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, 1998 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 $231,676,424 as of March 5, 1999. As of March 5, 1999 there were outstanding 10,072,888 common shares, without par value, of the registrant. DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K Documents Into Which Incorporated --------- ----------------------- 1998 Annual Report to Stockholders Part II (Items 5, 6, 7, 7A, and 8) Definitive Proxy Statement for Annual Meeting of Shareholders to be held April 14, 1999 Part III (Items 10 through 13) Exhibit Index: Page 26
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.....................21 Item 9 - Changes In and Disagreements With Accountants on Accounting and Financial Disclosures............................21 Part III Item 10 - Directors and Executive Officers of the Registrant.............21 Item 11 - Executive Compensation.........................................21 Item 12 - Security Ownership of Certain Beneficial Owners and Management..........................................21 Item 13 - Certain Relationships and Related Transactions.................22 Part IV Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................22 Signatures..................................................................24 Page 2
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 County"), 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. On April 1, 1998, Pendleton acquired the Muncie office of Insurance and Risk Management, Inc., which was renamed, on April 1, 1998, First Merchants Insurance Services, Inc. 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, 1998, the Corporation had consolidated assets of $1.177 billion, consolidated deposits of $926.8 million and stockholders' equity of $131.5 million. The Corporation is headquartered in Muncie, Indiana, and is presently engaged in conducting commercial banking business through the 27 offices of its five banking subsidiaries. As of December 31, 1998, the Corporation and its subsidiaries had 492 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 has signed definitive agreements with both Jay Financial Corporation and Anderson Community Bank regarding their affiliation with the Corporation. Page 3
- -------------------------------------------------------------------------------- COMPETITION The Corporation's banking subsidiaries are located in Delaware, Fayette, Hamilton, Henry, Madison, Wayne, Randolph, and Union counties in Indiana and Butler county in Ohio. 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 County 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 County, 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
- -------------------------------------------------------------------------------- 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, 1998, 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, 1998, in excess of the applicable regulatory minimum requirements. Page 5
- -------------------------------------------------------------------------------- CAPITAL REQUIREMENTS (continued) The following table summarizes the Corporation's risk-adjusted capital ratios under FRB guidelines at December 31, 1998: <TABLE> <CAPTION> Corporation's Regulatory Consolidated Minimum Ratio Requirement ------------- ----------- <S> <C> <C> Tier 1 Capital to Risk-Weighted Assets Ratio.................. 16.0% 4.0% Total Capital to Risk-Weighted Assets Ratio.................. 16.9% 8.0% </TABLE> Page 6
- -------------------------------------------------------------------------------- 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> 1998 1997 1996 -------------------------- -------------------------- -------------------------- 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..........................$ 15,172 $ 720 4.7% $ 3,127 $ 172 5.5% $ 9,359 $ 498 5.3% Interest-bearing deposits................ 598 27 4.5 693 34 4.9 346 16 4.6 Federal Reserve and Federal Home Loan Bank stock............ 3,590 278 7.7 3,144 242 7.7 2,800 212 7.6 Securities:(1) Taxable.................................. 175,281 10,858 6.2 172,993 10,818 6.3 204,323 12,752 6.2 Tax-exempt............................... 93,438 7,049 7.5 86,568 6,647 7.7 77,996 5,892 7.6 --------- ------- -------- ------- -------- ------- Total Securities....................... 268,719 17,907 6.7 259,561 17,465 6.7 282,319 18,644 6.6 Mortgage loans held for sale............... 773 98 12.7 406 47 11.6 262 21 8.0 Loans:(2) Commercial............................... 