-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J6g2bDT3DBzL5YtAXhQ9cGz7X6X5SOPRJANUvycU28hpiXpJM8yuJ4S837zHYH2S MjTwhR3Stsan+MYU2t2yIA== 0000912057-97-017584.txt : 19970515 0000912057-97-017584.hdr.sgml : 19970515 ACCESSION NUMBER: 0000912057-97-017584 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST MERCHANTS CORP CENTRAL INDEX KEY: 0000712534 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 351544218 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17071 FILM NUMBER: 97604569 BUSINESS ADDRESS: STREET 1: 200 E JACKSON ST STREET 2: PO BOX 792 CITY: MUNCIE STATE: IN ZIP: 47308-0792 BUSINESS PHONE: 3177471500 MAIL ADDRESS: STREET 1: 200 EAST JACKSON STREET CITY: MUNCIE STATE: IN ZIP: 47305 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 or 15 (d) of THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 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 of organization) Identification No.) 200 East Jackson Street - Muncie, IN 47305-2814 - -------------------------------------------------------------------------------- (Address of principal executive office) (Zip code) (765) 747-1500 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable - -------------------------------------------------------------------------------- (Former name former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days, Yes X No ----- ----- As of May 5, 1997, there were outstanding 6,612,490 common shares, without par value, of the registrant. The exhibit index appears on page 19. This report including the cover page contains a total of 38 pages. Page 1 FIRST MERCHANTS CORPORATION FORM 10-Q INDEX Page No. -------- PART I. Financial information: Item 1. Financial Statements: Consolidated Condensed Balance Sheet............................. 3 Consolidated Condensed Statement of Income....................... 4 Consolidated Condensed Statement of Changes in Stockholders' Equity............................................. 5 Consolidated Condensed Statement of Cash Flows................... 6 Notes to Consolidated Condensed Financial Statements............. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 12 PART II. Other Information: Item 4. Submission of Matters to a Vote of Security Holders.............. 19 Item 6. Exhibits and Reports of Form 8-K................................. 19 Signatures ................................................................. 20 Page 2 FIRST MERCHANTS CORPORATION FORM 10-Q PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CONSOLIDATED CONDENSED BALANCE SHEET (Dollars in thousands, except per share amounts) (Unaudited)
March 31, December 31, 1997 1996 --------- ------------ ASSETS: Cash and due from banks........................... $ 35,020 $ 33,882 Federal funds sold................................ 1,560 1,150 --------- ------------ Cash and cash equivalents...................... 36,580 35,032 Interest-bearing deposits......................... 371 290 Investment securities available for sale.......... 230,973 228,379 Investment securities held to maturity............ 42,442 47,227 Mortgage Loans held for sale...................... 144 284 Loans............................................. 651,782 631,416 Less: Allowance for loan losses.............. (6,883) (6,622) --------- ------------ Net loans................................... 644,899 624,794 Premises and equipment............................ 15,284 15,303 Federal Reserve and Federal Home Loan Bank stock.. 3,090 3,090 Interest receivable............................... 8,289 8,643 Core deposit intangibles and goodwill............. 1,681 1,714 Others assets..................................... 4,078 3,237 --------- ------------ Total assets................................ $ 987,831 $ 967,993 --------- ------------ --------- ------------ LIABILITIES: Deposits: Noninterest-bearing............................ $ 95,886 $ 110,175 Interest-bearing............................... 686,007 684,276 -------- ------- Total deposits.............................. 781,893 794,451 Short-term borrowings............................. 71,626 45,037 Federal Home Loan Bank advances................... 12,450 9,150 Interest payable.................................. 3,476 3,376 Other liabilities................................. 4,596 3,292 --------- ------------ Total liabilities........................... 874,041 855,306 STOCKHOLDERS' EQUITY: Preferred stock, no-par value: Authorized and unissued -- 500,000 shares Common stock, $.125 stated value: Authorized --- 20,000,000 shares Issued and outstanding -- 6,610,357 and 6,603,319 shares........................... 827 825 Additional paid-in capital........................ 23,155 22,968 Retained earnings................................. 89,822 87,978 Net unrealized gain (loss) on securities available for sale......................................... (14) 916 --------- ------------ Total stockholders' equity.................. 113,790 112,687 --------- ------------ Total liabilities and stockholders' equity.. $ 987,831 $ 967,993 --------- ------------ --------- ------------
See notes to consolidated condensed financial statements. Page 3 FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF INCOME (Dollars in thousands, except per share amounts) (Unaudited)
Three Months Ended March 31 ---------------------- 1997 1996 ---------- ---------- Interest Income: Loans receivable Taxable......................................... $ 13,793 $ 12,480 Tax exempt...................................... 29 18 Investment securities: Taxable......................................... 2,949 3,290 Tax exempt...................................... 1,039 911 Federal funds sold................................. 27 270 Deposits with financial institutions............... 3 5 Federal Reserve and Federal Home Loan Bank stock... 44 36 ---------- ---------- Total interest income........................ 17,884 17,010 Interest expense: Deposits........................................... 7,502 7,365 Short-term borrowings.............................. 708 547 Federal Home Loan Bank advances.................... 133 125 ---------- ---------- Total interest expense.......................... 8,343 8,037 ---------- ---------- Net Interest Income................................... 9,541 8,973 Provision for loan losses............................. 287 280 ---------- ---------- Net Interest Income After Provision For Loan Losses... 9,254 8,693 Other Income: Net realized gains on sales of available-for-sale securities.................... 10 17 Other income....................................... 2,122 1,955 ---------- ---------- Total other income.................................... 2,132 1,972 Total other expenses.................................. 6,206 5,822 ---------- ---------- Income before income tax.............................. 5,180 4,843 Income tax expense.................................... 1,751 1,656 ---------- ---------- Net Income............................................ $ 3,429 $ 3,187 ---------- ---------- ---------- ---------- Per share: Net income......................................... $ .52 $ .49 Dividends (1)...................................... .24 .20 Weighted average shares outstanding................... 6,605,012 6,564,529
(1) Dividends per share is for First Merchants Corporation only, not restated for pooling transactions. See notes to consolidated condensed financial statements. Page 4 FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Dollar amounts in thousands) (Unaudited)
1997 1996 -------- -------- Balances, January 1......................................... $112,687 $104,967 Net income.................................................. 3,429 3,187 Cash dividends.............................................. (1,585) (1,122) Net change in unrealized loss on securities available for sale.................................................. (930) (1,338) Stock issued under dividend reinvestment and stock purchase plan............................................. 175 124 Stock options exercised..................................... 14 34 -------- -------- Balances, March 31...........................................$113,790 $105,852 -------- -------- -------- --------
See notes to consolidated condensed financial statements. Page 5 FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited)
