As filed with the Securities and Exchange Commission on April __, 1996.December 29, 1998
Registration Statement No. 33-___________33-__________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------------------------------------------------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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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
(317)(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-PresidentVice President David R. Prechtel, Esq.
First Merchants Corporation Bingham Summers Welsh &
Spilman
200 East Jackson Street Spilman
Muncie, Indiana 47305 2700 Market Tower
Muncie, Indiana 47305(765) 747-1530 10 West Market Street
(317) 747-1500
Indianapolis, Indiana 46204
(317) 635-8900
(Name, address, including zip code,
and telephone number, including area
code, of agent for service)
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 becomesand 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. / /
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 registeredregistered(1) price per unit(1)unit(2) offering price (1)(2) fee
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Common Stock, Up to
no par value 565,7051,098,837 shares $ N/A $8,753,060 $3,018.06$13.240748 $14,549,424 $4,292.08
(1) EstimatedThis represents the maximum number of shares to be offered to Jay Financial
Corporation shareholders.
(2) The maximum offering price is based on an estimate solely for the purpose
of calculating the registration fee and has been calculated as of December 31,1995 in accordance
with Rule 457(f)457 (f)(2) on the basis of the book value on November 30, 1998 of
the securitiesshares of common stock of Jay Financial Corporation to be exchanged forcancelled in
connection with the common
stock to be issued by the registrant.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 1 of 156 Pages
Exhibit Index is on Page 148
FIRST MERCHANTSJAY FINANCIAL CORPORATION
CROSS-REFERENCE SHEET
FOR
REGISTRATION STATEMENT ON FORM S-4 AND PROSPECTUS
Items of Form S-4 Headings in Prospectus
----------------- ----------------------
1. Forepart of Registration Forepart of Registration Statement;
Statement and Outside Front Outside Front Cover Page
Cover Page of Prospectus
2. Inside Front and Outside Inside Front and Outside Back Cover
Back Cover Pages of Pages of Prospectus
Prospectus
3. Risk Factors, Ratio of Summary; Summary of Selected
Earnings to Fixed Charges Financial Data; Comparative Per
and Other Information Share Data
4. Terms of the Transaction Summary; General Information;
Proposed Merger; Federal Income Tax
Consequences; Comparative Per Share
Data; Comparison of Common Stock
5. Pro Forma Financial Pro Forma Condensed Combined
Information Financial Information
6. Material Contacts with the Not Applicable
Company Being Acquired
7. Additional Information Not Applicable
Required for Reoffering by
Persons and Parties Deemed
to be Underwriters
8. Interests of Named Experts Legal Opinions; Experts
and Counsel
9. Disclosure of Commission Not Applicable
Position on Indemnification
for Securities Act
Liabilities
10. Information with Respect to Summary of Selected Financial Data;
S-3 Registrants Comparative Per Share Data; Pro
Forma Condensed Combined Financial
Information
11. Incorporation of Certain Incorporation of Certain Documents
Information by Reference by Reference
12. Information with Respect to Not Applicable
S-2 or S-3 Registrants
13. Incorporation of Certain Not Applicable
Information by Reference
14. Information with Respect to Not Applicable
Registrants Other Than S-3
or S-2 Registrants
15. Information with Respect to Not Applicable
S-3 Companies
Items of Form S-4 Headings in Prospectus
----------------- ----------------------
16. Information with Respect to Not Applicable
S-2 or S-3 Companies
17. Information with Respect to Summary of Selected Financial Data;
Companies Other Than S-3 or Description of Randolph County;
S-2 Companies Randolph County's Management's
Discussion & Analysis of Financial
Condition & Results of Operations;
Regulation and Supervision of First
Merchants, Randolph County and
Subsidiaries; Comparative Per Share
Data; Index to Financial Statements
18. Information if Proxies, General Information; Proposed
Consents or Authorizations Merger; Description of First
are to be Solicited Merchants; Description of Randolph
County
19. Information if Proxies, Not Applicable
Consents or Authorizations
are not to be Solicited or
in an Exchange Offer
RANDOLPH COUNTY BANCORP
122 West Washington Street
Winchester, Indiana 47394112 WEST MAIN STREET
P.O. BOX 1089
PORTLAND, INDIANA 47371
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD
__________, 1996
To the Shareholders of
Randolph County Bancorp_______________, 1999
Notice is hereby given that, pursuant to the call of the Board of
Directors, a Special Meeting of the Shareholders of Randolph County Bancorp
("Randolph County"),Jay Financial Corporation,
will be held on ________________ ___, 1999, at _______ ___, 1996, at ______ __.m.p.m. local time, at the
main office of The Randolph CountyFirst National Bank ("Bank")of Portland located at 122112 West WashingtonMain
Street, Winchester, Indiana.Portland, Indiana 47371.
The purposes of the Special Meeting are:
1. To consider and vote upon anthe transactions contemplated by the
Agreement of Reorganization and Merger dated January 17, 1996August 20, 1998, between First
Merchants Corporation and Randolph County,
pursuantJay Financial Corporation. Pursuant to which Randolph Countythe Agreement,
Jay Financial Corporation will be merged with and into First Merchants Corporation and
theThe First National Bank of Portland will become a wholly-owned subsidiary of
First Merchants Corporation, asCorporation. 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.
Only shareholdersHolders of Class A and Class B common stock of record at the close of
business on _______________________ ___, 19961999, will be entitled to notice of, and to vote
at, the Special Meeting and any adjournment thereof. Holders of Class A and
Class B common stock shall vote as one group and no distinction shall be drawn
between Class A and Class B shares.
Shareholders of Randolph CountyJay Financial Corporation are entitled to assert
dissenters' rights of appraisal in connection with the proposed merger under
Chapter 44 of the Indiana Business Corporation Law, a copy of which is attached
as Appendix B to the accompanying Proxy Statement-Prospectus.
_________ ___, 1996WHETHER 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
Max Gordon,Barry J. Hudson, Chairman YOUR VOTE IS IMPORTANT - PLEASE MAIL YOUR PROXY PROMPTLY.
THE AFFIRMATIVE VOTE OF HOLDERS OF AT LEAST A MAJORITY
OF THE OUTSTANDING SHARES OF COMMON STOCK OF
RANDOLPH COUNTY IS REQUIRED FOR APPROVAL
OF THE AGREEMENT OF REORGANIZATION AND MERGER.
IN ORDER THAT THERE MAY BE PROPER REPRESENTATION AT THE
MEETING, YOU ARE URGED TO COMPLETE, SIGN, DATE AND
RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED.
NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.of the Board
__________, 1999
Portland, Indiana
PROSPECTUS OF FIRST MERCHANTS CORPORATION FOR UP TO
1,098,837 SHARES OF COMMON STOCK
AND
PROXY STATEMENT OF RANDOLPH COUNTY BANCORP
COMMON STOCKJAY FINANCIAL CORPORATION
FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD __________, 1999
The Boards of Directors of First Merchants Corporation ("FIRST MERCHANTS")
and Jay Financial Corporation ("JAY FINANCIAL") have agreed to merge Jay
Financial with and into First Merchants. This Proxy Statement-Prospectus serves
as a Prospectus with respect to a maximum of 565,7051,098,837 shares of common stock, no par value, of First
Merchants Corporation ("First Merchants")common stock being offered to shareholders of Randolph County
Bancorp ("Randolph County")Jay Financial in
connection with the proposed merger ("Merger") of
Randolph County with and into First Merchants. It alsomerger. This Proxy Statement-Prospectus
constitutes the Proxy Statement of Randolph County to be usedJay Financial in connection with the Special
Meeting of Shareholders to be held on __________________________ ___, 1996,1999 for the
purpose of voting on the Merger.
On the effective date of the Merger, Randolph County will merge with andmerger.
If Jay Financial is merged into First Merchants, and each share of Randolph CountyJay
Financial common stock shall be converted into the right to receive twenty and 53/100 (20.53)13.41681
shares of First Merchants common stock. This exchange ratio is subject to
adjustment under the circumstances described in this Proxy Statement-Prospectus.
First Merchants will pay cash for any fractional share interests resulting from
the exchange ratio.
The Merger is subject to the approval ofmerger cannot be completed unless the shareholders of Randolph
County, receiptJay Financial
approve it. Jay Financial will hold a special meeting of required regulatory approvalsits 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 certain other conditions
set forthreturning
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 Jay Financial will be held on
____________ __, 1999 at ___ p.m. local time, at the main office of The First
National Bank of Portland located at 112 West Main Street, Portland, Indiana
47371.
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 Agreement of Reorganizationover-the-counter market and Merger (the "Agreement") dated
January 17, 1996,share prices are reported by and between First Merchants and Randolph County, a copy of
which is attached hereto as Appendix A. The Board of Directors of Randolph
County received the
written opinion of Professional Bank Services, Inc.,
investment bankers, dated _______ ___, 1996, thatNASDAQ National Market System under the terms of the Merger are
fair from a financial point of view to Randolph County shareholders.
--------------------------------------------------
THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BYsymbol FRME.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE COMMISSION PASSED UPON THE ACCURACYSECURITIES TO BE ISSUED PURSUANT
TO THIS PROXY STATEMENT-PROSPECTUS OR ADEQUACY OFDETERMINED IF THIS PROSPECTUS.PROXY
STATEMENT-PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------------------------------
The date of this Proxy Statement-Prospectus is _________ ___, 1996.PROXY STATEMENT-PROSPECTUS DATED ___________, 1999
AND FIRST MAILED TO SHAREHOLDERS ON _______________, 1999.
AVAILABLE INFORMATION
First Merchants is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Judiciary Plaza, Room 1024, Washington, D.C. 20549, and at the Commission's
regional offices located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and at Northwestern Atrium Center, Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661-2511. Copies of such material also can be
obtained at prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
First Merchants' common stock is quoted on the NASDAQ National Market System and
such documents may also be inspected at the offices of the National Association
of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
First Merchants has filed with the Commission a Registration Statement on
Form S-4 under the Securities Act of 1933, as amended, with respect to the
shares of First Merchants common stock to be issued in connection with the
Merger. This Proxy Statement-Prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Reference is made
to the Registration Statement, including the exhibits filed as a part thereof,
which can be inspected and copied at prescribed rates at the public reference
facilities maintained by the Commission at the addresses set forth above.
All information contained in this Proxy Statement-Prospectus with respect
to Randolph County and The Randolph County Bank ("Bank") has been supplied by
Randolph County and Bank, respectively, and all information contained in this
Proxy Statement-Prospectus with respect to First Merchants has been supplied by
First Merchants.
THIS PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTSIMPORTANT BUSINESS AND FINANCIAL
INFORMATION ABOUT FIRST MERCHANTS THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS
DOCUMENT. THE INFORMATION INCORPORATED BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (EXCLUDING
UNINCORPORATED EXHIBITS) AREIS AVAILABLE WITHOUT CHARGE
TO EACH PERSON (INCLUDING
ANY BENEFICIAL OWNER) TO WHOM THIS PROXY STATEMENT-PROSPECTUS IS DELIVEREDJAY FINANCIAL 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, (317) 747-1500. IN ORDER(765) 747-1530. TO ASSUREOBTAIN TIMELY
DELIVERY, OF SUCH DOCUMENTS, ANY
REQUESTSYOU SHOULD BE MADE BY __________________, 1996.
The following documents previously filed by First Merchants with the
Commission pursuant to the Exchange Act are incorporated herein by reference:
1. First Merchants' Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
All documents subsequently filed by First Merchants pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the date on which the
Special Meeting is held shall be deemed to be incorporated by reference into
this Proxy Statement-Prospectus and to be a part hereof from the date of filing
such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement-Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Proxy
Statement-Prospectus.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT-PROSPECTUS,
AND IF GIVEN OR MADE,REQUEST SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED. THIS PROXY STATEMENT-PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO PURCHASE THE SECURITIES
OFFERED BY THIS PROXY STATEMENT-PROSPECTUS, NOR THE SOLICITATION OF A PROXY, IN
ANY JURISDICTION TO ANY PERSON TO WHOM IT WOULD BE UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION OF AN OFFER OR PROXY SOLICITATION IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROXY STATEMENT-PROSPECTUS, NOR ANY DISTRIBUTION OF THE
SECURITIES COVERED HEREBY AT ANY TIME SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF FIRST MERCHANTS OR
RANDOLPH COUNTY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROXY
STATEMENT-PROSPECTUS.
__________, 1999.
TABLE OF CONTENTS
PAGE
----
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PAGE
SUMMARY OF SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . .
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSED MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Description of the Merger. . . . . . . . . . . . . . . . . . . . . . .
Background and Reasons for the Merger. . . . . . . . . . . . . . . . .
Opinion of Investment Banker . . . . . . . . . . . . . . . . . . . . .
Recommendation of the Board of Directors . . . . . . . . . . . . . . .
Exchange of Randolph County Common Stock . . . . . . . . . . . . . . .
Rights of Dissenting Shareholders. . . . . . . . . . . . . . . . . . .
Resale of First Merchants Common Stock by Randolph County Affiliates .
Conditions to Consummation . . . . . . . . . . . . . . . . . . . . . .
Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restrictions Affecting Randolph County . . . . . . . . . . . . . . . .
Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . . . .
Effective Date of the Merger . . . . . . . . . . . . . . . . . . . . .
Management After the Merger. . . . . . . . . . . . . . . . . . . . . .
FEDERAL INCOME TAX CONSEQUENCES. . . . . . . . . . . . . . . . . . . . .
COMPARATIVE PER SHARE DATA . . . . . . . . . . . . . . . . . . . . . . .
Nature of Trading Market . . . . . . . . . . . . . . . . . . . . . . .
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Existing and Pro Forma Per Share Information . . . . . . . . . . . . .
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION . . . . . . . . . . .
DESCRIPTION OF FIRST MERCHANTS . . . . . . . . . . . . . . . . . . . . .
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition Policy and Pending Transactions. . . . . . . . . . . . . .
Incorporation of Certain Documents by Reference. . . . . . . . . . . .
DESCRIPTION OF RANDOLPH COUNTY . . . . . . . . . . . . . . . . . . . . .
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management . . . .
Certain Relationships and Related Transactions . . . . . . . . . . . .
RANDOLPH COUNTY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . .
REGULATION AND SUPERVISION OF FIRST MERCHANTS, . . . . . . . . . . . . .
RANDOLPH COUNTY AND SUBSIDIARIES . . . . . . . . . . . . . . . . . . . .
Bank Holding Company Regulation. . . . . . . . . . . . . . . . . . . .
Capital Adequacy Guidelines for Bank Holding Companies . . . . . . . .
Bank Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank Capital Requirements. . . . . . . . . . . . . . . . . . . . . . .
Branches and Affiliates. . . . . . . . . . . . . . . . . . . . . . . .
PAGE
----
FDICIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposit Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . .
Recent Legislation . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Matters . . . . . . . . . . . . . . . . . . . . . . . . . .
COMPARISON OF COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . .
Authorized But Unissued Shares . . . . . . . . . . . . . . . . . . . .
Preemptive Rights. . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquidation Rights . . . . . . . . . . . . . . . . . . . . . . . . . .
Assessment and Redemption. . . . . . . . . . . . . . . . . . . . . . .
Anti-Takeover Provisions . . . . . . . . . . . . . . . . . . . . . . .
Director Liability . . . . . . . . . . . . . . . . . . . . . . . . . .
LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . F-1
APPENDICES
A. Agreement of Reorganization and Merger . . . . . . . . . . . . . . A-1
B. Indiana Business Corporation Law, Chapter 44
(Dissenters' Rights of Appraisal). . . . . . . . . . . . . . . . . B-1
C. Fairness Opinion of Professional Bank Services, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Shareholders Meeting. . . . . . . . . . . . . . . . . . . . . . 1
Record Date; Vote Required. . . . . . . . . . . . . . . . . . . . . 2
Reasons for the Merger. . . . . . . . . . . . . . . . . . . . . . . 2
Recommendation to Shareholders. . . . . . . . . . . . . . . . . . . 2
The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Exchange of Shares. . . . . . . . . . . . . . . . . . . . . . . . . 3
Opinion of Financial Adviser. . . . . . . . . . . . . . . . . . . . 3
What We Need to Do to Complete the Merger . . . . . . . . . . . . . 3
Termination of the Merger . . . . . . . . . . . . . . . . . . . . . 4
Waiver and Amendment. . . . . . . . . . . . . . . . . . . . . . . . 4
Accounting Treatment. . . . . . . . . . . . . . . . . . . . . . . . 4
Regulatory Approvals. . . . . . . . . . . . . . . . . . . . . . . . 4
Restrictions Placed on the Sale of First Merchants Stock Issued to
Certain Jay Financial Shareholders. . . . . . . . . . . . . . . 5
Comparative Rights of First Merchants Shareholders And Jay
Financial Shareholders. . . . . . . . . . . . . . . . . . . . . 5
Dissenters' Rights. . . . . . . . . . . . . . . . . . . . . . . . . 5
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . 5
Management and Operations After the Merger. . . . . . . . . . . . . 5
Interests of Directors and Officers in the Merger that are Different
From Your Interests . . . . . . . . . . . . . . . . . . . . . . 6
Pro Forma Comparative Per Share Data. . . . . . . . . . . . . . . . 6
SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . 8
SPECIAL MEETING (Jay Financial Shareholders) . . . . . . . . . . . . . . 15
General Information . . . . . . . . . . . . . . . . . . . . . . . . 15
Matters To Be Considered. . . . . . . . . . . . . . . . . . . . . . 15
Votes Required. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . 16
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(i)
MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Description of the Merger . . . . . . . . . . . . . . . . . . . . . 17
First Merchants' Reasons for the Merger . . . . . . . . . . . . . . 17
Jay Financial's Reasons for the Merger. . . . . . . . . . . . . . . 17
Opinion of Financial Advisor. . . . . . . . . . . . . . . . . . . . 19
Recommendation of the Board of Directors. . . . . . . . . . . . . . 23
Exchange of Jay Financial Common Stock. . . . . . . . . . . . . . . 23
Conversion Ratio Adjustment . . . . . . . . . . . . . . . . . . . . 24
Rights of Dissenting Shareholders . . . . . . . . . . . . . . . . . 24
Resale of First Merchants Common Stock by Jay Financial Affiliates. 26
Conditions to Consummation of the Merger. . . . . . . . . . . . . . 27
Termination; Waiver; Amendment. . . . . . . . . . . . . . . . . . . 27
Restrictions Affecting Jay Financial. . . . . . . . . . . . . . . . 28
Regulatory Approvals. . . . . . . . . . . . . . . . . . . . . . . . 29
Effective Date of the Merger. . . . . . . . . . . . . . . . . . . . 29
Management After the Merger . . . . . . . . . . . . . . . . . . . . 30
Interests of Certain Persons in the Merger. . . . . . . . . . . . . 30
Accounting Treatment. . . . . . . . . . . . . . . . . . . . . . . . 31
Registration Statement. . . . . . . . . . . . . . . . . . . . . . . 31
FEDERAL INCOME TAX CONSEQUENCES. . . . . . . . . . . . . . . . . . . . . 32
COMPARATIVE PER SHARE DATA . . . . . . . . . . . . . . . . . . . . . . . 34
Nature of Trading Market. . . . . . . . . . . . . . . . . . . . . . 34
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
DESCRIPTION OF FIRST MERCHANTS . . . . . . . . . . . . . . . . . . . . . 37
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Acquisition Policy and Pending Transactions . . . . . . . . . . . . 37
Incorporation of Certain Information by Reference . . . . . . . . . 38
DESCRIPTION OF JAY FINANCIAL . . . . . . . . . . . . . . . . . . . . . . 39
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Security Ownership of Certain Beneficial Owners and Management. . . 41
Certain Relationships and Related Transactions. . . . . . . . . . . 43
JAY FINANCIAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . 44
REGULATION AND SUPERVISION OF FIRST MERCHANTS,
JAY FINANCIAL AND SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . 67
Bank Holding Company Regulation . . . . . . . . . . . . . . . . . . 67
Capital Adequacy Guidelines for Bank Holding Companies. . . . . . . 67
Bank Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . 68
(ii)
Bank Capital Requirements . . . . . . . . . . . . . . . . . . . . . 69
FDICIA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Deposit Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 70
Brokered Deposits . . . . . . . . . . . . . . . . . . . . . . . . . 70
Interstate Banking And Branching. . . . . . . . . . . . . . . . . . 71
Additional Matters. . . . . . . . . . . . . . . . . . . . . . . . . 71
COMPARISON OF COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . 72
Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Authorized But Unissued Shares. . . . . . . . . . . . . . . . . . . 72
Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . 73
Dividend Rights . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Dissenters' Rights. . . . . . . . . . . . . . . . . . . . . . . . . 74
Liquidation Rights. . . . . . . . . . . . . . . . . . . . . . . . . 75
Assessment and Redemption . . . . . . . . . . . . . . . . . . . . . 75
Anti-Takeover Provisions. . . . . . . . . . . . . . . . . . . . . . 75
Director Liability. . . . . . . . . . . . . . . . . . . . . . . . . 77
LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
OTHER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
WHERE YOU CAN FIND ADDITIONAL INFORMATION. . . . . . . . . . . . . . . . 78
FORWARD LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . 80
INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . F-1
APPENDICES
A. Agreement of Reorganization and Merger. . . . . . . . . . . . . A-1
B. Indiana Business Corporation Law, Chapter 44
(Dissenters' Rights of Appraisal) . . . . . . . . . . . . . . . B-1
C. Fairness Opinion of Professional Bank Services, Inc.. . . . . . C-1
(iii)
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement-Prospectus and was prepared to assist shareholders in
their review of the Proxy Statement-Prospectus. This summary does not purport
to be complete and is qualified in all respects by reference to the full text of
this Proxy Statement-Prospectus and the appendices hereto.THIS BRIEF SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THE SHAREHOLDERS MEETING:
Date, Time and Place __________ ____, 1996, at _____ o'clock
__.m., local time, at the main office of The
Randolph County Bank ("Bank"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 78.
THE COMPANIES (PAGES 37 AND 39 ), 122 West
Washington
FIRST MERCHANTS CORPORATION
200 East Jackson Street
Winchester,Muncie, Indiana 47394.
Purpose of the Meeting To consider and vote upon the Agreement of
Reorganization and Merger (the "Agreement"),
dated January 17, 1996 by and between First
Merchants Corporation ("First Merchants") and
Randolph County Bancorp ("Randolph County"),
pursuant to which Randolph County will merge
(the "Merger") with and into First Merchants
and the Bank will become a wholly-owned
subsidiary of First Merchants. A copy of the
Agreement is attached to this Proxy Statement
Prospectus as Appendix A. See "NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS" and the
discussions under the captions "GENERAL
INFORMATION" and "PROPOSED MERGER."
Required Shareholder Vote Approval of the Agreement by the affirmative
vote, in person or by proxy, of the holders
of at least a majority of the outstanding
shares of Randolph County common stock is
required under Indiana law. Executive
officers and members of the Board of
Directors of Randolph County control in the
aggregate, directly and indirectly,
approximately 27.69% of the outstanding
shares of Randolph County common stock. Each
member of the Randolph County Board of
Directors has agreed to cause all shares of
Randolph County common stock beneficially
owned by him to be voted in favor of the
Merger. As of March 31, 1996, the members of
the Randolph County Board of Directors
beneficially owned 7,293 or approximately 26%
of the shares of Randolph County common stock
outstanding. See "GENERAL INFORMATION,"
"PROPOSED MERGER-- Conditions to
Consummation," "PROPOSED MERGER--
Recommendation of the Board of Directors,"
and "DESCRIPTION OF RANDOLPH COUNTY--Security
Ownership of Management."
Shares Outstanding and As of _______ ___, 1996, Randolph County had
Entitled to Vote 27,555 shares of common stock issued and
outstanding. Randolph County shareholders of
record at the close of business on ______
___, 1996 are entitled to notice of, and to
vote
i
at, the Special Meeting of Shareholders. See
"GENERAL INFORMATION."
Proxies Proxies are revocable at any time before they
are exercised. See "GENERAL INFORMATION."
THE PARTIES TO THE47305
(765) 747-1500
First Merchants is a multi-bank holding
TRANSACTION: company organized under the laws of the
State of Indiana and headquartered in Muncie, Indiana. First Merchants has threefive
banking subsidiaries, First Merchants Bank, National Association, ("First Merchants Bank"), First United
Bank, and Pendleton Banking Company.Company, The Union County National Bank of Liberty and
The Randolph County Bank. In addition, Pendleton Banking Company owns First
Merchants' principal executive offices
are located at 200 East Jackson Street, Box
792, Muncie, Indiana 47305 and its telephone
number is (317) 747-1500.Merchants Insurance Services, Inc. See "DESCRIPTION OF FIRST MERCHANTS."
First Merchants has also entered into a definitive agreement to acquire Union National Bancorp
and its wholly-owned subsidiary, The Union
County National Bank of Liberty.Anderson
Community Bank. See "DESCRIPTION OF FIRST MERCHANTS--Acquisition Policy and
Pending Affiliations.Transactions."
Randolph CountyJAY FINANCIAL CORPORATION
112 West Main Street
P.O. Box 1089
Portland, Indiana 47371
(219) 726-7158
Jay Financial is a one bank holding company organized under the laws of the
State of Indiana. The First National Bank of Portland is a wholly-owned
subsidiary of Randolph County. Randolph
County's principal executive offices are
located at 122 West Washington Street,
Winchester, Indiana 47394 and its telephone
number is (317) 584-2501.Jay Financial. See "DESCRIPTION OF RANDOLPH COUNTY.JAY FINANCIAL."
THE MERGER:
DescriptionSHAREHOLDERS MEETING (PAGE 15)
The Special Meeting of Shareholders of Jay Financial will be held on ________
__, 1999, at ____ p.m. local time, at The First National Bank of Portland, 112
West Main Street, Portland, Indiana 47371. At the Special Meeting, Jay
Financial shareholders will be asked:
1. to approve the merger of Jay Financial and First Merchants; and
2. to act on any other items that may be submitted to a vote at the
Special Meeting.
1
RECORD DATE; VOTE REQUIRED (PAGE 15)
You can vote at the Special Meeting of Shareholders if you owned either Class A
or Class B common stock of Jay Financial 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 Onshares of Jay Financial
common stock outstanding must vote in its favor. You can vote your shares by
attending the effectiveSpecial 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 Merger, Randolph
Merger Countymeeting either by sending in a
new proxy or by attending the meeting and voting in person.
Jay Financial's executive officers, directors and their affiliates control in
the aggregate, directly and indirectly, 58,592 shares or approximately 71% of
the shares of Jay Financial common stock outstanding. Barry J. Hudson, Chairman
of the Board of Jay Financial, has agreed to cause all shares of Jay Financial
common stock owned by him of record or beneficially to be voted in favor of the
merger. Mr. Hudson owns of record or beneficially 54,879 shares or approximately
67% of the shares of Jay Financial common stock outstanding. As a result,
approval of the merger is assured merely by the vote of all shares controlled by
Barry Hudson in favor of the merger.
REASONS FOR THE MERGER (PAGE 17)
FIRST MERCHANTS. First Merchants' Board of Directors considered a number of
financial and nonfinancial factors in making its decision to merge with Jay
Financial, including its respect for the ability and integrity of the Jay
Financial Board of Directors, management and staff. The Board believes that
expanding First Merchants' operations in the areas Jay Financial operates offers
long term strategic benefits to First Merchants.
JAY FINANCIAL. In considering the merger with First Merchants, the Board of
Directors of Jay Financial collected and evaluated a variety of economic,
financial and market information regarding First Merchants and its subsidiaries,
their respective businesses and First Merchants' reputation and future
prospects. In the opinion of the Board of Directors of Jay Financial, favorable
factors included First Merchants' strong earnings and stock performance, its
management, the compatibility of its markets to those of Jay Financial and the
attractiveness of First Merchants' offer from a financial perspective.
Consideration was further given to the potential benefits of ownership of First
Merchants common stock, which is traded in the over-the-counter market and
reported on the NASDAQ National Market System, as compared to Jay Financial
common stock, which has no established public trading market. In addition, the
Board of Directors considered the opinion of Professional Bank Services, Inc.,
the financial advisor to Jay Financial, indicating that the consideration to be
received by Jay Financial's shareholders under the Agreement is fair from a
financial perspective. The Board of Directors believes that the merger will
have a positive, long-term impact on The First National Bank of Portland's
customers and employees and the communities served by The First National Bank of
Portland.
RECOMMENDATION TO SHAREHOLDERS (PAGES 16 AND 23)
The Board of Directors of Jay Financial believes that the merger is in your best
interests and unanimously recommends that you vote "FOR" the proposal to approve
the merger.
2
THE MERGER (PAGE 17)
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.
Jay Financial will merge with and into First Merchants and the separate corporate
existence of Randolph Countythereafter Jay Financial will
cease.cease to exist. As a result of the Merger, themerger, The First National Bank of Portland
will become a wholly-owned subsidiary of First Merchants. First Merchants is accounting forWe hope to complete
this merger in the Merger
asfirst quarter of 1999.
EXCHANGE OF SHARES (PAGE 23)
As a poolingJay Financial shareholder, each of interests transaction. See
"PROPOSED MERGER--Descriptionyour shares of the Merger."
Exchange of Randolph County On the effective date of the Merger, each
Common Stock outstanding share of Randolph CountyJay Financial common
stock will be converted into the right to receive twenty and 53/100 (20.53)13.41681 shares of First
Merchants common stock. Cash will be paid for fractional shares of First
Merchants common stock resulting from the exchangeconversion ratio. See "PROPOSED MERGER--ExchangeThe exact number of
Randolph County Common Stock" and Appendix A
to this Proxy Statement-Prospectus.
ii
Recommendation of the The Randolph County Board of Directors has
Board of Directors unanimously approved the Agreement and
unanimously recommends that Randolph County
shareholders approve the Agreement. Each
member of the Randolph County Board of
Directors has agreed to cause all shares of
Randolph County common stock beneficially
owned by him to be voted in favor of the
Merger. As of March 31, 1996, the members of
the Randolph County Board of Directors
beneficially owned 7,293 or approximately 26%
of the shares of Randolph County common stock
outstanding. See "PROPOSED MERGER --
Recommendation of the Board of Directors."
Reasons for the The Merger will provide the customers and
Merger communities that the Bank serves with
enhanced loan opportunities, additional
resources and banking expertise and the
opportunity to receive new and expanded
financial products and services. Randolph
County shareholders who receive First Merchants common stock that you will receive is subject to
adjustment under the Agreement
may benefit from ownershipcertain circumstances described in a company whosedetail later in this
document.
There is currently no established trading market for shares of Jay Financial
common stock. Shares of First Merchants common stock isare traded in the over-the-counterover-
the-counter market and are reported on the NASDAQ National Market System, as there
presently exists no active tradingSystem. 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 13.41681, the market value of the consideration that Jay
Financial shareholders will receive in the merger for each share of Jay
Financial common stock would be $366.68 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 of Randolph County common stock. See
"PROPOSED MERGER--Background and Reasons forwill fluctuate prior to the Merger."
Opinion of Investmentmerger, while the conversion ratio is fixed.
OPINION OF FINANCIAL ADVISER (PAGE 19)
The Board of Directors of Randolph CountyJay Financial has
Banker received the written opinion of
Professional Bank Services, Inc., investment bankers, dated _________ ___, 1996,August 19, 1998, that the terms of the
Mergermerger are fair from a financial point of view to the shareholders of Randolph County.
See "PROPOSED MERGER--OpinionJay
Financial. The opinion was updated as of Investment
Banker"the date of this Proxy Statement-
Prospectus. We have attached a copy of the opinion and Appendix Cupdate to this Proxy
Statement-Prospectus.
Conditions to the Consummationdocument
as Appendix C.
WHAT WE NEED TO DO TO COMPLETE THE MERGER (PAGE 27)
The completion of the Merger is subjectmerger depends on a number of conditions being met. In
addition to Merger certainour compliance with the Agreement, these conditions which include among
others, theothers:
1. approval of the Agreement by the
affirmative voteJay Financial shareholders;
2. approval of the holders of at least
a majority of the outstanding shares of
Randolph County common stock, the receipt of
requiredmerger by certain regulatory approvals,agencies;
3
3. the receipt of a letter from First Merchants' independent public
accountants as to its ability to account for the Mergermerger as
a pooling"pooling of interests,interests;" and
4. the receipt of an opinion of counsel with respect to certain federal
income tax matters.
See "PROPOSED MERGER--
Conditions to Consummation."
Termination of theTERMINATION OF THE MERGER (PAGE 27)
The Agreement may be terminated before the Merger Mergermerger becomes effective upon the
occurrence of certain events, including among others,others:
1. a material misrepresentation in or a breach of the Agreement by First Merchants or Randolph
County,Agreement;
2. a material adverse change in the financial condition of First
Merchants or iii
Randolph CountyJay Financial since SeptemberJune 30, 1995,1998;
3. the failure of the Mergermerger to qualify as a tax-free reorganization,reorganization;
4. the failure of the Mergermerger to qualify for pooling"pooling of interestsinterests"
accounting treatment, ortreatment;
5. the Mergermerger not having been consummated by Septembercompleted before April 30, 1996. See "PROPOSED MERGER -- Termination."
Effective Date1999; or
6. the average daily closing price of the First Merchants and Randolph County
Merger anticipate that the Merger will be completed
during the ______________ quarter of 1996.
See "PROPOSED MERGER--Effective Date of the
Merger."
Management and Operations As a result of the Merger, Randolph County's
After the Merger corporate existence will cease. Accordingly,
the directors and officers of Randolph County
will not serve in such capacities after the
effective date of the Merger. The directors
and officers of the Bank serving on the
effective date of the Merger will continue in
their respective positions after consummation
of the Merger, subject to the Bank's Articles
of Incorporation and By-Laws. In accordance
with the Agreement and in connection with the
first annual meeting of the shareholders of
First Merchants after the Merger, First
Merchants shall cause all necessary corporate
action to be taken to cause the current
Chairman of the Board of the Bank, Michael D.
Wickersham, to be nominated for election as a
member of First Merchants' Board of Directors
for a three (3)-year term. See "PROPOSED
MERGER-- Management After the Merger" and
"DESCRIPTION OF RANDOLPH COUNTY--Management."
Federal Income Tax In general, no gain or loss, for federal
Consequences to Randolph income tax purposes, will be recognized by
County Shareholders Randolph County shareholders with respect
to First Merchants common stock received infor a
defined period before closing of the Merger. Gainmerger being less than $22.93 or
loss, for federal income
tax purposes, will be recognized, however,
with respect to cash payments made to
shareholders of Randolph County who perfect
their dissenters' rights or who receive cash
in lieu of fractional share interests
resulting from the exchange ratio.
Shareholders are urged to consult with their
tax advisors with respectgreater than $34.40, subject to the tax
consequencesright of the Mergernonterminating party
to them. See
"FEDERAL INCOME TAX CONSEQUENCES."
Dissenters' Rights Shareholderspreserve the Agreement by adjusting the conversion ratio.
WAIVER AND AMENDMENT (PAGE 27)
We can agree to amend the Agreement, and each of Randolph Countyus 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 Jay Financial
shareholders approve the merger if the amendment or waiver would have dissenters' rights of appraisal established
by Indiana law entitling them to receive cash
for their shares of Randolph County common
stock. In general, to exercise these rights,
a shareholder must (1) deliver to Randolph
County before the votematerial
adverse effect on the Agreement is
taken,Jay Financial shareholders.
ACCOUNTING TREATMENT (PAGE 31)
We expect the merger to qualify as a written notice"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 29)
The merger must be approved by the Board of Governors of the shareholder's
intent to demand payment in cash forFederal Reserve
System and the sharesIndiana Department of Randolph County common stock owned
by the shareholder, if the Merger is
iv
effectuated; (2) not vote in favorFinancial Institutions. We have filed all
of the Agreement;required applications or notices with the Federal Reserve Board and (3) follow all other
requirements ofthe
Indiana law. See "PROPOSED
MERGER--Rights of Dissenting Shareholders"
and Appendix B to this Proxy
Statement-Prospectus.
Resale of FirstDepartment.
4
RESTRICTIONS PLACED ON THE SALE OF FIRST MERCHANTS STOCK ISSUED TO
CERTAIN JAY FINANCIAL SHAREHOLDERS (PAGE 26)
Certain resale restrictions apply to the sale
Merchants Common Stock or transfer of the shares of First
Merchants common stock issued to directors, executive officers and 10%
shareholders of Randolph
CountyJay Financial in exchange for their shares of Randolph CountyJay Financial
common stock.
See "PROPOSED
MERGER--Resale of First Merchants Common
Stock by Randolph County Affiliates."
Comparative ShareholderCOMPARATIVE RIGHTS OF FIRST MERCHANTS SHAREHOLDERS
AND JAY FINANCIAL SHAREHOLDERS (PAGE 72)
The rights of shareholders of First Merchants Rights and Randolph CountyJay Financial differ in some
respects. Upon completion of the Merger, Randolph
Countymerger, Jay Financial 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.
See "COMPARISONDISSENTERS' RIGHTS (PAGE 24)
Indiana law permits you to dissent from the merger and have the fair value of
your stock appraised by a court and paid to you in cash. To do this, you must
follow certain procedures, including giving Jay Financial certain notices and
NOT VOTING YOUR SHARES IN FAVOR OF COMMON STOCK."
Trading MarketTHE 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 32)
In general, no gain or loss, for There is currently no established trading
Stock market forfederal income tax purposes, will be recognized
by you upon distribution to you of shares of Randolph CountyFirst Merchants common stock. SharesGain
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 30)
Jay Financial's corporate existence will cease after the merger. Accordingly,
directors and officers of Jay Financial will not serve in such capacities after
the effective date of the merger. The directors and officers of The First
National Bank of Portland will continue in their respective positions after the
merger, subject to certain restrictions.
5
INTERESTS OF DIRECTORS AND OFFICERS IN THE MERGER THAT ARE DIFFERENT
FROM YOUR INTERESTS (PAGE 30)
Some of Jay Financial's directors and officers have interests in the merger that
are different from, or in addition to, their interests as shareholders of Jay
Financial. These interests exist because of agreements that the Jay Financial
directors and officers have with First Merchants, including the following.
When we complete the merger, Barry J. Hudson, current Chairman of the Board of
Jay Financial, will be nominated for election as a director of First Merchants
to serve for three years following the merger. The officers and directors of
Jay Financial will remain officers and directors of The First National Bank of
Portland. The merger is conditioned on First Merchants offering change of
control agreements to Barry J. Hudson and James A. Meinerding, the current
Chairman of the Board and President, respectively, of Jay Financial.
The members of the Jay Financial 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 Jay Financial'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 we had been merged 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 13.41681. 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 Jay Financial included in this document and historical financial
information of First Merchants 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 78.
6
FIRST MERCHANTS AND JAY FINANCIAL HISTORICAL AND PRO FORMA PER SHARE DATA
NINE MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31
FIRST MERCHANTS -- HISTORICAL (1) SEPTEMBER 30, 1998 1997 1996 1995
------------------ ---- ---- -----
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
JAY FINANCIAL -- HISTORICAL
Net income $13.31 $17.84 $20.40 $16.53
Cash dividends 1.00 2.00 2.00 1.00
Book value at period end 179.11 166.39 149.89 131.49
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 $1.43 $1.35 $1.22
Diluted 1.12 1.42 1.34 1.22
Cash dividends .57 .69 .59 .51
Book value at period end 12.93 12.39 11.36 10.43
JAY FINANCIAL -- EQUIVALENT (2)
Net income
Basic $15.16 $19.19 $18.11 $16.37
Diluted 15.03 19.05 17.98 16.37
Cash dividends 7.65 9.26 7.92 6.84
Book value at period end 173.48 166.23 152.41 139.94
(1) Restated for 3-for-2 stock splits of First Merchants common stock are tradedeffected
in October 1995 and 1998.
(2) Computed by multiplying First Merchants pro forma per share information by
the indicated conversion ratio of 13.41681.
7
SELECTED FINANCIAL DATA
The following tables show summarized historical financial data for each of Jay
Financial 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 over-the-counter
marketfollowing tables is based on historical financial
information of Jay Financial included in this document and are reported on the NASDAQ
National Market System. The closing pricehistorical financial
information of First Merchants common stock as reported bythat it has presented in its prior Securities and
Exchange Commission filings. All of the NASDAQ National Market System was $26.00
per share on November 16, 1995, the business
day before the Merger was publicly announced,
and was $______ per share on _______ ___,
1996. See "COMPARATIVE PER SHARE DATA."
v
SUMMARY OF SELECTED FINANCIAL DATA - FIRST MERCHANTS
The following summary sets forth selected consolidated financial information regarding First Merchants. This informationwe
provide in the following tables should be read in conjunctionconnection with thethis
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 78. First Merchants' audited historical
financial statements were audited by Olive, LLP, independent certified public
accountants, and notes appearing elsewhere within
this Proxy Statement-Prospectus.
Twelve Months Ended December 31,
--------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----Jay Financial's audited historical financial statements were
audited by Crowe, Chizek & Co. LLP, independent certified public accountants.
