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 September 30, 2006
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, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
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 October 16, 2006, there were 18,412,237 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.........28
Item 5. Other Information...........................................28
Item 6. Exhibits....................................................29
Signatures...................................................................30
Index to Exhibits............................................................31
Page 2
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
September 30, December 31,
2006 2005
------------ ------------
(Unaudited)
ASSETS:
Cash and due from banks ....................................... $ 65,641 $ 70,417
Interest-bearing deposits...................................... 8,717 8,748
Investment securities available for sale ...................... 458,784 422,627
Investment securities held to maturity ........................ 9,290 11,639
Mortgage loans held for sale................................... 3,395 4,910
Loans, net of allowance for loan losses of $26,975 and $25,188. 2,614,669 2,432,239
Premises and equipment ........................................ 40,511 39,417
Federal Reserve and Federal Home Loan Bank stock............... 23,620 23,200
Interest receivable ........................................... 23,946 19,690
Core deposit intangibles ...................................... 15,280 17,567
Goodwill ...................................................... 121,386 121,266
Cash surrender value of life insurance......................... 63,539 43,579
Other assets .................................................. 23,261 21,780
----------- -----------
Total assets .............................................. $ 3,472,039 $ 3,237,079
=========== ===========
LIABILITIES:
Deposits:
Noninterest-bearing ......................................... $ 324,601 $ 314,335
Interest-bearing ............................................ 2,369,690 2,068,241
----------- -----------
Total deposits ............................................ 2,694,291 2,382,576
Borrowings .................................................... 419,146 508,236
Interest payable .............................................. 10,236 5,874
Other liabilities.............................................. 26,075 26,997
----------- -----------
Total liabilities ......................................... 3,149,748 2,923,683
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Preferred stock, no-par value:
Authorized and unissued - 500,000 shares
Common Stock, $.125 stated value:
Authorized --- 50,000,000 shares
Issued and outstanding - 18,334,811 and 18,416,714 shares.... 2,292 2,302
Additional paid-in capital .................................... 143,688 145,682
Retained earnings ............................................. 184,555 174,717
Accumulated other comprehensive loss .......................... (8,244) (9,305)
----------- -----------
Total stockholders' equity ................................ 322,291 313,396
----------- -----------
Total liabilities and stockholders' equity ................ $ 3,472,039 $ 3,237,079
=========== ===========
See notes to consolidated condensed financial statements.
Page 3
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
Interest Income:
Loans receivable
Taxable ................................................... $48,738 $40,853 $137,475 $116,506
Tax exempt ................................................ 189 160 588 483
Investment securities
Taxable ................................................... 3,289 2,427 9,097 7,132
Tax exempt ................................................ 1,645 1,595 4,905 4,702
Federal funds sold .......................................... 13 51 41 190
Deposits with financial institutions ........................ 144 185 390 493
Federal Reserve and Federal Home Loan Bank stock ............ 307 296 938 889
------- ------- -------- --------
Total interest income ..................................... 54,325 45,567 153,434 130,395
------- ------- -------- --------
Interest expense:
Deposits .................................................... 20,291 12,172 51,624 32,707
Borrowings .................................................. 6,410 5,255 18,831 14,685
------- ------- ------- -------
Total interest expense .................................... 26,701 17,427 70,455 47,392
------- ------- ------- -------
Net Interest Income ........................................... 27,624 28,140 82,979 83,003
Provision for loan losses ..................................... 1,558 1,794 5,013 6,409
------- ------- ------- -------
Net Interest Income After Provision for Loan Losses ........... 26,066 26,346 77,966 76,594
------- ------- ------- -------
Other Income:
Net realized gains on sales of available-for-sale securities. 16 22
Other income ................................................ 8,835 8,764 25,843 26,566
------- ------- ------- -------
Total other income ............................................ 8,835 8,780 25,843 26,588
------- ------- ------- -------
Other expenses:
Salaries and benefits ....................................... 14,033 13,384 41,968 41,463
Other expenses .............................................. 9,922 9,917 29,669 29,268
------- ------- ------- -------
Total other expenses .......................................... 23,955 23,301 71,637 70,731
------- ------- ------- -------
Income before income tax ...................................... 10,946 11,825 32,172 32,451
Income tax expense ............................................ 3,207 3,605 9,633 9,743
------- ------- ------- -------
Net Income .................................................... $ 7,739 $ 8,220 $22,539 $22,708
======= ======= ======= =======
Per share:
Basic ..................................................... $ .42 $ .45 $ 1.23 $ 1.23
Diluted ................................................... .42 .44 1.22 1.22
Dividends ................................................. .23 .23 .69 .69
See notes to consolidated condensed financial statements.
Page 4
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ---------------------
2006 2005 2006 2005
--------- --------- --------- --------
Net Income...................................................................... $ 7,739 $ 8,220 $22,539 $ 22,708
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period, net of
income tax benefit of $(2,742), $589, $(707), and $2,195 ................. 3,993 (883) 941 (3,293)
Unrealized gains on cash flow hedges:
Unrealized gains arising during the period, net of income tax of
$(79), $0, $(79) and $0 .................................................. 119 119
Less: Reclassification adjustment for gains (losses) included in net
income, net of income tax expense of $0, $6, $0 and $9 ....................... 10 13
--------- --------- --------- ---------
4,113 (893) 1,060 (3,306)
--------- --------- --------- ---------
Comprehensive income ........................................................... $ 11,852 $ 7,327 $23,599 $ 19,402
========= ========= ========= =========
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)
2006 2005
--------- ---------
Balances, January 1 ............................................ $ 313,396 $ 314,603
Net income ..................................................... 22,539 22,708
Cash dividends on common stock ................................. (12,662) (12,748)
Cash dividends on restricted stock awards ...................... (39)
Other comprehensive income (loss), net of tax................... 1,060 (3,306)
Stock issued under employee benefit plan ....................... 857 913
Stock issued under dividend reinvestment and stock purchase plan 919 638
Stock options exercised ........................................ 857 2,114
Tax benefit from stock options exercised ....................... 132
Stock redeemed ................................................. (5,332) (6,970)
Issuance of stock in acquisition ............................... 438
Share-based compensation ....................................... 564
--------- ---------
Balances, September 30 ......................................... $ 322,291 $ 318,390
========= =========
See notes to consolidated condensed financial statements.
Page 6
FIRST MERCHANTS CORPORATION
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------------------
2006 2005
---------------- ----------------
Cash Flows From Operating Activities:
Net income........................................................................ $ 22,539 $ 22,708
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses....................................................... 5,013 6,409
Depreciation and amortization................................................... 6,495 3,829
Share-based compensation........................................................ 564
Tax benefits from stock options exercised....................................... (132)
Mortgage loans originated for sale.............................................. (89,366) (55,065)
Proceeds from sales of mortgage loans........................................... 90,879 53,406
Change in interest receivable................................................... (4,256) (2,243)
Change in interest payable...................................................... 4,362 1,232
Other adjustments............................................................... (19,886) 3,397
--------------- ---------------
Net cash provided by operating activities..................................... $ 16,212 $ 33,673
--------------- ---------------
Cash Flows From Investing Activities:
Net change in interest-bearing deposits........................................... $ 31 $ (1,365)
Purchases of
Securities available for sale................................................... (82,027) (77,867)
Proceeds from maturities of
Securities available for sale................................................... 42,581 53,220
Securities held to maturity..................................................... 6,520 1,550
Proceeds from sales of securities available for sale.............................. 2,023
Purchase of Federal Reserve and
Federal Home Loan Bank Stock.................................................... (420) (307)
Net change in loans............................................................... (187,443) (19,688)
Other adjustments................................................................. (7,589) (4,048)
--------------- ---------------
Net cash used by investing activities......................................... $ (228,347) $ (46,482)
--------------- ---------------
Cash Flows From Financing Activities:
Net change in
Demand and savings deposits..................................................... $ (1,868) $ (171,585)
Certificates of deposit and other time deposits................................. 313,583 228,729
Borrowings........................................................................ 144,806 99,151
Repayment of borrowings........................................................... (233,894) (116,083)
Cash dividends on common stock.................................................... (12,662) (12,748)
Cash dividends on restricted stock awards......................................... (39)
Stock issued under employee benefit plan.......................................... 857 913
Stock issued under dividend reinvestment and stock purchase plans................. 919 638
Stock options exercised........................................................... 857 2,114
Tax benefit from stock options exercised.......................................... 132
Stock redeemed.................................................................... (5,332) (6,970)
--------------- ---------------
Net cash provided/(used) by financing activities.............................. 207,359 24,159
--------------- ---------------
Net Change in Cash and Cash Equivalents............................................. (4,776) 11,350
Cash and Cash Equivalents, January 1................................................ 70,417 69,960
--------------- ---------------
Cash and Cash Equivalents, June 30.................................................. $ 65,641 $ 81,310
=============== ===============
Additional cash flows information:
Interest paid .................................................................... $ 66,093 $ 46,160
Income tax paid .................................................................. 11,273 12,700
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, except as discussed below within the caption "Change in
Accounting Principle". 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,
2005 has been derived from the audited consolidated balance sheet of the
Corporation as of that date. Certain information and note disclosures normally
included in the Corporation's annual financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted. These consolidated condensed financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Corporation's Form 10-K annual
report filed with the Securities and Exchange Commission. The results of
operations for the three and nine month periods ended September 30, 2006 are not
necessarily indicative of the results to be expected for the year.
Change in Accounting Principle
Effective January 1, 2006, the Corporation adopted Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment ("SFAS 123(R)"). SFAS
123(R) addresses all forms of share-based payment awards, including shares under
employee stock purchase plans, stock options, restricted stock and stock
appreciation rights. SFAS 123(R) requires all share-based payments to be
recognized as expense, based upon their fair values, in the financial statements
over the vesting period of the awards. The Corporation has elected the modified
prospective application and, as a result, has recorded approximately $564,000 in
compensation expense related to vested stock options, Employee Stock Purchase
Plan options and restricted stock awards, less estimated forfeitures, for the
nine month period ended September 30, 2006.
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.
