UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
Commission File Number 0-17071
First Merchants Corporation
(Exact name of registrant as specified in its charter)
Indiana 35-1544218
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 East Jackson Street
Muncie, IN 47305-2814
(Address of principal executive office) (Zip code)
(765) 747-1500
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). Yes [x] No [ ]
As of October 29, 2004, there were 18,631,063 outstanding common shares, without
par value, of the registrant.
FIRST MERCHANTS CORPORATION
FORM 10-Q
INDEX
Page No.
PART I. Financial Information:
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets........................3
Consolidated Condensed Statements of Income..................4
Consolidated Condensed Statements of
Comprehensive Income.........................................5
Consolidated Condensed Statements of
Stockholders' Equity.........................................6
Consolidated Condensed Statements of Cash Flows..............7
Notes to Consolidated Condensed Financial Statements.........8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................24
Item 4. Controls and Procedures.....................................24
PART II. Other Information:
Item 1. Legal Proceedings...........................................25
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds..............................25
Item 3. Defaults Upon Senior Securities.............................25
Item 4. Submission of Matters to a Vote of Security Holders.........25
Item 5. Other Information...........................................25
Item 6. Exhibits....................................................26
Signatures...................................................................27
Exhibit Index................................................................28
Page 2
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
September 30, December 31,
2004 2003
------------ ------------
(Unaudited)
ASSETS:
Cash and due from banks ....................................... $ 73,367 $ 77,112
Federal funds sold ............................................ 22,700 32,415
----------- -----------
Cash and cash equivalents ................................... 96,067 109,527
Interest-bearing deposits...................................... 12,204 8,141
Investment securities available for sale ...................... 415,138 348,860
Investment securities held to maturity ........................ 5,507 7,937
Mortgage loans held for sale................................... 2,715 3,043
Loans, net of allowance for loan losses of $25,243 and $25,493. 2,370,063 2,328,010
Premises and equipment ........................................ 38,170 39,639
Federal Reserve and Federal Home Loan Bank stock............... 22,750 15,502
Interest receivable ........................................... 17,594 16,840
Goodwill ...................................................... 118,715 118,679
Core deposit intangibles ...................................... 21,471 24,044
Cash surrender value of life insurance......................... 41,700 37,927
Other assets .................................................. 19,268 18,663
----------- -----------
Total assets .............................................. $ 3,181,362 $ 3,076,812
=========== ===========
LIABILITIES:
Deposits:
Noninterest-bearing ......................................... $ 373,548 $ 338,201
Interest-bearing ............................................ 2,083,271 2,023,900
----------- -----------
Total deposits ............................................ 2,456,819 2,362,101
Borrowings .................................................... 379,922 383,170
Interest payable .............................................. 5,706 4,680
Other liabilities.............................................. 25,253 22,896
----------- -----------
Total liabilities ......................................... 2,867,700 2,772,847
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Perferred stock, no-par value:
Authorized and unissued - 500,000 shares
Common Stock, $.125 stated value:
Authorized --- 50,000,000 shares
Issued and outstanding - 18,562,001 and 18,408,177 shares.... 2,320 2,314
Additional paid-in capital .................................... 148,993 150,310
Retained earnings ............................................. 160,004 149,096
Accumulated other comprehensive income ........................ 2,345 2,245
----------- -----------
Total stockholders' equity ................................ 313,662 303,965
----------- -----------
Total liabilities and stockholders' equity ................ $ 3,181,362 $ 3,076,812
=========== ===========
See notes to consolidated condensed financial statements.
Page 3
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
Interest Income:
Loans receivable
Taxable ................................................... $35,342 $35,607 $103,590 $106,539
Tax exempt ................................................ 143 185 443 512
Investment securities
Taxable ................................................... 2,146 1,342 6,147 4,621
Tax exempt ................................................ 1,679 1,562 4,529 4,819
Federal funds sold .......................................... 18 49 73 339
Deposits with financial institutions ........................ 154 13 388 54
Federal Reserve and Federal Home Loan Bank stock ............ 319 201 954 610
------- ------- -------- --------
Total interest income ..................................... 39,801 38,959 116,124 117,494
------- ------- -------- --------
Interest expense:
Deposits .................................................... 8,487 8,623 24,556 26,555
Borrowings .................................................. 4,522 4,462 13,297 13,100
------- ------- ------- -------
Total interest expense .................................... 13,009 13,085 37,853 39,655
------- ------- ------- -------
Net Interest Income ........................................... 26,792 25,874 78,271 77,839
Provision for loan losses ..................................... 1,380 1,706 4,472 8,430
------- ------- ------- -------
Net Interest Income After Provision for Loan Losses ........... 25,412 24,168 73,799 69,609
------- ------- ------- -------
Other Income:
Net realized gains on sales of available-for-sale securities. 332 512 732 950
Other income ................................................ 8,079 8,364 25,151 27,365
------- ------- ------- -------
Total other income ............................................ 8,411 8,876 25,883 28,315
Total other expenses .......................................... 22,790 22,960 67,976 67,336
------- ------- ------- -------
Income before income tax ...................................... 11,033 10,084 31,706 30,388
Income tax expense ............................................ 3,380 2,735 9,763 8,636
------- ------- ------- -------
Net Income .................................................... $ 7,653 $ 7,349 $21,943 $21,752
======= ======= ======= =======
Per share:
Basic ..................................................... $ .41 $ .40 $ 1.18 $ 1.20
Diluted ................................................... .41 .39 1.18 1.19
Dividends ................................................. .23 .23 .69 .67
See notes to consolidated condensed financial statements.
Page 4
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
2004 2003 2004 2003
--------- --------- --------- --------
Net Income...................................................................... $ 7,653 $ 7,349 $21,943 $21,752
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period, net of
income tax (expense) benefit of $(3,104), $2,753, $(359) and $1,590....... 4,656 (4,129) 539 (2,385)
Less: Reclassification adjustment for gains included
in net income, net of income tax expense of $133, $205, $293 and $380..... 199 307 439 570
--------- --------- --------- ---------
4,457 (4,436) 100 (2,955)
--------- --------- --------- ---------
Comprehensive income ........................................................... $ 12,110 $ 2,913 $22,043 $18,797
========= ========= ========= =========
See notes to consolidated condensed financial statements
Page 5
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
2004 2003
--------- ---------
Balances, January 1 ............................................ $ 303,965 $ 261,129
Net income ..................................................... 21,943 21,752
Cash dividends ................................................. (12,777) (12,302)
Other comprehensive income (loss), net of tax................... 100 (2,955)
Stock issued under employee benefit plans ...................... 903 819
Stock issued under dividend reinvestment and stock purchase plan 977 887
Stock options exercised ........................................ 981 838
Stock Redeemed ................................................. (2,430) (301)
Issuance of stock in acquisitions............................... 31,218
Cash paid in lieu of fractional shares.......................... 116
--------- ---------
Balances, September 30 ......................................... $ 313,662 $ 301,201
========= =========
See notes to consolidated condensed financial statements
Page 6
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------------------
2004 2003
---------------- --------------
Cash Flows From Operating Activities:
Net income........................................................................ $ 21,943 $ 21,752
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses....................................................... 4,472 8,430
Depreciation and amortization................................................... 3,810 3,495
Mortgage loans originated for sale.............................................. (66,111) (190,639)
Proceeds from sales of mortgage loans........................................... 66,439 200,142
Change in interest receivable................................................... (754) 1,069
Change in interest payable...................................................... 1,026 (1,175)
Other adjustments............................................................... 2,557 564
--------------- ---------------
Net cash provided by operating activities..................................... $ 33,382 $ 43,638
--------------- ---------------
Cash Flows From Investing Activities:
Net change in interest-bearing deposits........................................... $ (4,063) $ (221)
Purchases of
Securities available for sale................................................... (170,719) (188,244)
Proceeds from maturities of
Securities available for sale................................................... 76,414 144,172
Proceeds from sales of
Securities available for sale................................................... 32,336 58,245
Purchase of Federal Reserve and
Federal Home Loan Bank Stock.................................................... (7,248)
Net change in loans............................................................... (46,525) (49,331)
Other adjustments................................................................. (4,768) (7,793)
Net cash paid in acquisition...................................................... (3,207)
--------------- ---------------
Net cash used by investing activities......................................... $ (124,573) $ (46,379)
--------------- ---------------
Cash Flows From Financing Activities:
Net change in
Demand and savings deposits..................................................... $ 20,514 $ 7,023
Certificates of deposit and other time deposits................................. 74,204 (5,044)
Borrowings...................................................................... (4,641) (20,713)
Cash dividends.................................................................... (12,777) (12,604)
Stock issued under employee benefit plan.......................................... 903 887
Stock issued under dividend reinvestment and stock purchase plan.................. 977 838
Stock options exercised........................................................... 981 819
Stock redeemed.................................................................... (2,430)
Cash paid in lieu of fractional shares............................................ 116
--------------- ---------------
Net cash provided (used) by financing activities.............................. 77,731 (28,678)
--------------- ---------------
Net Change in Cash and Cash Equivalents............................................. (13,460) (31,419)
Cash and Cash Equivalents, January 1................................................ 109,527 119,038
--------------- ---------------
Cash and Cash Equivalents, September 30............................................. $ 96,067 $ 87,619
=============== ===============
See notes to consolidated condensed financial statements.
Page 7
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 1. General
The significant accounting policies followed by First Merchants Corporation
("Corporation") and its wholly owned subsidiaries for interim financial
reporting are consistent with the accounting policies followed for annual
financial reporting. All adjustments which are of a normal recurring nature and
are in the opinion of management necessary for a fair statement of the results
for the periods reported have been included in the accompanying consolidated
condensed financial statements.
