
Individuals' loans for
household and other
personal expenditures...................... 206,083 179,325 201,629 181,878 142,938
Tax-exempt loans............................. 12,615 7,277 6,093 4,070 2,652
Other loans.................................. 12,170 8,800 5,523 3,552 2,073
---------- ---------- ---------- --------- ---------
Total loans........................ $2,004,377 $1,359,586 $1,175,586 $998,895 $890,356
========== ========== ========== ========= =========
Residential Real Estate Loans Held for Sale at December 31, 2002, 2001, 2000,
1999, and 1998 were $21,545,000, $307,000, $0, $61,000, and $776,000.
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, 2002. 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................ $ 279,576 $ 92,923 $ 34,145 $ 406,644
Agricultural production financing
and other loans to farmers................... 73,909 8,741 2,409 85,059
Real estate - Construction..................... 100,005 26,336 7,555 133,896
Tax-exempt loans............................... 521 7,553 4,541 12,615
Other loans.................................... 413 11,594 163 12,170
---------- --------- --------- ----------
Total.................................... $ 454,424 $ 147,147 $ 48,813 $ 650,384
========== ========= ========= ==========
Page 16
STATISTICAL DATA (continued)
Maturing
---------------------------------------------------
1 - 5 Over
Years 5 Years
----- -------
(Dollars in Thousands)
Loans maturing after one year with:
Fixed rate.............................. $ 74,191 $ 47,598
Variable rate........................... 72,956 1,215
------------- ------------
Total................................. $ 147,147 $ 48,813
============= ============
NONACCRUING, CONTRACTUALLY PAST DUE 90 DAYS OR MORE
OTHER THAN NONACCRUING AND RESTRUCTURED LOANS
December 31
--------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in Thousands)
Nonaccruing loans......................... $14,134 $6,327 $2,370 $1,280 $1,073
Loans contractually past due 90
days or more other than
nonaccruing............................. 6,676 4,828 2,483 2,826 2,334
Restructured loans........................ 2,508 3,511 3,085 908 1,110
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 $783,000 for the year ended December 31, 2002, was
recognized on the nonaccruing and restructured loans listed in the table above,
whereas interest income of $1,544,000 would have been recognized under their
original loan terms.
Potential problem loans:
Management has identified certain other loans totaling $36,630,000 as of
December 31, 2002, not included in the table above, or the 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 north-central and east-central Indiana
and Butler and Franklin counties in 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 17
STATISTICAL DATA (continued)
- ----------------
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the loan loss experience for the years indicated.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in Thousands)
Allowance for loan losses:
Balance at January 1.................... $ 15,141 $ 12,454 $ 10,128 $ 9,209 $ 8,429
Chargeoffs:
Commercial and industrial(1)........... 4,711 1,688 974 361 794
Real estate mortgage(3)................ 800 227 43 40 44
Individuals' loans for household and
other personal expenditures,
including other loans................ 2,602 1,632 1,274 1,368 1,393
-------- -------- -------- -------- -------
Total chargeoffs..................... 8,113 3,547 2,291 1,769 2,231
-------- -------- -------- -------- -------
Recoveries:
Commercial and industrial(2)........... 549 176 171 114 325
Real estate mortgage(4)................ 92 32 1 32 20
Individuals' loans for household and
other personal expenditures,
including other loans................ 672 365 407 301 294
-------- -------- -------- -------- -------
Total recoveries..................... 1,313 573 579 447 639
-------- -------- -------- -------- -------
Net chargeoffs........................... 6,800 2,974 1,712 1,322 1,592
-------- -------- -------- -------- -------
Provisions for loan losses............... 7,174 3,576 2,625 2,241 2,372
Allowance acquired in purchase........... 6,902 2,085 1,413
-------- -------- -------- -------- -------
Balance at December 31................... $22,417 $15,141 $12,454 $10,128 $ 9,209
======== ======== ======== ======== =======
(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.......... .37% .23% .16% .14% .18%
Page 18
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:
2002 2001
------------------------- -------------------------
Amount Per Cent Amount Per Cent
-------- -------- -------- --------
(Dollars in Thousands)
Balance at December 31:
Commercial and industrial(1)................ $ 12,405 31.2% $ 6,884 28.8%
Real estate mortgage(2)..................... 2,875 57.3 2,655 56.9
Individuals' loans for household and
other personal expenditures,
including other loans..................... 7,037 11.5 5,502 14.3
Unallocated................................. 100 N/A 100 N/A
-------- ------ -------- ------
Totals...................................... $ 22,417 100.0% $ 15,141 100.0%
======== ====== ======== ======
2000 1999
------------------------- -------------------------
Amount Per Cent Amount Per Cent
-------- -------- -------- --------
(Dollars in Thousands)
Balance at December 31:
Commercial and industrial(1)................ $ 4,478 28.0% $ 3,347 27.8%
Real estate mortgage(2)..................... 1,554 53.9 1,297 53.2
Individuals' loans for household and
other personal expenditures,
including other loans..................... 4,622 18.1 3,914 19.0
Unallocated................................. 1,800 N/A 1,570 N/A
-------- ------ -------- ------
Totals...................................... $ 12,454 100.0% $ 10,128 100.0%
======== ====== ======== ======
1998
-------------------------
Amount Per Cent
-------- --------
Balance at December 31: (Dollars in Thousands)
Commercial and industrial(1)................ $ 2,954 27.3%
Real estate mortgage(2)..................... 1,313 56.1
Individuals' loans for household and
other personal expenditures,
including other loans..................... 3,514 16.6
Unallocated. .... .......................... 1,428 N/A
-------- ------
Totals...................................... $ 9,209 100.0%
======== ======
(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 19
STATISTICAL DATA (continued)
- ----------------
Loan Administration and Loan Loss Chargeoff Procedures
Primary responsibility and accountability for day-to-day lending activities
rests with the Corporation's affiliate banks. Loan personnel at each bank have
the authority to extend credit under guidelines approved by the bank's board of
directors. Executive and board loan committees active at each bank serve as
vehicles for communication and for the pooling of knowledge, judgment and
experience of its members. These committees provide valuable input to lending
personnel, act as an approval body, and monitor the overall quality of the
banks' loan portfolios. 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. The Corporation also maintains a loan grading and review program for
its affiliate banks, which includes quarterly reviews of problem loans,
delinquencies and charge-offs. The purpose of this program is to evaluate loan
administration, credit quality, loan documentation and the adequacy of the
allowance for loan losses.
The Corporation maintains an allowance for loan losses to cover probable credit
losses identified during its loan review process. The allowance is increased by
the provision for loan losses and decreased by charge-offs less recoveries. All
charge-offs are approved by the bank's 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:
2002 2001 2000
--------------- --------------- ---------------
(Dollars in Thousands)
For the year ending December 31:
Impaired loans with an allowance................... $ 16,901 $ 10,381 $ 7,862
Impaired loans for which the discounted
cash flows or collateral value exceeds the
carrying value of the loan....................... 27,450 10,780 6,977
------------ ------------ ------------
Total impaired loans......................... $ 44,351 $ 21,161 $ 14,839
============ ============ ============
Allowance for impaired loans (included in the
Corporation's allowance for loan losses)......... $ 7,299 $ 3,251 $ 2,253
Average balance of impaired loans.................. 49,663 22,327 15,053
Interest income recognized on impaired loans....... 3,656 1,538 1,361
Cash basis interest included above................. 2,344 1,555 1,080
Page 20
- --------------------------------------------------------------------------------
STATISTICAL DATA (continued)
DEPOSITS
The average balances, interest income and expense and average rates on deposits
for the years ended December 2002, 2001 and 2000 are presented within the
distribution of assets, liabilities and stockholders' equity table on page 11 of
this Form 10-K.
As of December 31, 2002, 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.......... $ 69,737 $ 19,601 $ 26,319 $ 84,077 $199,734
Per cent....................... 35% 10% 13% 42% 100%
RETURN ON EQUITY AND ASSETS
The information regarding return on equity and assets is presented on page 2 of
the Corporation's 2002 Annual Report to Stockholders - Financial Review under
the caption "Five - Year Summary of Selected Financial Data" within Exhibit 13
of this Form 10-K.
SHORT-TERM BORROWINGS
2002 2001 2000
----------------- ----------------- -----------------
(Dollars in Thousands)
Balance at December 31:
Securities sold under repurchase
agreements (short-term portion)........ $ 65,962 $ 22,732 $ 31,956
Federal funds purchased.................. 10,500 975
U.S. Treasury demand notes............... 6,273 4,968
--------- --------- ---------
Total short-term borrowings......... $ 65,962 $ 39,505 $ 37,899
========= ========= =========
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:
2002 2001 2000
----------------- ----------------- -----------------
(Dollars in Thousands)
Weighted average interest rate on outstanding
balance at December 31:
Securities sold under repurchase
agreements(short-term portion).............. 1.1% 3.3% 6.2%
Total short-term borrowings..................... 1.1 2.4 5.6
Weighted average interest rate during the year:
Securities sold under repurchase
agreements (short-term portion)............. 1.4% 3.7% 5.6%
Total short-term borrowings..................... 1.3 4.0 5.0
Highest amount outstanding at any month end
during the year:
Securities sold under repurchase
agreements (short-term portion)............. $ 54,375 $ 17,750 $ 14,505
Total short-term borrowings..................... 67,984 46,195 56,099
Average amount outstanding during the year:
Securities sold under repurchase
agreements (short-term portion)............. $ 41,241 $ 14,036 $ 12,116
Total short-term borrowings..................... 49,886 22,126 33,165
Page 21
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 70 banking offices
operated by the Corporation's affiliate banks, 55 are owned by the respective
banks and 15 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, 2002 was $38,645,000.
- --------------------------------------------------------------------------------
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 2002 to a vote of
security holders, through the solicitation of proxies or otherwise.
Page 22
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
58 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 and Chief Operating Officer of the Corporation
51 Chief Operating Officer, Corporation since August 2002; President and Chief
Executive Officer First Merchants from
September 2000 to August 2002; Bank of America
from 1983 to February 2000; Executive Vice
President of the Corporation since February of
2000.
Robert R. Connors Senior Vice President of Operations Senior Vice President of Operations and
53 and Technology, Corporation and First Technology, Corporation and First Merchants
Merchants since August 2002; Senior Vice President of
Operations and Compliance Officer at First
Internet Bank of Indiana from 1999 to 2002;
Senior Vice President of Operations and Chief
Information Officer at Peoples Bank & Trust
Company from 1984 to 1999.
Larry R. Helms Senior Vice President, General Senior Vice President and General Counsel,
62 Counsel and Secretary, Corporation Corporation since 1982 and Secretary
since January 1997; Senior Vice President,
First Merchants from January 1979 to 2002;
Director of First United Bank from 1991 to 2002
and Pendleton Banking Company from 1992 to
2002.
Mark K. Hardwick Senior Vice President and Chief Senior Vice President and Chief Financial
32 Financial Officer, Corporation Officer of the Corporation since April of 2002;
Corporate Controller, Corporation from
November 1997 to April 2002; Senior Accountant,
Geo. S. Olive & Company from September 1994 to
October 1997.
Page 23
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
- --------------------------------------------------------------------------------
The information required under this item is incorporated by reference to pages
53 and 54 of the Corporation's 2002 Annual Report to Stockholders under the
captions "Stock Information" and "Common Stock Listing", Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA.
- --------------------------------------------------------------------------------
The information on page 2 of the Corporation's 2002 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 17 of the Corporation's 2002 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.
Management believes that the Corporation's liquidity and interest
sensitivity position at December 31, 2002, 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, 2002.
INTEREST RATE SENSITIVITY ANALYSIS
(dollars in thousands) At December 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
1-180 DAYS 181-365 DAYS 1-5 YEARS BEYOND 5 YEARS TOTAL
===================================================================================================================================
Rate-Sensitive Assets:
Federal funds sold and interest-bearing deposits ........ $ 34,968 $ 34,968
Investment securities ................................... 27,765 $ 12,136 $ 85,429 $ 216,732 342,062
Loans ................................................... 850,254 195,160 661,945 318,563 2,025,922
Federal Reserve and Federal Home Loan Bank stock ........ 11,409 11,409
---------- ---------- ---------- ---------- ----------
Total rate-sensitive assets ........................ 924,396 207,296 747,374 535,295 2,414,361
---------- ---------- ---------- ---------- ----------
Rate-Sensitive Liabilities:
Interest-bearing deposits ............................... 723,470 494,076 494,077 52,937 1,764,560
Securities sold under repurchase agreements ............. 65,962 23,632 89,594
Other short-term borrowings ............................. 10,168 10,168
Federal Home Loan Bank advances ......................... 7,807 7,819 67,398 101,653 184,677
Trust preferred securities .............................. 53,188 53,188
Other borrowed funds .................................... 19,300 19,300
---------- ---------- ---------- ---------- ----------
Total rate-sensitive liabilities ................... 826,707 501,895 585,107 207,778 2,121,487
---------- ---------- ---------- ---------- ----------
Interest rate sensitivity gap by period .................... $ 97,689 $ (294,599) $ 162,267 $ 327,517
Cumulative rate sensitivity gap ............................ 97,689 (196,910) (34,643) 292,874
Cumulative rate sensitivity gap ratio
at December 31, 2002 .................................... 111.8% 85.2% 98.2% 113.8%
at December 31, 2001 .................................... 135.4% 97.6% 109.7% 116.9%
Page 24
The Corporation had a cumulative negative gap of $196,910,000 in the one-year
horizon at December 31, 2002, just over 7.4 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.
The comparative rising and falling scenarios for the period ended December
31, 2003 assume further interest rate changes in addition to the base simulation
discussed above. These changes are immediate and parallel changes to the base
case scenario. In addition, total rate movements (beginning point minus ending
point) to each of the various driver rates utilized by management in the base
simulation for the period ended December 31, 2003 are as follows:
Driver Rates RISING FALLING
================================================================================
Prime 200 Basis Points (50) Basis Points
Federal Funds 200 (50)
One-Year T-Bill 200 (20)
Two-Year T-Bill 200 (59)
Interest Checking 100 --
MMIA Savings 100 --
First Flex 100 (25)
CD's 200 (53)
FHLB Advances 200 (66)
Results for the base, rising and falling interest rate scenarios are
listed below, based upon the Corporation's rate sensitive assets at December 31,
2002. The net interest income shown represents cumulative net interest income
over a 12-month time horizon. Balance sheet assumptions used for the base
scenario are the same for the rising and falling simulations.
BASE RISING FALLING
===============================================================================
Net Interest Income (dollars in thousands) $105,138 $113,855 $ 98,793
Variance from base $ 8,717 $ (6,345)
Percent of change from base 8.29% (6.03)%
Page 25
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)%
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 18 through 51 of the Corporation's 2002 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, 2002, 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 25, 2003
furnished to its stockholders in connection with an annual meeting to be held
April 10, 2003 (the "2003 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 2003 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.
Page 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
- --------------------------------------------------------------------------------
The information in the Corporation's 2003 Proxy Statement, under the caption,
"Security Ownership of Certain Beneficial Owners and Management," is expressly
incorporated herein by reference.
The following table presents information relating to securities aurthorized
under equity compensation plans.
Equity Compensation Plan Information
(a) (b) (c)
Number of securities to Weighted-average Number of securities remaining
be issued upon exercise exercise price of available for future issuance under
of outstanding options, outstanding options, equity compensations plans (excluding
Plan category warrants and rights warrants and rights securities reflected in column (a)
------------- ----------------------- -------------------- -------------------------------------
Equity compensation plans approved
by stockholders 771,589 $ 20.78 195,217
Equity compensation plans not
approved by stockholders 30,871 21.65
----------------------- -------------------- -------------------------------------
Total 802,460 $ 20.81 195,217
======================= ==================== =====================================
The only plan reflected above that was not approved by the Corporation's
stockholders relates to certain First Merchants Corporation Stock Option
Agreements ("Agreements"). These Agreements provide for non-qualified stock
options of the common stock of the Corporation to be granted to each director of
First Merchants Bank, National Association (the "Bank") who, on the date of the
grant: (a) is serving as a director of the Bank; (b) is not an employee of the
Corporation, the Bank, or any of the Corporation's other affiliated banks or
non-bank subsidiaries; and (c) is not serving as a director of the Corporation.
The exercise price of the shares is equal to the fair market value of the shares
upon the grant of the option. Options become 100 percent vested when granted and
are fully exercisable six months after the date of the grant, for a period of
ten years.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------------------------------
The information in the Corporation's 2003 Proxy Statement, under the caption
"Interest of Management in Certain Transactions," is expressly incorporated
herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
Within the 90 days prior to the filing date of this report, the Corporation
carried out an evaluation, under the supervision and with the participation of
the Corporation's management, including the Corporation's Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based upon that evaluation,
the Corporation's Chief Executive Officer and Chief Financial Officer concluded
that the Corporation's disclosure controls and procedures are effective.
Disclosure controls and procedures are controls and procedures that are designed
to ensure that information required to be disclosed in Corporation reports filed
or submitted under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
we carried out this evaluation.
Page 28
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
- --------------------------------------------------------------------------------
(a) 1. Financial Statements:
Independent accountants' report
Consolidated balance sheets at
December 31, 2002 and 2001
Consolidated statements of income,
years ended December 31, 2002,
2001 and 2000
Consolidated statements of comprehensive income,
years ended December 31, 2002, 2001 and 2000
Consolidated statements of stockholders' equity,
years ended December 31, 2002, 2001 and 2000
Consolidated statements of cash flows,
years ended December 31, 2002,
2001 and 2000
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 CNBC Bancorp dated August 28, 2002.
