SEC Filing | First Merchants Corporation

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ---------- DATE OF REPORT: April 1, 2002 ---------- FIRST MERCHANTS CORPORATION (Exact name of registrant as specified in its charter) ---------- INDIANA 0-17071 35-1544218 (State or other jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification No.) 200 East Jackson Street P.O. Box 792 Muncie, Indiana 47305-2814 (Address of principal executive offices, including zip code) (317) 747-1500 (Registrant's telephone number, including area code) Page 1 of 4 Pages Exhibit Index on Page 5

Item 1. Not Applicable. - ------ Item 2. Acquisition or Disposition of Assets. - ------ ------------------------------------ On April 1, 2002, First Merchants Corporation acquired all of the assets of Lafayette Bancorporation through the merger of Lafayette Bancorporation with and into First Merchants Corporation (the "Merger"). Lafayette Bancorporation's principal asset was the shares of common stock of its wholly-owned subsidiary, Lafayette Bank and Trust Company (the "Bank"). The Bank is an Indiana state chartered bank providing various commercial and consumer banking services to its customers located primarily in the Indiana counties of Tippecanoe, Jasper, White and Carroll, through 20 offices. At December 31, 2001, Lafayette Bancorporation had total assets of approximately $762 million and deposits of approximately $618 million. First Merchants Corporation will account for the Merger under the purchase method of accounting. As part of the Merger, shareholders of Lafayette Bancorporation shall receive approximately 2,773,059 shares of First Merchants Corporation common stock and approximately $50,866,560 in cash in exchange for their shares of Lafayette Bancorporation common stock. The form and amount of such consideration was arrived at through arms length negotiations between First Merchants Corporation and Lafayette Bancorporation. First Merchants Corporation intends to finance the cash consideration payable in the Merger through the sale of cumulative trust preferred securities by its wholly-owned subsidiary, First Merchants Capital Trust I. First Merchants Capital Trust I will invest all of the proceeds from the sale of the cumulative trust preferred securities in junior subordinated debentures to be issued by First Merchants Corporation. In connection with the Merger, shareholders of Lafayette Bancorporation were offered the opportunity to elect to receive either 1.11 shares of First Merchants Corporation common stock or $30 in cash in exchange for each share of Lafayette Bancorporation common stock owned by them. Pursuant to the terms of the Merger, under certain circumstances, the 1.11 exchange ratio was subject to adjustment and the cash elections made by Lafayette Bancorporation shareholders were subject to being converted into elections to receive stock. However, all elections by Lafayette Bancorporation shareholders to receive cash in exchange for their shares will be honored and the 1.11 exchange ratio will not be adjusted. Cash will be paid by First Merchants Corporation in lieu of issuing fractional shares resulting from the 1.11 exchange ratio. For further information regarding the terms of the Merger, see the Agreement of Reorganization and Merger between First Merchants Corporation and Lafayette Bancorporation dated October 14, 2001, which is incorporated into this Form 8-K by reference and filed as an exhibit hereto. A copy of the press release announcing consummation of the Merger is filed as an exhibit to this Form 8-K. 2

Items 3-6. Not Applicable. - --------- Item 7. Financial Statements and Exhibits. - ------ --------------------------------- (a) Financial Statements of Business Acquired. (i) Report of Independent Auditors. (ii) Consolidated Balance Sheets as of December 31, 2001 and 2000. (iii) Consolidated Statements of Income for the Years Ended December 31, 2001, 2000 and 1999. (iv) Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2001, 2000 and 1999. (v) Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999. (vi) Notes to Consolidated Financial Statements. (b) Pro Forma Financial Information. (i) Unaudited Pro Forma Combined Consolidated Financial Information Including Balance Sheet as of December 31, 2001, Statement of Income for the Year Ended December 31, 2001 and the notes thereto. (c) Exhibits. (2.1) Agreement of Reorganization and Merger by and between First Merchants Corporation and Lafayette Bancorporation dated October 14, 2001 (the "Merger Agreement"). (Incorporated by reference to Exhibit 2 to First Merchants Corporation's Current Report on Form 8-K filed October 15, 2001.) (2.2) Undertaking by First Merchants Corporation to furnish supplementally the Disclosure Letters referenced in the Merger Agreement. (23) Consent of Crowe, Chizek and Company LLP (99) Press release dated April 1, 2002 Items 8 and 9. Not Applicable. - -------------

SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. DATE: April 1, 2002. FIRST MERCHANTS CORPORATION By: /s/ Larry R. Helms ----------------------------- Larry R. Helms, Senior Vice President and General Counsel

INDEX OF FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements of Business Acquired. (i) Report of Independent Auditors. (ii) Consolidated Balance Sheets as of December 31, 2001 and 2000. (iii) Consolidated Statements of Income for the Years Ended December 31, 2001, 2000 and 1999. (iv) Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2001, 2000 and 1999. (v) Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999. (vi) Notes to Consolidated Financial Statements. (b) Pro Forma Financial Information. (i) Unaudited Pro Forma Combined Consolidated Financial Information Including Balance Sheet as of December 31, 2001, Statement of Income for the Year Ended December 31, 2001 and the notes thereto. (c) Exhibits. (2.1) Agreement of Reorganization and Merger by and between First Merchants Corporation and Lafayette Bancorporation dated October 14, 2001 (the "Merger Agreement"). (Incorporated by reference to Exhibit 2 to First Merchants Corporation's Current Report on Form 8-K filed October 15, 2001.) (2.2) Undertaking by First Merchants Corporation to furnish supplementally the Disclosure Letters referenced in the Merger Agreement. (23) Consent of Crowe, Chizek and Company LLP (99) Press release dated April 1, 2002

REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Lafayette Bancorporation Lafayette, Indiana We have audited the accompanying consolidated balance sheets of Lafayette Bancorporation as of December 31, 2001 and 2000 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lafayette Bancorporation as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Crowe, Chizek and Company LLP Indianapolis, Indiana January 24, 2002

LAFAYETTE BANCORPORATION CONSOLIDATED BALANCE SHEETS December 31, 2001 and 2000 (Dollar amounts in thousands) - ------------------------------------------------------------------------------------------------- 2001 2000 ---- ---- ASSETS Cash and due from banks $ 32,028 $ 26,452 Interest-bearing deposits in other financial institutions 10,237 21,820 Federal funds sold 9,200 25,200 --------- --------- Total cash and cash equivalents 51,465 73,472 Securities available-for-sale 94,164 78,857 Securities held-to-maturity (fair value $4,047 and $4,580) 3,918 4,484 Loans held for sale 17,262 5,949 Loans 555,864 537,725 Less: Allowance for loan losses (5,413) (5,071) --------- --------- Net loans 550,451 532,654 FHLB stock, at cost 2,344 2,200 Premises, furniture and equipment, net 11,007 11,353 Intangible assets 12,291 13,007 Accrued interest receivable and other assets 19,416 19,171 --------- --------- Total assets $ 762,318 $ 741,147 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Noninterest-bearing deposits $ 80,012 $ 70,866 Interest-bearing demand and savings deposits 268,698 230,984 Interest-bearing time deposits 269,862 276,447 --------- --------- Total deposits 618,572 578,297 Short-term borrowings 32,073 55,572 FHLB advances 34,982 35,737 Note payable 10,150 11,550 Accrued interest payable and other liabilities 7,421 7,190 --------- --------- Total liabilities 703,198 688,346 Shareholders' equity Common stock, no par value: 20,000,000 shares authorized; 3,961,589 and 3,953,616 shares issued and outstanding 3,962 3,954 Additional paid-in capital 38,119 38,024 Retained earnings 16,639 11,086 Accumulated other comprehensive income (loss) 400 (263) --------- --------- Total shareholders' equity 59,120 52,801 --------- --------- Total liabilities and shareholders' equity $ 762,318 $ 741,147 ========= ========= - ------------------------------------------------------------------------------------------------- See accompanying notes. 2.

LAFAYETTE BANCORPORATION CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) - -------------------------------------------------------------------------------------------------------- 2001 2000 1999 ---- ---- ---- Interest income Loans, including related fees $ 46,853 $ 46,620 $ 38,520 Taxable securities 3,299 3,318 3,831 Tax exempt securities 1,731 1,664 1,529 Other 1,781 784 510 ------------ ------------ ------------ Total interest income 53,664 52,386 44,390 Interest expense Deposits 22,650 23,016 18,024 Short-term borrowings 1,506 1,773 1,358 Other borrowings 2,747 2,616 2,161 ------------ ------------ ------------ Total interest expense 26,903 27,405 21,543 ------------ ------------ ------------ Net interest income 26,761 24,981 22,847 Provision for loan losses 1,225 1,200 1,060 ------------ ------------ ------------ Net interest income after provision for loan losses 25,536 23,781 21,787 Noninterest income Fiduciary activities 1,264 1,187 1,134 Service charges on deposit accounts 2,352 1,880 1,581 Net realized gain/(loss) on securities - (12) (144) Net gain on loan sales 1,858 659 942 Other service charges and fees 1,080 1,042 923 Investment product commissions 398 758 318 Other 502 311 371 ------------ ------------ ------------ Total noninterest income 7,454 5,825 5,125 Noninterest expense Salaries and employee benefits 12,908 10,681 9,836 Occupancy, net 1,293 1,247 1,073 Equipment 1,914 1,731 1,314 Intangible amortization 716 740 597 Other 5,343 4,777 4,714 ------------ ------------ ------------ Total noninterest expenses 22,174 19,176 17,534 ------------ ------------ ------------ Income before income taxes 10,816 10,430 9,378 Income taxes 3,401 3,514 3,027 ------------ ------------ ------------ Net income $ 7,415 $ 6,916 $ 6,351 ============ ============= ============ Basic earnings per share $ 1.87 $ 1.75 $ 1.61 ============ ============= ============ Diluted earnings per share $ 1.84 $ 1.74 $ 1.57 ============ ============= ============ - -------------------------------------------------------------------------------------------------------- See accompanying notes. 3.

