<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, 1997 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 $253,638,448 as of
March 2, 1998.
As of March 2, 1998 there were outstanding 6,674,696 common shares, without
par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K
Documents Into Which Incorporated
--------- -----------------------
1997 Annual Report to Stockholders Part II (Items 5, 6, 7, and 8)
Definitive Proxy Statement for
Annual Meeting of Shareholders
to be held April 7, 1998 Part III (Items 10 through 13)
Exhibit Index: Page 28
<PAGE>
FORM 10-K TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Form 10-K
Page
Number
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 7A - Quantitative and Qualitative Disclosures about Market Risk . . 21
Item 8 - Financial Statements and Supplementary Data. . . . . . . . . . 22
Item 9 - Changes In and Disagreements With Accountants on
Accounting and Financial Disclosures . . . . . . . . . . . . . 22
Part III
Item 10 - Directors and Executive Officers of the Registrant . . . . . . 23
Item 11 - Executive Compensation . . . . . . . . . . . . . . . . . . . . 23
Item 12 - Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . . . 23
Item 13 - Certain Relationships and Related Transactions . . . . . . . . 23
Part IV
Item 14 - Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . 24
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
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, 1997, the Corporation had consolidated assets of $1.020
billion, consolidated deposits of $843.8 million and stockholders' equity of
$122.0 million.
The Corporation is headquartered in Muncie, Indiana, and is presently engaged
in conducting commercial banking business through the 24 offices of its five
banking subsidiaries. As of December 31, 1997, the Corporation and its
subsidiaries had 462 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, 1997, the Corporation's leverage
ratio of capital to total assets was 11.9 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, 1997, 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, 1997:
Corporation's Regulatory
Consolidated Minimum
Ratio Requirement
----- -----------
Tier 1 Capital to Risk-Weighted
Assets Ratio . . . . . . . . . . . . . . . . . . 16.9% 4.0%
Total Capital to Risk-Weighted
Assets Ratio . . . . . . . . . . . . . . . . . . 17.9% 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>
1997 1996 1995
-------------------------- --------------------------- --------------------------
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 . . . . . . . . . . . . . $ 3,127 $ 172 5.5% $ 9,359 $ 498 5.3% $ 18,409 $ 1,028 5.6%
Interest-bearing deposits. . . . . . . . . . 693 34 4.9 346 16 4.6 250 9 3.6
Federal Reserve and
Federal Home Loan Bank stock. . . . . . . . 3,144 242 7.7 2,800 212 7.6 2,692 209 7.8
Securities:(1)
Taxable. . . . . . . . . . . . . . . . . . . 172,993 10,818 6.3 204,323 12,752 6.2 206,724 12,419 6.0
Tax-exempt . . . . . . . . . . . . . . . . . 86,568 6,647 7.7 77,996 5,892 7.6 72,666 5,542 7.6
-------- ------ -------- ------ -------- -------
Total Securities . . . . . . . . . . . . . 259,561 17,465 6.7 282,319 18,644 6.6 279,390 17,961 6.4
Mortgage loans held for sale . . . . . . . . . 406 47 11.6 262 21 8.0 281 22 7.8
Loans:(2)
Commercial . . . . . . . . . . . . . . . . . 272,483 25,125 9.2 230,848 21,232 9.2 211,998 20,347 9.6
Bankers' acceptance and commercial paper
purchased . . . . . . . . . . . . . . . . . 1,193 68 5.7 20 1 5.5 2,590 149 5.8
Real estate mortgage . . . . . . . . . . . . 258,499 21,430 8.3 233,830 19,543 8.4 218,607 18,566 8.5
Installment. . . . . . . . . . . . . . . . . 141,290 13,103 9.3 119,379 11,300 9.5 109,917 9,997 9.1
Tax-exempt . . . . . . . . . . . . . . . . . 2,021 178 8.8 1,566 140 8.9 1,064 112 10.5
-------- ------ -------- ------ -------- -------
Total loans. . . . . . . . . . . . . . . . 675,486 59,904 8.9 585,643 52,216 8.9 544,176 49,171 9.0
-------- ------ -------- ------ -------- -------
Total earning assets . . . . . . . . . . . 942,417 77,864 8.3 880,729 71,607 8.1 845,198 68,400 8.1
------ -------
Net unrealized loss on securities
available for sale . . . . . . . . . . . . . 1,273 961 1,483
Allowance for loan losses. . . . . . . . . . . (6,761) (6,672) (6,654)
Cash and due from banks. . . . . . . . . . . . 30,647 28,341 26,359
Premises and equipment . . . . . . . . . . . . 14,950 14,879 14,225
Other assets . . . . . . . . . . . . . . . . . 10,812 13,906 10,384
-------- -------- --------
Total assets . . . . . . . . . . . . . . . $993,338 $932,144 $890,995
======== ======== ========
Liabilities:
Interest-bearing deposits:
NOW accounts. . . . . . . . . . . . . . . . $104,620 $ 2,450 2.3 $109,792 $ 2,503 2.3 $103,015 $ 2,643 2.6
Money market deposit accounts . . . . . . . 105,628 4,188 4.0 100,897 3,701 3.7 107,735 4,147 3.8
Savings deposits. . . . . . . . . . . . . . 69,633 1,740 2.5 70,875 1,898 2.7 74,293 2,125 2.9
Certificates and other time deposits. . . . 425,478 23,542 5.5 381,378 21,037 5.5 355,448 19,312 5.4
-------- ------ -------- ------ -------- -------
Total interest-bearing deposits. . . . . . 705,359 31,920 4.5 662,942 29,139 4.4 640,491 28,227 4.4
Short-term borrowings . . . . . . . . . . . . 53,185 2,856 5.4 51,768 2,687 5.2 47,345 2,628 5.6
Federal Home Loan Bank advances . . . . . . . 15,455 949 6.1 9,192 523 5.7 9,000 496 5.5
-------- ------ -------- ------ -------- -------
Total interest-bearing liabilities . . . . 773,999 35,725 4.6 723,902 32,349 4.5 696,836 31,351 4.5
Noninterest-bearing deposits. . . . . . . . . 94,759 90,719 88,335
Other liabilities . . . . . . . . . . . . . . 7,566 9,429 6,791
-------- -------- --------
Total liabilities. . . . . . . . . . . . . 876,324 824,050 791,962
Stockholders' equity. . . . . . . . . . . . . 117,014 108,094 99,033
-------- -------- --------
Total liabilities and stockholders' equity $993,338 35,725 3.8(3) $932,144 32,349 3.6(3) $890,995 31,351 3.7(3)
======== ------- ======== ------- ======== -------
Net interest income. . . . . . . . . . . . $42,139 4.5 $39,258 4.5 $37,049 4.4
======= ======= =======
(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
Adjustment to convert tax exempt investment
securities to fully taxable equivalent basis,
using marginal rate of 35% for 1995, 1996,
and 1997. . . . . . . . . .. . . . . . . . . . $ 2,389 $ 2,111 $ 1,952
======= ======= =======
</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>
1997 Compared to 1996 1996 Compared to 1995
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 . . . . . . . . . . $( 343) $ 17 $ (326) $ (478) $ ( 52) $ (530)
Interest-bearing deposits. . . . . . . 17 1 18 4 3 7
Federal Reserve and Federal
Home Loan Bank stock . . . . . . . . 26 4 30 8 ( 5) 3
Securities . . . . . . . . . . . . . . (1,461) 282 (1,179) 171 512 683
Mortgage loans held for sale . . . . . 14 12 26 ( 2) 1 ( 1)
Loans. . . . . . . . . . . . . . . . . 7,966 (278) 7,688 3,607 (562) 3,045
------- ------ ------ ------ ------ -----
Totals . . . . . . . . . . . . . . . 6,219 38 6,257 3,310 (103) 3,207
------- ------ ------ ------ ------ -----
Interest expense:
NOW accounts . . . . . . . . . . . . . ( 126) 73 ( 53) 173 (313) (140)
Money market deposit
accounts . . . . . . . . . . . . . . 179 308 487 (315) (131) (446)
Savings deposits . . . . . . . . . . . ( 33) (125) (158) ( 91) (136) (227)
Certificates and other
time deposits. . . . . . . . . . . . 2,440 65 2,505 1,376 349 1,725
Short-term borrowings. . . . . . . . . ( 3) 172 169 248 (189) 59
Federal Home Loan Bank advances. . . . 382 44 426 10 17 27
------- ------ ------ ------ ------ -----
Totals . . . . . . . . . . . . . . . 2,839 537 3,376 1,401 (403) 998
------- ------ ------ ------ ------ -----
Change in net interest
income (fully taxable
equivalent basis). . . . . . . . . . . $ 3,380 $ (499) 2,881 $1,909 $ 300 2,209
======= ====== ====== ======
Tax equivalent adjustment
using marginal rate
of 35% for 1995, 1996,
and 1997 . . . . . . . . . . . . . . . (278) (159)
------ ------
Change in net interest
income . . . . . . . . . . . . . . . . $2,603 $2,050
====== ======
</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, 1997:
U.S. Treasury. . . . . . . . . . . . . . . . $ 19,207 $ 104 $ 11 $ 19,300
Federal agencies . . . . . . . . . . . . . . 66,783 405 48 67,140
State and municipal. . . . . . . . . . . . . 67,842 1,815 28 69,629
Mortgage-backed securities . . . . . . . . . 36,682 362 86 36,958
Other asset-backed securities. . . . . . . . 487 2 54 435
Corporate obligations. . . . . . . . . . . . 18,219 139 30 18,328
Marketable equity securities . . . . . . . . 250 250
--------- ------ ----- ---------
Total available for sale . . . . . . . . . 209,470 2,827 257 212,040
--------- ------ ----- ---------
Held to maturity at December 31, 1997:
U.S. Treasury. . . . . . . . . . . . . . . . 249 2 247
Federal agencies . . . . . . . . . . . . . . 3,412 6 1 3,417
State and municipal. . . . . . . . . . . . . 26,206 252 2 26,456
Mortgage-backed securities . . . . . . . . . 1,255 4 1 1,258
Other asset-backed securities. . . . . . . . 4,210 7 166 4,051
--------- ------ ----- ---------
Total held to maturity . . . . . . . . . . 35,332 269 172 35,429
--------- ------ ----- ---------
Total investment securities. . . . . . . . $ 244,802 $3,096 $ 429 $ 247,469
========= ====== ===== =========
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 . . . . . . . . . 35,946 297 145 36,098
Other asset-backed securities. . . . . . . . 6,204 130 6,074
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 . . . . . . . . . 1,053 1,053
Other asset-backed securities. . . . . . . . 3,791 17 121 3,687
--------- ------ ----- ---------
Total held to maturity . . . . . . . . . . 47,227 421 154 47,494
--------- ------ ----- ---------
Total investment securities. . . . . . . . $ 274,083 $2,679 $ 889 $ 275,873
========= ====== ===== =========
</TABLE>
Page 9
<PAGE>
- -------------------------------------------------------------------------------
STATISTICAL DATA (continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
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>
<TABLE>
<CAPTION>
Cost
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Federal Reserve and Federal Home Loan
Bank stock at December 31:
Federal Reserve Bank stock . . . . . . . . $ 397 $ 397 $ 397
Federal Home Loan Bank stock . . . . . . . 2,976 2,693 2,305
------- ------- -------
Total. . . . . . . . . . . . . . . . . $ 3,373 $ 3,090 $ 2,702
======= ======= =======
</TABLE>
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, 1997 were:
Securities available for sale December 31, 1997:
<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. . . . . . . . . . $ 3,242 5.77% $ 15,965 6.00%
Federal Agencies . . . . . . . . 15,327 6.62 51,456 6.27
State and Municipal. . . . . . . 6,461 4.07 26,900 4.65 $ 33,590 4.64%
Corporate Obligations. . . . . . 9,596 5.90 8,623 6.13
-------- --------- --------
Total . . . . . . . . . . . . $ 34,626 5.88% $ 102,944 5.79% $ 33,590 4.64%
======== ========= ========
</TABLE>
Page 10
<PAGE>
- -------------------------------------------------------------------------------
STATISTICAL DATA (continued)
<TABLE>
<CAPTION>
Marketable Equity,
Mortgage and
Other Asset-Backed
Due After Ten Years Securities Total
------------------- ---------- -----
Amount Yield* Amount Yield* Amount Yield*
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury. . . . . . . . . . $ 19,207 5.96%
Federal Agencies . . . . . . . . 66,783 6.35
State and Municipal. . . . . . . $ 891 6.14% 67,842 4.61
Corporate Obligations. . . . . . 18,219 6.01
Marketable Equity Security . . . 250 7.90% 250 7.90
Mortgage-backed securities . . . $ 36,682 6.37 36,682 6.37
Other asset-backed securities. . 487 7.00 487 7.00
------ --------- ---------
Total. . . . . . . . . . . . . $ 891 6.14% $ 37,419 6.39% $ 209,470 5.73%
====== ========= =========
</TABLE>
Securities held to maturity at December 31, 1997:
<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 . . . . . . . . $ 2,912 6.42% 500 6.17
State and Municipal. . . . . . . 8,588 4.88 14,824 4.72 $ 2,264 4.99%
--------- -------- --------
Total . . . . . . . . . . . . $ 11,500 5.27% $ 15,573 4.77% $ 2,264 4.99%
========= ======== ========
</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 . . . . . . . . 3,412 6.38
State and Municipal. . . . . . . 26,206 4.82
Mortgage-backed securities . . . $ 1,255 6.59% 1,255 6.59
Other asset-backed securities. . $ 530 5.86% 4,210 7.05 4,210 7.05
------ -------- --------
Total. . . . . . . . . . . . $ 530 5.86% $ 5,465 6.95% $ 35,332 5.30%
====== ======== ========
</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, 1997:
<TABLE>
<CAPTION>
Amount Yield
------- -----
<S> <C> <C>
Federal Reserve Bank stock . . . . . $ 397 6.00%
Federal Home Loan Bank stock . . . . 2,976 8.00
-------
Total. . . . . . . . . . . . . . . $ 3,373 7.76%
=======
</TABLE>
Page 11
<PAGE>
- -------------------------------------------------------------------------------
STATISTICAL DATA (continued)
LOAN PORTFOLIO
TYPES OF LOANS
The loan portfolio at the dates indicated is presented below:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans at December 31:
Commercial and
industrial loans . . . . . . . . . $ 148,281 $ 132,134 $ 98,880 $ 89,696 $ 90,192
Bankers acceptances and loans
to financial institutions. . . . . 705 625 2,925 3,293
Agricultural production
financing and other loans
to farmers . . . . . . . . . . . . 16,764 18,906 17,203 17,255 16,470
Real estate loans:
Construction . . . . . . . . . . . 21,389 13,167 9,913 8,126 8,127
Commercial and farmland. . . . . . 97,503 97,596 104,731 95,092 85,992
Residential. . . . . . . . . . . . 287,072 253,530 215,738 217,148 196,570
Individuals' loans for
household and other
personal expenditures. . . . . . . 125,706 113,507 102,313 99,812 91,277
Tax-exempt loans . . . . . . . . . . 2,598 1,643 1,204 1,514 2,029
Other loans. . . . . . . . . . . . . 3,782 1,672 949 1,608 3,350
-------- -------- -------- -------- --------
703,800 632,780 553,856 530,251 497,300
Unearned interest on loans . . . . . (487) (1,364) (1,518) (1,610) (1,597)
-------- -------- -------- -------- --------
Total loans. . . . . . . . . . $ 703,313 $ 631,416 $ 552,338 $ 528,641 $ 495,703
========= ========= ========= ========= =========
</TABLE>
Residential Real Estate Loans Held for Sale at December 31, 1997,
1996, and 1995 were $471,400, $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, 1997. Also
presented are the amounts due after one year classified according to
the sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
Maturing
-----------------------------------------------
Within 1-5 Over 5
1 Year Years Years Total
------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial and industrial loans . . . . . $ 61,858 $ 42,869 $ 43,554 $148,281
Agricultural production financing
and other loans to farmers. . . . . . . 13,498 2,711 555 16,764
Real estate - Construction. . . . . . . . 9,122 3,742 8,525 21,389
Tax-exempt loans. . . . . . . . . . . . . 477 438 1,683 2,598
Other loans . . . . . . . . . . . . . . . 3,504 184 94 3,782
--------- --------- --------- --------
Total. . . . . . . . . . . . . . . . $ 88,459 $ 49,944 $ 54,411 $192,814
========= ========= ========= ========
</TABLE>
Page 12
<PAGE>
- -------------------------------------------------------------------------------
STATISTICAL DATA (continued)
<TABLE>
<CAPTION>
Maturing
----------------------
1 - 5 Over
Years 5 Years
----- -------
(Dollars in Thousands)
<S> <C> <C>
Loans maturing after one
year with:
Fixed rates . . . . . . . . . . $ 13,677 $ 26,736
Variable rate . . . . . . . . . 36,267 27,675
-------- --------
Total . . . . . . . . . . . . $ 49,944 $ 54,411
======== ========
</TABLE>
RISK ELEMENTS
<TABLE>
<CAPTION>
December 31
---------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans . . . . . . . . . . . . $ 1,410 $ 2,777 $ 576 $ 398 $ 1,649
Loans contractually past due 90
days or more other than
nonaccruing. . . . . . . . . . . . . . . 1,972 1,699 1,119 1,322 936
Restructured loans. . . . . . . . . . . . 282 1,540 1,075 1,242 1,509
</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 $180,280 for the year ended December 31, 1997, was
recognized on the nonaccruing and restructured loans listed in the table
above, whereas interest income of $296,759 would have been recognized under
their original loan terms.
