<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996 Commission file number 0-17071
FIRST MERCHANTS CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-1544218
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 East Jackson
Muncie, Indiana 47305-2814
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 747-1500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.125 stated value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value (not necessarily a reliable indication of the
price at which more than a limited number of shares would trade) of the voting
stock held by non-affiliates of the registrant was $185,416,446 as of March 6,
1997.
As of March 6, 1997 there were outstanding 6,604,615 common shares, without
par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K
Documents Into Which Incorporated
--------- -----------------------
1996 Annual Report to Stockholders Part II (Items 5 through 8)
Definitive Proxy Statement for
Annual Meeting of Shareholders
to be held April 8, 1997 Part III (Items 10 through 13)
EXHIBIT INDEX: Page 27 Total Pages 135
<PAGE>
FORM 10-K TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
Part I
Item 1 - Business........................................................3
Item 2 - Properties.....................................................19
Item 3 - Legal Proceedings..............................................19
Item 4 - Submission of Matters to a Vote of Security Holders............19
Supplemental Information - Executive Officers of the Registrant..........20
Part II
Item 5 - Market For the Registrant's Common Equity and
Related Stockholder Matters....................................21
Item 6 - Selected Financial Data........................................21
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................21
Item 8 - Financial Statements and Supplementary Data....................21
Item 9 - Changes In and Disagreements With Accountants on
Accounting and Financial Disclosures...........................21
Part III
Item 10 - Directors and Executive Officers of the Registrant............22
Item 11 - Executive Compensation........................................22
Item 12 - Security Ownership of Certain Beneficial
Owners and Management.........................................22
Item 13 - Certain Relationships and Related Transactions................22
Part IV
Item 14 - Exhibits, Financial Statement Schedules, and
Reports on Form 8-K...........................................23
Signatures....................................................................25
Index to Exhibits.............................................................27
Page 2
<PAGE>
PART I
ITEM 1. BUSINESS.
- --------------------------------------------------------------------------------
GENERAL
First Merchants Corporation (the "Corporation") was incorporated under Indiana
law on September 20, 1982, as the bank holding company for First Merchants Bank,
National Association ("First Merchants"), a national banking association
incorporated in 1893. Prior to December 16, 1991, First Merchants' name was The
Merchants National Bank of Muncie. On November 30, 1988, the Corporation
acquired Pendleton Banking Company ("Pendleton"), a state chartered commercial
bank organized in 1872. On July 31, 1991, the Corporation acquired First United
Bank ("First United"), a state chartered commercial bank organized in 1882. On
August 1, 1996, the Corporation acquired The Union County National Bank of
Liberty ("Union National"), a national banking association incorporated in 1872.
On October 2, 1996, the Corporation acquired The Randolph County Bank ("Randolph
County"), a state chartered commercial bank founded in 1865.
After the holding company was formed in 1982, the Corporation's practice was to
appoint each of the outside directors of First Merchants as a director of the
Corporation. However, as the Corporation grew through acquisition of four other
financial institutions, it became apparent that increased separation of the
operation and direction of the Corporation and First Merchants would be
desirable, and that this objective was hindered by the substantial overlap in
the composition of the two Boards of Directors. Therefore, the Corporation's
Board appointed an AD HOC Committee on Board Structure to review the structure
and makeup of the two Boards. The Committee's report and recommendations,
including a plan to restructure the respective Boards effective as of January 1,
1997, were unanimously adopted by the Boards of both the Corporation and First
Merchants on December 10, 1996. As a result of the restructuring, six of the
directors who were serving on both Boards became directors of First Merchants
only, and five of the directors who were serving on both Boards became directors
of the Corporation only. The size of the Corporation's Board was reduced from
eighteen to twelve members, and the size of the First Merchants' Board was
reduced from fifteen to ten members.
As of December 31, 1996, the Corporation had consolidated assets of $968.0
million, consolidated deposits of $794.5 million and stockholders' equity of
$112.7 million.
The Corporation is headquartered in Muncie, Indiana, and is presently engaged in
conducting commercial banking business through the 23 offices of its five
banking subsidiaries. As of December 31, 1996, the Corporation and its
subsidiaries had 452 full-time equivalent employees.
Through its subsidiaries, the Corporation offers a broad range of financial
services, including: accepting time and transaction deposits; making consumer,
commercial, agri-business and real estate mortgage loans; issuing credit cards;
renting safe deposit facilities; providing personal and corporate trust
services; and providing other corporate services, letters of credit and
repurchase agreements.
ACQUISITION POLICY AND PENDING TRANSACTIONS
The Corporation anticipates that it will continue its policy of geographic
expansion through consideration of acquisitions of additional financial
institutions. Management of the Corporation periodically engages in reviewing
and analyzing potential acquisitions.
At the present time, management of the Corporation is not actively engaged in
discussions or negotiations with other financial institutions regarding their
affiliation with the Corporation.
Page 3
<PAGE>
- --------------------------------------------------------------------------------
COMPETITION
The Corporation's banking subsidiaries are located in Delaware, Madison,
Fayette, Wayne, Union, Randolph and Henry counties, Indiana. In addition to the
competition provided by the lending and deposit gathering subsidiaries of
national manufacturers, retailers, insurance companies and investment brokers,
the banking subsidiaries compete vigorously with other banks, thrift
institutions, credit unions and finance companies located within their service
areas.
SUPERVISION AND REGULATION
The Corporation is a bank holding company ("BHC") subject to regulation under
the Bank Holding Company Act of 1956, as amended (the "Act"). The Act generally
requires a BHC to obtain prior approval of the Federal Reserve Board (the "FRB")
to acquire or hold more than a 5% voting interest in any bank. The Act
restricts the non-banking activities of BHCs to those which are closely related
to banking activities. As a result of the provisions in the Financial
Institutional Reform, Recovery and Enforcement Act of 1989, BHCs may now own and
operate savings and loan associations or savings banks which, in the past, was
prohibited. First Merchants and Union National are national banks and are
supervised, regulated and examined by the Comptroller of the Currency.
Pendleton, First United, and Randolph County are state banks and are supervised,
regulated and examined by the Indiana Department of Financial Institutions (the
"DFI"). In addition, First Merchants, as a member of the Federal Reserve
System, is supervised and regulated by the Federal Reserve. In addition,
Pendleton, First United, and Randolph County, which are not members of the
Federal Reserve System, are supervised and regulated by the Federal Deposit
Insurance Corporation ("FDIC"). The deposits of First Merchants, Union
National, Pendleton, First United, and Randolph County (the "Banks") are insured
by the FDIC. Each regulator has the authority to issue cease-and-desist orders
if it determines their activities represent an unsafe and unsound practice or
violation of law.
Under the Act and under regulations of the FRB, the Corporation and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with the extension of credit and are subject to limitations as to
certain intercompany transactions.
Subject to certain limitations, an Indiana bank may establish branches de novo
and may establish branches by acquisition in any location or locations within
Indiana. Indiana law permits intrastate bank holding company acquisitions,
subject to certain limitations. Effective July 1, 1992, Indiana bank holding
companies were permitted to acquire banks, and banks and bank holding companies
in Indiana were permitted to be acquired by bank holding companies, located in
any state in the United States which permits reciprocal entry by Indiana bank
holding companies. Prior to July 1, 1992, such interestate bank holding company
acquisitions were permitted only on a regional, as opposed to national, basis.
Neither the Corporation nor its subsidiaries presently contemplate engaging in
any non-banking related business activities.
During 1991, Congress passed the Federal Deposit Insurance Corporation
Improvement Act ("FDICIA"). In addition to addressing the insurance fund's
financial needs, FDICIA expanded the power of the federal banking regulators.
FDICIA introduced a new system of classifying financial institutions with
respect to their capitalization. Effective in 1993, FDICIA also requires
certain financial institutions, such as First Merchants, to have annual audits
and requires management to issue supplemental reports attesting to an
institution's compliance with laws and regulations and to the adequacy of its
internal controls and procedures.
Page 4
<PAGE>
- --------------------------------------------------------------------------------
SUPERVISION AND REGULATION (continued)
The Riegle Community Development and Regulatory Improvement Act of 1994 ("Act")
was signed into law in 1994. The Act contains seven titles pertaining to
community development and home ownership protection, small business capital
formation, paperwork reduction and regulatory improvement, money laundering and
flood insurance. The Act grants the authority to several agencies to promulgate
regulations under the Act. No regulations have yet been promulgated. The
Corporation cannot predict with certainty the impact of the Act on the banking
industry.
In September, 1994, the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 ("Interstate Act") was enacted into law. The Interstate Act
authorized interstate acquisitions, mergers and bank branching and agency
banking with affiliates in different states. The Interstate Act amends the Bank
Holding Company Act to allow adequately capitalized and managed bank holding
companies to acquire a bank located in another state beginning in September,
1995. The new act permits full interstate branching after June 1, 1997. After
that date, BHCs may merge existing bank subsidiaries into one bank, with banks
also permitted to merge unaffiliated banks across state lines. States may
permit interstate branching earlier than June 1, 1997, where both states
involved with a bank merger expressly permit it by statute. The Interstate Act
permits states to enact a law expressly prohibiting interstate mergers. Such
laws must apply equally to all out-of-state banks and be passed before June 1,
1997.
The monetary policies of regulatory authorities, including the Federal Reserve
Board, have a significant effect on the operating results of banks and bank
holding companies. The nature of future monetary policies and the effect of
such policies on the future business and earnings of the Corporation and its
subsidiary banks cannot be predicted.
The Corporation is under the jurisdiction of the Securities and Exchange
Commission and state securities commission for matters relating to the offering
and sale of its securities and is subject to the Securities and Exchange
Commission's rules and regulations relating to periodic reporting, reporting to
stockholders, proxy solicitation, and insider trading.
The Corporation's income is principally derived from dividends paid on the
common stock of its subsidiaries. The payment of these dividends are subject to
certain regulatory restrictions.
CAPITAL REQUIREMENTS
The Corporation and its subsidiary banks must meet certain minimum capital
requirements mandated by the FRB, the FDIC and DFI. These regulatory agencies
require BHCs and banks to maintain certain minimum ratios of primary capital to
total assets and total capital to total assets. As of January 1, 1991, the FRB
required bank holding companies to maintain a minimum Tier 1 leverage ratio to 3
per cent capital to total assets; however, for all but the most highly rated
institutions which do not anticipate significant growth, the minimum Tier 1
ratio is 3 per cent plus an additional cushion of 100 to 200 basis points. As
of December 31, 1996, the Corporation's leverage ratio of capital to total
assets was 11.6 per cent.
The FRB and FDIC each have approved the imposition of "risk-adjusted" capital
ratios on BHCs and financial institutions. The Corporation and its subsidiaries
had capital to assets ratios and risk-adjusted capital ratios at December 31,
1996, in excess of the applicable regulatory minimum requirements.
Page 5
<PAGE>
- --------------------------------------------------------------------------------
CAPITAL REQUIREMENTS (continued)
The following table summarizes the Corporation's risk-adjusted capital ratios
under FRB guidelines at December 31, 1996:
Corporation's Regulatory
Consolidated Minimum
Ratio Requirement
----- -----------
Tier 1 Capital to Risk-Weighted
Assets Ratio . . . . . . . . . . . 17.0% 4.0%
Total Capital to Risk-Weighted
Assets Ratio . . . . . . . . . . . 18.0% 8.0%
Page 6
<PAGE>
- --------------------------------------------------------------------------------
STATISTICAL DATA
The following tables set forth statistical data relating the Corporation and its
subsidiaries.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
The daily average balance sheet amounts, the related interest income or expense,
and average rates earned or paid are presented in the following table.
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------- -------------------------- ---------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- ------- ---- ------- ------- ---- ------- ------- ----
(DOLLARS IN THOUSANDS ON FULLY TAXABLE EQUIVALENT BASIS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
FEDERAL FUNDS SOLD . . . . . . . $ 9,359 $ 498 5.3% $ 18,409 $ 1,028 5.6% $ 6,199 $ 271 4.4%
INTEREST-BEARING DEPOSITS. . . . 346 16 4.6 250 9 3.6 65 2 3.1
FEDERAL RESERVE AND
FEDERAL HOME LOAN BANK STOCK . 2,800 212 7.6 2,692 209 7.8 2,638 163 6.2
SECURITIES:(1)
TAXABLE. . . . . . . . . . . . . 204,323 12,752 6.2 206,724 12,419 6.0 205,978 11,771 5.7
TAX-EXEMPT . . . . . . . . . . . 77,996 5,892 7.6 72,666 5,542 7.6 77,323 5,674 7.3
-------- ------- -------- ------- -------- -------
TOTAL SECURITIES. . . . . . . 282,319 18,644 6.6 279,390 17,961 6.4 283,301 17,445 6.2
MORTGAGE LOANS HELD FOR SALE . . . 262 21 8.0 281 22 7.8
LOANS:(2)
COMMERCIAL . . . . . . . . . . . 230,848 21,232 9.2 211,998 20,347 9.6 199,622 16,493 8.3
BANKERS' ACCEPTANCE AND
COMMERCIAL PAPER PURCHASED . . 20 1 5.5 2,590 149 5.8 454 22 4.8
REAL ESTATE MORTGAGE . . . . . . 233,830 19,543 8.4 218,607 18,566 8.5 206,015 16,401 8.0
INSTALLMENT. . . . . . . . . . . 119,379 11,300 9.5 109,917 9,997 9.1 105,960 8,762 8.3
TAX-EXEMPT . . . . . . . . . . . 1,566 140 8.9 1,064 112 10.5 1,733 179 10.3
-------- ------- -------- ------- -------- -------
TOTAL LOANS . . . . . . . . . 585,643 52,216 8.9 544,176 49,171 9.0 513,784 41,857 8.1
-------- ------- -------- ------- -------- -------
TOTAL EARNING ASSETS. . . . . 880,729 71,607 8.1 845,198 68,400 8.1 805,987 59,738 7.4
------- ------- -------
NET UNREALIZED LOSS ON SECURITIES
AVAILABLE FOR SALE . . . . . . . (961) (1,483) (1,457)
ALLOWANCE FOR LOAN LOSSES. . . . . (6,672) (6,654) (6,589)
CASH AND DUE FROM BANKS. . . . . . 28,341 26,359 27,780
PREMISES AND EQUIPMENT . . . . . . 14,879 14,225 13,415
OTHER ASSETS . . . . . . . . . . . 15,828 13,350 14,121
-------- -------- --------
TOTAL ASSETS. . . . . . . . . $932,144 $890,995 $853,257
-------- -------- --------
-------- -------- --------
LIABILITIES:
INTEREST-BEARING DEPOSITS:
NOW ACCOUNTS . . . . . . . . . $109,792 $ 2,503 2.3 $103,015 $ 2,643 2.6 $107,862 $ 2,408 2.2
MONEY MARKET DEPOSIT ACCOUNTS 100,897 3,701 3.7 107,735 4,147 3.8 119,388 3,545 3.0
SAVINGS DEPOSITS . . . . . . . 70,875 1,898 2.7 74,293 2,125 2.9 86,322 2,442 2.8
CERTIFICATES AND OTHER
TIME DEPOSITS. . . . . . . . . 381,378 21,037 5.5 355,448 19,312 5.4 299,817 13,008 4.3
-------- ------- -------- ------- -------- -------
TOTAL INTEREST-BEARING
DEPOSITS. . . . . . . . . . . 662,942 29,139 4.4 640,491 28,227 4.4 613,389 21,403 3.5
SHORT-TERM BORROWINGS . . . . . . 51,768 2,687 5.2 47,345 2,628 5.6 48,917 1,964 4.0
FEDERAL HOME LOAN BANK ADVANCES . 9,192 523 5.7 9,000 496 5.5 7,692 462 6.0
-------- ------- -------- ------- -------- -------
TOTAL INTEREST-BEARING
LIABILITIES . . . . . . . . . 723,902 32,349 4.5 696,836 31,351 4.5 669,998 23,829 3.6
NONINTEREST-BEARING DEPOSITS. . . 90,719 88,335 85,255
OTHER LIABILITIES . . . . . . . . 9,429 6,791 6,538
-------- -------- --------
TOTAL LIABILITIES . . . . . . 824,050 791,962 761,791
STOCKHOLDERS' EQUITY. . . . . . . 108,094 99,033 91,466
-------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY. . . . . $932,144 32,349 3.6(3) $890,995 31,351 3.7(3) $853,257 23,829 3.0(3)
-------- ------- -------- ------- -------- -------
-------- -------- --------
NET INTEREST INCOME . . . . . $ 39,258 4.5 $ 37,049 4.4 $ 35,909 4.5
------- ------- -------
------- ------- -------
</TABLE>
(1) AVERAGE BALANCE OF SECURITIES IS COMPUTED BASED ON THE AVERAGE
OF THE HISTORICAL AMORTIZED COST BALANCES WITHOUT THE EFFECTS
OF THE FAIR VALUE ADJUSTMENT.
(2) NONACCRUING LOANS HAVE BEEN INCLUDED IN THE AVERAGE BALANCES.
(3) TOTAL INTEREST EXPENSE DIVIDED BY TOTAL EARNING ASSETS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ADJUSTMENT TO CONVERT TAX EXEMPT INVESTMENT
SECURITIES TO FULLY TAXABLE EQUIVALENT BASIS,
USING MARGINAL RATE OF 34% FOR 1994 AND 35%
FOR 1995 AND 1996 . . . . . . $ 2,112 $ 1,952 $ 1,971
------- ------- -------
------- ------- -------
</TABLE>
Page 7
<PAGE>
- --------------------------------------------------------------------------------
STATISTICAL DATA (continued)
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table presents net interest income components on a tax-equivalent
basis and reflects changes between periods attributable to movement in either
the average balance or average interest rate for both earning assets and
interest-bearing liabilities. The volume differences were computed as the
difference in volume between the current and prior year times the interest rate
of the prior year, while the interest rate changes were computed as the
difference in rate between the current and prior year times the volume of the
prior year. Volume/rate variances have been allocated on the basis of the
absolute relationship between volume variances and rate variances.
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
Increase (Decrease) Due To Increase (Decrease) Due To
-------------------------- --------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(Dollars in Thousands on Fully Taxable Equivalent Basis)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Federal funds sold. . . . . . . . . $ (478) $ (52) $ (530) $ 665 $ 92 $ 757
Interest-bearing deposits . . . . . 4 3 7 7 7
Federal Reserve and Federal
Home Loan Bank stock. . . . . . . 8 (5) 3 3 43 46
Securities. . . . . . . . . . . . . 171 512 683 (185) 701 516
Mortgage loans held for sale. . . . (2) 1 (1) 22 22
Loans . . . . . . . . . . . . . . . 3,607 (562) 3,045 2,541 4,773 7,314
------- ------- ------- ------- -------- -------
Totals. . . . . . . . . . . . . . 3,310 (103) 3,207 3,053 5,609 8,662
------- ------- ------- ------- -------- -------
Interest expense:
NOW accounts. . . . . . . . . . . . 173 (313) (140) (125) 360 235
Money market deposit
accounts. . . . . . . . . . . . . (315) (131) (446) (351) 953 602
Savings deposits. . . . . . . . . . ( 91) (136) (227) (390) 73 (317)
Certificates and other
time deposits . . . . . . . . . . 1,376 349 1,725 2,650 3,654 6,304
Short-term borrowings . . . . . . . 248 (189) 59 ( 67) 731 664
Federal Home Loan Bank advances . . 10 17 27 74 (40) 34
------- ------- ------- ------- -------- -------
Totals. . . . . . . . . . . . . . 1,401 (403) 998 1,791 5,731 7,522
------- ------- ------- ------- -------- -------
Change in net interest
income (fully taxable
equivalent basis) . . . . . . . . . $1,909 $ 300 2,209 $1,262 $ (122) 1,140
------- ------- ------- --------
------- ------- ------- --------
Tax equivalent adjustment
using marginal rate
of 34% for 1994 and 35% for
1995 and 1996 . . . . . . . . . . . (160) 19
------- -------
Change in net interest
income. . . . . . . . . . . . . . . $2,049 $1,159
------- -------
------- -------
</TABLE>
Page 8
<PAGE>
- --------------------------------------------------------------------------------
STATISTICAL DATA (continued)
INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
approximate market value of the investment securities at the dates
indicated were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Available for sale at December 31, 1996:
U.S. Treasury . . . . . . . . . . . . . . $ 21,570 $ 92 $ 46 $ 21,616
Federal agencies. . . . . . . . . . . . . 79,130 540 180 79,490
State and municipal . . . . . . . . . . . 52,026 1,173 106 53,093
Mortgage-backed securities. . . . . . . . 41,441 297 275 41,463
Other asset-backed securities . . . . . . 709 709
Corporate obligations . . . . . . . . . . 31,470 156 128 31,498
Marketable equity securities. . . . . . . 510 510
---------- -------- ------ ----------
Total available for sale. . . . . . . . 226,856 2,258 735 228,379
---------- -------- ------ ----------
Held to maturity at December 31, 1996:
U.S. Treasury . . . . . . . . . . . . . . 249 7 242
Federal agencies. . . . . . . . . . . . . 5,729 23 5 5,747
State and municipal . . . . . . . . . . . 36,405 381 21 36,765
Mortgage-backed securities. . . . . . . . 2,730 13 2,717
Other asset-backed securities . . . . . . 2,114 17 108 2,023
---------- -------- ------ ----------
Total held to maturity. . . . . . . . . 47,227 421 154 47,494
---------- -------- ------ ----------
Total investment securities . . . . . . $ 274,083 $ 2,679 $ 889 $ 275,873
---------- -------- ------ ----------
---------- -------- ------ ----------
Available for sale at December 31, 1995:
U.S. Treasury. . . . . . . . . . . . . . . $ 16,239 $ 184 $ 11 $ 16,412
Federal agencies . . . . . . . . . . . . . 84,047 1,529 93 85,483
State and municipal. . . . . . . . . . . . 40,391 1,257 68 41,580
Mortgage-backed securities . . . . . . . . 47,012 411 282 47,141
Other asset-backed securities. . . . . . . 433 1 432
Corporate obligations. . . . . . . . . . . 34,114 289 106 34,297
Marketable equity securities . . . . . . . 562 31 593
---------- -------- ------ ----------
Total available for sale . . . . . . . 222,798 3,701 561 225,938
---------- -------- ------ ----------
Held to maturity at December 31, 1995:
U.S. Treasury. . . . . . . . . . . . . . . 3,103 8 2 3,109
Federal agencies . . . . . . . . . . . . . 11,645 69 21 11,693
State and municipal. . . . . . . . . . . . 40,393 574 57 40,910
Mortgage-backed securities . . . . . . . . 4,563 9 21 4,551
Other asset-backed securities. . . . . . . 474 8 482
Corporate obligations. . . . . . . . . . . 500 1 499
---------- -------- ------ ----------
Total held to maturity . . . . . . . . 60,678 668 102 61,244
---------- -------- ------ ----------
Total investment securities. . . . . . $ 283,476 $ 4,369 $ 663 $ 287,182
---------- -------- ------ ----------
---------- -------- ------ ----------
</TABLE>
Page 9
<PAGE>
- --------------------------------------------------------------------------------
STATISTICAL DATA (continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Available for sale at December 31, 1994
U.S. Treasury. . . . . . . . . . . . . . . $ 21,815 $ 678 $ 21,137
Federal agencies . . . . . . . . . . . . . 40,060 $ 3 1,510 38,553
State and municipal. . . . . . . . . . . . 12,936 86 474 12,548
Mortgage-backed securities . . . . . . . . 24,464 29 1,132 23,361
Other asset-backed securities. . . . . . . 930 930
Corporate obligations. . . . . . . . . . . 26,457 4 1,195 25,266
Marketable equity securities . . . . . . . 354 8 2 360
---------- -------- ------ ----------
Total available for sale . . . . . . . 127,016 130 4,991 122,155
---------- -------- ------ ----------
Held to maturity at December 31, 1994
U.S. Treasury. . . . . . . . . . . . . . . 18,098 21 404 17,715
Federal agencies . . . . . . . . . . . . . 29,528 29 589 28,968
State and municipal. . . . . . . . . . . . 58,974 525 1,085 58,414
Mortgage-backed securities . . . . . . . . 17,569 69 905 16,733
Other asset-backed securities. . . . . . . 2,110 33 2,077
Corporate obligations. . . . . . . . . . . 10,514 5 230 10,289
---------- -------- ------ ----------
Total held to maturity . . . . . . . . 136,793 649 3,246 134,196
---------- -------- ------ ----------
Total investment securities. . . . . . $ 263,809 $ 779 $8,237 $ 256,351
---------- -------- ------ ----------
---------- -------- ------ ----------
</TABLE>
Cost
-----------------------------
1996 1995 1994
---- ---- ----
Federal Reserve and Federal Home Loan
Bank stock at December 31:
Federal Reserve Bank stock . . . . . $ 397 $ 397 $ 397
Federal Home Loan Bank stock . . . . 2,693 2,305 2,283
------- -------- --------
Total. . . . . . . . . . . . . . $ 3,090 $ 2,702 $ 2,680
------- -------- --------
------- -------- --------
The Fair Value of Federal Reserve and Federal Home Loan Bank stock approximates
cost.
The maturity distribution (dollars in thousands) and average yields for the
securities portfolio at December 31, 1996 were:
Securities available for sale December 31, 1996:
<TABLE>
<CAPTION>
Within 1 Year 1-5 Years 5 - 10 Years
------------- --------- ------------
Amount Yield* Amount Yield* Amount Yield*
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury. . . . . . . . . . . $ 7,812 6.44% $ 13,758 5.88%
Federal Agencies . . . . . . . . . 18,621 5.93 60,509 6.43
State and Municipal. . . . . . . . 4,345 6.57 24,490 7.07 $ 16,507 7.24%
Corporate Obligations. . . . . . . 8,983 5.42 21,852 6.28 635 6.66
Marketable Equity Securities . . . 510 7.90
--------- -------- ---------
Total . . . . . . . . . . . . . $ 40,271 6.01% $120,609 6.47% $ 17,142 7.22%
--------- -------- ---------
--------- -------- ---------
</TABLE>
Page 10
<PAGE>
<TABLE>
<CAPTION>
STATISTICAL DATA (continued)
Mortgage and other
Due After Ten Years asset-backed Total
------------------- ------------ -----
Amount Yield* Amount Yield* Amount Yield*
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury. . . . . . . . $ 21,570 6.08%
Federal Agencies . . . . . . 79,130 6.31
State and Municipal. . . . . 6,684 6.47% 52,026 7.00
Corporate Obligations. . . . 31,470 6.04
Marketable Equity Security . 510 7.90
Mortgage-backed securities . $ 41,441 6.87% 41,441 6.87
Other asset-backed securities 709 6.81 709 6.81
-------- -------- --------
Total . . . . . . . . . . $ 6,684 6.47% $ 42,150 6.87% $226,856 6.52%
-------- -------- --------
-------- -------- --------
</TABLE>
Securities held to maturity at December 31, 1996:
<TABLE>
<CAPTION>
Within 1 Year 1 - 5 Years 5 - 10 Years
------------- ----------- ------------
Amount Yield* Amount Yield* Amount Yield*
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury. . . . . . . . $ 249 5.36%
Federal Agencies . . . . . . $ 2,301 5.49% 3,428 6.35
State and Municipal. . . . . 10,400 7.25 22,015 7.12 $ 3,415 7.71%
-------- -------- --------
Total . . . . . . . . . . $ 12,701 6.93% $ 25,692 7.00% $ 3,415 7.71%
-------- -------- --------
-------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Mortgage and other
Due After Ten Years asset-backed Total
------------------- ------------ -----
Amount Yield* Amount Yield* Amount Yield*
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury. . . . . . . . $ 249 5.36%
Federal Agencies . . . . . . 5,729 6.01
State and Municipal. . . . . $ 575 8.98% 36,405 7.24
Mortgage-backed securities . $ 2,730 6.67% 2,730 6.67
Other asset-backed securities 2,114 6.99 2,114 6.99
-------- -------- --------
Total. . . . . . . . . . $ 575 8.98% $ 4,844 6.81% $ 47,277 7.04%
-------- -------- --------
-------- -------- --------
</TABLE>
*Interest yields on state and municipal securities are presented on a fully
taxable equivalent basis using a 35% rate.