(Incorporated by reference to registrant's Form 8-K filed on
August 28, 2002)
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 for quarter ended June 30, 2002)
4.1 Certificate of Trust of First Merchants Capital Trust I dated
December 12, 2001 (3)
4.2 Amended and Restated Trust Agreement of First Merchants Capital
Trust I dated April 17, 2002 (3)
4.3 Agreement as to Expenses and Liabilities dated April 17, 2002 (3)
4.4 Cumulative Trust Preferred Security Certificate (3)
4.5 Preferred Securities Guarantee Agreement dated April 17, 2002 (3)
4.6 Indenture dated April 17, 2002 (3)
4.7 First Supplemental Indenture dated April 17, 2002 (3)
4.8 8.75% Junior Subordinated Debenture due June 30, 2002 (3)
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 29
ITEM 15. FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON
FORM 8-K (continued)
- --------------------------------------------------------------------------------
10e First Merchants Corporation Change of Control Agreement with
Mark K. Hardwick dated May 14, 2002. (Incorporated by
reference to registrant's Form 10-Q for quarter ended June
30, 2002) (1)
10f First Merchants Corporation change of Control Agreement with
Roger M. Arwood dated November 14, 2000. (Incorporated by
reference to registrant's Form 10-K for year ended December
31, 2001)(1)
10g First Merchants Corporation Change of Control Agreement with
Larry R. Helms dated November 14, 2000. (Incorporated by
reference to registrant's Form 10-K for year ended December
31, 2001)(1)
10h First Merchants Corporation Change of Control Agreement with
Robert R. Connors dated August 26, 2002. (Incorporated by
reference to registrant's Form 10-Q for quarter ended
September 30, 2002)(1)
10i First Merchants Change of Control Agreement with Michael L.
Cox dated May 11, 1999. (Incorporated by reference to
registrant's Form 10-K for year ended December 31, 2001)(1)
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, as amended.(1)(2)
13 2002 Annual Report to Stockholders-Financial Review (except
for the pages and information expressly incorporated by
reference in this Form 10-K, the Annual Report to
Stockholders-Financial Review 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 accountants' report for
First Merchants Corporation Employee Stock Purchase Plan (See
Exhibit 13 to this Form 10-K)(2)
99.2 Certifications Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of
The Sarbanes-Oxley Act of 2002(2)
(1) Management contract or compensatory plan.
(2) Filed here within.
(3) Incorporated by reference to the registrant's Form 8-K filed on
April 19, 2002.
Page 30
(b) Reports on Form 8-K:
NONE
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 28th day of March,
2003.
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 28th day of March, 2003.
/s/ Michael L. Cox /s/Mark K. Hardwick
- -------------------------------------- --------------------------------------
Michael L. Cox President and Mark K. Hardwick Sr. Vice President
Chief Executive and Chief Financial
Officer (Principal Officer (Principal
Executive Officer) Financial and
Accounting Officer)
/s/ Stefan S. Anderson* /s/ Michael L. Cox
- ----------------------------------- ------------------------------------
Stefan S. Anderson Director Michael L. Cox Director
/s/Roger M. Arwood*
- ------------------------------------ ------------------------------------
Roger M. Arwood Director Barry J. Hudson Director
/s/ James F. Ault* /s/ Robert T. Jeffares*
- ------------------------------------ ------------------------------------
James F. Ault Director Robert T. Jeffares Director
/s/ Dennis A. Bieberich* /s/ Norman M. Johnson*
- ------------------------------------ ------------------------------------
Dennis A. Bieberich Director Norman M. Johnson Director
/s/Richard A. Boehning* /s/ George A. Sissel*
- ------------------------------------ ------------------------------------
Richard A. Boehning Director George A. Sissel Director
/s/ Blaine M. Brownell*
- ------------------------------------ ------------------------------------
Blaine M. Brownell Director Robert M. Smitson Director
/s/ Dr. John E. Worthen*
- ------------------------------------ ------------------------------------
Frank A. Bracken Director Dr. John E. Worthen Director
/s/ Thomas B. Clark*
- ------------------------------------
Thomas B. Clark Director
* By Mark K. Hardwick 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/ Mark K. Hardwick
------------------------------
Mark K. Hardwick
As Attorney-in-Fact
March 28, 2003
Page 31
FIRST MERCHANTS CORPORATION
FORM 10-K
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Michael L. Cox, certify that:
1. I have reviewed this annual report on Form 10-K of First Merchants
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
by: /s/ Michael L. Cox
----------------------
Michael L. Cox
President and Chief Executive Officer
Page 32
CERTIFICATION
- -------------
I, Mark K. Hardwick, certify that:
1. I have reviewed this annual report on Form 10-K of First Merchants
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
by: /s/ Mark K. Hardwick
--------------------
Mark K. Hardwick
Senior Vice President and
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
Page 33
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
(a)3. Exhibits:
Exhibit No: Description of Exhibit:
2 Agreement of Reorganization and Merger between First Merchants
Corporation and CNBC Bancorp dated August 28, 2002.
(Incorporated by reference to registrant's Form 8-K filed on
August 28, 2002)
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 for quarter ended June 30, 2002)
4.1 Certificate of Trust of First Merchants Capital Trust I dated
December 12, 2001 (3)
4.2 Amended and Restated Trust Agreement of First Merchants Capital
Trust I dated April 17, 2002 (3)
4.3 Agreement as to Expenses and Liabilities dated April 17, 2002 (3)
4.4 Cumulative Trust Preferred Security Certificate (3)
4.5 Preferred Securities Guarantee Agreement dated April 17, 2002 (3)
4.6 Indenture dated April 17, 2002 (3)
4.7 First Supplemental Indenture dated April 17, 2002 (3)
4.8 8.75% Junior Subordinated Debenture due June 30, 2002 (3)
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
Mark K. Hardwick dated May 14, 2002. (Incorporated by
reference to registrant's Form 10-Q for quarter ended June
30, 2002) (1)
Page 34
10f First Merchants Corporation change of Control Agreement with
Roger M. Arwood dated November 14, 2000. (Incorporated by
reference to registrant's Form 10-K for year ended December
31, 2001)(1)
10g First Merchants Corporation Change of Control Agreement with
Larry R. Helms dated November 14, 2000. (Incorporated by
reference to registrant's Form 10-K for year ended December
31, 2001)(1)
10h First Merchants Corporation Change of Control Agreement with
Robert R. Connors dated August 26, 2002. (Incorporated by
reference to registrant's Form 10-Q for quarter ended
September 30, 2002)(1)
10i First Merchants Change of Control Agreement with Michael L.
Cox dated May 11, 1999. (Incorporated by reference to
registrant's Form 10-K for year ended December 31, 2001)(1)
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, as amended.(1)(2)
13 2002 Annual Report to Stockholders-Financial Review (except
for the pages and information expressly incorporated by
reference in this Form 10-K, the Annual Report to
Stockholders-Financial Review 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 accountants' report for
First Merchants Corporation Employee Stock Purchase Plan (See
Exhibit 13 to this Form 10-K)(2)
99.2 Certifications Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of
The Sarbanes-Oxley Act of 2002(2)
(1) Management contract or compensatory plan.
(2) Filed here within.
(3) Incorporated by reference to the registrant's Form 8-K filed on
April 19, 2002.
Page 35
EXHIBIT-10L
FIRST MERCHANTS CORPORATION 1999 LONG-TERM EQUITY INVENTIVE PLAN,
AS AMENDED
Exhibit 10l--FIRST MERCHANTS CORPORATION 1999 LONG-TERM EQUITY INCENTIVE PLAN
ARTICLE I
ESTABLISHMENT AND PURPOSE
Section 1.01. Establishment and Term of Plan. First Merchants
Corporation, an Indiana corporation (the "Company"), hereby establishes the
First Merchants Corporation 1999 Long-Term Equity Incentive Plan (the "Plan"),
effective as of April 14, 1999, subject to the approval of the Plan at the
Company's 1999 annual meeting of shareholders by the holders of a majority of
the shares of the Company's common stock present and voting at that meeting in
person or by proxy.
Section 1.02. Purpose. The Plan is designed to promote the interests of
the Company, its subsidiaries, and its shareholders by providing stock-based
incentives to selected Employees, Non-Employee Directors, Subsidiary Directors
and Advisory Directors who are expected to contribute materially to the success
of the Company and its subsidiaries. The purpose of the Plan is to provide a
means of rewarding performance and to provide an opportunity to increase the
personal ownership interest of Employees, Non-Employee Directors, Subsidiary
Directors and Advisory Directors in the continued success of the Company. The
Company believes that the Plan will assist its efforts to attract and retain
quality Employees, Non-Employee Directors, Subsidiary Directors and Advisory
Directors.
ARTICLE II
ADMINISTRATION
Section 2.01. Administrative Committee. The Plan shall be administered
by the Committee, which shall serve at the pleasure of the Board of Directors.
The Committee shall have full authority to administer the Plan, including
authority to interpret and construe any provision of the Plan and to adopt such
rules and regulations for administering the Plan as it may deem necessary to
comply with the requirements of the Plan or any applicable law.
Section 2.02. Powers of the Committee. The Committee shall, subject to
the terms of this Plan, have the authority to: (i) select the eligible
Employees, Subsidiary Directors and Advisory Directors who shall receive Awards,
(ii) grant Awards, (iii) determine the types and sizes of Awards to be granted
to Employees, Subsidiary Directors and Advisory Directors under the Plan (but
not to Non-Employee Directors, who shall receive Director Options in accordance
with Article VI of this Plan), (iv) determine the terms, conditions, vesting
periods, and restrictions applicable to Awards (other than Director Options),
(v) adopt, alter, and repeal administrative rules and practices governing this
Plan, (vi) interpret the terms and provisions of this Plan and any Awards
granted under this Plan, (vii) prescribe the forms of any Award Agreements or
other instruments relating to Awards, and (viii) otherwise supervise the
administration of this Plan. The Committee may delegate any of its authority to
any other person or persons that it deems appropriate with respect to Awards
granted to Employees who are not officers of the Company.
Section 2.03. Actions of the Committee. All actions taken and all
interpretations and determinations made in good faith by the Committee, or made
by any other person or persons to whom the Committee has delegated authority,
shall be final and binding upon all Participants, the Company, and all other
interested persons. All decisions by the Committee shall be made with the
approval of not less than a majority of its members. Members of the Committee
who are eligible for Awards may vote on any matters affecting the administration
of the Plan or the grant of any Awards pursuant to the Plan, except that no such
member shall act upon the granting of an Award to himself or herself; but any
such member may be counted in determining the existence of a quorum of the
Committee.
ARTICLE III
ELIGIBILITY
Section 3.01. Employees, Subsidiary Directors and Advisory Directors.
Any Employee of the Company or any of its Subsidiaries who is selected by the
Committee to be a Participant under the Plan, and any Subsidiary Director or
Advisory Director, shall be eligible for the grant of Awards (other than
Director Options). The selection of the Employees, Subsidiary Directors and
Advisory Directors to receive Awards (other than Director Options) shall be
within the discretion of the Committee. More than one Award may be granted to
the same Employee, Subsidiary Director or Advisory Director.
Section 3.02. Non-Employee Directors. All Non-Employee Directors are
eligible for the grant of Director Options, as provided in Article VI of this
Plan. Non-Employee Directors are not, however, eligible for the grant of any
Awards other than Director Options.
ARTICLE IV
SHARES SUBJECT TO AWARDS
Section 4.01. Number of Common Shares. The shares subject to the Awards
and other provisions of the Plan shall be the Company's authorized but unissued,
or reacquired Common Shares. The aggregate number of Common Shares that may be
subject to Awards granted under this Plan in any fiscal year shall be equal to
the sum of (i) one percent (1%) of the number of Common Shares Outstanding as of
the last day of the Company's prior fiscal year, plus (ii) the number of Common
Shares that were available for the grant of Awards, but not granted, under this
Plan in any previous fiscal year; provided that in no event will the number of
Common Shares available for the grant of Awards in any fiscal year exceed
one-and-one-half percent (1 1/2%) of the Common Shares Outstanding as of the
last day of the prior fiscal year. The aggregate number of Common Shares that
may be issued under the Plan upon the exercise of Incentive Stock Options is
1,200,000, as adjusted pursuant to Section 4.02. No fractional shares shall be
issued under this Plan; if necessary, the Committee shall determine the manner
in which the value of fractional shares will be treated.
The assumption of awards granted by an organization acquired by the
Company, or the grant of Awards under this Plan in substitution for any such
awards, shall not reduce the number of Common Shares available for the grant of
Awards under this Plan. Common Shares subject to an Award that is forfeited,
terminated or canceled without having been exercised shall again be available
for grant under this Plan, subject to the limitations noted in the foregoing
paragraph of this Section 4.01.
Section 4.02. Adjustment. In the event of any change in the Common
Shares by reason of a merger, consolidation, reorganization, recapitalization or
similar transaction, or in the event of a stock split, stock dividend or
distribution to shareholders (other than normal cash dividends), spin-off or any
other change in the corporate structure of the Company, the Committee shall
adjust the number and class of shares that may be issued under this Plan, the
aggregate number of Common Shares that may be issued under the Plan upon the
exercise of Incentive Stock Options, the number and class of shares subject to
outstanding Awards, the exercise price applicable to outstanding Awards, and the
Fair Market Value of the Common Shares and other value determinations applicable
to outstanding Awards, as appropriate. All determinations made by the Committee
with respect to adjustments under this Section 4.02 shall be conclusive and
binding for all purposes of the Plan.
ARTICLE V
AWARDS
Section 5.01. Grant of Awards. Awards authorized under this Article V
may be granted pursuant to another incentive program which incorporates by
reference the terms and conditions of this Plan. Awards may be granted singly or
in combination or tandem with other Awards. Awards may also be granted in
replacement of, or in substitution for, other awards granted by the Company
whether or not such other awards were granted under this Plan; without limiting
the foregoing, if a Participant pays all or part of the exercise price or taxes
associated with an Award by the transfer of Common Shares or the surrender of
all or part of an Award (including the Award being exercised), the Committee
may, in its discretion, grant a new Award to replace the Common Shares that were
transferred or the Award that was surrendered. The Company may assume awards
granted by an organization acquired by the Company or may grant Awards in
replacement of, or in substitution for, any such awards.
Section 5.02. Types of Awards. Awards may include, but are
not limited to, the following:
(a) Director Option. A right to purchase Common Shares
granted to a Non-Employee Director pursuant to Article VI of this Plan.
(b) Stock Award. An Award that is made in Common Shares or
Restricted Stock or that is otherwise based on, or valued in whole or
in part by reference to, the Common Shares. All or part of any Stock
Award may be subject to conditions, restrictions and risks of
forfeiture, as and to the extent established by the Committee. Stock
Awards may be based on the Fair Market Value of the Common Shares, or
on other specified values or methods of valuation, as determined by the
Committee.
(c) Stock Option. A right to purchase a specified number of
Common Shares, during a specified period and at a specified exercise
price, all as determined by the Committee. A Stock Option may be an
Incentive Stock Option or a Non-Qualified Stock Option. Incentive Stock
Options may only be issued to Employees. In addition to the terms,
conditions, vesting periods, and restrictions established by the
Committee in the Award Agreement, Incentive Stock Options must comply
with the requirements of Section 422 of the Code, Section 5.03(f), and
this Article V.
Section 5.03. Terms and Conditions of Awards; Agreements. Awards
granted under the Plan shall be evidenced by an Award Agreement executed by the
Company and the Participant, which shall contain such terms and be in such form
as the Committee may from time to time approve, subject to the following
limitations and conditions:
(a) Number of Shares. The Award Agreement shall state, as
appropriate, the type and total number of shares granted, and/or the
type and total number of shares with respect to which Stock Options are
granted.
(b) Award Prices. The Award Agreement shall state, as
applicable, the price per share of the Common Shares with respect to
which Stock Options are issued. The price or other value shall be
determined by the Committee. For Incentive Stock Options, the exercise
price shall satisfy all of the requirements of the Code and of Section
5.03(f) of this Plan.
(c) Payment of Exercise Price; Deferral. The exercise price of
a Stock Option (other than an Incentive Stock Option), Director Option,
and any Stock Award for which the Committee has established an exercise
price, may be paid in cash, by the transfer of Common Shares, by the
surrender of all or part of an Award (including the Award being
exercised), or by a combination of these methods, as and to the extent
permitted by the Committee. The exercise price of an Incentive Stock
Option may be paid in cash, by the transfer of Common Shares, or by a
combination of these methods, as and to the extent permitted by the
Committee at the time of grant, but may not be paid by the surrender of
all or part of an Award. The Committee may prescribe any other method
of paying the exercise price that it determines to be consistent with
applicable law and the purpose of this Plan.
With the approval of the Committee, the delivery of the Common
Shares, cash, or any combination thereof subject to an Award (other
than Director Options) may be deferred, either in the form of
installments or a single future delivery. The Committee may also permit
selected Participants to defer the payment of some or all of their
Awards, as well as other compensation, in accordance with procedures
established by the Committee to assure that the recognition of taxable
income is deferred under the Code. The Committee may also establish
rules and procedures for the crediting of interest on deferred cash
payments and dividend equivalents on Awards.
(d) Issuance of Shares and compliance with Securities Laws.
The Company may postpone the issuance and delivery of certificates
representing shares until (a) the admission of such shares to listing
on any stock exchange on which shares of the Company of the same class
are then listed, and (b) the completion of such registration or other
qualification of such shares under any state or federal law, rule or
regulation as the Company shall determine to be necessary or advisable,
which registration or other qualification the Company shall use it best
efforts to complete; provided, however, a person purchasing shares
pursuant to the Plan has no right to require the Company to register
the Common Shares under federal or state securities laws at any time.
Any person purchasing shares pursuant to the Plan may be required to
make such representations and furnish such information as may, in the
opinion of counsel for the Company, be appropriate to permit the
Company, in light of the existence or non-existence with respect to
such shares of an effective registration under the Securities Act of
1933, as amended, or any similar state statute, to issue the shares in
compliance with the provisions of those or any comparable acts.
