FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,June 30, 2008
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 offices) (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 check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Smaller reporting company [ ]
(Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of April 30,July 31, 2008, there were 18,204,22718,113,836 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.........................17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................27
Item 4. Controls and Procedures.....................................27
PART II. Other Information:
Item 1. Legal Proceedings...........................................28
Item 1.A. Risk Factors................................................28
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds..............................28
Item 3. Defaults Upon Senior Securities.............................28
Item 4. Submission of Matters to a Vote of Security Holders.........28Holders.........29
Item 5. Other Information...........................................28Information...........................................29
Item 6. Exhibits....................................................29
Signatures...................................................................30Exhibits....................................................30
Signatures...................................................................31
Index to Exhibits............................................................31Exhibits............................................................32
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)
March 31,June 30, December 31,
2008 2007
------------ ------------
(Unaudited)
ASSETS:
Cash and due from banks ....................................... $ 89,96180,996 $ 134,188
Federal funds sold ............................................ 495
----------- -----------
Cash and cash equivalents ..................................... 80,996 134,683
Interest-bearing deposits...................................... 21,2807,267 24,931
Investment securities available for sale ...................... 415,638397,068 440,836
Investment securities held to maturity ........................ 10,41711,256 10,331
Mortgage loans held for sale................................... 3,4943,234 3,735
Loans, net of allowance for loan losses of $29,094$31,597 and $28,228. 2,908,6162,986,999 2,848,615
Premises and equipment ........................................ 44,52644,232 44,445
Federal Reserve and Federal Home Loan Bank stock............... 25,34525,455 25,250
Interest receivable ........................................... 21,21219,680 23,402
Core deposit intangibles ...................................... 11,62111,562 12,412
Goodwill ...................................................... 123,435124,668 123,444
Cash surrender value of life insurance......................... 71,66372,948 70,970
Other real estate owned ....................................... 17,243 2,569
Other assets .................................................. 19,950 19,03319,852 16,464
----------- -----------
Total assets .............................................. $ 3,767,1583,822,460 $ 3,782,087
=========== ===========
LIABILITIES:
Deposits:
Noninterest-bearing ......................................... $ 380,364403,152 $ 370,397
Interest-bearing ............................................ 2,432,7632,460,483 2,473,724
----------- -----------
Total deposits ............................................ 2,813,1272,863,635 2,844,121
Borrowings:
Federal funds purchased ..................................... 111,144151,356 52,350
Securities sold under repurchase agreements ................. 103,02490,872 106,497
Federal Home Loan Bank Advances ............................. 244,468228,196 294,101
Subordinated debentures, revolving credit lines
and term loans ............................................ 115,826 115,826
----------- -----------
Total borrowings .......................................... 574,462586,250 568,774
Interest payable .............................................. 7,6216,658 8,325
Other liabilities.............................................. 23,10718,525 20,931
----------- -----------
Total liabilities ......................................... 3,418,3173,475,068 3,442,151
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Cumulative Preferred Stock, $1,000 par value:
Authorized -- 600 shares
Issued and outstanding - 125 shares.......................... 125
Preferred stock, no-par value:
Authorized and unissued - 500,000 shares
Common Stock, $.125 stated value:
Authorized -- 50,000,000 shares
Issued and outstanding - 17,978,26318,062,701 and 18,002,787 shares.... 2,2472,258 2,250
Additional paid-in capital .................................... 137,633140,258 137,801
Retained earnings ............................................. 206,710209,059 202,750
Accumulated other comprehensive income/(loss).................. 2,126loss .......................... (4,308) (2,865)
----------- -----------
Total stockholders' equity ................................ 348,841347,392 339,936
----------- -----------
Total liabilities and stockholders' equity ................ $ 3,767,1583,822,460 $ 3,782,087
=========== ===========
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 March 31,Six Months Ended
June 30, June 30,
2008 2007 2008 2007
Interest Income:
Loans receivable
Taxable ................................................... $51,101 $49,645$49,023 $51,204 $100,124 $100,849
Tax exempt ................................................ 165 201178 249 343 450
Investment securities
Taxable ................................................... 3,249 3,2822,947 3,394 6,196 6,676
Tax exempt ................................................ 1,513 1,6611,452 1,651 2,965 3,312
Federal funds sold .......................................... 8 13 91 11 92
Deposits with financial institutions ........................ 282 123133 120 415 243
Federal Reserve and Federal Home Loan Bank stock ............ 335 328370 299 705 627
------- ------- ------- -------
Total interest income ..................................... 56,653 55,24154,106 57,008 110,759 112,249
------- ------- ------- -------
Interest Expense:
Deposits .................................................... 19,433 21,806
Borrowings .................................................. 6,411 6,36016,297 22,390 35,730 44,196
Fed funds purchased ......................................... 577 1,047 1,246 1,901
Securities sold under repurchase agreements ................. 632 910 1,448 1,479
Federal Home Loan Bank advances ............................. 2,825 3,009 5,861 5,945
Subordinated debentures, revolving credit lines
and term loans ............................................ 1,602 2,037 3,492 4,038
------- ------- ------- -------
Total interest expense .................................... 25,844 28,16621,933 29,393 47,777 57,559
------- ------- ------- -------
Net Interest Income ........................................... 30,809 27,07532,173 27,615 62,982 54,690
Provision for loan losses ..................................... 3,823 1,5997,070 1,648 10,893 3,247
------- ------- ------- -------
Net Interest Income After Provision for Loan Losses ........... 26,986 25,47625,103 25,967 52,089 51,443
------- ------- ------- -------
Other Income:
Service charges on deposit accounts ......................... 2,931 2,8833,157 3,091 6,088 5,974
Fiduciary activities ........................................ 2,142 2,0362,126 2,257 4,268 4,293
Other customer fees ......................................... 1,679 1,4911,767 1,535 3,446 3,026
Commission income ............................................ 1,669 1,6381,427 1,269 3,096 2,907
Earnings on cash surrender value of life insurance .......... 738 685606 782 1,344 1,467
Net gains and fees on sales of loans ........................ 643 532668 611 1,311 1,143
Net realized gains/(losses) on sales of
available-for-sale securities ............................. 7313 86 (1)
Other income ................................................ 652 540570 221 1,222 761
------- ------- ------- -------
Total other income ............................................ 10,527 9,80410,334 9,766 20,861 19,570
------- ------- ------- -------
Other expenses:
Salaries and benefits ....................................... 16,098 14,72615,698 14,796 31,796 29,522
Net occupancy ............................................... 1,805 1,5981,750 1,612 3,555 3,210
Equipment ................................................... 1,654 1,7221,643 1,783 3,297 3,505
Marketing ................................................... 484 487612 653 1,096 1,140
Outside data processing fees................................. 882 9511,009 1,036 1,891 1,987
Printing and office supplies................................. 281 299291 388 572 687
Core deposit amortization.................................... 808 790 7911,598 1,581
Write-off of unamortized underwriting expense ............... 1,771 1,771
Other expenses .............................................. 4,279 3,6204,593 4,910 8,872 8,530
------- ------- ------- -------
Total other expenses .......................................... 26,273 24,19426,404 27,739 52,677 51,933
------- ------- ------- -------
Income Before Income Tax ...................................... 11,240 11,0869,033 7,994 20,273 19,080
Income tax expense ............................................ 3,114 3,3152,491 1,786 5,605 5,101
------- ------- ------- -------
Net Income .................................................... $ 8,1266,542 $ 7,7716,208 $ 14,668 $ 13,979
======= ======= ======= =======
Per share:
Basic .....................................................net income .......................................... $ .45.37 $ .42.34 $ .82 $ .76
Diluted ................................................... .45 .42
Dividends .................................................net income ....................................... .36 .34 .81 .76
Cash dividends paid ....................................... .23 .23 .46 .46
Average diluted shares outstanding (in thousands) ......... 18,159 18,369 18,108 18,432
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 March 31,Six Months Ended
June 30, June 30,
---------------------- ----------------------
2008 2007 2008 2007
--------- --------- --------- ---------
Net Income...................................................................... $ 8,1266,542 $ 7,7716,208 $ 14,668 $ 13,979
Other comprehensive incomelosses net of tax:
Unrealized gainslosses on securities available for sale:
Unrealized holding gainslosses arising during the period, net of
income tax benefit of $(1,824)$3,188, $1,493, $1,364 and $(298)................................. 3,388 553$1,195................... (5,920) (2,773) (2,532) (2,220)
Unrealized gainsgains/(losses) on cash flow hedges:
Unrealized gainsgains/(losses) arising during the period, net of income tax of
$(1,183)$243, $221, $(939) and $(41) ....................................................... 1,774 62$179............................................... (365) (331) 1,409 (269)
Amortization of items previously recorded in accumulated other
comprehensive income,income/(losses), net of income tax expense
of $85$94, $(140), $179, and $0 .............. (127)$(140)............................................ (141) 210 (268) 210
Reclassification adjustment for gains/(losses) included in net
income, net of income tax expense of $29$5, $0, $34, and $0 .............................. (44)$0...................... (8) (52) 1
--------- --------- 4,991 616--------- ---------
(6,434) (2,894) (1,443) (2,278)
--------- --------- --------- ---------
Comprehensive income ........................................................... $ 13,117108 $ 8,3873,314 $ 13,225 $ 11,701
========= ========= ========= =========
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)
2008 2007
--------- ---------
Balances, January 1 ............................................ $ 339,936 $ 327,325
Net income ..................................................... 8,126 7,77114,668 13,979
Cash dividends on common stock ................................. (4,166) (4,260)(8,358) (8,483)
Other comprehensive incomeloss, net of tax........................... 4,991 616tax ........................... (1,443) (2,278)
Stock issued under dividend reinvestment and stock purchase plan 272 291547 593
Stock options exercised, net ................................... 1,160 140of tax ............................ 1,595 370
Tax benefit from stock options exercised ....................... 96 17137 89
Stock redeemed ................................................. (2,137) (3,503)(2,180) (4,956)
Issuance of stock related to acquisition ....................... 1,463
Cumulative preferred stock issued .............................. 125
Share-based compensation ....................................... 438 251902 741
--------- ---------
Balances, March 31June 30. ............................................. $ 348,841347,392 $ 328,648327,380
========= =========
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)
ThreeSix Months Ended
March 31,June 30,
----------------------------------
2008 2007
---------------- ----------------
Cash Flows From Operating Activities:
Net income........................................................................income............................................ $ 8,12614,668 $ 7,77113,979
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses....................................................... 3,823 1,599losses........................... 10,893 3,247
Depreciation and amortization................................................... 1,126 1,150amortization....................... 2,258 2,357
Share-based compensation........................................................ 438 251compensation............................ 902 741
Tax benefits from stock options exercised....................................... (96) (17)exercised........... (137) (89)
Mortgage loans originated for sale.............................................. (28,904) (28,046)sale.................. (58,050) (58,085)
Proceeds from sales of mortgage loans........................................... 29,145 30,727loans............... 58,551 60,656
Change in interest receivable................................................... 2,190 2,404receivable....................... 3,722 2,730
Change in interest payable...................................................... (704) 1,508payable.......................... (1,667) 1,091
Other adjustments............................................................... 1,310 1,546adjustments................................... (17,688) (117)
--------------- ---------------
Net cash provided by operating activities.....................................activities......... $ 16,45413,452 $ 18,89326,510
--------------- ---------------
Cash Flows From Investing Activities:
Net change in interest-bearing deposits...........................................deposits............... $ 3,65117,664 $ 4,4992,386
Purchases of
Securities available for sale................................................... (550) (25,137)sale....................... (21,136) (49,694)
Securities held to maturity..................................................... (500)maturity......................... (1,840)
Proceeds from maturities of
Securities available for sale................................................... 30,890 14,446sale....................... 60,876 31,252
Securities held to maturity..................................................... 413 389maturity......................... 913 390
Purchase of Federal Reserve and
Federal Home Loan Bank Stock.................................................... (95)Stock........................ (205) (131)
Purchase of bank owned life insurance ............................................................ (706) (3,500)
Net cash paid in acquisitions ........................ (237)
Net change in loans............................................................... (63,824) (39,859)loans................................... (149,277) (115,646)
Other adjustments................................................................. (1,207) (2,019)adjustments..................................... (2,048) (4,090)
--------------- ---------------
Net cash used by investing activities.........................................activities............. $ (31,222)(95,996) $ (51,181)(139,033)
--------------- ---------------
Cash Flows From Financing Activities:
Net change in
Demand and savings deposits.....................................................deposits......................... $ (11,318)23,209 $ (72,495)(40,530)
Certificates of deposit and other time deposits................................. (19,674) 9,345
Borrowings........................................................................ 62,794 82,333deposits..... (3,695) 9,593
Borrowings............................................ 269,506 192,048
Repayment of borrowings........................................................... (57,106) (25,908)borrowings............................... (252,029) (45,237)
Cash dividends on common stock.................................................... (4,166) (4,260)stock........................ (8,358) (8,483)
Stock issued under dividend
reinvestment and stock purchase plans................. 272 291plans............... 547 593
Stock options exercised........................................................... 1,160 140exercised............................... 1,595 370
Cumulative preferred stock issued.................................................issued..................... 125
Tax benefit from stock options exercised.......................................... 96 17exercised.............. 137 89
Stock redeemed.................................................................... (2,137) (3,503)redeemed........................................ (2,180) (4,956)
--------------- ---------------
Net cash usedprovided by financing activities......................................... (29,954) (14,040)activities......... 28,857 103,487
--------------- ---------------
Net Change in Cash and Cash Equivalents............................................. (44,722) (46,328)Equivalents................. (53,687) (9,036)
Cash and Cash Equivalents, January 1................................................1.................... 134,683 89,957
--------------- ---------------
Cash and Cash Equivalents, March 31.................................................June 30...................... $ 89,96180,996 $ 43,62980,921
=============== ===============
Additional cash flows information:
Interest paid ............................................................................................................ $ 26,54849,444 $ 26,65758,239
Income tax paid .................................................................. 1,500 500...................................... 10,471 6,939
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
Financial Statement Preparation
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,
2007 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 six months ended March 31,June 30, 2008 are not necessarily
indicative of the results to be expected for the year.
NOTE 2. Share-Based Compensation
Stock options and restricted stock awards ("RSAs") have been issued to
directors, officers and other management employees under the Corporation's 1994
Stock Option Plan and The 1999 Long-term Equity Incentive Plan. The stock
options, which have a ten year life, become 100 percent vested ranging from
three months to two years and are fully exercisable when vested. Option exercise
prices equal the Corporation's common stock closing price on NASDAQ on the date
of grant. RSAs provide for the issuance of shares of the Corporation's common
stock at no cost to the holder and generally vest after three years. The RSAs
vest only if the employee is actively employed by the Corporation on the vesting
date and, therefore, any unvested shares are forfeited. Deferred stock units
("DSUs") have been credited to non-employee directors who have elected to defer
payment of compensation under the Corporation's 2008 Equity Compensation Plan
for Non-employee Directors. DSUs credited are equal to the restricted shares
that the non-employee director would have received under the plan.
The Corporation's 2004 Employee Stock Purchase Plan ("ESPP") provides eligible
employees of the Corporation and its subsidiaries an opportunity to purchase
shares of common stock of the Corporation through annual offerings financed by
payroll deductions. The price of the stock to be paid by the employees may not
be less than 85 percent of the lesser of the fair market value of the
Corporation's common stock at the beginning or at the end of the offering
period. Common stock purchases are made annually and are paid through advance
payroll deductions of up to 20 percent of eligible compensation.
SFAS 123(R) required the Corporation to begin recording compensation expense in
2006 related to unvested share-based awards outstanding as of December 31, 2005,
by recognizing the unamortized grant date fair value of these awards over the
remaining service periods of those awards, with no change in historical reported
fair values and earnings. Awards granted after December 31, 2005 are valued at
fair value in accordance with provisions of SFAS 123(R) and are recognized on a
straight-line basis over the service periods of each award. To complete the
exercise of vested stock options, RSA's and ESPP options, the Corporation
generally issues new shares from its authorized but unissued share pool.
Share-based compensation for the three and six months ended March 31,June 30, 2008
totaled $464,000 and 2007
totaled $438,000$902,000, respectively, compared to $490,000 and $251,000, respectively.$741,000
for the three and six months ended June 30, 2007. Share based compensation has
been recognized as a component of salaries and benefits expense in the
accompanying Consolidated Condensed Statements of Income.
Page 8
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 2. Share-Based Compensation continued
The estimated fair value of the stock options granted during 2008 and in prior
years was calculated using a Black Scholes option pricing model. The following
summarizes the assumptions used in the 2008 Black Scholes model:
Risk-free interest rate 2.69%
Expected price volatility 32.13%
Dividend yield 3.68%
Forfeiture rate 5.00%
Weighted-average expected life, until exercise 6.53 years
The Black Scholes model incorporates assumptions to value share-based awards.