Potential problem loans:
Management has identified certain other loans totaling $7,880,846 as of
December 31, 1997, 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>
- -------------------------------------------------------------------------------
STATISTICAL DATA (continued)
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the loan loss experience for the years
indicated.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance at January 1 . . . . . . . . . $ 6,622 $ 6,696 $ 6,603 $ 6,467 $ 5,811
Chargeoffs:
Commercial . . . . . . . . . . . . . 443 767 794 973 675
Real estate mortgage . . . . . . . . 31 14 1 53 129
Installment. . . . . . . . . . . . . 1,135 855 759 462 571
------- ------- ------- ------- -------
Total chargeoffs. . . . . . . . . . 1,609 1,636 1,554 1,488 1,375
------- ------- ------- ------- -------
Recoveries:
Commercial . . . . . . . . . . . . . 264 106 127 269 248
Real estate mortgage . . . . . . . . 1 7 4 30 5
Installment. . . . . . . . . . . . . 203 196 128 123 124
------- ------- ------- ------- -------
Total recoveries. . . . . . . . . . 468 309 259 422 377
------- ------- ------- ------- -------
Net chargeoffs . . . . . . . . . . . . 1,141 1,327 1,295 1,066 998
------- ------- ------- ------- -------
Provisions for loan losses . . . . . . 1,297 1,253 1,388 1,202 1,654
------- ------- ------- ------- -------
Balance at December 31 . . . . . . . . $ 6,778 $ 6,622 $ 6,696 $ 6,603 $ 6,467
======= ======= ======= ======= =======
Ratio of net chargeoffs during the
period to average loans
outstanding during the period. . . . . .17% .23% .24% .21% .21%
Peer Group . . . . . . . . . . . . . . . N/A .26% .26% .25% .49%
</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:
<TABLE>
<CAPTION>
1997 1996
------------------ -------------------
Amount Per Cent Amount Per Cent
------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at December 31:
Commercial, financial and
agricultural . . . . . . . . . . $ 2,594 23.6% $ 2,924 24.2%
Real estate - construction . . . . 3 3.0 3 2.1
Real estate - mortgage . . . . . . 1,061 54.7 1,041 55.6
Installment. . . . . . . . . . . . 1,702 18.3 1,576 17.8
Tax-exempt loans . . . . . . . . . 4 .4 16 .3
Unallocated. . . . . . . . . . . . 1,414 N/A 1,062 N/A
------- ----- ------- ----
Totals . . . . . . . . . . . . . . $ 6,778 100.0% $ 6,622 100.0%
======== ====== ======= ======
1995 1994
------------------ -------------------
Amount Per Cent Amount Per Cent
------ -------- ------ --------
(Dollars in Thousands)
Balance at December 31:
Commercial, financial and
agricultural . . . . . . . . . . $ 3,105 21.8% $ 3,080 20.5%
Real estate - construction . . . . 1 1.8 4 1.5
Real estate - mortgage . . . . . . 1,121 58.0 1,048 59.1
Installment. . . . . . . . . . . . 1,506 18.2 1,550 18.6
Tax-exempt loans . . . . . . . . . 4 .2 4 .3
Unallocated. . . . . . . . . . . . 959 N/A 917 N/A
-------- ---- ------- -----
Totals . . . . . . . . . . . . . . $ 6,696 100.0% $ 6,603 100.0%
======== ====== ======= ======
1993
------------------
Amount Per Cent
------ --------
(Dollars in Thousands)
Balance at December 31:
Commercial, financial and
agricultural . . . . . . . . . . $ 3,021 22.9%
Real estate - construction . . . . 6 1.6
Real estate - mortgage . . . . . . 870 57.0
Installment. . . . . . . . . . . . 1,589 18.1
Tax-exempt loans . . . . . . . . . 7 .4
Unallocated. . . . . . . . . . . . 974 N/A
-------- ----
Totals . . . . . . . . . . . . . . $ 6,467 100.0%
======== ======
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
(Dollars in Thousands)
For the year ending December 31:
Impaired loans with an allowance . . . . . . . . $ 1,476 $ 3,124 $ 2,314
Impaired loans for which the discounted
cash flows or collateral value exceeds the
carrying value of the loan . . . . . . . . . . 1,075 868 2,498
------- ------- -------
Total impaired loans . . . . . . . . . . . . $ 2,551 $ 3,992 $ 4,812
======= ======= =======
Allowance for impaired loans (included in the
Corporation's allowance for loan losses) . . . $ 407 $ 1,092 $ 1,177
Average balance of impaired loans. . . . . . . . 3,414 5,213 4,650
Interest income recognized on impaired loans . . 180 311 153
Cash basis interest included above . . . . . . . 162 291 93
</TABLE>
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>
1997 1996 1995
--------------- --------------- ----------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31:
Noninterest bearing deposits . . . . . $ 94,759 $ 90,719 $ 88,335
NOW accounts . . . . . . . . . . . . . 104,620 2.3% 109,792 2.3% 103,015 2.6%
Money market deposit accounts. . . . . 105,628 4.0 100,897 3.7 107,735 3.8
Savings deposits . . . . . . . . . . . 69,633 2.5 70,875 2.7 74,293 2.9
Certificates of deposit and
other time deposits. . . . . . . . . 425,478 5.5 381,378 5.5 355,448 5.4
-------- -------- -------- ---
Total deposits. . . . . . . . . . . $800,118 4.0 $753,661 3.9 $728,826 3.9
======== ======== ======== ---
</TABLE>
As of December 31, 1997, 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 . . . . . . . . $51,373 $11,708 $19,766 $21,255 $104,102
Per cent. . . . . . . . . . . . . . . 49% 11% 19% 21% 100%
</TABLE>
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Return on assets (net income divided by
average total assets) . . . . . . . . . . . . 1.45% 1.41% 1.35%
Return on equity (net income divided by
average equity). . . . . . . . . . . . . . . 12.28 12.16 12.17
Dividend payout ratio (dividends per
share divided by net income per share) . . . 47.93 40.85 39.49
Equity to assets ratio (average equity
divided by average total assets) . . . . . . 11.78 11.60 11.11
</TABLE>
Page 17
<PAGE>
- -------------------------------------------------------------------------------
STATISTICAL DATA (continued)
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at December 31:
Federal funds purchased . . . . . . . . . . $ 4,070 $ 20,725 $ 1,700
Securities sold under repurchase
agreements . . . . . . . . . . . . . . . . 15,398 20,054 28,887
U.S. Treasury demand notes. . . . . . . . . 7,361 4,258 6,790
-------- -------- --------
Total short-term borrowings . . . . . . . $ 26,829 $ 45,037 $ 37,377
======== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Weighted average interest rate on outstanding
balance at December 31:
Securities sold under repurchase
agreements . . . . . . . . . . . . . . . . . . 5.13% 4.92% 5.26%
Total short-term borrowings . . . . . . . . . . 5.38 5.78 5.28
Weighted average interest rate during the year:
Securities sold under repurchase
agreements . . . . . . . . . . . . . . . . . . 4.99 5.07 5.52
Total short-term borrowings . . . . . . . . . . 5.36 5.19 5.55
Highest amount outstanding at any month end
during the year:
Securities sold under repurchase
agreements . . . . . . . . . . . . . . . . . . $49,750 $52,221 $58,097
Total short-term borrowings . . . . . . . . . . 84,860 83,678 65,514
Average amount outstanding during the year:
Securities sold under repurchase
agreements . . . . . . . . . . . . . . . . . . 31,327 42,140 35,436
Total short-term borrowings . . . . . . . . . . 53,185 51,768 47,345
</TABLE>
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, 1997 was $15,382,400.
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 1997 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.
<TABLE>
<CAPTION>
<S> <C> <C>
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,
63 President and Chief Executive of the Corporation and
Officer, Corporation; First Merchants since
Chairman of the Board and 1987; President and
Chief Executive Officer, Chief Executive Officer
First Merchants Bank, N.A. of the Corporation since
1982, and Chief Executive
Officer of First Merchants
Bank since 1979
Michael L. Cox Executive Vice President, Executive Vice President
53 Chief Operating Officer and Chief Operating
and 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, Senior Vice President,
57 General Counsel and Corporation since 1982;
Secretary, Corporation; General Counsel,
Senior Vice President, First Corporation since 1990
Merchants Bank, N.A.; and Secretary since
Director of First United January 1, 1997; Senior
Bank; Director of Pendleton Vice President, First
Banking Company 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
58 Director, Corporation; and Director, Corporation
President, Chief Executive since August 1996;
Officer and Director, The President, Union County
Union County National Bank National Bank since 1983
of Liberty and Director since 1981
James L. Thrash Senior Vice President and Senior Vice President and
48 Chief Financial Officer, Chief Financial Officer
Corporation; Senior Vice of the Corporation since
President, First Merchants 1990; Senior Vice
Bank, N.A. President, First Merchants
since 1990
</TABLE>
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
49 of the Corporation's 1997 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
21 of the Corporation's 1997 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
22 through 27 of the Corporation's 1997 Annual Report to Stockholders -
Financial Review under the caption "Management's Discussion and Analysis,"
Exhibit 13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------------------
It is the objective of First Merchants Corporation to monitor and manage risk
exposure to net interest income caused by changes in interest rates. It is
the goal of the Corporation's Asset Liability function to provide optimum and
stable net interest income. To accomplish this, management uses two asset
liability tools. GAP/Interest Rate Sensitivity Reports and Net Interest
Income Simulation Modeling are both constructed, presented and monitored on a
quarterly basis.
