<PAGE>
As filed with the Securities and Exchange Commission on January 7, 1999
Registration Statement No. 33-__________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------------------------------
FIRST MERCHANTS CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1544218
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6712
(Primary Standard Industrial Classification Code Number)
200 East Jackson Street
Muncie, Indiana 47305
(765) 747-1500
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
------------------------------------------------
Larry R. Helms With a copy to:
Senior Vice President David R. Prechtel, Esq.
First Merchants Corporation Bingham Summers Welsh &
200 East Jackson Street Spilman
Muncie, Indiana 47305 2700 Market Tower
(765) 747-1530 10 West Market Street
Indianapolis, Indiana 46204
(317) 635-8900
(Name, address, including zip code,
and telephone number, including area John R. Zerkle, Esq.
code, of agent for service) Leagre Chandler & Millard
1400 First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, Indiana 46204
(317) 808-3000
<PAGE>
Approximate date of commencement of the proposed sale of the securities
to the public: As soon as practicable after the effective date of this
Registration Statement and the effective time of the merger described in the
accompanying Proxy Statement/Prospectus.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------
Title of each class Amount Proposed Proposed Amount of
of securities to be maximum offering maximum aggregate registration
to be registered registered(1) price per unit(2) offering price (2) fee
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, Up to
no par value 810,658 shares $9.337766 $7,569,735 $2,233.07
</TABLE>
(1) This represents the maximum number of shares to be offered to Anderson
Community Bank shareholders.
(2) The maximum offering price is based on an estimate solely for the
purpose of calculating the registration fee and has been calculated in
accordance with Rule 457 (f)(2) on the basis of the book value on
November 30, 1998 of the shares of common stock of Anderson Community
Bank to be cancelled in connection with the merger.
-------------------------------------------------
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
ANDERSON COMMUNITY BANK
19 WEST 10TH STREET
ANDERSON, INDIANA 46016
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD
_______________, 1999
Notice is hereby given that, pursuant to the call of the Board of
Directors, a Special Meeting of the Shareholders of Anderson Community Bank,
will be held on ________________ ___, 1999, at _______ p.m. local time, at the
Anderson Fine Arts Center located at 32 West 10th Street, Anderson, Indiana
46016.
The purposes of the Special Meeting are:
1. To consider and vote upon the transactions contemplated by the
Agreement of Reorganization and Merger dated October 27, 1998 (the "Agreement"),
among First Merchants Corporation, Pendleton Banking Company, and Anderson
Community Bank. Pursuant to the Agreement, Anderson Community Bank will be
merged into Pendleton Banking Company, a wholly-owned subsidiary of First
Merchants Corporation, under the name of "The Madison Community Bank." The
merger is more fully described in the accompanying Proxy Statement-Prospectus;
and
2. To transact such other business as may properly be presented at
the Special Meeting.
Shareholders of Anderson Community Bank common stock of record at the
close of business on ______________ ___, 1999, will be entitled to notice of,
and to vote at, the Special Meeting and any adjournment thereof.
Shareholders of Anderson Community Bank are entitled to assert
dissenters' rights in connection with the proposed merger in accordance with
Indiana Code Section 28-1-7-21 under The Indiana Financial Institutions Act,
a copy of which is attached as Appendix B to the accompanying Proxy
Statement-Prospectus.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU
ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE
PREVIOUSLY RETURNED YOUR PROXY CARD.
By Order of the Board of Directors
James F. Ault,
Chairman of the Board
__________, 1999
Anderson, Indiana
<PAGE>
PROSPECTUS OF FIRST MERCHANTS CORPORATION FOR UP TO
810,658 SHARES OF COMMON STOCK
AND
PROXY STATEMENT OF ANDERSON COMMUNITY BANK
FOR SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ____________, 1999
The Boards of Directors of First Merchants Corporation ("FIRST
MERCHANTS"), Pendleton Banking Company ("PENDLETON") and Anderson Community Bank
("ANDERSON") have agreed to merge Anderson with and into Pendleton under the
name of "The Madison Community Bank." This Proxy Statement-Prospectus serves as
a Prospectus with respect to a maximum of 810,658 shares of First Merchants
common stock being offered to shareholders of Anderson in connection with the
proposed merger. This Proxy Statement-Prospectus constitutes the Proxy Statement
of Anderson in connection with the Special Meeting of Shareholders to be held on
__________________ ___, 1999 for the purpose of voting on the merger.
If Anderson is merged into Pendleton, each share of Anderson common
stock shall be converted into the right to receive 1.38 shares of First
Merchants common stock. First Merchants will pay cash for any fractional share
interests resulting from the exchange ratio.
The merger cannot be completed unless the shareholders of Anderson
approve it. Anderson will hold a special meeting of its shareholders for that
purpose. YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the
Special Meeting, please take the time to vote by completing and returning the
enclosed proxy card. If you sign, date and mail your proxy card without
indicating how you want to vote, your proxy will be counted as a vote in favor
of the merger.
The Special Meeting of the Shareholders of Anderson will be held on
____________ __, 1999 at ___ p.m. local time, at the Anderson Fine Arts Center
located at 32 West 10th Street, Anderson, Indiana 46016.
This document provides you with detailed information about the Special
Meeting and the proposed merger. We encourage you to read this entire document
carefully. You can also get information about First Merchants from publicly
available documents that First Merchants has filed with the Securities and
Exchange Commission. Additionally, shares of First Merchants common stock are
traded in the over-the-counter market and share prices are reported by the
NASDAQ National Market System under the symbol FRME.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED PURSUANT
TO THIS PROXY STATEMENT-PROSPECTUS OR DETERMINED IF THIS PROXY
STATEMENT-PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
PROXY STATEMENT-PROSPECTUS DATED ___________, 1999
AND FIRST MAILED TO SHAREHOLDERS ON _______________, 1999.
<PAGE>
THIS PROXY STATEMENT-PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND FINANCIAL
INFORMATION ABOUT FIRST MERCHANTS THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS
DOCUMENT. THE INFORMATION INCORPORATED BY REFERENCE IS AVAILABLE WITHOUT CHARGE
TO EACH ANDERSON SHAREHOLDER UPON WRITTEN OR ORAL REQUEST TO LARRY R. HELMS,
SENIOR VICE PRESIDENT AND GENERAL COUNSEL, FIRST MERCHANTS CORPORATION, 200 EAST
JACKSON STREET, MUNCIE INDIANA 47305, (765) 747-1530. TO OBTAIN TIMELY DELIVERY,
YOU SHOULD REQUEST SUCH INFORMATION BY __________, 1999.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
SUMMARY.........................................................................................1
The Companies..........................................................................1
The Shareholders Meeting...............................................................2
Record Date; Vote Required.............................................................2
Reasons for the Merger.................................................................2
Recommendation to Shareholders.........................................................3
The Merger.............................................................................3
Exchange of Shares.....................................................................3
Opinion of Financial Advisor...........................................................3
What We Need to Do to Complete the Merger..............................................4
Termination of the Merger..............................................................4
Waiver and Amendment...................................................................5
Accounting Treatment...................................................................5
Regulatory Approvals...................................................................5
Restrictions Placed on the Sale of First Merchants Stock Issued to
Certain Anderson Shareholders.................................................5
Comparative Rights of First Merchants Shareholders and Anderson Shareholders...........5
Stock Options..........................................................................6
Dissenters' Rights.....................................................................6
Certain Federal Income Tax Consequences................................................6
Management and Operations After the Merger.............................................6
Interests of Directors and Officers in the Merger that are Different
From Your Interests...........................................................6
Pro Forma Comparative Per Share Data...................................................7
SELECTED FINANCIAL DATA.........................................................................9
SPECIAL MEETING (Anderson Shareholders)........................................................16
General Information...................................................................16
Matters To Be Considered..............................................................16
Votes Required........................................................................16
Proxies...............................................................................16
Solicitation of Proxies...............................................................17
Recommendations of the Board of Directors.............................................17
(i)
<PAGE>
MERGER.........................................................................................18
Description of the Merger.............................................................18
First Merchants' and Pendleton's Reasons for the Merger...............................18
Background and Anderson's Reasons for the Merger......................................19
Opinion of Financial Advisor..........................................................20
Recommendation of the Board of Directors..............................................24
Exchange of Anderson Common Stock.....................................................24
Rights of Dissenting Shareholders.....................................................25
Resale of First Merchants Common Stock by Anderson Affiliates.........................27
Conditions to Consummation of the Merger..............................................27
Termination; Waiver; Amendment........................................................28
Restrictions Affecting Anderson.......................................................29
Regulatory Approvals..................................................................30
Effective Date of the Merger..........................................................30
Management After the Merger...........................................................31
Interests of Certain Persons in the Merger............................................31
Stock Options.........................................................................32
Accounting Treatment..................................................................32
Registration Statement................................................................33
FEDERAL INCOME TAX CONSEQUENCES................................................................34
COMPARATIVE PER SHARE DATA.....................................................................36
Nature of Trading Market..............................................................36
Dividends.............................................................................37
DESCRIPTION OF FIRST MERCHANTS.................................................................38
Business..............................................................................38
Acquisition Policy and Pending Transactions...........................................38
Incorporation of Certain Information by Reference.....................................39
DESCRIPTION OF PENDLETON.......................................................................40
Business..............................................................................40
Properties............................................................................40
Litigation............................................................................40
Employees.............................................................................40
Management............................................................................40
Security Ownership of Management......................................................42
Certain Relationships and Related Transactions........................................43
DESCRIPTION OF ANDERSON........................................................................44
Business..............................................................................44
Properties............................................................................44
Litigation............................................................................44
Employees.............................................................................44
Management............................................................................44
Security Ownership of Certain Beneficial Owners and Management........................46
Certain Relationships and Related Transactions........................................48
(ii)
<PAGE>
ANDERSON MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................................49
REGULATION AND SUPERVISION OF FIRST MERCHANTS
AND ITS SUBSIDIARIES AND ANDERSON..............................................................72
Bank Holding Company Regulation.......................................................72
Capital Adequacy Guidelines for Bank Holding Companies................................72
Bank Regulation.......................................................................73
Bank Capital Requirements.............................................................74
FDICIA................................................................................74
Deposit Insurance.....................................................................75
Brokered Deposits.....................................................................75
Interstate Banking And Branching......................................................76
Additional Matters....................................................................76
COMPARISON OF COMMON STOCK.....................................................................77
Governing Law.........................................................................77
Authorized But Unissued Shares........................................................77
Preemptive Rights.....................................................................78
Dividend Rights.......................................................................78
Voting Rights.........................................................................79
Dissenters' Rights....................................................................79
Liquidation Rights....................................................................80
Assessment and Redemption.............................................................80
Anti-Takeover Provisions..............................................................81
Director Liability....................................................................83
LEGAL OPINIONS.................................................................................83
EXPERTS........................................................................................83
OTHER MATTERS..................................................................................83
WHERE YOU CAN FIND ADDITIONAL INFORMATION......................................................84
FORWARD LOOKING STATEMENTS.....................................................................86
INDEX TO FINANCIAL STATEMENTS.................................................................F-1
APPENDICES
A. Agreement of Reorganization and Merger......................................A-1
B. Section 28-1-7-21 of The Indiana Financial Institutions Act
(Dissenters' Rights)........................................................B-1
C. Fairness Opinion of Professional Bank Services, Inc.........................C-1
</TABLE>
(iii)
<PAGE>
SUMMARY
THIS BRIEF SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THE PROXY
STATEMENT-PROSPECTUS. IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT IS
IMPORTANT TO YOU. YOU SHOULD CAREFULLY READ THE ENTIRE PROXY
STATEMENT-PROSPECTUS AND THE OTHER DOCUMENTS TO WHICH THIS DOCUMENT REFERS TO
UNDERSTAND THE MERGER FULLY. SEE "WHERE YOU CAN FIND ADDITIONAL INFORMATION" ON
PAGE 84.
THE COMPANIES (PAGES 38, 40 AND 44)
FIRST MERCHANTS CORPORATION
200 East Jackson Street
Muncie, Indiana 47305
(765) 747-1500
First Merchants is a multi-bank holding company organized under the laws of the
State of Indiana and headquartered in Muncie, Indiana. First Merchants has five
banking subsidiaries, First Merchants Bank, National Association, First United
Bank, Pendleton Banking Company, The Union County National Bank of Liberty and
The Randolph County Bank. In addition, Pendleton Banking Company owns First
Merchants Insurance Services, Inc. See "DESCRIPTION OF FIRST MERCHANTS."
First Merchants has also entered into a definitive agreement to merge Jay
Financial Corporation into First Merchants. As a result of the merger, The First
National Bank of Portland will become a wholly-owned subsidiary of First
Merchants. See "DESCRIPTION OF FIRST MERCHANTS--Acquisition Policy and Pending
Transactions."
PENDLETON BANKING COMPANY
100 West State Street
Pendleton, Indiana 46064
(765) 778-2132
Pendleton is a bank organized and existing under the laws of the State of
Indiana and a wholly-owned subsidiary of First Merchants. Pendleton also
owns and operates a subsidiary, First Merchants Insurance Services, Inc. See
"DESCRIPTION OF PENDLETON."
ANDERSON COMMUNITY BANK
19 West 10th Street
Anderson, Indiana 46016
(765) 622-9773
Anderson is a bank organized and existing under the laws of the State of
Indiana. See "DESCRIPTION OF ANDERSON."
1
<PAGE>
THE SHAREHOLDERS MEETING (PAGE 16)
The Special Meeting of Shareholders of Anderson will be held on ________ __,
1999, at ____ p.m. local time, at the Anderson Fine Arts Center, 32 West 10th
Street, Anderson, Indiana 46016. At the Special Meeting, Anderson will ask its
shareholders:
1. to approve the merger of Anderson and Pendleton; and
2. to act on any other items that may be submitted to a vote at the
Special Meeting.
RECORD DATE; VOTE REQUIRED (PAGE 16)
You can vote at the Special Meeting of Shareholders if you owned common stock of
Anderson at the close of business on _________, 1999. You can cast one vote for
each share of stock you owned on that date. To approve the merger, the holders
of a majority of the shares of Anderson common stock outstanding must vote in
its favor. You can vote your shares by attending the Special Meeting of
Shareholders or you can mark the enclosed proxy card with your vote, sign it and
mail it in the enclosed return envelope. You can revoke your proxy as late as
the date of the Special Meeting either by sending in a new proxy or by attending
the Special Meeting and voting in person.
Anderson's executive officers, directors and their affiliates control in the
aggregate, directly and indirectly, 296,332 shares or approximately 48% of the
shares of Anderson common stock outstanding. In addition, First Merchants owns
25,000 shares or approximately 4% of the shares of Anderson common stock
outstanding. The Anderson Board anticipates that all of these shares will be
voted in favor of the merger. If all such shares are voted in favor of the
merger, approval of the merger is assured.
REASONS FOR THE MERGER (PAGES 18 AND 19)
FIRST MERCHANTS AND PENDLETON. First Merchants' and Pendleton's Boards of
Directors considered a number of financial and nonfinancial factors in making
their decision to merge Anderson with Pendleton, including their respect for the
ability and integrity of the Anderson Board of Directors, management and staff.
The Boards believe that expanding First Merchants' operations in the areas
Anderson operates offers long term strategic benefits to First Merchants and
Pendleton. As a result, First Merchants, as the sole shareholder of Pendleton,
will approve the merger.
ANDERSON. The Anderson Board of Directors considered a number of financial and
non-financial factors in reaching its decision to approve the Agreement and
merger. These factors included, among other things, the prospects of Anderson as
an independent bank in the current and anticipated competitive environment of
the financial services industry, the amount and form of the consideration First
Merchants offered to the Anderson shareholders, the tax-free nature of the
merger, the fairness opinion of Professional Bank Services, Inc. and the
analysis underlying that opinion, and the potential effects of the merger on
Anderson customers and employees and the communities Anderson serves.
2
<PAGE>
RECOMMENDATION TO SHAREHOLDERS (PAGES 17 AND 24)
The Board of Directors of Anderson believes that the merger is fair to you and
in your best interests and unanimously recommends that you vote "FOR" the
proposal to adopt the Agreement and approve the merger.
THE MERGER (PAGE 18)
WE HAVE ATTACHED THE AGREEMENT OF REORGANIZATION AND MERGER (THE "AGREEMENT") TO
THIS DOCUMENT AS APPENDIX A. PLEASE READ THE AGREEMENT. IT IS THE LEGAL DOCUMENT
THAT GOVERNS THE MERGER.
Anderson will merge with Pendleton under the name of "The Madison Community
Bank" and thereafter Anderson will cease to exist. After the merger, the
resulting bank under the name of "The Madison Community Bank" will continue to
be a wholly-owned subsidiary of First Merchants. We hope to complete this merger
in the first quarter of 1999.
EXCHANGE OF SHARES (PAGE 24)
As an Anderson shareholder, each of your shares of Anderson common stock will be
converted into the right to receive 1.38 shares of First Merchants common stock.
Cash will be paid for fractional shares of First Merchants common stock
resulting from the conversion ratio. The exact number of shares of First
Merchants common stock that you will receive may be subject to adjustment under
certain circumstances described in detail later in this document.
There is currently no established trading market for shares of Anderson common
stock. Shares of First Merchants common stock are traded in the over-the-counter
market and are reported on the NASDAQ National Market System. The closing price
of First Merchants common stock was $27.33 per share on August 19, 1998 (as
adjusted to take into account a 3-for-2 stock split of First Merchants common
stock effected in October, 1998), the business day before the merger was
publicly announced, and was $_______ per share on ________ __, 1999. Based on
the conversion ratio of 1.38, the market value of the consideration that
Anderson shareholders will receive in the merger for each share of Anderson
common stock would be $37.72 based on First Merchants' closing stock price on
August 19, 1998 and $_______ based on First Merchants' closing stock price on
__________ __, 1999. Of course, the market price of First Merchants' shares will
fluctuate prior to the merger, while the conversion ratio is fixed.
OPINION OF FINANCIAL ADVISOR (PAGE 20)
The Board of Directors of Anderson has received the written opinion of
Professional Bank Services, Inc. dated October 20, 1998, that the terms of the
merger are fair from a financial point of view to the shareholders of Anderson.
The opinion was updated as of the date of this Proxy-Statement-Prospectus. We
have attached a copy of the opinion and update to this document as Appendix C.
3
<PAGE>
WHAT WE NEED TO DO TO COMPLETE THE MERGER (PAGE 27)
The completion of the merger depends on a number of conditions being met. In
addition to our compliance with the Agreement, these conditions include among
others:
1. approval of the Agreement by Anderson's shareholders;
2. approval of the Agreement by First Merchants, as the sole
shareholder of Pendleton;
3. approval of the merger by certain regulatory agencies;
4. the receipt of a letter from First Merchants' independent public
accountants as to its ability to account for the merger as a
"pooling of interests"; and
5. the receipt of an opinion of counsel with respect to certain
federal income tax matters.
TERMINATION OF THE MERGER (PAGE 28)
The Agreement may be terminated before the merger becomes effective upon the
occurrence of certain events, including among others:
1. a material misrepresentation or breach of the Agreement;
2. a material adverse change in the financial condition of First
Merchants or Anderson since June 30, 1998;
3. the failure of the merger to qualify as a tax-free reorganization;
4. the failure of the merger to qualify for "pooling of interests"
accounting treatment;
5. the merger not having been completed before April 30, 1999;
6. if First Merchants or any of its subsidiaries (including
Pendleton) are acquired by a third party;
7. if Anderson furnishes information or enters into discussions
or negotiations with a third party relating to a proposed
acquisition of Anderson, if Anderson fails to give First
Merchants written notice of any such intention, or if
Anderson's Board of Directors withdraws or modifies its
recommendation to Anderson shareholders to vote for the merger
following receipt of a proposal for an acquisition from a
third party;
4
<PAGE>
8. if Anderson's Board of Directors terminates the Agreement in
the exercise of its fiduciary duties after receipt of an
unsolicited acquisition proposal from a third party; or
9. if either party is unable to satisfy the conditions precedent
to the merger (providing such party is not then in material
breach of the Agreement).
If Anderson terminates the Agreement in connection with an acquisition
proposal by a third party pursuant to items 7 or 8 above, Anderson has agreed to
pay First Merchants the amount of $750,000 in liquidated damages.
WAIVER AND AMENDMENT (PAGE 28)
We can agree to amend the Agreement, and each of us can waive our right to
require the other party to adhere to the terms and conditions of the Agreement,
where the law allows. However, we may not do so after the Anderson shareholders
approve the merger if the amendment or waiver would have a material adverse
effect on the Anderson shareholders.
ACCOUNTING TREATMENT (PAGE 32)
We expect the merger to qualify as a "pooling of interests." This means that,
for accounting and financial reporting purposes, we will treat our companies as
if they had always been one company.
REGULATORY APPROVALS (PAGE 30)
The merger must be approved by the Federal Deposit Insurance Corporation
("FDIC") and the Indiana Department of Financial Institutions (the "Indiana
Department"). We have filed all of the required applications or notices with the
FDIC and the Indiana Department.
RESTRICTIONS PLACED ON THE SALE OF FIRST MERCHANTS STOCK ISSUED TO
CERTAIN ANDERSON SHAREHOLDERS (PAGE 27)
Certain resale restrictions apply to the sale or transfer of the shares of First
Merchants common stock issued to directors, executive officers and 10%
shareholders of Anderson in exchange for their shares of Anderson common stock.
COMPARATIVE RIGHTS OF FIRST MERCHANTS SHAREHOLDERS
AND ANDERSON SHAREHOLDERS (PAGE 77)
The rights of shareholders of First Merchants and Anderson differ in some
respects. Upon completion of the merger, Anderson shareholders who receive First
Merchants common stock will take such stock subject to its terms and conditions.
The Articles of Incorporation of First Merchants contain certain anti-takeover
measures which may discourage or render more difficult a subsequent takeover of
First Merchants by another corporation. In addition, First Merchants is
5
<PAGE>
an Indiana business corporation whereas Anderson is an Indiana bank. Indiana law
differs as it relates to shares of a bank and shares of a corporation.
STOCK OPTIONS (PAGE 32)
Pursuant to the terms of the Agreement, the officers, directors and employees of
Anderson are required to exercise all of their options to acquire shares of
Anderson common stock prior to the consummation of the merger.
DISSENTERS' RIGHTS (PAGE 25)
Indiana law permits you to dissent from the merger and have the value of your
stock determined by a court and paid to you in cash. To do this, you must follow
certain procedures, including giving Anderson certain notices and NOT VOTING
YOUR SHARES IN FAVOR OF THE MERGER. You will not receive any stock in First
Merchants if you dissent and follow all of the required procedures. Instead, you
will only receive the value of your stock in cash. The relevant sections of
Indiana law governing this process are attached to this document as Appendix B.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES (PAGE 34)
In general, no gain or loss, for federal income tax purposes, will be recognized
by you upon distribution to you of shares of First Merchants common stock. Gain
or loss, for federal income tax purposes, will be recognized, however, with
respect to cash payments received by you in lieu of fractional share interests
resulting from the conversion ratio. Gain or loss will also be recognized with
respect to cash payments received by you if you perfect your dissenters' rights.
You are urged to consult with your own tax advisors with respect to the tax
consequences of the merger to you.
Our obligation to complete the merger is conditioned on our receipt of a legal
opinion about the federal income tax consequences of the merger. The opinion
will not however bind the Internal Revenue Service which could take a different
view. Determining the actual tax consequences of the merger to you can be
complicated.
MANAGEMENT AND OPERATIONS AFTER THE MERGER (PAGE 31)
Anderson's existence will cease after the merger. However, the resulting bank
from the merger, operating under the name of "The Madison Community Bank," will
have its principal office at the main office of Anderson. The current directors
and officers of Pendleton and Anderson, if they so choose, will continue to
serve as directors and officers of the resulting bank after the effective date
of the merger.
INTERESTS OF DIRECTORS AND OFFICERS IN THE MERGER THAT ARE DIFFERENT
FROM YOUR INTERESTS (PAGE 31)
Some of Anderson's directors and officers have interests in the merger that are
different from, or in addition to, their interests as shareholders of Anderson.
These interests exist because of
6
<PAGE>
agreements that the Anderson directors and officers have with First
Merchants, including the following:
When we complete the merger, James F. Ault, current Chairman of the Board of
Anderson, will be nominated for election as a director of First Merchants for a
three year term at the first annual meeting of First Merchant's shareholders
following the merger. The officers and directors of Anderson will remain
officers and directors of the resulting bank after the merger. In addition,
Michael L. Baker, Bradley K. Condon, and Michael E. Stephens, the President and
Chief Executive Officer, Senior Vice President, and Senior Vice President and
Cashier, respectively, of Anderson shall be offered employment agreements with
the resulting bank after the merger.
The members of the Anderson Board of Directors knew about these additional
interests, and considered them, when they approved the Agreement.
PRO FORMA COMPARATIVE PER SHARE DATA
The following tables show information about Anderson's and First Merchants'
income per share, dividends per share and book value per share, and similar
information reflecting the merger (which we refer to as "pro forma"
information). In presenting the comparative pro forma information for certain
time periods, we assumed that Anderson had been merged with Pendleton throughout
those periods.
We also assumed that we will treat our companies as if they had always been
combined for accounting and financial reporting purposes (a method known as
"pooling of interests" accounting). The information listed as "equivalent pro
forma" was obtained by multiplying the pro forma amounts by the conversion ratio
of 1.38. The pro forma information, while helpful in illustrating the financial
characteristics of the new company under one set of assumptions, does not
attempt to predict or suggest future results.
The information in the following table is based on the historical financial
information of Anderson included in this document and historical financial
information of First Merchants (including Pendleton) which it has presented in
its prior Securities and Exchange Commission filings. The historical financial
information of First Merchants has been incorporated into this document by
reference. See "WHERE YOU CAN FIND ADDITIONAL INFORMATION" on page 84.
7
<PAGE>
FIRST MERCHANTS AND ANDERSON HISTORICAL AND
PRO FORMA PER SHARE DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31
FIRST MERCHANTS - HISTORICAL (1) SEPTEMBER 30, 1998 1997 1996 1995
------------------ ---- ---- ----
<S> <C> <C> <C> <C>
Net income
Basic $1.15 $1.44 $1.33 $1.22
Diluted 1.13 1.43 1.32 1.21
Cash dividends .57 .69 .59 .51
Book value at period end 12.88 12.20 11.38 10.66
ANDERSON - HISTORICAL
Net income
Basic $1.30 $1.08 $.42 $(.28)
Diluted 1.29 1.08 .42 (.28)
Cash dividends --- --- --- ---
Book value at period end 12.42 11.06 9.93 9.50
NINE MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31
FIRST MERCHANTS - PRO FORMA (1) SEPTEMBER 30, 1998 1997 1996 1995
------------------ ---- ---- ----
Net income
Basic $1.13 $1.39 $1.26 $1.16
Diluted 1.11 1.38 1.25 1.11
Cash dividends .57 .69 .59 .51
Book value at period end 12.59 12.06 11.08 10.25
ANDERSON - EQUIVALENT (2)
Net income
Basic $1.56 $1.92 $1.74 $1.55
Diluted 1.53 1.90 1.73 1.53
Cash dividends .79 .95 .81 .70
Book value at period end 17.37 16.64 15.29 14.15
</TABLE>
(1) Restated for 3-for-2 stock splits of First Merchants common stock effected
in October 1995 and 1998.
(2) Computed by multiplying First Merchants pro forma per share information by
the indicated conversion ratio of 1.38.
8
<PAGE>
SELECTED FINANCIAL DATA
The following tables show summarized historical financial data for each of
Anderson and First Merchants and also show similar pro forma information
reflecting the merger. The pro forma information reflects the "pooling of
interests" method of accounting.
We expect that we will incur reorganization and restructuring expenses as a
result of combining our companies. We also anticipate that the merger will
provide the combined company with financial benefits that include reduced
operating expenses and the opportunity to earn more revenue. The pro forma
information, while helpful in illustrating the financial characteristics of the
new company under one set of assumptions, does not take into account these
expected expenses or these anticipated financial benefits, or otherwise attempt
to predict or suggest future results.
The information in the following tables is based on historical financial
information of Anderson included in this document and historical financial
information of First Merchants (including Pendleton) that it has presented in
its prior Securities and Exchange Commission filings. All of the summary
financial information we provide in the following tables should be read in
connection with this historical financial information. The historical
information of First Merchants has been incorporated into this document by
reference. See "WHERE YOU CAN FIND ADDITIONAL INFORMATION" on page 84. First
Merchants' audited historical financial statements were audited by Olive, LLP,
independent certified public accountants, and Anderson's audited historical
financial statements were audited by Crowe, Chizek and Company LLP, independent
certified public accountants.
9
<PAGE>
FIRST MERCHANTS
FIVE YEAR SUMMARY OF SELECTED HISTORICAL FINANCIAL DATA
(Dollars in Thousands, Except per Share Amounts)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 FOR THE YEARS ENDED DECEMBER 31
------------------------ ------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income - tax equivalent $60,905 $57,669 $77,864 $71,607 $68,400 $59,738 $58,592
Interest expense 28,088 26,376 35,725 32,349 31,351 23,829 24,056
------- ------- ------- ------- ------- ------- -------
Net interest income- tax equivalent 32,817 31,293 42,139 39,258 37,049 35,909 34,536
Tax equivalent adjustment 1,902 1,763 2,389 2,111 1,952 1,971 2,011
------- ------- ------- ------- ------- ------- -------
Net interest income 30,915 29,530 39,750 37,147 35,097 33,938 32,525
Provision for loan losses 1,268 952 1,297 1,253 1,388 1,202 1,654
Noninterest income 8,385 6,755 9,229 8,342 7,592 6,919 7,350
Noninterest expense 20,358 19,104 25,748 24,135 22,992 22,632 22,108
------- ------- ------- ------- ------- ------- -------
Income before income tax and cumulative
effect of change in accounting
principle 17,674 16,229 21,934 20,101 18,309 17,023 16,113
Income tax expense 6,161 5,557 7,561 6,959 6,261 5,660 5,250
------- ------- ------- ------- ------- ------- -------
Income before cumulative effect of change
in accounting principle 11,513 10,672 14,373 13,142 12,048 11,363 10,863
Cumulative effect of change in accounting
principle 260
------- ------- ------- ------- ------- ------- -------
NET INCOME $11,513 $10,672 $14,373 $13,142 $12,048 $11,363 $11,123
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
PER SHARE DATA (1)
Income before cumulative effect of change
in accounting principle
Basic $ 1.15 $ 1.07 $ 1.44 $ 1.33 $ 1.22 $ 1.15 $ 1.09
Diluted 1.13 1.06 1.43 1.32 1.21 1.15 1.09
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 FOR THE YEARS ENDED DECEMBER 31
------------------------------ ------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net income
Basic $1.15 $1.07 $1.44 $1.33 $1.22 $1.15 $1.12
Diluted 1.13 1.06 1.43 1.32 1.21 1.15 1.11
Cash dividends (2) .57 .51 .69 .59 .51 .47 .42
BALANCES END OF PERIOD
Total assets $1,113,879 $1,007,711 $1,020,136 $967,993 $942,156 $868,153 $842,681
Total loans 733,659 699,495 703,784 631,700 553,074 528,641 495,703
Total deposits 860,588 789,366 843,812 794,451 783,936 720,009 688,644
Securities sold under repurchase
agreements 78,302 33,802 15,398 20,054 28,887 19,010 27,319
Federal home loan bank advances 29,704 18,700 20,700 9,150 9,000 8,000 6,000
Stockholders' equity 129,827 119,714 121,969 112,687 104,967 92,754 89,257
SELECTED RATIOS
Return on average assets 1.47% 1.44% 1.45% 1.41% 1.35% 1.33% 1.34%
Return on average equity 12.23 12.29 12.28 12.16 12.17 12.42 12.89
</TABLE>
(1) Restated for 3-for-2 stock splits effected January 1993 and October 1995
and 1998.
(2) Dividends per share are for First Merchants only, not restated for pooling
transactions.
11
<PAGE>
ANDERSON
SUMMARY OF SELECTED HISTORICAL FINANCIAL DATA
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
NINE MONTHS ENDED FOR THE YEARS ENDED
SEPTEMBER 30 DECEMBER 31 MARCH 9,1995
----------------------------------- ------------------------- (DATE OF INCEPTION)
1998 1997 1997 1996 TO DECEMBER 31, 1995
---- ---- ---- ---- --------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income - tax equivalent (1) $4,182 $3,060 $4,307 $2,755 $1,168
Interest expense 1,835 1,368 1,877 1,254 528
----- ----- ----- ----- -----
Net interest income - tax equivalent (1) 2,347 1,692 2,430 1,501 640
Tax equivalent adjustment (1) (42) (16) (27) - -
----- ----- ----- ----- -----
Net interest income 2,305 1,676 2,403 1,501 640
Provision for loan losses 103 155 197 256 210
Noninterest income 267 138 200 120 44
Noninterest expense 1,244 1,011 1,406 976 625
----- ----- ----- ----- -----
Income before income taxes 1,225 648 1,000 389 (151)
Income tax expense 462 248 375 157 -
----- ----- ----- ----- -----
NET INCOME $763 $400 $625 $232 $(151)
==== ==== ==== ==== ======
PER SHARE DATA
Basic earnings per share $1.30 $0.69 $1.08 $0.42 $(0.28)
Diluted earnings per share 1.29 0.69 1.08 0.42 (0.28)
Shareholders' equity, end of period 12.42 10.65 11.06 9.93 9.50
BALANCES END OF PERIOD
Total assets 75,713 54,368 62,837 45,969 27,262
Total loans 59,156 43,776 50,206 35,275 15,839
Total deposits 67,672 47,816 55,894 40,052 21,918
Noninterest-bearing deposits 11,319 8,203 8,311 4,989 4,412
Interest-bearing deposits 56,362 39,613 47,583 35,063 17,506
Shareholders' equity 7,327 6,209 6,448 5,537 5,199
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED FOR THE YEARS ENDED
SEPTEMBER 30 DECEMBER 31 MARCH 9,1995
------------------------------- ----------------------------- (DATE OF INCEPTION)
1998 1997 1997 1996 TO DECEMBER 31, 1995
---- ---- ---- ---- --------------------
<S> <C> <C> <C> <C> <C>
SELECTED RATIOS
Return on average assets 1.48% 1.05% 1.19% 0.66% (0.96)%
Return on average equity 14.78 9.00 10.36 4.33 (3.46)
</TABLE>
(1) Net interest income has been presented on both a tax equivalent and non-tax
equivalent basis. The tax equivalent basis was calculated using a 34% tax rate
for all periods presented. The tax equivalent adjustment reverses the tax
equivalent basis in order to present net interest income in accordance with
generally accepted accounting principles (GAAP), as reflected in the financial
statements.
13
<PAGE>
FIRST MERCHANTS
PRO FORMA SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
NINE MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31
SEPTEMBER 30 -------------------------------
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income - tax equivalent $65,087 $82,171 $74,362 $69,568
Interest expense 29,923 37,602 33,603 31,879
--------- --------- --------- ---------
Net interest income - tax equivalent 35,164 44,569 40,759 37,689
Tax equivalent adjustment 1,944 2,416 2,111 1,952
--------- --------- --------- ---------
Net interest income 33,220 42,153 38,648 35,737
Provision for loan losses 1,371 1,494 1,509 1,598
Noninterest income 8,652 9,429 8,462 7,636
Noninterest expense 21,602 27,154 25,111 23,617
--------- --------- --------- ---------
Income before income tax 18,899 22,934 20,490 18,158
Income tax expense 6,623 7,936 7,116 6,261
--------- --------- --------- ---------
NET INCOME $12,276 $14,998 $13,374 $11,897
--------- --------- --------- ---------
--------- --------- --------- ---------
PER SHARE DATA (1)
Net income
Basic $1.13 $1.39 $1.26 $1.12
Diluted 1.11 1.38 1.25 1.11
Cash dividends (2) .57 .69 .59 .51
BALANCES END OF PERIOD
Total assets $1,189,589 $1,082,970 $1,013,959 $969,415
Total loans 792,815 753,990 666,975 537,235
Total deposits 928,260 899,706 834,503 805,854
Securities sold under repurchase agreements 78,302 15,398 20,054 28,887
Federal Home Loan Bank advances 29,704 20,700 9,150 9,000
Stockholders' equity 137,151 128,414 118,221 110,163
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31
SEPTEMBER 30 -------------------------------
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
SELECTED RATIOS
Return on average assets 1.47% 1.43% 1.38% 1.31%
Return on average equity 12.55 12.21 11.81 11.44
</TABLE>
(1) Restated for 3-for-2 stock splits effected January 1993 and October 1995 and
1998.
(2) Dividends per share are for First Merchants only, not restated for
pooling transactions.
15
<PAGE>
SPECIAL MEETING
SPECIAL MEETING OF SHAREHOLDERS OF
ANDERSON COMMUNITY BANK
GENERAL INFORMATION
This Proxy Statement-Prospectus is furnished to the shareholders of
Anderson Community Bank ("ANDERSON") in connection with the solicitation by the
Board of Directors of Anderson of proxies for use at the Special Meeting of
Shareholders to be held on ___________________, 1999, at ________ o'clock p.m.,
local time, at the Anderson Fine Arts Center, 32 West 10th Street, Anderson,
Indiana 46016. This Proxy Statement-Prospectus is first being mailed to Anderson
shareholders on _______________________ ___, 1999.
MATTERS TO BE CONSIDERED
The purpose of the Special Meeting is to consider and vote upon an
Agreement of Reorganization and Merger (the "AGREEMENT"), dated October 27,
1998, by and among First Merchants Corporation ("FIRST MERCHANTS"), Pendleton
Banking Company ("PENDLETON"), and Anderson. Pursuant to the Agreement, Anderson
will merge with and into Pendleton, a wholly-owned subsidiary of First
Merchants, under the name of "The Madison Community Bank." The resulting bank
will be a wholly-owned subsidiary of First Merchants.
VOTES REQUIRED
Approval of the Agreement requires the affirmative vote of a majority
of the outstanding shares of Anderson common stock. Only holders of record of
Anderson common stock at the close of business on _____________ ___, 1999, are
entitled to notice of, and to vote at, the Special Meeting. Anderson had 589,784
shares of common stock issued and outstanding on the record date, which shares
were held of record by approximately 198 shareholders. Each share of Anderson
common stock is entitled to one vote.
Anderson's executive officers, directors and their affiliates control
in the aggregate, directly and indirectly, 296,332 shares or approximately 48%
of the shares of Anderson common stock outstanding. In addition, First Merchants
owns 25,000 shares or approximately 4% of the shares of Anderson common stock
outstanding. The Anderson Board anticipates that all of these shares will be
voted in favor of the merger. If all such shares are voted in favor of the
merger, approval of the merger is assured.
PROXIES
The shares represented by proxies properly signed and returned will be
voted at the Special Meeting. In the absence of specific instructions to the
contrary, proxies will be voted FOR approval of the Agreement described in this
Proxy Statement-Prospectus and in accordance with the judgment of the persons
named as proxies with respect to any other matter which may properly come before
the Special Meeting; provided, however, that in no event will a proxy that
16
<PAGE>
has been voted against the merger be voted in favor of any motion to adjourn
the Special Meeting for the purpose of soliciting additional votes in favor
of the merger. Any shareholder giving a proxy has the right to revoke it
before it is exercised. Therefore, execution of a proxy will not affect a
shareholder's right to vote in person if he or she attends the Special
Meeting. Revocation may be made by a later dated proxy delivered to Anderson;
by written notice sent to the Secretary of Anderson at 19 West 10th Street,
Anderson, Indiana 46016; or by personal oral or written request at the
Special Meeting. To be effective, any revocation must be received before the
proxy is exercised.
Because approval of the Agreement and the merger of Anderson into
Pendleton requires the affirmative vote of a majority of the outstanding shares
of Anderson common stock, abstentions and broker non-votes will have the same
effect as voting against approval of the Agreement. Accordingly, the Anderson
Board urges the Anderson shareholders to complete, date and sign the
accompanying proxy and return it promptly in the enclosed postage-paid envelope.
SOLICITATION OF PROXIES
The cost of soliciting proxies will be borne by Anderson. In addition
to use of the mails, proxies may be solicited personally or by telephone or
telecopy by directors, officers and certain employees of Anderson, who will not
be specially compensated for such soliciting.
RECOMMENDATIONS OF THE BOARD OF DIRECTORS
The Anderson Board has unanimously approved the Agreement and the
transactions contemplated thereby. The Board believes that the merger is in the
best interests of Anderson and its shareholders. The Board unanimously
recommends that the Anderson shareholders vote "FOR" the Agreement and the
transactions contemplated thereby. See "MERGER - Anderson's Reasons for the
Merger - Recommendation of the Board of Directors."
17
<PAGE>
MERGER
THE FOLLOWING SUMMARY OF CERTAIN ASPECTS OF THE AGREEMENT DOES NOT PURPORT TO BE
A COMPLETE DESCRIPTION OF THE TERMS OF THE AGREEMENT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE AGREEMENT, WHICH IS ATTACHED TO THIS PROXY
STATEMENT-PROSPECTUS AS APPENDIX A AND IS INCORPORATED INTO THIS PROXY
STATEMENT-PROSPECTUS BY REFERENCE.
DESCRIPTION OF THE MERGER
Under the terms of the Agreement, Anderson will merge with and into
Pendleton, a wholly-owned subsidiary of First Merchants, under the name of "The
Madison Community Bank" and thereafter the separate existence of Anderson will
cease. After the merger, the resulting bank under the name of "The Madison
Community Bank" will continue to be a wholly-owned subsidiary of First
Merchants.
FIRST MERCHANTS' AND PENDLETON'S REASONS FOR THE MERGER
In adopting the Agreement and the merger, the First Merchants and
Pendleton Boards considered a number of factors concerning the benefits of the
merger. Without assigning any relative or specific weights to the factors, the
First Merchants and Pendleton Boards considered the following material factors:
1. First Merchants' and Pendleton's respect for the
ability and integrity of the Anderson Board of
Directors, management, and staff, and their
affiliates and First Merchants' and Pendletons'
belief that expanding their operations in the areas
served by Anderson offers important long range
strategic benefits to First Merchants and Pendleton;
2. a review of (i) the business, operations, earnings,
and financial condition including the capital levels
and asset quality, of Anderson on a historical,
prospective, and pro forma basis in comparison to
other financial institutions in the area, (ii) the
demographic, economic, and financial characteristics
of the market in which Anderson operates, including
existing competition, history of the market areas
with respect to financial institutions, and average
demand for credit, on a historical and prospective
basis, and (iii) the results of First Merchants' due
diligence review of Anderson; and
3. a variety of factors affecting and relating to the
overall strategic focus of First Merchants, including
First Merchants' desire to expand into contiguous
markets.
18
<PAGE>
BACKGROUND AND ANDERSON'S REASONS FOR THE MERGER
In the spring of 1998, representatives of First Merchants and Anderson
first discussed informally the possibility of a merger between Anderson and
Pendleton. In its April meeting, the Board of Directors of Anderson authorized
the Executive Committee to pursue discussions with Pendleton and First
Merchants. In late May, the Executive Committee engaged Professional Bank
Services, Inc. to perform a valuation of Anderson. Based on this valuation and
the ongoing but still preliminary conversations with First Merchants, the
Executive Committee decided to proceed with further discussions in order to
outline the parameters of a possible affiliation.
At the Anderson Board of Directors meeting in July, 1998,
representatives of First Merchants met with the Board to discuss the possibility
of a merger between Pendleton and Anderson. The Board thereafter adopted a
resolution authorizing the Executive Committee to work toward a letter of
intent. Negotiations continued in July and August, with a letter of intent being
executed on August 20, 1998, subject to due diligence, execution of a definitive
agreement, approval by the Anderson shareholders, receipt of a fairness opinion,
and approval of the appropriate bank regulatory agencies. Thereafter, the
Anderson Board retained Professional Bank Services, Inc. to provide a fairness
opinion in connection with the execution of a definitive agreement related to
the merger.
The negotiation of the definitive agreement, due diligence, and all
related work proceeded throughout September and October, 1998. During that time,
because of a decline in the stock price of First Merchants, the original
exchange ratio was adjusted from that originally set forth in the letter of
intent to provide for a greater number of shares to be issued to the Anderson
shareholders. In consideration for this increase in shares, Anderson agreed to a
fixed exchange ratio without any requirement that the First Merchants stock
price be at a certain point at closing.
At its meeting in October, 1998, the Board of Directors of Anderson met
with legal counsel and representatives of Professional Bank Services, Inc. The
Board considered carefully the terms and conditions of the merger proposal as
set forth in the proposed definitive agreement. Professional Bank Services, Inc.
provided its opinion that the merger was fair to the shareholders of Anderson
from a financial point of view. Based on the above and after lengthy discussion,
the Board authorized execution of the Agreement and the submission of the
Agreement to a vote of the Anderson shareholders and recommended that the
shareholders approve the Agreement and merger. First Merchants and Anderson
executed the Agreement on October 27, 1998.
The Anderson Board considered a number of financial and non-financial
factors in reaching its decision to approve the Agreement and merger. These
factors included, among other things, the prospects of Anderson as an
independent bank in the current and anticipated competitive environment of the
financial services industry, the amount and form of the consideration First
Merchants offered to the Anderson shareholders, the tax-free nature of the
merger, the fairness opinion of Professional Bank Services, Inc. and the
analyses underlying that opinion, and the potential effects of the merger on
Anderson customers and employees and the communities Anderson serves.
19
<PAGE>
Based upon the foregoing factors, the Board of Directors of Anderson
concluded that it was in the best interests of Anderson and its shareholders to
affiliate with First Merchants. The importance of the various factors discussed
above relative to one another cannot be precisely determined or stated.
OPINION OF FINANCIAL ADVISOR
Professional Bank Services, Inc. ("PBS") was engaged by Anderson to
advise Anderson's Board of Directors as to the fairness of the consideration,
from a financial perspective, to be paid by First Merchants to the Anderson
shareholders as set forth in the Agreement.
PBS is a bank consulting firm with offices in Louisville, Chicago,
Nashville and Washington, D.C. As part of its investment banking business, PBS
is regularly engaged in reviewing the fairness of financial institution
acquisition transactions from a financial perspective and in the valuation of
financial institutions and other businesses and their securities in connection
with mergers, acquisitions, estate settlements, and other transactions. Neither
PBS nor any of its affiliates has a material financial interest in Anderson or
First Merchants. PBS was selected to advise Anderson's Board of Directors based
upon it familiarity with Indiana financial institutions and knowledge of the
banking industry as a whole.
PBS performed certain analyses described herein and presented the range
of values for Anderson resulting from such analyses to the Board of Directors of
Anderson in connection with its advice as to fairness of the consideration to be
paid by First Merchants.
A Fairness Opinion of PBS was delivered to the Board of Directors of
Anderson on October 20, 1998, at a meeting of the Board of Directors and has
been updated as of the date of this Prospectus/Proxy Statement. A copy of the
Fairness Opinion, which includes a summary of the assumptions made and
information analyzed in deriving the Fairness Opinion, and the update are
attached as Appendix C to this Proxy Statement-Prospectus and should be read in
its entirety. The Fairness Opinion was delivered prior to First Merchants'
October, 1998 3-for-2 stock split and accordingly references an exchange ratio
of 0.92 rather than the actual exchange ratio of 1.38 as provided in the
Agreement.
In arriving at its Fairness Opinion, PBS reviewed certain publicly
available business and financial information relating to Anderson and First
Merchants. PBS considered certain financial and stock market data of Anderson
and First Merchants, compared that data with similar data for certain other
publicly-held bank holding companies and considered the financial terms of
certain other comparable bank transactions in the State of Indiana that had
recently been effected. PBS also considered such other information, financial
studies, analyses and investigations and financial, economic and market criteria
that it deemed relevant. In connection with its review, PBS did not
independently verify the foregoing information and relied on such information as
being complete and accurate in all material respects. Financial forecasts
prepared by PBS were based on assumptions believed by PBS to be reasonable and
to reflect currently available information. PBS did not make an independent
evaluation or appraisal of the assets of Anderson or First Merchants.
20
<PAGE>
As part of preparing this Fairness Opinion, PBS performed a due
diligence review of First Merchants on August 19, 1998 and updated the review on
October 20, 1998. As part of the due diligence, PBS reviewed the following
items: minutes of the meetings of the Board of Directors of First Merchants for
1997 and year to date 1998; regulatory reports of examination of First Merchants
and First Merchants Bank National Association; December 31, 1995, 1996 and 1997
audited annual reports and supplemental management letters issued by First
Merchants' independent external auditors; the June 30, 1998 Consolidated Reports
of Condition and Income for each of First Merchants' subsidiary banks; the
Consolidated Financial Statements for Bank Holding Companies (FR Y-9C); the Bank
Holding Company Performance Report for March 31, 1998; various asset quality
related reports; the most recent Allowance for Loan and Lease Loss analysis
reports for First Merchants and each affiliate bank; and independent internal
audit reports.