The risk-free rate of interest, for periods equal to the expected life of the
option, is based on a zero-coupon U.S. government instrument over a similar
contractual term of the equity instrument. Expected price volatility is based on
historical volatility of the Corporation's common stock. In addition, the
Corporation generally uses historical information to determine the dividend
yield and weighted-average expected life of the options, until exercise.
Separate groups of employees that have similar historical exercise behavior with
regard to option exercise timing and forfeiture rates are considered separately
for valuation and attribution purposes.
Share-based compensation expense recognized in the Consolidated Condensed
Statements of Income is based on awards ultimately expected to vest and is
reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods,
if actual forfeitures differ from those estimates. Pre-vesting forfeitures were
estimated to be approximately 5 percent for the threesix months ended March 31,June 30, 2008,
based on historical experience.
The following table summarizes the components of the Corporation's share-based
compensation awards recorded as expense:
Three Months Ended March 31,Six Months Ended
June 30, June 30,
2008 2007 2008 2007
----------- ----------- ----------- -----------
Stock and ESPP Options:
Pre-tax compensation expense ........................................$ 181141 $ 119174 $ 321 $ 292
Income tax benefit .................................................. (6) (9) (22) (15)
(7)---------- ---------- ---------- ----------
Stock and ESPP option expense, net of income taxes .......................$ 166135 $ 112165 $ 299 $ 277
========== ========== ========== ==========
Restricted Stock Awards:
Pre-tax compensation expense ........................................$ 257323 $ 132316 $ 581 $ 449
Income tax benefit .................................................. (90) (46)(113) (110) (203) (157)
---------- ---------- ---------- ----------
Restricted stock awards expense, net of income taxes .....................$ 167210 $ 86206 $ 378 $ 292
========== ========== ========== ==========
Total Share-Based Compensation:
Pre-tax compensation expense ........................................$ 438464 $ 251490 $ 902 $ 741
Income tax benefit .................................................. (105) (53)(119) (119) (225) (172)
---------- ---------- ---------- ----------
Total share-based compensation expense, net of income taxes ..............$ 333345 $ 198371 $ 677 $ 569
========== ========== ========== ==========
Page 9
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 2. Share-Based Compensation continued
As of March 31,June 30, 2008, unrecognized compensation expense related to stock options
and RSAs totaling $458,000 and ESPP options totaling $551,000, $2,531,000 and $46,000,$2,215,000 respectively, is expected to be
recognized over weighted-average periods of 1.42, 2.001.17 and 0.251.77 years, respectively.
Stock option activity under the Corporation's stock option plans as of March 31,June 30,
2008 and changes during the threesix months ended March 31,June 30, 2008 were as follows:
Weighted-
Average
Weighted- Remaining
Number Average Contractual Aggregate
of Exercise Term Intrinsic
Shares Price (in Years) Value
---------- ------------ ----------- ----------
Outstanding at January 1, 2008 .................. 1,054,430 $ 24.30
Granted ......................................... 72,300 27.93
Exercised ....................................... (100,722) 22.59(123,045) 22.73
Cancelled ....................................... (13,390) 22.32(24,394) 22.73
----------
Outstanding at March 31,June 30, 2008 ................... 1,012,618.................... 979,291 $ 24.76 5.68 $3,832,35724.77 5.61 $ 0
==========
Vested and Expected to Vest at March 31,June 30, 2008 ... 999,957.... 971,682 $ 24.72 5.64 $3,815,77824.75 5.52 $ 0
Exercisable at March 31,June 30, 2008 ................... 882,768.................... 847,441 $ 24.39 5.13 $3,662,3145.05 $ 0
The weighted-average grant date fair value was $6.54 for stock options granted
during the threesix months ended March 31,June 30, 2008.
The aggregate intrinsic value in the table above represents the total pre-tax
intrinsic value (the difference between the Corporation's closing stock price on
the last trading day of the first threesix months of 2008 and the exercise price,
multiplied by the number of in-the-money options) that would have been received
by the option holders had all option holders exercised their stock options on
March 31,June 30, 2008. The amount of aggregate intrinsic value will change based on the
fair market value of the Corporation's common stock. At June 30, 2008, all
option exercise prices were above the closing price of $18.15.
The aggregate intrinsic value of stock options exercised during the first threesix
months of 2008 was $502,000.$615,000. Exercise of options during this same period
resulted in cash receipts of $1,160,000.$1,595,000. The Corporation recognized a tax
benefit of approximately $96,000$137,000 in the first threesix months of 2008, related to
the exercise of employee stock options and has been recorded as an increase to
additional paid-in capital.
The following table summarizes information on unvested restricted stock awardsRSAs outstanding as of
March 31,June 30, 2008:
Weighted-Average
Number of Grant-Date Fair
Shares Value
---------- -----------
Unvested RSAs at January 1, 2008 ............. 98,027 $ 27.12
Granted ...................................... 61,525 27.8163,485 27.03
Forfeited .................................... (1,227)(1,577) 25.67
Vested ....................................... (488) 25.97(988) 26.73
----------
Unvested RSAs at March 31,June 30, 2008 .............. 157,837............... 158,947 $ 27.8527.10
==========
Page 10
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 2. Share-Based Compensation continued
On June 30, 2008, 620 DSUs were credited to non-employee directors at the
closing price of $18.15.
The grant date fair value of ESPP options was estimated at the beginning of the
July 1, 2007 offering period and approximates $184,000. The ESPP options vestsvested
during the twelve month period ending June 30, 2008. At March 31,June 30, 2008, totalall
compensation expense related to ESPP options was fully recognized. Total
unrecognized compensation expense related to unvested ESPP options was $46,000,
which is expected to be recognized over a period of three months.
Note 3. Disclosures About Fair Value of Assets and Liabilities
Effective January 1, 2008, the Corporation adopted Statement of Financial
Accounting Standards No. 157, Fair Value Measurements (FAS 157). FAS 157 defines
fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. FAS 157 has been applied
prospectively as of the beginning of the year.
FAS 157 defines fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. FAS 157 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. The standard
describes three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilites
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilites; quoted prices in active markets that are
not active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets
or liabilities
Level 3 Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or liabilities
Following is a description of the valuation methodologies used for instruments
measured at fair value on a recurring basis and recognized in the accompanying
balance sheet, as well as the general classification of such instruments
pursuant to the valuation hierarchy.
Available-for-sale securities
Where quoted market prices are available in an active market, securities are
classified within Level 1 of the valuation hierarchy. There are no securities
classified within Level 1 of the hierarchy. If quoted market prices are not
available, then fair values are estimated by using pricing models, quoted prices
of securities with similar characteristics or discounted cash flows. Level 2
securities include treasury securities, agencies, mortgage backs, state and
municipal, corporate obligations, and marketable equity securities. In certain
cases where Level 1 or Level 2 inputs are not available, securities are
classified within Level 3 of the hierarchy and include mortgage backedmortgage-backed
securities and corporate obligations.
Interest rate swap agreements
The fair value is estimated by a third party using inputs that are primarily
unobservable and cannot be corroborated by observable market data and,
therefore, are classified within Level 3 of the valuation hierarchy.
Page 11
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
The following table presents the fair value measurements of assets and
liabilities recognized in the accompanying balance sheet measured at fair value
on a recurring basis and the level within the FAS 157 fair value hierarchy in
which the fair value measurements fall at March 31,June 30, 2008.
Fair Value Measurements Using
-----------------------------------------------------------------
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs
Fair Value (Level 1) (Level 2) (Level 3)
--------------------------------------------------------------------------------
Available-for-saleAvailable for sale securities $415,638 $404,477 $11,161$397,068 $387,568 $ 9,500
Interest rate swap agreements 28 28
Page 11
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
The following is a reconciliation of the beginning and ending balances of
recurring fair value measurements recognized in the accompanying balance sheet
using significant unobservable Level 3 inputs:inputs for the three and six months ended
June 30, 2008.
Available-for-SaleThree Months Ended Six Months Ended
June 30, 2008 June 30, 2008
--------------------------------------- ----------------------------------------
Available for Sale Interest Available for Sale Interest
Securities -----------------Rate Swaps Securities Rate Swaps
--------------------------------------- ----------------------------------------
Beginning balance $ 11,161 $ 12,023
Total realized and unrealized gains and losses
Included in net income $ 28 $ 28
Included in other comprehensive income (862)
----------1,661 (3,391)
Purchases, issuances, and settlements
Transfers in/(out) of Level 3 975
Principal payments (107)
--------------------------------------- ----------------------------------------
Ending balance $ 11,161
==========9,500 $ 28 $ 9,500 $ 28
======================================= ========================================
There were no gains or losses included in the first quarter earnings
attributable to the change in unrealized gains or losses related to assets and
liabilites still held at March 31, 2008.
Following is a description of valuation methodologies used for instruments
measured at fair value on a non-recurring basis and recognized in the
accompanying balance sheet, as well as the general classification of such
instruments pursuant to the valuation hierarchy.
Impaired Loans
Loan impairment is reported when scheduled payments under contractual terms are
deemed uncollectible. Impaired loans are carried at the present value of
estimated future cash flows using the loan's existing rate, or the fair value of
collateral if the loan is collateral dependent. A portion of the allowance for
loan losses is allocated to impaired loans if the value of such loans is deemed
to be less than the unpaid balance. If these allocations cause the allowance for
loan losses to increase, such increase is reported as a component of the
provision for loan losses. Loan losses are charged against the allowance when
management believes the uncollectability of the loan is confirmed. During the
first quartersix months of 2008, certain impaired loans were partially charged-off or
re-evaluated, resulting in a remaining balance for these loans, net of specific
reserve, of $13,679,000$12,741,000 as of March 31,June 30, 2008. The valuation would be considered
Level 3, consisting of appraisals of underlying collateral and discounted cash
flow analysis.
Page 12
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 4. Investment Securities
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale at March 31,June 30, 2008
U.S. Treasury ........................ $ 1,5011,500 $ 3214 $ 1,5331,514
U.S. Government-sponsored
agency securities................... 51,880 776 52,65645,873 334 $ 33 46,174
State and municipal .................. 146,266 3,805 $ 5 150,066135,195 2,314 34 137,475
Mortgage-backed securities ........... 190,303 4,199 187 194,315196,858 1,064 1,656 196,266
Corporate obligations ................ 13,700 2,146 11,55413,658 4,556 9,102
Marketable equity securities.......... 6,215 701 5,5147,327 790 6,537
-------- -------- -------- --------
Total available for sale ......... 409,865 8,812 3,039 415,638400,411 3,726 7,069 397,068
-------- -------- -------- --------
Held to maturity at March 31,June 30, 2008
State and municipal................... 10,405 453 113 10,74511,244 315 172 11,387
Mortgage-backed securities............ 12 12
-------- -------- -------- --------
Total held to maturity ........... 10,417 453 113 10,75711,256 315 172 11,399
-------- -------- -------- --------
Total investment securities ...... $420,282$411,667 $ 9,2654,041 $ 3,152 $426,3957,241 $408,467
======== ======== ======== ========
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale at December 31, 2007
U.S. Treasury ........................ $ 1,501 $ 18 $ 1,519
U.S. Government-sponsored
agency securities .................. 67,793 240 $ 98 67,935
State and municipal .................. 150,744 2,324 156 152,912
Mortgage-backed securities ........... 199,591 1,654 1,444 199,801
Corporate obligations ................ 13,740 1,294 12,446
Marketable equity securities ......... 6,835 612 6,223
-------- -------- -------- --------
Total available for sale .......... 440,204 4,236 3,604 440,836
-------- -------- -------- --------
Held to maturity at December 31, 2007
State and municipal .................. 10,317 237 298 10,256
Mortgage-backed securities ........... 14 14
-------- -------- -------- --------
Total held to maturity ............ 10,331 237 298 10,270
-------- -------- -------- --------
Total investment securities ....... $450,535 $ 4,473 $ 3,902 $451,106
======== ======== ======== ========
Page 13
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 5. Loans and Allowance
March 31,June 30, December 31,
2008 2007
----------- -----------
Loans:
Commercial and industrial loans .............................................. $ 724,643815,137 $ 662,701
Agricultural production financing and other loans to farmers ................. 123,314125,125 114,324
Real estate loans:
Construction ............................................................... 178,171181,598 165,425
Commercial and farmland .................................................... 961,431954,672 947,234
Residential ................................................................ 728,956718,065 744,627
Individuals' loans for household and other personal expenditures ............. 174,857161,387 187,880
Tax-exempt loans ............................................................. 11,64622,553 16,423
Lease financing receivables, net of unearned income........................... 8,4389,158 8,351
Other loans .................................................................. 26,25430,901 29,878
----------- -----------
2,937,7103,018,596 2,876,843
Allowance for loan losses..................................................... (29,094)(31,597) (28,228)
----------- -----------
Total Loans............................................................... $ 2,908,6162,986,999 $ 2,848,615
=========== ===========
ThreeSix Months Ended
March 31,June 30,
2008 2007
----------- -----------
Allowance for loan losses:
Balances, January 1 .......................................................... $ 28,228 $ 26,540
Provision for losses ......................................................... 3,823 1,59910,893 3,247
Recoveries on loans .......................................................... 913 2312,078 527
Loans charged off ............................................................ (3,870) (1,551)(9,602) (2,706)
----------- -----------
Balances, March 31 ...........................................................June 30 ............................................................ $ 29,09431,597 $ 26,81927,608
=========== ===========
MarchJune 30, December 31,
December 31,2008 2007
---------- ------------
Non Performing Assets:
2008 2007
================================================================================
Non-accrual loans................................loans.............................. $ 27,46534,410 $ 29,031
Renegotiated loans............................... 142loans............................. 136 145
-------- --------
Non performing loans (NPL)....................... 27,607..................... 34,546 29,176
Real estate owned and repossessed assets......... 7,372assets....... 17,243 2,573
-------- --------
Non performing assets (NPA)...................... 34,979.................... 51,789 31,749
90+ days delinquent.............................. 4,996delinquent............................ 3,538 3,578
-------- --------
NPAS & 90+ days delinquent.......................delinquent..................... $ 39,97555,327 $ 35,327
======== ========
Page 14
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 6. Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted-
average shares outstanding during the reporting period. Diluted net income per
share is computed by dividing net income by the combination of all dilutive
common share equivalents, comprised of shares issuable under the Corporation's
share-based compensation plans, and the weighted-average shares outstanding
during the reporting period.
Dilutive common share equivalents include the dilutive effect of in-the-money
share-based awards, which are calculated based on the average share price for
each period using the treasury stock method. Under the treasury stock method,
the exercise price of share-based awards, the amount of compensation expense, if
any, for future service that the Corporation has not yet recognized, and the
amount of estimated tax benefits that would be recorded in additional
paid-in-captial when share-based awards are exercised, are assumed to be used to
repurchase common stock in the current period.
Three Months Ended March 31,June 30,
2008 2007
------------------------------------------- ------------------------------------------
Weighted- Weighted-
Net Average Per Share Net Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic net income per share:
Net income available to
common stockholders......................$ 8,126 17,938,4426,542 18,050,956 $ .45.37 $ 7,771 18,410,9586,208 18,290,918 $ .42.34
========== ==========
Effect of dilutive stock options............. 116,525 85,576108,251 77,595
---------- ------------ ---------- ------------
Diluted net income per share:
Net income available to
common stockholders
and assumed conversions..................$ 8,126 18,054,9676,542 18,159,207 $ .45.36 $ 7,771 18,496,5346,208 18,368,513 $ .42.34
========== ============ ========== ========== ============ ==========
Stock options to purchase 671,394 and 714,716 shares for the three months ended
June 30, 2008 and 2007 were not included in the earnings per share calculation
because the exercise price exceeded the average market price.
Six Months Ended June 30,
2008 2007
------------------------------------------- ------------------------------------------
Weighted- Weighted-
Net Average Per Share Net Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic net income per share:
Net income available to
common stockholders......................$ 14,668 17,994,699 $ .82 $ 13,979 18,350,606 $ .76
========== ==========
Effect of dilutive stock options............. 112,873 81,800
---------- ------------ ---------- ------------
Diluted net income per share:
Net income available to
common stockholders
and assumed conversions..................$ 14,668 18,107,572 $ .81 $ 13,979 18,432,406 $ .76
========== ============ ========== ========== ============ ==========
Stock options to purchase 571,407628,599 and 610,971692,836 shares for the threesix months ended
March 31,June 30, 2008 and 2007 were not included in the earnings per share calculation
because the exercise price exceeded the average market price.
Page 15
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
Note 7. Impact of Accounting Changes
EFFECT OF NEWLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (FAS 159) became effective for the
Corporation on January 1, 2008. FAS 159 allows companies an option to report
selected financial assets and liabilities at fair value. Because we did not
elect the fair value measurement provision for any of our financial assets or
liabilities, the adoption of SFAS 159 did not have any impact on our 2008
consolidated financial statements. Presently, we have not determined whether we
will elect the fair value measurement provisions for future transactions.