The GAP/Interest Rate Sensitive Report is a tool which displays repricing
timing differences between interest sensitive assets and liabilities. The
Corporation elects to categorize its non-maturity deposits as all to reprice
in 13 months. The FMC 181-365 day Sensitivity Gap Ratio depicts the
institution is asset sensitive (107.8%). See Interest-Rate Sensitivity
Analysis below:
INTEREST-RATE SENSITIVITY ANALYSIS
(Dollars in Thousands)
<TABLE>
<CAPTION>
At December 31, 1997
-----------------------------------------------------------------
1-180 DAYS 181-365 DAYS 1-5 YEARS BEYOND 5 YEARS TOTAL
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rate-Sensitive Assets:
Federal funds sold and
interest bearing deposits . . . . . . . $ 9,435 $ 9,435
Investment Securities. . . . . . . . . . 52,680 $ 34,688 $122,966 $ 37,038 247,372
Loans. . . . . . . . . . . . . . . . . . 302,943 71,869 263,440 65,532 703,784
Federal Reserve and
Federal Home Loan Bank stock. . . . . . 2,976 397 3,373
-------- -------- -------- -------- --------
Total rate-sensitive assets . . . . . 368,034 106,557 386,406 102,967 963,964
-------- -------- -------- -------- --------
Rate-Sensitive Liabilities:
Interest-bearing deposits. . . . . . . . 304,651 102,033 320,727 788 728,199
Borrowed funds . . . . . . . . . . . . . 26,829 26,829
Federal Home Loan Bank advances. . . . . 2,294 4,294 9,278 4,834 20,700
-------- -------- -------- -------- --------
Total rate-sensitive liabilities. . . . 333,774 106,327 330,005 5,622 775,728
-------- -------- -------- -------- --------
Interest rate sensitivity gap by period . $ 34,260 $ 230 $ 56,401 $ 97,345
Cumulative rate sensitivity gap . . . . . 34,260 34,490 90,891 188,236
Cumulative rate sensitivity gap ratio
at December 31, 1997. . . . . . . . . . 110.3% 107.8% 111.8% 124.3%
</TABLE>
The Corporation had a cumulative positive gap of $34,490,000 in the one year
horizon at December 31, 1997, or just over 3 percent of total assets. Net
interest income at financial institutions with positive gaps tends to
increase when rates increase and decrease as interest rates decline.
Page 21
<PAGE>
The Corporation places its greatest credence in net interest income
simulation modeling. The GAP/Interest Rate Sensitivity Report is known to
have two major shortfalls. The GAP/Interest Rate Sensitivity Report fails to
precisely gauge how often an interest rate sensitive product reprices nor is
it able to measure the magnitude of potential future rate movements.
The simulation modeling product used by the Corporation is a personal
computer based system known as Asset Liability Model System (ALMS) supported
by Alltel, Inc., of Little Rock, AK. The system provides software
sophisticated enough to measure; basis risk, yield curve risk, option risk,
and interest rate risk. More specifically the software considers yield curve
changes, prepayment speeds, caps, floors and allows the user to tie different
products to different interest rate drivers which can be assumed to change at
different speeds and magnitudes.
The Corporation's asset liability process monitors simulated net interest
income under three separate interest rate scenarios; rising (rate shock),
falling (rate shock) and flat. Net Interest income is simulated over an 18
month horizon. By policy, the difference between the best performing and the
worst performing rate scenarios are not allowed to show a variance greater
than 10%.
Assumed interest rate changes are simulated to move incrementally over 18
months. The total rate movement (beginning point less ending point) to
noteworthy interest rate indexes are as follows:
<TABLE>
<CAPTION>
Rising Falling
----------------- ---------------
<S> <C> <C>
Prime 300 Basis Points (300) Basis Points
Federal Funds 300 (300)
90 Day T-Bill 320 (275)
One Year T-Bill 290 (255)
Three Year T-Note 275 (235)
Five Year T-Note 265 (215)
Ten Year T-Note 260 (195)
Interest Checking 100 ( 60)
MMIA Savings 140 (100)
Money Market Index 300 (300)
Regular Savings 100 ( 60)
</TABLE>
Results for the flat, rising (rate shock) and falling (rate shock) interest
rate scenarios are listed below. The net interest income shown represents
cumulative net interest income over an 18 month time horizon. Balance sheet
assumptions are the same under both scenarios:
<TABLE>
<CAPTION>
Flat/Base Rising Falling
--------- --------- ---------
<S> <C> <C> <C>
Net Interest Income (Dollars in Thousands) $ 60,359 $ 59,423 $ 60,130
Change vs. Flat/Base Scenario (936) (229)
% Change (1.58)% (0.38)%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- -------------------------------------------------------------------------------
The financial statements and supplementary data required under this item are
incorporated herein by reference to page 20 and pages 28 through 46 of the
Corporation's 1997 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, 1997, 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 22
<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 1998 Proxy Statement furnished
to its stockholders in connection with an annual meeting to be held April 7,
1998 (the "1998 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 1998 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 1998 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 1998 Proxy Statement, under the caption "Interest of Management
in Certain Transactions," which Proxy Statement has been filed with the
Commission.
Page 23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Exhibit 13
Page
Number
----------
<S> <C>
(a)1. Financial Statements:
Independent auditor's report . . . . . . . . . . . . . . . 20
Consolidated balance sheet at
December 31, 1997 and 1996 . . . . . . . . . . . . . . . 28
Consolidated statement of income,
years ended December 31, 1997,
1996 and 1995. . . . . . . . . . . . . . . . . . . . . . 29
Consolidated statement of changes in
stockholders' equity, years ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . 30
Consolidated statement of cash flows,
years ended December 31, 1997,
1996 and 1995. . . . . . . . . . . . . . . . . . . . . . 31
Notes to consolidated financial
statements . . . . . . . . . . . . . . . . . . . . . . . 32-46
</TABLE>
(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:
EXHIBIT NO: DESCRIPTION OF EXHIBIT:
- ---------- ----------------------
3.1 First Merchants Corporation Articles of Incorporation and
the Articles and amendment thereto is incorporated by reference to
registrant's Form 10-Q for quarter ended June 30, 1997.
3.2 First Merchants Corporation Bylaws and amendments thereto (same as
above).
10.1 First Merchants Corporation and First Merchants Bank, National
Association Management Incentive Plan is incorporated by reference
to registrant's Form 10-K for year ended December 31, 1996.
10.2 First Merchants Bank, National Association Unfunded Deferred
Compensation Plan, as amended is incorporated by reference to
registrant's Form 10-K for year ended December 31, 1996.
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 are
incorporated by reference to registrant's Form 10-K for year ended
December 31, 1996.
10.6 First Merchants Corporation Unfunded Deferred Compensation Plan is
incorporated by reference to registrant's Form 10-K for year ended
December 31, 1996.
10.7 First Merchants Corporation Supplemental Executive Retirement Plan
and amendments thereto.
Page 24
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(continued)
- -------------------------------------------------------------------------------
EXHIBIT NO: DESCRIPTION OF EXHIBIT:
- ---------- ----------------------
13 1997 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)
21 Subsidiaries of Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule, year ended December 31, 1997
99.1 Financial statements and independent auditor's report for
First Merchants Corporation Employee Stock Purchase Plan
(b) Reports on Form 8-K:
None were filed during 1997.
Page 25
<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
19th day of March, 1998.
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 19, 1998
Stefan S. Anderson Principal Executive Officer
/s/ James L. Thrash
- ------------------------------ Principal Financial and March 19, 1998
James L. Thrash Principal Accounting Officer
/s/ Michael L. Cox
- ------------------------------ Director March 19, 1998
Michael L. Cox
- ------------------------------ Director
Frank A. Bracken
/s/ Thomas B. Clark
- ------------------------------ Director March 19, 1998
Thomas B. Clark
- ------------------------------ Director
David A. Galliher
- ------------------------------ Director
Norman M. Johnson
/s/ Ted J. Montgomery
- ------------------------------ Director March 19, 1998
Ted J. Montgomery
/s/ George A. Sissel
- ------------------------------ Director March 19, 1998
George A. Sissel
Page 26
<PAGE>
Signature Capacity Date
- ------------------------------ ------------------------------ ------
- ------------------------------ Director
Robert M. Smitson
- ------------------------------ Director
Michael D. Wickersham
/s/ John E. Worthen
- ------------------------------ Director March 19, 1998
John E. Worthen
Page 27
<PAGE>
INDEX TO EXHIBITS
- -------------------------------------------------------------------------------
(a)3. Exhibits:
EXHIBIT NO: DESCRIPTION OF EXHIBIT:
- ---------- ----------------------
10.7 First Merchants Corporation Supplemental Executive Retirement Plan
and Amendments thereto
13 1997 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.)
21 Subsidiaries of Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule, year ended December 31, 1997
99.1 Financial statements and independent auditor's report for
First Merchants Corporation Employee Stock Purchase Plan
Page 28
<PAGE>
FIRST MERCHANTS CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
SECTION 1. ESTABLISHMENT AND PURPOSE
A. Establishment. First Merchants Corporation (the "Employer"), hereby
establishes a non-qualified supplemental executive retirement plan for certain
executives, as designated and described herein, which shall be known as the
FIRST MERCHANTS CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (the "Plan").
B. Purpose. The purpose of the Plan is to enable the Employer to attract,
retain, and motivate key executive employees of high caliber, and to provide
equitable retirement and survivor benefits for certain key executive employees,
their surviving spouses and designated beneficiaries.
SECTION 2. DEFINITIONS
For purposes of this Plan, certain words or phrases used herein will have the
following meanings:
A. "Board of Directors" means the Board of Directors of First Merchants
Corporation.
B. "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
C. "Compensation Committee" means the Employer's Compensation and Human
Resources Committee.
D. "Executive" means a key executive Employee that is designated to
participate in the Plan under Section 3 below.
E. "Non-qualified SERP Benefit" means the difference between (1) and (2),
where (1) is the Retirement Benefit that would have been paid the Executive from
the Pension Plan at the Executive's Normal, Late or Disability Retirement Date
(whichever is applicable) if there were no compensation limit imposed under Code
Section 401(a)(17) and if Final Average Monthly Plan Compensation did not
exclude bonuses for purposes of determining the Standard Benefit Formula, and
(2) is the Retirement Benefit payable to the Executive under the Pension Plan at
the Executive's Normal, Late or Disability Retirement Date (whichever is
applicable).
F. "Pension Plan" means the First Merchants Corporation Retirement Pension
Plan, as amended, a qualified pension plan under Section 401(a) of the Internal
Revenue Code of 1986, as amended.
G. "Term Certain Expiration Date" means the 15th anniversary of the event,
retirement or death,
1
<PAGE>
which causes payment of benefits under this Plan to commence, unless the
Compensation Committee establishes a different Term Certain Expiration Date
for a covered Executive at the time it designates such Executive to
participate in the Plan.
H. The following terms will have the same meanings as they have under the
Pension Plan: "Employee," "Employer," "Final Average Monthly Plan
Compensation," "Normal, Early, Late, or Disability Retirement Date," "Retirement
Benefit," "Normal, Early, Late, or Disability Retirement Benefit," and "Standard
Benefit Formula."
SECTION 3. DESIGNATION OF EXECUTIVES PARTICIPATING IN PLAN
The Compensation Committee shall have the sole discretion, from time to time, to
designate Employees to participate in the Plan as covered Executives. This
designation shall be by resolution of the Compensation Committee and shall be
limited to management or highly compensated Employees. The Compensation
Committee shall notify each Employee so designated in writing. Covered
Executives, their spouses and designated beneficiaries shall become entitled to
benefits under this Plan if the Executive is employed by the Employer on his or
her 65th birthday (unless the Compensation Committee, at the time it designates
a covered Executive to participate in the Plan, establishes a different minimum
age as of which such Executive shall become entitled to such benefits),
Disability Retirement Date or death, whichever occurs earliest.
SECTION 4. RETIREMENT BENEFIT
If an Executive retires on his or her Normal, Late or Disability Retirement
Date, the Executive shall receive each year thereafter (unless the Compensation
Committee provides for a different benefit commencement date for a covered
Executive at the time it designates such Executive to participate in the Plan),
in the manner described in Section 6, an amount equal to the Non-qualified SERP
Benefit for the Executive's lifetime. If the Executive's Retirement Benefit
under the Pension Plan commences at a time other than his or her Normal
Retirement Date, the amount of the Non-qualified SERP Benefit shall be adjusted
using the same actuarial factors and assumptions (except as otherwise provided
in Section 7 of this Plan) used to calculate the Retirement Benefit payable to
the Executive under the Pension Plan.
SECTION 5. PRE-RETIREMENT SURVIVOR BENEFIT
If a covered Executive dies while still actively employed by the Employer, and
if the Executive is survived by the Executive's spouse, the Executive's spouse
shall receive each year until the Term Certain Expiration Date, in the manner
described in Section 6, the Non-qualified SERP Benefit otherwise payable to the
Executive under this Plan, determined as if the Executive had retired on the
date immediately preceding the date of the Executive's death. In determining
this Benefit, the Executive shall be deemed to be vested under the Pension Plan
and not to have waived the death benefit coverage under the Pension Plan
(whether or not that is actually true). If the Executive is not survived by the
Executive's spouse, or if the spouse does not live until the Term Certain
Expiration
2
<PAGE>
Date, the person(s) designated under Section 8 shall receive each year, in
the manner described in Section 6, an amount equal to such Benefit.
SECTION 6. MANNER OF PAYING BENEFITS
Within 30 days following the retirement of the Executive, or, if Section 5
applies, within 30 days following the death of the Executive, payment of a
monthly benefit shall commence to the covered Executive, or to the Executive's
spouse or designated beneficiary, equal to the benefit described in Section 4 or
5 of this Plan, whichever applies.