8
FIRST MERCHANTS
FIVE YEAR SUMMARY OF SELECTED HISTORICAL FINANCIAL DATA
(Dollars in Thousands, Except Per Share Amounts)
RESULTS OF OPERATIONS
Net Interest Income
(Fully Taxable Equivalent Basis) $29,245 $28,282 $26,806 $26,400 $23,277
Net Interest Income 27,881 26,983 25,508 25,210 21,957
Provision for Loan Losses 640 782 1,014 1,357 1,401
Net Interest Income After
Provision for Loan Losses 27,241 26,201 24,494 23,853 20,556
Total Other Income 6,907 6,298 6,588 5,576 5,229
Total Other Expenses 18,842 18,434 18,214 17,603 15,792
Income Before Income Tax
Expense and Change in
Accounting Method 15,306 14,065 12,868 11,826 9,993
Net Income 9,858 9,158 8,699 7,785 6,759
PER SHARE DATA (1)
Income Before Change in
Accounting Methods $1.95 $1.80 $1.65 $1.53 $1.39
Net Income 1.95 1.80 1.70 1.53 1.39
Cash Dividends Paid .77 .71 .63 .57 .53
December
NINE MONTHS ENDED
SEPTEMBER 30 FOR THE YEARS ENDED DECEMBER 31
Book Value 15.92 14.07 13.53 12.53 11.57
December 31 Market Value
(Bid Price) 25.75 20.83 19.33 19.00 12.45
AVERAGE BALANCES
Total Assets $665,347 $634,868 $626,398 $603,067 $560,412
Total Loans 413,940 388,639 357,028 329,750 300,276
Total Deposits 538,539 514,029 517,826 501,526 441,302
Total Stockholders' Equity 76,001 70,104 66,887 61,246 54,473
YEAR-END BALANCES
Total Assets $707,859 $644,606 $626,113 $616,859 $596,573
Total Loans 419,730 401,605 376,872 350,308 323,382
Total Deposits 588,156 529,830 506,302 511,971 484,824
Total Stockholders' Equity 80,473 71,018 68,804 63,935 58,472
vi
Twelve Months Ended December 31,
----------------------------------------------------------------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
1992 1991---- ---- ---- ---- ---- ---- ----
FINANCIAL RATIOS
Return on Average Assets 1.48% 1.44% 1.39% 1.29% 1.21%
Return on Average
Stockholders' Equity 12.97 13.06 13.01 12.71 12.41
Average Earning Assets
to Average Total Assets 94.65 94.05 93.71 93.93 93.82
Allowance for Loan Losses
as % of Total Loans 1.18 1.24 1.27 1.24 1.20
Dividend Payout Ratio 39.49 39.44 37.06 37.25 38.13
Average Stockholders' Equity
to Average Assets 11.42 11.04 10.68 10.16 9.72
Tax Equivalent Yield on
Earning Assets 8.15 7.44 7.38 8.31 9.48
Cost of Supporting Liabilities 3.51 2.70 2.81 3.65 5.05
Net Interest Margin on Earning
Assets 4.64 4.74 4.57 4.66 4.43
- ----------------------------
(1) Per share amounts have been adjusted to give retroactive effect to First
Merchants' October, 1995 three-for-two stock split and January, 1993 three-
for-two stock split.
Amounts include First United Bank subsequent to its acquisition on July 31,
1991.
vii
SUMMARY OF SELECTED FINANCIAL DATA - RANDOLPH COUNTY
The following summary sets forth selected consolidated financial
information regarding Randolph County. This information should be read in
conjunction with the financial statements and notes appearing elsewhere within
this Proxy Statement-Prospectus.
Twelve Months Ended December 31,
---------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in Thousands, Except Per Share Amounts)
RESULTSSUMMARY 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
(Fully Taxable Equivalent Basis) $ 2,816 $ 2,809 $ 2,951 $ 2,555 $ 2,555interest 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 2,654 2,598 2,674 2,671 2,321interest income 30,915 29,530 39,750 37,147 35,097 33,938 32,525
Provision for Loan Losses 408 120 240 180 120
Net Interestloan 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 After
Provision for Loan Losses 2,246 2,478 2,434 2,491 2,201
Total Otherbefore 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 223 242 418 221 191
Total Other Expenses 1,535 1,614 1,404 1,308 1,230tax expense 6,161 5,557 7,561 6,959 6,261 5,660 5,250
------- ------- ------- ------- ------- ------- -------
Income Before Income Tax
Expense and Changebefore cumulative effect of
change in Accounting Method 934 1,105 1,448 1,404 1,162
Net Income 667 802 1,072 1,030 863accounting 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 Changebefore cumulative effect
of change in Accounting Methods $ 24.20 $ 29.10 $ 37.68 $ 37.36 $ 30.96
Net Income 24.20 29.10 38.89 37.36 30.96
Cash Dividends Paid 10.00 10.00 11.50 16.00 12.00
Decemberaccounting 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
9
NINE MONTHS ENDED
SEPTEMBER 30 FOR THE YEARS ENDED DECEMBER 31
Book Value 317.66 302.06 282.97 250.24 218.14
AVERAGE BALANCES
Total Assets $72,606 $78,771 $76,379 $70,584 $67,356
Total Loans 43,950 42,703 37,370 34,337 33,930
Total Deposits 63,331 69,206 68,406 63,481 61,021
Total Stockholders' Equity 8,642 8,178 7,402 6,494 5,647
YEAR-END BALANCES
Total Assets $73,219 $78,432 $80,626 $77,053 $70,311
Total Loans 43,494 43,778 40,351 35,351 33,345
Total Deposits 63,441 68,781 71,544 68,475 62,845
Total Stockholders' Equity 8,753 8,327 7,801 6,898 6,026
viii
Twelve Months Ended December 31,
---------------------------------------------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
1992 1991---- ---- ---- ---- ---- ---- ----
FINANCIAL
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 .92% 1.02% 1.40% 1.46% 1.28%average assets 1.47% 1.44% 1.45% 1.41% 1.35% 1.33% 1.34%
Return on Average
Stockholders' Equity 7.72 9.81 14.48 15.86 15.28
Average Earning Assets
to Averageaverage equity 12.23 12.29 12.28 12.16 12.17 12.42 12.89
(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.
10
JAY FINANCIAL
FIVE YEAR SUMMARY OF SELECTED HISTORICAL FINANCIAL DATA
(Dollars in Thousands, Except Per Share Amounts)
NINE MONTHS ENDED
SEPTEMBER 30 FOR THE YEARS ENDED DECEMBER 31
--------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
SUMMARY OF OPERATIONS
Interest income - tax equivalent (1) $6,519 $6,364 $8,565 $8,215 $7,379 $6,481 $6,548
Interest expense 2,904 2,774 3,754 3,525 3,159 2,704 2,855
------------------------------------------------------------------------------
Net interest income - tax equivalent (1) 3,615 3,590 4,811 4,690 4,220 3,777 3,693
Tax equivalent adjustment (1) (97) (143) (187) (211) (239) (275) (258)
------------------------------------------------------------------------------
Net interest income 3,518 3,447 4,624 4,479 3,981 3,502 3,435
Provision for loan losses (180) (180) (240) (281) (155) (139) (139)
Noninterest income 582 523 689 846 596 523 583
Noninterest expense 2,241 2,133 2,844 2,483 2,423 2,258 2,134
------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 1,679 1,657 2,229 2,561 1,999 1,628 1,745
Income tax expense 589 573 768 890 645 476 553
------------------------------------------------------------------------------
Income before cumulative effect of change in
accounting principle 1,090 1,084 1,461 1,671 1,354 1,152 1,192
Cumulative effect of change in
accounting principle - - - - - - 53
------------------------------------------------------------------------------
NET INCOME $1,090 $1,084 $1,461 $1,671 $1,354 $1,152 $1,245
------- ------- ------ ------ ------ ------ ------
------- ------- ------ ------ ------ ------ ------
11
NINE MONTHS ENDED
SEPTEMBER 30 FOR THE YEARS ENDED DECEMBER 31
--------------------- ------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
PER SHARE DATA (2)
Income before cumulative effect of change in
accounting principle $13.31 $13.24 $17.84 $20.40 $16.53 $14.07 $14.56
Net income 13.31 13.24 17.84 20.40 16.53 14.07 15.20
Cash dividends 1.00 1.00 2.00 2.00 1.00 0.95 0.95
BALANCES END OF PERIOD
Total Assets 94.39 94.73 95.74 95.54 96.19
Allowance for Loan Losses
as % of$108,626 $103,570 $104,977 $101,679 $92,492 $87,391 $84,907
Total Loans 1.36 1.12 1.40 1.08 .99
Dividend Payout Ratio 41.32 34.37 15.86 14.28 12.87
Average Stockholders' Equity
to Average Assets 11.90 10.38 9.69 9.20 8.38
Tax Equivalent Yield88,242 84,484 84,908 77,502 64,660 55,565 49,545
Total Deposits 88,872 83,685 83,602 87,151 80,829 76,213 74,739
Noninterest-bearing deposits 5,205 4,508 5,441 7,040 6,660 6,555 5,532
Interest-bearing deposits 83,667 79,177 78,161 80,111 74,169 69,658 69,207
Long-term borrowings 3,800 3,800 4,800 1,000 0 0 568
Shareholders' equity 14,669 13,318 13,627 12,276 10,769 8,912 8,449
SELECTED RATIOS
Return on Earning Assets 7.75 6.94 7.50 8.67 9.88
Cost of Supporting Liabilities 3.64 3.18 3.46 4.39 5.93
Net Interest Marginaverage assets 1.37% 1.42% 1.42% 1.70% 1.52% 1.37% 1.51%
Return on Earning
Assets 4.11 3.76 4.04 4.28 3.95average equity 10.25 11.29 11.25 14.44 13.70 13.34 15.82
- ---------------------------
(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
consolidated financial statements.
(2) Per share amounts havedata has been retroactively adjusted to give retroactive effect to Randolph
County's November, 1993 three-for-onereflect stock split.
ixdividends.
12
PROSPECTUS OF PROXY STATEMENT OF
FIRST MERCHANTS
CORPORATION RANDOLPH COUNTY BANCORP
------------------------------------------------------------PRO FORMA SUMMARY OF SELECTED FINANCIAL DATA
(Dollars In Thousands, Except Per Share Amounts)
NINE MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31
SEPTEMBER 30 -------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
SUMMARY OF OPERATIONS
Interest income -- tax equivalent $67,424 $86,429 $79,822 $75,779
Interest expense 30,992 39,479 35,874 34,510
------- ------- ------- -------
Net interest income -- tax equivalent 36,432 46,950 43,948 41,269
Tax equivalent adjustment 1,999 2,576 2,322 2,191
------- ------- ------- -------
Net interest income 34,433 44,374 41,626 39,078
Provision for loan losses 1,448 1,537 1,534 1,543
Noninterest income 8,967 9,918 9,188 8,188
Noninterest expense 22,599 28,592 26,618 25,415
------- ------- ------- -------
Income before income tax 19,353 24,163 22,662 20,308
Income tax expense 6,750 8,329 7,849 6,906
------- ------- ------- -------
Net income $12,603 $15,834 $14,813 $13,402
------- ------- ------- -------
------- ------- ------- -------
PER SHARE DATA (1)
Net income
Basic $1.13 $1.43 $1.35 $1.22
Diluted 1.12 1.42 1.34 1.22
Cash dividends (2) .57 .69 .59 .51
BALANCES END OF PERIOD
Total assets $1,222,505 $1,125,113 $1,069,672 $1,034,648
Total loans 821,901 788,692 709,202 617,734
Total deposits 949,460 927,414 881,602 864,765
Securities sold under repurchase
agreements 78,302 15,398 20,054 28,887
Federal home loan bank advances 33,504 25,500 10,150 9,000
13
NINE MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31
SEPTEMBER 30 -------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
Stockholders' equity $144,496 $135,596 $124,963 $115,736
SELECTED RATIOS
Return on average assets 1.46% 1.44% 1.44% 1.37%
Return on average equity 12.03 12.18 12.38 12.30
(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.
14
SPECIAL MEETING
SPECIAL MEETING OF SHAREHOLDERS OF
RANDOLPH COUNTY BANCORP
TO BE HELD ON ____________, 1996
------------------------------------------------------------JAY FINANCIAL CORPORATION
GENERAL INFORMATION
This Proxy Statement-Prospectus is furnished to the shareholders of Randolph County BancorpJay
Financial Corporation ("Randolph County"JAY FINANCIAL") in connection with the solicitation by
the Board of Directors of Randolph CountyJay Financial of proxies for use at the Special
Meeting of Shareholders to be held on _________________, _____________ ___,
1996,___________________, 1999, at _______________
o'clock __.m.p.m., local time, at the main office of The Randolph
CountyFirst National Bank (the "Bank"), 122of
Portland, 112 West WashingtonMain Street, Winchester,Portland, Indiana 47394.47371. This Proxy Statement-ProspectusStatement-
Prospectus is first being mailed to Randolph CountyJay Financial shareholders on
________________________________ ___, 1996.1999.
MATTERS TO BE CONSIDERED
The purpose of the Special Meeting is to consider and vote upon an
Agreement of Reorganization and Merger (the "Agreement""AGREEMENT"), dated January 17,
1996,August 20, 1998,
by and between First Merchants Corporation ("First Merchants"FIRST MERCHANTS") and Randolph County.Jay
Financial. Pursuant to the Agreement, Randolph CountyJay Financial will merge with and into
First Merchants (the "Merger") and theThe First National Bank of Portland will become a wholly-ownedwholly-
owned subsidiary of First Merchants.
VOTES REQUIRED
Approval of the Agreement byrequires the affirmative vote of the holders of at
least a majority of
the outstanding shares of Randolph CountyJay Financial Class A and Class B common stock is
required.stock. Only
holders of record of Randolph CountyJay Financial common stock at the close of business on
______________________ ___, 1996, the record date,1999, are entitled to notice of, and to vote at, the Special
Meeting. Randolph CountyJay Financial had 27,55581,900 shares of no
par value common stock issued and outstanding
on the record date, which shares were held of record by approximately 7174
shareholders. For each matter to be
voted on at the Special Meeting, eachEach share of Randolph CountyJay Financial common stock is entitled to one vote.
The cost of soliciting proxies will be borne by Randolph County. In
addition to useJay Financial's executive officers, directors and their affiliates control
in the aggregate, directly and indirectly, 58,592 shares or approximately 71% of
the mails, proxies mayshares of Jay Financial common stock outstanding. Barry J. Hudson, Chairman
of the Board of Jay Financial, has agreed to cause all shares of Jay Financial
common stock owned by him of record or beneficially to be solicited personallyvoted in favor of the
merger. Mr. Hudson owns of record or beneficially 54,879 shares or approximately
67% of the shares of Jay Financial common stock outstanding. As a result,
approval of the merger is assured merely by telephone or telegraphthe vote of all shares controlled by
directors, officers, and certain employeesBarry Hudson in favor of Randolph
County, who will not be specially compensated for such soliciting.the merger.
PROXIES
The shares represented by proxies properly signed and returned will be
voted at the Special Meeting as instructed by the shareholders giving the
proxies.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 in the proxy with respect to any other matter which may properly come before
the Special Meeting. See "PROPOSED MERGER--Rights of Dissenting
Shareholders." Any shareholder giving a proxy has the right to
15
revoke it at
any time 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 Randolph County;Jay
Financial; by written notice sent to the Secretary of Randolph County
BancorpJay Financial at 122112 West
WashingtonMain Street, Winchester,Portland, Indiana 47394;47371; or by personal oral or written request at
the Special Meeting. To be effective, any revocation must be received before
the proxy is exercised.
PROPOSED MERGER
The following summary of certain aspects of the Agreement does not purport
to be a complete description of the termsBecause approval of the Agreement and is qualifiedthe merger of Jay Financial into
First Merchants requires the affirmative vote of a majority of the outstanding
shares of Jay Financial common stock, abstentions and broker non-votes will have
the same effect as voting against approval of the Agreement. Accordingly, the
Jay Financial Board urges the Jay Financial shareholders to complete, date and
sign the accompanying proxy and return it promptly in its entiretythe enclosed postage-paid
envelope.
SOLICITATION OF PROXIES
The cost of soliciting proxies will be borne by referenceJay Financial. In
addition to use of the mails, proxies may be solicited personally or by
telephone or telegraph by directors, officers and certain employees of Jay
Financial, who will not be specially compensated for such soliciting. In
soliciting proxies, the directors, officers and employees of Jay Financial
have no authority to make any representations and warranties about the merger
or the Agreement in addition to or contrary to the Agreement, which is attached toprovisions stated in this
Proxy Statement-ProspectusStatement-Prospectus. No statement made by a director, officer or
employee of Jay Financial regarding the merger or the Agreement should be
relied upon except as Appendix A and is incorporated intoexpressly stated in this Proxy Statement-Prospectus by reference.Statement-Prospectus.
RECOMMENDATIONS
The Jay Financial Board has unanimously approved the Agreement and the
transactions contemplated thereby. The Board believes that the merger is in
the best interests of Jay Financial and its shareholders. The Board
unanimously recommends that the Jay Financial shareholders vote "FOR" the
Agreement and the transactions contemplated thereby. See "MERGER - Jay
Financial's Reasons for the Merger - Recommendation of the Board of
Directors."
16
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, Randolph CountyJay Financial will merge with and into
First Merchants and the separate corporate existence of Randolph CountyJay Financial will
cease. As a result, theThe First National Bank of Portland (the "BANK") will
become a wholly-owned subsidiary of First Merchants. It is the present
intention of First Merchants to continue to operate the Bank as a subsidiary
after the effective date of the Merger. The
Merger will be accounted for as a pooling of interests transaction.
As of December 31, 1995, Randolph County had consolidated assets of
approximately $73.2 million, consolidated deposits of approximately $63.4
million, consolidated shareholders' equity of approximately $8.8 million and
consolidated net income for the year then ended of approximately $667,000.
Based on the pro forma financial information included elsewhere in this Proxy
Statement-Prospectus and assuming that the Merger had been consummated on
December 31, 1995, Randolph County represented as of such date 9.4% of the
consolidated assets of First Merchants, 9.7% of consolidated deposits, 9.8%
of consolidated shareholders' equity and, for the year then ended, 6.3% of
consolidated net income. See "PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION."
BACKGROUND ANDmerger.
FIRST MERCHANTS' REASONS FOR THE MERGER
In recent years, there has been,adopting the Agreement and there continues to be, substantial
consolidation in the United States banking and financial services industry.
This trend ismerger, the First Merchants Board
considered a number of concern to smaller institutions like Randolph County because
larger entities that emerge from consolidations may acquire substantial
competitive advantages. Additionally, developments and deregulation in the
financial services sectorfactors concerning First Merchants' benefits of the
economy have ledmerger. Without assigning any relative or specific weights to increased competitionthe factors, the
First Merchants Board considered the following material factors:
1. First Merchants' respect for commercial banks.
In response to these competitive factorsthe ability and after evaluationintegrity of financial,
economic, legal, and market considerations, the Jay
Financial Board of Directors, of Randolph
County concludedmanagement, and staff, and their
affiliates and First Merchants' belief that an affiliation with a larger, more diversified financial
organization would beexpanding its
operations in the best interestareas served by Jay Financial offers important
long range strategic benefits to First Merchants;
2. a review of Randolph County(i) the business, operations, earnings, and
its
shareholders, employeesfinancial condition including the capital levels and customers, as well asasset
quality, of Jay Financial on a historical, prospective, and pro
forma basis in comparison to other financial institutions in the
communities thatarea, (ii) the Bank
serves. Indemographic, economic, and financial
characteristics of the opinionmarket in which Jay Financial 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 Jay Financial; 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.
JAY FINANCIAL'S REASONS FOR THE MERGER
Among other items considered by the Jay Financial Board of Directors in
evaluating whether to remain independent or whether to pursue a merger with
First Merchants were the following factors:
17
1. the prospects of Randolph County, such an
affiliation will provideJay Financial and First Merchants, as separate
institutions and as combined;
2. the Bank with enhanced lending capabilities, additional
resources and management expertise,compatibility of First Merchants' subsidiary banks' markets
to that of Jay Financial's market;
3. the potentialanticipated tax-free nature of the merger to achieve certain economiesthe shareholders
of scale andJay Financial receiving solely First Merchants common stock in
exchange for their shares of Jay Financial common stock;
4. the opportunity to develop new or expanded products and services.
Further, Randolph County shareholders will benefit frompossibility of increased liquidity through ownership of a larger
financial institution and from ownership ofFirst
Merchants common stock whichas compared to Jay Financial common stock
because First Merchants common stock is traded in the
over-the-counter market and isshare prices are reported on the
NASDAQ National Market System.
The termsSystem;
5. the timeliness of a merger given the state of the Agreement were agreed uponeconomy and the
stock markets as well as anticipated trends in arm's length negotiations
conducted betweenboth;
6. regulatory requirements;
7. relevant price information involving recent comparable bank
acquisitions which occurred in the respective managements of Randolph County andMidwest United States;
8. First Merchants. The factors considered byMerchants' intention to operate the Board of Directors of Randolph County
prior to entering into the Agreement included, but were not limited to, the
amount and form of consideration offered by First Merchants for the shares of
Randolph County common stock; the financial condition, recent results of
operations and prospects of Randolph County and First Merchants; the strength of
the managementBank as a wholly-owned
subsidiary of First Merchants;
the historic prices for shares9. an analysis of Randolph
County andalternatives to Jay Financial merging with First
Merchants, common stock;including other potential acquirors; and
the future prospects of Randolph
County in light of increased deregulation and competition within the financial
services industry. Further, the Board of Directors of Randolph County relied
upon10. the opinion of Professional Bank Services, Inc., investment bankers, indicating that
the Mergerconsideration to be received by Jay Financial's shareholders
under the Agreement is fair from a financial pointperspective.
The Board of viewDirectors of Jay Financial also considered the impact of the
merger on Jay Financial's and the Bank's customers and employees and the
communities served by the Bank. First Merchants' historical practice of
retaining employees of acquired institutions with competitive salary and benefit
programs was considered, as was the opportunity for training, education, growth
and advancement of the Bank's employees within First Merchants or one of its
subsidiaries. The Board of Directors of Jay Financial examined First Merchants'
continuing commitment to the shareholders of
Randolph County. See "PROPOSED MERGER--Opinion of
2
Investment Banker" and Appendix C. Allcommunities served by the institutions previously
acquired by First Merchants. Further from the standpoint of the foregoing factors were integral
components in the determinationBank's
customers, it was anticipated that more products and services would become
available because of the consideration to be exchanged for each
share of Randolph County common stock.First Merchants' greater resources.
Based upon the foregoing reasons,factors, the Board of Directors of Randolph CountyJay Financial
concluded that at this time, it iswas advantageous for Randolph County to affiliatemerge with First Merchants. The
Boardimportance of Directors, in approving and
recommending that shareholders approve the Agreement, believes that the Merger
is in the best interest of Randolph County and its shareholders, employees and
customers and the communities which the Bank serves.various factors relative to one another cannot be precisely
determined or measured.
18
OPINION OF INVESTMENT BANKERFINANCIAL ADVISOR
Professional Bank Services, Inc. ("PBS") was engaged by Randolph CountyJay Financial to
advise the Randolph CountyJay Financial's Board of Directors as to the fairness of the
consideration, from a financial perspective, to be paid by First Merchants to
Randolph County'sthe Jay Financial shareholders as set forth in the Agreement.
PBS is a bank consulting firm with offices in Louisville, Chicago,
Nashville Indianapolis,and Washington, D.C., and Ocala, Florida. 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 Randolph CountyJay Financial
or First Merchants. PBS was selected to advise the Randolph CountyJay Financial's Board of
Directors based upon its familiarity with Indiana financial institutions and
its
knowledge of the banking industry as a whole.
Following Randolph County's selection of PBS, First Merchants retained PBS
to provide consulting services with respect to the section of the application
filed by First Merchants with the Board of Governors of the Federal Reserve
System relating to competition. PBS will be compensated for its services on an
hourly rate basis. PBS's relationship with Randolph County was not a
consideration in First Merchants' selection of PBS. Except as described in this
section, neither First Merchants nor Randolph County have had any material or
compensable relationship with PBS, its affiliates, and/or unaffiliated
representatives during the past two years.
PBS performed certain analyses described belowherein and discussedpresented the range of
values for Randolph CountyJay Financial resulting from such analyses withto the Board of Directors
of Randolph CountyJay Financial in connection with its advice as to the fairness of the
consideration to be paid by First Merchants.
A Fairness Opinion of PBS was delivered to the Board of Directors of Randolph CountyJay
Financial on ____________, 1996August 19, 1998, at a regular meeting of the Board of Directors.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, isand the update are
attached as Appendix C to this Proxy Statement-Prospectus and should be read in
its entirety.
In arriving at its Fairness Opinion, PBS reviewed certain publicly
available business and financial information relating to Randolph CountyJay Financial and First
Merchants. PBS considered certain financial and stock market data of Randolph CountyJay
Financial and First Merchants, compared that data with similar data for certain
other publicly-held bank holding companies which own Indiana financial
institutions, and considered the financial terms of
certain other comparable Indiana 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 Randolph CountyJay Financial or First Merchants. PBS
took into consideration the results of PBS' wholly owned subsidiary's,
Investment Bank Services, Inc. ("IBS"), solicitation of indications of interest
from other financial institutions concerning their interest in a possible
affiliation with Jay Financial. PBS reviewed the correspondence and 3
information
regarding thereceived from interested financial institutions who had also expressed an
interest in acquiring Randolph County.that were contacted. PBS
reviewed all offers received by Randolph County.Jay Financial.
As part of preparing thethis Fairness Opinion, PBS performed a due diligence
review of First Merchants and its affiliate banks.on August 19, 1998. As part of the due diligence, review, PBS
reviewed the following items: minutes of the meetings of the Board of Directors
meetings beginning January 1,
1994 through March 20, 1996;of First Merchants for 1997 and year to date 1998; regulatory reports filed with the Securitiesof
examination of First Merchants and Exchange
CommissionFirst Merchants Bank, National Association;
December 31, 1995, 1996 and 1997 audited annual reports and
19
supplemental management letters issued by First Merchants on Forms 10-KMerchants' independent external
auditors; the June 30, 1998 Consolidated Reports of Condition and 10-QIncome for
each of First Merchants' subsidiary banks; the years ending
DecemberConsolidated Financial
Statements for Bank Holding Companies (FR Y-9C), the Bank Holding Company
Performance Report for March 31, 1994, 1995 and 1996 to date; report of independent auditors for1998; various asset quality related reports;
the years ending December 31, 1994 and 1995; management letters from independent
auditors for 1994 and management's responses thereto; Uniform Bank Performance
Reports; investment security holdings; listing of pending litigation provided by
independent counsel; analysis and calculation of themost recent Allowance for Loan and Lease Losses as of December 31, 1995; and internally identified special assets
and related reports.
PBS also interviewed senior management ofLoss analysis reports for First
Merchants regarding
operations, performance and the future prospects of First Merchants. PBS
compared the historical common stock market of financial institutions
headquartered in Indiana to First Merchants.each affiliate bank; and independent internal audit reports.
PBS reviewed and analyzed the historical performance of Randolph CountyJay Financial and
Jay Financial's wholly-owned subsidiary, the Bank, contained in Audited Financial Statementsin: audited Annual
Reports and financial statements dated December 31, 19941996 and 1995;
unaudited internal financial statements1997 of Randolph County dated September 30,
1995;Jay
Financial; December 31, 19951997, March 31, 1998 and June 30, 19951998 Consolidated
Reports of Condition and Income filed by the Bank with the Federal Deposit
Insurance Corporation by the Bank;Corporation; December 31, 1994, June 30, 19951997 and September 30, 1995March 31, 1998 Uniform Bank
Performance ReportReports of the Bank; historical common stock trading activity of Randolph County;Jay
Financial; 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 purposepurposes of the Fairness Opinion.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 various
written
and oral presentationspresentation to Randolph County'sJay Financial's Board of Directors, PBS performed a
variety of financial analyses, including those summarized below.herein. The summary set forth below
does not purport to be a complete description of the analyses performed by PBS
in this regard. The preparation of a fairness opinionFairness 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 Randolph
County'sJay Financial's or 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
171 Indianaall bank acquisition transactions in the State of Indiana since 1990. There were
64 bank acquisition transactions in Indiana announced since 1985.1990 for which
detailed financial information was available. The purpose of the analysis was to
obtain an evaluation range based on these Indiana bank acquisition transactions.
MultiplesMedian multiples of earnings and book valuesvalue implied by the comparable
transactions were utilized in obtaining a range for the acquisition value of Randolph County.Jay
Financial. In addition to reviewing recent Indiana bank transactions, PBS
performed separate comparable analyses for acquisitions of Indiana banks which, like Randolph
4
County,Jay
Financial, had an equity-to-asset ratio greater than 11.0%between 10.00% and 13.50%, were locatedhad total
assets between $75.0 - $200.0 million, had a return on average equity ("ROAE")
between 11.00% - 13.50% and bank transactions effected in
non-
metropolitan areas and those with deposits between $25.0 and $75.0 million.
Values20
Indiana since January 1, 1996. In addition, median values for the 17164 Indiana bank
acquisitions expressed as multiples of both book value and earnings were 1.451.70
and 14.42,17.87, respectively. The median multiples of book value and earnings for
acquisitions of Indiana banks with equity-to-
asset ratios greater than 11.0%which, like Jay Financial, had an equity-to-asset
ratio between 10.00% and 13.50% were 1.411.71 and 15.52, respectively. For
acquisitions of Indiana banks located in non-metropolitan areas, the median
multiples were 1.40 and 13.89,20.55, respectively. For
acquisitions of Indiana banks with depositsassets between $25.0 and $75.0 - $200.0 million, the
median multiples were 1.421.85 and 13.12,19.89. For Indiana acquisitions of banks with a
ROAE between 11.00% - 13.50%, the median multiples of book value and earnings
were 1.96 and 16.61, respectively. AssumingThe median multiples of book value and
earnings for acquisitions of Indiana banks since January 1, 1996, were 2.21 and
24.20, respectively.
The Agreement provides that, in the proposed transaction, Jay Financial
shareholders will receive an aggregate of 732,558 shares of First Merchants'Merchants
common stock (or 1,098,837 shares of First Merchants common stock after taking
into account a 3-for-2 stock split of First Merchants common stock effected in
October, 1998) for all 81,900 shares of Jay Financial common stock outstanding,
as further defined in the Agreement. On August 17, 1998, the average of the
bid/ask price is $27.25for First Merchants common stock on the National Association of
Securities Dealers Automated Quotation System was $40.375 per share. Such price
does not reflect the effect of the 3-for-2 stock split of First Merchants common
stock effected in October, 1998. Using this average price of $40.375 per share
of First Merchants common stock, the proposed consideration to be received
represents an aggregate value of $29,577,029 or $361.14 per share of Jay
Financial common stock. The $361.14 per share of Jay Financial common stock
represents a multiple of Jay Financial's December 31, 1997 book value and earnings continue,a
multiple of Jay Financial's 1997 net income of 2.17X and 20.24X, 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 should equal $559.44 per Randolph
County common share. This representsranked
in the 78th percentile as a multiple of book value and in the 62nd percentile
as a multiple of earningsearnings. Compared to Indiana bank transactions where the
acquired institution had an equity-to-asset ratio between 10.00% and 13.50%, the
acquisition value ranked in the 78th percentile as a multiple of 1.76book value and
23.11, respectively.the 48th percentile as a multiple of earnings. For Indiana bank acquisitions
where the acquired institution had between $75.0 - $200.0 million in assets, the
acquisition value ranked in the 75th percentile as a multiple of book value and
the 52nd percentile as a multiple of earnings. For Indiana bank transactions
where the acquired institution had a ROAE between 11.00% and 13.50%, the
acquisition value ranked in the 60th percentile as a multiple of book value and
the 70th percentile as a multiple of earnings. For Indiana bank transactions
effected since January 1, 1996, the acquisition value ranked in the 49th
percentile as a multiple of book value and in the 23rd percentile as a multiple
of earnings.
ADJUSTED NET ASSET VALUE ANALYSIS: PBS reviewed Randolph County'sJay Financial's balance
sheet data to determine the amount of material adjustments required to the
stockholder'sstockholders' equity of Randolph CountyJay Financial based on differences between the market
value of Randolph County'sJay Financial's assets and their value reflected on Randolph County'sJay Financial's
financial statements. PBS determined that one adjustmenttwo adjustments were warranted. Equity
was warranted.increased $15,000 to reflect the after tax appreciation in Jay Financial's
held to maturity securities portfolio. PBS also reflected a value of the non-interestnon-
interest bearing demand deposits of approximately $3,212,000.$1,266,000. The aggregate
adjusted net asset value of Jay Financial was determined to be $434.22$14,908,000 or
$182.03 per share of Randolph County'sJay Financial common stock.
21
DISCOUNTED EARNINGS ANALYSIS: A dividend discount analysis was performed by
PBS pursuant to which a range of stand-alone values of Randolph CountyJay Financial was determined by
adding (i) the present value of estimated future dividend streams that Randolph CountyJay
Financial could generate over a five-year period beginning in 1996
and ending in 2000, and (ii) the present value of
the "terminal value" of Randolph County's common equityJay Financial's earnings at the end of 2000.the fifth year.
The "terminal value" of Randolph County's common equityJay Financial's earnings at the end of the five-year
period was determined by applying a multiple of 1.4517.87 times the projected
terminal year's book value.earnings. The 1.4517.87 multiple represents the median price paid as
a multiple of book valueearnings for all Indiana bank transactions since 1985.1990.
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 Randolph CountyJay Financial's common stock.
The aggregate value of Randolph County,Jay Financial, determined by adding the present value of
the total cash flows, was $379.02$26,289,000 or $320.99 per Randolph County common share. In addition, using
the five-year projection as a base, a twenty-year projection was prepared
assuming that an annual growth rate of 6.00%6.0%, and a consistent return on assets of 1.00% would remain1.50% in effect for the entire period, beginningyear
1, 1.55% in 1998.year 2 and 1.60% in years 3 through 20. Dividends also were assumedequal to
be 50%50.0% of income for all years.throughout the analysis. This long-term projection resulted in
aan aggregate value of $284.37$19,810,000 or $241.88 per Randolph County share.share of Jay Financial common
stock.
SPECIFIC ACQUISITION ANALYSIS: PBS valued Randolph CountyJay Financial 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 $414.20in the aggregate $24,494,000,
or $299.07 per share, of Randolph
County common stock, 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 1995a projected December 31, 1998 earnings for Randolph Countylevel of $667,000.$1,659,000. 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 $26,120,000 or $318.92 per share of Jay
Financial common stock.
PRO FORMA MERGER ANALYSIS: PBS compared the historical performance of Randolph CountyJay
Financial to that of First Merchants and other regional bank holding companies. This
analysis included, among other things, a comparison of profitability, asset
quality and capital adequacy measures. In addition, the contribution of each of Randolph CountyJay Financial 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 Randolph County, as well as the projected financial dataJay Financial was prepared by
PBS, wasand analyzed. Randolph County'sJay Financial's historical
financial data was compared to the pro forma
5
combined historical and projected
earnings, and book value and dividends per share as well as
other measures of profitability, capital adequacy and asset quality.share.
The Fairness Opinion is directed only to the question of whether the
consideration to be received by Randolph County'sJay Financial's shareholders under the Agreement
is fair and equitable from a financial perspective and does not constitute a
recommendation to any Randolph CountyJay Financial shareholder to vote in favor of the
Merger.affiliation. No limitations were imposed on PBS regarding the scope of its
investigation or otherwise by Randolph County or any of its affiliates.Jay Financial.
22
Based on the results of the various analyses described above, PBS concluded
that the consideration to be received by Randolph CountyJay Financial's shareholders under the
Agreement is fair and equitable from a financial perspective to the shareholders
of Randolph County.Jay Financial.
Based on a First Merchants stock price of $40.375 (which stock price does
not reflect the effect of the 3-for-2 stock split of First Merchants common
stock effected in October, 1998), PBS and IBS will receive a feefees of $15,000 and reimbursementapproximately
$119,000 for all reasonable out-
of-pocket expenses from Randolph County forservices performed in connection with the servicesale of Jay Financial
and the rendering thisof the Fairness Opinion. In addition, Randolph CountyJay Financial has agreed
to indemnify PBS and IBS and its directors, officers and employees, from
liability in connection with the Merger,transaction, and to hold PBS and IBS harmless
from any losses, actions, claims, damages, expenses or liabilities related to
any of PBS'sPBS' or IBS' acts or decisions made in good faith and in the best
interest of Randolph County.Jay Financial.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF RANDOLPH COUNTYJAY FINANCIAL HAS CAREFULLY CONSIDERED AND
UNANIMOUSLY APPROVED THE AGREEMENT AND UNANIMOUSLY RECOMMENDS TO THE JAY
FINANCIAL SHAREHOLDERS THAT SHAREHOLDERSTHEY APPROVE THE AGREEMENT.
Each member of the Randolph County Board of Directors has agreed to cause
all shares of Randolph County common stock beneficially owned by him to be voted
in favor of the Merger. As of March 31, 1996, the members of the Randolph
County Board of Directors beneficially owned 7,293 or approximately 26% of the
shares of Randolph County common stock outstanding.
EXCHANGE OF RANDOLPH COUNTYJAY FINANCIAL COMMON STOCK
Under the terms of the Agreement, as of the effective date of the Merger,merger,
each outstanding share of Randolph CountyJay Financial common stock, other than shares as to
which dissenters' rights have been exercised, will be converted into the right
to receive twenty and 53/100 (20.53)13.41681 shares of First Merchants common stock. The Agreement
originally provided for a conversion ratio of 8.94454. However, as a result of
First Merchants October 23, 1998, 3-for-2 stock split, the conversion ratio was
adjusted to 13.41681. The conversion ratio is subject to further adjustment
under certain circumstances. See "MERGER -- Conversion Ratio Adjustment."
No fractional shares of First Merchants common stock will be issued to shareholders of Randolph County in connection with the Merger.Jay
Financial 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 certificates
representing Randolph County shares of common stock,the shareholder's certificates, promptly receive
an amount
of cash equal tofor the fractionfractional interest. The price of the fractional interest will
equal First Merchants' average of the closing price of First
Merchants common stock as(as reported on NASDAQ in the over-the-counter marketby NASDAQ) for the
five business days immediately preceding the effective date of the Merger.merger.
After the effective date of the Merger,merger, stock certificates previously
representing Randolph CountyJay Financial 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. Prior toAfter the surrendereffective date
of Randolph Countythe merger and until holders of Jay Financial common stock exchange their
stock certificates for exchange subsequent to the
effective date, the holders of such shares entitled to receive shares of First Merchants common stock and cash for fractional sharescertificates, they will not be entitled to
receive payment ofFirst
Merchants' dividends or other distributions declared on such shares of
First Merchants common stock. Upon exchange of such certificates, however,distributions. However, any accumulated dividends
or other distributions 6
previously declared and withheld on the shares of First Merchants common stock will be paid, without interest.interest, upon
the exchange of Jay Financial stock certificates for those of First Merchants.
On the effective date of the Merger,merger, the stock transfer books of Randolph CountyJay Financial
will be closed and no transfer of shares of Randolph CountyJay Financial common stock will
thereafter be made. If, after the effective date, certificates representing
shares of Randolph CountyJay Financial common stock are presented for registration or transfer,
they will be cancelled and exchanged for shares of First Merchants' common stock
and/orand cash, as applicable.
23
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 Randolph CountyJay Financial within ten days of the shareholder's delivery of
his or her certificates. Delivery of Jay Financial shares for conversion will
not be taken until after the effective date of the Merger, of his or her certificates representing
Randolph County common stock tomerger. First Merchants
Bank, whichNational Association will act as conversion agent in the Merger.merger.
Instructions as to delivery of stock certificates will be sent to each
shareholder shortly after the effective date of the Merger.merger.
CONVERSION RATIO ADJUSTMENT
The Agreement provides that Jay Financial may terminate the Agreement if
the First Merchants Average Price (as defined below) is less than $22.93 (a "JAY
FINANCIAL PRICE TERMINATION EVENT"). The Agreement also provides that First
Merchants may terminate the Agreement if the First Merchants Average Price is
greater than $34.40 (a "FIRST MERCHANTS PRICE TERMINATION EVENT"). As a result
of First Merchants October 23, 1998, 3-for-2 stock split, such prices have been
adjusted from $34.40 and $51.60, respectively, as originally provided in the
Agreement.
If a Jay Financial Price Termination Event occurs and Jay Financial's Board
exercises its right to terminate the Agreement, it must give written notice to
First Merchants of its election to terminate the merger within 24 hours of the
Determination Date (as defined below). Within two business days after the
receipt of such notice, First Merchants will have the option of increasing the
conversion ratio to equal a number equal to a quotient, the numerator of which
is the product of $22.93 and the conversion ratio (as then in effect) and the
denominator of which is the First Merchants Average Price. If First Merchants
elects to make such an adjustment to the conversion ratio, the Agreement will
remain in effect in accordance with its terms (except for the adjustment to the
conversion ratio).
If a First Merchants Price Termination Event occurs and First Merchants'
Board exercises its right to terminate the Agreement, it must give written
notice to Jay Financial of its election to terminate the merger within 24 hours
of the Determination Date. Within two business days after the receipt of such
notice, Jay Financial will have the option of decreasing 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 Jay Financial elects to make such an
adjustment to the conversion ratio, the Agreement will remain in effect in
accordance with its terms (except for the adjustment to the conversion ratio).
"First Merchants Average Price" means 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 NASDAQ trading days preceding the fifth
calendar day prior to the Determination Date. "Determination Date" means the
fifth calendar day prior to the closing date of the merger.
