UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________to_________
Commission file number 0-17071
FIRST MERCHANTS CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1544218
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 East Jackson
Muncie, Indiana 47305-2814
(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 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 $479,658,139 as of the
last business day of the registrant's most recently completed second fiscal
quarter (June 30, 2004).
As of March 9, 2005 there were 18,543,441 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 Part I (Item 1)
Report to Shareholders for the year
ended December 31, 2004 Part II (Items 5, 6, 7, 7A, and 8)
Portions of the Registrant's Part III (Items 10 through 14)
Definitive Proxy Statement for
Annual Meeting of Shareholders
to be held April 14, 2005
FORM 10-K TABLE OF CONTENTS
Form 10-K
Page
Number
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS.................................3
PART I
Item 1 - Business............................................................4
Item 2 - Properties.........................................................23
Item 3 - Legal Proceedings..................................................23
Item 4 - Submission of Matters to a Vote of Security Holders................23
Supplemental Information - Executive Officers of the Registrant.............24
PART II
Item 5 - Market For the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities........................................................25
Item 6 - Selected Financial Data...........................................26
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................26
Item 7A- Quantitative and Qualitative Disclosures About Market Risk........26
Item 8 - Financial Statements and Supplementary Data.......................27
Item 9 - Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure...............................27
Item 9A- Controls and Procedures...........................................27
Item 9B- Other Information.................................................28
PART III
Item 10- Directors and Executive Officers of the Registrant.................29
Item 11- Executive Compensation.............................................29
Item 12- Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.....................30
Item 13- Certain Relationships and Related Transactions.....................30
Item 14- Principal Accounting Fees and Services.............................30
PART IV
Item 15- Exhibits and Financial Statement Schedules.........................31
Signatures.........................................................33
Exhibit Index......................................................34
Page 2
STATEMENT 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 "believe",
"continue", "pattern", "estimate", "project", "intend", "anticipate", "expect"
and similar expressions or future or conditional verbs such as "will", "would",
"should", "could", "might", "can", "may", or 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 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;
* 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;
* acquisitions of other businesses by the Corporation and integration of
such acquired businesses;
* changes in market, economic, operational, liquidity, credit and interest
rate risks associated with the Corporation's business; and
* the continued availability of earnings and excess capital sufficient
for the lawful and prudent declaration and payment of cash dividends.
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 3
PART I
Item 1. BUSINESS
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GENERAL
First Merchants Corporation (the "Corporation") is a financial holding
company headquartered in Muncie, Indiana. The Corporation's Common Stock is
traded on NASDAQ's National Market System under the symbol FRME and was
organized in September 1982. Since its organization, the Corporation has grown
to include ten affiliate banks with over seventy locations in seventeen Indiana
and three Ohio counties, a trust company, a multi-line insurance agency, a
reinsurance agency, and a title agency.
The bank subsidiaries of the Corporation include the following:
* First Merchants Bank, National Association in Delaware and Hamilton
counties;
* The Madison Community Bank, National Association in Madison County;
* First United Bank, National Association in Henry County;
* The Union County National Bank of Liberty with locations in Union,
Fayette, Wayne and Butler (OH) counties;
* The Randolph County Bank, National Association;
* The First National Bank of Portland in Jay County;
* Decatur Bank & Trust Company, National Association in Adams County;
* Frances Slocum Bank & Trust Company, National Association in Wabash,
Howard, and Miami counties;
* Lafayette Bank and Trust Company, National Association in Tippecanoe,
Carroll, Jasper, and White counties; and
* Commerce National Bank in Franklin and Hamilton counties in Ohio.
Effective January 1, 2005, The Union County National Bank of Liberty was
merged into The Randolph County Bank, National Association, and the name of the
continuing institution is United Communities National Bank.
The Corporation also operates First Merchants Insurance Services, Inc. a
full- service property, casualty, personal lines, and health care insurance
agency headquartered in Muncie, Indiana. On October 27, 2004, Mangas Agencies,
Inc. merged with and into First Merchants Insurance Services, Inc. The
Corporation is also the majority owner of the Indiana Title Insurance Company
LLC, a full-service title insurance agency; operates First Merchants Reinsurance
Co. Ltd., a reinsurance agency; and wholly-owns Merchants Trust Company,
National Association, a trust and asset management services company.
As of December 31, 2004, the Corporation had consolidated assets of
$3.2 billion, consolidated deposits of $2.4 billion and stockholders' equity of
$315 million. The Corporation is presently engaged in conducting commercial
banking business through the offices of its ten banking subsidiaries. As of
December 31, 2004, the Corporation and its subsidiaries had 1,100 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. These
documents can also be read and copied at the Securities and Exchange
Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information on the public reference room. Our SEC filings are also
available to the public at the Securities and Exchange Commission's web site at
http://www.sec.gov. 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.
Page 4
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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.
COMPETITION
The Corporation's banking subsidiaries are located in Indiana and Ohio
counties where other financial services companies provide similar banking
services. 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 CORPORATION 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
section of this Form 10-K) 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 5
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
stockholders' 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, 2004:
Regulatory Minimum
Corporation Requirement
Tier 1 Capital: 9.6% 4.0%
(to risk-weighted assets)
Total Capital: 11.6% 8.0%
BANK REGULATION
Each of the Corporation's bank subsidiaries are national banks and are
supervised, regulated and examined by the Office of the Comptroller of the
Currency (the "OCC"). The OCC 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. Federal law extensively
regulates 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 6
BANK CAPITAL REQUIREMENTS
The OCC has adopted risk-based capital ratio guidelines to which 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 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 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 OCC as of December 31, 2004.
The Federal Reserve 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 7
FDICIA continued
As of December 31, 2004, 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 "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 banking laws restrict the amount of dividends that an affiliate
bank may declare in a year without obtaining prior regulatory approval. National
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, 2004, the
Corporation's affiliate banks had a total of $11,090,000 retained net profits
available for 2005 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 8
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 9
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,including provisions which became 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 developed 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. The Federal Reserve
regulates the supply of credit in order to influence general economic
conditions, primarily through open market operations in United States government
obligations, varying the discount rate on financial institution borrowings,
varying reserve requirements against financial institution deposits, and
restricting certain borrowings by financial institutions and their subsidiaries.
The monetary policies of the Federal Reserve have had a significant effect on
the operating results of the bank subsidiaries in the past and are expected to
continue to do so in the future.
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 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)
2004 2003 2002
------------------------------ ------------------------------ ------------------------------
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Balance Rate Balance Balance Rate Balance Balance Rate
--------- --------- -------- --------- --------- -------- --------- --------- --------
Assets:
Federal funds sold ............ $ 7,759 $ 165 2.1% $ 44,243 $ 485 1.1% $ 39,239 $ 557 1.4%
Interest-bearing deposits...... 17,500 555 3.2 6,655 76 1.1 2,866 141 4.9
Federal Reserve and
Federal Home Loan Bank stock. 22,655 1,250 5.5 13,615 649 4.8 12,327 735 6.0
Securities: (1)
Taxable ....................... 247,930 8,371 3.4 181,698 6,105 3.4 170,937 9,086 5.3
Tax-exempt .................... 141,205 9,382 6.6 136,028 9,648 7.1 131,145 9,523 7.3
---------- -------- ---------- -------- ---------- --------
Total Securities............. 389,135 17,753 4.6 317,726 15,753 5.0 302,082 18,609 6.2
Mortgage loans held for sale..... 4,205 240 5.7 12,294 725 5.9 21,545 503 2.3
Loans: (2)
Commercial .................... 1,495,195 89,108 6.0 1,387,704 82,183 5.9 1,010,232 66,736 6.6
Bankers' acceptance and
Commercial paper purchased... 4,660 61 1.3
Real estate mortgage........... 486,377 27,969 5.8 517,376 32,100 6.2 484,267 35,704 7.4
Installment ................... 372,817 22,636 6.1 345,084 26,167 7.6 318,277 26,649 8.4
Tax-exempt .................... 10,423 894 8.6 14,496 1,088 7.5 8,108 725 8.9
---------- -------- ---------- -------- ---------- --------
Total loans ................. 2,369,017 140,847 5.9 2,281,614 142,324 6.2 1,842,429 130,317 7.1
---------- -------- ---------- -------- ---------- --------
Total earning assets......... 2,806,066 160,570 5.7 2,663,853 159,287 6.0 2,198,943 150,359 6.8
---------- -------- ---------- -------- ---------- --------
Net unrealized gain (loss) on securities
available for sale........... 4,676 7,553 6,214
Allowance for loan losses........ (26,093) (28,906) (20,187)
Cash and due from banks.......... 63,420 75,801 66,510
Premises and equipment .......... 38,397 39,069 44,088
Other assets .................... 222,638 202,825 110,683
--------- --------- ---------
Total assets ................ $3,109,104 $2,960,195 $2,406,251
========== ========== ==========
Liabilities:
Interest-bearing deposits:
NOW accounts ................ $ 346,525 1,779 0.5% $ 344,933 2,015 0.6% $ 273,126 3,680 1.3%
Money market deposit accounts 359,359 3,219 0.9 336,669 3,360 1.0 332,811 3,290 1.0
Savings deposits ............ 297,364 992 0.3 293,119 1,376 0.5 184,849 2,184 1.2
Certificates and other
time deposits ............. 1,051,092 27,854 2.7 988,957 28,107 2.8 838,272 30,546 3.6
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
deposits..................... 2,054,340 33,844 1.6 1,963,678 34,858 1.8 1,629,058 39,700 2.4
Borrowings ...................... 402,776 17,741 4.4 381,178 17,530 4.6 277,709 14,060 5.1
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
liabilities.................. 2,457,116 51,585 2.1 2,344,856 52,388 2.2 1,906,767 53,760 2.8
Noninterest-bearing deposits..... 310,966 293,397 227,995
Other liabilities ............... 31,018 28,339 33,914
---------- ---------- ----------
Total liabilities............ 2,799,100 2,666,592 2,168,676
Stockholders' equity ............ 310,004 293,603 237,575
---------- ---------- ----------
Total liabilities and
stockholders' equity........ $3,109,104 51,585 1.8(3) $2,960,195 52,388 2.0(3) $2,406,251 53,760 2.4(3)
========== -------- ========== -------- ========== --------
Net interest income ......... $108,986 $106,899 $ 96,599
======== ======== ========
Net interest margin.......... 3.9 4.0 4.4
(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 2004, 2003, and
2002.............................
$3,597 $3,757 $3,676
====== ====== ======
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.
2004 Compared to 2003 2003 Compared to 2002
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 ............... $ (577) $ 257 $ (320) $ 65 $ (135) $ (70)
Interest-bearing deposits ........ 229 250 479 127 (248) (121)
Federal Reserve and Federal
Home Loan Bank stock ........... 474 127 601 72 (158) (86)
Securities ....................... 3,332 (1,332) 2,000 924 (3,780) (2,856)
Mortgage loans held for sale ..... (462) (23) (485) (288) 510 222
Loans ............................ 5,843 (6,835) (992) 29,315 (17,475) 11,840
-------- --------- --------- -------- --------- ---------
Totals ........................... 8,839 (7,556) 1,283 30,215 (21,286) 8,929
-------- --------- --------- -------- --------- ---------
Interest expense:
NOW accounts ..................... 9 (245) (236) 794 (2,459) (1,665)
Money market deposit
accounts........................ 217 (358) (141) 38 32 70
Savings deposits.................. 20 (404) (384) 899 (1,707) (808)
Certificates and other
time deposits................... 1,708 (1,961) (253) 4,948 (7,387) (2,439)
Borrowings........................ 969 (758) 211 4,853 (1,381) 3,472
-------- --------- --------- -------- --------- ---------
Totals.......................... 2,923 (3,726) (803) 11,532 (12,902) (1,370)
-------- --------- --------- -------- --------- ---------
Change in net interest
income (fully taxable
equivalent basis)................ $ 5,916 $ (3,830) 2,086 $18,683 $ (8,384) 10,299
======== ========= ======== =========
Tax equivalent adjustment
using marginal rate
of 35% for 2004, 2003,
and 2002.......................... 161 (80)
---------- ----------
Change in net interest
income........................... $ 2,247 $ 10,219
========== ==========
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, 2004
U.S. Treasury ............................... $ 1,745 $ 1 $ 1,744
Federal agencies ............................ 65,325 $ 73 332 65,066
State and municipal ......................... 150,284 5,243 82 155,445
Mortgage-backed securities .................. 183,200 485 1,980 181,705
Corporate obligations ....................... 18 18
Marketable equity securities ................ 12,191 8 12,199
-------- -------- -------- --------
Total available for sale ................. 412,763 5,809 2,395 416,177
-------- -------- -------- --------
Held to maturity at December 31, 2004
State and municipal ......................... 5,306 162 5,468
Mortgage-backed securities .................. 52 52
-------- -------- -------- --------
Total held to maturity ................... 5,358 162 5,520
-------- -------- -------- --------
Total investment securities .............. $418,121 $ 5,971 $ 2,395 $421,697
======== ======== ======== ========
Available for sale at December 31, 2003
(Dollars in Thousands)
U.S. Treasury ............................... $ 1,498 $ 1,498
Federal agencies ............................ 38,290 $ 523 $ 52 38,761
State and municipal ......................... 118,794 6,932 86 125,640
Mortgage-backed securities .................. 174,208 813 1,817 173,204
Corporate obligations ....................... 500 16 516
Marketable equity securities ................ 9,237 4 9,241
-------- -------- -------- --------
Total available for sale ................. 342,527 8,288 1,955 348,860
-------- -------- -------- --------
Held to maturity at December 31, 2003
State and municipal ......................... 7,860 389 8,249
Mortgage-backed securities .................. 77 77
-------- -------- -------- --------
Total held to maturity ................... 7,937 389 8,326
-------- -------- -------- --------
Total investment securities .............. $350,464 $ 8,677 $ 1,955 $357,186
======== ======== ======== ========
Page 13
- --------------------------------------------------------------------------------
STATISTICAL DATA (continued)
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
======== ======== ======== ========
Cost
----------------------------------------------------------
2004 2003 2002
---- ---- ----
(Dollars in Thousands)
Federal Reserve and Federal Home Loan
Bank stock at December 31:
Federal Reserve Bank stock .................... $ 8,814 $ 2,320 $ 493
Federal Home Loan Bank stock .................. 14,044 13,182 10,916
------- ------- -------
Total ..................................... $22,858 $15,502 $11,409
======= ======= =======
The fair value of Federal Reserve and Federal Home Loan Bank stock approximates
cost.
There were no issuers included in our investment security portfolio at December
31, 2004, 2003 or 2002 where the aggregate carrying value of any one issuer
exceeded 10 percent of the Corporation's stockholders' equity at those dates.
The term "issuer" excludes the U.S. Government and its agencies and
corporations.
The maturity distribution (Dollars in Thousands) and average yields for the
securities portfolio at December 31, 2004 were:
Securities available for sale December 31, 2004:
Within 1 Year 1-5 Years 5-10 Years
------------- --------- ----------
Amount Yield* Amount Yield* Amount Yield*
------ ------ ------ ------ ------ ------
U.S. Treasury...................... $ 1,744 1.7%
Federal Agencies................... 1,502 2.8 $ 61,211 3.6% $ 2,353 3.6%
State and Municipal................ 9,882 7.1 69,151 5.0 51,086 6.2
------- -------- -------
Total.......................... $13,128 5.9% $130,362 4.3% $53,439 6.1%
======= ======== =======
Page 14
- --------------------------------------------------------------------------------
STATISTICAL DATA (continued)
Marketable Equity
and Mortgage -
Due After Ten Years Backed Securities Total
------------------- ----------------------- -----
Amount Yield* Amount Yield* Amount Yield*
------ ------ ------ ------ ------ ------
U.S. Treasury........................ $ 1,744 1.7%
Federal Agencies..................... 65,066 3.6
State and Municipal.................. $ 25,326 7.3% 155,445 5.9
Marketable equity securities......... $ 12,199 5.4% 12,199 5.4
Mortgage-backed securities........... 181,705 3.9 181,705 3.9
Other asset-backed securities........ 18 7.0 18 7.0
-------- --------- --------
Total............................ $ 25,344 7.3% $ 193,904 4.0% $416,177 4.6%
======== ========= ========
Securities held to maturity at December 31, 2004:
Within 1 Year 1-5 Years 5-10 Years
------------- --------- ----------
Amount Yield* Amount Yield* Amount Yield*
------ ------ ------ ------ ------ ------
State and municipal.................. $ 1,110 8.1% $ 2,760 8.1% $ 295 9.0%
Mortgage-Backed
Due After Ten Years Securities Total
------------------- ------------ -----
Amount Yield* Amount Yield* Amount Yield*
------ ------ ------ ------ ------ ------
State and municipal.................. $ 1,141 8.8% $ 5,306 8.3%
Mortgage-backed securities........... $ 52 8.4% 52 8.4
------- ------- -------
Total............................ $ 1,141 8.8% $ 52 8.4% $ 5,358 8.3%
======= ======= =======
*Interest yields on state and municipal securities are presented on a fully
taxable equivalent basis using a 35% rate.
Page 15
STATISTICAL DATA (continued)
Federal Reserve and Federal Home Loan Bank stock at December 31, 2004:
(Dollars in Thousands)
Amount Yield
Federal Reserve Bank Stock........... $ 8,814 6.0%
Federal Home Loan Bank stock......... 14,044 4.3
-------
Total............................ $22,858 4.9%
=======
The following tables show the Corporation's gross unrealized losses and fair
value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position at December 31,
2004 and 2003:
Less than 12 12 Months or Total
Months Longer
---------------------------------------------------------------------------
GROSS GROSS GROSS
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSSES VALUE LOSSES VALUE LOSSES
---------------------------------------------------------------------------
(Dollars in Thousands)
Temporarily impaired investment
securities at December 31, 2004:
U.S. Treasury ........................................ $ 1,496 $ (1) $ 1,496 $ (1)
Federal agencies ..................................... 46,227 (303) $ 1,472 $ (29) 47,699 (332)
State and municipal .................................. 2,976 (20) 1,094 (62) 4,070 (82)
Mortgage-backed securities ........................... 109,213 (1,129) 27,493 (851) 136,706 (1,980)
---------- ---------- ---------- ---------- ---------- ----------
Total temporarily impaired investment securities .. $ 159,912 $ (1,453) $ 30,059 $ (942) $189,971 $ (2,395)
========== ========== ========== ========== ========== ==========
Less than 12 12 Months or Total
Months Longer
---------------------------------------------------------------------------
GROSS GROSS GROSS
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSSES VALUE LOSSES VALUE LOSSES
---------------------------------------------------------------------------
(Dollars in Thousands)
Temporarily impaired investment
securities at December 31, 2003:
Federal agencies ..................................... $ 7,410 $ (50) $ 747 $ (2) $ 8,157 $ (52)
State and municipal .................................. 2,547 (82) 166 (4) 2,713 (86)
Mortgage-backed securities ........................... 90,148 (1,817) 90,148 (1,817)
---------- ---------- ---------- ---------- ---------- ----------
Total temporarily impaired investment securities .. $ 100,105 $ (1,949) $ 913 $ (6) $ 101,018 $ (1,955)
========== ========== ========== ========== ========== ==========
Page 16
STATISTICAL DATA (continued)
LOAN PORTFOLIO
TYPES OF LOANS
The loan portfolio at the dates indicated is presented below:
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Dollars in Thousands)
Loans at December 31:
Commercial and
industrial loans........................... $ 451,227 $ 435,221 $ 401,395 $ 301,962 $ 258,405
Agricultural production
financing and other loans
to farmers................................. 98,902 95,048 85,059 29,645 24,547
Real estate loans:
Construction............................... 164,738 149,865 133,896 58,316 45,412
Commercial and farmland.................... 709,163 564,578 401,561 230,233 167,317
Residential................................ 761,163 866,477 746,349 544,028 466,660
Individuals' loans for
household and other
personal expenditures...................... 198,532 196,093 206,083 179,325 201,629
Tax-exempt loans............................. 8,203 16,363 12,615 7,277 6,093
Lease financing.............................. 11,311 7,919 5,249
Other loans.................................. 24,812 21,939 12,170 8,800 5,523
---------- ---------- ---------- ---------- ----------
Total loans........................ $2,428,051 $2,353,503 $2,004,377 $1,359,586 $1,175,586
========== ========== ========== ========== ==========
Residential Real Estate Loans Held for Sale at December 31, 2004, 2003, 2002,
2001 and 2000 were $3,367,000, $3,043,000, $21,545,000, $307,000, and $0.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
Presented in the table below are the maturities of loans (excluding residential
real estate, individuals' loans for household and other personal expenditures
and lease financing) outstanding as of December 31, 2004. 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................ $ 334,525 $ 84,987 $ 31,715 $ 451,227
Agricultural production financing
and other loans to farmers................... 84,681 11,594 2,627 98,902
Real estate - Construction..................... 128,821 30,904 5,013 164,738
Real estate - Commercial and farmland.......... 383,028 264,995 61,140 709,163
Tax-exempt loans............................... 55 3,177 4,971 8,203
Other loans.................................... 11,013 13,484 315 24,812
---------- --------- --------- ----------
Total.................................... $ 942,123 $ 409,141 $105,781 $1,457,045
========== ========= ========= ==========
Page 17
STATISTICAL DATA (continued)
Maturing
---------------------------------------------------
1 - 5 Over
Years 5 Years
----- -------
(Dollars in Thousands)
Loans maturing after one year with:
Fixed rate.............................. $ 109,404 $ 99,121
Variable rate........................... 299,737 6,660
------------- ------------
Total................................. $ 409,141 $ 105,781
============= ============
NONACCRUING, CONTRACTUALLY PAST DUE 90 DAYS OR MORE
OTHER THAN NONACCRUING AND RESTRUCTURED LOANS
December 31
---------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Dollars in Thousands)
Nonaccruing loans......................... $15,355 $19,453 $14,134 $6,327 $2,370
Loans contractually past due 90
days or more other than
nonaccruing............................. 1,907 6,530 6,676 4,828 2,483
Restructured loans........................ 2,019 641 2,508 3,511 3,085
------- ------- ------- ------- -------
$19,281 $26,624 $23,318 $14,666 $7,938
======= ======= ======= ======= =======
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 $3,029,000 for the year ended December 31, 2004, was
recognized on the nonaccruing and restructured loans listed in the table above,
whereas interest income of $4,166,000 would have been recognized under their
original loan terms.
Potential problem loans:
Management has identified certain other loans totaling $65,953,000 as of
December 31, 2004, 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, Franklin and Hamilton counties in Ohio. The Banks' loans are
generally secured by specific items of collateral, including real property,
consumer assets, and business assets.
Page 18
STATISTICAL DATA (continued)
- ----------------
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the loan loss experience for the years indicated.
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Dollars in Thousands)
Allowance for loan losses:
Balance at January 1.................... $ 25,493 $ 22,417 $ 15,141 $ 12,454 $ 10,128
Chargeoffs:
Commercial and industrial(1)........... 7,455 5,023 4,711 1,688 974
Real estate mortgage(3)................ 1,588 2,111 800 227 43
Individuals' loans for household and
other personal expenditures,
including other loans................ 1,858 5,005 2,602 1,632 1,274
-------- -------- -------- -------- --------
Total chargeoffs..................... 10,901 12,139 8,113 3,547 2,291
-------- -------- -------- -------- --------
Recoveries:
Commercial and industrial(2)........... 1,629 1,002 549 176 171
Real estate mortgage(4)................ 161 421 92 32 1
Individuals' loans for household and
other personal expenditures,
including other loans................ 461 588 672 365 407
-------- -------- -------- -------- --------
Total recoveries..................... 2,251 2,011 1,313 573 579
-------- -------- -------- -------- --------
Net chargeoffs........................... 8,650 10,128 6,800 2,974 1,712
-------- -------- -------- -------- --------
Provisions for loan losses............... 5,705 9,477 7,174 3,576 2,625
Allowance acquired in purchase........... 3,727 6,902 2,085 1,413
-------- -------- -------- -------- --------
Balance at December 31................... $22,548 $25,493 $22,417 $15,141 $12,454
======== ======== ======== ======== ========
(1)Category also includes the chargeoffs for lease financing, loans to
financial institutions, tax-exempt loans and agricultural production
financing and other loans to farmers.