296,329 26,737 9.0 272,483 25,125 9.2 230,848 21,232 9.2 Bankers' acceptance and commercial paper purchased............................... 1,366 67 4.9 1,193 68 5.7 20 1 5.5 Real estate mortgage..................... 274,573 22,786 8.3 258,499 21,430 8.3 233,830 19,543 8.4 Installment.............................. 145,379 13,374 9.2 141,290 13,103 9.3 119,379 11,300 9.5 Tax-exempt............................... 3,511 309 8.8 2,021 178 8.8 1,566 140 8.9 --------- ------- -------- ------- -------- ------- Total loans............................ 721,158 63,273 8.8 675,486 59,904 8.9 585,643 52,216 8.9 --------- ------- -------- ------- -------- ------- Total earning assets................... 1,010,010 82,303 8.1 942,417 77,864 8.3 880,729 71,607 8.1 --------- ------- -------- ------- -------- ------- Net unrealized gain on securities available for sale....................... 2,897 1,273 961 Allowance for loan losses.................. (7,020) (6,761) (6,672) Cash and due from banks.................... 29,249 30,647 28,341 Premises and equipment..................... 16,608 14,950 14,879 Other assets............................... 12,970 10,812 13,906 ---------- -------- -------- Total assets........................... $1,064,714 $993,338 $932,144 ========== ======== ======== Liabilities: Interest-bearing deposits: NOW accounts............................ $ 116,026 $ 2,329 2.0 $104,620 $ 2,450 2.3 $109,792 $ 2,503 2.3 Money market deposit accounts........... 140,015 5,810 4.1 105,628 4,188 4.0 100,897 3,701 3.7 Savings deposits........................ 68,016 1,653 2.4 69,633 1,740 2.5 70,875 1,898 2.7 Certificates and other time deposits.... 434,897 23,960 5.5 425,478 23,542 5.5 381,378 21,037 5.5 ---------- ------- -------- ------- -------- ------- Total interest-bearing deposits........ 758,954 33,752 4.4 705,359 31,920 4.5 662,942 29,139 4.4 Borrowings................................ 77,508 4,298 5.5 68,640 3,805 5.5 60,960 3,210 5.3 ---------- ------- -------- ------- -------- ------- Total interest-bearing liabilities..... 836,462 38,050 4.6 773,999 35,725 4.6 723,902 32,349 4.5 Noninterest-bearing deposits.............. 97,771 94,759 90,719 Other liabilities......................... 3,769 7,566 9,429 ---------- -------- -------- Total liabilities...................... 938,002 876,324 824,050 Stockholders' equity...................... 126,712 117,014 108,094 ---------- -------- -------- Total liabilities and stockholders'equity $1,064,714 38,050 3.8(3) $993,338 35,725 3.8(3) $932,144 32,349 3.6(3) ========== ------- ======== -------- ======== -------- Net interest income...................... $44,254 4.3 $ 42,139 4.5 $ 39,258 4.5 ======= ======== ======== (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 1996, 1997, and 1998................................ $ 2,575 $ 2,389 $ 2,111 ======= ======== ======== </TABLE> Page 7
- -------------------------------------------------------------------------------- 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> 1998 Compared to 1997 1997 Compared to 1996 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................... $ 575 $ ( 27) $ 548 $( 343) $ 17 $( 326) Interest-bearing deposits............ ( 4) ( 3) ( 7) 17 1 18 Federal Reserve and Federal Home Loan Bank stock............... 35 1 36 26 4 30 Securities........................... 612 (170) 442 (1,461) 282 (1,179) Mortgage loans held for sale......... 46 5 51 14 12 26 Loans................................ 4,013 (644) 3,369 7,966 (278) 7,688 ------- -------- ------- -------- ------- -------- Totals............................. 5,277 (838) 4,439 6,219 38 6,257 ------- -------- ------- -------- ------- -------- Interest expense: NOW accounts......................... 251 (372) (121) ( 126) 73 ( 53) Money market deposit accounts........................... 1,419 203 1,622 179 308 487 Savings deposits..................... (40) ( 47) ( 87) ( 33) (125) ( 158) Certificates and other time deposits...................... 519 (101) 418 2,440 65 2,505 Borrowings........................... 492 1 493 382 44 426 ------- -------- ------- -------- ------- -------- Totals............................. 2,641 (316) 2,325 2,839 537 3,376 ------- -------- ------- -------- ------- -------- Change in net interest income (fully taxable equivalent basis).................... $2,636 $ (522) $2,114 $ 3,380 $ (449) $ 2,881 ======= ======== ======== ======= Tax equivalent adjustment using marginal rate of 35% for 1996, 1997, and 1998............................. (186) (278) ------- ------- Change in net interest income............................... $1,928 $2,603 ======= ======= </TABLE> Page 8