Federal Reserve and Federal Home Loan Bank stock at December 31, 1996:
Amount Yield
------ -----
Federal Reserve Bank stock . $ 397 6.00%
Federal Home Loan Bank stock 2,693 8.00
--------
Total. . . . . . . . . . . $ 3,090 7.74
--------
--------
Page 11
<PAGE>
STATISTICAL DATA (continued)
LOAN PORTFOLIO
TYPES OF LOANS
The loan portfolio at the dates indicated is presented below:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans at December 31:
Commercial and
industrial loans . . . . . . . . . $ 132,134 $ 98,880 $ 89,696 $ 90,192 $ 87,680
Bankers acceptances and loans
to financial institutions. . . . . 625 2,925 3,293 9,822
Agricultural production
financing and other loans
to farmers . . . . . . . . . . . . 18,906 17,203 17,255 16,470 18,768
Real estate loans:
Construction . . . . . . . . . . . 13,167 9,913 8,126 8,127 2,619
Commercial and farmland. . . . . . 97,596 104,731 95,092 85,992 74,389
Residential. . . . . . . . . . . . 253,530 215,738 217,148 196,570 177,050
Individuals' loans for
household and other
personal expenditures. . . . . . . 113,507 102,313 99,812 91,277 78,485
Tax-exempt loans . . . . . . . . . . 1,643 1,204 1,514 2,029 3,083
Other loans. . . . . . . . . . . . . 1,672 949 1,608 3,350 5,594
--------- --------- --------- --------- ---------
632,780 553,856 530,251 497,300 457,490
Unearned interest on loans . . . . . (1,364) (1,518) (1,610) (1,597) (1,585)
--------- --------- --------- --------- ---------
Total loans. . . . . . . . . . $ 631,416 $ 552,338 $ 528,641 $ 495,703 $ 455,905
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Residential Real Estate Loans Held for Sale at December 31, 1996 and 1995 were
$284,020 and $735,522.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
Presented in the table below are the maturities of loans (excluding commercial
real estate, farmland, residential real estate and individuals' loans)
outstanding as of December 31, 1996. Also presented are the amounts due after
one year classified according to the sensitivity to changes in interest rates.
Maturing
--------------------------------------
Within 1-5 Over 5
1 Year Years Years Total
------ ----- ------ -----
(Dollars in Thousands)
Commercial and industrial loans. . $ 75,886 $ 28,642 $ 27,606 $132,134
Agricultural production financing
and other loans to farmers . . . 15,237 2,831 838 18,906
Real estate - Construction . . . . 8,238 2,394 2,535 13,167
Tax-exempt loans . . . . . . . . . 672 855 116 1,643
Other loans. . . . . . . . . . . . 1,009 663 1,672
-------- -------- -------- --------
Total . . . . . . . . . . . . $101,042 $ 35,385 $ 31,095 $167,522
-------- -------- -------- --------
-------- -------- -------- --------
Page 12
<PAGE>
STATISTICAL DATA (continued)
Maturing
------------------
1 - 5 Over
Years 5 Years
----- -------
(Dollars in Thousands)
Loans maturing after one
year with:
Fixed rates . . . . . . . . . . . $ 14,240 $ 9,335
Variable rate . . . . . . . . . . 21,145 21,760
-------- --------
Total . . . . . . . . . . . . . $ 35,385 $ 31,095
-------- --------
-------- --------
RISK ELEMENTS
<TABLE>
<CAPTION>
December 31
-----------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans. . . . . . . . . $ 2,777 $ 576 $ 398 $ 1,649 $ 1,614
Loans contractually past due 90
days or more other than
nonaccruing . . . . . . . . . . . 1,699 1,119 1,322 936 1,050
Restructured loans . . . . . . . . 1,540 1,075 1,242 1,509 2,226
</TABLE>
Nonaccruing loans are loans which are reclassified to a nonaccruing status when
in management's judgment the collateral value and financial condition of the
borrower do not justify accruing interest. Interest previously recorded but not
deemed collectible is reversed and charged against current income. Interest
income on these loans is then recognized when collected.
Restructured loans are loans for which the contractual interest rate has been
reduced or other concessions are granted to the borrower because of a
deterioration in the financial condition of the borrower resulting in the
inability of the borrower to meet the original contractual terms of the loans.
Interest income of $255,381 for the year ended December 31, 1996, was recognized
on the nonaccruing and restructured loans listed in the table above, whereas
interest income of $320,642 would have been recognized under their original loan
terms.
Potential problem loans:
Management has identified certain other loans totaling $7,732,143 as of
December 31, 1996, not included in the risk elements table, which are current as
to principal and interest, about which there are doubts as to the borrowers'
ability to comply with present repayment terms.
The Banks generate commercial, mortgage and consumer loans from customers
located primarily in central and east central Indiana and Butler County,
Ohio. The Banks' loans are generally secured by specific items of
collateral, including real property, consumer assets, and business assets.
Although the Banks have diversified loan portfolio, a substantial portion of
their debtors' ability to honor their contracts is dependent upon economic
conditions in the automotive and agricultural industries.
Page 13
<PAGE>
<TABLE>
<CAPTION>
STATISTICAL DATA (continued)
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the loan loss experience for the years indicated.
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance at January 1 . . . . . . $ 6,696 $ 6,603 $ 6,467 $ 5,811 $ 5,076
Chargeoffs:
Commercial . . . . . . . . . . 767 794 973 675 950
Real estate mortgage . . . . . 14 1 53 129 112
Installment. . . . . . . . . . 855 759 462 571 708
-------- -------- -------- -------- --------
Total chargeoffs. . . . . . . 1,636 1,554 1,488 1,375 1,770
-------- -------- -------- -------- --------
Recoveries:
Commercial . . . . . . . . . . 106 127 269 248 236
Real estate mortgage . . . . . 7 4 30 5 38
Installment. . . . . . . . . . 196 128 123 124 130
-------- -------- -------- -------- --------
Total recoveries. . . . . . . 309 259 422 377 404
-------- -------- -------- -------- --------
Net chargeoffs . . . . . . . . . 1,327 1,295 1,066 998 1,366
-------- -------- -------- -------- --------
Provisions for loan losses . . . 1,253 1,388 1,202 1,654 2,101
-------- -------- -------- -------- --------
Balance at December 31 . . . . . $ 6,622 $ 6,696 $ 6,603 $ 6,467 $ 5,811
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratio of net chargeoffs during the
period to average loans
outstanding during the period. . .23% .24% .21% .21% .32%
Peer Group . . . . . . . . . . . . N/A .26% .25% .49% .65%
</TABLE>
Page 14
<PAGE>
STATISTICAL DATA (continued)
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31:
Presented below is an analysis of the composition of the allowance for loan
losses and per cent of loans in each category to total loans:
1996 1995
------------------- -------------------
Amount Per Cent Amount Per Cent
------ -------- ------ --------
(Dollars in Thousands)
Balance at December 31:
Commercial, financial and
agricultural . . . . . . $ 2,924 24.2% $ 3,105 21.8%
Real estate - construction 3 2.1 1 1.8
Real estate - mortgage . . 1,041 55.6 1,121 58.0
Installment. . . . . . . . 1,576 17.8 1,506 18.2
Tax-exempt loans . . . . . 16 .3 4 .2
Unallocated. . . . . . . . 1,062 N/A 959 N/A
-------- -------- -------- --------
Totals . . . . . . . . . . $ 6,622 100.0% $ 6,696 100.0%
-------- -------- -------- --------
-------- -------- -------- --------
1994 1993
------------------- ------------------
Amount Per Cent Amount Per Cent
------ -------- ------ --------
(Dollars in Thousands)
Balance at December 31:
Commercial, financial and
agricultural . . . . . . $ 3,080 20.5% $ 3,021 22.9%
Real estate - construction 4 1.5 6 1.6
Real estate - mortgage . . 1,048 59.1 870 57.0
Installment. . . . . . . . 1,550 18.6 1,589 18.1
Tax-exempt loans . . . . . 4 .3 7 .4
Unallocated. . . . . . . . 917 N/A 974 N/A
-------- -------- -------- --------
Totals . . . . . . . . . . $ 6,603 100.0% $ 6,467 100.0%
-------- -------- -------- --------
-------- -------- -------- --------
1992
-------------------
Amount Per Cent
------ --------
(Dollars in Thousands)
Balance at December 31:
Commercial, financial and
agricultural . . . . . . $ 3,089 26.6%
Real estate - construction 2 .6
Real estate - mortgage . . 771 55.2
Installment. . . . . . . . 1,688 16.9
Tax-exempt loans . . . . . 8 .7
Unallocated. . . . . . . . 253 N/A
-------- --------
Totals . . . . . . . . . . $ 5,811 100.0%
-------- --------
-------- --------
Page 15
<PAGE>
STATISTICAL DATA (continued)
LOAN LOSS CHARGEOFF PROCEDURES
The Banks have weekly meetings at which loan delinquencies, maturities and
problems are reviewed. The Board of Directors receive and review reports on
loans monthly.
The Executive Committee of First Merchants' Board meets bimonthly to approve or
disapprove all new loans in excess of $1,000,000 and the Board reviews all
commercial loans in excess of $50,000 which were made or renewed during the
preceding month. Pendleton's and First United's loan committees, consisting of
all loan officers and the president, meet as required to approve or disapprove
any loan which is in excess of an individual loan officer's lending limit.
The Loan/Discount Committee of Union County's Board meets monthly to approve
or disapprove all loans to borrowers with aggregate loans in excess of
$300,000. The Loan Committee of Randolph County's Board meets weekly to
approve or disapprove any loan which is in excess of an individual loan
officer's lending limit.
All chargeoffs are approved by the senior loan officer and are reported to the
Banks' Boards. The Banks charge off loans when a determination is made that all
or a portion of a loan is uncollectible or as a result of examinations by
regulators and the independent auditors.
PROVISION FOR LOAN LOSSES
In banking, loan losses are one of the costs of doing business. Although the
Banks' management emphasize the early detection and chargeoff of loan losses, it
is inevitable that at any time certain losses exist in the portfolio which have
not been specifically identified. Accordingly, the provision for loan losses is
charged to earnings on an anticipatory basis, and recognized loan losses are
deducted from the allowance so established. Over time, all net loan losses must
be charged to earnings. During the year, an estimate of the loss experience for
the year serves as a starting point in determining the appropriate level for the
provision. However, the amount actually provided in any period may be greater
or less than net loan losses, based on management's judgment as to the
appropriate level of the allowance for loan losses. The determination of the
provision in any period is based on management's continuing review and
evaluation of the loan portfolio, and its judgment as to the impact of current
economic conditions on the portfolio. The evaluation by management includes
consideration of past loan loss experience, changes in the composition of the
loan portfolio, and the current condition and amount of loans outstanding.
Impaired loans are measured by the present value of expected future cash flows,
or the fair value of the collateral of the loans, if collateral dependent.
Information on impaired loans is summarized below:
1996 1995
-------- --------
(Dollars in Thousands)
For the year ending December 31:
Impaired loans with an allowance . . . . . . . . . . $ 3,124 $ 2,314
Impaired loans for which the discounted
cash flows or collateral value exceeds the
carrying value of the loan . . . . . . . . . . . . 868 2,498
-------- --------
Total impaired loans . . . . . . . . . . . . . . $ 3,992 $ 4,812
-------- --------
-------- --------
Allowance for impaired loans (included in the
Corporation's allowance for loan losses) . . . . . $ 1,092 $ 1,177
Average balance of impaired loans. . . . . . . . . . 5,213 4,650
Interest income recognized on impaired loans . . . . 311 153
Cash basis interest included above . . . . . . . . . 291 93
Page 16
<PAGE>
STATISTICAL DATA (continued)
DEPOSITS
The following table shows the average amount of deposits and average rate of
interest paid thereon for the years indicated.
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31:
Noninterest bearing deposits . . $ 90,719 $ 88,335 $ 85,255
NOW accounts . . . . . . . . . . 109,792 2.3% 103,015 2.6% 107,862 2.2%
Money market deposit accounts. . 100,897 3.7 107,735 3.8 119,388 3.0
Savings deposits . . . . . . . . 70,875 2.7 74,293 2.9 86,322 2.8
Certificates of deposit and
other time deposits. . . . . . 381,378 5.5 355,448 5.4 299,817 4.3
-------- -------- --------
Total deposits. . . . . . . . $753,661 3.9 $728,826 3.9 $698,644 3.1
-------- -------- --------
-------- -------- --------
</TABLE>
As of December 31, 1996, certificates of deposit and other time deposits
of $100,000 or more mature as follows:
<TABLE>
<CAPTION>
Maturing
----------------------------------------------
3 Months 3-6 6-12 Over 12
or less Months Months Months Total
------- ------ ------ ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit and
other time deposits. . . . . . . $36,090 $13,321 $14,044 $19,347 $82,802
Per cent . . . . . . . . . . . . . 44% 16% 17% 23% 100%
</TABLE>
RETURN ON EQUITY AND ASSETS
1996 1995 1994
---- ---- ----
Return on assets (net income divided by
average total assets) . . . . . . . . . . . 1.41% 1.35% 1.33%
Return on equity (net income divided by
average equity). . . . . . . . . . . . . . 12.16 12.17 12.42
Dividend payout ratio (dividends per
share divided by net income per share) . . 40.85 39.49 39.44
Equity to assets ratio (average equity
divided by average total assets) . . . . . 11.60 11.11 10.72
Page 17
<PAGE>
STATISTICAL DATA (continued)
SHORT-TERM BORROWINGS
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
Balance at December 31:
Federal funds purchased . . . . . . . . . . $ 20,725 $ 1,700 $ 12,198
Securities sold under repurchase
agreements. . . . . . . . . . . . . . . 20,054 28,887 19,010
U.S. Treasury demand notes. . . . . . . . . 4,258 6,790 9,423
--------- -------- ---------
Total short-term borrowings . . . . . $ 45,037 $ 37,377 $ 40,631
--------- -------- ---------
--------- -------- ---------
Securities sold under repurchase agreements are borrowings maturing within one
year and are secured by U. S. Treasury and Federal agency obligations.
Pertinent information with respect to short-term borrowings is summarized below:
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
Weighted average interest rate on outstanding
balance at December 31:
Securities sold under repurchase
agreements . . . . . . . . . . . . . . . 4.92% 5.26% 4.78%
Total short-term borrowings . . . . . . . . 5.78 5.28 5.38
Weighted average interest rate during the year:
Securities sold under repurchase
agreements. . . . . . . . . . . . . . . 5.07 5.52 3.88
Total short-term borrowings . . . . . . . . 5.19 5.55 4.04
Highest amount outstanding at any month end
during the year:
Securities sold under repurchase
agreements . . . . . . . . . . . . . . . $52,221 $58,097 $30,230
Total short-term borrowings . . . . . . . . 83,678 65,514 73,731
Average amount outstanding during the year:
Securities sold under repurchase
agreements. . . . . . . . . . . . . . . 42,140 35,436 24,696
Total short-term borrowings . . . . . . . . 51,768 47,498 48,932
Page 18
<PAGE>
ITEM 2. PROPERTIES.
- --------------------------------------------------------------------------------
The headquarters of the Corporation and First Merchants are located in a
five-story building at 200 East Jackson Street, Muncie, Indiana. This building
and eight branch buildings are owned by First Merchants; four remaining branches
of First Merchants are located in leased premises. Twelve automated cash
dispensers are located in leased premises. All of the Corporation's and First
Merchants' facilities are located in Delaware and Madison Counties of Indiana.
The principal offices of Pendleton are located at 100 West State Street,
Pendleton, Indiana. Pendleton also operates three branches. All of Pendleton's
properties are owned by Pendleton and are located in Madison County, Indiana.
Two automated dispensers are located in leased premises.
The principal offices of First United are located at 790 West Mill Street,
Middletown, Indiana. First United also operates two branches. All of First
United's properties are owned by First United and are located in Henry County,
Indiana.
The principal offices of Union National are located at 107 West Union Street,
Liberty, Indiana. This building and two branches are owned by Union National;
one branch is located in leased premises. Three automated cash dispensers are
located in leased premises. All of Union National's facilities are located in
Union, Fayette and Wayne Counties of Indiana.
The principal office of Randolph County is located at 122 West Washington
Street, Winchester, Indiana. This building is owned by Randolph County and is
located in Randolph County, Indiana.
None of the properties owned by the banks are subject to any major encumbrances.
The net investment of the Corporation and subsidiaries in real estate and
equipment at December 31, 1996 was $15,303,300.
ITEM 3. LEGAL PROCEEDINGS.
- --------------------------------------------------------------------------------
There is no pending legal proceeding, other than ordinary routine litigation
incidental to the business of the Corporation or its subsidiaries, of a material
nature to which the Corporation or its subsidiaries is a party or of which any
of their properties are subject. Further, there is no material legal proceeding
in which any director, officer, principal shareholder, or affiliate of the
Corporation, or any associate of any such director, officer or principal
shareholder, is a party, or has a material interest, adverse to the Corporation.
None of the routine legal proceedings, individually or in the aggregate, in
which the Corporation or its affiliates are involved are expected to have a
material adverse impact on the financial position or the results of operations
of the Corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- --------------------------------------------------------------------------------
No matters were submitted during the fourth quarter of 1996 to a vote of
security holders, through the solicitation of proxies or otherwise.
Page 19
<PAGE>
SUPPLEMENTAL INFORMATION - EXECUTIVE OFFICERS OF THE REGISTRANT.
The names, ages, and positions with the Corporation and subsidiary banks of all
executive officers of the Corporation are listed below.
Offices with the Corporation Principal Occupation
Name and Age And Subsidiary Banks During Past Five Years
------------- ------------------------------ ---------------------------
Stefan S. Anderson Chairman of the Board, Chairman of the Board of
62 President and Chief Executive the Corporation and First
Officer, Corporation; Chairman Merchants since 1987;
of the Board and Chief President and Chief
Executive Officer, First Executive Officer of the
Merchants Bank, N.A. Corporation since 1982,
and Chief Executive
Officer of First Merchants
Bank since 1979
Michael L. Cox Executive Vice President, Executive Vice President
52 Chief Operating Officer and and Chief Operating
Director, Corporation; Officer, Corporation since
President, Chief Operating May, 1994; President and
Officer and Director, First Chief Operating Officer,
Merchants Bank, N.A. First Merchants since
April, 1996; Director,
Corporation and First
Merchants since December,
1984; President,
Information Services
Group, Ontario Corporation
prior to May 1994
Larry R. Helms Senior Vice President, General Senior Vice President,
56 Counsel and Secretary, Corporation since 1982;
Corporation; Senior Vice General Counsel,
President, First Merchants Corporation since 1990 and
Bank, N.A.; Director of First Secretary since January 1,
United Bank; Director of 1997; Senior Vice
Pendleton Banking Company President, First Merchants
since January 1979;
Director of First United
Bank since 1991 and
Pendleton Banking Company
since 1992
Ted J. Montgomery Senior Vice President and Senior Vice President and
57 Director, Corporation; Director, Corporation
President, Chief Executive since August 1996;
Officer and Director, The President, Union County
Union County National Bank of National Bank since 1983
Liberty and Director since 1981
James L. Thrash Senior Vice President and Senior Vice President and
47 Chief Financial Officer, Chief Financial Officer of
Corporation; Senior Vice the Corporation since
President, First Merchants 1990; Senior Vice
Bank, N.A. President, First Merchants
since 1990
Page 20
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information required under this item is incorporated by reference to page 4
of the Corporation's 1996 Annual Report to Stockholders under the caption
"Stockholder Information," Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA.
The information required under this item is incorporated by reference to page 1
of the Corporation's 1996 Annual Report to Stockholders - Financial Review under
the caption "Five-Year Summary of Selected Financial Data," Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required under this item is incorporated by reference to page 2
through 7 of the Corporation's 1996 Annual Report to Stockholders - Financial
Review under the caption "Management's Discussion and Analysis," Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required under this item are
incorporated herein by reference to inside cover and pages 8 through 26 of the
Corporation's 1996 Annual Report to Stockholders - Financial Review, Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
In connection with its audits for the two most recent fiscal years ended
December 31, 1996, there have been no disagreements with the Corporation's
independent certified public accountants on any matter of accounting principles
or practices, financial statement disclosure or audit scope or procedure, nor
have there been any changes in accountants.
Page 21
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required under this item relating to directors is incorporated
by reference to the Corporation's 1997 Proxy Statement furnished to its
stockholders in connection with an annual meeting to be held April 8, 1997 (the
"1997 Proxy Statement"), under the caption "Election of Directors," which Proxy
Statement has been filed with the Commission. The information required under
this item relating to executive officers is set forth in Part I, "Supplemental
Information - Executive Officers of the Registrant" of this annual report on
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required under this item is incorporated by reference to the
Corporation's 1997 Proxy Statement, under the captions, "Compensation of
Directors" and "Compensation of Executive Officers," which Proxy Statement has
been filed with the Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required under this item is incorporated by reference to the
Corporation's 1997 Proxy Statement, under the caption, "Security Ownership of
Certain Beneficial Owners and Management," which Proxy Statement has been filed
with the Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required under this item is incorporated by reference to the
Corporation's 1997 Proxy Statement, under the caption "Interest of Management in
Certain Transactions," which Proxy Statement has been filed with the Commission.
Page 22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
Annual Report Form 10-K
Page Page
Number Number
------------- ---------
(a)1. Financial Statements:
Independent auditor's report. . . . . Inside Cover 106
Consolidated balance sheet at
December 31, 1996 and 1995. . . . . 8 114
Consolidated statement of income,
years ended December 31, 1996,
1995 and 1994. . . . . . . . . . . 9 115
Consolidated statement of changes in
stockholders' equity, years ended
December 31, 1996, 1995 and 1994. . 10 116
Consolidated statement of cash
flows, years ended December 31, 1996,
1995 and 1994 . . . . . . . . . . . 11 117
Notes to consolidated financial
statements. . . . . . . . . . . . 12-26 118
(a)2. Financial statement schedules:
All schedules are omitted because
they are not applicable or not
required, or because the required
information is included in the
consolidated financial statements
or related notes.
(a)3. Exhibits:
Form 10-K
Page
Exhibit No: Description of Exhibit: Number
----------- ----------------------- ----------
3.1 First Merchants Corporation
Articles of Incorporation and the Articles
and amendment thereto. . . . . . . . . . . . . . 31
3.2 First Merchants Corporation
Bylaws and amendments thereto. . . . . . . . . . 43
10.1 First Merchants Corporation and First
Merchants Bank, National Association
Management Incentive Plan. . . . . . . . . . . . 57
10.2 First Merchants Bank, National Association
Unfunded Deferred Compensation Plan,
as amended . . . . . . . . . . . . . . . . . . . 62
10.3 First Merchants Corporation 1989 Stock Option
Plan is incorporated by reference to
Registrant's Registration Statement on Form
S-8 (SEC File No. 33-28901) effective on
May 24, 1989
10.4 First Merchants Corporation 1994 Stock Option
Plan is incorporated by reference to
Registrant's Form 10-K for year ended
December 31, 1993
10.5 First Merchants Corporation
Change of Control Agreements . . . . . . . . . . 65
10.6 First Merchants Corporation
Unfunded Deferred Compensation Plan. . . . . . . 76
Page 23
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(CONTINUED)
Form 10-K
Page
Exhibit No: Description of Exhibit: Number
----------- ----------------------- ----------
13 1996 Annual Report to Stockholders (except
for the Pages and information thereof
expressly incorporated by reference in this
Form 10-K, the Annual Report to Stockholders
is provided solely for the information of
the Securities and Exchange Commission and is
not deemed "filed" as part of this Form
10-K). . . . . . . . . . . . . . . . . . . . . . 79-132
21 Subsidiaries of Registrant. . . . . . . . . . . . 28
23 Consent of Independent Auditors . . . . . . . . . 29
27.1 Financial Data Schedule, year ended
December 31, 1996. . . . . . . . . . . . . . . . 133
27.2 Financial Data Schedule, year ended
December 31, 1995, restated . . . . . . . . . . 134
27.3 Financial Data Schedule, year ended
December 31, 1994, restated . . . . . . . . . . 135
99.1 Financial statements and independent
auditor's report for First Merchants
Corporation Employee Stock Purchase Plan . . . . 30
(b) Reports on Form 8-K:
Form 8-K was filed on October 2, 1996 for the acquisition and merger by the
Corporation of all the assets of Randolph County Bancorp. Form 8-K
included various financial statements and exhibits related to this merger.
Page 24
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 10th day of March,
1997.
FIRST MERCHANTS CORPORATION
By /s/ Stefan S. Anderson
----------------------------------------
Stefan S. Anderson, Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
on Form 10-K has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
- ---------------------------- ---------------------------- ------------------
/s/ Stefan S. Anderson Director, March 10, 1997
- ---------------------------- Principal Executive Officer
Stefan S. Anderson
/s/ James L. Thrash Principal Financial and March 10, 1997
- ---------------------------- Principal Accounting Officer
James L. Thrash
/s/ Michael L. Cox Director March 10, 1997
- ----------------------------
Michael L. Cox
Director March 10, 1997
- ----------------------------
Frank A. Bracken
/s/ Thomas B. Clark Director March 10, 1997
- ----------------------------
Thomas B. Clark
/s/ David A. Galliher Director March 10, 1997
- ----------------------------
David A. Galliher
Director March 10, 1997
- ----------------------------
Norman M. Johnson
/s/ Ted J. Montgomery Director March 10, 1997
- ----------------------------
Ted J. Montgomery
Director March 10, 1997
- ----------------------------
George A. Sissel
Page 25
<PAGE>
Signature Capacity Date
- ---------------------------- ---------------------------- ------------------
Director March 10, 1997
- ----------------------------
Robert M. Smitson
/s/ Michael D. Wickersham Director March 10, 1997
- ----------------------------
Michael D. Wickersham
Director March 10, 1997
- ----------------------------
Robert F. Wisehart
/s/ John E. Worthen Director March 10, 1997
- ----------------------------
John E. Worthen
Page 26
<PAGE>
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
(a)3. Exhibits:
Form 10-K
Page
Exhibit No: Description of Exhibit: Number
----------- ----------------------- ---------
3.1 First Merchants Corporation
Articles of Incorporation and the Articles
and amendment thereto. . . . . . . . . . . . . . 31
3.2 First Merchants Corporation
Bylaws and amendments thereto . . . . . . . . . 43
10.1 First Merchants Corporation and First Merchants
Bank, National Association
Management Incentive Plan . . . . . . . . . . . 57
10.2 First Merchants Bank, National Association
Unfunded Deferred Compensation Plan,
as amended . . . . . . . . . . . . . . . . . . 62
10.3 First Merchants Corporation 1989 Stock Option
Plan is incorporated by reference to
Registrant's Registration Statement on Form
S-8 (SEC File No. 33-28901) effective on
May 24, 1989.
10.4 First Merchants Corporation 1994 Stock Option
Plan is incorporated by reference to
Registrant's Form 10-K for year ended
December 31, 1993.
10.5 First Merchants Corporation
Change of Control Agreements. . . . . . . . . . 65
10.6 First Merchants Corporation
Unfunded Deferred Compensation Plan . . . . . . 76
13 1996 Annual Report to Stockholders (except
for the Pages and information thereof
expressly incorporated by reference in this
Form 10-K, the Annual Report to Stockholders
is provided solely for the information of
the Securities and Exchange Commission and is
not deemed "filed" as part of this Form
10-K). . . . . . . . . . . . . . . . . . . . . . 79 - 132
21 Subsidiaries of Registrant. . . . . . . . . . . . 28
23 Consent of Independent Auditors . . . . . . . . . 29
27.1 Financial Data Schedule, year ended
December 31, 1996. . . . . . . . . . . . . . . . 133
27.2 Financial Data Schedule, year ended
December 31,1995, restated . . . . . . . . . . . 134
27.3 Financial Data Schedule, year ended
December 31, 1994, restated . . . . . . . . . . 135
99.1 Financial statements and independent
auditor's report for First Merchants
Corporation Employee Stock Purchase Plan . . . . 30
Page 27
<PAGE>
ARTICLES OF INCORPORATION
OF
FIRST MERCHANTS CORPORATION
Following are the Articles of Incorporation, as amended, 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
The name of the Corporation is First Merchants Corporation.
ARTICLE II
PURPOSES
The purposes for which the Corporation is formed are:
SECTION 1. To acquire control of The Merchants National Bank of Muncie and
to operate as a bank holding company.
SECTION 2. GENERAL POWERS. To possess, exercise, and enjoy all rights,
powers and privileges conferred upon bank holding companies by the Bank Holding
Company Act of 1956 as amended and as hereafter amended or supplemented, and all
other rights and powers authorized by the laws of the State of Indiana, and the
laws of the United States of America applicable to bank holding companies and
the regulations of the Board of Governors of the Federal Reserve System.