RIGHTS OF DISSENTING SHAREHOLDERS
The Indiana Business Corporation Law ("IBCL") provides shareholders of
merging corporations with certain dissenters' rights. The dissenters' rights of
Randolph CountyJay Financial shareholders are set forth in Chapter 44 of the IBCL, a copy of
which is attached to this Proxy Statement-ProspectusStatement-
24
Prospectus as Appendix B. Shareholders will not be entitled to dissenters'
rights absent strict compliance with the procedures of Indiana law.
Chapter 44 of the IBCL provides that Jay Financial shareholders of Randolph County have the
right to demand payment in cash for the fair value of their shares of
Randolph County common stock immediately
before the Mergermerger becomes effective,
excludingeffective. Such fair market value excludes any
appreciation or depreciation in value in anticipation of the Merger,merger, unless a court
determines that such exclusion would be inequitable. To claim this right, the
shareholder must first:
(a)1. deliver to Randolph CountyJay Financial before the vote is taken, written notice
of the shareholder's intent to demand payment in cash for the
shareholder's shares if the Mergermerger is effectuated,effectuated; AND
(b)2. not vote in favor of the Mergermerger in person or by proxy.
Dissenting shareholders may send their written notice to Max Gordon,Barry J. Hudson,
Chairman Randolph County Bancorp, 122of the Board, Jay Financial Corporation, 112 West WashingtonMain Street,
Winchester,Portland, Indiana 47394.47371.
If the Mergermerger is approved by the Jay Financial shareholders, First
Merchants or Randolph
CountyJay Financial will, within 10 days after shareholder approval, send
a notice of dissenters' rights to those shareholders satisfyingwho have satisfied the
above conditions within 10 days after shareholder approval has occurred.conditions. The notice will state the procedures thethat dissenting
shareholder thereaftershareholders must follow to exercise dissenters' rights in accordance withunder Indiana law.
A Randolph CountyJay Financial shareholder who is sent such a notice must then
(a)then:
1. demand payment for the shareholder'shis or her shares of Randolph CountyJay Financial common
stock,
(b)stock;
2. certify whetherthat beneficial ownership of the Randolph CountyJay Financial shares was
acquired before the date set forth in such notice,notice; and
(c)3. deposit the shareholder'sJay Financial stock certificates representing shares of Randolph County common stock in accordance with
the terms of suchthe notice.
A Randolph County shareholder who
does not demand payment or deposit the shareholder's certificates representing
shares of Randolph County common stock as required and within applicable time
periods is considered to have voted the shareholder's shares of Randolph County
common stock in favor of the Merger and is not entitled to receive payment for
the shareholder's shares under Chapter 44 of the IBCL.
AJAY FINANCIAL SHAREHOLDER WHO DOES NOT STRICTLY COMPLY WITH EACH OF THE PRELIMINARY
CONDITIONS DESCRIBED ABOVE WILL BE CONSIDERED NOT TO BE ENTITLED TO RIGHTS UNDER
CHAPTER 44 OF THE IBCL. SHAREHOLDERS WHO EXECUTE AND RETURN THE ENCLOSED PROXY
BUT DO NOT SPECIFY A CHOICE
7
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 SHAREHOLDER REVOKES THE PROXY PRIOR TO ITS BEING VOTED.
Upon consummation of the Merger,merger, First Merchants will pay each dissenting
Jay Financial shareholder who has complied with all statutoryof the requirements of
Chapter 44 and Randolph
County'sof the notice, and who was the beneficial owner of Randolph County common
stock prior to November 17, 1995 (the date the Merger proposal was first
publicly announced), First Merchants' estimate of the fair value of the
shares as of the time immediately prior to the Merger, excluding any appreciation in
value in anticipationmerger, EXCLUDING ANY
APPRECIATION IN VALUE IN ANTICIPATION OF THE MERGER. The determination of the
Merger. For those dissenters who became beneficial
ownersestimate of "fair value" will be based on the value of such shares of Jay
Financial common stock on or after November 17, 1995, First Merchants may withhold
paymentAugust 19, 1998, the day immediately prior to the
announcement of the fair value of the shares until the dissenter agrees to accept the
amount in full satisfaction of the dissenter's demand or until First Merchants
is otherwise directed by a court of competent jurisdiction.merger.
25
Dissenters who comply with certain procedures can object to the fair value established by First Merchants by
stating their estimate of the fair value and demand payment of the additional
amount claimed as fair value within thirty (30)30 days after First Merchants mademakes or offeredoffers payment to the
dissenter. First Merchants can elect to agree to the dissenter's fair value
demand or can
commence an action within 60 days of receipt of the dissenter's demand
in the Randolph County Circuit or Superior Court of Jay County for a judicial determination of
the fair value. The Court may appoint appraisers to determine the fair value.
The costs of the proceeding, including compensation and expenses of the
appraisers, counsel for the parties and experts, will be assessed against all
parties to the action in such amounts as the Court finds equitable. Each
dissenter made a party to the action will be entitled to receive the amount, if
any, by which the Court finds the fair value of the dissenter's shares, plus
interest, exceeds the amount paid by First Merchants.
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 PROVISIONS 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.
RESALE OF FIRST MERCHANTS COMMON STOCK BY RANDOLPH COUNTYJAY FINANCIAL AFFILIATES
NoGenerally, no restrictions on the sale or transfer of the shares of First
Merchants common stock issued pursuant to the Mergermerger will be imposed solely as a
result of the Merger, other thanmerger. However, certain restrictions onwill apply to the transfer
of suchFirst Merchants' shares issued toowned by any shareholder who may be deemed to be ana Jay Financial
"affiliate" of Randolph County for
purposes ofunder Rule 145 underof the Securities Act of 1933, as amended (the
"Securities Act""SECURITIES ACT"). Directors, executive officers and 10% shareholders are
generally deemed to be affiliates for purposes of Rule 145.
The Agreement provides that Randolph CountyJay Financial will provide First Merchants with
a list identifying each affiliate of Randolph County.Jay Financial. The Agreement also requires
that each Randolph CountyJay Financial affiliate deliver to First Merchants, prior to the
effective date of the Merger,merger, a written transfer restriction agreement. The
transfer restriction agreement toshall provide that the effect that such 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 by such affiliate (a)received:
1. during the period 30 days prior to the effective date (b)of the
merger;
2. until such time as financial results covering at least 30 days of
combined operations of Randolph CountyJay Financial and First Merchants have
been published
within the meaning of Section 201.01 of the Securitiespublished; and
Exchange Commission's
Codification of Financial Reporting Policies and (c)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.
26
The certificates representing First Merchants common stock issued to Randolph CountyJay
Financial affiliates in the Mergermerger may contain a legend indicating these resale
restrictions. 8
As this is a general statement of certain restrictions regarding the sale
or transfer of the shares of First Merchants common stock to be issued in the
Merger, those shareholders of Randolph County who may be affiliates of Randolph
County should confer with their legal counsel regarding the resale restrictions
that may apply to them.IF YOU ARE AN AFFILIATE OF JAY FINANCIAL, YOU SHOULD CONFER WITH
LEGAL COUNSEL REGARDING THE TRANSFER RESTRICTIONS THAT MAY APPLY.
CONDITIONS TO CONSUMMATION OF THE MERGER
Consummation of the Mergermerger 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 at least a majority of the outstanding shares of common stock
of Randolph County as
required under Indiana law;Jay Financial;
2. the registration of the shares of First Merchants common stock with the
Securities and Exchange Commission and the receipt of all state
securities and blue sky approvals and authorizations required for the offer and sale
of the shares of First Merchants common stock to Randolph County
shareholders in accordance with the Agreement;Jay Financial shareholders;
3. the receipt of all regulatory approvals required for the Merger;merger;
4. the receipt of an opinion of counsel with respect to certain
federal income tax matters;
5. the receipt by First Merchants of a letter from its independent
public accountants confirming its ability to account for the
Mergermerger as a pooling"pooling of interests; andinterests";
6. the receipt by First Merchants of certain undertakings from
affiliates of Randolph County. Further,
consummationJay Financial; and
7. First Merchants offering change of control agreements to Barry J.
Hudson and James A. Meinerding.
Consummation of the merger is further conditioned upon theboth parties
receipt by First Merchants and Randolph
County of certain officers' certificates and legal opinions, the accuracy on the
effective date of the Merger 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 transaction, which are more fully
enumerated in the Agreement, which is fully set forth as Appendix A to this
Proxy Statement-Prospectus,merger are requirements not subject to unilateral waiver and those conditions not mandated by law may be altered
only by the written consent of the parties to the Agreement.parties. See "PROPOSED MERGER"MERGER -- Resale of First
Merchants Common Stock by Randolph CountyJay Financial Affiliates," "PROPOSED MERGER"MERGER -- Regulatory
Approvals" andApprovals," "MERGER - Interests of Certain Persons in the Merger," "FEDERAL
INCOME TAX CONSEQUENCES" and also Appendix A.
TERMINATIONTERMINATION; WAIVER; AMENDMENT
The Agreement may be terminated before the Mergermerger becomes effective ifunder
the following conditions:
27
1. either party makes a material misrepresentation in or materially
breaches the Agreement;
if2. either party reasonably determines that consummation of the
Mergermerger is inadvisable due to the commencement or threat of
material litigation or legal proceedings against one of the parties;
if3. a material adverse change occurs in the consolidated financial
condition or business of First Merchants or Randolph CountyJay Financial since
SeptemberJune 30, 1995; if1998;
4. the Mergermerger will not constitute a tax-free reorganization under
the Internal Revenue Code of 1986, as amended; if1986;
5. the Mergermerger cannot be accounted for as a pooling"pooling of interests; ifinterests";
6. certain information provided pursuant to the Agreement by Randolph CountyJay
Financial to First Merchants prior to consummation of the Mergermerger
has had or may have a material adverse effect on the financial
condition or business of Randolph CountyJay Financial or the Bank; or ifThe First National Bank
of Portland;
7. consummation of the Mergermerger has not occurred by SeptemberApril 30, 1996.1999; or
8. as described under "MERGER - Conversion Ratio Adjustment."
Upon termination for any of these reasons, the Agreement will be void and
of no further force or effect.
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 to the Agreement is permissible
after the Jay Financial shareholders approve the merger if the amendment or
waiver would have a material adverse effect on the Jay Financial shareholders.
RESTRICTIONS AFFECTING RANDOLPH COUNTYJAY FINANCIAL
The Agreement contains certain restrictions regarding the conduct of
business of Randolph CountyJay Financial and theThe First National Bank pending consummation of the Merger.Portland. Among other
items, neither Randolph CountyJay Financial nor the Bank may, without the prior written consent
of First Merchants, materially change its capital structure, or
declare or pay any
dividends or make any other distribution to its shareholders,
exceptshareholders. Notwithstanding,
the Agreement allows for the payment by Randolph County ofJay Financial to make quarterly dividendsdividend payments on
its shares
of common stock of $1.50in October, 1998, December, 1998 and April, 1999, which
dividends shall not exceed $0.50 per share, in April of 1996 and $1.50 per share in July
of 1996. Randolph Countyrespectively. Jay Financial may not
pay any such dividend with respect to the fiscal quarter in which the Mergermerger
becomes effective and in which Randolph
CountyJay Financial shareholders will become entitled to
receive dividends on the shares of First Merchants common stock into whichreceived in the sharesmerger. The
First National Bank of 9
Randolph County are to be converted. The BankPortland is permitted under the Agreement to pay
dividends into Jay Financial to cover its expenses of operations and expenses
related to the ordinary course of business.merger.
28
REGULATORY APPROVALS
The Mergermerger is subject to the prior approval requirements of the Indiana
Financial Institutions Act and the Bank Holding Company Act of 1956.
Applications thereunder have been filed with the Indiana Department of Financial
Institutions ("Indiana Department"INDIANA DEPARTMENT") and with the Board of Governors of the
Federal Reserve System ("Federal Reserve"FEDERAL RESERVE"). In reviewing the Indiana Department
application, the Indiana Department considers various factors includingincluding:
1. the managerial and financial resources of First Merchants,Merchants;
2. whether First Merchants' subsidiaries, First Merchants Bank,
National Association, Pendleton Banking Company, First United
Bank, The Union County National Bank of Liberty and Pendleton Banking
Company,The Randolph
County Bank, have met, and propose to continue to meet, the
credit needs of their communities,communities; and
3. whether the interests of depositors, creditors, and the public
generally are jeopardized by the transaction.
In reviewing the Federal Reserve application, the Federal Reserve takes
into consideration various factors including the financial and managerial
resources and future prospects of First Merchants and its subsidiaries, as well
as the competitive effects of the acquisition and the convenience and needs of
the community served by the Bank.The First National Bank of Portland. The Federal
Reserve 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 Federal Reserve finds that the anti-competitiveanti-
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 approval of the Federal ReserveReserve's approval is received, the Mergermerger cannot be
consummated for 30 days, the first 20 days ofduring which time the United States Department of
Justice has the authority to challenge the Mergermerger on antitrust grounds. With
the approval of the Federal Reserve and the Department of Justice, the waiting
period can be reduced to no later than 15 days.
The approvals of the Indiana Department and the Federal Reserve are not to
be interpreted as the opinion of those regulatory authorities that the Mergermerger is
favorable to the shareholders of Randolph CountyJay Financial from a financial point of view or
that those regulatory authorities have considered the adequacy of the terms of
the Merger.merger. The approvals in no way constitute an endorsement or a
recommendation of the Mergermerger by the Indiana Department or the Federal Reserve.
EFFECTIVE DATE OF THE MERGER
The Mergermerger will become effective in the month in which the last required
approval to consummate the Mergermerger is received or, if later, in which any
applicable waiting period following an approval expires. First Merchants and
Randolph CountyJay Financial currently anticipate that the effective date of the Mergermerger will
occur during the ________________first quarter of 1996.1999.
29
MANAGEMENT AFTER THE MERGER
First Merchants will be the surviving corporation in the Mergermerger and Randolph County'sJay
Financial's separate corporate existence will cease. Accordingly, the directors
and officers of Randolph CountyJay Financial will no longer serve in such capacities after the
effective date of the Merger.merger.
The officers and directors of theThe First National Bank of Portland
immediately prior to the Mergermerger will continue to be the officers and directors
of the Bank following the Mergermerger subject to the provisions of the Bank's
Articles of IncorporationAssociation and By-Laws. Bank directors who desire to continue to
serve in that capacity shall do so for at least the remainder of the one year
terms to which they have been elected. The First National Bank of Portland's
directors will be subject to First Merchants' policy of mandatory retirement at
age 70; provided, however, the policy of mandatory retirement will not apply to
any of the Bank's current directors until 12 months after the merger.
In accordance with the Agreement, and in connection with the first annual
meeting of the shareholders of First Merchants after the Merger, First Merchants shall cause all necessary corporate
action to be taken to cause the current Chairman of the Board of the Bank, Michael Wickersham,Jay Financial,
Barry J. Hudson, to either (i) be nominated for election as a member of the
First Merchants'Merchants Board of Directors for a three (3)-year
term.
10year term at the first annual
meeting of First Merchants' shareholders following the merger, or (ii) be
appointed as a director at the Board's first meeting following the completion of
the merger. As an appointed director, Mr. Hudson would serve until the next
annual meeting of First Merchants' shareholders and then be nominated for
election to a three year term as a director. The timing of the merger's
completion will dictate the option that is followed.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain of the directors and officers of Jay Financial have interests in
the merger other than their interests as Jay Financial shareholders, pursuant to
certain agreements and understandings that are reflected in the Agreement.
Those agreements and understandings are as follows.
First Merchants has agreed that it will cause the current Chairman of the
Board of Jay Financial, Barry J. Hudson, 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. If First
Merchants' Board meets after the merger but before the next annual meeting of
First Merchants' shareholders, the Board shall appoint Mr. Hudson as a director
to serve until the first annual meeting of First Merchants.
The officers and directors of Jay Financial will remain officers and
directors of the First National Bank of Portland after the merger.
The merger is conditional upon First Merchants offering change of control
agreements to Barry J. Hudson and James A. Meinerding, the current Chairman of
the Board and President, respectively, of Jay Financial. The agreements are
expected to provide severance benefits in the event of a change in control of
First Merchants or the termination or constructive termination of the executive.
The severance benefits payable in such a circumstance will be approximately 2.9
times the executive's annual cash compensation at the time. Mr. Hudson's
agreement is to be in
30
effect for so long as he serves as the Chief Executive Officer of the First
National Bank of Portland and Mr. Meinerding's is to be for a term of three
years after the merger.
The members of the Jay Financial Board of Directors knew about those
additional interests, and considered them, when they approved the Agreement.
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.
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.
31
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 following discussion summarizes certain federal income tax aspects of
the Merger. The discussion does not purportmerger is expected 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.
Assuming that (i) the Merger of Randolph County with and into First
Merchants qualifiesqualify as a statutory mergerreorganization under state law; (ii) the Merger
constitutes a reorganization within the meaning of Section 368 (a)(1)(A)368(a)
of the Internal Revenue Code of 1986, as amended (the "Code""CODE"); (iii) after the
transaction, First Merchants, as successor of Randolph County, will hold
substantially all of its assets; and (iv) in the transaction, the Randolph
County shareholders will exchange an amount of stock constituting control of
Randolph County for First Merchants common stock;. As such, the
following is a summary of the federal income tax consequences whichthat will result:
(1)1. No gain or loss will be recognized by Randolph CountyJay Financial shareholders
who exchange all of their Randolph CountyJay Financial common stock for First
Merchants common stock pursuant to the Merger,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)stock;
2. The basis of the First Merchants common stock received (including
any fractional share interests deemed received) by Randolph CountyJay Financial
shareholders who exchange all of their Randolph CountyJay Financial common stock
for First Merchants common stock will be the same as the basis of
the Randolph CountyJay Financial common stock surrendered in exchange therefor.
(3)therefor;
3. The holding period of the First Merchants common stock received
(including any fractional share interests deemed received) by Randolph
CountyJay
Financial shareholders who exchange all of their Randolph CountyJay Financial
common stock for First Merchants common stock will include the
period during which the Randolph CountyJay Financial common stock was held,
provided the Randolph
CountyJay Financial common stock was held as a capital
asset on the date of the exchange.
(4)exchange;
4. Where a cash payment is received by a Randolph CountyJay Financial 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 by First Merchants, subject
to the provisions and limitations of Section 302 of the Code.
Where such exchange qualifies under the provisions and
limitations of Section 302(a) of the Code, such shareholder will
recognize a capital gain or loss provided that the Randolph
CountyJay Financial
common stock was held as a capital asset on the date of the
Merger.
(5)merger;
5. Any Randolph CountyJay Financial shareholder who perfects dissenter's rights and
receives solely cash in exchange for such shareholder's Randolph
Countyhis or her Jay Financial
common stock shall be treated as having received such cash as a
distribution in redemption of the Randolph CountyJay Financial common stock
subject to the provisions and limitations of Section 302 of the
Code. Where,If, as a result of such distribution, such Randolph CountyJay Financial
shareholder owns no First Merchants common stock, either directly
or through the application of the constructive ownership rules of
Section 318(a) of the Code, the redemption will be a complete
termination of interest within the meaning of Section 302(b)(3)
of the Code and the cash will be treated as a distribution in
full payment and exchange for Randolph
Countythe Jay Financial common stock as
provided in Section 302(a) of the Code. GainUnder Section 1001 of
the Code, gain or loss (subject to any applicable
32
limitations of the Code) will be realized and recognized to such
Randolph CountyJay Financial shareholder in an amount equal to the difference
between the redemption price and the adjusted basis of the Randolph CountyJay
Financial common stock surrendered in exchange therefor.
11
(6)therefor;
6. No gain or loss will be recognized by Randolph CountyJay Financial or First
Merchants in connection with the transaction.
(7)transaction; and
7. The basis of the assets of Randolph CountyJay Financial acquired by First
Merchants in the Mergermerger will be the same as the basis of such
assets in the hands of Randolph CountyJay Financial immediately prior to the
Merger.merger.
Receipt of an opinion of tax counsel (the "Tax Opinion") with respect to the above is a
condition precedent to consummation of the Merger.merger. The Tax
Opiniontax opinion will be
based upon representations made by the managementsmanagement of First Merchants and Randolph County.Jay
Financial. 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 DISCUSSION SET FORTH ABOVE IS BASED UPONCONSEQUENCES OF THE CODE,
TREASURY REGULATIONS, CASE LAWMERGER AND INTERNAL REVENUE SERVICE RULINGS AS IN EFFECT
ON THE DATE HEREOF WITHOUT CONSIDERATION OFDOES NOT CONSIDER THE FACTS AND CIRCUMSTANCES
OF ANY PARTICULAR SITUATION OF ANY RANDOLPH COUNTYJAY FINANCIAL SHAREHOLDER. THIS DISCUSSION
ASSUMES THAT RANDOLPH COUNTY SHAREHOLDERS HOLD THEIR RANDOLPH COUNTY COMMON
STOCK AS CAPITAL ASSETS WITHIN THE MEANING OF SECTION 1221 OF THE CODE. SPECIAL
TAX CONSIDERATIONS NOT DISCUSSED HEREIN MAY BE APPLICABLE TO PARTICULAR CLASSES
OF TAXPAYERS, SUCH AS BROKER-DEALERS, OR TO ANY SHAREHOLDER WHO ACQUIRED
RANDOLPH COUNTY COMMON STOCK THROUGH THE EXERCISE OF ANY EMPLOYEE STOCK OPTION
OR OTHERWISE AS COMPENSATION. EACH SHAREHOLDER SHOULD CONSULT
WITH HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF
THE MERGER, TO
HIM OR HER, INCLUDING THE APPLICATION AND EFFECT OF EXISTING AND PROPOSED
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
33
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 November 16, 1995,August 19, 1998, the business day immediately preceding the
public announcement of the Merger,merger, the closing price of First Merchants common
stock reported by the NASDAQ National Market System was $26.00$27.33 per share.share (as adjusted to take into account a 3-for-2 stock
split of First Merchants common stock effected in October, 1998). On
_________ ___, 1996,____________, 1999, the closing price of First Merchants common stock reported by the NASDAQ National Market System was
$_______$______ per share. The following table sets forth, for the periods indicated,
theFirst Merchants' high and low closing prices per share of First Merchants common stock as reported by the NASDAQ
National Market System.share. Prices reflect
inter-dealer prices without retail mark-up, mark-down or commission, and may not
represent the actual transactions.transaction. All prices have been adjusted to give effect
to stock dividends and stock splits.
12
19941996 HIGH LOW
- ---- ---- ---
First Quarter $20.33 $19.00$18.33 $16.67
Second Quarter 19.67 18.67$18.33 $16.33
Third Quarter 22.50 19.00$17.33 $15.50
Fourth Quarter 22.33 20.33
1995$17.83 $16.04
1997
- ----
First Quarter 22.17 20.83$20.00 $16.83
Second Quarter 23.50 21.33$20.50 $18.50
Third Quarter 26.50 22.67$21.59 $20.00
Fourth Quarter 26.75 25.75
1996$25.33 $21.42
1998
- ----
First Quarter 27.50 25.00$27.67 $23.83
Second Quarter (through ______ ___, 1996)$31.17 $26.17
Third Quarter $30.83 $21.67
There is no established public trading market for shares of Randolph CountyJay Financial
common stock. Most trades are isolated and occur after private negotiations,
with the result that management of Randolph CountyJay Financial is not directly informed of
trades or prices. The best information available to Randolph CountyJay Financial's management
indicates that in 1994, 19951996, 1997 and 1996,1998, the following number of shares of Randolph CountyJay
Financial common stock were traded in the number of transactions and for prices
to be within the ranges set forth below:
Number of Sales Price
Shares Number of -----------
Year Traded Transactions High Low
---- ------ ------------ ---- -------
1994 57 1 $300.00 $300.00
1995 62 2 320.00 312.00
1996 (through _________ ___, 1996)4547 12 $166.50 $140.00
1997 0 0 ---- ----0 0
1998 0 0 0 0
(through September 30, 1998)
34
Management of Randolph CountyJay Financial 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 Randolph CountyJay Financial common stock would
trade and there may have been additional shares of Randolph CountyJay Financial common stock
traded at higher or lower prices of which Randolph CountyJay Financial management is unaware.
The last trade of Randolph CountyJay Financial common stock, of which Randolph
CountyJay Financial management
is aware, occurred on or about November 14, 1995June 5, 1996 and involved the sale of 12210 shares
at a price which, to the best of Randolph CountyJay Financial management's knowledge, was
approximately $320.00$140 per share.
As of March 31, 1996,__________, 199__, there were approximately 1,127____ holders of First
Merchants common stock and approximately 7174 holders of Randolph CountyJay Financial common
stock, not including individual participants in security position listings.
13
DIVIDENDS
The following table sets forth the per share cash dividends declared on
shares of First Merchants common stock and Randolph CountyJay Financial common stock since
January 1, 1994.1996. All dividends have been adjusted to give effect to stock
dividends and stock splits.
First Merchants Randolph County
1994Jay Financial
1996 Common Stock (1) Common Stock (2)
- ---- ---------------- -------------------------------
First Quarter $0.17$0.13 $0.00
Second Quarter 0.17 3.00$0.13 $0.25
Third Quarter 0.19 0.00$0.16 $0.40
Fourth Quarter 0.19 7.00
1995$0.16 $1.35
1997
- ----
First Quarter 0.19 0.00$0.16 $0.00
Second Quarter 0.19 3.00$0.16 $0.50
Third Quarter 0.20 0.00$0.19 $0.50
Fourth Quarter 0.20 7.00
1996$0.19 $1.00
1998
- ----
First Quarter 0.20 0.00$0.19 $0.00
Second Quarter 1.50
(through _______ __, 1996)$0.19 $0.50
Third Quarter $0.20 $0.50
(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) During 19941996, 1997 and 1995, Randolph County1998, Jay Financial has declared and paid dividends
on a semiannualquarterly basis. In accordance with the Agreement, Randolph CountyJay Financial is
permitted to pay dividends on its common stock of $1.50in October 1998, December
1998, and April 1999, which dividends shall not exceed $0.50 per share,
in April,
1996 and $1.50 in July, 1996,respectively, provided that Randolph CountyJay Financial may not pay any such dividend
during the fiscal quarter in which the Mergermerger becomes
35
effective and in which Randolph CountyJay Financial shareholders become entitled to
receive dividends on the shares of First Merchants common stock into which
their shares of Randolph CountyJay Financial common stock are to be converted.
EXISTING AND PRO FORMA PER SHARE INFORMATION
The following table sets forth certain historical, pro forma and equivalent
per share information, giving effect to the Merger and to the pending merger
with Union National Bancorp ("Union National"). The data is based on historical
financial statements and the pro forma financial information included herein.
14
As Reported
-----------
First Merchants Book Value At
- --------------- Net Income (5) Cash Dividends Period End
-------------- -------------- -------------
Year Ended December 31,
1995 $1.95 $0.77 $15.92
1994 1.80 0.71 14.07
1993 1.65 0.63 13.53
Randolph County
- ---------------
Year Ended December 31,
1995 24.20 10.00 317.66
1994 29.10 10.00 302.06
1993 37.68 11.50 282.97
Net Income (5)
--------------
FIRST RANDOLPH FIRST RANDOLPH
MERCHANTS COUNTY MERCHANTS COUNTY
Pro Forma (1) Equivalent (1) Pro Forma (2) Equivalent (2)
Year Ended
December 31
1995 $1.87 $38.39 $1.84 $37.78
1994 1.76 36.13 1.72 35.31
1993 1.67 34.29 1.64 33.67
Cash Dividends
--------------
FIRST RANDOLPH FIRST RANDOLPH
MERCHANTS COUNTY MERCHANTS COUNTY
Pro Forma (1) Equivalent (1) Pro Forma (2) Equivalent (2)
Year Ended
December 31
1995 $.77 $15.81 $.77 $15.81
1994 .71 14.58 .71 14.58
1993 .63 12.93 .63 12.93
Book Value
----------
FIRST RANDOLPH FIRST RANDOLPH
MERCHANTS COUNTY MERCHANTS COUNTY
Pro Forma (1) Equivalent (1) Pro Forma (2) Equivalent (2)
As of December
31, 1995 $15.88 $326.02 $16.00 $328.48
15
Market Value of Common Stock
----------------------------
FIRST RANDOLPH RANDOLPH
MERCHANTS COUNTY COUNTY
Historical (4) Equivalent
November 16, 1995 (3) $26.00 $317.66 $533.78
(1) Considers the pending merger with Randolph County. See "PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION."
(2) Considers the pending merger with Randolph County, as well as the
pending merger with Union National. See "PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION."
(3) Represents the last business day prior to the public announcement of
the proposed merger with Randolph County.
(4) Based upon the per share book value of Randolph County common stock as
of December 31, 1995.
(5) Net income excludes the cumulative effect of change in accounting for
income taxes.
16
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed balance sheet as of
December 31, 1995, and the pro forma combined condensed statements of income for
each of the years in the three-year period ended December 31, 1995, give effect
to the Merger based on the historical consolidated financial statements of First
Merchants and its subsidiaries and the historical consolidated financial
statements of Randolph County and its subsidiary under the assumptions and
adjustments set forth in the accompanying notes to the pro forma financial
statements.
The pro forma financial statements have been prepared by the managements of
First Merchants and Randolph County based upon their respective financial
statements. These pro forma statements, which include results of operations as
if the Merger had been consummated at the beginning of each period presented,
may not be indicative of the results that actually would have occurred if the
Merger had been in effect on the dates indicated or which may be obtained in the
future. The pro forma financial statements should be read in conjunction with
the historical consolidated financial statements and notes thereto of First
Merchants and Randolph County incorporated by reference herein.
The following pro forma combined condensed balance sheet and condensed
statements of income include:
(a) First Merchant's historical consolidated financial information.
(b) Randolph County's historical consolidated financial information.
(c) The combined statements of First Merchants and Randolph County, which
have been designated herein as "First Merchants/Randolph County Pro
Forma Combined."
(d) Union National's historical consolidated financial information, which
has been designated herein as "Union National." First Merchants has
entered into a definitive agreement, dated January 24, 1996 to
acquire, for shares of First Merchants common stock, all of the
issued and outstanding common stock of Union National. The proposed
transaction would be accounted for as a pooling of interests;
accordingly, historical financial data for Union National is included
for all periods presented. There can be no assurance at this stage
of the process that the transaction will be completed. See
"DESCRIPTION OF FIRST MERCHANTS --Acquisition Policy and Pending
Transactions."
(e) The combined statements of First Merchants, Randolph County and Union
National which have been designated herein as "Pro Forma Combined."
17
PRO FORMA COMBINED CONDENSED BALANCE SHEET
December 31, 1995
(Unaudited)
(In Thousands)
(1) (b) (c) (d) (e)
Pro Forma First Merchants Pro Forma
Adjustments Randolph County/ Adjustments
First Randolph Increase Pro Forma Union Increase Pro Forma
Merchants County (Decrease) Combined National (Decrease) Combined
-------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 31,432 $ 4,080 $ 35,512 $ 3,461 $ 38,973
Federal funds sold 37,500 1,400 38,900 38,900
Interest-bearing deposits 155 104 259 259
Investment securities:
Available for sale 143,120 22,029 165,149 60,789 225,938
Held to maturity 58,214 58,214 2,464 60,678
-------------------------------------------------------------------------------------------------
Total investment securities 201,334 22,029 223,363 63,253 286,616
Mortgage loans held for sale
736 736 736
Loans 418,994 43,494 462,488 89,850 552,338
Allowance for loan losses ( 4,957) ( 594) ( 5,551) ( 1,144) ( 6,695)
-------------------------------------------------------------------------------------------------
Net loans 414,037 42,900 456,937 88,706 545,643
Premises and equipment 10,476 1,331 11,807 3,207 14,834
Goodwill 1,845 1,845 1,845
Other assets 10,344 1,375 11,719 2,631 14,350
-------------------------------------------------------------------------------------------------
Total Assets $ 707,859 $ 73,219 $ 781,078 $161,078 $ 942,156
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Liabilities:
Deposits $ 588,156 63,441 $ 651,597 $132,339 $ 783,936
Repurchase agreements 27,293 27,293 1,594 28,887
Other short-term borrowings 6,682 6,682 1,808 8,490
Federal Home Loan Bank advances 1,000 1,000 8,000 9,000
Other liabilities 4,255 1,025 5,280 1,596 6,876
-------------------------------------------------------------------------------------------------
Total Liabilities 627,386 64,466 691,852 145,337 $ 837,189
-------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock 632 2,756 ( 2,686)(1) 702 970 ( 852) (2) 820
Additional paid - in capital 15,852 709 2,686 (1) 19,247 1,957 852 (2) 22,056
Retained earnings 62,836 5,250 68,086 12,119 80,205
Net unrealized gain on
securities available for sale 1,153 38 1,191 695 1,886
-------------------------------------------------------------------------------------------------
Total Stockholders' Equity 80,473 8,753 89,226 15,741 104,967
-------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $707,859 $ 73,219 $ 781,078 $161,078 $ 942,156
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
See notes to pro forma consolidated balance sheet
18
NOTES TO PRO FORMA COMBINED CONDENSED BALANCE SHEET (Unaudited)
The following pro forma adjustments are necessary to record the Merger and
pending merger.
[1] To reflect exchange of shares of Randolph County common stock for shares of
First Merchants common stock, retaining the historical cost basis of
assets, liabilities and equity through the treatment as a pooling of
interest. A total of 565,704 shares of First Merchants common stock will
be issued at the exchange ratio of 20.53 shares of First Merchants common
stock for each of the 27,555 issued and outstanding shares of Randolph
County common stock as of December 31, 1995, resulting in a transfer from
common stock to additional paid-in capital of $2,686,000 to reflect the
decrease in the aggregate par value of the issued and outstanding shares of
First Merchants common stock relative to the aggregate par value of the
currently outstanding shares of Randolph County common stock.
Common stock $ (2,686)
Additional paid-in capital $ 2,686
[2] To reflect exchange of shares of Union National common stock for shares of
First Merchants common stock, retaining the historical cost basis of
assets, liabilities and equity through the treatment as a pooling of
interest. A total of 942,685 shares of First Merchants common stock will
be issued at the exchange ratio of 4.86 shares of First Merchants common
stock for each of the 193,968 issued and outstanding shares of Union
National common stock as of December 31, 1995, resulting in a transfer from
common stock to additional paid-in capital of $852,000 to reflect the
decrease in the aggregate par value of the issued and outstanding shares
of First Merchants common stock relative to the aggregate par value of the
currently outstanding shares of Union National common stock.
Common stock $ (852)
Additional paid-in capital $ 852
19
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
Year Ended December 31, 1995
(Unaudited)
(In thousands, except share and per share data)
(a) (b) (c) (d) (e)
First
Merchants/
Pro Forma Randolph Pro Forma
Adjustments County Adjustments
First Randolph Increase Pro Forma Union Increase Pro Forma
Merchants County (Decrease) Combined National (Decrease) Combined
-------------------------------------------------------------------------------------------------
Interest income $ 49,964 $ 5,152 $ 55,116 $ 11,332 $ 66,448
Interest expense 22,083 2,498 24,501 6,770 31,351
-------------------------------------------------------------------------------------------------
Net interest income 27,881 2,654 30,535 4,562 35,097
Provision for loan losses 640 408 1,048 340 1,388
-------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 27,881 2,246 29,487 4,222 33,709
Total other income 6,907 223 7,130 463 7,593
Total other expenses 18,842 1,535 20,377 2,617 22,994
-------------------------------------------------------------------------------------------------
Income before income taxes 15,306 934 16,240 2,068 18,308
Income taxes 5,448 267 5,715 545 6,260
-------------------------------------------------------------------------------------------------
Net income $ 9,858 $ 667 $ 10,525 $ 1,523 $ 12,048
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Net income per common share $ 1.95 $ 1.87 $ 1.84
Average Shares Outstanding $5,055,169 $5,621,078 $6,564,214
20
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
Year Ended December 31, 1994
(Unaudited)
(In thousands, except share and per share data)
(a) (b) (c) (d) (e)
Pro Forma First Pro Forma
Adjustments Merchants/ Adjustments
First Randolph Increase Randolph Union Increase Pro Forma
Merchants County (Decrease) County National (Decrease) Combined
Pro Forma
Combined
--------------------------------------------------------------------------------------------------
Interest income $ 43,114 $ 4,968 $ 48,082 $ 9,684 $ 57,766
Interest expense 16,131 2,370 18,501 5,327 23,828
--------------------------------------------------------------------------------------------------
Net interest income 26,963 2,598 29,581 4,357 33,938
Provision for loan losses 762 120 902 300 1,202
--------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 26,201 2,476 28,679 4,057 32,736
Total other income 6,298 241 6,539 379 6,918
Total other expenses 18,434 1,614 20,048 2,584 22,632
--------------------------------------------------------------------------------------------------
Income before income taxes 14,065 1,105 15,170 1,852 17,022
Income taxes 4,907 303 5,210 449 5,659
--------------------------------------------------------------------------------------------------
Net income $ 9,158 $ 802 $ 9,960 $ 1,403 $ 11,363
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
Net income per common share $ 1.80 $ 1.76 $ 1.72
Average Shares Outstanding 5,077,307 5,643,257 6,587,564
21
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
Year Ended December 31, 1993
(Unaudited)
(In thousands, except share and per share data)
(a) (b) (c) (d) (e)
Pro Forma First Merchants/ Pro Forma
Adjustments Randolph County Adjustments
First Randolph Increase Pro Forma Union Increase Pro Forma
Merchants County (Decrease) Combined National (Decrease) Combined
-------------------------------------------------------------------------------------------------
Interest income $ 42,006 $ 5,210 $ 47,216 $ 9,365 $ 56,581
Interest expense 16,498 2,536 19,034 5,022 24,056
-------------------------------------------------------------------------------------------------
Net interest income 25,508 2,674 28,182 4,343 32,525
Provision for loan losses 1,014 240 1,254 400 1,654
-------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 24,494 2,434 26,928 3,943 30,871
Total other income 6,589 418 7,007 343 7,350
Total other expenses 18,215 1,403 19,618 2,490 22,108
-------------------------------------------------------------------------------------------------
Income before income taxes 12,868 1,449 14,317 1,796 16,113
Income taxes 4,396 410 4,806 444 5,250
-------------------------------------------------------------------------------------------------
Net income(1) $ 8,472 $ 1,039 $ 9,511 $ 1,352 $ 10,863
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
Net income per common share $ 1.65 $ 1.67 $ 1.64
Average Shares Outstanding 5,124,626 5,690,576 6,634,145
(1) Net income excludes the cumulative effect of change in accounting for
income taxes.
22
SUMMARY OF PRO FORMA COMBINED SELECTED FINANCIAL DATA (1)
Twelve Months Ended December 31,
------------------------------------------------
1995 1994 1993
------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)
RESULTS OF OPERATIONS
Interest Income $ 66,448 $ 57,766 $ 56,581
Interest Expense 31,351 23,828 24,056
Net Interest Income 35,097 33,938 32,525
Provision for Loan Losses 1,388 1,202 1,654
Net Interest Income After
Provision for Loan Losses 33,709 32,736 30,871
Total Other Income 7,593 6,918 7,350
Total Other Expenses 22,994 22,632 22,108
Net Income (2) 12,048 11,363 10,863
PER SHARE DATA (3)
Net Income (2) 1.84 1.72 1.64
Cash Dividends Paid .77 .71 .63
December 31 Book Value 16.00 12.68 12.14
YEAR-END BALANCES
Total Assets 942,156 868,153 842,681
Total Loans 553,074 528,641 495,703
Total Deposits 783,936 720,009 688,644
Total Federal Home Loan Bank
Advances 9,000 8,000 6,000
Total Stockholders' Equity 104,967 92,754 89,257
23
Twelve Months Ended December 31,
------------------------------------------------
1995 1994 1993
------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)
FINANCIAL RATIOS
Return on Average Assets 1.35% 1.33% 1.30%
Return on Average
Stockholders' Equity 12.17 12.42 12.59
Average Earning Assets to
Average Total Assets 94.86 94.46 94.27
Allowance for Loan Losses
as % of Total Loans 1.21 1.25 1.30
Average Stockholders'
Equity to Average Assets 11.11 10.72 10.36
Tax Equivalent Yield on
Earning Assets 8.09 7.41 7.46
Cost of Supporting Liabilities 3.71 2.95 3.06
Net Interest Margin on Earning
Assets 4.38 4.46 4.40
(1) The pro forma information set forth in this table gives effect to one
additional separate transaction, the acquisition of Union National, that is
presently pending and which is expected to be accounted for under the
pooling of interest method (see "DESCRIPTION OF FIRST MERCHANTS --
Acquisition Policy and Pending Transactions.")
(2) Net income excludes the cumulative effect of the change in accounting for
income taxes.
(3) Per share amounts have been adjusted to give retroactive effect to First
Merchants' three-for-two stock splits on October, 1995 and January, 1993.
2436
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 Banking Company, ("Pendleton"), a state chartered
commercial bank organized in 1872. On July 31, 1991, First Merchants acquired
First United Bank, ("First United"), a state chartedchartered 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 2126 offices of its threefive 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;collections, safe deposit
operations;operations, performing fiduciary and trust services; and providing other
services relating to the general banking business.
First MerchantsMerchants' 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 Banking Company. 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 consideration of acquisitions of additional financial institutions. Management of First
Merchants management periodically engages in reviewingreviews and analyzinganalyzes potential acquisitions.