- -------------------------------------------------------------------------------- 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, 1998: U.S. Treasury.............................. $ 20,269 $ 95 $ $ 20,364 Federal agencies........................... 52,598 577 19 53,156 State and municipal........................ 86,537 2,620 4 89,153 Mortgage-backed securities................. 126,329 424 183 126,570 Other asset-backed securities.............. 265 1 11 255 Corporate obligations...................... 18,624 143 8 18,759 Marketable equity securities............... 250 250 --------- ------ ------ --------- Total available for sale................. 304,872 3,860 225 308,507 --------- ------ ------ --------- Held to maturity at December 31, 1998: U.S. Treasury.............................. 249 4 253 Federal agencies........................... 500 1 501 State and municipal........................ 17,480 348 1 17,827 Mortgage-backed securities................. 864 3 867 Other asset-backed securities.............. 1,761 2 27 1,736 --------- ------ ------ --------- Total held to maturity................... 20,854 358 28 21,184 --------- ------ ------ --------- Total investment securities.............. $ 325,726 $4,218 $ 253 $ 329,691 ========= ====== ====== ========= 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 ========= ====== ====== ========= </TABLE> Page 9
- -------------------------------------------------------------------------------- STATISTICAL DATA (continued) <TABLE> <CAPTION> Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- (Dollars in Thousands) <S> <C> <C> <C> <C> Available for sale at December 31, 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> <TABLE> <CAPTION> Cost ---------------------------------- 1998 1997 1996 ------ ------ ------ <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 . . . . . . . 3,326 2,976 2,693 ------ ------ ------ Total. . . . . . . . . . . . . . . . . $3,723 $3,373 $3,090 ====== ====== ====== </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, 1998 were: Securities available for sale December 31, 1998: <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............ $ 19,265 5.39% $ 1,004 6.53% Federal Agencies......... 13,313 6.35 38,272 5.99 $ 1,013 5.53% State and Municipal...... 7,547 5.65 47,767 4.53 25,817 5.14 Corporate Obligations.... 12,454 5.50 6,170 6.68 --------- ------- -------- Total................. $ 52,579 5.70% $93,213 5.29% $ 26,830 5.15% ========= ======= ======== </TABLE> Page 10
- -------------------------------------------------------------------------------- STATISTICAL DATA (continued) <TABLE> <CAPTION> Marketable Equity, Mortgage and Other Due After Ten Years Asset-Backed Securities Total ------------------- ----------------------- -------------------- Amount Yield* Amount Yield* Amount Yield* ------- ------ -------- ------- ------ ------ <S> <C> <C> <C> <C> <C> <C> U.S. Treasury.................. $ 20,269 5.44% Federal Agencies............... 52,598 6.07 State and Municipal............ $ 5,406 5.69% 86,537 4.88 Corporate Obligations.......... 18,624 5.89 Marketable Equity Security..... $ 250 7.90% 250 7.90 Mortgage-backed securities..... 126,329 6.23 126,329 6.23 Other asset-backed securities.. 265 6.93 265 6.93 ------- -------- -------- Total....................... $ 5,406 5.69% $126,844 6.23% $304,872 5.75% ======= ======== ======== </TABLE> Securities held to maturity at December 31, 1998: <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............... $ 500 6.17% State and Municipal............ 4,870 5.15 10,492 4.74 $ 1,638 5.10% ------- ------- ------- Total....................... $ 5,370 5.24% $10,741 4.75% $ 1,638 5.10% ======= ======= ======= </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............. 500 6.17 State and Municipal.......... $ 480 5.88% 17,480 4.92 Mortgage-backed securities... $ 864 6.57% 864 6.57 Other asset-backed securities 1,761 7.38 1,761 7.38 ------- ------- ------- Total.................... $ 480 5.88% $ 2,625 7.11% $20,854 5.23 ======= ======= ======= </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, 1998: <TABLE> <CAPTION> Amount Yield ------ ----- <S> <C> <C> Federal Reserve Bank stock........................ $ 397 6.00% Federal Home Loan Bank stock...................... 3,326 8.00 ------ Total........................................... $3,723 7.79% ====== </TABLE> Page 11