SECTION 3. TO DEAL IN REAL PROPERTY. Subject to the limitations of
Section 2 above, to acquire by purchase, exchange, lease or otherwise, and to
hold, own, use, construct, improve, equip, manage, occupy, mortgage, sell,
lease, convey, exchange or otherwise dispose of, alone or in conjunction with
others, real estate and leaseholds of every kind, character and description
whatsoever and wheresoever situated, and any other interests therein, including,
but without limiting the generality thereof, buildings, factories, warehouses,
offices and structures of all kinds.
SECTION 4. CAPACITY TO ACT. Subject to the limitations of Section 2
above, to have the capacity to act possessed by natural persons and to perform
such acts as are necessary and advisable to accomplish the purposes, activities
and business of the Corporation.
SECTION 5. TO ACT AS AGENT. Subject to the limitations of Section 2
above, to act as agent or representative for any firm, association, corporation,
partnership, government or person, public or private, with respect to any
activity or business of the Corporation.
<PAGE>
SECTION 6. TO MAKE CONTRACTS AND GUARANTEES. Subject to the
limitations of Section 2 above, to make, execute and perform, or cancel and
rescind, contracts of every kind and description, including guarantees and
contracts of suretyship, with any firm, association, corporation, partnership,
government or person, public or private.
SECTION 7. TO BORROW FUNDS. Subject to the limitations of Section 2
above, to borrow moneys for any activity or business of the Corporation and,
from time to time, without limit as to amount, to draw, make, accept, endorse,
execute and issue promissory notes, drafts, bills of exchange, warrants, bonds,
debentures, notes, trust receipts, and other negotiable or non-negotiable
instruments and evidences of indebtedness, and to secure the payment thereof,
and the interest thereon, by mortgage, pledge, conveyance, or assignment in
trust of all or any part of the assets of the Corporation, real, personal or
mixed, including contract rights, whether at the time owned or thereafter
acquired, and to sell, exchange or otherwise dispose of such securities or other
obligations of the Corporation.
SECTION 8. TO DEAL IN ITS OWN SECURITIES. Subject to the limitations
of Section 2 above, to purchase, take, receive or otherwise acquire, and to
hold, own, pledge, transfer or otherwise dispose of shares of its own capital
stock and other securities. Purchases of the Corporation's own shares, whether
direct or indirect, may be made without shareholder approval only to the extent
of unreserved and unrestricted earned surplus available therefor.
ARTICLE III
PERIOD OF EXISTENCE
The period during which the Corporation shall continue is perpetual.
ARTICLE IV
RESIDENT AGENT AND PRINCIPAL OFFICE
SECTION 1. RESIDENT AGENT. The name and address of the Corporation's
Resident Agent for service of process is:
Rodney A. Medler
200 East Jackson Street
Muncie, IN 47305
- 2 -
<PAGE>
SECTION 2. PRINCIPAL OFFICE. The post office address of the principal
office of the Corporation is:
200 East Jackson Street
Muncie, IN 47305
ARTICLE V
AUTHORIZED SHARES
SECTION 1. NUMBER OF SHARES. The total number of shares of common
stock which the Corporation is to have authority to issue is 20,000,000, all
with no par value. The total number of shares of preferred stock the
Corporation is to have authority to issue is 500,000, all with no par value.
SECTION 2. TERMS OF SHARES. The authorized shares of "Common Stock"
shall be equal to every other share of Common Stock and shall participate
equally with other shares of Common Stock in all earnings and profits of the
Corporation and on distribution of assets, either on dissolution, liquidation or
otherwise. The authorized shares of "Preferred Stock" shall be equal to every
other share of Preferred Stock and shall participate equally with other shares
of Preferred Stock. The terms of the Preferred Stock and its relative rights,
preferences, limitations or restrictions shall be established by the Board of
Directors prior to issuance of any Preferred Stock.
SECTION 3. VOTING RIGHTS. Each holder of Common Stock shall have the
right to vote on all matters presented to shareholders and shall be entitled on
all matters including elections of Directors to one vote for each share of
Common Stock registered in his/her name on the books of the Corporation. The
voting rights of the Preferred Stock, if any, shall be determined by the Board
of Directors prior to issuance of the Preferred Stock.
ARTICLE VI
REQUIREMENTS PRIOR TO DOING BUSINESS
The Corporation will not commence business until consideration of the value
of at least One Thousand Dollars ($1,000.00) has been received for the issuance
of shares.
ARTICLE VII
DIRECTORS
SECTION 1. NUMBER. The number of Directors of the Corporation shall
not be less than twelve (12) nor more than twenty-one (21), as may be specified
from time to time by the Bylaws. If and whenever the Bylaws do not contain a
provision specifying the number of Directors, the number shall be sixteen (16).
The Directors shall be classified, with respect to the time for which
- 3 -
<PAGE>
they severally hold office, into three (3) classes as nearly equal in number as
possible, as shall be specified in the Bylaws, one class to be originally
elected for a term expiring at the annual meeting of shareholders to be held in
1986, another class to be originally elected for a term expiring at the annual
meeting of shareholders to be held in 1987, and another class to be originally
elected for a term expiring at the annual meeting of shareholders to be held in
1988, with each Director to hold office until his successor is elected and
qualified. At each annual meeting of shareholders, the successor of each
Director whose term expires at that meeting shall be elected to hold office for
a term expiring at the annual meeting of shareholders held in the third year
following the year of his election, or until his successor is elected and
qualified.
SECTION 2. NAMES AND POST OFFICE ADDRESSES OF THE DIRECTORS. The names
and post office addresses of the initial Board of Directors of the Corporation
are:
NAME NUMBER AND STREET OR BUILDING CITY STATE ZIP CODE
Stefan S. Anderson 2705 W. Twickingham Drive Muncie IN 47304
Thomas F. Bluemle 1900 N. Brentwood Lane Muncie IN 47304
Frank A. Bracken 1011 E. Parkway Drive Muncie IN 47304
Clell W. Douglass 305 Normandy Drive Muncie IN 47304
David A. Galliher 2500 W. Berwyn Road Muncie IN 47304
William P. Givens 1209 W. Beechwood Avenue Muncie IN 47303
John W. Hartmeyer 818 W. Riverside Avenue Muncie IN 47303
David W. Howell Rural Route #2, Box 174 Middletown IN 47358
Betty J. Kendall Rural Route #14, Box 425 Muncie IN 47302
Don E. Marsh 1250 Warwick Road Muncie IN 47304
Robert H. Mohlman 3405 N. Vienna Woods Drive Muncie IN 47304
Robert R. Park Rural Route #2, Box 126 Gaston IN 47342
Peter L. Roesner 2207 W. Wiltshire Road Muncie IN 47304
Hamer D. Shafer 3500 W. Gatewood Lane Muncie IN 47304
Robert M. Smitson 2601 W. Chelsea Drive Muncie IN 47304
Reed D. Voran 2308 W. Wiltshire Road Muncie IN 47304
SECTION 3. QUALIFICATIONS OF DIRECTORS. Directors need not be
shareholders of the Corporation.
- 4 -
<PAGE>
ARTICLE VIII
INCORPORATOR(S)
The name and post office address of the incorporator of the Corporation is:
Stefan S. Anderson
200 East Jackson Street
Muncie, IN 47305
ARTICLE IX
PROVISIONS FOR REGULATION OF BUSINESS
AND CONDUCT OF AFFAIRS OF CORPORATION
SECTION 1. MEETINGS OF SHAREHOLDERS. Meetings of shareholders of the
Corporation shall be held at such place, within or without the State of Indiana,
as may be specified in the notices or waivers of notice of such meetings.
SECTION 2. MEETINGS OF DIRECTORS. Meetings of Directors of the
Corporation shall be held at such place, within or without the State of Indiana,
as may be specified in the notices or waivers of notice of such meetings. A
member of the Board of Directors or of a committee designated by the Board may
participate in a meeting of the Board or committee by means of a conference
telephone or similar communications equipment by which all persons participating
in the meeting can communicate with each other, and participation by these means
constitutes presence in person at the meeting.
SECTION 3. CONSIDERATION FOR SHARES. Shares of stock of the
Corporation 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.
SECTION 4. BYLAWS OF THE CORPORATION. The Board of Directors, unless
otherwise provided in the Bylaws or in these Articles of Incorporation, may by a
majority vote of the actual number of Directors elected and qualified from time
to time make, alter, amend or repeal the Bylaws.
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,
each of which, to the extent provided in the resolution, the Articles of
Incorporation, or the Bylaws, may exercise all of the authority of the Board of
Directors of the Corporation, including, but not limited to, the authority to
issue and sell or approve any contract to issue and sell, securities or shares
of the Corporation or designate the terms of a series of a class of securities
or shares of the Corporation. The terms which may be affixed by each such
committee include, but are not limited to, the price, dividend rate, and
provisions of
- 5 -
<PAGE>
redemption, a sinking fund, conversion, voting or preferential rights or other
features of securities or class or series of a class of shares. Each such
committee may have full power to adopt a final resolution which sets forth those
terms and to authorize a statement of such terms to be filed with the Secretary
of State. However, no such committee has 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. No member of any such
committee 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 such committee
and its method of procedure shall be determined by the Board of Directors. A
member of the Board of Directors shall not be liable for any action taken by any
such committee if he is not a member of that committee and has acted in good
faith and in a manner he reasonably believes is in the best interest of the
Corporation.
SECTION 5. CONSENT ACTION BY SHAREHOLDERS. Any action required by
statute to be taken at a meeting of the shareholders, or any action which may be
taken at a meeting of the shareholders, may be taken without a meeting if, prior
to such action, a consent in writing, setting forth the action so taken, shall
be signed by all of the shareholders entitled to vote with respect to the
subject matter thereof, and such written consent is filed with the minutes of
the proceedings of the shareholders.
SECTION 6. CONSENT ACTION BY DIRECTORS. Any action required or
permitted to be taken at any meeting of the Board of Directors or 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 7. INTEREST OF DIRECTORS IN CONTRACTS. Any contract or other
transaction between the Corporation or any corporation in which this Corporation
owns a majority of the capital stock shall be valid and binding, notwithstanding
that the Directors or officers of this Corporation are identical or that some or
all of the Directors or officers, or both, are also directors or officers of
such other corporation.
Any contract or other transaction between the Corporation and one or more
of its Directors or members or employees, or between the Corporation and any
firm of which one or more of its Directors are members or employees or in which
they are interested, or between the Corporation and any corporation or
association of which one or more of its Directors are stockholders, members,
directors, officers, or employees, or in which they are interested, shall be
valid for all purposes notwithstanding the presence of such Director or
Directors at the meeting of the Board of Directors of the Corporation which acts
upon, or in reference to, such contract or transaction and notwithstanding his
or their participation in such action, if the fact of such interest shall be
disclosed or known to the Board of Directors and the Board of Directors shall
authorize, approve and ratify such contract or transaction by a vote of a
majority of the Directors present, such interested Director
- 6 -
<PAGE>
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 8. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
AGENTS. Every person who is or was a Director, officer, employee or agent of
this Corporation or of any other corporation for which he is or was serving in
any capacity at the request of this Corporation shall be indemnified by this
Corporation against any and all liability and expense that may be incurred by
him in connection with or resulting from or arising out of any claim, action,
suit or proceeding, provided that such person is wholly successful with respect
thereto or acted in good faith in what he reasonably believed to be in or not
opposed to the best interest of this Corporation or such other corporation, as
the case may be, and, in addition, in any criminal action or proceeding in which
he had no reasonable cause to believe that his conduct was unlawful. As used
herein, "claim, action, suit or proceeding" shall include any claim, action,
suit or proceeding (whether brought by or in the right of this Corporation or
such other corporation or otherwise), civil, criminal, administrative or
investigative, whether actual or threatened or in connection with an appeal
relating thereto, in which a Director, officer, employee or agent of this
Corporation may become involved, as a party or otherwise,
(i) by reason of his being or having been a Director, officer,
employee, or agent of this Corporation or such other corporation or arising
out of his status as such or
(ii) by reason of any past or future action taken or not taken by him
in any such capacity, whether or not he continues to be such at the time
such liability or expense is incurred.
The terms "liability" and "expense" shall include, but shall not be limited to,
attorneys' fees and disbursements, amounts of judgments, fines or penalties, and
amounts paid in settlement by or on behalf of a Director, officer, employee, or
agent, but shall not in any event include any liability or expenses on account
of profits realized by him in the purchase or sale of securities of the
Corporation in violation of the law. The termination of any claim, action,
suit or proceeding, by judgment, settlement (whether with or without court
approval) or conviction or upon a plea of guilty or of NOLO CONTENDERE, or its
equivalent, shall not create a presumption that a Director, officer, employee,
or agent did not meet the standards of conduct set forth in this paragraph.
Any such Director, officer, employee, or agent who has been wholly
successful with respect to any such claim, action, suit or proceeding shall be
entitled to indemnification as a matter of right. Except as provided in the
preceding sentence, any indemnification hereunder shall be made only if (i) the
Board of Directors acting by a quorum consisting of Directors who are not
parties to or who have been wholly successful with respect to such claim,
action, suit or proceeding shall find that the Director, officer, employee, or
agent has met the standards of conduct set forth in the preceding
- 7 -
<PAGE>
paragraph; or (ii) independent legal counsel shall deliver to the Corporation
their written opinion that such Director, officer, employee, or agent has met
such standards of conduct.
If several claims, issues or matters of action are involved, any such
person may be entitled to indemnification as to some matters even though he is
not entitled as to other matters.
The Corporation may advance expenses to or, where appropriate, may at its
expense undertake the defense of any such Director, officer, employee, or agent
upon receipt of an undertaking by or on behalf of such person to repay such
expenses if it should ultimately be determined that he is not entitled to
indemnification hereunder.
The provisions of this Section shall be applicable to claims, actions,
suits or proceedings made or commenced after the adoption hereof, whether
arising from acts or omissions to act during, before or after the adoption
hereof.
The rights of indemnification provided hereunder shall be in addition to
any rights to which any person concerned may otherwise be entitled by contract
or as a matter of law and shall inure to the benefit of the heirs, executors and
administrators of any such person.
The Corporation may purchase and maintain insurance on behalf of any person
who is or was a Director, officer, employee or agent of the Corporation or is or
was serving at the request of the Corporation as a director, officer, employee
or agent of another corporation against any liability asserted against him and
incurred by him in any capacity or arising out of his status as such, whether or
not the Corporation would have the power to indemnify him against such liability
under the provisions of this Section or otherwise.
SECTION 9. DISTRIBUTIONS OUT OF CAPITAL SURPLUS. The Board of
Directors of the Corporation may from time to time distribute to its
shareholders out of the capital surplus of the Corporation a portion of its
assets, in cash or property, without the assent or vote of the shareholders,
provided that with respect to such a distribution the requirements of the Act
other than shareholder approval are satisfied.
SECTION 10. POWERS OF DIRECTORS. In addition to the powers and the
authority granted by these Articles or by statute expressly conferred, the Board
of Directors of the Corporation is hereby authorized to exercise all powers and
to do all acts and things as may be exercised or done under the laws of the
State of Indiana by a corporation organized and existing under the provisions of
the Act and not specifically prohibited or limited by these Articles.
SECTION 11. REMOVAL OF DIRECTORS. Any and 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
- 8 -
<PAGE>
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.
SECTION 12. FAIR PRICE, FORM OF CONSIDERATION AND PROCEDURAL SAFEGUARDS
FOR CERTAIN BUSINESS COMBINATIONS.
(A) The affirmative vote of the holders of not less than three-fourths
(3/4) of the Voting Shares (as hereinafter defined) of the Corporation shall be
required for the authorization or adoption, except as provided in subsection (D)
of this Section, of the following transactions:
1. Any merger or consolidation of the Corporation or its subsidiary or
subsidiaries (as hereinafter defined) with or into either of the
following:
(a) 10% Shareholders (as hereinafter defined); or
(b) Any other corporation (whether or not itself a 10% Shareholder)
which, after such merger or consolidation, would be an Affiliate
(as hereinafter defined) of a 10% Shareholder.
2. Any sale, lease, exchange, transfer or other disposition (including,
without limitation, the granting of a mortgage or other security
interest) to or with any 10% Shareholder of any material part of the
assets of the Corporation or any of its subsidiaries; and
3. A liquidation or dissolution of the Corporation or any material
subsidiary thereof or adoption of any plan with respect thereto.
4. Any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its subsidiaries or any
other transaction (whether or not with or into or otherwise involving
a 10% Shareholder) which has the effect, directly or indirectly, of
increasing the proportionate share of the outstanding shares of any
class of equity or convertible securities of the Corporation or any
subsidiary which is directly or indirectly owned by any 10%
Shareholder; and
5. Any agreement, contract or other arrangement providing for any one or
more of the actions specified in the foregoing clauses (A)1. through
(A)4.
(B) Prior to the approval of any of the transactions referred to in
subsection (A) of this section ("Business Combination"), the Board of
Directors of the Corporation shall make an evaluation of all relevant
factors and issues arising out of or in connection with any such Business
Combination and shall report to the shareholders the conclusion which the
Board of Directors reaches from such evaluation. Relevant factors and
issues shall include
- 9 -
<PAGE>
consideration of the impact which any such Business Combination will have on the
community in which the Corporation or its subsidiaries conducts business, the
employees of the Corporation or any of its subsidiaries, and the suppliers and
customers of the Corporation and its subsidiaries, and shall also include any
and all other factors which the Board of Directors in its discretion deems
relevant.
(C) The following definitions shall apply when used in this Section:
1. "10% Shareholder" shall mean, in respect of any Business
Combination, any person (other than the Corporation) who or
which, as of the record date for the determination of
shareholders entitled to notice of and to vote on such Business
Combination or immediately prior to the consummation of any such
Business Combination:
(a) Is the beneficial owner (as determined in accordance with
Rule 13d-3 promulgated by the Securities and Exchange
Commission) ("Beneficial Owner"), directly or indirectly, of
not less than ten percent (10%) of the Voting Shares; or
(b) Is an Affiliate (as hereinafter defined) of the Corporation
and at any time within two years prior thereto was the
Beneficial Owner, directly or indirectly, of not less than
ten percent (10%) of the then outstanding Voting Shares; or
(c) Any individual, corporation, partnership or other person or
entity which, together with any of its Affiliates (as
hereinafter defined), beneficially owns in the aggregate
more than ten percent (10%) of the Voting Shares of the
Corporation.
2. "Voting Shares" includes:
(a) Any securities of the Corporation which are entitled to vote
on any matter referred to in this Section;
(b) Any securities, including but not limited to, preferred
stock, bonds, debentures, or options, which can be converted
into voting securities at the time of the vote referred to
in this Section; and
(c) Security agreements of any nature for which voting
securities are pledged as collateral.
3. "Affiliate" shall include all persons who would be defined as
affiliates under Rule 12b-2 under the Securities Exchange Act of
1934.
- 10 -
<PAGE>
4. "Subsidiary" means any corporation of which a majority of any
class of equity securities (as defined in Rule 3a 11-1 of the
general rules and regulations under the Securities Exchange Act
of 1934) are owned, directly or indirectly, by the Corporation;
provided, however, that for the purposes of the definition of a
10% Shareholder set forth above, the term "Subsidiary" shall mean
only a corporation of which a majority of each class of equity
security is owned, directly or indirectly, by the Corporation.
5. "Fair Market Value" means:
(1) In the case of stock, in the absence of any
determination price as established on a national, regional,
or local exchange or over-the-counter market, or in the
absence of any market-maker dealing in the stock on a
regular basis, the fair market value of such stock on the
date in question as determined by the Board in good faith;
and
(2) In the case of property other than cash or stock,
the fair market value of such property on the date in
question as determined by the Board in good faith.
(D) The additional voting requirement set forth in subsection (A) above
shall not be applicable, and any such Business Combination shall require the
affirmative vote of two-thirds (2/3) of the Voting Shares, if one of the
following occurs:
1. The Business Combination shall have been approved by two-thirds
(2/3) of the Directors of the Corporation; or
2. All of the following conditions shall have been met:
(a) The aggregate amount of the cash and the Fair Market Value
as of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by holders of
Common Stock in such Business Combination shall be at least equal to
the greater of (i) and (ii), where (i) is the highest per share price
(including any brokerage commissions, transfer taxes and soliciting
dealers' fees) paid by the 10% Shareholder or any other party for any
shares of Common Stock acquired within the two-year period immediately
prior to the first public announcement of the proposal of the Business
Combination (the "Announcement Date") or, if higher, the per share
price paid in the transaction in which the 10% Shareholder became a
10% Shareholder, and (ii) is the per share book value of the
Corporation reported at the end of the fiscal quarter immediately
preceding the later of any public announcement of any proposed
Business
- 11 -
<PAGE>
Combination or the meeting date on which the shareholders are to consider the
proposed Business Combination;
(b) The consideration to be received by holders of a particular
class of outstanding Voting Stock (including Common Stock) shall be in
cash or in the same form as the 10% Shareholder has previously paid
for shares of such class of Voting Stock. If the 10% Shareholder has
paid for shares of any class of Voting Stock with varying forms of
consideration, the form of consideration for such class of Voting
Stock shall be either cash or the form used to acquire the largest
number of shares of such class of Voting Stock previously acquired by
it;
(c) A proxy or information statement describing the proposed
merger or consolidation and complying with the requirements of the
Securities Exchange Act of 1934 and the rules and regulations
thereunder (or any subsequent provisions replacing such Act, rules or
regulations) shall be mailed to shareholders of the Corporation at
least thirty (30) days prior to the meeting of shareholders called to
consider the proposed Business Combination or, if no meeting, thirty
(30) days prior to the consummation of such Business Combination
(whether or not such proxy or information statement is required to be
mailed pursuant to such Act or subsequent provisions).
ARTICLE X
AMENDMENTS
These Articles of Incorporation may be amended at any time, subject to the
provisions of this Article, by the affirmative vote of a majority of the
outstanding shares of stock of the Corporation entitled to vote on such
amendment. No amendment shall be adopted which shall repeal, modify, amend,
alter or diminish in any way the provisions of Article V, Section 1 of Article
VII, Section 4 of Article IX, Section 11 of Article IX, Section 12 of Article
IX, or this Article X without the affirmative vote of three-fourths (3/4) of the
outstanding shares of stock of the Corporation entitled to vote on such
amendment.
The Bylaws of the Corporation may be amended as provided herein and therein
except that no amendment shall in any way repeal, modify, amend, alter or
diminish the provisions of this Article or the other provisions of the Articles
of Incorporation referenced in this Article.
- 12 -
<PAGE>
EXHIBIT 3.2
BYLAWS OF
FIRST MERCHANTS CORPORATION
Following are the Bylaws, as amended, 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
SECTION 1. NAME. The name of the Corporation is First Merchants
Corporation.
SECTION 2. PRINCIPAL OFFICE AND RESIDENT AGENT. The post office
address of the principal office of the Corporation is 200 East Jackson Street,
Muncie, Indiana 47305, and the name of its Resident Agent in charge of such
office is Rodney A. Medler.
SECTION 3. 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
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.
<PAGE>
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. CERTIFICATE FOR SHARES. Each 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, with the seal of the Corporation thereto affixed, 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 certificates 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.
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 only on the books of the Corporation upon
surrender of the certificate or certificates
-2-
<PAGE>
representing the same, properly endorsed by the registered holder or by his duly
authorized attorney or accompanied by proper evidence of succession, assignment
or authority to transfer.
SECTION 8. CANCELLATION. Every certificate surrendered to the
Corporation for exchange or transfer shall be canceled, and no new certificate
or certificates shall be issued in exchange for any existing certificate until
such existing certificate shall have been so canceled, except in cases provided
for in Section 10 of this Article III.
SECTION 9. TRANSFER AGENT AND REGISTRAR. The Board of Directors may
appoint a transfer agent and a registrar for each class of capital stock of the
Corporation and may require all certificates representing such shares to bear
the signature of such transfer agent and registrar. Shareholders shall be
responsible for notifying the Corporation or transfer agent and registrar for
the class of stock held by such shareholder in writing of any changes in their
addresses from time to time, and failure so to do shall relieve the Corporation,
its shareholders, Directors, officers, transfer agent and registrar of liability
for failure to direct notices, dividends, or other documents or property to an
address other than the one appearing upon the records of the transfer agent and
registrar of the Corporation.
SECTION 10. LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation may
cause a new certificate or certificates to be issued in place of any certificate
or certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Corporation
may, in its discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificate or certificates,
or his legal representative, to give the Corporation a bond in such sum and in
such form as it may direct to indemnify against any claim that may be made
against the Corporation with respect to the certificates alleged to have been
lost, stolen or destroyed or the issuance of such new certificate. The
Corporation, in its discretion, may authorize the issuance of such new
certificates without any bond when in its judgment it is proper to do so.
SECTION 11. REGISTERED SHAREHOLDERS. The Corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of such shares to receive dividends, to vote as such owner, to hold liable
for calls and assessments, and to treat as owner in all other respects, and
shall not be bound to recognize any equitable or other claims to or interest in
such share or shares on the part of any other person, whether or not it shall
have express or other notice thereof, except as otherwise provided by the laws
of Indiana.
SECTION 12. OPTIONS TO OFFICERS AND EMPLOYEES. The issuance, including
the consideration, of rights or options to Directors, officers or employees of
the Corporation, and not to the shareholders generally, to purchase from the
Corporation shares of its capital stock shall be approved by the affirmative
vote of the holders of a majority of the shares entitled to vote thereon or
shall be authorized by and consistent with a plan approved by such a vote of the
shareholders.
-3-
<PAGE>
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 on the third Tuesday in April of
each year, if such day is not a holiday, and if a holiday, then on the first
following day that is not a holiday, or in lieu of such day may be held on such
other day as the Board of Directors may set by resolution, but not later than
the end of the fifth month following the close of the fiscal year of the
Corporation. Failure to hold the annual meeting at the designated time shall
not work any forfeiture or a dissolution of the Corporation, and shall not
affect otherwise valid corporate acts.
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
-4-
<PAGE>
on the records maintained by the Corporation or its transfer agent for the class
of stock held by such shareholder.
SECTION 6. VOTING AT MEETINGS.
(a) QUORUM. The holders of record of a majority of the issued and
outstanding stock of the Corporation entitled to vote at such meeting, present
in person or by proxy, shall constitute a quorum at all meetings of shareholders
for the transaction of business, except where otherwise provided by law, the
Articles of Incorporation or these Bylaws. In the absence of a quorum, any
officer entitled to preside at, or act as secretary of, such meeting shall have
the power to adjourn the meeting from time to time until a quorum shall be
constituted. At any such adjourned meeting at which a quorum shall be present,
any business may be transacted which might have been transacted at the original
meeting, but only those shareholders entitled to vote at the original meeting
shall be entitled to vote at any adjournment or adjournments thereof unless a
new record date is fixed by the Board of Directors for the adjourned meeting.
(b) VOTING RIGHTS. Except as otherwise provided by law or by the
provisions of the Articles of Incorporation, every shareholder shall have the
right at every shareholders' meeting to one vote for each share of stock having
voting power, registered in his name on the books of the Corporation on the date
for the determination of shareholders entitled to vote, on all matters coming
before the meeting including the election of directors. At any meeting of
shareholders, every shareholder having the right to vote shall be entitled to
vote in person, or by proxy executed in writing by the shareholder or a duly
authorized attorney in fact and bearing a date not more than eleven (11) months
prior to its execution, unless a longer time is expressly provided therein.
(c) REQUIRED VOTE. When a quorum is present at any meeting, the vote of
the holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which, by express provision of the Act or of the
Articles of Incorporation or by these Bylaws, a greater vote is required, in
which case such express provision shall govern and control the decision of such
question.
SECTION 7. VOTING LIST. The Corporation or its transfer agent shall
make, at least five (5) days before each election of directors, a complete list
of the shareholders entitled by the Articles of Incorporation, as now or
hereafter amended, to vote at such election, arranged in alphabetical order,
with the address and number of shares so entitled to vote held by each, which
list shall be on file at the principal office of the Corporation and subject to
inspection by any shareholder. Such list shall be produced and kept open at the
time and place of election and subject to the inspection of any shareholder
during the holding of such election. The original stock register or transfer
book, or a duplicate thereof kept in the State of Indiana, shall be the only
evidence as to who are the shareholders entitled to examine such list or the
stock ledger or transfer book or to vote at any meeting of the shareholders.
SECTION 8. FIXING OF RECORD DATE TO DETERMINE SHAREHOLDERS ENTITLED TO
VOTE. The Board of Directors may prescribe a period not exceeding fifty (50)
days prior to meetings of the
-5-
<PAGE>
shareholders, during which no transfer of stock on the books of the Corporation
may be made; or, in lieu of prohibiting the transfer of stock may fix a day and
hour not more than fifty (50) days prior to the holding of any meeting of
shareholders as the time as of which shareholders entitled to notice of, and to
vote at, such meeting shall be determined, and all persons who are holders of
record of voting stock at such time, and no others, shall be entitled to notice
of, and to vote at, such meeting. In the absence of such a determination, such
date shall be ten (10) days prior to the date of such meeting.