Effective January 1, 2008, the Corporation adopted EITF 06-4, Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements and EITF 06-10, Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Collateral Assignment
Split-Dollar Life Insurance Arrangements. The adoption of EITF 06-4 and EITF
06-10 did not have any impact on our 2008 consolidated financial statements.
Future Accounting Matters
Financial Accounting Standards Board Statement No. 141 (SFAS 141R), "Business
Combinations (Revised 2007)," was issued in December 2007 and is effective on
January 1, 2009. It replaces SFAS 141 which applies to all transactions and
other events in which one entity obtains control over one or more other
businesses. SFAS 141R requires an acquirer, upon initially obtaining control of
another entity, to recognize the assets, liabilities and any non-controlling
interest in the acquiree at fair value as of the acquisition date. Contingent
consideration is required to be recognized and measured at fair value on the
date of acquisition rather than at a later date when the amount of that
consideration may be determinable beyond a reasonable doubt. This fair value
approach replaces the cost allocation process required under SFAS 141 whereby
the cost of an acquisition was allocated to the individual assetassets acquired and
liabilities assumed based on their estimated fair value. SFAS 141R requires
acquirers to expense acquisition-related costs as incurred rather than
allocating such costs to the assets acquired and liabilities assumed. Under SFAS
141R, the requirements of SFAS 146, "Accounting for Costs Associated with Exit
or Disposal Activities," would have to be met in order to accrue for a
restructuring plan in purchase accounting. Pre-acquisition contingencies are to
be recognized at fair value, unless it is a non-contractual contingency that is
not likely to materialize, in which case, nothing should be recognized in
purchase accounting. Instead, that contingency would be subject to the probable
and estimable recognition criteria under SFAS 5, "Accounting for Contingencies." The Corporation is evaluating the requirements of SFAS 141R to
determine if it will have a significant impact on the Corporation's financial
condition or results of operations.
Financial Accounting Standards Board Statement No. 160 (SFAS 160),
"Noncontrolling Interest in Consolidated Financial Statements, an amendment of
ARB Statement No. 51," was issued in December 2007 and establishes accounting
and reporting standards for the non-controlling interest in a subsidiary and for
the deconsolidation of a subsidiary. SFAS 160 clarifies that a non-controlling
interest in a subsidiary, which is sometimes referred to as a minority interest,
is an ownership interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements. Among other
requirements, SFAS 160 requires consolidated net income to be reported at
amounts that are attributable to both the parent and the non-controlling
interest. It also requires disclosure, on the face of the consolidated income
statement, of the amounts of consolidated net income attributable to the parent
and to the non-controlling interest. SFAS 160 is effective for the Corporation
on January 1, 2009 and is not expected to have a significant impact on the
Corporation's financial statements.
Financial Accounting Standards Board Statement No. 161 (SFAS 161), "Disclosures
About Derivative Instruments and Hedging Activities, an Amendment of FASB
Statement No. 133," was issued in March 2008 and amends and expands the
disclosure requirements of SFAS 133 to provide greater transparency about (i)
how and why an entity uses derivative instruments, (ii) how derivative
instruments and related hedge items are accounted for under SFAS 133 and its
related interpretations, and (iii) how derivative instruments and related hedged
items affect an entity's financial position, results of operations and cash
flows. To meet those objectives, SFAS 161 requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of gains and losses on derivative instruments and disclosures
about credit-risk-related contingent features in derivative agreements. SFAS 161
is effective for the Corporation on January 1, 2009 and is not expected to have
a significant impact on the Corporation's financial statements.
Page 16
FIRST MERCHANTS CORPORATION
FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- --------------
FORWARD-LOOKING STATEMENTS
We fromFrom time to time, we include forward-looking statements in our oral and written
communication. We 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. We intend 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 we are 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 our goals, intentions and expectations;
* statements regarding our business plan and growth strategies;
* statements regarding the asset quality of our loan and investment
portfolios; and
* estimates of our 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 our net interest margin, asset valuations
and expense expectations;
* adverse changes in the economy, which might affect our business
prospects and could cause credit-related losses and expenses;
* adverse developments in our loan and investment portfolios;
* competitive factors in the banking industry, such as the trend towards
consolidation in our market;
* changes in the banking legislation or the regulatory requirements of
federal and state agencies applicable to bank holding companies and
banks like our affiliate banks;
* acquisitions of other businesses by us and integration of such acquired
businesses;
* changes in market, economic, operational, liquidity, credit and interest
rate risks associated with our 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, our actual future results may be
materially different from the results indicated by these forward- looking
statements. In addition, our past results of operations do not necessarily
indicate our anticipated future results.
Page 17
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 us to apply
significant judgments to various accounting, reporting and disclosure matters.
We must use assumptions and estimates to apply these principles where actual
measurement is not possible or practical. For a complete discussion of our
significant accounting policies, see "Notes to the Consolidated Financial
Statements" in our Annual Report on Form 10-K for the year ended December 31,
2007. 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. We have
reviewed the application of these policies with the Audit Committee of our Board
of Directors.
We believe there have been no significant changes during the quartersix months ended
March
31,June 30, 2008 to the items that we disclosed as our critical accounting policies
and estimates in Management's Discussion and Analysis of Financial Condition and
Results of Operations in our Annual Report on Form 10-K for the year ended
December 31, 2007.
BUSINESS SUMMARY
We are a diversified financial holding company headquartered in Muncie, Indiana.
Since its organization in 1982, the Corporation has grown to include 65 banking
center locations in 18 Indiana and 3 Ohio counties. In addition to its branch
network, the Corporation's delivery channels include ATMs, check cards,
interactive voice response systems and internet technology.
The Corporation's business activities are currently limited to one significant
business segment, which is community banking. As of March 31,June 30, 2008, the
Corporation's financial service affiliates included four nationally chartered
banks: First Merchants Bank, National Association, First Merchants Bank of
Central Indiana, National Association, Lafayette Bank and Trust Company,
National Association and Commerce National Bank. The banks provide commercial
and retail banking services. In addition, our trust company, multi-line
insurance company and a title company provide trust asset management services,
retail and commercial insurance agency services and title services,
respectively.
Management believes that its vision, mission, culture statement and core values
produce profitable growth for stockholders. Management also believes it is
important to maintain a strong control environment as we continue to grow our
businesses. Interest rate and market risks inherent in our asset and liability
balances are managed within prudent ranges, while ensuring adequate liquidity
and funding. Sound credit policies are maintained and interest rate and market
risks inherent in our asset and liability balances are managed within prudent
ranges, while ensuring adequate liquidity and funding.
RESULTS OF OPERATIONS
Net income for the three months ended March 31,June 30, 2008, equaled $8,126,000,$6,542,000,
compared to $7,771,000$6,208,000 in the same period of 2007. Diluted earnings per share
were $.45,$.36, an increase of 7.15.9 percent from the $.42$.34 reported for the firstsecond
quarter 2007. Net income for the six months ended June 30, 2008 was $14,668,000
compared to 13,979,000 for the same period in 2007. Diluted earnings per share
were $.81 in 2008 and $.76 in 2007.
Annualized returns on average assets and average stockholders' equity for the
three months ended March 31,June 30, 2008, were .86.69 percent and 9.437.46 percent,
respectively, compared with .88.69 percent and 9.477.53 percent for the same period of
2007. Annualized returns on average assets and average stockholders' equity for
the six months ended June 30, 2008, were .78 percent and 8.44 percent,
respectively, compared with .78 percent and 8.50 percent for the same period of
2007.
Page 18
FIRST MERCHANTS CORPORATION
FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations continued
- ------------------------
CAPITAL
Our regulatory capital continues to exceed regulatory "well capitalized"
standards. Tier I regulatory capital consists primarily of total stockholders'
equity and subordinated debentures issued to business trusts categorized as
qualifying borrowings, less non-qualifying intangible assets and unrealized net
securities gains. Our Tier I capital to average assets ratio was 7.37.4 percent at
March 31,June 30, 2008 and 7.2 percent at year end 2007. In addition, at March 31,June 30, 2008,
we had a Tier I risk-based capital ratio of 8.68.5 percent and total risk-based
capital ratio of 11.211.1 percent. Regulatory capital guidelines require a Tier I
risk-based capital ratio of at least 4.0 percent and a total risk-based capital
ratio of at least 8.0 percent.
Our GAAP capital ratio, defined as total stockholders' equity to total assets,
equaled 9.39.1 percent at March 31,June 30, 2008 and 9.0 percent at December 31, 2007. When
we acquire other companies for stock, GAAP capital increases by the entire
amount of the purchase price.
Our tangible capital ratio, defined as total stockholders' equity less
intangibles net of tax to total assets less intangibles net of tax, equaled 6.05.9
percent as of March 31,June 30, 2008, and 5.7 percent at December 31, 2007.
We believe that all of the above capital ratios are meaningful measurements for
evaluating our safety and soundness. Additionally, we believe the following
table is also meaningful when considering our performance measures. The table
details and reconciles tangible earnings per share, return on tangible capital
and tangible assets to traditional GAAP measures.
March 31, December 31,
(Dollars in thousands) 2008 2007
=========== ===========
Average goodwill .......................... $ 123,435 $ 123,191
Average core deposit intangible (CDI) ..... 11,978 13,868
Average deferred tax on CDI ............... (3,178) (3,659)
----------- -----------
Intangible adjustment ................... $ 132,235 $ 133,400
=========== ===========
Average stockholders' equity (GAAP capital) $ 344,780 $ 330,786
Intangible adjustment ..................... (132,235) (133,400)
----------- -----------
Average tangible capital ................ $ 212,545 $ 197,386
=========== ===========
Average assets ............................ $ 3,758,491 $ 3,639,772
Intangible adjustment ..................... (132,235) (133,400)
----------- -----------
Average tangible assets ................. $ 3,626,256 $ 3,506,372
=========== ===========
Net income ................................ $ 8,126 $ 31,639
CDI amortization, net of tax .............. 480 1,919
----------- -----------
Tangible net income ..................... $ 8,606 $ 33,558
=========== ===========
Diluted earnings per share ................ $ .45 $ 1.73
Diluted tangible earnings per share ....... $ .48 $ 1.83
Return on average GAAP capital ............ 9.43% 9.56%
Return on average tangible capital ........ 16.42%
June 30, December 31,
(Dollars in thousands) 2008 2007
----------- -----------
Average goodwill .......................... $ 124,052 $ 123,191
Average core deposit intangible (CDI) ..... 11,949 13,868
Average deferred tax on CDI ............... (3,074) (3,659)
----------- -----------
Intangible adjustment ................... $ 132,927 $ 133,400
=========== ===========
Average stockholders' equity (GAAP capital) $ 347,788 $ 330,786
Intangible adjustment ..................... (132,927) (133,400)
----------- -----------
Average tangible capital ................ $ 214,861 $ 197,386
=========== ===========
Average assets ............................ $ 3,764,351 $ 3,639,772
Intangible adjustment ..................... (132,927) (133,400)
----------- -----------
Average tangible assets ................. $ 3,631,424 $ 3,506,372
=========== ===========
Net income ................................ $ 14,668 $ 31,639
CDI amortization, net of tax .............. 959 1,919
----------- -----------
Tangible net income ..................... $ 15,627 $ 33,558
=========== ===========
Diluted earnings per share ................ $ .81 $ 1.73
Diluted tangible earnings per share ....... $ .86 $ 1.83
Return on average GAAP capital ............ 8.44% 9.56%
Return on average tangible capital ........ 14.55% 17.00%
Return on average assets .................. .78% .87%
Return on average tangible assets ......... .86% .87%
Return on average tangible assets ......... .95% .96%
Page 19
FIRST MERCHANTS CORPORATION
FORM 10-Q
ASSET QUALITY/PROVISION FOR LOAN LOSSES
Our primary business focus is middle market commercial and residential real
estate, auto and small consumer lending, which results in portfolio
diversification. We ensure that appropriate methods to understand and underwrite
risk are utilized. Commercial loans are individually underwritten and
judgmentally risk rated. They are periodically monitored and prompt corrective
actions are taken on deteriorating loans. Retail loans are typically
underwritten with statistical decision-making tools and are managed throughout
their life cycle on a portfolio basis.
The allowance for loan losses is maintained through the provision for loan
losses, which is a charge against earnings. The amount provided for loan losses
and the determination of the adequacy of the allowance are based on a continuous
review of the loan portfolio, including an internally administered loan "watch"
list and an ongoing loan review. 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 March 31,June 30, 2008, non-performing assets, which includes nonaccrual loans,
restructured loans, and other real estate owned totaled $34,979,000,$51,789,000, an increase
of $3,203,000$20,040,000 from December 31, 2007 as noted in Note 5 Loans and Allowance,
included within the Notes to Consolidated Condensed Financial Statements of this
Form 10Q. Other real estate owned increased $4,799,000$14,670,000 from December 31, 2007,
primarily due to one borrower.two borrowers. Non-performing loans will increase or decrease
going forward due to portfolio growth, routine problem loan recognition and
resolution through collections, sales or charge-offs. The performance of any
loan can be affected by external factors, such as economic conditions, or
factors particular to a borrower, such as actions of a borrower's management.
At March 31,June 30, 2008, impaired loans totaled $93,718,000,$107,289,000, an increase of
$6,769,000$20,340,000 from December 31, 2007. At March 31,June 30, 2008, an allowance for losses
was not deemed necessary for impaired loans totaling $71,890,000,$93,139,000, as there was
no identified loss on these credits. An allowance of $6,121,000$5,742,000 was recorded for
the remaining balance of impaired loans of $21,828,000$14,150,000 and is included in our
allowance for loan losses. The increase of total impaired loans is primarily due
to the increase of performing, substandard classified loans, which comprise a
portion of our total impaired loans. A loan is deemed impaired when, based on
current information or events, it is probable all amounts due of principleprincipal and
interest according to the contractual terms of the loan agreement will not be
collected. All of our criticized loans, including substandard, doubtful and loss
credits, are included in the impaired loan total.
At March 31,June 30, 2008, the allowance for loan losses was $29,094,000,$31,597,000, an increase of
$866,000$3,369,000 from year end 2007. As a percent of loans, the allowance was .991.05
percent at March 31,June 30, 2008 and .98 percent at December 31, 2007.
The provision for loan losses for the first threesix months of 2008 was $3,823,000,$10,893,000,
an increase of $2,224,000$7,646,000 from $1,599,000$3,247,000 for the same period in 2007. The
increase from the prior quarteryear was a result of increasedan increase in net charge offs and
the increase in non-performing loans. The decline in the value of $1,637,000.the
residential real estate in our market has negatively impacted the underlying
collateral value in our residential, land development and construction loans.
This downturn in the real estate market is expected to continue and management
is proactive in evaluating loans collateralized by real estate. The evaluation
by management includes consideration of specific borrower cash flow analysis and
estimated collateral values, types and amounts on non-performing loans, past and
anticipated loan loss experience, changes in the composition of the loan
portfolio, and the current condition and amount of loans outstanding. The
determination of the provision in any period is based on management's continuing
review and evaluation of the loan portfolio, and its judgment as to the impact
of current economic conditions on the portfolio. The
evaluation by management includes consideration of past loan loss experience,
changes in the composition of the loan portfolio and the current condition and
amount of loans outstanding.
Page 20
FIRST MERCHANTS CORPORATION
FORM 10-Q
LIQUIDITY
Liquidity management is the process by which we ensure that adequate liquid
funds are available for us and our subsidiaries. These funds are necessary in
order 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 our asset/liability committee.
Our liquidity is dependent upon our receipt of dividends from our bank
subsidiaries, which are subject to certain regulatory limitations and access to
other funding sources. Liquidity of our 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, we utilize advances from the Federal Home Loan Bank ("FHLB") and a
revolving line of credit with LaSalle Bank, N.A. as funding sources. At March
31,June 30,
2008, total borrowings from the FHLB were $244,468,000.$228,196,000. Our bank subsidiaries
have pledged certain mortgage loans and investments to the FHLB. The total
available remaining borrowing capacity from the FHLB at March 31,June 30, 2008, was
$35,029,000.$43,532,000. At March 31,June 30, 2008, our revolving line of credit had no balance and a
remaining borrowing capacity of $25,000,000.
On February 15, 2008,
we paid down the outstanding $25,000,000 balance on the revolving line of credit
through an increase of the subordinated debenture with LaSalle.
The principal source of asset-funded liquidity is investment securities
classified as available-for-sale,available for sale, the market values of which totaled
$415,638,000$397,068,000 at March 31,June 30, 2008, a decrease of $25,198,000$43,768,000 or 5.79.9 percent below
December 31, 2007. Securities classified as held-to-maturityheld to maturity that are maturing
within a short period of time can also be a source of liquidity. Securities
classified as held-to-maturityheld to maturity and that are maturing in one year or less totaled
$1,033,000$1,871,000 at March 31,June 30, 2008. 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, we are 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 our consolidated financial
statements. Such activities include: traditional off-balance sheet
credit-related financial instruments, commitments under operating leases and
long-term debt.