As of the date of this Proxy Statement-
Prospectus,Statement-Prospectus, First Merchants is a party to
a definitive agreement to merge with
Union National and thereby acquire its wholly-owned subsidiary, The Union County
NationalAnderson Community Bank through a merger of
Liberty. Union National'sAnderson Community Bank into Pendleton Banking Company. Anderson Community
Bank's principal executive offices are located in Liberty,Anderson, Indiana. As of
September 30, 1998, Anderson Community Bank had assets of approximately $75.7
million, deposits of approximately $67.7 million, shareholders' equity of
approximately $7.3 million and net income for the nine month period then ended
of approximately $763,000.
37
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
Additional information concerning First Merchants is included in the First
Merchants'Merchants documents incorporated by reference in this Proxy
Statement-
Prospectus. See "AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE.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."
2538
DESCRIPTION OF RANDOLPH COUNTYJAY FINANCIAL
BUSINESS
Randolph CountyJay Financial is an Indiana corporation which was incorporated in 19841988 and
which is a registered bank holding company owning all of the issued and
outstanding common stock of the Bank. Randolph County'sThe First National Bank of Portland (the "BANK").
Jay Financial's principal office is located in Winchester,Portland, Indiana and its
business consists primarily of the ownership, supervision and control of the
Bank. The common stock of the Bank is Randolph County'sJay Financial's principal asset and
dividends paid by the Bank are Randolph
County'sJay Financial's principal source of income.
The Bank is an Indiana-chartereda national bank which was originally organizedestablished in 18651904 and which has
been in continuous operation since that date. The Bank provides various
commercial and consumer banking services to the Winchester,
Indiana community and surrounding area.its customers located primarily in
Jay 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
Randolph County owns no real or personal property of a material nature.
The main office of Randolph CountyJay Financial and the Bank is located at 122112 West WashingtonMain
Street, Winchester,Portland, Indiana. SuchThe Bank also operates two branches located at 115
West Main Street, Portland, Indiana and 218 West Lincoln Street, Portland,
Indiana. The main office isand one of the branches are owned by the Bank andBank. The
remaining branch is not subject to any significant encumbrances.located in leased premises.
LITIGATION
There is no pending litigation of a material nature in which Randolph
CountyJay Financial
or the Bank is a party or in which any of their respective property is subject,
other than ordinary routine litigation incidental to the normal business of Randolph CountyJay
Financial or the Bank. Further, except as set forth below, 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 Randolph CountyJay Financial or the Bank. None of the
ordinary routine litigation in which Randolph CountyJay Financial or the Bank is involved is
expected to have a material adverse impact upon the financial condition or
results of operation of Randolph
CountyJay Financial or the Bank.
Stanley R. Hendrickson is the President and a director of Randolph County
and the Bank. On July 15, 1993, in the United States District Court for the
Southern District of Indiana, Mr. Hendrickson plead guilty under a March 24,
1993 indictment and was found guilty of knowingly failing to make a return to
the Internal Revenue Service regarding receipt of cash in amounts in excess of
$10,000 as required by 26 U.S.C. Section 6050I, in violation of 21 U.S.C.
Section 7203. As a result of the foregoing, the Federal Deposit Insurance
Corporation ("FDIC") filed on April 25, 1994 a Notice of Intention to Remove
From Office and to Prohibit From Further Participation against Mr. Hendrickson
(Cause No. FDIC-94-28e). The proceeding was instituted to determine whether an
appropriate order should be issued against Mr. Hendrickson removing him as an
officer, director and/or institution-affiliated party of the Bank and
prohibiting him from further participation in the conduct of the affairs of the
Bank and any other insured depository institution without the prior written
approval of the FDIC and such other appropriate federal financial institutions
regulatory agency. The proceeding was dismissed by the FDIC on March 22, 1996.
EMPLOYEES
As of March 31, 1996,September 30, 1998, the Bank had 2648 full-time equivalent employees
to whom it provides a variety of benefits. Management of the Bank considers its
relations with its employees to be good. As of the same date, Randolph CountyJay Financial had
2three employees, bothone of whom areis an executive officersofficer of both Randolph CountyJay Financial and
the Bank and neithernone of whom is separately compensated by Randolph CountyJay Financial for his
services to Randolph County.Jay Financial.
39
MANAGEMENT
The following table contains certain information about each director and
executive officer of Randolph CountyJay Financial as of the date of this Proxy
Statement-Prospectus:
26
DIRECTORS:
PRINCIPAL OCCUPATION FOR SERVED AS DIRECTOR
NAME AGE THE LAST FIVE YEARS CONTINUOUSLY SINCE (1)
- ---- --- ------------------- ----------------------
James S. Fitzmaurice 78 Retired Businessman 1984 (1975)
Max Gordon 78 Retired Farmer 1984 (1973)
Stanley R. Hendrickson 57 President of Randolph 1992 (1992)
County and Bank since
1992. Prior thereto,
Comptroller of Silver
Towne, Inc.
Richard K. Peterson 68 Retired Banker 1993 (1993)(2)
William H. Ward 65 Associate of Matchett
DIRECTORS:
PRINCIPAL OCCUPATION FOR SERVED AS DIRECTOR
NAME AGE LAST 5 YEARS CONTINUOUSLY SINCE (1)
---- --- ------------ ----------------------
Barry J. Hudson 58 Chairman of the Board, Chief 1988 (1981)
Executive Officer and Investment
Officer, The First National Bank of
Portland; Chairman of the Board of
Mutual Security, Inc.
Bonnie Maitlen, 48 Training and Development 1988 (1985)
M.D. Consultant/Specialist
Greg Moser 46 Owner - Moser Engineering 1994 (1994)
Stephen R. Myron, 43 Administrator - Preferred Medical 1988 (1983)
M.D. Management
Sam Shoemaker 61 Director of Adult Education-Jay 1988 (1987)
County School System
Stanley Teeter 69 Owner - Baird Freeman Funeral Home 1988 (1983)
Gary L. Whitenack 50 Owner - Whitenack Farm & Supply Co. 1993 (1993)
Ward Insurance Agency
Michael D. Wickersham 43 President & Director of 1988 (1988)
Wick's Pies, Inc.
(1) Years in parenthesis relate to service as a director of the Bank. All of
Randolph County'sJay Financial's directors are also directors of the Bank. (2) Mr. Peterson also served asThe only other
director of the Bank is John F. Brigham, age 66, who is the President of
Mutual Security, Inc. and has been a director of the Bank from 1960 through 1992
and Randolph County from 1984 through 1992.since 1965. Mr.
Brigham is the only director of the Bank who is not a director of Jay
Financial.
EXECUTIVE OFFICERS:
NAME AGE OFFICE AND BUSINESS EXPERIENCE
- ---- --- ------------------------------
Max Gordon 78
NAME AGE OFFICE
---- --- ------
Barry J. Hudson 58 Chairman of the Board of Jay Financial
since 1988 and Chairman of the Board, Chief
Executive Officer and Investment Officer of
the Board of Randolph
County, Vice President of Bank and
Retired Farmer
Stanley R. Hendrickson 57 President of Randolph County and Bank
since 1993 and Comptroller of Silver
Towne, Inc. prior to that time
Alvin P. Peters 53 Vice President and Cashier of Bank
Brian A. Edwards 44 Vice President of Bank
Douglas E. Fields 50 Vice President-Mortgage Loans of Bank
Linda D. Brown 45 Vice President and Trust Officer of Bank
Rick D. Tudor 37 Vice President - Installment Loans of Bank since 1981
40
James A. Meinerding 48 President and Chief Operations Officer of
the Bank since 1998
Robert G. Bell 47 Executive Vice President, Chief Loan
Officer and Investment Officer of the Bank
since 1998
Chuck Huffman 41 Senior Vice President, Cashier, Chief Trust
and Investment Officer of the Bank since
1998
Jeff Whetstone 41 Chief Financial Officer and Loan Review
Officer of the Bank since 1995
Stanley Teeter 69 Treasurer of Jay Financial since 1988 and
Owner of Baird Freeman Funeral Home since
1980
Stephen R. Myron, M.D. 43 Secretary of Jay Financial since 1988 and
Administrator of Preferred Medical
Management since 1988
All of Randolph County'sJay Financial'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
Randolph County'sJay Financial's or the Bank's directors or executive officers have been selected
for their respective positions.
In accordance with the Agreement, and in connection with the first annual
meeting of the shareholders of First Merchants after the Merger, First Merchants shall cause all necessary corporate
action to be taken to cause the current Chairman 27
of the Board and Chief
Executive Officer of the Bank, Michael D. Wickersham,Barry J. Hudson, to either (i) be nominated for
election as a member of the First Merchants Board of Directors for a three-year term. See
"PROPOSED MERGER -- Management Afterthree year
term at the Merger"first annual meeting of First Merchants' shareholders following the
merger, or (ii) be appointed as a director at the Board's first meeting
following the completion of the merger. As an appointed director, Mr. Hudson
would serve until the next annual meeting of the First Merchants shareholders
and "DESCRIPTION OF FIRST
MERCHANTS -- Management."then to be nominated for election to a three year term as Director. The
timing of the merger's completion will dictate the option that is followed.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following is a summary of the amount and percent of Randolph County'sJay Financial's
common stock beneficially owned on MarchOctober 31, 19961998, by each beneficial owner of
more than five percent of Randolph County'sJay Financial's common stock, by each director of Randolph County,Jay
Financial, by each executive officer of Randolph County,Jay Financial, and by all directors and
executive officers as a group. Unless otherwise noted, the beneficial owner has
sole voting and investment power.
AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS
- ---------------- ------------------------ ----------------
James S. Fitzmaurice 228(2) *
Max Gordon 285(3) 1.03%
Stanley R. Hendrickson 330(4) 1.20%
Richard K. Peterson 600 2.18%
William H. Ward 5,820(5) 21.12%
Michael D. Wickersham 30 *
Linda D. Brown 100 *
Brian A. Edwards 173 *
Douglas E. Fields 20 *
Alvin P. Peters 40 *
Richard D. Tudor 5(6) *
Juanita I. Chenowith 3,000 10.89%
R.R. #4
Union City, Indiana
Edward G. Dunn 1,650 5.99%
7701 Spring Mill Road
Indianapolis, Indiana
MCCRAB & Co, Nations Bank 1,920 6.97%
Box 832246
Dallas, Texas
Trussal & Co., NBD Bank, N.A. 2,350 8.53%
Box 77975
Detroit, Michigan 48277
Estate of Robert M. Ward, Deceased 5,760 20.90%
c/o William H. Ward,
Personal Representative
251 E. South
Winchester, Indiana
2841
AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS
- ---------------- ------------------------ ----------------
Directors and Executive 7,631 27.69%
Officers as a Group
(11
AMOUNT AND NATURE
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS
---------------- ----------------------- ----------------
Patsy J. Elick 4,580 (2) 5.59%
Barry J. Hudson 54,879 (3) 67.01%
Bonnie Maitlen, M.D. 472 (4) *
James A. Meinderding 336 *
Greg Moser 517 *
Stephen R. Myron, M.D. 840 1.03%
Sam Shoemaker 556 (5) *
Stanley Teeter 572 *
Gary L. Whitenack 420 *
Mutual Security, Inc. 20,916 (6) 25.54%
Directors and Executive 58,592 71.54%
Officers as a Group (8
Individuals)
(1) The information contained in this column is based upon information
furnished to Randolph CountyJay Financial by the persons and entities named above and
shareholder records of Randolph County.Jay Financial.
(2) Patsy J. Elick's mailing address is 405 East High Street, Portland, IN
47371.
(3) Includes 21819,076 shares held jointly with his spouse, Mary Fitzmaurice.
(3) Includes 105Elizabeth Hudson; 201
shares held by his spouse, Eva Marie Gordon, inminor son, Aaron Eugene Hudson; 201 shares held by his
minor daughter, Mary Catherine Hudson; and 20,916 shares held by Mutual
Security, Inc. over which he disclaims any beneficial interest.has sole voting and investment power. Mr.
Hudson's mailing address is 112 West Main Street, Portland, IN 47371.
(4) Includes 200472 shares held jointly with her spouse, Gary Maitlen.
(5) Includes 556 shares held jointly with his spouse, Gretchen Hendrickson.
(5)Sue Shoemaker.
42
(6) Includes 57603,250 Class A voting shares heldand 17,666 Class B non-voting shares.
All such shares are entitled to be voted in connection with the merger and
are included in the estate of Robert M. Ward, deceased, in
which William H. Wardshares beneficially owned by Barry J. Hudson. Mutual
Security, Inc.'s mailing address is personal representative.
(6) Includes 5 shares held jointly with his spouse, Kimberly Tudor.108 East Main Street, Portland, IN
47371.
* Percentage beneficially owned is less than 1% of the outstanding shares.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain directors and executive officers of Randolph CountyJay Financial and the Bank
and their associates are
customers of and have had transactions with Randolph
CountyJay Financial or the Bank 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.
RANDOLPH COUNTY43
JAY FINANCIAL MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis reviews the consolidated operating
results and financial condition of Randolph County and its subsidiary, the Bank.
This discussion should be read(Dollar amounts in conjunction with the consolidated financial
statements, notes thereto and other financial information presented herein.
OVERVIEW AND PER SHARE INCOME
Net income for 1995 was $667,000, or 16.8% less than the $802,000 earned in
1994, which had decreased from 1993 net income of $1,072,000 by 25.2%. Net
incomethousands, except per share was $24.20data)
THE FOLLOWING DISCUSSION AND ANALYSIS REVIEWS THE CONSOLIDATED OPERATING RESULTS
AND FINANCIAL CONDITION OF JAY FINANCIAL AND ITS SUBSIDIARY, THE FIRST NATIONAL
BANK OF PORTLAND. THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED 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 JAY FINANCIAL TO DIFFER MATERIALLY FROM
ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS.
Jay Financial is a one-bank holding company located in Portland, Indiana, and
conducts business from three offices of The First National Bank of Portland (the
"BANK") in Jay County, Indiana. The Bank provides a wide range of commercial
and personal banking activities, including accepting deposits; making commercial
and consumer loans; originating mortgage loans; providing personal and corporate
trust services; and providing investment advisory and brokerage services.
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
RESULTS OF OPERATIONS
NET INCOME
Jay Financial earned $1,461, or $17.84 per share for 1995, a decrease of 16.8%,1997 compared to $29.10$1,671, or
$20.40 per share for 1994, which had decreased from $38.89, or 25.2% from 1993. The primary
reason for the decrease1996. Net interest income increased during 1997; however,
this increase was more than offset by decreases in netnoninterest income and
increases in 1995 compared to 1994 was the increase
in the provision for loan losses to $408,000 in 1995 from $120,000 in 1994. Net
income in 1994 decreased compared to 1993 due to a decline in the net interest
margin and a $220,000 gain in 1993 on an investment security which was written
down in 1992.
29
noninterest expenses.
Return on average assets (ROA) was .92% in 1995 compared with 1.02% in 19941.42% and 1.40% in 1993. Return1.70% for 1997 and 1996,
respectively, while return on average stockholders' equity (ROE) was 7.72%, 9.81%11.25% and 14.48%14.44% for
1995, 1994 and 1993.
ANALYSIS OF INCOME STATEMENTthose same periods.
NET INTEREST INCOME
Net interest income is Randolph County's largestthe most significant component of Jay Financial's
earnings. Net interest income and
representsis the difference between interest and fees
earnedrealized on loans, investments
and other earning assets, primarily loans and thesecurities, and interest paid on
interest bearing liabilities.deposits and other borrowed funds. The net interest margin is this difference
expressed as a percent computedpercentage of average earning assets. Net interest income is
determined by dividingseveral factors, including the volume of earning assets and
liabilities, the mix of earning assets and liabilities, and interest rates. For
1997 and 1996, net interest income was $4,624 and $4,479, respectively. This
represents a $145, or 3.2% increase over the prior year. The increase in net
interest income during 1997 is primarily attributable to the higher loan volume
generated by Jay Financial.
44
Total interest income for 1997 was $374, or 4.7% greater than for 1996.
Interest and fees on loans increased $556, or 8.0%, to $7,530 for 1997, compared
to $6,974 for 1996. Growth in Jay Financial's loan portfolio accounted for the
increase in total interest income, as average loan balances were approximately
$8,517, or 11.7% higher in 1997 compared to 1996. Partially offsetting the
growth in loan interest income, was a decrease in interest income on securities
and other investments (federal funds sold and interest-bearing balances with
banks). This decrease occurred as securities and other investments were used to
partially fund the loan growth, resulting in a decrease in the average balances
of securities and other investments of $4,282 in 1997 compared to 1996.
Total interest expense for 1997 increased $229, or 6.5%, compared to 1996. The
increase was primarily attributable to increased borrowings, as average
borrowings increased approximately $2,786, or 359.0% during 1997. Deposits did
not grow significantly, resulting in the use of borrowings to help fund the loan
growth.
See Tables 2 and 3 for an analysis of Jay Financial's net interest income (on a
tax-equivalent basis) for 1997 and 1996.
Net interest income, on a fully taxabletax equivalent basis, by average earning assets and represents a
measure of basic earnings on interest bearing assets held by Randolph County.for 1997 was $121, or 2.6%
higher than for 1996. The net interest margin, on a tax equivalent basis for
1997 and 1996 was 4.1%4.98% and 5.08%, respectively. The net interest margin
remains strong, however it declined during 1997 and the increase in 1995net interest
income was modest. Although loan growth was experienced, the average rate on
loans declined 32 basis points and the average rate on earning assets declined 3
basis points. In addition, a general increase in the cost of funds coupled with
the increase in borrowings resulted in an increase in the average rate on
interest-bearing liabilities of 12 basis points. The net decline in interest
rate spread of 15 basis points offset the growth in loans to moderate the growth
in net interest income and cause the decline in net interest margin.
Contributing to the decrease in the rate on loans and in net interest margin was
approximately $100 of loan interest income recovery recorded in 1996. A bit
over one half of the 32 basis point decline in rate on loans is attributable to
this 1996 loan interest income recovery.
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 composition of the allowance
for loan losses. The provision for loan losses was $240 for 1997 and $281 for
1996. A lower provision was required as a result of decreased net charge-offs.
Net charge-offs were $170 and $365 for 1997 and 1996, respectively. The
decrease in net charge-offs was primarily attributable to the fact that 1996
charge-offs included one large commercial loan charge-off of approximately $190,
while two large commercial loan recoveries were recorded in 1997. The allowance
for loan losses substantially kept pace with loan growth as the allowance at
year end 1997 was $992, or 1.17% of total loans compared to 3.8%$922, or 1.19% of
total loans at year end 1996.
45
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 1994the process of
collection.
See Table 5 for a summary of nonperforming loans. Nonperforming loans were very
stable between 1997 and 4.0%1996, while the growth in 1993.the allowance provided an
increased level of coverage of allowance as a percentage of nonperforming loans.
Impaired loans are those loans for which full payment in accordance with the
contractual terms is not expected. See Note 1 and Note 4 to Jay Financial's
consolidated financial statements included in this Proxy Statement-Prospectus
(the "Consolidated Financial Statements") regarding information on Jay
Financial's impaired loans. Impaired loans decreased to $563 at year end 1997
from $980 at year end 1996.
Management designates certain loans for internal monitoring purposes in a watch
category. 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
category 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, Jay Financial had a total of $1,015 of loans on its watch
list which were not included in impaired or nonperforming loans.
NONINTEREST INCOME AND EXPENSE
See Table 6 for an analysis of changes in noninterest income and expense.
Noninterest income decreased $157, or 18.6% to $689 compared to the prior year.
This was primarily due to decreases in trust income and other noninterest
income. Trust income declined $25 in 1997 compared to 1996 due to one-time
increased trust billings in 1996. Trust income is generally recorded on a cash
basis, which materially approximates the accrual basis; however, in 1996 certain
trust billings were changed from billing in arrears to advance billings. Other
noninterest income decreased $143, or 29.5% in 1997. The decrease in
noninterest income was primarily due to a 1996 recovery on an unrecorded loan.
Total noninterest expense for 1997 was $361, or 14.5% higher than the prior
year.
Salaries and employee benefits for 1997 were $1,551, a $176, or 12.8% increase
from the 1996 amount. Salaries increased $79 due to annual raises and an
increase of two full-time equivalent employees. 401(k) contribution expense
increased $42, as a new matching contribution
46
percentage was in effect for the first full year in 1997, and $23 was expensed
to correct for an error in prior year matching contributions.
Premises and equipment expense increased $59, or 17.2% in 1997. The increase
was due to increased depreciation expense, as a result of fixed asset
expenditures over the past two years, primarily related to remodeling and data
processing.
Other noninterest expenses increased $126, or 16.5% in 1997. Legal expense
increased $28 due to settlement of litigation during 1997. Credit card
processing expense increased $36 due to increased merchant processing activity.
Other real estate expenses increased $33 due to the payment of significantly
past due property taxes on a foreclosed property during 1997.
INCOME TAXES
The provision for income taxes was stable as a percent of income before income
taxes for 1997 and 1996. The effective income tax rate for 1997 and 1996 was
34.5% and 34.8%, respectively. Further tax information regarding Jay Financial
can be found in Note 1 and Note 8 to the Consolidated Financial Statements.
FINANCIAL CONDITION
Total assets were $104,977 at year end 1997 compared to $101,679 at year end
1996, an increase of $3,298, or 3.2%. Increases were realized in loans and cash
value of life insurance, partially offset by decreases in cash and cash
equivalents and securities.
Cash value of life insurance increased as new policies were purchased to fund
increased retirement benefits to certain officers. See Note 12 to the
Consolidated Financial Statements for more information regarding Jay Financial's
benefit plans.
Cash and cash equivalents decreased during 1997 primarily as a result of the
need to fund loan growth. See the consolidated statement of cash flows and the
Liquidity and Rate Sensitivity discussion for more information on cash and cash
equivalents.
SECURITIES
See Note 3 to the Consolidated Financial Statements and Table 7 for information
about Jay Financial's securities. Jay Financial classifies all securities as
available for sale, except small issues of states and political subdivisions.
During 1997, securities available-for-sale and held-to-maturity declined by
$2,677 as Jay Financial funded its loan growth. No significant changes in the
composition of securities occurred since the prior year.
47
LOANS
See Note 4 to the Consolidated Financial Statements and Table 8 for information
about Jay Financial's loan portfolio.
Loans increased $7,406 or 9.6% from year end 1997 to year end 1996. This growth
occurred primarily in commercial and commercial real estate loans, accounting
for $4,802 of the increase in loans. The majority of this increase occurred in
loans dependent on the agriculture industry, as agriculture loans increased to
$17,136 at year end 1997 from $13,429 at year end 1996. Residential real estate
loans also grew during 1997, increasing $2,867 or 10.6%. Management believes
this level of loan growth is relatively consistent with the demand in the Bank's
market and the Bank's relative market share.
DEPOSITS
See Note 6 to the Consolidated Financial Statements and Tables 2 and 9 for more
information about Jay Financial's deposits. Jay Financial's average deposits
for 1997 were very stable compared to 1996. However, total deposits at year end
1997 were $3,549, or 4.1% less than year end 1996. Management attributes the
majority of the decrease in year end deposits to the timing of outflows of
public fund deposits and large certificates of deposit. However, during 1997 a
trend of lower deposit growth than loan growth continued, resulting in the need
to borrow funds.
BORROWINGS
At year end 1997 short-term borrowings increased $1,508, or 236.7%, and FHLB
advances increased $3,800, or 380.0% from year end 1996. The increase in
borrowings was used to fund loan growth in the absence of growth in deposits.
See Note 9 to the consolidated financial statements for more information on Jay
Financial's FHLB advances.
CAPITAL
The Bank 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 bank 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
48
regulations, a "well-capitalized" institution must achieve a Tier 1 risk-based
capital ratio of at least 6.00%, and 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 Jay Financial'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 the Bank met all the capital requirements as of December 31,
1997, and was well-capitalized under the guidelines established by the banking
regulators. To be well-capitalized, the Bank 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 Jay Financial's
consolidated liquidity, capital resources or operations.
The Bank's actual capital amounts and ratios are presented in Note 11 to the
Consolidated 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. Jay Financial 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, Jay Financial has the ability to sell securities available for sale,
and Jay Financial may borrow from the Federal Reserve and the Federal Home Loan
Bank.
The consolidated statement of cash flows and Table 10 illustrate the sources and
uses of Jay Financial's cash and cash equivalents. During 1997, average loans
increased $8,517. This loan increase was funded approximately one half by
decreases in securities and other investments, approximately one third by
increased borrowings, and the remainder by decreases in cash balances.
Management believes Jay Financial has sufficient liquidity to meet reasonable
borrower, depositor, and creditor needs in the present economic environment.
Jay Financial has not received any recommendations from regulatory authorities
which would materially affect liquidity, capital resources or operations.
Jay Financial'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.
49
As seen in Table 11, the Bank has a negative cumulative gap position for all
time periods except the over five year category. This would suggest that the
Bank 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, the
Bank 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 impact on the growth in the balance sheets and increased
levels of income and expense has been nominal.
YEAR 2000
Jay Financial'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 Jay Financial
now plans to convert its mission critical systems to First Merchants' systems,
which is expected to occur early in the second quarter of 1999. Jay Financial'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. Jay Financial 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 Jay Financial.
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 Jay Financial does not expect the
total cost to address this issue to be significant to operations.
50
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
RESULTS OF OPERATIONS
NET INCOME
Jay Financial earned $387, or $4.73 per share for the third quarter of 1998
compared to $371, or $4.53 per share for the third quarter of 1997. Net income
increased $6, or 0.6% to $1,090 for the nine month period ending September 30,
1998 compared to the same period in 1997. Net income per share was $13.31 and
$13.24 for the nine month period ending September 30, 1998 and 1997,
respectively. Net interest income increased during the period; however, this
increase was largely offset by decreases in trust income and service charge
income, as well as increased noninterest expenses, such as salaries and employee
benefits.
Annualized return on average assets (ROA) was 1.37% and 1.42% for the periods
ending September 30, 1998 and 1997, respectively, while annualized return on
average equity (ROE) was 10.25% and 11.29% for those same periods ending
September 30, 1998 and 1997, respectively.
NET INTEREST INCOME
For the nine months ended September 30, 1998 and 1997, net interest income was
$3,518 and $3,447, respectively. This represents a $71, or 2.1% increase over
the prior year. Net interest income for the third quarter of 1998 was $54, or
4.6% higher than for the same 1997 period. The increase in net interest income
during 1998 is primarily attributable to the continued growth in loans.
Total interest income increased $201, or 3.2% for the nine month period ending
September 30, 1998, and $100, or 4.7% for the third quarter of 1998. Interest
and fees on loans increased $275, or 4.9%, to $5,853 for the first nine months
of 1998, compared to $5,578 for the first nine months of 1997. For the third
quarter of 1998, interest and fees on loans increased $103, or 5.3% compared to
the third quarter of 1997. Growth in Jay Financial's loan portfolio continued
to account for the majority of the increase in total interest income, as average
loan balances were approximately $5,496, or 6.9% higher for the nine months
ended September 1998 compared to 1997. The increase in loan interest income was
partially offset by a decline in interest income on securities. Average
securities balances declined by $3,443 for the nine months ended September 1998
compared to 1997, as proceeds from sales, maturities and payments on securities
were used to help fund loan growth.
Total interest expense increased $130, or 4.7% for the nine month period ending
September 30, 1998, and $46, or 4.8% for the third quarter of 1998. The
increase was primarily attributable to increased long-term debt, as average long
term debt increased $2,583, or 125.5% for the nine month period ended September
1998. Average deposits did not change significantly during 1998, resulting in
the use of long-term borrowings to help fund loan growth.
51
PROVISION FOR LOAN LOSSES AND NET INTEREST MARGINASSET 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 $180 for the first nine months of both 1998 and
1997, and $60 for the third quarter of both 1998 and 1997. The allowance for
loan losses at September 30, 1998 was $900, or 1.02% of total loans compared to
$992, or 1.17% of total loans at December 31, 1997. The allowance as a
percentage of loans has declined; however, the level of nonperforming loans also
declined by $456, or 59.0%, and the allowance as a percent of nonperforming
loans more than doubled to 283.9%. Net charge-offs were $272 and $121 for the
first nine months of 1998 and 1997, respectively. Management believes this
increase is primarily attributable to two large commercial loan recoveries
recorded in 1997, rather than an adverse trend in the overall portfolio.
NONINTEREST INCOME AND EXPENSE
Noninterest income totaled $582 for the first nine months of 1998, compared to
$523 for that same period of 1997, an increase of $59, or 11.3%. Noninterest
income for the third quarter increased $8, or 4.3% to $196 compared to the prior
year.
Other noninterest income increased for both the first nine months and the third
quarter of 1998. Nearly two-thirds of the increase was attributable to
increased earnings on the cash value of life insurance, as a result of the
additional life insurance purchases in 1997. The remaining increase was split
nearly evenly between increased ATM fees related to new ATM surcharges
implemented in late 1997, and merchant charge card fees related to increased
merchant activity.
Partially offsetting the increase in other noninterest income was a decrease in
trust income for both the first nine months and the third quarter of 1998.
Trust fees declined as a decline in the volume of estate accounts was
experienced. In addition, service charges on deposit accounts decreased
slightly for the first nine months of 1998 and for the third quarter of 1998.
The average deposit base was very stable between the applicable periods, and the
slight decrease in service charges is attributable to natural variations in
charges on a similar deposit base.
Noninterest expense totaled $2,241 for the first nine months of 1998, compared
to $2,133 for that same period of 1997, an increase of $108, or 5.1%. Total
noninterest expense for the third quarter of 1998 was $28, or 3.8% higher than
the prior year.
Salary and employee benefits expense was $1,224 for the first nine months of
1998, an increase of $63, or 5.4%, from the $1,161 for the first nine months of
1997. Total salaries and employee benefits for the third quarter of 1998 were
$393, a $18, or 4.8% increase from the 1997 amount. While the number of
employees declined from 51 to 48 during 1998, this decline was more than offset
by a $50 incentive bonus related to achievement of various employee goals, and
the additional expense of increased officer retirement benefits.
Other noninterest expenses were $705 for the first nine months of 1998, an
increase of $38, or 5.7%, compared to $667 for the first nine months of 1997.
For the third quarter of 1998, other operating expenses increased $15, or 5.7%
from the prior year. Increases in noninterest expense relate primarily to
increased merchant credit card processing costs and increased ATM
52
processing costs. The increased ATM processing costs related to a new debit
card product, as well as vendor billing adjustments for ATM transaction
processing.
INCOME TAXES
The effective income tax rate for the first nine months of 1998 and 1997 was
35.1% and 34.6%, respectively. The effective income tax rate for the third
quarter of 1998 and 1997 was 35.9% and 34.9%, respectively. The increase in
effective tax rate for these periods was primarily attributable to the decline
in income on non-taxable securities.
FINANCIAL CONDITION
Total assets were $108,626 at September 30, 1998 compared to $104,977 at
December 31, 1997, an increase of $3,649, or 3.5%. Increases of $2,129, and
$3,426 were realized in cash and cash equivalents, and net loans, respectively,
while securities decreased $2,353 for the first nine months of 1998. Proceeds
from sales, maturities, and payments on securities were used to partially fund
loan growth during 1998, as average deposits were comparable to the prior year.
Other assets increased in 1998 due to the addition of other real estate acquired
in foreclosure of $350.
Average deposits during 1998 were very comparable to 1997. However, by
September 30 total deposits had increased $5,270 from the prior year end,
primarily related to increased interest-bearing deposits. Management attributes
the increased deposit level to the timing of inflows in public fund deposits, as
public funds increased $2,739 in 1998, and to slightly more aggressive pricing
on certificates of deposit, as certificates less than $100 increased by $2,754.
This period end increase in deposits, allowed for decreases in short-term debt
and FHLB advances of $1,946 and $1,000, respectively.
CAPITAL
Management believes the Bank 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 Jay Financial's
consolidated liquidity, capital resources or operations.
53
The Bank's actual capital amounts and ratios are presented in the following
table.
1995 1994 1993
---------------------------------------------------------Minimum Required
To Be Well
Minimum Required Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount RateRatio Amount RateRatio Amount Rate
---------------------------------------------------------
(in thousands)Ratio
------ ----- ------ ----- ------ -----
September 30, 1998
- ------------------
Total interest income $5,314 7.8% $5,180 6.9% $5,487 7.3%
Total interest expense 2,498 3.6 2,371 3.1 2,536 3.5
---------------------------------------------------------
Net interest $2,816 4.1% $2,809 3.8% $2,951 4.0%
income/margin
---------------------------------------------------------
---------------------------------------------------------capital (to risk weighted assets) $ 15,159 19.1% $ 6,350 8.0% $ 7,938 10.0%
Tier 1 capital (to risk weighted assets) 14,259 18.0 3,175 4.0 4,763 6.0
Tier 1 capital (to average assets) 14,259 13.2 4,324 4.0 5,405 5.0
Note: Presented on a fully taxable equivalent basis.
Net interestLIQUIDITY
Liquidity refers to the availability of funds to meet deposit withdrawals and
borrowing repayments, fund loan commitments and pay expenses. Jay Financial 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, Jay Financial has the ability to sell securities available for sale,
and Jay Financial may borrow from the Federal Reserve and the Federal Home Loan
Bank.
Jay Financial's consolidated statement of cash flows included in this Proxy
Statement-Prospectus illustrates the sources and uses of Jay Financial's cash
and cash equivalents for the nine months ended September 30, 1998 and 1997.
Including net income of $2,816,000$1,090, net cash from operating activities for the first
nine months of 1998 generated $1,167 of available cash. Net cash from investing
activities utilized $1,280 of available cash, primarily as a result of funding
$3,606 in 1995 increased overnet loans, which exceeded the $2,809,000
recorded in 1994. In 1994, net interest income decreased slightly$2,386 of funds provided from the $2,951,000 recordedsales,
maturities and payments on securities. The $5,270 increase in 1993. The amountdeposits, offset
by the net repayments on short-term borrowings and FHLB advances account for the
majority of net interest income is affectedthe $2,242 in cash generated from financing activities. Total cash
inflows for the nine month period in 1998 exceeded cash outflows by changes$2,129
resulting in a cash and cash equivalent balance of $4,563 at September 30, 1998.
Management believes Jay Financial has sufficient liquidity to meet reasonable
borrower, depositor, and creditor needs in the volume and mix of earning assets and interest bearing
liabilities, and the interest rates on these assets and liabilities. An
analysis of how volume and rate changes have affected net interest income since
1993 is presented below.
ANALYSIS OF CHANGES IN NET INTEREST INCOMEpresent economic environment.
Jay Financial has not received any recommendations from regulatory authorities
which would materially affect liquidity, capital resources or operations.
54
TABLE 1 - JAY FINANCIAL FIVE YEAR FINANCIAL SUMMARY
(Dollars in Thousands, Except Per Share Amounts)
NINE MONTHS ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
1998 1997 1997 1996 1995 over 1994 1994 over 1993
------------------------------------------------------------
Volume Rate Total Volume Rate Total
------------------------------------------------------------
(in thousands)---------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Interest earning assets $(416) $ 303 $(113) $(166) $(241) $(407)income - tax equivalent (1) $6,519 $6,364 $8,565 $8,215 $7,379 $6,481 $6,548
Interest bearing
liabilities (207) 334 127 49 214 (165)
------------------------------------------------------------
Change in netexpense 2,904 2,774 3,754 3,525 3,159 2,704 2,855
---------------------------------------------------------------------------------------
Net interest income $(209) $( 31) $(240) $(215) $( 27) $(242)
------------------------------------------------------------
------------------------------------------------------------- tax equivalent (1) 3,615 3,590 4,811 4,690 4,220 3,777 3,693
Tax equivalent adjustment (1) (97) (143) (187) (211) (239) (275) (258)
---------------------------------------------------------------------------------------
Net interest income 3,518 3,447 4,624 4,479 3,981 3,502 3,435
Provision for loan losses (180) (180) (240) (281) (155) (139) (139)
Noninterest income 582 523 689 846 596 523 583
Noninterest expense 2,241 2,133 2,844 2,483 2,423 2,258 2,134
---------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 1,679 1,657 2,229 2,561 1,999 1,628 1,745
Income tax expense 589 573 768 890 645 476 553
---------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle 1,090 1,084 1,461 1,671 1,354 1,152 1,192
Cumulative effect of change in
accounting principle - - - - - - 53
---------------------------------------------------------------------------------------
NET INCOME $1,090 $1,084 $1,461 $1,671 $1,354 $1,152 $1,245
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
PER SHARE DATA (2)
Income before cumulative effect of change
in accounting principle $13.31 $13.24 $17.84 $20.40 $16.53 $14.07 $14.56
Net income 13.31 13.24 17.84 20.40 16.53 14.07 15.20
Cash dividends 1.00 1.00 2.00 2.00 1.00 0.95 0.95
Shareholders' equity, end of year 179.11 162.61 166.39 149.89 131.49 108.82 103.17
SELECTED ACTUAL YEAR-END BALANCES
Total assets $108,626 $103,570 $104,977 $101,679 $92,492 $87,391 $84,907
Earning assets 101,565 98,101 98,284 95,356 85,530 80,136 78,168
Investment securities available-for-sale 9,621 12,192 11,898 14,352 16,473 21,598 2,753
Investment securities held-to-maturity 855 971 931 1,154 1,411 1,628 20,402
Loans 88,242 84,484 84,908 77,502 64,660 55,565 49,545
Allowance for loan losses (900) (981) (992) (922) (1,006) (878) (806)
Total deposits 88,872 83,685 83,602 87,151 80,829 76,213 74,739
Noninterest-bearing deposits 5,205 4,508 5,441 7,040 6,660 6,555 5,532
Interest-bearing deposits 83,667 79,177 78,161 80,111 74,169 69,658 69,207
Long-term borrowings 3,800 3,800 4,800 1,000 0 0 568
Shareholders' equity 14,669 13,318 13,627 12,276 10,769 8,912 8,449
SELECTED RATIOS
Loans to deposits 99.29% 100.95% 101.56% 88.93% 80.00% 72.91% 66.29%
Return on average assets 1.37% 1.42% 1.42% 1.70% 1.52% 1.37% 1.51%
Return on average equity 10.25% 11.29% 11.25% 14.44% 13.70% 13.34% 15.82%
Dividends payout ratio 10.03% 10.09% 11.23% 9.81% 6.06% 6.77% 6.27%
Leverage capital ratio (3) 13.19% 12.52% 12.54% 12.32% 11.38% 10.02% 10.38%
Efficiency ratio (4) 53.40% 51.86% 51.71% 44.85% 50.31% 52.51% 49.91%
OTHER DATA
Number of employees 48 51 51 49 44 42 42
Average common shares outstanding (2) 81,900 81,900 81,900 81,900 81,899 81,893 81,893
Cash dividends declared $82 $82 $164 $164 $82 $78 $78
Note: Presented(1) Net interest income has been presented on both a fully taxabletax equivalent and non-tax
equivalent basis. Average earning assets, comprised of loans, investment securities and other
earning assets decreased 8.2%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 1995 while average interest bearing liabilities
decreased 10.5%. Net interest margin increasedorder to 4.1% for 1995 compared to
3.8% for 1994. As the above analysis indicates, decreased volume was the
primary reason net
30
interest income increased in 1995. In addition, the decrease in margins during
1994 adversely affectedpresent net interest income in 1994.
Average earning assets increased 2.0%accordance with
generally accepted accounting principles (GAAP), as reflected in 1994 while interest bearing
liabilities increased 1.3%. Net interest margin decreasedthe
consolidated financial statements.
(2) Per share data has been retroactively adjusted to 3.6% for 1994 from
3.8% for 1993.reflect stock dividends.
(3) The decrease inleverage capital ratio is that of the Bank. Jay Financial is not
required to calculate such ratio.
(4) The efficiency ratio is calculated by dividing noninterest expense by the
sum of net interest margin over the two-year period was
primarily due to competitive factorsincome, on a fully tax equivalent basis, and low rate car loan promotions.
PROVISION FOR LOAN LOSSES
The provision for loan losses represents a charge against income and a
corresponding increasenoninterest
income.
55
TABLE 2 - JAY FINANCIAL AVERAGE BALANCE SHEETS AND INTEREST RATES
(Dollars in the allowance for loan losses. This provision was
$408,000 in 1995 compared to $120,000 and $240,000 in 1994 and 1993. For an
analysis of loan losses and the allowance for loan losses - See "RANDOLPH COUNTY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Loans."
NON-INTEREST INCOME
Non-interest income decreased to $223,000 in 1995 compared to $242,000 in
1994, a decrease of 7.9% after decreasing 42.1% in 1994. Fees from fiduciary
activities may fluctuate significantly due to the level of estate assets
administered. In 1993, a gain of $220,000 was realized from proceeds of an
investment security written off in 1992. A comparison of the components of non-
interest income is presented in the following table.