- -------------------------------------------------------------------------------- STATISTICAL DATA (continued) LOAN PORTFOLIO TYPES OF LOANS The loan portfolio at the dates indicated is presented below: <TABLE> <CAPTION> 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> Loans at December 31: Commercial and industrial loans.................. $ 169,685 $ 148,281 $ 132,134 $ 98,880 $ 89,696 Bankers acceptances and loans to financial institutions......... 900 705 625 2,925 Agricultural production financing and other loans to farmers........................ 16,661 16,764 18,906 17,203 17,255 Real estate loans: Construction...................... 26,426 21,389 13,167 9,913 8,126 Commercial and farmland........... 95,172 97,503 97,596 104,731 95,092 Residential....................... 302,680 287,072 253,530 215,738 217,148 Individuals' loans for household and other personal expenditures............. 128,253 125,706 113,507 102,313 99,812 Tax-exempt loans.................... 2,115 2,598 1,643 1,204 1,514 Other loans......................... 1,217 3,782 1,672 949 1,608 ---------- ---------- ---------- ---------- ---------- 743,109 703,800 632,780 553,856 530,251 Unearned interest on loans.......... (137) (487) (1,364) (1,518) (1,610) ---------- ---------- ---------- ---------- ---------- Total loans................... $ 742,972 $ 703,313 $ 631,416 $ 552,338 $ 528,641 ========== ========== ========== ========== ========== </TABLE> Residential Real Estate Loans Held for Sale at December 31, 1998, 1997, 1996, 1995, and 1994 were $775,800, $471,400, $284,020, 735,522, and $0. MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES Presented in the table below are the maturities of loans (excluding commercial real estate, banker acceptances, farmland, residential real estate and individuals' loans) outstanding as of December 31, 1998. 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............ $ 66,367 $ 53,164 $ 50,154 $169,685 Agricultural production financing and other loans to farmers............... 12,022 3,333 1,306 16,661 Real estate - Construction................. 13,431 5,677 7,318 26,426 Tax-exempt loans........................... 401 367 1,347 2,115 Other loans................................ 978 143 96 1,217 -------- -------- -------- -------- Total ................................ $ 93,199 $ 62,684 $ 60,221 $216,104 ======== ======== ======== ======== </TABLE> Page 12
- -------------------------------------------------------------------------------- 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................ $16,407 $26,627 Variable rate.............. 46,277 33,594 ------- ------- Total.................... $62,684 $60,221 ======= ======= </TABLE> RISK ELEMENTS <TABLE> <CAPTION> December 31 --------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- -------- ------- ------- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> Nonaccruing loans.................... $ 735 $ 1,410 $ 2,777 $ 576 $ 398 Loans contractually past due 90 days or more other than nonaccruing......................... 2,275 1,972 1,699 1,119 1,322 Restructured loans................... 926 282 1,540 1,075 1,242 </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 $94,000 for the year ended December 31, 1998, was recognized on the nonaccruing and restructured loans listed in the table above, whereas interest income of $163,000 would have been recognized under their original loan terms. POTENTIAL PROBLEM LOANS: Management has identified certain other loans totaling $7,039,000 as of December 31, 1998, not included in the risk elements table, or impaired loan table, 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
- -------------------------------------------------------------------------------- STATISTICAL DATA (continued) SUMMARY OF LOAN LOSS EXPERIENCE The following table summarizes the loan loss experience for the years indicated. <TABLE> <CAPTION> 1998 1997 1996 1995 1994 ------- ------- -------- ------- ------- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> Allowance for loan losses: Balance at January 1.............. $ 6,778 $ 6,622 $ 6,696 $ 6,603 $ 6,467 Chargeoffs: Commercial...................... 694 443 767 794 973 Real estate mortgage............ 44 31 14 1 53 Installment..................... 1,143 1,135 855 759 462 ------- ------- ------- ------- ------- Total chargeoffs............... 1,881 1,609 1,636 1,554 1,488 ------- ------- ------- ------- ------- Recoveries: Commercial...................... 217 264 106 127 269 Real estate mortgage............ 20 1 7 4 30 Installment..................... 294 203 196 128 123 ------- ------- ------- ------- ------- Total recoveries............... 531 468 309 259 422 ------- ------- ------- ------- ------- Net chargeoffs.................... 1,350 1,141 1,327 1,295 1,066 ------- ------- ------- ------- ------- Provisions for loan losses........ 1,984 1,297 1,253 1,388 1,202 ------- ------- ------- ------- ------- Balance at December 31............ $ 7,412 $ 6,778 $ 6,622 $ 6,696 $ 6,603 ======= ======= ======= ======= ======= Ratio of net chargeoffs during the period to average loans outstanding during the period..... .18% .17% .23% .24% .21% Peer Group.......................... N/A .29% .26% .26% .25% </TABLE> Page 14