LAFAYETTE BANCORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 2001, 2000, and 1999 (Dollar amounts in thousands, except per share data) - ------------------------------------------------------------------------------------------------------------------ Accumulated Additional Other Total Common Paid-in Retained Comprehensive Treasury Shareholders' Stock Capital Earnings Income (Loss) Stock Equity ----- ------- -------- ------------- ----- ------ Balance, January 1, 1999 $ 2,394 $ 32,620 $ 7,747 $ (42) $ (105) $ 42,614 Comprehensive income Net income 6,351 6,351 Change in net unrealized gain/ (loss) on securities available-for-sale (1,914) (1,914) -------- Total comprehensive income 4,437 Issue 11,884 shares under stock option plan 12 266 278 3-2 stock split, 1,200,738 shares 1,201 (1,201) -- Cash dividends ($.39 per share) (1,540) (1,540) Purchase 105 treasury shares (4) (4) Retire 20,517 treasury shares (21) (88) 109 -- -------- -------- -------- -------- -------- -------- Balance, December 31, 1999 3,586 32,886 11,269 (1,956) -- 45,785 Comprehensive income Net income 6,916 6,916 Change in net unrealized gain/ (loss) on securities available-for-sale 1,693 1,693 -------- Total comprehensive income 8,609 Issue 8,448 shares under stock option plan 9 108 117 10% Stock dividend 359,043 shares 359 5,030 (5,393) (4) Cash dividends ($.43 per share) (1,706) (1,706) -------- -------- -------- -------- -------- -------- Balance, December 31, 2000 3,954 38,024 11,086 (263) -- 52,801 Comprehensive income Net income 7,415 7,415 Change in net unrealized gain/ (loss) on securities available-for-sale 663 663 -------- Total comprehensive income 8,078 Issue 7,973 shares under stock option plan 8 95 103 Cash dividends ($.47 per share) (1,862) (1,862) -------- -------- -------- -------- -------- -------- Balance, December 31, 2001 $ 3,962 $ 38,119 $ 16,639 $ 400 $ -- $ 59,120 ======== ======== ======== ======== ======== ======== - ------------------------------------------------------------------------------------------------------------------ See accompanying notes. 4.

LAFAYETTE BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2001, 2000, and 1999 (Dollar amounts in thousands) - ----------------------------------------------------------------------------------------------- 2001 2000 1999 ---- ---- ---- Cash flows from operating activities Net income $ 7,415 $ 6,916 $ 6,351 Adjustments to reconcile net income to net cash from operating activities Depreciation 1,475 1,339 948 Net amortization 773 722 726 Provision for loan losses 1,225 1,200 1,060 Net realized (gain)/loss on securities -- 12 144 Net realized (gain) loss on sale of other real estate 9 (5) -- Change in assets and liabilities Loans originated for sale (138,582) (56,201) (67,547) Loans sold 127,269 53,426 74,459 Accrued interest receivable and other assets (750) (4,410) (1,947) Accrued interest payable and other liabilities 231 323 1,314 --------- -------- --------- Net cash from operating activities (935) 3,322 15,508 Cash flows from investing activities Change in interest-bearing balances with other financial institutions -- -- 671 Purchase of securities available-for-sale (84,767) (86,815) (172,049) Proceeds from sales of securities available-for-sale 56,077 82,375 56,027 Proceeds from maturities of securities available-for-sale 14,432 8,119 109,826 Purchase of securities held-to-maturity -- -- (2,000) Proceeds from maturities of securities held-to-maturity 564 229 2,160 Loans made to customers, net of payments collected (19,297) (49,452) (78,085) Purchase of Federal Home Loan Bank stock (144) (303) (358) Property and equipment expenditures (1,129) (2,109) (3,578) Proceeds from sales of other real estate 330 470 -- --------- -------- --------- Net cash from investing activities (33,934) (47,486) (87,386) - ---------------------------------------------------------------------------------------------- (continued) 5.