(2)Category also includes the recoveries for lease financing, 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% .44% .37% .23% .16%
Page 19
STATISTICAL DATA (continued)
- ----------------
The information regarding the analysis of loan loss experience on pages 9 and 10
of the First Merchants Corporation - Annual Report 2004 under the caption "ASSET
QUALITY/PROVISION FOR LOAN LOSSES" is expressly incorporated herein by
reference.
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 percent of loans in each category to total loans:
2004 2003
------------------------- -------------------------
Amount Per Cent Amount Per Cent
-------- -------- -------- --------
(Dollars in Thousands)
Balance at December 31:
Commercial and industrial(1)................ $ 16,821 30.9% $ 17,517 29.9%
Real estate mortgage(2)..................... 1,916 60.6 4,441 60.8
Individuals' loans for household and
other personal expenditures,
including other loans..................... 3,711 8.5 3,435 9.3
Unallocated................................. 100 N/A 100 N/A
-------- ------ -------- ------
Totals...................................... $ 22,548 100.0% $ 25,493 100.0%
======== ====== ======== ======
2002 2001
------------------------- -------------------------
Amount Per Cent Amount Per Cent
-------- -------- -------- --------
(Dollars in Thousands)
Balance at December 31:
Commercial and industrial(1)................ $ 12,405 31.8% $ 6,884 29.2%
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 10.9 5,502 13.9
Unallocated................................. 100 N/A 100 N/A
-------- ------ -------- ------
Totals...................................... $ 22,417 100.0% $ 15,141 100.0%
======== ====== ======== ======
2000
-------------------------
Amount Per Cent
-------- --------
(Dollars in Thousands)
Balance at December 31:
Commercial and industrial(1)................ $ 4,478 28.5%
Real estate mortgage(2)..................... 1,554 53.9
Individuals' loans for household and
other personal expenditures,
including other loans..................... 4,622 17.6
Unallocated. .... .......................... 1,800 N/A
-------- ------
Totals...................................... $ 12,454 100.0%
======== ======
(1) Category also includes the allowance for loan losses and percent of
loans for lease financing, loans to financial institutions, tax-exempt
loans, agricultural production financing and other loans to farmers and
construction real estate loans.
(2) Category includes the allowance for loan losses and percent of loans for
commercial and farmland and residential real estate loans.
At December 31, 2004, the Corporation had no concentration of loans exceeding 10
percent of total loans, which are not otherwise disclosed. Loan concentrations
are considered to exist when there are amounts loaned to a multiple number of
borrowers engaged in similar activities, which would cause them to be similarly
impacted by economic or other conditions.
Page 20
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 between the banks and for the pooling of knowledge,
judgment and experience of the Corporation's affiliate banks. These committees
provide valuable input to lending personnel, act as an approval body, and
monitor the overall quality of the banks' loan portfolios. 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:
2004 2003 2002
--------------- --------------- ----------------
(Dollars in Thousands)
As of, and for the year ending December 31:
Impaired loans with an allowance............................ $ 7,728 $ 12,725 $ 16,901
Impaired loans for which the discounted
cash flows or collateral value exceeds the
carrying value of the loan................................ 41,683 32,047 27,450
------------ ------------ ------------
Total impaired loans.................................. $ 49,411 $ 44,772 $ 44,351
============ ============ ============
Total impaired loans as a percent of total loans.............. 2.03% 1.90% 2.19%
Allowance for impaired loans (included in the
Corporation's allowance for loan losses).................. $ 1,673 $ 5,728 $ 7,299
Average balance of impaired loans........................... 59,568 50,245 49,663
Interest income recognized on impaired loans................ 4,166 3,259 3,656
Cash basis interest included above.......................... 3,029 2,714 2,344
Page 21
- --------------------------------------------------------------------------------
STATISTICAL DATA (continued)
DEPOSITS
The average balances, interest income and expense and average rates on deposits
for the years ended December 2004, 2003 and 2002 are presented within the
"Distribution of Assets, Liabilities and Stockholders' Equity, Interest Rates
and Interest Differential" table on page 11 of this Form 10-K.
As of December 31, 2004, 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.......... $117,826 $ 22,121 $ 26,027 $ 92,388 $258,362
Per cent....................... 45% 9% 10% 36% 100%
RETURN ON EQUITY AND ASSETS
The information regarding return on equity and assets presented on page 2 of the
First Merchants Corporation - Annual Report 2004 under the caption "Five - Year
Summary of Selected Financial Data" is expressly incorporated herein by
reference.
SHORT-TERM BORROWINGS
2004 2003 2002
----------------- ----------------- -----------------
(Dollars in Thousands)
Balance at December 31:
Securities sold under repurchase
agreements (short-term portion)........ $ 87,472 $ 71,095 $ 65,962
Federal funds purchased.................. 32,550
U.S. Treasury demand notes...............
--------- --------- ---------
Total short-term borrowings...... $ 120,022 $ 71,095 $ 65,962
========= ========= =========
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:
2004 2003 2002
----------------- ----------------- -----------------
(Dollars in Thousands)
Weighted average interest rate on outstanding
balance at December 31:
Securities sold under repurchase
agreements(short-term portion).............. 1.8% 1.4% 1.1%
Total short-term borrowings..................... 1.9 1.4 1.1
Weighted average interest rate during the year:
Securities sold under repurchase
agreements (short-term portion)............. .8% .9% 1.4%
Total short-term borrowings..................... 1.0 .9 1.3
Highest amount outstanding at any month end
during the year:
Securities sold under repurchase
agreements (short-term portion)............. $ 37,771 $ 69,396 $ 54,375
Total short-term borrowings..................... 120,019 113,618 67,984
Average amount outstanding during the year:
Securities sold under repurchase
agreements (short-term portion)............. $ 62,702 $ 51,780 $ 41,241
Total short-term borrowings..................... 81,194 59,719 49,886
Page 22
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, 56 are owned by the respective
banks and 14 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, 2004 was $38,254,000.
- --------------------------------------------------------------------------------
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 2004 to a vote of
security holders, through the solicitation of proxies or otherwise.
Page 23
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. The officers are elected by the Board of Directors of
the Corporation for a term of one (1) year or until the election of their
successors. There are no arrangements between any officer and any other person
pursuant to which he was selected as an officer.
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
60 Corporation Corporation since April 1999;
President First Merchants from
April 1999 to September 2000;
President and Chief Operating Officer,
Corporation since August 1998 and from
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
53 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
55 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.
Larry R. Helms Senior Vice President, General Senior Vice President and General Counsel,
64 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
34 Financial Officer, Corporation Officer of the Corporation since April of 2002;
Corporate Controller, Corporation from
November 1997 to April 2002.
Page 24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
- --------------------------------------------------------------------------------
On October 15, 2004, the Corporation issued 68,548 unregistered shares of its
common stock pursuant to a Merger Agreement dated October 15, 2004, between the
Corporation, First Merchants Insurance Services, Inc. and Mangas Agencies, Inc.
("Mangas"). The Corporation issued the unregistered shares to the shareholders
of Mangas, at a value of $24.80 per share, in exchange for all the common stock
of Mangas. The issuance by the Corporation of its shares of common stock were
not registered under the Securities Act of 1933, as amended ("Securities Act").
The shares were issued pursuant to the exemption contemplated in Section 4 (2)
of the Securities Act, for transactions not involving a public offering.
The information on pages 54 and 55 of the First Merchants Corporation - Annual
Report 2004 under the captions "Annual Meeting, Stock Price and Dividend
Information" and "Common Stock Listing", is expressly incorporated herein by
reference.
The following table presents information relating to the Corporation's purchases
of its equity securities, as follows(1):
TOTAL NUMBER OF MAXIMUM NUMBER OF
SHARES PURCHASED AS PART SHARES THAT MAY YET
TOTAL NUMBER OF AVERAGE PRICE OF PUBLICLY ANNOUNCED BE PURCHASED UNDER
PERIOD SHARES PURCHASED PAID PER SHARE PLANS OR PROGRAMS THE PLANS OR PROGRAMS
------ ---------------- -------------- ------------------------- -----------------------
October 1-31, 2004 0 0 0
November 1-30, 2004 67,365 (2) 25.21 0 0
December 1-31, 2004 21,152 (3) 28.22 0 0
(1) On February 10, 2004, the Corporation's Board authorized management to
repurchase up to 250,000 shares of the Corporation's Common Stock. This
authorization expired February 8, 2005.
(2) 63,000 of these shares were purchased in open-market transactions pursuant
to the Board's authorization to repurchase shares. The remaining 4,365 shares
were purchased in connection with the exercise of certain outstanding options.
(3) 13,500 of these shares were purchased in open-market transactions pursuant
to the Board's authorization to repurchase shares. The remaining 7,652 shares
were purchased in connection with the exercise of certain outstanding options.
The following table presents information relating to securities authorized under
equity compensation plans.
Equity Compensation Plan Information
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 first column)
------------- ----------------------- -------------------- -------------------------------------
Equity compensation plans approved
by stockholders 966,939 $ 22.06 400,000 (1)
Equity compensation plans not
approved by stockholders(2) 52,704 20.83
----------------------- -------------------- -------------------------------------
Total 1,019,643 $ 22.00 400,000 (1)
======================= ==================== =====================================
(1) This number does not include shares remaining available for future issuance
under the 1999 Long-term Equity Incentive Plan, which was approved by the
Corporation's shareholders at the 1999 annual meeting. The aggregate number of
shares that are available for grants under that Plan in any calendar year is
equal to the sum of: (a) 1% of the number of common shares of the Corporation
outstanding as of the last day of the preceding calendar year; plus (b) the
number of shares that were available for grants, but not granted, under the Plan
in any previous year; but in no event will the number of shares available for
grants in any calendar year exceed 1 1/2% of the number of common shares of the
Corporation outstanding as of the last day of the preceding calendar year. The
1999 Long-term Equity Incentive Plan will expire in 2009.
(2) 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 provided for non-qualified stock
options of the common stock of the Corporation, awarded between 1995 and 2002
to each director of First Merchants Bank, National Association (the "Bank") who,
on the date of the grants: (a) were serving as a director of the Bank; (b) were
not an employee of the Corporation, the Bank, or any of the Corporation's other
affiliated banks or non-bank subsidiaries; and (c) were not serving as a
director of the Corporation. The exercise price of the shares was equal to the
fair market value of the shares upon the grant of the option. Options became 100
percent vested when granted and are fully exercisable six months after the date
of the grant, for a period of ten years.
Page 25
ITEM 6. SELECTED FINANCIAL DATA.
- --------------------------------------------------------------------------------
The information on page 2 of the First Merchants Corporation - Annual Report
2004 under the caption "Five-Year Summary of Selected Financial Data", is
expressly incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
- --------------------------------------------------------------------------------
The information on pages 3 through 19 of the First Merchants Corporation -
Annual Report 2004 under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations", is expressly incorporated herein
by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- --------------------------------------------------------------------------------
The information on pages 12 through 14 of the First Merchants Corporation -
Annual Report 2004 under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" within the section "Interest
Sensitivity and Disclosures About Market Risk", is expressly incorporated herein
by reference.
Page 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- --------------------------------------------------------------------------------
Pages 20 through 53 of the First Merchants Corporation - Annual Report 2004, 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, 2004, there have been no disagreements with the Corporation's
independent registered public accounting firm on any matter of accounting
principles or practices, financial statement disclosure or audit scope or
procedure, nor have there been any changes in accountants.
ITEM 9A. CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
At the end of the period covered by this report (the "Evaluation Date"), 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 it's disclosure controls and procedures pursuant to Rule
13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934 ("Exchange Act").
Based upon that evaluation, the Corporation's Chief Executive Officer and Chief
Financial Officer concluded that, as of the Evaluation Date, 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 Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Corporation is responsible for establishing and maintaining
effective internal control over financial reporting as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934. The Corporation's internal
control over financial reporting is designed to provide reasonable assurance to
the Corporation's management and board of directors regarding the preparation
and fair presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Accordingly, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Management assessed the effectiveness of the Corporation's internal control over
financial reporting as of December 31, 2004. In making this assessment,
management used the criteria set forth in "Internal Control - Integrated
Framework" issued by the Committee of Sponsoring Organizations (COSO) of the
Treadway Commission. Based on this assessment, management has determined that
the Corporation's internal control over financial reporting as of December 31,
2004 is effective based on the specified criteria.
Management's assessment of the effectiveness of internal control over financial
reporting as of December 31, 2004 has been audited by BKD, LLP, an independent
registered public accounting firm, as stated in their report, which appears
on the next page.
There have been no changes in the Corporation's internal controls over financial
reporting identified in connection with the evaluation referenced above that
occurred during the Corporation's last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Corporation's
internal control over financial reporting.
Page 27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee, Board of Directors and Stockholders
First Merchants Corporation
Muncie, Indiana
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that First
Merchants Corporation maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Corporation's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Corporation's internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit includes obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control and performing such
other procedures as we consider necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that First Merchants Corporation
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Also in our
opinion, First Merchants Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements of First Merchants Corporation and our report dated January 28, 2005,
expressed an unqualified opinion thereon.
BKD, LLP
Indianapolis, Indiana
January 28, 2005
ITEM 9B. OTHER INFORMATION
- --------------------------------------------------------------------------------
None
Page 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- --------------------------------------------------------------------------------
The information in the Corporation's Proxy Statement dated March 3, 2005
furnished to its stockholders in connection with an annual meeting to be held
April 14, 2005 (the "2005 Proxy Statement"), under the captions "ELECTION OF
DIRECTORS", "COMMITTEES OF THE BOARD" 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.
The Corporation has adopted a Code of Ethics that applies to its Chief Executive
Officer, Chief Operating Officer, Chief Financial Officer, Controller and
Treasurer. It is part of the Corporation's Code of Business Conduct, which
applies to all employees and directors of the Corporation and its affiliates. A
copy of the Code of Ethics may be obtained, free of charge, by writing to the
General Counsel of First Merchants Corporation at 200 East Jackson Street,
Muncie, IN 47305. In addition, the Code of Ethics is maintained on the
Corporation's web site, which can be accessed at http://www.firstmerchants.com.
ITEM 11. EXECUTIVE COMPENSATION.
- --------------------------------------------------------------------------------
The information in the Corporation's 2005 Proxy Statement, under the captions,
"COMPENSATION OF DIRECTORS", "COMPENSATION OF EXECUTIVE OFFICERS", "COMMITTEES
OF THE BOARD-Compensation and Human Resources Committee Interlocks and Insider
Participation", "COMMITTEES OF THE BOARD-Compensation and Human Resources
Committee Report on Executive Compensation" and "PERFORMANCE GRAPH" is expressly
incorporated herein by reference.
Page 29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
- --------------------------------------------------------------------------------
The information in the Corporation's 2005 Proxy Statement, under the caption,
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" is expressly
incorporated herein by reference. The information required under this item
relating to equity compensation plans is set forth in Part II, Item 5 of this
annual report on Form 10-K under the table entitled "Equity Compensation Plan
Information" and is expressly incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------------------------------
The information in the Corporation's 2005 Proxy Statement, under the caption
"INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS," is expressly incorporated
herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
- --------------------------------------------------------------------------------
The information in the Corporation's 2005 Proxy Statement, under the caption
"INDEPENDENT PUBLIC ACCOUNTANTS", is expressly incorporated herein by reference.
Page 30
PART IV
ITEM 15. FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.
- --------------------------------------------------------------------------------
(a) 1. Financial Statements:
Independent accountants' report
Consolidated balance sheets at
December 31, 2004 and 2003
Consolidated statements of income,
years ended December 31, 2004,
2003 and 2002
Consolidated statements of comprehensive income,
years ended December 31, 2004, 2003 and 2002
Consolidated statements of stockholders' equity,
years ended December 31, 2004, 2003 and 2002
Consolidated statements of cash flows,
years ended December 31, 2004,
2003 and 2002
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:
- ----------- ------------------------
3a First Merchants Corporation Articles of Incorporation.
(Incorporated by reference to registrant's Form 10-Q for quarter
ended June 30, 1999)
3b Bylaws of First Merchants Corporation (2)
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)
Page 31
ITEM 15. FINANCIAL STATEMENT SCHEDULES AND EXHIBITS (continued)
- --------------------------------------------------------------------------------
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)
10f First Merchants Corporation change of Control Agreement with
Roger M. Arwood dated February 11, 2003. (Incorporated by
reference to registrant's Form 10-Q for quarter ended March
31, 2003)(1)
10g First Merchants Corporation Change of Control Agreement with
Larry R. Helms dated February 11, 2003. (Incorporated by
reference to registrant's Form 10-Q for quarter ended March
31, 2003)(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 February 11, 2003. (Incorporated by reference to
registrant's Form 10-Q for quarter ended March 31, 2003)(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. (Incorporated by reference to registrant's
Form 10-Q for quarter ended September 30, 2004) (1)
13 First Merchants Corporation - Annual Report 2004 (except
for the pages and information expressly incorporated by
reference in this Form 10-K, the First Merchants Corporation
- Annual Report 2004 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 Registered Public Accounting Firm(2)
24 Limited Power of Attorney(2)
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes - Oxley Act of 2002(2)
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes - Oxley Act of 2002(2)
32 Certifications Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002(2)
99.1 Financial statements and independent registered public
accounting firm's report for First Merchants Corporation
Employee Stock Purchase Plan (See Exhibit 13 to this Form
10-K)(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 32
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 16th day of March,
2005.
FIRST MERCHANTS CORPORATION
By /s/ Michael L.Cox
-----------------------------
Michael L. Cox, President
and 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 16th day of March, 2005.
/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* /s/ Barry J. Hudson*
- ------------------------------------ ------------------------------------
Roger M. Arwood Director Barry J. Hudson Director
/s/ James F. Ault*
- ------------------------------------ ------------------------------------
James F. Ault Director Robert T. Jeffares Director
/s/Richard A. Boehning* /s/ Norman M. Johnson*
- ------------------------------------ ------------------------------------
Richard A. Boehning Director Norman M. Johnson Director
/s/ Thomas D. McAuliffe*
- ------------------------------------ ------------------------------------
Frank A. Bracken Director Thomas D. McAuliffe Director
/s/ Charles E. Schalliol*
- ------------------------------------ ------------------------------------
Blaine M. Brownell Director Charles E. Schalliol Director
/s/ Thomas B. Clark*
- ------------------------------------ ------------------------------------
Thomas B. Clark Director Robert M. Smitson Director
/s/ Roderick English* /s/ Jeam L. Wojtowicz*
- ------------------------------------ ------------------------------------
Roderick English Director Jean L. Wojtowicz Director
/s/ Dr. Jo Ann Gora*
- ------------------------------------
Dr. Jo Ann Gora 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 16, 2005
Page 33
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
(a) 3. Exhibits:
Exhibit No: Description of Exhibits:
- ----------- ------------------------
3a First Merchants Corporation Articles of Incorporation.
(Incorporated by reference to registrant's Form 10-Q for quarter
ended June 30, 1999)
3b Bylaws of First Merchants Corporation (2)
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 February 11, 2003. (Incorporated by
reference to registrant's Form 10-Q for quarter ended March
31, 2003)(1)
10g First Merchants Corporation Change of Control Agreement with
Larry R. Helms dated February 11, 2003. (Incorporated by
reference to registrant's Form 10-Q for quarter ended March
31, 2003)(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 February 11, 2003. (Incorporated by reference to
registrant's Form 10-Q for quarter ended March 31, 2003)(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. (Incorporated by reference to registrant's
Form 10-Q for quarter ended September 30, 2004)(1)
13 First Merchants Corporation - Annual Report 2004 (except
for the pages and information expressly incorporated by
reference in this Form 10-K, the First Merchants Corporation
- Annual Report 2004 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 Registered Public Accounting Firm(2)
24 Limited Power of Attorney(2)
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes - Oxley Act of 2002(2)
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes - Oxley Act of 2002(2)
32 Certifications Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002(2)
99.1 Financial statements and independent registered public
accounting firm's report for First Merchants Corporation
Employee Stock Purchase Plan (See Exhibit 13 to this Form
10-K)(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-3b
BYLAWS OF
FIRST MERCHANTS CORPORATION
Following are the Bylaws, as amended and restated as of February 8,
2005, of First Merchants Corporation (hereinafter referred to as the
"Corporation"), a corporation existing pursuant to the provisions of the Indiana
Business Corporation Law, as amended (hereinafter referred to as the "Act"):
ARTICLE I
Name, Principal Office and Seal
Section 1. Name and Principal Office. The name of the
Corporation is First Merchants Corporation. The post office address of the
principal office of the Corporation is 200 East Jackson Street, Muncie, Indiana
47305.
Section 2. Seal. The seal of the Corporation shall be circular
in form and mounted upon a metal die, suitable for impressing the same upon
paper. About the upper periphery of the seal shall appear the words "First
Merchants Corporation" and about the lower periphery thereof the word "Muncie,
Indiana". In the center of the seal shall appear the word "Seal".
ARTICLE II
Fiscal Year
The fiscal year of the Corporation shall begin each year on the first
day of January and end on the last day of December of the same year.
ARTICLE III
Capital Stock
Section 1. Number of Shares and Classes of Capital Stock. The
total number of shares of capital stock which the Corporation shall have
authority to issue shall be as stated in the Articles of Incorporation.
Section 2. Consideration for No Par Value Shares. The shares of
stock of the Corporation without par value shall be issued or sold in such
manner and for such amount of consideration as may be fixed from time to time by
the Board of Directors. Upon payment of the consideration fixed by the Board of
Directors, such shares of stock shall be fully paid and nonassessable.
Section 3. Consideration for Treasury Shares. Treasury shares
may be disposed of by the Corporation for such consideration as may be
determined from time to time by the Board of Directors.
Section 4. Payment for Shares. The consideration for the
issuance of shares of capital stock of the Corporation may be paid, in whole or
in part, in money, in other property, tangible or intangible, or in labor
actually performed for, or services actually rendered to the Corporation;
provided, however, that the part of the surplus of the Corporation which is
transferred to stated capital upon the issuance of shares as a share dividend
shall be deemed to be the consideration for the issuance of such shares. When
payment of the consideration for which a share was authorized to be issued shall
have been received by the Corporation, or when surplus shall have been
transferred to stated capital upon the issuance of a share dividend, such share
shall be declared and taken to be fully paid and not liable to any further call
or assessment, and the holder thereof shall not be liable for any further
payments thereon. In the absence of actual fraud in the transaction, the
judgment of the Board of Directors as to the value of such property, labor or
services received as consideration, or the value placed by the Board of
Directors upon the corporate assets in the event of a share dividend, shall be
conclusive. Promissory notes, uncertified checks, or future services shall not
be accepted in payment or part payment of the capital stock of the Corporation,
except as permitted by the Act.
Section 5. Share Certificates. Shares of the Corporation's
stock may but need not be represented by a certificate. The rights and
obligations of shareholders of the same class or series of shares are identical
whether or not their shares are represented by certificates.