We provide customers with off-balance sheet credit support through loan
commitments and standby letters of credit. Summarized credit-related financial
instruments at March 31,June 30, 2008 are as follows:
At March 31,June 30,
(Dollars in thousands) 2008
================================================================================--------------
Amounts of commitments:
Loan commitments to extend credit ............................... $ 764,722740,862
Standby letters of credit ....................................... 25,00924,053
----------
$ 789,731764,915
==========
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, we have entered into a number of
long-term leasing arrangements to support our ongoing activities. The required
payments under such commitments and borrowings at March 31,June 30, 2008 are as follows:
2008 2009 2010 2011 2012 2013 Total
(Dollars in thousands) remaining and after
=======================================================================================================---------------------------------------------------------------------------
Operating leases ......... $ 1,253869 $ 1,4201,519 $ 1,1901,256 $ 9611,071 $ 606699 $ 79366 $ 5,5095,780
Borrowings ............... 234,794 55,348 58,071 18,944 65,874 141,431 574,462236,782 55,344 61,058 23,943 65,792 143,331 586,250
-------- -------- -------- -------- -------- -------- --------
Total .................... $236,047$237,651 $ 56,76856,863 $ 59,26162,314 $ 19,90525,014 $ 66,480 $141,510 $579,97166,491 $143,697 $592,030
======== ======== ======== ======== ======== ======== ========
Page 21
FIRST MERCHANTS CORPORATION
FORM 10-Q
INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET RISK
Asset/Liability Management ("ALM") has been an important factor in our ability
to record consistent earnings growth through periods of interest rate volatility
and product deregulation. Management and the Board of Directors monitor our
liquidity and interest sensitivity positions at regular meetings to review how
changes in interest rates may affect earnings. Decisions regarding investments
and the pricing of loan and deposit products are made after analysis of reports
designed to measure liquidity, rate sensitivity, our exposure to changes in net
interest income given various rate scenarios and the economic and competitive
environments.
It is our objective to monitor and manage risk exposure to net interest income
caused by changes in interest rates. It is the goal of our Asset/LiabilityALM function to
provide optimum and stable net interest income. To accomplish this, we use two
asset liabilityALM tools. GAP/Interest Rate Sensitivity Reports and Net Interest Income
Simulation Modeling are both constructed, presented, and monitored quarterly.
We believe that our liquidity and interest sensitivity position at March 31,June 30,
2008, remained adequate to meet our primary goal of achieving optimum interest
margins while avoiding undue interest rate risk.
Net interest income simulation modeling, or earnings-at-risk, measures the
sensitivity of net interest income to various interest rate movements. Our 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 on
the following page. The interest rate scenarios are used for analytical purposes
and do not necessarily represent our view of future market movements. Rather,
these are intended to provide a measure of the degree of volatility interest
rate movements may introduce into our earnings.
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 our 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
our best estimate of expected future behavior.
Page 22
FIRST MERCHANTS CORPORATION
FORM 10-Q
The comparative rising and falling scenarios below 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 us in the base simulation are as follows:
Driver Rates RISING FALLING
=============================================================- -------------------------------------------------------------
Prime 200 Basis Points (200) Basis Points
Federal Funds 200 (200)
One-Year CMT 200 (156)(200)
Three-Year CMT 200 (182)(200)
Five-Year CMT 200 (200)
CD's 200 (158)(166)
FHLB Advances 200 (200)
Results for the base, rising and falling interest rate scenarios are listed
below, based upon our rate sensitive assets and liabilities at March 31,June 30, 2008.
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
(Dollars in thousands)
=========================================================================- -------------------------------------------------------------------------
Net Interest Income $123,123 $123,353 $119,882$129,680 $129,918 $124,004
Variance from base $ 230238 $ (3,241)(5,676)
Percent of change from base (0.2)% (2.6)(4.4)%
The comparative rising and falling scenarios below 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 us in the base simulation are as follows:
Driver Rates RISING FALLING
=============================================================- -------------------------------------------------------------
Prime 200 Basis Points (200) Basis Points
Federal Funds 200 (200)
One-Year CMT 200 (200)
Two-Year CMT 200 (200)
Three-Year CMT 200 (200)
Five-Year CMT 200 (200)
CD's 200 (193)
FHLB Advances 200 (200)
Results for the base, rising and falling interest rate scenarios are listed
below, based upon our rate sensitive assets and liabilities at December 31,
2007. 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
(Dollars in thousands)
=========================================================================- -------------------------------------------------------------------------
Net Interest Income $117,693 $120,089 $116,063
Variance from base $ 2,396 $ (1,630)
Percent of change from base 2.0 % (1.4)%
Page 23
FIRST MERCHANTS CORPORATION
FORM 10-Q
EARNING ASSETS
The following table presents the earning asset mix as of March 31,June 30, 2008, and
December 31, 2007. Earning assets increased by $31,958,000$80,950,000 in the threesix months
ended March 31,June 30, 2008. Loans and loans held for sale increased by $60,626,000.$141,252,000.
The three largest loan segments that increased were in commerical and industrial
at $61,492,000,$152,436,000, agricultural production at $10,801,000, and commercial and
farmland at $14,197,000, and real estate
construction at $12,746,000.$ 7,438,000. Loan segments that decreased were residential real
estate of $15,671,000$26,562,000 and loans to individuals of $13,023,000.$26,493,000. Investments
decreased by $25,000,000$42,843,000 as lower yielding investments matured and were
reinvested in higher yielding loans.
- ----------------------------------------------------------------------------------------------------
EARNING ASSETS
(Dollars in thousands) March 31,June 30, December 31,
2008 2007
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing time deposits ...................... $21,280 $24,931$ 7,267 $ 24,931
Investment securities available for sale ............ 415,638397,068 440,836
Investment securities held to maturity .............. 10,41711,256 10,331
Mortgage loans held for sale ........................ 3,4943,234 3,735
Loans ............................................... 2,937,7103,018,596 2,876,843
Federal Reserve and Federal Home Loan Bank stock 25,34525,455 25,250
---------- ----------
Total .......................... $3,413,884$3,462,876 $3,381,926
========== ==========
- --------------------------------------------------------------------------------
DEPOSITS AND BORROWINGS
The table below reflects the level of deposits and borrowed funds (federal funds
purchased; repurchase agreements; Federal Home Loan Bank advances; and
subordinated debentures, revolving credit lines and term loans) based on period
ending amounts as of March 31, 2008 and December 31, 2007.
(Dollars in thousands) March 31, December 31,
2008 2007
---------- ----------
Deposits ........................................ $2,813,127 $2,844,121
Federal funds purchased.......................... 111,144 52,350
Securities sold under repurchase agreements...... 103,024 106,497
Federal Home Loan Bank advances ................. 244,468 294,101
Subordinated debentures, revolving credit lines,
term loans and other ......................... 115,826 115,826
---------- ----------
$3,387,589 $3,412,895
========== ==========
We have continued to leverage our 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 our interest simulation discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the headings "LIQUIDITY" and "INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET
RISK".
Page 24
FIRST MERCHANTS CORPORATION
FORM 10-Q
NET INTEREST INCOME
Net Interest Income is the primary source of our earnings. It is a function of
net interest margin and the level of average earning assets. The table below
presents our asset yields, interest expense, and net interest income as a
percent of average earning assets for the three and six months ended March 31,June 30,
2008 and 2007.
During the threesix months ended March 31,June 30, 2008, asset yields decreased 2364 basis
points on a fully taxable equivalent basis (FTE) and interest costs decreased 4799
basis points (FTE), resulting in an 2435 basis point (FTE) increase in net
interest income as compared to the same period in 2007.
Three Months Ended March 31,Six Months Ended
June 30, June 30,
(Dollars in Thousands) 2008 2007 =========== ===========2008 2007
----------- ----------- ----------- -----------
Annualized net interest income........................ $ 123,237125,964 $ 108,302110,459 $ 128,691 $ 109,380
Annualized FTE adjustment............................. $ 3,6153,562 $ 4,0104,093 $ 3,509 $ 4,052
Annualized net interest income
On a fully taxable equivalent basis................. $ 126,852129,526 $ 112,312114,552 $ 132,200 $ 113,432
Average earning assets................................ $3,396,641 $3,209,807$3,412,666 $3,275,760 $3,428,960 $3,242,966
Interest income (FTE) as a percent
of average earning assets........................... 6.78% 7.01%6.60% 7.09% 6.41% 7.05%
Interest expense as a percent
of average earning assets........................... 3.04% 3.51%2.80% 3.59% 2.56% 3.55%
Net interest income (FTE) as a percent
of average earning assets........................... 3.74%3.80% 3.50% 3.85% 3.50%
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.
HEDGING ACTIVITIES
On August 1, 2006, the Corporation purchased three prime-based interest rate
floor agreements with an aggregate notional amount of $250 million and strike
rates ranging from 6% to 7%. The combined purchase price of approximately
$550,000 was to be amortized on an allocated fair value basis over the
three-year term of the agreements. On March 19, 2008, the Corporation received
$5,216,000 in connection with the termination of the three interest rate floor
agreements. The contractual maturity of the floors was August 1, 2009. During
the life of the floors, pre-tax gains of approximately $4,662,500 were deferred
in accumulated other comprehensive income (AOCI) in accordance with cash flow
hedge accounting rules established by SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (as amended). The amounts deferred in AOCI
will be reclassified out of equity into earnings over the remaining sixteen
months of the original contract. SFAS 133 requires that amounts deferred in AOCI
be reclassified into earnings in the same periods during which the originally
hedged cash flows (prime-based interest payments on loan assets) affects
earnings, as long as the originally hedged cash flows remain probable of
occurring (i.e. the principal amount of designated prime-based loans match or
exceed the notional amount of the terminated floor through August 1, 2009). If
the principal amount of the originally hedged loans falls below the notional
amount of the terminate floors, then amounts in AOCI could be accelerated. The
Corporation decided to terminate the interest rate floor agreements only after
considering the impact of the transaction on its risk management objectives and
after alternative strategies were in place to mitigate the adverse impact of
falling interest rates on its net interest margin. At March 31,June 30, 2008, the
remaining pre-tax gains are approximately $4.2$3.6 million.
The Corporation has introduced a new derivative product offering to customers.
This product allows the customers to enter into an agreement with the
Corporation to swap a variable rate loan to a fixed rate. These derivative
products are designed to reduce, eliminate or modify the borrower's interest
rate or market price risk. The extension of credit incurred through the sale of
derivative products is subject to the same approval, financial information and
analysis standards as traditional credit products. The Corporation limits its
risk exposure by entering into a similar swap agreement with a separate,
well-capitalized and rated counterparty previously approved by the Credit and
Asset Liability Committee. By using these interest rate swap arrangements, the
Corporation is also better insulated from market risk and volatility. These
derivative contracts are not designated against specific assets or liabilities
and, therefore, do not qualify for hedge accounting. Therefore, the adjustment
to fair value for both swap arrangements is recorded in non-interest income.
Page 25
FIRST MERCHANTS CORPORATION
FORM 10-Q
OTHER INCOME
Total other income in the first three monthssecond quarter of 2008 was $723,000$568,000 or 7.45.8 percent
higher than the same period of 2007.
Four items primarily account for the change:
1. Gains of $277,000In the second quarter 2008, fees related to loan level hedge agreements
were $224,000. No such fees were collected in 2007 as this is a new product
offerring in 2008.
2. Earnings on bank-owned life insurance decreased $176,000 from the termination of three interest rate floor
agreements occurredsame
period in 2007 due to the decline in the first quartermarket value of 2008.
2.the underlying
investments.
3. Other customer and electronic card fees up $188,000increased $159,000 due to increased
fees to customers and increased interchange fees.customer electronic activity.
4. Insurance Commissions increased $158,000 from the same period in 2007 due
to the purchase of an insurance agency in April 2008.
Other income for the first six months of 2008 was $1,291,000 or 6.6 percent
higher than the same period in 2007.
Five items primarily account for the change:
1. In 2008, fees related to derivative hedge agreements were $316,000. No such
fees were collected in 2007.
2. Other customer and electronic card fees increased $319,000 due to increased
fees to customers and increased customer electronic activity.
3. Insurance Commissions increased $189,000 from the same period in 2007 due
to the purchase of an insurance agency in April 2008.
4. Net gains and fees on sales of mortgagesmortgage loans increased $111,000$168,000 due to
additional loans sold in the secondary market.
4. Trust fees increased $106,000 as a result of increased trust business.5. Earnings on bank-owned life insurance decreased $123,000 from the same
period in 2007 due to the decline in the subprime and commercial paper
markets.
OTHER EXPENSES
OtherTotal other expenses in the first three monthssecond quarter of 2008 were $2,079,000$1,335,000 or 8.64.8
percent higherlower than the same period in 2007.
Two items primarily account for the change:
1. Salary and employee benefit expenses were $1,372,000$902,000 higher than in the first
quarter of 2008, as compared to the same
period inof 2007 primarily due to staffstaffing additions and normal annual increases.
Approximately $187,000$61,000 of the increase is due to increases in share-based
compensation expense.
2. Expenses related toIn the second quarter of 2007, the Corporation wrote off $1.8 million in
unamortized underwriting fees associated with First Merchants Capital Trust
I Subordinated debentures. No such charge existed in 2008.
Total other real estate ownedexpenses for the first six months of 2008 were $744,000 or 1.4
percent higher than the same period in 2007:
Two items primarily account for the change:
1. Salary and repossessed assetsemployee benefit expenses were $193,000$2,274,000 higher in 2008 than in the
same period of 2007 due to staffing additions and normal annual increases.
Approximately $165,000 of the increase is due to increases in 2007.share-based
compensation expense.
2. In the second quarter of 2007, the Corporation wrote off $1.8 million in
unamortized underwriting fees associated with First Merchants Capital Trust
I Subordinated debentures. No such charge existed in 2008.
Page 26
FIRST MERCHANTS CORPORATION
FORM 10-Q
INCOME TAXES
Income tax expense, for the threesix months ended March 31,June 30, 2008, decreasedincreased by
$201,000$504,000 from the same period in 2007. The effective tax rate was 27.7 and 29.926.7
percent for the 2008 and 2007 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 us, 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, we carried out an evaluation,
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures. Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our 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 our reports filed or submitted
under the Securities Exchange Act of 1934 are 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 our internal controls over financial reporting
identified in connection with the evaluation referenced above that occurred
during our last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Page 27
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- ---------------------------
None
Item 1.A. Risk Factors
- ----------------------
There have been no material changes from the risk factors previously disclosed
in the Corporation's December 31, 2007 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
- ---------------------------------------------------
a. NoneOn April 1, 2008, the Corporation issued 51,302 unregistered
shares of its common stock pursuant to a Merger Agreement dated
April 1, 2008, between the Corporation, First Merchants Insurance
Services, Inc. and Patishall Insurance Agency, Inc.
("Patishall"). The Corporation issued the unregistered shares to
the shareholders of Patishall, at a value of $28.513 per share,
in exchange for all the common stock of Patishall. The issuance
by the Corporation of its shares of common stock were not
registered under the Securities Act of 1933, as amended
("Securities Act"). The shares were issued pursuant to the
exemption contemplated under Section 4 (2) of the Securities Act,
for transactions not involving a public offering.
b. None
c. Issuer Purchases of Equity Securities
The following table presents information relating to our purchases of equity
securities during the quarter ended March 31,June 30, 2008, as follows(1):
MAXIMUM NUMBER (OR
TOTAL NUMBER OF APPROXIMATE DOLLAR VALUE)
SHARES PURCHASED AS PART OF SHARES THAT MAY YET
TOTAL NUMBER OF AVERAGE PRICE OF PUBLICLY ANNOUNCED BE PURCHASED UNDER
PERIOD SHARES PURCHASED PAID PER SHARE PLANS OR PROGRAMSPROGRAMS(2) THE PLANS OR PROGRAMS
------ ---------------- -------------- ------------------------- ------------------------
01/04/01/08 - 01/31/04/30/08 103,443(1) $22.64 95,0000 $ 0 0 390,000
02/05/01/08 - 02/29/05/31/08 30,308(2) 26.872,928(1) 23.46 0 390,000
03/06/01/08 - 03/31/06/30/08 1,983(2) 29.440 0 0 390,000
(1) These shares were purchased in connection with the exercise of certain
outstanding stock options.
(2) On December 4, 2007, the Corporation's Board authorized management to
repurchase up to 500,000 shares of the Corporation's Common Stock. This
authorization was publicly announced and expires December 31, 2008. Of the
103,443 shares referenced above, 95,000 shares were purchased in open
market transactions pursuant to this authorization. There
were 390,000 remaining shares that may yet be purchased pursuant to such
authorizations as of March 31,June 30, 2008. The remaining 8,443 shares were purchased in
connection with the exercise of certain outstanding stock options.
(2) These shares were purchased in connection with the exercise of certain
outstanding stock options.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None
Page 28
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Nonea. The Annual Meeting of Shareholders of the Corporation was held on
April 29, 2008.
b. No response is required.
c. The following matters were voted on by shareholders:
(i) Election of Directors - The following directors were elected
for a term of three years.