LAFAYETTE BANCORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years ended December 31, 2001, 2000, and 1999 (Dollar amounts in thousands) 2001 2000 1999 ---- ---- ---- Cash flows from financing activities Net change in deposit accounts $ 40,275 $ 56,050 $ 9,686 Cash received in branch acquisition for liabilities assumed, net of assets acquired -- -- 45,266 Net change in short-term borrowings (23,499) 28,299 10,871 Proceeds from other borrowings -- 22,000 30,000 Payments on other borrowings (2,155) (17,690) (10,877) Common stock issued 103 117 278 Dividends paid (1,862) (1,706) (1,540) Purchase of fractional shares from stock dividend -- (4) -- Purchase of treasury stock -- -- (4) -------- -------- -------- Net cash from financing activities 12,862 87,066 83,680 -------- -------- -------- Net change in cash and cash equivalents (22,007) 42,902 11,802 Cash and cash equivalents at beginning of year 73,472 30,570 18,768 -------- -------- -------- Cash and cash equivalents at end of year $ 51,465 $ 73,472 $ 30,570 ======== ======== ======== Supplemental disclosures of cash flow information Cash paid during the period for Interest $ 27,495 $ 26,882 $ 20,765 Income taxes 4,054 3,405 3,168 Non-cash investing and financing activities Loans transferred to other real estate $ 298 $ 50 $ 465 See also Note 18 regarding 1999 branch acquisition - ------------------------------------------------------------------------------------------- See accompanying notes. 6.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations and Principles of Consolidation: The consolidated financial statements include the accounts of Lafayette Bancorporation (Corporation) and its wholly owned subsidiary, Lafayette Bank and Trust Company (Bank), after elimination of significant intercompany transactions and accounts. The Corporation provides financial services to its customers, primarily commercial and retail banking and trust services, with operations conducted through its main office and 17 branches located in Tippecanoe, White, Jasper, and Carroll Counties in Indiana. The majority of the Corporation's revenue is derived from commercial and retail business lending activities and investments. Although the overall loan portfolio is diversified, the economy of Tippecanoe County is heavily dependent on Purdue University, one of the area's largest employers, and the economy of White and Jasper County is heavily dependent on the agricultural industry. The majority of the Bank's loans are secured by specific items of collateral including business assets, real property and consumer assets. Use of Estimates: Management must make estimates and assumptions in preparing financial statements that affect the amounts reported and disclosed. These estimates and assumptions may change in the future and future results could differ from these estimates. Estimates that are more susceptible to change in the near term include the allowance for loan losses, the fair value of securities and other financial instruments, and the determination and carrying value of impaired loans. Securities: Securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available-for-sale when they might be sold before maturity. Securities available-for-sale are reported at fair value, with unrealized gains or losses included in other comprehensive income. Realized gains or losses are determined based on the amortized cost of the specific security sold. Interest and dividend income, adjusted by amortization of purchase premium or discount, is included in earnings. Loans Held for Sale: The Bank sells certain fixed-rate first mortgage loans in the secondary market on a servicing-released basis. Mortgage loans held for sale are carried at the lower of cost or estimated market value determined on an aggregate basis. - -------------------------------------------------------------------------------- (continued) 7.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loans: Interest on real estate, commercial and most installment loans is accrued over the term of the loans based on the principal outstanding. The recognition of interest income is discontinued when, in management's judgment, the interest will not be collectible in the normal course of business. Loans are evaluated for non-accrual when the loan is impaired or payments are past due over 90 days. Interest received is recognized on the cash basis or cost recovery method until qualifying for return to accrual status. Accrual is resumed when all contractually due payments are brought current and future payments are reasonably assured. The Bank defers loan fees, net of certain direct loan origination costs. The net amount deferred is reported in the balance sheet as part of loans and is recognized into interest income over the term of the loan using a method which approximates a level-yield. Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and loan recoveries and decreased by loan charge-offs. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Loan impairment is recognized if a loan's full principal or interest payments are not expected to be received. Loans considered to be impaired are reduced to the present value of expected future cash flows using the loans' existing rate or to the fair value of collateral if repayment is expected solely from the collateral, by allocating a portion of the allowance for loan losses to such loans. Smaller-balance homogeneous loans are evaluated for impairment in total. Such loans include residential real estate loans secured by one to four family residences and installment loans to individuals for household, family and other personal expenditures. Commercial and agricultural loans are evaluated individually for impairment. Premises, Furniture and Equipment: Premises, furniture and equipment are stated at cost less accumulated depreciation. Depreciation expense is recognized over the estimated useful lives of the assets, principally on the straight-line method. Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value when acquired, establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Holding costs after acquisition are expensed. Long-term Assets: These assets are reviewed for impairment when events indicate their carrying amounts may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at discounted amounts. - -------------------------------------------------------------------------------- (continued) 8.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Repurchase Agreements: Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance. The Bank retains possession of and control over pledged securities. Intangibles: Intangibles include goodwill and core deposit intangibles. Goodwill is amortized on the straight-line method over 15 to 25 years, and core deposit is amortized on an accelerated method over 10 years. Intangibles are assessed for impairment based on estimated undiscounted cash flows, and written down if necessary. Stock Compensation: Expense for employee compensation under stock option plans is based on Opinion 25, with expense reported only if options are granted below market price at grant date. Pro forma disclosures of net income and earnings per share are provided as if the fair value method of Financial Accounting Standard No. 123 were used for stock-based compensation. Income Taxes: Deferred tax liabilities and assets are determined at each balance sheet date. They are measured by applying enacted tax laws to future taxable income or expense resulting from differences in the financial statement and tax basis of assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Earnings Per Share: Basic earnings per share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per share are restated for all stock splits and dividends through the date of issue of the financial statements. Statement of Cash Flows: Cash and cash equivalents are defined to include cash on hand, amounts due from banks, and federal funds sold. The Corporation reports net cash flows for customer loan transactions, deposit transactions, and short-term borrowings. Financial Instruments: Financial instruments include credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. - -------------------------------------------------------------------------------- (continued) 9.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Fair Values of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed separately. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are now such matters that will have a material effect on the financial statements. Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, which are also recognized as a separate component of equity. Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the holding company or by the holding company to shareholders. Industry Segments: Internal financial information is primarily reported and aggregated in three lines of business, banking, mortgage banking and trust services. New Accounting Pronouncements: Beginning January 1, 2001, a new accounting standard requires all derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values will be recorded in the income statement. Fair value changes involving hedges will generally be recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. Adoption of this standard on January 1, 2001 did not have a material effect on the financial statements. - -------------------------------------------------------------------------------- (continued) 10.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) A new accounting standard requires all business combinations to be recorded using the purchase method of accounting for any transaction initiated after June 30, 2001. Under the purchase method, all identifiable tangible and intangible assets and liabilities of the acquired company must be recorded at fair value at date of acquisition, and the excess cost over fair value of net assets acquired is recorded as goodwill. Identifiable intangible assets must be separated from goodwill. Identifiable intangible assets with finite useful lives will continue to amortize under the new standard, whereas goodwill will cease being amortized starting in 2002. Annual impairment testing will be required for goodwill with impairment being recorded if the carrying amount of goodwill exceeds its implied fair value. Amounts previously recorded as goodwill from depository institution branch acquisitions are not presently considered to be goodwill under the new standard and these amounts will continue to be amortized. Management is currently evaluating the impact of this new standard, but management expects to continue amortizing all of the Corporation's intangible assets. Reclassifications: Some items in the prior financial statements were reclassified to conform to the current presentation. NOTE 2 - SECURITIES The fair value of securities available for sale and the related gains and losses recognized in accumulated other comprehensive income (loss) were as follows: Gross Gross Fair Unrealized Unrealized Value Gains Losses ----- ----- ------ Securities Available-for-Sale 2001 U.S. Government and its agencies $ 2,023 $ 23 $ -- Obligations of states and political subdivisions 36,315 433 (350) Corporate obligations 10,426 331 (5) Mortgage-backed and other asset-backed securities 42,856 391 (152) Other securities 2,544 -- (9) ------------ ------------ ------------- $ 94,164 $ 1,178 $ (516) ============ ============ ============ - -------------------------------------------------------------------------------- (continued) 11.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 2 - SECURITIES (Continued) Gross Gross Fair Unrealized Unrealized Value Gains Losses ----- ----- ------ 2000 U.S. Government and its agencies $ 4,193 $ 10 $ (18) Obligations of states and political subdivisions 31,012 418 (286) Corporate obligations 4,001 48 -- Mortgage-backed and other asset-backed securities 37,105 58 (652) Other securities 2,546 515 (529) ------------ ------------ ------------ $ 78,857 $ 1,049 $ (1,485) ============ ============ ============ The carrying amount, unrecognized gains and losses and fair value of securities held to maturity were as follows: Gross Gross Carrying Unrecognized Unrecognized Fair Amount Gains Losses Value ------ ----- ------ ----- Securities Held to Maturity - --------------------------- 2001 Obligations of states and political subdivisions $ 3,918 $ 129 $ -- $ 4,047 ============ ============ ============ ============ 2000 Obligations of states and political subdivisions $ 4,484 $ 98 $ (2) $ 4,580 ============ ============ ============ ============ Gross gains of $0, $2, and $35 and gross losses of $0, $14, and $179 were realized on sales of securities available-for-sale in 2001, 2000, and 1999. - -------------------------------------------------------------------------------- (continued) 12.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 2 - SECURITIES (Continued) The fair value of securities and carrying amount, if different, at December 31, 2001 by contractual maturity are shown below. Securities not due at a single maturity date are shown separately. Available Held-to-Maturity For Sale Carrying Fair Fair Amount Value Value ------ ----- ----- Due in 1 year or less $ -- $ -- $ 1,074 Due after 1 year through 5 years 1,924 2,015 17,670 Due after five years through 10 years 927 964 7,431 Due after 10 years 1,067 1,068 25,133 ------------ ------------ ------------ Subtotal 3,918 4,047 51,308 Mortgage-backed and other asset- backed securities -- -- 42,856 ------------ ------------ ------------ Total $ 3,918 $ 4,047 $ 94,164 ============ ============ ============ Securities with a carrying value of $34,702 and $57,405 at December 31, 2001 and 2000 were pledged to secure public deposits and repurchase agreements. See Note 8 regarding additional securities pledges. At December 31, 2001 and 2000, mortgage-backed securities include collateralized mortgage obligations (CMO's) and real estate mortgage investment conduits (REMIC's) with an amortized cost of $27,997 and $17,295 and fair value of $28,123 and $16,753, all of which are issued by U.S. Government agencies. At December 31, 2001 and 2000, approximately $7,538 and $8,481 are variable rate, with the remainder fixed rate. - -------------------------------------------------------------------------------- (continued) 13.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 3 - LOANS Loans are comprised of the following as of December 31: 2001 2000 ---- ---- Commercial and agricultural loans $232,997 $215,087 Real estate construction 62,305 54,768 Residential real estate loans 211,014 212,190 Installment loans to individuals 44,559 50,696 Commercial paper 4,989 4,984 -------- -------- Total $555,864 $537,725 ======== ======== Non-performing loans consist of the following at December 31: 2001 2000 ---- ---- Loans past due 90 days or more $ 768 $1,052 Non-accrual loans 3,440 2,718 Restructured loans 25 55 ------ ------ Total $4,233 $3,825 ====== ====== Information regarding impaired loans is as follows: 2001 2000 ---- ---- Year-end impaired loans With no allowance for loan losses allocated $ 693 $ 25 With allowance for loan losses allocated 7,535 5,151 Amount of the allowance allocated 2,077 1,658 2001 2000 1999 ---- ---- ---- Average balance of impaired loans $5,608 $2,885 $697 Interest income recognized during impairment 312 55 3 Cash-basis interest income recognized 220 41 3 The Bank had $237 and $34 of loans on non-accrual at December 31, 2001 or 2000 that management did not deem to be impaired. - -------------------------------------------------------------------------------- (continued) 14.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 3 - LOANS (Continued) Certain directors and officers of the Corporation and Bank were customers of the Bank in the ordinary course of business. Loan activity with these related parties is as follows: Balance as of January 1, 2001 $ 910 Change in persons included -- New loans 791 Loan payments (474) ------- Balance as of December 31, 2001 $ 1,227 ======= NOTE 4 - ALLOWANCE FOR LOAN LOSSES The activity in the allowance for loan losses is as follows: 2001 2000 1999 ---- ---- ---- Balance, January 1 $ 5,071 $ 4,618 $ 4,241 Provision charged to operations 1,225 1,200 1,060 Loans charged-off (982) (877) (829) Recoveries on loans previously charged-off 99 130 146 ------- ------- ------- Balance, December 31 $ 5,413 $ 5,071 $ 4,618 ======= ======= ======= NOTE 5 - PREMISES, FURNITURE AND EQUIPMENT A summary of premises, furniture and equipment by major category follows: 2001 2000 ---- ---- Land $ 905 $ 870 Buildings and improvements 9,037 8,782 Leasehold improvements 1,749 1,786 Furniture and equipment 8,438 9,781 -------- -------- Total 20,129 21,219 Accumulated depreciation (9,122) (9,866) -------- -------- Premises, furniture and equipment, net $ 11,007 $ 11,353 ======== ======== - -------------------------------------------------------------------------------- (continued) 15.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 6 - INTEREST-BEARING TIME DEPOSITS Time deposits of $100 or greater totaled $53,727 and $53,514 at December 31, 2001 and 2000. At December 31, 2001, the scheduled maturities of time deposits are as follows: 2002 $ 193,826 2003 57,608 2004 11,294 2005 2,813 2006 4,052 Thereafter 269 ------------ Total $ 269,862 ============ NOTE 7 - SHORT-TERM BORROWINGS Short-term borrowings are comprised of the following at year-end: 2001 2000 ---- ---- Balance of repurchase agreements outstanding $31,505 $54,275 Balance of treasury tax and loan open-end note 568 1,297 ------- ------- Total short-term borrowings $32,073 $55,572 ======= ======= At December 31, 2001 and 2000, the Corporation had $667 and $1,054 in related party repurchase agreements. - -------------------------------------------------------------------------------- (continued) 16.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 8 - FHLB ADVANCES AND NOTE PAYABLE FHLB advances and note payable outstanding at December 31 consist of the following: 2001 2000 ---- ---- Federal Home Loan Bank advances; annual principal payments; various maturities with final maturity May 15, 2008; interest payable monthly at various fixed interest rates from 5.45% - 6.82%; secured by a blanket pledge of the Bank's obligations of the U.S. Government and U.S. Government agencies and one-to-four family residential mortgage loans. $ 7,982 $ 8,737 Federal Home Loan Bank advances; principal callable one year from date of advance and quarterly thereafter, otherwise, principal payments due at maturity, with final maturities in 2002 and 2010; interest payable monthly at various fixed interest rates from 4.98%-6.20%; secured by a blanket pledge of the Bank's obligations of the U.S. Government and U.S. Government agencies and one-to-four family residential mortgage loans. 27,000 27,000 --------- --------- Total FHLB advances 34,982 35,737 Note payable to Northern Trust Company; quarterly principal payments of $350 required; matures March 31, 2006; interest payable monthly at a variable rate, which is currently 3.60% based on the Federal Funds rate plus an applicable margin based on the Corporation's existing capital ratios; obligation is unsecured but subject to various covenants, including defined minimum return on average assets, tangible net worth, capital ratios, loan loss allowance to non-performing loans ratio, and maximum non-performing assets. At year-end, the Corporation was in compliance with all covenants. 10,150 11,550 --------- --------- Total $ 45,132 $ 47,287 ========= ========= Annual principal payments required are as follows: 2002 $ 7,399 2003 4,426 2004 1,479 2005 1,485 2006 2,800 Thereafter 27,543 ------------ Total FHLB advances and note payable $ 45,132 ============ - -------------------------------------------------------------------------------- (continued) 17.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 9 - EMPLOYEE BENEFIT PLANS The following sets forth the defined benefit pension plan's funded status and amount recognized in the balance sheet at December 31 (amounts computed as of September 30, 2001 and 2000): 2001 2000 ---- ---- Change in benefit obligation: Beginning benefit obligation $ 13,314 $ 12,626 Service cost 813 783 Interest cost 979 928 Actuarial (gain) loss 1,128 (503) Benefits paid (588) (520) -------- -------- Ending benefit obligation 15,646 13,314 Change in plan assets, at fair value: Beginning plan assets 16,341 16,603 Actual return (246) 258 Employer contribution -- -- Benefits paid (588) (520) -------- -------- Ending plan assets 15,507 16,341 -------- -------- Funded status (139) 3,027 Unrecognized net actuarial (gain) loss 2,480 (382) Unrecognized prior service cost 17 19 Unrecognized transition asset (480) (631) -------- -------- Prepaid benefit cost $ 1,878 $ 2,033 ======== ======== The components of pension expense and related actuarial assumptions were as follows. 2001 2000 1999 ---- ---- ---- Service cost $ 813 $ 783 $ 647 Interest cost 979 928 812 Expected return on plan assets (1,488) (1,513) (1,386) Amortization of prior service cost 2 2 2 Amortization of transition asset (151) (151) (151) ------- ------- ------- $ 155 $ 49 $ (76) ======= ======= ======= Discount rate on benefit obligation 7.00% 7.50% 7.50% Long-term expected rate of return on plan assets 9.25 9.25 9.25 Rate of compensation increase 4.00 4.00 4.00 At December 31, 2001 and 2000, the plan's assets include Lafayette Bancorporation common stock of $1,216 and $582. At December 31, 2001 and 2000 the plan's assets also included Lafayette Bank and Trust Company certificates of deposit of $538 and $436. - -------------------------------------------------------------------------------- (continued) 18.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 9 - EMPLOYEE BENEFIT PLANS (Continued) The Bank maintains a retirement savings plan covering substantially all employees. The plan requires employees to complete one year of service and be 21 years of age before entering the plan. The plan allows for Bank contributions at an annually determined matching percentage of the first 4% of employee salary contributions, as well as an annual discretionary contribution. Total 401(k) contributions charged to expense were $176, $161, and $140 for 2001, 2000 and 1999. The Bank maintains a deferred compensation plan for the benefit of certain directors. Under the plan, the Bank agrees, in return for the directors deferring the receipt of a portion of their current compensation, to pay a retirement benefit computed as the amount of the compensation deferred plus accrued interest at a variable rate. Accrued benefits payable totaled $1,596 and $1,289 at December 31, 2001 and 2000. Deferred compensation expense was $131 for 2001, and $106 for 2000. In conjunction with the plan, the Bank has purchased life insurance on the directors. The cash surrender value of that insurance is carried as an other asset on the consolidated balance sheet, and was approximately $7,171 and $6,834 at December 31, 2001 and 2000. NOTE 10 - POSTRETIREMENT BENEFITS The Bank sponsors a postretirement benefit plan which provides defined medical benefits. Retirees contribute an amount equal to their individual applicable premium to provide the coverage, less 30%, which is paid monthly by the Bank. Retirees must pay 100% of medical premiums for all dependent coverage. The plan is not funded and has no assets. - -------------------------------------------------------------------------------- (continued) 19.