- -------------------------------------------------------------------------------- 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> 1998 1997 ------------------- ------------------- Amount Per Cent Amount Per Cent ------ -------- ------ -------- (Dollars in Thousands) <S> <C> <C> <C> <C> Balance at December 31: Commercial, financial and agricultural................. $ 2,375 25.2% $ 2,594 23.6% Real estate - construction..... 3 3.6 3 3.0 Real estate - mortgage......... 1,057 53.5 1,061 54.7 Installment.................... 2,824 17.4 1,702 18.3 Tax-exempt loans............... 4 .3 4 .4 Unallocated.................... 1,149 N/A 1,414 N/A ------- ------ ------- ------ Totals......................... $ 7,412 100.0% $ 6,778 100.0% ======= ====== ======= ====== 1996 1995 ------------------- ------------------- Amount Per Cent Amount Per Cent ------ -------- ------ -------- (Dollars in Thousands) Balance at December 31: Commercial, financial and agricultural................. $ 2,924 24.2% $ 3,105 21.8% Real estate - construction..... 3 2.1 1 1.8 Real estate - mortgage......... 1,041 55.6 1,121 58.0 Installment.................... 1,576 17.8 1,506 18.2 Tax-exempt loans............... 16 .3 4 .2 Unallocated.................... 1,062 N/A 959 N/A ------- ------ ------- ------ Totals......................... $ 6,622 100.0% $ 6,696 100.0% ======= ====== ======= ====== 1994 ------------------- Amount Per Cent ------ -------- (Dollars in Thousands) Balance at December 31: Commercial, financial and agricultural................. $ 3,080 20.5% Real estate - construction..... 4 1.5 Real estate - mortgage......... 1,048 59.1 Installment.................... 1,550 18.6 Tax-exempt loans............... 4 .3 Unallocated.................... 917 N/A ------- ------ Totals......................... $ 6,603 100.0% ======= ====== </TABLE> Page 15
- -------------------------------------------------------------------------------- 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> 1998 1997 1996 ---- ---- ---- (Dollars in Thousands) <S> <C> <C> <C> For the year ending December 31: Impaired loans with an allowance................ $ 1,946 $ 1,476 $ 3,124 Impaired loans for which the discounted cash flows or collateral value exceeds the carrying value of the loan.................... 6,882 1,075 868 ------- ------- ------- Total impaired loans........................ $ 8,828 $ 2,551 $ 3,992 ======= ======= ======= Allowance for impaired loans (included in the Corporation's allowance for loan losses)...... $ 712 $ 407 $ 1,092 Average balance of impaired loans............... 8,318 3,414 5,213 Interest income recognized on impaired loans.... 873 180 311 Cash basis interest included above.............. 745 162 291 </TABLE> Page 16
- -------------------------------------------------------------------------------- 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> 1998 1997 1996 -------------- -------------- -------------- Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> <C> Balance at December 31: Noninterest bearing deposits............ $ 97,771 $ 94,759 $ 90,719 NOW accounts............................ 116,026 2.0% 104,620 2.3% 109,792 2.3% Money market deposit accounts........... 140,015 4.1 105,628 4.0 100,897 3.7 Savings deposits........................ 68,016 2.4 69,633 2.5 70,875 2.7 Certificates of deposit and other time deposits.................... 434,897 5.5 425,478 5.5 381,378 5.5 -------- -------- -------- Total deposits....................... $856,725 3.9 $800,118 4.0 $753,661 3.9 ======== ======== ======== </TABLE> As of December 31, 1998, 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.................. $ 35,033 $14,426 $22,774 $19,346 $91,579 Per cent............................... 38% 16% 25% 21% 100% </TABLE> RETURN ON EQUITY AND ASSETS <TABLE> <CAPTION> 1998 1997 1996 ---- ---- ---- <S> <C> <C> <C> Return on assets (net income divided by average total assets)......................... 1.45% 1.45% 1.41% Return on equity (net income divided by average equity).............................. 12.15 12.28 12.16 Dividend payout ratio (dividends per share divided by net income per share)....... 50.47 47.93 40.85 Equity to assets ratio (average equity divided by average total assets)............. 11.90 11.78 11.60 </TABLE> Page 17