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) requires 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. At
September 30, 2006, share-based compensation for the three and nine months ended
September 30, 2006 totaled $212,000 and $564,000, respectively, and 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
Prior to 2006, the Corporation accounted for share-based compensation in
accordance with APB 25 using the intrinsic value method, which did not require
that compensation expense be recognized for the Corporation's stock and ESPP
options; however, under APB 25, the Corporation was required to record
compensation expense over the vesting period for the value of RSAs granted, if
any.
The Corporation provided pro forma disclosure amounts in accordance with SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure"
(SFAS No. 148), as if the fair value method defined by SFAS No. 123 had been
applied to its share-based compensation. The Corporation's net income and net
income per share for the nine months ended September 30, 2005 would have been
reduced if compensation expense related to stock and ESPP options had been
recorded in the financial statements, based on fair value at the grant dates.
The estimated fair value of the stock options granted during 2006 and in prior
years was calculated using a Black Scholes option pricing model. The following
summarizes the assumptions used in the 2006 Black Scholes model:
Risk-free interest rate 4.59%
Expected price volatility 29.84%
Dividend yield 3.54%
Forfeiture rate 4.00%
Weighted-average expected life, until exercise 5.75 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 4 percent for the nine months ended September 30,
2006, based on historical experience. In the Corporation's pro forma disclosures
required under SFAS 123(R) for the periods prior to fiscal 2006, the Corporation
accounted for forfeitures as they occurred.
As a result of adopting SFAS 123(R), net income of the Corporation for the nine
months ended September 30, 2006 was $451,000 lower (net of $113,000 in tax
benefits), than if it had continued to account for share-based compensation
under APB 25. The impact on both basic and diluted earnings per share for the
nine months ended September 30, 2006 was $.01 per share.
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
Pro forma net income, as if the fair value based method had been applied to all
awards, is as follows:
(In thousands, except for per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
------------------------ ------------------------
Net income as reported ................................................... $ 7,739 $ 8,220 $ 22,539 $ 22,708
Add: Share-based compensation awards recorded as expense,
net of income taxes ................................................. 177 451
Less: Share-based compensation cost, determined under
the fair value based method, net of income taxes .................... (177) (1,083) (451) (1,630)
---------- ---------- ---------- ----------
Pro forma net income ..................................................... $ 7,739 $ 7,137 $ 22,539 $ 21,078
========== ========== ========== ==========
Earnings per share:
Basic - as reported ................................................. $ .42 $ .45 $ 1.23 $ 1.23
Basic - pro forma ................................................... .42 .39 1.23 1.14
Diluted - as reported ............................................... .42 .44 1.22 1.22
Diluted - pro forma ................................................. .42 .38 1.22 1.13
The following table summarizes the components of the Corporation's share-based
compensation awards recorded as expense:
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2006
----------- -----------
Stock and ESPP Options:
Pre-tax compensation expense ........................................$ 165 $ 417
Income tax benefit .................................................. 4 (16)
---------- ----------
Stock and ESPP option expense, net of income taxes .......................$ 169 $ 401
========== ==========
Restricted Stock Awards:
Pre-tax compensation expense ........................................$ 47 $ 147
Income tax benefit .................................................. (39) (97)
---------- ----------
Restricted stock awards expense, net of income taxes .....................$ 8 $ 50
========== ==========
Total Share-Based Compensation:
Pre-tax compensation expense ........................................$ 212 $ 564
Income tax benefit .................................................. (35) (113)
---------- ----------
Total share-based compensation expense, net of income taxes ..............$ 177 $ 451
========== ==========
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
As of September 30, 2006, unrecognized compensation expense related to stock
options, RSAs and ESPP options totaling $279,000, $1,002,000 and $149,000,
respectively, is expected to be recognized over weighted-average periods of
1.21, 2.33 and .75 years, respectively.
Stock option activity under the Corporation's stock option plans as of September
30, 2006 and changes during the nine months ended September 30, 2006 were as
follows:
Weighted-
Average
Weighted- Remaining
Number Average Contractual Aggregate
of Exercise Term Intrinsic
Shares Price (in Years) Value
---------- ------------ ----------- ----------
Outstanding at January 1, 2006 .................. 1,104,787 $ 23.28
Granted ......................................... 72,256 25.03
Exercised ....................................... (72,093) 16.46
Cancelled ....................................... (23,188) 23.80
----------
Outstanding at September 30, 2006 ............... 1,081,762 $ 23.85 6.09 $1,259,000
==========
Vested and Expected to Vest at September 30, 2006 1,080,896 $ 23.85 .09 $1,259,000
Exercisable at September 30, 2006 ............... 1,002,591 $ 23.74 5.82 $1,259,000
The weighted-average grant date fair value was $6.22 for stock options granted
during the nine months ended September 30, 2006.
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 nine months of 2006 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
September 30, 2006. The amount of aggregate intrinsic value will change based on
the fair market value of the Corporation's common stock.
The aggregate intrinsic value of stock options exercised during the first nine
months of 2006 was $595,000. Exercise of options during this same period
resulted in cash receipts of $857,000. The Corporation recognized a tax benefit
of approximately $113,000 in the first nine months of 2006, 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 awards
outstanding as of September 30, 2006:
Weighted-Average
Number of Grant-Date Fair
Shares Value
---------- -----------
Unvested RSAs at January 1, 2006 ............. 2,000 $ 26.44
Granted ...................................... 55,300 25.14
Forfeited .................................... 2,700 25.14
Vested ....................................... 200 25.14
----------
Unvested RSAs at September 30, 2006 .......... 54,400 $ 25.19
==========
Page 11
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 2. Share-Based Compensation continued
The grant date fair value of ESPP options was estimated at the beginning of the
July 1, 2006 offering period and approximates $198,000. The ESPP options vested
during the twelve month period ending June 30, 2007. At September 30, 2006,
total unrecognized compensation expense releated to unvested ESPP options was
$149,000, which is expected to be recognized over a period of nine months.
NOTE 3. Investment Securities
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale at September 30, 2006
U.S. Treasury ........................ $ 1,495 $ (1) $ 1,494
U.S. Government-sponsored
agency securities................... 93,466 $ 50 (1,552) 91,964
State and municipal .................. 169,655 2,116 (1,057) 170,714
Mortgage-backed securities ........... 187,394 447 (5,014) 182,827
Marketable equity securities.......... 12,085 (300) 11,785
-------- -------- -------- --------
Total available for sale ......... 464,095 2,613 (7,924) 458,784
-------- -------- -------- --------
Held to maturity at September 30, 2006
State and municipal................... 9,271 392 (244) 9,419
Mortgage-backed securities............ 19 19
-------- -------- -------- --------
Total held to maturity ........... 9,290 392 (244) 9,438
-------- -------- -------- --------
Total investment securities ...... $473,385 $ 3,005 $ (8,168) $468,222
======== ======== ======== ========
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale at December 31, 2005
U.S. Treasury ........................ $ 1,586 $ (1) $ 1,585
U.S. Government-sponsored
agency securities .................. 83,026 $ 1 (1,836) 81,191
State and municipal .................. 167,095 2,159 (1,131) 168,123
Mortgage-backed securities ........... 168,019 139 (5,656) 162,502
Other asset-backed securities......... 1 1
Marketable equity securities ......... 9,660 (435) 9,225
-------- -------- -------- --------
Total available for sale .......... 429,387 2,299 (9,059) 422,627
-------- -------- -------- --------
Held to maturity at December 31, 2005
State and municipal .................. 11,609 283 (412) 11,480
Mortgage-backed securities ........... 30 30
-------- -------- -------- --------
Total held to maturity ............ 11,639 283 (412) 11,510
-------- -------- -------- --------
Total investment securities ....... $441,026 $ 2,582 $ (9,471) $434,137
======== ======== ======== ========
Page 12
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 4. Loans and Allowance
September 30, December 31,
2006 2005
----------- -----------
Loans:
Commercial and industrial loans .............................................. $ 497,280 $ 461,102
Agricultural production financing and other loans to farmers ................. 104,147 95,130
Real estate loans:
Construction ............................................................... 175,753 174,783
Commercial and farmland .................................................... 835,403 734,865
Residential ................................................................ 757,116 751,217
Individuals' loans for household and other personal expenditures ............. 215,237 200,139
Tax-exempt loans ............................................................. 16,550 8,263
Lease financing receivables, net of unearned income........................... 8,543 8,713
Other loans .................................................................. 31,615 23,215
----------- -----------
2,641,644 2,457,427
Allowance for loan losses..................................................... (26,975) (25,188)
----------- -----------
Total Loans............................................................... $ 2,614,669 $ 2,432,239
=========== ===========
Nine Months Ended
September 30,
2006 2005
----------- -----------
Allowance for loan losses:
Balances, January 1 .......................................................... $ 25,188 $ 22,548
Provision for losses ......................................................... 5,013 6,409
Recoveries on loans .......................................................... 1,421 1,436
Loans charged off ............................................................ (4,647) (5,244)
----------- -----------
Balances, September 30 ....................................................... $ 26,975 $ 25,149
=========== ===========
Information on nonaccruing, contractually
past due 90 days or more other than
nonaccruing and restructured loans is September 30, December 31,
summarized below: 2006 2005
================================================================================
Non-accrual loans................................ $ 16,524 $ 10,030
Loans contractually past due 90 days
or more other than nonaccruing................. 4,253 3,965
Restructured loans............................... 93 310
-------- --------
Total........................................ $ 20,870 $ 14,305
======== ========
Page 13
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
NOTE 5. 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 September 30,
2006 2005
------------------------------------------- -------------------------------------------
Weighted- Weighted-
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic net income per share:
Net income available to
common stockholders................. $ 7,739 18,317,558 $ .42 $ 8,220 18,478,154 $ .45
========== ==========
Effect of dilutive stock options........ 63,073 111,880
---------- ------------ ---------- ------------
Diluted net income per share:
Net income available to
common stockholders
and assumed conversions............. $ 7,739 18,380,631 $ .42 $ 8,220 18,590,034 $ .44
========== ============ ========== ========== ============ ==========
Options to purchase 659,432 and 207,349 shares for the three months ended
September 30, 2006 and 2005 were not included in the earnings per share
calculation because the exercise price exceeded the average market price.