SECTION 9. NOMINATIONS FOR DIRECTOR. Nominations for election to the
Board of Directors may be made by the Board of Directors or by a shareholder of
any outstanding class of capital stock of the Corporation entitled to vote for
the election of directors. Nominations, other than those made by or on behalf
of the existing management of the Corporation, shall be made in writing and
shall be delivered or mailed to the President of the Corporation not less than
ten (10) days nor more than fifty (50) days prior to any meeting of shareholders
called for the election of Directors. Such notification shall contain the
following information to the extent known to the notifying shareholder: (a) the
name and address of each proposed nominee; (b) the principal occupation of each
proposed nominee; (c) the total number of shares of capital stock of the
Corporation that will be voted for each proposed nominee; (d) the name and
residence address of the notifying shareholder; and (e) the number of shares of
capital stock of the Corporation owned by the notifying shareholder.
Nominations not made in accordance herewith may, in his discretion, be
disregarded by the chairman of the meeting, and upon his instructions, the vote
tellers may disregard all votes cast for each such nominee.
ARTICLE V
BOARD OF DIRECTORS
SECTION 1. ELECTION, NUMBER AND TERM OF OFFICE. The number of
Directors of the Corporation to be elected by the holders of the shares of stock
entitled by the Articles of Incorporation to elect Directors shall be twelve
(12) unless 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; however, for current Directors who served as a
director of the Corporation's subsidiary, The Merchants National Bank of Muncie
(now known as First Merchants Bank, N.A.) on or before January 1, 1971, such age
shall be seventy-two (72) years. The term of a Director shall expire as of
-6-
<PAGE>
the annual meeting following which the Director is no longer eligible to serve
under the provisions of this paragraph, even if fewer than three (3) years have
elapsed since the commencement of the Director's term.
Except in the case of earlier resignation, removal or death, all Directors
shall hold office until their respective successors are chosen and qualified.
The provisions of this Section of the Bylaws may not be changed or amended
except by a two-thirds (2/3) vote of the Board of Directors.
SECTION 2. VACANCIES. Any vacancy occurring in the Board of Directors
caused by resignation, death or other incapacity, or an increase in the number
of Directors, shall be filled by a majority vote of the remaining members of the
Board of Directors, until the next annual meeting of the shareholders, or at the
discretion of the Board of Directors, such vacancy may be filled by a vote of
the shareholders at a special meeting called for that purpose.
SECTION 3. ANNUAL MEETING OF DIRECTORS. The Board of Directors shall
meet each year immediately after the annual meeting of the shareholders, at the
place where such meeting of the shareholders has been held either within or
without the State of Indiana, for the purpose of organization, election of
officers, and consideration of any other business that may properly come before
the meeting. No notice of any kind to either old or new members of the Board of
Directors for such annual meeting shall be necessary.
SECTION 4. REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held at such times and places, either within or without the
State of Indiana, as may be fixed by the Directors. Such regular meetings of
the Board of Directors may be held without notice or upon such notice as may be
fixed by the Directors.
SECTION 5. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by the Chairman of the Board, the President, or by not
less than a majority of the members of the Board of Directors. Notice of the
time and place, either within or without the State of Indiana, of a special
meeting shall be served upon or telephoned to each Director at least twenty-four
(24) hours, or mailed, telegraphed or cabled to each Director at his usual place
of business or residence at least forty-eight (48) hours, prior to the time of
the meeting. Directors, in lieu of such notice, may sign a written waiver of
notice either before the time of the meeting, at the meeting or after the
meeting. Attendance by a Director in person at any special meeting shall
constitute a waiver of notice.
SECTION 6. QUORUM. A majority of the actual number of Directors
elected and qualified, from time to time, shall be necessary to constitute a
quorum for the transaction of any business except the filling of vacancies, and
the act of a majority of the Directors present at the meeting, at which a quorum
is present, shall be the act of the Board of Directors, unless the act of a
greater number is required by the Act, by the Articles of Incorporation, or by
these Bylaws. A Director, who is present at a meeting of the Board of
Directors, at which action on any corporate matter is taken, shall be
conclusively presumed to have assented to the action taken, unless (a) his
dissent shall be
-7-
<PAGE>
affirmatively stated by him at and before the adjournment of such meeting (in
which event the fact of such dissent shall be entered by the secretary of the
meeting in the minutes of the meeting), or (b) he shall forward such dissent by
registered mail to the Secretary of the Corporation immediately after the
adjournment of the meeting. The right of dissent provided for by either clause
(a) or cause (b) of the immediately preceding sentence shall not be available,
in respect of any matter acted upon at any meeting, to a Director who voted at
the meeting in favor of such matter and did not change his vote prior to the
time that the result of the vote on such matter was announced by the chairman of
such meeting.
A member of the Board of Directors may participate in a meeting of the
Board by means of a conference telephone or similar communications equipment by
which all Directors participating in the meeting can communicate with each
other, and participation by these means constitutes presence in person at the
meeting.
SECTION 7. CONSENT ACTION BY DIRECTORS. Any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if prior to such action a
written consent to such action is signed by all members of the Board of
Directors or such committee, as the case may be, and such written consent is
filed with the minutes of proceedings of the Board of Directors or committee.
SECTION 8. REMOVAL. Any or all members of the Board of Directors may
be removed, with or without cause, at a meeting of the shareholders called
expressly for that purpose by the affirmative vote of the holders of not less
than two-thirds (2/3) of the outstanding shares of capital stock then entitled
to vote on the election of Directors, except that if the Board of Directors, by
an affirmative vote of at least two-thirds (2/3) of the entire Board of
Directors, recommends removal of a Director to the shareholders, such removal
may be effected by the affirmative vote of the holders of not less than a
majority of the outstanding shares of capital stock then entitled to vote on the
election of Directors at a meeting of shareholders called expressly for that
purpose.
The provisions in this Section of the Bylaws may not be changed or amended
except by a two-thirds (2/3) vote of the Board of Directors.
SECTION 9. DIVIDENDS. The Board of Directors shall have power, subject
to any restrictions contained in the Act or in the Articles of Incorporation and
out of funds legally available therefor, to declare and pay dividends upon the
outstanding capital stock of the Corporation as and when they deem expedient.
Before declaring any dividend, there may be set aside out of any funds of the
Corporation available for dividends such sum or sums as the Board of Directors
from time to time in their absolute discretion deem proper for working capital,
or as a reserve or reserves to meet contingencies or for such other purposes as
the Board of Directors may determine, and the Board of Directors may in their
absolute discretion modify or abolish any such reserve in the manner in which it
was created.
SECTION 10. FIXING OF RECORD DATE TO DETERMINE SHAREHOLDERS ENTITLED TO
RECEIVE CORPORATE BENEFITS. The Board of Directors may fix a day and hour not
exceeding fifty (50) days
-8-
<PAGE>
preceding the date fixed for payment of any dividend or for the delivery of
evidence of rights, or for the distribution of other corporate benefits, or for
a determination of shareholders for any other purpose, as a record time for the
determination of the shareholders entitled to receive any such dividend, rights
or distribution, and in such case only shareholders of record at the time so
fixed shall be entitled to receive such dividend, rights or distribution. If no
record date is fixed for the determination of shareholders entitled to receive
payment of a dividend, the end of the day on which the resolution of the Board
of Directors declaring such dividend is adopted shall be the record date for
such determination.
SECTION 11. INTEREST OF DIRECTORS IN CONTRACTS. Any contract or other
transaction between the Corporation or any corporation in which this Corporation
owns a majority of the capital stock shall be valid and binding, notwithstanding
that the Directors or officers of this Corporation are identical or that some or
all of the Directors of 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
-9-
<PAGE>
to declare dividends or distributions, amend the Articles of Incorporation or
the Bylaws, approve a plan of merger or consolidation, even if such plan does
not require shareholder approval, reduce earned or capital surplus, authorize or
approve the reacquisition of shares unless pursuant to a general formula or
method specified by the Board of Directors, or recommend to the shareholders a
voluntary dissolution of the Corporation or a revocation thereof.
The Board of Directors may, in its discretion, constitute and appoint other
committees, in addition to an executive committee, to assist in the management
and control of the affairs of the Corporation, with responsibilities and powers
appropriate to the nature of the several committees and as provided by the Board
of Directors in the resolution of appointment or in subsequent resolutions and
directives. Such committees may include, but are not limited to, an audit
committee and a compensation and human resources committee.
No member of any committee appointed by the Board of Directors shall
continue to be a member thereof after he ceases to be a Director of the
Corporation. However, where deemed in the best interests of the Corporation, to
facilitate communication and utilize special expertise, directors of the
Corporation's affiliated banks and corporations may be appointed to serve on
such committees, as "affiliate representatives." Such affiliate representatives
may attend and participate fully in meetings of such committees, but they shall
not be entitled to vote on any matter presented to the meeting nor shall they be
counted for the purpose of determining whether a quorum exists. The calling and
holding of meetings of any such committee and its method of procedure shall be
determined by the Board of Directors. To the extent permitted by law, a member
of the Board of Directors, and any affiliate representative, serving on any such
committee shall not be liable for any action taken by such committee if he has
acted in good faith and in a manner he reasonably believes is 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, Vice Chairman of the Board, a
President, one (1) or more 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. Any two (2) or more offices may be held by the same person,
except the duties of President and Secretary shall not be performed by the same
person. No person shall be eligible for the office of Chairman of the Board,
Vice Chairman of the Board, 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
-10-
<PAGE>
hold office until his successor shall have been duly chosen and qualified, or
until his death, or until he shall resign, or shall have been removed in the
manner hereinafter provided.
SECTION 3. REMOVAL. Any principal officer may be removed, either with
or without cause, at any time, by resolution adopted at any meeting of the Board
of Directors by a majority of the actual number of Directors elected and
qualified from time to time.
SECTION 4. SUBORDINATE OFFICERS. In addition to the principal officers
enumerated in Section 1 of this Article VI, the Corporation may have one or more
Assistant Treasurers, one or more Assistant Secretaries and such other officers,
agents and employees as the Board of Directors may deem necessary, each of whom
shall hold office for such period, may be removed with or without cause, have
such authority, and perform such duties as the President, 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 any such subordinate
officers, agents or employees.
SECTION 5. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Chairman of the Board of Directors, or to the President,
or to 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, who shall
be chosen from among the Directors, shall preside at all meetings of
shareholders and at all meetings of the Board of Directors. He shall perform
such other duties and have such other powers as, from time to time, may be
assigned to him by the Board of Directors.
SECTION 8. VICE CHAIRMAN OF THE BOARD. The Vice Chairman of the Board,
who shall be chosen from among the Directors, shall act in the absence of the
Chairman of the Board. He shall perform such other duties and have such other
powers as, from time to time, may be assigned to him by the Board of Directors.
SECTION 9. PRESIDENT. The President, who shall be chosen from among
the Directors, shall be the chief executive officer of the Corporation and as
such shall have general supervision of the affairs of the Corporation, subject
to the control of the Board of Directors. He shall be an EX OFFICIO member of
all standing committees. In the absence or disability of the Chairman of the
Board and Vice Chairman of the Board, the President shall preside at all
meetings of shareholders and at all meetings of the Board of Directors. Subject
to the control and direction of the Board of Directors, the President may enter
into any contract or execute and deliver any instrument in the name and on
behalf of the Corporation. In general, he shall perform all duties and have all
powers incident to the
-11-
<PAGE>
office of President, as herein defined, and all such other duties and powers as,
from time to time, may be assigned to him by the Board of Directors.
SECTION 10. VICE PRESIDENTS. The Vice Presidents in the order of their
seniority, unless otherwise determined by the Board of Directors, shall, in the
absence or disability of the President and Executive Vice President, perform the
duties and exercise the powers of the President. They shall perform such other
duties and have such other powers as the President or the Board of Directors may
from time to time assign.
SECTION 11. 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. He shall upon
request exhibit at all reasonable times his 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 him by the President or the Board of
Directors. The Treasurer shall give such bond, if any, for the faithful
discharge of his duties as the Board of Directors may require.
SECTION 12. 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 him by the President or the Board of
Directors.
SECTION 13. SALARIES. The salaries of the principal officers shall be
fixed from time to time by the Board of Directors, and the salaries of any
subordinate officers may be fixed by the President.
SECTION 14. VOTING CORPORATION'S SECURITIES. Unless otherwise ordered
by the Board of Directors, the Chairman of the Board, the President and
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
-12-
<PAGE>
Board of Directors by resolution from time to time may confer like powers upon
any other person or persons.
ARTICLE VII
INDEMNIFICATION
SECTION 1. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
AGENTS. Every person who is or was a Director, officer, employee or agent of
this Corporation or of any other corporation for which he is or was serving in
any capacity at the request of this Corporation shall be indemnified by this
Corporation against any and all liability and expense that may be incurred by
him in connection with or resulting from or arising out of any claim, action,
suit or proceeding, provided that such person is wholly successful with respect
thereto or acted in good faith in what he reasonably believed to be in or not
opposed to the best interest of this Corporation or such other corporation, as
the case may be, and, in addition, in any criminal action or proceeding in which
he had no reasonable cause to believe that his conduct was unlawful. As used
herein, "claim, action, suit or proceeding" shall include any claim, action,
suit or proceeding (whether brought by or in the right of this Corporation or
such other corporation or otherwise), civil, criminal, administrative or
investigative, whether actual or threatened or in connection with an appeal
relating thereto, in which a Director, officer, employee or agent of this
Corporation may become involved, as a party or otherwise,
(i) by reason of his being or having been a Director, officer,
employee, or agent of this Corporation or such other corporation
or arising out of his status as such or
(ii) by reason of any past or future action taken or not taken by him
in any such capacity, whether or not he continues to be such at
the time such liability or expense is incurred.
The terms "liability" and "expense" shall include, but shall not be limited to,
attorneys' fees and disbursements, amounts of judgments, fines or penalties, and
amounts paid in settlement by or on behalf of a Director, officer, employee, or
agent, but shall not in any event include any liability or expenses on account
of profits realized by him in the purchase or sale of securities of the
Corporation in violation of the law. The termination of any claim, action, suit
or proceeding, by judgment, settlement (whether with or without court approval)
or conviction or upon a plea of guilty or of NOLO CONTENDERE, or its equivalent,
shall not create a presumption that a Director, officer, employee, or agent did
not meet the standards of conduct set forth in this paragraph.
Any such Director, officer, employee, or agent who has been wholly
successful with respect to any such claim, action, suit or proceeding shall be
entitled to indemnification as a matter of right. Except as provided in the
preceding sentence, any indemnification hereunder shall be made only if
-13-
<PAGE>
(i) the Board of Directors acting by a quorum consisting of Directors
who are not parties to or who have been wholly successful with
respect to such claim, action, suit or proceeding shall find that
the Director, officer, employee, or agent has met the standards
of conduct set forth in the preceding paragraph; or
(ii) independent legal counsel shall deliver to the Corporation their
written opinion that such Director, officer, employee, or agent
has met such standards of conduct.
If several claims, issues or matters of action are involved, any such
person may be entitled to indemnification as to some matters even though he is
not entitled as to other matters.
The Corporation may advance expenses to or, where appropriate, may at its
expense undertake the defense of any such Director, officer, employee, or agent
upon receipt of an undertaking by or on behalf of such person to repay such
expenses if it should ultimately be determined that he is not entitled to
indemnification hereunder.
The provisions of this Section shall be applicable to claims, actions,
suits or proceedings made or commenced after the adoption hereof, whether
arising from acts or omissions to act during, before or after the adoption
hereof.
The rights of indemnification provided hereunder shall be in addition to
any rights to which any person concerned may otherwise be entitled by contract
or as a matter of law and shall inure to the benefit of the heirs, executors and
administrators of any such person.
The Corporation may purchase and maintain insurance on behalf of any person
who is or was a Director, officer, employee or agent of the Corporation or is or
was serving at the request of the Corporation as a director, officer, employee
or agent of another corporation against any liability asserted against him and
incurred by him in any capacity or arising out of his status as such, whether or
not the Corporation would have the power to indemnify him against such liability
under the provisions of this Section or otherwise.
ARTICLE VIII
AMENDMENTS
Except as expressly provided herein or in the Articles of Incorporation,
the Board of Directors may make, alter, amend or repeal these Bylaws by an
affirmative vote of a majority of the actual number of Directors elected and
qualified.
-14-
<PAGE>
FIRST MERCHANTS CORPORATION
AND
FIRST MERCHANTS BANK, N.A.
=====================================================
MANAGEMENT INCENTIVE PLAN
FOR
___________________________________
=====================================================
Prepared by:
Mercer Meidinger Hansen, Inc.
120 Monument Circle, Suite 308
Indianapolis, IN 46204
Approved by:
Board of Directors Compensation Committee
April 21, 1988 (ORIGINAL APPROVAL)
February 19, 1997 (CURRENT APPROVAL)
<PAGE>
PLAN SUMMARY
OBJECTIVE: First Merchants Corporation and First Merchants Bank, N.A.
believe that performance-based pay should be a significant
component of the total compensation package.
The purpose of this plan is to provide incentive compensation
which will:
1. Link compensation to organization and individual goal
achievement.
2. Motivate and retain key personnel.
3. Attract qualified talent to the organization.
ADMINISTRATION: The plan will be administered by the Compensation Committee
of the Board of Directors. The Committee will have the
authority to:
-- Modify the formal plan document
-- Make the final award determinations
-- Set conditions for eligibility and award
-- Define extraordinary accounting events in calculating
earnings
-- Establish future payout schedules
-- Determine circumstances/causes for which payouts can be
withheld
-- Abolish the plan
ELIGIBILITY: Eligibility will be determined annually by the Compensation
Committee of the Board of Directors.
In order to receive an award, an incumbent must be employed
at the time of the award except for conditions of death or
retirement.
<PAGE>
AWARD LEVELS: Award levels will vary with organizational level:
For the _____________________________________ of First
Merchants Corporation and First Merchants Bank, the maximum
bonus will be ____% of base salary.
The actual bonus will be calculated according to the
attached schedules.
The _________________ will not be eligible to participate
in the bank-wide Employee Performance Bonus Plan of First
Merchants Bank.
ANNUAL Beginning in 1997, the current year (1997) will have a
WEIGHTING: weight of 60% and the average of the two previous years
will have a weight of 40%. For purposes of calculating
the current year bonus, the percentage of maximum payout
will be used in the weighting calculation.
FORM OF AWARD: Payout will be in cash; there will be no deferral or
vesting provisions.
AWARD TIMING: Awards will be made not later than the 15th day of the
month following the month in which the audited financial
statement is delivered.
PRO-RATA AWARD: Participants employed for a period less than the full
fiscal year will receive a payout prorated to their length
of employment, so long as they have service of at least 90
days during the performance year.
PERFORMANCE For the ____________________, performance criteria will
CRITERIA AND include the performance of First Merchants Corporation and
WEIGHTS: First Merchants Bank. The weighting of these criteria
shall be as follows:
PERFORMANCE CRITERIA WEIGHT
(SEE ATTACHED SCHEDULE A)
<PAGE>
PAYOUT Award schedules, attached hereto, define the minimum
THRESHOLD performance levels for which Incentive Compensation Awards
CONDITIONS: will be made. Awards will be made if performance equals or
exceeds the minimum performance levels shown on any one of
the attached schedules. For the current year, minimum
("THRESHOLD") performance levels are:
(SEE ATTACHED SCHEDULE A)
The total incentive award is calculated by adding the
applicable awards derived from each of the schedules.
A schedule will be utilized for this purpose only if
the actual performance level is above the schedule's
minimum.
Approved by the Compensation Committee:
April 21, 1988 (ORIGINAL APPROVAL)
February 19, 1997 (CURRENT APPROVAL)
<PAGE>
SCHEDULE A TO FIRST MERCHANTS CORPORATION MANAGEMENT INCENTIVE PLAN
The Corporation's Management Incentive Plan covering its executive
officers are all in the form of Exhibit 10.1 and are substantially identical,
except as noted below. Actual targets are not disclosed.
The maximum bonus under the Management Incentive Plan for Chief
Executive Officer is 40% of base salary. The performance criteria used
include the Corporation's return on assets, return on equity, efficiency
ratio and net income growth.
The maximum bonus under the Management Incentive Plan for Chief Operating
Officer is 40% of base salary. The performance criteria used include the
Corporation's return on equity and the Corporation's and First Merchants Bank,
N.A.'s return on assets, efficiency ratio and net income growth.
The maximum bonus under the Management Incentive Plan for Administrative
Officers (Chief Financial Officer and General Counsel) is 25% of base salary.
The performance criteria used include the Corporation's and First Merchants
Bank, N.A.'s return on assets, efficiency ratio and net income growth.
The maximum bonus under the Management Incentive Plan for Chief
Executive Officer of the Union County National Bank of Liberty is 25% of base
salary. The performance criteria used include the Union County National
Bank's return on assets, efficiency ratio, net income growth and percentage
of annual plan objectives achieved.
<PAGE>
FIRST MERCHANTS BANK, N.A.
UNFUNDED DEFERRED COMPENSATION PLAN
(AS AMENDED THROUGH 12/10/96)
The Bank hereby adopts and establishes an Unfunded Deferred
Compensation Plan ("PLAN") for its non-employee directors, effective as of
November 13, 1973, as follows:
1. Any duly elected non-employee director of the Bank
may, by written election duly filed with the Bank on or
before December 31st of any year, elect to participate in
the Plan by deferring the receipt of all or any specified
part of his annual Director's fees for one or more
succeeding calendar years.
2. Any non-employee of the Bank elected to fill a
vacancy on the Bank's Board of Directors who was not a
director on the preceding December 31st may, by written
election filed with the Bank before his term begins, elect
to defer all or a specified part of his annual director's
fees for the balance of the calendar year following such
election and for succeeding calendar years.
3. An election to defer such director's fees
continues from year to year unless and until the director
terminates such election by written request; provided,
however, in the event of a termination the sums previously
deferred at the request of the participating director cannot
be distributed until the director is no longer a director of
either the Bank, its parent, First Merchants Corporation
("Corporation"), or any of the Corporation's other affiliate
banks or corporations.
4. The Bank will maintain on its books of account a
complete separate listing by memorandum of all fees deferred
by each participating director and will credit such deferred
compensation account not less often than quarterly with that
rate of interest then being paid by the Bank on its 18-month
variable rate individual retirement accounts. The rate of
interest to be credited on directors' deferred compensation
accounts, or the method of calculating such rate, may be
prospectively changed from time to time by a majority vote
of the directors who are not participating and do not have
an account balance under the Plan at the time such action is
taken.
<PAGE>
5. Except as above provided, by the acceptance of
each such deferred compensation account the Bank shall
become contractually obligated to pay all such sums
(principal and interest) held in a deferred compensation
account when and as requested in writing by the
participating director. Such contractual obligation shall be
unsecured and shall not be evidenced by any other written
instrument or instruments. By the adoption of this Plan by
the Bank it is intended that all such funds so accrued and
the interest earned thereon shall not be regarded as the
receipt of income to the participating director for federal
income tax purposes until the taxable year or years wherein
such funds are actually paid out by the Bank to the
participating director.
6. All amounts deferred under this Plan, together
with accumulated interest earned thereon shall be
distributed by the Bank over the period chosen by the
director upon first electing to participate in the Plan.
Such distribution shall commence as of the first day of the
calendar year immediately following the year in which the
director is no longer a director of either the Bank, the
Corporation, or any of the Corporation's other affiliate
banks or corporations. Notwithstanding the foregoing, a
director or former director may request a lump sum
distribution of all or part of the director's previously
deferred amounts in the event of an unanticipated emergency
which was not reasonably foreseeable by the director and
which has caused the director severe immediate financial
hardship. The decision whether to approve or deny such
request shall be based on all relevant facts and
circumstances reasonably available to the Board, and shall
be made by a majority vote of the directors who are not
participating and do not have an account balance under the
Plan at the time the request is made.
7. Upon the death of a participating director or
former participating director prior to the expiration of the
period during which the deferred amounts are payable, all
remaining deferred fees and interest earned thereon shall be
paid over the remaining portion of the period so elected to
his designated beneficiary or beneficiaries until all
account sums and interest earned thereon have been fully
paid out.
2.
<PAGE>
8. In the event the director is no longer a director
of either the Bank, the Corporation, or any of the
Corporation's other affiliate banks or corporations, and
becomes a proprietor, officer, partner, employee, or
otherwise becomes affiliated with any business in
competition with the Bank, the Corporation, or any of the
Corporation's affiliates, then and in that event, the entire
balance of the director's deferred fees, including interest,
may at the discretion of the continuing directors of the
Bank be paid immediately to the director in a lump sum.
9. It is intended that the Unfunded Deferred
Compensation Plan established by this Resolution shall
comply with the requirements of Revenue Ruling 71-419; and
the Bank, its Board of Directors, and the Plan's
participating directors, in the implementation of the Plan,
intend to be governed by the procedures and requirements
therein outlined.
3.
<PAGE>
CHANGE OF CONTROL AGREEMENT
This Agreement is made and entered into this ______ day of ______ , 1996,
by and between First Merchants Bank, National Association (hereafter referred
to as "Bank"), and First Merchants Corporation, an Indiana corporation
which owns Bank (hereinafter referred to as "Corporation"), both with their
principal offices and business located at 200 East Jackson Street, Muncie,
Indiana, and ___________ (hereinafter, referred to as "Executive" of Muncie,
Indiana).
WHEREAS, the Bank and Corporation consider the continuance of proficient
and experienced management to be essential to protecting and enhancing the
best interest of the Bank, Corporation and its shareholders, and
WHEREAS, the Bank and Corporation desire to assure the continued
services of Executive on behalf of Bank and Corporation, and
WHEREAS, the Bank and Corporation recognize that if faced with a
proposal for Change of Control, as hereinafter defined, Executive will have a
significant role in helping the Board of Directors assess the options and
advising the Board of Directors on what is in the best interests of the Bank
and Corporation and the shareholders, and it is necessary for Executive to be
able to provide this advice and counsel without being influenced by the
uncertainties of the Executive's own situation, and
WHEREAS, the Bank and Corporation desire to provide fair and reasonable
benefits to Executive on the terms and subject to the conditions set forth in
this Agreement.
NOW, THEREFORE, in consideration of these promises, the mutual covenants
and undertakings herein contained and the continued employment of Executive
by the Corporation as its ______ and by the Bank as its _______ , the Bank,
the Corporation and the Executive, each intending to be legally bound,
covenant and agree as follows:
<PAGE>
1. TERM OF AGREEMENT.
The Agreement shall continue in effect through December 31, 1997;
provided, however, that commencing on December 31, 1997, and each December 31
thereafter, the term of this Agreement shall automatically be extended for
one additional year unless, not later that October 31st immediately preceding
each December 31, and every October 31, thereafter, the Bank or Corporation
shall have given notice that it does not wish to extend this Agreement; and
provided, further, that if a Change of Control of the Bank or Corporation as
defined in Section 2, shall have occurred during the original or extended
term of this Agreement, this Agreement shall continue in effect for a period
of not less than twenty-four (24) months beyond the month in which such
Change of Control occurred.
2. DEFINITIONS.
For purposes of this Agreement, the terms of this Article shall have the
following meaning throughout this Agreement:
(A) CAUSE: "Cause" shall be defined as:
(1) professional incompetence;
(2) willful misconduct;
(3) personal dishonesty;
(4) breach of fiduciary duty involving personal profit;
(5) intentional failure to perform stated duties;
(6) willful violation of any law, rule or regulation (other
than traffic violations or similar offenses) or final cease and
desist orders; and
(7) any intentional material breach of any term, condition or
covenant of this Agreement.
(B) CHANGE OF CONTROL: "Change of Control" shall mean the following:
(1) any person (as such term is used in Sections 13(d) and
14(d) of the Exchange Act), other than the Corporation, is or
becomes the Beneficial Owner (as defined
Page 2
<PAGE>
in Rule 13d-3 under the Exchange Act) directly or indirectly of
securities of the Corporation or Bank representing twenty-five
percent (25%) or more of the combined voting power of the Bank
or Corporation's then outstanding securities;
(2) persons constituting a majority of the Board of Directors
of the Corporation or Bank were not directors of Employer for at
least twenty-four (24) preceding months;
(3) the stockholders of the Bank or Corporation approve a
merger or consolidation of the Bank or Corporation with any other
corporation, other than (1) a merger or consolidation which would
result in the voting securities of the Bank or Corporation
outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into
voting securities of the surviving entity) more than 50 percent
of the combined voting power of the voting securities of the Bank
or Corporation or such surviving entity outstanding immediately
after such merger or consolidation or (2) a merger or
consolidation effected to implement a recapitalization of the Bank
or corporation (or similar transaction) in which no person acquires
50 percent or more of the combined voting power of the Bank or
Corporation's then outstanding securities; or
Page 3
<PAGE>
(4) the stockholders of the Corporation approve a plan of complete
liquidation of the Bank or Corporation or an agreement for the sale or
disposition by the Bank or Corporation of all or substantially all of the
Corporation's assets.