Vote Count
--------------------------------
Vote For Vote Witheld
--------------------------------
Thomas B. Clark 12,807,082 1,000,219
Roderick English 12,980,400 826,900
Jo Ann M. Gora 12,854,672 952,628
William L. Hoy 13,348,793 458,507
Jean L. Wojtowicz 12,896,129 911,171
(ii) Approval of the First Merchants Corporation Equity
Compensation Plan for Non-Employee Directors: Votes For -
9,628,685, Votes Against - 1,055,525, Votes Abstained -
165,822.
(iii) Ratification of the appointment of Independent Public
Accounting Firm - BKD, LLP, Indianapolis, Indiana: Votes For
- 13,678,456, Votes Against - 103,259, Votes Abstained -
27,656.
Item 5. Other Information
- --------------------------
a. None
b. None
Page 2829
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART II. OTHER INFORMATION
Item 6. Exhibits
- -----------------------------------------
Exhibit No.: Description of Exhibit: Form 10-Q Page No.:
------------ ------------------------- -------------------
10a First Merchants Corporation 33
Change of Control Agreement
with Michael J. Stewart
dated April 29, 2008.
10b First Amendment to the 41
First Merchants Corporation
2007 Directors' Deferred
Compensation Plan as
amended on April 29, 2008.
10c First Merchants Corporation 44
Equity Compensation Plan for
Non-Employee Directors,
effective April 29, 2008.
14 First Merchants Corporation 50
Code of Conduct as amended
on April 29, 2008.
31.1 Certification of Chief 3265
Executive Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
31.2 Certification of Chief 3366
Financial Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
32 Certifications Pursuant to 3467
18 U.S.C. Section 1350, as
Adopted Pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002
Page 2930
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: May 9,August 11, 2008 by /s/ Michael C. Rechin
-------------------------- -------------------------------------
Michael C. Rechin
President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 9,August 11, 2008 by /s/ Mark K. Hardwick
-------------------------- -------------------------------------
Mark K. Hardwick
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Page 3031
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.:
------------ ------------------------- -------------------
10a First Merchants Corporation 33
Change of Control Agreement
with Michael J. Stewart
dated April 29, 2008.
10b First Amendment to the 41
First Merchants Corporation
2007 Directors' Deferred
Compensation Plan as
amended on April 29, 2008.
10c First Merchants Corporation 44
Equity Compensation Plan for
Non-Employee Directors,
effective April 29, 2008.
14 First Merchants Corporation 50
Code of Conduct as amended
on April 29, 2008.
31.1 Certification of Chief 3265
Executive Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
31.2 Certification of Chief 3366
Financial Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
32 Certifications Pursuant to 3467
18 U.S.C. Section 1350, as
Adopted Pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002
Page 32
EXHIBIT-10a
CHANGE OF CONTROL AGREEMENT
This Agreement is made and entered into as of April 29, 2008, by and
between First Merchants Corporation, an Indiana corporation (hereinafter
referred to as "Corporation"), with its principal office located at 200 East
Jackson Street, Muncie, Indiana, and Michael J. Stewart (hereinafter referred to
as "Executive"), of Indianapolis, Indiana.
WHEREAS, the Corporation considers the continuance of proficient and
experienced management to be essential to protecting and enhancing the best
interests of the Corporation and its shareholders; and
WHEREAS, the Corporation desires to assure the continued services of the
Executive on behalf of the Corporation; and
WHEREAS, the Corporation recognizes that if faced with a proposal for a
Change of Control, as hereinafter defined, the Executive will have a significant
role in helping the Board of Directors assess the options and advising the Board
of Directors on what is in the best interests of the Corporation and its
shareholders; and it is necessary for the Executive to be able to provide this
advice and counsel without being influenced by the uncertainties of the
Executive's own situation; and
WHEREAS, the Corporation desires to provide fair and reasonable benefits to
the Executive on the terms and subject to the conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and undertakings
herein contained and the continued employment of the Executive by the
Corporation as its Executive Vice President and Chief Banking Officer, the
Corporation and the Executive, each intending to be legally bound, covenant and
agree as follows:
1. Term of Agreement.
This Agreement shall continue in effect through December 31, 2008;
provided, however, that commencing on December 31, 2008 and each December 31
thereafter, the term of this Agreement shall automatically be extended for one
additional year unless, not later than October 31, 2008 or October 31
immediately preceding any December 31 thereafter, the Corporation shall have
given the Executive notice that it does not wish to extend this Agreement; and
provided further, that if a Change of Control of the Corporation, as defined in
Section 2, shall have occurred during the original or extended term of this
Agreement, this Agreement shall continue in effect for a period of not less than
twenty-four (24) months beyond the month in which such Change of Control
occurred.
Page 33
2. Definitions.
For purposes of this Agreement, the following definitions shall
apply:
(A) Cause: "Cause" shall mean:
(1) professional incompetence;
(2) willful misconduct;
(3) personal dishonesty;
(4) breach of fiduciary duty involving personal profit;
(5) intentional failure to perform stated duties;
(6) willful violation of any law, rule or regulation (other
than traffic violations or similar offenses) or final
cease and desist orders; and
(7) any intentional material breach of any term, condition
or covenant of this Agreement.
(B) Change of Control: "Change of Control" shall mean:
(1) any person (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934 ["Exchange
Act"]), other than the Corporation, is or becomes the
Beneficial Owner (as defined in Rule 13d-3 under the
Exchange Act) directly or indirectly of securities of
the Corporation representing twenty-five percent (25%)
or more of the combined voting power of the
Corporation's then outstanding securities;
(2) persons constituting a majority of the Board of
Directors of the Corporation were not directors of the
Corporation for at least the twenty-four (24) preceding
months;
(3) the stockholders of the Corporation approve a merger or
consolidation of the Corporation with any other
corporation, other than (a) a merger or consolidation
which would result in the voting securities of the
Corporation outstanding immediately prior thereto
continuing to represent (either by remaining
outstanding or by being converted into voting
securities of the surviving entity) more than fifty
percent (50%) of the combined voting power of the
voting securities of the Corporation or such surviving
entity outstanding immediately after such a merger or
consolidation, or (b) a merger or consolidation
effected to implement a recapitalization of the
Corporation (or similar transaction) in which no person
acquires fifty percent (50%) or more of the combined
voting power of the Corporation's then outstanding
securities; or
Page 34
(4) the stockholders of the Corporation approve a plan of
complete liquidation of the Corporation or an agreement
for the sale or disposition by the Corporation of all
or substantially all of the Corporation's assets.
(C) Date of Termination: "Date of Termination" shall mean the
date stated in the Notice of Termination (as hereinafter
defined) or thirty (30) days from the date of delivery of
such notice, as hereinafter defined, whichever comes first.
(D) Disability: "Disability" shall mean the definition of such
term as used in the disability policy then in effect for the
Corporation, and a determination of full disability by the
Corporation; provided that in the event there is no
disability insurance then in force, "disability" shall mean
incapacity due to physical or mental illness which will have
caused the Executive to have been unable to perform his
duties with the Corporation on a full time basis for one
hundred eighty (180) consecutive calendar days.
(E) Notice of Termination: "Notice of Termination" shall mean a
written notice, communicated to the other parties hereto,
which shall indicate the specific termination provisions of
this Agreement relied upon and set forth in reasonable
detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under
the provisions so indicated.
(F) Retirement: "Retirement" shall mean termination of
employment by the Executive in accordance with the
Corporation's normal retirement policy generally applicable
to its salaried employees in effect at the time of a Change
of Control.
3. Termination.
(A) General. If any of the events described in Section 2
constituting a Change in Control of the Corporation shall
have occurred, the Executive shall be entitled to the
benefits described in Section 4 upon the subsequent
termination of the Executive's employment during the term of
this Agreement, unless such termination is (a) because of
the death or Disability of the Executive, (b) by the
Corporation for Cause, or (c) by the Executive other than on
account of Constructive Termination (as hereinafter
defined).
(B) If, following a Change of Control, the Executive's
employment shall be terminated for Cause, the Corporation
shall pay him his salary through the Date of Termination at
the rate in effect on the date of the Notice of Termination,
and the Corporation shall have no further obligations under
this Agreement. If, following a Change of Control, the
Executive's employment shall be terminated as a result of
death or Disability, compensation to the Executive shall be
made pursuant to the Corporation's then existing policies on
death or Disability, and the Corporation shall have no
further obligations under this Agreement. If, following a
Change of Control, the Executive's employment is terminated
by and at the request of the Executive as a result of
Retirement, compensation to the Executive shall be made
pursuant to the Corporation's normal retirement policy
generally applicable to its salaried employees at the time
of the Change of Control, and the Corporation shall have no
further obligations under this Agreement.
(C) Constructive Termination. The Executive shall be entitled to
terminate his employment upon the occurrence of Constructive
Termination. For purposes of this Agreement, "Constructive
Termination" shall mean, without the Executive's express
written consent, the occurrence, after a Change of Control
of the Corporation, of any of the following circumstances:
(1) the assignment to the Executive of any duties
inconsistent (unless in the nature of a promotion) with
the position in the Corporation that the Executive held
immediately prior to the Change of Control of the
Corporation, or a significant adverse reduction or
alteration in the nature or status of the Executive's
position, duties or responsibilities or the conditions
of the Executive's employment from those in effect
immediately prior to such Change of Control;
Page 35
(2) a reduction in the Executive's annual base salary, as
in effect immediately prior to the Change of Control of
the Corporation or as the same may be adjusted from
time to time, except for across-the-board salary
reductions similarly affecting all management personnel
of the Corporation;
(3) the Corporation requires the Executive to be relocated
anywhere other than its offices in Muncie, Indiana;
(4) the taking of any action to deprive the Executive of
any material fringe benefit enjoyed by him at the time
of the Change of Control, or the failure to provide him
with the number of paid vacation days to which he is
entitled on the basis of years of service with the
Corporation and in accordance with the Corporation's
normal vacation policy in effect at the time of the
Change of Control;
(5) the failure to continue to provide the Executive with
benefits substantially similar to those enjoyed by the
Executive under any of the Corporation's life
insurance, medical, health and accident, or disability
plans in which the Executive was participating at the
time of the Change of Control of the Corporation, or
the taking of any action which would directly or
indirectly materially reduce any of such benefits; or
(6) the failure of the Corporation to continue this
Agreement in effect, or to obtain a satisfactory
agreement from any successor to assume and agree to
perform this Agreement, as contemplated in Section 5
hereof.
4. Compensation Upon Termination.
Following a Change of Control, if his employment by the Corporation
shall be terminated by the Executive on account of Constructive
Termination or by the Corporation other than for Cause, death,
Disability, or Retirement (by and at the request of the Executive),
then the Executive shall be entitled to the benefits provided below:
(A) No later than the fifth day following the Date of
Termination, the Corporation shall pay to the Executive his
full base salary through the Date of Termination, at the
rate in effect at the time Notice of Termination is given,
plus all other amounts to which the Executive is entitled
under any incentive, bonus or other compensation plan of the
Corporation in effect at the time such payments are due;
(B) In lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination, no later than
the fifth day following the Date of Termination, the
Corporation shall pay to the Executive a lump sum severance
payment, in cash, equal to two and ninety-nine hundredths
(2.99) times the sum of (a) the Executive's annual base
salary rate as in effect on the date of the Notice of
Termination, and (b) the largest bonus received by the
Executive during the two (2) years immediately preceding the
Date of Termination under the Corporation's Management
Incentive Plan covering the Executive;
Page 36
(C) During the period beginning with the Executive's Date of
Termination and continuing until the earlier of (a) the
second anniversary of such Date of Termination, or (b)
Executive's sixty-fifth (65th) birthday, the Corporation
shall arrange to provide the Executive with life,
disability, accident and health insurance benefits
substantially similar to those which the Executive was
receiving immediately prior to the Notice of Termination and
shall pay the same percentage of the cost of such benefits
as the Corporation was paying on the Executive's behalf on
the date of such Notice;
(D) In lieu of shares of common stock of the Corporation
("Corporation Shares") issuable upon the exercise of
outstanding options ("Options"), if any, granted to the
Executive under any Corporation stock option plan (which
Options shall be cancelled upon the making of the payment
referred to below), the Executive shall receive an amount in
cash equal to the product of (a) the excess of the higher of
the closing price of Corporation Shares as reported on the
NASDAQ National Market System, the American Stock Exchange
or the New York Stock Exchange, wherever listed, on or
nearest the Date of Termination or the highest per share
price for Corporation Shares actually paid in connection
with any Change of Control of the Corporation, over the per
share exercise price of each Option held by the Executive
(whether or not then fully exercisable), times (b) the
number of Corporation Shares covered by each such Option;
(E) If the payments or benefits, if any, received or to be
received by the Executive (whether under this Agreement or
under any other plan, arrangement, or agreement between the
Executive and the Corporation), in connection with
termination or Constructive Termination of the Executive's
employment following a Change of Control, constitute an
"excess parachute payment" within the meaning of Section
280G of the Internal Revenue Code ("Code"), the Corporation
shall pay to the Executive, no later than the fifth day
following the Date of Termination, an additional amount (as
determined by the Corporation's independent public
accountants) equal to the excise tax, if any, imposed on the
"excess parachute payment" under Section 4999 of the Code;
provided, however, if the amount of such excise tax is
finally determined to be more or less than the amount paid
to the Executive hereunder, the Corporation (or the
Executive if the finally determined amount is less than the
original amount paid) shall pay the difference between the
amount originally paid and the finally determined amount to
the other party no later than the fifth day following the
date such final determination is made;
Page 37
(F) The Corporation shall pay to the Executive all reasonable
legal fees and expenses incurred by the Executive as a
result of such termination (including all such fees and
expenses, if any, incurred in contesting or disputing any
such termination or in seeking to obtain or enforce any
right or benefit provided by this Agreement), unless the
decision-maker in any proceeding, contest, or dispute
arising hereunder makes a formal finding that the Executive
did not have a reasonable basis for instituting such
proceeding, contest, or dispute;
(G) The Corporation shall provide the Executive with individual
out-placement services in accordance with the general custom
and practice generally accorded to an executive of the
Executive's position.
5. Successors; Binding Agreement.
(A) The Corporation shall require any successor (whether direct
or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business
and/or assets of the Corporation to expressly assume and
agree to perform this Agreement in the same manner and to
the same extent that the Corporation would be required to
perform it if no such succession had taken place. Failure of
the Corporation to obtain such assumption and agreement
prior to the effectiveness of any such succession shall be a
breach of this Agreement and shall entitle the Executive to
compensation from the Corporation in the same amount and on
the same terms to which the Executive would be entitled
hereunder if the Executive terminates his employment on
account of Constructive Termination following a Change of
Control of the Corporation, except that for the purposes of
implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of
Termination. As used in this Agreement, "the Corporation"
shall mean the Corporation and any successor to its business
and/or assets as aforesaid which assumes and agrees to
perform this Agreement, by operation of law or otherwise.
(B) This Agreement shall inure to the benefit of and be
enforceable by the Executive and his personal or legal
representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If the Executive
should die while any amount would still be payable to the
Executive hereunder had the Executive continued to live, all
such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the
devisee, legatee or other designee or, if there is no such
designee, to his estate.
Page 38
6. Miscellaneous.
No provision of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing
and signed by the Executive and such officer as may be specifically
designated by the Corporation. No waiver by either party hereto at the
time of any breach by the other party hereto of, or compliance with,
any condition or provision of this Agreement to be performed by such
other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent
time. No agreement or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by
either party which are not expressly set forth in this Agreement. The
validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Indiana
without regard to its conflicts of law principles. All references to a
section of the Exchange Act or the Code shall be deemed also to refer
to any successor provisions to such section. Any payments provided for
hereunder shall be paid net of any applicable withholding required
under federal, state or local law. The obligations of the Corporation
under Section 4 shall survive the expiration of the term of this
Agreement.
7. Validity.
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
8. Counterparts.
This Agreement may be executed in several counterparts, each of which
shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
9. Arbitration.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted
before a panel of three (3) arbitrators in Muncie, Indiana in
accordance with the rules of the American Arbitration Association then
in effect. Judgment may be entered on the arbitrator's award in any
court having jurisdiction; provided, however, that the Executive shall
be entitled to seek specific performance of his right to be paid until
the Date of Termination during the pendency of any dispute or
controversy arising under or in connection with this Agreement.
Page 39
10. Entire Agreement.
This Agreement sets forth the entire agreement of the parties hereto
in respect of the subject matter contained herein and supersedes all
prior agreements, promises, covenants, arrangements, communications,
representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto; and any prior
agreement of the parties hereto in respect of the subject matter
contained herein is hereby terminated and cancelled.
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed by their duly authorized officers, and the Executive has hereunder
subscribed his name, as of the day and year first above written.