Three Months Ended March 31 --------------------- 1997 1996 ------ ------ Cash Flows From Operating Activities: Net income.......................................................................... $ 3,429 $ 3,187 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses......................................................... 287 280 Depreciation and amortization..................................................... 443 394 Securities amortization, net...................................................... 132 2 Securities losses (gains), net.................................................... 10 17 Mortgage loans originated for sale................................................ (700) (108) Proceeds from sales of mortgage loans............................................. 856 853 Change in interest receivable..................................................... 438 741 Change in interest payable........................................................ 100 21 Other adjustments................................................................. 1,338 1,127 ------- -------- Net cash provided by operating activities....................................... 6,333 6,514 Cash Flows From Investing Activities: Net change in interest-bearing deposits............................................. (81) (101) Purchases of Securities available for sale..................................................... (20,939) (60,357) Securities held to maturity....................................................... (1,151) (16,526) Proceeds from maturities of Securities available for sale..................................................... 15,153 51,818 Securities held to maturity....................................................... 6,675 21,657 Proceeds from sales of Securities available for sale..................................................... 970 Net change in loans.................................................................. (19,961) (12,704) Purchases of premises and equipment.................................................. (424) (278) Other investing activities........................................................... 8 (58) ------- -------- Net cash used by investing activities........................................... (20,720) (15,579)
(continued) Page 6 FIRST MERCHANTS CORPORATION FORM 10-Q CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited)
Three Months Ended March 31 ----------------------- 1997 1996 --------- ------- Cash Flows From Financing Activities: Net change in Demand and savings deposits......................................... (23,014) (38,911) Certificates of deposit and other time deposits..................... 10,456 8,433 Short-term borrowings............................................... 26,589 2,947 Federal Home Loan Bank Advances....................................... 3,300 5,000 Repayment of Federal Home Loan Bank Advances.......................... (5,000) Cash dividends........................................................ (1,585) (1,122) Stock issued under dividend reinvestment and stock purchase plan...... 175 124 Stock options exercised............................................... 14 34 ------- -------- Net cash used by financing activities............................. 15,935 (28,495) ------- -------- ------- -------- Net Change in Cash and Cash Equivalents................................ 1,548 (37,560) Cash and Cash Equivalents, January 1................................... 35,032 77,874 ------- -------- Cash and Cash Equivalents, March 31.................................... $ 36,580 $ 40,314 ------- -------- ------- --------
See notes to consolidated condensed financial statements. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS NOTE 1. General The significant accounting policies followed by First Merchants Corporation ("Corporation") and its wholly owned subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting, except for the change in method of accounting discussed more fully in Note 2. All adjustments which are of a normal recurring nature and are in the opinion of management necessary for a fair statement of the results for the periods reported have been included in the accompanying consolidated condensed financial statements. NOTE 2. Change in Methods of Accounting Statement of Financial Accounting Standards ("SFAS") No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was adopted by the Corporation on January 1, 1997. SFAS No. 125 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are considered secured borrowings. A transfer of financial assets in which the transferor surrenders control over those assets is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. The transferor has surrendered control over transferred assets only if all specific conditions are met. This Statement provides detailed measurement standards for assets and liabilities included in these transactions. The adoption of this Statement had no material impact on the Corporation's financial condition and results of operations. Page 7 FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands, except per share amounts) (Unaudited) NOTE 3. Business Combinations On August 1, 1996, the Corporation issued 942,685 shares of its common stock in exchange for all of the outstanding shares of Union National Bancorp, Liberty, Indiana. On October 2, 1996, the Corporation issued 565,705 shares of its common stock in exchange for all of the outstanding shares of Randolph County Bancorp, Winchester, Indiana. These transactions were accounted for under the pooling-of-interests method of accounting. The financial information contained herein reflects the mergers and reports the financial condition and results of operations as though the Corporation had been combined as of January 1, 1996. Separate operating results of Union National Bancorp and Randolph County Bancorp for the period prior to the merger were as follows:
Three Months Ended March 31 1996 -------- Net Interest Income: First Merchants Corporation................................... $ 7,024 Union National Bancorp........................................ 1,241 Randolph County Bancorp....................................... 708 ------- Combined................................................. $ 8,973 ------- ------- Net Income: First Merchants Corporation.................................. $ 2,579 Union National Bancorp....................................... 371 Randolph County Bancorp...................................... 237 ------- Combined................................................... $ 3,187 ------- ------- Net Income Per Share: First Merchants Corporation.................................. $ .39 Union National Bancorp....................................... .06 Randolph County Bancorp...................................... .04 -------- Combined.................................................... $ .49 -------- Page 8
FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited)
NOTE 4. Investment Securities Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------ Available for sale at March 31, 1997: U.S. Treasury..................................... $ 20,562 $ 26 $ 108 $ 20,480 Federal agencies.................................. 81,707 271 594 81,384 State and municipal............................... 57,765 883 320 58,328 Mortgage-backed securities........................ 38,930 280 395 38,815 Other asset-backed securities..................... 620 5 625 Corporate obligations............................. 31,000 75 242 30,833 Marketable equity security........................ 508 508 --------- --------- ---------- -------- Total available for sale 231,092 1,540 1,659 230,973 --------- --------- ---------- -------- Held to maturity at March 31, 1997: U.S. Treasury..................................... 249 11 238 Federal agencies.................................. 3,424 10 15 3,419 State and municipal............................... 32,868 173 107 32,934 Mortgage-backed securities........................ 3,083 1 14 3,070 Other asset-backed securities..................... 1,820 3 101 1,722 Corporate obligations............................. 998 1 999 --------- --------- --------- -------- Total held to maturity......................... 42,442 188 248 42,382 --------- --------- ---------- -------- Total investment securities.................... $ 273,534 $ 1,728 $ 1,907 $273,355 --------- --------- ----------- -------- --------- --------- ----------- --------