(C) DATE OF TERMINATION: "Date of Termination" shall mean the date
stated in the Notice of Termination (as hereinafter defined) or thirty
(30) days from the date of delivery of such notice, as hereinafter
defined, whichever comes first.
(D) DISABILITY: "Disability" shall mean the definition of such
term as used in the disability policy then in effect for the Bank or
Corporation and a determination of full disability by the parties;
provided that in the event there is no disability insurance then in
force, "disability" shall mean incapacity due to physical or mental
illness, which will have caused Executive to have been unable to perform
his duties with the Bank and/or Corporation on a full time basis for
180 consecutive calendar days.
(E) NOTICE OF TERMINATION: "Notice of Termination" shall mean a
written notice, communicated to the other parties hereto, which shall
indicate the specific termination provisions of this Agreement relied
upon and set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment
under the provisions so indicated.
(F) RETIREMENT: "Retirement" shall mean termination of employment
by the Executive in accordance with Bank's or Corporation's normal
retirement policy generally applicable to its salaried employees in
effect at the time of Change of Control
(3) TERMINATION
(A) GENERAL. If any of the events described in Section 2
constituting a Change in Control of the Bank or Corporation shall
have occurred, the Executive shall be entitled to the benefits
provided in Section 4 upon the subsequent termination of the
Executive's employment during the term of this Agreement unless such
termination is (a) because of the death or Disability of the
Executive, (b) by the Bank or Corporation for Cause of (c) by the
Executive other than on account of Constructive Termination (as
hereinafter defined).
(B) If, following a Change of Control, the Executive's
employment shall be terminated for Cause, the Bank and Corporation
shall pay him his full salary through the Date of Termination at
the rate in effect on the date of the Notice of Termination, and the
Bank and Corporation shall have no further obligations under this
Agreement. If, following a Change of Control, the Executive's
Page 4
<PAGE>
employment shall be terminated as a result of death or Disability,
compensation to the Executive shall be made pursuant to the Bank's
and Corporation's then existing policies on death or Disability and
the Bank and the Corporation shall have no further obligations under
this Agreement. If, following a Change of Control, the Executive's
employment is terminated by and at the request of the Executive as
a result of Retirement, compensation to the Executive shall be made
pursuant to the Bank's and Corporation's normal retirement policy
generally applicable to its salaried employees at the time of Change
of Control and the Bank and Corporation shall have no further
obligations under this Agreement.
(C) CONSTRUCTIVE TERMINATION. The Executive shall be entitled to
terminate his employment upon the occurrence of Constructive
Termination. For purposes of this Agreement, "Constructive Termination"
shall mean, without the Executive's express written consent, the
occurrence, after a Change in Control of the Bank or Corporation, of
any of the following circumstances:
(1) the assignment to the Executive of any duties inconsistent
(unless in the nature of a promotion) with the position in the Bank
or Corporation that the Executive held immediately prior to the Change
in Control of the Bank or Corporation, or a significant adverse
reduction or alteration in the nature or status of the Executive's
position, duties or responsibilities or the conditions of the
Executive's employment from those in effect immediately prior to such
Change in Control;
(2) a reduction by the Bank or Corporation in the Executive's
annual base salary as in effect immediately prior to the Change in
Control of the Bank or Corporation or as the same may be increased
from time to time, except for across-the-board salary reductions
similarly affecting all management personnel of the Bank or
Corporation;
(3) the Bank and/or Corporation requires Executive to be
relocated anywhere other than the offices in Muncie, Indiana;
(4) the taking of any action by the Bank and/or Corporation to
deprive Executive of any material fringe benefit enjoyed by him at
the time of the Change of Control, or the failure by the Bank
and/or Corporation to provide him with the number of paid
vacation days to which he is entitled on the basis of years of
Page 5
<PAGE>
service with the Bank and/or Corporation and in accordance with the
Bank's and/or Corporation's normal vacation policy in effect at the
time of Change of Control;
(5) the failure by the Bank or Corporation to continue to
provide Executive with benefits substantially similar to those
enjoyed by the Executive under any of the Bank or Corporation's
life insurance, medical, health and accident, or disability plans
in which the Executive was participating at the time of the Change
in Control of the Bank or Corporation, or the taking of any action
by the Bank or Corporation which would directly or indirectly
materially reduce any of such benefits; or
(6) the failure of the Bank or Corporation to continue this
Agreement in effect, or to obtain a satisfactory agreement from
any successor to assume and agree to perform this Agreement, as
contemplated in Section 5 hereof.
4. COMPENSATION UPON TERMINATION.
Following a Change in Control, if the employment by the Bank or
Corporation shall be terminated by the Executive on account of Constructive
Termination or by the Bank or Corporation other than for Cause, death,
Disability, or Retirement (by and at the request of the Executive), then the
Executive shall be entitled to the benefits provided below:
(A) No later than the fifth day following the Date of Termination,
the Corporation shall pay to the Executive his full base salary through
the Date of Termination at the rate in effect at the time Notice of
Termination is given, plus all other amounts to which the Executive
is entitled under any incentive, bonus or other compensation plan of
the Corporation, at the time such payments are due;
(B) Pay Executive an amount in cash, in a lump sum, which, when
added to the present value of all other compensation, benefits and
payments required to be included in the calculation under Section 280G of
the Internal Revenue Code and regulations thereunder, shall equal 299%
of the "base amount" as defined under Section 280G of the Internal Revenue
Code, provided such payment shall be reduced to the extent necessary
to prevent it from constituting a "parachute payment" within the
meaning of Section 280G of the Internal Revenue Code of 1986, as amended.
Page 6
<PAGE>
(C) For a period beginning with Executive's termination of
employment and not to exceed two years, the Bank or Corporation
shall arrange to provide Executive with life, disability, accident
and health insurance benefits substantially similar to those which
Executive was receiving immediately prior to the Notice of Termination.
(D) In lieu of shares of common stock of the Corporation
("Corporation Shares") issuable upon the exercise of outstanding options
("Options"), if any, granted to Executive under any Corporation stock
option plan (which Options shall be canceled upon the making of the
payment, referred to below), Executive shall receive an amount in cash
equal to the product of (A) the excess of, the higher of the closing
price of Corporation Shares as reported on the NASDAQ National Market
System, the American Stock Exchange or The New York Stock Exchange,
wherever listed, on or nearest the Date of Termination or the highest
per shares price for Corporation Shares actually paid in connection with
any Change in Control of the Corporation, over the per share exercise
price of each Option held by Executive (whether or not then fully
exercisable), times (B) the number of Corporation Shares covered by
each such Option;
(E) The Bank or Corporation shall pay to Executive all reasonable
legal fees and expenses incurred by the Executive as a result of such
termination (including all such fees and expenses, if any, incurred in
contesting or disputing any such termination or in seeking to obtain or
enforce any right or benefit provided by this Agreement); unless the
decision-maker in any proceeding, contest or dispute arising hereunder
makes a formal finding that the Executive did not have a reasonable
basis for instituting such proceeding, contest or dispute;
(F) The Bank or Corporation shall provide Executive with individual
out placement services in accordance with the general custom and
practice generally accorded to an executive of Executive's position.
5. SUCCESSORS; BINDING AGREEMENT.
A. The Bank or Corporation will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise)
to all or substantially all of the business and/or assets of the Bank
or Corporation to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Bank or Corporation
would be required to perform it if no such succession had taken place.
Failure of the Bank or Corporation to obtain such assumption and
agreement prior to the effectiveness of any such
Page 7
<PAGE>
succession shall be a breach of this Agreement and shall entitle
Executive to compensation from the Bank or Corporation in the same
amount and on the same terms to which Executive would be entitled
hereunder if Executive terminates his employment on account of
Constructive Termination following a Change in Control of the Bank
or Corporation, except that for the purposes of implementing the
foregoing, the date on which any such succession becomes
effective shall be deemed the Date of Termination. As used in this
Agreement, "Bank or Corporation" shall mean the Bank or Corporation
and any successor to their business and/or assets as aforesaid which
assumes and agrees to perform this Agreement by operation of law, or
otherwise.
B. This Agreement shall inure to the benefit of and be
enforceable by the Executive and his personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees
and legatees. If the Executive should die while any amount would still
be payable to the Executive hereunder had the Executive continued to live,
all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the devisee, legatee or
other designee or, if there is no such designee, to their estate.
6. GUARANTEE BY CORPORATION AND BANK
In consideration of the value of the continued employment of Executive
by the Bank or the Corporation, and the benefits derived by the Bank and the
Corporation from Executive's employment by the Bank and the Corporation, the
Corporation and the Bank hereby unconditionally and fully guarantee and
endorse the obligations of the other hereunder, and agree to be fully bound
by the terms of this Agreement in the event that the other fails to perform,
honor or otherwise complete fully its obligations hereunder.
Page 8
<PAGE>
7. MISCELLANEOUS.
No provision of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing and
signed by you and such officer as may be specifically designated by the
Board. No waiver by either party hereto at the time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar of dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreement or representations, oral or otherwise, express
or implied, with respect to the subject matter hereof have been made by
either party which are not expressly set forth in this Agreement. The
validity, interpretation, construction and performance of this Agreement
shall be governed by the laws of the State of Indiana without regard to its
conflicts of law principles. All references to section of the Exchange Act or
the Code shall be deemed also to refer to any successor provisions to such
sections. Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law. The
obligations of the corporation under Section 4 shall survive the expiration
of the term of this Agreement.
8. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
9. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
10. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three arbitrators in Muncie, Indiana in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction; provided, however, that the Executive shall be entitled to seek
specific performance of his right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in
connection with this Agreement.
11. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of
the parties hereto in respect of the subject matter contained herein and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by
any officer, employee or representative of any party hereto; and any prior
agreement of the parties hereto in respect of the subject matter contained
herein is hereby terminated and cancelled.
Page 9
<PAGE>
IN WITNESS WHEREOF, the Bank and the Corporation have caused this
Agreement to be executed by duly authorized officers of the respective
entities and the seals of the Bank and the Corporation to be affixed hereto,
and the Executive has hereunder subscribed his name, this __________ day of
______________, 1996.
"CORPORATION" "BANK"
FIRST MERCHANTS CORPORATION FIRST MERCHANTS BANK,
NATIONAL
ASSOCIATION
By: _____________________________ By: _____________________________
Printed: Stefan S. Anderson Printed: Stefan S. Anderson
Its: Chairman of the Board Its: Chairman of the Board
"EXECUTIVE"
By: _________________________________
Printed: ____________________________
Page 10
<PAGE>
SCHEDULE A TO FIRST MERCHANTS CORPORATION
CHANGE OF CONTROL AGREEMENT
The Corporation's Change of Control Agreement covering Stefan S.
Anderson and Michael L. Cox are all in the form of Exhibit 10.5 and are
substantially identical.
Page 11
<PAGE>
FIRST MERCHANTS CORPORATION
UNFUNDED DEFERRED COMPENSATION PLAN
The Corporation hereby adopts and establishes an Unfunded Deferred
Compensation Plan ("PLAN") for its non-employee directors, effective as of
January 1, 1997, as follows:
1. Any duly elected non-employee director of the
Corporation may, by written election duly filed with the
Corporation on or before December 31 of any year, elect to
participate in the Plan by deferring the receipt of all or
any specified part of the director's fees to which the
director would otherwise be entitled, for one or more
succeeding calendar years.
2. Any non-employee director of the Corporation
elected to fill a vacancy on the Corporation's Board who was
not a director on the preceding December 31 may, by written
election filed with the Corporation before taking office,
elect to defer all or a specified part of the fees accruing
to the director for the balance of the calendar year
following such election and for succeeding calendar years.
3. An election to defer such director's fees
continues from year to year unless and until the director
terminates such election by written request; provided,
however, in the event of a termination the sums previously
deferred at the request of the participating director cannot
be distributed until the director is no longer a director of
either the Corporation or any of its affiliate banks or
corporations.
4. The Corporation will maintain on its books of
account a complete separate listing by memorandum of all
fees deferred by each participating director and will credit
such deferred compensation account not less often than
quarterly with that rate of interest then being paid by
First Merchants Bank, N.A. on its 18-month variable rate
individual retirement accounts. The rate of interest to be
credited on directors' deferred compensation accounts, or
the method of calculating such rate, may be prospectively
changed from time to time by a majority vote of the
directors who are not participating and do not have an
account balance under the Plan at the time such action is
taken.
<PAGE>
5. Except as above provided, by the acceptance of
each such deferred compensation account the Corporation
shall become contractually obligated to pay all such sums
(principal and interest) held in a deferred compensation
account when and as requested in writing by the
participating director. Such contractual obligation shall be
unsecured and shall not be evidenced by any other written
instrument or instruments. By the adoption of this Plan by
the Corporation it is intended that all such funds so
accrued and the interest earned thereon shall not be
regarded as the receipt of income to the participating
director for federal income tax purposes until the taxable
year or years wherein such funds are actually paid out by
the Corporation to the participating director.
6. All amounts deferred under this Plan, together with
accumulated interest earned thereon shall be distributed by
the Corporation over the period chosen by the director upon
first electing to participate in the Plan. Such
distribution shall commence as of the first day of the
calendar year immediately following the year in which the
director is no longer a director of either the Corporation
or any of its affiliate banks or corporations.
Notwithstanding the foregoing, a director or former director
may request a lump sum distribution of all or part of the
director's previously deferred amounts in the event of an
unanticipated emergency which was not reasonably foreseeable
by the director and which has caused the director severe
immediate financial hardship. The decision whether to
approve or deny such request shall be based on all relevant
facts and circumstances reasonably available to the Board,
and shall be made by a majority vote of the directors who
are not participating and do not have an account balance
under the Plan at the time the request is made.
7. Upon the death of a participating director or
former participating director prior to the expiration of the
period during which the deferred amounts are payable, all
remaining deferred fees and interest earned thereon shall be
paid over the remaining portion of the period so elected to
the director's designated beneficiary or beneficiaries until
all account sums and interest earned thereon have been fully
paid out.
8. In the event the director is no longer a director
of either the Corporation or any of its affiliate banks or
2.
<PAGE>
corporations, and becomes a proprietor, officer, partner, employee, or
otherwise becomes affiliated with any business in competition with the
Corporation or any of the Corporation's affiliates, then and in that
event, the entire balance of the director's deferred fees, including
interest, may at the discretion of the continuing directors of the
Corporation be paid immediately to the director in a lump sum.
9. It is intended that the Plan established by this
Resolution shall comply with the requirements of Revenue
Ruling 71-419; and the Corporation, the Board, and the
Plan's participating directors, in the implementation of the
Plan, intend to be governed by the procedures and
requirements therein outlined.
3.
<PAGE>
[GRAPHIC: MAP; FIRST MERCHANTS CORPORATION MARKET AREA]
First
Merchants
Corporation
Market Area
2
<PAGE>
STOCKHOLDER INFORMATION
Corporate Office
200 East Jackson Street
Muncie, IN 47305
765-747-1500
http://firstmerchants.com
First Merchants Corporation currently provides services through
25 offices located in Delaware, Madison, Henry, Fayette, Wayne, Union and
Randolph counties in Indiana.
First Merchants Corporation of Muncie, Indiana, was organized in September,
1982, as the bank holding company for The Merchants National Bank of Muncie, now
First Merchants Bank, N.A., an institution which has served Muncie and the
surrounding communities since 1893.
In November, 1988, First Merchants acquired Pendleton Banking Company of
Pendleton, Indiana, a commercial bank which was organized in 1872.
In July, 1991, the Corporation acquired First United Bank of Middletown,
Indiana, which was established in 1882.
In August, 1996, First Merchants Corporation acquired The Union County
National Bank of Liberty, Indiana, established in 1872.
In October, 1996, the Corporation acquired The Randolph County Bank of
Winchester, Indiana, which was founded in 1865.
Subsidiaries of First Merchants Corporation conduct a full range of banking
operations, including commercial, industrial, consumer and real estate lending,
deposit and investment services, and other banking services. First Merchants
Bank, with more than one billion dollars in fiduciary assets at market value,
operates one of the ten largest trust departments in Indiana.
First Merchants Corporation is committed to the sound management of its
subsidiaries and to leading its east central Indiana marketplace in meeting
customer banking needs and expectations.
3
<PAGE>
STOCKHOLDER INFORMATION
STOCK PRICE AND DIVIDEND INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders of First Merchants Corporation will be
held: Tuesday, April 8, 1997, 3:30 p.m. at the Horizon Convention Center,
401 South High Street, Muncie, Indiana.
PRICE PER SHARE
- --------------------------------------------------------------------------------
QUARTER HIGH LOW DIVIDENDS DECLARED
- --------------------------------------------------------------------------------
1996 1995 1996 1995 1996 1995
-------- -------- -------- -------- ------- --------
First Quarter $ 27.50 $ 22.17 $ 25.00 $ 20.83 $ .20 $ .1867
Second Quarter 27.50 23.50 24.50 21.33 .20 .1867
Third Quarter 26.00 26.50 23.25 22.67 .24 .20
Fourth Quarter 26.75 26.75 24.06 25.75 .24 .20
The table above lists per share prices and dividend payments during 1996 and
1995, as adjusted for the 3-for-2 stock split of October, 1995.
Prices are as reported by the National Association of Securities Dealers
Automated Quotation - National Market System.
Numbers rounded to nearest cent when applicable.
STOCK INFORMATION
COMMON STOCK LISTING
First Merchants Corporation common stock is traded over-the-counter on the
NASDAQ National Market System. Quotations are carried in many daily papers.
The NASDAQ symbol is FRME (Cusip #320817-10-9). At the close of business on
December 31, 1996, the number of shares outstanding was 6,603,319. There were
1,424 stockholders of record on that date.
STOCK TRANSFER AGENT AND REGISTRAR
First Merchants Bank, N.A.
Corporate Trust Department
P.O. Box 792
Muncie, Indiana 47308-0792
GENERAL STOCKHOLDER INQUIRIES
Stockholders and interested investors may obtain information about the
Corporation upon written request or by calling:
Mr. Douglas B. Harris
Assistant Vice President & Bank Investments
Investor Services
First Merchants Corporation
P.O. Box 792
Muncie, Indiana 47308-0792
765-741-7278
1-800-262-4261, Ext. 278
MARKET MAKERS
The following firms make a market in First Merchants Corporation stock:
City Securities Corporation
Herzog, Heine, Geduld, Inc.
Howe, Barnes & Johnson, Inc.
McDonald and Company
NatCity Investments, Inc.
David A. Noyes and Company
FORM 10-K AND FINANCIAL INFORMATION
First Merchants Corporation, upon request and without charge, will furnish
stockholders, security analysts, and investors a copy of Form 10-K filed
with the Securities and Exchange Commission. Please contact:
Mr. James Thrash
Senior Vice President
and Chief Financial Officer
First Merchants Corporation
P.O. Box 792
Muncie, Indiana 47308-0792
765-747-1390
1-800-262-4261, Ext. 390
4
<PAGE>
ANNUAL REPORT 1996
Financial Review
Relationship Banking . . .
When It's Meant to Last
First Merchants Corporation
(COVER)
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA. . . . . . . . . . . . 1
MANAGEMENT'S DISCUSSION & ANALYSIS. . . . . . . . . . . . . . . . . 2
CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . 12
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
First Merchants Corporation
Muncie, Indiana
We have audited the consolidated balance sheet of First Merchants Corporation
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended December 31, 1996 (pages 8-26). These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of First
Merchants Corporation and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in the notes to the Consolidated Financial Statements, the
Corporation changed its method of accounting for investments in securities in
1994.
/S/ GEO. S. OLIVE & CO. LLC
Geo. S. Olive & Co. LLC
Indianapolis, Indiana
January 24, 1997
(INSIDE COVER)
<PAGE>
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net Interest Income
Fully Taxable Equivalent Basis . . . . . . . $ 39,258 $ 37,049 $ 35,909 $ 34,536 $ 33,457
Less Tax Equivalent Adjustment . . . . . . . . . 2,112 1,952 1,971 2,011 1,454
--------- --------- --------- --------- ---------
Net Interest Income. . . . . . . . . . . . . . . 37,146 35,097 33,938 32,525 32,003
Provision for Loan Losses. . . . . . . . . . . . 1,253 1,388 1,202 1,654 2,101
--------- --------- --------- --------- ---------
Net Interest Income
After Provision for Loan Losses . . . . . . 35,893 33,709 32,736 30,871 29,902
Total Other Income . . . . . . . . . . . . . . . 8,342 7,593 6,919 7,350 6,117
Total Other Expenses . . . . . . . . . . . . . . 24,135 22,994 22,632 22,108 21,603
--------- --------- --------- --------- ---------
Income Before Income Tax Expense . . . . . . . . 20,100 18,308 17,023 16,113 14,416
Income Tax Expense . . . . . . . . . . . . . . . 6,958 6,260 5,660 5,250 4,415
--------- --------- --------- --------- ---------
Income Before Change in Accounting Method . . . 13,142 12,048 11,363 10,863 10,001
Change in Accounting Method for Income Taxes . . 260
--------- --------- --------- --------- ---------
Net Income . . . . . . . . . . . . . . . . . . . $ 13,142 $ 12,048 $ 11,363 $ 11,123 $ 10,001
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
PER SHARE DATA (1)
Income Before Change in Accounting Method. . . . $ 2.00 $ 1.84 $ 1.73 $ 1.64 $ 1.52
Net Income . . . . . . . . . . . . . . . . . . . 2.00 1.84 1.73 1.68 1.52
Cash Dividends Paid (2). . . . . . . . . . . . . .88 .77 .71 .63 .57
December 31 Book Value . . . . . . . . . . . . . 17.07 15.99 14.08 13.46 12.49
December 31 Market Value (Bid Price) . . . . . . 25.25 25.75 20.83 19.33 19.00
AVERAGE BALANCES
Total Assets . . . . . . . . . . . . . . . . . . $932,144 $890,995 $853,257 $832,756 $794,564
Total Loans. . . . . . . . . . . . . . . . . . . 585,905 544,457 513,784 469,782 429,421
Total Deposits . . . . . . . . . . . . . . . . . 753,661 728,826 698,644 694,453 667,173
Total Federal Home Loan Bank Advances. . . . . . 9,192 9,000 7,692 5,833 3,583
Total Stockholders' Equity . . . . . . . . . . . 108,094 99,033 91,466 86,311 78,637
YEAR-END BALANCES
Total Assets . . . . . . . . . . . . . . . . . . $967,993 $942,156 $868,153 $842,681 $818,243
Total Loans. . . . . . . . . . . . . . . . . . . 631,700 553,074 528,641 495,703 455,905
Total Deposits . . . . . . . . . . . . . . . . . 794,451 783,936 720,009 688,644 685,112
Total Federal Home Loan Bank Advances. . . . . . 9,150 9,000 8,000 6,000 4,000
Total Stockholders' Equity . . . . . . . . . . . 112,687 104,967 92,754 89,257 82,233
FINANCIAL RATIOS
Return on Average Assets . . . . . . . . . . . . 1.41% 1.35% 1.33% 1.34% 1.26%
Return on Average Stockholders' Equity . . . . . 12.16 12.17 12.42 12.89 12.72
Average Earning Assets to Total Assets . . . . . 94.48 94.86 94.46 94.27 94.38
Allowance for Loan Losses as % of Total Loans. . 1.05 1.21 1.25 1.30 1.08
Dividend Payout Ratio . . . . . . . . . . . . . 40.85 39.49 39.44 37.06 37.25
Average Stockholders' Equity to Average Assets . 11.60 11.11 10.72 10.36 9.90
Tax Equivalent Yield on Earning Assets (3) . . . 8.13 8.09 7.41 7.46 8.37
Cost of Supporting Liabilities . . . . . . . . . 3.67 3.71 2.95 3.06 3.91
Net Interest Margin on Earning Assets. . . . . . 4.46 4.38 4.46 4.40 4.46
</TABLE>
(1) Restated for 3-for-2 stock split distributed January, 1993, and October,
1995.
(2) Dividends per share is for First Merchants Corporation only, not restated
for pooling transactions.
(3) 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.
1
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Corporation's financial data for periods prior to mergers accounted for
as pooling of interests has been restated.
[Graphic; Bar Chart; Return on Average Assets]
[Graphic; Bar Chart; Return on Average Equity]
RESULTS OF OPERATIONS
Net income amounted to $13,142,000 or $2.00 per share, an increase of
8.7 per cent over 1995 at $1.84 per share.
Return on assets increased 1.41 per cent, up from 1.35 per cent in 1995,
and 1.33 per cent in 1994.
Return on equity was 12.16 per cent in 1996, 12.17 per cent in 1995, and
12.42 per cent in 1994.
In 1996, First Merchants Corporation ("Corporation") recorded the
twenty-first consecutive year of improvement in net income on both an aggregate
and per share basis.
CAPITAL
The Corporation's capital strength continues to exceed regulatory minimums
and peer group averages. Management believes that strong capital is a distinct
advantage in the competitive environment in which the Corporation operates and
will provide a solid foundation for continued growth.
The Corporation's Tier I capital to average assets ratio was 11.6 per cent
at year-end 1996 and 11.1 per cent at December 31, 1995. At December 31, 1996,
the Corporation had a Tier I risk-based capital ratio of 17.0 per cent, total
risk-based capital ratio of 18.0 per cent, and a leverage ratio of 11.6 per
cent. Regulatory capital guidelines require a Tier I risk-based capital ratio
of 4.0 per cent and a total risk-based capital ratio of 8.0 per cent.
The Corporation has an employee stock purchase plan and an employee stock
option plan. Activity under these plans is described in Note 15 to the
Consolidated Financial Statements. The transactions under these plans have not
had a material effect on the Corporation's capital position.
ASSET QUALITY/PROVISION FOR LOAN LOSSES
The Corporation's asset quality and loan loss experience have consistently
been superior to that of its peer group, as summarized on the following page.
Asset quality has been a major factor in the Corporation's ability to generate
consistent profit improvement.
The allowance for loan losses is maintained through the provision for loan
losses, which is a charge against earnings.
The amount provided for loan losses and the determination of the adequacy
of the allowance are based on a continuous review of the loan portfolio,
including an internally administered loan "watch" list and an independent loan
review provided by an outside accounting firm. The evaluation takes into
consideration identified credit problems, as well as the possibility of losses
inherent in the loan portfolio that cannot be specifically identified.
The following table summarizes the risk elements for the Corporation
(table dollar amounts in thousands).
(continued)
2
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ASSET QUALITY/PROVISION FOR LOAN LOSSES (continued)
The increase in non-performing loans from December 31, 1995, to December
31, 1996, is primarily attributable to one loan placed in non-accrual status
during 1996. This loan is included in impaired loans at December 31, 1996, for
which an allowance was recorded. Management is in the process of resolving this
loan situation and anticipates that no additional provision for loan losses will
be required.
The Corporation adopted SFAS No. 114 and No. 118 ACCOUNTING BY CREDITORS
FOR IMPAIRMENT OF A LOAN AND ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A
LOAN-INCOME RECOGNITION AND DISCLOSURES on January 1, 1995. Impaired loans
included in the table above, totaled $3,992,000 at December 31, 1996. An
allowance for losses at December 31, 1996, was not deemed necessary for impaired
loans totaling $868,000, but an allowance of $1,092,000 was recorded for the
remaining balance of impaired loans of $3,124,000. The average balance of
impaired loans for 1996 was $5,213,000.
At December 31, 1996, the allowance for loan losses was $6,622,000,
down slightly from year end 1995. As a per cent of loans, the allowance was
1.05 per cent, down from 1.21 per cent at year end 1995.
The provision for loan losses in 1996 was $1,253,000 compared to $1,388,000
in 1995.
(Dollars in Thousands)
December 31, December 31,
1996 1995
------------- ------------
Non-accrual loans. . . . . . . . . . . . . . . . $ 2,777 $ 576
Loans contractually past due 90 days
or more other than nonaccruing . . . . . . 1,699 1,119
Restructured loans. . . . . . . . . . . . . . . 1,540 1,075
----------- ----------
Total . . . . . . . . . . . . . . . . . . $ 6,016 $ 2,770
----------- ----------
----------- ----------
[Graphic; Bar Chart; Net Loan Losses]
The table below presents loan loss experience for the years indicated and
compares the Corporation's loss experience to that of its peer group.