(e) Rights as a Shareholder. Unless otherwise provided by the
Board of Directors or the Committee, a Participant shall have rights as
a shareholder with respect to shares covered by an Award, including
voting rights or rights to dividends, only upon the date of issuance of
a certificate to him or her, and, if payment is required, only after
such shares are fully paid.
(f) Incentive Stock Options. To the extent any Award granted
pursuant to this Plan contains an Incentive Stock Option, the following
limitations and conditions shall apply to such Incentive Stock Option
and the Award Agreement relating thereto in addition to the terms and
conditions provided herein:
(i) Price. The price of an Incentive Stock
Option shall be an amount per share not less
than the Fair Market Value per share of the
Common Shares on the date of granting of the
option. In the case of Incentive Stock
Options granted to an Employee of the
Company who is a 10% shareholder, the option
price shall be an amount per share not less
than one hundred ten percent (110%) of the
Fair Market Value per share of the Common
Shares on the date of the granting of the
Incentive Stock Option.
(ii) Exercise Period. Unless terminated earlier
pursuant to other terms and provisions of
the Award Agreement, the term of each
Incentive Stock Option shall expire within
the period prescribed in the Agreement
relating thereto, which shall not be more
than five (5) years from the date the
Incentive Stock Option is granted if the
Participant is a ten percent (10%)
shareholder, and not more than ten (10)
years from the date the Incentive Stock
Option is granted if the Participant is not
a ten percent (10%) shareholder.
(iii) Limitation on Grants. No Incentive Stock
Option shall be granted under this Plan
after April 14, 2009.
(iv) Limitation on Transferability. No Incentive
Stock Option shall be assignable or
transferable except by will or under the
laws of descent and distribution. During the
lifetime of a Participant, the Incentive
Stock Option shall be exercisable only by
the Participant and may not be transferred
or assigned pursuant to a qualified domestic
relations order.
(v) Maximum Exercise Rule. The aggregate Fair
Market Value (determined at the time the
option is granted) of the shares with
respect to which Incentive Stock Options are
exercisable for the first time by an
Employee during any calendar year under all
such plans of the Company and any parent or
Subsidiary of the Company shall not exceed
One Hundred Thousand Dollars ($100,000).
(g) Termination of Awards Under Certain Conditions. The
Committee may cancel any unexpired, unpaid or deferred Awards at any
time, if the Participant is not in compliance with all applicable
provisions of this Plan or with any Award Agreement, or if the
Participant, whether or not he or she is currently employed by the
Company, engages in any of the following activities without the prior
written consent of the Company:
(i) Directly or indirectly renders services to
or for an organization, or engages in a
business that is, in the judgment of the
Committee, in competition with the Company.
(ii) Discloses to anyone outside of the Company,
or uses for any purpose other than the
Company's business, any confidential or
proprietary information or material relating
to the Company, whether acquired by the
Participant during or after employment with
the Company.
The Committee may, in its discretion and as a condition to the
exercise of an Award, require a Participant to acknowledge in writing
that he or she is in compliance with all applicable provisions of this
Plan and of any Award Agreement and has not engaged in any activities
referred to in clauses (i) and (ii) above.
(h) Nontransferability. Unless otherwise determined by the
Committee and provided in the Award Agreement, (i) no Award granted
under this Plan may be transferred or assigned by the Participant to
whom it is granted other than by will, pursuant to the laws of descent
and distribution, or pursuant to a qualified domestic relations order,
and (ii) an Award granted under this Plan may be exercised, during the
Participant's lifetime, only by the Participant or by the Participant's
guardian or legal representative.
Section 5.04. Election to Defer Grant or Receipt of Award.
Notwithstanding any provision herein to the contrary, the Committee may provide,
in any Award Agreement or in any program granting Awards under this Plan, that
the Participant may elect to defer receipt of the Award as provided in the Award
Agreement or program.
ARTICLE VI
DIRECTOR OPTIONS
Section 6.01. Grant of Director Options.
(a) Administration. A committee formed by only those Directors
other than Non-Employee Directors shall have full authority to
administer Director Options, including authority to require that any
Non-Employee Director sign an Award Agreement as a condition of
receiving a Director Option.
(b) Granting of Director Options. Until this Plan is
terminated, each individual serving as a Non-Employee Director on July
1 in any year after 1998 shall automatically receive a Director Option,
effective on such date.
Section 6.02. Number of Common Shares Subject to Each Director Option.
Each Director Option shall entitle the Non-Employee Director the right to
purchase one thousand (1,000) Common Shares on the terms and conditions
specified herein.
Section 6.03. Exercise Price. The exercise price of the Common
Shares subject to each Director Option shall be the Fair Market Value of the
Common Shares at the date of grant.
Section 6.04. Date Director Options Become Exercisable. Unless
otherwise established by the Board of Directors, each Director Option shall
become exercisable in full six (6) months after the date of grant; provided,
however, all Director Options shall become exercisable in full (i) upon a Change
of Control, (ii) in accordance with the terms of Section 6.06, or (iii) upon
attainment by the Non-Employee Director of age 70.
Section 6.05. Expiration Date. Unless terminated earlier pursuant to
the terms of this Plan, each Director Option shall terminate, and the right of
the holder to purchase Common Shares upon exercise of the Director Option shall
expire, at the close of business on the tenth anniversary date of the date of
grant.
Section 6.06. Continuous Service as a Director. No Director Option may
be exercised unless the Non-Employee Director to whom the Director Option was
granted has continued to be a Non-Employee Director from the time of grant
through the time of exercise, except as provided in Section 6.04 and this
Section 6.06.
(a) Retirement or Disability. If the service in office of a
Non-Employee Director is terminated due to the retirement or Disability
of the Non-Employee Director, the Non-Employee Director (or his or her
legal representative if he or she becomes incapacitated), shall have
the right, on or after the date of such termination but in no event
following the expiration of the Director Option, to exercise the
Director Option in full, whether or not the Non-Employee Director would
otherwise have been entitled to exercise the Director Option at such
date.
(b) Death. If the service in office of a Non-Employee Director
is terminated due to the death of the Non-Employee Director, the
Non-Employee Director's estate, executor, administrator, personal
representative or beneficiary shall have the right to exercise the
Director Option in full prior to the earlier of (i) one (1) year after
the date of his or her death, and (ii) the expiration of the Director
Option.
(c) Employed by Company. If a Non-Employee Director ceases to
be a Non-Employee Director by reason of his or her employment by the
Company or his or her appointment as a Subsidiary Director or Advisory
Director, the Director Option granted to that Non-Employee Director
shall be treated the same as Non-Qualified Stock Options held by
Employees, Subsidiary Directors or Advisory Directors, whichever is
applicable, and shall continue to be exercisable prior to the
expiration of the Director Option, subject to the limitations on
exercise following termination of employment, or termination of service
as a Subsidiary Director or Advisory Director, established by the
Committee pursuant to Article VIII of this Plan.
ARTICLE VII
TAX WITHHOLDING OBLIGATIONS
Prior to the payment of an Award, the Company may withhold, or require
a Participant to remit to the Company, an amount sufficient to pay any federal,
state and local withholding taxes associated with the Award. The Committee may,
in its discretion and subject to such rules as the Committee may adopt, permit a
Participant to pay any or all withholding taxes associated with the Award in
cash, by the transfer of Common Shares, by the surrender of all or part of an
Award (including the Award being exercised), or by a combination of these
methods.
ARTICLE VIII
TERMINATION OF EMPLOYMENT OR TERMINATION OF SERVICE AS
SUBSIDIARY DIRECTOR OR ADVISORY DIRECTOR
Section 8.01. Termination of Employment. Unless the Committee provides
otherwise in the Award Agreement, if a Participant's employment with the Company
or a Subsidiary terminates for any reason other than Retirement, Disability or
death of the Participant, he or she may, but only within the thirty (30)-day
period immediately following such termination of employment, and in no event
later than the expiration date specified in the Award Agreement, exercise his or
her Award to the extent that he or she was entitled to exercise it at the date
of such termination; provided, however, if a Participant's employment is
terminated for deliberate, willful or gross misconduct, as determined by the
Board of Directors, all rights under the Award shall expire upon receipt of the
notice of such termination. The transfer of an Employee from the employ of the
Company to a Subsidiary, or vice versa, or from one Subsidiary to another
Subsidiary, shall not be deemed a termination of employment for purposes of the
Plan.
Section 8.02. Retirement or Disability. Unless the Committee provides
otherwise in the Award Agreement, if a Participant's employment with the Company
or any Subsidiary, or his or her service as a Subsidiary Director or Advisory
Director, terminates due to Retirement or Disability, the Participant (or his or
her legal representative if he or she becomes incapacitated) may, on or after
the date of such termination but in no event later than the expiration date of
the Award, exercise in full each Award granted to the Participant prior to such
termination, whether or not the Participant would otherwise have been entitled
to exercise the Award at such date. However, if the Award being exercised under
this Section is an Incentive Stock Option, it may be exercised as such only
during (i) the three (3) month period immediately following a termination due to
Retirement, or (ii) during the one (1) year period immediately following a
termination due to Disability (but in no event later than the expiration date of
the Award). During the remainder of the exercise period, if any, the option may
be exercised as a Non-Qualified Stock Option.
Section 8.03. Death. Unless the Committee provides otherwise in the
Award Agreement, if a Participant dies (whether prior to or after termination of
employment or termination of service as a Subsidiary Director or Advisory
Director), the Participant's estate, executor, administrator, personal
representative or beneficiary may, within the one (1) year period immediately
following the Participant's death but in no event later than the expiration date
of the Award, exercise in full each Award granted to the Participant prior to
his or her death, whether or not the Participant would otherwise have been
entitled to exercise the Award at such date. If the Award being exercised under
this Section is an Incentive Stock Option and the Participant dies prior to
termination of employment or within three (3) months following such termination,
the Award may continue to be exercised as an Incentive Stock Option during the
entire one (1) year period immediately following the Participant's death (but in
no event later than the expiration date of the Award).
ARTICLE IX
CHANGE OF CONTROL
Unless and to the extent the terms and conditions of a Change of
Control agreement between the Company and a Participant provide otherwise, in
the event of a Change of Control of the Company, (i) all Stock Options then
outstanding will become fully exercisable as of the date of the Change of
Control, and (ii) all restrictions and conditions applicable to Restricted Stock
and other Stock Awards will be deemed to have been satisfied as of the date of
the Change of Control. Any such determination by the Board of Directors that is
made after the occurrence of a Change of Control will not be effective unless a
majority of the Directors then in office were in office at the beginning of a
period of twenty-four (24) consecutive months and the determination is approved
by a majority of such Directors.
ARTICLE X
AMENDMENT OF PLAN OR AWARDS
Section 10.01. Amendment, Suspension or Termination of Plan. The Board
of Directors may, from time to time, amend, suspend or terminate this Plan at
any time, and, in accordance with such amendments, may thereupon change terms
and conditions of any Awards not theretofore issued. Shareholder approval for
any such amendment will be required only to the extent necessary to satisfy the
rules of NASDAQ or any national exchange on which the Common Shares are listed,
or to satisfy any applicable federal or state law or regulation.
Section 10.02. Amendment of Outstanding Awards. The Committee may, in
its discretion, amend the terms of any Award (other than a Director Option),
prospectively or retroactively, but no such amendment may impair the rights of
any Participant without his or her consent. Shareholder approval for any such
amendment will be required only to the extent necessary to satisfy the rules of
NASDAQ or any national exchange on which the Common Shares are listed, or to
satisfy any applicable federal or state law or regulation. The Committee may, in
whole or in part, waive any restrictions or conditions applicable to, or
accelerate the vesting of, any Award (other than a Director Option).
ARTICLE XI
MISCELLANEOUS
Section 11.01. Governing Law. The interpretation, validity and
enforcement of this Plan will, to the extent not otherwise governed by the Code
or the securities laws of the United States, be governed by the laws of the
State of Indiana.
Section 11.02. Rights of Employees. Nothing in this Plan will confer
upon any Participant the right to continued employment by the Company or limit
in any way the Company's right to terminate any Participant's employment at
will.
ARTICLE XII
DEFINITIONS
Section 12.01. Definitions. When capitalized in this Plan, unless the
context otherwise requires:
(a) "Advisory Director" means an advisory director of the
Company or any of its Subsidiaries, who is not an Employee or Director
of the Company or any of its Subsidiaries.
(b) "Award" means a grant made to a Participant pursuant to
Article V of this Plan.
(c) "Award Agreement" means a written instrument between the
Company and a Participant evidencing an Award and prescribing the
terms, conditions, and restrictions applicable to the Award.
(d) "Board of Directors" means the Board of Directors of the
Company, as constituted at any time.
(e) "Change of Control" means the first to occur of the
following events:
(i) any "person," as such term is used in
Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the
"Exchange Act") other than the Company, is
or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities
of the Company or First Merchants Bank,
National Association (the "Bank")
representing twenty-five percent (25%) or
more of the combined voting power of the
Company's or Bank's then outstanding
securities;
(ii) persons constituting a majority of the Board
of Directors of the Company or the Bank were
not directors of the Company or the Bank for
at least the twenty-four (24) months
preceding months;
(iii) the shareholders of the Company or the Bank
approve a merger or consolidation of the
Company or the Bank with any other company,
other than (1) a merger or consolidation
which would result in the voting securities
of the Company 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 Company or
the Bank or such surviving entity
outstanding immediately after such merger
or consolidation or (2) a merger or
consolidation effected to implement a
recapitalization of the Company or the Bank
(or similar transaction) in which no person
acquires fifty percent (50%) or more of
the combined voting power of the Company's
or the Bank's then outstanding
securities; or
(iv) the shareholders of the Company approve a
plan of complete liquidation of the Company
or the Bank or an agreement for the sale or
disposition by the Company or the Bank of
all or substantially all of the Company's
assets.
(f) "Code" means the Internal Revenue Code of 1986, as
amended.
(g) "Committee" means the Compensation and Human Resources
Committee of the Board of Directors, consisting of two or more
Non-Employee Directors who are "non-employee directors" as defined in
paragraph (b)(3) of Rule 16b-3.
(h) "Common Share" means a share of common stock of First
Merchants Corporation.
(i) "Common Shares Outstanding" means the total number of
Common Shares outstanding as reflected in the Company's financial
statements as of the most recent fiscal year-end.
(j) "Company" means First Merchants Corporation.
(k) "Director" means a director of the Company.
(l) "Director Option" means a right to purchase Common Shares
granted to a Non-Employee Director pursuant to Article VI.
(m) "Disabled" or "Disability" means a permanent disability as
defined in the applicable long-term disability plan of the Company;
except that "Disabled" or "Disability" with respect to Director Options
or Awards made to Subsidiary Directors or Advisory Directors shall mean
total and permanent disability as defined in Section 22(e)(3) of the
Code.
(n) "Employee" means any individual employed by the Company or
any of its Subsidiaries, including officers and Employees who are
members of the Board of Directors of the Company or any of its
Subsidiaries.
(o) "Fair Market Value" of a Common Share means the value of
the share on a particular date, determined as follows:
(i) if the stock is not listed on such date on any
national securities exchange, the average between the
highest "bid" and lowest "offered" quotations of a
share on such date (or, if none, on the most recent
date on which there were bid and offered quotations
of a share), as reported by NASDAQ, or other similar
service selected by the Committee;
(ii) if the stock is listed on such date on one (1) or
more national securities exchanges, the last reported
sale price of a share on such date as recorded on the
composite tape system, or, if such system does not
cover the stock, the last reported sale price of a
share on such date on the principal national
securities exchange on which the stock is listed, or,
if no sale of the stock took place on such date, the
last reported sale price of a share on the most
recent day on which a sale of a share took place as
recorded by such system or on such exchange, as the
case may be; or
(iii) if the stock is neither listed on such date on a
national securities exchange nor traded in the
over-the-counter market, the fair market value of a
share on such date as determined in good faith by the
Committee, on a basis consistent with regulations
under the Code.
(p) "Incentive Stock Options" means stock options issued to
Employees which qualify under and meet the requirements of Section 422
of the Code.
(q) "Non-Employee Director" means any Director of the
Company who is not an Employee of the Company or any of its
Subsidiaries.
(r) "Non-Qualified Stock Options" means stock options which do
not qualify under or meet the requirements of Section 422 of the Code.
(s) "Participant" means any person to whom an Award has been
granted under this Plan.
(t) "Plan" means this First Merchants Corporation 1999
Long-Term Equity Incentive Plan authorized by the Board of Directors at
its meeting held on February 9, 1999, as such Plan from time to time
may be amended as herein provided.
(u) "Restricted Stock" means an Award of Common Shares that
are nontransferable and are subject to a substantial risk of
forfeiture.
(v) "Retirement", in the case of an Employee, means the
termination of all employment with the Company and its Subsidiaries for
any reason other than death or Disability after the day on which the
Employee has attained age 55.
(w) "Rule 16b-3" means Rule 16b-3 of the Securities and
Exchange Commission, under the Securities Exchange Age of 1934, as
amended.
(x) "Stock Options" means the Incentive Stock Options and the
Non-Qualified Stock Options issued pursuant to the Plan.
(y) "Subsidiary" means a corporation or other form of business
association of which shares (or other ownership interests) having fifty
percent (50%) or more of the voting power are, or in the future become,
owned or controlled, directly or indirectly, by the Company.
(z) "Subsidiary Director" means a director of a Subsidiary of
the Company, who is not a Director of the Company or an Employee of the
Company or any of its Subsidiaries.