Nine Months Ended September 30,
2006 2005
------------------------------------------- ---------------------------------------
Weighted- Weighted-
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ---------- ------------ ----------
Basic net income per share:
Net income available to
common stockholders................. $ 22,539 18,375,574 $ 1.23 $ 22,708 18,490,866 $ 1.23
========== ==========
Effect of dilutive stock options........ 79,723 115,042
---------- ------------ ---------- ------------
Diluted net income per share:
Net income available to
common stockholders
and assumed conversions............. $ 22,539 18,455,297 $ 1.22 $ 22,708 18,605,908 $ 1.22
========== ============ ========== ========== ============ ==========
Options to purchase 647,801 and 170,312 shares for the nine months ended
September 30, 2006 and 2005 were not included in the earnings per share
calculation because the exercise price exceeded the average market price.
Page 14
FIRST MERCHANTS CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars in thousands)
(Unaudited)
Note 6. Defined Benefit Pension Costs
The Corporation has defined benefit pension plans covering substantially all
employees. The plans provide benefits that are based on the employees'
compensation and years of service. The Corporation uses an actuarial calculation
to determine pension plan costs.
In January 2005, the Board of Directors of the Corporation approved the
curtailment of the accumulation of defined benefits for future services provided
by certain participants in the First Merchants Corporation Retirement Pension
Plan (the "Plan"). Employees of the Corporation and certain of its subsidiaries
who are participants in the Plan were notified that, on and after March 1, 2005,
no additional pension benefits will be earned by employees who have not both
attained the age of fifty-five (55) and accrued at least ten (10) years of
"Vesting Service". As a result of this action, the Corporation recorded a
$1,630,000 pension curtailment loss to record previously unrecognized prior
service costs in accordance with SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Plans and for Termination
Benefits." This loss was recognized and recorded by the Corporation in the first
quarter of 2005.
The following represents the pension cost for the three and nine months ended
September 30, 2006.
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
-------------------------- -------------------------
Pension Cost
------------
Service cost............................................ $ 131 $ 145 $ 393 $ 434
Interest cost .......................................... 684 658 2,050 1,974
Expected return on plan assets ......................... (728) (768) (2,184) (2,305)
Amortization of the transition asset.................... (7) (20)
Amortization of prior service cost...................... 2 1 4 4
Amortization of the net loss............................ 86 24 260 70
Curtailment loss........................................ 1,630
---------- ---------- ---------- ----------
Total Pension Cost................................ $ 175 $ 53 $ 523 $ 1,787
========== ========== ========== ==========
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
In March 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 156 ("SFAS No. 156"). This Statement amends
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, with respect to the accounting for separately
recognized servicing assets and servicing liabilities.
SFAS No. 156 requires an entity to initially recognize a servicing asset or
servicing liability at fair value each time it undertakes an obligation to
service a financial asset by entering into a servicing contract in other
specific situations.
In addition, SFAS No. 156 permits an entity to choose either of the following
subsequent measurement methods for each class of separately recognized servicing
assets and servicing liabilities:
o Amortization method- Amortize servicing assets or servicing liabilities in
proportion to and over the period of estimated net servicing income or net
servicing loss and assess servicing assets or servicing liabilities for
impairment or increased obligation, based on fair value at each reporting
date.
o Fair value measurement method- Measure servicing assets or servicing
liabilities at fair value at each reporting date and report changes in fair
value in earnings in the period in which the changes occur.
SFAS No. 156 is effective for the Corporation at the beginning of its first
fiscal year that begins after September 15, 2006, and should be applied
prospectively for recognition and initial measurement of servicing assets and
servicing liabilities. Earlier adoption is permitted as of the beginning of an
entity's fiscal year, provided the entity has not yet issued financial
statements, including interim financial statements, for any period of that
fiscal year.
The Corporation did not early adopt SFAS No. 156 on January 1, 2006. The
Corporation is currently evaluating the effect of adoption of this Statement on
its financial condition and results of operations.
In September 2006, the Emerging Issues Task Force (EITF) reached a consensus
regarding the accounting for entities with split-dollar life insurance
arrangements that provide an employee with a specified benefit that is not
limited to an employee's active service period. In reaching its consensus, the
EITF determined that an employer should recognize as a liability the future
benefits to be provided to employees beyond the employees active service period.
In the case of split-dollar plan that provides a death benefit to the employee's
designated beneficiary and the benefit is provided to the employee beyond their
active service period, an entity should accrue a liability during the employee's
active service period for the cost of maintaining the life insurance policy
during the employee's retirement period. EITF 06-4 is effective for fiscal years
beginning after December 15, 2007 with earlier application permitted. Entities
should recognize the effects of applying EITF 06-4 either as a change in
accounting principle through a cumulative-effect adjustment to retained earnings
or other components of equity as of the beginning of the year of adoption or as
a change in accounting principle through retrospective application to all prior
periods. The Corporation is currently evaluating the effect of adoption of this
Statement on its financial condition and results of operations.
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 158, Accounting for Defined Benefit Pension and Other Postretirement Plan-an
amendment of SFAS No. 87, 88, 106 and 132(R). This statement requires an entity
that sponsors one or more single-employer defined benefit plans to recognize the
funded status of a benefit plan (measured as the difference between the fair
value of plan assets and the benefit obligation) in its statement of financial
position. For a pension plan, the benefit obligation is the projected benefit
obligation and for any other plan the benefit obligation is the accumulated
postretirement benefit obligation. Additionally, all items previously deferred
when applying SFAS No. 87 or SFAS No. 106 will now be recognized as a component
of accumulated other comprehensive income, net of applicable taxes. SFAS No. 158
will not change the components of net periodic benefit cost. SFAS No. 158 will
require plan asset and benefit obligations to be measured primarily as of the
balance sheet date. The effective date for the recognition of the funded status
on the balance sheet is for fiscal years ending after December 15, 2006 while
the effective date for the requirement that the measurement date of plan assets
and the benefit obligation be the same as the balance sheet date is for fiscal
years ending after December 15, 2008. The Corporation is currently evaluating
the effect of adoption of this Statement on its financial condition and results
of operations.
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 from time to time 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 the Corporation's Annual Report on Form 10-K for the year ended
December 31, 2005. 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 quarter ended
September 30, 2006 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 the Corporation's Annual Report on Form
10-K for the year ended December 31, 2005.
BUSINESS SUMMARY
We are a financial holding company headquartered in Muncie, Indiana. Since our
organization in 1982, we have grown to include 8 affiliate banks with 64
locations in 17 Indiana and 3 Ohio counties. In addition to our branch network,
our delivery channels include ATMs, check cards, interactive voice response
systems and internet technology.
Our business activities are currently limited to one significant business
segment, which is community banking. Our financial service affiliates include
eight nationally chartered banks: First Merchants Bank, N.A., The Madison
Community Bank, N.A., United Communities National Bank, First National Bank,
Decatur Bank and Trust Company, N.A., Frances Slocum Bank & Trust Company, N.A.,
Lafayette Bank and Trust Company, N.A. and Commerce National Bank. The banks
provide commercial and retail banking services. In addition, our trust company,
multi-line insurance company and title company provide trust asset management
services, retail and commercial insurance agency services and title services,
respectively.
We believe that our mission, guiding principles and strategic initiatives
produce profitable growth for stockholders. Our vision is to satisfy all the
financial needs of our customers, help them succeed financially and be
recognized as the premier financial services company in our markets. Our primary
strategy to achieve this vision is to increase product usage and focus on
providing each customer with all of the financial products that fulfill their
needs. Our cross-sell strategy and diversified business model facilitate growth
in strong and weak economic cycles.
We believe it is important to maintain a well controlled environment as we
continue to grow our businesses. 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.
Our stockholder value has continued to increase due to customer satisfaction and
the balanced way we manage our business risk.
RESULTS OF OPERATIONS
Net income for the three months ended September 30, 2006, equaled $7,739,000,
compared to $8,220,000 in the same period of 2005. Diluted earnings per share
were $.42, a decrease of 4.5 percent from the $.44 reported for the third
quarter 2006. The decrease in earnings per share is primarily a result of the
decrease in the net interest margin of 34 basis points from the same period of
2005.
Net income for the nine months ended September 30, 2006, equaled $22,539,000,
compared to $22,708,000 during the same period in 2005. Diluted earnings per
share were $1.22 for the nine month period in 2006 and 2005.
Annualized returns on average assets and average stockholders' equity for the
three months ended September 30, 2006, were .90 percent and 9.72 percent,
respectively, compared with 1.03 percent and 10.38 percent for the same period
of 2005.
Page 18
FIRST MERCHANTS CORPORATION
FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations continued
------------------------
RESULTS OF OPERATIONS (continued)
Annualized returns on average assets and average stockholders' equity
for the nine months ended September 30, 2006 were .90 percent and 9.47 percent,
respectively, compared with .95 percent and 9.62 percent for the same period of
2005. For further analysis, see the respective sections of Management's
Discussion and Analysis of Financial Condition and Results of Operations.
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 7.5 percent at
September 30, 2006 and 7.7 percent at year end 2005. In addition, at September
30, 2006, we had a Tier I risk-based capital ratio of 9.4 percent and total
risk-based capital ratio of 11.4 percent. Regulatory capital guidelines require
a Tier I risk-based capital ratio of 4.0 percent and a total risk-based capital
ratio of 8.0 percent.
Our GAAP capital ratio, defined as total stockholders' equity to total assets,
equaled 9.3 percent at September 30, 2006 and 9.7 percent at December 31, 2005.
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 5.7
percent as of September 30, 2006, and 5.8 percent at December 31, 2005.
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.