Page 9 FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited)
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- --------- -------- Available for sale at December 31, 1996: U.S. Treasury............................. $ 21,570 $ 92 $ 46 $ 21,616 Federal agencies.......................... 79,130 540 180 79,490 State and municipal....................... 52,026 1,173 106 53,093 Mortgage-backed securities................ 41,441 297 275 41,463 Other asset-backed securities............. 709 709 Corporate obligations..................... 31,470 156 128 31,498 Marketable equity securities.............. 510 510 ------- ------- ------ ------ Total available for sale................. 226,856 2,258 735 228,379 ------- ------- ------ ------- Held to maturity at December 31, 1996: U.S. Treasury............................ 249 7 242 Federal agencies......................... 5,729 23 5 5,747 State and municipal...................... 36,405 381 21 36,765 Mortgage-backed securities............... 2,730 13 2,717 Other asset-backed securities............ 2,114 17 108 2,023 ------- ------ ----- ------- Total held to maturity.................. 47,227 421 154 47,494 ------- ------ ----- ------- Total investment securities............. $ 274,083 $ 2,679 $ 889 $ 275,873 ------- ------ ----- ------- ------- ------ ----- -------
Page 10 FIRST MERCHANTS CORPORATION FORM 10-Q NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Table dollar amounts in thousands) (Unaudited)
NOTE 5. Loans and Allowance March 31, December 31, 1997 1996 --------- ----------- Loans: Commercial and industrial loans..................................... $ 135,195 $ 132,134 Bankers' acceptances and loans to financial institutions............ 965 625 Agricultural production financing and other loans to farmers........ 16,253 18,906 Real estate loans: Construction....................................................... 14,808 13,167 Commercial and farmland............................................ 102,594 97,596 Residential........................................................ 261,644 253,530 Individuals' loans for household and other personal expenditures.... 117,060 113,507 Tax-exempt loans.................................................... 1,286 1,643 Other loans......................................................... 3,044 1,672 Unearned interest on loans.......................................... (1,067) ( 1,364) -------- -------- Total.............................................................. $ 651,782 $ 631,416 -------- -------- -------- -------- Three Months Ended March 31 -------------------- 1997 1996 --------- -------- Allowance for loan losses: Balances, January 1................................................. $ 6,622 $ 6,696 Provision for losses................................................ 287 280 Recoveries on loans................................................. 249 77 Loans charged off................................................... (275) ( 499) --------- -------- Balances, March 31.................................................. $ 6,883 6,554 --------- -------- --------- --------
Page 11 FIRST MERCHANTS CORPORATION FORM 10-Q ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Corporation's financial data for periods prior to mergers accounted for as pooling of interests has been restated. RESULTS OF OPERATIONS The Corporation has recorded 21 consecutive years of growth in earnings per share, reaching $2.00 in 1996, an increase of 8.7 per cent over 1995. Return on assets rose to 1.41 per cent in 1996, from 1.35 per cent in 1995, and 1.22 per cent in 1994. Return on equity, was 12.16 per cent in 1996, 12.17 per cent in 1995, and 12.42 per cent in 1994. Following are the levels achieved in each of these ratios during the first quarter of 1997, as compared to the same period in 1996. -Earnings per share were $.52, up 6.1 per cent from $.49 -Return on assets was 1.42 per cent increasing from 1.39 per cent -Return on equity totaled 12.11 per cent compared to 12.10 per cent for the first quarter of 1996 CAPITAL The Corporation's capital strength continues to exceed regulatory minimums and peer group averages. Management believes that strong capital is a distinct advantage in the competitive environment in which the Corporation operates and will provide a solid foundation for continued growth. The Corporation's Tier I capital to average assets ratio was 11.6 per cent at year-end 1996 and 11.7 per cent at March 31, 1997. At March 31, 1997, the Corporation had a Tier I risk-based capital ratio of 16.8 per cent, total risk-based capital ratio of 17.8 per cent, and a leverage ratio of 11.6 per cent. Regulatory capital guidelines require a Tier I risk-based capital ratio of 4.0 per cent and a total risk-based capital ratio of 8.0 per cent. Page 12 FIRST MERCHANTS CORPORATION FORM 10-Q ASSET QUALITY/PROVISION FOR LOAN LOSSES The Corporation's asset quality and loan loss experience have consistently been superior to that of its peer group, as summarized on the following page. Asset quality has been a major factor in the Corporation's ability to generate consistent profit improvement. The allowance for loan losses is maintained through the provision for loan losses, which is a charge against earnings. The amount provided for loan losses and the determination of the adequacy of the allowance are based on a continuous review of the loan portfolio, including an internally administered loan "watch" list and an independent loan review provided by an outside accounting firm. The evaluation takes into consideration identified credit problems, as well as the possibility of losses inherent in the loan portfolio that cannot be specifically identified. The following table summarized the risk elements for the Corporation (table dollar amounts in thousands.)
- ------------------------------------------------------------------------------- (Dollars in Thousands) March 31, December 31, December 31, 1997 1996 1995 - ------------------------------------------------------------------------------- Non-accrual loans..................... $2,408 $2,777 $ 576 Loans contractually past due 90 days or more other than nonaccruing....... 1,560 1,699 1,119 Restructured loans.................... 1,212 1,540 1,075 ------ ------ ------ Total......................... $5,180 $6,016 $2,770 ------ ------ ------ ------ ------ ------
The increase in non-performing loans from December 31, 1995, to December 31, 1996, is primarily attributable to one loan placed in non-accrual status during 1996. This loan is included in impaired loans at December 31, 1996, for which an allowance was recorded. Management is in the process of resolving this loan situation and anticipates that no additional provision for loan losses will be required. The Corporation adopted SFAS No. 114 and No. 118 ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN AND ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN-INCOME RECOGNITION AND DISCLOSURES on January 1, 1995. Impaired loans included in the table above, totaled $3,992,000 at December 31, 1996, was not deemed necessary for impaired loans totaling $868,000, but an allowance of $1,092,000 was recorded for the remaining balance of impaired loans of $3,124,000. The average balance of Impaired loans for 1996 was $5,213,000. The balance of impaired loans has not changed significantly since December 31, 1996. At December 31, 1996, the allowance for loan losses was $6,622,000, down slightly from year end 1995. As a per cent of loans, the allowance was 1.05 per cent, down from 1.21 per cent at year end 1995. The provision for loan losses in 1996 was $1,253,000 compared to $1,388,000 in 1995. Page 13 FIRST MERCHANTS CORPORATION FORM 10-Q At March 31, 1997, the allowance for loan losses increased by $261,000 to $6,883,000, or 1.06 per cent of total loans. The first quarter 1997 provision of $287,000 was up only slightly from the same quarter in 1996, and was offset by only $26,000 in net charge-offs. The table below presents loan loss experience for the years indicated and compares the Corporation's loss experience to that of its peer group, consisting of bank holding companies with assets between $500 million and $1 billion.