A book entry stock account shall be established in the name of each
shareholder who is the beneficial owner of any shares of the Corporation's stock
that are not represented by a certificate, which stock account shall set forth
the number of such shares credited to the shareholder. A shareholder may request
that a stock certificate, representing all or part of the shares credited to his
or her stock account, be issued and delivered to the shareholder at any time.
Any holder of capital stock of the Corporation shall be entitled to a
stock certificate, signed by the President or a Vice President and the Secretary
or any Assistant Secretary of the Corporation, stating the name of the
registered holder, the number of shares represented by such certificate, the par
value of each share of stock or that such shares of stock are without par value,
and that such shares are fully paid and nonassessable. If such shares are not
fully paid, the certificate shall be legibly stamped to indicate the per cent
which has been paid, and as further payments are made, the certificate shall be
stamped accordingly. The certificate may bear the seal of the Corporation or its
facsimile.
If the Corporation is authorized to issue shares of more than one
class, every certificate shall state the kind and class of shares represented
thereby, and the relative rights, interests, preferences and restrictions of
such class, or a summary thereof; provided, that such statement may be omitted
from the certificate if it shall be set forth upon the face or back of the
certificate that such statement, in full, will be furnished by the Corporation
to any shareholder upon written request and without charge.
Section 6. Facsimile Signatures. If a certificate is
countersigned by the written signature of a transfer agent other than the
Corporation or its employee, the signatures of the officers of the Corporation
may be facsimiles. If a certificate is countersigned by the written signature of
a registrar other than the Corporation or its employee, the signatures of the
transfer agent and the officers of the Corporation may be facsimiles. In case
any officer, transfer agent, or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent, or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if he were such officer,
transfer agent, or registrar at the date of its issue.
Section 7. Transfer of Shares. The shares of capital stock of
the Corporation shall be transferable on the books of the Corporation upon
surrender of the certificate or certificates representing the same, properly
endorsed by the registered holder or by the holder's duly authorized attorney or
accompanied by proper evidence of succession, assignment or authority to
transfer. Shares that are not represented by a certificate shall be transferable
on the books of the Corporation upon receipt of written direction to do so from
the registered holder or the holder's duly authorized attorney or accompanied by
proper evidence of succession, assignment or authority to transfer, in a form
satisfactory to the Corporation, its transfer agent or registrar.
Section 8. Cancellation. Every certificate surrendered to the
Corporation for exchange or transfer shall be canceled, and no new certificate
or certificates shall be issued in exchange for any existing certificate until
such existing certificate shall have been so canceled, except in cases provided
for in Section 10 of this Article III.
Section 9. Transfer Agent and Registrar. The Board of Directors
may appoint a transfer agent and a registrar for each class of capital stock of
the Corporation and may require all certificates representing such shares to
bear the signature of such transfer agent and registrar. Shareholders shall be
responsible for notifying the Corporation or transfer agent and registrar for
the class of stock held by such shareholder in writing of any changes in their
addresses from time to time, and failure so to do shall relieve the Corporation,
its shareholders, Directors, officers, transfer agent and registrar of liability
for failure to direct notices, dividends, or other documents or property to an
address other than the one appearing upon the records of the transfer agent and
registrar of the Corporation.
Section 10. Lost, Stolen or Destroyed Certificates. The
Corporation may cause a new certificate or certificates to be issued in place of
any certificate or certificates theretofore issued by the Corporation alleged to
have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate of stock to be lost, stolen or
destroyed. When authorizing such issue of a new certificate or certificates, the
Corporation may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to give the Corporation a bond in
such sum and in such form as it may direct to indemnify against any claim that
may be made against the Corporation with respect to the certificates alleged to
have been lost, stolen or destroyed or the issuance of such new certificate. The
Corporation, in its discretion, may authorize the issuance of such new
certificates without any bond when in its judgment it is proper to do so.
Section 11. Registered Shareholders. The Corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of such shares to receive dividends, to vote as such owner, to hold
liable for calls and assessments, and to treat as owner in all other respects,
and shall not be bound to recognize any equitable or other claims to or interest
in such share or shares on the part of any other person, whether or not it shall
have express or other notice thereof, except as otherwise provided by the laws
of Indiana.
Section 12. Options to Officers and Employees. The issuance,
including the consideration, of rights or options to Directors, officers or
employees of the Corporation, and not to the shareholders generally, to purchase
from the Corporation shares of its capital stock shall be approved by the
affirmative vote of the holders of a majority of the shares entitled to vote
thereon or shall be authorized by and consistent with a plan approved by such a
vote of the shareholders.
ARTICLE IV
Meetings of Shareholders
Section 1. Place of Meeting. Meetings of shareholders of the
Corporation shall be held at such place, within or without the State of Indiana,
as may from time to time be designated by the Board of Directors, or as may be
specified in the notices or waivers of notice of such meetings.
Section 2. Annual Meeting. The annual meeting of shareholders
for the election of Directors, and for the transaction of such other business as
may properly come before the meeting, shall be held at such time as the Board of
Directors may set by resolution, following the close of the fiscal year of the
Corporation. A failure to hold the annual meeting at the designated time shall
not affect the validity of any corporate action.
Section 3. Special Meetings. Special meetings of the
shareholders, for any purpose or purposes, unless otherwise prescribed by
statute or by the Articles of Incorporation, may be called by the Board of
Directors or the President and shall be called by the President or Secretary at
the request in writing of a majority of the Board of Directors, or at the
request in writing of shareholders holding of record not less than one-fourth
(1/4) of all the shares outstanding and entitled by the Articles of
Incorporation to vote on the business for which the meeting is being called.
Section 4. Notice of Meetings. A written or printed notice,
stating the place, day and hour of the meeting, and in case of a special
meeting, or when required by any other provision of the Act, or of the Articles
of Incorporation, as now or hereafter amended, or these Bylaws, the purpose or
purposes for which the meeting is called, shall be delivered or mailed by the
Secretary, or by the officers or persons calling the meeting, to each
shareholder of record entitled by the Articles of Incorporation, as now or
hereafter amended, and by the Act to vote at such meeting, at such address as
appears upon the records of the Corporation, at least ten (10) days before the
date of the meeting. Notice of any such meeting may be waived in writing by any
shareholder, if the waiver sets forth in reasonable detail the purpose or
purposes for which the meeting is called, and the time and place thereof.
Attendance at any meeting in person, or by proxy, shall constitute a waiver of
notice of such meeting. Each shareholder, who has in the manner above provided
waived notice of a shareholders' meeting, or who personally attends a
shareholders' meeting, or is represented thereat by a proxy authorized to appear
by an instrument of proxy, shall be conclusively presumed to have been given due
notice of such meeting. Notice of any adjourned meeting of shareholders shall
not be required to be given if the time and place thereof are announced at the
meeting at which the adjournment is taken except as may be expressly required by
law.
Section 5. Addresses of Shareholders. The address of any
shareholder appearing upon the records of the Corporation shall be deemed to be
the latest address of such shareholder appearing on the records maintained by
the Corporation or its transfer agent for the class of stock held by such
shareholder.
Section 6. Voting at Meetings.
(a) Quorum. The holders of record of a majority of the issued and
outstanding stock of the Corporation entitled to vote at such meeting, present
in person or by proxy, shall constitute a quorum at all meetings of shareholders
for the transaction of business, except where otherwise provided by law, the
Articles of Incorporation or these Bylaws. In the absence of a quorum, any
officer entitled to preside at, or act as secretary of, such meeting shall have
the power to adjourn the meeting from time to time until a quorum shall be
constituted. At any such adjourned meeting at which a quorum shall be present,
any business may be transacted which might have been transacted at the original
meeting, but only those shareholders entitled to vote at the original meeting
shall be entitled to vote at any adjournment or adjournments thereof unless a
new record date is fixed by the Board of Directors for the adjourned meeting.
(b) Voting Rights. Except as otherwise provided by law or by the
provisions of the Articles of Incorporation, every shareholder shall have the
right at every shareholders' meeting to one vote for each share of stock having
voting power, registered in his name on the books of the Corporation on the date
for the determination of shareholders entitled to vote, on all matters coming
before the meeting including the election of directors. At any meeting of
shareholders, every shareholder having the right to vote shall be entitled to
vote in person, or by proxy executed in writing by the shareholder or a duly
authorized attorney in fact and bearing a date not more than eleven (11) months
prior to its execution, unless a longer time is expressly provided therein.
(c) Required Vote. When a quorum is present at any meeting, the vote of
the holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which, by express provision of the Act or of the
Articles of Incorporation or by these Bylaws, a greater vote is required, in
which case such express provision shall govern and control the decision of such
question.
Section 7. Voting List. The Corporation or its transfer agent
shall make, at least five (5) business days before each meeting of the
shareholders, a complete list of the shareholders entitled by the Articles of
Incorporation, as now or hereafter amended, to notice of the meeting, arranged
in alphabetical order, with the address of and number of shares held by each,
which list shall be on file at the principal office of the Corporation and
subject to inspection during regular business hours by any shareholder entitled
to vote at the meeting, or by the shareholder's agent or attorney authorized in
writing. Such list shall be available continuing through the meeting, at the
Corporation's principal office or at a place identified in the meeting notice in
the city where the meeting will be held.
Section 8. Fixing of Record Date to Determine Shareholders
Entitled to Vote. The Board of Directors may fix a record date, not exceeding
seventy (70) days prior to the date of any meeting of the shareholders, for the
purpose of determining the shareholders entitled to notice of and to vote at the
meeting. In the absence of action by the Board of Directors fixing a record date
as herein provided, the record date shall be the sixtieth (60th) day prior to
the date of the meeting. A new record date must be fixed if a meeting of the
shareholders is adjourned to a date more than one hundred twenty (120) days
after the date fixed for the original meeting.
Section 9. Nominations for Director. The Nominating and
Governance Committee of the Board of Directors shall have the responsibility for
nominating individuals to serve as members of the Board of Directors, including
the slate of Directors to be elected each year at the annual meeting of
shareholders. In so doing, the Committee shall maintain up-to-date criteria for
selecting Directors and a process for identifying and evaluating prospective
nominees. Shareholders may suggest a candidate for consideration by the
Committee as a Director nominee by submitting the suggestion in writing and
delivering or mailing it to the Secretary of the Corporation at the
Corporation's principal office. Suggestions for nominees from shareholders must
include: (a) the name, address and number of the Corporation's shares owned by
the shareholder; (b) the name, address, age and principal occupation of the
suggested nominee; (c) such other information concerning the suggested nominee
as the shareholder may wish to submit or the Committee may reasonably request.
The Committee shall evaluate suggestions for nominees from shareholders in the
same manner as other candidates.
Any nominations for election as Directors at any annual or special
meeting of shareholders not made in accordance with this Section may be
disregarded by the Chairman of the meeting, in the Chairman's discretion; and,
upon the Chairman's instructions, the vote tellers or inspectors of shareholder
votes may disregard all votes cast for each such nominee.
ARTICLE V
Board of Directors
Section 1. Election, Number and Term of Office. The business and
affairs of the Corporation shall be managed in accordance with the Act under the
direction of a Board consisting of seventeen (17) Directors, to be elected by
the holders of the shares of stock entitled by the Articles of Incorporation to
elect Directors. The number of Directors may be changed by amendment of this
Section by a two-thirds (2/3) vote of the Board of Directors.
The Directors shall be divided into three (3) classes as nearly equal
in number as possible, all Directors to serve three (3) year terms except as
provided in the third paragraph of this Section. One class shall be elected at
each annual meeting of the shareholders, by the holders of the shares of stock
entitled by the Articles of Incorporation to elect Directors. Unless the number
of Directors is changed by amendment of this Section, Classes I and II shall
each have six (6) Directors, and Class III shall have five (5) Directors. No
decrease in the number of Directors shall have the effect of shortening the term
of any incumbent Director.
No person shall serve as a Director subsequent to the annual meeting
of shareholders following the end of the calendar year in which such person
attains the age of seventy (70) years. The term of a Director shall expire as of
the annual meeting following which the Director is no longer eligible to serve
under the provisions of this paragraph, even if fewer than three (3) years have
elapsed since the commencement of the Director's term.
Except in the case of earlier resignation, removal or death, all
Directors shall hold office until their respective successors are chosen and
qualified.
The provisions of this Section of the Bylaws may not be changed or
amended except by a two-thirds (2/3) vote of the Board of Directors.
Section 2. Vacancies. Any vacancy occurring in the Board of
Directors caused by resignation, death or other incapacity, or an increase in
the number of Directors, shall be filled by a majority vote of the remaining
members of the Board of Directors, until the next annual meeting of the
shareholders, or at the discretion of the Board of Directors, such vacancy may
be filled by a vote of the shareholders at a special meeting called for that
purpose.
Section 3. Annual Meeting of Directors. The Board of Directors
shall meet each year immediately after the annual meeting of the shareholders,
at the place where such meeting of the shareholders has been held either within
or without the State of Indiana, for the purpose of organization, election of
officers, and consideration of any other business that may properly come before
the meeting. No notice of any kind to either old or new members of the Board of
Directors for such annual meeting shall be necessary.
Section 4. Regular Meetings. Regular meetings of the Board of
Directors shall be held at such times and places, either within or without the
State of Indiana, as may be fixed by the Directors. Such regular meetings of the
Board of Directors may be held without notice or upon such notice as may be
fixed by the Directors.
Section 5. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board, the President, or by not
less than a majority of the members of the Board of Directors. Notice of the
time and place, either within or without the State of Indiana, of a special
meeting shall be delivered personally, telephoned, faxed or sent by other
electronic means to each Director at least twenty-four (24) hours, or mailed or
delivered by express private delivery service, to each Director at the
Director's usual place of business or residence at least forty-eight (48) hours,
prior to the time of the meeting. Directors, in lieu of such notice, may sign a
written waiver of notice either before the time of the meeting, at the meeting
or after the meeting. Attendance by a Director in person at any special meeting
shall constitute a waiver of notice.
Section 6. Quorum. A majority of the actual number of Directors
elected and qualified, from time to time, shall be necessary to constitute a
quorum for the transaction of any business except the filling of vacancies, and
the act of a majority of the Directors present at the meeting, at which a quorum
is present, shall be the act of the Board of Directors, unless the act of a
greater number is required by the Act, by the Articles of Incorporation, or by
these Bylaws. A Director, who is present at a meeting of the Board of Directors,
at which action on any corporate matter is taken, shall be conclusively presumed
to have assented to the action taken, unless (a) his dissent shall be
affirmatively stated by him at and before the adjournment of such meeting (in
which event the fact of such dissent shall be entered by the secretary of the
meeting in the minutes of the meeting), or (b) he shall forward such dissent by
registered mail to the Secretary of the Corporation immediately after the
adjournment of the meeting. The right of dissent provided for by either clause
(a) or cause (b) of the immediately preceding sentence shall not be available,
in respect of any matter acted upon at any meeting, to a Director who voted at
the meeting in favor of such matter and did not change his vote prior to the
time that the result of the vote on such matter was announced by the chairman of
such meeting.
A member of the Board of Directors may participate in a meeting of the
Board by means of a conference telephone or similar communications equipment by
which all Directors participating in the meeting can communicate with each
other, and participation by these means constitutes presence in person at the
meeting.
Section 7. Consent Action by Directors. Any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if prior to such action a
written consent to such action is signed by all members of the Board of
Directors or such committee, as the case may be, and such written consent is
filed with the minutes of proceedings of the Board of Directors or committee.
Section 8. Removal. Any or all members of the Board of Directors
may be removed, with or without cause, at a meeting of the shareholders called
expressly for that purpose by the affirmative vote of the holders of not less
than two-thirds (2/3) of the outstanding shares of capital stock then entitled
to vote on the election of Directors, except that if the Board of Directors, by
an affirmative vote of at least two-thirds (2/3) of the entire Board of
Directors, recommends removal of a Director to the shareholders, such removal
may be effected by the affirmative vote of the holders of not less than a
majority of the outstanding shares of capital stock then entitled to vote on the
election of Directors at a meeting of shareholders called expressly for that
purpose.
The provisions in this Section of the Bylaws may not be changed or
amended except by a two-thirds (2/3) vote of the Board of Directors.
Section 9. Dividends. The Board of Directors shall have power,
subject to any restrictions contained in the Act or in the Articles of
Incorporation and out of funds legally available therefor, to declare and pay
dividends upon the outstanding capital stock of the Corporation as and when they
deem expedient. Before declaring any dividend, there may be set aside out of any
funds of the Corporation available for dividends such sum or sums as the Board
of Directors from time to time in their absolute discretion deem proper for
working capital, or as a reserve or reserves to meet contingencies or for such
other purposes as the Board of Directors may determine, and the Board of
Directors may in their absolute discretion modify or abolish any such reserve in
the manner in which it was created.
Section 10. Fixing of Record Date to Determine Shareholders
Entitled to Receive Corporate Benefits. The Board of Directors may fix a day and
hour not exceeding fifty (50) days preceding the date fixed for payment of any
dividend or for the delivery of evidence of rights, or for the distribution of
other corporate benefits, or for a determination of shareholders for any other
purpose, as a record time for the determination of the shareholders entitled to
receive any such dividend, rights or distribution, and in such case only
shareholders of record at the time so fixed shall be entitled to receive such
dividend, rights or distribution. If no record date is fixed for the
determination of shareholders entitled to receive payment of a dividend, the end
of the day on which the resolution of the Board of Directors declaring such
dividend is adopted shall be the record date for such determination.
Section 11. Interest of Directors in Contracts. Any contract or
other transaction between the Corporation or any corporation in which this
Corporation owns a majority of the capital stock shall be valid and binding,
notwithstanding that the Directors or officers of this Corporation are identical
or that some or all of the Directors or officers, or both, are also directors or
officers of such other corporation.
Any contract or other transaction between the Corporation and one or
more of its Directors or members or employees, or between the Corporation and
any firm of which one or more of its Directors are members or employees or in
which they are interested, or between the Corporation and any corporation or
association of which one or more of its Directors are stockholders, members,
directors, officers, or employees or in which they are interested, shall be
valid for all purposes, notwithstanding the presence of such Director or
Directors at the meeting of the Board of Directors of the Corporation which acts
upon, or in reference to, such contract or transaction and notwithstanding his
or their participation in such action, if the fact of such interest shall be
disclosed or known to the Board of Directors and the Board of Directors shall
authorize, approve and ratify such contract or transaction by a vote of a
majority of the Directors present, such interested Director or Directors to be
counted in determining whether a quorum is present, but not to be counted in
calculating the majority of such quorum necessary to carry such vote. This
Section shall not be construed to invalidate any contract or other transaction
which would otherwise be valid under the common and statutory law applicable
thereto.
Section 12. Committees. The Board of Directors may, by resolution
adopted by a majority of the actual number of Directors elected and qualified,
from time to time, designate from among its members an executive committee and
one or more other committees.
During the intervals between meetings of the Board of Directors, any
executive committee so appointed, unless expressly provided otherwise by law or
these Bylaws, shall have and may exercise all the authority of the Board of
Directors, including, but not limited to, the authority to issue and sell or
approve any contract to issue or sell, securities or shares of the Corporation
or designate the terms of a series or class of securities or shares of the
Corporation. The terms which may be affixed by the executive committee include,
but are not limited to, the price, dividend rate, and provisions of redemption,
a sinking fund, conversion, voting, or preferential rights or other features of
securities or class or series of a class of shares. Such committee may have full
power to adopt a final resolution which sets forth these terms and to authorize
a statement of such terms to be filed with the Secretary of State. However, such
executive committee shall not have the authority to declare dividends or
distributions, amend the Articles of Incorporation or the Bylaws, approve a plan
of merger or consolidation, even if such plan does not require shareholder
approval, reduce earned or capital surplus, authorize or approve the
reacquisition of shares unless pursuant to a general formula or method specified
by the Board of Directors, or recommend to the shareholders a voluntary
dissolution of the Corporation or a revocation thereof.
The Board of Directors may, in its discretion, constitute and appoint
other committees, in addition to an executive committee, to assist in the
management and control of the affairs of the Corporation, with responsibilities
and powers appropriate to the nature of the several committees and as provided
by the Board of Directors in the resolution of appointment or in subsequent
resolutions and directives. Such committees may include, but are not limited to,
an audit committee and a compensation and human resources committee.
No member of any committee appointed by the Board of Directors shall
continue to be a member thereof after he ceases to be a Director of the
Corporation. However, where deemed in the best interests of the Corporation, to
facilitate communication and utilize special expertise, directors of the
Corporation's affiliated banks and corporations may be appointed to serve on
such committees, as "affiliate representatives." Such affiliate representatives
may attend and participate fully in meetings of such committees, but they shall
not be entitled to vote on any matter presented to the meeting nor shall they be
counted for the purpose of determining whether a quorum exists. The calling and
holding of meetings of any such committee and its method of procedure shall be
determined by the Board of Directors. To the extent permitted by law, a member
of the Board of Directors, and any affiliate representative, serving on any such
committee shall not be liable for any action taken by such committee if he has
acted in good faith and in a manner the Director reasonably believed to be in
the best interests of the Corporation. A member of a committee may participate
in a meeting of the committee by means of a conference telephone or similar
communications equipment by which all members participating in the meeting can
communicate with each other, and participation by these means constitutes
presence in person at the meeting.
ARTICLE VI
Officers
Section 1. Principal Officers. The principal officers of the
Corporation shall be a Chairman of the Board, a Vice Chairman of the Board, a
Chief Executive Officer, a President, one (1) or more Vice Presidents (which may
include one (1) or more Executive Vice Presidents, Senior Vice Presidents, First
Vice Presidents and/or other Vice Presidents), a Treasurer and a Secretary. The
Corporation may also have, at the discretion of the Board of Directors, such
other subordinate officers as may be appointed in accordance with the provisions
of these Bylaws. The Board of Directors may, from time to time, designate a
chief operating officer and a chief financial officer from among the principal
officers of the Corporation. Any two (2) or more offices may be held by the same
person. No person shall be eligible for the office of Chairman of the Board,
Vice Chairman of the Board, Chief Executive Officer or President who is not a
Director of the Corporation.
Section 2. Election and Term of Office. The principal officers
of the Corporation shall be chosen annually by the Board of Directors at the
annual meeting thereof. Each such officer shall hold office until his successor
shall have been duly chosen and qualified, or until his death, or until he shall
resign, or shall have been removed in the manner hereinafter provided.
Section 3. Removal. Any principal officer may be removed, either
with or without cause, at any time, by resolution adopted at any meeting of the
Board of Directors by a majority of the actual number of Directors elected and
qualified from time to time.
Section 4. Subordinate Officers. In addition to the principal
officers enumerated in Section 1 of this Article VI, the Corporation may have
one or more Assistant Treasurers, one or more Assistant Secretaries and such
other officers, agents and employees as the Board of Directors may deem
necessary, each to hold office for such period, to have such authority, and to
perform such duties as the Chief Executive Officer or the Board of Directors may
from time to time determine. The Board of Directors may delegate to any
principal officer the power to appoint and to remove, either with or without
cause, any such subordinate officers, agents or employees.
Section 5. Resignations. Any officer may resign at any time by
giving written notice to the Chairman of the Board of Directors, the Chief
Executive Officer, the President, or the Secretary. Any such resignation shall
take effect upon receipt of such notice or at any later time specified therein,
and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
Section 6. Vacancies. Any vacancy in any office for any cause
may be filled for the unexpired portion of the term in the manner prescribed in
these Bylaws for election or appointment to such office for such term.
Section 7. Chairman of the Board. The Chairman of the Board
shall preside at all meetings of shareholders and at all meetings of the Board
of Directors. The Chairman of the Board shall perform such other duties and have
such other powers as, from time to time, may be assigned by the Board of
Directors.
