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
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
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
- ------------------------------------------------------------------------------- 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
- ------------------------------------------------------------------------------- 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
- ------------------------------------------------------------------------------- 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
- ------------------------------------------------------------------------------- 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
- ------------------------------------------------------------------------------- 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
- ------------------------------------------------------------------------------- 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
- ------------------------------------------------------------------------------- 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
- ------------------------------------------------------------------------------- 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
- ------------------------------------------------------------------------------- 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
- ------------------------------------------------------------------------------- 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
- ------------------------------------------------------------------------------- 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
- ------------------------------------------------------------------------------- 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
- ------------------------------------------------------------------------------- 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
- ------------------------------------------------------------------------------- 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
- ------------------------------------------------------------------------------- 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
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
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
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
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
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
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
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
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
Signature Capacity Date - ------------------------------ ------------------------------ ------ - ------------------------------ Director Robert M. Smitson - ------------------------------ Director Michael D. Wickersham /s/ John E. Worthen - ------------------------------ Director March 19, 1998 John E. Worthen Page 27
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