September 30, December 31,
(Dollars in thousands) 2006 2005
Average Goodwill .......................... $ 121,380 $ 120,867
Average Core Deposit Intangible (CDI) ..... 16,406 19,087
Average Deferred Tax on CDI ............... (4,779) (7,141)
----------- -----------
Intangible Adjustment ................... $ 133,007 $ 132,813
=========== ===========
Average Stockholders' Equity (GAAP Capital) $ 317,282 $ 315,907
Intangible Adjustment ..................... (133,007) (132,813)
----------- -----------
Average Tangible Capital ................ $ 184,275 $ 183,094
=========== ===========
Average Assets ............................ $ 3,328,120 $ 3,195,784
Intangible Adjustment ..................... (133,007) (132,813)
----------- -----------
Average Tangible Assets ................. $ 3,195,113 $ 3,062,971
=========== ===========
Net Income ................................ $ 22,539 $ 30,239
CDI Amortization, net of tax .............. 1,440 1,952
----------- -----------
Tangible Net Income ..................... $ 23,979 $ 32,191
=========== ===========
Diluted Earnings per Share ................ $ 1.22 $ 1.63
Diluted Tangible Earnings per Share ....... $ 1.30 $ 1.73
Return on Average GAAP Capital ............ 9.50% 9.58%
Return on Average Tangible Capital ........ 17.40% 17.58%
Return on Average Assets .................. 0.90% 0.95%
Return on Average Tangible Assets ......... 1.00% 1.05%
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 September 30, 2006, non-performing loans totaled $20,870,000, an increase of
$6,565,000 from December 31, 2005, as noted in Note 4. Loans and Allowance,
included within the Notes to Consolidated Condensed Financial Statements of this
Form 10-Q. Our top ten largest non-performers total $8.5 million. Of those top
ten, only two have balances in excess of $1 million.
At September 30, 2006, impaired loans totaled $64,809,000, an increase of
$12,429,000 from December 31, 2005. At September 30, 2006, an allowance for
losses was not deemed necessary for impaired loans totaling $47,539,000, but an
allowance of $3,905,000 was recorded for the remaining balance of impaired loans
of $17,270,000 and is included in our allowance for loan losses.
At September 30, 2006, the allowance for loan losses was $26,975,000, an
increase of $1,787,000 from year end 2005. As a percent of loans, the allowance
was 1.02 percent at September 30, 2006 and December 31, 2005.
The provision for loan losses for the first nine months of 2006 was $5,013,000,
a decrease of $1,396,000 from $6,409,000 for the same period in 2005.
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 for us and our subsidiaries to meet financial commitments on a timely
basis. These commitments include withdrawals by depositors, funding credit
obligations to borrowers, paying dividends to shareholders, paying operating
expenses, funding capital expenditures, and maintaining deposit reserve
requirements. Liquidity is monitored and closely managed by the asset/liability
committees at each subsidiary and by 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
September 30, 2006, total borrowings from the FHLB were $229,729,000. Our bank
subsidiaries have pledged certain mortgage loans and certain investments to the
FHLB. The total available remaining borrowing capacity from the FHLB at
September 30, 2006, was $124,035,000. At September 30, 2006, our revolving line
of credit had a balance of $10,500,000 and a remaining borrowing capacity of
$9,500,000.
The principal source of asset-funded liquidity is investment securities
classified as available-for-sale, the market values of which totaled
$458,784,000 at September 30, 2006, an increase of $36,157,000 or 9.0 percent
over December 31, 2005. Securities classified as held-to-maturity that are
maturing within a short period of time can also be a source of liquidity.
Securities classified as held-to-maturity and that are maturing in one year or
less totaled $125,000 at September 30, 2006. 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 September 30, 2006 are as follows:
At September 30,
(Dollars in thousands) 2006
================================================================================
Amounts of commitments:
Loan commitments to extend credit ............................... $ 622,352
Standby letters of credit ....................................... 30,586
----------
$ 652,938
==========
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 long-term debt at September 30, 2006 are as
follows:
2006 2007 2008 2009 2010 2011 Total
(Dollars in thousands) remaining and after
=======================================================================================================
Operating leases ......... $ 522 $ 1,828 $ 1,346 $ 1,162 $ 1,087 $ 1,680 $ 7,625
Long-term debt ........... 99,796 53,995 32,395 23,368 35,148 174,444 419,146
-------- -------- -------- -------- -------- -------- --------
Total .................... $100,318 $ 55,823 $ 33,741 $ 24,530 $ 36,235 $176,124 $426,771
======== ======== ======== ======== ======== ======== ========
Page 21
FIRST MERCHANTS CORPORATION
FORM 10-Q
INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET RISK
Asset/Liability Management 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 Liability
function to provide optimum and stable net interest income. To accomplish this,
we use two asset liability 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 September 30,
2006, remained adequate to meet our primary goal of achieving optimum interest
margins while avoiding undue interest rate risk.
We place our greatest credence in net interest income simulation modeling. The
GAP/Interest Rate Sensitivity Report is believed by our management to have two
major shortfalls. The GAP/Interest Rate Sensitivity Report fails to precisely
gauge how often an interest rate sensitive product reprices, nor is it able to
measure the magnitude of potential future rate movements.
Net interest income simulation modeling, or earnings-at-risk, measures the
sensitivity of net interest income to various interest rate movements. 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
below. 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 for the period ended August 31,
2007 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
for the period ended August 31, 2007 are as follows:
Driver Rates RISING FALLING
=============================================================
Prime 200 Basis Points (200) Basis Points
Federal Funds 200 (200)
One-Year CMT 200 (200)
Three-Year CMT 200 (200)
Five-Year CMT 200 (200)
CD's 200 (190)
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 August 31, 2006.
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 $106,608 $105,471 $109,931
Variance from base $ (1,137) $ 3,323
Percent of change from base (1.07)% 3.12%
The comparative rising and falling scenarios for the period ended December 31,
2006 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
for the period ended December 31, 2006 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 (89)
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 November 30,
2005. 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 $111,989 $114,930 $109,220
Variance from base $ 2,941 $ (2,769)
Percent of change from base 2.63% (2.47)%
Page 23
FIRST MERCHANTS CORPORATION
FORM 10-Q
EARNING ASSETS
The following table presents the earning asset mix as of September 30, 2006, and
December 31, 2005.
Loans increased approximately $182,702,000 from December 31, 2005 to September
30, 2006, and investment securities increased by approximately $33,808,000
during the same period. All loan categories increased except leases, which
decreased slightly. The largest increases were in commercial and farmland of
$100,538,000 and commercial and industrial of $36,178,000.
----------------------------------------------------------------------------------------------------
EARNING ASSETS
(Dollars in thousands) September 30, December 31,
2006 2005
----------------------------------------------------------------------------------------------------
Interest-bearing time deposits ...................... $ 8,717 $ 8,748
Investment securities available for sale ............ 458,784 422,627
Investment securities held to maturity .............. 9,290 11,639
Mortgage loans held for sale ........................ 3,395 4,910
Loans ............................................... 2,641,644 2,457,427
Federal Reserve and Federal Home Loan Bank stock 23,620 23,200
---------- ----------
Total .......................... $3,145,450 $2,928,551
========== ==========
--------------------------------------------------------------------------------
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 September 30, 2006 and December 31, 2005.
(Dollars in thousands) September 30, December 31,
2006 2005
---------- ----------
Deposits ........................................ $2,694,291 $2,382,576
Federal funds purchased.......................... 41,500 50,000
Securities sold under repurchase agreements...... 48,461 106,415
Federal Home Loan Bank advances ................. 229,729 247,865
Subordinated debentures, revolving credit lines
and term loans................................ 99,456 103,956
---------- ----------
$3,113,437 $2,890,812
========== ==========
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 nine months ended September
30, 2006 and 2005.
During the nine months ended September 30, 2006, asset yields increased 72 basis
points (FTE) and interest costs increased 90 basis points, resulting in an 18
basis point (FTE) decrease in net interest income as compared to the same period
in 2005. The increases in interest income and interest expense were primarily a
result of eight 25 basis point overnight federal funds rate increases by the
Federal Open Market Committee during this period.
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in Thousands) 2006 2005 2006 2005
Annualized Net Interest Income........................ $ 110,499 $ 112,560 $ 110,639 $ 110,670
Annualized FTE Adjustment............................. $ 3,953 $ 3,781 $ 3,944 $ 3,723
Annualized Net Interest Income
On a Fully Taxable Equivalent Basis................. $ 114,452 $ 116,341 $ 114,583 $ 114,393
Average Earning Assets................................ $3,125,079 $2,908,431 $3,036,748 $2,891,142
Interest Income (FTE) as a Percent
of Average Earning Assets........................... 7.08% 6.40% 6.87% 6.15%
Interest Expense as a Percent
of Average Earning Assets........................... 3.42% 2.40% 3.09% 2.19%
Net Interest Income (FTE) as a Percent
of Average Earning Assets........................... 3.66% 4.00% 3.78% 3.96%
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 will be amortized on an allocated fair value basis over the three-year
term of the agreements. During the quarter, the fair value of the floors
increased by $172,934 to $672,934. No ineffectiveness was required to be
recognized. The Corporation's objective in using interest rate floors is to add
stability to interest income by reducing its exposure to decreases in cash flows
on its prime-based loans. An interest rate floor agreement involves the receipt
of cash payments when the underlying interest rate falls below the floor strike
rate over the life of the agreement without exchange of the underlying principal
(notional) amount. The interest rate floors are designated as cash flow hedges
and will be accounted for in accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended.
Page 25
FIRST MERCHANTS CORPORATION
FORM 10-Q
OTHER INCOME
Total other income in the third quarter of 2006 was $55,000 or .6 percent higher
than the same quarter of 2005.
Two items account for most of the change:
1. Service charged increased by $219,000 in the third quarter of 2006
compared with the third quarter in 2005 due to mid-year fee increases.
2. Gains on loan sales decreased by $277,000 or 36.0% from the same third
quarter in 2005 due to a reduction in mortgage originations.
Total other income in the first nine months of 2006 was $745,000 or 2.8 percent
lower than the same period of 2005.
Two items primarily account for the change:
1. Gains on loan sales decreased by $668,000 or 30.0 percent from the same
period in 2005 due to a reduction in mortgage loan originations.
2. A cash payment was received in the first quarter of 2005 of
approximately $200,000, related to the Corporation's membership in a
credit card network that was merged with another card network. No such
payment was received during the same period in 2006.