Section 8. Vice Chairman of the Board. The Vice Chairman of
the Board shall act in the absence of the Chairman of the Board. The Vice
Chairman of the Board shall perform such other duties and have such other powers
as, from time to time, may be assigned by the Board of Directors.
Section 9. Chief Executive Officer. The Chief Executive
Officer, subject to the control of the Board of Directors, shall have overall
responsibility for the affairs of the Corporation, including responsibility for
developing and attaining major corporate goals and implementing policies
approved by the Board. In general, the Chief Executive Officer shall perform the
duties and exercise the powers incident to the office of Chief Executive Officer
and all such other duties and powers as, from time to time, may be assigned by
the Board of Directors. In the absence or disability of the Chairman of the
Board and Vice Chairman of the Board, the Chief Executive Officer shall preside
at all meetings of the shareholders and the Board of Directors at which the
Chief Executive Officer is in attendance.
Section 10. President. The President shall perform the duties
and exercise the powers incident to the office of President and all such other
duties and powers as, from time to time, may be assigned by the Board of
Directors or the Chief Executive Officer. Subject to the control and direction
of the Board of Directors and the Chief Executive Officer, the President may
enter into, execute and deliver any agreement, instrument or document in the
name and on behalf of the Corporation.
Section 11. Vice Presidents. The Corporation shall have such
Vice Presidents as the Board of Directors shall determine, which may include one
(1) or more Executive Vice Presidents, Senior Vice Presidents, First Vice
Presidents and/or other Vice Presidents. The Board of Directors shall designate
one of the Vice Presidents (an Executive Vice President, if one has been
appointed) to perform the duties and exercise the powers of the President in the
absence or disability of the President. The Vice Presidents shall perform such
duties and have such powers as the Chief Executive Officer, the President, or
the Board of Directors may from time to time assign.
Section 12. Treasurer. The Treasurer shall have charge and
custody of, and be responsible for, all funds and securities of the Corporation
and shall deposit all such funds in the name of the Corporation in such banks or
other depositories as shall be selected by the Board of Directors. The Treasurer
shall upon request exhibit at all reasonable times the Treasurer's books of
account and records to any of the Directors of the Corporation during business
hours at the office of the Corporation where such books and records shall be
kept; shall render upon request by the Board of Directors a statement of the
condition of the finances of the Corporation at any meeting of the Board of
Directors or at the annual meeting of the shareholders; shall receive, and give
receipt for, moneys due and payable to the Corporation from any source
whatsoever; and in general, shall perform all duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to the
Treasurer by the Chief Executive Officer, the President, or the Board of
Directors. The Treasurer shall give such bond, if any, for the faithful
discharge of the Treasurer's duties as the Board of Directors may require. All
acts affecting the Treasurer's duties and responsibilities shall be subject to
the review and approval of the Corporation's chief financial officer.
Section 13. Secretary. The Secretary shall keep or cause to be
kept in the books provided for that purpose the minutes of the meetings of the
shareholders and of the Board of Directors; shall duly give and serve all
notices required to be given in accordance with the provisions of these Bylaws
and by the Act; shall be custodian of the records and of the seal of the
Corporation and see that the seal is affixed to all documents, the execution of
which on behalf of the Corporation under its seal is duly authorized in
accordance with the provisions of these Bylaws; and, in general, shall perform
all duties incident to the office of Secretary and such other duties as may,
from time to time, be assigned to the Secretary by the Chief Executive Officer,
the President, or the Board of Directors.
Section 14. Voting Corporation's Securities. Unless otherwise ordered by
the Board of Directors, the Chairman of the Board, the Chief Executive Officer,
the President and the Secretary, and each of them, are appointed attorneys and
agents of the Corporation, and shall have full power and authority in the name
and on behalf of the Corporation, to attend, to act, and to vote all stock or
other securities entitled to be voted at any meetings of security holders of
corporations, or associations in which the Corporation may hold securities, in
person or by proxy, as a stockholder or otherwise, and at such meetings shall
possess and may exercise any and all rights and powers incident to the ownership
of such securities, and which as the owner thereof the Corporation might have
possessed and exercised, if present, or to consent in writing to any action by
any such other corporation or association. The Board of Directors by resolution
from time to time may confer like powers upon any other person or persons.
ARTICLE VII
Indemnification
Section 1. Indemnification of Directors, Officers, Employees and
Agents. Every person who is or was a Director, officer, employee or agent of
this Corporation or of any other corporation for which he is or was serving in
any capacity at the request of this Corporation shall be indemnified by this
Corporation against any and all liability and expense that may be incurred by
him in connection with or resulting from or arising out of any claim, action,
suit or proceeding, provided that such person is wholly successful with respect
thereto or acted in good faith in what he reasonably believed to be in or not
opposed to the best interest of this Corporation or such other corporation, as
the case may be, and, in addition, in any criminal action or proceeding in which
he had no reasonable cause to believe that his conduct was unlawful. As used
herein, "claim, action, suit or proceeding" shall include any claim, action,
suit or proceeding (whether brought by or in the right of this Corporation or
such other corporation or otherwise), civil, criminal, administrative or
investigative, whether actual or threatened or in connection with an appeal
relating thereto, in which a Director, officer, employee or agent of this
Corporation may become involved, as a party or otherwise,
(i) by reason of his being or having been a Director, officer,
employee, or agent of this Corporation or such other
corporation or arising out of his status as such or
(ii) by reason of any past or future action taken or not taken by
him in any such capacity, whether or not he continues to be
such at the time such liability or expense is incurred.
The terms "liability" and "expense" shall include, but shall not be limited to,
attorneys' fees and disbursements, amounts of judgments, fines or penalties, and
amounts paid in settlement by or on behalf of a Director, officer, employee, or
agent, but shall not in any event include any liability or expenses on account
of profits realized by him in the purchase or sale of securities of the
Corporation in violation of the law. The termination of any claim, action, suit
or proceeding, by judgment, settlement (whether with or without court approval)
or conviction or upon a plea of guilty or of nolo contendere, or its equivalent,
shall not create a presumption that a Director, officer, employee, or agent did
not meet the standards of conduct set forth in this paragraph.
Any such Director, officer, employee, or agent who has been wholly
successful with respect to any such claim, action, suit or proceeding shall be
entitled to indemnification as a matter of right. Except as provided in the
preceding sentence, any indemnification hereunder shall be made only if
(i) the Board of Directors acting by a quorum consisting of
Directors who are not parties to or who have been wholly
successful with respect to such claim, action, suit or
proceeding shall find that the Director, officer, employee,
or agent has met the standards of conduct set forth in the
preceding paragraph; or
(ii) independent legal counsel shall deliver to the Corporation
their written opinion that such Director, officer, employee,
or agent has met such standards of conduct.
If several claims, issues or matters of action are involved, any such
person may be entitled to indemnification as to some matters even though he is
not entitled as to other matters.
The Corporation may advance expenses to or, where appropriate, may at
its expense undertake the defense of any such Director, officer, employee, or
agent upon receipt of an undertaking by or on behalf of such person to repay
such expenses if it should ultimately be determined that he is not entitled to
indemnification hereunder.
The provisions of this Section shall be applicable to claims, actions,
suits or proceedings made or commenced after the adoption hereof, whether
arising from acts or omissions to act during, before or after the adoption
hereof.
The rights of indemnification provided hereunder shall be in addition
to any rights to which any person concerned may otherwise be entitled by
contract or as a matter of law and shall inure to the benefit of the heirs,
executors and administrators of any such person.
The Corporation may purchase and maintain insurance on behalf of any
person who is or was a Director, officer, employee or agent of the Corporation
or is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation against any liability asserted against
him and incurred by him in any capacity or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Section or otherwise.
ARTICLE VIII
Amendments
Except as expressly provided herein or in the Articles of
Incorporation, the Board of Directors may make, alter, amend or repeal these
Bylaws by an affirmative vote of a majority of the actual number of Directors
elected and qualified.
EXHIBIT-13
FIRST MERCHANTS CORPORATION - ANNUAL REPORT 2004
EXHIBIT 13--FIRST MERCHANTS CORPORATION - ANNUAL REPORT 2004
FINANCIAL REVIEW
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 20
CONSOLIDATED FINANCIAL STATEMENTS 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25
ANNUAL MEETING, STOCK PRICE AND DIVIDEND INFORMATION 54
COMMON STOCK LISTING 55
FORM 10-K, FINANCIAL INFORMATION AND CODE OF ETHICS 56
1
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(in thousands, except share data) 2004 2003 2002 2001 2000
===================================================================================================================================
Operations (3)
Net Interest Income
Fully Taxable Equivalent (FTE) Basis .............. $ 108,986 $ 106,899 $ 96,599 $ 66,806 $ 58,619
Less Tax Equivalent Adjustment ......................... 3,597 3,757 3,676 2,445 2,637
---------- ---------- ---------- ---------- ----------
Net Interest Income .................................... 105,389 103,142 92,923 64,361 55,982
Provision for Loan Losses .............................. 5,705 9,477 7,174 3,576 2,625
---------- ---------- ---------- ---------- ----------
Net Interest Income
After Provision for Loan Losses ................... 99,684 93,665 85,749 60,785 53,357
Total Other Income ..................................... 34,554 35,902 27,077 18,543 16,634
Total Other Expenses ................................... 91,642 91,279 71,009 45,195 40,083
---------- ---------- ---------- ---------- ----------
Income Before Income Tax Expense .................. 42,596 38,288 41,817 34,133 29,908
Income Tax Expense ..................................... 13,185 10,717 13,981 11,924 9,968
---------- ---------- ---------- ---------- ----------
Net Income ............................................. $ 29,411 $ 27,571 $ 27,836 $ 22,209 $ 19,940
========== ========== ========== ========== ==========
Per share data (1)(3)
Basic Net Income ....................................... $ 1.59 $ 1.51 $ 1.70 $ 1.63 $ 1.51
Diluted Net Income ..................................... 1.58 1.50 1.69 1.61 1.50
Cash Dividends Paid .................................... .92 .90 .86 .84 .78
December 31 Book Value ................................. 16.93 16.42 15.24 12.82 11.61
December 31 Market Value (Bid Price) ................... 28.30 25.51 21.67 21.78 19.54
Average balances (3)
Total Assets ........................................... $3,109,104 $2,960,195 $2,406,251 $1,689,694 $1,532,691
Total Loans (4)......................................... 2,369,017 2,281,614 1,842,429 1,270,555 1,104,013
Total Deposits ......................................... 2,365,306 2,257,075 1,857,053 1,331,631 1,209,015
Securities Sold Under Repurchase Agreements
(long-term portion) ............................... 181 66,535 44,394 53,309
Total Federal Home Loan Bank Advances .................. 225,375 208,733 155,387 103,941 80,008
Total Subordinated Debentures, Revolving
Credit and Term Loans ............................ 96,230 94,203 52,756 2,571
Total Stockholders' Equity ............................. 310,004 293,603 237,575 166,232 141,446
Year-end balances (3)
Total Assets ........................................... $3,191,668 $3,076,812 $2,678,687 $1,787,035 $1,621,063
Total Loans (4)......................................... 2,431,418 2,356,546 2,025,922 1,359,893 1,175,586
Total Deposits ......................................... 2,408,150 2,362,101 2,036,688 1,421,251 1,288,299
Securities Sold Under Repurchase Agreements
(long-term portion) .............................. 320 23,632 32,500 32,500
Total Federal Home Loan Bank Advances .................. 223,663 212,779 184,677 103,499 93,182
Total Subordinated Debentures, Revolving
Credit and Term Loans ............................ 97,206 97,782 72,488 8,500
Total Stockholders' Equity ............................. 314,603 303,965 261,129 179,128 156,063
Financial ratios (3)
Return on Average Assets ............................... .95% .93% 1.16% 1.31% 1.30%
Return on Average Stockholders' Equity ................. 9.49 9.39 11.72 13.36 14.10
Average Earning Assets to Total Assets ................. 90.28 89.99 91.38 93.29 94.85
Allowance for Loan Losses as % of Total Loans .......... .93 1.08 1.11 1.11 1.06
Dividend Payout Ratio .................................. 58.23 60.00 50.89 52.17 52.00
Average Stockholders' Equity to Average Assets ......... 9.97 9.92 9.87 9.84 9.23
Tax Equivalent Yield on Earning Assets (2).............. 5.72 5.98 6.83 7.80 8.19
Cost of Supporting Liabilities ......................... 1.84 1.97 2.44 3.56 4.16
Net Interest Margin on Earning Assets .................. 3.88 4.01 4.39 4.24 4.03
(1) Restated for all stock dividends and stock splits.
(2) 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.
(3) Business combinations that affect the comparability of the 2004, 2003 and
2002 information are discussed in Note 2 to the Consolidated Financial
Statements. Business combinations that affect the comparability of the
2001 and 2000 information are discussed in the Corporation's Forms 10-K
for years ended December 31, 2003 and 2002.
(4) Includes loans held for sale.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
First Merchants Corporation ("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:
o statements of the Corporation's goals, intentions and expectations;
o statements regarding the Corporation's business plan and growth
strategies;
o statements regarding the asset quality of the Corporation's loan and
investment portfolios; and
o 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:
o 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;
o adverse changes in the economy, which might affect the Corporation's
business prospects and could cause credit-related losses and expenses;
o adverse developments in the Corporation's loan and investment
portfolios;
o competitive factors in the banking industry, such as the trend towards
consolidation in the Corporation's market; and
o changes in the banking legislation or the regulatory requirements of
federal and state agencies applicable to bank holding companies and
banks like the Corporation's affiliate banks.
Because of these and other uncertainties, the Corporation's actual future
results may be materially different from the results indicated by these
forward-looking statements. In addition, the Corporation's past results of
operations do not necessarily indicate its future results.
CRITICAL ACCOUNTING POLICIES
Generally accepted accounting principles require management to apply significant
judgment to certain accounting, reporting and disclosure matters. Management
must use assumptions and estimates to apply those principles where actual
measurement is not possible or practical. For a complete discussion of the
Corporation's significant accounting policies, see the notes to the consolidated
financial statements and discussion throughout this Annual Report. Below is a
discussion of the Corporation's critical accounting policies. These policies are
critical because they are highly dependent upon subjective or complex judgments,
assumptions and estimates. Changes in such estimates may have a significant
impact on the
3
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES continued
Corporation's financial statements. Management has reviewed the application of
these policies with the Corporation's Audit Committee.
Allowance for Loan Losses. The allowance for loan losses represents management's
estimate of probable losses inherent in the Corporation's loan portfolio. In
determining the appropriate amount of the allowance for loan losses, management
makes numerous assumptions, estimates and assessments.
The Corporation's strategy for credit risk management includes conservative
credit policies and underwriting criteria for all loans, as well as an overall
credit limit for each customer significantly below legal lending limits. The
strategy also emphasizes diversification on a geographic, industry and customer
level, regular credit quality reviews and management reviews of large credit
exposures and loans experiencing deterioration of credit quality.
The Corporation's allowance consists of three components: probable losses
estimated from individual reviews of specific loans, probable losses estimated
from historical loss rates, and probable losses resulting from economic,
environmental, qualitative or other deterioration above and beyond what is
reflected in the first two components of the allowance.
Larger commercial loans that exhibit probable or observed credit weaknesses are
subject to individual review. Where appropriate, reserves are allocated to
individual loans based on management's estimate of the borrower's ability to
repay the loan given the availability of collateral, other sources of cash flow
and legal options available to the Corporation. Included in the review of
individual loans are those that are impaired as provided in SFAS No. 114,
Accounting by Creditors for Impairment of a Loan. Any allowances for impaired
loans are measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or fair value of the underlying
collateral. The Corporation evaluates the collectibility of both principal and
interest when assessing the need for a loss accrual.
Historical loss rates are applied to other commercial loans not subject to
specific reserve allocations.
Homogenous loans, such as consumer installment and residential mortgage loans
are not individually risk graded. Rather, credit scoring systems are used to
assess credit risks. Reserves are established for each pool of loans using loss
rates based on a five year average net charge-off history by loan category.
Historical loss rates for commercial and consumer loans may be adjusted for
significant factors that, in management's judgment, reflect the impact of any
current conditions on loss recognition. Factors which management considers in
the analysis include the effects of the national and local economies, trends in
the nature and volume of loans (delinquencies, charge-offs and nonaccrual
loans), changes in mix, asset quality trends, risk management and loan
administration, changes in the internal lending policies and credit standards,
collection practices and examination results from bank regulatory agencies and
the Corporation's internal loan review. An unallocated reserve, primarily based
on the factors noted above, is maintained to recognize the imprecision in
estimating and measuring loss when evaluating reserves
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES continued
for individual loans or pools of loans. Allowances on individual loans and
historical loss rates are reviewed quarterly and adjusted as necessary based on
changing borrower and/or collateral conditions and actual collection and
charge-off experience.
The Corporation's primary market areas for lending are north-central and
east-central Indiana and Columbus, Ohio. When evaluating the adequacy of
allowance, consideration is given to this regional geographic concentration and
the closely associated effect changing economic conditions have on the
Corporation's customers.
The Corporation has not substantively changed any aspect of its overall approach
in the determination of the allowance for loan losses. There have been no
material changes in assumptions or estimation techniques as compared to prior
periods that impacted the determination of the current period allowance.
Valuation of Securities. The Corporation's available-for-sale security portfolio
is reported at fair value. The fair value of a security is determined based on
quoted market prices. If quoted market prices are not available, fair value is
determined based on quoted prices of similar instruments. Available-for-sale and
held-to-maturity securities are reviewed quarterly for possible
other-than-temporary impairment. The review includes an analysis of the facts
and circumstances of each individual investment such as the length of time the
fair value has been below cost, the expectation for that security's performance,
the credit worthiness of the issuer and the Corporation's ability to hold the
security to maturity. A decline in value that is considered to be other-than
temporary is recorded as a loss within other operating income in the
consolidated statements of income.
Pension. The Corporation provides pension benefits to its employees. In
accordance with applicable accounting rules, the Corporation does not
consolidate the assets and liabilities associated with the pension plan.
Instead, the Corporation recognizes a prepaid asset for contributions the
Corporation has made to the pension plan in excess of pension expense. The
measurement of the prepaid asset and the annual pension expense involves
actuarial and economic assumptions.
The assumptions used in pension accounting relate to the expected rate of return
on plan assets, the rate of increase in salaries, the interest-crediting rate,
the discount rate, and other assumptions. See Note 16 "Employee Benefit Plans"
in the Annual Report for the specific assumptions used by the Corporation.
The annual pension expense for the Corporation is currently most sensitive to
the discount rate. Each 25 basis point reduction in the 2005 discount rate of
6.0 percent would increase the Corporation's 2005 pension expense by
approximately $206,000. In addition, each 25 basis point reduction in the 2005
expected rate of return of 8.0 percent would increase the Corporation's 2005
pension expense by approximately $96,000.
Goodwill and Intangibles. For purchase acquisitions, the Company is required to
record the assets acquired, including identified intangible assets, and the
liabilities assumed at their fair value, which in many instances involves
estimates based on third party valuations, such as appraisals, or internal
valuations based on
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL ACCOUNTING POLICIES continued
discounted cash flow analyses or other valuation techniques that may include
estimates of attrition, inflation, asset growth rates or other relevant factors.
In addition, the determination of the useful lives for which an intangible asset
will be amortized is subjective.
Goodwill and indefinite-lived assets recorded must be reviewed for impairment on
an annual basis, as well as on an interim basis if events or changes indicate
that the asset might be impaired. An impairment loss must be recognized for any
excess of carrying value over fair value of the goodwill or the indefinite-lived
intangible with subsequent reversal of the impairment loss being prohibited. The
tests for impairment fair values are based on internal valuations using
management's assumptions of future growth rates, future attrition, discount
rates, multiples of earnings or other relevant factors. The resulting estimated
fair values could have a significant impact on the carrying values of goodwill
or intangibles and could result in impairment losses being recorded in future
periods.
BUSINESS SUMMARY
The Corporation is a diversified financial holding company headquartered in
Muncie, Indiana. Since its organization in 1982, the Corporation has grown to
include 10 affiliate banks with over 70 locations in 17 Indiana and 3 Ohio
counties. In addition to its branch network, the Corporation's delivery channels
include ATMs, check cards, interactive voice response systems and internet
technology.
The Corporation's business activities are currently limited to one significant
business segment, which is community banking. The Corporation's financial
service affiliates include 10 nationally chartered banks: First Merchants Bank,
N.A., The Madison Community Bank, N.A., First United Bank, N.A., The Randolph
County Bank, N.A., Union County National Bank, First National Bank, Decatur Bank
and Trust Company, N.A., Frances Slocum Bank & Trust Company, N.A., Lafayette
Bank and Trust Company, N.A. and Commerce National Bank. Effective January 1,
2005, Union County National Bank was merged into The Randolph County Bank, N.A.,
and the name of the continuing institution is United Communities National Bank.
The banks provide commercial and retail banking services. In addition, the
Corporation's trust company, multi-line insurance company and title company
provide trust asset management services, retail and commercial insurance agency
services and title services, respectively.
Management believes that its mission, guiding principles and strategic
initiatives produce profitable growth for stockholders. Our vision is to satisfy
all the financial needs of our customers, help them succeed financially and be
recognized as the premier financial services company in our markets. Our primary
strategy to achieve this vision is to increase product usage and focus on
providing each customer with all of the financial products that fulfill their
needs. Our cross-sell strategy and diversified business model facilitate growth
in strong and weak economic cycles.
Management believes it is important to maintain a well controlled environment as
we continue to grow our businesses. Sound credit policies are maintained and
have resulted in declining nonperforming loans and net charge-offs as a
percentage of loans outstanding from the prior year. Interest rate and market
risks inherent in our asset and liability balances are managed within prudent
ranges, while ensuring
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSSINESS SUMMARY continued
adequate liquidity and funding. Our stockholder value has continued to increase
due to customer satisfaction and the balanced way we manage our business risk.
RESULTS OF OPERATIONS
As of December 31, 2004 total assets equaled $3,191,668,000, an increase of
$114,856,000 or 3.7 percent over 2003. Of this amount, loans increased
$74,548,000 and investments increased $64,738,000. Details of these changes are
discussed within the "EARNING ASSETS" section of Management's Discussion and
Analysis of Financial Condition and Results of Operations.
As of December 31, 2003 total assets equaled $3,076,812,000, an increase of
$398,125,000 from December 31, 2002. Of this amount, loans increased
$349,126,000, investments increased $14,735,000, intangibles, including
goodwill, increased $35,506,000 and cash value of life insurance increased by
$23,618,000. The addition of Commerce National Bank on March 1, 2003 accounted
for $298,702,000 in loan growth, $12,500,000 in investment growth and most of
the increase in intangibles.
Absent Commerce National Bank, total loans increased by $50,424,000 in 2003.
Positive growth of commercial and industrial and commercial real estate loans of
$73,436,000 was mitigated by declines in installment loans and residential real
estate loans of $12,166,000 and $9,776,000, respectively.
The Corporation also completed the purchase of $23 million in Bank Owned Life
Insurance (BOLI) during May, 2003. The BOLI yield is 8.34 percent on a fully tax
equivalent basis, adjustable annually. The tax-free investment was used to
offset the cost of current employee benefit programs.
Net income for 2004 totaled $29,411,000, an increase of $1,840,000 or 6.7
percent. The increase was primarily attributable to loan growth and improved
credit quality. Diluted earnings per share totaled $1.58, a 5.3 percent increase
from $1.50 reported for 2003.