NON-INTEREST INCOMEThousands)
Percentage of Change
Year Ended DecemberYEARS ENDED DECEMBER 31,
Over Prior Years
------------------------------------------------------------
1995 1994 1993 1995 1994 1993
------------------------------------------------------------
(In thousands)1997 1996
-----------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
ASSETS BALANCE INTEREST RATE BALANCE INTEREST RATE
-----------------------------------------------------------------------------------
Fiduciary activitiesINTEREST EARNING ASSETS
Securities
Taxable $8,480 $496 5.85% $10,108 $536 5.30%
Non-taxable (1) 6,286 476 7.57% 7,359 562 7.64%
Federal funds sold 635 38 5.98% 2,166 114 5.26%
Interest-bearing balances with banks - - 0.00% 187 9 4.81%
Unrealized loss on AFS securities (48) - 0.00% (185) - 0.00%
-----------------------------------------------------------------------------------
Total securities 15,353 1,010 6.58% 19,635 1,221 6.22%
Loans (1)(2)
Commercial 41,936 3,959 9.44% 38,060 3,746 9.84%
Real estate 28,474 2,447 8.59% 24,245 2,103 8.67%
Installment and other consumer 10,756 1,149 10.68% 10,344 1,145 11.07%
-----------------------------------------------------------------------------------
Total loans 81,166 7,555 9.31% 72,649 6,994 9.63%
TOTAL EARNING ASSETS 96,519 8,565 8.87% 92,284 8,215 8.90%
-----------------------------------------------------------------------------------
NONINTEREST EARNING ASSETS
Allowance for loan losses (945) (1,007)
Premises and equipment 1,063 1,066
Cash and due from banks 2,542 2,632
Accrued interest and other assets 3,405 3,190
-------- -------
TOTAL ASSETS $102,584 $98,165
-------- -------
-------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
Deposits
Interest-bearing demand deposits $20,631 $530 2.57% $21,368 $533 2.49%
Savings deposits 6,945 196 2.82% 6,248 170 2.72%
Time deposits 51,913 2,810 5.41% 51,755 2,779 5.37%
-----------------------------------------------------------------------------------
Total interest-bearing deposits 79,489 3,536 4.45% 79,371 3,482 4.39%
Borrowed funds
Short-term borrowings 812 46 5.67% 451 23 5.10%
Long-term debt 2,750 172 6.25% 325 20 6.15%
-----------------------------------------------------------------------------------
Total borrowed funds 3,562 218 6.12% 776 43 5.54%
TOTAL INTEREST-BEARING LIABILITIES 83,051 $3,754 4.52% 80,147 $3,525 4.40%
-----------------------------------------------------------------------------------
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing demand deposits 5,719 5,656
Accrued interest and other liabilities 833 789
Shareholders' equity 12,981 11,573
-------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $102,584 $98,165
-------- -------
-------- -------
INTEREST MARGIN RECAP
NET INTEREST INCOME AND
INTEREST RATE SPREAD $4,811 4.35% $4,690 4.50%
-------- ------- -------- -------
-------- ------- -------- -------
NET INTEREST INCOME MARGIN 4.98% 5.08%
------- -------
------- -------
(1) Interest income on tax-exempt securities and loans has 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 balances and loan fees are
included in interest income. Loan fees were $61 and $98 for 1997 and 1996.
56
- --------------------------------------------------------------------------------
TABLE 3 - JAY FINANCIAL VOLUME/RATE ANALYSIS
- --------------------------------------------------------------------------------
(Dollars in Thousands)
1997-1996
------------------------------------
Change Change
Total Due To Due To
INTEREST INCOME Change Volume Rate
------------------------------------
Loans $561 $799 $(238)
Securities
Taxable (40) (85) 45
Tax-exempt (86) (81) (5)
Interest-bearing balances with banks (9) (9) -
Federal funds sold (76) (90) 14
------------------------------------
TOTAL INTEREST INCOME 350 534 (184)
------------------------------------
INTEREST EXPENSE
Interest-bearing DDA (3) (19) 16
Savings deposits 26 19 7
Time deposits 31 9 22
Short-term borrowings 23 20 3
Long-term borrowings 152 152 -
------------------------------------
TOTAL INTEREST EXPENSE 229 181 48
------------------------------------
NET INTEREST INCOME $121 $353 $(232)
------ ------ -------
------ ------ -------
57
- --------------------------------------------------------------------------------
TABLE 4 - JAY FINANCIAL ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
(Dollars in Thousands)
SEPTEMBER 30, DECEMBER 31,
1998 1997 1997 1996
---------------------------------------------------------------
BALANCE AT BEGINNING OF PERIOD $992 $922 $922 $1,006
LOANS CHARGED-OFF
Commercial (234) (200) (224) (300)
Real estate-residential 0 0 0 (24)
Consumer (126) (80) (116) (82)
---------------------------------------------------------------
TOTAL CHARGE-OFFS (360) (280) (340) (406)
---------------------------------------------------------------
CHARGE-OFFS RECOVERED
Commercial 6 116 118 7
Real estate-residential 35 5 5 3
Consumer 47 38 47 31
---------------------------------------------------------------
TOTAL RECOVERIES 88 159 170 41
---------------------------------------------------------------
Net loans charged-off (272) (121) (170) (365)
Current year provision 180 180 240 281
---------------------------------------------------------------
BALANCE AT END OF PERIOD $900 $981 $992 $922
---- ---- ---- ----
---- ---- ---- ----
Loans at period end $88,242 $84,484 $84,908 $77,502
Ratio of allowance to loans at period
end 1.02% 1.16% 1.17% 1.19%
Average loans $85,732 $80,235 $81,166 $72,649
Ratio of net loans charged-off to
average loans 0.32% 0.15% 0.21% 0.50%
58
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)
SEPTEMBER 30, DECEMBER 31,
1998 1997 1997 1996
---------------------------------------------------------------
Commercial $692 $790 $753 $733
Real estate-residential 116 89 110 98
Consumer 70 67 64 71
Unallocated 22 35 65 20
---------------------------------------------------------------
Total $900 $981 $992 $922
---- ---- ---- ----
---- ---- ---- ----
COMPOSITION OF LOAN PORTFOLIO
(Dollars in Thousands)
SEPTEMBER 30, DECEMBER 31,
1998 1997 1997 1996
---------------------------------------------------------------
Commercial 53.45% 52.58% 52.21% 51.01%
Real estate-residential 35.20% 34.75% 35.22% 34.89%
Consumer 11.35% 12.66% 12.56% 14.10%
---------------------------------------------------------------
Total 100.00% 100.00% 100.00% 100.00%
------- ------- ------- -------
------- ------- ------- -------
59
- --------------------------------------------------------------------------------
TABLE 5 - JAY FINANCIAL NONPERFORMING ASSETS
- --------------------------------------------------------------------------------
(Dollars in Thousands)
SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
-------------------------------------------
PRINCIPAL BALANCE
Nonaccrual $301 $736 $758
90 days or more past due 16 37 17
-------------------------------------------
TOTAL NONPERFORMING LOANS $317 $773 $775
---- ---- ----
---- ---- ----
Nonperforming loans as a percent
of loans 0.36% 0.91% 1.00%
Other real estate owned $350 $0 $10
OREO as a percent of loans 0.40% 0.00% 0.01%
Allowance as a percent of
nonperforming loans 283.91% 128.33% 118.97%
60
- --------------------------------------------------------------------------------
TABLE 6 - JAY FINANCIAL NONINTEREST INCOME & EXPENSE
- --------------------------------------------------------------------------------
(Dollars in Thousands)
% CHANGE
1997 FROM '96 1996
-------------------------------------------
NONINTEREST INCOME
Trust income $ 3690 (21.74%) $ 60 $ 46 (40.0)% 30.4% (28.1)%115
Service charges on deposit accounts 144 119 112 21.0 6.3 ( 9.7)249 (2.73%) 256
Other 342 (29.48%) 485
Net gain on loan sales 9 (10.00%) 10
Securities gain 220losses, net (1) (95.00%) (20)
-------------------------------------------
TOTAL NONINTEREST INCOME $689 (18.56%) $846
---- ------- ----
---- ------- ----
% CHANGE
1997 FROM '96 1996
-------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits $ 1,551 12.80% $ 1,375
Premises and equipment 403 17.15% 344
Other customer fees 28 37 27 (24.3) 37.0 8.0
Other 15 26 13 (42.3) 100.0 30.0
------------------------------
Total non-interest
income $223 $242 $418 ( 7.9)% (42.1)% 89.1%
------------------------------
------------------------------890 16.49% 764
TOTAL NONINTEREST EXPENSE $2,844 14.54% $2,483
------ ------ ------
------ ------ ------
3161
NON-INTEREST EXPENSE
Operating expenses, other than interest expense and the provision for loan
losses, were $1,535,000- --------------------------------------------------------------------------------
TABLE 7 - JAY FINANCIAL SECURITIES MATURITY SCHEDULE
- --------------------------------------------------------------------------------
(Dollars in 1995, a decrease from 1994 of 4.9%. Operating
expenses increased 15.0% to $1,614,000 in 1994 compared to $1,404,000 in 1993.
A comparison of the components of non-interest expense is presented in the
following table.Thousands)
Percentage of ChangeAT DECEMBER 31, 1997
--------------------
1 Year Ended December 31and Less 1 to 5 Years 5 to 10 Years Over Prior Year
----------------------------------------------------------
1995 1994 1993 1995 1994 1993
----------------------------------------------------------
(in thousands)10 Years
----------------- ----------------- ----------------- ----------------- Total
AVAILABLE-FOR-SALE Balance Rate Balance Rate Balance Rate Balance Rate Balance
------- ------- ------- ------- ------- ------- ------- ------- -------
Salaries
U.S. Government & agencies $498 5.27% $2,534 6.25% - - - - $3,032
States and employee
benefits $ 813 $ 823 $ 773 ( 1.2)% 6.5% 3.2%
Net occupancy expense 144 153 56 ( 5.9) 173.2 21.7
Equipment expense 78 62 46 25.8 34.8 12.2
Data processing fees 71 70 67 1.4 4.5 0.0
Deposit insurance
expense 78 157 151 (50.3) 4.0 7.1
Printingpolitical subdivisions (1) 1,641 7.11% 1,872 7.94% 1,106 7.73% - - 4,619
Mortgage-backed - - 357 6.21% 386 6.41% 2,411 6.63% 3,154
Equity securities (2) - - - - - - - - 1,093
------- ------- ------- ------- -------
TOTAL AVAILABLE-FOR-SALE $2,139 $4,763 $1,492 $2,411 $11,898
------- ------- ------- ------- -------
------- ------- ------- ------- -------
HELD-TO-MATURITY
States and office
supplies 45 54 49 (16.7) 10.2 11.4
Advertising 46 45 40 2.2 12.5 33.3
Legal and professional
fees 70 51 40 37.3 27.5 53.8
Director and committee
fees 66 71 70 ( 7.0) 1.4 2.9
Other expenses 124 128 112 ( 3.1) 14.3 16.7
--------------------------
Total other expenses $1,535 $1,614 $1,404 ( 4.9)% 15.0% 7.3%
--------------------------
--------------------------political subdivisions (1) $75 6.70% $701 7.35% $155 8.59% $0 - $931
------- ------- ------- ------- -------
TOTAL HELD-TO-MATURITY $75 $701 $155 $0 $931
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Salaries and employee benefits, the largest component of non-interest
expense,(1) - Average rates were $813,000 and represented 53.0% of the 1995 total compared to 51.0%
and 55.1% for 1994 and 1993. The number of full-timecalculated on a tax equivalent employees
decreased from 28 to 26 during the period December 31, 1994 to December 31,
1995.
Premises and equipment expense increased 3.3% in 1995 to $378,000 after
increasing 110.8% in 1994. The increases are primarily due to increased
depreciation charges and provision for real estate taxes for the major
renovation of the main office which was completed in 1994.
Deposit insurance expense decreased 50.3% in 1995 after increasing 4.0% in
1994 and 7.1% in 1993. A reduction in the assessment rate by the FDIC in the
final two quarters of 1995 resulted in the decrease in 1995. The Bank is
currently in the lowest regulatory risk category and deposits are assessed at
the lowest rate. Since the Bank Insurance Fund reachedbasis using a mandated funding level
in 1995, the assessment rate for the Bank has been further reduced to the $2,000
minimum level permissible in 1996.
32
INCOME TAXES
Income tax expense for 1995 was $267,000, as compared to $303,000 recorded
in 1994 and $410,000 in 1993. The decrease inmarginal
federal income taxes of $36,000 for 1995
was due primarily to a decrease in pre-tax income of $171,000. Income taxes
also decreased in 1994 compared to 1993 due to the lower level of taxable
income. The effective tax rate was 28.6% for 1995 and 27.4% for 1994.
ANALYSIS OFof 34%.
(2) - Equity securities have no stated maturity date.
62
- --------------------------------------------------------------------------------
TABLE 8 - JAY FINANCIAL CONDITION
OVERVIEW
At year-end 1995, Randolph County's consolidated assets decreased to
$73,219,000 compared to $78,432,000 at December 31, 1994. Average assets were
$72,606,000 during 1995, which represents a decrease of 7.8% compared to 1994
averages.
The financial condition of Randolph County at December 31, 1995, is
presentedLOAN LIQUIDITY
- --------------------------------------------------------------------------------
(Dollars in the comparative balance sheet of the consolidated financial
statements included in this Proxy Statement-Prospectus. The following
discussion addresses investments, loans and other components of earning assets,
sources of funds supporting these earning assets, capital resources, and
liquidity.
INVESTMENT SECURITIES
The Bank maintains an investment portfolio to provide for liquidity, to
correct asset-liability imbalances over time, and to provide income. The bond
portfolio decreased by 14.1% from December 31, 1993 to December 31, 1994 and
decreased 23.4% from December 31, 1994 to December 31, 1995. Proceeds from
investment securities were used to fund deposit outflows.
The portfolio consists of U.S. Treasury and Agency obligations, non-taxable
and taxable obligations of states and municipalities and corporate obligations.
Certain local issues of the portfolio are unrated by a major rating service. In
each case, the Bank believes the unrated issues have investment quality
characteristics.
In December 1995, pursuant to a one-time opportunity to do so, the Bank
reclassified its entire investment portfolio as "available for sale" from "held
to maturity" as defined in SFAS 115. The reclassification was made to increase
the liquidity of the portfolio and give the Bank greater flexibility in
portfolio management. The regulatory agencies have announced that changes in a
bank's capital account due to changes in the market value of "available for
sale" securities would not in itself trigger certain regulatory action thus
reducing regulatory risks previously associated with large holdings of
"available for sale" securities.
33
LOANS
Loans decreased .6% to $43,494,000 at December 31, 1995 compared to
$43,778,000 at December 31, 1994. Growth remained particularly strong in real
estate loans, which were 19.9% higher than the same period a year earlier. The
Bank increased its residential real estate portfolio because of the low-risk
nature of the loans, demand for such loans and lack of demand for traditional
commercial credits, and a decided regulatory emphasis toward real estate lending
as a key element in Community Reinvestment Act and other regulatory assessments
of the Bank. Consumer loans decreased from the high levels of 1994 and 1993 as
special rates and promotions were discontinued.
Randolph County experienced growth in loans at December 31, 1994 compared
to December 31, 1993 as loans increased 8.5% to $43,778,000 from $40,351,000.
Loan growth in 1994 occurred primarily in real estate and consumer loans.
The loan portfolio at the dates indicated is presented below:Thousands)
1995 1994
--------------------------
(in Thousands)
Loans at December 31:
CommercialLOAN MATURITIES AT DECEMBER 31, 1997
------------------------------------------------------
1 Year 1 - 5 Over 5
and industrial loans $ 3,230 $ 3,578
Agricultural production financing and
other loans to farmers 6,063 5,681
Real estate loans 22,590 18,848
Individuals' loans for household and
other personal expenditures 12,988 17,016
Tax-exempt loans 85 90
Other loans 5 47
--------------------------
44,961 45,260
Unearned interest on loans (1,467) (1,482)
--------------------------Less Years Years Total
loans $43,494 $43,778
--------------------------
--------------------------
LOAN QUALITY
The allowance for loan losses was $594,000 at December 31, 1995,
representing 1.37% of total loans compared to $489,000 at December 31, 1994
which represented 1.12% of total loans. Net chargeoffs to average loans were
.69% and .25% for the years ended December 31, 1995 and 1994. During 1995,
one chargeoff represented 59% of total chargeoffs for the year. The ratio of
provision for loan losses to average loans was .56% for year ended December 31,
1995 and .15% for the same period in 1994. The allowance for loan losses was
substantially greater than nonperforming loans at both December 31, 1995 and
1994.
The allowance for loan losses is maintained at a level considered adequate
by management to absorb potential loan losses as determined by evaluations of
the loan portfolio on a continuing basis. This evaluation by management
includes consideration of past loan loss experience, changes in the composition
of the loan portfolio, the volume and condition of loans outstanding and current
market and economic conditions.
34
The provision for loan losses charged to expense was $408,000 in 1995 and
$120,000 in 1994. Loan losses, net of recoveries, charged against the allowance
were $303,000 in 1995, compared to $198,000 in 1994.
A summary of loan loss experience and management's allocation of the
allowance for loan losses to various loan categories for the years indicated
follows.
SUMMARY OF LOAN LOSS EXPERIENCE
Year Ended December 31
--------------------------
1995 1994
--------------------------
(in Thousands)
Allowance for loan losses:
Balance at January 1 $489 $567
Chargeoffs:
Commercial 245 128
Real estate mortgage 12
Installment 79 78
--------------------------
Total chargeoffs 324 218
--------------------------
Recoveries:
Commercial 5 5
Installment 16 15
--------------------------
Total recoveries 21 20
--------------------------
Net chargeoffs 303 198
--------------------------
Provisions for loan losses 408 120
--------------------------
Balance at December 31 $594 $489
--------------------------
--------------------------
Ratio of net chargeoffs during the period to
average loans outstanding during the period. .69% .25%
LOAN LOSS CHARGEOFF PROCEDURES
The Board of Directors has weekly meetings at which loan delinquencies,
maturities and problems are reviewed. The Board of Directors meets weekly to
approve or disapprove all new or disapprove any loan which is in excess of an
individual loan officer's lending limit.
All chargeoffs are approved by the Bank's Board. The Bank charges off
loans when a determination is made that all or a portion of a loan is not
collectable or as a result of examinations by regulators and the independent
auditors.
35
MANAGEMENT'S ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31:
Presented below is an analysis of the composition of the allowance for loan
losses and per cent of loans in each category total loans:
1995 1994
----------------------------------------------
Amount Per Cent Amount Per Cent
----------------------------------------------
(in Thousands)------------------------------------------------------
Balance at December 31:
Commercial financial and
agricultural $400 21.6% $268 21.5%$10,740 $8,690 $24,902 $44,332
Real estate - mortgage 79 51.9 66 43.1
Installment 115 26.5 155 35.4
----------------------------------------------
Totals $594 100.0% $489 100.0%
----------------------------------------------
----------------------------------------------estate-residential 482 1,282 28,144 29,908
Consumer 895 9,431 342 10,668
------------------------------------------------------
TOTAL LOANS $12,117 $19,403 $53,388 $84,908
------------------------------------------------------
------------------------------------------------------
SENSITIVITY TO CHANGES IN INTEREST RATES
Fixed rates $11,954 $18,484 $11,328 $41,766
Variable rates 163 919 42,060 43,142
------------------------------------------------------
TOTAL LOANS $12,117 $19,403 $53,388 $84,908
------------------------------------------------------
------------------------------------------------------
As indicated by the following table, on December63
- --------------------------------------------------------------------------------
TABLE 9 - JAY FINANCIAL MATURITY RANGES OF TIME DEPOSITS
WITH BALANCES OF $100,000 OR MORE AT DECEMBER 31,
1995 Randolph County's
nonperforming loans totaled $36,000 a decrease of $307,000 from year-end 1994.- --------------------------------------------------------------------------------
(Dollars in Thousands)
December 31
-----------------------
1995 1994
-----------------------
(in1997
--------------
3 months or less $6,874
3 through 6 months 3,969
6 through 12 months 300
Over 12 months 2,511
--------------
TOTAL $13,654
-------
-------
64
- --------------------------------------------------------------------------------
TABLE 10 - JAY FINANCIAL FUNDING USES AND SOURCES
- --------------------------------------------------------------------------------
(Dollars in Thousands)
1997 1996
-------------------------------------------------------
Increase/(decrease)
Average ------------------- Average
Balance Amount Percent Balance
-------------------------------------------------------
Nonaccruing loans $
FUNDING USES
Loans, total $81,166 $8,517 11.72% $72,649
Taxable securities 8,480 (1,628) (16.11%) 10,108
Tax-exempt securities 6,286 (1,073) (14.58%) 7,359
Federal funds sold 635 (1,531) (70.68%) 2,166
Interest-bearing balances - (187) (100.00%) 187
-------------------------------------------------------
TOTAL USES $96,567 $4,098 4.43% $92,469
------- ------ ----- -------
------- ------ ----- -------
FUNDING SOURCES
Noninterest-bearing deposits $5,719 $63 1.11% $5,656
Interest-bearing demand 20,631 (737) (3.45%) 21,368
Savings deposits 6,945 697 11.16% 6,248
Time deposits 51,913 158 0.31% 51,755
Short-term borrowings 812 361 80.04% 451
Long-term borrowings 2,750 2,425 746.15% 325
-------------------------------------------------------
TOTAL SOURCES $88,770 $2,967 3.46% $85,803
------- ------ ----- -------
------- ------ ----- -------
65
- --------------------------------------------------------------------------------
TABLE 11 - JAY FINANCIAL LIQUIDITY AND INTEREST RATE SENSITIVITY
- --------------------------------------------------------------------------------
(Dollars in Thousands)
AT DECEMBER 31, 1997
1 - 90 91 - 365 1 - 5
Days Days Years Over 5 Years Total
------------ ------------ --------- ------------ ------------
INTEREST EARNING ASSETS
Loans $9,752 $20,552 $42,703 $11,901 $84,908
Securities held-to-maturity
Taxable 0 $ 0 Loans contractually past due 90 days or
more other than nonaccruing 36 343
-----------------------
$36 $343
-----------------------
-----------------------0 0 -
Tax-exempt 75 0 701 155 931
Securities available-for-sale
Taxable 0 2,110 3,243 1,926 7,279
Tax-exempt 1,160 614 1,770 1,075 4,619
------------ ------------ --------- ------------ ------------
Total Securities 1,235 2,724 5,714 3,156 12,829
Restricted stock 0 0 0 547 547
Federal funds sold 0 0 0 0 -
------------ ------------ --------- ------------ ------------
TOTAL EARNING ASSETS $10,987 $23,276 $48,417 $15,604 $98,284
------------ ------------ --------- ------------ ------------
------------ ------------ --------- ------------ ------------
INTEREST BEARING LIABILITIES
Interest-bearing demand deposits $21,302 $0 $0 $0 $21,302
Savings deposits 7,062 0 0 0 7,062
Time Deposits 12,370 18,109 19,318 0 49,797
Short-term borrowings 2,145 0 0 0 2,145
Long-term borrowings 0 1,000 3,800 0 4,800
------------ ------------ --------- ------------ ------------
TOTAL INTEREST BEARING LIABILITIES $42,879 $19,109 $23,118 $0 $85,106
------------ ------------ --------- ------------ ------------
------------ ------------ --------- ------------ ------------
Rate sensitive gap (31,892) 4,167 25,299 15,604 13,178
Rate sensitive cumulative gap (31,892) (27,725) (2,426) 13,178
Cumulative gap as a percentage of earning assets (32.45%) (28.21%) (2.47%) 13.41%
Nonaccruing loans are loans which are reclassified to a nonaccruing status
when in management's judgment the collateral value and financial condition of
the borrower do not justify accruing interest. Interest previously recorded but
not deemed collectible is reversed and charged against current income. Interest
income on these loans is then recognized when collected.
Management has identified certain other loans totaling $631,000 as of
December 31, 1995, not included in the risk elements table, which are current as
to principal and interest, about which there are doubts as to the borrowers'
ability to comply with present repayment terms.
SOURCES OF FUNDS
Randolph County generally relies on customers' deposits along with
shareholders' equity, to fund its earning assets.
Average total deposits were $57,580,000 in 1995, a decrease of 9.3% from
the prior year.
3666
CAPITAL RESOURCES
Randolph County continues to maintain a strong capital position, to support
its current needs and provide a sound foundation for further expansion.
During 1995, stockholders' equity increased to $ 8,753,000, as a result of
net income after dividends of $276,000 and the net unrealized gain on securities
available for sale of $38,000 (net of taxes of $15,000). The dividend payout
ratio was 41.3% in 1995 compared to 34.4% in 1994 and was consistent with
management's policy of maintaining an appropriate balance between earnings
returned to stockholders in the form of dividends and earnings retained to
support future growth. Book value per share at year-end advanced to $317.66
from $302.06 one year earlier, an increase of 5.2% after increasing 6.7% in
1994. Randolph County continues to exceed all regulatory capital requirements.
LIQUIDITY
Liquidity is a measure of Randolph County's ability to meet its customers'
present and future deposit withdrawals and/or increased loan demand. Randolph
County manages its liquidity through a coordinated asset/liability management
program.
Liquidity is provided by projecting credit demand and other financial needs
and then maintaining sufficient cash and assets readily convertible into cash to
meet these requirements. Randolph County has provided for its liquidity needs
through growth in core deposits, maturing loans, investments in its securities
portfolio and by maintaining adequate balances in money market assets. At
December 31, 1995, Randolph County had $10.7 million or 14.6% of total assets in
investment securities, federal funds sold and interest bearing time deposits
maturing within one year. This is considered by management to be more than
adequate in view of projected liquidity needs.
ACCOUNTING MATTERS
DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 119 ("SFAS 119")
requires disclosures about derivative financial instruments - futures, forwards,
swap and option contracts and other financial instruments with similar
characteristics (e.g., interest rate caps or floors and loan commitments). The
definition of derivatives excludes all on-balance sheet receivables and
payables, including those that "derive" their values or cash flows from the
price of another security or index, such as mortgage-backed securities and
interest-only obligations.
SFAS 119 requires disclosures about amounts, nature and terms of
derivatives that are not subject to SFAS 105 because they do not result in off-
balance sheet risk of accounting loss. It requires that distinction be made
between financial instruments held or issued for trading purposes and financial
instruments held or issued for purposes other than trading. The required
disclosures, either in the body of the financial statements or in the footnotes,
include: (i) the face or contract amount (or notional principal amount) and (ii)
the nature and terms, including at a
37
minimum, a discussion of (1) the credit and market risk of those instruments,
(2) the cash requirements of those instruments and (3) the related accounting
policy.
SFAS 119 amends SFAS 105 and 107 to require disaggregation of information
about financial instruments with off-balance sheet risk of accounting loss and
to require that fair value information be presented without combining,
aggregating or netting the fair values of derivatives with fair value of
nonderivatives and be presented together with the related carrying amounts in
the body of the financial statements, a single footnote or a summary table in a
form that makes it clear whether the amounts represent assets or liabilities.
SFAS 119 was effective for Randolph County's financial statements issued for the
year ended December 31, 1995.
At December 31, Randolph County did not have any derivative financial
instruments as defined in SFAS 119.
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS
During 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 122 ("SFAS 122") ACCOUNTING FOR MORTGAGE SERVICING RIGHTS. SFAS 122
pertains to mortgage banking enterprises and financial institutions that conduct
operations that are substantially similar to the primary operations of a
mortgage banking enterprise. SFAS 122 eliminates the accounting distinction
between mortgage servicing rights that are acquired through loan origination
activities and those acquired through purchase transactions. Under SFAS 122, if
a mortgage banking enterprise sells or securities loans and retains the mortgage
servicing rights, the enterprise must allocate the total cost of the mortgage
loans to the mortgage servicing rights and the loans (without the rights based
on their relative fair values if is practicable to estimate those fair values.
If it is not practicable, the entire cost should be allocated to the mortgage
loans and no cost should be allocated to the mortgage servicing rights. An
entity would measure impairment of mortgage servicing rights and loans based on
the excess of the carrying amount of the mortgage servicing rights portfolio
over the fair value of that portfolio.
SFAS 122 is to be applied prospectively in fiscal years beginning after
December 15, 1995, to transactions in which an entity acquires mortgage
servicing rights and to impairment evaluations of all capitalized mortgage
servicing rights. Randolph County currently does not originate and sell
mortgage loans, so SFAS 122 is not expected to have a material effect on
financial conditions or results of operations in 1996.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The FASB issued SFAS 123, STOCK-BASED COMPENSATION. In December, 1994, the
FASB decided to require expanded disclosures rather than recognition of
compensation cost for fixed, in the money, options rather than recognition of
compensation expense as was originally proposed.
This statement establishes a fair value based method of accounting for
stock-based compensation plans. The FASB encourages employers to recognize the
related compensation expense: however, employers are permitted to continue to
apply the provisions of APB Opinion No. 25. Employers that choose to continue
to follow APB
38
No. 25 are required to disclose in notes to the financial statements the pro
forma effects on their net income and earnings per share of the new accounting
method.
SFAS 123 is effective for Randolph County in 1996. Currently Randolph
County has no stock-based compensation plans and adoption of SFAS No. 123 is not
expected to have any effect on 1996 financial statements.
INFLATION
Changing prices of goods, services, and capital affect the financial
position of every business enterprise. The level of market interest rates and
the price of funds loaned or borrowed fluctuate due to changes in the rate of
inflation and various other factors, including government monetary policy.
Fluctuating interest rates affect Randolph County's net interest income,
loan volume, and other operating expenses, such as employees' salaries and
benefits, reflecting the effects of escalating prices, as well as increased
levels of operations and other factors. As the inflation rate increases, the
purchasing power of the dollar decreases. Those holding fixed-rate monetary
assets incur a loss, while those holding fixed rate monetary liabilities enjoy a
gain. The nature of a bank holding company's operations is such that there will
be an excess of monetary assets over monetary liabilities, and, thus, a bank
holding company will tend to suffer from an increase in the rate of inflation
and benefit from a decrease.
REGULATION AND SUPERVISION
OF FIRST MERCHANTS, RANDOLPH COUNTYJAY FINANCIAL AND SUBSIDIARIES
BANK HOLDING COMPANY REGULATION
First Merchants and Randolph CountyJay Financial are registered as bank holding companies
and are subject to the regulations of the Federal Reserve Board ("FEDERAL
RESERVE") under the Bank Holding Company Act of 1956, as amended (the "BHC
Act"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.
ItThus, it is the policy of the Federal Reserve that, pursuant to this requirement, 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 insured depository institution subsidiary bank that may become "undercapitalized" (as defined in the
statute)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
Federal Reserve's determination that such activity or control
constitutes a serious
39
risk to the financial
soundness and stability of any bank subsidiary of the bank
holding company.subsidiary.
The BHC Act prohibits First Merchants and Randolph County are prohibited byJay Financial from doing any of
the BHC Act from
acquiringfollowing 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 or mergingassociation.
2. Merging or consolidating with another bank holding company without prior approval of the Federal Reserve. Additionally, First
Merchants and Randolph County are prohibited by the BHC Act from engagingcompany.
3. Engaging in or
from 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 so closely related to banking as to be a proper incident thereto.banking.
The BHC Act does not place territorial restrictions on the activities of 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 which require a minimum ratio of
total capital to risk-weighted assets of 8% (including certain off-balance sheet
activities such as standby letters of credit) of 8%. At least half of the total
required capital must be "Tier 1 capital," consisting principally of common
67
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 ("Tier 2
capital") may consist of a limited amount of subordinatedsubordinate 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 ofassets. 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' and Randolph County'sJay Financial's regulatory capital
ratios as of December 31, 1995:September 30, 1998:
FIRST MERCHANTS RANDOLPH COUNTYFirst Merchants Jay Financial
--------------- ----------------------------
Tier 1 Capital: 16.99% 16.78%16.30% 18.34%
Total Capital: 18.07 17.9217.24 19.47
Leverage Ratio: 10.98 11.9011.94 13.48
BANK REGULATION
First Merchants Bank, is aThe Union County National Bank and The First
National Bank of Portland are national bankbanks and isare supervised, regulated and
examined by the Office of the Comptroller of the Currency (the "OCC"). First
United 40
Bank, Pendleton Banking Company and theThe Randolph County Bank are state
banks chartered in Indiana and are supervised, regulated and examined by the
Indiana Department of Financial Institutions.Department. In addition, three of First Merchants' subsidiaries,
Pendleton Banking Company, First United PendletonBank and theThe Randolph County Bank, are
supervised and regulated by the Federal Deposit Insurance Corporation (the "FDIC").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 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.
68
BANK CAPITAL REQUIREMENTS
The FDIC and the OCC have adopted risk-based capital ratio guidelines to
which state-chartered banks and national banks under their respective
supervision are subject. The guidelines
establish a systematic analytical framework that makes regulatory capital requirements more sensitive
to differences in risk profiles among banking organizations.profiles. Risk-based capital ratios are determined by
allocating assets and specified off-balance sheet commitments to four riskrisk-
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 two 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 certain 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 aan additional 100 to 200 basis points.
All of First Merchants' affiliate banks as well as theThe First National Bank
of Portland exceed the risk-based capital guidelines of the FDIC andand/or the OCC
as of December 31, 1995.
FDICIA requires each federal banking agencySeptember 30, 1998.
The Federal Reserve, the FDIC and the OCC have adopted rules to revise its risk-based
capital standards within 18 months of their enactment to ensure that those
standards take adequate account ofincorporate
market and interest rate risk concentration of credit
risk andcomponents into their risk-based capital
standards. Amendments to the risk of nontraditional activities, as well as reflect the actual
performance and expected
41
risk of loss on multifamily mortgages. Banking regulators continue to indicate
their desire to raiserisk-based capital requirements, applicableincorporating
market risk, became effective January 1, 1998. Under the new market risk
requirements, capital will be allocated to banking organizations
beyond their current levels. Neither First Merchants nor Randolph County is
ablesupport the amount of market risk
related to predict whether and when higher capital requirements would be imposed
and, if so, to what levels and on what schedule.
BRANCHES AND AFFILIATES
Branching by First Merchants' affiliate banks is subject to the
jurisdiction, and requires the prior approval, of the bank's primary federal
regulatory authority and, if the branching bank is a state bank, of the Indiana
Department of Financial Institutions.
First Merchants' affiliate banks and the Bank are subject to the Federal
Reserve Act, which restricts financial transactions between banks and affiliated
companies. The statute limits credit transactions between a bank and its
executive officers and its affiliates, prescribes terms and conditions for bank
affiliate transactions deemed to be consistent with safe and sound banking
practices, and restricts the types of collateral security permitted in
connection with a bank's extension of credit to an affiliate.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.
Among other things, the regulations define the relevant
capital measures for the five capital categories. An institution is deemed to
be "well capitalized" if it has a total risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage
ratio of 5% or greater, and is not subject to a regulatory order, agreement or
directive to meet and maintain a specific capital level for any capital measure.
An institution is deemed to be "adequately capitalized" if it has a total risk-
based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or
greater, and generally a leverage ratio of 4% or greater. An institution is
deemed to be "undercapitalized" if it has a total risk-based capital ratio of
less than 8%, a Tier 1 risk-based capital ratio of less than 4%, or generally a
leverage ratio of less than 4%, and "significantly undercapitalized" if it has a
total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital
ratio of less than 3%, or a leverage ratio of less than 3%. An institution is
deemed to be "critically undercapitalized" if it has a ratio of tangible equity
(as defined in the regulations) to total assets that is equal to or less than
2%.
"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 any company that controls the undercapitalized
institution as described above.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 42
undercapitalized" banks
are subject to one or more of a number of requirements
and restrictions, including an order by the FDIC to sell
sufficient voting stock 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
69
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.
FDICIA further directs thatAs of September 30, 1998, each federal banking agency prescribe standards
for depository institutionsbank subsidiary of First Merchants and depository institution holding companies
relating to internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
management compensation, a maximum ratio of classified assets to capital,
minimum earnings sufficient to absorb losses, a minimum ratio of market value to
book value or publicly traded shares and such other standards as the agency
deemed appropriate. The federal banking agencies have issued certain advance
notices of proposed rulemakings, soliciting commentsJay
Financial was "well capitalized" based on the implementation"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 these FDICIA provisions. Neither First Merchantsapplying 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 Randolph County can predict
on what form such rules will eventually be adopted or what effect such rules
will have onprospects.
DEPOSIT INSURANCE
First Merchants' affiliate banks or the Bank.
DEPOSIT INSURANCE
The deposits of First Merchants' affiliateand Jay Financial's affiliated banks are insured up to
$100,000
per insured account,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 ("BIF"SAIF"). Accordingly, administered by the FDIC. The FDIC has
adopted regulations establishing a permanent risk-related deposit insurance
premiums are paidassessment 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 BIF. The Bank's deposits are insured up to
$100,000 per insured accountthe FDIC by the BIF. Ifinstitution's primary
federal regulator. Each insured bank's insurance assessment rate is then
determined by the FDIC believes that an increaserisk 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 insurancehighest 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 is necessary, it may increase the insurance premiums
applicable to the BIF.
FDICIA required the FDIC to issue regulations, effective January 1, 1994,
which establish1997 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 system for settingdepository 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
prevailing market rates or (b) offering "pass through" deposit insurance premiums based uponon
certain employee benefit plan accounts unless it provides certain notice to
affected depositors.
70
INTERSTATE BANKING AND BRANCHING
Under the
risks a particular bank or savings association poses to the deposit insurance
funds. Effective January 1, 1993, the FDIC adopted a final rule that implements
a transitional risk-based assessment system whereby a base insurance premium,
yet unspecified, will be adjusted according to the capital category and
subcategory of an institution to one of three capital categories consisting of
(1) well capitalized, (2) adequately capitalized, or (3) undercapitalized, and
one of three subcategories consisting of (a) health, (b) supervisory concern, or
(c) substantial supervisory concern. An institution's assessment rate will
depend upon the capital category and supervisory category to which it is
assigned. Assessment rates will range from 0.23% for an institution in the
highest category (i.e., well capitalized) to 0.31% for an institution in the
lowest category (i.e. undercapitalized and substantial supervisory concern).
The supervisory subgroup to which an institution is assigned by the FDIC is
confidential and may not be disclosed. Deposit insurance assessments may
increase depending upon the category and subcategory, if any, to which the bank
is assigned by the FDIC. Any increase in insurance assessments could have an
adverse effect on the earnings of First Merchants' affiliate banks.
43
RECENT LEGISLATION
The Riegle Community Development and Regulatory Improvement Act of 1994
("Act") contains seven titles pertaining to community development and home
ownership protection, small business capital formation, paperwork reduction and
regulatory improvement, money laundering and flood insurance. The Act grants
the authority to several agencies to promulgate regulations under the Act. No
regulations have yet been promulgated. Neither First Merchants, Randolph County
nor the Bank is able to predict the impact of the Act on the banking industry.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 ("Riegle-Neal Act"RIEGLE-NEAL") allows for interstate bankingsubject to certain concentration limits, required
regulatory approvals and interstate branching
without regard to whether such activity is permissible under state law. Since
September 29, 1995,other requirements, (i) bank holding companies were allowedsuch as
First Merchants and Jay Financial are permitted to acquire banks anywhere in the United States subject to certain state restrictions. Beginning
on June 1, 1997, an insured bank may merge with an insured bank in another state
without regard to whether such merger is prohibited by state law. Additionally,
an out-of-state bank may acquire the branches of an insured bank in another
state without acquiring the entire bank; provided, however, that the law of the
state where the branch is located permits such an acquisition. States may
permit interstate branching earlier than June 1, 1997, where both states
involved with the bank merger expressly permit it by statute. Further,and bank
holding companies may merge existing bank subsidiaries located in different
states into one bank.
On March 14, 1996, the Governor of the State of Indiana signed
comprehensive new interstate banking and branching legislation which implements
the Riegle-Neal Act. This act carries an emergency clause which made it
effective immediately on passage.
The new legislation accelerates the date for interstate banking and
branching within Indiana. The following activities are now permitted:
(i) A merger of banks in different states, with the resultingany state; (ii) any bank operating
the acquired bank asthat is a branch. Any branch may then be used to open
additional branches within that state.
(ii) A branch by acquisition in another state by purchasesubsidiary of a
single branch
by an out of state bank.
(iii) The establishment of a de novo branch in another state by an out of state
bank.
Provisions (ii) and (iii) above require reciprocity with the home state of
the bank establishing the branch until June 1, 1997, when the provisions of the
Riegle-Neal Act become effective irrespective of state law. Furthermore, these
provisions permit an out of state bankholding company is permitted to establish other branches throughout
Indiana once their initial branch is owned in Indiana. Additionally, the new
Indiana statute expands the definition of "branch" to include a mobile branch.
Since September 29, 1995, insured bank subsidiaries have been allowed to
act as an agent for an affiliated bank or thrift in offering limited banking
services
44
(receivereceive deposits, renew time deposits,
close loans, service loans and receive loan payments on loan obligations) both within the same stateas an agent for any other
bank subsidiary of that holding company; and across state lines.
Neither First Merchants, Randolph County nor the Bank is able(iii) banks are permitted to
predictacquire branch offices outside their home states by merging with certainty the impact of this legislation on the banking industry.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 theThe First National Bank of Portland 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 ofor administrative action will
be enacted or the extent to which the banking industry in general or First
Merchants and its affiliate banks in particular would be affected thereby.
71
COMPARISON OF COMMON STOCK
THE FOLLOWING SUMMARY COMPARISON OF FIRST MERCHANTS COMMON STOCK AND JAY
FINANCIAL 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 JAY FINANCIAL'S
ARTICLES OF INCORPORATION AND BY-LAWS.