"CORPORATION" "EXECUTIVE"
FIRST MERCHANTS CORPORATION
By /s/ Michael C. Rechin By /s/ Michael J. Stewart
---------------------------_ ------------------------------
Michael C. Rechin Michael J. Stewart
President & Chief Executive Officer
Page 40
EXHIBIT-10b
FIRST AMENDMENT
OF THE
FIRST MERCHANTS CORPORATION
2007 DIRECTORS' DEFERRED COMPENSATION PLAN
WHEREAS, First Merchants Corporation (the "Company") maintains the First
Merchants Corporation 2007 Directors' Deferred Compensation Plan (Effective as
August 1, 2007) (the "Plan"); and
WHEREAS, pursuant to the authority contained in Section 8.1 of the Plan,
the Company has reserved the right to amend the Plan;
NOW, THEREFORE, pursuant to the amending power reserved to the Company and
delegated to the undersigned individuals, the Plan is hereby amended, effective
January 1, 2008, in the following particulars:
1. By replacing Section 3.1 in its entirety with the following:
"Section 3.1 Participant Deferral Contributions. Subject to the terms
and limitations of this Article III, a Participant may elect, pursuant to
Section 3.2, to have all or a portion of his Fees payable in any Plan Year
withheld by the Company and credited as a "Participant Deferral
Contribution" under the Plan. The term "contribution" is used for ease of
reference; however, contributions are merely credits to each Participant's
Account, which is a bookkeeping account. The term "Fees," for purposes of
the Plan, means the fees payable by the Company or an Affiliate to the
Participant for the Participant's services as a Director, including
retainer fees for attendance at regularly scheduled meetings, special
meetings called from time to time, and fees for attendance at any and all
meetings of committees of the applicable board of directors. Fees may be
paid in the form of cash ("Cash Fees") and in the form of shares of
restricted stock ("Stock Fees")."
2. By replacing Section 3.4 in its entirety with the following:
"Section 3.4 Investment Credits. A Participant's Account will be
increased to reflect the increase in the value of the Account established
for the Participant. The amount of earnings credited on deferred Cash Fees
will be determined as if the deferred Cash Fees were invested in the
greater of the Fed Funds Rate or the Five-Year Treasury Interest Rate
determined as of the first business day of each quarter of the calendar
year, but not to exceed 120 percent of the Applicable Long Term Federal
rate for monthly compounding. The amount of earnings credited on deferred
Stock Fees will be equal to dividends paid on an equivalent number of
shares of common stock of the Company for the period of time that the Stock
Fees are deferred. In the event any Participant is entitled to a
distribution of the Account under Article IV, the increase in the value of
the Account will be allocated as of the last day of the quarter immediately
preceding the quarter in which the payment to the Participant will be
made."
Page 41
3. By replacing subsection 3.5(ii) in its entirety with the following:
"(ii) Increased by the amount determined under Section 3.4 since the
last accounting; and"
4. By replacing subsection 4.1(a) in its entirety with the following:
"(a) Timing of Execution and Delivery of Election. A Participant may
elect the date or dates his Account balance will be paid or will begin to
be paid by completing and filing with the Committee a payment election form
approved by the Committee. To be effective, the election under this Section
must be filed with the Committee no later than the later of: (i) the time
the Participant is first eligible to make a deferral election under this
Plan (or under any other plan required to be aggregated with this Plan
pursuant to the requirements of Code Section 409A); or (ii) December 31,
2007. If no date is specified, payment will be made or commenced within 90
days following the Participant's Separation from Service."
5. By replacing Section 4.2 in its entirety with the following:
"Section 4.2 Method of Payment. Except as provided in Sections 4.5
through 4.7, a Participant may elect, in accordance with Section 4.3, to
have the balance of his or deferred Cash Fees distributed in cash in:
(a) A single lump sum payment; or
(b) Annual installment payments over a period of 2 to 5 years.
All deferred Stock Fees will be paid in a single lump sum."
6. By replacing subsection 4.3(c) in its entirety with the following:
"(c) Installments. If installment distributions are elected, the
initial annual installment amount will be the deferred Cash Fees
otherwise payable in a single sum multiplied by a fraction, the
numerator of which is one and the denominator of which is the
total number of installment distributions. Subsequent annual
installments will also be a fraction of the unpaid deferred Cash
Fees, the numerator of which is always one but the denominator of
which is the denominator used in calculating the previous
installment minus one. For example, if five annual installment
payments are elected, the initial installment will be one-fifth
of the vested deferred Cash Fees, the second installment will be
one-fourth of the remaining deferred Cash Fees and the third
installment will be one-third of the remaining deferred Cash
Fees, and so on."
7. By replacing Section 4.4 in its entirety with the following:
"Section 4.4 Vesting. A Participant will be fully "vested" in his
deferred Cash Fees at all times. A Participant will be "vested" in his
Stock Fees in accordance with Sections 3.04 and 3.05 of the First Merchants
Corporation Equity Compensation Plan for Non-Employee Directors."
Page 42
IN WITNESS WHEREOF, the Company, by its duly authorized officers, has
executed this First Amendment of the First Merchants Corporation 2007
Directors' Deferred Compensation Plan this 29th day of April, 2008, but
effective as of January 1, 2008.
FIRST MERCHANTS CORPORATION
By: /s/ Michael C. Rechin
------------------------------
Michael C. Rechin, President
and Chief Executive Officer
ATTEST:
By: /s/ Mark K. Hardwick
------------------------------------------
Mark K. Hardwick, Senior Vice President
and Chief Financial Officer
Page 43
EXIBIT-10c
FIRST MERCHANTS CORPORATION
EQUITY COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS
ARTICLE I
ESTABLISHMENT AND PURPOSE
Section 1.01. Establishment of Plan. First Merchants Corporation, an
Indiana corporation (the "Company"), hereby establishes the First Merchants
Corporation Equity Compensation Plan for Non-Employee Directors (the "Plan"),
effective as of April 29, 2008 (the "Effective Date"), subject to the approval
of the Plan at the Company's 2008 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 purpose of the Plan is to promote the interests
of the Company and its shareholders by more closely aligning the interests of
the Company and its Non-Employee Directors by requiring the payment of at least
one-half (1/2) of the Compensation payable to Non-Employee Directors for their
service in that capacity in Restricted Shares of the Company's common stock. A
"Non-Employee Director" means any member of the board of directors of the
Company (the "Board") who is not an employee of the Company or any of its
Subsidiaries. A "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.
ARTICLE II
ADMINISTRATION
The Plan shall be administered by the Compensation and Human Resources
Committee of the Board (the "Committee"), which shall serve at the pleasure of
the Board. 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.
All actions taken and interpretations made in good faith by the Committee,
or taken or made by any other person or persons to whom the Committee has
delegated authority, in the administration of the Plan shall be final and
binding upon all interested persons. All decisions by the Committee shall be
made with the approval of not less than a majority of its members. No member of
the Committee shall be liable for anything done or omitted to be done by him or
her or by any other member of the Committee or the Board in connection with the
Plan, except for his or her own willful misconduct or as expressly provided by
statute.
Page 44
ARTICLE III
PARTICIPATION; NON-EMPLOYEE DIRECTOR COMPENSATION
Section 3.01. Participation. All Non-Employee Directors shall automatically
become participants in the Plan with respect to all Compensation payable to them
for calendar quarters ending after the Effective Date, until the Plan is
terminated in accordance with the provisions of Article VII. "Compensation"
means any retainer, fee or other payment of any kind to which a Non-Employee
Director is entitled for services performed in that capacity, including, without
limitation, any additional amount payable to a Non-Employee Director for
chairing a Board committee, but excluding any "Director Option" granted under
the Company's 1999 Long-Term Equity Incentive Plan (the "1999 Equity Incentive
Plan").
Section 3.02. Non-Employee Director Compensation. The Board shall annually,
or at other times as the Board shall deem appropriate, determine the amount of
Compensation to be payable for services performed by Non-Employee Directors, in
accordance with applicable laws and regulations. Such Compensation shall be paid
quarterly, as of the last business day of each calendar quarter.
Section 3.03. Fraction Payable in Restricted Shares. A fraction of all
Compensation payable to Non-Employee Directors for calendar quarters ending
after the Effective Date, as determined by the Board from time to time, which
fraction shall not be less than one-half (1/2), shall be paid in Restricted
Shares, as defined in Section 3.04. In the absence of such determination, this
fraction shall be one-half (1/2). The number of Restricted Shares to be issued
to each Non-Employee Director shall be determined on the basis of the Fair
Market Value of such Shares as of the date (i.e., the last business day of the
calendar quarter) for which the Compensation is payable. The "Fair Market Value"
of a Restricted Share means the last reported sale price of a share of the
Company's common stock on the relevant 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. The shares shall be issued as
of the last business day of the relevant calendar quarter and shall be credited
to the Non-Employee Director's stock account as soon as administratively
feasible thereafter, but in no event shall any such payment be made later than
the March 15 of the calendar year next following the calendar year in which such
shares were earned. To the extent Compensation payable in Restricted Shares to a
Non-Employee Director under this Section 3.03 would result in a fractional share
of common stock being issuable to such Non-Employee Director, cash shall be paid
to the Non-Employee Director in lieu of such fractional share.
Section 3.04. Restrictions on Shares. A "Restricted Share" means a share of
the Company's common stock that is nontransferable and subject to a substantial
risk of forfeiture, to the extent provided in this Section 3.04. The shares
issued to a Non-Employee Director in accordance with Section 3.03 may be
registered in the name of a nominee or held in such other manner as the
Committee determines to be appropriate. A book entry stock account will be
established in the Non-Employee Director's name. The Non-Employee Director will
be the beneficial owner of the shares issued and credited to his or her stock
account and, subject to the restrictions set forth in this Section 3.04, he or
she will have all rights of beneficial ownership in such shares including the
right to vote the shares and receive all dividends and other distributions paid
or made with respect thereto. The Company or its nominee will retain custody of
the shares issued under this Plan until (i) all of the restrictions have lapsed
in accordance with Subsection 3.04(a), and (ii) the Non-Employee Director makes
a specific request in writing to the Company for such shares to be sold,
transferred or delivered; provided, however, at any time following the lapse of
such restrictions, a Non-Employee Director may request that a stock certificate,
representing all or part of the shares credited to his or her stock account on
which the restrictions have lapsed, be issued and delivered to the Non-Employee
Director. None of the shares issued under this Plan may be sold, transferred,
assigned, pledged, encumbered or otherwise alienated or hypothecated, unless and
until, and then only to the extent that, these restrictions have lapsed in
accordance with Subsection 3.04(a).
Page 45
(a) Lapse of Restrictions. The restrictions set forth in the first
paragraph of Section 3.04 shall lapse on the earliest of the following
dates: (i) the third anniversary of the date as of which the
Restricted Shares were issued if, as of the date the restrictions are
to lapse, the Non-Employee Director has continued to serve in that
capacity from the date as of which the Restricted Shares were issued
to the date of lapse; (ii) the date of the Non-Employee Director's
retirement as a member of the Board after he or she has attained age
fifty-five (55); (iii) the date of the Non-Employee Director's death;
(iv) the date the Non-Employee Director is determined to be totally
and permanently disabled, as defined in Section 22(e)(3) of the
Internal Revenue Code of 1986, as amended (the "Code"), or (v) the
date of a "Change of Control," as defined in the 1999 Equity Incentive
Plan.
(b) Forfeiture of Restricted Shares. In the event a Non-Employee
Director's service as a member of the Board terminates prior to the
date the restrictions on all or part of the Restricted Shares issued
pursuant to the Plan have lapsed in accordance with Subsection
3.04(a), all shares still subject to the restrictions shall be
returned to or canceled by the Company and shall be deemed to have
been forfeited by the Non-Employee Director.
Section 3.05. Deferral of Compensation Paid in Restricted Shares. A
Non-Employee Director may elect to defer payment of all or part of his or her
Compensation that is payable in the form of Restricted Shares under the
provisions of this Article III, in accordance with the First Merchants
Corporation 2007 Directors' Deferred Compensation Plan (the "Directors' Deferred
Compensation Plan"), modified as provided in the following sentences of this
Section 3.05. A Non-Employee Director who makes such an election shall be
credited with Deferred Stock Units (which may include fractional shares) equal
to the number of Restricted Shares that the Non-Employee Director would
otherwise receive in accordance with Section 3.03 of this Plan. The Non-Employee
Director shall not be deemed to be the beneficial owner of any shares of the
Company's stock that the Non-Employee Director would have received had the
election not been made, and he or she shall not have the right to vote any such
shares or to receive any dividends or other distributions paid or made with
respect thereto. However, in lieu of the provision for crediting interest to a
Non-Employee Director's Account under Section 3.4 of the Directors' Deferred
Compensation Plan, the portion of the Non-Employee Director's Account under the
Directors' Deferred Compensation Plan that is credited with Deferred Stock Units
shall be credited with earnings each quarter equal to the dividends that would
be payable on an equivalent number of shares of the Company's common stock.
Notwithstanding Section 4.2 of the Directors' Deferred Compensation Plan, the
only permissible form of payment of the portion of the balance in the
Non-Employee Director's Account under the Directors' Deferred Compensation Plan
credited with Deferred Stock Units shall be a distribution of shares of Company
common stock in a single lump sum payment; provided, however, the Non-Employee
Director shall receive cash in lieu of a fractional share. The provisions of
Section 3.04 of this Plan shall supersede the vesting provisions of Section 4.4
of the Directors' Deferred Compensation Plan to the extent they may conflict.
Page 46
ARTICLE IV
SHARES ISSUABLE UNDER PLAN
Section 4.01. Number of Shares. The shares issuable under the Plan shall be
the Company's authorized but unissued, or reacquired, common stock, or shares
purchased in the open market. The maximum number of shares of common stock that
may be issued under the Plan shall be 500,000, as adjusted pursuant to Section
4.02.
Section 4.02. Adjustment. If the Company shall at any time increase or
decrease the number of its outstanding shares of common stock or change in any
way the rights and privileges of such shares by means of a payment of a stock
dividend or any other distribution upon such shares payable in common stock, or
through a stock split, reverse stock split, subdivision, consolidation,
combination, reclassification, or recapitalization involving common stock, then
the numbers, rights and privileges of the shares issuable under Section 4.01
shall be increased, decreased or changed in like manner.
ARTICLE V
MISCELLANEOUS PROVISIONS
Section 5.01. No Right to be Elected. Neither the Plan nor any action taken
hereunder shall be construed as giving any Non-Employee Director any right to be
elected or re-elected as a director of the Company.
Section 5.02. Non-Assignment. A participant's rights and interest under the
Plan may not be assigned or transferred, hypothecated or encumbered, in whole or
in part, either directly or by operation of law or otherwise (except, in the
event of a participant's death, by will or the laws of descent and
distribution), including, without limitation, execution, levy, garnishment,
attachment, pledge, bankruptcy, or in any other manner; and no such right or
interest of any participant in the Plan shall be subject to any obligation or
liability of such participant.
Section 5.03. Compliance with Applicable Laws. No shares of the Company's
common stock shall be issued hereunder unless counsel for the Company shall be
satisfied that such issuance will be in compliance with applicable federal,
state, local and foreign securities, securities exchange, and other applicable
laws and regulations.
Section 5.04. Withholding. It shall be a condition to the obligation of the
Company to issue shares of common stock hereunder that the participant pay to
the Company, to the extent required by law and upon its demand, such amount as
may be requested by the Company for the purpose of satisfying any liability to
withhold federal, state, local or foreign income or other taxes. A participant
in the Plan may satisfy the withholding obligation, in whole or in part, by
electing to have the Company withhold shares of common stock, otherwise issuable
under the Plan, having a Fair Market Value equal to the amount required to be
withheld. If the amount requested is not paid, the Company shall have no
obligation to issue, and the participant shall have no right to receive, shares
of common stock.
Page 47
Section 5.05. Unfunded Plan. The Plan shall be unfunded. The Company shall
not be required to establish any special or separate fund or to make any other
segregation of assets to assure the issuance of shares hereunder.
Section 5.06. Ratification of Actions Taken. By accepting any payment of
Non-Employee Director Compensation hereunder or other benefit under the Plan,
each participant, and each person claiming under or through him or her, shall be
conclusively deemed to have indicated his or her acceptance and ratification of,
and consent to, any action taken under the Plan by the Company, the Board, or
the Committee.
Section 5.07. Registration. The appropriate officers of the Company shall
cause to be filed any registration statement required by the Securities Act of
1933, as amended, and any reports, returns or other information regarding any
shares of common stock issued pursuant to the Plan as may be required by Section
13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or any other applicable statute, rule or regulation.
Section 5.08. Governing Law. The interpretation, validity and enforcement
of this Plan shall, 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 5.09. Headings. Headings are given to the sections of this Plan
solely as a convenience to facilitate reference. Such headings, numbering and
paragraphing shall not in any case be deemed in any way material or relevant to
the construction of this Plan or any provisions hereof. The use of the singular
shall also include within its meaning the plural, where appropriate, and vice
versa.