As amended, August 14, 2001
EXHIBIT-13
2002 ANNUAL REPORT TO STOCKHOLDERS-FINANCIAL REVIEW
EXHIBIT 13--2002 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 ACCOUNTANTS' REPORT 18
CONSOLIDATED
FINANCIAL STATEMENTS 19
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS 23
STOCKHOLDER INFORMATION 52
================================================================================
1
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
===================================================================================================================================
(in thousands, except share data) 2002 2001 2000 1999 1998
===================================================================================================================================
Operations (4)
Net Interest Income
Fully Taxable Equivalent (FTE) Basis ............... $ 96,599 $ 66,806 $ 58,619 $ 56,513 $ 52,463
Less Tax Equivalent Adjustment .......................... 3,676 2,445 2,637 2,948 2,767
---------- ---------- ---------- ---------- ----------
Net Interest Income ..................................... 92,923 64,361 55,982 53,565 49,696
Provision for Loan Losses ............................... 7,174 3,576 2,625 2,241 2,372
---------- ---------- ---------- ---------- ----------
Net Interest Income
After Provision for Loan Losses .................... 85,749 60,785 53,357 51,324 47,324
Total Other Income ...................................... 27,077 18,543 16,634 14,573 12,880
Total Other Expenses .................................... 71,009 45,195 40,083 36,710 32,741
---------- ---------- ---------- ---------- ----------
Income Before Income Tax Expense ................... 41,817 34,133 29,908 29,187 27,463
Income Tax Expense ...................................... 13,981 11,924 9,968 10,099 9,556
---------- ---------- ---------- ---------- ----------
Net Income .............................................. $ 27,836 $ 22,209 $ 19,940 $ 19,088 $ 17,907
========== ========== ========== ========== ==========
Per share data (1)(4)
Basic Net Income ........................................ $ 1.79 $ 1.71 $ 1.59 $ 1.44 $ 1.36
Diluted Net Income ...................................... 1.77 1.69 1.58 1.43 1.34
Cash Dividends Paid (2) ................................. .90 .88 .82 .76 .70
December 31 Book Value .................................. 16.00 13.46 12.19 10.48 11.66
December 31 Market Value (Bid Price) .................... 22.75 22.87 20.52 23.18 23.58
Average balances (4)
Total Assets ............................................ $2,406,251 $1,689,694 $1,532,691 $1,397,230 $1,254,223
Total Loans ............................................. 1,842,429 1,270,555 1,104,013 935,716 870,317
Total Deposits .......................................... 1,857,053 1,331,631 1,209,015 1,073,074 1,016,629
Securities Sold Under Repurchase Agreements
(long-term portion) ................................ 66,535 44,394 53,309 56,181 34,900
Total Federal Home Loan Bank Advances ................... 155,387 103,941 80,008 57,062 30,742
Total Trust Preferred Securities ........................ 37,379
Total Stockholders' Equity .............................. 237,575 166,232 141,446 149,727 148,052
Year-end balances (4)
Total Assets ............................................ $2,678,687 $1,787,035 $1,621,063 $1,474,048 $1,362,527
Total Loans ............................................. 2,025,922 1,359,893 1,175,586 998,956 891,132
Total Deposits .......................................... 2,036,688 1,421,251 1,288,299 1,147,203 1,085,952
Securities Sold Under Repurchase Agreements
(long-term portion) ............................... 23,632 32,500 32,500 35,000 28,000
Total Federal Home Loan Bank Advances ................... 184,677 103,499 93,182 73,514 47,068
Total Trust Preferred Securities ........................ 53,188
Total Stockholders' Equity .............................. 261,129 179,128 156,063 126,296 153,891
Financial ratios (4)
Return on Average Assets ................................ 1.16% 1.31% 1.30% 1.37% 1.43%
Return on Average Stockholders' Equity .................. 11.72 13.36 14.10 12.75 12.09
Average Earning Assets to Total Assets .................. 91.38 93.29 94.85 94.77 94.80
Allowance for Loan Losses as % of Total Loans ........... 1.11 1.11 1.06 1.01 1.03
Dividend Payout Ratio ................................... 50.85 52.07 51.90 53.15 52.24
Average Stockholders' Equity to Average Assets .......... 9.87 9.84 9.23 10.72 11.80
Tax Equivalent Yield on Earning Assets (3) .............. 6.83 7.80 8.19 7.81 8.15
Cost of Supporting Liabilities .......................... 2.44 3.56 4.16 3.54 3.74
Net Interest Margin on Earning Assets ................... 4.39 4.24 4.03 4.27 4.41
(1) Restated for all stock dividends and stock splits.
(2) Dividends per share is for First Merchants Corporation only, not restated
for pooling transactions.
(3) 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.
(4) Business combinations that affect the comparability of this information
are discussed in Note 2 to the consolidated financial statements.
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.
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 Form
10-K and Form 10-Q, in other written materials and in oral statements made by
senior management to analysts, investors, representatives of the media and
others. The Corporation intends these forward-looking statements to be covered
by the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995, and the Corporation is
including this statement for purposes of these safe harbor provisions.
Forward-looking statements can often be identified by the use of words like
"estimate," "project," "intend," "anticipate," "expect" and similar expressions.
These forward-looking statements include:
* statements of the Corporation's goals, intentions and expectations;
* statements regarding the Corporation's business plan and growth
strategies;
* statements regarding the asset quality of the Corporation's loan and
investment portfolios; and
* estimates of the Corporation's risks and future costs and benefits.
These forward-looking statements are subject to significant risks,
assumptions and uncertainties, including, among other things, the following
important factors which could affect the actual outcome of future events:
* fluctuations in market rates of interest and loan and deposit
pricing, which could negatively affect the Corporation's net
interest margin, asset valuations and expense expectations;
* adverse changes in the Indiana economy, which might affect the
Corporation's business prospects and could cause credit-related
losses and expenses;
* adverse developments in the Corporation's loan and investment
portfolios;
* competitive factors in the banking industry, such as the trend
towards consolidation in the Corporation's market; and
* changes in the banking legislation or the regulatory requirements of
federal and state agencies applicable to bank holding companies and
banks like the Corporation's affiliate banks.
3
================================================================================
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
Because of these and other uncertainties, the Corporation's actual future
results may be materially different from the results indicated by these forward-
looking statements. In addition, the Corporation's past results of operations do
not necessarily indicate its future results.
CRITICAL ACCOUNTING POLICIES
Certain policies are important to the portrayal of the Corporation's
financial condition, since they require management to make difficult, complex or
subjective judgements, some of which relate to matters that are inherently
uncertain. Management believes that its critical accounting policies are those
that involve the determination of the allowance for loan losses ("ALL").
The ALL is a significant estimate that can and does change based on
management's assumptions about specific borrowers and applicable economic and
environmental conditions, among other factors. The ALL is maintained to absorb
losses inherent in the loan portfolio and is based on ongoing, quarterly
assessments of the probable losses inherent in the loan portfolio. The ALL is
increased by the provision for loan losses, which is charged against current
operating results. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance. The Corporation's methodology
for assessing the appropriateness of the ALL consists of three key elements -
the determination of the appropriate reserves for specifically identified loans,
historical losses, and environmental or qualitative factors.
Specific allowances are established in those instances where management
has identified significant conditions or circumstances related to a credit that
management believes indicate the probability that a loss may be incurred. The
loans that are reviewed for specific allowances are generally those internally
classified as substandard, doubtful or loss, including nonaccrual loans, loans
in the process of foreclosure and certain loans past due 90 days or more and
still accruing interest. Additionally, management also specifically reviews any
other loan with a significant loss exposure.
The Corporation's five-year average historical loss experience is used to
estimate an appropriate allowance for those loans not individually reviewed. The
historical loss experience is determined for each type of loan in the portfolio.
There are certain inherent risks in the Corporation's loan portfolio;
accordingly, the Corporation includes certain environmental or qualitative
factors in its determination of the adequacy of the allowance for loan losses.
These factors include national and local economic conditions that could have an
impact of the credit quality of the loan portfolio, lending policies and
procedures, portfolio size and composition, delinquency and non-performing loan
trends, lending management and staff, loan review systems and procedures,
concentration of credit, among other factors. The evaluation of the inherent
loss with respect to these factors is subject to a higher degree of uncertainty
because they are not identified with specific credits.
4
================================================================================
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
RESULTS OF OPERATIONS
Net income for the year 2002 reached $27,836,000, up from $22,209,000 in
2001. The $5,627,000 increase is attributable to several factors, including the
April 1, 2002 acquisition of Lafayette Bank and Trust Company ("Lafayette"),
improved net interest margin and the elimination of goodwill amortization.
However, these factors were mitigated by increased provision for loan losses and
increased other expenses. These factors and others are discussed within the
respective sections of Management's Discussion & Analysis of Financial Condition
and Results of Operations. Diluted earnings per share totaled $1.77, a 4.7%
increase over $1.69 reported for 2001. In 2002, First Merchants Corporation
("Corporation") recorded the twenty-seventh consecutive year of improvement in
net income on both an aggregate and per share basis.
Net income for the year 2001 reached $22,209,000 up from $19,940,000 in
2000. The $2,269,000 increase is attributable to several factors, including the
July 1, 2001 acquisition of Frances Slocum Bank and Trust Company and improved
net interest margin; however, these factors were mitigated by increased other
expenses. These factors and others are discussed within the respective sections
of Management's Discussion & Analysis of Financial Condition and Results of
Operations. Diluted earnings per share totaled $1.69, a 7.0% increase over $1.58
reported for 2000.
Return on equity was 11.72 percent in 2002, as compared to the 2001 and
2000 figures of 13.36 percent and 14.10 percent.
Return on assets was 1.16 percent in 2002, 1.31 percent in 2001 and 1.30
percent in 2000.
The declines in return on equity and return on assets during 2002 are
primarily due to increased provision for loan losses, which is discussed in the
Asset Quality/Provision for Loan Losses section of Management's Discussion &
Analysis of Financial Condition and Results of Operations.
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.
Tier I capital consists primarily of common stockholders' equity and trust
preferred securities, less nonqualifying intangible assets and unrealized net
securities gains. The Corporation's Tier I capital to average assets ratio was
7.92 percent and 8.7 percent at December 31, 2002 and 2001, respectively. In
addition, at December 31, 2002, the Corporation had a Tier I risk-based capital
ratio of 10.06 percent and total risk-based capital ratio of 11.17 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.
5
================================================================================
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
CAPITAL continued
The Corporation has an employee stock purchase plan and an employee stock option
plan. Activity under these plans is described in Note 16 to the Consolidated
Financial Statements. The transactions under these plans have not had a material
effect on the Corporation's capital position.
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.
(See Critical Accounting Policies)
At December 31, 2002, non-performing loans totaled $23,318,000, an
increase of $8,652,000, as noted in the table on the following page. This
increase was primarily due to the addition of $8,122,000 in non-accrual loans
and past due 90 days or more other than non-accruing loans related to the
acquisition of Lafayette and the general downturn in the economy.
At December 31, 2002, impaired loans totaled $44,351,000, an increase of
$23,190,000 from year end 2001. The increase was attributable to the addition of
impaired loans totaling $14,677,000, related to the acquisition of Lafayette and
several borrowers whose loans are considered impaired at December 31, 2002, but
were not impaired at December 31, 2001. At December 31, 2002, an allowance for
losses was not deemed necessary for impaired loans totaling $27,450,000, but an
allowance of $7,299,000 was recorded for the remaining balance of impaired loans
of $16,901,000 and is included in the Corporation's allowance for loan losses.
The average balance of impaired loans for 2002 was $49,663,000.
At December 31, 2002, the allowance for loan losses was $22,417,000, an
increase of $7,276,000 from year end 2001. As a percent of loans, the allowance
was 1.11 percent at both December 31, 2002 and 2001.
The provision for loan losses in 2002 was $7,174,000, an increase of
$3,598,000 from $3,576,000 in 2001. The Corporation's adequacy of the allowance
for loan losses reflects increased non-performing loans, increased specific
reserves and increased impaired loans, resulting in increased provision expense.
Of the $3.6 million increase, approximately $900,000 is attributable to the
provision for loan losses for Lafayette subsequent to its acquisition, with the
remaining based on the regular ongoing evaluation of the loan portfolios of the
Corporation's bank subsidiaries. Current non-performing and impaired loan
balances indicate that some decline in loan asset quality has occurred, which
management believes is a result of current economic conditions.
6
================================================================================
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
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,
- --------------------------------------------------------------------------------
2002 2001
================================================================================
Non-accrual loans .............................. $14,134 $ 6,327
Loans contractually
past due 90 days or more
other than non-accruing ..................... 6,676 4,828
Restructured loans ............................. 2,508 3,511
------- -------
Total ....................................... $23,318 $14,666
======= =======
The table below presents loan loss experience for the years indicated.
(Dollars in Thousands) 2002 2001 2000
===================================================================================================================================
Allowance for loan losses:
Balance at January 1 ............................................... $15,141 $12,454 $10,128
------- ------- -------
Chargeoffs ......................................................... 8,113 3,547 2,291
Recoveries ......................................................... 1,313 573 579
------- ------- -------
Net chargeoffs ..................................................... 6,800 2,974 1,712
Provision for loan losses .......................................... 7,174 3,576 2,625
Allowance acquired in acquisitions.................................. 6,902 2,085 1,413
------- ------- -------
Balance at December 31 ............................................. $22,417 $15,141 $12,454
======= ======= =======
Ratio of net chargeoffs during the period to
average loans outstanding during the period ....................... .37% .23% .16%
LIQUIDITY
Liquidity management is the process by which the Corporation ensures that
adequate liquid funds are available for the Corporation and its subsidiaries.
These funds are necessary in order for the Corporation and its subsidiaries to
meet financial commitments on a timely basis. These commitments include
withdrawals by depositors, funding credit obligations to borrowers, paying
dividends to shareholders, paying operating expenses, funding capital
expenditures, and maintaining deposit reserve requirements. Liquidity is
monitored and closely managed by the asset/liability committees at each
subsidiary and by the Corporation's asset/liability committee.
The liquidity of the Corporation is dependent upon the receipt of
dividends from its bank subsidiaries, which are subject to certain regulatory
limitations as explained in Note 14 to the consolidated financial statements,
and access to other funding sources. Liquidity of the Corporation's bank
subsidiaries is derived primarily from core deposit growth, principal payments
received on loans, the sale and maturity of investment securities, net cash
provided by operating activities, and access to other funding sources. The most
stable source of liability-funded liquidity for both the long-term and
short-term is deposit growth and retention in the core deposit base. In
addition, the Corporation utilizes advances from the Federal Home Loan Bank
("FHLB") as a funding source. At December 31, 2002, total borrowings from the
FHLB were $184,677,000. The Corporation's bank subsidiaries have pledged certain
mortgage loans and certain investments to the FHLB. The total available
remaining borrowing capacity from the FHLB at December 31, 2002, was
$221,204,000. The principal source of asset-funded liquidity is investment
securities classified as available-for-sale, the market values of which totaled
7
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MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
LIQUIDITY continued
$332,925,000 at December 31, 2002, an increase of $101,257,000 or 43.7% over
2001. Securities classified as held-to-maturity that are maturing within a short
period of time can also be a source of liquidity. Securities classified as
held-to-maturity and that are maturing in one year or less totaled $1,286,000 at
December 31, 2002. In addition, other types of assets-such as cash and due from
banks, federal funds sold and securities purchased under agreements to resell,
and loans and interest-bearing deposits with other banks maturing within one
year-are sources of liquidity.
In the normal course of business, the Corporation is a party to a number
of other off-balance sheet activities that contain credit, market and
operational risk that are not reflected in whole or in part in the Corporation's
consolidated financial statements. Such activities include: traditional
off-balance sheet credit-related financial instruments, commitments under
operating leases and long-term debt.
The Corporation provides customers with off-balance sheet credit support
through loan commitments and standby letters of credit. Summarized
credit-related financial instruments at December 31, 2002 are as follows:
At December 31,
(Dollars in thousands) 2002
================================================================================
Amounts of commitments:
Loan commitments to extend credit ............................... $ 312,146
Standby letters of credit ....................................... 18,124
----------
$ 330,270
==========
Since many of the commitments are expected to expire unused or be only
partially used, the total amount of unused commitments in the preceding table
does not necessarily represent future cash requirements.
In addition to owned banking facilities, the Corporation has entered into a
number of long-term leasing arrangements to support the ongoing activities of
the Corporation. The required payments under such commitments and long-term debt
at December 31, 2002 are as follows:
2002 2003 2004 2005 2006 2007 Total
(Dollars in thousands) and after
=======================================================================================================
Operating leases ......... $ 967 $ 795 $ 533 $ 567 $ 345 $ 323 $ 3,530
Trust preferred securities 53,188 53,188
Long-term debt ........... 81,588 32,382 27,750 20,403 10,495 101,653 274,271
-------- -------- -------- -------- -------- -------- --------
Total .................... $ 82,555 $ 33,177 $ 28,283 $ 20,970 $ 10,840 $155,164 $330,989
======== ======== ======== ======== ======== ======== ========
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
8
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MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET RISK continued
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, 2002, 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, 2002.