The consolidated condensed balance sheet of the Corporation as of December 31,
2003 has been derived from the audited consolidated balance sheet of the
Corporation as of that date. Certain information and note disclosures normally
included in the Corporation's annual financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted. These consolidated condensed financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Corporation's Form 10-K annual
report filed with the Securities and Exchange Commission.
The results of operations for the three and nine month periods ended September
30, 2004 are not necessarily indicative of the results to be expected for the
year.
Stock options are granted for a fixed number of shares to employees. The
Corporation's stock option plans are accounted for in accordance with Accounting
Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to
Employees, and related interpretations. APB No. 25 requires compensation expense
for stock options to be recognized only if the market price of the underlying
stock exceeds the exercise price on the date of the grant. For all grants, no
stock-based employee compensation cost is reflected in net income, as options
granted under those plans had an exercise price equal to the market value of the
underlying common stock on the grant date.
The following table illustrates the effect on net income and earnings per share
if the Corporation has applied the fair value provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------------------------- ------------------------
Net income, as reported ..................................... $ 7,653 $ 7,349 $ 21,943 $ 21,752
Add: Total stock-based employee compensation
cost included in reported net income, net
of income taxes........................................... 2 12
Less: Total stock-based employee compensation
cost determined under the fair value based
method, net of income taxes .............................. (140) (149) (599) (641)
---------- ---------- ---------- ----------
Pro forma net income ........................................ $ 7,513 $ 7,202 $ 21,344 $ 21,123
========== ========== ========== ==========
Earnings per share:
Basic - as reported ...................................... $ .41 $ .40 $ 1.18 $ 1.20
Basic - pro forma ........................................ .41 .39 1.15 1.16
Diluted - as reported .................................... .41 .39 1.18 1.19
Diluted - pro forma ...................................... .40 .39 1.14 1.16
Page 8
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 1. General (continued)
The Corporation makes its Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, available on its website at www.firstmerchants.com without
charge, as soon as reasonably practicable after such reports are electronically
filed with, or furnished to, the Securities and Exchange Commission.
Additionally, upon request the Corporation will also provide without charge, a
copy of its Form 10-Q to any shareholder by mail. Requests should be sent to Mr.
Brian Edwards, Shareholder Relations Officer, First Merchants Corporation, P.O.
Box 792, Muncie, IN 47308-0792.
NOTE 2. Impact of Accounting Changes
In March 2004, the SEC issued Staff Accounting Bulletin No. 105 (SAB 105),
"Application of Accounting Principals to Loan Commitments". Current accounting
guidance requires the commitment to originate mortgage loans to be held for sale
be recognized on the balance sheet at fair value from inception through
expiration or funding. SAB 105 requires that the fair-value measurement include
only differences between the guaranteed interest rate in the loan commitment and
a market interest rate, excluding any expected future cash flows related to the
customer relationship or loan servicing. SAB 105 is effective for commitments to
originate mortgage loans to be held for sale that are entered into after March
31, 2004. Its adoption did not have a material impact on the consolidated
financial position or results of operations of the Corporation.
In March 2004, the FASB's Emerging Issues Task Force reached a consensus on EITF
Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments". The guidance prescribes a three-step model
for determining whether an investment is other-than-temporarily impaired and
requires disclosures about unrealized losses on investments. The accounting
guidance is effective for reporting periods beginning after June 15, 2004, while
the disclosure requirements are effective for annual reporting periods ending
after June 15, 2004. The adoption of this EITF did not have a material effect on
the consolidated financial position or results of operation of the Corporation.
NOTE 3. Investment Securities
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale at September 30, 2004
U.S. Treasury .................... $ 1,491 $ $ (1) $ 1,490
Federal agencies.................. 46,556 202 (78) 46,680
State and municipal .............. 155,406 7,254 (78) 162,582
Mortgage-backed securities ....... 191,492 752 (1,558) 190,686
Other asset-backed securities..... 518 518
Corporate obligations.............
Marketable equity securities...... 13,175 7 13,182
-------- -------- -------- --------
Total available for sale ..... 408,638 8,215 (1,715) 415,138
-------- -------- -------- --------
Held to maturity at September 30, 2004
State and municipal............... 5,452 204 5,656
Mortgage-backed securities........ 55 55
-------- -------- -------- --------
Total held to maturity ....... 5,507 204 5,711
-------- -------- -------- --------
Total investment securities .. $414,145 $ 8,419 $ (1,715) $420,849
======== ======== ======== ========
Page 9
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale at December 31, 2003
U.S. Treasury ....................... $ 1,498 $ 1,498
Federal agencies .................... 38,290 $ 523 $ (52) 38,761
State and municipal ................. 118,794 6,932 (86) 125,640
Mortgage-backed securities .......... 174,208 813 (1,817) 173,204
Corporate obligations ............... 500 16 516
Marketable equity securities ........ 9,237 4 9,241
-------- -------- -------- --------
Total available for sale ......... 342,527 8,288 (1,955) 348,860
-------- -------- -------- --------
Held to maturity at December 31, 2003
State and municipal ................. 7,860 389 8,249
Mortgage-backed securities .......... 77 77
-------- -------- -------- --------
Total held to maturity ........... 7,937 389 8,326
-------- -------- -------- --------
Total investment securities ...... $350,464 $ 8,677 $ (1,955) $357,186
======== ======== ======== ========
Page 10
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 4. Loans and Allowance
September 30, December 31,
2004 2003
---- ----
Loans:
Commercial and industrial loans .............................................. $ 445,235 $ 443,140
Agricultural production financing and other loans to farmers ................. 99,464 95,048
Real estate loans:
Construction ............................................................... 154,711 149,865
Commercial and farmland .................................................... 592,199 564,578
Residential ................................................................ 859,901 866,477
Individuals' loans for household and other personal expenditures ............. 203,763 196,093
Tax-exempt loans ............................................................. 11,062 16,363
Other loans .................................................................. 28,971 21,939
----------- -----------
2,395,306 2,353,503
Allowance for loan losses..................................................... (25,243) (25,493)
----------- -----------
Total Loans............................................................... $ 2,370,063 $ 2,328,010
=========== ===========
Nine Months Ended
September 30,
2004 2003
----------- -----------
Allowance for loan losses:
Balances, January 1 .......................................................... $ 25,493 $ 22,417
Allowance acquired in acquisition............................................. 3,727
Provision for losses ......................................................... 4,472 8,430
Recoveries on loans .......................................................... 1,234 1,539
Loans charged off ............................................................ (5,956) (6,271)
----------- -----------
Balances, September 30 ....................................................... $ 25,243 $ 29,842
=========== ===========
Information on nonaccruing, contractually
past due 90 days or more other than
nonaccruing and restructured loans is September 30, December 31,
summarized below: 2004 2003
================================================================================
Non-accrual loans................................ $ 16,852 $ 19,453
Loans contractually past due 90 days
or more other than nonaccruing................. 6,664 6,530
Restructured loans............................... 2,169 641
-------- --------
Total........................................ $ 25,685 $ 26,624
======== ========
Page 11
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 5. Net Income Per Share
Three Months Ended September 30,
2004 2003
------------------------------------------- -------------------------------------------
Weighted- Weighted-
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic net income per share:
Net income available to
common stockholders................. $ 7,653 18,548,041 $ .41 $ 7,349 18,466,678 $ .40
========== ==========
Effect of dilutive stock options........ 110,418 155,628
---------- ------------ ---------- ------------
Diluted net income per share:
Net income available to
common stockholders
and assumed conversions............. $ 7,653 18,658,459 $ .41 $ 7,349 18,622,306 $ .39
========== ============ ========== ========== ============ ==========
Options to purchase 415,186 and 167,483 shares for the three months ended
September 30, 2004 and 2003 were not included in the earnings per share
calculation because the exercise price exceeded the average market price.
Nine Months Ended September 30,
2004 2003
------------------------------------------- --------------------------------------------
Weighted- Weighted-
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic net income per share:
Net income available to
common stockholders................. $ 21,943 18,525,947 $ 1.18 $ 21,752 18,144,970 $ 1.20
========== ==========
Effect of dilutive stock options........ 123,632 128,352
---------- ------------ ---------- ------------
Diluted net income per share:
Net income available to
common stockholders
and assumed conversions............. $ 21,943 18,649,579 $ 1.18 $ 21,752 18,273,322 $ 1.19
========== ============ ========== ========== ============ ==========
Options to purchase 295,025 and 289,909 shares for the nine months ended
September 30, 2004 and 2003 were not included in the earnings per share
calculation because the exercise price exceeded the average market price.
Page 12
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
Note 6. Defined Benefit Pension Costs
The Corporation has defined benefit pension plans covering substantially all
employees. The plans provide benefits that are based on the employees'
compensation and years of service. The Corporation uses an actuarial calculation
to determine pension plan costs.
The following represents the pension cost for the three and nine months ended
September 30.
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------------------------- -------------------------
Pension Cost
- ------------
Service cost............................................ $ 480 $ 391 $ 1,440 $ 1,173
Interest cost .......................................... 697 654 2,091 1,962
Expected return on plan assets ......................... (701) (630) (2,103) (1,889)
Amortization of the transition asset.................... (37) (37) (113) (113)
Amortization of prior service cost...................... 34 34 103 103
Amortization of the net loss............................ 88 65 264 194
---------- ---------- ---------- ----------
Total Pension Cost................................ $ 561 $ 477 $ 1,682 $ 1,430
========== ========== ========== ==========
Page 13
FIRST MERCHANTS CORPORATION
FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- --------------
FORWARD-LOOKING STATEMENTS
The Corporation from time to time includes forward-looking statements in
its oral and written communication. The Corporation may include forward-looking
statements in filings with the Securities and Exchange Commission, such as this
Form 10-Q, in other written materials and in oral statements made by senior
management to analysts, investors, representatives of the media and others. The
Corporation intends these forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and the Corporation is including this
statement for purposes of these safe harbor provisions. Forward-looking
statements can often be identified by the use of words like "believe",
"continue", "pattern", "estimate", "project", "intend", "anticipate", "expect"
and similar expressions or future or conditional verbs such as "will", "would",
"should", "could", "might", "can", "may", or similar expressions. These
forward-looking statements include:
* statements of the Corporation's goals, intentions and expectations;
* statements regarding the Corporation's business plan and growth
strategies;
* statements regarding the asset quality of the Corporation's loan and
investment portfolios; and
* estimates of the Corporation's risks and future costs and benefits.