- -------------------------------------------------------------------------------- STATISTICAL DATA (continued) SHORT-TERM BORROWINGS <TABLE> <CAPTION> 1998 1997 1996 ---- ---- ---- (Dollars in Thousands) <S> <C> <C> <C> Balance at December 31: Securities sold under repurchase agreements(short-term portion)......... $ 20,836 $ 15,398 $ 20,054 Federal funds purchased.................. 17,070 4,070 20,725 U.S. Treasury demand notes............... 2,226 7,361 4,258 -------- -------- -------- Total short-term borrowings......... $ 40,132 $ 26,829 $ 45,037 ======== ======== ======== </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> 1998 1997 1996 ---- ---- ---- (Dollars in Thousands) <S> <C> <C> <C> Weighted average interest rate on outstanding balance at December 31: Securities sold under repurchase agreements (short-term portion).... 5.07% 5.13% 4.92% Total short-term borrowings ............ 5.27 5.38 5.78 Weighted average interest rate during the year: Securities sold under repurchase agreements (short-term portion).... 5.10 4.99 5.07 Total short-term borrowings ............ 4.99 5.36 5.19 Highest amount outstanding at any month end during the year: Securities sold under repurchase agreements (short-term portion).... $27,002 $49,750 $52,221 Total short-term borrowings ............ 61,355 84,860 83,678 Average amount outstanding during the year: Securities sold under repurchase agreements (short-term portion).... 24,526 31,327 42,140 Total short-term borrowings ............ 37,854 53,185 51,768 </TABLE> Page 18
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 County 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, 1998 was $16,954,400. 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 1998 to a vote of security holders, through the solicitation of proxies or otherwise. Page 19
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 of 64 Chief Executive Officer, the Corporation and First Corporation; Chairman of the Merchants since 1987; Board and Chief Executive Chief Executive Officer of Officer, First Merchants the Corporation since Bank, N.A. 1982; President of the Corporation from 1982 to August 1998, and Chief Executive Officer of First Merchants Bank since 1979 Michael L. Cox President, Chief Operating President and Chief 54 Officer and Director, Operating Officer, Corporation; President, Corporation since Chief Operating Officer and August 1998 and May, 1994 Director, First Merchants respectively; President Bank, N.A. and Chief Operating Officer, 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, 58 General Counsel and Corporation since 1982; Secretary, Corporation; General Counsel, Senior Vice President, First Corporation since 1990 and Merchants Bank, N.A.; Secretary since January 1, Director of First United 1997; Senior Vice Bank; Director of Pendleton President, First Merchants Banking Company since January 1979; Director of First United Bank since 1991 and Pendleton Banking Company since 1992 Ted J. Montgomery Senior Vice President and Senior Vice President and 59 Director, Corporation; Director, Corporation President, Chief Executive since August 1996; Officer and Director, The President, Union County Union County National Bank of National Bank since 1983 Liberty and Director since 1981 James L. Thrash Senior Vice President and Senior Vice President and 49 Chief Financial Officer, Chief Financial Officer of Corporation; Senior Vice the Corporation since President, First Merchants 1990; Senior Vice Bank, N.A. President, First Merchants since 1990 </TABLE> Page 20
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 50 of the Corporation's 1998 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 18 of the Corporation's 1998 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 19 through 27 of the Corporation's 1998 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 - -------------------------------------------------------------------------------- The information required under this item is incorporated by reference to page 21 and 22 of the corporation's 1998 Annual Report to Stockholders - Financial Review under the caption "Management's Discussion and Analysis," Exhibit 13. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - -------------------------------------------------------------------------------- The financial statements and supplementary data required under this item are incorporated herein by reference to page 17 and pages 28 through 47 of the Corporation's 1998 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, 1998, 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. 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 1999 Proxy Statement furnished to its stockholders in connection with an annual meeting to be held April 14, 1999 (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 1999 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 1999 Proxy Statement, under the caption, "Security Ownership of Certain Beneficial Owners and Management," which Proxy Statement has been filed with the Commission. Page 21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------------------------------------------------------------------------------- The information required under this item is incorporated by reference to the Corporation's 1999 Proxy Statement, under the caption "Interest of Management in Certain Transactions," which Proxy Statement has been filed with the Commission. 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.............................. 17 Consolidated balance sheet at December 31, 1998 and 1997.............................. 28 Consolidated statement of income, years ended December 31, 1998, 1997 and 1996........................................... 29 Consolidated statement of comprehensive income, Years ended December 31, 1998, 1997, and 1996........... 30 Consolidated statement of changes in stockholders' equity, years ended December 31, 1998, 1997 and 1996........................ 30 Consolidated statement of cash flows, years ended December 31, 1998, 1997 and 1996........................................... 31 Notes to consolidated financial statements.............................................. 32-47 </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. Page 22
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (continued) - -------------------------------------------------------------------------------- 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 is incorporated by reference to registrant's Form 10-K for year ended December 31, 1997. 13 1998 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, 1998 99.1 Financial statements and independent auditor's report for First Merchants Corporation Employee Stock Purchase Plan (b) Reports on Form 8-K: None Page 23
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 31st day of March, 1999. 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 31, 1999 Stefan S. Anderson Principal Executive Officer /s/ James L. Thrash - ------------------------------ Principal Financial and March 31, 1999 James L. Thrash Principal Accounting Officer /s/ Michael L. Cox - ------------------------------ Director March 31, 1999 Michael L. Cox /s/ Frank A. Bracken - ------------------------------ *Director March 31, 1999 Frank A. Bracken /s/ Thomas B. Clark - ------------------------------ *Director March 31, 1999 Thomas B. Clark /s/ David A. Galliher - ------------------------------ *Director March 31, 1999 David A. Galliher /s/ Norman M. Johnson - ------------------------------ *Director March 31, 1999 Norman M. Johnson /s/ Ted J. Montgomery - ------------------------------ *Director March 31, 1999 Ted J. Montgomery /s/ George A. Sissel - ------------------------------ *Director March 31, 1999 George A. Sissel Page 24
Signature Capacity Date - ------------------------------ ------------------------------ ---- /s/ Robert M. Smitson - ------------------------------ *Director March 31, 1999 Robert M. Smitson /s/ Michael D. Wickersham - ------------------------------ *Director March 31, 1999 Michael D. Wickersham /s/ John E. Worthen - ------------------------------ *Director March 31, 1999 John E. Worthen * By James L. Thrash as Attorney-in-Fact pursuant to a limited Power of Attorney executed by the directors listed above, which Power of Attorney has been filed with the Securities and Exchange Commission. By /s/ James L. Thrash -------------------------------------- James L. Thrash As Attorney-in-Fact March 31, 1999 Page 25
INDEX TO EXHIBITS - -------------------------------------------------------------------------------- (a)3. Exhibits: Exhibit No: Description of Exhibit: - ----------- ----------------------- 13 1998 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 24 Limited Power of Attorney 27 Financial Data Schedule, year ended December 31, 1998 99.1 Financial statements and independent auditor's report for First Merchants Corporation Employee Stock Purchase Plan Page 26