INTEREST RATE SENSITIVITY ANALYSIS
(dollars in thousands) At December 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
1-180 DAYS 181-365 DAYS 1-5 YEARS BEYOND 5 YEARS TOTAL
===================================================================================================================================
Rate-Sensitive Assets:
Federal funds sold and interest-bearing deposits ........ $ 34,968 $ 34,968
Investment securities ................................... 27,765 $ 12,136 $ 85,429 $ 216,732 342,062
Loans ................................................... 850,254 195,160 661,945 318,563 2,025,922
Federal Reserve and Federal Home Loan Bank stock ........ 11,409 11,409
---------- ---------- ---------- ---------- ----------
Total rate-sensitive assets ........................ 924,396 207,296 747,374 535,295 2,414,361
---------- ---------- ---------- ---------- ----------
Rate-Sensitive Liabilities:
Interest-bearing deposits ............................... 723,470 494,076 494,077 52,937 1,764,560
Securities sold under repurchase agreements ............. 65,962 23,632 89,594
Other short-term borrowings ............................. 10,168 10,168
Federal Home Loan Bank advances ......................... 7,807 7,819 67,398 101,653 184,677
Trust preferred securities .............................. 53,188 53,188
Other borrowed funds .................................... 19,300 19,300
---------- ---------- ---------- ---------- ----------
Total rate-sensitive liabilities ................... 826,707 501,895 585,107 207,778 2,121,487
---------- ---------- ---------- ---------- ----------
Interest rate sensitivity gap by period .................... $ 97,689 $ (294,599) $ 162,267 $ 327,517
Cumulative rate sensitivity gap ............................ 97,689 (196,910) (34,643) 292,874
Cumulative rate sensitivity gap ratio
at December 31, 2002 .................................... 111.8% 85.2% 98.2% 113.8%
at December 31, 2001 .................................... 135.4% 97.6% 109.7% 116.9%
The Corporation had a cumulative negative gap of $196,910,000 in the one-year
horizon at December 31, 2002, just over 7.4 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.
9
================================================================================
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
INTEREST RATE SENSITIVITY ANALYSIS continued
Net interest income simulation modeling, or earnings-at-risk, measures the
sensitivity of net interest income to various interest rate movements. The
Corporation's asset liability process monitors simulated net interest income
under three separate interest rate scenarios; base, rising and falling.
Estimated net interest income for each scenario is calculated over a 12-month
horizon. The immediate and parallel changes to the base case scenario used in
the model are presented below. The interest rate scenarios are used for
analytical purposes and do not necessarily represent management's view of future
market movements. Rather, these are intended to provide a measure of the degree
of volatility interest rate movements may introduce into the earnings of the
Corporation.
The base scenario is highly dependent on numerous assumptions embedded in
the model, including assumptions related to future interest rates. While the
base sensitivity analysis incorporates management's best estimate of interest
rate and balance sheet dynamics under various market rate movements, the actual
behavior and resulting earnings impact will likely differ from that projected.
For mortgage-related assets, the base simulation model captures the expected
prepayment behavior under changing interest rate environments. Assumptions and
methodologies regarding the interest rate or balance behavior of indeterminate
maturity products, e.g., savings, money market, NOW and demand deposits reflect
management's best estimate of expected future behavior.
The comparative rising and falling scenarios for the period ended December
31, 2003 assume further interest rate changes in addition to the base simulation
discussed above. These changes are immediate and parallel changes to the base
case scenario. In addition, total rate movements (beginning point minus ending
point) to each of the various driver rates utilized by management in the base
simulation for the period ended December 31, 2003 are as follows:
Driver Rates RISING FALLING
================================================================================
Prime 200 Basis Points (50) Basis Points
Federal Funds 200 (50)
One-Year T-Bill 200 (20)
Two-Year T-Bill 200 (59)
Interest Checking 100 --
MMIA Savings 100 --
First Flex 100 (25)
CD's 200 (53)
FHLB Advances 200 (66)
Results for the base, rising and falling interest rate scenarios are
listed below, based upon the Corporation's rate sensitive assets at December 31,
2002. The net interest income shown represents cumulative net interest income
over a 12-month time horizon. Balance sheet assumptions used for the base
scenario are the same for the rising and falling simulations.
BASE RISING FALLING
===============================================================================
Net Interest Income (dollars in thousands) $105,138 $113,855 $ 98,793
Variance from base $ 8,717 $ (6,345)
Percent of change from base 8.29% (6.03)%
10
================================================================================
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
EARNING ASSETS
Earning assets increased $767.4 million during 2002. The table below
reflects the earning asset mix for the years 2002 and 2001 (at December 31).
Loans grew by $666.0 million while investment securities increased by
$101.7 million. The acquisition of Lafayette combined with increased loan demand
resulted in a 49.0% increase in the Corporation's loan portfolio. In addition,
the increase in investment securities was primarily a result of the acquisition
of Lafayette.
EARNING ASSETS
(dollars in millions) December 31,
================================================================================
2002 2001
-------- --------
Federal funds sold and interest-bearing time deposits $ 35.0 $ 38.2
Securities available for sale ....................... 332.9 231.7
Securities held to maturity ......................... 9.1 8.7
Loans ............................................... 2,025.9 1,359.9
Federal Reserve and Federal Home Loan Bank stock .... 11.4 8.4
-------- --------
Total ........................................... $2,414.3 $1,646.9
======== ========
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, trust preferred securities and other borrowed funds) based
on year-end levels at December 31, 2002 and 2001.
As of December 31
(dollars in millions)
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITIES SOLD UNDER OTHER SHORT-TERM FEDERAL HOME LOAN TRUST PREFERRED OTHER BORROWED
DEPOSITS REPURCHASE AGREEMENTS BORROWINGS BANK ADVANCES SECURITIES FUNDS
===================================================================================================================================
2002 $2,036.7 $89.6 $10.2 $184.7 $53.2 $19.3
2001 1,421.3 45.6 16.8 103.5 8.5
11
================================================================================
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
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 2002.
In 2002, asset yields decreased 97 basis points (FTE) and interest cost
decreased 112 basis points, resulting in a 15 basis point (FTE) increase in net
interest income. The Corporation aggressively repriced deposits downward in
relation to market interest rates in an effort to mitigate declining asset
yields resulting from a 4.5% decrease in the prime rate in 2001 and an
additional 75 basis point decline in 2002.
(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
==============================================================================================================
2002 6.83% 2.44% 4.39% $2,198,943 $96,599
2001 7.80 3.56 4.24 1,576,334 66,806
2000 8.19 4.16 4.03 1,453,795 58,619
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.
12
================================================================================
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 2002 amounted to $27,077,000 or 46.0 percent higher than
in 2001. The increase of $8,534,000 is primarily attributable to the following
factors:
1. Service charges on deposit accounts increased $3,601,000 or 62.9 percent
due to increased number of accounts, price adjustments and approximately
$3,105,000 of additional service charge income related to the April 1,
2002 acquisition of Lafayette.
2. Net realized gains on sales of available-for-sale securities totaled
$739,000 in 2002, while net realized losses on sales of available-for-sale
securities totaled $(200,000) during 2001.
3. Revenues from fiduciary activities increased $829,000 or 15.3 percent due
primarily to additional fees received related to the acquisition of
Lafayette.
4. The Corporation sold its purchase money order business in September of
2002, resulting in a net gain on sale of $514,000.
5. Abstract, title insurance and other related income increased $910,000 in
2002, related to the January 1, 2002 acquisition of Delaware County
Abstract Company, Inc. and Beebe & Smith Title Insurance Company, Inc.
6. Gains on sale of mortgage loans included in other income increase by
$481,000, or 39.1 percent, due to increased mortgage volume. In addition,
decreasing mortgage loan rates caused an increase in refinancing volume,
which facilitated an increase in loan sales activity.
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.
13
================================================================================
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 2002 amounted to $71,009,000, an increase of 57.1
percent from the prior year, or $25,814,000.
The following factors account for most of the increase:
1. Salaries and benefit expense grew $14,439,000, or 58.4 percent, due to
normal salary increases, staff additions and additional salary and benefit
cost of $9,785,000 related to the April 1, 2002 acquisition of Lafayette.
2. Telephone expenses increased by $1,497,000 or 140.9%, due to additional
telephone costs related to the acquisition of Lafayette. In addition,
increased service contract charges related to greater usage of telephone
lines, contributed to this increase.
3. Equipment expenses increased by $2,188,000 or 48.4%, primarily related to
the April 1, 2002 acquisition of Lafayette.
4. Core deposit intangible amortization increased by $907,000, due to
utilization of the purchase method of accounting for the Corporation
related to the April 1, 2002 acquisition of Lafayette.
5. Data processing fees increased by $1,421,000, or 63.4 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 2002.
6. Net occupancy expenses increased by $903,000 or 33.1%, primarily related
to the April 1, 2002 acquisition of Lafayette.
Other expenses amounted to $45,195,000 in 2001, 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.
14
================================================================================
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
INCOME TAXES
The increase in 2002 tax expense of $2,057,000 is attributable primarily
to the acquisition of Lafayette and an increase in pre-tax income of $5,627,000.
The increase in 2001 tax expenses of $1,956,000 is attributable primarily to a
$4,225,000 increase in net pre-tax income. In addition, the effective tax rates
for the periods ending December 31, 2002, 2001 and 2000 were 33.4%, 34.9% and
33.3%, respectively. The 150 basis point decrease is primarily a result of
increases in tax exempt interest income and reduced state taxes, resulting from
the effect of state income apportionment.
ACCOUNTING MATTERS
ACCOUNTING FOR A BUSINESS COMBINATION
Statement of Financial Accounting Standards ("SFAS") No. 141 requires that
most all business combinations should be accounted for using the purchase method
of accounting; use of the pooling method is prohibited.
This Statement requires that goodwill be initially recognized as an asset
in the financial statement and measured as the excess of the cost of an acquired
entity over the net of the amounts assigned to identifiable assets acquired and
liabilities assumed. In addition, SFAS No. 141 requires all other intangibles,
such as core deposit intangibles for a financial institution, to be identified.
The provisions of Statement No. 141 were effective for any business
combination that was initiated after June 30, 2001.
ACCOUNTING FOR GOODWILL
Under the provisions of SFAS No. 142, goodwill should not be amortized but
should be tested for impairment at the reporting unit level. Impairment test of
goodwill should be done on an annual basis unless events or circumstances
indicate impairment has occurred in the interim period. The annual impairment
test can be performed at any time during the year as long as the measurement
date is used consistently from year to year.
Impairment testing is a two step process, as outlined within the
statement. If the fair value of goodwill is less than its carrying value, then
the goodwill is deemed impaired and a loss recognized.
15
================================================================================
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
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 $87,640,000 and $26,081,000 at December 31, 2002 and
2001, respectively. Had Statement No. 142 been applied retroactively, the
reported 2001 and 2000 net income would have increased by $1,070,000 and
$724,000, respectively. At December 31, 2002, no impairment loss was identified.
ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS
SFAS No. 147 became effective October 1, 2002. This standard requires any
intangible assets previously recorded under SFAS No. 72 to be included in the
scope of SFAS No.s 141 and 142. This standard has no immediate impact on the
financial position and results of operations of the Corporation, as the
Corporation did not have any recorded unidentified intangible assets or goodwill
that had continued to be amortized.
ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE-AN AMENDMENT
OF FASB STATEMENT NO. 123
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148. SFAS No. 148 amends FASB Statement No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123") and provides alternative methods for accounting for a
change by registrants to the fair value method of accounting for stock-based
compensation. Additionally, SFAS No. 148 amends the disclosure requirements of
SFAS 123 to require disclosure in the significant accounting policy footnote of
both annual and interim financial statements of the method of accounting for
stock-based compensation and the related pro-forma disclosures when the
intrinsic value method continues to be used. The statement is effective for
fiscal years ending after December 15, 2002. Adoption of this statement did not
have a material effect on the Corporation's financial position or results of
operations.
16
================================================================================
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
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.
17
================================================================================
INDEPENDENT ACCOUNTANTS' 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, 2002 and 2001, 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, 2002. 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, 2002 and
2001, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
As more fully discussed in Note 7, the Corporation changed its method of
accounting for goodwill in 2002.
BKD, LLP
Indianapolis, Indiana
January 17, 2003
18
================================================================================
CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) December 31,
===================================================================================================================================
2002 2001
Assets
Cash and due from banks .......................................................... $ 87,638 $ 68,743
Federal funds sold ............................................................... 31,400 34,285
----------- -----------
Cash and cash equivalents ........................................................ 119,038 103,028
Interest-bearing time deposits ................................................... 3,568 3,871
Investment securities
Available for sale ............................................................ 332,925 231,668
Held to maturity (fair value of $9,585 and $8,762) ............................ 9,137 8,654
----------- -----------
Total investment securities ................................................. 342,062 240,322
Mortgage loans held for sale ..................................................... 21,545 307
Loans, net of allowance for loan losses of $22,417 and $15,141.................... 1,981,960 1,344,445
Premises and equipment ........................................................... 38,645 27,684
Federal Reserve and Federal Home Loan Bank stock ................................. 11,409 8,350
Interest receivable .............................................................. 17,346 12,024
Core deposit intangibles ............ ............................................ 19,577 6,096
Goodwill.......................................................................... 87,640 26,081
Cash surrender value of life insurance............................................ 14,309 6,470
Other assets ..................................................................... 21,588 8,357
----------- -----------
Total assets ................................................................ $ 2,678,687 $ 1,787,035
=========== ===========
Liabilities
Deposits
Noninterest-bearing ............................................................ $ 272,128 $ 186,987
Interest-bearing ............................................................... 1,764,560 1,234,264
----------- -----------
Total deposits ............................................................... 2,036,688 1,421,251
Borrowings ....................................................................... 356,927 174,404
Interest payable ................................................................. 6,019 5,488
Other liabilities ................................................................ 17,924 6,764
----------- -----------
Total liabilities ............................................................ 2,417,558 1,607,907
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 -- 16,322,748 and 13,303,822 shares .................... 2,040 1,663
Additional paid-in capital ....................................................... 116,503 50,563
Retained earnings ................................................................ 138,110 124,304
Accumulated other comprehensive income ........................................... 4,476 2,598
----------- -----------
Total stockholders' equity .................................................. 261,129 179,128
----------- -----------
Total liabilities and stockholders' equity .................................. $ 2,678,687 $ 1,787,035
=========== ===========
See notes to consolidated financial statements.
19
================================================================================
CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data) Year Ended December 31,
===================================================================================================================================
2002 2001 2000
Interest income
Loans receivable
Taxable ............................................................. $129,279 $103,123 $ 95,798
Tax exempt .......................................................... 638 438 311
Investment securities
Taxable ............................................................. 9,086 11,207 14,478
Tax exempt .......................................................... 6,190 4,103 4,587
Federal funds sold .................................................... 557 899 666
Deposits with financial institutions .................................. 197 106 103
Federal Reserve and Federal Home Loan Bank stock ...................... 735 559 585
-------- -------- --------
Total interest income ............................................. 146,682 120,435 116,528
-------- -------- --------
Interest expense
Deposits .............................................................. 39,700 45,856 49,607
Securities sold under repurchase agreements ........................... 2,060 3,208 4,263
Federal Home Loan Bank advances ....................................... 8,166 6,556 5,315
Trust preferred securities ............................................ 3,324
Other borrowings ...................................................... 509 454 1,361
-------- -------- --------
Total interest expense ........................................... 53,759 56,074 60,546
-------- -------- --------
Net interest income ...................................................... 92,923 64,361 55,982
Provision for loan losses ............................................. 7,174 3,576 2,625
-------- -------- --------
Net interest income
after provision for loan losses .......................................... 85,749 60,785 53,357
-------- -------- --------
Other income
Fiduciary activities .................................................. 6,258 5,429 4,972
Service charges on deposit accounts ................................... 9,330 5,729 4,776
Other customer fees ................................................... 3,918 3,166 3,519
Net realized gains (losses) on
sales of available-for-sale securities .............................. 739 (200) (107)
Commission income ..................................................... 2,203 1,945 1,950
Other income .......................................................... 4,629 2,474 1,524
-------- -------- --------
Total other income ............................................... 27,077 18,543 16,634
-------- -------- --------
Other expenses
Salaries and employee benefits ........................................ 39,150 24,711 21,418
Net occupancy expenses ................................................ 3,632 2,729 2,471
Equipment expenses .................................................... 6,709 4,521 4,299
Marketing expenses..................................................... 1,495 1,072 1,010
Outside data processing fees .......................................... 3,664 2,243 1,736
Printing and office supplies .......................................... 1,597 1,143 1,144
Goodwill and core deposit amortization................................. 2,589 1,682 896
Other expenses ........................................................ 12,173 7,094 7,109
-------- -------- --------
Total other expenses ............................................. 71,009 45,195 40,083
-------- -------- --------
Income before income tax ................................................. 41,817 34,133 29,908
Income tax expense .................................................... 13,981 11,924 9,968
-------- -------- --------
Net income ............................................................... $ 27,836 $ 22,209 $ 19,940
======== ======== ========
Net income per share:
Basic ................................................................. $ 1.79 $ 1.71 $ 1.59
Diluted ............................................................... 1.77 1.69 1.58
See notes to consolidated financial statements.