PBS reviewed and analyzed the historical performance of Anderson
contained in: audited Annual Reports and financial statements dated December 31,
1996 and 1997 of Anderson; December 31, 1997, March 31, 1998 and June 30, 1998
Consolidated Reports of Condition and Income filed by Anderson with the Federal
Deposit Insurance Corporation; December 31, 1997, March 31, 1998 and June 30,
1998 Uniform Bank Performance Reports of Anderson; historical common stock
trading activity of Anderson; and the premises and other fixed assets. PBS
reviewed and tabulated statistical data regarding the loan portfolio, securities
portfolio and other performance ratios and statistics. Financial projections
were prepared and analyzed as well as other financial studies, analyses and
investigations as deemed relevant for the purposes of this opinion. In review of
the aforementioned information, PBS took into account its assessment of general
market and financial conditions, its experience in other similar transactions,
and its knowledge of the banking industry generally.
In connection with rendering the Fairness Opinion and preparing its
written and oral presentation to Anderson's Board of Directors, PBS performed a
variety of financial analyses, including those summarized herein. The summary
does not purport to be a complete description of the analyses performed by PBS
in this regard. The preparation of a Fairness Opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. Accordingly, notwithstanding the separate factors summarized below,
PBS believes that its analyses must be considered as a whole and that selecting
portions of its analyses and of the factors considered by it, without
considering all analyses and factors, could create an incomplete view of the
evaluation process underlying its opinion. In performing its analyses, PBS made
numerous assumptions with respect to industry performance, business and economic
conditions and other matters, many of which are beyond Anderson's of First
Merchants' control. The analyses performed by PBS are not necessarily indicative
of actual values or future results, which may be significantly more or less
favorable than suggested by such analyses. In addition, analyses relating to the
values of businesses do not purport to be appraisals or to reflect the process
by which businesses actually may be sold.
ACQUISITION COMPARISON ANALYSIS: In performing this analysis, PBS
reviewed all bank acquisition transactions in the State of Indiana since 1990.
There were 65 bank acquisition transactions in Indiana announced since 1990 for
which detailed financial information was available. The purpose of the analysis
was to obtain an evaluation range based on these Indiana
21
<PAGE>
bank acquisition transactions. Median multiples of earnings and book value
implied by the comparable transactions were utilized in obtaining a range for
the acquisition value of Anderson. In addition to reviewing recent Indiana
bank transactions, PBS performed separate comparable analyses for
acquisitions of banks which, like Anderson, had an equity-to-asset ratio
between 10.00% and 12.00%, had total assets between $50.0 - $100.0 million,
had a return on average equity ("ROAE") between 12.00% - 14.00% and bank
transactions effected in Indiana since January 1, 1996. In addition, median
values for the 65 Indiana acquisitions expressed as multiples of both book
value and earnings were 1.70X and 17.87X, respectively. The median multiples
of book value and earnings for acquisitions of Indiana banks which, like
Anderson, had an equity-to-asset ratio between 10.00% and 12.00% were 1.70X
and 21.55X, respectively. For acquisitions of Indiana banks with assets
between $50.0 - $100.0 million, the median multiples were 1.69X and 16.42X.
For Indiana acquisitions of banks with a ROAE between 12.00% - 14.00%, the
median multiples of book value and earnings were 1.84X and 15.96X,
respectively. The median multiples of book value and earnings for
acquisitions of Indiana banks since January 1, 1996, were 2.20X and 24.12X,
respectively.
The Agreement provides that, in the proposed transaction, Anderson
shareholders will receive 1.38 shares of First Merchants common stock for each
Anderson common share outstanding, as further defined in the Agreement. On
October 15, 1998, the closing price for First Merchants common stock on the
National Association of Securities Dealers Automated Quotation System was $34.00
per share. Such price does not reflect the effect of the 3-for-2 stock split of
First Merchants common stock effected later in October, 1998. Using this closing
price of $34.00 per share of First Merchants common stock, the proposed
consideration to be received represents a value of $31.28 per share of Anderson
common stock. The $31.28 per share of Anderson common stock represents a
multiple of Anderson's adjusted June 30, 1998 book value and a multiple of
Anderson's 1998 budgeted net income of 2.65X and 20.17X, respectively.
The market value of the proposed transaction's percentile ranking was
prepared and analyzed with respect to the above Indiana comparable transaction
groups. Compared to all Indiana bank transactions, the acquisition value ranked
in the 94th percentile as a multiple of book value and in the 62nd percentile as
a multiple of earnings. Compared to Indiana bank transactions where the acquired
institution had an equity-to-asset ratio between 10.00% and 12.00%, the
acquisition value ranked in the 90th percentile as a multiple of book value and
the 27th percentile as a multiple of earnings. For Indiana bank acquisitions
where the acquired institution had between $50.0 - $100.0 million in assets, the
acquisition value ranked in the 100th percentile as a multiple of book value and
the 71st percentile as a multiple of earnings. For Indiana bank transactions
where the acquired institution had a ROAE between 12.00% and 14.00%, the
acquisition value ranked in the 80th percentile as a multiple of book value and
the 79th percentile as a multiple of earnings. For Indiana bank transactions
effected since January 1, 1996, the acquisition value ranked in the 79th
percentile as a multiple of book value and in the 24th percentile as a multiple
of earnings.
ADJUSTED NET ASSET VALUE ANALYSIS: PBS reviewed Anderson's balance
sheet data to determine the amount of material adjustments required to the
stockholders' equity of Anderson based on differences between the market value
of Anderson's assets and their value reflected on Anderson's financial
statements. PBS determined that two adjustments were warranted. Equity
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was decreased $21,000 to reflect the intangible assets of Anderson. PBS also
reflected a value of the non-interest bearing demand deposits of
approximately $2,257,000. The aggregate adjusted net asset value of Anderson
was determined to be $9,469,000 or $15.46 per share of Anderson common stock.
DISCOUNTED EARNINGS ANALYSIS: A dividend discount analysis was
performed by PBS pursuant to which a range of values of Anderson was determined
by adding (i) the present value of estimated future dividend streams that
Anderson could generate over a five-year period and (ii) the present value of
the "terminal value" of Anderson's earnings at the end of the fifth year. The
"terminal value" of Anderson's earnings at the end of the five-year period was
determined by applying a multiple of 17.87 times the projected terminal year's
earnings. The 17.87 multiple represents the median price paid as a multiple of
earnings for all Indiana bank transactions since 1990.
Dividend streams and terminal values were discounted to present values
using a discount rate of 12%. This rate reflects assumptions regarding the
required rate of return of holders or buyers of Anderson's common stock. The
aggregate value of Anderson, determined by adding the present value of the total
cash flows, was $18,551,000 or $30.30 per share. In addition, using the
five-year projection as a base, a twenty-year projection was prepared assuming
an annual growth rate of 10.0%, and a return on assets of 1.58% throughout the
analysis. Dividends were equal to 30.0% of income in years 1 through 8 and
increased to 50% of net income for the remaining periods. This long-term
projection resulted in an aggregate value of $18,156,000 or $29.65 per share of
Anderson common stock.
SPECIFIC ACQUISITION ANALYSIS: PBS valued Anderson based on an
acquisition analysis assuming a "break-even" earnings scenario to an acquiror as
to price, current interest rates and amortization of the premium paid. Based on
this analysis, an acquiring institution would pay in aggregate $13,150,000, or
$21.47 per share, assuming they were willing to accept no impact to their net
income in the initial year. This analysis was based on a funding cost of 6.5%
adjusted for taxes, amortization of the acquisition premium over 15 years and a
projected December 31, 1998 earnings level of $950,000. This analysis was
repeated assuming a potential acquiror would attain non-interest expense
reductions of 10% in the transaction. Based on this analysis, an acquiring
institution would pay in aggregate $14,142,000 or $23.09 per share of Anderson
common stock.
PRO FORMA MERGER ANALYSIS: PBS compared the historical performance of
Anderson to that of First Merchants and other regional holding companies. This
analysis included, among other things, a comparison of profitability, asset
quality and capital measures. In addition, the contribution of Anderson and
First Merchants to the income statement and balance sheet of the pro forma
combined company was analyzed.
The effect of the affiliation on the historical and pro forma financial
data of Anderson was prepared and analyzed. Anderson's historical financial data
was compared to the pro forma combined historical and projected earnings, book
value and dividends per share.
The Fairness Opinion is directed only to the question of whether the
consideration to be received by Anderson's shareholders under the Agreement is
fair and equitable from a financial
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perspective and does not constitute a recommendation to any Anderson
shareholder to vote in favor of the affiliation. No limitations were imposed
on PBS regarding the scope of its investigation or otherwise by Anderson.
Based on the results of the various analyses described above, PBS
concluded that the consideration to be received by Anderson's shareholders
under the Agreement is fair and equitable from a financial perspective to the
shareholders of Anderson.
PBS will receive fees of approximately $7,500 for all services performed
in connection with the rendering of the Fairness Opinion. In addition,
Anderson has agreed to indemnify PBS and its directors, officers and
employees, from liability in connection with the transaction, and to hold PBS
harmless from any losses, actions, claims, damages, expenses or liabilities
related to any of PBS' acts or decisions made in good faith and in the best
interest of Anderson.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF ANDERSON HAS CAREFULLY CONSIDERED AND
UNANIMOUSLY APPROVED THE AGREEMENT AND UNANIMOUSLY RECOMMENDS TO THE ANDERSON
SHAREHOLDERS THAT THEY ADOPT AND APPROVE THE AGREEMENT.
EXCHANGE OF ANDERSON COMMON STOCK
Under the terms of the Agreement, as of the effective date of the
merger, each outstanding share of Anderson common stock, other than shares as
to which dissenters' rights have been exercised, will be converted into the
right to receive 1.38 shares of First Merchants common stock.
The exact number of shares to be received by each Anderson shareholder
may be adjusted if First Merchants issues a stock dividend with respect to
its common stock, combines, subdivides or splits up its outstanding shares of
common stock or takes any similar recapitalization action. If any of these
events happen, the exact number of shares of First Merchants common stock
that you will receive will be adjusted so that you will receive such number
of First Merchants shares as represents the same percentage of outstanding
shares of First Merchants common stock at the time of consummation of the
merger as would have been represented by the number of shares you would have
received if such event(s) had not occurred.
No fractional shares of First Merchants common stock will be issued to
Anderson shareholders. Each shareholder who otherwise would be entitled to a
fractional interest in a First Merchants share as a result of the exchange
ratio will, upon surrender of all of the shareholder's certificates, promptly
receive cash for the fractional interest. The price of the fractional
interest will equal First Merchants' average closing price (as reported by
NASDAQ) for the five business days immediately preceding the effective date
of the merger.
After the effective date of the merger, stock certificates previously
representing Anderson common stock will represent only the right to receive
shares of First Merchants common stock and cash for any fractional shares,
or, in the case of dissenters, the right to receive cash. After the effective
date of the merger and until holders of Anderson common stock exchange their
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stock certificates for First Merchants certificates, they will not receive
First Merchants' dividends or other distributions. However, any accumulated
dividends or other distributions previously declared will be paid, without
interest, upon the exchange of Anderson stock certificates for those of First
Merchants. On the effective date of the merger, the stock transfer books of
Anderson will be closed and no transfer of shares of Anderson common stock
will thereafter be made. If, after the effective date, certificates
representing shares of Anderson common stock are presented for registration
or transfer, they will be cancelled and exchanged for shares of First
Merchants' common stock and cash, as applicable.
Distribution of stock certificates representing shares of First
Merchants common stock and cash payments for fractional shares will be made
to each former shareholder of Anderson within 10 days of the shareholder's
delivery of his or her certificates. Delivery of Anderson shares for
conversion will not be taken until after the effective date of the merger.
First Merchants Bank, National Association will act as conversion agent in
the merger. Instructions as to delivery of stock certificates will be sent to
each shareholder shortly after the effective date of the merger.
RIGHTS OF DISSENTING SHAREHOLDERS
The Indiana Financial Institutions Act ("IFIA") provides shareholders of
merging banks with certain dissenters' rights. The dissenters' rights of
Anderson shareholders are set forth in Section 28-1-7-21 of the IFIA, a copy
of which is attached to this Proxy Statement-Prospectus as Appendix B.
Shareholders will not be entitled to dissenters' rights absent strict
compliance with the procedures of Indiana law.
Section 28-1-7-21 of the IFIA provides that Anderson shareholders have
the right to demand payment in cash for the value of their shares immediately
before the merger becomes effective. To claim this right, a shareholder must
first:
1. deliver to Anderson before the vote is taken, written
notice of the shareholder's demand for payment in
cash for the shareholder's shares if the merger is
effectuated; AND
2. not vote in favor of the merger in person or by proxy.
Dissenting shareholders may send their written notice to James F. Ault,
Chairman of the Board, Anderson Community Bank, 19 West 10th Street,
Anderson, Indiana 46016.
If the merger is effected and a shareholder has complied with the above
conditions, First Merchants shall pay to the shareholder, upon surrender of
the stock certificates representing the shareholder's shares, the value of
the shareholder's shares as of the day before the date on which the vote was
taken approving the merger. Any shareholders failing to comply strictly with
the conditions described above will not be entitled to payment of the value
of their shares. Immediately after the merger is approved by the Anderson
shareholders, shareholders dissenting under this process will only be
entitled to payment of the value of their shares, will cease to be Anderson
shareholders, and are not entitled to exercise any rights as shareholders.
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Once a shareholder has made a demand for payment as described above,
such demand for payment may not be withdrawn unless Anderson consents to the
withdrawal. Therefore, shareholders should carefully consider their decision
to dissent from the merger before making demands for payment.
AN ANDERSON SHAREHOLDER WHO DOES NOT STRICTLY COMPLY WITH EACH OF THE
CONDITIONS DESCRIBED ABOVE WILL BE CONSIDERED NOT TO BE ENTITLED TO RIGHTS
UNDER SECTION 28-1-7-21 OF THE IFIA. SHAREHOLDERS WHO EXECUTE AND RETURN THE
ENCLOSED PROXY BUT DO NOT SPECIFY A CHOICE ON THE MERGER PROPOSAL WILL BE
DEEMED TO HAVE VOTED IN FAVOR OF THE MERGER AND ACCORDINGLY TO HAVE WAIVED
THEIR DISSENTERS' RIGHTS, UNLESS THE SHAREHOLDERS REVOKE THE PROXY PRIOR TO
ITS BEING VOTED.
If the merger is effected, First Merchants will, within 10 days after
the merger is effected, send a written notice stating the date the merger was
effected to those shareholders who have satisfied the above conditions. The
notice will also include a written offer to those shareholders to pay for the
shareholder's shares at a specified price considered to be the value of the
shares as determined by First Merchants.
Within 20 days after the merger is effected, the dissenting shareholder
must submit the stock certificates representing the shareholder's shares to
First Merchants for notation on the certificates that a demand for payment
has been made by the shareholder. At the option of First Merchants, the
failure of a shareholder to do so terminates the shareholder's rights to
dissent under the process described herein, unless a court directs otherwise.
If the value of the shares is agreed upon by the shareholder and First
Merchants within 30 days after the date on which the merger was effected,
First Merchants shall pay the value of the shares to the shareholder within
90 days after the date on which the merger was effected after the shareholder
has surrendered the shareholder's certificates representing the shares.
If the dissenting shareholder and First Merchants do not agree on the
value of the shares within 30 days after the merger is effected, then either
the dissenting shareholder or First Merchants may commence an action within
90 days after the merger is effected in the Circuit or Superior Court of
Madison County for a judicial determination of the value of the shares. Each
dissenter made a party to the action will be entitled to receive an amount
equal to the value of each dissenting share multiplied by the number of
dissenting shares that any dissenting shareholder owns. The value of the
shares is payable by First Merchants only upon endorsement and delivery of
the dissenting shareholders' stock certificates to the resulting bank. Any
party may appeal from the judgment by the court.
THE FOREGOING SUMMARY OF THE RIGHTS OF DISSENTING SHAREHOLDERS ADDRESSES
ALL MATERIAL FEATURES OF THE APPLICABLE INDIANA DISSENTERS' RIGHTS STATUTE
BUT DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY THE
STATUTORY PROVISION ATTACHED HERETO AS APPENDIX B.
A SHAREHOLDER'S FAILURE TO COMPLY WITH THE STATUTORY REQUIREMENTS FOR
EXERCISING DISSENTERS' RIGHTS WILL RESULT IN A LOSS OF SUCH RIGHTS AND
SHAREHOLDERS WHO MAY WISH TO EXERCISE DISSENTERS' RIGHTS SHOULD CONSIDER
SEEKING LEGAL COUNSEL.
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RESALE OF FIRST MERCHANTS COMMON STOCK BY ANDERSON AFFILIATES
Generally, no restrictions on the sale or transfer of the shares of
First Merchants common stock issued pursuant to the merger will be imposed
solely as a result of the merger. However, certain restrictions will apply to
the transfer of First Merchants' shares owned by any shareholder deemed an
Anderson "affiliate" under Rule 145 of the Securities Act of 1933, as amended
(the "SECURITIES ACT"). Directors, executive officers and 10% shareholders
are generally deemed to be affiliates for purposes of Rule 145.
The Agreement provides that Anderson will provide First Merchants with a
list identifying each affiliate of Anderson. The Agreement also requires that
each Anderson affiliate deliver to First Merchants, prior to the effective
date of the merger, a written transfer restriction agreement. The transfer
restriction agreement shall provide that the affiliate will not sell, pledge,
transfer or otherwise dispose or reduce such affiliate's market risk with
respect to the First Merchants common stock to be received:
1. during the period 30 days prior to the effective date of the
merger;
2. until such time as financial results covering at
least 30 days of combined operations of Anderson and
Pendleton have been published; and
3. unless done pursuant to an effective registration
statement under the Securities Act or pursuant to
Rule 145 or another exemption from the registration
requirements under the Securities Act.
The certificates representing First Merchants common stock issued to
Anderson affiliates in the merger may contain a legend indicating these
resale restrictions. IF YOU ARE AN AFFILIATE OF ANDERSON, YOU SHOULD CONFER
WITH LEGAL COUNSEL REGARDING THE TRANSFER RESTRICTIONS THAT MAY APPLY.
CONDITIONS TO CONSUMMATION OF THE MERGER
Consummation of the merger is conditioned upon, among other things, the
satisfaction of each of the following conditions:
1. the approval of the Agreement by the affirmative vote of the
holders of a majority of the outstanding shares of common stock
of Anderson;
2. the approval of the Agreement by First Merchants, as the sole
shareholder of Pendleton;
3. the registration of First Merchants common stock with
the Securities and Exchange Commission and the
receipt of all state securities and blue sky
approvals required for the offer and sale of First
Merchants common stock to Anderson shareholders;
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4. the receipt of all regulatory approvals required for the merger;
5. the receipt of an opinion of counsel with respect to certain
federal income tax matters;
6. the receipt by First Merchants of a letter from its
independent public accountants confirming its ability
to account for the merger as a "pooling of
interests"; and
7. the receipt by First Merchants of certain undertakings from
affiliates of Anderson.
Consummation of the merger is further conditioned upon both parties
receipt of certain officers' certificates and legal opinions, the accuracy of
representations and warranties contained in the Agreement and the fulfillment
of certain covenants set forth in the Agreement. The conditions to
consummation of the merger are requirements not subject to unilateral waiver
and may be altered only by the written consent of the parties. See "MERGER -
Resale of First Merchants Common Stock by Anderson Affiliates," "MERGER -
Opinion of Financial Advisor," "MERGER - Regulatory Approvals," "MERGER -
Interests of Certain Persons in the Merger," "FEDERAL INCOME TAX
CONSEQUENCES" and Appendix A.
TERMINATION; WAIVER; AMENDMENT
The Agreement may be terminated before the merger becomes effective
under the following conditions:
1. any of the parties makes a material misrepresentation in or
materially breaches the Agreement;
2. any of the parties reasonably determines that consummation of
the merger is inadvisable due to the commencement or threat
of material legal proceedings against one of the parties;
3. a material adverse change has occurred in the financial condition
or business of First Merchants or Anderson since June 30, 1998;
4. the merger will not constitute a tax-free reorganization under
the Internal Revenue Code of 1986;
5. the merger cannot be accounted for as a "pooling of interests";
6. certain information provided pursuant to the Agreement by
Anderson to First Merchants prior to consummation of the
merger has had or may have a material adverse effect on the
financial condition or business of Anderson;
7. consummation of the merger has not occurred by April 30, 1999;
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8. the occurrence of a merger, consolidation, share exchange, stock
transaction, or asset transaction in which First Merchants or
any of its subsidiary banks (including Pendleton) are acquired
by a third party, or First Merchants enters into an agreement for
such a transaction or such a transaction is publicly disclosed;
9. Anderson furnishes information or enters into discussions or
negotiations with a third party relating to a proposed
acquisition of Anderson, Anderson fails to give First Merchants
written notice of any such intention, or Anderson's Board of
Directors withdraws or modifies its recommendation to Anderson
shareholders to vote for the merger following receipt of a
proposal for an acquisition from a third party;
10. Anderson's Board of Directors terminates the Agreement in the
exercise of its fiduciary duties after receipt of an unsolicited
acquisition proposal from a third party; or
11. any of the conditions to completion of the merger cannot be
satisfied by April 30, 1999.
Upon termination for any of these reasons, the Agreement will be void
and of no further force or effect. However, if any party to the Agreement
willfully breaches any of the provisions of the Agreement, then the other
party to the Agreement shall be entitled to recover appropriate damages for
such breach. In addition, in the event First Merchants or Pendleton
terminates the Agreement after Anderson takes the action described in item 9
above or Anderson terminates the Agreement in accordance with item 10 above,
Anderson is required to pay First Merchants $750,000 as liquidated damages to
reimburse First Merchants for the considerable time and expense invested and
to be invested by First Merchants in furtherance of the Agreement and the
merger.
The parties can agree to amend the Agreement and can waive their right
to require the other party to adhere to the terms and conditions of the
Agreement, where the law allows. However, no amendment is permissible after
the Anderson shareholders approve the merger if the amendment or waiver would
have a material adverse effect on the Anderson shareholders.
RESTRICTIONS AFFECTING ANDERSON
The Agreement contains certain restrictions regarding the conduct of
business of Anderson. Among other items, Anderson may not, without the prior
written consent of First Merchants, materially change its capital structure,
issue stock, declare or pay any dividends or make any other distribution to
its shareholders. Notwithstanding the above, the Agreement requires that
certain options be exercised by the officers, directors and employees of
Anderson and that the related shares of Anderson common stock be issued
before the effective date of the merger to such persons.
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REGULATORY APPROVALS
The merger is subject to the prior approval requirements of the Indiana
Financial Institutions Act and the Bank Merger Act, Section 18(c) of the
Federal Deposit Insurance Act. Applications thereunder have been filed with
the Indiana Department of Financial Institutions ("INDIANA DEPARTMENT") and
with the Federal Deposit Insurance Corporation ("FDIC"). In reviewing the
Indiana Department application, the Indiana Department considers various
factors including:
1. the managerial and financial resources of First Merchants and
Pendleton;
2. whether First Merchants' subsidiaries, First Merchants Bank,
National Association, Pendleton, First United Bank, The Union
County National Bank of Liberty and The Randolph County Bank,
have met, and propose to continue to meet, the credit needs of
their communities; and
3. whether the interests of depositors, creditors, and the public
generally are jeopardized by the transaction.
In reviewing the FDIC application, the FDIC takes into consideration
various factors including applicable capital requirements, the financial and
managerial resources and future prospects of Pendleton and Anderson, as well
as the competitive effects of the acquisition and the convenience and needs
of the communities served by Anderson and Pendleton. The FDIC may not approve
a transaction if it finds that the effect of the transaction substantially
lessens competition, tends to create a monopoly or results in a restraint of
trade, unless the FDIC finds that the anti-competitive effects of the
proposed transaction are outweighed by the public interest and the probable
effect of the transaction in meeting the convenience and needs of the
communities to be served.
After the FDIC's approval is received, the merger cannot be consummated
for 30 days, during which time the United States Attorney General has the
authority to challenge the merger on antitrust grounds. With the approval of
the FDIC and the Attorney General, the waiting period can be reduced.
Any approvals that may be received from the Indiana Department and the
FDIC are not to be interpreted as the opinion of those regulatory authorities
that the merger is favorable to the shareholders of Anderson from a financial
point of view or that those regulatory authorities have considered the
adequacy of the terms of the merger. The approvals in no way constitute an
endorsement or a recommendation of the merger by the Indiana Department or
the FDIC.
EFFECTIVE DATE OF THE MERGER
The merger will become effective in the month in which the last required
approval to consummate the merger is received or, if later, in which any
applicable waiting period following an approval expires. First Merchants,
Pendleton and Anderson currently anticipate that the effective date of the
merger will occur during the first quarter of 1999.
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MANAGEMENT AFTER THE MERGER
Pendleton will be the surviving corporation in the merger and Anderson's
separate existence will cease. Accordingly, the directors and officers of
Anderson will no longer serve in such capacities after the effective date of
the merger. However, the Board of Directors of the resulting bank after the
merger shall consist of all of the current members of the Board of Directors
of Anderson and the Board of Directors of Pendleton who desire to serve on
such Board.
Anderson's directors serving on the Board of Directors of the resulting
bank will become subject to First Merchants' policy of mandatory retirement
at age 70; provided, however, the policy of mandatory retirement will not
apply to any of Anderson's current directors until 12 months after the
merger. Any members of the Board of Directors of the resulting bank subject
to such mandatory retirement policy may be designated as directors emeritus
to serve in an advisory non-voting capacity. The Chairman of the Board of
Directors of Anderson, James F. Ault, will serve as the Chairman of the Board
of Directors of the resulting bank. The Chairman of the Board of Directors of
Pendleton, George R. Likens, will serve as the Vice-Chairman of the Board of
Directors of the resulting bank.
The officers of Pendleton and Anderson immediately prior to the merger
shall continue as officers of the resulting bank in various positions. The
current President of Anderson, Michael L. Baker, shall serve as the President
and Chief Executive Officer of the resulting bank.
In accordance with the Agreement, First Merchants shall cause all
necessary action to be taken to cause the current Chairman of the Board of
Anderson, James F. Ault, to be nominated for election as a member of the
First Merchants Board of Directors for a three year term at the first annual
meeting of First Merchants' shareholders following the merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain of the directors and officers of Anderson have interests in the
merger other than their interests as Anderson shareholders, pursuant to
certain agreements and understandings. Those agreements and understandings
are as follows:
First Merchants has agreed that it will cause the current Chairman of
the Board of Anderson, James F. Ault, to be nominated for election to the
First Merchants Board of Directors for a three year term at the first annual
meeting of First Merchants' shareholders following the merger.
The officers and directors of Anderson will remain officers and
directors of the resulting bank after the merger. The current President of
Anderson, Michael L. Baker, shall serve as the President and Chief Executive
Officer of the resulting bank. The current Chairman of the Board of Directors
of Anderson, James F. Ault, will serve as the Chairman of the Board of
Directors of the resulting bank.
In connection with the merger, it is anticipated that Michael L. Baker,
Bradley K. Condon, and Michael E. Stephens, the President and Chief Executive
Officer, Senior Vice
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President, and Senior Vice President, respectively, of Anderson will enter
into written employment agreements with the resulting bank after the merger.
In general, such employment agreements for Messrs. Baker, Condon and
Stephens shall provide for employment for a period of five (5) years as an
officer of First Merchants or as an officer of any of First Merchants'
subsidiaries (including the resulting bank) with such title and duties as
determined by the Board of Directors of First Merchants or the Board of
Directors of any respective subsidiary. As an employee, each such individual
shall be entitled to a base salary which is not less than their base salary
paid by Anderson at the time of execution of the Agreement and participation
in all other employee benefit programs offered by First Merchants to other
employees in similar positions. In addition, Messrs. Baker, Condon and
Stephens shall be entitled to receive deferred compensation in the amount of
$50,000, $37,500, and $37,500, respectively, per year for the first five (5)
years of the employment agreement payable at the end of each year if the
individual is still employed by First Merchants or any of First Merchants'
subsidiaries.
These employment agreements may be terminated prior to expiration of the
five (5) year term upon the death or disability of the employee, by First
Merchants or any of First Merchants' subsidiaries employing the employee with
or without cause, or by the employee. The employee shall have different
rights and obligations depending upon the cause of termination of the
employment agreement. Upon the occurrence of certain circumstances set forth
in the employment agreement, each such employee shall be prohibited from
working in an office or branch of a commercial banking institution located in
Madison County, Indiana during the employee's employment by First Merchants
or any of First Merchants' subsidiaries and for a period of one (1) year
after termination of such employment.
The members of the Anderson Board of Directors knew about those
additional interests, and considered them, when they approved the Agreement.
STOCK OPTIONS
Pursuant to the terms of the Agreement, the officers, directors and
employees of Anderson holding options to purchase Anderson common stock are
required to exercise such options prior to consummation of the merger.
ACCOUNTING TREATMENT
The merger is expected to qualify as a "pooling of interests" for
accounting and financial reporting purposes. It is a condition of the merger
that First Merchants shall have received a letter from its independent
accountants to the effect that, in their opinion, the merger will qualify as
a pooling of interests transaction under generally accepted accounting
principles. Olive, LLP are the independent accountants for First Merchants.
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REGISTRATION STATEMENT
First Merchants has filed a Registration Statement on Form S-4 with the
Securities and Exchange Commission registering under the Securities Act the
shares of First Merchants common stock to be issued pursuant to the merger.
First Merchants common stock, for so long as it is listed on the NASDAQ
National Market System, is exempt from the statutory registration
requirements of each state in the United States. Therefore, First Merchants
has not taken any steps to register its stock under those statutes.
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FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING DISCUSSION SUMMARIZES CERTAIN FEDERAL INCOME TAX ASPECTS OF THE
MERGER. THE DISCUSSION DOES NOT PURPORT TO COVER ALL FEDERAL INCOME TAX
CONSEQUENCES RELATING TO THE MERGER AND DOES NOT CONTAIN ANY INFORMATION WITH
RESPECT TO STATE, LOCAL OR OTHER TAX LAWS.
The merger is expected to qualify as a reorganization under Section
368(a) of the Internal Revenue Code of 1986, as amended (the "CODE"). As
such, the following is a summary of the federal income tax consequences that
will result:
1. No gain or loss will be recognized by Anderson shareholders
who exchange all of their Anderson common stock for First
Merchants common stock pursuant to the merger, except to the
extent of gain or loss attributable to any cash received in
lieu of receipt of a fractional share of First Merchants
common stock;
2. The basis of First Merchants common stock received (including
any fractional share interests deemed received) by Anderson
shareholders who exchange all of their Anderson common stock
for First Merchants common stock will be the same as the basis
of the Anderson common stock surrendered in exchange therefor;
3. The holding period of the First Merchants common stock
received (including any fractional share interests deemed
received) by Anderson shareholders who exchange all of their
Anderson common stock for First Merchants common stock will
include the period during which the Anderson common stock was
held, provided the Anderson common stock was held as a capital
asset on the date of the exchange;
4. Where a cash payment is received by an Anderson shareholder in
lieu of fractional shares of First Merchants common stock, the
cash payment will be treated as a distribution in redemption
of the deemed fractional share interest, subject to the
provisions and limitations of Section 302 of the Code. Where
such exchange qualifies under Section 302(a) of the Code, such
shareholder will recognize a capital gain or loss provided
that the Anderson common stock was held as a capital asset on
the date of the merger;
5. Any Anderson shareholder who perfects dissenter's rights and
receives solely cash in exchange for his or her Anderson
common stock shall be treated as having received such cash as
a distribution in redemption of the Anderson common stock
subject to the provisions and limitations of Section 302 of
the Code. Where such exchange qualifies under Section 302(a)
of the Code, such shareholder will recognize a capital gain or
loss provided that the Anderson common stock was held as a
capital asset as of the exchange. Under Section 1001 of the
Code, gain or loss (subject to any applicable limitations of
the Code) will be realized and recognized by such Anderson
shareholder in an amount equal to the difference between the
redemption price and the adjusted basis of the Anderson common
stock surrendered in exchange therefor;
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6. No gain or loss will be recognized by Anderson, Pendleton or
First Merchants in connection with the transaction; and
7. The basis of the assets of Anderson acquired by Pendleton in
the merger will be the same as the basis of such assets in the
hands of Anderson immediately prior to the merger.
8. First Merchants' basis in Pendleton stock will be equal to its
prior basis in Pendleton stock plus the net basis of the
assets of Anderson acquired in the merger.
Receipt of an opinion of tax counsel with respect to the above is a
condition precedent to consummation of the merger. The tax opinion will be
based upon representations made by the management of First Merchants,
Pendleton and Anderson. The opinion will not however be binding on the
Internal Revenue Service which could take a different view. No ruling has
been sought from the Internal Revenue Service regarding the tax-free nature
of the merger.
THE FOREGOING IS ONLY A GENERAL DESCRIPTION OF THE MATERIAL FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT CONSIDER THE FACTS AND
CIRCUMSTANCES OF ANY PARTICULAR ANDERSON SHAREHOLDER. EACH SHAREHOLDER SHOULD
CONSULT WITH HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF EXISTING
AND PROPOSED FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
35
<PAGE>
COMPARATIVE PER SHARE DATA
NATURE OF TRADING MARKET
Shares of First Merchants common stock are traded in the
over-the-counter market and share prices are reported by the NASDAQ National
Market System under the symbol FRME. On August 19, 1998, the business day
immediately preceding the public announcement of the merger, the closing
price of First Merchants common stock was $27.33 per share (as adjusted to
take into account a 3-for-2 stock split of First Merchants common stock
effected in October, 1998). On ____________, 1999, the closing price of First
Merchants common stock was $______ per share. The following table sets forth,
for the periods indicated, First Merchants' high and low closing prices per
share. Prices reflect inter-dealer prices without retail mark-up, mark-down
or commission, and may not represent the actual transaction. All prices have
been adjusted to give effect to stock dividends and stock splits.
<TABLE>
<CAPTION>
1996 HIGH LOW
- ---- ---- ---
<S> <C> <C>
First Quarter $18.33 $16.67
Second Quarter $18.33 $16.33
Third Quarter $17.33 $15.50
Fourth Quarter $17.83 $16.04
1997
- ----
First Quarter $20.00 $16.83
Second Quarter $20.50 $18.50
Third Quarter $21.59 $20.00
Fourth Quarter $25.33 $21.42
1998
- ----
First Quarter $27.67 $23.83
Second Quarter $31.17 $26.17
Third Quarter $30.83 $21.67
</TABLE>
There is no established public trading market for shares of Anderson
common stock. Most trades are isolated and occur after private negotiations,
with the result that management of Anderson is not directly informed of
trades or prices. The best information available to Anderson's management
indicates that in 1996, 1997 and 1998, the following number of shares of
Anderson common stock were traded in the number of transactions and for
prices to be within the ranges set forth below:
<TABLE>
<CAPTION>
Number of Sales Price
Shares Number of -----------
Year Traded Transactions High Low
---- ------ ------------- ---- ---
<S> <C> <C> <C> <C>
1996 0 0 $ 0.00 $ 0.00
1997 2,000 3 10.50 10.50
1998 15,727 16 13.25 12.00
(through September 30, 1998)
</TABLE>
36
<PAGE>
Management of Anderson has not verified the accuracy of the above
prices. Further, the prices may not be a reliable indicator of the price at
which more than a limited number of shares of Anderson common stock would
trade and there may have been additional shares of Anderson common stock
traded at higher or lower prices of which Anderson's management is unaware.
The last trade of Anderson common stock, of which Anderson's management is
aware, occurred on or about April 10, 1998 and involved the sale of 127
shares at a price which, to the best of Anderson management's knowledge, was
approximately $13.25 per share.
As of ________________, 199__, there were approximately ____ holders of
First Merchants common stock and approximately 198 holders of Anderson common
stock, not including individual participants in security position listings.
DIVIDENDS
The following table sets forth the per share cash dividends declared on
shares of First Merchants common stock and Anderson common stock since
January 1, 1996. All dividends have been adjusted to give effect to stock
dividends and stock splits.
<TABLE>
<CAPTION>
First Merchants Anderson
1996 Common Stock (1) Common Stock (2)
- ---- ---------------- ----------------
<S> <C> <C>
First Quarter $0.13 $0.00
Second Quarter $0.13 $0.00
Third Quarter $0.16 $0.00
Fourth Quarter $0.16 $0.00
1997
- ----
First Quarter $0.16 $0.00
Second Quarter $0.16 $0.00
Third Quarter $0.19 $0.00
Fourth Quarter $0.19 $0.00
1998
- ----
First Quarter $0.19 $0.00
Second Quarter $0.19 $0.00
Third Quarter $0.20 $0.00
</TABLE>
(1) There can be no assurance as to the amount of future dividends that may
be declared or paid on shares of First Merchants common stock since
dividend policies are subject to the discretion of the Board of
Directors of First Merchants, general business conditions and dividends
paid to First Merchants by its affiliate banks. For certain
restrictions on the payment of dividends on shares of First Merchants
common stock, see "COMPARISON OF COMMON STOCK--Dividend Rights."
(2) Anderson has never declared and paid dividends to its shareholders.
Furthermore, in accordance with the terms of the Agreement, Anderson
may not declare, distribute or pay any dividends on its shares of
common stock from the date of the Agreement through the date of
consummation of the merger without the approval of First Merchants.
37
<PAGE>
DESCRIPTION OF FIRST MERCHANTS
BUSINESS
First Merchants was incorporated under Indiana law on September 20, 1982
as the bank holding company for First Merchants Bank, National Association, a
national banking association incorporated on February 6, 1893. On November
30, 1988, First Merchants acquired Pendleton, a state chartered commercial
bank organized in 1872. On July 31, 1991, First Merchants acquired First
United Bank, a state chartered commercial bank organized in 1882. On August
1, 1996, First Merchants acquired The Union County National Bank of Liberty,
a national banking association organized in 1872. On October 2, 1996, First
Merchants acquired The Randolph County Bank, a state chartered commercial
bank organized in 1865.
First Merchants is headquartered in Muncie, Indiana and is presently
conducting commercial banking business through the 26 offices of its five
bank subsidiaries. These commercial banking activities include accepting
demand, savings and time deposits; making agricultural, commercial,
industrial, consumer and real estate loans; installment credit lending;
collections, safe deposit operations, performing fiduciary and trust
services; and providing other services relating to the general banking
business.
First Merchants' bank subsidiaries make and service both secured and
unsecured loans to individuals, firms and corporations. Their installment
loan departments make direct loans to individuals and purchase installment
obligations from retailers without recourse. In addition, First Merchants'
subsidiaries make a variety of residential, industrial, commercial and
agricultural loans.
First Merchants is also conducting an insurance agency business through
First Merchants Insurance Services, Inc., a wholly-owned subsidiary of
Pendleton. First Merchants Insurance Services, Inc. commenced operations in
1998.
ACQUISITION POLICY AND PENDING TRANSACTIONS
First Merchants anticipates that it will continue its policy of
geographic expansion through acquisitions of additional financial
institutions. First Merchants' management periodically reviews and analyzes
potential acquisitions. As of the date of this Proxy Statement-Prospectus,
First Merchants is a party to a definitive agreement pursuant to which Jay
Financial Corporation will merge into First Merchants. As a result of the
merger, The First National Bank of Portland will become a wholly-owned
subsidiary of First Merchants. Jay Financial Corporation's and The First
National Bank of Portland's principal executive offices are located in
Portland, Indiana. As of September 30, 1998, Jay Financial Corporation had
assets of approximately $108.6 million, deposits of approximately $88.9
million, shareholders' equity of approximately $14.7 million and net income
for the nine month period then ended of approximately $1 million.
38
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
Additional information concerning First Merchants is included in the
First Merchants documents incorporated by reference in this Proxy
Statement-Prospectus. Shareholders desiring copies of such documents may
contact First Merchants at its address or telephone number indicated under
"WHERE YOU CAN FIND ADDITIONAL INFORMATION."
39
<PAGE>
DESCRIPTION OF PENDLETON
BUSINESS
Pendleton is a state chartered commercial bank organized in 1872.
Pendleton's principal office is located in Pendleton, Indiana. Pendleton
provides various commercial and consumer banking services to its customers
located primarily in Madison County, Indiana. These services include
accepting demand, savings and time deposits; making commercial, consumer and
real estate loans; administering trusts and estates; and providing other
services relating to the general banking business, such as, for example, safe
deposit facilities.
Pendleton is also conducting an insurance agency business through First
Merchants Insurance Services, Inc., a wholly-owned subsidiary of Pendleton.
First Merchants Insurance Services, Inc. commenced operations in 1998.
PROPERTIES
The main office of Pendleton is located at 100 West State Street,
Pendleton, Indiana. Pendleton also operates five branches with a branch
located in each of Pendleton, Indiana, Anderson, Indiana, Ingalls, Indiana,
Lapel, Indiana, and Markleville, Indiana. The main office and all of the
branches are owned by Pendleton. First Merchants Insurance Services, Inc.,
the wholly-owned subsidiary of Pendleton, has its main office at 200 East
Jackson Street, Muncie, Indiana at the offices of First Merchants.
LITIGATION
There is no pending litigation of a material nature in which Pendleton
is a party or in which any of its property is subject, other than ordinary
routine litigation incidental to the normal business of Pendleton. Further,
there is no material legal proceeding in which any director, executive
officer, principal shareholder or associate of any such director, executive
officer, principal shareholder or affiliate is a party or has a material
interest adverse to Pendleton. None of the ordinary routine litigation in
which Pendleton is involved is expected to have a material adverse impact
upon the financial condition or results of operation of Pendleton.
EMPLOYEES
As of September 30, 1998, Pendleton had 42 full-time equivalent
employees to whom it provides a variety of benefits. Management of Pendleton
considers its relations with its employees to be good.
MANAGEMENT
The following table contains certain information about each director and
executive officer of Pendleton as of the date of this Proxy
Statement-Prospectus:
40
<PAGE>
DIRECTORS:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION FOR SERVED AS DIRECTOR
NAME AGE LAST 5 YEARS CONTINUOUSLY SINCE
---- --- ------------ ------------------
<S> <C> <C> <C>
George R. Likens 56 Farmer 1985
Larry R. Helms 58 Senior Vice President, Secretary and General 1989
Counsel of First Merchants and Senior Vice
President of First Merchants Bank, N.A.
Attorney at Law and Partner at Baker &
John S. Keeler 49 Daniels 1976
Attorney at Law
Joseph Kilmer 53 1989
President of Pendleton
Norman Locke 57 1991
Attorney at Law and President of Madison
G. Douglass Owens 65 County Abstract and Title Corporation 1963
Curtis L. Stephenson 38 Owner of Pendleton Insurance Co., Inc. 1995
</TABLE>
EXECUTIVE OFFICERS:
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C> <C>
George R. Likens 56 Chairman of the Board of Directors of Pendleton since 1993
Norman Locke 57 President of Pendleton since 1993
Ed Armantrout 43 Vice President of Pendleton since 1993
</TABLE>
All of Pendleton's directors and executive officers hold office for a
term of one year or until their respective successors are duly elected and
qualified. There are no arrangements or understandings between any of the
directors or executive officers and any other persons according to which any
of Pendleton's directors or executive officers have been selected for their
respective positions.
41
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following is a summary of the amount and percent of First Merchants
common stock beneficially owned on October 31, 1998, by each director of
Pendleton, by each executive officer of Pendleton, and by all directors and
executive officers as a group. Unless otherwise noted, the beneficial owner
has sole voting and investment power.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS
---------------- ----------------------- ----------------
<S> <C> <C>
Ed Armantrout 184 *
Larry R. Helms 32,783 (2) *
John S. Keeler 33,024 *
Joseph Kilmer 13,126 (3) *
George R. Likens 26,983 *
Norman Locke 19,239 (4) *
G. Douglass Owens 32,252 (5) *
Curtis L. Stephenson 33 *
Directors and Executive Officers 157,624 1.56%
as a Group (8 Individuals)
</TABLE>
(1) The information contained in this column is based upon information
furnished to Pendleton by the persons and entities named above and
shareholder records of First Merchants. The shares shown include the
following shares which may be acquired within the 60 day period
following October 31, 1998 under a stock option plan by the executive
officers of First Merchants and Pendleton named above: Mr. Helms,
17,924 shares; and Mr. Locke, 14,737 shares. The shares shown for
directors and executive officers as a group include 32,661 shares which
may be acquired within the 60 day period following October 31, 1998
under a stock option plan.
(2) Includes 14,859 shares held jointly with Mr. Helms' spouse.
(3) Includes 1,903 shares held in the name of Mr. Kilmer's wife. Mr.
Kilmer also owns 1,900 shares of common stock of Anderson.
(4) Includes 4,180 shares held jointly with Mr. Locke's spouse.
42
<PAGE>
(5) Includes 16,771 shares held in the estate of Mr. Owens' wife for which
Mr. Owens is the personal representative, 15,253 shares held in
Mr. Owens' wife's trust, 60 shares held in the name of Jonathan D.
Owens with Mr. Owens as custodian, 52 shares held in the name of
Katrina H. Owens with Mr. Owens as custodian, and 7 shares held
in the name of Zayda D. Owens with Mr. Owens as custodian. Mr. Owens
also owns 1,000 shares of common stock of Anderson.
* Percentage beneficially owned is less than 1% of the outstanding
shares.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain directors and executive officers of Pendleton are customers of
and have had transactions with Pendleton from time to time in the ordinary
course of business. Similar transactions may be expected to take place in the
ordinary course of business in the future. All loans included in such
transactions were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons and do not involve more than the normal risk
of collectibility or present other unfavorable features.
43
<PAGE>
DESCRIPTION OF ANDERSON
BUSINESS
Anderson is a state chartered commercial bank organized in 1995.
Anderson's principal office is located in Anderson, Indiana. Anderson
provides various commercial and consumer banking services to its customers
located primarily in Madison County, Indiana. These services include
accepting demand, savings and time deposits; making commercial, consumer and
real estate loans; administering trusts and estates; and providing other
services relating to the general banking business, such as, for example, safe
deposit facilities.
PROPERTIES
The main office of Anderson is located at 19 West 10th Street, Anderson,
Indiana. Anderson also operates three branches located in Anderson, Indiana.
The main office and one branch of Anderson are leased; the other two branches
of Anderson are owned by Anderson.
LITIGATION
There is no pending litigation of a material nature in which Anderson is
a party or in which any of its property is subject, other than ordinary
routine litigation incidental to the normal business of Anderson. Further,
there is no material legal proceeding in which any director, executive
officer, principal shareholder or associate of any such director, executive
officer, principal shareholder or affiliate is a party or has a material
interest adverse to Anderson. None of the ordinary routine litigation in
which Anderson is involved is expected to have a material adverse impact upon
the financial condition or results of operation of Anderson.
EMPLOYEES
As of September 30, 1998, Anderson had 26 full-time equivalent
employees to whom it provides a variety of benefits. Management of Anderson
considers its relations with its employees to be good.
MANAGEMENT
The following table contains certain information about each director and
executive officer of Anderson as of the date of this Proxy
Statement-Prospectus:
44
<PAGE>
DIRECTORS:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION FOR SERVED AS DIRECTOR
NAME AGE LAST 5 YEARS CONTINUOUSLY SINCE
---- --- ------------ ------------------
<S> <C> <C> <C>
James F. Ault 63 Chairman of the Board of Directors of Anderson, 1995
Retired executive of General Motors Corporation
Michael L. Baker 38 President and Chief Executive Officer of Anderson 1995
R. Glenn Falls 77 Investment Counselor at Anderson University
Edward L. Foggs 64 Executive Director of Leadership Council of the 1995
Church of God, Inc. and Trustee of Community
Hospital of Madison County
William H. Hardacre 67 Self-employed real estate developer 1995
Jeffrey A. Jenness 43 Executive Secretary, Treasurer and Chief Executive 1995
Operator of Board of Pensions of the Church of
God, Inc.
C. David Kleinhenn 47 Chief Executive Officer of Kleinhenn Company, Inc. 1995
and President and Chief Executive Operator of Duo
Company, Inc.
Herbert G. Likens 54 Farmer and Owner of Likens Farm, Inc. 1996
Robert J. Pensec 56 President of Carbide Grinding Co., Inc. 1995
Eric R. Retrum 48 Physician with Madison County Imaging, P.C. 1995
Kurt Retrum 45 Physician with Madison County Imaging, P.C. 1995
Stephen D. Skaggs 46 Vice President of Perfecto Tool & Engineering Co., 1995
Inc.
Leland R. Symonds 99 Retired from Emge Packing Co., Inc. 1995
</TABLE>
45
<PAGE>
EXECUTIVE OFFICERS:
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- -------
<S> <C> <C>
James F. Ault 63 Chairman of the Board of Directors of Anderson since 1995
Jeffrey A. Jenness 42 Vice Chairman of the Board of Directors of Anderson since 1995 and
Executive Secretary, Treasurer, and Chief Executive Operator of
Board of Pensions of the Church of God, Inc. since 1994
Michael L. Baker 38 President and Chief Executive Officer of Anderson since 1995
Bradley K. Condon 34 Senior Vice President of Anderson since 1995
Michael E. Stephens 45 Senior Vice President and Cashier of Anderson since 1995
</TABLE>
All of Anderson's directors and executive officers hold office for a
term of one year or until their respective successors are duly elected and
qualified. There are no arrangements or understandings between any of the
directors or executive officers and any other persons according to which any
of Anderson's directors or executive officers have been selected for their
respective positions.