GOVERNING LAW
The rights of holders of Randolph CountyJay Financial common stock who receive First
Merchants common stock in the Mergermerger will be governed by the IBCL,Indiana Business
Corporation Law (the "IBCL"), the state in which First Merchants is
incorporated, and by First Merchants' Articles of Incorporation ("First Merchants' Articles"FIRST
MERCHANTS' ARTICLES") and By-Laws. The rights of Randolph
CountyJay Financial shareholders are
governed by the IBCL, the state in which Randolph CountyJay Financial is incorporated, and by
Randolph County'sJay Financial's Articles of Incorporation ("Randolph
County's Articles"JAY FINANCIAL'S ARTICLES") and
By-Laws. The rights of Randolph CountyJay Financial shareholders differ in certain respects
from the rights they would have as First Merchants shareholders, including
certain anti-takeover measures, and 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.
The following summary comparison of First Merchants common stock
and Randolph County 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 and By-Laws and Randolph County's
Articles and By-Laws.
AUTHORIZED BUT UNISSUED SHARES
First Merchants' Articles authorizeauthorizes the issuance of 20,000,000 shares of
common stock, of which 5,060,661 whole10,079,540 shares were outstanding as of March 31,
1996.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
45
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 March 31, 1996,November 30, 1998, First Merchants had 151,988162,977 shares of its common
stock reserved and remaining available for issuance under its Employee Stock
Purchase Plan and 203,77534,829 shares of its common stock reserved and remaining
available for issuance under its Stock Option Plans. See "DESCRIPTION OF FIRST
MERCHANTS -- Compensation of Directors and -- Compensation of Executive
Officers."Options Plan.
The issuance of additional shares of First Merchants common stock to
persons who were not holders of First Merchants common stock prior to such
issuance or the
issuance of First Merchants preferred stock may adversely affect the interests
of First Merchants shareholders.
Randolph County'sJay Financial's Articles authorize the issuance of 60,000540,000 shares of
no
par value common stock, 27,555500,000 of which are Class A shares and 40,000 of which are Class
B shares. Each outstanding share of Class A stock is entitled to one vote on
all matters to which shareholders are entitled to vote. Class B stock is
"non-voting stock." However, the IBCL extends voting rights to Class B
shareholders in situations such as the merger. Besides voting rights, the two
classes of stock are equal. There are 64,234 shares of Class A stock issued and
outstanding and 17,666 shares of Class B stock issued and outstanding.
Randolph County's Articles do not authorize the issuance of any other class of
stock.72
PREEMPTIVE RIGHTS
As permitted by Indiana law, neither First Merchants' Articles nor Randolph
County'sJay
Financial's Articles provide for preemptive rights to subscribe for any new or
additional First Merchants or Randolph CountyJay Financial shares of common stock. Preemptive
rights may be granted to First Merchants or Randolph CountyJay Financial shareholders if First
Merchants' or Randolph County'sJay Financial's Articles are amended accordingly.
DIVIDEND RIGHTS
The holders of common stock of First Merchants and Randolph CountyJay Financial are
entitled to dividends and other distributions when, as and if declared by
their respective Board of Directors out of funds legally available therefor. In
general, withDirectors. With respect to First Merchants and Jay
Financial, a dividend may notgenerally MAY NOT be paid if, after
giving it effect, (i) First Merchantsif:
1. The corporation would not be able to pay its debts as they become due
in the usual course of business,business; or
(ii) First Merchants'2. The corporation's total assets would be less than the sum of its total
liabilities plus unless First
Merchants' Articles permitted otherwise, the amount that would be needed to
satisfy the preferential rights upon dissolution, of shareholders whose
preferential rights are superior to those receiving the dividend if First
Merchants were to be dissolved at the time of the dividend. The same dividend
limitations apply to Randolph County shareholders.payable upon
dissolution.
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.
46
Dividends paid to First Merchants byMerchants' national bank subsidiaries and its Indiana-chartered
affiliate banks
or paid to Randolph County by the Bank are limited by Indiana law to the balance
of the bank's undivided profits account adjusted for statutorily-defined bad
debts. The First Merchants Bank may pay dividends to First Merchants in cash on itstheir common
stock only out of adjusted retained net profits for the year in which the
dividend is paid and the two preceding years.
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, RANDOLPH COUNTYJAY FINANCIAL AND
SUBSIDIARIES." If a bank's capital levels are deemed inadequate by the
regulatory authorities, payment of dividends to its parent holding company may
be prohibited without prior regulatory approval.prohibited. Neither First Merchants' present affiliate banks nor the Bank
is subject to such a restriction.
VOTING RIGHTS
The holders of the outstanding shares of First Merchants and Randolph
County common stock
are entitled to one vote per share on all matters presented for shareholder
vote. Jay Financial shares are divided into two classes, Class A and Class
B. As described above, Class A shares may vote on all matters presented for
shareholder approval. However, Class B shares generally are not entitled to
vote. Indiana law extends the Class B shareholders the right to vote on the
merger. Neither First
73
Merchants shareholders nor Randolph CountyJay Financial shareholders have cumulative voting
rights in the election of directors.
Indiana law generally requires that mergers, consolidations, sales, leases,
exchanges or other dispositions of all or substantially all of the assets of a
corporation be approved by a shareholder vote of a majority of votes entitled to
be cast at the shareholders meeting, subject to provisionsprovision in the corporations'
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. Randolph County's Articles do
not contain such a provision. See "COMPARISON OF COMMON
STOCK--Anti-Takeover Provisions."
Indiana law requires shareholder approval for most amendments to a
corporation's articles of incorporation by a majority of a quorum present 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 in its
articles of incorporation to prescribe a higher shareholder vote requirement for
certain amendments, andamendments. 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. Randolph County'sJay Financial's
Articles do not contain suchrequire a majority vote to amend any provision.
DISSENTERS' RIGHTS
The holders of First Merchants common stockJay Financial shareholders possess dissenters' rights in connection with
certain mergers and other significant corporate actions. Under Indiana law, a First Merchants
shareholder is entitled to dissent from and obtain payment of the fair value of
the shareholder's shares in the event of
(i) consummationfollowing events:
1. Consummation of a plan of merger to which First MerchantsJay Financial is a party, if
shareholder approval is required and the shareholder is entitled to
vote thereon; (ii) consummationthereon.
2. Consummation of a plan of share exchange by which First Merchants'Jay Financial'
shares will
47
be acquired, if the shareholder is entitled to vote
thereon; (iii) consummationthereon.
3. Consummation of a sale or exchange of all, or substantially all, the
property of First
MerchantsJay Financial other than in the usual course of business,
if the shareholder is entitled to vote thereon; (iv) approvalthereon.
4. Approval of a control share acquisition under Indiana law; and
(v) any5. Any corporate 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 voting or non-voting shareholders are
entitled to dissent and obtain payment for their shares.
Randolph CountyFirst Merchants shareholders do not have similar dissenters' rights.
The dissenters' rights provisions described above do not apply, however, to
the holders ofbecause its
shares of any class or series with respect to a merger, share
exchange or sale or exchange of property if the shares of that class or series
were registered on a United States securities exchange registered under the
Exchange Act or traded on the NASDAQ National Market System or a similar market.
As of the date of this Proxy Statement-Prospectus, shares of First Merchants
common stock are traded on the NASDAQ National Market System, and shares of
Randolph County common stock are not registered on a securities exchange nor
traded on the NASDAQ National Market System or any similar market.System. With respect to
dissenters' rights of Randolph CountyJay Financial shareholders in connection with the Merger,merger,
see the discussion under "PROPOSED MERGER"MERGER -- Rights of Dissenting Shareholders" and also
Appendix B.
74
LIQUIDATION RIGHTS
In the event of any liquidation or dissolution of First Merchants, the
holders of shares of First Merchants common stockits
shareholders are entitled to receive pro rata, with respectaccording to the number of
shares held, by them 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 Randolph
County, the holders of shares of Randolph County common stockJay Financial, its shareholders are entitled to
receive pro rata, with respectaccording to the number of shares held, by them any assets
distributable to shareholders, subject to the payment of Randolph County'sJay Financial's
liabilities and any rights of creditors.
ASSESSMENT AND REDEMPTION
Under Indiana law, neither the shares of First Merchants common stock nor
of Randolph CountyJay Financial 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 giving such redemption or acquisition
effect, First Merchantsit would not be
able to pay its debts as they become due in
the usual course of business, ordue. Additionally, First Merchants'Merchants may not
redeem its shares if its total assets would be less than the sum of its total
liabilities plus unless First Merchants' Articles
permitted otherwise, the amount that would be needed to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior
to those whose stock is being redeemed or acquired if First Merchants were to be
dissolved at the time of the redemption or acquisition. Randolph Countypayable upon dissolution.
Jay Financial has similar redemption rights under Indiana law.
48
First Merchants and Randolph CountyJay Financial must give prior notice to the Federal
Reserve if the consideration to be paid by them for any redemption or
acquisition of their respective shares, when aggregated with the consideration
paid for all redemptionsredemption or acquisitions for the preceding 12 months, equalsequal or
exceeds 10% of the consolidated net worth of the company involved.
ANTI-TAKEOVER PROVISIONS
The anti-takeover measures applicable to First Merchants and Randolph
County,Jay Financial,
as described below, may have the effect of discouraging or rendering it
more difficult for a person or other entity
to acquire control of First
Merchants or Randolph County.either company. These measures may have the effect of
discouraging certain tender offers for shares of First Merchants common stock or
Randolph Countyeither 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.
INDIANA LAW. Under the business combinations provisions of the IBCL, 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 (5) years from completing a
business combination with the corporation unless, prior to the acquisition of
such 10% interest, the board of directors of the corporation 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 of the corporation are complied with and a majority of
disinterested shareholders approve the transaction or all shareholders receive a
price per share as determined in
accordance with the business combinations provision of the IBCL.by Indiana law.
75
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 eighteen (18)18 months and does not apply to a combination with a
shareholder who acquired a 10% ownership position prior to the effective
time of the election. First
Merchants is covered by the business combinations provisions of the IBCL and Randolph CountyJay
Financial is not covered. The constitutional validity of the business
combinations provisionprovisions of Indiana law has in the past
been challenged and has been upheld by the United States
Supreme Court.
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 of share exchange. First Merchants is subject to
the 49
control share acquisition provision. Randolph CountyJay Financial is not subject to the
control share acquisition provision as a result of it having fewer than 100
shareholders.not.
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 (3) 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 two-thirds (2/3)2/3rds
vote of the shares entitled to vote; provided, however, that if the Board by
a two-thirds (2/3)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
three-fourths (3/4)3/4ths of the voting stock as a condition of certain business combinations
(which includedinvolving 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) involving any shareholder who owns more
than 10% of the voting stock, unless eitherforegoing. An exception exists if the transaction is approved
by a two-thirds (2/3)2/3rds vote of the Board or the shareholders are to receive fair
consideration (generally,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 (2) years preceding the business combination, and (b) the per
share book value for the stock) for their
shares in the business combination.stock. In the event two-thirds (2/3)2/3rds Board approval is obtained
or the fair consideration is to be paid, then approval of the business combination
would only require the approval of the holders of two-thirds (2/3)2/3rds of the voting stock.
76
The above referred to provision of First Merchants' Articles can be amended
only with the approval of three-fourths (3/4)3/4ths of the voting stock.
The existence of authorized but unissued common and preferred stocksstock 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 First Merchantsits 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.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 because thereshareholders. There is no
guarantee that current shareholders willwould 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.
RANDOLPH COUNTY'SJAY FINANCIAL'S ARTICLES. In addition to the protection afforded by the
IBCL, Randolph County's Articles provide that if the Board of Directors of
Randolph County consists of nine or more members, the By-Laws may provide that
the Directors shall be divided into two or more classes whose term of office
shall expire at different times, but no term shall continue more than three (3)
years. At the present time, Randolph County's By-Laws do not provide for such a
classified Board.
Randolph County's Articles provide that in the event a shareholder of any
shares of Randolph County's common stock decides to sell, exchange, or in any
manner
50
dispose of any shares held by such shareholder (other than transfers by such
holder to the estate of such holder or to a direct family member of that holder,
including spouses, siblings and lineal descendants), such selling shareholder
shall first offer to Randolph County the right to purchase all, or any part of,
the shares proposed to be sold on the same terms and conditions and at the same
purchase price per share as the purchase terms in the proposed sale. The existence of authorized but unissued shares
of Jay Financial common stock of Randolph
County may have an anti-takeover effect as the issuance
of additional Randolph
CountyJay Financial shares with sufficient voting power could have a
dilutive effect on Randolph County'sJay Financial's stock and may result in the defeat of an
attempt to acquire control of Randolph County.the corporation. The Board of Directors of Randolph CountyJay
Financial may issue shares of common stock at any time without shareholder
approval. The Agreement prohibits the issuance by Randolph CountyJay Financial of additional
shares of common stock.
DIRECTOR LIABILITY
Under the IBCL, a director of First Merchants or Randolph CountyJay Financial will not be
liable to shareholders for any action taken as a director, or any failure to
take any action, unless (i) theunless:
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 corporationcorporation; and
(ii) such2. Such breach or failure to perform constitutes willful misconduct or
recklessness.
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 Randolph CountyJay
Financial by the law firm of Cook & Haviza, 111 North Main Street,
Winchester,Krieg, DeVault, Alexander and Capehart, One Indiana
47394.Square, Suite 2800, Indianapolis, IN 46204. Frank A. Bracken is of counsel with
Bingham Summers Welsh & Spilman and a director of First Merchants and First Merchants Bank.Merchants.
77
EXPERTS
The consolidated financial statements of First Merchants, incorporated by
reference in this Proxy Statement-Prospectus, have been audited by Geo. S. Olive, & Co., LLC,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 Geo. S. Olive, &
Co., LLCLLP given on the
authority of such firm as experts in auditing and accounting.
The consolidated financial statements of Randolph County and Union NationalJay Financial included in this
Proxy Statement-ProspectusStatement - Prospectus have been audited by Geo. S. OliveCrowe, Chizek & Co., LLC, LLP,
independent public accountants, to the extent and for the periods indicated in
their reportsreport thereon, and have been so included in this Proxy
Statement-Prospectus in reliance on the reportsupon such report of Geo. S. OliveCrowe, Chizek & Co., LLC LLP
given on the authority of such firm as experts in auditing and accounting.
51
Representatives of Geo. S. Olive & Co., LLC are not expected to be at the
Special Meeting of Shareholders of Randolph County.
OTHER MATTERS
The Special Meeting of Shareholders is called for the purposes set forth in
the Notice. The Board of Directors of Randolph CountyJay Financial 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
pursuant to the proxy with respect to such matters in accordance with the recommendationrecommendations of
management of Randolph County.
52Jay Financial.
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 Jay Financial 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 Jay Financial 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:
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
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.
78
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.
First Merchants SEC Filings Period
- --------------------------- ------
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
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 Jay Financial 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, as
well as all pro forma financial information, and Jay Financial has supplied all
such information relating to Jay Financial.
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
79
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.
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 and Jay Financial and of First Merchants 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 and Jay Financial 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, Jay Financial
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
80
compiled by the independent public accountants of First Merchants and Jay
Financial, 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 after the merger is included in the
Commission filings incorporated by reference herein. See "WHERE YOU CAN FIND
ADDITIONAL INFORMATION."
81
INDEX TO FINANCIAL STATEMENTS
RANDOLPH COUNTY BANCORP
Independent Auditor's Report. . . . . . . . . . . . . . . . . . F-3
Consolidated Balance Sheet as of December 31, 1995 and 1994 . . F-4
Consolidated Statement of Income for the Years Ended
December 31, 1995, 1994 and 1993. . . . . . . . . . . . . . . . F-5
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 1995, 1994 and 1993. . . . . . F-7
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . F-8
Notes to Consolidated Financial Statements. . . . . . . . . . . F-9
UNION NATIONAL BANCORP
Independent Auditor's Report. . . . . . . . . . . . . . . . . . F-23
Consolidated Balance Sheet as of December 31, 1995 and 1994 . . F-24
Consolidated Statement of Income for the Years Ended
December 31, 1995, 1994 and 1993. . . . . . . . . . . . . . . . F-25
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 1995, 1994 and 1993. . . . . . F-26
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . F-27
Notes to Consolidated Financial Statements. . . . . . . . . . . F-28
JAY FINANCIAL CORPORATION
Consolidated Balance Sheets as of September 30, 1998 and 1997 (unaudited) . . . . . . F-2
Consolidated Statements of Income and Comprehensive Income for the
Three Months Ended September 30, 1998 and 1997 (unaudited) . . . . . . . . . . . F-3
Consolidated Statements of Income and Comprehensive Income for the
Nine Months Ended September 30, 1998 and 1997 (unaudited). . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . F-6
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Consolidated Balance Sheets as of December 31, 1997 and 1996. . . . . . . . . . . . . F-8
Consolidated Statements of Income for the Years Ended
December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . F-10
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-11
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . F-12
F-1
RANDOLPH COUNTY BANCORPJAY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share data)
(Unaudited)
- --------------------------------------------------------------------------------
September 30, December 31,
1998 1997
---- ----
ASSETS
Cash and due from banks $2,263 $2,434
Federal funds sold 2,300 -
-------- --------
Total cash and cash equivalents 4,563 2,434
Securities available-for-sale, at market 9,621 11,898
Securities held-to-maturity, at cost (market value - $877
and $954) 855 931
Restricted stock 547 547
Loans 88,242 84,908
Less: Allowance for loan losses (900) (992)
-------- --------
Loans, net 87,342 83,916
Premises and equipment, net 875 1,029
Accrued interest receivable 1,089 939
Cash value of life insurance 2,944 2,844
Other assets 790 439
-------- --------
$108,626 $104,977
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing deposits $5,205 $5,441
Interest-bearing deposits 83,667 78,161
-------- --------
Total deposits 88,872 83,602
U.S. Treasury demand notes 199 845
Federal funds purchased - 1,300
Federal Home Loan Bank advances 3,800 4,800
Accrued interest payable 316 290
Other liabilities 770 513
-------- --------
93,957 91,350
-------- --------
Shareholders' equity
Class A common stock, $1 stated value, 500,000 shares
authorized, 64,234 shares issued and outstanding 64 64
Class B common stock, nonvoting, $1 stated value, 40,000
shares authorized, 17,666 issued and outstanding 18 18
Additional paid-in capital 775 775
Retained earnings 13,801 12,793
Unrealized gain (loss) on securities available-for-sale,
net of tax ($73 and $54) 11 (23)
-------- --------
14,669 13,627
-------- --------
$108,626 $104,977
-------- --------
-------- --------
F-2
JAY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND SUBSIDIARYCOMPREHENSIVE INCOME
For the three months ended September 30, 1998 and 1997
(Dollars in thousands except per share data)
(Unaudited)
- --------------------------------------------------------------------------------
1998 1997
---- ----
INTEREST INCOME
Loans, including fees $ 2,045 $ 1,942
Taxable securities 110 122
Non-taxable securities 49 73
Federal funds sold 36 3
------- -------
2,240 2,140
INTEREST EXPENSE
Deposits 930 877
Short-term borrowings 4 18
Federal Home Loan Bank advances 68 61
------- -------
1,002 956
------- -------
NET INTEREST INCOME 1,238 1,184
Provision for loan losses 60 60
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,178 1,124
NONINTEREST INCOME
Trust income 17 30
Service charges on deposit accounts 60 64
Securities gains (losses), net 4 3
Net gain on loan sales 7 2
Other 108 89
------- -------
196 188
NONINTEREST EXPENSES
Salaries and employee benefits 393 375
Premises and equipment 99 104
Other 278 263
------- -------
770 742
------- -------
INCOME BEFORE INCOME TAXES 604 570
Provision for income taxes 217 199
------- ------
NET INCOME 387 371
Other comprehensive income, net of tax:
Change in unrealized gains/losses on securities 41 24
------- ------
COMPREHENSIVE INCOME $ 428 $ 395
------- ------
------- ------
Net income per share $ 4.73 $ 4.53
------- ------
------- ------
Dividends per share $ .50 $ .50
------- ------
------- ------
F-3
JAY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the nine months ended September 30, 1998 and 1997
(Dollars in thousands except per share data)
(Unaudited)
- --------------------------------------------------------------------------------
1998 1997
---- ----
INTEREST INCOME
Loans, including fees $ 5,853 $ 5,578
Taxable securities 339 381
Non-taxable securities 162 245
Federal funds sold 68 17
------- -------
6,422 6,221
INTEREST EXPENSE
Deposits 2,672 2,635
Short-term borrowings 14 42
Federal Home Loan Bank advances 218 97
2,904 2,774
------- -------
NET INTEREST INCOME 3,518 3,447
Provision for loan losses 180 180
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,338 3,267
NONINTEREST INCOME
Trust income 59 73
Service charges on deposit accounts 174 190
Securities gains (losses), net 8 (1)
Net gain on loan sales 16 7
Other 325 254
------- -------
582 523
NONINTEREST EXPENSES
Salaries and employee benefits 1,224 1,161
Premises and equipment 312 305
Other 705 667
------- -------
2,241 2,133
------- -------
INCOME BEFORE INCOME TAXES 1,679 1,657
Provision for income taxes 589 573
------- -------
NET INCOME 1,090 1,084
Other comprehensive income, net of tax:
Change in unrealized gains/losses on securities 34 40
------- -------
COMPREHENSIVE INCOME $ 1,124 $ 1,124
------- -------
------- -------
Net income per share $ 13.31 $ 13.24
------- -------
------- -------
Dividends per share $ 1.00 $ 1.00
------- -------
------- -------
F-4
JAY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1998 and 1997
(Dollars in thousands)
(Unaudited)
- --------------------------------------------------------------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,090 $ 1,084
Adjustments to reconcile net income to net cash
from operating activities
Provision for loan losses 180 180
Depreciation and amortization 242 242
Securities net (gains) losses (8) 1
Net change in
Interest receivable (150) (129)
Interest payable 26 33
Other assets and liabilities (213) 229
-------- --------
Net cash from operating activities 1,167 1,640
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale (1,508) (2,126)
Purchase of restricted stock - (56)
Proceeds from sales of securities available-for-sale 1,508 2,004
Proceeds from principal payments and maturities
of securities available-for-sale 2,311 2,310
Proceeds from maturities of securities held-to-maturity 75 181
Loans made to customers and payments received (3,606) (7,103)
Purchases of premises and equipment, net (60) (172
-------- --------)
Net cash from investing activities (1,280) (4,962)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 5,270 (3,466)
Net change in short-term borrowings (1,946) 1,230
Proceeds from FHLB advances - 2,800
Payments on FHLB advances (1,000) -
Dividends paid (82) (82)
-------- --------
Net cash from financing activities 2,242 482
-------- --------
Net change in cash and cash equivalents 2,129 (2,840)
Cash and cash equivalents at beginning of period 2,434 4,843
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,563 $ 2,003
-------- --------
-------- --------
F-5
JAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
F-2September 30, 1998
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The significant accounting policies followed by Jay Financial Corporation (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 consolidated 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 - PENDING BUSINESS COMBINATION
On August 20, 1998, the Company agreed to merge with 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 13.41681 common shares of First Merchants. The
proposed transaction requires approval by regulatory authorities and the
shareholders of the Company. The proposed transaction is expected to be
consummated in the first quarter of 1999. It is expected to be accounted for as
a pooling-of-interests.
F-6
REPORT OF INDEPENDENT AUDITOR'S REPORT
To the Stockholders andAUDITORS
Board of Directors Randolph County Bancorp
Winchester,and Shareholders
Jay Financial Corporation
Portland, Indiana
We have audited the accompanying consolidated balance sheetsheets of Randolph County Bancorp and
subsidiaryJay Financial
Corporation as of December 31, 19951997 and 1994,1996 and the related consolidated
statements of income, changes in stockholders'shareholders' equity and cash flows for each of
the
three years in the period ended December 31, 1995.then ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements describedreferred to above present
fairly, in all material respects, the consolidated financial position of Randolph County Bancorp and subsidiaryJay Financial
Corporation as of December 31, 19951997 and 1994,1996, and the results of theirits operations
and theirits cash flows for each of the three years in
the periodthen ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in the notes to the consolidated financial statements, theCrowe, Chizek and Company changed its method of accounting for income taxes in 1993.
GEO. S. OLIVE & CO. LLCLLP
Indianapolis, Indiana
January 17, 1996,8, 1998, except for the last
paragraph of the note on Loans and
AllowanceNote 15,
as to which the date is March 19,August 20, 1998
F-7
JAY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
F-3
(dollar references in thousands except share data)
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
December 31 1995 1994
- ---------------------------------------------------------------------------------------------------------1997 1996
---- ----
ASSETS
Cash and due from banks $ 4,080,0232,434 $ 2,503,6282,893
Federal funds sold 1,400,000 1,050,000
-------------------------------
Cash- 1,950
--------- ---------
Total cash and cash equivalents 5,480,023 3,553,628
Interest-bearing deposits 103,595
Investment securities
Available for sale 22,029,295
Held to maturity 28,776,202
-------------------------------
Total investment securities 22,029,295 28,776,2022,434 4,843
Securities available-for-sale, at market 11,898 14,352
Securities held-to-maturity, at cost (market value - $954
and $1,175 in 1997 and 1996) 931 1,154
Restricted stock 547 398
Loans 43,493,754 43,778,18484,908 77,502
Less: Allowance for loan losses (593,580) (489,409)
-------------------------------
Net loans 42,900,174 43,288,775(992) (922)
--------- ---------
Loans, net 83,916 76,580
Premises and equipment, 1,331,159 1,459,800
Interestnet 1,029 1,085
Accrued interest receivable 1,082,609 1,037,736939 909
Cash value of life insurance 2,844 1,815
Other assets 292,182 315,625
-------------------------------439 543
--------- ---------
Total assets $73,219,037 $78,431,766
-------------------------------
-------------------------------$ 104,977 $ 101,679
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest bearingNoninterest-bearing deposits $ 7,333,4645,441 $ 6,537,517
Interest bearing 56,107,793 62,243,689
-------------------------------7,040
Interest-bearing deposits 78,161 80,111
--------- ---------
Total deposits 63,441,257 68,781,206
Due to broker 387,591 795,000
Interest83,602 87,151
U.S. Treasury demand notes 845 637
Federal funds purchased 1,300 -
Federal Home Loan Bank advances 4,800 1,000
Accrued interest payable 380,724 304,932290 260
Other liabilities 256,405 223,635
-------------------------------513 355
--------- ---------
Total liabilities 64,465,977 70,104,773
-------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common91,350 89,403
--------- ---------
Shareholders' equity
Class A common stock, $100$1 stated value, Authorized--60,000500,000 shares
Issuedauthorized, 64,234 shares issued and outstanding--27,555outstanding 64 64
Class B common stock, nonvoting, $1 stated value, 40,000
shares authorized, 17,666 issued and 27,567 shares 2,755,500 2,756,700
Paid-inoutstanding 18 18
Additional paid-in capital 709,036 709,344775 775
Retained earnings 5,250,057 4,860,949
Net unrealized gain12,793 11,496
Unrealized depreciation on securities available for sale 38,467
-------------------------------available-for-sale,
net of tax ($54 in 1997 and $20 in 1996) (23) (77)
--------- ---------
Total stockholders'shareholders' equity 8,753,060 8,326,993
-------------------------------13,627 12,276
--------- ---------
Total liabilities and stockholders'shareholders' equity $73,219,037 $78,431,766
-------------------------------
-------------------------------$ 104,977 $ 101,679
--------- ---------
--------- ---------
See notes to consolidated financial statements.
F-4F-8
JAY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997 and 1996
(dollar references in thousands except per share data)
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------1997 1996
---- ----
INTEREST INCOME
Loans, receivableincluding fees $ 7,530 $ 6,974
Taxable $3,857,471 $3,446,748 $3,358,934
Tax exempt 26,112 34,340 34,793
Investment securities Taxable 854,488 1,024,299 1,182,463
Tax exempt 340,132 435,395 586,638496 536
Non-taxable securities 314 371
Federal funds sold 68,798 27,523 46,706
Deposits38 114
Interest-bearing balances with financial institutions 5,297 1,055
-----------------------------------------------
Total interest income 5,152,298 4,968,305 5,210,589
-----------------------------------------------banks - 9
--------- ---------
8,378 8,004
INTEREST EXPENSE
Deposits 2,489,584 2,326,572 2,532,4773,536 3,482
Short-term borrowings 8,636 44,095 3,927
-----------------------------------------------
Total interest expense 2,498,220 2,370,667 2,536,404
-----------------------------------------------46 23
Federal Home Loan Bank advances 172 20
--------- ---------
3,754 3,525
--------- ---------
NET INTEREST INCOME 2,654,078 2,597,638 2,674,1854,624 4,479
Provision for loan losses 408,000 120,000 240,000
-----------------------------------------------240 281
--------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,246,078 2,477,638 2,434,185
-----------------------------------------------
OTHER4,384 4,198
NONINTEREST INCOME
Fiduciary activities 35,680 59,705 45,635Trust income 90 115
Service charges on deposit accounts 143,992 119,292 112,264249 256
Securities losses, net (1) (20)
Net gain on loan sales 9 10
Other customer fees 28,425 36,184 27,246
Security gain 220,000
Other income 14,715 26,494 12,775
-----------------------------------------------
Total other income 222,812 241,675 417,920
-----------------------------------------------
OTHER342 485
--------- ---------
689 846
NONINTEREST EXPENSES
Salaries and employee benefits 812,950 822,890 773,491
Net occupancy expenses 143,934 152,663 56,404
Equipment expenses 77,953 62,107 45,691
Data processing fees 71,209 70,211 66,583
Deposit insurance expense 78,431 156,958 151,157
Printing1,551 1,375
Premises and office supplies 45,087 53,839 48,686
Advertising 46,250 44,650 39,500
Legal and professional fees 69,685 50,541 40,457
Director and committee fees 65,900 71,050 69,800equipment 403 344
Other expenses 123,128 129,372 111,848
-----------------------------------------------
Total other expenses 1,534,527 1,614,281 1,403,617
-----------------------------------------------
(continued)
F-5
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
890 764
--------- ---------
2,844 2,483
--------- ---------
INCOME BEFORE INCOME TAX AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING METHOD $ 934,363 $1,105,032 $1,448,488
Income tax expense 267,337 302,931 409,877
-----------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING METHOD 667,026 802,101 1,038,611
CUMULATIVE EFFECT OF CHANGE IN METHOD OF
ACCOUNTING FOR INCOME TAXES 33,500
-----------------------------------------------2,229 2,561
Provision for income taxes 768 890
--------- ---------
NET INCOME $ 667,0261,461 $ 802,101 $1,072,111
-----------------------------------------------
-----------------------------------------------
PER SHARE
Income before cumulative effect of change
in accounting method $24.20 $29.10 $37.681,671
--------- ---------
--------- ---------
Net income 24.20 29.10 38.89
WEIGHTED AVERAGE SHARES OUTSTANDING 27,565 27,567 27,567per share $ 17.84 $ 20.40
--------- ---------
--------- ---------
Average shares outstanding 81,900 81,900
--------- ---------
--------- ---------
See notes to consolidated financial statements.
F-6F-9
JAY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN STOCKHOLDERS'SHAREHOLDERS' EQUITY
Years ended December 31, 1997 and 1996
(dollar references in thousands except per share data)
- --------------------------------------------------------------------------------
NET
COMMON STOCK UNREALIZED
--------------------------- GAIN ON
SECURITIES
SHARES PAID-IN RETAINED AVAILABLE
OUTSTANDING AMOUNT CAPITAL EARNINGS FOR SALE TOTAL
- --------------------------------------------------------------------------------------------------------------------Unrealized
Appreciation
(Depreciation)
on Securities
Additional Available-
Common Paid-in Retained for-Sale,
Stock Capital Earnings Net of Tax Total
----- ------- -------- ---------- -----
BALANCES,BALANCE, JANUARY 1, 1993 9,1891996 $ 918,900 $709,344 $5,270,204 $6,898,44882 $ 775 $ 9,989 $ (77) $ 10,769
Net income for 1993 1,072,111 1,072,1111,671 1,671
Cash dividends-$2 per share (164) (164)
Net change in unrealized
depreciation on securities
available-for-sale - -
------- ------- ------- ------- -------
BALANCE, DECEMBER 31, 1996 82 775 11,496 (77) 12,276
Net income 1,461 1,461
Cash dividends ($11.50- $2 per share) (169,997) (169,997)
200% stock dividend 18,378 1,837,800 (1,837,800)
----------------------------------------------------------------------------------
BALANCES,share (164) (164)
Net change in unrealized
depreciation on securities
available-for-sale 54 54
------- ------- ------- ------- -------
BALANCE, DECEMBER 31, 1993 27,567 2,756,700 709,344 4,334,518 7,800,562
Net income for 1994 802,101 802,101
Cash dividends ($10 per share) (275,670) (275,670)
----------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1994 27,567 2,756,700 709,344 4,860,949 8,326,993
Net income for 1995 667,026 667,026
Cash dividends ($10 per share) (275,586) (275,586)
Unrealized gain on securities
available for sale, net of taxes
of $15,237 $38,467 38,467
Purchase of stock (12) (1,200) (308) (2,332) (3,840)
----------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1995 27,555 $2,755,500 $709,036 $5,250,057 $38,467 $8,753,060
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------1997 $ 82 $ 775 $12,793 $ (23) $13,627
------- ------- ------- ------- -------
------- ------- ------- ------- -------
See notes to consolidated financial statements.
F-7F-10
JAY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1996
(dollar references in thousands)
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 667,0261,461 $ 802,101 $1,072,1111,671
Adjustments to reconcile net income to net cash
provided
byfrom operating activities
Provision for loan losses 408,000 120,000 240,000240 281
Depreciation and amortization 130,957 100,449 36,353351 361
Deferred income tax (15,862) 27,159 (76,018)
Investment securities amortization,(89) 87
Securities net 95,274 361,978 312,138
Security gain (220,000)losses 1 20
Net change in
Interest receivable (44,873) 68,134 (60,642)(30) (40)
Interest payable 75,792 47,644 (48,100)30 (12)
Other assets 111,231 (263,005) 110,380
Other adjustments 48,578 3,474 (61,023)
------------------------------------------------and liabilities 197 (196)
--------- ---------
Net cash provided byfrom operating activities 1,476,123 1,267,934 1,305,199
------------------------------------------------2,161 2,172
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing deposits (103,595) 100,000
Purchasesbalances with banks - 498
Purchase of securities held to maturity (8,133,079) (11,802,796) (19,940,074)available-for-sale (2,126) (3,101)
Purchase of restricted stock (149) (36)
Proceeds from sales of securities available-for-sale 2,003 2,038
Proceeds from principal payments and maturities
of securities available-for-sale 2,618 3,135
Proceeds from maturities of securities held-to-maturity 221 255
Loans purchased (1,103) (2,095)
Loans sold 250 530
Loans made to customers and payments received (6,723) (11,642)
Payment of securities held
to maturity 14,441,000 16,055,577 17,880,875
Net change in loans (132,280) (3,718,068) (5,110,851)life insurance premiums (935) -
Purchases of premises and equipment, (2,316) (707,920) (483,189)
Premiums paid on life insurance (744,800)
Refunds of life insurance premiums 744,800
Other 82,053 47,510
------------------------------------------------net (221) (256)
--------- ---------
Net cash provided (used) byfrom investing activities 6,069,730 653,646 (8,250,529)
------------------------------------------------(6,165) (10,674)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in Noninterest-bearing, NOW, money market and savings
deposits (3,256,441) (8,282,200) 2,268,738
Certificates of deposit (2,083,507) 5,519,650 799,827
Cash dividends (275,670) (179,186) (169,997)
Purchase of stock (3,840)
------------------------------------------------(3,549) 6,322
Net change in short-term borrowings 1,508 283
Proceeds from FHLB advances 3,800 1,000
Dividends paid (164) (164)
--------- ---------
Net cash provided (used) byfrom financing activities (5,619,458) (2,941,736) 2,898,568
------------------------------------------------1,595 7,441
--------- ---------
NET INCREASE (DECREASE)CHANGE IN CASH AND CASH EQUIVALENTS 1,926,395 (1,020,156) (4,046,762)(2,409) (1,061)
Cash and cash equivalents at beginning of year 4,843 5,904
--------- ---------
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR 3,553,628 4,573,784 8,620,546
------------------------------------------------
CASH AND CASH EQUIVALENTS,AT END OF YEAR $5,480,023 $3,553,628 $4,573,784
------------------------------------------------
------------------------------------------------
ADDITIONAL CASH FLOWS INFORMATION$ 2,434 $ 4,843
--------- ---------
--------- ---------
Cash paid during the year for:
Interest paid $2,422,418 $2,429,994 $2,584,504$ 3,724 $ 3,537
Income tax paid 249,253 404,195 419,860taxes 824 1,020
SEE NOTES TO CONSOLIDATEDF-11
JAY FINANCIAL STATEMENTS.
F-8
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
NATURE OF OPERATIONS ANDYears ended December 31, 1997 and 1996
(dollar references in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: The accounting and reporting policies of Randolph County Bancorp ("Company"consolidated financial statements include Jay
Financial Corporation (the "Company"), and its wholly ownedwholly-owned subsidiary, The Randolph CountyFirst
National Bank of Portland ("Bank"), conform to
generally accepted accounting principles and reporting practices followed by. Intercompany transactions are eliminated in
consolidation.
The Company operates primarily in the banking industry. Theindustry, which accounts for more
significantthan 90% of the policies are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimatesits revenues, operating income and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.assets. The Company is a bank holding company whose principal activity isand Bank are
engaged in the ownershipbusiness of commercial and management of the Bank.retail banking and trust and
investment services in Jay County, Indiana. The Bank operates under a state bank charter and
provides full banking services, including trust services. As a state bank, the
Bank is subject to the regulation of the Department of Financial Institutions,
State of Indiana and the Federal Deposit Insurance Corporation.
The Bank generates commercial, mortgage and consumer loans and receives deposits
fromBank's customers are located
primarily in RandolphJay County Indiana and surrounding counties. The majority of the Company's
income is derived from loans to customers who are predominantly small and
middle-market businesses and individuals. The Bank's loans are generally
secured by specific items of collateral including real property, consumer assets
and business assets. Although the Bank has a diversified loan portfolio,
a substantial portionapproximately 20% of its
debtors' ability to honor their contractsthe portfolio at December 31, 1997 is dependent upon economic conditionsthe
agriculture industry.
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 agricultural industry.
CONSOLIDATION--The consolidated financial statements include the accounts of the
Company and the Bank after eliminationdisclosures provided, and future
results could differ. The allowance for loan losses, fair value of all material intercompany transactionsfinancial
instruments, and accounts.
INVESTMENT SECURITIES--The Company adopted Statementthe determination and carrying value of Financial Accounting
Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES, on January 1, 1994.
Debt securitiesimpaired loans are
particularly subject to change.
SECURITIES: Securities are classified as held to maturity and carried at
amortized cost when the Companymanagement has the positive intent and ability to hold the securitiesthem
to maturity. Securities held
to maturity are carried at amortized cost. Debt securities not classified as
held to maturity are classified as available for sale.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 stockholders'shareholders'
equity, net of tax. AmortizationSecurities are written down to fair value when a decline in
fair value is not temporary. Interest and dividend income, adjusted by
amortization of premiums and accretion of discounts are recorded as interest
income from securities.purchase premium or discount, is included in earnings. Realized
gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined based on the specific-identification method.
At January 1, 1994,amortized cost of the Bank determined there were no securities which should be
reclassified as availablespecific
security sold.
LOANS: Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs, and an allowance for sale,loan losses. Interest income is
reported on the interest method and therefore there was no change in total
stockholders' equity.
Prior to the adoption of SFAS No. 115, investment securities were carried at
cost, adjusted forincludes amortization of premiumsnet deferred loan
fees and discounts. Realized gains and
lossescosts 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 sales were included in other income. Gains and losses on the sale of
securities were determined on the specific-identification method.
F-9such loans are
reported as principal reductions.
F-12
JAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
LOANS are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans, except for installment loans with
add-on interest, for which a method that approximates the level yield method is
used. Loans are placedYears ended December 31, 1997 and 1996
(dollar references in a nonaccrual status when the collection of interest
becomes doubtful. Interest income previously accrued but not deemed collectible
is reversed and charged against current income. Interest on nonaccrual loans is
then recognized as income when collected.thousands)
- -----------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ALLOWANCE FOR LOAN LOSSES is maintained to absorb potential loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio.LOSSES: The
evaluation by management includes consideration of past loss experience, changes
in the composition of the portfolio, the current condition and amount of loans
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes ina valuation
allowance, increased by the economic environment and market conditions. Management believes that, as of
December 31, 1995, the allowanceprovision for loan losses is adequateand decreased by
charge-offs, less recoveries. Management estimates the allowance balance
required based on information currently available. A worsening or protracted economic declinepast loan loss experience, known and inherent risks in the
area within whichportfolio, information about specific borrower situations and estimated
collateral values, economic conditions, and other factors. Allocations of the
Company operates would increaseallowance may be made for specific loans, but the likelihoodentire allowance is available
for any loan that, in management's judgment, should be charged-off. Loan
impairment is reported when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of additional losses duesimilar 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 credit and market risks and could create the need for
additional loss reserves.original terms of the loan.
PREMISES AND EQUIPMENTEQUIPMENT: Premises and equipment are carriedstated at cost net of
accumulated depreciation. Depreciation is computed usingover the straight-line method for bank premisesassets' useful
lives on the straight line basis.
INCOME TAXES: Income tax expense is the sum of the current year income tax due
or refundable and the declining-balance method for equipment based principally onchange 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.