ARTICLE VI
AMENDMENT
The Board may amend the Plan at any time and from time to time, as it deems
advisable; provided, however, that no amendment shall become effective without
shareholder approval if such shareholder approval is required by any applicable
federal or state law, rule or regulation, or by the rules of NASDAQ or any
national exchange on which the Company's common stock is listed; and provided,
further, that any such amendment shall comply with applicable provisions of Rule
16b-3 under Section 16 of the Exchange Act, as in effect from time to time, the
Code and the rules thereunder as in effect from time to time, and, to the extent
applicable, the Employee Retirement Income Security Act of 1974, as amended, and
the rules thereunder as in effect from time to time. No amendment of the Plan
shall materially and adversely affect any right of any participant with respect
to any shares of common stock of the Company theretofore issued without such
participant's written consent.
ARTICLE VII
TERMINATION
This Plan shall terminate upon the earlier of (a) the Board's adoption of a
resolution terminating the Plan, or (b) April 29, 2018, which is ten (10) years
from the date the Plan was initially approved and adopted by the shareholders of
the Company in accordance with Article VIII. No termination of the Plan shall
materially and adversely affect any of the rights or obligations of any person
without his or her written consent with respect to any shares of common stock of
the Company theretofore earned and issuable under the Plan.
Page 48
ARTICLE VIII
SHAREHOLDER APPROVAL
The Plan shall be effective as of the Effective Date, contingent upon
shareholder approval and adoption at the 2008 annual meeting of the shareholders
of the Company. The shareholders shall be deemed to have approved and adopted
the Plan only if it is approved and adopted at a meeting of the shareholders
duly held by vote taken in the manner required by the securities laws of the
United States, the Code, and the laws of the State of Indiana, as applicable.
Page 49
EXHIBIT-14
FIRST MERCHANTS CORPORATION
CODE OF CONDUCT
Revised April 2008
Page 50
TABLE OF CONTENTS
A. Introduction....................................................................................1
B. Confidential Information........................................................................2
1. Customer and Supplier Information...............................................................2
2. Employee Information............................................................................3
3. Inside Information..............................................................................3
C. Conflicts of Interest...........................................................................3
1. Dealing with Customers, Suppliers or Competitors in Business Ventures...........................4
2. Borrowing from Customers or Suppliers...........................................................4
3. Gifts to Employees, Officers or Directors.......................................................4
D. Public Communications...........................................................................5
1. Regulatory Disclosures and Public Comments......................................................5
2. Media Inquiries.................................................................................5
E. Lending Practices...............................................................................6
1. Granting of Preferential Rates..................................................................6
2. Prohibited Lending Practices....................................................................6
F. Political Contributions.........................................................................6
1. Prohibitions....................................................................................6
2. Personal Political Contributions................................................................7
G. Outside Activities..............................................................................7
1. Community Service...............................................................................7
2. Fiduciary Appointments..........................................................................7
3. Political Activities............................................................................7
4. Outside Employment and Board Service............................................................8
H. Personal Financial Responsibility...............................................................8
1. General.........................................................................................8
2. Borrowing from other Financial Institutions.....................................................8
3. Borrowing from Customers or Suppliers...........................................................9
4. Taking Advantage of a Business Opportunity that Rightfully Belongs to the Company...............9
5. Corporate Property Services.....................................................................9
6. Employee Purchase of Company Assets.............................................................9
7. Purchase of Property Held by the Company as a Fiduciary.........................................10
8. Handling of Personal Accounts...................................................................10
I. Personal Trading and Investments................................................................10
1. Investment in Securities of a Customer, Supplier, or Competitor.................................10
2. Securities Trading..............................................................................11
3. Non-public and/or Material Inside Information...................................................11
4. Preferential Treatment..........................................................................11
5. Securities Transactions by Trust and Investment Personnel.......................................11
6. Investment in First Merchants Corporation Securities............................................11
J. Code of Ethics for First Merchants Corporation Financial Management.............................11
i
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A. Introduction
The First Merchants Corporation Code of Conduct consists of two parts: (1)
a comprehensive code of ethical and legal business conduct (Sections A-I)
that applies to all directors, officers and employees of First Merchants
Corporation and its affiliates (collectively, the "Company"); and (2) a
supplemental Code of Ethics for First Merchants Corporation Financial
Management (Section J) that applies to the chief executive officer and
senior financial officers of First Merchants Corporation, in recognition of
their unique responsibilities for assuring proper accounting, financial
reporting and internal controls.
The comprehensive code of ethical and legal business conduct applicable to
all of the Company's directors, officers and employees is adopted in
accordance with NASDAQ Marketplace Rule 4350(n); and the supplemental code
of ethics applicable to the chief executive officer and senior financial
officers is adopted in accordance with Section 406 of the Sarbanes-Oxley
Act of 2002 and Securities and Exchange Commission ("SEC") Regulation S-K,
Item 406. The text of the Code of Conduct has been posted on the Company's
Internet website. The text of the supplemental Code of Ethics for Financial
Management has also been posted separately on the website.
The Code of Conduct provides general principles of personal and business
conduct that are intended to promote ethical behavior, proper handling of
actual or apparent conflicts of interest, full and fair disclosure, and
compliance with applicable laws, rules and regulations. It does not cover
all conceivable situations but sets forth basic responsibilities for
representatives of the Company. It sets forth basic standards of conduct,
not necessarily ideal or maximum standards.
The essence of the financial services industry is trust and confidence.
Thus, it is imperative that representatives of the Company display, and be
perceived by the public as displaying, the highest principles of personal
and professional integrity. They must always keep in mind that the
standards of behavior and performance the public expects of the Company's
directors, officers and employees, and that the Company has pledged to
meet, are higher than the general norms for the business world. The Company
assumes that its employees, officers and directors will comply with all
laws, rules and regulations applicable to the Company and their own
personal conduct.
Compliance with the Code of Conduct is a condition of employment and for
service as a director. Anyone who is aware of a violation or apparent
violation by an employee, officer or director should report the same to the
appropriate person or persons, which, depending on the nature of the
alleged violation and/or the position held by the alleged violator, may be
a supervisor, the Director of Human Resources, the CEO or other executive
officer of the Company or a Company affiliate, the Chairman of the Board or
of the Audit Committee of the Company or a Company affiliate, and/or the
Company's Legal Counsel (which may be either in-house counsel or counsel to
the Board of Directors). Failure to report a serious violation of which an
employee, officer or director is aware to a proper Company official or
representative may itself be a violation of the Code of Conduct, depending
on the circumstances. The Company will take such disciplinary or preventive
action as is appropriate under the circumstances to address any existing or
potential violation that is brought to the attention of the proper
authority. No adverse action will be taken against anyone who, in good
faith, reports a violation or potential violation of the Code of Conduct.
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Any waiver of a provision of the Code of Conduct applicable to directors or
executive officers of the Company must be approved by the Board of
Directors of First Merchants Corporation. The Company shall disclose such
waiver, along with the reasons for the waiver, in a Form 8-K filed with the
Securities and Exchange Commission ("SEC") within four (4) business days.
With rare exceptions, the Company will not grant or permit such waivers.
The First Merchants Corporation Audit Committee is responsible for ensuring
the enforcement of the Code of Conduct and for interpreting its provisions.
The Company's Chief Risk Officer is responsible for ongoing compliance by
employees, officers and directors with the Code of Conduct and for
overseeing training and monitoring compliance of such persons with respect
to its provisions; and for these purposes he or she shall report to
directly to the Chairman of the Audit Committee as well as to the CEO of
the Company. A request for an interpretation of any provision of the Code
of Conduct may be directed to a supervisor, the Director of Human Resources
or Legal Counsel. A written request for an interpretation may also be
submitted to the Chairman of the Audit Committee, setting forth the
relevant facts and circumstances. The Audit Committee will respond to such
a request, after consulting with the Company's Legal Counsel and/or other
outside legal counsel if and to the extent it deems appropriate.
The Code of Conduct shall be reviewed at least annually by the Nominating
and Governance Committee.
B. Confidential Information
1. Customer and Supplier Information
Confidential Information received from or concerning customers and
suppliers is to be held in strictest confidence. The very nature of
the Company's business is such that employees, officers and directors
may have access to a customer's business plans, financial information,
forecasts, decisions, problems and other data. This information is to
be used solely for business purposes, as an aid to providing
knowledgeable service, and must not be used for personal gain. Such
information should never be transmitted to anyone outside the Company,
including family and associates, or to employees of the Company who do
not need to know such information in performing their jobs.
Exceptions to this policy include: (a) routine credit inquiries; (b)
disclosures required by legal process or upon advice of the Company's
Legal Counsel; and (c) information authorized for release by written
approval of a customer or supplier.
Directors, officers and employees should take appropriate measures to
protect the security of confidential information by ensuring, when
leaving the office, that open areas and work spaces are cleared of
paperwork, that confidential information is locked in desks or file
cabinets, and that access to all files containing confidential
information is properly controlled. They should also avoid displaying
documents in an indiscriminate manner or engaging in inappropriate
business conversations in public places, on or off the Company's
premises.
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2. Employee Information
The Company will safeguard the confidential aspects of the
relationships between the Company and its employees. Requests for
information concerning present or former employees relating to their
employment or to matters such as salary verification should be
referred to the Human Resources Department. The Credit Department or
other office(s) designated under published Company policies and
procedures may answer routine credit inquiries about Company employees
in response to proper requests for checking account, savings or loan
information. This policy applies to both oral and written requests.
3. Inside Information
The use or disclosure of "material inside information" about the
Company, defined as information not publicly disseminated but
significant enough to possibly materially affect the Company and/or
its securities, is not only prohibited, but may be a serious violation
of federal or state securities laws. Directors, officers and employees
who have a question which involves the use or disclosure of
information that has not yet been publicly disseminated should contact
their supervisor, the Director of Human Resources, or the Company's
Legal Counsel, as appropriate, prior to such use or disclosure.
C. Conflicts of Interest
A conflict of interest occurs when a person's personal interests improperly
interfere, or appear to interfere, with the interests of the Company or
with the person's judgment in performing his or her responsibilities on
behalf of the Company. Employees, officers and directors of the Company
must never allow their personal interests to interfere with their
objectivity in performing their responsibilities to the Company, and they
must never use or attempt to use their position with the Company to obtain
any improper financial or other benefit for themselves, their family
members, or any other person.
The Company will conduct an appropriate review, in accordance with NASDAQ
Marketplace Rule 4350(h), of all related party transactions for potential
conflict of interest situations on an ongoing basis. All such transactions
must be approved by the First Merchants Corporation Audit Committee. For
this purpose, "related party transactions" are transactions involving the
Company's directors or executive officers, or members of their immediate
family, which must be disclosed pursuant to SEC Regulation S-K, Item 404.
Employees, officers and directors of the Company should always consider, in
advance of taking any action, whether such action might pose an actual or
apparent conflict of interest and whether such conflict would prevent them
from complying with the principles set forth in the first paragraph of this
Section. They should be familiar and strive to comply with both the letter
and spirit of applicable federal and state statutes and regulations,
Company bylaws, and common law fiduciary principles relating to conflicts
of interest. Although it is frequently difficult to determine when an
actual or apparent conflict of interest exists, the following sections
contain guidelines for proper conduct in some of the situations that may
arise from time to time.
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1. Dealing with Customers, Suppliers or Competitors in Business Ventures
Employees, officers and directors of the Company should not own,
directly or indirectly, a significant financial interest in any
business entity that does or seeks to do business with, or is in
competition with, the Company unless the interest has been fully
disclosed in advance to the Board of Directors and has been determined
to not improperly influence any decision that they might be required
to make in performing their duties for the Company.
2. Borrowing from Customers or Suppliers
See "Personal Financial Responsibility"
3. Gifts to Employees, Officers or Directors
The Company expects employees, officers and directors to render
efficient and courteous service to its customers at all times without
expecting reward other than compensation or fees regularly received
for their employment or service to the Company. Accordingly, they
shall not solicit, receive or participate in any arrangement leading
to the payment of money or anything of value to them, their relatives
or friends for past or future business conducted with the Company. To
avoid even the appearance of impropriety, it is important that they
decline any gifts from present or prospective customers or suppliers
if acceptance would raise the slightest doubt of improper influence.
The Federal Bank Bribery Act (18 U.S.C. Section 215) generally makes
it a crime for a person associated with a bank or a bank holding
company, including employees, officers, directors, agents and
attorneys of the bank or bank holding company, to seek or accept
anything of value from any person or entity in connection with any
transaction or business of such bank or holding company with which the
person is associated. It is a crime for the giver as well as the
receiver. The Act cannot be read in a vacuum and must be interpreted
and administered accordingly. The Act is intended to prevent a pay-off
to bank or bank holding company officials as a quid pro quo either to
induce a particular transaction or as a "gratuity" on account of a
particular transaction. Thus, where a benefit is given or received as
a result of a banking transaction, the Act may be violated. However,
the Act is not intended to proscribe the receipt of gratuities or
favors of reasonable value where it is clear from the circumstances
that the customer is not trying to exert influence over the bank or
bank holding company official in connection with a transaction, and
the gratuity or favor is, in fact, unsolicited. The term "gift"
includes, but is not limited to, substantial favors, money, credit,
special discounts on goods or money, tickets to entertainment events,
trips, hotel expenses, excessive entertainment, and food or beverages.
Gifts to immediate family are included in this prohibition.
Employees of the Company should not accept gifts of cash in any
amount. However, the Company recognizes that situations may arise when
it would be appropriate for an employee to accept the benefit of
another's expenditure. Such situations include:
a. Gifts of reasonable value (not in excess of $100) given at
Christmas, other holidays or special occasions, which
represent expressions of friendship;
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b. Reasonable entertainment at luncheon, dinner or business
meetings with present or prospective customers and suppliers
when the return of the expenditure on a comparable basis is
likely to occur and the expenditure is a proper business
expense;
c. Unsolicited advertising or promotional material (e.g., pens,
calendars, etc.) of a value not exceeding $100;
d. Awards given by charitable, educational, civic or religious
organizations or meritorious contributions or service; and
e. Gifts or bequests based upon family relationships.
Circumstances surrounding a gift may be such that rejection or return
of the gift would cause embarrassment or would potentially damage
friendly relationships between a customer or supplier and the Company.
In that case, the employee should report the gift and its estimated
value to the Director of Human Resources.
Employees may not accept a devise of property or an interest in
property from a customer or supplier of the Company (other than a
relative or a person who has never dealt with the employee as a
representative of the Company) under a will, trust, or other estate
planning instrument at any time. The fact that the employee did not
know of the bequest does not justify an exception.
D. Public Communications
1. Regulatory Disclosures and Public Comments
Employees, officers and directors of the Company shall strive to
ensure that all reports, documents and other information that the
Company files with or submits to the SEC and in other public
communications made by the Company are accurate, complete, timely and
fair, in accordance with applicable disclosure standards, including
standards of materiality where appropriate. Employees, officers and
directors shall not knowingly misrepresent, or cause others to
misrepresent, material facts about the Company to others, including,
without limitation, the Company's independent auditors and
governmental regulators or other governmental officials.
Employees, officers and directors who are requested to make a public
statement or comment on a law, regulation or other matter related to
or affecting the Company should first submit a copy of the statement
to the CEO (or in the case of a director, to the Chairman of the Board
of Directors) for approval. Company letterhead shall not be used in
commenting on any law, regulation or matter that only relates to or
affects the employee, officer or director personally and not the
Company.
2. Media Inquiries
Only the Director of Marketing, members of executive management or, in
appropriate cases, the Chairman of the Board of Directors, should
initiate or respond to contacts with the media on behalf of the
Company. Any media inquiries should be directed to the Marketing
Department and employees should only respond to media inquiries after
being cleared by the Marketing Department or a member of executive
management. In the event of a robbery, disturbance or other
emergencies, all communications should be referred to the appropriate
bank security officer, the Director of Marketing or a member of
executive management.
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E. Lending Practices
1. Granting of Preferential Rates
The lending services of the Company's affiliate banks are available to
equitably serve the legitimate and deserving credit needs of
customers. All loans should be based solely upon a borrower's credit
worthiness and overall relationship with the Company. Preferential
rates shall not be granted to any employee, officer or director in
violation of Company policy. If questions arise concerning lending
services, consult the loan policy manual or a senior loan officer.
2. Prohibited Lending Practices
The following lending practices are prohibited either by law or
Company policy. For purposes of this section, the term "lending
officer" refers to any Company employee who has lending authority. A
lending officer:
a. Shall not extend credit to a customer if any of the proceeds
are to be given or loaned to the lending officer, or to pay
a debt owed to the lending officer or members of his or her
immediate family.
b. Shall not extend credit to a customer to enable the customer
to purchase real estate or personal property from the
lending officer, unless prior written approval is obtained
from a senior loan officer.
c. Shall not extend credit to a relative of the lending
officer, whether by blood or marriage, or to an individual
residing in the lending officer's household.
d. Shall not extend credit to a company in which the lending
officer has an interest as a director, officer or partner,
or an ownership interest exceeding five percent (5%), or in
which a relative of the lending officer, whether by blood or
marriage, has such an interest.
e. Shall not loan his or her personal funds, or the personal
funds of other employees, to a customer or supplier of the
Company where the lending officer or other employee has any
responsibility for the Company's relationship with such
customer or supplier.