20
================================================================================
CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31,
(in thousands) 2002 2001 2000
===================================================================================================================================
Net income ............................................................................ $ 27,836 $ 22,209 $ 19,940
-------- -------- --------
Other comprehensive income, net of tax:
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the period,
net of income tax expense of $2,426, $1,848, $2,610................ .............. 3,639 2,775 3,831
Less: Reclassification adjustment for gains (losses) included in net income,
net of income tax (expense) benefit of $(296), $80, $43 ........................ 443 (120) (64)
Unrealized loss on pension minimum funding liability:
Unrealized loss arising during the period,
net of income tax benefit of $879 ................................................ (1,318)
-------- -------- --------
1,878 2,895 3,895
-------- -------- --------
COMPREHENSIVE INCOME $ 29,714 $ 25,104 $ 23,835
======== ======== ========
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, 2000 ..................... 10,936,617 $ 1,367 $ 25,481 $ 103,640 $ (4,192) $ 126,296
Net income for 2000.......................... 19,940 19,940
Cash dividends ($ .82 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 ($.88 per share).............. (11,127) (11,127)
Other comprehensive income, net of tax ...... 2,895 2,895
Stock issued under employee benefit plans ... 28,466 4 500 504
Stock issued under dividend reinvestment
and stock purchase plan .................. 35,348 4 799 803
Stock options exercised ..................... 19,627 2 223 225
Stock redeemed .............................. (306,966) (38) (6,985) (7,023)
Issuance of stock related to acquisition..... 677,972 85 14,516 14,601
Five percent (5%) stock dividend............. 604,128 76 (76)
Cash paid in lieu of fractional shares....... (22) (22)
----------- -------- -------- --------- --------- ---------
Balances, December 31, 2001 12,670,307 1,584 50,642 124,304 2,598 179,128
Net income for 2002.......................... 27,836 27,836
Cash dividends ($.90 per share).............. (13,995) (13,995)
Other comprehensive income, net of tax ...... 1,878 1,878
Stock issued under employee benefit plans ... 35,613 4 654 658
Stock issued under dividend reinvestment
and stock purchase plan .................. 28,487 5 946 951
Stock options exercised ..................... 49,689 6 488 494
Stock redeemed .............................. (148,405) (20) (4,313) (4,333)
Issuance of stock related to acquisitions.... 2,912,869 364 68,183 68,547
Five percent (5%) stock dividend............. 774,188 97 (97)
Cash paid in lieu of fractional shares....... (35) (35)
----------- -------- -------- --------- --------- ---------
Balances, December 31, 2002 16,322,748 $ 2,040 $116,503 $ 138,110 $ 4,476 $ 261,129
=========== ======== ======== ========= ========= =========
See notes to consolidated financial statements.
21
================================================================================
CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
===================================================================================================================================
Year Ended December 31,
(in thousands, except share data) 2002 2001 2000
===================================================================================================================================
Operating activities:
Net income ......................................................... $ 27,836 $ 22,209 $ 19,940
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses ........................................ 7,174 3,576 2,625
Depreciation ..................................................... 4,273 2,984 3,198
Amortization of goodwill and intangibles ......................... 2,444 1,682 896
Deferred income tax .............................................. (503) 616 (767)
Securities amortization, net ..................................... 573 8 72
Securities losses (gains), net ................................... (739) 200 107
Loss (gain) on sale of premises and equipment .................... (7) 2 (105)
Mortgage loans originated for sale ............................... (140,584) (22,705) (2,111)
Proceeds from sales of mortgage loans ............................ 126,905 22,398 2,172
Net change in
Interest receivable .......................................... 763 2,514 (825)
Interest payable ............................................. (1,318) (1,727) 1,479
Other adjustments ................................................ (9,122) (545) 3,104
--------- --------- ---------
Net cash provided by operating activities .................... 17,695 31,212 29,785
--------- --------- ---------
Investing activities:
Net change in interest-bearing deposits ............................ 10,729 (2,988) 1,330
Purchases of
Securities available for sale .................................... (182,511) (34,500) (11,437)
Securities held to maturity ......................................
Proceeds from maturities of
Securities available for sale .................................... 164,273 108,692 49,975
Securities held to maturity ...................................... 4,307 3,612 5,617
Proceeds from sales of
Securities available for sale .................................... 21,363 770 14,654
Net change in loans ................................................ (100,650) (50,384) (87,658)
Purchase of Federal Home Loan Bank stock ........................... (715) (592) (712)
Purchases of premises and equipment ................................ (4,854) (2,438) (4,409)
Proceeds from sale of fixed assets ................................. 75 37 449
Net cash received (paid) in acquisition............................. (12,532) 5,261
Other investing activities ......................................... 280
--------- --------- ---------
Net cash provided (used) by investing activities ............. (100,515) 27,470 (31,911)
--------- --------- ---------
Financing activities:
Net change in
Demand and savings deposits ...................................... 34,818 55,640 772
Certificates of deposit and other time deposits .................. (26,662) (72,940) 33,268
Repurchase agreements and other borrowings ....................... 7,893 506 (51,385)
Federal Home Loan Bank advances .................................... 77,900 60,930 199,396
Repayment of Federal Home Loan Bank advances ....................... (32,047) (50,613) (181,510)
Trust preferred securities.......................................... 53,188
Cash dividends ..................................................... (13,995) (11,127) (10,331)
Stock issued under employee benefit plans .......................... 658 504 481
Stock issued under dividend reinvestment
and stock purchase plan .......................................... 951 803 811
Stock options exercised ............................................ 494 225 510
Stock redeemed ..................................................... (4,333) (7,023) (6,712)
Cash paid in lieu of issuing fractional shares ..................... (35) (22) (4)
--------- --------- ---------
Net cash provided (used) by financing activities ............. 98,830 (23,117) (14,704)
--------- --------- ---------
Net change in cash and cash equivalents ............................... 16,010 35,565 (16,830)
Cash and cash equivalents, beginning of year .......................... 103,028 67,463 84,293
--------- --------- ---------
Cash and cash equivalents, end of year ................................ $ 119,038 $ 103,028 $ 67,463
========= ========= =========
Additional cash flows information:
Interest paid ....................................................... $ 53,228 $ 56,921 $ 58,810
Income tax paid ..................................................... 14,313 12,440 9,544
See notes to consolidated financial statements.
22
================================================================================
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"), Frances Slocum Bank & Trust Company
("Frances Slocum"), and Lafayette Bank and Trust Company ("Lafayette"),
(collectively the "Banks"), First Merchants Insurance Services, Inc. ("FMIS"),
First Merchants Reinsurance Company ("FMRC"), Indiana Title Insurance Company
("ITIC"), First Merchants Capital Trust I ("FMC Trust I"), First Merchants
Capital Trust II ("FMC Trust II"), and First Merchants Capital Trust III ("FMC
Trust III"), 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, Frances Slocum and Lafayette operate under state bank
charters and provide full banking services, including trust services. As state
banks, Madison, First United, Randolph County, Decatur, Frances Slocum and
Lafayette 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 north-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.
23
================================================================================
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
CONSOLIDATION
The consolidated financial statements include the accounts of the
Corporation and all its subsidiaries, after elimination of all material
intercompany transactions.
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.
24
================================================================================
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 and is based on ongoing, quarterly assessments of the probable losses
inherent in the loan portfolio. The allowance is increased by the provision for
loan losses, which is charged against current operating results. Loan losses are
charged against the allowance when management believes the uncollectibility of a
loan balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance. The Corporation's methodology for assessing the appropriateness of
the allowance consists of three key elements - the determination of the
appropriate reserves for specifically identified loans, historical losses, and
environmental or qualitative factors.
Specific allowances are established in those instances where management has
identified significant conditions or circumstances related to a credit that
management believes indicate the probability that a loss may be incurred. The
loans that are reviewed for specific allowances are generally those internally
classified as substandard, doubtful or loss, including nonaccrual loans, loans
in the process of foreclosure and certain loans past due 90 days or more and
still accruing interest. Additionally, management also specifically reviews any
other loan with a significant loss exposure.
The Corporation's five-year average historical loss experience is used to
estimate an appropriate allowance for those loans not individually reviewed. The
historical loss experience is determined for each type of loan in the portfolio.
There are certain inherent risks in the Corporation's loan portfolio;
accordingly, the Corporation includes certain environmental or qualitative
factors in its determination of the adequacy of the allowance for loan losses.
These factors include national and local economic conditions that could have an
impact of the credit quality of the loan portfolio, lending policies and
procedures, portfolio size and composition, delinquency and non-performing loan
trends, lending management and staff, loan review systems and procedures,
concentration of credit, among other factors. The evaluation of the inherent
loss with respect to these factors is subject to a higher degree of uncertainty
because they are not identified with specific credits.
25
================================================================================
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 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.
GOODWILL is maintained by applying the provisions of SFAS No. 142, which was
adopted by the Corporation on January 1, 2002. Goodwill is reviewed for
impairment annually in accordance with this statement with any loss recognized
through the income statement, at that time.
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. At December
31, 2002, the Corporation has stock-based employee compensation plans, which are
described more fully in Note 16. 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 2002, 2001 and 2000, related to specific grants in which the market
price exceeded the exercise price. For all remaining grants, no stock-based
employee compensation cost is reflected in net income, as options granted under
those plans had an exercise price equal to the market value of the underlying
common stock on the grant date.
26
================================================================================
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
The following table illustrates the effect on net income and earnings per share
if the Corporation had applied the fair value provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Year Ended December 31
2002 2001 2000
--------------------------------------
Net income, as reported ..................................... $ 27,836 $ 22,209 $ 19,940
Less: Total stock-based employee compensation
cost determined under the fair value based
method, net of income taxes .............................. (1,006) (498) (125)
---------- ---------- ----------
Pro forma net income ........................................ $ 26,830 $ 21,711 $ 19,815
========== ========== ==========
Earnings per share:
Basic - as reported ...................................... $ 1.79 $ 1.71 $ 1.59
Basic - pro forma ........................................ 1.72 1.67 1.58
Diluted - as reported .................................... 1.77 1.69 1.58
Diluted - pro forma ...................................... 1.71 1.66 1.57
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 13, 2002.
NOTE 2
BUSINESS COMBINATIONS
Effective September 6, 2002, the Corporation acquired Stephenson Insurance
Service, Inc., which was merged into FMIS, a wholly-owned subsidiary of the
Corporation. The Corporation issued 36,276 shares of its common stock at a cost
of $27.47 per share to complete the transaction. This acquisition was deemed to
be an immaterial acquisition.
On August 28, 2002, the Corporation signed a definitive agreement to
acquire CNBC Bancorp ("CNBC"), Columbus, Ohio. The acquisition will be accounted
for under the purchase method of accounting. Under the terms of the agreement,
the Corporation will exchange 1.01 shares of the Corporation's common stock or
$29.57 in cash for each of the outstanding shares of CNBC. However, no more than
$24,562,000 aggregate cash may be paid in the merger, and there may be
allocations of stock to certain shareholders if this threshold is exceeded. The
transaction is subject to approval by stockholders of CNBC, and appropriate
regulatory agencies. The Corporation anticipates amortizing core deposit
intangibles over ten years. As of December 31, 2002 CNBC had total assets and
shareholders' equity of $331,741,000 and $24,265,000 respectively. To fund a
portion of the cash consideration payable to the stockholders of CNBC, the
Corporation will establish a wholly owned trust subsidiary that will issue and
sell up to $25,000,000 in trust preferred securities of the Corporation. The
preferred securities will have a 30 year maturity and a coupon rate based upon
three-month LIBOR, plus 325 basis points, but LIBOR
27
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 2
BUSINESS COMBINATIONS continued
shall not exceed 8.75% prior to the fifth anniversary of the closing date. The
proceeds from the sale of the preferred securities will be loaned to the
Corporation by the trust subsidiary 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 trust subsidiary. Issuance costs will
be amortized over the life of the preferred securities. The Corporation will
guarantee the preferred securities and distributions.
On April 1, 2002, the Corporation acquired 100% of the outstanding stock
of Lafayette Bancorporation, the holding company of Lafayette, which is located
in Lafayette, Indiana. Lafayette is a state chartered bank with branches located
in central Indiana. Lafayette Bancorporation was merged into the Corporation,
and Lafayette maintained its state charter as a subsidiary of First Merchants
Corporation. The Corporation issued approximately 2,911,712 shares of its common
stock at a cost of $22.36 per share and approximately $50,867,000 in cash to
complete the transaction. As a result of the acquisition, the Corporation has an
opportunity to increase its customer base and continue to increase its market
share. The purchase had a recorded acquisition price of $115,978,000, including
goodwill of $57,893,000 none of which is deductible for tax purposes.
Additionally, core deposit intangibles totaling $16,052,000 were recognized and
will be amortized over 10 years using the 150% declining balance method.
The combination was accounted for under the purchase method of accounting.
All assets and liabilities were recorded at their fair values as of April 1,
2002. The purchase accounting adjustments are being amortized over the life of
the respective asset or liability. Lafayette's results of operations are
included in the Corporation's consolidated income statement beginning April 1,
2002. The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.
Investments....................... $104,717
Loans............................. 552,016
Premises and equipment............ 10,269
Core deposit intangibles.......... 16,052
Goodwill.......................... 57,893
Other............................. 64,074
--------
Total assets acquired.......... 805,021
--------
Deposits.......................... 607,281
Other............................. 81,762
--------
Total liabilities acquired..... 689,043
--------
Net assets acquired............ $115,978
========
28
================================================================================
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 Lafayette
merger had taken place at the beginning of each period.
Year Ended
December 31,
2002 2001
----------- -----------
Net Interest Income ........................ $ 98,855 $ 87,090
Net Income ................................. 28,016 28,504
Per share - combined:
Basic Net Income.......................... 1.69 1.79
Diluted Net Income........................ 1.68 1.78
Effective January 1, 2002, the Corporation acquired Delaware County
Abstract Company, Inc. and Beebe & Smith Title Insurance Company, Inc., which
were merged into ITIC, a wholly-owned subsidiary of the Corporation. The
Corporation issued approximately 108,919 shares of its common stock at a cost of
$22.38 per share to complete the transaction. ITIC's operations were
subsequently contributed to Indiana Title Insurance Company, LLC in which the
Corporation has a 52.12% ownership interest. This acquisition was deemed to be
an immaterial acquisition.
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 747,465 shares of its common stock at a cost of $20.51 per
share and $14,490,985 in cash to complete the transaction. As a result of the
acquisition, the Corporation has 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 are being 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.
29
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 2
BUSINESS COMBINATIONS continued
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
=========
The following proforma disclosures, including the effect of the purchase
accounting adjustments, depict the results of operations as though the Frances
Slocum 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.......................... 1.63 1.62
Diluted Net Income........................ 1.62 1.61
On May 31, 2000, the Corporation acquired Decatur Financial Inc., the
holding company of Decatur. Decatur 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 960,230 shares of newly issued common
stock and $12,355,000 of cash. The combination was accounted for under the
purchase method of accounting. Decatur's' 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 are being amortized over the life
of the respective asset or liability.
30
================================================================================
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 Decatur
merger had taken place at the beginning of the period.
Year Ended
December 31, 2000
-----------------
Net Interest Income .......................... $ 57,849
Net Income ................................... $ 19,563
Net Income per share - combined:
Basic ....................................... $ 1.48
Diluted ..................................... 1.47
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, 2002, was
$33,371,000.
31
================================================================================
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, 2002
U.S. Treasury .......................................... $ 125 $ 125
Federal agencies ....................................... 27,630 $ 814 $ 8 28,436
State and municipal .................................... 135,715 5,787 178 141,324
Mortgage-backed securities ............................. 117,724 2,448 54 120,118
Other asset-backed securities .......................... 1,000 1,000
Corporate obligations .................................. 12,101 465 12,566
Marketable equity securities ........................... 29,452 20 116 29,356
-------- -------- -------- --------
Total available for sale ............................ 323,747 9,534 356 332,925
-------- -------- -------- --------
Held to maturity at December 31, 2002
State and municipal .................................... 9,013 448 9,461
Mortgage-backed securities ............................. 124 124
-------- -------- -------- --------
Total held to maturity .............................. 9,137 448 9,585
-------- -------- -------- --------
Total investment securities ......................... $332,884 $ 9,982 $ 356 $342,510
======== ======== ======== ========
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
======== ======== ======== ========
The amortized cost and fair value of securities available for sale and
held to maturity at December 31, 2002, 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, 2002:
Due in one year or less.......................................... $ 22,226 $ 22,627 $ 1,286 $ 1,310
Due after one through five years ................................ 67,198 70,148 4,857 5,120
Due after five through ten years ................................ 46,601 48,562 2,015 2,149
Due after ten years ............................................. 39,546 41,114 855 882
-------- -------- -------- --------
175,571 182,451 9,013 9,461
Mortgage-backed securities ...................................... 117,724 120,118 124 124
Other asset-backed securities ................................... 1,000 1,000
Marketable equity securities .................................... 29,452 29,356
-------- -------- -------- --------
Totals ........................................................ $323,747 $332,925 $ 9,137 $ 9,585
======== ======== ======== ========
32
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 4
INVESTMENT SECURITIES continued
Securities with a carrying value of approximately $136,269,000 and
$106,476,000 were pledged at December 31, 2002 and 2001 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 2002, 2001 and
2000 were $21,363,000, $770,000 and $14,654,000. Gross gains of $739,000 in 2002
and gross losses of $200,000 and $107,000 in 2001 and 2000, were realized on
those sales.
NOTE 5
LOANS AND ALLOWANCE
2002 2001
===============================================================================================================
Loans at December 31:
Commercial and industrial loans .......................................... $ 406,644 $ 301,962
Agricultural production financing and other loans to farmers ............. 85,059 29,645
Real estate loans:
Construction ........................................................ 133,896 58,316
Commercial and farmland ............................................. 401,561 230,233
Residential ......................................................... 746,349 544,028
Individuals' loans for household and other personal expenditures ......... 206,083 179,325
Tax-exempt loans ......................................................... 12,615 7,277
Other loans .............................................................. 12,170 8,800
--------- ---------
2,004,377 1,359,586
Allowance for loan losses................................................ (22,417) (15,141)
--------- ---------
Total loans ......................................................... $1,981,960 $1,344,445
========= =========
2002 2001 2000
================================================================================
Allowance for loan losses:
Balance, January 1 ............... $ 15,141 $ 12,454 $ 10,128
Allowance acquired in acquisitions 6,902 2,085 1,413
Provision for losses ............. 7,174 3,576 2,625
Recoveries on loans .............. 1,313 573 579
Loans charged off ................ (8,113) (3,547) (2,291)
-------- -------- --------
Balance, December 31 ............. $ 22,417 $ 15,141 $ 12,454
======== ======== ========
Information on nonaccruing, contractually
past due 90 days or more other than
nonaccruing and restructured loans is
summarized below: 2002 2001 2000
================================================================================
At December 31:
Non-accrual loans .................. $14,134 $ 6,327 $2,370
Loans contractually past due 90 days
or more other than nonaccruing ... 6,676 4,828 2,483
Restructured loans ................. 2,508 3,511 3,085
33
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 5
LOANS AND ALLOWANCE continued
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.