SECTION 7. TERM CERTAIN
Benefits on behalf of a covered Executive, whether payable as a Normal, Late, or
Disability Retirement Benefit, or as a survivor benefit or other death benefit
payable to a spouse or designated beneficiary, shall be made at least through
the Term Certain Expiration Date, without any actuarial reduction on account of
such guaranteed payment. At any time, in the discretion of the Compensation
Committee, the computed value of the future benefits payable under the Plan to a
surviving spouse or designated beneficiary as a guaranteed Term Certain payment,
or as a survivor benefit or other death benefit may be computed and paid in one
lump sum.
SECTION 8. DESIGNATION OF BENEFICIARY
An Executive, or subsequent to the Executive's death, the Executive's spouse,
may designate the person(s) to receive the benefits payable under this Plan if
the Executive and the Executive's spouse do not live to receive the benefits
through the Term Certain Expiration Date. If such designation is not made, or
if no designated beneficiary is then living, such benefit shall be paid to the
Executive's spouse, if then living, or if not, to the Executive's descendants,
PER STIRPES, who are then living, or if there are no such descendants then
living, to the Executive's estate.
SECTION 9. EARLY, LATE OR DISABILITY RETIREMENT
The Compensation Committee may grant to a covered Executive, while in the employ
of the Employer, early, late or disability retirement under this Plan, if such
Executive is eligible for and elects an Early, Late or Disability Retirement
Benefit under the Pension Plan. The Compensation Committee, in its sole
discretion, may provide that retirement benefits under this Plan shall begin at
any time after the granting of early, late or disability retirement, rather than
at the Executive's Normal Retirement Date, and the Term Certain Expiration Date
shall terminate on the 15th anniversary of the commencement of retirement
benefits (or, if the Compensation Committee established a different Term Certain
Expiration Date for the covered Executive at the time it designated such
Executive to participate in the Plan, such anniversary which corresponds to the
number of years for which payment is guaranteed).
3
<PAGE>
SECTION 10. TERMINATION OF EMPLOYMENT
If an Executive's employment with the Employer is terminated prior to his or her
65th birthday (or such other minimum age established by the Compensation
Committee at the time it designates such Executive to participate in the Plan,
as of which such Executive shall become entitled to benefits hereunder), either
by the Employer or by the Executive, and either with or without cause, no
benefits shall be paid under any provision of this Plan, unless the Compensation
Committee, in its sole discretion, shall provide that the benefits will be paid
regardless of the termination of the Executive's employment. However,
disability retirement or death shall not be deemed to be a termination of
employment for purposes of this Section.
SECTION 11. PROHIBITION OF COMPETITIVE EMPLOYMENT
If, during the period of an Executive's employment with the Employer or while
the Executive is receiving benefits under this Plan, a covered Executive engages
in competitive activities without the Employer's written consent, no further
benefits shall be payable under any provision of this Plan. For purposes of
this Section, "competitive activities" shall mean engaging, directly or
indirectly (including providing consulting services), in a business similar to
any business of the Employer or any of its subsidiaries, or owning, managing,
operating, controlling, being employed by, participating in, having any
financial interest in, or being connected in any manner with the ownership,
management, operation or conduct of, any such similar business.
SECTION 12. TITLE TO LIFE INSURANCE
If life insurance is purchased to provide the Employer with funds to make
benefit payments under this Plan to or on behalf of a covered Executive, the
owner and beneficiary of such life insurance contract shall at all times be the
Employer or, if the Employer establishes a "rabbi trust" in connection with this
Plan, the trustee of such trust. If the Employer is the owner and beneficiary
of the life insurance contract, it shall have the unrestricted right to use all
amounts and to exercise all options and privileges thereunder without the
knowledge or consent of the Executive, his or her designated beneficiary, or any
other person, it being expressly agreed that neither the Executive nor any such
beneficiary or other person shall have any right, title or interest whatsoever
in or to any such contract. If the trustee of a "rabbi trust" is the owner and
beneficiary of the life insurance contract, the respective rights and interests
of the Employer, the trustee, the Executive, his or her designated beneficiary,
and other persons, shall be governed by the terms of the trust agreement and the
life insurance contract.
SECTION 13. PAYMENTS ARE NOT SECURED
Except as provided in the "rabbi trust" agreement, if any, established by the
Employer in connection with this Plan, (a) the Executive, his or her designated
beneficiary and any other person or persons having or claiming a right to
payment of benefits hereunder, or to any interest under this Plan, shall rely
solely on the unsecured promise of the Employer, and (b) nothing herein shall be
construed to
4
<PAGE>
give the Executive, his or her designated beneficiary or any other person or
persons any right, title, interest or claim in or to any specific asset,
fund, reserve, account or property of any kind whatsoever owned by the
Employer or in which it may have any right, title or interest now or in the
future, but the Executive shall have the right to enforce his or her claim
against the Employer in the same manner as any unsecured creditor.
SECTION 14. NON-ASSIGNABILITY OF BENEFITS
Neither the Executive, nor his or her designated beneficiary, nor any other
person entitled to any payment hereunder, shall have power to transfer, assign,
anticipate, mortgage or otherwise encumber any right to receive a payment in
advance of the time such payment is due under the provisions of this Plan, and
any attempted transfer, assignment, anticipation, mortgage or encumbrance shall
be void. No payment hereunder shall be subject to seizure for the payment of
public or private debts, judgments, alimony or separate maintenance, or be
transferable by operation of law in the event of bankruptcy, insolvency or
otherwise.
SECTION 15. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Compensation Committee, which shall have
sole authority to construe and interpret the Plan and issue such rules and
regulations as it deems appropriate. The Compensation Committee shall have the
duty and responsibility of deciding questions of eligibility, determining the
amount, manner and time of payment of any benefits hereunder, and distributing
the benefits to covered Executives, their spouses and/or beneficiaries;
provided, however, the Compensation Committee may appoint or employ individuals
to assist in the administration of the Plan and any other agents it deems
advisable, including legal and actuarial counsel. The Compensation Committee's
interpretations, determinations, rules and regulations, and calculations shall
be final and binding on all persons and parties concerned. If a covered
Executive, spouse or beneficiary desires a review of any benefit determination
made by the Compensation Committee, he or she shall follow the claims review
procedure described in Section 6.06 of the Pension Plan (except that such appeal
shall be to the Compensation Committee rather than to the committee responsible
for administering the Pension Plan, if different).
SECTION 16. AMENDMENT
This Plan may be amended at any time or from time to time by the Board of
Directors of the Employer. Any amendment shall not reduce the benefit of any
covered Executive, or any person receiving benefits under this Plan, without the
written consent of the affected person. The failure of either the Employer or
any covered Executive to enforce any of the provisions hereof shall not be
deemed a waiver thereof. No provision of this Plan shall be deemed to have been
waived or modified unless such waiver or modification shall be in writing and
signed by the party or parties affected by such waiver or modification. The
Employer reserves the right to terminate the Plan at any time by action of the
Board of Directors. The termination of this Plan shall not affect the benefits
of any Executive, Executive's spouse or designated beneficiary covered by the
Plan, prior to termination.
5
<PAGE>
SECTION 17. NON-GUARANTEE OF EMPLOYMENT
This Plan shall not be construed as giving any Executive the right to be
retained as an Employee of the Employer for any period.
SECTION 18. BINDING EFFECT AND GOVERNING LAW
This Plan shall be binding upon the Executive and the Executive's spouse,
beneficiaries, heirs, executors, administrators, personal representatives,
successors and assigns, and upon the Employer and its successors and assigns.
Except as preempted by ERISA or any other applicable federal law, the Plan shall
be construed, enforced and administered, and the validity thereof shall be
determined, in accordance with the laws of the State of Indiana.
This Plan was adopted by the Board of Directors of First Merchants Corporation
on February 11, 1997, effective as of March 1, 1997. It was amended by the
Executive Committee of the Board of Directors, acting on the Board's behalf
under authority granted in the Bylaws of the Corporation, on December ___, 1997,
retroactively to the effective date of the Plan.
First Merchants Corporation
By /s/ Stefan S. Anderson
--------------------------------------
Stefan S. Anderson, Chairman
6
<PAGE>
Exhibit 13
Annual Report
Financial Review
- -------------------------------------------------------------------
- -------------------------------------------------------------------
TABLE OF CONTENTS
INDEPENDENT AUDITOR'S REPORT . . . . . . . . . . . . . . . 20
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA . . . . . . . 21
MANAGEMENT'S DISCUSSION & ANALYSIS . . . . . . . . . . . . 22
CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . . 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . 32
- -------------------------------------------------------------------
- -------------------------------------------------------------------
19
<PAGE>
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, 1997 and 1996, 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, 1997
(pages 28-46). 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, 1997 and
1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
GEO. S. OLIVE & CO. LLC
Indianapolis, Indiana
January 23, 1998
20
<PAGE>
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net Interest Income
Fully Taxable Equivalent Basis. . . . . . $ 42,139 $ 39,258 $ 37,049 $ 35,909 $ 34,536
Less Tax Equivalent Adjustment. . . . . . . . 2,389 2,111 1,952 1,971 2,011
--------- --------- --------- --------- ---------
Net Interest Income . . . . . . . . . . . . . 39,750 37,147 35,097 33,938 32,525
Provision for Loan Losses . . . . . . . . . . 1,297 1,253 1,388 1,202 1,654
--------- --------- --------- --------- ---------
Net Interest Income
After Provision for Loan Losses . . . . . 38,453 35,894 33,709 32,736 30,871
Total Other Income. . . . . . . . . . . . . . 9,229 8,342 7,592 6,919 7,350
Total Other Expenses. . . . . . . . . . . . . 25,748 24,135 22,992 22,632 22,108
--------- --------- --------- --------- ---------
Income Before Income Tax Expense. . . . . 21,934 20,101 18,309 17,023 16,113
Income Tax Expense. . . . . . . . . . . . . . 7,561 6,959 6,261 5,660 5,250
--------- --------- --------- --------- ---------
Income Before Change in Accounting Method . . 14,373 13,142 12,048 11,363 10,863
Change in Accounting Method for Income Taxes. 260
--------- --------- --------- --------- ---------
Net Income. . . . . . . . . . . . . . . . . . $ 14,373 $ 13,142 $ 12,048 $ 11,363 $ 11,123
========= ========= ========= ========= =========
PER SHARE DATA (1)
Income Before Change in Accounting Method . . $ 2.17 $ 2.00 $ 1.84 $ 1.73 $ 1.64
Basic Net Income. . . . . . . . . . . . . . . 2.17 2.00 1.84 1.73 1.68
Diluted Net Income. . . . . . . . . . . . . . 2.14 1.98 1.82 1.72 1.67
Cash Dividends Paid (2) . . . . . . . . . . . 1.04 .88 .77 .71 .63
December 31 Book Value. . . . . . . . . . . . 18.30 17.07 15.99 14.08 13.46
December 31 Market Value (Bid Price). . . . . 36.50 25.25 25.75 20.83 19.33
AVERAGE BALANCES
Total Assets . . . . . . . . . . . . . . . . . $ 993,338 $932,144 $890,995 $853,257 $832,756
Total Loans. . . . . . . . . . . . . . . . . . 675,892 585,905 544,457 513,784 469,782
Total Deposits 800,118 753,661 728,826 698,644 694,453
Total Federal Home Loan Bank Advances. . . . . 15,455 9,192 9,000 7,692 5,833
Total Stockholders' Equity . . . . . . . . . . 117,014 108,094 99,033 91,466 86,311
YEAR-END BALANCES
Total Assets . . . . . . . . . . . . . . . . . $1,020,136 $967,993 $942,156 $868,153 $842,681
Total Loans. . . . . . . . . . . . . . . . . . 703,784 631,700 553,074 528,641 495,703
Total Deposits . . . . . . . . . . . . . . . . 843,812 794,451 783,936 720,009 688,644
Total Federal Home Loan Bank Advances. . . . . 20,700 9,150 9,000 8,000 6,000
Total Stockholders' Equity . . . . . . . . . . 121,969 112,687 104,967 92,754 89,257
FINANCIAL RATIOS
Return on Average Assets . . . . . . . . . . . 1.45% 1.41% 1.35% 1.33% 1.34%
Return on Average Stockholders' Equity . . . . 12.28 12.16 12.17 12.42 12.89
Average Earning Assets to Total Assets . . . . 94.77 94.48 94.86 94.46 94.27
Allowance for Loan Losses as % of Total Loans. .96 1.05 1.21 1.25 1.30
Dividend Payout Ratio. . . . . . . . . . . . . 47.93 40.85 39.49 39.44 37.06
Average Stockholders' Equity to Average Assets 11.78 11.60 11.11 10.72 10.36
Tax Equivalent Yield on Earning Assets (3) . . 8.27 8.13 8.09 7.41 7.46
Cost of Supporting Liabilities . . . . . . . . 3.79 3.67 3.71 2.95 3.06
Net Interest Margin on Earning Assets. . . . . 4.48 4.46 4.38 4.46 4.40
</TABLE>
(1) Restated for 3- for- 2 stock splits 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.
21
<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 $14,373,000 or $2.17 per share, an 8.5 percent
increase over 1996 at $2.00 per share. Diluted net income per share amounted
to $2.14, an 8.1 percent increase over the 1996 figure of $1.98.
Return on assets increased to 1.45 percent, up from 1.41 percent in
1996, and 1.35 percent in 1995.
Return on equity was 12.28 percent in 1997, 12.16 percent in 1996, and
12.17 percent in 1995.