OTHER EXPENSES
Total other expenses represent non-interest expenses of the Corporation. Total
other expenses during the third quarter of 2006 increased from the third quarter
of 2005 by $654,000 or 2.8 percent. Salary expenses were $408,000 higher than
the same period in 2005, primarily due to staff additions and normal annual
increases. In addition, salary expenses of $212,000 were recorded in the quarter
due to share-based compensation expense recorded.
Total other expenses in the first nine months of 2006 were $906,000 or 1.3
percent higher than the same period of 2005.
Three areas account for most of the change:
1. A pension accounting loss, totaling approximately $1,630,000, was
recorded during the first quarter of 2005. The loss resulted from the
curtailment of the accumulation of defined benefits in our defined
benefit pension plan.
2. Salary expenses were $2,126,000 higher than the same period in 2005,
primarily due to staff additions and normal annual increases. In
addition, salary expenses of $564,000 were recorded in the first nine
months of 2006, due to share-based compensation expense recorded.
3. A fixed asset write off $300,000 was recognized in the second quarter
of 2006 as a result of closed branches.
Page 26
FIRST MERCHANTS CORPORATION
FORM 10-Q
INCOME TAXES
Income tax expense, for the nine months ended September 30, 2006, decreased by
$110,000 from the same period in 2005. The effective tax rate was 29.9 and 30.0
percent for the 2006 and 2005 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, 2005 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
---------------------------------------------------
a. None
b. None
c. Issuer Purchases of Equity Securities
The following table presents information relating to our purchases of equity
securities during the quarter ended September 30, 2006, as follows(1):
MAXIMUM NUMBER OF
TOTAL NUMBER OF SHARES THAT MAY YET
TOTAL NUMBER OF AVERAGE PRICE SHARES PURCHASED AS PART BE PURCHASED UNDER
PERIOD SHARES PURCHASED PAID PER SHARE OF BOARD AUTHORIZATION(1) BOARD AUTHORIZATION(1)
------ ---------------- -------------- ------------------------- ------------------------
07/01/06 - 07/31/06 9,246(2) $23.66 0 0
08/01/06 - 08/31/06 0 $0 0 0
09/01/06 - 09/30/06 0 $0 0 0
(1) On February 14, 2006, the Corporation's Board authorized management to
repurchase up to 250,000 shares of the Corporation's Common Stock. This
authorization was not publicly announced and expires February 13, 2007. There
were 30,000 remaining shares that may yet be purchased pursuant to such
authorizations as of September 30, 2006.
(2) These shares were purchased in connection with the exercise of certain
outstanding stock options.
Item 3. Defaults Upon Senior Securities
----------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
None
Item 5. Other Information
--------------------------
a. None
b. None
Page 28
FIRST MERCHANTS CORPORATION
FORM 10-Q
PART II. OTHER INFORMATION
Item 6. Exhibits
-----------------------------------------
Exhibit No.: Description of Exhibit: Form 10-Q Page No.:
------------ ------------------------- -------------------
3(ii) Bylaws of First Merchants 32
Corporation, as most recently
amended on July 25, 2006
31.1 Certification of Chief 42
Executive Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
31.2 Certification of Chief 43
Financial Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
32 Certifications Pursuant to 44
18 U.S.C. Section 1350, as
Adopted Pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002
Page 29
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: November 8, 2006 by /s/ Michael L. Cox
-------------------------- -------------------------------------
Michael L. Cox
President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 8, 2006 by /s/ Mark K. Hardwick
-------------------------- -------------------------------------
Mark K. Hardwick
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
Page 30
FIRST MERCHANTS CORPORATION
FORM 10-Q
INDEX TO EXHIBITS
INDEX TO EXHIBITS
(a)3. Exhibits:
Exhibit No.: Description of Exhibit: Form 10-Q Page No.:
------------ ------------------------- -------------------
3(ii) Bylaws of First Merchants 32
Corporation, as most recently
amended on July 25, 2006
31.1 Certification of Chief 42
Executive Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
31.2 Certification of Chief 43
Financial Officer Pursuant
to Section 302 of the
Sarbanes - Oxley Act of
2002
32 Certifications Pursuant to 44
18 U.S.C. Section 1350, as
Adopted Pursuant to Section
906 of the Sarbanes-Oxley
Act of 2002
Page 31
EXHIBIT-3(ii)
BYLAWS OF
FIRST MERCHANTS CORPORATION
Following are the Bylaws, amended and restated as of February 8, 2005, of
First Merchants Corporation (hereinafter referred to as the "Corporation"), a
corporation existing pursuant to the provisions of the Indiana Business
Corporation Law, as amended (hereinafter referred to as the "Act"):
ARTICLE I
Name, Principal Office and Seal
Section 1. Name and Principal Office. The name of the Corporation is First
Merchants Corporation. The post office address of the principal office of the
Corporation is 200 East Jackson Street, Muncie, Indiana 47305.
Section 2. Seal. The seal of the Corporation shall be circular in form and
mounted upon a metal die, suitable for impressing the same upon paper. About the
upper periphery of the seal shall appear the words "First Merchants Corporation"
and about the lower periphery thereof the word "Muncie, Indiana". In the center
of the seal shall appear the word "Seal".
ARTICLE II
Fiscal Year
The fiscal year of the Corporation shall begin each year on the first day
of January and end on the last day of December of the same year.
ARTICLE III
Capital Stock
Section 1. Number of Shares and Classes of Capital Stock. The total number
of shares of capital stock which the Corporation shall have authority to issue
shall be as stated in the Articles of Incorporation.
Section 2. Consideration for No Par Value Shares. The shares of stock of
the Corporation without par value shall be issued or sold in such manner and for
such amount of consideration as may be fixed from time to time by the Board of
Directors. Upon payment of the consideration fixed by the Board of Directors,
such shares of stock shall be fully paid and nonassessable.
Section 3. Consideration for Treasury Shares. Treasury shares may be
disposed of by the Corporation for such consideration as may be determined from
time to time by the Board of Directors.
Section 4. Payment for Shares. The consideration for the issuance of shares
of capital stock of the Corporation may be paid, in whole or in part, in money,
in other property, tangible or intangible, or in labor actually performed for,
or services actually rendered to the Corporation; provided, however, that the
part of the surplus of the Corporation which is transferred to stated capital
upon the issuance of shares as a share dividend shall be deemed to be the
consideration for the issuance of such shares. When payment of the consideration
for which a share was authorized to be issued shall have been received by the
Corporation, or when surplus shall have been transferred to stated capital upon
the issuance of a share dividend, such share shall be declared and taken to be
fully paid and not liable to any further call or assessment, and the holder
thereof shall not be liable for any further payments thereon. In the absence of
actual fraud in the transaction, the judgment of the Board of Directors as to
the value of such property, labor or services received as consideration, or the
value placed by the Board of Directors upon the corporate assets in the event of
a share dividend, shall be conclusive. Promissory notes, uncertified checks, or
future services shall not be accepted in payment or part payment of the capital
stock of the Corporation, except as permitted by the Act.
Section 5. Share Certificates. Shares of the Corporation's stock may but
need not be represented by a certificate. The rights and obligations of
shareholders of the same class or series of shares are identical whether or not
their shares are represented by certificates.
A book entry stock account shall be established in the name of each
shareholder who is the beneficial owner of any shares of the Corporation's stock
that are not represented by a certificate, which stock account shall set forth
the number of such shares credited to the shareholder. A shareholder may request
that a stock certificate, representing all or part of the shares credited to his
or her stock account, be issued and delivered to the shareholder at any time.
Page 32
Any holder of capital stock of the Corporation shall be entitled to a stock
certificate, signed by the President or a Vice President and the Secretary or
any Assistant Secretary of the Corporation, stating the name of the registered
holder, the number of shares represented by such certificate, the par value of
each share of stock or that such shares of stock are without par value, and that
such shares are fully paid and nonassessable. If such shares are not fully paid,
the certificate shall be legibly stamped to indicate the per cent which has been
paid, and as further payments are made, the certificate shall be stamped
accordingly. The certificate may bear the seal of the Corporation or its
facsimile.
If the Corporation is authorized to issue shares of more than one class,
every certificate shall state the kind and class of shares represented thereby,
and the relative rights, interests, preferences and restrictions of such class,
or a summary thereof; provided, that such statement may be omitted from the
certificate if it shall be set forth upon the face or back of the certificate
that such statement, in full, will be furnished by the Corporation to any
shareholder upon written request and without charge.
Section 6. Facsimile Signatures. If a certificate is countersigned by the
written signature of a transfer agent other than the Corporation or its
employee, the signatures of the officers of the Corporation may be facsimiles.
If a certificate is countersigned by the written signature of a registrar other
than the Corporation or its employee, the signatures of the transfer agent and
the officers of the Corporation may be facsimiles. In case any officer, transfer
agent, or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent, or
registrar before such certificate is issued, it may be issued by the Corporation
with the same effect as if he were such officer, transfer agent, or registrar at
the date of its issue.
Section 7. Transfer of Shares. The shares of capital stock of the
Corporation shall be transferable on the books of the Corporation upon surrender
of the certificate or certificates representing the same, properly endorsed by
the registered holder or by the holder's duly authorized attorney or accompanied
by proper evidence of succession, assignment or authority to transfer. Shares
that are not represented by a certificate shall be transferable on the books of
the Corporation upon receipt of written direction to do so from the registered
holder or the holder's duly authorized attorney or accompanied by proper
evidence of succession, assignment or authority to transfer, in a form
satisfactory to the Corporation, its transfer agent or registrar.
Section 8. Cancellation. Every certificate surrendered to the Corporation
for exchange or transfer shall be canceled, and no new certificate or
certificates shall be issued in exchange for any existing certificate until such
existing certificate shall have been so canceled, except in cases provided for
in Section 10 of this Article III.