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Allowance for loan losses:
Balance at January 1 . . . . . . . . . . $ 6,696 $ 6,603 $ 6,467
-------- -------- --------
Chargeoffs . . . . . . . . . . . . . . . 1,636 1,554 1,488
Recoveries . . . . . . . . . . . . . . . 309 259 422
-------- -------- --------
Net chargeoffs . . . . . . . . . . . . . 1,327 1,295 1,066
Provision for loan losses. . . . . . . . 1,253 1,388 1,202
-------- -------- --------
Balance at December 31 . . . . . . . . . $ 6,622 $ 6,696 $ 6,603
-------- -------- --------
-------- -------- --------
Ratio of net chargeoffs during
the period to average loans
outstanding during the period. . . . . . .23% .24% .21%
Peer Group . . . . . . . . . . . . . . . . . N/A .26% .25%
3
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIQUIDITY AND INTEREST SENSITIVITY
Asset/Liability Management has been an important factor in the
Corporation's ability to record consistent earnings growth through periods of
interest rate volatility and product deregulation. Management and the Board of
Directors monitor the Corporation's liquidity and interest sensitivity positions
at regular meetings to ensure that changes in interest rates will not adversely
affect earnings. Decisions regarding investment and the pricing of loan and
deposit products are made after analysis of reports designed to measure
liquidity, rate sensitivity, the Corporation's exposure to changes in net
interest income given various rate scenarios, and the economic and competitive
environments.
The Corporation's liquidity and interest sensitivity position at December
31, 1996, remained adequate to meet the Corporation's primary goal of achieving
optimum interest margins while avoiding undue interest rate risk. The table
below presents the Corporation's interest rate sensitivity analysis as of
December 31, 1996.
- --------------------------------------------------------------------------------
INTEREST-RATE SENSITIVITY ANALYSIS
(Dollars in Thousands)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
1-180 181 - 365 1-5 YEARS BEYOND 5 TOTAL
DAYS DAYS YEARS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rate-Sensitive Assets:
Federal funds sold and
interest-bearing deposits . . . . . . . . . . 1,440 $ 1,440
Investment securities. . . . . . . . . . . . . 54,565 $ 29,873 $ 161,071 $ 30,097 275,606
Loans. . . . . . . . . . . . . . . . . . . . . 302,827 77,364 205,688 45,821 631,700
Federal Reserve and
Federal Home Loan Bank stock . . . . . . . . 2,783 307 3,090
-------- -------- ---------- --------- --------
Total rate-sensitive assets. . . . . . . . . 361,615 107,237 366,759 76,225 911,836
-------- -------- ---------- --------- --------
Rate Sensitive Liabilities:
Interest-bearing deposits. . . . . . . . . . . 302,263 85,307 294,428 2,278 684,276
Borrowed funds . . . . . . . . . . . . . . . . 45,037 45,037
Federal Home Loan Bank advances. . . . . . . . 9,150 9,150
-------- -------- ---------- --------- --------
Total rate-sensitive liabilities . . . . . . 347,300 85,307 303,578 2,278 738,463
-------- -------- ---------- --------- --------
Interest rate sensitivity gap by period. . . . . $ 14,315 $ 21,930 $ 63,181 $ 73,947
Cumulative rate sensitivity gap. . . . . . . . . 14,315 36,245 99,426 173,373
Cumulative rate sensitivity gap ratio
at December 31, 1996 . . . . . . . . . . . . . 104.1% 108.4% 113.5% 123.5%
</TABLE>
The Corporation had a cumulative positive gap of $36,245,000 in the one year
horizon at December 31, 1996, or just over 4 per cent of total assets. Net
interest income at financial institutions with positive gaps tends to increase
when rates increase and generally decrease as interest rates decline.
EARNING ASSETS
Earning assets increased $30.3 million during 1996.
The following table presents the earning asset mix for the years 1996 and
1995 (at December 31).
Loans grew by more than $79 million while short-term investments and
securities declined, reflecting the Corporation's intent to change the balance
sheet mix to emphasize loans which generally carry higher yields than federal
funds sold, interest-bearing deposits and investment securities and often
provide collateral business.
- --------------------------------------------------------------------------------
EARNING ASSETS
(Dollars in Millions) DECEMBER 31
1996 1995
-------- --------
Federal funds sold and interest-bearing time deposits. . . $ 1.4 $ 39.2
Securities available for sale. . . . . . . . . . . . . . . 228.4 225.9
Securities held to maturity. . . . . . . . . . . . . . . . 47.2 60.7
Mortgage loans held for sale . . . . . . . . . . . . . . . 0.3 0.7
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . 631.4 552.3
Federal Reserve and Federal Home Loan Bank stock . . . . . 3.1 2.7
-------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . $ 911.8 $ 881.5
-------- --------
-------- --------
4
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DEPOSITS, SHORT-TERM BORROWINGS AND FEDERAL HOME LOAN BANK ADVANCES
The following table presents the level of deposits and borrowed funds
(Federal funds purchased, repurchase agreements with customers, U.S. Treasury
demand notes and Federal Home Loan Bank advances) based on year-end levels at
December 31, 1996 and 1995.
- --------------------------------------------------------------------------------
AS OF DECEMBER 31
(Dollars in Millions)
SHORT-TERM FEDERAL HOME LOAN
DEPOSITS BORROWINGS BANK ADVANCES
--------- ---------- ------------------
1996 $ 794.5 $ 45.0 $ 9.2
1995 783.9 37.4 9.0
- --------------------------------------------------------------------------------
NET INTEREST INCOME
Net interest income is the primary source of the Corporation's earnings.
It is a function of net interest margin and the level of average earning assets.
The table at right presents the Corporation's asset yields, interest
expense, and net interest income as a per cent of average earning assets for
the three-year period ending in 1996.
Asset yields improved slightly in 1996 (.04 per cent FTE) due to strong
loan growth. Interest costs declined by a like amount, primarily due to rate
reductions to three interest-bearing deposit products: interest checking, Money
Market investment account and regular savings.
The resulting "spread" increase of .08 per cent combined with earning asset
growth of $35.5 million accounted for the growth in net interest income (FTE) of
$2.2 million.
Asset yields in 1995 were .67 per cent higher than in 1994 as loan rates
improved. Interest costs increased .75 per cent due to growth in higher costing
deposit products, namely certificates of deposit. This .08 per cent decline in
net interest margin (FTE) was offset by growth in earning assets of $39.2
million, enabling net interest income to grow by $1.1 million.
- --------------------------------------------------------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
INTEREST INCOME INTEREST EXPENSE NET INTEREST INCOME NET INTEREST INCOME
(FTE) as a Per Cent as a Per Cent (FTE) as a Per Cent AVERAGE on a
of Average of Average of Average EARNING Fully Taxable
Earning Assets Earning Assets Earning Assets ASSETS Equivalent Basis
------------------ ---------------- ------------------- ---------- -------------------
<S> <C> <C> <C> <C> <C>
1996 8.13% 3.67% 4.46% $ 880,729 $ 39,258
1995 8.09 3.71 4.38 845,198 37,049
1994 7.42 2.96 4.46 805,987 35,909
</TABLE>
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.
- --------------------------------------------------------------------------------
OTHER INCOME
The Corporation has placed emphasis on the growth of non-interest income in
recent years by offering a wide range of fee-based services. Fee schedules are
regularly reviewed by a pricing committee to ensure that the products and
services offered by the Corporation are priced to be competitive and profitable.
Other income in 1996 amounted to $8,342,000 or 9.9 per cent higher than in
1995. The increase of $750,000 is primarily attributable to the following five
factors:
1. Trust revenues increased $166,000 (5.9 per cent) due to stronger
business activity and markets.
2. Deposit service charges increased $195,000 (6.9 per cent) primarily
due to changes in pricing.
3. Interchange fees for the Corporation's credit and debit card programs
grew by $169,000 (142 per cent) due to increased product offerings.
4. The Corporation recorded securities gains of $148,000 compared to
losses of $30,000 last year, an increase of $178,000 as shorter
maturity, available for sale securities were sold at gains and longer
maturity, higher yielding investments were purchased.
5. Postal money order agent fees increased $79,000 (19.4 per cent) due to
an increased client base.
Other income reached $7,592,000 in 1995, exceeding the prior year by
$674,000 or 9.7 per cent. Major factors included:
1. A $185,000 (7.1 per cent) increase in trust revenues, which was
principally due to the increasing stock and bond markets.
2. A gain of $205,000, included in other income, on the sale of
approximately $8,000,000 of the Corporation's student loans.
5
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OTHER EXPENSE
Total "other expenses" represent non-interest operating expenses of
the Corporation. Those expenses amounted to $24,135,000 in 1996, an increase of
5.0 per cent from the prior year, or $1,142,000.
Including an $813,000 reduction in deposit insurance premiums, remaining
operating expenses grew by $1,955,000. Four major areas account for most of
this increase:
1. Salary and benefit expenses, which account for over one-half of the
Corporation's non-interest operating expenses, increased by $640,000
(5.0 per cent) due to normal salary increases.
2. Equipment expense rose $223,000, reflecting the Corporation's
investment in technology to increase productivity.
3. Expenses related to mergers with Union National Bancorp and Randolph
County Bancorp amounted to $258,000.
4. The previous year included a $238,000 refund from the State of Indiana
for intangibles taxes paid in 1988 and 1989.
1995 expenses at $22,993,000 exceeded the prior year by $361,000 (1.6 per
cent). Salary and benefit expenses increased by $605,000 (5.0 per cent). Net
occupancy expense increased $124,000 (8.7 per cent) and equipment expense grew
by $131,000 (7.3 per cent) primarily due to technology upgrading. These
increases were offset by a $723,000 (46.7 per cent) decrease in deposit
insurance premiums due to a rate reduction implemented by the Federal Deposit
Insurance Corporation during 1995, and by a refund of $238,000 from the State of
Indiana for intangibles taxes paid in 1988 and 1989.
INCOME TAXES
The increase in 1996 tax expense of $698,000 is attributable primarily to a
$1,792,000 increase in net pre-tax income. Likewise, the $601,000 increase in
1995 resulted primarily from a $1,286,000 increase in pre-tax net income.
ACCOUNTING MATTERS
Accounting for Mortgage Servicing Rights
During 1995, the FASB issued SFAS No. 122 ("SFAS 122") ACCOUNTING FOR
MORTGAGE SERVICING RIGHTS. SFAS 122 pertains to mortgage banking enterprises
and financial institutions that conduct operations that are substantially
similar to the primary operations of a mortgage banking enterprise. SFAS 122
eliminates the accounting distinction between mortgage servicing rights that are
acquired through loan origination activities and those acquired through purchase
transactions. Under SFAS 122, if a mortgage banking enterprise sells or
securitizes loans and retains the mortgage servicing rights, the enterprise must
allocate the total cost of the mortgage loans to the mortgage servicing rights
and the loans (without the rights) based on their relative fair values if it is
practicable to estimate those fair values. If it is not practicable, the entire
cost should be allocated to the mortgage loans and no cost should be allocated
to the mortgage servicing rights. An entity would measure impairment of
mortgage service rights and loans based on the excess of the carrying amount of
the mortgage servicing rights portfolio over the fair value of that portfolio.
In 1996, the Corporation adopted SFAS No. 122. The adoption of this
statement had no material impact on the Corporation's financial condition and
result of operations.
Accounting for Stock-Based Compensation
The FASB issued SFAS 123, STOCK-BASED COMPENSATION. In December, 1994, the
FASB decided to require expanded disclosures rather than recognition of
compensation cost for fixed, at the money, options rather than recognition of
compensation expense as was originally proposed in the exposure draft.
This statement establishes a fair value based method of accounting for
stock-based compensation plans. The FASB encourages employers to recognize the
related compensation expense; however, employers are permitted to continue to
apply the provisions of APB Opinion No. 25. The Corporation has chosen to
follow APB No. 25 and the pro forma effects on net income and earnings per share
of the new accounting method are disclosed in footnote 15.
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities
SFAS No. 125 provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are considered secured
borrowings.
(continued)
6
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ACCOUNTING MATTERS (continued)
A transfer of financial assets in which the transferor surrenders control
over those assets is accounted for as a sale to the extent that consideration
other than beneficial interests in the transferred assets is received in
exchange. The transferor has surrendered control over transferred assets only
if all of the following conditions are met:
1. The transferred assets have been isolated from the transferor-put
presumptively beyond the reach of the transferor and its creditors,
even in bankruptcy or other receivership.
2. Each transferee obtains the right-free of conditions that constrain it
from taking advantage of that right-to pledge or exchange the
transferred assets, or the transferee is a qualifying special-purpose
entity and the holders of beneficial interests in that entity have the
right-free of conditions that constrain them from taking advantage of
that right-to pledge or exchange those interests.
3. The transferor does not maintain effective control over the
transferred assets through an agreement that both entitles and
obligates the transferor to repurchase or redeem them before their
maturity, or an agreement that entitles the transferor to repurchase
or redeem transferred assets that are not readily obtainable.
This Statement provides detailed measurement standards for assets and
liabilities included in these transactions. It also includes implementation
guidance for assessing isolation of transferred assets and for accounting for
transfers of partial interests, servicing of financial assets, securitizations,
transfers of sales-type and direct financing lease receivables, securities
lending transactions, repurchase agreements, "wash sales," loan syndications and
participations, risk participations in banker's acceptances, factoring
arrangements, transfers of receivables with recourse, and extinguishments of
liabilities.
The Statement supersedes FASB Statements No. 76, EXTINGUISHMENT OF DEBT,
and No. 77, REPORTING BY TRANSFERORS FOR TRANSFERS OF RECEIVABLES WITH
RECOURSE, and No. 122, ACCOUNTING FOR MORTGAGE SERVICING RIGHTS and amends
FASB Statement No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES, in addition to clarifying or amending a number of other
statements and technical bulletins.
Except as amended by Statement No. 127, this Statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and is to be applied prospectively. Earlier
or retroactive application is not permitted. Statement No. 127 defers for one
year the effective date (a) of paragraph 15 of Statement No. 125 and (b) for
repurchase agreement, dollar-roll, securities lending, and similar transactions,
or paragraphs 9-12 and 237(b) of Statement No. 125.
INFLATION
Changing prices of goods, services, and capital affect the financial
position of every business enterprise. The level of market interest rates and
the price of funds loaned or borrowed fluctuate due to changes in the rate of
inflation and various other factors, including government monetary policy.
Fluctuating interest rates affect the Corporation's net interest income,
loan volume, and other operating expenses, such as employees' salaries and
benefits, reflecting the effects of escalating prices, as well as increased
levels of operations and other factors. As the inflation rate increases, the
purchasing power of the dollar decreases. Those holding fixed-rate monetary
assets incur a loss, while those holding fixed rate monetary liabilities enjoy a
gain. The nature of a bank holding company's operations is such that there will
be an excess of monetary assets over monetary liabilities, and, thus, a bank
holding company will tend to suffer from an increase in the rate of inflation
and benefit from a decrease.
7
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks. . . . . . . . . . . . . . . . . $ 33,881,943 $ 38,973,542
Federal funds sold . . . . . . . . . . . . . . . . . . . 1,150,000 38,900,000
------------ ------------
Cash and cash equivalents. . . . . . . . . . . . . . . 35,031,943 77,873,542
Interest-bearing deposits. . . . . . . . . . . . . . . . 289,886 259,036
Investment securities
Available for sale . . . . . . . . . . . . . . . . . . 228,378,738 225,938,429
Held to maturity . . . . . . . . . . . . . . . . . . . 47,227,212 60,678,153
------------ ------------
Total investment securities . . . . . . . . . . . . 275,605,950 286,616,582
Mortgage loans held for sale . . . . . . . . . . . . . . 284,020 735,522
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . 631,415,970 552,338,402
Less: Allowance for loan losses . . . . . . . . . . . ( 6,621,716) ( 6,695,593)
------------ ------------
Net Loans. . . . . . . . . . . . . . . . . . . . . . 624,794,254 545,642,809
Premises and equipment . . . . . . . . . . . . . . . . . 15,303,300 14,834,011
Federal Reserve and Federal Home Loan Bank stock . . . . 3,090,300 2,701,800
Interest receivable. . . . . . . . . . . . . . . . . . . 8,642,816 8,999,471
Core deposit intangibles and goodwill. . . . . . . . . . 1,714,239 1,845,417
Other assets . . . . . . . . . . . . . . . . . . . . . . 3,236,126 2,647,561
------------ ------------
Total assets. . . . . . . . . . . . . . . . . . . . $967,992,834 $942,155,751
------------ ------------
------------ ------------
LIABILITIES
Deposits
Noninterest-bearing. . . . . . . . . . . . . . . . . . $110,175,273 $114,571,855
Interest-bearing . . . . . . . . . . . . . . . . . . . 684,276,081 669,364,509
------------ ------------
Total deposits . . . . . . . . . . . . . . . . . . . 794,451,354 783,936,364
Short-term borrowings. . . . . . . . . . . . . . . . . . 45,036,752 37,377,266
Federal Home Loan Bank advances. . . . . . . . . . . . . 9,150,000 9,000,000
Interest payable . . . . . . . . . . . . . . . . . . . . 3,375,697 3,415,316
Other liabilities. . . . . . . . . . . . . . . . . . . . 3,291,674 3,459,772
------------ ------------
Total liabilities. . . . . . . . . . . . . . . . . . 855,305,477 837,188,718
STOCKHOLDERS' EQUITY
Preferred stock, no-par value
Authorized and unissued--500,000 shares
Common stock, $.125 stated value
Authorized--20,000,000 shares
Issued and outstanding--6,603,319 and 6,562,290 shares 825,415 820,286
Additional paid-in capital . . . . . . . . . . . . . . . 22,967,729 22,055,101
Retained earnings. . . . . . . . . . . . . . . . . . . . 87,978,127 80,205,350
Net unrealized gain on securities available for sale . . 916,086 1,886,296
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . 112,687,357 104,967,033
------------ ------------
Total liabilities and stockholders' equity . . . . . $967,992,834 $942,155,751
------------ ------------
------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
8
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans receivable
Taxable. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52,095,502 $ 49,060,029 $ 41,677,535
Tax exempt . . . . . . . . . . . . . . . . . . . . . . . . . 89,806 81,407 117,752
Investment securities
Taxable. . . . . . . . . . . . . . . . . . . . . . . . . . . 12,832,350 12,478,700 11,831,060
Tax exempt . . . . . . . . . . . . . . . . . . . . . . . . . 3,832,051 3,642,321 3,765,015
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . 498,131 1,027,984 271,020
Deposits with financial institutions . . . . . . . . . . . . . 15,599 9,025 1,743
Federal Reserve and Federal Home Loan Bank stock . . . . . . . 131,879 149,110 102,785
------------- ------------- --------------
Total interest income. . . . . . . . . . . . . . . . . . . . 69,495,318 66,448,576 57,766,910
------------- ------------- --------------
INTEREST EXPENSE
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,139,357 28,227,765 21,403,065
Short-term borrowings. . . . . . . . . . . . . . . . . . . . . 2,686,548 2,627,511 1,963,569
Federal Home Loan Bank advances. . . . . . . . . . . . . . . . 522,975 496,086 462,184
------------- ------------- --------------
Total interest expense . . . . . . . . . . . . . . . . . . . 32,348,880 31,351,362 23,828,818
------------- ------------- --------------
NET INTEREST INCOME. . . . . . . . . . . . . . . . . . . . . . . 37,146,438 35,097,214 33,938,092
Provision for loan losses. . . . . . . . . . . . . . . . . . . 1,253,000 1,388,000 1,202,000
------------- ------------- --------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES. . . . . . . . . . . . . . . . . . . 35,893,438 33,709,214 32,736,092
------------- ------------- --------------
OTHER INCOME
Fiduciary activities . . . . . . . . . . . . . . . . . . . . . 2,966,731 2,801,174 2,616,156
Service charges on deposit accounts. . . . . . . . . . . . . . 3,023,933 2,829,158 2,763,031
Other customer fees. . . . . . . . . . . . . . . . . . . . . . 1,659,085 1,270,075 1,163,449
Net realized gains (losses)on
sales of available-for-sale securities . . . . . . . . . . . 148,088 ( 29,721) ( 18,386)
Other income . . . . . . . . . . . . . . . . . . . . . . . . . 544,316 721,713 394,421
------------- ------------- --------------
Total other income . . . . . . . . . . . . . . . . . . . . . 8,342,153 7,592,399 6,918,671
------------- ------------- --------------
OTHER EXPENSES
Salaries and employee benefits . . . . . . . . . . . . . . . . 13,432,849 12,792,364 12,187,511
Net occupancy expenses . . . . . . . . . . . . . . . . . . . . 1,537,055 1,555,094 1,431,023
Equipment expenses . . . . . . . . . . . . . . . . . . . . . . 2,151,846 1,928,516 1,797,357
Deposit insurance expense. . . . . . . . . . . . . . . . . . . 12,418 825,185 1,548,225
Printing and office supplies . . . . . . . . . . . . . . . . . 922,842 1,094,404 952,125
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . 6,078,457 4,797,592 4,716,068
------------- ------------- --------------
Total other expenses . . . . . . . . . . . . . . . . . . . . 24,135,467 22,993,155 22,632,309
------------- ------------- --------------
INCOME BEFORE INCOME TAX . . . . . . . . . . . . . . . . . . . . 20,100,124 18,308,458 17,022,454
Income tax expense . . . . . . . . . . . . . . . . . . . . . . 6,958,549 6,260,615 5,659,815
------------- ------------- --------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,141,575 $ 12,047,843 $ 11,362,639
------------- ------------- --------------
------------- ------------- --------------
NET INCOME PER SHARE . . . . . . . . . . . . . . . . . . . . . . $ 2.00 $ 1.84 $ 1.73
WEIGHTED AVERAGE SHARES OUTSTANDING. . . . . . . . . . . . . . . 6,581,167 6,563,559 6,585,697
</TABLE>
See Notes to Consolidated Financial Statements.
9
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
------------------------- Paid-In
Shares Amount Capital
------ ------ -------
<S> <C> <C> <C>
BALANCES, JANUARY 1, 1994. . . . . . . . . . . . . . . 4,899,899 $ 612,488 $23,299,610
Net income for 1994. . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . . . . . . .
Cumulative effect of change in method of
accounting for securities. . . . . . . . . . . . .
Net change in unrealized gain (loss) on
securities available for sale. . . . . . . . . . .
Stock issued under employee benefit plans. . . . . . 10,543 1,318 248,485
Stock issued under dividend reinvestment
and stock purchase plan. . . . . . . . . . . . . . 11,670 1,459 355,745
Stock options exercised. . . . . . . . . . . . . . . 4,875 609 107,275
Stock redeemed . . . . . . . . . . . . . . . . . . . ( 50,333) ( 6,292) ( 1,549,343)
---------- ---------- -----------
BALANCES, DECEMBER 31, 1994. . . . . . . . . . . . . . 4,876,654 609,582 22,461,772
Net income for 1995. . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . . . . . . .
Net change in unrealized gain (loss) on
securities available for sale. . . . . . . . . . .
Stock issued under employee benefit plans. . . . . . 11,175 1,397 275,254
Stock issued under dividend reinvestment
and stock purchase plan. . . . . . . . . . . . . . 13,928 1,741 454,498
Stock options exercised. . . . . . . . . . . . . . . 9,267 1,158 191,251
Stock redeemed . . . . . . . . . . . . . . . . . . . ( 31,918) ( 3,990) ( 1,113,113)
Three-for-two stock split. . . . . . . . . . . . . . 1,683,344 210,418 ( 210,418)
Cash paid in lieu of issuing fractional shares . . . ( 160) ( 20) ( 4,143)
---------- ---------- -----------
BALANCES, DECEMBER 31, 1995. . . . . . . . . . . . . . 6,562,290 820,286 22,055,101
Net income for 1996. . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . . . . . . .
Net change in unrealized gain (loss) on
securities available for sale . . . . . . . . . .
Stock issued under employee benefit plans. . . . . . 15,175 1,897 295,849
Stock issued under dividend reinvestment
and stock purchase plan. . . . . . . . . . . . . . 21,712 2,714 555,387
Stock options exercised. . . . . . . . . . . . . . . 4,237 530 63,689
Cash paid in lieu of issuing fractional
shares . . . . . . . . . . . . . . . . . . . . ( 95) ( 12) ( 2,297)
---------- ---------- -----------
BALANCES, DECEMBER 31, 1996. . . . . . . . . . . . . . 6,603,319 $ 825,415 $22,967,729
---------- ---------- -----------
---------- ---------- -----------
<CAPTION>
Net Unrealized Gain
(Loss) On
Retained Securities
Earnings Available for Sale Total
-------- ------------------ -----
<S> <C> <C> <C>
BALANCES, JANUARY 1, 1994. . . . . . . . . . . . . . . $ 65,248,042 $ 89,160,140
Net income for 1994. . . . . . . . . . . . . . . . . 11,362,639 11,362,639
Cash dividends . . . . . . . . . . . . . . . . . . . ( 3,995,630) ( 3,995,630)
Cumulative effect of change in method of
accounting for securities. . . . . . . . . . . . . $ 916,464 916,464
Net change in unrealized gain (loss) on
securities available for sale. . . . . . . . . . . ( 3,848,702) ( 3,848,702)
Stock issued under employee benefit plans. . . . . . 249,803
Stock issued under dividend reinvestment
and stock purchase plan. . . . . . . . . . . . . . 357,204
Stock options exercised. . . . . . . . . . . . . . . 107,884
Stock redeemed . . . . . . . . . . . . . . . . . . . ( 1,555,635)
------------ ------------ -------------
BALANCES, DECEMBER 31, 1994. . . . . . . . . . . . . . 72,615,051 ( 2,932,238) 92,754,167
Net income for 1995. . . . . . . . . . . . . . . . . 12,047,843 12,047,843
Cash dividends . . . . . . . . . . . . . . . . . . . ( 4,455,212) ( 4,455,212)
Net change in unrealized gain (loss) on
securities available for sale. . . . . . . . . . . 4,818,534 4,818,534
Stock issued under employee benefit plans. . . . . . 276,651
Stock issued under dividend reinvestment
and stock purchase plan. . . . . . . . . . . . . . 456,239
Stock options exercised. . . . . . . . . . . . . . . 192,409
Stock redeemed . . . . . . . . . . . . . . . . . . . ( 2,332) ( 1,119,435)
Three-for-two stock split
Cash paid in lieu of issuing fractional shares . . . ( 4,163)
------------ ------------ -------------
BALANCES, DECEMBER 31, 1995. . . . . . . . . . . . . . 80,205,350 1,886,296 104,967,033
Net income for 1996. . . . . . . . . . . . . . . . . 13,141,575 13,141,575
Cash dividends . . . . . . . . . . . . . . . . . . . ( 5,368,798) ( 5,368,798)
Net change in unrealized gain (loss) on
securities available for sale . . . . . . . . . . ( 970,210) ( 970,210)
Stock issued under employee benefit plans. . . . . . 297,746
Stock issued under dividend reinvestment
and stock purchase plan. . . . . . . . . . . . . . 558,101
Stock options exercised. . . . . . . . . . . . . . . 64,219
Cash paid in lieu of issuing fractional shares . . . ( 2,309)
------------ ------------ -------------
BALANCES, DECEMBER 31, 1996. . . . . . . . . . . . . . $ 87,978,127 $ 916,086 $ 112,687,357
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See Notes to Consolidated Financial Statements.