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 10 - POSTRETIREMENT BENEFITS (Continued) The following sets forth the plan's benefit obligation and amounts recognized in the balance sheet at December 31: 2001 2000 ---- ---- Change in postretirement benefit obligation: Beginning benefit obligation $ 454 $ 550 Unrecognized net actuarial (gain) loss -- (159) Service cost 31 35 Interest cost 36 38 Benefits paid, net (23) (10) ----- ----- Ending benefit obligation 498 454 Unrecognized net gain 277 302 ----- ----- Accrued benefit obligation $ 775 $ 756 ===== ===== Components of net periodic postretirement benefit cost as of December 31: 2001 2000 1999 ---- ---- ---- Service cost $ 31 $ 35 $ 31 Interest cost 36 38 34 Amortization of unrecognized gain (25) (10) (11) ---- ---- ---- Benefit cost $ 42 $ 63 $ 54 ==== ==== ==== For measurement purposes, the annual rate of increase in the per capita cost of covered health care benefits assumed was 7 % for 2001, 8% for 2000, and 11.5% for 1999, with the rate assumed to decrease to 6% over the next two years in the 2001 and 2000 calculation, and to 5.5% over the next year in the 1999 calculation. The health care cost trend is a significant assumption. However, either an increase or decrease in the assumed health care cost trend rates by 1% in each year would affect the accumulated postretirement benefit obligation as of December 31, 2001 and the aggregate service and interest cost components of net periodic postretirement benefit cost for the year then ended by amounts not considered to be material. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 8% for 2001 and 2000, and 7% for 1999. - -------------------------------------------------------------------------------- (continued) 20.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 11 - STOCK APPRECIATION RIGHTS AND STOCK OPTION PLAN The Corporation maintains an Officers' Stock Appreciation Rights Plan for granting rights to certain officers, under which all available rights have been granted. Upon exercise of a stock appreciation right, the holder may receive cash equal to the excess of the fair market value of common stock at the date of exercise over the option price. Stock appreciation rights are vested at 20% per year and must be exercised within 10 years of grant. The plan expires May 2002. Granted rights outstanding were fully vested and consisted of 38,105 at an option price of $3.66 for 2001 and 2000. In 2001, no rights were exercised. In 2000, 16,500 rights were exercised when the fair market value was $23.18 per share. The aforementioned amounts of rights and prices are adjusted for stock dividends and splits. Compensation expense (benefit) charged to operations in 2001, 2000 and 1999 was $539, ($376), and $14 and is based on an increase (decrease) in market value. The liability at December 31, 2001, 2000 and 1999 was $895, $356 and $1,053. The Corporation has established two nonqualified stock option plans to provide stock options to directors and key members of management. One plan was adopted in 1995 ("1995 Plan") and the other in 1998 ("1998 Plan"). There are no shares of common stock remaining available for grant under the 1995 Plan. The total number of shares of common stock remaining available for grant to directors is 17 and management is 19,928 under the 1998 Plan. All shares for both plans were available for grant at a price equal to the market price of the stock at the date of grant. Under the 1995 Plan, options granted to directors at the effective date are exercisable any time after the date of grant, and options granted to directors elected after the effective date are exercisable after two years. Under the 1998 Plan, options granted to directors are exercisable after two years. Options granted to management under both plans become 20% exercisable after one year and 20% each subsequent year. Both plans are effective for five years and options must be exercised within ten years from the date of grant. - -------------------------------------------------------------------------------- (continued) 21.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 11 - STOCK APPRECIATION RIGHTS AND STOCK OPTION PLAN (Continued) A summary of the Corporation's stock option activity, and related information for the years ended December 31, follows (adjusted for stock dividends and splits): Weighted Weighted Average Average Exercise Fair Options Price Value ------- -------- ------- Outstanding, beginning of 1999 227,427 $ 12.89 Granted 14,834 24.70 $ 4.76 Exercised (17,166) 11.26 Forfeited (9,758) 14.72 ----------- --------- Outstanding, end of 1999 215,337 13.75 Granted 20,075 15.23 2.19 Exercised (9,144) 11.37 Forfeited (8,441) 15.69 ----------- --------- Outstanding, end of 2000 217,827 13.91 Granted 24,650 15.00 3.98 Exercised (7,973) 11.53 Forfeited (2,352) 15.52 ----------- --------- Outstanding, end of 2001 232,152 14.09 =========== ========= Options outstanding at December 31, 2001 include 184,529 with exercise prices ranging from $10.39 to $15.23 (weighted average exercise price of $12.20) and a weighted average remaining life of 5.87 years; and 47,623 with exercise prices ranging from $17.63 to $24.70 (weighted average exercise price of $21.41) and a weighted average remaining life of 7.27 years. Options exercisable at December 31, 2001 include 136,677 with exercise prices ranging from $10.39 to $15.23 (weighted average exercise price of $11.28); and 37,406 with exercise prices ranging from $17.63 to $24.70 (weighted average exercise price of $20.86). Pro forma information regarding net income and earnings per share has been determined as if the Corporation had accounted for its stock options under the fair value method. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for the years 2001, 2000, and 1999: risk-free interest rates of 4.9%, 6.7%, and 5.4% dividend yields of 2% for 2001, 3% for 2000 and 2% for 1999; volatility factors of the expected market price of the Corporation's common stock of .37, .24, and .13; and a weighted average expected life of the options of five years for management options and two years for directors' options. - -------------------------------------------------------------------------------- (continued) 22.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 11 - STOCK APPRECIATION RIGHTS AND STOCK OPTION PLAN (Continued) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Corporation's pro forma information follows (in thousands except for earnings per share information): 2001 2000 1999 ---- ---- ---- Pro forma net income $ 7,329 $ 6,859 $ 6,270 Pro forma earnings per share Basic $ 1.85 $ 1.74 $ 1.59 Diluted $ 1.82 $ 1.72 $ 1.55 In future years, the pro forma effect of not applying this standard may increase if additional options are granted. NOTE 12 - INCOME TAXES Income taxes consist of the following: 2001 2000 1999 ---- ---- ---- Currently payable $ 4,172 $3,498 $ 3,004 Deferred income taxes (benefit) (782) 3 (50) Non-qualified stock option benefit allocated to additional paid-in capital 11 13 73 ------- ------ ------- Total $ 3,401 $3,514 $ 3,027 ======= ====== ======= The following is a reconciliation of statutory federal income taxes and the amount computed by applying the statutory rate of 34% to income before income taxes: 2001 2000 1999 ---- ---- ---- Statutory rate applied to income before income taxes $ 3,677 $ 3,546 $ 3,188 Add/(deduct) Tax exempt interest income (533) (486) (430) State tax expense (net of federal benefit) 395 474 417 Other (138) (20) (148) ------- ------- ------- Total $ 3,401 $ 3,514 $ 3,027 ======= ======= ======= - -------------------------------------------------------------------------------- (continued) 23.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 12 - INCOME TAXES (Continued) The net deferred tax asset reflected in the consolidated balance sheet is comprised of the following components as of December 31: 2001 2000 ---- ---- Deferred tax assets Allowance for loan losses $ 1,718 $ 1,380 Accrued stock appreciation rights 350 139 Accrued post-retirement benefit obligation 462 426 Deferred compensation 589 470 Deferred loan fees 99 57 Net unrealized loss on securities available-for-sale -- 173 ------- ------- Total tax assets 3,218 2,645 Deferred tax liabilities Depreciation (339) (341) Net pension benefit (734) (795) Intangible asset amortization (282) (186) Net unrealized gain on securities available-for-sale (262) -- Other (179) (248) ------- ------- Total deferred tax liabilities (1,796) (1,570) Valuation allowance -- -- ------- ------- Net deferred tax asset $ 1,422 $ 1,075 ======= ======= NOTE 13 - PER SHARE DATA The following table illustrates the computation of basic and diluted earnings per share. Weighted average shares outstanding have been restated for all periods for stock splits and dividends. 2001 2000 1999 ---- ---- ---- Basic earnings per share Net income $ 7,415 $ 6,916 $ 6,351 Weighted average shares outstanding 3,959,582 3,950,297 3,940,024 -------------- --------------- -------------- Basic earnings per share $ 1.87 $ 1.75 $ 1.61 ============== ============== ============== Diluted earnings per share Net income $ 7,415 $ 6,916 $ 6,351 Weighted average shares outstanding 3,959,582 3,950,297 3,940,024 Dilutive effect of stock options 61,213 35,224 94,364 -------------- --------------- -------------- Diluted average shares outstanding 4,020,795 3,985,521 4,034,388 -------------- --------------- -------------- Diluted earnings per share $ 1.84 $ 1.74 $ 1.57 ============== ============== ============== - -------------------------------------------------------------------------------- (continued) 24.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 14 - CAPITAL REQUIREMENTS The Corporation and Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, the institution may be required to limit capital distributions, limit asset growth and expansion, and prepare capital restoration plans. On March 12, 1999 the Corporation's wholly-owned subsidiary bank acquired three branches in Jasper County, Indiana. As a result of this transaction consolidated and bank-only capital levels were reduced. The Corporation borrowed $14,000 and contributed $13,000 to the Bank in order for the bank to maintain its well-capitalized status. As of December 31, 2001, the Bank was categorized as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. The Corporation was categorized as undercapitalized as of December 31, 1999, as the total capital ratio was slightly below the minimum required level for capital adequacy purposes. The Corporation returned to adequately capitalized status as of March 31, 2000 and has maintained that status through December 31, 2001. Although the Corporation's capital was slightly below the minimum at December 31, 1999, no corrective regulatory action was initiated by the banking regulatory authorities and management anticipates maintaining its adequately capitalized status in the foreseeable future. - -------------------------------------------------------------------------------- (continued) 25.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 14 - CAPITAL REQUIREMENTS (Continued) The actual capital amounts and ratios are presented in the following table (in millions) for the Corporation and the Bank. Minimum Required To Minimum Required Be Well-Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Regulations ------ -------- -------- ------ ----------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- 2001 Total capital to risk weighted assets Consolidated $ 51.8 9.28% $ 44.7 8.00% $ 55.9 10.00% Lafayette Bank and Trust 61.3 10.98 44.7 8.00 55.8 10.00 Tier 1 capital to risk weighted assets Consolidated 46.4 8.31 22.3 4.00 33.5 6.00 Lafayette Bank and Trust 55.9 10.01 22.3 4.00 33.5 6.00 Tier 1 capital to average assets Consolidated 46.4 6.24 29.7 4.00 37.2 5.00 Lafayette Bank and Trust 55.9 7.51 29.8 4.00 37.2 5.00 2000 Total capital to risk weighted assets Consolidated $ 45.1 8.33% $ 43.3 8.00% $ 54.1 10.00% Lafayette Bank and Trust 55.5 10.19 43.6 8.00 54.5 10.00 Tier 1 capital to risk weighted assets Consolidated 40.0 7.40 21.7 4.00 32.5 6.00 Lafayette Bank and Trust 50.5 9.26 21.8 4.00 32.7 6.00 Tier 1 capital to average assets Consolidated 40.0 5.79 27.7 4.00 34.6 5.00 Lafayette Bank and Trust 50.5 7.29 27.7 4.00 34.6 5.00 The Bank is also subject to state regulations restricting the amount of dividends payable to the Corporation. At December 31, 2001, the Bank had $8,882 of retained earnings available for dividends under these regulations. - -------------------------------------------------------------------------------- (continued) 26.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES The Bank leases branch facilities under operating leases expiring in various years through 2007. Expense for leased premises was $306, $281, and $244 for 2001, 2000 and 1999. Future minimum lease payments are as follows: 2002 $ 290 2003 267 2004 222 2005 162 2006 75 Thereafter 19 ------------ Total $ 1,035 ============ In the ordinary course of business, the Bank has loans, commitments and contingent liabilities, such as guarantees and commitments to extend credit, which are not reflected in the consolidated balance sheet. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policy to make such commitments as it uses for on-balance sheet items. At December 31, off-balance sheet financial instruments whose contract amount represents credit risk are summarized as follows: 2001 2000 ---- ---- Unused lines of credit $84,611 $64,987 Commitments to make loans 6,180 7,229 Standby letters of credit 3,536 1,585 Commercial letters of credit -- -- Since many commitments to make loans expire without being used, the amount does not necessarily represent future cash commitments. Collateral obtained upon exercise of the commitment is determined using management's credit evaluation of the borrower, and may include accounts receivable, inventory, property, land and other items. These commitments are generally variable rate or carry a term of one year or less. The cash balance required to be maintained on hand or on deposit with the Federal Reserve was $10,738 and $9,639 at December 31, 2001 and 2000. These reserves do not earn interest. - -------------------------------------------------------------------------------- (continued) 27.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value and estimated fair values of the Corporation's financial instruments as of December 31 are as follows: -----------2 0 0 1--------- -----------2 0 0 0--------- Carrying Fair Carrying Fair Value Value Value Value ----- ----- ----- ----- Financial assets Cash and cash equivalents $ 51,465 $ 51,465 $ 73,472 $ 73,472 Securities available-for-sale 94,164 94,164 78,857 78,857 Securities held-to-maturity 3,918 4,047 4,484 4,580 Loans held for sale 17,262 17,435 5,949 6,058 Loans, net 550,451 551,053 532,654 524,222 FHLB stock 2,344 2,344 2,200 2,200 Accrued interest receivable 6,803 6,803 7,830 7,830 Financial liabilities Deposits $ (618,572) $ (623,883) $ (578,297) $ (580,115) Short-term borrowings (32,073) (32,073) (55,572) (55,572) FHLB advances (34,982) (35,358) (35,737) (35,903) Note payable (10,150) (10,150) (11,550) (11,550) Accrued interest payable (2,180) (2,180) (2,772) (2,772) The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. The carrying amount is considered to estimate fair value for cash and short-term instruments, demand deposits, short-term borrowings, accrued interest, and variable rate loans, deposits and note payable that re-price frequently and fully. Securities fair values are based on quoted market prices or, if no quotes are available, on the rate and term of the security and on information about the issuer. For loans held for sale, the fair value of loans held for sale is based on quoted market prices. For commercial, real estate, consumer, and other loans, fair value is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. FHLB stock is restricted in nature and is not actively traded on a secondary market and the carrying amount is a reasonable estimate of fair value. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. For FHLB advances, fair value is estimated using rates currently available to the Corporation for debt with similar terms and remaining maturities. The estimated fair value for off-balance sheet loan commitments approximates carrying value and are not considered significant to this presentation. - -------------------------------------------------------------------------------- (continued) 28.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 17 - PARENT COMPANY STATEMENTS Presented below are condensed balance sheets, statements of income and cash flows for the parent company: CONDENSED BALANCE SHEETS December 31 2001 2000 ---- ---- ASSETS Cash on deposit with subsidiary $ 1,855 $ 1,901 Investment in bank 68,589 63,221 Other assets 387 265 ------- ------- $70,831 $65,387 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Note payable $10,150 $11,550 Other liabilities 1,561 1,036 Shareholders' equity 59,120 52,801 ------- ------- $70,831 $65,387 ======= ======= CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Years ended December 31 2001 2000 1999 ---- ---- ---- Operating income Dividends received from subsidiary bank $ 3,525 $ 3,200 $ 2,960 Interest income 40 74 75 ------------ ------------ ------------ 3,565 3,274 3,035 Operating expenses Interest expense 634 1,007 749 Compensation expense (benefit) 539 (376) 14 Other operating expenses 232 119 111 ------------ ------------ ------------ 1,405 750 874 Income before income taxes and equity in undistributed earnings of bank 2,160 2,524 2,161 Income tax benefit 550 215 389 ------------ ------------ ------------ Income before equity in undistributed earnings of bank 2,710 2,739 2,550 Equity in undistributed earnings of bank 4,705 4,177 3,801 ------------ ------------ ------------ Net income 7,415 6,916 6,351 Other comprehensive income, net of tax 663 1,693 (1,914) ------------ ------------ ------------ Comprehensive income $ 8,078 $ 8,609 $ 4,437 ============ ============ ============ - -------------------------------------------------------------------------------- (continued) 29.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000, and 1999 (Dollar amounts in thousands, except per share data) - -------------------------------------------------------------------------------- NOTE 17 - PARENT COMPANY STATEMENTS (Continued) CONDENSED STATEMENTS OF CASH FLOWS Years ended December 31 2001 2000 1999 ---- ---- ---- Cash flows from operating activities Net income $ 7,415 $ 6,916 $ 6,351 Adjustments to reconcile net income to net cash from operating activities Amortization of deferred costs 6 6 6 Equity in undistributed earnings of bank (4,705) (4,177) (3,801) Other assets and other liabilities 397 (419) (160) ------------ ------------ ------------ Net cash from operating activities 3,113 2,326 2,396 Cash flows from financing activities Proceeds from note payable -- -- 14,000 Principal payments on note payable (1,400) (1,400) (1,050) Capital contribution to subsidiary bank - -- (13,000) Common stock issued 103 117 278 Dividends paid (1,862) (1,706) (1,540) Purchase of fractional shares -- (4) -- Purchase of treasury shares -- -- (4) ------------ ------------ ------------ Net cash from financing activities (3,159) (2,993) (1,316) ------------ ------------ ------------ Net change in cash and cash equivalents (46) (667) 1,080 Cash and cash equivalents at beginning of year 1,901 2,568 1,488 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 1,855 $ 1,901 $ 2,568 ============ ============ ============ NOTE 18 - BRANCH ACQUISITION In March 1999, the Bank purchased three branches located in DeMotte, Remington, and Rensselaer, Indiana. The fair value of assets acquired was $71,749 (consisting primarily of goodwill and core deposit intangibles of $13,510, and commercial loans, net of a $563 purchase adjustment for credit quality), the fair value of liabilities assumed was $117,015 (consisting primarily of customer deposits), and the Bank received $45,266 of cash at settlement. - -------------------------------------------------------------------------------- (continued) 30.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000, and 1999 (Dollar amounts in thousands, except per share data) NOTE 19 - OTHER COMPREHENSIVE INCOME Other comprehensive income components and related taxes were as follows: 2001 2000 1999 ---- ---- ---- Unrealized holding gains (losses) on securities available-for-sale $ 1,098 $ 2,791 $ (3,314) Less: reclassification adjustments for gains and losses later recognized in income -- 12 144 -------------- --------------- -------------- Net unrealized gains (losses) 1,098 2,803 (3,170) Tax effect (435) (1,110) 1,256 -------------- --------------- -------------- Other comprehensive income $ 663 $ 1,693 $ (1,914) ============== =============== ============== NOTE 20 - QUARTERLY FINANCIAL DATA (UNAUDITED) Interest Net Interest Net Earnings per Share Income Income Income Basic Fully Diluted ------ ------ ------ ----- ------------- 2001 First quarter $ 13,786 $ 6,187 $ 1,678 $ .42 $ .42 Second quarter 13,745 6,601 1,906 .48 .48 Third quarter 13,373 6,835 2,019 .51 .50 Fourth quarter 12,760 7,138 1,812 .46 .44 2000 First quarter $ 12,123 $ 6,084 $ 1,798 $ .46 $ .45 Second quarter 12,878 6,297 1,807 .46 .46 Third quarter 13,427 6,226 1,634 .41 .41 Fourth quarter 13,958 6,374 1,677 .42 .42 Earnings per share amounts have been restated for subsequent stock dividends and splits. - -------------------------------------------------------------------------------- (continued) 31.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Dollar amounts in thousands, except per share data) NOTE 21 - SEGMENT INFORMATION The Corporation's operations include three primary segments: banking, mortgage banking, and trust services. Through its banking subsidiary's locations in Tippecanoe, Jasper, White and Carroll Counties, the Corporation provides traditional community banking services, such as accepting deposits and making commercial, residential and consumer loans. Mortgage banking activities include the origination of residential mortgage loans for sale on a servicing released basis to various investors. The Corporation's trust department provides both personal and corporate trust services. The Corporation's three reportable segments are determined by the products and services offered. Loans, investments and deposits comprise the primary revenues and expenses of the banking operation, net gains on loans sold account for the revenues in the mortgage banking segment, and trust administration fees provide the primary revenues in the trust department. The following segment financial information has been derived from the internal profitability reporting system utilized by management to monitor and manage the financial performance of the Corporation. The accounting policies of the three segments are the same as those described in the summary of significant accounting policies. The Corporation evaluates segment performance based on profit or loss before income taxes. The evaluation process for the mortgage banking and trust segments include only direct expenses, while certain indirect expenses, including goodwill, are absorbed by the banking operation. The difference between segment totals and consolidated totals are holding company amounts and income tax expense. - -------------------------------------------------------------------------------- (continued) 32.