In 1997, First Merchants Corporation ("Corporation") recorded the
twenty-second 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 11.9
percent at year-end 1997, up from 11.6 percent at December 31, 1996. At
December 31, 1997, the Corporation had a Tier I risk-based capital ratio of
16.9 percent, total risk-based capital ratio of 17.9 percent, and a leverage
ratio of 11.9 percent. Regulatory capital guidelines require a Tier I
risk-based capital ratio of 4.0 percent and a total risk-based capital ratio
of 8.0 percent.
The Corporation 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.
(continued)
22
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
ASSET QUALITY/PROVISION for LOAN LOSSES (continued)
The reduction in non-performing loans is primarily attributable to two
loans. One in the amount of $1,000,000 was removed from non-accrual status
and one in the amount of $651,000 was removed from restructured status. No
material loss is expected on either of these loans.
The Corporation adopted Statement of Financial Accounting Standards
("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 below,
totaled $2,551,000 at December 31, 1997. An allowance for losses at
December 31, 1997, was not deemed necessary for impaired loans totaling
$1,075,000, but an allowance of $407,000 was recorded for the remaining
balance of impaired loans of $1,476,000. The average balance of impaired
loans for 1997 was $3,414,000.
At December 31, 1997, the allowance for loan losses was $6,778,000, up
slightly from year end 1996. As a percent of loans, the allowance was .96
percent, down from 1.05 percent at year end 1996. The decline in the
allowance ratio is attributable to significant loan growth.
The provision for loan losses in 1997 was $1,297,000 compared to
$1,253,000 in 1996.
<TABLE>
<CAPTION>
December 31,
1997 1996
------------------------
(Dollars in Thousands)
<S> <C> <C>
Non-accrual loans. . . . . . . . . . . . . . . . $ 1,410 $ 2,777
Loans contractually past due 90 days
or more other than nonaccruing. . . . . . . 1,972 1,699
Restructured loans . . . . . . . . . . . . . . . 282 1,540
-------- --------
Total . . . . . . . . . . . . . . . . . . . $ 3,664 $ 6,016
======== ========
</TABLE>
The Corporation's asset quality and loan loss experience have consistently
been superior to that of its peer group. Asset quality has been a major
factor in the Corporation's ability to generate consistent profit improvement.
[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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Allowance for loan losses:
Balance at January 1. . . . . . . . . . $ 6,622 $ 6,696 $ 6,603
------------ ------------ ------------
Chargeoffs. . . . . . . . . . . . . . . 1,609 1,636 1,554
Recoveries. . . . . . . . . . . . . . . 468 309 259
------------ ------------ ------------
Net chargeoffs. . . . . . . . . . . . . 1,141 1,327 1,295
Provision for loan losses . . . . . . . 1,297 1,253 1,388
------------ ------------ -------------
Balance at December 31. . . . . . . . . $ 6,778 $ 6,622 $ 6,696
============ ============ =============
Ratio of net chargeoffs during
the period to average loans
outstanding during the period . . . . . .17% .23% .24%
Peer Group. . . . . . . . . . . . . . . . . N/A .26% .26%
</TABLE>
23
<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 investments 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, 1997, 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, 1997.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
INTEREST-RATE SENSITIVITY ANALYSIS
(Dollars in Thousands) AT DECEMBER 31, 1997
1-180 DAYS 181-365 DAYS 1-5 YEARS BEYOND TOTAL
5 YEARS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rate-Sensitive Assets:
Federal funds sold and
interest-bearing deposits. . . . . $ 9,435 $ 9,435
Investment securities. . . . . . . . 52,680 $ 34,688 $ 122,966 $ 37,038 247,372
Loans. . . . . . . . . . . . . . . . 302,943 71,869 263,440 65,532 703,784
Federal Reserve and
Federal Home Loan Bank stock . . . 2,976 397 3,373
----------- ----------- ---------- ---------- --------
Total rate-sensitive assets . . . 368,034 106,557 386,406 102,967 963,964
----------- ----------- ---------- ---------- --------
Rate-Sensitive Liabilities:
Interest-bearing deposits. . . . . . 304,651 102,033 320,727 788 728,199
Borrowed funds . . . . . . . . . . . 26,829 26,829
Federal Home Loan Bank advances. . . 2,294 4,294 9,278 4,834 20,700
----------- ----------- ---------- ---------- --------
Total rate-sensitive liabilities. 333,774 106,327 330,005 5,622 775,728
----------- ----------- ---------- ---------- --------
Interest rate sensitivity gap by period . $ 34,260 $ 230 $ 56,401 $ 97,345
Cumulative rate sensitivity gap . . . . . 34,260 34,490 90,891 188,236
Cumulative rate sensitivity gap ratio
at December 31, 1997. . . . . . . . . . 110.3% 107.8% 111.8% 124.3%
</TABLE>
The Corporation had a cumulative positive gap of $34,490,000 in the one year
horizon at December 31, 1997, or just over 3 percent 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.
24
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
EARNING ASSETS
Earning assets increased $52 million during 1997.
The following table presents the earning asset mix for the years 1997
and 1996 (at December 31).
Loans grew by $72 million while investment securities declined. This
reflects the Corporation's strategy to change the balance sheet mix to
emphasize loans which generally carry higher yields than investment
securities, and often provide collateral business.
- -------------------------------------------------------------------------------
EARNING ASSETS
<TABLE>
<CAPTION>
(Dollars in Millions) DECEMBER 31
1997 1996
-------- --------
<S> <C> <C>
Federal funds sold and interest-bearing time deposits. . $ 9.4 $ 1.4
Securities available for sale. . . . . . . . . . . . . . 212.0 228.4
Securities held to maturity. . . . . . . . . . . . . . . 35.3 47.2
Mortgage loans held for sale . . . . . . . . . . . . . . 0.5 0.3
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . 703.3 631.4
Federal Reserve and Federal Home Loan Bank stock . . . . 3.4 3.1
-------- --------
Total. . . . . . . . . . . . . . . . . . . . . . . . $ 963.9 $ 911.8
======== ========
</TABLE>
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, 1997 and 1996.
<TABLE>
<CAPTION>
AS OF DECEMBER 31 (Dollars in Millions)
- -------------------------------------------------------------------------------
SHORT-TERM FEDERAL HOME LOAN
DEPOSITS BORROWINGS BANK ADVANCES
<S> <C> <C> <C>
1997 . . . . . . . . . . . . . . . $ 843.8 $ 26.8 $ 20.7
1996 . . . . . . . . . . . . . . . 794.5 45.0 9.2
- -------------------------------------------------------------------------------
</TABLE>
NET INTEREST INCOME
Net interest income is the primary source of the Corporation's earnings.
It is a function of net interest margin and the level of average earning
assets.
The table below presents the Corporation's asset yields, interest
expense, and net interest income as a percent of average earning assets for
the three-year period ending in 1997.
Asset yields improved .14 percent (FTE) in 1997, due primarily to a
shift in the Corporation's asset mix (a larger percentage in higher-yielding
loans, and a smaller percentage in investments.)
Interest costs rose by a similar amount (.12 percent) resulting in a .02
percent increase in net interest income (FTE) as a percent of average earning
assets. This "spread" increase accounted for only a small portion of the
growth in net interest income. Most of the $2.9 million increase is
attributable to growth in earning assets which exceeded $60 million.
<TABLE>
<CAPTION>
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------
INTEREST INCOME INTEREST EXPENSE NET INTEREST INCOME NET INTEREST INCOME
(FTE) AS A PERCENT AS A PERCENT (FTE) AS A PERCENT AVERAGE ON A
OF AVERAGE OF AVERAGE 0F AVERAGE EARNINGS FULLY TAXABLE
EARNING ASSETS EARNING ASSETS EARNING ASSETS ASSETS EQUIVALENT BASIS
-------------- -------------- -------------- -------- ----------------
<S> <C> <C> <C> <C> <C>
1997 8.27% 3.79% 4.48% $941,351 $ 42,139
1996 8.13 3.67 4.46 880,729 39,258
1995 8.09 3.71 4.38 845,198 37,049
</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.
- ------------------------------------------------------------------------------
25
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 1997 amounted to $9,229,000 or 10.6 percent higher than
in 1996. The increase of $887,000 is primarily attributable to the following
factors:
1. Revenues from fiduciary activity grew $388,000, or 13.1 percent, due to
strong new business activity and markets.
2. Service charges on deposit accounts increased $341,000, or 11.3 percent,
due to account growth and some minor price adjustments.
3. Personal money order agent fees increased $71,000, or 14.6 percent, due
to Increased sales volume.
Other income in 1996 amounted to $8,342,000 or 9.9 percent higher than in
1995. The increase of $750,000 is primarily attributable to the following
five factors:
1. Revenues from fiduciary activities increased $166,000, or 5.9 percent,
due to stronger business activity and markets.
2. Deposit service charges increased $195,000, or 6.9 percent, primarily due
to changes in pricing.
3. Interchange fees for the Corporation's credit and debit card programs
grew by $169,000, or 142 percent, due to increased product offerings.
4. The Corporation recorded securities gains of $148,000 compared to losses
of $30,000 in 1995, 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. Personal money order agent fees increased $79,000, or 19.4 percent, due
to an increased client base.
OTHER EXPENSE
Total "other expenses" represent non-interest operating expenses of the
Corporation. Those expenses amounted to $25,748,000 in 1997, an increase of
6.7 percent from the prior year, or $1,613,000.
Four major areas account for most of the increase:
1. Salary and benefit expenses, which account for over one-half of the
Corporation's non-interest operating expenses, grew by $889,000, or 6.6
percent due to normal salary increases and staff additions.
2. Equipment expenses increased $193,000, or 9.0 percent, reflecting the
Corporation's efforts to improve efficiency and provide electronic
service delivery to its customers.
3. Marketing expenses rose $145,000, or 20.5 percent, due to more aggressive
product promotion.
4. Outside data processing fees grew by $176,000, or 19.5 percent, due to
increased debit card, credit card and trust activity.
1996 expenses amounted to $24,135,000, an increase of 5.0 percent 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 increased by $640,000, or 5.0 percent, due to
normal salary increases.
2. Equipment expense rose $223,000, again 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.
26
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INCOME TAXES
The increase in 1997 tax expense of $602,000 is attributable primarily to a
$1,833,000 increase in net pre-tax income, mitigated somewhat by a $514,000
increase in tax-exempt income. Likewise, the $698,000 increase in 1996
resulted primarily from a $1,792,000 increase in pre-tax net income.
ACCOUNTING MATTERS
REPORTING COMPREHENSIVE INCOME
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, REPORTING COMPREHENSIVE INCOME, establishing standards for
the reporting of comprehensive income and its components in financial
statements. Statement No. 130 is applicable to all entities that provide a
full set of financial statements. Enterprises that have no items of other
comprehensive income in any period presented are excluded from the scope of
this Statement.
Statement No. 130 is effective for interim and annual periods beginning
after December 15, 1997. Earlier application is permitted. The Corporation
will adopt Statement No. 130 during fiscal year 1998.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
Also in 1997, the FASB issued Statement No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION, which supersedes Statement No. 14,
FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE. It establishes
standards for the way that public enterprises report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures
regarding products and services, geographic areas and major customers.
Statement No. 131 defines operating segments as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision-maker in deciding how to allocate
resources and in assessing performance.
This standard is effective for financial statement periods beginning after
December 15, 1997, and requires comparative information for earlier years to
be restated. Due to recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, it may have on the Corporation's
future financial statement disclosures.
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.
YEAR 2000
The Corporation has conducted a comprehensive review of its computer systems
to identify the systems that could be affected by the Year 2000 Issue and has
developed an implementation plan to resolve the issue. The Year 2000 Issue
is the result of the computer programs being written using two digits rather
than four to define the applicable year. Any of the Corporation's programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations. The Corporation is utilizing both internal and external
resources to identify, correct or reprogram and test the systems for the Year
2000 compliance. It is anticipated that all reprogramming efforts will be
complete by December 31, 1998, allowing adequate time for testing.
OTHER
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, including the
Corporation; that address is http://www.sec.gov
27
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
December 31
(In Thousands, Except Share Data) 1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks . . . . . . . . . . . . $ 33,127 $ 33,882
Federal funds sold . . . . . . . . . . . . . . 9,050 1,150
--------- ---------
Cash and cash equivalents . . . . . . . . . . 42,177 35,032
Interest-bearing time deposits. . . . . . . . . 385 290
Investment securities
Available for sale. . . . . . . . . . . . . . 212,040 228,379
Held to maturity. . . . . . . . . . . . . . . 35,332 47,227
--------- ---------
Total investment securities. . . . . . . . 247,372 275,606
Mortgage loans held for sale. . . . . . . . . . 471 284
Loans . . . . . . . . . . . . . . . . . . . . . 703,313 631,416
Less: Allowance for loan losses (6,778) (6,622)
--------- ---------
Net loans . . . . . . . . . . . . . . . . . 696,535 624,794
Premises and equipment. . . . . . . . . . . . . 15,382 15,303
Federal Reserve and Federal Home Loan Bank stock 3,373 3,090
Interest receivable . . . . . . . . . . . . . . 8,968 8,643
Core deposit intangibles and goodwill . . . . . 1,625 1,714
Other assets. . . . . . . . . . . . . . . . . . 3,848 3,237
--------- ---------
Total assets . . . . . . . . . . . . . . . $ 1,020,136 $ 967,993
============ ==========
LIABILITIES
Deposits
Noninterest-bearing . . . . . . . . . . . . . $ 115,613 $ 110,175
Interest-bearing. . . . . . . . . . . . . . . 728,199 684,276
--------- ---------
Total deposits. . . . . . . . . . . . . . . 843,812 794,451
Short-term borrowings . . . . . . . . . . . . . 26,829 45,037
Federal Home Loan Bank advances . . . . . . . . 20,700 9,150
Interest payable. . . . . . . . . . . . . . . . 3,615 3,376
Other liabilities . . . . . . . . . . . . . . . 3,211 3,292
--------- ---------
Total liabilities . . . . . . . . . . . . . 898,167 855,306
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--6,664,439 and
6,603,319 shares . . . . . . . . . . . . . . 833 825
Additional paid-in capital. . . . . . . . . . . 24,140 22,968
Retained earnings . . . . . . . . . . . . . . . 95,449 87,978
Net unrealized gain on securities
available for sale . . . . . . . . . . . . . . 1,547 916
--------- ---------
Total stockholders' equity. . . . . . . . . 121,969 112,687
--------- ---------
Total liabilities and stockholders' equity. $ 1,020,136 $ 967,993
============ ==========
See Notes to Consolidated Financial Statements.