These forward-looking statements are subject to significant risks,
assumptions and uncertainties, including, among other things, the following
important factors which could affect the actual outcome of future events:
* fluctuations in market rates of interest and loan and deposit pricing,
which could negatively affect the Corporation's net interest margin,
asset valuations and expense expectations;
* adverse changes in the economy, which might affect the Corporation's
business prospects and could cause credit-related losses and expenses;
* adverse developments in the Corporation's loan and investment
portfolios;
* competitive factors in the banking industry, such as the trend towards
consolidation in the Corporation's market;
* changes in the banking legislation or the regulatory requirements of
federal and state agencies applicable to bank holding companies and
banks like the Corporation's affiliate banks;
* acquisitions of other businesses by the Corporation and integration of
such acquired businesses;
* changes in market, economic, operational, liquidity, credit and interest
rate risks associated with the Corporation's business; and
* the continued availability of earnings and excess capital sufficient
for the lawful and prudent declaration and payment of cash dividends.
Because of these and other uncertainties, the Corporation's actual future
results may be materially different from the results indicated by these forward-
looking statements. In addition, the Corporation's past results of operations do
not necessarily indicate its future results.
Page 14
FIRST MERCHANTS CORPORATION
FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations continued
- ------------------------
CRITICAL ACCOUNTING POLICIES
Generally accepted accounting principles are complex and require
management to apply significant judgments to various accounting, reporting and
disclosure matters. Management of the Corporation must use assumptions and
estimates to apply these principles where actual measurement is not possible or
practical. For a complete discussion of the Corporation's significant accounting
policies, see "Notes to the Consolidated Financial Statements" in the
Corporation's 2003 Annual Report. Certain policies are considered critical
because they are highly dependent upon subjective or complex judgments,
assumptions and estimates. Changes in such estimates may have a significant
impact on the financial statements. Management has reviewed the application of
these policies with the Audit Committee of the Corporation's Board of Directors.
For a discussion of applying critical accounting policies, see "Critical
Accounting Policies" beginning on page 4 in the Corporation's 2003 Annual
Report.
RESULTS OF OPERATIONS
Net income for the three months ended September 30, 2004, equaled
$7,653,000, compared to $7,349,000 in the same period of 2003. Diluted earnings
per share were $.41, an increase of 2.5 percent from the $.40 reported for the
third quarter 2003.
Net income for the nine months ended September 30, 2004, equaled
$21,943,000, compared to $21,752,000 during the same period in 2003. Diluted
earnings per share were $1.18, a .8 percent decrease from the $1.19 reported in
2003.
Annualized returns on average assets and average stockholders' equity
for the nine months ended September 30, 2004 were .95 percent and 9.50 percent,
respectively, compared with .99 percent and 9.98 percent for the same period of
2003.
The decreases in diluted earning per share, return on equity and return
on assets for the nine months ended September 30, 2004, are primarily due to a
decrease in net interest margin of 21 basis points from the same period in 2003,
decreased gains from the sale of mortgage loans of $2,790,000 mitigated by a
reduction in the provision for loan losses of $3,958,000. For further analysis,
see the respective sections of Management's Discussion and Analysis of Financial
Conditions and Results of Operations.
Page 15
FIRST MERCHANTS CORPORATION
FORM 10-Q
CAPITAL
The Corporation's regulatory capital continues to exceed regulatory
"well capitalized" standards. Tier I regulatory capital consists primarily of
total stockholders' equity and trust-preferred securities, less non-qualifying
intangible assets and unrealized net securities gains. The Corporation's Tier I
capital to average assets ratio was 7.6 percent at September 30, 2004 and 7.4
percent at year end 2003. In addition, at September 30, 2004, the Corporation
had a Tier I risk-based capital ratio of 9.5 percent and total risk-based
capital ratio of 11.6 percent. Regulatory capital guidelines require a Tier I
risk-based capital ratio of 4.0 percent and a total risk-based capital ratio of
8.0 percent.
The Corporation's GAAP capital ratio, defined as total stockholders'
equity to total assets, equaled 9.9 percent at September 30, 2004 and December
31, 2003. When the Corporation acquires other companies, GAAP capital increases
by the entire amount of the purchase price.
The Corporation's tangible capital ratio, defined as total
stockholders' equity less intangibles net of tax to total assets less
intangibles net of tax, equaled 6.0 percent as of September 30, 2004, up from
5.8 percent as of December 31, 2003.
Management believes that all of the above capital ratios are meaningful
measurements for evaluating the safety and soundness of the Corporation.
Additionally, management believes the following table is also meaningful when
considering performance measures of the Corporation. The table details and
reconciles tangible earnings per share, return on tangible capital and tangible
assets to traditional GAAP measures.
September 30, December 31,
(Dollars in Thousands) 2004 2003
Average Goodwill .......................... $ 112,281 $ 107,232
Average Core Deposit Intangible (CDI) ..... 22,574 24,393
Average Deferred Tax on CDI ............... (8,254) (8,951)
----------- -----------
Intangible Adjustment ................... $ 126,601 $ 122,674
=========== ===========
Average Stockholders' Equity (GAAP Capital) $ 308,035 $ 293,603
Intangible Adjustment ..................... (126,601) (122,674)
----------- -----------
Average Tangible Capital ................ $ 181,434 $ 170,929
=========== ===========
Average Assets ............................ $ 3,083,919 $ 2,960,195
Intangible Adjustment ..................... (126,601) (122,674)
----------- -----------
Average Tangible Assets ................. $ 2,957,318 $ 2,837,521
=========== ===========
Net Income ................................ $ 21,943 $ 27,571
CDI Amortization, net of tax .............. 1,626 2,341
----------- -----------
Tangible Net Income ..................... $ 23,569 $ 29,912
=========== ===========
Diluted Earnings per Share ................ $ 1.18 $ 1.50
Diluted Tangible Earnings per Share ....... $ 1.26 $ 1.63
Return on Average GAAP Capital ............ 9.50% 9.39%
Return on Average Tangible Capital ........ 17.32% 17.50%
Return on Average Assets .................. 0.95% 0.93%
Return on Average Tangible Assets ......... 1.06% 1.05%
Page 16
FIRST MERCHANTS CORPORATION
FORM 10-Q
ASSET QUALITY/PROVISION FOR LOAN LOSSES
The allowance for loan losses is maintained through the provision
for loan losses, which is a charge against earnings. The amount provided for
loan losses and the determination of the adequacy of the allowance are based on
a continuous review of the loan portfolio, including an internally administered
loan "watch" list and an independent loan review primarily provided by an
outside accounting firm. The evaluation takes into consideration identified
credit problems, as well as the possibility of losses inherent in the loan
portfolio that are not specifically identified.
At September 30, 2004, non-performing loans totaled $25,685,000, a
decrease of $939,000 from December 31, 2003, as noted in the table on page 11.
At September 30, 2004, impaired loans totaled $54,969,000, a increase
of $10,197,000 from December 31, 2003. At September 30, 2004, an allowance for
losses was not deemed necessary for impaired loans totaling $44,139,000, but an
allowance of $3,912,000 was recorded for the remaining balance of impaired loans
of $10,830,000 and is included in the Corporation's allowance for loan losses.
The increase in impaired loans was primarily the result of two loans totaling
$9,272,000. The larger of the two credits totals $4,588,000 and is in the
process of liquidation. The second totals $2,342,000 and is classified
substandard due to weak cashflow. The average balance of impaired loans for the
first nine months of 2004 was $54,166,000.
At December 31, 2003, impaired loans totaled $44,772,000. An allowance
for losses was not deemed necessary for impaired loans totaling $32,047,000, but
an allowance of $5,728,000 was recorded for the remaining balance of impaired
loans of $12,725,000 and is included in the Corporation's allowance for loan
losses. The average balance of impaired loans for 2003 was $50,245,000.
At September 30, 2004, the allowance for loan losses was $25,243,000, a
decrease of $250,000 from year end 2003. As a percent of loans, the allowance
was 1.05 percent at September 30, 2004 and 1.08 at December 31, 2003.
The provision for loan losses for the first nine months of 2004 was
$4,472,000, a decrease of $3,958,000 from $8,430,000 for the same period in
2003. The Corporation's provision for loan losses reflects reduced specific
reserves, net charge-offs and non-performing loans, resulting in decreased
provision expense. Current declines in the amount of non-performing loans and
average impaired loan balances indicate that loan asset quality has improved
during the first nine months of 2004.
Page 17
FIRST MERCHANTS CORPORATION
FORM 10-Q
LIQUIDITY
Liquidity management is the process by which the Corporation ensures that
adequate liquid funds are available for the Corporation and its subsidiaries.
These funds are necessary in order for the Corporation and its subsidiaries to
meet financial commitments on a timely basis. These commitments include
withdrawals by depositors, funding credit obligations to borrowers, paying
dividends to shareholders, paying operating expenses, funding capital
expenditures, and maintaining deposit reserve requirements. Liquidity is
monitored and closely managed by the asset/liability committees at each
subsidiary and by the Corporation's asset/liability committee.