For a discussion concerning interests which certain officers and
directors of Anderson have in the merger other than their interests as
Anderson shareholders, see "MERGER - Interests of Certain Persons in the
Merger."
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following is a summary of the amount and percent of Anderson's
common stock beneficially owned on October 31, 1998, by each beneficial owner
of more than five percent of Anderson's common stock, by each director of
Anderson, by each executive officer of Anderson, and by all directors and
executive officers as a group. Unless otherwise noted, the beneficial owner
has sole voting and investment power.
46
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS
---------------- ----------------------- ----------------
<S> <C> <C>
James F. Ault 13,997 (2) 2.29%
Michael L. Baker 12,162 (3) 1.99%
Bradley K. Condon 3,000 (4) *
R. Glenn Falls 8,437 (5) 1.38%
Edward L. Foggs 2,760 (6) *
William H. Hardacre 8,410 (7) 1.37%
Jeffrey A. Jenness 14,860 (8) 2.43%
C. David Kleinhenn 11,207 1.83%
Herbert G. Likens 360 *
Robert J. Pensec 70,776 11.56%
Eric R. Retrum 46,189 (9) 7.54%
Kurt Retrum 33,436 (10) 5.46%
Stephen D. Skaggs 7,738 (11) 1.26%
Michael E. Stephens 6,675 (12) 1.09%
Leland R. Symonds 56,325 9.20%
Directors and Executive Officers 296,332 48.39%
as a Group (15 Individuals)
</TABLE>
(1) The information contained in this column is based upon information
furnished to Anderson by the persons and entities named above and
shareholder records of Anderson. All numbers and percentages are
presented fully diluted to include unexercised options to purchase in
the aggregate of 22,650 shares of Anderson's common stock.
(2) Includes 9,000 shares held jointly with Mr. Ault's spouse.
47
<PAGE>
(3) Includes 750 shares held jointly with by Mr. Baker's spouse and 5,262
shares held by Mr. Baker in his self-directed IRA. Also includes
options to purchase 5,650 shares.
(4) Includes 1,250 shares held jointly with Mr. Condon's spouse, and
options to purchase 750 shares.
(5) Includes options to purchase 660 shares.
(6) Includes 2,000 shares held by Dr. Foggs in his self-directed IRA and
options to purchase 660 shares.
(7) Includes options to purchase 2,410 shares.
(8) Includes 6,000 shares held by Mr. Jenness in his self-directed IRA,
and options to purchase 7,860 shares.
(9) Includes 8,000 shares for which Dr. Eric Retrum is acting as custodian
for his four children.
(10) Includes 10,000 shares for which Dr. Kurt Retrum is acting as
custodian for his four children.
(11) All 7,738 shares are held jointly with Mr. Skaggs' spouse.
(12) Includes 500 shares held jointly with Mr. Stephens' spouse and 3,675
shares owned by Mr. Stephens in his self-directed IRA. Also includes
options to purchase 2,500 shares.
* Percentage beneficially owned is less than 1% of the outstanding
shares.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain directors and executive officers of Anderson are customers of
and have had transactions with Anderson from time to time in the ordinary
course of business. Similar transactions may be expected to take place in the
ordinary course of business in the future. All loans included in such
transactions were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons and do not involve more than the normal risk
of collectibility or present other unfavorable features.
48
<PAGE>
ANDERSON MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar
amounts in thousands, except per share data)
THE FOLLOWING DISCUSSION AND ANALYSIS REVIEWS THE OPERATING RESULTS AND
FINANCIAL CONDITION OF ANDERSON. THIS DISCUSSION SHOULD BE READ IN
CONJUNCTION WITH THE FINANCIAL STATEMENTS, NOTES THERETO AND OTHER FINANCIAL
INFORMATION PRESENTED THEREIN WHICH ARE INCLUDED IN THIS PROXY
STATEMENT-PROSPECTUS.
CERTAIN STATEMENTS IN THIS SECTION CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934. SUCH FORWARD-LOOKING STATEMENTS INVOLVE
KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE
ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF ANDERSON TO DIFFER MATERIALLY
FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY
SUCH FORWARD-LOOKING STATEMENTS.
Anderson conducts business from four offices in Anderson, Indiana in Madison
County, Indiana. Anderson provides a range of commercial and personal banking
activities, including accepting individual and commercial deposits and making
commercial, mortgage and consumer loans.
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
RESULTS OF OPERATIONS
NET INCOME
Anderson earned $625, or $1.08 per share, for 1997 compared to $232, or $.42
per share, for 1996. This increase was driven by increased net interest
income which more than offset higher operating expenses during 1997.
Return on average assets (ROA) was 1.19% and .66% for 1997 and 1996, while
return on average equity (ROE) was 10.36% and 4.33% for those same periods.
NET INTEREST INCOME
Net interest income is the most significant component of Anderson's earnings.
Net interest income is the difference between interest and fees realized on
earning assets, primarily loans, securities and short-term investments and
interest paid on deposits. The net interest margin is this difference
expressed as a percentage of average earning assets. Net interest income is
determined by several factors, including the volume of earning assets and
liabilities, the mix of earning assets and liabilities, and interest rates.
For 1997, net interest income was $2,403, representing a $902, or 60.1%
increase over 1996 net interest income of $1,501. The increase in net
interest income for 1997 resulted from the continued growth of Anderson.
49
<PAGE>
Total interest income for 1997 was $1,525, or 55.4%, greater than in 1996.
Interest and fees on loans increased $1,421, or 60.4%, to $3,774 for 1997,
compared to $2,353 for 1996. Significant growth in Anderson's loan portfolio
accounted for the increase in total interest income, as average loan balances
were $15,589, or 59.8% higher in 1997 than in 1996. The average balances of
all categories of loans increased during the year. The average yield on total
loans increased modestly to 9.06% for 1997 from 9.02% in 1996. Interest
income on securities and short-term investments, on a tax equivalent basis,
increased to $533 for 1997 from $402 in 1996 due to a $924 increase in
average balance, and an increase in average yield to 6.11% for 1997 from
5.16% in 1996. Prior to 1997, Anderson's only interest earning investments,
other than loans, were federal funds sold and securities purchased under
agreements to resell, essentially short-term money market investments. During
1997, Anderson began acquiring securities, primarily taxable issuances of US
Government agencies and municipal bonds, in an effort to increase the yield
on the investment portfolio.
Total interest expense for 1997 increased $623, or 49.7%, compared to 1996.
The increase was primarily attributable to increased volume, as average
deposits, in all categories, increased $13,275, or 52.0% during 1997. The
average cost of deposits declined slightly to 4.84% for 1997 from 4.92% in
1996. This decline resulted primarily from a slight shift in deposit
composition as higher cost interest bearing time deposits declined to 61.0%
of average deposits in 1997 from 64.6% in 1996.
See Tables 2 and 3 for an analysis of Anderson's net interest income (on a
tax-equivalent basis) for 1997 and 1996.
Net interest income, on a tax equivalent basis, for 1997 was $929, or 61.9%
higher than for 1996. The net interest margin, on a tax equivalent basis, for
1997 and 1996 was 4.82% and 4.43%. The net interest margin increased due to
continued strong loan growth, changes made in the investment portfolio to
increase yield and controlling the interest cost of deposit funds.
PROVISION FOR LOAN LOSSES AND ASSET QUALITY
The provision for loan losses represents charges made to earnings to maintain
an adequate allowance for loan losses. The allowance is maintained at an
amount believed by management to be sufficient to absorb losses inherent in
the credit portfolio. Management conducts, on a quarterly basis, a detailed
evaluation of the adequacy of the allowance.
See Table 4 for a summary of the activity in and the composition of the
allowance for loan losses. The provision for loan losses was $197 for 1997
and $256 for 1996. A lower provision was recorded in 1997 due to a slight
slowdown in loan growth. Charge-offs have been negligible since the formation
of Anderson and asset quality has been good. Management maintains the reserve
at a level believed appropriate based on their ongoing analysis of the risk
in the portfolio. Individual loans identified as possible problems are
analyzed and portions of the allowance allocated to those loans, if needed,
and portions of the allowance are allocated to "good" loans based upon
industry averages, adjusted by management in consideration of growth, the
local economy and other factors. The allowance for loan losses at year end
1997 was $658, or 1.31% of total loans, compared to $466, or 1.32% of total
loans, at year end 1996.
50
<PAGE>
Nonperforming loans include nonaccrual loans, restructured loans, and loans
delinquent 90 days or more. Loans are classified as nonaccrual when
management believes that collection of interest is doubtful, typically when
payments are past due 90 days, unless the loans are well secured and in the
process of collection.
See Table 5 for a summary of nonperforming loans. Nonperforming loans were
nominal in 1997 and 1996 and were $0 at year end.
Impaired loans are those loans for which full payment in accordance with the
contractual terms is not expected. No loans were designated as impaired
during 1997 or 1996.
Management designates certain loans for internal monitoring purposes on a
watch list. Loans may be placed on management's watch list as a result of
delinquent status, concern about the borrower's financial condition or the
value of the collateral securing the loan, substandard classification during
regulatory examinations, or simply as a result of management's desire to
monitor more closely a borrower's financial condition and performance. Watch
category loans may include loans with loss potential that are still
performing and accruing interest and may be current under the terms of the
loan agreement; however, management may have a significant degree of concern
about the borrowers' ability to continue to perform according to the terms of
the loan. Loss exposure on these loans is typically evaluated based primarily
upon the estimated liquidation value of the collateral securing the loan.
Also, watch list loans may include credits which, although adequately secured
and performing, reflect a past delinquency problem or unfavorable financial
trends exhibited by the borrower.
At December 31, 1997, Anderson had one loan with a balance of $493 graded
substandard and included on its watch list. The loan was not considered
impaired and was performing as agreed.
NONINTEREST INCOME AND EXPENSE
See Table 6 for an analysis of changes in noninterest income and expense.
Noninterest income increased $80, or 66.7%, to $200 for 1997 compared to $120
in 1996. This increase was volume driven as the number of accounts,
particularly demand deposits, increased. Other income increased $27 due
primarily to an arrangement, begun in mid-1997 whereby Anderson receives
finders fees for taking mortgage loan applications for a mortgage company.
The loans are closed by the mortgage company and Anderson incurs no interest
rate risk. Noninterest expense for 1997 was $1,406, up $430 (44.1%). The
increases are due to increased staffing (up $233 or 47.1%), premises and
equipment (up $61 or 37.0%) and data processing (up $33 or 49.3%) costs
incurred as Anderson grows. The financial results for 1997 reflect a full
year's operations for a branch opened in mid-1996. Data processing costs are
tied to volume and the number of accounts.
51
<PAGE>
INCOME TAXES
The provision for income taxes, as a percent of income before income taxes,
was 37.5% for 1997 and 40.4% for 1996. Further tax information regarding
Anderson can be found in Notes 1 and 7 to Anderson's financial statements
included in this Proxy Statement-Prospectus (the "Financial Statements").
FINANCIAL CONDITION
Total assets were $62,837 at year end 1997 compared to $45,969 at year end
1996, an increase of $16,868 or 36.7%. Increased loan totals were funded by
increased deposits and, as discussed above, short-term investments were
reduced and replaced with available for sale securities.
SECURITIES
See Note 2 to the Financial Statements and Table 7 for information about
Anderson's securities. Prior to 1997, Anderson invested available funds in
federal funds sold and securities purchased under agreements to resell. The
repurchase agreements were, essentially, loans to another financial
institution, secured by securities with a fair value greater than the loan
amount. They were for short terms, generally less than one month. During
1997, to increase investment yield and generate tax exempt income, Anderson
acquired U.S. Government and Agency securities and securities of states and
political subdivisions. Anderson classifies all securities as available for
sale, but did not sell securities during 1997.
Other than securities of the U.S. Government and its agencies, Anderson has
no security concentrations greater than 10% of shareholders' equity at
December 31, 1997.
LOANS
See Note 3 to the Financial Statements and Table 8 for information about
Anderson's loan portfolio. Total loans increased $14,931 or 42.3% from year
end 1997 to year end 1996. This growth occurred in all categories with the
largest percentage increase, but smallest dollar increase, being a $1,464, or
82.2%, increase in consumer loans. Since its founding, Anderson has realized
strong loan growth and focuses on small commercial business and commercial
real estate lending. Commercial real estate loans comprise $20,636, or 41.1%
of total loans, at December 31, 1997. The percent is down slightly from 46.8%
of total loans at the prior year end. Commercial loans increased to $11,899,
or 23.7% of the portfolio, at December 31, 1997 from $6,464, or 18.3%, at
year end 1996. The percentage of consumer loans to total loans increased
slightly while the percentage of residential real estate loans to total loans
has decreased slightly.
DEPOSITS
See Note 6 to the Financial Statements and Tables 2 and 9 for more
information about Anderson's deposits. Average deposits increased to $46,172
for 1997 from $29,559 for 1996, an increase of $16,613, or 56.2%. Average
noninterest-bearing deposits increased to $7,398 for
52
<PAGE>
1997 from $4,060 in 1996. Anderson seeks commercial deposit relationships and
offers sweep products, account analysis and other features to attract them.
Year end total deposits increased $15,842, or 39.6%, from 1996 to 1997.
Noninterest-bearing deposits increased to $8,311 from $4,989. At December 31,
1997, $14,391, or 48.2%, of Anderson's time deposits had balances of greater
than $100. For 1997, average time deposits issued in amounts greater than
$100 totaled $10,214 or 43.2% of average total time deposits. Anderson has
historically had significant balances of large denomination time deposits.
The majority of these funds are from public entities with whom Anderson has
had an ongoing relationship. Management believes these deposit sources to be
stable.
CAPITAL
Anderson is subject to various regulatory capital guidelines as required by
federal banking agencies. These guidelines define the various components of
core capital and assign risk weights to various categories of assets.
Tier 1 capital consists of shareholders' equity excluding unrealized gains
and losses on securities available for sale, as defined by Anderson
regulators. The definition of Tier 2 capital includes the amount of allowance
for loan losses which does not exceed 1.25% of gross risk weighted assets.
Total capital is the sum of Tier 1 and Tier 2 capital.
The minimum requirements under the capital guidelines are generally at least
a 4.00% leverage ratio (Tier 1 capital divided by average assets excluding
unrealized gains/losses), a 4.00% Tier 1 risk-based capital ratio (Tier 1
capital divided by risk-weighted assets), and a 8.00% total capital ratio
(Tier 1 capital plus Tier 2 capital divided by risk-weighted assets).
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
requires federal regulatory agencies to define capital tiers. These are:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Under these regulations, a
"well-capitalized" institution must achieve a Tier 1 risk-based capital ratio
of at least 6.00%, a total capital ratio of at least 10.00%, and a leverage
ratio of at least 5.00% and not be under a capital directive order. Failure
to meet capital requirements can initiate regulatory action that could have a
direct material effect on Anderson's financial statements. If only adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions, asset growth, and expansion is
limited, in addition to the institution being required to submit a capital
restoration plan.
Management believes Anderson met all the capital requirements as of December
31, 1997, and was well-capitalized under the guidelines established by
banking regulators. To be well-capitalized, Anderson must maintain the prompt
corrective action capital guidelines described above.
At December 31, 1997, management was not aware of any current recommendations
by banking regulatory authorities which, if they were to be implemented,
would have, or are reasonably likely to have, a material effect on Anderson's
consolidated liquidity, capital resources or operations.
53
<PAGE>
Anderson's actual capital amounts and ratios are presented in Note 10 to the
Financial Statements.
LIQUIDITY AND RATE SENSITIVITY
Liquidity refers to the availability of funds to meet deposit withdrawals and
borrowing repayments, fund loan commitments and pay expenses. Anderson has
many sources of liquid funds, including cash and cash equivalents, payments
and maturities of loans and securities, growth in deposits, and net income.
In addition, Anderson has the ability to sell securities available for sale,
and Anderson may borrow from the Federal Reserve and the Federal Home Loan
Bank.
The statement of cash flows and Table 10 illustrate the sources and uses of
Anderson's cash and cash equivalents. Management believes Anderson has
sufficient liquidity to meet reasonable borrower, depositor, and creditor
needs in the present economic environment. Anderson has not received any
recommendations from regulatory authorities which would materially affect
liquidity, capital resources or operations.
Anderson's interest rate sensitivity position is influenced by the timing of
the maturity or repricing of interest earning assets and interest-bearing
liabilities. One method of gauging sensitivity is by a static gap analysis,
as presented in Table 11. Rate sensitivity gap is defined as the difference
between the repricing of interest earning assets and the repricing of
interest bearing liabilities within certain defined time frames. Rising
interest rates are likely to increase net interest income in a positive gap
position, while declining rates are likely to be beneficial in a negative gap
position.
As seen in Table 11, Anderson has a negative cumulative gap position for the
1 to 90 day and the 91 to 365 day time periods. This suggests that Anderson
may earn more net interest income if rates fall, or less net interest income
if rates rise. However, a limitation of the traditional static gap analysis
is that it does not consider the timing or magnitude of noncontractual
repricing. In addition, the static gap analysis treats demand and savings
deposits as repriceable within the earliest time category due to the lack of
contractual maturity; however, experience suggests that these deposits are
actually somewhat resistant to rate sensitivity. As a practical matter,
Anderson has the ability to adjust rates on deposit accounts in an effort to
achieve a neutral interest rate sensitivity position.
INFLATION
The effects of price changes and inflation on a financial institution vary
considerably from an industrial organization. Changes in interest rates,
rather than changes in the prices of goods and services, is the primary
determinant of profitability of a financial institution. Inflation affects
the growth of total assets, but it is difficult to assess its impact because
neither the timing nor the magnitude of the changes in the consumer price
index directly coincide with changes in interest rates. During periods of
high inflation, there are normally corresponding increases in the money
supply. During such times, financial institutions often experience above
average growth in loans and deposits. Also, general increases in the price of
goods and services will result in increased operating expenses. Over the past
few years, the rate of inflation has been relatively low, and its
54
<PAGE>
impact on the growth in the balance sheets and increased levels of income and
expense has been nominal.
YEAR 2000
Anderson's Board of Directors and management is aware of the possible
consequences the Year 2000 may pose with regard to the computer systems
utilized to conduct business on a daily basis. A "Year 2000 Committee"
prepared a detailed plan to address this issue. Prior to the pending merger,
replacement and testing of specific system applications and hardware was
scheduled to be completed by the end of 1998. However, due to the pending
merger, Anderson now plans to convert its mission critical systems to First
Merchants' systems, which is expected to occur early in the second quarter of
1999. Anderson's contingency plan in the event the merger does not occur is
to proceed with the previously planned system upgrade with the current system
vendor. Certain other systems that are not dependent upon the merger are
expected to be Year 2000 compliant by year end 1998. Anderson has
communicated with customers to promote awareness of the Year 2000 issue, and
a risk assessment process has also been implemented to evaluate the Year 2000
preparedness of certain significant commercial borrowers of Anderson.
Management does not believe the remaining necessary steps involved to resolve
this issue will significantly impair the organization's ability to operate
and conduct business in a normal fashion, and Anderson does not expect the
total cost to address this issue to be significant to operations.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
RESULTS OF OPERATIONS
NET INCOME
Anderson earned $280, or $.47 per share for the third quarter of 1998
compared to $168, or $.29 per share for the third quarter of 1997. Net income
increased $363, or 90.7% to $763 for the nine month period ending September
30, 1998 compared to the same period in 1997. Diluted earnings per share were
$1.29 and $.69 for the nine month periods ended September 30, 1998 and 1997,
respectively. As in 1997, increased net interest income drove the increase
for the period and more than offset higher operating costs.
Annualized return on average assets (ROA) was 1.48% and 1.05% for the periods
ending September 30, 1998 and 1997, respectively, while annualized return on
average equity (ROE) was 14.78% and 9.00% for those same periods.
55
<PAGE>
NET INTEREST INCOME
For the nine months ended September 30, 1998 and 1997, net interest income
was $2,305 and $1,676, respectively. This represents a $629, or 37.5%
increase over the prior year. Net interest income for the third quarter of
1998 was $206, or 33.1% higher than for the same 1997 period. The increase in
net interest income during 1998 is attributable to the continued growth of
Anderson and both loans and securities have increased since December 31, 1997.
Total interest income increased $1,096, or 36.0%, for the nine month period
ending September 30, 1998, and $372, or 33.4%, for the third quarter of 1998.
Interest and fees on loans increased $984, or 37.1%, to $3,634 for the first
nine months of 1998, compared to $2,650 for the first nine months of 1997.
For the third quarter of 1998, interest and fees on loans increased $316, or
32.3%, compared to the third quarter of 1997. Growth in Anderson's loan
portfolio accounted for the majority of the increase in total interest
income, as average loan balances were $14,526, or 36.6% higher for the nine
months ended September 1998 than the same period in 1997. The annualized
average yield on loans increased 8.94% for 1998 from 8.91% in 1997. Interest
income on securities and short-term investments increased $112 during the
first nine months of 1998, due primarily to a $2,420 increase in average
outstanding balance.
Total interest expense increased $467, or 34.1% for the nine month period
ending September 30, 1998, and $166, or 33.9% for the third quarter of 1998.
The increase was attributable to a $13,580, or 36.1% increase in average
deposit balances in 1998, as compared to 1997. The average cost of deposits
declined nominally.
PROVISION FOR LOAN LOSSES AND ASSET QUALITY
See Table 4 for a summary of the activity in and composition of the allowance
for loan losses, and see Table 5 for a summary of nonperforming assets. The
provision for loan losses was $103 for the first nine months of 1998 and $155
for the same period in 1997. The reduction in provision results from a slight
slowdown in loan growth as asset quality remains good. The allowance for loan
losses at September 30, 1998 was $761, or 1.29% of total loans compared to
$658, or 1.31% of total loans at December 31, 1997. Nonperforming loans were
$492 at September 30, 1998. This was one loan that management believes to be
well secured and in the process of resolution.
NONINTEREST INCOME AND EXPENSE
Noninterest income totaled $267 for the first nine months of 1998, compared
to $138 for the same period of 1997, an increase of $129, or 93.5%.
Noninterest income for the third quarter increased $52, or 106.1% to $101
compared to the prior year. The increases come from deposit account service
charges and fees, driven by the continued growth in deposits, and fees earned
from mortgage loan finders fees.
Noninterest expense totaled $1,244 for the first nine months of 1998,
compared to $1,011 for that same period of 1997, an increase of $233, or
23.0%. Noninterest expense for the third quarter of 1998 was $104, or 30.3%
higher than the prior year.
56
<PAGE>
These increases are primarily growth driven. Anderson opened a new branch in
March, 1998, and increased volume result in higher data processing fees.
Factors increasing other noninterest expense include increased advertising
costs, higher attorneys' fees and a $10 expense related to the settlement of
a lawsuit related to a dispute about a letter of credit.
INCOME TAXES
The effective income tax rates for the first nine months of 1998 and 1997
were 37.7% and 38.3%. The decrease in effective tax rate was primarily
attributable to increased income on non-taxable securities.
FINANCIAL CONDITION
Total assets were $75,713 at September 30, 1998 compared to $62,837 at
December 31, 1997, an increase of $12,876, or 20.5%. An $11,778 (21.1%)
increase in deposits was used to fund increases in loans of $8,950 (17.8%)
and securities of $3,185 (47.9%).
CAPITAL
Management believes Anderson met all the capital requirements as of September
30, 1998, and was well-capitalized under the guidelines established by the
banking regulators.
At September 30, 1998, management was not aware of any current
recommendations by banking regulatory authorities which, if they were to be
implemented, would have, or are reasonably likely to have, a material effect
on Anderson's consolidated liquidity, capital resources or operations.
Anderson's actual capital amounts and ratios are presented in the following
table.
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
September 30, 1998 Amount Ratio Amount Ratio Amount Ratio
- ------------------ -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets) $ 7,963 13.8% $ 4,627 8.0% $ 5,783 10.0%
Tier 1 capital (to risk weighted assets) 7,240 12.5 2,313 4.0 3,470 6.0
Tier 1 capital (to average assets) 7,240 9.7 2,988 4.0 3,735 5.0
</TABLE>
LIQUIDITY
Liquidity refers to the availability of funds to meet deposit withdrawals and
borrowing repayments, fund loan commitments and pay expenses. Anderson has
many sources of liquid funds, including cash and cash equivalents, payments
and maturities of loans and securities, growth in deposits, and net income.
In addition, Anderson has the ability to sell securities available for sale,
and Anderson may borrow from the Federal Reserve and the Federal Home Loan
Bank.
57
<PAGE>
Management believes Anderson has sufficient liquidity to meet reasonable
borrower, depositor, and creditor needs in the present economic environment.
Anderson has not received any recommendations from regulatory authorities
which would materially affect liquidity, capital resources or operations.
58
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
TABLE 1 - ANDERSON FINANCIAL SUMMARY
(Dollar amounts in thousands, except per share data)
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED MARCH 9,1995
NINE MONTHS ENDED SEPTEMBER 30, DECEMBER 31, (DATE OF INCEPTION)
1998 1997 1997 1996 TO DECEMBER 31, 1995
---- ---- ---- ---- --------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income - tax equivalent (1) $ 4,182 3,060 $4,307 $ 2,755 $1,168
Interest expense 1,835 1,368 1,877 1,254 528
-------- ------- -------- --------- ------
Net interest income - tax equivalent (1) 2,347 1,692 2,430 1,501 640
Tax equivalent adjustment (1) (42) (16) (27) -- --
-------- ------- -------- --------- ------
Net interest income 2,305 1,676 2,403 1,501 640
Provision for loan losses 103 155 197 256 210
Noninterest income 267 138 200 120 44
Noninterest expense 1,244 1,011 1,406 976 625
-------- ------- -------- --------- ------
Income before income taxes 1,225 648 1,000 389 (151)
Income tax expense 462 248 375 157 --
-------- ------- -------- --------- ------
NET INCOME $ 763 $ 400 $ 625 $ 232 $ (151)
======== ======= ======== ======== ======
PER SHARE DATA
Basic earnings per share $ 1.30 $ 0.69 $ 1.08 $ 0.42 $(0.28)
Diluted earnings per share 1.29 0.69 1.08 0.42 (0.28)
Shareholders' equity, end of period 12.42 10.65 11.06 9.93 9.50
SELECTED ACTUAL PERIOD-END BALANCES
Total assets 75,713 54,368 62,837 45,969 27,262
Earning assets 72,438 50,645 56,989 43,084 25,788
Securities available-for-sale 9,830 6,633 6,645 -- --
Loans 59,156 43,776 50,206 35,275 15,839
Allowance for loan losses (761) (616) (658) (466) (210)
Total deposits 67,672 47,816 55,894 40,052 21,918
Noninterest-bearing deposits 11,310 8,203 8,311 4,989 4,412
Interest-bearing deposits 56,362 39,613 47,583 35,063 17,506
Shareholders' equity 7,327 6,209 6,448 5,537 5,199
59
<PAGE>
SELECTED RATIOS
Loans to deposits 87.42% 91.55% 89.82% 88.07% 72.26%
Return on average assets 1.48% 1.05% 1.19% 0.66% -0.96%
Return on average equity 14.78% 9.00% 10.36% 4.33% -3.46%
Leverage capital ratio 9.69% 11.08% 10.92% 12.81% 18.87%
Efficiency ratio (2) 47.59% 55.25% 53.46% 60.21% 91.37%
OTHER DATA
Number of employees 26 26 25 21 12
Shares outstanding at period end 589,784 583,144 583,144 557,744 547,044
Shares used to compute basic earnings per share 588,257 579,407 580,409 553,497 547,044
Shares used to compute diluted earnings per share 591,313 580,393 581,325 553,497 547,044
</TABLE>
(1) Net interest income has been presented on both a tax equivalent and
non-tax equivalent basis. The tax equivalent basis was calculated using a 34%
tax rate for all periods presented. The tax equivalent adjustment reverses
the tax equivalent basis in order to present net interest income in
accordance with generally accepted accounting principles (GAAP), as reflected
in the financial statements.
(2) The efficiency ratio is calculated by dividing noninterest expense by the
sum of net interest income, on a fully tax equivalent basis, and noninterest
income.
60
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 2 - ANDERSON AVERAGE BALANCE SHEETS AND INTEREST RATES
(Dollar amounts in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1997 1996
--------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST EARNING ASSETS
Securities
Taxable $ 3,995 $ 266 6.66% $ -- $ -- 0.00%
Non-taxable (1) 1,104 79 7.14% -- -- 0.00%
Federal funds sold and repurchase agreements 3,623 188 5.19% 7,791 402 5.16%
Unrealized loss on AFS securities (7) -- 0.00% -- -- 0.00%
-------- -------- ------ -------- ------- -----
Total securities 8,715 533 6.11% 7,791 402 5.16%
Loans (1)(2)
Commercial 26,379 2,459 9.32% 17,472 1,616 9.25%
Real estate 11,778 977 8.30% 6,504 540 8.30%
Installment and other consumer 3,509 338 9.63% 2,101 197 9.38%
-------- -------- ------ -------- ------- -----
Total loans 41,666 3,774 9.06% 26,077 2,353 9.02%
-------- -------- ------ -------- ------- -----
TOTAL EARNING ASSETS 50,381 4,307 8.55% 33,868 2,755 8.13%
-------- -------- ------ -------- ------- -----
NONINTEREST EARNING ASSETS
Allowance for loan losses (556) (326)
Premises and equipment 639 527
Cash and due from banks 1,668 846
Accrued interest and other assets 458 299
-------- --------
TOTAL ASSETS $ 52,590 $35,214
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
Deposits
Interest-bearing demand deposits $ 6,297 163 2.59% $ 3,480 87 2.50%
Savings deposits 8,829 400 4.53% 5,550 258 4.65%
Time deposits 23,648 1,314 5.56% 16,469 909 5.52%
-------- -------- ------ -------- ------- ------
Total interest-bearing deposits 38,774 1,877 4.84% 25,499 1,254 4.92%
61
<PAGE>
Borrowed funds
Short-term borrowings -- -- 0.00% -- -- 0.00%
Long-term debt -- -- 0.00% -- -- 0.00%
-------- -------- ------ -------- ------- ------
Total borrowed funds -- -- 0.00% -- -- 0.00%
-------- -------- ------ -------- ------- ------
TOTAL INTEREST-BEARING LIABILITIES 38,774 1,877 4.84% 25,499 1,254 4.92%
-------- -------- ------ -------- ------- ------
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing demand deposits 7,398 4,060
Accrued interest and other liabilities 386 292
Shareholders' equity 6,032 5,363
-------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 52,590 $ 35,214
-------- --------
-------- --------
INTEREST MARGIN RECAP
NET INTEREST INCOME AND
INTEREST RATE SPREAD $ 2,430 3.71% $ 1,501 3.22%
NET INTEREST INCOME MARGIN ======== 4.82% ======== 4.43%
</TABLE>
(1) Interest income on tax-exempt securities have been adjusted to a tax
equivalent basis using a marginal federal income tax rate of 34% for all
years.
(2) Nonaccrual loans are included in average loan balance and loan fees are
included in interest income.
62
<PAGE>
- -------------------------------------------------------------------------------
TABLE 3 - ANDERSON VOLUME/RATE ANALYSIS
(Dollar amounts in thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997-1996
------------------------------------------------
Change Change
Total Due To Due To
Change Volume Rate
------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $1,421 $1,412 $ 9
Securities
Taxable 266 266 -
Tax-exempt 79 79 -
Short-term investments (214) (216) 2
------ ------ --
TOTAL INTEREST INCOME
1,552 1,541 11
------ ------ --
INTEREST EXPENSE
Interest-bearing DDA 76 73 3
Savings deposits 142 149 (7)
Time deposits 405 399 6
Short-term borrowings - - -
Long-term borrowings - - -
----- ------ --
TOTAL INTEREST EXPENSE 623 621 2
----- ------ --
NET INTEREST INCOME $ 929 $ 920 $9
====== ====== ==
</TABLE>
63
<PAGE>
- --------------------------------------------------------------------------------
TABLE 4 - ANDERSON ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD $658 $466 $466 $210
LOANS CHARGED-OFF
Commercial 0 0 0 0
Real estate-residential 0 0 0 0
Consumer 0 (5) (5) 0
----- ----- ----- ----
TOTAL CHARGE-OFFS 0 (5) (5) 0
----- ----- ----- ----
CHARGE-OFFS RECOVERED
Commercial 0 0 0 0
Real estate-residential 0 0 0 0
Consumer 0 0 0 0
----- ----- ----- ----
TOTAL RECOVERIES 0 0 0 0
----- ----- ----- ----
Net loans charged-off 0 (5) (5) 0
Current year provision 103 155 197 256
----- ----- ----- ----
BALANCE AT END OF PERIOD $761 $616 $658 $466
===== ===== ===== =====
Loans at period end $59,156 $43,776 $50,206 $35,275
Ratio of allowance to loans
at period end 1.29% 1.41% 1.31% 1.32%
Average loans $54,245 $39,690 $41,666 $26,077
Ratio of net loans charged-off
to average loans 0.00% 0.01% 0.01% 0.00%
<CAPTION>
Allocation of Allowance for Loan Losses
SEPTEMBER 30, DECEMBER 31,
1998 1997 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Commercial $529 $436 $468 $317
Real estate-residential 126 106 118 80
Consumer 95 65 72 48
Unallocated 11 9 - 21
----- ----- ----- -----
Total $761 $616 $658 $466
===== ===== ===== =====
</TABLE>
64
<PAGE>
- --------------------------------------------------------------------------------
TABLE 5 - ANDERSON NONPERFORMING ASSETS
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
PRINCIPAL BALANCE
Nonaccrual $0 $0 $0
90 days or more past due 492 0 0
---- ---- ----
TOTAL NONPERFORMING LOANS $492 $0 $0
==== ==== ====
Nonperforming loans as a percent
of loans 0.83% 0.00% 0.00%
Other real estate owned $0 $0 $0
OREO as a percent of loans 0.00% 0.00% 0.00%
Allowance as a percent of
nonperforming loans 154.67% N/A N/A
</TABLE>
65
<PAGE>
- --------------------------------------------------------------------------------
TABLE 6 - ANDERSON NONINTEREST INCOME & EXPENSE
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% CHANGE
1997 FROM '96 1996
---- -------- ----
<S> <C> <C> <C>
NONINTEREST INCOME
Service charges on deposit accounts $ 153 53.00% $ 100
Other 47 135.00% 20
----------- ------- ----------
TOTAL NONINTEREST INCOME $ 200 66.67% $ 120
=========== ======= ==========
<CAPTION>
% CHANGE
1997 FROM '96 1996
---- -------- ----
<S> <C> <C> <C>
NONINTEREST EXPENSE
Salaries and employee benefits $ 728 47.07% $ 495
Occupancy and equipment 226 36.97% 165
Data Processing 100 49.25% 67
Other 352 41.37% 249
----------- ------- ----------
TOTAL NONINTEREST EXPENSE $ 1,406 44.06% $ 976
=========== ======= ==========
</TABLE>
66
<PAGE>
- --------------------------------------------------------------------------------
TABLE 7 - ANDERSON SECURITIES MATURITY SCHEDULE
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------
1 Year and Less 1 to 5 Years 5 to 10 Years Over 10 Years
------------------- ------------------- --------------------------------------- Total
AVAILABLE-FOR-SALE Balance Rate Balance Rate Balance Rate Balance Rate Balance
- ------------------ --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government & agencies $1,008 6.30% $3,896 6.50% $ - - - - $4,904
States and political subdivisions(1) 55 8.98% 605 9.47% 1,081 10.03% - - 1,741
------ ------ ------ ------ ------
TOTAL AVAILABLE-FOR-SALE $1,063 $4,501 $1,081 $6,645
====== ====== ====== ====== ======
</TABLE>
(1) Average rates were calculated on a tax equivalent basis using a marginal
federal income tax rate of 34%.
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<PAGE>
- --------------------------------------------------------------------------------
TABLE 8 - ANDERSON LOAN COMPOSITION AND LIQUIDITY
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
LOAN PORTFOLIO COMPOSITION BALANCE % BALANCE %
------- -- ------- --
<S> <C> <C> <C> <C>
Residential real estate $14,425 28.7% $10,504 29.8%
Commercial real estate 20,636 41.1% 16,525 46.8%
Commercial 11,899 23.7% 6,464 18.3%
Consumer 3,246 6.5% 1,782 5.1%
------- ------ ------- ------
$50,206 100.0% $35,275 100.0%
======= ====== ======= ======
</TABLE>
The following tables present the contractual maturities of loans and, by
maturity bucket, the breakdown between fixed and variable rate loans.
<TABLE>
<CAPTION>
CONTRACTUAL LOAN MATURITIES AT DECEMBER 31, 1997
---------------------------------------------------------------------------------
1 Year 1 - 5 Over 5
LOANS DUE IN: and Less Years Years Total
-------- ----- ----- -----
<S> <C> <C> <C> <C>
BALANCE $25,179 $23,753 $1,274 $50,206
======= ======= ====== =======
SENSITIVITY TO CHANGES IN
INTEREST RATES
Fixed rates $8,011 $4,481 $375 $12,867
Variable rates 17,168 19,272 899 37,339
------- ------- ------ -------
TOTAL $25,179 $23,753 $1,274 $50,206
======= ======= ====== =======
</TABLE>
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<PAGE>
- --------------------------------------------------------------------------------
TABLE 9 - ANDERSON MATURITY RANGES OF TIME DEPOSITS
WITH BALANCES OF $100,000 OR MORE AT DECEMBER 31
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997
----
<S> <C>
3 months or less $ 6,644
3 through 6 months 4,329
6 through 12 months 2,762
Over 12 months 656
----------
TOTAL $ 14,391
==========
</TABLE>
69
<PAGE>
- --------------------------------------------------------------------------------
TABLE 10 - ANDERSON FUNDING USES AND SOURCES
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------- ----------------
Increase/(decrease)
Average -------------------- Average
Balance Amount Percent Balance
---------------------------------------------- ----------------
<S> <C> <C> <C> <C>
FUNDING USES
Loans, total $41,666 $15,589 59.78% $26,077
Taxable securities 3,995 3,995 N/A -
Tax-exempt securities 1,104 1,104 N/A -
Short-term investments 3,623 (4,168) -53.50% 7,791
------- ------- -------
TOTAL USES $50,388 $16,520 48.78% $33,868
======= ======= =======
FUNDING SOURCES
Noninterest-bearing deposits $7,398 $3,338 82.22% $4,060
Interest-bearing demand 6,297 2,817 80.95% 3,480
Savings deposits 8,829 3,279 59.08% 5,550
Time deposits 23,648 7,179 43.59% 16,469
------- ------- -------
TOTAL SOURCES $46,172 $16,613 56.20% $29,559
======= ======= =======
</TABLE>
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<PAGE>
- --------------------------------------------------------------------------------
TABLE 11 - ANDERSON LIQUIDITY AND INTEREST RATE SENSITIVITY
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
1 - 90 91 - 365 1 - 5
Days Days Years Over 5 Years Total
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Loans $ 19,550 $ 8,375 $ 21,905 $ 376 $ 50,206
Securities available-for-sale
Taxable 0 1,008 3,896 0 4,904
Tax-exempt 55 0 605 1,081 1,741
------------ ---------- ----------- ----------- ------------
Total Securities 55 1,008 4,501 1,081 6,645
Restricted stock 0 0 0 138 138
------------ ---------- ----------- ----------- ------------
TOTAL EARNING ASSETS $ 19,605 $ 9,383 $ 26,406 $ 1,595 $ 56,989
============ ========== =========== =========== ============
INTEREST BEARING LIABILITIES
Interest-bearing demand deposits $ 7,282 $ - $ - $ - $ 7,282
Savings deposits 10,478 12 0 0 10,490
Time Deposits 8,902 16,626 4,270 13 29,811
Short-term borrowings 0 0 0 0 -
Long-term borrowings 0 0 0 0 -
------------ ---------- ----------- ----------- ------------
-
TOTAL INTEREST BEARING LIABILITIES $ 26,662 $ 16,638 $ 4,270 $ 13 $ 47,583
============ ========== =========== =========== ============
Rate sensitive gap $ (7,057) $ (7,255) $ 22,136 $ 1,582 $ 9,406
Rate sensitive cumulative gap $ (7,057) $ (14,312) $ 7,824 $ 9,406
Cumulative gap as a percentage of
earning assets (12.38)% (25.11)% 13.73% 16.50%
</TABLE>
71
<PAGE>
REGULATION AND SUPERVISION
OF FIRST MERCHANTS AND ITS SUBSIDIARIES AND ANDERSON
BANK HOLDING COMPANY REGULATION
First Merchants is registered as bank holding company and is subject to
the regulations of the Federal Reserve Board ("FEDERAL RESERVE") under the Bank
Holding Company Act of 1956, as amended (the "BHC ACT"). Bank holding companies
are required to file periodic reports with and are subject to periodic
examination by the Federal Reserve. The Federal Reserve has issued regulations
under the BHC Act requiring a bank holding company to serve as a source of
financial and managerial strength to its subsidiary banks. Thus, it is the
policy of the Federal Reserve that, a bank holding company should stand ready to
use its resources to provide adequate capital funds to its subsidiary banks
during periods of financial stress or adversity. Additionally, under the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a bank holding
company is required to guarantee the compliance of any subsidiary bank that may
become "undercapitalized" (as defined in the FDICIA) with the terms of any
capital restoration plan filed by such subsidiary with its appropriate federal
banking agency up to the lesser of (i) an amount equal to 5% of the
institution's total assets at the time the institution became undercapitalized,
or (ii) the amount that is necessary (or would have been necessary) to bring the
institution into compliance with all applicable capital standards as of the time
the institution fails to comply with such capital restoration plan. Under the
BHC Act, the Federal Reserve has the authority to require a bank holding company
to terminate any activity or relinquish control of a nonbank subsidiary (other
than a nonbank subsidiary of a bank) upon the determination that such activity
constitutes a serious risk to the financial stability of any bank subsidiary.
The BHC Act prohibits First Merchants from doing any of the following
without the prior approval of the Federal Reserve:
1. Acquiring direct or indirect control of more than 5% of the
outstanding shares of any class of voting stock or
substantially all of the assets of any bank or savings
association.
2. Merging or consolidating with another bank holding company.
3. Engaging in or acquiring ownership or control of more than 5%
of the outstanding shares of any class of voting stock of any
company engaged in a nonbanking business unless such business
is determined by the Federal Reserve to be closely related to
banking.
The BHC Act does not place territorial restrictions on such nonbanking-related
activities.
CAPITAL ADEQUACY GUIDELINES FOR BANK HOLDING COMPANIES
Bank holding companies are required to comply with the Federal
Reserve's risk-based capital guidelines. These guidelines require a minimum
ratio of capital to risk-weighted assets of
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<PAGE>
8% (including certain off-balance sheet activities such as standby letters of
credit). At least half of the total required capital must be "Tier 1
capital," consisting principally of common shareholders' equity,
noncumulative perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock and minority interest in the equity accounts of
consolidated subsidiaries, less certain goodwill items. The remainder may
consist of a limited amount of subordinate debt and intermediate-term
preferred stock, certain hybrid capital instruments and other debt
securities, cumulative perpetual preferred stock, and a limited amount of the
general loan loss allowance.
In addition to the risk-based capital guidelines, the Federal Reserve
has adopted a Tier 1 (leverage) capital ratio under which the bank holding
company must maintain a minimum level of Tier 1 capital to average total
consolidated assets. The ratio is 3% in the case of bank holding companies which
have the highest regulatory examination ratings and are not contemplating
significant growth or expansion. All other bank holding companies are expected
to maintain a ratio of at least 1% to 2% above the stated minimum.
The following are First Merchants' regulatory capital ratios as of
September 30, 1998:
<TABLE>
<CAPTION>
First Merchants
---------------
<S> <C>
Tier 1 Capital: 16.30%
Total Capital: 17.24
Leverage Ratio: 11.94
</TABLE>
BANK REGULATION
First Merchants Bank and The Union County National Bank are national
banks and are supervised, regulated and examined by the Office of the
Comptroller of the Currency (the "OCC"). First United Bank, Pendleton, The
Randolph County Bank and Anderson are state banks chartered in Indiana and are
supervised, regulated and examined by the Indiana Department. In addition, three
of First Merchants' subsidiaries, Pendleton Banking Company, First United Bank
and The Randolph County Bank, as well as Anderson are supervised and regulated
by the FDIC. Each regulator has the authority to issue cease-and-desist orders
if it determines that activities of the bank regularly represent an unsafe and
unsound banking practice or a violation of law.
Both federal and state law extensively regulate various aspects of the
banking business such as reserve requirements, truth-in-lending and
truth-in-savings disclosure, equal credit opportunity, fair credit reporting,
trading in securities and other aspects of banking operations. Current federal
law also requires banks, among other things, to make deposited funds available
within specified time periods.
Insured state-chartered banks are prohibited under FDICIA from engaging
as the principal in activities that are not permitted for national banks, unless
(i) the FDIC determines
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<PAGE>
that the activity would pose no significant risk to the appropriate deposit
insurance fund, and (ii) the bank is, and continues to be, in compliance with
all applicable capital standards.
BANK CAPITAL REQUIREMENTS
The FDIC and the OCC have adopted risk-based capital ratio
guidelines to which state-chartered banks and national banks are subject. The
guidelines establish a framework that makes regulatory capital requirements
more sensitive to differences in risk profiles. Risk-based capital ratios are
determined by allocating assets and specified off-balance sheet commitments
to four risk-weighted categories, with higher levels of capital being
required for the categories perceived as representing greater risk.
Like the capital guidelines established by the Federal Reserve,
these guidelines divide a bank's capital into tiers. Banks are required to
maintain a total risk-based capital ratio of 8%. The FDIC or OCC may,
however, set higher capital requirements when a bank's particular
circumstances warrant. Banks experiencing or anticipating significant growth
are expected to maintain capital ratios, including tangible capital
positions, well above the minimum levels.
In addition, the FDIC and the OCC established guidelines prescribing
a minimum Tier 1 leverage ratio (Tier 1 capital to adjusted total assets as
specified in the guidelines). These guidelines provide for a minimum Tier 1
leverage ratio of 3% for banks that meet specified criteria, including that
they have the highest regulatory rating and are not experiencing or
anticipating significant growth. All other banks are required to maintain a
Tier 1 leverage ratio of 3% plus an additional 100 to 200 basis points.
All of First Merchants' affiliate banks as well as Anderson exceed
the risk-based capital guidelines of the FDIC and/or the OCC as of September
30, 1998.
The Federal Reserve, the FDIC and the OCC have adopted rules to
incorporate market and interest rate risk components into their risk-based
capital standards. Amendments to the risk-based capital requirements,
incorporating market risk, became effective January 1, 1998. Under the new
market risk requirements, capital will be allocated to support the amount of
market risk related to a financial institution's ongoing trading activities.
FDICIA
FDICIA requires, among other things, federal bank regulatory
authorities to take "prompt corrective action" with respect to banks which do
not meet minimum capital requirements. For these purposes, FDICIA establishes
five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. The FDIC has adopted regulations to implement the prompt
corrective action provisions of FDICIA.
"Undercapitalized" banks are subject to growth limitations and are
required to submit a capital restoration plan. A bank's compliance with such
plan is required to be guaranteed by the bank's parent holding company. If an
"undercapitalized" bank fails to submit an acceptable plan, it is treated as if
it is significantly undercapitalized. "Significantly undercapitalized" banks are
subject to one or more restrictions, including an order by the FDIC to sell
sufficient voting stock
74
<PAGE>
to become adequately capitalized, requirements to reduce total assets and
cease receipt of deposits from correspondent banks, and restrictions on
compensation of executive officers. "Critically undercapitalized"
institutions may not, beginning 60 days after become "critically
undercapitalized," make any payment of principal or interest on certain
subordinated debt or extend credit for a highly leveraged transaction or
enter into any transaction outside the ordinary course of business. In
addition, "critically undercapitalized" institutions are subject to
appointment of a receiver or conservator.
As of September 30, 1998, each bank subsidiary of First Merchants as
well as Anderson was "well capitalized" based on the "prompt corrective
action" ratios and deadlines described above. It should be noted, however,
that a bank's capital category is determined solely for the purpose of
applying the OCC's (or the FDIC's) "prompt corrective action" regulations and
that the capital category may not constitute an accurate representation of
the bank's overall financial condition or prospects.
DEPOSIT INSURANCE
First Merchants' affiliated banks and Anderson are insured up to
regulatory limits by the FDIC and, accordingly, are subject to deposit
insurance assessments to maintain the Bank Insurance Fund (the "BIF") and the
Savings Association Insurance Fund ("SAIF") administered by the FDIC. The
FDIC has adopted regulations establishing a permanent risk-related deposit
insurance assessment system. Under this system, the FDIC places each insured
bank in one of nine risk categories based on (i) the bank's capitalization,
and (ii) supervisory evaluations provided to the FDIC by the institution's
primary federal regulator. Each insured bank's insurance assessment rate is
then determined by the risk category in which it is classified by the FDIC.