</TABLE>
28
<PAGE>
CONSOLIDATED STATEMENT of INCOME
<TABLE>
<CAPTION>
(In Thousands, Except Share Data) Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans receivable
Taxable $ 59,773 $ 52,096 $ 49,060
Tax exempt 116 90 81
Investment securities
Taxable 10,818 12,832 12,479
Tax exempt 4,320 3,832 3,642
Federal funds sold 172 498 1,028
Deposits with financial institutions 34 16 9
Federal Reserve and Federal Home Loan Bank stock 242 132 149
--------- --------- ---------
Total interest income 75,475 69,496 66,448
--------- --------- ---------
INTEREST EXPENSE
Deposits 31,920 29,139 28,227
Short-term borrowings 2,856 2,687 2,628
Federal Home Loan Bank advances 949 523 496
--------- --------- ---------
Total interest expense 35,725 32,349 31,351
--------- --------- ---------
NET INTEREST INCOME 39,750 37,147 35,097
Provision for loan losses 1,297 1,253 1,388
--------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 38,453 35,894 33,709
--------- --------- ---------
OTHER INCOME
Fiduciary activities 3,355 2,967 2,801
Service charges on deposit accounts 3,365 3,024 2,829
Other customer fees 1,912 1,659 1,270
Net realized gains (losses)on
sales of available-for-sale securities (14) 148 (30)
Other income 611 544 722
--------- --------- ---------
Total other income 9,229 8,342 7,592
--------- --------- ---------
OTHER EXPENSES
Salaries and employee benefits 14,322 13,433 12,792
Net occupancy expenses 1,620 1,537 1,555
Equipment expenses 2,345 2,152 1,929
Marketing expense 851 706 654
Deposit insurance expense 97 12 825
Outside data processing fees 1,077 901 739
Printing and office supplies 1,021 923 1,094
Other expenses 4,415 4,471 3,404
--------- --------- ---------
Total other expenses 25,748 24,135 22,992
--------- --------- ---------
INCOME BEFORE INCOME TAX 21,934 20,101 18,309
Income tax expense 7,561 6,959 6,261
--------- --------- ---------
NET INCOME $ 14,373 $ 13,142 $ 12,048
========= ========= =========
NET INCOME PER SHARE:
Basic $2.17 $2.00 $1.84
Diluted 2.14 1.98 1.82
</TABLE>
See Notes to Consolidated Financial Statements.
29
<PAGE>
CONSOLIDATED STATEMENT of CHANGES in STOCKHOLDERS' EQUITY
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Net
Unrealized Gain
(Loss) On
Common Stock Additional Securities
------------ Paid-In Retained Available
Shares Amount Capital Earnings for Sale Total
------ ------ ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1995 4,876,654 $ 610 $ 22,461 $ 72,615 $(2,932) $ 92,754
Net income for 1995 12,048 12,048
Cash dividends ($.77 per share) (4,456) (4,456)
Net change in unrealized gain (loss) on
securities available for sale 4,818 4,818
Stock issued under employee benefit plans 11,175 1 276 277
Stock issued under dividend reinvestment
and stock purchase plan 13,928 2 454 456
Stock options exercised 9,267 1 191 192
Stock redeemed (31,918) (4) (1,113) (2) (1,119)
Three-for-two stock split 1,683,344 210 (210)
Cash paid in lieu of issuing fractional shares (160) (4) (4)
--------- ----- -------- -------- ------- --------
BALANCES, DECEMBER 31, 1995 6,562,290 820 22,055 80,205 1,886 104,966
Net income for 1996 13,142 13,142
Cash dividends ($.88 per share) (5,369) (5,369)
Net change in unrealized gain (loss) on
securities available for sale (970) (970)
Stock issued under employee benefit plans 15,175 2 296 298
Stock issued under dividend reinvestment
and stock purchase plan 21,712 3 555 558
Stock options exercised 4,237 64 64
Cash paid in lieu of issuing fractional shares (95) (2) (2)
--------- ----- -------- -------- ------- --------
BALANCES, DECEMBER 31, 1996 6,603,319 825 22,968 87,978 916 112,687
Net income for 1997 14,373 14,373
Cash dividends ($1.04 per share) (6,902) (6,902)
Net change in unrealized gain (loss) on
securities available for sale 631 631
Stock issued under employee benefit plans 13,690 2 289 291
Stock issued under dividend reinvestment
and stock purchase plan 23,276 3 723 726
Stock options exercised 24,154 3 160 163
--------- ----- -------- -------- ------- --------
BALANCES, DECEMBER 31, 1997 6,664,439 $ 833 $ 24,140 $ 95,449 $ 1,547 $121,969
========= ===== ======== ======== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
30
<PAGE>
CONSOLIDATED STATEMENT of CASH FLOWS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 14,373 $ 13,142 $ 12,048
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 1,297 1,253 1,388
Depreciation and amortization 1,810 1,626 1,482
Amortization of goodwill and intangibles 89 131 131
Deferred income tax (35) 401 377
Securities amortization, net 236 188 693
Securities losses (gains), net 14 (148) 30
Mortgage loans originated for sale (7,139) (2,501) (4,491)
Proceeds from sales of mortgage loans 6,952 2,952 3,785
Net change in
Interest receivable (325) 357 (706)
Interest payable 239 (40) 979
Other adjustments (1,050) (593) 67
--------- --------- ---------
Net cash provided by operating activities 16,461 16,768 15,783
--------- --------- ---------
INVESTING ACTIVITIES:
Net change in interest-bearing deposits (95) (31) (236)
Purchases of
Securities available for sale (68,524) (113,473) (91,178)
Securities held to maturity (2,652) (22,450) (41,575)
Proceeds from maturities of
Securities available for sale 73,786 96,441 35,716
Securities held to maturity 15,878 35,715 62,053
Proceeds from sales of
Securities available for sale 10,552 13,120 14,165
Net change in loans (73,038) (80,404) (25,629)
Purchase of Federal Home Loan Bank stock (283) (389)
Purchases of premises and equipment (2,157) (2,083) (2,187)
Other investing activities 236 71 367
--------- --------- ---------
Net cash used by investing activities (46,297) (73,483) (48,504)
--------- --------- ---------
FINANCING ACTIVITIES:
Net change in
Demand and savings deposits 5,438 (19,168) 2,604
Certificates of deposit and other time deposits 43,923 29,683 61,323
Short-term borrowings (18,208) 7,659 (3,254)
Federal Home Loan Bank advances 11,550 7,150 1,000
Repayment of Federal Home Loan Bank advances (7,000)
Cash dividends (6,902) (5,369) (4,456)
Stock issued under employee benefit plans 292 298 277
Stock issued under dividend reinvestment
and stock purchase plan 669 558 456
Stock options exercised 219 64 192
Stock redeemed (1,119)
Cash paid in lieu of issuing fractional shares (2) (4)
--------- --------- ---------
Net cash provided by financing activities 36,981 13,873 57,019
--------- --------- ---------
NET CHANGE in CASH
and CASH EQUIVALENTS 7,145 (42,842) 24,298
CASH and CASH EQUIVALENTS,
BEGINNING of YEAR 35,032 77,874 53,576
--------- --------- ---------
CASH and CASH EQUIVALENTS,
END of YEAR $ 42,177 $ 35,032 $ 77,874
========= ========= =========
ADDITIONAL CASH FLOWS INFORMATION:
Interest paid $ 35,486 $ 32,388 $ 30,372
Income tax paid 7,602 6,203 5,641
</TABLE>
See Notes to Consolidated Financial Statements.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Share Data)
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. Certain prior year amounts have been reclassified to conform
with current classifications.
INVESTMENT SECURITIES - 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 in 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.
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 Statement of Financial Accounting
Standards ("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 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, 1997, 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.
(continued)
32
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Share Data)
NOTE 1
NATURE of OPERATIONS and SUMMARY of SIGNIFICANT ACCOUNT POLICIES (continued)
PREMISES and EQUIPMENT are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line and declining balance
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 7 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.
STOCK OPTIONS are granted for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant.
The Corporation accounts for and will continue to account for stock option
grants in accordance with APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and, accordingly, recognizes no compensation expense for the stock
option grants.
EARNINGS PER SHARE have been computed based upon the weighted average common
and common equivalent 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.
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, 1995. Separate operating results of Union National
Bancorp and Randolph County Bancorp for the periods prior to the merger were
as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net interest income:
First Merchants Corporation $ 33,060 $ 27,881
Union National Bancorp 2,961 4,562
Randolph County Bancorp 1,126 2,654
--------- ---------
Combined $ 37,147 $ 35,097
========= =========
Net income:
First Merchants Corporation $ 11,556 $ 9,858
Union National Bancorp 974 1,523
Randolph County Bancorp 612 667
--------- ---------
Combined $ 13,142 $ 12,048
========= =========
Net income per share:
Basic:
First Merchants Corporation $ 1.76 $ 1.50
Union National Bancorp .15 .23
Randolph County Bancorp .09 .11
--------- ---------
Combined $ 2.00 $ 1.84
========= =========
Diluted:
First Merchants Corporation $ 1.74 $ 1.49
Union National Bancorp .15 .23
Randolph County Bancorp .09 .10
--------- ---------
Combined $ 1.98 $ 1.82
========= =========
</TABLE>
33
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Share Data)
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, 1997,
was $10,973,000.
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, 1997
U.S. Treasury $ 19,207 $ 104 $ 11 $ 19,300
Federal agencies 66,783 405 48 67,140
State and municipal 67,842 1,815 28 69,629
Mortgage-backed securities 36,682 362 86 36,958
Other asset-backed securities 487 2 54 435
Corporate obligations 18,219 139 30 18,328
Marketable equity securities 250 250
--------- ------ ----- ---------
Total available for sale 209,470 2,827 257 212,040
--------- ------ ----- ---------
Held to maturity at December 31, 1997
U.S. Treasury 249 2 247
Federal agencies 3,412 6 1 3,417
State and municipal 26,206 252 2 26,456
Mortgage-backed securities 1,255 4 1 1,258
Other asset-backed securities 4,210 7 166 4,051
--------- ------ ----- ---------
Total held to maturity 35,332 269 172 35,429
--------- ------ ----- ---------
Total investment securities $ 244,802 $3,096 $ 429 $ 247,469
========= ====== ===== =========
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 35,946 297 145 36,098
Other asset-backed securities 6,204 130 6,074
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 1,053 1,053
Other asset-backed securities 3,791 17 121 3,687
--------- ------ ----- ---------
Total held to maturity 47,227 421 154 47,494
--------- ------ ----- ---------
Total investment securities $ 274,083 $2,679 $ 889 $ 275,873
========= ====== ===== =========
</TABLE>
The amortized cost and fair value of securities held to maturity and
available for sale at December 31, 1997, 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)
34
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Share Data)
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, 1997:
Due in one year or less $ 34,626 $ 34,681 $ 11,500 $ 11,529
Due after one through five years 102,944 103,712 15,573 15,742
Due after five through ten years 33,590 35,079 2,264 2,319
Due after ten years 891 925 530 530
--------- --------- --------- ---------
172,051 174,397 29,867 30,120
Mortgage-backed securities 36,682 36,958 1,255 1,258
Other asset-backed securities 487 435 4,210 4,051
Marketable equity securities 250 250
--------- --------- --------- ---------
Totals $ 209,470 $ 212,040 $ 35,332 $ 35,429
========= ========= ========= =========
</TABLE>
Securities with a carrying value of approximately $92,991,000 and
$102,787,000 were pledged at December 31, 1997 and 1996, 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 1997, 1996 and
1995 were $10,552,000, $13,120,000 and $14,165,000. Gross gains of $0,
$148,000 and $57,800 and gross losses of $14,000, $0 and $113,900 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>
1997 1996
---- ----
<S> <C> <C>
Loans at December 31:
Commercial and industrial loans $ 148,281 $ 132,134
Bankers' acceptances and loans to financial institutions 705 625
Agricultural production financing and other loans to farmers 16,764 18,906
Real estate loans:
Construction 21,389 13,167
Commercial and farmland 97,503 97,596
Residential 287,072 253,530
Individuals' loans for household and other personal expenditures 125,706 113,507
Tax-exempt loans 2,598 1,643
Other loans 3,782 1,672
---------- ----------
703,800 632,780
Unearned interest on loans (487) (1,364)
---------- ----------
Total loans $ 703,313 $ 631,416
========== ==========
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Allowance for loan losses:
Balance, January 1 $ 6,622 $ 6,696 $ 6,603
Provision for losses 1,297 1,253 1,388
Recoveries on loans 468 309 259
Loans charged off (1,609) (1,636) (1,554)
-------- -------- --------
Balance, December 31 $ 6,778 $ 6,622 $ 6,696
======== ======== ========
</TABLE>
(continued)
35
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Share Data)
NOTE 5
LOANS and ALLOWANCE (continued)
Information on impaired loans is summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
As of, and for, the year ending December 31:
Impaired loans with an allowance $ 1,476 $ 3,124 $ 2,314
Impaired loans for which the discounted
cash flows or collateral value exceeds the
carrying value of the loan 1,075 868 2,498
-------- -------- --------
Total impaired loans $ 2,551 $ 3,992 $ 4,812
======== ======== ========
Allowance for impaired loans (included in the
Corporation's allowance for loan losses) $ 407 $ 1,092 $ 1,177
Average balance of impaired loans 3,414 5,213 4,650
Interest income recognized on impaired loans 180 311 153
Cash basis interest included above 162 291 93
</TABLE>
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 below:
<TABLE>
<CAPTION>
<S> <C>
Balances, January 1, 1997 $ 9,063
New loans, including renewals 5,547
Payments, etc., including renewals (2,177)
--------
Balances, December 31, 1997 $ 12,433
========
</TABLE>
NOTE 6
PREMISES and EQUIPMENT
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Cost at December 31:
Land $ 2,826 $ 2,829
Buildings and leasehold improvements 13,723 13,863
Equipment 15,320 13,559
-------- --------
Total cost 31,869 30,251
Accumulated depreciation (16,487) (14,948)
-------- --------
Net $ 15,382 $ 15,303
======== ========
</TABLE>
The Corporation is committed under various noncancelable lease contracts
for certain subsidiary office facilities. Total lease expense for 1997, 1996
and 1995 was $141,000, $134,000 and $127,000, respectively. The future
minimum rental commitments required under the operating leases in effect at
December 31, 1997, expiring at various dates through the year 2016, follow on
the right for the years ending December 31:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 135
1999 123
2000 106
2001 71
2002 62
After 2002 4
------
Total future minimum obligations $ 501
======
</TABLE>
36
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Share Data)
NOTE 7
DEPOSITS
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deposits at December 31:
Demand deposits $ 234,905 $ 225,437
Savings deposits 176,953 170,179
Certificates and other time deposits
of $100,000 or more 104,100 82,802
Other certificates and time deposits 327,854 316,033
---------- ----------
Total deposits $ 843,812 $ 794,451
========== ==========
</TABLE>
Certificates and other time deposits maturing in years ending December 31:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 298,311
1999 87,074
2000 27,407
2001 10,340
2002 8,034
After 2002 788
----------
$ 431,954
==========
</TABLE>
NOTE 8
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Short-term borrowings at December 31:
Federal funds purchased $ 4,070 $ 20,725
Securities sold under repurchase agreements 15,398 20,054
U.S. Treasury demand notes 7,361 4,258
-------- ---------
Total short-term borrowings $ 26,829 $ 45,037
======== =========
</TABLE>
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 1997 and 1996 totaled $33,802,000 and $52,221,000, and the
daily average of such agreements totaled $31,327,000 and $42,140,000.