The liquidity of the Corporation is dependent upon the receipt of
dividends from its bank subsidiaries, which are subject to certain regulatory
limitations and access to other funding sources. Liquidity of the Corporation's
bank subsidiaries is derived primarily from core deposit growth, principal
payments received on loans, the sale and maturity of investment securities, net
cash provided by operating activities, and access to other funding sources. The
most stable source of liability-funded liquidity for both the long-term and
short-term is deposit growth and retention in the core deposit base. In
addition, the Corporation utilizes advances from the Federal Home Loan Bank
("FHLB") and a revolving line of credit with LaSalle Bank, N.A. as a funding
source. At September 30, 2004, total borrowings from the FHLB were $227,209,000.
The Corporation's bank subsidiaries have pledged certain mortgage loans and
certain investments to the FHLB. The total available remaining borrowing
capacity from the FHLB at September 30, 2004, was $152,843,000. At September 30,
2004, the Corporation's revolving line of credit had a balance of $3,000,000 and
a remaining borrowing capacity of $17,000,000. The principal source of
asset-funded liquidity is investment securities classified as
available-for-sale, the market values of which totaled $415,138,000 at September
30, 2004, an increase of $66,278,000 or 19.0 percent over December 31, 2003.
Securities classified as held-to-maturity that are maturing within a short
period of time can also be a source of liquidity. Securities classified as
held-to-maturity and that are maturing in one year or less totaled $880,000 at
September 30, 2004. In addition, other types of assets such as cash and due from
banks, federal funds sold and securities purchased under agreements to resell,
and loans and interest-bearing deposits with other banks maturing within one
year are sources of liquidity.
In the normal course of business, the Corporation is a party to a number
of other off-balance sheet activities that contain credit, market and
operational risk that are not reflected in whole or in part in the Corporation's
consolidated financial statements. Such activities include: traditional
off-balance sheet credit-related financial instruments, commitments under
operating leases and long-term debt.
The Corporation provides customers with off-balance sheet credit support
through loan commitments and standby letters of credit. Summarized
credit-related financial instruments at September 30, 2004 are as follows:
At September 30,
(Dollars in thousands) 2004
================================================================================
Amounts of commitments:
Loan commitments to extend credit ............................... $ 549,970
Standby letters of credit ....................................... 27,522
----------
$ 577,492
==========
Since many of the commitments are expected to expire unused or be only
partially used, the total amount of unused commitments in the preceding table
does not necessarily represent future cash requirements.
In addition to owned banking facilities, the Corporation has entered into a
number of long-term leasing arrangements to support the ongoing activities of
the Corporation. The required payments under such commitments and long-term debt
at September 30, 2004 are as follows:
2004 2005 2006 2007 2008 2009 Total
(Dollars in thousands) remaining and after
=======================================================================================================
Operating leases ......... $ 384 $ 1,443 $ 1,327 $ 1,112 $ 916 $ 3,255 $ 8,437
Long-term debt ........... 70,507 29,727 27,882 24,995 51,653 175,158 379,922
-------- -------- -------- -------- -------- -------- --------
Total .................... $ 70,891 $ 31,170 $ 29,209 $ 26,107 $ 52,569 $178,413 $388,359
======== ======== ======== ======== ======== ======== ========
Page 18
FIRST MERCHANTS CORPORATION
FORM 10-Q
INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET RISK
Asset/Liability Management has been an important factor in the
Corporation's ability to record consistent earnings growth through periods of
interest rate volatility and product deregulation. Management and the Board of
Directors monitor the Corporation's liquidity and interest sensitivity positions
at regular meetings to review how changes in interest rates may affect earnings.
Decisions regarding investment and the pricing of loan and deposit products are
made after analysis of reports designed to measure liquidity, rate sensitivity,
the Corporation's exposure to changes in net interest income given various rate
scenarios and the economic and competitive environments.
It is the objective of the Corporation to monitor and manage risk
exposure to net interest income caused by changes in interest rates. It is the
goal of the Corporation's Asset Liability function to provide optimum and stable
net interest income. To accomplish this, management uses two asset liability
tools. GAP/Interest Rate Sensitivity Reports and Net Interest Income Simulation
Modeling are both constructed, presented, and monitored quarterly.
Management believes that the Corporation's liquidity and interest
sensitivity position at September 30, 2004, remained adequate to meet the
Corporation's primary goal of achieving optimum interest margins while avoiding
undue interest rate risk.
The Corporation places its greatest credence in net interest income
simulation modeling. The GAP/Interest Rate Sensitivity Report is believed by the
Corporation's management to have two major shortfalls. The GAP/Interest Rate
Sensitivity Report fails to precisely gauge how often an interest rate sensitive
product reprices, nor is it able to measure the magnitude of potential future
rate movements.
Net interest income simulation modeling, or earnings-at-risk, measures
the sensitivity of net interest income to various interest rate movements. The
Corporation's asset liability process monitors simulated net interest income
under three separate interest rate scenarios; base, rising and falling.
Estimated net interest income for each scenario is calculated over a 12-month
horizon. The immediate and parallel changes to the base case scenario used in
the model are presented below. The interest rate scenarios are used for
analytical purposes and do not necessarily represent management's view of future
market movements. Rather, these are intended to provide a measure of the degree
of volatility interest rate movements may introduce into the earnings of the
Corporation.
The base scenario is highly dependent on numerous assumptions embedded
in the model, including assumptions related to future interest rates. While the
base sensitivity analysis incorporates management's best estimate of interest
rate and balance sheet dynamics under various market rate movements, the actual
behavior and resulting earnings impact will likely differ from that projected.
For mortgage-related assets, the base simulation model captures the expected
prepayment behavior under changing interest rate environments. Assumptions and
methodologies regarding the interest rate or balance behavior of indeterminate
maturity products, e.g., savings, money market, NOW and demand deposits reflect
management's best estimate of expected future behavior.
Page 19
FIRST MERCHANTS CORPORATION
FORM 10-Q
The comparative rising and falling scenarios for the period ended June 30,
2005 assume further interest rate changes in addition to the base simulation
discussed above. These changes are immediate and parallel changes to the base
case senario. In addition, total rate movements (beginning point minus ending
point) to each of the various driver rates utilized by management in the base
simulation for the period ended June 30, 2005 are as follows:
Driver Rates RISING FALLING
================================================================================
Prime 200 Basis Points (200) Basis Points
Federal Funds 200 (100)
One-Year T-Bill 200 (157)
Two-Year T-Bill 200 (233)
Three-Year T-Bill 200 (290)
Interest Checking 100 (14)
MMIA Savings 100 (24)
First Flex 100 (24)
CD's 200 (200)
FHLB Advances 200 (200)
Results for the base, rising and falling interest rate scenarios are listed
below, based upon the Corporation's rate sensitive assets at June 30, 2004. The
net interest income shown represents cumulative net interest income over a
12-month time horizon. Balance sheet assumptions used for the base scenario are
the same for the rising and falling simulations.
BASE RISING FALLING
================================================================================
Net Interest Income (dollars in thousands) $107,825 $116,032 $ 93,395
Variance from base $ 8,206 $(14,431)
Percent of change from base 1.61% (13.38)%
The comparative rising and falling scenarios for the period ended December 31,
2004 assume further interest rate changes in addition to the base simulation
discussed above. These changes are immediate and parallel changes to the base
case scenario. In addition, total rate movements (beginning point minus ending
point) to each of the various driver rates utilized by management in the base
simulation for the period ended December 31, 2004 are as follows:
Driver Rates RISING FALLING
================================================================================
Prime 200 Basis Points (200) Basis Points
Federal Funds 200 (100)
One-Year T-Bill 200 (138)
Two-Year T-Bill 200 (194)
Interest Checking 100 (14)
MMIA Savings 100 (24)
First Flex 100 (24)
CD's 200 (59)
FHLB Advances 200 (117)
Results for the base, rising and falling interest rate scenarios are listed
below. The net interest income shown represents cumulative net interest income
over a 12-month time horizon. Balance sheet assumptions used for the base
scenario are the same for the rising and falling simulations.
BASE RISING FALLING
===============================================================================
Net Interest Income (dollars in thousands) $100,873 $102,792 $ 87,217
Variance from base $ 1,919 $(13,655)
Percent of change from base 1.90% (13.54)%
Page 20
FIRST MERCHANTS CORPORATION
FORM 10-Q
EARNING ASSETS
The following table presents the earning asset mix as of September 30,
2004, and December 31, 2003.
Loans increased approximately $16.2 million from December 31, 2003 to
September 30, 2004, while investment securities increased by $63.8 million
during the same period. The Corporation's interest sensitivity and liquidity
position has allowed management to purchase securities resulting in increased
net interest income from securities.
- ----------------------------------------------------------------------------------------------------
EARNING ASSETS
(Dollars in Millions) September 30, December 31,
2004 2003
- ---------------------------------------------------------------------------------------------------
Federal funds sold and interest-bearing deposits $ 34.9 $ 40.6
Investment securities available for sale ....... 415.1 348.9
Investment securities held to maturity ......... 5.5 7.9
Mortgage loans held for sale ................... 2.7 3.0
Loans .......................................... 2,370.1 2,353.6
Federal Reserve and Federal Home Loan Bank stock 22.8 15.5
---------- ----------
Total ..................... $ 2,851.1 $ 2,769.5
========== ==========
- --------------------------------------------------------------------------------
DEPOSITS AND BORROWINGS
The following table presents the level of deposits and borrowed funds
(Federal funds purchased, repurchase agreements, U.S. Treasury demand notes,
Federal Home Loan Bank advances, subordinated debentures and other borrowed
funds)at September 30, 2004, and December 31, 2003.
- --------------------------------------------------------------------------------
(Dollars in Millions) September 30, December 31,
2004 2003
---------- ------------
Deposits ........................................ $ 2,456.8 $ 2,362.1
Securities sold under repurchase agreements...... 60.5 71.1
Federal Home Loan Bank advances ................. 227.2 212.8
Subordinated debentures, revolving credit lines
and term loans................................ 92.0 97.8
Other borrowed funds ............................ .2 1.5
The Corporation has continued to leverage its capital position with
Federal Home Loan Bank advances, as well as repurchase agreements which are
pledged against acquired investment securities as collateral for the borrowings.