Effective January 1, 1997, the annual insurance premiums on bank
deposits insured by the BIF and the SAIF vary between $0.00 per $100 of
deposits for banks classified in the highest capital and supervisory
evaluation categories to $0.27 per $100 of deposits for banks classified in
the lowest capital and supervisory evaluation categories.
The Deposit Insurance Funds Act of 1996 provides for assessments to
be imposed on insured depository institutions with respect to deposits
insured by the BIF and the SAIF (in addition to assessments currently imposed
on depository institutions with respect to BIF- and SAIF-insured deposits) to
pay for the cost of Financing Corporation ("FICO") funding. The FDIC
established the FICO assessment rates effective January 1, 1997 at $0.013 per
$100 annually for BIF-assessable deposits and $0.0648 per $100 annually for
SAIF-assessable deposits. The FICO assessments do not vary depending upon a
depository institution's capitalization or supervisory evaluations.
BROKERED DEPOSITS
Under FDIC regulations, no FDIC-insured depository institution can
accept brokered deposits unless it (i) is well capitalized, or (ii) is
adequately capitalized and received a waiver from the FDIC. In addition,
these regulations prohibit any depository institution that is not well
capitalized from (a) paying an interest rate on deposits in excess of 76
basis points over certain
75
<PAGE>
prevailing market rates or (b) offering "pass through" deposit insurance on
certain employee benefit plan accounts unless it provides certain notice to
affected depositors.
INTERSTATE BANKING AND BRANCHING
Under the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 ("RIEGLE-NEAL") subject to certain concentration limits, required
regulatory approvals and other requirements, (i) bank holding companies such
as First Merchants are permitted to acquire banks and bank holding companies
located in any state; (ii) any bank that is a subsidiary of a bank holding
company is permitted to receive deposits, renew time deposits, close loans,
service loans and receive loan payments as an agent for any other bank
subsidiary of that holding company; and (iii) banks are permitted to acquire
branch offices outside their home states by merging with out-of-state banks,
purchasing branches in other states, and establishing de novo branch offices
in other states.
ADDITIONAL MATTERS
In addition to the matters discussed above, First Merchants'
affiliate banks and Anderson are subject to additional regulation of their
activities, including a variety of consumer protection regulations affecting
their lending, deposit and collection activities and regulations affecting
secondary mortgage market activities.
The earnings of financial institutions are also affected by general
economic conditions and prevailing interest rates, both domestic and foreign,
and by the monetary and fiscal policies of the United States Government and
its various agencies, particularly the Federal Reserve.
Additional legislation and administrative actions affecting the
banking industry may be considered by the United States Congress, state
legislatures and various regulatory agencies, including those referred to
above. It cannot be predicted with certainty whether such legislation or
administrative action will be enacted or the extent to which the banking
industry in general or First Merchants and its affiliate banks or Anderson in
particular would be affected thereby.
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<PAGE>
COMPARISON OF COMMON STOCK
THE FOLLOWING SUMMARY COMPARISON OF FIRST MERCHANTS COMMON STOCK AND ANDERSON
COMMON STOCK INCLUDES ALL MATERIAL FEATURES OF SUCH STOCKS BUT DOES NOT
PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO FIRST
MERCHANTS' ARTICLES OF INCORPORATION AND BY-LAWS AND ANDERSON'S ARTICLES OF
INCORPORATION AND BY-LAWS.
GOVERNING LAW
The rights of holders of Anderson common stock who receive First
Merchants common stock in the merger will be governed by the Indiana Business
Corporation Law (the "IBCL"), the state in which First Merchants is
incorporated, and by First Merchants' Articles of Incorporation ("FIRST
MERCHANTS' ARTICLES") and By-Laws. The rights of Anderson shareholders are
governed by the Indiana banking statutes, the state in which Anderson is
incorporated, and by Anderson's Articles of Incorporation ("ANDERSON'S
ARTICLES") and By-Laws. The rights of Anderson shareholders differ in certain
respects from the rights they would have as First Merchants shareholders as
First Merchants is an Indiana corporation and Anderson is an Indiana bank.
Several ways in which the rights of Anderson shareholders will differ from
their rights as First Merchants shareholders include certain anti-takeover
measures, the vote percentage required for the amendment of certain
significant provisions of the articles of incorporation and for the approval
of certain significant corporate transactions.
AUTHORIZED BUT UNISSUED SHARES
First Merchants' Articles authorize the issuance of 20,000,000
shares of common stock, of which 10,079,540 shares were outstanding as of
November 30, 1998. The remaining authorized but unissued shares of common
stock may be issued upon authorization of the Board of Directors of First
Merchants without prior shareholder approval. First Merchants has 500,000
shares of preferred stock authorized. These shares are available to be
issued, without prior shareholder approval, in classes with relative rights,
privileges and preferences determined for each class by the Board of
Directors of First Merchants. No shares of preferred stock have currently
been issued.
As of November 30, 1998, First Merchants had 162,977 shares of its
common stock reserved and remaining available for issuance under its Employee
Stock Purchase Plan and 34,829 shares of its common stock reserved and
remaining available for issuance under its Stock Options Plan.
The issuance of additional shares of First Merchants common stock or
the issuance of First Merchants preferred stock may adversely affect the
interests of First Merchants shareholders.
Anderson's Articles authorize the issuance of 2,000,000 shares of
common stock. Each outstanding share of stock is entitled to one vote on all
matters to which shareholders are entitled to vote. There are 589,784 shares
of stock issued and outstanding as of the date hereof and there will be
612,434 shares of stock issued and outstanding after the exercise of all
options for Anderson stock by the officers, directors and employees of
Anderson.
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<PAGE>
PREEMPTIVE RIGHTS
As permitted by Indiana law, neither First Merchants' Articles nor
Anderson's Articles provide for preemptive rights to subscribe for any new or
additional First Merchants or Anderson shares of common stock. Preemptive
rights may be granted to First Merchants or Anderson shareholders if First
Merchants' or Anderson's Articles are amended accordingly.
DIVIDEND RIGHTS
The holders of common stock of First Merchants and Anderson are
entitled to dividends and other distributions when, as and if declared by
their respective Board of Directors. With respect to First Merchants, a
dividend generally MAY NOT be paid if:
1. The corporation would not be able to pay its debts as they become due
in the usual course of business; or
2. The corporation's total assets would be less than the sum of its total
liabilities plus preferential rights of shareholders payable upon
dissolution.
Anderson may declare a dividend of so much of its undivided profits as
is considered expedient by the Anderson Board. With respect to Anderson, a
dividend generally MAY NOT be paid:
1. If payment of the dividend would impair Anderson's capital stock; or
2. In an amount greater than the remainder of undivided profits of
Anderson on hand after deducting losses, bad debts, depreciation and
all other expenses.
Anderson must also obtain the approval of the Indiana Department for the
payment of a dividend if the total of all dividends declared during a year
would exceed the sum of the retained net income for the year to date combined
with Anderson's retained net income for the previous two years.
The amount of dividends, if any, that may be declared by First
Merchants in the future will necessarily depend upon many factors, including,
without limitation, future earnings, capital requirements, business
conditions and capital levels of subsidiaries (since First Merchants is
primarily dependent upon dividends paid by its subsidiaries for revenues),
the discretion of First Merchants' Board of Directors and other factors that
may be appropriate in determining dividend policies.
Similar to Anderson, First Merchants' national bank subsidiaries and
its Indiana-chartered affiliate banks may pay dividends to First Merchants in
cash on their common stock only out of adjusted retained net profits for the
year in which the dividend is paid and the two preceding years.
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<PAGE>
Dividends paid by First Merchants' affiliate banks will ordinarily
be restricted to a lesser amount than is legally permissible because of the
need for the banks to maintain adequate capital consistent with the capital
adequacy guidelines promulgated by the banks' principal federal regulatory
authorities. See "REGULATION AND SUPERVISION OF FIRST MERCHANTS AND ITS
SUBSIDIARIES AND ANDERSON." If a bank's capital levels are deemed inadequate
by the regulatory authorities, payment of dividends to its parent holding
company may be prohibited. First Merchants' present affiliate banks are not
subject to such a restriction.
VOTING RIGHTS
The holders of the outstanding shares of First Merchants common
stock are entitled to one vote per share on all matters presented for
shareholder vote. Anderson shares may vote on all matters presented for
shareholder approval. Neither First Merchants shareholders nor Anderson
shareholders have cumulative voting rights in the election of directors.
Indiana law with respect to corporations and banks generally
requires that mergers, consolidations, sales, leases, exchanges or other
dispositions of all or substantially all of the assets of an entity be
approved by a shareholder vote of a majority of votes entitled to be cast at
the shareholders meeting, subject to provision in the articles of
incorporation requiring a higher percentage vote. First Merchants' Articles
provide that certain business combinations may, under certain circumstances,
require approval of more than a majority of the outstanding voting shares of
First Merchants common stock. See "COMPARISON OF COMMON STOCK--Anti-Takeover
Provisions." Anderson's Articles do not contain any similar provisions.
Indiana law with respect to corporations and banks requires
shareholder approval for most amendments to a corporation's or bank's
articles of incorporation by a majority of a quorum at a shareholder's
meeting (and, in certain cases, a majority of all shares held by any voting
group entitled to vote). Indiana law permits a corporation or bank in its
articles of incorporation to prescribe a higher shareholder vote requirement
for certain amendments. First Merchants' Articles require a super-majority
shareholder vote of seventy-five percent of the outstanding shares of common
stock for the amendment of certain significant provisions. Anderson's
Articles require a majority vote to amend any provision.
DISSENTERS' RIGHTS
Anderson shareholders possess dissenters' rights in connection with
certain mergers and acquisitions. Under Indiana law, a bank's shareholder is
entitled to dissent from and obtain payment of the value of the shareholder's
shares in the following events:
1. Consummation of a plan of merger or consolidation to which the
bank is a party, if the shareholder is entitled to vote
thereon and the surviving entity is organized under the laws
of the State of Indiana;
2. Consummation of a plan of exchange for formation of a bank
holding company for the bank pursuant to which the bank's
shares will be acquired, if the shareholder is entitled to
vote thereon; and
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<PAGE>
3. Any action taken pursuant to a shareholder vote to the extent
the articles of incorporation, by-laws or a resolution of the
board of directors provides that shareholders are entitled to
dissent and obtain payment for their shares.
First Merchants shareholders do not have dissenters' rights because
its shares are traded on the NASDAQ National Market System. With respect to
dissenters' rights of Anderson shareholders in connection with the merger,
see the discussion under "MERGER -- Rights of Dissenting Shareholders" and
also Appendix B.
LIQUIDATION RIGHTS
In the event of any liquidation or dissolution of First Merchants,
its shareholders are entitled to receive pro rata, according to the number of
shares held, any assets distributable to shareholders, subject to the payment
of First Merchants' liabilities and any rights of creditors and holders of
shares of First Merchants preferred stock then outstanding. In the event of
any liquidation or dissolution of Anderson, its shareholders are entitled to
receive pro rata, according to the number of shares held, any assets
distributable to shareholders, subject to the payment of Anderson's
liabilities and any rights of creditors.
ASSESSMENT AND REDEMPTION
Under Indiana law, neither the shares of First Merchants common
stock nor of Anderson common stock are liable to further assessment.
Under Indiana law, First Merchants may redeem or acquire shares of
its common stock with funds legally available therefor, and shares so
acquired constitute authorized but unissued shares. First Merchants may not
redeem or acquire its shares of common stock if, after such redemption it
would not be able to pay its debts as they become due. Additionally, First
Merchants may not redeem its shares if its total assets would be less than
the sum of its total liabilities plus preferential rights of shareholders
payable upon dissolution. First Merchants must give prior notice to the
Federal Reserve if the consideration to be paid by it for any redemption or
acquisition of its shares, when aggregated with the consideration paid for
all redemption or acquisitions for the preceding 12 months, equal or exceeds
10% of the consolidated net worth of First Merchants.
Anderson has similar redemption rights as First Merchants, but must
follow a different procedure and obtain certain approvals. To redeem its
stock, the Board of Directors of Anderson must pass a resolution approving
the redemption of its shares. Furthermore, prior to such redemption, the
adopted resolution of the Anderson Board of Directors must be submitted to
and approved by the Indiana Department. If the resolution of the Anderson
Board of Directors prohibits the reissue of such acquired shares, the number
of authorized shares must be reduced by an amendment to Anderson's Articles.
Amendments to Anderson's Articles must be approved by the Indiana Department
and delivered to the Indiana Secretary of State. Reacquired shares may also
be cancelled by a resolution of the Anderson Board of Directors and the
Indiana Department.
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<PAGE>
Redemption of shares may not be made when First Merchants or
Anderson is insolvent or would be rendered insolvent by the redemption.
ANTI-TAKEOVER PROVISIONS
The anti-takeover measures applicable to First Merchants and
Anderson, as described below, may have the effect of discouraging a person or
other entity to acquire control of either company. These measures may have
the effect of discouraging certain tender offers for shares of either
company's common stock which might otherwise be made at premium prices or
certain other acquisition transactions which might be viewed favorably by a
significant number of shareholders.
FIRST MERCHANTS AND INDIANA LAW. Under the business combinations
provisions of the IBCL which are applicable to First Merchants, any 10%
shareholder of an Indiana corporation, with a class of voting shares
registered under Section 12 of the Securities Exchange Act of 1934 or which
has specifically adopted this provision in the corporation's articles of
incorporation, is prohibited for a period of five years from completing a
business combination with the corporation unless, prior to the acquisition of
such 10% interest, the board of directors approved either the acquisition of
such interest or the proposed business combination. Further, the corporation
and a 10% shareholder may not consummate a business combination unless all
provisions of the articles of incorporation are complied with and a majority
of disinterested shareholders approve the transaction or all shareholders
receive a price per share as determined by Indiana law.
An Indiana corporation may elect to remove itself from the
protection provided by the Indiana business combinations provision, but such
an election remains ineffective for 18 months and does not apply to a
combination with a shareholder who acquired a 10% ownership position prior to
the election. The constitutional validity of the business combinations
provisions of Indiana law has been upheld by the United States Supreme Court.
First Merchants is covered by the business combinations provisions of the
IBCL. Such provisions are not applicable to Anderson as an Indiana bank.
In addition to the business combinations provision, the IBCL also
contains a "control share acquisition" provision which, although different in
structure from the business combinations provision, may have a similar effect
of discouraging or making more difficult a hostile takeover of an Indiana
corporation. This provision, however, also may have the effect of
discouraging premium bids for outstanding shares. The IBCL provides that,
unless otherwise provided in the corporation's articles of incorporation or
by-laws, certain acquisitions of shares of the corporation's common stock
will be accorded voting rights only if a majority of the disinterested
shareholders approves a resolution granting the potential acquiror the
ability to vote such shares. Upon disapproval of the resolution, the shares
held by the acquiror shall be redeemed by the corporation at the fair market
value of the shares as determined by the control share acquisition provision.
This provision does not apply to a plan of affiliation and merger if
the corporation complies with the applicable merger provisions and is a party to
the agreement of merger or plan
81
<PAGE>
of share exchange. First Merchants is subject to the control share
acquisition provision. Again, such provisions are not applicable to Anderson
as an Indiana bank.
FIRST MERCHANTS' ARTICLES. In addition to the protection afforded by
the IBCL, First Merchants' Articles provide that the directors of First
Merchants shall be divided into three classes, each serving three year terms
with one class to be elected at each annual meeting of shareholders. First
Merchants' Articles provide that directors may be removed with or without
cause by a 2/3rds vote of the shares entitled to vote; provided, however,
that if the Board by 2/3rds vote recommends removal of a director, that
director may be removed by a majority of the shares entitled to vote.
First Merchants' Articles also require the approval of the holders
of 3/4ths of the voting stock as a condition of certain business combinations
involving any shareholder holding more than 10% of the voting stock.
"Business combinations" include, but are not limited to, mergers,
consolidations, sales, leases, liquidations, dissolutions, certain
reorganizations, and agreements relating to the foregoing. An exception
exists if the transaction is approved by a 2/3rds vote of the Board or the
shareholders are to receive fair consideration for their shares. "Fair
consideration" generally means, an amount per share equal to the higher of
(a) the highest per share price paid for the stock in the two years preceding
the business combination, and (b) the per share book value for the stock. In
the event 2/3rds Board approval is obtained or fair consideration is to be
paid, then approval of the business combination would only require the
approval of the holders of 2/3rds of the voting stock.
The above referred to provision of First Merchants' Articles can be
amended only with the approval of 3/4ths of the voting stock.
The existence of authorized but unissued common and preferred stock
of First Merchants may have an anti-takeover effect as the issuance of
additional First Merchants shares with sufficient voting power could have a
dilutive effect on its stock and may result in the defeat of an attempt to
acquire control of First Merchants. The Board may issue shares of common
stock and/or preferred stock at any time without shareholder approval. The
relative rights, preferences, limitations and restrictions attendant with the
ownership of the preferred stock would be determined by the Board prior to
the issuance thereof. The Board would determine whether any voting rights
would attach to the preferred stock. The Board has no present plans to issue
any preferred stock or common stock other than in connection with the merger.
The issuance of preferred or common stock in the future could result in the
dilution of ownership and control of First Merchants by common shareholders.
There is no guarantee that current shareholders would have an opportunity to
purchase any of the preferred or common stock when and if it is issued since
they do not have preemptive rights.
ANDERSON'S ARTICLES. The existence of authorized but unissued shares
of Anderson common stock may have an anti-takeover effect as the issuance of
additional Anderson shares with sufficient voting power could have a dilutive
effect on Anderson's stock and may result in the defeat of an attempt to
acquire control of the bank. The Board of Directors of Anderson may issue
shares of common stock at any time without shareholder approval. The
Agreement prohibits the issuance by Anderson of additional shares of common
stock.
82
<PAGE>
DIRECTOR LIABILITY
Under the IBCL, a director of First Merchants will not be liable to
shareholders for any action taken as a director, or any failure to take any
action, unless:
1. The director has breached or failed to perform his duties as a
director in good faith with the care an ordinarily prudent
person in a like position would exercise under similar
circumstances and in a manner the director reasonably believes
to be in the best interests of the corporation; and
2. Such breach or failure to perform constitutes willful misconduct or
recklessness.
Similar provisions are applicable to the liability of a director of
Anderson under Indiana banking statutes.
LEGAL OPINIONS
Certain legal matters in connection with the Agreement will be
passed upon for First Merchants by the law firm of Bingham Summers Welsh &
Spilman, 2700 Market Tower, 10 West Market Street, Indianapolis, Indiana
46204 and for Anderson by the law firm of Leagre Chandler & Millard, 1400
First Indiana Plaza, 135 North Pennsylvania, Indianapolis, Indiana 46204.
Frank A. Bracken is of counsel with Bingham Summers Welsh & Spilman and a
director of First Merchants.
EXPERTS
The financial statements of First Merchants, incorporated by
reference in this Proxy Statement-Prospectus, have been audited by Olive,
LLP, independent public accountants, to the extent and for the periods
indicated in their report thereon, and have been so incorporated by reference
in this Proxy Statement-Prospectus in reliance upon such report of Olive, LLP
given on the authority of such firm as experts in auditing and accounting.
The financial statements of Anderson included in this Proxy
Statement -Prospectus have been audited by Crowe, Chizek and Company LLP,
independent public accountants, to the extent and for the periods indicated
in their report thereon, and have been so included in this Proxy
Statement-Prospectus in reliance upon such report of Crowe, Chizek and
Company LLP given on the authority of such firm as experts in auditing and
accounting.
OTHER MATTERS
The Special Meeting of Shareholders is called for the purposes set
forth in the Notice. The Board of Directors of Anderson knows of no other
matter for action by shareholders at such Special Meeting other than the
matters described in the Notice. However, the enclosed proxy will confer
discretionary authority with respect to matters which are not known to the
Board of Directors at the time of the printing thereof and which may properly
come before the Special Meeting. It is the intention of the persons named in
the proxy to vote with respect to such matters in accordance with the
recommendations of management of Anderson.
83
<PAGE>
WHERE YOU CAN FIND ADDITIONAL INFORMATION
First Merchants has filed with the Securities and Exchange
Commission (the "COMMISSION") a Registration Statement under the Securities
Act that registers the distribution to Anderson shareholders of the shares of
First Merchants common stock to be issued in connection with the merger. The
Registration Statement, including the attached exhibits and schedules,
contains additional relevant information about Anderson and First Merchants
common stock. The rules and regulations of the Commission allow First
Merchants to omit certain information included in the Registration Statement
from this Proxy Statement-Prospectus.
In addition, First Merchants files reports, proxy statements and
other information with the Commission under the Securities Exchange Act of
1934. You may read this information at the following locations of the
Commission:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, NY 10048 Suite 1400
Chicago, Illinois 60661-2511
</TABLE>
You may also obtain copies of this information by mail from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, at prescribed rates. The public may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330.
The Commission also maintains an Internet world wide web site that
contains reports, proxy statements and other information about issuers, like
First Merchants, who file electronically with the Commission. The address of
that site is http://www.sec.gov.
The Commission allows First Merchants to "incorporate by reference"
information into this Proxy Statement-Prospectus. This means that it can
disclose important information to you by referring you to another document
filed separately with the Commission. The information incorporated by
reference is considered to be a part of this Proxy Statement-Prospectus,
except for any information that other information included directly in this
document supersedes.
This Proxy Statement-Prospectus incorporates by reference the
documents listed below that First Merchants has previously filed with the
Commission. They contain important information about First Merchants and its
financial condition.
84
<PAGE>
<TABLE>
<CAPTION>
First Merchants SEC Filings Period
- --------------------------- ------
<S> <C>
Annual Report on Form 10-K................................ Year ended December 31, 1997
Quarterly Report on Form 10-Q............................. Quarter ended March 31, 1998
Quarterly Report on Form 10-Q............................. Quarter ended June 30, 1998
Quarterly Report on Form 10-Q............................. Quarter ended September 30, 1998
Current Report on Form 8-K................................ Dated August 11, 1998
</TABLE>
The description of First Merchants common stock set forth in the registration
statement filed by First Merchants pursuant to Section 12 of the
Securities Exchange Act of 1934, including any amendment or report
filed with the Commission for the purpose of updating such description.
First Merchants incorporates by reference additional documents that
it may file with the Commission between the date of this Proxy
Statement-Prospectus and the date of the Anderson Special Meeting. These
documents include periodic reports, such as Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as
proxy statements.
First Merchants has supplied all information contained or
incorporated by reference in this Proxy Statement-Prospectus relating to
First Merchants and Pendleton, as well as all pro forma financial
information, and Anderson has supplied all such information relating to
Anderson.
You can obtain any of the documents incorporated by reference
in this document through First Merchants, or from the Commission through the
Commission's web site at the address described above. Documents incorporated
by reference are available from First Merchants without charge, excluding any
exhibits to those documents unless the exhibit is specifically incorporated
by reference as an exhibit in this Proxy Statement-Prospectus. You can obtain
documents incorporated by reference in this Proxy Statement-Prospectus by
requesting them in writing or by telephone from:
FIRST MERCHANTS CORPORATION
Larry R. Helms
Senior Vice President and General Counsel
200 East Jackson Street
Muncie, Indiana 47305
(765) 747-1530
If you would like to request documents, please do so by ___________,
1999 to insure timely delivery before the Special Meeting. If you request any
incorporated documents from us, we will mail them to you by first class mail,
or another equally prompt means, within one business day after we received
your request.
85
<PAGE>
WE HAVE NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ABOUT THE MERGER OR OUR COMPANIES THAT IS DIFFERENT FROM, OR
IN ADDITION TO, THAT CONTAINED IN THIS PROXY STATEMENT-PROSPECTUS OR IN ANY
OF THE MATERIALS THAT WE HAVE INCORPORATED INTO THIS DOCUMENT. THEREFORE, IF
ANYONE DOES GIVE YOU INFORMATION OF THIS SORT, YOU SHOULD NOT RELY ON IT. IF
YOU ARE IN A JURISDICTION WHERE OFFERS TO EXCHANGE OR SELL, OR SOLICITATIONS
OF OFFERS TO EXCHANGE OR PURCHASE, THE SECURITIES OFFERED BY THIS DOCUMENT OR
THE SOLICITATION OF PROXIES IS UNLAWFUL, OR IF YOU ARE A PERSON TO WHOM IT IS
UNLAWFUL TO DIRECT THESE TYPES OF ACTIVITIES, THEN THE OFFER PRESENTED IN
THIS DOCUMENT DOES NOT EXTEND TO YOU. THE INFORMATION CONTAINED IN THIS
DOCUMENT SPEAKS ONLY AS OF THE DATE OF THIS DOCUMENT UNLESS THE INFORMATION
SPECIFICALLY INDICATES THAT ANOTHER DATE APPLIES.
FORWARD LOOKING STATEMENTS
This Proxy Statement-Prospectus contains certain forward-looking
statements with respect to the financial condition, results of operations,
and business of First Merchants, Pendleton and Anderson and of First
Merchants and Pendleton following the consummation of the merger, including
statements relating to the cost savings and revenue enhancements that are
expected to be realized from the merger and the expected impact of the merger
on First Merchants' financial performance. These forward-looking statements
involve certain risks and uncertainties. Factors that may cause actual
results to differ materially from those contemplated by such forward-looking
statements include, among other things, the following possibilities: (i)
expected cost savings from the merger cannot be fully realized; (ii) deposit
attrition, customer loss, or revenue loss following the merger is greater
than expected; (iii) competitive pressure in the banking industry increases
significantly; (iv) costs or difficulties related to the integration of the
businesses of First Merchants, Pendleton and Anderson are greater than
expected; (v) changes in the interest rate environment reduce margins; (vi)
general economic conditions, either nationally or regionally, are less
favorable than expected, resulting in, among other things, a deterioration in
credit quality; (vii) changes occur in the regulatory environment; (viii)
changes occur in business conditions and inflation; (ix) changes occur in the
securities markets; and (x) disruptions of the operations of First Merchants,
Pendleton, Anderson or any of their subsidiaries, or any other governmental
or private entity as a result of the "Year 2000 Problem." The forward-looking
earnings estimates included in this Proxy Statement-Prospectus have not been
examined or compiled by the independent public accountants of First Merchants
and Anderson, nor have such accountants applied any procedures thereto.
Accordingly, such accountants do not express an opinion or any other form of
assurance on them. Further information on other factors that could affect the
financial results of First Merchants and Pendleton after the merger is
included in the Commission filings incorporated by reference herein. See
"WHERE YOU CAN FIND ADDITIONAL INFORMATION."
86
<PAGE>
INDEX TO FINANCIAL STATEMENTS
ANDERSON COMMUNITY BANK
<TABLE>
<CAPTION>
<S> <C>
Balance Sheets as of September 30, 1998 and 1997 (unaudited).......................F-2
Statements of Income and Comprehensive Income for the
Three Months Ended September 30, 1998 and 1997 (unaudited)....................F-3
Statements of Income and Comprehensive Income for the
Nine Months Ended September 30, 1998 and 1997 (unaudited)..................F-4
Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 (unaudited).......................................F-5
Notes to Financial Statements......................................................F-6
Report of Independent Auditors.....................................................F-8
Balance Sheets as of December 31, 1997 and 1996....................................F-9
Statements of Income for the Years Ended
December 31, 1997 (audited) and 1996 (unaudited)..............................F-10
Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1997 (audited) and 1996 (unaudited)..........F-11
Statements of Cash Flows for the Years Ended
December 31, 1997 (audited) and 1996 (unaudited)..............................F-12
Notes to Financial Statements......................................................F-13
</TABLE>
F-1
<PAGE>
ANDERSON COMMUNITY BANK
BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,333 $ 5,297
Federal funds sold and securities purchased under
agreement to resell 3,071 -
----------- -----------
Total cash and cash equivalents 5,404 5,297
Securities available for sale 9,830 6,645
Loans 59,156 50,206
Less: Allowance for loan losses (761) (658)
------------ ------------
Loans, net 58,395 49,548
Premises, equipment and improvements, net 1,058 620
Accrued interest receivable and other assets 1,026 727
----------- -----------
$ 75,713 $ 62,837
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing deposits $ 11,310 $ 8,311
Interest-bearing demand and savings deposits 23,485 17,772
Interest-bearing time deposits 32,877 29,811
----------- -----------
67,672 55,894
Accrued interest payable and other liabilities 714 495
----------- -----------
Total liabilities 68,386 56,389
----------- -----------
Shareholders' equity
Common stock, $1 par value, 2,000,000 shares authorized,
589,784 and 583,144 shares outstanding 590 583
Surplus 5,200 5,128
Undivided profits 1,468 705
Net unrealized gain on securities available for sale 69 32
----------- -----------
Total shareholders' equity 7,327 6,448
----------- -----------
$ 75,713 $ 62,837
=========== ===========
</TABLE>
See accompanying notes.
F-2
<PAGE>
ANDERSON COMMUNITY BANK
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the three months ended September 30, 1998 and 1997
(Dollar amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 1,293 $ 977
Federal funds sold 52 39
Securities
Taxable 109 81
Tax exempt 31 16
------------ ------------
1,485 1,113
INTEREST EXPENSE
Deposits 656 490
------------ ------------
NET INTEREST INCOME 829 623
Provision for loan losses 33 60
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 796 563
NONINTEREST INCOME
Service charges on deposit accounts 50 39
Other 51 10
------------ ------------
101 49
NONINTEREST EXPENSES
Salaries and employee benefits 236 191
Occupancy and equipment 64 56
Data processing 33 24
Other 114 72
------------ ------------
447 343
------------ ------------
INCOME BEFORE INCOME TAXES 450 269
Income taxes 170 101
------------ ------------
NET INCOME 280 168
Other comprehensive income, net of tax:
Change in unrealized gains/losses on securities 57 15
------------ ------------
COMPREHENSIVE INCOME $ 337 $ 183
============ ============
Basic earnings per share $ .47 $ .29
============ ============
Diluted earnings per share $ .47 $ .29
============= ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
ANDERSON COMMUNITY BANK
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the nine months ended September 30, 1998 and 1997 (Dollar
amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 3,634 $ 2,650
Federal funds sold 132 90
Securities
Taxable 293 272
Tax exempt 81 32
------------ ------------
4,140 3,044
INTEREST EXPENSE
Deposits 1,835 1,368
------------ ------------
NET INTEREST INCOME 2,305 1,676
Provision for loan losses 103 155
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,202 1,521
NONINTEREST INCOME
Service charges on deposit accounts 138 112
Other 129 26
------------ ------------
267 138
NONINTEREST EXPENSES
Salaries and employee benefits 655 545
Occupancy and equipment 198 174
Data processing 95 72
Other 296 220
------------ ------------
1,244 1,011
------------ ------------
INCOME BEFORE INCOME TAXES 1,225 648
Provision for income taxes 462 248
------------ ------------
NET INCOME 763 400
Other comprehensive income, net of tax:
Change in unrealized gains/losses on securities 37 18
------------ ------------
COMPREHENSIVE INCOME $ 800 $ 418
============ ============
Basic earnings per share $ 1.30 $ .69
============ ============
Diluted earnings per share $ 1.29 $ .69
============= ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
ANDERSON COMMUNITY BANK
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1998 and 1997
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 763 $ 400
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 110 79
Stock awards expense 10 9
Provision for loan losses 103 155
Changes in assets and liabilities:
Accrued interest receivable and other assets (299) (999)
Accrued interest payable and other liabilities 200 (46)
------------ -------------
Net cash from operating activities 887 (402)
CASH FLOWS FROM INVESTING ACTIVITIES
Loans made to customers and payments received (8,950) (8,506)
Purchase of securities available for sale (3,629) (6,607)
Proceeds from principal payments and maturities
of securities available for sale 500 -
Purchases of premises and equipment, net (548) (92)
------------- -------------
Net cash from investing activities (12,627) (15,205)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 11,778 7,764
Issuance of stock 69 245
------------ ------------
Net cash from financing activities 11,847 8,009
------------ ------------
Net change in cash and cash equivalents 107 (7,598)
Cash and cash equivalents at beginning of period 5,297 10,225
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,404 $ 2,627
============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The significant accounting policies followed by Anderson Community Bank (the
"Company") for interim financial reporting are consistent with the accounting
policies followed for annual financial reporting. The consolidated interim
financial statements have been prepared in accordance with Generally Accepted
Accounting Principles and in accordance with instructions to Form 10-QSB and
may not include all information and footnotes normally disclosed for full
annual financial statements. All adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the periods
reported have been included in the accompanying unaudited financial
statements and all such adjustments are of a normal recurring nature.
Under a new accounting standard, comprehensive income is now reported for all
periods. Comprehensive income includes both net income and other
comprehensive income. Other comprehensive income includes the changes in
unrealized gains and losses on securities available-for-sale, net of tax.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by the weighted
average shares outstanding during the period. Diluted earnings per share
further assume the effect of potentially dilutive common stock equivalents.
The following table presents the number of shares used to compute per share
data:
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares outstanding used
to compute basic earnings per share 588,257 579,407 589,784 583,144
Effect of stock options 3,056 986 2,717 791
------- ------- ------- -------
Weighted average shares used
to compute diluted earnings per share 591,313 580,393 592,501 583,935
======= ======= ======= =======
</TABLE>
F-6
<PAGE>
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 3 - PENDING BUSINESS COMBINATION
On October 27, 1998, the Company agreed to merge with Pendleton Banking
Company (Pendleton), a wholly-owned subsidiary of First Merchants Corporation
(First Merchants). First Merchants is a bank holding company located in
Muncie, Indiana. Under the terms of the agreement, each outstanding common
share of the Company will be converted into 1.38 common shares of First
Merchants. The proposed transaction requires approval by regulatory
authorities and both the shareholders of the Company and Pendleton. The
proposed transaction is expected to be consummated in the first quarter of
1999.
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Anderson Community Bank
Anderson, Indiana
We have audited the accompanying balance sheets of Anderson Community Bank as of
December 31, 1997 and 1996 and the related statements of income, changes in
shareholders' equity and cash flows for the year ended December 31, 1997. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Anderson Community Bank as of
December 31, 1997 and 1996 and the results of its operations and cash flows for
the year ended December 31, 1997 in conformity with generally accepted
accounting principles.
Crowe, Chizek and Company LLP
Indianapolis, Indiana
December 9, 1998
F-8
<PAGE>
ANDERSON COMMUNITY BANK
BALANCE SHEETS
December 31, 1997 and 1996
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,297 $ 2,416
Federal funds sold and securities purchased under
agreement to resell - 7,809
----------- -----------
Total cash and cash equivalents 5,297 10,225
Securities available for sale 6,645 -
Loans 50,206 35,275
Less: Allowance for loan losses (658) (466)
----------- -----------
Loans, net 49,548 34,809
Premises, equipment and improvements, net 620 606
Accrued interest receivable and other assets 727 329
----------- -----------
$ 62,837 $ 45,969
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing deposits $ 8,311 $ 4,989
Interest-bearing demand and savings deposits 17,772 10,251
Interest-bearing time deposits 29,811 24,812
----------- -----------
55,894 40,052
Accrued interest payable and other liabilities 495 380
----------- -----------
Total liabilities 56,389 40,432
Shareholders' equity
Common stock, $1 par value, 2,000,000 shares authorized,
583,144 and 557,744 shares outstanding 583 558
Surplus 5,128 4,899
Undivided profits 705 80
Net unrealized gain on securities available for sale 32 -
----------- ----------
Total shareholders' equity 6,448 5,537
----------- -----------
$ 62,837 $ 45,969
=========== ===========
</TABLE>
See accompanying notes.
F-9
<PAGE>
ANDERSON COMMUNITY BANK
STATEMENTS OF INCOME
Years ended December 31, 1997 and 1996
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(UNAUDITED)
1997 1996
---- ----
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 3,774 $ 2,353
Federal funds sold and short term
money market investments 188 402
Securities
Taxable 266 -
Tax Exempt 52 -
------------ ----------
4,280 2,755
INTEREST EXPENSE
Deposits 1,877 1,254
---------- ----------
NET INTEREST INCOME 2,403 1,501
Provision for loan losses 197 256
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,206 1,245
Noninterest income
Service charges on deposit accounts 153 100
Other 47 20
---------- ----------
200 120
Noninterest expense
Salaries and employee benefits 728 495
Occupancy and equipment 226 165
Data processing 100 67
Other 352 249
---------- ----------
1,406 976
---------- ----------
INCOME BEFORE INCOME TAXES 1,000 389
Income taxes 375 157
---------- ----------
NET INCOME $ 625 $ 232
========== ==========
PER SHARE DATA
Basic earnings per share $ 1.08 $ .42
Diluted earnings per share $ 1.08 $ .42
</TABLE>
See accompanying notes.
F-10
<PAGE>
ANDERSON COMMUNITY BANK
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1997 and 1996
(Unaudited)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Net Total
Common Undivided Unrealized Shareholders'
Stock Surplus Profits Gain Equity
----- ------- ------- ---- ------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 $ 547 $ 4,803 $ (152) $ - $ 5,198
Net income for 1996 232 232
Issuance of 10,700 shares
of common stock 11 96 107
------- -------- -------- ---------- --------
BALANCE AT DECEMBER 31, 1996 558 4,899 80 - 5,537
Net income for 1997 625 625
Issuance of 25,400 shares
of common stock 25 229 254
Change in net unrealized
gain on securities available
for sale 32 32
------- -------- -------- ---------- --------
BALANCE AT DECEMBER 31, 1997 $ 583 $ 5,128 $ 705 $ 32 $ 6,448
======= ======== ======== ========== ========
</TABLE>
See accompanying notes.
F-11
<PAGE>
ANDERSON COMMUNITY BANK
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1996
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
(UNAUDITED)
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 625 $ 232
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 98 70
Stock awards expense 9 5
Provision for loan losses 197 256
Changes in assets and liabilities:
Accrued interest receivable and other assets (398) (99)
Accrued interest payable and other liabilities 99 258
--------- ---------
Net cash from operating activities 630 722
CASH FLOWS FROM INVESTING ACTIVITIES
Loans made to customers, net of payments collected (14,936) (19,436)
Purchase of securities available for sale (6,596) -
Net premises and equipment purchases (112) (320)
--------- --------
Net cash from investing activities (21,644) (19,756)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts 15,842 18,097
Issuance of stock 244 102
--------- --------
Net cash from financing activities 16,086 18,199
--------- --------
Net change in cash and cash equivalents (4,928) (835)
Cash and cash equivalents at beginning of year 10,225 11,060
--------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,297 $10,225
========= ========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 1,839 1,168
Income taxes 422 16
</TABLE>
See accompanying notes.
F-12
<PAGE>
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: Anderson Community Bank is a de-novo bank, which was
formed March 9, 1995. The Bank is engaged in the business of commercial and
retail banking, with operations conducted through its main office and three
branches located in Madison County, Indiana. The majority of the Bank's income
is derived from commercial and retail business lending activities and
short-term investments. The Bank generates commercial, mortgage and installment
loans, and receives deposits from customers primarily in the Madison County,
Indiana area. The majority of the Bank's loans are secured by specific items of
collateral including business assets, real property and consumer assets.
USE OF ESTIMATES: To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions
based on available information. These estimates and assumptions affect the
amounts reported in the financial statements and the disclosures provided, and
future results could differ. The estimate for allowance for loan losses is
particularly subject to change.
SECURITIES: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately in shareholders'
equity, net of tax. Securities are written down to fair value when a decline in
fair value is not temporary. Interest and dividend income, adjusted by
amortization of purchase premium or discount, is included in earnings.
LOANS: Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs, the allowance for loan losses, and charge-offs. Interest
income is reported on the interest method and includes amortization of net
deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 90 days. Payments received on such loans are
reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance
required based on past loan loss experience, known and inherent risks in the
portfolio, information about specific borrower situations and estimated
collateral values, economic conditions, and other factors. Allocations of the
allowance may be made for specific loans, but the entire allowance is available
for any loan that, in management's judgement, should be charged-off.
F-13
<PAGE>
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ALLOWANCE FOR LOAN LOSSES: (Continued) Loan impairment is reported when full
payment under the loan terms is not expected. Impairment is evaluated in total
for smaller-balance loans of similar nature such as residential mortgage,
consumer, and credit card loans, and on an individual loan basis for other
loans. If a loan is impaired, a portion of the allowance is allocated so that
the loan is reported, net, at the present value of estimated future cash flows
using the loan's existing rate or at the fair value of collateral if repayment
is expected solely from the collateral. Loans are evaluated for impairment when
payments are delayed, typically 90 days or more, or when it is probable that
all principal and interest amounts will not be collected according to the
original terms of the loan.
PREMISES, EQUIPMENT AND IMPROVEMENTS: Premises, equipment and improvements are
stated at cost less accumulated depreciation and are depreciated over estimated
useful lives using straight-line and accelerated methods.
EMPLOYEE BENEFITS: In 1997 the Bank implemented a 401(k) profit sharing plan
covering substantially all employees. Employee contributions are voluntary and
employer contributions include both matching and discretionary contributions.
The Bank's matching contribution to the plan for 1997 totaled $6.
INCOME TAXES: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more
fully disclosed separately. Fair value estimates involve uncertainties and
matters of significant judgement regarding interest rates, credit risk,
prepayments and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
DIVIDEND RESTRICTION: Banking regulations require the maintenance of certain
capital levels which may limit the amount of dividends available to be paid to
shareholders.
F-14
<PAGE>
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LONG-TERM ASSETS: These assets are reviewed for impairment when events indicate
their carrying amount may not be recoverable from future undiscounted cash
flows.
EARNINGS PER SHARE: Basic earnings per share is based on weighted-average
common shares outstanding. Diluted earnings per share further assumes issue of
any dilutive potential common shares. The accounting standard for computing
earnings per share was revised for 1997, and all earnings per share previously
reported are recalculated to follow the new standard.
CASH FLOWS: Cash and cash equivalents include cash on hand, demand deposits
with other financial institutions and federal funds sold. Cash flows are
reported net for customer loan and deposit transactions, interest-bearing time
deposits with other financial institutions and short-term borrowings with
maturities of 90 days or less.
FINANCIAL STATEMENT PRESENTATION: Certain items in the 1996 financial
statements have been reclassified to correspond with the 1997 presentation.
FUTURE ACCOUNTING CHANGES: New accounting standards have been issued which will
require future reporting of comprehensive income (net income plus changes in
holding gains and loses on securities available for sale) and may require
redetermination of industry segment financial information.
NOTE 2 - SECURITIES
The amortized cost and fair value of securities available for sale at year-end
1997 are as follows.
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury $ 499 $ 4 $ - $ 503
U.S. Government
agencies 4,379 22 - 4,401
States and
political subdivisions 1,719 23 (1) 1,741
---------- ---------- --------- ---------
$ 6,597 $ 49 $ (1) $ 6,645
========== ========== ========= =========
</TABLE>
F-15
<PAGE>
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
The amortized cost and fair value of debt securities available for sale at
year-end 1997, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due in one year or less $ 1,061 $ 1,063
Due after one year through five years 4,470 4,501
Due after five years through ten years 1,066 1,081
Due after ten years - -
---------- ----------
$ 6,597 $ 6,645
========== ==========
</TABLE>
No securities were sold in 1997.
Securities with amortized cost of $1,012 at year-end 1997 were pledged to
secure public deposits and securities sold under agreements to repurchase.
Securities purchased under agreements to resell at December 31, 1996 totaled
$6,809. The advances earn interest from 5.00% to 5.07% and mature at various
dates during the month of January 1997. All repurchase agreements were with one
institution. These agreements are secured by U.S. government agency bonds with
fair market values greater than or equal to the amount of the advance.
Securities purchased under agreements to resell averaged approximately $6,336
during 1996, and the maximum amounts outstanding at any month-end during 1996
was $8,635.
F-16
<PAGE>
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS
Year-end loans are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Residential real estate $ 14,425 $ 10,504
Commercial real estate 20,636 16,525
Commercial 11,899 6,464
Consumer 3,246 1,782
---------- ----------
$ 50,206 $ 35,275
========== ==========
</TABLE>
Certain of the Bank's directors, executive officers or principal shareholders,
including their immediate families and companies in which they are principal
owners, were loan customers of the Bank. Loans to these individuals totaled
$933 and $572 at year-end 1997 and 1996.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance, January 1 $ 466 $ 210
Provision for loan losses 197 256
Loans charged off (5) -
Recoveries on loans previously charged off - -
--------- --------
Balance, December 31 $ 658 $ 466
========= ========
</TABLE>
F-17
<PAGE>
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - PREMISES, EQUIPMENT AND IMPROVEMENTS
Year-end premises, equipment and improvements are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Building premises $ 213 $ 183
Land 12 12
Leasehold improvements 170 165
Furniture and equipment 435 358
---------- ----------
Total 830 718
Accumulated depreciation (210) (112)
---------- ----------
$ 620 $ 606
========== ==========
</TABLE>
Some facilities are leased under operating leases. Rental expense was $49 and
$25 in 1997 and 1996 respectively. The Bank currently has one operating lease
which expires in 1998 and requires future minimum lease payments of $5.
NOTE 6 - INTEREST-BEARING DEPOSITS
Time deposits issued in denominations of $100 or more or greater totaled
$14,391 and $12,489 at year-end 1997 and 1996.
At year-end, 1997, scheduled maturities of time deposits are as follows:
<TABLE>
<S> <C>
1998 $ 25,528
1999 3,914
2000 109
2001 143
2002 104
Thereafter 13
-----------
$ 29,811
===========
</TABLE>
F-18
<PAGE>
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 7 - INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current federal $ 293 $ 196
Current state 89 55
Deferred federal (4) (74)
Deferred state (3) (20)
--------- ---------
$ 375 $ 157
========= =========
</TABLE>
The effective tax rate differs from the statutory federal income tax rate as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Statutory rates $ 340 $ 132
Effect of:
Tax exempt income (15) -
State tax expense, net 57 23
Other, net (7) 2
--------- --------
$ 375 $ 157
========= ========
</TABLE>
F-19
<PAGE>
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 7 - INCOME TAXES (Continued)
The year end composition of deferred tax assets and liabilities was as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets
Bad debt provision $ 168 $ 121
Other 11 14
--------- ---------
179 135
Deferred tax liabilities
Accrual to cash basis (37) (7)
Depreciation (24) (16)
Deferred loan fees (23) (10)
Unrealized gain on securities (16) -
--------- ---------
(100) (33)
Less: valuation allowance - -
--------- ---------
Net deferred tax asset $ 79 $ 102
========= =========
</TABLE>
F-20
<PAGE>
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 8 - COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK
Some financial instruments are used to meet customer financing needs and to
reduce exposure to interest rate changes These financial instruments include
commitments to extend credit and standby letters of credit. These involve, to
varying degrees, credit and interest-rate risk in excess of the amount reported
in the balance sheets.
Commitments at year-end are as follows.
<TABLE>
<S> <C>
Unused open end revolving lines of credit $ 7,697 $ 3,572
Standby letters of credit 135 90
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
and letters of credit generally have fixed expiration dates of no more than one
year or are variable rate. Standby letters of credit are conditional
commitments to guarantee a customer's performance to a third party. Exposure to
credit loss if the other party does not perform is represented by the
contractual amount of these items. Collateral or other security is normally not
obtained for these financial instruments prior to their use, and many of the
commitments are expected to expire without being used.
F-21
<PAGE>
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 9 - STOCK OPTION AND AWARD PLANS
Pursuant to a stock award plan, key employees are granted stock each year based
on the Bank's profitability. During 1997 and 1996, 900 and 500 shares were
awarded under the stock award plan.
The Bank's stock option plan reserved 21,000 shares of common stock for the
purpose of grants to officers and other employees under an incentive stock
option plan and 50,000 shares of common stock for grants to directors under a
non-qualified plan. Options are granted at the fair value of stock at the date
of the grant. All options granted have 10 year terms, vest immediately and are
fully exercisable upon grant.
A summary of stock option activity and related per share information is as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------- --------- -------- ---------
<S> <C> <C> <C> <C>
Outstanding beginning of year 38,500 $ 10.00 16,150 $ 10.00
Granted 2,500 10.00 32,450 10.00
Exercised (24,500) (10.00) (10,100) (10.00)
Forfeited - -
-------- --------
Outstanding - end of year 16,500 $ 10.00 38,500 $ 10.00
======== ========= ======== =========
Exercisable at end of year 16,500 $ 10.00 38,500 $ 10.00
======== ========= ======== =========
Weighted average fair value per
option granted during the year $ 1.50 $ .58
</TABLE>
F-22
<PAGE>
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 9 - STOCK OPTION AND AWARD PLANS (Continued)
The fair value of options granted are estimated using the following
weighted-average information: risk-free interest rate of 5.18% (1997) and
5.81% (1996), expected life of 1 year, dividend rate of 0% and expected
volatility of stock price of .001.