NOTE 9
FEDERAL HOME LOAN BANK ADVANCES
Advances from FHLB at December 31:
<TABLE>
<CAPTION>
1997 1996
--------------------- --------------------
Weighted Weighted
Average Average
Interest Interest
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Maturities in years ending December 31:
1997 $ 2,000 4.76%
1998 $ 5,000 5.60% 5,000 5.61
1999 7,150 6.02 2,150 5.81
2000 1,850 6.36
2002 150 7.07
Thereafter 6,550 6.65
-------- --------
Total advances $ 20,700 6.16 $ 9,150 5.48
======== ========
</TABLE>
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 percent of these advances. Advances are subject
to restrictions or penalties in the event of prepayment.
37
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Share Data)
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 $11,877,000
and $5,997,000 at December 31, 1997 and 1996.
In 1996, the Corporation adopted SFAS No. 122, ACCOUNTING FOR MORTGAGE
SERVICING RIGHTS. The adoption of this statement has had no material impact
on the Corporation's financial condition and results of operations.
NOTE 11
INCOME TAX
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income tax expense, for the year ended December 31:
Currently payable:
Federal $ 5,702 $ 4,903 $ 4,400
State 1,894 1,655 1,484
Deferred:
Federal (21) 336 299
State (14) 65 78
-------- -------- --------
Total income tax expense $ 7,561 $ 6,959 $ 6,261
======== ======== ========
Reconciliation of federal statutory
to actual tax expense:
Federal statutory income tax at 34% $ 7,458 $ 6,834 $ 6,225
Tax-exempt interest (1,257) (1,140) (1,087)
Effect of state income taxes 1,241 1,135 1,031
Other 119 130 92
-------- -------- --------
Actual tax expense $ 7,561 $ 6,959 $ 6,261
======== ======== ========
</TABLE>
Tax expense (benefit) applicable to security gains and losses for the
years ended December 31, 1997, 1996 and 1995, was ($5,700), $60,000 and
($12,200), respectively.
A cumulative net deferred tax asset is included in other assets. The
components of the asset are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax asset at December 31:
Assets
Differences in accounting for loan fees $ 157
Differences in accounting for loan losses $ 2,692 2,571
Deferred compensation 313 285
Differences in accounting for pensions
and other employee benefits 183 118
-------- ------
Total assets 3,188 3,131
-------- ------
Liabilities
Differences in depreciation methods 1,012 983
Differences in accounting for loans and securities 125 78
Differences in accounting for loan fees 28
Net unrealized gain on securities available for sale 1,023 607
State income tax 146 152
Other 69 75
-------- -------
Total liabilities $ 2,403 $ 1,895
-------- -------
Net deferred tax asset $ 785 $ 1,236
======== =======
</TABLE>
38
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Share Data)
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:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Commitments to extend credit $138,828 $137,653
Standby letters of credit 4,649 2,874
</TABLE>
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, 1997,
available for 1998 dividends to the Corporation is $22,736,000. 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, 1997, was
$118,792,000, of which $96,056,000 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, 1997, there were 342,924 shares of common stock
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.
NOTE 14
REGULATORY CAPITAL
The Corporation and Banks are subject to various regulatory capital
requirements administered by the federal banking agencies and are assigned to
a capital category. The assigned capital category is largely determined by
three ratios that are calculated according to the regulations: total risk
adjusted capital, Tier 1 capital, and Tier 1 leverage ratios. The ratios are
intended to measure capital relative to assets and credit risk associated
with those assets and off-balance sheet exposures of the entity. The capital
category assigned to an entity can also be affected by qualitative judgments
made by regulatory agencies about the risk inherent in the entity's
activities that are not part of the calculated ratios.
There are five capital categories defined in the regulations, ranging from
well capitalized to critically undercapitalized. Classification of a bank in
any of the undercapitalized categories can result in actions by regulators
that could have a material effect on a bank's operations.
At December 31, 1997, 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
(continued)
39
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Share Data)
NOTE 14
REGULATORY CAPITAL (continued)
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 percent, 6
percent and 5 percent, 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>
1997 1996
Required for Required for
Actual Adequate Capital(1) Actual Adequate Capital (1)
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
--------- ------ ------- ------ --------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31
Total Capital (1) (to risk-weighted assets)
Consolidated ............................ $125,762 17.9% $56,166 8.0% $116,693 18.0% $51,884 8.0%
First Merchants ............................ 75,539 17.4 34,756 8.0 69,651 17.8 31,300 8.0
Pendleton ............................ 12,256 17.4 5,628 8.0 11,383 17.9 5,074 8.0
First United ............................ 7,570 18.2 3,332 8.0 7,091 17.2 3,302 8.0
Randolph County ............................ 10,278 15.1 5,448 8.0 9,985 14.9 5,364 8.0
Union National ............................ 18,075 17.0 8,498 8.0 17,672 17.9 7,914 8.0
Tier I Capital (1) (to risk-weighted assets)
Consolidated ............................ $118,984 16.9% $28,083 4.0% $110,072 17.0% $25,942 4.0%
First Merchants ............................ 71,900 16.6 17,378 4.0 66,143 16.9 15,650 4.0
Pendleton ............................ 11,506 16.4 2,814 4.0 10,629 16.8 2,537 4.0
First United ............................ 7,133 17.1 1,666 4.0 6,663 16.1 1,651 4.0
Randolph County ............................ 9,548 14.0 2,724 4.0 9,234 13.8 2,682 4.0
Union National ............................ 16,852 15.9 4,249 4.0 16,492 16.7 3,957 4.0
Tier I Capital (1) (to average assets)
Consolidated ............................ $118,984 11.9% $40,010 4.0% $110,072 11.6% $38,012 4.0%
First Merchants ............................ 71,900 11.7 24,548 4.0 66,143 11.6 22,849 4.0
Pendleton ............................ 11,506 11.8 3,897 4.0 10,629 12.3 3,462 4.0
First United ............................ 7,133 11.5 2,481 4.0 6,663 11.3 2,351 4.0
Randolph County ............................ 9,548 14.0 2,733 4.0 9,234 12.9 2,863 4.0
Union National ............................ 16,852 9.1 7,438 4.0 16,492 9.5 6,954 4.0
(1) As defined by regulatory agencies
</TABLE>
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 $139,000 for 1997, $191,000 for 1996
and $253,000 for 1995.
The table on the next page sets forth the plans' funded status and amounts
recognized in the consolidated balance sheet at December 31:
40
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Share Data)
NOTE 15
EMPLOYEE BENEFIT PLANS (continued)
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C> <C>
Actuarial present value of:
Accumulated benefit obligation including vested
benefits of $12,020 and $10,885............................ $ 12,322 $ 11,133
----------- ---------
----------- ---------
Projected benefit obligation for service rendered to date.... $(14,454) $ (13,060)
Plan assets at fair value, primarily interest-bearing deposits
and corporate bonds and securities........................... 18,865 15,188
----------- ---------
----------- ---------
Plan assets in excess of projected benefit obligation........... 4,411 2,128
Unrecognized net gain from experience
different than that assumed ............................. ( 4,169) ( 1,615)
Unrecognized prior service cost ............................. ( 156) ( 169)
Unrecognized net transition asset ............................. ( 519) ( 638)
----------- ---------
Accrued pension cost included in the balance sheet.............. $( 433) $( 294)
----------- ---------
----------- ---------
1997 1996 1995
-------- -------- ---------
Pension expense includes the following components:
Service cost-benefits earned during the year................ $ 624 $ 537 $ 462
Interest cost on projected benefit obligation............... 956 921 845
Actual return on plan assets................................ (4,251) (1,966) (2,633)
Net amortization and deferral............................... 2,810 699 1,579
-------- -------- ---------
$ 139 $ 191 $ 253
-------- -------- ---------
-------- -------- ---------
1997 1996 1995
-------- -------- ---------
Assumptions used in the accounting as of December 31 were:
Discount rate................................................ 7.40% 7.50% 7.50%
Rate of increase in compensation............................. 4.50% 4.50% 4.50%
Expected long-term rate of return on assets.................. 9.00% 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 merged 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
percent 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, 1997.
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 percent vested when granted and are
fully exercisable generally six months after the date of the grant, for a
period of ten years. There were 80,525 shares available for grant at December
31, 1997.
The table on the following page 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, 1997, 1996 and 1995. The number of shares and prices
have been restated to give effect to the Corporation's 1995 stock split.
(continued)
41
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Share Data)
NOTE 15
EMPLOYEE BENEFIT PLANS (continued)
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
---- ---- -----
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.... 272,122 $ 19.37 223,059 $18.07 179,807 $15.81
Granted........................... 64,250 31.36 53,300 24.27 57,150 24.16
Exercised......................... ( 37,953) 14.99 ( 4,237) 15.23 ( 13,898) 13.26
--------- -------- -------- ------ --------
Outstanding, end of year.......... 298,419 $ 22.47 272,122 $19.37 223,059 $18.07
--------- -------- --------
--------- -------- --------
Options exercisable at year end.... 234,169 218,822 165,909
Weighted-average fair value of
options granted during the year.. $ 6.32 $ 5.09 $4.90
</TABLE>
As of December 31, 1997, other information by exercise price range for options
outstanding and exercisable is as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
- ------------------------------------------------------------------- ---------------------------
Weighted-Average
Exercise Price Number Weighted-Average Remaining Number Weighted-Average
Range Of Shares Exercise Price Contractual Life Of Shares Exercise Price
- ---------------- --------- ---------------- ---------------- --------- -----------------
<S> <C> <C> <C> <C> <C>
$ 9.11 - $11.33 36,956 $10.51 2.5 years 36,956 $10.51
17.22 - 25.00 197,213 21.82 7.0 years 197,213 21.82
31.25 - 31.38 64,250 31.36 9.5 years
--------- -------
298,419 $22.47 7.0 years 234,169 $20.04
--------- -------
--------- -------
</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:
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Risk-free interest rates................................ 6.54% 6.66%
Dividend yields......................................... 3.37% 3.41%
Volatility factors of expected market price common stock 11.20% 12.00%
Weighted-average expected life of the options........... 8.50 years 8.50 years
</TABLE>
(Continued)
42
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Share Data)
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 below:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net income
As reported............ $14,373 $13,142
Pro forma.............. 13,948 12,852
Earnings per share
Basic:
As reported............ $ 2.17 $ 2.00
Pro forma.............. 2.10 1.95
Diluted:
As reported............ $ 2.14 $ 1.98
Pro forma.............. 2.07 1.93
</TABLE>
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 percent of the lesser of the fair market value of the
Corporation's common stock at the beginning or at the end of the offering
period. Common stock purchases are made annually and are paid through
advance payroll deductions of up to 20 percent of eligible compensation.