1997 (1) 1996 1995 1994 ------ ------ ------ ------ (Dollars in Thousands) Allowance for loan losses: Balance at January 1.................. $6,622 $6,696 $6,603 $6,467 ------ ------ ------ ------ Chargeoffs............................ 275 1,636 1,554 1,488 Recoveries............................ 249 309 259 422 ------ ------ ------ ------ Net chargeoffs........................ 26 1,327 1,295 1,066 Provision for loan losses............. 287 1,253 1,388 1,202 ------ ------ ------ ------ Balance at December 31................ $6,883 $6,622 $6,696 $6,603 ------ ------ ------ ------ ------ ------ ------ ------ Ratio of net chargeoffs during the period to average loans outstanding during the period..................... .02% (2) .23% .24% .21% Peer Group............................. N/A .26% .26% .25% (1) Through March 31, 1997 (2) First three months annualized
Page 14 FIRST MERCHANTS CORPORATION FORM 10-Q LIQUIDITY AND INTEREST SENSITIVITY Asset/Liability management has been an important factor in the Corporation's ability to record consistent earnings growth through periods of interest rate volatility and product deregulation. Management and the Board of Directors monitor the Corporation's liquidity and interest sensitivity positions at regular meetings to ensure that changes in interest rates will not adversely affect earnings. Decisions regarding investment and the pricing of loan and deposit products are made after analysis of reports designed to measure liquidity, rate sensitivity, the Corporation's exposure to changes in net interest income given various rate scenarios, and the economic and competitive environments. The Corporation's liquidity and interest sensitivity position at March 31, 1997, remained adequate to meet the Corporation's primary goal of achieving optimum interest margins while avoiding undue interest rate risk. The table below presents the Corporation's interest rate sensitivity analysis as of March 31, 1997. INTEREST-RATE SENSITIVITY ANALYSIS At March 31, 1997 (Dollars in Thousands)
Beyond 1-180 Days 181-365 Days 1-5 Years 5 Years Total ---------- ------------ --------- ------- ------- Rate-Sensitive Assets: Federal funds sold and interest-bearing deposits....... $ 1,931 $ 1,931 Investment securities 51,840 $ 44,479 $ 140,424 $ 36,672 273,415 Loans............................ 311,822 76,142 212,566 51,396 651,926 Federal Reserve and Federal Home Loan Bank stock............ 2,693 397 3,090 ---------- ------------ --------- ------- ------- Total rate-sensitive assets.... 368,286 120,621 352,990 88,465 930,362 ---------- ------------ --------- ------- ------- Rate-Sensitive Liabilities: Interest bearing deposits........ 302,945 78,596 303,134 1,332 686,007 Short-term borrowings............ 71,626 71,626 Federal Home Loan Bank Advances........................ 75 2,072 7,870 2,433 12,450 ---------- ------------ --------- ------- -------- Total rate-sensitive liabilities 374,646 80,668 311,004 3,765 770,083 ---------- ------------ --------- ------- --------- Interest rate sensitivity gap by period............................ $ (6,360) $ 39,953 $ 41,986 $ 84,700 Cumulative rate sensitivity gap.... (6,360) 33,593 75,579 160,279 Cumulative rate sensitivity gap ratio at March 31, 1997........... 98.3% 107.4% 109.9% 120.8%
The Corporation had a cumulative positive gap of $33,593,000 in the one year horizon at March 31, 1997 or 3.4 per cent of total assets. Net interest income at financial institutions with positive gaps tends to increase when rates increase and generally decrease as interest rates decline. The .25 per cent increase in the prime lending rate which occurred in late March, 1997 should have a modest positive effect on the Corporation's net interest income. Page 15 FIRST MERCHANTS CORPORATION FORM 10-Q EARNING ASSETS Earning assets increased $30.3 million during 1996. The following table presents the earning asset mix for the years ended 1996 and 1995 and at March 31, 1997. Loans grew by more than $79 million while short-term investments and securities declined, reflecting the Corporation's intent to change the balance sheet mix to emphasize loans which generally carry higher yields than federal funds sold, interest-bearing deposits and investment securities and often provide collateral business. The same trend continued during the first quarter of 1997. Loans grew by more than $20 million, accounting for all of the growth in earning assets.
- --------------------------------------------------------------------------------------------------------------- EARNING ASSETS (Dollars in Millions) March 31, December 31, December 31, 1997 1996 1995 --------- ------------ ------------ Federal funds sold and interest-bearing deposits............. $ 1.9 $ 1.4 $ 39.2 Investment securities available for sale .................... 231.0 228.4 225.9 Investment securities held to maturity ...................... 42.4 47.2 60.7 Mortgage loans held for sale ................................ .1 0.3 0.7 Loans ....................................................... 651.8 631.4 552.3 Federal Reserve and Federal Home Loan Bank stock............. 3.1 3.1 2.7 --------- -------- --------- Total.................................................... $ 930.3 $ 911.8 $ 881.5 --------- -------- --------- --------- -------- --------- - ---------------------------------------------------------------------------------------------------------------
DEPOSITS, SHORT-TERM BORROWINGS AND FEDERAL HOME LOAN BANK ADVANCES The following table presents the level of deposits and borrowed funds (Federal funds purchased, repurchase agreements with customers, U.S. Treasury demand notes and Federal Home Loan Bank advances) for the years ended 1996 and 1995 and at March 31, 1997. Lack of deposit growth coupled with loan growth has resulted in a greater reliance on borrowed funds. The Corporation plans to place further emphasis on deposit growth going forward through advertising and product development. - ----------------------------------------------------------- DEPOSITS, SHORT-TERM BORROWINGS AND FEDERAL HOME LOAN BANK ADVANCES (Dollars in Millions) Federal Short-Term Home Loan Deposits Borrowings Bank Advances ---------------------------------------------- March 31, 1997.......... $781.9 $ 71.6 $ 12.5 December 31, 1996....... 794.5 45.0 9.2 December 31, 1995....... 783.9 37.4 9.0 --------------------------------------------- Page 16 FIRST MERCHANTS CORPORATION FORM 10-Q NET INTEREST INCOME Net Interest Income is the primary source of the Corporation's earnings. It is a function of net interest margin and the level of average earning assets. The table below presents the Corporation's asset yields, interest expense, and net interest income as a per cent of average earning assets for the three-year period ending in 1996 and the first quarter of 1997. Asset yields improved slightly in 1996 (.04 per cent FTE) due to strong loan growth. Interest costs declined by a like amount, primarily due to rate reductions to three interest-bearing deposit products: interest checking, Money Market investment account and regular savings. The resulting "spread" increase of .08 per cent combined with earning asset growth of $35.5 million accounted for the growth in net interest income (FTE) of $2.2 million. During the first quarter of 1997, both interest yields and interest costs declined, with yields falling .08 per cent, but costs by only .03 per cent. The resulting .05 per cent decline in margin was offset by earning asset growth of $37 million.