Information on impaired loans is summarized below: 2002 2001 2000
=====================================================================================================================
As of, and for the year ending December 31:
Impaired loans with an allowance .......................... $16,901 $10,381 $ 7,862
Impaired loans for which the discounted
cash flows or collateral value exceeds the
carrying value of the loan ............................ 27,450 10,780 6,977
------- ------- -------
Total impaired loans ............................... $44,351 $21,161 $14,839
======= ======= =======
Total impaired loans as a percent
of total loans ........................................ 2.19% 1.56% 1.26%
Allowance for impaired loans (included in the
Corporation's allowance for loan losses) .............. $ 7,299 $ 3,251 $ 2,253
Average balance of impaired loans ......................... 49,663 22,327 15,053
Interest income recognized on impaired loans .............. 3,656 1,538 1,361
Cash basis interest included above ........................ 2,344 1,555 1,080
NOTE 6
PREMISES AND EQUIPMENT
2002 2001
================================================================================
Cost at December 31:
Land .......................................... $ 6,473 $ 5,626
Buildings and leasehold improvements .......... 39,768 26,747
Equipment ..................................... 34,898 26,127
-------- --------
Total cost ................................ 81,139 58,500
Accumulated depreciation and amortization ..... (42,494) (30,816)
-------- --------
Net ....................................... $ 38,645 $ 27,684
======== ========
The Corporation is committed under various noncancelable lease contracts
for certain subsidiary office facilities. Total lease expense for 2002, 2001 and
2000 was $1,027,000, $771,000 and $515,000, respectively. The future minimum
rental commitments required under the operating leases in effect at December 31,
2002, expiring at various dates through the year 2013 are as follows for the
years ending December 31:
====================================================
2003 ................................ $ 967
2004 ................................ 795
2005 ................................ 533
2006 ................................ 567
2007 ................................ 345
After 2007 ........................... 323
------
Total future minimum obligations $3,530
======
34
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 7
GOODWILL
During 2002, the Corporation changed its method of accounting and
financial reporting for goodwill and other intangible assets by adopting the
provisions of SFAS No. 142. Had the new method been applied retroactively, the
previously reported 2001 and 2000 net income would have increased by $1,070,000
and $724,000, respectively. No impairment loss was recorded in 2002.
NOTE 8
CORE DEPOSIT INTANGIBLES
The carrying basis and accumulated amortization of recognized core deposit
intangibles at December 31 were:
2002 2001
================================================================================
Gross carrying amount ...................... $ 22,902 $ 6,850
Accumulated amortization ................... (3,325) (754)
-------- --------
Core deposit intangibles ................... $ 19,577 $ 6,096
======== ========
Amortization expense for the years ended December 31, 2002, 2001 and 2000,
was $2,571,000, $612,000 and $142,000, respectively. Estimated amortization
expense for each of the following five years is:
2003 ................................ $2,837
2004 ................................ 2,764
2005 ................................ 2,694
2006 ................................ 2,625
2007 ................................ 2,560
35
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 9
DEPOSITS
2002 2001
================================================================================
Deposits at December 31:
Demand deposits ............................. $ 594,961 $ 418,481
Savings deposits ............................ 567,186 366,084
Certificates and other time deposits
of $100,000 or more ....................... 199,734 192,400
Other certificates and time deposits ........ 674,807 444,286
---------- ----------
Total deposits .......................... $2,036,688 $1,421,251
========== ==========
=====================================================
Certificates and other time deposits maturing
in years ending December 31:
2003 ....................... $479,891
2004 ....................... 209,698
2005 ....................... 66,587
2006 ....................... 44,210
2007 ....................... 71,035
After 2007 ................. 3,120
--------
$874,541
========
NOTE 10
BORROWINGS
2002 2001
================================================================================
Borrowings at December 31:
Securities sold under repurchase agreements ....... $ 89,594 $ 45,632
Federal funds purchased ........................... 10,500
U. S. Treasury demand notes ....................... 6,273
Federal Home Loan Bank advances ................... 184,677 103,499
Trust preferred securities......................... 53,188
Other borrowed funds............................... 29,468 8,500
-------- --------
Total borrowings .............................. $356,927 $174,404
======== ========
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 2002 and 2001 totaled $89,594,000
and $68,546,000, and the average of such agreements totaled $72,791,000 and
$59,365,000.
36
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 10
BORROWINGS continued
Maturities of Federal Home Loan Bank advances and securities sold under
repurchase agreements as of December 31, 2002, 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:
2003 .............. $ 15,626 5.10% $65,962 1.07%
2004 .............. 18,000 4.84 14,382 5.62
2005 .............. 18,500 4.65 9,250 5.64
2006 .............. 20,403 4.95
2007 .............. 10,495 4.38
After 2007 ........ 101,653 5.11
-------- -------
Total ...... $184,677 4.98% $89,594 2.28%
======== =======
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.
On April 12, 2002, the Corporation and FMC Trust I (the "Trust") entered
into an Underwriting Agreement with Stifel, Nicolaus & Company, Incorporated and
RBC Dain Rauscher Inc. for themselves and as co-representatives for several
other underwriters (the "Underwriting Agreement"). On April 17, 2002 and
pursuant to the Underwriting Agreement, the Trust issued 1,850,000 8.75%
Cumulative Trust Preferred Securities (liquidation amount $25 per Preferred
Security) (the "Preferred Securities") with an aggregate liquidation value of
$46,250,000. On April 23, 2002 and pursuant to the Underwriting Agreement, the
Trust issued an additional 277,500 Preferred Securities with an aggregate
liquidation value of $6,937,500 to cover over-allotments. The proceeds from the
sale of the Preferred Securities were invested by the Trust in the Corporation's
8.75% Junior Subordinated Debentures due June 30, 2032 (the "Debentures"). The
proceeds from the issuance of the Debentures were used by the Corporation to
fund a portion of the cash consideration payable to the shareholders of
Lafayette Bancorporation in connection with the acquisition of Lafayette. The
Preferred Securities are recorded as borrowings in the Corporation's
consolidated December 31, 2002, balance sheet. Issuance costs are being
amortized over the life of the Preferred Securities. Distributions are paid
quarterly on March 31, June 30, September 30 and December 31 of each year. The
Debentures will mature and the Preferred Securities must be redeemed on June 30,
2032. The Trust has the option of shortening the maturity date to a date not
earlier than June 30, 2007, requiring prior approval of the Board of Governors
of the Federal Reserve System.
37
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 10
BORROWINGS continued
At December 31, 2002, other borrowed funds included $19,300,000 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 March 31, 2003. The total principal
amount outstanding at any one time may not exceed $25,000,000.
NOTE 11
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 $48,773,000,
$37,909,000 and $22,591,000 at December 31, 2002, 2001 and 2000. The amount of
capitalized servicing assets is considered immaterial.
NOTE 12
INCOME TAX
2002 2001 2000
==================================================================================================================================
Income tax expense for the year ended December 31:
Currently payable:
Federal ................................................................ $ 11,869 $ 9,098 $ 9,236
State .................................................................. 2,615 2,210 1,499
Deferred:
Federal ................................................................ (446) 406 (715)
State .................................................................. (57) 210 (52)
-------- -------- --------
Total income tax expense ............................................ $ 13,981 $ 11,924 $ 9,968
======== ======== ========
Reconciliation of federal statutory to actual tax expense:
Federal statutory income tax at 34% .................................... $ 14,085 $ 11,539 $ 10,169
Tax-exempt interest .................................................... (2,006) (1,319) (1,308)
Graduated tax rates .................................................... 355 312 299
Effect of state income taxes ........................................... 1,613 1,597 941
Other .................................................................. (66) (205) (133)
-------- -------- --------
Actual tax expense ................................................. $ 13,981 $ 11,924 $ 9,968
======== ======== ========
38
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 12
INCOME TAX continued
Tax expense (benefit) applicable to security gains and losses for the
years ended December 31, 2002, 2001 and 2000, was $296,000, ($80,000) and
$(43,000), respectively.
A cumulative net deferred tax asset (liability) is included in the
consolidated balance sheets. The components of the asset (liability) are as
follows:
2002 2001
=====================================================================================================================
Deferred tax asset at December 31:
Assets:
Differences in accounting for loan losses ............................. $ 8,820 $5,103
Deferred compensation ................................................. 1,949 1,069
Other ................................................................. 157 268
------ ------
Total assets ...................................................... 10,926 6,440
------ ------
Liabilities:
Differences in depreciation methods ................................... 1,058 838
Differences in accounting for loans and securities .................... 7,072 2,137
Differences in accounting for loan fees ............................... 383 436
Differences in accounting for pensions
and other employee benefits ......................................... 86 315
State income tax ...................................................... 57 115
Net unrealized gain on securities available for sale................... 2,513 1,464
Other ................................................................. 1,040 756
------ ------
Total liabilities ................................................. 12,209 6,061
------ ------
Net deferred tax asset (liability)................................. $(1,283) $ 379
====== =====
NOTE 13
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:
2002 2001
-------- --------
Commitments
to extend credit $312,146 $199,656
Standby letters
of credit 18,124 9,806
39
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 13
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 14
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, 2002, First United, Union National,
Decatur and Frances Slocum, had no retained net profits available for 2003
dividends to the Corporation without prior regulatory approval. The amount at
December 31, 2002, available for 2003 dividends from First Merchants, Madison,
Randolph County, First National and Lafayette to the Corporation totaled
$6,279,000, $758,000, $903,000, $962,000 and $6,245,000, respectively.
Total stockholders' equity for all subsidiaries at December 31, 2002, was
$320,320,000, of which $300,073,000 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,
40
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 14
STOCKHOLDERS' EQUITY continued
2002, there were 337,020 shares of common stock reserved for purchase under the
plan.
On August 13, 2002, 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 13, 2002, to holders of record on August
30, 2002.
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 15
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, 2002, 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.
41
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 15
REGULATORY CAPITAL continued
Actual and required capital amounts and ratios are listed below.
2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
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 ...................... $224,967 11.17% $161,087 8.00% $159,315 11.75% $108,514 8.00%
First Merchants ................... 69,424 11.69 47,493 8.00 70,562 11.69 48,281 8.00
Madison ........................... 21,040 11.45 14,706 8.00 19,329 11.61 13,320 8.00
First United ...................... 7,429 12.97 4,581 8.00 8,245 13.17 5,009 8.00
Randolph County ................... 7,616 11.27 5,407 8.00 7,009 11.97 4,684 8.00
Union County ...................... 16,636 12.35 10,778 8.00 17,897 13.50 10,606 8.00
First National .................... 10,211 11.37 7,182 8.00 10,387 12.34 6,731 8.00
Decatur ........................... 11,462 11.77 7,789 8.00 11,871 14.41 6,588 8.00
Frances Slocum .................... 16,259 11.68 11,132 8.00 13,634 10.25 10,638 8.00
Lafayette ......................... 67,912 11.00 49,387 8.00
Tier I Capital (1)(to risk-weighted assets)
Consolidated ...................... $202,550 10.06% $ 80,543 4.00% $144,174 10.63% $ 54,257 4.00%
First Merchants ................... 63,776 10.74 23,746 4.00 64,817 10.74 24,140 4.00
Madison ........................... 18,978 10.32 7,353 4.00 17,852 10.72 6,660 4.00
First United ...................... 6,713 11.72 2,290 4.00 7,546 12.05 2,504 4.00
Randolph County ................... 6,771 10.02 2,703 4.00 6,277 10.72 2,342 4.00
Union County ...................... 15,202 11.28 5,389 4.00 16,332 12.32 5,303 4.00
First National .................... 9,324 10.39 3,591 4.00 9,389 11.16 3,366 4.00
Decatur ........................... 10,242 10.52 3,895 4.00 10,834 13.16 3,294 4.00
Frances Slocum..................... 14,510 10.43 5,566 4.00 12,007 9.03 5,319 4.00
Lafayette ......................... 61,111 9.90 24,694 4.00
Tier I Capital (1) (to average assets)
Consolidated ...................... $202,550 7.92% $102,309 4.00% $144,174 8.70% $ 66,298 4.00%
First Merchants ................... 63,776 8.14 31,327 4.00 64,817 8.17 31,737 4.00
Madison ........................... 18,978 8.47 8,959 4.00 17,852 8.24 8,667 4.00
First United ...................... 6,713 8.32 3,226 4.00 7,546 9.52 3,171 4.00
Randolph County ................... 6,771 7.64 3,546 4.00 6,277 7.73 3,250 4.00
Union County ...................... 15,202 7.38 8,239 4.00 16,332 7.94 8,227 4.00
First National .................... 9,324 8.20 4,547 4.00 9,389 7.93 4,736 4.00
Decatur ........................... 10,242 7.66 5,350 4.00 10,834 8.40 5,159 4.00
Frances Slocum..................... 14,510 8.37 6,933 4.00 12,007 7.05 6,809 4.00
Lafayette ......................... 61,111 7.93 30,813 4.00
(1) as defined by regulatory agencies
NOTE 16
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.
42
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 16
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
2002 2001
===============================================================================
Change in benefit obligation
Benefit obligation at beginning of year ............ $ 20,172 $ 16,953
Obligation acquired in acquisition ................. 17,712
Service cost ....................................... 2,007 926
Interest cost ...................................... 2,470 1,269
Actuarial loss ..................................... 3,971 2,048
Benefits paid ...................................... (1,614) (1,024)
-------- --------
Benefit obligation at end of year .................. 44,718 20,172
-------- --------
Change in plan assets
Fair value of plan assets at beginning of year 20,638 23,967
Fair value of plan assets acquired in acquisition... 15,507
Actual loss on plan assets ......................... (2,881) (2,305)
Benefits paid ...................................... (1,614) (1,024)
-------- --------
Fair value of plan assets at end of year ........... 31,650 20,638
-------- --------
Funded (unfunded) status .......................... (13,068) 466
Unrecognized net actuarial loss..................... 12,940 442
Unrecognized prior service cost .................... 1,986 (107)
Unrecognized transition asset ...................... (329) (69)
-------- --------
Prepaid benefit cost ............................... 1,529 732
Additional pension liability ....................... (3,810)
-------- --------
Net minimum liability............................... $ (2,281) $ 732
======== ========
Amounts recognized in the balance sheets consist of:
Prepaid benefit cost ............................... $ 1,529 $ 732
Additional pension liability ....................... (3,810)
Intangible asset ................................... 1,613
Deferred taxes ..................................... 879
Accumulated other comprehensive loss ............... 1,318
-------- --------
Net amount recognized ................................... $ 1,529 $ 732
======== ========
2002 2001 2000
==============================================================================================
Pension cost (benefit) includes the following components:(1)
Service cost-benefits earned during the year ............ $ 1,770 $ 926 $ 714
Interest cost on projected benefit obligation ........... 2,202 1,269 1,181
Actual (return) loss on plan assets ..................... 2,654 2,305 (2,570)
Net amortization and deferral ........................... (5,674) (4,858) 160
------- ------- -------
Total pension cost (benefit) ......................... $ 952 $ (358) $ (515)
======= ======= =======
(1) Lafayette components are included beginning as of April 1, 2002.
2002 2001 2000
==============================================================================================
Assumptions used in the accounting as of December 31 were:
Discount rate ........................................ 6.75% 7.11% 7.70%
Rate of increase in compensation ..................... 4.00% 4.00% 4.00%
Expected long-term rate of return on assets .......... 8.14% 9.00% 9.00%
The 1994 Stock Option Plan reserved 520,931 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.
43
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 16
EMPLOYEE BENEFIT PLANS continued
The 1999 Long-term Equity Incentive Plan reserved 1,323,000 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
939,484 shares available for grant at December 31, 2002.
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, 2002, 2001 and 2000. The number of shares and prices have been restated to
give effect to the Corporation's 2002 stock dividend.
Year Ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
===================================================================================================================================
Outstanding, beginning of year ................ 734,111 $ 18.81 626,943 $ 17.99 626,529 $ 17.74
Granted ....................................... 158,819 28.19 136,503 20.69 142,168 19.32
Exercised ..................................... (68,131) 13.38 (25,449) 10.30 (52,812) 14.64
Cancelled ..................................... (22,339) 23.29 (3,886) 20.84 (88,942) 20.26
------- ------- -------
Outstanding, end of year ...................... 802,460 $ 21.01 734,111 $ 18.81 626,943 $ 17.99
======= ======= =======
Options exercisable at year end ............... 542,627 494,962 493,128
Weighted-average fair value of
options granted during the year ............ $ 7.84 $ 6.00 $ 4.97
As of December 31, 2002, 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 - $19.19 329,799 $16.61 4.7 years 328,563 $16.67
20.55 - 26.04 310,001 21.92 7.2 years 201,168 22.57
26.60 - 28.64 162,660 28.20 9.2 years 12,896 27.61
------- -------
802,460 $21.01 6.5 years 542,627 $19.11
======= =======
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.
44
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 16
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:
2002 2001 2000
Risk-free interest rates........ 4.78% 5.32% 6.01%
Dividend yields................. 3.63% 3.59% 3.38%
Volatility factors of expected
market price common stock... 31.02% 30.95% 22.86%
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 in Note 1 to the consolidated financial statements.
The 1999 Employee Stock Purchase Plan enables eligible employees to
purchase the Corporation's common stock. A total of 275,625 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 37,394 shares in
2002 at $17.61 per share. The fair value on the purchase date was $28.28.