10
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . $ 13,141,575 $ 12,047,843 $ 11,362,639
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for loan losses. . . . . . . . . . . . . 1,253,000 1,388,000 1,202,000
Depreciation and amortization. . . . . . . . . . . 1,626,294 1,482,506 1,486,796
Amortization of goodwill and intangibles . . . . . 131,178 131,177 131,177
Deferred income tax. . . . . . . . . . . . . . . . 401,403 376,872 ( 65,314)
Securities amortization, net . . . . . . . . . . . 188,121 693,006 1,497,651
Securities losses (gains), net . . . . . . . . . . ( 148,088) 29,721 18,386
Mortgage loans originated for sale . . . . . . . . ( 2,500,838) ( 4,491,484)
Proceeds from sales of mortgage loans. . . . . . . 2,952,340 3,785,283
Net change in
Interest receivable. . . . . . . . . . . . . . . 356,655 ( 705,889) ( 70,479)
Interest payable . . . . . . . . . . . . . . . . ( 39,619) 979,376 338,736
Other adjustments. . . . . . . . . . . . . . . . . ( 594,237) 66,911 ( 65,498)
------------- ------------- -------------
Net cash provided by operating activities. . . 16,767,784 15,783,322 15,836,094
------------- ------------- -------------
INVESTING ACTIVITIES:
Net change in interest-bearing deposits. . . . . . . ( 30,850) ( 235,919) 230,737
Purchases of
Securities available for sale. . . . . . . . . . . ( 113,473,186) ( 91,178,441) ( 34,370,276)
Securities held to maturity. . . . . . . . . . . . ( 22,449,898) ( 41,575,202) ( 43,701,349)
Proceeds from maturities of
Securities available for sale. . . . . . . . . . . 96,441,179 35,715,846 14,109,090
Securities held to maturity. . . . . . . . . . . . 35,715,345 62,053,098 71,998,501
Proceeds from sales of
securities available for sale. . . . . . . . . . 13,120,159 14,165,258 16,152,838
Net change in loans . . . . . . . . . . . . . . . . ( 80,404,445) ( 25,628,670) ( 34,838,202)
Purchase of Federal Home Loan Bank stock . . . . . . ( 388,500)
Purchases of premises and equipment. . . . . . . . . ( 2,083,063) ( 2,187,086) ( 3,017,115)
Other investing activities . . . . . . . . . . . . . 70,441 365,990 1,454,774
------------- ------------- -------------
Net cash used by investing activities. . . . . ( 73,482,818) ( 48,505,126) ( 11,981,002)
------------- ------------- -------------
FINANCING ACTIVITIES:
Net change in
Demand and savings deposits. . . . . . . . . . . . ( 19,167,911) 2,604,084 16,887,893
Certificates of deposit and other time deposits. . 29,682,901 61,322,576 14,477,751
Short-term borrowings. . . . . . . . . . . . . . . 7,659,486 ( 3,253,901) ( 12,090,302)
Federal Home Loan Bank advances. . . . . . . . . . . 5,150,000 1,000,000 2,000,000
Repayment of Federal Home Loan Bank advances . . . . ( 5,000,000)
Cash dividends . . . . . . . . . . . . . . . . . . . ( 5,368,798) ( 4,455,212) ( 3,995,630)
Stock issued under employee benefit plans. . . . . . 297,746 276,651 249,803
Stock issued under dividend reinvestment
and stock purchase plan. . . . . . . . . . . . . . 558,101 456,239 357,204
Stock options exercised. . . . . . . . . . . . . . . 64,219 192,409 107,884
Stock redeemed . . . . . . . . . . . . . . . . . . . ( 1,119,435) ( 1,555,635)
Cash paid in lieu of issuing fractional shares . . . ( 2,309) ( 4,163)
------------- ------------- -------------
Net cash provided by financing activities. . . . 13,873,435 57,019,248 16,438,968
------------- ------------- -------------
NET CHANGE IN CASH
AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . ( 42,841,599) 24,297,444 20,294,060
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR. . . . . . . . . . . . . . . . . . 77,873,542 53,576,098 33,282,038
------------- ------------- -------------
CASH AND CASH EQUIVALENTS,
END OF YEAR. . . . . . . . . . . . . . . . . . . . . $ 35,031,943 $ 77,873,542 $ 53,576,098
------------- ------------- -------------
------------- ------------- -------------
ADDITIONAL CASH FLOWS INFORMATION:
Interest paid. . . . . . . . . . . . . . . . . . . . $ 32,388,499 $ 30,371,976 $ 23,597,053
Income tax paid. . . . . . . . . . . . . . . . . . . 6,202,895 5,641,046 5,860,952
</TABLE>
See Notes to Consolidated Financial Statements.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Per Share Amounts)
NOTE 1
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Merchants Corporation
("Corporation"), and its wholly owned subsidiaries, First Merchants Bank, N.A.
("First Merchants"), Pendleton Banking Company ("Pendleton"), First United Bank
("First United"), The Randolph County Bank ("Randolph County"), and Union County
National Bank ("Union National"), (collectively "the Banks"), conform to
generally accepted accounting principles and reporting practices followed by the
banking industry. The more significant of the policies are described below.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Corporation is a bank holding company whose principal activity is the
ownership and management of the Banks. First Merchants and Union National
operate under national bank charters and provide full banking services,
including trust services. As national banks, First Merchants and Union National
are subject to the regulation of the Office of the Comptroller of the Currency
and the Federal Deposit Insurance Corporation ("FDIC"). Pendleton, First United
and Randolph County operate under state bank charters and provide full banking
services, including trust services. As state banks, Pendleton, First United and
Randolph County are subject to the regulation of the Department of Financial
Institutions, State of Indiana, and the FDIC.
The Banks generate commercial, mortgage, and consumer loans and receive
deposits from customers located primarily in central and east central Indiana
and Butler County, Ohio. The Banks' loans are generally secured by specific
items of collateral, including real property, consumer assets, and business
assets. Although the Banks have a diversified loan portfolio, a substantial
portion of their debtors' ability to honor their contracts is dependent upon
economic conditions in the automotive and agricultural industries.
CONSOLIDATION - The consolidated financial statements include the accounts of
the Corporation and the Banks, after elimination of all material intercompany
transactions and accounts. Certain prior year amounts have been reclassified to
conform with current classifications.
INVESTMENT SECURITIES - The Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES, on January 1, 1994.
Debt securities are classified as held to maturity when the Corporation has
the positive intent and ability to hold the securities to maturity. Securities
held to maturity are carried at amortized cost.
Debt securities not classified as held to maturity are classified as
available for sale. Securities available for sale are carried at fair value
with unrealized gains and losses reported separately through stockholders'
equity, net of tax.
Amortization of premiums and accretion of discounts are recorded as
interest income from securities. Realized gains and losses are recorded as net
security gains (losses). Gains and losses on sales of securities are determined
on the specific-identification method.
At January 1, 1994, investment and trading account securities, with an
approximate carrying value of $123,634,000, were reclassified as available for
sale. This reclassification resulted in an increase in total stockholders'
equity, net of taxes, of $916,000.
MORTGAGE SERVICING RIGHTS on originated loans are capitalized by allocating the
total cost of the mortgage loans between the mortgage servicing rights and the
loans based on their relative fair values. Capitalized servicing rights are
amortized in proportion to and over the period of estimated servicing revenues.
MORTGAGE LOANS HELD FOR SALE are carried at the lower of aggregate cost or
market. Net unrealized losses are recognized through a valuation allowance by
charges to income.
LOANS are carried at the principal amount outstanding. A loan is impaired when,
based on current information or events, it is probable that the Banks will be
unable to collect all amounts due (principal and interest) according to the
contractual terms of the loan agreement. Payments with insignificant delays not
exceeding 60 days outstanding are not considered impaired. Certain nonaccrual
and substantially delinquent loans may be considered to be impaired. In
applying the provisions of SFAS No. 114, the Corporation considers its
investment in one-to-four family residential loans and consumer installment
loans to be homogeneous and therefore excluded from separate identification for
evaluation of impairment. Interest income is accrued on the principal balances
of loans, except for installment loans with add-on interest, for which a method
that approximates the level yield method is used. The accrual of interest on
impaired loans is discontinued when, in management's opinion, the borrower may
be unable to meet payments as they become due. When interest accrual is
discontinued, all unpaid accrued interest is reversed when considered
uncollectible. Interest income is subsequently recognized only to the extent
cash payments are received. Certain loan fees and direct costs are being
deferred and amortized as an adjustment of yield on the loans.
ALLOWANCE FOR LOAN LOSSES is maintained to absorb potential loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loan loss experience,
changes in the composition of the loan portfolio, the current condition and
amount of loans outstanding, and the probability
(continued)
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Per Share Amounts)
NOTE 1
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNT POLICIES (continued)
of collecting all amounts due. Impaired loans are measured by the present value
of expected future cash flows, or the fair value of the collateral of the loans,
if collateral dependent.
The determination of the adequacy of the allowance for loan losses is based
on estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that, as of
December 31, 1996, the allowance for loan losses is adequate based on
information currently available. A worsening or protracted economic decline in
the area within which the Corporation operates would increase the likelihood of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
PREMISES AND EQUIPMENT are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line and declining methods based on
the estimated useful lives of the assets. Maintenance and repairs are expensed
as incurred, while major additions and improvements are capitalized. Gains and
losses on dispositions are included in current operations.
FEDERAL RESERVE AND FEDERAL HOME LOAN BANK STOCK are required investments for
institutions that are members of the Federal Reserve Bank ("FRB") and Federal
Home Loan Bank ("FHLB") systems. The required investment in the common stock is
based on a predetermined formula.
INTANGIBLE ASSETS are being amortized on the straight-line basis over periods
ranging from 10 to 25 years. Such assets are periodically evaluated as to the
recoverability of their carrying value.
INCOME TAX in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The
Corporation files consolidated income tax returns with its subsidiaries.
EARNINGS PER SHARE have been computed based upon the weighted average common
shares outstanding during each year and have been restated to give effect to a
three-for-two stock split distributed to stockholders on October 27, 1995.
Common stock equivalents, consisting of shares issuable under employee benefit
plans, were not included since their effect on dilution was insignificant.
NOTE 2
BUSINESS COMBINATIONS
On August 1, 1996, the Corporation issued 942,685 shares of its common stock in
exchange for all of the outstanding shares of Union National Bancorp, Liberty,
Indiana. On October 2, 1996, the Corporation issued 565,705 shares of its
common stock in exchange for all of the outstanding shares of Randolph County
Bancorp, Winchester, Indiana. These transactions were accounted for under the
pooling-of-interests method of accounting. The financial information contained
herein reflects the mergers and reports the financial condition and results of
operations as though the Corporation had been combined as of January 1, 1994.
Separate operating results of Union National Bancorp and Randolph County Bancorp
for the periods prior to the merger were as follows:
1996 1995 1994
---- ---- ----
Net interest income:
First Merchants Corporation. . . $ 33,059 $ 27,881 $ 26,983
Union National Bancorp . . . . . 2,961 4,562 4,357
Randolph County Bancorp. . . . . 1,126 2,654 2,598
--------- --------- ---------
Combined . . . . . . . . . . . $ 37,146 $ 35,097 $ 33,938
--------- --------- ---------
--------- --------- ---------
Net income:
First Merchants Corporation. . . $ 11,556 $ 9,858 $ 9,158
Union National Bancorp . . . . . 974 1,523 1,403
Randolph County Bancorp. . . . . 612 667 802
--------- --------- ---------
Combined . . . . . . . . . . . $ 13,142 $ 12,048 $ 11,363
--------- --------- ---------
--------- --------- ---------
Net income per share:
First Merchants Corporation. . . $ 1.76 $ 1.50 $ 1.39
Union National Bancorp . . . . . .15 .23 .21
Randolph County Bancorp. . . . . .09 .11 .13
--------- --------- ---------
Combined . . . . . . . . . . . $ 2.00 $ 1.84 $ 1.73
--------- --------- ---------
--------- --------- ---------
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Per Share Amounts)
NOTE 3
RESTRICTION ON CASH AND DUE FROM BANKS
The Banks are required to maintain reserve funds in cash and/or on deposit
with the Federal Reserve Bank. The reserve required at December 31, 1996, was
$11,859,000.
NOTE 4
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----- ----- ------ -----
<S> <C> <C> <C> <C>
Available for sale at December 31, 1996
U.S. Treasury. . . . . . . . . . . . . . . . . . . . . $ 21,570 $ 92 $ 46 $ 21,616
Federal agencies . . . . . . . . . . . . . . . . . . . 79,130 540 180 79,490
State and municipal. . . . . . . . . . . . . . . . . . 52,026 1,173 106 53,093
Mortgage and other asset-backed securities . . . . . . 42,150 297 275 42,172
Corporate obligations. . . . . . . . . . . . . . . . . 31,470 156 128 31,498
Marketable equity securities . . . . . . . . . . . . . 510 510
-------- -------- ------ --------
Total available for sale. . . . . . . . . . . . . . 226,856 2,258 735 228,379
-------- -------- ------ --------
Held to maturity at December 31, 1996
U.S. Treasury. . . . . . . . . . . . . . . . . . . . . 249 7 242
Federal agencies . . . . . . . . . . . . . . . . . . . 5,729 23 5 5,747
State and municipal. . . . . . . . . . . . . . . . . . 36,405 381 21 36,765
Mortgage and other asset-backed securities . . . . . . 4,844 17 121 4,740
-------- -------- ------ --------
Total held to maturity . . . . . . . . . . . . . . . 47,227 421 154 47,494
-------- -------- ------ --------
Total investment securities. . . . . . . . . . . . . $274,083 $ 2,679 $ 889 $275,873
-------- -------- ------ --------
-------- -------- ------ --------
Available for sale at December 31, 1995
U.S. Treasury. . . . . . . . . . . . . . . . . . . . . . $ 16,239 $ 184 $ 11 $ 16,412
Federal agencies . . . . . . . . . . . . . . . . . . . . 84,047 1,529 93 85,483
State and municipal. . . . . . . . . . . . . . . . . . . 40,391 1,257 68 41,580
Mortgage and other asset-backed securities . . . . . . . 47,445 411 283 47,573
Corporate obligations. . . . . . . . . . . . . . . . . . 34,114 289 106 34,297
Marketable equity securities . . . . . . . . . . . . . . 562 31 593
-------- -------- ------ --------
Total available for sale. . . . . . . . . . . . . . 222,798 3,701 561 225,938
-------- -------- ------ --------
Held to maturity at December 31, 1995
U.S. Treasury. . . . . . . . . . . . . . . . . . . . . . 3,103 8 2 3,109
Federal agencies . . . . . . . . . . . . . . . . . . . . 11,645 69 21 11,693
State and municipal. . . . . . . . . . . . . . . . . . . 40,393 574 57 40,910
Mortgage and other asset-backed securities . . . . . . . 5,037 17 21 5,033
Corporate obligations. . . . . . . . . . . . . . . . . . 500 1 499
-------- -------- ------ --------
Total held to maturity. . . . . . . . . . . . . . . 60,678 668 102 61,244
-------- -------- ------ --------
Total investment securities . . . . . . . . . . . . $283,476 $ 4,369 $ 663 $287,182
-------- -------- ------ --------
-------- -------- ------ --------
</TABLE>
The amortized cost and fair value of securities held to maturity and
available for sale at December 31, 1996, by contractual maturity, are shown on
the following page. Expected maturities will differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without
call or prepayment penalties.
(continued)
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Per Share Amounts)
NOTE 4
INVESTMENT SECURITIES (continued)
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Maturity distribution at December 31, 1996:
Due in one year or less . . . . . . . . . . . $ 40,496 $ 40,566 $ 11,990 $ 12,022
Due after one through five years. . . . . . . 120,610 121,038 25,692 25,878
Due after five through ten years. . . . . . . 16,136 16,819 3,617 3,698
Due after ten years . . . . . . . . . . . . . 6,954 7,274 1,084 1,156
--------- --------- --------- ---------
184,196 185,697 42,383 42,754
Mortgage and other asset-backed securities. . 42,150 42,172 4,844 4,740
Marketable equity securities. . . . . . . . . 510 510
--------- --------- --------- ---------
Totals. . . . . . . . . . . . . . . . . . . $ 226,856 $ 228,379 $ 47,227 $ 47,494
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Securities with a carrying value of approximately $102,787,000 and
$99,098,000 were pledged at December 31, 1996 and 1995, to secure certain
deposits, Federal Home Loan Bank advances and for other purposes as permitted or
required by law.
Proceeds from sales of securities available for sale during 1996, 1995 and
1994 were $13,120,000, $14,165,000 and $16,153,000. Gross gains of $148,000,
$57,800 and $167,000 and gross losses of $0, $113,900 and $198,000 were realized
on those sales.
In December, 1995, the Corporation transferred certain securities from held
to maturity to available for sale in accordance with a transition
reclassification allowed by the Financial Accounting Standards Board. Such
securities had a carrying value of $52,119,000 and a fair value of $52,811,000.
NOTE 5
LOANS AND ALLOWANCE
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Loans at December 31:
Commercial and industrial loans. . . . . . . . . . . . . . . . . . . . . $ 132,134 $ 98,880
Bankers' acceptances and loans to financial institutions . . . . . . . . 625 2,925
Agricultural production financing and other loans to farmers . . . . . . 18,906 17,203
Real estate loans:
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,167 9,913
Commercial and farmland. . . . . . . . . . . . . . . . . . . . . . . . 97,596 104,731
Residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253,530 215,738
Individuals' loans for household and other personal expenditures . . . . 113,507 102,313
Tax-exempt loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,643 1,204
Other loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,672 949
---------- ----------
632,780 553,856
Unearned interest on loans . . . . . . . . . . . . . . . . . . . . . . . ( 1,364) ( 1,518)
---------- ----------
Total loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 631,416 $ 552,338
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Allowance for loan losses:
Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,696 $ 6,603 $ 6,467
Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . . 1,253 1,388 1,202
Recoveries on loans. . . . . . . . . . . . . . . . . . . . . . . . . . . 309 259 422
Loans charged off. . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 1,636) ( 1,554) ( 1,488)
--------- --------- ---------
Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,622 $ 6,696 $ 6,603
--------- --------- ---------
--------- --------- ---------
</TABLE>
(continued)
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Per Share Amounts)
NOTE 5
LOANS AND ALLOWANCE (continued)
Information on impaired loans is summarized below:
1996 1995
---- ----
For the year ending December 31:
Impaired loans with an allowance . . . . . . . . . $ 3,124 $ 2,314
Impaired loans for which the discounted
cash flows or collateral value exceeds the
carrying value of the loan . . . . . . . . . . . . 868 2,498
-------- --------
Total impaired loans . . . . . . . . . . . . . $ 3,992 $ 4,812
-------- --------
-------- --------
Allowance for impaired loans (included in the
Corporation's allowance for loan losses). . . . . $ 1,092 $ 1,177
Average balance of impaired loans . . . . . . . . . 5,213 4,650
Interest income recognized on impaired loans. . . . 311 153
Cash basis interest included above. . . . . . . . . 291 93
Nonaccruing and restructured loans totaled $1,640,000 at December 31, 1994.
Additional interest income of $57,000 for 1994 would have been recorded had
income on nonaccruing and restructured loans been considered collectible and
accounted for on the accrual basis under the original terms of the loans.
The Banks have entered into transactions with certain directors, executive
officers, significant stockholders, and their affiliates or associates ("related
parties"). Such transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and did not, in the opinion of management, involve more
than normal credit risk or present other unfavorable features.
The aggregate amount of loans, as defined, to such related parties were as
shown on the right:
Balances, January 1, 1996. . . . . . . . . . . . $ 12,314
New loans, including renewals. . . . . . . . . . 18,128
Payments, etc., including renewals . . . . . . . ( 21,379)
---------
Balances, December 31, 1996. . . . . . . . . . . $ 9,063
---------
---------
NOTE 6
PREMISES AND EQUIPMENT
1996 1995
---- ----
Cost at December 31:
Land . . . . . . . . . . . . . . . . . . . . . $ 2,829 $ 2,855
Buildings and leasehold improvements . . . . . 13,863 13,404
Equipment. . . . . . . . . . . . . . . . . . . 13,559 12,432
--------- ----------
Total cost . . . . . . . . . . . . . . . . . 30,251 28,691
Accumulated depreciation . . . . . . . . . . . . ( 14,948) ( 13,857)
--------- ----------
Net. . . . . . . . . . . . . . . . . . . . . $ 15,303 $ 14,834
--------- ----------
--------- ----------
The Corporation is committed under various noncancelable lease contracts
for certain subsidiary office facilities. Total lease expense for 1996, 1995
and 1994 was $134,000, $127,000 and $113,000, respectively. The future minimum
rental commitments required under the operating leases in effect at December 31,
1996, expiring at various dates through the year 2016, follow on the right for
the years ending December 31:
1997 . . . . . . . . . . . . . . . . . . . . $ 133,000
1998 . . . . . . . . . . . . . . . . . . . . 113,000
1999 . . . . . . . . . . . . . . . . . . . . 104,000
2000 . . . . . . . . . . . . . . . . . . . . 88,000
2001 . . . . . . . . . . . . . . . . . . . . 69,000
After 2001 . . . . . . . . . . . . . . . . . 294,000
----------
Total future minimum obligations . . . . . $ 801,000
----------
----------
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Per Share Amounts)
NOTE 7
DEPOSITS
1996 1995
---- ----
Deposits at December 31:
Demand deposits. . . . . . . . . . . . . . . . $ 225,437 $ 257,258
Savings deposits . . . . . . . . . . . . . . . 170,179 157,525
Certificates and other time deposits
of $100,000 or more. . . . . . . . . . . . . 82,802 70,487
Other certificates and time deposits . . . . . 316,033 298,666
---------- ----------
Total deposits . . . . . . . . . . . . . . $ 794,451 $ 783,936
---------- ----------
---------- ----------
Certificates and other time deposits maturing in years ending December 31:
1997 . . . . . . . . $ 279,664
1998 . . . . . . . . 71,995
1999 . . . . . . . . 27,928
2000 . . . . . . . . 13,234
2001 . . . . . . . . 3,736
After 2001 . . . . . . . 2,278
----------
$ 398,835
----------
----------
NOTE 8
SHORT-TERM BORROWINGS
1996 1995
---- ----
Short-term borrowings at December 31:
Federal funds purchased. . . . . . . . . . . . $ 20,725 $ 1,700
Securities sold under repurchase agreements. . 20,054 28,887
U.S. Treasury demand notes . . . . . . . . . . 4,258 6,790
--------- ---------
Total short-term borrowings. . . . . . . . . $ 45,037 $ 37,377
--------- ---------
--------- ---------
Securities sold under repurchase agreements consist of obligations of the
Banks to other parties. The obligations are secured by U.S. Treasury and
Federal agency obligations and generally mature within one to 185 days from the
transaction date. The maximum amount of outstanding agreements at any month-end
during 1996 and 1995 totaled $52,221,000 and $58,097,000 and the monthly average
of such agreements totaled $42,140,000 and $35,436,000.
NOTE 9
FEDERAL HOME LOAN BANK ADVANCES
Advances from FHLB at December 31:
1996 1995
--------------------------------------
Weighted Weighted
Average Average
Interest Interest
Amount Rate Amount Rate
------ ---- ------ ----
Maturities in years ending December 31:
1996. . . . . . . . . . . . . . . . $ 5,000 6.46%
1997. . . . . . . . . . . . . . . . $ 2,000 4.76% 2,000 4.76
1998. . . . . . . . . . . . . . . . 5,000 5.61 2,000 5.29
1999. . . . . . . . . . . . . . . . 2,150 5.81
-------- --------
Total advances . . . . . . . . . $ 9,150 5.48 $ 9,000 5.83
-------- --------
-------- --------
The terms of a security agreement with the FHLB require the Corporation to
pledge as collateral for advances qualifying first mortgage loans in an amount
equal to at least 160 per cent of these advances. Advances are subject to
restrictions or penalties in the event of prepayment.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Per Share Amounts)
NOTE 10
LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheet. The loans are serviced primarily for the Federal
Home Loan Mortgage Corporation and the unpaid balances totaled $5,997,000 and
$3,546,000 at December 31, 1996 and 1995.
In 1996, the Corporation adopted SFAS No. 122, ACCOUNTING FOR MORTGAGE
SERVICING RIGHTS. The adoption of this statement had no material impact on the
Corporation's financial condition and results of operations.
NOTE 11
INCOME TAX
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income tax expense, for the year ended December 31:
Currently payable:
Federal. . . . . . . . . . . . . . . . . . . $ 4,903 $ 4,400 $ 4,310
State. . . . . . . . . . . . . . . . . . . . 1,655 1,484 1,414
Deferred:
Federal. . . . . . . . . . . . . . . . . . . 336 299 ( 73)
State. . . . . . . . . . . . . . . . . . . . 65 78 9
-------- -------- --------
Total income tax expense. . . . . . . . . $ 6,959 $ 6,261 $ 5,660
-------- -------- --------
-------- -------- --------
Reconciliation of federal statutory
to actual tax expense (benefit):
Federal statutory income tax at 34%. . . . . . $ 6,834 $ 6,225 $ 5,788
Tax-exempt interest. . . . . . . . . . . . . . (1,140) (1,087) (1,177)
Effect of state income taxes . . . . . . . . . 1,135 1,031 939
Other. . . . . . . . . . . . . . . . . . . . . 130 92 110
-------- -------- --------
Actual tax expense . . . . . . . . . . . . . $ 6,959 $ 6,261 $ 5,660
-------- -------- --------
-------- -------- --------
</TABLE>
Tax expense (benefit) applicable to security gains and losses for the years
ended December 31, 1996, 1995 and 1994, was $50,300, ($7,900) and ($6,800),
respectively.
The components of the deferred tax asset included in other assets are as
shown in the table below.
No valuation allowance at December 31, 1996, was considered necessary.
1996 1995
---- ----
Deferred Tax Asset at December 31:
Differences in depreciation methods. . . . . . . . . . $ ( 983) $ ( 923)
Differences in accounting for loans and securities . . ( 78) ( 63)
Differences in accounting for loan fees. . . . . . . . 157 364
Differences in accounting for loan losses. . . . . . . 2,571 2,575
Deferred compensation. . . . . . . . . . . . . . . . . 285 280
Differences in accounting for pensions
and other employee benefits. . . . . . . . . . . . . 118 66
Net unrealized gain on securities available for sale . ( 607) ( 1,245)
Alternative minimum tax credit carryover . . . . . . . 123
State income tax . . . . . . . . . . . . . . . . . . . ( 152) ( 166)
Other. . . . . . . . . . . . . . . . . . . . . . . . . ( 75) ( 12)
-------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . . $ 1,236 $ 999
-------- --------
-------- --------
Assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,131 $ 3,411
Liabilities. . . . . . . . . . . . . . . . . . . . . . . (1,895) (2,412)
-------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,236 $ 999
-------- --------
-------- --------
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Per Share Amounts)
NOTE 12
COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements. The
Banks' exposure to credit loss in the event of nonperformance by the other party
to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual or notional amount of those
instruments. The Banks use the same credit policies in making such commitments
as they do for instruments that are included in the consolidated balance sheet.
Financial instruments whose contract amount represents credit risk as of
December 31, were as follows:
1996 1995
---- ----
Commitments to extend credit. . . . . . . $137,653 $128,940
Standby letters of credit . . . . . . . . 2,874 3,238
Commitments to extend credit are agreements to lend to a customer, as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Banks evaluate each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Banks upon extension of credit, is based on management's
credit evaluation. Collateral held varies, but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Banks
to guarantee the performance of a customer to a third party.
The Corporation and Banks are also subject to claims and lawsuits which
arise primarily in the ordinary course of business. It is the opinion of
management that the disposition or ultimate resolution of such claims and
lawsuits will not have a material adverse effect on the consolidated financial
position of the Corporation.
NOTE 13
STOCKHOLDERS' EQUITY
National and state banking laws restrict the maximum amount of dividends
that a bank may pay in any calendar year. National and state banks are limited
to the bank's retained net income (as defined) for the current year plus those
for the previous two years. The amount at December 31, 1996, available for 1997
dividends to the Corporation, is $21,512,000. As a practical matter, the
subsidiaries restrict dividends to a lesser amount because of the need to
maintain an adequate capital structure.
Total stockholders' equity for all subsidiaries at December 31, 1996, was
$110,349,000, of which $88,837,000 was restricted from dividend distribution to
the Corporation.
The Corporation has a Dividend Reinvestment and Stock Purchase Plan,
enabling stockholders to elect to have their cash dividends on all shares held
automatically reinvested in additional shares of the Corporation's common stock.
In addition, stockholders may elect to make optional cash payments up to an
aggregate of $2,500 per quarter for the purchase of additional shares of common
stock. The stock is credited to participant accounts at fair market value.
Dividends are reinvested on a quarterly basis. At December 31, 1996, 364,334
shares of common stock were reserved for purchase under the plan.
On August 8, 1995, the Board of Directors of the Corporation declared a
three-for-two stock split on its common shares. The new shares were distributed
on October 27, 1995, to holders of record on October 20, 1995.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Per Share Amounts)
NOTE 14
REGULATORY CAPITAL
The Corporation and Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate actions by the regulatory agencies
that, if undertaken, could have a material effect on the Corporation's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Corporation and Banks must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
At December 31, 1996, the management of the Corporation believes that it
meets all capital adequacy requirements to which it is subject. The most recent
notifications from the regulatory agencies categorized the Corporation and Banks
as well capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Corporation and Banks must maintain a
minimum total capital, Tier I capital to risk-weighted assets and Tier I capital
to average assets of 10 per cent, 6 per cent and 5 per cent, respectively.