- --------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Interest Income Interest Expense Net Interest Income Net Interest Income (FTE) as a Per Cent as a Per Cent (FTE) as a Per Cent Average on a of Average of Average of Average Earning Fully Taxable Earning Assets Earning Assets Earning Assets Assets Equivalent Basis - --------------------------------------------------------------------------------------------------------------------------------- 1997 (1) 8.05% 3.64% 4.41% $917,774 $40,464 1996 8.13 3.67 4.46 880,729 39,258 1995 8.09 3.71 4.38 845,198 37,049 1994 7.42 2.96 4.46 805,987 35,909 Average earning assets include the average balance of securities classified as available for sale, computed based on the average of the historical amortized cost balances without the effects of the fair value adjustment. (1) First Three Months Annualized - ---------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME The Corporation has placed emphasis on the growth of non-interest income in recent years by offering a wide range of fee-based services. Fee schedules are regularly reviewed by a pricing committee to ensure that the products and services offered by the Corporation are priced to be competitive and profitable. Other income in 1996 amounted to $8,342,000 or 9.9 per cent higher than in 1995. The increase of $750,000 is primarily attributable to the following five factors: 1. Trust revenues increased $166,000 (5.9 percent) due to stronger business activity and markets. 2. Deposit service charges increased $195,000 (6.9 per cent) primarily due to changes in pricing. 3. Interchange fees for the Corporation's credit and debit card programs grew by $169,000 (142 per cent) due to increased product offerings. 4. The Corporation recorded securities gains of $148,000 compared to losses of $30,000 last year, an increase of $178,000 as shorter maturity, available for sale securities were sold at gains and longer maturity, higher yielding investments were purchased. 5. Postal money order agent fees increased $79,000 (19.4 per cent) due to an increased client base. Page 17 FIRST MERCHANTS CORPORATION FORM 10-Q Other income in the first quarter of 1997 exceeded the same quarter in the prior year by $160,000 or 8.1 per cent. Two categories accounted for most of this increase: 1. Trust fees grew by $38,000 or 5.5 per cent, again due to stronger activity and positive investment returns. 2. Deposit service charges increased by $82,000 or 10.8 per cent due primarily to changes in pricing. OTHER EXPENSE Total "other expenses" represent non-interest operating expenses of the Corporation. Those expenses amounted to $24,135,000 in 1996, an increase of 5.0 per cent from the prior year, or $1,142,000. Including an $813,000 reduction in deposit insurance premiums, remaining operating expenses grew by $1,955,000. Four major areas account for most of this increase: 1. Salary and benefit expenses, which account for over one-half of the Corporation's non-interest operating expenses, increased by $640,000 (5.0 per cent) due to normal salary increases. 2. Equipment expense rose $223,000, reflecting the Corporation's investment in technology to increase productivity and improve customer service. 3. Expenses related to mergers with Union National Bancorp and Randolph County Bancorp amounted to $258,000. 4. The previous year included a $238,000 refund from the State of Indiana for intangibles taxes paid in 1988 and 1989. First quarter other expense in 1997 exceeded the same quarter one year earlier by $384,000 or 6.6 per cent. Four primary areas account for this increase: 1. Salaries and benefits grew by $182,000 or 5.6 per cent due primarily to normal annual salary adjustments. 2. Business supply expense grew by $50,000 or nearly 27 per cent primarily due to increased use of data processing supplies and personal money order forms. 3. Equipment expense grew $29,000 or 5.4 per cent, again reflecting the Corporation's investment in technology to increase productivity and improve customer service. 4. Marketing expense increased $29,000 (almost 18 per cent). INCOME TAXES 1996 income tax expense increased by $698,000 primarily due to a $1,792,000 increase in net pre-tax income. Likewise, the increase of $95,000 in the first quarter of 1997, as compared to the same quarter in 1996, results from a $337,000 increase in pre-tax net income which was partially offset by a $139,000 increase in tax exempt income. OTHER The Securities and Exchange Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including the Corporation, and that the address is (http://www.sec.gov). Page 18 FIRST MERCHANTS CORPORATION FORM 10-Q PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None during the period covered by this report. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: FORM 10-Q PAGE EXHIBIT NO.: DESCRIPTION OF EXHIBIT: NUMBER ------------ ----------------------- --------- 10.1 First Merchants Corporation Supplemental Executive Retirement Plan.... 21 10.2 Trust Under First Merchants Corporation Supplemental Executive Retirement Plan.... 28 27.1 Financial Data Schedule, Quarter Ended March 31, 1997............................ 36 27.2 Restated Financial Data Schedule, Quarter Ended March 31, 1996...................... 37 27.3 Restated Financial Data Schedule, Quarter Ended March 31, 1995...................... 38 (b) Reports on Form 8-K: No reports were filed on Form 8-K during the quarter ended March 31, 1997. Page 19 FIRST MERCHANTS CORPORATION FORM 10-Q SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST MERCHANTS CORPORATION ------------------------------- (Registrant) Date May 12, 1997 by /s/ Stefan S. Anderson ----------------- --------------------------------- Stefan S. Anderson President and Director Date May 12, 1997 by /s/ James L. Thrash ---------------- --------------------------------- James L. Thrash Chief Financial & Principal Accounting Officer Page 20 EX-10.1 2 FIRST MERCHANTS SUPP. EXEC. RET. PLAN - ------------------------------------------------------------------------------- EXHIBIT 10.1 -- First Merchants Corporation Supplemental Executive Retirement Plan - ------------------------------------------------------------------------------- SECTION 1. ESTABLISHMENT AND PURPOSE A. Establishment. First Merchants Corporation (the "Employer"), hereby establishes a non-qualified supplemental executive retirement plan for certain executives, as designated and described herein, which shall be known as the FIRST MERCHANTS CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (the "Plan"). B. Purpose. The purpose of the Plan is to enable the Employer to attract, retain, and motivate key executive employees of high caliber, and to provide equitable retirement and survivor benefits for certain key executive employees, their surviving spouses and designated beneficiaries. SECTION 2. DEFINITIONS For purposes of this Plan, certain words or phrases used herein will have the following meanings: A. "Board of Directors" means the Board of Directors of First Merchants Corporation. B. "Code" means the Internal Revenue Code of 1986, as amended from time to time. C. "Compensation Committee" means the Employer's Compensation and Human Resources Committee. D. "Executive" means a key executive Employee that is designated to participate in the Plan under Section 3 below. E. "Non-qualified SERP Benefit" means the difference between (1) and (2), where (1) is the Retirement Benefit that would have been paid the Executive from the Pension Plan at the Executive's Normal, Early, Late or Disability Retirement Date (whichever is applicable) if there were no compensation limit imposed under Code Section 401(a)(17) and if Final Average Monthly Plan Compensation did not exclude bonuses for purposes of determining the Standard Benefit Formula, and (2) is the Retirement Benefit payable to the Executive under the Pension Plan at the Executive's Normal, Early, Late or Disability Retirement Date (whichever is applicable). F. "Pension Plan" means the First Merchants Corporation Retirement Pension Plan, as amended, a qualified pension plan under Section 401(a) of the Internal Revenue Code of 1986, as amended. Page 21 G. "Term Certain Expiration Date" means the 15th anniversary of the event, retirement or death, which causes payment of benefits under this Plan to commence. H. The following terms will have the same meanings as they have under the Pension Plan: "Employee," "Employer," "Final Average Monthly Plan Compensation," "Normal, Early, Late, or Disability Retirement Date," "Retirement Benefit," "Normal, Early, Late, or Disability Retirement Benefit," "Optional Form of Payment," and "Standard Benefit Formula." SECTION 3. DESIGNATION OF EXECUTIVES PARTICIPATING IN PLAN The Compensation Committee shall have the sole discretion, from time to time, to designate Employees to participate in the Plan as covered Executives. This designation shall be by resolution of the Compensation Committee and shall be