LOAN SERVICING: The Bank sells originated loans with servicing rights
retained. Servicing rights have not been recorded as an asset due to
immateriality.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated useful livesusing relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of the assets. Maintenancesignificant judgment regarding interest rates, credit risk,
prepayments, and repairs are expensed as incurred
while major additions and improvements are capitalized. Gains and losses on
dispositions are included in current operations.
ADVERTISING COSTS are expensed as incurred.
INCOME TAXother factors, especially in the consolidated statementabsence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
NET INCOME PER SHARE: Net income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The
Company files consolidated income tax returns with its subsidiary.
EARNINGS PER SHARE have beenper share is computed based upon the weighted
average common shares outstanding during each year.
- --> ACQUISITION OF COMPANY
In January, 1996, the Company signed a definitive agreement to be acquired by
First Merchants Corporation ("First"), Muncie, Indiana. The agreement provides
that each stockholder of the Company would receive shares of First common stock
for each common share of Company stock held. The proposed transaction is
subject to the approval of the Company's stockholders and appropriate regulatory
authorities.
F-10outstanding.
F-13
JAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)Years ended December 31, 1997 and 1996
(dollar references in thousands)
- -->--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CASH FLOW REPORTING: 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.
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 losses on securities available for sale) and may require
redetermination of industry segment financial information.
NOTE 2 - RESTRICTION ON CASH
AND DUE FROM BANKS
TheAt December 31, 1997 and 1996, the Bank iswas required to maintain reserve funds in cash and/orhave $802 and $824 on
deposit with the Federal Reserve Bank.or as cash on hand. These reserves do not earn
interest.
NOTE 3 - SECURITIES
The reserve requiredamortized cost and market values of securities at December 31, 1995, was
$586,000.
- --> INVESTMENT SECURITIESyear-end are as follows.
1995
-----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Available for sale1997:
SECURITIES AVAILABLE-FOR-SALE
U.S. TreasuryGovernment and its agencies $ 3,7093,010 $ 24 $ (2) $ 3,032
States and political subdivisions 4,512 108 - 4,619
Mortgage-backed 3,150 24 (20) 3,154
Equity securities 1,195 - (103) 1,093
--------- ---------- ---------- ---------
$ 11,867 $ 156 $ (125) $ 11,898
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
SECURITIES HELD-TO-MATURITY
State and political subdivisions $ 931 $ 23 $ 8- $ 3,724
Federal agencies 4,892 28 10 4,910
State and municipal 8,428 50 18 8,460
Corporate obligations 4,937 25 27 4,935
------------------------------------------------------------
Total investment securities $21,966 $126 $63 $22,029
------------------------------------------------------------
------------------------------------------------------------954
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
F-14
JAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1996
(dollar references in thousands)
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
1994
------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Held to maturity
U.S. Treasury1996:
SECURITIES AVAILABLE-FOR-SALE
U.S Government and its agencies $ 5,468 $1823,005 $ 5,286
Federal agencies 4,999 120 4,87918 $ (11) $ 3,012
States and political subdivisions 5,805 106 (16) 5,895
Mortgage-backed 4,423 9 (55) 4,377
Equity securities 1,176 - (108) 1,068
--------- ---------- ---------- ---------
$ 14,409 $ 133 $ (190) $ 14,352
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
SECURITIES HELD-TO-MATURITY
State and municipal 9,826 $20 84 9,762
Corporate obligations 8,483 5 185 8,303
-------------------------------------------------------------
Total investment securities $28,776 $25 $571 $28,230
-------------------------------------------------------------
-------------------------------------------------------------political subdivisions $ 1,154 $ 22 $ (1) $ 1,175
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)Mortgage-backed securities are primarily issued by federal agencies and
government sponsored entities.
Restricted stock primarily consists of Federal Reserve and Federal Home Loan
Bank stock.
The amortized cost and estimated marketfair value of debt securities available for sale at
December 31, 1995,year-end 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.Securities not due at
a single maturity date are shown separately.
1995
----------------------
AMORTIZED FAIR
MATURITY DISTRIBUTION AT DECEMBER 31 COST VALUE
- -----------------------------------------------------------------------Available-for-Sale Held-to-Maturity
------------------ ----------------
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
Within
Due in one year or less $ 9,0732,135 $ 9,073
One to2,139 $ 75 $ 75
Due after one through five years 12,406 12,454
Five to4,337 4,406 701 712
Due after five through ten years 352 367
After1,050 1,106 155 167
Due after ten years 135 135- - - -
--------- --------
Totals $21,966 $22,029
--------- --------
--------- -----------------
7,522 7,651 931 954
Mortgage-backed securities 3,150 3,154 - -
Equity securities 1,195 1,093 - -
--------- --------- --------- ---------
$ 11,867 $ 11,898 $ 931 $ 954
--------- --------- --------- ---------
--------- --------- --------- ---------
F-15
JAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1996
(dollar references in thousands)
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
Proceeds from sales of securities during 1997 were $2,003 for securities
available-for-sale. Gross gains of $6 and gross losses of $7 were realized on
those sales. Proceeds from sales of securities during 1996 were $2,038 for
securities available-for-sale. Gross gains of $2 and gross losses of $22 were
realized on those sales. No securities held-to-maturity were sold in 1997 or
1996.
Securities with a carrying valuetotal amortized cost of $103,000$1,508 and $99,600$2,008 were pledged at
December 31, 19951997 and 19941996 to secure certainpublic deposits and for other purposes as
permitted or required by law. ThereSee also Note 9.
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are comprised of the following classifications:
1997 1996
---- ----
Real estate-residential $ 29,908 $ 27,041
Real estate-commercial 25,576 22,707
Commercial 18,756 16,823
Consumer 10,668 10,931
--------- ---------
$ 84,908 $ 77,502
--------- ---------
--------- ---------
Loans dependent on the agriculture industry included in total loans were
no sales of investment securities during 1995, 1994 or 1993.
However, a gain of $220,000 was realized in 1993 from proceeds of an investment
security previously written off in 1992. The tax expense on this gain was
$87,000approximately $17,136 and $13,429 at December 31, 1997 and 1996.
Activity in the year ended December 31, 1993.
On December 31, 1995, the Bank transferred all securities from held to maturity
to availableallowance for sale in accordance with a transition reclassification allowed
by the Financial Accounting Standards Board. Such securities had a carrying
value of $21,966,000 and a fair value of $22,029,000.
F-12loan losses was as follows:
1997 1996
---- ----
Balance, January 1 $ 922 $ 1,006
Provision for loan losses 240 281
Recoveries on loans 170 41
Loans charged off (340) (406)
--------- ---------
Balance, December 31 $ 992 $ 922
--------- ---------
--------- ---------
F-16
JAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)Years ended December 31, 1997 and 1996
(dollar references in thousands)
- --------------------------------------------------------------------------------
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired loan information is as follows:
LOANS AND ALLOWANCE
DECEMBER 31 1995 1994
- -----------------------------------------------------------------------------------------1997 1996
---- ----
Commercial and industrialYear end loans:
with no allowance for loan losses allocated $ 480 $ 9
with allowance for loan losses allocated 83 971
Amount of the allowance allocated 41 281
Average balance of impaired loans $ 3,230 $ 3,578
Real estate loans (includes $10,111 and $9,687 secured
by farmland) 22,590 18,848
Agricultural production financing and other loans to
farmers 6,063 5,681
Individuals' loans for household and other personal
expenditures 12,988 17,016
Tax-exempt loans 85 90
Other loans 5 47
--------------------
44,961 45,260
Unearnedduring the year 741 417
Interest income recognized during impairment 11 12
Cash-basis interest on loans (1,467) (1,482)
--------------------
Total loans $43,494 $43,778
--------------------
--------------------income recognized 11 12
Certain of the Company's officers, directors, principal shareholders and their
associates were loan customers of the Bank. At December 31, 1997 and 1996 loans
to these individuals totaled $3,874 and $3,480.
NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment are as follows:
DECEMBER 31 1995 1994 1993
- ------------------------------------------------------------------------------------------1997 1996
---- ----
Allowance for loan losses
Balances, January 1 $489 $567 $382
Provision for losses 408 120 240
Recoveries on loans 21 20 16
Loans charged off (324) (218) (71)
-------------------------------
Balances, December 31 $594 $489 $567
-------------------------------
Nonperforming loans -------------------------------
Nonaccruing loans $33
Loans contractually past due 90 days or more other
than nonaccruing $36 $343 45Land and land improvements $ 96 $ 96
Buildings and improvements 1,046 935
Furniture and equipment 1,574 1,464
-------- ---------
Total cost 2,716 2,495
Accumulated depreciation and amortization (1,687) (1,410)
-------- ---------
$ 1,029 $ 1,085
-------- ---------
-------- ---------
F-13Depreciation charged to operations totaled $277 and $228 for 1997 and 1996.
F-17
JAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
The Company adopted SFAS No. 114Years ended December 31, 1997 and No. 118 ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN1996
(dollar references in thousands)
- -----------------------------------------------------------------------------
NOTE 6 - DEPOSITS
Certificates of deposit of $100 or more total $13,654 and ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN -
INCOME RECOGNITION AND DISCLOSURES on January 1, 1995. The adoption of SFAS
No. 114 and 118 did not have a material impact on the Company's financial
position or results of operations. Impaired loans totaled $631,000$15,752 at December
31, 1995. An allowance for losses at December 31, 1995, was not
deemed necessary for impaired loans totaling $525,000, but an allowance1997 and 1996.
At year-end 1997, the scheduled maturities of $73,000 was recorded for the remaining balance of impaired loans of $106,000.
The average balance of impaired loans for 1995 was $572,000. Interest
incomecertificates and cash receipts ofother time
deposits (included in interest totaled $47,000 and $37,000 during the
period in 1995 that the loans were impaired.
The Bank has entered into transactions with certain directors, executive
officers, significant stockholders and their affiliates or associates
(related parties). Such transactions were made in the ordinary course of
business on substantially the same terms and conditions, including interest
rates and collateral, as those prevailing at the same time for comparable
transactions with other customers, and did not, in the opinion of management,
involve more than normal credit risk or present other unfavorable features.
The aggregate amount of loans, as defined, to such related parties werebearing deposits) are as follows:
1995 1994
1998 $ 30,479
1999 9,515
2000 7,038
2001 1,291
2002 1,474
Thereafter -
----------------------------------------------------------------------------------
$ 49,797
---------
---------
NOTE 7 - LOAN SERVICING
Mortgage loans serviced for FHLMC are not included in the consolidated financial
statements. The unpaid principal balances totaled $4,840 and $5,305 at December
31, 1997 and 1996.
NOTE 8 - INCOME TAX
Income tax expense:
1997 1996
---- ----
Balances, January 1 $963 $795
Changes in composition of related parties (442)
New loans, including renewals 84 1,167
Payments, etc., including renewals (96) (999)
-----------------
Balances, December 31 $509 $963
-----------------
-----------------Currently payable $ 857 $ 803
Deferred (89) 87
--------- ---------
$ 768 $ 890
--------- ---------
--------- ---------
On March 19, 1996,The difference between the Company charged off $188,000 in loansfinancial statement tax provision and amounts
computed by applying the statutory federal income tax rate of 34% to a single
borrower. In conjucnction with the chargeoff, a provision for loan losses of
$188,000 was also recorded. These transactions were the result of information
related to the borrower which became available subsequent to December 31, 1995
and discussions with regulatory authorities. Both of these transactions are
reflected in the December 31, 1995 consolidated financial statements.
- --> PREMISES AND EQUIPMENTpre-tax
income is reconciled as follows:
DECEMBER 31 1995 1994
- -------------------------------------------------------------------1997 1996
---- ----
LandIncome tax provision computed at statutory federal rate $ 223758 $ 223
Buildings 1,208 1,203
Equipment 511 512
-----------------
Total cost 1,942 1,938
Accumulated depreciation (611) (478)
-----------------
Net $1,331 $1,460
-----------------
-----------------871
Tax effect of:
Income from tax exempt securities and loans (106) (119)
State income tax, net of federal tax effect 126 145
Other (10) (7)
------- -------
Income tax expense $ 768 $ 890
------- -------
------- -------
F-14F-18
JAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
DEPOSITSYears ended December 31, 1997 and 1996
(dollar references in thousands)
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAX (Continued)
The year-end net deferred tax asset is comprised of the following components:
DECEMBER 31 1995 1994
- -----------------------------------------------------------------------1997 1996
---- ----
Noninterest bearingDeferred tax assets:
Allowance for loan losses $ 7,333333 $ 6,538
Interest-bearing demand 9,446 10,464
Savings deposits 9,949 12,981
Certificates305
Deferred compensation 66 50
Accrued retirement benefits 81 61
Unrealized loss on equity securities available for sale 41 43
Other 7 6
--------- ---------
528 465
Deferred tax liabilities:
Depreciation (48) (72)
Unrealized gain on debt securities available for sale (54) (20)
Net deferred loan fees (45) (26)
Leasing activities (57) (29)
Net discount accretion on securities and other time deposits of
$100,000 or more 5,476 4,279
Other certificates and time deposits 31,237 34,519
----------------------
Total deposits $63,441 $68,781
----------------------
----------------------(9) (57)
--------- ---------
(213) (204)
Valuation allowance (41) (43)
--------- ---------
Net deferred tax asset $ 274 $ 218
--------- ---------
--------- ---------
Certificates maturing in years ending December 31:NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES
Year-end Federal Home Loan Bank advances are as follows:
1997 1996
---- ----
1996 $25,555
1997 6,109
6.07%, due August 1998 4,154$ 500 $ 500
6.37%, due August 1998 500 500
6.49%, due May 1999 642
2000 253
-------
$36,713
-------
-------500 -
6.24%, due June 1999 1,300 -
6.06%, due July 1999 1,000 -
6.06%, due October 1999 1,000 -
--------- ---------
$ 4,800 $ 1,000
--------- ---------
--------- ---------
F-15The advances outstanding at December 31, 1997 are due in full at maturity,
require monthly interest payments and are secured by a blanket pledge of the
Bank's eligible securities and mortgage loans.
F-19
JAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
INCOME TAX
YEAR ENDED DECEMBER 31 1995 1994 1993Years ended December 31, 1997 and 1996
(dollar references in thousands)
- --------------------------------------------------------------------------------
NOTE 10 - -------------------------------------------------------------------------------
Income tax expense
Currently payable
Federal $196 $188 $339
State 87 88 147
Deferred
Federal (12) 19 (55)
State (4) 8 (21)
------------------------
Total income tax expense $267 $303 $410
------------------------
------------------------
Reconciliation of federal statutory to actual
tax expense
Federal statutory income tax at 34% $318 $376 $492
Tax exempt interest (107) (139) (183)
Effect of state income taxes 55 63 83
Other 1 3 18
------------------------
Actual tax expense $267 $303 $410
------------------------
------------------------
A cumulative net deferred tax asset is included in other assets. The components
of the asset are as follows:
DECEMBER 31 1995 1994
- -------------------------------------------------------------------------------
Differences in depreciation methods $(32) $(17)
Differences in accounting for loan losses 187 143
State income tax (14) (13)
Differences in accounting for pensions (19) (2)
Differences in accounting for securities available for sale (25)
Other 5
---------------
$ 102 $111
---------------
---------------
Assets $192 $151
Liabilities (90) (32)
---------------
$ 102 $119
---------------
---------------
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS) COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements. The
Bank's exposure to credit loss in the event of nonperformance by the other party
to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual or notional amount of those
instruments. The Bank uses the same credit policies in making such commitments
as it does for instruments that are included in the consolidated balance sheet.
Financial instruments whose contract amount represents credit risk as of
December 31, were as follows:
1995 1994
- ----------------------------------------------------------------------1997 1996
---- ----
Commitments to extend credit $2,746 $3,276$ 9,899 $ 13,054
Standby letters of credit 55 5548 56
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. Standby
letters of credit are conditional commitments issued by the Bank to guarantee
the performance of a customer to a third party. Commitments and letters of
credit generally have fixed expiration dates of no more than one year or other termination clauses and may
require payment of a fee.are
variable rate. Since many commitments and most letters of the commitments are expected tocredit expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary
by the Bank upon extension of credit is based on management's credit evaluation.
Collateral held varies but may include accounts receivable, inventory, property
and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by theNOTE 11 - REGULATORY MATTERS
The Bank to
guarantee the performance of a customer to a third party.
The Company and Bank are alsois subject to claimsregulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and lawsuits which arise
primarily in the ordinary courseprompt corrective action
regulations involve quantitative and qualitative measures of business. It is the opinion of management
that the disposition or ultimate resolution of such claimsassets,
liabilities, and lawsuits will not
have a material adverse effect on the consolidated financial position of the
Company.
- --> RESTRICTION ON DIVIDENDS
Without prior approval, the Bank is restricted by Indiana law and regulations
of the Department of Financial Institutions, State of Indiana, and the Federal
Deposit Insurance Corporation as to the maximum amount of dividends it can pay
to its parent to the balance of the undivided profits account, adjusted for
defined bad debts. As a practical matter, the Bank restricts dividends to a
lesser amount because of the need to maintain an adequate capital structure.
At December 31, 1995, total stockholders' equity of the Bank was $8,756,000 of
which $6,152,000 was restricted from dividend distribution to the Company.
F-17certain off-balance-sheet items calculated under regulatory
accounting practices.
F-20
JAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
PENSION PLANYears ended December 31, 1997 and 1996
(dollar references in thousands)
- --------------------------------------------------------------------------------
NOTE 11 - REGULATORY MATTERS (Continued)
The Bank's defined-benefit pension plan covers substantially all of its
employees. The benefitsprompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are based primarily on years of servicenot
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
employees'
pay near retirement. Contributionsexpansion, and plans for capital restoration are intended to provide not only for
benefits attributed to service to date, but also for those expected to be earned
inrequired.
At year end 1997 and 1996, the future. Pension expensecapital requirements were met and the Bank was
$52,000 for 1995, $77,000 for 1994categorized as well capitalized. Actual capital levels (in millions) and
$50,000 for 1993.
The following tables set forth the plan's funded status and amounts recognized
in the consolidated balance sheet:minimum required levels were:
DECEMBER 31 1995 1994
- ------------------------------------------------------------------------------------------------------------
Actuarial present value of
Accumulated benefit obligation including vested benefits of $1,481
and $1,287
$1,510 $1,309Minimum Required
To Be Well
Minimum Required Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
------------------
Projected benefit obligation for service rendered to date $(1,890) $(1,591)
Plan assets at fair value, primarily time deposits in financial institutions 1,678 1,411
------------------
Projected benefit obligation in excess of plan assets (212) (180)
Unrecognized net loss from experience different than that assumed 211 149
Unrecognized prior service cost 153 158
Unrecognized net asset at January 1, 1987 being recognized over 17
years (108) (123)
------------------
Prepaid pension cost included in other assets $ 44 $ 4
------------------
------------------
YEAR ENDED DECEMBER 31 1995 1994 1993
- ---------------------------------------------------------------------------------------------------Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Pension expense includes the following components
Service cost - benefits earned during the year $57 $65 $52
Interest cost on projected benefit obligation 105 100 98
Actual return on plan assets (246) (6) (21)
Net amortization and deferral 136 (82) (79)
-----------------------------
$52 $77 $50
-----------------------------
-----------------------------
Assumptions used in the accounting were:
Discount rate 6.25% 6.75% 6.00%
Rate of increase in compensation 4.00% 4.00% 4.50%
Expected long-term rate of return on assets 8.00% 7.00% 7.00%
1997
Total capital (to risk weighted assets) $ 14,180 18.3% $ 6,197 8.0% $ 7,747 10.0%
Tier 1 capital (to risk weighted assets) 13,212 17.1 3,099 4.0 4,648 6.0
Tier 1 capital (to average assets) 13,212 12.5 4,215 4.0 5,269 5.0
1996
Total capital (to risk weighted assets) 12,954 17.5 5,930 8.0 7,413 10.0
Tier 1 capital (to risk weighted assets) 12,032 16.2 2,965 4.0 4,448 6.0
Tier 1 capital (to average assets) 12,032 12.3 3,905 4.0 4,882 5.0
F-18NOTE 12 - EMPLOYEE BENEFIT PLANS
The Bank has a retirement savings 401(k) plan in which substantially all
employees may participate. The Bank matches employees' contributions at the
rate of 75 percent for the first 6 percent of base salary contributed. The
Bank's expense for the plan was $74 for 1997 and $32 for 1996.
The Bank has purchased life insurance on certain directors and officers, which
insurance had an approximate cash value of $2,844 and $1,815 at December 31,
1997 and 1996. The Bank also has entered into deferred compensation, salary
continuation and survivor income benefit agreements that provide benefits to
certain directors and officers or their beneficiaries. The
F-21
benefits expected to be paid at retirement are being accrued to date of full
eligibility. Accrued benefits payable totaled $372 and $280 at December 31,
1997 and 1996.
F-22
JAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)Years ended December 31, 1997 and 1996
(dollar references in thousands)
- --------------------------------------------------------------------------------
NOTE 13 - DISCLOSURES ABOUT FAIR VALUESVALUE OF FINANCIAL INSTRUMENTS
TheFinancial instruments at year-end were as follows, in thousands.
---------- 1997 ------- ---------- 1996 -------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial assets
Cash and cash equivalents 2,434 2,434 4,843 4,843
Securities available-for-sale 11,898 11,898 14,352 14,352
Securities held-to-maturity 931 954 1,154 1,175
Loans, net 83,916 84,534 76,580 76,770
Accrued interest receivable 939 939 909 909
Financial liabilities
Deposits (83,602) (84,060) (87,151) (87,763)
Short-term borrowings (2,145) (2,145) (637) (637)
FHLB advances (4,800) (4,833) (1,000) (1,005)
Accrued interest payable (290) (290) (260) (260)
Off-balance sheet items - - - -
For purposes of these fair value disclosures, the following methods and assumptions were
used to estimate theused. The fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS--The fair value ofvalues for cash and cash equivalents, approximatescash value of life
insurance, demand and savings deposits, accrued interest, and short-term
borrowings are considered to approximate the carrying value.
INTEREST-BEARING DEPOSITS--Theamounts. The fair value
of interest-bearing time deposits
approximates carrying value.
INVESTMENT SECURITIES--Fair values arefor securities is based on quoted market prices.
LOANS--For both short-term loans and variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values.for the individual securities or
for equivalent securities. The fair value for other loans are estimated using discounted cash
flow analyses, usingis based on estimates of
the difference in interest rates currently being offeredthat the Company would charge the borrowers for
similar such loans with similar termsmaturities made at December 31, applied for an
estimated time period until the loan is assumed to borrowers of similar credit quality.
INTEREST RECEIVABLE/PAYABLE--Thereprice or be paid. The fair
values of interest receivable/payable
approximate carrying values.
DEPOSITS--The fair values of noninterest-bearing and interest-bearing demand
accounts are equal to the amount payable on demand at the balance sheet date.
Fair valuesvalue for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculationand FHLB advances is based on estimates of the
rates that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturitiesthe Company would pay on such deposits and rates available on such
advances at December 31, applied for the time deposits.
DUE TO BROKER--Theperiod until maturity. The
carrying value (which is zero) of off-balance sheet items is considered to be a
reasonable estimate of fair value of due to broker approximates carrying value.
The estimated fair values of the Company's financialas these instruments are as follows:
1995
-----------------
DECEMBER 31 CARRYING FAIR
AMOUNT VALUE
- ----------------------------------------------------------------------
ASSETS
Cash and cash equivalents $5,480 $5,480
Interest-bearing deposits 104 104
Investment securities available for sale 22,029 22,029
Loans, net 42,900 42,939
Interest receivable 1,083 1,083
LIABILITIES
Deposits 63,441 63,409
Interest payable 381 381
Due to broker 388 388
F-19generally variable-
rate and short-term in nature, with minimal fees charged.
F-23
JAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)Years ended December 31, 1997 and 1996
(dollar references in thousands)
- --------------------------------------------------------------------------------
NOTE 14 - PARENT COMPANY CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
CONDENSED BALANCE SHEETSHEETS
------------------------
December 31, 1997 and 1996
DECEMBER 31 1995 1994
- -------------------------------------------------------------------------------1997 1996
---- ----
ASSETS
Cash $ 7 $ 2
Investment in subsidiary 8,756 8,321subsidiary-The First National Bank $ 13,339 $ 12,004
Securities available-for-sale 285 266
Other assets 200 197
---------------------
Total assets3 6
--------- ---------
$ 8,96313,627 $ 8,520
---------------------
---------------------12,276
--------- ---------
--------- ---------
LIABILITIES Dividend payableAND SHAREHOLDERS' EQUITY
Liabilities $ 193- $ 193
Other liabilities 17
---------------------
Total liabilities 210 193
STOCKHOLDERS' EQUITY 8,753 8,327
---------------------
Total liabilities and stockholders'-
Shareholders' equity 13,627 12,276
--------- ---------
$ 8,96313,627 $ 8,520
---------------------
---------------------12,276
--------- ---------
--------- ---------
CONDENSED STATEMENTSTATEMENTS OF INCOME
------------------------------
Years ended December 31, 1997 and 1996
YEAR ENDED DECEMBER 31 1995 1994 1993
- --------------------------------------------------------------------------------1997 1996
---- ----
Income--dividendsDividends on securities available for sale $ 6 $ 4
Dividends from subsidiary $281 $279 $174
Expense--other expense 18 2 1
---------------------
Income before income tax and equity177 244
Equity in subsidiary undistributed income of
subsidiary 263 277 173
Income tax benefit 7 1
---------------------
Income before equity in undistributed1,280 1,426
Other expenses (2) (3)
--------- ---------
Net income of subsidiary 270 278 173
Equity in undistributed income of subsidiary 397 524 899
---------------------
NET INCOME $667 $802 $1,072
---------------------
---------------------$ 1,461 $ 1,671
--------- ---------
--------- ---------
F-20F-24
JAY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)Years ended December 31, 1997 and 1996
(dollar references in thousands)
- --------------------------------------------------------------------------------
NOTE 14 - PARENT COMPANY CONDENSED STATEMENTFINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
Years ended December 31, 1997 and 1996
YEAR ENDED DECEMBER 31 1995 1994 1993
- ---------------------------------------------------------------------------------------1997 1996
---- ----
OPERATING ACTIVITIES
Net income $667 $802 $1,072$ 1,461 $ 1,671
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed income of subsidiary (397) (524) (899)(1,280) (1,426)
Change in Otherother assets (3) (101) (4)
Otherand liabilities 18
---------------------------3 4
--------- ---------
Net cash provided byfrom operating activities 285 177 169
---------------------------183 249
--------- ---------
INVESTING ACTIVITIES
Purchase securities available-for-sale (20) (85)
--------- ---------
FINANCING ACTIVITIES
Cash dividends (276) (179) (165)
Purchase of stock (4)
---------------------------(164) (164)
--------- ---------
Net cash used byfrom financing activities (280) (179) (165)
---------------------------
NET INCREASE (DECREASE) IN(164) (164)
--------- ---------
Net change in cash and cash equivalents - -
Cash and cash equivalents at beginning of year - -
--------- ---------
CASH 5 (2) 4AND CASH AT BEGINNING OF YEAR 2 4
---------------------------
CASHEQUIVALENTS AT END OF YEAR $ 7- $ 2 $ 4
---------------------------
----------------------------
--------- ---------
--------- ---------
F-21
UNION NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
F-22
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and
Board of Directors
Union National Bancorp
Liberty, Indiana
We have audited the consolidated balance sheet of Union National Bancorp and
subsidiary as of December 31, 1995 and 1994, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended December 31, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of Union
National Bancorp and subsidiary as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in the notes to the consolidated financial statements,NOTE 15 - PENDING BUSINESS COMBINATION
On August 20, 1998, the Company changed its method of accounting for investments in securities in 1994 and
income taxes in 1993.
GEO. S. OLIVE & CO., LLC
Indianapolis, Indiana
February 2, 1996
F-23
UNION NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31 1995 1994
- --------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 3,461,220 $ 3,213,296
Federal funds sold 450,000
----------------------------------
Cash and cash equivalents 3,461,220 3,663,296
Investment securities
Available for sale 60,789,224 22,791,661
Held to maturity 2,464,191 30,339,708
----------------------------------
Total investment securities 63,253,415 53,131,369
Loans 89,850,398 83,257,882
Allowance for loan losses (1,144,546) (1,116,077)
----------------------------------
Net loans 88,705,852 82,141,805
Premises and equipment 3,026,917 3,124,478
Federal Reserve and Federal Home Loan Bank stock 810,000 800,800
Interest receivable 1,729,585 1,566,387
Other assets 90,546 686,777
----------------------------------
Total assets $161,077,535 $145,114,912
----------------------------------
----------------------------------
LIABILITIES
Deposits
Noninterest bearing $ 7,805,936 $ 7,795,091
Interest bearing 124,533,486 113,603,118
----------------------------------
Total deposits 132,339,422 121,398,209
Short-term borrowings 3,401,997 1,442,177
Federal Home Loan Bank advances 8,000,000 8,000,000
Interest payable 1,168,093 811,091
Other liabilities 426,739 54,330
----------------------------------
Total liabilities 145,336,251 131,705,807
----------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $5 stated value
Authorized--200,000 shares
Issued and outstanding--193,968 and 194,302 shares 969,840 971,510
Paid-in capital 1,957,192 1,982,242
Retained earnings 12,118,983 10,867,652
Net unrealized gain (loss) on securities available for sale 695,269 (412,299)
----------------------------------
Total stockholders' equity 15,741,284 13,409,105
----------------------------------
Total liabilities and stockholders' equity $161,077,535 $145,114,912
----------------------------------
----------------------------------
See notes to consolidated financial statements.
F-24
UNION NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
Interest Income
Loans receivable $ 7,451,813 $6,509,161 $6,200,780
Investment securities
Taxable 3,000,511 2,253,873 2,292,384
Tax exempt 827,269 894,628 846,576
Trading account securities
Taxable 7,879
Tax exempt 4,100
Federal funds sold 52,622 26,462 12,964
-----------------------------------------------
Total interest income 11,332,215 9,684,124 9,364,683
-----------------------------------------------
INTEREST EXPENSE
Deposits 6,172,877 4,782,135 4,566,096
Short-term borrowings 128,912 82,680 72,707
Federal Home Loan Bank advances 468,584 462,184 383,209
-----------------------------------------------
Total interest expense 6,770,373 5,326,999 5,022,012
-----------------------------------------------
NET INTEREST INCOME 4,561,842 4,357,125 4,342,671
Provision for loan losses 340,000 300,000 400,000
-----------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,221,842 4,057,125 3,942,671
-----------------------------------------------
OTHER INCOME
Service charges on deposit accounts 307,454 263,573 203,378
Net realized gains on sales of available-for-sale securities 36,683 12,931 38,281
Trading account securities gains, net 16,699
Other income 118,912 102,724 84,984
-----------------------------------------------
Total other income 463,049 379,228 343,342
-----------------------------------------------
OTHER EXPENSES
Salaries and employee benefits 1,418,349 1,313,166 1,283,705
Premises and equipment expenses 377,682 321,105 286,638
Data processing fees 168,943 168,988 154,609
Deposit insurance expense 142,735 257,073 240,357
Other expenses 509,054 523,821 524,710
-----------------------------------------------
Total other expenses 2,616,763 2,584,153 2,490,019
-----------------------------------------------
INCOME BEFORE INCOME TAX AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING METHOD 2,068,128 1,852,200 1,795,994
Income tax expense 545,125 449,425 444,253
-----------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
METHOD 1,523,003 1,402,775 1,351,741
CUMULATIVE EFFECT OF CHANGE IN METHOD OF ACCOUNTING FOR
INCOME TAXES 68,848
-----------------------------------------------
NET INCOME $ 1,523,003 $1,402,775 $1,420,589
-----------------------------------------------
-----------------------------------------------
PER SHARE
Income before cumulative effect of change in accounting method $7.85 $7.22 $6.96
Net income $7.85 $7.22 $7.32
WEIGHTED AVERAGE SHARES OUTSTANDING 194,061 194,302 194,150
See notes to consolidated financial statements.
F-25
UNION NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK
--------------------------------
SHARES PAID-IN
OUTSTANDING AMOUNT CAPITAL
- ----------------------------------------------------------------------------------------------------------------------------
BALANCES, JANUARY 1, 1993 193,552 $967,760 $1,940,992
Net income for 1993
Cash dividends ($1.10 per share)
Sale of stock 750 3,750 41,250
------------------------------------------------
BALANCES, DECEMBER 31, 1993 194,302 971,510 1,982,242
Net income for 1994
Cash dividends ($1.20 per share)
Cumulative effect of change in method of accounting for securities,
net of taxes of $182,000
Net change in unrealized gain (loss) on securities available for
sale, net of taxes of $470,000
------------------------------------------------
BALANCES, DECEMBER 31, 1994 194,302 971,510 1,982,242
Net income for 1995
Cash dividends ($1.40 per share)
Net change in unrealized gain (loss) on securities available for
sale, net of taxes of $740,000
Purchase of stock (334) (1,670) (25,050)
------------------------------------------------
BALANCES, DECEMBER 31, 1995 193,968 $969,840 $1,957,192
------------------------------------------------
------------------------------------------------
NET
UNREALIZED
GAIN (LOSS)
ON SECURITIES
RETAINED AVAILABLE FOR
EARNINGS SALE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
BALANCES, JANUARY 1, 1993 $ 8,491,182 $11,399,934
Net income for 1993 1,420,589 1,420,589
Cash dividends ($1.10 per share) (213,732) (213,732)
Sale of stock 45,000
------------------------------------------------
BALANCES, DECEMBER 31, 1993 9,698,039 12,651,791
Net income for 1994 1,402,775 1,402,775
Cash dividends ($1.20 per share) (233,162) (233,162)
Cumulative effect of change in method of accounting for securities,
net of taxes of $182,000 $272,568 272,568
Net change in unrealized gain (loss) on securities available for
sale, net of taxes of $470,000 (684,867) (684,867)
------------------------------------------------
BALANCES, DECEMBER 31, 1994 10,867,652 (412,299) 13,409,105
Net income for 1995 1,523,003 1,523,003
Cash dividends ($1.40 per share) (271,672) (271,672)
Net change in unrealized gain (loss) on securities available for
sale, net of taxes of $740,000 1,107,568 1,107,568
Purchase of stock (26,720)
------------------------------------------------
BALANCES, DECEMBER 31, 1995 $12,118,983 $695,269 $15,741,284
------------------------------------------------
------------------------------------------------
See notes to consolidated financial statements.
F-26
UNION NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $1,523,003 $1,402,775 $1,420,589
Adjustments to reconcile net income to net cash provided by operating
activities
Provision for loan losses 340,000 300,000 400,000
Depreciation and amortization 205,716 260,650 136,966
Deferred income tax (benefit) 52,432 35,503 (103,098)
Investment securities amortization (accretion), net 209 (26,110) (125,962)
Investment securities gains (36,683) (12,931) (38,281)
Net change in
Trading account securities 74,812
Interest receivable (163,198) (110,108) 236,168
Interest payable 357,002 197,342 (94,293)
Other adjustments 208,040 30,166 (143,509)
-------------------------------------------------
Net cash provided by operating activities 2,486,521 2,077,287 1,763,392
-------------------------------------------------
INVESTING ACTIVITIES
Purchases of securities available for sale (19,320,938) (10,154,162)
Proceeds from sales of securities available for sale 2,111,062 1,069,377
Proceeds from maturities of securities available for sale 9,178,784 1,684,439
Purchases of securities held to maturity (1,655,300) (1,065,000) (23,070,644)
Proceeds from sales of securities held to maturity 358,540
Proceeds from maturities of securities held to maturity 1,089,426 6,444,010 18,708,311
Proceeds from investment securities sales 2,097,993
Net change in loans (6,935,457) (5,353,131) (9,495,633)
Purchases of premises and equipment (108,155) (1,078,980) (267,876)
Purchase of FHLB stock (9,200) (225,900)
Other investing activities 146,703 70,082
-------------------------------------------------
Net cash used by investing activities (15,291,238) (8,532,644) (11,957,767)
-------------------------------------------------
FINANCING ACTIVITIES
Net change in
Noninterest-bearing, interest-bearing and savings deposits (742,089) 351,096 6,256,540
Certificates of deposit 11,683,302 10,249,058 (123,997)
Short-term borrowings 1,959,820 (4,389,165) 2,446,893
FHLB advances 2,000,000 2,000,000
Cash dividends (271,672) (233,162) (213,732)
Stock sold (purchased) (26,720) 45,000
-------------------------------------------------
Net cash provided by financing activities 12,602,641 7,977,827 10,410,704
-------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (202,076) 1,522,470 216,329
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,663,296 2,140,826 1,924,497
-------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $3,461,220 $3,663,296 $2,140,826
-------------------------------------------------
-------------------------------------------------
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $6,413,371 $5,129,657 $5,116,305
Income tax paid 326,235 459,372 595,480
See notes to consolidated financial statements.
F-27
UNION NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
- - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Union National Bancorp ("Company"), and
its wholly owned subsidiary, Union County National Bank ("Bank"), conform to
generally accepted accounting principles and reporting practices followed by the
banking industry. The more significant of the policies are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company is a bank holding company whose principal activity is the ownership
and management of the Bank. The Bank operates under a national bank charter and
provides full banking services, including trust services. As a national bank,
the Bank is subject to the regulation of the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation.
The Bank generates commercial, mortgage and consumer loans and receives deposits
from customers located primarily in Union, Fayette and Wayne Counties, Indiana
and Butler County, Ohio. The Bank's loans are generally secured by specific
items of collateral including real property, consumer assets and business
assets. Although the Bank has a diversified loan portfolio, a substantial
portion of its debtors' ability to honor their contracts is dependent upon
economic conditions in the agricultural industry.
CONSOLIDATION--The consolidated financial statements include the accounts of the
Company and the Bank after elimination of all material intercompany transactions
and accounts.
INVESTMENT SECURITIES--The Company adopted SFAS 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES, on January 1, 1994.
Trading account securities are held for resale in anticipation of short-term
market movements and are valued at fair value. Gains and losses, both realized
and unrealized, are included in other income.
Debt securities are classified as held to maturity when the Company has the
positive intent and ability to hold the securities to maturity. Securities held
to maturity are carried at amortized cost.
Debt securities not classified as held to maturity or included in the trading
account and marketable equity securities not classified as trading are
classified as available for sale. Securities available for sale are carried at
fair value with unrealized gains and losses reported separately through
stockholders' equity, net of tax.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
F-28
UNION NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
At January 1, 1994, investment and trading account securities with an
approximate carrying value of $15,948,000 and $117,000 were reclassified as
available for sale. This reclassification resulted in an increase in total
stockholders' equity, net of taxes, of $272,600.
Prior to the adoption of SFAS No. 115, investment securities were carried at
cost, adjusted for amortization of premiums and discounts, and securities held
for sale and marketable equity securities were carried at the lower of aggregate
cost or market. Realized gains and losses on sales were included in other
income. Unrealized losses on securities held for sale were included in other
income. Unrealized losses on marketable equity securities were charged to
stockholders' equity. Gains and losses on the sale of securities were
determined on the specific-identification method.
LOANS are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans, except for installment loans with
add-on interest, for which a method that approximates the level yield method is
used. Loans are placed in a nonaccrual status when the collection of interest
becomes doubtful. Interest income previously accrued but not deemed collectible
is reversed and charged against current income. Interest on these loans is then
recognized as income when collected. Loans are considered impaired when it
becomes probable that the Bank will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Interest income on
these loans is recognized as described above depending on the accrual status of
the loan. Certain loan fees and direct costs are being deferred and amortized
as an adjustment of yield on the loans.
DIRECT LEASE FINANCING TRANSACTIONS are accounted for by the finance method.
Under this method, lease income (total lease payments receivable plus the
residual value less the cost of leased equipment) is recognized in decreasing
amounts over the term of the lease, thus providing a level return on the
unrecovered investment.
ALLOWANCE FOR LOAN LOSSES is maintained to absorb potential loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loan loss experience,
changes in the composition of the loan portfolio, the current condition and
amount of loans outstanding, and the probability of collecting all amounts due.
Impaired loans are measured by the present value of expected future cash flows,
or the fair value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that, as of
December 31, 1995 the allowance for loan losses is adequate based on information
currently available. A worsening or protracted economic decline in the area
within which the Bank operates would increase the likelihood of additional
losses due to credit and market risks and could create the need for additional
loss reserves.
PREMISES AND EQUIPMENT are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method for premises and the
declining-balance method for equipment based principally on the estimated useful
lives of the assets. Maintenance and repairs are expensed as incurred while
major additions and improvements are capitalized. Gains and losses on
dispositions are included in current operations.
F-29
UNION NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
FEDERAL RESERVE AND FEDERAL HOME LOAN BANK STOCK are required investments for
institutions that are members of the Federal Reserve (FRB) and Federal Home Loan
Bank (FHLB) system. The required investment in the common stock is based on a
predetermined formula.
INCOME TAX in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The
Company files consolidated income tax returns with its subsidiary.
EARNINGS PER SHARE have been computed based upon the weighted average common
shares outstanding during each year.
- - RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve funds in cash and/or on deposit with
the Federal Reserve Bank. The reserve required at December 31, 1995, was
$559,000.