F. Political Contributions
1. Prohibitions
It is unlawful for the Company to make contributions or expenditures
in connection with any election. Federal and state laws prohibit the
Company from contributing corporate funds or property in support of a
political party or candidate for public office. In addition to cash
payments, this prohibition applies to contributions of meeting rooms,
food, beverages, and reimbursement of expenses to third parties or
anything of value for the purpose of influencing any election.
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2. Personal Political Contributions
The policy of the Company regarding corporate political contributions
is not intended to discourage employees, officers and directors from
making personal contributions to candidates or political parties of
their choice. The Company does not and will not exert pressure, either
direct or indirect, that infringes on their right to decide to whom
personal political contributions will be made.
G. Outside Activities
1. Community Service
The Company recognizes its responsibilities to the communities, states
and nation in which it operates and whose citizens it serves. The
Company considers itself socially responsible and responsive. It
recognizes that it cannot thrive unless the communities in which it
operates thrive, nor can it exist without public support. The Company
endeavors to strengthen these communities, states and nation, and the
free enterprise system, by encouraging its employees, officers and
directors to become involved in charitable, civic and community causes
and organizations and by making appropriate financial and other
contributions to these causes and organizations.
2. Fiduciary Appointments
Employees of the Company shall not accept an appointment as a personal
representative, executor, trustee, administrator, guardian or other
fiduciary relationship, whether such appointment is as the sole
fiduciary or as a co-fiduciary. Exceptions may be made for fiduciary
appointments based upon close family or personal relationships where
the circumstances warrant. The First Merchants Corporation Audit
Committee must approve all exceptions prior to acceptance of such an
appointment.
3. Political Activities
Employees, officers and directors are encouraged to take an active
part in supporting their political party and their individual
candidates, such as by serving as a volunteer, an active party worker,
an appointed official, or an elected official. Employees whose
participation will require time away from the Company must obtain
prior approval from the Director of Human Resources.
In all cases, individuals who are seeking elective office or
participating in political activities do so as an individual and not
as a representative of the Company. To prevent any impression of
sponsorship or endorsement by the Company, they must not use the
Company's name or its address in campaign materials or in collecting
funds. The Company shall not be identified in any advertisements or
literature except as may be appropriate in biographical information.
-7-
Page 58
4. Outside Employment and Board Service
The Company recognizes that there may be times when employees will
want to obtain outside employment or serve on boards of directors. Any
such employment or service must be secondary to their position with
the Company and must not interfere with their work or responsibilities
with the Company or involve improper diversion of Company resources.
An employee who wishes to obtain outside employment must notify his or
her supervisor in advance and submit a statement to the Human
Resources Department describing the intended new employment and the
anticipated number of hours and location of the work. Should this job
affect the employee's work performance or attendance, the supervisor
in consultation with the Human Resources Department will take
appropriate action.
An employee who wishes to serve on a for-profit board must have the
prior approval of the CEO of the Company or Company affiliate as
appropriate; provided, however, if the employee wishing to serve is
the CEO of the Company or a Company affiliate, such approval must come
from the Company's or affiliate's Board Chairman instead. Service as a
director of a family business or corporation must be reported but will
generally be approved.
An employee who wishes to serve on a not-for-profit board shall
disclose his or her intention to do so to the CEO of the Company or
Company affiliate as appropriate; provided, however, if the employee
wishing to serve is the CEO of the Company or a Company affiliate,
such disclosure shall be made to the Company's or affiliate's Board
Chairman instead. Service on a not-for-profit board does not require
prior approval; however, the CEO or Board Chairman may affirmatively
deny permission for an employee to do so under circumstances involving
potential material harm to the interests of the Company.
H. Personal Financial Responsibility
1. General
It is important that employees, officers and directors of financial
services organizations properly manage their personal finances and use
credit intelligently. Imprudent personal financial management and its
consequent hardships often affect job performance and may even tempt
individuals in positions of trust to violate their fiduciary
obligations to the Company and/or its customers. Employees who are
having financial problems should consult with their supervisor or the
Director of Human Resources or his or her delegate. Directors and CEOs
of the Company or an affiliate who are having financial problems
should consult with the Company's or affiliate's Board Chairman or the
Chairman of the Company's or affiliate's Audit Committee.
2. Borrowing from other Financial Institutions
Borrowing from other financial institutions, including correspondent
banks, is permitted as long as the loan is obtained on substantially
the same rates, terms and conditions as the financial institution
offers to other customers of similar credit worthiness.
-8-
Page 59
3. Borrowing from Customers or Suppliers
Employees are not permitted to borrow from customers or suppliers
except those that engage in lending in the usual course of their
business. Even then, borrowing must only be on terms offered to others
in similar circumstances, without special treatment as to interest
rates, repayment terms, security or other provisions. This prohibition
does not preclude borrowing from individuals related to an employee by
blood or marriage.
4. Taking Advantage of a Business Opportunity that Rightfully Belongs to
the Company
Employees, officers and directors must not take personal advantage of
an opportunity that rightfully belongs to the Company. Whenever the
Company has been actively soliciting a business opportunity or has
been offered such an opportunity, or whenever the funds, facilities,
personnel or other resources of the Company have been used in pursuing
an opportunity, that opportunity belongs to the Company and shall not
be diverted to the personal benefit of any employee, officer or
director. Examples of improperly taking advantage of a Company
opportunity may include, without limitation:
a. Selling or improperly disclosing information to which a
person has access because of his or her position.
b. Acquiring a property interest when the Company is known to
be interested in purchasing or leasing the property interest
in question.
c. Receiving a commission, fee or other payment on a
transaction that would otherwise accrue to the Company.
d. Diverting business from the Company or encouraging employees
to leave their employment with the Company.
e. Otherwise improperly profiting, either directly or
indirectly, to the detriment of the Company.
5. Corporate Property Services
Employees are not permitted to act as a principal for either
themselves or their close family members in the supply of goods,
property or services to the Company. Using the services of other
Company employees or other Company resources during working hours for
personal purposes is also prohibited.
6. Employee Purchase of Company Assets
It is improper for employees to purchase, directly or indirectly, any
Company assets other than at public sale. Any such transaction is
likely to subject the Company to criticism and, depending on the
circumstances, may even result in liability, even if entered into
innocently. Company assets, including repossessed loan collateral,
will not be sold to employees or members of their immediate family
except at public sale. This policy also extends to "friends" who
purchase an asset from the Company and then resell it to an employee
or member of his or her immediate family. Upon approval of the
executive officer responsible for the Company's or an affiliate's
physical properties, items of Company equipment or other property that
are of nominal value may be sold to employees when the return to the
Company or affiliate will equal or exceed that from other methods of
disposal.
-9-
Page 60
7. Purchase of Property Held by the Company as a Fiduciary
Property held by the Company as a fiduciary shall not be sold or
transferred, by loan or otherwise, to the Company or any of its
directors, officers or employees, or to any other individual or
organization with whom there exists a connection or interest that
might adversely affect the Company's exercise of sound judgment or the
financial interests of the Company or any beneficial owner of the
property in selling or transferring such property; provided, however,
an exception may be made where (a) expressly authorized by the
instrument creating the fiduciary relationship or by court order, or
(b) such sale or transfer is made in accordance with applicable laws
and with the prior approval of the Company's Legal Counsel or the
First Merchants Corporation Audit Committee.
It is also improper for an employee to become a tenant of any real
estate managed by First Merchants Trust Company.
8. Handling of Personal Accounts
All employees, officers and directors shall handle their personal
checking accounts satisfactorily, avoiding overdrafts and avoiding the
use of facilities at other financial institutions to disguise
potential overdrafts. The use of two or more financial institutions to
disguise overdrafts, sometimes referred to as "kiting", is both a
violation of this Code and a violation of the law.
I. Personal Trading and Investments
While it is not the intent of the Company to unduly limit employees,
officers and directors in their personal trading and investments,
transactions must be avoided that would involve or appear to involve a
conflict of interest between the individual and the Company or between the
Company and any customer. Trading on inside or confidential information is
also prohibited. This policy covers transactions for the personal account
of the employee, officer or director, as well as members of his or her
immediate family and close relatives, whether by blood or marriage.
Investment situations that might involve a conflict of interest are many,
varied and not subject to simple listing. Anyone who has any uncertainty
about a situation should consult the Company's Legal Counsel or the
Director of Human Resources.
1. Investment in Securities of a Customer, Supplier, or Competitor
Employees should generally avoid investing in securities of a
customer, supplier, borrower or competitor of the Company, except for
publicly held companies where the securities have a broad market.
Participation in a business venture with such parties should be
considered the same as investing in their securities for these
purposes. Such investment may affect an employee's judgment or
decisions made on behalf of the Company.
-10-
Page 61
2. Securities Trading
Employees are expressly prohibited from buying or selling investment
securities through the Company unless they establish their own account
or a fiduciary account, following normal procedures. The commission
charged shall be as stated in the published fee schedule for employees
of the Company. This section is not applicable to the securities of
First Merchants Corporation, which may be purchased through employee
benefit programs in which the employee is eligible to participate.
3. Non-public and/or Material Inside Information
Non-public or material inside information provided by customers,
suppliers and others in the normal course of business is confidential
and must be held inviolate. Such information must never be used as a
basis for personal investment decisions. Anyone who has uncertainty
about the information should consult the Company's Legal Counsel.
4. Preferential Treatment
Employees must never use commissions paid in the sale of securities
for the Company's customers to obtain special concessions from
brokerage firms. Employees shall not accept preferential treatment in
the form of an allocation of "hot" new issues or any other securities
which become available prior to a public offering or that are or may
become in such demand that the broker, investment banker, issuer, or
other seller of the securities might expect to receive favorable
treatment in return for making such allocation.
5. Securities Transactions by Trust and Investment Personnel
Trust and investment personnel, because of their responsibilities with
respect to fiduciary accounts, are subject to further restrictions and
guidelines relating to investments. Specifically, any trust and
investment personnel involved in securing approval for trades and/or
actually trading on behalf of a fiduciary account must always place
the fiduciary account before his or her own personal investments.
Other restrictions and guidelines concerning securities trading
policies and procedures are covered in the First Merchants Trust
Company Trust and Investment Policy Manual.
6. Investment in First Merchants Corporation Securities
Directors, officers and employees of the Company shall not execute
personal transactions in First Merchants Corporation securities if
they possess material inside information that has not been disclosed
to the public.
J. Code of Ethics for First Merchants Corporation Financial Management
This Code of Ethics for First Merchants Corporation Financial Management is
adopted pursuant to Section 406 of the Sarbanes-Oxley Act of 2002 and
Securities and Exchange Commission ("SEC") Regulation S-K, Item 406, which
states that issuers shall disclose whether they have adopted a code of
ethics that applies to their principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions. Although part of the Code of Conduct of First
Merchants Corporation (the "Company"), this Code of Ethics applies
specifically and separately to the following officers of the Company: the
Chief Executive Officer, the Chief Financial Officer, the Chief Banking
Officer, the Chief Accounting Officer, the Corporate Controller, and the
Corporate Treasurer (collectively, the "Senior Financial Officers").
-11-
Page 62
The Senior Financial Officers shall always act with integrity and engage in
honest and ethical conduct. In addition to the policies set forth elsewhere
in the Code of Conduct, the Senior Financial Officers have the following
obligations:
1. The Senior Financial Officers must never allow their personal
interests to interfere with their objectivity in performing their
responsibilities to the Company; and they must never use or attempt to
use their position with the Company to obtain any improper personal
financial or other benefit for themselves, for their family members,
or for any other person. They should determine in advance of taking
any action whether such action poses a conflict of interest and
whether such conflict would prevent them from complying with the above
principles. A "conflict of interest" occurs when a person's personal
interests improperly interferes with the interests of the Company. Any
actual or apparent conflict of interest involving a Senior Financial
Officer shall be reported immediately to the Company's Legal Counsel
(which may be either in-house counsel or counsel to the Board of
Directors), who shall promptly report the matter to the Chairman of
the Audit Committee. Legal Counsel and the Chairman of the Audit
Committee shall ensure that appropriate actions are taken to provide
for the ethical handling of any actual or apparent conflict of
interest reported to them.
2. The Senior Financial Officers shall strive to ensure that all reports
and documents that the Company files with, or submits to, the SEC and
in other public communications made by the Company contain full, fair,
accurate, timely and understandable disclosures, in accordance with
applicable disclosure standards, including standards of materiality,
where appropriate. Accordingly, they shall not knowingly misrepresent,
or cause others to misrepresent, material facts about the Company to
others, including, without limitation, the Company's independent
auditors and governmental regulators or other governmental officials.
Within their areas of responsibility, they shall properly review and
critically analyze proposed disclosures for accuracy and completeness.
In addition, they shall promptly bring to the attention of the
Company's Legal Counsel any material information of which they become
aware that affects the disclosures made by the Company in its public
filings or other public communications. Legal Counsel shall, in turn,
promptly report the situation to the Chairman of the Audit Committee.
3. It is the Company's policy to comply with all applicable governmental
laws, rules and regulations; and all Senior Financial Officers must
adhere to this policy. Activity which would be criminally or civilly
actionable shall also be deemed to be a violation of this policy. For
example, the anti-fraud provisions of the federal securities laws make
it unlawful for a person to trade securities on the basis of material,
non-public information. Such illegal insider trading would also
constitute a violation of this policy. Anyone who is uncertain about
the interpretation or applicability of a law, rule or regulation
should consult with the Company's Legal Counsel before taking action.
-12-
Page 63
4. A Senior Financial Officer who becomes aware of an existing or
potential violation of this Code of Ethics shall promptly notify the
Company's Legal Counsel, who shall promptly inform the Chairman of the
Audit Committee of the situation. A Senior Financial Officer's failure
to report a violation of which he or she has knowledge is itself a
violation of the Code. The Company will take such disciplinary or
preventive action as is appropriate under the circumstances to address
any such existing or potential violation that is brought to its
attention. No adverse action shall be taken against anyone who, in
good faith, reports a violation or potential violation of this Code of
Ethics.
5. Compliance with this Code of Ethics is a condition of employment, and
any violations thereof may result in disciplinary action, up to and
including discharge.
In any circumstance where the Company's Legal Counsel is involved in
the matter giving rise to a violation or potential violation of this
Code of Ethics, the required internal reporting or notification shall
instead be made directly to the Chairman of the Audit Committee.
The Audit Committee is responsible for applying this Code of Ethics to
specific situations and has the authority to interpret this Code in
any particular situation. Anyone desiring an interpretation of a
provision of the Code of Ethics may consult with the Company's Legal
Counsel and/or submit a written request for an interpretation to the
Audit Committee, setting forth the relevant facts and circumstances.
The Audit Committee shall respond to any such written request as it
deems appropriate. In so doing, it may consult with the Company's
Legal Counsel and/or other outside legal counsel.
The SEC requires public disclosure of any waiver from, or amendment
to, a provision of this Code of Ethics. The Company expects full
compliance with this Code and, with rare exceptions, will not grant or
permit waivers from its requirements. Anyone requesting a waiver from
a provision of the Code of Ethics shall submit the request to the
Audit Committee, which shall, in consultation with the Company's Legal
Counsel and/or other outside legal counsel, determine whether the
request should be granted.
The Chairman of the Audit Committee shall inform the Board of
Directors of any violation of this Code of Ethics that is reported to
the Committee and of any waiver from the Code's provisions that is
approved by the Committee.
-13-
Page 64
EXHIBIT-31.1
FIRST MERCHANTS CORPORATION
FORM 10-Q
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
- -------------
I, Michael C. Rechin, 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 report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in the Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report, based on such evaluation;
and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of 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: May 9,August 11, 2008 by /s/ Michael C. Rechin
-------------------------------------
Michael C. Rechin
President and
Chief Executive Officer
(Principal Executive Officer)
Page 3265
EXHIBIT-31.2
FIRST MERCHANTS CORPORATION
FORM 10-Q
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
- -------------
I, Mark K. Hardwick, Executive 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 report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in the Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report, based on such evaluation;
and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of 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: May 9,August 11, 2008 by: /s/Mark K. Hardwick
----------------------------------------
Mark K. Hardwick
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Page 3366
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 March 31,June 30, 2008 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Michael C. Rechin, 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: May 9,August 11, 2008 by /s/ Michael C. Rechin
--------------------------- -------------------------------------
Michael C. Rechin
President and
Chief Executive Officer
(Principal 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 March 31,June 30, 2008 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Mark K. Hardwick, Executive 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: May 9,August 11, 2008 by /s/ Mark K. Hardwick
--------------------------- -------------------------------------
Mark K. Hardwick
Executive Vice President and
Chief Financial Officer
(Principal Financial 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 3467