Section 9. Transfer Agent and Registrar. The Board of Directors may appoint
a transfer agent and a registrar for each class of capital stock of the
Corporation and may require all certificates representing such shares to bear
the signature of such transfer agent and registrar. Shareholders shall be
responsible for notifying the Corporation or transfer agent and registrar for
the class of stock held by such shareholder in writing of any changes in their
addresses from time to time, and failure so to do shall relieve the Corporation,
its shareholders, Directors, officers, transfer agent and registrar of liability
for failure to direct notices, dividends, or other documents or property to an
address other than the one appearing upon the records of the transfer agent and
registrar of the Corporation.
Section 10. Lost, Stolen or Destroyed Certificates. The Corporation may
cause a new certificate or certificates to be issued in place of any certificate
or certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Corporation
may, in its discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificate or certificates,
or the owner's legal representative, to give the Corporation a bond in such sum
and in such form as it may direct to indemnify against any claim that may be
made against the Corporation with respect to the certificates alleged to have
been lost, stolen or destroyed or the issuance of such new certificate. The
Corporation, in its discretion, may authorize the issuance of such new
certificates without any bond when in its judgment it is proper to do so.
Section 11. Registered Shareholders. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of such shares to receive dividends, to vote as such owner, to hold liable for
calls and assessments, and to treat as owner in all other respects, and shall
not be bound to recognize any equitable or other claims to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Indiana.
Page 33
Section 12. Options to Officers and Employees. The issuance, including the
consideration, of rights or options to Directors, officers or employees of the
Corporation, and not to the shareholders generally, to purchase from the
Corporation shares of its capital stock shall be approved by the affirmative
vote of the holders of a majority of the shares entitled to vote thereon or
shall be authorized by and consistent with a plan approved by such a vote of the
shareholders.
ARTICLE IV
Meetings of Shareholders
Section 1. Place of Meeting. Meetings of shareholders of the Corporation
shall be held at such place, within or without the State of Indiana, as may from
time to time be designated by the Board of Directors, or as may be specified in
the notices or waivers of notice of such meetings.
Section 2. Annual Meeting. The annual meeting of shareholders for the
election of Directors, and for the transaction of such other business as may
properly come before the meeting, shall be held at such time as the Board of
Directors may set by resolution, following the close of the fiscal year of the
Corporation. A failure to hold the annual meeting at the designated time shall
not affect the validity of any corporate action.
Section 3. Special Meetings. Special meetings of the shareholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the Articles
of Incorporation, may be called by the Board of Directors or the President and
shall be called by the President or Secretary at the request in writing of a
majority of the Board of Directors, or at the request in writing of shareholders
holding of record not less than one-fourth (1/4) of all the shares outstanding
and entitled by the Articles of Incorporation to vote on the business for which
the meeting is being called.
Section 4. Notice of Meetings. A written or printed notice, stating the
place, day and hour of the meeting, and in case of a special meeting, or when
required by any other provision of the Act, or of the Articles of Incorporation,
as now or hereafter amended, or these Bylaws, the purpose or purposes for which
the meeting is called, shall be delivered or mailed by the Secretary, or by the
officers or persons calling the meeting, to each shareholder of record entitled
by the Articles of Incorporation, as now or hereafter amended, and by the Act to
vote at such meeting, at such address as appears upon the records of the
Corporation, at least ten (10) days before the date of the meeting. Notice of
any such meeting may be waived in writing by any shareholder, if the waiver sets
forth in reasonable detail the purpose or purposes for which the meeting is
called, and the time and place thereof. Attendance at any meeting in person, or
by proxy, shall constitute a waiver of notice of such meeting. Each shareholder,
who has in the manner above provided waived notice of a shareholders' meeting,
or who personally attends a shareholders' meeting, or is represented thereat by
a proxy authorized to appear by an instrument of proxy, shall be conclusively
presumed to have been given due notice of such meeting. Notice of any adjourned
meeting of shareholders shall not be required to be given if the time and place
thereof are announced at the meeting at which the adjournment is taken except as
may be expressly required by law.
Section 5. Addresses of Shareholders. The address of any shareholder
appearing upon the records of the Corporation shall be deemed to be the latest
address of such shareholder appearing on the records maintained by the
Corporation or its transfer agent for the class of stock held by such
shareholder.
Section 6. Voting at Meetings.
(a) Quorum. The holders of record of a majority of the issued and
outstanding stock of the Corporation entitled to vote at such meeting, present
in person or by proxy, shall constitute a quorum at all meetings of shareholders
for the transaction of business, except where otherwise provided by law, the
Articles of Incorporation or these Bylaws. In the absence of a quorum, any
officer entitled to preside at, or act as secretary of, such meeting shall have
the power to adjourn the meeting from time to time until a quorum shall be
constituted. At any such adjourned meeting at which a quorum shall be present,
any business may be transacted which might have been transacted at the original
meeting, but only those shareholders entitled to vote at the original meeting
shall be entitled to vote at any adjournment or adjournments thereof unless a
new record date is fixed by the Board of Directors for the adjourned meeting.
(b) Voting Rights. Except as otherwise provided by law or by the
provisions of the Articles of Incorporation, every shareholder shall have the
right at every shareholders' meeting to one vote for each share of stock having
voting power, registered in the shareholder's name on the books of the
Corporation on the date for the determination of shareholders entitled to vote,
on all matters coming before the meeting including the election of directors. At
any meeting of shareholders, every shareholder having the right to vote shall be
entitled to vote in person, or by proxy executed by the shareholder or a duly
authorized attorney in fact, in writing, transmitted by electronic means, or by
any other method allowed by law, and bearing a date not more than eleven (11)
months prior to its execution, unless a longer time is expressly provided
therein.
Page 34
(c) Required Vote. When a quorum is present at any meeting, the
vote of the holders of a majority of the stock having voting power present in
person or represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which, by express provision of the Act
or of the Articles of Incorporation or by these Bylaws, a greater vote is
required, in which case such express provision shall govern and control the
decision of such question.
Section 7. Voting List. The Corporation or its transfer agent shall make,
at least five (5) business days before each meeting of the shareholders, a
complete list of the shareholders entitled by the Articles of Incorporation, as
now or hereafter amended, to notice of the meeting, arranged in alphabetical
order, with the address of and number of shares held by each, which list shall
be on file at the principal office of the Corporation and subject to inspection
during regular business hours by any shareholder entitled to vote at the
meeting, or by the shareholder's agent or attorney authorized in writing. Such
list shall be available continuing through the meeting, at the Corporation's
principal office or at a place identified in the meeting notice in the city
where the meeting will be held.
Section 8. Fixing of Record Date to Determine Shareholders Entitled to
Vote. The Board of Directors may fix a record date, not exceeding seventy (70)
days prior to the date of any meeting of the shareholders, for the purpose of
determining the shareholders entitled to notice of and to vote at the meeting.
In the absence of action by the Board of Directors fixing a record date as
herein provided, the record date shall be the sixtieth (60th) day prior to the
date of the meeting. A new record date must be fixed if a meeting of the
shareholders is adjourned to a date more than one hundred twenty (120) days
after the date fixed for the original meeting.
Section 9. Nominations for Director. The Nominating and Governance
Committee of the Board of Directors shall have the responsibility for nominating
individuals to serve as members of the Board of Directors, including the slate
of Directors to be elected each year at the annual meeting of shareholders. In
so doing, the Committee shall maintain up-to-date criteria for selecting
Directors and a process for identifying and evaluating prospective nominees.
Shareholders may suggest a candidate for consideration by the Committee as a
Director nominee by submitting the suggestion in writing and delivering or
mailing it to the Secretary of the Corporation at the Corporation's principal
office. Suggestions for nominees from shareholders must include: (a) the name,
address and number of the Corporation's shares owned by the shareholder; (b) the
name, address, age and principal occupation of the suggested nominee; (c) such
other information concerning the suggested nominee as the shareholder may wish
to submit or the Committee may reasonably request. The Committee shall evaluate
suggestions for nominees from shareholders in the same manner as other
candidates.
Any nominations for election as Directors at any annual or special meeting of
shareholders not made in accordance with this Section may be disregarded by the
Chairman of the meeting, in the Chairman's discretion; and, upon the Chairman's
instructions, the vote tellers or inspectors of shareholder votes may disregard
all votes cast for each such nominee.
ARTICLE V
Board of Directors
Section 1. Election, Number and Term of Office. The business and affairs of
the Corporation shall be managed in accordance with the Act under the direction
of a Board consisting of twelve (12) Directors, to be elected by the holders of
the shares of stock entitled by the Articles of Incorporation to elect
Directors. The number of Directors may be changed by amendment of this Section
by a two-thirds (2/3) vote of the Board of Directors.
The Directors shall be divided into three (3) classes as nearly equal in
number as possible, all Directors to serve three (3) year terms except as
provided in the third paragraph of this Section. One class shall be elected at
each annual meeting of the shareholders, by the holders of the shares of stock
entitled by the Articles of Incorporation to elect Directors. Unless the number
of Directors is changed by amendment of this Section, each class shall have four
(4) Directors. No decrease in the number of Directors shall have the effect of
shortening the term of any incumbent Director.
No person shall serve as a Director subsequent to the annual meeting of
shareholders following the end of the calendar year in which such person attains
the age of seventy (70) years. The term of a Director shall expire as of the
annual meeting following which the Director is no longer eligible to serve under
the provisions of this paragraph, even if fewer than three (3) years have
elapsed since the commencement of the Director's term.
Except in the case of earlier resignation, removal or death, all Directors
shall hold office until their respective successors are chosen and qualified.
The provisions of this Section of the Bylaws may not be changed or amended
except by a two-thirds (2/3) vote of the Board of Directors.
Page 35
Section 2. Vacancies. Any vacancy occurring in the Board of Directors
caused by resignation, death or other incapacity, or an increase in the number
of Directors, shall be filled by a majority vote of the remaining members of the
Board of Directors, until the next annual meeting of the shareholders, or at the
discretion of the Board of Directors, such vacancy may be filled by a vote of
the shareholders at a special meeting called for that purpose.
Section 3. Annual Meeting of Directors. The Board of Directors shall meet
each year immediately after the annual meeting of the shareholders, at the place
where such meeting of the shareholders has been held either within or without
the State of Indiana, for the purpose of organization, election of officers, and
consideration of any other business that may properly come before the meeting.