Net income for 2003 totaled $27,571,000, down from $27,836,000 in 2002. The
$265,000 decrease was attributable to several factors, including compression of
the net interest margin, increased provision for loan losses and increased
noninterest expenses. These factors and others are discussed within the
respective sections of Management's Discussion and Analysis of Financial
Condition and Results of Operations. Diluted earnings per share totaled $1.50, a
11.2 percent decrease from $1.69 reported for 2002.
Return on equity totaled 9.49 percent in 2004, 9.39 percent in 2003 and 11.72
percent in 2002. Return on assets totaled .95 percent in 2004, .93 percent in
2003 and 1.16 percent in 2002. Multiple factors impacting the reported financial
results are discussed within the respective sections of Management's Discussion
and Analysis of Financial Condition and Results of Operations.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL
The Corporation's regulatory capital continues to exceed regulatory "well
capitalized" standards. Tier I regulatory capital consists primarily of total
stockholders' equity and subordinated debentures issued to business trusts
categorized as qualifying borrowings, less non-qualifying intangible assets and
unrealized net securities gains. The Corporation's Tier I capital to average
assets ratio was 7.50 percent and 7.38 percent at December 31, 2004 and 2003,
respectively. In addition, at December 31, 2004, the Corporation had a Tier I
risk-based capital ratio of 9.57 percent and total risk-based capital ratio of
11.57 percent. Regulatory capital guidelines require a Tier I risk-based capital
ratio of 4.0 percent and a total risk-based capital ratio of 8.0 percent.
The Corporation's GAAP capital ratio, defined as total stockholders' equity to
total assets, equaled 9.86 percent as of December 31, 2004, down from 9.88
percent in 2003. When the Corporation acquires other companies for stock, GAAP
capital increases by the entire amount of the purchase price.
The Corporation's tangible capital ratio, defined as total stockholders' equity
less intangibles net of tax to total assets less intangibles net of tax, equaled
5.92 percent as of December 31, 2004 up from 5.78 percent in 2003.
Management believes that all of the above capital ratios are meaningful
measurements for evaluating the safety and soundness of the Corporation.
Additionally, management believes the following table is also meaningful when
considering performance measures of the Corporation. The table details and
reconciles tangible earnings per share, return on tangible capital and tangible
assets to traditional GAAP measures.
December 31,
(Dollars in Thousands) 2004 2003
===============================================================================
Average Goodwill..................................... $ 112,281 $ 107,232
Average Core Deposit Intangible (CDI)................ 22,164 24,393
Average Deferred Tax on CDI.......................... (8,105) (8,951)
---------- ----------
Intangible Adjustment.............................. $ 126,340 $ 122,674
========== ==========
Average Stockholders' Equity (GAAP Capital).......... $ 310,004 $ 293,603
Intangible Adjustment................................ (126,340) (122,674)
---------- ----------
Average Tangible Capital........................... $ 183,664 $ 170,929
========== ==========
Average Assets....................................... $3,109,104 $2,960,195
Intangible Adjustment................................ (126,340) (122,674)
---------- ----------
Average Tangible Assets............................ $2,982,764 $2,837,521
========== ==========
Net Income........................................... $ 29,411 $ 27,571
CDI Amortization, net of tax......................... 2,133 2,341
---------- ----------
Tangible Net Income................................ $ 31,544 $ 29,912
========== ==========
Diluted Earnings per Share........................... $ 1.58 $ 1.50
Diluted Tangible Earnings per Share.................. $ 1.69 $ 1.63
Return on Average GAAP Capital....................... 9.49% 9.39%
Return on Average Tangible Capital................... 17.49% 17.50%
Return on Average Assets............................. 0.95% 0.93%
Return on Average Tangible Assets.................... 1.06% 1.05%
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ASSET QUALITY/PROVISION FOR LOAN LOSSES
The Corporation's primary business focus is middle market commercial and
residential real estate, auto and small consumer lending, which results in
portfolio diversification. Management ensures that appropriate methods to
understand and underwrite risk are utilized. Commercial loans are individually
underwritten and judgmentally risk rated. They are periodically monitored and
prompt corrective actions are taken on deteriorating loans. Retail loans are
typically underwritten with statistical decision-making tools and are managed
throughout their life cycle on a portfolio basis.
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 primarily 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, 2004, non-performing loans totaled $19,281,000, a decrease of
$7,343,000, as noted in the following table. Loans 90 days past due other than
non-accrual and restructured loans decreased by $4,623,000. The amount of
non-accrual loans, totaling $15,355,000 at December 31, 2004, will increase or
decrease going forward due to portfolio growth, routine problem loans
recognition and resolution through collections, sales or charge-offs. The
performance of any loan can be affected by external factors, such as economic
conditions, or factors particular to a borrower, such as actions of a borrower's
management.
At December 31, 2004, impaired loans totaled $49,411,000, an increase of
$4,639,000 from year end 2003. At December 31, 2004, a specific allowance for
losses was not deemed necessary for impaired loans totaling $41,683,000, but a
specific allowance of $1,673,000 was recorded for the remaining balance of
impaired loans of $7,728,000 and is included in the Corporation's allowance for
loan losses. The average balance of impaired loans for 2004 was $59,568,000. The
increase of total impaired loans of $4,639,000 is primarily due to the increase
of performing, substandard classified loans, which comprise a portion of the
Corporation's total impaired loans. A loan is deemed impaired when, based on
current information or events, it is probable that all amounts due of principal
and interest according to the contractual terms of the loan agreement will not
be collected. For the Corporation, all performing, substandard classified loans
are included in the impaired loan total.
At December 31, 2004, the allowance for loan losses was $22,548,000, a decrease
of $2,945,000 from year end 2003. As a percent of loans, the allowance was .93
percent at December 31, 2004 and 1.08 percent at December 31, 2003. Management
believes that the allowance for loan losses is adequate to cover losses inherent
in the loan portfolio at December 31, 2004. The process for determining the
adequacy of the allowance for loan losses is critical to our financial results.
It requires management to make difficult, subjective and complex judgments, as a
result of the need to make estimates about the effect of matters that are
uncertain. Therefore, the allowance for loan losses, considering current factors
at the time, including economic conditions and ongoing internal and external
examination processes, will
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ASSET QUALITY/PROVISION FOR LOAN LOSSES continued
increase or decrease as deemed necessary to ensure the allowance for loan losses
remains adequate. In addition, the allowance as a percentage of charge-offs and
nonperforming loans will change at different points in time based on credit
performance, loan mix and collateral values.
The provision for loan losses in 2004 was $5,705,000, a decrease of $3,772,000
from $9,477,000 in 2003. The Corporation's allowance for loan losses reflects
decreased non-performing loans as noted in the following table and decreased
specific reserves, resulting in decreased provision expense.
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,
2004 2003
=========================================================================
Non-accrual loans .............................. $ 15,355 $ 19,453
Loans contractually
past due 90 days or more
other than non-accruing ..................... 1,907 6,530
Restructured loans ............................. 2,019 641
-------- --------
Total ....................................... $ 19,281 $ 26,624
======== ========
The table below represents loan loss experience for the years indicated.
(Dollars in Thousands) 2004 2003 2002
======================================================================================
Allowance for loan losses:
Balance at January 1 ............................... $25,493 $22,417 $15,141
------- ------- -------
Chargeoffs ......................................... 10,901 12,139 8,113
Recoveries ......................................... 2,251 2,011 1,313
------- ------- -------
Net chargeoffs ..................................... 8,650 10,128 6,800
Provision for loan losses .......................... 5,705 9,477 7,174
Allowance acquired in acquisitions.................. 3,727 6,902
------- ------- -------
Balance at December 31 ............................. $22,548 $25,493 $22,417
======= ======= =======
Ratio of net chargeoffs during the period to
average loans outstanding during the period ....... .37% .44% .37%
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
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY continued
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, 2004, total borrowings from the
FHLB were $223,663,000. 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, 2004, was
$148,451,000.
The principal source of asset-funded liquidity is investment securities
classified as available-for-sale, the market values of which totaled
$416,177,000 at December 31, 2004. 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 $1,110,000 at December 31, 2004. 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 and commitments under
operating leases.
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, 2004 are as follows:
At December 31,
(Dollars in Thousands) 2004
================================================================================
Amounts of commitments:
Loan commitments to extend credit ............................... $ 540,087
Standby letters of credit ....................................... 22,024
----------
$ 562,111
==========
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.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY continued
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 other
borrowing arrangements at December 31, 2004 are as follows:
2005 2006 2007 2008 2009 2010 Total
(Dollars in Thousands) and after
=========================================================================================================
Operating leases $ 1,746 $ 1,515 $ 1,145 $ 880 $ 829 $ 2,287 $ 8,402
Federal funds purchased 32,550 32,550
Securities sold under
repurchase agreements 87,152 320 87,472
Federal Home Loan Bank Advances 33,477 29,859 24,995 19,306 9,428 106,598 223,663
Subordinated debentures,
revolving credit lines and
term loans 8,250 88,956 97,206
-------- ------- ------- ------- -------- --------- --------
Total $163,175 $31,694 $26,140 $20,186 $ 10,257 $ 197,841 $449,293
======== ======= ======= ======= ======== ========= ========
The Corporation's purchase obligations have no material impact in its cash flow
or liquidity and, accordingly, has not been included in the above table.
INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET RISK
Asset/Liability Management has been an important factor in the Corporation's
ability to record consistent earnings growth through periods of interest rate
volatility and product deregulation. Management and the Board of Directors
monitor the Corporation's liquidity and interest sensitivity positions at
regular meetings to review how changes in interest rates may affect earnings.
Decisions regarding investment and the pricing of loan and deposit products are
made after analysis of reports designed to measure liquidity, rate sensitivity,
the Corporation's exposure to changes in net interest income given various rate
scenarios and the economic and competitive environments.
It is the objective of the Corporation to monitor and manage risk exposure to
net interest income caused by changes in interest rates. It is the goal of the
Corporation's Asset/Liability function to provide optimum and stable net
interest income. To accomplish this, management uses two asset liability tools.
GAP/Interest Rate Sensitivity Reports and Net Interest Income Simulation
Modeling are both constructed, presented and monitored quarterly.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET RISK continued
Management believes that the Corporation's liquidity and interest sensitivity
position at December 31, 2004, 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, 2004.
(Dollars in Thousands) At December 31, 2004
- ------------------------------------------------------------------------------------------------------------------------------------
1-180 DAYS 181-365 DAYS 1-5 YEARS BEYOND 5 YEARS TOTAL
====================================================================================================================================
Rate-Sensitive Assets:
Federal funds sold and interest-bearing deposits ........ $ 9,343 $ 9,343
Investment securities ................................... 37,978 $ 47,068 $ 223,942 $ 112,547 421,535
Loans ................................................... 1,198,089 252,368 831,534 149,427 2,431,418
Federal Reserve and Federal Home Loan Bank stock ........ 21,323 1,535 22,858
---------- ---------- ---------- ---------- ----------
Total rate-sensitive assets ........................ 1,245,410 299,436 1,076,799 263,509 2,885,154
---------- ---------- ---------- ---------- ----------
Rate-Sensitive Liabilities:
Interest-bearing deposits ............................... 1,411,013 173,153 489,473 3,826 2,077,465
Securities sold under repurchase agreements ............. 87,472 87,472
Federal Home Loan Bank advances ......................... 9,750 21,174 87,664 105,075 223,663
Subordinated debentures, revolving credit
lines and term loans .................................. 13,250 83,956 97,206
---------- ---------- ---------- ---------- ----------
Total rate-sensitive liabilities ................... 1,521,485 194,327 577,137 192,857 2,485,806
---------- ---------- ---------- ---------- ----------
Interest rate sensitivity gap by period .................... $ (276,075) $ 105,109 $ 499,662 $ 70,652
Cumulative rate sensitivity gap ............................ (276,075) (170,966) 328,696 399,348
Cumulative rate sensitivity gap ratio
at December 31, 2004 .................................... 81.9% 90.0% 114.3% 116.1%
at December 31, 2003 .................................... 73.6% 83.6% 111.6% 115.1%
The Corporation had a cumulative negative gap of $170,966,000 in the one-year
horizon at December 31, 2004, just over 5.4 percent of total assets.
The Corporation places its greatest credence in net interest income simulation
modeling. The above 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,
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET RISK continued
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,
2005 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, 2005 are as follows:
Driver Rates RISING FALLING
=============================================================
Prime 200 Basis Points (200) Basis Points
Federal Funds 200 (200)
One-Year CMT 200 (200)
Two-Year CMT 200 (200)
CD's 200 (74)
FHLB Advances 200 (200)
Results for the base, rising and falling interest rate scenarios are listed
below. 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) $109,311 $117,212 $ 97,757
Variance from base $ 7,901 $(11,554)
Percent of change from base 7.2% (10.6)%
The comparative rising and falling scenarios for the period ending December 31,
2004 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, 2004 are as follows:
Driver Rates RISING FALLING
=============================================================
Prime 200 Basis Points (200) Basis Points
Federal Funds 200 (100)
One-Year T-Bill 200 (138)
Two-Year T-Bill 200 (194)
Interest Checking 100 (14)
MMIA Savings 100 (24)
First Flex 100 (24)
CD's 200 (59)
FHLB Advances 200 (117)
Results for the base, rising and falling interest rate scenarios are listed
below. 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) $100,873 $102,792 $ 87,217
Variance from base $ 1,919 $(13,656)
Percent of change from base 1.90% (13.54)%
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EARNING ASSETS
Earnings assets increased approximately $115.7 million during 2004 as compared
to 2003. Loans grew by $74.5 million. Positive growth of commercial and
industrial and commercial, construction and farmland real estate loans of
approximately $178.9 million was mitigated by a $105.3 million decline in
residential real estate loans.
Investment securities increased by $64.7 million. The Corporation purchased
agency mortgage-backed securities, including ten year amortizing pools and five
and seven year mortgage balloon pools. In addition, three to five year tax
exempt state and municipal securities and federal agency securities were
purchased during 2004.
The table below reflects the earning asset mix for the years 2004 and 2003 (at
December 31).
Earning Assets
(Dollars in Millions) December 31,
================================================================================
2004 2003
-------- --------
Federal funds sold and interest-bearing time deposits $ 9.3 $ 40.6
Securities available for sale ....................... 416.2 348.9
Securities held to maturity ......................... 5.4 7.9
Mortgage loans held for sale ........................ 3.4 3.0
Loans ............................................... 2,428.0 2,353.6
Federal Reserve and Federal Home Loan Bank stock .... 22.9 15.5
-------- --------
Total ........................................... $2,885.2 $2,769.5
======== ========
DEPOSITS AND BORROWINGS
The table below reflects the level of deposits and borrowed funds (repurchase
agreements; Federal Home Loan Bank advances; subordinated debentures, revolving
credit lines and term loans; and other borrowed funds) based on year-end levels
at December 31, 2004 and 2003.
(Dollars in Millions) December 31,
2004 2003
---------- ----------
Deposits ........................................ $ 2,408.2 $ 2,362.1
Federal funds purchased.......................... 32.6
Securities sold under repurchase agreements...... 87.5 71.1
Federal Home Loan Bank advances ................. 223.7 212.8
Subordinated debentures, revolving credit lines
and term loans................................ 97.2 97.8
Other borrowed funds ............................ 1.5
The Corporation has continued to leverage its capital position with Federal Home
Loan Bank advances, as well as repurchase agreements which are pledged against
acquired investment securities as collateral for the borrowings. The interest
rate risk is included as part of the Corporation's interest simulation discussed
in Management's Discussion and Analysis of Financial Condition and Results of
Operations under the headings "LIQUIDITY" and "INTEREST SENSITIVITY AND
DISCLOSURES ABOUT MARKET RISK".
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
following table 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 2004.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET INTEREST INCOME continued
In 2004, asset yields decreased 26 basis points (FTE) and interest cost
decreased 13 basis points, resulting in a 13 basis point (FTE) decrease in net
interest income as compared to 2003. Margins remained compressed through the
first half of 2004 as the combined first and second quarters net interest margin
equaled 3.87 percent. In June 2004, the first of five 25 basis point overnight
federal funds rate increases by the Federal Open Market Committee occurred,
helping increase the combined third and fourth quarter net interest margin to
3.90 percent. However, the net interest margin for the 2004 fourth quarter
declined to 3.85 percent. This was primarily due to the reversal of
approximately $340,000 of interest income in the fourth quarter, related to
loans placed on non-accrual status and charged-off during the quarter. In
addition, the Corporation maintained an average federal funds sold position of
approximately $60 million, which generated lower yields.
In 2003, asset yields decreased 85 basis points (FTE) and interest cost
decreased 47 basis points, resulting in a 38 basis point (FTE) decrease in net
interest income as compared with 2002. The margin compression was primarily a
result of a stressed Indiana economy and an interest rate cycle that
approximated a 40-year low during 2003.
(Dollars in Thousands) December 31,
2004 2003 2002
---------- ----------- ----------
Net Interest Income.............................. $ 105,389 $ 103,142 $ 92,923
FTE Adjustment................................... $ 3,597 $ 3,757 $ 3,676
Net Interest Income
On a Fully Taxable Equivalent Basis............ $ 108,986 $ 106,899 $ 96,599
Average Earning Assets........................... $2,806,776 $ 2,663,853 $2,198,943
Interest Income (FTE) as a Percent
of Average Earning Assets...................... 5.72% 5.98% 6.83%
Interest Expense as a Percent
of Average Earning Assets...................... 1.84% 1.97% 2.44%
Net Interest Income (FTE) as a Percent
of Average Earning Assets...................... 3.88% 4.01% 4.39%
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. In addition,
annualized amounts are computed utilizing a 30/360 day basis.
OTHER INCOME
The Corporation offers 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 2004 amounted to $34,554,000, a 3.8 percent decline from 2003.
The decrease of $1,348,000 is primarily attributable to the following factors:
1. Net gains and fees on sales of mortgage loans included in other income
decreased by $2,759,000 due to decreased mortgage volume during 2004.
2. Life insurance proceeds included in other income was $0 for 2004
compared to $535,000 for 2003.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER INCOME continued
3. Service charges on deposit accounts increased $533,000 or 4.8 percent
due to increased number of customer accounts and price adjustments.
4. Revenues from fiduciary activities increased $896,000 or 13.3 percent
due to expansion, market improvements and price adjustments.
Other income in 2003 amounted to $35,902,000 or 32.6 percent higher than in
2002. The increase of $8,825,000 is primarily attributable to the following
factors:
1. Net gains and fees on sales of mortgage loans included in other income
increased by $4,676,000 due to increased mortgage volume during most
of 2003.
In addition, decreasing mortgage loan rates during the first three
quarters of 2003 caused an increase in refinancing volume, which
facilitated an increase in loan sales activity.
2. Service charges on deposit accounts increased $1,775,000 or 19.0
percent due to increased number of accounts, price adjustments and
approximately $742,000 of additional service charge income related to
April 1, 2002 acquisition of Lafayette.
3. Life insurance proceeds included in other income was $535,000 for
2003, compared to $0 for the same period last year.
4. Insurance commissions increased by $465,000 or 21.1 percent primarily
as a result of the September 6, 2002 acquisition of Stephenson
Insurance Services, Inc.
5. Revenues from fiduciary activities increased $478,000 or 7.6 percent
due primarily to the additional fees related to the acquisition of
Lafayette.
OTHER EXPENSES
Other expenses represent non-interest operating expenses of the Corporation.
Other expenses amounted to $91,642,000 in 2004, an increase of 0.4 percent from
the prior year, or $363,000. The following factors account for most of the
increase:
1. Salaries and benefit expense grew $1,995,000 or 4.0 percent, due to
normal salary increases and additional salary cost related to the
March 1, 2003 acquisition of Commerce National.
2. Prepayment penalties for early prepayment of FHLB advances totaled
$340,000 for 2003 and no such penalties were incurred during 2004.
3. Investment securities write-downs totaling $615,000 were incurred in
2003, resulting from other-than-temporary losses being recognized on
two securities. No investment security write-downs resulting from
other-than temporary losses were incurred during 2004.
4. In 2003, the Corporation incurred $460,000 expense to fund the
anticipation of a settlement of a claim. No such expense was incurred
during 2004.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER EXPENSES continued
Other expenses represent non-interest operating expenses of the Corporation.
Other expenses amounted to $91,279,000 in 2003, an increase of 28.5 percent from
the prior year, or $20,270,000. The following factors account for most of the
increase:
1. Salaries and benefit expense grew $11,334,000 or 29.0 percent, due to
normal salary increases, staff additions and additional salary cost
related to the April 1, 2002 acquisition of Lafayette and the March 1,
2003 acquisition of Commerce National.
2. Net occupancy expenses increased by $1,262,000 or 34.7 percent
primarily due to the acquisitions of Lafayette and Commerce National.
3. Equipment expense increased by $1,364,000 or 20.3 percent primarily
due to the acquisitions of Lafayette and Commerce National.
4. Core deposit intangible amortization increased by $1,111,000, due to
the acquisitions of Lafayette and Commerce National.
5. Prepayment penalties for early prepayment of FHLB advances totaled
$340,000 for 2003 and no such penalties were incurred during 2002.
6. Investment securities write-downs totaling $615,000 were incurred in
2003, resulting from other-than-temporary losses being recognized on
two securities.
INCOME TAXES
Income tax expense totaled $13,185,000 for 2004, which is an increase of
$2,468,000 from 2003. The 2004 increase in tax expense is primarily a result of
the increase of the 2004 income before income tax, as compared to 2003.
In addition, the effective tax rates for the periods ending December 31, 2004,
2003 and 2002 were 31.0 percent, 28.0 percent and 33.4 percent, respectively.
The effective tax rate has remained lower than the federal statutory income tax
rate of 34 percent, primarily due to the Corporation's tax-exempt investment
income on securities and loans, income tax credits generated from investments in
affordable housing projects, income generated by subsidiaries domiciled in a
state with no state or local income tax, increases in tax exempt earnings from
bank-owned life insurance contracts and reduced state taxes, resulting from the
effect of state income apportionment.
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
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INFLATION continued
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.
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee, Board of Directors and Stockholders
First Merchants Corporation
Muncie, Indiana
We have audited the accompanying consolidated balance sheets of First Merchants
Corporation as of December 31, 2004 and 2003, 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, 2004. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Merchants
Corporation as of December 31, 2004 and 2003, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2004, in conformity with accounting principles generally accepted in the United
States of America.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of First Merchants
Corporation's internal control over financial reporting as of December 31, 2004
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and
our report dated January 28, 2005 expressed unqualified opinions on management's
assessment and on the effectiveness of the Corporation's internal control over
financial reporting.
BKD, LLP
Indianapolis, Indiana
January 28, 2005
20
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
(in thousands, except share data) December 31,
==========================================================================================================
2004 2003
Assets
Cash and due from banks ................................................ $ 69,960 $ 77,112
Federal funds sold ..................................................... 32,415
----------- -----------
Cash and cash equivalents .............................................. 69,960 109,527
Interest-bearing time deposits ......................................... 9,343 8,141
Investment securities
Available for sale .................................................. 416,177 348,860
Held to maturity (fair value of $5,520 and $8,326) .................. 5,358 7,937
----------- -----------
Total investment securities ....................................... 421,535 356,797
Mortgage loans held for sale ........................................... 3,367 3,043
Loans, net of allowance for loan losses of $22,548 and $25,493.......... 2,405,503 2,328,010
Premises and equipment ................................................. 38,254 39,639
Federal Reserve and Federal Home Loan Bank stock ....................... 22,858 15,502
Interest receivable .................................................... 17,318 16,840
Core deposit intangibles ............................................... 20,669 24,044
Goodwill................................................................ 120,615 118,679
Cash value of life insurance............................................ 42,061 37,927
Other assets ........................................................... 20,185 18,663
----------- -----------
Total assets ...................................................... $ 3,191,668 $ 3,076,812
=========== ===========
Liabilities
Deposits
Noninterest-bearing .................................................. $ 330,685 $ 338,201
Interest-bearing ..................................................... 2,077,465 2,023,900
----------- -----------
Total deposits ..................................................... 2,408,150 2,362,101
Borrowings ............................................................. 440,891 383,170
Interest payable ....................................................... 4,411 4,680
Other liabilities ...................................................... 23,613 22,896
----------- -----------
Total liabilities .................................................. 2,877,065 2,772,847
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 -- 18,573,997 and 18,512,834 shares .......... 2,322 2,314
Additional paid-in capital ............................................. 150,862 150,310
Retained earnings ...................................................... 161,459 149,096
Accumulated other comprehensive income (loss)........................... (40) 2,245
----------- -----------
Total stockholders' equity ........................................ 314,603 303,965
----------- -----------
Total liabilities and stockholders' equity ........................ $ 3,191,668 $ 3,076,812
=========== ===========
See notes to consolidated financial statements.