45
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 16
EMPLOYEE BENEFIT PLANS continued
At December 31, 2002, there were 195,217 shares of Corporation common
stock reserved for purchase under the plan, and $453,000 has been withheld from
compensation, plus interest, toward the purchase of shares after June 30, 2003,
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 Note 1 to the
consolidated financial statements and were estimated using an option pricing
model with the following assumptions for 2002, 2001 and 2000, respectively:
dividend yield of 3.63, 3.59, and 3.38 percent; an expected life of one year for
all years; expected volatility of 31.02, 30.95, and 22.86 percent; and risk-free
interest rates of 4.78, 5.32 and 6.01 percent. The fair value of those purchase
rights granted in 2002, 2001 and 2000 was $10.65, $5.36 and $3.82 respectively.
The Corporation maintains 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 4 to 6 percent of
base salary contributed by participants. The Corporations' expense for the plans
was $315,000 for 2002, $190,000 for 2001 and $182,000 for 2000.
NOTE 17
NET INCOME PER SHARE
==================================================================================================================================
Year Ended December 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
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 .......... $27,836 15,585,512 $1.79 $22,209 13,019,984 $1.71 $19,940 12,504,930 $1.59
===== ===== =====
Effect of dilutive stock options.. 131,146 93,811 86,960
------- ---------- ------- ---------- ------- ----------
Diluted net income per share:
Net income available to
common stockholders
and assumed conversions ...... $27,836 15,716,658 $1.77 $22,209 13,113,795 $1.69 $19,940 12,591,890 $1.58
======= ========== ===== ======= ========== ===== ======= ========== =====
Options to purchase 154,483, 117,625 and 228,708 shares of common stock
with weighted average exercise prices of $27.24, $24.76, and $22.62 at December
31, 2002, 2001 and 2000 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.
46
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 18
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.
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.
INTEREST RECEIVABLE/PAYABLE The fair values of interest receivable/payable
approximate carrying values.
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.
47
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 18
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, FEDERAL HOME LOAN BANK ADVANCES AND
TRUST PREFERRED SECURITIES
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:
2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
===================================================================================================================================
Assets at December 31:
Cash and cash equivalents .................................. $ 119,038 $ 119,038 $ 103,028 $ 103,028
Interest-bearing time deposits ............................. 3,568 3,568 3,871 3,871
Investment securities available for sale ................... 332,925 332,925 231,668 231,668
Investment securities held to maturity ..................... 9,137 9,585 8,654 8,762
Mortgage loans held for sale ............................... 21,545 21,545 307 307
Loans ...................................................... 1,981,960 2,008,189 1,344,445 1,386,515
FRB and FHLB stock ......................................... 11,409 11,409 8,350 8,350
Interest receivable ........................................ 17,346 17,346 12,024 12,024
Cash surrender of life insurance............................ 14,309 14,309 6,470 6,470
Liabilities at December 31:
Deposits ................................................... 2,036,688 2,063,474 1,421,251 1,448,336
Borrowings:
Securities sold under repurchase agreements ............ 89,594 90,138 45,632 45,939
Federal funds purchased ................................ 10,500 10,500
U.S. Treasury demand notes ............................. 6,273 6,273
FHLB advances .......................................... 184,677 196,244 103,499 105,955
Trust preferred securities ............................. 53,188 57,655
Other borrowed funds.................................... 29,468 29,468 8,500 8,500
Interest payable ........................................... 6,019 6,019 5,488 5,488
48
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 19
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,
2002 2001
================================================================================
Assets
Cash .............................................. $ 4,404 $ 3,041
Investment securities available for sale........... 3,500 3,500
Investment in subsidiaries ........................ 320,309 180,423
Goodwill .......................................... 448 448
Other assets ...................................... 12,265 1,396
-------- --------
Total assets ................................... $340,926 $188,808
======== ========
Liabilities
Borrowings ........................................ $ 74,132 $ 8,500
Other liabilities ................................. 5,665 1,180
-------- --------
Total liabilities .............................. 79,797 9,680
Stockholders' equity ................................. 261,129 179,128
-------- --------
Total liabilities and stockholders' equity ..... $340,926 $188,808
======== ========
CONDENSED STATEMENT OF INCOME
December 31,
2002 2001 2000
===================================================================================================================================
Income
Dividends from subsidiaries ................................................ $ 22,720 $ 20,245 $ 71,705
Administrative services fees................................................ 6,580 4,133
Other income ............................................................... 535 269 174
-------- -------- --------
Total income ............................................................ 29,835 24,647 71,879
-------- -------- --------
Expenses
Amortization of core deposit intangibles,
goodwill, and fair value adjustments ...................................... 28 66 50
Interest expense............................................................ 3,858 88 788
Salaries and employee benefits.............................................. 7,641 4,767 185
Net occupancy expenses...................................................... 1,527 1,002 11
Equipment expenses.......................................................... 1,447 898 18
Telephone expenses.......................................................... 1,543 547
Other expenses.............................................................. 2,767 1,003 581
-------- -------- --------
Total expenses .......................................................... 18,811 8,371 1,633
-------- -------- --------
Income before income tax benefit and equity in
undistributed income of subsidiaries ......................................... 11,024 16,276 70,246
Income tax benefit ...................................................... 4,336 1,567 496
-------- -------- --------
Income before equity in undistributed income of subsidiaries ................. 15,360 17,843 70,742
Equity in undistributed (distributions in excess of)
income of subsidiaries ................................................... 12,476 4,366 (50,802)
-------- -------- --------
Net Income ................................................................... $ 27,836 $ 22,209 $ 19,940
======== ======== ========
49
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 19
CONDENSED FINANCIAL INFORMATION (parent company only)
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31,
=====================================================================================================================
2002 2001 2000
=====================================================================================================================
Operating activities:
Net income ........................................................ $ 27,836 $ 22,209 $ 19,940
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization .................................................... 28 66 50
Distributions in excess of (equity in undistributed)
income of subsidiaries ............... ........................ (12,476) (4,366) 50,802
Net change in:
Other assets ................................................. (6,892) (1,274) (36)
Other liabilities ............................................ 4,430 (842) 1,270
-------- -------- --------
Net cash provided by operating activities ................. 12,926 15,793 72,026
-------- -------- --------
Investing activities:
Net change in loans ............................................... 2,350
Purchase of securities available for sale.......................... (3,500)
Proceeds from sales of securities available for sale ..............
Investment in subsidiary .......................................... (51,135) (14,296) (14,159)
-------- -------- --------
Net cash used by investing activities ..................... (51,135) (17,796) (11,809)
-------- -------- --------
Financing activities:
Cash dividends .................................................... (13,995) (11,127) (10,331)
Borrowing from affiliates ......................................... 13,000
Repayment of borrowings from affiliates ........................... (45,000)
Borrowings......................................................... 55,832 8,500
Stock issued under employee benefit plans ......................... 658 504 481
Stock issued under dividend reinvestment
and stock purchase plan ......................................... 951 803 811
Stock options exercised ........................................... 494 225 510
Stock redeemed .................................................... (4,333) (7,023) (6,712)
Cash paid in lieu of issuing fractional shares .................... (35) (22) (4)
-------- -------- --------
Net cash provided (used) by financing activities .......... 39,572 (8,140) (47,245)
-------- -------- --------
Net change in cash ................................................... 1,363 (10,143) 12,972
Cash, beginning of year .............................................. 3,041 13,184 212
-------- -------- --------
Cash, end of year .................................................... $ 4,404 $ 3,041 $ 13,184
======== ======== ========
NOTE 20
QUARTERLY RESULTS OF OPERATIONS (unaudited)
The following table sets forth certain quarterly results for the years ended
December 31, 2002 and 2001:
- -----------------------------------------------------------------------------------------------------------------------------------
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
2002:
March ............ $ 27,591 $ 10,213 $ 17,378 $ 1,192 $ 5,479 13,417,284 13,531,873 $ .41 $ .41
June ............. 39,678 14,596 25,082 1,284 7,940 16,306,998 16,472,869 .49 .48
September......... 40,148 14,820 25,328 1,821 7,827 16,265,998 16,404,150 .49 .48
December.......... 39,265 14,130 25,135 2,877 6,590 16,312,476 16,411,523 .40 .40
---------- ---------- ----------- -------- -------- ----- -----
$ 146,682 $ 53,759 $ 92,923 $ 7,174 $ 27,836 15,585,512 15,716,658 $1.79 $1.77
========== ========== =========== ======== ======== ===== =====
2001:
March ............ $ 30,088 $ 15,399 $ 14,689 $ 653 $ 5,106 12,786,906 12,875,153 $ .40 $ .40
June ............. 29,267 13,997 15,270 695 5,574 12,626,115 12,710,432 .44 .44
September......... 31,558 14,296 17,262 1,023 6,020 13,346,954 13,444,218 .45 .44
December.......... 29,522 12,382 17,140 1,205 5,509 13,310,613 13,421,575 .42 .41
---------- ---------- ----------- -------- -------- ----- -----
$ 120,435 $ 56,074 $ 64,361 $ 3,576 $ 22,209 13,019,984 13,113,795 $1.71 $1.69
========== ========== =========== ======== ======== ===== =====
50
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
================================================================================
NOTE 21
SUBSEQUENT EVENT
Effective January 1, 2003, the Corporation formed Merchants Trust Company,
National Association ("MTC"), a wholly-owned subsidiary of the Corporation,
through a capital contribution totaling approximately $2,038,000. On January 1,
2003, MTC purchased the trust operations of First Merchants, First National and
Lafayette for a fair value acquisition price of $20,687,000. MTC unites the
trust and asset management services of all affiliate banks of the Corporation.
All intercompany transactions related to this purchase by MTC will be eliminated
in the consolidated financial statements of the Corporation.
51
================================================================================
STOCKHOLDER INFORMATION
================================================================================
First Merchants Corporation is a financial holding company headquartered in
Muncie, Indiana. It was organized in September, 1982, as the bank holding
company for Merchants National Bank of Muncie, now First Merchants Bank,
National Association. Since its organization, First Merchants Corporation has
grown to include nine affiliate banks with 69 locations in 18 Indiana counties
and one Ohio county, a multi-line insurance agency, a title insurance company
and a trust company.
Subsidiaries of the Corporation include First Merchants Bank, National
Association in Delaware and Hamilton Counties, The Madison Community Bank in
Madison County, First United Bank in Henry County, The Union County National
Bank of Liberty (with offices in Union, Fayette, Wayne and Oxford (OH)
Counties), The Randolph County Bank, The First National Bank of Portland in Jay
County, Decatur Bank & Trust Company in Adams County, Frances Slocum Bank and
Trust Company (with offices in Wabash, Howard and Miami Counties) and Lafayette
Bank and Trust Company (with offices in Carroll, Jasper, White and Tippecanoe
Counties). The Corporation also operates First Merchants Insurance Services, a
full-service property casualty, personal lines, and healthcare insurer,
headquartered in Muncie, Indiana, and is a majority owner of the Indiana Title
Insurance Company, LLC, a title insurance agency.
Effective January 1, 2003, First Merchants Corporation formed Merchants Trust
Company, National Association. This unites the trust and asset management
services of all affiliate banks of the Corporation and represents one of the
largest trust companies in the state of Indiana, with assets in excess of $1.3
billion. Merchants Trust Company provides a full range of trust and investment
services for individuals, families, businesses, and not-for-profit
organizations. In addition, Merchants Trust Company specializes in turn-key
retirement plans, including pension plans, profit sharing, 401(k) and 403(b)
plans, cross-tested plans, and cash balance plans.
First Merchants Corporation is one of only two Indiana-based companies listed
among America's Finest Companies, an investment guide published by The Staton
Institute. First Merchants continues to receive an A+ rating from Standard &
Poor's for its common stock (NASDAQ symbol FRME) and Blue Ribbon status for all
affiliate banks from independent bank-rating service Veribanc. At the end of
2002, First Merchants Corporation has accomplished 27 years of consecutive
increased earnings.
First Merchants Corporation's operating philosophy is to be client 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://wwww.firstmerchants.com
52
================================================================================
ANNUAL MEETING, STOCK PRICE & DIVIDEND INFORMATION
================================================================================
First Merchants Corporation currently provides services through 69 offices
located in Adams, Delaware, Carroll, Fayette, Hamilton, Henry, Howard, Boone,
Jasper, Jay, Madison, Miami, Wabash, Wayne, White, Randolph, Tippecanoe and
Union counties in Indiana and Butler County in Ohio.
The 2003 Annual Meeting of Stockholders
of First Merchants Corporation
will be held...
Thursday, April 10, 2003 at 3:30 p.m.
Horizon Convention Center
401 South High Street
Muncie, Indiana
STOCK INFORMATION
PRICE PER SHARE
QUARTER HIGH LOW DIVIDENDS DECLARED(1)
================================================================================================================================
2002 2001 2002 2001 2002 2001
------------------------- -------------------------- ---------------------------
First Quarter ............. $ 25.76 $ 22.90 $ 20.95 $ 18.99 $ .22 $ .22
Second Quarter ............. 28.71 21.70 24.29 19.72 .22 .22
Third Quarter .............. 28.75 23.57 21.43 19.96 .23 .22
Fourth Quarter ............. 25.47 23.78 21.66 21.57 .23 .22
(1) The Liquidity section of Management's Discussion & Analysis of Financial
Condition and Results of Operations and Note 14 to Consolidated Financial
Statements include discussions regarding dividend restrictions from the
bank subsidiaries to the Corporation.
The table above lists per share prices and dividend payments during 2002 and
2001. Prices are as reported by the National Association of Securities Dealers.
Automated Quotation - National Market System.
Numbers rounded to nearest cent when applicable.
53
================================================================================
COMMON STOCK LISTING & MARKET MAKERS
================================================================================
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 January
31, 2003, the number of shares outstanding was 16,323,429. There were 2,890
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
American Stock Transfer & Trust Company
59 Maiden Lane, 1st Floor
New York, NY 10038
MARKET MAKERS
The following firms make a market in First Merchants Corporation stock:
First Tennessee Securities
Geduld, LLC
Keefe, Bruyette & Woods, Inc.
Knight Securities, L.P.
Herzog, Heine, Geduld, Inc.
Howe Barnes Investments, Inc.
Sandler O'Neill & Partners
NatCity Investments, Inc.
RBC Capital Markets
Spear, Leeds, & Kellog
Stifel, Nicolaus & Company, Inc.
54
================================================================================
FORM 10-K AND FINANCIAL INFORMATION
================================================================================
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. Mark Hardwick
Senior Vice President
and Chief Financial Officer
First Merchants Corporation
P. O. Box 792
Muncie, Indiana 47308-0792
765-751-1857
1-800-262-4261 Ext. 1857
55
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
Lafayette Bank and Trust Company.........................Indiana
Commerce National Bank......................................U.S.
First Merchants Capital Trust I.........................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
Wabash Valley Investments, Inc............................Nevada
Wabash Valley, LLC........................................Nevada
Wabash Valley Holdings, Inc...............................Nevada
Merchants Trust Company, National Association...............U.S.
CNBC Retirement Services, Inc...............................Ohio
CNBC Statutory Trust I...............................Connecticut
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 17 2003, 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 28, 2003
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 Mark K. Hardwick, 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 11, 2003
/s/ Michael L. Cox /s/ Stefan S. Anderson
- -------------------------------------- ------------------------------------
Michael L. Cox President and Stefan S. Anderson Director
Chief Executive
Officer (Principal
Executive Officer)
/s/Mark K. Hardwick /s/ Roger M. Arwood
- -------------------------------------- ------------------------------------
Mark K. Hardwick Sr. Vice President Roger M. Arwood Director
and Chief Financial
Officer (Principal
Financial and
Accounting Officer) /s/ James F. Ault
------------------------------------
James F. Ault Director
/s/ Dennis A. Bieberich
------------------------------------
Dennis A. Bieberich Director
/s/ Richard A. Boehning
------------------------------------
Richard A. Boehning Director
/s/ Blaine M. Brownell
------------------------------------
Blaine M. Brownell Director
------------------------------------
Frank A. Bracken Director
/s/ Thomas B. Clark
------------------------------------
Thomas B. Clark Director
/s/ Michael L. Cox
------------------------------------
Michael L. Cox Director
------------------------------------
Barry J. Hudson Director
/s/ Robert T. Jeffares
------------------------------------
Robert T. Jeffares Director
/s/ Norman M. Johnson
------------------------------------
Norman M. Johnson Director
/s/ George A. Sissel
------------------------------------
George A. Sissel Director
------------------------------------
Robert M. Smitson Director
/s/ Dr. John E. Worthen
------------------------------------
Dr. John E. Worthen Director
EXHIBIT-99.1
ACCOUNTANTS' REPORT FOR FIRST MERCHANTS CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
EXHIBIT 99.1--FINANCIAL STATEMENTS AND INDEPENDENT ACCOUNTANTS' REPORT FOR
FIRST MERCHANTS CORPORATION EMPLOYEE STOCK PURCHASE PLAN
- --------------------------------------------------------------------------------
The annual finanial statements and independent accountants' report thereon for
First Merchants Corporation Employee Stock Purchase Plan for the year ending
December 31, 2002, will be filed as an amendment to the 2002 Annual Report on
Form 10-K.
EXHIBIT-99.2
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
EXHIBIT 99.2--CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of First Merchants Corporation (the
"Corporation") on Form 10-K for the year ending December 31, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"), I
Michael L. Cox, President & Chief Executive Officer of the Corporation, do
hereby certify, in accordance with 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)); and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Corporation.
Date 03/28/03 by /s/ Michael L. Cox
--------------------------- -------------------------------------
Michael L. Cox
President and Chief Executive Officer
In connection with the annual report of First Merchants Corporation (the
"Corporation") on Form 10-K for the year ending December 31, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"), I
Mark K. Hardwick, Senior Vice President and Chief Financial Officer of the
Corporation, do hereby certify, in accordance with 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)); and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Corporation.
Date 03/28/03 by /s/ Mark K. Hardwick
--------------------------- -------------------------------------
Mark K. Hardwick
Senior Vice President and
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)