At year-end, options outstanding were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Number of options 16,500 38,500
Range of exercise price per option share $10 $10
Weighted-average exercise price per option $10 $10
Weighted-average remaining option life (years) 8.10 9.21
For options now exercisable:
Number 16,500 38,500
Weighted-average exercise price per share $10 $10
</TABLE>
Financial Accounting Standard No. 123, which became effective for 1996,
requires pro forma disclosures for companies that do not adopt its fair value
accounting method for stock-based employee compensation. Accordingly, the
following pro forma information presents net income and earnings per share had
the Standard's fair value method been used to measure compensation cost for
stock option plans. Compensation cost actually recognized for stock options was
$0 for 1997 and 1996.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period, which in this case is
immediate. The Company's pro forma information follows.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Pro forma net income $ 621 $ 214
Pro forma earnings per share $ 1.07 $ .39
</TABLE>
F-23
<PAGE>
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 10 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative and qualitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If only adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
As a newly chartered bank, the Bank is required to maintain through March 31,
1998, a Tier 1 capital to average assets of 8% based upon the FDIC's statement
of policy. At year end, the capital requirements were met and the Bank was
designated as "well capitalized." Actual capital levels and minimum required
levels were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1997
- ----
Total capital (to Risk
Weighted Assets) $ 6,985 14.65% $ 3,814 8% $ 4,767 10%
Tier I Capital (to Risk
Weighted Assets) $ 6,388 13.40% $ 1,907 4% $ 2,860 6%
Tier 1 Capital (to
Average Assets) $ 6,388 10.92% $ 2,339 4% $ 2,924 5%
</TABLE>
F-24
<PAGE>
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 11 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments at year-end were as follows:
<TABLE>
<CAPTION>
---------1997--------- ---------1996---------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 5,297 $ 5,297 $10,225 $10,225
Securities available-for-sale 6,645 6,645 - -
Loans, net 49,548 49,479 34,809 34,753
Accrued interest receivable 442 442 253 253
Financial liabilities
Deposits 55,894 56,117 40,052 40,204
Accrued interest payable 188 188 150 150
</TABLE>
Estimated fair value approximates carrying value for all items except those
described. The fair value for securities is based on quoted market values for
the individual securities or for equivalent securities. The fair value for loans
is based on estimates of the difference in interest rates that the Bank would
charge the borrowers for similar such loans with similar maturities made at
December 31, applied for an estimated time period until the loan is assumed to
reprice or be paid. The fair value for certificates of deposit is based on
estimates of the rates that the Company would pay on such maturity. The
estimated fair value for off-balance-sheet loan commitments are considered
nominal.
F-25
<PAGE>
ANDERSON COMMUNITY BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
(Dollars amounts in thousands, except per share data)
(Amounts related to the 1996 Statements of Income,
Changes in Shareholders' Equity and Cash Flows are Unaudited)
- --------------------------------------------------------------------------------
NOTE 12 - PER SHARE DATA
The following table presents the number of shares used to compute basic and
diluted earnings per share:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Weighted average shares
outstanding during the year 580,409 553,497
Dilutive effect of stock options 916 -
---------- ---------
Weighted average shares used to
compute diluted earnings
per share 581,325 553,497
========== =========
</TABLE>
NOTE 13 - PENDING BUSINESS COMBINATION
On October 27, 1998, the Company agreed to merge with Pendleton Banking Company
(Pendleton), a wholly-owned subsidiary of First Merchants Corporation (First
Merchants). First Merchants is a bank holding company located in Muncie,
Indiana. Under the terms of the agreement, each outstanding common share of the
Company will be converted into 1.38 common shares of First Merchants. The
proposed transaction requires approval by regulatory authorities and both the
shareholders of the Company and Pendleton. The proposed transaction is expected
to be consummated in the first quarter of 1999.
F-26
<PAGE>
APPENDIX A
AGREEMENT OF REORGANIZATION AND MERGER
AMONG
FIRST MERCHANTS CORPORATION,
PENDLETON BANKING COMPANY
AND
ANDERSON COMMUNITY BANK
THIS AGREEMENT OF REORGANIZATION AND MERGER (the "Agreement"), is
entered this 27th day of October, 1998, by and among FIRST MERCHANTS CORPORATION
("First Merchants"), PENDLETON BANKING COMPANY ("Pendleton"), and ANDERSON
COMMUNITY BANK ("Anderson").
W I T N E S S E T H:
WHEREAS, First Merchants is a corporation duly organized and existing
under the laws of the State of Indiana and a registered bank holding company
under the Bank Holding Company Act of 1956, as amended, with its principal
place of business in Muncie, Delaware County, Indiana;
WHEREAS, Pendleton is a state bank duly organized and existing under
the laws of the State of Indiana and a wholly-owned subsidiary of First
Merchants with its principal banking office in Pendleton, Madison County,
Indiana;
WHEREAS, Anderson is a state bank duly organized and existing under
the laws of the State of Indiana with its principal banking office in
Anderson, Madison County, Indiana;
WHEREAS, it is the desire of First Merchants, Pendleton and
Anderson to effect a statutory merger of Anderson with and into Pendleton
under the name of "The Madison Community Bank"; and
WHEREAS, a majority of the entire Board of Directors of First
Merchants and Pendleton and a majority of the entire Board of Directors of
Anderson have approved this
A-1
<PAGE>
Agreement, designated it as a plan of reorganization within the provisions of
Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the
"Code"), and authorized its execution.
NOW, THEREFORE, in consideration of the mutual promises, covenants, and
agreements herein contained and other good and valuable consideration, the
receipt of which is hereby acknowledged, First Merchants, Pendleton, and
Anderson hereby make this Agreement and prescribe the terms and conditions of
the merger of Anderson with and into Pendleton and the mode of carrying the
transaction into effect as follows:
SECTION 1
THE MERGER
1.01. MERGER. Subject to the terms and conditions of this Agreement, on
the Effective Date (as defined in Section 11 hereof), Anderson shall be merged
with and into Pendleton, under the Articles of Incorporation of Pendleton, and
Pendleton shall be the "Continuing Bank" which shall continue its corporate
existence under the laws of the State of Indiana, pursuant to the provisions of
and with the effect provided in the Indiana Financial Institutions Act and
particularly Indiana Code Chapter 28-1-7 (the "Merger").
1.02. RIGHT TO REVISE MERGER. First Merchants and Pendleton may, at any
time, change the method of effecting the Merger if and to the extent First
Merchants and Pendleton deem such change to be desirable; provided, however,
that no such change, modification or amendment shall (a) alter or change the
amount or kind of consideration to be received by the shareholders of Anderson
specified in Section 3 hereof as a result of the Merger, (ii) adversely affect
the tax treatment to the shareholders of Anderson, or (iii) materially impede or
delay receipt of any approvals referred to in this Agreement or the consummation
of the transactions contemplated by this Agreement.
SECTION 2
EFFECT OF THE MERGER
Upon the Merger becoming effective:
2.01. GENERAL DESCRIPTION. The separate existence of Anderson shall
cease and the Continuing Bank shall possess all of the assets of Anderson
including all of its rights, privileges, immunities, powers, and franchises and
shall be subject to and assume all of the duties and liabilities of Anderson.
2.02. NAME AND OFFICES. Subject to regulatory approval, the name of the
Continuing Bank shall be changed to be "The Madison Community Bank," with 19
West 10th Street being
A-2
<PAGE>
the principal office of the Continuing Bank. After the Effective Date, all
offices of Pendleton and Anderson shall be operated as branches of the
Continuing Bank except for the principal office of the Continuing Bank.
2.03. DIRECTORS OF THE CONTINUING BANK. The Board of Directors of the
Continuing Bank, until such time as their successors are elected and qualified,
shall consist of all of the current members of the Board of Directors of
Anderson and the Board of Directors of Pendleton who desire to serve on the
Board of Directors of the Continuing Bank; provided, however, that all such
directors of the Continuing Bank shall be subject to First Merchants' policy of
mandatory retirement at age seventy (70); provided, further, that the policy of
mandatory retirement shall not apply to any of Anderson's current directors
until twelve (12) months after the Effective Date. Any members of the Board of
Directors of the Continuing Bank subject to such mandatory retirement policy
may be designated by the Continuing Bank's Board of Directors as directors
emeritus to serve in an advisory non-voting capacity and to attend meetings of
the Continuing Bank's Board of Directors. The Chairman of the Board of
Directors of Anderson shall serve as the Chairman of the Board of Directors of
the Continuing Bank and the Chairman of the Board of Directors of Pendleton
shall serve as the Vice-Chairman of the Board of Directors of the Continuing
Bank, until such time as their successors are elected and qualified.
2.04. OFFICERS OF THE CONTINUING BANK. The officers of Pendleton and
Anderson immediately prior to the Effective Date shall continue as officers of
the Continuing Bank until such time as their successors are elected and
qualified; provided, however, that the current President of Anderson, Michael
L. Baker, shall serve as the President and Chief Executive Officer of the
Continuing Bank until such time as his successor is elected and qualified.
2.05 ARTICLES OF INCORPORATION AND BYLAWS. The Articles of
Incorporation and Bylaws of the Continuing Bank shall be those of Pendleton
immediately prior to the Effective Date until the same shall be further amended
as provided by law. The Bylaws of Pendleton in effect immediately prior to the
Effective Date shall be amended as of the Effective Date (i) to increase the
size of the Board of Directors consistent with Section 2.03, (ii) to provide
for directors emeritus consistent with Section 2.03, and (iii) to change the
name of the Continuing Bank pursuant to Section 2.02.
2.06. ASSETS AND LIABILITIES. The title to all assets, real estate and
other property owned by Pendleton and Anderson shall vest in the Continuing
Bank without reversion or impairment. All liabilities of Pendleton and Anderson
shall be assumed by the Continuing Bank.
2.07. ADDITIONAL ACTIONS. If, at any time after the Effective Date,
the Continuing Bank shall consider or be advised that any further deeds,
assignments or assurances in law or any
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other acts are necessary or desirable (a) to vest, perfect or confirm, of
record or otherwise, in the Continuing Bank its right, title or interest in, to
or under any of the rights, properties or assets of Anderson, or (b) otherwise
carry out the purposes of this Agreement, Anderson and its officers and
directors shall be deemed to have granted to the Continuing Bank an irrevocable
power of attorney to execute and deliver all such deeds, assignments or
assurances in law and to do all acts necessary or proper to vest, perfect or
confirm title to and possession of such rights, properties or assets in the
Continuing Bank, and the officers and directors of the Continuing Bank are
authorized in the name of Anderson or otherwise to take any and all such action.
SECTION 3
CONSIDERATION TO BE
DISTRIBUTED TO SHAREHOLDERS OF ANDERSON
3.01. CONSIDERATION. Upon and by reason of the Merger becoming
effective, the shareholders of Anderson of record on the Effective Date
who have not dissented to the Merger in accordance with Indiana Code
Section 28-1-7-21, as amended, shall be entitled to receive 1.38 shares of
First Merchants common stock for each share of Anderson common stock held
(the "Conversion Ratio").
3.02. NO FRACTIONAL FIRST MERCHANTS COMMON SHARES. Certificates for
fractional shares of common stock of First Merchants shall not be issued in
respect of fractional interests arising from the Conversion Ratio. Each
Anderson shareholder who would otherwise have been entitled to a fraction of a
First Merchants share, upon surrender of all of his/her certificates
representing Anderson common shares, shall be paid in cash (without interest)
in an amount equal to the fraction of the average of the closing price of First
Merchants common stock as quoted by the NASDAQ National Market System for the
five (5) business days preceding the Effective Date. No such shareholder of
Anderson shall be entitled to dividends, voting rights or any other rights in
respect of any fractional share.
3.03. RECAPITALIZATION. If, between the date of this Agreement and the
Effective Date, First Merchants issues a stock dividend with respect to its
shares of common stock, combines, subdivides, or splits up its outstanding
shares or takes any similar recapitalization action, then the number of shares
of First Merchants common stock into which each outstanding Anderson share will
be converted under Section 3.01 hereof shall be adjusted so that each Anderson
shareholder shall receive such number of First Merchants shares as represents
the same percentage of outstanding shares of First Merchants common stock at
the Effective Date as would have been represented by the number of shares such
shareholder would have received if the recapitalization had not occurred.
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3.04. DISTRIBUTION OF FIRST MERCHANTS COMMON STOCK AND CASH.
(a) Each share of common stock of Pendleton outstanding
immediately prior to the Effective Date shall remain outstanding
unaffected by the Merger, except that such shares shall be converted
into shares of the Continuing Bank.
(b) Following the Effective Date, distribution of stock
certificates representing First Merchants common stock and cash
payments for fractional shares shall be made by First Merchants to each
former shareholder of Anderson within ten (10) days of such
shareholder's delivery of his/her certificates representing common
stock of Anderson to the conversion agent, First Merchants Bank (the
"Conversion Agent"). Certificates surrendered for exchange by a person
who is deemed to be an "affiliate" (as defined in Section 7.06 hereof)
of Anderson shall not be exchanged until First Merchants has received a
written agreement from such affiliate as required pursuant to Section
7.06 hereof. Interest shall not accrue or be payable with respect to
any cash payments.
(c) Following the Effective Date, stock certificates
representing Anderson common stock shall be deemed to evidence only the
right to receive ownership of First Merchants common stock (for all
corporate purposes other than the payment of dividends) and cash for
fractional shares, as applicable. No dividends or other distributions
otherwise payable subsequent to the Effective Date on stock of First
Merchants shall be paid to any shareholder entitled to receive the same
until such shareholder has surrendered his/her certificates for
Anderson common stock to the Conversion Agent in exchange for
certificates representing First Merchants common stock and cash. Upon
surrender, there shall be paid to the recordholder of the new
certificate(s) evidencing shares of First Merchants common stock the
amount of all dividends and other distributions, without interest
thereon, withheld with respect to such common stock.
(d) At or after the Effective Date, there shall be no
transfers on the stock transfer books of Anderson of any shares of the
common stock of Anderson. If, after the Effective Date, certificates
are presented for transfer to Anderson, such certificates shall be
cancelled and exchanged for the consideration set forth in Section 3.01
hereof, as adjusted pursuant to the terms of this Agreement.
(e) First Merchants shall be entitled to rely upon the stock
transfer books of Anderson to establish the persons entitled to receive
cash and shares of common stock of First Merchants, which books, in the
absence of actual knowledge by First Merchants of any adverse claim
thereto, shall be conclusive with respect to the ownership of such
stock.
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(f) With respect to any certificate for shares of Anderson
common stock which has been lost, stolen, or destroyed, First Merchants
shall be authorized to issue common stock to the registered owner of
such certificate upon receipt of an affidavit of lost stock
certificate, in form and substance satisfactory to First Merchants, and
upon compliance by the Anderson shareholder with all procedures
historically required by Anderson in connection with lost, stolen, or
destroyed certificates.
SECTION 4
DISSENTING SHAREHOLDERS
If any holders of Anderson common stock perfect their dissenters'
rights in accordance with Indiana Code Section 28-1-7-21, as amended, any issued
and outstanding shares of Anderson common stock held by such dissenting holders
shall not be converted as described in Section 3 but shall from and after the
Effective Date represent the right to receive such consideration as may be
accorded to dissenting shareholders under Indiana Code Section 28-1-7-21, as
amended.
SECTION 5
REPRESENTATIONS AND
WARRANTIES OF ANDERSON
Anderson represents and warrants to First Merchants and Pendleton as
follows: (For the purposes of this Section, a "Disclosure Letter" is defined as
a letter referencing Section 5 of this Agreement which shall be prepared and
executed by an authorized executive officer of Anderson and delivered to and
initialed by an authorized executive officer of each of First Merchants and
Pendleton contemporaneous with the execution of this Agreement.)
5.01. ORGANIZATION AND AUTHORITY. Anderson is a state bank duly
organized and validly existing under the laws of the State of Indiana. Anderson
has the power and authority (corporate and other) to conduct its business in the
manner and by the means utilized as of the date hereof. Anderson has no
subsidiaries. Anderson is subject to primary federal regulatory supervision and
regulation by the Federal Deposit Insurance Corporation.
5.02. AUTHORIZATION.
(a) Anderson has the corporate power and authority to enter
into this Agreement and to carry out its obligations hereunder. This
Agreement, when executed and delivered, will have been duly authorized
and will constitute a valid and binding obligation of Anderson,
enforceable in accordance with its terms except to the extent limited
by insolvency, reorganization, liquidation, readjustment of debt or
other laws of general application relating to or affecting the
enforcement of creditors' rights.
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(b) Neither the execution of this Agreement, nor the
consummation of the transactions contemplated hereby, does or will (i)
conflict with, result in a breach of, or constitute a default under
Anderson's Articles of Incorporation or By-Laws; (ii) conflict with,
result in a breach of, or constitute a default under any federal, state
or local law, statute, ordinance, rule, regulation or court or
administrative order or decree, or any note, bond, indenture, mortgage,
security agreement, contract, arrangement or commitment, to which
Anderson is subject or bound, the result of which would materially
affect the business or financial condition of Anderson; (iii) result in
the creation of or give any person, corporation or entity, the right to
create any lien, charge, encumbrance, security interest, or any other
rights of others or other adverse interest upon any right, property or
asset of Anderson; (iv) terminate or give any person, corporation or
entity, the right to terminate, amend, abandon, or refuse to perform
any note, bond, indenture, mortgage, security agreement, contract,
arrangement or commitment to which Anderson is subject or bound; or (v)
accelerate or modify, or give any party thereto the right to accelerate
or modify, the time within which, or the terms according to which,
Anderson is to perform any duties or obligations or receive any rights
or benefits under any note, bond, indenture, mortgage, security
agreement, contract, arrangement or commitment.
(c) Other than in connection or in compliance with the
provisions of applicable federal and state securities laws and
applicable Indiana and federal banking and corporate statutes, all as
amended, and the rules and regulations promulgated thereunder, no
notice to, filing with, authorization of, exemption by, or consent or
approval of, any public body or authority is necessary for the
consummation by Anderson of the transactions contemplated by this
Agreement.
5.03. CAPITALIZATION.
(a) As of June 30, 1998, Anderson had 2,000,000 shares of
common stock authorized, $1.00 par value per share, 589,784 shares of
which were issued and outstanding. Such issued and outstanding shares
of Anderson common stock have been duly and validly authorized by all
necessary corporate action of Anderson, are validly issued, fully paid
and nonassessable and have not been issued in violation of any
preemptive rights of any shareholders. Except as disclosed pursuant to
Section 5.03(b) below, Anderson has no intention or obligation to
authorize or issue additional shares of its common stock. Anderson has
not authorized the issuance of any other class of stock. As of June 30,
1998, Anderson had total capital of $6,988,299, which consisted of
common stock of $589,784, additional capital of $5,199,554, retained
earnings of $1,186,990 and unrealized gain on securities of $11,901.
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(b) Except as set forth in the Disclosure Letter, there are no
options, commitments, calls, agreements, understandings, arrangements
or subscription rights regarding the issuance, purchase or acquisition
of capital stock, or any securities convertible into or representing
the right to purchase or otherwise receive the capital stock or any
debt securities, of Anderson by which Anderson is or may become bound.
Anderson has no outstanding contractual or other obligation to
repurchase, redeem or otherwise acquire any of its outstanding shares
of capital stock.
(c) Except as set forth in the Disclosure Letter, no person
or entity beneficially owns 5% or more of Anderson's outstanding shares
of common stock.
(d) Anderson has not taken or agreed to take any action nor
has any knowledge of any fact or circumstance and Anderson will not
take any action that would prevent the Merger from qualifying for
pooling-of-interests accounting treatment.
5.04. ORGANIZATIONAL DOCUMENTS. The Articles of Incorporation and
By-Laws of Anderson have been delivered to First Merchants and represent true,
accurate and complete copies of such corporate documents of Anderson in effect
as of the date of this Agreement.
5.05. COMPLIANCE WITH LAW. Anderson has not engaged in any activity nor
taken or omitted to take any action which has resulted or, to the knowledge of
Anderson could result, in the violation of any local, state, federal or foreign
law, statute, rule, regulation or ordinance or of any order, injunction,
judgment or decree of any court or government agency or body, the violation of
which could materially affect the business, prospects, condition (financial or
otherwise) or results of operations of Anderson. Anderson possesses all
licenses, franchises, permits and other authorizations necessary for the
continued conduct of its business without material interference or interruption
and such licenses, franchises, permits and authorizations shall be transferred
to the Continuing Bank on the Effective Date without any restrictions or
limitations thereon or the need to obtain any consents of third parties. All
agreements and understandings with, and all orders and directives of, all
regulatory agencies or government authorities with respect to the business or
operations of Anderson, including all correspondence, communications and
commitments related thereto, are set forth in the Disclosure Letter. Anderson
has received no inquiries from any regulatory agency or government authority
relating to its compliance with the Bank Secrecy Act, the Truth-in-Lending Act
or the Community Reinvestment Act or any laws with respect to the protection of
the environment or the rules and regulations promulgated thereunder.
5.06. ACCURACY OF STATEMENTS. Neither this Agreement nor any report,
statement, list, certificate or other information furnished or to be furnished
by Anderson to First Merchants in connection with this Agreement or any of the
transactions contemplated hereby (including, without limitation, any information
which has been or shall be supplied by Anderson with
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respect to its business, operations and financial condition for inclusion in
the proxy statement and registration statement relating to the Merger) contains
or shall contain (in the case of information relating to the proxy statement at
the time it is mailed and for the registration statement at the time it becomes
effective) any untrue statement of a material fact or omits or shall omit to
state a material fact necessary to make the statements contained herein or
therein not misleading.
5.07. LITIGATION AND PENDING PROCEEDINGS. Except as set forth in the
Disclosure Letter, there are no claims of any kind, nor any action, suits,
proceedings, arbitrations or investigations pending or to the knowledge of
Anderson threatened in any court or before any government agency or body,
arbitration panel or otherwise (nor does Anderson have any knowledge of a basis
for any claim, action, suit, proceeding, arbitration or investigation) against,
by or materially adversely affecting Anderson or its business, prospects,
conditions (financial or otherwise), results of operations or assets, or which
would prevent the performance of this Agreement or declare the same unlawful or
cause the rescission hereof. There are no material uncured violations, or
violations with respect to which material refunds or restitutions may be
required, cited in any compliance report to Anderson as a result of an
examination by any regulatory agency or body.
5.08. FINANCIAL STATEMENTS.
(a) Anderson's balance sheets as of the end of the two fiscal
years ended December 31, 1996 and 1997 and the six months ended June
30, 1998 and the related statements of income, shareholders' equity and
cash flows for the years or period then ended (hereinafter collectively
referred to as the "Financial Information") present fairly the
financial condition or position of Anderson as of the respective dates
thereof and the results of operations of Anderson for the respective
periods covered thereby and have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis.
(b) All loans reflected in the Financial Information and which
have been made, extended or acquired since June 30, 1998, (i) have been
made for good, valuable and adequate consideration in the ordinary
course of business; (ii) constitute the legal, valid and binding
obligation of the obligor and any guarantor named therein; (iii) are
evidenced by notes, instruments or other evidences of indebtedness
which are genuine and what they purport to be; and (iv) to the extent
that Anderson has a security interest in collateral or a mortgage
securing such loans, are secured by perfected security interests or
mortgages naming Anderson as the secured party or mortgagee.
5.09. ABSENCE OF CERTAIN CHANGES. Except for events and conditions
relating to the business environment in general or as set forth in the
Disclosure Letter, since June 30, 1998,
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no events or conditions of any character, whether actual, threatened or
contemplated, have occurred, or, to the knowledge of Anderson, can reasonably
be expected to occur, which materially adversely affect Anderson's business,
prospects, conditions (financial or otherwise), assets or results of operations
or which have caused, or can reasonably be expected to cause, Anderson's
business to be conducted in a materially less profitable manner than prior to
June 30, 1998.
5.10. ABSENCE OF UNDISCLOSED LIABILITIES. Anderson is not a party to
any agreement, contract, obligation, commitment, arrangement, liability, lease
or license which individually exceeds $10,000 per year or which may not be
terminated within one year from the date of this Agreement, except as set forth
in the Disclosure Letter and except for unfunded loan commitments made in the
ordinary course of Anderson's business consistent with past practices, nor to
the knowledge of Anderson does there exist any circumstances resulting from
transactions effected or to be effected or events which have occurred or may
occur or from any action taken or omitted to be taken which could reasonably be
expected to result in any such agreement, contract, obligation, commitment,
arrangement, liability, lease or license.
5.11. TITLE TO ASSETS.
(a) Except as set forth in the Disclosure Letter, Anderson has
good and marketable title to all personal property reflected in the
June 30, 1998 Financial Information, good and marketable title to all
other properties and assets which Anderson purports to own, good and
marketable title to or right to use by terms of any lease or contract
all other property used in Anderson's business, and good and marketable
title to all property and assets acquired since June 30, 1998, free and
clear of all mortgages, liens, pledges, restrictions, security
interests, charges, claims or encumbrances of any nature.
(b) All furniture, fixtures, machinery, equipment, computer
software and hardware, and all other tangible personal property owned
or used by Anderson, including any such items leased as a lessee, are
in good working order and free of known defects, subject only to normal
wear and tear. The operation by Anderson of such properties and assets
is in compliance with all applicable laws, ordinances, rules and
regulations of any governmental authority having jurisdiction over such
use.
5.12. LOANS AND INVESTMENTS.
(a) Except as set forth in the Disclosure Letter, there is no
loan of Anderson in excess of $10,000 that has been classified by bank
regulatory examiners as "Other Loans Specially Mentioned,"
"Substandard," "Doubtful" or "Loss," nor is there any loan of Anderson
in excess of $10,000 that has been identified by accountants or
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auditors (internal or external) as having a significant risk of
uncollectibility. Anderson's loan watch list and all loans in excess of
$10,000 that Anderson's management has determined to be ninety (90)
days or more past due with respect to principal or interest or has
placed on nonaccrual status are set forth in the Disclosure Letter.
(b) Each of the reserves and allowances for possible loan
losses and the carrying value for real estate owned which are shown on
the Financial Information is, in the opinion of Anderson, adequate in
all material respects under the requirements of generally accepted
accounting principles applied on a consistent basis to provide for
possible losses on loans outstanding and real estate owned as of the
date of such Financial Information.
(c) Except as set forth in the Disclosure Letter, none of the
investments reflected in the Financial Information and none of the
investments made by Anderson since June 30, 1998 is subject to any
restrictions, whether contractual or statutory, which materially
impairs the ability of Anderson to dispose freely of such investment at
any time. Except as set forth in the Disclosure Letter, Anderson is not
a party to any repurchase agreements with respect to securities.
5.13. EMPLOYEE BENEFIT PLANS.
(a) The Disclosure Letter contains a list identifying each
"employee benefit plan," as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), which (i)
is subject to any provision of ERISA, and (ii) is maintained,
administered or contributed to by Anderson and covers any employee,
director or former employee or director of Anderson under which
Anderson has any liability. Copies of such plans (and, if applicable,
related trust agreements or insurance contracts) and all amendments
thereto and written interpretations thereof have been furnished to
First Merchants together with the three most recent annual reports
prepared in connection with any such plan and the current summary plan
descriptions. Such plans are hereinafter referred to individually as an
"Employee Plan" and collectively as the "Employee Plans." The Employee
Plans which individually or collectively would constitute an "employee
pension benefit plan" as defined in Section 3(2) of ERISA are
identified in the list referred to above.
(b) The Employee Plans comply with and have been operated in
accordance with all applicable laws, regulations, rulings and other
requirements the breach or violation of which could materially affect
Anderson or an Employee Plan. Each Employee Plan has been administered
in substantial conformance with such requirements and all reports and
information required with respect to each Employee Plan has been timely
given.
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(c) To the knowledge of Anderson, no "prohibited
transaction," as defined in Section 406 of ERISA or Section 4975 of
the Code, for which no statutory or administrative exemption exists,
and no "reportable event," as defined in Section 4043(b) of ERISA, has
occurred with respect to any Employee Plan. To the knowledge of
Anderson, Anderson has no liability to the Pension Benefit Guaranty
Corporation ("PBGC"), to the Internal Revenue Service ("IRS"), to the
Department of Labor ("DOL") or to an employee or Employee Plan
beneficiary under Section 502 of ERISA.
(d) To the knowledge of Anderson, no "fiduciary," as
defined in Section (3)(21) of ERISA, of an Employee Plan has failed
to comply with the requirements of Section 404 of ERISA.
(e) Each of the Employee Plans which is intended to be
qualified under Code Section 401(a) has been amended to comply in all
material respects with the applicable requirements of the Code,
including the Tax Reform Act of 1986, the Revenue Act of 1987, the
Technical and Miscellaneous Revenue Act of 1988, the Omnibus Budget
Reconciliation Act of 1989, the Revenue Reconciliation Act of 1990, the
Tax Extension Act of 1991, the Unemployment Compensation Amendments of
1992, the Omnibus Budget Reconciliation Act of 1993, and the Retirement
Protection Act of 1994 and any rules, regulations or other requirements
promulgated thereunder (the "Acts"). In addition, each such Employee
Plan has been and is being operated in substantial conformance with the
applicable provisions of ERISA and the Code, as amended by the Acts and
as amended by the Small Business Job Protection Act of 1996 and the
Taxpayer Relief Act of 1997, even though such Employee Plans are not
yet required to be amended for such legislation. Except as set forth in
the Disclosure Letter, Anderson sought and received favorable
determination letters from the IRS within the applicable remedial
amendment periods under Code Section 401(b), and has furnished to First
Merchants copies of the most recent IRS determination letters with
respect to any such Employee Plan.
(f) No Employee Plan owns any security of Anderson.
(g) No Employee Plan has incurred an "accumulated funding
deficiency," as determined under Code Section 412 and ERISA
Section 302.
(h) No Employee Plan has been terminated or incurred a
partial termination (either voluntarily or involuntarily).
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(i) No claims against an Employee Plan or Anderson, with
respect to an Employee Plan, (other than normal benefit claims) have
been asserted or, to the knowledge of Anderson, threatened.
(j) There is no contract, agreement, plan or arrangement
covering any employee, director or former employee or director of
Anderson that, individually or collectively, could give rise to the
payment of any amount that would not be deductible by reason of Section
280G or Section 162(a)(1) of the Code.
(k) No event has occurred that would cause the imposition of
the tax described in Code Section 4980B. All requirements of ERISA
Section 601 have been met.
(l) The Disclosure Letter contains a list of each employment,
severance or other similar contract, arrangement or policy and each
plan or arrangement (written or oral) providing for insurance coverage
(including any self-insured arrangements), workers' compensation,
disability benefits, supplemental unemployment benefits, vacation
benefits, retirement benefits or deferred compensation, profit sharing,
bonuses, stock options, stock appreciation or other forms of incentive
compensation or post-retirement insurance, compensation or benefits
which (i) is not an Employee Plan, (ii) was entered into, maintained or
contributed to, as the case may be, by Anderson and (iii) covers any
employee, director or former employee or director of Anderson. Such
contracts, plans and arrangements as are described above, copies or
descriptions of all of which have been furnished previously to First
Merchants, are hereinafter referred to collectively as the "Benefit
Arrangements." Each of the Benefit Arrangements has been maintained in
substantial compliance with its terms and with the requirements
prescribed by any and all statutes, orders, rules and regulations which
are applicable to such Benefit Arrangements.
(m) Anderson has no present and knows of no future liability
in respect of post-retirement health and medical benefits for former
employees or directors of Anderson.
(n) Except as set forth in the Disclosure Letter, there has
been no amendment to, written interpretation or announcement (whether
or not written) by Anderson relating to, or change in employee
participation or coverage under, any Employee Plan or Benefit
Arrangement which would increase materially the expense of maintaining
such Employee Plans or Benefit Arrangements above the level of the
expense incurred in respect thereof for the fiscal year ended December
31, 1997.
(o) For purposes of this Section 5.13, references to Anderson
are deemed to include (i) all predecessors of Anderson, (ii) any
subsidiary of Anderson, (iii) all
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members of any controlled group (as determined under Code Section
414(b) or (c)) that includes Anderson, and (iv) all members of any
affiliated service group (as determined under Code Section 414(m)
or (n)) that includes Anderson.
5.14 OBLIGATIONS TO EMPLOYEES. Except as set forth in the Disclosure
Letter, all accrued obligations and liabilities of Anderson, whether arising by
operation of law, by contract or by past custom, for payments to trust or other
funds, to any government agency or body or to any individual director, officer,
employee or agent (or his heirs, legatees or legal representative) with respect
to unemployment compensation or social security benefits and all pension,
retirement, savings, stock purchase, stock bonus, stock ownership, stock option,
stock appreciation rights or profit sharing plan, any employment, deferred
compensation, consultant, bonus or collective bargaining agreement or group
insurance contract or other incentive, welfare or employee benefit plan or
agreement maintained by Anderson for its current or former directors, officers,
employees and agents have been and are being paid to the extent required by law
or by the plan or contract, and adequate actuarial accruals and/or reserves for
such payments have been and are being made by Anderson in accordance with
generally accepted accounting and actuarial principles. All obligations and
liabilities of Anderson, whether arising by operation of law, by contract, or by
past custom, for all forms of compensation which are or may be payable to its
current or former directors, officers, employees or agents have been and are
being paid, and adequate accruals and/or reserves for payment therefor have been
and are being made in accordance with generally accepted accounting principles.
All accruals and reserves referred to in this Section 5.14 are correctly and
accurately reflected and accounted for in the books, statements and records of
Anderson.
5.15. TAXES, RETURNS AND REPORTS. Anderson has (a) duly filed all
federal, state, local and foreign tax returns of every type and kind required to
be filed as of the date hereof, and each return is true, complete and accurate
in all material respects; (b) paid in all materials respects all taxes,
assessments and other governmental charges due or claimed to be due upon it or
any of its income, properties or assets; and (c) not requested an extension of
time for any such payments (which extension is still in force). Except for taxes
not yet due and payable, the reserve for taxes on the Financial Information is
adequate to cover all of Anderson's tax liabilities (including, without
limitation, income taxes and franchise fees) that may become payable in future
years with respect to any transactions consummated prior to June 30, 1998.
Anderson has no or will not have any liability for taxes of any nature for or
with respect to the operation of its business, including the assets of any
subsidiary, from June 30, 1998 up to and including the Effective Date, except to
the extent reflected on the Financial Information or on financial statements of
Anderson subsequent to such date and as set forth in the Disclosure Letter.
Anderson is not currently under audit by any state or federal taxing authority.
Except as set forth in the Disclosure Letter, neither the federal, state, or
local tax returns of Anderson have been audited by any taxing authority during
the past five (5) years.
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5.16. DEPOSIT INSURANCE. The deposits of Anderson are insured by the
Federal Deposit Insurance Corporation ("FDIC") in accordance with the Federal
Deposit Insurance Act, and Anderson has paid all premiums and assessments due
with respect to such deposit insurance.
5.17. REPORTS. Since January 1, 1995, Anderson has timely filed all
reports, registrations and statements, together with any required amendments
thereto, that it was required to file with (i) the Indiana Department of
Financial Institutions, (ii) the FDIC, and (iii) any federal, state, municipal
or local government, securities, banking, environmental, insurance and other
governmental or regulatory authority, and the agencies and staffs thereof
(collectively, the "Regulatory Authorities"), having jurisdiction over the
affairs of Anderson. All such reports filed by Anderson complied in all material
respects with all the rules and regulations promulgated by the applicable
Regulatory Authorities and are true, accurate and complete and were prepared in
conformity with generally accepted regulatory accounting principles applied on a
consistent basis. There is no unresolved violation, criticism or exception by
any of the Regulatory Authorities with respect to any report or statement filed
by, or any examinations of, Anderson.
5.18. ABSENCE OF DEFAULTS. Anderson is not in violation of its charter
documents or By-Laws or in default under any material agreement, commitment,
arrangement, lease, insurance policy or other instrument, whether entered into
in the ordinary course of business or otherwise and whether written or oral, and
there has not occurred any event that, with the lapse of time or giving of
notice or both, would constitute such a default.
5.19. YEAR 2000 COMPLIANCE. To the best knowledge of Anderson, all
computer software and hardware utilized by Anderson is Year 2000 compliant,
which, for purposes of this Agreement, shall mean that the data outside the
range 1990-1999 will be correctly processed in any level of computer hardware or
software, including, but not limited to, microcode, firmware, applications
programs, files and databases. All computer software used by Anderson is
designed to be used prior to, during and after the calendar year 2000 A.D., and
that such software will operate during each such time period without error
relating to date data, specifically including any error relating to, or the
product of, date data that represents or references difference centuries or more
than one century.
5.20. TAX AND REGULATORY MATTERS. Anderson has not taken or agreed to
take any action or has any knowledge of any fact or circumstance that would (i)
prevent the transactions contemplated hereby from qualifying as a reorganization
within the meaning of Section 368 of the Code or (ii) materially impede or delay
receipt of any regulatory approval required for consummation of the transactions
contemplated by this Agreement.
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5.21. REAL PROPERTY.
(a) The legal description of each parcel of real property
owned by Anderson (other than real property acquired in foreclosure or
in lieu of foreclosure in the course of the collection of loans and
being held by Anderson for disposition as required by law) is set forth
in the Disclosure Letter under the heading of "Owned Real Property"
(such real property being herein referred to as the "Owned Real
Property"). The legal description of each parcel of real property
leased by Anderson is also set forth in the Disclosure Letter under the
heading of "Leased Real Property" (such real property being herein
referred to as the "Leased Real Property"). Anderson shall update the
Disclosure Letter within ten (10) days after acquiring or leasing any
real property after the date hereof. Collectively, the Owned Real
Property and the Leased Real Property are herein referred to as the
"Real Property."
(b) There is no pending action involving Anderson as to the
title of or the right to use any of the Real Property.
(c) Anderson has no interest in any other real property
except interests as a mortgagee, and except for any real property
acquired in foreclosure or in lieu of foreclosure and being held for
disposition as required by law.
(d) None of the buildings, structures or other improvements
located on the Real Property encroaches upon or over any adjoining
parcel of real estate or any easement or right-of-way or "setback" line
and all such buildings, structures and improvements are located and
constructed in conformity with all applicable zoning ordinances and
building codes.
(e) None of the buildings, structures or improvements located
on the Real Property are the subject of any official complaint or
notice by any governmental authority of violation of any applicable
zoning ordinance or building code, and there is no zoning ordinance,
building code, use or occupancy restriction or condemnation action or
proceeding pending, or, to the best knowledge of Anderson, threatened,
with respect to any such building, structure or improvement. The Real
Property is in good condition for its intended purpose, ordinary wear
and tear excepted, and has been maintained in accordance with
reasonable and prudent business practices applicable to like
facilities. The Real Property has been used and operated in compliance
with all applicable laws, statutes, rules, regulations and ordinances
applicable thereto.
(f) Except as may be reflected in the Financial Information
or with respect to such easements, liens, defects or encumbrances as do
not individually or in the aggregate materially adversely affect the
use or value of the Owned Real Property,
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Anderson has, and at the Closing Date will have, good and marketable
title to the Owned Real Property.
(g) Anderson has not caused or allowed the generation,
treatment, storage, disposal or release at any Real Property of any
Toxic Substance, except in accordance with all applicable federal,
state and local laws and regulations. "Toxic Substance" means any
hazardous, toxic or dangerous substance, pollutant, waste, gas or
material, including, without limitation, petroleum and petroleum
products, metals, liquids, semi-solids or solids, that are regulated
under any federal, state or local statute, ordinance, rule, regulation
or other law pertaining to environmental protection, contamination,
quality, waste management or cleanup.
(h) Except as disclosed in the Disclosure Letter, there are
no underground storage tanks located on, in or under any Owned Real
Property. Anderson does not own or operate any underground storage tank
at any Leased Real Property.
(i) The Real Property is not "property" within the definition
of Indiana Code 13-11-2-174. Anderson is not required to provide a
"disclosure document" to First Merchants and Pendleton as a result of
the Merger pursuant to the Indiana Responsible Property Transfer Law
(I.C. Section 13-25-3-1 ET SEQ.).
(j) There are no mechanic's or materialman's liens against
the Real Property, and no unpaid claims for labor performed, materials
furnished or services rendered in connection with constructing,
improving or repairing the Real Property in respect of which liens may
or could be filed against the Real Property.
5.22. BROKER'S OR FINDER'S FEES. Except as set forth in the Disclosure
Letter, no agent, broker or other person acting on behalf of Anderson or under
any authority of Anderson is or shall be entitled to any commission, broker's or
finder's fee or any other form of compensation or payment from any of the
parties hereto, other than attorneys' or accountants' fees, in connection with
any of the transactions contemplated by this Agreement.
5.23. BRING DOWN OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties of Anderson contained in this Section 5 shall be true, accurate
and correct on and as of the Effective Date except as affected by the
transactions contemplated by and specified within the terms of this Agreement.
5.24. NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties contained in this Section 5 shall expire on the
Effective Date or the earlier termination of this Agreement, and thereafter
Anderson and all directors, officers and employees of Anderson shall have no
further liability with respect thereto unless a court of
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competent jurisdiction should determine that any misrepresentation or breach of
a warranty was willfully or intentionally caused either by action or inaction.
SECTION 6
REPRESENTATIONS AND
WARRANTIES OF FIRST MERCHANTS
First Merchants represents and warrants to Anderson with respect to
itself and Pendleton as follows:
6.01. ORGANIZATION AND QUALIFICATION. First Merchants is a corporation
organized and existing under the laws of the State of Indiana, and Pendleton is
a state bank duly organized and validly existing under the laws of the State of
Indiana. First Merchants and Pendleton have the power and authority (corporate
and other) to conduct their respective businesses in the manner and by the means
utilized as of the date hereof.
6.02. AUTHORIZATION.
(a) First Merchants and Pendleton have the corporate power and
authority to enter into this Agreement and to carry out their
respective obligations hereunder subject to certain required regulatory
approvals. The Agreement, when executed and delivered, will have been
duly authorized and will constitute a valid and binding obligation of
First Merchants and Pendleton, enforceable in accordance with its
terms, except to the extent limited by insolvency, reorganization,
liquidation, readjustment of debt, or other laws of general application
relating to or affecting the enforcement of creditor's rights.
(b) Neither the execution of this Agreement, nor the
consummation of the transactions contemplated hereby, does or will (i)
conflict with, result in a breach of, or constitute a default under
First Merchant's or Pendleton's Articles of Incorporation or By-laws;
(ii) conflict with, result in a breach of, or constitute a default
under any federal, foreign, state, or local law, statute, ordinance,
rule, regulation, or court or administrative order or decree, or any
note, bond, indenture, mortgage, security agreement, contract,
arrangement, or commitment, to which First Merchants or Pendleton is
subject or bound, the result of which would materially affect the
business or financial condition of First Merchants; (iii) result in the
creation of or give any person, corporation or entity, the right to
create any lien, charge, claim, encumbrance, security interest, or any
other rights of others or other adverse interest upon any right,
property or asset of First Merchants or Pendleton; (iv) terminate or
give any person, corporation or entity the right to terminate, amend,
abandon, or refuse to perform any note, bond, indenture, mortgage,
security agreement, contract, arrangement, or
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commitment to which First Merchants or Pendleton is a party or by which
First Merchant or Pendleton is subject or bound; or (v) accelerate or
modify, or give any party thereto the right to accelerate or modify,
the time within which, or the terms according to which, First Merchants
or Pendleton is to perform any duties or obligations or receive any
rights or benefits under any note, bond, indenture, mortgage, security
agreement, contract, arrangement, or commitment.
(c) Other than in connection or in compliance with the
provisions of applicable federal and state securities laws, and
applicable Indiana and federal banking and corporate statutes, all as
amended, and the rules and regulations promulgated thereunder, no
notice to, filing with, authorization of, exemption by, or consent or
approval of, any public body or authority is necessary for the
consummation by First Merchants and Pendleton of the transactions
contemplated by this Agreement.
6.03. CAPITALIZATION.
(a) As of June 30, 1998, First Merchants had 20,000,000
shares of common stock authorized, no par value, of which 6,697,656
shares were issued and outstanding. The shares of common stock are
validly issued, fully paid and nonassessable. Such issued and
outstanding shares of First Merchants common stock have been duly and
validly authorized by all necessary corporate action of First
Merchants, are validly issued, fully paid and nonasssessable and have
not been issued in violation of any preemptive rights of any
shareholders.
(b) First Merchants has 500,000 shares of Preferred Stock
authorized, no par value, no shares of which have been issued and no
commitments exist to issue any of such shares.
(c) The shares of First Merchants' common stock to be issued
pursuant to the Merger will be fully paid, validly issued and
nonassessable.
(d) As of June 30, 1998, Pendleton had 114,000 shares of
common stock authorized, $10 par value per share, of which 114,000
shares were issued and outstanding. Such issued and outstanding shares
of Pendleton common stock are owned by First Merchants, have been duly
and validly authorized by all necessary corporate action of Pendleton,
are validly issued, fully paid and nonassessable, and have not been
issued in violation of any preemptive rights of any Pendleton
shareholders.
6.04. ORGANIZATIONAL DOCUMENTS. The respective Articles of
Incorporation or Association and By-laws of First Merchants and Pendleton in
force as of the date hereof have been delivered to Anderson. The documents
delivered by them represent complete and
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accurate copies of the corporate documents of First Merchants and Pendleton in
effect as of the date of this Agreement.
6.05. ACCURACY OF STATEMENTS. Neither this Agreement nor any report,
statement, list, certificate or other information furnished or to be furnished
by First Merchants or Pendleton to Anderson in connection with this Agreement or
any of the transactions contemplated hereby (including, without limitation, any
information which has been or shall be supplied by First Merchants or Pendleton
with respect to their businesses, operations and financial condition for
inclusion in the proxy statement and registration statement relating to the
Merger) contains or shall contain (in the case of information relating to the
proxy statement at the time it is mailed and to the registration statement at
the time it becomes effective) any untrue statement of a material fact or omits
or shall omit to state a material fact necessary to make the statements
contained herein or therein, in light of the circumstances in which they are
made, not misleading.
6.06. COMPLIANCE WITH LAW. Neither First Merchants nor Pendleton have
engaged in any activity nor taken or omitted to take any action which has
resulted or, to the knowledge of First Merchants, could result in the violation
of any local, state, federal or foreign law, statute, rule, regulation or
ordinance or of any order, injunction, judgment or decree of any court or
government agency or body, the violation of which could materially adversely
affect the business, prospects, condition (financial or otherwise) or results of
operations of First Merchants. First Merchants and Pendleton possess all
licenses, franchises, permits and other authorizations necessary for the
continued conduct of their respective businesses without material interference
or interruption. There are no agreements or understandings with, nor any orders
or directives of, any regulatory agencies or government authorities, which would
have a material adverse effect on the consolidated financial position of First
Merchants. Pendleton has received no written inquiries from any regulatory
agency or government authority relating to its compliance with the Bank Secrecy
Act, the Truth-in-Lending Act or the Community Reinvestment Act.
6.07. FINANCIAL STATEMENTS. First Merchants' consolidated balance
sheets as of the end of the three (3) fiscal years ended December 31, 1995, 1996
and 1997 and the six months ended June 30, 1998 and the related consolidated
statements of income, shareholders' equity and cash flows for the years or
period then ended present fairly the consolidated financial condition or
position of First Merchants as of the respective dates thereof and the
consolidated results of operations of First Merchants for the respective periods
covered thereby and have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis. All required regulatory
reports have been filed by First Merchants with its primary federal regulator
during 1998, 1997, 1996 and 1995, and all of such reports are true, accurate and
complete in all material respects and have been prepared in conformity with
generally accepted regulatory accounting principles applied on a consistent
basis.
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6.08. ABSENCE OF CERTAIN CHANGES. Except for events and conditions
relating to the business environment in general, since June 30, 1998, no events
or conditions of any character, whether actual, threatened or contemplated, have
occurred, or can reasonably be expected to occur, which materially adversely
affect First Merchants consolidated business, prospects, conditions (financial
or otherwise), assets or results of operations or which have caused, or can
reasonably be expected to cause, First Merchants business, on a consolidated
basis, to be conducted in a materially less profitable manner than prior to June
30, 1998.
6.09. FIRST MERCHANTS SECURITIES AND EXCHANGE COMMISSION FILINGS. First
Merchants has filed all reports and other documents required to be filed by it
under the Securities Exchange Act of 1934 and the Securities Act of 1933,
including First Merchants' Annual Report on Form 10-K for the year ended
December 31, 1997, and Quarterly Report on Form 10-Q for the quarter ended June
30, 1998, copies of which have previously been delivered to Anderson.
6.10 LITIGATION AND PENDING PROCEEDINGS. There are no claims of any
kind, nor any action, suits, proceedings, arbitrations or investigations pending
or to the knowledge of First Merchants threatened in any court or before any
government agency or body, arbitration panel or otherwise (nor does First
Merchants have any knowledge of a basis for any claim, action, suit, proceeding,
arbitration or investigation) against, by or materially adversely affecting
First Merchants or its business, prospects, conditions (financial or otherwise),
results of operations or assets, or which would prevent the performance of this
Agreement or declare the same unlawful or cause the recission hereof. There are
no material uncured violations, or violations with respect to which material
refunds or restitutions may be required, cited in any compliance report to First
Merchants as a result of an examination by any regulatory agency or body.