21
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Income
(in thousands, except share data) Year Ended December 31,
====================================================================================================
2004 2003 2002
Interest income
Loans receivable
Taxable ................................................ $139,953 $141,236 $129,279
Tax exempt ............................................. 581 707 638
Investment securities
Taxable ................................................ 8,371 6,105 9,086
Tax exempt ............................................. 6,098 6,270 6,190
Federal funds sold ....................................... 165 487 557
Deposits with financial institutions ..................... 555 76 197
Federal Reserve and Federal Home Loan Bank stock ......... 1,251 649 735
-------- -------- --------
Total interest income ................................ 156,974 155,530 146,682
-------- -------- --------
Interest expense
Deposits ................................................. 33,844 34,858 39,700
Securities sold under repurchase agreements .............. 517 1,521 2,060
Federal Home Loan Bank advances .......................... 9,777 9,439 8,166
Subordinated debentures, revolving
credit and term loans .................................. 6,784 6,161 3,756
Other borrowings ......................................... 663 409 77
-------- -------- --------
Total interest expense .............................. 51,585 52,388 53,759
-------- -------- --------
Net interest income ......................................... 105,389 103,142 92,923
Provision for loan losses ................................ 5,705 9,477 7,174
-------- -------- --------
Net interest income after provision for loan losses ......... 99,684 93,665 85,749
-------- -------- --------
Other income
Fiduciary activities ..................................... 7,632 6,736 6,258
Service charges on deposit accounts ...................... 11,638 11,105 9,330
Other customer fees ...................................... 4,083 4,124 3,918
Net realized gains on
sales of available-for-sale securities ................. 1,188 950 739
Commission income ........................................ 3,088 2,668 2,203
Earnings on cash surrender value
of life insurance ...................................... 1,798 1,347 689
Net gains and fees on sales of loans ..................... 3,629 6,388 1,712
Other income ............................................. 1,498 2,584 2,228
-------- -------- --------
Total other income .................................. 34,554 35,902 27,077
-------- -------- --------
Other expenses
Salaries and employee benefits ........................... 52,479 50,484 39,150
Net occupancy expenses ................................... 5,308 4,894 3,632
Equipment expenses ....................................... 7,665 8,073 6,709
Marketing expenses........................................ 1,709 1,797 1,495
Outside data processing fees ............................. 4,920 4,118 3,664
Printing and office supplies ............................. 1,580 1,706 1,597
Core deposit amortization................................. 3,375 3,704 2,589
Other expenses ........................................... 14,606 16,503 12,173
-------- -------- --------
Total other expenses ................................ 91,642 91,279 71,009
-------- -------- --------
Income before income tax .................................... 42,596 38,288 41,817
Income tax expense ....................................... 13,185 10,717 13,981
-------- -------- --------
Net income .................................................. $ 29,411 $ 27,571 $ 27,836
======== ======== ========
Net income per share:
Basic .................................................... $ 1.59 $ 1.51 $ 1.70
Diluted .................................................. 1.58 1.50 1.69
See notes to consolidated financial statements.
22
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Comprehensive Income
Year Ended December 31,
(in thousands) 2004 2003 2002
==================================================================================================================================
Net income ............................................................................ $ 29,411 $ 27,571 $ 27,836
--------- -------- ---------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period,
net of income tax (expense) benefit of $1,199, $1,465, and $(2,426)............... (1,799) (2,197) 3,639
Less: Reclassification adjustment for gains included in net income,
net of income tax expenses of $(475), $(380), and $(296)........................ 713 570 443
Unrealized loss on pension minimum funding liability:
Unrealized loss arising during the period,
net of income tax benefit of $150, $357, and $879 ................................ (227) (536) (1,318)
--------- -------- ---------
(2,285) (2,231) 1,878
--------- -------- ---------
COMPREHENSIVE INCOME $ 27,126 $ 25,340 $ 29,714
========= ======== =========
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, 2002 12,670,307 $ 1,584 $ 50,642 $ 124,304 $ 2,598 $ 179,128
Net income for 2002.......................... 27,836 27,836
Cash dividends ($.86 per share).............. (13,995) (13,995)
Other comprehensive income (loss),
net of tax ............................... 1,878 1,878
Stock issued under employee benefit plans ... 35,613 4 654 658
Stock issued under dividend reinvestment
and stock purchase plan .................. 28,487 5 946 951
Stock options exercised ..................... 49,689 6 488 494
Stock redeemed .............................. (148,405) (20) (4,313) (4,333)
Issuance of stock related to acquisitions.... 2,912,869 364 68,183 68,547
Five percent (5%) stock dividend............. 774,188 97 (97)
Cash paid in lieu of fractional shares....... (35) (35)
----------- -------- -------- --------- -------- ---------
Balances, December 31, 2002 16,322,748 2,040 116,503 138,110 4,476 261,129
Net income for 2003.......................... 27,571 27,571
Cash dividends ($.90 per share).............. (16,557) (16,557)
Other comprehensive income (loss),
net of tax ............................... (2,231) (2,231)
Stock issued under employee benefit plans ... 39,747 5 814 819
Stock issued under dividend reinvestment
and stock purchase plan .................. 48,168 6 1,218 1,224
Stock options exercised ..................... 66,513 8 1,183 1,191
Stock redeemed .............................. (17,915) (2) (486) (488)
Issuance of stock related to acquisition..... 1,173,996 147 31,188 31,335
Five percent (5%) stock dividend............. 879,577 110 (110)
Cash paid in lieu of fractional shares....... (28) (28)
----------- -------- -------- --------- -------- ---------
Balances, December 31, 2003 18,512,834 2,314 150,310 149,096 2,245 303,965
Net income for 2004.......................... 29,411 29,411
Cash dividends ($.92 per share).............. (17,048) (17,048)
Other comprehensive income (loss),
net of tax ............................... (2,285) (2,285)
Stock issued under employee benefit plans ... 45,267 6 897 903
Stock issued under dividend reinvestment
and stock purchase plan .................. 50,799 6 1,272 1,278
Stock options exercised ..................... 90,338 11 1,393 1,404
Stock redeemed .............................. (193,789) (24) (4,702) (4,726)
Issuance of stock related to acquisition..... 68,548 9 1,692 1,701
----------- -------- -------- --------- -------- ---------
Balances, December 31, 2004 18,573,997 $ 2,322 $150,862 $ 161,459 $ (40) $ 314,603
=========== ======== ======== ========= ======== =========
See notes to consolidated financial statements.
23
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Cash Flows
===============================================================================================================
Year Ended December 31,
(in thousands, except share data) 2004 2003 2002
===============================================================================================================
Operating activities:
Net income ......................................................... $ 29,411 $ 27,571 $ 27,836
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses ........................................ 5,705 9,477 7,174
Depreciation and amortization..................................... 5,064 4,769 4,273
Mortgage loans originated for sale ............................... (83,313) (212,243) (140,584)
Proceeds from sales of mortgage loans ............................ 82,989 230,745 126,905
Net change in
Interest receivable .......................................... (478) 1,368 763
Interest payable ............................................. (269) (1,695) (1,318)
Other adjustments ................................................ 842 5,677 (7,354)
--------- --------- ---------
Net cash provided by operating activities .................... 39,951 65,669 17,695
--------- --------- ---------
Investing activities:
Net change in interest-bearing deposits ............................ (1,202) (4,573) 10,729
Purchases of
Securities available for sale .................................... (214,393) (260,467) (182,511)
Proceeds from maturities of
Securities available for sale .................................... 116,294 174,003 164,273
Securities held to maturity ...................................... 4,307
Proceeds from sales of
Securities available for sale .................................... 32,336 58,245 21,363
Purchase of Federal Reserve and Federal Home Loan Bank stock (7,356) (4,093) (3,059)
Net change in loans ................................................ (83,198) (56,825) (100,650)
Net cash paid in acquisition ....................................... (201) (7,793) (12,532)
Other adjustments .................................................. (6,106) (2,262) (2,435)
--------- --------- ---------
Net cash used by investing activities......................... (163,826) (103,765) (100,515)
--------- --------- ---------
Cash flows from financing activities:
Net change in
Demand and savings deposits ...................................... 89,008 39,400 34,818
Certificates of deposit and other time deposits .................. (42,959) 14,476 (26,662)
Receipt of borrowings .............................................. 181,211 73,303 138,981
Repayment of borrowings ............................................ (124,763) (84,755) (32,047)
Cash dividends ..................................................... (17,048) (16,557) (13,995)
Stock issued under employee benefit plans .......................... 903 819 658
Stock issued under dividend reinvestment
and stock purchase plan .......................................... 1,278 1,224 951
Stock options exercised ............................................ 1,404 1,191 494
Stock redeemed ..................................................... (4,726) (488) (4,333)
Cash paid in lieu of issuing fractional shares ..................... (28) (35)
--------- --------- ---------
Net cash provided by activities .............................. 84,308 28,585 98,830
--------- --------- ---------
Net change in cash and cash equivalents ............................... (39,567) (9,511) 16,010
Cash and cash equivalents, beginning of year .......................... 109,527 119,038 103,028
--------- --------- ---------
Cash and cash equivalents, end of year ................................ $ 69,960 $ 109,527 $ 119,038
========= ========= =========
Additional cash flows information:
Interest paid ....................................................... $ 51,854 $ 53,727 $ 53,228
Income tax paid ..................................................... 10,501 13,952 14,313
See notes to consolidated financial statements.
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
The accounting and reporting policies of First Merchants Corporation
("Corporation"), and its wholly owned subsidiaries, First Merchants Bank, N.A.
("First Merchants"), The Madison Community Bank, N.A. ("Madison"), First United
Bank, N.A. ("First United"), The Randolph County Bank, N.A. ("Randolph County"),
The Union County National Bank ("Union National"), First National Bank ("First
National"), Decatur Bank and Trust Company, N.A. ("Decatur"), Frances Slocum
Bank & Trust Company, N.A. ("Frances Slocum"), Lafayette Bank and Trust Company,
N.A. ("Lafayette"), and Commerce National Bank ("Commerce National"),
(collectively the "Banks"), Merchants Trust Company, National Association
("MTC"), First Merchants Insurance Services, Inc. ("FMIS"), First Merchants
Reinsurance Company ("FMRC"), Indiana Title Insurance Company ("ITIC") and CNBC
Retirement Services, Inc. ("CRS, Inc."), conform to generally accepted
accounting principles and reporting practices followed by the banking industry.
The more significant of the policies are described below. Effective January 1,
2005, Union National was merged into Randolph County, and the name of the
continuing institution is United Communities National Bank.
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. The Banks operate under national bank charters and provide
full banking services, including trust services. As national banks, the Banks
are subject to the regulation of the Office of the Comptroller of the Currency
and the Federal Deposit Insurance Corporation.
The Banks generate commercial, mortgage, and consumer loans and receive deposits
from customers located primarily in north-central and east-central Indiana and
Butler, Franklin and Hamilton counties in Ohio. The Banks' loans are generally
secured by specific items of collateral, including real property, consumer
assets and business assets.
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.
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
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.
Available-for-sale and held-to-maturity securities are reviewed quarterly for
possible other-than-temporary impairment. The review includes an analysis of the
facts and circumstances of each individual investment such as the length of time
the fair value has been below cost, the expectation for that security's
performance, the credit worthiness of the issuer and the Corporation's ability
to hold the security to maturity. A decline in value that is considered to be
other-than temporary is recorded as a loss within other operating income in the
consolidated statements of income.
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 held in the Corporation's portfolio 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.
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
economic, environmental or qualitative factors.
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
Larger commercial loans that exhibit probable or observed credit weaknesses are
subject to individual review. Where appropriate, reserves are allocated to
individual loans based on management's estimate of the borrower's ability to
repay the loan given the availability of collateral, other sources of cash flow
and legal options available to the Corporation. Included in the review of
individual loans are those that are impaired as provided in SFAS No. 114. Any
allowances for impaired loans are measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or
fair value of the underlying collateral. The Corporation evaluates the
collectibility of both principal and interest when assessing the need for a loss
accrual. Historical loss rates are applied to other commercial loans not subject
to specific reserve allocations.
Homogenous loans, such as consumer installment and residential mortgage loans
are not individually risk graded. Rather, credit scoring systems are used to
assess credit risks. Reserves are established for each pool of loans using loss
rates based on a five year average net charge-off history by loan category.
Historical loss rates for commercial and consumer loans may be adjusted for
significant factors that, in management's judgment, reflect the impact of any
current conditions on loss recognition. Factors which management considers in
the analysis include the effects of the national and local economies, trends in
the nature and volume of loans (delinquencies, charge-offs and nonaccrual
loans), changes in mix, asset quality trends, risk management and loan
administration, changes in the internal lending policies and credit standards,
collection practices and examination results from bank regulatory agencies and
the Corporation's internal loan review.
An unallocated reserve, primarily based on the factors noted above, is
maintained to recognize the imprecision in estimating and measuring loss when
evaluating reserves for individual loans or pools of loans. Allowances on
individual loans and historical loss rates are reviewed quarterly and adjusted
as necessary based on changing borrower and/or collateral conditions and actual
collection and charge-off experience.
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 10 years. Intangible assets are periodically evaluated as to the
recoverability of their carrying value.
27
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
GOODWILL is maintained by applying the provisions of SFAS No. 142. 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. The
Corporation's stock-based employee compensation plans 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 $12,000 in 2003 and $23,000 in 2002, 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.
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
2004 2003 2002
----------------------------
Net income, as reported ...................... $29,411 $27,571 $27,836
Add: Total stock-based employee compensation
cost included in reported net income, net
of income taxes ........................... 12 23
Less: Total stock-based employee compensation
cost determined under the fair value based
method, net of income taxes ............... (1,083) (1,034) (1,029)
------- ------- -------
Pro forma net income $28,328 $26,549 $26,830
======= ======= =======
Earnings per share:
Basic - as reported ....................... $ 1.59 $ 1.51 $ 1.70
Basic - pro forma ......................... $ 1.53 $ 1.46 $ 1.64
Diluted - as reported ..................... $ 1.58 $ 1.50 $ 1.69
Diluted - pro forma ....................... $ 1.52 $ 1.45 $ 1.63
EARNINGS PER SHARE have been computed based upon the weighted average common and
common equivalent shares outstanding during each year.
NOTE 2
BUSINESS COMBINATIONS
Effective October 15, 2004, the Corporation acquired Mangas Agencies, Inc.,
which was merged into FMIS, a wholly-owned subsidiary of the Corporation. The
Corporation
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
NOTE 2
BUSINESS COMBINATIONS continued
issued 68,548 shares of its common stock at a cost of $24.80 per share to
complete the transaction. The acquisition was deemed to be an immaterial
acquisition.
On March 1, 2003, the Corporation acquired 100 percent of the outstanding stock
of CNBC Bancorp, the holding company of Commerce National, CRS, Inc. and CNBC
Trust I. Commerce National is a national chartered bank located in Columbus,
Ohio. CNBC Bancorp was merged into the Corporation, and Commerce National
maintained its national charter as a wholly-owned subsidiary of the Corporation.
CRS, Inc. and the CNBC Trust I are also maintained as wholly-owned subsidiaries
of the Corporation. The Corporation issued approximately 1,225,242 shares of its
common stock and approximately $24,562,000 in cash to complete the transaction.
As a result of the acquisition, the Corporation will have an opportunity to
increase its customer base and continue to increase its market share. The
purchase had a recorded acquisition price of $55,729,000, including goodwill of
$30,291,000 none of which is deductible for tax purposes. Additionally, core
deposit intangibles totaling $8,171,000 were recognized and are being amortized
over 10 years using the 150 percent 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 March 1, 2003.
The purchase accounting adjustments are being amortized over the life of the
respective asset or liability. Commerce National's results of operations are
included in the Corporation's consolidated income statement beginning March 1,
2003. The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.
Investments....................... $ 12,500
Loans............................. 298,702
Premises and equipment............ 1,293
Core deposit intangibles.......... 8,171
Goodwill.......................... 30,291
Other............................. 20,789
--------
Total assets acquired.......... 371,746
--------
Deposits.......................... 271,537
Other............................. 44,480
--------
Total liabilities acquired..... 316,017
--------
Net assets acquired............ $ 55,729
========
The following proforma disclosures, including the effect of the purchase
accounting adjustments, depict the results of operations as though the CNBC
Bancorp merger had taken place at the beginning of each period.
Year Ended
December 31,
2003 2002
-------- --------
Net Interest Income........... $104,797 $102,641
Net Income.................... 23,601 29,454
Per Share - combined:
Basic Net Income........... 1.28 1.67
Diluted Net Income......... 1.27 1.66
Effective January 1, 2003, the Corporation formed MTC, a wholly-owned subsidiary
of the Corporation, through a capital contribution totaling approximately
$2,038,000.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
NOTE 2
BUSINESS COMBINATIONS continued
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
united the trust and asset management services of all affiliate banks of the
Corporation. All intercompany transactions related to this purchase by MTC have
been eliminated in the consolidated financial statements of the Corporation.
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 38,090 shares of its common stock at a cost
of $26.16 per share to complete the transaction. This acquisition was deemed to
be an immaterial acquisition.
On April 1, 2002, the Corporation acquired 100 percent of the outstanding stock
of Lafayette Bancorporation, the holding company of Lafayette, which is located
in Lafayette, Indiana. Lafayette is a national chartered bank with branches
located in central Indiana. Lafayette Bancorporation was merged into the
Corporation, and Lafayette maintained its bank charter as a subsidiary of First
Merchants Corporation. The Corporation issued approximately 3,057,298 shares of
its common stock at a cost of $21.30 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 are being amortized over 10 years using the 150 percent 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
========
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 Lafayette
merger had taken place at the beginning of each period.
Year Ended
December 31,
2002
------------
Net Interest Income .................... $ 98,855
Net Income ............................. 28,016
Per share - combined:
Basic Net Income ..................... 1.16
Diluted Net Income ................... 1.60
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 114,365 shares of its common stock at a cost of $21.31 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
percent ownership interest. This acquisition was deemed to be an immaterial
acquisition.
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, 2004, was
$4,397,000.
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, 2004
U.S. Treasury .................................... $ 1,745 $ 1 $ 1,744
Federal agencies ................................. 65,325 $ 73 332 65,066
State and municipal .............................. 150,284 5,243 82 155,445
Mortgage-backed securities ....................... 183,200 485 1,980 181,705
Other asset-backed securities .................... 18 18
Marketable equity securities ..................... 12,191 8 12,199
---------- ---------- ---------- ----------
Total available for sale ...................... 412,763 5,809 2,395 416,177
---------- ---------- ---------- ----------
Held to maturity at December 31, 2004
State and municipal .............................. 5,306 162 5,468
Mortgage-backed securities ....................... 52 52
---------- ---------- ---------- ----------
Total held to maturity ........................ 5,358 162 5,520
---------- ---------- ---------- ----------
Total investment securities ................... $ 418,121 $ 5,971 $ 2,395 $ 421,697
========== ========== ========== ==========
Available for sale at December 31, 2003
U.S. Treasury .................................... $ 1,498 $ 1,498
Federal agencies ................................. 38,290 $ 523 $ 52 38,761
State and municipal .............................. 118,794 6,932 86 125,640
Mortgage-backed securities ....................... 174,208 813 1,817 173,204
Corporate obligations ............................ 500 16 516
Marketable equity securities ..................... 9,237 4 9,241
---------- ---------- ---------- ----------
Total available for sale ...................... 342,527 8,288 1,955 348,860
---------- ---------- ---------- ----------
Held to maturity at December 31, 2003
State and municipal .............................. 7,860 389 8,249
Mortgage-backed securities ....................... 77 77
---------- ---------- ---------- ----------
Total held to maturity ........................ 7,937 389 8,326
---------- ---------- ---------- ----------
Total investment securities ................... $ 350,464 $ 8,677 $ 1,955 $ 357,186
========== ========== ========== ==========
Certain investments in debt securities are reported in the financial statements
at an amount less than their historical cost. The historical cost of these
investments totaled $192,366,000 and $102,973,000 at December 31, 2004 and 2003,
respectively. Total fair value of these investments was $189,971,000 and
$101,018,000, which is approximately 45.1 and 28.3 percent of the Corporation's
available-for-sale and held-to-maturity investment portfolio at December 31,
2004 and 2003, respectively. These declines primarily resulted from recent
increases in market interest rates.
Based on evaluation of available evidence, including recent changes in market
interest rates, credit rating information and information obtained from
regulatory filings, management believes the declines in fair value for these
securities are temporary. Should the impairment of any of these securities
become other than temporary, the cost basis of the investment will be reduced
and the resulting loss recognized in net income in the period the
other-than-temporary impairment is identified.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
NOTE 4
INVESTMENT SECURITIES continued
The following tables show the Corporation's gross unrealized losses and fair
value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position at December 31,
2004 and 2003:
Less than 12 12 Months or Total
Months Longer
---------------------------------------------------------------------------
GROSS GROSS GROSS
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSSES VALUE LOSSES VALUE LOSSES
---------------------------------------------------------------------------
Temporarily impaired investment
securities at December 31, 2004:
U.S. Treasury ....................................... $ 1,496 $ (1) $ 1,496 $ (1)
Federal agencies .................................... 46,227 (303) $ 1,472 $ (29) 47,699 (332)
State and municipal ................................. 2,976 (20) 1,094 (62) 4,070 (82)
Mortgage-backed securities .......................... 109,213 (1,129) 27,493 (851) 136,706 (1,980)
---------- ---------- ---------- ---------- ---------- ----------
Total temporarily impaired investment securities . $ 159,912 $ (1,453) $ 30,059 $ (942) $189,971 $ (2,395)
========== ========== ========== ========== ========== ==========
Less than 12 12 Months or Total
Months Longer
---------------------------------------------------------------------------
GROSS GROSS GROSS
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSSES VALUE LOSSES VALUE LOSSES
---------------------------------------------------------------------------
Temporarily impaired investment
securities at December 31, 2003:
Federal agencies .................................... $ 7,410 $ (50) $ 747 $ (2) $ 8,157 $ (52)
State and municipal ................................. 2,547 (82) 166 (4) 2,713 (86)
Mortgage-backed securities .......................... 90,148 (1,817) 90,148 (1,817)
---------- ---------- ---------- ---------- ---------- ----------
Total temporarily impaired investment securities . $ 100,105 $ (1,949) $ 913 $ (6) $ 101,018 $ (1,955)
========== ========== ========== ========== ========== ==========
The amortized cost and fair value of securities available for sale and held to
maturity at December 31, 2004, 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, 2004:
Due in one year or less............................ $ 13,026 $ 13,128 $ 1,110 $ 1,125
Due after one through five years .................. 129,277 130,362 2,760 2,856
Due after five through ten years .................. 50,916 53,439 295 328
Due after ten years ............................... 24,132 25,323 1,141 1,159
--------- --------- -------- --------
217,351 222,252 5,306 5,468
Mortgage-backed securities ........................ 183,200 181,705 52 52
Other asset-backed securities ..................... 21 21
Marketable equity securities ...................... 12,191 12,199
--------- --------- -------- --------
Totals .......................................... $ 412,763 $ 416,177 $ 5,358 $ 5,520
========= ========= ======== ========
Securities with a carrying value of approximately $157,356,000 and $158,474,000
were pledged at December 31, 2004 and 2003 to secure certain deposits and
securities sold under repurchase agreements, and for other purposes as permitted
or required by law.