No notice of any kind to either old or new members of the Board of Directors for
such annual meeting shall be necessary.
Section 4. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such times and places, either within or without the State of
Indiana, as may be fixed by the Directors. Such regular meetings of the Board of
Directors may be held without notice or upon such notice as may be fixed by the
Directors.
Section 5. Special Meetings. Special meetings of the Board of Directors may
be called by the Chairman of the Board, the President, or by not less than a
majority of the members of the Board of Directors. Notice of the time and place,
either within or without the State of Indiana, of a special meeting shall be
delivered personally, telephoned, faxed or sent by other electronic means to
each Director at least twenty-four (24) hours, or mailed or delivered by express
private delivery service, to each Director at the Director's usual place of
business or residence at least forty-eight (48) hours, prior to the time of the
meeting. Directors, in lieu of such notice, may sign a written waiver of notice
either before the time of the meeting, at the meeting or after the meeting.
Attendance by a Director in person at any special meeting shall constitute a
waiver of notice.
Section 6. Quorum. A majority of the actual number of Directors elected and
qualified, from time to time, shall be necessary to constitute a quorum for the
transaction of any business except the filling of vacancies, and the act of a
majority of the Directors present at the meeting, at which a quorum is present,
shall be the act of the Board of Directors, unless the act of a greater number
is required by the Act, by the Articles of Incorporation, or by these Bylaws. A
Director, who is present at a meeting of the Board of Directors, at which action
on any corporate matter is taken, shall be conclusively presumed to have
assented to the action taken, unless (a) the Director shall have affirmatively
stated the Director's dissent at and before the adjournment of such meeting (in
which event the fact of such dissent shall be entered by the secretary of the
meeting in the minutes of the meeting), or (b) the Director shall forward such
dissent by registered mail to the Secretary of the Corporation immediately after
the adjournment of the meeting. The right of dissent provided for by either
clause (a) or clause (b) of the immediately preceding sentence shall not be
available, in respect of any matter acted upon at any meeting, to a Director who
voted at the meeting in favor of such matter and did not change this vote prior
to the time that the result of the vote on such matter was announced by the
chairman of such meeting.
A member of the Board of Directors may participate in a meeting of the
Board by means of a conference telephone or similar communications equipment by
which all Directors participating in the meeting can communicate with each
other, and participation by these means constitutes presence in person at the
meeting.
Section 7. Consent Action by Directors. Any action required or permitted to
be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if prior to such action a written consent to
such action is signed by all members of the Board of Directors or such
committee, as the case may be, and such written consent is filed with the
minutes of proceedings of the Board of Directors or committee.
Section 8. Removal. Any or all members of the Board of Directors may be
removed, with or without cause, at a meeting of the shareholders called
expressly for that purpose by the affirmative vote of the holders of not less
than two-thirds (2/3) of the outstanding shares of capital stock then entitled
to vote on the election of Directors, except that if the Board of Directors, by
an affirmative vote of at least two-thirds (2/3) of the entire Board of
Directors, recommends removal of a Director to the shareholders, such removal
may be effected by the affirmative vote of the holders of not less than a
majority of the outstanding shares of capital stock then entitled to vote on the
election of Directors at a meeting of shareholders called expressly for that
purpose.
Page 36
The provisions in this Section of the Bylaws may not be changed or amended
except by a two-thirds (2/3) vote of the Board of Directors.
Section 9. Dividends. The Board of Directors shall have power, subject to
any restrictions contained in the Act or in the Articles of Incorporation and
out of funds legally available therefor, to declare and pay dividends upon the
outstanding capital stock of the Corporation as and when they deem expedient.
Before declaring any dividend, there may be set aside out of any funds of the
Corporation available for dividends such sum or sums as the Board of Directors
from time to time in their absolute discretion deem proper for working capital,
or as a reserve or reserves to meet contingencies or for such other purposes as
the Board of Directors may determine, and the Board of Directors may in their
absolute discretion modify or abolish any such reserve in the manner in which it
was created.
Section 10. Fixing of Record Date to Determine Shareholders Entitled to
Receive Corporate Benefits. The Board of Directors may fix a record date with
respect to any dividend, including a share dividend, or other distribution to
the shareholders of the Corporation, or for a determination of shareholders for
any other purpose, as a time for the determination of the shareholders entitled
to receive any such dividend, distribution or rights; and in such case only
shareholders of record at the time so fixed shall be entitled to receive such
dividend, rights or distribution. If no record date is fixed for the
determination of shareholders entitled to receive payment of a dividend, the end
of the day on which the resolution of the Board of Directors declaring such
dividend is adopted shall be the record date for such determination.
Section 11. Interest of Directors in Contracts. Any contract or other
transaction between the Corporation and any corporation in which this
Corporation owns a majority of the capital stock shall be valid and binding,
notwithstanding that the Directors or officers of this Corporation and the other
corporation are identical or that some or all of the Directors or officers, or
both, are also directors or officers of such other corporation.
Any contract or other transaction between the Corporation and one or more
of its Directors or members or employees, or between the Corporation and any
firm of which one or more of its Directors are members or employees or in which
they are interested, or between the Corporation and any corporation or
association of which one or more of its Directors are stockholders, members,
directors, officers, or employees or in which they are interested, shall be
valid for all purposes, notwithstanding the presence of such Director or
Directors at the meeting of the Board of Directors of the Corporation which acts
upon, or in reference to, such contract or transaction and notwithstanding his
or their participation in such action, if the fact of such interest shall be
disclosed or known to the Board of Directors and the Board of Directors shall
authorize, approve and ratify such contract or transaction by a vote of a
majority of the Directors present, such interested Director or Directors to be
counted in determining whether a quorum is present, but not to be counted in
calculating the majority of such quorum necessary to carry such vote. This
Section shall not be construed to invalidate any contract or other transaction
which would otherwise be valid under the common and statutory law applicable
thereto.
Section 12. Committees. The Board of Directors may, by resolution adopted
by a majority of the actual number of Directors elected and qualified, from time
to time, designate from among its members an Executive Committee and one or more
other committees.
During the intervals between meetings of the Board of Directors, any
Executive Committee so appointed, unless expressly provided otherwise by law or
these Bylaws, shall have and may exercise all the authority of the Board of
Directors, including, but not limited to, the authority to issue and sell or
approve any contract to issue or sell, securities or shares of the Corporation
or designate the terms of a series or class of securities or shares of the
Corporation. The terms which may be affixed by the Executive Committee include,
but are not limited to, the price, dividend rate, and provisions of redemption,
a sinking fund, conversion, voting, or preferential rights or other features of
securities or class or series of a class of shares. Such Committee may have full
power to adopt a final resolution which sets forth these terms and to authorize
a statement of such terms to be filed with the Secretary of State. However, such
Executive Committee shall not have the authority to declare dividends or
distributions, amend the Articles of Incorporation or the Bylaws, approve a plan
of merger or consolidation, even if such plan does not require shareholder
approval, reduce earned or capital surplus, authorize or approve the
reacquisition of shares unless pursuant to a general formula or method specified
by the Board of Directors, or recommend to the shareholders a voluntary
dissolution of the Corporation or a revocation thereof.
Page 37
The Board of Directors may, in its discretion, constitute and appoint other
committees, in addition to an Executive Committee, to assist in the management
and control of the affairs of the Corporation, with responsibilities and powers
appropriate to the nature of the several committees and as provided by the Board
of Directors in the resolution of appointment or in subsequent resolutions and
directives. Such committees may include, but are not limited to, a Nominating
and Governance Committee, an Audit Committee, and a Compensation and Human
Resources Committee.
No member of any committee appointed by the Board of Directors shall
continue to be a member thereof after he ceases to be a Director of the
Corporation. The calling and holding of meetings of any committee and its method
of procedure shall be determined by the Board of Directors or by the committee
itself, except as otherwise provided in these Bylaws. To the extent permitted by
law, a member of the Board of Directors serving on any such committee shall not
be liable for any action taken by such committee if the Director has acted in
good faith and in a manner the Director reasonably believed to be in the best
interests of the Corporation. A member of a committee may participate in a
meeting of the committee by means of a conference telephone or similar
communications equipment by which all members participating in the meeting can
communicate with each other, and participation by these means constitutes
presence in person at the meeting.
ARTICLE VI
Officers
Section 1. Principal Officers. The principal officers of the Corporation
shall be a Chairman of the Board, a Vice Chairman of the Board, a Chief
Executive Officer, a President, one (1) or more Vice Presidents (which may
include one (1) or more Executive Vice Presidents, Senior Vice Presidents, First
Vice Presidents and/or other Vice Presidents), a Treasurer and a Secretary. The
Corporation may also have, at the discretion of the Board of Directors, such
other subordinate officers as may be appointed in accordance with the provisions
of these Bylaws. The Board of Directors may, from time to time, designate a
chief operating officer and a chief financial officer from among the principal
officers of the Corporation. Any two (2) or more offices may be held by the same
person. No person shall be eligible for the office of Chairman of the Board,
Vice Chairman of the Board, Chief Executive Officer or President who is not a
Director of the Corporation.
Section 2. Election and Term of Office. The principal officers of the
Corporation shall be chosen annually by the Board of Directors at the annual
meeting thereof. Each such officer shall hold office until the officer's
successor shall have been duly chosen and qualified, or until the officer's
death, or until the officer shall resign, or shall have been removed in the
manner hereinafter provided.
Section 3. Removal. Any principal officer may be removed, either with or
without cause, at any time, by resolution adopted at any meeting of the Board of
Directors by a majority of the actual number of Directors elected and qualified
from time to time.
Section 4. Subordinate Officers. In addition to the principal officers
enumerated in Section 1 of this Article VI, the Corporation may have one or more
Assistant Treasurers, one or more Assistant Secretaries and such other officers,
agents and employees as the Board of Directors may deem necessary, each to hold
office for such period, to have such authority, and to perform such duties as
the Chief Executive Officer or the Board of Directors may from time to time
determine. The Board of Directors may delegate to any principal officer the
power to appoint and to remove, either with or without cause, any such
subordinate officers, agents or employees.