6.11 YEAR 2000 COMPLIANCE. To the best knowledge of First Merchants,
all computer software and hardware utilized by First Merchants is Year 2000
compliant, which, for purposes of this Agreement, shall mean that the data
outside the range 1990-1999 will be correctly processed in any level of computer
hardware or software, including, but not limited to, microcode, firmware,
applications programs, files and databases. All computer software used by First
Merchants is designed to be used prior to, during and after the calendar year
2000 A.D., and that such software will operate during each such time period
without error relating to date data, specifically including any error relating
to, or the product of, date data that represents or references different
centuries or more than one century.
6.12. SEPARATE EXISTENCE OF THE CONTINUING BANK. First Merchants
acknowledges that its present intention is to retain the Continuing Bank as a
separate banking subsidiary of First Merchants for a period of five (5) years
after the Effective Date.
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6.13. BRING DOWN OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties of First Merchants and Pendleton contained in this Section 6
shall be true, accurate and correct on and as of the Effective Date except as
affected by the transactions contemplated by and specified within the terms of
this Agreement.
6.14. NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties contained in this Section 6 shall expire on the
Effective Date or the earlier termination of this Agreement, and thereafter
First Merchants and Pendleton and all directors, officers and employees of First
Merchants and Pendleton shall have no further liability with respect thereto
unless a court of competent jurisdiction should determine that any
misrepresentation or breach of a warranty was willfully or intentionally caused
either by action or inaction.
SECTION 7
COVENANTS OF ANDERSON
Anderson covenants and agrees with First Merchants and Pendleton as
follows:
7.01. SHAREHOLDER APPROVAL. Anderson shall submit this Agreement to its
shareholders for approval at a meeting to be called and held in accordance with
applicable law and the Articles of Incorporation and By-Laws of Anderson at the
earliest possible reasonable date. The Board of Directors of Anderson shall
recommend to the shareholders of Anderson that such shareholders approve this
Agreement and shall not thereafter withdraw or modify its recommendation. The
Board of Directors of Anderson shall use its best efforts to obtain any vote of
its shareholders necessary for the approval of this Agreement.
7.02. OTHER APPROVALS. Anderson shall proceed expeditiously, cooperate
fully and use its best efforts to procure upon reasonable terms and conditions
all consents, authorizations, approvals, registrations and certificates, to
complete all filings and applications and to satisfy all other requirements
prescribed by law which are necessary for consummation of the Merger on the
terms and conditions provided in this Agreement at the earliest possible
reasonable date.
7.03. CONDUCT OF BUSINESS.
(a) On and after the date of this Agreement and until the
Effective Date or until this Agreement shall be terminated as herein
provided, Anderson shall not, without the prior written consent of
First Merchants, (i) make any material changes in its capital
structure; (ii) authorize a class of stock or, except upon the exercise
of stock options disclosed pursuant to Section 5.03(b), issue, or
authorize the issuance of, stock other than or in addition to the
outstanding stock as set forth in Section 5.03 hereof; (iii) declare,
distribute or pay any dividends on its shares of common stock, or
authorize a
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stock split, or make any other distribution to its shareholders;
(iv) merge, combine or consolidate with or sell its sasets or any of
its securities to any other person, corporation or entity, effect a
share exchange or enter into any other transaction not in the
ordinary course of business; (v) incur any liability or obligation,
make any commitment, payment or disbursement, enter into any
contract, agreement, understanding or arrangement or engage in any
transaction, or acquire or dispose of any property or asset having a
fair market value in excess of $10,000.00 (except for personal or
real property acquired or disposed of in connection with
foreclosures on mortgages or enforcement of security interests and
loans made or sold by Anderson in the ordinary course of business);
(vi) subject any of its properties or assets to a mortgage, lien,
claim, charge, option, restriction, security interest or
encumbrance; (vii) promote or increase or decrease the rate of
compensation (except for promotions and non-material increases in
the ordinary course of business and in accordance with past
practices) or enter into any agreement to promote or increase or
decrease the rate of compensation of any director, officer or
employee of Anderson; (viii) execute, create, institute, modify or
amend any pension, retirement, savings, stock purchase, stock bonus,
stock ownership, stock option, stock appreciation or depreciation
right or profit sharing plans, any employment, deferred
compensation, consultant, bonus or collective bargaining agreement,
group insurance contract or other incentive, welfare or employee
benefit plan or agreement for current or former directors, officers
or employees of Anderson, change the level of benefits or payments
under any of the foregoing or increase or decrease any severance or
termination of pay benefits or any other fringe or employee benefits
other than as required by law or regulatory authorities; (ix) amend
its Articles of Incorporation or By-Laws from those in effect on the
date of this Agreement; (x) modify, amend or institute new
employment policies or practices, or enter into, renew or extend any
employment or severance agreements with respect to any present or
former Anderson directors, officers or employees; (xi) give,
dispose, sell, convey, assign, hypothecate, pledge, encumber or
otherwise transfer or grant a security interest in any common stock
of Anderson; (xii) fail to make additions to Anderson's reserve for
loan losses, or any other reserve account, in the ordinary course of
business and in accordance with sound banking practices; (xiii)
other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money or assume,
guarantee, endorse or otherwise as an accommodation become
responsible or liable for the obligations of any other individual,
corporation or other entity; and (xiv) agree in writing or otherwise
to take any of the foregoing actions.
(b) Anderson shall maintain, or cause to be maintained, in
full force and effect insurance on its properties and operations and
fidelity coverage on its directors, officers and employees in such
amounts and with regard to such liabilities and hazards as customarily
are maintained by other companies operating similar businesses.
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(c) Anderson shall continue to give to First Merchants and
Pendleton and their respective employees, accountants, attorneys and
other authorized representatives reasonable access during regular
business hours and other reasonable times to all its premises,
properties, statements, books and records.
7.04. PRESERVATION OF BUSINESS. On and after the date of this Agreement
and until the Effective Date or until this Agreement is terminated as herein
provided, Anderson shall (a) carry on its business diligently, substantially in
the same manner as heretofore conducted, and in the ordinary course of business;
(b) use its best efforts to preserve its business organizations intact, to keep
its present officers and employees and to preserve its present relationship with
customers and others having business dealings with them; and (c) not do or fail
to do anything which will cause a material breach of, or material default in,
any contract, agreement, commitment, obligation, understanding, arrangement,
lease or license to which it is a party or by which it is or may be subject or
bound.
7.05 OTHER NEGOTIATIONS. Except with the prior written approval of
First Merchants and Pendleton, on and after the date of this Agreement and until
the Effective Date, Anderson shall not, and shall not permit or authorize its
respective directors, officers, employees, agents or representatives to,
directly or indirectly, initiate, solicit, encourage, or engage in discussions
or negotiations with, or provide information to, any corporation, association,
partnership, person or other entity or group concerning any merger,
consolidation, share exchange, combination, purchase or sale of substantial
assets, sale of shares of capital stock (or securities convertible or
exchangeable into or otherwise evidencing, or any agreement or instrument
evidencing the right to acquire, capital stock), tender offer, acquisition of
control of Anderson or similar transaction involving Anderson (all such
transactions hereinafter referred to as "Acquisition Transactions"). Anderson
shall promptly communicate to First Merchants and Pendleton the terms of any
proposal, written or oral, which it may receive with respect to an Acquisition
Transaction and any request by or indication of interest on the part of any
third party with respect to initiation of any Acquisition Transaction or
discussion with respect thereto. The above provisions of this Section 7.05
notwithstanding, nothing contained in this Agreement shall prohibit (i) Anderson
from furnishing information to, or entering into discussions or negotiations
with, any person or entity that makes an unsolicited proposal of an Acquisition
Transaction if and to the extent that (a) the Board of Directors of Anderson,
after consultation with and based upon the written advice of legal counsel,
determines in good faith that such action is required for the directors of
Anderson to fulfill their fiduciary duties and obligations to the Anderson
shareholders and other constituencies under Indiana law, and (b) prior to
furnishing such information to, or entering into discussions or negotiations
with, such person or entity, Anderson provides immediate written notice to First
Merchants and Pendleton to the effect that it is furnishing information to, or
entering into discussions or negotiations with, such person or entity, or (ii)
notwithstanding the provisions of Section 7.01, the Board of Directors of
Anderson from failing to make, withdrawing or modifying its recommendation to
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shareholders regarding the Merger following receipt of a proposal for an
Acquisition Transaction if the Board of Directors of Anderson, after
consultation with and based upon the written advice of legal counsel, determines
in good faith that such action is required for the directors of Anderson to
fulfill their fiduciary duties and obligations to the Anderson shareholders and
other constituencies under Indiana law.
7.06. RESTRICTIONS REGARDING AFFILIATES. Anderson shall, within thirty
(30) days after the date of this Agreement and promptly thereafter until the
Effective Date to reflect any changes or upon the request of First Merchants,
provide First Merchants with a list identifying each person who may reasonably
be deemed to be an "affiliate" of Anderson within the meaning of such term as
used in Rule 145 under the Securities Act of 1933, as amended (the "1933 Act").
Each director, executive officer and other person who is an "affiliate" of
Anderson for purposes of the 1933 Act shall deliver to First Merchants, at least
thirty-one (31) days prior to the Effective Date, a written agreement, in form
and substance satisfactory to counsel to First Merchants, regarding compliance
by each such person with (i) the provisions of such Rule 145, and (ii) the
requirements of Accounting Principles Board Opinion No. 16 regarding the
disposition of shares (or reduction of risk with respect thereto) of Anderson
common stock during the thirty (30) days preceding the Effective Date, or First
Merchants common stock until such time as financial results covering at least
thirty (30) days of post-Merger operations have been published.
7.07. PRESS RELEASE. Anderson shall not issue any press releases or
make any other public announcements or disclosures relating to the Merger
without the prior approval of First Merchants and Pendleton.
7.08. DISCLOSURE LETTER UPDATE. Anderson shall promptly supplement,
amend and update monthly and as of the Effective Date the Disclosure Letter with
respect to any matters hereafter arising which, if in existence or having
occurred as of the date of this Agreement, would have been required to be set
forth or described in the Disclosure Letter.
7.09 CONFIDENTIALITY. Anderson shall use its best efforts to cause its
officers, employees, and authorized representatives to, hold in strict
confidence all confidential data and information obtained by it from First
Merchants and Pendleton, unless such information (i) was already known to
Anderson, (ii) becomes available to Anderson from other sources, (iii) is
independently developed by Anderson, (iv) is disclosed outside of Anderson with
and in accordance with the terms of prior written approval of First Merchants or
Pendleton, or (v) is or becomes readily ascertainable from public or published
information or trade sources or public disclosure of such information is
required by law or requested by a court or other governmental agency,
commission, or regulatory body. Anderson further agrees that in the event this
Agreement is terminated, it will return to First Merchants and Pendleton all
information obtained by Anderson regarding First Merchants and Pendleton,
including
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all copies made of such information by Anderson. This provision shall survive
the Effective Date or the earlier termination of this Agreement.
7.10 COOPERATION. Anderson shall generally cooperate with First
Merchants and Pendleton and their respective officers, employees, attorneys,
accountants and other agents, and, generally, do such other acts and things in
good faith as may be reasonable, necessary or appropriate to timely effectuate
the intents and purposes of this Agreement and the consummation of the
transactions contemplated hereby, including, without limitation, (i) Anderson
shall cooperate and assist First Merchants and Pendleton in preparation of
and/or filing of all regulatory applications, the registration statement for
registration of First Merchants' shares, and all other documentation required to
be prepared for consummation of the Merger and obtaining all necessary
approvals, and (ii) Anderson shall furnish First Merchants and Pendleton with
all information concerning itself that First Merchants and Pendleton may request
in connection with the preparation of the documentation referenced above. Prior
to the Closing (as defined in Section 12 hereof), Anderson agrees to disclose to
First Merchants and Pendleton any fact or matter that comes to the attention of
Anderson that might indicate that any of the representations or warranties of
Anderson may be untrue, incorrect, or misleading in any material respect.
7.11. ENVIRONMENTAL REPORTS. Anderson, at its sole cost and expense,
shall provide to First Merchants and Pendleton, as soon as reasonably practical,
but not later than thirty (30) days after the date hereof, a copy of any and all
environmental reports currently in Anderson's possession or which Anderson can
obtain without undue effort on all real property owned, leased or operated by
Anderson as of the date hereof (but excluding space in retail and similar
establishments leased by Anderson for automatic teller machines or bank branch
facilities where the space leased comprises less than 20% of the total space
leased to all tenants of such property). Anderson shall not be required by this
Section 7.11 to cause any new environmental investigations to be conducted or
environmental reports to be prepared. Should the cost of taking all remedial or
other corrective actions and measures relating to real property owned, leased or
operated by Anderson (i) required by applicable law or reasonable likely to be
required by applicable law, or (ii) recommended or suggested by any report or
reports as prudent in light of serious life, health or safety concerns, in the
aggregate, exceed the sum of $100,000 as reasonably estimated by an
environmental expert retained for such purpose by First Merchants and Pendleton
and reasonably acceptable to Anderson, or if the cost of such actions and
measures cannot be so reasonably estimated by such expert to be such amount or
less with any reasonable degree of certainty, then First Merchants shall have
the right for a period of fifteen (15) business days following receipt of such
estimate or indication that the cost of such actions and measures cannot be so
reasonably estimated to terminate this Agreement by providing written notice of
such termination to Anderson.
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7.12. LETTER TO ANDERSON SHAREHOLDERS. Within five (5) business days
after execution of this Agreement by Anderson, Pendleton and First Merchants,
Anderson shall deposit in the United States mail a letter to each of the
shareholders of record of Anderson as of the date of execution of this Agreement
informing each shareholder about the execution of this Agreement and the
proposed Merger. The terms of such letter to the shareholders of Anderson shall
be in a form mutually agreed to by First Merchants, Pendleton and Anderson.
7.13. EXERCISE OF OPTIONS. Anderson shall cause the stock options
disclosed pursuant to Section 5.03(b) to be exercised and the related shares of
Anderson common stock to be issued on or before the Effective Date. Anderson
commits that no cash shall be paid to option holders in connection with the
exercise of such options and that immediately prior to the effective time of the
Merger, Anderson will have 612,434 shares of common stock outstanding.
SECTION 8
COVENANTS OF FIRST MERCHANTS AND PENDLETON
First Merchants and Pendleton covenant and agree with Anderson as
follows:
8.01. APPROVALS. First Merchants and Pendleton shall proceed
expeditiously, cooperate fully and use their best efforts to procure upon
reasonable terms and conditions all consents, authorizations, approvals,
registrations and certificates, to complete all filings and applications and to
satisfy all other requirements prescribed by law which are necessary for
consummation of the Merger on the terms and conditions provided in this
Agreement. First Merchants and Pendleton shall provide Anderson with copies of
proposed regulatory filings in connection with the Merger and afford Anderson
the opportunity to offer comment on the filings before filing. The approval of
the shareholders of First Merchants of the transactions contemplated by this
Agreement is not required.
8.02. PENDLETON SHAREHOLDER APPROVAL. First Merchants, as the sole
shareholder of Pendleton, shall approve the Merger and the terms of this
Agreement as required by law.
8.03. EMPLOYEE BENEFIT PLANS. No later than January 1, 2000, First
Merchants will permit Anderson employees to participate in any tax-qualified
retirement plan First Merchants maintains for its employees, provided that such
an employee meets the applicable participation requirements, in lieu of
Anderson's current tax-qualified retirement plan(s). Until that time, Anderson's
current tax-qualified retirement plan(s) will be maintained at the same level,
with respect to benefit accruals, provided for on the Effective Date. Following
the Effective Date, Anderson employees will otherwise participate in employee
benefit plans that in the aggregate are substantially comparable to the employee
benefit plans provided to those employees by Anderson
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on the Effective Date. Each Anderson employee who is still employed by
Anderson on the Effective Date and is a participant in the Anderson 401(k)
plan shall be fully vested with respect to all contributions made by or on
behalf of such employee under the Anderson 401(k) plan. For purposes of
determining an Anderson employee's eligibility and vesting service under a
First Merchant's employee benefit plan that the employee is permitted to
enter, service with Anderson will be treated as service with First Merchants;
provided, however, that service with Anderson shall not be treated as service
with First Merchants for purposes of benefit accrual under First Merchants'
defined benefit pension plan. In addition, service with Anderson will be
counted for seniority purposes for determining applicable vacation time, sick
days, and years of service awards with First Merchants.
8.04. FIRST MERCHANTS' BOARD OF DIRECTORS. In connection with the first
annual meeting of the shareholders of First Merchants following the Effective
Date, First Merchants shall cause all necessary action to be taken to cause the
current Chairman of the Board of Anderson, James F. Ault, to be nominated for
election as a member of the First Merchants' Board of Directors for a three
(3)-year term.
8.05. PRESS RELEASE. Except as required by law, neither First Merchants
nor Pendleton shall issue any press release to any national wire service
relating solely to the Merger without the prior approval of Anderson.
8.06. CONFIDENTIALITY. First Merchants and Pendleton shall, and shall
use their best efforts to cause their respective officers, employees, and
authorized representatives to, hold in strict confidence all confidential data
and information obtained by them from Anderson, unless such information (i) was
already known to First Merchants or Pendleton, (ii) becomes available to First
Merchants or Pendleton from other sources, (iii) is independently developed by
First Merchants or Pendleton, (iv) is disclosed outside of First Merchants or
Pendleton with and in accordance with the terms of prior written approval of
Anderson, or (v) is or becomes readily ascertainable from public or published
information or trade sources or public disclosure of such information is
required by law or requested by a court or other governmental agency,
commission, or regulatory body. First Merchants and Pendleton further agree that
in the event this Agreement is terminated, they will return to Anderson all
information obtained by First Merchants and Pendleton regarding Anderson,
including all copies made of such information by First Merchants and Pendleton.
This provision shall survive the Effective Date or the earlier termination of
this Agreement.
8.07. ANDERSON EMPLOYEES. On or before the Effective Date, it is First
Merchants' present intention to offer to employ all employees of Anderson, who
are currently actively employed by Anderson, a position either at the Anderson
Community Banking Centers of the Continuing Bank or some other position within
the First Merchants organization commencing on the Effective Date; provided such
Anderson employees satisfy all employment application and qualification
requirements applicable to all prospective First Merchants employees. In the
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event any offer of employment by First Merchants is accepted by any Anderson
employees, First Merchants shall not be obligated to continue any employment
relationship with any former Anderson employee for any specific period of time
and such former Anderson employees shall be employees at will with First
Merchants. This Section 8.07 expresses the current intentions of First Merchants
with respect to the employees of Anderson, but shall not be construed as a
binding obligation of First Merchants or a guarantee of employment of all
Anderson employees.
8.08. DIRECTORS' AND OFFICERS' INDEMNIFICATION.
(a) After the Effective Date, First Merchants and Pendleton shall
indemnify, defend and hold harmless the present and former officers and
directors of Anderson against all losses, expenses, claims, damages and
liabilities arising out of actions or omissions (arising from their present or
former status as officers or directors) occurring on or prior to the Effective
Date to the full extent permitted under the applicable provisions of Indiana law
and under the articles of incorporation and bylaws of Anderson, as in effect on
the date hereof.
(b) If, after the Effective Date, First Merchants or Pendleton or any
of its or their successors or assigns (i) shall consolidate with or merge into
any other corporation or entity and shall not be the continuing or surviving
corporation or entity of such consolidation or merger or (ii) shall transfer all
or substantially all of its properties and assets to any individual, corporation
or other entity, then and in each such case, proper provision shall be made so
that the successors and assigns of First Merchants and/or Pendleton shall assume
the obligations set forth in this Section 8.08.
8.09 ACCESS. On and after the date of this Agreement and until the
Effective Date or until this Agreement is terminated as provided herein, First
Merchants and Pendleton shall continue to give Anderson and its employees,
accountants, attorneys and other authorized representatives reasonable access
during regular business hours and other reasonable times to all its premises,
properties, statements, books and records.
SECTION 9
CONDITIONS PRECEDENT TO THE MERGER
The obligation of each of the parties hereto to consummate the
transactions contemplated by this Agreement is subject to the satisfaction and
fulfillment of each of the following conditions on or prior to the Effective
Date:
9.01. SHAREHOLDER APPROVAL. The shareholders of Anderson shall have
approved, ratified and confirmed this Agreement as required by applicable law.
First Merchants, as the
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sole shareholder of Pendleton, shall have approved, ratified and confirmed
this Agreement as required by applicable law.
9.02. REGISTRATION STATEMENT EFFECTIVE. First Merchants shall have
registered its shares of common stock to be issued to shareholders of Anderson
in accordance with this Agreement with the Securities and Exchange Commission
pursuant to the 1933 Act, and all state securities and "blue sky" approvals and
authorizations required to offer and sell such shares shall have been received
by First Merchants. The registration statement with respect thereto shall have
been declared effective by the Securities and Exchange Commission and no stop
order shall have been issued or threatened.
9.03. TAX OPINION. The parties shall have obtained an opinion of
counsel, which shall be in form and content satisfactory to counsel for all
parties hereto, to the effect that the Merger effected pursuant to this
Agreement shall constitute a tax-free transaction (except to the extent cash or
boot is received) to each party hereto and to the shareholders of each party.
Such opinion shall be based upon factual representations received by such
counsel from the parties, which representations may take the form of written
certifications.
9.04. AFFILIATE AGREEMENTS. First Merchants shall have obtained (a)
from Anderson, a list identifying each affiliate of Anderson and (b) from each
affiliate of Anderson, the agreements contemplated by Section 7.06 hereof.
9.05. REGULATORY APPROVALS. The FDIC and the Indiana Department of
Financial Institutions shall have authorized and approved the Merger and the
transactions related thereto. In addition, all appropriate orders, consents,
approvals and clearances from all other regulatory agencies and governmental
authorities whose orders, consents, approvals or clearances are required by law
for consummation of the transactions contemplated by this Agreement shall have
been obtained.
9.06. OFFICER'S CERTIFICATE. First Merchants, Pendleton and Anderson
shall have delivered to each other a certificate signed by their Chairman or
President and their Secretary, dated the Effective Date, certifying that (a) all
the representations and warranties of their respective entities are true,
accurate and correct on and as of the Effective Date; (b) all the covenants of
their respective entities have been complied with from the date of this
Agreement through and as of the Effective Date; and (c) their respective
entities have satisfied and fully complied with all conditions necessary to make
this Agreement effective as to them.
9.07. FAIRNESS OPINION. Anderson shall have obtained an opinion from an
investment banker of its choosing to the effect that the terms of the Merger are
fair to the shareholders of Anderson from a financial viewpoint. Such opinion
shall be (a) in form and substance
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reasonably satisfactory to Anderson, (b) dated as of a date not later than
the mailing date of the Proxy Statement relating to the Merger and (c)
included in the Proxy Statement.
9.08. POOLING OF INTERESTS. First Merchants and Pendleton shall have
obtained from their independent accountants, Olive, LLP, a letter stating that,
based upon their review of such documents and information which they deemed
relevant, such firm is currently unaware of any reason why the Merger cannot be
accounted for as a "pooling of interests."
9.09. NO JUDICIAL PROHIBITION. Neither Anderson, Pendleton nor First
Merchants shall be subject to any order, decree or injunction of a court or
agency of competent jurisdiction which enjoins or prohibits the consummation of
the Merger.
9.10. OTHER CONSENTS AND APPROVALS. All consents and other approvals
required for the transfer of any contracts, agreements, leases, loans, etc. as a
result of the Merger shall have been obtained.
SECTION 10
TERMINATION OF MERGER
10.01. MANNER OF TERMINATION. This Agreement and the transactions
contemplated hereby may be terminated at any time prior to the Effective Date by
written notice delivered by First Merchants or Pendleton to Anderson or by
Anderson to First Merchants and Pendleton:
(a) By Anderson, First Merchants or Pendleton, if there has
been a material misrepresentation, a breach of warranty or a failure to
comply with any covenant on the part of any party in the
representations, warranties, and covenants set forth herein; provided
that Anderson shall have no right to terminate for its own default,
that First Merchants shall have no right to terminate for its own
default or a default by Pendleton, and that Pendleton shall have no
right to terminate for its own default or a default by First Merchants;
(b) By Anderson, First Merchants or Pendleton, if it shall
determine in its sole discretion that the transactions contemplated by
this Agreement have become inadvisable or impracticable by reason of
commencement or threat of material litigation or proceedings against
any of the parties;
(c) By Anderson, if the financial condition, business, assets,
or results of operations of First Merchants shall have been materially
and adversely changed from that in existence at June 30, 1998, or by
First Merchants or Pendleton, if the financial condition, business,
assets, or results of operations of Anderson shall have been materially
and adversely changed from that in existence at June 30, 1998;
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(d) By Anderson, First Merchants or Pendleton, if the
transaction contemplated herein has not been consummated by April 30,
1999 (provided that if Anderson is the terminating party that it is not
then in material breach of any representation, warranty, covenant or
other agreement contained herein, if First Merchants is the terminating
party that neither it nor Pendleton is then in material breach of any
representation, warranty, covenant or other agreement contained herein,
or if Pendleton is the terminating party that neither it nor First
Merchants is then in material breach of any representation, warranty,
covenant or other agreement contained herein);
(e) By First Merchants or Pendleton if any of the items,
events or information set forth in any update to the Disclosure Letter
has had or may have a material adverse effect on the financial
condition, results of operations, business, or prospects of Anderson;
(f) By First Merchants, Pendleton or Anderson if, in the
opinion of counsel to First Merchants and Pendleton or to Anderson, the
Merger will not constitute a tax-free reorganization under the Code;
(g) By First Merchants if the Merger cannot be accounted for
as a "pooling of interests";
(h) By Anderson, (i) if First Merchants or any of its
subsidiary banks (including Pendleton) is acquired by a third party in
a merger, consolidation, share exchange, stock transaction or asset
transaction, (ii) if First Merchants enters into an agreement
containing the terms and conditions of such a transaction, or (iii) if
the terms and conditions of such a transaction involving First
Merchants or any of its subsidiary banks (including Pendleton) are
publicly disclosed;
(i) By First Merchants pursuant to its termination rights set
forth in Section 7.11 hereof;
(j) By Anderson, if the appropriate discharge of the fiduciary
duties of the Board of Directors of Anderson consistent with Section
7.05 requires that Anderson terminate this Agreement;
(k) By First Merchants or Pendleton if it receives written
notice under Section 7.05 that Anderson intends to furnish information
to or enter into discussions or negotiations with a third party in
connection with a proposed Acquisition Transaction, if Anderson fails
to give any such written notice as required in Section 7.05 or if
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Anderson's Board of Directors fails to make, withdraws or modifies its
recommendation to Anderson shareholders to vote in favor of the Merger
following receipt of a proposal for an Acquisition Transaction; or
(l) By either party (provided that the terminating party is
not then in material breach of any representation or warranty contained
in this Agreement or in material breach of any covenant or other
agreement contained in this Agreement) in the event that any of the
conditions precedent to the obligations of such party to consummate the
Merger cannot be satisfied or fulfilled by the date specified in
Section 10.1(d) of this Agreement.
10.02. EFFECT OF TERMINATION. Except as provided below, in the
event that this Agreement is terminated pursuant to the provisions of
Section 10.01 hereof, no party shall have any liability to any other
party for costs, expenses, damages or otherwise; provided, however,
that notwithstanding the foregoing, in the event that this Agreement is
terminated pursuant to Section 10.01(a) hereof on account of a willful
breach of any of the representations and warranties set forth herein or
any breach of any of the agreements set forth herein, then the
non-breaching party shall be entitled to recover appropriate damages
from the breaching party, including, without limitation, reimbursement
to the non-breaching party of its costs, fees and expenses (including
attorneys', accountants' and advisors' fees and expenses) incident to
the negotiation, preparation and execution of this Agreement and
related documentation; provided, however that nothing in this proviso
shall be deemed to constitute liquidated damages for the willful breach
by a party of the terms of this Agreement or otherwise limit the rights
of the non-breaching party. Notwithstanding the foregoing, in the event
of termination by First Merchants or Pendleton in accordance with
Section 10.01(k) or by Anderson in accordance with Section 10.01(j),
Anderson shall pay First Merchants the sum of Seven Hundred Fifty
Thousand Dollars ($750,000) as liquidated damages. Such liquidated
damages shall be in lieu of cost, expenses and damages otherwise
recoverable under the first sentence of this Section 10.02. Such
payment shall be made within ten (10) days of the date of notice of
termination. Anderson acknowledges the reasonableness of such amount in
light of the considerable time and expense invested and to be invested
by First Merchants and its representatives in furtherance of the
Merger. Such amount was agreed upon by First Merchants and Anderson as
compensation to First Merchants for its time and expense and not as a
penalty to Anderson, it being impossible to ascertain the exact value
of the time and expense to be invested. First Merchants shall also be
entitled to recover from Anderson its reasonable attorney fees incurred
in the enforcement of this Section.
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SECTION 11
EFFECTIVE DATE OF MERGER
Subject to the terms and upon satisfaction of all requirements of law
and the conditions specified in this Agreement, the Merger shall become
effective at the close of business on the day specified in the Articles of
Merger of Anderson with and into Pendleton as filed with the Secretary of State
of the State of Indiana (the "Effective Date"). The Effective Date shall occur
no later than the last business day of the month in which any waiting period
following the last approval of the Merger by a state or federal regulatory
agency or governmental authority expires.
SECTION 12
CLOSING
12.01. CLOSING DATE AND PLACE. The closing of the Merger (the
"Closing") shall take place at the main office of First Merchants on the
Effective Date or at such other place as mutually agreed to by First Merchants,
Pendleton and Anderson.
12.02. ARTICLES OF MERGER. Subject to the provisions of this
Agreement, on the Effective Date, the Articles of Merger shall be duly filed
with the Secretary of State of the State of Indiana.
12.03. OPINIONS OF COUNSEL. At the Closing, Anderson shall deliver an
opinion of its counsel, Leagre, Chandler & Millard, to First Merchants, and
First Merchants and Pendleton shall deliver an opinion of their counsel, Bingham
Summers Welsh & Spilman, to Anderson, dated as of the date of the Closing. The
form of such opinions shall be as mutually agreed to by the parties hereto and
their respective counsel.
SECTION 13
MISCELLANEOUS
13.01. EFFECTIVE AGREEMENT. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns, but none of the provisions thereof shall inure to the benefit
of any other person, firm, or corporation whomsoever, except as expressly
applied to the current and former officers and directors of First Merchants,
Pendleton and Anderson and their beneficiaries. Neither this Agreement nor any
of the rights, interests, or obligations hereunder shall be assigned or
transferred by either party hereto without the prior written consent of the
other party.
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13.02. WAIVER; AMENDMENT.
(a) First Merchants, Pendleton and Anderson may, by an
instrument in writing executed in the same manner as this Agreement:
(i) extend the time for the performance of any of the covenants or
agreements of any other party under this Agreement; (ii) waive any
inaccuracies in the representations or warranties of any other party
contained in this Agreement or in any document delivered pursuant
hereto or thereto; (iii) waive the performance by any other party of
any of the covenants or agreements to be performed by it or them under
this Agreement; or (iv) waive the satisfaction or fulfillment of any
condition the nonsatisfaction or nonfulfillment of which is a condition
to the right of the party so waiving to terminate this Agreement. The
waiver by any party hereto of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any other or
subsequent breach hereunder.
(b) Notwithstanding the prior approval by the shareholders of
Anderson, this Agreement may be amended, modified or supplemented by
the written agreement of Anderson, Pendleton and First Merchants
without further approval of such shareholders, except that no such
amendment, modification or supplement shall result in a decrease in the
consideration specified in Section 3 hereof or shall materially
adversely affect the rights of the shareholders of Anderson without the
further approval of such shareholders.
13.03. NOTICES. Any notice required or permitted by this Agreement
shall be deemed to have been duly given if delivered in person, receipted for or
sent by certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to First Merchants and Pendleton: With a copy to:
200 E. Jackson Street, Box 792 Bingham Summers Welsh & Spilman
Muncie, IN 47305 2700 Market Tower
Attn: Stefan S. Anderson, 10 West Market Street
Chairman and Chief Executive Indianapolis, Indiana 46204-2982
Officer Attn: David R. Prechtel, Esq.
If to Anderson: With a copy to:
19 West 10th Street Leagre, Chandler & Millard
Anderson, IN 46016 9100 Keystone Crossing, Suite 800
Attn: James F. Ault, Chairman Indianapolis, Indiana 46240
Attn: Michael L. Baker Attn: John R. Zerkle, Esq.
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or to such substituted address as any of them have given to the other in
writing.
13.04. HEADINGS. The headings in this Agreement have been inserted
solely for the ease of reference and should not be considered in the
interpretation or construction of this Agreement.
13.05. SEVERABILITY. In case any one or more of the provisions
contained herein shall, for any reason, be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision of this Agreement, but this Agreement shall
be construed as if such invalid, illegal, or unenforceable provision or
provisions had never been contained herein.
13.06. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument. In addition, this Agreement and
the documents to be delivered hereunder may be executed by the parties hereto
either manually or by facsimile signatures, each of which shall constitute an
original signature.
13.07. GOVERNING LAW. This Agreement is executed in and shall be
construed in accordance with the laws of the State of Indiana.
13.08. ENTIRE AGREEMENT. This Agreement supersedes any other agreement,
whether oral or written, between First Merchants, Pendleton and Anderson
relating to the matters contemplated hereby, and constitutes the entire
agreement between the parties hereto.
13.09. EXPENSES. First Merchants, Pendleton and Anderson shall each pay
their own expenses incidental to the transactions contemplated hereby. It is
understood that the cost of the fairness opinion referenced in Section 9.07
shall be borne by Anderson whether or not the Merger is consummated. This
provision shall survive the Effective Date or the earlier termination of this
Agreement.
13.10 SURVIVAL OF COVENANTS. The provisions of Sections 7.09, 8.06,
10.02, 10.03, 13.09 and this Section 13.10 shall survive beyond the termination
of this Agreement. The provisions of Sections 8.03, 8.04, 8.08, 13.09 and this
Section 13.10 shall survive beyond the Effective Date.
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IN WITNESS WHEREOF, First Merchants, Pendleton and Anderson have made
and entered into this Agreement as of the day and year first above written and
have caused this Agreement to be executed and attested by their duly authorized
officers.
FIRST MERCHANTS CORPORATION
ATTEST:
/s/ Larry R. Helms By:/s/ Stefan S. Anderson
- ------------------------------- -----------------------------------------
Larry R. Helms, Secretary Stefan S. Anderson, Chairman and Chief
Executive Officer
PENDLETON BANKING COMPANY
ATTEST:
/s/ Sherry Hazelbaker By:/s/ Norman Locke
- ------------------------------- -----------------------------------------
Sherry Hazelbaker, Secretary Norman Locke, President
ANDERSON COMMUNITY BANK
ATTEST:
/s/ Michael E. Stephens By:/s/ Michael L. Baker
- ------------------------------- -----------------------------------------
Michael E. Stephens, Secretary Michael L. Baker, President and
Chief Executive Officer
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APPENDIX B
INDIANA CODE 28-1-7-21
RIGHTS OF DISSENTING SHAREHOLDERS
(a) A shareholder entitled to vote on the adoption of an agreement of
merger or consolidation may dissent from the merger or consolidation and obtain
payment of the value of the shareholder's shares in the manner provided in this
section.
(b) If a proposed merger or consolidation is submitted to a vote at a
shareholders' meeting, the meeting notice must state that shareholders are or
may be entitled to assert dissenters' rights under this section.
(c) A shareholder who desires to assert dissenters' rights under this
section must:
(1) Deliver to the corporation before the vote is taken written
notice of the shareholder's demand for payment for the
shareholder's shares if the proposed action is effected; and
(2) Not vote the shareholder's shares in favor of the proposed
action.
(d) If the merger or consolidation is effected, the surviving or new
corporation shall pay to the shareholder, upon surrender of the certificate or
certificates representing the shareholder's shares, the value of the shares as
of the day before the date on which the vote was taken approving the merger or
consolidation. A shareholder failing to satisfy the requirements of subsection
(c) is not entitled to payment for the shareholder's shares under this section.
Immediately after the vote is taken approving the merger or consolidation, the
shareholder, except as otherwise provided in subsection (e), is entitled to
payment only as provided in this section, ceases to be a shareholder, and is not
entitled to vote or to exercise any other rights of a shareholder.
(e) A demand for payment made under subsection (c) may not be withdrawn
unless the corporation consents to the withdrawal. With respect to a shareholder
who has made a demand for payment, the right of the shareholder to be paid the
value of his shares ceases and his status as a shareholder is restored without
prejudice to any corporate proceedings which may have been taken during the
interim, and the shares held by the shareholder shall be treated for all
purposes as if no objection and demand had been made by the shareholder, if:
(1) The shareholder's request to withdraw the shareholder's
demand is consented to by the corporation;
(2) The merger or consolidation is abandoned;
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(3) The shareholders revoke the authority to effect the merger
or consolidation;
(4) A petition for the determination of value by a court is not
filed within the time provided in this section; or
(5) A court of competent jurisdiction determines that the
shareholder is not entitled to the relief provided by this
section.
(f) Within ten (10) days after the merger or consolidation is effected,
the surviving or new corporation shall mail or deliver written notice of the
date of that action to each dissenting shareholder who has made demand under
this section. For purposes of giving this notice, the corporation shall use the
shareholder's address which appears on the corporate records. In the notice the
corporation shall include a written offer to the shareholder to pay for the
shareholder's shares at a specified price considered by the corporation to be
the value of them. If within thirty (30) days after the date on which the merger
or consolidation was effected the value of shares is agreed upon between a
dissenting shareholder and the surviving or new corporation, the surviving or
new corporation shall make payment to the shareholder for the shares. The
surviving or new corporation shall make the payment within ninety (90) days
after the date on which the merger or consolidation was effected, upon surrender
of the certificate or certificates representing the shares. Upon payment of the
agreed value, the dissenting shareholder ceases to have any interest in the
shares.
(g) If within the period of thirty (30) days a dissenting shareholder
and the surviving or new corporation do not so agree, then either the
corporation or the dissenting shareholder may file a petition in any circuit or
superior court in the county in Indiana where the principal office of the
corporation is located requesting that the court determine the value of the
shares. However, the petition must be filed within ninety (90) days after the
effective date of the merger or consolidation. Two (2) or more dissenting
shareholders may join as plaintiffs or be joined as defendants in the action,
and two (2) or more actions may be transferred and consolidated to avoid
inconsistent results and promote judicial economy. The jurisdiction of the court
is plenary and exclusive.
(h) The court shall render judgment against the surviving or new
corporation for payment of an amount equal to the value of each dissenting share
multiplied by the number of dissenting shares that any dissenting shareholder
who is a party is entitled to require the surviving or new corporation to
purchase. The judgment is payable only upon the endorsement and delivery to the
surviving or new corporation of the certificates for the shares described in the
judgment. Any party may appeal from the judgment.
(i) Within twenty (20) days after the merger or consolidation is
effected, the shareholder shall submit the certificate or certificates
representing the shareholder's shares to the corporation for notation on the
certificate or certificates that demand for payment has been made.
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The shareholder's failure to do so, at the option of the corporation,
terminates the shareholder's rights under this section unless a court of
competent jurisdiction, for good and sufficient cause shown, otherwise
directs. If shares represented by a certificate on which notation has been so
made are transferred, each new certificated issued for those shares shall
bear a similar notation together with the name of the original dissenting
holder of the shares, and a transferee of the shares acquires by the transfer
no rights in the corporation other than those which the original dissenting
shareholder had after making demand for payment of the value of the shares.
[Acts 1933, ch. 40, ss. 134, p. 176; 1965, ch. 356, ss. 9; P.L. 238-1983,
ss. 9; P.L. 33-1991, ss. 13; P.L. 14-1992, ss. 72; P.L. 262-1995, ss.10.]
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APPENDIX C
PROFESSIONAL BANK SERVICES, INC.
FAIRNESS OPINION AND UPDATE
October 20, 1998
Board of Directors
Anderson Community Bank
19 West 10th Street
Anderson, Indiana 46016
Dear Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial perspective, to the common shareholders of Anderson Community Bank,
Anderson, Indiana (the "Company") of the proposed merger of the Company with
Pendleton Banking Company, Pendleton, Indiana ("Pendleton"), a wholly-owned
subsidiary of First Merchants Corporation, Muncie, Indiana ("FRME"). In the
proposed merger, Company shareholders will receive 0.92 FRME common shares or an
aggregate of 563,439 FRME common shares for all Company common shares
outstanding, as further defined in the Agreement of Reorganization and Merger
between FRME, Pendleton and the Company (the "Agreement"). On October 15, 1998,
the proposed consideration to be received represents an aggregate value of
$19,156,936 or $31.28 per Company common share based on the closing price for
FRME common stock of $34.00 per share as quoted on the National Association of
Securities Dealers Automated Quotation System.
Professional Bank Services, Inc. ("PBS") is bank consulting firm and as part of
its investment banking business is continually engaged in reviewing the
fairness, from a financial perspective, of bank acquisition transactions and in
the valuation of banks and other businesses and their securities in connection
with mergers, acquisitions, estate settlements and other purposes. We are
independent with respect to the parties of the proposed transaction.
For purposes of this opinion, PBS performed a review and analysis of the
historic performance of the Company contained in: (i) December 31, 1997, March
31, 1998 and June 30, 1998 Consolidated Reports of Condition and Income filed by
the Company with the FDIC; (ii) December 31, 1996 and 1997 audited annual
reports of the Company; and (iii) December 31, 1997, March 31, 1998 and June 30,
1998 Uniform Bank Performance Reports of the Company.
C-1
<PAGE>
Board of Directors
Anderson Community Bank
October 20, 1998
Page 2
We have reviewed and tabulated statistical data regarding the loan portfolio,
securities portfolio and other performance ratios and statistics. Financial
projections were prepared and analyzed as well as other financial studies,
analyses and investigations as deemed relevant for the purposes of this
opinion. In review of the aforementioned information, we have taken into
account our assessment of general market and financial conditions, our
experience in other transactions, and our knowledge of the banking industry
generally.
For the purposes of this opinion, PBS reviewed and analyzed the historic
performance of FRME contained in: (i) December 31, 1995, 1996 and 1997 audited
annual reports of FRME; and (ii) June 30, 1997, September 30, 1997, March 31,
1998 and June 30, 1998 unaudited financial data and reports filed on Form 10-K
and 10-Q with the Securities and Exchange Commission.
We have not compiled, reviewed or audited the financial statements of the
Company or FRME nor have we independently verified any of the information
reviewed; we have relied upon such information as being complete and accurate in
all material respects. We have not made independent evaluation of the assets of
the Company or FRME.
Based on the foregoing and all other factors deemed relevant, it is our opinion
as investment bankers, that, as of the date hereof, the consideration proposed
to be received by the shareholders of the Company under the Agreement is fair
and equitable from a financial perspective.
Very truly yours,
PROFESSIONAL BANK SERVICES, INC.
C-2
<PAGE>
___________________, 1999
Board of Directors
Anderson Community Bank
19 West 10th Street
Anderson, Indiana 46016
Dear Members of the Board:
To our knowledge, nothing of a material nature has occurred since the issuance
of our Fairness Opinion (the "Opinion") to the common shareholders of Anderson
Community Bank, Anderson, Indiana (the "Company") dated October 20, 1998, that
would cause us to alter or rescind the Opinion. The Opinion is related to the
fairness from a financial point of view, to the common shareholders of the
Company, regarding the proposed transaction outlined in the Agreement of
Reorganization and Merger between First Merchants Corporation, Muncie, Indiana,
Pendleton Banking Company, Pendleton, Indiana and the Company.
Very truly yours,
PROFESSIONAL BANK SERVICES, INC.
C-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Articles of Incorporation provide that the Registrant
will indemnify any person who is or was a director, officer, employee or agent
of the Registrant or of any other corporation for which he is or was serving in
any capacity at the request of the Registrant against all liability and expense
that may be incurred in connection with or resulting from or arising out of any
claim, action, suit or proceeding with respect to which such director, officer
or employee is wholly successful or acted in good faith in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant or such other corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was unlawful. A
director, officer, employee or agent of the Registrant is entitled to be
indemnified as a matter of right with respect to those claims, actions, suits or
proceedings where he has been wholly successful. In all other cases, such
director, officer, employee or agent will be indemnified only if the Board of
Directors of the Registrant or independent legal counsel finds that he has met
the standards of conduct set forth above.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following Exhibits are being filed as part of this Registration
Statement except those which are incorporated by reference:
<TABLE>
Exhibit No. Description of Exhibit Form S-4 Page
- ----------- ---------------------- -------------
<S> <C>
2. Agreement of Reorganization and Merger.................................................... (A)
3.a. First Merchants Corporation Articles of Incorporation and the
Articles of Amendment thereto............................................................. (B)
b. First Merchants Corporation Bylaws and amendments thereto................................. (B)
5. Opinion of Bingham Summers Welsh & Spilman (legality)..................................... 171
8. Opinion of Bingham Summers Welsh & Spilman
(tax matters)............................................................................. 172
10.a. First Merchants Corporation and First Merchants Bank,
National Association Management Incentive Plan............................................ (C)
b. First Merchants Bank, National Association Unfunded Deferred
Compensation Plan, as Amended............................................................. (C)
II-1
<PAGE>
c. First Merchants Corporation 1989 Stock Option Plan........................................ (D)
d. First Merchants Corporation 1994 Stock Option Plan........................................ (E)
e. First Merchants Corporation Change of Control Agreements.................................. (F)
f. First Merchants Corporation Unfunded Deferred Corporation Plan............................ (F)
g. First Merchants Corporation Supplemented Executive Retirement
Plan and amendments thereto............................................................... (G)
h. Agreement of Reorganization and Merger dated August 20, 1998,
between First Merchants Corporation and Jay
Financial Corporation..................................................................... 176
21. Subsidiaries of Registrant................................................................ 212
23.a. Consent of Olive, LLP..................................................................... 213
b. Consent of Crowe, Chizek and Company LLP.................................................. 214
c. Consent of Bingham Summers Welsh & Spilman (legality)..................................... (1)
d. Consent of Bingham Summers Welsh & Spilman
(tax matters)............................................................................. (1)
e. Consent of Professional Bank Services, Inc................................................ 215
24. Power of Attorney included in "Signatures" section........................................ 167
99. Form of Proxy............................................................................. 216
</TABLE>
(b) 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.
(c) Fairness opinion furnished as part of prospectus.
(A) Included as Appendix A to the Prospectus.
(B) Incorporated by reference to Registrant's Quarterly Report Form 10-Q
for quarter ended June 30, 1997.
(C) Incorporated by reference to Registrant's Form 10-K for year ended
December 31, 1996.
(D) Incorporated by reference to Registrant's Registration Statement on
Form S-8 (SEC File No. 33-28901) effective on May 24, 1989.
II-2
<PAGE>
(E) Incorporated by reference to Registrant's Annual Report on Form 10-K
for year ended December 31, 1993.
(F) Incorporated by reference to Registrant's Annual Report on Form 10-K
for year ended December 31, 1996.
(G) Incorporated by reference to Registrant's Annual Report on Form 10-K
for year ended December 31, 1997.
(1) Included in opinion.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934, (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) (1) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
the use of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) The undersigned registrant hereby undertakes that every
prospectus (i) that is filed pursuant to paragraph (b)(1) immediately preceding,
or (ii) that purports to meet the requirements of Section 10(a)(3) of the
Securities Act of 1933, and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the
II-3
<PAGE>
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(d) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(e) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(f) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(g) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(h) The undersigned registrant hereby undertakes to remove from
registration by means of a post-effective amendment any of the securities being
registered which remain unsold at the termination of the offering.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Muncie,
State of Indiana, as of the 31st day of December, 1998.
FIRST MERCHANTS CORPORATION
By: /s/ Stefan S. Anderson
--------------------------------------
Stefan S. Anderson, Chief Executive
Officer
Each person whose signature appears below constitutes and appoints
Stefan S. Anderson and Larry R. Helms and each of them his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement and any subsequent registration statement filed by First Merchants
Corporation pursuant to Rule 462(b) of the Securities Act of 1933, and to file
the same, with all exhibits thereto, and other documents in connection therewith
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agents full power and authority to perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed as of the 31st day of December, 1998
by the following persons in the capacities indicated.