Proceeds from sales of securities available for sale during 2004, 2003 and 2002
were $32,336,000, $58,245,000 and $21,363,000. Gross gains of $1,502,000,
$950,000 and $739,000 in 2004, 2003 and 2002, and gross losses of $314,000 in
2004 were realized on those sales.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
NOTE 5
LOANS AND ALLOWANCE
2004 2003
============================================================================================
Loans at December 31:
Commercial and industrial loans .................................. $ 462,538 $ 443,140
Agricultural production financing and other loans to farmers ..... 98,902 95,048
Real estate loans:
Construction ................................................ 164,738 149,865
Commercial and farmland ..................................... 709,163 564,578
Residential ................................................. 761,163 866,477
Individuals' loans for household and other personal expenditures . 198,532 196,093
Tax-exempt loans ................................................. 8,203 16,363
Other loans ...................................................... 24,812 21,939
---------- ----------
2,428,051 2,353,503
Allowance for loan losses........................................ (22,548) (25,493)
---------- ----------
Total loans ................................................. $2,405,503 $2,328,010
========== ==========
2004 2003 2002
===============================================================================
Allowance for loan losses:
Balance, January 1 ................... $ 25,493 $ 22,417 $ 15,141
Allowance acquired in acquisitions 3,727 6,902
Provision for losses ................. 5,705 9,477 7,174
Recoveries on loans .................. 2,251 2,011 1,313
Loans charged off .................... (10,901) (12,139) (8,113)
---------- ---------- ----------
Balance, December 31 ................. $ 22,548 $ 25,493 $ 22,417
========== ========== ==========
Information on nonaccruing, contractually past due 90 days or more other than
nonaccruing and restructured loans is summarized below:
2004 2003 2002
===============================================================================
At December 31:
Non-accrual loans ....................... $ 15,355 $ 19,453 $ 14,134
Loans contractually past due 90 days
or more other than nonaccruing ........ 1,907 6,530 6,676
Restructured loans ...................... 2,019 641 2,508
---------- ---------- ----------
Total non-performing loans.......... $ 19,281 $ 26,624 $ 23,318
========== ========== ==========
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.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
NOTE 5
LOANS AND ALLOWANCE continued
Information on impaired loans is summarized below: 2004 2003 2002
============================================================================================
As of, and for the year ending December 31:
Impaired loans with an allowance ................. $ 7,728 $ 12,725 $ 16,901
Impaired loans for which the discounted
cash flows or collateral value exceeds the
carrying value of the loan ................... 41,683 32,047 27,450
---------- ---------- ----------
Total impaired loans ...................... $ 49,411 $ 44,772 $ 44,351
========== ========== ==========
Total impaired loans as a percent
of total loans ............................... 2.03% 1.90% 2.19%
Allowance for impaired loans (included in the
Corporation's allowance for loan losses) ..... $ 1,673 $ 5,728 $ 7,299
Average balance of impaired loans ................ 59,568 50,245 49,663
Interest income recognized on impaired loans ..... 4,166 3,259 3,656
Cash basis interest included above ............... 3,029 2,714 2,344
NOTE 6
PREMISES AND EQUIPMENT
2004 2003
===============================================================================
Cost at December 31:
Land ............................................. $ 8,281 $ 7,463
Buildings and leasehold improvements ............. 40,520 40,308
Equipment ........................................ 38,852 38,777
---------- ----------
Total cost ................................... 87,653 86,548
Accumulated depreciation and amortization ........ (49,399) (46,909)
---------- ----------
Net .......................................... $ 38,254 $ 39,639
========== ==========
The Corporation is committed under various noncancelable lease contracts for
certain subsidiary office facilities. Total lease expense for 2004, 2003 and
2002 was $2,151,000, $1,629,000 and $1,027,000, respectively. The future minimum
rental commitments required under the operating leases in effect at December 31,
2004, expiring at various dates through the year 2013 are as follows for the
years ending December 31:
====================================================
2005 ..................................... $ 1,746
2006 ..................................... 1,515
2007 ..................................... 1,145
2008 ..................................... 880
2009 ..................................... 829
After 2009 ................................ 2,287
-------
Total future minimum obligations $ 8,402
=======
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
NOTE 7
GOODWILL
The changes in the carrying amount of goodwill at December 31 are noted below.
No impairment loss was recorded in 2004 and 2003.
2004 2003
===============================================================================
Balance, January 1 .................................. $ 118,679 $ 87,640
Goodwill acquired ................................... 1,900 30,291
Adjustments to previously
acquired goodwill ................................. 36 748
---------- ----------
Balance, December 31 ................................ $ 120,615 $ 118,679
========== ==========
NOTE 8
CORE DEPOSIT INTANGIBLES
The carrying basis and accumulated amortization of recognized core deposit
intangibles at December 31 were:
2004 2003
===============================================================================
Gross carrying amount ............................... $ 31,073 $ 31,073
Accumulated amortization ............................ (10,404) (7,029)
---------- ----------
Core deposit intangibles ......................... $ 20,669 $ 24,044
========== ==========
Amortization expense for the years ended December 31, 2004, 2003 and 2002, was
$3,375,000, $3,704,000 and $2,571,000, respectively. Estimated amortization
expense for each of the following five years is:
2005 ..................................... $ 3,065
2006 ..................................... 3,013
2007 ..................................... 3,013
2008 ..................................... 3,013
2009 ..................................... 3,013
After 2009 ............................... 5,552
--------
$ 20,669
========
NOTE 9
DEPOSITS
2004 2003
===============================================================================
Deposits at December 31:
Demand deposits .................................. $ 703,989 $ 706,202
Savings deposits ................................. 634,132 643,328
Certificates and other time deposits
of $100,000 or more ............................ 258,362 279,810
Other certificates and time deposits ............. 811,667 732,761
---------- ----------
Total deposits ............................... $2,408,150 $2,362,101
========== ==========
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
NOTE 9
DEPOSITS continued
=====================================================
Certificates and other time deposits maturing
in years ending December 31:
2005 .................................... $ 608,607
2006 .................................... 214,577
2007 .................................... 168,394
2008 .................................... 47,572
2009 .................................... 27,009
After 2009 .............................. 3,870
----------
$1,070,029
==========
NOTE 10
BORROWINGS
2004 2003
===============================================================================
Borrowings at December 31:
Federal funds purchased .......................... $ 32,550
Securities sold under repurchase agreements ...... 87,472 $ 71,095
Federal Home Loan Bank advances .................. 223,663 212,779
Subordinated debentures, revolving credit
lines and term loans ........................... 97,206 97,782
Other borrowed funds.............................. 1,514
---------- ----------
Total borrowings ............................. $ 440,891 $ 383,170
========== ==========
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 2004 and 2003 totaled $87,472,000
and $74,969,000, and the average of such agreements totaled $62,669,000 and
$70,354,000 during 2004 and 2003.
Maturities of securities sold under repurchase agreements; Federal Home Loan
Bank advances; and subordinated debentures, revolving credit lines and term
loans as of December 31, 2004, are as follows:
SUBORDENATED DEBENTURES
SECURITIES SOLD UNDER FEDERAL HOME LOAN REVOLOVING CREDIT LINES
REPURCHASE AGREEMENTS BANK ADVANCES AND TERM LOANS
- ----------------------------------------------------------------------------------------------------------------------
AMOUNT AMOUNT AMOUNT
======================================================================================================================
Maturities in years ending December 31:
2005 .............................. $ 87,152 $ 33,477 $ 8,250
2006 .............................. 320 29,859
2007 .............................. 24,995
2008 .............................. 19,306
2009 .............................. 9,428
After 2009 ........................ 106,598 88,956
-------- --------- --------
Total ...................... $ 87,472 $ 223,663 $ 97,206
======== ========= ========
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
NOTE 10
BORROWINGS continued
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. The total available remaining borrowing capacity from
the FHLB at December 31, 2004, was $148,451,000.
Subordinated Debentures, Revolving Credit Lines and Term Loans. Three borrowings
were outstanding on December 31, 2004, for $97,206,000.
o First Merchants Capital Trust I. The subordinated debenture, entered
into on April 12, 2002, for $54,832,000 will mature on June 20, 2032.
The Corporation may redeem the debenture no earlier than June 30,
2007, subject to the prior approval of the Federal Reserve, as
required by law or regulation. Interest is fixed at 8.75 percent and
payable on March 31, June 30, September 30 and December 31 of each
year.
o CNBC Statutory Trust I. As part of the March 1, 2003, acquisition of
CNBC Bancorp, the Corporation assumed $4,124,000 of a junior
subordinated debenture entered into on February 22, 2001. The
subordinated debenture of $4, 124,000 will mature on February 22,
2031. Interest is fixed at 10.20 percent and payable on February 22
and August 22 of each year. The Corporation may redeem the debenture,
in whole or in part, at its option commencing February 22, 2011, at a
redemption price of 105.10 percent of the outstanding principal amount
and, thereafter, at a premium which declines annually. On or after
February 22, 2021, the securities may be redeemed at face value with
prior approval of the Board of Governors of the Federal Reserve
System.
o Lasalle Bank, N.A. The outstanding balance of a Loan and Subordinated
Debenture Loan Agreement ("LaSalle Agreement") entered into with
LaSalle Bank, N.A. on March 25, 2003 for $38,250,000. The LaSalle
Agreement includes three credit facilities:
o The Term Loan of $5,000,000 matures on March 25, 2010.
Interest is calculated at a floating rate equal to the
lender's prime rate or LIBOR plus 1.50 percent. The Term Loan
is secured by 100 percent of the common stock of First
Merchants Bank, N.A. and 100 percent of the common stock of
Lafayette Bank and Trust Company, N.A. The Agreement contains
several restrictive covenants, including the maintenance of
various capital adequacy levels, asset quality and
profitability ratios, and certain restrictions on dividends
and other indebtedness.
o The Revolving Loan had a balance of $8,250,000 at December 31,
2004. Interest is payable quarterly based on LIBOR plus 1
percent. Principal and interest are due on or before March
23,2005. The total principal amount outstanding at any one
time may not exceed $20,000,000. The Revolving Loan is secured
by 100 percent of the common stock of First Merchants Bank,
N.A. and 100 percent of the common stock of Lafayette Bank and
Trust Company, N.A. The Agreement contains several restrictive
covenants, including the maintenance of various capital
adequacy levels,
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
NOTE 10
BORROWINGS continued
asset quality and profitability ratios, and certain
restrictions on dividends and other indebtedness.
o The Subordinated Debenture of $25,000,000 matures on March 25,
2010. Interest is calculated at a floating rate equal to, at
the Corporation's option, either the lender's prime rate or
LIBOR plus 2.50 percent. The Subordinated Debenture is treated
as Tier 2 Capital for regulatory capital purposes.
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 $113,344,000,
$105,865,000 and $90,346,000 at December 31, 2004, 2003 and 2002. The amount of
capitalized servicing assets is considered immaterial.
NOTE 12
INCOME TAX
2004 2003 2002
=========================================================================================================
Income tax expense for the year ended December 31:
Currently payable:
Federal ..................................................... $ 11,934 $ 9,475 $ 11,869
State ....................................................... 1,772 1,569 2,615
Deferred:
Federal ..................................................... (615) (597) (446)
State ....................................................... 94 270 (57)
---------- ---------- ----------
Total income tax expense ................................. $ 13,185 $ 10,717 $ 13,981
========== ========== ==========
Reconciliation of federal statutory to actual tax expense:
Federal statutory income tax at 34% ......................... $ 14,483 $ 13,030 $ 14,085
Tax-exempt interest ......................................... (2,098) (2,198) (2,006)
Graduated tax rates ......................................... 335 289 355
Effect of state income taxes ................................ 1,178 1,213 1,613
Earnings on life insurance .................................. (472) (512) (133)
Tax credits ................................................. (274) (317) (293)
Other ....................................................... 33 (788) 360
---------- ---------- ----------
Actual tax expense ....................................... $ 13,185 $ 10,717 $ 13,981
========== ========== ==========
Tax expense applicable to security gains and losses for the years ended December
31, 2004, 2003 and 2002, was $475,000, $380,000, and $296,000, respectively.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
NOTE 12
INCOME TAX continued
A cumulative net deferred tax liability is included in the consolidated balance
sheets. The components of the net liability are as follows:
2004 2003
============================================================================================
Deferred tax liability at December 31:
Assets:
Differences in accounting for loan losses ..................... $ 9,438 $ 11,305
Deferred compensation ......................................... 2,707 2,514
State income tax .............................................. 524 18
Other ......................................................... 222 135
---------- ----------
Total assets .............................................. 12,891 13,972
---------- ----------
Liabilities:
Differences in depreciation methods ........................... 3,469 3,061
Differences in accounting for loans and securities ............ 8,181 9,905
Differences in accounting for loan fees ....................... 628 715
Differences in accounting for pensions
and other employee benefits ................................. 339 861
State income tax ..............................................
Net unrealized gain on securities available for sale........... 2,220 2,123
Other ......................................................... 1,317 1,102
---------- ----------
Total liabilities ......................................... 16,154 17,767
---------- ----------
Net deferred tax liability ................................ $ (3,263) $ (3,795)
========== ==========
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:
2004 2003
--------- ---------
Commitments
to extend credit $ 540,087 $ 481,771
Standby letters
of credit 22,024 25,242
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
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
NOTE 13
COMMITMENTS AND CONTINGENT LIABILITIES continued
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 banking laws restrict the maximum amount of dividends that a bank may
pay in any calendar year. National 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, 2004, First Merchants, Union National, First National and
Frances Slocum had no retained net profits available for 2005 dividends to the
Corporation without prior regulatory approval. The amount at December 31, 2004,
available for 2005 dividends from Madison, First United, Randolph County,
Decatur, Lafayette and Commerce National to the Corporation totaled $3,937,000,
$238,000, $927,000, $17,000, $2,807,000 and $3,164,000, respectively.
Total stockholders' equity for all subsidiaries at December 31, 2004, was
$393,772,000, of which $370,668,000 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.
On August 15, 2003 and 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 12, 2003 and September 13, 2002, to
holders of record on August 29, 2003 and August 30, 2002, respectively.
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,
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
NOTE 15
REGULATORY CAPITAL continued
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, 2004, 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.
42
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.
2004 2003
- -----------------------------------------------------------------------------------------------------------------------------------
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 ...................... $275,786 11.57% $190,736 8.00% $266,488 11.60% $183,793 8.00%
First Merchants ................... 68,064 11.47 47,474 8.00 67,425 11.08 48,667 8.00
First United ...................... 7,703 11.86 5,196 8.00 21,682 10.71 16,198 8.00
First United ...................... 7,703 11.86 5,196 8.00 6,679 10.95 4,882 8.00
Randolph County ................... 8,847 11.58 6,111 8.00 8,023 11.20 5,731 8.00
Union County ...................... 16,293 12.00 10,858 8.00 15,679 11.37 11,032 8.00
First National .................... 10,198 11.42 7,146 8.00 10,643 12.25 6,951 8.00
Decatur ........................... 11,419 11.62 7,862 8.00 11,273 11.84 7,616 8.00
Frances Slocum .................... 17,491 12.93 10,825 8.00 18,173 15.19 9,571 8.00
Lafayette ......................... 71,962 11.35 50,701 8.00 70,401 11.32 49,765 8.00
Commerce National ................. 36,829 10.70 27,532 8.00 36,698 12.31 23,851 8.00
Tier I Capital (1)(to risk-weighted assets)
Consolidated ...................... $228,234 9.57% $ 95,368 4.00% $215,995 9.40% $ 91,896 4.00%
First Merchants ................... 62,310 10.50 23,737 4.00 59,858 9.84 24,334 4.00
Madison ........................... 23,671 10.54 8,981 4.00 19,473 9.62 8,099 4.00
First United ...................... 7,100 10.93 2,598 4.00 5,985 9.81 2,441 4.00
Randolph County ................... 7,998 10.47 3,055 4.00 7,160 10.00 2,865 4.00
Union County ...................... 14,596 10.75 5,429 4.00 14,067 10.20 5,516 4.00
First National .................... 9,322 10.44 3,573 4.00 9,750 11.22 3,476 4.00
Decatur ........................... 10,635 10.82 3,931 4.00 10,268 10.79 3,808 4.00
Frances Slocum..................... 15,793 11.67 5,412 4.00 16,669 13.93 4,785 4.00
Lafayette ......................... 67,028 10.58 25,350 4.00 64,982 10.45 24,883 4.00
Commerce National ................. 27,648 8.03 13,766 4.00 27,472 9.21 11,926 4.00
Tier I Capital (1) (to average assets)
Consolidated ...................... $228,234 7.50% $121,711 4.00% $215,995 7.38% $117,110 4.00%
First Merchants ................... 62,310 7.78 32,024 4.00 59,858 7.37 32,475 4.00
Madison ........................... 23,671 9.01 10,510 4.00 19,473 8.07 9,658 4.00
First United ...................... 7,100 7.68 3,700 4.00 5,985 6.99 3,426 4.00
Randolph County ................... 7,998 8.42 3,799 4.00 7,160 7.89 3,632 4.00
Union County ...................... 14,596 7.47 7,814 4.00 14,067 7.30 7,709 4.00
First National .................... 9,322 7.99 4,664 4.00 9,750 8.53 4,571 4.00
Decatur ........................... 10,635 7.96 5,342 4.00 10,268 7.61 5,400 4.00
Frances Slocum..................... 15,793 9.58 6,593 4.00 16,669 10.52 6,341 4.00
Lafayette ......................... 67,028 7.94 33,747 4.00 64,982 8.02 32,397 4.00
Commerce National ................. 27,648 7.01 15,785 4.00 27,472 7.78 14,133 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.
43
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, using measurement dates of
September 30, 2004 and 2003.
December 31
2004 2003
===============================================================================
Change in benefit obligation
Benefit obligation at beginning of year ............ $ 45,579 $ 44,718
Service cost ....................................... 1,920 1,564
Interest cost ...................................... 2,789 2,617
Actuarial (gain) loss .............................. 1,917 (1,667)
Benefits paid ...................................... (1,847) (1,653)
-------- --------
Benefit obligation at end of year .................. 50,358 45,579
-------- --------
Change in plan assets
Fair value of plan assets at beginning of year ..... 33,940 31,650
Actual return on plan assets ....................... 3,080 3,876
Benefits paid ...................................... (1,847) (1,653)
Employer contributions ............................. 3,854 67
-------- --------
Fair value of plan assets at end of year ........... 39,027 33,940
-------- --------
Unfunded status .................................... (11,331) (11,639)
Unrecognized net actuarial loss..................... 10,944 9,656
Unrecognized prior service cost .................... 1,697 1,834
Unrecognized transition asset ...................... (27) (178)
-------- --------
Prepaid benefit cost (liability) ................... 1,283 (327)
Additional pension liability ....................... (5,416) (4,924)
-------- --------
Net minimum liability............................... $ (4,133) $ (5,251)
======== ========
Amounts recognized in the balance sheets consist of:
Prepaid benefit cost (liability) ................... $ 1,283 $ (327)
Additional pension liability ....................... (5,416) (4,924)
Intangible asset ................................... 1,697 1,834
Deferred taxes ..................................... 1,487 1,236
Accumulated other comprehensive loss ............... 2,232 1,854
-------- --------
Net amount recognized ................................... $ 1,283 $ (327)
======== ========
In January 2005, the Board of Directors of the Corporation approved the
curtailment of the accumulation of defined benefits for future services provided
by certain participants in the First Merchants Corporation Retirement Pension
Plan (the "Plan"). Employees of the Corporation and certain of its subsidiaries
who are participants in the Plan were notified that, on and after March 1, 2005,
no additional pension benefits will be earned by employees who have not both
attained the age of fifty-five (55) and accrued at least ten (10) years of
"Vesting Service". As a result of this action, the Corporation has decided to
record a $1,630,000 pension curtailment loss to record previously unrecognized
prior service costs in accordance with SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Plans and for Termination
Benefits." This loss will be recognized and recorded by the Corporation in the
first quarter of 2005.
At December 31, 2004 and 2003, the plans' accumulated benefit obligation totaled
$43,161,000 and $39,192,000, respectively. Projected future benefit payments in
years ending December 31 are as follows:
2005 ................................ $ 1,821
2006 ................................ 1,985
2007 ................................ 2,136
2008 ................................ 2,210
2009 ................................ 2,380
2010 to 2014 ......................... 15,042
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
NOTE 16
EMPLOYEE BENEFIT PLANS continued
The Corporation's planned and required contributions to its defined-benefit
pension plans in 2005 total $564,000. The Corporation's contributions paid to
its defined-benefit pension plans in 2004 totaled $3,854,000, of which
$2,108,000 was required and $1,746,000 was discretionary.
At September 30, 2004 the plans' assets were allocated 68 percent to equity
securities, 28 percent to debt securities, and 4 percent to real estate and
other plan assets. The targeted allocation for those categories of plan assets
are 40 to 80 percent, 20 to 60 percent and 1 to 15 percent, respectively.
At September 30, 2003 the plans' assets were allocated 67 percent to equity
securities, 25 percent to debt securities, and 8 percent to real estate and
other plan assets. The targeted allocation for those categories of plan assets
are 40 to 80 percent, 20 to 60 percent, and 0 to 15 percent, respectively.
2004 2003 2002(1)
==============================================================================================
Pension cost includes the following components:
Service cost-benefits earned during the year ............ $ 1,920 $ 1,564 $ 1,770
Interest cost on projected benefit obligation ........... 2,789 2,617 2,202
Actual (return) loss on plan assets ..................... (3,080) (3,876) 2,654
Net amortization and deferral ........................... 614 1,617 (5,674)
------- ------- -------
Total pension cost ................................... $ 2,243 $ 1,922 $ 952
======= ======= =======
(1) Lafayette components are included beginning as of April 1, 2002.
2004 2003 2002
==============================================================================================
Assumptions used in the accounting as of December 31 were:
Discount rate ........................................ 6.00% 6.25% 6.75%
Rate of increase in compensation ..................... 4.00% 4.00% 4.00%
Expected long-term rate of return on assets .......... 8.00% 8.00% 8.14%
The above assumptions used to measure benefit obligations as of the plan's
measurement date were the same assumptions used to determine the net benefit
cost.
At September 30, 2004 and 2003, the Corporation based its estimate of the
expected long-term rate of return on analysis of the historical returns of the
plans and current market information available. The plans' investment strategies
are to provide for preservation of capital with an emphasis on long-term growth
without undue exposure to risk. The assets of the plans' are invested in
accordance with the plans' Investment Policy Statement, subject to strict
compliance with ERISA and any other applicable statutes.