limited to management or highly compensated Employees. The Compensation Committee shall notify each Employee so designated in writing. Covered Executives, their spouses and designated beneficiaries shall be entitled to benefits under this Plan if the Executive is employed by the Employer on his or her 65th birthday, Early Retirement Date, Disability Retirement Date or death, whichever occurs earliest. SECTION 4. RETIREMENT BENEFIT If an Executive retires on his or her Normal, Early, Late or Disability Retirement Date, the Executive shall receive each year thereafter, in the manner described in Section 6, an amount equal to the Non-qualified SERP Benefit for the Executive's lifetime. If the Executive's Retirement Benefit under the Pension Plan commences at a time other than his or her Normal Retirement Date or in an Optional Form of Payment, the amount of the Non-qualified SERP Benefit shall be adjusted using the same actuarial factors and assumptions (except as otherwise provided in Section 7 of this Plan) used to calculate the Retirement Benefit payable to the Executive under the Pension Plan. SECTION 5. PRE-RETIREMENT SURVIVOR BENEFIT If a covered Executive dies while still actively employed by the Employer, and if the Executive is survived by the Executive's spouse, the Executive's spouse shall receive each year until the Term Certain Expiration Date, in the manner described in Section 6, the Non-qualified SERP Benefit otherwise payable to the Executive under this Plan, determined as if the Executive had retired on the date immediately preceding the date of the Executive's death. If the Executive is not survived by the Executive's spouse, or if the spouse does not live until the Term Certain Expiration Date, the person(s) designated under Section 8 shall receive each year, in the manner described in Section 6, an amount equal to such Benefit. Page 22 SECTION 6. MANNER OF PAYING BENEFITS Within 30 days following the death or retirement of the Executive, a monthly benefit payment shall be commence equal to the yearly benefit payable under Section 4 or 5 of this Plan. SECTION 7. FIFTEEN YEAR TERM CERTAIN Benefits on behalf of a covered Executive, whether payable as a Normal, Early, Late, or Disability Retirement Benefit, or as a Pre-retirement Survivor Benefit or other death benefit payable to a designated beneficiary, shall be made at least through the Term Certain Expiration Date, without any actuarial reduction on account of such guaranteed payment. At any time, in the discretion of the Compensation Committee, the commuted value of the future benefits payable under the Plan on behalf of any recipient may be computed and paid in one lump sum. SECTION 8. DESIGNATION OF BENEFICIARY An Executive, or subsequent to the Executive's death, the Executive's spouse, may designate the person(s) to receive the benefits payable under this Plan if the Executive and the Executive's spouse do not live to receive the benefits through the Term Certain Expiration Date. If such designation is not made, or if no designated beneficiary is then living, such benefit shall be paid to the Executive's spouse, if then living, or if not, to the Executive's descendants, PER STIRPES, who are then living, or if there are no such descendants then living, to the Executive's estate. SECTION 9. EARLY, LATE OR DISABILITY RETIREMENT The Compensation Committee may grant to a covered Executive, while in the employ of the Employer, early, late or disability retirement under this Plan, if such Executive is eligible for and elects an Early, Late or Disability Retirement Benefit under the Pension Plan. The Compensation Committee, in its sole discretion, may provide that retirement benefits under this Plan shall begin at any time after the granting of early, late or disability retirement, rather than at the Executive's Normal Retirement Date, and the Term Certain Expiration Date shall terminate on the 15th anniversary of the commencement of retirement benefits. SECTION 10. TERMINATION OF EMPLOYMENT If an Executive's employment with the Employer is terminated prior to his or her Normal Retirement Date, either by the Employer or by the Executive, and either with or without cause, no benefits shall be paid under any provision of this Plan, unless the Compensation Committee, in its sole discretion, shall provide that the benefits will be paid regardless of the termination of the Executive's employment. However, early or disability retirement or death shall not be deemed to be a termination of employment for purposes of this Section. Page 23 SECTION 11. PROHIBITION OF COMPETITIVE EMPLOYMENT If, during the period of an Executive's employment with the Employer or while the Executive is receiving benefits under this Plan, a covered Executive engages in competitive activities without the Employer's written consent, no further benefits shall be payable under any provision of this Plan. For purposes of this Section, "competitive activities" shall mean engaging, directly or indirectly (including providing consulting services), in a business similar to any business of the Employer or any of its subsidiaries, or owning, managing, operating, controlling, being employed by, participating in, having any financial interest in, or being connected in any manner with the ownership, management, operation or conduct of, any such similar business. SECTION 12. TITLE TO LIFE INSURANCE If life insurance is purchased to provide the Employer with funds to make benefit payments under this Plan to or on behalf of a covered Executive, the owner and beneficiary of such life insurance contract shall at all times be the Employer or, if the Employer establishes a "rabbi trust" in connection with this Plan, the trustee of such trust. If the Employer is the owner and beneficiary of the life insurance contract, it shall have the unrestricted right to use all amounts and to exercise all options and privileges thereunder without the knowledge or consent of the Executive, his or her designated beneficiary, or any other person, it being expressly agreed that neither the Executive nor any such beneficiary or other person shall have any right, title or interest whatsoever in or to any such contract. If the trustee of a "rabbi trust" is the owner and beneficiary of the life insurance contract, the respective rights and interests of the Employer, the trustee, the Executive, his or her designated beneficiary, and other persons, shall be governed by the terms of the trust agreement and the life insurance contract. SECTION 13. PAYMENTS ARE NOT SECURED Except as provided in the "rabbi trust" agreement, if any, established by the Employer in connection with this Plan, (a) the Executive, his or her designated beneficiary and any other person or persons having or claiming a right to payment of benefits hereunder, or to any interest under this Plan, shall rely solely on the unsecured promise of the Employer, and (b) nothing herein shall be construed to give the Executive, his or her designated beneficiary or any other person or persons any right, title, interest or claim in or to any specific asset, fund, reserve, account or property of any kind whatsoever owned by the Employer or in which it may have any right, title or interest now or in the future, but the Executive shall have the right to enforce his or her claim against the Employer in the same manner as any unsecured creditor. Page 24 SECTION 14. NON-ASSIGNABILITY OF BENEFITS Neither the Executive, nor his or her designated beneficiary, nor any other person entitled to any payment hereunder, shall have power to transfer, assign, anticipate, mortgage or otherwise encumber any right to receive a payment in advance of the time such payment is due under the provisions of this Plan, and any attempted transfer, assignment, anticipation, mortgage or encumbrance shall be void. No payment hereunder shall be subject to seizure for the payment of public or private debts, judgments, alimony or separate maintenance, or be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. SECTION 15. ADMINISTRATION OF THE PLAN The Plan shall be administered by the Compensation Committee, which shall have sole authority to construe and interpret the Plan and issue such rules and regulations as it deems appropriate. The Compensation Committee shall have the duty and responsibility of deciding questions of eligibility, determining the amount, manner and time of payment of any benefits hereunder, and distributing the benefits to covered Executives, their spouses and/or beneficiaries; provided, however, the Compensation Committee may appoint or employ individuals to assist in the administration of the Plan and any other agents it deems advisable, including legal and actuarial counsel. The Compensation Committee's interpretations, determinations, rules and regulations, and calculations shall be final and binding on all persons and parties concerned. If a covered Executive, spouse or beneficiary desires a review of