The interest rate risk is included as part of the Corporation's interest
simulation discussed in Management's Discussion and Analysis under the headings
"LIQUIDITY" and "INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET RISK".
Page 21
FIRST MERCHANTS CORPORATION
FORM 10-Q
NET INTEREST INCOME
Net Interest Income is the primary source of the Corporation's
earnings. It is a function of net interest margin and the level of average
earning assets. The table below presents the Corporation's asset yields,
interest expense, and net interest income as a percent of average earning assets
for the three and nine months ended September 30, 2004 and 2003.
Annualized net interest income (FTE) for the nine months ended
September 30, 2004 increased by $319,000, or .3 percent over the same period in
2003. For the same period interest income and interest expense, as a percent of
average earning assets, decreased 40 basis points and 19 basis points
respectively. This resulted in a 21 basis point decline in net interest income,
as a percent of average earning assets, from the first nine months 2003 margin
of 4.10 percent. Federal Reserve Bank rate reductions during 2003 significantly
contributed to this margin compression. Net interest margin for the trailing
four quarters equaled 3.78, 3.87, 3.87 and 3.89 percent. Since June 28, 2004, 75
basis points of prime rate increases have aided third quarter margin
improvement.
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in Thousands) 2004 2003 2004 2003
Annualized Net Interest Income........................ $ 107,168 $ 103,496 $ 104,362 $ 103,785
Annualized FTE Adjustment............................. $ 3,924 $ 3,809 $ 3,569 $ 3,827
Annualized Net Interest Income
On a Fully Taxable Equivalent Basis................. $ 111,092 $ 107,305 $ 107,931 $ 107,612
Average Earning Assets................................ $2,818,392 $2,712,070 $2,772,189 $2,628,319
Interest Income (FTE) as a Percent
of Average Earning Assets........................... 5.79% 5.89% 5.71% 6.11%
Interest Expense as a Percent
of Average Earning Assets........................... 1.85% 1.93% 1.82% 2.01%
Net Interest Income (FTE) as a Percent
of Average Earning Assets........................... 3.94% 3.96% 3.89% 4.10%
Average earning assets include the average balance of securities classified as
available for sale, computed based on the average of the historical amortized
cost balances without the effects of the fair value adjustment. In addition,
annualized amounts are computed utilizing a 30/360 day basis.
Page 22
FIRST MERCHANTS CORPORATION
FORM 10-Q
OTHER INCOME
Other income in the third quarter of 2004 was $465,000 or 5.2 percent
lower than the same quarter of 2003. Gains on sales of mortgage loans decreased
by $657,000 from the same period in 2003 as stabilizing mortgage rates caused
reduced volume from refinancing of mortgage loans.
Other income in the first nine months of 2004 was $2,432,000 or 8.6
percent lower than the same period of 2003. Gains on sales of mortgage loans
decreased by $2,790,000 from the same period in 2003 as stabilizing mortgage
rates caused reduced volume from refinancing of mortgage loans.
OTHER EXPENSES
Total other expenses represent non-interest expenses of the
Corporation. Total other expenses during the third quarter of 2004 decreased
from the third quarter of 2003 by $170,000 or .7 percent.
Total other expenses during the first nine months of 2004 exceeded the
same period in 2003 by $640,000 or .7 percent.
Two areas account for the change:
1. Salaries and benefit expense grew $1,284,000, due to normal salary
increases and additional salary cost related to the March 1, 2003
acquisition of Commerce National Bank.
2. In 2003, the Corporation accrued $460,000 in anticipation of a
settlement of a claim. The claim has been settled for $184,500 causing
a reduction in other expenses of $275,500.
Page 23
FIRST MERCHANTS CORPORATION
FORM 10-Q
INCOME TAXES
Income tax expense, for the nine months ended September 30, 2004,
increased by $1,127,000 from the same period in 2003. The effective tax rate was
30.8 and 28.4 percent for the 2004 and 2003 periods.
OTHER
The Securities and Exchange Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission, including
the Corporation, and that address is (http://www.sec.gov).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The information required under this item is included as part of Management's
Discussion and Analysis of Financial Condition and Results of Operations, under
the headings "LIQUIDITY" and "INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET
RISK".
Item 4. Controls and Procedures
- -------------------------------------------------------------------
At the end of the period covered by this report, the Corporation carried out an
evaluation, under the supervision and with the participation of the
Corporation's management, including the Corporation's Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
it's disclosure controls and procedures. Based upon that evaluation, the
Corporation's Chief Executive Officer and Chief Financial Officer concluded that
the Corporation's disclosure controls and procedures are effective. Disclosure
controls and procedures are controls and procedures that are designed to ensure
that information required to be disclosed in Corporation reports filed or
submitted under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
There have been no changes in the Corporation's internal controls over financial
reporting identified in connection with the evaluation referenced above that
occurred during the Corporation's last fiscal quarter that have materially
affected, or is reasonably likely to materially affect, the Corporation's
internal control over financial reporting.
Page 24
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
None
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
- ---------------------------------------------------
a. None
b. None
c. None
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None
Item 5. Other Information
- --------------------------
a. None
b. On October 12, 2004, the Board of Directors of the Corporation
amended and restated the Corporation's By-Laws. As part of the amendments,
Article IV, Section 9 was amended to change the procedures by which shareholders
of the Corporation may recommend nominees to the Corporation's Board of
Directors. The new procedures are different than those set forth in the
Corporation's March 5, 2004 Proxy Statement. The exact text of Article IV,
Section 9 of the Corporation's By-Laws which sets forth those procedures is set
forth below in its entirety:
Section 9. Nominations for Director. The Nominating and Governance
Committee of the Board of Directors shall have the responsibility for nominating
individuals to serve as members of the Board of Directors, including the slate
of Directors to be elected each year at the annual meeting of shareholders. In
so doing, the Committee shall maintain up-to-date criteria for selecting
Directors and a process for identifying and evaluating prospective nominees.
Shareholders may suggest a candidate for consideration by the Committee as a
Director nominee by submitting the suggestion in writing and delivering or
mailing it to the Secretary of the Corporation at the Corporation's principal
office. Suggestions for nominees from shareholders must include: (a) the name,
address and number of the Corporation's shares owned by the shareholder; (b) the
name, address, age and principal occupation of the suggested nominee; (c) such
other information concerning the suggested nominee as the shareholder may wish
to submit or the Committee may reasonably request. The Committee shall evaluate
suggestions for nominees from shareholders in the same manner as other
candidates.
Page 25
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART II. OTHER INFORMATION
Item 6. Exhibits
- -----------------------------------------
a. Exhibits
Exhibit No.: Description of Exhibit: Form 10-Q Page No.:
------------ ------------------------- -------------------
3(ii) Bylaws of First Merchants
Corporation, as most
recently amended on
October 12, 2004
(Incorporated by reference
to Exhibit 3(ii) to First
Merchants Corporation's
current report on Form 8-K
filed October 15, 2004.)
10a First Merchants Corporation 29
1999 Long-Term Equity
Incentive Plan, as most
recently amended on August
10, 2004
31.1 Certification of Chief 43
Executive Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
31.2 Certification of Chief 44
Financial Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
32 Certifications Pursuant to 45
18 U.S.C. Section 1350, as
Adopted Pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002
Page 26
FIRST MERCHANTS CORPORATION
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
First Merchants Corporation
---------------------------
(Registrant)
Date 11/09/04 by /s/ Michael L. Cox
--------------------------- -------------------------------------
Michael L. Cox
President and Chief Executive Officer
Date 11/09/04 by /s/ Mark K. Hardwick
--------------------------- -------------------------------------
Mark K. Hardwick
Senior Vice President and
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
Page 27
FIRST MERCHANTS CORPORATION
FORM 10-Q
INDEX TO EXHIBITS
INDEX TO EXHIBITS
(a)3. Exhibits:
Exhibit No.: Description of Exhibit: Form 10-Q Page No.:
------------ ------------------------- -------------------
3(ii) Bylaws of First Merchants
Corporation, as most
recently amended on
October 12, 2004
(Incorporated by reference
to Exhibit 3(ii) to First
Merchants Corporation's
current report on Form 8-K
filed October 15, 2004.)
10a First Merchants Corporation 29
1999 Long-Term Equity
Incentive Plan, as most
recently amended on August
10, 2004
31.1 Certification of Chief 43
Executive Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
31.2 Certification of Chief 44
Financial Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
32 Certifications Pursuant to 45
18 U.S.C. Section 1350, as
Adopted Pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002
Page 28
Exhibit 10a
FIRST MERCHANTS CORPORATION
1999 LONG-TERM EQUITY INCENTIVE PLAN
ARTICLE I
ESTABLISHMENT AND PURPOSE
Section 1.01. Establishment and Term of Plan. First Merchants
Corporation, an Indiana corporation (the "Company"), hereby establishes the
First Merchants Corporation 1999 Long-Term Equity Incentive Plan (the "Plan"),
effective as of April 14, 1999, subject to the approval of the Plan at the
Company's 1999 annual meeting of shareholders by the holders of a majority of
the shares of the Company's common stock present and voting at that meeting in
person or by proxy.
Section 1.02. Purpose. The Plan is designed to promote the interests of
the Company, its subsidiaries, and its shareholders by providing stock-based
incentives to selected Employees, Non-Employee Directors, Subsidiary Directors
and Advisory Directors who are expected to contribute materially to the success
of the Company and its subsidiaries. The purpose of the Plan is to provide a
means of rewarding performance and to provide an opportunity to increase the
personal ownership interest of Employees, Non-Employee Directors, Subsidiary
Directors and Advisory Directors in the continued success of the Company. The
Company believes that the Plan will assist its efforts to attract and retain
quality Employees, Non-Employee Directors, Subsidiary Directors and Advisory
Directors.