The plans' risk management practices include quarterly evaluations of investment
managers, including reviews of compliance with investment manager guidelines and
restrictions; ability to exceed performance objectives; adherence to the
investment philosophy and style; and ability to exceed the performance of other
investment managers. The evaluations are reviewed by management with appropriate
follow-up and actions taken, as deemed necessary. The Investment Policy
Statement generally allows investments in cash and cash equivalents, real
estate, fixed income debt securities and equity securities, and specifically
prohibits investments in derivatives, options, futures, private placements,
short selling, non-marketable securities and purchases of non-investment grade
bonds.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
NOTE 16
EMPLOYEE BENEFIT PLANS continued
At December 31, 2004, the maturities of the plans' debt securities ranged from
14 days to 6.2 years, with a weighted average maturity of 2.9 years. At December
31, 2003, the maturities of the plans' debt securities ranged from 59 days to
5.6 years, with a weighted average maturity of 2.5 years.
The 1994 Stock Option Plan reserved 546,978 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. No shares remain available for grant under the
1994 Plan.
The 1999 Long-term Equity Incentive Plan was approved by the Corporation's
shareholders at the 1999 annual meeting. The aggregate number of shares that are
available for grants under that Plan in any calendar year is equal to the sum
of: (a) 1 percent of the number of common shares of the Corporation outstanding
as of the last day of the preceding calendar year; plus (b) the number of shares
that were available for grants, but not granted, under the Plan in any previous
year; but in no event will the number of shares available for grants in any
calendar year exceed 1.5 percent of the number of common shares of the
Corporation outstanding as of the last day of the preceding calendar year.
Options, which have a ten year life, become 100 percent vested ranging from six
months to two years and are fully exercisable when vested. The 1999 Long-term
Equity Incentive Plan will expire in 2009.
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,
2004, 2003 and 2002.
Year Ended December 31, 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
===================================================================================================================================
Outstanding, beginning of year ................ 951,509 $ 20.71 842,583 $ 19.89 770,817 $ 17.91
Granted ....................................... 185,170 25.60 190,714 23.46 166,760 26.85
Exercised ..................................... (95,899) 15.48 (69,672) 16.93 (71,538) 12.74
Cancelled ..................................... (21,137) 25.36 (12,116) 22.27 (23,456) 22.18
--------- ------- -------
Outstanding, end of year ...................... 1,019,643 $ 22.00 951,509 $ 20.71 842,583 $ 19.89
========= ======= =======
Options exercisable at year end ............... 693,560 653,040 569,758
Weighted-average fair value of
options granted during the year ............ $ 6.98 $ 5.99 $ 7.47
As of December 31, 2004, 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
===============================================================================================================
$ 12.43 - $19.73 417,854 $17.77 4.1 years 417,484 $17.77
20.46 - 25.60 449,631 24.28 7.8 years 123,963 23.29
26.29 - 26.93 152,158 26.87 7.2 years 152,113 26.87
--------- -------
1,019,643 $22.00 6.2 years 693,560 $20.75
========= =======
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
NOTE 16
EMPLOYEE BENEFIT PLANS continued
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.
The fair value of each option grant was estimated on the grant date using an
option-pricing model with the following assumptions:
2004 2003 2002
----- ----- -----
Risk-free interest rates........ 4.57% 3.55% 4.78%
Dividend yields................. 3.64% 3.65% 3.63%
Volatility factors of expected
market price common stock... 30.89% 31.29% 31.02%
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 enabled eligible employees to purchase the
Corporation's common stock. A total of 289,406 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 was determined by the
Corporation's compensation committee, but was not 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 were made
annually and paid through advance payroll deductions of up to 20 percent of
eligible compensation. Participants under the plan purchased 45,267 shares in
2004 at $19.94 per share. The fair value on the purchase date was $25.60. The
1999 Employee Stock Purchase Plan expired after the July 1, 2004 purchase of
shares.
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 2004, 2003 and 2002, respectively: dividend yield of 3.64, 3.65,
and 3.63 percent; an expected life of one year for all years; expected
volatility of 30.89, 31.29, and 31.02 percent; and risk-free interest rates of
4.57, 3.55 and 4.78 percent. The fair value of those purchase rights granted in
2004, 2003 and 2002 was $6.38, $4.81 and $10.14 respectively.
The First Merchants Corporation 2004 Employee Stock Purchase Plan was approved
by the Corporation's stockholders at their annual meeting on April 22, 2004. The
effective date of the Plan was July 1, 2004. Its purpose is to provide eligible
employees of the Corporation and its subsidiaries an opportunity to purchase
shares of common stock of the Corporation through annual offerings financed by
payroll deductions. A total of 400,000 shares of the Corporation's common stock
are reserved for issuance
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
NOTE 16
EMPLOYEE BENEFIT PLANS continued
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. At December 31, 2004, $904,000 has
been withheld from compensation, plus interest, toward the purchase of shares
after June 30, 2005, the end of the annual offering period.
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 5 to 6 percent of base salary
contributed by participants. The Corporations' expense for the plans was
$660,000 for 2004, $600,000 for 2003, and $315,000 for 2002.
The Corporation maintains supplemental executive retirement and other
nonqualified retirement plans for the benefit of certain directors and officers.
Under the plans, the Corporation agrees to pay retirement benefits that are
actuarially determined based upon plan participants' compensation amounts and
years of service. Accrued benefits payable totaled $ 3,004,000 and $2,511,000 at
December 31, 2004 and 2003. Benefit plan expense was $615,000, $485,000 and
$436,000 for 2004, 2003 and 2002.
The Corporation maintains post-retirement benefit plans that provide health
insurance benefits to retirees. The plans allow retirees to be carried under the
Corporation's health insurance plan, generally from ages 55 to 65. The retirees
pay most of the premiums due for their coverage, with amounts paid by retirees
ranging from 70 to 100 percent of the premiums payable. The accrued benefits
payable under the plans totaled $1,022,000 and $898,000 at December 31, 2004 and
2003. Post-retirement plan expense totaled $202,000, $240,000 and $19,000 for
the years ending December 31, 2004, 2003 and 2002.
NOTE 17
NET INCOME PER SHARE
=================================================================================================================================
Year Ended December 31, 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
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 .......... $29,411 18,540,451 $ 1.59 $27,571 18,233,855 $ 1.51 $27,836 16,364,788 $ 1.70
====== ====== ======
Effect of dilutive stock options.. 126,826 137,575 137,703
------- ---------- ------- ---------- ------- ----------
Diluted net income per share:
Net income available to
common stockholders
and assumed conversions ...... $29,411 18,667,277 $ 1.58 $27,571 18,371,430 $ 1.50 $27,836 16,502,491 $ 1.69
======= ========== ====== ======= ========== ====== ======= ========== ======
Options to purchase 320,661, 233,658 and 162,207 shares of common stock with
weighted average exercise prices of $24.66, $24.01 and $25.94 at December 31,
2004, 2003 and 2002 were excluded from the computation of diluted net income per
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
NOTE 17
NET INCOME PER SHARE continued
share because the options exercise price was greater than the average market
price of the common stock.
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 VALUE OF LIFE INSURANCE The fair value of cash 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.
BORROWINGS The fair value of borrowings is estimated using a discounted cash
flow calculation, based on current rates for similar debt, except for short-term
and adjustable rate borrowing arrangements. At December 31, the fair value for
these instruments approximates carrying value.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
NOTE 18
FAIR VALUES OF FINANCIAL INSTRUMENTS continued
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:
2004 2003
- -----------------------------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
=======================================================================================================================
Assets at December 31:
Cash and cash equivalents .................................. $ 69,960 $ 69,960 $ 109,527 $ 109,527
Interest-bearing time deposits ............................. 9,343 9,343 8,141 8,141
Investment securities available for sale ................... 416,177 416,177 348,860 348,860
Investment securities held to maturity ..................... 5,358 5,520 7,937 8,326
Mortgage loans held for sale ............................... 3,367 3,367 3,043 3,043
Loans ...................................................... 2,405,503 2,415,924 2,328,010 2,383,666
FRB and FHLB stock ......................................... 22,858 22,858 15,502 15,502
Interest receivable ........................................ 17,318 17,318 16,840 16,840
Cash value of life insurance ............................... 42,061 42,061 37,927 37,927
Liabilities at December 31:
Deposits ................................................... 2,408,150 2,404,595 2,362,101 2,378,669
Borrowings:
Federal funds purchased ................................ 32,550 32,550
Securities sold under repurchase agreements ............ 87,472 85,136 71,095 71,139
FHLB advances .......................................... 223,663 234,247 212,779 239,251
Subordinated debentures, revolving credit
lines and term loans ................................. 97,206 105,139 97,782 103,313
Other borrowed funds.................................... 1,514 1,514
Interest payable ........................................... 4,411 4,411 4,680 4,680
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 SHEETS
December 31,
2004 2003
==============================================================================
Assets
Cash .............................................. $ 987 $ 3,235
Investment securities available for sale........... 3,500 3,500
Investment in subsidiaries ........................ 401,721 391,241
Goodwill .......................................... 448 448
Other assets ...................................... 10,039 10,500
-------- --------
Total assets ................................... $416,695 $408,924
======== ========
Liabilities
Borrowings ........................................ $ 97,206 $ 99,550
Other liabilities ................................. 4,886 5,409
-------- --------
Total liabilities .............................. 102,092 104,959
Stockholders' equity ................................. 314,603 303,965
-------- --------
Total liabilities and stockholders' equity ..... $416,695 $408,924
======== ========
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
NOTE 19
CONDENSED FINANCIAL INFORMATION (parent company only) continued
CONDENSED STATEMENTS OF INCOME
December 31,
2004 2003 2002
===============================================================================================================
Income
Dividends from subsidiaries ................................................ $ 28,983 $ 45,445 $ 22,720
Administrative services fees from subsidiaries.............................. 13,767 10,849 6,580
Other income ............................................................... 375 472 535
-------- -------- ---------
Total income ............................................................ 43,125 56,766 29,835
-------- -------- ---------
Expenses
Amortization of core deposit intangibles
and fair value adjustments ................................................ 11 26 28
Interest expense............................................................ 6,785 6,463 3,858
Salaries and employee benefits.............................................. 11,240 9,531 7,641
Net occupancy expenses...................................................... 1,481 1,869 1,527
Equipment expenses.......................................................... 2,918 1,955 1,447
Telephone expenses.......................................................... 1,383 1,571 1,543
Other expenses.............................................................. 3,228 3,730 2,767
-------- -------- ---------
Total expenses .......................................................... 27,046 25,145 18,811
-------- -------- ---------
Income before income tax benefit and equity in
undistributed income of subsidiaries ......................................... 16,079 31,621 11,024
Income tax benefit ...................................................... 4,557 5,577 4,336
-------- -------- ---------
Income before equity in undistributed income of subsidiaries ................. 20,636 37,198 15,360
Equity in undistributed (distributions in excess of)
income of subsidiaries ................................................... 8,775 (9,627) 12,476
-------- -------- ---------
Net Income ................................................................... $ 29,411 $ 27,571 $ 27,836
======== ======== =========
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
================================================================================================================
2004 2003 2002
================================================================================================================
Operating activities:
Net income ........................................................ $ 29,411 $ 27,571 $ 27,836
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization .................................................... 11 26 28
Distributions in excess of (equity in undistributed)
income of subsidiaries ............... ........................ (8,775) (9,627) (12,476)
Net change in:
Other assets ................................................. (535) 2,406 (6,892)
Other liabilities ............................................ 461 (6) 4,430
-------- -------- ---------
Net cash provided by operating activities ................. 20,573 20,370 12,926
-------- -------- ---------
Investing activities - Investment in subsidiaries .................... (2,289) (25,858) (51,135)
-------- -------- ---------
Net cash used by investing activities ..................... (2,289) (25,858) (51,135)
-------- -------- ---------
Financing activities:
Cash dividends .................................................... (17,048) (16,557) (13,995)
Borrowings......................................................... 7,251 47,594 55,832
Repayment of borrowings ........................................... (9,594) (29,550)
Stock issued under employee benefit plans ......................... 903 819 658
Stock issued under dividend reinvestment
and stock purchase plan ......................................... 1,278 1,339 951
Stock options exercised ........................................... 1,404 1,191 494
Stock redeemed .................................................... (4,726) (489) (4,333)
Cash paid in lieu of issuing fractional shares .................... (28) (35)
-------- -------- ---------
Net cash provided (used) by financing activities .......... (20,532) 4,319 39,572
-------- -------- ---------
Net change in cash ................................................... (2,248) (1,169) 1,363
Cash, beginning of year .............................................. 3,235 4,404 3,041
-------- -------- ---------
Cash, end of year .................................................... $ 987 $ 3,235 $ 4,404
======== ======== =========
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
NOTE 20
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth certain quarterly results for the years ended
December 31, 2004 and 2003:
- ----------------------------------------------------------------------------------------------------------------------------------
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
2004:
March ............ $ 38,224 $ 12,592 $ 25,632 $ 1,372 $ 6,935 18,518,282 18,645,571 $ .37 $ .37
June ............. 38,099 12,252 25,847 1,720 7,355 18,511,190 18,633,301 .40 .40
September......... 39,801 13,009 26,792 1,380 7,653 18,548,041 18,658,459 .41 .41
December.......... 40,850 13,732 27,118 1,233 7,468 18,583,492 18,720,802 .41 .40
---------- -------- ------------ ------------- -------- ------ ------
$ 156,974 $ 51,585 $ 105,389 $ 5,705 $ 29,411 18,540,451 18,667,277 $ 1.59 $ 1.58
========== ======== ============ ============= ======== ====== ======
2003:
March ............ $ 38,981 $ 12,971 $ 26,010 $ 4,601 $ 5,658 17,565,405 17,675,633 $ .32 $ .32
June ............. 39,554 13,599 25,955 2,123 8,745 18,392,925 18,519,155 .48 .48
September......... 38,959 13,085 25,874 1,706 7,349 18,466,678 18,622,306 .40 .39
December.......... 38,036 12,733 25,303 1,047 5,819 18,497,612 18,666,079 .31 .31
---------- -------- ------------ ------------- -------- ------ ------
$ 155,530 $ 52,388 $ 103,142 $ 9,477 $ 27,571 18,233,855 18,371,400 $ 1.51 $ 1.50
========== ======== ============ ============= ======== ====== ======
NOTE 21
ACCOUNTING MATTERS
On December 12, 2003, the American Institute of Certified Public Accountants
issued Statement of Position No. 03-3, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer (SOP 03-3). SOP 03-3 requires acquired loans
with poor credit quality to be recorded at fair value and prohibits carrying
over or creation of valuation allowances in the initial accounting for the
loans. SOP 03-3 also limits the yield that may be accreted to income. SOP 03-3
applies to the purchase of an individual loan, a pool of loans, a group of
loans, and loans acquired in a business combination. SOP 03-3 is effective for
loans acquired in fiscal years beginning after December 31, 2004. SOP 03-3 is
not expected to have a material impact on the Corporation's results of
operations or financial condition.
In March 2004, the Emerging Issues Task Force (EITF) finalized and issued EITF
03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments (EITF 03-1). EITF 03-1 provides recognition and measurement
guidance regarding when impairments of equity and debt securities are considered
other-than-temporary, requiring a charge to earnings, and also requires
additional annual disclosures for investments in unrealized loss positions. The
additional annual disclosure requirements were previously issued by the EITF in
November 2003 and were effective for the Corporation for the year ended December
31, 2003. In September 2004, the Financial Accounting Standards Board (FASB)
issued FASB Staff Position (FSP) EITF 03-1-1, which delays the recognition and
measurement provisions of EITF 03-1, pending the issuance of further
implementation guidance. We are currently evaluating the effect of the
recognition and measurement provisions of EITF 03-1. While our analysis is
pending the FASB's revisions to EITF 03-1, we currently believe the adoption of
EITF 03-1 will not result in a material impact on the Corporation's results of
operations or financial condition.
In December, 2004, FASB issued an amendment to SFAS 123 (SFAS 123R), which
eliminates the ability to account for share-based compensation transactions
using Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees,
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(table dollar amounts in thousands, except share data)
ACCOUNTING MATTERS continued
and generally requires that such transactions be accounted for using a fair
value-based method. SFAS 123R will be effective for the Corporation beginning
July 1, 2005. SFAS123R applies to all awards granted after the required
effective date and to awards modified, repurchased, or cancelled after that
date. The cumulative effect of initially applying this Statement, if any, is
recognized as of the required effective date.
As of the required effective date, the Corporation may elect to apply SFAS 123R
using a modified version of prospective application. Under that transition
method, compensation cost is recognized on or after the required effective date
for the portion of outstanding awards for which the requisite service has not
yet been rendered, based on the grant-date fair value of those awards calculated
under SFAS 123 for either recognition or pro forma disclosures. For periods
before the required effective date, the Corporation may elect to apply a
modified version of retrospective application under which financial statements
for prior periods are adjusted on a basis consistent with the pro forma
disclosures required for those periods by SFAS 123.
The Corporation will first report compensation cost under SFAS 123R in the third
quarter of 2005. For liability-classified awards, the Corporation will initially
measure the cost of employee services received in exchange for an award based on
its current fair value; the fair value will be remeasured subsequently at each
reporting date through the settlement date, and changes in fair value will be
recognized as compensation cost. For equity-classified awards, the grant date
fair value will be recognized in earnings over the requisite service period. We
are currently evaluating the effect of the recognition and measurement
provisions of SFAS 123R, but we currently believe the adoption of SFAS 123R will
not result in a material impact on the Corporation's results of operations or
financial condition.
53
ANNUAL MEETING, STOCK PRICE AND DIVIDEND INFORMATION
The 2005 Annual Meeting of Stockholders
of First Merchants Corporation
will be held...
Thursday, April 14, 2005 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)
=================================================================================================
2004 2003 2004 2003 2004 2003
------------------- ----------------- ----------------------
First Quarter ............. $ 26.33 $ 23.15 $ 23.50 $ 21.29 $ .23 $ .22
Second Quarter ............. 25.88 24.56 22.20 21.72 .23 .22
Third Quarter .............. 25.77 27.25 22.96 23.47 .23 .23
Fourth Quarter ............. 29.19 27.22 24.15 25.00 .23 .23
(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 2004 and
2003. Prices are as reported by the National Association of Securities Dealers.
Automated Quotation - National Market System.
Numbers rounded to nearest cent when applicable.
54
COMMON STOCK LISTING
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, 2005, the number of shares outstanding was 18,578,882. There were 2,975
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
800-262-4261 Ext. 7278
Stock Transfer Agent and Registrar
American Stock Transfer & Trust Company
59 Maiden Lane, 1st Floor
New York, NY 10038
55
FORM 10-K, FINANCIAL INFORMATION AND CODE OF ETHICS
FORM 10-K, FINANCIAL INFORMATION AND CODE OF ETHICS
The 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
The Corporation has adopted a Code of Ethics that applies to its Chief Executive
Officer, Chief Operating Officer, Chief Financial Officer, Controller and
Treasurer. It is part of the Corporation's Code of Business Conduct, which
applies to all employees and directors of the Corporation and its affiliates. A
copy of the Code of Ethics may be obtained, free of charge, by writing to the
General Counsel of First Merchants Corporation at 200 East Jackson Street,
Muncie, IN 47305. In addition, the Code of Ethics is maintained on the
Corporation's web site, which can be accessed at http://www.firstmerchants.com.
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
56
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, National Association............U.S.
First United Bank, National Association.....................U.S.
United Communities National Bank............................U.S.
The First National Bank of Portland.........................U.S.
Decatur Bank & Trust Company, National Association..........U.S.
Frances Slocum Bank & Trust Company, National Association...U.S.
Lafayette Bank and Trust Company, National Association......U.S.
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
FMB Portfolio Management, Inc...........................Delaware
UCNB Portfolio Management, Inc..........................Delaware
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 REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in this Annual Report on
Form 10-K of First Merchants Corporation (the "Corporation") and the
Registration Statements on Form S-8, File Numbers 333-116074, 333-111374,
333-50484, 333-80119 and 333-80117 of our reports dated January 28, 2005, with
respect to the consolidated financial statements of the Corporation, the
Corporation's management's assessment of the effectiveness of internal control
over financial reporting, and the effectiveness of internal control over
financial reporting of the Corporation, all as included in this Annual Report on
Form 10-K of the Corporation.
BKD, LLP
Indianapolis, Indiana
March 16, 2005
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 8, 2005
/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/ Richard A. Boehning
------------------------------------
Richard A. Boehning Director
------------------------------------
Frank A. Bracken Director
------------------------------------
Blaine M. Brownell Director
/s/ Thomas B. Clark
------------------------------------
Thomas B. Clark Director
/s/ Michael L. Cox
------------------------------------
Michael L. Cox Director
/s/ Roderick English
------------------------------------
Roderick English Director
/s/ Dr. Jo Ann Gora
------------------------------------
Dr. Jo Ann Gora Director
/s/ Barry J. Hudson
------------------------------------
Barry J. Hudson Director
------------------------------------
Robert T. Jeffares Director
/s/ Norman M. Johnson
------------------------------------
Norman M. Johnson Director
/s/ Thomas D. McAuliffe
------------------------------------
Thomas D. McAuliffe Director
/s/ Charles E. Schalliol
------------------------------------
Charles E. Schalliol Director
------------------------------------
Robert M. Smitson Director
/s/ Jean L. Wojtowicz
------------------------------------
Jean L. Wojtowicz Director
EXHIBIT-31.1
FIRST MERCHANTS CORPORATION
FORM 10-K
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
- -------------
I, Michael L. Cox, President and Chief Executive Officer of First Merchants
Corporation, certify that:
1. I have reviewed this Annual Report on Form 10-K of First Merchants
Corporation;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in the Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report, based on such evaluation;
and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board or directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 16, 2005 /s/Michael L. Cox
----------------------------------------
Michael L. Cox
President and Chief Executive Officer
EXHIBIT-31.2
FIRST MERCHANTS CORPORATION
FORM 10-K
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
- -------------
I, Mark K. Hardwick, Senior Vice President and Chief Financial Officer of First
Merchants Corporation, certify that:
1. I have reviewed this Annual Report on Form 10-K of First Merchants
Corporation;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in the Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report, based on such evaluation;
and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board or directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 16, 2005 /s/Mark K. Hardwick
----------------------------------------
Mark K. Hardwick
Senior Vice President and
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
EXHIBIT-32
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of First Merchants Corporation (the
"Corporation") on Form 10-K for the period ending December 31, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"), I
Michael L. Cox, President and 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 March 16, 2005 by /s/ Michael L. Cox
--------------------------- -------------------------------------
Michael L. Cox
President and Chief Executive Officer
A signed copy of this written statement required by Section 906 has been
provided to First Merchants Corporation and will be retained by First Merchants
Corporation and furnished to the Securities and Exchange Commission or its staff
upon request.
In connection with the annual report of First Merchants Corporation (the
"Corporation") on Form 10-K for the period ending December 31, 2004 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 March 16, 2005 by /s/ Mark K. Hardwick
--------------------------- -------------------------------------
Mark K. Hardwick
Senior Vice President and
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
A signed copy of this written statement required by Section 906 has been
provided to First Merchants Corporation and will be retained by First Merchants
Corporation and furnished to the Securities and Exchange Commission or its staff
upon request.
EXHIBIT-99.1
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S REPORT
FOR FIRST MERCHANTS CORPORATION EMPLOYEE STOCK PURCHASE PLAN
EXHIBIT 99.1--FINANCIAL STATEMENTS AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM'S REPORT FOR FIRST MERCHANTS CORPORATION EMPLOYEE STOCK
PURCHASE PLAN
- --------------------------------------------------------------------------------
The annual financial statements and independent registered public accounting
firm's report thereon for First Merchants Corporation Employee Stock Purchase
Plan for the year ending December 31, 2004, will be filed as an amendment to the
2004 Annual Report on Form 10-K.