any benefit determination made by the Compensation Committee, he or she shall follow the claims review procedure described in Section 6.06 of the Pension Plan (except that such appeal shall be to the Compensation Committee rather than to the committee responsible for administering the Pension Plan, if different). SECTION 16. AMENDMENT This Plan may be amended at any time or from time to time by the Board of Directors of the Employer. Any amendment shall not reduce the benefit of any covered Executive, or any person receiving benefits under this Plan, without the written consent of the affected person. The failure of either the Employer or any covered Executive to enforce any of the provisions hereof shall not be deemed a waiver thereof. No provision of this Plan shall be deemed to have been waived or modified unless such waiver or modification shall be in writing and signed by the party or parties affected by such waiver or modification. The Employer reserves the right to terminate the Plan at any time by action of the Board of Directors. The termination of this Plan shall not affect the benefits of any Executive, Executive's spouse or designated beneficiary covered by the Plan, prior to termination. Page 25 SECTION 17. NON-GUARANTEE OF EMPLOYMENT This Plan shall not be construed as giving any Executive the right to be retained as an Employee of the Employer for any period. SECTION 18. BINDING EFFECT AND GOVERNING LAW This Plan shall be binding upon the Executive and the Executive's spouse, beneficiaries, heirs, executors, administrators, personal representatives, successors and assigns, and upon the Employer and its successors and assigns. Except as preempted by ERISA or any other applicable federal law, the Plan shall be construed, enforced and administered, and the validity thereof shall be determined, in accordance with the laws of the State of Indiana. This Plan was adopted by the Board of Directors of First Merchants Corporation on February 11, 1997, and shall be effective as of March 1, 1997. First Merchants Corporation By: /s/ Stefan S. Anderson ---------------------------------- Title: President -------------------------------- Page 26 - ------------------------------------------------------------------------------- Schedule A to First Merchants Corporation Supplemental Executive Retirement Plan - ------------------------------------------------------------------------------- The Corporation's Supplemental Executive Retirement Plan covers the following executives: Offices with the Corporation Name and Subsidiary Banks - ---- ---------------------------- Stefan S. Anderson President and Chief Executive Officer, Corporation; Chief Executive Officer, First Merchants Bank, N.A. Michael L. Cox Executive Vice President, Chief Operating Officer, Corporation; Chief Operating Officer, First Merchants Bank, N.A. Ted J. Montgomery Senior Vice President, Corporation; Chief Executive Officer, The Union County National Bank of Liberty Roger W. Gilcrest Executive Vice President, First Merchants Bank, N.A. Page 27 EX-10.2 3 TRUST UNDER FIRST MERCHANTS SUPP. EXEC. RET. PLAN - ------------------------------------------------------------------------------- EXHIBIT 10.2 -- Trust Under First Merchants Corporation Supplemental Executive Retirement Plan - ------------------------------------------------------------------------------- This Agreement made this 1st day of March, 1997, by and between First Merchants Corporation ("EMPLOYER"), and First Merchants Bank, N.A. ("TRUSTEE"): WHEREAS, Employer has adopted the nonqualified deferred compensation plan known as the First Merchants Corporation Supplemental Executive Retirement Plan ("PLAN"); WHEREAS, Employer has incurred or expects to incur liability under the terms of such Plan with respect to the individuals participating in such Plan; WHEREAS, Employer wishes to establish a trust (hereinafter called "TRUST") and to contribute to the Trust assets that shall be held therein, subject to the claims of Employer's creditors in the event of Employer's Insolvency, as herein defined, until paid to Plan participants and their beneficiaries in such manner and at such times as specified in the Plan; WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plan as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974; and WHEREAS, it is the intention of Employer to make contributions to the Trust to provide itself with a source of funds to assist it in the meeting of its liabilities under the Plan. NOW, THEREFORE, the parties do hereby establish the trust and agree that the Trust shall be comprised, held and disposed of as follows: SECTION 1. ESTABLISHMENT OF TRUST. (a) Employer hereby deposits with Trustee in trust the cash and insurance policies listed in Schedule A, which shall become the principal of the Trust to be held, administered and disposed of by Trustee as provided in this Trust Agreement. (b) The Trust hereby established shall be irrevocable. (c) The Trust is intended to be a grantor trust, of which Employer is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. Page 28 (d) The principal of the Trust, and any earnings thereon shall be held separate and apart from other funds of Employer and shall be used exclusively for the uses and purposes of Plan participants and general creditors as herein set forth. Plan participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plan and this Trust Agreement shall be mere unsecured contractual rights of Plan participants and their beneficiaries against Employer. Any assets held by the Trust will be subject to the claims of Employer's general creditors under federal and state law in the event of Insolvency, as defined in Section 3(a) herein. (e) Employer, in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property in trust with Trustee to augment the principal to be held, administered and disposed of by Trustee as provided in this Trust Agreement. Neither Trustee nor any Plan participant or beneficiary shall have any right to compel such additional deposits. SECTION 2. PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES. (a) Employer shall deliver to Trustee a schedule (the "PAYMENT SCHEDULE") that indicates the amounts payable in respect of each Plan participant (and his or her beneficiaries), that provides a formula or other instructions acceptable to Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Plan), and the time of commencement for payment of such amounts. Except as otherwise provided herein, Trustee shall make payments to the Plan participants and their beneficiaries in accordance with such Payment Schedule. The Trustee shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Plan and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by Employer. (b) The entitlement of a Plan participant or his or her beneficiaries to benefits under the Plan shall be determined by Employer or such party as it shall designate under the Plan, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Plan. (c) Employer may make payment of benefits directly to Plan participants or their beneficiaries as they become due under the terms of the Plan. Employer shall notify Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to participants or their beneficiaries. In addition if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Plan, Employer shall make the balance of each such payment as it falls due. Trustee shall notify Employer where principal and earnings are not sufficient. Page 29 SECTION 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARY WHEN EMPLOYER IS INSOLVENT. (a) Trustee shall cease payment of benefits to Plan participants and their beneficiaries if the Employer is Insolvent. Employer shall be considered "Insolvent" for purposes of this Trust Agreement if (i) Employer is unable to pay its debts as they become due, or (ii) Employer is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, as provided in Section 1(d) hereof, the principal and income of the Trust shall be subject to claims of general creditors of Employer under federal and state law as set forth below. (1) The Board of Directors and the Chief Executive Officer of Employer shall have the duty to inform Trustee in writing of Employer's insolvency. If a person claiming to be a creditor of Employer alleges in writing to Trustee that Employer has become insolvent, Trustee shall determine whether Employer is Insolvent and, pending such determination, Trustee shall discontinue payment of benefits to Plan participants or their beneficiaries. (2) Unless Trustee has actual knowledge of Employer's insolvency, or has received notice from Employer or a person claiming to be a creditor alleging that Employer is Insolvent, Trustee shall have no duty to inquire whether Employer is Insolvent. Trustee may in all events rely on such evidence concerning Employer's solvency as may be furnished to Trustee and that provides Trustee with a reasonable basis for making a determination concerning Employer's