Page 38
Section 5. Resignations. Any officer may resign at any time by giving
written notice to the Chairman of the Board of Directors, the Chief Executive
Officer, the President, or the Secretary. Any such resignation shall take effect
upon receipt of such notice or at any later time specified therein, and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
Section 6. Vacancies. Any vacancy in any office for any cause may be filled
for the unexpired portion of the term in the manner prescribed in these Bylaws
for election or appointment to such office for such term.
Section 7. Chairman of the Board. The Chairman of the Board shall preside
at all meetings of shareholders and at all meetings of the Board of Directors.
The Chairman of the Board shall perform such other duties and have such other
powers as, from time to time, may be assigned by the Board of Directors.
Section 8. Vice Chairman of the Board. The Vice Chairman of the Board shall
act in the absence of the Chairman of the Board. The Vice Chairman of the Board
shall perform such other duties and have such other powers as, from time to
time, may be assigned by the Board of Directors.
Section 9. Chief Executive Officer. The Chief Executive Officer, subject to
the control of the Board of Directors, shall have overall responsibility for the
affairs of the Corporation, including responsibility for developing and
attaining major corporate goals and implementing policies approved by the Board.
In general, the Chief Executive Officer shall perform the duties and exercise
the powers incident to the office of Chief Executive Officer and all such other
duties and powers as, from time to time, may be assigned by the Board of
Directors. In the absence or disability of the Chairman of the Board and Vice
Chairman of the Board, the Chief Executive Officer shall preside at all meetings
of the shareholders and the Board of Directors at which the Chief Executive
Officer is in attendance.
Section 10. President. The President shall perform the duties and exercise
the powers incident to the office of President and all such other duties and
powers as, from time to time, may be assigned by the Board of Directors or the
Chief Executive Officer. Subject to the control and direction of the Board of
Directors and the Chief Executive Officer, the President may enter into, execute
and deliver any agreement, instrument or document in the name and on behalf of
the Corporation.
Section 11. Vice Presidents. The Corporation shall have such Vice
Presidents as the Board of Directors shall determine, which may include one (1)
or more Executive Vice Presidents, Senior Vice Presidents, First Vice Presidents
and/or other Vice Presidents. The Board of Directors shall designate one of the
Vice Presidents (an Executive Vice President, if one has been appointed) to
perform the duties and exercise the powers of the President in the absence or
disability of the President. The Vice Presidents shall perform such duties and
have such powers as the Chief Executive Officer, the President, or the Board of
Directors may from time to time assign.
Section 12. Treasurer. The Treasurer shall have charge and custody of, and
be responsible for, all funds and securities of the Corporation and shall
deposit all such funds in the name of the Corporation in such banks or other
depositories as shall be selected by the Board of Directors. The Treasurer shall
upon request exhibit at all reasonable times the Treasurer's books of account
and records to any of the Directors of the Corporation during business hours at
the office of the Corporation where such books and records shall be kept; shall
render upon request by the Board of Directors a statement of the condition of
the finances of the Corporation at any meeting of the Board of Directors or at
the annual meeting of the shareholders; shall receive, and give receipt for,
moneys due and payable to the Corporation from any source whatsoever; and in
general, shall perform all duties incident to the office of Treasurer and such
other duties as from time to time may be assigned to the Treasurer by the Chief
Executive Officer, the President, or the Board of Directors. The Treasurer shall
give such bond, if any, for the faithful discharge of the Treasurer's duties as
the Board of Directors may require. All acts affecting the Treasurer's duties
and responsibilities shall be subject to the review and approval of the
Corporation's chief financial officer.
Section 13. Secretary. The Secretary shall keep or cause to be kept in the
books provided for that purpose the minutes of the meetings of the shareholders
and of the Board of Directors; shall duly give and serve all notices required to
be given in accordance with the provisions of these Bylaws and by the Act; shall
be custodian of the records and of the seal of the Corporation and see that the
seal is affixed to all documents, the execution of which on behalf of the
Corporation under its seal is duly authorized in accordance with the provisions
of these Bylaws; and, in general, shall perform all duties incident to the
office of Secretary and such other duties as may, from time to time, be assigned
to the Secretary by the Chief Executive Officer, the President, or the Board of
Directors.
Page 39
Section 14. Voting Corporation's Securities. Unless otherwise ordered by
the Board of Directors, the Chairman of the Board, the Chief Executive Officer,
the President and the Secretary, and each of them, are appointed attorneys and
agents of the Corporation, and shall have full power and authority in the name
and on behalf of the Corporation, to attend, to act, and to vote all stock or
other securities entitled to be voted at any meetings of security holders of
corporations, or associations in which the Corporation may hold securities, in
person or by proxy, as a stockholder or otherwise, and at such meetings shall
possess and may exercise any and all rights and powers incident to the ownership
of such securities, and which as the owner thereof the Corporation might have
possessed and exercised, if present, or to consent in writing to any action by
any such other corporation or association. The Board of Directors by resolution
from time to time may confer like powers upon any other person or persons.
ARTICLE VII
Indemnification
Section 1. Indemnification of Directors, Officers, Employees and Agents.
Every person who is or was a Director, officer, employee or agent of this
Corporation or of any other corporation for which such person is or was serving
in any capacity at the request of this Corporation shall be indemnified by this
Corporation against any and all liability and expense that such person may incur
in connection with or resulting from or arising out of any claim, action, suit
or proceeding, provided that such person is wholly successful with respect
thereto or acted in good faith in what such person reasonably believed to be in
or not opposed to the best interest of this Corporation or such other
corporation, as the case may be, and, in addition, in any criminal action or
proceeding in which such person had no reasonable cause to believe that his or
her conduct was unlawful. As used herein, "claim, action, suit or proceeding"
shall include any claim, action, suit or proceeding (whether brought by or in
the right of this Corporation or such other corporation or otherwise), civil,
criminal, administrative or investigative, whether actual or threatened or in
connection with an appeal relating thereto, in which a Director, officer,
employee or agent of this Corporation may become involved, as a party or
otherwise,
(i) by reason of such person's being or having been a Director,
officer, employee, or agent of this Corporation or such other
corporation or arising out of his or her status as such or
(ii) by reason of any past or future action taken or not taken by
such person in any such capacity, whether or not such person
continues to be such at the time such liability or expense is
incurred.
The terms "liability" and "expense" shall include, but shall not be limited
to, attorneys' fees and disbursements, amounts of judgments, fines or penalties,
and amounts paid in settlement by or on behalf of a Director, officer, employee,
or agent, but shall not in any event include any liability or expenses on
account of profits realized by such person in the purchase or sale of securities
of the Corporation in violation of the law. The termination of any claim,
action, suit or proceeding, by judgment, settlement (whether with or without
court approval) or conviction or upon a plea of guilty or of nolo contendere, or
its equivalent, shall not create a presumption that a Director, officer,
employee, or agent did not meet the standards of conduct set forth in this
paragraph.
Any such Director, officer, employee, or agent who has been wholly
successful with respect to any such claim, action, suit or proceeding shall be
entitled to indemnification as a matter of right. Except as provided in the
preceding sentence, any indemnification hereunder shall be made only if
(i) the Board of Directors acting by a quorum consisting of
Directors who are not parties to or who have been wholly
successful with respect to such claim, action, suit or
proceeding shall find that the Director, officer, employee,
or agent has met the standards of conduct set forth in the
preceding paragraph; or
(ii) independent legal counsel shall deliver to the Corporation
their written opinion that such Director, officer, employee,
or agent has met such standards of conduct.
If several claims, issues or matters of action are involved, any such
person may be entitled to indemnification as to some matters even though he is
not entitled as to other matters.
Page 40
The Corporation may advance expenses to or, where appropriate, may at its
expense undertake the defense of any such Director, officer, employee, or agent
upon receipt of an undertaking by or on behalf of such person to repay such
expenses if it should ultimately be determined that such person is not entitled
to indemnification hereunder.
The provisions of this Section shall be applicable to claims, actions,
suits or proceedings made or commenced after the adoption hereof, whether
arising from acts or omissions to act during, before or after the adoption
hereof.
The rights of indemnification provided hereunder shall be in addition to
any rights to which any person concerned may otherwise be entitled by contract
or as a matter of law and shall inure to the benefit of the heirs, executors and
administrators of any such person.
The Corporation may purchase and maintain insurance on behalf of any person
who is or was a Director, officer, employee or agent of the Corporation or is or
was serving at the request of the Corporation as a director, officer, employee
or agent of another corporation against any liability asserted against such
person and incurred by such person in any capacity or arising out of his or her
status as such, whether or not the Corporation would have the power to indemnify
such person against such liability under the provisions of this Section or
otherwise.
ARTICLE VIII
Amendments
Except as expressly provided herein or in the Articles of Incorporation,
the Board of Directors may make, alter, amend or repeal these Bylaws by an
affirmative vote of a majority of the actual number of Directors elected and
qualified.
Page 41
EXHIBIT-31.1
FIRST MERCHANTS CORPORATION
FORM 10-Q
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
-------------
I, Michael L. Cox, President and Chief Executive Officer of First Merchants
Corporation, certify that:
1. I have reviewed this 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: November 8, 2006 by /s/ Michael L. Cox
-------------------------------------
Michael L. Cox
President and
Chief Executive Officer
(Principal Executive Officer)
Page 42
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: November 8, 2006 by: /s/Mark K. Hardwick
----------------------------------------
Mark K. Hardwick
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
Page 43
EXHIBIT-32
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of First Merchants Corporation (the
"Corporation") on Form 10-Q for the period ending September 30, 2006 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Michael L. Cox, President and Chief Executive Officer of the Corporation, do
hereby certify, in accordance with 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)); and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Corporation.
Date: November 8, 2006 by /s/ Michael L. Cox
--------------------------- -------------------------------------
Michael L. Cox
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 September 30, 2006 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: November 8, 2006 by /s/ Mark K. Hardwick
--------------------------- -------------------------------------
Mark K. Hardwick
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
A signed copy of this written statement required by Section 906 has been
provided to First Merchants Corporation and will be retained by First Merchants
Corporation and furnished to the Securities and Exchange Commission or its staff
upon request.
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