There have been no conditions or events since that notification that management
believes have changed this categorization.
Actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
1996
-----------------------------------------------
Actual Required for
------ Adequate Capital (1)
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
December 31
Total Capital (1) (to risk-weighted assets)
Consolidated . . . . . . . . . . . . . . . . . . . . $116,693 18.0% $ 51,884 8.0%
First Merchants. . . . . . . . . . . . . . . . . . . 69,651 17.8 31,300 8.0
Pendleton. . . . . . . . . . . . . . . . . . . . . . 11,383 17.9 5,074 8.0
First United . . . . . . . . . . . . . . . . . . . . 7,091 17.2 3,302 8.0
Randolph County. . . . . . . . . . . . . . . . . . . 9,985 14.9 5,364 8.0
Union National . . . . . . . . . . . . . . . . . . . 17,672 17.9 7,914 8.0
Tier I Capital (1) (to risk-weighted assets)
Consolidated . . . . . . . . . . . . . . . . . . . . $110,072 17.0% $25,942 4.0%
First Merchants. . . . . . . . . . . . . . . . . . . 66,143 16.9 15,650 4.0
Pendleton. . . . . . . . . . . . . . . . . . . . . . 10,629 16.8 2,537 4.0
First United . . . . . . . . . . . . . . . . . . . . 6,663 16.1 1,651 4.0
Randolph County. . . . . . . . . . . . . . . . . . . 9,234 13.8 2,682 4.0
Union National . . . . . . . . . . . . . . . . . . . 16,492 16.7 3,957 4.0
Tier I Capital (1) (to average assets)
Consolidated . . . . . . . . . . . . . . . . . . . . $110,072 11.6% $38,012 4.0%
First Merchants. . . . . . . . . . . . . . . . . . . 66,143 11.6 22,849 4.0
Pendleton. . . . . . . . . . . . . . . . . . . . . . 10,629 12.3 3,462 4.0
First United . . . . . . . . . . . . . . . . . . . . 6,663 11.3 2,351 4.0
Randolph County. . . . . . . . . . . . . . . . . . . 9,234 12.9 2,863 4.0
Union National . . . . . . . . . . . . . . . . . . . 16,492 9.5 6,954 4.0
(1) As defined by regulatory agencies
</TABLE>
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Per Share Amounts)
NOTE 15
EMPLOYEE BENEFIT PLANS
The Corporation's defined-benefit pension plans cover substantially all of
the Banks' employees. The benefits are based primarily on years of service and
employees' pay near retirement. Contributions are intended to provide not only
for benefits attributed to service to date, but also for those expected to be
earned in the future. Pension expense was $191,000 for 1996, $253,000 for 1995
and $270,000 for 1994.
The following table sets forth the plans' funded status and amounts
recognized in the consolidated balance sheet at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Actuarial present value of:
Accumulated benefit obligation including vested
benefits of $10,885 and $10,478. . . . . . . . . . . . . . . . . . . $ 11,133 $ 10,691
------------ ------------
------------ ------------
Projected benefit obligation for service rendered to date. . . . . . . $ (13,060) $ ( 12,861)
Plan assets at fair value, primarily interest-bearing deposits
and corporate bonds and securities . . . . . . . . . . . . . . . . . . 15,188 13,727
------------ ------------
Plan assets in excess of projected benefit obligation. . . . . . . . . . 2,128 866
Unrecognized net gain from experience
different than that assumed. . . . . . . . . . . . . . . . . . . . . . ( 1,615) ( 358)
Unrecognized prior service cost. . . . . . . . . . . . . . . . . . . . . ( 169) 82
Unrecognized net transition asset. . . . . . . . . . . . . . . . . . . . ( 638) ( 758)
------------ ------------
Accrued pension cost included in the balance sheet . . . . . . . . . . . $ ( 294) $ ( 168)
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Pension expense includes the following components:
Service cost-benefits earned during the year . . . . . . . . . . . . $ 537 $ 462 $ 548
Interest cost on projected benefit obligation. . . . . . . . . . . . 921 845 778
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . (1,966) (2,633) ( 130)
Net amortization and deferral. . . . . . . . . . . . . . . . . . . . 699 1,579 ( 926)
------- ------- -------
$ 191 $ 253 $ 270
------- ------- -------
------- ------- -------
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Assumptions used in the accounting as of December 31 were:
Discount rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.50% 7.50% 8.25%
Rate of increase in compensation . . . . . . . . . . . . . . . . . . . 4.50% 4.50% 4.50%
Expected long-term rate of return on assets. . . . . . . . . . . . . . 8.75% 8.75% 8.75%
</TABLE>
Randolph County employees participated in a defined-benefit pension plan,
which is included in the above disclosures. This plan was mergered with the
Corporation's plan as of December 31, 1996. Randolph County's plan assumptions
used in the accounting were different than the Corporation's plan assumptions.
However, the differences do not have a material impact on the disclosures
presented.
In 1989, stockholders approved the 1989 Stock Option Plan, reserving
112,500 shares of Corporation common stock for the granting of options to
certain employees. The exercise price of the shares may not be less than the
fair market value of the shares upon grant of the option. Options become 100
per cent vested when granted and are fully exercisable generally six months
after the date of grant, for a period of ten years. There were no shares
available for grant at December 31, 1996.
(continued)
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Per Share Amounts)
NOTE 15
EMPLOYEE BENEFIT PLANS (continued)
On March 31, 1994, stockholders approved the 1994 Stock Option Plan,
reserving 315,000 shares of Corporation common stock for the granting of options
to certain employees and non-employee directors. The exercise price of the
shares may not be less than the fair market value of the shares upon the grant
of the option. Options become 100 per cent vested when granted and are fully
exercisable generally six months after the date of the grant, for a period of
ten years. There were 144,775 shares available for grant at December 31, 1996.
The following is a summary of the status of the Corporation's stock option
plans and changes in those plans as of and for the years ended December 31,
1996, 1995 and 1994. The number of shares and prices have been restated to give
effect to the Corporation's 1995 stock split.
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Shares Price Shares Price Shares Price
------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year . . . . . . . 223,059 $ 18.07 179,807 $ 15.81 127,345 $ 13.72
Granted. . . . . . . . . . . . . . . . . . . 53,300 24.27 57,150 24.16 59,775 20.13
Exercised. . . . . . . . . . . . . . . . . . ( 4,237) 15.23 ( 13,898) 13.26 ( 7,313) 14.75
------- ------- -------
Outstanding, end of year. . . . . . . . . . 272,122 $ 19.37 223,059 $ 18.07 179,807 $ 15.81
------- ------- -------
------- ------- -------
Options exercisable at year end . . . . . . 218,822 165,909 120,032
Weighted-average fair value of
options granted during the year . . . . . $ 5.09 $ 4.90
</TABLE>
As of December 31, 1996, other information by exercise price range for options
outstanding and exercisable is as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
- ---------------------------------------------------------------------------- ----------------------------
Exercise Price Number Weighted-Average Weighted-Average Number Weighted-Average
Range Of Shares Exercise Price Remaining Contractual Life Of Shares Exercise Price
- ---------------- --------- ---------------- -------------------------- --------- -----------------
<S> <C> <C> <C> <C> <C>
$ 9.11 - 11.33 58,723 $ 10.50 3.54 years 58,723 $ 10.50
17.22 - 25.00 213,399 21.81 7.95 years 160,099 20.57
------- -------
272,122 $ 19.37 6.99 years 218,822 $ 17.87
------- -------
------- -------
</TABLE>
The Corporation's stock option plans are accounted for in accordance with
Accounting Principles Board Opinion ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, and related interpretations. The exercise price of each option
was equal to the market price of the Corporation's stock on the date of grant;
therefore, no compensation expense was recognized.
Although the Corporation has elected to follow APB No. 25, SFAS No. 123
requires pro forma disclosures of net income and earnings per share as if the
Corporation had accounted for its employee stock options under that Statement.
The fair value of each option grant was estimated on the grant date using an
option-pricing model with the following assumptions:
1996 1995
---- ----
Risk-free interest rates. . . . . . . . . . . . . . . . . . 6.66% 6.57%
Dividend yields . . . . . . . . . . . . . . . . . . . . . . 3.41% 3.23%
Volatility factors of expected market price common stock. . 12.00% 12.00%
Weighted-average expected life of the options . . . . . . . 8.5 years 8.5 years
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Per Share Amounts)
NOTE 15
EMPLOYEE BENEFIT PLANS (continued)
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this statement are shown on the right:
1996
----
Net Income
As reported. . . . . . . . . . . . $ 13,142
Pro Forma. . . . . . . . . . . . . 12,852
Earnings per share
As reported. . . . . . . . . . . . $ 2.00
Pro Forma. . . . . . . . . . . . . 1.95
In 1994, the stockholders approved the 1994 Employee Stock Purchase Plan,
enabling eligible employees to purchase the Corporation's common stock. A total
of 168,750 shares of the Corporation's common stock are reserved for issuance
pursuant to the plan. The price of the stock to be paid by the employees is
determined by the Corporation's compensation committee, but may not be less than
85 per cent 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 per cent of eligible compensation.
Participants under the plan purchased 15,175 shares in 1996 at $19.62 per
share. The fair market value per share on the purchase date was $25.00.
At December 31, 1996, 120,998 shares of Corporation common stock were
reserved for purchase under the plan, and $150,438 has been withheld from
compensation, plus interest, toward the purchase of shares after June 30, 1997,
the end of the annual offering period.
The Corporation's Employee Stock Purchase Plan is accounted for in
accordance with APB No. 25. Although the Corporation has elected to follow APB
No. 25, SFAS No. 123 requires pro forma disclosures of net income and earnings
per share as if the Corporation had accounted for the purchased shares under
that statement. The pro forma disclosures are included in the table above and
were estimated using an option pricing model with the following assumptions for
1996 and 1995, respectively: dividend yield of 3.41 and 3.23 per cent; an
expected life of one year for both years; expected volatility of 12 per cent;
and risk-free interest rates of 6.66 and 6.57 per cent. The fair value of those
purchase rights granted in 1996 and 1995 was $4.68 and $3.95, respectively.
The Banks have retirement savings 401(k) plans in which substantially all
employees may participate. The Banks match employees' contributions at the rate
of 25 per cent (30 per cent at Union National) for the first 5 per cent (6 per
cent at Union National) of base salary contributed by participants. The Banks'
expense for the plans was $92,000 for 1996, $81,000 for 1995 and $74,000 for
1994. Union National's plan was merged with the Corporation's plan as of
December 31, 1996.
Union National has an Employee Stock Ownership Plan covering substantially
all of its employees. The cost of the plan is borne by Union National through
contributions to an Employee Stock Ownership Trust in amounts determined by its
Board of Directors. The contributions to the plan in 1996, 1995 and 1994 were
$91,700, $79,000 and $70,300, respectively.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Per Share Amounts)
NOTE 16
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
CASH AND CASH EQUIVALENTS--The fair value of cash and cash equivalents
approximates carrying value.
INTEREST-BEARING DEPOSITS--The fair value of interest-bearing time deposits
approximates carrying value.
INVESTMENT SECURITIES--Fair values are based on quoted market prices.
MORTGAGE LOANS HELD FOR SALE--The fair value of mortgages held for sale
approximates carrying values.
LOANS--For both short-term loans and variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values. The fair value for other loans is estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
INTEREST RECEIVABLE/PAYABLE--The fair values of interest receivable/payable
approximate carrying values.
FEDERAL RESERVE AND FEDERAL HOME LOAN BANK STOCK--The fair value of FRB and FHLB
stock is based on the price at which it may be resold to the FRB and FHLB.
DEPOSITS--The fair values of noninterest-bearing demand accounts,
interest-bearing demand accounts and savings deposits are equal to the amount
payable on demand at the balance sheet date. The carrying amounts for variable
rate, fixed-term certificates of deposit approximate their fair values at the
balance sheet date. Fair values for fixed-rate certificates of deposit and
other time deposits are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on such time deposits.
FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND U.S.
TREASURY DEMAND NOTES--These financial instruments are short-term borrowing
arrangements. The rates at December 31, 1996 and 1995, approximate market
rates, thus the fair value approximates carrying value.
FEDERAL HOME LOAN BANK ADVANCES--The fair value of these borrowings is estimated
using a discounted cash flow calculation, based on current rates for similar
debt.
The estimated fair values of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Assets at December 31:
Cash and cash equivalents. . . . . . . . . . . . . . $ 35,032 $ 35,032 $ 77,874 $ 77,874
Interest-bearing deposits. . . . . . . . . . . . . . 290 290 259 259
Investment securities available for sale . . . . . . 228,379 228,379 225,938 225,938
Investment securities held to maturity . . . . . . . 47,227 47,494 60,678 61,244
Mortgage loans held for sale . . . . . . . . . . . . 284 284 736 736
Loans. . . . . . . . . . . . . . . . . . . . . . . . 631,416 632,151 552,338 552,795
FRB and FHLB stock . . . . . . . . . . . . . . . . . 3,090 3,090 2,702 2,702
Interest receivable. . . . . . . . . . . . . . . . . 8,643 8,643 9,000 9,000
Liabilities at December 31:
Deposits . . . . . . . . . . . . . . . . . . . . . . 794,451 795,369 783,936 786,064
Short-term borrowings:
Federal funds purchased. . . . . . . . . . . . . . 20,725 20,725 1,700 1,700
Securities sold under repurchase agreements. . . . 20,054 20,054 28,887 28,887
U.S. Treasury demand notes . . . . . . . . . . . . 4,258 4,258 6,790 6,790
FHLB Advances. . . . . . . . . . . . . . . . . . . . 9,150 9,340 9,000 8,976
Interest payable . . . . . . . . . . . . . . . . . . 3,376 3,376 3,415 3,415
</TABLE>
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Per Share Amounts)
NOTE 17
CONDENSED FINANCIAL INFORMATION (Parent Company Only)
Presented below is condensed financial information as to financial
position, results of operations, and cash flows of the Corporation:
CONDENSED BALANCE SHEET
December 31
-------------------------
1996 1995
---- ----
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . $ 413 $ 633
Security purchased with agreement
to resell to an affiliate . . . . . . . . . . 1,000
Investment securities available for sale . . . 258 342
Investment in subsidiaries . . . . . . . . . . 110,349 103,078
Goodwill . . . . . . . . . . . . . . . . . . . 570 587
Other assets . . . . . . . . . . . . . . . . . 195 762
---------- ----------
Total assets . . . . . . . . . . . . . . . . $ 112,785 $ 105,402
---------- ----------
---------- ----------
LIABILITIES. . . . . . . . . . . . . . . . . . . $ 98 $ 435
STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . 112,687 104,967
---------- ----------
Total liabilities and stockholders' equity . $ 112,785 $ 105,402
---------- ----------
---------- ----------
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries. . . . . . . . . . . . . . . . . . $ 5,420 $ 5,378 $ 4,894
Other income . . . . . . . . . . . . . . . . . . . . . . . . . 25 51 23
--------- --------- ---------
Total income . . . . . . . . . . . . . . . . . . . . . . . 5,445 5,429 4,917
--------- --------- ---------
EXPENSES
Amortization of core deposit intangibles,
goodwill, and fair value adjustments . . . . . . . . . . . . 43 38 32
Business combination expenses. . . . . . . . . . . . . . . . . 258
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . 269 189 184
--------- --------- ---------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 570 227 216
--------- --------- ---------
Income before income tax benefit and equity in
undistributed income of subsidiaries . . . . . . . . . . . . 4,875 5,202 4,701
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . ( 100) ( 72) ( 72)
--------- --------- ---------
Income before equity in undistributed income of subsidiaries . . 4,975 5,274 4,773
Equity in undistributed income of subsidiaries . . . . . . . . . 8,167 6,774 6,590
--------- --------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,142 $ 12,048 $ 11,363
--------- --------- ---------
--------- --------- ---------
</TABLE>
(continued)
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Per Share Amounts)
NOTE 17
CONDENSED FINANCIAL INFORMATION (Parent Company Only, continued)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,142 $ 12,048 $ 11,363
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization . . . . . . . . . . . . . . . . . . . . . . . . 20 47 34
Equity in undistributed income of subsidiaries . . . . . . . ( 8,167) ( 6,774) ( 6,590)
Security gains . . . . . . . . . . . . . . . . . . . . . . . ( 19) ( 20) ( 9)
Net change in:
Other assets . . . . . . . . . . . . . . . . . . . . . . . 567 ( 57) ( 149)
Other liabilities. . . . . . . . . . . . . . . . . . . . . ( 337) 81 29
------- ------- -------
Net cash provided by operating activities. . . . . . . . 5,206 5,325 4,678
------- ------- -------
INVESTING ACTIVITIES:
Purchase of a security with an agreement to resell . . . . . ( 1,000)
Purchase of securities available for sale. . . . . . . . . . ( 309) ( 43)
Proceeds from sales of securities available for sale . . . . 103 113 68
Other investing activities . . . . . . . . . . . . . . . . . ( 78) ( 203)
------- ------- -------
Net cash used by investing activities. . . . . . . . . . ( 975) ( 196) ( 178)
------- ------- -------
FINANCING ACTIVITIES:
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . ( 5,369) ( 4,456) ( 3,995)
Stock issued under employee benefit plans. . . . . . . . . . . 298 277 250
Stock issued under dividend reinvestment
and stock purchase plan. . . . . . . . . . . . . . . . . . . 558 456 357
Stock options exercised. . . . . . . . . . . . . . . . . . . . 64 192 108
Stock redeemed . . . . . . . . . . . . . . . . . . . . . . . . ( 1,119) ( 1,556)
Cash paid in lieu of issuing fractional shares . . . . . . . . ( 2) ( 4)
------- ------- -------
Net cash used by financing activities. . . . . . . . . . ( 4,451) ( 4,654) ( 4,836)
------- ------- -------
Net change in cash on deposit. . . . . . . . . . . . . . . . . ( 220) 475 ( 336)
Cash on deposit, beginning of year . . . . . . . . . . . . . . 633 158 494
------- ------- -------
Cash on deposit, end of year . . . . . . . . . . . . . . . . . $ 413 $ 633 $ 158
------- ------- -------
------- ------- -------
</TABLE>
NOTE 18
QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The following table sets forth certain quarterly results for the years
ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
PROVISION
NET FOR AVERAGE
QUARTER ENDED INTEREST INTEREST INTEREST LOAN NET SHARES EARNINGS
INCOME EXPENSE INCOME LOSSES INCOME OUTSTANDING PER SHARE
------ ------- ------ ------ ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
March, 1996. . . . . $ 17,010 $ 8,037 $ 8,973 $ 280 $ 3,187 6,564,529 $ .49
June, 1996 . . . . . 16,992 7,856 9,136 300 3,273 6,570,648 .50
September, 1996. . . 17,511 8,201 9,310 295 3,221 6,591,219 .49
December, 1996 . . . 17,982 8,255 9,727 378 3,461 6,598,271 .52
--------- --------- --------- -------- --------- -------
$ 69,495 $ 32,349 $ 37,146 $ 1,253 $ 13,142 6,581,167 $ 2.00
--------- --------- --------- -------- --------- -------
--------- --------- --------- -------- --------- -------
March, 1995. . . . . $ 15,508 $ 6,831 $ 8,677 $ 236 $ 2,924 6,559,622 $ .45
June, 1995 . . . . . 16,512 7,740 8,772 355 3,015 6,564,113 .46
September, 1995. . . 16,994 8,502 8,492 266 3,052 6,571,138 .46
December, 1995 . . . 17,434 8,278 9,156 531 3,057 6,559,364 .47
--------- --------- --------- -------- --------- -------
$ 66,448 $ 31,351 $ 35,097 $ 1,388 $ 12,048 6,563,559 $ 1.84
--------- --------- --------- -------- --------- -------
--------- --------- --------- -------- --------- -------
</TABLE>
26
<PAGE>
ANNUAL REPORT APPENDIX - GRAPHIC & IMAGE INFORMATION
- --------------------------------------------------------------------------------
MAP: FIRST MERCHANTS CORPORATION MARKET AREA
This graphic is a map of Indiana showing the market area for First Merchants
Corporation ("Corporation"). The map illustrates the location of Delaware,
Madison, Henry, Randolph, Union, Fayette, and Wayne counties, Indiana. The
map identifies the communities with Corporation offices. The following table
summarizes the Corporation's office locations:
LOCATION COUNTY
Muncie Delaware
Albany Delaware
Daleville Delaware
Eaton Delaware
Pendleton Madison
Edgewood Madison
Ingalls Madison
Lapel Madison
Markleville Madison
Middletown Henry
Sulphur Springs Henry
Mooreland Henry
Winchester Randolph
Connersville Fayette
Liberty Union
Richmond Wayne
- --------------------------------------------------------------------------------
<PAGE>
ANNUAL REPORT APPENDIX - GRAPHIC & IMAGE INFORMATION (Continued)
- --------------------------------------------------------------------------------
Bar Chart: RETURN ON AVERAGE ASSETS
A bar graph with the following plot points for the respective years.
RETURN ON AVERAGE ASSETS
(per cent)
1994 1995 1996
---- ---- ----
Return on Average Assets 1.33% 1.35% 1.41%
A narrative discussion of this data is provided in the Management's Discussion &
Analysis, under the caption "Results of Operations."
- --------------------------------------------------------------------------------
Bar Chart: RETURN ON AVERAGE EQUITY
A bar graph with the following plot points for the respective years.
RETURN ON AVERAGE EQUITY
(per cent)
1994 1995 1996
---- ---- ---
Return on Average Equity 12.42% 12.17% 12.16%
A narrative discussion of the data is provided in the Management's Discussion &
Analysis, under the caption "Results of Operations."
- --------------------------------------------------------------------------------
Bar Chart: NET LOAN LOSSES
A bar graph with the following plot points for the respective years.
NET LOAN LOSSES
(as a per cent of average loans)
1994 1995 1996
---- ---- ----
First Merchants Corporation .21% .24% .23%
Peer Group .25% .26% N/A
A narrative discussion of this data is provided in the Management's Discussion &
Analysis, under the caption "Asset Quality/Provision for Loan Losses."
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT
- --------------------------------------------------------------------------------
State of
Name Incorporation
---- -------------
First Merchants Bank, National Association . . . . . . . . . . . . . . . U.S.
Pendleton Banking Company. . . . . . . . . . . . . . . . . . . . . . .Indiana
First United Bank. . . . . . . . . . . . . . . . . . . . . . . . . . .Indiana
The Union County National Bank of Liberty. . . . . . . . . . . . . . . . U.S.
The Randolph County Bank . . . . . . . . . . . . . . . . . . . . . . .Indiana
<PAGE>
EXHIBIT 23--CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference to Registration Statements
on Form S-8, File Number 33-28900 and 33-28901, of our report dated January 24,
1997, on the consolidated financial statements of First Merchants Corporation,
which report is incorporated by reference in the Annual Report on Form 10-K of
First Merchants Corporation.
/s/ Geo. S. Olive & Co. LLC
Indianapolis, Indiana
March 20, 1997
<PAGE>
EXHIBIT 99.1--FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR'S REPORT FOR
FIRST MERCHANTS CORPORATION EMPLOYEE STOCK PURCHASE PLAN
The annual financial statements and independent auditor's report thereon for
First Merchants Corporation Employee Stock Purchase Plan for the year ending
June 30, 1997, will be filed as an amendment to the 1996 Annual Report on Form
10-K no later than October 28, 1997.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CORPORATION'S FORM 10-K FOR THE YEAR-TO-DATE AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 33,882
<INT-BEARING-DEPOSITS> 290
<FED-FUNDS-SOLD> 1,150
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 228,379
<INVESTMENTS-CARRYING> 47,227
<INVESTMENTS-MARKET> 47,494
<LOANS> 631,700
<ALLOWANCE> 6,621
<TOTAL-ASSETS> 967,993
<DEPOSITS> 794,451
<SHORT-TERM> 45,037
<LIABILITIES-OTHER> 6,667
<LONG-TERM> 9,150
0
0
<COMMON> 825
<OTHER-SE> 111,862
<TOTAL-LIABILITIES-AND-EQUITY> 967,993
<INTEREST-LOAN> 52,185
<INTEREST-INVEST> 16,664
<INTEREST-OTHER> 646
<INTEREST-TOTAL> 69,495
<INTEREST-DEPOSIT> 29,139
<INTEREST-EXPENSE> 32,349
<INTEREST-INCOME-NET> 37,146
<LOAN-LOSSES> 1,253
<SECURITIES-GAINS> 148
<EXPENSE-OTHER> 24,135
<INCOME-PRETAX> 20,100
<INCOME-PRE-EXTRAORDINARY> 13,142
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,142
<EPS-PRIMARY> 2.00
<EPS-DILUTED> 2.00
<YIELD-ACTUAL> 4.46
<LOANS-NON> 2,777
<LOANS-PAST> 1,699
<LOANS-TROUBLED> 1,540
<LOANS-PROBLEM> 7,732
<ALLOWANCE-OPEN> 6,696
<CHARGE-OFFS> 1,636
<RECOVERIES> 309
<ALLOWANCE-CLOSE> 6,622
<ALLOWANCE-DOMESTIC> 5,560
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,062
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION RESTATED AS A RESULT OF
POOLING OF INTEREST TRANSACTIONS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 38,974
<INT-BEARING-DEPOSITS> 259
<FED-FUNDS-SOLD> 38,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 225,938
<INVESTMENTS-CARRYING> 60,678
<INVESTMENTS-MARKET> 61,244
<LOANS> 553,074
<ALLOWANCE> 6,696
<TOTAL-ASSETS> 942,156
<DEPOSITS> 783,936
<SHORT-TERM> 37,377
<LIABILITIES-OTHER> 6,875
<LONG-TERM> 9,000
0
0
<COMMON> 820
<OTHER-SE> 104,147
<TOTAL-LIABILITIES-AND-EQUITY> 942,156
<INTEREST-LOAN> 49,141
<INTEREST-INVEST> 16,121
<INTEREST-OTHER> 1,186
<INTEREST-TOTAL> 66,448
<INTEREST-DEPOSIT> 28,228
<INTEREST-EXPENSE> 31,351
<INTEREST-INCOME-NET> 35,097
<LOAN-LOSSES> 1,388
<SECURITIES-GAINS> (30)
<EXPENSE-OTHER> 22,993
<INCOME-PRETAX> 18,308
<INCOME-PRE-EXTRAORDINARY> 12,048
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,048
<EPS-PRIMARY> 1.84
<EPS-DILUTED> 1.84
<YIELD-ACTUAL> 4.38
<LOANS-NON> 576
<LOANS-PAST> 1,119
<LOANS-TROUBLED> 1,075
<LOANS-PROBLEM> 6,736
<ALLOWANCE-OPEN> 6,603
<CHARGE-OFFS> 1,554
<RECOVERIES> 259
<ALLOWANCE-CLOSE> 6,696
<ALLOWANCE-DOMESTIC> 5,737
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 959
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION RESTATED AS A RESULT OF
POOLING OF INTEREST TRANSACTIONS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 48,401
<INT-BEARING-DEPOSITS> 23
<FED-FUNDS-SOLD> 5,175
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 122,155
<INVESTMENTS-CARRYING> 136,793
<INVESTMENTS-MARKET> 134,196
<LOANS> 528,641
<ALLOWANCE> 6,603
<TOTAL-ASSETS> 868,153
<DEPOSITS> 720,009
<SHORT-TERM> 40,631
<LIABILITIES-OTHER> 6,759
<LONG-TERM> 8,000
0
0
<COMMON> 610
<OTHER-SE> 92,144
<TOTAL-LIABILITIES-AND-EQUITY> 868,153
<INTEREST-LOAN> 41,794
<INTEREST-INVEST> 15,597
<INTEREST-OTHER> 376
<INTEREST-TOTAL> 57,767
<INTEREST-DEPOSIT> 21,403
<INTEREST-EXPENSE> 23,829
<INTEREST-INCOME-NET> 33,938
<LOAN-LOSSES> 1,202
<SECURITIES-GAINS> (18)
<EXPENSE-OTHER> 22,632
<INCOME-PRETAX> 17,023
<INCOME-PRE-EXTRAORDINARY> 11,363
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,363
<EPS-PRIMARY> 1.73
<EPS-DILUTED> 1.73
<YIELD-ACTUAL> 4.46
<LOANS-NON> 398
<LOANS-PAST> 1,322
<LOANS-TROUBLED> 1,242
<LOANS-PROBLEM> 6,455
<ALLOWANCE-OPEN> 6,467
<CHARGE-OFFS> 1,488
<RECOVERIES> 422
<ALLOWANCE-CLOSE> 6,603
<ALLOWANCE-DOMESTIC> 5,686
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 917
</TABLE>