ARTICLE II
ADMINISTRATION
Section 2.01. Administrative Committee. The Plan shall be administered
by the Committee, which shall serve at the pleasure of the Board of Directors.
The Committee shall have full authority to administer the Plan, including
authority to interpret and construe any provision of the Plan and to adopt such
rules and regulations for administering the Plan as it may deem necessary to
comply with the requirements of the Plan or any applicable law.
Section 2.02. Powers of the Committee. The Committee shall, subject to
the terms of this Plan, have the authority to: (i) select the eligible
Employees, Subsidiary Directors and Advisory Directors who shall receive Awards,
(ii) grant Awards, (iii) determine the types and sizes of Awards to be granted
to Employees, Subsidiary Directors and Advisory Directors under the Plan (but
not to Non-Employee Directors, who shall receive Director Options in accordance
with Article VI of this Plan), (iv) determine the terms, conditions, vesting
periods, and restrictions applicable to Awards (other than Director Options),
(v) adopt, alter, and repeal administrative rules and practices governing this
Plan, (vi) interpret the terms and provisions of this Plan and any Awards
granted under this Plan, (vii) prescribe the forms of any Award Agreements or
other instruments relating to Awards, and (viii) otherwise supervise the
administration of this Plan. The Committee may delegate any of its authority to
any other person or persons that it deems appropriate with respect to Awards
granted to Employees who are not officers of the Company.
Page 29
Section 2.03. Actions of the Committee. All actions taken and all
interpretations and determinations made in good faith by the Committee, or made
by any other person or persons to whom the Committee has delegated authority,
shall be final and binding upon all Participants, the Company, and all other
interested persons. All decisions by the Committee shall be made with the
approval of not less than a majority of its members. Members of the Committee
who are eligible for Awards may vote on any matters affecting the administration
of the Plan or the grant of any Awards pursuant to the Plan, except that no such
member shall act upon the granting of an Award to himself or herself; but any
such member may be counted in determining the existence of a quorum of the
Committee.
ARTICLE III
ELIGIBILITY
Section 3.01. Employees, Subsidiary Directors and Advisory Directors.
Any Employee of the Company or any of its Subsidiaries who is selected by the
Committee to be a Participant under the Plan, and any Subsidiary Director or
Advisory Director, shall be eligible for the grant of Awards (other than
Director Options). The selection of the Employees, Subsidiary Directors and
Advisory Directors to receive Awards (other than Director Options) shall be
within the discretion of the Committee. More than one Award may be granted to
the same Employee, Subsidiary Director or Advisory Director.
Section 3.02. Non-Employee Directors. All Non-Employee Directors are
eligible for the grant of Director Options, as provided in Article VI of this
Plan. Non-Employee Directors are not, however, eligible for the grant of any
Awards other than Director Options.
ARTICLE IV
SHARES SUBJECT TO AWARDS
Section 4.01. Number of Common Shares. The shares subject to the Awards
and other provisions of the Plan shall be the Company's authorized but unissued,
or reacquired Common Shares. The aggregate number of Common Shares that may be
subject to Awards granted under this Plan in any fiscal year shall be equal to
the sum of (i) one percent (1%) of the number of Common Shares Outstanding as of
the last day of the Company's prior fiscal year, plus (ii) the number of Common
Shares that were available for the grant of Awards, but not granted, under this
Plan in any previous fiscal year; provided that in no event will the number of
Common Shares available for the grant of Awards in any fiscal year exceed
one-and-one-half percent (1 1/2%) of the Common Shares Outstanding as of the
Page 30
last day of the prior fiscal year. The aggregate number of Common Shares that
may be issued under the Plan upon the exercise of Incentive Stock Options is
1,200,000, as adjusted pursuant to Section 4.02. No fractional shares shall be
issued under this Plan; if necessary, the Committee shall determine the manner
in which the value of fractional shares will be treated.
The assumption of awards granted by an organization acquired by the
Company, or the grant of Awards under this Plan in substitution for any such
awards, shall not reduce the number of Common Shares available for the grant of
Awards under this Plan. Common Shares subject to an Award that is forfeited,
terminated or canceled without having been exercised shall again be available
for grant under this Plan, subject to the limitations noted in the foregoing
paragraph of this Section 4.01.
Section 4.02. Adjustment. In the event of any change in the Common
Shares by reason of a merger, consolidation, reorganization, recapitalization or
similar transaction, or in the event of a stock split, stock dividend or
distribution to shareholders (other than normal cash dividends), spin-off or any
other change in the corporate structure of the Company, the Committee shall
adjust the number and class of shares that may be issued under this Plan, the
aggregate number of Common Shares that may be issued under the Plan upon the
exercise of Incentive Stock Options, the number and class of shares subject to
outstanding Awards, the exercise price applicable to outstanding Awards, and the
Fair Market Value of the Common Shares and other value determinations applicable
to outstanding Awards, as appropriate. All determinations made by the Committee
with respect to adjustments under this Section 4.02 shall be conclusive and
binding for all purposes of the Plan.
ARTICLE V
AWARDS
Section 5.01. Grant of Awards. Awards authorized under this Article V
may be granted pursuant to another incentive program which incorporates by
reference the terms and conditions of this Plan. Awards may be granted singly or
in combination or tandem with other Awards. Awards may also be granted in
replacement of, or in substitution for, other awards granted by the Company
whether or not such other awards were granted under this Plan; without limiting
the foregoing, if a Participant pays all or part of the exercise price or taxes
associated with an Award by the transfer of Common Shares or the surrender of
all or part of an Award (including the Award being exercised), the Committee
may, in its discretion, grant a new Award to replace the Common Shares that were
transferred or the Award that was surrendered. The Company may assume awards
granted by an organization acquired by the Company or may grant Awards in
replacement of, or in substitution for, any such awards.
Section 5.02. Types of Awards. Awards may include, but are not
limited to, the following:
Page 31
(a) Director Option. A right to purchase Common Shares
granted to a Non-Employee Director pursuant to Article VI of this Plan.
(b) Stock Award. An Award that is made in Common Shares or
Restricted Stock or that is otherwise based on, or valued in whole or
in part by reference to, the Common Shares. All or part of any Stock
Award may be subject to conditions, restrictions and risks of
forfeiture, as and to the extent established by the Committee. Stock
Awards may be based on the Fair Market Value of the Common Shares, or
on other specified values or methods of valuation, as determined by the
Committee.
(c) Stock Option. A right to purchase a specified number of
Common Shares, during a specified period and at a specified exercise
price, all as determined by the Committee. A Stock Option may be an
Incentive Stock Option or a Non-Qualified Stock Option. Incentive Stock
Options may only be issued to Employees. In addition to the terms,
conditions, vesting periods, and restrictions established by the
Committee in the Award Agreement, Incentive Stock Options must comply
with the requirements of Section 422 of the Code, Section 5.03(f), and
this Article V.
Section 5.03. Terms and Conditions of Awards; Agreements. Awards
granted under the Plan shall be evidenced by an Award Agreement executed by the
Company and the Participant, which shall contain such terms and be in such form
as the Committee may from time to time approve, subject to the following
limitations and conditions:
(a) Number of Shares. The Award Agreement shall state, as
appropriate, the type and total number of shares granted, and/or the
type and total number of shares with respect to which Stock Options are
granted.
(b) Award Prices. The Award Agreement shall state, as
applicable, the price per share of the Common Shares with respect to
which Stock Options are issued. The price or other value shall be
determined by the Committee. For Incentive Stock Options, the exercise
price shall satisfy all of the requirements of the Code and of Section
5.03(f) of this Plan.
(c) Payment of Exercise Price; Deferral. The exercise price of
a Stock Option (other than an Incentive Stock Option), Director Option,
and any Stock Award for which the Committee has established an exercise
price, may be paid in cash, by the transfer of Common Shares, by the
surrender of all or part of an Award (including the Award being
exercised), or by a combination of these methods, as and to the extent
permitted by the Committee. The exercise price of an Incentive Stock
Option may be paid in cash, by the transfer of Common Shares, or by a
combination of these methods, as and to the extent permitted by the
Committee at the time of grant, but may not be paid by the surrender of
all or part of an Award. The Committee may prescribe any other method
of paying the exercise price that it determines to be consistent with
applicable law and the purpose of this Plan.
Page 32
With the approval of the Committee, the delivery of the Common
Shares, cash, or any combination thereof subject to an Award (other
than Director Options) may be deferred, either in the form of
installments or a single future delivery. The Committee may also permit
selected Participants to defer the payment of some or all of their
Awards, as well as other compensation, in accordance with procedures
established by the Committee to assure that the recognition of taxable
income is deferred under the Code. The Committee may also establish
rules and procedures for the crediting of interest on deferred cash
payments and dividend equivalents on Awards.
(d) Issuance of Shares and compliance with Securities Laws.
The Company may postpone the issuance and delivery of certificates
representing shares until (a) the admission of such shares to listing
on any stock exchange on which shares of the Company of the same class
are then listed, and (b) the completion of such registration or other
qualification of such shares under any state or federal law, rule or
regulation as the Company shall determine to be necessary or advisable,
which registration or other qualification the Company shall use it best
efforts to complete; provided, however, a person purchasing shares
pursuant to the Plan has no right to require the Company to register
the Common Shares under federal or state securities laws at any time.
Any person purchasing shares pursuant to the Plan may be required to
make such representations and furnish such information as may, in the
opinion of counsel for the Company, be appropriate to permit the
Company, in light of the existence or non-existence with respect to
such shares of an effective registration under the Securities Act of
1933, as amended, or any similar state statute, to issue the shares in
compliance with the provisions of those or any comparable acts.