/s/ Stefan S. Anderson
- -------------------------------
Stefan S. Anderson Chairman of the Board, Chief Executive
Officer and Director (Principal Executive
Officer)
/s/ James L. Thrash
- -------------------------------
James L. Thrash Senior Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
/s/ Frank A. Bracken
- -------------------------------
Frank A. Bracken Director
S-1
<PAGE>
/s/ Thomas B. Clark
- -------------------------------
Thomas B. Clark Director
/s/ Michael L. Cox
- -------------------------------
Michael L. Cox Director
/s/ David A. Galliher
- -------------------------------
David A. Galliher Director
/s/ Norman M. Johnson
- -------------------------------
Norman M. Johnson Director
/s/ Ted J. Montgomery
- -------------------------------
Ted J. Montgomery Director
/s/ George A. Sissel
- -------------------------------
George A. Sissel Director
/s/ Robert M. Smitson
- -------------------------------
Robert M. Smitson Director
/s/ Michael D. Wickersham
- -------------------------------
Michael D. Wickersham Director
/s/ John E. Worthen
- -------------------------------
John E. Worthen Director
S-2
<PAGE>
EXHIBIT INDEX
(a) The following Exhibits are being filed as part of this Registration
Statement except those that are incorporated by reference:
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Form S-4 Page
- ----------- ---------------------- -------------
<S> <C> <C>
2. Agreement of Reorganization and Merger................................................ (A)
3.a. First Merchants Corporation Articles of Incorporation and the
Articles of Amendment thereto......................................................... (B)
b. First Merchants Corporation Bylaws and amendments thereto............................. (B)
5. Opinion of Bingham Summers Welsh & Spilman (legality)................................. 171
8. Opinion of Bingham Summers Welsh & Spilman (tax matters).............................. 172
10.a. First Merchants Corporation and First Merchants Bank,
National Association Management Incentive Plan........................................ (C)
b. First Merchants Bank, National Association Unfunded Deferred
Compensation Plan, as Amended......................................................... (C)
c. First Merchants Corporation 1989 Stock Option Plan.................................... (D)
d. First Merchants Corporation 1994 Stock Option Plan.................................... (E)
e. First Merchants Corporation Change of Control Agreements.............................. (F)
f. First Merchants Corporation Unfunded Deferred Corporation Plan........................ (F)
g. First Merchants Corporation Supplemented Executive Retirement
Plan and amendments thereto........................................................... (G)
h. Agreement of Reorganization and Merger dated August 20, 1998,
between First Merchants Corporation and Jay Financial Corporation..................... 176
21. Subsidiaries of Registrant............................................................ 212
23.a. Consent of Olive, LLP................................................................. 213
b. Consent of Crowe, Chizek and Company LLP.............................................. 214
c. Consent of Bingham Summers Welsh & Spilman (legality)................................. (1)
d. Consent of Bingham Summers Welsh & Spilman (tax matters).............................. (1)
e. Consent of Professional Bank Services, Inc............................................ 215
24. Power of Attorney included in "Signatures" section.................................... 167
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
99. Form of Proxy......................................................................... 216
(b) 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.
(c) Fairness opinion furnished as part of prospectus.
(A) Included as Appendix A to the Prospectus.
(B) Incorporated by reference to Registrant's Quarterly Report
Form 10-Q for quarter ended June 30, 1997.
(C) Incorporated by reference to Registrant's Form 10-K for year
ended December 31, 1996.
(D) Incorporated by reference to Registrant's Registration
Statement on Form S-8 (SEC File No. 33-28901) effective
on May 24, 1989.
(E) Incorporated by reference to Registrant's Annual Report
on Form 10-K for year ended December 31, 1993.
(F) Incorporated by reference to Registrant's Annual Report
on Form 10-K for year ended December 31, 1996.
(G) Incorporated by reference to Registrant's Annual Report
on Form 10-K for year ended December 31, 1997.
(1) Included in opinion.
</TABLE>
<PAGE>
January 4, 1999
First Merchants Corporation
200 East Jackson Street
Muncie, Indiana 47305
Gentlemen:
You have requested our opinion in connection with the proposed public
offering by First Merchants Corporation, an Indiana corporation (the "Company"),
of up to 810,658 shares of common stock ("Shares") covered by a Registration
Statement on Form S-4 (the "Registration Statement") filed with the Securities
and Exchange Commission on or about January 4, 1999.
In connection with your request to us, we have been provided with the
following:
1. The Articles of Incorporation and By-Laws of the Company;
2. The minute book of the Company; and
3. A certificate from the Indiana Secretary of State certifying that
the Company is a corporation duly organized and existing under
and by virtue of the laws of the State of Indiana.
For purpose of this opinion, we have examined the above documents and have
relied upon them as to matters of fact. We have not independently checked to
verify the accuracy or completeness of the information set forth or certified in
such documents.
Based solely upon the foregoing documents and examination, and subject to
the foregoing limitations and qualifications, we are of the opinion that:
1. As of this date, the Company is a duly organized and existing
corporation under the laws of the State of Indiana with the
corporate power and authority to conduct its business as
described in the Registration Statement; and
2. The Shares, when issued as contemplated by the Registration
Statement in exchange for payment therefor, will be validly
issued, fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference made to us in the Registration Statement and
Proxy Statement-Prospectus forming a part thereof under the caption "Legal
Opinions." By giving this consent, we do not admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
BINGHAM SUMMERS WELSH & SPILMAN
Ex. 5-1
<PAGE>
January 4, 1999
Board of Directors
First Merchants Corporation
200 East Jackson Street
Muncie, IN 47305-2814
Board of Directors
Pendleton Banking Company
100 West State Street
Pendleton, IN 46064
Board of Directors
Anderson Community Bank
19 West 10th Street
Anderson, IN 46016
Re: Merger of Anderson Community Bank with and into Pendleton Banking
Company, a wholly-owned subsidiary of First Merchants Corporation
Ladies and Gentlemen:
We have acted as special counsel to First Merchants Corporation, an Indiana
corporation registered as a bank holding company under the Bank Holding Company
Act of 1956, as amended ("First Merchants"), and Pendleton Banking Company, a
bank organized under the laws of the State of Indiana ("Pendleton"), in
connection with the proposed merger of Anderson Community Bank, a bank organized
under the laws of the State of Indiana ("Anderson"), with and into Pendleton
under the name of "The Madison Community Bank", pursuant to the terms of the
Agreement of Reorganization and Merger between First Merchants, Pendleton and
Anderson, dated October 27, 1998 (the "Merger Agreement"), as described in the
Registration Statement on Form S-4 to be filed by First Merchants with the
Securities and Exchange Commission on or about January 4, 1999 (the
"Registration Statement").
This opinion is being rendered as required by Section 9 of the Merger
Agreement. All capitalized terms herein, unless otherwise specified, have the
meaning assigned to them in the Registration Statement.
In connection with this opinion, we have relied on and have examined, and
we are familiar with originals or copies of, certified or otherwise identified
to our satisfaction, (i) the Merger Agreement, (ii) the Registration Statement,
and (iii) such other documents as we have deemed necessary or appropriate in
order to enable us to render the opinions below. In our examination, we have
assumed the genuineness of all signatures, the legal capacity of all natural
<PAGE>
First Merchants Corporation
Pendleton Banking Company
Anderson Community Bank
January 4, 1999
Page 2
persons, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified,
conformed or photostatic copies and the authenticity of the originals of such
copies. This opinion is subject to the receipt by us prior to the effective time
of the merger of Anderson with and into Pendleton (the "Merger") of certain
written representations and covenants of Anderson and First Merchants, the
accuracy and truthfulness of which we shall assume and rely upon without
investigation. In rendering our opinion, we have considered the applicable
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations, pertinent judicial authorities, interpretive rulings of
the Internal Revenue Service and such other authorities as we have considered
relevant.
Based upon and subject to the foregoing, provided that the merger of
Anderson with and into Pendleton qualifies as a statutory merger under
applicable state law, and assuming that (i) after the transaction, Pendleton, as
successor of Anderson, will hold substantially all of its assets, and that (ii)
in the transaction, the Anderson shareholders will exchange an amount of stock
constituting majority control of Anderson solely for First Merchants common
stock, we are of the opinion that the Merger will, under current law, constitute
a reorganization within the meaning of Sections 368(a)(1)(A) and 368 (a)(2)(D)
of the Code and that Anderson, Pendleton and First Merchants will each be a
party to the reorganization within the meaning of Section 368(b) of the Code. As
a reorganization under Sections 368(a)(1)(A) and 368(a)(2)(D) of the Code, the
Merger will have the following federal income tax consequences for Anderson
shareholders, Anderson, Pendleton and First Merchants:
1. No gain or loss will be recognized by Anderson shareholders who
exchange all of their Anderson common stock for First Merchants common stock
pursuant to the Merger, except to the extent of gain or loss attributable to any
cash received in lieu of receipt of a fractional share of First Merchants common
stock.
2. The basis of First Merchants common stock (including deemed fractional
share interests) received by Anderson shareholders who exchange all of their
Anderson common stock for First Merchants common stock will be the same as the
basis of the Anderson common stock surrendered in exchange therefor.
3. The holding period of the First Merchants common stock received by the
Anderson shareholders (including deemed fractional share interests) who exchange
all of their Anderson common stock for First Merchants common stock will include
the period during which the Anderson common stock was held, provided the
Anderson common stock was held as a capital asset on the date of the exchange.
<PAGE>
First Merchants Corporation
Pendleton Banking Company
Anderson Community Bank
January 4, 1999
Page 3
4. Where a cash payment is received by an Anderson shareholder in lieu of
fractional shares of First Merchants common stock, the cash payment will be
treated as a distribution in redemption of the deemed fractional share interest,
subject to the provisions and limitations of Section 302 of the Code. Where such
exchange qualifies under Section 302(a) of the Code, such shareholder will
recognize a capital gain or loss provided that the Anderson common stock was
held as a capital asset on the date of the Merger.
5. Any Anderson shareholder who perfects dissenter's rights and receives
solely cash in exchange for such shareholder's Anderson common stock shall be
treated as having received such cash as a distribution in redemption of the
Anderson common stock subject to the provisions and limitations of Section 302
of the Code. Where such exchange qualifies under Section 302(a) of the Code,
such shareholder will recognize a capital gain or loss provided that the
Anderson common stock was held as a capital asset as of the exchange. Under
Section 1001 of the Code, gain or loss (subject to any applicable limitations of
the Code) will be realized and recognized by such Anderson shareholder in an
amount equal to the difference between the redemption price and the adjusted
basis of the Anderson common stock surrendered in exchange therefor.
6. No gain or loss will be recognized by Anderson, Pendleton or First
Merchants in connection with the transaction.
7. The basis of the assets of Anderson acquired by Pendleton in the
Merger will be the same as the basis of such assets in the hands of Anderson
immediately prior to the Merger.
8. First Merchants' basis in Pendleton stock will be equal to its prior
basis in Pendleton stock plus the net basis of the assets of Anderson acquired
in the Merger.
The opinions expressed herein represent our conclusions as to the
application of existing federal income tax law to the facts as presented to us,
and we give no assurance that changes in such law or any interpretation thereof
will not affect the opinions expressed by us. Moreover, there can be no
assurance that these opinions will not be challenged by the Internal Revenue
Service or that a court considering the issues will not hold contrary to such
opinions. We express no opinion on the treatment of this transaction under the
income tax laws of any state or other taxing jurisdictions. We assume no
obligation to advise of any changes concerning the above, whether or not deemed
material, which may hereafter come or be brought to our attention.
<PAGE>
First Merchants Corporation
Pendleton Banking Company
Anderson Community Bank
January 4, 1999
Page 4
Except as set forth above, we express no opinion as to the tax
consequences to any party, whether federal, state, local or foreign, of the
Merger or of any transactions related to the Merger or contemplated by the
Merger Agreement. This opinion is addressed to you and is being furnished to
you solely for your use in connection with the transaction that is the
subject of the Merger Agreement. We assume no professional responsibility to
any other person or entity. Accordingly, the opinions expressed herein are
not to be utilized or quoted by, delivered or disclosed to, in whole or in
part, any other person, corporation, entity or governmental authority, or for
any other purpose, without the prior written consent of this firm. We hereby
consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
BINGHAM SUMMERS WELSH & SPILMAN
<PAGE>
AGREEMENT OF REORGANIZATION AND MERGER
BETWEEN
FIRST MERCHANTS CORPORATION
AND
JAY FINANCIAL CORPORATION
THIS AGREEMENT OF REORGANIZATION AND MERGER (the "Agreement"), is entered
this 20th day of August, 1998, by and between FIRST MERCHANTS CORPORATION
("First Merchants") and JAY FINANCIAL CORPORATION ("Jay Financial").
W I T N E S S E T H:
WHEREAS, First Merchants is a corporation duly organized and existing under
the laws of the State of Indiana and a registered bank holding company under the
Bank Holding Company Act of 1956, as amended, with its principal place of
business in Muncie, Delaware County, Indiana;
WHEREAS, Jay Financial is a corporation duly organized and existing under
the laws of the State of Indiana and a registered bank holding company under the
Bank Holding Company Act of 1956, as amended, with its principal place of
business in Portland, Jay County, Indiana;
WHEREAS, The First National Bank of Portland (the "Bank") is a national
bank duly organized and existing under the laws of the United States and a
wholly-owned subsidiary of Jay Financial with its principal banking office in
Portland, Jay County, Indiana;
WHEREAS, it is the desire of First Merchants and Jay Financial to effect a
transaction whereby the Bank will become a wholly-owned subsidiary of First
Merchants through a statutory merger of Jay Financial with and into First
Merchants; and
WHEREAS, a majority of the entire Board of Directors of First Merchants and
a majority of the entire Board of Directors of Jay Financial have approved this
Agreement, designated it as a plan of reorganization within the provisions of
Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the
"Code"), and authorized its execution.
NOW, THEREFORE, in consideration of the mutual promises, covenants, and
agreements herein contained and other good and valuable consideration, the
receipt of which is
Ex. 10(h)-1
<PAGE>
hereby acknowledged, First Merchants and Jay Financial hereby make this
Agreement and prescribe the terms and conditions of the merger of Jay Financial
with and into First Merchants and the mode of carrying the transaction into
effect as follows:
SECTION 1
THE MERGER
1.01. MERGER. Subject to the terms and conditions of this Agreement, on
the Effective Date (as defined in Section 11 hereof), Jay Financial shall be
merged into and under the Articles of Incorporation of First Merchants, which
shall be the "Continuing Company" and which shall continue its corporate
existence under the laws of the State of Indiana, pursuant to the provisions of
and with the effect provided in the Indiana Business Corporation Law and
particularly Indiana Code Chapter 23-1-40 (the "Merger").
1.02. RIGHT TO REVISE MERGER. First Merchants may, at any time, change
the method of effecting the Merger if and to the extent First Merchants deems
such change to be desirable, including, without limitation, to provide for the
merger of Jay Financial and a wholly-owned subsidiary of First Merchants;
provided, however, that no such change, modification or amendment shall (a)
alter or change the amount or kind of consideration to be received by the
shareholders of Jay Financial specified in Section 3 hereof as a result of the
Merger, (ii) adversely affect the tax treatment to the shareholders of Jay
Financial, or (iii) materially impede or delay receipt of any approvals referred
to in this Agreement or the consummation of the transactions contemplated by
this Agreement.
SECTION 2
EFFECT OF THE MERGER
Upon the Merger becoming effective:
2.01. GENERAL DESCRIPTION. The separate existence of Jay Financial shall
cease and the Continuing Company shall possess all of the assets of Jay
Financial including all of the issued and outstanding shares of capital stock of
the Bank and all of its rights, privileges, immunities, powers, and franchises
and shall be subject to and assume all of the duties and liabilities of Jay
Financial.
2.02. NAME, OFFICES, AND MANAGEMENT. The name of the Continuing Company
shall continue to be "First Merchants Corporation." Its principal banking
office shall be located at 200 E. Jackson Street, Muncie, Indiana. The Board of
Directors of the Continuing Company, until such time as their successors have
been elected and qualified, shall consist of the current
Ex. 10(h)-2
<PAGE>
Board of Directors of First Merchants. The officers of First Merchants
immediately prior to the Effective Date shall continue as the officers of the
Continuing Company.
2.03. CAPITAL STRUCTURE. The amount of capital stock of the Continuing
Company shall not be less than the capital stock of First Merchants immediately
prior to the Effective Date increased by the amount of capital stock issued in
accordance with Section 3 hereof.
2.04. ARTICLES OF INCORPORATION AND BYLAWS. The Articles of Incorporation
and Bylaws of the Continuing Company shall be those of First Merchants
immediately prior to the Effective Date until the same shall be further amended
as provided by law.
2.05. ASSETS AND LIABILITIES. The title to all assets, real estate and
other property owned by First Merchants and Jay Financial shall vest in the
Continuing Company without reversion or impairment. All liabilities of Jay
Financial shall be assumed by the Continuing Company.
2.06. ADDITIONAL ACTIONS. If, at any time after the Effective Date, the
Continuing Company shall consider or be advised that any further deeds,
assignments or assurances in law or any other acts are necessary or desirable
(a) to vest, perfect or confirm, of record or otherwise, in the Continuing
Company its right, title or interest in, to or under any of the rights,
properties or assets of Jay Financial or the Bank, or (b) otherwise carry out
the purposes of this Agreement, Jay Financial and the Bank and their respective
officers and directors shall be deemed to have granted to the Continuing Company
an irrevocable power of attorney to execute and deliver all such deeds,
assignments or assurances in law and to do all acts necessary or proper to vest,
perfect or confirm title to and possession of such rights, properties or assets
in the Continuing Company and otherwise to carry out the purposes of this
Agreement, and the officers and directors of the Continuing Company are
authorized in the name of Jay Financial or the Bank or otherwise to take any and
all such action.
SECTION 3
CONSIDERATION TO BE
DISTRIBUTED TO SHAREHOLDERS OF JAY FINANCIAL
3.01. CONSIDERATION. Upon and by reason of the Merger becoming effective,
the shareholders of Jay Financial of record on the Effective Date who have not
dissented to the Merger in accordance with Indiana Code Section 23-1-44, as
amended, shall be entitled to receive eight and 94454/100,000 (8.94454) shares
of First Merchants common stock for each share of Jay Financial common stock
held (the "Conversion Ratio"). The Conversion Ratio shall be subject to
adjustment as set forth in Sections 3.03 and 3.04 hereof.
Ex. 10(h)-3
<PAGE>
3.02. NO FRACTIONAL FIRST MERCHANTS COMMON SHARES. Certificates for
fractional shares of common stock of First Merchants shall not be issued in
respect of fractional interests arising from the Conversion Ratio. Each Jay
Financial shareholder who would otherwise have been entitled to a fraction of a
First Merchants share, upon surrender of all of his/her certificates
representing Jay Financial common shares, shall be paid in cash (without
interest) in an amount equal to the fraction of the average of the closing price
of First Merchants common stock as quoted by NASDAQ for the five (5) business
days preceding the Effective Date. No such shareholder of Jay Financial shall
be entitled to dividends, voting rights or any other rights in respect of any
fractional share.
3.03. RECAPITALIZATION. If, between the date of this Agreement and the
Effective Date, First Merchants issues a stock dividend with respect to its
shares of common stock, combines, subdivides, or splits up its outstanding
shares or takes any similar recapitalization action, then the number of shares
of First Merchants common stock into which each outstanding Jay Financial share
will be converted under Section 3.01 hereof shall be adjusted so that each Jay
Financial shareholder shall receive such number of First Merchants shares as
represents the same percentage of outstanding shares of First Merchants common
stock at the Effective Date as would have been represented by the number of
shares such shareholder would have received if the recapitalization had not
occurred.
3.04. CONVERSION RATIO ADJUSTMENT.
(a) As used in this Section 3.04, the term "First Merchants Average
Price" shall mean the average of the daily closing prices of the common
stock of First Merchants as reported in The Wall Street Journal (Midwest
Edition) for the ten (10) NASDAQ trading days preceding the fifth (5th)
calendar day prior to the Closing (the "Determination Date"). The First
Merchants Average Price shall be appropriately and proportionately adjusted
to reflect any share adjustment as contemplated by Section 3.03 hereof.
(b) Jay Financial may terminate this Agreement if its Board of
Directors so determines by a vote of a majority of the members of its
entire Board of Directors if the First Merchants Average Price shall be
less than $34.40; subject, however, to the following two provisions. If
Jay Financial elects to exercise its right of termination pursuant to the
immediately preceding sentence, it shall give written notice to First
Merchants within twenty-four (24) hours of the Determination Date. Within
two (2) business days after the date of receipt of such notice, First
Merchants shall have the option of adjusting the Conversion Ratio to equal
a number equal to a quotient, the numerator of which is the product of
$34.40 and the Conversion Ratio (as then in effect) and the denominator of
which is the First Merchants Average Price. If First Merchants makes an
election contemplated by the preceding sentence, it shall give prompt
written notice to Jay Financial of such election and the revised Conversion
Ex. 10(h)-4
<PAGE>
Ratio, whereupon no termination shall have occurred pursuant to this
Section 3.04(b) and this Agreement shall remain in effect in accordance
with its terms (except as the Conversion Ratio shall have been so
modified), and any references in this Agreement to "Conversion Ratio" shall
thereafter be deemed to refer to the Conversion Ratio as adjusted pursuant
to this Section 3.04(b).
(c) First Merchants may terminate this Agreement if its Board of
Directors so determines by a vote of a majority of the members of its
entire Board of Directors if the First Merchants Average Price shall be
greater than $51.60; subject, however, to the following two provisions. If
First Merchants elects to exercise its right of termination pursuant to the
immediately preceding sentence, it shall give written notice to Jay
Financial within twenty-four (24) hours of the Determination Date. Within
two (2) business days after the date of receipt of such notice, Jay
Financial shall have the option of adjusting the Conversion Ratio to equal
a number equal to a quotient, the numerator of which is the product of
$51.60 and the Conversion Ratio (as then in effect) and the denominator of
which is the First Merchants Average Price. If Jay Financial makes an
election contemplated by the preceding sentence, it shall give prompt
written notice to First Merchants of such election and the revised
Conversion Ratio, whereupon no termination shall have occurred pursuant to
this Section 3.04(c) and this Agreement shall remain in effect in
accordance with its terms (except as the Conversion Ratio shall have been
so modified), and any references in this Agreement to "Conversion Ratio"
shall thereafter be deemed to refer to the Conversion Ratio as adjusted
pursuant to this Section 3.04(c).
3.05. DISTRIBUTION OF FIRST MERCHANTS COMMON STOCK AND CASH.
(a) Each share of common stock of First Merchants outstanding
immediately prior to the Effective Date shall remain outstanding unaffected
by the Merger.
(b) Following the Effective Date, distribution of stock certificates
representing First Merchants common stock and cash payments for fractional
shares shall be made by First Merchants to each former shareholder of Jay
Financial within ten (10) days of such shareholder's delivery of his/her
certificates representing common stock of Jay Financial to the conversion
agent, First Merchants Bank (the "Conversion Agent"). Certificates
surrendered for exchange by a person who is deemed to be an "affiliate" (as
defined in Section 7.06 hereof) of Jay Financial shall not be exchanged
until First Merchants has received a written agreement from such affiliate
as required pursuant to Section 7.06 hereof. Interest shall not accrue or
be payable with respect to any cash payments.
(c) Following the Effective Date, stock certificates representing Jay
Financial common stock shall be deemed to evidence only the right to
receive
Ex. 10(h)-5
<PAGE>
ownership of First Merchants common stock (for all corporate purposes other
than the payment of dividends) and cash for fractional shares, as
applicable. No dividends or other distributions otherwise payable
subsequent to the Effective Date on stock of First Merchants shall be paid
to any shareholder entitled to receive the same until such shareholder has
surrendered his/her certificates for Jay Financial common stock to the
Conversion Agent in exchange for certificates representing First Merchants
common stock and cash. Upon surrender, there shall be paid to the
recordholder of the new certificate(s) evidencing shares of First Merchants
common stock the amount of all dividends and other distributions, without
interest thereon, withheld with respect to such common stock.
(d) At or after the Effective Date, there shall be no transfers on
the stock transfer books of Jay Financial of any shares of the common stock
of Jay Financial. If, after the Effective Date, certificates are presented
for transfer to Jay Financial, such certificates shall be cancelled and
exchanged for the consideration set forth in Section 3.01 hereof, as
adjusted pursuant to the terms of this Agreement.
(e) First Merchants shall be entitled to rely upon the stock transfer
books of Jay Financial to establish the persons entitled to receive cash
and shares of common stock of First Merchants, which books, in the absence
of actual knowledge by First Merchants of any adverse claim thereto, shall
be conclusive with respect to the ownership of such stock.
(f) With respect to any certificate for shares of Jay Financial
common stock which has been lost, stolen, or destroyed, First Merchants
shall be authorized to issue common stock to the registered owner of such
certificate upon receipt of an affidavit of lost stock certificate, in form
and substance satisfactory to First Merchants, and upon compliance by the
Jay Financial shareholder with all procedures historically required by Jay
Financial in connection with lost, stolen, or destroyed certificates.
SECTION 4
DISSENTING SHAREHOLDERS
Shareholders of Jay Financial shall have the rights accorded to dissenting
shareholders under Indiana Code Section 23-1-44, as amended.
Ex. 10(h)-6
<PAGE>
SECTION 5
REPRESENTATIONS AND
WARRANTIES OF JAY FINANCIAL
Jay Financial represents and warrants to First Merchants with respect to
itself and the Bank as follows: (For the purposes of this Section, a
"Disclosure Letter" is defined as a letter referencing Section 5 of this
Agreement which shall be prepared and executed by an authorized executive
officer of Jay Financial and delivered to and initialed by an authorized
executive officer of First Merchants as provided in Section 7.08 hereof.)
5.01. ORGANIZATION AND AUTHORITY. Jay Financial is a corporation duly
organized and validly existing under the laws of the State of Indiana, and the
Bank is a national bank duly organized and validly existing under the laws of
the United States. Jay Financial and the Bank have the power and authority
(corporate and other) to conduct their respective businesses in the manner and
by the means utilized as of the date hereof. Jay Financial's only subsidiary is
the Bank, and the Bank has no subsidiaries. The Bank is subject to primary
federal regulatory supervision and regulation by the Office of the Comptroller
of the Currency.
5.02. AUTHORIZATION.
(a) Jay Financial has the corporate power and authority to enter into
this Agreement and to carry out its obligations hereunder. This Agreement,
when executed and delivered, will have been duly authorized and will
constitute a valid and binding obligation of Jay Financial, enforceable in
accordance with its terms except to the extent limited by insolvency,
reorganization, liquidation, readjustment of debt or other laws of general
application relating to or affecting the enforcement of creditors' rights.
(b) Neither the execution of this Agreement, nor the consummation of
the transactions contemplated hereby, does or will (i) conflict with,
result in a breach of, or constitute a default under Jay Financial's
Articles of Incorporation or By-Laws; (ii) conflict with, result in a
breach of, or constitute a default under any federal, foreign, state or
local law, statute, ordinance, rule, regulation or court or administrative
order or decree, or any note, bond, indenture, mortgage, security
agreement, contract, arrangement or commitment, to which Jay Financial or
the Bank is subject or bound, the result of which would materially affect
the business or financial condition of Jay Financial or the Bank; (iii)
result in the creation of or give any person, corporation or entity, the
right to create any lien, charge, encumbrance, security interest, or any
other rights of others or other adverse interest upon any right, property
or asset of Jay Financial or the Bank; (iv) terminate or give any person,
corporation or entity, the right to terminate, amend, abandon, or refuse to
perform any note, bond, indenture, mortgage, security agreement, contract,
arrangement or commitment to which Jay
Ex. 10(h)-7
<PAGE>
Financial or the Bank is subject or bound; or (v) accelerate or modify, or
give any party thereto the right to accelerate or modify, the time within
which, or the terms according to which, Jay Financial or the Bank is to
perform any duties or obligations or receive any rights or benefits under
any note, bond, indenture, mortgage, security agreement, contract,
arrangement or commitment.
(c) Other than in connection or in compliance with the provisions of
the Bank Holding Company Act of 1956, federal and state securities laws and
applicable Indiana banking and corporate statutes, all as amended, and the
rules and regulations promulgated thereunder, no notice to, filing with,
authorization of, exemption by, or consent or approval of, any public body
or authority is necessary for the consummation by Jay Financial of the
transactions contemplated by this Agreement.
5.03. CAPITALIZATION.
(a) As of June 30, 1998, Jay Financial had 500,000 shares of Class A
voting common stock authorized, no par value per share, 64,234 shares of
which were issued and outstanding, and 40,000 shares of Class B non-voting
common stock authorized, no par value per share, 17,666 shares of which
were issued and outstanding, for an aggregate number of shares of common
stock issued and outstanding of 81,900 shares. Such issued and outstanding
shares of Jay Financial common stock have been duly and validly authorized
by all necessary corporate action of Jay Financial, are validly issued,
fully paid and nonassessable and have not been issued in violation of any
preemptive rights of any shareholders. Jay Financial has no intention or
obligation to authorize or issue additional shares of its common stock.
Jay Financial has not authorized the issuance of any other class of stock.
On a consolidated basis as of June 30, 1998, Jay Financial had total
capital of $14,282,735.38, which consisted of voting common stock of
$64,234.00, nonvoting common stock of $17,666.00, capital surplus of
$775,244.44, and retained earnings of $13,455,462.35.
(b) As of June 30, 1998, the Bank had 40,000 shares of common stock
authorized, $5 par value per share, all of which shares were issued and
outstanding to Jay Financial. Such issued and outstanding shares of Bank
common stock have been duly and validly authorized by all necessary
corporate action of the Bank, are validly issued, fully paid and
nonassessable, and have not been issued in violation of any preemptive
rights of any Bank shareholders. All the issued and outstanding shares of
Bank common stock are owned by Jay Financial free and clear of all liens,
pledges, charges, claims, encumbrances, restrictions, security interests,
options and preemptive rights and of all other rights of any other person,
corporation or entity with respect thereto. As of June 30, 1998, the Bank
had total capital of $13,984,368, which consisted of common stock of
$200,000, capital surplus of $3,010,000, and retained earnings of
$10,804,239.
Ex. 10(h)-8
<PAGE>
(c) There are no options, commitments, calls, agreements,
understandings, arrangements or subscription rights regarding the issuance,
purchase or acquisition of capital stock, or any securities convertible
into or representing the right to purchase or otherwise receive the capital
stock or any debt securities, of Jay Financial or the Bank by which Jay
Financial or the Bank is or may become bound. Neither Jay Financial or the
Bank has any outstanding contractual or other obligation to repurchase,
redeem or otherwise acquire any of its respective outstanding shares of
capital stock.
(d) Except as set forth in the Disclosure Letter, no person or entity
beneficially owns 5% or more of Jay Financial's outstanding shares of
common stock.
(e) Neither Jay Financial nor the Bank has taken or agreed to take
any action or has any knowledge of any fact or circumstance and neither Jay
Financial nor the Bank will take any action that would prevent the Merger
from qualifying for pooling-of-interests accounting treatment.
5.04. ORGANIZATIONAL DOCUMENTS. The respective Articles of Incorporation
or Association and By-Laws of Jay Financial and the Bank have been delivered to
First Merchants and represent true, accurate and complete copies of such
corporate documents of Jay Financial and the Bank in effect as of the date of
this Agreement.
5.05. COMPLIANCE WITH LAW. Neither Jay Financial nor the Bank has engaged
in any activity nor taken or omitted to take any action which has resulted or,
to the knowledge of Jay Financial could result, in the violation of any local,
state, federal or foreign law, statute, rule, regulation or ordinance or of any
order, injunction, judgment or decree of any court or government agency or body,
the violation of which could materially affect the business, prospects,
condition (financial or otherwise) or results of operations of Jay Financial or
the Bank. Jay Financial and the Bank possess all licenses, franchises, permits
and other authorizations necessary for the continued conduct of their respective
businesses without material interference or interruption and such licenses,
franchises, permits and authorizations shall be transferred to First Merchants
on the Effective Date without any restrictions or limitations thereon or the
need to obtain any consents of third parties. All agreements and understandings
with, and all orders and directives of, all regulatory agencies or government
authorities with respect to the business or operations of Jay Financial or the
Bank, including all correspondence, communications and commitments related
thereto, are set forth in the Disclosure Letter. The Bank has received no
inquiries from any regulatory agency or government authority relating to its
compliance with the Bank Secrecy Act, the Truth-in-Lending Act or the Community
Reinvestment Act or any laws with respect to the protection of the environment
or the rules and regulations promulgated thereunder.
Ex. 10(h)-9
<PAGE>
5.06. ACCURACY OF STATEMENTS. Neither this Agreement nor any report,
statement, list, certificate or other information furnished or to be furnished
by Jay Financial or the Bank to First Merchants in connection with this
Agreement or any of the transactions contemplated hereby (including, without
limitation, any information which has been or shall be supplied by Jay Financial
or the Bank with respect to their businesses, operations and financial condition
for inclusion in the proxy statement and registration statement relating to the
Merger) contains or shall contain (in the case of information relating to the
proxy statement at the time it is mailed and for the registration statement at
the time it becomes effective) any untrue statement of a material fact or omits
or shall omit to state a material fact necessary to make the statements
contained herein or therein not misleading.
5.07. LITIGATION AND PENDING PROCEEDINGS. Except as set forth in the
Disclosure Letter, there are no claims of any kind, nor any action, suits,
proceedings, arbitrations or investigations pending or to the knowledge of Jay
Financial or the Bank threatened in any court or before any government agency or
body, arbitration panel or otherwise (nor does Jay Financial or the Bank have
any knowledge of a basis for any claim, action, suit, proceeding, arbitration or
investigation) against, by or materially adversely affecting Jay Financial or
the Bank or their respective businesses, prospects, conditions (financial or
otherwise), results of operations or assets, or which would prevent the
performance of this Agreement or declare the same unlawful or cause the
rescission hereof. There are no material uncured violations, or violations with
respect to which material refunds or restitutions may be required, cited in any
compliance report to Jay Financial or the Bank as a result of an examination by
any regulatory agency or body.
5.08. FINANCIAL STATEMENTS.
(a) Jay Financial's consolidated balance sheets as of the end of the
three fiscal years ended December 31, 1995, 1996 and 1997 and the six
months ended June 30, 1998 and the related consolidated statements of
income, shareholders' equity and cash flows for the years or period then
ended (hereinafter collectively referred to as the "Financial Information")
present fairly the consolidated financial condition or position of Jay
Financial as of the respective dates thereof and the consolidated results
of operations of Jay Financial for the respective periods covered thereby
and have been prepared in conformity with generally accepted accounting
principles applied on a consistent basis.
(b) All loans reflected in the Financial Information and which have
been made, extended or acquired since June 30, 1998, (i) have been made for
good, valuable and adequate consideration in the ordinary course of
business; (ii) constitute the legal, valid and binding obligation of the
obligor and any guarantor named therein; (iii) are evidenced by notes,
instruments or other evidences of indebtedness which are true, genuine and
what they purport to be; and (iv) to the extent that the Bank has a
security
Ex. 10(h)-10
<PAGE>
interest in collateral or a mortgage securing such loans, are secured by
perfected security interests or mortgages naming the Bank as the secured
party or mortgagee, except for such unperfected security interests or
mortgages naming the Bank as secured party or mortgagee which, on an
individual loan basis, would not materially adversely affect the value of
any such loan and the recovery of payment on any such loan if the Bank is
not able to enforce any such security interest or mortgage.
5.09. ABSENCE OF CERTAIN CHANGES. Except for events and conditions
relating to the business environment in general or as set forth in the
Disclosure Letter, since June 30, 1998, no events or conditions of any
character, whether actual, threatened or contemplated, have occurred, or, to the
knowledge of Jay Financial, can reasonably be expected to occur, which
materially adversely affect Jay Financial's or the Bank's business, prospects,
conditions (financial or otherwise), assets or results of operations or which
have caused, or can reasonably be expected to cause, Jay Financial's or the
Bank's business to be conducted in a materially less profitable manner than
prior to June 30, 1998.
5.10. ABSENCE OF UNDISCLOSED LIABILITIES. Neither Jay Financial nor the
Bank is a party to any agreement, contract, obligation, commitment, arrangement,
liability, lease or license which individually exceeds $10,000 per year or which
may not be terminated within one year from the date of this Agreement, except as
set forth in the Disclosure Letter and except for unfunded loan commitments made
in the ordinary course of the Bank's business consistent with past practices,
nor to the knowledge of Jay Financial does there exist any circumstances
resulting from transactions effected or to be effected or events which have
occurred or may occur or from any action taken or omitted to be taken which
could reasonably be expected to result in any such agreement, contract,
obligation, commitment, arrangement, liability, lease or license.
5.11. TITLE TO ASSETS.
(a) Except as set forth in the Disclosure Letter, Jay Financial and
the Bank have good and marketable title in fee simple absolute to all
personal property reflected in the June 30, 1998 Financial Information,
good and marketable title to all other properties and assets which Jay
Financial or the Bank purport to own, good and marketable title to or right
to use by terms of any lease or contract all other property used in Jay
Financial's or the Bank's business, and good and marketable title to all
property and assets acquired since June 30, 1998, free and clear of all
mortgages, liens, pledges, restrictions, security interests, charges,
claims or encumbrances of any nature.
(b) All furniture, fixtures, machinery, equipment, computer software
and hardware, and all other tangible personal property owned or used by Jay
Financial or the Bank, including any such items leased as a lessee, are in
good working order and free of known defects, subject only to normal wear
and tear. The operation by Jay
Ex. 10(h)-11
<PAGE>
Financial or the Bank of such properties and assets is in compliance with
all applicable laws, ordinances, rules and regulations of any governmental
authority having jurisdiction over such use.
5.12. LOANS AND INVESTMENTS.
(a) Except as set forth in the Disclosure Letter, there is no loan of
the Bank in excess of $10,000 that has been classified by bank regulatory
examiners as "Other Loans Specially Mentioned," "Substandard," "Doubtful"
or "Loss," nor is there any loan of the Bank in excess of $10,000 that has
been identified by accountants or auditors (internal or external) as having
a significant risk of uncollectibility. The Bank's loan watch list and all
loans in excess of $10,000 that the Bank's management has determined to be
ninety (90) days or more past due with respect to principal or interest or
has placed on nonaccrual status are set forth in the Disclosure Letter.
(b) Each of the reserves and allowances for possible loan losses and
the carrying value for real estate owned which are shown on the Financial
Information is, in the opinion of Jay Financial and the Bank, adequate in
all material respects under the requirements of generally accepted
accounting principles applied on a consistent basis to provide for possible
losses on loans outstanding and real estate owned as of the date of such
Financial Information.
(c) Except as set forth in the Disclosure Letter, none of the
investments reflected in the Financial Information and none of the
investments made by Jay Financial or the Bank since June 30, 1998 is
subject to any restrictions, whether contractual or statutory, which
materially impairs the ability of Jay Financial or the Bank to dispose
freely of such investment at any time. Except as set forth in the
Disclosure Letter, neither Jay Financial nor the Bank are a party to any
repurchase agreements with respect to securities.
5.13. EMPLOYEE BENEFIT PLANS.
(a) The Disclosure Letter contains a list identifying each "employee
benefit plan," as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), which (i) is subject to any
provision of ERISA, and (ii) is maintained, administered or contributed to
by Jay Financial or the Bank and covers any employee, director or former
employee or director of Jay Financial or the Bank under which Jay Financial
or the Bank has any liability. Copies of such plans (and, if applicable,
related trust agreements or insurance contracts) and all amendments thereto
and written interpretations thereof have been furnished to First Merchants
together with the three most recent annual reports prepared in connection
with any such plan and the current summary plan descriptions. Such plans
are hereinafter referred to individually
Ex. 10(h)-12
<PAGE>
as an "Employee Plan" and collectively as the "Employee Plans." The
Employee Plans which individually or collectively would constitute an
"employee pension benefit plan" as defined in Section 3(2) of ERISA are
identified in the list referred to above.
(b) The Employee Plans comply with and have been operated in
accordance with all applicable laws, regulations, rulings and other
requirements the breach or violation of which could materially affect Jay
Financial, the Bank, or an Employee Plan. Each Employee Plan has been
administered in substantial conformance with such requirements and all
reports and information required with respect to each Employee Plan has
been timely given.
(c) No "prohibited transaction," as defined in Section 406 of ERISA
or Section 4975 of the Code, for which no statutory or administrative
exemption exists, and no "reportable event," as defined in Section 4043(b)
of ERISA, has occurred with respect to any Employee Plan. Neither Jay
Financial nor the Bank has any liability to the Pension Benefit Guaranty
Corporation ("PBGC"), to the Internal Revenue Service ("IRS"), to the
Department of Labor ("DOL") or to an employee or Employee Plan beneficiary
under Section 502 of ERISA.
(d) To the best knowledge of Jay Financial and the Bank, no
"fiduciary," as defined in Section (3)(21) of ERISA, of an Employee Plan
has failed to comply with the requirements of Section 404 of ERISA.
(e) Each of the Employee Plans which is intended to be qualified
under Code Section 401(a) has been amended to comply in all material
respects with the applicable requirements of the Code, including the Tax
Reform Act of 1986, the Revenue Act of 1987, the Technical and
Miscellaneous Revenue Act of 1988, the Omnibus Budget Reconciliation Act of
1989, the Revenue Reconciliation Act of 1990, the Tax Extension Act of
1991, the Unemployment Compensation Amendments of 1992, the Omnibus Budget
Reconciliation Act of 1993, and the Retirement Protection Act of 1994 and
any rules, regulations or other requirements promulgated thereunder (the
"Acts"). In addition, each such Employee Plan has been and is being
operated in substantial conformance with the applicable provisions of ERISA
and the Code, as amended by the Acts. Except as set forth in the
Disclosure Letter, Jay Financial and/or the Bank, as applicable, sought and
received favorable determination letters from the IRS within the applicable
remedial amendment periods under Code Section 401(b), and has furnished to
First Merchants copies of the most recent IRS determination letters with
respect to any such Employee Plan.
(f) No Employee Plan owns any security of Jay Financial or the Bank.
Ex. 10(h)-13
<PAGE>
(g) No Employee Plan has incurred an "accumulated funding
deficiency," as determined under Code Section 412 and ERISA Section 302.
(h) No Employee Plan has been terminated or incurred a partial
termination (either voluntarily or involuntarily).
(i) No claims against an Employee Plan, Jay Financial or the Bank,
with respect to an Employee Plan, (other than normal benefit claims) have
been asserted or threatened.
(j) There is no contract, agreement, plan or arrangement covering any
employee, director or former employee or director of Jay Financial or the
Bank that, individually or collectively, could give rise to the payment of
any amount that would not be deductible by reason of Section 280G or
Section 162(a)(1) of the Code.
(k) To the best knowledge of Jay Financial and the Bank, no event has
occurred that would cause the imposition of the tax described in Code
Section 4980B. To the best knowledge of Jay Financial and the Bank, all
requirements of ERISA Section 601 have been met.
(l) The Disclosure Letter contains a list of each employment,
severance or other similar contract, arrangement or policy and each plan or
arrangement (written or oral) providing for insurance coverage (including
any self-insured arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits, retirement benefits
or deferred compensation, profit sharing, bonuses, stock options, stock
appreciation or other forms of incentive compensation or post-retirement
insurance, compensation or benefits which (i) is not an Employee Plan, (ii)
was entered into, maintained or contributed to, as the case may be, by Jay
Financial or the Bank and (iii) covers any employee, director or former
employee or director of Jay Financial or the Bank. Such contracts, plans
and arrangements as are described above, copies or descriptions of all of
which have been furnished previously to First Merchants, are hereinafter
referred to collectively as the "Benefit Arrangements." Each of the
Benefit Arrangements has been maintained in substantial compliance with its
terms and with the requirements prescribed by any and all statutes, orders,
rules and regulations which are applicable to such Benefit Arrangements.
(m) Except for (i) COBRA health care continuation coverage
obligations of the Bank, and (ii) the Bank's obligation to pay for the cost
of individual lifetime health care insurance coverage for one retiree which
arose out of an acquisition by the Bank in 1988, neither Jay Financial nor
the Bank has any present or future liability in respect of post-retirement
health and medical benefits for former employees or directors of Jay
Financial or the Bank.
Ex. 10(h)-14
<PAGE>
(n) Except as set forth in the Disclosure Letter, there has been no
amendment to, written interpretation or announcement (whether or not
written) by Jay Financial or the Bank relating to, or change in employee
participation or coverage under, any Employee Plan or Benefit Arrangement
which would increase materially the expense of maintaining such Employee
Plans or Benefit Arrangements above the level of the expense incurred in
respect thereof for the fiscal year ended December 31, 1997.
(o) For purposes of this Section 5.13, references to Jay Financial or
the Bank are deemed to include (i) all predecessors of Jay Financial or the
Bank, (ii) any subsidiary of Jay Financial or the Bank, (iii) all members
of any controlled group (as determined under Code Section 414(b) or (c))
that includes Jay Financial or the Bank, and (iv) all members of any
affiliated service group (as determined under Code Section 414(m) or (n))
that includes Jay Financial or the Bank.
5.14 OBLIGATIONS TO EMPLOYEES. Except as set forth in the Disclosure
Letter, all accrued obligations and liabilities of Jay Financial and the Bank,
whether arising by operation of law, by contract or by past custom, for payments
to trust or other funds, to any government agency or body or to any individual
director, officer, employee or agent (or his heirs, legatees or legal
representative) with respect to unemployment compensation or social security
benefits and all pension, retirement, savings, stock purchase, stock bonus,
stock ownership, stock option, stock appreciation rights or profit sharing plan,
any employment, deferred compensation, consultant, bonus or collective
bargaining agreement or group insurance contract or other incentive, welfare or
employee benefit plan or agreement maintained by Jay Financial or the Bank for
their current or former directors, officers, employees and agents have been and
are being paid to the extent required by law or by the plan or contract, and
adequate actuarial accruals and/or reserves for such payments have been and are
being made by Jay Financial or the Bank in accordance with generally accepted
accounting and actuarial principles, except where the failure to pay any such
accrued obligations or liabilities or to maintain adequate accruals and/or
reserves for payment thereof would not materially adversely affect Jay Financial
or the Bank or their respective businesses, prospects, conditions (financial or
otherwise), results of operations or assets. All obligations and liabilities of
Jay Financial and the Bank, whether arising by operation of law, by contract, or
by past custom, for all forms of compensation which are or may be payable to
their current or former directors, officers, employees or agents have been and
are being paid, and adequate accruals and/or reserves for payment therefor have
been and are being made in accordance with generally accepted accounting
principles, except where the failure to pay any such obligations and liabilities
or to maintain adequate accruals and/or reserves for ayment thereof would not
materially adversely affect Jay Financial or the Bank or their respective
businesses, prospects, conditions (financial or otherwise), results of
operations or assets. All accruals and reserves referred to in this Section
5.14 are correctly and accurately reflected and accounted for in the books,
statements and records of Jay Financial and the Bank, except where the failure
to
Ex. 10(h)-15
<PAGE>
correctly and accurately reflect and account for such accruals and reserves
would not materially adversely affect Jay Financial or the Bank or their
respective businesses, prospects, conditions (financial or otherwise), results
of operations or assets.
5.15. TAXES, RETURNS AND REPORTS. Jay Financial and the Bank have (a)
duly filed all federal, state, local and foreign tax returns of every type and
kind required to be filed as of the date hereof, and each return is true,
complete and accurate in all material respects; (b) paid in all materials
respects all taxes, assessments and other governmental charges due or claimed to
be due upon them or any of their income, properties or assets; and (c) not
requested an extension of time for any such payments (which extension is still
in force). Except for taxes not yet due and payable, the reserve for taxes on
the Financial Information is adequate to cover all of Jay Financial's and the
Bank's tax liabilities (including, without limitation, income taxes and
franchise fees) that may become payable in future years with respect to any
transactions consummated prior to June 30, 1998. Neither Jay Financial nor the
Bank has or will have, any liability for taxes of any nature for or with respect
to the operation of their business, including the assets of any subsidiary, from
June 30, 1998 up to and including the Effective Date, except to the extent
reflected on their Financial Information or on financial statements of Jay
Financial or the Bank subsequent to such date and as set forth in the Disclosure
Letter. Neither Jay Financial nor the Bank is currently under audit by any
state or federal taxing authority. Except as set forth in the Disclosure
Letter, neither the federal, state, or local tax returns of Jay Financial or the
Bank have been audited by any taxing authority during the past five (5) years.
5.16. DEPOSIT INSURANCE. The deposits of the Bank are insured by the
Federal Deposit Insurance Corporation ("FDIC") in accordance with the Federal
Deposit Insurance Act, and the Bank has paid all premiums and assessments with
respect to such deposit insurance.
5.17. REPORTS. Since January 1, 1995, each of Jay Financial and the Bank
have timely filed all reports, registrations and statements, together with any
required amendments thereto, that it was required to file with (i) the Federal
Reserve Board, (ii) the Office of the Comptroller of the Currency, (iii) the
FDIC, and (iv) any federal, state, municipal or local government, securities,
banking, environmental, insurance and other governmental or regulatory
authority, and the agencies and staffs thereof (collectively, the "Regulatory
Authorities"), having jurisdiction over the affairs of either Jay Financial or
the Bank. All such reports filed by Jay Financial and the Bank complied in all
material respects with all the rules and regulations promulgated by the
applicable Regulatory Authorities and are true, accurate and complete and were
prepared in conformity with generally accepted regulatory accounting principles
applied on a consistent basis. There is no unresolved violation, criticism or
exception by any of the Regulatory Authorities with respect to any report or
statement filed by, or any examinations of, Jay Financial or the Bank.