solvency. (3) If at any time Trustee has determined that Employer is insolvent, Trustee shall discontinue payments to Plan participants or their beneficiaries and shall hold the assets of the Trust for the benefit of Employer's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Plan participants or their beneficiaries to pursue their rights as general creditors of Employer with respect to benefits due under the Plan or otherwise. (4) Trustee shall resume the payment of benefits to Plan participants or their beneficiaries in accordance with Section 2 of this Trust Agreement only after Trustee has determined that Employer is not Insolvent (or is no longer Insolvent). Page 30 (c) Provided that there are sufficient assets, if Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Plan participants or their beneficiaries under the terms of the Plan for the period of such discontinuance, less the aggregate amount of any payments made to Plan participants or their beneficiaries by Employer in lieu of the payments provided for hereunder during any such period of discontinuance. SECTION 4. PAYMENTS TO EMPLOYER. Except as provided in Section 3 hereof, after the Trust has become irrevocable, Employer shall have no right or power to direct Trustee to return to Employer or to divert to others any of the Trust assets before all payment of benefits have been made to Plan participants and their beneficiaries pursuant to the terms of the Plan. SECTION 5. INVESTMENT AUTHORITY. (a) The Trustee shall invest and reinvest the principal and income received by and held in the Trust, and keep such assets invested without distinction between principal and income, in insurance contracts, common or preferred stocks, corporate and government bonds and notes, and other securities in accordance with such investment guidelines as Employer may provide to the Trustee from time to time. (b) Subject to paragraph (a) of this Section, Trustee may invest in securities (including stock or rights to acquire stock) or obligations issued by Employer. All rights associated with assets of the Trust shall be exercised by Trustee or the person designated by Trustee, and shall in no event be exercisable by or rest with Plan participants. (c) Employer shall have the right at any time, and from time to time in its sole discretion, to substitute assets of equal fair market value for any asset held by the Trust. This right is exercisable by Employer in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity. SECTION 6. DISPOSITION OF INCOME. During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested. Page 31 SECTION 7. ACCOUNTING BY TRUSTEE. Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between Employer and Trustee. With sixty (60) days following the close of each calendar year and within sixty (60) days after the removal or resignation of Trustee, Trustee shall deliver to Employer a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. SECTION 8. RESPONSIBILITY OF TRUSTEE. (a) Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by Employer which is contemplated by, and in conformity with, the terms of the Plan or this Trust and is given in writing by Employer. In the event of a dispute between Employer and a party, Trustee may apply to a court of competent jurisdiction to resolve the dispute. (b) If Trustee undertakes or defends any litigation arising in connection with this Trust, Employer agrees to indemnify Trustee against Trustee's costs, expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. If Employer does not pay such costs, expenses and liabilities in a reasonably timely manner, Trustee may obtain payment from the Trust. (c) Trustee may consult with legal counsel (who may also be counsel for Employer generally) with respect to any of its duties or obligations hereunder. (d) Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder. (e) Trustee shall have, without exclusion, all powers conferred on Trustees by applicable law, unless expressly provided otherwise herein, provided, however, that if an insurance policy is held as an asset of the Trust, Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy. Page 32 (f) Notwithstanding any powers granted to Trustee pursuant to this Trust Agreement or to applicable law, Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of Section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. SECTION 9. COMPENSATION AND EXPENSES OF TRUSTEE. Employer shall pay all administrative and Trustee's fees and expenses. If not so paid, the fees and expenses shall be paid from the Trust. SECTION 10. RESIGNATION AND REMOVAL OF TRUSTEE. (a) Trustee may resign at any time by written notice to Employer, which shall be effective thirty (30) days after receipt of such notice unless Employer and Trustee agree otherwise. (b) Trustee may be removed by Employer on thirty (30) days' notice or upon shorter notice accepted by Trustee. (c) Upon resignation or removal of Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within sixty (60) days after receipt of notice of resignation, removal or transfer, unless Employer extends the time limit. (d) If Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 11 hereof, by the effective date of resignation or removal under paragraph (a) or (b) of this Section. If no such appointment has been made, Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. SECTION 11. APPOINTMENT OF SUCCESSOR. (a) If Trustee resigns or is removed in accordance with Section 10(a) or (b) hereof, Employer may appoint any third party, such as a bank trust department or other party that may be granted corporate trustee powers under state law, as a successor to replace Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by Employer or the successor Trustee to evidence the transfer. Page 33 (b) The successor Trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Sections 7 and 8 hereof. The successor Trustee shall not be responsible for and Employer shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee. SECTION 12. AMENDMENT OR TERMINATION. (a) This Trust may be amended by a written instrument executed by Trustee and Employer. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Plan or shall make the Trust revocable after it has become irrevocable in accordance with Section 1(b) hereof. (b) The Trust shall not terminate until the date on which Plan participants and their beneficiaries are no longer entitled to benefits pursuant to the terms of the Plan. Upon termination of the Trust any assets remaining in the Trust shall be returned to Employer. (c) Upon written approval of all participants and beneficiaries then or thereafter entitled to payment of benefits pursuant to the terms of the Plan, Employer may terminate this Trust prior to the time all benefit payments under the Plan have been made. All assets in the Trust at termination shall be returned to Employer. SECTION 13. MISCELLANEOUS. (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) Benefits payable to Plan participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. (c) This Trust Agreement shall be governed by and construed in accordance with the laws of the State of Indiana. Page 34 SECTION 14. EFFECTIVE DATE. The effective date of this Trust Agreement shall be March 1, 1997. First Merchants Corporation First Merchants Bank, N.A. By: /s/ Stefan S. Anderson By: /s/ Roger W. Gilcrest ------------------------------ -------------------------- Title: President Title: Executive Vice President --------------------------- ----------------------- EMPLOYER TRUSTEE Page 35 EX-27.1 4 EXHIBIT 27.1
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIRST MERCHANTS CORPORATION'S CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR QUARTER ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 35,020 371 1,560 0 230,973 42,442 42,382 652,926 6,883 987,831 781,893 71,626 8,072 12,450 0 0 827 112,963 987,831 13,822 3,988 74 17,884 7,502 8,343 9,541 287 10 6,206 5,180 3,429 0 0 3,429 .52 .52 0 0 0 0 0 0 0 0 0 0 0 0
EX-27.2 5 EXHIBIT 27.2
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FOR FIRST MERCHANTS CORPORATION FOR QUARTER ENDED MARCH 31, 1996 RESTATED AS A RESULT OF POOLING OF INTEREST TRANSACTIONS. 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 26,739 360 13,575 0 229,658 56,700 56,967 565,045 6,554 916,480 753,458 40,324 7,864 9,000 0 0 821 105,031 916,480 12,498 4,201 311 17,010 7,365 8,037 8,973 280 17 5,822 4,843 3,187 0 0 3,187 .49 .49 0 0 0 0 0 0 0 0 0 0 0 0
EX-27.3 6 EXHIBIT 27.3
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FOR FIRST MERCHANTS CORPORATION FOR QUARTER ENDED MARCH 31, 1995 RESTATED AS A RESULT OF POOLING OF INTEREST TRANSACTIONS. 3-MOS DEC-31-1995 JAN-01-1995 MAR-31-1995 32,614 162 3,675 0 142,270 126,798 126,142 531,493 6,709 862,922 712,541 38,113 6,538 8,000 0 0 610 95,588 862,922 11,599 3,835 76 15,508 6,096 6,831 8,677 236 23 5,815 4,418 2,924 0 0 2,924 .45 .45 0 0 0 0 0 0 0 0 0 0 0 0
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