(e) Rights as a Shareholder. Unless otherwise provided by the
Board of Directors or the Committee, a Participant shall have rights as
a shareholder with respect to shares covered by an Award, including
voting rights or rights to dividends, only upon the date of issuance of
a certificate to him or her, and, if payment is required, only after
such shares are fully paid.
(f) Incentive Stock Options. To the extent any Award granted
pursuant to this Plan contains an Incentive Stock Option, the following
limitations and conditions shall apply to such Incentive Stock Option
and the Award Agreement relating thereto in addition to the terms and
conditions provided herein:
(i) Price. The price of an Incentive Stock
Option shall be an amount per share not
less than the Fair Market Value per share
of the Common Shares on the date of
granting of the option. In the case of
Incentive Stock Options granted to an
Employee of the Company who is a 10%
shareholder, the option price shall be
an amount per share not less than one
hundred ten percent (110%) of the Fair
Market Value per share of the Common Shares
on the date of the granting of the Incentive
Stock Option.
Page 33
(ii) Exercise Period. Unless terminated earlier
pursuant to other terms and provisions of
the Award Agreement, the term of each
Incentive Stock Option shall expire within
the period prescribed in the Agreement
relating thereto, which shall not be more
than five (5) years from the date the
Incentive Stock Option is granted if the
Participant is a ten percent (10%)
shareholder, and not more than ten (10)
years from the date the Incentive Stock
Option is granted if the Participant is not
a ten percent (10%) shareholder.
(iii) Limitation on Grants. No Incentive Stock
Option shall be granted under this Plan
after April 14, 2009.
(iv) Limitation on Transferability. No Incentive
Stock Option shall be assignable or
transferable except by will or under the
laws of descent and distribution.
Notwithstanding the foregoing, a Participant
may, by delivering written notice to the
Company in a form satisfactory to the
Company, designate a person who, in the
event of the Participant's death, shall
thereafter be entitled to exercise the
Option. During the lifetime of a
Participant, the Incentive Stock Option
shall be exercisable only by the
Participant and may not be transferred or
assigned pursuant to a qualified domestic
relations order.
(v) Maximum Exercise Rule. The aggregate Fair
Market Value (determined at the time the
option is granted) of the shares with
respect to which Incentive Stock Options are
exercisable for the first time by an
Employee during any calendar year under all
such plans of the Company and any parent or
Subsidiary of the Company shall not exceed
One Hundred Thousand Dollars ($100,000).
(g) Termination of Awards Under Certain Conditions. The
Committee may cancel any unexpired, unpaid or deferred Awards at any
time, if the Participant is not in compliance with all applicable
provisions of this Plan or with any Award Agreement, or if the
Participant, whether or not he or she is currently employed by the
Company, engages in any of the following activities without the prior
written consent of the Company:
(i) Directly or indirectly renders services to
or for an organization, or engages in a
business that is, in the judgment of the
Committee, in competition with the Company.
(ii) Discloses to anyone outside of the Company,
or uses for any purpose other than the
Company's business, any confidential or
proprietary information or material relating
to the Company, whether acquired by the
Participant during or after employment with
the Company.
Page 34
The Committee may, in its discretion and as a condition to the
exercise of an Award, require a Participant to acknowledge in writing
that he or she is in compliance with all applicable provisions of this
Plan and of any Award Agreement and has not engaged in any activities
referred to in clauses (i) and (ii) above.
(h) Nontransferability. Unless otherwise determined by the
Committee and provided in the Award Agreement, (i) no Award granted
under this Plan may be transferred or assigned by the Participant to
whom it is granted other than by will, pursuant to the laws of descent
and distribution, or pursuant to a qualified domestic relations order,
and (ii) an Award granted under this Plan may be exercised, during the
Participant's lifetime, only by the Participant or by the Participant's
guardian or legal representative. Notwithstanding the foregoing, a
Participant may, by delivering written notice to the Company in a form
satisfactory to the Company, designate a person who, the event of the
Participant's death, shall thereafter be entitled to exercise the
Award.
Section 5.04. Election to Defer Grant or Receipt of Award.
Notwithstanding any provision herein to the contrary, the Committee may provide,
in any Award Agreement or in any program granting Awards under this Plan, that
the Participant may elect to defer receipt of the Award as provided in the Award
Agreement or program.
ARTICLE VI
DIRECTOR OPTIONS
Section 6.01. Grant of Director Options.
(a) Administration. A committee formed by only those Directors
other than Non-Employee Directors shall have full authority to
administer Director Options, including authority to require that any
Non-Employee Director sign an Award Agreement as a condition of
receiving a Director Option.
(b) Granting of Director Options. Until this Plan is
terminated, each individual serving as a Non-Employee Director on July
1 in any year after 1998 shall automatically receive a Director Option,
effective on such date.
Section 6.02. Number of Common Shares Subject to Each Director Option.
Each Director Option shall entitle the Non-Employee Director the right to
purchase one thousand (1,000) Common Shares on the terms and conditions
specified herein.
Section 6.03. Exercise Price. The exercise price of the Common Shares
subject to each Director Option shall be the Fair Market Value of the Common
Shares at the date of grant.
Page 35
Section 6.04. Date Director Options Become Exercisable. Unless
otherwise established by the Board of Directors, each Director Option shall
become exercisable in full six (6) months after the date of grant; provided,
however, all Director Options shall become exercisable in full (i) upon a Change
of Control, (ii) in accordance with the terms of Section 6.06, or (iii) upon
attainment by the Non-Employee Director of age 70.
Section 6.05. Expiration Date. Unless terminated earlier pursuant to
the terms of this Plan, each Director Option shall terminate, and the right of
the holder to purchase Common Shares upon exercise of the Director Option shall
expire, at the close of business on the tenth anniversary date of the date of
grant.
Section 6.06. Continuous Service as a Director. No Director Option may
be exercised unless the Non-Employee Director to whom the Director Option was
granted has continued to be a Non-Employee Director from the time of grant
through the time of exercise, except as provided in Section 6.04 and this
Section 6.06.
(a) Retirement or Disability. If the service in office of a
Non-Employee Director is terminated due to the retirement or Disability
of the Non-Employee Director, the Non-Employee Director (or his or her
legal representative if he or she becomes incapacitated), shall have
the right, on or after the date of such termination but in no event
following the expiration of the Director Option, to exercise the
Director Option in full, whether or not the Non-Employee Director would
otherwise have been entitled to exercise the Director Option at such
date.
(b) Death. If the service in office of a Non-Employee Director
is terminated due to the death of the Non-Employee Director, the
Non-Employee Director's estate, executor, administrator, personal
representative or beneficiary shall have the right to exercise the
Director Option in full prior to the earlier of (i) one (1) year after
the date of his or her death, and (ii) the expiration of the Director
Option.
(c) Employed by Company. If a Non-Employee Director ceases to
be a Non-Employee Director by reason of his or her employment by the
Company or his or her appointment as a Subsidiary Director or Advisory
Director, the Director Option granted to that Non-Employee Director
shall be treated the same as Non-Qualified Stock Options held by
Employees, Subsidiary Directors or Advisory Directors, whichever is
applicable, and shall continue to be exercisable prior to the
expiration of the Director Option, subject to the limitations on
exercise following termination of employment, or termination of service
as a Subsidiary Director or Advisory Director, established by the
Committee pursuant to Article VIII of this Plan.
Page 36
ARTICLE VII
TAX WITHHOLDING OBLIGATIONS
Prior to the payment of an Award, the Company may withhold, or require
a Participant to remit to the Company, an amount sufficient to pay any federal,
state and local withholding taxes associated with the Award. The Committee may,
in its discretion and subject to such rules as the Committee may adopt, permit a
Participant to pay any or all withholding taxes associated with the Award in
cash, by the transfer of Common Shares, by the surrender of all or part of an
Award (including the Award being exercised), or by a combination of these
methods.
ARTICLE VIII
TERMINATION OF EMPLOYMENT OR TERMINATION OF SERVICE AS
SUBSIDIARY DIRECTOR OR ADVISORY DIRECTOR
Section 8.01. Termination of Employment. Unless the Committee provides
otherwise in the Award Agreement, if a Participant's employment with the Company
or a Subsidiary terminates for any reason other than Retirement, Disability or
death of the Participant, he or she may, but only within the thirty (30)-day
period immediately following such termination of employment, and in no event
later than the expiration date specified in the Award Agreement, exercise his or
her Award to the extent that he or she was entitled to exercise it at the date
of such termination; provided, however, if a Participant's employment is
terminated for deliberate, willful or gross misconduct, as determined by the
Board of Directors, all rights under the Award shall expire upon receipt of the
notice of such termination. The transfer of an Employee from the employ of the
Company to a Subsidiary, or vice versa, or from one Subsidiary to another
Subsidiary, shall not be deemed a termination of employment for purposes of the
Plan.
Section 8.02. Retirement or Disability. Unless the Committee provides
otherwise in the Award Agreement, if a Participant's employment with the Company
or any Subsidiary, or his or her service as a Subsidiary Director or Advisory
Director, terminates due to Retirement or Disability, the Participant (or his or
her legal representative if he or she becomes incapacitated) may, on or after
the date of such termination but in no event later than the expiration date of
the Award, exercise in full each Award granted to the Participant prior to such
termination, whether or not the Participant would otherwise have been entitled
to exercise the Award at such date. However, if the Award being exercised under
this Section is an Incentive Stock Option, it may be exercised as such only
during (i) the three (3) month period immediately following a termination due to
Retirement, or (ii) during the one (1) year period immediately following a
termination due to Disability (but in no event later than the expiration date of
the Award). During the remainder of the exercise period, if any, the option may
be exercised as a Non-Qualified Stock Option.