LAFAYETTE BANCORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000, and 1999 (Dollar amounts in thousands, except per share data) - -------------------------------------------------------------------------------- NOTE 21 - SEGMENT INFORMATION (Continued) Mortgage Total 2001 Banking Banking Trust Segments - ---- ------- ------- ----- -------- Net interest income $ 27,058 $ 297 $ -- $ 27,355 Net gain on loan sales -- 1,858 -- 1,858 Other revenue 4,330 2 1,264 5,596 Noncash items: Depreciation 1,369 58 48 1,475 Provision for loan loss 1,225 -- -- 1,225 Segment profit, before taxes 10,858 998 326 12,185 Segment assets 744,396 17,402 133 761,931 2000 - ---- Net interest income $ 25,769 $ 146 $ -- $ 25,915 Net gain on loan sales -- 659 -- 659 Other revenue 3,973 6 1,187 5,166 Non-cash items: Depreciation 1,243 48 48 1,339 Provision for loan loss 1,200 -- - 1,200 Segment profit, before taxes 10,655 67 385 11,107 Segment assets 734,581 6,122 179 740,822 1999 - ---- Net interest income $ 23,310 $ 211 $ -- $ 23,521 Net gain on loan sales -- 942 -- 942 Other revenue 2,959 90 1,134 4,183 Noncash items: Depreciation 868 42 38 948 Provision for loan loss 1,060 -- -- 1,060 Segment profit, before taxes 9,328 459 390 10,177 Segment assets 641,132 3,325 202 644,659 NOTE 22 - PENDING MERGER On October 15, 2001, Lafayette Bancorporation signed a definitive agreement with First Merchants Corporation, located in Muncie, Indiana, to merge with and into First Merchants Corporation. Under the terms of the agreement, upon the closing of this transaction, Lafayette Bank and Trust Company will be a wholly-owned subsidiary of First Merchants Corporation. The transaction is subject to shareholder and regulatory approval and is expected to be effective in the second quarter of 2002. - -------------------------------------------------------------------------------- (continued) 33.

UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION The following is the unaudited pro forma combined consolidated financial information for First Merchants Corporation and for Lafayette Bancorporation giving effect to the merger of Lafayette Bancorporation with and into First Merchants Corporation and the issuance of preferred securities and other bank debt to fund the cash consideration payable in the merger. The balance sheet information presented gives effect to the merger and the related issuance of the preferred securities and bank debt as if each occurred on December 31, 2001. The income statement information presented gives effect to the merger and the related issuance of the preferred securities and bank debt as if each occurred on January 1, 2001. The following pro forma historical information does not reflect any cost savings which First Merchants Corporation may achieve subsequent to the merger. You should read the unaudited pro forma combined consolidated financial information in conjunction with the accompanying Notes to Unaudited Pro Forma Combined Consolidated Financial Information. This unaudited pro forma combined consolidated financial information may not be indicative of the results of operations that actually would have occurred if the merger and the related issuance of the preferred securities and bank debt had occurred on the dates assumed above or of the results of operations that may be achieved in the future.

UNAUDITED PRO FORMA COMBINED CONSOLIDATED CONDENSED BALANCE SHEET AS OF DECEMBER 31, 2001 First Pro forma Pro forma Merchants Lafayette Adjustments Combined --------- --------- ----------- -------- (Dollars in thousands) Assets: Cash and due from banks....................... $ 68,743 $ 32,028 $ (1,400) (1) $ 101,242 (400) (2) 3,275 (3) (1,004) (4) Interest-bearing deposits..................... 10,237 10,237 Federal funds sold............................ 34,285 9,200 ---- 43,485 ---------- --------- --------- ----------- Cash and cash equivalents................... 103,028 51,465 471 154,964 Interest-bearing time deposits................ 3,871 ---- ---- 3,871 Investment securities Available for sale.......................... 231,668 94,164 ---- 325,832 Held to maturity............................ 8,654 3,918 129 (5) 12,701 ---------- --------- --------- ----------- Total investment securities............... 240,322 98,082 129 338,533 Mortgage loans held for sale.................. 307 17,262 173 (5) 17,742 Loans, net of allowance....................... 1,344,445 550,451 602 (5) 1,895,498 Premises and equipment........................ 27,684 11,007 9,441 (6) 48,132 Federal Reserve and FHLB stock................ 8,350 2,344 ---- 10,694 Interest Receivable........................... 12,024 6,803 ---- 18,827 Core deposit intangible and goodwill.......... 32,177 12,291 42,537 (7) 90,714 (12,291) (8) 16,000 (9) Other assets.................................. 14,827 12,613 2,133 (15) 35,194 7,538 (10) (1,917 (14) ---------- --------- --------- ----------- Total assets............................. $1,787,035 $ 762,318 $ 64,816 $ 2,614,169 ========== ========= ========= =========== Liabilities: Deposits Noninterest bearing......................... $ 186,987 $ 80,012 $ ---- $ 266,999 Interest bearing............................ 1,234,264 538,560 5,311 (5) 1,778,135 ---------- --------- --------- ----------- Total deposits........................... 1,421,251 618,572 5,311 2,045,134 Borrowings.................................... 174,404 77,205 376 (5) 6,750 (16) 258,735 Trust preferred............................... 46,250 (11) 46,250 Other liabilities............................. 12,252 7,421 139 (17) 19,812 ---------- --------- --------- ----------- Total liabilities....................... 1,607,907 703,198 58,826 2,369,931 ---------- --------- --------- ----------- Shareholders' equity: Common stock................................ 1,584 3,962 (3,962)(12) 1,931 347 (13) Additional paid in capital.................. 50,642 38,119 (38,119)(12) 115,405 64,763 (13) Retained earnings........................... 124,304 16,639 (16,639)(12) 124,304 Accumulated comprehensive income............ 2,598 400 (400)(12) 2,598 ---------- --------- --------- ----------- Total shareholders' equity.............. 179,128 59,120 5,990 244,238 ---------- --------- --------- ----------- Total liabilities and shareholders' equity $ 1,787,035 $ 762,318 $ 64,816 $ 2,614,169 =========== ========= ========= =========== The accompanying notes are an integral part of the unaudited pro forma combined consolidated financial information.