- - INVESTMENT SECURITIES
1995
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------
Available for sale
U. S. Treasury $ 7,999 $ 135 $ 8,134
Federal agencies 11,637 202 $ 11 11,828
State and municipal 13,194 809 13 13,990
Mortgage-backed securities 23,422 201 162 23,461
Marketable equity securities 312 31 343
Corporate obligations 3,057 24 3,033
------------------------------------------------------------
Total available for sale 59,621 1,378 210 60,789
------------------------------------------------------------
Held to maturity
State and municipal 380 91 471
Other asset-backed securities 2,084 9 21 2,072
------------------------------------------------------------
Total held to maturity 2,464 100 21 2,543
------------------------------------------------------------
Total investment securities $62,085 $1,478 $231 $63,332
------------------------------------------------------------
------------------------------------------------------------
F-30
UNION NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
1994
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------
Available for sale
U. S. Treasury $ 9,998 $ 128 $ 9,870
Federal agencies 4,495 $ 3 239 4,259
State and municipal 3,174 55 89 3,140
Mortgage-backed securities 3,223 296 2,927
Marketable equity securities 354 8 2 360
Corporate obligations 2,236 2,236
------------------------------------------------------------
Total available for sale 23,480 66 754 22,792
------------------------------------------------------------
Held to maturity
State and municipal 11,031 294 321 11,004
Mortgage-backed securities 17,569 69 905 16,733
Other asset-backed securities 1,740 33 1,707
------------------------------------------------------------
Total held to maturity 30,340 363 1,259 29,444
------------------------------------------------------------
Total investment securities $53,820 $429 $2,013 $52,236
------------------------------------------------------------
------------------------------------------------------------
The amortized cost and fair value of securities held to maturity and available
for sale at December 31, 1995, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
1995
-------------------------------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
-------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
MATURITY DISTRIBUTION AT DECEMBER 31 COST VALUE COST VALUE
- ------------------------------------------------------------------------------------------------
Within one year $ 5,201 $ 5,223
One to five years 21,590 22,096
Five to ten years 3,089 3,305 $ 187 $ 212
After ten years 6,007 6,360 193 259
------------------------------------------------------------
35,887 36,984 380 471
Mortgage-backed securities 23,422 23,462
Other asset-backed securities 2,084 2,072
Marketable equity securities 312 343
------------------------------------------------------------
Totals $59,621 $60,789 $2,464 $2,543
------------------------------------------------------------
------------------------------------------------------------
Investment securities with a carrying value of $7,905,483 and $2,622,000 were
pledged at December 31, 1995 and 1994 to secure certain deposits, Federal Home
Loan Bank advances and for other purposes as permitted or required by law.
F-31
UNION NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
Proceeds from the sales of investment securities available for sale during 1995
and 1994 were $2,111,000 and $1,069,400. Gross losses of $900 and gross gains
of $10,800 were realized on the sales.
Proceeds from sales of investment securities held to maturity during 1993 were
$2,098,000. Gross gains of $38,300 for 1993 were realized on those sales.
During 1995, management inadvertently sold a bond backed by automobile loans
with an amortized cost of $353,568 from the held to maturity investment
portfolio, believing such investment had been classified as a loan and not as a
security. The realized gain on the sale was $4,972. There were no other sales
or transfers from the held to maturity investment portfolio other than the
transfer described below.
On December 12, 1995, the Bank transferred certain securities from held to
maturity to available for sale in accordance with a transition reclassification
allowed by the Financial Accounting Standards Board. Such securities had a
carrying value of $25,732,000 and a fair value of $26,364,000.
- - LOANS AND ALLOWANCE
DECEMBER 31 1995 1994
----------------------
Commercial and industrial loans $ 9,960 $ 7,175
Real estate loans (includes $8,896 and $9,288 secured
by farmland) 64,716 61,641
Agricultural production financing and other loans to
farmers 5,344 6,264
Individuals' loans for household and other personal
expenditures 9,332 7,636
Tax-exempt loans 256 220
Lease financing(1) 293 450
----------------------
89,901 83,386
Unearned interest on loans (51) (128)
----------------------
Total loans $89,850 $83,258
----------------------
----------------------
(1)Lease financing
Lease contracts receivable at December 31 $284 $371
Residual value of lease equipment 55 149
Unearned lease income (46) (70)
----------------------
Net investment in direct lease financing $293 $450
----------------------
----------------------
At December 31, 1995, minimum lease payments receivable in succeeding years were
as follows: $114,000 in 1996, $86,000 in 1997, $57,000 in 1998, $21,000 in 1999
and $6,000 in 2000.
F-32
UNION NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31 1995 1994 1993
- --------------------------------------------------------------------------------
Allowance for loan losses
Balance, January 1 $1,116 $1,100 $1,078
Provision for losses 340 300 400
Recoveries on loans 37 73 19
Loans charged off (348) (357) (397)
--------------------------------
Balance, December 31 $1,145 $1,116 $1,100
--------------------------------
--------------------------------
The Company adopted SFAS No. 114 and No. 118 ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN and ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN -
INCOME RECOGNITION AND DISCLOSURES on January 1, 1995. Impaired loans totaled
$1,059,000 at December 31, 1995. An allowance for losses at December 31, 1995,
was not deemed necessary for impaired loans totaling $72,600, but an allowance
of $545,000 was recorded for the remaining balance of impaired loans of
$986,400. The average balance of impaired loans for 1995 was $1,219,000.
Interest income and cash receipts of interest totaled $72,000 and $51,000 during
the period in 1995 that the loans were impaired.
In addition, at December 31, 1995, the Company had other nonaccrual loans of
approximately $107,000, for which impairment had not been recognized. If
interest on these loans had been recognized at the original interest rates,
interest income would have increased approximately $4,000 in 1995.
The Company has no commitments to loan additional funds to the borrowers of
impaired or nonaccrual loans.
Nonaccruing and restructured loans totaled $560,000 and $1,719,000 at December
31, 1994 and 1993. Additional interest income of approximately $18,000 for 1994
and $145,000 for 1993 would have been recorded had income on those loans been
considered collectible and accounted for on the accrual basis under the original
terms of the loans.
F-33
UNION NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
- - PREMISES AND EQUIPMENT
DECEMBER 31 1995 1994
- --------------------------------------------------------------------------------
Land $ 782 $ 782
Buildings 2,490 2,475
Equipment 1,593 1,510
-----------------------
Total cost 4,865 4,767
Accumulated depreciation (1,838) (1,643)
-----------------------
Net $3,027 $3,124
-----------------------
-----------------------
- - DEPOSITS
DECEMBER 31 1995 1994
- --------------------------------------------------------------------------------
Noninterest bearing $ 7,806 $ 7,795
Interest-bearing demand 27,284 26,182
Savings deposits 10,442 12,298
Certificates and other time deposits of $100,000 or
more 15,795 11,850
Other certificates and time deposits 71,012 63,273
-------------------------
Total deposits $132,339 $121,398
-------------------------
-------------------------
Certificates, including other time deposits of $100,000 or more, maturing in
years ending December 31:
- --------------------------------------------------------------------------------
1996 $46,633
1997 23,107
1998 8,781
1999 4,466
2000 1,933
Thereafter 1,887
----------------
$86,807
----------------
----------------
F-34
UNION NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
- - SHORT-TERM BORROWINGS
DECEMBER 31 1995 1994
- --------------------------------------------------------------------------------
Federal funds purchased $1,600
Securities sold under repurchase agreements 1,594 $1,234
U. S. Treasury demand notes 208 208
----------------------
Total short-term borrowings $3,402 $1,442
----------------------
----------------------
Securities sold under agreements to repurchase consist of obligations of the
Bank to other parties. The obligations are secured by U. S. Treasury and
Federal agency obligations and such collateral is held by the Federal Reserve
Bank of Chicago. The following table summarizes certain information on these
repurchase agreements.
AS OF AND FOR THE YEAR ENDED DECEMBER 31 1995 1994
- --------------------------------------------------------------------------------
Book value $1,594 $1,234
Collateral book value 4,954 2,738
Collateral market value 4,954 2,738
Average balance of agreements during year 1,804 1,307
Highest month-end balance during year 3,427 1,634
Interest payable at end of year 4 3
Weighted average interest rate at end of year 4.58% 3.58%
- - FEDERAL HOME LOAN BANK ADVANCES
Advances from FHLB at December 31.
1995 1994
-----------------------------------------------
MATURITIES IN YEARS ENDING INTEREST INTEREST
DECEMBER 31 AMOUNT RATE AMOUNT RATE
- --------------------------------------------------------------------------------
1996 $1,000 8.10% $1,000 8.10%
1996 1,000 8.40 1,000 8.40
1996 1,000 5.33 1,000 5.33
1996 1,000 4.70 1,000 4.70
1997 2,000 4.76 2,000 4.76
1998 2,000 5.29 2,000 5.29
---------- ----------
Total advances $8,000 $8,000
---------- ----------
---------- ----------
F-35
UNION NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
The terms of a security agreement with the FHLB require the Company to pledge as
collateral for advances both qualifying first mortgage loans in an amount equal
to at least 170 percent of these advances. Advances are subject to restrictions
or penalties in the event of prepayment.
- - INCOME TAX
Year Ended December 31 1995 1994 1993
- --------------------------------------------------------------------------------
Income tax expense
Currently payable
Federal $325 $277 $333
State 168 136 145
Deferred
Federal 44 18 (41)
State 8 18 7
-----------------------------------------------
Total income tax expense $545 $449 $444
-----------------------------------------------
-----------------------------------------------
Reconciliation of federal statutory to actual tax expense
Federal statutory income
tax at 34% $703 $630 $611
Tax exempt interest (253) (279) (266)
Effect of state income taxes 117 102 100
Other (22) (4) (1)
-----------------------------------------------
Actual tax expense $545 $449 $444
-----------------------------------------------
-----------------------------------------------
Tax expense applicable to security gains for the years ended December 31, 1995,
1994, and 1993 was $14,700, $5,200, and $15,300, respectively.
F-36
UNION NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
A cumulative deferred liability for 1995 and tax asset for 1994 is included in
other liabilities for 1995 and other assets for 1994. The components of the
(liability) asset are as follows:
DECEMBER 31 1995 1994
- --------------------------------------------------------------------------------
Differences in depreciation methods $(190) $(172)
Accretion of investments discounts (5) (13)
Differences in accounting for loan fees (4) 25
Differences in accounting for loan losses 281 270
State income tax (18) (21)
Differences in accounting for leases (15) 2
Alternative minimum tax credit carryover 123 133
Net unrealized (gain) loss on securities
available for sale (464) 276
-----------------------------------------------
$(292) $ 500
-----------------------------------------------
-----------------------------------------------
Assets $404 $706
Liabilities (696) (206)
-----------------------------------------------
$(292) $500
-----------------------------------------------
-----------------------------------------------
No valuation allowance was considered necessary at December 31, 1995.
The alternative minimum tax credit carryover is available to offset future
regular federal income tax liabilities and has an unlimited carryover period.
During 1993, the Company adopted Statement of Financial Standards No. 109,
ACCOUNTING FOR INCOME TAXES. As a result, the beginning deferred tax asset was
increased by $68,848, which is reported as the cumulative effect of a change in
accounting method.
- - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements. The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual or notional amount of those
instruments. The Company uses the same credit policies in making such
commitments as it does for instruments that are included in the consolidated
balance sheet.
F-37
UNION NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
Financial instruments whose contract amount represents credit risk as of
December 31 were as follows:
1995 1994
- --------------------------------------------------------------------------------
Commitments to extend credit $5,545 $5,199
Standby letters of credit 363 233
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Company upon extension of credit is based on
management's credit evaluation. Collateral held varies but may include accounts
receivable, inventory, property and equipment, and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party.
The Company and Bank are also subject to claims and lawsuits which arise
primarily in the ordinary course of business. It is the opinion of management
that the disposition or ultimate resolution of such claims and lawsuits will not
have a material adverse effect on the consolidated financial position of the
Company.
- - RESTRICTION ON BANK DIVIDENDS
Without prior approval of the Comptroller of the Currency, the Bank is
restricted by national banking laws as to the maximum amount of dividends it can
pay to the parent in any calendar year to the Bank's retained net profits (as
defined) for that year and the two preceding years. The amount at December 31,
1995 available for 1996 dividends to the Company was $2,375,000. As a practical
matter, the Bank restricts dividends to a lesser amount because of the need to
maintain an adequate capital structure. Total equity capital of the Bank at
December 31, 1995 was $15,445,000 of which $13,070,000 was restricted from
dividend distribution to the Company.
- - EMPLOYEE BENEFIT PLANS
The Company has a retirement savings 401(k) plan in which substantially all
employees may participate. The Company matches employees' contributions at the
rate of 30 per cent for the first 6 per cent of base salary contributed by
participants. The Company's expense for the plan was $13,100 for 1995, $13,400
for 1994 and $12,400 for 1993.
F-38
UNION NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
The Company also has an Employee Stock Ownership Plan covering substantially all
of its employees. The cost of the plan is borne by the Company through
contributions to an Employee Stock Ownership Trust in amounts determined by the
Board of Directors. The contributions to the plan in 1995, 1994 and 1993 were
$79,000, $70,300 and $69,200, respectively.
- - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS--The fair value of cash and cash equivalents
approximates carrying value.
SECURITIES AND MORTGAGE-BACKED SECURITIES--Fair values are based on quoted
market prices.
LOANS--The fair values for loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
INTEREST RECEIVABLE/PAYABLE--The fair values of interest receivable/payable
approximate carrying values.
FRB AND FHLB STOCK--Fair value of FRB and FHLB stock is based on the price at
which it may be resold to the FRB and FHLB.
DEPOSITS--The fair values of noninterest-bearing and interest-bearing demand
accounts are equal to the amount payable on demand at the balance sheet date.
Fair values for certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on such
time deposits.
FEDERAL HOME LOAN BANK ADVANCES--The fair value of these borrowings are
estimated using a discounted cash flow calculation, based on current rates for
similar debt.
SHORT-TERM BORROWINGS--Federal funds purchased, securities sold under repurchase
agreements and U. S. Treasury demand notes are short-term borrowing
arrangements. The rates at December 31, 1995, approximate market rates, thus
the fair values approximate carrying values.
F-39
UNION NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
The estimated fair values of the Company's financial instruments are as follows:
1995
-----------------------------------------------
CARRYING FAIR
DECEMBER 31 AMOUNT VALUE
- --------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 3,461 $ 3,461
Securities available for sale 60,789 60,789
Securities held to maturity 2,464 2,543
Loans 89,850 88,838
Interest receivable 1,730 1,730
Stock in FRB and FHLB 810 810
LIABILITIES
Deposits 132,339 132,640
Short-term borrowings 3,402 3,402
Federal Home Loan Bank advances 8,000 7,976
Interest payable 1,168 1,168
- - SUBSEQUENT EVENT
On January 24, 1996, the Company signed a definitive agreementagreed to merge with First Merchants Corporation
of Muncie, Indiana (First Merchants). First Merchants is a bank holding company located in Muncie,
Indiana. Under the terms of the agreement, shareholderseach outstanding common share of the
Company will receive 4.86be converted into 13.41681 common shares of First Merchants stock
for each shareMerchants. The
proposed transaction requires approval by regulatory authorities and the
shareholders of the Company's common stock owned.Company. The proposed transaction is subjectexpected to approval by the Company's stockholders and regulatory agencies. Although the
Company anticipates that the merger will be
consummated duringin the secondfirst quarter of 1996, there can1999. It is expected to be no assurance that the acquisition will be
completed.
F-40
UNION NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
- - CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Presented below is condensed financial informationaccounted for as
to financial position,
results of operations and cash flows of the Company:
CONDENSED BALANCE SHEET
December 31 1995 1994
- --------------------------------------------------------------------------------
ASSETS
Cash on deposit $ 35 $ 19
Investment securities available for sale 92 110
Investment in subsidiary 15,445 13,087
Premises and equipment, net 189 198
------------------------
Total assets $ 15,761 $ 13,414
------------------------
------------------------
LIABILITIES--income taxes $ 20 $ 4
STOCKHOLDERS' EQUITY 15,741 13,410
-----------------------
Total liabilities and stockholders' equity $ 15,761 $ 13,414
------------------------
------------------------
CONDENSED STATEMENT OF INCOME
December 31 1995 1994 1993
- --------------------------------------------------------------------------------
Income
Dividends from subsidiary $ 240 $ 280 $ 220
Interest and dividend income on securities 6 8 13
Securities gains 20 9 17
Other income 25 6
-------------------------
Total income 291 303 250
Expenses 18 12 10
-------------------------
Income before income tax and equity in undistributed
income of subsidiary 273 291 240
Income tax expense 11 2 4
-------------------------
Income before equity in undistributed income of
subsidiary 262 289 236
Equity in undistributed income of subsidiary 1,261 1,114 1,185
-------------------------
NET INCOME $ 1,523 $1,403 $1,421
-------------------------
-------------------------
F-41
UNION NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 1995 1994 1993
- --------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 1,523 $ 1,403 $ 1,421
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed income of subsidiary (1,261) (1,114) (1,185)
Depreciation 9 5
Securities accretion, net (3)
Securities gains (20) (9)
Net change in other assets 1
Net change in trading account securities 75
Net change in other liabilities 10 2
-----------------------------
Net cash provided by operating activities 261 282 314
-----------------------------
-----------------------------
INVESTING ACTIVITIES
Purchase of securities available for sale (59) (43)
Proceeds from sales of securities available for sale 113 68
Purchase of premises and equipment (203)
-----------------------------
Net cash provided (used) by investing activities 54 (178)
-----------------------------
FINANCING ACTIVITIES
Cash dividends (272) (233) (214)
Stock purchase (27) 45
------------------------------
Net cash used by financing activities (299) (233) (169)
------------------------------
NET INCREASE (DECREASE) IN CASH 16 (129) 145
CASH AT BEGINNING OF YEAR 19 148 3
------------------------------
CASH AT END OF YEAR $ 35 $ 19 $ 148
------------------------------
------------------------------
F-42a pooling-of-interests.
F-25
APPENDIX A
AGREEMENT OF REORGANIZATION AND MERGER
BETWEEN
FIRST MERCHANTS CORPORATION
AND
RANDOLPH COUNTY BANCORPJAY FINANCIAL CORPORATION
THIS AGREEMENT OF REORGANIZATION AND MERGER ("Agreement"(the "Agreement"), is entered
this 17th20th day of January, 1996,August, 1998, by and between FIRST MERCHANTS CORPORATION
("First Merchants") and RANDOLPH COUNTY BANCORPJAY FINANCIAL CORPORATION ("Randolph County"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.Indiana;
WHEREAS, Randolph CountyJay 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 Winchester, RandolphPortland, Jay County, Indiana.Indiana;
WHEREAS, The Randolph CountyFirst National Bank of Portland (the "Bank") is a banking institutionnational
bank duly organized and existing under the laws of the State of IndianaUnited States and a
wholly-owned subsidiary of Randolph CountyJay Financial with its principal banking office in
Winchester, RandolphPortland, Jay County, Indiana.Indiana;
WHEREAS, it is the desire of First Merchants and Randolph CountyJay Financial to effect a
transaction whereby the Bank will become a wholly-owned subsidiary of First
Merchants through a statutory merger of Randolph CountyJay Financial with and into First
Merchants.Merchants; and
WHEREAS, a majority of the entire Board of Directors of First Merchants and
a majority of the entire Board of Directors of Randolph CountyJay 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.
A-1
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 and Randolph CountyJay Financial
hereby make this Agreement and prescribe the terms and conditions of the merger
of Randolph CountyJay 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(as defined in Section 11 hereof, Randolph Countyhereof), 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 A-1
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 chapterChapter 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 Randolph CountyJay Financial shall
cease and the Continuing Company shall possess all of the assets of Randolph CountyJay
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 Randolph County.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,
A-2
until such time as their successors have been elected and qualified, shall
consist of the current 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 Randolph CountyJay Financial shall vest in the
Continuing Company without reversion or impairment. All liabilities of Randolph
CountyJay
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 RANDOLPH COUNTYJAY FINANCIAL
3.01. CONSIDERATION. Upon and by reason of the Merger becoming effective,
the shareholders of Randolph CountyJay 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 twentyeight and 53/100 (20.53)94454/100,000 (8.94454) shares
of First Merchants common stock for each share of Randolph CountyJay Financial common stock
held.held (the "Conversion Ratio"). The Conversion Ratio shall be subject to
adjustment as set forth in Sections 3.03 and 3.04 hereof.
A-3
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 exchange ratio.Conversion Ratio. Each Randolph
CountyJay
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 Randolph CountyJay 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. A-2
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 Randolph CountyJay Financial share
will be converted under Section 3.01 hereof shall be adjusted so that each Randolph CountyJay
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 Ratio, whereupon no termination shall have
occurred pursuant to this Section 3.04(b)
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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 Randolph CountyJay Financial within ten (10) days of such shareholder's
delivery of his/her certificates representing common stock of Randolph CountyJay
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.
(b)(c) Following the Effective Date, stock certificates
representing Randolph CountyJay Financial 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
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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 Randolph CountyJay 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.
(c)(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 Randolph CountyJay 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.
(d)(f) With respect to any certificate for shares of Randolph CountyJay 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 Randolph CountyJay Financial shareholder with all procedures
historically required by Randolph CountyJay Financial in connection with lost, stolen,
or destroyed certificates.
SECTION 4
DISSENTING SHAREHOLDERS
Shareholders of Randolph CountyJay Financial shall have the rights accorded to dissenting
shareholders under Indiana Code Section 23-1-44, as amended.
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SECTION 5
REPRESENTATIONS AND
WARRANTIES OF RANDOLPH COUNTY
Randolph CountyJAY 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 Randolph CountyJay Financial and delivered to and initialed by an authorized
executive officer of First Merchants contemporaneous with the execution of this
Agreement.as provided in Section 7.08 hereof.)
5.01. ORGANIZATION AND AUTHORITY. Randolph CountyJay Financial is a corporation duly
organized and validly existing under the laws of the State of Indiana, and the
Bank is a state banking associationnational bank duly organized and validly existing under the laws of
the State of Indiana. Randolph CountyUnited 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. Randolph County'sJay 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 Federal Deposit Insurance
Corporation.Office of the Comptroller
of the Currency.
5.02. AUTHORIZATION.
(a) Randolph CountyJay 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 Randolph County,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 Randolph County'sJay
Financial's Articles of Incorporation or By-LawsBy-Laws; (ii) conflict with,
result in a breach of, or to the best of its knowledge,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 Randolph CountyJay Financial or the Bank is subject or bound, the result of which
would materially affect the business or financial condition of Randolph CountyJay
Financial or the Bank; (ii)(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 Randolph CountyJay Financial or
the Bank; (iii)(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 Randolph CountyJay Financial or the Bank is subject or bound; or
(iv)(v) accelerate or modify, or give any
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party thereto the right to accelerate or modify, the time within which, or
the terms according to which, Randolph CountyJay 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 A-4
public body or authority is necessary for the
consummation by Randolph
CountyJay Financial of the transactions contemplated by this
Agreement.
5.03. CAPITALIZATION.
(a) As of December 31, 1995, Randolph CountyJune 30, 1998, Jay Financial had 60,000500,000 shares of
Class A voting common stock authorized, no par value per share, 27,55564,234
shares of which were issued and outstanding.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 Randolph CountyJay Financial common stock have been
duly and validly authorized by all necessary corporate action of Randolph County,Jay
Financial, are validly issued, fully paid and nonassessable and have not
been issued in violation of any preemptive rights of any shareholders.
Randolph CountyJay Financial has no intention or obligation to authorize or issue
additional shares of its common stock. Randolph CountyJay Financial has not authorized
the issuance of any other class of stock. On a consolidated basis as of
December 31, 1995, Randolph CountyJune 30, 1998, Jay Financial had total capital of $8,902,996,$14,282,735.38, which
consisted of voting common stock of $2,755,500, additional$64,234.00, nonvoting common stock
of $17,666.00, capital surplus of $709,036,$775,244.44, and retained earnings of
$5,399,994, and unrealized gain of $38,466.$13,455,462.35.
(b) As of December 31, 1995,June 30, 1998, the Bank had 1,00040,000 shares of common
stock authorized, $100.00$5 par value per share, all of which shares were
issued and outstanding to Randolph County.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 Randolph CountyJay 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 December 31, 1995,June 30, 1998, the Bank had total capital of
$8,906,739,$13,984,368, which consisted of common stock of $100,000,$200,000, capital
surplus of $2,500,000, undivided profits$3,010,000, and retained earnings of $6,268,273, and unrealized gain
of $38,466.$10,804,239.
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(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 Randolph CountyJay Financial or
the Bank by which Randolph
CountyJay Financial or the Bank is or may become bound.
Neither Randolph CountyJay 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 Randolph County'sJay 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 Randolph CountyJay Financial and the Bank have been delivered to
First Merchants and represent true, accurate and complete copies of such
corporate documents of Randolph CountyJay Financial and the Bank in effect as of the date of
this Agreement.
5.05. COMPLIANCE WITH LAW. Neither Randolph CountyJay 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 Randolph CountyJay 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 Randolph CountyJay Financial or
the Bank. Randolph CountyJay Financial and the Bank possess all licenses, franchises, permits
and other
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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 Randolph CountyJay 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.
5.06. ACCURACY OF STATEMENTS. Neither this Agreement nor any report,
statement, list, certificate or other information furnished or to be furnished
by Randolph CountyJay Financial or the Bank to First Merchants in connection with this
Agreement or any of the transactions contemplated
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hereby (including, without limitation, any information which has been or shall
be supplied by Randolph CountyJay 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 material claims of any kind, nor any material action, suits,
proceedings, arbitrations or investigations pending or to the knowledge of Randolph CountyJay
Financial or the Bank threatened in any court or before any government agency or
body, arbitration panel or otherwise (nor does Randolph
CountyJay 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 Randolph CountyJay Financial or
the Bank or their respective officers and/or directors, 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 Randolph CountyJay Financial or the Bank as a result of an examination by
any regulatory agency or body.
5.08. FINANCIAL STATEMENTS.
(a) Randolph County'sJay Financial's consolidated balance sheets as of the end of
the three fiscal years ended December 31, 1992, 19931995, 1996 and 19941997 and the
ninesix months ended SeptemberJune 30, 19951998 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 Randolph
CountyJay Financial as of the respective dates thereof and the
consolidated results of operations of Randolph CountyJay Financial 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 Randolph County and Bank with their respective primary
federal regulators during 1995, 1994, 1993 and 1992, are true, accurate and
complete and were prepared in conformity with generally accepted regulatory accounting principles applied on a consistent basis.
(b) All loans reflected in the Financial Information and which
have been made, extended or acquired since SeptemberJune 30, 1995,1998, (i) have been
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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 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.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
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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 SeptemberJune 30, 1995,1998, no events or conditions of any
character, whether actual, threatened or contemplated, have occurred, or, to the
knowledge of Randolph County,Jay Financial, can reasonably be expected to occur, which
materially adversely affect Randolph County'sJay 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, Randolph County'sJay Financial's or the
Bank's business to be conducted in a materially less profitable manner than
prior to SeptemberJune 30, 1995.1998.
5.10. ABSENCE OF UNDISCLOSED LIABILITIES. Neither Randolph CountyJay 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 Randolph County,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, Randolph CountyJay Financial
and the Bank have good and marketable title in fee simple absolute to
all real property (including, without limitation, all real property used as
bank holding company or bank premises and all other real estate owned) and
personal property reflected in the June 30, 1998 Financial
Information, as of September 30,
1995, good and marketable title to all other properties and
assets which Randolph CountyJay 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 Randolph County'sJay Financial's or the Bank's business, and
good and marketable title to all property and assets acquired since SeptemberJune
30, 1995,1998, free and clear of all mortgages, liens, pledges, restrictions,
security interests, charges, claims or encumbrances of any nature.
(b) All realfurniture, fixtures, machinery, equipment, computer
software and hardware, and all other tangible personal property owned or
used by Randolph CountyJay 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 Financial or the
Bank of such properties and assets is in compliance with all applicable
zoning laws, ordinances, rules and all laws, statutes, rules, regulations and
ordinances relating to the environment, pollution and the treatment, storage,
disposal, discharge or release of chemicals and hazardous or toxic substances or
wastes.any governmental authority
having jurisdiction over such use.
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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 ifof $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.
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(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 Randolph CountyJay 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 Randolph CountyJay Financial or the Bank since SeptemberJune 30, 19951998 is
subject to any restrictions, whether contractual or statutory, which
materially impairs the ability of Randolph CountyJay Financial or the Bank to dispose
freely of such investment at any time. Except as set forth in the
Disclosure Letter, neither Randolph CountyJay 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 Randolph CountyJay Financial or the Bank and covers
any employee, director or former employee or director of Randolph CountyJay Financial
or the Bank under which Randolph CountyJay 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 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.
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(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
Randolph County,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 Randolph
County orJay 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) NoTo 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
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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, Randolph CountyJay 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) Except as set forth in the Disclosure Letter, noNo Employee Plan owns any security of Randolph CountyJay Financial or the
Bank.
(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, Randolph CountyJay 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 Randolph CountyJay
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) NoTo 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. AllTo 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 Randolph CountyJay Financial or the Bank and
(iii) covers any employee, director or former employee or director of
Randolph CountyJay 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 as set forthfor (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 the Disclosure Letter,1988, neither
Randolph
CountyJay 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 Randolph CountyJay Financial or the Bank.
(n) Except as set forth in the Disclosure Letter, there has been
no amendment to, written interpretation or announcement (whether or not
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written) by Randolph CountyJay 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, 1994.1997.
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(o) For purposes of this Section 5.13, references to Randolph CountyJay
Financial or the Bank are deemed to include (i) all predecessors of Randolph CountyJay
Financial or the Bank, (ii) any subsidiary of Randolph CountyJay Financial or the Bank,
(iii) all members of any controlled group (as determined under Code
Section 414(b) or (c)) that includes Randolph CountyJay Financial or the Bank, and (iv)
all members of any affiliated service group (as determined under Code
Section 414(m) or (n)) that includes Randolph CountyJay Financial or the Bank.
5.14 OBLIGATIONS TO EMPLOYEES. Except as set forth in the Disclosure
Letter, all accrued obligations and liabilities of Randolph CountyJay 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 Randolph CountyJay 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 Randolph CountyJay Financial or the Bank in accordance with generally accepted
accounting and actuarial principles.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
Randolph CountyJay 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.principles, except where the failure to pay any such obligations and 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 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 Randolph CountyJay Financial and Bank.the Bank, except where the failure
to 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. Randolph CountyJay 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
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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 Randolph County'sJay 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 December 31, 1994.June 30, 1998. Neither Randolph CountyJay 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
December 31, 1994June 30, 1998 up to and including the Effective Date, except to the extent
reflected on their Financial Information or on financial statements of Randolph
CountyJay
Financial or the Bank subsequent to such date and as set forth in the Disclosure
Letter. Neither Randolph CountyJay 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 Randolph CountyJay Financial or the
Bank have been audited by any taxing authority during the past five (5) years.
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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, 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.
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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 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.
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(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 Randolph CountyJay Financial or
the Bank or under any authority of Randolph CountyJay 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, other than attorneys' or
accountants' fees, in connection with any of the transactions contemplated by
this Agreement.
5.18.5.22. BRING DOWN OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties of Randolph CountyJay 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.
5.19.A-18
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 Randolph CountyJay Financial and the
Bank and all directors, officers and employees of Randolph CountyJay 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 caused either by actionmade or inaction.is deemed to be fraudulent.
SECTION 6
REPRESENTATIONS AND
WARRANTIES OF FIRST MERCHANTS
First Merchants hereby represents and warrants to Randolph CountyJay 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-lawsBy-laws; (ii) conflict
with, result in a breach of, or to the best of its knowledge,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 is subject or bound, the result of which would
materially affect the business or financial condition of First
Merchants; (ii)(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
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other rights of others or other
adverse interest upon any right, property or asset of First Merchants;
(iii)(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
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agreement, contract, arrangement, or commitment to which First Merchants is
a party or by which First Merchant is subject or bound; or (iv)(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) At December 31, 1995As of June 30, 1998, First Merchants had 20,000,000 shares
of common stock authorized, no par value, of which 5,053,9016,697,656 shares were
issued and outstanding. The
5,053,901Such 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.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) Other than in connection with the proposed merger of Union
National Bancorp with and into First Merchants and pursuant to First
Merchant's Dividend Reinvestment and Stock Purchase Plan, Stock Option
Plans and Employee Stock Purchase Plans, there are no options, commitments,
calls or agreements outstanding regarding the issuance of capital stock or
any securities representing the right to purchase or otherwise receive such
stock, or any debt securities of First Merchants. First Merchants does not
have any outstanding contractual obligation to repurchase, redeem, or
otherwise acquire any of its outstanding shares of capital stock.
(d) 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 Randolph County.Jay
Financial. The documents 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 Randolph CountyJay 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 becomebecomes effective)
any untrue statement of a material fact
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or omits or shall omit to state a
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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 ofor 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, 1992, 19931995, 1996 and
19941997 and the ninesix months ended SeptemberJune 30, 19951998 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, 1994, 1993 and 1992,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 SeptemberJune 30, 1995,1998, 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 SeptemberJune
30, 1995.1998.
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, 1994,1997, and Quarterly Report on Form 10-Q for the quarter ended SeptemberJune
30, 1995,1998, copies of which have previously been delivered to Randolph
County.Jay Financial.
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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 A-13
competent jurisdiction should
determine that any misrepresentation or breach of a warranty was willfully or
intentionally caused either by actionmade or inaction.is deemed to be fraudulent.
SECTION 7
COVENANTS OF RANDOLPH COUNTY
Randolph CountyJAY 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. Randolph CountyJay 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 Randolph CountyJay
Financial at the earliest possible reasonable date, and the Board of Directors
of Randolph CountyJay Financial shall subject to their fiduciary duties recommend to the shareholders of Randolph CountyJay 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.
7.02. OTHER APPROVALS. Randolph CountyJay 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 Randolph CountyJay 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
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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 Randolph CountyJay
Financial prior to the Effective Date of customary quarterly cash dividends
on its common stock in October, 1998, December, 1998, and April, 1996 (for the first fiscal quarter)
and July, 1996 (for the second fiscal quarter),1999,
which dividends shall not exceed One and 50/100 Dollarsfifty cents ($1.50) and One and 50/100 Dollars ($1.50).50) per share,
respectively, provided that Randolph CountyJay Financial shall not pay any such dividend
with respect to anyduring the fiscal quarter in which the Merger shall become effective and in
which Randolph CountyJay Financial shareholders will become entitled to receive dividends
on the shares of First Merchants into which the shares of Randolph CountyJay Financial
have been converted or in any subsequent fiscal quarter, and (b) the
payment by the Bank to Randolph CountyJay Financial of dividends to pay Randolph County'sJay 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
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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 Randolph CountyJay 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
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 ofor employees of Randolph CountyJay
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 benefits 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 Randolph CountyJay 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; and (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.practices;
(xiii) other than in the ordinary course of
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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) Randolph CountyJay 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) Randolph CountyJay 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. Randolph Countyprovided, 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.
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,
Randolph CountyJay 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 Randolph CountyJay Financial or the Bank or similar transaction involving Randolph
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CountyJay
Financial or the Bank (all such transactions hereinafter referred to as an
"Acquisition Transactions"Transaction"). Randolph CountyJay 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.
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7.06. RESTRICTIONS REGARDING AFFILIATES. Randolph CountyJay Financial shall, within
30thirty (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 Randolph
County for purposesJay Financial within the meaning of
such term as used in Rule 145 under the Securities Act of 1933, as amended ("1933(the
"1933 Act"). Each director, executive officer and other person who is an
"affiliate" of Randolph CountyJay Financial for purposes of the 1933 Act shall deliver to First
Merchants, on orat least thirty-one (31) days prior to the Effective Date, hereunder a written
agreement, in form and substance satisfactory to counsel to First Merchants,
providing thatregarding compliance by each such person will not sell, pledge, transfer, disposewith (i) the provisions of or otherwise reduce his
marketsuch Rule
145, and (ii) the requirements of Accounting Principles Board Opinion No. 16
regarding the disposition of shares (or reduction of risk with respect to sharesthereto)
of Jay Financial common stock during the thirty (30) days preceding the
Effective Date, or First Merchants common stock to be
received by such person pursuant to this Agreement (a) during the period 30 days
prior to the Effective Date, (b) until such time as financial
results covering at least 30thirty (30) days of combinedpost-Merger operations of First Merchants and Randolph County have been
published within the meaning of Section 201.01 of the Securities and
Exchange Commission's Codification of Financial Reporting Policies, and (c)
unless such sales are pursuant to an effective registration statement under the
1933 Act or pursuant to Rule 145 of the Securities and Exchange Commission or
another exemption from the 1933 Act.published.
7.07. PRESS RELEASE. Neither Randolph County orJay 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 UPDATE. Randolph CountyLETTER. 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 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
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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.
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
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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 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 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.
SECTION 8
COVENANTS OF FIRST MERCHANTS
First Merchants covenants and agrees with Randolph CountyJay 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
Randolph CountyJay Financial with copies of proposed regulatory filings in connection with the
Merger and afford Randolph CountyJay Financial the opportunity to offer comment on the filings
before filing. The approval of the shareholders of First Merchants shareholders of the
transactions contemplated by this Agreement is not required.
8.02. EMPLOYEE BENEFIT PLANS.
Within one (1) year following the Effective
Date,(a) COVERAGE UNDER FIRST MERCHANTS' PLANS. No later than
January 1, 2000, First Merchants will permit Bankcover the Bank's employees to participate inunder 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. A-16
Following the Effective Date, the Bank
employees will otherwise receive employee benefits that in the aggregate
are substantially
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comparable to the employee benefits provided to those employees by Randolph CountyJay
Financial or the Bank on the Effective Date. For purposes of determining a
Randolph CountyJay 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 Randolph
CountyJay Financial or the Bank will be treated as service
with First Merchants; provided, however, that service with Randolph CountyJay Financial or
the Bank willshall 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.
(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. In connection withFirst 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 shall cause all necessary action to be taken to causefollowing the current Chairman of the Board of the Bank, Michael Wickersham,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.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 Randolph County.Jay Financial.
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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 Randolph CountyJay 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 Randolph CountyJay 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 thethis Agreement is terminated, it will return to
Randolph
CountyJay Financial all information obtained by First Merchants regarding Randolph CountyJay
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.
8.06. COVENANTS REGARDING THE BANK. Upon consummation of the Merger, the
Bank shall be a national bank organized under the laws of the State of IndianaUnited 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
IncorporationAssociation 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 Randolph County Bank."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 transactiontransactions
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 Randolph CountyJay Financial shall have
approved, ratified and confirmed this Agreement as required by applicable law.
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9.02. REGISTRATION STATEMENT EFFECTIVE. First Merchants shall have
registered its shares of common stock to be issued to shareholders of Randolph
CountyJay
Financial in accordance with this Agreement with the Securities and Exchange
Commission pursuant to the 1933 Act, and all
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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 and the Bank shall have
obtained (a) from Randolph County,Jay Financial, a list identifying each affiliate of Randolph CountyJay
Financial and (b) from each affiliate of Randolph County,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 Randolph CountyJay 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 thethis
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. Randolph CountyJay Financial shall have obtained an opinion from
an investment banker of its choosing to the effect that the terms of the Merger
isare fair to the shareholders of Randolph CountyJay Financial from a financial viewpoint. Such
opinion shall be (a) in form and substance reasonably satisfactory to Randolph County,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, Geo. S. Olive, & Co. 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."
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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.
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
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written notice delivered by First Merchants to Randolph CountyJay Financial or by Randolph
CountyJay Financial
to First Merchants:Merchants only for the following reasons:
(a) By Randolph CountyJay 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 representation,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 Randolph CountyJay 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 Randolph CountyJay 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 SeptemberJune 30, 1995;1998;
(d) By Randolph CountyJay Financial or First Merchants, if the transaction
contemplated herein has not been consummated by SeptemberApril 30, 1996;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 Randolph CountyJay Financial or the Bank;
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(f) By First Merchants or Randolph CountyJay 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; or
(g) By First Merchants if the Merger cannot be accounted for as
a "pooling of interests."interests";
(h) By First Merchants or Jay Financial pursuant to their
respective termination rights set forth in Section 3.04 hereof;
(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 Randolph CountyJay Financial or First
Merchants or their respective officers, directors, employees, agents, or
shareholders, except for payment of their respective expenses and First
Merchantsperformance of
their respective obligations under SectionSections 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 Randolph
CountyJay
Financial with and into First Merchants as filed with the Secretary of State of
the State of Indiana ("Effective(the "Effective Date"). The Effective Date shall occur no
later than the last business day of the month in which that thirty (30) dayany waiting period
following the last approval of the Merger by a state or federal regulatory
agency or governmental authority expires.
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SECTION 12
CLOSING
12.01. CLOSING DATE AND PLACE. The closing of the Merger ("Closing"(the "Closing")
shall take place at the main office of First Merchants on the Effective Date.
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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.
12.03. OPINIONS OF COUNSEL. At the Closing, Randolph CountyJay Financial shall deliver
an opinion of its counsel, CookKrieg DeVault Alexander & Haviza,Capehart, to First
Merchants, and First Merchants shall deliver an opinion of its counsel, Bingham
Summers Welsh & Spilman, to Randolph County,Jay Financial, dated as of the date of the ClosingClosing.
The form of such opinions shall be as mutually agreed to by the parties hereto
and substantially in the form set forth in Exhibit A and Exhibit B, respectively,
attached hereto.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.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 Randolph CountyJay 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
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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