5.18. ABSENCE OF DEFAULTS. Neither Jay Financial nor the Bank is in
violation of its charter documents or By-Laws or in default under any material
agreement, commitment,
Ex. 10(h)-16
<PAGE>
arrangement, lease, insurance policy or other instrument, whether entered into
in the ordinary course of business or otherwise and whether written or oral, and
there has not occurred any event that, with the lapse of time or giving of
notice or both, would constitute such a default.
5.19. TAX AND REGULATORY MATTERS. Neither Jay Financial nor the Bank has
taken or agreed to take any action or has any knowledge of any fact or
circumstance that would (i) prevent the transactions contemplated hereby from
qualifying as a reorganization within the meaning of Section 368 of the Code or
(ii) materially impede or delay receipt of any regulatory approval required for
consummation of the transactions contemplated by this Agreement.
5.20. REAL PROPERTY.
(a) The legal description of each parcel of real property owned by
Jay Financial or the Bank (other than real property acquired in foreclosure
or in lieu of foreclosure in the course of the collection of loans and
being held by Jay Financial or the Bank for disposition as required by law)
is set forth in the Disclosure Letter under the heading of "Owned Real
Property" (such real property being herein referred to as the "Owned Real
Property"). The legal description of each parcel of real property leased
by Jay Financial or the Bank is also set forth in the Disclosure Letter
under the heading of "Leased Real Property" (such real property being
herein referred to as the "Leased Real Property"). Jay Financial shall
update the Disclosure Letter within ten (10) days after acquiring or
leasing any real property after the date hereof. Collectively, the Owned
Real Property and the Leased Real Property are herein referred to as the
"Real Property."
(b) There is no pending action involving Jay Financial or the Bank as
to the title of or the right to use any of the Real Property.
(c) Neither Jay Financial nor the Bank has any interest in any other
real property except interests as a mortgagee, and except for any real
property acquired in foreclosure or in lieu of foreclosure and being held
for disposition as required by law.
(d) None of the buildings, structures or other improvements located
on the Real Property encroaches upon or over any adjoining parcel of real
estate or any easement or right-of-way or "setback" line and all such
buildings, structures and improvements are located and constructed in
conformity with all applicable zoning ordinances and building codes.
(e) None of the buildings, structures or improvements located on the
Real Property are the subject of any official complaint or notice by any
governmental authority of violation of any applicable zoning ordinance or
building code, and there is no zoning ordinance, building code, use or
occupancy restriction or condemnation
Ex. 10(h)-17
<PAGE>
action or proceeding pending, or, to the best knowledge of Jay Financial,
threatened, with respect to any such building, structure or improvement.
The Real Property is in good condition for its intended purpose, ordinary
wear and tear excepted, and has been maintained in accordance with
reasonable and prudent business practices applicable to like facilities.
The Real Property has been used and operated in compliance with all
applicable laws, statutes, rules, regulations and ordinances applicable
thereto.
(f) Except as may be reflected in the Financial Information or with
respect to such easements, liens, defects or encumbrances as do not
individually or in the aggregate materially adversely affect the use or
value of the Owned Real Property, Jay Financial and the Bank have, and at
the Closing Date will have, good and marketable title to their respective
Owned Real Property.
(g) Neither Jay Financial nor the Bank has caused or allowed the
generation, treatment, storage, disposal or release at any Real Property of
any Toxic Substance, except in accordance with all applicable federal,
state and local laws and regulations. "Toxic Substance" means any
hazardous, toxic or dangerous substance, pollutant, waste, gas or material,
including, without limitation, petroleum and petroleum products, metals,
liquids, semi-solids or solids, that are regulated under any federal, state
or local statute, ordinance, rule, regulation or other law pertaining to
environmental protection, contamination, quality, waste management or
cleanup.
(h) Except as disclosed in the Disclosure Letter, there are no
underground storage tanks located on, in or under any Owned Real Property.
Neither Jay Financial nor the Bank own or operate any underground storage
tank at any Leased Real Property.
(i) The Real Property is not "property" within the definition of
Indiana Code 13-11-2-174. Neither Jay Financial nor the Bank is required
to provide a "disclosure document" to First Merchants as a result of the
Merger pursuant to the Indiana Responsible Property Transfer Law (I.C.
Section 13-25-3-1 ET SEQ.).
(j) There are no mechanic's or materialman's liens against the Real
Property, and no unpaid claims for labor performed, materials furnished or
services rendered in connection with constructing, improving or repairing
the Real Property in respect of which liens may or could be filed against
the Real Property.
5.21. BROKER'S OR FINDER'S FEES. Except as set forth in the Disclosure
Letter, no agent, broker or other person acting on behalf of Jay Financial or
the Bank or under any authority of Jay Financial or the Bank is or shall be
entitled to any commission, broker's or finder's fee or any other form of
compensation or payment from any of the parties hereto,
Ex. 10(h)-18
<PAGE>
other than attorneys' or accountants' fees, in connection with any of the
transactions contemplated by this Agreement.
5.22. BRING DOWN OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties of Jay Financial and the Bank contained in this Section 5 shall
be true, accurate and correct on and as of the Effective Date except as affected
by the transactions contemplated by and specified within the terms of this
Agreement.
5.23. NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties contained in this Section 5 shall expire on the Effective Date or
the earlier termination of this Agreement, and thereafter Jay Financial and the
Bank and all directors, officers and employees of Jay Financial and the Bank
shall have no further liability with respect thereto unless a court of competent
jurisdiction should determine that any misrepresentation or breach of a warranty
was willfully or intentionally made or is deemed to be fraudulent.
SECTION 6
Representations and
WARRANTIES OF FIRST MERCHANTS
First Merchants hereby represents and warrants to Jay Financial as follows:
6.01. ORGANIZATION AND QUALIFICATION. First Merchants is a corporation
organized and existing under the laws of the State of Indiana and has the
corporate power and authority to conduct its business in the manner and by the
means utilized as of the date hereof.
6.02. AUTHORIZATION.
(a) First Merchants has the corporate power and authority to enter
into this Agreement and to carry out its obligations hereunder subject to
certain required regulatory approvals. The Agreement, when executed and
delivered, will have been duly authorized and will constitute a valid and
binding obligation of First Merchants, enforceable in accordance with its
terms, except to the extent limited by insolvency, reorganization,
liquidation, readjustment of debt, or other laws of general application
relating to or affecting the enforcement of creditor's rights.
(b) Neither the execution of this Agreement, nor the consummation of
the transactions contemplated hereby, does or will (i) conflict with,
result in a breach of, or constitute a default under First Merchant's
Articles of Incorporation or By-laws; (ii) conflict with, result in a
breach of, or constitute a default under any federal, foreign,
Ex. 10(h)-19
<PAGE>
state, or local law, statute, ordinance, rule, regulation, or court or
administrative order or decree, or any note, bond, indenture, mortgage,
security agreement, contract, arrangement, or commitment, to which First
Merchants is subject or bound, the result of which would materially affect
the business or financial condition of First Merchants; (iii) result in the
creation of or give any person, corporation or entity, the right to create
any lien, charge, claim, encumbrance, security interest, or any other
rights of others or other adverse interest upon any right, property or
asset of First Merchants; (iv) terminate or give any person, corporation or
entity the right to terminate, amend, abandon, or refuse to perform any
note, bond, indenture, mortgage, security agreement, contract, arrangement,
or commitment to which First Merchants is a party or by which First
Merchant is subject or bound; or (v) accelerate or modify, or give any
party thereto the right to accelerate or modify, the time within which, or
the terms according to which, First Merchants is to perform any duties or
obligations or receive any rights or benefits under any note, bond,
indenture, mortgage, security agreement, contract, arrangement, or
commitment.
(c) Other than in connection or in compliance with the provisions of
the Bank Holding Company Act of 1956, federal and state securities laws,
and applicable Indiana banking and corporate statutes, all as amended, and
the rules and regulations promulgated thereunder, no notice to, filing
with, authorization of, exemption by, or consent or approval of, any public
body or authority is necessary for the consummation by First Merchants of
the transactions contemplated by this Agreement.
6.03. CAPITALIZATION.
(a) As of June 30, 1998, First Merchants had 20,000,000 shares of
common stock authorized, no par value, of which 6,697,656 shares were
issued and outstanding. Such issued and outstanding shares of First
Merchants common stock have been duly and validly authorized by all
necessary corporate action of First Merchants, are validly issued, fully
paid and nonassessable and have not been issued in violation of any
preemptive rights of any shareholders.
(b) First Merchants has 500,000 shares of Preferred Stock authorized,
no par value, no shares of which have been issued and no commitments exist
to issue any of such shares.
(c) The shares of First Merchants' common stock to be issued pursuant
to the Merger will be fully paid, validly issued and nonassessable.
6.04. ORGANIZATIONAL DOCUMENTS. The Articles of Incorporation and By-laws
of First Merchants in force as of the date hereof have been delivered to Jay
Financial. The documents
Ex. 10(h)-20
<PAGE>
delivered by it represent complete and accurate copies of the corporate
documents of First Merchants in effect as of the date of this Agreement.
6.05. ACCURACY OF STATEMENTS. Neither this Agreement nor any report,
statement, list, certificate or other information furnished or to be furnished
by First Merchants to Jay Financial in connection with this Agreement or any of
the transactions contemplated hereby (including, without limitation, any
information which has been or shall be supplied by First Merchants with respect
to its business, operations and financial condition for inclusion in the proxy
statement and registration statement relating to the Merger) contains or shall
contain (in the case of information relating to the proxy statement at the time
it is mailed and to the registration statement at the time it becomes effective)
any untrue statement of a material fact or omits or shall omit to state a
material fact necessary to make the statements contained herein or therein, in
light of the circumstances in which they are made, not misleading.
6.06. COMPLIANCE WITH LAW. First Merchants has not engaged in any
activity nor taken or omitted to take any action which has resulted or, to the
knowledge of First Merchants, could result in the violation of any local, state,
federal or foreign law, statute, rule, regulation or ordinance or of any order,
injunction, judgment or decree of any court or government agency or body, the
violation of which could materially adversely affect the business, prospects,
condition (financial or otherwise) or results of operations of First Merchants.
First Merchants possesses all licenses, franchises, permits and other
authorizations necessary for the continued conduct of its business without
material interference or interruption. There are no agreements or
understandings with, nor any orders or directives of, any regulatory agencies or
government authorities, which would have a material adverse effect on the
consolidated financial position of First Merchants. First Merchants has
received no written inquiries from any regulatory agency or government authority
relating to its compliance with the Bank Secrecy Act, the Truth-in-Lending Act
or the Community Reinvestment Act.
6.07. FINANCIAL STATEMENTS. First Merchants consolidated balance sheets
as of the end of the three (3) fiscal years ended December 31, 1995, 1996 and
1997 and the six months ended June 30, 1998 and the related consolidated
statements of income, shareholders' equity and cash flows for the years or
period then ended present fairly the consolidated financial condition or
position of First Merchants as of the respective dates thereof and the
consolidated results of operations of First Merchants for the respective periods
covered thereby and have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis. All required regulatory
reports have been filed by First Merchants with its primary federal regulator
during 1998, 1997, 1996 and 1995, and all of such reports are true, accurate and
complete in all material respects and have been prepared in conformity with
generally accepted regulatory accounting principles applied on a consistent
basis.
6.08. ABSENCE OF CERTAIN CHANGES. Except for events and conditions
relating to the business environment in general, since June 30, 1998, no events
or conditions of any
Ex. 10(h)-21
<PAGE>
character, whether actual, threatened or contemplated, have occurred, or can
reasonably be expected to occur, which materially adversely affect First
Merchants consolidated business, prospects, conditions (financial or otherwise),
assets or results of operations or which have caused, or can reasonably be
expected to cause, First Merchants business, on a consolidated basis, to be
conducted in a materially less profitable manner than prior to June 30, 1998.
6.09. FIRST MERCHANTS SECURITIES AND EXCHANGE COMMISSION FILINGS. First
Merchants has filed all reports and other documents required to be filed by it
under the Securities Exchange Act of 1934 and the Securities Act of 1933,
including First Merchants' Annual Report on Form 10-K for the year ended
December 31, 1997, and Quarterly Report on Form 10-Q for the quarter ended June
30, 1998, copies of which have previously been delivered to Jay Financial.
6.10. BRING DOWN OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties of First Merchants contained in this Section 6 shall be true,
accurate and correct on and as of the Effective Date except as affected by the
transactions contemplated by and specified within the terms of this Agreement.
6.11. NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties contained in this Section 6 shall expire on the Effective Date or
the earlier termination of this Agreement, and thereafter First Merchants and
all directors, officers and employees of First Merchants shall have no further
liability with respect thereto unless a court of competent jurisdiction should
determine that any misrepresentation or breach of a warranty was willfully or
intentionally made or is deemed to be fraudulent.
SECTION 7
COVENANTS OF JAY FINANCIAL
Jay Financial covenants and agrees with First Merchants, and covenants and
agrees to cause the Bank to act, as follows:
7.01. SHAREHOLDER APPROVAL. Jay Financial shall submit this Agreement to
its shareholders for approval at a meeting to be called and held in accordance
with applicable law and the Articles of Incorporation and By-Laws of Jay
Financial at the earliest possible reasonable date, and the Board of Directors
of Jay Financial shall recommend to the shareholders of Jay Financial that such
shareholders approve this Agreement. The Board of Directors of Jay Financial
shall use its best efforts to obtain any vote of its shareholders necessary for
the approval of this Agreement.
Ex. 10(h)-22
<PAGE>
7.02. OTHER APPROVALS. Jay Financial and the Bank shall proceed
expeditiously, cooperate fully and use their best efforts to procure upon
reasonable terms and conditions all consents, authorizations, approvals,
registrations and certificates, to complete all filings and applications and to
satisfy all other requirements prescribed by law which are necessary for
consummation of the Merger on the terms and conditions provided in this
Agreement at the earliest possible reasonable date.
7.03. CONDUCT OF BUSINESS.
(a) On and after the date of this Agreement and until the Effective
Date or until this Agreement shall be terminated as herein provided,
neither Jay Financial nor the Bank shall, without the prior written consent
of First Merchants, (i) make any material changes in their capital
structure; (ii) authorize a class of stock or issue, or authorize the
issuance of, stock other than or in addition to the outstanding stock as
set forth in Section 5.03 hereof; (iii) declare, distribute or pay any
dividends on their shares of common stock, or authorize a stock split, or
make any other distribution to their shareholders, except for (a) the
payment by Jay Financial prior to the Effective Date of customary quarterly
cash dividends on its common stock in October, 1998, December, 1998, and
April, 1999, which dividends shall not exceed fifty cents ($.50) per
share, respectively, provided that Jay Financial shall not pay any such
dividend during the fiscal quarter in which the Merger shall become
effective and in which Jay Financial shareholders will become entitled to
receive dividends on the shares of First Merchants into which the shares of
Jay Financial have been converted or in any subsequent fiscal quarter, and
(b) the payment by the Bank to Jay Financial of dividends to pay Jay
Financial's expenses of operations and its business and payment of fees and
expenses incurred in connection with the transactions contemplated by this
Agreement; (iv) merge, combine or consolidate with or sell their assets or
any of their securities to any other person, corporation or entity, effect
a share exchange or enter into any other transaction not in the ordinary
course of business; (v) incur any liability or obligation, make any
commitment, payment or disbursement, enter into any contract, agreement,
understanding or arrangement or engage in any transaction, or acquire or
dispose of any property or asset having a fair market value in excess of
$10,000.00 (except for personal or real property acquired or disposed of in
connection with foreclosures on mortgages or enforcement of security
interests and loans made or sold by the Bank in the ordinary course of
business); (vi) subject any of their properties or assets to a mortgage,
lien, claim, charge, option, restriction, security interest or encumbrance;
(vii) promote or increase or decrease the rate of compensation (except for
promotions and non-material increases in the ordinary course of business
and in accordance with past practices) or enter into any agreement to
promote or increase or decrease the rate of compensation of any director,
officer or employee of Jay Financial or the Bank; (viii) execute, create,
institute, modify or amend any pension, retirement, savings, stock
purchase, stock bonus, stock ownership, stock option, stock appreciation or
Ex. 10(h)-23
<PAGE>
depreciation right or profit sharing plans, any employment, deferred
compensation, consultant, bonus or collective bargaining agreement, group
insurance contract or other incentive, welfare or employee benefit plan or
agreement for current or former directors, officers or employees of Jay
Financial or the Bank, change the level of benefits or payments under any
of the foregoing or increase or decrease any severance or termination of
pay benefit or any other fringe or employee benefits other than as required
by law or regulatory authorities; (ix) amend their Articles of
Incorporation or By-Laws from those in effect on the date of this
Agreement; (x) modify, amend or institute new employment policies or
practices, or enter into, renew or extend any employment or severance
agreements with respect to any present or former Jay Financial or Bank
directors, officers or employees; (xi) give, dispose, sell, convey, assign,
hypothecate, pledge, encumber or otherwise transfer or grant a security
interest in any common stock of the Bank; (xii) fail to make additions to
the Bank's reserve for loan losses, or any other reserve account, in the
ordinary course of business and in accordance with sound banking practices;
(xiii) other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money or assume, guarantee,
endorse or otherwise as an accommodation become responsible or liable for
the obligations of any other individual, corporation or other entity; and
(xiv) agree in writing or otherwise to take any of the foregoing actions.
(b) Jay Financial and the Bank shall maintain, or cause to be
maintained, in full force and effect insurance on its properties and
operations and fidelity coverage on its directors, officers and employees
in such amounts and with regard to such liabilities and hazards as
customarily are maintained by other companies operating similar businesses.
(c) Jay Financial and the Bank shall continue to give to First
Merchants and its employees, accountants, attorneys and other authorized
representatives reasonable access during regular business hours and other
reasonable times to all their premises, properties, statements, books and
records.
7.04. PRESERVATION OF BUSINESS. On and after the date of this Agreement
and until the Effective Date or until this Agreement is terminated as herein
provided, Jay Financial and the Bank each shall (a) carry on their business
diligently, substantially in the same manner as heretofore conducted, and in the
ordinary course of business; (b) use their best efforts to preserve their
business organizations intact, to keep their present officers and employees and
to preserve their present relationship with customers and others having business
dealings with them; and (c) not do or fail to do anything which will cause a
material breach of, or material default in, any contract, agreement, commitment,
obligation, understanding, arrangement, lease or license to which they are a
party or by which they are or may be subject or bound.
Ex. 10(h)-24
<PAGE>
7.05. OTHER NEGOTIATIONS. Except with the prior written approval of First
Merchants, on and after the date of this Agreement and until the Effective Date,
Jay Financial and the Bank shall not, and shall not permit or authorize their
respective directors, officers, employees, agents or representatives to,
directly or indirectly, initiate, solicit, encourage, or engage in discussions
or negotiations with, or provide information to, any corporation, association,
partnership, person or other entity or group concerning any merger,
consolidation, share exchange, combination, purchase or sale of substantial
assets, sale of shares of capital stock (or securities convertible or
exchangeable into or otherwise evidencing, or any agreement or instrument
evidencing the right to acquire, capital stock), tender offer, acquisition of
control of Jay Financial or the Bank or similar transaction involving Jay
Financial or the Bank (all such transactions hereinafter referred to as an
"Acquisition Transaction"). Jay Financial and the Bank shall promptly
communicate to First Merchants the terms of any proposal, written or oral, which
either may receive with respect to an Acquisition Transaction and any request by
or indication of interest on the part of any third party with respect to
initiation of any Acquisition Transaction or discussion with respect thereto.
7.06. RESTRICTIONS REGARDING AFFILIATES. Jay Financial shall, within
thirty (30) days after the date of this Agreement and promptly thereafter until
the Effective Date to reflect any changes or upon the request of First
Merchants, provide First Merchants with a list identifying each person who may
reasonably be deemed to be an "affiliate" of Jay Financial within the meaning of
such term as used in Rule 145 under the Securities Act of 1933, as amended (the
"1933 Act"). Each director, executive officer and other person who is an
"affiliate" of Jay Financial for purposes of the 1933 Act shall deliver to First
Merchants, at least thirty-one (31) days prior to the Effective Date, a written
agreement, in form and substance satisfactory to counsel to First Merchants,
regarding compliance by each such person with (i) the provisions of such Rule
145, and (ii) the requirements of Accounting Principles Board Opinion No. 16
regarding the disposition of shares (or reduction of risk with respect thereto)
of Jay Financial common stock during the thirty (30) days preceding the
Effective Date, or First Merchants common stock until such time as financial
results covering at least thirty (30) days of post-Merger operations have been
published.
7.07. PRESS RELEASE. Neither Jay Financial nor the Bank shall issue any
press releases or make any other public announcements or disclosures relating to
the Merger without the prior approval of First Merchants.
7.08. DISCLOSURE LETTER. Within five (5) business days after the date of
execution of this Agreement by both First Merchants and Jay Financial, Jay
Financial shall deliver to First Merchants the Disclosure Letter referenced in
Section 5 hereof in complete form containing all required information as of the
date of this Agreement along with copies of all documents, instruments, and
agreements referenced in the Disclosure Letter. Upon receipt of the Disclosure
Letter, First Merchants shall have the opportunity to review the Disclosure
Letter and all documents, instruments, and agreements provided therewith and
conduct such
Ex. 10(h)-25
<PAGE>
additional due diligence and review of Jay Financial and the Bank as First
Merchants deems necessary. Within ten (10) business days after receipt by First
Merchants of the Disclosure Letter from Jay Financial, First Merchants shall
have the right to either (i) accept the complete Disclosure Letter by having an
authorized executive officer of First Merchants initial the Disclosure Letter
and delivering an initialed copy to Jay Financial, or (ii) provide Jay Financial
with written notice of termination of this Agreement by First Merchants in
accordance with the terms of Section 10.01(j) hereof. In the event the
Disclosure Letter is accepted by First Merchants, Jay Financial shall thereafter
promptly supplement, amend and update monthly and as of the Effective Date the
Disclosure Letter with respect to any matters hereafter arising which, if in
existence or having occurred as of the date of this Agreement, would have been
required to be set forth or described in the Disclosure Letter.
7.09 CONFIDENTIALITY. Jay Financial and the Bank shall use their best
efforts to cause their respective officers, employees, and authorized
representatives to, hold in strict confidence all confidential data and
information obtained by them from First Merchants, unless such information (i)
was already known to Jay Financial and the Bank, (ii) becomes available to Jay
Financial and the Bank from other sources, (iii) is independently developed by
Jay Financial and the Bank, (iv) is disclosed outside of Jay Financial and the
Bank with and in accordance with the terms of prior written approval of First
Merchants, or (v) is or becomes readily ascertainable from public or published
information or trade sources or public disclosure of such information is
required by law or requested by a court or other governmental agency,
commission, or regulatory body. Jay Financial and the Bank further agree that
in the event this Agreement is terminated, it will return to First Merchants all
information obtained by Jay Financial and the Bank regarding First Merchants,
including all copies made of such information by Jay Financial and the Bank.
This provision shall survive the Effective Date or the earlier termination of
this Agreement.
7.10 COOPERATION. Jay Financial shall generally cooperate with First
Merchants and its officers, employees, attorneys, accountants and other agents,
and, generally, do such other acts and things in good faith as may be
reasonable, necessary or appropriate to timely effectuate the intents and
purposes of this Agreement and the consummation of the transactions contemplated
hereby, including, without limitation, (i) Jay Financial shall cooperate and
assist First Merchants in preparation of and/or filing of all regulatory
applications, the registration statement for registration of First Merchants'
shares, and all other documentation required to be prepared for consummation of
the Merger and obtaining all necessary approvals, and (ii) Jay Financial shall
furnish First Merchants with all information concerning itself and the Bank that
First Merchants may request in connection with the preparation of the
documentation referenced above. Prior to the Closing (as defined in Section 12
hereof), Jay Financial agrees to disclose to First Merchants any fact or matter
that comes to the attention of Jay Financial that might indicate that any of the
representations or warranties of Jay Financial may be untrue, incorrect, or
misleading in any material respect.
Ex. 10(h)-26
<PAGE>
7.11. ENVIRONMENTAL REPORTS. Jay Financial, at its sole cost and expense,
shall provide to First Merchants, as soon as reasonably practical, but not later
than thirty (30) days after the date hereof, a report of a phase one
environmental investigation on all real property owned, leased or operated by
Jay Financial or the Bank as of the date hereof (but excluding space in retail
and similar establishments leased by Jay Financial or the Bank for automatic
teller machines or bank branch facilities where the space leased comprises less
than 20% of the total space leased to all tenants of such property) and within
ten (10) days after the acquisition or lease of any real property acquired or
leased by Jay Financial or the Bank after the date hereof (but excluding space
in retail and similar establishments leased by Jay Financial or the Bank for
automatic teller machines or bank branch facilities where the space leased
comprises less than 20% of the total space leased to all tenants of such
property). If required by the phase one investigation in First Merchants'
reasonable opinion, Jay Financial shall provide to First Merchants, within
thirty (30) days of such request, a report of a phase two investigation on
properties requiring such additional study. First Merchants shall have fifteen
(15) business days from the receipt of any such phase one or phase two
investigation report to notify Jay Financial of any dissatisfaction with the
contents of such report. Should the cost of taking all remedial or other
corrective actions and measures (i) required by applicable law or reasonable
likely to be required by applicable law, or (ii) recommended or suggested by
such report or reports as prudent in light of serious life, health or safety
concerns, in the aggregate, exceed the sum of $250,000 as reasonably estimated
by an environmental expert retained for such purpose by First Merchants and
reasonably acceptable to Jay Financial, or if the cost of such actions and
measures cannot be so reasonably estimated by such expert to be such amount or
less wit any reasonable degree of certainty, then First Merchants shall have the
right for a period of fifteen (15) business days following receipt of such
estimate or indication that the cost of such actions and measures cannot be so
reasonably estimated to terminate this Agreement by providing written notice of
such termination to Jay Financial.
7.12. LETTER TO JAY FINANCIAL SHAREHOLDERS. Within two (2) business
days after execution of this Agreement by Jay Financial and First Merchants, Jay
Financial shall deposit in the United States mail a letter to each of the
shareholders of record of Jay Financial as of the date of execution of this
Agreement informing each shareholder about the execution of this Agreement and
the proposed Merger. The terms of such letter to the shareholders of Jay
Financial shall be in a form mutually agreed to by First Merchants and Jay
Financial.
Ex. 10(h)-27
<PAGE>
SECTION 8
COVENANTS OF FIRST MERCHANTS
First Merchants covenants and agrees with Jay Financial as follows:
8.01. APPROVALS. First Merchants shall proceed expeditiously, cooperate
fully and use its best efforts to procure upon reasonable terms and conditions
all consents, authorizations, approvals, registrations and certificates, to
complete all filings and applications and to satisfy all other requirements
prescribed by law which are necessary for consummation of the Merger on the
terms and conditions provided in this Agreement. First Merchants shall provide
Jay Financial with copies of proposed regulatory filings in connection with the
Merger and afford Jay Financial the opportunity to offer comment on the filings
before filing. The approval of the shareholders of First Merchants of the
transactions contemplated by this Agreement is not required.
8.02. EMPLOYEE BENEFIT PLANS.
(a) COVERAGE UNDER FIRST MERCHANTS' PLANS. No later than January 1,
2000, First Merchants will cover the Bank's employees under any
tax-qualified retirement plan First Merchants maintains for its employees,
provided that such an employee meets the applicable participation
requirements, in lieu of the Bank's current tax-qualified retirement plan.
Until that time, the Bank's current tax-qualified retirement plan will be
maintained at the same level, with respect to benefit accruals, provided
for on the Effective Date. Following the Effective Date, the Bank
employees will otherwise receive employee benefits that in the aggregate
are substantially comparable to the employee benefits provided to those
employees by Jay Financial or the Bank on the Effective Date. For purposes
of determining a Jay Financial or Bank employee's eligibility and vesting
service under a First Merchant's employee benefit plan that the employee is
permitted to enter, service with Jay Financial or the Bank will be treated
as service with First Merchants; provided, however, that service with Jay
Financial or the Bank shall not be treated as service with First Merchants
for purposes of benefit accrual.
(b) COVERAGE UNDER FIRST MERCHANTS' HEALTH PLAN. Those employees of
the Bank who become covered by the health plan sponsored by First Merchants
under the provisions of subsection (a) and who are, at such time, subject
to an eligibility waiting period due to a pre-existing condition exclusion
or limitation under the Bank's health plan which also constitutes a
pre-existing condition exclusion or limitation under the health plan
sponsored by First Merchants shall receive credit towards the satisfaction
under the First Merchants health plan of any waiting period imposed with
respect to such pre-existing condition exclusion or limitation.
Ex. 10(h)-28
<PAGE>
(c) CONTINUATION OF THE BANK'S DEFERRED COMPENSATION PLANS. From and
after the Effective Date, First Merchants shall use its best efforts to
continue or cause the Bank to continue, in accordance with their respective
terms, the nonqualified deferred compensation plans sponsored by Jay
Financial and the Bank for the benefit of the members of the Board of
Directors of Jay Financial and the Bank and the employees of the Bank,
provided such plans do not require additional cash contributions or benefit
accruals by the Bank or First Merchants beyond what has been contributed or
earned in terms of an accrued benefit as of the Effective Date. First
Merchants reserves the right, however, to amend any and all such plans so
as to prevent any new employees or directors of the Bank or Jay Financial
from becoming eligible thereunder.
8.03. FIRST MERCHANTS BOARD OF DIRECTORS. First Merchants shall cause
all necessary action to be taken to cause the current President of the Bank,
Barry Hudson, to either (i) be nominated for election as a member of the First
Merchants' Board of Directors for a three (3)-year term at the first annual
meeting of the shareholders of First Merchants following the Effective Date or
(ii) to be appointed as a member of the First Merchants' Board of Directors at
the next meeting of the First Merchants' Board of Directors following the
Effective Date to serve until the first annual meeting of the shareholders of
First Merchants following the Effective Date and then to be nominated for
election as a member of the First Merchants' Board of Directors for a three
(3)-year term at the first annual meeting of the shareholders of First Merchants
following the Effective Date, whichever can be effected first depending on the
timing of the occurrence of the Effective Date.
8.04. PRESS RELEASE. Except as required by law, First Merchants shall not
issue any press release to any national wire service relating solely to the
Merger without the prior approval of Jay Financial.
8.05. CONFIDENTIALITY. First Merchants shall, and shall use its best
efforts to cause its officers, employees, and authorized representatives to,
hold in strict confidence all confidential data and information obtained by it
from Jay Financial or the Bank, unless such information (i) was already known to
First Merchants, (ii) becomes available to First Merchants from other sources,
(iii) is independently developed by First Merchants, (iv) is disclosed outside
of First Merchants with and in accordance with the terms of prior written
approval of Jay Financial or the Bank, or (v) is or becomes readily
ascertainable from public or published information or trade sources or public
disclosure of such information is required by law or requested by a court or
other governmental agency, commission, or regulatory body. First Merchants
further agrees that in the event this Agreement is terminated, it will return to
Jay Financial all information obtained by First Merchants regarding Jay
Financial or the Bank, including all copies made of such information by First
Merchants. This provision shall survive the Effective Date or the earlier
termination of this Agreement.
Ex. 10(h)-29
<PAGE>
8.06. COVENANTS REGARDING THE BANK. Upon consummation of the Merger, the
Bank shall be a national bank organized under the laws of the United States and
the officers and directors of the Bank in office immediately prior to the
consummation of the Merger shall be the officers and directors of the Bank at
the Effective Date subject to the provisions of the Bank's Articles of
Association and By-Laws. Thereafter, the Bank directors who desire to continue
to serve in that capacity shall do so for at least the remainder of the one (1)
year terms to which they have been elected. The Bank directors will be subject
to First Merchants' policy of mandatory retirement at age seventy (70);
provided, however, the policy of mandatory retirement will not apply to any of
the Bank's current directors until twelve (12) months after the Effective Date.
First Merchants intends to continue to operate the Bank as an operating
subsidiary of First Merchants under the name "The First National Bank of
Portland" with no changes in the number or locations of branches.
SECTION 9
CONDITIONS PRECEDENT TO THE MERGER
The obligation of each of the parties hereto to consummate the transactions
contemplated by this Agreement is subject to the satisfaction and fulfillment of
each of the following conditions on or prior to the Effective Date:
9.01. SHAREHOLDER APPROVAL. The shareholders of Jay Financial shall have
approved, ratified and confirmed this Agreement as required by applicable law.
9.02. REGISTRATION STATEMENT EFFECTIVE. First Merchants shall have
registered its shares of common stock to be issued to shareholders of Jay
Financial in accordance with this Agreement with the Securities and Exchange
Commission pursuant to the 1933 Act, and all state securities and "blue sky"
approvals and authorizations required to offer and sell such shares shall have
been received by First Merchants. The registration statement with respect
thereto shall have been declared effective by the Securities and Exchange
Commission and no stop order shall have been issued or threatened.
9.03. TAX OPINION. The parties shall have obtained an opinion of counsel,
which shall be in form and content satisfactory to counsel for all parties
hereto, to the effect that the Merger effected pursuant to this Agreement shall
constitute a tax-free transaction (except to the extent cash or boot is
received) to each party hereto and to the shareholders of each party. Such
opinion shall be based upon factual representations received by such counsel
from the parties, which representations may take the form of written
certifications.
Ex. 10(h)-30
<PAGE>
9.04. AFFILIATE AGREEMENTS. First Merchants and the Bank shall have
obtained (a) from Jay Financial, a list identifying each affiliate of Jay
Financial and (b) from each affiliate of Jay Financial, the agreements
contemplated by Section 7.06 hereof.
9.05. REGULATORY APPROVALS. The Board of Governors of the Federal Reserve
System and the Indiana Department of Financial Institutions shall have
authorized and approved the Merger and the transactions related thereto. In
addition, all appropriate orders, consents, approvals and clearances from all
other regulatory agencies and governmental authorities whose orders, consents,
approvals or clearances are required by law for consummation of the transactions
contemplated by this Agreement shall have been obtained.
9.06. OFFICER'S CERTIFICATE. First Merchants and Jay Financial shall have
delivered to each other a certificate signed by their Chairman or President and
their Secretary, dated the Effective Date, certifying that (a) all the
representations and warranties of their respective corporations are true,
accurate and correct on and as of the Effective Date; (b) all the covenants of
their respective corporations have been complied with from the date of this
Agreement through and as of the Effective Date; and (c) their respective
corporations have satisfied and fully complied with all conditions necessary to
make this Agreement effective as to them.
9.07. FAIRNESS OPINION. Jay Financial shall have obtained an opinion from
an investment banker of its choosing to the effect that the terms of the Merger
are fair to the shareholders of Jay Financial from a financial viewpoint. Such
opinion shall be (a) in form and substance reasonably satisfactory to Jay
Financial, (b) dated as of a date not later than the mailing date of the Proxy
Statement relating to the Merger and (c) included in the Proxy Statement.
9.08. POOLING OF INTERESTS. First Merchants shall have obtained from its
independent accountants, Olive, LLC, a letter stating that, based upon their
review of such documents and information which they deemed relevant, such firm
is currently unaware of any reason why the Merger cannot be accounted for as a
"pooling of interests."
9.09. NO JUDICIAL PROHIBITION. Neither Jay Financial, the Bank nor First
Merchants shall be subject to any order, decree or injunction of a court or
agency of competent jurisdiction which enjoins or prohibits the consummation of
the Merger.
9.10. CHANGE OF CONTROL AGREEMENTS. First Merchants shall have offered
Change of Control Agreements to Barry Hudson and Jim Meinerding.
Ex. 10(h)-31
<PAGE>
SECTION 10
TERMINATION OF MERGER
10.01. MANNER OF TERMINATION. This Agreement and the transactions
contemplated hereby may be terminated at any time prior to the Effective Date by
written notice delivered by First Merchants to Jay Financial or by Jay Financial
to First Merchants only for the following reasons:
(a) By Jay Financial or First Merchants, if there has been a material
misrepresentation, a breach of warranty or a failure to comply with any
covenant on the part of any party in the representations, warranties, and
covenants set forth herein; provided that the party in default shall have
no right to terminate for its own default;
(b) By Jay Financial or First Merchants, if it shall determine in its
sole discretion that the transactions contemplated by this Agreement have
become inadvisable or impracticable by reason of commencement or threat of
material litigation or proceedings against any of the parties;
(c) By Jay Financial or First Merchants, if the financial condition,
business, assets, or results of operations of the other party shall have
been materially and adversely changed from that in existence at June 30,
1998;
(d) By Jay Financial or First Merchants, if the transaction
contemplated herein has not been consummated by April 30, 1999 (provided
that the terminating party is not then in material breach of any
representation, warranty, covenant or other agreement contained herein);
(e) By First Merchants if any of the items, events or information set
forth in any update to the Disclosure Letter has had or may have a material
adverse effect on the financial condition, results of operations, business,
or prospects of Jay Financial or the Bank;
(f) By First Merchants or Jay Financial if, in the opinion of counsel
to First Merchants or Jay Financial, the Merger will not constitute a
tax-free reorganization under the Code;
(g) By First Merchants if the Merger cannot be accounted for as a
"pooling of interests";
(h) By First Merchants or Jay Financial pursuant to their respective
termination rights set forth in Section 3.04 hereof;
Ex. 10(h)-32
<PAGE>
(i) By First Merchants pursuant to its termination rights set forth
in Section 7.11 hereof; or
(j) By First Merchants, if it shall determine in its sole discretion
that the transactions contemplated by this Agreement have become
inadvisable or impracticable by reason of any matters disclosed in the
Disclosure Letter received by First Merchants in accordance with Section
7.08 hereof or contained in any of the documents, instruments or agreements
referenced in the Disclosure Letter.
10.02. EFFECT OF TERMINATION. Upon termination by written notice, as
provided in this Section, this Agreement shall be void and of no further force
or effect and there shall be no obligation on the part of Jay Financial or First
Merchants or their respective officers, directors, employees, agents, or
shareholders, except for payment of their respective expenses and performance of
their respective obligations under Sections 7.09 and 8.05.
SECTION 11
EFFECTIVE DATE OF MERGER
Subject to the terms and upon satisfaction of all requirements of law and
the conditions specified in this Agreement, the Merger shall become effective at
the close of business on the day specified in the Articles of Merger of Jay
Financial with and into First Merchants as filed with the Secretary of State of
the State of Indiana (the "Effective Date"). The Effective Date shall occur no
later than the last business day of the month in which any waiting period
following the last approval of the Merger by a state or federal regulatory
agency or governmental authority expires.
SECTION 12
CLOSING
12.01. CLOSING DATE AND PLACE. The closing of the Merger (the "Closing")
shall take place at the main office of First Merchants on the Effective Date or
at such other place as mutually agreed to by First Merchants and Jay Financial.
12.02. ARTICLES OF MERGER. Subject to the provisions of this Agreement,
on the Effective Date, the Articles of Merger shall be duly filed with the
Secretary of State of the State of Indiana.
Ex. 10(h)-33
<PAGE>
12.03. OPINIONS OF COUNSEL. At the Closing, Jay Financial shall deliver
an opinion of its counsel, Krieg DeVault Alexander & Capehart, to First
Merchants, and First Merchants shall deliver an opinion of its counsel, Bingham
Summers Welsh & Spilman, to Jay Financial, dated as of the date of the Closing.
The form of such opinions shall be as mutually agreed to by the parties hereto
and their respective counsel.
SECTION 13
MISCELLANEOUS
13.01. EFFECTIVE AGREEMENT. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns, but none of the provisions thereof shall inure to the benefit
of any other person, firm, or corporation whomsoever, except as expressly
applied to the officers and directors of First Merchants and Jay Financial.
Neither this Agreement nor any of the rights, interests, or obligations
hereunder shall be assigned or transferred by either party hereto without the
prior written consent of the other party.
13.02. WAIVER; AMENDMENT.
(a) First Merchants and Jay Financial may, by an instrument in
writing executed in the same manner as this Agreement: (i) extend the time
for the performance of any of the covenants or agreements of the other
party under this Agreement; (ii) waive any inaccuracies in the
representations or warranties of the other party contained in this
Agreement or in any document delivered pursuant hereto or thereto; (iii)
waive the performance by the other party of any of the covenants or
agreements to be performed by it or them under this Agreement; or (iv)
waive the satisfaction or fulfillment of any condition the nonsatisfaction
or nonfulfillment of which is a condition to the right of the party so
waiving to terminate this Agreement. The waiver by any party hereto of a
breach of any provision of this Agreement shall not operate or be construed
as a waiver of any other or subsequent breach hereunder.
(b) Notwithstanding the prior approval by the shareholders of Jay
Financial, this Agreement may be amended, modified or supplemented by the
written agreement of Jay Financial and First Merchants without further
approval of such shareholders, except that no such amendment, modification
or supplement shall result in a decrease in the consideration specified in
Section 3 hereof or shall materially adversely affect the rights of the
shareholders of Jay Financial without the further approval of such
shareholders.
Ex. 10(h)-34
<PAGE>
13.03. NOTICES. Any notice required or permitted by this Agreement shall
be deemed to have been duly given if delivered in person, receipted for or sent
by certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to First Merchants: With a copy to:
200 E. Jackson Street, Box 792 Bingham Summers Welsh & Spilman
Muncie, IN 47305 2700 Market Tower
Attn: Stefan S. Anderson, 10 West Market Street
President and Chief Executive Indianapolis, Indiana 46204-2982
Officer Attn: David R. Prechtel, Esq.
If to Jay Financial: With a copy to:
112 West Main Street Krieg DeVault Alexander & Capehart
P.O. Box 1089 One Indiana Square, Suite 2800
Portland, IN 47371 Indianapolis, Indiana 46204
Attn: Barry Hudson, President Attn: Michael E. Williams, Esq.
or to such substituted address as any of them have given to the other in
writing. Notwithstanding the foregoing, all notices required to be given
pursuant to Sections 3.04(b) and 3.04(c) hereof shall be given in the time
periods specified in such sections by either hand delivery or facsimile
transmission to the specified parties.
13.04. HEADINGS. The headings in this Agreement have been inserted solely
for the ease of reference and should not be considered in the interpretation or
construction of this Agreement.
13.05. SEVERABILITY. In case any one or more of the provisions contained
herein shall, for any reason, be held to be invalid, illegal, or unenforceable
in any respect, such invalidity, illegality, or unenforceability shall not
affect any other provision of this Agreement, but this Agreement shall be
construed as if such invalid, illegal, or unenforceable provision or provisions
had never been contained herein.
13.06. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument. In addition, this Agreement
and the documents to be delivered hereunder may be executed by the parties
hereto either manually or by facsimile signatures, each of which shall
constitute an original signature.
13.07. GOVERNING LAW. This Agreement is executed in and shall be
construed in accordance with the laws of the State of Indiana.
Ex. 10(h)-35
<PAGE>
13.08. ENTIRE AGREEMENT. This Agreement supersedes any other agreement,
whether oral or written, between First Merchants and Jay Financial relating to
the matters contemplated hereby, and constitutes the entire agreement between
the parties hereto.
13.09. EXPENSES. First Merchants and Jay Financial shall each pay their
own expenses incidental to the transactions contemplated hereby. It is
understood that the cost of the fairness opinion referenced in Section 9.07
shall be borne by Jay Financial whether or not the Merger is consummated. This
provision shall survive the Effective Date or the earlier termination of this
Agreement.
IN WITNESS WHEREOF, First Merchants and Jay Financial have made and entered
into this Agreement as of the day and year first above written and have caused
this Agreement to be executed and attested by their duly authorized officers.
FIRST MERCHANTS CORPORATION
ATTEST:
/s/ Larry R. Helms By: /s/ Stefan S. Anderson
- ------------------------------- ---------------------------------------
Larry R. Helms, Secretary Stefan S. Anderson, President and Chief
Executive Officer
JAY FINANCIAL CORPORATION
ATTEST:
/s/ Stephen Myron By: /s/ Barry Hudson
- ------------------------------- ---------------------------------------
Stephen Myron, M.D., Secretary Barry Hudson, Presiden
Ex. 10(h)-36
<PAGE>
SUBSIDIARIES OF REGISTRANT
The following entities are subsidiaries of the Registrant, First Merchants
Corporation, as of the date hereof:
<TABLE>
<CAPTION>
NAME OF REGISTRANT'S SUBSIDIARY STATE OF INCORPORATION OR ORGANIZATION
------------------------------- --------------------------------------
<S> <C>
First Merchants Bank, National Association Under the laws of the United States
(also doing business as First Merchants
Bank of Hamilton County)
200 East Jackson Street
Muncie, Indiana 47305
First United Bank Indiana
709 Mill Street
Middletown, Indiana 47356
Pendleton Banking Company Indiana
100 West State Street, Box 210
Pendleton, Indiana 46064
First Merchants Insurance Services, Inc. Indiana
200 East Jackson Street
Muncie, Indiana 47305
(a wholly-owned subsidiary of Pendleton
Banking Company)
The Randolph County Bank Indiana
122 West Washington Street
Winchester, Indiana 47394
The Union County National Bank Under the laws of the United States
of Liberty
107 West Union, Box 217
Liberty, Indiana 47353
</TABLE>
Ex. 21-1
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Form S-4 and Prospectus of First Merchants Corporation, relating to the
issuance of securities in the proposed merger of Anderson Community Bank into
Pendleton Banking Company (to be renamed The Madison Community Bank), a
wholly owned subsidiary of First Merchants Corporation, of our report, dated
January 23, 1998 on the consolidated financial statements of First Merchants
Corporation as of December 31, 1997 and 1996 and for each of the three years
in the period ended December 31, 1997. We also consent to the reference to
our firm appearing under the headings "Selected Financial Data" and "Experts"
in the Prospectus.
Olive LLP
January 4, 1999
Indianapolis, Indiana
Ex. 23(a)-1
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in the Registration Statement on Form S-4, the
Proxy Statement-Prospectus of First Merchants Corporation relating to the
issuance of securities in the proposed merger of Anderson Community Bank into
Pendleton Banking Company (to be renamed The Madison Community Bank), a
wholly owned subsidiary of First Merchants Corporation, of our report, dated
December 9, 1998, on the financial statements of Anderson Community Bank as
of December 31, 1997 and 1996 and for the year ended December 31, 1997. We
also consent to the reference to our firm appearing under the heading
"Experts" in the Prospectus.
Crowe, Chizek and Company LLP
January 4, 1999
Indianapolis, Indiana
Ex. 23(b)-1
<PAGE>
CONSENT OF FINANCIAL ADVISOR
We consent to the use of our fairness opinion letter dated October 20, 1998 and
the update to be dated as of the date of the Prospectus/Proxy Statement forming
a part of the Registration Statement on Form S-4 filed by First Merchants
Corporation in connection with the proposed merger of Anderson Community Bank to
be included in such Prospectus/Proxy Statement, subject to the issuance of such
opinion by us. We further consent to the references to our fairness opinion
letter and the analysis conducted by us and the use of our name in such Proxy
Statement/Prospectus in conjunction therewith.
PROFESSIONAL BANK SERVICES, INC.
Louisville, Kentucky
January 4, 1999
Ex. 23(e)-1
<PAGE>
ANDERSON COMMUNITY BANK
19 West 10th Street
Anderson, Indiana 46016
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Michael E. Stephens and Bradley K. Condon, and
each of them, proxies of the undersigned, with full power of substitution and
re-substitution, to represent and vote all shares of common stock of Anderson
Community Bank ("Anderson") which the undersigned would be entitled to vote at
the Special Meeting of Shareholders of Anderson to be held at the Anderson Fine
Arts Center located at 32 West 10th Street, Anderson, Indiana 46016, on
____________, ______________, 1999, at _______ p.m. local time, and at any
adjournment thereof, with all of the powers the undersigned would possess if
personally present, as set forth below.
The Board of Directors of Anderson recommends a vote FOR approval of the
Agreement of Reorganization and Merger dated October 27, 1998, by and among
First Merchants Corporation, Pendleton Banking Company ("Pendleton") and
Anderson pursuant to which Anderson will merge with and into Pendleton under the
name "The Madison Community Bank."
1. Approval of the Agreement of Reorganization and Merger:
________ FOR ________ AGAINST ________ ABSTAIN
2. In their discretion, on such other matters as may properly be
presented at the Special Meeting.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NOT OTHERWISE DIRECTED, THIS PROXY
WILL BE VOTED FOR APPROVAL OF THE AGREEMENT OF REORGANIZATION AND MERGER. ON
ANY OTHER MATTERS THAT MAY PROPERLY BE PRESENTED AT THE SPECIAL MEETING, THIS
PROXY WILL BE VOTED IN ACCORDANCE WITH THE RECOMMENDATIONS OF THE BOARD OF
DIRECTORS OF ANDERSON.
PLEASE COMPLETE, SIGN, DATE AND RETURN THIS PROXY PROMPTLY.
Dated: ______________, 1999
__________________________________________
(SIGNATURE OF SHAREHOLDER)
__________________________________________
(SIGNATURE OF SHAREHOLDER)
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS ON YOUR STOCK CERTIFICATE. JOINT OWNERS
SHOULD EACH SIGN PERSONALLY. TRUSTEES AND OTHERS SIGNING IN A REPRESENTATIVE
CAPACITY SHOULD INDICATE THE CAPACITY IN WHICH THEY SIGN.
Ex. 99-1