UNAUDITED PRO FORMA COMBINED CONSOLIDATED CONDENSED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2001 First Pro forma Pro forma Merchants Lafayette Adjustments Combined ---------- --------- --------- ----------- (Dollars in thousands, except per share data) Interest Income: Loans receivable........................... $ 103,561 $ 46,853 $ (266)(18) $ 150,148 Investment securities...................... 15,310 5,030 (29)(18) 20,311 Other...................................... 1,564 1,781 ---- 3,345 ---------- --------- --------- ----------- Total interest income................... 120,435 53,664 (295) 173,804 ---------- --------- --------- ----------- Interest Expense: Deposits................................... 45,856 22,650 (5,311)(18) 63,195 Securities sold under repurchase agreements 3,208 1,506 ---- 4,714 Federal Home Loan Bank advances & other.... 7,010 2,747 (251)(18) 135 (23) 9,641 Trust Preferred............................ ---- ---- 4,002 (22) 4,002 ---------- --------- --------- ----------- Total interest expense.................. 56,074 26,903 (1.425) 81,552 ---------- --------- --------- ----------- Net Interest Income: ........................... 64,361 26,761 1,130 92,252 Provision for loan losses.................. 3,576 1,225 ---- 4,801 ---------- --------- --------- ----------- Net interest income after provision for loan losses:......................................... 60,785 25,536 1,130 87,451 ---------- --------- --------- ----------- Non-interest Income: Fiduciary activities....................... 5,429 1,264 ---- 6,693 Service charges on deposit accounts........ 5,729 2,352 ---- 8,081 Other customer fees........................ 3,166 1,080 ---- 4,246 Net realized losses on sales of available-for-sale securities........... (200) ---- ---- (200) Commission income.......................... 1,945 398 ---- 2,343 Other income............................... 2,474 2,360 ---- 4,834 ---------- --------- --------- ----------- Total other income...................... 18,543 7,454 ---- 25,997 ---------- --------- --------- ----------- Non-interest expenses: Salaries and employee benefits............. 24,711 12,908 ---- 37,619 Net occupancy expenses..................... 2,729 1,293 236 (19) 4,258 Equipment expenses......................... 4,521 1,914 ---- 6,435 Goodwill and core deposit amortization..... 1,682 716 3,556 (21) 5,238 (716)(24) Other expenses............................. 11,552 5,343 ---- 16,895 ---------- --------- --------- ----------- Total other expenses.................... 45,195 22,174 3,076 70,445 ---------- --------- --------- ----------- Income before income tax:....................... 34,133 10,816 (1,946) 43,003 Income tax expense......................... 11,924 3,401 (788)(20) 14,537 ---------- ---------- ---------- ----------- Net income: .................................... $ 22,209 $ 7,415 $ (1,158) $ 28,466 ========== ========== ========== =========== Per Share Data: Basic earnings............................ $ 1.79 $ 1.87 ---- $ 1.88 Diluted earnings.......................... 1.78 1.84 ---- 1.87 Average common shares-basic............... 12,399,985 3,959,582 ---- 15,173,044 Average common shares-diluted............. 12,489,329 4,020,795 ---- 15,262,388 The accompanying notes are an integral part of the unaudited pro forma combined consolidated financial information.