Section 8.03. Death. Unless the Committee provides otherwise in the
Award Agreement, if a Participant dies (whether prior to or after termination of
employment or termination of service as a Subsidiary Director or Advisory
Page 37
Director), the Participant's estate, executor, administrator, personal
representative or beneficiary may, within the one (1) year period immediately
following the Participant's death but in no event later than the expiration date
of the Award, exercise in full each Award granted to the Participant prior to
his or her death, whether or not the Participant would otherwise have been
entitled to exercise the Award at such date. If the Award being exercised under
this Section is an Incentive Stock Option and the Participant dies prior to
termination of employment or within three (3) months following such termination,
the Award may continue to be exercised as an Incentive Stock Option during the
entire one (1) year period immediately following the Participant's death (but in
no event later than the expiration date of the Award).
ARTICLE IX
CHANGE OF CONTROL
Unless and to the extent the terms and conditions of a Change of
Control agreement between the Company and a Participant provide otherwise, in
the event of a Change of Control of the Company, (i) all Stock Options then
outstanding will become fully exercisable as of the date of the Change of
Control, and (ii) all restrictions and conditions applicable to Restricted Stock
and other Stock Awards will be deemed to have been satisfied as of the date of
the Change of Control. Any such determination by the Board of Directors that is
made after the occurrence of a Change of Control will not be effective unless a
majority of the Directors then in office were in office at the beginning of a
period of twenty-four (24) consecutive months and the determination is approved
by a majority of such Directors.
ARTICLE X
AMENDMENT OF PLAN OR AWARDS
Section 10.01. Amendment, Suspension or Termination of Plan. The Board
of Directors may, from time to time, amend, suspend or terminate this Plan at
any time, and, in accordance with such amendments, may thereupon change terms
and conditions of any Awards not theretofore issued. Shareholder approval for
any such amendment will be required only to the extent necessary to satisfy the
rules of NASDAQ or any national exchange on which the Common Shares are listed,
or to satisfy any applicable federal or state law or regulation.
Section 10.02. Amendment of Outstanding Awards. The Committee may, in
its discretion, amend the terms of any Award (other than a Director Option),
prospectively or retroactively, but no such amendment may impair the rights of
any Participant without his or her consent. Shareholder approval for any such
amendment will be required only to the extent necessary to satisfy the rules of
NASDAQ or any national exchange on which the Common Shares are listed, or to
satisfy any applicable federal or state law or regulation. The Committee may, in
whole or in part, waive any restrictions or conditions applicable to, or
accelerate the vesting of, any Award (other than a Director Option).
Page 38
ARTICLE XI
MISCELLANEOUS
Section 11.01. Governing Law. The interpretation, validity and
enforcement of this Plan will, to the extent not otherwise governed by the Code
or the securities laws of the United States, be governed by the laws of the
State of Indiana.
Section 11.02. Rights of Employees. Nothing in this Plan will confer
upon any Participant the right to continued employment by the Company or limit
in any way the Company's right to terminate any Participant's employment at
will.
ARTICLE XII
DEFINITIONS
Section 12.01. Definitions. When capitalized in this Plan, unless the
context otherwise requires:
(a) "Advisory Director" means an advisory director of the
Company or any of its Subsidiaries, who is not an Employee or Director
of the Company or any of its Subsidiaries.
(b) "Award" means a grant made to a Participant pursuant to
Article V of this Plan.
(c) "Award Agreement" means a written instrument between the
Company and a Participant evidencing an Award and prescribing the
terms, conditions, and restrictions applicable to the Award.
(d) "Board of Directors" means the Board of Directors of the
Company, as constituted at any time.
(e) "Change of Control" means the first to occur of the
following events:
(i) any "person," as such term is used in
Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the
"Exchange Act") other than the Company, is
or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities
of the Company or First Merchants Bank,
National Association (the "Bank")
representing twenty-five percent (25%) or
more of the combined voting power of the
Company's or Bank's then outstanding
securities;
Page 39
(ii) persons constituting a majority of the Board
of Directors of the Company or the Bank were
not directors of the Company or the Bank for
at least the twenty-four (24) months
preceding months;
(iii) the shareholders of the Company or the Bank
approve a merger or consolidation of the
Company or the Bank with any other company,
other than (1) a merger or consolidation
which would result in the voting securities
of the Company or the Bank outstanding
immediately prior thereto continuing to
represent (either by remaining outstanding
or by being converted into voting securities
of the surviving entity) more than fifty
percent (50%) of the combined voting power
of the voting securities of the Company or
the Bank or such surviving entity
outstanding immediately after such merger
or consolidation or (2) a merger or
consolidation effected to implement a
recapitalization of the Company or the
Bank (or similar transaction) in which no
person acquires fifty percent (50%) or more
of the combined voting power of the
Company's or the Bank's then outstanding
securities; or
(iv) the shareholders of the Company approve a
plan of complete liquidation of the Company
or the Bank or an agreement for the sale or
disposition by the Company or the Bank of
all or substantially all of the Company's
assets.
(f) "Code" means the Internal Revenue Code of 1986, as
amended.
(g) "Committee" means the Compensation and Human Resources
Committee of the Board of Directors, consisting of two or more
Non-Employee Directors who are "non-employee directors" as defined in
paragraph (b)(3) of Rule 16b-3.
(h) "Common Share" means a share of common stock of First
Merchants Corporation.
(i) "Common Shares Outstanding" means the total number of
Common Shares outstanding as reflected in the Company's financial
statements as of the most recent fiscal year-end.
(j) "Company" means First Merchants Corporation.
(k) "Director" means a director of the Company.
Page 40
(l) "Director Option" means a right to purchase Common Shares
granted to a Non-Employee Director pursuant to Article VI.
(m) "Disabled" or "Disability" means a permanent disability as
defined in the applicable long-term disability plan of the Company;
except that "Disabled" or "Disability" with respect to Director Options
or Awards made to Subsidiary Directors or Advisory Directors shall mean
total and permanent disability as defined in Section 22(e)(3) of the
Code.
(n) "Employee" means any individual employed by the Company or
any of its Subsidiaries, including officers and Employees who are
members of the Board of Directors of the Company or any of its
Subsidiaries.
(o) "Fair Market Value" of a Common Share means the value of
the share on a particular date, determined as follows:
(i) the last reported sale price of a share of common stock
on such date, or if no sale took place, the last reported
sale price of a share on the most recent day on which a
sale of a share of stock took place as reported by NASDAQ
or a national securities exchange on which the Company's
stock is listed on such date; or
(ii) if the Company's stock is not listed on NASDAQ or a
national securities exchange on such date, the fair
market value of a share on such date as determined in
good faith by the Committee.
(p) "Incentive Stock Options" means stock options issued to
Employees which qualify under and meet the requirements of Section 422
of the Code.
(q) "Non-Employee Director" means any Director of the Company
who is not an Employee of the Company or any of its Subsidiaries.
(r) "Non-Qualified Stock Options" means stock options which do
not qualify under or meet the requirements of Section 422 of the Code.
(s) "Participant" means any person to whom an Award has been
granted under this Plan.
(t) "Plan" means this First Merchants Corporation 1999
Long-Term Equity Incentive Plan authorized by the Board of Directors at
its meeting held on February 9, 1999, as such Plan from time to time
may be amended as herein provided.
(u) "Restricted Stock" means an Award of Common Shares that
are nontransferable and are subject to a substantial risk of
forfeiture.
Page 41
(v) "Retirement", in the case of an Employee, means the
termination of all employment with the Company and its Subsidiaries for
any reason other than death or Disability after the day on which the
Employee has attained age 55.
(w) "Rule 16b-3" means Rule 16b-3 of the Securities and
Exchange Commission, under the Securities Exchange Age of 1934, as
amended.
(x) "Stock Options" means the Incentive Stock Options and the
Non-Qualified Stock Options issued pursuant to the Plan.
(y) "Subsidiary" means a corporation or other form of business
association of which shares (or other ownership interests) having fifty
percent (50%) or more of the voting power are, or in the future become,
owned or controlled, directly or indirectly, by the Company.
(z) "Subsidiary Director" means a director of a Subsidiary of
the Company, who is not a Director of the Company or an Employee of the
Company or any of its Subsidiaries.
Page 42
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Michael L. Cox, President and Chief Executive Officer of First Merchants
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Merchants
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report, based on such evaluation;
and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board or directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 9, 2004 /s/Michael L. Cox
----------------------------------------
Michael L. Cox
President and Chief Executive Officer
Page 43
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Mark K. Hardwick, Senior Vice President and Chief Financial Officer of First
Merchants Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Merchants
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report, based on such evaluation;
and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board or directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 9, 2004 /s/Mark K. Hardwick
----------------------------------------
Mark K. Hardwick
Senior Vice President and
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
Page 44
Exhibit 32
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of First Merchants Corporation (the
"Corporation") on Form 10-Q for the period ending September 30, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"), I
Michael L. Cox, President and Chief Executive Officer of the Corporation, do
hereby certify, in accordance with 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)); and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Corporation.
Date 11/09/04 by /s/ Michael L. Cox
--------------------------- -------------------------------------
Michael L. Cox
President and Chief Executive Officer
A signed copy of this written statement required by Section 906 has been
provided to First Merchants Corporation and will be retained by First Merchants
Corporation and furnished to the Securities and Exchange Commission or its staff
upon request.
In connection with the quarterly report of First Merchants Corporation (the
"Corporation") on Form 10-Q for the period ending September 30, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"), I
Mark K. Hardwick, Senior Vice President and Chief Financial Officer of the
Corporation, do hereby certify, in accordance with 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)); and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Corporation.
Date 11/09/04 by /s/ Mark K. Hardwick
--------------------------- -------------------------------------
Mark K. Hardwick
Senior Vice President and
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
A signed copy of this written statement required by Section 906 has been
provided to First Merchants Corporation and will be retained by First Merchants
Corporation and furnished to the Securities and Exchange Commission or its staff
upon request.
Page 45