Participants under the plan purchased 13,690 shares in 1997 at $21.25 per
share. The fair market value per share on the purchase date was $31.25.
At December 31, 1997, there were 123,122 shares of Corporation common
stock reserved for purchase under the plan, and $191,000 has been withheld
from compensation, plus interest, toward the purchase of shares after June
30, 1998, 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 1997 and 1996, respectively: dividend yield of 3.37
and 3.41 percent; an expected life of one year for both years; expected
volatility of 11.20 and 12.00 percent; and risk-free interest rates of 6.54
and 6.66 percent. The fair value of those purchase rights granted in 1997
and 1996 was $5.03 and $4.68, 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 percent (30 percent at Union National) for the first 5 percent (6
percent at Union National) of base salary contributed by participants. The
Banks' expense for the plans was $110,000 for 1997, $92,000 for 1996 and
$81,000 for 1995. Union National's plan was merged with the Corporation's
plan as of December 31, 1996.
Union National had an Employee Stock Ownership Plan covering substantially
all of its employees. The plan was terminated in 1997. The cost of the plan
was 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 1997, 1996 and 1995 were $0, $91,700 and
$79,000, respectively.
NOTE 16
Net Income Per Share
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
----------------------------- --------------------------- -----------------------------
Weighted- Weighted- Weighted-
Average Per Share Average Per Share Average Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
------ --------- --------- ------ --------- ---------- ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic net income per share:
Net income available to
common stockholders....... $14,373 6,633,535 $2.17 $13,142 6,581,167 $2.00 $12,048 6,563,559 $1.84
===== ===== =====
Effect of dilutive stock options 90,105 66,371 57,254
Diluted net income per share: --------- --------- ---------
Net income available to
common stockholders
and assumed conversions $14,373 6,723,640 $2.14 $13,142 6,647,538 $1.98 $12,048 6,620,813 $1.82
======= ========= ===== ======= ========= ===== ======= ========= =====
</TABLE>
43
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Share Data)
NOTE 17
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 TIME 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, 1997 and 1996, 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.
OFF-BALANCE SHEET COMMITMENTS -- Loan commitments and letters of credit
generally have short-term, variable rate features and contain clauses which
limit the Banks' exposure to changes in customer credit quality.
Accordingly, their carrying values, which are immaterial at the respective
balance sheet dates, are reasonable estimates of fair value.
The estimated fair values of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Assets at December 31:
Cash and cash equivalents........................ $ 42,177 $ 42,177 $ 35,032 $ 35,032
Interest-bearing deposits........................ 385 385 290 290
Investment securities available for sale......... 212,040 212,040 228,379 228,379
Investment securities held to maturity........... 35,332 35,429 47,227 47,494
Mortgage loans held for sale..................... 471 471 284 284
Loans............................................ 703,313 704,335 631,416 632,151
FRB and FHLB stock............................... 3,373 3,373 3,090 3,090
Interest receivable.............................. 8,968 8,968 8,643 8,643
Liabilities at December 31:
Deposits......................................... 843,812 845,277 794,451 795,369
Short-term borrowings:
Federal funds purchased........................ 4,070 4,070 20,725 20,725
Securities sold under repurchase agreements 15,398 15,398 20,054 20,054
U.S. Treasury demand notes..................... 7,361 7,361 4,258 4,258
FHLB advances.................................... 20,700 21,114 9,150 9,340
Interest payable................................. 3,615 3,615 3,376 3,376
</TABLE>
44
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Share Data)
NOTE 18
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
<TABLE>
<CAPTION>
December 31
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash............................................ $ 318 $ 413
Security purchased with agreement
to resell to an affiliate...................... 2,000 1,000
Investment securities available for sale........ 250 258
Investment in subsidiaries...................... 118,732 110,349
Goodwill........................................ 553 570
Other assets.................................... 230 195
---------- ----------
Total assets.................................. $ 122,083 $ 112,785
========== ==========
LIABILITIES $ 114 $ 98
STOCKHOLDERS' EQUITY 121,969 112,687
---------- ----------
Total liabilities and stockholders' equity $ 122,083 $ 112,785
========== ==========
</TABLE>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries.................... $ 6,903 $ 5,420 $ 5,378
Other income................................... 101 25 51
-------- --------- --------
Total income............................... 7,004 5,445 5,429
-------- --------- --------
EXPENSES
Amortization of core deposit intangibles,
goodwill, and fair value adjustments......... 45 43 38
Business combination expenses.................. 258
Other expenses................................. 591 269 189
-------- --------- --------
Total expenses............................. 636 570 227
-------- --------- --------
INCOME BEFORE INCOME TAX BENEFIT and EQUITY in
UNDISTRIBUTED INCOME of SUBSIDIARIES......... 6,368 4,875 5,202
Income tax benefit........................... (193) (100) (72)
-------- --------- --------
INCOME BEFORE EQUITY in
UNDISTRIBUTED INCOME of SUBSIDIARIES 6,561 4,975 5,274
Equity in undistributed income of subsidiaries 7,812 8,167 6,774
-------- --------- --------
NET INCOME........................................ $ 14,373 $ 13,142 $ 12,048
======== ========= ========
</TABLE>
(continued) 45
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts In Thousands, Except Share Data)
NOTE 18
CONDENSED FINANCIAL INFORMATION (Parent Company Only) continued
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 14,373 $ 13,142 $ 12,048
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 17 20 47
Equity in undistributed income of subsidiaries (7,812) (8,167) (6,774)
Security gains (19) (20)
Net change in:
Other assets 25 567 (57)
Other liabilities 16 (337) 81
-------- -------- ------
Net cash provided by operating activities 6,619 5,206 5,325
-------- -------- ------
INVESTING ACTIVITIES:
Purchase of a security with an agreement
to resell (1,000) (1,000)
Purchase of securities available for sale (309)
Proceeds from sales of securities available for sale 8 103 113
Other investing activities (78)
-------- -------- ------
Net cash used by investing activities (992) (975) (196)
-------- -------- ------
FINANCING ACTIVITIES:
Cash dividends (6,902) (5,369) (4,456)
Stock issued under employee benefit plans 291 298 277
Stock issued under dividend reinvestment
and stock purchase plan 726 558 456
Stock options exercised 163 64 192
Stock redeemed (1,119)
Cash paid in lieu of issuing fractional shares (2) (4)
-------- -------- ------
Net cash used by financing activities (5,722) (4,451) (4,654)
-------- -------- ------
Net change in cash on deposit (95) (220) 475
Cash on deposit, beginning of year 413 633 158
-------- -------- ------
Cash on deposit, end of year $ 318 $ 413 $ 633
======== ======== ======
</TABLE>
NOTE 19
QUARTERLY RESULTS of OPERATIONS (Unaudited)
The following table sets forth certain quarterly results for the years
ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
PROVISION AVERAGE
NET FOR SHARES NET INCOME
QUARTER ENDED INTEREST INTEREST INTEREST LOAN NET OUTSTANDING PER SHARE
INCOME EXPENSE INCOME LOSSES INCOME BASIC DILUTED BASIC DILUTED
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997:
March . . . . . . $ 17,884 $ 8,343 $ 9,541 $ 287 $ 3,429 6,605,012 6,692,974 $ .52 $ .51
June . . . . . . 18,980 8,901 10,079 290 3,707 6,618,723 6,702,709 .56 .55
Sept. . . . . . . 19,042 9,132 9,910 375 3,536 6,649,993 6,743,407 .53 .53
Dec. . . . . . . 19,569 9,349 10,220 345 3,701 6,660,414 6,764,472 .56 .55
--------- -------- -------- ------ ------- ------ -------
$ 75,475 $ 35,725 $ 39,750 $1,297 $14,373 6,633,535 6,723,640 $ 2.17 $ 2.14
========= ======== ======== ====== ======= ====== =======
1996:
March . . . . . . $ 17,010 $ 8,037 $ 8,973 $ 280 $ 3,187 6,564,529 6,633,789 $ .49 $ .48
June . . . . . . 16,992 7,856 9,136 300 3,273 6,570,648 6,640,592 .50 .49
Sept. . . . . . . 17,511 8,201 9,310 295 3,221 6,591,219 6,649,897 .49 .49
Dec. . . . . . . 17,982 8,255 9,727 378 3,461 6,598,271 6,665,873 .52 .52
--------- -------- -------- ------ ------- ------ -------
$ 69,495 $ 32,349 $ 37,146 $1,253 $ 13,142 6,581,167 6,647,538 $ 2.00 $ 1.98
========= ======== ======== ====== ======= ====== =======
</TABLE>
46
<PAGE>
[GRAPHIC:MAP;FIRST MERCHANTS CORPORATION MARKET AREA]
First
Merchants
Corporation
Market Area
STOCKHOLDER INFORMATION
Corporate Office
200 East Jackson Street
Muncie, IN 47305
765-747-1500
http://firstmerchants.com
First Merchants Corporation currently provides services through 24
offices located in Delaware, Madison, Henry, Fayette, Wayne, Union and
Randolph counties in Indiana.
47
<PAGE>
ANNUAL MEETING
The Annual Meeting of Stockholders of First Merchants Corporation will
be held ...
Tuesday, April 7, 1998
3:30 p.m.
Horizon Convention Center
401 South High Street
Muncie, 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, established in 1882.
In August, 1996, First Merchants Corporation acquired 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.
48
<PAGE>
STOCK PRICE AND DIVIDEND INFORMATION
<TABLE>
<CAPTION>
PRICE PER SHARE
- ------------------------------------------------------------------------------------------------------
QUARTER HIGH LOW DIVIDENDS DECLARED
- ------------------------------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $30.00 $27.50 $25.25 $25.00 $ .24 $ .20
Second Quarter 30.75 27.50 27.75 24.50 .24 .20
Third Quarter 32.38 26.00 30.00 23.25 .28 .24
Fourth Quarter 38.00 26.75 32.13 24.06 .28 .24
</TABLE>
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 trader over-the-counter on the
NASDAQ National Market System. Quotations are carried in many daily papers.
The NASDAQ symbol is FMRE (Cusip #320817-10-9). At the close of business on
December 31, 1997, the number of shares outstanding was 6,664,439. There were
1,473 stockholders of record on that date.
GENERAL STOCKHOLDER INQUIRIES
Stockholders and interested investors may obtain information about the
Corporation upon written request or by calling:
Mr. Douglas B. Harris
Vice President
Investor Services & Bank Investments
First Merchants Corporation
P.O. Box 792
Muncie, Indiana 47308-0792
765-741-7278
1-800-262-4261, Ext. 7278
STOCK TRANSFER AGENT AND REGISTRAR
First Merchants Bank, N.A.
Corporate Trust Department
P.O. Box 792
Muncie, Indiana 47308-0792
MARKET MAKERS
The following firms make a market in First Merchants Corporation stock:
Robert W. Baird & Co., Inc.
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. 1390
49
<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.
<TABLE>
<CAPTION>
RETURN ON AVERAGE ASSETS
(per cent)
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Return on Average Assets 1.35% 1.41% 1.45%
</TABLE>
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.
<TABLE>
<CAPTION>
RETURN ON AVERAGE EQUITY
(per cent)
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Return on Average Equity 12.17% 12.16% 12.28%
</TABLE>
A narrative discussion of this 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.
<TABLE>
<CAPTION>
NET LOAN LOSSES
(as a per cent of average loans)
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
First Merchants Corporation .24% .23% .17%
Peer Group .26% .26% N/A
</TABLE>
A narrative discussion of this data is provided in the Management's
Discussion & Analysis, under the caption "Asset Quality/Provision for Loan
Losses."
- ------------------------------------------------------------------------------
<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>
EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
State of
Name Incorporation
---- -------------
<S> <C>
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
</TABLE>
<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 23, 1998, 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 22, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 33,127
<INT-BEARING-DEPOSITS> 385
<FED-FUNDS-SOLD> 9,050
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 212,040
<INVESTMENTS-CARRYING> 35,332
<INVESTMENTS-MARKET> 35,429
<LOANS> 703,784
<ALLOWANCE> 6,778
<TOTAL-ASSETS> 1,020,136
<DEPOSITS> 843,812
<SHORT-TERM> 26,829
<LIABILITIES-OTHER> 6,826
<LONG-TERM> 20,700
0
0
<COMMON> 833
<OTHER-SE> 121,136
<TOTAL-LIABILITIES-AND-EQUITY> 1,020,136
<INTEREST-LOAN> 59,889
<INTEREST-INVEST> 15,138
<INTEREST-OTHER> 448
<INTEREST-TOTAL> 75,475
<INTEREST-DEPOSIT> 31,920
<INTEREST-EXPENSE> 35,725
<INTEREST-INCOME-NET> 39,750
<LOAN-LOSSES> 1,297
<SECURITIES-GAINS> (14)
<EXPENSE-OTHER> 25,748
<INCOME-PRETAX> 21,934
<INCOME-PRE-EXTRAORDINARY> 14,373
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,373
<EPS-PRIMARY> 2.17
<EPS-DILUTED> 2.14
<YIELD-ACTUAL> 4.48
<LOANS-NON> 1,410
<LOANS-PAST> 1,972
<LOANS-TROUBLED> 282
<LOANS-PROBLEM> 7,881
<ALLOWANCE-OPEN> 6,622
<CHARGE-OFFS> 1,609
<RECOVERIES> 468
<ALLOWANCE-CLOSE> 6,778
<ALLOWANCE-DOMESTIC> 5,364
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,414
</TABLE>
<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, 1998, will be filed as an amendment to the 1997 Annual Report on
Form 10-K no later than October 28, 1998.