Notes to Unaudited Pro Forma Combined Consolidated Financial Information (Dollars in thousands) Note 1 - Basis of Presentation On April 1, 2002, First Merchants Corporation acquired all of the assets of Lafayette Bancorporation through the merger of Lafayette Bancorporation with and into First Merchants Corporation. As part of the merger, shareholders of Lafayette Bancorporation will receive approximately 2,773,059 shares of First Merchants Corporation common stock and approximately $50,866,560 in cash. The acquisition will be accounted for under the purchase method of accounting and, accordingly, the assets and liabilities of Lafayette Bancorporation have been marked to estimated fair value based upon conditions as of December 31, 2001. Since these are pro forma statements, we cannot assure that the amounts reflected in these financial statements would have been representative of the actual amounts earned had the companies been combined at the time. The actual fair value adjustments will be made based upon appraisals and evaluations that will be made as of the date the merger is completed. Thus, the actual fair value adjustment may differ significantly from those reflected in the pro forma financial statements. Note 2 - Pro Forma Adjustments (1) To record payment by Lafayette Bancorporation for estimated transaction costs. (2) To record payment by First Merchants Corporation for estimated transaction costs. (3) To record receipt of cash for stock options exercised. (4) To record payment for stock appreciation rights. (5) To adjust interest-earning assets and interest-bearing liabilities of Lafayette Bancorporation to estimated fair value. (6) To record premises at estimated fair value. (7) To record goodwill for the cost of acquisition over the estimated fair value of net assets acquired as follows: Purchase Price: Common stock $ 347 Additional paid in capital 64,763 Acquisition costs 400 Cash paid to Lafayette Bancorporation stockholders 50,867 --------- Total purchase price paid $ 116,377 ========= Allocated to: Historical book value of Lafayette Bancorporation's assets and liabilities $ 59,120 Record estimated transaction costs of Lafayette Bancorporation (1,400) Record payment of stock appreciation rights (1,004) Cash received for stock options exercised 3,275 Write off of Lafayette Bancorporation's historical goodwill and core deposit intangible (12,291) --------- Adjusted book value of Lafayette Bancorporation $ 47,700 ========= Core deposit intangible 16,000 Adjustments to record assets and liabilities at fair value: Securities 129 Mortgage loans held for sale 173 Loans 602 Premises and equipment 9,441 Deposits (5,311) Borrowings (376) Deferred taxes 7,538 Pension assets/liability (2,056) --------- Total allocation $ 26,140 ========= Goodwill $ 42,537 =========

(8) To eliminate Lafayette Bancorporation's historical goodwill and core deposit intangible. (9) To record core deposit intangible. (10) To record deferred taxes on the purchase accounting adjustments. (11) To record issuance of the preferred securities by First Merchants Corporation of $46,250,000. (12) To eliminate Lafayette Bancorporation's equity accounts. (13) To record issuance of 2,773,059 shares of First Merchants Corporation's common stock. (14) To eliminate Lafayette Bancorporation's pension asset. (15) To record estimated net debt issuance costs. (16) To record additional borrowings necessary for cash consideration to Lafayette Bancorporation's shareholders in the event the underwriters do not exercise their over-allotment option. (17) To recognize Lafayette Bancorporation's pension liability. (18) To record effect of amortization of purchase accounting adjustments in a manner that approximates the level yield method. (19) To record amortization of purchase accounting adjustment related to premises and equipment. (20) To record tax effect of purchase accounting adjustments at an effective rate of 40.525%. (21) To record amortization of core deposit intangible. (22) To record interest expense and amortization of debt issuance costs related to the preferred securities issued to fund the cash consideration payable in the merger at an assumed rate of 8.5%. (23) To record interest expense on additional borrowings necessary to finance the remaining cash consideration payable to Lafayette Bancorporation's shareholders in the event the underwriters do not exercise their over-allotment option at an assumed rate of 2.0%. In the event the underwriters exercise their over-allotment option, this interest expense on the additional borrowing would not be incurred and the interest expense recorded in footnote 22 would be increased by $574,000, at an assumed rate of 8.5%. (24) To eliminate Lafayette Bancorporation's goodwill and core deposit intangible amortization expense.


                                                                     EXHIBIT 2.2



                                   UNDERTAKING

     First Merchants Corporation hereby undertakes to furnish supplementally to
the Securities and Exchange Commission upon request a copy of the Disclosure
Letters referenced in Sections 5 and 6 of the Agreement of Reorganization and
Merger between First Merchants Corporation and Lafayette Bancorporation dated
October 14, 2001.

                                                                      EXHIBIT 23



                         Consent of Independent Auditors

     We consent to the inclusion in the Current Report on Form 8-K of First
Merchants Corporation of our report, dated January 24, 2002, on the consolidated
financial statements of Lafayette Bancorporation as of December 31, 2001 and
2000 and for each of the three years in the period ended December 31, 2001.


CROWE, CHIZEK AND COMPANY LLP
April 1, 2002
Indianapolis, Indiana

EXHIBIT 99 N / E / W / S R / E / L / E / A / S / E April 1, 2002 FOR IMMEDIATE RELEASE FIRST MERCHANTS CORPORATION ANNOUNCES COMPLETION OF MERGER WITH LAFAYETTE BANCORPORATION Effective April 1, 2002, First Merchants Corporation of Muncie, Indiana, successfully completed its previously announced merger with Lafayette Bancorporation, Lafayette, Indiana. Lafayette Bancorporation's wholly owned subsidiary, Lafayette Bank and Trust Company, has become the second largest affiliate of First Merchants Corporation, as well as the western anchor for the family of nine individually chartered banking companies located in north-central and east-central Indiana. Conditions of the merger call for shareholders of Lafayette Bancorporation to receive approximately 2,773,059 shares of First Merchants Corporation common stock and $50,866,560 in cash in exchange for their shares of Lafayette Bancorporation common stock. Michael L. Cox, President and CEO of First Merchants, said "we had hoped and anticipated that the Corporation would be successful in putting approximately 40% of the consideration of this transaction in cash. Remarkably, the shareholders of Lafayette elected very close to 40% in cash and 60% in stock. This ratio validates all of our pro forma analysis and permits us to honor the wishes of the former Lafayette shareholders." On a combined basis, as of December 31, 2001, the two partners will now comprise $2.6 billion in assets, $1.9 billion in loans outstanding, $2.04 billion of customer deposit funds, and total equity capital of $244 million. The transaction will use the purchase method of accounting and the results of Lafayette's operations for the last three quarters of 2002 will be included in First Merchants' operations for 2002. Two sitting directors of Lafayette Bancorporation have been invited to join the First Merchants Corporation Board and will be elected at its next regularly scheduled meeting. They are Mr. Richard A. Boehning, a prominent Lafayette attorney, and Mr. Robert T. Jeffares, the retired Chief Financial Officer of Great Lakes Chemical in Lafayette. Additionally, Mr. Robert J. Weeder, President and CEO, will be elected a Senior Vice President of First Merchants Corporation. Mr. Weeder commented as follows. "Working with First Merchants Corporation has truly been a pleasure from the first day we talked. It is easy to see how they have succeeded in growing their family of fine community banks. Our merger with them brings enhanced liquidity to our shareholders, the capability to serve even larger customers based on our combined capital strength, and a geographic diversification to other parts of the state of Indiana - always a consideration as we address economic shifts within our market. We look forward to growing our companies together in the future."

Mr. Cox remarked, "Lafayette Bank and Trust has a long history of excellent performance. It is the largest community banking organization in a very attractive growth market area. Bringing Lafayette Bank and Trust into the First Merchants family results in a natural extension of our company's geographic reach, and we are extremely pleased to have such an exemplary partner." First Merchants Corporation is a financial holding company headquartered in Muncie, Indiana. Along with Lafayette Bank and Trust, its other subsidiaries include First Merchants Bank in Delaware and Hamilton Counties, Madison Community Bank in Madison County, First United Bank in Henry County, Union County National Bank (with offices in Union, Fayette, Wayne, and Butler (OH) Counties), The Randolph County Bank, First National Bank of Portland in Jay County, Decatur Bank & Trust Company in Adams County, and Frances Slocum Bank (with offices in Wabash, Howard, and Miami Counties). The Corporation also operates First Merchants Insurance Services, a full-service property casualty, personal lines, and healthcare insurer, headquartered in Muncie, Indiana, and is a majority member of Indiana Title Insurance Company, LLC, a title insurance agency. First Merchants Corporation's common stock is traded over-the-counter on the NASDAQ National Market System under the symbol FRME and is rated A+ by Standard & Poor's Corporation. Quotations are carried in daily newspapers and can be found on the company's Internet web page (http:/www.firstmerchants.com). Eleven brokerage firms make a market in First Merchants Corporation stock: Midwest Research First Tennessee; Keefe, Bruyette & Woods, Inc.; Knight Securities, L.P.; Herzog, Heine, Geduld, Inc.; Howe Barnes Investments, Inc.; Sandler O'Neill & Partners; NatCity Investments, Inc.; Sherwood Securities Corp.; Spear, Leeds & Kellog; RBC Capital Markets; and Stifel, Nicolaus & Company, Inc. Questions may be directed to: Mr. Brian Edwards Vice President of Shareholder Relations First Merchants Corporation 200 East Jackson Street Muncie, IN 47305-2814 Telephone: 765/741-7278